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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

From: Sylvia Hartwell, Tax Partner, Calderwood & Harkness LLP

To: Stephanie Okafor, Responsible Partner, Banking & Finance, Calderwood & Harkness LLP Daniel Obi, Lead Associate, Banking & Finance, Calderwood & Harkness LLP Janet R. Prescott, Chief Financial Officer, Stonefield Logistics Group Inc.

Date: August 22, 2023

Re: Tax Structuring Analysis — $120,000,000 Mezzanine Financing of Stonefield Logistics Group Inc.

Matter No.: 1012-00001

Billing Code: 231892.SLG

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I. Executive Summary and Purpose

The purpose of this memorandum is to analyze the principal federal income tax and Texas state tax implications of the proposed $120,000,000 mezzanine term loan (the "Mezzanine Facility") from Ridgeline Mezzanine Capital Fund III, LP ("Ridgeline") to Stonefield Logistics Group Inc. ("Stonefield" or the "Borrower"). This memorandum is intended to assist the deal team and the Borrower's management in understanding the tax structuring considerations that arise from the proposed transaction, and to identify planning opportunities and compliance obligations that should be addressed in advance of and following the anticipated closing on September 29, 2023.

This memorandum addresses five principal tax issues:

1. Original Issue discount (OID) Arising from Detachable Warrants. The issuance of detachable warrants representing 3.0% of the fully-diluted equity of Stonefield in connection with the Mezzanine Facility creates an "investment unit" for federal income tax purposes, requiring an allocation of the $120,000,000 issue price between the debt component and the warrants. The portion allocated to the warrants reduces the issue price of the debt, generating original issue discount that will accrue as additional interest expense to Stonefield and additional interest income to Ridgeline over the six-year term of the facility.

2. Deductibility of PIK Interest Under IRC Section 163(j). The Mezzanine Facility includes a 250 basis point payment-in-kind ("PIK") interest component that compounds quarterly and is added to the outstanding principal balance. This PIK interest, together with the OID arising from the warrant allocation, constitutes business interest expense subject to the limitation on business interest deductions imposed by IRC Section 163(j). Given Stonefield's existing senior debt burden and the post-2021 changes to the computation of adjusted taxable income ("ATI"), there is a meaningful risk of Section 163(j) disallowance.

3. Federal Income Tax Treatment of Warrant Issuance and Exercise. The memorandum analyzes the tax consequences to both Stonefield and Ridgeline upon the issuance, exercise, and potential put-right settlement of the detachable warrants, including the application of IRC Sections 302, 305, and 1032, and the interplay between the anti-dilution provisions and the constructive distribution rules.

4. Interaction with Stonefield's Existing Interest Expense Deduction Capacity. The incremental interest expense generated by the Mezzanine Facility—including cash interest, PIK interest, and OID amortization—must be layered on top of the existing interest burden from Stonefield's $275,000,000 Senior Secured Term Loan B and $50,000,000 Senior Secured Revolving Credit Facility. This section quantifies the combined interest expense and models the potential magnitude of Section 163(j) disallowance and carryforward accumulation.

5. Texas Margin Tax Implications. Stonefield is headquartered in Fort Worth, Texas, and two of its operating subsidiaries are organized under Texas law. This memorandum addresses the treatment of the Mezzanine Facility—including interest expense, OID, and warrant-related transactions—under the Texas franchise (margin) tax.

This memorandum should be read in conjunction with the term sheet executed between Stonefield and Ridgeline on July 17, 2023 (the "Term Sheet"), and the first draft of the Mezzanine Credit Agreement circulated by Archer Blackwell & Moss LLP, counsel to Ridgeline, on August 4, 2023 (the "Draft Credit Agreement"). References herein to specific provisions of the Mezzanine Facility are based on the Term Sheet and the Draft Credit Agreement as currently drafted, and the analysis should be updated to the extent material terms are revised in subsequent drafts.

Coordination Note: Caldwell Baines & Associates, PC (Patricia V. Baines, engagement partner), acting as tax counsel to Cascade Ridge Capital Partners, LLC ("Cascade Ridge" or the "Sponsor"), is separately advising on the tax implications of the Mezzanine Facility at the fund and sponsor level, including partnership-level Section 163(j) computations for Cascade Ridge Capital Fund V, LP and investor-level reporting considerations. This memorandum addresses borrower-level tax considerations only and does not purport to analyze fund-level or investor-level consequences. We have been in preliminary communication with Ms. Baines regarding coordination on certain cross-cutting issues, including the investment unit allocation and its impact at both the borrower and lender levels.

Caveat: The analysis set forth in this memorandum is based on the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), the Treasury Regulations promulgated thereunder, published guidance of the Internal Revenue Service, and the Texas Tax Code, each as in effect as of the date of this memorandum. Changes in applicable law, regulations, or administrative interpretations—whether by legislative action, regulatory amendment, or judicial decision—could affect the conclusions expressed herein. This memorandum is intended to provide general tax structuring guidance and does not constitute a formal tax opinion. We have not been asked to, and do not, opine on the likelihood that any particular position would be sustained on audit or in litigation.

II. Transaction Summary

A. Overview of the Mezzanine Financing

The proposed transaction involves a mezzanine term loan to be extended by Ridgeline to Stonefield in the aggregate principal amount of $120,000,000. The key structural parameters of the Mezzanine Facility, as reflected in the Term Sheet and the Draft Credit Agreement, are summarized below.

Borrower. Stonefield Logistics Group Inc., a corporation organized under the laws of the State of Delaware, with its principal executive offices located at 4800 Commerce Parkway, Suite 1200, Fort Worth, Texas 76107. Stonefield is a national provider of less-than-truckload ("LTL"), intermodal freight, and freight brokerage services operating across the contiguous United States.

Mezzanine Lender. Ridgeline Mezzanine Capital Fund III, LP, a limited partnership organized under the laws of the State of Delaware, managed by its general partner, Ridgeline Capital Management, LLC, with offices at 767 Lexington Avenue, 22nd Floor, New York, New York 10065. Ridgeline is a dedicated mezzanine credit fund focused on middle-market sponsor-backed transactions.

Principal Amount. $120,000,000, funded in a single draw at closing.

Maturity Date. Six years from the closing date—September 29, 2029.

Purpose of Proceeds. The proceeds of the Mezzanine Facility will be used to fund Stonefield's capital expenditure program, which includes (i) fleet expansion (acquisition of approximately 350 additional Class 8 tractors and 1,200 dry van and refrigerated trailers over the 2024-2026 period), (ii) terminal facility buildout (construction and expansion of three new regional distribution terminals in Nashville, Tennessee; Columbus, Ohio; and Reno, Nevada), and (iii) technology upgrades (implementation of a new enterprise transportation management system and fleet telematics platform). The capital expenditure program is projected to require approximately $85 million per year over the next three fiscal years, with approximately 25% of unused annual CapEx capacity available for carryforward.

Governing Law. The Mezzanine Credit Agreement is governed by the laws of the State of New York.

B. Interest Rate Structure

The Mezzanine Facility bears interest at a total rate of 1,100 basis points (11.00%) per annum, comprised of two components:

Cash Pay Component. 850 basis points (8.50%) per annum, payable in cash quarterly in arrears on the last business day of each calendar quarter. The first interest payment date is December 29, 2023.

PIK Component. 250 basis points (2.50%) per annum, compounding quarterly and added to the outstanding principal balance on each quarterly interest payment date. The PIK component is not paid in cash during the term of the facility but instead accrues and capitalizes, increasing the outstanding principal balance (and thus the total amount due at maturity or upon any prepayment or acceleration).

Default Rate. Upon the occurrence and during the continuance of an Event of Default, the applicable interest rate increases by an additional 200 basis points, resulting in a total default rate of 1,300 basis points (13.00%) per annum.

Day Count Convention. Interest is computed on the basis of a 360-day year for the actual number of days elapsed (Actual/360), which is standard for institutional credit facilities and results in a modestly higher effective annual interest rate than a 365-day convention.

First Interest Payment Date. December 29, 2023, covering the period from the closing date (September 29, 2023) through December 29, 2023 (a stub period of approximately 91 days).

C. Warrant Terms

In connection with the Mezzanine Facility, Stonefield will issue to Ridgeline detachable warrants (the "Warrants") to purchase shares of common stock of Stonefield on the terms summarized below.

Warrant Coverage. The Warrants entitle Ridgeline to acquire shares of common stock of Stonefield representing 3.0% of the fully-diluted equity of Stonefield on a post-exercise basis. The number of shares issuable upon exercise of the Warrants will be determined based on the capitalization table of Stonefield as of the closing date.

Exercise Price. $0.01 per share. The nominal exercise price effectively provides Ridgeline with equity participation at negligible cost, reflecting the equity "kicker" that is customary in mezzanine financing transactions.

Warrant Type. The Warrants are detachable from the Mezzanine Facility debt instrument and are immediately exercisable upon issuance at closing. The Warrants may be exercised at any time following the closing date and do not have a separate expiration date, except as described below in connection with the put right.

Anti-Dilution Protection. The Warrants include weighted-average broad-based anti-dilution protection, which adjusts the exercise price and/or the number of shares issuable upon exercise in the event of (i) stock splits, (ii) stock dividends, (iii) issuances of common stock or common stock equivalents at a price below the then-current fair market value per share, and (iv) other dilutive events, in each case using a broad-based weighted-average formula.

Put Right. Ridgeline has the right to require Stonefield to repurchase the Warrants (or any shares issued upon exercise of the Warrants) at fair market value upon the occurrence of any of the following triggering events: (a) a change of control of Stonefield, (b) an initial public offering of Stonefield's common stock, or (c) the seventh anniversary of the issuance of the Warrants (September 29, 2030). Fair market value for purposes of the put right is to be determined by a mutually selected independent appraiser. The put right provides Ridgeline with a liquidity mechanism for its equity position in the absence of a public market for Stonefield's shares.

D. Relevant Capital Structure Context

To contextualize the Mezzanine Facility within Stonefield's overall capital structure, the following summarizes the existing indebtedness and equity ownership of Stonefield as of the anticipated closing date.

Existing Senior Secured Term Loan B. $275,000,000 outstanding principal amount, bearing interest at SOFR plus 375 basis points per annum, maturing November 15, 2026. The Senior Term Loan B is secured by a first-priority lien on substantially all assets of Stonefield and its subsidiaries. Administrative Agent: Whitmore National Bank, N.A.

Existing Senior Secured Revolving Credit Facility. $50,000,000 total committed amount, of which $12,000,000 is expected to be drawn at the closing of the Mezzanine Facility. The Revolving Facility bears interest at SOFR plus 350 basis points per annum and matures on November 15, 2025. Administrative Agent: Whitmore National Bank, N.A.

Total Funded Debt Post-Closing. Upon the closing of the Mezzanine Facility, Stonefield's total funded debt will be approximately $407,000,000, comprised of $275,000,000 under the Senior Term Loan B, $12,000,000 drawn under the Revolving Facility, and $120,000,000 under the Mezzanine Facility.

Financial Performance Metrics. For the twelve-month period ending June 30, 2023 ("LTM"), Stonefield reported Adjusted EBITDA of $108,600,000. For fiscal year 2022, Stonefield reported total revenue of $687,000,000 and Adjusted EBITDA of $98,400,000. The year-over-year improvement in Adjusted EBITDA reflects improved pricing discipline, operating leverage from network density gains, and the initial benefits of the fleet modernization program commenced in fiscal year 2022.

Total Leverage at Closing. Based on LTM Adjusted EBITDA of $108,600,000 and total funded debt of $407,000,000, the total leverage ratio at closing is approximately 3.75x.

Equity Ownership. Stonefield is a portfolio company of Cascade Ridge Capital Partners, LLC. Cascade Ridge Capital Fund V, LP holds approximately 78.4% of the equity of Stonefield through Cascade Ridge SLG Holdings, LLC, a Delaware limited liability company formed as the acquisition holding vehicle. The remaining equity is held by management and co-investors. The Sponsor acquisition of Stonefield was completed in November 2019 at a total enterprise value of approximately $520,000,000.

Guarantors under the Mezzanine Facility. The obligations of Stonefield under the Mezzanine Credit Agreement will be guaranteed by the following entities: (i) Cascade Ridge SLG Holdings, LLC (Delaware), (ii) Stonefield Intermodal Services, Inc. (Texas), (iii) Stonefield Fleet Management, LLC (Texas), and (iv) Stonefield Freight Brokerage, Inc. (Delaware). The guarantees are secured by a second-priority lien on the collateral that secures the Senior Credit Facilities, pursuant to an Intercreditor Agreement to be entered into among Whitmore National Bank, N.A., as Senior Agent, and Ridgeline, as Mezzanine Lender.

E. Transaction Fees

The following fees and expenses are expected to be incurred in connection with the Mezzanine Facility:

These transaction costs have significant tax implications, as discussed in Section VIII.A below. The proper characterization and amortization of each category of costs must be determined in order to optimize Stonefield's tax position while ensuring compliance with applicable provisions of the Code and Treasury Regulations.

III. Original Issue discount (OID) Analysis — Detachable Warrants

A. Applicable Legal Framework

The issuance of the Mezzanine Facility in tandem with the Warrants implicates the original issue discount rules of the Code. The following provisions form the core legal framework for this analysis:

IRC Section 1273 — Definition of OID. Section 1273(a)(1) defines "original issue discount" as the excess, if any, of the "stated redemption price at maturity" of a debt instrument over its "issue price." Where the issue price of a debt instrument is less than the amount payable at maturity (including all payments other than qualified stated interest), the difference constitutes OID, which accrues as additional interest income to the holder and is deductible as additional interest expense by the issuer over the term of the instrument.

IRC Section 1273(c)(2) — Investment Units. Section 1273(c)(2) provides that when a debt instrument is issued as part of an "investment unit" — that is, in conjunction with an option, warrant, or other right to acquire stock of the issuer or a related party — the issue price of the investment unit must be allocated between the debt instrument and the other property (here, the Warrants) based on their relative fair market values. This allocation reduces the issue price attributable to the debt component, which in turn creates OID.

IRC Section 1274. Section 1274 provides rules for determining the issue price of debt instruments issued for property. While Section 1274 is primarily applicable to debt instruments issued for non-publicly traded property, its principles inform the determination of issue price in the investment unit context.

Treasury Regulation § 1.1273-2. This regulation provides detailed rules for determining the issue price of a debt instrument, including provisions addressing debt instruments issued as part of an investment unit. Under Reg. § 1.1273-2(h), when a debt instrument and one or more other items of property are issued together as an investment unit for a single price (here, $120,000,000 in cash), the issue price of the investment unit (i.e., the cash amount) is allocated between the components based on their relative fair market values as of the issue date.

Treasury Regulation § 1.1275-2. This regulation provides additional guidance on the treatment of investment units, including rules regarding the separation and recombination of investment unit components and the consequences thereof for OID purposes.

Together, these provisions establish that the detachable Warrants issued in connection with the Mezzanine Facility require an allocation of the $120,000,000 issue price, with the result that the debt component will have an issue price that is less than its stated principal amount, thereby generating OID.

B. Investment Unit Analysis

The Mezzanine Facility ($120,000,000 principal amount) and the Warrants (representing 3.0% of the fully-diluted equity of Stonefield, with an exercise price of $0.01 per share) constitute an "investment unit" within the meaning of IRC Section 1273(c)(2) and Treasury Regulation § 1.1273-2(h). This conclusion is based on the following factors:

First, the Mezzanine Facility and the Warrants are being issued simultaneously, at closing, in connection with the same transaction, and the issuance of the Warrants is a condition to Ridgeline's commitment to fund the Mezzanine Facility. The Term Sheet and the Draft Credit Agreement treat the Warrants as an integral component of the overall financing package.

Second, the Warrants are detachable from the debt instrument. Unlike embedded conversion features that are inseparable from the underlying debt (and which are generally analyzed under the contingent payment debt instrument rules or the conversion feature rules of Reg. § 1.1272-1(e)), the Warrants are separate instruments that can be exercised, transferred, or settled independently of the Mezzanine Facility. The Warrant Agreement is a separate document from the Mezzanine Credit Agreement, and the Warrants are immediately exercisable upon issuance.

Third, the Warrants are "other property" within the meaning of Section 1273(c)(2) — specifically, they are options to acquire stock of the issuer (Stonefield). The nominal exercise price of $0.01 per share, which is effectively zero in economic terms, does not alter this characterization; the Warrants are nonetheless equity-linked instruments that must be separately valued and allocated.

Because the Warrants are detachable and treated as separate property for tax purposes, the $120,000,000 cash proceeds received by Stonefield at closing must be allocated between the debt component (the Mezzanine Facility) and the equity component (the Warrants) based on their respective fair market values as of the closing date (September 29, 2023). The amount allocated to the Warrants reduces the issue price of the debt component, and the difference between the stated redemption price at maturity of the debt component and its reduced issue price constitutes OID.

C. Valuation and Allocation of Issue Price

The determination of the fair market value of the Warrants as of the closing date is critical to the OID analysis, as it directly determines the magnitude of OID generated by the investment unit allocation. Because the Warrants entitle Ridgeline to acquire 3.0% of the fully-diluted equity of Stonefield at a nominal exercise price of $0.01 per share, the fair market value of the Warrants is essentially equal to 3.0% of the total equity value of Stonefield as of the closing date, less the aggregate nominal exercise price.

Valuation Methodologies. The fair market value of the Warrants may be established using one or more of the following methodologies:

• Black-Drubeck Option Pricing Model. The Black-Drubeck model is widely used for valuing options and warrants. However, because the Warrants have a nominal exercise price and are immediately exercisable, the Black-Drubeck model would produce a value that is essentially equal to the fair market value of the underlying equity interest (i.e., the time value component is minimal relative to the intrinsic value). The key inputs to the model — current equity value, exercise price, expected volatility, risk-free rate, and time to expiration — can be estimated based on Stonefield's financial profile and comparable public company data.

• Implied Enterprise Value Analysis. An alternative approach is to estimate the total enterprise value of Stonefield as of the closing date and derive the equity value by subtracting total funded debt. Based on the November 2019 acquisition at approximately $520,000,000 TEV and the subsequent operating performance of the business, a current enterprise value estimate can be developed using an appropriate multiple of LTM Adjusted EBITDA ($108,600,000). At current market multiples for mid-cap transportation and logistics companies, which range from approximately 7.0x to 9.5x Adjusted EBITDA, the implied enterprise value would range from approximately $760,000,000 to $1,032,000,000. Subtracting total funded debt of $407,000,000 yields an implied equity value range of approximately $353,000,000 to $625,000,000. Three percent of the midpoint equity value (approximately $489,000,000) would yield a warrant value of approximately $14,700,000.

• Comparable Transaction Analysis. This methodology examines recent mezzanine financing transactions in the transportation and logistics sector where warrant coverage was included, and derives implied warrant values based on the pricing of those transactions. While comparable transaction data for private mezzanine deals is limited, market data from financial sponsors and mezzanine fund administrators may be available through Zynvaro Thornton Advisory Group, LLC.

Enterprise Value Context. As noted above, Cascade Ridge acquired Stonefield in November 2019 for a total enterprise value of approximately $520,000,000. Since the acquisition, Stonefield's operating performance has improved, with LTM Adjusted EBITDA increasing from approximately $83,000,000 at the time of acquisition to $108,600,000 as of June 30, 2023 — an increase of approximately 31%. This operating improvement, combined with favorable market conditions in the transportation sector, supports an enterprise value estimate that is meaningfully higher than the 2019 acquisition price.

Illustrative Allocation Analysis. For purposes of illustration (and subject to refinement upon receipt of the formal warrant valuation), assume the Warrants are valued at $X million. In that case:

• The issue price of the investment unit is $120,000,000 (the cash amount paid by Ridgeline).

• The issue price allocated to the Warrants is $X million.

• The issue price allocated to the debt component (Mezzanine Facility) is ($120,000,000 minus $X million).

• The stated redemption price at maturity of the debt component is $120,000,000 (plus accrued PIK, as discussed in Section III.E below).

• The OID arising from the warrant allocation is $X million.

The higher the fair market value attributed to the Warrants, the greater the OID generated — and, consequently, the greater the annual interest deduction available to Stonefield over the six-year term of the Mezzanine Facility. However, as discussed in Section IV below, this incremental interest deduction is subject to the Section 163(j) limitation, and may not be currently deductible to the extent that Stonefield's total business interest expense exceeds 30% of its ATI.

Recommendation. We recommend that Stonefield engage an independent appraiser — or, alternatively, coordinate with Zynvaro Thornton Advisory Group, LLC (Andrew S. Thornton, managing director), which is already serving as Stonefield's financial advisor on this transaction — to establish a defensible fair market value for the Warrants as of the closing date. The appraisal should be completed prior to closing, if practicable, so that the allocation can be documented in the closing deliverables and consistently applied by both Stonefield and Ridgeline for tax reporting purposes. The valuation should be supported by a written report that sets forth the methodology, assumptions, and conclusions in sufficient detail to withstand IRS scrutiny on audit.

D. OID Accrual and Amortization

Statutory Framework. Under IRC Section 1272(a), OID is included in the gross income of the holder (Ridgeline) and is deductible by the issuer (Stonefield) on a daily basis over the term of the debt instrument, using the "constant yield method" (also referred to as the "economic accrual method"). The constant yield method requires that OID be accrued based on the yield to maturity of the debt instrument, computed using the issue price and the payments to be made under the instrument, including all stated interest and principal payments.

Constant Yield Methodology. Under the constant yield method, the daily portion of OID for any accrual period is determined by:

(i) multiplying the adjusted issue price of the debt instrument at the beginning of the accrual period by the yield to maturity of the instrument (properly adjusted for the length of the accrual period), and

(ii) subtracting the amount of any qualified stated interest (QSI) allocable to the accrual period.

The adjusted issue price of the debt instrument is the original issue price, increased by the OID previously accrued (whether or not actually deducted by the issuer or included in income by the holder). This methodology produces a pattern of OID accrual that is somewhat front-loaded in the early years of the instrument's term, as the accrual in each period is based on a progressively higher adjusted issue price.

Tax Characterization. For both federal income tax purposes, the OID is treated as additional interest. This characterization has several important consequences:

• Stonefield may deduct the OID as interest expense, subject to the Section 163(j) limitation.

• Ridgeline must include the OID in gross income as ordinary interest income, regardless of whether any cash payment is received.

• The OID accrual is independent of, and in addition to, the cash interest (850 bps) and PIK interest (250 bps) payable under the Mezzanine Facility.

Illustrative Accrual Schedule. An illustrative year-by-year OID accrual schedule will be prepared upon receipt of the formal warrant valuation. The schedule will cover the six-year term from closing (September 29, 2023) through maturity (September 29, 2029) and will reflect the constant yield accrual methodology, taking into account the interaction between the warrant allocation OID and the PIK interest component (as discussed in Section III.E below). The schedule will be set forth in Appendix A to this memorandum.

Commitment Fee Interaction. The $2,400,000 commitment fee paid by Stonefield to Ridgeline at closing may also affect the yield computation and the OID analysis. Under general principles, a fee paid by a borrower to a lender in connection with the origination of a debt instrument is economically equivalent to a reduction in the issue price of the instrument. If the commitment fee is treated as reducing the issue price, it would increase the OID on the Mezzanine Facility by $2,400,000 (in addition to the OID arising from the warrant allocation). Alternatively, the commitment fee may be treated as a separate deductible expense amortized over the term of the debt. The proper characterization of the commitment fee is discussed further in Section VIII.A below; for purposes of the OID computation, we recommend treating it as additional OID to ensure conservative and consistent reporting.

E. Interaction of OID with PIK Component

The 250 basis point PIK interest component of the Mezzanine Facility introduces additional complexity into the OID analysis. Because the PIK interest is not paid in cash but instead compounds quarterly and is added to the outstanding principal balance, it affects both the stated redemption price at maturity and the yield computation of the debt instrument.

Qualified Stated Interest Analysis. Under Treasury Regulation § 1.1273-1(c), "qualified stated interest" ("QSI") is defined as stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually at a single fixed rate. Interest that is payable by the addition to the outstanding principal balance — i.e., PIK interest — does not satisfy the requirement that it be unconditionally payable in cash or property. Accordingly, the 250 basis point PIK component of the Mezzanine Facility generally does not qualify as QSI.

The 850 basis point cash pay component, by contrast, does satisfy the QSI requirements, as it is unconditionally payable in cash at a single fixed rate on a quarterly basis (i.e., at intervals of at least annually). Accordingly, only the 850 bps cash pay component qualifies as QSI; the 250 bps PIK component does not.

Consequences of Non-QSI Treatment. Because the PIK interest is not QSI, it is included in the computation of the stated redemption price at maturity for OID purposes. Under Treasury Regulation § 1.1275-1(d), the stated redemption price at maturity of a debt instrument is the sum of all payments to be made under the instrument other than QSI. For the Mezzanine Facility, the stated redemption price at maturity includes:

(a) the original principal amount of $120,000,000;

(b) all PIK interest accrued and compounded over the six-year term, which is not QSI and therefore is included in the stated redemption price at maturity; and

The inclusion of compounded PIK interest in the stated redemption price at maturity has the effect of increasing the total OID on the debt instrument. The total OID is the excess of the stated redemption price at maturity (including compounded PIK) over the issue price of the debt component (which has already been reduced by the warrant allocation). In other words, the Mezzanine Facility generates OID from two sources: (1) the warrant allocation, which reduces the issue price below the face amount, and (2) the PIK interest, which increases the stated redemption price at maturity above the face amount.

Combined OID Computation. The combined OID from both sources must be computed together under the constant yield method, using a single yield to maturity that takes into account (i) the reduced issue price (reflecting the warrant allocation), (ii) the cash interest payments (QSI, excluded from the OID computation), (iii) the PIK interest accruals (included in OID), and (iv) the stated redemption price at maturity (including accumulated PIK). This computation will produce a single OID amortization schedule that reflects all of these inputs.

We note that the combined OID may be substantial. By way of illustration, if the warrants are valued at $14,700,000 (using the midpoint equity value estimate described in Section III.C) and the PIK interest compounds over the six-year term to an aggregate amount of approximately $20-22 million (depending on the compounding mechanics), the total OID could be in the range of $35-37 million. This would produce annual OID accrual of approximately $5-7 million per year (with some front-loading due to the constant yield methodology). The actual figures will depend on the final warrant valuation and the precise mechanics of PIK compounding as set forth in the Mezzanine Credit Agreement.

F. Recommendations on OID

Based on the foregoing analysis, we make the following recommendations regarding the OID consequences of the Mezzanine Facility:

1. Engage Appraiser. Engage an independent appraiser to determine the fair market value of the Warrants as of the closing date. We recommend coordinating with Zynvaro Thornton Advisory Group, LLC, which is already retained as Stonefield's financial advisor and has access to the company's financial data and projections. The appraisal should be completed in advance of closing, to the extent practicable.

2. Document Allocation. The allocation of the $120,000,000 issue price between the debt component and the Warrants should be documented in the closing deliverables to promote consistency between Stonefield and Ridgeline in their respective tax reporting. We recommend including an allocation provision in the Warrant Agreement, or alternatively, executing a separate tax allocation side letter between Stonefield and Ridgeline that sets forth the agreed allocation and the methodology used to derive it. While the IRS is not bound by allocations agreed between parties, a contemporaneous, documented allocation based on a defensible appraisal will carry significant weight on audit.

3. OID Amortization Schedule. Upon completion of the warrant valuation, we will prepare a detailed OID amortization schedule for use by Stonefield's tax compliance team and external auditors at Braddock & Saylor LLP. The schedule will set forth the year-by-year OID accrual, the adjusted issue price of the debt component at the beginning and end of each accrual period, and the yield to maturity of the instrument. This schedule will be included as Appendix A to a revised version of this memorandum.

4. Consistency with Ridgeline. We recommend confirming with Archer Blackwell & Moss LLP (counsel to Ridgeline) that Ridgeline will report the investment unit allocation consistently with Stonefield's position. While there is no statutory requirement of consistency, inconsistent reporting by the borrower and lender would increase the risk of IRS inquiry.

IV. Deductibility of PIK Interest Under IRC Section 163(j)

A. Overview of Section 163(j) Limitation

IRC Section 163(j), as amended by the Tax Cuts and Jobs Act of 2017 ("TCJA") and further modified by the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), imposes a limitation on the deductibility of "business interest expense" for all taxpayers other than certain exempt entities. The limitation applies at the entity level and, for partnerships and S corporations, is applied at the partnership or S corporation level before being allocated to partners or shareholders.

Under Section 163(j)(1), the deduction for business interest expense in any taxable year is limited to the sum of:

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

(2) 30% of the taxpayer's adjusted taxable income ("ATI") for the taxable year; and

(3) the taxpayer's floor plan financing interest for the taxable year (not applicable to Stonefield).

Definition of Business Interest Expense. Section 163(j)(5) defines "business interest" as any interest paid or accrued on indebtedness properly allocable to a trade or business. For Stonefield, substantially all interest expense — including cash interest on the Senior Facilities, cash interest on the Mezzanine Facility, PIK interest, and OID amortization — constitutes business interest expense subject to the Section 163(j) limitation.

Definition of Adjusted Taxable Income. Under Section 163(j)(8), ATI is computed by starting with the taxpayer's taxable income and making certain adjustments, including the exclusion of business interest expense, business interest income, net operating loss deductions, and (for taxable years beginning before January 1, 2022) any deduction allowable for depreciation, amortization, or depletion. Critically, for tax years beginning after December 31, 2021 — which includes Stonefield's fiscal year ending December 31, 2023, and all subsequent years during the term of the Mezzanine Facility — depreciation and amortization are no longer added back in computing ATI. As a result, ATI is now more closely analogous to taxable EBIT (earnings before interest and taxes) rather than taxable EBITDA, significantly reducing the Section 163(j) limitation for capital-intensive businesses such as Stonefield.

Carryforward of Disallowed Interest. Under Section 163(j)(2), any business interest expense that is disallowed under the limitation in a given taxable year is carried forward to the next succeeding taxable year and treated as business interest paid or accrued in that succeeding year. The carryforward is indefinite — there is no expiration period — and disallowed interest carryforwards are available in subsequent years to the extent the taxpayer has sufficient Section 163(j) capacity.

B. Treatment of PIK Interest as Business Interest Expense

The 250 basis point PIK interest on the Mezzanine Facility, though not paid in cash, constitutes "interest" for federal income tax purposes. Under the accrual method of accounting — which we assume Stonefield uses for federal income tax purposes — PIK interest is accrued as it compounds, creating a current-year deduction (subject to the Section 163(j) limitation) even though no cash payment is made until maturity or prepayment.

Similarly, the OID arising from the warrant allocation and the inclusion of PIK interest in the stated redemption price at maturity (as discussed in Section III above) is treated as interest for purposes of Section 163(j). Treasury Regulation § 1.163(j)-1(b)(22) defines "interest" broadly to include OID, and the legislative history of the TCJA confirms that the Section 163(j) limitation applies to all forms of interest expense, whether paid in cash, accrued, or economically accrued through OID amortization.

Accordingly, the total annual interest burden subject to Section 163(j) for purposes of computing Stonefield's interest deduction limitation includes all of the following components:

(a) Cash interest on the Mezzanine Facility: 850 bps on the outstanding principal balance (which increases quarterly as PIK accrues);

(b) PIK interest on the Mezzanine Facility: 250 bps, compounding quarterly;

(d) Interest on the Senior Term Loan B: SOFR + 375 bps on $275,000,000;

(e) Interest on the Senior Revolving Facility: SOFR + 350 bps on the drawn balance;

(f) Commitment fee amortization and other deferred financing cost amortization to the extent treated as interest for Section 163(j) purposes.

C. Quantitative Analysis of Section 163(j) Capacity

The following quantitative analysis is illustrative and is based on assumptions regarding SOFR rates, Stonefield's financial performance, and the final warrant valuation. Actual results will depend on facts existing at the time of filing. This analysis is intended to provide a reasonable estimate of the magnitude of the Section 163(j) issue for purposes of transaction structuring and planning.

Estimated ATI. Stonefield's LTM Adjusted EBITDA as of June 30, 2023 is $108,600,000. However, ATI for Section 163(j) purposes must be computed from taxable income, not financial reporting EBITDA. Key differences include: (i) the exclusion of any items that are not included in taxable income (e.g., certain book-tax timing differences); (ii) the add-back of business interest expense and NOL deductions; and (iii) the exclusion of depreciation and amortization add-backs (for taxable years beginning after December 31, 2021).

Based on Stonefield's historical financial data, we estimate that annual depreciation and amortization expense is approximately $25,000,000 to $35,000,000 (reflecting the existing fleet and terminal asset base, plus amortization of acquisition-related intangibles). Subtracting this from Adjusted EBITDA yields an estimated ATI of approximately $70,000,000 to $85,000,000 (before adding back business interest expense and NOL deductions, which are already excluded from the ATI computation). Applying the 30% limitation produces an estimated Section 163(j) cap of approximately $21,000,000 to $25,500,000 per year.

Estimated Total Annual Interest Expense (Year 1). The following table sets forth the estimated total annual interest expense for Stonefield in Year 1 of the Mezzanine Facility (fiscal year ending December 31, 2023, pro-rated for the portion of the year following the September 29, 2023 closing, and annualized for illustrative purposes):

Estimated Section 163(j) Disallowance. Comparing estimated total annual interest expense of approximately $45-47 million to the estimated Section 163(j) limitation of approximately $21-25.5 million, the estimated annual disallowance is approximately $19,500,000 to $26,000,000. This represents a significant portion of Stonefield's total interest expense and would result in substantial disallowed interest carryforwards accumulating each year during the term of the Mezzanine Facility.

Pre-Mezzanine Capacity Analysis. It is important to note that even before the Mezzanine Facility, Stonefield's existing senior debt generates annual interest expense of approximately $26,000,000. If the Section 163(j) cap is $21,000,000 to $25,500,000, the senior debt interest alone may consume all or substantially all of the available capacity, leaving little or no room for the incremental mezzanine interest. This means that effectively all of the mezzanine-related interest expense — cash interest, PIK, and OID — may be disallowed in the year incurred and carried forward indefinitely.

Impact of Increased Depreciation on ATI. As noted above, the purpose of the Mezzanine Facility is to fund Stonefield's capital expenditure program, which contemplates up to $85 million per year in fleet expansion, terminal buildout, and technology investments. As these capital expenditures are placed in service, the resulting depreciation expense will reduce ATI (since depreciation is no longer added back for taxable years beginning after December 31, 2021). This creates a counterintuitive dynamic: the deployment of mezzanine proceeds for their intended purpose will simultaneously increase total interest expense (as the PIK component grows the principal balance) and decrease ATI (as depreciation rises), thereby further constraining Section 163(j) capacity. Over the 2024-2026 period, the increase in annual depreciation from new CapEx could be $15,000,000 to $25,000,000 per year (depending on the asset mix and applicable depreciation methods, including any available bonus depreciation), which could reduce the Section 163(j) cap by $4,500,000 to $7,500,000 per year.

Cumulative Carryforward Implications. Over the six-year term of the Mezzanine Facility, the cumulative disallowed interest carryforward could grow to a very substantial amount — potentially $100,000,000 or more in aggregate. These carryforwards would be available to offset taxable income in future years (to the extent Section 163(j) capacity permits), but the timing of their utilization depends on factors such as future revenue growth, SOFR rate movements, debt prepayments, and the eventual disposition of Stonefield (e.g., in a sale or IPO). The accumulation of large disallowed interest carryforwards has implications for Stonefield's effective tax rate, deferred tax asset recognition, and cash tax position, all of which should be modeled and discussed with Stonefield's management and auditors.

D. Planning Considerations

Real Property Trade or Business Election. Under Section 163(j)(7)(B), an "electing real property trade or business" is exempt from the Section 163(j) limitation. This election is available to any trade or business described in Section 469(c)(7)(C), which includes any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. While Stonefield's core business is transportation and logistics — which does not qualify as a real property trade or business — the terminal facility buildout component of the CapEx program involves the construction and operation of real property. It may be worth evaluating whether any subsidiary engaged primarily in terminal operations could qualify for this election. However, we consider this unlikely to provide meaningful relief, as the terminal operations are ancillary to Stonefield's transportation business and are not conducted through separate entities that are primarily engaged in real property activities.

Small Business Exemption. Under Section 163(j)(3), the limitation does not apply to any taxpayer (other than a tax shelter) that meets the gross receipts test of Section 448(c) — i.e., average annual gross receipts for the three preceding taxable years do not exceed $29,000,000 (as adjusted for inflation for 2023). Stonefield's FY2022 revenue of $687,000,000 clearly exceeds this threshold, and the aggregation rules of Section 448(c)(2) would require the gross receipts of all members of the controlled group to be taken into account. Accordingly, the small business exemption is not available to Stonefield or any member of its consolidated group.

Coordination with Sponsor Tax Counsel. Section 163(j) applies at the partnership level for partnerships, including Cascade Ridge Capital Fund V, LP. The fund's share of Stonefield's interest expense may be subject to separate Section 163(j) limitations at the fund level, which could further restrict the deductibility of interest expense from the fund investors' perspective. We recommend conferring with Patricia V. Baines at Caldwell Baines & Associates, PC regarding the partnership-level implications and the impact on fund investor reporting (particularly K-1 disclosure of Section 163(j) items).

Tax Return Preparation. We recommend that Stonefield prepare a detailed Section 163(j) computation model incorporating the Mezzanine Facility and provide it to Braddock & Saylor LLP (William F. Saylor, engagement partner) for use in the preparation of Stonefield's FY2023 federal and state income tax returns. The model should project Section 163(j) computations for each year of the Mezzanine Facility term and track disallowed interest carryforwards. This model will be included as Appendix B to a revised version of this memorandum.

V. Federal Income Tax Treatment of Warrant Issuance and Exercise

A. Tax Treatment Upon Issuance (Closing Date)

The tax consequences to Stonefield and Ridgeline upon the issuance of the Warrants at closing are governed by the investment unit rules of IRC Section 1273(c)(2) and the general principles applicable to the issuance of stock options and warrants.

Treatment of Stonefield (Issuer). Stonefield does not recognize income or gain upon the issuance of the Warrants. Under IRC Section 1032(a), a corporation does not recognize gain or loss on the receipt of money or other property in exchange for its own stock (including options and warrants to acquire its stock). The portion of the $120,000,000 issue price allocated to the Warrants is treated, in economic substance, as a payment by Ridgeline for the equity component of the investment unit. From Stonefield's perspective, this amount is reflected as additional paid-in capital (or a similar equity account) on its balance sheet. For tax purposes, the allocated amount reduces the issue price of the debt component, creating OID as discussed in Section III above.

Treatment of Ridgeline (Holder). Ridgeline's tax basis in the Warrants equals the amount of the $120,000,000 issue price allocated to the Warrants under the investment unit rules. This basis represents Ridgeline's cost for the equity component of the investment and will be relevant in determining gain or loss upon a subsequent exercise, sale, or settlement of the Warrants.

Ridgeline's tax basis in the Mezzanine Facility debt instrument equals $120,000,000 minus the amount allocated to the Warrants. This reduced basis is the "issue price" of the debt component for OID purposes, and Ridgeline will include OID accruals in gross income over the term of the instrument under the constant yield method, as described in Section III.D above.

B. Tax Treatment Upon Exercise

Exercise Mechanics. The Warrants are exercisable at $0.01 per share. Upon exercise, Ridgeline will pay the aggregate exercise price (which, given the nominal per-share amount, will be a trivial cash outlay) and receive shares of Stonefield common stock.

Treatment of Ridgeline (Exercising Warrant Holder). Upon exercise, Ridgeline's tax basis in the shares of Stonefield common stock received equals the sum of: (a) its basis in the Warrants (i.e., the amount allocated to the Warrants from the investment unit issue price) plus (b) the $0.01 per share exercise price paid. The exercise of the Warrants is not a taxable event to Ridgeline; no gain or loss is recognized upon exercise because the exercise is merely a conversion of one form of equity right (the Warrant) into another (the underlying stock), with the tax basis carrying over.

Treatment of Stonefield (Issuer). Stonefield does not recognize income or gain upon the exercise of the Warrants. Under IRC Section 1032(a), a corporation does not recognize gain or loss on the receipt of property in exchange for its own stock. The exercise of the Warrants is treated as a capital transaction, and the aggregate exercise price received by Stonefield is added to its equity accounts.

Withholding Tax. No withholding tax applies upon exercise of the Warrants, as both Stonefield and Ridgeline are domestic entities and the transaction involves the issuance of equity by a domestic corporation to a domestic holder.

C. Anti-Dilution Adjustments

The Warrants include weighted-average broad-based anti-dilution protection. Under this provision, if Stonefield issues additional shares of common stock (or common stock equivalents) at a price below the then-current fair market value per share, the exercise price of the Warrants and/or the number of shares issuable upon exercise will be adjusted using a broad-based weighted-average formula, so as to protect Ridgeline against dilution of its percentage equity interest.

IRC Section 305 and Constructive Distributions. Under IRC Section 305(c) and Treasury Regulation § 1.305-7, certain adjustments to the conversion ratio or exercise price of convertible securities or warrants may be treated as constructive distributions (deemed dividends) to the holders of such securities. Specifically, Reg. § 1.305-7(a) provides that an adjustment in the conversion ratio or exercise price of a convertible instrument to reflect a stock dividend, stock split, or similar event is generally not treated as a constructive distribution, provided the adjustment is made pursuant to a bona fide, reasonable anti-dilution provision.

However, adjustments that have the effect of increasing the warrant holder's proportionate interest in the corporation — beyond what is necessary to prevent dilution — could be treated as constructive distributions under Section 305(c). For example, an adjustment triggered by an event that does not actually dilute existing stockholders, or an adjustment formula that systematically over-compensates for dilution, could result in deemed distribution treatment.

Recommendation. To minimize the risk of constructive distribution treatment under Section 305, we recommend that the anti-dilution provisions in the Warrant Agreement be reviewed to ensure that:

(a) The anti-dilution adjustments are limited to events that actually cause dilution of the warrant holder's proportionate equity interest (e.g., stock splits, stock dividends, below-market issuances, and similar events);

(b) The weighted-average formula used to compute adjustments is reasonable and consistent with market practice for broad-based anti-dilution protection;

(c) The Warrant Agreement does not include "ratchet" or "full-ratchet" anti-dilution provisions, which could more easily be characterized as providing the warrant holder with an increased proportionate interest; and

(d) The Warrant Agreement includes language expressly providing that anti-dilution adjustments are intended solely to prevent dilution and are not intended to result in a distribution to the warrant holder within the meaning of Section 305(c).

We will coordinate with Daniel Obi and Lisa Morrow on the Banking & Finance team to ensure the Warrant Agreement is drafted to satisfy these requirements and to fall within the safe harbors of Reg. § 1.305-7(a).

D. Put Right Tax Treatment

The Warrants include a put right exercisable by Ridgeline upon the occurrence of a change of control of Stonefield, an initial public offering of Stonefield's common stock, or the seventh anniversary of the issuance of the Warrants (September 29, 2030). Upon exercise of the put right, Stonefield is obligated to repurchase the Warrants (or, if the Warrants have been exercised, the underlying shares) at fair market value as determined by a mutually selected independent appraiser.

Tax Treatment to Ridgeline (Selling/Redeeming Holder). If Ridgeline exercises the put right and Stonefield repurchases the shares (or warrants) at fair market value, the transaction is treated as a redemption of stock under IRC Section 302. Section 302 provides that a redemption of stock by a corporation is treated either as (a) a sale or exchange, entitling the redeeming shareholder to capital gain or loss treatment, or (b) a distribution under Section 301 (potentially taxable as a dividend to the extent of earnings and profits), depending on whether the redemption meets one of the tests set forth in Section 302(b).

The relevant tests under Section 302(b) include:

(1) Complete Termination of Interest (Section 302(b)(3)). A redemption that completely terminates the shareholder's equity interest in the corporation qualifies as an exchange. Given that Ridgeline holds only 3.0% of the fully-diluted equity of Stonefield, a complete redemption of Ridgeline's interest would clearly satisfy this test. Provided Ridgeline has no other equity interest in Stonefield (directly or through attribution under Section 318), a put-right exercise resulting in the repurchase of all of Ridgeline's shares or warrants would qualify as a complete termination and would be treated as a sale or exchange.

(2) Substantially Disproportionate Redemption (Section 302(b)(2)). Even if the complete termination test is not satisfied (e.g., because Ridgeline retains a residual equity interest), a redemption may qualify as substantially disproportionate if, after the redemption, the shareholder owns less than 50% of the total combined voting power and the shareholder's percentage ownership is less than 80% of its pre-redemption percentage. Given Ridgeline's small percentage ownership, this test would also likely be satisfied.

(3) Not Essentially Equivalent to a Dividend (Section 302(b)(1)). This is a facts-and-circumstances test that applies as a residual standard. A redemption that results in a "meaningful reduction" in the shareholder's proportionate interest generally qualifies.

Based on the foregoing, we expect that the exercise of the put right by Ridgeline — resulting in the complete redemption of Ridgeline's 3.0% equity interest — would be treated as a sale or exchange under Section 302(b)(3), entitling Ridgeline to capital gain or loss treatment. Ridgeline would recognize capital gain equal to the excess of the fair market value purchase price over its adjusted basis in the shares (or warrants), or capital loss if the purchase price is less than its adjusted basis.

Tax Treatment to Stonefield (Redeeming Corporation). From Stonefield's perspective, the payment made to Ridgeline in connection with the put-right exercise is treated as a distribution in redemption of its stock under Section 302. Stonefield does not receive a deduction for the amount paid to repurchase its own stock; the payment is a return of capital to the redeeming shareholder and reduces Stonefield's equity. To the extent the payment exceeds the paid-in capital attributable to the redeemed shares, the excess reduces retained earnings.

E. Interaction with Change of Control Mandatory Prepayment

The Draft Credit Agreement provides that, upon a change of control of Stonefield, the outstanding principal balance of the Mezzanine Facility (including accrued PIK) must be prepaid at a price equal to 103% of the outstanding principal amount, plus all accrued and unpaid interest (including accrued but uncapitalized PIK interest). The Warrants are also immediately puttable by Ridgeline upon a change of control.

Tax Treatment of the 3% Prepayment Premium. The 3% premium above par payable upon a change-of-control mandatory prepayment (i.e., 3% of the then-outstanding principal balance) is treated as additional interest income to Ridgeline and an additional interest deduction to Stonefield for federal income tax purposes. This premium constitutes a "make-whole" or "call premium" payment that compensates the lender for the early termination of the lending arrangement and is characterized as interest under general tax principles. The deductibility of this premium payment by Stonefield is subject to the Section 163(j) limitation in the year of payment.

Interaction of Debt Prepayment and Warrant Put. In the event of a change of control, both the mandatory prepayment of the Mezzanine Facility and the exercise of the put right on the Warrants may occur simultaneously or in rapid succession. From a tax perspective, these are distinct transactions — the prepayment of the debt is a debt retirement event (potentially triggering recognition of any unamortized OID or cancellation-of-debt income, depending on the circumstances), while the warrant put is an equity redemption under Section 302. Proper sequencing and characterization of the payments is important to ensure that:

(a) The debt prepayment premium is properly treated as interest and not recharacterized as a payment for the equity component;

(b) The warrant put-right payment is properly treated as a stock redemption and not recharacterized as a debt payment;

(c) Any unamortized OID on the debt component at the time of prepayment is recognized by both Stonefield (as a deduction) and Ridgeline (as income) in the year of prepayment; and

(d) The aggregate payments are properly allocated between debt service and equity redemption in the closing documentation for the change of control transaction.

We recommend that the change of control provisions in the Mezzanine Credit Agreement and the Warrant Agreement be drafted to clearly distinguish between the debt prepayment and the equity redemption, and that the closing mechanics for any future change of control transaction include a tax allocation protocol.

VI. Interaction with Stonefield's Existing Interest Expense Deduction Capacity

A. Current Interest Expense Profile (Pre-Mezzanine)

Prior to the closing of the Mezzanine Facility, Stonefield's annual interest expense burden is generated by the following existing obligations:

Senior Secured Term Loan B. $275,000,000 outstanding principal amount at a floating rate of SOFR plus 375 basis points per annum. Based

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
From: Sylvia Hartwell, Tax Partner, Calderwood & Harkness LLP
To: Stephanie Okafor, Responsible Partner, Banking & Finance, Calderwood & Harkness LLP Daniel Obi, Lead Associate, Banking & Finance, Calderwood & Harkness LLP Janet R. Prescott, Chief Financial Officer, Stonefield Logistics Group Inc.
Date: August 22, 2023
Re: Tax Structuring Analysis — $120,000,000 Mezzanine Financing of Stonefield Logistics Group Inc.
Matter No.: 1012-00001
Billing Code: 231892.SLG
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I. Executive Summary and Purpose
The purpose of this memorandum is to analyze the principal federal income tax and Texas state tax implications of the proposed $120,000,000 mezzanine term loan (the "Mezzanine Facility") from Ridgeline Mezzanine Capital Fund III, LP ("Ridgeline") to Stonefield Logistics Group Inc. ("Stonefield" or the "Borrower"). This memorandum is intended to assist the deal team and the Borrower's management in understanding the tax structuring considerations that arise from the proposed transaction, and to identify planning opportunities and compliance obligations that should be addressed in advance of and following the anticipated closing on September 29, 2023.
This memorandum addresses five principal tax issues:
1.  Original Issue discount (OID) Arising from Detachable Warrants. The issuance of detachable warrants representing 3.0% of the fully-diluted equity of Stonefield in connection with the Mezzanine Facility creates an "investment unit" for federal income tax purposes, requiring an allocation of the $120,000,000 issue price between the debt component and the warrants. The portion allocated to the warrants reduces the issue price of the debt, generating original issue discount that will accrue as additional interest expense to Stonefield and additional interest income to Ridgeline over the six-year term of the facility.
2.  Deductibility of PIK Interest Under IRC Section 163(j). The Mezzanine Facility includes a 250 basis point payment-in-kind ("PIK") interest component that compounds quarterly and is added to the outstanding principal balance. This PIK interest, together with the OID arising from the warrant allocation, constitutes business interest expense subject to the limitation on business interest deductions imposed by IRC Section 163(j). Given Stonefield's existing senior debt burden and the post-2021 changes to the computation of adjusted taxable income ("ATI"), there is a meaningful risk of Section 163(j) disallowance.
3.  Federal Income Tax Treatment of Warrant Issuance and Exercise. The memorandum analyzes the tax consequences to both Stonefield and Ridgeline upon the issuance, exercise, and potential put-right settlement of the detachable warrants, including the application of IRC Sections 302, 305, and 1032, and the interplay between the anti-dilution provisions and the constructive distribution rules.
4.  Interaction with Stonefield's Existing Interest Expense Deduction Capacity. The incremental interest expense generated by the Mezzanine Facility—including cash interest, PIK interest, and OID amortization—must be layered on top of the existing interest burden from Stonefield's $275,000,000 Senior Secured Term Loan B and $50,000,000 Senior Secured Revolving Credit Facility. This section quantifies the combined interest expense and models the potential magnitude of Section 163(j) disallowance and carryforward accumulation.
5.  Texas Margin Tax Implications. Stonefield is headquartered in Fort Worth, Texas, and two of its operating subsidiaries are organized under Texas law. This memorandum addresses the treatment of the Mezzanine Facility—including interest expense, OID, and warrant-related transactions—under the Texas franchise (margin) tax.
This memorandum should be read in conjunction with the term sheet executed between Stonefield and Ridgeline on July 17, 2023 (the "Term Sheet"), and the first draft of the Mezzanine Credit Agreement circulated by Archer Blackwell & Moss LLP, counsel to Ridgeline, on August 4, 2023 (the "Draft Credit Agreement"). References herein to specific provisions of the Mezzanine Facility are based on the Term Sheet and the Draft Credit Agreement as currently drafted, and the analysis should be updated to the extent material terms are revised in subsequent drafts.
Coordination Note: Caldwell Baines & Associates, PC (Patricia V. Baines, engagement partner), acting as tax counsel to Cascade Ridge Capital Partners, LLC ("Cascade Ridge" or the "Sponsor"), is separately advising on the tax implications of the Mezzanine Facility at the fund and sponsor level, including partnership-level Section 163(j) computations for Cascade Ridge Capital Fund V, LP and investor-level reporting considerations. This memorandum addresses borrower-level tax considerations only and does not purport to analyze fund-level or investor-level consequences. We have been in preliminary communication with Ms. Baines regarding coordination on certain cross-cutting issues, including the investment unit allocation and its impact at both the borrower and lender levels.
Caveat: The analysis set forth in this memorandum is based on the Internal Revenue Code of 1986, as amended (the "Code" or "IRC"), the Treasury Regulations promulgated thereunder, published guidance of the Internal Revenue Service, and the Texas Tax Code, each as in effect as of the date of this memorandum. Changes in applicable law, regulations, or administrative interpretations—whether by legislative action, regulatory amendment, or judicial decision—could affect the conclusions expressed herein. This memorandum is intended to provide general tax structuring guidance and does not constitute a formal tax opinion. We have not been asked to, and do not, opine on the likelihood that any particular position would be sustained on audit or in litigation.
II. Transaction Summary
A. Overview of the Mezzanine Financing
The proposed transaction involves a mezzanine term loan to be extended by Ridgeline to Stonefield in the aggregate principal amount of $120,000,000. The key structural parameters of the Mezzanine Facility, as reflected in the Term Sheet and the Draft Credit Agreement, are summarized below.
Borrower. Stonefield Logistics Group Inc., a corporation organized under the laws of the State of Delaware, with its principal executive offices located at 4800 Commerce Parkway, Suite 1200, Fort Worth, Texas 76107. Stonefield is a national provider of less-than-truckload ("LTL"), intermodal freight, and freight brokerage services operating across the contiguous United States.
Mezzanine Lender. Ridgeline Mezzanine Capital Fund III, LP, a limited partnership organized under the laws of the State of Delaware, managed by its general partner, Ridgeline Capital Management, LLC, with offices at 767 Lexington Avenue, 22nd Floor, New York, New York 10065. Ridgeline is a dedicated mezzanine credit fund focused on middle-market sponsor-backed transactions.
Principal Amount. $120,000,000, funded in a single draw at closing.
Maturity Date. Six years from the closing date—September 29, 2029.
Purpose of Proceeds. The proceeds of the Mezzanine Facility will be used to fund Stonefield's capital expenditure program, which includes (i) fleet expansion (acquisition of approximately 350 additional Class 8 tractors and 1,200 dry van and refrigerated trailers over the 2024-2026 period), (ii) terminal facility buildout (construction and expansion of three new regional distribution terminals in Nashville, Tennessee; Columbus, Ohio; and Reno, Nevada), and (iii) technology upgrades (implementation of a new enterprise transportation management system and fleet telematics platform). The capital expenditure program is projected to require approximately $85 million per year over the next three fiscal years, with approximately 25% of unused annual CapEx capacity available for carryforward.
Governing Law. The Mezzanine Credit Agreement is governed by the laws of the State of New York.
B. Interest Rate Structure
The Mezzanine Facility bears interest at a total rate of 1,100 basis points (11.00%) per annum, comprised of two components:
Cash Pay Component. 850 basis points (8.50%) per annum, payable in cash quarterly in arrears on the last business day of each calendar quarter. The first interest payment date is December 29, 2023.
PIK Component. 250 basis points (2.50%) per annum, compounding quarterly and added to the outstanding principal balance on each quarterly interest payment date. The PIK component is not paid in cash during the term of the facility but instead accrues and capitalizes, increasing the outstanding principal balance (and thus the total amount due at maturity or upon any prepayment or acceleration).
Default Rate. Upon the occurrence and during the continuance of an Event of Default, the applicable interest rate increases by an additional 200 basis points, resulting in a total default rate of 1,300 basis points (13.00%) per annum.
Day Count Convention. Interest is computed on the basis of a 360-day year for the actual number of days elapsed (Actual/360), which is standard for institutional credit facilities and results in a modestly higher effective annual interest rate than a 365-day convention.
First Interest Payment Date. December 29, 2023, covering the period from the closing date (September 29, 2023) through December 29, 2023 (a stub period of approximately 91 days).
C. Warrant Terms
In connection with the Mezzanine Facility, Stonefield will issue to Ridgeline detachable warrants (the "Warrants") to purchase shares of common stock of Stonefield on the terms summarized below.
Warrant Coverage. The Warrants entitle Ridgeline to acquire shares of common stock of Stonefield representing 3.0% of the fully-diluted equity of Stonefield on a post-exercise basis. The number of shares issuable upon exercise of the Warrants will be determined based on the capitalization table of Stonefield as of the closing date.
Exercise Price. $0.01 per share. The nominal exercise price effectively provides Ridgeline with equity participation at negligible cost, reflecting the equity "kicker" that is customary in mezzanine financing transactions.
Warrant Type. The Warrants are detachable from the Mezzanine Facility debt instrument and are immediately exercisable upon issuance at closing. The Warrants may be exercised at any time following the closing date and do not have a separate expiration date, except as described below in connection with the put right.
Anti-Dilution Protection. The Warrants include weighted-average broad-based anti-dilution protection, which adjusts the exercise price and/or the number of shares issuable upon exercise in the event of (i) stock splits, (ii) stock dividends, (iii) issuances of common stock or common stock equivalents at a price below the then-current fair market value per share, and (iv) other dilutive events, in each case using a broad-based weighted-average formula.
Put Right. Ridgeline has the right to require Stonefield to repurchase the Warrants (or any shares issued upon exercise of the Warrants) at fair market value upon the occurrence of any of the following triggering events: (a) a change of control of Stonefield, (b) an initial public offering of Stonefield's common stock, or (c) the seventh anniversary of the issuance of the Warrants (September 29, 2030). Fair market value for purposes of the put right is to be determined by a mutually selected independent appraiser. The put right provides Ridgeline with a liquidity mechanism for its equity position in the absence of a public market for Stonefield's shares.
D. Relevant Capital Structure Context
To contextualize the Mezzanine Facility within Stonefield's overall capital structure, the following summarizes the existing indebtedness and equity ownership of Stonefield as of the anticipated closing date.
Existing Senior Secured Term Loan B. $275,000,000 outstanding principal amount, bearing interest at SOFR plus 375 basis points per annum, maturing November 15, 2026. The Senior Term Loan B is secured by a first-priority lien on substantially all assets of Stonefield and its subsidiaries. Administrative Agent: Whitmore National Bank, N.A.
Existing Senior Secured Revolving Credit Facility. $50,000,000 total committed amount, of which $12,000,000 is expected to be drawn at the closing of the Mezzanine Facility. The Revolving Facility bears interest at SOFR plus 350 basis points per annum and matures on November 15, 2025. Administrative Agent: Whitmore National Bank, N.A.
Total Funded Debt Post-Closing. Upon the closing of the Mezzanine Facility, Stonefield's total funded debt will be approximately $407,000,000, comprised of $275,000,000 under the Senior Term Loan B, $12,000,000 drawn under the Revolving Facility, and $120,000,000 under the Mezzanine Facility.
Financial Performance Metrics. For the twelve-month period ending June 30, 2023 ("LTM"), Stonefield reported Adjusted EBITDA of $108,600,000. For fiscal year 2022, Stonefield reported total revenue of $687,000,000 and Adjusted EBITDA of $98,400,000. The year-over-year improvement in Adjusted EBITDA reflects improved pricing discipline, operating leverage from network density gains, and the initial benefits of the fleet modernization program commenced in fiscal year 2022.
Total Leverage at Closing. Based on LTM Adjusted EBITDA of $108,600,000 and total funded debt of $407,000,000, the total leverage ratio at closing is approximately 3.75x.
Equity Ownership. Stonefield is a portfolio company of Cascade Ridge Capital Partners, LLC. Cascade Ridge Capital Fund V, LP holds approximately 78.4% of the equity of Stonefield through Cascade Ridge SLG Holdings, LLC, a Delaware limited liability company formed as the acquisition holding vehicle. The remaining equity is held by management and co-investors. The Sponsor acquisition of Stonefield was completed in November 2019 at a total enterprise value of approximately $520,000,000.
Guarantors under the Mezzanine Facility. The obligations of Stonefield under the Mezzanine Credit Agreement will be guaranteed by the following entities: (i) Cascade Ridge SLG Holdings, LLC (Delaware), (ii) Stonefield Intermodal Services, Inc. (Texas), (iii) Stonefield Fleet Management, LLC (Texas), and (iv) Stonefield Freight Brokerage, Inc. (Delaware). The guarantees are secured by a second-priority lien on the collateral that secures the Senior Credit Facilities, pursuant to an Intercreditor Agreement to be entered into among Whitmore National Bank, N.A., as Senior Agent, and Ridgeline, as Mezzanine Lender.
E. Transaction Fees
The following fees and expenses are expected to be incurred in connection with the Mezzanine Facility:
These transaction costs have significant tax implications, as discussed in Section VIII.A below. The proper characterization and amortization of each category of costs must be determined in order to optimize Stonefield's tax position while ensuring compliance with applicable provisions of the Code and Treasury Regulations.
III. Original Issue discount (OID) Analysis — Detachable Warrants
A. Applicable Legal Framework
The issuance of the Mezzanine Facility in tandem with the Warrants implicates the original issue discount rules of the Code. The following provisions form the core legal framework for this analysis:
IRC Section 1273 — Definition of OID. Section 1273(a)(1) defines "original issue discount" as the excess, if any, of the "stated redemption price at maturity" of a debt instrument over its "issue price." Where the issue price of a debt instrument is less than the amount payable at maturity (including all payments other than qualified stated interest), the difference constitutes OID, which accrues as additional interest income to the holder and is deductible as additional interest expense by the issuer over the term of the instrument.
IRC Section 1273(c)(2) — Investment Units. Section 1273(c)(2) provides that when a debt instrument is issued as part of an "investment unit" — that is, in conjunction with an option, warrant, or other right to acquire stock of the issuer or a related party — the issue price of the investment unit must be allocated between the debt instrument and the other property (here, the Warrants) based on their relative fair market values. This allocation reduces the issue price attributable to the debt component, which in turn creates OID.
IRC Section 1274. Section 1274 provides rules for determining the issue price of debt instruments issued for property. While Section 1274 is primarily applicable to debt instruments issued for non-publicly traded property, its principles inform the determination of issue price in the investment unit context.
Treasury Regulation § 1.1273-2. This regulation provides detailed rules for determining the issue price of a debt instrument, including provisions addressing debt instruments issued as part of an investment unit. Under Reg. § 1.1273-2(h), when a debt instrument and one or more other items of property are issued together as an investment unit for a single price (here, $120,000,000 in cash), the issue price of the investment unit (i.e., the cash amount) is allocated between the components based on their relative fair market values as of the issue date.
Treasury Regulation § 1.1275-2. This regulation provides additional guidance on the treatment of investment units, including rules regarding the separation and recombination of investment unit components and the consequences thereof for OID purposes.
Together, these provisions establish that the detachable Warrants issued in connection with the Mezzanine Facility require an allocation of the $120,000,000 issue price, with the result that the debt component will have an issue price that is less than its stated principal amount, thereby generating OID.
B. Investment Unit Analysis
The Mezzanine Facility ($120,000,000 principal amount) and the Warrants (representing 3.0% of the fully-diluted equity of Stonefield, with an exercise price of $0.01 per share) constitute an "investment unit" within the meaning of IRC Section 1273(c)(2) and Treasury Regulation § 1.1273-2(h). This conclusion is based on the following factors:
First, the Mezzanine Facility and the Warrants are being issued simultaneously, at closing, in connection with the same transaction, and the issuance of the Warrants is a condition to Ridgeline's commitment to fund the Mezzanine Facility. The Term Sheet and the Draft Credit Agreement treat the Warrants as an integral component of the overall financing package.
Second, the Warrants are detachable from the debt instrument. Unlike embedded conversion features that are inseparable from the underlying debt (and which are generally analyzed under the contingent payment debt instrument rules or the conversion feature rules of Reg. § 1.1272-1(e)), the Warrants are separate instruments that can be exercised, transferred, or settled independently of the Mezzanine Facility. The Warrant Agreement is a separate document from the Mezzanine Credit Agreement, and the Warrants are immediately exercisable upon issuance.
Third, the Warrants are "other property" within the meaning of Section 1273(c)(2) — specifically, they are options to acquire stock of the issuer (Stonefield). The nominal exercise price of $0.01 per share, which is effectively zero in economic terms, does not alter this characterization; the Warrants are nonetheless equity-linked instruments that must be separately valued and allocated.
Because the Warrants are detachable and treated as separate property for tax purposes, the $120,000,000 cash proceeds received by Stonefield at closing must be allocated between the debt component (the Mezzanine Facility) and the equity component (the Warrants) based on their respective fair market values as of the closing date (September 29, 2023). The amount allocated to the Warrants reduces the issue price of the debt component, and the difference between the stated redemption price at maturity of the debt component and its reduced issue price constitutes OID.
C. Valuation and Allocation of Issue Price
The determination of the fair market value of the Warrants as of the closing date is critical to the OID analysis, as it directly determines the magnitude of OID generated by the investment unit allocation. Because the Warrants entitle Ridgeline to acquire 3.0% of the fully-diluted equity of Stonefield at a nominal exercise price of $0.01 per share, the fair market value of the Warrants is essentially equal to 3.0% of the total equity value of Stonefield as of the closing date, less the aggregate nominal exercise price.
Valuation Methodologies. The fair market value of the Warrants may be established using one or more of the following methodologies:
•  Black-Drubeck Option Pricing Model. The Black-Drubeck model is widely used for valuing options and warrants. However, because the Warrants have a nominal exercise price and are immediately exercisable, the Black-Drubeck model would produce a value that is essentially equal to the fair market value of the underlying equity interest (i.e., the time value component is minimal relative to the intrinsic value). The key inputs to the model — current equity value, exercise price, expected volatility, risk-free rate, and time to expiration — can be estimated based on Stonefield's financial profile and comparable public company data.
•  Implied Enterprise Value Analysis. An alternative approach is to estimate the total enterprise value of Stonefield as of the closing date and derive the equity value by subtracting total funded debt. Based on the November 2019 acquisition at approximately $520,000,000 TEV and the subsequent operating performance of the business, a current enterprise value estimate can be developed using an appropriate multiple of LTM Adjusted EBITDA ($108,600,000). At current market multiples for mid-cap transportation and logistics companies, which range from approximately 7.0x to 9.5x Adjusted EBITDA, the implied enterprise value would range from approximately $760,000,000 to $1,032,000,000. Subtracting total funded debt of $407,000,000 yields an implied equity value range of approximately $353,000,000 to $625,000,000. Three percent of the midpoint equity value (approximately $489,000,000) would yield a warrant value of approximately $14,700,000.
•  Comparable Transaction Analysis. This methodology examines recent mezzanine financing transactions in the transportation and logistics sector where warrant coverage was included, and derives implied warrant values based on the pricing of those transactions. While comparable transaction data for private mezzanine deals is limited, market data from financial sponsors and mezzanine fund administrators may be available through Zynvaro Thornton Advisory Group, LLC.
Enterprise Value Context. As noted above, Cascade Ridge acquired Stonefield in November 2019 for a total enterprise value of approximately $520,000,000. Since the acquisition, Stonefield's operating performance has improved, with LTM Adjusted EBITDA increasing from approximately $83,000,000 at the time of acquisition to $108,600,000 as of June 30, 2023 — an increase of approximately 31%. This operating improvement, combined with favorable market conditions in the transportation sector, supports an enterprise value estimate that is meaningfully higher than the 2019 acquisition price.
Illustrative Allocation Analysis. For purposes of illustration (and subject to refinement upon receipt of the formal warrant valuation), assume the Warrants are valued at $X million. In that case:
•  The issue price of the investment unit is $120,000,000 (the cash amount paid by Ridgeline).
•  The issue price allocated to the Warrants is $X million.
•  The issue price allocated to the debt component (Mezzanine Facility) is ($120,000,000 minus $X million).
•  The stated redemption price at maturity of the debt component is $120,000,000 (plus accrued PIK, as discussed in Section III.E below).
•  The OID arising from the warrant allocation is $X million.
The higher the fair market value attributed to the Warrants, the greater the OID generated — and, consequently, the greater the annual interest deduction available to Stonefield over the six-year term of the Mezzanine Facility. However, as discussed in Section IV below, this incremental interest deduction is subject to the Section 163(j) limitation, and may not be currently deductible to the extent that Stonefield's total business interest expense exceeds 30% of its ATI.
Recommendation. We recommend that Stonefield engage an independent appraiser — or, alternatively, coordinate with Zynvaro Thornton Advisory Group, LLC (Andrew S. Thornton, managing director), which is already serving as Stonefield's financial advisor on this transaction — to establish a defensible fair market value for the Warrants as of the closing date. The appraisal should be completed prior to closing, if practicable, so that the allocation can be documented in the closing deliverables and consistently applied by both Stonefield and Ridgeline for tax reporting purposes. The valuation should be supported by a written report that sets forth the methodology, assumptions, and conclusions in sufficient detail to withstand IRS scrutiny on audit.
D. OID Accrual and Amortization
Statutory Framework. Under IRC Section 1272(a), OID is included in the gross income of the holder (Ridgeline) and is deductible by the issuer (Stonefield) on a daily basis over the term of the debt instrument, using the "constant yield method" (also referred to as the "economic accrual method"). The constant yield method requires that OID be accrued based on the yield to maturity of the debt instrument, computed using the issue price and the payments to be made under the instrument, including all stated interest and principal payments.
Constant Yield Methodology. Under the constant yield method, the daily portion of OID for any accrual period is determined by:
(i) multiplying the adjusted issue price of the debt instrument at the beginning of the accrual period by the yield to maturity of the instrument (properly adjusted for the length of the accrual period), and
(ii) subtracting the amount of any qualified stated interest (QSI) allocable to the accrual period.
The adjusted issue price of the debt instrument is the original issue price, increased by the OID previously accrued (whether or not actually deducted by the issuer or included in income by the holder). This methodology produces a pattern of OID accrual that is somewhat front-loaded in the early years of the instrument's term, as the accrual in each period is based on a progressively higher adjusted issue price.
Tax Characterization. For both federal income tax purposes, the OID is treated as additional interest. This characterization has several important consequences:
•  Stonefield may deduct the OID as interest expense, subject to the Section 163(j) limitation.
•  Ridgeline must include the OID in gross income as ordinary interest income, regardless of whether any cash payment is received.
•  The OID accrual is independent of, and in addition to, the cash interest (850 bps) and PIK interest (250 bps) payable under the Mezzanine Facility.
Illustrative Accrual Schedule. An illustrative year-by-year OID accrual schedule will be prepared upon receipt of the formal warrant valuation. The schedule will cover the six-year term from closing (September 29, 2023) through maturity (September 29, 2029) and will reflect the constant yield accrual methodology, taking into account the interaction between the warrant allocation OID and the PIK interest component (as discussed in Section III.E below). The schedule will be set forth in Appendix A to this memorandum.
Commitment Fee Interaction. The $2,400,000 commitment fee paid by Stonefield to Ridgeline at closing may also affect the yield computation and the OID analysis. Under general principles, a fee paid by a borrower to a lender in connection with the origination of a debt instrument is economically equivalent to a reduction in the issue price of the instrument. If the commitment fee is treated as reducing the issue price, it would increase the OID on the Mezzanine Facility by $2,400,000 (in addition to the OID arising from the warrant allocation). Alternatively, the commitment fee may be treated as a separate deductible expense amortized over the term of the debt. The proper characterization of the commitment fee is discussed further in Section VIII.A below; for purposes of the OID computation, we recommend treating it as additional OID to ensure conservative and consistent reporting.
E. Interaction of OID with PIK Component
The 250 basis point PIK interest component of the Mezzanine Facility introduces additional complexity into the OID analysis. Because the PIK interest is not paid in cash but instead compounds quarterly and is added to the outstanding principal balance, it affects both the stated redemption price at maturity and the yield computation of the debt instrument.
Qualified Stated Interest Analysis. Under Treasury Regulation § 1.1273-1(c), "qualified stated interest" ("QSI") is defined as stated interest that is unconditionally payable in cash or property (other than debt instruments of the issuer) at least annually at a single fixed rate. Interest that is payable by the addition to the outstanding principal balance — i.e., PIK interest — does not satisfy the requirement that it be unconditionally payable in cash or property. Accordingly, the 250 basis point PIK component of the Mezzanine Facility generally does not qualify as QSI.
The 850 basis point cash pay component, by contrast, does satisfy the QSI requirements, as it is unconditionally payable in cash at a single fixed rate on a quarterly basis (i.e., at intervals of at least annually). Accordingly, only the 850 bps cash pay component qualifies as QSI; the 250 bps PIK component does not.
Consequences of Non-QSI Treatment. Because the PIK interest is not QSI, it is included in the computation of the stated redemption price at maturity for OID purposes. Under Treasury Regulation § 1.1275-1(d), the stated redemption price at maturity of a debt instrument is the sum of all payments to be made under the instrument other than QSI. For the Mezzanine Facility, the stated redemption price at maturity includes:
(a) the original principal amount of $120,000,000;
(b) all PIK interest accrued and compounded over the six-year term, which is not QSI and therefore is included in the stated redemption price at maturity; and
(c) any other payments to be made at maturity that are not QSI.
The inclusion of compounded PIK interest in the stated redemption price at maturity has the effect of increasing the total OID on the debt instrument. The total OID is the excess of the stated redemption price at maturity (including compounded PIK) over the issue price of the debt component (which has already been reduced by the warrant allocation). In other words, the Mezzanine Facility generates OID from two sources: (1) the warrant allocation, which reduces the issue price below the face amount, and (2) the PIK interest, which increases the stated redemption price at maturity above the face amount.
Combined OID Computation. The combined OID from both sources must be computed together under the constant yield method, using a single yield to maturity that takes into account (i) the reduced issue price (reflecting the warrant allocation), (ii) the cash interest payments (QSI, excluded from the OID computation), (iii) the PIK interest accruals (included in OID), and (iv) the stated redemption price at maturity (including accumulated PIK). This computation will produce a single OID amortization schedule that reflects all of these inputs.
We note that the combined OID may be substantial. By way of illustration, if the warrants are valued at $14,700,000 (using the midpoint equity value estimate described in Section III.C) and the PIK interest compounds over the six-year term to an aggregate amount of approximately $20-22 million (depending on the compounding mechanics), the total OID could be in the range of $35-37 million. This would produce annual OID accrual of approximately $5-7 million per year (with some front-loading due to the constant yield methodology). The actual figures will depend on the final warrant valuation and the precise mechanics of PIK compounding as set forth in the Mezzanine Credit Agreement.
F. Recommendations on OID
Based on the foregoing analysis, we make the following recommendations regarding the OID consequences of the Mezzanine Facility:
1.  Engage Appraiser. Engage an independent appraiser to determine the fair market value of the Warrants as of the closing date. We recommend coordinating with Zynvaro Thornton Advisory Group, LLC, which is already retained as Stonefield's financial advisor and has access to the company's financial data and projections. The appraisal should be completed in advance of closing, to the extent practicable.
2.  Document Allocation. The allocation of the $120,000,000 issue price between the debt component and the Warrants should be documented in the closing deliverables to promote consistency between Stonefield and Ridgeline in their respective tax reporting. We recommend including an allocation provision in the Warrant Agreement, or alternatively, executing a separate tax allocation side letter between Stonefield and Ridgeline that sets forth the agreed allocation and the methodology used to derive it. While the IRS is not bound by allocations agreed between parties, a contemporaneous, documented allocation based on a defensible appraisal will carry significant weight on audit.
3.  OID Amortization Schedule. Upon completion of the warrant valuation, we will prepare a detailed OID amortization schedule for use by Stonefield's tax compliance team and external auditors at Braddock & Saylor LLP. The schedule will set forth the year-by-year OID accrual, the adjusted issue price of the debt component at the beginning and end of each accrual period, and the yield to maturity of the instrument. This schedule will be included as Appendix A to a revised version of this memorandum.
4.  Consistency with Ridgeline. We recommend confirming with Archer Blackwell & Moss LLP (counsel to Ridgeline) that Ridgeline will report the investment unit allocation consistently with Stonefield's position. While there is no statutory requirement of consistency, inconsistent reporting by the borrower and lender would increase the risk of IRS inquiry.
IV. Deductibility of PIK Interest Under IRC Section 163(j)
A. Overview of Section 163(j) Limitation
IRC Section 163(j), as amended by the Tax Cuts and Jobs Act of 2017 ("TCJA") and further modified by the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), imposes a limitation on the deductibility of "business interest expense" for all taxpayers other than certain exempt entities. The limitation applies at the entity level and, for partnerships and S corporations, is applied at the partnership or S corporation level before being allocated to partners or shareholders.
Under Section 163(j)(1), the deduction for business interest expense in any taxable year is limited to the sum of:
(1) the taxpayer's business interest income for the taxable year;
(2) 30% of the taxpayer's adjusted taxable income ("ATI") for the taxable year; and
(3) the taxpayer's floor plan financing interest for the taxable year (not applicable to Stonefield).
Definition of Business Interest Expense. Section 163(j)(5) defines "business interest" as any interest paid or accrued on indebtedness properly allocable to a trade or business. For Stonefield, substantially all interest expense — including cash interest on the Senior Facilities, cash interest on the Mezzanine Facility, PIK interest, and OID amortization — constitutes business interest expense subject to the Section 163(j) limitation.
Definition of Adjusted Taxable Income. Under Section 163(j)(8), ATI is computed by starting with the taxpayer's taxable income and making certain adjustments, including the exclusion of business interest expense, business interest income, net operating loss deductions, and (for taxable years beginning before January 1, 2022) any deduction allowable for depreciation, amortization, or depletion. Critically, for tax years beginning after December 31, 2021 — which includes Stonefield's fiscal year ending December 31, 2023, and all subsequent years during the term of the Mezzanine Facility — depreciation and amortization are no longer added back in computing ATI. As a result, ATI is now more closely analogous to taxable EBIT (earnings before interest and taxes) rather than taxable EBITDA, significantly reducing the Section 163(j) limitation for capital-intensive businesses such as Stonefield.
Carryforward of Disallowed Interest. Under Section 163(j)(2), any business interest expense that is disallowed under the limitation in a given taxable year is carried forward to the next succeeding taxable year and treated as business interest paid or accrued in that succeeding year. The carryforward is indefinite — there is no expiration period — and disallowed interest carryforwards are available in subsequent years to the extent the taxpayer has sufficient Section 163(j) capacity.
B. Treatment of PIK Interest as Business Interest Expense
The 250 basis point PIK interest on the Mezzanine Facility, though not paid in cash, constitutes "interest" for federal income tax purposes. Under the accrual method of accounting — which we assume Stonefield uses for federal income tax purposes — PIK interest is accrued as it compounds, creating a current-year deduction (subject to the Section 163(j) limitation) even though no cash payment is made until maturity or prepayment.
Similarly, the OID arising from the warrant allocation and the inclusion of PIK interest in the stated redemption price at maturity (as discussed in Section III above) is treated as interest for purposes of Section 163(j). Treasury Regulation § 1.163(j)-1(b)(22) defines "interest" broadly to include OID, and the legislative history of the TCJA confirms that the Section 163(j) limitation applies to all forms of interest expense, whether paid in cash, accrued, or economically accrued through OID amortization.
Accordingly, the total annual interest burden subject to Section 163(j) for purposes of computing Stonefield's interest deduction limitation includes all of the following components:
(a) Cash interest on the Mezzanine Facility: 850 bps on the outstanding principal balance (which increases quarterly as PIK accrues);
(b) PIK interest on the Mezzanine Facility: 250 bps, compounding quarterly;
(c) OID amortization attributable to the warrant allocation and the non-QSI treatment of PIK interest;
(d) Interest on the Senior Term Loan B: SOFR + 375 bps on $275,000,000;
(e) Interest on the Senior Revolving Facility: SOFR + 350 bps on the drawn balance;
(f) Commitment fee amortization and other deferred financing cost amortization to the extent treated as interest for Section 163(j) purposes.
C. Quantitative Analysis of Section 163(j) Capacity
The following quantitative analysis is illustrative and is based on assumptions regarding SOFR rates, Stonefield's financial performance, and the final warrant valuation. Actual results will depend on facts existing at the time of filing. This analysis is intended to provide a reasonable estimate of the magnitude of the Section 163(j) issue for purposes of transaction structuring and planning.
Estimated ATI. Stonefield's LTM Adjusted EBITDA as of June 30, 2023 is $108,600,000. However, ATI for Section 163(j) purposes must be computed from taxable income, not financial reporting EBITDA. Key differences include: (i) the exclusion of any items that are not included in taxable income (e.g., certain book-tax timing differences); (ii) the add-back of business interest expense and NOL deductions; and (iii) the exclusion of depreciation and amortization add-backs (for taxable years beginning after December 31, 2021).
Based on Stonefield's historical financial data, we estimate that annual depreciation and amortization expense is approximately $25,000,000 to $35,000,000 (reflecting the existing fleet and terminal asset base, plus amortization of acquisition-related intangibles). Subtracting this from Adjusted EBITDA yields an estimated ATI of approximately $70,000,000 to $85,000,000 (before adding back business interest expense and NOL deductions, which are already excluded from the ATI computation). Applying the 30% limitation produces an estimated Section 163(j) cap of approximately $21,000,000 to $25,500,000 per year.
Estimated Total Annual Interest Expense (Year 1). The following table sets forth the estimated total annual interest expense for Stonefield in Year 1 of the Mezzanine Facility (fiscal year ending December 31, 2023, pro-rated for the portion of the year following the September 29, 2023 closing, and annualized for illustrative purposes):
Estimated Section 163(j) Disallowance. Comparing estimated total annual interest expense of approximately $45-47 million to the estimated Section 163(j) limitation of approximately $21-25.5 million, the estimated annual disallowance is approximately $19,500,000 to $26,000,000. This represents a significant portion of Stonefield's total interest expense and would result in substantial disallowed interest carryforwards accumulating each year during the term of the Mezzanine Facility.
Pre-Mezzanine Capacity Analysis. It is important to note that even before the Mezzanine Facility, Stonefield's existing senior debt generates annual interest expense of approximately $26,000,000. If the Section 163(j) cap is $21,000,000 to $25,500,000, the senior debt interest alone may consume all or substantially all of the available capacity, leaving little or no room for the incremental mezzanine interest. This means that effectively all of the mezzanine-related interest expense — cash interest, PIK, and OID — may be disallowed in the year incurred and carried forward indefinitely.
Impact of Increased Depreciation on ATI. As noted above, the purpose of the Mezzanine Facility is to fund Stonefield's capital expenditure program, which contemplates up to $85 million per year in fleet expansion, terminal buildout, and technology investments. As these capital expenditures are placed in service, the resulting depreciation expense will reduce ATI (since depreciation is no longer added back for taxable years beginning after December 31, 2021). This creates a counterintuitive dynamic: the deployment of mezzanine proceeds for their intended purpose will simultaneously increase total interest expense (as the PIK component grows the principal balance) and decrease ATI (as depreciation rises), thereby further constraining Section 163(j) capacity. Over the 2024-2026 period, the increase in annual depreciation from new CapEx could be $15,000,000 to $25,000,000 per year (depending on the asset mix and applicable depreciation methods, including any available bonus depreciation), which could reduce the Section 163(j) cap by $4,500,000 to $7,500,000 per year.
Cumulative Carryforward Implications. Over the six-year term of the Mezzanine Facility, the cumulative disallowed interest carryforward could grow to a very substantial amount — potentially $100,000,000 or more in aggregate. These carryforwards would be available to offset taxable income in future years (to the extent Section 163(j) capacity permits), but the timing of their utilization depends on factors such as future revenue growth, SOFR rate movements, debt prepayments, and the eventual disposition of Stonefield (e.g., in a sale or IPO). The accumulation of large disallowed interest carryforwards has implications for Stonefield's effective tax rate, deferred tax asset recognition, and cash tax position, all of which should be modeled and discussed with Stonefield's management and auditors.
D. Planning Considerations
Real Property Trade or Business Election. Under Section 163(j)(7)(B), an "electing real property trade or business" is exempt from the Section 163(j) limitation. This election is available to any trade or business described in Section 469(c)(7)(C), which includes any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. While Stonefield's core business is transportation and logistics — which does not qualify as a real property trade or business — the terminal facility buildout component of the CapEx program involves the construction and operation of real property. It may be worth evaluating whether any subsidiary engaged primarily in terminal operations could qualify for this election. However, we consider this unlikely to provide meaningful relief, as the terminal operations are ancillary to Stonefield's transportation business and are not conducted through separate entities that are primarily engaged in real property activities.
Small Business Exemption. Under Section 163(j)(3), the limitation does not apply to any taxpayer (other than a tax shelter) that meets the gross receipts test of Section 448(c) — i.e., average annual gross receipts for the three preceding taxable years do not exceed $29,000,000 (as adjusted for inflation for 2023). Stonefield's FY2022 revenue of $687,000,000 clearly exceeds this threshold, and the aggregation rules of Section 448(c)(2) would require the gross receipts of all members of the controlled group to be taken into account. Accordingly, the small business exemption is not available to Stonefield or any member of its consolidated group.
Coordination with Sponsor Tax Counsel. Section 163(j) applies at the partnership level for partnerships, including Cascade Ridge Capital Fund V, LP. The fund's share of Stonefield's interest expense may be subject to separate Section 163(j) limitations at the fund level, which could further restrict the deductibility of interest expense from the fund investors' perspective. We recommend conferring with Patricia V. Baines at Caldwell Baines & Associates, PC regarding the partnership-level implications and the impact on fund investor reporting (particularly K-1 disclosure of Section 163(j) items).
Tax Return Preparation. We recommend that Stonefield prepare a detailed Section 163(j) computation model incorporating the Mezzanine Facility and provide it to Braddock & Saylor LLP (William F. Saylor, engagement partner) for use in the preparation of Stonefield's FY2023 federal and state income tax returns. The model should project Section 163(j) computations for each year of the Mezzanine Facility term and track disallowed interest carryforwards. This model will be included as Appendix B to a revised version of this memorandum.
V. Federal Income Tax Treatment of Warrant Issuance and Exercise
A. Tax Treatment Upon Issuance (Closing Date)
The tax consequences to Stonefield and Ridgeline upon the issuance of the Warrants at closing are governed by the investment unit rules of IRC Section 1273(c)(2) and the general principles applicable to the issuance of stock options and warrants.
Treatment of Stonefield (Issuer). Stonefield does not recognize income or gain upon the issuance of the Warrants. Under IRC Section 1032(a), a corporation does not recognize gain or loss on the receipt of money or other property in exchange for its own stock (including options and warrants to acquire its stock). The portion of the $120,000,000 issue price allocated to the Warrants is treated, in economic substance, as a payment by Ridgeline for the equity component of the investment unit. From Stonefield's perspective, this amount is reflected as additional paid-in capital (or a similar equity account) on its balance sheet. For tax purposes, the allocated amount reduces the issue price of the debt component, creating OID as discussed in Section III above.
Treatment of Ridgeline (Holder). Ridgeline's tax basis in the Warrants equals the amount of the $120,000,000 issue price allocated to the Warrants under the investment unit rules. This basis represents Ridgeline's cost for the equity component of the investment and will be relevant in determining gain or loss upon a subsequent exercise, sale, or settlement of the Warrants.
Ridgeline's tax basis in the Mezzanine Facility debt instrument equals $120,000,000 minus the amount allocated to the Warrants. This reduced basis is the "issue price" of the debt component for OID purposes, and Ridgeline will include OID accruals in gross income over the term of the instrument under the constant yield method, as described in Section III.D above.
B. Tax Treatment Upon Exercise
Exercise Mechanics. The Warrants are exercisable at $0.01 per share. Upon exercise, Ridgeline will pay the aggregate exercise price (which, given the nominal per-share amount, will be a trivial cash outlay) and receive shares of Stonefield common stock.
Treatment of Ridgeline (Exercising Warrant Holder). Upon exercise, Ridgeline's tax basis in the shares of Stonefield common stock received equals the sum of: (a) its basis in the Warrants (i.e., the amount allocated to the Warrants from the investment unit issue price) plus (b) the $0.01 per share exercise price paid. The exercise of the Warrants is not a taxable event to Ridgeline; no gain or loss is recognized upon exercise because the exercise is merely a conversion of one form of equity right (the Warrant) into another (the underlying stock), with the tax basis carrying over.
Treatment of Stonefield (Issuer). Stonefield does not recognize income or gain upon the exercise of the Warrants. Under IRC Section 1032(a), a corporation does not recognize gain or loss on the receipt of property in exchange for its own stock. The exercise of the Warrants is treated as a capital transaction, and the aggregate exercise price received by Stonefield is added to its equity accounts.
Withholding Tax. No withholding tax applies upon exercise of the Warrants, as both Stonefield and Ridgeline are domestic entities and the transaction involves the issuance of equity by a domestic corporation to a domestic holder.
C. Anti-Dilution Adjustments
The Warrants include weighted-average broad-based anti-dilution protection. Under this provision, if Stonefield issues additional shares of common stock (or common stock equivalents) at a price below the then-current fair market value per share, the exercise price of the Warrants and/or the number of shares issuable upon exercise will be adjusted using a broad-based weighted-average formula, so as to protect Ridgeline against dilution of its percentage equity interest.
IRC Section 305 and Constructive Distributions. Under IRC Section 305(c) and Treasury Regulation § 1.305-7, certain adjustments to the conversion ratio or exercise price of convertible securities or warrants may be treated as constructive distributions (deemed dividends) to the holders of such securities. Specifically, Reg. § 1.305-7(a) provides that an adjustment in the conversion ratio or exercise price of a convertible instrument to reflect a stock dividend, stock split, or similar event is generally not treated as a constructive distribution, provided the adjustment is made pursuant to a bona fide, reasonable anti-dilution provision.
However, adjustments that have the effect of increasing the warrant holder's proportionate interest in the corporation — beyond what is necessary to prevent dilution — could be treated as constructive distributions under Section 305(c). For example, an adjustment triggered by an event that does not actually dilute existing stockholders, or an adjustment formula that systematically over-compensates for dilution, could result in deemed distribution treatment.
Recommendation. To minimize the risk of constructive distribution treatment under Section 305, we recommend that the anti-dilution provisions in the Warrant Agreement be reviewed to ensure that:
(a) The anti-dilution adjustments are limited to events that actually cause dilution of the warrant holder's proportionate equity interest (e.g., stock splits, stock dividends, below-market issuances, and similar events);
(b) The weighted-average formula used to compute adjustments is reasonable and consistent with market practice for broad-based anti-dilution protection;
(c) The Warrant Agreement does not include "ratchet" or "full-ratchet" anti-dilution provisions, which could more easily be characterized as providing the warrant holder with an increased proportionate interest; and
(d) The Warrant Agreement includes language expressly providing that anti-dilution adjustments are intended solely to prevent dilution and are not intended to result in a distribution to the warrant holder within the meaning of Section 305(c).
We will coordinate with Daniel Obi and Lisa Morrow on the Banking & Finance team to ensure the Warrant Agreement is drafted to satisfy these requirements and to fall within the safe harbors of Reg. § 1.305-7(a).
D. Put Right Tax Treatment
The Warrants include a put right exercisable by Ridgeline upon the occurrence of a change of control of Stonefield, an initial public offering of Stonefield's common stock, or the seventh anniversary of the issuance of the Warrants (September 29, 2030). Upon exercise of the put right, Stonefield is obligated to repurchase the Warrants (or, if the Warrants have been exercised, the underlying shares) at fair market value as determined by a mutually selected independent appraiser.
Tax Treatment to Ridgeline (Selling/Redeeming Holder). If Ridgeline exercises the put right and Stonefield repurchases the shares (or warrants) at fair market value, the transaction is treated as a redemption of stock under IRC Section 302. Section 302 provides that a redemption of stock by a corporation is treated either as (a) a sale or exchange, entitling the redeeming shareholder to capital gain or loss treatment, or (b) a distribution under Section 301 (potentially taxable as a dividend to the extent of earnings and profits), depending on whether the redemption meets one of the tests set forth in Section 302(b).
The relevant tests under Section 302(b) include:
(1) Complete Termination of Interest (Section 302(b)(3)). A redemption that completely terminates the shareholder's equity interest in the corporation qualifies as an exchange. Given that Ridgeline holds only 3.0% of the fully-diluted equity of Stonefield, a complete redemption of Ridgeline's interest would clearly satisfy this test. Provided Ridgeline has no other equity interest in Stonefield (directly or through attribution under Section 318), a put-right exercise resulting in the repurchase of all of Ridgeline's shares or warrants would qualify as a complete termination and would be treated as a sale or exchange.
(2) Substantially Disproportionate Redemption (Section 302(b)(2)). Even if the complete termination test is not satisfied (e.g., because Ridgeline retains a residual equity interest), a redemption may qualify as substantially disproportionate if, after the redemption, the shareholder owns less than 50% of the total combined voting power and the shareholder's percentage ownership is less than 80% of its pre-redemption percentage. Given Ridgeline's small percentage ownership, this test would also likely be satisfied.
(3) Not Essentially Equivalent to a Dividend (Section 302(b)(1)). This is a facts-and-circumstances test that applies as a residual standard. A redemption that results in a "meaningful reduction" in the shareholder's proportionate interest generally qualifies.
Based on the foregoing, we expect that the exercise of the put right by Ridgeline — resulting in the complete redemption of Ridgeline's 3.0% equity interest — would be treated as a sale or exchange under Section 302(b)(3), entitling Ridgeline to capital gain or loss treatment. Ridgeline would recognize capital gain equal to the excess of the fair market value purchase price over its adjusted basis in the shares (or warrants), or capital loss if the purchase price is less than its adjusted basis.
Tax Treatment to Stonefield (Redeeming Corporation). From Stonefield's perspective, the payment made to Ridgeline in connection with the put-right exercise is treated as a distribution in redemption of its stock under Section 302. Stonefield does not receive a deduction for the amount paid to repurchase its own stock; the payment is a return of capital to the redeeming shareholder and reduces Stonefield's equity. To the extent the payment exceeds the paid-in capital attributable to the redeemed shares, the excess reduces retained earnings.
E. Interaction with Change of Control Mandatory Prepayment
The Draft Credit Agreement provides that, upon a change of control of Stonefield, the outstanding principal balance of the Mezzanine Facility (including accrued PIK) must be prepaid at a price equal to 103% of the outstanding principal amount, plus all accrued and unpaid interest (including accrued but uncapitalized PIK interest). The Warrants are also immediately puttable by Ridgeline upon a change of control.
Tax Treatment of the 3% Prepayment Premium. The 3% premium above par payable upon a change-of-control mandatory prepayment (i.e., 3% of the then-outstanding principal balance) is treated as additional interest income to Ridgeline and an additional interest deduction to Stonefield for federal income tax purposes. This premium constitutes a "make-whole" or "call premium" payment that compensates the lender for the early termination of the lending arrangement and is characterized as interest under general tax principles. The deductibility of this premium payment by Stonefield is subject to the Section 163(j) limitation in the year of payment.
Interaction of Debt Prepayment and Warrant Put. In the event of a change of control, both the mandatory prepayment of the Mezzanine Facility and the exercise of the put right on the Warrants may occur simultaneously or in rapid succession. From a tax perspective, these are distinct transactions — the prepayment of the debt is a debt retirement event (potentially triggering recognition of any unamortized OID or cancellation-of-debt income, depending on the circumstances), while the warrant put is an equity redemption under Section 302. Proper sequencing and characterization of the payments is important to ensure that:
(a) The debt prepayment premium is properly treated as interest and not recharacterized as a payment for the equity component;
(b) The warrant put-right payment is properly treated as a stock redemption and not recharacterized as a debt payment;
(c) Any unamortized OID on the debt component at the time of prepayment is recognized by both Stonefield (as a deduction) and Ridgeline (as income) in the year of prepayment; and
(d) The aggregate payments are properly allocated between debt service and equity redemption in the closing documentation for the change of control transaction.
We recommend that the change of control provisions in the Mezzanine Credit Agreement and the Warrant Agreement be drafted to clearly distinguish between the debt prepayment and the equity redemption, and that the closing mechanics for any future change of control transaction include a tax allocation protocol.
VI. Interaction with Stonefield's Existing Interest Expense Deduction Capacity
A. Current Interest Expense Profile (Pre-Mezzanine)
Prior to the closing of the Mezzanine Facility, Stonefield's annual interest expense burden is generated by the following existing obligations:
Senior Secured Term Loan B. $275,000,000 outstanding principal amount at a floating rate of SOFR plus 375 basis points per annum. Based

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