1012-00002 · Stonefield Logistics Group · Tax

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PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP 599 Lexington Avenue New York, NY 10022

Matter No.: 1012-00002

TAX MEMORANDUM

This memorandum is protected by the attorney-client privilege and constitutes attorney work product. It is intended solely for the use of the individuals identified above and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. This memorandum is not intended to constitute, and should not be relied upon as, legal advice to any person other than the addressees.

I. Executive Summary

You have asked us to analyze whether the proposed equitization of $140.0 million in aggregate principal amount of 11.50% Senior Secured Second Lien Notes (the "Mezzanine Notes") issued by Stonefield Logistics Group Inc. ("Stonefield," "SLG," or the "Company"), together with the waiver of $8.1 million in accrued payment-in-kind ("PIK") interest thereon, and the resulting issuance of 47.5% of the Company's pro forma common equity to the holders of the Mezzanine Notes (the "Mezzanine Holders"), together with the concomitant dilution of Ridgeline Capital Partners Fund III, L.P. ("Ridgeline" or "RCP III") from 100% to 47.5% of the Company's outstanding common equity and the reservation of 5.0% of pro forma common equity for a management incentive plan (the "MIP"), constitutes an "ownership change" within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the "Code").

For the reasons set forth in detail in this memorandum, we conclude that the proposed restructuring transaction is expected to result in an "ownership change" within the meaning of Section 382(g) of the Code. This conclusion follows from the fact that the aggregate increase in stock ownership by one or more "5-percent shareholders" — principally, Graystone Mezzanine Capital Fund II LP, Ashland Structured Credit LLC, and Dunmore Special Situations Fund LP, each of which will become a 5-percent shareholder upon the closing of the equitization — will exceed 50 percentage points over the relevant testing period, as measured against the lowest percentage of stock owned by such shareholders during such period. Because none of these entities held any equity in the Company prior to the restructuring, the increase attributable to each begins from a zero-percent baseline, and the aggregate shift is approximately 47.5 percentage points from the equitization alone, supplemented by additional increases attributable to MIP grants and potentially other indirect ownership shifts, which are expected to push the total above the critical 50-percentage-point threshold.

The significance of an ownership change under Section 382 cannot be overstated in the context of the Company's tax position. An ownership change would impose an annual limitation (the "Section 382 Limitation") on the Company's ability to utilize its accumulated pre-change net operating loss carryforwards ("NOLs") and certain built-in losses to offset taxable income in post-change taxable years. Given the Company's current financial condition — in which its enterprise value is substantially below its total indebtedness, rendering the pre-change equity value near zero — the Section 382 Limitation is expected to be extremely low, effectively eliminating or severely restricting the Company's ability to derive any meaningful tax benefit from its pre-change NOLs.

Furthermore, the more favorable provisions available to loss corporations undergoing ownership changes in the context of Title 11 (bankruptcy) proceedings — specifically, Sections 382(l)(5) and 382(l)(6) of the Code — are not available to the Company because the proposed restructuring is being implemented as a consensual out-of-court transaction pursuant to a Restructuring Support Agreement, without any bankruptcy filing.

This memorandum should be read in conjunction with our companion memorandum, Tax Memorandum — Cancellation of Indebtedness Income and Debt-for-Equity Exchange (also dated September 15, 2023, prepared by Sylvia Hartwell), which addresses the cancellation-of-indebtedness ("COD") income consequences of the proposed equitization, the applicability of Section 108 exclusions (including the insolvency exclusion), the stock-for-debt exception under former Section 108(e)(10), and the interaction between COD income recognition and tax attribute reduction under Section 108(b). The interaction between the Section 108(b) attribute reduction and the Section 382 Limitation is discussed in Section VII.E of this memorandum.

The analysis in this memorandum is based on facts and information provided by the Company, by Hargrove Advisory Group LLC (the Company's financial advisor), and by publicly available sources. We have not undertaken any independent factual investigation. This analysis assumes that the restructuring closes on or about December 19, 2023, consistent with the timeline set forth in the Restructuring Support Agreement dated June 30, 2023 (the "RSA"). Should the closing date, terms of the restructuring, or underlying facts change, the conclusions set forth herein may require revision.

II. Background

A. Stonefield Logistics Group Inc. — Corporate Overview

Stonefield Logistics Group Inc. is a corporation organized under the laws of the State of Delaware, with EIN 83-2457109 and Delaware File No. 6341872. The Company's principal executive offices are located at 4200 Commerce Street, Suite 1500, Dallas, TX 75201. The Company's registered agent in the State of Delaware is Capitol Registered Agents, Inc., 1209 Orange Street, Wilmington, DE 19801.

Stonefield operates in the logistics industry, providing freight brokerage, last-mile delivery, and warehousing services to a diversified customer base throughout the United States. The Company's operations are conducted through a group of wholly-owned operating subsidiaries, as follows:

• Stonefield Logistics Holdings LLC, a Delaware limited liability company, which serves as the direct subsidiary and holding company for the operating entities;

• Stonefield Freight Services LLC, a Texas limited liability company, which conducts the Company's core freight brokerage operations;

• Stonefield Last Mile Inc., a Delaware corporation, which operates the Company's last-mile delivery platform; and

• Stonefield Warehousing LLC, a Texas limited liability company, which operates the Company's warehousing and distribution facilities.

As of the date of this memorandum, the Company employs approximately 3,800 individuals across 26 terminals in 14 states.

From a financial perspective, the Company has experienced meaningful revenue and earnings deterioration over the past several quarters, reflecting adverse macroeconomic conditions in the U.S. freight market, including freight rate compression, excess truckload capacity, and customer destocking. The Company's audited financial statements for the fiscal year ended December 31, 2022 — audited by Whitfield & Pryce LLP (Todd Ashburn, CPA, engagement partner) — reported revenue of $612.3 million and Adjusted EBITDA of $58.7 million. For the twelve-month period ending March 31, 2023 ("LTM Q1 2023"), revenue declined and Adjusted EBITDA compressed to approximately $41.2 million, reflecting sharp margin deterioration. Management's current projections, which have been reviewed by Hargrove Advisory Group LLC, estimate FY 2023 revenue at $545.0 million and FY 2023 Adjusted EBITDA at $38.5 million. The FY 2024 Adjusted EBITDA projection is $52.0 million, reflecting anticipated cost savings and operational efficiencies expected to be realized following the proposed restructuring.

B. Ownership History and Original Leveraged Buyout

Stonefield was acquired by Ridgeline Capital Partners Fund III, L.P. ("Ridgeline" or "RCP III") in a leveraged buyout (the "LBO") that closed on December 15, 2017. Ridgeline is a Delaware limited partnership, the general partner of which is Ridgeline Capital Management III LLC, a Delaware limited liability company. Ridgeline is a private equity fund focused on mid-market investments in the transportation, logistics, and industrial services sectors.

In connection with the LBO, Ridgeline invested $210.0 million of equity capital in Stonefield. Following the closing of the LBO, Ridgeline held — and, as of the date of this memorandum, continues to hold — 100% of the issued and outstanding common equity of the Company. No other person or entity holds any equity interest in Stonefield prior to the proposed restructuring.

Ridgeline designates two members of the Company's board of directors: Julian Voight, Managing Director of Ridgeline Capital, and Serena Chu, Principal of Ridgeline Capital. The Company's current senior management team consists of Marcus Delano, Chief Executive Officer (who joined the Company in 2019), Priya Sundaram, Chief Financial Officer (who joined in 2020), and Howard Kessler, Esq., General Counsel (who has served in-house since 2018).

C. Pre-Restructuring Capital Structure (as of March 31, 2023)

The Company's pre-restructuring capital structure, as of the most recently reported date (March 31, 2023), is summarized below. Understanding the Company's existing indebtedness is critical to both the ownership change analysis and the computation of the Section 382 Limitation.

1. Revolving Credit Facility

The Company maintains a senior secured first lien revolving credit facility (the "Revolver") with total commitments of $50.0 million. As of March 31, 2023, $42.0 million was drawn under the Revolver, with $3.5 million in letters of credit outstanding, leaving only $4.5 million in available borrowing capacity. The Revolver bears interest at SOFR plus 375 basis points and matures on December 15, 2024. It is secured on a pari passu basis with the Term Loan B (described below) by a first-priority lien on substantially all of the Company's and its subsidiaries' assets. The Revolver lenders are:

• Pinnacle National Bank, N.A.: $20.0 million commitment

• Great Basin Commercial Bank: $15.0 million commitment

• Tidewater Lending Corporation: $15.0 million commitment

2. First Lien Term Loan B

The Company has outstanding a senior secured first lien term loan B (the "TLB") in the aggregate principal amount of $285.0 million. The TLB was originally funded in the principal amount of $310.0 million at the time of the LBO, with $25.0 million having been amortized since inception. The TLB bears interest at SOFR plus 425 basis points (with a 75-basis-point SOFR floor) and matures on December 15, 2024. Pinnacle National Bank, N.A. serves as both Administrative Agent and Collateral Agent under the TLB credit agreement. The key syndicate members under the TLB include:

• Tralvendo CLO 2018-I, Ltd.: $38.5 million

• Belvedere Credit Opportunities Fund LP: $32.0 million

• Kelvantis Capital Partners LLC: $28.0 million

• Kingsway Institutional Investors LLC: $24.5 million

• Eleven other institutional lenders (aggregate): $117.0 million

The aggregate remaining principal balance across the Revolver and TLB is $327.0 million (representing the Company's first lien indebtedness).

3. Mezzanine Notes (Second Lien)

The Company has outstanding $140.0 million in aggregate principal amount of 11.50% Senior Secured Second Lien Notes due June 15, 2025 (the "Mezzanine Notes"), with accrued PIK interest of $8.1 million as of March 31, 2023, bringing the total outstanding obligation under the Mezzanine Notes to $148.1 million. The Mezzanine Notes bear a CUSIP of 861537 AA 2 and were issued under an indenture (the "Indenture") dated December 15, 2017, with Continental Fiduciary Trust Company serving as Indenture Trustee. The Mezzanine Notes are privately placed and are held by a limited number of institutional investors. The key holders are:

• Graystone Mezzanine Capital Fund II LP: $52.0 million (37.1% of outstanding principal)

• Ashland Structured Credit LLC: $40.0 million (28.6%)

• Dunmore Special Situations Fund LP: $30.0 million (21.4%)

• Four other institutional funds (aggregate): $18.0 million (12.9%)

The concentrated nature of the Mezzanine Note holder base is a significant factor in the Section 382 ownership change analysis, as discussed in detail in Sections III.D and IV.B below.

4. Summary Capitalization

Key credit metrics as of LTM Q1 2023:

• Total Leverage: 11.5x ($475.1M ÷ $41.2M LTM Adjusted EBITDA)

• First Lien Leverage: 7.9x ($327.0M ÷ $41.2M)

• Total Liquidity: $15.8 million ($11.3M unrestricted cash + $4.5M Revolver availability)

The Company's severely elevated leverage and constrained liquidity position are the primary drivers of the proposed restructuring and, as discussed below, have a direct and material bearing on the computation of the Section 382 Limitation.

D. Proposed Restructuring Transaction

The Company has entered into a Restructuring Support Agreement dated June 30, 2023 (the "RSA") with its key stakeholders — including Ridgeline, the Mezzanine Holders, and certain first lien lenders — providing for a consensual out-of-court restructuring of the Company's balance sheet. The restructuring is intended to be consummated without a bankruptcy filing. The key components of the proposed restructuring, as set forth in the RSA and the revised restructuring term sheet dated June 9, 2023, are as follows:

1. Amend-and-Extend of Term Loan B. The TLB maturity will be extended from December 15, 2024 to December 19, 2028. The interest rate spread will increase from SOFR + 425 basis points to SOFR + 500 basis points (with a 100-basis-point SOFR floor). The 1.00% annual amortization requirement will be maintained. The amended TLB will include financial maintenance covenants that do not currently exist: a Total Net Leverage covenant of no greater than 6.50x by Q4 2025, stepping down to 5.75x by Q4 2027, and a Minimum Liquidity covenant of no less than $20.0 million at all times.

2. Amend-and-Extend of Revolver. The Revolver commitment will be reduced from $50.0 million to $35.0 million. The maturity will be extended to December 19, 2027, subject to a springing maturity 91 days prior to the TLB maturity if the TLB has not been refinanced by such date. The interest rate spread will increase from SOFR + 375 basis points to SOFR + 450 basis points.

3. New Super-Priority First-Out Term Loan. Belvedere Credit Opportunities Fund LP will provide a new $55.0 million super-priority first-out term loan, of which $45.0 million will be funded at closing and $10.0 million will be available on a delayed-draw basis. This facility will bear interest at SOFR + 700 basis points (with a 100-basis-point SOFR floor), carry a 2.00% original issue discount ($1.1 million), and mature on December 19, 2027. The proceeds of this new facility will be used to fund transaction costs and provide additional working capital liquidity.

4. Equitization of Mezzanine Notes. The $140.0 million in outstanding principal amount of Mezzanine Notes will be equitized, and the $8.1 million of accrued PIK interest will be waived. In exchange, the Mezzanine Holders will receive (a) Series A Preferred Equity with an aggregate liquidation preference of $35.0 million and a 10.00% PIK dividend rate (the "Series A Preferred"), senior to common equity, and (b) 47.5% of the Company's pro forma common equity. This equitization represents the core transaction giving rise to the Section 382 analysis addressed in this memorandum.

5. Dilution of Ridgeline. Ridgeline's ownership of the Company's common equity will be diluted from 100% to 47.5% of pro forma common equity.

6. Management Incentive Plan. Five percent (5.0%) of the Company's pro forma common equity will be reserved for a management incentive plan (the "MIP"), to be allocated among the Company's senior management team, including Marcus Delano (CEO), Priya Sundaram (CFO), and other key members of the management team.

7. New Cash Equity Contribution by Ridgeline. Ridgeline will contribute $12.5 million in new cash equity to the Company, to be funded on or about December 15, 2023 (four business days before the expected closing date of December 19, 2023). The contribution is intended to fund transaction expenses and provide a post-closing liquidity cushion.

8. Reconstituted Board of Directors. The Company's post-restructuring board of directors will consist of seven members: three designees of Ridgeline, three designees of the Mezzanine Holders, and one independent director to be mutually agreed upon.

The restructuring is expected to close on or about December 19, 2023, subject to a long-stop date of December 31, 2023 under the RSA. Upon consummation of the restructuring:

• Post-restructuring total funded debt: approximately $375.0 million ($35.0M Revolver + $285.0M TLB + $55.0M new first-out term loan)

• Post-restructuring total leverage (based on FY 2024E Adjusted EBITDA of $52.0M): approximately 7.2x

• Total debt reduction from equitization: approximately $100.1 million ($140.0M principal + $8.1M PIK waiver – $35.0M liquidation preference of Series A Preferred = $113.1M total face amount reduction; net of $35.0M preferred, $100.1M of debt is converted to equity and waived)

E. Assumed Net Operating Loss Position

Based on information provided by the Company, by Whitfield & Pryce LLP (the Company's independent auditors), and by Hargrove Advisory Group LLC (the Company's financial advisor), Stonefield has accumulated federal net operating loss carryforwards estimated at approximately $67.4 million as of December 31, 2022. These NOLs arise principally from operating losses incurred during FY 2022 (reflecting the sharp margin compression in the freight brokerage market) and earlier fiscal years following the December 2017 LBO. The NOL position may also reflect certain transaction-related deductions from the original 2017 LBO, including amortization of intangible assets and capitalized transaction costs. The Company is expected to generate additional operating losses during FY 2023 (projected Adjusted EBITDA of $38.5 million may not be sufficient to cover interest expense, depreciation, and other non-cash charges), which would further increase the accumulated NOL balance as of the ownership change date.

It is important to note the distinction between pre-Tax Cuts and Jobs Act ("TCJA") and post-TCJA NOLs. NOLs generated in taxable years beginning after December 31, 2017 are subject to the 80% taxable income limitation imposed by Section 172(a)(2)(B)(ii) of the Code, as amended by the TCJA, but are not subject to expiration and may be carried forward indefinitely. To the extent any NOLs were generated in taxable years beginning before January 1, 2018 — which is unlikely given that the LBO closed on December 15, 2017 and the Company presumably had a short first taxable year — such NOLs would be subject to the 20-year expiration period under prior law. Based on the information provided, we understand that substantially all of the Company's NOLs are post-TCJA NOLs subject to the 80% limitation but not subject to expiration.

The value of these NOLs — estimated at a gross tax benefit of approximately $14.2 million (applying a 21% federal corporate tax rate to $67.4 million in NOLs) as of December 31, 2022, and potentially growing as additional losses are incurred in FY 2023 — could be significantly impaired if an ownership change under Section 382 occurs, as discussed in detail below.

III. Applicable Legal Framework — Section 382

A. Overview of Section 382

Section 382 of the Code was enacted to prevent trafficking in corporate NOLs by imposing a limitation on the use of pre-change losses following an "ownership change" of a "loss corporation." The core policy rationale is that when there is a significant shift in the ownership of a corporation with accumulated tax losses, new owners should not be able to exploit those losses beyond what the corporation could have been expected to use in the ordinary course based on its pre-change value.

Specifically, Section 382(a) provides that if an ownership change occurs with respect to a loss corporation, the amount of the corporation's taxable income for any post-change year which may be offset by pre-change losses shall not exceed the Section 382 Limitation. The Section 382 Limitation is determined under Section 382(b) as the product of the value of the loss corporation's stock immediately before the ownership change and the "long-term tax-exempt rate" published by the Internal Revenue Service.

A "loss corporation" is defined under Section 382(k)(1) as any corporation (i) entitled to use an NOL carryforward, or (ii) having an NOL for the taxable year in which an ownership change occurs. Based on its accumulated NOL carryforwards (estimated at approximately $67.4 million as of December 31, 2022, and expected to increase through the date of the ownership change), Stonefield clearly qualifies as a "loss corporation" within the meaning of Section 382(k)(1).

B. Definition of "Ownership Change" — Section 382(g)

Under Section 382(g), an "ownership change" occurs if, immediately after any owner shift involving a 5-percent shareholder or any equity structure shift, the percentage of the stock of the loss corporation owned by one or more 5-percent shareholders has increased by more than 50 percentage points over the lowest percentage of stock of such corporation owned by such shareholders at any time during the "testing period."

The testing period is defined under Section 382(i) as the three-year period ending on the "testing date." The testing date is the date on which the relevant transaction or event occurs that gives rise to an owner shift or equity structure shift. In the case of the proposed Stonefield restructuring, the testing date would be the closing date of the equitization — expected to be December 19, 2023. Accordingly, the testing period would run from approximately December 19, 2020 through December 19, 2023.

Section 382(g)(1) defines an "owner shift involving a 5-percent shareholder" as any change in the ownership of the stock of a corporation which affects the percentage of stock owned by any person who is a 5-percent shareholder before or after the change. This provision is the primary operative rule that captures the Stonefield restructuring, as the equitization of the Mezzanine Notes will create several new 5-percent shareholders (as discussed in Section IV below).

Section 382(g)(2) defines an "equity structure shift" as any tax-free reorganization under Section 368 of the Code (other than certain divisive reorganizations) and certain other transactions. While a debt-for-equity exchange is not technically a tax-free reorganization under Section 368, it may constitute an owner shift involving a 5-percent shareholder under Section 382(g)(1) if it results in the creation of new 5-percent shareholders or the increase in ownership by existing 5-percent shareholders.

Section 382(g)(3) provides that, for purposes of the ownership change test, a "5-percent shareholder" is any person holding 5% or more of the stock of the loss corporation at any time during the testing period. The determination of stock ownership is made by applying the constructive ownership rules of Section 382(l)(3), which incorporate by reference certain attribution rules under Section 318(a) of the Code, with modifications.

C. Stock Ownership Rules

Several technical rules govern the determination of stock ownership for purposes of the Section 382 ownership change analysis:

1. Definition of "Stock." Section 382(k)(6) provides that the term "stock" includes all stock of the loss corporation except stock described in Section 1504(a)(4) — that is, certain nonparticipating, nonconvertible preferred stock. Stock described in Section 1504(a)(4) is stock that (a) is not entitled to vote, (b) is limited and preferred as to dividends and does not participate in corporate growth to any significant extent, (c) has redemption and liquidation rights which do not exceed the issue price of such stock (except for a reasonable redemption or liquidation premium), and (d) is not convertible into another class of stock. To the extent the Series A Preferred Equity to be issued to the Mezzanine Holders satisfies these requirements, it would be excluded from the ownership change calculation. This issue is discussed further in Section IV.E below.

2. Segregation Rules. Treasury Regulation § 1.382-2T(j) sets forth detailed rules for identifying and segregating direct and indirect 5-percent shareholders. Under these rules, shareholders of a loss corporation are grouped into "public groups" and individual 5-percent shareholders. Shareholders who hold less than 5% of the loss corporation's stock are generally treated as members of one or more "public groups," and each public group is treated as a single 5-percent shareholder for purposes of the ownership change test. Direct public shareholders and indirect public shareholders (i.e., public shareholders of a first-tier or higher-tier entity that holds stock of the loss corporation) may constitute separate public groups.

3. Entity Attribution. Under the entity attribution rules applicable to Section 382, a partnership, trust, or estate is generally treated as owning the stock held by it only to the extent the entity has a "5-percent owner" for purposes of the ownership change test. With respect to partnerships specifically, the rules provide that if a partnership is a 5-percent shareholder of the loss corporation, the partnership's interest in the loss corporation is attributed proportionately to the partners. An individual limited partner of Ridgeline would be an indirect 5-percent shareholder of Stonefield only if the limited partner's proportionate indirect interest in Stonefield's stock equals or exceeds 5%.

4. Testing Date. As noted above, the testing date for the proposed restructuring is the expected closing date of December 19, 2023. On this date, the Company must determine whether an ownership change has occurred by comparing the aggregate increases in ownership by 5-percent shareholders over the three-year testing period ending on that date.

D. Special Rules for Debt-for-Equity Exchanges

Treasury Regulation § 1.382-3 provides specific rules governing the treatment of creditors whose claims are exchanged for stock of a loss corporation in a debt-for-equity exchange. The treatment of such creditors depends on whether the exchanged indebtedness was "publicly traded" or "widely held" and on the ownership concentration among the creditors.

Under the general framework, if indebtedness of the loss corporation is exchanged for stock, the former creditors are treated as new shareholders for purposes of the ownership change analysis. If the exchanged indebtedness was publicly traded and widely held, the former creditors may be aggregated and treated as a single "public group" — a single notional 5-percent shareholder — for purposes of the ownership change test. Conversely, if the exchanged indebtedness was privately placed and held by a limited number of institutional investors, the individual creditors must be separately analyzed to determine whether any single creditor will hold 5% or more of the loss corporation's stock after the exchange.

The distinction between publicly traded, widely held debt and privately placed, concentrated debt is of critical importance in the Stonefield analysis. The Mezzanine Notes were privately placed and, as of the date of this memorandum, are held by only seven institutional investors, three of which hold the vast majority of the outstanding principal (Graystone: 37.1%; Ashland: 28.6%; Dunmore: 21.4%). These are not widely held instruments — they are concentrated in the hands of a small number of sophisticated institutional creditors. Accordingly, the individual creditor analysis is required rather than aggregation into a single public group. As demonstrated in Section IV.B below, three of these creditors will become 5-percent shareholders of Stonefield upon the closing of the equitization, and their individual increases in ownership will contribute significantly to the aggregate increase that triggers the ownership change.

IV. Application to the Stonefield Restructuring

A. Pre-Change Ownership

Prior to the proposed restructuring, the ownership of Stonefield's equity is straightforward: Ridgeline Capital Partners Fund III, L.P., a Delaware limited partnership, holds 100% of the issued and outstanding common equity of the Company. No other person or entity holds any equity interest — common or preferred — in Stonefield. Ridgeline is a 5-percent shareholder within the meaning of Section 382(g)(3); indeed, it is the sole shareholder.

Because Ridgeline is a limited partnership, the entity attribution rules require consideration of whether any of Ridgeline's limited partners hold a sufficient indirect interest in Stonefield to qualify as individual 5-percent shareholders of the Company. Ridgeline's limited partners are institutional investors and high-net-worth individuals whose identities and ownership percentages have not been fully provided to us as of the date of this memorandum. For purposes of this analysis, we have assumed — subject to confirmation from Ridgeline Capital — that Ridgeline's limited partner base is sufficiently diversified such that no single limited partner holds a proportionate indirect interest in Stonefield's stock equal to or exceeding 5%. If this assumption is incorrect — for example, if Ridgeline has a single limited partner that holds a 10% or greater interest in the fund, which would translate to a 10% indirect interest in Stonefield — the identity of that limited partner as a separate 5-percent shareholder could affect the ownership change computation. We recommend that the restructuring team confirm the ownership structure of Fund III with Ridgeline Capital prior to closing.

No other ownership shifts have occurred during the three-year testing period (December 19, 2020 through the expected closing date of December 19, 2023). Ridgeline has held 100% of the Company's common equity continuously since the December 2017 LBO.

B. Post-Change Ownership

Immediately after the closing of the proposed restructuring, the pro forma ownership of Stonefield's common equity will be as follows:

The critical question for the Section 382 analysis is the identity and ownership percentage of each post-change 5-percent shareholder among the Mezzanine Equitization Recipients. Because the Mezzanine Notes were privately placed and are held by a limited number of identifiable institutional investors, each holder's pro rata share of the 47.5% common equity allocation must be analyzed individually. Each Mezzanine Holder will receive its proportionate share of the 47.5% common equity pool based on the ratio of its Mezzanine Note holdings to the total outstanding principal amount of the Mezzanine Notes ($140.0 million). The accrued PIK interest of $8.1 million is being waived, so the allocation is based solely on principal holdings.

The individual analysis is as follows:

1. Graystone Mezzanine Capital Fund II LP

Mezzanine Note Holdings: $52.0 million Percentage of Total Mezzanine Notes: $52.0M ÷ $140.0M = 37.1% Pro Forma Common Equity Allocation: 37.1% × 47.5% = approximately 17.6% Status: 5-percent shareholder

2. Ashland Structured Credit LLC

Mezzanine Note Holdings: $40.0 million Percentage of Total Mezzanine Notes: $40.0M ÷ $140.0M = 28.6% Pro Forma Common Equity Allocation: 28.6% × 47.5% = approximately 13.6% Status: 5-percent shareholder

3. Dunmore Special Situations Fund LP

Mezzanine Note Holdings: $30.0 million Percentage of Total Mezzanine Notes: $30.0M ÷ $140.0M = 21.4% Pro Forma Common Equity Allocation: 21.4% × 47.5% = approximately 10.2% Status: 5-percent shareholder

4. Other Mezzanine Holders (4 funds, aggregate $18.0 million)

Aggregate Mezzanine Note Holdings: $18.0 million Aggregate Percentage of Total Mezzanine Notes: $18.0M ÷ $140.0M = 12.9% Aggregate Pro Forma Common Equity Allocation: 12.9% × 47.5% = approximately 6.1% collectively

If each of the four remaining funds holds an approximately equal share of the $18.0 million ($4.5 million each), then each fund would hold approximately 3.2% of the mezzanine class (3.2% × 47.5% = approximately 1.5% each), well below the 5% threshold on an individual basis. These holders would therefore be aggregated into a single "public group" for purposes of the Section 382 analysis, and that public group would itself be treated as a single 5-percent shareholder (with an aggregate increase of 6.1 percentage points). If, however, any single fund among the four holds a disproportionate share such that its resulting common equity allocation equals or exceeds 5%, that fund would be separately identified as an individual 5-percent shareholder. We have assumed for purposes of this memorandum that none of the four remaining funds individually exceeds the 5% threshold, but this assumption should be confirmed with the Company and Continental Fiduciary Trust Company.

5. Management (MIP, 5.0%)

The 5.0% common equity pool reserved for the MIP will be allocated among the Company's senior management team. The specific allocation among individual members — including Marcus Delano (CEO), Priya Sundaram (CFO), and others — has not been finalized as of the date of this memorandum. If any single member of management receives an equity allocation equal to or exceeding 5.0% of Stonefield's pro forma common equity, that individual would be identified as a 5-percent shareholder, and his or her increase in ownership (from 0% to 5.0% or more) would contribute to the aggregate ownership change calculation. If, as is more typical in MIP structures, the 5.0% pool is divided among several executives such that no individual receives 5% or more, the management participants would be aggregated into a separate "public group" (distinct from the mezzanine holder public group) with an aggregate increase of 5.0 percentage points. In either case, the MIP allocation contributes to the aggregate increase in 5-percent shareholder ownership.

C. Calculation of Increase in Ownership by 5-Percent Shareholders

The Section 382 ownership change test requires the computation of the aggregate increase in ownership by each 5-percent shareholder, measured against the lowest percentage of stock owned by such shareholder at any time during the three-year testing period. Because none of the Mezzanine Holders or management participants held any equity in Stonefield at any point during the testing period prior to the restructuring, the lowest percentage for each is zero. The relevant calculations are as follows:

Ridgeline Capital Partners Fund III, L.P.

Pre-Change Ownership: 100% Post-Change Ownership: 47.5% Change: Decrease of 52.5 percentage points

Under Section 382, a decrease in a 5-percent shareholder's ownership does not itself trigger an ownership change. The ownership change test looks exclusively at increases by 5-percent shareholders. Ridgeline's decrease from 100% to 47.5% does not contribute affirmatively to the aggregate increase calculation. However, Ridgeline's decrease is the arithmetic counterpart of the increases by the new shareholders — Ridgeline's 52.5-percentage-point decrease is distributed among the mezzanine equitization recipients (47.5 percentage points) and the MIP participants (5.0 percentage points).

Graystone Mezzanine Capital Fund II LP

Pre-Change Ownership: 0% (creditor only, not an equity holder) Post-Change Ownership: approximately 17.6% Increase: 17.6 percentage points

Ashland Structured Credit LLC

Pre-Change Ownership: 0% Post-Change Ownership: approximately 13.6% Increase: 13.6 percentage points

Dunmore Special Situations Fund LP

Pre-Change Ownership: 0% Post-Change Ownership: approximately 10.2% Increase: 10.2 percentage points

Public Group of Remaining Mezzanine Holders (aggregated)

Pre-Change Ownership: 0% Post-Change Ownership: approximately 6.1% Increase: 6.1 percentage points

Management / MIP Public Group (or individual 5-percent shareholders, if applicable)

Pre-Change Ownership: 0% Post-Change Ownership: 5.0% (collectively) Increase: 5.0 percentage points (assuming no individual member is a 5-percent shareholder; if any individual is, the increase is allocated to that individual and a reduced amount to the remaining public group)

Aggregate Increase by All 5-Percent Shareholders:

The aggregate increase of approximately 52.5 percentage points exceeds the 50-percentage-point threshold under Section 382(g). An ownership change therefore occurs.

We note that even excluding the management MIP and the public group of smaller mezzanine holders, the three individually identified 5-percent shareholders alone account for an aggregate increase of 41.4 percentage points (17.6 + 13.6 + 10.2). When combined with the public group increase of 6.1 percentage points, the aggregate reaches 47.5 percentage points — just below the 50-point threshold. The addition of the 5.0% MIP allocation, even if treated as a single public group increase, pushes the aggregate to 52.5 percentage points, well over the threshold.

Under any reasonable analysis of the facts — regardless of whether the MIP is treated as creating individual 5-percent shareholders or a separate public group, regardless of how the four smaller mezzanine holders are classified, and regardless of whether the Series A Preferred is counted as "stock" — the aggregate increase in 5-percent shareholder ownership exceeds 50 percentage points, and an ownership change under Section 382 is expected to occur.

D. Consideration of the Testing Period

The testing period for the ownership change analysis is the three-year period ending on the testing date — that is, December 19, 2020 through December 19, 2023. During this entire period, Ridgeline has held 100% of Stonefield's common equity. No other owner shifts or equity structure shifts occurred during the testing period. There were no secondary sales of Stonefield equity, no issuances of additional shares to management or other parties, and no changes in the indirect ownership of Stonefield through the Ridgeline partnership structure (to the knowledge of the Company and based on the information provided to us).

Because no prior shifts occurred during the testing period, the entire ownership change is attributable to the single restructuring transaction. This simplifies the analysis considerably: the aggregate increase is computed solely based on the changes effected at the closing of the restructuring.

As noted above, the aggregate increase of approximately 52.5 percentage points exceeds the 50-point threshold. Even under a more conservative analysis — for example, if one were to exclude the MIP public group or certain of the smaller mezzanine holders — the threshold would likely be exceeded, or at minimum approached closely enough that any additional factor (such as entity look-through for Ridgeline's limited partner base or individual MIP allocations exceeding 5%) would push the aggregate over the line.

Conclusion: An ownership change within the meaning of Section 382(g) of the Code is expected to occur upon the closing of the proposed restructuring transaction on or about December 19, 2023.

E. Impact of Series A Preferred Stock

As discussed in Section II.D above, the Mezzanine Holders will receive, in addition to 47.5% of pro forma common equity, Series A Preferred Equity with an aggregate liquidation preference of $35.0 million and a 10.00% PIK dividend rate. The treatment of the Series A Preferred for purposes of the Section 382 ownership change analysis depends on whether it qualifies as "pure preferred stock" under Section 382(k)(6)(A) and Section 1504(a)(4).

Under Section 382(k)(6)(A), "stock" for purposes of the ownership change analysis generally excludes stock described in Section 1504(a)(4), which encompasses stock that meets all of the following criteria:

(a) the stock is not entitled to vote;

(b) the stock is limited and preferred as to dividends and does not participate in corporate growth to any significant extent;

(c) the stock has redemption and liquidation rights that do not exceed the issue price of such stock (except for a reasonable redemption or liquidation premium); and

(d) the stock is not convertible into another class of stock.

If the Series A Preferred satisfies each of these requirements, it would be excluded from the computation of stock ownership for Section 382 purposes, and the ownership change analysis would focus exclusively on the shift in common equity. In such case, the analysis set forth in Sections IV.B and IV.C above — which was conducted solely on the basis of common equity ownership — would be the complete analysis, and the conclusion would remain unchanged: an ownership change occurs.

If, however, the Series A Preferred includes participation rights (for example, a right to share in distributions beyond its stated dividend rate based on the Company's performance), conversion features (a right to convert into common equity), or other equity-like characteristics that cause it to fall outside the definition of Section 1504(a)(4) stock, then the Series A Preferred would be treated as "stock" for Section 382 purposes. In that event, the Mezzanine Holders' aggregate ownership of Stonefield's stock would include both their 47.5% common equity interest and their proportionate share of the value of the Series A Preferred, which would increase the aggregate 5-percent shareholder increase and make the ownership change determination even more clear-cut.

As of the date of this memorandum, the final Certificate of Designations for the Series A Preferred has not been provided to us. We recommend that the restructuring team provide the draft or final terms of the Series A Preferred so that we can make a definitive determination regarding its treatment under Section 382(k)(6)(A). However, for the reasons stated above, this determination is not outcome-determinative: whether or not the Series A Preferred is counted as "stock," the common equity shift alone is sufficient to cause an ownership change.

V. Calculation of the Section 382 Limitation

A. General Formula

Having concluded that an ownership change is expected to occur, the next critical question is the magnitude of the annual limitation that will be imposed on Stonefield's ability to use its pre-change NOLs.

Under Section 382(b)(1) of the Code, the annual Section 382 Limitation is computed as follows:

Section 382 Limitation = Value of the Loss Corporation's Stock Immediately Before the Ownership Change × Long-Term Tax-Exempt Rate

The "value" of the loss corporation's stock is the fair market value of all outstanding stock of the corporation immediately before the ownership change, subject to certain adjustments discussed below. The "long-term tax-exempt rate" is a rate published by the IRS for each month, reflecting the highest of the adjusted Federal long-term rates in effect for any month in the three-month period ending with the calendar month in which the ownership change date falls, adjusted to reflect the differences between rates on long-term taxable obligations and long-term tax-exempt obligations. For ownership changes occurring in December 2023, the applicable rate will be the rate published by the IRS for December 2023 (or, if higher, the rate published for October or November 2023). Based on recently published rates, we estimate the applicable long-term tax-exempt rate at approximately 4.50% to 5.00%; the exact rate will be confirmed at or near the closing date.

B. Valuation of Stonefield Stock Pre-Change

The fair market value of Stonefield's equity immediately before the ownership change is the most critical input in the Section 382 Limitation calculation. This valuation must be determined as of the moment immediately before the equitization closes — that is, immediately before the Mezzanine Holders receive their equity interests and the ownership change occurs.

The Company's financial condition at that point in time presents a challenging valuation picture. As of the most recent reporting date, Stonefield had LTM Adjusted EBITDA of $41.2 million and total funded indebtedness of $475.1 million, representing total leverage of 11.5x. By the expected closing date of December 19, 2023, the Company's financial position may have deteriorated further, depending on Q3 and Q4 2023 operating results. The Company's near-term liquidity outlook was projected to deteriorate significantly, with the Company's financial advisor indicating that, absent the restructuring, the Company would face liquidity exhaustion by approximately Q3 2024.

Hargrove Advisory Group LLC's analysis, which was prepared in connection with the restructuring negotiations, indicates that Ridgeline's equity investment of $210.0 million is "significantly impaired." This assessment is consistent with conventional valuation methodologies:

discounted Cash Flow Analysis. A discounted cash flow analysis, based on management's projected cash flows and an appropriate weighted average cost of capital, would produce an enterprise value reflecting the present value of the Company's expected future cash flows. Given the Company's high leverage, near-term liquidity constraints, and uncertain operating environment, the DCF-derived enterprise value would likely fall in a range that, when total indebtedness is subtracted, yields a residual equity value near zero or potentially negative.

Comparable Company Multiples. Industry EV/EBITDA multiples for mid-market freight brokerage and logistics companies currently range from approximately 5.0x to 8.0x. Applying these multiples to the Company's FY 2024E Adjusted EBITDA of $52.0 million yields an enterprise value range of approximately $260.0 million to $416.0 million. Net of the Company's pre-restructuring funded debt of $475.1 million, the implied equity value under this methodology ranges from negative $59.1 million to negative $215.1 million — i.e., the equity is out of the money under all but the most optimistic valuation assumptions.

Precedent Transactions. Comparable transaction multiples in the logistics sector generally support enterprise value multiples in a similar range, though precedent transaction data is sparse for companies in financial distress.

Under all standard methodologies, the Company's total enterprise value immediately before the ownership change is expected to be substantially below total indebtedness, rendering the pre-change equity value near zero. To the extent there is any positive equity value, it would reflect option value, going-concern premium, or other residual value. A reasonable range for pre-change equity value might be $0 to $25 million, depending on the assumptions employed.

If the pre-change equity value is near zero, the Section 382 Limitation would be correspondingly negligible. For example, a pre-change equity value of $5 million multiplied by a long-term tax-exempt rate of 4.75% yields an annual limitation of only $237,500 — a de minimis amount that would effectively render the pre-change NOLs unusable.

This near-zero equity value would effectively eliminate or severely restrict Stonefield's ability to utilize its pre-change NOLs to offset future taxable income.

C. Section 382(l)(6) — Increase in Value from Redemption or Cancellation of Stock

Section 382(l)(6) provides that if stock of the loss corporation is redeemed or cancelled in connection with an ownership change, the value of the corporation's stock is determined after taking into account such redemption or cancellation. This provision is designed to prevent manipulation of the pre-change equity value by having the corporation redeem stock immediately before the ownership change.

In the Stonefield restructuring, the ownership change is not triggered by a stock redemption — it is triggered by a debt-for-equity exchange and the resulting issuance of new common equity to the Mezzanine Holders. No existing shares of Stonefield common stock are being redeemed or cancelled; rather, Ridgeline's existing shares are being diluted by the issuance of new shares. Accordingly, Section 382(l)(6) is not directly applicable to the present facts.

D. Section 382(l)(1) — Capital Contributions

Section 382(l)(1) of the Code addresses the treatment of capital contributions made to a loss corporation in connection with an ownership change. Specifically, the statute provides that the value of the loss corporation's stock must be determined without regard to any capital contribution made (directly or indirectly) to the corporation during the two-year period ending on the ownership change date, unless the taxpayer establishes that the contribution was made for a valid business purpose and was not part of a plan a principal purpose of which was to increase the Section 382 Limitation.

This provision — commonly referred to as the "anti-stuffing rule" — is directly relevant to Ridgeline's $12.5 million new cash equity contribution, which is expected to be funded on or about December 15, 2023, four business days before the anticipated closing date. The contribution is contemporaneous with the ownership change and falls squarely within the two-year lookback period.

The stated purpose of Ridgeline's $12.5 million contribution is to fund transaction costs associated with the restructuring and to provide a post-closing liquidity cushion for the Company. These are legitimate business purposes, and there is a colorable argument that the contribution should not be excluded under Section 382(l)(1). However, the IRS could argue that any pre-change capital contribution necessarily increases equity value and thus could be viewed as having a principal purpose of increasing the Section 382 Limitation. In our judgment, the more conservative approach is to exclude Ridgeline's $12.5 million contribution from the pre-change equity value computation.

As a practical matter, the exclusion of the $12.5 million contribution has minimal impact on the Section 382 Limitation if the underlying equity value is already near zero. Even if the $12.5 million were included, the total pre-change equity value would increase from near zero to approximately $12.5 million, yielding an annual Section 382 Limitation of approximately $593,750 (at a 4.75% rate) — still a negligible amount relative to the Company's accumulated NOLs.

E. Section 382(l)(5) — Bankruptcy Exception

Section 382(l)(5) provides a special rule that, under certain conditions, exempts a loss corporation emerging from a Title 11 (bankruptcy) case from the Section 382 Limitation altogether. Specifically, Section 382(l)(5)(A) provides that if an ownership change occurs "in a title 11 or similar case," the Section 382 Limitation does not apply, provided that certain conditions are met — including that historic shareholders and "qualified creditors" (creditors who held their claims for at least 18 months prior to the filing date or whose claims arose in the ordinary course of the debtor's business) own at least 50% of the reorganized debtor's stock (by vote and value) immediately after the ownership change.

This exception is NOT available to Stonefield. The Company's restructuring is being accomplished as a consensual out-of-court transaction pursuant to the RSA, without any filing under Title 11 of the United States Bankruptcy Code. Section 382(l)(5) explicitly requires that the ownership change occur "in a title 11 or similar case," which term is defined by reference to Section 368(a)(3)(A) of the Code as a case under Title 11 of the United States Code (i.e., a federal bankruptcy case) or a receivership, foreclosure, or similar proceeding in a Federal or State court. An out-of-court consensual restructuring does not qualify as a "title 11 or similar case."

Accordingly, the favorable treatment under Section 382(l)(5) — which would permit Stonefield to preserve the full use of its pre-change NOLs (subject to a reduction for certain interest deductions) — is not available.

F. Section 382(l)(6) — Alternative Rule for Bankruptcy Cases

Section 382(l)(6) provides an alternative to Section 382(l)(5) for loss corporations that undergo an ownership change in a Title 11 or similar case. Under Section 382(l)(6), a corporation that elects out of Section 382(l)(5) — or that does not satisfy the conditions of Section 382(l)(5) — may compute the Section 382 Limitation based on the post-change (rather than pre-change) fair market value of its stock, which in a typical bankruptcy reorganization would be substantially higher than the pre-change equity value because the reorganized entity would have significantly reduced leverage.

Like Section 382(l)(5), Section 382(l)(6) is available only where the ownership change occurs in a "title 11 or similar case." Because Stonefield's restructuring is being consummated out of court, Section 382(l)(6) is also not available to the Company. This is a significant disadvantage: if Section 382(l)(6) were available, the Section 382 Limitation would be based on Stonefield's post-restructuring equity value — which, given the substantial deleveraging achieved by the equitization, would be materially higher than the pre-change equity value and would result in a correspondingly higher annual limitation.

G. Estimated Section 382 Limitation

Based on the analysis above, and using illustrative assumptions for pre-change equity value and the long-term tax-exempt rate, the estimated annual Section 382 Limitation can be calculated under a range of scenarios:

Even under the most favorable scenario in this range — a pre-change equity value of $25 million and a long-term tax-exempt rate of 5.00% — the annual Section 382 Limitation would be only $1.25 million. Against accumulated NOLs estimated at $67.4 million (and potentially growing), this limitation is clearly inadequate to permit meaningful utilization of pre-change tax losses.

To illustrate the practical impact: assuming accumulated pre-change NOLs of $67.4 million and an annual Section 382 Limitation of $500,000 per year, it would take approximately 134.8 years to fully utilize the pre-change NOLs (assuming sufficient taxable income in each year, which itself is uncertain). For post-2017 NOLs (which carry forward indefinitely), the NOLs would remain on the Company's books in perpetuity but would provide only negligible annual tax benefit. For any pre-2018 NOLs (if they exist), they would expire long before they could be fully utilized at this annual rate.

The Section 382 Limitation will, as a practical matter, significantly impair or effectively eliminate the Company's ability to benefit from its pre-change NOLs.

VI. Built-In Gains and Losses — Section 382(h)

A. Net Unrealized Built-In Gain (NUBIG) vs. Net Unrealized Built-In Loss (NUBIL)

Section 382(h) of the Code provides additional rules relating to the treatment of "built-in" gains and losses existing at the time of an ownership change. These rules can either expand or further constrain the Section 382 Limitation, depending on whether the loss corporation has a net unrealized built-in gain ("NUBIG") or a net unrealized built-in loss ("NUBIL") at the time of the ownership change.

NUBIG. If the loss corporation has a NUBIG at the time of the ownership change — meaning the aggregate fair market value of its assets exceeds the aggregate adjusted tax basis of such assets — then the Section 382 Limitation is increased by the amount of "recognized built-in gains" during the five-year recognition period following the ownership change. Recognized built-in gains include gains on the disposition of assets that had built-in gains at the change date, as well as items of income that are attributable to periods before the change date but recognized during the recognition period. This increase can effectively supplement the annual limitation and accelerate the utilization of pre-change NOLs.

NUBIL. Conversely, if the loss corporation has a NUBIL at the time of the ownership change — meaning the aggregate adjusted tax basis of its assets exceeds their aggregate fair market value — then recognized built-in losses during the five-year recognition period are treated as pre-change losses subject to the Section 382 Limitation. This effectively subjects additional post-change deductions (such as depreciation deductions on assets whose tax basis exceeds fair market value, or losses on dispositions of depreciated assets) to the annual cap, further constraining the Company's tax position.

Given Stonefield's financial distress and the significant deterioration in its operating performance, there is a meaningful possibility that the Company has a NUBIL position at the ownership change date. The Company's assets — including tangible personal property (trucks, trailers, warehousing equipment), intangible assets (customer relationships, trade names, and goodwill recorded in connection with the 2017 LBO), and leasehold interests — may have fair market values that are below their adjusted tax bases, particularly given the decline in freight market conditions and the Company's impaired profitability. Goodwill and other intangible assets, in particular, are often the largest contributor to a NUBIL position in a leveraged buyout context, because their tax basis (reflecting the acquisition price allocated to intangibles under Section 338 or Section 1060) may significantly exceed their current fair market value in a distressed environment.

If Stonefield has a NUBIL, the impact on the Company's post-restructuring tax position would be compounded: not only would pre-change NOLs be subject to the annual Section 382 Limitation, but additional deductions and losses recognized during the five-year recognition period (e.g., amortization of intangible assets, depreciation of fixed assets, losses on asset dispositions) would also be treated as pre-change losses and subjected to the same annual cap.

We recommend that the Company coordinate with Whitfield & Pryce LLP and its internal tax department to compute the NUBIG/NUBIL position as of the expected ownership change date of December 19, 2023. This computation will require a comparison of the aggregate fair market value of all of the Company's assets (excluding cash, cash items, and certain other liquid assets) to their aggregate adjusted tax bases as of that date. Hargrove Advisory Group LLC's valuation work in connection with the restructuring may provide useful inputs for this analysis.

B. De Minimis Threshold

Section 382(h)(3)(B) provides a de minimis exception: the NUBIG or NUBIL position is disregarded entirely if the net amount does not exceed the lesser of (i) 15% of the fair market value of the corporation's assets (other than cash, cash equivalents, and marketable securities) at the change date, or (ii) $10 million.

We do not yet have sufficient information to determine whether Stonefield's built-in gain/loss position exceeds this threshold. The Company and its advisors should assess the aggregate fair market value and adjusted tax basis of the Company's non-cash assets as of the ownership change date to determine whether the de minimis exception applies. If the NUBIG or NUBIL falls below the de minimis threshold, the built-in gain/loss rules of Section 382(h) would not apply, and the Section 382 Limitation would be computed solely on the basis of the annual limitation formula under Section 382(b)(1).

VII. Planning Considerations and Potential Mitigants

A. Maximizing Pre-Change Equity Value

Because the Section 382 Limitation is a function of the pre-change equity value of the loss corporation, maximizing that value (within the bounds of defensible appraisal methodologies) is the single most impactful lever available to the Company for increasing the annual limitation. The Company should ensure that Hargrove Advisory Group LLC's valuation analysis considers all standard valuation

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 599 Lexington Avenue New York, NY 10022
Matter No.: 1012-00002
TAX MEMORANDUM
This memorandum is protected by the attorney-client privilege and constitutes attorney work product. It is intended solely for the use of the individuals identified above and should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. This memorandum is not intended to constitute, and should not be relied upon as, legal advice to any person other than the addressees.
I. Executive Summary
You have asked us to analyze whether the proposed equitization of $140.0 million in aggregate principal amount of 11.50% Senior Secured Second Lien Notes (the "Mezzanine Notes") issued by Stonefield Logistics Group Inc. ("Stonefield," "SLG," or the "Company"), together with the waiver of $8.1 million in accrued payment-in-kind ("PIK") interest thereon, and the resulting issuance of 47.5% of the Company's pro forma common equity to the holders of the Mezzanine Notes (the "Mezzanine Holders"), together with the concomitant dilution of Ridgeline Capital Partners Fund III, L.P. ("Ridgeline" or "RCP III") from 100% to 47.5% of the Company's outstanding common equity and the reservation of 5.0% of pro forma common equity for a management incentive plan (the "MIP"), constitutes an "ownership change" within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (the "Code").
For the reasons set forth in detail in this memorandum, we conclude that the proposed restructuring transaction is expected to result in an "ownership change" within the meaning of Section 382(g) of the Code. This conclusion follows from the fact that the aggregate increase in stock ownership by one or more "5-percent shareholders" — principally, Graystone Mezzanine Capital Fund II LP, Ashland Structured Credit LLC, and Dunmore Special Situations Fund LP, each of which will become a 5-percent shareholder upon the closing of the equitization — will exceed 50 percentage points over the relevant testing period, as measured against the lowest percentage of stock owned by such shareholders during such period. Because none of these entities held any equity in the Company prior to the restructuring, the increase attributable to each begins from a zero-percent baseline, and the aggregate shift is approximately 47.5 percentage points from the equitization alone, supplemented by additional increases attributable to MIP grants and potentially other indirect ownership shifts, which are expected to push the total above the critical 50-percentage-point threshold.
The significance of an ownership change under Section 382 cannot be overstated in the context of the Company's tax position. An ownership change would impose an annual limitation (the "Section 382 Limitation") on the Company's ability to utilize its accumulated pre-change net operating loss carryforwards ("NOLs") and certain built-in losses to offset taxable income in post-change taxable years. Given the Company's current financial condition — in which its enterprise value is substantially below its total indebtedness, rendering the pre-change equity value near zero — the Section 382 Limitation is expected to be extremely low, effectively eliminating or severely restricting the Company's ability to derive any meaningful tax benefit from its pre-change NOLs.
Furthermore, the more favorable provisions available to loss corporations undergoing ownership changes in the context of Title 11 (bankruptcy) proceedings — specifically, Sections 382(l)(5) and 382(l)(6) of the Code — are not available to the Company because the proposed restructuring is being implemented as a consensual out-of-court transaction pursuant to a Restructuring Support Agreement, without any bankruptcy filing.
This memorandum should be read in conjunction with our companion memorandum, Tax Memorandum — Cancellation of Indebtedness Income and Debt-for-Equity Exchange (also dated September 15, 2023, prepared by Sylvia Hartwell), which addresses the cancellation-of-indebtedness ("COD") income consequences of the proposed equitization, the applicability of Section 108 exclusions (including the insolvency exclusion), the stock-for-debt exception under former Section 108(e)(10), and the interaction between COD income recognition and tax attribute reduction under Section 108(b). The interaction between the Section 108(b) attribute reduction and the Section 382 Limitation is discussed in Section VII.E of this memorandum.
The analysis in this memorandum is based on facts and information provided by the Company, by Hargrove Advisory Group LLC (the Company's financial advisor), and by publicly available sources. We have not undertaken any independent factual investigation. This analysis assumes that the restructuring closes on or about December 19, 2023, consistent with the timeline set forth in the Restructuring Support Agreement dated June 30, 2023 (the "RSA"). Should the closing date, terms of the restructuring, or underlying facts change, the conclusions set forth herein may require revision.
II. Background
A. Stonefield Logistics Group Inc. — Corporate Overview
Stonefield Logistics Group Inc. is a corporation organized under the laws of the State of Delaware, with EIN 83-2457109 and Delaware File No. 6341872. The Company's principal executive offices are located at 4200 Commerce Street, Suite 1500, Dallas, TX 75201. The Company's registered agent in the State of Delaware is Capitol Registered Agents, Inc., 1209 Orange Street, Wilmington, DE 19801.
Stonefield operates in the logistics industry, providing freight brokerage, last-mile delivery, and warehousing services to a diversified customer base throughout the United States. The Company's operations are conducted through a group of wholly-owned operating subsidiaries, as follows:
• Stonefield Logistics Holdings LLC, a Delaware limited liability company, which serves as the direct subsidiary and holding company for the operating entities;
• Stonefield Freight Services LLC, a Texas limited liability company, which conducts the Company's core freight brokerage operations;
• Stonefield Last Mile Inc., a Delaware corporation, which operates the Company's last-mile delivery platform; and
• Stonefield Warehousing LLC, a Texas limited liability company, which operates the Company's warehousing and distribution facilities.
As of the date of this memorandum, the Company employs approximately 3,800 individuals across 26 terminals in 14 states.
From a financial perspective, the Company has experienced meaningful revenue and earnings deterioration over the past several quarters, reflecting adverse macroeconomic conditions in the U.S. freight market, including freight rate compression, excess truckload capacity, and customer destocking. The Company's audited financial statements for the fiscal year ended December 31, 2022 — audited by Whitfield & Pryce LLP (Todd Ashburn, CPA, engagement partner) — reported revenue of $612.3 million and Adjusted EBITDA of $58.7 million. For the twelve-month period ending March 31, 2023 ("LTM Q1 2023"), revenue declined and Adjusted EBITDA compressed to approximately $41.2 million, reflecting sharp margin deterioration. Management's current projections, which have been reviewed by Hargrove Advisory Group LLC, estimate FY 2023 revenue at $545.0 million and FY 2023 Adjusted EBITDA at $38.5 million. The FY 2024 Adjusted EBITDA projection is $52.0 million, reflecting anticipated cost savings and operational efficiencies expected to be realized following the proposed restructuring.
B. Ownership History and Original Leveraged Buyout
Stonefield was acquired by Ridgeline Capital Partners Fund III, L.P. ("Ridgeline" or "RCP III") in a leveraged buyout (the "LBO") that closed on December 15, 2017. Ridgeline is a Delaware limited partnership, the general partner of which is Ridgeline Capital Management III LLC, a Delaware limited liability company. Ridgeline is a private equity fund focused on mid-market investments in the transportation, logistics, and industrial services sectors.
In connection with the LBO, Ridgeline invested $210.0 million of equity capital in Stonefield. Following the closing of the LBO, Ridgeline held — and, as of the date of this memorandum, continues to hold — 100% of the issued and outstanding common equity of the Company. No other person or entity holds any equity interest in Stonefield prior to the proposed restructuring.
Ridgeline designates two members of the Company's board of directors: Julian Voight, Managing Director of Ridgeline Capital, and Serena Chu, Principal of Ridgeline Capital. The Company's current senior management team consists of Marcus Delano, Chief Executive Officer (who joined the Company in 2019), Priya Sundaram, Chief Financial Officer (who joined in 2020), and Howard Kessler, Esq., General Counsel (who has served in-house since 2018).
C. Pre-Restructuring Capital Structure (as of March 31, 2023)
The Company's pre-restructuring capital structure, as of the most recently reported date (March 31, 2023), is summarized below. Understanding the Company's existing indebtedness is critical to both the ownership change analysis and the computation of the Section 382 Limitation.
1. Revolving Credit Facility
The Company maintains a senior secured first lien revolving credit facility (the "Revolver") with total commitments of $50.0 million. As of March 31, 2023, $42.0 million was drawn under the Revolver, with $3.5 million in letters of credit outstanding, leaving only $4.5 million in available borrowing capacity. The Revolver bears interest at SOFR plus 375 basis points and matures on December 15, 2024. It is secured on a pari passu basis with the Term Loan B (described below) by a first-priority lien on substantially all of the Company's and its subsidiaries' assets. The Revolver lenders are:
• Pinnacle National Bank, N.A.: $20.0 million commitment
• Great Basin Commercial Bank: $15.0 million commitment
• Tidewater Lending Corporation: $15.0 million commitment
2. First Lien Term Loan B
The Company has outstanding a senior secured first lien term loan B (the "TLB") in the aggregate principal amount of $285.0 million. The TLB was originally funded in the principal amount of $310.0 million at the time of the LBO, with $25.0 million having been amortized since inception. The TLB bears interest at SOFR plus 425 basis points (with a 75-basis-point SOFR floor) and matures on December 15, 2024. Pinnacle National Bank, N.A. serves as both Administrative Agent and Collateral Agent under the TLB credit agreement. The key syndicate members under the TLB include:
• Tralvendo CLO 2018-I, Ltd.: $38.5 million
• Belvedere Credit Opportunities Fund LP: $32.0 million
• Kelvantis Capital Partners LLC: $28.0 million
• Kingsway Institutional Investors LLC: $24.5 million
• Eleven other institutional lenders (aggregate): $117.0 million
The aggregate remaining principal balance across the Revolver and TLB is $327.0 million (representing the Company's first lien indebtedness).
3. Mezzanine Notes (Second Lien)
The Company has outstanding $140.0 million in aggregate principal amount of 11.50% Senior Secured Second Lien Notes due June 15, 2025 (the "Mezzanine Notes"), with accrued PIK interest of $8.1 million as of March 31, 2023, bringing the total outstanding obligation under the Mezzanine Notes to $148.1 million. The Mezzanine Notes bear a CUSIP of 861537 AA 2 and were issued under an indenture (the "Indenture") dated December 15, 2017, with Continental Fiduciary Trust Company serving as Indenture Trustee. The Mezzanine Notes are privately placed and are held by a limited number of institutional investors. The key holders are:
• Graystone Mezzanine Capital Fund II LP: $52.0 million (37.1% of outstanding principal)
• Ashland Structured Credit LLC: $40.0 million (28.6%)
• Dunmore Special Situations Fund LP: $30.0 million (21.4%)
• Four other institutional funds (aggregate): $18.0 million (12.9%)
The concentrated nature of the Mezzanine Note holder base is a significant factor in the Section 382 ownership change analysis, as discussed in detail in Sections III.D and IV.B below.
4. Summary Capitalization
Key credit metrics as of LTM Q1 2023:
• Total Leverage: 11.5x ($475.1M ÷ $41.2M LTM Adjusted EBITDA)
• First Lien Leverage: 7.9x ($327.0M ÷ $41.2M)
• Total Liquidity: $15.8 million ($11.3M unrestricted cash + $4.5M Revolver availability)
The Company's severely elevated leverage and constrained liquidity position are the primary drivers of the proposed restructuring and, as discussed below, have a direct and material bearing on the computation of the Section 382 Limitation.
D. Proposed Restructuring Transaction
The Company has entered into a Restructuring Support Agreement dated June 30, 2023 (the "RSA") with its key stakeholders — including Ridgeline, the Mezzanine Holders, and certain first lien lenders — providing for a consensual out-of-court restructuring of the Company's balance sheet. The restructuring is intended to be consummated without a bankruptcy filing. The key components of the proposed restructuring, as set forth in the RSA and the revised restructuring term sheet dated June 9, 2023, are as follows:
1. Amend-and-Extend of Term Loan B. The TLB maturity will be extended from December 15, 2024 to December 19, 2028. The interest rate spread will increase from SOFR + 425 basis points to SOFR + 500 basis points (with a 100-basis-point SOFR floor). The 1.00% annual amortization requirement will be maintained. The amended TLB will include financial maintenance covenants that do not currently exist: a Total Net Leverage covenant of no greater than 6.50x by Q4 2025, stepping down to 5.75x by Q4 2027, and a Minimum Liquidity covenant of no less than $20.0 million at all times.
2. Amend-and-Extend of Revolver. The Revolver commitment will be reduced from $50.0 million to $35.0 million. The maturity will be extended to December 19, 2027, subject to a springing maturity 91 days prior to the TLB maturity if the TLB has not been refinanced by such date. The interest rate spread will increase from SOFR + 375 basis points to SOFR + 450 basis points.
3. New Super-Priority First-Out Term Loan. Belvedere Credit Opportunities Fund LP will provide a new $55.0 million super-priority first-out term loan, of which $45.0 million will be funded at closing and $10.0 million will be available on a delayed-draw basis. This facility will bear interest at SOFR + 700 basis points (with a 100-basis-point SOFR floor), carry a 2.00% original issue discount ($1.1 million), and mature on December 19, 2027. The proceeds of this new facility will be used to fund transaction costs and provide additional working capital liquidity.
4. Equitization of Mezzanine Notes. The $140.0 million in outstanding principal amount of Mezzanine Notes will be equitized, and the $8.1 million of accrued PIK interest will be waived. In exchange, the Mezzanine Holders will receive (a) Series A Preferred Equity with an aggregate liquidation preference of $35.0 million and a 10.00% PIK dividend rate (the "Series A Preferred"), senior to common equity, and (b) 47.5% of the Company's pro forma common equity. This equitization represents the core transaction giving rise to the Section 382 analysis addressed in this memorandum.
5. Dilution of Ridgeline. Ridgeline's ownership of the Company's common equity will be diluted from 100% to 47.5% of pro forma common equity.
6. Management Incentive Plan. Five percent (5.0%) of the Company's pro forma common equity will be reserved for a management incentive plan (the "MIP"), to be allocated among the Company's senior management team, including Marcus Delano (CEO), Priya Sundaram (CFO), and other key members of the management team.
7. New Cash Equity Contribution by Ridgeline. Ridgeline will contribute $12.5 million in new cash equity to the Company, to be funded on or about December 15, 2023 (four business days before the expected closing date of December 19, 2023). The contribution is intended to fund transaction expenses and provide a post-closing liquidity cushion.
8. Reconstituted Board of Directors. The Company's post-restructuring board of directors will consist of seven members: three designees of Ridgeline, three designees of the Mezzanine Holders, and one independent director to be mutually agreed upon.
The restructuring is expected to close on or about December 19, 2023, subject to a long-stop date of December 31, 2023 under the RSA. Upon consummation of the restructuring:
• Post-restructuring total funded debt: approximately $375.0 million ($35.0M Revolver + $285.0M TLB + $55.0M new first-out term loan)
• Post-restructuring total leverage (based on FY 2024E Adjusted EBITDA of $52.0M): approximately 7.2x
• Total debt reduction from equitization: approximately $100.1 million ($140.0M principal + $8.1M PIK waiver – $35.0M liquidation preference of Series A Preferred = $113.1M total face amount reduction; net of $35.0M preferred, $100.1M of debt is converted to equity and waived)
E. Assumed Net Operating Loss Position
Based on information provided by the Company, by Whitfield & Pryce LLP (the Company's independent auditors), and by Hargrove Advisory Group LLC (the Company's financial advisor), Stonefield has accumulated federal net operating loss carryforwards estimated at approximately $67.4 million as of December 31, 2022. These NOLs arise principally from operating losses incurred during FY 2022 (reflecting the sharp margin compression in the freight brokerage market) and earlier fiscal years following the December 2017 LBO. The NOL position may also reflect certain transaction-related deductions from the original 2017 LBO, including amortization of intangible assets and capitalized transaction costs. The Company is expected to generate additional operating losses during FY 2023 (projected Adjusted EBITDA of $38.5 million may not be sufficient to cover interest expense, depreciation, and other non-cash charges), which would further increase the accumulated NOL balance as of the ownership change date.
It is important to note the distinction between pre-Tax Cuts and Jobs Act ("TCJA") and post-TCJA NOLs. NOLs generated in taxable years beginning after December 31, 2017 are subject to the 80% taxable income limitation imposed by Section 172(a)(2)(B)(ii) of the Code, as amended by the TCJA, but are not subject to expiration and may be carried forward indefinitely. To the extent any NOLs were generated in taxable years beginning before January 1, 2018 — which is unlikely given that the LBO closed on December 15, 2017 and the Company presumably had a short first taxable year — such NOLs would be subject to the 20-year expiration period under prior law. Based on the information provided, we understand that substantially all of the Company's NOLs are post-TCJA NOLs subject to the 80% limitation but not subject to expiration.
The value of these NOLs — estimated at a gross tax benefit of approximately $14.2 million (applying a 21% federal corporate tax rate to $67.4 million in NOLs) as of December 31, 2022, and potentially growing as additional losses are incurred in FY 2023 — could be significantly impaired if an ownership change under Section 382 occurs, as discussed in detail below.
III. Applicable Legal Framework — Section 382
A. Overview of Section 382
Section 382 of the Code was enacted to prevent trafficking in corporate NOLs by imposing a limitation on the use of pre-change losses following an "ownership change" of a "loss corporation." The core policy rationale is that when there is a significant shift in the ownership of a corporation with accumulated tax losses, new owners should not be able to exploit those losses beyond what the corporation could have been expected to use in the ordinary course based on its pre-change value.
Specifically, Section 382(a) provides that if an ownership change occurs with respect to a loss corporation, the amount of the corporation's taxable income for any post-change year which may be offset by pre-change losses shall not exceed the Section 382 Limitation. The Section 382 Limitation is determined under Section 382(b) as the product of the value of the loss corporation's stock immediately before the ownership change and the "long-term tax-exempt rate" published by the Internal Revenue Service.
A "loss corporation" is defined under Section 382(k)(1) as any corporation (i) entitled to use an NOL carryforward, or (ii) having an NOL for the taxable year in which an ownership change occurs. Based on its accumulated NOL carryforwards (estimated at approximately $67.4 million as of December 31, 2022, and expected to increase through the date of the ownership change), Stonefield clearly qualifies as a "loss corporation" within the meaning of Section 382(k)(1).
B. Definition of "Ownership Change" — Section 382(g)
Under Section 382(g), an "ownership change" occurs if, immediately after any owner shift involving a 5-percent shareholder or any equity structure shift, the percentage of the stock of the loss corporation owned by one or more 5-percent shareholders has increased by more than 50 percentage points over the lowest percentage of stock of such corporation owned by such shareholders at any time during the "testing period."
The testing period is defined under Section 382(i) as the three-year period ending on the "testing date." The testing date is the date on which the relevant transaction or event occurs that gives rise to an owner shift or equity structure shift. In the case of the proposed Stonefield restructuring, the testing date would be the closing date of the equitization — expected to be December 19, 2023. Accordingly, the testing period would run from approximately December 19, 2020 through December 19, 2023.
Section 382(g)(1) defines an "owner shift involving a 5-percent shareholder" as any change in the ownership of the stock of a corporation which affects the percentage of stock owned by any person who is a 5-percent shareholder before or after the change. This provision is the primary operative rule that captures the Stonefield restructuring, as the equitization of the Mezzanine Notes will create several new 5-percent shareholders (as discussed in Section IV below).
Section 382(g)(2) defines an "equity structure shift" as any tax-free reorganization under Section 368 of the Code (other than certain divisive reorganizations) and certain other transactions. While a debt-for-equity exchange is not technically a tax-free reorganization under Section 368, it may constitute an owner shift involving a 5-percent shareholder under Section 382(g)(1) if it results in the creation of new 5-percent shareholders or the increase in ownership by existing 5-percent shareholders.
Section 382(g)(3) provides that, for purposes of the ownership change test, a "5-percent shareholder" is any person holding 5% or more of the stock of the loss corporation at any time during the testing period. The determination of stock ownership is made by applying the constructive ownership rules of Section 382(l)(3), which incorporate by reference certain attribution rules under Section 318(a) of the Code, with modifications.
C. Stock Ownership Rules
Several technical rules govern the determination of stock ownership for purposes of the Section 382 ownership change analysis:
1. Definition of "Stock." Section 382(k)(6) provides that the term "stock" includes all stock of the loss corporation except stock described in Section 1504(a)(4) — that is, certain nonparticipating, nonconvertible preferred stock. Stock described in Section 1504(a)(4) is stock that (a) is not entitled to vote, (b) is limited and preferred as to dividends and does not participate in corporate growth to any significant extent, (c) has redemption and liquidation rights which do not exceed the issue price of such stock (except for a reasonable redemption or liquidation premium), and (d) is not convertible into another class of stock. To the extent the Series A Preferred Equity to be issued to the Mezzanine Holders satisfies these requirements, it would be excluded from the ownership change calculation. This issue is discussed further in Section IV.E below.
2. Segregation Rules. Treasury Regulation § 1.382-2T(j) sets forth detailed rules for identifying and segregating direct and indirect 5-percent shareholders. Under these rules, shareholders of a loss corporation are grouped into "public groups" and individual 5-percent shareholders. Shareholders who hold less than 5% of the loss corporation's stock are generally treated as members of one or more "public groups," and each public group is treated as a single 5-percent shareholder for purposes of the ownership change test. Direct public shareholders and indirect public shareholders (i.e., public shareholders of a first-tier or higher-tier entity that holds stock of the loss corporation) may constitute separate public groups.
3. Entity Attribution. Under the entity attribution rules applicable to Section 382, a partnership, trust, or estate is generally treated as owning the stock held by it only to the extent the entity has a "5-percent owner" for purposes of the ownership change test. With respect to partnerships specifically, the rules provide that if a partnership is a 5-percent shareholder of the loss corporation, the partnership's interest in the loss corporation is attributed proportionately to the partners. An individual limited partner of Ridgeline would be an indirect 5-percent shareholder of Stonefield only if the limited partner's proportionate indirect interest in Stonefield's stock equals or exceeds 5%.
4. Testing Date. As noted above, the testing date for the proposed restructuring is the expected closing date of December 19, 2023. On this date, the Company must determine whether an ownership change has occurred by comparing the aggregate increases in ownership by 5-percent shareholders over the three-year testing period ending on that date.
D. Special Rules for Debt-for-Equity Exchanges
Treasury Regulation § 1.382-3 provides specific rules governing the treatment of creditors whose claims are exchanged for stock of a loss corporation in a debt-for-equity exchange. The treatment of such creditors depends on whether the exchanged indebtedness was "publicly traded" or "widely held" and on the ownership concentration among the creditors.
Under the general framework, if indebtedness of the loss corporation is exchanged for stock, the former creditors are treated as new shareholders for purposes of the ownership change analysis. If the exchanged indebtedness was publicly traded and widely held, the former creditors may be aggregated and treated as a single "public group" — a single notional 5-percent shareholder — for purposes of the ownership change test. Conversely, if the exchanged indebtedness was privately placed and held by a limited number of institutional investors, the individual creditors must be separately analyzed to determine whether any single creditor will hold 5% or more of the loss corporation's stock after the exchange.
The distinction between publicly traded, widely held debt and privately placed, concentrated debt is of critical importance in the Stonefield analysis. The Mezzanine Notes were privately placed and, as of the date of this memorandum, are held by only seven institutional investors, three of which hold the vast majority of the outstanding principal (Graystone: 37.1%; Ashland: 28.6%; Dunmore: 21.4%). These are not widely held instruments — they are concentrated in the hands of a small number of sophisticated institutional creditors. Accordingly, the individual creditor analysis is required rather than aggregation into a single public group. As demonstrated in Section IV.B below, three of these creditors will become 5-percent shareholders of Stonefield upon the closing of the equitization, and their individual increases in ownership will contribute significantly to the aggregate increase that triggers the ownership change.
IV. Application to the Stonefield Restructuring
A. Pre-Change Ownership
Prior to the proposed restructuring, the ownership of Stonefield's equity is straightforward: Ridgeline Capital Partners Fund III, L.P., a Delaware limited partnership, holds 100% of the issued and outstanding common equity of the Company. No other person or entity holds any equity interest — common or preferred — in Stonefield. Ridgeline is a 5-percent shareholder within the meaning of Section 382(g)(3); indeed, it is the sole shareholder.
Because Ridgeline is a limited partnership, the entity attribution rules require consideration of whether any of Ridgeline's limited partners hold a sufficient indirect interest in Stonefield to qualify as individual 5-percent shareholders of the Company. Ridgeline's limited partners are institutional investors and high-net-worth individuals whose identities and ownership percentages have not been fully provided to us as of the date of this memorandum. For purposes of this analysis, we have assumed — subject to confirmation from Ridgeline Capital — that Ridgeline's limited partner base is sufficiently diversified such that no single limited partner holds a proportionate indirect interest in Stonefield's stock equal to or exceeding 5%. If this assumption is incorrect — for example, if Ridgeline has a single limited partner that holds a 10% or greater interest in the fund, which would translate to a 10% indirect interest in Stonefield — the identity of that limited partner as a separate 5-percent shareholder could affect the ownership change computation. We recommend that the restructuring team confirm the ownership structure of Fund III with Ridgeline Capital prior to closing.
No other ownership shifts have occurred during the three-year testing period (December 19, 2020 through the expected closing date of December 19, 2023). Ridgeline has held 100% of the Company's common equity continuously since the December 2017 LBO.
B. Post-Change Ownership
Immediately after the closing of the proposed restructuring, the pro forma ownership of Stonefield's common equity will be as follows:
The critical question for the Section 382 analysis is the identity and ownership percentage of each post-change 5-percent shareholder among the Mezzanine Equitization Recipients. Because the Mezzanine Notes were privately placed and are held by a limited number of identifiable institutional investors, each holder's pro rata share of the 47.5% common equity allocation must be analyzed individually. Each Mezzanine Holder will receive its proportionate share of the 47.5% common equity pool based on the ratio of its Mezzanine Note holdings to the total outstanding principal amount of the Mezzanine Notes ($140.0 million). The accrued PIK interest of $8.1 million is being waived, so the allocation is based solely on principal holdings.
The individual analysis is as follows:
1. Graystone Mezzanine Capital Fund II LP
Mezzanine Note Holdings: $52.0 million Percentage of Total Mezzanine Notes: $52.0M ÷ $140.0M = 37.1% Pro Forma Common Equity Allocation: 37.1% × 47.5% = approximately 17.6% Status: 5-percent shareholder
2. Ashland Structured Credit LLC
Mezzanine Note Holdings: $40.0 million Percentage of Total Mezzanine Notes: $40.0M ÷ $140.0M = 28.6% Pro Forma Common Equity Allocation: 28.6% × 47.5% = approximately 13.6% Status: 5-percent shareholder
3. Dunmore Special Situations Fund LP
Mezzanine Note Holdings: $30.0 million Percentage of Total Mezzanine Notes: $30.0M ÷ $140.0M = 21.4% Pro Forma Common Equity Allocation: 21.4% × 47.5% = approximately 10.2% Status: 5-percent shareholder
4. Other Mezzanine Holders (4 funds, aggregate $18.0 million)
Aggregate Mezzanine Note Holdings: $18.0 million Aggregate Percentage of Total Mezzanine Notes: $18.0M ÷ $140.0M = 12.9% Aggregate Pro Forma Common Equity Allocation: 12.9% × 47.5% = approximately 6.1% collectively
If each of the four remaining funds holds an approximately equal share of the $18.0 million ($4.5 million each), then each fund would hold approximately 3.2% of the mezzanine class (3.2% × 47.5% = approximately 1.5% each), well below the 5% threshold on an individual basis. These holders would therefore be aggregated into a single "public group" for purposes of the Section 382 analysis, and that public group would itself be treated as a single 5-percent shareholder (with an aggregate increase of 6.1 percentage points). If, however, any single fund among the four holds a disproportionate share such that its resulting common equity allocation equals or exceeds 5%, that fund would be separately identified as an individual 5-percent shareholder. We have assumed for purposes of this memorandum that none of the four remaining funds individually exceeds the 5% threshold, but this assumption should be confirmed with the Company and Continental Fiduciary Trust Company.
5. Management (MIP, 5.0%)
The 5.0% common equity pool reserved for the MIP will be allocated among the Company's senior management team. The specific allocation among individual members — including Marcus Delano (CEO), Priya Sundaram (CFO), and others — has not been finalized as of the date of this memorandum. If any single member of management receives an equity allocation equal to or exceeding 5.0% of Stonefield's pro forma common equity, that individual would be identified as a 5-percent shareholder, and his or her increase in ownership (from 0% to 5.0% or more) would contribute to the aggregate ownership change calculation. If, as is more typical in MIP structures, the 5.0% pool is divided among several executives such that no individual receives 5% or more, the management participants would be aggregated into a separate "public group" (distinct from the mezzanine holder public group) with an aggregate increase of 5.0 percentage points. In either case, the MIP allocation contributes to the aggregate increase in 5-percent shareholder ownership.
C. Calculation of Increase in Ownership by 5-Percent Shareholders
The Section 382 ownership change test requires the computation of the aggregate increase in ownership by each 5-percent shareholder, measured against the lowest percentage of stock owned by such shareholder at any time during the three-year testing period. Because none of the Mezzanine Holders or management participants held any equity in Stonefield at any point during the testing period prior to the restructuring, the lowest percentage for each is zero. The relevant calculations are as follows:
Ridgeline Capital Partners Fund III, L.P.
Pre-Change Ownership: 100% Post-Change Ownership: 47.5% Change: Decrease of 52.5 percentage points
Under Section 382, a decrease in a 5-percent shareholder's ownership does not itself trigger an ownership change. The ownership change test looks exclusively at increases by 5-percent shareholders. Ridgeline's decrease from 100% to 47.5% does not contribute affirmatively to the aggregate increase calculation. However, Ridgeline's decrease is the arithmetic counterpart of the increases by the new shareholders — Ridgeline's 52.5-percentage-point decrease is distributed among the mezzanine equitization recipients (47.5 percentage points) and the MIP participants (5.0 percentage points).
Graystone Mezzanine Capital Fund II LP
Pre-Change Ownership: 0% (creditor only, not an equity holder) Post-Change Ownership: approximately 17.6% Increase: 17.6 percentage points
Ashland Structured Credit LLC
Pre-Change Ownership: 0% Post-Change Ownership: approximately 13.6% Increase: 13.6 percentage points
Dunmore Special Situations Fund LP
Pre-Change Ownership: 0% Post-Change Ownership: approximately 10.2% Increase: 10.2 percentage points
Public Group of Remaining Mezzanine Holders (aggregated)
Pre-Change Ownership: 0% Post-Change Ownership: approximately 6.1% Increase: 6.1 percentage points
Management / MIP Public Group (or individual 5-percent shareholders, if applicable)
Pre-Change Ownership: 0% Post-Change Ownership: 5.0% (collectively) Increase: 5.0 percentage points (assuming no individual member is a 5-percent shareholder; if any individual is, the increase is allocated to that individual and a reduced amount to the remaining public group)
Aggregate Increase by All 5-Percent Shareholders:
The aggregate increase of approximately 52.5 percentage points exceeds the 50-percentage-point threshold under Section 382(g). An ownership change therefore occurs.
We note that even excluding the management MIP and the public group of smaller mezzanine holders, the three individually identified 5-percent shareholders alone account for an aggregate increase of 41.4 percentage points (17.6 + 13.6 + 10.2). When combined with the public group increase of 6.1 percentage points, the aggregate reaches 47.5 percentage points — just below the 50-point threshold. The addition of the 5.0% MIP allocation, even if treated as a single public group increase, pushes the aggregate to 52.5 percentage points, well over the threshold.
Under any reasonable analysis of the facts — regardless of whether the MIP is treated as creating individual 5-percent shareholders or a separate public group, regardless of how the four smaller mezzanine holders are classified, and regardless of whether the Series A Preferred is counted as "stock" — the aggregate increase in 5-percent shareholder ownership exceeds 50 percentage points, and an ownership change under Section 382 is expected to occur.
D. Consideration of the Testing Period
The testing period for the ownership change analysis is the three-year period ending on the testing date — that is, December 19, 2020 through December 19, 2023. During this entire period, Ridgeline has held 100% of Stonefield's common equity. No other owner shifts or equity structure shifts occurred during the testing period. There were no secondary sales of Stonefield equity, no issuances of additional shares to management or other parties, and no changes in the indirect ownership of Stonefield through the Ridgeline partnership structure (to the knowledge of the Company and based on the information provided to us).
Because no prior shifts occurred during the testing period, the entire ownership change is attributable to the single restructuring transaction. This simplifies the analysis considerably: the aggregate increase is computed solely based on the changes effected at the closing of the restructuring.
As noted above, the aggregate increase of approximately 52.5 percentage points exceeds the 50-point threshold. Even under a more conservative analysis — for example, if one were to exclude the MIP public group or certain of the smaller mezzanine holders — the threshold would likely be exceeded, or at minimum approached closely enough that any additional factor (such as entity look-through for Ridgeline's limited partner base or individual MIP allocations exceeding 5%) would push the aggregate over the line.
Conclusion: An ownership change within the meaning of Section 382(g) of the Code is expected to occur upon the closing of the proposed restructuring transaction on or about December 19, 2023.
E. Impact of Series A Preferred Stock
As discussed in Section II.D above, the Mezzanine Holders will receive, in addition to 47.5% of pro forma common equity, Series A Preferred Equity with an aggregate liquidation preference of $35.0 million and a 10.00% PIK dividend rate. The treatment of the Series A Preferred for purposes of the Section 382 ownership change analysis depends on whether it qualifies as "pure preferred stock" under Section 382(k)(6)(A) and Section 1504(a)(4).
Under Section 382(k)(6)(A), "stock" for purposes of the ownership change analysis generally excludes stock described in Section 1504(a)(4), which encompasses stock that meets all of the following criteria:
(a) the stock is not entitled to vote;
(b) the stock is limited and preferred as to dividends and does not participate in corporate growth to any significant extent;
(c) the stock has redemption and liquidation rights that do not exceed the issue price of such stock (except for a reasonable redemption or liquidation premium); and
(d) the stock is not convertible into another class of stock.
If the Series A Preferred satisfies each of these requirements, it would be excluded from the computation of stock ownership for Section 382 purposes, and the ownership change analysis would focus exclusively on the shift in common equity. In such case, the analysis set forth in Sections IV.B and IV.C above — which was conducted solely on the basis of common equity ownership — would be the complete analysis, and the conclusion would remain unchanged: an ownership change occurs.
If, however, the Series A Preferred includes participation rights (for example, a right to share in distributions beyond its stated dividend rate based on the Company's performance), conversion features (a right to convert into common equity), or other equity-like characteristics that cause it to fall outside the definition of Section 1504(a)(4) stock, then the Series A Preferred would be treated as "stock" for Section 382 purposes. In that event, the Mezzanine Holders' aggregate ownership of Stonefield's stock would include both their 47.5% common equity interest and their proportionate share of the value of the Series A Preferred, which would increase the aggregate 5-percent shareholder increase and make the ownership change determination even more clear-cut.
As of the date of this memorandum, the final Certificate of Designations for the Series A Preferred has not been provided to us. We recommend that the restructuring team provide the draft or final terms of the Series A Preferred so that we can make a definitive determination regarding its treatment under Section 382(k)(6)(A). However, for the reasons stated above, this determination is not outcome-determinative: whether or not the Series A Preferred is counted as "stock," the common equity shift alone is sufficient to cause an ownership change.
V. Calculation of the Section 382 Limitation
A. General Formula
Having concluded that an ownership change is expected to occur, the next critical question is the magnitude of the annual limitation that will be imposed on Stonefield's ability to use its pre-change NOLs.
Under Section 382(b)(1) of the Code, the annual Section 382 Limitation is computed as follows:
Section 382 Limitation = Value of the Loss Corporation's Stock Immediately Before the Ownership Change × Long-Term Tax-Exempt Rate
The "value" of the loss corporation's stock is the fair market value of all outstanding stock of the corporation immediately before the ownership change, subject to certain adjustments discussed below. The "long-term tax-exempt rate" is a rate published by the IRS for each month, reflecting the highest of the adjusted Federal long-term rates in effect for any month in the three-month period ending with the calendar month in which the ownership change date falls, adjusted to reflect the differences between rates on long-term taxable obligations and long-term tax-exempt obligations. For ownership changes occurring in December 2023, the applicable rate will be the rate published by the IRS for December 2023 (or, if higher, the rate published for October or November 2023). Based on recently published rates, we estimate the applicable long-term tax-exempt rate at approximately 4.50% to 5.00%; the exact rate will be confirmed at or near the closing date.
B. Valuation of Stonefield Stock Pre-Change
The fair market value of Stonefield's equity immediately before the ownership change is the most critical input in the Section 382 Limitation calculation. This valuation must be determined as of the moment immediately before the equitization closes — that is, immediately before the Mezzanine Holders receive their equity interests and the ownership change occurs.
The Company's financial condition at that point in time presents a challenging valuation picture. As of the most recent reporting date, Stonefield had LTM Adjusted EBITDA of $41.2 million and total funded indebtedness of $475.1 million, representing total leverage of 11.5x. By the expected closing date of December 19, 2023, the Company's financial position may have deteriorated further, depending on Q3 and Q4 2023 operating results. The Company's near-term liquidity outlook was projected to deteriorate significantly, with the Company's financial advisor indicating that, absent the restructuring, the Company would face liquidity exhaustion by approximately Q3 2024.
Hargrove Advisory Group LLC's analysis, which was prepared in connection with the restructuring negotiations, indicates that Ridgeline's equity investment of $210.0 million is "significantly impaired." This assessment is consistent with conventional valuation methodologies:
discounted Cash Flow Analysis. A discounted cash flow analysis, based on management's projected cash flows and an appropriate weighted average cost of capital, would produce an enterprise value reflecting the present value of the Company's expected future cash flows. Given the Company's high leverage, near-term liquidity constraints, and uncertain operating environment, the DCF-derived enterprise value would likely fall in a range that, when total indebtedness is subtracted, yields a residual equity value near zero or potentially negative.
Comparable Company Multiples. Industry EV/EBITDA multiples for mid-market freight brokerage and logistics companies currently range from approximately 5.0x to 8.0x. Applying these multiples to the Company's FY 2024E Adjusted EBITDA of $52.0 million yields an enterprise value range of approximately $260.0 million to $416.0 million. Net of the Company's pre-restructuring funded debt of $475.1 million, the implied equity value under this methodology ranges from negative $59.1 million to negative $215.1 million — i.e., the equity is out of the money under all but the most optimistic valuation assumptions.
Precedent Transactions. Comparable transaction multiples in the logistics sector generally support enterprise value multiples in a similar range, though precedent transaction data is sparse for companies in financial distress.
Under all standard methodologies, the Company's total enterprise value immediately before the ownership change is expected to be substantially below total indebtedness, rendering the pre-change equity value near zero. To the extent there is any positive equity value, it would reflect option value, going-concern premium, or other residual value. A reasonable range for pre-change equity value might be $0 to $25 million, depending on the assumptions employed.
If the pre-change equity value is near zero, the Section 382 Limitation would be correspondingly negligible. For example, a pre-change equity value of $5 million multiplied by a long-term tax-exempt rate of 4.75% yields an annual limitation of only $237,500 — a de minimis amount that would effectively render the pre-change NOLs unusable.
This near-zero equity value would effectively eliminate or severely restrict Stonefield's ability to utilize its pre-change NOLs to offset future taxable income.
C. Section 382(l)(6) — Increase in Value from Redemption or Cancellation of Stock
Section 382(l)(6) provides that if stock of the loss corporation is redeemed or cancelled in connection with an ownership change, the value of the corporation's stock is determined after taking into account such redemption or cancellation. This provision is designed to prevent manipulation of the pre-change equity value by having the corporation redeem stock immediately before the ownership change.
In the Stonefield restructuring, the ownership change is not triggered by a stock redemption — it is triggered by a debt-for-equity exchange and the resulting issuance of new common equity to the Mezzanine Holders. No existing shares of Stonefield common stock are being redeemed or cancelled; rather, Ridgeline's existing shares are being diluted by the issuance of new shares. Accordingly, Section 382(l)(6) is not directly applicable to the present facts.
D. Section 382(l)(1) — Capital Contributions
Section 382(l)(1) of the Code addresses the treatment of capital contributions made to a loss corporation in connection with an ownership change. Specifically, the statute provides that the value of the loss corporation's stock must be determined without regard to any capital contribution made (directly or indirectly) to the corporation during the two-year period ending on the ownership change date, unless the taxpayer establishes that the contribution was made for a valid business purpose and was not part of a plan a principal purpose of which was to increase the Section 382 Limitation.
This provision — commonly referred to as the "anti-stuffing rule" — is directly relevant to Ridgeline's $12.5 million new cash equity contribution, which is expected to be funded on or about December 15, 2023, four business days before the anticipated closing date. The contribution is contemporaneous with the ownership change and falls squarely within the two-year lookback period.
The stated purpose of Ridgeline's $12.5 million contribution is to fund transaction costs associated with the restructuring and to provide a post-closing liquidity cushion for the Company. These are legitimate business purposes, and there is a colorable argument that the contribution should not be excluded under Section 382(l)(1). However, the IRS could argue that any pre-change capital contribution necessarily increases equity value and thus could be viewed as having a principal purpose of increasing the Section 382 Limitation. In our judgment, the more conservative approach is to exclude Ridgeline's $12.5 million contribution from the pre-change equity value computation.
As a practical matter, the exclusion of the $12.5 million contribution has minimal impact on the Section 382 Limitation if the underlying equity value is already near zero. Even if the $12.5 million were included, the total pre-change equity value would increase from near zero to approximately $12.5 million, yielding an annual Section 382 Limitation of approximately $593,750 (at a 4.75% rate) — still a negligible amount relative to the Company's accumulated NOLs.
E. Section 382(l)(5) — Bankruptcy Exception
Section 382(l)(5) provides a special rule that, under certain conditions, exempts a loss corporation emerging from a Title 11 (bankruptcy) case from the Section 382 Limitation altogether. Specifically, Section 382(l)(5)(A) provides that if an ownership change occurs "in a title 11 or similar case," the Section 382 Limitation does not apply, provided that certain conditions are met — including that historic shareholders and "qualified creditors" (creditors who held their claims for at least 18 months prior to the filing date or whose claims arose in the ordinary course of the debtor's business) own at least 50% of the reorganized debtor's stock (by vote and value) immediately after the ownership change.
This exception is NOT available to Stonefield. The Company's restructuring is being accomplished as a consensual out-of-court transaction pursuant to the RSA, without any filing under Title 11 of the United States Bankruptcy Code. Section 382(l)(5) explicitly requires that the ownership change occur "in a title 11 or similar case," which term is defined by reference to Section 368(a)(3)(A) of the Code as a case under Title 11 of the United States Code (i.e., a federal bankruptcy case) or a receivership, foreclosure, or similar proceeding in a Federal or State court. An out-of-court consensual restructuring does not qualify as a "title 11 or similar case."
Accordingly, the favorable treatment under Section 382(l)(5) — which would permit Stonefield to preserve the full use of its pre-change NOLs (subject to a reduction for certain interest deductions) — is not available.
F. Section 382(l)(6) — Alternative Rule for Bankruptcy Cases
Section 382(l)(6) provides an alternative to Section 382(l)(5) for loss corporations that undergo an ownership change in a Title 11 or similar case. Under Section 382(l)(6), a corporation that elects out of Section 382(l)(5) — or that does not satisfy the conditions of Section 382(l)(5) — may compute the Section 382 Limitation based on the post-change (rather than pre-change) fair market value of its stock, which in a typical bankruptcy reorganization would be substantially higher than the pre-change equity value because the reorganized entity would have significantly reduced leverage.
Like Section 382(l)(5), Section 382(l)(6) is available only where the ownership change occurs in a "title 11 or similar case." Because Stonefield's restructuring is being consummated out of court, Section 382(l)(6) is also not available to the Company. This is a significant disadvantage: if Section 382(l)(6) were available, the Section 382 Limitation would be based on Stonefield's post-restructuring equity value — which, given the substantial deleveraging achieved by the equitization, would be materially higher than the pre-change equity value and would result in a correspondingly higher annual limitation.
G. Estimated Section 382 Limitation
Based on the analysis above, and using illustrative assumptions for pre-change equity value and the long-term tax-exempt rate, the estimated annual Section 382 Limitation can be calculated under a range of scenarios:
Even under the most favorable scenario in this range — a pre-change equity value of $25 million and a long-term tax-exempt rate of 5.00% — the annual Section 382 Limitation would be only $1.25 million. Against accumulated NOLs estimated at $67.4 million (and potentially growing), this limitation is clearly inadequate to permit meaningful utilization of pre-change tax losses.
To illustrate the practical impact: assuming accumulated pre-change NOLs of $67.4 million and an annual Section 382 Limitation of $500,000 per year, it would take approximately 134.8 years to fully utilize the pre-change NOLs (assuming sufficient taxable income in each year, which itself is uncertain). For post-2017 NOLs (which carry forward indefinitely), the NOLs would remain on the Company's books in perpetuity but would provide only negligible annual tax benefit. For any pre-2018 NOLs (if they exist), they would expire long before they could be fully utilized at this annual rate.
The Section 382 Limitation will, as a practical matter, significantly impair or effectively eliminate the Company's ability to benefit from its pre-change NOLs.
VI. Built-In Gains and Losses — Section 382(h)
A. Net Unrealized Built-In Gain (NUBIG) vs. Net Unrealized Built-In Loss (NUBIL)
Section 382(h) of the Code provides additional rules relating to the treatment of "built-in" gains and losses existing at the time of an ownership change. These rules can either expand or further constrain the Section 382 Limitation, depending on whether the loss corporation has a net unrealized built-in gain ("NUBIG") or a net unrealized built-in loss ("NUBIL") at the time of the ownership change.
NUBIG. If the loss corporation has a NUBIG at the time of the ownership change — meaning the aggregate fair market value of its assets exceeds the aggregate adjusted tax basis of such assets — then the Section 382 Limitation is increased by the amount of "recognized built-in gains" during the five-year recognition period following the ownership change. Recognized built-in gains include gains on the disposition of assets that had built-in gains at the change date, as well as items of income that are attributable to periods before the change date but recognized during the recognition period. This increase can effectively supplement the annual limitation and accelerate the utilization of pre-change NOLs.
NUBIL. Conversely, if the loss corporation has a NUBIL at the time of the ownership change — meaning the aggregate adjusted tax basis of its assets exceeds their aggregate fair market value — then recognized built-in losses during the five-year recognition period are treated as pre-change losses subject to the Section 382 Limitation. This effectively subjects additional post-change deductions (such as depreciation deductions on assets whose tax basis exceeds fair market value, or losses on dispositions of depreciated assets) to the annual cap, further constraining the Company's tax position.
Given Stonefield's financial distress and the significant deterioration in its operating performance, there is a meaningful possibility that the Company has a NUBIL position at the ownership change date. The Company's assets — including tangible personal property (trucks, trailers, warehousing equipment), intangible assets (customer relationships, trade names, and goodwill recorded in connection with the 2017 LBO), and leasehold interests — may have fair market values that are below their adjusted tax bases, particularly given the decline in freight market conditions and the Company's impaired profitability. Goodwill and other intangible assets, in particular, are often the largest contributor to a NUBIL position in a leveraged buyout context, because their tax basis (reflecting the acquisition price allocated to intangibles under Section 338 or Section 1060) may significantly exceed their current fair market value in a distressed environment.
If Stonefield has a NUBIL, the impact on the Company's post-restructuring tax position would be compounded: not only would pre-change NOLs be subject to the annual Section 382 Limitation, but additional deductions and losses recognized during the five-year recognition period (e.g., amortization of intangible assets, depreciation of fixed assets, losses on asset dispositions) would also be treated as pre-change losses and subjected to the same annual cap.
We recommend that the Company coordinate with Whitfield & Pryce LLP and its internal tax department to compute the NUBIG/NUBIL position as of the expected ownership change date of December 19, 2023. This computation will require a comparison of the aggregate fair market value of all of the Company's assets (excluding cash, cash items, and certain other liquid assets) to their aggregate adjusted tax bases as of that date. Hargrove Advisory Group LLC's valuation work in connection with the restructuring may provide useful inputs for this analysis.
B. De Minimis Threshold
Section 382(h)(3)(B) provides a de minimis exception: the NUBIG or NUBIL position is disregarded entirely if the net amount does not exceed the lesser of (i) 15% of the fair market value of the corporation's assets (other than cash, cash equivalents, and marketable securities) at the change date, or (ii) $10 million.
We do not yet have sufficient information to determine whether Stonefield's built-in gain/loss position exceeds this threshold. The Company and its advisors should assess the aggregate fair market value and adjusted tax basis of the Company's non-cash assets as of the ownership change date to determine whether the de minimis exception applies. If the NUBIG or NUBIL falls below the de minimis threshold, the built-in gain/loss rules of Section 382(h) would not apply, and the Section 382 Limitation would be computed solely on the basis of the annual limitation formula under Section 382(b)(1).
VII. Planning Considerations and Potential Mitigants
A. Maximizing Pre-Change Equity Value
Because the Section 382 Limitation is a function of the pre-change equity value of the loss corporation, maximizing that value (within the bounds of defensible appraisal methodologies) is the single most impactful lever available to the Company for increasing the annual limitation. The Company should ensure that Hargrove Advisory Group LLC's valuation analysis considers all standard valuation

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