1003-00003 · Harrowgate Private Equity Fund IV LP · Tax

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CALDERWOOD & HARKNESS LLP 787 Seventh Avenue, 38th Floor New York, New York 10019

PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT

MEMORANDUM

This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared by Calderwood & Harkness LLP for the exclusive use of the addressees identified above. This memorandum is not intended as tax advice to any other person or entity. No portion of this memorandum may be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. The conclusions expressed herein are based on the facts, assumptions, and applicable law as of the date hereof. This memorandum was finalized in advance of the anticipated closing date of July 22, 2025; an initial draft was circulated earlier in the pre-closing period for review and comment.

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I. Executive Summary

This memorandum analyzes the state and local income, franchise, and gross receipts tax consequences arising from the proposed acquisition of VeloPay Systems, Inc. ("VeloPay" or the "Company") by Harrowgate Private Equity Fund IV LP ("HPE Fund IV" or the "Fund"), structured as a reverse triangular merger in which Harrowgate Velocity Merger Sub Inc. ("Merger Sub") will merge with and into VeloPay, with VeloPay surviving as a wholly-owned subsidiary of HPE Fund IV (the "Merger" or the "Transaction"). This memorandum is intended to complement, and should be read in conjunction with, the separate Tax Structure Memorandum (addressing Section 368 reorganization and Section 338(h)(10) election considerations), the Section 280G Parachute Payment Analysis, and the FIRPTA/Withholding Analysis Memorandum, each prepared by the undersigned.

Transaction Overview. The Transaction involves the acquisition of VeloPay for aggregate merger consideration of approximately $1.9 billion, reflecting per-share consideration of $20.00 across approximately 95,000,000 fully diluted shares. The Agreement and Plan of Merger (the "Merger Agreement") was executed on March 18, 2025, and closing is anticipated to occur on July 22, 2025, subject to the satisfaction or waiver of customary closing conditions, including the receipt of regulatory approvals from state money transmitter licensing authorities.

The Company. VeloPay is a Delaware corporation headquartered in Austin, Texas, that provides payment processing, fraud detection, and financial gateway services to approximately 14,000 merchants across the United States. The Company processed approximately $87 billion in annualized gross payment volume for its fiscal year ended December 31, 2024, generating total revenue of $412.3 million across its principal revenue streams of interchange-plus processing fees, SaaS subscription fees, and gateway transaction fees. As of the date of this memorandum, VeloPay employs approximately 1,340 individuals across its Austin, Texas headquarters (approximately 800+ employees); its Denver, Colorado office (approximately 200 employees); and its international offices in Toronto, Ontario, Canada and Lisbon, Portugal.

Subsidiaries. VeloPay has five subsidiaries: three domestic subsidiaries — VeloPay Processing LLC (Delaware LLC), VeloPay Fraud intelligence Inc. (Delaware corporation), and PayStream Gateway LLC (Delaware LLC) — and two foreign subsidiaries — VeloPay Canada Inc. (Ontario, Canada) and VeloPay Europe, Unipessoal Lda. (Portugal). The foreign subsidiaries are outside the scope of U.S. state and local tax but are noted for completeness and because their intercompany transactions with domestic affiliates may bear on state apportionment and transfer pricing considerations.

Key State Tax Jurisdictions. The principal state tax jurisdictions affected by the Transaction include: (i) Texas, as VeloPay's headquarters and the location of its largest employee presence; (ii) Delaware, as VeloPay's state of incorporation and the state of formation for all domestic subsidiaries, HPE Fund IV, and the Fund's general partner; (iii) Colorado, where VeloPay maintains a significant office and employee presence in Denver; and (iv) every state in which VeloPay and its subsidiaries have nexus through operations, remote employees, economic activity, or the holding of money transmitter licenses (VeloPay currently holds money transmitter licenses in 47 states plus the District of Columbia).

Principal Conclusions. Our analysis yields the following principal conclusions:

(a) Texas Margin Tax. The Texas franchise tax (commonly known as the "margin tax") is the single most significant state tax consideration for VeloPay given its Austin headquarters, substantial Texas employee base, and the volume of Texas-apportioned revenue. Post-acquisition, the composition of the Texas combined reporting group will change to include VeloPay and its domestic subsidiaries, and potentially other HPE Fund IV portfolio entities with Texas nexus. Detailed modeling is recommended to quantify any incremental exposure.

(b) Combined/Unitary Group Apportionment Changes. The change in VeloPay's ownership will alter the composition of the combined or unitary group in multiple states that require combined reporting (including California, New York, Illinois, Massachusetts, New Jersey, and Connecticut, among others). The resulting changes in apportionment factors may either increase or decrease VeloPay's state tax burden in each such jurisdiction, depending on the apportionment profiles of other entities included in the combined group.

(c) Delaware Franchise Tax. The Delaware franchise tax obligations of VeloPay and its Delaware-incorporated subsidiaries should be evaluated to determine whether the Authorized Shares Method or the Assumed Par Value Capital Method produces a lower tax liability. Post-merger, the number of authorized shares in VeloPay's Amended and Restated Certificate of Incorporation should be reduced to minimize this obligation.

(d) Nexus Expansion Risk. HPE Fund IV's broader portfolio affiliations in the payments and financial infrastructure sector create a risk that certain states could seek to assert nexus over VeloPay (or conversely, over HPE Fund IV's other portfolio companies) based on the unitary business principle, particularly in aggressive combined-reporting states.

(e) Short-Period Return Obligations. Merger Sub, which was formed on February 24, 2025 and will cease to exist upon the effective time of the Merger on July 22, 2025, will require a final short-period Delaware franchise tax return. VeloPay itself, as the surviving entity, generally will not be required to file short-period returns solely as a result of the change in ownership.

(f) Stockholder-Level State Tax and Withholding. The per-share merger consideration of $20.00 will be treated as proceeds from the sale of stock at the stockholder level. The state income tax consequences depend on each stockholder's state of residency. Certain states may impose withholding obligations on payments to nonresident sellers, which should be communicated to Keystone Pacific Transfer Services Inc. in its capacity as paying agent.

(g) Post-Closing Entity Rationalization. HPE Fund IV's anticipated integration plan may include the rationalization of VeloPay's subsidiary structure (e.g., merging subsidiaries into VeloPay or converting entity types), which may yield state tax savings through reduced filing obligations and franchise tax costs, though such restructuring must be carefully sequenced to preserve tax attributes and avoid unintended adverse consequences.

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

II. Structure of the Transaction and State Tax Characterization

A. Transaction Structure Recap

The Transaction is structured as a reverse triangular merger under Section 251 of the Delaware General Corporation Law ("DGCL"). The principal structural elements are as follows:

• Merger Sub. Harrowgate Velocity Merger Sub Inc. is a Delaware corporation formed on February 24, 2025 (Delaware File Number 7291034; EIN 93-1847265) for the sole purpose of effectuating the Merger. Merger Sub is a direct, wholly-owned subsidiary of HPE Fund IV. Merger Sub has no operations, no employees, no assets (other than the nominal capitalization contributed by HPE Fund IV), and no liabilities as of the date of this memorandum.

• Target. VeloPay Systems, Inc. is a Delaware corporation (Delaware File Number 5748392; EIN 82-3019478) that will be the surviving entity in the Merger.

• Mechanics. At the effective time of the Merger, Merger Sub will merge with and into VeloPay, with VeloPay as the surviving corporation. Each outstanding share of VeloPay common stock (other than shares held by VeloPay as treasury shares, shares held by HPE Fund IV or Merger Sub, and shares subject to valid appraisal demands) will be converted into the right to receive $20.00 in cash, without interest. The aggregate merger consideration is approximately $1.9 billion, based on approximately 95,000,000 fully diluted shares.

• Post-Merger Ownership. Following the Merger, VeloPay will be a wholly-owned subsidiary of HPE Fund IV. HPE Fund IV is a Delaware limited partnership (EIN 87-4231956) whose general partner is Harrowgate Capital Management IV LLC, a Delaware limited liability company (EIN 87-4231847).

• Federal Tax Treatment. As discussed in the separate Tax Structure Memorandum, the Transaction is recommended to be treated as a taxable stock acquisition for federal income tax purposes. The Tax Structure Memorandum analyzed the applicability of Section 368 reorganization treatment and the potential benefits and costs of a Section 338(h)(10) election, and ultimately recommended treatment as a taxable stock acquisition without a Section 338(h)(10) election. The per-share consideration of $20.00, representing aggregate consideration of approximately $1.9 billion divided by 95,000,000 fully diluted shares, will be treated as the purchase price for the VeloPay stock.

B. State Conformity to Federal Characterization

The vast majority of states that impose a corporate income or franchise tax generally conform to the federal characterization of a transaction for purposes of determining the nature and treatment of the transaction at the state level. Because the Transaction is treated as a taxable stock acquisition for federal purposes, and because VeloPay is the surviving entity in the statutory merger, most states will similarly treat the Transaction as a taxable event at the stockholder level while respecting VeloPay's continuing existence as a going concern for all state tax purposes.

Reverse Triangular Merger Respected. We have analyzed whether any state would recharacterize the reverse triangular merger as something other than a statutory merger resulting in a change of ownership at the stockholder level. Generally, states respect the form of a statutory merger under applicable state corporate law. Because the Merger is being effectuated under DGCL § 251, and VeloPay is the surviving corporation, we do not anticipate any state recharacterizing the transaction as an asset sale or other form of acquisition that would produce materially different state tax consequences for VeloPay.

Section 338(h)(10) Conformity Considerations. Although the recommendation in the Tax Structure Memorandum was for taxable stock acquisition treatment without a Section 338(h)(10) election, we note for completeness that if such an election were made, a state-by-state conformity analysis would be required. Most states that impose a corporate income tax conform to the federal Section 338(h)(10) election and would treat VeloPay as having sold its assets in a deemed liquidation for state tax purposes. However, certain states present nuances: for example, California generally conforms to Section 338(h)(10) for purposes of its corporation tax but applies its own apportionment rules to the deemed asset sale, which could produce different apportioned gain or loss results than at the federal level. Other states, such as New Hampshire and the District of Columbia, have historically had imperfect conformity or have required separate state-level elections. Because the Section 338(h)(10) election is not being made, these conformity issues do not arise in the present Transaction.

Continuity of VeloPay's State Tax Attributes. Because VeloPay is the surviving entity in the Merger, its state tax attributes — including its state tax identification numbers, nexus positions, filing histories, previously filed returns, state net operating loss carryforwards, tax credits, and registered agent and registered office information — generally continue uninterrupted. VeloPay will not need to register as a new entity in any state solely as a result of the Merger. However, as discussed in Section XII below, certain states require notifications of changes in ownership or changes in responsible party information, and these notifications should be coordinated with the 31 states requiring change-of-control approval or notification for purposes of VeloPay's money transmitter licenses.

III. Nexus Analysis — Current and Post-Acquisition

A. Current VeloPay Nexus Footprint

VeloPay's current state tax nexus footprint is extensive and arises from multiple independent bases.

Physical Presence Nexus. VeloPay maintains physical offices and employees in two states:

• Texas. VeloPay's corporate headquarters is located at 1455 Innovation Parkway, Suite 800, Austin, Texas 78759. VeloPay employs approximately 800 or more individuals in Texas across engineering, product development, operations, customer success, sales, and corporate functions. The Austin headquarters is VeloPay's largest office and the center of its domestic operations. There is no question that VeloPay has nexus in Texas for purposes of the Texas margin tax.

• Colorado. VeloPay operates a substantial office in Denver, Colorado, employing approximately 200 individuals in engineering, data science, and business development functions. This office creates clear physical presence nexus for Colorado corporate income tax purposes.

In addition to these two principal offices, VeloPay may have remote employees in other states that create physical presence nexus in those jurisdictions. We understand from discussions with VeloPay's Chief Financial Officer, Marcus Langford, that the Company has implemented a flexible work policy that permits certain employees to work remotely from various locations. The specific states in which remote employees are located should be confirmed through a payroll data review, which we have requested from VeloPay's tax team and its outside accounting firm, Vance Thornbury & Co. LLP.

Economic Nexus. Independently of its physical presence, VeloPay has substantial economic nexus in all 50 states and the District of Columbia. In the wake of the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), a growing number of states have adopted economic nexus standards for income and franchise tax purposes (in addition to sales and use tax purposes). VeloPay processes approximately $87 billion in annualized gross payment volume across more than 14,000 merchants located throughout the United States. The Company's fiscal year 2024 revenue of $412.3 million — derived from SaaS subscriptions, interchange-plus processing fees, and gateway transaction fees — is sourced to the locations of merchants and payors in every state. Given the magnitude of VeloPay's economic activity, it is virtually certain that VeloPay exceeds the economic nexus thresholds in every state that has adopted such standards for income or franchise tax purposes. States such as California (which applies an economic nexus standard for corporate income tax based on sales exceeding $610,395 in 2024), New York (which applies a bright-line economic nexus standard of $1 million or more in New York receipts), and numerous others would clearly capture VeloPay's activities.

Licensing Nexus. VeloPay holds money transmitter licenses in 47 states plus the District of Columbia. In many states, the holding of a state-issued license or registration constitutes a sufficient basis for asserting income or franchise tax nexus, even in the absence of physical presence or economic nexus. This licensing nexus reinforces VeloPay's already comprehensive nexus footprint across nearly all U.S. jurisdictions.

Subsidiary Nexus. VeloPay's three domestic subsidiaries — VeloPay Processing LLC, VeloPay Fraud intelligence Inc., and PayStream Gateway LLC — are each formed in Delaware and operate as part of VeloPay's integrated business. To the extent these entities are treated as separate entities for state tax purposes (rather than disregarded or included in a combined return), their nexus positions must be independently evaluated. VeloPay Processing LLC and PayStream Gateway LLC are Delaware LLCs that, depending on the entity classification elections made, may be treated as disregarded entities or as partnerships for federal and state tax purposes. VeloPay Fraud intelligence Inc. is a Delaware corporation subject to corporate income tax in states where it has nexus. We recommend confirming the federal entity classifications of each subsidiary and the state-level treatment in each relevant jurisdiction.

B. Post-Acquisition Nexus Changes

The acquisition of VeloPay by HPE Fund IV will produce several changes in the nexus landscape that require careful consideration.

HPE Fund IV as New Parent. HPE Fund IV is a Delaware limited partnership with its general partner, Harrowgate Capital Management IV LLC, also organized in Delaware. HPE Fund IV is a private equity fund that, we understand, currently holds three other platform investments in the payments and financial infrastructure sectors. The identities and state tax filing positions of these portfolio companies are relevant to the post-acquisition nexus analysis because, in states that apply a unitary business principle and require combined reporting, the addition of VeloPay to the HPE Fund IV family could cause VeloPay to be included in a combined return group that also includes one or more of these other portfolio companies.

Unitary Nexus Risk. Certain states aggressively apply the unitary business principle to require commonly controlled entities that are engaged in a unitary business to file on a combined basis. The unitary business concept, as articulated by the U.S. Supreme Court in Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983), and its progeny, looks to functional integration, centralization of management, and economies of scale to determine whether affiliated entities are engaged in a unitary business. If HPE Fund IV's other portfolio companies in the payments and financial infrastructure space are determined to be engaged in a unitary business with VeloPay (by virtue of common ownership through HPE Fund IV, combined with operational similarities or synergies), states such as California, New York, Illinois, and Massachusetts could seek to include those portfolio companies in VeloPay's combined return group.

The risk of unitary nexus depends critically on the degree of operational integration, shared management, and economies of scale among HPE Fund IV's portfolio companies. In general, private equity portfolio companies that operate independently and share only a common financial investor may not rise to the level of a unitary business. However, where a private equity fund invests in multiple companies within the same industry vertical and implements shared services, cross-selling, or integrated management structures (as is sometimes the case with financial technology platform investments), the unitary nexus risk increases materially. We recommend that HPE Fund IV evaluate its existing state tax filing positions and assess whether the addition of VeloPay to the portfolio changes the combined group composition in any state.

Assessment of HPE Fund IV's Existing Filing Positions. We have requested from Priya Deshmukh and Thomas Eriksen a summary of HPE Fund IV's current state tax filing obligations, including any combined returns filed in connection with its existing portfolio companies. Once this information is received, we will be in a position to provide a more definitive assessment of the post-acquisition combined group composition in each relevant state.

Foreign Subsidiary Considerations. VeloPay Canada Inc. (Ontario) and VeloPay Europe, Unipessoal Lda. (Portugal) are not subject to U.S. state income tax. However, intercompany transactions between these foreign entities and VeloPay's domestic operations — including intercompany service fees, royalties, or cost-sharing arrangements — could affect VeloPay's state-level apportionment factors and transfer pricing positions. In states that adopt a water's-edge combined reporting approach (such as California), the domestic affiliates of VeloPay are included in the combined report while the foreign affiliates are excluded, but intercompany transactions at the water's edge must be at arm's length and may be subject to adjustment.

IV. Texas Margin Tax Analysis

A. Overview of the Texas Franchise (Margin) Tax

Texas imposes a franchise tax on each "taxable entity" that does business in Texas or that is chartered or organized in Texas. Tex. Tax Code Ann. §§ 171.001, 171.0002. The franchise tax is commonly referred to as the "margin tax" because it is computed based on the taxable margin of the entity, which is the lesser of: (i) 70% of total revenue; (ii) total revenue minus cost of goods sold; (iii) total revenue minus compensation; or (iv) total revenue minus $1 million (for entities with total revenue of $20 million or less). The margin tax rate is 0.375% for entities primarily engaged in retail or wholesale trade and 0.75% for all other entities.

VeloPay is a technology company engaged in payment processing and financial gateway services. It does not qualify as a "retailer" or "wholesaler" under the Texas margin tax definitions because it is not primarily engaged in the sale of tangible personal property. Accordingly, VeloPay is subject to the general margin tax rate of 0.75%.

VeloPay's Austin headquarters at 1455 Innovation Parkway, Suite 800, Austin, Texas 78759, and its substantial Texas employee base of approximately 800 or more individuals, make Texas an unambiguous and primary filing jurisdiction for VeloPay. Texas is the state in which VeloPay has the most significant physical presence and operational footprint, and the margin tax represents the single most significant state-level tax obligation for the Company.

It bears noting that Texas does not impose a traditional corporate income tax. The margin tax is a franchise tax imposed on the privilege of doing business in Texas, and its base (total revenue less deductions) is fundamentally different from a net income tax. This distinction has important implications for the deductibility of various expenses, the interaction with federal tax provisions, and the overall effective tax rate analysis.

B. Computation of Texas Margin Tax — Current

Total Revenue. For Texas margin tax purposes, "total revenue" generally conforms to federal gross revenue, with certain adjustments required by the Texas Tax Code. VeloPay's fiscal year 2024 revenue of $412.3 million, as reported for federal income tax purposes, is the starting point for the Texas margin tax computation. Adjustments may include the exclusion of certain flow-through funds, bad debts, and other items as specified in Tex. Tax Code Ann. § 171.1011. For a payment processor such as VeloPay, a critical question is whether "total revenue" includes only VeloPay's net revenue (i.e., its fees) or whether it also includes the gross payment volume flowing through its platform. Under Texas Comptroller guidance, a payment processor that acts as an agent for merchants generally includes only its net fees, commissions, and subscription revenue in total revenue, excluding the gross payment amounts that are passed through to merchants. We have assumed, consistent with VeloPay's historical filing position (as confirmed during due diligence), that VeloPay's total revenue for Texas margin tax purposes is based on its net revenue of $412.3 million, not its $87 billion gross payment volume.

Single-Factor Apportionment. Texas uses a single-factor gross receipts apportionment formula for purposes of the margin tax. Tex. Tax Code Ann. § 171.106. The apportionment factor is the ratio of gross receipts from business done in Texas to gross receipts from the entity's entire business. Effective for reports due on or after January 1, 2008, Texas adopted market-based sourcing rules under which receipts from services are sourced to the location of the payor or customer. 34 Tex. Admin. Code § 3.591. For VeloPay, this means that its Texas-apportioned revenue is determined by the proportion of its 14,000+ merchants (and their corresponding payment volumes and fees) that are located in Texas, relative to its total merchant base across all states.

Given that VeloPay's merchants are dispersed nationally, we expect VeloPay's Texas apportionment factor to reflect the share of its total revenue attributable to Texas-based merchants. Texas is a large and economically significant state, and it is likely that a meaningful proportion of VeloPay's merchant base is located in Texas. Based on discussions with Marcus Langford, we understand that approximately [to be confirmed]% of VeloPay's revenue is attributable to Texas-based merchants. For illustrative purposes, if we assume a Texas apportionment factor of 10% (i.e., $41.23 million of VeloPay's $412.3 million in revenue is apportioned to Texas), the margin tax computation would proceed as follows.

Deduction Method Analysis. VeloPay must elect a deduction method to compute its taxable margin. The available methods are: (i) cost of goods sold ("COGS"); (ii) compensation; or (iii) the 30% standard deduction. The election is made annually and is irrevocable for the applicable reporting period.

• Cost of Goods Sold. For a technology and services company such as VeloPay, the availability of the COGS deduction is limited. The Texas Comptroller has historically taken a narrow view of what constitutes "cost of goods sold" for entities that do not sell tangible personal property. VeloPay's primary expenses — employee compensation, technology infrastructure, and third-party payment network fees — may not all qualify as COGS under Texas law. However, certain direct costs associated with the provision of payment processing services may qualify. This requires detailed analysis of VeloPay's expense categories.

• Compensation. VeloPay employs approximately 1,340 individuals, of whom approximately 800 or more are based in Texas. The compensation deduction includes wages, salaries, stock compensation (to the extent included in W-2 income), payroll taxes, and certain employee benefits, subject to a cap of $400,000 per employee. Given VeloPay's substantial payroll, the compensation deduction may be significant. However, only compensation paid to employees whose service is attributable to Texas (or, under certain interpretations, total compensation subject to apportionment) is deductible. The compensation deduction is a promising method for VeloPay given its large employee base.

• 30% Standard Deduction. The standard deduction is the simplest method and is available to all taxable entities. Under this method, the entity deducts 30% of its total revenue, resulting in a taxable margin of 70% of total revenue (or 70% of apportioned revenue). This method is advantageous for entities with relatively low employee compensation or COGS but may be less favorable for employee-intensive businesses like VeloPay.

Illustrative Computation. The following table provides a simplified illustrative framework for VeloPay's Texas margin tax liability, assuming a 10% Texas apportionment factor and comparing the compensation deduction method and the 30% standard deduction method. These figures are for illustrative purposes only and should be refined with actual data.

The actual computation will depend on detailed data regarding VeloPay's Texas-sourced revenue, qualifying compensation expenses, and any applicable COGS amounts. We recommend that VeloPay's tax team and Vance Thornbury & Co. LLP provide the underlying data necessary to complete this computation under each available method, so that the optimal deduction election can be identified for the current and post-acquisition reporting periods.

C. Post-Acquisition Impact on Texas Margin Tax

Survival of VeloPay. Because VeloPay survives the Merger and continues as a Texas-domiciled entity, there is no change in VeloPay's Texas nexus or filing obligations as a result of the Transaction. VeloPay will continue to be required to file Texas margin tax reports and pay the associated tax.

Combined Group Reporting. Texas requires combined reporting for affiliated entities that are part of a "combined group," defined as taxable entities that are part of an affiliated group engaged in a unitary business and that have common ownership of more than 50%. Tex. Tax Code Ann. § 171.1014. Post-closing, VeloPay and its three domestic subsidiaries — VeloPay Processing LLC, VeloPay Fraud intelligence Inc., and PayStream Gateway LLC — will be commonly owned by HPE Fund IV and must be included in a single combined Texas margin tax report. This combined reporting requirement is likely already in effect for VeloPay and its subsidiaries under their current ownership structure, but the change in ultimate parent to HPE Fund IV raises the question of whether other HPE Fund IV portfolio entities must also be included.

Specifically, if HPE Fund IV's three other platform investments in the payments and financial infrastructure sectors have Texas nexus (through physical presence, economic nexus, or licensing), and if those entities are engaged in a unitary business with VeloPay under Texas combined reporting standards, they would need to be included in the combined Texas margin tax report with VeloPay. This could have the effect of increasing the total revenue base of the combined group for Texas purposes, potentially increasing the aggregate Texas margin tax liability. Conversely, if the other portfolio companies have a lower Texas apportionment factor than VeloPay, the blended apportionment factor for the combined group could decrease, potentially lowering VeloPay's effective Texas tax burden. The net impact depends on the specific revenue profiles and Texas nexus positions of each portfolio entity and requires detailed modeling.

We strongly recommend that a comprehensive analysis be conducted to: (i) identify all HPE Fund IV portfolio entities; (ii) determine whether each has Texas nexus; (iii) assess whether each is engaged in a unitary business with VeloPay under Texas standards; and (iv) model the combined Texas margin tax liability under the post-acquisition combined group composition.

Impact of Acquisition Debt. The acquisition financing for the Transaction includes a $500 million senior secured term loan facility from Tralvendo National Bank and a $254.7 million draw on a revolving credit facility from Prairie State Bank. The Credit Agreement names VeloPay as the Borrower, with VeloPay's domestic subsidiaries serving as guarantors. Under the Texas margin tax framework, interest expense is generally not deductible — the margin tax does not provide for a deduction for interest expense, and interest payments are not included in the cost of goods sold or compensation deduction bases. Accordingly, the substantial interest payments on the acquisition debt will not reduce VeloPay's Texas margin tax liability. However, the incurrence of debt also does not increase the tax base, as borrowed funds are not included in "total revenue" for margin tax purposes.

Transaction Expenses. The Transaction involves approximately $48.5 million in combined buyer and seller transaction expenses, including advisory fees, legal fees, regulatory filing fees, and other costs. The treatment of these transaction expenses for Texas margin tax purposes depends on their characterization. Certain transaction costs that are compensatory in nature (e.g., success bonuses, retention payments, or transaction-related compensation to employees) may be deductible under the compensation method. Other transaction costs (e.g., professional service fees) generally are not deductible under any of the available deduction methods, as they do not qualify as cost of goods sold, compensation, or the standard deduction.

Refinancing of Existing Debt. VeloPay's existing $112 million debt facility with Meridian Commercial Credit Corp. will be refinanced in connection with the closing. The refinancing itself does not directly affect VeloPay's Texas margin tax liability, as neither the discharge of the old debt nor the incurrence of new debt is a revenue or deduction event for margin tax purposes. Any prepayment penalties, breakage costs, or defeasance fees paid in connection with the refinancing would similarly not affect the margin tax base, though they may have other state income tax implications in net-income-tax states.

Entity Rationalization. Post-closing, HPE Fund IV may seek to rationalize VeloPay's subsidiary structure by merging subsidiaries into VeloPay or converting entity types. Any such restructuring could affect the composition of the Texas combined group, the entities included in the combined margin tax report, and the aggregate total revenue and deduction bases. These restructuring actions should be carefully planned to ensure that they do not inadvertently increase the combined Texas margin tax liability and that any filing or reporting obligations triggered by entity dissolutions or conversions are satisfied.

D. Short-Period Texas Filing Obligations

VeloPay. Texas margin tax reports are generally filed annually on a calendar-year or fiscal-year basis. VeloPay's reporting period for Texas margin tax purposes corresponds to its federal tax year. A change in ownership (as distinct from a dissolution, withdrawal, or cancellation) does not, by itself, require the filing of a short-period Texas margin tax report. Because VeloPay is the surviving entity in the Merger and continues to exist and operate in Texas, VeloPay will continue to file its Texas margin tax report for the full annual reporting period. No short-period Texas filing is required solely as a result of the closing of the Transaction on July 22, 2025.

Merger Sub. Merger Sub was formed in Delaware on February 24, 2025 and will cease to exist upon the effective time of the Merger on July 22, 2025. We do not anticipate that Merger Sub has Texas nexus, as it was formed solely for the purpose of effectuating the Merger, has no operations, no employees, no office or place of business in Texas, and no Texas-sourced revenue. Accordingly, Merger Sub should not be required to file a Texas margin tax report. However, if the Texas Comptroller were to take the position that Merger Sub has Texas nexus by virtue of its participation in the Merger (a position we would view as aggressive and supportable to challenge), a final short-period Texas margin tax report could technically be required. We consider this risk to be low and recommend monitoring but not affirmatively filing a Texas margin tax report for Merger Sub.

V. Delaware Franchise Tax and Income Tax Considerations

A. Delaware Franchise Tax

Delaware imposes an annual franchise tax on all corporations incorporated in Delaware, regardless of whether the corporation has any operations, employees, or other activities in Delaware. Del. Code Ann. tit. 8, § 501 et seq. The Delaware franchise tax is a significant compliance obligation for VeloPay and its Delaware-incorporated subsidiaries, and the amount of the tax depends on the computation method elected.

Computation Methods. The Delaware franchise tax may be calculated under either of two methods:

(i) Authorized Shares Method. Under this method, the franchise tax is calculated based on the number of authorized shares of the corporation, regardless of the number of shares actually issued and outstanding. For corporations with 10,001 or more authorized shares, the tax is $250 plus $85 for each additional 10,000 shares (or fraction thereof) above 10,000. The maximum annual franchise tax under the Authorized Shares Method is $200,000 plus the $50 annual report filing fee.

(ii) Assumed Par Value Capital Method. Under this method, the franchise tax is calculated based on the corporation's total gross assets (as reported on its federal income tax return) divided by the number of issued shares, yielding an "assumed par value." The franchise tax is then computed at a rate of $400 per $1 million (or fraction thereof) of assumed par value capital. This method often produces a significantly lower tax for corporations with large authorized share counts but relatively lower total gross assets relative to those shares.

VeloPay's Current Position. VeloPay has 82.4 million shares of common stock issued and outstanding as of the most recent capitalization table reviewed during due diligence, and its total authorized shares are significantly higher (the pre-merger Certificate of Incorporation authorizes a substantially greater number of shares, as is typical for a venture-backed technology company that has completed multiple rounds of financing with option pool reserves). Under the Authorized Shares Method, VeloPay's franchise tax could approach or reach the statutory maximum of $200,000 per year, depending on the precise number of authorized shares.

Post-Merger Optimization. Following the Merger, VeloPay will become a wholly-owned subsidiary of HPE Fund IV. As a wholly-owned subsidiary, VeloPay will have no need for a large number of authorized shares. The Amended and Restated Certificate of Incorporation of the Surviving Corporation, which will be filed at the effective time of the Merger as contemplated by the Merger Agreement, should reduce the number of VeloPay's authorized shares to the minimum necessary (e.g., 1,000 shares of common stock). This reduction, combined with an election to use the Assumed Par Value Capital Method (if it produces a lower tax), could substantially reduce VeloPay's annual Delaware franchise tax obligation.

We recommend that Sandra Tung and Megan Chu confirm that the Amended and Restated Certificate of Incorporation of the Surviving Corporation contains an appropriately reduced authorized share count, and that the filing of the restated certificate is coordinated with the Delaware Secretary of State's office as part of the closing deliverables. A comparison of the franchise tax under both computation methods, using VeloPay's post-merger authorized share count and total gross assets, is set forth in Appendix D to this memorandum.

Merger Sub. Merger Sub (Delaware File Number 7291034) will cease to exist upon the effective time of the Merger on July 22, 2025. A final Delaware franchise tax return will be required for Merger Sub, pro-rated from the date of its incorporation (February 24, 2025) through the date of its dissolution by merger (July 22, 2025). The franchise tax for this short period is expected to be nominal given Merger Sub's minimal capitalization and short period of existence.

Domestic Subsidiaries. VeloPay's three domestic subsidiaries are each formed in Delaware and are subject to the Delaware annual entity tax:

• VeloPay Processing LLC — Delaware LLC; subject to the $300 annual LLC tax payable to the Delaware Secretary of State.

• VeloPay Fraud intelligence Inc. — Delaware corporation; subject to the Delaware corporate franchise tax, calculated under either the Authorized Shares Method or the Assumed Par Value Capital Method. Given that VeloPay Fraud intelligence Inc. is likely a small corporation with a limited number of authorized shares, the franchise tax should be modest.

• PayStream Gateway LLC — Delaware LLC; subject to the $300 annual LLC tax.

HPE Fund IV and Related Entities. HPE Fund IV (Delaware limited partnership) and Harrowgate Capital Management IV LLC (Delaware limited liability company) are each subject to the Delaware annual limited partnership or LLC tax of $300 per year. These are minimal obligations that do not change as a result of the Transaction.

B. Delaware Corporate Income Tax

Delaware imposes a corporate income tax at a rate of 8.7% on the taxable income of corporations that have nexus in Delaware. However, Delaware has long followed the practice of not imposing its corporate income tax on corporations whose only connection to Delaware is their state of incorporation and the maintenance of a registered agent and registered office. This principle — sometimes referred to as the "intangible holding company" or "passive investment company" exception — generally benefits Delaware-incorporated holding companies and operating companies that are headquartered and operate outside of Delaware.

VeloPay is headquartered in Austin, Texas, and its operations are conducted in Texas, Colorado, and other states (and internationally). VeloPay's only Delaware connection is its state of incorporation and the maintenance of a registered agent at Capitol Registered Agents LLC, 1209 Orange Street, Wilmington, Delaware 19801. The mere maintenance of a registered agent does not create income tax nexus under Delaware law. Accordingly, VeloPay is not subject to the Delaware corporate income tax, and this conclusion is not affected by the Transaction.

Similarly, VeloPay Processing LLC and PayStream Gateway LLC are Delaware LLCs that do not have a physical presence or operations in Delaware beyond their registered agent, and VeloPay Fraud intelligence Inc. is a Delaware corporation in the same position. None of these entities is expected to be subject to Delaware corporate income tax.

Conclusion. VeloPay and its domestic subsidiaries are subject to the Delaware franchise tax (and, for the LLCs, the annual LLC tax) but are not subject to the Delaware corporate income tax. The Delaware franchise tax can and should be optimized as described above.

VI. Colorado State Income Tax Considerations

A. Current Colorado Filing Obligations

VeloPay maintains an office in Denver, Colorado, and employs approximately 200 individuals there. This physical presence creates clear nexus for Colorado corporate income tax purposes under both traditional physical presence standards and Colorado's economic nexus provisions.

Tax Rate. Colorado imposes a flat corporate income tax at a rate of 4.40% for tax years beginning on or after January 1, 2024 (reduced from 4.55% for tax years beginning on or after January 1, 2022, and reflecting the series of rate reductions enacted by the Colorado legislature in recent years). Colo. Rev. Stat. § 39-22-301(1)(d).

Apportionment. Colorado uses a single-factor sales apportionment formula with market-based sourcing for receipts from services. Colo. Rev. Stat. § 39-22-303.6. Under this approach, VeloPay's Colorado-apportioned income is determined by the ratio of VeloPay's Colorado-sourced revenue (i.e., revenue from merchants and customers located in Colorado) to its total revenue from all sources. Given that VeloPay's merchants are dispersed nationally, Colorado's share of VeloPay's total revenue is expected to be a modest but meaningful percentage, reflecting the relative economic weight of Colorado's merchant base.

Filing Status. Colorado imposes combined reporting requirements on certain affiliated groups. Under Colorado law, a "unitary business" group of commonly owned corporations (80% or greater common ownership) may be required to file a combined return. Colo. Rev. Stat. § 39-22-303(11). VeloPay and its domestic subsidiaries that are treated as C corporations (i.e., VeloPay Fraud intelligence Inc.) may be required to file on a combined basis in Colorado if they are engaged in a unitary business. The domestic LLCs (VeloPay Processing LLC and PayStream Gateway LLC) would be included or excluded depending on their entity classification for Colorado tax purposes.

B. Post-Acquisition Colorado Changes

Combined Group Composition. Following the acquisition, VeloPay will become part of HPE Fund IV's broader affiliated group. If HPE Fund IV's other portfolio companies have Colorado nexus and are engaged in a unitary business with VeloPay under Colorado's combined reporting rules, the combined return group in Colorado could expand to include those entities. The impact on VeloPay's Colorado tax liability will depend on the apportionment profiles and taxable income (or losses) of the other entities included in the combined group.

Apportionment Impact. If the combined group expands to include entities with a different Colorado apportionment profile than VeloPay's, the blended apportionment factor could shift. For example, if another HPE Fund IV portfolio company has a relatively high proportion of Colorado-sourced revenue, the inclusion of that entity in the combined group could increase the group's Colorado apportionment factor, resulting in a higher Colorado tax liability for the group as a whole. Conversely, the inclusion of entities with little or no Colorado-sourced revenue could dilute the apportionment factor and reduce the Colorado tax.

Entity Rationalization. If VeloPay's subsidiaries are merged into VeloPay post-closing, the number of entities filing in Colorado would decrease, potentially simplifying compliance. However, any such mergers must be evaluated for Colorado tax consequences, including the potential triggering of gain or loss recognition, the transfer or elimination of tax attributes, and the filing of final returns for the merged entities.

Short-Period Return. Similar to the Texas analysis, no short-period Colorado return is required for VeloPay solely as a result of the change in ownership. VeloPay continues as the surviving entity and will file its Colorado return for the full annual period. If Merger Sub is deemed to have Colorado nexus (which we consider unlikely given its lack of operations), a final short-period return could be required, but we do not anticipate this issue arising.

VII. Multi-State Apportionment Analysis — Impact of Ownership Change

A. Apportionment Factor Changes

The change in VeloPay's ownership is expected to have a significant impact on VeloPay's state tax apportionment in states that require combined or unitary reporting. Prior to the acquisition, VeloPay files its state tax returns based on its own apportionment factors (or those of its subsidiaries, to the extent included in a combined return). The relevant apportionment factors typically include the sales/receipts factor (which is the dominant or sole factor in most states) and, in certain states that retain a multi-factor formula, the property factor and the payroll factor.

Following the acquisition, VeloPay will become part of HPE Fund IV's broader group of portfolio companies. In states that require combined or unitary reporting, VeloPay's apportionment factors will be combined (or blended) with those of other entities in the combined group. This can produce either a favorable or unfavorable shift in VeloPay's apportionment in any given state, depending on the relative magnitudes and geographic distributions of the combined group members' factors.

Key Combined Reporting States. The following states impose mandatory or elective combined reporting requirements that could be affected by the Transaction:

• California (mandatory combined reporting)

• New York (mandatory combined reporting under Article 9-A)

• Illinois (mandatory combined reporting)

• Massachusetts (mandatory combined reporting)

• New Jersey (mandatory combined reporting, effective 2019)

• Connecticut (mandatory combined reporting, effective 2016)

• Colorado (combined reporting as discussed in Section VI)

• Michigan (mandatory combined reporting)

• Minnesota (mandatory combined reporting)

• Oregon (mandatory combined reporting)

• Vermont (mandatory combined reporting)

• West Virginia (mandatory combined reporting)

• Wisconsin (mandatory combined reporting)

• And others

In each of these states, the inclusion of VeloPay in HPE Fund IV's combined group will change the numerator and denominator of the apportionment formula. The net effect will depend on the specific revenue, property, and payroll profiles of each entity in the combined group. We recommend that detailed apportionment modeling be conducted for at least the top ten state tax jurisdictions by revenue impact — which we expect to include California, New York, Texas (which is discussed separately in Section IV), Illinois, Florida, Pennsylvania, New Jersey, Massachusetts, Ohio, and Washington — to quantify the expected changes.

B. Market-Based Sourcing vs. Cost-of-Performance States

The sourcing of VeloPay's revenue for apportionment purposes varies by state and directly affects the apportionment factor in each jurisdiction.

Market-Based Sourcing. The majority of states now employ market-based sourcing for receipts from services. Under market-based sourcing, revenue from services is sourced to the location of the customer or the market for the service, rather than to the location where the service is performed. For VeloPay, this means that its processing fees, SaaS subscription fees, and gateway transaction fees are sourced to the locations of its 14,000+ merchants and their end customers. Because VeloPay's merchants are dispersed across all 50 states and the District of Columbia, market-based sourcing results in a broad distribution of VeloPay's revenue across many states, with no single state (other than potentially the largest states by merchant population) receiving a disproportionate share.

Cost-of-Performance States. A shrinking minority of states continue to apply cost-of-performance sourcing, under which revenue from services is sourced to the state where the greater proportion of the income-producing activity is performed. For VeloPay, cost-of-performance sourcing would tend to concentrate revenue in Texas (where VeloPay's Austin headquarters houses the majority of its operations and employees) and, to a lesser extent, in Colorado (where VeloPay's Denver office is located). This could result in a higher apportionment factor in Texas and Colorado and a lower apportionment factor in other states.

Summary of Major States' Sourcing Methodology:

For VeloPay, the distinction between market-based sourcing and cost-of-performance sourcing is particularly important because VeloPay's income-producing activities are heavily concentrated in Texas and Colorado (where its employees and operations are located), while its customers and merchants are broadly dispersed nationwide. In market-based sourcing states, VeloPay's apportionment factor in any given state will be relatively modest (reflecting that state's share of VeloPay's national merchant base). In cost-of-performance states, VeloPay's apportionment factor could be significantly higher in Texas and Colorado and significantly lower in the state in question.

C. Intercompany Transactions and Transfer Pricing at State Level

The acquisition will likely give rise to new intercompany transactions between VeloPay and HPE Fund IV (or its affiliated entities), including management fees, monitoring fees, cost-sharing arrangements, and potentially the allocation of acquisition debt and interest expense. These intercompany flows have important state tax implications.

Management and Monitoring Fees. If HPE Fund IV charges VeloPay a management or monitoring fee (as is customary in private equity portfolio company arrangements), such fees would be deductible by VeloPay for federal and state income tax purposes, subject to arm's-length requirements and state-specific addback rules. In states that impose related-party expense addback rules, the deductibility of management fees paid to HPE Fund IV or its affiliates may be limited or denied unless an exception applies (e.g., the fees have a valid business purpose and the recipient includes the income in its return filed in that state).

Debt Push-Down and Interest Expense. The Credit Agreement names VeloPay as the Borrower for the $500 million term loan and the $254.7 million revolver. This "debt push-down" structure — in which the operating company (VeloPay) bears the acquisition debt, rather than the acquiring fund (HPE Fund IV) — is a common private equity structuring technique designed to generate interest deductions at the operating company level. The interest expense on the acquisition debt will reduce VeloPay's federal taxable income (subject to the Section 163(j) limitation), and the deduction will flow through to state taxable income in states that conform to federal taxable income as the starting point for state tax computations.

However, a significant number of states impose interest expense addback requirements that may limit or eliminate VeloPay's ability to deduct the interest expense on the acquisition debt. These rules are designed to prevent base erosion through intercompany debt structures and, in some states, apply to related-party interest broadly or to interest paid to entities with certain relationships to the taxpayer. The following is a non-exhaustive list of states with interest expense addback rules that may be relevant:

• Connecticut — Mandatory addback of interest paid to related members, with limited exceptions. Conn. Gen. Stat. § 12-218c.

• New Jersey — Addback of interest and intangible expenses paid to related members. N.J. Stat. Ann. § 54:10A-4(k)(2)(I).

• North Carolina — Addback of related-party interest and intangible expenses. N.C. Gen. Stat. § 105-130.7A.

• Virginia — Addback of interest paid to related members. Va. Code Ann. § 58.1-402(B)(8).

• Indiana — Addback of interest paid to related members. Ind. Code § 6-3-2-20.

• Georgia — Addback of intangible expenses and interest paid to related members. Ga. Code Ann. § 48-7-28.3.

• Massachusetts — Addback of certain intercompany expenses, though the combined reporting regime mitigates some addback exposure.

• Others — Additional states with addback rules are identified in Appendix C.

The applicability of these addback rules to VeloPay's acquisition debt depends on whether the interest is treated as paid to a "related member" (which requires analysis of the relationship between VeloPay, HPE Fund IV, and the institutional lenders — Tralvendo National Bank and Prairie State Bank), whether any exceptions apply (e.g., the "subject-to-tax" exception, the "unreasonable" exception, or the "conduit" exception available in certain states), and the specific mechanics of each state's addback statute. Because the acquisition debt is owed to unrelated third-party lenders (Tralvendo National Bank and Prairie State Bank), the addback rules may not apply in many states, as they are generally targeted at related-party interest. However, if any portion of the debt is restructured as intercompany debt post-closing (e.g., if HPE Fund IV refinances the third-party debt with an intercompany note), the addback rules could be implicated.

We recommend that a detailed state-by-state analysis of interest deductibility be prepared, identifying the states in which VeloPay files, the applicable addback rules, available exceptions, and the estimated after-tax cost impact of any disallowed deductions. This analysis is set forth in summary form in Appendix C.

VIII. Treatment of Merger Consideration and Stockholder-Level State Tax

A. State Taxation of VeloPay Stockholders

The per-share merger consideration of $20.00 per share will be treated as proceeds from the sale or exchange of VeloPay stock by each stockholder. The state income tax consequences of this stock sale depend on each stockholder's state of residency (for individual stockholders) or state of organization and filing positions (for institutional stockholders and pass-through entities).

Institutional Stockholders. The principal institutional stockholders of VeloPay, as reflected in the capitalization table reviewed during due diligence, include:

• Ridgeline Ventures Fund III LP (San Francisco, California) — holding approximately 22.4% of VeloPay's outstanding shares. Ridgeline Ventures Fund III LP is a Delaware limited partnership. As a partnership, the gain recognized on the disposition of VeloPay stock will flow through to Ridgeline's partners and be reported on each partner's individual or entity state tax return based on that partner's state of residency. To the extent Ridgeline's partners are California residents, the gain will be subject to California individual income tax at rates up to 13.3%.

• Apex Growth Partners II LP (New York, New York) — holding approximately 16.8% of VeloPay's outstanding shares. Apex Growth Partners II LP is a Delaware limited partnership. The gain flows through to Apex's partners. New York-resident partners will be subject to New York State income tax (at rates up to 10.9%) and potentially New York City personal income tax (at rates up to 3.876%).

• Broadleaf Capital Partners LP (Boston, Massachusetts) — holding approximately 6.1% of VeloPay's outstanding shares. Broadleaf Capital Partners LP is a Delaware limited partnership. The gain flows through to Broadleaf's partners. Massachusetts-resident partners will be subject to Massachusetts income tax at a flat rate of 5.0% (applicable to long-term capital gains on most assets; short-term capital gains may be taxed at the higher rate of 9.0% effective 2023 due to the millionaires' tax surcharge for taxpayers with income exceeding $1 million).

Individual Stockholders. The principal individual stockholders include:

• Nathan Aldridge — holding approximately 14.2% of VeloPay's outstanding shares. Mr. Aldridge is based in Austin, Texas. Texas does not impose a state individual income tax. Accordingly, Mr. Aldridge will not owe any state income tax on the gain recognized from the sale of his VeloPay shares (other than in the unlikely event that another state asserts a nonresident tax claim based on the location of the property being sold, which is generally not applicable to stock sales).

• Sonia Reyes-Watkins — holding approximately 9.7% of VeloPay's outstanding shares. Ms. Reyes-Watkins is presumed to reside in Austin, Texas (based on due diligence information reviewed). Like Mr. Aldridge, Ms. Reyes-Watkins benefits from Texas's absence of a state individual income tax and should not owe any state income tax on her gain.

VeloPay's Obligations. VeloPay is not directly responsible for the stockholder-level state income taxes arising from the sale of stock. However, VeloPay (or the paying agent, Keystone Pacific Transfer Services Inc.) may have certain information reporting or withholding obligations, as discussed in Section VIII.C below.

B. Rollover Equity — State Tax Treatment

As contemplated by the Merger Agreement, Nathan Aldridge is rolling over approximately $14,200,000 and Sonia Reyes-Watkins is rolling over approximately $9,700,000 of their merger consideration into Harrowgate Velocity Co-Invest LP, a Delaware limited partnership formed on March 14, 2025 (EIN 93-2748163), for the purpose of allowing Messrs. Aldridge and Reyes-Watkins to retain an equity stake in VeloPay alongside HPE Fund IV.

The state tax treatment of the rollover equity depends on the federal characterization. If the rollover is treated for federal tax purposes as receipt of the full merger consideration followed by reinvestment into the Co-Invest LP (i.e., a taxable sale followed by a capital contribution), then the full gain on the VeloPay shares is recognized at the time of the Merger, and the subsequent investment into the Co-Invest LP is a nontaxable c

CALDERWOOD & HARKNESS LLP 787 Seventh Avenue, 38th Floor New York, New York 10019
PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
MEMORANDUM
This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared by Calderwood & Harkness LLP for the exclusive use of the addressees identified above. This memorandum is not intended as tax advice to any other person or entity. No portion of this memorandum may be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP. The conclusions expressed herein are based on the facts, assumptions, and applicable law as of the date hereof. This memorandum was finalized in advance of the anticipated closing date of July 22, 2025; an initial draft was circulated earlier in the pre-closing period for review and comment.
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I. Executive Summary
This memorandum analyzes the state and local income, franchise, and gross receipts tax consequences arising from the proposed acquisition of VeloPay Systems, Inc. ("VeloPay" or the "Company") by Harrowgate Private Equity Fund IV LP ("HPE Fund IV" or the "Fund"), structured as a reverse triangular merger in which Harrowgate Velocity Merger Sub Inc. ("Merger Sub") will merge with and into VeloPay, with VeloPay surviving as a wholly-owned subsidiary of HPE Fund IV (the "Merger" or the "Transaction"). This memorandum is intended to complement, and should be read in conjunction with, the separate Tax Structure Memorandum (addressing Section 368 reorganization and Section 338(h)(10) election considerations), the Section 280G Parachute Payment Analysis, and the FIRPTA/Withholding Analysis Memorandum, each prepared by the undersigned.
Transaction Overview. The Transaction involves the acquisition of VeloPay for aggregate merger consideration of approximately $1.9 billion, reflecting per-share consideration of $20.00 across approximately 95,000,000 fully diluted shares. The Agreement and Plan of Merger (the "Merger Agreement") was executed on March 18, 2025, and closing is anticipated to occur on July 22, 2025, subject to the satisfaction or waiver of customary closing conditions, including the receipt of regulatory approvals from state money transmitter licensing authorities.
The Company. VeloPay is a Delaware corporation headquartered in Austin, Texas, that provides payment processing, fraud detection, and financial gateway services to approximately 14,000 merchants across the United States. The Company processed approximately $87 billion in annualized gross payment volume for its fiscal year ended December 31, 2024, generating total revenue of $412.3 million across its principal revenue streams of interchange-plus processing fees, SaaS subscription fees, and gateway transaction fees. As of the date of this memorandum, VeloPay employs approximately 1,340 individuals across its Austin, Texas headquarters (approximately 800+ employees); its Denver, Colorado office (approximately 200 employees); and its international offices in Toronto, Ontario, Canada and Lisbon, Portugal.
Subsidiaries. VeloPay has five subsidiaries: three domestic subsidiaries — VeloPay Processing LLC (Delaware LLC), VeloPay Fraud intelligence Inc. (Delaware corporation), and PayStream Gateway LLC (Delaware LLC) — and two foreign subsidiaries — VeloPay Canada Inc. (Ontario, Canada) and VeloPay Europe, Unipessoal Lda. (Portugal). The foreign subsidiaries are outside the scope of U.S. state and local tax but are noted for completeness and because their intercompany transactions with domestic affiliates may bear on state apportionment and transfer pricing considerations.
Key State Tax Jurisdictions. The principal state tax jurisdictions affected by the Transaction include: (i) Texas, as VeloPay's headquarters and the location of its largest employee presence; (ii) Delaware, as VeloPay's state of incorporation and the state of formation for all domestic subsidiaries, HPE Fund IV, and the Fund's general partner; (iii) Colorado, where VeloPay maintains a significant office and employee presence in Denver; and (iv) every state in which VeloPay and its subsidiaries have nexus through operations, remote employees, economic activity, or the holding of money transmitter licenses (VeloPay currently holds money transmitter licenses in 47 states plus the District of Columbia).
Principal Conclusions. Our analysis yields the following principal conclusions:
(a) Texas Margin Tax. The Texas franchise tax (commonly known as the "margin tax") is the single most significant state tax consideration for VeloPay given its Austin headquarters, substantial Texas employee base, and the volume of Texas-apportioned revenue. Post-acquisition, the composition of the Texas combined reporting group will change to include VeloPay and its domestic subsidiaries, and potentially other HPE Fund IV portfolio entities with Texas nexus. Detailed modeling is recommended to quantify any incremental exposure.
(b) Combined/Unitary Group Apportionment Changes. The change in VeloPay's ownership will alter the composition of the combined or unitary group in multiple states that require combined reporting (including California, New York, Illinois, Massachusetts, New Jersey, and Connecticut, among others). The resulting changes in apportionment factors may either increase or decrease VeloPay's state tax burden in each such jurisdiction, depending on the apportionment profiles of other entities included in the combined group.
(c) Delaware Franchise Tax. The Delaware franchise tax obligations of VeloPay and its Delaware-incorporated subsidiaries should be evaluated to determine whether the Authorized Shares Method or the Assumed Par Value Capital Method produces a lower tax liability. Post-merger, the number of authorized shares in VeloPay's Amended and Restated Certificate of Incorporation should be reduced to minimize this obligation.
(d) Nexus Expansion Risk. HPE Fund IV's broader portfolio affiliations in the payments and financial infrastructure sector create a risk that certain states could seek to assert nexus over VeloPay (or conversely, over HPE Fund IV's other portfolio companies) based on the unitary business principle, particularly in aggressive combined-reporting states.
(e) Short-Period Return Obligations. Merger Sub, which was formed on February 24, 2025 and will cease to exist upon the effective time of the Merger on July 22, 2025, will require a final short-period Delaware franchise tax return. VeloPay itself, as the surviving entity, generally will not be required to file short-period returns solely as a result of the change in ownership.
(f) Stockholder-Level State Tax and Withholding. The per-share merger consideration of $20.00 will be treated as proceeds from the sale of stock at the stockholder level. The state income tax consequences depend on each stockholder's state of residency. Certain states may impose withholding obligations on payments to nonresident sellers, which should be communicated to Keystone Pacific Transfer Services Inc. in its capacity as paying agent.
(g) Post-Closing Entity Rationalization. HPE Fund IV's anticipated integration plan may include the rationalization of VeloPay's subsidiary structure (e.g., merging subsidiaries into VeloPay or converting entity types), which may yield state tax savings through reduced filing obligations and franchise tax costs, though such restructuring must be carefully sequenced to preserve tax attributes and avoid unintended adverse consequences.
Each of these conclusions is discussed in detail in the sections that follow.
II. Structure of the Transaction and State Tax Characterization
A. Transaction Structure Recap
The Transaction is structured as a reverse triangular merger under Section 251 of the Delaware General Corporation Law ("DGCL"). The principal structural elements are as follows:
• Merger Sub. Harrowgate Velocity Merger Sub Inc. is a Delaware corporation formed on February 24, 2025 (Delaware File Number 7291034; EIN 93-1847265) for the sole purpose of effectuating the Merger. Merger Sub is a direct, wholly-owned subsidiary of HPE Fund IV. Merger Sub has no operations, no employees, no assets (other than the nominal capitalization contributed by HPE Fund IV), and no liabilities as of the date of this memorandum.
• Target. VeloPay Systems, Inc. is a Delaware corporation (Delaware File Number 5748392; EIN 82-3019478) that will be the surviving entity in the Merger.
• Mechanics. At the effective time of the Merger, Merger Sub will merge with and into VeloPay, with VeloPay as the surviving corporation. Each outstanding share of VeloPay common stock (other than shares held by VeloPay as treasury shares, shares held by HPE Fund IV or Merger Sub, and shares subject to valid appraisal demands) will be converted into the right to receive $20.00 in cash, without interest. The aggregate merger consideration is approximately $1.9 billion, based on approximately 95,000,000 fully diluted shares.
• Post-Merger Ownership. Following the Merger, VeloPay will be a wholly-owned subsidiary of HPE Fund IV. HPE Fund IV is a Delaware limited partnership (EIN 87-4231956) whose general partner is Harrowgate Capital Management IV LLC, a Delaware limited liability company (EIN 87-4231847).
• Federal Tax Treatment. As discussed in the separate Tax Structure Memorandum, the Transaction is recommended to be treated as a taxable stock acquisition for federal income tax purposes. The Tax Structure Memorandum analyzed the applicability of Section 368 reorganization treatment and the potential benefits and costs of a Section 338(h)(10) election, and ultimately recommended treatment as a taxable stock acquisition without a Section 338(h)(10) election. The per-share consideration of $20.00, representing aggregate consideration of approximately $1.9 billion divided by 95,000,000 fully diluted shares, will be treated as the purchase price for the VeloPay stock.
B. State Conformity to Federal Characterization
The vast majority of states that impose a corporate income or franchise tax generally conform to the federal characterization of a transaction for purposes of determining the nature and treatment of the transaction at the state level. Because the Transaction is treated as a taxable stock acquisition for federal purposes, and because VeloPay is the surviving entity in the statutory merger, most states will similarly treat the Transaction as a taxable event at the stockholder level while respecting VeloPay's continuing existence as a going concern for all state tax purposes.
Reverse Triangular Merger Respected. We have analyzed whether any state would recharacterize the reverse triangular merger as something other than a statutory merger resulting in a change of ownership at the stockholder level. Generally, states respect the form of a statutory merger under applicable state corporate law. Because the Merger is being effectuated under DGCL § 251, and VeloPay is the surviving corporation, we do not anticipate any state recharacterizing the transaction as an asset sale or other form of acquisition that would produce materially different state tax consequences for VeloPay.
Section 338(h)(10) Conformity Considerations. Although the recommendation in the Tax Structure Memorandum was for taxable stock acquisition treatment without a Section 338(h)(10) election, we note for completeness that if such an election were made, a state-by-state conformity analysis would be required. Most states that impose a corporate income tax conform to the federal Section 338(h)(10) election and would treat VeloPay as having sold its assets in a deemed liquidation for state tax purposes. However, certain states present nuances: for example, California generally conforms to Section 338(h)(10) for purposes of its corporation tax but applies its own apportionment rules to the deemed asset sale, which could produce different apportioned gain or loss results than at the federal level. Other states, such as New Hampshire and the District of Columbia, have historically had imperfect conformity or have required separate state-level elections. Because the Section 338(h)(10) election is not being made, these conformity issues do not arise in the present Transaction.
Continuity of VeloPay's State Tax Attributes. Because VeloPay is the surviving entity in the Merger, its state tax attributes — including its state tax identification numbers, nexus positions, filing histories, previously filed returns, state net operating loss carryforwards, tax credits, and registered agent and registered office information — generally continue uninterrupted. VeloPay will not need to register as a new entity in any state solely as a result of the Merger. However, as discussed in Section XII below, certain states require notifications of changes in ownership or changes in responsible party information, and these notifications should be coordinated with the 31 states requiring change-of-control approval or notification for purposes of VeloPay's money transmitter licenses.
III. Nexus Analysis — Current and Post-Acquisition
A. Current VeloPay Nexus Footprint
VeloPay's current state tax nexus footprint is extensive and arises from multiple independent bases.
Physical Presence Nexus. VeloPay maintains physical offices and employees in two states:
• Texas. VeloPay's corporate headquarters is located at 1455 Innovation Parkway, Suite 800, Austin, Texas 78759. VeloPay employs approximately 800 or more individuals in Texas across engineering, product development, operations, customer success, sales, and corporate functions. The Austin headquarters is VeloPay's largest office and the center of its domestic operations. There is no question that VeloPay has nexus in Texas for purposes of the Texas margin tax.
• Colorado. VeloPay operates a substantial office in Denver, Colorado, employing approximately 200 individuals in engineering, data science, and business development functions. This office creates clear physical presence nexus for Colorado corporate income tax purposes.
In addition to these two principal offices, VeloPay may have remote employees in other states that create physical presence nexus in those jurisdictions. We understand from discussions with VeloPay's Chief Financial Officer, Marcus Langford, that the Company has implemented a flexible work policy that permits certain employees to work remotely from various locations. The specific states in which remote employees are located should be confirmed through a payroll data review, which we have requested from VeloPay's tax team and its outside accounting firm, Vance Thornbury & Co. LLP.
Economic Nexus. Independently of its physical presence, VeloPay has substantial economic nexus in all 50 states and the District of Columbia. In the wake of the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), a growing number of states have adopted economic nexus standards for income and franchise tax purposes (in addition to sales and use tax purposes). VeloPay processes approximately $87 billion in annualized gross payment volume across more than 14,000 merchants located throughout the United States. The Company's fiscal year 2024 revenue of $412.3 million — derived from SaaS subscriptions, interchange-plus processing fees, and gateway transaction fees — is sourced to the locations of merchants and payors in every state. Given the magnitude of VeloPay's economic activity, it is virtually certain that VeloPay exceeds the economic nexus thresholds in every state that has adopted such standards for income or franchise tax purposes. States such as California (which applies an economic nexus standard for corporate income tax based on sales exceeding $610,395 in 2024), New York (which applies a bright-line economic nexus standard of $1 million or more in New York receipts), and numerous others would clearly capture VeloPay's activities.
Licensing Nexus. VeloPay holds money transmitter licenses in 47 states plus the District of Columbia. In many states, the holding of a state-issued license or registration constitutes a sufficient basis for asserting income or franchise tax nexus, even in the absence of physical presence or economic nexus. This licensing nexus reinforces VeloPay's already comprehensive nexus footprint across nearly all U.S. jurisdictions.
Subsidiary Nexus. VeloPay's three domestic subsidiaries — VeloPay Processing LLC, VeloPay Fraud intelligence Inc., and PayStream Gateway LLC — are each formed in Delaware and operate as part of VeloPay's integrated business. To the extent these entities are treated as separate entities for state tax purposes (rather than disregarded or included in a combined return), their nexus positions must be independently evaluated. VeloPay Processing LLC and PayStream Gateway LLC are Delaware LLCs that, depending on the entity classification elections made, may be treated as disregarded entities or as partnerships for federal and state tax purposes. VeloPay Fraud intelligence Inc. is a Delaware corporation subject to corporate income tax in states where it has nexus. We recommend confirming the federal entity classifications of each subsidiary and the state-level treatment in each relevant jurisdiction.
B. Post-Acquisition Nexus Changes
The acquisition of VeloPay by HPE Fund IV will produce several changes in the nexus landscape that require careful consideration.
HPE Fund IV as New Parent. HPE Fund IV is a Delaware limited partnership with its general partner, Harrowgate Capital Management IV LLC, also organized in Delaware. HPE Fund IV is a private equity fund that, we understand, currently holds three other platform investments in the payments and financial infrastructure sectors. The identities and state tax filing positions of these portfolio companies are relevant to the post-acquisition nexus analysis because, in states that apply a unitary business principle and require combined reporting, the addition of VeloPay to the HPE Fund IV family could cause VeloPay to be included in a combined return group that also includes one or more of these other portfolio companies.
Unitary Nexus Risk. Certain states aggressively apply the unitary business principle to require commonly controlled entities that are engaged in a unitary business to file on a combined basis. The unitary business concept, as articulated by the U.S. Supreme Court in Container Corp. of America v. Franchise Tax Board, 463 U.S. 159 (1983), and its progeny, looks to functional integration, centralization of management, and economies of scale to determine whether affiliated entities are engaged in a unitary business. If HPE Fund IV's other portfolio companies in the payments and financial infrastructure space are determined to be engaged in a unitary business with VeloPay (by virtue of common ownership through HPE Fund IV, combined with operational similarities or synergies), states such as California, New York, Illinois, and Massachusetts could seek to include those portfolio companies in VeloPay's combined return group.
The risk of unitary nexus depends critically on the degree of operational integration, shared management, and economies of scale among HPE Fund IV's portfolio companies. In general, private equity portfolio companies that operate independently and share only a common financial investor may not rise to the level of a unitary business. However, where a private equity fund invests in multiple companies within the same industry vertical and implements shared services, cross-selling, or integrated management structures (as is sometimes the case with financial technology platform investments), the unitary nexus risk increases materially. We recommend that HPE Fund IV evaluate its existing state tax filing positions and assess whether the addition of VeloPay to the portfolio changes the combined group composition in any state.
Assessment of HPE Fund IV's Existing Filing Positions. We have requested from Priya Deshmukh and Thomas Eriksen a summary of HPE Fund IV's current state tax filing obligations, including any combined returns filed in connection with its existing portfolio companies. Once this information is received, we will be in a position to provide a more definitive assessment of the post-acquisition combined group composition in each relevant state.
Foreign Subsidiary Considerations. VeloPay Canada Inc. (Ontario) and VeloPay Europe, Unipessoal Lda. (Portugal) are not subject to U.S. state income tax. However, intercompany transactions between these foreign entities and VeloPay's domestic operations — including intercompany service fees, royalties, or cost-sharing arrangements — could affect VeloPay's state-level apportionment factors and transfer pricing positions. In states that adopt a water's-edge combined reporting approach (such as California), the domestic affiliates of VeloPay are included in the combined report while the foreign affiliates are excluded, but intercompany transactions at the water's edge must be at arm's length and may be subject to adjustment.
IV. Texas Margin Tax Analysis
A. Overview of the Texas Franchise (Margin) Tax
Texas imposes a franchise tax on each "taxable entity" that does business in Texas or that is chartered or organized in Texas. Tex. Tax Code Ann. §§ 171.001, 171.0002. The franchise tax is commonly referred to as the "margin tax" because it is computed based on the taxable margin of the entity, which is the lesser of: (i) 70% of total revenue; (ii) total revenue minus cost of goods sold; (iii) total revenue minus compensation; or (iv) total revenue minus $1 million (for entities with total revenue of $20 million or less). The margin tax rate is 0.375% for entities primarily engaged in retail or wholesale trade and 0.75% for all other entities.
VeloPay is a technology company engaged in payment processing and financial gateway services. It does not qualify as a "retailer" or "wholesaler" under the Texas margin tax definitions because it is not primarily engaged in the sale of tangible personal property. Accordingly, VeloPay is subject to the general margin tax rate of 0.75%.
VeloPay's Austin headquarters at 1455 Innovation Parkway, Suite 800, Austin, Texas 78759, and its substantial Texas employee base of approximately 800 or more individuals, make Texas an unambiguous and primary filing jurisdiction for VeloPay. Texas is the state in which VeloPay has the most significant physical presence and operational footprint, and the margin tax represents the single most significant state-level tax obligation for the Company.
It bears noting that Texas does not impose a traditional corporate income tax. The margin tax is a franchise tax imposed on the privilege of doing business in Texas, and its base (total revenue less deductions) is fundamentally different from a net income tax. This distinction has important implications for the deductibility of various expenses, the interaction with federal tax provisions, and the overall effective tax rate analysis.
B. Computation of Texas Margin Tax — Current
Total Revenue. For Texas margin tax purposes, "total revenue" generally conforms to federal gross revenue, with certain adjustments required by the Texas Tax Code. VeloPay's fiscal year 2024 revenue of $412.3 million, as reported for federal income tax purposes, is the starting point for the Texas margin tax computation. Adjustments may include the exclusion of certain flow-through funds, bad debts, and other items as specified in Tex. Tax Code Ann. § 171.1011. For a payment processor such as VeloPay, a critical question is whether "total revenue" includes only VeloPay's net revenue (i.e., its fees) or whether it also includes the gross payment volume flowing through its platform. Under Texas Comptroller guidance, a payment processor that acts as an agent for merchants generally includes only its net fees, commissions, and subscription revenue in total revenue, excluding the gross payment amounts that are passed through to merchants. We have assumed, consistent with VeloPay's historical filing position (as confirmed during due diligence), that VeloPay's total revenue for Texas margin tax purposes is based on its net revenue of $412.3 million, not its $87 billion gross payment volume.
Single-Factor Apportionment. Texas uses a single-factor gross receipts apportionment formula for purposes of the margin tax. Tex. Tax Code Ann. § 171.106. The apportionment factor is the ratio of gross receipts from business done in Texas to gross receipts from the entity's entire business. Effective for reports due on or after January 1, 2008, Texas adopted market-based sourcing rules under which receipts from services are sourced to the location of the payor or customer. 34 Tex. Admin. Code § 3.591. For VeloPay, this means that its Texas-apportioned revenue is determined by the proportion of its 14,000+ merchants (and their corresponding payment volumes and fees) that are located in Texas, relative to its total merchant base across all states.
Given that VeloPay's merchants are dispersed nationally, we expect VeloPay's Texas apportionment factor to reflect the share of its total revenue attributable to Texas-based merchants. Texas is a large and economically significant state, and it is likely that a meaningful proportion of VeloPay's merchant base is located in Texas. Based on discussions with Marcus Langford, we understand that approximately [to be confirmed]% of VeloPay's revenue is attributable to Texas-based merchants. For illustrative purposes, if we assume a Texas apportionment factor of 10% (i.e., $41.23 million of VeloPay's $412.3 million in revenue is apportioned to Texas), the margin tax computation would proceed as follows.
Deduction Method Analysis. VeloPay must elect a deduction method to compute its taxable margin. The available methods are: (i) cost of goods sold ("COGS"); (ii) compensation; or (iii) the 30% standard deduction. The election is made annually and is irrevocable for the applicable reporting period.
• Cost of Goods Sold. For a technology and services company such as VeloPay, the availability of the COGS deduction is limited. The Texas Comptroller has historically taken a narrow view of what constitutes "cost of goods sold" for entities that do not sell tangible personal property. VeloPay's primary expenses — employee compensation, technology infrastructure, and third-party payment network fees — may not all qualify as COGS under Texas law. However, certain direct costs associated with the provision of payment processing services may qualify. This requires detailed analysis of VeloPay's expense categories.
• Compensation. VeloPay employs approximately 1,340 individuals, of whom approximately 800 or more are based in Texas. The compensation deduction includes wages, salaries, stock compensation (to the extent included in W-2 income), payroll taxes, and certain employee benefits, subject to a cap of $400,000 per employee. Given VeloPay's substantial payroll, the compensation deduction may be significant. However, only compensation paid to employees whose service is attributable to Texas (or, under certain interpretations, total compensation subject to apportionment) is deductible. The compensation deduction is a promising method for VeloPay given its large employee base.
• 30% Standard Deduction. The standard deduction is the simplest method and is available to all taxable entities. Under this method, the entity deducts 30% of its total revenue, resulting in a taxable margin of 70% of total revenue (or 70% of apportioned revenue). This method is advantageous for entities with relatively low employee compensation or COGS but may be less favorable for employee-intensive businesses like VeloPay.
Illustrative Computation. The following table provides a simplified illustrative framework for VeloPay's Texas margin tax liability, assuming a 10% Texas apportionment factor and comparing the compensation deduction method and the 30% standard deduction method. These figures are for illustrative purposes only and should be refined with actual data.
The actual computation will depend on detailed data regarding VeloPay's Texas-sourced revenue, qualifying compensation expenses, and any applicable COGS amounts. We recommend that VeloPay's tax team and Vance Thornbury & Co. LLP provide the underlying data necessary to complete this computation under each available method, so that the optimal deduction election can be identified for the current and post-acquisition reporting periods.
C. Post-Acquisition Impact on Texas Margin Tax
Survival of VeloPay. Because VeloPay survives the Merger and continues as a Texas-domiciled entity, there is no change in VeloPay's Texas nexus or filing obligations as a result of the Transaction. VeloPay will continue to be required to file Texas margin tax reports and pay the associated tax.
Combined Group Reporting. Texas requires combined reporting for affiliated entities that are part of a "combined group," defined as taxable entities that are part of an affiliated group engaged in a unitary business and that have common ownership of more than 50%. Tex. Tax Code Ann. § 171.1014. Post-closing, VeloPay and its three domestic subsidiaries — VeloPay Processing LLC, VeloPay Fraud intelligence Inc., and PayStream Gateway LLC — will be commonly owned by HPE Fund IV and must be included in a single combined Texas margin tax report. This combined reporting requirement is likely already in effect for VeloPay and its subsidiaries under their current ownership structure, but the change in ultimate parent to HPE Fund IV raises the question of whether other HPE Fund IV portfolio entities must also be included.
Specifically, if HPE Fund IV's three other platform investments in the payments and financial infrastructure sectors have Texas nexus (through physical presence, economic nexus, or licensing), and if those entities are engaged in a unitary business with VeloPay under Texas combined reporting standards, they would need to be included in the combined Texas margin tax report with VeloPay. This could have the effect of increasing the total revenue base of the combined group for Texas purposes, potentially increasing the aggregate Texas margin tax liability. Conversely, if the other portfolio companies have a lower Texas apportionment factor than VeloPay, the blended apportionment factor for the combined group could decrease, potentially lowering VeloPay's effective Texas tax burden. The net impact depends on the specific revenue profiles and Texas nexus positions of each portfolio entity and requires detailed modeling.
We strongly recommend that a comprehensive analysis be conducted to: (i) identify all HPE Fund IV portfolio entities; (ii) determine whether each has Texas nexus; (iii) assess whether each is engaged in a unitary business with VeloPay under Texas standards; and (iv) model the combined Texas margin tax liability under the post-acquisition combined group composition.
Impact of Acquisition Debt. The acquisition financing for the Transaction includes a $500 million senior secured term loan facility from Tralvendo National Bank and a $254.7 million draw on a revolving credit facility from Prairie State Bank. The Credit Agreement names VeloPay as the Borrower, with VeloPay's domestic subsidiaries serving as guarantors. Under the Texas margin tax framework, interest expense is generally not deductible — the margin tax does not provide for a deduction for interest expense, and interest payments are not included in the cost of goods sold or compensation deduction bases. Accordingly, the substantial interest payments on the acquisition debt will not reduce VeloPay's Texas margin tax liability. However, the incurrence of debt also does not increase the tax base, as borrowed funds are not included in "total revenue" for margin tax purposes.
Transaction Expenses. The Transaction involves approximately $48.5 million in combined buyer and seller transaction expenses, including advisory fees, legal fees, regulatory filing fees, and other costs. The treatment of these transaction expenses for Texas margin tax purposes depends on their characterization. Certain transaction costs that are compensatory in nature (e.g., success bonuses, retention payments, or transaction-related compensation to employees) may be deductible under the compensation method. Other transaction costs (e.g., professional service fees) generally are not deductible under any of the available deduction methods, as they do not qualify as cost of goods sold, compensation, or the standard deduction.
Refinancing of Existing Debt. VeloPay's existing $112 million debt facility with Meridian Commercial Credit Corp. will be refinanced in connection with the closing. The refinancing itself does not directly affect VeloPay's Texas margin tax liability, as neither the discharge of the old debt nor the incurrence of new debt is a revenue or deduction event for margin tax purposes. Any prepayment penalties, breakage costs, or defeasance fees paid in connection with the refinancing would similarly not affect the margin tax base, though they may have other state income tax implications in net-income-tax states.
Entity Rationalization. Post-closing, HPE Fund IV may seek to rationalize VeloPay's subsidiary structure by merging subsidiaries into VeloPay or converting entity types. Any such restructuring could affect the composition of the Texas combined group, the entities included in the combined margin tax report, and the aggregate total revenue and deduction bases. These restructuring actions should be carefully planned to ensure that they do not inadvertently increase the combined Texas margin tax liability and that any filing or reporting obligations triggered by entity dissolutions or conversions are satisfied.
D. Short-Period Texas Filing Obligations
VeloPay. Texas margin tax reports are generally filed annually on a calendar-year or fiscal-year basis. VeloPay's reporting period for Texas margin tax purposes corresponds to its federal tax year. A change in ownership (as distinct from a dissolution, withdrawal, or cancellation) does not, by itself, require the filing of a short-period Texas margin tax report. Because VeloPay is the surviving entity in the Merger and continues to exist and operate in Texas, VeloPay will continue to file its Texas margin tax report for the full annual reporting period. No short-period Texas filing is required solely as a result of the closing of the Transaction on July 22, 2025.
Merger Sub. Merger Sub was formed in Delaware on February 24, 2025 and will cease to exist upon the effective time of the Merger on July 22, 2025. We do not anticipate that Merger Sub has Texas nexus, as it was formed solely for the purpose of effectuating the Merger, has no operations, no employees, no office or place of business in Texas, and no Texas-sourced revenue. Accordingly, Merger Sub should not be required to file a Texas margin tax report. However, if the Texas Comptroller were to take the position that Merger Sub has Texas nexus by virtue of its participation in the Merger (a position we would view as aggressive and supportable to challenge), a final short-period Texas margin tax report could technically be required. We consider this risk to be low and recommend monitoring but not affirmatively filing a Texas margin tax report for Merger Sub.
V. Delaware Franchise Tax and Income Tax Considerations
A. Delaware Franchise Tax
Delaware imposes an annual franchise tax on all corporations incorporated in Delaware, regardless of whether the corporation has any operations, employees, or other activities in Delaware. Del. Code Ann. tit. 8, § 501 et seq. The Delaware franchise tax is a significant compliance obligation for VeloPay and its Delaware-incorporated subsidiaries, and the amount of the tax depends on the computation method elected.
Computation Methods. The Delaware franchise tax may be calculated under either of two methods:
(i) Authorized Shares Method. Under this method, the franchise tax is calculated based on the number of authorized shares of the corporation, regardless of the number of shares actually issued and outstanding. For corporations with 10,001 or more authorized shares, the tax is $250 plus $85 for each additional 10,000 shares (or fraction thereof) above 10,000. The maximum annual franchise tax under the Authorized Shares Method is $200,000 plus the $50 annual report filing fee.
(ii) Assumed Par Value Capital Method. Under this method, the franchise tax is calculated based on the corporation's total gross assets (as reported on its federal income tax return) divided by the number of issued shares, yielding an "assumed par value." The franchise tax is then computed at a rate of $400 per $1 million (or fraction thereof) of assumed par value capital. This method often produces a significantly lower tax for corporations with large authorized share counts but relatively lower total gross assets relative to those shares.
VeloPay's Current Position. VeloPay has 82.4 million shares of common stock issued and outstanding as of the most recent capitalization table reviewed during due diligence, and its total authorized shares are significantly higher (the pre-merger Certificate of Incorporation authorizes a substantially greater number of shares, as is typical for a venture-backed technology company that has completed multiple rounds of financing with option pool reserves). Under the Authorized Shares Method, VeloPay's franchise tax could approach or reach the statutory maximum of $200,000 per year, depending on the precise number of authorized shares.
Post-Merger Optimization. Following the Merger, VeloPay will become a wholly-owned subsidiary of HPE Fund IV. As a wholly-owned subsidiary, VeloPay will have no need for a large number of authorized shares. The Amended and Restated Certificate of Incorporation of the Surviving Corporation, which will be filed at the effective time of the Merger as contemplated by the Merger Agreement, should reduce the number of VeloPay's authorized shares to the minimum necessary (e.g., 1,000 shares of common stock). This reduction, combined with an election to use the Assumed Par Value Capital Method (if it produces a lower tax), could substantially reduce VeloPay's annual Delaware franchise tax obligation.
We recommend that Sandra Tung and Megan Chu confirm that the Amended and Restated Certificate of Incorporation of the Surviving Corporation contains an appropriately reduced authorized share count, and that the filing of the restated certificate is coordinated with the Delaware Secretary of State's office as part of the closing deliverables. A comparison of the franchise tax under both computation methods, using VeloPay's post-merger authorized share count and total gross assets, is set forth in Appendix D to this memorandum.
Merger Sub. Merger Sub (Delaware File Number 7291034) will cease to exist upon the effective time of the Merger on July 22, 2025. A final Delaware franchise tax return will be required for Merger Sub, pro-rated from the date of its incorporation (February 24, 2025) through the date of its dissolution by merger (July 22, 2025). The franchise tax for this short period is expected to be nominal given Merger Sub's minimal capitalization and short period of existence.
Domestic Subsidiaries. VeloPay's three domestic subsidiaries are each formed in Delaware and are subject to the Delaware annual entity tax:
• VeloPay Processing LLC — Delaware LLC; subject to the $300 annual LLC tax payable to the Delaware Secretary of State.
• VeloPay Fraud intelligence Inc. — Delaware corporation; subject to the Delaware corporate franchise tax, calculated under either the Authorized Shares Method or the Assumed Par Value Capital Method. Given that VeloPay Fraud intelligence Inc. is likely a small corporation with a limited number of authorized shares, the franchise tax should be modest.
• PayStream Gateway LLC — Delaware LLC; subject to the $300 annual LLC tax.
HPE Fund IV and Related Entities. HPE Fund IV (Delaware limited partnership) and Harrowgate Capital Management IV LLC (Delaware limited liability company) are each subject to the Delaware annual limited partnership or LLC tax of $300 per year. These are minimal obligations that do not change as a result of the Transaction.
B. Delaware Corporate Income Tax
Delaware imposes a corporate income tax at a rate of 8.7% on the taxable income of corporations that have nexus in Delaware. However, Delaware has long followed the practice of not imposing its corporate income tax on corporations whose only connection to Delaware is their state of incorporation and the maintenance of a registered agent and registered office. This principle — sometimes referred to as the "intangible holding company" or "passive investment company" exception — generally benefits Delaware-incorporated holding companies and operating companies that are headquartered and operate outside of Delaware.
VeloPay is headquartered in Austin, Texas, and its operations are conducted in Texas, Colorado, and other states (and internationally). VeloPay's only Delaware connection is its state of incorporation and the maintenance of a registered agent at Capitol Registered Agents LLC, 1209 Orange Street, Wilmington, Delaware 19801. The mere maintenance of a registered agent does not create income tax nexus under Delaware law. Accordingly, VeloPay is not subject to the Delaware corporate income tax, and this conclusion is not affected by the Transaction.
Similarly, VeloPay Processing LLC and PayStream Gateway LLC are Delaware LLCs that do not have a physical presence or operations in Delaware beyond their registered agent, and VeloPay Fraud intelligence Inc. is a Delaware corporation in the same position. None of these entities is expected to be subject to Delaware corporate income tax.
Conclusion. VeloPay and its domestic subsidiaries are subject to the Delaware franchise tax (and, for the LLCs, the annual LLC tax) but are not subject to the Delaware corporate income tax. The Delaware franchise tax can and should be optimized as described above.
VI. Colorado State Income Tax Considerations
A. Current Colorado Filing Obligations
VeloPay maintains an office in Denver, Colorado, and employs approximately 200 individuals there. This physical presence creates clear nexus for Colorado corporate income tax purposes under both traditional physical presence standards and Colorado's economic nexus provisions.
Tax Rate. Colorado imposes a flat corporate income tax at a rate of 4.40% for tax years beginning on or after January 1, 2024 (reduced from 4.55% for tax years beginning on or after January 1, 2022, and reflecting the series of rate reductions enacted by the Colorado legislature in recent years). Colo. Rev. Stat. § 39-22-301(1)(d).
Apportionment. Colorado uses a single-factor sales apportionment formula with market-based sourcing for receipts from services. Colo. Rev. Stat. § 39-22-303.6. Under this approach, VeloPay's Colorado-apportioned income is determined by the ratio of VeloPay's Colorado-sourced revenue (i.e., revenue from merchants and customers located in Colorado) to its total revenue from all sources. Given that VeloPay's merchants are dispersed nationally, Colorado's share of VeloPay's total revenue is expected to be a modest but meaningful percentage, reflecting the relative economic weight of Colorado's merchant base.
Filing Status. Colorado imposes combined reporting requirements on certain affiliated groups. Under Colorado law, a "unitary business" group of commonly owned corporations (80% or greater common ownership) may be required to file a combined return. Colo. Rev. Stat. § 39-22-303(11). VeloPay and its domestic subsidiaries that are treated as C corporations (i.e., VeloPay Fraud intelligence Inc.) may be required to file on a combined basis in Colorado if they are engaged in a unitary business. The domestic LLCs (VeloPay Processing LLC and PayStream Gateway LLC) would be included or excluded depending on their entity classification for Colorado tax purposes.
B. Post-Acquisition Colorado Changes
Combined Group Composition. Following the acquisition, VeloPay will become part of HPE Fund IV's broader affiliated group. If HPE Fund IV's other portfolio companies have Colorado nexus and are engaged in a unitary business with VeloPay under Colorado's combined reporting rules, the combined return group in Colorado could expand to include those entities. The impact on VeloPay's Colorado tax liability will depend on the apportionment profiles and taxable income (or losses) of the other entities included in the combined group.
Apportionment Impact. If the combined group expands to include entities with a different Colorado apportionment profile than VeloPay's, the blended apportionment factor could shift. For example, if another HPE Fund IV portfolio company has a relatively high proportion of Colorado-sourced revenue, the inclusion of that entity in the combined group could increase the group's Colorado apportionment factor, resulting in a higher Colorado tax liability for the group as a whole. Conversely, the inclusion of entities with little or no Colorado-sourced revenue could dilute the apportionment factor and reduce the Colorado tax.
Entity Rationalization. If VeloPay's subsidiaries are merged into VeloPay post-closing, the number of entities filing in Colorado would decrease, potentially simplifying compliance. However, any such mergers must be evaluated for Colorado tax consequences, including the potential triggering of gain or loss recognition, the transfer or elimination of tax attributes, and the filing of final returns for the merged entities.
Short-Period Return. Similar to the Texas analysis, no short-period Colorado return is required for VeloPay solely as a result of the change in ownership. VeloPay continues as the surviving entity and will file its Colorado return for the full annual period. If Merger Sub is deemed to have Colorado nexus (which we consider unlikely given its lack of operations), a final short-period return could be required, but we do not anticipate this issue arising.
VII. Multi-State Apportionment Analysis — Impact of Ownership Change
A. Apportionment Factor Changes
The change in VeloPay's ownership is expected to have a significant impact on VeloPay's state tax apportionment in states that require combined or unitary reporting. Prior to the acquisition, VeloPay files its state tax returns based on its own apportionment factors (or those of its subsidiaries, to the extent included in a combined return). The relevant apportionment factors typically include the sales/receipts factor (which is the dominant or sole factor in most states) and, in certain states that retain a multi-factor formula, the property factor and the payroll factor.
Following the acquisition, VeloPay will become part of HPE Fund IV's broader group of portfolio companies. In states that require combined or unitary reporting, VeloPay's apportionment factors will be combined (or blended) with those of other entities in the combined group. This can produce either a favorable or unfavorable shift in VeloPay's apportionment in any given state, depending on the relative magnitudes and geographic distributions of the combined group members' factors.
Key Combined Reporting States. The following states impose mandatory or elective combined reporting requirements that could be affected by the Transaction:
• California (mandatory combined reporting)
• New York (mandatory combined reporting under Article 9-A)
• Illinois (mandatory combined reporting)
• Massachusetts (mandatory combined reporting)
• New Jersey (mandatory combined reporting, effective 2019)
• Connecticut (mandatory combined reporting, effective 2016)
• Colorado (combined reporting as discussed in Section VI)
• Michigan (mandatory combined reporting)
• Minnesota (mandatory combined reporting)
• Oregon (mandatory combined reporting)
• Vermont (mandatory combined reporting)
• West Virginia (mandatory combined reporting)
• Wisconsin (mandatory combined reporting)
• And others
In each of these states, the inclusion of VeloPay in HPE Fund IV's combined group will change the numerator and denominator of the apportionment formula. The net effect will depend on the specific revenue, property, and payroll profiles of each entity in the combined group. We recommend that detailed apportionment modeling be conducted for at least the top ten state tax jurisdictions by revenue impact — which we expect to include California, New York, Texas (which is discussed separately in Section IV), Illinois, Florida, Pennsylvania, New Jersey, Massachusetts, Ohio, and Washington — to quantify the expected changes.
B. Market-Based Sourcing vs. Cost-of-Performance States
The sourcing of VeloPay's revenue for apportionment purposes varies by state and directly affects the apportionment factor in each jurisdiction.
Market-Based Sourcing. The majority of states now employ market-based sourcing for receipts from services. Under market-based sourcing, revenue from services is sourced to the location of the customer or the market for the service, rather than to the location where the service is performed. For VeloPay, this means that its processing fees, SaaS subscription fees, and gateway transaction fees are sourced to the locations of its 14,000+ merchants and their end customers. Because VeloPay's merchants are dispersed across all 50 states and the District of Columbia, market-based sourcing results in a broad distribution of VeloPay's revenue across many states, with no single state (other than potentially the largest states by merchant population) receiving a disproportionate share.
Cost-of-Performance States. A shrinking minority of states continue to apply cost-of-performance sourcing, under which revenue from services is sourced to the state where the greater proportion of the income-producing activity is performed. For VeloPay, cost-of-performance sourcing would tend to concentrate revenue in Texas (where VeloPay's Austin headquarters houses the majority of its operations and employees) and, to a lesser extent, in Colorado (where VeloPay's Denver office is located). This could result in a higher apportionment factor in Texas and Colorado and a lower apportionment factor in other states.
Summary of Major States' Sourcing Methodology:
For VeloPay, the distinction between market-based sourcing and cost-of-performance sourcing is particularly important because VeloPay's income-producing activities are heavily concentrated in Texas and Colorado (where its employees and operations are located), while its customers and merchants are broadly dispersed nationwide. In market-based sourcing states, VeloPay's apportionment factor in any given state will be relatively modest (reflecting that state's share of VeloPay's national merchant base). In cost-of-performance states, VeloPay's apportionment factor could be significantly higher in Texas and Colorado and significantly lower in the state in question.
C. Intercompany Transactions and Transfer Pricing at State Level
The acquisition will likely give rise to new intercompany transactions between VeloPay and HPE Fund IV (or its affiliated entities), including management fees, monitoring fees, cost-sharing arrangements, and potentially the allocation of acquisition debt and interest expense. These intercompany flows have important state tax implications.
Management and Monitoring Fees. If HPE Fund IV charges VeloPay a management or monitoring fee (as is customary in private equity portfolio company arrangements), such fees would be deductible by VeloPay for federal and state income tax purposes, subject to arm's-length requirements and state-specific addback rules. In states that impose related-party expense addback rules, the deductibility of management fees paid to HPE Fund IV or its affiliates may be limited or denied unless an exception applies (e.g., the fees have a valid business purpose and the recipient includes the income in its return filed in that state).
Debt Push-Down and Interest Expense. The Credit Agreement names VeloPay as the Borrower for the $500 million term loan and the $254.7 million revolver. This "debt push-down" structure — in which the operating company (VeloPay) bears the acquisition debt, rather than the acquiring fund (HPE Fund IV) — is a common private equity structuring technique designed to generate interest deductions at the operating company level. The interest expense on the acquisition debt will reduce VeloPay's federal taxable income (subject to the Section 163(j) limitation), and the deduction will flow through to state taxable income in states that conform to federal taxable income as the starting point for state tax computations.
However, a significant number of states impose interest expense addback requirements that may limit or eliminate VeloPay's ability to deduct the interest expense on the acquisition debt. These rules are designed to prevent base erosion through intercompany debt structures and, in some states, apply to related-party interest broadly or to interest paid to entities with certain relationships to the taxpayer. The following is a non-exhaustive list of states with interest expense addback rules that may be relevant:
• Connecticut — Mandatory addback of interest paid to related members, with limited exceptions. Conn. Gen. Stat. § 12-218c.
• New Jersey — Addback of interest and intangible expenses paid to related members. N.J. Stat. Ann. § 54:10A-4(k)(2)(I).
• North Carolina — Addback of related-party interest and intangible expenses. N.C. Gen. Stat. § 105-130.7A.
• Virginia — Addback of interest paid to related members. Va. Code Ann. § 58.1-402(B)(8).
• Indiana — Addback of interest paid to related members. Ind. Code § 6-3-2-20.
• Georgia — Addback of intangible expenses and interest paid to related members. Ga. Code Ann. § 48-7-28.3.
• Massachusetts — Addback of certain intercompany expenses, though the combined reporting regime mitigates some addback exposure.
• Others — Additional states with addback rules are identified in Appendix C.
The applicability of these addback rules to VeloPay's acquisition debt depends on whether the interest is treated as paid to a "related member" (which requires analysis of the relationship between VeloPay, HPE Fund IV, and the institutional lenders — Tralvendo National Bank and Prairie State Bank), whether any exceptions apply (e.g., the "subject-to-tax" exception, the "unreasonable" exception, or the "conduit" exception available in certain states), and the specific mechanics of each state's addback statute. Because the acquisition debt is owed to unrelated third-party lenders (Tralvendo National Bank and Prairie State Bank), the addback rules may not apply in many states, as they are generally targeted at related-party interest. However, if any portion of the debt is restructured as intercompany debt post-closing (e.g., if HPE Fund IV refinances the third-party debt with an intercompany note), the addback rules could be implicated.
We recommend that a detailed state-by-state analysis of interest deductibility be prepared, identifying the states in which VeloPay files, the applicable addback rules, available exceptions, and the estimated after-tax cost impact of any disallowed deductions. This analysis is set forth in summary form in Appendix C.
VIII. Treatment of Merger Consideration and Stockholder-Level State Tax
A. State Taxation of VeloPay Stockholders
The per-share merger consideration of $20.00 per share will be treated as proceeds from the sale or exchange of VeloPay stock by each stockholder. The state income tax consequences of this stock sale depend on each stockholder's state of residency (for individual stockholders) or state of organization and filing positions (for institutional stockholders and pass-through entities).
Institutional Stockholders. The principal institutional stockholders of VeloPay, as reflected in the capitalization table reviewed during due diligence, include:
• Ridgeline Ventures Fund III LP (San Francisco, California) — holding approximately 22.4% of VeloPay's outstanding shares. Ridgeline Ventures Fund III LP is a Delaware limited partnership. As a partnership, the gain recognized on the disposition of VeloPay stock will flow through to Ridgeline's partners and be reported on each partner's individual or entity state tax return based on that partner's state of residency. To the extent Ridgeline's partners are California residents, the gain will be subject to California individual income tax at rates up to 13.3%.
• Apex Growth Partners II LP (New York, New York) — holding approximately 16.8% of VeloPay's outstanding shares. Apex Growth Partners II LP is a Delaware limited partnership. The gain flows through to Apex's partners. New York-resident partners will be subject to New York State income tax (at rates up to 10.9%) and potentially New York City personal income tax (at rates up to 3.876%).
• Broadleaf Capital Partners LP (Boston, Massachusetts) — holding approximately 6.1% of VeloPay's outstanding shares. Broadleaf Capital Partners LP is a Delaware limited partnership. The gain flows through to Broadleaf's partners. Massachusetts-resident partners will be subject to Massachusetts income tax at a flat rate of 5.0% (applicable to long-term capital gains on most assets; short-term capital gains may be taxed at the higher rate of 9.0% effective 2023 due to the millionaires' tax surcharge for taxpayers with income exceeding $1 million).
Individual Stockholders. The principal individual stockholders include:
• Nathan Aldridge — holding approximately 14.2% of VeloPay's outstanding shares. Mr. Aldridge is based in Austin, Texas. Texas does not impose a state individual income tax. Accordingly, Mr. Aldridge will not owe any state income tax on the gain recognized from the sale of his VeloPay shares (other than in the unlikely event that another state asserts a nonresident tax claim based on the location of the property being sold, which is generally not applicable to stock sales).
• Sonia Reyes-Watkins — holding approximately 9.7% of VeloPay's outstanding shares. Ms. Reyes-Watkins is presumed to reside in Austin, Texas (based on due diligence information reviewed). Like Mr. Aldridge, Ms. Reyes-Watkins benefits from Texas's absence of a state individual income tax and should not owe any state income tax on her gain.
VeloPay's Obligations. VeloPay is not directly responsible for the stockholder-level state income taxes arising from the sale of stock. However, VeloPay (or the paying agent, Keystone Pacific Transfer Services Inc.) may have certain information reporting or withholding obligations, as discussed in Section VIII.C below.
B. Rollover Equity — State Tax Treatment
As contemplated by the Merger Agreement, Nathan Aldridge is rolling over approximately $14,200,000 and Sonia Reyes-Watkins is rolling over approximately $9,700,000 of their merger consideration into Harrowgate Velocity Co-Invest LP, a Delaware limited partnership formed on March 14, 2025 (EIN 93-2748163), for the purpose of allowing Messrs. Aldridge and Reyes-Watkins to retain an equity stake in VeloPay alongside HPE Fund IV.
The state tax treatment of the rollover equity depends on the federal characterization. If the rollover is treated for federal tax purposes as receipt of the full merger consideration followed by reinvestment into the Co-Invest LP (i.e., a taxable sale followed by a capital contribution), then the full gain on the VeloPay shares is recognized at the time of the Merger, and the subsequent investment into the Co-Invest LP is a nontaxable c

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