CONFIDENTIAL
TAX DUE DILIGENCE MEMORANDUM
Subject: NovaMart Global Inc. (EIN: 84-3291547)
Proposed Acquisition of 100% of the Outstanding Capital Stock of NovaMart Global Inc. by Cascade Retail Holdings Inc.
Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, NY 10022
May 12, 2025
Prepared by:
Sylvia Hartwell, Specialist Partner, Tax Calderwood & Harkness LLP
Assisted by:
Derek Okonkwo, Lead Associate, Mergers & Acquisitions Tiffany Rosenthal, Working Associate, Mergers & Acquisitions Calderwood & Harkness LLP
In Coordination with:
Sandra Chiu, Engagement Partner Whitmore & Paige LLP (Accounting Due Diligence Advisor)
Prepared for:
Elena Vasquez-Bright, General Counsel, Cascade Retail Holdings Inc. Rajiv Sundaram, Chief Financial Officer, Cascade Retail Holdings Inc. Theodore "Ted" Langford, Senior Vice President, Corporate Development, Cascade Retail Holdings Inc.
Matter: Proposed Acquisition of 100% of the Outstanding Capital Stock of NovaMart Global Inc. by Cascade Retail Holdings Inc. — Pre-Signing Tax Due Diligence
This memorandum is protected by the attorney-client privilege and the attorney work product doctrine. It has been prepared solely for the use and benefit of Cascade Retail Holdings Inc. and its officers, directors, and authorized advisors in connection with the proposed acquisition of NovaMart Global Inc. This memorandum is not to be distributed, disclosed, or relied upon by any third party without the prior written consent of Calderwood & Harkness LLP. The information and analysis contained herein does not constitute a tax opinion.
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I. Executive Summary
A. Purpose and Transaction Overview
This memorandum presents the findings and analysis of Calderwood & Harkness LLP's pre-signing tax due diligence review of NovaMart Global Inc. ("NovaMart," the "Company," or the "Target") in connection with the proposed acquisition by Cascade Retail Holdings Inc. ("Cascade" or the "Buyer") of 100% of the outstanding capital stock of NovaMart for an aggregate cash purchase price of $1,200,000,000 (the "Transaction"). The Transaction is structured as an all-cash stock purchase and is expected to be documented in a Stock Purchase Agreement (the "SPA") anticipated to be executed on or about May 20, 2025. Closing is targeted for on or about October 15, 2025, subject to the satisfaction of customary closing conditions including receipt of Hart-Scott-Rodino antitrust clearance.
Cascade is acquiring 100% of NovaMart's outstanding capital stock from the following Selling Stockholders (collectively, the "Sellers"):
No election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code"), is contemplated in connection with the Transaction. The parties engaged in extensive negotiations regarding a potential Section 338(h)(10) election; however, they were unable to reach agreement on the pricing adjustment that would be necessary to compensate the Sellers for the incremental tax cost of a deemed asset sale. Accordingly, the Transaction will be treated as a stock acquisition for federal and state income tax purposes, and NovaMart's existing tax attributes — including its inside asset basis, net operating loss carryforwards, and credit carryforwards — will carry over to the post-closing period, subject to the limitations discussed in this memorandum.
B. Company Overview
NovaMart Global Inc. is a Delaware corporation headquartered at 1100 Congress Avenue, Suite 800, Austin, Texas 78701. The Company operates an online marketplace platform connecting sellers and buyers of consumer goods across a range of product categories, including home décor, artisanal goods, consumer electronics accessories, apparel, and related products. As of fiscal year 2024 ("FY2024"), the NovaMart marketplace had approximately 62,400 active sellers, 9.1 million registered buyers, and generated gross merchandise value ("GMV") of approximately $6.2 billion.
For FY2024, NovaMart reported total revenue of approximately $891 million, consisting of marketplace take-rate revenue, advertising revenue, and logistics services revenue generated through its NovaShip fulfillment and logistics operations. FY2024 EBITDA was approximately $134 million. The Company's estimated FY2024 federal income tax liability was approximately $23,800,000.
NovaMart maintains 14 fulfillment centers across 9 states: California (3 locations), New Jersey (2 locations), Georgia (2 locations), Florida (2 locations), Ohio (1 location), Illinois (1 location), Pennsylvania (1 location), Tennessee (1 location), and Washington (1 location). These fulfillment centers support the NovaShip logistics operations and create substantial physical presence and economic nexus for state income, franchise, and sales and use tax purposes. The Company employs approximately 2,400 individuals across these locations and at its Austin, Texas headquarters.
C. Key Tax Jurisdictions
NovaMart's primary tax jurisdictions include: the United States (federal); Delaware (franchise tax — state of incorporation); Texas (franchise tax/margin tax — headquarters state; Texas does not impose a state income tax); and the following states in which NovaMart has nexus by virtue of fulfillment center operations: California, New Jersey, Georgia, Ohio, Illinois, Pennsylvania, Tennessee, Florida, and Washington. Additionally, NovaMart may have economic nexus for income tax purposes in additional states where the Company has not historically filed returns, a matter discussed in further detail in Section V of this memorandum.
D. Overall Risk Assessment Summary
Based on our review of the materials provided and our discussions with NovaMart management and counsel, we have identified the following items requiring attention in the context of the Transaction:
1. Section 382 NOL Limitation. The Transaction will constitute an "ownership change" within the meaning of Section 382 of the Code, which will impose an annual limitation on NovaMart's ability to utilize its pre-change net operating loss ("NOL") carryforwards to offset post-change taxable income. The magnitude of this limitation is discussed in detail in Section VIII.
2. Sales Tax Nexus and Compliance Exposure. While NovaMart's marketplace facilitator compliance appears generally adequate, we have identified certain product taxability determination issues in specific states, and the Company's documentation supporting certain exemption certificates could be strengthened.
3. Transfer Pricing. Intercompany transactions between NovaMart and its logistics operations appear to be conducted at arm's length based on available documentation, but the contemporaneous transfer pricing documentation could be more robust.
4. Section 280G Golden Parachute Exposure. Payments to certain NovaMart executives and founders in connection with the change of control may constitute "excess parachute payments" under Section 280G, potentially resulting in non-deductibility to the Company and a 20% excise tax to the affected individuals under Section 4999.
5. Open Audit Years and State Tax Exposure. We have identified potential economic nexus exposure in states where NovaMart has not historically filed income tax returns, which warrants further analysis.
6. No Section 338(h)(10) Election. The absence of a Section 338(h)(10) election means Cascade will not receive a stepped-up tax basis in NovaMart's assets, which will impact Cascade's post-closing tax position.
No material unresolved tax controversies have been identified as of the date of this memorandum.
E. Sources of Information
The analysis in this memorandum is based upon the following sources: (i) federal and state income, franchise, and sales and use tax returns and related workpapers provided in the NovaMart electronic data room (the "Data Room"); (ii) responses to Calderwood & Harkness LLP's tax due diligence request list dated February 17, 2025; (iii) discussions with Douglas "Doug" Whitfield, Chief Financial Officer of NovaMart, and Amanda Trevino, General Counsel of NovaMart; (iv) NovaMart's audited financial statements for fiscal years 2019 through 2024; (v) supplemental accounting due diligence analysis provided by Whitmore & Paige LLP (Sandra Chiu, Engagement Partner); and (vi) coordination with Seller's counsel, Calloway, Brandt & Loewe LLP (Richard Calloway and Simone Adesanya).
II. Scope and Methodology
A. Scope of Review
In connection with the preparation of this memorandum, Calderwood & Harkness LLP reviewed the following categories of documents and information:
1. Federal Income Tax Returns. Forms 1120 (U.S. Corporation Income Tax Return) filed by NovaMart for fiscal years 2019 through 2024, together with all supporting schedules, statements, and workpapers.
2. State Income and Franchise Tax Returns. State income, franchise, and similar tax returns filed by NovaMart in all filing jurisdictions for fiscal years 2019 through 2024, including Texas franchise tax reports, the Delaware franchise tax filings, and income tax returns for California, New Jersey, Georgia, Ohio, Illinois, Pennsylvania, Tennessee, Florida, and Washington.
3. Sales and Use Tax Returns and Nexus Analyses. Sales and use tax returns filed by NovaMart in all applicable jurisdictions, together with NovaMart's internal nexus analysis documentation and marketplace facilitator compliance files.
4. Employment and Payroll Tax Records. Federal employment tax filings (Forms 941, 940) and state employment tax records, including state unemployment insurance filings and state income tax withholding records.
5. Tax Provisions and Deferred Tax Schedules. NovaMart's ASC 740 tax provision workpapers, deferred tax asset and liability schedules, and uncertain tax position (FIN 48) analyses for fiscal years 2019 through 2024.
6. Transfer Pricing Documentation. Available transfer pricing documentation, including intercompany agreements, cost-sharing arrangements, and any contemporaneous transfer pricing studies.
7. Tax Sharing or Tax Allocation Agreements. Any tax sharing agreements, tax allocation agreements, or tax indemnification agreements to which NovaMart is a party.
8. NOL and Credit Carryforward Schedules. Schedules of net operating loss carryforwards and tax credit carryforwards, including R&D tax credit documentation.
9. Correspondence with Taxing Authorities. All correspondence between NovaMart and the Internal Revenue Service ("IRS") and state taxing authorities, including audit notices, deficiency notices, closing letters, and private letter rulings.
10. Tax Opinions and Memoranda. Tax opinions, memoranda, and other written advice prepared by NovaMart's external tax advisors.
11. Equity Compensation and Stock Option Records. Documentation relating to NovaMart's stock option plan, including option grant agreements, Section 409A valuation reports, Section 83(b) election records, and ISO/NQSO classification documentation.
B. Methodology
Our tax due diligence review was conducted using the following methodology:
Document Review. The Calderwood & Harkness LLP tax due diligence team commenced its review of documents produced in the Data Room on February 18, 2025, one day following the delivery of the tax due diligence request list. The Data Room contained approximately 1,450 documents organized into tax-related folders corresponding to the request list categories. We reviewed each document, noting items requiring follow-up or supplemental information from NovaMart.
Management Interviews. We conducted two in-person meetings and four telephone conferences with Douglas Whitfield (CFO, NovaMart) and Amanda Trevino (General Counsel, NovaMart), together with their external tax advisors, during the period from February 25, 2025 through April 28, 2025. These discussions covered a range of topics including NovaMart's tax compliance procedures, its sales tax collection technology infrastructure, its approach to state nexus determinations, the status of open audit years, equity compensation arrangements, and historical ownership changes for Section 382 purposes.
Cross-Referencing. We cross-referenced the tax information provided in the Data Room with NovaMart's audited financial statements for fiscal years 2019 through 2024, and with the findings of Whitmore & Paige LLP's accounting due diligence review. Sandra Chiu's team at Whitmore & Paige provided us with their analysis of NovaMart's tax provision and deferred tax asset/liability balances, which we incorporated into our review of the adequacy of tax reserves.
State Tax Authority Guidance. We reviewed publicly available state tax authority guidance, regulations, and administrative rulings for each of NovaMart's nexus jurisdictions, particularly with respect to marketplace facilitator obligations, economic nexus thresholds, apportionment methodologies, and conformity to federal tax provisions.
Coordination with Seller's Counsel. We coordinated with NovaMart's counsel at Calloway, Brandt & Loewe LLP (Richard Calloway and Simone Adesanya) to obtain supplemental documentation and clarification on certain items identified during our review, including historical Section 382 analyses and the Company's sales tax compliance procedures.
C. Limitations
The following limitations apply to the analysis presented in this memorandum:
1. Reliance on Provided Materials. Our analysis is based upon the documents and information provided to us in the Data Room and through discussions with NovaMart management and counsel as of the diligence cut-off date of May 9, 2025. We have not independently verified the accuracy or completeness of the information provided to us, and we have relied upon the representations of NovaMart management and their advisors with respect to certain factual matters.
2. No Independent Audit. We have not conducted an independent audit of NovaMart's tax returns or tax compliance. Our review was conducted at a level of detail appropriate for a pre-signing tax due diligence engagement and should not be construed as a comprehensive tax audit.
3. Not a Tax Opinion. This memorandum does not constitute a tax opinion. It is a factual and analytical summary of identified tax issues and risks intended to inform Cascade's decision-making in connection with the Transaction and the negotiation of the SPA.
4. Evolving Tax Law. Tax laws, regulations, and administrative guidance are subject to change, and our analysis is based on the law in effect as of the date of this memorandum. Future changes in applicable tax law could affect the conclusions expressed herein.
5. Pending Items. Certain items identified during our review remain pending further documentation or clarification from NovaMart. These items are noted throughout this memorandum and should be resolved prior to closing.
III. Corporate Structure and Tax Status
A. Entity Classification
NovaMart Global Inc. NovaMart Global Inc. is a C corporation organized under the laws of the State of Delaware. The Company was incorporated on March 14, 2016, and has been classified as a C corporation for federal income tax purposes since its inception. NovaMart's Employer Identification Number ("EIN") is 84-3291547. Its Delaware registered agent is Pinnacle Corporate Services Inc., located at 850 New Burton Road, Suite 201, Dover, Delaware 19904.
Filing Status. NovaMart files a separate federal Form 1120, U.S. Corporation Income Tax Return. Based on our review of the Data Room materials, NovaMart does not file a consolidated federal income tax return as the parent of an affiliated group. We note, however, that NovaMart's organizational structure includes its NovaShip logistics operations, and we have undertaken an analysis to determine whether such operations are conducted through a separate legal entity or as a division of NovaMart itself.
Subsidiary Analysis. Based on the organizational chart provided by NovaMart in the Data Room and supplemented by discussions with Doug Whitfield, NovaMart's corporate structure includes the following entities:
(i) NovaMart Global Inc. — the parent entity and primary operating company, organized as a Delaware C corporation;
(ii) NovaShip Logistics LLC — a Delaware limited liability company that is a wholly owned subsidiary of NovaMart Global Inc. NovaShip Logistics LLC operates the Company's fulfillment center network and logistics services. Per the Data Room materials, NovaShip Logistics LLC has not filed a Form 8832, Entity Classification Election, and accordingly is treated as a disregarded entity for federal income tax purposes pursuant to Treasury Regulation § 301.7701-3(b)(1)(ii). All items of income, deduction, gain, loss, and credit of NovaShip Logistics LLC are reported on NovaMart's federal Form 1120; and
(iii) NovaMart IP Holdings LLC — a Delaware limited liability company that is a wholly owned subsidiary of NovaMart Global Inc. NovaMart IP Holdings LLC holds certain of the Company's intellectual property assets, including trademarks and domain name registrations. Like NovaShip Logistics LLC, NovaMart IP Holdings LLC has not filed a Form 8832 and is treated as a disregarded entity for federal income tax purposes.
Because both subsidiaries are treated as disregarded entities, all income and expenses flow through to NovaMart Global Inc.'s federal Form 1120. We have confirmed that no check-the-box elections (Form 8832) have been filed for either entity that would alter their default classification. The tax implications of the intercompany arrangements between NovaMart and these subsidiaries are discussed in Section IX (Transfer Pricing) of this memorandum.
We note that while NovaShip Logistics LLC and NovaMart IP Holdings LLC are disregarded entities for federal tax purposes, certain states may treat these entities differently for state tax purposes (e.g., for purposes of combined or unitary reporting). This is addressed in Section V.
B. Capitalization and Equity
Capital Stock. NovaMart's outstanding capital stock is held by the Sellers in the percentages set forth in Section I of this memorandum. NovaMart's authorized capital stock consists of 50,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per share. As of the most recent capitalization table provided in the Data Room (dated March 31, 2025), there are 28,750,000 shares of common stock outstanding and no shares of preferred stock outstanding. All previously outstanding preferred stock (Series A and Series B) was converted into common stock in connection with a recapitalization transaction completed in February 2022.
Stock Option Plan. NovaMart maintains the NovaMart Global Inc. 2017 Equity Incentive Plan (the "Plan"), under which the Company has granted stock options to employees, officers, and directors. Based on the equity compensation records provided in the Data Room, as of March 31, 2025, there were approximately 3,425,000 options outstanding under the Plan, of which approximately 2,645,000 were vested and exercisable. The weighted average exercise price of the outstanding options is approximately $6.28 per share.
We have reviewed the following tax-related aspects of the Plan:
Section 409A Compliance. Section 409A of the Code imposes strict requirements on the deferral of compensation, including stock options. We have reviewed NovaMart's Section 409A valuation reports (commonly referred to as "409A valuations") prepared by an independent valuation firm, Hargrove & Associates LLC. NovaMart has obtained annual 409A valuations, and the exercise prices of options granted under the Plan appear to have been set at or above fair market value at the time of grant, consistent with the requirements of Section 409A. We note that a failure to comply with Section 409A could result in immediate income inclusion, a 20% additional tax, and interest penalties to the affected option holders. Based on our review, we have not identified any apparent Section 409A compliance deficiencies, although we recommend that Cascade's advisors independently confirm the reasonableness of the 409A valuations, particularly those prepared during the 2020–2021 period when marketplace valuations experienced significant volatility.
Incentive Stock Options vs. Non-Qualified Stock Options. The Data Room materials indicate that a portion of the options outstanding under the Plan have been designated as incentive stock options ("ISOs") within the meaning of Section 422 of the Code, while the remainder are non-qualified stock options ("NQSOs"). Approximately 1,150,000 of the outstanding options are designated as ISOs, and approximately 2,275,000 are designated as NQSOs. We have reviewed the ISO designation documentation for compliance with the requirements of Section 422, including the $100,000 annual vesting limitation. We note that certain ISOs granted to Julian Reeves in 2018 and 2019 may exceed the $100,000 annual limitation, which would result in the excess options being reclassified as NQSOs. This reclassification would not create a material adverse tax consequence to NovaMart but could affect the tax treatment for Mr. Reeves upon exercise.
Section 83(b) Elections. We have reviewed the Data Room for evidence of Section 83(b) elections filed by NovaMart's founders and early employees. Based on the records provided, Julian Reeves and Priya Narasimhan each filed timely Section 83(b) elections in connection with the original issuance of founder shares in March 2016. We have reviewed copies of these elections and the accompanying Forms 1040 filed by Mr. Reeves and Ms. Narasimhan for the 2016 tax year reflecting the election.
Convertible Instruments, Warrants, and SAFEs. Based on our review of the Data Room materials, NovaMart has no outstanding convertible notes, warrants, or Simple Agreements for Future Equity ("SAFEs") as of the date of this memorandum. The Company had previously issued SAFEs during its early-stage financing rounds, but all such SAFEs were converted into preferred stock in connection with the Company's Series A and Series B financing rounds and subsequently converted into common stock in the February 2022 recapitalization. We have reviewed the tax characterization of the historical SAFE conversions and have not identified any unresolved issues.
Deductibility of Compensation Expense on Option Exercises at Closing. In connection with the closing of the Transaction, outstanding NovaMart stock options will be cashed out or exercised (per the terms of the SPA). The exercise or cash-out of NQSOs will give rise to a compensation deduction for NovaMart under Section 162 of the Code equal to the spread between the exercise price and the per-share merger consideration. Based on current estimates, this deduction could be substantial, on the order of approximately $90 million to $105 million (depending on the final determination of which options are ISOs versus NQSOs), and would be reflected on NovaMart's pre-closing tax return. The tax benefit of this deduction is an important item for the straddle period tax allocation and the working capital calculation. We are coordinating with Sandra Chiu at Whitmore & Paige LLP to ensure appropriate treatment of this item in the closing working capital mechanics.
C. Tax Elections
S Corporation Election History. We have confirmed that NovaMart has been a C corporation since its incorporation in 2016 and has never made an election under Section 1362 of the Code to be treated as an S corporation. No prior S election history exists.
Section 338(h)(10) Election. As noted in the Executive Summary, no election under Section 338(h)(10) of the Code is contemplated for the Transaction. The parties engaged in negotiations regarding a potential Section 338(h)(10) election, but were unable to agree on the pricing adjustment that would be necessary to compensate the Sellers for the additional tax cost of treating the stock sale as a deemed asset sale. The tax implications of the absence of a Section 338(h)(10) election are discussed in detail in Section XIV.
Qualified Subchapter S Subsidiary (QSub) Elections. Not applicable, as NovaMart is a C corporation.
Check-the-box Elections (Form 8832). As discussed in Section III.A above, neither NovaShip Logistics LLC nor NovaMart IP Holdings LLC has filed a Form 8832. Both entities are classified under the default rules of Treasury Regulation § 301.7701-3(b)(1)(ii) as disregarded entities.
Accounting Method Elections. NovaMart utilizes the accrual method of accounting for federal income tax purposes. Based on our review of the Data Room materials, NovaMart has elected the following accounting method treatments:
(i) NovaMart applies the uniform capitalization rules under Section 263A of the Code to its NovaShip fulfillment center inventory and related costs. The Company uses the simplified production method described in Treasury Regulation § 1.263A-2(b) for purposes of computing its Section 263A additional costs.
(ii) NovaMart has adopted the deferral method under Section 451(c) of the Code for the treatment of advance payments received for marketplace services (including annual seller subscription fees billed in advance).
(iii) NovaMart uses the specific identification method for recognizing revenue under Section 451(b), consistent with the revenue recognition timing reflected in its applicable financial statements under ASC 606.
Changes in Accounting Method. We have reviewed the Data Room for any Forms 3115 (Application for Change in Accounting Method) filed by NovaMart. NovaMart filed a Form 3115 in its FY2019 federal income tax return to change from the cash method of accounting to the accrual method of accounting. This change was made on a cut-off basis (no Section 481(a) adjustment was required) and was properly reflected on the FY2019 return. NovaMart also filed a Form 3115 in its FY2021 return to adopt the Section 451(c) deferral method for advance payments, resulting in a favorable Section 481(a) adjustment of approximately $3.2 million that is being recognized ratably over four years (FY2021 through FY2024). We have confirmed that the Section 481(a) adjustment is being properly reported on NovaMart's tax returns.
No other accounting method changes have been identified during the review period.
IV. Federal Income Tax Analysis
A. Tax Return Filing History and Compliance
NovaMart has filed federal Form 1120 for each taxable year since its incorporation in 2016. Our review focused on the fiscal years 2019 through 2024, which represent the most relevant period for purposes of this due diligence analysis. We have confirmed the following with respect to NovaMart's federal income tax filing history:
Timely Filing. NovaMart has filed its federal income tax returns on a timely basis for each of the fiscal years under review. The Company utilizes a December 31 fiscal year-end. For each year, NovaMart has filed a timely extension (Form 7004) and has subsequently filed its Form 1120 within the extended filing deadline. We have reviewed copies of the extension forms and the filed returns to confirm timely filing.
Amended Returns. NovaMart filed one amended federal income tax return during the review period. Specifically, the Company filed an amended Form 1120 for FY2021 in September 2023 to correct the reporting of its Section 481(a) adjustment related to the adoption of the Section 451(c) deferral method for advance payments. The amendment was a ministerial correction that reduced the Section 481(a) adjustment recognized in FY2021 from $3.4 million to $3.2 million and correspondingly adjusted the amounts recognized in subsequent years. The amended return resulted in a refund of approximately $42,000, which has been received.
Consistency and Accuracy. Based on our review of the FY2019 through FY2024 returns, NovaMart's federal income tax reporting appears internally consistent across the review period. We have cross-referenced key line items on the returns to the Company's audited financial statements and tax provision workpapers. While we did not conduct an independent audit, we have not identified any material inconsistencies or errors in the filed returns.
B. FY2024 Federal Income Tax Position
Estimated FY2024 Federal Income Tax Liability. NovaMart's estimated federal income tax liability for FY2024 is approximately $23,800,000. This estimate is based on the Company's fourth quarter tax provision calculations and preliminary FY2024 Form 1120 workpapers, as the FY2024 return had not yet been filed as of the diligence cut-off date.
Revenue Composition. NovaMart's FY2024 revenue of approximately $891 million is composed of the following streams:
Marketplace take-rate revenue consists of commissions charged to sellers as a percentage of the transaction value for completed sales on the NovaMart platform. The take rate varies by product category, ranging from 8.5% to 15.0%, with a blended average take rate of approximately 9.9%. Advertising revenue consists of fees paid by sellers for promoted listings, display advertising, and other advertising products on the NovaMart platform. Logistics services revenue consists of fees charged to sellers for fulfillment, shipping, and handling services provided through the NovaShip network.
Key Deductions. NovaMart's principal federal income tax deductions for FY2024 include:
(i) Cost of revenue, including direct costs of the NovaShip fulfillment operations, payment processing fees, and platform hosting costs: approximately $498 million;
(ii) Research and development expenses, including software engineering personnel costs, cloud computing expenses related to platform development, and third-party development costs: approximately $78 million;
(iii) Selling, general, and administrative expenses, including marketing, sales personnel, corporate overhead, and professional fees: approximately $147 million;
(iv) Stock-based compensation expense: approximately $34 million (representing the federal income tax deduction for the spread on NQSO exercises and the book-tax difference adjustment for restricted stock units vesting during FY2024);
(v) Depreciation and amortization: approximately $42 million; and
(vi) Interest expense on the Ashford Savings Bank, N.A. revolving credit facility: approximately $11.4 million (subject to Section 163(j) analysis, discussed below).
Effective Tax Rate Analysis. NovaMart's effective tax rate ("ETR") for FY2024 is approximately 17.7%, compared to the statutory federal corporate income tax rate of 21%. The principal reconciling items between the statutory rate and the effective rate include: (i) the benefit of R&D tax credits claimed under Section 41 (reducing the ETR by approximately 2.1 percentage points); (ii) the excess tax benefit from stock-based compensation deductions (reducing the ETR by approximately 1.5 percentage points); and (iii) state income taxes (net of federal benefit, increasing the ETR by approximately 0.8 percentage points). We have reviewed NovaMart's rate reconciliation workpapers and have not identified any unusual or unexplained reconciling items.
Uncertain Tax Positions. NovaMart's ASC 740 uncertain tax position analysis for FY2024 identifies three uncertain tax positions, which are discussed in detail in Section XII of this memorandum. The aggregate reserve maintained for these positions is approximately $4.6 million.
Tax Provision Workpapers and Deferred Tax Balances. We have reviewed NovaMart's tax provision workpapers for FY2024. The Company's net deferred tax asset balance as of December 31, 2024 is approximately $31.2 million, consisting primarily of deferred tax assets related to NOL carryforwards, stock-based compensation, and accrued liabilities, partially offset by deferred tax liabilities related to depreciation differences and prepaid expenses. No valuation allowance is recorded against the net deferred tax asset, as NovaMart's management has determined that it is more likely than not that the full amount of the deferred tax assets will be realized. We note that this determination should be reassessed post-closing in light of the Section 382 limitation on NOL carryforward utilization.
C. Net Operating Loss (NOL) Carryforwards
NovaMart generated NOLs during its startup phase from 2016 through 2019, a period during which the Company was investing heavily in platform development, seller and buyer acquisition, and the buildout of its NovaShip fulfillment network. The Company achieved profitability on a full-year basis in FY2020 and has been profitable in each subsequent year.
Summary of NOL Carryforward Balances by Year of Origin. Based on the NOL carryforward schedule provided in the Data Room and confirmed through our review of the filed tax returns, NovaMart's NOL carryforward balances as of December 31, 2024 are as follows:
As reflected in the table above, NovaMart has fully utilized its pre-2018 NOLs (generated in 2016 and 2017) and its 2018 NOL. The remaining NOL carryforward as of December 31, 2024 is approximately $6.8 million, all of which originated in 2019. This is a post-2017 NOL and is subject to the 80% taxable income limitation under Section 172(a), as amended by the Tax Cuts and Jobs Act of 2017 (the "TCJA"). Because it is a post-2017 NOL, it carries forward indefinitely but cannot offset more than 80% of taxable income in any given year.
We note that the pre-2018 NOLs (2016 and 2017) were not subject to the 80% limitation and could be carried back two years or carried forward twenty years. NovaMart elected to carry these NOLs forward rather than carry them back, which is consistent with the Company having had no taxable income in the years preceding 2016 (since 2016 was the Company's first year of existence).
Impact of the Stock Purchase on NOL Carryforwards. The remaining $6.8 million NOL carryforward will become subject to the Section 382 annual limitation upon the closing of the Transaction. This is discussed in detail in Section VIII of this memorandum. Given the relatively modest amount of the remaining NOL, the practical impact of the Section 382 limitation on Cascade's post-closing tax position is limited, but the limitation should nonetheless be factored into Cascade's financial model.
D. Research and Development Tax Credits
NovaMart has claimed federal R&D tax credits under Section 41 of the Code for fiscal years 2019 through 2024. The Company's platform development activities — including the design, development, and continuous improvement of the NovaMart marketplace technology, the NovaShip logistics management system, search and recommendation algorithms, payment processing infrastructure, and seller analytics tools — are the primary basis for these credit claims.
R&D Credit Claims by Year. The following table summarizes NovaMart's R&D credit claims:
NovaMart has utilized all of its R&D credits in the year claimed, as the Company has had sufficient regular tax liability in each year to fully absorb the credits. There are no R&D credit carryforwards as of December 31, 2024.
Documentation Review. We have reviewed the R&D credit studies prepared by NovaMart's tax advisors for fiscal years 2021 through 2024. These studies were prepared by Greenfield Tax Advisors, LLC, and include project-by-project analyses, employee surveys, and quantification of qualified research expenditures ("QREs") using the traditional credit method under Section 41(a)(1). The studies appear to follow the four-part test under Section 41(d) (technological uncertainty, process of experimentation, technological in nature, and qualified purpose).
Risk Assessment. Software development R&D credit claims have historically been an area of IRS scrutiny. We note that the IRS has increased its focus on R&D credit claims in recent years, including the implementation of the "Chief Counsel Memorandum 20230901" requirements for substantiation. While NovaMart's R&D credit documentation appears adequate based on our review, we cannot rule out the risk that the IRS could challenge a portion of the credits claimed. We estimate a potential exposure of $2 million to $5 million across all open years if the IRS were to disallow a portion of the claimed credits. We recommend that this risk be addressed through the Sellers' tax indemnification obligations in the SPA.
E. Section 163(j) Interest Expense Limitation
Section 163(j) of the Code, as amended by the TCJA, generally limits the deduction for business interest expense to the sum of (i) business interest income, (ii) 30% of adjusted taxable income ("ATI"), and (iii) floor plan financing interest. For tax years beginning after December 31, 2021, ATI is computed without adding back depreciation, amortization, or depletion (i.e., the calculation reverts to the "EBIT" basis rather than the "EBITDA" basis that applied under the temporary relief provision for tax years 2018 through 2021).
NovaMart's Interest Deductions. NovaMart's business interest expense for FY2024 consisted primarily of interest on its $150 million revolving credit facility with Ashford Savings Bank, N.A., in the approximate amount of $11.4 million. Based on our review, NovaMart's Section 163(j) limitation for FY2024 — 30% of ATI — is substantially in excess of the Company's $11.4 million interest expense, and accordingly all of NovaMart's interest expense was fully deductible in FY2024. NovaMart has no disallowed business interest expense carryforwards.
Post-Closing Considerations. We note that following the closing of the Transaction, the Section 163(j) analysis will be affected by two developments. First, NovaMart's existing revolving credit facility with Ashford Savings Bank will be repaid and terminated at closing. Second, Cascade's acquisition financing — including a $750 million Term Loan B at SOFR + 275 basis points and a $200 million revolver draw — will be incurred at the Cascade level. To the extent NovaMart becomes a member of Cascade's consolidated tax group post-closing, the consolidated group's Section 163(j) calculation will incorporate both the legacy Cascade interest expense and any new interest expense attributable to the acquisition financing. Cascade should model the impact of the increased interest burden on its consolidated Section 163(j) limitation.
F. Depreciation and Amortization
Fixed Asset Depreciation. NovaMart's fixed asset base consists primarily of leasehold improvements and equipment at its 14 fulfillment centers, information technology infrastructure (servers, networking equipment, and related hardware), and office furniture and fixtures at its Austin headquarters. NovaMart's total depreciable asset base (original cost) as of December 31, 2024 is approximately $287 million, with accumulated depreciation of approximately $119 million.
NovaMart utilizes the modified accelerated cost recovery system ("MACRS") for federal income tax depreciation purposes. The Company has elected 100% bonus depreciation under Section 168(k) for all eligible assets placed in service through December 31, 2022. For assets placed in service in 2023 and 2024, NovaMart has claimed the phased-down bonus depreciation rates of 80% and 60%, respectively, consistent with the TCJA's scheduled reduction of bonus depreciation. NovaMart has also utilized Section 179 expensing for certain qualifying equipment purchases, though the amounts are not material relative to the total asset base.
We have reviewed the fixed asset depreciation schedules and have confirmed that the depreciation methods and recovery periods applied are consistent with MACRS class lives. We have also identified the book-tax depreciation differences resulting from the use of bonus depreciation for tax purposes versus straight-line depreciation for financial reporting purposes. These differences are properly reflected in the Company's deferred tax liability schedules.
Amortization of Intangible Assets. NovaMart has not acquired intangible assets through prior acquisitions or asset purchases that would give rise to amortizable Section 197 intangibles. The Company's internally developed intangible assets (including its marketplace platform technology and the NovaMart brand) are not amortizable for tax purposes. Accordingly, NovaMart does not claim any Section 197 amortization deductions.
G. Revenue Recognition and Timing
NovaMart's revenue recognition policies for federal income tax purposes are generally consistent with its financial reporting policies under ASC 606, subject to certain modifications required by the Code.
Marketplace Take-Rate Revenue. NovaMart recognizes marketplace take-rate revenue for tax purposes at the point in time when a transaction between a buyer and seller is completed on the platform and the seller's obligation to pay the commission arises. This is consistent with NovaMart's financial reporting treatment and with the requirements of Section 451(b) of the Code, which generally requires accrual-method taxpayers to recognize income no later than the taxable year in which it is recognized for financial reporting purposes.
Advertising Revenue. Advertising revenue is recognized for tax purposes as the advertising services are delivered (i.e., as impressions or clicks are served). For annual or multi-month advertising packages paid in advance, NovaMart applies the deferral method under Section 451(c) to defer recognition of the advance payment to the extent it is deferred for financial reporting purposes, but no later than the end of the taxable year following the year of receipt.
Logistics Services Revenue. NovaShip logistics services revenue is recognized for tax purposes upon delivery of the goods to the end customer, consistent with the completion of the performance obligation under both ASC 606 and the tax rules.
Deferred Revenue. NovaMart's deferred revenue balance as of December 31, 2024 is approximately $23.4 million, consisting primarily of advance payments for annual seller subscriptions and pre-paid advertising packages. The tax treatment of this deferred revenue is consistent with the Section 451(c) deferral method, and we have confirmed that the amounts deferred for tax purposes do not exceed the amounts deferred for financial reporting purposes.
We have not identified any IRS challenges or adjustments to NovaMart's revenue timing positions during the review period.
H. Related Party Transactions
Management and Monitoring Fees. NovaMart has paid management and monitoring fees to its principal private equity sponsor, Ridgeline Equity Partners, LP, pursuant to a Management Services Agreement dated June 15, 2018 (the "Ridgeline MSA"). Under the Ridgeline MSA, NovaMart pays Ridgeline an annual management fee of $2.5 million, plus reasonable out-of-pocket expenses. We have reviewed the Ridgeline MSA and the fee payments reflected in NovaMart's financial statements for FY2019 through FY2024.
The annual management fee of $2.5 million appears reasonable in the context of the services provided (board representation, strategic advisory, investor relations support, and M&A transaction oversight). We have conducted an arm's length analysis by benchmarking the fee against management fees charged by comparable PE sponsors in similar portfolio company arrangements, and the fee falls within the range of market fees observed (typically 1.5% to 2.5% of EBITDA, or a flat fee of $1.5 million to $4.0 million). The fee is deductible by NovaMart under Section 162 as an ordinary and necessary business expense.
We have also confirmed that Brindoval Ventures Fund III, LP does not receive a separate management or monitoring fee from NovaMart. No other related party transactions between NovaMart and its stockholders have been identified that would raise deductibility or recharacterization concerns.
We note that the Ridgeline MSA contains a provision for an accelerated payment of the management fee upon a change of control of NovaMart (a "tail payment"), equal to the net present value of the remaining management fees that would have been payable through the end of the initial term of the Ridgeline MSA (June 15, 2028). Based on our calculations, the estimated tail payment would be approximately $7.1 million. The deductibility of this payment should be analyzed in the context of Section 162 and, potentially, Section 280G (discussed in Section VII.C). We recommend that this item be addressed in the SPA disclosure schedules.
V. State Income and Franchise Tax Analysis
A. Overview of State Tax Footprint
NovaMart files income, franchise, or similar tax returns in 11 state and local jurisdictions, based on physical nexus (through fulfillment center operations, employee presence, and headquarter location) and, in certain cases, economic nexus. The following table summarizes NovaMart's state tax filing obligations:
NovaMart's aggregate state and local tax burden for FY2024 is estimated at approximately $15,850,000. This figure includes franchise taxes, income taxes, and gross receipts-type taxes (such as the Ohio CAT and Washington B&O tax), but does not include sales and use taxes, payroll taxes, or property taxes, which are addressed separately.
Additionally, NovaMart employs approximately 2,400 individuals across its various locations, creating payroll tax nexus (and, in certain states, income tax nexus) in all states where employees are located. We note that certain NovaMart employees work remotely from states where the Company does not have fulfillment centers, which may create additional income tax nexus in those jurisdictions.
B. Texas Franchise Tax
NovaMart is headquartered in Austin, Texas, and is subject to the Texas franchise tax (commonly referred to as the "Texas margin tax"). Texas does not impose a state income tax on corporations, but the Texas franchise tax functions as a modified gross receipts tax.
Computation Method. NovaMart computes its Texas franchise tax using the total revenue minus cost of goods sold ("COGS") method, which NovaMart has determined to be the most favorable computation method based on the Company's cost structure. Under this method, taxable margin is computed as total revenue less allowable cost of goods sold. The applicable tax rate for entities other than retailers and wholesalers is 0.75%. NovaMart has taken the position that a portion of its revenue (NovaShip logistics services) qualifies for the reduced retailer/wholesaler rate of 0.375%, but the majority of its revenue (marketplace take-rate and advertising) is subject to the standard 0.75% rate.
Apportionment. Revenue is apportioned to Texas based on a single sales factor (gross receipts sourcing). NovaMart's Texas apportionment factor for FY2024 is approximately 14.2%, reflecting the proportion of NovaMart's total gross receipts sourced to Texas-based buyers.
Estimated Liability. NovaMart's estimated Texas franchise tax liability for FY2024 is approximately $4,200,000, making Texas the Company's largest state tax obligation outside of California.
Filing Compliance. We have reviewed NovaMart's filed Texas franchise tax reports (Forms 05-158-A and 05-158-B) for the period under review and have confirmed that all reports were timely filed. We have not identified any Texas Comptroller audits or inquiries involving NovaMart during the review period.
C. Delaware Franchise Tax
NovaMart is incorporated in Delaware and is therefore subject to the Delaware annual franchise tax. Delaware franchise tax is not based on income but rather on the Company's capitalization or the number of authorized shares.
Method of Calculation. NovaMart utilizes the assumed par value capital method for computing its Delaware franchise tax, which generally results in a lower tax liability than the authorized shares method for companies with a large number of authorized shares but low par value. Based on the Data Room materials, NovaMart's annual Delaware franchise tax has been approximately $200,000 in recent years.
Filing Compliance. We have confirmed that NovaMart has timely filed its annual franchise tax reports with the Delaware Secretary of State and has made all required payments. The Company is in good standing in Delaware as of the most recent good standing certificate dated April 1, 2025.
D. State-by-State Income Tax Summary
For each of NovaMart's nexus states, we have conducted a review of the following items: apportionment methodology, apportioned income and estimated state tax liability, filing status, open audit years and statute of limitations status, state tax incentives or credits claimed, and compliance with state-specific addback statutes. A summary of key findings for each state is provided below.
California. NovaMart maintains 3 fulfillment centers in California (two in the Greater Los Angeles area and one in the San Francisco Bay Area) and employs approximately 620 individuals in the state. California imposes a corporate income tax at a rate of 8.84% and requires mandatory combined reporting for unitary businesses. NovaMart's California apportionment is based on a single sales factor (market-based sourcing), and the Company's California apportionment factor for FY2024 is approximately 12.8%. NovaMart's estimated California income tax liability for FY2024 is approximately $3,800,000. We have reviewed NovaMart's California combined returns (Form 100) and have confirmed that NovaShip Logistics LLC and NovaMart IP Holdings LLC, as disregarded entities, are included in NovaMart's California return. NovaMart has not claimed California R&D credits or other incentives. There are no open California Franchise Tax Board audits.
New Jersey. NovaMart operates 2 fulfillment centers in New Jersey and employs approximately 280 individuals in the state. New Jersey imposes a corporate business tax at a rate of 9.0% (plus a surtax of 2.5% for tax years through 2023, which was reduced to 1.5% for 2024, on allocated net income over $1 million). New Jersey uses a single sales factor for apportionment. NovaMart's estimated New Jersey corporate business tax liability for FY2024 is approximately $1,600,000. We have reviewed NovaMart's New Jersey returns (Form CBT-100) for the review period and have not identified any compliance issues.
Georgia. NovaMart operates 2 fulfillment centers in Georgia and employs approximately 210 individuals in the state. Georgia imposes a corporate income tax at a rate of 5.75%. Georgia has adopted market-based sourcing and a single sales factor apportionment formula for corporate income tax. NovaMart's estimated Georgia income tax liability for FY2024 is approximately $800,000. No audits or inquiries from the Georgia Department of Revenue are pending.
Ohio. NovaMart operates 1 fulfillment center in Ohio and employs approximately 120 individuals in the state. Ohio does not impose a traditional corporate income tax but instead levies the Commercial Activity Tax ("CAT"), a gross receipts tax imposed at a rate of 0.26% on taxable gross receipts exceeding $1 million sourced to Ohio. NovaMart's estimated Ohio CAT liability for FY2024 is approximately $650,000. We have reviewed NovaMart's Ohio CAT returns and have confirmed compliance.
Illinois. NovaMart operates 1 fulfillment center in Illinois and employs approximately 140 individuals in the state. Illinois imposes a corporate income tax at a rate of 7.0% plus a personal property replacement tax of 2.5%, for a combined rate of 9.5%. Illinois requires mandatory combined reporting for unitary groups. NovaMart's estimated Illinois income tax liability for FY2024 is approximately $1,100,000. We have reviewed NovaMart's Illinois combined returns and have not identified any material issues.
Pennsylvania. NovaMart operates 1 fulfillment center in Pennsylvania and employs approximately 130 individuals in the state. Pennsylvania imposes a corporate net income tax at a rate of 8.99% (for tax years beginning in 2024; the rate is scheduled to decrease in future years pursuant to Act 53 of 2022). Pennsylvania uses a single sales factor apportionment formula with market-based sourcing. NovaMart's estimated Pennsylvania corporate net income tax liability for FY2024 is approximately $900,000. No audits or inquiries from the Pennsylvania Department of Revenue are pending.
Tennessee. NovaMart operates 1 fulfillment center in Tennessee and employs approximately 90 individuals in the state. Tennessee imposes both a franchise tax (based on the greater of net worth or the book value of real and tangible personal property in Tennessee) and an excise tax (at a rate of 6.5% on net earnings apportioned to Tennessee). NovaMart's estimated combined Tennessee franchise and excise tax liability for FY2024 is approximately $500,000. We note that Tennessee's franchise tax has been the subject of recent legislation and litigation that may affect the computation methodology in future years; NovaMart should monitor these developments.
Florida. NovaMart operates 2 fulfillment centers in Florida and employs approximately 260 individuals in the state. Florida imposes a corporate income tax at a rate of 5.5% on income apportioned to Florida. Florida uses a three-factor apportionment formula (sales, property, and payroll), with the sales factor double-weighted. NovaMart's estimated Florida corporate income tax liability for FY2024 is approximately $700,000. Florida recently adopted economic nexus standards for corporate income tax, which would independently subject NovaMart to Florida income tax even absent the physical presence of its fulfillment centers. No Florida Department of Revenue audits are pending.
Washington. NovaMart operates 1 fulfillment center in Washington and employs approximately 110 individuals in the state. Washington does not impose a corporate income tax but instead levies the Business & Occupation ("B&O") tax, a gross receipts tax. The applicable B&O tax rate depends on the classification of the activity; NovaMart's marketplace facilitation activities and logistics services are subject to different B&O tax classifications. NovaMart's estimated Washington B&O tax liability for FY2024 is approximately $1,400,000, reflecting the high B&O tax rate applicable to certain categories of service revenue sourced to Washington. We have reviewed NovaMart's Washington B&O tax returns and have not identified any material compliance issues.
E. State Tax Risks and Exposures
Economic Nexus in Non-Filing States. Following the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018), a number of states have adopted economic nexus standards for corporate income tax purposes (in addition to the more widely discussed sales tax economic nexus standards). NovaMart's substantial revenue volume ($891 million in FY2024) and broad customer base (9.1 million registered buyers located throughout the United States) suggest that the Company may have economic nexus for income tax purposes in states where it does not currently file returns. We have identified the following states as potentially presenting economic nexus exposure: New York, Massachusetts, Maryland, Virginia, Colorado, Minnesota, and Indiana. NovaMart does not currently file income tax returns in any of these states.
While the aggregate potential exposure is difficult to quantify without detailed apportionment calculations for each state, we estimate that the potential annual income tax exposure in non-filing states could range from $1.5 million to $4.0 million in the aggregate, based on NovaMart's apportioned income and the applicable tax rates. We recommend that NovaMart conduct a comprehensive state nexus study prior to closing, or that the Sellers provide appropriate representations and indemnification in the SPA to cover any pre-closing state income tax exposure in non-filing jurisdictions.
Throwback and Throwout Rules. Certain states in which NovaMart files income tax returns (including California and Illinois) apply throwback rules that require sales of tangible personal property shipped from a state in which the taxpayer has nexus to a destination state where the taxpayer does not have nexus to be "thrown back" to the origin state for apportionment purposes. While NovaMart is primarily a marketplace platform and does not itself sell tangible personal property, the NovaShip logistics operations involve the shipment of goods from NovaMart fulfillment centers to buyers located in all 50 states. To the extent that NovaMart's logistics revenue is characterized as a sale of tangible personal property (or a service ancillary to such a sale), throwback rules could increase apportioned income in origin states such as California. We have reviewed NovaMart's state apportionment calculations and have noted that the Company does not currently apply throwback treatment to its logistics revenue. We recommend further analysis of this position and appropriate disclosure in the SPA schedules.
State Conformity to Federal Provisions. State conformity to key federal tax provisions varies significantly. Of particular relevance to NovaMart:
(i) NOL carryforward limitations. Most states conform to the federal 80% taxable income limitation on post-2017 NOLs, but certain states impose additional limitations or suspensions on NOL usage.
(ii) Section 163(j) interest expense limitation. State conformity to Section 163(j) varies; certain states (including California and Illinois) have decoupled from the federal Section 163(j) limitation.
(iii) Bonus depreciation. Several states (including California, New Jersey, and Illinois) do not conform to federal bonus depreciation under Section 168(k), requiring separate state depreciation calculations.
We have reviewed NovaMart's state tax returns for proper treatment of these state-specific conformity issues and have not identified any material errors, although we recommend that NovaMart strengthen its documentation regarding the state bonus depreciation adjustment calculations.
Combined Reporting. California and Illinois both require mandatory combined reporting for unitary business groups. As noted above, NovaMart's subsidiaries (NovaShip Logistics LLC and NovaMart IP Holdings LLC) are included in NovaMart's combined returns in these states. The risk of additional entities being pulled into the combined group is low given NovaMart's relatively simple corporate structure. However, post-closing, the question of whether NovaMart and Cascade should file on a combined basis in mandatory combination states will need to be analyzed based on the unitary business test.
VI. Sales and Use Tax Analysis
A. Sales Tax Nexus Overview
NovaMart's sales tax obligations are primarily driven by its status as a "marketplace facilitator" under the laws of virtually all U.S. states that impose sales tax. Following the Supreme Court's 2018 Wayfair decision, all 45 states (plus the District of Columbia) that impose a general sales tax have enacted economic nexus legislation establishing sales volume and/or transaction thresholds for remote sellers. Additionally, most of these states have enacted marketplace facilitator laws that impose the obligation to collect and remit sales tax on the marketplace platform operator (i.e., NovaMart) rather than on individual sellers.
Physical Nexus. NovaMart's 14 fulfillment centers in 9 states create clear physical nexus for sales tax purposes in California, New Jersey, Georgia, Ohio, Illinois, Pennsylvania, Tennessee, Florida, and Washington. In addition, NovaMart's employee presence in Texas (headquarters) and potentially in other states where employees work remotely creates physical nexus in those jurisdictions.
Economic Nexus. Given NovaMart's FY2024 GMV of $6.2 billion, the Company far exceeds the economic nexus thresholds in all states that impose a sales tax. Accordingly, NovaMart has economic nexus for sales tax purposes in all applicable U.S. jurisdictions.
Marketplace Facilitator Status. As of the date of this memorandum, all 45 states with a general sales tax (plus the Distric