8-K: Body and Mind Divests NJ Cannabis Operations for $2M

Body and Mind Inc. has agreed to sell its New Jersey cannabis dispensary subsidiary, BaM Body and Mind Dispensary NJ, Inc., to Ascend New Jersey, LLC and a social equity partner for a total cash consideration of $2.0 million.

Summary

• Body and Mind Inc. (BMMJ) has divested its wholly-owned subsidiary, BaM Body and Mind Dispensary NJ, Inc. (BAM NJ), which operates a cannabis retail store in Lawrenceville, New Jersey.
• The buyer is Ascend New Jersey, LLC, and its social equity partner, who will acquire 100% of BAM NJ's equity interests.
• The total consideration for the sale is US$2.0 million in cash.
• US$1.0 million was paid at closing, adjusted for indebtedness and transaction expenses.
• An additional US$1.0 million is held in escrow, contingent upon the New Jersey Cannabis Regulatory Commission (CRC) granting a new annual Class 5 cannabis retailer license to Ascend's application.
• Ascend New Jersey, LLC will hold 35% of BAM NJ, and its social equity partner will hold 65%.
• The existing lease for the Lawrenceville property was assigned from BAM NJ to Ascend, which then immediately subleased the premises back to BAM NJ.
• Body and Mind, Inc.'s original lease guaranty was terminated and replaced by a new guaranty from Ascend Wellness Holdings, Inc.
• A $150,000 construction lien on the property must be satisfied by Ascend within 45 days of the assignment agreement.
• The lease term for the property has been amended to commence on the first day of the calendar month following the assignment agreement, with an initial ten-year term.
• Monthly base rent is $25,145.83, and additional rent is $5,091.67.
• BAM NJ's current Class 5 Cannabis Retailer license application with the CRC is being withdrawn to allow Ascend to submit a new application reflecting the new ownership.
• Prior to the sale, DEP Nevada, Inc. (BMMJ's subsidiary) acquired the remaining 5,000 shares of BAM NJ from Paul Drozdowski for $1.00, making BAM NJ a 100% wholly-owned subsidiary of DEP Nevada, Inc.
• A consulting agreement with Paul Drozdowski was terminated, triggering a $50,000 compensation payment from DEP Nevada, Inc. to Mr. Drozdowski.
• The Senior Lender (Bengal Catalyst Fund, LP) released its security interest in BAM NJ shares and assets to facilitate the transaction.

Sentiment

Score: 6

Explanation: The divestiture provides immediate cash and reduces contingent liabilities, which is positive. However, the contingent nature of half the payment and the need for new regulatory approval introduce uncertainty. The exit from a market could be viewed neutrally or slightly negatively depending on the company's overall strategy and market perception.

Positives

• Divestiture generates US$2.0 million in cash, providing capital to Body and Mind Inc.
• The transaction simplifies Body and Mind Inc.'s operational footprint by exiting the New Jersey market.
• Termination of Body and Mind Inc.'s lease guaranty reduces contingent liabilities.
• The structure allows for a contingent payment upon regulatory approval, aligning incentives for the buyer to secure the license.

Negatives

• The second US$1.0 million payment is contingent on obtaining a new CRC license, introducing regulatory risk and potential delay.
• The company is exiting a market, which could be seen as a reduction in growth opportunities or market presence.
• A $50,000 payment was made to terminate a consulting agreement, representing an expense related to the divestiture.
• A $150,000 construction lien on the property needs to be satisfied by the assignee, indicating a pre-existing issue.

Risks

• Regulatory Risk: The contingent US$1.0 million payment is dependent on the New Jersey Cannabis Regulatory Commission (CRC) issuing a final, non-appealable approval of the new Class 5 Cannabis Retail License application. If the CRC denies the application, the second payment will not be released to the seller.
• Subsequent Assignment Risk: In the event of a CRC Denial, the seller (DEP Nevada, Inc.) has an option to reacquire the Company Shares from Buyer and/or the Buyer Designees for US$1.0 million. This could reverse the transaction and potentially incur additional costs or complexities.
• Operational Delays: The assignee (Ascend) is required to use best efforts to commence construction within 45 days and open for business as soon as possible, but performance is subject to delays through no fault of the tenant, such as "force majeure". Failure to diligently pursue construction or opening could result in a material default of the lease.
• License Loss Risk: It will be a default of the lease if the tenant loses the right to operate the proposed use at the premises or fails to diligently prosecute a new application for a Class 5 Cannabis Retail application with the New Jersey Cannabis Regulatory Commission.
• Construction Lien: A $150,000 construction lien claim was filed on May 31, 2024, which the assignee must satisfy and remove within 45 days of the assignment agreement, or it will be deemed a default.
• Federal Cannabis Laws: The parties acknowledge that the production, sale, manufacture, possession, and use of cannabis is illegal under U.S. Federal Cannabis Laws, and some transactions may violate these laws. No party makes representations regarding compliance with U.S. Federal Cannabis Laws, and non-compliance with federal laws will not be a basis for rescission or amendment unless it also violates New Jersey state law.

Future Outlook

The future outlook for the divested New Jersey operation is contingent on Ascend New Jersey, LLC and its social equity partner obtaining a new Class 5 Cannabis Retailer License from the New Jersey Cannabis Regulatory Commission. The parties are committed to using best efforts to commence construction and open for business as soon as possible, with a specific timeline for submitting the new license application within 30 days of closing. If the license is denied, the seller has an option to reacquire the shares, potentially reversing the transaction.

Management Comments

• Body and Mind Inc. is pleased to announce the Company's wholly owned subsidiary, DEP Nevada, Inc. ('DEP') has entered into a Purchase Agreement with Ascend New Jersey, LLC (the Purchaser), whereby DEP, which owns 100% of BaM Body and Mind Dispensary NJ, Inc. (BAM NJ) agrees to sell all of the equity interests (the Interests) in BAM NJ to the Purchaser.
• The total consideration to be paid by the Purchaser to DEP for the acquisition of the Interests is US$2.0 million in cash with (i) US$1 million less any indebtedness as of the closing date and less any DEP transaction expenses at closing, and (ii) US$ 1million placed in escrow pending satisfaction of closing conditions.
• Ascend will hold 35% of the BAM NJ Shares and Ascends social equity partner will hold 65% of the BAM NJ Shares.

Industry Context

This divestiture reflects a strategic decision by Body and Mind Inc. to streamline its operations, potentially focusing on core markets or reducing exposure to the complex and federally illegal U.S. cannabis industry. The involvement of a "social equity partner" in the acquisition by Ascend New Jersey, LLC highlights the increasing importance of social equity programs in state-level cannabis licensing, particularly in emerging markets like New Jersey. This trend often involves partnerships with entities that meet specific criteria (e.g., minority-owned, located in disproportionately impacted areas) to promote equitable participation in the industry. The contingent payment structure tied to regulatory approval is common in the cannabis sector due to the high regulatory hurdles and uncertainties involved in obtaining and transferring licenses.

Comparison to Industry Standards

• The total consideration of $2.0 million for a New Jersey cannabis retail operation, with half contingent on license approval, is within the range seen for early-stage or pre-operational licenses in competitive limited-license states. For example, similar transactions in states like Illinois or Massachusetts for a single dispensary license have ranged from a few million to tens of millions, depending on the stage of development, market potential, and operational status.
• The 35%/65% ownership split with a social equity partner is a common model in states like New Jersey, New York, and Massachusetts, where social equity mandates often require significant ownership stakes for qualifying individuals or entities to promote diversity and address historical injustices in the cannabis industry. Companies like Curaleaf Holdings, Inc. and Green Thumb Industries Inc. have also engaged in partnerships or acquisitions involving social equity components in various states.
• The termination of the original lease guaranty and its replacement by the acquirer's parent company (Ascend Wellness Holdings, Inc.) is standard practice in commercial real estate transactions involving lease assignments, ensuring the landlord maintains a strong financial guarantor.
• The presence of a construction lien and the requirement for the assignee to resolve it within a specific timeframe is not uncommon in real estate transactions, especially for properties undergoing development or renovation, and is a standard due diligence item.

Management Changes

Corporate Governance

Legal Proceedings

• A Construction Lien Claim was filed on May 31, 2024, by William J. DiSanto of Englewood Construction, Inc. for $150,000.00 against the premises. The assignee must satisfy and remove this lien within 45 days of the assignment agreement.

Related Party Transactions

• DEP Nevada, Inc. (a wholly-owned subsidiary of Body and Mind Inc.) purchased 5,000 shares of BaM Body and Mind Dispensary NJ, Inc. from Paul Drozdowski for $1.00, making BAM NJ a 100% wholly-owned subsidiary of DEP Nevada, Inc. immediately prior to the sale to Ascend. This transaction also involved a $50,000 payment to Mr. Drozdowski to terminate his consulting agreement with DEP and BAM NJ.

Stakeholder Impact

• Shareholders (Body and Mind Inc.): Will receive US$2.0 million in cash (half contingent on regulatory approval), which could be used for other investments, debt reduction, or returned to shareholders. The divestiture also removes a contingent liability (lease guaranty).
• Shareholders (Ascend New Jersey, LLC / Ascend Wellness Holdings, Inc.): Will gain a new retail presence in the New Jersey cannabis market, expanding their operational footprint, contingent on obtaining the necessary license.
• Social Equity Partner: Will acquire a 65% ownership stake in the New Jersey cannabis dispensary, fulfilling social equity objectives and potentially benefiting from the growth of the cannabis market.
• Landlord (Lawrence Investment Group, LLC): Will have a new tenant (Ascend) with a new lease guaranty from Ascend Wellness Holdings, Inc., potentially strengthening the lease's financial backing. They will also receive reimbursement for legal fees.
• Employees (BAM NJ): The filing states the Company currently does not have, nor has ever had, any employees. Therefore, no direct impact on employees.
• Creditors (Body and Mind Inc.): The Senior Lender (Bengal Catalyst Fund, LP) released its security interest in BAM NJ, facilitating the sale. The cash proceeds could impact Body and Mind Inc.'s overall financial health and ability to meet other obligations.
• Customers (BAM NJ): The transaction aims to ensure the continued operation of a Class 5 Cannabis Retail store at the Lawrenceville location under new ownership, subject to regulatory approval, potentially maintaining or improving service for local customers.

Next Steps

• Ascend New Jersey, LLC to submit a new Class 5 Cannabis Retailer License application to the New Jersey Cannabis Regulatory Commission (CRC) within 30 days following the closing date.
• Ascend to diligently pursue the new CRC application, including applying for certification as a woman and/or minority business enterprise.
• Ascend to satisfy and remove the $150,000 Construction Lien Claim within 45 days of the Assignment Agreement.
• Ascend to use best efforts to commence construction at the premises as soon as possible, with the intent of applying for construction and demolition permits within 45 days of the Assignment Agreement.
• Ascend to provide the Landlord with a construction schedule and place contractors and workers at the premises.
• Ascend to request a CRC onsite assessment of the premises as soon as possible.
• Ascend/Tenant to open for business for the agreed-upon use as soon as possible following the date of the Assignment Agreement.
• If the CRC issues a final non-appealable denial of the new license application, DEP Nevada, Inc. (Seller) has an option to reacquire the Company Shares for US$1.0 million within 90 days of notice of denial.
• If the Seller Option is exercised, Ascend will re-assign the lease back to BAM NJ.
• The Escrow Agent will release the contingent consideration to the Seller upon CRC approval, or to the Buyer upon CRC denial.

Key Dates

Recommendation

The divestiture provides a clear cash infusion and reduces contingent liabilities for Body and Mind Inc., which are positive. However, the significant portion of the consideration being contingent on future regulatory approval introduces uncertainty. The company is exiting a market, which could be seen as a strategic streamlining or a reduction in growth potential. Without further information on the company's overall strategy, use of proceeds, and performance in other markets, a 'hold' recommendation is appropriate, advising investors to monitor the outcome of the regulatory approval and the company's subsequent strategic moves.

Keywords

Cannabis Divestiture, SEC Filing, Body and Mind Inc., Ascend New Jersey, Cannabis Retail License, New Jersey Cannabis, Asset Sale, Real Estate Lease, Corporate Transaction, Regulatory Approval, Marijuana Industry