8-K: Body and Mind Divests San Diego Dispensary

Body and Mind Inc. has agreed to sell its majority interest in NMG San Diego, LLC, which operates the Body and Mind San Diego dispensary, for $1.6 million.

Summary

• Body and Mind Inc.'s wholly owned subsidiary, DEP Nevada, Inc., is divesting its 60% interest in NMG San Diego, LLC, which operates the Body and Mind San Diego dispensary.
• The total purchase price for the assets is $1,600,000.
• The purchase price is structured with a $100,000 deposit already paid, $500,000 to be held in escrow for NMG SD's tax liability, $570,382.56 for landlord payments, and a $429,617.44 secured promissory note.
• A working capital adjustment, based on current assets minus current liabilities, is expected to be negative, which will reduce the amount of the promissory note.
• OTC Miramar, LLC, the buyer, will operate the dispensary and assume all related costs and liabilities from August 5, 2025, until the closing of the asset sale, receiving 100% of the gross revenue during this period.
• The transaction is contingent on several approvals, including the City of San Diego's approval for the transfer of the Local License, Landlord Consent, and a release from the Senior Lender.

Sentiment

Score: 7

Explanation: The divestment of a non-core asset for a reasonable price, with the buyer assuming operational liabilities, is a positive strategic move. However, the transaction is subject to regulatory approvals and a working capital adjustment that is expected to reduce the final payment, introducing some uncertainty.

Positives

• Divestment of a majority interest in a cannabis dispensary for $1.6 million, providing capital and streamlining operations.
• The buyer, OTC Miramar, LLC, assumes all operational liabilities and costs of the San Diego dispensary from August 5, 2025, until the closing of the asset sale.
• The buyer is responsible for satisfying NMG SD's existing tax liability with the California Department of Tax and Fee Administration (CDTFA) from the escrowed funds.

Negatives

• The purchase price is subject to a working capital adjustment, which is expected to be negative, reducing the final Note Payment amount.
• The transaction is contingent on multiple approvals, including the City of San Diego's transfer approval for the Local License, Landlord Consent, and a Senior Lender Release, which could delay or prevent closing.
• The secured promissory note carries a relatively low interest rate of 4.03% per annum and is interest-free until its maturity date.

Risks

• The transaction's closing is contingent on obtaining the Transfer Approval from the City of San Diego, Landlord Consent, and a Senior Lender Release; failure to secure these could lead to termination of the agreement.
• The cannabis business remains illegal under U.S. federal law, exposing parties to potential federal arrest, seizure, or prosecution, despite compliance with California state laws.
• Regulatory changes in cannabis laws or requirements from the California Department of Cannabis Control (DCC) or other Governmental Authorities could necessitate reformation of the agreement or impact operations.
• The working capital adjustment is anticipated to be negative, which will result in a reduction of the final payment amount from the buyer.
• A material breach of the Asset Purchase Agreement (APA), Management Services Agreement (MSA), or any related transaction documents by either party could lead to termination of the respective agreements.

Future Outlook

The parties intend to complete the asset sale, with OTC Miramar, LLC assuming operational control and financial responsibility for the San Diego dispensary until the closing. They commit to cooperating with regulatory authorities to obtain necessary approvals and to restructure the agreement if required by law or regulatory determination to ensure compliance.

Management Comments

• Body and Mind Inc.'s wholly owned subsidiary, DEP Nevada, Inc., has entered into an Asset Purchase Agreement with OTC Miramar, LLC, to sell its 60% interest in NMG San Diego LLC, which owns and operates the Body and Mind San Diego dispensary.
• The total consideration for the acquisition of the interests is US$1.6 million, with US$100,000 already paid as a deposit.

Industry Context

This transaction reflects the ongoing consolidation and strategic adjustments within the fragmented U.S. cannabis industry, particularly in states with established adult-use markets like California. Companies are divesting non-core or underperforming assets to streamline operations, improve financial health, and focus on more profitable ventures or regions. The structure of the deal, involving a management services agreement and a secured note, is common in the cannabis sector to navigate complex regulatory environments and ownership transfer processes.

Comparison to Industry Standards

• The sale of a dispensary asset for $1.6 million is within the typical range for single-asset transactions in the California cannabis retail market, though specific valuations vary widely based on revenue, profitability, license type, and location.
• The use of a Management Services Agreement (MSA) prior to full asset transfer is a standard practice in the U.S. cannabis industry, particularly in California, to facilitate operational control and revenue capture by the buyer while awaiting lengthy regulatory approvals for license transfers. This structure is seen in deals involving companies like Curaleaf, Green Thumb Industries, and Trulieve, which often use similar interim operating agreements.
• The 4.03% interest rate on the promissory note is relatively low for a secured note in the cannabis industry, where higher risk premiums typically lead to rates in the high single digits or low double digits, as seen in financing deals for smaller operators or those with less established cash flows.

Stakeholder Impact

• Shareholders: Potential positive impact from the divestment of a non-core asset, streamlining operations, and receiving cash consideration. However, the expected negative working capital adjustment could slightly reduce the final proceeds.
• Employees: Employees of the San Diego dispensary will likely transition under the management and eventual ownership of OTC Miramar, LLC, with OTC assuming human resource support and services.
• Customers: The San Diego dispensary is expected to continue operations under new management, likely with minimal immediate impact on customers.
• Creditors (NMG SD's): The escrowed funds are specifically designated to satisfy NMG SD's existing tax liability with CDTFA, benefiting this creditor. Other trade accounts payable will be assumed by the buyer, subject to adjustment.
• Landlord (Green Road, LLC): Will receive a significant payment ($570,382.56) to satisfy a sales bonus and outstanding rent, and the lease will be assigned to OTC Miramar, LLC.

Next Steps

• Buyer (OTC Miramar, LLC) to assume all liabilities of NMG's retail business operations from August 5, 2025, under the Management Services Agreement.
• Buyer to continue paying NMG SD's tax liability to the CDTFA until the escrowed cash amount is released.
• Closing deliverables to be exchanged, including bill of sale, Transfer Approval, Escrow Agreement, Lease Amendment, and countersigned Promissory Note.
• Parties to apply to the San Diego City Cannabis Business Division (CBD) for approval to transfer the Local License to Buyer.
• Parties to submit a DCC Form 27 Licensee Notification and Request Form to the California Department of Cannabis Control (DCC) to disclose OTC Miramar, LLC as an owner.
• Parties to cooperate in good faith to restructure, modify, or amend the transaction if the City denies the Local License transfer, aiming for buyer control and ownership.

Key Dates

Recommendation

The divestment of a non-core asset is a strategic move that could be positive for Body and Mind Inc. by streamlining operations and providing capital. However, the transaction is subject to regulatory approvals and an expected negative working capital adjustment, introducing uncertainty. The cannabis industry also carries inherent federal legal risks. Investors should hold to observe the successful completion of the transaction and the deployment of the proceeds before making further investment decisions.

Keywords

Cannabis, Dispensary, Asset Sale, SEC Filing, 8-K, Body and Mind Inc., NMG San Diego, OTC Miramar, California Cannabis, Marijuana, Divestment, Promissory Note, Management Services Agreement