8-K: Body and Mind Inc. Subsidiary DEP Nevada Finalizes Sale of Nevada Medical Group, LLC

DEP Nevada Inc. has entered into a series of agreements to finalize the sale of Nevada Medical Group, LLC to Fox Farms LLC, including a new side agreement and trademark license.

Summary

• DEP Nevada Inc., a subsidiary of Body and Mind Inc., has entered into an assignment and assumption agreement with Fox Farms LLC, effectively transferring the rights and obligations of a previous purchase agreement with Vegas Brazil LLC.
• The original membership interest purchase agreement (MIPA) with Vegas Brazil was terminated, and a new agreement was established with Fox Farms.
• The purchase price for Nevada Medical Group, LLC was reduced to $400,000, with $200,000 paid upfront and the remaining $200,000 to be paid via a promissory note.
• A new side agreement grants Fox Farms operational control of Nevada Medical Group while regulatory approval is pending, starting from August 1, 2024.
• A trademark license agreement allows Fox Farms to use the 'BAM BODY AND MIND' brand in Nevada for cannabis products originating from the facility.
• The new side agreement includes a provision for Fox Farms to receive up to $200,000 from the sale of inventory and accounts receivable if the MIPA is terminated through no fault of Fox Farms.
• A tax audit from 2019-2021 is being addressed, with any tax liability potentially reducing the principal of the promissory note.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive as the deal is progressing with a new buyer, but there are still risks and uncertainties related to regulatory approval and potential liabilities.

Positives

• Fox Farms gains operational control of Nevada Medical Group, LLC, allowing them to manage the business while awaiting regulatory approval.
• The purchase price was reduced from the original agreement, potentially saving Fox Farms money.
• The trademark license agreement allows Fox Farms to leverage the existing 'BAM BODY AND MIND' brand.
• Fox Farms has a potential right to receive up to $200,000 in post-termination receipts if the MIPA is terminated without their fault.
• The tax audit liability may reduce the principal of the promissory note, potentially reducing the amount owed.

Negatives

• The transaction is still pending regulatory approval, which could cause delays.
• Fox Farms assumes all costs, obligations, and liabilities related to the operations during the term of the side agreement.
• Fox Farms is responsible for any tax liabilities incurred due to their management of operations.
• The tax audit from 2019-2021 could result in a tax liability for the company.

Risks

• The transaction is contingent on regulatory approval, which may not be granted or could be delayed.
• Fox Farms is responsible for all operational costs and liabilities during the term of the side agreement.
• The tax audit could result in a significant liability for the company, although it may reduce the promissory note.
• There is a risk of termination of the side agreement if Fox Farms fails to meet certain obligations.
• The limited exclusivity of the trademark license can be terminated by the licensor after one year.

Future Outlook

The closing of the amended MIPA is subject to regulatory approval and other conditions. Fox Farms will operate the business while awaiting regulatory approval. The trademark license agreement is for a term of 99 years, unless terminated earlier.

Management Comments

• Stephen Trip Hoffman, President of DEP Nevada Inc., signed the agreements on behalf of the company.
• Ivan Alexander Fox, Managing Member of Fox Farms LLC, signed the agreements on behalf of the company.

Industry Context

This announcement reflects the ongoing consolidation and activity in the cannabis industry, with companies seeking to expand their operations through acquisitions and strategic partnerships. The transfer of the MIPA from Vegas Brazil to Fox Farms indicates a shift in the market and the importance of securing regulatory approvals for such transactions.

Comparison to Industry Standards

• The use of a side agreement to allow operational control before regulatory approval is a common practice in the cannabis industry to facilitate a smooth transition.
• The reduction in purchase price may reflect a reassessment of the value of the asset or the negotiating power of the buyer.
• The trademark license agreement is a standard practice in acquisitions where brand recognition is a key asset.
• The inclusion of a post-termination sell-off right is a protective measure for the buyer in case the deal falls through.
• The handling of the tax audit through a reduction in the promissory note is a common way to address potential liabilities in M&A transactions.

Stakeholder Impact

• Shareholders of Body and Mind Inc. will see a change in the ownership of Nevada Medical Group, LLC.
• Employees of Nevada Medical Group, LLC will be under new management by Fox Farms LLC.
• Customers of Nevada Medical Group, LLC may experience changes in branding and operations.
• Suppliers and creditors of Nevada Medical Group, LLC will be dealing with a new owner.

Next Steps

• Obtain regulatory approval from the Nevada Cannabis Compliance Board.
• Satisfy all closing conditions outlined in the amended MIPA.
• Execute and deliver the promissory note and guaranty.
• Complete the assignment of the membership interests from DEP Nevada to Fox Farms.
• Resignation of the current manager and officers of Nevada Medical Group, LLC.

Key Dates

Keywords

cannabis, acquisition, membership interest purchase agreement, trademark license, Nevada Medical Group, Fox Farms LLC, DEP Nevada, regulatory approval, promissory note, tax audit