Acquisitions And Business Combinations

6 Months Ended

Jun. 30, 2022

Note 7: ACQUISITIONS AND BUSINESS COMBINATIONS

NECC Merger Agreement

On January 28, 2022, the Company entered into the merger agreement (the “NECC Merger”) with NECC, Kenneth V. Stevens (“Mr. Stevens”), who is the sole owner of all of the issued and outstanding capital stock of NECC, and 4Front NECC Acquisition Co., a Massachusetts corporation (the “NECC Merger Sub”). At the effective time of the merger, the Company (i) paid Mr. Stevens cash in the amount of $9,000,000, and (ii) issued Mr. Stevens 28,571,428 Class A Subordinate Voting shares of the Company (the “SVS”).

In connection with the consummation of the NECC Merger on January 28, 2022, Mission Partners RE, LLC, a Delaware limited liability company wholly owned by the Company (“Mission Partners RE”), and Mr. Stevens entered into the first amendment to that certain membership interest purchase agreement (the “Everett Purchase Agreement”). Pursuant to the Everett Purchase Agreement, the Company (through Mission Partners RE) completed its acquisition of 100% of the issued and outstanding membership interests of 29 Everett Street LLC, a Massachusetts limited liability company (the “Everett LLC”), which was solely held by Mr. Stevens and which owns certain real property that is currently leased to and used by NECC. The Company (i) paid Mr. Stevens cash in the amount of $16,000,000, and (ii) issued Mr. Stevens a promissory note in the initial principal amount of $2,000,000, which will bear interest at an annual rate of ten percent (10%) and mature

on the

six-month

anniversary of January 28, 2022.

On July 28, 2022, the parties amended the promissory note to provide for payment of half the principal on the initial maturity date, and the remaining principal and all accrued interest on September 12, 2022. The Merger and Purchase Agreement were recorded as one transaction (collectively, referred to as the “NECC Acquisitions”), as the entities were commonly owned by the same individual and the purchase of Everett LLC was contingent on the Merger with NECC.

The NECC Merger was accounted for as a business combination in accordance with ASC 805. The Company has determined preliminary fair values of the assets acquired and liabilities assumed in the NECC Merger. These values are subject to change as the Company completes its determination of the fair value of assets acquired and liabilities assumed. Upon acquisition of NECC and Everett LLC on January 28, 2022, the Company consolidated the operations of Everett LLC into NECC. As of the date of acquisition, the Company recognized NECC under the THC Cannabis segment as part of segment reporting.

The Company entered into the NECC Merger in order to acquire cannabis licenses, as well as property and equipment held by NECC to increase the Company’s presence in Massachusetts and the northeastern United States. As part of the NECC, the Company incurred $130 in restructuring costs, which were included in transaction and restructuring related expenses and expensed as incurred. As part of the NECC Merger, the Company incurred $544 in transaction costs, which were included in transaction and restructuring related expenses and expensed as incurred.

The following tables present the preliminary purchase price allocation for the NECC Merger:


Cash consideration	$	25,000
Seller note		2,000
Equity consideration - common stock		18,200

Total Purchase Price	$	45,200


Description	Fair value
Assets acquired:
Cash	$	2
Inventory		213
Property, plant, and equipment		15,238
Intangible asset - licenses		18,000

Total assets acquired	$	33,453

Liabilities assumed:
Accounts payable		800

Total liabilities assumed	$	800

Estimated fair value of net assets acquired	$	32,653

Estimated Goodwill	$	12,547

Goodwill and Intangible Assets

Goodwill is represented by the future potential for the generation of positive cash flows and future relationships associated with the Company’s operations. While NECC had yet to generate revenues as of the date of the Merger, the Company identified that the inputs of the business were in place to begin generating revenue during fiscal year 2022. The Company adjusts provisional goodwill balance when new information is obtained regarding the valuation of acquired assets and liabilities during a

one-year

measurement period from the date of acquisition in accordance with ASC

805-10.

The Company has determined that the goodwill recognized in the above acquisition is not deductible for tax purposes.

The intangible assets acquired by the Company consist of cannabis licenses for operations. Utilizing alike licenses as a benchmark, the Company determined that the licenses acquired are indefinite lived assets.

Island Merger Agreement

On March 30, 2022, the Company entered into an agreement and plan of merger (the “Island Merger Agreement”) by and among the Company, Island Merger Sub, Island, and Navy (together the “Island Parties”). Pursuant to the terms and conditions of the Merger Agreement, Island Merger Sub merged with and into Island, with Island surviving the merger and continuing its corporate existence as a wholly owned subsidiary of the Company (the “Island Merger”). The Island Merger Agreement was to be effective as of April 25, 2022 (the “Effective Date”).

On the Effective Date, the Island Parties consummated the Island Merger, pursuant to the terms and conditions of the Island Merger Agreement, as amended. However, due to administrative and technical issues at the California Office of the Secretary of State, the Island Parties did not receive the certificate of merger evidencing the closing of the Island Merger as of the Effective Date until April 25, 2022. At the Effective Date, pursuant to the terms and conditions of the Island Merger Agreement, as amended, the Company issued to certain shareholders and debtholders of Island an aggregate of: (i) 8,783,716 Class A Subordinated Voting Shares of the Company (the “SVS”); (ii) 6%

54-month,

subordinated promissory notes (the “Island Merger Notes”) in the aggregate principal amount of $6,500,000; and (iii) warrants to purchase 2,999,975 SVS at a price of $1.00 per SVS (the “Warrants”, and together with the SVS and Island Merger Notes, the “Island Merger Consideration”).

On April 22, 2022, the Parties entered into the first amendment to the Island Merger Agreement to replace the requirement that certain noteholders fund a letter of credit to Island of up to $1,000,000. In lieu of funding a

letter

of credit, the noteholders agreed to pay the full $1,000,000 in cash to Island on or prior to the closing of the transactions contemplated by the Island Merger Agreement.

The Island Merger was accounted for as a business combination in accordance with ASC 805. The Company has determined preliminary fair values of the assets acquired and liabilities assumed in the Island Merger. These values are subject to change as the Company completes its determination of the fair value of assets acquired and liabilities assumed. Upon acquisition of Island and Navy on April 25, 2022, the Company consolidated the operations of Navy into Island. As of the date of acquisition, the Company recognized Island under the THC Cannabis segment as part of segment reporting.

The Company entered into the Island Merger in order to add new high-quality products to the Company’s growing brand portfolio, including diverse lines of

pre-rolls,

flower and infused products, as well as reduce production costs. As part of the Island Merger, the Company incurred

1,288 in restructuring costs, which were included in transaction and restructuring related expenses and expensed as incurred. As part of the Island Merger, the Company incurred $47 in transaction costs, which were included in transaction and restructuring related expenses and expensed as incurred.

The following tables present the preliminary purchase price allocation for the Island Merger:


Seller note	$	10,000
Equity consideration - common stock		6,245
Equity consideration - warrants		732

Total Purchase Price	$	16,977


Description	Fair value
Assets acquired:
Cash	$	458
Accounts receivable		876
Inventory		3,072
Prepaid expenses and other current assets		424
Property and equipment, net		2,214
Operating lease - right of use asset		10,227
Intangible assets		11,300

Total assets acquired	$	28,571

Liabilities assumed:
Accounts payable	$	1,356
Accrued expenses and other liabilities		2,566
Contract liabilities		3,535
Lease liabilities		10,227
Notes payable		245
Total liabilities assumed	$	17,929

Estimated fair value of net assets acquired	$	10,642

Estimated Goodwill	$	6,335

Goodwill and Intangible Assets

Goodwill is represented by the future potential for the generation of positive cash flows and future relationships associated with the Company’s operations. The Company adjusts provisional goodwill balance when new information is obtained regarding the valuation of acquired assets and liabilities during a

one-year

measurement period from the date of acquisition in accordance with ASC

805-10.

The Company has determined that the goodwill recognized in the above acquisition is not deductible for tax purposes.

The intangible assets acquired by the Company consist of cannabis licenses

trade names and trademarks for operations. Utilizing alike licenses as a benchmark, the Company determined that the licenses acquired are indefinite lived assets and the trade names and trademarks have a life of ten years.

Unaudited Pro Forma Results

The following unaudited pro forma financial information presents the results of operations of the Company, NECC, and Island for the six months ended June 30, 2022 and 2021, as if the acquisitions had occurred as of the beginning of the first period presented instead of on January 28 and April 25, 2022, respectively. The pro forma information does not necessarily reflect the results of operations that would have occurred had the entities been a single company during those periods.

The unaudited pro forma financial information for the Company including NECC and Island for the three months ended June 30, 2022 is as follows:


	For the For the Three Months Ended June 30,
	2022						2021
	Reported			Proforma			Reported			Proforma
Revenues	$	28,439		$	28,706		$	27,121		$	28,922
(Loss) income from operations		(4,099	)		(5,444	)		668			(936	)

Net loss	$	(6,546	)	$	(8,932	)	$	(6,218	)	$	(8,115	)

Basic and diluted earning (loss) per share	$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.01	)

The unaudited pro forma financial information for the Company including NECC and Island for the six months ended June 30, 2022 is as follows:


	For the For the Six Months Ended June 30,
	2022						2021
	Reported			Proforma			Reported			Proforma
Revenues	$	54,487		$	56,113		$	50,091		$	53,286
(Loss) income from operations		(5,340	)		(9,399	)		1,021			(2,490	)

Net loss	$	(12,440	)	$	(20,817	)	$	(17,302	)	$	(20,813	)

Basic and diluted earning (loss) per share	$	(0.02	)	$	(0.03	)	$	(0.02	)	$	(0.04	)