Contingencies

6 Months Ended

Jun. 30, 2022

Commitments and Contingencies Disclosure [Abstract]

Contingencies

Note 14: CONTINGENCIES

(a) Cannabis Industry

Cannabis is still considered a Schedule I substance under the Controlled Substance Act. As such, there is an inherent risk related to the federal government’s position on cannabis; additionally, the risk exists, due to the Company’s business in cannabis, that third party service providers could suspend or withdraw services and as well as the risk that regulatory bodies could impose certain restrictions on the issuer’s ability to operate in the U.S.; however, the Company has deemed it not reasonable to estimate a potential liability related to the possible enforcement of laws against the medical cannabis industry.

(b) Contingent consideration payable

As part of the acquisition of Om of Medicine, LLC and Cannex’s prior acquisition of Pure Ratios, the Company is subject to contingent consideration payable to the sellers. The fair value of the contingent consideration, which is based on specific revenue levels achieved over a 2-3-year period, is as follows:

	Om of Medicine
Balance, December 31, 2021	$	2,393
Changes in fair value		(2,393	)
Balance, June 30, 2022		—
Less: current portion		—
Long-term portion	$	—

The contingent consideration payable is measured at fair value based on unobservable inputs and is considered a Level 3 financial instrument. The determination of the fair value of these liabilities is primarily driven by the Company’s expectations of the respective subsidiaries achieving certain milestones. The expected milestones were assigned probabilities and the expected related cash flows were discounted to derive the fair value of the contingent consideration. The Company reached expected milestones during the year ended December 31, 2021, which resulted in a contingent consideration payment of $1,373 that was due to be paid by the Company in 2022. The Company paid $412 of the outstanding balance in April 2022. As discussed in Note 9, in April 2022, the Company entered into a seller note to pay the outstanding balance of the liability. The term of the note expires in six months and accrues interest at 10% per annum. See Note 9 for the outstanding balance of the note payable as of June 30, 2022.

The Company had an outstanding balance of contingent consideration of $2,393 for the period ended December 31, 2021, which included the liability noted above. However, the Company performed analyses and determined that it does not anticipate the subsidiaries to reach the required milestones, as detailed below, for the year ended December 31, 2022. As a result, the Company estimated the contingent consideration to be $nil as of June 30, 2022.

OM of Medicine: The contingent consideration payable is determined as the amount in excess of gross sales of $3,400 (for fiscal 2021) and $3,500 (2022) to a maximum payable of $6,900.

(c) Legal Matters

From time to time, the Company may be involved in certain disputes arising in the ordinary course of business. Such disputes, taken in the aggregate, are not expected to have a material adverse effect on the Company. There are also no proceedings in which any of the Company’s directors, officers, or affiliates is an adverse party or has a material interest adverse to the Company’s interest.

On May 15, 2017, the Company’s wholly-owned subsidiary, 4Front Advisors, LLC, entered into an Application, Training, and Consulting Agreement with 5Seat Investment, LLC and Kanna. A dispute arose about amounts owed to the subsidiary under the agreement, and on May 17, 2022, the parties agreed to settle the matter for payment of $600 to the Company’s subsidiary.

On January 26, 2022, Savills, Inc. sued the Company in the U.S. District Court for the Southern District of New York. That lawsuit alleged that the Company had breached an alleged agreement with Savills under which the Company was allegedly required to pay Savills a percentage of savings realized under certain incentive programs offered in some jurisdictions, which Savills would assist the Company in obtaining. Savills claimed damages of approximately $19,000 in connection with its claim that it obtained benefits for the Company allegedly valued at over $129,000. The Company denied these allegations, denied the Company had obtained such benefits, disputed Savills’ characterization of the facts, and denied liability. The Company filed a counterclaim against Savills alleging breach of contract by Savills. On August 3, 2022, the parties reached a confidential settlement in principle and agreed to dismissal of all claims. In accordance with the order of dismissal, if no application to restore the litigation is submitted by September 6, 2022, the case will be dismissed without prejudice.