DERIVATIVE LIABILITY

3 Months Ended

Mar. 31, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

In connection with the amendment of the senior secured debt with LI Lending LLC in July 2023, the Company issued warrants to purchase a variable number of Subordinate Voting Shares on August 10, 2023 wherein each warrant shall be exercisable into one (1) Subordinate Voting Share at an exercise price of $0.17 through May 1, 2026. If 4Front obtains a bona fide offer from a third party to refinance the loan within six months from the amendment date, the lender will have the option to match the proposed terms of the offer or keep the loan in force; upon exercise of either option, the lender's warrant coverage will be reduced from 33% to 30% of the loan balance divided by the exercise price as of the current maturity date. If 4Front obtains permitted secured debt senior to the loan up to $8.0 million, 75% of the warrants will become exercisable by cashless exercise. If 4Front obtains permitted secured debt senior to the loan in excess of $8.0 million (up to the $10.0 million maximum), 100% of the warrants will become exercisable by cashless exercise. The warrants met the criteria in ASC 480 due to the variability of the number of issuable shares, and are therefore classified as liabilities at fair value with changes being reported through the statement of operations. See Note 9 for further information on the July 2023 amendment.

In connection with the Second Amendment to the loan agreement with LI Lending on January 29, 2024, the Company issued a warrant to purchase 36,702,127 shares of Class A Subordinate Voting Shares at a price of C$0.14. These warrants were determined to be a derivative liability under ASC 815. Accordingly, the Company recorded an initial value of $2.6 million as a derivative liability on the date of grant.

The fair value of the warrants classified as liabilities was determined using the Black-Scholes simulation model based on Level 3 inputs on the fair value hierarchy. The following weighted average assumptions were used for the periods presented:


	Issuance Date			March 31, 2024
Share Price	$	0.10		$	0.11
Exercise Price	$	0.15		$	0.17
Expected Life	2.6 years			2.1 years
Annualized Volatility	89.8		%	106.4		%
Risk-Free Annual Interest Rate	4.4		%	4.6		%

In connection with the senior secured credit facility, the Company entered into a restricted stock unit (“RSU”) agreement (the “RSU Agreement”) dated November 13, 2023 wherein the Company granted 15,900,000 RSUs to the lender. Each RSU represents an unsecured promise to issue one Class A Subordinate Voting Share upon the earliest of certain distribution events at a price of CAD$0.31. If at the time of the distribution event, the number of SVS underlying the RSUs is less than 2.12% of the fully diluted SVS of the Company, an additional number of RSUs will be issuable to the lender at the closing market price on the Canadian Securities Exchange on the trading day prior to issuance. The additional RSUs met the criteria in ASC 480 due to the variability of the number of issuable shares, and are therefore classified as liabilities at fair value with changes being reported through the statement of operations. The fair value of the RSUs classified as liabilities was determined using the Company's share price which is considered a Level 1 input on the fair value hierarchy.

On January 29, 2024, the Company entered into a RSU agreement with LI Lending, LLC providing that, in the event of a financing by the Company at less than C$0.125 per share of Class A Subordinate Voting Shares, LI Lending, LLC shall be entitled to receive a number of shares necessary to restore it to 18.43% of the voting interests of the Company. The RSUs met the criteria in ASC 480 due to the variability of the number of issuable shares, and are therefore classified as liabilities at fair value with changes being reported through the statement of operations. As of the issuance date and March 31, 2024, the fair value of the RSUs classified as liabilities was determined to be nil.

A reconciliation of the changes in fair value of derivative liabilities for the three months ended March 31, 2024 is as follows:




Balance, beginning of period	$	4,550
Issuance of derivative liability	2,558
Change in fair value of derivative liability	(763)
Balance, end of period	$	6,345

See Note 11 for warrants classified within equity.