DERIVATIVE LIABILITY

9 Months Ended

Sep. 30, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

A reconciliation of the changes in fair value of derivative liabilities for the three and nine months ended September 30, 2024 is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Balance, beginning of period	$	5,478	$	—	$	4,550	$	—
Issuance of derivative liability	—		4,165		2,558		4,165
Cancellation of restricted stock units	(241)		—		(241)		—
Change in fair value of derivative liability	(2,403)		11,931		(4,033)		11,931
Balance, end of period	$	2,834	$	16,096	$	2,834	$	16,096

See Note 11 for warrants classified within equity.

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 SVS on August 10, 2023 wherein each warrant shall be exercisable into one SVS 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.

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			September 30, 2024
Share Price	$	0.10		$	0.05
Exercise Price	$	0.17		$	0.17
Expected Life (in Years)	2.7 years			1.6 years
Annualized Volatility	84.5		%	139.7		%
Risk-Free Annual Interest Rate	4.5		%	3.7		%

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 SVS 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 January 2024 warrants 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			September 30, 2024
Share Price	$	0.12		$	0.05
Exercise Price	$	0.11		$	0.11
Expected Life (in Years)	2.3 years			1.6 years
Annualized Volatility	104.3		%	140.1		%
Risk-Free Annual Interest Rate	4.3		%	3.7		%

In connection with the senior secured credit facility with Alt Debt II, LP, 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 at an issue price of CAD$0.31. Each RSU represents an unsecured promise to issue one SVS upon the earliest of certain distribution events. 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.

On September 20, 2024, the RSU Agreement dated November 13, 2023 was voided and the Company entered into a new RSU Agreement dated September 20, 2024 wherein the Company granted 49,957,714 RSUs to the lender at an issue price of CAD$0.08. Each RSU represents an unsecured promise to issue one SVS upon the earliest of certain distribution events. If at the time of the distribution event, the number of SVS underlying the RSUs is less than 4.24% 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 an RSU agreement with LI Lending, LLC providing that, in the event of a financing by the Company at less than C$0.125 per SVS on or before July 29, 2024, 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. No financing that would trigger the RSU had occurred as of July 29, 2024 and the RSU was forfeited as of September 30, 2024. As of the issuance date and September 30, 2024, the fair value of the RSUs classified as liabilities was determined to be nil.