Derivatives Liability

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives Liability

DERIVATIVE LIABILITY

In November 2022, the warrants issued in connection with the November 2020 private placement had expired unexercised and, accordingly, the balance of derivative liabilities was nil as of December 31, 2022.

In connection with the amendment of the senior secured debt with LI Lending LLC in July 2023, the Company issued 100,358,824 warrants 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 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 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 million (up to the $10 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 8 for further information on the July 2023 amendment.

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 assumptions were used for the periods presented:

	Issuance Date			September 30, 2023
Share Price	$	0.10		$	0.25
Exercise Price	$	0.17		$	0.17
Expected Life	2.7 years			2.6 years
Annualized Volatility	84.5		%	88.8		%
Risk-Free Annual Interest Rate	4.5		%	4.8		%

For the three and nine months ended September 30, 2023 and 2022, changes in fair value of the derivative liabilities measured on a recurring basis using significant unobservable inputs (Level 3) were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Balance, beginning of period	$	—	$	428	$	—	$	3,502
Issuance of warrants	4,165		—		4,165		—
Change in fair value of derivative liability	11,931		(420)		11,931		(3,494)
Balance, end of period	$	16,096	$	8	$	16,096	$	8

See Note 10 for warrants classified within equity.