Acquisitions and Business Combinations

12 Months Ended

Dec. 31, 2020

Business Combinations [Abstract]

Acquisitions and Business Combinations

11. ACQUISITIONS AND BUSINESS COMBINATIONS

Cannex Capital Holdings Inc.

On July 31, 2019, 4Front Holdings LLC (“Holdings”) and Cannex Capital Holdings, Inc. (“Cannex”) completed their business combination and the creation of 4Front Ventures Corp. The acquisition combined Cannex’s understanding of large-scale cultivation and manufacturing operations with 4Front’s existing asset base and its retail and regulatory capabilities.

The business combination was completed by way of a plan of arrangement agreement under the Business Corporations Act (British Columbia) pursuant to the terms of the business combination agreement among Holdings, Cannex, 4Front and 1196260 B.C. Ltd. dated March 1, 2019, as amended (the “Arrangement Agreement”). Pursuant to the terms of the Arrangement Agreement, the former owners of Holdings exchanged, through a series of transactions, their respective interests in Holdings in exchange for a total of 340.4 million shares in 4Front when calculated as if all share classes were converted to Subordinate Voting Shares.

Holdings has been identified for accounting purposes as the acquirer, and accordingly 4Front is considered a continuation of Holdings and the net assets of Cannex on July 31, 2019, the date of the business combination, are deemed to have been acquired by Holdings.

The acquisition was accounted for in accordance with ASC 805, and related operating results are included in the accompanying consolidated statements of operations, changes in equity and statement of cash flows for periods subsequent to the date of acquisition.

The Company recorded the acquired balances at fair value as determined by third party valuation firms. The following table summarizes the purchase price allocation:

Consideration transferred:
Equity issued (1)	$	181,110
Fair value of GGP warrants (2)		5,779
Replacement warrants (3)		5,317
Replacement stock options (4)		6,825
Total	$	199,031

Fair value of net assets acquired:
Cash	$	9,119
Accounts receivable		1,869
Prepaid expenses		352
Inventory		527
Property and equipment		1,230
Notes receivable		2,233
Notes receivable – 4Front (5)		12,497
Deposits – equipment		2,182
Deposits – real estate		820
Right-of-use assets		15,160
Investments		759
Lease receivables		33,192
Intangible assets		13,600
Goodwill		166,557
Accounts payable and accrued liabilities		(3,042	)
Notes payable		(201	)
Contingent consideration payable – Pure Ratios		(1,500	)
Convertible notes		(39,881	)
Lease liability		(16,442	)
	$	199,031

⁽¹⁾ As part of the business combination, 190,482,146 shares were issued to Cannex investors with a value of $0.95 per share ($1.25 CAD).

⁽²⁾ On July 31, 2019, 13,521,328 warrants that were held by Gotham Green Partners (the “GGP Warrants”) were replaced with warrants with the same terms in 4Front Ventures Corp, with a fair value of $5,779.  

In determining the fair value of the warrants issued to GGP, the Company used the Black-Scholes option pricing model with the following weighted average assumptions:

	July 31, 2019
Risk-Free Interest Rate		1.84	%
Expected Life of Options (years)		2.31
Expected Annualized Volatility		89	%
Expected Forfeiture Rate	nil
Expected Dividend Yield	nil
Black-Scholes Value of Each Option	$	0.43

⁽³⁾ On July 31, 2019, 25,251,757 warrants that were held by third parties, were replaced with warrants with the same terms in 4Front Ventures Corp, which had a total fair value of $5,317 determined using the Black-Scholes valuation model (Note 16). The value of these warrants is recorded as derivative liability, as the exercise price of these warrants are denominated in a foreign currency, Canadian Dollars.  

⁽⁴⁾ On July 31, 2019, 16,346,665 stock options held by Cannex shareholders were replaced with stock options of 4Front. These replacement options had the same terms as the original options. The fair value of the replacement options was $9,098, determined using the Black-Scholes model. The consideration for the business combination includes $6,825 for replacement options, relating to past service with the remaining $2,273 recognized over the vesting period.

⁽⁵⁾ As of July 31, 2019, Cannex had advanced the Company $12,497.  The note was eliminated upon consolidation.

Intangible assets comprise of trademarks with a fair value of $3,900 and know-how with a fair value of $9,700. The goodwill of $166,557 is attributable mainly to the skills and technical expertise of Cannex’s work force and the synergies expected to be achieved from integrating Cannex into 4Front’s existing Cannabis business. None of the goodwill recognized is expected to be deductible for tax purposes. For further details on intangible assets and goodwill, see Note 10.

In 2020, an adjustment to the purchase price accounting was made to record a deferred tax liability of $1,406 and to increase goodwill. See Note 24.

Acquisition costs of $2,324, were excluded from the consideration transferred, and were included in general and administrative expenses in the year ended December 31, 2019.

Om of Medicine LLC

On April 15, 2019, the Company acquired 100% of Om of Medicine LLC (“OM of Medicine”), a dispensary in Michigan. The purpose of the acquisition was to expand the Company’s presence to Michigan.

The acquisition was accounted for in accordance with ASC 805, and related operating results are included in the accompanying consolidated statements of operations, changes in equity and statement of cash flows for periods subsequent to the date of acquisition. The assets acquired and the liabilities assumed have been recorded at fair value as determined by the Company.

Goodwill arose because the consideration paid for the business acquisition reflected the benefit of expected revenue growth and future market development. None of the goodwill is expected to be deductible for tax purposes.  During the fourth quarter of 2019, management performed its annual impairment test and concluded that the carrying value was higher than the recoverable amount and recorded impairment losses to goodwill and intangibles assets of $2,651.

The following table summarizes the purchase price allocation:

Consideration transferred:
Cash	$	227
Contingent consideration (1)		3,750
Payables issued (2)		1,058
Equity paid (3)		4,400
Total	$	9,435

Fair value of net assets acquired are:

Fair value of net assets acquired:
Cash	$	51
Inventory		298
Property and equipment		192
Right-of-use assets		574
Goodwill		1,435
Intangible assets		7,700
Accounts payable and accrued liabilities		(161	)
Notes payable		(80	)
Lease liability		(574	)
	$	9,435

⁽¹⁾ Contingent consideration is payable depending on reaching certain future sales targets by Om of Medicine LLC.  The Company determined the contingent payments to be $3,750. See Note 20.  

⁽²⁾ Consists of $1,058 held back by the Company to pay future taxes, other expenses or payments to the sellers.

⁽³⁾ As part of the business combination, 9,040 Class F shares were issued which were valued at $4,400.

Acquisition costs of $29, were excluded from the consideration transferred, and were included in general and administrative expenses in the period in which they were incurred.

PHX Interactive, LLC

On February 22, 2019, the Company completed an acquisition of 100% of PHX Interactive, LLC (“PHX”), an entity that operated Greens Goddess Products, Inc., a cannabis license holder and dispensary operator in Phoenix, Arizona.  The purpose of the acquisition was to expand the Company’s operations to Arizona.

The acquisition was accounted for in accordance with ASC 805, and related operating results are included in the accompanying consolidated statements of operations and comprehensive loss, changes in equity and statement of cash flows for periods subsequent to the date of acquisition.  Due to a management agreement between PHX and Greens Goddess, PHX controlled Greens Goddess and the Company consolidated both PHX and Greens Goddess from the date of acquisition. The assets acquired and the liabilities assumed have been recorded at fair value as determined by the Company.

Goodwill arose because the consideration paid for the business acquisition reflected the benefit of expected revenue growth and future market development. These benefits were not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. Goodwill is not expected to be deductible for tax purposes.

On March 30, 2020, the Company completed the sale of PHX and Green Goddess to a third party for $6,000 in cash.  

The following table summarizes the purchase price allocation:

Consideration transferred:
Cash	$	3,360
Payables issued (1)		304
Equity paid (2)		2,676
Total	$	6,340
Fair value of net assets acquired:
Cash	$	102
Inventory		91
Property and equipment		72
Deposits		2
Goodwill		6,225
Accounts payable and accrued liabilities		(152	)
		6,340

⁽¹⁾ Consists of $304 held back by the Company to pay certain vendor payables.

⁽²⁾ As part of the business combination, 5,496 Class F shares were issued which were valued at $2,676.