4Front was incorporated pursuant to the provisions of the British Columbia Corporations Act. On July 31, 2019, 4Front Holdings LLC (“Holdings”) and Cannex Capital Holdings, Inc. (“Cannex”) completed their business combination which resulted in the business of each of Holdings and Cannex becoming the business of 4Front. Holdings has been identified as the acquirer for accounting purposes. Historical financial statements and MD&A with respect to each of Holdings and Cannex are available on the Company’s SEDAR profile at www.sedar.com. 4Front has its registered office in Vancouver, British Columbia and a head corporate office in Phoenix, Arizona. The Class A Subordinate Voting Shares (“SVS”) of 4Front trade on the Canadian Securities Exchange (“CSE”) under the ticker “FFNT” and are quoted on the OTC (OTCQX: FFNTF). The business combination constituted a reverse takeover of Cannex by 4Front. The Company owns or manages licensed cannabis facilities in state-licensed markets in the United States and has accelerated growth through business acquisitions. On February 22, 2019, the Company acquired PHX Interactive LLC, that manages a licensed cannabis dispensary in Phoenix, Arizona. On April 15, 2019 the Company purchased Om of Medicine LLC, a cannabis dispensary in Michigan. On July 31, 2019, the Company completed the reverse takeover of Cannex. In January 2020, the Company announced its intention to focus on “core” assets and to divest “non-core” assets. Core assets include vertically integrated cannabis production facilities and dispensaries in Illinois and Massachusetts, as well as one dispensary in Michigan. In January, the Company divested its interests in two Arkansas dispensary licenses for $2,000. In March 2020, the Company sold PHX Interactive LLC that controls an Arizona dispensary for $6,000. In January 2020, the Company issued convertible secured promissory notes of $3,000 to entities associated with Gotham Green Partners, LLC (such entities collectively referred to as “GGP”). These notes were repaid in full in May 2020. In March 2020, the Company announced the promotion of Leo Gontmakher, formerly 4Front’s COO, to CEO, the promotion of Joshua Rosen, formerly 4Front’s CEO, to Executive Chairman, the promotion of Nicolle Dorsey, formerly EVP of Finance, to CFO, and the departure of former CFO Brad Kotansky. In addition, the Company announced the cutting of significant corporate overhead costs, including 40% of corporate headcount and 45% of headcount related to the management of Mission stores. The Company expects these overhead cost reductions to result in annualized savings of $7,000 – 8,000. In March 2020, the United States and much of the world began to experience a rapid increase in the number of COVID-19 cases. The emergence of COVID-19, an extremely infectious airborne respiratory virus, caused a significant response on the part of many governments to contain it. The most relevant containment measure for the Company’s business is the implementation of “essential” type business designations and implementation of social distancing protocols. Thus far, the Company’s dispensaries and operations have been allowed to continue operating. Social distancing protocols have been implemented at the Company’s dispensaries which meet or exceed those required by the local jurisdiction. Through the date of this MD&A, sales continue to meet or exceed comparable periods last year, however there is no guarantee that the Company’s dispensaries/operations will continue to be designated as essential. On May 7, 2020, the Company completed its sale of its Pennsylvania dispensary for $10,550. On September 1, 2020, the Company closed the sale of its interest in an Arkansas dispensary for $2,449. On September 22, 2020, the Company closed the sale of three of its Maryland dispensaries for $5,500. On September 30, 2020, the Company closed the sale of its final Maryland dispensary for $1,200. In exchange for consent of allowing for the sale of the non-core assets, the Company agreed to make principal payments to GGP and to pay additional fees. The Company also agreed to repay principal to LI Lending and to pay an increased interest rate of an additional 2% on the final $10,000 tranche of the loan until such time as this amount has been paid down. On May 31, 2020, the Company’s dispensary in Chicago was broken into and sustained substantial damage. Most of the damage and inventory loss is expected to be covered by insurance and upon completion of repairs and security upgrades, the dispensary reopened to the public on July 31, 2020. In May 2020, the Company raised $5,827 through a private placement of convertible debt (the “Notes”). The Notes are secured, although subordinate to GGP and LI Lending, and bear an annual coupon of 5%, paid-inkind, and will mature on February 28, 2022 (although such maturity can be extended for 6 months subject to a 2.5% fee). The Notes are convertible into SVS of the Company at a conversion price of $0.25. Certain purchasers of the Notes were also able to exchange their existing equity holdings in the Company for convertible debenture that totaled $13,661 (the “Equity Swap Debenture”), with economic terms which mimic a preferred class of equity. Specifically, the Equity Swap Debentures mature on May 14, 2025, have an annual coupon of 3% which may be forgiven if the revenue of the Company is above $15,000, and converts to SVS at a conversion price of $0.4601227. In May 2020, the Company modified the principal balance of a $1,500 note receivable from Accucanna in exchange for the Common Owners foregoing approximately 1.4 million shares of Company class A subordinate voting stock payable as an earnout because of Pure Ratios attaining certain CBD sales milestones. The interest rate was lowered to 5% and the maturity date was extended. The Company is currently in discussions to settle the remaining balance of the promissory note and anticipates resolution by December 31, 2020. As of September 30, 2020, the Company: • owned and operated two dispensaries in Massachusetts, one dispensary in Illinois, and one dispensary in Michigan. • owned and operated two production facilities in Massachusetts and one production facility in Illinois. • leased real estate and sold supplies to cannabis producers in Washington State. • owned and operated Pure Ratios, a CBD products company in California that sells non-THC products throughout the United States. 5 The Company is building a cannabis manufacturing facility in Commerce, California, but paused construction in April 2020. The Company is recommencing construction on the facility and is expected to be completed in April 2021. This MD&A compares the three and nine-month periods ended September 30, 2020 and 2019. The 2020 balance sheet includes net assets acquired from Cannex and resulting intangible assets. CORPORATE DEVELOPMENTS • In January 2020, the Company commenced recreational sales at its Chicago, IL dispensary. • In January 2020, the Company secured convertible note financing of $3,000 and issued warrants. • In January 2020, the Company sold two of its Arkansas assets for $2,000. • In March 2020, the Company’s CEO assumed the role of Executive Chairman and the COO was promoted to CEO. • In March 2020, the Company divested of its Arizona assets for $6,000. • In March 2020, the Company reduced its corporate workforce and Mission overhead workforce by 40% and 45%, respectively. • In May 2020, the Company sold its non-core retail licenses in Pennsylvania for $10,550, of which $5,700 has been used to repay GGP. • In May 2020, the Company raised $5,827 through a private placement of convertible debt. • In May 2020, the Company modified the principal balance of the note receivable from Accucanna to $890, the interest to 5%, and the maturity date to July 5, 2020, with an optional 30-day extension by written notice from Accucanna. The Company is currently in discussions to settle the remaining balance of the promissory note and anticipates resolution by December 31, 2020. • In May 2020, the Company gave notice to extend the repayment date of the $4,886 note payable plus associated interest that was issued for the acquisition of Healthy Pharms Inc. The note payable is now due December 18, 2020. • On May 31, 2020 the Company’s Chicago dispensary was closed due to a break in. On July 31, 2020, the dispensary reopened following repairs and the security upgrades. • On August 12, 2020 the Company began adult use sales at its Georgetown, Massachusetts dispensary. • On September 1, 2020 the Company completed the sale of its interest in an Arkansas dispensary for $2,449. • On September 4, 2020 the Company began adult use sales at its Worcester, Massachusetts dispensary. • On September 22, 2020, the Company closed on the sale of three of its Maryland assets for $5,500. • On September 24, 2020 the Company announced that it was commencing construction on a new dispensary in Calumet City, Illinois, which is expected to open in December 2020. • On September 30, 2020, the Company closed the sale of its final Maryland asset for $1,200. • The Company announced on October 27, 2020, that it had entered into definitive purchase and sale agreements with an affiliate of Innovative Industrial Properties, Inc., to provide the sale and leaseback of its cultivation and production facilities in Tumwater, WA and Georgetown, MA. The all cash sale 6 price of $30,000 will be used by the Company to pay down the outstanding senior secured debt obligation to affiliates of Gotham Green Partners, and for other general corporate purposes. • On November 23, 2020, the Company announced it had completed its bought deal prospectus offering for aggregate proceeds of C$17,251,150, including full exercise of the over-allotment option granted to the underwriters. • The Company announced on November 24, 2020 that its 185,000 square foot production facility in Commerce, California is fully funded to recommence construction and is targeted to be completed in April 2021.
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