Our management’s discussion and analysis of financial condition and results of
operations should be read in conjunction with our accompanying Consolidated
Audited Financial Statements and related notes, as well other information
contained in this annual report. The discussion is based upon, among other
things, our Consolidated Audited Financial Statements, which have been prepared
in accordance with U.S. GAAP. The preparation of financial statements in
conformity with U.S. GAAP requires us to, among other things, make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosures of contingent liabilities at the financial statement dates and the
reported amounts of revenues and expenses during the reporting periods. We
review our estimates and assumptions on an ongoing basis. Our estimates are
based on our historical experience and other assumptions that we believe to be
reasonable under the circumstances. Actual results are likely to differ from
those estimates under different assumptions or conditions, but we do not believe
such differences will materially affect our financial position or results of
operations, although they could. All references to results of operations in this
discussion are references to results of continuing operations, unless otherwise
noted.
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Overview
The Company exists pursuant to the provisions of the
British Columbia Corporations Act
(British Columbia). The Company’s SVS are listed on the Canadian Securities
Exchange (“CSE”) under the ticker “FFNT” and are quoted on the OTC (OTCQX:
FFNTF).
The Company has two primary operating segments: THC Cannabis and CBD Wellness.
With regard to its THC Cannabis segment, as of December 31, 2021, the Company
operated six dispensaries, three in Massachusetts, two in Illinois, and one in
Michigan, primarily under the “MISSION” brand name. Also, as of December 31,
2021, the Company operated two production facilities in Massachusetts, one in
Illinois, and one in California. The Company produces the majority of products
that are sold at its Massachusetts and Illinois dispensaries. Also as part of
its THC Cannabis segment, the Company sells equipment, supplies and intellectual
property to cannabis producers in the state of Washington.
The Company’s CBD Wellness segment is focused upon its ownership and operation
of its wholly owned subsidiary, Pure Ratios Holdings, Inc. (“Pure Ratios”), a
CBD-focused wellness company in California, that sells non-THC products
throughout the United States.
While marijuana is legal under the laws of several U.S. states (with varying
restrictions), the United States Federal Controlled Substances Act classifies
all “marijuana” as a Schedule I drug, whether for medical or recreational use.
Under U.S. federal law, a Schedule I drug or substance has a high potential for
abuse, no accepted medical use in the United States, and a lack of safety data
for the use of the drug under medical supervision. In late January 2021, Senate
Majority Leader Chuck Schumer said lawmakers are in the process of merging
various cannabis bills, including his own legalization legislation. He is
working to enact reform in this Congressional session. This would include the
Marijuana Freedom and Opportunity Act, that would federally de-schedule
cannabis, reinvest tax revenue into communities most affected by the drug war,
and fund efforts to expunge prior cannabis records. It is likely that the
Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act would be
incorporated. Other federal legislation under review for possible submission
includes the Secure and Fair Enforcement Act (the “SAFE Banking Act”), a bill
that would allow cannabis companies to access the federally insured banking
system and capital markets without the risk of federal enforcement action, and
the Strengthening the Tenth Amendment Through Entrusting States Act (the STATES
Act), a bill that seeks protections for businesses and individuals in states
that have legalized and comply with state laws.
The Company’s Financial Statements are prepared in accordance with U.S.
generally accepted accounting principles (“U.S. GAAP”), and the financial
information contained herein, are reported in thousands (000’s) of United States
dollars (“$”) unless otherwise specified. Canadian dollar amounts are denoted by
“C$”.
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COVID-19
In March 2020, the United States and much of the world began experiencing a
rapid increase in 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, and health and
safety protocols for both employees and customers remain a focus of the Company.
Through the date of this filing, sales continue to meet or exceed comparable
periods last year, however there is no guarantee that the Company’s
dispensaries/operations will not see future negative effects from COVID-19.
The situation related to the pandemic and recovery from the pandemic continues
to be complex and rapidly evolving. Certain vaccines have been authorized by
major regulatory bodies to help fight the infection of COVID-19, and certain
other vaccines are in the last stages of development to provide such treatment.
Given the daily evolution of COVID-19 and the global responses to curb its
spread, the Company is not able to estimate the effects of COVID-19, including
specifically the Delta and Omnicron variant or other variants, on its results of
operations, financial condition, or liquidity for the year ended December 31,
2021 and beyond. To date, the effects of both the Delta and Omnicron variants
have mirrored the impacts of the earlier variants of the virus. While the
development and availability of multiple COVID-19 vaccines lessened the impact
of COVID-19 in 2021, if COVID-19 continues, it may have a material adverse
effect on the Company’s financial condition, liquidity, and future results of
operations.
War in Ukraine
In February 2022, the Russian Federation and Belarus commenced a military action
with the country of Ukraine. As a result of this action, various nations,
including the United States, have instituted economic sanctions against the
Russian Federation and Belarus. Further, the impact of this action and related
sanctions on the world economy are not determinable as of the date of these
financial statements. The specific impact on our financial condition, results of
operations, and cash flows is also not determinable as of the date of these
financial statements.
Recent Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially
impact our financial position and results of operations is disclosed in “Part
IV, Item 15, Note 2 – Significant Accounting Policies” to our consolidated
financial statements appearing elsewhere in this Annual Report on Form 10-K.
Significant Accounting Judgments, Estimates and Assumptions
The Company makes estimates and assumptions about the future that affect the
reported amounts of assets and liabilities. Estimates and judgments are
continually evaluated based on historical experience and other factors,
including expectations of future events that are believed to be reasonable under
the circumstances. Actual experience may differ from these estimates and
assumptions.
The effect of a change in an accounting estimate is recognized prospectively by
including it in the statement of operations in the period of the change, if the
change affects that period only, or in the period of the change and future
periods, if the change affects both.
Information about critical judgments in applying accounting policies that have
the most significant risk of causing material adjustment to the carrying amounts
of assets and liabilities recognized in the financial statements within the next
financial year are discussed below.
Significant estimates made in the preparation of these consolidated financial
statements include the following areas:
Useful lives of property, plant and equipment and intangible assets
Property, plant and equipment are amortized or depreciated over their useful
lives. Useful lives are based on management’s estimate of the period that the
assets will generate revenue, which are periodically reviewed for continued
appropriateness. Changes to estimates can result in significant variations in
the carrying value and amounts charged to the consolidated statement of
operations in specific periods.
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Amortization of intangible assets is dependent upon estimates of useful lives
based on management’s estimate.
Inventory
The net realizable value of inventories represents the estimated selling price
for inventories in the ordinary course of business, less all estimated costs of
completion and costs necessary to make the sale. The determination of net
realizable value requires significant judgment, including consideration of
factors such as shrinkage, the aging of and future demand for inventory,
expected future selling price the Company expects to realize by selling the
inventory, and the contractual arrangements with customers. The estimates are
judgmental in nature and are made at a point in time, using available
information, expected business plans, and expected market conditions. As a
result, the actual amount received on sale could differ from the estimated value
of inventory. Periodic reviews are performed on the inventory balance. The
impact of changes in inventory reserves is reflected in cost of goods sold.
Share-based compensation
Share-based compensation expense is measured by reference to the fair value of
the stock options at the date at which they are granted. Estimating fair value
for granted stock options requires determining the most appropriate valuation
model which is dependent on the terms and conditions of the grant. This estimate
also requires determining the most appropriate inputs to the valuation model
including the expected life of the option, volatility, dividend yield, and rate
of forfeitures. See Note 16.
Fair value of financial instrument
The individual fair values attributed to the different components of a financing
transaction, notably investment in equity securities, derivative financial
instruments, convertible debt and loans, are determined using valuation
techniques. The Company uses judgment to select the methods used to make certain
assumptions and in performing the fair value calculations in order to determine
(a) the values attributed to each component of a transaction at the time of
their issuance; (b) the fair value measurements for certain instruments that
require subsequent measurement at fair value on a recurring basis; and (c) for
disclosing the fair value of financial instruments subsequently carried at
amortized cost. These valuation estimates could be significantly different
because of the use of judgment and the inherent uncertainty in estimating the
fair value of these instruments that are not quoted in an active market. The
assumptions regarding the derivative liabilities are disclosed in Note 19.
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Goodwill Impairment
Goodwill arises from business combinations and is generally determined as the
excess of the fair value of the consideration transferred, plus the fair value
of any non-controlling interests in the acquiree, over the fair value of the net
assets acquired and liabilities assumed as of the acquisition date. Goodwill
acquired in a business combination is not amortized but tested for impairment at
least annually or more frequently if events and circumstances exist that
indicate that a goodwill impairment test should be performed. The Company uses
the approach described in ASC Topic 350 which includes both qualitative and
quantitative measures to test for impairment. There was no goodwill impairment
for the year ended December 31, 2021. Goodwill impairment for the year ended
December 31, 2020 was $13,400 associated with the Pure Ratio’s RU.
Determination of Reporting Units
The Company’s assets are aggregated into two reportable segments (THC Cannabis
and CBD Wellness). For the purposes of testing goodwill, the Company has
identified four reporting units. The Company analyzed its reporting units by
first reviewing the operating segments based on retail vs. production operations
for THC, and comprehensive operations of Pure Ratios for CBD. The production
operating segment was then further divided into two reporting units determined
through primary activities for cultivation and production, and ancillary
services supporting the production operating segment.
Business combinations
Classification of an acquisition as a business combination or an asset
acquisition depends on whether the assets acquired constitute a business, which
can be a complex judgment. Whether an acquisition is classified as a business
combination or asset acquisition can have a significant impact on the entries
made on and after acquisition.
In determining the fair value of all identifiable assets, liabilities and
contingent liabilities acquired, the most significant estimates relate to
contingent consideration and intangible assets. Management exercises judgement
in estimating the probability and timing of when earn-outs are expected to be
achieved which is used as the basis for estimating fair value. For any
intangible asset identified, depending on the type of intangible asset and the
complexity of determining its fair value, an independent valuation expert or
management may develop the fair value, using appropriate valuation techniques,
which are generally based on a forecast of the total expected future net cash
flows. The evaluations are linked closely to the assumptions made by management
regarding the future performance of these assets and any changes in the discount
rate applied. See Note 9 for additional details.
Intangible assets
Intangible assets acquired in a business combination are measured at fair value
at the acquisition date. The Company must exercise judgment in identifying
intangible assets, in determining their useful life, if any, and in testing for
impairment.
Segmented reporting
The Company must exercise judgement in defining its business segments (Note 20)
and allocating revenue, expenses and assets among the segments. The Company
bases allocations on the groupings used to manage the business and report to
senior management.
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Income taxes
The Company must exercise judgment in determining the provision for income
taxes. There are many transactions and calculations undertaken during the
ordinary course of business for which the ultimate tax determination is
uncertain. The Company recognizes liabilities and contingencies for expected tax
audit issues based on the Company’s current understanding of the tax law. For
matters where it is probable that an adjustment will be made, the Company
records its best estimate of the tax liability including the related interest
and penalties in the current tax provision.
In addition, the Company recognizes deferred tax assets relating to tax losses
carried forward to the extent there are sufficient taxable temporary differences
(deferred tax liabilities) relating to the same taxation authority and the same
taxable entity against which the unused tax losses can be utilized. However,
utilization of the tax losses also depends on the ability of the taxable entity
to satisfy certain tests at the time the losses are recouped.
Results of Operations
Year Ended December 31, 2021 Compared With Year Ended December 31, 2020
The following table sets forth our consolidated statement of operations for the
years ended December 31, 2021 and 2020, and the change between the two years ($
in thousands):
Change
2021 2020 $ %
Revenue from Sale of Goods $ 93,387 $ 46,616 $ 46,771 100 %
Real Estate Income 11,179 11,019 160 1 %
Total Revenues 104,566 57,635 46,931 81 %
Cost of Goods Sold (55,170 ) (21,124 ) (34,046 ) 161 %
Gross profit 49,396 36,511 12,885 35 %
Total Operating Expense 63,502 69,121 (5,619 ) (8 )%
Income (Loss) from Operations (14,106 ) (32,610 ) 18,504 57 %
Total Other income (expense), net (10,252 ) (12,333 )
2,081 17 %
Net Loss Before Income Taxes (24,358 ) (44,943 ) 20,585 46 %
Income Tax Expense (13,931 ) (15,049 ) 1,118 7 %
Net Loss from Continuing Operations (38,289 ) (59,992 ) 21,703 36 %
Net Loss from Discontinued Operations, Net
of Taxes – 12,987 (12,987 ) 100 %
Net Loss $ (38,289 ) $ (47,005 ) $ 8,716 19 %
Revenue from Sale of Goods
Revenue from sale of goods for the year ended December 31, 2021 was $93,387, an
increase of $46,771 or 100% compared to the year ended December 31, 2020. This
increase is primarily due to sales from the Calumet City, IL dispensary that
opened in December 2020, sales from the Brookline, MA dispensary that opened in
August 2021, and higher sales across other dispensaries with Michigan and
Massachusetts dispensaries benefiting from a full twelve months of adult-use
sales in 2021.
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Real Estate Income
Real Estate Income from leasing cannabis production facilities for the year
ended December 31, 2021 was $11,179, an increase of $160 or 1% which is
relatively flat compared to the $11,019 recognized for the year ended
December 31, 2020.
Cost of Goods Sold
Cost of goods sold (“COGS”) increased $34,046, for the year ended December 31,
2021, which is an increase of 161%, primarily resulting from the increase in
revenues. COGS represent costs to cultivate and produce cannabis and CBD
products that are produced in our owned facilities and are sold to third parties
and through our owned dispensaries. For products that are purchased from third
parties, COGS is the cost of inventory for sales to retail customers.
Gross Profit
Gross profit for the year ended December 31, 2021 was $49,396 or 47% of revenue
compared to $36,511 or 63% of revenue for the year ended December 31, 2020. The
decrease in gross profit percentage of 16% is primarily due to a one-time
inventory revaluation adjustment.
Total Operating Expenses
Total operating expenses for the year ended December 31, 2021 were $63,502, a
decrease of $5,619 or 8%, as compared to the year ended December 31, 2020. This
decrease is primarily due to no impairment of goodwill and intangible assets in
2021 and a reduction in selling and marketing expenses of $2,637 offset by an
increase in equity based compensation of $4,775 and $7,288 in general and
administrative expense.
Total Other Income (Expense), net
Total Other Income (Expense) for the year ended December 31, 2021 was $10,252,
as compared to $12,333 for the year ended December 31, 2020. This is primarily
driven by lesser interest expense in 2021 of $2,050 from the GGP and LI Lending
loans (Note 11).
Net Loss From Continuing Operations
Net loss from continuing operations for the year ended December 31, 2021 was
$38,289, compared to a net loss from continuing operations of $59,992 for the
year ended December 31, 2020. The higher loss for the year ended December 31,
2020 is primarily due to the impairment of goodwill from the Cannex business
combination.
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Results of Operations – Segments
The following tables summarize revenues net of sales discounts by segment for
the years ended December 31, 2021 and 2020:
For the Year ended December 31, 2021 vs. 2020
2021 2020 $ %
THC Cannabis 102,262 50,041 52,221 104 %
CBD Wellness 2,304 7,594 (5,290 ) (70 )%
Total 104,566 57,635 46,931 81 %
Year Ended December 31, 2021 Compared With Year Ended December 31, 2020
Net revenues for the THC Cannabis Segment were $102,262 for the year ended
December 31, 2021, an increase of $52,221 or 104%, compared to the year ended
December 31, 2020. The increase is due to higher sales across other dispensaries
with Michigan and Massachusetts dispensaries benefiting from a full twelve
months of adult-use sales in 2021.
Net revenues for the CBD Wellness Segment were $2,304 for the year ended
December 31, 2021, a decrease of $5,290 or 70%, compared to the year ended
December 31, 2020. The decrease is largely attributable to changes in marketing
strategy prioritizing profitable growth with a focus on achieving positive cash
flow.
Non-GAAP Financial and Performance Measures
In addition to providing financial measurements based on GAAP, we provide
additional financial metrics that are not prepared in accordance with GAAP.
Management uses non-GAAP financial measures, in addition to GAAP financial
measures, to understand and compare operating results across accounting periods,
for financial and operational decision making, for planning and forecasting
purposes and to evaluate the Company’s financial performance. Management uses
the non-GAAP measurement of adjusted EBITDA, which we believe reflects our
ongoing business in a manner that allows for meaningful comparisons and analysis
of trends in the business, as it facilitates comparing financial results across
accounting periods. We also believe that this non-GAAP financial measure enables
investors to evaluate the Company’s operating results and future prospects in
the same manner as management. This non-GAAP financial measures may also exclude
expenses and gains that may be unusual in nature, infrequent or not reflective
of the Company’s ongoing operating results. As there are no standardized methods
of calculating non-GAAP measures, our methods may differ from those used by
others, and accordingly, the use of these measures may not be directly
comparable to similarly titled measures used by others. Accordingly, non-GAAP
measures are intended to provide additional information and should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with GAAP.
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Adjusted EBITDA
Adjusted EBITDA is a financial measure that is not calculated in accordance with
accounting principles generally accepted in the United States of America (“U.S.
GAAP”). Management believes that because adjusted EBITDA excludes (a) certain
non-cash expenses (such as depreciation, amortization and stock-based
compensation) and (b) expenses that are not reflective of the Company’s core
operating results over time (such as restructuring costs, litigation or dispute
settlement charges or gains, and transaction-related costs), this measure
provides investors with additional useful information to measure the Company’s
financial performance, particularly with respect to changes in performance from
period to period. The Company’s management uses adjusted EBITDA (a) as a measure
of operating performance, (b) for planning and forecasting in future periods,
and (c) in communications with the Company’s board of directors concerning the
Company’s financial performance. The Company’s presentation of adjusted EBITDA
are not necessarily comparable to other similarly titled captions of other
companies due to different methods of calculation and should not be used by
investors as a substitute or alternative to net income or any measure of
financial performance calculated and presented in accordance with U.S. GAAP.
Instead, management believes adjusted EBITDA should be used to supplement the
Company’s financial measures derived in accordance with U.S. GAAP to provide a
more complete understanding of the trends affecting the business.
Although adjusted EBITDA is frequently used by investors and securities analysts
in their evaluations of companies, adjusted EBITDA has limitations as an
analytical tool, and investors should not consider it in isolation or as a
substitute for, or more meaningful than, amounts determined in accordance with
U.S. GAAP. Some of the limitations to using non-GAAP measures as an analytical
tool are (a) they do not reflect the Company’s interest income and expense, or
the requirements necessary to service interest or principal payments on the
Company’s debt, (b) they do not reflect future requirements for capital
expenditures or contractual commitments, and (c) although depreciation and
amortization charges are non-cash charges, the assets being depreciated and
amortized will often have to be replaced in the future, and non-GAAP measures do
not reflect any cash requirements for such replacements.
Adjusted EBITDA is defined by the Company as earnings before interest, taxes,
depreciation and amortization, accretion, share-based compensation expense,
legal settlement, change in value of derivative liability, foreign exchange gain
(loss), loss on lease termination, other non-cash expenses, and one-time charges
related to acquisition costs, financing related costs, extraordinary pre-opening
expenses and non-recurring expenses.
We consider these measures to be an important indicator of the financial
strength and performance of our business. The following table reconciles
adjusted EBITDA to its closest GAAP measure.
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For the years ended December 31, 2021 and 2020, adjusted EBITDA consisted of the
following:
Year ended December 31, 2021 2020
Net loss (GAAP) $ (38,309 ) $ (47,051 )
Interest income (15 ) (77 )
Interest expense 13,704 15,779
Income tax expense 13,931 15,049
Depreciation and amortization 6,636 8,563
Accretion 5,381 (643 )
Equity based compensation 10,081 5,306
Legal settlement (3,768 ) (2,480 )
Change in value of derivative liability (832 )
1,578
Foreign exchange gain (loss) – (19 )
Acquisition, transaction, and other non-cash costs 9,607 3,872
Non-cash inventory adjustment 8,506 2,305
Non-cash lease expense 3,814 2,404
Loss on lease termination 1,210 –
Investment write-off – 1,701
Adjustment to contingent consideration –
775
Commerce facility pre-opening expense 3,989 –
Impairment of goodwill – 16,748
Gain on sale of subsidiary – (12,987 )
Gain on sale leaseback transaction – (3,345 )
Gain on restructuring of notes receivable – (380 )
Gain on settlement of debt – (1,218 )
Adjusted EBITDA (Non-GAAP) $ 33,935 $ 5,880
Adjusted EBITDA should not be considered in isolation from, or as a substitute
for, net loss. There are a number of limitations related to the use of adjusted
EBITDA as compared to net operating loss, the closest comparable GAAP measure.
Adjusted EBITDA excludes:
• Interest income and expense
• Current income tax expense
• Non-cash depreciation and amortization expense
• Accretion expense related to a periodic update of the present value of a
liability
• Equity based compensation expense, which has been, and will continue to
be for the foreseeable future, a significant recurring expense in our
business and an important part of our compensation strategy
• Legal settlements
• Non-cash change in fair value of derivative liability
• Non-cash foreign exchange gains or losses, which accounts for the effect
of both realized and unrealized foreign exchange transactions; unrealized
gains or losses represent foreign exchange revaluation of foreign
denominated monetary assets and liabilities
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• Acquisition, transaction, and other expenses (income), which vary
significantly by transactions and are excluded to evaluate ongoing
operating results
• Investment write-off
• Non-cash impairment charges, as the charges are not expected to be a
recurring business activity
Year Ended December 31, 2021 Compared With Year Ended December 31, 2020
Liquidity and Capital Resources
As of December 31, 2021 and 2020, we had total current liabilities of $48,838
and $37,784, respectively, and current assets of $50,874 and $44,736,
respectively to meet its current obligations. As of December 31, 2021 and 2020,
we had working capital of $2,036 and $6,952, respectively. The decrease of
$4,916 is driven primarily by an increase in taxes payable, partially offset by
increases in cash and cash equivalents and inventory, and decreases in accounts
payable and derivative liability.
The Company is an early-stage growth company. It is generating cash from sales
and is deploying its capital reserves to acquire and develop assets capable of
producing additional revenues and earnings over both the immediate and near
term. Capital reserves are being utilized for capital expenditures and
improvements in existing facilities, product development and marketing, as well
as customer, supplier and investor and industry relations.
Cash Flows
Net Cash provided by (Used in) Continuing Operations
Net cash provided by continued operating activities was $5,777 for the year
ended December 31, 2021, an increase of $19,191 as compared to $13,414 of net
cash used in continued operating activities for the year ended December 31,
2020. The increase is due to higher sales at the Company’s dispensaries,
corporate cost reductions, and improved sell-through in vertically-integrated
locations.
Net cash used in continued operating activities was $13,414 for the year ended
December 31, 2020. This was largely due to increased non-cash charges such as
depreciation and accrued interest, which was offset by higher interest charges
from debt acquired through the Cannex acquisition and from other loans.
Net Cash Provided by (Used in) Continuing Investing
Net cash used in continued investing activities was $13,041 for the year ended
December 31, 2021, a decrease of $54,030 as compared to $41,016 of cash provided
by investing activities for the year ended December 31, 2020. The decrease is
primarily due to additional purchases of property and equipment for the year
ended December 31, 2021 as compared to the year ended December 31, 2020.
Net cash provided by investing activities was $41,016 for the year ended
December 31, 2020. This was largely due to the primary source of proceeds from
the sale of our dispensaries and interests in Arizona, Pennsylvania, Maryland
and Arkansas, as well as the closing of a sale leaseback transaction. Some of
these proceeds were used to purchased $13,785 in property and equipment during
the period.
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Net Cash Provided by (Used in) Continuing Financing Activities
Net cash provided by continued financing activities was $10,886 for the year
ended December 31, 2021, an increase of $28,894 as compared to $18,008 of cash
used by financing activities for the year ended December 31, 2020. The increase
is primarily attributed to the issuance of the new 2021 convertible note.
Net cash used by financing activities was $18,008 for the year ended December
31, 2020. This was largely due to the repayment of $37,813 of convertible
debentures, which was partially offset by $8,597 of cash proceeds from issuing
convertible debt and $12,134 from the sale of stock.
Net Cash Provided by (Used in) Discontinuing Operations
The Company did not have any cash provided by or used in discontinued operating,
investing, and financing activities in 2021, a decrease of $1,197 as compared to
the year ended December 31, 2020. The Company did not have any discontinued
operations for the year ended December 31, 2021.
Availability of Additional Funds
While the Company believes that its current cash on hand is sufficient to meet
operating and capital requirements for the next twelve months, there is
substantial doubt about continuing as a going concern thereafter that the
Company will be able to meet such requirements. The Company may need to raise
further capital, through the sale of additional equity or debt securities or
otherwise, to support its future operations. The Company’s operating needs
include the planned costs to operate its business, including amounts required to
fund working capital and capital expenditures. If the Company is unable to
secure additional capital, it may be required to curtail its research and
development initiatives and take additional measures to reduce costs in order to
conserve its cash.
Our operating needs include the planned costs to operate our business, including
amounts required to fund working capital and capital expenditures. Our future
capital requirements and the adequacy of our available funds will depend on many
factors, including our ability to successfully commercialize our products and
services, competing technological and market developments, and the need to enter
into collaborations with other companies or acquire other companies or
technologies to enhance or complement our product and service offerings.
Contractual Obligations
The Company has the following gross contractual obligations as of December 31,
2021, which are expected to be payable in the following respective periods:
Greater
Less than 1 than 5
year 1 to 3 years 3 to 5 years years Total
Accounts payable and accrued
liabilities $ 11,542 $ 1,200 $ – $ – $ 12,742
Convertible notes, notes payable
and accrued interest 6,197 64,616 – – 70,813
Contingent consideration payable – 2,393 – – 2,393
Total $ 17,739 $ 68,209 $ – $ – $ 85,948
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Off-Balance Sheet Arrangements
We did not have, during the periods presented, and we do not currently have, any
relationships with any organizations or financial partnerships, such as
structured finance or special purpose entities, that would have been established
for the purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.
Subsequent Events
Merger Agreement
On January 28, 2022 (the “Closing Date”), 4Front Ventures Corp. (the “Company”)
entered into the First Amendment to that certain agreement and plan of merger
(the “Merger Agreement”) by and among the Company, New England Cannabis
Corporation, Inc., a Massachusetts corporation (“NECC”), Kenneth V. Stevens
(“Mr. Stevens”), who is the sole owner of all of the issued and outstanding
capital stock of NECC, and 4Front NECC Acquisition Co., a Massachusetts
corporation (the “Merger Sub”). Pursuant to the terms and conditions of the
Merger Agreement, NECC would be merged with and into the Merger Sub, which will
change its name to New England Cannabis Corporation, Inc., and continue its
corporate existence as a wholly-owned subsidiary of the Company (the “Merger”).
Also on the Closing Date, the parties to the Merger Agreement, as amended,
consummated the Merger. At the effective time of the Merger, pursuant to the
terms and conditions of the Merger Agreement, as amended, the Company (i) paid
Mr. Stevens cash in the amount of USD$9,000,000, and (ii) issued Mr. Stevens
28,571,428 Class A Subordinate Voting shares of the Company (the “SVS”), with a
deemed value of $1.05 U.S. dollars per share, or a total estimated valuation of
USD$30,000,000.
The foregoing description of the Merger Agreement, as amended, is qualified in
its entirety by reference to the Merger Agreement, a complete copy of which was
filed as Exhibit 10.1 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission by the Company on October 8, 2021, and the
First Amendment to the Merger Agreement, a complete copy of which is filed as
Exhibit 10.3 hereto, each of which is incorporated herein by reference.
Membership Interest Purchase Agreement
In connection with the consummation of the Merger, on the Closing Date, the
Company, Mission Partners RE, LLC, a Delaware limited liability company
wholly-owned by the Company (“Mission Partners RE”), and Mr. Stevens entered
into the First Amendment to that certain membership interest purchase agreement
(the “Purchase Agreement”), pursuant to which the Company (through Mission
Partners RE) completed its acquisition of 100% of the issued and outstanding
membership interests of 29 Everett Street LLC, a Massachusetts limited liability
company (the “Everett LLC”), which was solely held by Mr. Stevens and which owns
certain real property that is currently leased to and used by NECC. Pursuant to
the terms and conditions of the Purchase Agreement, as amended, the Company
(i) paid Mr. Stevens cash in the amount of USD$16,000,000, and (ii) issued
Mr. Stevens a promissory note (the “Note”) in the initial principal amount of
USD$2,000,000, which will bear interest at an annual rate of ten percent
(10%) and will mature on the six-month anniversary of the Closing Date.
The foregoing description of the Purchase Agreement, as amended, is qualified in
its entirety by reference to the Purchase Agreement, a complete copy of which
was filed as Exhibit 10.2 to the Current Report on Form 8-K filed with the
Securities and Exchange Commission by the Company on October 8, 2021, the First
Amendment to the Purchase Agreement, a complete copy of which is filed as
Exhibit 10.4 hereto, and the Note, a complete copy of which is filed as Exhibit
10.5 hereto, each of which is incorporated herein by reference.
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On January 14, 2022, Healthy Pharms Inc. Unsecured promissory note with the
outstanding balance of $3,213 at December 31, 2021, was settled in shares. In
conjunction with the settlement agreement, the Company agreed to issue a total
of 6,235,512 class A subordinate voting shares to the noteholder to settle
outstanding debt. The settlement was signed and agreed upon by both parties on
the date of the agreement, January 14, 2022.
On January 28, 2022, the Company entered into the first amendment of the merger
agreement with New England Cannabis Corporation, Inc., a Massachusetts
corporation (“NECC”), Kenneth V. Stevens (“Mr. Stevens”), who is the sole owner
of all of the issued and outstanding capital stock of NECC, and 4Front NECC
Acquisition Co., a Massachusetts corporation (the “Merger Sub”). At the
effective time of the merger, the Company (i) paid Mr. Stevens cash in the
amount of USD$9,000,000, and (ii) issued Mr. Stevens 28,571,428 Class A
Subordinate Voting shares of the Company (the “SVS”), with a deemed value of
$1.05 U.S. dollars per share, or a total estimated valuation of USD$30,000,000.
In connection with the consummation of the Merger on January 28, 2022, Mission
Partners RE, LLC, a Delaware limited liability company wholly-owned by the
Company (“Mission Partners RE”), and Mr. Stevens entered into the first
amendment to that certain membership interest purchase agreement (the “Purchase
Agreement”). Pursuant to the Purchase Agreement, the Company (through Mission
Partners RE) completed its acquisition of 100% of the issued and outstanding
membership interests of 29 Everett Street LLC, a Massachusetts limited liability
company (the “Everett LLC”), which was solely held by Mr. Stevens and which owns
certain real property that is currently leased to and used by NECC. The Company
(i) paid Mr. Stevens cash in the amount of $16,000,000, and (ii) issued Mr.
Stevens a promissory note in the initial principal amount of $2,000,000, which
will bear interest at an annual rate of ten percent (10%) and will mature on the
six-month anniversary of January 28, 2022.
We are in the process of assessing the fair values of the acquired tangible
assets and any intangible assets and liabilities for these acquisitions, and
thus, have not presented purchase price allocations as of the date of this
filing.
On March 30, 2022, the Company entered into a merger agreement with Island
Global Holdings, Inc., a California corporation (“Island”); and Navy Capital SR
LLC, a Delaware limited liability company, solely in its capacity as the
representative of the Island stockholders (the “Stockholder Representative”).
All classes of Island’s equity securities are to be converted into a combination
of (i) SVS of the Company; and (ii) subordinated promissory notes (the “Merger
Notes”) to be negotiated and issued by the Company, using formulae to be
determined at a later date pursuant to the terms of the Merger Agreement.
We are in the process of assessing the fair values of the acquired tangible
assets and any intangible assets and liabilities for these acquisitions, and
thus, have not presented purchase price allocations as of the date of this
filing.
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