This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally relate to future events or our future financial or operating performance and may include statements concerning, among other things, our business strategy (including anticipated trends and developments in, and management plans for, our business and the markets in which we operate), financial results, the impact of COVID-19 on our business, operations, and the markets and communities in which we, our clients, and partners operate, results of operations, revenues, operating expenses, and capital expenditures, sales and marketing initiatives and competition. In some cases, you can identify forward-looking statements because they contain words such as "may," "might," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "suggests," "potential" or "continue" or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. These statements are not guarantees of future performance; they reflect our current views with respect to future events and are based on assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from expectations or results projected or implied by forward-looking statements.

We discuss many of these risks in other filings we make from time to time with the Securities and Exchange Commission (the "SEC"). Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q, which are inherently subject to change and involve risks and uncertainties. Unless required by federal securities laws, we assume no obligation to update any of these forward-looking statements, or to update the reasons actual results could differ materially from those anticipated, to reflect circumstances or events that occur after the statements are made. Given these uncertainties, investors should not place undue reliance on these forward-looking statements.

Investors should read this Quarterly Report on Form 10-Q and the documents that we reference in this report and have filed with the SEC and on SEDAR, including our Annual Report on Form 10-K, filed with the SEC on April 7, 2021, with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements for the three and nine months ended September 30, 2021 and 2020.

Unless the context otherwise indicates, when used in this Quarterly Report on Form 10-Q, "4Front," "the Company," "we," "us" and "our" refer to 4Front Ventures Corp., a British Columbia corporation, and its wholly owned subsidiaries on a consolidated basis.







Overview

The Company exists pursuant to the provisions of the Business 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 September 30, 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 September 30, 2021, the Company operated two production facilities in Massachusetts and one in Illinois. 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



                                       22

--------------------------------------------------------------------------------

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 Interim 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 ("$") unless otherwise specified. Canadian dollar amounts are denoted by "C$".





Recent Developments

Officer Personnel Changes

Effective July 1, 2021, the Company terminated its month-to-month independent contractor arrangement with Peter Rennard in his position as Interim Chief Financial Officer of the Company. Mr. Rennard's termination was not in connection with any known disagreement with the Company on any matter relating to the Company's operations, policies or practices, including accounting principles and practices.

Effective July 15, 2021, the Company's board of directors appointed Andrew Thut as the Company's Interim Chief Financial Officer while the Company continues its search for a permanent Chief Financial Officer. Mr. Thut joined the Company in October 2014 as its Chief Investment Officer and will continue to serve as Chief Investment Officer during his tenure as Interim Chief Financial Officer of the Company.

Final Close on Illinois Cultivation and Production Facility Project

The Company announced on August 5, 2021 the first closing of a multiphase expansion project to build an up to 558,000 sq. ft. cultivation and production facility (the "Facility") in the Village of Matteson, Illinois, located outside of Chicago. Construction on Phase 1, a 350,000 square foot cultivation and production facility, began in Q3 2021 and is expected to be completed in Q4 2022. The facility is expected to begin operations in Q1 2023. The Company plans to use the Facility to produce the Company's more than 20 in-house brands and 200 products, which will be offered to Illinois customers at an accessible price point at its Mission Dispensaries and partner dispensaries across Illinois.

Massachusetts Brookline Mission Dispensary Grand Opening

On July 15, 2021, the Company received final approval from the Massachusetts Cannabis Control Commission to open the Company's third adult-use retail dispensary in Massachusetts. Located at 1024 Commonwealth Avenue, Boston, MA, the dispensary held its grand opening on August 21, 2021.

Acquisition of New England Cannabis Corporation

Please see Note 18 of the financial statements for a full description of the Company's entrance into the NECC Merger Agreement on October 6, 2021, and related transactions.





Commerce Facility


The Company was awarded a temporary cannabis business license for its 170,000 sq. ft. Cannabis Manufacturing Facility (the "Facility") in Commerce, California on October 27, 2021. The Company intends that the Facility will manufacture both in-house and partner brands, including infused pre-rolls, gummies, hard candies, fruit chews, caramels, mints, soft gel capsules, vapes, tinctures and other manufactured infused products. As of November 17, 2021, the Company has commenced permitted manufacturing activities allowable under the license.





COVID-19


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 Quarterly Report on Form 10-Q, sales continue to meet or exceed



                                       23

--------------------------------------------------------------------------------

comparable periods prior to March 2020, 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. While it is anticipated in the ensuing months that authorized vaccines will become more widely available to the public, vaccine availability remains limited in certain regions and the timeline to sufficiently mitigate the effects of the pandemic through vaccines or other measures remains uncertain. If COVID-19 persists or worsens before vaccines or other treatments are made widely available, there may be further external developments, such as restrictions imposed by government authorities, that are beyond our control and may impact our operating plans. Parts of our business have experienced and may continue to experience, operational disruption and customer demand impacts. Furthermore, the impact of the Delta variant cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of COVID-19 vaccines against the Delta variant and the response by governmental bodies and regulators. As such, we are unable to reasonably estimate the duration of the pandemic or fully ascertain its long-term impact to our business.







RESULTS OF OPERATIONS



                                             For the Three Months          For the Nine Months
                                              Ended September 30,          Ended September 30,
                                              2021           2020           2021          2020
Total revenues                             $    25,941     $  15,293     $   76,032     $  40,646
Cost of goods sold                             (10,269 )      (6,061 )      (30,210 )     (18,756 )
Gross profit                                    15,672         9,232         45,822        21,890
Total expenses                                 (20,266 )     (17,962 )      (67,718 )     (49,763 )
Net loss from continuing operations             (4,594 )      (8,730 )      (21,896 )     (27,873 )
Net income from discontinued operations              -         4,761              -        15,473
Net loss                                        (4,594 )      (3,969 )   $  (21,896 )   $ (12,400 )
Net income attributable to
non-controlling interest                             5            67             15            41
Net loss attributable to shareholders           (4,599 )      (4,036 )   $  (21,911 )   $ (12,441 )




                     September 30,       December 31,
                         2021                2020
Total assets        $       212,112      $     204,756
Total liabilities           160,533            162,553
Total equity                 51,579             42,203




Components of Revenue

Revenue

As of September 30, 2021, 4Front owns or manages operations in California, Illinois, Massachusetts, Michigan, and Washington. Since commencing operations 4Front has generated revenue in each state. Adult-use sales began in August 2020 in Georgetown, MA, and in September 2020 in Worcester, MA. The Company opened its Calumet City, IL dispensary in December 2020 and opened its Brookline, MA dispensary under adult-use in August 2021. The additional adult-use sales and the new dispensaries have driven sales higher in 2021. The Company utilizes its cultivation and production techniques developed by Cannex for its Washington state customers to increase the yields and quality of products produced in Illinois and Massachusetts. The ability to supply the Company's adult=use dispensaries will ensure that the Company can meet increasing demand. As production increases, the Company will begin to sell excess production in the wholesale market. The Company also sells equipment and supplies to third party cannabis operators and sells non-THC wellness products through its Pure Ratios subsidiary.

Revenue from Sale of Goods

Revenue from sale of goods includes the sale of cannabis products through the Company's dispensaries. These products are either manufactured by the Company or are purchased from other licensed cannabis companies. Also included are equipment and supply sales and non-THC wellness product sales.



                                       24

--------------------------------------------------------------------------------

Real Estate Income

Real estate income from leasing cannabis production facilities to third party cannabis operators in the state of Washington.

Gross Profit

Gross profit is revenue less cost of goods sold. Cost of goods sold includes the costs to purchase products from third parties and includes finished goods such as flower, edibles, and concentrates. Cost of goods sold also includes costs to internally manufacture products such as packaging and other supplies, and allocated overhead which includes rent, salaries, utilities, and related costs. Cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis products, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes.

Total Operating Expenses

Total operating expenses include selling and marketing expenses, general and administrative expenses, depreciation and amortization, and equity-based compensation.

Selling and marketing expenses generally correlate to revenue. These expenses include labor costs and other selling costs to support the Company's retail locations. The Company expects selling costs as a percentage of revenue to decrease over time as volumes increase at the Massachusetts and Illinois dispensaries due to adult-use sales and as the Company begins to sell cannabis to the wholesale market.

General and administrative expenses include costs incurred at the corporate offices, primarily related to personnel costs, benefits, and other professional service costs. These costs are anticipated to be stable.

Provision for Income Taxes

Although the Company is a Canadian corporation, we are classified as a U.S. domestic corporation for U.S. federal income tax purposes under section 7874(b) of the U.S. Internal Revenue Code of 1986, as amended (the "U.S. Tax Code") and will be subject to U.S. federal income tax on our worldwide income. However, for Canadian tax purposes, regardless of any application of section 7874 of the U.S. Tax Code, we are treated as a Canadian resident corporation. As a result, we are subject to taxation in both Canada and the United States, which could have a material adverse effect on our financial condition and results of operations.

We are subject to income taxes in the jurisdictions in which we operate, and, consequently, income tax expense is a function of the allocation of taxable income by jurisdiction and the various activities that impact the timing of taxable events. Section 280E of the U.S. Tax Code prohibits businesses from deducting certain expenses associated with trafficking-controlled substances (within the meaning of Schedule I and II of the CSA). The Internal Revenue Service of the United States ("IRS") has invoked section 280E of the U.S. Tax Code in tax audits against various cannabis businesses in the United States that are permitted under applicable state laws. Although the IRS issued a clarification allowing the deduction of certain expenses, the scope of such items is interpreted very narrowly, and the bulk of operating costs and general administrative costs are not permissible deductions. As a result, we will have an effective tax rate in the U.S. significantly higher than the rate typically applicable to U.S. corporations. While there are currently several pending cases before various U.S. administrative and federal courts challenging these restrictions, there can be no assurance that these courts will issue an interpretation of Section 280E of the U.S. Tax Code favorable to cannabis businesses.

Three-Months Ended September 30, 2021

Revenue from sale of goods

Revenue for the three months ended September 30, 2021 from the Company's retail and wholesale sales are $23,126, which is an increase of $10,716 or 86% compared to $12,410 for the three months ended September 30, 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 increased sales from the other two Massachusetts dispensaries.

Revenue from the sale of equipment and supplies to third party cannabis operators was $1,260 for the three months ended September 30, 2021 as compared to $1,474 for the three months ended September 2020. This $214 or 15% decrease is due to normal fluctuation in revenue between quarters and future revenue is expected to remain at 2021 levels.

Revenue from the CBD Wellness segment is $413 for the three months ended September 30, 2021 as compared to $2,631 for the three months ended September 30, 2020. The revenue decrease of $2,218 is largely attributable to changes in marketing strategy prioritizing profitable growth with a focus on achieving positive cash flow.



                                       25

--------------------------------------------------------------------------------

Real Estate Income

Real estate income for the three months ended September 30, 2021 is $2,815 which is relatively flat from $2,883 for the three months ended September 30, 2020.

Cost of Goods Sold

Cost of goods sold ("COGS") for the three months ended September 30, 2021 is $10,269, an increase of $4,208 or 69%%, from $6,061 for the same period ended September 30, 2020. The difference in percentage increases is attributable to the margin benefits of increased sales on internally produced products.

Gross Profit

Gross profit margin for the three months ended September 30, 2021 is 56% compared to 55% for the same period ended 2020. The $6,440 increase in gross profit margin is due to lower COGS from internally produced products.

Total Operating Expenses

Total operating expense for the three months ended September 30, 2021 is $16,596, an increase of $6,319 from $10,277 for the period ended 2020. This increase is primarily due to: $1.9 million greater sales & marketing expenses due to the new dispensaries and increased retail staffing to meet adult-use sales demand; $3.3 million greater general and administrative expenses largely attributable to start-up costs for the opening of the Commerce Facility; $1.1 million greater equity based compensation expense.

Total Other Income (Expense)

Net other income for the three months ended September 30, 2021 increased $6,052 to $871 from a $5,181 net expense in the same period ended 2020. The overall net increase in other income is due to a $3.3 million in change in fair value of derivative liability and $2.1 million lower interest expense after debt was repaid with proceeds from sales leasebacks.

Net Income (Loss) Before Income Taxes

Net loss before taxes and non-controlling interest for the three months ended September 30, 2021 is $53, which is a $6,173 decrease compared to the $6,226 net loss before income taxes for the three months ended September 30, 2020 due the reasons explained above.

Nine-Months Ended September 30, 2021

Revenue from sale of goods

Revenue for the nine months ended September 30, 2021 from the Company's retail and wholesale sales increased $35,526 or 111% to $67,658 compared to $32,132 for the three months ended September 30, 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 benefitting from a full nine months of adult-use sales in 2021.

Revenue from the sale of equipment and supplies to third party cannabis operators was $3,628 for the nine months ended September 30, 2021 as compared to $3,238 for the nine months ended September 2020. This $390 or 12% increase is due to normal fluctuation in revenue between periods and future revenue is expected to remain at 2021 levels.

Revenue from the CBD Wellness segment is $1,959 for the nine months ended September 30, 2021 as compared to $6,090 for the similar period ended 2020. This revenue decrease of $4,130 or 68% largely attributable to changes in marketing strategy prioritizing profitable growth with a focus on achieving positive cash flow.




                                       26

--------------------------------------------------------------------------------






Real Estate Income

Real estate income for the nine months ended September 30, 2021 is $8,374, which is relatively flat from $8,514 recognized during the similar period ended September 30, 2020.

Cost of Goods Sold

COGS for the nine months ended September 30, 2021 is $30,210, an increase of $11,454 or 61%, from $18,756 for the period ended September 30, 2020. The favorable percentage increase as compared to 111%% in revenue growth was due to the margin benefits from increased sales of internally produced products.

Gross Profit

Gross profit margin for the nine months ended September 30, 2021 is 51% compared to 42% for the period ended 2020. The increase in gross profit margin is due to lower COGS from internally developed products.

Total Operating Expenses

Total operating expense for the nine months ended September 30, 2021 is $45,725, an increase of $10,800 from $34,925 for the period ended 2020. This increase is primarily due to $4.1 million greater equity based compensation, $5.4 million greater general and administrative expense, and $1.7 million greater selling and marketing expense.

Total Other Income (Expense)

Net other expense for the nine months ended September 30, 2021 increased $2,037 to $11,448 from $9,411 in the similar period ended 2020. The overall net increase in other expense for the period is due to $2.9 million in change in fair value of derivative liability and $2.7 million from the settlement of a business dispute in 2020, offset by a decrease in interest expense of $3.8 million due refinancing via sales leaseback transactions.

Net Income (Loss) Before Income Taxes

Net loss before taxes and non-controlling interest for the nine months ended September 30, 2021 is $11,351 compared to $22,446 for the similar period ended 2020, an improvement of $19,073. due the reasons explained above.

Non-GAAP Financial and Performance Measures

In addition to providing financial measurements based on GAAP, the Company provides 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. The Company utilizes the non-GAAP financial measurement of Adjusted EBITDA, which management believes reflects the Company's 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. Management also believes 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 measure 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 these non-GAAP measures, the Company's methods may differ from those used by others, and accordingly, the use of this measurement 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.





Adjusted EBITDA

Adjusted EBITDA is defined by the Company as earnings before interest, taxes, depreciation and amortization, share-based compensation expense, other non-cash expenses, and one-time charges related to acquisition costs, financing related costs, extraordinary



                                       27

--------------------------------------------------------------------------------

pre-opening expenses and non-recurring expenses. 4Front considers these measures to be an important indicator of the financial strength and performance of its business. The following table reconciles Pro Forma Adjusted EBITDA to its closest GAAP measure.





                                                            Nine Months Ended September 30,
                                                              2021                   2020
Net Loss from Continuing Operations (GAAP)              $        (21,896 )     $        (27,873 )
Interest income                                                      (13 )                  (71 )
Interest expense                                                   7,894                 11,691

Amortization of loan discount upon conversion of debt to equity

                                                          2,915                      -
Income tax expense                                                10,545                  5,427
Depreciation and amortization                                      3,667                  7,148
Accretion                                                              -                   (274 )
Equity based compensation                                          7,978                  3,792
Change in value of derivative liability                             (502 )                    -
Non-cash lease expense                                             2,203                      -
Loss on lease termination                                          1,210                  1,210
Commerce facility pre-opening expense                              2,035                      -
Legal settlements and other fair value adjustements                    -                 (2,209 )
Acquisition, transaction, and other one-time costs                 4,854                  1,974
Adjusted EBITDA (Non-GAAP)                              $         20,891       $            815


Liquidity and Capital Resources

As of September 30, 2021 and December 31, 2020, the Company had total current liabilities of $45,923 and $37,784, respectively and current assets of $43,267 and $44,736, respectively to meet its current obligations. As of September 30, 2021, the Company's working capital is $(6,697), a $13,649 decrease as compared to December 31, 2020, driven primarily by construction costs to complete the Commerce facility.

Specific factors affecting the Company's liquidity are:



   •  A loan due to LI Lending, LLC (see Note 11 of the Financial Statements
      entitled Related Party Transactions) with a balance of $47,588 at September
      30, 2021 is due in May 2024.

The Company is generating cash from retail sales and the opening of the Commerce facility is expected to generate additional cash to meet the needs of the Company. The Company may raise capital through equity offerings or the issuance of convertible debt to meet future capital requirements.

Cash Flows

Cash Flow from Operating Activities

Net cash provided in continued operating activities is $3,968 for the nine months ended September 30, 2021, an increase of $3,146 as compared to the nine months ended September 30, 2020. The increase is due to higher sales at the Company's dispensaries, corporate cost reductions, and improved sell-through in vertically-integrated locations.

Cash Flow from Investing Activities

Net cash used in continued investing activities is $(12,745) for the nine months ended September 30, 2021, an increase of $1,742 as compared to the nine months ended September 30, 2020. The increase is primarily due to additional purchases of property and equipment during the nine months ended September 30, 2021, as compared to the same period in the prior year.

Cash Flow from Financing Activities

Net cash used by financing activities is $1,678 for the nine months ended September 30, 2021, a decrease of $657 as compared to the nine months ended September 30, 2020. The decrease is primarily attributed to decreases in equity issuance in the period as compared to the same period in the prior year.






                                       28

--------------------------------------------------------------------------------

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.



Critical Accounting Policies



We review new accounting standards as issued. Although some of these accounting standards issued or effective after the end of our previous fiscal year may be applicable to the Company, we have not identified any standards that we believe merit further discussion. We do not expect the adoption of any recently issued accounting pronouncements to have a significant impact on our financial position, results of operations, or cash flows.





                                       29

--------------------------------------------------------------------------------

© Edgar Online, source Glimpses