GLAS 0001104659-22-041796 40-F/A as filed: Apr 1, 2022

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Exhibit 99.1

GLASS HOUSE BRANDS INC.

(FORMERLY MERCER PARK BRAND ACQUISITION CORP.)

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED

DECEMBER 31, 2021

AND

DECEMBER 31, 2020

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GLASS HOUSE BRANDS INC.
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		Page(s)
Report of Independent Registered Public Accounting Firm (PCAOB ID 324)		1
Consolidated Balance Sheets		2
Consolidated Statements of Operations		3
Consolidated Statements of Changes in Shareholders’ Equity		4
Consolidated Statements of Cash Flows		5 – 6
Notes to Consolidated Financial Statements		7 – 45

Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Glass House Brands Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Glass House Brands Inc. (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the two-year period ended December 31, 2021, and the related notes to the consolidated financial statements (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two-year period ended December 31, 2021, in conformity with the accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Macias Gini & O’Connell LLP

We have served as the Company's auditor since 2020.

Los Angeles, California

March 22, 2022

Macias Gini & O’Connell LLP
2029 Century Park East, Suite 1500
Los Angeles, CA 90067		www.mgocpa.com

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GLASS HOUSE BRANDS INC.
Consolidated Balance Sheets
As of December 31, 2021 and 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)


	2021		2020
ASSETS
Current Assets:
Cash	$	51,066,831	$	4,535,251
Restricted Cash		3,000,000		—
Accounts Receivable, Net		2,893,911		5,141,021
Prepaid Expenses and Other Current Assets		5,562,963		1,018,212
Inventory		6,596,302		6,866,002
Current Portion of Notes Receivable		—		904,534
Total Current Assets		69,120,007		18,465,020
Operating Lease Right-of-Use Assets, Net		3,077,730		2,532,629
Investments		7,196,359		10,701,868
Property, Plant and Equipment, Net		195,798,524		27,192,027
Intangible Assets, Net		5,629,833		5,279,000
Goodwill		4,918,823		4,815,999
Other Assets		2,339,993		554,266
TOTAL ASSETS	$	288,081,269	$	69,540,809
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES:
Current Liabilities:
Accounts Payable and Accrued Liabilities	$	10,215,004	$	6,570,715
Income Taxes Payable		5,038,983		4,740,003
Contingent Shares and Earnout Liabilities		38,428,700		—
Shares Payable		2,756,830		—
Derivative Liabilities - Convertible Debt		—		7,365,000
Current Portion of Operating Lease Liabilities		269,154		327,329
Current Portion of Notes Payable		37,986		601,187
Total Current Liabilities		56,746,657		19,604,234

Operating Lease Liabilities, Net of Current Portion		2,865,480		2,318,852
Other Non-Current Liabilities		1,449,045		849,358
Deferred Tax Liabilities		1,330,815		1,420,583
Notes Payable, Net of Current Portion		44,817,436		15,368,892
Notes Payable, Net of Current Portion - Related Parties		—		3,703,966
TOTAL LIABILITIES		107,209,433		43,265,885

SHAREHOLDERS' EQUITY:
Multiple Voting Shares (No par value, unlimited shares authorized, 4,754,979 and nil shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively)		—		—
Subordinate Voting Shares (No par value, unlimited shares authorized, 38,563,405 and nil shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively)		—		—
Exchangeable Shares (No par value, unlimited shares authorized, 18,256,784 and 23,191,563 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively)		—		—
Additional Paid-In Capital		241,896,900		42,934,402
Accumulated Deficit		(60,827,290)		(16,659,478)
Total Shareholders' Equity Attributable to the Company		181,069,610		26,274,924
Non-Controlling Interest		(197,774)		—
TOTAL SHAREHOLDERS' EQUITY		180,871,836		26,274,924
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	288,081,269	$	69,540,809

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GLASS HOUSE BRANDS INC.
Consolidated Statements of Operations
For the Years Ended December 31, 2021 and 2020
(Amounts Expressed in United States Dollars Unless Otherwise Stated)


	2021		2020
Revenues, Net	$	69,446,852	$	48,259,601
Cost of Goods Sold		53,427,461		29,519,143
Gross Profit		16,019,391		18,740,458

Operating Expenses:
General and Administrative		33,780,783		18,637,477
Sales and Marketing		3,530,529		1,489,664
Professional Fees		9,078,289		2,040,004
Depreciation and Amortization		4,767,396		2,576,263
Total Operating Expenses		51,156,997		24,743,408
Loss from Operations		(35,137,606)		(6,002,950)

Other Expense (Income):
Interest Expense		2,736,875		2,179,137
Interest Income		(64,837)		(115,572)
Loss on Investments		1,089,047		2,126,112
(Gain) Loss on Change in Fair Value of Derivative Liabilities		(825,000)		251,663
(Gain) on Change in Fair Value of Contingent Liabilities		(4,031,634)		—
Loss on Disposition of Subsidiary		6,090,337		—
Impairment Expense		817,875		—
Other Expense (Income), Net		117,216		(203,345)
Total Other Expense, Net		5,929,879		4,237,995

Loss from Operations Before Provision for Income Tax Expense		(41,067,485)		(10,240,945)
Provision for Income Tax Expense		3,298,101		6,418,533
Net Loss		(44,365,586)		(16,659,478)
Net Loss Attributable to Non-Controlling Interest		(197,774)		—
Net Loss Attributable to the Company	$	(44,167,812)	$	(16,659,478)
Loss Per Share - Basic and Diluted	$	(1.13)	$	(0.78)
Weighted-Average Shares Outstanding - Basic and Diluted		39,243,005		21,265,601

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GLASS HOUSE BRANDS INC.

Consolidated Statements of Changes in Shareholders’ Equity

For the Years Ended December 31, 2021 and 2020

(Amounts Expressed in United States Dollars Unless Otherwise Stated)


	$ Amount		Units	Units	Units		Units	$Amount		Units	$Amount		Additional				TOTAL EQUITY

			Multiple	Subordinate	Exchangeable		Class A	Class A		Class B	Class B		Paid-				ATTRIBUTABLE		Non-		TOTAL
	Members'		Voting	Voting	Voting		Common	Common		Common	Common		In			Accumulated	TO		Controlling		SHAREHOLDERS'
	Equity		Shares	Shares	Shares		Shares	Shares		Shares	Shares		Capital		Deficit		SHAREHOLDERS		Interest		EQUITY

BALANCE AS OF DECEMBER 31, 2019	$	35,047,515	—	—		—	—	$	—	—	$	—	$	—	$	—	$	35,047,515	$	3,554,731	$	38,602,246
Retroactive Application of Recapitalization (1)		(35,047,515)	—	—		22,388,322	—		—	—		—		38,602,246		—		3,554,731		(3,554,731)		—

Balance at December 31, 2019, After Effect of Retroactive Application of Recapitalization (1)		—	—	—		22,388,322	—		—	—		—		38,602,246		—		38,602,246		—		38,602,246
Net Loss		—	—	—		—	—		—	—		—		—		(16,659,478)		(16,659,478)		—		(16,659,478)
Contributions		—	—	—		—	—		—	—		—		11,835		—		11,835		—		11,835
Share-Based Compensation from Options		—	—	—		—	—		—	—		—		2,547,792		—		2,547,792		—		2,547,792
Issuance of Warrants in Relief of Liabilities		—	—	—		—	—		—	—		—		426,887		—		426,887		—		426,887
Issuance for Business Acquisition (1)		—	—	—		1,004,676	—		—	—		—		3,095,642		—		3,095,642		—		3,095,642
Cancellation of Shares for Issuance of Convertible Debt (1)		—	—	—		(201,435)	—		—	—		—		(1,750,000)		—		(1,750,000)		—		(1,750,000)
BALANCE AS OF DECEMBER 31, 2020	$	—	—	—		23,191,563	—	$	—	—	$	—	$	42,934,402	$	(16,659,478)	$	26,274,924	$	—	$	26,274,924


BALANCE AS OF DECEMBER 31, 2020, As Previously Reported	$	—	—	—		—	205,900,164	$	2,059	32,295,270	$	323	$	42,932,020	$	(16,659,478)	$	26,274,924	$	—	$	26,274,924
Retroactive Application of Recapitalization (1)		—	—	—		23,191,563	(205,900,164)		(2,059)	(32,295,270)		(323)		2,382		—		—		—		—
Balance at December 31, 2020, After Effect of Retroactive Application of Recapitalization (1)		—	—	—		23,191,563	—		—	—		—		42,934,402		(16,659,478)		26,274,924		—		26,274,924
Net Loss		—	—	—		—	—		—	—		—		—		(44,167,812)		(44,167,812)		(197,774)		(44,365,586)
Share-Based Compensation from Options and RSU's		—	—	—		—	—		—	—		—		8,484,913		—		8,484,913		—		8,484,913
Share-Based Compensation from Common Shares (1)		—	—	—		48,682	—		—	—		—		225,000		—		225,000		—		225,000
Issuance for Business Acquisition (1)		—	—	—		731,369	—		—	—		—		3,380,278		—		3,380,278		—		3,380,278
Issuance for Conversion of Convertible Debt (1)		—	—	—		646,096	—		—	—		—		1,925,000		—		1,925,000		—		1,925,000
Preferred Shares of Subsidiary Issued for Conversion of Debt (1)		—	—	—		—	—		—	—		—		31,285,258		—		31,285,258		—		31,285,258
Derivative Liability Reclassed to Equity Upon Conversion of Debt		—	—	—		—	—		—	—		—		6,722,000		—		6,722,000		—		6,722,000
Issuance for Conversion of Preferred Shares (1)		—	—	—		2,577,227	—		—	—		—		—		—		—		—		—
Issuance for Exercise of Warrants (1)		—	—	—		160,149	—		—	—		—		—		—		—		—		—
Issuance for Exercise of Options		—	—	479,195		—	—		—	—		—		88,654		—		88,654		—		88,654
Shares Payable for Asset Acquisition		—	—	—		—	—		—	—		—		748,500		—		748,500		—		748,500
Reclass of Shares Payable		—	—	—		—	—		—	—		—		(2,756,830)		—		(2,756,830)		—		(2,756,830)
Fair Value of Warrants Issued in Connection with Debt		—	—	—		—	—		—	—		—		3,276,764		—		3,276,764		—		3,276,764
Shares Issued in Business Combination for Cash		—	4,754,979	22,335,908		—	—		—	—		—		116,630,384		—		116,630,384		—		116,630,384
Issuance for Conversion of Exchangable Shares		—	—	9,098,302		(9,098,302)	—		—	—		—		—		—		—		—		—
Cash Received for Shares Issued		—	—	150,000		—	—		—	—		—		1,500,000		—		1,500,000		—		1,500,000
Shares Issued for the Purchase of Property and Equipment		—	—	6,500,000		—	—		—	—		—		29,250,000		—		29,250,000		—		29,250,000
Distributions to Preferred Shareholders		—	—	—		—	—		—	—		—		(1,797,423)		—		(1,797,423)		—		(1,797,423)
BALANCE AS OF DECEMBER 31, 2021	$	—	4,754,979	38,563,405		18,256,784	—	$	—	—	$	—	$	241,896,900	$	(60,827,290)	$	181,069,610	$	(197,774)	$	180,871,836

(1)	Amounts shown have been retroactively restated to give effect to the recapitalization transaction at a rate of 1 to 10.27078 GH Group shares.

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GLASS HOUSE BRANDS INC.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2021 and 2020

(Amounts Expressed in United States Dollars Unless Otherwise Stated)


	2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss	$	(44,365,586)	$	(16,659,478)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Deferred Tax Expense		(89,768)		1,330,584
Bad Debt Expense		3,286,494		—
Interest Capitalized to Notes Payable		1,427,522		1,091,341
Interest Income Capitalized to Principal Balance		(64,085)		(114,113)
Depreciation and Amortization		4,767,396		2,576,263
Loss on Investments		1,089,047		2,126,112
Impairment Expense		817,875		—
Loss on Disposition of Subsidiary		6,090,337		—
Gain on Extinguishment of Debt		—		(184,057)
Non-Cash Operating Lease Costs		730,881		919,519
Accretion of Debt Discount and Loan Origination Fees		953,549		1,061,463
(Gain) Loss on Change in Fair Value of Derivative Liabilities		(825,000)		251,663
(Gain) on Change in Fair Value of Contingent Liabilities		(4,031,634)		—
Share-Based Compensation		8,709,913		2,547,792
Changes in Operating Assets and Liabilities:
Accounts Receivable		2,182,335		(3,540,684)
Prepaid Expenses and Other Current Assets		(2,915,401)		(542,533)
Inventory		612,989		(3,764,209)
Other Assets		(1,881,146)		(24,701)
Accounts Payable and Accrued Liabilities		3,242,190		1,888,335
Cash Payments - Operating Lease Liabilities		(712,358)		(842,717)
Income Taxes Payable		89,514		3,875,626
Other Non-Current Liabilities		599,687		306,115
NET CASH USED IN OPERATING ACTIVITIES		(20,285,249)		(7,697,679)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment		(108,495,825)		(3,850,589)
Issuance of Note Receivable		(2,274,167)		(1,140,011)
Contributions to Equity Method Investments		(787,502)		(2,987,061)
Distributions Received from Equity Method Investments		340,780		340,138
Cash Paid for Business Acquisition, Net of Cash and Cash Equivalents Acquired		(284,028)		(81,522)
NET CASH USED IN INVESTING ACTIVITIES		(111,500,742)		(7,719,045)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the Issuance of Notes Payable, Third Parties and Related Parties		58,209,714		18,449,748
Payments on Notes Payable, Third Parties and Related Parties		(954,092)		(1,141,494)
Cash Received Upon Issuance of Equity		125,859,372		—
Contributions		—		11,835
Distributions to Preferred Shareholders		(1,797,423)		—
NET CASH PROVIDED BY FINANCING ACTIVITIES		181,317,571		17,320,089
NET INCREASE IN CASH AND CASH EQUIVALENTS		49,531,580		1,903,365
Cash and Cash Equivalents, Beginning of Period		4,535,251		2,631,886
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	54,066,831	$	4,535,251

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GLASS HOUSE BRANDS INC.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2021 and 2020

(Amounts Expressed in United States Dollars Unless Otherwise Stated)


	2021		2020
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION
Cash Paid for Interest	$	379,956	$	316,859
Cash Paid for Taxes	$	2,643,093	$	906,209

Non-Cash Investing and Financing Activities:
Net Assets Acquired From an Acquisition, Excluding Cash Acquired	$	5,709,615	$	7,902,973
Proceeds Deposited Into Escrow Account	$	2,029,932	$	—
Purchase of Property and Equipment from Proceeds of Note Payable, Third Parties	$	255,757	$	—
Conversion of Convertible Debt and Derivative Liability to Equity	$	39,932,258	$	477,007
Shares Payable for Asset Acquisition	$	748,500	$	—
Issuance of Warrants for Relief of Liabilities	$	—	$	426,887
Cancellation of Shares for Issuance of Convertible Debt	$	—	$	1,750,000
Recognition of Right-of-Use Assets for Operating Leases	$	1,419,650	$	1,182,942
Conversion of Note Receivable to Equity of Investee	$	—	$	2,045,309
Fair Value of Warrants Issued in Connection with Debt	$	3,276,764	$	—
Acquisition of Non-Controlling Interest Upon Roll-Up	$	—	$	3,554,731
Derivative Liability Incurred Upon Issuance of Convertible Debt	$	182,000	$	3,095,642
Reclass of Shares Payable	$	2,756,830	$	—
Shares Issued for the Purchase of Property and Equipment	$	29,250,000	$	—
Contingent Liabilities Recognized for the Purchase of Property and Equipment	$	34,820,000	$	—
Contingent Earnout Recorded as a Liability	$	7,640,334	$	—

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

1.NATURE OF OPERATIONS

Glass House Brands Inc. (the “Company”), formerly known as Mercer Park Brand Acquisition Corp. (“Mercer Park”), was incorporated under the Business Corporations Act (British Columbia) on April 16, 2019. The Company is a vertically integrated cannabis company that operates in the state of California. The Company, through its subsidiaries cultivates, manufactures, and distributes cannabis bulk flower and trim to wholesalers and consumer packaged goods to third-party retail stores in the state of California. The Company also owns and operates retail cannabis stores in the state of California. The Company’s subordinate voting shares, restricted voting shares and limited voting shares (collectively, the “Equity Shares”), and common share purchase warrants are listed on the Neo Exchange Inc. (the “Neo Exchange”), trading under the symbols “GLAS.A.U” and “GLAS.WT.U”, respectively. The Equity Shares and common share purchase warrants also trade on the OTCQX in the United States under the symbols GLASF and GHBWF, respectively. The head office and principal address of the Company is 3645 Long Beach Boulevard, Long Beach, California 90807. The Company’s registered office in Canada is 2200 HSBC Building 885 West Georgia Street, Vancouver, British Columbia, Canada V6C 3E8.

Business Combination Transaction

On January 31, 2020, pursuant to an Agreement and Plan of Merger (and various securities exchange agreements), a roll-up transaction (“Roll-Up”) was consummated whereby the assets and liabilities of a combined group of investment fund entities were merged with and into GH Group, Inc., formerly known as California Cannabis Enterprises, Inc. (“GH Group”), whereby GH Group survived the merger and now owns and controls the assets from such merged out entities.

On June 29, 2021, Mercer Park, a special purpose acquisition corporation (or “SPAC”) listed on the Neo Exchange in Canada, consummated its qualifying transaction (the “Business Combination”) pursuant to the terms of an Agreement and Plan of Merger dated as of April 8, 2021, as amended (the “Business Combination Agreement”), pursuant to which Mercer Park indirectly acquired 100% of the common equity interests of GH Group, which included all outstanding Class A and Class B common shares and certain Series A preferred shares (the “Preferred Shares”) of GH Group. In addition, Mercer Park assumed all outstanding common share purchase warrants and Preferred Shares purchase warrants and assumed or exchanged or caused to be exchanged all qualified incentive stock options of GH Group. The Business Combination was effectuated by a reverse merger of an indirect subsidiary of Mercer Park with GH Group, with GH Group as the surviving entity, and GH Group becoming a majority-owned indirect subsidiary of the Company. As a result of the Business Combination, GH Group’s shareholders became the controlling shareholders of Mercer Park, which changed its name to Glass House Brands Inc. concurrent with the closing of the Business Combination.

Upon closing of the Business Combination, Mercer Park indirectly acquired all of the issued and outstanding securities of GH Group with the exception of some of GH Group’s Preferred Shares, in exchange for an aggregate of 50,151,101 Equity Shares of the Company (which total includes, on an as-exchanged basis, Equity Shares issuable upon exchange of outstanding exchangeable shares (the “Exchangeable Shares”) of the Company’s subsidiary, MPB Acquisition Corp. (“MPB”)). The Company also issued 4,754,979 Multiple Voting Shares to certain founders of GH Group. In addition, 28,489,500 of the common share purchase warrants previously issued and outstanding in the capital of Mercer Park were assumed and remain outstanding. Of the 50,151,101 Equity Shares (inclusive of Exchangeable Shares on an as-exchanged basis) noted above, 731,369 Exchangeable Shares are held in escrow pending any final working capital adjustments. Additionally, 1,008,975 Equity Shares issued to the previous sponsor of Mercer Park are subject to a contractual lock-up with the Company. These shares are to be released from the lock-up restrictions based upon the amount of cash raised by the Company from certain debt and equity financings through June 2023. As of December 31, 2021, the Company released 392,819 Equity Shares that were originally subject to the lock-up restrictions, and 616,156 Equity Shares are subject to a capital-based earnout of permitted debt or equity financings within one year following the closing the Business Combination. As of December 31, 2021, additional earnout payments consisting of up to an additional 6,306,095 Equity Shares are issuable to the previous sponsor of Mercer Park and all holders of record of the Company’s Equity Shares, Exchangeable Shares, vested stock options and vested restricted stock units (“RSUs”) as of December 31, 2021, in the event the 20-day volume-weighted average price (“VWAP”) of the Equity Shares reaches $13.00 or $15.00 within two years of closing the Business Combination. In the event that the permitted debt or equity raised by the Company and the Equity Share price targets are not met, the earnout payments will be forfeited.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

1.NATURE OF OPERATIONS (Continued)

GH Group was deemed to be the acquirer in the Business Combination for accounting and financial reporting purposes based on an analysis of the criteria outlined in Accounting Standards Codification ("ASC") 805 “Business Combinations” (“ASC 805”). This determination was primarily based on GH Group’s stockholders prior to the Business Combination having a majority of the voting interests in the Company following the closing of the Business Combination, GH Group’s operations comprising the entirety of the ongoing operations of the Company, GH Group’s designees comprising a majority of the board of directors of Company, and GH Group’s senior management comprising the senior management of the Company. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of GH Group issuing stock for the net assets of Mercer Park, accompanied by a recapitalization. The net assets of Mercer Park are stated at historical cost, with no goodwill or other intangible assets recorded.

While Mercer Park was the legal acquirer in the Business Combination, because GH Group was deemed the accounting acquirer, the historical financial statements of GH Group became the historical financial statements of the Company upon the consummation of the Business Combination. As a result, the financial statements included in this report reflect (i) the historical operating results of GH Group prior to the Business Combination; (ii) the combined results of the Company and GH Group following the closing of the Business Combination; (iii) the assets and liabilities of GH Group at their historical cost; and (iv) the Company’s equity structure before and after the Business Combination.

In accordance with applicable guidance, the equity structure of the Company has been restated in all comparative periods to reflect the number of Equity Shares (including Exchangeable Shares on an as-exchanged basis) issued to GH Group’s shareholders in connection with the Business Combination on the statement of changes in shareholders equity and the footnotes to the Financial Statements. As such, the shares and corresponding capital amounts and earnings per share related to GH Group’s Class A and Class B common shares prior to the Business Combination have been retroactively restated to reflect an exchange ratio of 10.27078 Class A or Class B common shares of GH Group, as applicable, per 1 Equity Share of the Company, as established pursuant to the Business Combination Agreement.

COVID-19

The Company has continued to closely monitor the impact of the COVID-19 global pandemic with a focus on the health and safety of employees, business continuity and supporting its communities. Due to impacts from the COVID-19 pandemic and the uncertain pace of recovery, including the impact of the Delta and Omicron variants, the Company’s business operations may be materially and adversely affected if a significant number of the Company’s employees are impacted by the virus, including any future variants. The Company has implemented various preventative measures to reduce the spread of the virus and has experienced minimal disruption to its production, supply and distribution chains. As of the date hereof, all of the Company’s operating subsidiaries are operational. In addition, a portion of the Company’s workforce continues to effectively work remotely using various technological tools to maintain full operations and internal controls over financial reporting and disclosures.

The COVID-19 pandemic, including government measures to limit the spread of COVID-19, did not have a material adverse impact on the Company’s results of operations for the years ended December 31, 2021 and 2020. However, given the uncertainties associated with the COVID-19 pandemic, including those related to the distribution and acceptance of vaccines and therapeutics and their effectiveness with respect to new variants of the virus, the use of the Company’s products by consumers, future quarantine policies and restrictions on travel, trade and business operations and a reduction in discretionary consumer spending, we are unable to estimate the future impact of the COVID-19 pandemic on our business, financial condition, results of operations, and/or cash flows. The uncertain nature of the impacts of the COVID-19 pandemic may continue to affect our results of operations into the foreseeable future. We believe we have sufficient liquidity to enable us to meet the Company’s working capital and other operating requirements, fund growth initiatives and capital expenditures, satisfy liabilities, and repay scheduled principal and interest payments on outstanding debt obligations.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

1.NATURE OF OPERATIONS (Continued)

Liquidity

Historically, the Company’s primary source of liquidity has been its operations, capital contributions made by equity investors and debt issuances. The Company is currently meeting its current operational obligations as they become due from its current working capital and from operations. However, the Company has sustained losses since inception and may require additional capital in the future. As of and for the year ended December 31, 2021, the Company had an accumulated deficit of $60,827,290, a net loss from operations of $44,167,812 and net cash used in operating activities of $20,285,249. The Company estimates that based on current business operations and working capital, it will continue to meet its obligations as they become due in the short term.

The Company is generating cash from revenues and 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 primarily being utilized for capital expenditures, facility improvements, product development and marketing.

Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with financial liabilities. The Company manages liquidity risk through the management of its capital structure. The Company’s approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due. In the event sufficient cash flow is not available from operating activities, the Company may continue to raise equity or debt capital from investors in order to meet liquidity needs. If the Company is not able to secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, or suspend or curtail planned programs. Any of these actions could materially harm the Company’s business, results of operations and future prospects. There can be no assurance that such financing will be available or will be at terms acceptable to the Company.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Preparation

The accompanying Consolidated Financial Statements have been prepared on a going concern basis in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and reflect the accounts and operations of the Company and those of the Company’s subsidiaries in which the Company has a controlling financial interest. Investments in entities in which the Company has significant influence, but less than a controlling financial interest, are accounted for using the equity method.

All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial position of the Company as of December 31, 2021 and 2020, the consolidated results of operations and cash flows for the years ended December 31, 2021 and 2020 have been included.

Basis of Consolidation

These Consolidated Financial Statements as December 31, 2021 and 2020 include the accounts of the Company, its wholly-owned subsidiaries and entities over which the Company has control as defined in ASC 810 “Consolidation”. Subsidiaries over which the Company has control are fully consolidated from the date control commences until the date control ceases. Control exists when the Company has ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than fifty percent of the outstanding voting securities of another entity. In assessing control, potential voting rights that are currently exercisable are considered.

The following are the Company’s principal wholly-owned or controlled subsidiaries and or affiliates that are included in these consolidated financial statements as of December 31, 2021 and 2020 and for the years ended December 31, 2021 and 2020:

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Corporate Entities


			Ownership
Entity	Location	Purpose	2021		2020
MPB Acquisition Corp	Nevada	Holding company	100	%	0	%
GH Group Inc	Long Beach, CA	Holding company	100	%	100	%
GHB Unsub LLC	Long Beach, CA	Holding company	100	%	0	%
Glass House Retail, LLC	Long Beach, CA	Holding company	100	%	100	%
Glass House Cultivation, LLC	Santa Barbara, CA	Holding company	100	%	100	%
Glass House Manufacturing, LLC	Lompoc, CA	Holding company	100	%	100	%
LOB Investment Co. LLC	Long Beach, CA	Holding company	100	%	100	%
SoCal Hemp Co, LLC	San Bernardino Co., CA	Holding company	100	%	100	%
Field Investment Co. LLC	Long Beach, CA	Holding company	0	%	100	%
Field Taste Matters, Inc.	Long Beach, CA	Holding company	0	%	100	%

Management and Operating Entities


			Ownership
Subsidiaries	Location	Purpose	2021		2020
G&H Supply Company, LLC	Carpinteria, CA	Provides cultivation management	100	%	100	%
Mission Health Associates, Inc.	Carpinteria, CA	Cannabis cultivation	100	%	100	%
MGF Management LLC	Carpinteria, CA	Cultivation management	100	%	100	%
G&K Produce LLC	Carpinteria, CA	Cannabis cultivation	100	%	100	%
K&G Flowers LLC	Carpinteria, CA	Cannabis cultivation	100	%	100	%
GHCC Management LLC	Camarillo, CA	Cultivation management	100	%	0	%
Glass House Camarillo Cultivation LLC	Camarillo, CA	Cannabis cultivation	100	%	0	%
Lompoc Manufacturing GHG, LLC	Lompoc, CA	Processing management	100	%	100	%
Lompoc Management Co. LLC	Lompoc, CA	Manufacturing management	100	%	100	%
CA Manufacturing Solutions LLC	Lompoc, CA	Cannabis manufacturing	100	%	100	%
Saint Gertrude Management Company LLC	Santa Ana, CA	Retail management	100	%	100	%
Bud and Bloom	Santa Ana, CA	Cannabis retail	100	%	100	%
Farmacy SB, Inc.	Santa Barbara, CA	Cannabis retail	100	%	100	%
ICANN, LLC	Berkeley, CA	Cannabis retail	100	%	0	%
Farmacy Isla Vista, LLC	Santa Barbara, CA	Cannabis retail applicant	100	%	100	%
SBDANK LLC	Santa Ynez, CA	Cannabis retail applicant	51	%	51	%
E7 Eureka LLC	Eureka, CA	Cannabis retail applicant	100	%	0	%
Zero One Seven Management, LLC	Long Beach, CA	Manufacturing management	0	%	100	%
ATES Enterprises, LLC	Long Beach, CA	Cannabis manufacturing	0	%	100	%

Real Estate Entities


			Ownership
Subsidiaries	Location	Purpose	2021		2020
Glass House Farm LLC	Carpinteria, CA	Real Estate	100	%	100	%
Magu Farm LLC	Carpinteria, CA	Real Estate	100	%	100	%
East Saint Gertrude 1327 LLC	Santa Ana, CA	Real Estate	100	%	100	%
2000 De La Vina LLC	Santa Barbara, CA	Real Estate	100	%	100	%
GH Camarillo LLC	Camarillo, CA	Real Estate	100	%	0	%

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Non-Controlling Interest

Non-controlling interest represents equity interests owned by parties that are not shareholders of the ultimate parent. The share of net assets attributable to non-controlling interests is presented as a component of equity. Their share of net income or loss is recognized directly in equity. Changes in the parent company’s ownership interest that do not result in a loss of control are accounted for as equity transactions.

Use of Estimates

The preparation of the Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the Consolidated Financial Statements and the reported amounts of total net revenue and expenses during the reporting period. The Company regularly evaluates significant estimates and assumptions related to the consolidation or non-consolidation of variable interest entities, estimated useful lives, depreciation of property and equipment, amortization of intangible assets, inventory valuation, share-based compensation, business combinations, goodwill impairment, long-lived asset impairment, purchased asset valuations, fair value of financial instruments, compound financial instruments, derivative liabilities, deferred income tax asset valuation allowances, incremental borrowing rates, lease terms applicable to lease contracts and going concern. These estimates and assumptions are based on current facts, historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue, costs and expenses that are not readily apparent from other sources. The actual results the Company experiences may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.

Segmented Information

The Company currently operates in one segment, the production and sale of cannabis products, which is how the Company’s Chief Operating Decision Maker manages the business and makes operating decisions. All of the Company’s operations are in the United States of America in the State of California. Intercompany sales and transactions are eliminated in consolidation.

Reclassifications

Certain comparative amounts have been reclassified to conform with current period presentation. There were no impacts on net loss or cash flows for the periods presented.

Cash and Cash Equivalents

Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less.

Restricted Cash

Restricted cash balances are those which meet the definition of cash and cash equivalents but are not available for use by the Company. As of December 31, 2021 and 2020, restricted cash was $3.0 million and nil, respectively, which is held in an escrow account and used as an interest reserve for the senior term loan agreement. See “Note 16 – Notes Payable” for further discussion.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounts Receivable

The Company extends non-interest-bearing trade credit to its customers in the ordinary course of business which is not collateralized. Accounts receivable are shown on the face of the Consolidated Balance Sheets, net of an allowance for doubtful accounts. The Company analyzes the aging of accounts receivable, historical bad debts, customer creditworthiness and current economic trends, in determining the allowance for doubtful accounts. The Company does not accrue interest receivable on past due accounts receivable. The reserve for doubtful accounts was $60,000 and $200,000 as of December 31, 2021 and 2020, respectively.

Inventory

Inventory is comprised of raw materials, finished goods and work-in-process such as pre-harvested cannabis plants and by-products to be extracted. The costs of growing cannabis, including but not limited to labor, utilities, nutrition and supplies, are capitalized into inventory until the time of harvest. All direct and indirect costs related to inventory are capitalized when incurred, and subsequently classified to cost of goods sold in the Consolidated Statements of Operations. Raw materials and work-in-process is stated at the lower of cost or net realizable value, determined using the weighted average cost. Finished goods inventory is stated at the lower of cost or net realizable value, with cost being determined on the first-in, first-out (“FIFO”) method of accounting. Net realizable value is determined as the estimated selling price in the ordinary course of business less estimated costs to sell. The Company periodically reviews physical inventory for excess, obsolete, and potentially impaired items and establishes reserves when warranted. The Company reviews inventory for obsolete, redundant and slow-moving goods, and any such inventory is written down to net realizable value. Packaging and supplies are initially valued at cost. The reserve estimate for excess and obsolete inventory is based on expected future use. The reserve estimates have historically been consistent with actual experience as evidenced by actual sale or disposal of the goods. As of December 31, 2021 and 2020, the Company’s reserve was $784,289 and nil, respectively.

Investments

Investments in unconsolidated affiliates are accounted as follows:

Equity Method and Joint Venture Investments

The Company accounts for investments in which it can exert significant influence but does not control as equity method investments in accordance with ASC 323, “Investments—Equity Method and Joint Ventures”. In accordance with ASC 825, “Financial Instruments”, the fair value option (“FVO”) to measure eligible items at fair value on an instrument-by-instrument basis can be applied. Joint ventures are joint arrangements whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Investments in joint ventures are accounted for under the equity method. These investments are recorded at the amount of the Company’s initial investment and adjusted each period for the Company’s share of the investee’s income or loss, and dividends paid.

Investments in Equity without Readily Determinable Fair Value

Investments without readily determinable fair values (which are classified as Level 3 investments in the fair value hierarchy) use a determinable available measurement alternative in accordance with ASC 321, “Investments—Equity Securities”. The measurement alternative requires the investments to be held at cost and adjusted for impairment and observable price changes, if any.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Property, Plant and Equipment

Property, plant and equipment is stated at cost, net of accumulated depreciation and impairment losses, if any. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:


Land		Not Depreciated
Buildings		39 Years
Furniture and Fixtures		5 Years
Leasehold Improvements		Shorter of Lease Term or Economic Life
Equipment and Software		3 – 5 Years
Construction in Progress		Not Depreciated

The assets’ residual values, useful lives and methods of depreciation are reviewed at each reporting period and adjusted prospectively if appropriate. An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising from de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in the Consolidated Statements of Operations in the period the asset is derecognized.

Intangible Assets

Intangible assets are recorded at cost, less accumulated amortization and impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Intangible assets with a definite life are amortized on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any. The estimated useful lives, residual values and amortization methods are reviewed at each reporting period, and any changes in estimates are accounted for prospectively. Intangible assets with an indefinite life or not yet available for use are not subject to amortization. Amortization is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:


Dispensary Licenses		Indefinite
Intellectual Property		5 Years

In accordance with ASC 350, “Intangibles—Goodwill and Other” (“ASC 350”), costs of internally developing, maintaining or restoring intangible assets are expensed as incurred. Inversely, costs are capitalized when certain criteria are met through the point at which the intangible asset is substantially complete and ready for its intended use.

Goodwill

Goodwill is measured as the excess of consideration transferred over the net of the acquisition date fair value of assets acquired and liabilities assumed in a business acquisition. In accordance with ASC 350, goodwill and other intangible assets with indefinite lives are no longer subject to amortization. The Company reviews the goodwill and other intangible assets allocated to each of the Company’s reporting units for impairment on an annual basis as of year-end or whenever events or changes in circumstances indicate carrying amount it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the carrying amount of a reporting unit is in excess of its fair value, the Company recognizes an impairment charge equal to the amount in excess.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company applies the guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2011-08 “Intangibles-Goodwill and Other-Testing Goodwill for Impairment,” which provides entities with an option to perform a qualitative assessment (commonly referred to as “Step Zero”) to determine whether further quantitative analysis for impairment of goodwill is necessary. In performing Step Zero for the Company’s goodwill impairment test, the Company is required to make assumptions and judgments including but not limited to the following: the evaluation of macroeconomic conditions as related to the Company’s business, industry and market trends, and the overall future financial performance of its reporting units and future opportunities in the markets in which they operate. If impairment indicators are present after performing Step Zero, the Company would perform a quantitative impairment analysis to estimate the fair value of goodwill.

During the years ended December 31, 2021 and 2020, the Company performed the Step Zero analysis for its goodwill impairment test. As a result of the Company’s Step Zero analysis, no further quantitative impairment test was deemed necessary. There were no impairments of goodwill or intangible assets with indefinite lives for the years ended December 31, 2021 and 2020.

Impairment of Long-Lived Assets

For purposes of the impairment test, long-lived assets such as property, plant and equipment, and definite-lived intangible assets are grouped with other assets and liabilities at the lowest level for which identifiable independent cash flows are available (“asset group”). In accordance with ASC 360, “Property, Plant, and Equipment” (“ASC 360”), the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In order to determine if assets have been impaired, the impairment test is a two-step approach wherein the recoverability test is performed first to determine whether the long-lived asset is recoverable. The recoverability test (Step 1) compares the carrying amount of the asset to the sum of its future undiscounted cash flows using entity-specific assumptions generated through the asset’s use and eventual disposition. If the carrying amount of the asset is less than the cash flows, the asset is recoverable and an impairment is not recorded. If the carrying amount of the asset is greater than the cash flows, the asset is not recoverable and an impairment loss calculation (Step 2) is required. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the asset group. Fair value can be determined using a market approach, income approach or cost approach. The cash flow projection and fair value represents management’s best estimate, using appropriate and customary assumptions, projections and methodologies at the date of evaluation. The reversal of impairment losses is prohibited.

Leased Assets

In accordance with ASU 2016-02, “Leases (Topic 842)” (“ASC 842”), the Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and accrued obligations under operating lease (current and non-current) liabilities in the Consolidated Balance Sheets. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets and are expensed in the Consolidated Statements of Operations on a straight-line basis over the lease term.

ROU assets represent the Company’s right to use an underlying asset for the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are classified as a finance lease or an operating lease. A finance lease is a lease in which 1) ownership of the property transfers to the lessee by the end of the lease term; 2) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise; 3) the lease is for a major part of the remaining economic life of the underlying asset; 4) the present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already included in the lease payments equals or exceeds substantially all of the fair value; or 5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. The Company classifies a lease as an operating lease when it does not meet any one of these criteria.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company applies judgment in determining whether a contract contains a lease and if a lease is classified as an operating lease or a finance lease. The Company applies judgement in determining the lease term as the non-cancellable term of the lease, which may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. All relevant factors that create an economic incentive for it to exercise either the renewal or termination options are considered. The Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise or not to exercise the option to renew or to terminate. The Company also applies judgment in allocating the consideration in a contract between lease and non-lease components. It considers whether the Company can benefit from the ROU asset either on its own or together with other resources and whether the asset is highly dependent on or highly interrelated with another ROU asset.

Income Taxes

Prior to the Roll-Up, most of the combined entities flowing into the Company’s investment funds were either single member LLCs or taxed as flow-through entities. Income taxes for such entities are not payable, or provided for, by the Company. Members are taxed individually on their share of the entity’s earnings. California imposes an LLC fee based on revenue, which is included with state taxes as a provision for income taxes. Certain entities with cannabis licenses were either corporations or LLCs electing to be taxed as corporations.

Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the Consolidated Balance Sheets. Effects of enacted tax law changes on deferred tax assets and liabilities are reflected as adjustments to tax expense in the period in which the law is enacted. Deferred tax assets may be reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized.

The Company follows accounting guidance issued by the Financial Accounting Standards Board (“FASB”) related to the application of accounting for uncertainty in income taxes. Under this guidance, the Company assesses the likelihood of the financial statement effect of a tax position that should be recognized when it is more likely than not that the position will be sustained upon examination by a taxing authority based on the technical merits of the tax position, circumstances, and information available as of the reporting date.

Convertible Instruments

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815, “Accounting for Derivative Instruments and Hedging Activities” (“ASC 815”). ASC 815 generally provide three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument”.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

On January 1, 2021, the Company early adopted ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”, which simplifies the accounting for convertible instruments by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required to be accounted for as derivatives under ASC 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. By removing the separation model, a convertible debt instrument will be reported as a single liability instrument with no separate accounting for embedded conversion features. This new standard also removes certain settlement conditions that are required for contracts to qualify for equity classification and simplifies the diluted earnings per share calculations by requiring that an entity use the if-converted method and that the effect of potential share settlement be included in diluted earnings per share calculations. The Company also records, when necessary, deemed dividends for the intrinsic value of conversion options embedded in Preferred Shares of GH Group based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. ASC 815-40 provides that generally, if an event is not within the entity’s control could require net cash settlement, then the contract shall be classified as an asset or a liability.

Derivative Liabilities

The Company evaluates its agreements to determine if such instruments have derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the Consolidated Statements of Operations. In calculating the fair value of derivative liabilities, the Company uses a valuation model when Level 1 inputs are not available to estimate fair value at each reporting date. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the Consolidated Balance Sheets as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve months of the Consolidated Balance Sheets dates. Critical estimates and assumptions used in the model are discussed in “Note 13 - Derivative Liabilities”.

Business Combinations

Business combinations are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value at the date of acquisition. Acquisition related transaction costs are expensed as incurred and included in the Consolidated Statements of Operations. Identifiable assets and liabilities, including intangible assets of acquired businesses, are recorded at their fair value at the date of acquisition. When the Company acquires control of a business, any previously held equity interest is also remeasured to fair value. The excess of the purchase consideration and any previously held equity interest over the fair value of identifiable net assets acquired is goodwill. If the fair value of identifiable net assets acquired exceeds the purchase consideration and any previously held equity interest, the difference is recognized in the Consolidated Statements of Operations immediately as a gain on acquisition. See “Note 9 – Business Acquisitions” for further details on business combinations.

Contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. The Company allocates the total cost of the acquisition to the underlying net assets based on their respective estimated fair values. As part of this allocation process, the Company identifies and attributes values and estimated lives to the intangible assets acquired. These determinations involve significant estimates and assumptions regarding multiple, highly subjective variables, including those with respect to future cash flows, discount rates, asset lives, and the use of different valuation models, and therefore require considerable judgment. The Company’s estimates and assumptions are based, in part, on the availability of listed market prices or other transparent market data. These determinations affect the amount of amortization expense recognized in future periods. The Company bases its fair value estimates on assumptions it believes to be reasonable but are inherently uncertain. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates, and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with ASC 450, “Contingencies”, as appropriate, with the corresponding gain or loss being recognized in earnings in accordance with ASC 805, “Business Combinations”.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Revenue Recognition

Revenue is recognized by the Company in accordance with ASC 606, “Revenue from Contracts with Customers”. Through application of the standard, the Company recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In order to recognize revenue under ASC 606, the Company applies the following five (5) steps:

(1)

Identify a customer along with a corresponding contract;

(2)

Identify the performance obligation(s) in the contract to transfer goods or provide distinct services to a customer;

(3)

Determine the transaction price the Company expects to be entitled to in exchange for transferring promised goods or services to a customer;

(4)

Allocate the transaction price to the performance obligation(s) in the contract;

(5)

Recognize revenue when or as the Company satisfies the performance obligation(s).

Revenues consist of wholesale and consumer packaged goods (“CPG”) and retail sales of cannabis, which are generally recognized at a point in time when control over the goods have been transferred to the customer and is recorded net of sales discounts. Payment is typically due upon transferring the goods to the customer or within a specified time period permitted under the Company’s credit policy. During the years ended December 31, 2021 and 2020, sales discounts were approximately $4.0 million and $3.2 million, respectively.

Revenue is recognized upon the satisfaction of the performance obligations. The Company satisfies its performance obligations and transfers control upon delivery and acceptance by the customer.

Dispensary Revenue

The Company recognizes revenue from the sale of cannabis for a fixed price upon delivery of goods to customers at the point of sale since at this time performance obligations are satisfied. Fees collected related to taxes that are required to be remitted to regulatory authorities are recorded as liabilities and are not included as a component of revenues.

Cultivation and Wholesale CPG

The Company recognizes revenue from the sale of cannabis for a fixed price upon the shipment of cannabis goods as the Company has transferred to the buyer the significant risks and rewards of ownership of the goods. The Company does not retain either continuing material involvement to the degree usually associated with ownership or effective control over the goods sold. Excise taxes due upon sale are recorded as an expense in the accompanying Consolidated Statements of Operations.

Share-Based Compensation

The Company has a share-based compensation plan comprised of stock options (“Options”), unrestricted stock bonus, RSUs and stock appreciation rights (“SARs”). Options provide the right to the purchase of one Equity Share per option. RSU’s provide the right to receive one Equity Share per unit (or cash payment equal to the fair market value of an Equity Share). SARs provide the right to receive cash from the exercise of such right based on the increase in value between the exercise price and the fair market value of Equity Shares of the Company at the time of exercise.

The Company accounts for its share-based awards in accordance with ASC 718, “Compensation – Stock Compensation”, which requires fair value measurement on the grant date and recognition of compensation expense for all share-based payment awards made to employees and directors, including restricted share awards. For stock options, the Company estimates the fair value using a closed option valuation (Black-Scholes) model. When there are market-related vesting conditions to the vesting term of the share-based compensation, the Company uses a valuation model to estimate the probability of the market-related vesting conditions being met and will record the expense. The fair value of restricted share awards is based upon the quoted market price of the Equity Shares on the date of grant. The fair value is then expensed over the requisite service periods of the awards, which is generally the performance period, and the related amount is recognized in the Consolidated Statements of Operations.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The fair value models require the input of certain assumptions that require the Company’s judgment, including the expected term and the expected share price volatility of the underlying share. The assumptions used in calculating the fair value of share-based compensation represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change resulting in the use of different assumptions, share-based compensation expense could be materially different in the future. In addition, the Company elected not to estimate the expected forfeiture rate and only recognize expense for those shares that actually vest.

Financial Instruments

Fair Value

The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

In accordance with the fair value accounting requirements, companies may choose to measure eligible financial instruments and certain other items at fair value. The Company has not elected the fair value option for any eligible financial instruments. There have been no transfers between fair value levels during the years ended December 31, 2021 and 2020.

Financial instruments are measured at amortized cost or at fair value. Financial instruments measured at amortized cost consist of accounts receivable, due from and due to related party, other liabilities, and accounts payable and accrued liabilities wherein the carrying value approximates fair value due to its short-term nature. Other financial instruments measured at amortized cost include notes payable and a senior secured convertible credit facility wherein the carrying value at the effective interest rate approximates fair value as the interest rate for notes payable and the interest rate used to discount the host debt contract for senior secured convertible credit facility approximate a market rate for similar instruments offered to the Company.

Cash and cash equivalents and restricted cash are measured at Level 1 inputs. Acquisition-related liabilities resulting from business combinations are measured at fair value using Level 1 or Level 3 inputs. Investments that are measured at fair value use Level 3 inputs. Refer to “Note 6 – Investments” for assumptions used to value investments. Derivative liabilities that are measured at fair value use Level 3 inputs. Refer to “Note 13 – Derivative Liabilities” for assumptions used to value the derivative liabilities. Refer to “Note 14 – Contingent Shares and Earnout Liabilities” for assumptions used to value the contingent consideration.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The individual fair values attributed to the different components of a financing transaction, notably derivative financial instruments, convertible debentures and loans, are determined using valuation techniques. The Company uses judgment to select the methods used to make certain assumptions and derive estimates. Significant judgment is also used when attributing fair values to each component of a transaction upon initial recognition, measuring fair values for certain instruments on a recurring basis and disclosing the fair values 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 instruments that are not quoted or observable in an active market.

Impairment

The Company assesses all information available, including on a forward-looking basis, the expected credit loss associated with its assets carried at amortized cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. To assess whether there is a significant increase in credit risk, the Company compares the risk of a default occurring on the asset at the reporting date with the risk of default at the date of initial recognition based on available information, and forward-looking information that is reasonable and supportive. For accounts receivable only, the Company applies the simplified approach as permitted by ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”. The simplified approach to the recognition of expected losses does not require the Company to track the changes in credit risk. Rather, the Company recognizes a loss allowance based on lifetime expected credit losses at each reporting date from the date of the trade receivable. Expected credit losses are measured as the difference in the present value of the contractual cash flows that are due to the Company under the contract and the cash flows that the Company expects to receive. The Company assesses all information available, including past due status, credit ratings, the existence of third-party insurance, and forward-looking macro-economic factors in the measurement of the expected credit losses associated with its assets carried at amortized cost. The Company measures expected credit loss by considering the risk of default over the contract period and incorporates forward-looking information into its measurement.

Loss per Share

The Company calculates basic loss per share by dividing net loss by the weighted-average number of Subordinate Voting Shares (including Exchangeable Shares on an as-exchanged basis) outstanding during the period. Multiple Voting shares are excluded in calculating loss per share as they do not participate in profit and loss. Diluted loss per share is the same as basic loss per share as the issuance of shares on the exercise of convertible debentures, warrants and share options are anti-dilutive.

Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”, which eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company adopted ASU 2019-12 on January 1, 2021. The adoption of the standard did not have a material impact on the Company’s Consolidated Financial Statements.

In January 2020, the FASB issued ASU 2020-01, “Investments—Equity Securities (Topic 321)”, “Investments—Equity Method and Joint Ventures (Topic 323)”, and “Derivatives and Hedging (Topic 815)”, which is intended to clarify the interaction of the accounting for equity securities under Topic 321, investments accounted for under the equity method of accounting in Topic 323, and the accounting for certain forward contracts and purchased options accounted for under Topic 815. The Company adopted ASU 2020-01 on January 1, 2021. The adoption of the standard did not have a material impact on the Company’s Consolidated Financial Statements.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

In August 2020, the FASB issued ASU 2020-06, “Debt — Debt With Conversion and Other Options (Subtopic 470-20)” and “Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. ASU 2020-06 is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Adoption is applied on a modified or full retrospective transition approach. The Company early adopted ASU 2020-06 on January 1, 2021. The adoption of the standard did not have a material impact on the Company’s Consolidated Financial Statements.

3.CONCENTRATIONS OF BUSINESS AND CREDIT RISK

The Company maintains cash balances at its physical locations, which are not currently insured, and with various U.S. banks and credit unions with balances in excess of the Federal Deposit Insurance Corporation and National Credit Union Share Insurance Fund limits, respectively. The failure of a bank or credit union where the Company has significant deposits could result in a loss of a portion of such cash balances in excess of the insured limit, which could materially and adversely affect the Company’s business, financial condition and results of operations. As of December 31, 2021 and 2020, the Company has not experienced any losses with regards to its cash balances.

The Company provides credit in the normal course of business to customers located throughout California. The Company performs ongoing credit evaluations of its customers and maintains allowances for doubtful accounts based on factors surrounding the credit risk of specific customers, historical trends, and other information. There were one (2021) and two (2020) customers for each of the years ended December 31, 2021 and 2020 that comprised 29% and 37%, respectively, of the Company’s revenues. As of December 31, 2021 and 2020, these same customers had balances due the Company of $2,403,097 and $4,053,718, respectively.

4.INVENTORY

As of December 31, 2021 and 2020, inventory consists of the following:


	2021		2020
Raw Materials	$	1,325,590	$	4,109,434
Work-in-Process		2,777,244		1,793,094
Finished Goods		2,493,468		963,474
Total Inventory	$	6,596,302	$	6,866,002

5.NOTES RECEIVABLE

As of December 31, 2021 and 2020, notes receivable consists of the following:


	2021			2020
Notes receivable with an investee maturing in April and May 2021, bearing interest at 8.00 percent per annum.	$	—	(i)	$	904,534	(i)
Total Notes Receivable		—			904,534
Less Current Portion of Notes Receivable		—			(904,534)
Notes Receivable, Net of Current Portion	$	—		$	—

(i)	As of December 31, 2021, the note receivable was fully reserved in the amount of $968,619.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

5.NOTES RECEIVABLE (Continued)

On February 23, 2021, the Company entered into a Merger and Exchange Agreement with Element 7 CA, LLC (“Element 7”) to acquire the membership or equity interests of certain retail entities held by Element 7 in addition to a Consulting Agreement (collectively the “Element 7 Agreements”). As of December 31, 2021, the Company has terminated the Element 7 Agreements with Element 7 and has converted the pre-closing financing payment and consulting fees into notes receivable in accordance with the Agreements. As of December 31, 2021, the note receivable was fully reserved in the amount of $2,274,167. During the year ended December 31, 2021, the Company did not record interest income related to the Element 7 notes receivable. See “Note 22 – Commitments and Contingencies” for further information.

6.INVESTMENTS

The Company has various investments in entities in which it holds a significant but non-controlling interest through voting equity or through representation on the entities’ board of directors or equivalent governing bodies. Accordingly, the Company was deemed to have significant influence resulting in the Company accounting for these investments under the equity method.

As of December 31, 2021 and 2020, activity related to investments consist of the following:


			NRO
	LOB Group,		Management,		SoCal Hemp		ICANN,				5042 Venice,		Lompoc TIC,
	Inc.		LLC		JV, LLC		LLC		F/ELD		LLC		LLC		TOTAL
Fair Value as of December 31, 2019	$	2,865,896	$	2,455,966	$	186,707	$	—	$	2,815,130	$	2,245,863	$	381,315	$	10,950,877
Additions		—		—		2,987,062		2,045,309		—		—		—		5,032,371
Distribution		—		—		—		—		—		(263,656)		(76,482)		(340,138)
Disposition Due to Acquisition		—		—		—		—		(2,815,130)		—		—		(2,815,130)
(Loss) Gain on Equity Method Investments		(56,484)		(119,253)		(2,114,991)		—		—		240,488		(75,872)		(2,126,112)
Fair Value as of December 31, 2020	$	2,809,412	$	2,336,713	$	1,058,778	$	2,045,309	$	—	$	2,222,695	$	228,961	$	10,701,868
Additions		—		—		701,254		—		—				86,248		787,502
Distributions		—		—		—		—				(243,880)		(96,900)		(340,780)
Reclass of Investment for Acquisition		—		—		—		(2,045,309)		—		—		—		(2,045,309)
Impairment		—		—		(817,875)		—		—		—		—		(817,875)
(Loss) Gain on Equity Method Investments		(48,271)		(317,764)		(942,157)		—		—		242,705		(23,560)		(1,089,047)
Fair Value as of December 31, 2021	$	2,761,141	$	2,018,949	$	—	$	—	$	—	$	2,221,520	$	194,749	$	7,196,359

During the years ended December 31, 2021 and 2020, the Company recorded net losses from equity method investments of $1,089,047 and $2,126,112, respectively. These investments are recorded at the amount of the Company’s initial investment and adjusted for the Company’s share of the investee’s income or loss and dividends paid. During the fourth quarter of the year ended December 31, 2021, the Company recognized $817,875 of other than temporary impairment as a result of the investee ceasing operations. The Company determined that the fair value of its investment in SoCal Hemp JV, LLC was nil as of December 31, 2021.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

7.PROPERTY, PLANT AND EQUIPMENT

As of December 31, 2021 and 2020, property, plant and equipment consist of the following:


	2021		2020

Land	$	70,782,068	$	8,966,874
Buildings		108,024,254		11,211,573
Furniture and Fixtures		316,395		44,519
Leasehold Improvements		8,412,489		7,475,295
Equipment and Software		5,712,519		4,502,869
Construction in Progress		11,867,167		315,306

Total Property, Plant and Equipment		205,114,892		32,516,436
Less Accumulated Depreciation and Amortization		(9,316,368)		(5,324,409)
Property, Plant and Equipment, Net	$	195,798,524	$	27,192,027

During the years ended December 31, 2021 and 2020, the Company recorded depreciation expense of $4,597,229 and $2,387,930, respectively.

During the year ended December 31, 2021, the Company entered into a third amendment to its acquisition agreement (the “Camarillo Acquisition Agreement”) regarding the purchase of certain real property in Camarillo, California. The purchase price was amended to $93,000,000 payable in cash. The Company further entered into a fourth amendment to the Camarillo Acquisition Agreement in which certain fixed assets in the amount of $110,000 were added to the net assets acquired and consideration to be credited to the sellers at closing. In addition, the parties agreed to afford the sellers more time to obtain terminations to UCC-1 financing statements with respect to certain personal property conveyed as part of the asset acquisition. The Company paid the total cash purchase price upon closing on September 14, 2021 (“Camarillo Closing Date”). The asset acquisition was accounted for in accordance with ASC 805-50, “Acquisition of Assets Rather than a Business”. As consideration for the option right to purchase certain real property in conjunction with the Camarillo Acquisition Agreement (the "Option Right"), the Company issued 6,500,000 Equity Shares with an aggregate value of $29,250,000 on the Camarillo Closing Date. In addition to the Equity Shares issued for the Option Right on the Camarillo Closing Date, the Company is obligated to issue up to 3,500,000 Equity Shares as a contingent payment, and a potential earnout fee of up to $75,000,000 payable in Equity Shares, if certain conditions and financial metrics are met, see “Note 14 – Contingent Shares and Earnout Liabilities” for further information.

The following is a summary of the total consideration paid in the above transaction:


Cash Payments	$	93,000,000
Survey and Other Fees		262,875
Shares Issued for the Purchase of Real Property		29,250,000
Fair Value of Contingent Consideration		14,973,000
Fair Value of Earn Out Payments		19,847,000
Total Consideration in the Camarillo Transaction	$	157,332,875

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

8.DISPOSITION OF SUBSIDARY

On March 3, 2021, the Company entered into an agreement to assign all of its membership interests in Field Investment Co., LLC (“Field Investment Co.”), a subsidiary and Field Investment Co.’s subsidiaries Field Taste Matters, Inc., ATES Enterprises, LLC, and Zero One Seven Management, LLC for de minimis consideration to an unrelated third party. On the same day, the Company immediately divested itself of Field Investment Co. and recognized a loss on disposition of a subsidiary in the amount of $6,090,337 for the year ended December 31, 2021. The subsidiary disposed of does not qualify as a discontinued operation in accordance with ASC 205 "Discontinued Operations”.

The net assets of the subsidiary that was disposed of consists of the following:


ASSETS:
Accounts Receivable, Net	$	21,067
Prepaid Expenses and Other Current Assets		430,654
Operating Lease Right-of-Use Assets, Net		976,417
Property, Plant and Equipment, Net		310,501
Intangible Assets, Net		3,727,500
Goodwill		2,095,918
Other Assets		95,419
TOTAL ASSETS	$	7,657,476
LIABILITIES:

Accounts Payable and Accrued Liabilities	$	473,500
Operating Lease Liabilities		1,051,588
Notes Payable		42,051
TOTAL LIABILITIES	$	1,567,139
NET ASSETS DISPOSED	$	6,090,337

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

9.BUSINESS ACQUISITIONS

A summary of business acquisitions completed during the years ended December 31, 2021 and 2020 is as follows:


	2021		2020
Total Consideration
Cash	$	442,956	$	81,523
Equity Investment Converted		2,045,309		2,815,130
Prior Note Receivable Converted		—		1,910,678
Fair Value of Equity Issued		3,380,278		3,095,642
Total Consideration	$	5,868,543	$	7,902,973

Net Assets Acquired (Liabilities Assumed)
Current Assets ⁽³⁾	$	562,221	$	2,149,910
Operating Right-of-Use Asset		1,160,730		—
Property, Plant and Equipment		692,645		461,055
Non-Current Assets		—		178,142
Deferred Tax Assets, Net		(209,466)		—
Current Liabilities Assumed		(922,745)		(814,834)
Long-Term Liabilities Assumed		(1,113,584)		(57,218)
Intangible Assets:
Intellectual Property		600,000		750,000
Dispensary License		2,900,000		3,140,000
Total Intangible Assets		3,500,000		3,890,000
Total Identifiable Net Assets Acquired (Net Liabilities Assumed)		3,669,801		5,807,055
Goodwill ⁽¹⁾		2,198,742		2,095,918
Total Net Assets Acquired	$	5,868,543	$	7,902,973
Pro Forma Revenues ⁽²⁾		n/a	$	60,361
Pro Forma Net Loss ⁽²⁾		n/a	$	(393,743)

(1)

Goodwill arising from acquisitions represent expected synergies, future income and growth, and other intangibles that do not qualify for separate recognition. Generally, goodwill related to dispensaries acquired within a state adds to the footprint of the Company’s dispensaries within the state, giving the Company’s customers more access to the Company’s branded stores. Goodwill related to cultivation and wholesale acquisitions provide for lower costs and synergies of the Company’s growing and wholesale distribution methods which allow for overall lower costs.

(2)

If the acquisition had been completed on January 1, 2021 or 2020 for the 2021 and 2020 acquisitions, respectively, the Company estimates it would have recorded increases in revenues and net loss shown in the pro forma amounts noted above. As the 2021 acquisition was completed on January 1, 2021, no pro forma information is required.

(3)	Included in current assets acquired in these business combinations was cash acquired in the amount of $158,928 and nil during the year ended December 31, 2021 and 2020, respectively.

On February 11, 2020, the Company completed the acquisition of a licensed concentrate and extractions business for an aggregate consideration of $7,902,973 which is comprised of prior investment with a value of $2,815,130, convertible note receivable, and accrued interest in the amount of $1,910,678, cash at closing in the amount of $81,523, and the issuance of 10,318,807 Class A Common Shares valued at $3,095,642.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

9.BUSINESS ACQUISITIONS

On January 1, 2021, the Company completed an acquisition of 100% of the equity interests of iCANN, LLC dba Farmacy Berkeley (“iCANN”) a licensed retail cannabis company located in Berkeley, California. Pursuant to the terms of the merger agreement between a subsidiary of the Company and iCANN, the following occurred: (i) the Company elected to convert an earlier issued convertible note with an unpaid principal amount of $2,000,000 and accrued interest of $45,309 into equity interests of iCANN; (ii) the Company paid $400,000 in cash to four founder-holders of iCANN equity interests: (iii) the Company issued 7,511,725 shares of Class A Common Stock of GH Group (which were ultimately exchanged for 731,369 Exchangeable Shares) to holders of iCANN equity interests; and (iv) $42,956 in cash to the remaining holders of iCANN equity interests who were not accredited investors. In addition, during the year ended December 31, 2021, the Company granted 48,682 Exchangeable Shares to various brokers and consultants as finders’ fees and recorded $225,000 in share-based compensation.

10.INTANGIBLE ASSETS

As of December 31, 2021 and 2020, intangible assets consist of the following:


	2021		2020
Definite Lived Intangible Assets
Intellectual Property	$	790,000	$	940,000
Total Definite Lived Intangible Assets		790,000		940,000
Less Accumulated Amortization		(208,667)		(201,000)
Definite Lived Intangible Assets, Net		581,333		739,000

Indefinite Lived Intangible Assets
Dispensary Licenses		5,048,500		4,540,000
Total Indefinite Lived Intangible Assets		5,048,500		4,540,000
Total Intangible Assets, Net	$	5,629,833	$	5,279,000

For the year ended December 31, 2021 and 2020, the Company recorded amortization expense related to intangible assets of $170,167 and $188,333, respectively. Additionally, during the year ended December 31, 2021, management noted no indications of impairment on its intangible assets.

The following is the future minimum amortization expense to be recognized for the years ended December 31:


December 31:
2022	$	158,000
2023		158,000
2024		145,333
2025		120,000
Total Future Amortization Expense	$	581,333

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

11.GOODWILL

As of December 31, 2021 and 2020, goodwill was $4,918,823 and $4,815,999, respectively. See “Note 8 – Disposition of Subsidiary” and “Note 9 – Business Acquisitions” for further information.

Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. Goodwill arises when the purchase price for acquired businesses exceeds the fair value of tangible and intangible assets acquired less assumed liabilities. Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The goodwill impairment test compares the fair value of a reporting unit with its carrying amount. The amount by which the carrying amount exceeds the reporting unit’s fair value is recognized as a goodwill impairment loss. The Company conducts its annual goodwill impairment assessment as of the last day of the fiscal year. During the years ended December 31, 2021 and 2020, management noted no indications of impairment on its goodwill.

12.ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

As of December 31, 2021 and 2020, accounts payable and accrued liabilities consist of the following:


	2021		2020

Accounts Payable	$	4,777,435	$	2,583,910
Accrued Liabilities		2,418,664		1,082,980
Accrued Payroll and Related Liabilities		1,699,253		1,724,921
Sales Tax and Cannabis Taxes		1,319,652		1,178,904

Total Accounts Payable and Accrued Liabilities	$	10,215,004	$	6,570,715

The Company offers a customer loyalty rewards program that allows members to earn discounts on future purchases. Unused discounts earned by loyalty rewards program members are included in accrued liabilities and recorded as a sales discount at the time a qualifying purchase is made. The value of points accrued as of December 31, 2021 and 2020 was $380,000 and $1,007,000, respectively.

13.DERIVATIVE LIABILITIES

During the years ended December 31, 2021 and 2020, the Company issued convertible debt to third parties and related parties, see “Note 16 – Notes Payable” and “Note 17 – Notes Payable – Related Parties”, respectively. Upon the analysis of the conversion feature of the convertible debt under ASC 815 “Derivatives and Hedging” (“ASC 815”), the Company determined that the conversion features are to be accounted as derivative liabilities. The Company valued the conversion feature using the Binomial Lattice Model using the following Level 3 inputs:


	2021*			2020

Weighted-Average Risk Free Annual Rate		0.25	%		0.82	%
Weighted-Average Average Probability at Maturity		0.00	%		0.31	%
Weighted-Average Average Probability Before Maturity		100.00	%		59.00	%
Weighted-Average Average Probability at Change of Control		0.00	%		33.00	%
Weighted-Average Expected Annual Dividend Yield		0.0	%		9.0	%
Weighted-Average Expected Stock Price Volatility		0.0	%		70.9	%
Weighted-Average Expected Life in Years		—			2.28
* Represents inputs immediately prior to the conversion on June 29, 2021

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

13.DERIVATIVE LIABILITIES (Continued)

A reconciliation of the beginning and ending balance of derivative liabilities and change in fair value of derivative liabilities for the years ended December 31, 2021 and 2020 is as follows:


	2021		2020
Balance at Beginning of Year	$	7,365,000	$	—

Derivative Liability Incurred Upon Issuance of Convertible Debt		182,000		7,113,337
Change in Fair Value		(825,000)		251,663
Reclassed to Equity Upon Conversion of Debt		(6,722,000)		—
Balance at End of Year	$	—	$	7,365,000

Derivative liabilities are included in current liabilities as the holders of the convertible notes can convert at any time.

During the year ended December 31, 2021, the Company converted all its convertible debt with derivative conversion features to Preferred Shares. As a result, the Company recorded adjustments to the fair value of the derivative through the date of conversion. The remaining derivative balance was reclassed to shareholders’ equity upon conversion of the related convertible debt. See “Note 16 – Notes Payable” and “Note 17 – Notes Payable – Related Parties” for further information. It is management’s view that conversions of debt with bifurcated conversion features that are deemed derivatives should be accounted under the conversion accounting model. As a result of the conversion of debt and relief of the derivative conversion feature, the Company recognized no loss on extinguishment of debt or additional amortization of debt discount as the conversion of the debt was executed under the original terms of the agreement as required under ASC 470 “Debt”.

14.CONTINGENT SHARES AND EARNOUT LIABILITIES


	2021
Balance at Beginning of Year	$	—
Contingent Shares Issued Upon Closing of Business Combination		7,640,334	(i)
Contingent Earnout Issued for Option Right		19,847,000	(ii)
Contingent Shares Issued for Option Right		14,973,000	(iii)
Change in Fair Value of Contingent Liabilities		(4,031,634)
Balance at End of Year	$	38,428,700

(i)	Contingent Earnout – Business Combination on June 29, 2021

Upon closing of the Business Combination on June 29, 2021, 1,008,975 Equity Shares related to the sponsor of Mercer Park Brand Acquisition Corp. were locked up by the Company. These shares are to be released from the lock-up restrictions based upon the amount of cash raised by the Company from certain debt and equity financings through June 2023. As of December 31, 2021, the Company released 392,819 Equity Shares that were originally subject to lock-up restrictions. In accordance with ASC 480 “Distinguishing Liabilities from Equity” (“ASC 480”), management determined the provisions of these earnouts required liability treatment. Accordingly, the remaining 616,156 Equity Shares under lock-up restrictions were initially valued and recorded as a liability in the amount of $7,640,334. The remaining Equity Shares are subject to a capital-based earnout of permitted debt or equity financings within one year following closing as further defined in the Investor Rights Agreement entered into on June 29, 2021 in connection with the completion of the Business Combination. As of December 31, 2021, the value of the contingent earnout was $2,372,200 and included as a component of contingent shares and earnout liabilities in the accompanying Consolidated Balance Sheets. The decrease in fair value of $5,268,134 was recorded as a component of change in fair value of contingent liabilities during the year ended December 31, 2021 and is included in the accompanying Consolidated Statements of Operations.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

14.CONTINGENT SHARES AND EARNOUT LIABILITIES (Continued)

Additional earnout payments consisting of up to an additional 6,306,095 of the Company’s Equity Shares are issuable to the sponsor of Mercer Park and all holders of record of Equity Shares, the Exchangeable Shares, vested stock options and vested RSU’s as of December 31, 2021 in the event the 20-day VWAP of the Equity Shares reaches $13.00 or $15.00 within two years of closing. In the event that the permitted debt or equity raised by the Company and Equity Share price targets are not met, as described in the Investor Rights Agreement, the earnout payments will be forfeited. In accordance with ASC 480, management determined the provisions of these earnouts did not require liability treatment. As of December 31, 2021, no shares were issued in connection with these earnouts.

(ii)	Contingent Earnout – Camarillo Transaction

As a consideration for the Option Right, the Company is obligated to pay a contingent earnout fee of up to $75,000,000, payable in Equity Shares, if certain conditions and financial metrics are met. In accordance with ASC 480, the Company initially recorded $19,847,000 as a capital addition to property and equipment and as a component of contingent shares and earnout liabilities in the Consolidated Balance Sheets. As of December 31, 2021, the fair value of the contingent earnout was $22,571,000 which reflected an increase in fair value of $2,724,000 during the year ended December 31, 2021 which is included as component of change in fair value of contingent liabilities in the accompanying Consolidated Statements of Operations. The value of the contingent consideration is based upon the potential earn out of the facilities’ adjusted earnings during the earnout period and is measured at fair value using a discounted cash flow model that is based on unobservable inputs.

(iii)

Contingent Shares – Camarillo Transaction

As consideration for the Option Right, the Company issued 6,500,000 Equity Shares with an aggregate value of $29,250,000 on the Camarillo Closing Date. The Company allocated the fair value of the Option Right to the assets acquired upon its exercise in September 2021. In addition to the Equity Shares issued for the Option Right, the Company is obligated to issue up to 3,500,000 Equity Shares as a contingent payment, which are subject to certain conditions and events following closing.As a result, the Company initially valued and recorded $14,973,000 as a component in contingent shares and earnout liabilities in the Consolidated Balance Sheets. As of December 31, 2021, the fair value of the contingent payment was $13,485,500 and included as a component in contingent shares and earnout liabilities in the accompanying Consolidated Balance Sheet as of December 31, 2021. As this contingent liability is considered a derivative under ASC 815, the Company recorded a decrease in fair value of $1,487,500 during the year ended December 31, 2021 and is included as component of change in fair value of contingent liabilities in the accompanying Consolidated Statements of Operations. The value of the contingent consideration is based upon the value of the Company’s Equity Shares, the probability of future events occurring and other unobservable inputs.

15.LEASES

The Company leases buildings which it plans to use for corporate purposes and the production and sale of cannabis products. In accordance with ASC 842, the Company initially measures the ROU asset at cost, which is primarily comprised of the initial amount of the lease liability, plus initial direct costs and lease payments at or before the commencement date, less any lease incentives received. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company utilizes its secured borrowing rate.

Measurement of the lease payments are comprised using 1) fixed lease payments less any incentives; 2) variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; 3) the amount expected to be payable by the lessee under residual value guarantees; 4) the exercise of purchase options, if the lessee is reasonably certain to exercise the options; 5) payments of penalties for early termination of a lease unless the Company is reasonably certain not to terminate early. The incremental borrowing rate is determined using estimates which are based on the information available at commencement date and determines the present value of lease payments if the implicit rate is unavailable.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

15.LEASES (Continued)

Most operating leases contain renewal options that provide for rent increases based on prevailing market conditions. The terms used to calculate the ROU assets for these properties include the renewal options that the Company is reasonably certain to exercise, not longer than the underlying asset life. Both ROU assets and lease liabilities exclude variable payments not based on an index or rate, which are treated as period costs. The Company’s lease agreements do not contain significant residual value guarantees, restrictions or covenants. The Company has elected not to recognize ROU assets and lease liabilities for short-term leases (defined as leases with a lease term of 12 months or less that do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise).

The below are the details of the lease cost and other disclosures regarding the Company’s leases for the years ended December 31, 2021 and 2020:


	2021		2020

Operating Lease Cost	$	730,881	$	919,519
Short-Term Lease Costs		669,003		344,980
Total Lease Expenses	$	1,399,884	$	1,264,499


	2021			2020
Cash Paid for Amounts Included in the Measurement of Lease Liabilities:
Operating Cash Flows from Operating Leases	$	712,358		$	842,717

Non-Cash Additions to Right-of-Use Assets and Lease Liabilities:
Recognition of Right-of-Use Assets for Operating Leases	$	1,419,650		$	1,182,942

Weighted-Average Remaining Lease Term (Years) - Operating Leases		8.00			5.00
Weighted-Average Discount Rate - Operating Leases		17.00	%		17.00	%

On September 14, 2021, the Company entered into an agreement to lease out a portion of its real property at approximately $500,000 per month for 36 months. However, lease payments to the Company are abated if certain contingencies are met by the lessee. Such contingencies are expected to be met, and as a result, no rental income was recognized by the Company.

Future minimum operating lease payments under non-cancelable operating leases as of December 31, 2021 are as follows:


December 31:	Third Parties		Related Parties		Total
2022	$	374,197	$	393,127	$	767,324
2023		384,088		396,783		780,871
2024		384,088		393,597		777,685
2025		365,566		320,004		685,570
2026		310,000		320,004		630,004
Thereafter		1,320,833		560,007		1,880,840
Total Future Minimum Lease Payments		3,138,772		2,383,522		5,522,294
Less Imputed Interest		(1,479,098)		(908,562)		(2,387,660)
Total Amount Representing Present Value		1,659,674		1,474,960		3,134,634
Less Current Portion of Operating Lease Liabilities		(109,136)		(160,018)		(269,154)
Operating Lease Liabilities, Net of Current Portion	$	1,550,538	$	1,314,942	$	2,865,480

The Company leases certain business facilities from related parties and third parties under non-cancellable operating lease agreements that specify minimum rentals. The operating leases require monthly payments ranging from $800 to $28,000 and expire through July 2031. Certain lease monthly payments may escalate up to 5.0% each year. In such cases, the variability in lease payments is included within the current and noncurrent operating lease liabilities.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

16.NOTES PAYABLE

As of December 31, 2021 and 2020, notes payable consist of the following:


	2021			2020
Note payable maturing in June 2021, bearing interest at 7.00 percent per annum	$	—	(i)		343,435	(i)
Note payable maturing in December 2020, bearing interest at 8.00 percent per annum		—	(ii)		212,821	(ii)
Convertible notes payable maturing in February 2023, bearing interest at 8.00 percent per annum		—	(iii)		20,790,514	(iii)
Term loan payable maturing in November 30, 2026, bearing interest at 10.00 percent per annum		44,616,587	(iv)		—	(iv)
Other - Vehicle Loans		238,835			44,931
Total Notes Payable		44,855,422			21,391,701
Less Unamortized Debt Issuance Costs and Loan Origination Fees		—			(5,421,622)
Net Amount	$	44,855,422		$	15,970,079
Less Current Portion of Notes Payable		(37,986)			(601,187)
Notes Payable, Net of Current Portion	$	44,817,436		$	15,368,892

(i)	During the year ended December 31, 2017, GH Group issued debt to an unrelated third party for working capital needs in the amount of $2,000,000. The debt matured in June 2021 and bore interest at 7.00 percent per year. The balance as of December 31, 2021 and 2020 was nil and $343,435, respectively.

(ii)

During the year ended December 31, 2019, GH Group issued debt to an unrelated third party for working capital needs in the amount of $377,658. The debt matured in December 2020 and bore interest at 8.00 percent per year. The balance as of December 31, 2021 and 2020 was nil and $212,821, respectively.

(iii)

Effective January 8, 2020, the board of directors of GH Group approved approximately $17,500,000 in a private placement of Senior Convertible Notes. On January 4, 2021, the board of directors of GH Group approved an increase of the Senior Convertible Notes offering to $22,599,844. On June 29, 2021, the Senior Convertible Notes were automatically converted into Preferred Shares following the occurrence of a Qualified Equity Financing (“QEF”) at a conversion price equal to the lesser of 80% of the cash price paid per Preferred Share or the quotient resulting from dividing $250,000,000 by the number of outstanding shares of Common Stock of GH Group immediately prior to the QEF. Prior to conversion, the Senior Convertible Notes bore cash interest at a rate of 4% per year paid quarterly and generally accrue interest at a rate of 4.3% per year. The Senior Convertible Note holders were also issued a security interest in the stock and membership interests held by GH Group and its subsidiaries. As noted above, on June 29, 2021, all principal and accrued interest under the Senior Convertible Notes were converted into Preferred Shares. See “Note 13 – Derivative Liabilities” and “Note 18 – Shareholders’ Equity” for further details on aggregate shares issued and amounts.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

16.NOTES PAYABLE (Continued)

(iv)

On December 9, 2021 (“Senior Secure Closing Date”), the Company entered into a senior secured term loan agreement for total available proceeds of up to $100,000,000 with funds managed by a U.S.-based private credit investment fund and other third-party lenders (together, the “Senior Secured Lender”). Effective December 10, 2021, the Company closed on an initial term loan through the credit agreement of $50,000,000. The principal amount under the credit agreement will be paid in monthly installments in an aggregate amount equal to 1.25% per annum of the original principal amount, 24 months following the Senior Secure Closing Date, with a maturity date through November 30, 2026. Interest will be paid, beginning December 31, 2021, in monthly installments equal to the floating base rate plus the applicable term margin, or 5.25%. The interest rate will not be less than 10% per annum or exceed 12% per annum. As of December 31, 2021, the interest rate was 10%. The Company incurred debt issuance costs of approximately $2,142,000 reduced from the initial term loan principal amount received. In connection with the Initial Term Loan, the Company issued 2,000,000 warrants to the Senior Secured Lender, with an exercise price of $11.50 per share, to acquire one Equity Share until June 26, 2026. These warrants were fair valued using level 1 inputs as these warrants are openly traded on a stock exchange. Accordingly, the Company recorded an additional debt discount of $3,276,764 related to the change in terms of the warrants.

Two additional delayed draw term loans may be requested by the Company in an amount equal to the principal amount of $25,000,000 (or such lesser amount as agreed) each. The Company has optional and mandatory prepayments. Mandatory prepayments include any voluntary and involuntary sale or disposition of assets by the Company or any restricted subsidiaries. The outstanding principal amount of the obligation will be repaid by 100% of cash proceeds received with certain exemptions as defined in the agreement. As of the Senior Secure Closing Date, the Company deposited an interest reserve in the amount of $3,000,000 into an escrow account and included as restricted cash in the Consolidated Balance Sheets. Additionally, the Company’s real property held in Glass House Farm LLC, Magu Farm LLC and GH Camarillo LLC was pledged as security.

The credit agreement contains certain financial covenant which require the Company to maintain liquidity in excess of $10,000,000 at all times. As of December 31, 2021, the Company was in compliance with such financial covenant. Additionally, there are certain covenants which will require the Company to maintain a specific minimum debt service coverage ratio which will be measured quarterly beginning with the quarter ending December 31, 2022, as well as achieve completion of phase one project work at the Camarillo facility on or before July 31, 2022. Such covenants were not in effect as of December 31, 2021.

In June 2021, GH Group completed a Series A Preferred Stock Financing round of $12,530,963. The Preferred Stock carried an annual 15.0 percent cumulative dividend in year 1. During March 2021, the Company raised $7,625,000 from unrelated third parties and recorded as debt. On June 29, 2021, all principal and accrued interest of such debt was converted to Preferred Shares. See “Note 13 – Derivative Liabilities” and “Note 18 – Shareholders’ Equity” for further details on aggregate shares issued and amounts.

Scheduled maturities of notes payable for the years ended December 31:


	Principal
December 31:	Payments
2022	$	37,986
2023		665,433
2024		7,542,830
2025		7,545,368
2026		7,500,000
Thereafter		21,563,805
Total Future Minimum Principal Payments	$	44,855,422

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

17.NOTES PAYABLE – RELATED PARTIES

As of December 31, 2021 and 2020, notes payable from related parties consist of the following:


	2021			2020
Convertible notes payable maturing in February 2023, bearing interest at 8.00 percent per annum	$	—	(i)	$	2,049,037	(i)
Convertible note payable maturing in March 2023, bearing interest at 6.00 percent per annum		—	(ii)		2,189,264	(ii)
Total Notes Payable - Related Parties		—			4,238,301
Less Unamortized Debt Issuance Costs and Loan Origination Fees		—			(534,335)
Net Amount	$	—		$	3,703,966
Less Current Portion of Notes Payable - Related Parties		—			—
Notes Payable, Net of Current Portion - Related Parties	$	—		$	3,703,966

(i)

(ii)

During the year ended December 31, 2018, Magu Farm LLC (“Magu Farm”) issued approximately $9,925,000 in secured promissory notes convertible into equity interests (collectively, the “Magu Farm Convertible Notes”) in Magu Investment Fund LLC (“Magu Investment Fund”) to certain lenders who are affiliates of shareholders of the Company (collectively, the “Magu Farm Lenders,” and individually, a “Magu Farm Lender”)

On October 7, 2019, Magu Farm and Magu Investment Fund notified each Magu Farm Lender of Magu Investment Fund’s intention to merge with and into the Company at the closing of the Roll-Up. Subsequent to such notification, effective as of October 7, 2019, each Magu Farm Lender other than Kings Bay Investment Company Ltd., a Cayman Islands company (“KBIC”), entered into a letter agreement pursuant to which such Magu Farm Lender, among other things, (a) converted its respective Magu Farm Convertible Note with an aggregate value of $8,000,000 into equity interests in Magu Investment Fund and (b) agreed to terminate both the Co-Lending Agreement and its respective security interest as defined in the agreement. All accrued and unpaid interest were paid prior to conversion. Effective March 1, 2020, KBIC assigned the balance of its respective Magu Farm Convertible Note (the “Kings Bay Note”) to Kings Bay Capital Management Ltd., a Cayman Islands company (“KBCM”).

Effective as of April 10, 2020, KBCM and the Company entered into an Assignment, Novation and Note Modification Agreement and a Security Agreement, pursuant to which, among other things, (a) the Company assumed all of Magu Farm LLC’s rights, duties, liabilities and obligations under the Kings Bay Note, (b) the Kings Bay Note was modified to, among other things, provide KBCM with the right to convert the Kings Bay Note into Class A Common Stock at the same conversion price accorded to the other Magu Farm Lenders, and (c) the obligations under the Kings Bay Note were secured by a pledge of the securities of the Company’s subsidiaries but expressly subordinated to the holders of the Senior Convertible Notes. As a result of the modification, the Company recorded a loss on extinguishment of debt due to modification for approximately $389,000 which is included as a component of other expense, netted in the accompanying Consolidated Statements of Operations for the year ended December 31, 2020. On June 29, 2021, all principal and accrued interest under the Kings Bay Note was converted into Preferred Shares, and the Kings Bay security interest was terminated by filing of a UCC-3 termination statement. See “Note 18 – Shareholders’ Equity” for further details on shares issued and amount.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

17.NOTES PAYABLE – RELATED PARTIES (Continued)

In February 2021, GH Group issued a $2,000,000 unsecured promissory note in favor of Beach Front Properties, LLC. The debt matures in February 2023 and bears interest at fifteen percent (15%) per year. On June 29, 2021, all principal and accrued interest under such promissory note was converted to Preferred Shares. See “Note 13 – Derivative Liabilities” and “Note 18 – Shareholders’ Equity” for further details on aggregate shares issued and amounts.

In June 2021, GH Group completed a Qualified Equity Financing (“QEF”) for the offering and sale of the Preferred Shares in the amount of $12,530,963. The Preferred Shares carry an annual fifteen percent (15%) cumulative dividend in year 1, which is increased by 5% in the year following the first anniversary of the date of issuance. On June 29, 2021, all principal and accrued interest from such debt was converted into Preferred Shares. See “Note 13 – Derivative Liabilities” and “Note 18 – Shareholders’ Equity” for further details on aggregate shares issued and amounts.

18.SHAREHOLDERS’ EQUITY

As of December 31, 2021, the authorized share capital of the Company is comprised of an unlimited number of (i) Subordinate Voting Shares, (ii) Restricted Voting Shares, (iii) Limited Voting Shares, (iv) Multiple Voting Shares and (v) Preferred Shares.:

Multiple Voting Shares

The Company is authorized to issue an unlimited number of Multiple Voting Shares without nominal or par value. Holders of Multiple Voting Shares will be entitled to receive notice of any meeting of shareholders of the Company, and to attend, vote and speak at such meetings, except those meetings at which only holders of a specific class of shares are entitled to vote separately as a class under the Business Corporations Act (British Columbia). On all matters upon which holders of Multiple Voting Shares are entitled to vote, each Multiple Voting Share will be entitled to 50 votes per Multiple Voting Share. Multiple Voting Shares are not entitled to dividends.

The Multiple Voting Shares have three (3)-year sunset period that will expire June 29, 2024, upon which they will be automatically redeemed for $0.001 per Multiple Voting Share.

Equity Shares

The holders of each class of Equity Shares are entitled to receive notice of, to attend (if applicable, virtually) and to vote at all meetings of shareholders of the Company, except that they are not able to vote (but are entitled to receive notice of, to attend (if applicable, virtually) and to speak) at those meetings at which the holders of a specific class are entitled to vote separately as a class under the Business Corporations Act (British Columbia) and except that holders of Limited Voting Shares are not entitled to vote for the election of directors. The Subordinate Voting Shares and Restricted Voting Shares carry one vote per share on all matters. The Limited Voting Shares carry one vote per share on all matters except the election of directors, as the holders of Limited Voting Shares do not have any entitlement to vote in respect of the election for directors of the Company.

In the case of liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of Equity Shares will be entitled, subject to the prior rights of the holders of any shares of the Company ranking in priority to the Equity Shares (including any liquidation preference on any issued and outstanding Multiple Voting Shares and/or Preferred Shares), to participate ratably the Company’s remaining property along with all holders of the other classes of Equity Shares (on a per share basis).

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

18.SHAREHOLDERS’ EQUITY (Continued)

Exchangeable Shares (MPB Acquisition Corp.)

Exchangeable Shares are shares issued by MPB Acquisition Corp., a wholly-owned subsidiary of the Company (“MPB”), and will entitle their holders to rights that are comparable to those rights attached to the Subordinate Voting Shares, except that (i) the Exchangeable Shares will have 1.1 votes per share (this expires on June 29, 2022, after which they will have one vote per share), and (ii) the aggregate voting power of the Exchangeable Shares will not exceed 49.9% of the total voting power of all classes of shares of MPB. Until the Exchangeable Shares are exchanged for Subordinate Voting Shares, holders of Exchangeable Shares will not have the right to vote at meetings of the Company, though they will have the right to vote at meetings of the shareholders of MPB, including with respect to altering the rights of holders of any of the Exchangeable Shares, or if MPB decides to take certain actions without fully protecting the holders of any of the Exchangeable Shares, or as otherwise required by law. The Exchangeable Shares will be exchangeable at any time, on a one-for-one basis, for Subordinate Voting Shares, at the option of the holder.

The Company treats the Exchangeable Shares as options with a value equal to a share of Subordinate Voting Shares, which represents the holder’s claim on the equity of the Company. In order to comply with certain contractual requirements of the Business Combination, the Company and MPB are required to maintain the economic equivalency of such Exchangeable Shares with the publicly traded Subordinated Voting Shares of the Company. This means the Exchangeable Shares are required to share the same economic benefits and retain the same proportionate ownership in the assets of the Company as the holders of the Company’s publicly traded Subordinated Voting Shares. The Company has presented these Exchangeable Shares as a part of shareholders’ equity within these Consolidated Financial Statements due to (i) the fact that they are economically equivalent to the Corporation’s publicly traded Subordinated Voting Shares, and (ii) the holders of the Exchangeable Shares are subject to restrictions on transfer under US securities laws but may dispose of the Exchangeable Shares without such restriction by exchanging them for Subordinate Voting Shares of the Company. Changes in these assumptions would affect the presentation of the Exchangeable Shares from shareholders’ equity to non-controlling interests; however, there would be no impact on earnings per share.

Preferred Shares (GH Group)

The authorized total number of Preferred Shares is 50,000,000. As of December 31, 2021, there are 18,515,491 Preferred Shares issued and outstanding. Holders of Preferred Shares are entitled to notice of and to attend any meeting of the shareholders of GH Group but are not entitled to vote. The Preferred Shares do not carry any voting rights and include a 15% cumulative dividend rate, which is increased by 5% in the year following the first anniversary of the date of issuance. Dividends are payable when and if declared by GH Group’s board of directors. The Preferred Shares have a conversion option to convert the Preferred Shares into Class A Common Stock of GH Group within 60 days after the issuance by the holder. In the event of a liquidation, voluntary or involuntary, dissolution or winding-up of GH Group, the holders of the Preferred Shares outstanding are entitled to be paid out of the assets of GH Group available for distribution to it stockholders, before any payment shall be made to the holders of Junior Securities an amount in cash equal to the aggregate Liquidation Value which is a) all Preferred Shares held, b) plus unpaid accrued and accumulated dividends on the Preferred Shares (declared or undeclared) c) divided by the fair market value of 1 share of Series A Common Stock at the conversion time. GH Group has the right to redeem all or some of the Preferred Shares from a holder for an amount equal to the Liquidation Value and all unpaid accrued and accumulated dividends. Capitalized terms not defined in this paragraph shall have the meanings ascribed in GH Group’s Certificate of Designation, as amended. In accordance with the provisions above, the Company recorded distributions to the holders of Preferred Shares in the amount of $1,797,423 for the year ended December 31, 2021. No distributions were recognized for the year ended December 31, 2020.

Non-Controlling Interest

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

18.SHAREHOLDERS’ EQUITY (Continued)

During the year ended December 31, 2020, as part of the Roll-Up transaction, the Company acquired all the membership or equity interests from a certain combined group of companies and their non-controlling members, resulting in a non-controlling interest balance of $3,554,731 being reclassed to a controlling interest during the year ended December 31, 2020.

Separate from the Roll-Up transaction, the Company recorded a loss attributable to a non-controlling interest during the years ended December 31, 2021 and 2020, of $197,774 and nil, respectively. The value of the equity issuances issued to non-controlling interest members were fair valued using the estimated fair value of the equity of the Company.

Transactions Prior to the Business Combination through December 31, 2020 (GH Group)

On January 31, 2020, pursuant to the Roll-Up Agreements, the Roll-Up was consummated whereby the assets and liabilities of a certain combined group of companies were rolled into GH Group through a series of mergers whereby GH Group now owns and controls all of the assets and liabilities of such combined entities. As a result of the Roll-Up, the investors and sponsor of the combined entities were ultimately 22,388,322 Exchangeable Shares.

On February 11, 2020, GH Group issued Class A Common Stock which was exchanged into 1,004,676 Exchangeable Shares valued at $3,095,642 related to an acquisition.

In February 2020, GH Group repurchased Class A Common Stock which was equivalent to 201,435 Exchangeable Shares from an investor and issued as part of the Senior Convertible Notes in February 2020, $1,750,000 Senior Convertible Notes. The shares repurchased were simultaneously cancelled.

Transactions Prior to the Business Combination January 1, 2021 through June 29, 2021 (GH Group)

On January 1, 2021, GH Group issued Class A Common Stock which was exchanged into 731,369 Exchangeable Shares valued at $3,380,278 related to an acquisition, see “Note 9 – Business Acquisitions”. In addition, GH Group issued additional Class A Common Stock which was exchanged into 48,682 Exchangeable Shares to brokers and consultants for the acquisition. The shares issued to brokers and consultants for the acquisition were recorded as share-based compensation in the amount of $225,000.

In June 2021, GH Group issued Class A Common Stock which was exchanged into 646,096 Exchangeable Shares in conversion of $1,925,000 in Senior Convertible Notes.

In June 2021, GH Group issued Class A Common Stock which was exchanged into 160,149 Exchangeable Shares for the cashless exercise of 1,968,300 warrants.

Transactions Contemporaneous to the Business Combination (June 29, 2021) and through December 31, 2021 (Glass House Brands Inc.)

On June 29, 2021, contemporaneously with the Business Combination, the Company issued 4,754,979 Multiple Voting Shares to the founders of GH Group and issued 22,335,908 Subordinate Voting Shares to investors for approximately $124,359,000 in cash, net of fees but before the value of the earnout liability recorded of $7,640,334, see “Note 14 – Contingent Shares and Earnout Liabilities”.

During the year ended December 31, 2021, the Company, through GH Group, issued 38,808,618 Preferred Shares in connection with the Series A Preferred Stock financing and conversion of Senior Convertible Notes into Preferred Shares with an aggregate value of $31,285,258, net of the value of the initial derivative liability. In conjunction with these transactions, the Company issued 4,928,578, as converted, Company warrants with an exercise price of $10.00 per warrant which expire in June 2024. Simultaneously, certain holders of Preferred Shares holding 20,293,127 Preferred Shares elected to convert their Preferred Shares to 2,577,227 Exchangeable Shares.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

18.SHAREHOLDERS’ EQUITY (Continued)

On June 29, 2021, certain holders of 5,392,564 vested options of GH Group were exercised (some on a cashless basis and cash exercise) and were issued Subordinate Voting Shares. As a result, the Company issued 479,195 Subordinate Voting Shares with an aggregate value of $88,654.

On September 14, 2021, in conjunction with the closing of the Camarillo Acquisition for the purchase of certain real property, the Company issued 6,500,000 Subordinate Voting Shares with an aggregate value of $29,250,000, see “Note 7 – Property, Plant and Equipment” for further information.

On August 23, 2021, the Company received $1,500,000 from an investor prior to receiving Subordinate Voting Shares. During the year ended December 31, 2021, the Company issued 150,000 Subordinate Voting Shares to said investor.

In October 2021, the Company agreed to issue 150,000 Subordinate Voting Shares at a per value price of $4.99 per share and an aggregate value of $748,500 to Element 7. The shares are still pending delivery as of December 31, 2021. See “Note 22 – Commitments and Contingencies” for further information.

On December 9, 2021, the Company issued 2,000,000 Company warrants with an exercise price of $11.50 per warrant which will expire in June 2026. See “Note 16 – Notes Payable” for further information.

During the year ended December 31, 2021, the Company’s Exchangeable Voting Shareholders exchanged 9,098,302 of their shares for Subordinate Voting Shares in accordance with their agreements.

19.SHARE-BASED COMPENSATION

The Company has an equity incentive plan (the “Incentive Plan”) under which the Company may issue various types of equity instruments or instruments that track to equity, more particularly the Company’s Subordinate Voting Shares, to any employee, officers, consultants or directors. The types of equity instruments issuable under the Incentive Plan encompass, among other things, stock options, unrestricted stock bonus, stock appreciation rights, and restricted stock units (together, “Awards”). Share-based compensation expenses are recorded as a component of general and administrative costs. Compensation issuable under the Incentive Plan is governed by the policies and procedures promulgated by the Company’s Compensation, Nominating, and Governance Committee as adopted by the Board of Directors. The maximum number of Awards that may be issued under the Incentive Plan is 15% of the outstanding capitalization of the Company, including the Exchangeable Shares, as calculated using the treasury method. If an Award expires, becomes un-exercisable, or is cancelled, forfeited or otherwise terminated without having been exercised or settled in full, as the case may be, the shares allocable to the unexercised portion of the Award shall again become available for future grant or sale under the Incentive Plan (unless the Incentive Plan has terminated by its terms). Shares that have been issued under the Incentive Plan will result in additional capacity in the Incentive Plan. Granting and vesting of Awards will be determined by the Compensation Committee or the Board of Directors as applicable. The exercise price for options (if applicable) will generally not be less than the fair market value of the Award at the time of grant and will generally expire after 5 years.

Stock Options

Immediately prior to the close of the Business Combination, GH Group had 31,403,186 outstanding vested options with a blended average exercise price of $0.23 and 29,294,324 outstanding unvested options with a blended average exercise price of $0.26. Incident to the close, 5,392,564 options were exercised resulting in the issuance of 479,195 Subordinate Voting Shares.

Of the remaining options, the vested GH Group non-qualified stock options (“NQSOs”) were paid the net-value of their outstanding options at close by reserving 1,433,793 Subordinate Voting Shares to be issued on or before June 29, 2024. As these shares have not been issued and are payable on or before June 29, 2024, the Company reclassified $2,756,830 from equity to shares payable. Unvested NQSOs were exchanged RSUs of the Company on substantially similar terms to the NQSO grants equal to the net-value of such options at close using a share price of $10 and a GH Group Class A Common share value of $0.97 prior to close. As a result, the Company issued 1,076,499 RSU’s.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

19.SHARE-BASED COMPENSATION (Continued)

Vested and unvested GH Group incentive stock options (“ISOs”) were exchanged for Company incentive stock options using an exchange ratio of 10.27078 to 1. This resulted in the exchange of 21,065,367 ISO’s for 2,051,000 Company incentive stock options.

A reconciliation of the beginning and ending balance of stock options outstanding is as follows:


		Weighted-
	Number of Stock	Average Exercise
	Options	Price
Balance as of December 31, 2019	50,575,080	$	0.22
Granted	4,696,786	$	0.30
Forfeited	(6,868,242)	$	0.22
Balance as of December 31, 2020	48,403,624	$	0.23
Granted Prior to Business Combination	12,182,545	$	0.30
Forfeited Prior to Business Combination	(296,350)	$	0.24
Exercised Prior to Business Combination	(4,921,707)	$	0.26
Exchanged for Subordinate Shares At Business Combination	(19,320,935)	$	0.26
Converted to RSU's At Business Combination	(14,886,359)	$	0.26
Effect on Conversion related to the Business Combination	(19,108,791)	$	0.28
Granted After Business Combination	108,695	$	4.60
Forfeited After Business Combination	(72,938)	$	2.36
Balance as of December 31, 2021	2,087,784	$	2.78

The following table summarizes the stock options that remain outstanding as of December 31, 2021:


	Exercise			Stock Options
Security Issuable	Price		Expiration Date	Outstanding
Subordinate Voting Shares	$	2.26	October 2024	976,465
Subordinate Voting Shares	$	3.08	April 2025	161,226
Subordinate Voting Shares	$	3.08	January 2026	841,398
Subordinate Voting Shares	$	4.60	October 2026	108,695
				2,087,784

As of December 31, 2021 and 2020, options vested and exercisable was 1,000,717 and 20,880,755, respectively. For the years ended December 31, 2021 and 2020, the fair value of stock options granted with a fixed exercise price was determined using the Black-Scholes option-pricing model with the following assumptions at the time of grant:


	2021		2020
Weighted-Average Risk-Free Annual Interest Rate	0.29	%	0.31	%
Weighted-Average Expected Annual Dividend Yield	0.0	%	0.0	%
Weighted-Average Expected Stock Price Volatility	84.6	%	85.3	%
Weighted-Average Expected Life in Years	4.00		4.00
Weighted-Average Estimated Forfeiture Rate	0.0	%	0.0	%

Stock price volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of publicly-traded cannabis companies. The expected life represents the period of time that stock options granted are expected to be outstanding. The risk-free rate was based on United States Treasury zero coupon bond with a remaining term equal to the expected life of the options.

During the years ended December 31, 2021 and 2020, the weighted-average fair value of stock options granted was $0.34 and $0.18, respectively, per option. As of December 31, 2021 and 2020, stock options outstanding have a weighted-average remaining contractual life of 3.4 years and 8.8 years, respectively.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

19.SHARE-BASED COMPENSATION (Continued)

For the year ended December 31, 2021 and 2020, the Company recognized $4,442,223 and $2,547,792, respectively, in share-based compensation expense related to these stock options.

Restricted Stock Units

As previously noted, 1,076,499 RSU’s were issued for the exchange of 14,886,359 GH Group stock options held immediately prior to the Business Combination. An additional grant of 2,591,584 RSU’s were made to certain members of the Company’s management team which vests over three years and are subject to accelerated vesting if certain performance metrics are achieved.

A reconciliation of the beginning and ending balance of restricted stock units outstanding is as follows:


		Number of
		Restricted
		Stock
Balance as of December 31, 2019 and 2020		—
Granted		2,591,584
Exchanged and Converted from Options		1,076,499
Forfeited		(437,135)
Balance as of December 31, 2021		3,230,948

During the years ended December 31, 2021 and 2020, the Company recognized $4,042,690 and nil, respectively, in stock-based compensation related to RSU’s. The Company recognizes the exchanged and converted from options as stock-based compensation related to RSU’s.

Stock Appreciation Right Units

During the year ended December 31, 2021, GH Group issued 230,752 stock appreciation rights (“SARs units”) to various employees of the Company. The SARs units vest 33% one year after the grant date and the remaining 67% vest monthly over two years. Vested and exercised SAR units will receive cash in the amount of the SARs units exercised multiplied by the excess of the fair market value of an Equity Share over the stated strike price of the SAR unit. As the SARs units are cash-settled, the Company recognizes the value of the SAR units as liabilities which are included in accounts payable and accrued liabilities in the Consolidated Balance Sheets. As of December 31, 2021, the Company recorded a liability of $35,442.

A reconciliation of the beginning and ending balance of SARs units outstanding is as follows:


		Number of
		Stock
		Appreciation
		Rights Units
Balance as of December 31, 2019 and 2020		—
Granted		230,752
Forfeited		(71,016)
Balance as of December 31, 2021		159,736

During the years ended December 31, 2021 and 2020, the Company recognized approximately $35,442 and nil, respectively, in expense related to the SARs units.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

19.SHARE-BASED COMPENSATION (Continued)

Warrants

A reconciliation of the beginning and ending balance of warrants outstanding is as follows:


		Weighted-
	Number of	Average Exercise
	Warrants	Price
Balance as of December 31, 2019 and 2020	1,968,300	$	0.16
Exercised	(1,968,300)	$	0.16
Assumed from the Business Combination	28,489,500	$	11.50
Granted	6,928,578	$	10.43
Balance as of December 31, 2021	35,418,078	$	11.35

The following table summarizes the warrants that remain outstanding as of December 31, 2021:


				Warrants	Warrants
Security Issuable	Exercise Price		Expiration Date	Outstanding	Exercisable
Subordinate Voting Shares	$	11.50	June 2026	28,489,500	28,489,500
Subordinate Voting Shares	$	10.00	June 2024	4,928,578	4,928,578
Subordinate Voting Shares	$	11.50	June 2026	2,000,000	2,000,000
				35,418,078	35,418,078

For the year ended December 31, 2020, the fair value of warrants granted with a fixed exercise price and fair valued using level 3 inputs was determined using the Black-Scholes option-pricing model with the following assumptions at the time of grant:


	2020
Weighted-Average Risk-Free Annual Interest Rate	0.31	%
Weighted-Average Expected Annual Dividend Yield	0.0	%
Weighted-Average Expected Stock Price Volatility	85.3	%
Weighted-Average Expected Life in Years	3.00
Weighted-Average Estimated Forfeiture Rate	0.0	%

There were no warrants issued in during the year ended December 31, 2021 that required fair valuing using level 3 inputs.

During the years ended December 31, 2021 and 2020, the weighted-average fair value of warrants granted was $1.64 and $0.22, respectively, per warrant. As of December 31, 2021 and 2020, warrants outstanding have a weighted-average remaining contractual life of 4.2 years and 2.6 years, respectively.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

20.LOSS PER SHARE

The following is a reconciliation for the calculation of basic and diluted loss per share for the years ended December 31, 2021 and 2020:


	2021		2020
Net Loss	$	(44,167,812)	$	(16,659,478)
Weighted-Average Shares Outstanding - Basic and Diluted		39,243,005		21,265,601
Loss Per Share - Basic and Diluted	$	(1.13)	$	(0.78)

Diluted loss per share is the same as basic loss per share as the issuance of shares on the exercise of convertible debentures, warrants and share options are anti-dilutive.

21.PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES

Provision for income taxes consists of the following for the years ended December 31, 2021 and 2020:


	2021		2020
Current:
Federal	$	3,382,708	$	3,543,578
State		5,162		1,544,371
Total Current		3,387,870		5,087,949
Deferred:
Federal		(322,017)		1,229,887
State		232,249		100,697
Total Deferred		(89,768)		1,330,584
Total Provision for Income Taxes	$	3,298,102	$	6,418,533

As of December 31, 2021 and 2020, the components of deferred tax assets and liabilities were as follows:


	2021		2020
Deferred Tax Assets:
Allowance for Doubtful Accounts	$	984,437	$	13,992
Inventory Reserve		219,474		—
Deferred Rent		18,978		25,995
Accrued Expenses		131,916		—
Operating Lease Liabilities		606,718		—
Non-qualified Stock Options		809,992		572,999
Loss on Disposal of Subsidiary		1,720,979		—
Operating Losses		19,488,540		5,937,406
Other		—		6,130
Total Deferred Tax Assets		23,981,034		6,556,522
Valuation Allowance		(22,495,563)		(6,510,405)
Net Deferred Tax Assets	$	1,485,471	$	46,117

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

21.PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES (Continued)


	2021		2020
Deferred Tax Liabilities:
Contingent Consideration	$	(1,203,039)	$	—
Property, Plant & Equipment		(937,801)		(1,273,724)
Right-of-Use Assets		(598,774)		—
State Taxes		(76,672)		—
Other		—		(192,976)
Total Deferred Tax Liabilities		(2,816,286)		(1,466,700)
Net Deferred Tax Liabilities	$	(1,330,815)	$	(1,420,583)

The reconciliation between the effective tax rate on income and the statutory tax rate is as follows for the years ended December 31, 2021 and 2020:


	2021		2020
Income Tax Benefit at Federal Rate	$	(8,634,892)	$	(505,820)
State Taxes and Fees		1,435,198		1,464,420
IRS Section 280E Disallowance		1,922,244		914,042
Uncertain Tax Position		420,976		306,115
Change in Valuation Allowance		15,810,756		4,279,589
State Tax Carryforwards		(3,928,330)		—
Excess Accrual of Prior Year Taxes		(3,425,023)		—
Interest on Convertible Debt		—		160,588
Other Permanent Differences		(302,827)		(200,401)
Reported Income Tax Expense	$	3,298,102	$	6,418,533

As the Company operates in the cannabis industry, it is subject to the limits of IRC Section 280E (“Section 280E”) for U.S. federal income tax purposes under which the Company is only allowed to deduct expenses directly related to the cost of goods sold (COGS) of its products. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under Section 280E, and the Company deducts all operating expenses on its state tax returns.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

A reconciliation of the beginning and ending amount of total unrecognized tax benefits for years ended December 31, 2021 and 2020 is as follows:


	2021		2020
Balance at Beginning of Year	$	849,358	$	543,243
IRS Section 280E Positions Acquired		178,712		—
IRS Section 280E Positions		420,976		306,115
Balance at End of Year	$	1,449,046	$	849,358

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

21.PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES (Continued)

The Company has determined that the tax impact of its corporate overhead allocation was not more likely than not to be sustained on the merits as required under ASC 740 “Income Taxes” due to the evolving interpretations of Section 280E. As a result, the Company included in the balance of total unrecognized tax benefits as of December 31, 2021 and 2020, potential benefits of $1,449,046 and $849,358, respectively, that if recognized would impact the effective tax rate on income from operations. Unrecognized tax benefits that reduce a net operating loss, similar to tax loss or tax credit carryforwards, are presented as a reduction to deferred income taxes.

The Company’s evaluation of tax positions was performed for those tax years which remain open to for audit. The Company may from time to time, be assessed interest or penalties by the taxing authorities, although any such assessments historically have been minimal and immaterial to the Company’s financial results. In the event the Company is assessed for interest and/or penalties, such amounts will be classified as income tax expense in the financial statements.

As of December 31, 2021, the Company’s federal tax returns since 2018 and state tax returns since 2017 are still subject to adjustment upon audit. No tax returns are currently being examined by any taxing authorities. While it is reasonably possible that certain portions of the unrecognized tax benefit may change from a lapse in applicable statute of limitations, it is not possible to reasonably estimate the effect of any amount of such a change to previously recorded uncertain tax positions in the next 12 months.

22.COMMITMENTS AND CONTINGENCIES

Contingencies

The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of these regulations could result in fines, restrictions on its operations, or revocation, cancellation, non-renewal or other losses of permits, licensed and entitlements that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state statues, regulations, and ordinances as of December 31, 2021 and 2020, cannabis laws and regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions in the future.

Royalty

Effective as of May 9, 2019, Sweet & Salty, Inc., a California corporation (“Lender”) and GH Brands LLC, a California limited liability company and subsidiary of the Company (“GH Brands”) entered into a License and Services Agreement, pursuant to which Lender granted to GH Brands an exclusive, transferable, sublicensable, right and license to use, exploit and incorporate the name, nicknames, initials, signature, voice, image, likeness, and photographic or graphic representations of likeness, statements and biography of the artist Annabella Avery Thorne, professionally known as Bella Thorne, for all purposes relating to or in connection with the development, quality control, cultivation, extraction, manufacture, production, branding, testing, advertising, marketing, promotion, commercialization, packaging, distribution, exploitation and/or sale of the products of GH Brands and its affiliates. The term of the License and Service Agreement is 3 years, with the right to renew upon 60 days prior notice for an additional 2-year term. Royalty fees for Bella Thorne branded boxes are 10% for the 1st year and 12% for years 2 to 5. Royalty fees for flower products and accessories are 6% for the 1st year, 7% for the 2nd year and 8% for years 3 to 5. Minimum guarantee fees are recoupable against royalties for an initial term of $1,000,000 ($50,000 initial payment, $200,000 for the 1st year, $375,000 for the 2nd year and $375,000 for the 3rd year). The agreement provides an option to renew for a 2-year term with a guaranteed minimum fee of $1,500,000 ($750,000 for the 4th year, $750,000 for the 5th year). During the years ended December 31, 2021 and 2020, the Company recognized expenses related to these royalties in the amount of $388,436 and $137,500, respectively. As of December 31, 2021 and 2020, the Company has $328,125 and nil, respectively, due under this royalty agreement which are included in accounts payable and accrued liabilities in the Consolidated Balance Sheets

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

22.COMMITMENTS AND CONTINGENCIES (Continued)

Claims and Litigation

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of December 31, 2021 and 2020, there were no pending or threatening lawsuits that could be reasonably assessed to have resulted in a probable loss to the Company in an amount that can be reasonably estimated. As such, no accrual has been made in the Consolidated Financial Statements relating to claims and litigations. As of December 31, 2021 and 2020, there were also no proceedings in which any of the Company’s directors, officers or affiliates were an adverse party to the Company or had a material interest adverse to the Company’s interest.

Element 7 Transaction

Effective February 23, 2021, the Company entered into a Merger and Exchange Agreement (the “Element 7 Merger Agreement”) with Element 7 whereby the Company has the right, subject to satisfactory completion of due diligence and other conditions, to obtain all of the equity interests held by Element 7 in seventeen holding companies that hold the rights to in-process state and local cannabis retail licenses or license applications, some of which are partially owned. Under the Element 7 Merger Agreement, the Company is obligated to purchase all such equity interests for each retail cannabis license that meets the conditions for sale and Element 7 is obligated to sell such equity interests. The consideration payable under the Element 7 Merger Agreement is $1,500,000 for 100% of Element 7’s equity interests in each cannabis retail license holding entity payable in equity shares of the Company at $10 per share (plus certain pre-close convertible debt financing of up to $4,000,000). Conditions to closing the transaction include, among other things, the availability of $25,000,000 for development of certain Element 7 retail cannabis licenses, and the delivery by Element 7 of certain leases.

In addition, effective February 23, 2021, the Company entered into a License Development and Consulting Agreement (the “Element 7 License Agreement”) with Element 7 to provide certain retail consulting services to develop and obtain up to thirty-four cannabis retail licenses in exchange for the payment of certain fees as set forth in the Element 7 License Agreement, including, without limitation, a fixed fee of up to $5,580,000 and $150,000 for each transfer of retail cannabis license developed and transferred to GH Group. During the year ended December 31, 2021, the Company paid $2,274,167 which was recorded as a note receivable, see “Note 5 - Notes Receivable” for further information.

In November 2021, the Company terminated the Element 7 Merger Agreement and the Element 7 License Agreement and filed suit against Element 7 for, among other things, fraud and breach of contract and demanded performance under the Merger and Exchange Agreement and Consulting Agreement executed on February 23, 2021. As of December 31, 2021, the Company received membership or equity interests in one entity out of seventeen entities that were contractually committed to be transferred under the Merger Agreement. Accordingly, 150,000 Subordinate Voting Shares are to be issued, see “Note 18 - Shareholders’ Equity” for further information. The Company believes the likelihood of a loss contingency is neither probable nor remote. As such, no amount has been accrued in the financial statements.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

23.RELATED PARTY TRANSACTIONS

Incubation Services

Effective January 1, 2019, GH Group and Magu Capital LLC (“Magu Capital”), a company partially owned by an executive and board members of the Company, entered into a Services and Incubation Agreement (the “Services and Incubation Agreement”), pursuant to which Magu Capital agreed to perform certain advisory and business “incubation” services for GH Group (and incur certain fees and expenses on behalf of GH Group as part of, and as performance for, such services) in consideration of GH Group’s agreement to issue to Magu Capital, upon a date certain following the closing of the Roll-Up as reasonably determined by the board of directors of GH Group, a warrant to purchase a fixed number of Class A Common shares of GH Group at an agreed upon strike price no later than three years following the grant date.

On July 23, 2020, GH Group issued to Magu Capital a warrant to purchase Class A Common shares of GH Group (the “Magu Capital Warrant”), in full satisfaction of GH Group’s obligations under the Services and Incubation Agreement to compensate Magu Capital for the incubation services. The Magu Capital Warrants were fair valued at approximately $427,000. The Company recorded a gain on extinguishment of the liability in the amount of approximately $573,000 which was recorded as a component of other income in the accompanying Consolidated Statements of Operations for the year ended December 31, 2020. On June 28, 2021, GH Group notified Magu Capital of its termination of the Services and Incubation Agreement, and by extension the automatic exercise of Magu Capital’s warrant issued in connection with the Services and Incubation Agreement.

Issuance of Exchangeable Shares for Management Services

In January 2020, as part of the Roll-Up, GH Group: (a) issued to APP Investment Advisors LLC, (“APP Investment Advisors”), a company partially owned by an executive and board members of the Company, 880,870 Class A Common shares of GH Group in exchange for certain management services rendered by APP Investment Advisors for AP Investment Fund (one of the entities that merged with GH Group in the Roll-Up); and (b) issued to Magu Capital 2,263,513 Class A Common shares of GH Group in exchange for certain management services rendered by Magu Capital for CA Brand Collective, Magu Investment Fund and MG Padaro Fund (i.e., entities that merged with GH Group in the Roll-Up). All of the Class A Common shares issued to APP Investment Advisors and Magu Capital were exchanged for Exchangeable Shares upon the closing of the Business Combination. See “Note 18 - Shareholders’ Equity” for further information on Exchangeable Shares.

Leases

Neo Street Partners LLC, a company partially owned by an executive and board member of the Company, entered into a five-year lease with a subsidiary of the Company. The lease, which commenced in October 2018, provides for an initial annual base rent payment of $213,049 increasing to $243,491 for years two to five. Rent expense for the years ended December 31, 2021 and 2020 were $243,491 and $243,491, respectively.

3645 Long Beach LLC, a company partially owned by an executive and board member of the Company, entered into a five-year lease with a subsidiary of the Company. The lease, which commenced in December 2019, provides for an initial annual base rent payment of $64,477 increasing to $69,352 for year two and increasing five percent per annum thereafter. Rent expense for the years ended December 31, 2021 and 2020 were $69,352 and $64,752, respectively.

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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

23.RELATED PARTY TRANSACTIONS (Continued)

Consulting Agreement

Beach Front Property Management Inc, a company that is majority-owned by an executive and board member of the Company, entered into a consulting agreement with the Company dated September 28, 2020. The monthly consulting fee is $10,860 for M&A advisory and assistance and real estate acquisition and financing services. The agreement may be terminated by either party for any/or no reason without penalty upon seven days written notice. Consulting fees for the years ended December 31, 2021 and 2020 were $130,320 and $32,580, respectively.

Refer to “Note 17 – Notes Payable - Related Parties” for additional information around the notes payable for the years ended December 31, 2021 and 2020.

24.REVENUES, NET

Revenues are disaggregated as follows for the years ended December 31, 2021 and 2020:


	2021		2020
Retail	$	21,734,403	$	14,503,125
Wholesale		47,712,449		33,756,476
Revenues, Net	$	69,446,852	$	48,259,601

25.SUBSEQUENT EVENTS

The Company has evaluated subsequent events through March 22, 2022, which is the date these Consolidated Financial Statements were issued, and has concluded that the following subsequent events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the notes to the Consolidated Financial Statements.

On December 17, 2021, the Company enter into a definitive agreement, as amended, to acquire all of the issued and outstanding shares and other securities of Plus Products Holdings Inc. (“PLUS”), a leading cannabis edibles company in California. The definitive agreement is in the process of being amended and restated. The Company is acquiring PLUS for approximately $33 million through a combination of Company unsecured convertible debenture notes, Equity Shares and RSUs (the “PLUS Acquisition”). The PLUS Acquisition, which is expected to close in Q2 2022, is being completed by way of a court and creditor approved plan under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (the “CCAA”), and is subject to certain customary closing conditions and approvals for transactions of this nature, including, among others, the final approval of the Supreme Court of British Columbia in the context of the CCAA proceedings.

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Exhibit 99.3

GLASS HOUSE BRANDS INC.

Annual Information Form

For the year ended December 31, 2021

Dated March 31, 2022

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EXPLANATORY NOTES AND DISCLAIMERS	3
CORPORATE STRUCTURE	6
GENERAL DEVELOPMENT OF THE BUSINESS	8
DESCRIPTION OF THE BUSINESS	13
CANNABIS MARKET OVERVIEW	29
RISK FACTORS	49
DIVIDENDS AND DISTRIBUTIONS	77
DESCRIPTION OF CAPITAL STRUCTURE	78
MARKET FOR SECURITIES	81
SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER	82
DIRECTORS AND OFFICERS	83
PROMOTER	87
LEGAL PROCEEDINGS AND REGULATORY ACTIONS	88
AUDIT COMMITTEE	89
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS	92
TRANSFER AGENT AND REGISTRAR	93
MATERIAL CONTRACTS	94
INTERESTS OF EXPERTS	98
ADDITIONAL INFORMATION	99
SCHEDULE A – AUDIT COMMITTEE CHARTER	A-1

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EXPLANATORY NOTES AND DISCLAIMERS

Formation of Company

In this annual information form (“AIF”), unless the context otherwise requires, the “Company”, “we”, “us” and “our” refers to Glass House Brands Inc. together with its subsidiaries, which entity was previously a publicly-listed special purpose acquisition corporation named Mercer Park Brand Acquisition Corp. (“Mercer Park”). See “Corporate Structure”.

Prior to the Business Combination (as defined herein and described under “Corporate Structure”), Mercer Park’s only business was to seek and effect an acquisition of one or more businesses or assets by way of a merger, share exchange, asset acquisition, share purchase, reorganization or other similar business combination. In June 2021, Mercer Park completed the Business Combination with GH Group ( as defined herein), a California based vertically integrated cannabis company, changed its name to Glass House Brands Inc. and now carries on the business of GH Group. Accordingly, discussion herein regarding the business activities and operations of the Company for periods prior to the completion of the Business Combination includes references to the business carried on by GH Group and its subsidiaries, as well as certain material events of Mark Park. See “Corporate Structure” and “General Development of the Business”.

Currency of Information Provided

This AIF applies to the business activities and operation of the Company for the year ended December 31, 2021, as updated to March 30, 2022. Unless otherwise indicated, the information in this AIF is stated as of March 30, 2022.

Presentation of Financial Information and Currency

The Company presents its consolidated financial statements in United States dollars, and prepares such financial statements in accordance with United States Generally Accepted Accounting Principles (“U.S. GAAP”). Unless otherwise indicated, all references to “$” or ”US$” in this AIF refer to United States dollars and all references to “C$” in this AIF refer to Canadian dollars.

Market and Industry Data

Unless otherwise indicated, the market and industry data contained in this AIF is based upon information from independent industry publications, government publications, market research, analyst reports and surveys and other publicly available sources. Government and industry publications and reports generally indicate that they have obtained their information from sources believed to be reliable, but do not guarantee the accuracy and completeness of their information. Actual outcomes may vary materially from those forecast in such reports or publications, and the prospect for material variation can be expected to increase as the length of the forecast period increases. Although the Company believes these sources to be generally reliable, market and industry data is subject to interpretation and cannot be verified with complete certainty due to limits on the availability and reliability of the data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in any survey. The Company has not independently verified any of the data from third party sources referred to in this AIF and accordingly, the accuracy and completeness of such data is not guaranteed.

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Forward-Looking Information

This AIF contains certain “forward-looking information” and “forward-looking statements”, as defined in applicable securities laws (collectively referred to herein as “forward-looking statements”). All statements other than statements of historical fact are considered forward-looking statements. Forward-looking statements are based on the assumptions, estimates, analyses and opinions of management made in light of its experience and its perception of trends, current conditions and expected developments, as well as other factors that management believes to be relevant and reasonable in the circumstances at the date hereof. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects”, “is expected”, “budget”, “scheduled”, “estimates”, “continues”, “forecasts”, “projects”, “predicts”, “intends”, “anticipates” or “believes”, or variations of, or the negatives of such words and phrases, or statements that certain actions, events or results “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved. The forward-looking statements contained herein include, but are not limited to, information with respect to the Company’s expectations regarding: the legislative framework regarding the licensing of cannabis and related activities; proposed and anticipated changes to applicable laws and regulations regarding the cannabis market, associated fees and taxes and the business impact on the Company; any potential future legalization of adult-use and/or medical marijuana under U.S. federal law; the completion of, and matters relating to, the various proposed transactions discussed by the Company herein and the expected timing related thereto; the potential size of the adult and medical-use cannabis markets in the jurisdictions in which the Company currently operates in and may in the future operate; the availability and renewal of requisite licenses and permits on terms acceptable to the Company; anticipated future cultivation, manufacturing and extraction capacity and output, and the resulting anticipated operational and financial benefits to the Company; expectations as to the development and distribution of the Company’s brands and products and the distribution of third-party products; estimated future sales, estimated future operating costs and other prospective financial performance and the resulting effects on the Company’s financial position; prospective operational performance; business prospects and objectives and near and long term strategies, including growth strategies; competitive strengths; anticipated trends and challenges in the Company’s business and the markets in which it operates; the ability of the Company to satisfy the requirements of its debt obligations, and to repay, renew or refinance such indebtedness upon such indebtedness becoming payable; anticipated cash needs; the Company’s ability to raise funds in the capital markets and the resulting effects on the Company’s financial position; the schedule for the release of outstanding shares or other securities of the Company or its subsidiaries that are currently subject to lock-up arrangements; the completion of the PLUS Acquisition (as defined herein); the Element 7 Proceeding (as defined herein); other economic, business, regulatory and/or competitive factors related to the Company or the cannabis industry generally, and other events or conditions that may occur in the future.

Forward-looking statements are inherently subject to known and unknown risks, uncertainties and other factors that may be beyond the Company’s ability to predict or control and that may cause the actual results, level of activity, performance or achievements of the Company to be materially different from those expressed or implied by such forward-looking statements, including but not limited to risks related to: the fact that cannabis continues to be a controlled substance under the CSA (as defined herein); the enforcement of U.S. federal law and any other relevant law and an investor’s contribution to and involvement in such activities may result in U.S. federal civil and/or criminal prosecution, including forfeiture of his, her or its entire investment; the Rohrabacher-Blumenauer Amendment (as defined herein) not being renewed; federal and state forfeiture laws; the illegality of cannabis under U.S. federal law restricting the Company’s access to capital; anti-money laundering laws and regulation; restricted access to banking; heightened scrutiny by regulatory authorities; travelling across borders; regulatory or political change; the fact that the cannabis industry is a new industry and may not succeed; the Company’s management team or other owners could be disqualified from ownership in the Company; public opinion and perception; general regulation; licensure; California regulatory non-compliance; reclassification of cannabis in the United States; service providers; enforceability of contracts; lack of access to U.S. bankruptcy protections; environmental and regulation matters; the impact of the global COVID-19 pandemic on the Company, including its supply chain, its ability to deliver products, the timing of customer purchase decisions and the health of employees; the loss of foreign private issuer status and become a full domestic issuer in the United States; the Company’s Multiple Voting Shares and capital structure generally; the Company’s ability to refinance, extend or repay its indebtedness; limited operating history; reliance on management; successfully obtaining additional financing as required to fund the Company’s continuing operations; lack of profitability of the Company; negative cash flow from operations; competition; future acquisitions or dispositions; an agricultural business; vulnerability to rising energy costs; product liability; product recalls; results of future clinical research being unfavourable; reliance on key inputs; dependence on suppliers and skilled labour; growth management; product diversion; internal controls over financial reporting and/or disclosure controls and procedures being inadequate; forecasting and projections; leased premises; reliance on a single operating jurisdiction and lack of diversification; reliable data regarding the medical and adult-use marijuana industry; litigation; intellectual property rights; competition from synthetic production and technological advances; constraints on marketing products; fraudulent or illegal activity by employees, contractors and consultants; information technology systems, security breaches and cyber-attacks; taxation matters, including federal, California state and local taxes; high bonding and insurance coverage costs; global financial conditions; the fact that the Company is a holding company; increased costs as

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a result of being a public company; limitations on remedies and rights to indemnification; enforcing judgments and effecting service of process on directors and officers; past performance not being indicative of future results; market price volatility; the impact of the invasion of Ukraine by Russia and other global events on financial markets; sales by existing securityholders, including upon expiration of existing lock-up arrangements; limited market for securities; future sales of the Company’s securities and dilution; as well as the factors discussed in the “Risk Factors” section of this AIF.

All forward-looking statements made herein are qualified by this Forward-Looking Information cautionary statement. The Company does not undertake to update any forward-looking statements, except in accordance with applicable securities laws. Accordingly, readers should not place undue reliance on forward-looking statements in this AIF. If the Company does update one or more forward-looking statements, no inference should be drawn that it will make additional updates with respect to those or other forward-looking statements, unless required by law.

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CORPORATE STRUCTURE

The Company was previously a publicly-listed special purpose acquisition corporation named Mercer Park Brand Acquisition Corp., incorporated under the Business Corporations Act (British Columbia) (“BCBCA”) on April 16, 2019, for the purpose of effecting an acquisition of one or more businesses or assets. Mercer Park completed an initial public offering and became listed on the Neo Exchange Inc. (the “Neo Exchange”) on May 13, 2019, and, on June 29, 2021 completed its qualifying transaction under the rules of the Neo Exchange (the “Business Combination”) pursuant to the terms of an Agreement and Plan of Merger dated as of April 8, 2021, as amended June 18, 2021 and June 28, 2021 (collectively, the “Business Combination Agreement”), pursuant to which Mercer Park acquired indirectly 100% of the common equity interests of GH Group, Inc. (“GH Group”), a California based vertically integrated cannabis company, and changed its name to Glass House Brands Inc.. See “General Development of the Business”.

As a result of the Business Combination, GH Group’s shareholders became the controlling shareholders of the Company, and the Company continued to carry on the business of GH Group. The Business Combination was effected by a reverse merger of an indirect subsidiary of Mercer Park with GH Group, with GH Group as the surviving entity, and GH Group became a majority-owned indirect subsidiary of the Company.

In connection with the Business Combination, the articles of the Company (the “Articles”) were amended to, among other things: (i) create and set the terms of the restricted voting shares (“Restricted Voting Shares”) and limited voting shares of the Company (“Limited Voting Shares”), (ii) amend the terms of Mercer Park’s Class A restricted voting shares to provide for the conversion of such shares into Restricted Voting Shares, Limited Voting Shares, or subordinate voting shares of the Company (“Subordinate Voting Shares”, and collectively with the Restricted Voting Shares and Limited Voting Shares, the “Equity Shares”), as applicable (rather than solely into Subordinate Voting Shares) on completion of the Business Combination, (iii) provide for the conversion of Mercer Park’s Class B shares directly or indirectly on a one-for-one basis into Equity Shares on completion of the Business Combination, (iv) amend the terms of the multiple voting shares of the Company (“Multiple Voting Shares”) to convert the terms of such class of shares into non-transferable, redeemable and retractable preferred shares carrying 50 votes per share with no dividend or conversion rights and a $0.001 redemption and liquidation value, and (v) amend the terms of the Subordinate Voting Shares issuable on conversion of Mercer Park’s Class A restricted voting shares, including by amending the requirements in respect of who may hold Subordinate Voting Shares (collectively, the “Share Terms Amendment”). See “Description of Capital Structure”.

The head office of the Company is 3645 Long Beach Boulevard, Long Beach, California 90807. The registered office of the Company is Suite 2200, HSBC Building, 885 West Georgia Street, Vancouver, BC V6C 3E8 Canada.

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Set forth below is the organization chart of the Company, setting out all material subsidiaries of the Company and their jurisdiction of incorporation, formation or organization.

Note:

(1)

The voting securities of MPB Acquisition Corp. consist of Class A common shares of MPB Acquisition Corp. and the Exchangeable Shares (as defined herein). As of the date of the AIF, the Company holds all of the Class A common shares of MPB Acquisition Corp., entitling the Company to approximately 56.26% of the votes attached to all voting securities of MPB Acquisition Corp. The holders of Exchangeable Shares are entitled to the remaining 43.74% of the votes attached to the voting securities of MPB Acquisition Corp. See “Description of the Capital Structure – Exchangeable Shares”.

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GENERAL DEVELOPMENT OF THE BUSINESS

The Company is a vertically integrated cannabis company that operates in the state of California. The Company cultivates, manufactures, and distributes cannabis bulk flower and trim to wholesalers and consumer packaged goods to third-party retail stores in the state of California. The Company also owns and operates retail cannabis stores in the state of California.

The Company’s business is operated through its majority owned subsidiary GH Group (previously named California Cannabis Enterprises, Inc.), which was incorporated under the laws of Delaware in 2018, and whose business in 2018 included cultivation (an approximately 150,000 sq. ft. Carpinteria, California greenhouse facility (“Casitas”)), with manufacturing (an approximately 20,000 sq. ft. extraction and manufacturing facility in Lompoc, California (the “CMS Asset”)), and retail (Bud and Bloom, a California corporation with a cannabis dispensary located in Santa Ana, California and The Pottery, a California corporation with a cannabis dispensary located in Los Angeles, California, which also, at such time, controlled an approximately 10,000 sq. ft. indoor cultivation operation on site).

In 2019, GH Group expanded its retail presence to include one of the three (3) dispensary permits in Santa Barbara, California, under its “Farmacy” brand and established an omnichannel retail approach with web-based ordering capabilities and delivery optionality. See “Cannabis Market Overview – Compliance with License Requirements – Retail and Distribution” for a discussion of the Company’s online sale and delivery regulatory compliance protocols as of the date of this AIF. At the same time, GH Group strengthened its consumer packaged goods (“CPG”) brand-building and brand acquisition capabilities with an investment in brand-building around its “Glass House Farms” brand and the launch of the Forbidden Flowers brand in partnership with an actress. On January 1, 2021, GH Group completed the acquisition of a fourth dispensary, iCANN, LCC d/b/a Farmacy Berkeley (“iCANN” or “Farmacy Berkeley”). See “Acquisitions – iCANN Acquisition” below.

In 2020, GH Group expanded its cultivation footprint by over 300% with an approximately 355,000 sq. ft. cultivation facility in Padaro, California. GH Group’s manufacturing capacity was also scaled alongside the cultivation expansion. During this time, sales of Glass House Farms products grew at market-leading rates, positioned as a “best in category”, attractively priced everyday brand, and a premium line of flower, Grower’s Choice by Glass House Farms, was launched.

GH Group also added additional brands and form factors to its offerings to complement the strong positioning in the flower segment enjoyed by Glass House Farms. In edibles and topicals, the Company benefits from a partnership with a well-known cannabis activist and entrepreneur under its cannabis wellness brand “Mama Sue”.

Prior to the Business Combination with GH Group, Mercer Park completed an initial public offering on May 13, 2019 and issued an aggregate of 40,250,000 Class A restricted voting units, consisting of Class A restricted voting share and warrants, and received approximately C$402.5 million of proceeds. The Class A restricted voting shares and warrants underlying the units were listed for trading on the Neo Exchange. Certain Class B shares and Class B warrants in the capital of Mercer Park were held by the Mercer Park Founders (as defined herein) and Mercer Park’s sponsor, Mercer Park Brand, L.P. (“Mercer”). See “Corporate Structure” and “Material Contracts – Investor Rights Agreement”.

On June 29, 2021, Mercer Park completed the Business Combination with GH Group pursuant to the terms of the Business Combination Agreement, which is available under the Company’s SEDAR profile at www.sedar.com. The Company’s Equity Shares and Equity Share purchase warrants (the “Warrants”) began trading on the Neo Exchange on July 5, 2021.

In September 2021, the Company completed the acquisition of an approximately 5.5 million square foot greenhouse facility located in Camarillo, California. See “Acquisitions – SoCal Greenhouse Acquisition”.

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Through these activities, the Company established the foundation for its ultimate strategy to create a leading California cannabis brand company through a fully vertically integrated commercial cannabis company engaged in all licensed verticals: (i) cultivation; (ii) manufacturing; (iii) distribution; and (iv) retail. The Company strives to provide customers with consistently high-quality products across a range of trusted and recognizable brands.

Acquisitions

Roll-Up Transaction

On January 31, 2020, pursuant to an Agreement and Plan of Merger (and various securities exchange agreements), a roll-up transaction was consummated whereby the assets and liabilities of a combined group of investment fund entities were merged with and into GH Group, whereby GH Group survived the merger and now owns and controls the assets from such merged out entities, which became GH Group’s business going forward.

iCANN Acquisition

On January 1, 2021, GH Group completed an acquisition of 100% of the equity interests of iCANN, a licensed retail cannabis company located in Berkeley, California. Pursuant to the terms of the merger agreement between a subsidiary of GH Group and iCANN, GH Group (i) elected to convert earlier issued convertible notes with principal amount of $2,000,000 and accrued interest of $45,321 into equity interests of iCANN; (ii) paid $400,000 in cash to four holders of iCANN equity interests: (iii) issued 7,511,725 Series A common shares to holders of iCANN equity interests; and (iv) issued an additional 500,000 Series A common shares to brokers and consultants, or the cash equivalent for certain non-accredited investors. All such Series A common shares were exchanged on closing of the Business Combination for Exchangeable Shares based on a value of $10.00 per Exchangeable Share and pursuant to a value formula as set out in the Business Combination Agreement.

Element 7 Acquisition and Litigation

Effective February 23, 2021, GH Group entered into a Merger and Exchange Agreement (the “E7 Merger Agreement”) with Element 7 CA, LLC (“E7”) whereby GH Group had the right, subject to satisfactory completion of due diligence and other conditions, to obtain all of the membership or equity interests held by E7 in seventeen holding companies that hold the rights to in-process state and local cannabis retail licenses or license applications, some of which are partially owned. In addition, GH Group entered into a License Development and Consulting Agreement (the “E7 License Agreement”, and together with the E7 Merger Agreement, the “E7 Agreements”) with E7 to provide certain retail consulting services to develop and obtain up to thirty-four cannabis retail licenses in exchange for the payment of certain fees set forth in the E7 License Agreement. In November 2021, GH Group terminated the E7 Agreements based on a breach of contractual terms, and as of December 31, 2021, GH Group had converted certain pre-closing financing payment and consulting fees into notes receivable in the amount of $2,274,167. As of December 31, 2021, the Company had received membership or equity interests in one entity out of seventeen entities that were contractually committed to be transferred under the E7 Merger Agreement.

On November 4, 2021, GH Group filed a lawsuit in the Superior Court for the County of Los Angeles, Central District (Case No. 21STCV40401) against E7 and its principals and owners Josh Black and Robert “Bobby” DiVito (together, “Element 7”) for a variety of claims, including fraud and breach of contract and demanded performance under the E7 Agreements.

The court proceeding was subsequently withdrawn by the Company without prejudice and on March 13, 2022, GH Group entered into an agreement with American Patriot Brands, Inc. (“APB”) to jointly file suit against Element 7 to enforce the transfer of contractually committed licenses (the “Joint Litigation Agreement”). GH Group and APB jointly refiled a complaint against Element 7 in the County of Los Angeles, Central District (Case No. 22STCV09323) (the “Element 7 Proceeding”). If either GH Group or APB is successful in the Element 7 Proceeding, the Company expects to have a path to achieve transfer of the existing licenses at issue.

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Under the terms of the Joint Litigation Agreement, GH Group will pay all legal fees for GH Group and APB’s joint litigation against Element 7. GH Group will have the option to purchase any license or licensed entity interests recovered by APB from Element 7 that were included in the E7 Merger Agreement, that have either a state or local permit and a valid lease, or a have a local permit that is without a real property site but is in a competitive license jurisdiction, in each case at a valuation of $750,000 per license or licensed entity, paid in Equity Shares at the 10-day volume weighted average price calculated as of the date of such purchase. In addition, under the Joint Litigation Agreement, GH Group also has the right of first refusal to purchase any other licenses or licensed entity outside of the foregoing groups, and the right to terminate the Joint Litigation Agreement at any time.

SoCal Greenhouse Acquisition

Following completion of the Business Combination, on September 14, 2021, the Company completed its acquisition of an approximately 5.5 million square foot greenhouse facility located in Camarillo, California (the “SoCal Facility”) for total consideration of $93.0 million in cash, plus stock considerations payable to the original holder of the option to purchase the SoCal Facility (the “Option Holder”).

Under the terms of the definitive purchase agreements dated March 29, 2021, as amended, for the SoCal Facility and the option rights to purchase the SoCal Facility pursuant to the terms of an agreement to assign option dated June 6, 2021 as amended by an assignment and assumption of option agreement dated September 14, 2021 (collectively, the “SoCal Purchase Agreements”), the Company paid the sellers of the SoCal Facility at closing $93.0 million (approximately C$117.7 million) in cash and issued to the Option Holder 6.5 million Subordinate Voting Shares (“Closing Shares”) at a price equal to $10.00 per share (C$12.65), which were subject to a customary lock-up agreement restricting the sale of 50% of such shares for six (6) months following the closing and the remaining 50% of such shares for twelve (12) months following the closing. The Company held back an additional 3.5 million Subordinate Voting Shares (the “Contingent Shares”), which may be issued to the Option Holder after closing upon satisfaction of certain contractual indemnity obligations, and which Contingent Shares will be subject to the same lockup restrictions. Finally, the Option Holder is entitled to earn up to $75.0 million (approximately C$94.9 million) of additional Subordinate Voting Shares (the “Earn-Out Shares”), to be priced based on the volume weighted average price of such shares for twenty (20) consecutive trading days immediately prior to the last day of the 12-month period commencing on the date that is thirty (30) months after the date certain capital expenditures are made by the Company to the SoCal Facility, as more particularly detailed in the SoCal Purchase Agreements. The vesting of the Earn-Out Shares is determined pursuant to an earn-out formula set forth in the SoCal Purchase Agreements. The Earn-Out Shares are also subject to the same lock-up restrictions as the Closing Shares and Contingent Shares. See “Material Contracts”.

On March 11, 2022, the Company received California state cannabis licenses, as well as a cannabis business license from Ventura County, for the Phase I retrofit of the SoCal Facility. See “General Development of the Business – Financing Transactions – Senior Secured Term Loan” and “Description of the Business” below.

PLUS Acquisition

The Company entered into a definitive agreement on December 17, 2021, as subsequently amended January 17, 2022 and March 25, 2022 (the “PLUS Acquisition Agreement”), to acquire the business of Plus Products Inc. (“PLUS”), a leading cannabis edibles company based in California, through the acquisition of all outstanding securities of PLUS’ wholly-owned subsidiary, Plus Products Holdings Inc. (“PPH”). The Company is acquiring PPH for approximately $33 million through a combination of the issuance of approximately C$20,504,850 in unsecured convertible debt to existing secured noteholders of PLUS, 2,102,654 Equity Shares to existing securityholders of PLUS and approximately 1,793,791 restricted share units and 208,635 incentive shares to certain management, employees and consultants of PLUS (the “PLUS Acquisition”). The PLUS Acquisition, which is currently expected to close in April 2022, is being completed by way of a plan under the Companies’ Creditors Arrangement Act (the “CCAA”) and is subject to certain remaining closing conditions for transactions of this nature, including, among others, receipt of the amended and restated sanction order of the Supreme Court of British Columbia in the context of the CCAA proceedings. See “Material Contracts”.

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Financing Transactions

GH Group Financing

Between January 30, 2020 and January 5, 2021, GH Group issued $22,599,844 in convertible debt (the “Convertible Debt”) bearing 8% interest per annum (4% of which was paid in cash and 4% of which was accrued and was to be automatically converted upon a $10,000,000 equity raise at the greater of a 20% discount or a $250,000,000 valuation cap). The Convertible Debt converted upon the completion of the GH Group Financing described below.

In June 2021, GH Group completed an equity financing in the United States for gross proceeds of $12,530,963.39 (the “GH Group Financing”). Investors in the GH Group Financing received, for each $1.27 invested or for each $0.8246932 of outstanding convertible promissory notes converted, one (1) preferred share of GH Group (the “GH Group Preferred Shares”) and one (1) warrant (the “GH Group Warrants”) to purchase a Class A common share of GH Group at an exercise price equal to the fair market value of one Class A common share of GH Group as of the date of issuance of such GH Group Warrant. The completion of the GH Group Financing triggered the conversion of the outstanding amount of the Convertible Debt. Upon closing of the Business Combination, some of the issued outstanding GH Group Preferred Shares were exchanged for Exchangeable Shares based on a value of $10.00 per Exchangeable Share and pursuant to a value formula as set out in the Business Combination Agreement, and each GH Group Warrant was exchanged for a Warrant to purchase a number of Equity Shares equal to (i) the number of shares of GH Group that were issuable upon exercise of such GH Group Warrant immediately prior to the closing of the Business Combination divided by the applicable exchange ratio. As of December 31, 2021, there were 18,515,491 GH Group Preferred Shares issued and outstanding with a total face value (excluding interest, which is paid on a quarterly basis) of $23,514,674.22.

Mercer Park Private Placement

On June 29, 2021, in conjunction with the completion of the Business Combination, Mercer Park completed a private placement of $85 million of non-voting shares of Mercer Park Brand Pipe Inc., a wholly owned subsidiary of Mercer Park (the “Private Placement Shares”) at a price of $10.00 per Private Placement Share (the “Mercer Park Private Placement”). Canaccord Genuity Corp. (“Canaccord”), the underwriter in respect of Mercer Park’s initial public offering and the sole agent in respect of the Mercer Park Private Placement, subscribed for $4.9 million of Private Placement Shares under the Mercer Park Private Placement, which subscription was funded by Canaccord directing to Mercer Park an equal amount from the non-discretionary portion of deferred underwriting fees paid by Mercer Park to Canaccord in connection with the closing of the Business Combination. Under the terms of the Mercer Park Private Placement, Canaccord was entitled to a 4.0% commission on the sale of the Private Placement Shares, other than in connection with the sale of Private Placement Shares to certain president’s list subscribers. In addition, a subscriber under the Mercer Park Private Placement that subscribed for $20.1 million of Private Placement Shares was transferred 223,333 free-trading Equity Shares by Mercer for no additional consideration in order make the effective price of such subscription $9.00 per Private Placement Share. Pursuant to the Business Combination, the Private Placement Shares were exchanged for Equity Shares on a one-for-one basis. The funds from the Mercer Park Private Placement were used to fund the Company’s growth strategy, for working capital and for general corporate purposes.

Senior Secured Term Loan

Effective December 10, 2021, the Company entered into a senior secured credit agreement, as amended by an amendment to credit agreement and waiver dated January 21, 2022 (the “Loan Agreement”), among the Company, MPB Acquisition Corp., GHB Usub, LLC, GH Group and a U.S.-based private credit investment fund (the “Lender”) for up to $100 million (the “Loan”), with an initial draw of $50 million (the “Initial Term Loan”). The Initial Term Loan has a variable interest rate currently set at 10% per annum, and in no event shall be more than 12% per annum. The gross proceeds of the Loan will be used to fund the phased retrofit of the SoCal Facility and for general corporate purposes.

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The Initial Term Loan shall be repayable in monthly installments beginning on December 1, 2023, at an aggregate amount equal to 1.25% of the original principal amount of the Initial Term Loan. Two subsequent draws of $25 million (the “Delayed Draw Term Loans”) each will be available at future dates provided certain terms and conditions under the Loan Agreement have been met and shall be repayable in monthly installments beginning on December 1, 2023, at an aggregate amount equal to 1.25% of the original principal amount of the Delayed Draw Term Loans. The conditions of the Loan Agreement included the creation and issuance of 2,000,000 Warrants, and delivered to the Lender at closing, with each Warrant exercisable at an exercise price of $11.50 to acquire one Equity Share until June 26, 2026, subject to acceleration or redemption as set forth under the terms of the Warrant Agreement. See “Material Contracts”.

Recent Management Changes

On August 4, 2021, the Company announced the appointment of Erik W. Thoresen as Chief Business Development Officer. In this role, Mr. Thoresen spearheads M&A initiatives as the Company capitalizes on California-based and potential future national consumer packaged goods (CPG) opportunities.

On September 29, 2021, the Company announced the appointment of Mark Vendetti as Chief Financial Officer. Mr. Vendetti has over 30 years of Finance and Accounting experience focused on consumer driven product companies. Prior to joining the Company, Mr. Vendetti was the CFO of Canndescent, a leading producer of premium California Cannabis, from 2019 to 2021. During his career, Mr. Vendetti has worked for some of the most well-known consumer companies and their brands including Procter and Gamble, XM Satellite Radio, Abercrombie and Fitch, Bauer Hockey and Mattel. He holds a BA in Mathematics from Amherst College and an MBA from Harvard University. See “Directors and Officers”.

COVID-19

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DESCRIPTION OF THE BUSINESS

Overview

While many cannabis businesses prioritize brand building and customer acquisition before securing a reliable product flow, the Company believes that in a consumer-focused CPG space, consistent delivery of high-quality product at an attractive price point is a first principle, and a prerequisite for any other activity.

The Company operates multiple greenhouse cultivation facilities located in Carpinteria, California and its manufacturing or production facility is located in Lompoc, California. In September 2021, the Company completed its acquisition of the SoCal Facility located in Camarillo, California, which greenhouses were previously used to grow vine crops ad are currently being converted and retrofitted by the Company for the cultivation of premium commercial cannabis.

The Company generates revenue by selling its products in bulk at wholesale and at retail to its own and third-party dispensaries in California, including both raw cannabis, cannabis oil, and cannabis consumer goods. The Company’s “Farmacy” branded dispensaries are currently located in Santa Barbara, Santa Ana, and Berkeley, California.

Cultivation

The Company’s cultivation strategy focuses on marrying nature and technology with the goal of producing premium quality cannabis indoors in greenhouses specifically designed to optimize quality and yields while minimizing inputs and environmental impact. The Company uses the sun, the climate and advanced technology to conduct precision agriculture.

As of the date hereof, the Company’s greenhouse cultivation is conducted in three facilities, being the Casitas Facility and the Padaro Facility located in Santa Barbara County, California and the SoCal Facility in Camarillo, California. Together the three facilities total over 6 million sq. ft. of indoor greenhouse area, although cannabis cultivation is not conducted in the entirety of the greenhouse area.

The Company received the necessary licenses to operate Phase 1 of the SoCal Facility on March 11, 2022, including all California state licenses for nursery, cultivation and processing operations, and the local cannabis business license from Ventura County. The Company has commenced nursery activities, and currently expects that the first harvest and sale will occur in Q3 2022.

Each of the Casitas and Padaro facilities were cut flower greenhouses prior to the Company taking over the properties and were transitioned to cannabis use by the Company. The Casitas Facility includes more than 150,000 sq. ft. of greenhouse footprint with onsite propagation, nursery, flowering canopy, drying and on site processing. It originally started under the California Proposition 215 regulatory structure and was used as the model facility for the creation of the Santa Barbara County cannabis ordinance and tax plan. It underwent a full retrofit by the Company, including the addition of new growing systems, fertigation, photoperiod lights, automated light deprivation curtains, and upgraded climate control technology. The Company followed up the Casitas project with its Padaro Facility acquisition, which tripled the Company’s cultivation footprint while increasing canopy planting efficiency through the use of an innovative rolling tray system. The Company retrofitted the Padaro Facility with significantly improved efficiency, lower cost per sq. ft. costs and improved operating processes. The Padaro property was the very first fully licensed and entitled cannabis facility in the Santa Barbara Coastal area. The Company’s Santa Barbara-based greenhouse operations were substantially expanded in 2020. Facility upgrades to the Padaro location were fully completed in Q3 2020, allowing 100% of the Company’s 306,595 sq. ft. of licensed greenhouse canopy to be operational at the start of Q4 2020, up from 205,287 square feet in July 2020 (a 49% expansion). In 2020, the Company produced 410,000 wet pounds of cannabis biomass from both of its Santa Barbara based greenhouse operations, up 226% from 126,000 wet pounds in 2019, and the Company produced over 750,000 wet pounds of cannabis biomass in 2021, representing a 85% increase from 2020.

The Southern California climate, with over 280 days of sun per year, minimizes the need for supplemental electric lighting to drive yields, while moderate ambient temperatures and humidity levels drastically reduce climate control expenses and limit pest pressures.

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The Company’s flower is predominantly sun-grown in “light deprivation” greenhouses, with supplemental lighting used only for photoperiod control of flowering schedules, so as to allow for the maximum number of harvests per year on a “perpetual harvest” model.

On September 14, 2021, the Company acquired the SoCal Facility located in Camarillo, California. The SoCal Facility consists of six separate greenhouses, six packhouses or warehouses, a water filtration building, three buildings housing multiple energy co-generation generators and a main office, along with associated water tanks, solar arrays and ancillary buildings. The 125-acres of existing greenhouses use high-tech and ultra-efficient climate control systems. They were previously used to grow immature and mature vine crops including, without limitation, tomatoes, peppers, and cucumbers, and are an ideal height for cultivation of premium commercial cannabis. While capital expenditures will be required to make certain capital improvements to the greenhouses for such purposes, such improvements will not require any structures to be replaced. Phase 1 of the SoCal Facility retrofit has included the conversion of two greenhouses and two packhouses totally approximately 1.7 million square feet, and began operation in March of 2022 and is expected to be completed by the end of Q2 2022. The initial Phase 1 capacity is expected to produce over 180,000 dry pounds of sellable cannabis (Flower, Smalls and Trim), representing more than a 300% increase from the Company’s current capacity.

In order to maintain high quality cultivation outputs, the Company’s cultivation team employs Integrated Pest Management (“IPM”) techniques. IPM is an ecosystem-based strategy to control pests and associated crop damage through techniques such as biological controls including the use of beneficial insects and climate control and manipulation.

The use of IPM requires constant and careful monitoring of plant health by the Company’s team of IPM specialists who continuously monitor plant growth, pest pressure, climate and other relevant factors and take active and pre-emptive steps to prevent issues from arising.

The Company’s cultivation expertise reflects the culmination of years of operating experience and specialized input from cannabis, agriculture, technology, business, manufacturing and scientific experts, allowing the Company to grow high-quality cannabis at a low cost. The Company’s cultivation management team has a combined 100+ years of greenhouse experience. The Company won the 2020 Cannabis & Tech Today Sustainable Leadership Award for stewardship in connection with its stewardship of local community initiatives, and the 2021 Leadership Award for Energy Consumption.

Cultivation Performance

As of December 31, 2021, the Company’s total greenhouse licensed cultivation canopy was approximately 306,595 sq. ft., with production capacity of approximately 750,000 wet pounds (or 96,000 dry equivalent pounds) per year. The Company’s ability to grow productively at scale has resulted in lower unit production costs. During 2021, the Company increased production of dry equivalent pounds by 79% and drove down production costs per pound, from $219/lb in 2020 to $189/lb in 2021.

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Cultivation Licenses

Padaro Licenses

The applicable licenses for cultivation/processing issued by the California Department of Cannabis Control (“DCC”) (formerly California Department of Food and Agriculture) are held by K&G Flowers, LLC and G&K Produce, LLC, respectively (each of which is a wholly owned subsidiary of the Company), as described in the table below.

License Holder	Address	Permit/License No.	Expiration/ Renewal Date (MM/DD/YY)	License Type
G&K Produce, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001702	11/22/22	Adult-Use-Nursery
G&K Produce, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001652	02/20/23	Adult-Use-Small Mixed- Light Tier 1
G&K Produce, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001633	02/20/23	Adult-Use-Small Mixed- Light Tier 1
G&K Produce, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001624	02/20/23	Adult-Use-Small Mixed- Light Tier 1
G&K Produce, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001622	02/20/23	Adult-Use-Small Mixed- Light Tier 1
G&K Produce, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001599	02/20/23	Adult-Use-Small Mixed- Light Tier 1
G&K Produce, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001589	02/20/23	Adult-Use-Small Mixed- Light Tier 1
G&K Produce, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001582	02/20/23	Adult-Use-Small Mixed- Light Tier 1
G&K Produce, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001700	01/02/23	Adult-Use-Small Mixed- Light Tier 1
G&K Produce, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001696	01/02/23	Adult-Use-Small Mixed- Light Tier 1
G&K Produce, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001695	01/02/23	Adult-Use-Small Mixed- Light Tier 1
G&K Produce, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001683	01/02/23	Adult-Use-Small Mixed- Light Tier 1
G&K Produce, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001678	01/02/23	Adult-Use-Small Mixed- Light Tier 1
G&K Produce, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001664	01/02/23	Adult-Use-Small Mixed- Light Tier 1
G&K Produce, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001655	01/02/23	Adult-Use-Small Mixed- Light Tier 1
K&G Flowers, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001673	11/22/22	Adult-Use-Small Mixed- Light Tier 1
K&G Flowers, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001670	11/22/22	Adult-Use-Small Mixed- Light Tier 1
K&G Flowers, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001668	11/22/22	Adult-Use-Small Mixed- Light Tier 1
K&G Flowers, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001667	11/22/22	Adult-Use-Small Mixed- Light Tier 1
K&G Flowers, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001665	11/22/22	Adult-Use-Small Mixed- Light Tier 1
K&G Flowers, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001649	11/22/22	Adult-Use-Small Mixed- Light Tier 1
K&G Flowers, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001647	11/22/22	Adult-Use-Small Mixed- Light Tier 1
K&G Flowers, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001660	02/20/23	Adult-Use-Small Mixed- Light Tier 1
K&G Flowers, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001657	02/20/23	Adult-Use-Small Mixed- Light Tier 1
K&G Flowers, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001654	02/20/23	Adult-Use-Small Mixed- Light Tier 1
K&G Flowers, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001635	02/20/23	Adult-Use-Small Mixed- Light Tier 1
K&G Flowers, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001630	02/20/23	Adult-Use-Small Mixed- Light Tier 1
K&G Flowers, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001629	02/20/23	Adult-Use-Small Mixed- Light Tier 1
K&G Flowers, LLC	3480 Via Real Carpinteria, CA 93013	CCL18-0001628	02/20/23	Adult-Use-Small Mixed- Light Tier 1

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Casitas Licenses

The applicable licenses for cultivation/processing as well as for distribution/transportation issued by the DCC are held by Mission Health Associates, Inc. (a wholly owned subsidiary of the Company), as described in the table below.

License Holder	Address	Permit/License No.	Expiration/ Renewal Date (MM/DD/YY)	License Type
Mission Health Associates, Inc.	5601 Casitas Pass Road Carpinteria, CA 93013	CCL18- 0001009	06/07/22	Medicinal-Nursery
Mission Health Associates, Inc.	5601 Casitas Pass Road Carpinteria, CA 93013	CCL18- 0003034	03/25/23	Medicinal-Processor
Mission Health Associates, Inc.	5601 Casitas Pass Road Carpinteria, CA 93013	CCL18- 0000498	03/15/23	Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.	5601 Casitas Pass Road Carpinteria, CA 93013	CCL18- 0000503	03/15/23	Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.	5601 Casitas Pass Road Carpinteria, CA 93013	CCL18- 0000512	03/11/23	Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.	5601 Casitas Pass Road Carpinteria, CA 93013	CCL18- 0000510	03/11/23	Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.	5601 Casitas Pass Road Carpinteria, CA 93013	CCL18- 0000509	03/11/23	Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.	5601 Casitas Pass Road Carpinteria, CA 93013	CCL18- 0000506	03/11/23	Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.	5601 Casitas Pass Road Carpinteria, CA 93013	CCL18- 0000505	03/11/23	Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.	5601 Casitas Pass Road Carpinteria, CA 93013	CCL18- 0000502	03/11/23	Medicinal-Small Mixed-Light Tier 1
Mission Health Associates, Inc.	5601 Casitas Pass Road Carpinteria, CA 93013	CCL18- 0000500	03/11/23	Medicinal-Small Mixed-Light Tier 1

The Pottery Licenses

The applicable license for cultivation/processing as well as for distribution/transportation issued by the DCC is held by The Pottery Inc., as described in the table below. The Pottery, Inc. is co-owned by the Company with an unrelated third party, TLMD Holdings, LLC.

License Holder	Address	Permit/License No.	Expiration/ Renewal Date (MM/DD/YY)	License Type
The Pottery Inc.	5042 Venice Blvd. Los Angeles, CA 90019	CCL18-0000935	04/01/22	Adult-Use-Specialty Indoor
The Pottery Inc.	5042 Venice Blvd. Los Angeles, CA 90019	C11-0000726-LIC (DCC)	07/08/22	Adult-Use & Medicinal – Distributor License

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SoCal Facility Licenses

The applicable licenses for cultivation issued by the DCC are held by Glass House Camarillo Cultivation, LLC (a wholly owned subsidiary of the Company), as described in the table below.

License Holder	Address	Permit/License No.	Expiration/ Renewal Date (MM/DD/YY)	License Type
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	CCL21-0005096	2/24/2023	Adult-Use-Nursery
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	CCL21-0005106	3/10/2023	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	CCL21-0005107	3/10/2023	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	CCL21-0005108	3/10/2023	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	CCL21-0005193	3/18/2023	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	CCL21-0005113	3/18/2023	Adult-Use-Small Mixed- Light Tier 1

Applications for additional licenses for cultivation/processing have been approved by the DCC and are expected to be issued upon payment by no later than April 30, 2022, as described in the table below.

License Holder	Address	Application No.	Expiration/ Renewal Date (MM/DD/YY)	License Type
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005102	Pending Payment	Adult-Use Processor
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005105	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005114	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005115	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005116	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005117	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005120	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005121	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005122	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005123	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005124	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005125	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005127	Pending Payment	Adult-Use-Small Mixed- Light Tier 1

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Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005128	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005129	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005130	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005131	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005132	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005133	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005134	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005135	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005136	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005137	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005138	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005139	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005140	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005141	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005142	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005143	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005144	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005145	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005146	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005147	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005148	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005150	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005151	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005152	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005154	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005155	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005156	Pending Payment	Adult-Use-Small Mixed- Light Tier 1

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Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005157	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005158	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005159	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005160	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005161	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005163	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005165	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005166	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005167	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005168	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005170	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005172	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005173	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005174	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005175	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005176	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005177	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005178	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005179	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005180	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005181	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005182	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005183	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005184	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005185	Pending Payment	Adult-Use-Small Mixed- Light Tier 1
Glass House Camarillo Cultivation LLC	645 Laguna Road Camarillo, CA 93012	LCA21-0005186	Pending Payment	Adult-Use-Small Mixed- Light Tier 1

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Lompoc License

The applicable license for processing issued by the DCC is held by Lompoc Manufacturing GHG LLC (a wholly owned subsidiary of the Company), as described in the table below.

License Holder		Address		Permit/License No.		Expiration/ Renewal Date (MM/DD/YY)		License Type
Lompoc Manufacturing GHG LLC		1637 W. Central Avenue Lompoc, CA 93436		CCL21-0003640		8/19/2022		Adult-Use Processor

Manufacturing and Distribution

The Company’s Lompoc CMS Asset is a roughly 20,000 sq. ft. property purpose-built to convert cannabis biomass into CPG, located less than a four-hour drive from both the San Francisco Bay Area and Los Angeles, and about one hour’s drive from the Company’s cultivation facilities. The CMS Asset holds Type 6 and Type 7 cannabis manufacturing licenses which enables it to conduct all manufacturing, extraction, infusion, conversion, and packaging processes legal in the State of California, ranging from physical, “solventless” extraction processes to volatile solvent extraction and remediation methods. This allows the facility the optionality to produce a wide variety of cannabis products.

The CMS Asset also holds a Type 11 cannabis distribution license, which activates the facility as a distribution hub for the Company’s California operations. Given the logistical issues that the state framework can engender as a result of testing, quarantine and distribution regulations, this license can simplify some of the supply chain challenges faced by an operator of the Company’s scale relying on third-party distribution services.

On February 1, 2020, the Company acquired a licensed concentrates and extractions business in financial distress that was subsequently disposed of in its entirety on March 3, 2021.

CMS Asset

The CMS Asset facility was renovated in collaboration with extraction and manufacturing professionals with substantial combined experience in the category of extraction and manufacturing and in creating such facilities. Operational efficiency at scale and process optionality were core to the design philosophy implemented in anticipation of an evolving landscape for both cannabis product trends and extraction and manufacturing technologies. To this end, extensive HVAC systems, thorough access management controls, and intensive safety protocols were implemented to enable safe and compliant volatile-solvent extraction capability at large scale, and even the layout of the facility itself creates workflow efficiency while also enhancing safety. Products in process move through the facility in an optimized flow. Walls are treated with antimicrobial and antifungal coatings to seek to ensure product purity and safety. Deep freezer capacity has been maximized to enable large-scale “live” extraction processes, which use cannabis plants flash-frozen upon harvest as their raw material. The power supply has been upgraded to support production far in excess of foreseeable output, and office space has been updated to enable better facility management.

Options for products that can be produced at the facility cover a broad range of cannabis manufactured goods, from cannabis-infused products to “dabbable” concentrates.

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Manufacturing and Distribution Licenses

The applicable license for manufacture as well as for distribution issued by the DCC is held by CA Manufacturing Solutions LLC (a wholly owned subsidiary of the Company), as described in the table below.

License Holder	Address	Permit/License No.	Expiration/ Renewal Date (MM/DD/YY)	License Type
CA Manufacturing Solutions LLC	1637 W. Central Ave. Lompoc, CA 93436	CDPH-10002412	04/12/22	Annual Manufacturing License – Adult and Medicinal Cannabis Products Type 7: Volatile Solvent Extraction
CA Manufacturing Solutions LLC	1637 W. Central Ave. Lompoc, CA 93436	C11-0000031-LIC (DCC)	04/30/22	Adult-Use & Medicinal – Distributor License

Wholesale Sales

In addition to sending cultivated biomass to the CMS Asset for manufacture, the Company also sells its biomass on various wholesale markets. The dollar figures in the tables below are expressed in millions.


WHOLESALE – BULK BIOMASS	Q1 2021			Q2 2021			Q3 2021			Q4 2021			TOTAL
Number of Bulk Customers		27			26			26			35			71
Total Revenue	$	4.5		$	6.2		$	5.0		$	6.5		$	22.2

Average Revenue per Customer	$	0.15		$	0.24		$	0.19		$	0.19		$	0.31
Top 5 customers (% of sales)		64	%		70	%		86	%		58	%		45	%
Top 10 customers (% of sales)		93	%		91	%		99	%		78	%		63	%

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Further, the Company has a wholesale business selling Company-branded consumer packaged goods to distributors and retailers in the State of California.


WHOLESALE – OWNED BRANDS Consumer Packaged Goods			Q1 2021		Q2 2021		Q3 2021		Q4 2021		Total
Cumulative Points of Distribution				387		459		471		465		669
Revenue by Brand	100	%	$	5.7	$	6.1	$	6.9	$	6.8	$	25.5
Glass House Farms	91.4	%		5.0		5.1		6.5		6.7		25.5
Other	8.6	%		0.7		1.0		0.4		0.1		23.3
Revenue by Category	100.0	%	$	5.7	$	6.1	$	6.9	$	6.8	$	25.5
Flower	89.2	%		5.0		5.4		6.2		6.1		22.7
Concentrates	2.9	%		0.4		0.3		0.1		—		0.8
Pre-rolls	7.2	%		0.2		0.4		0.6		0.7		1.9
Vape	0.5	%		0.1		—		—		—		0.1
Other	0.2	%		—		—		—		—		—

Combined wholesale biomass revenue for the three-months and twelve-months ended December 31, 2021 was $6.5 million and $22.2 million, respectively. The Company’s wholesale biomass and wholesale CPG revenue increased by $13.9 million, or 41%, for the year ended December 31, 2021 as compared to the year ended December 31, 2020.

The Company relies on a single large distributor to provide the bulk of its wholesale sales, which provided approximately 99% of its wholesale revenue in 2020 and 2021. Although the Company is not dependent on this relationship, a change in the status of the distributor or the relationship could cause supply chain disruption, therefore the Company has developed relationships with alternative distributors to carry its goods.

Each of the following licensed facilities are responsible for more than 10% of the gross revenue of the Company: Casitas, Padaro, CA Manufacturing Solutions, Farmacy SB, and Bud and Bloom.

Brand, Product and Marketing

The creation of dominant, extensible CPG products and brands is the Company’s strategic mission. While many cannabis businesses prioritized brand building and customer acquisition before securing a reliable product flow, the Company believes that in a consumer-focused CPG space, consistent delivery of high-quality product at an attractive price point is a first principle, and a prerequisite for any other activity.

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As production quantity has increased and the Company’s products have become more widely distributed, the Company has been pleased to receive recognition for its improved product quality from cannabis-friendly media outlets such as LA Weekly, to cannabis influencers and connoisseur cannabis reviewers such as Respect My Region¹.

The Company does not aim to create a consumer-facing corporate-umbrella brand, but instead takes a “House of Brands” approach, with a portfolio of brand assets constructed on consumer data, consumer segmentation, analysis and insights.

The Company has taken care to segment its consumer and product types so as to cover a broad swath of the market, from new cannabis users to connoisseurs, across a range of use cases, product formats, and price points. Glass House Farms, the Company’s flagship brand, provides best-in-class, affordable cannabis flower products for everyday consumption. Its product range includes eighth-ounce flower jars, quarter-ounce smalls bags, 1g single pre-roll joints, five half-gram pre-roll multipacks, and Grower’s Choice, its premium “cream of the crop” line of eighth- ounce flower jars. Forbidden Flowers, the Company’s brand collaboration with an actress, highlights a sensual cannabis style. Its lines of eighth-ounce flower jars and two-packs of colorful half-gram pre-roll joints use strains complementing the Forbidden Flowers brand positioning, specifically fruit-forward in flavor and relaxing in effects.

Retail

The Company has operational dispensaries in Santa Barbara, Santa Ana, and Berkeley, California, and manages a partially owned dispensary in Los Angeles. The Company uses clean, minimalistic retail space with a focus on local sourcing and sustainably grown cannabis. The Company’s staff has substantial knowledge on the health and wellness benefits of cannabis, as well as the Company’s focus on educating customers on responsible adult-use, including understanding appropriate dosing.

The Company offers a curated selection of high quality cannabis products in a variety of price tiers, servicing a wide range of the community. The product selection specifically promotes local and sustainably cultivated cannabis through sourcing of brands that are local to the retail facility and a focus on educating customers on the importance of supporting the local economy by purchasing locally grown cannabis. The Company’s motto is “Local Farms, Local People, Local Values”. This ethos is woven into purchasing decisions and illustrates the Company’s prioritization of locally cultivated and manufactured products.

The Company intends to curate what it believes to be the best selection of cannabis products from the following categories: flower, edibles, beverages, topicals, sublinguals and concentrates. Unlike many cannabis retailers that emphasize high-tetrahydrocannabinol (“THC”) levels in their products, product curation is a specialty of the Company and focuses on educating customers, seeking to match needs and desires with appropriate products to provide optimal experiences. This de-emphasis on high-THC helps customers understand the many benefits of a wide range of cannabinoids, including cannabidiol (“CBD”), cannabinol (“CBN”) and Tetrahydrocannabivarin (“THCV”).

Retail Locations

The Company offers online payment processing, as well as in store pickup and home delivery services for adult-use and medicinal-use customers at all locations. See “Cannabis Market Overview – Compliance with License Requirements – Retail and Distribution” for a discussion of the Company’s online sale and delivery regulatory compliance protocols.

^1.See Respect My Region (2021). The Farmacy is Committed to Providing a Service Over Sales Experience for Santa Barbara’s Cannabis Community. Available at: https://www.respectmyregion.com/the-farmacy-dispensary-santa-barbara/; Respect My Region (2021). Papaya Punch Strain Review Featuring Glass House Farms Grower’s Choice Cannabis in California. Available at: https://www.respectmyregion.com/papaya- punch-review-glass-house-farms-growers-choice/; Respect My Region (2021). Respect My Region (2021). Flo White Strain Review Featuring the Grower’s Choice Line from Glass House Farms in California. Available at: https://www.respectmyregion.com/glass-house-farms-flo-white-review/; Respect My Region (2021). Do-Si-Do Strain Review Featuring Glass House Farms in California. Available at: https://www.respectmyregion.com/glass-house-farms-do-si-dos/; Respect My Region (2021). The GMO Strain Review Featuring Glass House Farms in California. Available at: https://www.respectmyregion.com/gmo-strain-glass- house-farms/; Respect My Region (2021). The Midnight Thorneberry Strain Review Featuring Glass House Farms. Available at: https://www.respectmyregion.com/bella-thorne-midnight-thorneberry-joint/; Respect My Region (2020). Mac 1 Strain Review Featuring El Blunto and Glass House Farms in California. Available at: https://www.respectmyregion.com/mac-1-glass-house-farms-el-blunto/.

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Farmacy SB

The Farmacy SB is located at 128 W Mission Street, Santa Barbara, California. It was first licensed adult-use retail storefront to open in the City of Santa Barbara. The Company secured one (1) of only three (3) storefront permits from the City of Santa Barbara, after an exhaustive merit-based selection process. Over 60 applicants applied, and the Farmacy SB’s application was one of the highest scored applications. The Farmacy SB was selected for a license due to its compatibility with the surrounding neighborhood, local hiring commitment, employee benefit plans, dedication to compliance and design.

As an example of the Company’s contribution to and partnership with the local community. The Company has sponsored a popular “Neighbor Deal” program that encourages its customers to shop at nearby businesses by offering discounted product if they show a same day receipt. In this manner, the Farmacy SB has also enhanced the quality of the surrounding neighborhood and built positive relationships with neighboring businesses.

The Farmacy SB was voted by local residents as the Best Cannabis Dispensary in 2020 and 2021.²

2000 De La Vina LLC (a wholly owned subsidiary of the Company) purchased the property located at 128 W. Mission Street, Santa Barbara, California 93101 from Edwin Begg, Trustee for the Susan Miratti Trust for a purchase price of $1.25 million. The property consists of two buildings, one of which is used to house Farmacy Santa Barbara. The Farmacy Santa Barbara building and is approximately 1,342 sq. ft. located at 117-B W. Mission Street, Santa Barbara, California 93101.

Farmacy SB License

The applicable license for retail issued by DCC is held by Farmacy SB, Inc. (a wholly owned subsidiary of the Company), as described in the table below. See “Material Contracts”.

License Holder		Address		Permit/License No.		Expiration/ Renewal Date (MM/DD/YY)		License Type
Farmacy SB, Inc.		128 W. Mission Street Santa Barbara, CA 93101		C10-0000293- LIC (DCC)		06/25/22		Adult-Use & Medicinal – Retailer License

Farmacy Berkeley

Farmacy Berkeley is located at 3243 Sacramento St, Berkeley, California and has been in operation since 2019. The Farmacy Berkeley strives to bring together cannabis advocates who share a consistent commitment to sustainably produced cannabis products delivered in a welcoming, inviting, and open environment.³

²Santa Barbara Independent (2020). Best of Santa Barbara 2020 - Cannabis Dispensary. Available at: https://www.independent.com/2020/10/14/best-of-santa-barbara-2020-living-well/. Santa Barbara Independent (2021). Best of Santa Barbara 2021 - Cannabis Dispensary. Available at: https://www.independent.com/2021/10/20/best-of-santa-barbara-2021-living-well/.

³ East Bay Express (2021). Best of The East Bay 2021 – Reader’s Picks: Best Cannabis Delivery. Available at: https://eastbayexpress.com/readers-picks-cannabis/.

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Farmacy Berkeley License

The applicable license for retail issued by DCC is held by iCANN, LLC doing business as Farmacy Berkeley (a wholly owned subsidiary of the Company), as described in the table below.

License Holder		Address		Permit/License No.		Expiration/ Renewal Date (MM/DD/YY)		License Type
iCANN, LLC		3243 Sacramento Street Berkeley, CA 94702		C10-0000506- LIC (DCC)		07/24/22		Adult-Use & Medicinal – Retailer License

The Pottery

The Pottery is located at 5042 Venice Blvd, Los Angeles, California, includes both cultivation and a retail dispensary and has been in operation since 2018. This property is in a high traffic area and is comprised of a 21,000 sq. ft. lot with a 12,000 sq. ft. building. It is centrally located between Beverly Hills, Hollywood, Santa Monica and downtown Los Angeles. Approximately one-third of the facility’s building area is dedicated to The Pottery’s retail shop, while the remaining functions as an indoor cannabis cultivation facility. The property is partially owned and operated by the Company.

The Pottery strives to bring together cannabis enthusiasts from within their local community and create a space that is a welcoming, energetic, and an inclusive environment. The Pottery delivers to a number of nearby cities including Santa Monica, Culver City and West Hollywood. The Pottery also holds a license for the distribution of cannabis goods which enables it to package the flower grown onsite.

The Pottery License

The applicable license for retail issued by DCC is held by The Pottery Inc. (which is a partially owned subsidiary of the Company co-owned with an unrelated third party, TLMD Holdings, LLC), as described in the table below.

License Holder		Address		Permit/License No.		Expiration/ Renewal Date (MM/DD/YY)		License Type
The Pottery Inc.		5042 Venice Blvd, Los Angeles, CA 90019		C11-0000389- LIC (DCC)		07/08/22		Adult-Use & Medicinal – Retailer License

Farmacy Santa Ana

Farmacy Santa Ana, located at 1327 East St Gertrude Place, Santa Ana, California, has been in operation since 2016.

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Farmacy Santa Ana License

The applicable license for retail issued by DCC is held by Bud and Bloom, as described in the table below. See “Material Contracts”.

License Holder		Address		Permit/License No.		Expiration/ Renewal Date (MM/DD/YY)		License Type
Bud and Bloom		1327 St. Gertrude Place E. Santa Ana, CA 92705		C10-0000044- LIC (DCC)		05/09/22		Adult-Use & Medicinal – Retailer License

Information Technology & Inventory Management

The Company has an information technology infrastructure that prioritizes security, compliance, business process support, customer-facing technology, operational systems, data insights, and business intelligence. The Company uses Microsoft Business Central with “Cannabis add on”, a third-party software platform, to serve as its inventory management system (“IMS”) and data warehouse. The Company’s IMS supports company-wide operations including wholesale sales and internal inventory transfer transactions, customer data management, production, inventory management, pricing, order management, accounting, finance and purchasing. The Company’s IMS also serves as a data warehouse, allowing for daily inventory management.

The Company also uses its IMS for weekly cycle counts and monthly full inventory counts. The Company’s IMS allows for comprehensive reporting on all stages of inventory within the Company. All personally identifiable information is required to be stored and maintained by the Company in compliance with the California Consumer Privacy Act.

The IMS system pushes information into California’s track and trace system (METRC).

The Company intends to continue to implement and use leading tools and technologies that allow it to support and promote growth in its business.

Banking & Processing

The Company and all of its operating entities have accounts with a Federal Deposit Protection Corp (FDIC) insured bank headquartered in the greater Los Angeles area. The Company selected its bank because it is a subsidiary of one of the largest banks in the United States, which is expected to be helpful as the Company scales its operations.

The Company currently accepts cash, debit cards and ACH for sales in the retail locations and cash for sales to direct-to- consumer customers. See “Cannabis Market Overview – Compliance with License Requirements – Retail and Distribution”.

Specialized Skills

The Company specializes in the cultivation, extraction, product development, manufacturing and distribution of cannabis products. The Company employs personnel with a wide range of skill sets, including those with masters’ and bachelors’ degrees in their respective fields. With respect to cultivation, the Company recruits individuals with plant science and agricultural experience, and personnel have the practical experience necessary to cultivate high yielding, multiple strain variety cannabis plants and to develop new cannabis strains through selective horticultural practices. With regard to extraction, the Company recruits individuals with extraction and distillation experience for its product lines, and personnel have the practical experience and knowledge necessary to process the raw, dried cannabis product through volatile extraction processes, thereby generating high yields of cannabis extracts and distillates. In addition, Company personnel have the practical experience and knowledge necessary to conduct secondary processing of cannabis biomass into crude cannabis oil, distillate, and concentrates, including shatter, wax and crystals, and to utilize the natural terpenes in cannabis to formulate premium vaporizer oils. Terpenes are the oils that give cannabis plants their smell. They come from the same components as THC and CBD.

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With regard to product development and manufacturing, the Company recruits individuals with professional culinary education for edibles product development for its edibles division, and personnel have extensive experience in confectionary product development and manufacturing, particularly with regard to cannabis edibles, including chocolates, candies, cookies, gummies, beverages and tinctures.

With regard to sales and distribution, the Company recruits employees who retain a high degree of industry awareness and knowledge who can interface with dispensaries state-wide and introduce our products with the intention of retaining and potentially increasing shelf-space and the intention of maintaining or increasing market share. The Company’s sales and distribution teams are important conduits for collecting intelligence on consumer behavior and trends. Our distribution capabilities are critical to building trust with dispensaries that they will receive inventory on a timely and consistent basis.

The Company believes that it currently possesses all specialized skills and knowledge it requires, but will continue to compete with other cannabis and manufacturing companies to secure and retain such staff.

Sources, Pricing and Availability of Raw Materials, Component Parts or Finished Products

The Company presently sources all flower feedstock for sale from its cultivation facility. It has developed relationships with local cannabis growers whereby flower quantities are readily available at competitive prices should the sourcing need arise. The Company sources approximately 80% of its biomass needs in extraction from its cultivation facility. Remaining biomass material is readily available from multiple sources at competitive prices. The Company manufactures substantially all full spectrum cannabis oil needs from its internal extraction operations. A small amount of specialized cannabis oil is procured from multiple external sources at competitive prices. The Company manufactures all finished goods for its proprietary brands. Third party distributed brand product is sourced directly from third party partners.

Intangible Property

The Company has developed numerous proprietary technologies and processes. These proprietary technologies and processes include its information system software, cultivation, edible manufacturing and extraction techniques, quality and compliance processes and new product development processes. While actively exploring the patentability of these techniques and processes, the Company relies on non-disclosure/confidentiality arrangements and trade secret protection. The Company has invested significant resources towards developing recognizable and unique brands consistent with premium companies in analogous industries. To date, the Company has ten registered trademarks with the State of California and has two federal trademark applications pending with the United States Patent and Trademark Office.

The Company owns 61 domain names, including its website domain (http://www.glasshousebrands.com/), in addition to social media accounts across all major platforms. The Company maintains strict standards and operating procedures regarding its intellectual property, including the regular use of non-disclosure, confidentiality, and intellectual property assignment agreements.

Environmental

Although a number of environmental restrictions apply to the Company, they are of a general nature and often tied to limitations on land use and do not affect ongoing operations. The environmental regulations that do affect operations generally relate to natural resource use, such as water use permits, wastewater management, energy generation, and air pollution limitations. Although these regulations limit the scope of potential operations, such financial and operational obligations related to such regulations do not have a material impact on the Company’s financial position or operations as currently conducted.

Employees

As of December 31, 2021, the Company had 458 full-time employees and 5 contract personnel. The employees are distributed among several departments including manufacturing, cultivation, distribution and warehousing, quality assurance/control and compliance, sales, marketing, finance, accounting and administration. Additionally, the Company utilizes contract employees in security, cultivation, packaging and warehousing activities. The use of contract employees enables the Company to manage variable staffing needs and in the case of cultivation and security personnel, access to experienced, qualified and readily available human resources.

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Competitive Conditions

As the Company is vertically integrated, it competes on multiple fronts, from manufacturing to retail to delivery, and experiences competition in each of these areas. From a retail perspective, the Company competes with other licensed retailers and delivery companies in the geographies where retail and delivery services are located. These other retailers range from small local operators to more significant operators with a presence throughout the State of California and other states in the United States. From a product perspective, the Company competes with other manufactures of brands for shelf space in non-Company owned dispensaries throughout California. Similar to certain competitors in the retail space, the Company competes with manufacturers ranging in size from small local operators to significant operators with a larger presence. Indirectly, the Company competes with the illicit market, including many illegal dispensaries.

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CANNABIS MARKET OVERVIEW

In accordance with the Staff Notice 51-352 (Revised) – Issuers with U.S. Marijuana- Related Activities of the Canadian Securities Administrators (“Staff Notice 51-352”), below is a discussion of the current federal and state-level U.S. regulatory regimes in those jurisdictions where the Company is currently directly or indirectly involved through its subsidiaries. In accordance with Staff Notice 51-352, the Company intends to evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended and made available to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding marijuana regulation. Any non-compliance, citations or notices of violation which may have an impact on the Company’s licensing, business activities or operations are required by Staff Notice 51- 352 to be promptly disclosed by the Company.

The legalization and regulation of marijuana for medical and adult-use purposes is being implemented at the State level in the United States, and in California, at the State and local levels. State laws regulating cannabis are in direct conflict with the federal Controlled Substances Act of 1970 (the “Substances Act”), which makes cannabis use and possession federally illegal. Although certain States and territories of the U.S. authorize medical or adult-use cannabis production and distribution by licensed or registered entities, under U.S. federal law, the possession, use, cultivation, and transfer of cannabis and any related drug paraphernalia is illegal and any such acts are criminal acts under federal law under any and all circumstances under the Substances Act. Although the Company’s activities are compliant with applicable United States State and local laws, strict compliance with State and local laws with respect to cannabis may neither absolve the Company of liability under United States federal law, nor may it provide a defense to any federal proceeding which may be brought against the Company. The risk of federal enforcement and other risks associated with the Company’s business are described under “Risk Factors”.

The following table is intended to assist readers in identifying those parts of this AIF that address the disclosure expectations outlined in Staff Notice 51-352 for issuers that currently have marijuana-related activities in U.S. States where such activity has been authorized within a State regulatory framework.

Industry Involvement	Specific Disclosure Necessary to Fairly Present all Material Facts, Risks and Uncertainties		AIF Cross-Reference
All Issuers with U.S. Marijuana- Related Activities	Describe the nature of the issuer’s involvement in the U.S. marijuana industry and include the disclosures indicated for at least one of the direct, indirect and ancillary industry involvement types noted in this table.		-General Development of the Business -Description of the Business
		Prominently State that marijuana is illegal under U.S. federal law and that enforcement of relevant laws is a significant risk.		-Legal and Regulatory Framework – United States Federal Overview -Regulatory Framework – U.S. Federal Enforcement Priorities -Risk Factors – The approach to the enforcement of cannabis laws may be subject to change or may not proceed as previously outlined
		Discuss any statements and other available guidance made by federal authorities or prosecutors regarding the risk of enforcement action in any jurisdiction where the issuer conducts U.S. marijuana-related activities.		-Legal and Regulatory Framework – United States Federal Overview -Legal and Regulatory Framework – U.S. Federal Enforcement Priorities - Legal and Regulatory Framework – California State Level Overview

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	Outline related risks including, among others, the risk that third-party service providers could suspend or withdraw services and the risk that regulatory bodies could impose certain restrictions on the issuer’s ability to operate in the U.S.		-Legal and Regulatory Framework – United States Federal Overview -Legal and Regulatory Framework – U.S. Federal Enforcement Priorities - Legal and Regulatory Framework – California State Level Overview -Risk Factors – Service providers could suspend or withdraw service -Risk Factors – While legal under applicable U.S. State law, the Company’s business activities are illegal under U.S. federal law
	Given the illegality of marijuana under U.S. federal law, discuss the issuer’s ability to access both public and private capital and indicate what financing options are / are not available in order to support continuing operations.		-Cannabis Market Overview – Ability to Access Public and Private Capital -Risk Factors – The Company may be subject to restricted access to banking in the United States and Canada -Risk Factors – The Company’s investments in the U.S. are subject to applicable anti-money laundering laws and regulations
	Quantify the issuer’s balance sheet and operating statement exposure to U.S. marijuana related activities.		-Exposure to U.S. Marijuana Related Activities
	Disclose if legal advice has not been obtained, either in the form of a legal opinion or otherwise, regarding (a) compliance with applicable State regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law.		-The Company has received and continues to receive legal input regarding (a) compliance with applicable State regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law in certain respects. The Company receives such input on an ongoing basis but does not have a formal legal opinion on such matters.
U.S. Marijuana Issuers with direct involvement in cultivation or distribution	Outline the regulations for U.S. States in which the issuer operates and confirm how the issuer complies with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. State.		-Legal and Regulatory Framework – United States Federal Overview -Legal and Regulatory Framework – U.S. Federal Enforcement Priorities -Legal and Regulatory Framework -California State Level Overview -Legal and Regulatory Framework – Compliance with State Regulatory Framework -Legal and Regulatory Framework – Non- Compliance with State and Local Cannabis Laws
		Discuss the issuer’s program for monitoring compliance with U.S. State law on an ongoing basis, outline internal compliance procedures and provide a positive statement indicating that the issuer is in compliance with U.S. State law and the related licensing framework. Promptly disclose any non-compliance, citations or notices of violation which may have an impact on the issuer’s licences, business activities or operations.		-Legal and Regulatory Framework – United States Federal Overview -Legal and Regulatory Framework – U.S. Federal Enforcement Priorities -Legal and Regulatory Framework – California State Level Overview -Legal and Regulatory Framework – Compliance with State Regulatory Framework -Legal and Regulatory Framework – Non- Compliance with State and Local Cannabis Laws

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U.S. Marijuana Issuers with indirect involvement in cultivation or distribution	Outline the regulations for U.S. states in which the issuer's investee(s) operate.		-Legal and Regulatory Framework – United States Federal Overview -Legal and Regulatory Framework – U.S. Federal Enforcement Priorities -Legal and Regulatory Framework -California State Level Overview -Legal and Regulatory Framework – Compliance with State Regulatory Framework -Legal and Regulatory Framework – Non- Compliance with State and Local Cannabis Laws
		Provide reasonable assurance, through either positive or negative statements, that the investee's business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state. Promptly disclose any non- compliance, citations or notices of violation, of which the issuer is aware, that may have an impact on the investee's license, business activities or operations.		-Legal and Regulatory Framework – United States Federal Overview -Legal and Regulatory Framework – U.S. Federal Enforcement Priorities -Legal and Regulatory Framework – California State Level Overview -Legal and Regulatory Framework – Compliance with State Regulatory Framework -Legal and Regulatory Framework – Non- Compliance with State and Local Cannabis Laws -Risk Factors – California Regulatory Regime and Transfer and Grant of Licenses
U.S. Marijuana Issuers with material ancillary involvement	Provide reasonable assurance, through either positive or negative statements, that the applicable customer's or investee's business is in compliance with applicable licensing requirements and the regulatory framework enacted by the applicable U.S. state.		-Legal and Regulatory Framework – United States Federal Overview -Legal and Regulatory Framework – U.S. Federal Enforcement Priorities -Legal and Regulatory Framework – California State Level Overview -Legal and Regulatory Framework – Compliance with State Regulatory Framework -Legal and Regulatory Framework – Non- Compliance with State and Local Cannabis Laws -Risk Factors – California Regulatory Regime and Transfer and Grant of Licenses

In accordance with Staff Notice 51-352, below is a discussion of the federal and State-level U.S. regulatory regimes in those jurisdictions where the Company is, directly or indirectly involved through its subsidiaries. The Company and its subsidiaries are directly engaged in the manufacture, possession, use, sale and distribution of cannabis and hold licenses in the adult-use and/or medicinal cannabis marketplace in the State of California. In accordance with Staff Notice 51-352, the Company will continue to evaluate, monitor and reassess this disclosure, and any related risks, on an ongoing basis and the same will be supplemented and amended to investors in public filings, including in the event of government policy changes or the introduction of new or amended guidance, laws or regulations regarding cannabis regulation. As noted under “Non-Compliance with State and Local Cannabis Laws” below, the Company intends to promptly remedy any known occurrences of non- compliance with applicable State and local cannabis rules and regulations, and the Company intends to publicly disclose any non-compliance, citations or notices of violation which may have an impact on its licenses, business activities or operations.

See “Cannabis Market Overview – Neo Exchange Guidance Regarding Companies with U.S. Marijuana-Related Activities” below for a discussion on the Neo Exchange’s additional expectations for issuers with U.S. marijuana-related activities.

Neo Exchange Guidance Regarding Companies with U.S. Marijuana-Related Activities

Subject to satisfactory compliance with all listing requirements set out in the Neo Exchange Listing Manual and the additional items reflected below, the Neo Exchange currently does not have a policy prohibiting the listing of companies established and/or holding assets in the U.S. with marijuana-related activities, provided such activities are conducted in compliance with the current laws and regulations of a U.S. State where such activities are legal.

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In addition to the listing requirements in the Neo Exchange Listing Manual, which include the standard requirements for timely and accurate disclosure as defined by the Canadian Securities Administrators and as further enhanced by their specific disclosure requirements set out in Staff Notice 51-352, the Neo Exchange expects issuers with U.S. marijuana-related activities, among other things, to: (i) undertake that they are respecting and will continue to respect, within the realm of their control, the U.S. DOJ (as defined below) marijuana enforcement priorities as they were defined in the now-rescinded Cole Memorandum (as defined below) (see “Cannabis Market Overview – Legal and Regulatory Framework – United States Federal Overview”); and (ii) undertake that they are neither importing nor exporting marijuana to or from the United States.

Exposure to U.S. Marijuana Related Activities

As of December 31, 2021, 100% of the Company’s business was directly derived from U.S. cannabis-related activities, based on the existing operations of the Company. As such, the Company’s balance sheet and operating statement exposure to U.S. cannabis related activities is 100%.

Use of Cannabis

Cannabis is generally the reference used for preparation of the leaves and flowering tops of cannabis sativa, the hemp plant, which contains a number of pharmacologically-active principles (cannabinoids). It is used for its euphoric properties and can be considerably more potent when smoked and inhaled than when eaten.

Medical cannabis refers to the use of cannabis and its constituent cannabinoids, such as THC and CBD, as medical therapy to treat disease or alleviate symptoms. The cannabis plant has a history of medicinal use dating back thousands of years across many cultures.

Smoking cannabis is the most traditional form of ingestion and consists of smoking the dried flowers or leaves of the cannabis plant. Cannabis can be smoked through a pipe, rolled into a joint (or cigarette), or smoked using a water pipe (also known as a “bong”). Vaporizing involves using a vaporizer, which is a device that is able to extract the therapeutic ingredients in the cannabis plant material at a much lower temperature than required for burning. This allows user to inhale the active ingredients as a vapor instead of smoke. Many medical marijuana patients find that vaporizing offers an improved medical effectiveness, compared to smoking.

Topical cannabis encompasses herbal medicines that are applied directly to the skin or muscles. They include lotions, salves, balms, sprays, oils, and creams. Some patients report they are effective for skin conditions like psoriasis, joint diseases like rheumatoid arthritis, migraines, restless leg syndrome, some spasms, and everyday muscle stress and soreness. Unlike smoking, vaporizing or eating cannabis, topical products are generally non-psychoactive.

California Cannabis Market

Management believes that California is the most strategic base for post-prohibition expansion given its talent pool, wealth of brand and product expertise, mature consumer trends and agricultural conditions. It is management’s view that California has significant impact on global consumer trends, especially the consumer-packaged goods industry. California brands and retailers are often perceived as the “gold standard” influencing the global industry. With approximately 31 million adult residents and 279 million adult visitors annually, the California cannabis market grew to nearly $3 billion in annual spending in 2017, the largest market in the world. Annual legal cannabis spending in the State decreased to $2.5 billion in 2018, including as a direct result of burdensome regulations and taxes and recalcitrant or unprepared county and city authorities. Legal spending increased to $2.9 billion in 2019. California represents approximately 22% of the total 2025 U.S. cannabis market opportunity, and 16% of the estimated 2025 global recreational adult-use industry. According to BDS Analytics, the California cannabis market is expected to reach $7.4 billion in 2025, more than 2.7 times larger than Florida, the next largest market in the United States.⁴

⁴ Arcview Market Research (2020). The State of Legal Cannabis Markets, 8th edition. Available at: https://research.arcviewgroup.com/solcm8/.

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Legal and Regulatory Framework

United States Federal Overview

A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety for use under medical supervision and a high potential for abuse. The U.S. Department of Justice (“DOJ”) defines Schedule I drugs, substances or chemicals as “drugs with no currently accepted medical use and a high potential for abuse.” The United States Food and Drug Administration (“FDA”) has not approved marijuana as a safe and effective drug for any indication.⁵

As of March 1, 2021, 47 States, the District of Columbia and the territories of Guam and Puerto Rico have now, under State law, legalized cannabis for medical and/or recreational purposes and public acceptance of cannabis continues to increase across the United States at a rapid pace. In 15 States, the sale and possession of both medical- use and adult-use cannabis is legal, and the District of Columbia has legalized adult-use cannabis but does not permit commercial sales. The sale and possession of both medical-use and adult-use cannabis is legal in the State of California.

Notwithstanding the permissive regulatory environment of medical and/or recreational cannabis at the State level, and the increasing number of States with legal recreational frameworks, cannabis continues to be categorized as a Schedule I controlled substance under the Substances Act. Dozens of pieces of legislation have been introduced in the United States Congress that would legitimize the use and sale of cannabis, including the “Marijuana Opportunity, Reinvestment, and Expungement (MORE) Act” that would remove marijuana from the Substances Act, and the “Strengthening the Tenth Amendment through Entrusting States (STATES) Act” that would lift the Substances Act’s restrictions on cannabis for individuals or corporations operating in compliance with State law. The MORE Act passed the House of Representatives on December 4, 2020, but was not considered in the Senate. Following the 2020 election, the Democratic Party now controls both the House of Representatives and the Senate. Democratic Senate Majority Leader Chuck Schumer, Senator Cory Booker and Senator Ron Wyden released a public statement on February 1, 2021 stating their intention to introduce comprehensive cannabis reform legislation. They plan to release a unified discussion draft of the reform legislation in the early part of 2021. However, there can be no assurances as to when any such bill will pass, if any such bill will pass at all or if any such bill will be accepted and made law by the President. As a result, cannabis-related practices or activities, including without limitation, the manufacture, importation, possession, use, or distribution of cannabis, remain illegal under United States federal law.

As a result of the conflict between state and federal law regarding cannabis, investments in cannabis businesses in the United States are subject to inconsistent legislation and regulation. On August 29, 2013, the U.S. DOJ attempted to address this inconsistency and to provide guidance to enforcement agencies when then Deputy Attorney General, James Cole, authored a memorandum (the “Cole Memorandum”) addressed to all United States Attorneys acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several States have enacted laws relating to cannabis for medical and recreational purposes.

In particular, the Cole Memorandum noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a prosecutorial priority at the federal level. Notably, however, the U.S. DOJ has never provided specific guidelines for what regulatory and enforcement systems it deems sufficient under the Cole Memorandum standard.

⁵ United States Drug Enforcement Administration (2018). Drug Scheduling. Available at: https://www.dea.gov/drug-scheduling.

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The Cole Memorandum outlined the following priorities for the U.S. DOJ relating to the prosecution of cannabis offenses:

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Preventing the distribution of marijuana to minors;

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Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs and cartels;

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Preventing the diversion of marijuana from States where it is legal under State law in some form to other States;

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Preventing State-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity;

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Preventing violence and the use of firearms in the cultivation and distribution of marijuana;

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Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;

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Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production on public lands; and

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Preventing marijuana possession or use on federal property.

While not legally binding, and merely prosecutorial guidance, the Cole Memorandum laid a framework for managing the tension between State and federal laws concerning State-regulated cannabis businesses.

In March 2017, then newly-appointed Attorney General Jeff Sessions, a long-time opponent of State-regulated medical and recreational cannabis, noted limited federal resources and acknowledged that much of the Cole Memorandum had merit; however, he had previously stated that he did not believe it had been implemented effectively. On January 4, 2018, the Cole Memorandum was rescinded by Attorney General Sessions. While this did not create a change in federal law, as the Cole Memorandum was not itself law, the revocation removed the U.S. DOJ’s guidance to U.S. Attorneys that State-regulated cannabis industries substantively in compliance with the Cole Memorandum’s guidelines should not be a prosecutorial priority.

In addition to the rescission of the Cole Memorandum, Attorney General Sessions issued a memorandum (the “Sessions Memorandum”) which confirmed the rescission of the Cole Memorandum on the basis that the prosecutorial guidelines therein were “unnecessary” given the well-established principles governing federal prosecution that are already in place. Those principles are included in chapter 9.27.000 of the United States Attorneys’ Manual (“USAM”) and require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution and the cumulative impact of particular crimes on the community.

While the Sessions Memorandum emphasizes that marijuana is a Schedule I controlled substance, and reiterates the statutory view that cannabis is a “dangerous drug and that marijuana activity is a serious crime,” it does not otherwise indicate that the prosecution of marijuana-related offenses is now a DOJ priority. Furthermore, the Sessions Memorandum explicitly describes itself as a guide to prosecutorial discretion. Such discretion is in the hands of U.S. Attorneys in deciding whether or not to prosecute marijuana-related offenses; resultantly, it is uncertain how active U.S. federal prosecutors will be in relation to such activities. Dozens of U.S. Attorneys across the country have affirmed that their view of federal enforcement priorities has not changed.

Cannabis remains a Schedule I controlled substance at the federal level, and neither the Cole Memorandum nor the Sessions Memorandum has changed that fact. The federal government of the United States has always reserved the right to enforce federal law in regard to the sale and disbursement of medical or recreational cannabis, even if State law sanctioned such sale and disbursement. From a purely legal perspective, the criminality of cannabis activities at the federal level today is identical to what it was on January 3, 2018 and it remains unclear whether the risk of enforcement has been altered. Attorney General Sessions resigned on November 7, 2018 and was later replaced by Attorney General William Barr. During his Senate confirmation hearing, Mr. Barr stated that he disagrees with efforts by States to legalize marijuana, but would not go after marijuana companies in states that legalized it under Obama administration policies. He stated further that he would not upset settled expectations that have arisen as a result of the Cole Memorandum (as defined below). Federal enforcement of cannabis-related activity remained consistent with the priorities outlined in the Cole Memorandum throughout Attorney General Barr’s tenure.

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Current U.S. President Biden publicly stated during his campaign a policy goal to decriminalize possession of cannabis at the federal level. It is unclear how much of a priority decriminalization may be for President Biden’s administration. President Biden nominated federal judge Merrick Garland to serve as his Attorney General. During his confirmation hearings in the Senate on February 22, 2021, Attorney General nominee Garland confirmed that he would not prioritize pursuing cannabis prosecutions in states that have legalized and that are regulating the use of cannabis, both for medical and adult use. The Senate confirmed Judge Garland as Attorney General on March 10, 2021. Additionally, under U.S. federal law it may potentially be a violation of federal money laundering statutes for financial institutions to accept any proceeds from cannabis sales or any other Schedule I narcotics. As a result, both U.S. and Canadian banks have been reluctant to transact with cannabis companies, due to the uncertain legal and regulatory framework characterizing the industry at present. There is a risk that banks and other financial institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses. More specifically, under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be prosecuted for money laundering or conspiracy. Despite these laws, in February 2014, the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Treasury Department issued a memorandum (the “FinCEN Memorandum”) providing instructions to banks seeking to provide services to cannabis-related businesses. The FinCEN Memorandum, which is covered in more detail below, states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued (the “2014 Cole Memorandum”) to federal prosecutors relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the Substances Act. The 2014 Cole Memorandum was also rescinded by the Sessions Memorandum. However, the FinCEN Memorandum was not rescinded, and the then Treasury Secretary Steve Mnuchin publicly stated that the U.S. Treasury Department was not informed of Attorney General Sessions’ intent to rescind the Cole Memorandum and that there is no desire to rescind the FinCEN Memorandum.

While the Sessions Memorandum introduced further uncertainty and added to the State-federal divide concerning the legislation and prosecution of cannabis, the United States Congress has repeatedly enacted legislation to protect the medical marijuana industry from prosecution. The United States Congress has passed appropriations bills each year since 2014 that included a so-called “rider” provision (known then as the “Rohrabacher-Blumenauer Amendment”) which by its terms does not appropriate any federal funds to the U.S. DOJ for the prosecution of medical cannabis offenses of individuals who are in compliance with State medical cannabis laws. Subsequent to the issuance of the Sessions Memorandum on January 4, 2018, the United States Congress continued to include the Rohrabacher-Blumenauer Amendment in each subsequent omnibus appropriations bill for fiscal years 2018, 2019, 2020 and 2021, thus preserving the protections for the medical cannabis marketplace and its lawful participants from interference by the U.S. DOJ up and through the 2021 appropriations deadline of September 30, 2021.

Notably, the Amendment has always applied only to medical cannabis programs, and have no effect on pursuit of recreational cannabis activities. There have been attempts by Congressional supporters of cannabis legalization to extend the protections afforded by the Rohrabacher-Blumenauer Amendment to recreational cannabis activities, but those efforts have been unsuccessful.

American courts have construed these appropriations bills to prevent the federal government from prosecuting individuals when those individuals are operating in strict compliance with State law. However, because this conduct continues to violate federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the Substances Act, any individual or business – even those that have fully complied with State law – could be prosecuted for violations of federal law. If Congress restores funding, the U.S. government will have the authority to prosecute individuals for violations of the law within the past five years under the Substances Act’s statute of limitations.

Prior to 2018, the cultivation of hemp in the U.S. was governed by (i) Section 7606 of the Agricultural Act of 2014, codified at U.S.C. Chapter 7, Section 5490 (the “2014 Farm Bill”) and (ii) applicable State law. Section 7606 allowed for the cultivation of industrial hemp for research purposes under State agricultural pilot programs. Although the 2014 Farm Bill expired on September 30, 2018, Section 7606 remained in place.

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On December 20, 2018, the Agriculture Improvement Act of 2018 (the “2018 Farm Bill”) became law. The law legalizes hemp as an agricultural commodity by removing hemp, its derivatives, cannabinoids, and extracts (including CBD and any part of the cannabis plant which contains 0.3% THC or less on a dry weight basis) from the list of controlled substances in the Substances Act.⁶ Each State can now develop a plan for the regulation of hemp production, which will be administered subject to the approval and oversight of the United States Department of Agriculture. On January 15, 2021, USDA published a final rule that provides regulations for the production of hemp in the United States and is effective on March 22, 2021. With the passage of the 2018 Farm Bill, hemp and its derivatives cultivated and produced in compliance with federal and state laws and regulations is now legal.

However, cultivation is still subject to serious restrictions that, ultimately, may vary greatly between different jurisdictions.

Notwithstanding the comments made by Attorney General Garland, there is no guarantee that the current presidential administration will not change its stated policy regarding the low-priority enforcement of U.S. federal cannabis laws that conflict with State laws. The Biden administration and Congress could reverse course and decide to enforce U.S. federal cannabis laws vigorously.

An additional challenge to marijuana-related businesses is that the provisions of the United States Internal Revenue Code (“Code”) (specifically, section 280E thereof) are being applied by the U.S. Internal Revenue Service (“IRS”) to businesses operating in the medical and adult-use marijuana industry. Section 280E of the Code prohibits marijuana businesses from deducting their ordinary and necessary business expenses, forcing them to pay higher effective U.S. federal tax rates than similar companies in other industries. The effective tax rate on a marijuana business depends on how large its ratio of non-deductible expenses is to its total revenues. Therefore, businesses in the legal cannabis industry may be less profitable than they would otherwise be.

U.S. Federal Enforcement Priorities

For the reasons set forth above, the Company, and any future investments of the Company, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada and the U.S. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to invest in the U.S. or any other jurisdiction. See “Risk Factors”.

Changes in government policy or public opinion can significantly influence the regulation of the cannabis industry in Canada, the United States and elsewhere. A negative shift in the public’s perception of cannabis in the U.S. or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause State jurisdictions to abandon initiatives or proposals to legalize cannabis, thereby limiting the number of new State jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on the Company’s business, financial condition and results of operations. See “Risk Factors”.

Further, violations of any U.S. federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from criminal charges or civil proceedings conducted by either the U.S. federal government or private citizens (who have the right to seek private relief for the Company’s “aiding and abetting” activities that violate U.S. federal law), including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including on its reputation and ability to conduct business, its holding (directly or indirectly) of cannabis licenses in the U.S., the listing of its securities on various stock exchanges, its financial position, operating results, profitability or liquidity, or the market price of its publicly-traded shares. In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation or final resolution of any such matters because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial. See “Risk Factors”.

⁶ Specifically, the law defines “hemp” as “the plant Cannabis sativa L. and any part of that plant, including the seeds thereof and all derivatives, extracts, cannabinoids, isomers, acids, salts, and salts of isomers, whether growing or not, with a delta-9 tetrahydrocannabinol concentration of not more than 0.3 percent on a dry weight basis.”

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California State Level Review

In 1996, California was the first state to legalize medical marijuana through Proposition 215, the Compassionate Use Act (“CUA”). This legalized the use, possession and cultivation of medical marijuana by patients with a physician recommendation for treatment of cancer, anorexia, AIDS, chronic pain, spasticity, glaucoma, arthritis, migraine or any other illness for which marijuana provides relief. In 2003, Senate Bill 420 was signed into law establishing an optional identification card system for medical marijuana patients.

In September 2015, the California legislature passed three bills collectively known as Medical Cannabis Regulation and Safety Act (“MCRSA”). MCRSA established a licensing and regulatory framework for medical marijuana businesses in California. The system created multiple license types for dispensaries, infused products manufacturers, cultivation facilities, testing laboratories, transportation companies, and distributors. Edible infused product manufacturers would require either volatile solvent or non-volatile solvent manufacturing licenses depending on their specific extraction methodology. Multiple agencies would oversee different aspects of the program and businesses would require a state license and local approval to operate. However, in November 2016, voters in California overwhelmingly passed Proposition 64, the Adult Use of Marijuana Act (“AUMA”) creating an adult use marijuana program for adult use 21 years of age or older. AUMA had some conflicting provisions with MCRSA, so in June 2017, the California State Legislature passed Senate Bill No. 94, known as the Medical and Adult-Use Cannabis Regulation and Safety Act (“MAUCRSA”), which amalgamates MCRSA and AUMA to provide a set of regulations to govern medical and adult use licensing regime for cannabis businesses in the State of California. MAUCRSA went into effect on January 1, 2018. The California Bureau of Cannabis Control (“BCC”), the California Department of Food and Agriculture (“CDFA”), the California Department of Public Health - Manufactured Cannabis Safety Branch (“CDPH”), and the California Department of Tax and Fee Administration all have some degree of regulatory responsibility for marijuana operations. MAUCRSA became effective on January 1, 2018.

From January 2018 through mid-2021, three different state programs licensed and regulated cannabis businesses: BCC, CDFA, and CDPH. In July 2021, the DCC was established by consolidating the three former state cannabis authorities, BCC, CDFA, and CDPH. The DCC released consolidated regulations in September 2021 and aims to:

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Create a single point of contact for licensees, local governments and other stakeholders

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Simplify and centralize licensing and regulatory oversight

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Support businesses to be successful and compliant with state law

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Improve enforcement coordination.

In July 2019, California enacted A.B. 97. In relevant part, this bill authorizes licensing authorities to issue citations and fines to a licensee or an unlicensed person who violates MAUCRSA. The maximum fine is $5,000 per violation for licensees and $30,000 per violation for unlicensed persons. Each day of a violation constitutes a separate violation. A.B. 97 also repeals a prior requirement that an applicant for a provisional license first hold a temporary license. The bill also requires applicants for provisional licenses to submit evidence of compliance with the California Environmental Quality Act, limits the validity of a provisional license to 12 months with subsequent renewals as-approved by the relevant licensing authority, and allows licensing authorities to revoke provisional licenses for failing to diligently pursue final licensure. Finally, the bill requires the CDPH to establish a certification program for manufactured cannabis products comparable to the National Organic Program and the California Organic Food and Farming Act. In October 2019, California enacted A.B. 1529. This bill mandates that all cannabis vaping cartridges and cannabis vaporizers must include a universal symbol identifying the product as a vaping product.

In order to legally operate a medical or adult use cannabis business in California, the operator must have both a local and state license. This requires license holders to operate in cities with cannabis licensing programs. Therefore, cities in California are allowed to determine the number of licenses they will issue to marijuana operators or can choose to outright ban marijuana.

To the knowledge of management of the Company, there have not been any statements or guidance made by federal authorities or prosecutors regarding the risk of enforcement action specific to the State of California. For more information on federal enforcement and the risks associated with the U.S. cannabis regulatory environment generally, see, without limitation, “Risk Factors – Risks Related to the Regulatory Environment – U.S. federal law and enforcement pertaining to cannabis and hemp” and “Risk Factors – Risks Related to the Regulatory Environment – Risks related to heightened scrutiny by regulatory authorities”.

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California Licenses and Regulations

In California, State and local medical and adult use cannabis business licenses are renewed annually. Each year, licensees are required to submit a renewal application per guidelines published by DCC. While renewals are annual, there is no limit to the number of renewals a licensee may obtain. Assuming requisite renewal fees are paid, renewal applications are submitted in a timely manner, the establishment has not been cited for material violations, renewal applicants can anticipate approval in the ordinary course of business. However, any unexpected denials, delays or costs associated with a licensing renewal could impede planned operations and may have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

Beginning June 30, 2022, the DCC will no longer issue provisional licenses to general applicants. For equity applicants, the deadline is extended for one year, ending June 30, 2023. To be eligible for processing, applicants must submit an application on or before March 31, 2022.

Retail

The DCC is responsible for licensing and regulating cannabis retailers in California. Adult use retailer licenses permit the sale of cannabis and cannabis products to any individual age 21 years of age or older who do not possess a physician’s recommendation. Thus, should a Company subsidiary be awarded a license, it will be authorized to sell cannabis and cannabis products to adults over the age of 21 subject to customer presentation of a valid government-issued photo ID. As with all state-legal marijuana programs, only cannabis grown in California can be sold in California and retail licensees may only sell cannabis products procured from a duly licensed distributor or licensed microbusiness authorized to engage in distribution. All cannabis products are subject to appropriate laboratory testing, packaging, labeling, and tracking requirements. Upon receipt, licensed retailers must confirm cannabis products have not expired, are properly packaged and bear batch numbers which correspond with tracking and laboratory analysis documentation. Cannabis and cannabis products may only be displayed for inspection and sale on the sales floor of the facility, and may only be removed from packaging for customer inspection if placed in a proper container provided by the licensee and not readily accessible without the assistance of licensee staff (who must remain with the customer throughout such inspection). Any cannabis product displayed or inspected in this manner must be destroyed following inspection or when no longer being using for display purposes and may not be sold or consumed. Retailers may only provide free cannabis products under certain, very limited circumstances and may not sell other goods, with the exception of cannabis accessories and branded merchandise, though this limitation may be removed this year.

Medicinal retailer licenses permit the sale of medicinal cannabis and cannabis products for use pursuant to the CUA, found at Section 11362.5 of the Health and Safety Code, by a medicinal cannabis patient in California who possesses a valid physician’s recommendation. Only certified physicians may provide medicinal cannabis recommendations.

Distribution

The DCC is responsible for licensing and regulating cannabis distributors in California. Cannabis distribution licenses permit the licensee to transport cannabis goods between licensees, arrange for testing of cannabis goods, and conduct the quality assurance review of cannabis goods to ensure compliance with all packaging and labeling requirements. A licensed cannabis distributor may only distribute cannabis goods, cannabis accessories and licensees’ branded merchandise or promotional materials.

Manufacturing

The DCC is responsible for licensing and regulating cannabis manufacturers and for establishing statewide standards for packaging and labeling of cannabis and cannabis products. A cannabis manufacturer is anyone who makes or packages a prepared cannabis product, including edibles, topicals, tinctures, extracts, vape cartridges, capsules and more. Cannabis manufacturers can also package flower and roll and package pre-rolls on their licensed premises. Manufacturing licenses are issued based on the type of manufacturing operations to be conducted on the licensed premises. License types include extraction (using volatile and nonvolatile solvents), infusion, packaging and labeling, and shared-use facilities.

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Cultivation

The DCC is responsible for licensing and regulating cannabis cultivators, nurseries and processors. The DCC is authorized to issue 16 different types of cannabis cultivation licenses, depending on the type of cultivation (outdoor, indoor, mixed-light) and the size (small, medium, large). The DCC also issues licenses to nurseries and processors. The DCC manages the California Cannabis Track-and-Trace system (“CT&T”), which tracks all commercial cannabis and cannabis products.

Reporting Requirements

The state of California has selected Franwell Inc.’s METRC solution (“METRC”) as the CT&T system used to track commercial cannabis activity and movement along the legal supply chain. While METRC is interoperable with other third-party systems via application programming interface, only licensees have access to METRC itself.

Operating Procedure Requirements

Licensing applicants must submit standard operating procedures (“SOPs”) describing how the operator will, among other requirements, secure the facility, manage inventory, comply with seed-to-sale requirements, dispense cannabis, and handle waste. Once SOPs approved by the governing regulating body(ies), licensees must provide their employees with SOP training and seek written approval from governing regulating bodies before materially changing their SOPs.

Site-Visits & Inspections

The DCC and its authorized representatives have broad authority, with or without notice, to inspect licensed cannabis operations, including premises, facilitates, equipment, books and records (which may be copied, and such copies retained), and cannabis products. Failure to grant representatives from the DCC full and immediate access to facilities, property, and premises, and to cooperate with inspections and investigations may result in disciplinary action. Laws and regulations enacted by many local jurisdictions grant local cannabis governing bodies and law enforcement agencies similar inspection authority.

Storage and Security

To ensure the safety and security of cannabis facilities and operations, the DCC requires licensees to:

Maintain a fully operational security alarm system;

Contract for security alarm services;

Maintain a video surveillance system that records continuously 24 hours a day;

Ensure adequate lighting is installed and maintained on and about licensed facilities;

Only transact business during authorized hours of operations;

Store cannabis and cannabis product only in areas identified for such purposes on drawings submitted to and approved by the State in connection with licensing;

Store all cannabis and cannabis products in a secured, locked room or a vault;

Report to DCC and local law enforcement within 24 hours after being notified or becoming aware of the theft, diversion, or loss of cannabis; and

To the extent applicable based on a licensee’s authorized scope of operations, ensure the safe transport of cannabis and cannabis products between licensed facilities, maintain a transportation manifest in any vehicle transporting cannabis and cannabis products. Only vehicles registered with the DCC, that meet DCC distribution requirements, are to be used to transport cannabis and cannabis products for wholesale distribution.

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In addition to DCC storage and security requirements, local jurisdictions may have additional storage and security requirements. Such requirements, to the extent they exist, may vary from one locality to another.

California Home Delivery Requirements

California law allows certain licensed retailers to deliver cannabis to adult customers at any private address within the state, including within those jurisdictions that have land use and zoning ordinances prohibiting the establishment of commercial cannabis businesses. At least 25 local jurisdictions where cannabis sales are banned sued the state, seeking to overturn the rule allowing home deliveries statewide. As of the date hereof, the suit was dismissed on procedural grounds, and the state regulation stands. To the knowledge of management, there have been no significant enforcement efforts mounted by local governments.

The State of California requires the satisfaction of various regulatory compliance obligations in order to operate a cannabis delivery service. The cannabis license that permits the operation of a storefront dispensary in the State of California (also referred to as a retail license) currently permits that entity to also establish a delivery operation. If an entity does not wish to set up and operate a storefront dispensary location at which it can sell products to customers in person, California has established a separate license which allows for a retail delivery operation (also referred to as a non-storefront retail license). California regulations regarding the delivery of cannabis products include the following requirements:

All deliveries of cannabis goods must be performed by a delivery employee (at least 21 years of age) who is directly employed by a licensed retailer.

All deliveries of cannabis goods must be made in person.

Prior to providing cannabis goods to a delivery customer, a delivery employee must confirm the identity and age of the delivery customer (as is required if such customer was purchasing the product in the physical dispensary) and ensure that all cannabis goods sold comply with the regulatory requirements.

A licensed cannabis entity is permitted to contract with a third-party service that provides a technology platform to facilitate the sale and delivery of cannabis goods, in accordance with all of the following: (1) the licensed cannabis entity does not allow for delivery of cannabis goods by the technology platform service provider; (2) the licensed entity does not share in the profits of the sale of cannabis goods with the technology platform service provider, or otherwise provide for a percentage or portion of the cannabis goods sales to the technology platform service provider; (3) the licensed cannabis entity does not advertise or market cannabis goods in conjunction with the technology platform service provider, outside of the technology platform, and ensures that the technology platform service provider does not use the licensed cannabis entity’s license number or legal business name on any advertisement or marketing that primarily promotes the services of the technology platform; and (4) provides various disclosures to customers about the source of the delivered cannabis goods.

Cannabis may only be delivered to a physical address but cannot be delivered to an address located on publicly owned land or an address on land or in a building leased by a public agency, and the delivery cannot be to a location outside of the state of California.

The delivery operations must satisfy any local jurisdiction requirements for the delivery of cannabis products.

A delivery employee is not permitted to carry cannabis goods in the delivery vehicle with a value in excess of $5,000 at any time.

The delivery vehicle and its use must satisfy certain regulatory requirements such as continuous and dedicated GPS, use of locked containment units for the cannabis products, and unmarked vehicles.

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The Company understands that the Company is in compliance with the laws of the State of California and the related cannabis licensing framework. There are no current incidences of non-compliance, citations or notices of violation which are outstanding which may have an impact on the Company’s licenses, business activities or operations in the State of California. Notwithstanding the foregoing, like most businesses, the Company may from time to time experience incidences of non-compliance with applicable rules and regulations in the states in which the Company operates, including the State of California, and such non-compliance may have an impact on the Company’s licenses, business activities or operations in the applicable state. However, the Company, takes steps to minimize, disclose and remedy all incidences of non-compliance which may have an impact on the Company’s licenses, business activities or operations in all states in which the Company operates, including the State of California. See “Legal and Regulatory Framework – Compliance”.

Compliance with License Requirements

The Company currently has cannabis cultivation, manufacturing, distribution, retail, and delivery operations in the State of California and is in compliance with applicable State licensing requirements and the California cannabis regulatory framework. The Company maintains the appropriate licenses for its California cultivation, manufacturing, distribution, retail and delivery operations, as applicable.

The licenses of the Company and its subsidiaries are independently issued for each approved activity for use at the Company’s facilities in California. License renewal applications are submitted in accordance with the guidelines published by local cannabis regulators, the California Department of Cannabis Control. The Company has a strong track record of maintaining its licenses in good standing.

The Company has developed and implemented a compliance program designed to achieve its strategic business goals. This compliance program integrates external regulations and requirements with internal procedures and rules to effectively outline the employee duties and standards of work. The Company has implemented policies and procedures to seek to ensure compliance with applicable laws and regulations.

In additions, the Company employs individuals dedicated to monitoring California law and local regulations for changes and updates. Further, the Company has contracts with external consultants and external advisors that assist in the monitoring, notification, and interpretation of any changes.

The Company conducts quarterly internal audits to monitor compliance with regulations and to identify the areas for improvement.

Cultivation Operations Compliance

The Company’s onsite operations maintain compliance by merging compliant operations into day to day activity. Onsite staff is trained on compliance matters and is required to operate in accordance with SOPs that have merged compliance functions with daily operational activity necessary to propagate, cultivate, harvest, and cure cannabis.

Onsite staff are required to understand and adhere to compliance requirements related to cultivation. Cultivation operations include the following departments, each of which has a manager or supervisor responsible for maintaining regulatory compliance, updating the SOPs, confirming with compliance department managers any changes to operations or the premises, and reporting, both within their chain of command but also, in many cases, into systems or reporting chains in compliance and finance.

The departments that have material compliance obligations with respect to the Company cultivation operations include:

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propagation;

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integrated pest management;

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general cultivation;

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track and trace;

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inventory control;

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facilities; and

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operations.

Facilities, in conjunction with compliance staff, designate and maintain premises diagram information, including lighting plans and implementation, and canopy areas. Canopy areas are marked using easily identifiable ribbon lines and attaching the relevant licenses to such contiguous canopy spaces. General cultivation staff are aware of the canopy limitations and are required to ensure that all cultivation is kept within canopy boundaries.

The track and trace team is led by a Track and Trace Manager that ensures strict compliance with CT&T and includes four additional staff who manage compliance with respect to track and trace operations, including requesting unique identifiers (“UIDs”), tagging immature plant lots, upon moving immature plants to mature plant growth area tagging such plants with new UIDs, assisting in harvesting measurement and data input in conjunction with various cultivation team members.

The track and trace team members have each completed training to enter the cultivation licenses daily track and trace activities in the METRC system. The Track and Trace Manager oversees all data entry to seek to ensure accuracy and perform corrections within 24 hours of identified data entries. The Track and Trace Manager is also responsible for general track and trace compliance reconciliation, record storage, cross-functional reporting, and notifying the DCC in the event of any outage that keeps the account offline and are required to maintain a record of track and trace activities which occurred while offline.

The propagation team is responsible for initiating a transfer from nursery licensed areas to mature plant licensed areas. The propagation issues an external transfer sheet containing the UIDs and quantities of plant batches and licensed destination to the track and trace team. Upon receiving a transfer sheet, the track and trace team enters the information into the METRC system, producing a manifest to initiate the movement of plants from the nursery to the Small Mixed Tier 1 licensed areas.

The processing team led by the Processing Manager is responsible for oversight of the harvesting and processing of all cannabis batches. This includes working with the track and trace team to in providing the required harvest information, including for each plant and UID the wet weight and waste weight (such waste is required to be processed in accordance with the applicable guidelines).

The track and trace team works with Inventory Managers to maintain accurate inventory records and update weights after drying and curing processes. A certified scale is used to weigh the total dry weight of a harvested batch as soon as the drying phase is completed, typically after approximately 10 days from harvest. This total dry weight is recorded prior to any processing activity. The total dry weight is then reconciled upon completion of processing the harvest batch by comparing final product and waste weights.

In addition to the general cultivation operations track and trace teams are responsible, along with inventory team members, for issuing manifests for nursery transfers onsite, transfer of cannabis offsite, and any other inbound or outbound cannabis goods processing as well as general inventory management and information collection at the required times and processes. In order to seek to ensure accuracy, a cycle count schedule is in place at each cultivation facility to accomplish a 30-day reconciliation of all cannabis plant and processed inventory.

Senior Cultivation Managers are responsible for drafting and updating an IPM plan in conjunction with compliance staff. The IPM plan includes any county-imposed limitations, legal limitations, and label guidelines for application. In addition, the Company imposes its own strict guidelines on the use of active ingredient products and categorically excludes certain product classes.

The Company’s indoor cultivation operation at The Pottery is a relatively small scale grow in comparison to the Company’s greenhouse operations. The indoor grow operates with a CDFA Specialty Indoor license. This license is regulated by a maximum of 5,000 sq. ft. of canopy space which suits the premises as the physical design as constructed is just under 5,000 square feet.

Additional regulatory requirements for this license type, such as weighmaster licenses and local permits, are maintained by The Pottery’s Cultivation Manager with assistance from third party advisors.

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Required record retention for the specialty indoor license is generally as follows:

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Financial records: The cultivation managers send copies of all receipts & invoices (cash & card) to the Company’s accounting team. Onsite copies are kept in a filing cabinet at The Pottery cultivation by Cultivation Managers.

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Personnel records: The Company’s human resources department keeps all employee files stored in office.

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Disposal records: The cultivation management maintains a binder with all waste manifests/invoices/destruction certificates.

The compliance department is generally responsible for maintaining licenses in good standing, including ancillary cultivation licenses such as weighmasters licenses, State Water Resources Control Board licenses and disclosures, and maintaining information on the Company’s ability to meet license obligations. The responsibility includes maintaining accurate state level licenses and amending and updating such licenses and related license information, such as the premises diagrams, when required.

The Company’s compliance and licensing team is responsible for audits of onsite activities, implementing reporting guidelines, and acting as a resource to onsite team members. The compliance team calendars license renewals and other regulatory deadlines and submits, or approves the submission through contractors, of all documents to cannabis regulators. The compliance/licensing manager is responsible for preparing and submitting license renewals prior to expiration of both cannabis and other regulatory licenses, for example, State Water Resources Control Board licenses and waivers, weighmasters certificates and local permits.

The Company has a robust financial reporting and compliance system in place. Financial reporting is reconciled against METRC reporting for maintenance of accuracy and prevention of loss. The cultivation business units are led by a Cultivation Controller who reports to the Corporate Controller who in turn reports to the Company’s Chief Financial Officer. In conjunction with operations staff, the finance team provides for the payment of local cannabis taxes, California cultivation and excise taxes and the tracking of outbound and inbound products transfers.

The finance team is also responsible for maintaining records relating to financial interest holders, tax payments, contracts and transaction records which are produced as needed for regulatory review.

Manufacturing Operations Compliance

Under applicable State regulatory requirements, licensed cannabis manufacturers are required to establish a security plan to include measures preventing access to the premises by unauthorized persons and to protect physical safety of employees and to install a security alarm system designed to prevent theft or loss.

The Company seeks to comply with such security requirements through the following policies and procedures:

Security and Security Plans

Security management: The Security Manager, in coordination with managers and security advisors, is responsible for the development, upkeep, and adherence to a security plan.

Security training: All employees receive adequate security training which includes (i) the proper use of security measures and controls for the prevention of diversion, theft, or loss of cannabis or cannabis products, (ii) procedures and instructions for responding to an emergency, and (iii) education of department managers, who are responsible for the ongoing security training in daily operations. Employees are required to report any suspicious activity or security concerns to their supervisor immediately or security officer on duty immediately.

Personnel security: Each person working is supplied with a unique identification code to document entry and egress. This is accomplished with the use of a credentialed fob device that is controlled by the Security Manager. Security codes and fobs are kept secure and inaccessible to any unauthorized person. The Human Resources Manager maintains personnel records (separate from payroll records) to be kept for seven (7) year for each employee The Human Resources Manager is assigned responsibility for personnel policy and procedure documentation, maintenance, implementation, and training.

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Security access: Each person employed is supplied with a unique identification code contained in a credentialed fob device for access. Visitors, including outside vendors and consultants, must obtain a visitor identification badge prior to entering an enclosed locked area and will be escorted and monitored by a Manufacturing Manager.

Theft or diversion: Any incident involving theft or diversion will be reported to the City of Lompoc and the Lompoc Police Department as soon as practical but within 24 hours. Any theft in excess of $250 in retail value of cannabis plant materials, extract, cannabis-infused product, or other item containing cannabis shall be reported to the Lompoc Police Department and the City of Lompoc in writing within 24 hours of the theft.

Facility security: Consists of four primary systems: (i) contracted physical security, including 24 hour onsite armed security; (ii) CCTV 24-7 recording; (iii) manual code access doors equipped with ID card readers; and (iv) intrusion alarms.

Quality Control Program

Each cannabis manufacturing licensee is responsible for implementing a quality control program to ensure that cannabis products are not adulterated or misbranded. The quality control program includes quality control operations for all of the following:

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The grounds, building, and manufacturing premises: This is accomplished by the Company’s Manufacturing Facilities Manager and staff following internal SOPs to maintain the manufacturing premises so that they remain in a clean condition, free from any contamination or potential disturbance to the quality and safety of products on site.

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Equipment and utensils: The Company’s manufacturing team has established procedures for validating that all equipment and machinery is in compliance with design specification, including built as designed with proper materials, capacity, and functions, in addition to properly connected and calibrated. The Equipment Production Supervisor oversees that team performs a visual inspection, looks for any contaminants, foreign objects, or quality issues with the equipment, supplies, raw materials or the facility. If a quality control issue is discovered when performing a visual inspection, staff must immediately notify the Manager on duty so that batch is remediated before further processing. The manufacturing team establish that operating ranges are shown to be capable of being held as long as necessary during routine productions and have a schedule for routine re-verification of all equipment and machinery.

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Personnel: The Company’s manufacturing team seeks to ensure that all cannabis and cannabis products are processed, manufactured, packaged, labeled, handled, and stored in a safe and sanitary manner and seeks to ensure that the identity, strength, quality, and purity of cannabis and cannabis products are maintained. All employees working in direct contact with cannabis must conform to hygienic practices.

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Cannabis product components: All production materials, packaging components, labeling, and other supplies must be physically inspected and stored under quarantine until they are sampled, if necessary, and released for use. All containers are inspected for appropriate labeling as to contents, container damage, or broken seals and contamination.

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Shipment inspection: Shipments unloaded from carriers are inspected for physical damage. If there is slight or moderate physical damage, the material will be more closely inspected. If any consequential damage is found, the material in question will not be permitted into the facility and the Inventory Manager will be immediately notified. The Inventory Manager and/or a Quality Assurance Specialist will make the decision to either accept or return the material. Any damaged material, which cannot be left on the truck, will be brought to the quarantine area and clearly marked as “DAMAGED” or “REJECTED”.

Manufacturing Processes and Procedures

The Company’s manufacturing operations have organized their processes and procedures by outlining each process that occurs in designated areas in the following order:

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Pre-processing/preparation area: This area is used for preparing the raw plant material. Mechanical homogenizers are used to grind the material to a uniform size. Large, super-low temperature freezers are used for storage. After preparation, material is brought to the extraction room.

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Extraction room: Non-volatile extraction is completed in the designated “extraction room” by an original equipment manufacturing-trained and certified technician. After the initial extraction is completed, the product can move into the designated area for post-production and refinement.

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Post-processing/refinement lab: This room houses solvent reclamation equipment, hazardous/flammable material storage, vacuum ovens, vacuum pumps, small benchtop chillers, water heaters, heating mantels, distillation apparati, etc. The area meets U.S. National Fire Protection Association criteria for class 1B flammable liquids and vapors. All product completed in this section of the facility is deemed safe for handling by the QA Specialist before entering the Packaging Area. When products reach the end of their refinement cycle and pass quality control sampling/testing, they are be moved to the designated finished product area.

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Commercial food processing/“kitchen”: The area referred to as the food processing facility or “kitchen” is utilized to infuse active cannabis ingredients into consumable goods. All employees working in this area have sufficient training in Hazard Analysis Critical Control Point training and are “Serv Safe” certified. All food products are stored according to their perishability in a clean and efficacious work environment for the purpose of food processing.

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Packaging/labeling area: Finished products are moved to this area, and products still in need of formulation go to the “formulation and filling room,” where the various derivative products are volumetrically packaged and labeled by way of automated or manual robotic filling machines, then returned to this area. All product prior to being packaged and labeled undergoes a quality assessment to seek to ensure product is free of debris. An enhanced visual inspection and an olfaction inspection may be performed at this time. A log is compiled by every employee delineating employee number, product batch code, date and net batch weight. When a product has been counted and logged, the items are moved to the “secured product storage vault” and locked until further distribution.

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Formulation and filling room: This area is considered a clean room to create “nutraceutical style” products and can be used as a clean area for future work. Products to be volumetrically filled and formulated primarily consist of vape devices and topical products and tinctures.

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Secured product storage vault: This area is the most secure space in the facility, surrounded by a U.S. Drug Enforcement Agency-style “cage” comprised of anchored rod iron and Kevlar/steel inserts within the drywall. This area is tightly climate-controlled to seek to ensure hazard controls for any consumable products that are at risk for food-borne bacteria.

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Testing: All cannabis received is tested for contaminants and cannabinoid and terpenoid profile, though testing of cannabis that will undergo further processing before sale is not required by State law or regulation. In lieu of initiated testing with an independent testing laboratory, a lot specific report or Certificate of Analysis may be accepted from the supplier of the cannabis provided the results are reported by an independent testing laboratory that is licensed by the State of California. The Quality Assurance department establishes the reliability of the supplier’s analyses through confirmation of the supplier’s test results at appropriate intervals.

Inventory Control

The Company has a written inventory control plan capable of tracking the location and disposition of all cannabis and cannabis products at its licensed premises. The Inventory Control Manager follows the internal Inventory Tracking SOP and oversees that the inventory team reports all tracking of inventory items accurately.

In addition, the Company reconciles the on-hand inventory of cannabis and cannabis products at its licensed premises with the records in the track-and-trace database at least once every 30 calendar days. The Inventory Control Manager and team produce a 30-day inventory reconciliation for all inventory in the track and trace system. This is overseen by the Operations Coordinator who reports to the Plant Manager.

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Retail and Distribution

Each of the Company’s retail locations is managed by a General Manager who is responsible for maintaining compliant operations. CT&T obligations are handled by the inventory and compliance team whose duties include receiving inbound cannabis products, checking the products against the manifest, accepting or rejecting products and updating the track and trace database when accepted, destruction of product, processing returns, compliance training and inventory reconciliation. At the time of delivery, the receiving employee is charged with examining the product packaging to seek to ensure that it meets all of the packaging and labeling requirements.

The track and trace system, METRC, is only one of multiple data sets used to manage, track, reconcile, and reduce loss of inventory. The Company also enters all inventory into its general inventory management system, by porting METRC tags through the Company’s enterprise resource planning software. Each dispensary has its own assigned tags. METRC manifests, tags, certificates of analysis, inventory reconciliations, and invoices are kept for records retention. Manifests are required to be kept for seven (7) years.

The inventory and compliance team reviews and fully assesses all on-hand inventory every 30 days and cross- references to the general inventory database.

Safety and security measures are an integral part of each floorplan. Licensed premises are designed to control customer flow and prohibit unauthorized entry to limited-access areas. Limited-access areas include spaces utilized to secure, store, transfer, or receive cash, salable goods, records and surveillance equipment (excluding the sales floor). These areas are accessible only to authorized individuals; authorization is granted by necessity of job function. Additionally:

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no one under age 21 may enter a limited-access area;

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only authorized individuals are permitted entry to a limited-access area, which may include:

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employees;

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outside vendors;

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contractors; or

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anyone doing business that requires access to the limited-access area;

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authorized individuals who are not employees must:

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be accompanied by an employee at all time;

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have their visits recorded in a log (including date, time, name, purpose of visit, areas visited, employee escort name; logs are retained in compliance with State record keeping requirements and available to licensing agencies and authorities upon request); and

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only employees and contractors are permitted on site outside of retail store hours.

Employees are required to display a laminated identification badge. Visitors are provided a visitors badge. To enter each retail licensed area, a customer is required to present a valid government issued photo ID.

Each Company retail licensee location has specific access controls related to both inventory and cash management. Cash is secured in specialized vaults as a safety measure against robbery and is regularly deposited.

When transporting cash, each Company retail store is required to comply with all DCC regulations, security protocols and best business practices defined by the retail finance team in all transportation of cash. Armored car transportation is the preferred method of transportation. This service in combination with retail security protocols are designed to safeguard all transportation of cash to and from the specific site.

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There are several specific controls related to general retail merchandising, that include limits on customer interactions with samples, product display, and purchasing requirements. Store merchandising is directed and approved by the VP of Retail and implemented by store General Managers and designees. Changes to merchandising are reviewed for any compliance issues, and, where appropriate, proposed changes are reviewed by the corporate compliance managers.

To purchase a cannabis product online, a customer is required to upload a valid California identification and a self-photo, both of which are electronically verified by retail employees. No online sales or home deliveries are made to individuals outside the State of California. On delivery, the Company’s delivery employee electronically scans the customer’s identification and utilizes mobile technology to process electronic payments and to upload data into the Company’s inventory management system.

Delivery operations must be conducted by an employee over the age of 21. A copy of the licensee’s license, the driver’s government identification, and the employee badge are required to be carried by the driver. At the time of delivery, the driver must confirm the age and identify of the customer in accordance with general retail customer data collection procedures.

Certain restrictions on where the delivery is allowed to occur include the requirement that it be to a physical address within California, cannot be to a school, youth center, or childcare center, and cannot be delivered to any public or United States land.

Retail delivery may only be accomplished by using an enclosed motor vehicle that cannot have markings that indicate that the vehicle might contain cannabis and no passengers or operators outside of employees of the licensee may be in the vehicle. The vehicle is required to have a GPS device owned by the licensee that records all locations traveled and stores such information for 90 days. The total value of goods that can be carried cannot exceed $5,000 at any time, or more than $3,000 in goods that do not have orders associated with them and the delivery driver cannot leave the licensed premises until a delivery order has been received.

Cannabis goods are kept in a lockable case (either combination or lock) that is secured to the inside of the vehicle.

Distributor obligations include separation of non-cannabis goods storage from cannabis goods, a requirement to store by batches of similar products and not store mixed product batches together. Batch labeling of products must occur and include, manufacturer or processor license number and information, date of entry into storage, UID for each batch, a description of the goods and the unit weight or batch weight and count (as accomplished by licensed weighing devices and personnel), and the best by or any expiration dates.

Batch testing is accomplished by licensed laboratories who take samples while products are held. Testing operations, including those accomplished while the goods are held, are highly regulated. A Company employee must be present when sampling occurs. The sampling process must be on video with the batch number identified on video and the recording maintained for 90 days. Chain of custody records for anyone possessing and moving the sample are required.

All cannabis goods transported by distribution require a manifest in the track and trace system prior to shipment, the information required includes: testing and sampling data, sale of goods, destruction or disposal of goods, description of goods and weight and count of goods. Prior to shipment the manifest must be sent to the purchaser or transferee and the DCC. The receiving licensee is required to check the manifest and reject any non-conforming goods or goods not on the manifest.

While the Company is compliant with State and local cannabis laws, its cannabis-related activities remain illegal under United States federal law. See “Risk Factors”.

Non-Compliance with State and Local Cannabis Laws

From time to time, as with all businesses and all rules, it is anticipated that the Company may experience incidences of non-compliance with applicable rules and regulations, which may include minor matters such as:

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staying open slightly too late due to an excess of customers at stated closing time;

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minor inventory discrepancies with regulatory reporting software;

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missing fields in regulatory reports;

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cleaning schedules not available on display;

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educational materials and/or interpreter services not available in an sufficient number of languages;

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updated staffing plan not immediately available on site;

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improper illumination of external signage;

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marijuana infused product utensils improperly stored;

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labels out of compliance with most recent regulatory guidelines;

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partial obstruction of camera views; and

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onsite surveillance room used for any other function (i.e., storage).

In addition, either on an inspection basis or in response to complaints, such as from neighbours, customers or former employees, State or local regulators may among other things issue “show cause” letters, give warnings to or cite the Company for violations, including those listed above. Such regulatory actions could lead to the requirement to remedy the situation, or, in more serious cases, lead to penalties and/or amendments, suspensions or revocations of licenses or otherwise have an impact on the Company’s licenses, business activities or operations.

The Company conducts and intends to continue to conduct internal audits with respect to compliance with applicable State and local cannabis rules and regulations.

The Company intends to promptly remedy any known occurrences of non-compliance with applicable State and local cannabis rules and regulations and the Company intends to publicly disclose any non-compliance, citations or notices of violation which may have an impact on its licenses, business activities or operations.

Ability to Access Public and Private Capital

The Company has historically, and will continue to have access to equity financing from the public capital markets by virtue of its status as a reporting issuer in each of the provinces and territories of Canada other than Quebec.

The Company has historically, and continues to have, access to equity and debt financing from the prospectus exempt (private placement) markets in the U.S. The Company also has relationships with sources of private capital (such as funds and high net worth individuals) that could be investigated at a higher cost of capital.

The Company currently has access to equity financing through the private markets in the U.S. In addition, the Company has accessed the credit markets through a credit facility for up to $100 million through the Loan Agreement (see “General Development of the Business – Financing Transactions – Senior Secured Term Loan”). However, there can be no assurance the Company will continue to access these financing options in the future.

Commercial banks, private equity firms and venture capital firms have approached the cannabis industry cautiously to date. However, there are increasing numbers of high net worth individuals and family offices that have made meaningful investments in companies and businesses similar to that of the Company. Although there has been an increase in the amount of private financing available over the last several years, there is neither a broad nor deep pool of institutional capital that is available to cannabis license holders and license applicants. There can be no assurance that additional financing, if raised privately, will be available to the Company when needed or on terms which are acceptable to the Company. The Company’s inability to raise financing to fund capital expenditures or acquisitions could limit its growth and may have a material adverse effect upon future profitability. See “Risk Factors – The Company may be subject to restricted access to banking services in the United States and Canada.”

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RISK FACTORS

There are a number of risk factors that could cause future results to differ materially from those described herein. The following are certain factors relating to the Company and its business that may have a material adverse effect on the Company’s business, financial condition, results of operations and prospects, or the trading price of the Equity Shares. These risks and uncertainties are not the only ones facing the Company. Additional risks and uncertainties not presently known to the Company or currently deemed immaterial by the Company may also impair the operations of the Company. If any such risks actually occur, security holders of the Company could lose all or part of their investment and the business, financial condition, liquidity, cash flows, results of operations and prospects of the Company could be materially adversely affected and the ability of the Company to implement its growth plans could be adversely affected.

Risks Related to Legality of Cannabis

While legal under applicable U.S. State law, the Company’s business activities are illegal under U.S. federal law.

Investors are cautioned that in the United States, cannabis is largely regulated at the State level, and in California, at both the State and local levels. To the Company’s knowledge, as of the date hereof, some form of cannabis has been legalized in 47 States, the District of Columbia, and the territories of Guam, U.S. Virgin Islands, Northern Mariana Islands and Puerto Rico. Additional States have pending legislation regarding the same. Although California authorizes medical and/or adult-use cannabis production and distribution by licensed or registered entities, and numerous other States have legalized cannabis in some form, under U.S. federal law, the possession, use, cultivation, and transfer of cannabis and any related drug paraphernalia is illegal, and any such acts are criminal acts under federal law under any and all circumstances under the Substances Act. The concepts of “medical cannabis”, “retail cannabis” and “adult-use cannabis” do not exist under U.S. federal law. Marijuana is a Schedule I drug under the Substances Act. Under U.S. federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the U.S., and a lack of safety for the use of the drug under medical supervision. Although the Company believes that the business of the Company is and will be compliant with applicable U.S. State and local law, strict compliance with State and local laws with respect to cannabis may not absolve the Company of liability under U.S. federal law, nor may it provide a defense to any federal proceeding which may be brought against the Company. Any such proceedings brought against the Company may result in a material adverse effect on the Company.

Since the possession and use of cannabis and any related drug paraphernalia is illegal under U.S. federal law, the Company may be deemed to be aiding and abetting illegal activities. The Company manufactures and distributes medical and adult-use cannabis. As a result, U.S. law enforcement authorities, in their attempt to regulate the illegal use of cannabis and any related drug paraphernalia, may seek to bring an action or actions against the Company, including, but not limited to, a claim regarding the possession, use and sale of cannabis, and/or aiding and abetting another’s criminal activities. The U.S. federal aiding and abetting statute provides that anyone who “commits an offense or aids, abets, counsels, commands, induces or procures its commission, is punishable as a principal.” As a result, the U.S. DOJ, under the current administration, could allege that the Company has “aided and abetted” violations of federal law by providing financing and services to the Company. Under these circumstances, the federal prosecutor could seek to seize the assets of the Company, and to recover the “illicit profits” previously distributed to shareholders resulting from any of the foregoing. In these circumstances, the Company’s operations would cease, shareholders may lose their entire investment and directors, officers and/or shareholders may be left to defend any criminal charges against them at their own expense and, if convicted, be sent to federal prison. Such an action would result in a material adverse effect on the Company.

U.S. Customs and Border Protection (“CBP”) enforces the laws of the United States. Crossing the border while in violation of the Substances Act and other related federal laws may result in denied admission, seizures, fines and apprehension. CBP officers administer the Immigration and Nationality Act to determine the admissibility of travelers, who are non-U.S. citizens, into the United States. An investment in the Company, if it became known to CBP, could have an impact on a shareholder’s admissibility into the United States and could lead to a lifetime ban on admission. See “Risk Factors – U.S. border officials could deny entry of non-U.S. citizens into the U.S. to employees of or investors in companies with cannabis operations in the United States and Canada”.

The Company derives 100% of its revenues from the cannabis industry in the State of California which industry is illegal under U.S. federal law. Even where the Company’s cannabis-related activities are compliant with applicable State and local law, such activities remain illegal under U.S. federal law. The enforcement of relevant laws is a significant risk.

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Medical cannabis has been protected against enforcement by enacted legislation from the United States Congress in the form of what is commonly called the “Rohrabacher-Blumenauer Amendment”, which prevents federal prosecutors from using federal funds to impede the implementation of medical cannabis laws enacted at the State- level, subject to the United States Congress restoring such funding. Notably, this amendment has always applied to only medical cannabis programs, and has no effect on pursuit of recreational cannabis activities. The amendment has historically been passed as an amendment to omnibus appropriations bills, which by their nature expire at the end of a fiscal year or other defined term. The current omnibus appropriations bill continued the protections for the medical cannabis marketplace and its lawful participants from interference by the U.S. DOJ up and through the 2021 appropriations deadline of September 30, 2021.

In July 2020, the House of Representatives passed the “Blumenauer-McClintock-Norton-Lee amendment” to the Commerce, Justice, Science (CJS) Appropriations bill. That amendment proposed continuing the Rohrabacher- Blumenauer Amendment’s protections for state medical cannabis programs, and extend those protections to include recreational programs in states where recreational cannabis is legal. The amendment was not included in the final spending bill, so at this time the protections afforded by the Rohrabacher-Blumenauer Amendment apply only to medical cannabis programs.

Should the Rohrabacher-Blumenauer Amendment language not be included in the Fiscal Year 2022 appropriations package, there can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with State law. Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Company, even if such proceedings were concluded successfully in favour of the Company.

Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. This could have a material adverse effect on the Company, including its reputation and ability to conduct business, its holding (directly or indirectly) of medical and adult-use cannabis licenses in the United States, its financial position, operating results, profitability or liquidity or the market price of its publicly-traded shares. In addition, it will be difficult for the Company to estimate the time or resources that would be needed for the investigation of any such matters or its final resolution because, in part, the time and resources that may be needed are dependent on the nature and extent of any information requested by the applicable authorities involved, and such time or resources could be substantial.

The approach to the enforcement of cannabis laws may be subject to change or may not proceed as previously outlined.

As a result of the conflict between state and federal law regarding cannabis, investments in cannabis businesses in the U.S. are subject to inconsistent legislation and regulation. The response to this inconsistency was addressed in the Cole Memorandum addressed to all United States district attorneys acknowledging that notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several States have enacted laws relating to cannabis for medical purposes.

The Cole Memorandum outlined certain priorities for the U.S. DOJ relating to the prosecution of cannabis offenses. In particular, the Cole Memorandum noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the U.S. DOJ has never provided specific guidelines for what regulatory and enforcement systems it deems sufficient under the Cole Memorandum standard.

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In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the U.S. DOJ should be focused on addressing only the most significant threats related to cannabis. States where medical cannabis had been legalized were not characterized as a high priority. In March 2017, then newly appointed Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit; however, he had previously stated that he did not believe it had been implemented effectively and, on January 4, 2018, former Attorney General Jeff Sessions issued the Sessions Memorandum, which rescinded the Cole Memorandum. The Sessions Memorandum rescinded previous nationwide guidance specific to the prosecutorial authority of United States Attorneys relative to cannabis enforcement on the basis that they are unnecessary, given the well-established principles governing federal prosecution that are already in place. Those principles are included in chapter 9.27.000 of the USAM and require federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.

As a result of the Sessions Memorandum, federal prosecutors are now free to utilize their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of State-level laws that may be inconsistent with federal prohibitions. No direction was given to federal prosecutors in the Sessions Memorandum as to the priority they should ascribe to such cannabis activities, and resultantly it is uncertain how active U.S. federal prosecutors will be in relation to such activities.

As discussed above, should the Rohrabacher-Blumenauer Amendment not be renewed, there can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with State law.

On November 7, 2018, Mr. Sessions tendered his resignation as Attorney General at the request of President Donald Trump. Following Mr. Sessions’ resignation, Matthew Whitaker began serving as Acting United States Attorney General, and William Barr was eventually appointed to the role. During his Senate confirmation hearing, Mr. Barr stated that he disagrees with efforts by States to legalize marijuana, but would not go after marijuana companies in states that legalized it under Obama administration policies. He stated further that he would not upset settled expectations that have arisen as a result of the Cole Memorandum. Federal enforcement of cannabis-related activity remained consistent with the priorities outlined in the Cole Memorandum throughout Attorney General Barr’s tenure.

In January 2021, Joseph R. Biden Jr. was sworn in as the new President of the United States. President Biden nominated federal judge Merrick Garland to serve as his Attorney General. During his confirmation hearings in the Senate on February 22, 2021, Attorney General nominee Garland confirmed that he would not prioritize pursuing cannabis prosecutions in states that have legalized and that are regulating the use of cannabis, both for medical and adult use. The Senate confirmed Judge Garland as Attorney General on March 10, 2021.

However, unless and until the United States Congress amends the Substances Act with respect to medical and/or adult-use cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that U.S. federal authorities may enforce current U.S. federal law. If the U.S. federal government begins to enforce U.S. federal laws relating to cannabis in States where the sale and use of cannabis is currently legal, or if existing applicable State laws are repealed or curtailed, the Company’s business, results of operations, financial condition and prospects and the Company would be materially adversely affected.

Such potential proceedings could involve significant restrictions being imposed upon the Company or third parties, while diverting the attention of key executives. Such proceedings could have a material adverse effect on the Company, as well as the Company’s reputation, even if such proceedings were concluded successfully in favour of the Company. In the extreme case, such proceedings could ultimately involve the prosecution of key executives of the Company or the seizure of corporate assets; however as of the date hereof, the Company believes that proceedings of this nature are remote.

There is no certainty as to how the U.S. DOJ, Federal Bureau of Investigation and other government agencies will handle cannabis matters in the future. The Company regularly monitors the activities of the current administration in this regard.

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The Company may be subject to restricted access to banking services in the United States and Canada.

In February 2014, FinCEN issued guidance through the FinCEN Memorandum (which is not law) with respect to financial institutions providing banking services to cannabis businesses. This guidance includes burdensome due diligence expectations and reporting requirements, and does not provide any safe harbors or legal defenses from examination or regulatory or criminal enforcement actions by the U.S. DOJ, FinCEN or other federal regulators. Thus, many banks and other financial institutions in the United States choose not to provide banking services to cannabis-related businesses or rely on this guidance, which can be amended or revoked at any time by the Biden administration. In addition to the foregoing, banks may refuse to process debit card payments, and credit card companies generally refuse to process credit card payments for cannabis-related businesses. As a result, the Company may have limited or no access to banking or other financial services in the United States. The inability, or limitation of the Company’s ability, to open and maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Company to operate and conduct its business as planned or to operate efficiently.

Additionally, Canadian banks may potentially refuse to provide banking services to companies engaged in U.S. cannabis activities while it is illegal under U.S. federal law.

There are increasing numbers of high net worth individuals and family offices that have made meaningful investments in companies and businesses similar to the Company. Although there has been an increase in the amount of private financing available over the last several years, there is neither a broad nor deep pool of institutional capital that is available to cannabis license holders and license applicants. There can be no assurance that additional financing, if raised privately, will be available to the Company when needed or on terms which are acceptable to the Company. The Company’s inability to raise financing to fund capital expenditures or acquisitions could limit its growth and may have a material adverse effect upon future profitability.

The differing regulatory requirements across State jurisdictions may hinder or otherwise prevent the Company from achieving economies of scale.

Traditional rules of investing may prove to be imperfect in the cannabis industry. For example, while it would be common for investment managers to purchase equity in companies in different States to reach economies of scale and to conduct business across State lines, such an investment thesis may not be feasible in the cannabis industry because of varying State-by-State legislation. Applicable regulations in many States may require advance disclosure of and approval of State regulators to accomplish an investment. As no two regulated markets in the cannabis industry are exactly the same, doing business across State lines may not be possible or commercially practicable. As a result, the Company may be limited to identifying opportunities in individual States, which may have the effect of slowing the growth prospects of the Company.

Risk of legal, regulatory or other political change.

The success of the business strategy of the Company depends on the legality of the cannabis industry. The political environment surrounding the cannabis industry in general can be volatile and the regulatory framework remains in flux. To the Company’s knowledge, as of the date hereof, some form of cannabis has been legalized in 47 States, the District of Columbia, and the territories of Guam, U.S. Virgin Islands, Northern Mariana Islands and Puerto Rico; however, the risk remains that a shift in the regulatory or political realm could occur and have a drastic impact on the industry as a whole, adversely impacting the Company’s business, results of operations, financial condition or prospects.

Delays in enactment of new State or federal regulations could restrict the ability of the Company to reach strategic growth targets. The growth strategy of the Company is contingent upon certain federal and State regulations being enacted to facilitate the legalization of medical and adult-use marijuana. If such regulations are not enacted, or enacted but subsequently repealed or amended, or enacted with prolonged phase-in periods, the growth targets of the Company could be negatively impacted, and thus, the effect on the return of investor capital, could be detrimental.

The Company is unable to predict with certainty when and how the outcome of these complex regulatory and legislative proceedings will affect its business and growth.

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Further, there is no guarantee that State laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of State laws within their respective jurisdictions, including prohibiting ownership of cannabis businesses by public companies. If the federal government begins to enforce federal laws relating to cannabis in States where the sale and use of cannabis is currently legal under State law, or if existing applicable State laws are repealed or curtailed, the Company’s business, results of operations, financial condition and prospects would be materially adversely affected. It is also important to note that local and city ordinances may strictly limit and/or restrict disbursement of marijuana in a manner that will make it extremely difficult or impossible to transact business in that jurisdiction, which may adversely affect the Company’s continued operations. Federal actions against individuals or entities engaged in the cannabis industry or a repeal of applicable marijuana legislation could adversely affect the Company and its business, results of operations, financial condition and prospects.

The Company is also aware that multiple States are considering special taxes or fees on businesses in the cannabis industry. It is a potential yet unknown risk at this time that other States are in the process of reviewing such additional fees and taxation. Should such special taxes or fees be adopted, this could have a material adverse effect upon the Company’s business, results of operations, financial condition or prospects.

Overall, the medical and adult-use cannabis industry is subject to significant regulatory change at both the State and federal level. The inability of the Company to respond to the changing regulatory landscape may cause it to not be successful in capturing significant market share and could otherwise harm its business, results of operations, financial condition or prospects.

The cannabis industry is a new industry that may not succeed.

Should the U.S. federal government change course and decide to prosecute those dealing in medical or adult-use cannabis under applicable law, there may not be any market for the Company’s products and services. It is a new industry subject to extensive regulation, and there can be no assurance that it will grow, flourish or continue to the extent necessary to permit the Company to succeed. The Company is treating, and will treat, the cannabis industry as a deregulating industry with significant unsatisfied demand for the Company’s products and may adjust its future operations, product mix and market strategy as the industry develops and matures.

The Company’s operations in the U.S. cannabis market may become the subject of heightened scrutiny.

For the reasons set forth above, the Company’s existing operations in the U.S., and any future operations or investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada and the U.S. As a result, the Company may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on the Company’s ability to operate or invest in the U.S. or any other jurisdiction, in addition to those described herein.

Given the heightened risk profile associated with cannabis in the U.S., CDS Clearing and Depository Services Inc. (“CDS”) may implement procedures or protocols that would prohibit or significantly curtail the ability of CDS to settle trades for cannabis companies that have cannabis businesses or assets in the U.S. On February 8, 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, the TMX Group announced the signing of a Memorandum of Understanding (“TMX MOU”) with the Neo Exchange, the Canadian Securities Exchange, the Toronto Stock Exchange, and the TSX Venture Exchange. The TMX MOU outlines the parties’ understanding of Canada’s regulatory framework applicable to the rules, procedures, and regulatory oversight of the exchanges and CDS as it relates to issuers with cannabis-related activities in the U.S. The TMX MOU confirms, with respect to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of listed issuers. As a result, there is no CDS ban on the clearing of securities of issuers with cannabis- related activities in the U.S. However, there can be no guarantee that this approach to regulation will continue in the future. If such a ban were to be implemented, it would have a material adverse effect on the ability of holders of Equity Shares to make and settle trades. In particular, Equity Shares would become highly illiquid as until an alternative was implemented, investors would have no ability to effect a trade of Equity Shares through the facilities of a stock exchange.

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In light of the political and regulatory uncertainty surrounding the treatment of U.S. cannabis-related activities, including the rescission of the Cole Memorandum discussed above, on February 8, 2018, the Canadian Securities Administrators revised their previously released Staff Notice – 51-352 Issuers with U.S. Marijuana-Related Activities setting out their disclosure expectations for specific risks facing issuers with cannabis-related activities in the U.S. The Staff Notice confirms that a disclosure-based approach remains appropriate for issuers with U.S. cannabis-related activities. The Staff Notice includes additional disclosure expectations that apply to all issuers with U.S. cannabis-related activities, including those with direct and indirect involvement in the cultivation and distribution of cannabis, as well as issuers that provide goods and services to third parties involved in the U.S. cannabis industry. The Company views the Staff Notice favourably, as it provides increased transparency and greater certainty regarding the views of its exchange and its regulator of existing operations and strategic business plan as well as the Company’s ability to pursue further investment and opportunities in the Company.

Government policy changes or public opinion may also result in a significant influence over the regulation of the cannabis industry in Canada, the U.S. or elsewhere. A negative shift in the public’s perception of medical and/or adult-use cannabis in the U.S. or any other applicable jurisdiction could affect future legislation or regulation. Among other things, such a shift could cause State jurisdictions to abandon initiatives or proposals to legalize medical and/or adult-use cannabis, thereby limiting the number of new State jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

Settlement by Securityholders Resident in the United States.

Given the heightened risk profile associated with cannabis in the United States, capital markets participants may be unwilling to assist with the settlement of trades for U.S. resident securityholders of companies with operations in the United States cannabis industry which may prohibit or significantly impair the ability of securityholders in the United States to trade the Equity Shares. In the event residents of the United States are unable to settle trades of the Equity Shares, this may affect the pricing of such securities in the secondary market, the transparency and availability of trading prices and the liquidity of these securities.

Regulatory scrutiny of the Company’s industry may negatively impact its ability to raise additional capital.

The Company’s business activities rely on newly established and/or developing laws and regulations in the various States in which the Company operates. These laws and regulations are rapidly evolving and subject to change with minimal notice. Regulatory changes may adversely affect the Company’s profitability or cause it to cease operations entirely. The cannabis industry may come under the scrutiny or further scrutiny by the FDA, Securities and Exchange Commission, the U.S. DOJ, the Financial Industry Regulatory Advisory or other federal, State or non-governmental regulatory authorities or self-regulatory organizations that supervise or regulate the production, distribution, sale or use of cannabis for medical and/or adult-use purposes in the U.S. It is impossible to determine the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any proposals will become law. The regulatory uncertainty surrounding the Company’s industry may adversely affect the business and operations of the Company, including without limitation, the costs to remain compliant with applicable laws and the impairment of its ability to raise additional capital, create a public trading market in the U.S. for securities of the Company or to find a suitable acquirer, which could reduce, delay or eliminate any return on investment in the Company.

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The Company’s investments in the U.S. are subject to applicable anti-money laundering laws and regulations.

Because the manufacture, distribution, and dispensation of cannabis remains illegal under the Substances Act, banks and other financial institutions providing services to cannabis-related businesses risk violation of federal anti-money laundering statutes (18 U.S.C. §§ 1956 and 1957), the unlicensed money-remitter statute (18 U.S.C. § 1960) and the U.S. Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended and the rules and regulations thereunder, the Criminal Code (Canada) and other related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the United States and Canada. These statutes can impose criminal liability for engaging in certain financial and monetary transactions with the proceeds of a “specified unlawful activity” such as distributing controlled substances which are illegal under U.S. federal law, including cannabis, and for failing to identify or report financial transactions that involve the proceeds of cannabis-related violations of the Substances Act. As a result, a majority of the United States’ banks and financial institutions have refused to open bank accounts for the deposit of funds from businesses involved with the cannabis industry. Others have agreed to accept deposits from medical cannabis sales, but not recreational cannabis sales. The inability to open bank accounts with certain institutions could materially and adversely affect the business of the Company. See “Risk Factors – The Company may be subject to restricted access to banking in the United States and Canada”.

In February 2014, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network issued the FinCEN Memorandum providing instructions to banks seeking to provide services to cannabis-related businesses. The FinCEN Memorandum states that in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. It refers to supplementary guidance that Deputy Attorney General Cole issued to federal prosecutors in the 2014 Cole Memorandum relating to the prosecution of money laundering offenses predicated on cannabis-related violations of the Substances Act. It is unclear at this time whether the current administration will follow the guidelines of the FinCEN Memorandum.

In the event that any of the Company’s operations, or any proceeds thereof, any dividends or distributions therefrom, or any profits or revenues accruing from such operations in the U.S. were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above or any other applicable legislation. This could restrict or otherwise jeopardize the ability of the Company to declare or pay dividends, effect other distributions or subsequently repatriate such funds back to Canada. Furthermore, while there is no current intention by the Company to declare or pay dividends on the Equity Shares in the foreseeable future, in the event that a determination was made that the Company’s proceeds from operations (or any future operations or investments in the U.S.) could reasonably be shown to constitute proceeds of crime, the Company may decide or be required to suspend declaring or paying dividends without advance notice and for an indefinite period of time.

Any re-classification of cannabis or changes in U.S. controlled substance laws and regulations may affect the Company’s business.

If cannabis and/or CBD is re-categorized as a Schedule II or lower controlled substance, the ability to conduct research on the medical benefits of cannabis would most likely be simpler and more accessible; however, if cannabis is re-categorized as a Schedule II or other controlled substance, the resulting re-classification would result in the requirement for FDA approval if medical claims are made for the Company’s products such as medical cannabis. As a result, the manufacture, importation, exportation, domestic distribution, storage, sale and use of such products may be subject to a significant degree of regulation by the Drug Enforcement Administration (“DEA”). In that case, the Company may be required to be registered (licensed) to perform these activities and have the security, control, recordkeeping, reporting and inventory mechanisms required by the DEA to prevent drug loss and diversion. Obtaining the necessary registrations may result in delay of the manufacturing or distribution of the Company’s current or anticipated products. The DEA conducts periodic inspections of certain registered establishments that handle controlled substances. Failure to maintain compliance could have a material adverse effect on the Company’s business, financial condition and results of operations. The DEA may seek civil penalties, refuse to renew necessary registrations, or initiate proceedings to restrict, suspend or revoke those registrations. In certain circumstances, violations could lead to criminal proceedings.

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The Company is subject to risks associated with the CBD industry.

The cultivation, manufacture, labeling, and distribution of hemp and hemp-derived CBD products is regulated by various federal, state, and local agencies. These governmental authorities may commence regulatory or legal proceedings, which could restrict the permissible scope of the Company’s products claims or the ability to sell hemp, CBD isolate, and hemp-derived CBD products in the future. If the Company’s operations are found to be in violation of any such applicable laws or regulations, the Company may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of operations, any of which could adversely affect the ability to operate the business and financial results. Failure to comply with FDA requirements may result in the issuance of warning letters, injunctions, product withdrawals, recalls, product seizures, fines, and criminal prosecutions. The U.S. Federal Trade Commission (“FTC”) regulates the advertising of such products and requires that all product claims be supported by competent and reliable scientific evidence. Violations of FTC requirements could result in legal action, including injunctions and orders to return money to consumers.

The availability of favourable locations may be severely restricted.

In California and other States, the local municipality has authority to choose where any cannabis establishment will be located. These authorized areas are frequently removed from other retail operations.

Because the cannabis industry remains illegal under U.S. federal law, the disadvantaged tax status of businesses deriving their income from cannabis, and the reluctance of the banking industry to support cannabis businesses, it may be difficult for the Company to locate and obtain the rights to operate at various preferred locations. Property owners may violate their mortgages by leasing to the Company, and those property owners that are willing to allow use of their facilities may require payment of above fair market value rents to reflect the scarcity of such locations and the risks and costs of providing such facilities.

U.S. border officials could deny entry of non-U.S. citizens into the U.S. to employees of or investors in companies with cannabis operations in the United States and Canada.

Because cannabis remains illegal under U.S. federal law, those employed at or investing in legal and licensed Canadian cannabis companies could face detention, denial of entry or lifetime bans from the U.S. for their business associations with U.S. cannabis businesses. Entry happens at the sole discretion of CBP officers on duty, and these officers have wide latitude to ask questions to determine the admissibility of a non-U.S. citizen or foreign national. The government of Canada has started warning travelers on its website that previous use of cannabis, or any substance prohibited by U.S. federal laws, could mean denial of entry to the U.S. Business or financial involvement in the legal cannabis industry in Canada or in the United States could also be reason enough for U.S. border guards to deny entry. On September 21, 2018, CBP released a statement outlining its current position with respect to enforcement of the laws of the United States. It stated that Canada’s legalization of cannabis will not change CBP enforcement of United States laws regarding controlled substances and because cannabis continues to be a controlled substance under United States law, working in or facilitating the proliferation of the legal marijuana industry in U.S. States where it is deemed legal or Canada may affect admissibility to the U.S. As a result, CBP has affirmed that, employees, directors, officers, managers and investors of companies involved in business activities related to cannabis in the U.S. or Canada (such as the Company), who are not U.S. citizens face the risk of being barred from entry into the United States for life. On October 9, 2018, CBP released an additional statement regarding the admissibility of Canadian citizens working in the legal cannabis industry. CBP stated that a Canadian citizen working in or facilitating the proliferation of the legal cannabis industry in Canada coming into the U.S. for reasons unrelated to the cannabis industry will generally be admissible to the U.S.; however, if such person is found to be coming into the U.S. for reasons related to the cannabis industry, such person may be deemed inadmissible.

Business Structure Risks

Unpredictability caused by the Company’s capital structure.

Although other Canadian-based companies have dual class or multiple voting share structures, given the concentration of voting control that is held indirectly by the Company Founders by virtue of their Multiple Voting Shares, the Company is not able to predict whether this control will result in a lower trading price for or greater fluctuations in the trading price of the Equity Shares or will result in adverse publicity to the Company or other adverse consequences.

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The Company’s multi-class structure has the effect of concentrating voting control and the ability to influence corporate matters with the Company Founders.

The Multiple Voting Shares have 50 votes per share, whereas the Equity Shares have one (1) vote per share (other than in respect of the election of directors of the Company, for which the Limited Voting Shares do not have any entitlement to vote). Currently, the Company Founders hold approximately 80.9% of the voting power in the Company on a non-diluted basis, and approximately 73.3% on a diluted basis, just based on their ownership of 100% of the Multiple Voting Shares (without taking into account any Equity Share they may hold). Accordingly, each of the Company Founders has significant influence over the management and affairs of the Company and over all matters requiring shareholder approval, including the election of directors and significant corporate transactions. In addition, because of the 50-to-1 voting ratio between the Multiple Voting Shares and Equity Shares, the holders of Multiple Voting Shares control a majority of the combined voting power of the Company’s voting shares even though the Multiple Voting Shares represent a substantially reduced percentage of the total outstanding shares of the Company. The concentrated voting control of the holders of Multiple Voting Shares limits the ability of the holders of Equity Shares to influence corporate matters for the foreseeable future, including the election of directors as well as with respect to the Company’s decisions to amend its share capital, create and issue additional classes of shares, make significant acquisitions, sell significant assets or parts of its business, merge with other companies and/or undertake other significant transactions. As a result, holders of Multiple Voting Shares have the ability to influence or control many matters affecting the Company and actions may be taken that the holders of Equity Shares may not view as beneficial. The market price of the Equity Shares could be adversely affected due to the significant influence and voting power of the holders of Multiple Voting Shares. Additionally, the significant voting interest of the holders of Multiple Voting Shares could discourage transactions involving a change of control, including transactions in which an investor, as a holder of the Equity Shares, might otherwise receive a premium for the Equity Shares over the then-current market price, or discourage competing proposals if a going private transaction is proposed by one or more holders of Multiple Voting Shares. See “Description of Capital Structure – Equity Shares” and “Description of Capital Structure – Multiple Voting Shares”.

The issuance of Preferred Shares (as defined herein) could decrease earnings and assets available to holders of the Equity Shares and may decrease the market price of the Equity Shares.

The issuance of Preferred Shares and the terms selected by the board of directors of the Company (the “Board”) could decrease the amount of earnings and assets available for distribution to holders of Equity Shares or adversely affect the rights and powers, including the voting rights, of the holders of the Equity Shares without any further vote or action by the holders of the Equity Shares. The issuance of Preferred Shares, or the issuance of rights to purchase Preferred Shares, could make it more difficult for a third-party to acquire a majority of the Equity Shares and thereby have the effect of delaying, deferring or preventing a change of control of the Company or an unsolicited acquisition proposal or of making the removal of management more difficult. Additionally, the issuance of Preferred Shares may have the effect of decreasing the market price of the Equity Shares.

Loss of FPI status.

The Company is currently a “foreign private issuer” (“FPI”) as defined in Rule 405 under the United States Securities Act of 1933 (“U.S. Securities Act”) and Rule 3b-4 under the United States Securities Exchange Act of 1934. While the terms of the Multiple Voting Shares and Equity Shares are intended to avoid such a circumstance, if, as of the last business day of the Company’s second fiscal quarter for any year, more than 50% of the Company’s outstanding voting securities (as determined under Rule 405 of the U.S. Securities Act) are directly or indirectly held of record by residents of the United States, the Company will no longer meet the definition of an FPI, which may have adverse consequences on the Company’s ability to raise capital in private placements or Canadian prospectus offerings. In addition, the loss of the Company’s FPI status may result in increased reporting requirements and increased audit, legal and administration costs. These increased costs may significantly affect the Company’s business, financial condition and results of operations.

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General Regulatory and Legal Risks

The Company may be subject to the risk of civil asset forfeiture.

Because the cannabis industry remains illegal under U.S. federal law, any property owned by participants in the cannabis industry which are either used in the course of conducting such business, or are the proceeds of such business, could be subject to seizure by law enforcement and subsequent civil asset forfeiture. Even if the owner of the property were never charged with a crime, the property in question could still be seized and subject to an administrative proceeding by which, with minimal due process, it could be subject to forfeiture.

The Company may lack access to U.S. bankruptcy protections.

Because the use of cannabis is illegal under U.S. federal law, many courts have denied cannabis businesses bankruptcy protections, thus making it very difficult for lenders to recoup their investments in the cannabis industry in the event of a bankruptcy. If the Company were to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to the Company’s U.S. operations, which could have a material adverse effect on the Company.

The Company may be subject to the risk of an inability to enforce its contracts.

It is a fundamental principle of law that a contract will not be enforced if it involves a violation of law or public policy. Because cannabis remains illegal at a federal level, judges in multiple States have on a number of occasions refused to enforce contracts for the repayment of money when the loan was used in connection with activities that violate federal law, even if there is no violation of State law. There remains doubt and uncertainty that the Company will be able to legally enforce contracts it enters into if necessary. The Company cannot be assured that it will have a remedy for breach of contract, which would have a material adverse effect on the Company.

The Company may be subject to the risk of changes in Canadian laws or regulations, or a failure to comply with any such laws and regulations.

The Company is subject to laws and regulations enacted by the federal and provincial governments of Canada. In particular, the Company is required to comply with certain Canadian securities law, income tax law, the rules of the Neo Exchange and other legal and regulatory requirements. Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those laws and regulations and their interpretation and application also may change from time to time and those changes could have a material adverse effect on the Company’s business, investments and results of operations. In addition, a failure to comply with applicable laws or regulations, as interpreted and applied, could result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

The Company is subject to general regulatory and licensing risks.

The Company is subject to a variety of laws, regulations and guidelines relating to the manufacture, management, transportation, storage and disposal of cannabis, including laws and regulations relating to health and safety, the conduct of operations and the protection of the environment. Achievement of the Company’s business objectives is contingent, in part, upon compliance with applicable regulatory requirements and obtaining all requisite regulatory approvals. Changes to such laws, regulations and guidelines due to matters beyond the control of the Company may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

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The Company is required to obtain or renew further government permits and licenses for its current and contemplated operations. Obtaining, amending or renewing the necessary governmental permits and licenses can be a time consuming process potentially involving numerous regulatory agencies, public hearings and costly undertakings on the part of the Company. As of April 1, 2022, California will no longer issue provisional licenses, instead requiring all marijuana businesses to obtain annual licensure. This is a lengthier process, which will include a full review under the California Environmental Quality Act for every facility seeking licensure. The duration and success of the Company’s efforts to obtain, amend and renew permits and licenses are contingent upon many variables not within its control, including the interpretation of applicable requirements implemented by the relevant permitting or licensing authority. The Company may not be able to obtain, amend or renew permits or licenses that are necessary to its operations or to achieve the growth of its business. Any unexpected delays or costs associated with the permitting and licensing process could impede the ongoing or proposed operations of the Company. To the extent necessary, permits or licenses are not obtained, amended or renewed, or are subsequently suspended or revoked, the Company may be curtailed or prohibited from proceeding with ongoing operations or planned development and commercialization activities. Such curtailment or prohibition may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

Many of the licenses held by the Company are subject to renewal on an annual or periodic basis; however, they are generally renewed, as a matter of course, if the license holder continues to operate in compliance with applicable legislation and regulations and without any material change to its operations. These renewals are contingent upon the registration holder’s past and continued ability to meet the statutory and regulatory requirements of the given program. The Licensing Manager, supported by Compliance personnel, actively monitor renewal dates for licenses to seek to ensure that licenses are renewed as and when required. The Company has implemented a centralized tracking, review, and upkeep system with respect to license maintenance.

While the Company believes that its compliance controls have been developed to mitigate the risk of any violations of any licenses they hold arising, there is no assurance that the Company’s licenses will be renewed by each applicable regulatory authority in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process for any of the licenses held by the Company could impede the ongoing or planned operations of the Company and have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

The Company may become involved in a number of government or agency proceedings, investigations and audits. The outcome of any regulatory or agency proceedings, investigations, audits, and other contingencies could harm the Company’s reputation, require the Company to take, or refrain from taking, actions that could harm its operations or require the Company to pay substantial amounts of money, harming its financial condition. There can be no assurance that any pending or future regulatory or agency proceedings, investigations and audits will not result in substantial costs or a diversion of management’s attention and resources or have a material adverse impact on the Company’s business, financial condition, results of operations or prospects.

California regulatory regime and transfer and grant of licenses.

Cannabis business activities are heavily regulated in California. The Company’s operations are subject to various laws, regulations and guidelines by governmental authorities, relating to the manufacture, marketing, management, transportation, storage, sale, pricing and disposal of medical and recreational marijuana and cannabis oil, and also including laws and regulations relating to health and safety, insurance coverage, the conduct of operations and the protection of the environment. Laws and regulations, applied generally, grant the DCC, and local regulatory bodies broad administrative discretion over the activities of the Company in California, including the power to limit or restrict business activities as well as impose additional disclosure requirements on the Company’s products and services. Government approvals, including state licenses and local permits, are currently required in connection with the operations of the Company. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from cultivating, manufacturing, distributing and selling medical or adult use cannabis in California. Achievement of the Company’s business objectives is contingent, in part, upon compliance with regulatory requirements enacted by the DCC and local governmental authorities and obtaining all regulatory approvals from the DCC, and local governmental authorities, where necessary, for the cultivation, manufacturing, distribution and sale of its cannabis products.

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The Company may not be able to obtain or maintain the necessary licenses, permits, certificates, authorizations or accreditations to operate its respective business, or may only be able to do so at great cost. In addition, the Company may not be able to comply fully with the wide variety of laws and regulations applicable to the Cannabis industry. The Company will incur ongoing costs and obligations related to regulatory compliance and obtaining new licenses. Failure to comply with regulations may lead to possible sanctions including the revocation or imposition of additional conditions on licenses to operate the Company’s business, the suspension or expulsion from the California cannabis market or of its key personnel, and the imposition of fines and censures. The inability to obtain or maintain necessary licenses, permits, certificates, authorizations or accreditations, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to the Company’s operations, increased compliance costs or give rise to material liabilities, which could have a material adverse effect on the business, results of operations, financial condition and prospects of the Company.

Regulatory action and approvals from the Food and Drug Administration.

The Company’s cannabis-based products are supplied to patients diagnosed with certain medical conditions. However, the Company’s cannabis-based products are not approved by the FDA as “drugs” or for the diagnosis, cure, mitigation, treatment, or prevention of any disease. Accordingly, the FDA may regard any promotion of the cannabis-based products as the promotion of an unapproved drug in violation of the Food, Drug and Cosmetic Act (“FDCA”).

In recent years, the FDA has issued letters to a number of companies selling products that contain CBD oil derived from hemp warning them that the marketing of their products violates the FDCA. FDA enforcement action against the Company could result in a number of negative consequences, including fines, disgorgement of profits, recalls or seizures of products, or a partial or total suspension of the Company’s production or distribution of its products. Any such event could have a material adverse effect on the Company’s business, prospects, financial condition, and operating results.

Limited Trademark Protection.

The Company will not be able to register any U.S. federal trademarks for its cannabis products. Because producing, manufacturing, processing, possessing, distributing, selling, and using cannabis is illegal under the Substances Act. The United States Patent and Trademark Office will not permit the registration of any trademark that identifies cannabis products. As a result, the Company likely will be unable to protect its cannabis product trademarks beyond the geographic areas in which it and its subsidiaries conduct business. The use of its trademarks outside the states in which they operate by one or more other persons could have a material adverse effect on the value of such trademarks.

Business Risks Related to the Cannabis Industry

Scientific research related to the benefits of marijuana remains in early stages, is subject to a number of important assumptions and may prove to be inaccurate.

Research in Canada, the U.S. and internationally regarding the medical benefits, viability, safety, efficacy and dosing of cannabis or isolated cannabinoids remains in early stages. To the Company’s knowledge, there have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids. Any statements made in this AIF concerning the potential medical benefits of cannabinoids are based on published articles and reports. As a result, any statements made in this AIF are subject to the experimental parameters, qualifications, assumptions and limitations in the studies that have been completed.

Although the Company believes that the articles and reports, and details of research studies and clinical trials that are publicly available reasonably support its beliefs regarding the medical benefits, viability, safety, efficacy and dosing of cannabis, future research and clinical trials may prove such statements to be incorrect, or could raise concerns regarding and perceptions relating to cannabis. Given these risks, uncertainties and assumptions, prospective and current shareholders of the Company should not place undue reliance on such articles and reports. Future research studies and clinical trials may draw opposing conclusions to those stated in this AIF or reach negative conclusions regarding the viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to medical cannabis, which may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

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Competition in the cannabis industry is intense and increased competition by larger and better-financed competitors could materially and adversely affect the business, financial condition and results of operations of the Company.

The Company faces intense competition in the cannabis industry, some of which comes from companies with longer operating histories and more financial resources, manufacturing and marketing experience than the Company. In addition, there is potential that the cannabis industry will undergo consolidation, creating larger companies with financial resources, manufacturing and marketing capabilities, and products that will be greater than those of the Company. As a result of this competition, the Company may be unable to maintain its operations or develop them as currently contemplated on terms it considers to be acceptable or at all. Increased competition by larger, better-financed competitors with geographic advantages may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

The Company faces competition from the illegal cannabis market.

The Company faces competition from illegal dispensaries and the illegal market that are unlicensed and unregulated. Such black market entities may sell cannabis and cannabis products with higher concentrations of active ingredients, use flavours or other additives which the Company may not be permitted to use, or engage in advertising and promotion activities from which the Company is prohibited. As these illegal market participants do not comply with the regulations governing the cannabis industry, their operations may also have significantly lower costs than those of the Company. The perpetuation of the illegal market for cannabis may have a material adverse effect on the Company’s business, financial condition, results of operations or prospects, as well as the public perception of cannabis use.

The Company may be unable to attract and retain customers.

The Company’s future success depends on its ability to attract and retain customers. There are many factors which could impact the Company’s ability to attract and retain customers, including but not limited to its ability to continually produce desirable and effective product, the successful implementation of customer-acquisition plans and the continued growth in its aggregate number of customers. The failure to acquire and retain customers would have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

Negative publicity or consumer perception may affect the success of the Company’s business.

The success of the cannabis industry may be significantly influenced by the public’s perception of marijuana. Both the medical and adult-use of marijuana are controversial topics, and there is no guarantee that future scientific research, publicity, regulations, medical opinion and public opinion relating to marijuana will be favourable. The cannabis industry is an early-stage business that is constantly evolving with no guarantee of viability. The market for medical and adult-use marijuana is uncertain, and any adverse or negative publicity, scientific research, limiting regulations, medical opinion and public opinion (whether or not accurate or with merit) relating to the consumption of marijuana, whether in Canada, the U.S. or elsewhere, may have a material adverse effect on the Company’s business, financial condition, results of operations, customer base or prospects.

Public perception can be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of marijuana products. There can be no assurance that future scientific research or findings, regulatory investigations, litigation, media attention or other publicity will be favourable to the marijuana market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory investigations, litigation, media attention or other publicity that are perceived as less favourable than, or that question, earlier research reports, findings or other publicity could have a material adverse effect on the demand for adult-use or medical marijuana and on the business, results of operations, financial condition, cash flows or prospects of the Company.

Further, adverse publicity reports or other media attention regarding the safety, efficacy and quality of marijuana in general, or associating the consumption of adult-use and medical marijuana with illness or other negative effects or events, could have such a material adverse effect. There is no assurance that such adverse publicity reports or other media attention will not arise. Among other things, a negative shift in the public’s perception of cannabis in the United States or any other applicable jurisdiction could cause State jurisdictions to abandon initiatives or proposals to legalize medical and/or adult-use cannabis, thereby limiting the number of new State jurisdictions into which the Company could expand. Any inability to fully implement the Company’s expansion strategy may have a material adverse effect on the Company’s business, results of operations or prospects.

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Results of future clinical research may negatively impact the cannabis industry.

Research in Canada, the U.S. and internationally regarding the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis or isolated cannabinoids (such as CBD and THC) remains in early stages. There have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids (such as CBD and THC) and future research and clinical trials may discredit the medical benefits, viability, safety, efficacy, and social acceptance of cannabis or could raise concerns regarding, and perceptions relating to, cannabis. Given these risks, uncertainties and assumptions, prospective purchasers of the Company’s securities should not place undue reliance on such articles and reports. Future research studies and clinical trials may draw opposing conclusions to those stated in this AIF or reach negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing, social acceptance or other facts and perceptions related to cannabis, which could have a material adverse effect on the demand for the Company’s products with the potential to lead to a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

Future research may lead to findings that vaporizers and related products are not safe for their intended use.

Vaporizers and related products were recently developed and therefore the scientific or medical communities have had a limited period of time to study the long-term health effects of their use. Currently, there is limited scientific or medical data on the safety of such products for their intended use and the medical community is still studying the health effects of the use of such products, including the long-term health effects. If the scientific or medical community were to determine conclusively that use of any or all of these products pose long-term health risks, market demand for these products and their use could materially decline. Such a determination could also lead to litigation, reputational harm and significant regulation. Loss of demand for the Company’s products, product liability claims and increased regulation stemming from unfavourable scientific studies on cannabis vaporizer products could have a material adverse effect on the Company’s business, results of operations, financial condition or prospects.

The current controversy surrounding vaporizers and vaporizer products may materially and adversely affect the market for vaporizer products and expose the Company to litigation and additional regulation.

There have been a number of highly publicized cases involving lung and other illnesses and deaths that appear to be related to vaporizer devices and/or products used in such devices (such as vaporizer liquids). Some jurisdictions in Canada and the United States have already taken steps to prohibit the sale or distribution of vaporizers, restrict the sale and distribution of such products or impose restrictions on flavours or use of such vaporizers. This trend may continue, accelerate and expand. Negative public sentiment may prompt regulators to decide to further limit or defer the cannabis industry’s ability to sell cannabis vaporizer products, and may also diminish consumer demand for such products. The potential deterioration in the public’s perception of cannabis containing vaping liquids may result in a reduced market for the Company’s vaping products. There can be no assurance that the Company will be able to meet any additional compliance requirements or regulatory restrictions, or remain competitive in face of unexpected changes in market conditions.

Litigation pertaining to vaporizer products is accelerating and that litigation could potentially expand to include the Company’s products, which would materially and adversely affect the Company’s business, financial condition, results of operations or prospects.

The cannabis industry is difficult to forecast.

The Company must rely largely on its own market research to forecast sales as detailed forecasts are not generally obtainable from other sources at this early stage of the cannabis industry. A failure in the demand for its products to materialize as a result of competition, technological change or other factors could have a material adverse effect on the business, results of operations, financial condition or prospects of the Company.

Reliable data on the medical and adult-use cannabis industry is not available.

As a result of recent and ongoing regulatory and policy changes in the medical and adult-use cannabis industry, the market data available is limited and unreliable. Federal and State laws prevent widespread participation and hinder market research. Therefore, market research and projections by the Company of estimated total retail sales, demographics, demand, and similar consumer research, are based on assumptions from limited and unreliable market data, and generally represent the personal opinions of the Company’s management team as of the date of this AIF.

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The Company may be subject to the risk of constraints on marketing products.

The development of the Company’s business and operating results may be hindered by applicable restrictions on sales and marketing activities imposed by government regulatory bodies. The regulatory environment in the U.S. limits companies’ abilities to compete for market share in a manner similar to other industries. If the Company is unable to effectively market its products and compete for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through increased selling prices for its products, the Company’s sales and results of operations or prospects could be adversely affected.

Risks Related to the Company’s Business

COVID-19 pandemic.

COVID-19 was declared a pandemic by the World Health Organization on March 11, 2020. The outbreak has caused companies and various international jurisdictions to impose restrictions such as quarantines, business closures and travel restrictions. While the impact of these restrictions did not have a material adverse impact on the Company’s results of operations for the years ended December 31, 2021 and December 31, 2020, the Company has continued to monitor closely the evolution of the pandemic.. The Company has attempted to assess the impact of the pandemic by identifying risks in the following principal areas:

Mandatory Closure. In response to the pandemic, most States and localities have deemed cannabis sales to be “essential business” and made only limited changes (if any) to normal business practices to prevent the spread of COVID-19. While the Company has and continues to work closely with State and local regulators to remain in compliance with COVID-19 guidelines, there is no guarantee further measures may nevertheless require the Company to shut down operations its operations in California should the state face a surge of cases for COVID-19 or any of its variants. The Company’s ability to generate revenue would be materially impacted by any shut down of its operations.

Customer Impact. The Company has implemented several initiatives prioritizing its medical patients and customers most susceptible to COVID-19 during the pendency of the COVID-19 outbreak. While the Company is seeking to implement measures, where permitted, such as “curbside” sales and delivery, to reduce infection risk to its customers, regulators may not permit such measures, or such measures may not prevent a reduction in demand.

Health and Safety of Patients, Customers, and Employees. In accordance with the guidance of the Centers of Disease Control and Prevention (“CDC”), the Company made essential changes to promote a healthy and safe operating environment for all of its patients, customers and employees, including:

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frequently sanitizing high-touch surfaces;

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deep cleaning and sanitizing workstations;

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sanitizing or washing hands after each transaction;

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ensuring hand sanitizer is easily accessible;

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suspending all use of paper menus, demo products, and demo samples;

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positioning staff at every other register when possible;

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taking the temperature of store employees before they begin their shift;

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requiring all dispensary staff to wear face masks;

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installed plexi-shields in areas where patients/customers come face to face with staff (check-in and at registers where glass doesn’t already exist); and

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placed markers on the floor to dictate 6 feet + of space between patients/customers.

Supply Chain Disruption. The Company relies on third party suppliers for equipment and services to produce its products and keep its operations going. If its suppliers are unable to continue operating due to mandatory closures or other effects of the pandemic, it may negatively impact its own ability to continue operating. At this time, the Company has not experienced any failure to secure critical supplies or services. However, disruptions in our supply chain may affect our ability to continue certain aspects of the Company’s operations or may significantly increase the cost of operating its business and significantly reduce its margins.

Staffing Disruption. The Company is, for the time being, implementing among its staff where feasible “social distancing” measures recommended by such bodies as the CDC, the Presidential administration, as well as state and local governments. The Company has cancelled nonessential travel by employees, implemented remote meetings where possible, and permitted all staff who can work remotely to do so. For those whose duties require them to work on- site, measures have been implemented to reduce infection risk, such as reducing contact with customers, mandating additional cleaning of workspaces and hand disinfection, providing masks and taking the temperature of employees before they begin their shift. Nevertheless, despite such measures, The Company may find it difficult to ensure that its operations remain staffed due to employees falling ill with COVID-19, becoming subject to quarantine, or deciding not to come to come to work on their own volition to avoid infection.

The Company is actively addressing the risk to business continuity represented by each of the above factors through the implementation of a broad range of measures throughout its structure and is re-assessing its response to the COVID-19 pandemic on an ongoing basis. The above risks individually or collectively, the uncertain pace of recovery, including the impact of the Delta and Omicron variants, may have a material impact on the Company’s ability to generate revenue.

Implementing measures to remediate the risks identified above may materially increase our costs of doing business, reduce our margins and potentially result in losses. While the Company is not currently in financial distress, if its financial situation materially deteriorates as a result of the impact of the pandemic, the Company could eventually be unable to meet its obligations to third parties, which in turn could lead to insolvency and bankruptcy of the Company.

The Company may not successfully execute its business strategy.

An important part of the Company’s business strategy involves expanding operations in additional U.S. markets, including in markets where it does not currently operate. The Company may be unable to pursue this strategy in the future at the desired pace or at all. The Company may be unable to, among other things, identify suitable businesses to acquire or invest in, complete acquisitions on satisfactory terms, successfully expand its infrastructure and sales force to support growth, achieve satisfactory returns on acquired businesses or enter into successful business arrangements for technical assistance or management expertise.

In addition, the process of integrating acquired businesses, particularly in new markets, may involve unforeseen difficulties, such as loss of key employees, and may require a disproportionate amount of management’s attention and financial and other resources. The Company can give no assurance that it will ultimately be able to effectively integrate and manage the operations of any acquired business or realize anticipated synergies. The failure to successfully integrate the cultures, operating systems, procedures and information technologies of an acquired business could have a material adverse effect on the Company’s business, financial condition or results of operations.

If the Company succeeds in expanding its business, such expansion may place increased demands on management, operating systems, internal controls and financial and physical resources. If not managed effectively, these increased demands may adversely affect the services provided to customers. In addition, the Company’s personnel, systems, procedures and controls may be inadequate to support future operations, particularly with respect to operations in U.S. states in which it does not currently operate. Consequently, in order to manage growth effectively, the Company may be required to increase expenditures to increase its physical resources, expand, train and manage its employee base, improve management, financial and information systems and controls or make other capital expenditures. The Company’s business, financial condition and results of operations could be adversely affected if it encounters difficulties in effectively managing the budgeting, forecasting and other process control issues presented by future growth.

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The Company has a limited operating history.

As a high-growth enterprise, the Company does not have a history of profitability. As such, the Company has no immediate prospect of generating profit from its intended operations. The Company will therefore be subject to many of the risks common to early-stage enterprises, including under-capitalization, cash shortages, limitations with respect to personnel, financial, and other resources and lack of revenues. There is no assurance that the Company will be successful in achieving a return on its shareholders’ investment and the likelihood of success must be considered in light of the early stage of operations.

The Company is reliant on its management team.

The success of the Company is dependent upon the ability, expertise, judgment, discretion and good faith of its senior management. While employment agreements or management agreements are customarily used as a primary method of retaining the services of key employees, these agreements cannot assure the continued services of such employees. Any loss of the services of such individuals could have a material adverse effect on the Company’s business, operating results, financial condition or prospects.

News media have reported that U.S. immigration authorities have increased scrutiny of Canadian citizens who are crossing the U.S.-Canada border with respect to persons involved in cannabis businesses in the U.S. There have been a number of Canadians barred from entering the U.S. as a result of an investment in or act related to U.S. cannabis businesses. In some cases, entry has been barred for extended periods of time. Company employees traveling from Canada to the U.S. for the benefit of the Company may encounter enhanced scrutiny by U.S. immigration authorities that may result in the employee not being permitted to enter the U.S. for a specified period of time. If this happens to the Company employees, then this may reduce our ability to manage effectively our business in the U.S.

Certain of the Company’s officers and directors may now be, and all of them in respect of the Company may in the future become, affiliated with entities engaged in business activities similar to those intended to be conducted by the Company and, accordingly, may have conflicts of interest in allocating their time and determining to which entity a particular business opportunity should be presented.

The Company’s officers and directors also may become aware of business opportunities which may be appropriate for presentation to the Company and the other entities to which they owe duties. In the course of their other business activities, the Company’s officers and directors may owe similar or other duties, and may have obligations, to other entities or pursuant to other outside business arrangements, including seeking and presenting investment and business opportunities. Accordingly, they may have conflicts of interest in determining to which entity a particular business opportunity should be presented. These conflicts may not be resolved in our favour, as the Company’s officers and directors are not required to present investment and business opportunities to the Company in priority to other entities with which they are affiliated or to which they owe duties, and such conflicts may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

The Company’s officers, directors, security holders and their respective affiliates and associates may have interests that conflict with the Company’s interests.

The Company has not adopted a policy that expressly prohibits its directors, officers, security holders, affiliates or associates from having a direct or indirect financial interest in any investment to be acquired or disposed of by us or in any transaction to which the Company is a party or has an interest. Such persons or entities may have a conflict between their interests and ours, which may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

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Failure to establish and maintain effective internal control over financial reporting may result in the Company not being able to accurately report its financial results, which could result in a loss of investor confidence and adversely affect the market price of the Equity Shares.

The Company is responsible for establishing and maintaining adequate internal control over financial reporting, which is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Despite the Company’s financial control and management systems, such internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A failure to prevent or detect errors or misstatements may result in a decline in the price of the Equity Shares and harm the Company’s ability to raise capital in the future.

If management of the Company is unable to certify the effectiveness of its internal controls, or if material weaknesses or significant deficiencies in its internal controls are identified, such as in connection with the year ended December 31, 2021, the Company could be subject to regulatory scrutiny and a loss of public confidence, which could harm its business. In addition, if the Company does not maintain adequate financial and management personnel, processes and controls, it may not be able to accurately report its financial performance on a timely basis, which could cause a decline in the price of Equity Shares and harm the Company’s ability to raise capital.

It is not expected that the Company’s disclosure controls and procedures and internal control over financial reporting will prevent all error or fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.

Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within an organization are detected. The inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts of certain persons, by collusion of two or more people or by management override of the controls. Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected in a timely manner or at all. If the Company cannot provide reliable financial reports or prevent fraud, its reputation and operating results could be materially adversely affected, which could also cause investors to lose confidence in its reported financial information.

The Company may be subject to the risk of competition from synthetic production and technological advances.

The pharmaceutical industry may attempt to dominate the cannabis industry, and in particular, legal marijuana, through the development and distribution of synthetic products which emulate the effects and treatment of organic marijuana. If they are successful, the widespread popularity of such synthetic products could change the demand, volume and profitability of the cannabis industry. This could adversely affect the ability of the Company to secure long-term profitability and success through the sustainable and profitable operation of its business. There may be unknown additional regulatory fees and taxes that may be assessed in the future that may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

The Company may be subject to the risks associated with fraudulent or illegal activity by its employees, contractors and consultants.

The Company is exposed to the risk that its employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to the Company that violates: (i) government regulations; (ii) manufacturing standards; (iii) federal and provincial healthcare fraud and abuse laws and regulations; or (iv) laws that require the true, complete and accurate reporting of financial information or data. It may not always be possible for the Company to identify and deter misconduct by its employees and other third parties, and the precautions taken by the Company to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting the Company from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against the Company, and it is not successful in defending itself or asserting its rights, those actions could have a significant impact on the Company’s business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of the Company’s operations, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

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Certain events or developments in the cannabis industry more generally may impact the Company’s reputation.

Damage to the Company’s reputation can be the result of the actual or perceived occurrence of any number of events, and could include any negative publicity, whether true or not. Cannabis has often been associated with various other narcotics, violence and criminal activities, the risk of which is that our business might attract negative publicity. There is also risk that the action(s) of other participants, companies and service providers in the cannabis industry may negatively affect the reputation of the industry as a whole and thereby negatively impact the reputation of the Company. The increased usage of social media and other web-based tools used to generate, publish and discuss user-generated content and to connect with other users has made it increasingly easier for individuals and groups to communicate and share opinions and views in regards to the Company and its activities, whether true or not, and the cannabis industry in general, whether true or not. We do not ultimately have direct control over how it or the cannabis industry is perceived by others. Reputation loss may result in decreased investor confidence, increased challenges in developing and maintaining community relations and an impediment to the Company’s overall ability to advance its business strategy and realize on its growth prospects, thereby having a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

Third parties with whom the Company may do business may perceive themselves as being exposed to reputational risk as a result of their relationship with the Company.

The parties with which the Company may do business may perceive that they are exposed to reputational risk as a result of the Company’s cannabis-related business activities. Failure to establish or maintain business relationships due to reputational risk arising in connection with the nature of the Company’s business may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

The Company may be subject to advertising and promotional risk in the event it cannot effectively implement a successful branding strategy.

The Company’s future growth and profitability may depend on the effectiveness and efficiency of advertising and promotional costs, including its ability to (i) create brand recognition for any products we may develop or sell; (ii) determine appropriate advertising strategies, messages and media; and (iii) maintain acceptable operating margins on such costs. There can be no assurance that advertising and promotional costs will result in revenues for the Company’s business in the future, or will generate awareness for any of the Company’s products. In addition, no assurance can be given that the Company will be able to manage our advertising and promotional costs on a cost-effective basis.

The cannabis industry in Canada, including both the medical and adult-use cannabis markets, is in its early development stage and restrictions on advertising, marketing and branding of cannabis companies and products by Health Canada, various medical associations, other governmental or quasi-governmental bodies or voluntary industry associations may adversely affect the Company’s ability to conduct sales and marketing activities and to create brand recognition, and could potentially result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

The Company is subject to product liability regimes and strict product recall requirements.

The Company distributes products designed to be ingested by humans. Accordingly, the Company faces the risk of exposure to product liability claims, regulatory action and litigation if any of its business’s products are alleged to have caused significant loss or injury. In addition, the sale of cannabis products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of cannabis products alone or in combination with other medications or substances could occur. The Company may be subject to various product liability claims, including, among others, that specific cannabis products caused injury or illness, or include inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against the Company could result in increased costs, could adversely affect our reputation with the Company’s clients and consumers generally, and may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

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In addition, manufacturers and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labelling disclosure. To the extent any products are recalled due to an alleged product defect or for any other reason, the Company could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. The Company may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin or at all. In addition, a product recall may require significant management attention. Moreover, a recall for any of the foregoing reasons could lead to decreased demand and could have a material adverse effect on the Company. Product recalls may lead to increased scrutiny of operations by applicable regulatory agencies, requiring further management attention and potential legal fees and other expenses.

The Company may not be able to successfully develop new products or find a market for their sale.

The cannabis industry is in its early stages of development and the Company, and its competitors, may seek to introduce new products in the future. In attempting to keep pace with any new market developments, the Company may need to expend significant amounts of capital in order to successfully develop and generate revenues from new products introduced by the Company. The Company may also be required to obtain additional regulatory approvals from Health Canada and any other applicable regulatory authorities, which may take significant amounts of time. The Company may not be successful in developing effective and safe new products, bringing such products to market in time to be effectively commercialized, or obtaining any required regulatory approvals, which, together with any capital expenditures made in the course of such product development and regulatory approval processes, may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

The Company is reliant on third-party suppliers, manufacturers and contractors.

The Company maintains a full supply chain for the provision of products and services to the regulated cannabis industry. Due to the uncertain regulatory landscape for regulating cannabis in Canada and the U.S., the Company’s third-party suppliers, manufacturers and contractors may elect, at any time, to decline or withdraw services necessary for the Company’s operations. Loss of these suppliers, manufacturers and contractors may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

The Company is reliant on key inputs.

The marijuana business is dependent on a number of key inputs and their related costs including raw materials and supplies related to growing operations, as well as electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs could materially impact the business, financial condition, results of operations or prospects of the Company. Some of these inputs may only be available from a single supplier or a limited group of suppliers. If a sole source supplier was to go out of business, the Company might be unable to find a replacement for such source in a timely manner or at all. If a sole source supplier were to be acquired by a competitor, that competitor may elect not to sell to the Company in the future. Any inability to secure required supplies and services or to do so on appropriate terms could have a materially adverse impact on the business, financial condition, results of operations or prospects of the Company.

The Company is reliant on equipment and skilled labour.

The ability of the Company to compete and grow is dependent on it having access, at a reasonable cost and in a timely manner, to skilled labour, equipment, parts and components. No assurances can be given that the Company will be successful in maintaining its required supply of skilled labour, equipment, parts and components. It is also possible that the final costs of the major equipment contemplated by the Company’s capital expenditure plans may be significantly greater than anticipated by the Company’s management, and may be greater than funds available to the Company, in which circumstance the Company may curtail, or extend the timeframes for completing, its capital expenditure plans. This may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

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Service providers could suspend or withdraw service.

As a result of any adverse change to the approach in enforcement of United States cannabis laws, adverse regulatory or political change, additional scrutiny by regulatory authorities, adverse change in public perception in respect of the consumption of marijuana or otherwise, third-party service providers to the Company could suspend or withdraw their services, which may have a material adverse effect on the Company’s business, revenues, operating results, financial condition or prospects.

The Company may be subject to the risk of litigation.

The Company may become party to litigation from time to time in the ordinary course of business which could adversely affect its business. Should any litigation in which the Company becomes involved be determined against the Company, such a decision could adversely affect the Company’s ability to continue operating and/or the market price for the Equity Shares. Even if the Company is involved in litigation and wins, litigation can redirect significant Company resources. See “General Development of the Business – Acquisitions – Element 7 Acquisition and Litigation” for details relating to the Element 7 Proceeding.

The Company may be subject to risks related to the protection and enforcement of intellectual property rights and may become subject to allegations that the Company is in violation of intellectual property rights of third parties.

The ownership and protection of intellectual property rights may be a significant aspect of the Company’s future success, particularly with respect to protections for cultivation processes and technologies. The Company may rely on trade secrets, technical know-how and proprietary information that are not protected by patents to maintain its competitive position. The Company tries to protect its intellectual property by entering into confidentiality agreements with parties that have access to it, such as the Company’s partners, collaborators, employees and consultants. Any of these parties may breach these agreements and we may not have adequate remedies for any specific breach. In addition, trade secrets and technical know-how, which are not protected by patents, may otherwise become known to or be independently developed by competitors, in which event the Company could be materially adversely affected.

Unauthorized parties may attempt to replicate or otherwise obtain and use the Company’s products, trade secrets, technical know-how and proprietary information. Policing the unauthorized use the Company’s future intellectual property rights could be difficult, expensive, time-consuming and unpredictable, as may be enforcing these rights against unauthorized use by others. Identifying unauthorized use of intellectual property rights is difficult as the Company may be unable to effectively monitor and evaluate the products being distributed by its competitors, including parties such as unlicensed dispensaries, and the processes used to produce such products. In addition, in any infringement proceeding, some or all of the Company’s future trademarks, patents or other intellectual property rights or other proprietary know-how, or arrangements or agreements seeking to protect the same for the benefit of the Company, may be found invalid, unenforceable, anti-competitive or not infringed. An adverse result in any litigation or defense proceedings could put one or more of the Company’s future trademarks, patents or other intellectual property rights at risk of being invalidated or interpreted narrowly. Any or all of these events could result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

In addition, other parties may claim that the Company’s products infringe on their proprietary and perhaps patent-protected rights. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, legal fees, injunctions, temporary restraining orders and/or require the payment of damages. As well, the Company may need to obtain licenses from third parties who allege that the Company has infringed on their lawful rights. However, such licenses may not be available on terms acceptable to the Company or at all. In addition, the Company may not be able to obtain or utilize on terms that are favourable to it, or at all, licenses or other rights with respect to intellectual property that it does not own.

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The Company may be subject to risks related to information technology systems, including cyber-attacks.

The Company’s operations depend, in part, on how well it and its suppliers protect networks, equipment, information technology systems and software against damage from a number of threats, including, but not limited to, cable cuts, damage to physical plants, natural disasters, intentional damage and destruction, fire, power loss, hacking, computer viruses, vandalism and theft. The Company’s operations also depend, in part, on the timely maintenance, upgrade and replacement of networks, equipment, IT systems and software, as well as pre-emptive expenses to mitigate the risks of failures. Any of these and other events could result in information system failures, delays and/or increase in capital expenses. The failure of information systems or a component of information systems could, depending on the nature of any such failure, adversely impact the Company’s reputation and results of operations. The Company’s risk and exposure to these matters cannot be fully mitigated because of, among other things, the evolving nature of these threats. As a result, cyber security and the continued development and enhancement of controls, processes and practices designed to protect systems, computers, software, data and networks from attack, damage or unauthorized access may become a priority to ensure the ongoing success and security of the business. As cyber threats continue to evolve, the Company may be required to expend additional resources to continue to modify or enhance protective measures or to investigate and remediate any security vulnerabilities.

The Company may be subject to risks related to security breaches.

Given the nature of the Company’s product and its lack of legal availability outside of channels approved by the Government of the United States, as well as the concentration of inventory in its facilities, despite meeting or exceeding all legislative security requirements, there remains a risk of shrinkage as well as theft. A security breach at the Company’s facilities could expose the Company to additional liability and to potentially costly litigation, increase expenses relating to the resolution and future prevention of these breaches and may deter potential patients from choosing the Company’s products.

In addition, the Company collects and stores personal information about its patients and is responsible for protecting that information from privacy breaches. A privacy breach may occur through procedural or process failure, information technology malfunction, or deliberate unauthorized intrusions. Theft of data for competitive purposes, particularly patient lists and preferences, is an ongoing risk whether perpetrated via employee collusion or negligence or through deliberate cyber-attack. Any such theft or privacy breach would have a material adverse effect on the Company’s business, financial condition and results of operations or prospects.

The Company may be subject to risks related to high bonding and insurance coverage.

There is a risk that a greater number of State regulatory agencies will begin requiring entities engaged in certain aspects of the business or industry of legal marijuana to post a bond or significant fees when applying, for example, for a dispensary license or renewal as a guarantee of payment of sales and franchise tax. The Company is not able to quantify at this time the potential scope for such bonds or fees in the States in which it currently or may in the future operate. Any bonds or fees of material amounts could have a negative impact on the ultimate success of the Company’s business.

The Company’s business is subject to a number of risks and hazards generally, including adverse environmental conditions, accidents, labour disputes and changes in the regulatory environment. Such occurrences could result in damage to assets, personal injury or death, environmental damage, delays in operations, monetary losses and possible legal liability.

Although the Company maintains insurance to protect against certain risks in such amounts as it considers to be reasonable, its insurance does not cover all the potential risks associated with its operations. The Company may also be unable to maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. Moreover, insurance against risks such as environmental pollution or other hazards encountered in the operations of the Company is not generally available on acceptable terms. The Company might also become subject to liability for pollution or other hazards which may not be insured against or which the Company may elect not to insure against because of premium costs or other reasons. Losses from these events may cause the Company to incur significant costs that could have a material adverse effect upon its business, results of operations, financial condition or prospects.

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The Company may be subject to transportation risks.

The Company’s business involves, both directly and indirectly, the production, sale and distribution of cannabis products. Due to the perishable nature of such products, the Company depends on fast and efficient direct and third-party transportation services to distribute its product. Any prolonged disruption of third-party transportation services could have an adverse effect on the Company. Rising costs associated with the third-party transportation services used by the Company to ship its products may also adversely impact the business of the Company.

The Company’s share price may be vulnerable to rising energy costs.

The Company’s business involves the production of cannabis products which consumes considerable energy, making the Company vulnerable to rising energy costs. Rising or volatile energy costs may adversely impact the business of the Company and its ability to operate profitably.

The Company is subject to risks inherent in an agricultural business.

The Company’s business involves the growing of cannabis, which is an agricultural product. As such, the business may be subject to the risks inherent in the agricultural business, such as insects, plant diseases and similar agricultural risks. Even when grown indoors under climate-controlled conditions monitored by trained personnel, there can be no assurance that natural elements, such as insects and plant diseases, will not have a material adverse effect on the production of cannabis products and on the Company’s business, financial condition, results of operations or prospects of the Company.

Management of growth may prove to be difficult.

The Company may be subject to growth-related risks including capacity constraints and pressure on its internal systems and controls. The ability of the Company to manage growth effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base. The inability of the Company to deal with this growth may result in a material adverse effect on the Company’s business, financial condition, results of operations or prospects.

The Company may be subject to the risks of leverage.

It is anticipated that the Company will continue to utilize leverage in connection with the Company’s investments in the form of secured or unsecured indebtedness. Although the Company will seek to use leverage in a manner it believes is prudent, such leverage will increase the exposure of an investment to adverse economic factors such as downturns in the economy or deterioration in the condition of the investment. If the Company defaults on secured indebtedness, the lender may foreclose and the Company could lose its entire investment in the security of such loan. If the Company defaults on unsecured indebtedness, the terms of the loan may require the Company to repay the principal amount of the loan and any interest accrued thereon in addition to heavy penalties that may be imposed. Because the Company may engage in financings where several investments are cross-collateralized, multiple investments may be subject to the risk of loss. As a result, the Company could lose its interest in performing investments in the event such investments are cross-collateralized with poorly performing or nonperforming investments.

In addition to leveraging the Company’s investments, the Company may borrow funds in its own name for various purposes and may withhold or apply from distributions amounts necessary to repay such borrowings. The interest expense and such other costs incurred in connection with such borrowings may not be recovered by income from investments purchased by the Company. If investments fail to cover the cost of such borrowings, the value of the investments held by the Company would decrease faster than if there had been no such borrowings. Additionally, if the investments fail to perform to expectation, the interests of investors in the Company could be subordinated to such leverage, which will compound any such adverse consequences.

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The Company may undertake future acquisitions or dispositions, which bear inherent risks.

Material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) potential disruption of the Company’s ongoing business; (ii) distraction of management; (iii) the Company may become more financially leveraged; (iv) the anticipated benefits and cost savings of those transactions may not be realized fully or at all or may take longer to realize than expected; (v) increased scope and complexity of the Company’s operations; and (vi) loss or reduction of control over certain of the Company’s assets. Additionally, the Company may issue additional Equity Shares in connection with such transactions, which would dilute a Company Shareholder’s holdings in the Company or indirect holdings in the Company.

The presence of one or more material liabilities of an acquired company that are unknown to the Company at the time of acquisition could have a material adverse effect on the business, results of operations, prospects and financial condition of the Company. A strategic transaction may result in a significant change in the nature of the Company’s business, operations and strategy. In addition, the Company may encounter unforeseen obstacles or costs in implementing a strategic transaction or integrating any acquired business into the Company’s operations.

Risks related to the difficulty of attracting and retaining personnel.

The Company’s success depends to a significant degree upon its ability to attract, retain and motivate highly skilled and qualified personnel. Failure to attract and retain necessary technical personnel, sales and marketing personnel and skilled management could adversely affect the Company’s business. If the Company fails to attract, train and retain sufficient numbers of these highly qualified people, its prospects, business, financial condition and results of operations will be materially and adversely affected.

Co-investment risk in terms of control over the Company’s investments.

The Company may co-invest in one or more investments with certain strategic investors and/or other third parties through joint ventures or other entities, which parties in certain cases may have different interests or superior rights to those of the Company. Although it is our intent to retain control and other superior rights over the Company’s investments, under certain circumstances it may be possible that the Company relinquishes such rights over certain of its investments and, therefore, may have a limited ability to protect its position therein. In addition, even when the Company does maintain a control position with respect to its investments, the Company’s investments may be subject to typical risks associated with third-party involvement, including the possibility that a third-party may have financial difficulties resulting in a negative impact on such investment, may have economic or business interests or goals that are inconsistent with those of the Company, or may be in a position to take (or block) action in a manner contrary to the Company’s objectives. The Company may also, in certain circumstances, be liable for the actions of its third-party partners or co-investors. Co-investments by third parties may or may not be on substantially the same terms and conditions as the Company, and such different terms may be disadvantageous to the Company.

Liabilities arising from the Company’s website accessibility.

Internet websites are visible by people everywhere, not just in jurisdictions where the activities described therein are considered legal. As a result, to the extent the Company sells services or products via web-based links targeting only jurisdictions in which such sales or services are compliant with State law, the Company may face legal action in other jurisdictions which are not the intended object of any of the Company’s marketing efforts for engaging in any web-based activity that results in sales into such jurisdictions deemed illegal under applicable laws.

Certain remedies may be limited to the Company.

Pursuant to its governing documents, the Company and the shareholders of the Company may be prevented from recovering damages for alleged errors or omissions made by the members of the Board and its officers. The Company’s governing documents also provide that the Company will, to the fullest extent permitted by law, indemnify members of the Board and its officers for certain liabilities incurred by them by virtue of their acts on behalf of the Company.

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The Company may have difficulty enforcing judgments and effecting service of process on directors and officers.

The directors and officers of the Company reside outside of Canada. Most or all of the assets of such persons are located outside of Canada. Therefore, it may not be possible for the Company’s shareholders to collect or to enforce judgments obtained in Canadian courts predicated upon the civil liability provisions of applicable Canadian securities laws against such persons. Moreover, it may not be possible for Company shareholders to effect service of process within Canada upon such persons.

Past performance is not indicative of future results.

The prior investment and operational performance of the Company is not indicative of the future operating results of the Company. There can be no assurance that the historical operating results achieved by the Company will be achieved, and the Company’s performance may be materially different.

Financial projections may prove materially inaccurate or incorrect.

Any Company financial estimates, projections and other forward-looking information or statements included in this AIF were prepared by the Company without the benefit of reliable historical industry information or other information customarily used in preparing such estimates, projections and other forward-looking information or statements. Such forward-looking information or statements are based on assumptions of future events that may or may not occur, which assumptions may not be disclosed in this AIF. Shareholders should inquire of the Company and become familiar with the assumptions underlying any estimates, projections or other forward-looking information or statements. Projections are inherently subject to varying degrees of uncertainty and their achievability depends on the timing and probability of a complex series of future events. There is no assurance that the assumptions upon which these projections are based will be realized. Actual results may differ materially from projected results for a number of reasons including increases in operation expenses, changes or shifts in regulatory rules, undiscovered and unanticipated adverse industry and economic conditions, and unanticipated competition. Accordingly, shareholders should not rely on any projections to indicate the actual results the Company might achieve.

The Company may not pay dividends.

It is not intended that the Company will pay any dividends on the Equity Shares in the foreseeable future. Dividends paid by the Company would be subject to tax and, potentially, withholdings.

Market and Economy Risks

The Company may be vulnerable to currency exchange fluctuations.

Due to the Company’s present operations in the United States, and its intention to continue future operations outside Canada, the Company is exposed to significant currency fluctuations. Recent events in the global financial markets have been coupled with increased volatility in the currency markets. All or substantially all of the Company’s revenue is earned in U.S. dollars, but a portion of its operating expenses are incurred in Canadian dollars. Fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar may have a material adverse effect on the Company’s business, financial position or results of operations or prospects.

The Company may be subject to market price volatility risks.

The market price of the Equity Shares may be subject to wide fluctuations in response to many factors, including variations in the operating results of the Company, divergence in financial results from analysts’ expectations, changes in earnings estimates by stock market analysts, changes in the business prospects for the Company, general economic conditions, legislative changes, and other events and factors outside of the Company’s control. In addition, stock markets have from time to time experienced extreme price and volume fluctuations, which, as well as general economic and political conditions, could adversely affect the market price for the Equity Shares.

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There may be restrictions on the market for the Equity Shares.

Notwithstanding that the Equity Shares are listed on the Neo Exchange, various regulatory regimes in the United States forbid the transfer of such Equity Shares in quantities that exceed published thresholds without receiving advanced approval of the State regulators. Failure to obtain approval may result in the Company’s licenses in that State being revoked.

There may be a limited market for the Equity Shares.

Notwithstanding that the Equity Shares are listed on the Neo Exchange, there can be no assurance that an active and liquid market for such Equity Shares will be maintained and a Company Shareholder may find it difficult to resell any securities of the Company.

Subsequent offerings will result in dilution to holders of the Equity Shares.

The Company may sell additional equity securities in subsequent offerings (including through the sale of securities convertible into Equity Shares or other equity securities) and may issue additional Equity Shares or other securities of the Company or other equity securities to finance acquisitions, operations, or other projects. The size of future issuances of Equity Shares or other equity securities (or of securities convertible into Equity Shares or other equity securities) nor the effect, if any, that future issuances and sales of such securities will have on the market price of the Equity Shares can be predicted at this time. Any transaction involving the issuance of previously authorized but unissued Equity Shares, securities convertible into Equity Shares, or other equity securities and convertible debt securities of the Company would result in dilution to holders of Equity Shares. Exercises of issued and outstanding Warrants may also result in dilution to the holders of Equity Shares.

Increased levels of volatility or a rapid destabilization of global economic conditions could have a material adverse effect on the business and operations of the Company.

Global financial conditions have been characterized by increased volatility, with numerous financial institutions having either gone into bankruptcy or having to be rescued by government authorities, as well as a result of the COVID-19 virus pandemic and the Russian invasion of Ukraine. Global financial conditions could suddenly and rapidly destabilize in response to existing and future events, including the COVID-19 virus pandemic or the Russian invasion of Ukraine, as government authorities may have limited resources to respond to existing or future crises. Global capital markets have continued to display increased volatility in response to global events, including the COVID-19 virus pandemic and the Russian invasion of Ukraine. Future crises may be precipitated by any number of causes, including natural disasters, epidemics (such as the COVID-19 virus pandemic), geopolitical instability and war (such as the Russian invasion of Ukraine), changes to energy prices or sovereign defaults. Any sudden or rapid destabilization of global economic conditions could negatively impact the Company’s ability to obtain equity or debt financing or make other suitable arrangements to finance its operations. If increased levels of volatility continue or in the event of a rapid destabilization of global economic conditions, including as a result of the COVID-19 virus pandemic or the Russian invasion of Ukraine, it may result in a material adverse effect on the Company and the trading price of the Company’s securities could be adversely affected.

Environmental Risks

The Company may be subject to significant environmental regulations and risks.

The Company’s operations are subject to environmental regulation in the various jurisdictions in which it operates. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors (or the equivalent thereof) and employees. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company’s operations.

Government approvals and permits are currently, and may in the future, be required in connection with the Company’s operations. To the extent such approvals are required and not obtained, the Company may be curtailed or prohibited from its production of medical marijuana or from proceeding with the development of its operations as currently contemplated.

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Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The Company may be required to compensate those suffering loss or damage by reason of its operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.

Amendments to current laws, regulations and permits governing the production of medical marijuana, or more stringent implementation thereof, could have a material adverse impact on the Company and cause increases in expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development.

The Company may be subject to unknown environmental risks.

There can be no assurance that the Company will not encounter hazardous conditions at the facilities where it operates its businesses, such as asbestos or lead, in excess of expectations that may delay the development of its businesses. Upon encountering a hazardous condition, work at the facilities of the Company may be suspended. The presence of other hazardous conditions may require significant expenditure of the Company’s resources to correct the condition. Such conditions could have a material impact on the investment returns of the Company.

Tax Risks

U.S. and Canadian tax residence of the Company.

The Company is treated as a U.S. corporation for U.S. federal income tax purposes under section 7874 of the Code. and therefore subject to U.S. federal income tax on its worldwide income. For Canadian tax purposes, however, the Company is treated as a Canadian resident company (as defined in the Income Tax Act (Canada) (“Tax Act”)) for Canadian federal income tax purposes. Consequently, the Company is subject to income tax both in Canada and the U.S.

The deduction of certain expenses of the Company may be restricted.

Section 280E of the Code generally prohibits businesses from deducting or claiming tax credits with respect to expenses paid or incurred in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of Schedule I and II of the Substances Act) which is prohibited by U.S. federal law or the law of any state in which such trade or business is conducted. Section 280E of the Code currently applies to businesses operating in the cannabis industry, irrespective of whether such businesses are licensed and operating in accordance with applicable state laws. The application of section 280E of the Code generally causes such businesses to pay higher effective U.S. federal income tax rates than similar businesses in other industries due to the loss of certain deductions and credits. The impact of section 280E of the Code on the effective tax rate of a cannabis business generally depends on how large the ratio of non-deductible expenses is to the business’s total revenues. The Company is currently subject to section 280E of the Code and consequently, section 280E of the Code may adversely affect the Company’s profitability and, in fact, may cause the Company to operate at a loss. While recent legislative proposals, if enacted into law, could eliminate or diminish the application of section 280E of the Code to cannabis businesses, the enactment of any such law is uncertain and until any changes in federal law, it is anticipated that the Company will continue to be subject to section 280E of the Code.

Dividends paid by the Company may be subject to withholding tax.

It is unlikely that the Company will pay any dividends on the Equity Shares in the foreseeable future. However, dividends received by holders who are residents of Canada for purposes of the Tax Act will be subject to U.S. withholding tax. Any such dividends may not qualify for a reduced rate of withholding tax under the Canada-U.S. Tax Convention (as defined below) as amended. In addition, a foreign tax credit or a deduction in respect of foreign taxes may not be available.

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Dividends received by U.S. Holders (as defined below) will not be subject to U.S. withholding tax but will be subject to Canadian withholding tax. Dividends paid by the Company will be characterized as U.S. source income for purposes of the foreign tax credit rules under the Code. Accordingly, U.S. shareholders generally will not be able to claim a credit for any Canadian tax withheld unless, depending on the circumstances, they have an excess foreign tax credit limitation due to other foreign source income that is subject to a low or zero rate of foreign tax.

Dividends received by shareholders that are neither Canadian nor U.S. shareholders will be subject to U.S. withholding tax and will also be subject to Canadian withholding tax. These dividends may not qualify for a reduced rate of U.S. withholding tax under any income tax treaty otherwise applicable to a shareholder of the Company, subject to examination of the relevant treaty. These dividends may however qualify for a reduced rate of Canadian withholding tax under any income tax treaty otherwise applicable to a shareholder of the Company, subject to examination of the relevant treaty.

The Company may be subject to net operating loss limitations.

Section 382 of the Code contains rules that limit for U.S. federal income tax purposes the ability of a corporation that undergoes an “ownership change” to utilize its net operating losses (and certain other tax attributes) existing as of the date of such ownership change. Under these rules, a corporation is treated as having had an “ownership change” if there is more than a 50% increase in stock ownership by one or more “5 percent shareholders,” within the meaning of section 382 of the Code, during a rolling three-year period. The Business Combination resulted in an ownership change for purposes of section 382 of the Code. However, the Company currently does not have any material net operating loss carry forwards or other tax attribute carry forwards, that would be subject to limitation under section 382 of the Code.

Risk of U.S. tax classification of the Company as a U.S. Real Property Holding Company.

The Company is treated as a U.S. domestic corporation for U.S. federal income tax purposes under section 7874(b) of the Code. As a result, non-U.S. shareholders may be subject to U.S. federal income tax upon a disposition of their Equity Shares depending on whether the Company is classified as a United States real property holding corporation (a “USRPHC”) under the Code. It is not expected that the Company will be a USRPHC, but we do not intend to seek a ruling request or other written guidance of its status as a non-USRPHC from the IRS. If the Company were to be considered a USRPHC, Non-U.S. shareholders may be subject to U.S. federal income tax on any gain associated with the disposition of their Equity Shares.

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DIVIDENDS AND DISTRIBUTIONS

The Company has not paid dividends and current intends to reinvest any future earnings to finance the development and growth of its business. As a result, the Company does not intend to pay dividends on the Equity Shares in the foreseeable future. Any future determination to pay distributions will be at the discretion of the Board and will depend on the financial condition, business environment, operating results, capital requirements, any contractual restrictions on the payment of distributions and any other factors that the Board deems relevant. The Loan Agreement restricts the Company from declaring or paying dividends. See “General Development of the Business – Financing Transactions – Senior Secured Term Loan”. The Exchange Rights Agreement (as defined below) restricts the Company from declaring or paying dividends on the Equity Shares unless economically equivalent dividends are declared and paid on the Exchangeable Shares, subject to applicable law. See “Description of Capital Structure – Exchangeable Shares – Exchange Rights Agreement”.

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DESCRIPTION OF CAPITAL STRUCTURE

The following is a summary of the rights, privileges, restrictions and conditions attaching to the outstanding securities of the Company. The Company previously applied to and was granted by the Canadian provincial securities regulatory authorities an exemption from the provisions of National Instrument 41-101 – General Prospectus Requirements relating to restricted securities. The Company also previously applied for and was granted exemptive relief from the requirements under Part 10 of NI 51-102 - Continuous Disclosure Obligations, and from the requirements under Part 2 of OSC Rule 56-501 – Restricted Shares. The relief was granted pursuant to an order dated June 29, 2021.

Authorized Share Capital

The authorized capital of the Company is comprised of an unlimited number of (i) Subordinate Voting Shares, (ii) Restricted Voting Shares, (iii) Limited Voting Shares, (iv) Multiple Voting Shares and (v) preferred shares (the “Preferred Shares”). As of December 31, 2021, there were 38,563,405 Equity Shares, 4,754,979 Multiple Voting Shares and no Preferred Shares outstanding.

In addition, as of December 31, 2021, there were 18,256,784 Exchangeable Shares (as defined below) issued and outstanding in the capital of MPB Acquisition Corp. The Company also had an aggregate of 30,489,500 Warrants, 2,087,784 stock options and 3,230,948 restricted share units outstanding, convertible or exercisable in each case to acquire the same number of Equity Shares as of December 31, 2021. In addition, the Company has 4,928,578 unlisted Equity Share purchase warrants outstanding that it assumed in connection with the Business Combination.

The Preferred Shares are issuable in series with such terms as are determined by the Board from time to time. It is not intended that such Preferred Shares will be used for anti-takeover purposes.

The Equity Shares are “restricted securities” within the meaning of such term under applicable Canadian securities laws. The Company has complied with the requirements of Part 12 of National Instrument 41-101 – General Prospectus Requirements (“NI 41-101”) to be able to file a prospectus under which the Equity Shares or securities that are, directly or indirectly, convertible into, or exercisable or exchangeable for, the Equity Shares are distributed, as the Company received the requisite prior majority approval of shareholders of the Company, at the special meeting of shareholders held on June 2, 2021, in accordance with applicable law, including Section 12.3 of NI 41-101, to, among other things, effect the Share Terms Amendment. The Share Terms Amendment constituted a “restricted security reorganization” within the meaning of such term under applicable Canadian securities laws.

As of December 31, 2021, the Equity Shares represent approximately 19.1% of the voting rights attached to outstanding securities of the Company and the Multiple Voting Shares represent approximately 80.9% of the voting rights attached to outstanding securities of the Company.

The following is a summary of the rights, privileges, restrictions and conditions attached to the Equity Shares, Multiple Voting Shares and Exchangeable Shares but does not purport to be complete. Reference should be made to the Articles and the full text of their provisions for a complete description thereof.

Equity Shares

The holders of each class of Equity Shares are entitled to receive notice of, to attend (if applicable, virtually) and to vote at all meetings of shareholders of the Company, except that they are not able to vote (but are entitled to receive notice of, to attend (if applicable, virtually) and to speak) at those meetings at which the holders of a specific class are entitled to vote separately as a class under the BCBCA, and except that holders of Limited Voting Shares are not entitled to vote for the election of directors. The Subordinate Voting Shares and Restricted Voting Shares carry one vote per share on all matters. The Limited Voting Shares carry one vote per share on all matters except the election of directors, as the holders of Limited Voting Shares do not have any entitlement to vote in respect of the election for directors of the Company.

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Multiple Voting Shares

The holders of Multiple Voting Shares are entitled to receive notice of, to attend (if applicable, virtually) and to vote at all meetings of shareholders of the Company, except that they are not able to vote (but are entitled to receive notice of, to attend (if applicable, virtually) and to speak) at those meetings at which the holders of a specific class are entitled to vote separately as a class under the BCBCA. The Multiple Voting Shares carry 50 votes per share, voting together with the other classes of Equity Shares as if they were a single class except as otherwise provided in the Articles and except where otherwise required by law or stock exchange requirements. The Multiple Voting Shares are subject to a three (3)-year sunset period expiring on June 29, 2024.

The holders of Multiple Voting Shares shall be entitled to vote as a separate class, in addition to any other vote of shareholders that may be required, in respect of any alteration, repeal or amendment of the Articles (other than in respect of the creation of a series of Preferred Shares) which would adversely affect the rights of the holders of the Multiple Voting Shares, and such alteration, repeal or amendment shall not be effective unless a resolution in respect thereof is approved by a majority of the votes cast by holders of the Multiple Voting Shares.

In the case of liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders for the purpose of winding up its affairs, the holders of Multiple Voting Shares shall be entitled, subject to the prior rights of the holders of any shares of the Company ranking in priority to the Multiple Voting Shares (including any liquidation preference on any issued and outstanding Preferred Shares ranking in priority to the Multiple Voting Shares), to receive their redemption price of $0.001 per Multiple Voting Share (rounded down to the nearest cent taking into account all Multiple Voting Shares being liquidated at the relevant time).

In addition to the terms of the Multiple Voting Shares in the Articles of the Company, pursuant to the terms of a coattail agreement dated June 29, 2021, entered into among the Company, the Company Founders and Odyssey Trust Company, as trustee to oversee the implementation of the agreement on behalf of the holders of Equity Shares (the “Coattail Agreement”), there are restrictions on the sale of Multiple Voting Shares other than to a controlled affiliate conditional upon such controlled affiliate becoming a party to the Coattail Agreement. A holder of Multiple Voting Shares is also restricted from, directly or indirectly, granting a security interest, by way of pledge, hypothecation or otherwise, in any Multiple Voting Shares. The Coattail Agreement provides for certain rights to holders of Equity Shares representing not less than 10% of the Equity Shares to require the trustee to take action in the event of a breach or intended breach of the transfer and sale restrictions.

Exchangeable Shares

Pursuant to the Business Combination, the sellers of GH Group received, exchangeable common stock of MPB Acquisition Corp. (“Exchangeable Shares”) as part of their consideration.

The Exchangeable Shares entitle their holders to rights that are comparable (without taking into account tax consequences) to those rights attaching to the Equity Shares, except that (i) the Exchangeable Shares have 1.1 votes per share (this will expire after one (1) year, after which they will have one vote per share), and (ii) the aggregate voting power of the Exchangeable Shares will not exceed 49.9% of the total voting power of all classes of shares of MPB Acquisition Corp. Until their Exchangeable Shares are exchanged for the applicable Equity Shares pursuant to the Exchange Rights Agreement (as defined below) or the provisions of the Exchangeable Shares, holders of Exchangeable Shares do not have the right to vote at the Company’s shareholder meetings, though they have voting rights in MPB Acquisition Corp., including at meetings of the shareholders of MPB Acquisition Corp. with respect to altering the rights of holders of any of the Exchangeable Shares, or if MPB Acquisition Corp. decides to take certain actions without fully protecting the holders of any of the Exchangeable Shares, or as otherwise required by law. The Exchangeable Shares are exchangeable at any time, on a one-for-one basis, for Equity Shares, at the option of the holder, subject to certain contractual lockup restrictions.

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Exchange Rights Agreement

The Company entered into an exchange rights agreement dated June 29, 2021, as amended, with MPB Acquisition Corp. and the representative of the sellers of GH Group (being Kyle Kazan) on behalf of the holders of the Exchangeable Shares (the “Exchange Rights Agreement”), whereby the Company agreed to make certain covenants in favour of the sellers of GH Group to protect their rights as holders of Exchangeable Shares. The Company agreed to reserve the necessary amount of Equity Shares for issuance upon exchange of the Exchangeable Shares, and ensure such shares remain protected from pre-emptive and other rights. Upon notice to the Company and MPB Acquisition Corp. and as required under the provisions of the Exchangeable Shares, the Company will issue such number of Equity Shares to a holder of Exchangeable Shares in exchange for the Exchangeable Shares of such holder on a one for one basis, subject to the terms specified in the Exchange Rights Agreement. Additionally, the Company has an overriding liquidation call right under the Exchange Rights Agreement to purchase all, but not less than all, of the Exchangeable Shares from the holders thereof upon a proposed liquidation, dissolution or winding-up of MPB Acquisition Corp., as well as a redemption call right and retraction call right on the Exchangeable Shares, in each case for the consideration set forth in such agreements. The Exchange Rights Agreement restricts the Company from declaring or paying dividends on the Equity Shares unless economically equivalent dividends are declared and paid on the Exchangeable Shares, subject to applicable law. See “Material Contracts”.

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MARKET FOR SECURITIES

Trading Price and Volume

The Equity Shares and Warrants are listed and posted for trading on the Neo Exchange under the symbol “GLAS.A.U” and “GLAS.WT.U”, respectively. The Equity Shares and Warrants also trade on the OTCQX in the United States under the symbol “GLASF” and “GHBWF”, respectively.

The Equity Shares and Warrants commenced trading on the Neo Exchange effective July 5, 2021, following completion of the Business Combination.

The following indicates the high and low values and volume with respect to trading activity for the Equity Shares and Warrants on the Neo Exchange on a monthly basis from the commencement of trading on July 5, 2021 through the Company’s financial year ended December 31, 2021.

Equity Shares


Month	High (US$)	Low (US$)	Volume
2021
July	11.90	5.14	1,856,330
August	8.29	4.16	1,817,749
September	6.90	4.11	1,913,815
October	5.08	4.20	921,549
November	6.25	4.18	1,221,779
December	4.44	3.50	798,747

The price of the Equity Shares as quoted by the Neo Exchange at the close of business on March 30, 2022 was US$5.09.

Warrants


Month	High (US$)	Low (US$)	Volume
2021
July	2.99	1.10	1,432,503
August	2.27	1.19	927,805
September	1.80	1.19	152,757
October	1.60	1.19	308,631
November	1.80	1.05	416,484
December	1.51	1.19	86,113

The price of the Warrants as quoted by the Neo Exchange at the close of business on March 30, 2022 was US$5.09.

Prior Sales

The only classes of securities of the Company that are not listed is the Preferred Shares and the Multiple Voting Shares, of which no Preferred Shares have been issued and the following Multiple Voting Shares were issued on completion of the Business Combination on June 29, 2021:


		Issue Price Per
	Type of Security	Security	Number of
Date	Issued	(US$)	Securities Issued
June 29, 2021	Multiple Voting Shares	$0.0001	4,754,979

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SECURITIES SUBJECT TO CONTRACTUAL RESTRICTION ON TRANSFER

The following sets out the number of securities of the Company that are subject to a contractual restriction on transfer. The Multiple Voting Shares are, on their terms and pursuant to the terms of the Coattail Agreement, non-transferable except to controlled affiliates. To the knowledge of the Company, no other securities of the Company are held in escrow or subject to contractual restrictions on transfer. All contractual restrictions on transfer are governed by agreements between the applicable securityholders and the Company.


	Number of Securities
	Subject to Contractual
Designation of Class	Restriction	Percentage of Class⁽¹⁾
Subordinate, Restricted or Limited Voting Shares⁽²⁾	3,250,000	8.4	%
Subordinate, Restricted or Limited Voting Shares issuable under Exchangeable Shares⁽³⁾	7,282,477	39.9	%
Multiple Voting Shares⁽⁴⁾	4,754,979	100	%

Notes:

(1)

As of December 31, 2021.

(2)

Subject to the terms of a lockup arrangement, pursuant to which these Equity Shares will be released on September 15, 2022. See “General Development of the Business – Acquisitions – SoCal Greenhouse Acquisition”.

(3)

Subject to the terms of a lock-up agreement, pursuant to which these Exchangeable Shares (and Equity Shares issuable in exchange therefor) will be released on June 29, 2022.See “Description of Capital Structure – Exchangeable Shares” and the disclosure below regarding the “Lockup Agreement”.

(4)

See “Description of Capital Structure – Multiple Voting Shares”.

Pursuant to the investor rights agreement (the “Investor Rights Agreement”) entered into on April 8, 2021, as amended June 18, 2021, between the Company and Mercer Park’s founders (being Mercer, Charles Miles and Sean Goodrich) (“Mercer Park Founders”), none of such founders’ Equity Shares subject to forfeiture thereunder are transferable until the expiry of the applicable forfeiture periods set forth in the Investor Rights Agreement. See “Material Contracts – Investor Rights Agreement”.

Pursuant the Business Combination, the Company Founders and the Mercer Park Founders entered into a lockup agreement on June 29, 2021, pursuant to which (i) 50% of the Exchangeable Shares issued to the Company Founders were subject to a six (6) month lock-up period that ended December 29, 2021, and the remaining 50% of the Exchangeable Shares issued to the Company Founders are subject to a 12-month lock-up period which will end on June 29, 2022, and (ii) the Equity Shares issued to the Mercer Park Founders are subject to, in addition to certain forfeiture-based restrictions, the same time-based lock-up restrictions (collectively, the “Lockup Agreement”). See “Material Contracts”.

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DIRECTORS AND OFFICERS

The following table sets forth, for each of the Company’s directors and executive officers, the person’s name, state and country of residence, position(s) held with the Company and principal occupation (s) for the five preceding years.

Name and State and Country of Residence	Position(s) with the Company	Principal Occupation(s) in Last Five Years
Kyle Kazan California, United States	Chairman and Chief Executive Officer (since June 2021)	Chief Executive Officer, GH Group (2018 – June 2021) Founder and Chairman, Beach Front Property Management (1999 – present)
Graham Farrar California, United States	President and Director (since June 2021)	President, GH Group (2018 – June 2021) CEO, Mission Health Associates, dba Glass House Farms (2015 – 2020)
Robert (“Jamie”) Mendola⁽²⁾ California, United States	Director (since June 2021)	Head of Strategy and M&A, Mercer Park L.P. Chief Executive Officer and Portfolio Manager, Pacific Grove Capital (2014 – 2019)
Humble Lukanga⁽¹⁾ California, United States	Director (since June 2021)	Chief Executive Officer and Founder, Life Line Financial Group
Jocelyn Rosenwald⁽¹⁾⁽²⁾ California, United States	Director (since June 2021)	Director of Acquisitions and Asset Management, Beach Front Property Management
George Raveling⁽²⁾ California, United States	Director (since June 2021)	Self-Employed Consultant, Coaching for Success
Hector De La Torre⁽¹⁾ California, United States	Director (since June 2021)	Director, California Air Resources Board
Robert Hoban⁽²⁾ Colorado, United States	Director (since June 2021)	President of Hoban Law Group
Daryl Kato California, United States	Chief Operating Officer (since June 2021)	Chief Operating Officer, GH Group (2019 – June 2021) Chief Financial Officer, Nissin Foods (USA) Co., Inc. (2015 – 2019)
Mark Vendetti California, United States	Chief Financial Officer (since September 2021)	Chief Financial Officer, Fiore Management, LLC (2019 – 2021) Senior Vice President, Corporate Finance, Mattel, Inc. (2018 – 2019)
Jamin Horn California, United States	General Counsel and Corporate Secretary (since June 2021)	General Counsel and Corporate Secretary, GH Group (2020 – June 2021) Self- Employed, Attorney (2019 – 2020) Associate Counsel and VP Corporate, FLRish, Inc. (2017 – 2019)

Notes:

(1)	Member of the Audit Committee of the Board (the “Audit Committee”). Mr. Lukanga is Chair.

(2)	Member of the Compensation, Nomination and Corporate Governance Committee of the Board. Mr. Hoban is Chair.

The directors of the Company are elected by the shareholders of the Company at each annual general meeting and expected to hold office until the next annual general meeting at which time they may be re-elected or replaced, unless they resign or are removed by the shareholders of the Company prior thereto.

Pursuant to the Investor Rights Agreement, the Mercer Park Founders have, until June 29, 2024, the right to put forward one nominee for the Board for as long as the Mercer Park Founders continue to hold at least 50% of the respective Sponsor Shares (as defined herein) owned by each of them, respectively, at the closing of the Business Combination (assuming Sponsor Shares subject to forfeiture continue to be owned at the relevant time). See “Material Contracts – Investor Rights Agreement”.

The directors and executive officers of the Company, as a group, beneficially own or exercise control or direction over, directly or indirectly (i) 746,198 Equity Shares and (ii) 3,782,591 Multiple Voting Shares, representing approximately 68.72% of the voting rights attached to all of the Company’s voting securities as of December 31, 2021.

Biographies

The following are brief profiles of the directors and executive officers of the Company.

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Kyle Kazan, Chairman and Chief Executive Officer

Kyle Kazan is a seasoned investor and expert manager of private equity funds with over two decades of domestic and international experience, and has a track record of growing de novo companies to industry leadership in the fields of fund/asset management, property management and insurance. In 1991, Mr. Kazan began investing in real estate, eventually launching a total of 23 private equity funds. He also served on the boards of multiple international investment and hedge funds before pivoting in 2016 to the regulated cannabis industry, where he closed four funds and consolidated them to form the Company. Since his early service as a special education teacher and law enforcement officer, Mr. Kazan has been a vocal advocate for police reform and ending the War on Drugs and its injustices, speaking on behalf of Law Enforcement Against Prohibition (LEAP) and appearing in many media outlets ranging from CNN to Fox. Mr. Kazan is a frequent guest professor at NYU Stern School of Business, USC Marshall Business School, and UCLA Anderson School of Management, and he is a graduate of the University of Southern California, where he played varsity basketball for Hall of Fame Coach George Raveling.

Graham Farrar, Director and President

Graham Farrar is a serial entrepreneur who began his career as part of the original team at Software.com, taking the company public in 1999. Shortly thereafter, he served on the board of Seacology and was part of the founding team at Sonos, where he was involved with product design, development, sales, and customer support. After Sonos, Mr. Farrar served as a board member for Heal the Ocean, was a founder and partner of e-book publishers iStoryTime Inc. and zuuka, and founded a Santa Barbara luxury rental company. He first ventured into the regulated cannabis industry by founding Elite Garden Wholesale, an agriculture technology company focused on developing products for the hydroponics industry. Mr. Farrar currently sits on the board of directors of The Santa Barbara Bowl Foundation.

Robert (“Jamie”) Mendola, Director

Jamie Mendola is the Head of Strategy and M&A at Mercer Park LP and AYR Wellness, with 20 years of experience as a private and public equity investor. He is the Founder and CEO of Pacific Grove Capital, a long-short hedge fund which also launched one of the earliest dedicated SPAC funds in the United States. Mr. Mendola was also a former partner at Scout Capital, a multi-billion dollar hedge fund and had previous experience at J.P. Morgan, JLL Partners and Watershed Capital. Mr. Mendola has a B.S. from Binghamton university and M.B.A. from Stanford’s Graduate School of Business.

Humble Lukanga, Director

Humble Lukanga is the Founder and Chief Executive Officer of Life Line Financial Group, a wealth management firm servicing some of the best-known performers and leaders in business, sports and entertainment. He is also the Trustee of the University of New Mexico and a board member of several companies and foundations. Mr. Lukanga was named to The Hollywood Reporter’s Top Business Managers list for 3 years running and New Mexico Business Weekly’s “Top 40 Under 40”. He has a B.A. and M.B.A. from the University of New Mexico, is a certified CFP and has a Personal Finance Planning degree from UCLA.

Jocelyn Rosenwald, Director

Jocelyn Rosenwald began her career as a Teach For America Corps member in New York City. In 2011, she became a founding teacher at KIPP Star Elementary School and quickly became a teacher leader. She began her career in real estate investment in 2013 with Beach Front Properties LLC and managed a $500 million portfolio of opportunistic real estate investments. In November of 2016, Ms. Rosenwald began supervising the operations of 4 funds in the regulated cannabis industry which would eventually be consolidated to form the Company. She holds a B.A. from the University of Pennsylvania, an M.A. in Education from Hunter College, and an M.B.A. from UCLA Anderson School of Business.

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George Raveling, Director

George Raveling was the first African American basketball coach in the Pac-8 (now Pac-12), the head coach at Washington State University, University of Iowa and USC, and the assistant coach of the medal-winning 1984 and 1988 U.S. Olympic teams. He was also a former Director of International Basketball at Nike and a former commentator for Fox Sports and CBS. Mr. Raveling was inducted into Naismith Memorial Basketball Hall of Fame, National Collegiate Hall of Fame, and was a recipient of John W. Bunn Lifetime Achievement Award. He is the author of two books and is a co-founder of The Daily Coach leadership program. George has a B.S. in Economics from Villanova University, where he is also inducted into the Villanova Hall of Fame.

Hector De La Torre, Director

Hector De La Torre was a member of California State Assembly representing L.A. from 2004 to 2010 and was a member of South Gate City Council for 8 years, including as a Mayor for 2 years. Hector currently serves as the Chair of L.A. Care, the largest public health plan in the U.S. and the Trustee of Occidental College. He was a former Executive Director of national non-profit Transamerica Center for Health Studies, former Chair of state Budget Subcommittee on Health & Human Services, Rules Committee, and Accountability & Administrative Review Committee, among others. Mr. De La Torre has been an Assembly-Appointed Member of California Air Resources board of directors since 2011, with focus on goods movement, the environment and green technology. He is a graduate of Occidental College and completed graduate work at the Elliott School of International Affairs at the George Washington University.

Robert (“Bob”) Hoban, Director

Bob Hoban is a 12-year veteran of the cannabis industry and Founder of Hoban Law Group, a global full-service commercial cannabis law firm and the first of its kind. He is the Co-Founder of Gateway Proven Strategies, a global cannabis industry consulting firm. Mr. Hoban has founded, created, bought, and sold over 15 of his own cannabis companies. He is widely recognized by a variety of publications and organizations as one of the most influential people in the global cannabis industry.

Daryl Kato, Chief Operating Officer

Daryl Kato is a seasoned leader with nearly 20 years of experience in operations, finance, accounting, and technology across multiple industry sectors and consumer packaged goods categories. Most recently, he served as the Chief Financial Officer and board director at Nissin Foods USA. Prior to that, he co-founded and sold a digital out-of-home advertising company and completed several business transformation projects while with Nestlé USA, Global Nestle Professional, Farmer Brothers, and Mitsubishi UFJ Financial Group. Mr. Kato began his career in Deloitte’s audit practice where he earned his CPA license. He holds a B.A. in Business Economics & minor in Accounting from the University of California at Los Angeles and an M.B.A. from USC Marshall School of Business.

Mark Vendetti, Chief Financial Officer

With over 30 years of finance and accounting experience, Mark Vendetti’s career spans a wide variety of industries including retail, CPG, e-commerce, manufacturing, financial services and entertainment. He has worked for some of the world’s most iconic enterprises, including Procter and Gamble, Abercrombie and Fitch, Bauer Hockey, and Mattel. From 2019 to 2021, just prior to joining the Company, Mr. Vendetti was the CFO of Canndescent, a leading producer of premium cannabis. He was also CFO of Francesca’s, a women’s specialty retailer, from 2013 to 2015, when the company enjoyed annual sales growth rates in excess of 20% and opened 240 new stores. His leadership of turnaround efforts at Bauer Hockey and Mattel generated significant improvements in company profitability, and he has helped engineer two multi-billion-dollar transactions: the merger of XM Satellite Radio with Sirius and the sale of the Sears Credit Card business to Citigroup. He holds a B.A. in Mathematics from Amherst College and an M.B.A. from Harvard University.

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Jamin Horn, General Counsel and Corporate Secretary

Jamin Horn has over a decade of legal experience in counseling high-growth private and public companies, principally in the medical and digital technology sectors, and over six years of experience advising California and multi-state cannabis operators and associated technology service providers. Prior to becoming an attorney, he worked on investor-side early-stage financing and intellectual property commercialization planning and analysis. Mr. Horn joined FLRish, Inc., the parent company of Harborside, in 2017 as Associate Counsel, where he was responsible for corporate and commercial transactions through the company’s growth and public listing before departing at the end of 2020 as VP of Corporate Affairs. He is a member of the State Bar of California, the ACC, and INCBA, and he holds a J.D. from UC Davis School of Law and a B.S. in Molecular, Cellular and Developmental Biology from UC Santa Cruz.

Cease Trade Orders

To the best of the Company’s knowledge, none of the Company’s directors and executive officers has, within the 10 years prior to the date of this AIF, been a director, chief executive officer or chief financial officer of any company that, while such person was acting in that capacity (or after such person ceased to act in that capacity but resulting from an event that occurred while that person was acting in such capacity), was the subject of a cease trade order, an order similar to a cease trade order, or an order that denied the company access to any exemption under securities legislation, in each case for a period of more than 30 consecutive days.

Penalties or Sanctions

To the best of the Company’s knowledge, no director or executive officer of the Company nor any shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company, nor a personal holding company of any such persons, has been subject to any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority or has been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision.

Bankruptcies and Insolvencies

To the best of the Company’s knowledge, no director or executive officer of the Company, nor a shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company, nor a personal holding company of any such persons, has, within the 10 years before the date of this AIF, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or been subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director, executive officer or shareholder.

To the best of the Company’s knowledge, no director or executive officer of the Company, nor a shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company, is as of the date of this AIF or has been, within the 10 years before the date of this AIF, a director or executive officer of any company that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or comprise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets.

Conflicts

Certain of the directors and executive officers of the Company are officers and directors of, or are associated with, other public and private companies. Such associations may give rise to conflicts of interest with the Company from time to time. The BCBCA requires, among other things, that the directors and executive officers of the Company act honestly and in good faith with a view to the best interest of the Company, to disclose any personal interest which they may have in any material contract or transaction which is proposed to be entered into with the Company and, in the case of directors, to abstain from voting as a director for the approval of any such contract or transaction. To the extent that conflicts of interest arise, such conflicts are required to be resolved in accordance with the provisions of the BCBCA.

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PROMOTER

Mercer was considered a promoter of Mercer Park within the meaning of applicable securities legislation, prior to the completion of the Business Combination. To the knowledge of the Company based on public filings on the System for Electronic Disclosure by Insiders (SEDI), as of the date hereof, Mercer beneficially owns, or controls or directs, directly or indirectly, 8,323,374 Equity Shares (representing approximately 21.5% of the issued and outstanding Equity Shares on a non-diluted basis and approximately 3.0% of the voting power in the Company as of December 31, 2021) and 8,364,500 Warrants (representing approximately 23.6% of the issued and outstanding Warrants as of December 31, 2021). Additionally, 1,008,975 of the Equity Shares issued to Mercer are subject to a contractual lock-up with the Company, and are to be released from the lock-up restrictions based upon the amount of cash raised by the Company from certain debt and equity financings through June 2023.

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LEGAL PROCEEDINGS AND REGULATORY ACTIONS

Legal Proceedings

There are no legal proceedings material to the Company to which the Company or a subsidiary thereof is a party or of which any of their respective property is the subject matter, nor or any such proceedings known to the Company to be contemplated, and there have been no such legal proceedings during the Company’s most recently completed financial year.

Regulatory Actions

The Company has not been subject to any penalties or sanctions imposed by any court relating to securities legislation or by a securities regulatory authority during the Company’s most recently completed financial year, nor has the Company been subject to any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision, nor has the Company entered into any settlement agreements before a court relating to securities legislation or with a securities regulatory authority during the Company’s most recently completed financial year.

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AUDIT COMMITTEE

The Audit Committee is primarily responsible for:

●

Recommending to the Board the external auditor to be nominated for election by the Company’s shareholders at each annual meeting and negotiating the compensation of such external auditor;

●

Overseeing the work of the external auditor;

●

Reviewing the Company’s financial statements, its management’s discussion and analysis in respect thereof and press releases regarding earnings before they are reviewed and approved by the Board and publicly disseminated by the Company; and

●

Reviewing the Company’s financial reporting procedures for the Company’s public disclosure of financial information extracted or derived from its financial statements.

The Board has adopted an audit committee charter (“Audit Committee Charter”) which sets out the Audit Committee’s mandate, organization, powers, and responsibilities. A copy of this Audit Committee Charter is attached as Schedule A to this AIF.

Below are the details of each audit committee member, including his/her name, whether he/she is independent and financially literate as such terms are defined under National Instrument 52-110 – Audit Committees (“NI 52-110”) and his/her education and experience as it

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relates to the performance of his/her duties as an audit committee member. All three audit committee members are financially literate under NI 52-110. The qualifications and independence of each member is discussed below.

Member Name	Independent⁽¹⁾	Financially Literate⁽²⁾	Education and Experience Relevant to Performance of Audit Committee Responsibilities
Humble Lukanga (Chair)	Yes	Yes	Humble owns Life Line Financial Group, a wealth management firm servicing world-class performers and leaders in business, sports and entertainment. In addition to Life Line Financial, Humble serves on the board of trustees for the University of New Mexico and the board of directors for various companies. He holds both a Bachelors and Masters in Business Administration from the Anderson School of Management at the University of New Mexico, received a Personal Finance Planning degree from UCLA and holds the CFP credential.
Jocelyn Rosenwald	Yes	Yes	Jocelyn began her career as a Teach for America Corps member in New York City. She began her career in real estate investment in 2013 with Beach Front Properties LLC and managed a $500M portfolio of opportunistic real estate investments. In November of 2016, Jocelyn began supervising the operations of 4 funds in the regulated cannabis industry which would eventually be consolidated to form GH Group. Today, Jocelyn sits on the Board of the Company as a director. She holds a BA from the University of Pennsylvania, an MA in Education from Hunter College, and an MBA from UCLA Anderson School of Business. She is a co-founder of GH Group and current director of the Company.
Hector De La Torre	Yes	Yes	Hector’s career has been defined by his public service and outstanding record of leadership. From 2004-10, Hector represented the 50^th District in southeast Los Angeles County to the California State Assembly, where he focused on health care, the environment, and good governance. Previously, he was a member of the South Gate City Council for 8 years, including serving 2 years as Mayor. In 2011, Hector became the Assembly-Appointed Member of the California Air Resources board of directors, a position he still holds, where he focuses on goods movement, environmental justice, and green technologies. He served as the executive director of the Transamerica Center for Health Studies, a national non-profit focused on helping people better understand health coverage, and today is chair of the board at L.A. Care, the largest public health plan in America, as well as a trustee of Occidental College, where he received his B.A. He did his graduate studies at the Elliott School of International Affairs at the George Washington University. Hector has been an early and vocal advocate for cannabis policy reform and remains dedicated to serving the industry.

Notes:

(1)

Independent within the meaning of NI 52-110.

(2)

An individual is financially literate within the meaning of NI 52-110 if he or she has the ability to read and understand a set of financial statements that present a breadth of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues and can reasonably be expected to be raised by the Company’s financial statements.

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Since the commencement of the Company’s most recently completed financial year, there has not been a recommendation of the Audit Committee to nominate or compensate an external auditor which was not adopted by the Board.

The Audit Committee has adopted specific policies and procedures for the engagement of non-audit services as described in the Audit Committee Charter attached hereto as Schedule A.

The following table discloses the fees billed to the Company by its external auditor during the last two fiscal years ended December 31, 2021 and December 31, 2020:


	Audit		Audit Related	Tax	All Other
Financial Year Ended	Fees⁽¹⁾		Fees⁽²⁾	Fees⁽³⁾	Fees⁽⁴⁾
December 31, 2021	$	1,346,799	Nil	Nil	Nil
December 31, 2020	$	93,277	Nil	Nil	Nil

Notes:

(1)

The aggregate fees billed for audit services.

(2)

The aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not disclosed in the audit fees column.

(3)

The aggregate fees billed for tax compliance, tax advice, tax return and tax planning services.

(4)

The aggregate fees billed for professional services other than those listed in the other three columns.

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INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS

Other than as disclosed elsewhere in this AIF, no director, executive officer or, to the best of the Company’s knowledge, shareholder that beneficially owns, or controls or directs, directly or indirectly, more than 10% of any class of outstanding voting securities of the Company, or any of their respective associates or affiliates, has any material interest, direct or indirect, in any transaction within the three most recently completed financial years before the date of this AIF or during the current financial year which has materially affected or is reasonably expected to materially affect the Company or a subsidiary of the Company.

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TRANSFER AGENT AND REGISTRAR

Odyssey Trust Company has been appointed as the registrar and transfer agent of the Equity Shares and the Multiple Voting Shares. The office of Odyssey Trust Company (where the securities register and register of transfers are maintained) is located in Calgary, Alberta.

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MATERIAL CONTRACTS

The only material contracts, other than those contracts entered into in the ordinary course of business, which the Company or one of its subsidiaries has entered into within the last financial year or before the last financial year but are still in effect, are set forth below. Copies of these material contracts are available under the Company’s SEDAR profile at www.sedar.com.

●

Warrant agency agreement between the Company and Odyssey Trust Company, as warrant agent, dated May 13, 2019, as supplemented June 29 2021 (the “Warrant Agreement”). See “Material Contracts – Warrant Agreement” below for further details.

●

Investor Rights Agreement. See “Material Contracts – Investor Rights Agreement” below for further details.

●

Registration rights agreement dated June 29, 2021 among the Company, the Company Founders and Mercer (“Registration Rights Agreement”). See “Material Contracts – Registration Rights Agreement” below for further details.

●

Lockup Agreement. See “Securities Subject to Contractual Restriction on Transfer” for further details.

●

Exchange Rights Agreement. See “Description of Capital Structure – Exchangeable Shares – Exchange Rights Agreement” for further details.

●

SoCal Purchase Agreements. See “General Development of the Business – Acquisitions – SoCal Greenhouse Acquisition” for further details.

●

Loan Agreement. See “General Development of the Business – Financing Transactions – Senior Secured Term Loan” for further details.

●

PLUS Acquisition Agreement. See “General Development of the Business – Acquisitions – PLUS Acquisition” for further details.

As of the date of this AIF, the following leases of the Company, which represent the Company’s two (2) most significant leases, are considered to be material contracts entered into for the purposes of this AIF:

●

the lease dated as of June 4, 2017 by and between 3243 Sacramento LLC, as lessor, and Farmacy Berkeley, as lessee; and

●

the lease dated as of October 1, 2018 between Neo Street Partners LLC and Lompoc TIC, LLC, as lessor, and CA Manufacturing Solutions LLC, as lessee.

No lease represents more than 10% of the consolidated revenues of the Company.

To the extent that cannabis-related licenses could also be considered to be material contracts, see “Description of the Business – Retail – Farmacy SB License” and “Description of the Business – Retail – Farmacy Santa Ana License”.

Copies of the above material contracts are available on the Company’s SEDAR profile at www.sedar.com. Set out below are the particulars of certain material contracts not described elsewhere in this AIF.

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Warrant Agreement

Pursuant to the Business Combination, the outstanding share purchase warrants of predecessor Mercer Park were exchanged for Warrants of the Company and became exercisable to acquire Equity Shares commencing 65 days after the completion of the Business Combination, pursuant to the terms of the Warrant Agreement. Each Warrant is exercisable to purchase one Equity Share at a price of $11.50 per share, subject to certain adjustments. The Company may accelerate the expiry date of the outstanding Warrants (excluding the Warrants exchanged for Mercer Park Founders’ Warrants but only to the extent still held by Mercer at the date of public announcement of such acceleration and not transferred prior to the accelerated expiry date, due to the anticipated knowledge by Mercer of material undisclosed information which could limit its flexibility) by providing 30 days’ notice if, and only if, the closing share price of the Equity Shares equals or exceeds $18.00 per share (subject to adjustments) for any 20 trading days within a 30-trading day period, in which case the expiry date shall be the date which is 30 days following the date on which such notice is provided. The right to exercise will be forfeited unless the Warrants are exercised prior to the date specified in the notice of acceleration of the expiry date. The Warrant Agreement contemplates that the Warrants may be exercised through cashless exercise.

Investor Rights Agreement

Pursuant to the Investor Rights Agreement, parties agreed that (i) until June 29, 2024, the Mercer Park Founders may put forward one nominee for the Board so long as the Mercer Park Founders hold at least 50% of their respective Sponsor Shares (as defined below) owned by each of them, respectively, at the closing of the Business Combination (assuming Sponsor Shares subject to forfeiture continue to be owned at the relevant time), and (ii) the number of Equity Shares issued to the Mercer Park Founders on closing of the Business Combination in exchange for the Mercer Park Class B shares that were issued to them for nominal consideration in connection with Mercer Park’s initial public offering (the “Sponsor Shares”) be subject to forfeiture, as follows:

●

Price Based Earn-out Shares:

o

Approximately 2,522,438 Sponsor Shares will be earned based on meeting the following share price trading thresholds (the “Price Based Earn-out Shares”):

◾

if within two (2) years following the closing of the Business Combination, the volume weighted average price per share of the Equity Shares on the Neo Exchange or other nationally recognized Canadian or United States stock exchange for 20 consecutive trading days (the “20-day VWAP”) meets or exceeds $13.00 (subject to customary adjustments), Mercer Park Founders will earn and retain 2/3 (66.66%) of the Price Based Earn-out Shares; and

◾

if within two (2) years following the closing of the Business Combination, the 20-day VWAP meets or exceeds $15.00 (subject to customary adjustments), the Mercer Park Founders will earn and retain the remaining 1/3 (33.34%) of the Price Based Earn-out Shares.

o

For each Price Based Earn-out Share earned by the Mercer Park Founders pursuant to the foregoing, the Company shall promptly cause MPB Acquisition Corp. to issue to the shareholders and optionholders of GH Group (the “Selling GH Group Securityholders”) who were eligible to receive Merger Consideration, as defined in and pursuant to the terms of the Business Combination Agreement, 1.5 Exchangeable Shares.

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o

In the event the Mercer Park Founders have not earned any Price Based Earn-out Shares pursuant to the foregoing, Mercer shall promptly tender the unearned Price Based Earn-out Shares to the Company for forfeiture for no consideration on the date that is the first business day that immediately follows the two (2)-year anniversary of the closing of the Business Combination, being June 30, 2023.

●

Capital Based Earn-out Shares:

o

Approximately 1,008,975 Sponsor Shares (the “Capital Based Earn-out Shares”) will be earned and retained based on the amount of the Company’s Closing Cash (as such term is defined in the Business Combination Agreement), plus any net proceeds from equity or equity-linked financings (e.g. issuance of convertible debt, sale of common or preferred stock, etc.) closed within one (1) year following the closing of the Business Combination (the “Post Closing Cash”, together with the Closing Cash, the “Total Cash”, not to exceed $402.5 million).

o

392,819 Capital Based Earn-out Shares (which was determined in accordance with the formula set forth immediately below based on the Closing Cash) (the “Closing Capital Based Earn-out Shares”) were earned on closing of the Business Combination and not subject to forfeiture, based on the minimum Closing Cash condition being met.

o

The number of Capital Based Earn-out Shares ultimately deemed earned by the Mercer Park Founders shall be calculated based on the following formula (but in no event will more than 1,008,975 Capital Based Earn-out Shares be deemed earned, including the Closing Capital Based Earn-out Shares earned): (Total Cash - $185.0 million) / $202.5 million ∗ 2,522,438.

o

1,008,975 of the Sponsor Shares minus the number of Closing Capital Based Earn-out Shares will be earned upon the following event occurring at or within 24 months following the closing of the Business Combination (being until June 29, 2023):

◾

in full, if the Company or any of its affiliates closes either (i) a debt facility with any of the lenders who have provided the Company with a term sheet prior to the closing of the Business Combination or any of their affiliates, and/or (ii) a private placement of securities, and the Company enters into a term cannabis supply agreement with TPCO US Holding, LLC or any of its affiliates; or

◾

otherwise, in part or in full, in accordance with the formula set forth above.

o

Notwithstanding the above, in the event the 20-day VWAP reaches $17.00 (subject to customary adjustments) within two (2) years following the closing of the Business Combination, Mercer Park Founders will earn and retain 100% of the Capital Based Earn-out Shares, provided that if an Anti-Dilution Payment (as defined below) was paid to the Selling GH Group Securityholders, the amount of Capital Based Earn-out Shares to be earned by Mercer Park Founders will be reduced by the number of Equity Shares issued to the Selling GH Group Securityholders under the Anti-Dilution Payment.

●

Anti-Dilution Payment: If any Post Closing Cash is raised by the Company below $10.00 per Equity Share, the Selling GH Group Securityholders will have the benefit of anti-dilution protection whereby additional Exchangeable Shares will be issued by MPB Acquisition Corp. to the Selling GH Group Securityholders (the “Anti-Dilution Payment”).

●

Other events: If the Company consummates a transaction which results in the holders of Equity Shares having the right to exchange their shares for cash, securities or other property having a value equaling or exceeding a 20-day VWAP threshold set forth above (for any non-cash proceeds, as determined based on the agreed valuation set forth in the applicable definitive agreements for such transaction or, in the absence of such valuation, their fair market value), such 20-day VWAP threshold will be considered met and the applicable Sponsor Shares will be considered earned and retained and may participate in such transaction.

In addition, pursuant to the Investor Rights Agreement, Mercer will use its reasonable best efforts to assist the Company with fundraising efforts and to leverage their capital markets expertise and relationships for a period of at least one (1) year after the closing of the Business Combination.

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Registration Rights Agreement

The Registration Rights Agreement provides the Company Founders and Mercer (the “Registering Shareholders” or “Piggyback Shareholders”, as applicable) with certain demand registration rights and piggyback registration rights in respect of the Equity Shares held by such holders from time to time. These Equity Shares are referred to as “registrable securities”. Each of the Registering Shareholders can request that the Company qualify by prospectus in Canada all or a portion of their registrable securities, provided that the aggregate offering price meets certain thresholds. If the Company proposes to register or qualify its securities for sale to the public, it must provide notice to each Registering Shareholder and the Piggyback Shareholders and use its reasonable commercial efforts to cause to be registered all registrable securities that the holders of such registrable securities request in writing be so registered. These piggy-back registration rights are unlimited in number. If a public offering of securities is being effected, those securities offered shall be allocated first to the Company then, to the Registering Shareholders (pro rata based on the amount owned by each), and then, to the Piggyback Shareholders (pro rata based on the amount owned by each).

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INTERESTS OF EXPERTS

The consolidated financial statements of the Company for the financial year ended December 31, 2021 have been audited by Macias Gini & O’Connell LLP. Macias Gini & O’Connell LLP has confirmed that it is independent with respect to the Company in accordance with the rules of professional conduct that are relevant to its audit of the Company’s consolidated financial statements.

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ADDITIONAL INFORMATION

Additional information relating to the Company is available on SEDAR at www.sedar.com and on the Company’s website at www.glasshousebrands.com. Additional information, including information concerning directors’ and officers’ remuneration and indebtedness, principal holders of the Company’s securities and securities authorized for issuance under equity compensation plans, where applicable, is contained in the management information circular of the Company (then Mercer Park) dated May 4, 2021 for its annual and special meeting of shareholders held on June 2, 2021 in connection with the Business Combination.

Additional financial information is contained in the Company’s audited financial statements and MD&A for its most recently completed financial year. Such documents, as well as additional information about the Company, may be found under the Company’s profile on SEDAR at www.sedar.com.

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SCHEDULE A – AUDIT COMMITTEE CHARTER

GLASS HOUSE BRANDS INC.

CHARTER OF THE AUDIT COMMITTEE

PURPOSE

The audit committee (the “Audit Committee”) is a committee of the board of directors (the “Board”) of Glass House Brands Inc. (the “Company”). The primary function of the Audit Committee is to assist the directors of the Company in fulfilling their applicable roles by:

recommending to the Board the appointment and compensation of the Company’s external auditor;

overseeing the work of the external auditor, including the resolution of disagreements between the external auditor and management;

pre-approving all non-audit services (or delegating such pre-approval if and to the extent permitted by law) to be provided to the Company by the Company’s external auditor;

satisfying themselves that adequate procedures are in place for the review of the Company’s public disclosure of financial information, other than those described in (g) below, extracted or derived from its financial statements, including periodically assessing the adequacy of such procedures;

establishing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal controls or auditing matters, and for the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters;

reviewing and approving any proposed hiring of current or former partners or employees of the current auditor of the Company; and

reviewing and recommending to the Board the approval of the annual and interim financial statements, related Management Discussion and Analysis (“MD&A”) and other financial information provided by the Company to any governmental body or the public.

The Audit Committee should primarily fulfill these roles by carrying out the activities enumerated in this Charter. However, it is not the duty of the Audit Committee to prepare financial statements, to plan or conduct internal or external audits, to determine that the financial statements are complete and accurate and are in accordance with United States generally accepted accounting principles, to conduct investigations, or to assure compliance with laws and regulations or the Company’s internal policies, procedures and controls, as these are the responsibility of management, and in certain cases, the external auditor.

LIMITATIONS ON AUDIT COMMITTEE’S DUTIES

In contributing to the Audit Committee’s discharge of its duties under this Charter, each member of the Audit Committee shall be obliged only to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Nothing in this Charter is intended to be, or may be construed as, imposing on any members of the Audit Committee a standard of care or diligence that is in any way more onerous or extensive than the standard to which the directors are subject.

Members of the Audit Committee are entitled to rely, absent actual knowledge to the contrary, on (i) the integrity of the persons and organizations from whom they receive information, (ii) the accuracy and completeness of the information provided, (iii) representations made by management as to the non-audit services provided to the Company by the external auditor, (iv) financial statements of the Company represented to them by a member of management or in a written report of the external auditors to present fairly the financial position of the Company in accordance with generally accepted accounting principles, and (v) any report of a lawyer, accountant, engineer, appraiser or other person whose profession lends credibility to a statement made by any such person.

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COMPOSITION AND MEETINGS

The Audit Committee should be comprised of not less than three directors as determined by the Board, all of whom shall be independent within the meaning of National Instrument 52-110 – Audit Committees (“NI 52-110”) of the Canadian Securities Administrators (or exempt therefrom), and free of any relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment as a member of the Audit Committee. All members of the Audit Committee should have (or should gain within a reasonable period of time after appointment) a working familiarity with basic finance and accounting practices. Each member must be “financially literate” within the meaning of NI 52-110 or must become financially literate within a reasonable period of time following his or her appointment. The Audit Committee members may enhance their familiarity with finance and accounting by participating in educational programs conducted by the Company or an outside consultant.

The members of the Audit Committee shall be elected by the Board on an annual basis or until their successors shall be duly appointed. Unless a Chair of the Audit Committee (the “Chair”) is elected by the full Board, the members of the Audit Committee may designate a Chair by majority vote of the full Audit Committee membership.

In addition, the Audit Committee members should meet all of the requirements for members of audit committees as defined from time to time under applicable legislation and the rules of any stock exchange on which the Company’s securities are listed or traded.

The Audit Committee should meet at least four times annually, or more frequently as circumstances require. The Audit Committee should meet within forty-five (45) days following the end of the first three financial quarters to review and discuss the unaudited financial results for the preceding quarter and the related MD&A, and should meet within 90 days following the end of the fiscal year end to review and discuss the audited financial results for the preceding quarter and year and the related MD&A.

The Audit Committee may ask members of management or others to attend meetings and provide pertinent information as necessary. For purposes of performing their duties, members of the Audit Committee shall have full access to all corporate information and any other information deemed appropriate by them, and shall be permitted to discuss such information and any other matters relating to the financial position of the Company with senior employees, officers and the external auditor of the Company, and others as they consider appropriate.

For greater certainty, management is indirectly accountable to the Audit Committee and is responsible for the timeliness and integrity of the financial reporting and information presented to the Board.

In order to foster open communication, the Audit Committee or its Chair should meet at least annually with management and the external auditor in separate sessions to discuss any matters that the Audit Committee or each of these groups believes should be discussed privately. In addition, the Audit Committee or its Chair should meet with management quarterly in connection with the Company’s interim financial statements.

A quorum for the transaction of business at any meeting of the Audit Committee shall be a majority of the number of members of the Audit Committee or such greater number as the Audit Committee shall by resolution determine.

Meetings of the Audit Committee shall be held from time to time and at such place as any member of the Audit Committee shall determine upon 48 hours’ notice to each of its members. The notice period may be waived by all members of the Audit Committee. Each of the Chair of the Board, the external auditor, the Chief Executive Officer, the Chief Financial Officer or the Secretary shall be entitled to request that any member of the Audit Committee call a meeting.

This Charter is subject in all respects to the Company’s articles from time to time.

ROLE

As part of its function in assisting the Board in fulfilling its oversight role (and without limiting the generality of the Audit Committee’s role), the Audit Committee should:

(1)

Determine any desired agenda items;

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(2)

Review and recommend to the Board changes to this Charter, as considered appropriate from time to time;

(3)

Review the public disclosure regarding the Audit Committee required by NI 52-110;

(4)

Review and seek to ensure that disclosure controls and procedures and internal control over financial reporting frameworks are operational and functional;

(5)

Summarize in the Company’s annual information form the Audit Committee’s composition and activities, as required; and

(6)

Submit the minutes of all meetings of the Audit Committee to the Board upon request.

Documents / Reports Review

(7)

Review and recommend to the Board for approval the Company’s annual and interim financial statements, including any certification, report, opinion, undertaking or review rendered by the external auditor and the related MD&A, as well as such other financial information of the Company provided to the public or any governmental body as the Audit Committee or the Board require.

(8)

Review other financial information provided to any governmental body or the public as they see fit.

(9)

Review any of the Company’s press releases that contain financial information.

(10)

Seek to satisfy itself and ensure that adequate procedures are in place for the review of the Company’s public disclosure of financial information extracted or derived from the Company’s financial statements and related MD&A and periodically assess the adequacy of those procedures.

External Auditor

(11)

Recommend to the Board the selection of the external auditor, considering independence and effectiveness, and review and recommend the fees and other compensation to be paid to the external auditor. The Audit Committee shall have the ultimate authority to approve all audit engagement terms and fees, including the auditors’ audit plan.

(12)

Review and seek to ensure that all financial information provided to the public or any governmental body, as required, provides for the fair presentation of the Company’s financial condition, financial performance and cash flow.

(13)

Instruct the external auditor that its ultimate client is not management and that it is required to report directly to the Audit Committee, and not management.

(14)

Monitor the relationship between management and the external auditor including reviewing any management letters or other reports of the external auditor and discussing any material differences of opinion between management and the external auditor.

(15)

Review and discuss, on an annual basis, with the external auditor all significant relationships it has with the Company to determine the external auditor’s independence.

(16)

Pre-approve all non-audit services (or delegate such pre-approval, as the Audit Committee may determine and as permitted by applicable Canadian securities laws) to be provided by the external auditor.

(17)

Review the performance of the external auditor and any proposed discharge of the external auditor when circumstances warrant.

(18)

Periodically consult with the external auditor out of the presence of management about significant risks or exposures, internal controls and other steps that management has taken to control such risks, and the fullness and accuracy of the financial statements, including the adequacy of internal controls to expose any payments, transactions or procedures that might be deemed illegal or otherwise improper.

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(19)

Communicate directly with the external auditor and arrange for the external auditor to be available to the Audit Committee and the full Board as needed.

(20)

Review and approve any proposed hiring by the Company of current or former partners or employees of the current (and any former) external auditor of the Company.

Audit Process

(21)

Review the scope, plan and results of the external auditor’s audit and reviews, including the auditor’s engagement letter, the post-audit management letter, if any, and the form of the audit report. The Audit Committee may authorize the external auditor to perform supplemental reviews, audits or other work as deemed desirable.

(22)

Following completion of the annual audit and quarterly reviews, review separately with each of management and the external auditor any significant changes to planned procedures, any difficulties encountered during the course of the audit and, if applicable, reviews, including any restrictions on the scope of work or access to required information and the cooperation that the external auditor received during the course of the audit and, if applicable, reviews.

(23)

Review any significant disagreements among management and the external auditor in connection with the preparation of the financial statements.

(24)

Where there are significant unsettled issues between management and the external auditor that do not affect the audited financial statements, the Audit Committee shall seek to ensure that there is an agreed course of action leading to the resolution of such matters.

Financial Reporting Processes

(25)

Review the integrity of the financial reporting processes, both internal and external, in consultation with the external auditor as they see fit.

(26)

Consider the external auditor’s judgments about the quality, transparency and appropriateness, not just the acceptability, of the Company’s accounting principles and financial disclosure practices, as applied in its financial reporting, including the degree of aggressiveness or conservatism of its accounting principles and underlying estimates, and whether those principles are common practices or are minority practices.

(27)

Review all material balance sheet issues, material contingent obligations (including those associated with material acquisitions or dispositions) and material related party transactions.

(28)

Review with management and the external auditor the Company’s accounting policies and any changes that are proposed to be made thereto, including all critical accounting policies and practices used, any alternative treatments of financial information that have been discussed with management, the ramification of their use and the external auditor’s preferred treatment and any other material communications with management with respect thereto.

(29)

Review the disclosure and impact of contingencies and the reasonableness of the provisions, reserves and estimates that may have a material impact on financial reporting.

(30)

If considered appropriate, establish separate systems of reporting to the Audit Committee by each of management and the external auditor.

(31)

Periodically consider the need for an internal audit function, if not present.

Risk Management

(32)

Review program of risk assessment and steps taken to address significant risks or exposures of all types, including insurance coverage and tax compliance.

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General

(33)

The Audit Committee may at its discretion retain independent counsel, accountants and other professionals to assist it in the conduct of its activities and to set and pay (as an expense of the Company) the compensation for any such advisors.

(34)

Respond to requests by the Board with respect to the functions and activities that the Board requests the Audit Committee to perform.

(35)

Periodically review this Charter and, if the Audit Committee deems appropriate, recommend to the Board changes to this Charter.

(36)

Review the public disclosure regarding the Audit Committee required from time to time by applicable Canadian securities laws, including:

●

The Charter of the Audit Committee;

●

the composition of the Audit Committee;

●

the relevant education and experience of each member of the Audit Committee;

●

the external auditor services and fees; and

●

such other matters as the Company is required to disclose concerning the Audit Committee.

(37)

Perform any other activities as the Audit Committee deems necessary or appropriate including seeking to ensure all regulatory documents are compiled to meet Committee reporting obligations under NI 52-110.

AUDIT COMMITTEE COMPLAINT PROCEDURES

The Audit Committee shall establish procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal controls or auditing matters, and for the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.

The Audit Committee is a committee of the Board and is not and shall not be deemed to be an agent of the Company’s securityholders for any purpose whatsoever. The Board may, from time to time, permit departures from the terms hereof, either prospectively or retrospectively, and no provision contained herein is intended to give rise to civil liability to the Company securityholders or other liability whatsoever.

Effective Date: June 29, 2021

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British Columbia, Canada	2833	87-4028335
(Province or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number (if applicable))	(I.R.S. Employer Identification Number (if applicable))

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
N/A	N/A	N/A


Exhibit		Description
99.1		Audited Consolidated Financial Statements for the years ended December 31, 2021 and 2020.
99.2*		Management’s Discussion and Analysis of the Company for the year ended December 31, 2021.
99.3		Annual Information Form for the year ended December 31, 2021.
99.4		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act.
99.5		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act.
99.6**		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350.
99.7*		Consent of Macias Gini & O’Connell LLP.
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


	GLASS HOUSE BRANDS INC.

Date: March 31, 2022	By:	/s/ Kyle Kazan
	Name: Kyle Kazan
	Title: Chief Executive Officer


For the fiscal year ended December 31, 2021		Commission File Number 000-56261


Date: March 31, 2022

By:	/s/ Mark Vendetti
Name: Mark Vendetti
Chief Financial Officer


Dated: March 31, 2022	/s/ Kyle Kazan
	Kyle Kazan
	Chief Executive Officer (principal executive officer)

Dated: March 31, 2022	/s/ Mark Vendetti
	Mark Vendetti
	Chief Financial Officer (principal financial officer)