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Equibles

6-K

Glass House Brands Inc. (GLASF)

6-K 2021-11-17 For: 2021-09-30
View Original
Added on April 07, 2026

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form6-K

REPORT OF FOREIGN PRIVATEISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of November, 2021 Commission File Number: 000-56261

Glass House Brands Inc.

(Translation of registrant’s name into English)

3645 Long Beach Blvd.

Long Beach, California 90807

(Address of principal executive office)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F ¨ Form 40-F x

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Glass House Brands Inc.
Date: November 17, 2021 /s/ Kyle Kazan
By: Kyle Kazan
Title: Chief Executive Officer 
2

EXHIBIT INDEX

Exhibit Number Description
99.1 Unaudited<br> Condensed Interim Consolidated Financial Statements as of September 30, 2021 and December 31, 2020, and for the Three<br> and Nine Months Ended September 30, 2021 and 2020
99.2 Management’s<br> Discussion and Analysis of Financial Condition and Results of Operations for the Three and Nine Months Ended September<br> 30, 2021 and 2020 
3

Exhibit 99.1

GLASSHOUSE BRANDS INC.

(FORMERLYMERCER PARK BRAND ACQUSITION CORP.)

UNAUDITEDCONDENSED INTERIMCONSOLIDATED FINANCIAL STATEMENTS

ASOF

SEPTEMBER30, 2021 AND DECEMBER 31, 2020AND FOR THE THREE AND NINE MONTHS ENDEDSEPTEMBER 30, 2021 AND 2020

GLASS HOUSE BRANDS INC.

Table of Contents

Page(s)
Condensed Consolidated Balance Sheets 1
Unaudited Condensed Interim Consolidated Statements of Operations 2
Unaudited Condensed Interim Consolidated Statements of Changes<br> in Shareholders’ Equity 3
Unaudited Condensed Interim Consolidated Statements of Cash<br> Flows 4 – 5
Notes to Unaudited Condensed Interim Consolidated Financial<br> Statements 6 – 28

GLASS HOUSE BRANDS INC.

Condensed Consolidated Balance Sheets

As of September 30, 2021 and December 31, 2020

(Amounts Expressed in United StatesDollars Unless Otherwise Stated)

2021 2020
Unaudited
ASSETS
Current Assets:
Cash $ 28,861,502 $ 4,535,251
Accounts Receivable, Net 2,668,167 5,141,021
Prepaid Expenses and Other Current Assets 7,623,281 1,922,746
Inventory 11,355,962 6,866,002
Total Current Assets 50,508,912 18,465,020
Operating Lease Right-of-Use Assets, Net 2,950,525 2,532,629
Investments 8,164,827 10,701,868
Property, Plant and Equipment, Net 186,939,145 27,192,027
Intangible Assets, Net 4,920,833 5,279,000
Goodwill 4,918,823 4,815,999
Other Assets 160,478 554,266
TOTAL ASSETS $ 258,563,543 $ 69,540,809
LIABILITIES AND SHAREHOLDERS’<br> EQUITY
LIABILITIES:
Current Liabilities:
Accounts Payable and Accrued Liabilities $ 18,031,938 $ 11,310,718
Contingent Shares and Earnout Liabilities 39,236,941 -
Shares Payable 2,756,830 -
Derivative Liabilities - Convertible Debt - 7,365,000
Current Portion of Operating Lease Liabilities 219,114 327,329
Current Portion of<br> Notes Payable 37,626 601,187
Total Current Liabilities 60,282,449 19,604,234
Operating Lease Liabilities, Net of Current<br> Portion 2,761,341 2,318,852
Other Non-Current Liabilities 1,366,900 849,358
Deferred Tax Liabilities 1,093,416 1,420,583
Notes Payable, Net of Current Portion 207,382 15,368,892
Notes Payable, Net<br> of Current Portion - Related Parties - 3,703,966
TOTAL LIABILITIES 65,711,488 43,265,885
SHAREHOLDERS' EQUITY:
Subordinate Voting<br> Shares (No Par value, Unlimited shares authorized, 29,460,947 and nil shares issued and outstanding as of September 30, 2021 and<br> December 31, 2020, respectively) - -
Exchangeable<br> Shares (No Par value, Unlimited shares authorized, 27,290,154 and 23,191,563 shares issued and outstanding as of September 30, 2021<br> and December 31, 2020, respectively) - -
Additional Paid-In Capital 235,110,523 42,934,402
Accumulated Deficit (42,258,468 ) (16,659,478 )
TOTAL SHAREHOLDERS'<br> EQUITY 192,852,055 26,274,924
TOTAL LIABILITIES<br> AND SHAREHOLDERS’ EQUITY $ 258,563,543 $ 69,540,809

The accompanying notes are an integral part of these unaudited Condensed Interim Consolidated Financial Statements.

- 1 -

GLASS HOUSE BRANDS INC.

Unaudited Condensed Interim Consolidated Statementsof Operations

For the Three and Nine Months Ended September 30, 2021and 2020

(Amounts Expressed in United StatesDollars Unless Otherwise Stated)

Three Months<br> Ended Nine Months<br> Ended
2021 2020 2021 2020
Revenues, Net $ 17,171,852 $ 13,307,759 $ 51,086,410 $ 31,319,809
Cost of Goods Sold 14,824,559 8,362,072 34,702,383 19,377,719
Gross Profit 2,347,293 4,945,687 16,384,027 11,942,090
Operating Expenses:
General and Administrative 8,530,522 4,703,107 20,252,908 13,419,767
Sales and Marketing 856,534 336,730 2,351,816 1,118,319
Professional Fees 1,694,281 350,181 6,998,482 1,497,747
Depreciation and Amortization 783,482 701,352 2,246,338 1,849,871
Total Operating Expenses 11,864,819 6,091,370 31,849,544 17,885,704
Loss from Operations (9,517,526 ) (1,145,683 ) (15,465,517 ) (5,943,614 )
Other Expense (Income):
Interest Expense 11,665 622,710 2,193,375 1,476,995
Interest Income (16,443 ) (41,166 ) (48,665 ) (203,999 )
Loss on Investments 568,471 51,489 852,729 126,397
(Gain) Loss on Change in Fair Value of<br> Derivative Liabilities - 988,898 (825,000 ) 1,925,886
Gain on Change in Fair Value of Contingent<br> Liabilities (3,223,393 ) - (3,223,393 ) -
Loss on Disposition of Subsidiary - - 6,090,339 -
Gain on Extinguishment of Debt - (573,113 ) - (184,057 )
Other Expense (Income),<br> Net 97,858 (2,708 ) 57,344 (30,477 )
Total Other (Income)<br> Expense, Net (2,561,842 ) 1,046,110 5,096,729 3,110,745
Loss from Operations Before Provision for Income Tax Expense (6,955,684 ) (2,191,793 ) (20,562,246 ) (9,054,359 )
Provision for Income Tax Expense 772,792 1,613,167 5,036,744 3,545,870
Net Loss $ (7,728,476 ) $ (3,804,960 ) $ (25,598,990 ) $ (12,600,229 )
Loss Per Share - Basic and Diluted $ (0.15 ) $ (0.16 ) $ (0.77 ) $ (0.61 )
Weighted-Average Shares Outstanding<br> - Basic and Diluted 51,293,958 23,191,563 33,305,042 20,616,559

The accompanying notes are an integral part of these unaudited Condensed Interim Consolidated Financial Statements.

- 2 -

GLASS HOUSE BRANDS INC.

Unaudited Condensed Interim Consolidated Statementsof Changes in Shareholders’ EquityFor the Nine Months Ended September 30, 2021 and 2020

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

Amount Units Units Units Units Amount Units Amount
TOTAL EQUITY
Multiple Subordinate Exchangeable Class A Class A Class B Class B Additional<br> Paid- ATTRIBUTABLE Non- TOTAL
Members' Voting Voting Non-Voting Common Common Common Common In Accumulated TO Controlling SHAREHOLDERS'
Equity Shares Shares Shares Shares Shares Shares Shares Capital Deficit SHAREHOLDERS' Interest EQUITY
BALANCE<br> AS OF DECEMBER 31, 2019 - - - - - $ - $ - $ 35,047,515 $ 3,554,731 $ 38,602,246
Retroactive<br> Application of Recapitalization (1) ) - - 22,388,322 - - 38,602,246 - 3,554,731 (3,554,731 ) -
Balance<br> 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 - - - - - - (12,600,229 ) (12,600,229 ) - (12,600,229 )
Contributions - - - - - 10,318 - 10,318 - 10,318
Share-Based<br> Compensation from Options - - - - - 1,945,909 - 1,945,909 - 1,945,909
Issuance of<br> Warrants in Relief of Liabilities - - - - - 426,887 - 426,887 - 426,887
Issuance for<br> Business Acquisition (1) - - 1,004,676 - - 3,095,642 - 3,095,642 - 3,095,642
Cancellation<br> of Shares for Issuance of Convertible Debt (1) - - (201,435 ) - - (1,750,000 ) - (1,750,000 ) - (1,750,000 )
BALANCE<br> AS OF SEPTEMBER 30, 2020 - - 23,191,563 - - $ 42,331,002 $ (12,600,229 ) $ 29,730,773 $ - $ 29,730,773
BALANCE<br> AS OF DECEMBER 31, 2020, As Previously Reported - - - 205,900,164 32,295,270 $ 42,932,020 $ (16,659,478 ) $ 26,274,924 $ - $ 26,274,924
Retroactive<br> Application of Recapitalization (1) - - 23,191,563 (205,900,164 ) ) (32,295,270 ) ) 2,382 - - - -
Balance<br> 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 - - - - - - (25,598,990 ) (25,598,990 ) - (25,598,990 )
Share-Based<br> Compensation from Options and RSU's - - - - - 5,286,672 - 5,286,672 - 5,286,672
Share-Based<br> Compensation from Common Shares (1) - - 48,682 - - 225,000 - 225,000 - 225,000
Issuance for<br> Business Acquisition (1) - - 731,369 - - 3,380,278 - 3,380,278 - 3,380,278
Issuance for<br> Conversion of Convertible Debt (1) - - 646,096 - - 1,925,000 - 1,925,000 - 1,925,000
Preferred<br> Shares of Subsidiary Issued for Conversion of Debt (1) - - - - - 31,288,392 - 31,288,392 - 31,288,392
Derivative<br> Liability Reclassed to Equity Upon Conversion of Debt - - - - - 6,722,000 - 6,722,000 - 6,722,000
Issuance for<br> Conversion of Preferred Shares (1) - - 2,512,295 - - - - - - -
Issuance for Exercise of Warrants<br> (1) - - 160,149 - - - - - - -
Issuance for Exercise of Options - 525,039 - - - 88,654 - 88,654 - 88,654
Reclass to<br> Share Payable - - - - - (2,756,830 ) - (2,756,830 ) - (2,756,830 )
Shares Issued<br> in Business Combination for Cash 4,754,979 22,335,908 - - - 116,675,330 - 116,675,330 - 116,675,330
Cash Received<br> in Advance of Shares Issued - 100,000 - - - 1,000,000 - 1,000,000 - 1,000,000
Shares Issued<br> for the Purchase of Property and Equipment - 6,500,000 - - - 29,250,000 - 29,250,000 - 29,250,000
Distributions<br> to Preferred Shareholders - - - - - (908,375 ) - (908,375 ) - (908,375 )
BALANCE<br> AS OF SEPTEMBER 30, 2021 4,754,979 29,460,947 27,290,154 - - $ 235,110,523 $ (42,258,468 ) $ 192,852,055 $ - $ 192,852,055

All values are in US Dollars.

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

The accompanying notes are an integral part of these unaudited Condensed Interim Consolidated Financial Statements.

- 3 -

GLASS HOUSE BRANDS INC.

Unaudited Condensed Interim Consolidated Statementsof Cash Flows For the Nine Months Ended September 30, 2021 and 2020

(Amounts Expressed in United StatesDollars Unless Otherwise Stated)

2021 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (25,598,990 ) $ (12,600,229 )
Adjustments to Reconcile Net Loss to Net<br> Cash Used in Operating Activities:
Deferred Tax (Recovery) Expense (327,167 ) 203,040
Interest Capitalized to Notes Payable 1,427,522 603,853
Interest Income Capitalized to Principal<br> Balance (48,085 ) (87,931 )
Depreciation and Amortization 2,246,338 1,849,871
Loss on Investments 852,729 126,397
Loss on Disposition of Subsidiary 6,070,902 -
Gain on Extinguishment of Debt - (184,057 )
Non-Cash Operating Lease Costs 463,563 725,648
Accretion of Debt Discount and Loan Origination<br> Fees 760,226 641,943
(Gain) Loss on Change in Fair Value of<br> Derivative Liabilities (825,000 ) 1,925,886
Gain on Change in Fair Value of Contingent<br> Liabilities (3,223,393 ) -
Share-Based Compensation 5,511,672 1,945,909
Changes in Operating Assets and Liabilities:
Accounts Receivable 2,451,787 (2,063,518 )
Prepaid Expenses and Other Current Assets (4,003,665 ) (414,800 )
Inventory (4,146,671 ) (2,306,159 )
Other Assets 298,369 (8,213 )
Accounts Payable and Accrued Liabilities 1,369,375 593,569
Cash Payments - Operating Lease Liabilities (472,014 ) (650,033 )
Income Taxes Payable 4,740,280 2,769,282
Other Non-Current<br> Liabilities 517,542 187,163
NET CASH USED<br> IN OPERATING ACTIVITIES (11,934,680 ) (6,742,379 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of Property and Equipment (97,154,888 ) (3,380,299 )
Issuance of Note Receivable - (1,140,000 )
Purchase of Investments (657,504 ) (2,521,406 )
Distributions Received from Equity Method<br> Investments 296,507 132,000
Cash Paid for Business<br> Acquisition, Net of Cash and Cash Equivalents Acquired (284,028 ) (81,522 )
NET CASH USED<br> IN INVESTING ACTIVITIES (97,799,913 ) (6,991,227 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the Issuance of Notes Payable,<br> Third Parties and Related Parties 10,512,820 13,854,786
Payments on Notes Payable, Third Parties<br> and Related Parties (947,919 ) (497,329 )
Cash Received Upon Issuance of Equity 125,404,318 -
Contributions - Controlling and Non-Controlling<br> Interest - 10,318
Distributions - Controlling<br> and Non-Controlling Interest (908,375 ) -
NET CASH PROVIDED<br> BY FINANCING ACTIVITIES 134,060,844 13,367,775
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 24,326,251 (365,831 )
Cash and Cash Equivalents, Beginning<br> of Period 4,535,251 2,631,886
CASH AND CASH EQUIVALENTS, END<br> OF PERIOD $ 28,861,502 $ 2,266,055

The accompanying notes are an integral part of these unaudited Condensed Interim Consolidated Financial Statements.

- 4 -

GLASS HOUSE BRANDS INC.

Unaudited Condensed Interim Consolidated Statementsof Cash Flows For the Nine Months Ended September 30, 2021 and 2020

(Amounts Expressed in United StatesDollars Unless Otherwise Stated)

2021 2020
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION
Cash Paid for Interest $ 174,374 $ 148,875
Cash Paid for Taxes $ 35,829 $ 10,200
Non-Cash Investing and Financing Activities:
Net Assets Acquired From an Acquisition,<br> 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<br> Payable, Third Parties $ 255,757 $ -
Conversion of Convertible Debt and Derivative<br> Liability to Equity $ 39,935,392 $ 426,887
Cancellation of Shares for Issuance of<br> Convertible Debt $ - $ 1,750,000
Recognition of Right-of-Use Assets for<br> Operating Leases $ 1,160,730 $ 1,182,942
Acquisition of Non-Controlling Interest<br> Upon Roll-Up $ - $ 3,554,731
Derivative Liability Incurred Upon Issuance<br> of Convertible Debt $ 182,000 $ 6,961,337
Shares Payable to Vested Option Holders $ 2,756,830 $ -
Shares Issued for the Purchase of Property<br> and Equipment $ 29,250,000 $ -
Contingent Liabilities Recognized for the<br> Purchase of Property and Equipment $ 34,820,000 $ -
Contingent Earnout Recorded as a Liability $ 7,640,334 $ -

The accompanying notes are an integral part of these unaudited Condensed Interim Consolidated Financial Statements.

- 5 -

GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Amounts Expressed in United StatesDollars Unless Otherwise Stated)

1.       NATUREOF OPERATIONS

Glass House Brands Inc. (the “Company”), formerly known as Mercer Park Brand Acquisition Corp. (“Mercer Park”), was incorporated under the Business CorporationsAct (British Columbia) on April 16, 2019. 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 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, trading under the symbols “GLAS.A.U” and “GLAS.WT.U”, 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.

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. GH Group is now an indirectly held subsidiary of the Company. See “Business Combination Transaction” below.

Business Combination Transaction

On June 29, 2021, Mercer Park, a special purpose acquisition corporation or SPAC listed in 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, pursuant to which Mercer Park acquired indirectly 100% of the common equity interests of GH Group, which included all outstanding Class A and Class B common shares of GH Group as well as assuming all outstanding common share purchase warrants and assuming or exchanging all qualified incentive stock options of GH Group. 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. 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 become a majority-owned indirect subsidiary of the Company. GH Group is considered the acquirer for accounting and financial reporting purposes and the Business Combination is treated as a recapitalization of GH Group.

Upon closing of the Business Combination, Mercer Park acquired all of the issued and outstanding securities of GH Group with the exception 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, 731,360 Exchangeable Shares are held in escrow pending any final working capital adjustments. Additionally, 1,008,975 Equity Shares issued to the previous sponsors of Mercer Park are subject to a contractual locked up with the Company. These shares are to be released from the lockup restrictions based upon the amount of cash raised by the Company from certain debt and equity financings through June 2023. As of September 30, 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 September 30, 2021, additional earnout payments consisting of up to an additional 6,306,095 Equity Shares are issuable to the previous sponsors of Mercer Park and all holders of record of the Company’s Equity Shares, the Exchangeable Shares, vested stock options and vested restricted stock units of the Company (“RSUs”) as of September 30, 2021, in the event the 20-day 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.

GH Group, Inc. was deemed the accounting acquirer in the Business Combination 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 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.

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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Amounts Expressed in United StatesDollars Unless Otherwise Stated)

1.       NATUREOF OPERATIONS (Continued)

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. 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, with retail stores being considered an essential business under current state guidelines. 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 three and nine months ended September 30, 2021. However, given the uncertainties associated with the COVID-19 pandemic, including those related to the distribution and acceptance of the vaccines and their effectiveness with respect to new variants of the virus, the use of the Company’s products by consumers, disruptions to the global and local economies due to related stay-at-home orders, 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.

2.       SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies and critical estimates applied by the Company in these Unaudited Condensed Interim Consolidated Financial Statements are the same as those applied in the Company’s audited Consolidated Financial Statements and accompanying notes for the year ended December 31, 2020 which can be found on Mercer Park Brand Acquisition Final Long form Prospectus filed on Sedar.com on May 7, 2021, unless otherwise disclosed in these accompanying notes to the Unaudited Condensed Interim Consolidated Financial Statements for the three and nine months ended September 30, 2021.

Basis of Preparation

The accompanying Unaudited Condensed Interim 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”) for interim financial information. The Unaudited Condensed Interim Consolidated Financial Statements include the accounts and operations of the Company and those of the Company’s subsidiaries in which the Company has a controlling financial interest, if any, after elimination of intercompany accounts and transactions. 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 September 30, 2021 and December 31, 2020, the consolidated results of operations for the three and nine months ended September 30, 2021 and 2020, and consolidated statements of equity and cash flows for the nine months ended September 30, 2021 and 2020 have been included.

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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Amounts Expressed in United StatesDollars Unless Otherwise Stated)

2.       SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The accompanying Unaudited Condensed Interim Consolidated Financial Statements do not include all of the information required for full annual financial statements. Accordingly, certain information, footnotes and disclosures normally included in the annual financial statements, prepared in accordance with GAAP, have been condensed or omitted. The financial data presented herein should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2020, and the related notes thereto, and have been prepared using the same accounting policies described therein.

Basis of Consolidation

These Unaudited Condensed Interim Consolidated Financial Statements as of September 30, 2021 and December 31, 2020 and for the three and nine months ended September 30, 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.

Functional Currency

The Company and its subsidiaries’ functional currency, as determined by management, is the United States (“U.S.”) dollar. These Unaudited Condensed Interim Consolidated Financial Statements are presented in U.S. dollars as this is the primary economic environment of the group.

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. Diluted loss per share is determined by adjusting profit or loss attributable to Company shareholders and the weighted-average number of Subordinate Voting Shares (including Exchangeable Shares on an as-exchanged basis) outstanding, for the effects of all dilutive potential Subordinate Voting Shares, the Company takes into account all convertible debentures, warrants and stock options issued.

Recently Adopted Accounting Standards

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), 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 Unaudited Condensed Interim Consolidated Financial Statements.

In January 2020, the FASB issued ASU 2020-01, “Investments—Equity Securities (Topic 321)”, “Investments—Equity Method and Joint Ventures (Topic323)”, and “Derivatives and Hedging (Topic 815)” (“ASU 2020-01”), which is intended to clarify the interaction of the accounting for equity securities under Topic 321 and 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 Unaudited Condensed Interim Consolidated Financial Statements.

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 OwnEquity”, 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 Unaudited Condensed Interim Consolidated Financial Statements.

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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Amounts Expressed in United StatesDollars Unless Otherwise Stated)

3.       CONCENTRATIONSOF BUSINESS AND CREDIT RISK

The Company maintains cash at its physical locations, which are not currently insured and cash 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 September 30, 2021 and December 31, 2020 and for the three and nine months ended September 30, 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 the three months ended September 30, 2021 and 2020 that comprised 31% and 29%, respectively, of the Company’s revenues. There were one (2021) and two (2020) customers for the nine months ended September 30, 2021 and 2020 that comprised 20% and 26%, respectively, of the Company’s revenues. As of September 30, 2021, one of these customers had a balance due to the Company of $2,079,372, or 78%, of total accounts receivable. As of December 31, 2020, there were two customers that comprised 37% of the Company’s revenues, these customers had balances due the Company $4,053,718, or 79%, of total accounts receivable.

4.       INVENTORY

As of September 30, 2021 and December 31, 2020, inventory consists of the following:

2021 2020
Raw Materials $ 4,061,683 $ 4,109,434
Work-in-Process 5,005,377 1,793,094
Finished Goods 2,288,902 963,474
Total Inventory $ 11,355,962 $ 6,866,002

5.       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 equity method accounting.

As of September 30, 2021, activity related to investments consist of the following:

NRO
LOB Group, Management, SoCal Hemp ICANN, 5042 Venice, Lompoc TIC,
Inc. LLC JV,<br> LLC LLC LLC LLC TOTAL
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 - - 571,256 - - 86,248 657,504
Distributions - - - - (199,607 ) (96,900 ) (296,507 )
Reclass of<br> Investment for Acquisition - - - (2,045,309 ) - - (2,045,309 )
Income<br> (Loss) on Equity Method Investments 64,389 (226,825 ) (854,847 ) - 182,225 (17,671 ) (852,729 )
Fair Value as of September<br> 30, 2021 $ 2,873,801 $ 2,109,888 $ 775,187 $ - $ 2,205,313 $ 200,638 $ 8,164,827

During the three and nine months ended September 30, 2021, the Company recorded net loss from equity method investments of $568,471 and $852,729, respectively. During the three and nine months ended September 30, 2020, the Company recorded net losses from equity method investments of $51,489 and $126,397, respectively. These investments are recorded at the amount of the Company’s investment and as adjusted for the Company’s share of the investee’s income or loss, and dividends paid.

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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

6.       PROPERTY,PLANT AND EQUIPMENT

As of September 30, 2021 and December 31, 2020, property, plant and equipment consist of the following:

2021 2020
Land $ 69,047,874 $ 8,966,874
Buildings 106,458,448 11,211,573
Furniture and Fixtures 2,334,081 44,519
Leasehold Improvements 8,594,575 7,475,295
Equipment and Software 5,360,437 4,502,869
Construction in Progress 2,315,235 315,306
Total Property, Plant and Equipment 194,110,650 32,516,436
Less Accumulated Depreciation and Amortization (7,171,505 ) (5,324,409 )
Property, Plant and Equipment,<br> Net $ 186,939,145 $ 27,192,027

For the three and nine months ended September 30, 2021 and 2020, the Company recorded depreciation and amortization expense of $743,982 and $2,115,671, respectively. For the three and nine months ended September 30, 2020, the Company recorded depreciation expense and amortization of $650,852 and $1,712,038, respectively.

During the three months ended September 30, 2021, the Company entered into a third amendment to its acquisition agreement (the “Camarillo Acquisition Agreement”) regarding the Camarillo Asset Acquisition. 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 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, and 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 Camarillo Asset Acquisition. The Company paid the total cash purchase price on closing on September 14, 2021 (“Closing Date”).The Camarillo 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 Closing Date. In addition to the Equity Shares issued for the Option Right on the 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 20 – Commitments and Contingencies” for further information.

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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

7.       DISPOSITIONOF 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 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 $6,070,902 for the nine months ended September 30, 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 411,219
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 $ 7,638,041
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 $ 6,070,902

8.       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 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, the Company granted 48,682 Exchangeable Shares to various consultants as a finder’s fee. During the nine months ended September 30, 2021, the Company recorded $225,000 in share-based compensation associated with grants to founder-holders.

The purchase price allocations for the business acquisition, as set forth in the table below, reflect various preliminary fair value estimates and analyses that are subject to change within the measurement period as valuations are finalized. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair values of certain tangible assets, the valuation of intangible assets acquired and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired at the acquisition date during the measurement period. Measurement period adjustments that the Company determines to be material will be applied retrospectively to the period of acquisition in the Company’s consolidated financial statements and, depending on the nature of the adjustments, other periods subsequent to the period of acquisition could be affected. All the acquisitions noted below were accounted for in accordance with ASC 805.

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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

8.       BUSINESS ACQUISITIONS*(Continued)*

Preliminary allocation of purchase price of business acquisitions completed during the nine months ended September 30, 2021 are as follows:

Total Consideration 2021
Cash $ 442,956
Equity Investment Converted 2,045,309
Fair Value of Equity Issued 3,380,278
Total Consideration $ 5,868,543
Net Assets Acquired (Liabilities<br> Assumed)
Current Assets $ 562,221
Operating Right-of-Use Asset 1,160,730
Property, Plant and Equipment 692,645
Deferred Tax Assets, Net (209,466 )
Current Liabilities Assumed (922,745 )
Long-Term Liabilities Assumed (1,113,584 )
Intangible Assets:
Intellectual Property 600,000
Dispensary License 2,900,000
Total Intangible<br> Assets 3,500,000
Total Identifiable Net Assets Acquired (Net Liabilities Assumed) 3,669,801
Goodwill<br> ^(1)^ 2,198,742
Total Net Assets Acquired $ 5,868,543
Pro Forma Revenues ^(2)^ n/a
Pro Forma Net Loss ^(2)^ n/a

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

(2) As the acquisition was completed on January 1, 2021, no pro forma information is required. 
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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

9.       INTANGIBLE ASSETS

As of September 30, 2021 and December 31, 2020, intangible assets consist of the following:

2021 2020
Definite Lived Intangible<br> Assets $ 790,000 $ 940,000
Intellectual Property
Total Definite Lived Intangible Assets 790,000 940,000
Less Accumulated Amortization (169,167 ) (201,000 )
Definite Lived Intangible Assets,<br> Net 620,833 739,000
Indefinite Lived Intangible Assets
Cannabis Licenses 4,300,000 4,540,000
Total Indefinite Lived Intangible<br> Assets 4,300,000 4,540,000
Total Intangible Assets, Net $ 4,920,833 $ 5,279,000

For the three and nine months ended September 30, 2021, the Company recorded amortization expense related to intangible assets of $39,500 and $130,667, respectively. For the three and nine months ended September 30, 2020, the Company recorded amortization expense related to intangible assets of $50,500 and $137,833, respectively. Additionally, during the nine months ended September 30, 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:
2021<br> (remaining) $ 39,500
2022 158,000
2023 158,000
2024 145,333
2025 120,000
Total<br> Future Amortization Expense $ 620,833

10.       GOODWILL

As of September 30, 2021 and December 31, 2020, goodwill was $4,918,823 and $4,815,999, respectively. See “Note 7 – Disposition of Subsidiary” and “Note8 – 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 consists of one step comparing 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 nine months ended September 30, 2021, management noted no indications of impairment on its goodwill.

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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

11.       ACCOUNTS PAYABLEAND ACCRUED LIABILITIES

As of September 30, 2021 and December 31, 2020, accounts payable and accrued liabilities consist of the following:

2021 2020
Accounts Payable $ 2,765,352 $ 2,583,910
Accrued Liabilities 2,419,273 1,082,980
Accrued Payroll and Related Liabilities 1,928,686 1,724,921
Income Taxes Payable 9,689,749 4,740,003
Sales Tax and Cannabis Taxes 1,228,878 1,178,904
Total Accounts Payable and Accrued<br> Liabilities $ 18,031,938 $ 11,310,718

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 September 30, 2021 and December 31, 2020 was approximately $429,000 and $1,007,000, respectively.

12.       DERIVATIVELIBILITIES

During the nine months ended September 30, 2021 and the year ended December 31, 2020, the Company issued convertible debt to third parties and related parties, see “Note 14 – Notes Payable” and “Note 15 – 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<br> June 29, 2021

A reconciliation of the beginning and ending balance of derivative liabilities and change in fair value of derivative liabilities as of September 30, 2021 and December 31, 2020 is as follows:

2021 2020
Balance at Beginning of Period $ 7,365,000 $ -
Derivative Liability Incurred Upon Issuance<br> of Convertible Debt 182,000 7,113,337
Change in Fair Value (825,000 ) 251,663
Reclassed to Equity<br> Upon Conversion of Debt (6,722,000 ) -
Balance at End of Period $ - $ 7,365,000

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

During the nine months ended September 30, 2021, the Company converted all its convertible debt with derivative conversion features to Preferred Shares. As a result, the Company fair valued 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 14 – Notes Payable” and “Note 15 – Notes Payable –Related Parties” for further information. Management views that conversions of debt with bifurcated conversion features that are deemed derivatives should 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”.

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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed Interim Consolidated Financial Statements

(Amounts Expressed in United States Dollars Unless Otherwise Stated)

13.       LEASES

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 Unaudited Condensed Interim Consolidated Balance Sheets.

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. The Company classifies a lease as an operating lease when it does not meet any criteria of a finance lease as set forth by ASC 842 “Leases”.

ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Most operating leases contain renewal options that provide for rent increases based on prevailing market conditions. The Company has lease extension terms at its properties that have either been extended or are reasonably certain to be extended. The terms used to calculate the lease liabilities and ROU assets for these properties include the renewal options that the Company is reasonably certain to exercise.

The Company leases land, buildings, equipment and other capital assets which it plans to use for corporate purposes and the production and sale of cannabis products. Leases with an initial term of 12 months or less are not recorded on the Unaudited Condensed Interim Consolidated Balance Sheets and are expensed in the Unaudited Condensed Interim Consolidated Statements of Operations on the straight-line basis over the lease term.

The below are the details of the lease cost and other disclosures regarding the Company’s leases for the three and nine months ended September 30, 2021 and 2020:

Three Months<br> Ended Nine Months<br> Ended
2021 2020 2021 2020
Operating Lease Cost $ 148,864 $ 231,168 $ 463,563 $ 725,648
Short-Term Lease Costs 149,371 126,090 400,353 367,513
Total Lease Expenses $ 298,235 $ 357,258 $ 863,916 $ 1,093,161
Nine Months<br> Ended
--- --- --- --- ---
2021 2020
Cash Paid for Amounts Included in the Measurement of Lease Liabilities:
Operating Cash Flows from<br> Operating Leases $ 472,014 $ 650,033
Non-Cash Additions to Right-of-Use Assets and Lease Liabilities:
Recognition of Right-of-Use Assets for<br> Operating Leases $ 1,160,730 $ 1,182,942

The weighted-average remaining lease term and discount rate related to the Company’s operating lease liabilities as of September 30, 2021 were 7.8 years and 17.0%, respectively. The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is not readily determinable, the Company utilizes its secured borrowing rate. ROU assets include any lease payments required to be made prior to commencement and exclude lease incentives. 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 lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.

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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed InterimConsolidated Financial Statements

(AmountsExpressed in United States Dollars Unless Otherwise Stated)

13.       LEASES*(Continued)*

Future minimum operating lease payments under non-cancelable operating leases as of September 30, 2021 are as follows:

December<br> 31: Third<br> Parties Related<br> Parties Total
2021 (remaining) $ 60,000 $ 97,630 $ 157,630
2022 240,000 393,127 633,127
2023 240,000 396,783 636,783
2024 240,000 393,596 633,596
2025 240,000 320,004 560,004
Thereafter 1,220,000 880,011 2,100,011
Total Future Minimum Lease Payments 2,240,000 2,481,151 4,721,151
Less Imputed<br> Interest (769,821 ) (970,875 ) (1,740,696 )
Total Amount Representing<br> Present Value 1,470,179 1,510,276 2,980,455
Less Current Portion of Operating<br> Lease Liabilities (66,577 ) (152,537 ) (219,114 )
Operating<br> Lease Liabilities, Net of Current Portion $ 1,403,602 $ 1,357,739 $ 2,761,341

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 $5,800 to $27,000 and expire through January 2031. Certain lease monthly payments may escalate up to 5.0% each year. In such cases, the variability in lease payments are included within the current and noncurrent operating lease liabilities.

14.       NOTESPAYABLE

As of September 30, 2021 and December 31, 2020, notes payable consist of the following:

2021 2020
Note payable maturing in June 2021, bearing interest at 7.00<br> percent per annum. $ - (i) 343,435 (i)
Note payable maturing in December 2020, bearing<br> interest at 8.00 percent per annum. - (ii) 212,821 (ii)
Convertible notes payable maturing in February<br> 2023, bearing interest at 8.00 percent per annum. - (iii) 20,790,514 (iii)
Funds raised for Series A Preferred<br> Stock financing. Recorded as debt bearing interest at 15.00 percent per annum prior to close of financing. - (iv) - (iv)
Other -<br> Vehicle Loans 245,008 44,931
Total<br> Notes Payable 245,008 21,391,701
Less Unamortized<br> Debt Issuance Costs and Loan Origination Fees - (5,421,622
Net Amount $ 245,008 $ 15,970,079
Less Current Portion of Notes<br> Payable (37,626 (601,187
Notes<br> Payable, Net of Current Portion $ 207,382 $ 15,368,892
(i) During<br> the year ended December 31, 2017, the Company issued debt to an unrelated third party for<br> working capital needs in the amount of $2,000,000. The debt matures in June 2021 and bears<br> interest at 7.00 percent per year. The balance was fully paid during the nine months ended<br> September 30, 2021.
--- ---
(ii) During<br> the year ended December 31, 2019, the Company issued debt to an unrelated third party for<br> working capital needs in the amount of $377,658. The debt matured in December 2020 and bears<br> interest at 7.00 percent per year. The balance was fully paid during the nine months ended<br> September 30, 2021.
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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed InterimConsolidated Financial Statements

(AmountsExpressed in United States Dollars Unless Otherwise Stated)

14. NOTES PAYABLE (Continued)
(iii) Effective<br> January 8, 2020, the board of directors approved approximately $17,500,000 of private placement<br> of Senior Convertible Notes. On January 4, 2021, the board of directors approved an increase<br> of the Senior Convertible Notes offering to $22,599,844. The Senior Convertible Notes are<br> automatically converted in the event of a Qualified Equity Financing (“QEF”)<br> at the better of an 80% discount or a valuation cap of $250,000,000 or may be optionally<br> converted at the election of the holder. The Senior Convertible Notes bear cash interest<br> at a rate of 4.00 percent per year paid quarterly and generally accrue interest at a rate<br> of 4.30 percent per year. The Senior Convertible Note holders were issued a security interest<br> in the stock and membership interests held by the Company in its subsidiaries. On June 29,<br> 2021, all principal and accrued interest under the Senior Convertible Notes were converted<br> to Preferred Shares. See “Note 12 – Derivative Liabilities” and<br> “Note 16 – Shareholders’ Equity” for further details on aggregate<br> shares issued and amounts.
(iv) In<br> March 2021, the Company began to raise a Series A Preferred Stock Financing round of $12,000,000.<br> The Preferred Stock will carry an annual 15.0 percent cumulative dividend in year 1. During<br> March 2021, the Company raised $7,625,000 from unrelated third parties recorded as debt.<br> On June 29, 2021, all principal and accrued interest of such debt was converted to Preferred<br> Shares. See “Note 12 – Derivative Liabilities” and “Note 16 – Shareholders’ Equity” for further details on aggregate shares<br> issued and amounts.
--- ---

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

Principal
December<br> 31: Payments
2021 (remaining) $ 9,204
2022 38,171
2023 40,433
2024 42,830
2025 45,368
Thereafter 69,002
Total<br> Future Minimum Principal Payments $ 245,008

15.       NOTESPAYABLE – RELATED PARTIES

As of September 30, 2021 and December 31, 2020, notes payable from related parties consist of the following:

2021 2020
Convertible notes<br> payable maturing in February 2023, bearing interest at 8.00 percent per annum. $ - (i) $ 2,049,037 (i)
Convertible<br> note payable maturing in March 2023, bearing interest at 6.00 percent per annum. - (ii) 2,189,264 (ii)
Total<br> Notes Payable - Related Parties - 4,238,301
Less Unamortized<br> Debt Issuance Costs and Loan Origination Fees - (534,335
Net Amount $ - $ 3,703,966
Less Current<br> Portion of Notes Payable - Related Parties - -
Notes<br> Payable, Net of Current Portion - Related Parties $ - $ 3,703,966
(i) Effective<br> January 8, 2020, the board of directors of GH Group approved approximately $17,500,000 of<br> private placement of Senior Convertible Notes. On January 4, 2021, the board of directors<br> of GH Group approved an increase of the Senior Convertible Notes offering to $22,599,844.<br> On June 29, 2021, the Senior Convertible Notes were automatically converted into Preferred<br> Shares of GH Group following the occurrence of a Qualified Equity Financing (“QEF”)<br> at a conversion price equal to the lesser of 80% of the cash price paid per Preferred Share<br> or the quotient resulting from dividing $250,000,000 by the number of outstanding shares<br> of common stock of GH Group immediately prior to the QEF. Prior to conversion, the Senior<br> Convertible Notes bore cash interest at a rate of 4% per year paid quarterly and generally<br> accrue interest at a rate of 4.3% per year. The Senior Convertible Note holders were also<br> issued a security interest in the stock and membership interests held by GH Group and its<br> subsidiaries. As noted above, on June 29, 2021, all principal and accrued interest under<br> the Senior Convertible Notes were converted into Preferred Shares. See “Note 12 – Derivative Liabilities” and “Note 16 – Shareholders’ Equity” for further details on aggregate shares issued and amounts.
--- --- 
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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed InterimConsolidated Financial Statements

(AmountsExpressed in United States Dollars Unless Otherwise Stated)

15. NOTES PAYABLE – RELATED PARTIES (Continued)
(ii) During<br> the year ended December 31, 2018, Magu Farm LLC (“Magu Farm”) issued approximately<br> $9,925,000 in secured promissory notes convertible into equity interests (collectively, the<br> “Magu Farm Convertible Notes”) in Magu Investment Fund LLC (“Magu Investment<br> Fund”) to certain lenders who are affiliates of shareholders of the Company (collectively,<br> 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, net in the accompanying Unaudited Condensed Interim Consolidated Statement of Operations for the nine months ended September 30, 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 16 – Shareholders’ Equity” for further details on shares issued and amount.

During the nine months ended September 30, 2021, the Company issued a $2,000,000 promissory note to 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 12 – Derivative Liabilities” and “Note 16 –Shareholders’ Equity” for further details on aggregate shares issued and amounts.

In June 2021, GH Group completed a QEF (i.e., of 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. During March 2021, the Company raised $2,000,000 from Beach Front Properties, LLC that was initially recorded as debt. On June 29, 2021, all principal and accrued interest from such debt was converted into Preferred Shares. See “Note 12 – Derivative Liabilities” and *“Note 16 – Shareholders’ Equity”*for further details on aggregate shares issued and amounts.

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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed InterimConsolidated Financial Statements

(AmountsExpressed in United States Dollars Unless Otherwise Stated)

16.       SHAREHOLDERS’EQUITY

As of September 30, 2021, the authorized share capital of the Company is comprised of the following:

Authorized

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.

Subordinate Voting Shares

The Company is authorized to issue an unlimited number of Subordinate Voting Shares without nominal or par value. Holders of Subordinate 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 Subordinate Voting Shares are entitled to vote, each Subordinate Voting Share will be entitled to one vote per Subordinate Voting Share.

Holders of Subordinate Voting Shares will be entitled to receive dividends out of the assets available for the payment or distribution of dividends at such times and in such amount and form as the board of directors of the Company may from time to time determine.

Exchangeable Shares (MPB AcquisitionCorp.)

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 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. 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 RTO, 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 (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.

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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed InterimConsolidated Financial Statements

(AmountsExpressed in United States Dollars Unless Otherwise Stated)

16.       SHAREHOLDERS’EQUITY (Continued)

Preferred Shares (GH Group)

The authorized total number of Preferred Shares of GH Group is 50,000,000. As of September 30, 2021, there are 19,024,159 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 the 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 the Company, the holders of the Preferred Shares outstanding are entitled to be paid out of the assets of the Company 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 Series A Common Stock at the conversion time. The Company 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.

Transactions Prior to the BusinessCombination through September 30, 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 combined group of companies were rolled into GH Group through a series of mergers whereby GH Group now owns and controls the interest of all the entities previously combined. As a result of the Roll-Up, GH Group issued to the investors of the combined entities 22,388,322 Exchangeable Shares to certain GH Group Founder parties.

On February 11, 2020, GH Group issued 1,004,676 Exchangeable Shares valued at $3,095,642 related to an acquisition.

In February 2020, GH Group repurchased 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 BusinessCombination through June 29, 2021 (GH Group)

On January 1, 2021, GH Group issued 731,369 Exchangeable Shares valued at $3,380,278 related to an acquisition, see *“Note 8 – Business Acquisitions”.*In addition, GH Group issued an additional 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 646,096 Exchangeable Shares in conversion of $1,925,000 in Senior Convertible Notes.

In June 2021, GH Group issued 160,149 Exchangeable Shares for the cashless exercise of 1,968,300 warrants.

TransactionsContemporaneous to the Business Combination (June 29, 2021) and through September 30, 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, Inc and issued 22,335,908 Subordinate Voting Shares to investors for approximately $124,409,000 in cash, net of fees but before the value of the earnout liability recorded of $7,640,334, see “Note 20 – Commitments and Contingencies”.

During the nine months ended September 30, 2021, the Company through GH Group, issued 38,806,009 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 $31,288,392, net of the value of the initial derivative liability. In conjunction with these transactions, the Company issued 4,928,248, as converted, Company warrants with an exercise price of $10.00 per warrant which expire in June 2024. Simultaneously, Preferred Shareholders holding 19,781,850 Preferred Shares elected to convert their Preferred Shares to 2,512,295 Exchangeable Shares.

On June 29, 2021, holders of 5,392,564 vested options of GH Group exercised their vested options (some on a cashless basis and cash exercise) and were issued Subordinate Voting Shares. As a result, the Company issued 525,039 Subordinate Voting Shares.

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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed InterimConsolidated Financial Statements

(AmountsExpressed in United States Dollars Unless Otherwise Stated)

16.       SHAREHOLDERS’EQUITY (Continued)

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 6 – Property, Plant and Equipment” for further information.

On August 23, 2021, the Company received $1,000,000 from an investor prior to receiving shares. Subsequent to September 30, 2021, the Company issued 100,000 Subordinate Voting Shares to the investor.

17.       SHARE-BASEDCOMPENSATION

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, stock appreciation rights, restricted stock and or other awards (together, “Awards”). Share-based compensation expenses are recorded as a component of general and administrative. 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 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

At the close of the Business Combination, GH Group had 31,417,654 outstanding vested options with a blended average exercise price of $0.23 and 29,474,324 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 525,039 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 1,395,992 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 reclassed out from equity to shares payable, $ 2,756,830. Unvested NQSOs were exchanged to restricted stock units (“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 1,047,838 RSU’s.

Vested and unvested GH Group incentive stock options (“ISOs”) were exchanged for Company incentive stock options using an exchange ratio of 10.27 to 1. This resulted in the exchange of 21,112,030 ISO’s for 2,055,543 Company incentive stock options.

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

Weighted-
Number of Average
Stock<br> Options Exercise<br> Price
Balance as of December 31, 2020 48,403,624 $ 0.22
Granted 12,604,612 $ 0.30
Forfeited (296,345 ) $ 0.24
Exercised (5,392,564 ) $ 0.26
Exchanged<br> for Subordinate Shares (19,320,931 ) $ 0.26
Converted<br> to RSU's (14,886,359 ) $ 0.26
Effect on<br> Conversion related to the Business Combination (19,056,494 ) $ 0.28
Balance as of September<br> 30, 2021 2,055,543 $ 2.69 
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GLASS HOUSE BRANDS INC.

Notes to Unaudited Condensed InterimConsolidated Financial Statements

(AmountsExpressed in United States Dollars Unless Otherwise Stated)

17.       SHARE-BASEDCOMPENSATION (Continued)

The following table summarizes the stock options that remain outstanding as of September 30, 2021:

Exercise Stock<br> Options Stock<br> Options
Security<br> Issuable Price Expiration<br> Date Outstanding Exercisable
Subordinate Voting<br> Shares $ 2.26 October 2024 976,925 -
Subordinate Voting Shares $ 3.08 January 2025 37,832 -
Subordinate Voting Shares $ 3.08 April 2025 148,381 -
Subordinate Voting Shares $ 3.08 January 2026 892,405 -
2,055,543 -

For the three and nine months ended September 30, 2021 and year ended December 31, 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<br> Risk-Free Annual Interest Rate 0.29 % 0.31 %
Weighted-Average Expected Annual<br> Dividend Yield 0.0 % 0.0 %
Weighted-Average Expected Stock<br> Price Volatility 84.6 % 85.3 %
Weighted-Average Expected Life<br> in Years 4.00 4.00
Weighted-Average Estimated Forfeiture<br> 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 nine months ended September 30, 2021 and year ended December 31, 2020, the weighted-average fair value of stock options granted was $0.31 and $0.18, respectively, per option. As of September 30, 2021 and December 31, 2020, stock options outstanding have a weighted-average remaining contractual life of 4.0.

For the three months ended September 30, 2021 and 2020, the Company recognized $817,901 and $628,097, respectively, in share-based compensation expense related to these stock options. For the nine months ended September 30, 2021 and 2020, the Company recognized $3,086,640 and $1,945,909, respectively, in share-based compensation expense related to these stock options.

Restricted Stock Units

As previously noted, 1,047,838 RSU’s were issued for the exchange of 14,886,359 GH Group stock options prior to the Business Combination. An additional grant of 2,562,804 RSU’s were made to certain members of the Company’s management 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, 2020 -
Granted 2,562,804
Exchanged<br> and Converted from Options 1,047,838
Balance as of September<br> 30, 2021 3,610,642

During the three and nine months ended September 30, 2021, the Company recognized $2,153,223 and $2,200,032, respectively, in stock-based compensation related to RSU’s. No stock-based compensation was recognized with regards to RSU’s for the three and nine months ended September 30, 2020.

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GLASS HOUSE BRANDS INC.<br><br><br><br>Notes to Unaudited Condensed Interim Consolidated Financial Statements<br><br><br><br>(Amounts Expressed in United StatesDollars Unless Otherwise Stated)
17.       SHARE-BASED COMPENSATION (Continued)
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Stock Appreciation Right Units

During the nine months ended September 30, 2021, GH Group issued 230,752 stock appreciation rights (“SARs”) units to various employees of the Company. The SAR 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 units they exercise multiplied by the excess of the fair market value of the Company’s Equity Share over the stated strike price of the SAR unit. As the SAR 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 Unaudited Interim Consolidated Balance Sheets. As of September 30, 2021, the Company recorded a liability of approximately $79,000.

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

Number of
Stock
Appreciation
Right Units
Balance as of December 31, 2020 -
Granted 230,752
Forfeited (47,708 )
Balance as of September 30, 2021 183,044

During the three and nine months ended September 30, 2021, the Company recognized approximately ($173,000) and $79,000, respectively, in expense related to SAR units.

Warrants

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

Weighted-
Number<br> of Warrants Average<br><br> <br>Exercise Price
Balance as of December 31, 2020 1,968,300 $ 0.16
Exercised (1,968,300 ) $ 0.16
Assumed from the Business Combination 28,489,500 $ 11.50
Granted 4,928,248 $ 10.00
Balance as of September 30, 2021 33,417,748 $ 11.28

The following table summarizes the warrants that remain outstanding as of September 30, 2021:

Exercise Warrants Warrants
Security Issuable 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 4,928,248 4,928,248
33,417,748 33,417,748

As of September 30, 2021 and December 31, 2020, warrants outstanding have a weighted-average remaining contractual life of 4.4 and 2.6 years, respectively.

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GLASS HOUSE BRANDS INC.<br><br><br><br>Notes to Unaudited Condensed Interim Consolidated Financial Statements<br><br><br><br>(Amounts Expressed in United StatesDollars Unless Otherwise Stated)
18.       LOSS PER SHARE
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The following is a reconciliation for the calculation of basic and diluted loss per share for the three and nine months ended September 30, 2021 and 2020:

Three Months<br> Ended Nine Months<br> Ended
2021 2020 2021 2020
Net Loss $ (7,728,476 ) $ (3,804,960 ) $ (25,598,990 ) $ (12,600,229 )
Weighted-Average Shares Outstanding -<br> Basic and Diluted 51,293,958 23,191,563 33,305,042 20,616,559
Loss Per Share - Basic and Diluted $ (0.15 ) $ (0.16 ) $ (0.77 ) $ (0.61 )

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.

19.       PROVISION FOR INCOME TAXES AND DEFERRED INCOME TAXES

Provision for income taxes consists of the following for the three and nine months ended September 30, 2021 and 2020:

Three<br> Months Ended Nine<br> Months Ended
2021 2020 2021 2020
Current:
Federal $ 737,570 $ 1,214,770 $ 4,189,281 $ 2,542,023
State 85,153 396,795 1,174,630 800,807
Total<br> Current 822,723 1,611,565 5,363,911 3,342,830
Deferred:
Federal (44,133 ) (5,398 ) (245,600 ) 130,074
State (5,798 ) 7,000 (81,567 ) 72,966
Total<br> Deferred (49,931 ) 1,602 (327,167 ) 203,040
Total Provision for Income<br> Taxes $ 772,792 $ 1,613,167 $ 5,036,744 $ 3,545,870

The Company has used a discrete effective tax rate method to calculate taxes for the fiscal three- and nine-month periods ended September 30, 2021 and 2020. The Company determined that since small changes in estimated ordinary income would result in significant changes in the estimated annual effective tax rate, the historical method would not provide a reliable estimate for the fiscal three- and nine-month periods ended September 30, 2021 and 2020.

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 sales of product. This results in permanent differences between ordinary and necessary business expenses deemed nonallowable under Section 280E, and the Company deducts all operating expenses on its state tax returns.

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 “IncomeTaxes” due to the evolving interpretations of Section 280E. As a result, the Company included in the balance of total unrecognized tax benefits as of September 30, 2021 and December 31, 2020, potential benefits of $1,366,899 and $849,358, respectively, that if recognized would impact the effective tax rate on income from continuing 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 September 30, 2021, the Company’s federal tax returns since 2017 and state tax returns since 2016 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.

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GLASS HOUSE BRANDS INC.<br><br><br><br>Notes to Unaudited Condensed Interim Consolidated Financial Statements<br><br><br><br>(Amounts Expressed in United StatesDollars Unless Otherwise Stated)
20.       COMMITMENTS AND CONTINGENCIES
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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 September 30, 2021 and December 31, 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.

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 sponsors of Mercer Park Brand Acquisition Corp. were locked up by the Company. These shares are to be released from the lockup restrictions based upon the amount of cash raised by the Company from certain debt and equity financings through June 2023. As of September 30, 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 which remained locked up as of September 30, 2021 were 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. As of September 30, 2021, the value of the contingent earnout was $3,086,941 and included as a component of contingent shares and earnout liabilities in the accompanying Unaudited Condensed Interim Consolidated Balance Sheet. The change in fair value of $4,553,393 was recorded as a component of change in fair value of contingent liabilities during the three and nine months ended September 30, 2021 and is included in the accompanying Unaudited Condensed Interim Consolidated Statement of Operations.

Additional earnout payments consisting of up to an additional 6,306,095 of the Company’s Equity Shares are issuable to the sponsors of Mercer Park and all holders of record of the Equity Shares, the Exchangeable Shares, vested stock options and vested RSU’s as of September 30, 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 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 September 30, 2021, no shares were issued in connection with these earnouts.

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 recorded $19,847,000 as a capital addition to property and equipment and as a liability, which is included in contingent shares and earnout liabilities in the accompanying Unaudited Condensed Interim Consolidated Balance Sheet as of September 30, 2021. 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 discounted cash flow model that is based on unobservable inputs.

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 Closing Date. The Company capitalized the fair value of the Option Right during the nine months ended September 30, 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 occur, if any, as defined in the Option Right Agreement. As a result, of the Company’s obligation to issue up to 3,500,000 Equity Shares as a contingent payment if certain conditions and financials metrics are met, the Company initially recorded $14,973,000 as a liability, which is included in contingent shares and earnout liabilities in the accompanying Unaudited Condensed Interim Consolidated Balance Sheet as of September 30, 2021. As this contingent liability is considered a derivative under ASC 815, the Company recorded a change in fair value of $1,330,000 during the three and nine months ended September 30, 2021 and is included as component of change in fair value of contingent liabilities in the accompanying Unaudited Condensed Interim Consolidated Statement 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.

- 25 -
GLASS HOUSE BRANDS INC.<br><br><br><br>Notes to Unaudited Condensed Interim Consolidated Financial Statements<br><br><br><br>(Amounts Expressed in United StatesDollars Unless Otherwise Stated)
20.       COMMITMENTS AND CONTINGENCIES (Continued)
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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 License and Service Agreement is 3 years, with the right to renew upon 60- days prior notice for additional 2-year term. Royalty fees for Bella boxes are 10% for the 1^st^ year and 12% for 2-5 years. Royalty fees for flower products and accessories are 6% for the 1^st^ year, 7% for the 2^nd^ year and 8% for 3-5 years. Minimum guarantee fees are recoupable against royalties for an initial term of $1,000,000 ($50,000 initial payment, $200,000 for the 1^st^ year, $375,000 for the 2^nd^ year and $375,000 for the 3^rd^ year). For a renewal term, the minimum guarantee fee is $1,500,000 ($750,000 for the 4^th^ year, $750,000 for the 5^th^ year). During the three and nine months ended September 30, 2021, the Company recognized expenses related to these royalties in the amount of $107,186 and $294,686, respectively. During the three and nine months ended September 30, 2020, the Company recognized expenses related to these royalties in the amount of nil and $137,500, respectively. As of September 30, 2021 and December 31, 2020, the Company has $187,500 and nil, respectively, due under this royalty agreement which are included in accounts payable and accrued liabilities in the Unaudited Interim Consolidated Balance Sheets

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 September 30, 2021 and December 31, 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 Unaudited Condensed Interim Consolidated Financial Statements relating to claims and litigations. As of September 30, 2021 and December 31, 2020, there are also no proceedings in which any of the Company’s directors, officers or affiliates is an adverse party to the Company or has a material interest adverse to the Company’s interest.

21.       RELATED PARTY TRANSACTIONS

Incubation Services

Effective January 1, 2019, GH Group and Magu Capital LLC, a California limited liability company (“Magu Capital”), an affiliate of certain significant shareholders of GH Group, 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 and no later than three years following the grant date. 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.

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 was fair valued at approximately $427,000. The Company recorded a gain on extinguishment of the liability in the amount of approximately $ 573,000 which is recorded as a component of other income in the accompanying consolidated statement of operations for the nine months ended September 30, 2020.

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GLASS HOUSE BRANDS INC.<br><br><br><br>Notes to Unaudited Condensed Interim Consolidated Financial Statements<br><br><br><br>(Amounts Expressed in United StatesDollars Unless Otherwise Stated)
21.       RELATED PARTY TRANSACTIONS (Continued)
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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, a California limited liability company (“APP Investment Advisors”), an affiliate of certain significant shareholders of GH Group, 880,870 Class A Common shares of GH Group, in exchange for certain management services rendered by APP Investment Advisors for AP Investment Fund (i.e., one of the entities that merged with GH Group in the Roll-Up); and (b) issued to Magu Capital, an affiliate of certain significant shareholders GH Group, 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 16 - Shareholders’ Equity”*for further information on exchangeable shares.

22.       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 the Company’s operations are in the United States of America in the State of California. Intercompany sales and transactions are eliminated in consolidation.

23.       REVENUES, NET

Revenues are disaggregated as follows for the three and nine months ended September 30, 2021 and 2020:

Three<br> Months Ended Nine<br> Months Ended
2021 2020 2021 2020
Retail $ 5,219,887 $ 3,819,809 $ 16,596,529 $ 10,767,543
Wholesale 11,951,965 9,487,950 34,489,881 20,552,266
Revenues,<br> Net $ 17,171,852 $ 13,307,759 $ 51,086,410 $ 31,319,809
24.       RECLASSIFICATIONS
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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.

25.       SUBSEQUENT EVENTS

The Company has evaluated subsequent events through November 15, 2021, which is the date these unaudited interim Condensed Consolidated Financial Statements were issued, and has concluded that the following subsequent events have occurred that would require recognition in the Condensed Consolidated Financial Statements or disclosure in the notes to the Condensed Consolidated Financial Statements.

Element 7 CA, LLC Transaction

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 has the right, subject to satisfactory completion of due diligence and other conditions, to obtain all of the 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. Under the E7 Merger Agreement, GH Group is obligated to purchase all such equity interests for each retail cannabis license that meets the conditions for sale and E7 is obligated to sell such equity interests. The consideration payable under the E7 Merger Agreement is $1,500,000 for 100% of E7’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). This could result in the issuance of up to 2,400,000 Equity Shares in the amount of $24,000,000. Conditions to closing the transaction include, among other things, the availability of $25,000,000 for development of certain E7 retail cannabis licenses, and the delivery by E7 of certain leases.

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GLASS HOUSE BRANDS INC.<br><br><br><br>Notes to Unaudited Condensed Interim Consolidated Financial Statements<br><br><br><br>(Amounts Expressed in United StatesDollars Unless Otherwise Stated)
25.       SUBSEQUENT EVENTS (Continued)
---

Effective February 23, 2021, GH Group entered into a License Development and Consulting Agreement (the “E7 License Agreement”) 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 as set forth in the E7 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.

On November 4, 2021, GH Group filed a lawsuit in 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 arising from Element 7's conduct incident to the E7 Merger Agreement. In addition, GH Group has also given notice to E7 that it is terminating the E7 License Agreement for cause.

To date, E7 has fully transferred three retail licenses located in Dunsmuir, Hesperia, and Eureka, California out of a total of seventeen licenses that were contractually committed to be transferred under the terms of the E7 Merger Agreement. GH Group is confident that it will ultimately prevail in the lawsuit and be able to enforce the transfer of the remaining fourteen retail licenses.

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Exhibit 99.2

GLASS HOUSE BRANDS INC.

(FORMERLY MERCER PARKBRAND ACQUSITION CORP.)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTSOF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED

SEPTEMBER 30, 2021 AND2020

Introduction

This management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided as of November 15, 2021 and should be read together with Glass House Brands Inc.’s (the “Company”) Unaudited Condensed Interim Consolidated Financial Statements (the “Financial Statements”), for the three and nine months ended September 30, 2021, and the accompanying notes, and the audited Consolidated Financial Statements for the year ended December 31, 2020, and the accompanying notes. The financial results discussed herein have been prepared in accordance with U.S. GAAP and, unless otherwise noted, are expressed in United States dollars. Additional information relating to the Company can be found on SEDAR at www.sedar.com.

Overview

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 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, trading under the symbols “GLAS.A.U” and “GLAS.WT.U”, 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.

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. GH Group is now an indirectly held subsidiary of the Company. See “Business Combination Transaction” below.

Business Combination Transaction

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, pursuant to which Mercer Park acquired indirectly 100% of the common equity interests of GH Group, which included all outstanding Class A and Class B common shares of GH Group as well as assuming all outstanding common share purchase warrants and assuming or exchanging all qualified incentive stock options of GH Group. 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. 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 became a majority-owned indirect subsidiary of the Company. GH Group is considered the acquirer for accounting and financial reporting purposes and the Business Combination is treated as a recapitalization of GH Group.

Upon closing of the Business Combination, Mercer Park acquired all of the issued and outstanding securities of GH Group with the exception 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, 731,360 Exchangeable Shares are held in escrow pending any final working capital adjustments. Additionally, 1,008,975 Equity Shares issued to the previous sponsors of Mercer Park are subject to a contractual locked up with the Company. These shares are to be released from the lockup restrictions based upon the amount of cash raised by the Company from certain debt and equity financings through June 2023. As of September 30, 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 of the Business Combination. Additional earnout payments consisting of up to an additional 6,306,095 Equity Shares are issuable to the previous sponsors of Mercer Park and all holders of record of the Equity Shares, the Exchangeable Shares, vested stock options and vested restricted stock units of the Company (“RSU’s”) as of September 30, 2021 in the event the 20-day 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.

GH Group was deemed the accounting acquirer in the Business Combination based on an analysis of the criteria outlined in Accounting Standards Codification ("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 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. 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, with retail stores being considered an essential business under current state guidelines. 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 three and nine months ended September 30, 2021. However, given the uncertainties associated with the COVID-19 pandemic, including those related to the distribution and acceptance of the vaccines and their effectiveness with respect to new variants of the virus, the use of the Company’s products by consumers, disruptions to the global and local economies due to related stay-at-home orders, 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.

Major Business Lines and Geographies

The Company views its financial results under one business line – the creation of dominant, extensible wholesale and consumer packaged goods (“CPG”) and brands through cannabis cultivation, production, and sales. The Company currently generates all of its revenue in the state of California.

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.

Cannabis Cultivation, Production and Sales

The Company operates multiple greenhouse cultivation facilities located in Carpinteria, California and its manufacturing or production facility is located in Lompoc, California. During the quarter, the Company completed its previously announced acquisition of an approximately 5.5 million square feet greenhouse facility located in Camarillo, California (the “Camarillo Asset Acquisition”). See “Liquidity and Capital Resources – CompletedTransaction” below.

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.

Market Update and Objectives

The state of California represents the largest single market for cannabis in the U.S., with over $7 billion in revenues in 2020 and an adult population of over 31 million. The California market is highly fragmented, with over 6,000 cultivation licenses in operation, over 1,000 distribution licenses over 700 operational dispensaries and greater than 1,000 brands. With this backdrop, the Company looks to use scale in cultivation and distribution (at wholesale and through its own dispensaries and third-party retailers) to achieve economies of scale that will allow the Company to outperform competitors and build superior brand awareness and loyalty.

California experienced declines in wholesale biomass pricing the third quarter of 2021 as compared to both the second quarter of 2021 and the third quarter of 2020 with prices dropping in excess of 25% for the company’s flower cannabis. In addition, total retail sales and retail flower sales are down 6% and 16%, respectively, according to BDSA, for the third quarter of 2021 as compared to the third quarter of 2020.

Results of Operations

The following are the results of our operations for the three months ended September 30, 2021 compared to three months ended September 30, 2020:

Three Months Ended
2021 2020
Revenues, Net $ 17,171,852 $ 13,307,759
Cost of Goods Sold 14,824,559 8,362,072
Gross Profit 2,347,293 4,945,687
Operating Expenses:
General and Administrative 8,530,522 4,703,107
Sales and Marketing 856,534 336,730
Professional Fees 1,694,281 350,181
Depreciation and Amortization 783,482 701,352
Total Operating Expenses 11,864,819 6,091,370
Loss from Operations (9,517,526 ) (1,145,683 )
Other Expense (Income):
Interest Expense 11,665 622,710
Interest Income (16,443 ) (41,166 )
Loss on Investments 568,471 51,489
Loss on Change in Fair Value of Derivative Liabilities - 988,898
Gain on Change in Fair Value of Contingent Liabilities (3,223,393 ) -
Gain on Extinguishment of Debt - (573,113 )
Other Expense (Income), Net 97,858 (2,708 )
Total Other (Income) Expense, Net (2,561,842 ) 1,046,110
Loss from Operations Before Provision for Income Tax Expense (6,955,684 ) (2,191,793 )
Provision for Income Tax Expense 772,792 1,613,167
Net Loss $ (7,728,476 ) $ (3,804,960 )
Loss Per Share - Basic and Diluted $ (0.15 ) $ (0.16 )
Weighted-Average Shares Outstanding - Basic and Diluted 51,293,958 23,191,563

Revenue

Revenue for the three months ended September 30, 2021 was $17.2 million, which represents an increase of $3.9 million, or 29%, from $13.3 million for the three months ended September 30, 2020. The increase in revenue was primarily due to an increase in the Company’s CPG business and retail operations. The Company’s wholesale biomass and wholesale CPG revenue increased by $ 2.4 million, or 26%, for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020. Wholesale CPG revenue increased $3.5 million due to strong consumer and distribution acceptance of the Glass House Farms brand. Wholesale biomass revenue declined by $1.1 million as wholesale cannabis pricing dropped significantly between the two quarters. If wholesale cannabis pricing remained consistent between the two quarters, an additional $4.1 million in revenue would have been recognized for the three months ended September 30, 2021. The Company’s cannabis retail dispensaries grew revenue, increasing $1.4 million, or 37%, in retail sales during the three months ended September 30, 2021 compared to retail sales during the comparative period in the prior year. This increase was primarily attributable to an additional retail location being opened during the first quarter of 2021, which retail location reported $1.7 million in net retail revenue for the three months ended September 30, 2021, compared to nil for the comparative period.

Cost of Goods Sold and Gross Profit

Cost of goods sold for the three months ended September 30, 2021 was $ 14.8 million, an increase of $6.4 million, or 77%, compared with $8.4 million for the three months ended September 30, 2020. Gross profit for the three months ended September 30, 2021 was $2.3 million, representing a gross margin of 14%, compared with a gross profit of $4.9 million, representing a gross margin of 37% for the three months ended September 30, 2020. The increase in cost of goods sold was primarily attributable to the Company’s growth in revenue and accompanying increase in production. An increase in cultivation capacity and the associated increase in product, labor, and overhead costs during the three months ended September 30, 2021 supported the increase in production. The decrease in gross margin is primarily due to the significantly lower wholesale biomass prices during the three months ended September 30, 2021 as compared to the same period in the prior year and increased costs referenced above.

Total Operating Expenses

Total operating expenses for the three months ended September 30, 2021 was $11.9 million, an increase of $5.8 million, or 95%, compared to total operating expenses of $6.1 million for the three months ended September 30, 2020. The increase in total operating expenses was attributable to the factors described below.

General and administrative expenses for the three months ended September 30, 2021 and September 30, 2020 were $8.5 million and $4.7 million, respectively, an increase of $ 3.8 million, or 81%. The increase in general and administrative expenses is primarily attributed to the Company’s initiatives in connection with operational expansion including corporate, cultivation and retail operations which resulted in an increase of $3.6 million across salaries and wages, stock-based compensation and IT consulting fees.

Sales and marketing expenses for the three months ended September 30, 2021 and September 30, 2020 were $0.8 million and $0.3 million, respectively, an increase of $0.5 million, or 154%. The increase in sales and marketing expenses is primarily attributed to the increase in the Company’s efforts related to digital media, marketing research and royalty expenses of $0.3 million. Sales and marketing expenses include trade marketing, point of sale marketing for our wholesale CPG business product lines and promotions in various media outlets.

Professional fees for the three months ended September 30, 2021 and September 30, 2020 were $1.7 million and $0.4 million, respectively, an increase of $1.3 million, or 384%. The Company recognized increased legal fees of $0.5 million coupled with increased accounting and consulting professional fees of $1.0 million related to the Camarillo Acquisition and other initiatives that occurred during the third quarter of 2021. The increases were offset by a decrease in asset management fees of $0.2 million during the third quarter of 2021, compared to the same period in the prior year.

Depreciation and amortization for the three months ended September 30, 2021 and September 30, 2020 was $0.8 million and $0.7 million, respectively, an increase of $0.1 million, or 12%. The increase is attributed to the growth of the Company’s operations through previous acquisition of iCANN, LLC dba Farmacy Berkeley during the first quarter of 2021 which resulted in an increase of depreciation and amortization during the three months ended September 30, 2021.

Total Other Income, Net

Total other income for the three months ended September 30, 2021 was $2.6 million and total other expense for the three months ended September 30, 2020 was $1.0 million, a decrease of $ 3.6 million, or 345%. The decrease in total other expense was primarily due to a gain on change in fair value of contingent earnout liability of $3.2 million during the three months ended September 30, 2021, compared to the same period in the prior year.

Provision for Income Taxes

The provision for income tax expense for the three months ended September 30, 2021 was $0.8 million, a decrease of $0.8 million, or 52%, compared to provision for income tax expense of $ 1.6 million for the three months ended September 30, 2020. The decrease in provision for income taxes was directly impacted by the Company’s decrease in gross profit for the current period.

The following are the results of our operations for the nine months ended September 30, 2021 compared to nine months ended September 30, 2020:

Nine Months Ended
2021 2020
Revenues, Net $ 51,086,410 $ 31,319,809
Cost of Goods Sold 34,702,383 19,377,719
Gross Profit 16,384,027 11,942,090
Operating Expenses:
General and Administrative 20,252,908 13,419,767
Sales and Marketing 2,351,816 1,118,319
Professional Fees 6,998,482 1,497,747
Depreciation and Amortization 2,246,338 1,849,871
Total Operating Expenses 31,849,544 17,885,704
Loss from Operations (15,465,517 ) (5,943,614 )
Other Expense (Income):
Interest Expense 2,193,375 1,476,995
Interest Income (48,665 ) (203,999 )
Loss on Investments 852,729 126,397
(Gain) Loss on Change in Fair Value of Derivative Liabilities (825,000 ) 1,925,886
Gain on Change in Fair Value of Contingent Liabilities (3,223,393 ) -
Loss on Disposition of Subsidiary 6,090,339 -
Gain on Extinguishment of Debt - (184,057 )
Other Expense (Income), Net 57,344 (30,477 )
Total Other Expense, Net 5,096,729 3,110,745
Loss from Operations Before Provision for Income Tax Expense (20,562,246 ) (9,054,359 )
Provision for Income Tax Expense 5,036,744 3,545,870
Net Loss $ (25,598,990 ) $ (12,600,229 )
Loss Per Share - Basic and Diluted $ (0.77 ) $ (0.61 )
Weighted-Average Shares Outstanding - Basic and Diluted 33,305,042 20,616,559

Revenue

Revenue for the nine months ended September 30, 2021 was $51.1 million, which represents an increase of $19.8 million, or 63%, from $31.3 million for the nine months ended September 30, 2020. The increase in revenue was primarily due to an increase in the Company’s CPG business supported by incremental cannabis production and sales from the Company’s second greenhouse cultivation facility located in Carpinteria, California, which commenced operations during the first quarter of 2020. The expansion of the cultivation facility was increased from 113,000 square feet during 2020 to over 390,000 square feet by the end of 2020. The Company’s wholesale biomass and wholesale CPG revenue increased by $13.9 million, or 68%, for the nine months ended September 30, 2021 from the nine months ended September 30, 2020. Wholesale CPG revenue increased $12.0 million and was driven by strong retail and consumer acceptance of the Glass House Farms brand. Wholesale biomass revenue increased $1.9 million but was negatively impacted by significantly lower pricing in the third quarter of 2021 when compared to the same quarter last year. If wholesale cannabis pricing remained consistent between the two quarters, an additional $4.1 million in revenue would have been recognized for the nine months ended September 30, 2021. In addition, the Company’s cannabis retail dispensaries grew revenue, and had an increase of $5.8 million, or 54%, in retail sales during the nine months ended September 30, 2021, compared to retail sales during the comparative period in the prior year. This increase was primarily attributable to an additional retail location the Company opened during the first quarter of 2021, which retail location reported $5.1 million in net retail revenue during the nine months ended September 30, 2021, compared to nil for the comparative period.

Cost of Goods Sold and Gross Profit

Cost of goods sold for the nine months ended September 30, 2021 was $34.7 million, an increase of $15.3 million, or 79%, compared with $19.4 million for the nine months ended September 30, 2020. Gross profit for the nine months ended September 30, 2021 was $16.4 million, representing a gross margin of 32%, compared with a gross profit of $ 11.9 million, representing a gross margin of 38% for the nine months ended September 30, 2020. The increase in cost of goods sold was primarily attributable to the Company’s growth in revenue and accompanying increase in production. An increase in cultivation capacity and the associated increase in product, labor, and overhead costs during the nine months ended September 30, 2021 supported the increase in production. The decrease in gross margin is primarily due to the significantly lower wholesale biomass prices compared to the same period in the prior year and increased costs referenced above.

Total Operating Expenses

Total operating expenses for the nine months ended September 30, 2021 were $31.8 million, an increase of $ 13.9 million, or 78%, compared to total operating expenses of $17.9 million for the nine months ended September 30, 2020. The increase in total operating expenses was attributable to the factors described below.

General and administrative expenses for the nine months ended September 30, 2021 and September 30, 2020 were $20.2 million and $13.4 million, respectively, an increase of $6.8 million, or 51%. The increase in general and administrative expenses is primarily attributed to the Company’s initiatives in connection with operational expansion including corporate, cultivation and retail operations which resulted in increases in salaries and wages, stock-based compensation and IT consulting fees of $5.8 million as well as increases to general operational accounts.

Sales and marketing expenses for the nine months ended September 30, 2021 and September 30, 2020 were $2.3 million and $1.1 million, respectively, an increase of $1.2 million, or 110%. The increase in sales and marketing expenses is primarily attributed to the increase in the Company’s efforts related to digital media, marketing research, promotions and royalty expense of $0.8 million. Sales and marketing expenses include trade marketing, point of sale marketing for our CPG product lines and promotions in various media outlets as well as royalty expense.

Professional fees for the nine months ended September 30, 2021 and September 30, 2020 were $7.0 million and $1.5 million, respectively, an increase of $5.5 million, or 367%. The Company recognized increased legal fees of $1.8 million coupled with increased accounting and consulting professional fees of $3.9 million related to the Business Combination transaction and other initiatives that occurred during the nine months ended September 30, 2021. The increases were offset by a decrease in asset management fees of $0.2 million during the nine months ended September 30, 2021 compared to the same period in the prior year.

Depreciation and amortization for the nine months ended September 30, 2021 and September 30, 2020 was $2.2 million and $1.8 million, respectively, an increase of $ 0.4 million, or 21%. The increase is attributed to the growth of the Company’s operations through acquisitions and purchase of additional $3.1 million of fixed assets which resulted in an increase of depreciation and amortization during the nine months ended September 30, 2021.

Total Other Expense, Net

Total other expense for the nine months ended September 30, 2021 and September 30, 2020 was $5.1 million and $3.1 million, respectively, an increase of $2.0 million, or 64%. Total other expense recognized an increase in gain on change in fair value of derivative liabilities and contingent shares payable of $6.0 million offset primarily by increases of $0.7 million in interest expense, $0.7 million in loss on investments and $6.1 million expensed during the nine months ended September 30, 2021 due to the deconsolidation of Field Investment Co, LLC, a former subsidiary, and its subsidiaries, Field Taste Matters, Inc., ATES Enterprises, LLC, and Zero One Seven Management, LLC for de minimis consideration to an unrelated party as well as increases to other expense accounts.

Provision for Income Taxes

The provision for income tax expense for the nine months ended September 30, 2021 was $5.0 million, an increase of $1.5 million, or 42%, compared to provision for income tax expense of $3.5 million for the nine months ended September 30, 2020. The increase in provision for income taxes was due to the Company’s increased gross profit compared to the same period in the prior year.

Non-GAAP Financial Measures

In addition to providing financial measurements based on GAAP, the Company provides additional financial metrics that are not defined under or prepared in accordance with GAAP. Management uses such non-GAAP financial measures, in addition to GAAP financial measures, to understand and compare operating results across accounting periods, for financial and operational decision-making, for planning and forecasting purposes and to evaluate the Company’s financial performance. These non-GAAP financial measures (collectively, the “non-GAAP financial measures”) are:

EBITDA Net Loss (GAAP) adjusted for interest and financing costs, income taxes, depreciation, and amortization.
Adjusted EBITDA EBITDA (Non-GAAP) adjusted for transaction costs, restructuring costs, share-based compensation, and other non-cash operating costs, such as changes in fair value of derivative liabilities, unrealized changes in fair value of investments and loss on extinguishment of debt.

Management believes that these non-GAAP financial measures assess the Company’s ongoing business in a manner that allows for meaningful comparisons and analysis of trends in the business, as they facilitate comparing financial results across accounting periods and to those of peer companies. Management also believes that these non-GAAP financial measures enable investors to evaluate the Company’s operating results and future prospects in the same manner as management. These non-GAAP financial measures may also exclude expenses and gains that may be unusual in nature, infrequent or not reflective of the Company’s ongoing operating results.

As there are no standardized methods of calculating these non-GAAP financial measures, the Company’s methods may differ from those used by others, and accordingly, the use of these measures may not be directly comparable to similarly titled measures used by others. Accordingly, these non-GAAP financial measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

These supplemental non-GAAP financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-GAAP financial measures presented provide additional perspective and insights when analyzing the core operating performance of the business. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to, and should only be considered in conjunction with, the GAAP financial measures presented herein. The Company uses these metrics to measure its core financial and operating performance for business planning purposes. In addition, the Company believes investors use both GAAP and non-GAAP measures to assess management’s past and future decisions associated with its priorities and allocation of capital, as well as to analyze how the business operates in, or responds to, swings in economic cycles or to other events that impact the cannabis industry. However, these measures do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies in the Company’s industry.

These non-GAAP financial measures exclude certain material non-cash items and certain other adjustments the Company believes are not reflective of its ongoing operations and performance.

These financial measures are not intended to represent and should not be considered as alternatives to net income, operating income or any other performance measures derived in accordance with GAAP as measures of operating performance or operating cash flows or as measures of liquidity.

These non-GAAP financial measures have important limitations as analytical tools and should not be considered in isolation or as a substitute for any standardized measure under GAAP. For example, certain of these non-GAAP financial measures:

● exclude certain tax payments that may reduce cash available<br>to the Company;
● do not reflect any cash capital expenditure requirements for<br>the assets being depreciated and amortized that may have to be replaced in the future;
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● do not reflect changes in, or cash requirements for, working<br>capital needs; and
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● do not reflect the interest expense, or the cash requirements<br>necessary to service interest or principal payments on debt.
--- ---

Other companies in the cannabis industry may calculate these measures differently than the Company does, limiting their usefulness as comparative measures.

The following table provides a reconciliation of the Company’s net loss to Adjusted EBITDA (non-GAAP) for the three months ended September 30, 2021 compared to three months ended September 30, 2020:

Three Months Ended
2021 2020
Net Loss (GAAP) $ (7,728,476 ) $ (3,804,960 )
Depreciation and Amortization 783,482 701,352
Interest Expense 11,665 622,710
Income Tax Expense 772,792 1,613,167
EBITDA (6,160,537 ) (867,731 )
Adjustments:
Shared-Based Compensation 3,126,024 628,097
Stock Appreciation Rights Expense (172,839 ) -
Loss on Equity Method Investments 568,471 51,489
Change in Fair Value of Derivative Liabilities - 988,898
Change in Fair Value of Contingent Liabilities (3,223,393 ) -
Gain on Extinguishment of Debt - (573,113 )
Other Non-Recurring Items:
Acquisition Related Professional Fees 508,744 -
Adjusted EBITDA (non-GAAP) $ (5,353,530 ) $ 227,640

Adjusted EBITDA (non-GAAP)

Adjusted EBITDA, a non-GAAP measure which excludes depreciation and amortization, interest expense, income taxes, share-based compensation, stock appreciation rights expense, loss on equity method investments, loss on change in fair value of derivative liabilities, gain on change in fair value of contingent earnout liabilities, gain on extinguishment of debt, and acquisition related professional fees was a loss of $5.4 million for the three months ended September 30, 2021 compared to $0.2 million for the three months ended September 30, 2020. The decrease in adjusted EBITDA of $5.6 million for the three months ended September 30, 2021, is due to a lower gross profit coupled with higher non-excludable operating expenses.

The following table provides a reconciliation of the Company’s net loss to Adjusted EBITDA (non-GAAP) for the nine months ended September 30, 2021 compared to nine months ended September 30, 2020:

Nine Months Ended
2021 2020
Net Loss (GAAP) $ (25,598,990 ) $ (12,600,229 )
Depreciation and Amortization 2,246,338 1,849,871
Interest Expense 2,193,375 1,476,995
Income Tax Expense 5,036,744 3,545,870
EBITDA (16,122,533 ) (5,727,493 )
Adjustments:
Shared-Based Compensation 5,556,548 1,945,909
Stock Appreciation Rights Expense 78,652 -
Loss on Equity Method Investments 852,729 126,397
Change in Fair Value of Derivative Liabilities (825,000 ) 1,925,886
Change in Fair Value of Contingent Liabilities (3,223,393 ) -
Gain on Extinguishment of Debt - (184,057 )
Other Non-Recurring Items:
Acquisition Related Professional Fees 4,982,889 479,502
Loss on Disposition of Subsidiary 6,090,339 -
Adjusted EBITDA (non-GAAP) $ (2,609,769 ) $ (1,433,856 )

Adjusted EBITDA (non-GAAP)

Adjusted EBITDA, a non-GAAP measure which excludes depreciation and amortization, interest expense, income taxes, share-based compensation, stock appreciation rights expense, loss on equity method investments, (gain) loss on change in fair value of derivative liabilities, gain on change in fair value of contingent earnout liabilities, gain on extinguishment of debt, acquisition related professional fees, and loss on disposition of subsidiary was a loss of $2.6 million for the nine months ended September 30, 2021 compared to a loss of $1.4 million for the nine months ended September 30, 2020. The increased loss in adjusted EBITDA of $1.2 million for the nine months ended September 30, 2021, is due to an increased loss in EBITDA offset by an increase of adjustments and other non-recurring items.

Selected Quarterly Information

A summary of selected information for each of the quarters presented is as follows:

Loss Per Share
- Basic and
Revenues Net Loss Diluted
September 30, 2021 $ 17,171,852 $ (7,728,476 ) $ (0.15 )
June 30, 2021 $ 18,674,277 $ (4,716,721 ) $ (0.19 )
March 31, 2021 $ 15,240,281 $ (13,153,793 ) $ (0.55 )
December 31, 2020 $ 16,939,792 $ (4,059,249 ) $ (0.18 )
September 30, 2020 $ 13,307,759 $ (3,804,960 ) $ (0.16 )
June 30, 2020 $ 11,562,723 $ (3,654,615 ) $ (0.16 )
March 31, 2020 $ 6,449,327 $ (5,140,654 ) $ (0.33 )
December 31, 2019 $ 5,737,106 $ (7,203,550 ) $ (0.32 )

Revenues for the quarter ended September 30, 2021 were $17.2 million, which represents a decrease of $1.5 million or 8% from $18.7 million for the quarter ended June 30, 2021. The decrease in revenue was primarily due to the pricing impact of biomass wholesale products which dropped during the three months ended September 30, 2021, discussed in the “Results of Operations” section above. Revenue growth in during the quarter ended March 31, 2020 through the quarter ended December 31, 2020 was primarily driven by an increase in cannabis production from the Company’s second greenhouse cultivation facility located in Carpinteria, California, which commenced operations during the first quarter of 2020 and expanded operational canopy from approximately 113,000 square feet as of December 31, 2019, to over 390,000 square feet by December 31, 2020.

Net loss for the quarter ended September 30, 2021 was $7.7 million, which represents an increase of $3.0 million, or 64% from $4.7 million for the quarter ended June 30, 2021. The increase in net loss was primarily due a decrease in gross profit for the quarter ended September 30, 2021 due to the pricing impact of biomass wholesale products in addition to increased operating expenses. Net loss for quarter ended March 31, 2021 was $13.1 million, $ 5.4 million, or 70% greater compared to the quarter ended September 30, 2021. The difference in net loss was primarily due to the Company’s disposition of Field Investment Co., LLC, a subsidiary and its subsidiaries Field Taste Matters, Inc., ATES Enterprises, LLC, and Zero One Seven Management, LLC. The Company recorded a loss on disposition of subsidiary in the amount of $6.1 million during the quarter ended March 31, 2021.

Liquidity and Capital Resources

Overview

Historically, the Company’s primary source of liquidity has been its normal 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 September 30, 2021, and for the nine-month period then ended, the Company had an accumulated deficit of $42,258,468, a net loss from operations of $15,465,517 and net cash used in operating activities of $11,934,680. 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.

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.

Completed Transaction

During the three months ended September 30, 2021, the Company entered into a third amendment to its acquisition agreement (the “Camarillo Acquisition Agreement”) regarding the Camarillo Asset Acquisition. 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 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, and 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 Camarillo Asset Acquisition. The Company paid the total cash purchase price on closing on September 14, 2021 (“Closing Date”). 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 Closing Date. In addition to the Equity Shares issued for the Option Right on the 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.

The Company recorded $19,847,000 as a capital addition to property and equipment and as a liability, which is included in contingent earnout liabilities in the accompanying Financial Statements as of September 30, 2021. 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 discounted cash flow model that is based on unobservable inputs.

The Company capitalized the fair value of the purchase Option Right during the nine months ended September 30, 2021. As a result of the Company’s obligation to issue up to the 3,500,000 Equity Shares as a contingent payment if certain conditions and financials metrics are met, as discussed in the paragraph above, the Company initially recorded $14,973,000 as a liability, which is included in contingent earnout liabilities in the accompanying Financial Statements as of September 30, 2021. 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.

On August 23, 2021, the Company received $1,000,000 from an investor prior to receiving shares. Subsequent to September 30, 2021, the Company issued 100,000 Equity Shares to the investor.

Financial Condition

Cash Flows

The following table summarizes the Company’s consolidated statements of cash flows from continuing operations for the nine months ended September 30, 2021 and 2020:

2021 2020
Net Cash Used in Operating Activities $ (11,934,680 ) $ (6,742,379 )
Net Cash Used in Investing Activities (97,799,913 ) (6,991,227 )
Net Cash Provided by Financing Activities 134,060,844 13,367,775
Net Increase (Decrease) in Cash and Cash Equivalents 24,326,251 (365,831 )
Cash and Cash Equivalents, Beginning of Period 4,535,251 2,631,886
Cash and Cash Equivalents, End of Period $ 28,861,502 $ 2,266,055

Cash Flow from Operating Activities

Net cash used in operating activities was $11.9 million for the nine months ended September 30, 2021, an increase of $5.2 million, or 77%, compared to $6.7 million for the nine months ended September 30, 2020. The increase in cash used in operating activities was primarily due to an increase in net loss and adjustments to reconcile net loss to net cash used in operating activities of $7.8 million for the nine months ended September 30, 2021 as compared to the prior period. This was offset by decrease in changes in operating assets and liabilities of $2.6 million for the nine months ended September 30, 2021 as compared to the prior period prior.

Cash Flow from Investing Activities

Net cash used in investing activities was $97.8 million for the nine months ended September 30, 2021, an increase of $90.8 million, or 1,299%, compared to $7.0 million for the nine months ended September 30, 2020. This was primarily driven by the increase in purchases of property and equipment of $93.8 million for the nine months ended September 30, 2021, compared to the prior period. During the nine months ended September 30, 2021, the Company closed on the GH Camarillo Asset Acquisition for a total purchase price of $ 93,000,000, in which the Company acquired certain real property from the prior fee owner as a result of the completion of the transaction, discussed in the “Liquidity and Capital Resources - CompletedTransactions” section above.

Cash Flow from Financing Activities

Net cash provided by financing activities totaled $134.0 million for the nine months ended September 30, 2021, an increase of $120.6 million, or 902%, compared to $13.4 million for the nine months ended September 30, 2020. This was driven by cash proceeds received from the shares issued in the Business Combination during the current period of $ 124.4 million, compared to nil during the nine months ended September 30, 2020 and was coupled with a decrease in proceeds from the issuance of notes payable.

As previously noted, the Company’s primary source of liquidity has been capital contributions and debt capital made available from investors. The Company expects to generate positive cash flow from its operations going forward and expects such positive cash flow to be its principal source of future liquidity. In the event sufficient cash flow is not available from operating activities, the Company may continue to raise equity capital from investors in order to meet liquidity needs. The Company does not have any committed sources of financing, nor significant outstanding capital expenditure commitments.

Contractual Obligations

The Company has contractual obligations to make future payments, including debt agreements and lease agreements from third parties.

The following table summarizes such obligations as of September 30, 2021:

2021 2022 2023- 2024 After 2024 Total
(remaining)
Notes Payable from Third Parties $ 9,204 $ 38,171 $ 83,263 $ 114,370 $ 245,008
Lease Obligations 157,630 633,127 1,270,379 2,660,015 4,721,151
Total Contractual Obligations $ 166,834 $ 671,298 $ 1,353,642 $ 2,774,385 $ 4,966,159

Off-Balance Sheet Arrangements

As of the date of this filing, the Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition of the Company including, without limitation, such considerations as liquidity and capital resources that have not previously been discussed.

Transactions with Related Parties During the Nine Months EndedSeptember 30, 2021

Private Placement

Effective January 8, 2020, the board of directors of GH Group approved approximately $17,500,000 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 of GH Group 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 accrued 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.

Magu Farm Lenders Debt Transactions

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”). The principal amounts funded under the Magu Farm Convertible Notes was used to finance a previous acquisition of a cultivation facility located in Carpinteria, California.

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. 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.

BFP Debt Transaction

During the nine months ended September 30, 2021, the Company issued a $2,000,000 promissory note to 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.

Qualified Equity Financing

In June 2021, the GH Group completed a QEF (i.e., of the offering and sale of the Preferred Shares in the amount of $12,530,963. The Preferred Sharescarry an annual fifteen percent (15%) cumulative dividend in year 1. During March 2021, the Company raised $ 2,000,000 from Beach Front Properties, LLC that was initially recorded as debt. On June 29, 2021, all principal and accrued interest from such debt was converted to Preferred Shares.

Incubation Services

Effective January 1, 2019, GH Group and Magu Capital LLC, a California limited liability company (“Magu Capital”), an affiliate of certain significant shareholders of GH Group, 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 and no later than three years following the grant date. 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.

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 Warrant was fair valued at approximately $427,000. The Company recorded a gain on extinguishment of the liability in the amount of approximately $ 573,000 which is recorded as a component of other income in the accompanying consolidated statement of operations for the nine months ended September 30, 2020.

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, a California limited liability company (“APP Investment Advisors”), an affiliate of certain significant shareholders of GH Group, 880,870 Class A Common shares of GH Group, in exchange for certain management services rendered by APP Investment Advisors for AP Investment Fund (i.e., one of the entities that merged with GH Group in the Roll-Up); and (b) issued to Magu Capital, an affiliate of certain significant shareholders GH Group, 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.

Proposed Transaction

Element 7 CA, LLC Transaction

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 has the right, subject to satisfactory completion of due diligence and other conditions, to obtain all of the 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. Under the E7 Merger Agreement, GH Group is obligated to purchase all such equity interests for each retail cannabis license that meets the conditions for sale and E7 is obligated to sell such equity interests. The consideration payable under the E7 Merger Agreement is $1,500,000 for 100% of E7’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). This could result in the issuance of up to 2,400,000 Equity Shares in the amount of $24,000,000. Conditions to closing the transaction include, among other things, the availability of $25,000,000 for development of certain E7 retail cannabis licenses, and the delivery by E7 of certain leases.

Effective February 23, 2021, GH Group entered into a License Development and Consulting Agreement (the “E7 License Agreement”) 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 as set forth in the E7 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.

On November 4, 2021, GH Group filed a lawsuit in 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 arising from Element 7's conduct incident to the E7 Merger Agreement. In addition, GH Group has also given notice to E7 that it is terminating the E7 License Agreement for cause.

To date, E7 has fully transferred three retail licenses located in Dunsmuir, Hesperia, and Eureka, California out of a total of seventeen licenses that were contractually committed to be transferred under the terms of the E7 Merger Agreement. GH Group is confident that it will ultimately prevail in the lawsuit and be able to enforce the transfer of the remaining fourteen retail licenses.

Critical Accounting Estimates

Use of Estimates

The preparation of the unaudited Condensed Interim Consolidated Financial Statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of unaudited Condensed Interim 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.

Estimated Useful Lives and Depreciation of Property and Equipment

Depreciation of property and equipment is dependent upon estimates of useful lives which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.

Estimated Useful Lives and Amortization of Intangible Assets

Amortization of intangible assets is dependent upon estimates of useful lives and residual values which are determined through the exercise of judgment. Intangible assets that have indefinite useful lives are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions.

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”). 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”, the Company determines if an arrangement is a lease at inception. The Company elected the package of practical expedients provided by ASC 842, which forgoes reassessment of the following upon adoption of the new standard: (1) whether contracts contain leases for any expired or existing contracts, (2) the lease classification for any expired or existing leases, and (3) initial direct costs for any existing or expired leases. In addition, the Company elected an accounting policy to exclude from the balance sheet the right-of-use assets and lease liabilities related to short-term leases, which are those leases with a lease term of twelve months or less that do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise.

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 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. In adoption of ASC 842, the Company applied the practical expedient test or approach which applies hindsight in determining the lease term and assessing impairment of right-of-use assets by using its actual knowledge or current expectation as of the effective date. 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 right-of-use asset either on its own or together with other resources and whether the asset is highly dependent on or highly interrelated with another right-of-use asset. Lessees are required to record a right-of -use asset and a lease liability for all leases with a term greater than twelve months. Lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. 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.

Income Taxes

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 combined balance sheet. 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”. Professional standards 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”.

The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with ASC 470, “Accounting for Convertible Securities with Beneficial Conversion Features”, as those professional standards pertain to “Certain Convertible Instruments”. On January 1, 2021, 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 Topic 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 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 or 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 unaudited Condensed Interim 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 unaudited Condensed Interim 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 date.

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 unaudited Condensed Interim 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 also is 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 unaudited Condensed Interim Consolidated Statements of Operations immediately as a gain on acquisition.

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.

Share-Based Compensation

The Company has a share-based compensation plan comprised of stock options (“Options”),unrestricted stock bonus, and restricted stock units (“RSUs”). GH Group has a share-based compensation plan comprised of stock appreciation rights (“SARs”). Options provide the right to the purchase of one Equity Share per option. 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. 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).

The Company accounts for its share-based awards in accordance with ASC Subtopic 718-10, “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 common shares on the date of grant. The fair value is then expensed over the requisite service periods of the awards, net of estimated forfeitures, which is generally the performance period and the related amount is recognized in the Condensed Interim Consolidated Statements of Operations.

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 is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If the actual forfeiture rate is materially different from management’s estimates, the share-based compensation expense could be significantly different from what the Company has recorded in the current period.

Financial Instruments

Measurement

All financial instruments are required to be measured at fair value on initial recognition, plus, in the case of a financial asset or financial liability not at fair value through profit or loss (“FVTPL”), transaction costs that are directly attributable to the acquisition or issuance of the financial asset or financial liability. Transaction costs of financial assets and financial liabilities carried at FVTPL are expensed in profit or loss. Financial assets and financial liabilities with embedded derivatives are considered separately when determining whether their cash flows are solely payment of principal and interest. Financial assets that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of the subsequent accounting periods. All other financial assets including equity investments are measured at their fair values at the end of subsequent accounting periods, with any changes taken through profit and loss or other comprehensive income (irrevocable election at the time of recognition). For financial liabilities measured subsequently at FVTPL, changes in fair value due to credit risk are recorded in other comprehensive income.

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.

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 all information available, and reasonable and supportive forward-looking information. 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.

Changes in Accounting Policies Including Adoption

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), 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 unaudited Condensed Interim 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)” (“ASU 2020-01”), which is intended to clarify the interaction of the accounting for equity securities under Topic 321 and 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 unaudited Condensed Interim Consolidated Financial Statements.

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” (“ASU 2020-06”), 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 unaudited Condensed Interim Consolidated Financial Statements.

Financial Instruments and Other Instruments

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, accounts receivables, investments, notes receivable, trade payables, accrued liabilities, operating lease liabilities, derivatives, notes payable, acquisition consideration of assets and liabilities. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy. This is described, as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

Level 1 – inputs are quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 – inputs are observable inputs other than quoted prices included within Level 1, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are observable directly or indirectly.

Level 3 – inputs are unobservable inputs for the asset or liability that reflect the reporting entity’s own assumptions and are not based on observable market data.

There have been no transfers between fair value levels during the years.

Other Risks and Uncertainties

Credit Risk

Credit risk is the risk of a potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure as of September 30, 2021 and December 31, 2020 is the carrying values of cash and cash equivalents, accounts receivable, due from related party. The Company does not have significant credit risk with respect to its customers. All cash and cash equivalents are placed with major U.S. financial institutions. The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk but has limited risk as the majority of its sales are transacted with cash.

Liquidity Risk

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 risk is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due. As of September 30, 2021 and December 31, 2020, cash generated from ongoing operations was not sufficient to fund operations and growth strategy as discussed above in “Liquidity and Capital Resources”.

Interest Rate Risk

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Cash and cash equivalents bear interest at market rates. The Company’s financial liabilities have fixed rates of interest and therefore expose the Company to a limited interest rate fair value risk.

Price Risk

Price risk is the risk of variability in fair value due to movements in equity or market prices. The Company’s investments are susceptible to price risk arising from uncertainties about their future outlook, future values and the impact of market conditions. The fair value of investments held in privately-held entities are based on a market approach, which uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Shares Outstanding

As of the date of this MD&A, the Company had 4,754,979 Multiple Voting Shares and 29,460,947 Equity Shares. There are 27,290,154 Exchangeable Shares issued and outstanding in the capital of MPB Acquisition Corp. In addition, the Company had outstanding an aggregate of 33,417,748 warrants, 2,055,543 stock options and 3,610,642 RSUs.

Update to Q4 2021 Outlook

The Company has included an update to its Q4 2021 outlook, previously provided in its non- offering prospectus dated May 6, 2021 filed in connection with its de-SPAC transaction, in its press release dated November 11, 2021, which is available on SEDAR at www.sedar.com.

Cautionary Note Regarding Forward-Looking Information

This MD&A contains certain forward -looking information and forward-looking statements, as defined in applicable securities laws (collectively referred to herein as “forward-looking statements”). These statements relate to future events or the Company’s future performance. All statements other than statements of historical fact are forward-looking statements. 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. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those anticipated in such forward-looking statements. Forward looking statements include, but are not limited to: statements concerning the completion of, and matters relating to, the various proposed transactions discussed by the Company herein and the expected timing related thereto; the expected operations, financial results and condition of the Company; general economic trends; the regulatory and legal environment relating to cannabis in the United States; any potential future legalization of adult-use and/or medical marijuana under U.S. federal law; expectations of market size and growth in the United States and the States the Company operates; cannabis cultivation, production and extraction capacity estimates and projections; additional funding requirements; statements based on the Company’s Q3 2021 financial statements; the Company’s future objectives and strategies to achieve those objectives; the Company’s estimated cash flow and expectations that the Company will have positive cash flow going forward, capitalization and adequacy thereof; the Company’s expectations with respect to the legal lawsuit filed by GH Group against E7 and the Company’s intention to terminate the E7 License Agreement for cause; and other statements with respect to management’s beliefs, plans, estimates and intentions, and similar statements concerning anticipated future events, results, circumstances, performance or expectations that are not historical facts.

Inherent in forward-looking statements are risks, uncertainties, and other factors beyond the Corporation’s ability to predict or control. Factors that could cause such differences include, but are not limited to: cannabis is a controlled substance under applicable legislation; the enforcement of cannabis laws could change; differing regulatory requirements across State jurisdictions may hinder economies of scale; legal, regulatory or other political change; the unpredictable nature of the cannabis industry; regulatory scrutiny; the impact of regulatory scrutiny on the ability to raise capital; anti-money laundering laws and regulations; any reclassification of cannabis or changes in U.S. controlled substances and regulations; restrictions on the availability of favorable locations; enforceability of contracts; general regulatory and licensing risks; California regulatory regime and transfer and grant of licenses; limitations on ownership of licenses; regulatory action from the Food and Drug Administration; competition; ability to attract and retain customers; unfavorable publicity or consumer perception; results of future clinical research and/or controversy surrounding vaporizers and vaporizer products; limited market data and difficulty to forecast; constraints on marketing products; effects of the COVID-19 pandemic; execution of the Company’s business strategy; reliance on management; ability to establish and maintain effective internal control over financial reporting; competition from synthetic production and technological advances; fraudulent or illegal activity by employees, contractors and consultants; product liability and recalls; risks related to product development and identifying markets for sale; dependence on suppliers, manufacturers, and contractors; reliance on inputs; reliance on equipment and skilled labor; service providers; litigation and any unexpected outcomes thereof; intellectual property risks; information technology systems, cyber-attacks, security, and privacy breaches; bonding and insurance coverage; transportation; energy costs; risks inherent in an agricultural business; management of growth; risks of leverage; future acquisitions or dispositions; difficulty attracting and retaining personnel; and past performance not being indicative of future results.

Readers are cautioned that the factors outlined herein are not an exhaustive list of the factors or assumptions that may affect the forward-looking statements, and that the assumptions underlying such statements may prove to be incorrect. Actual results and developments are likely to differ, and may differ materially, from those expressed or implied by the forward-looking statements contained in this MD&A. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Corporation’s actual results, performance, or achievements to be materially different from any of its future results, performance or achievements expressed or implied by forward-looking statements. All forward-looking statements herein are qualified by this cautionary statement. The forward-looking statements in this MD&A speak only as of the date of this MD&A or as of the date specified in such statement. Accordingly, readers should not place undue reliance on forward-looking statements. The Company undertakes no obligation to update publicly or otherwise revise any forward-looking statements whether because of new information or future events or otherwise, except as may be required by law. 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.

Disclosure Controls and Internal Control over Financial Reporting

In accordance with National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings (“NI 52-109”), management is responsible for establishing and maintaining adequate Disclosure Controls and Procedures (“DCP”) and Internal Control Over Financial Reporting (“ICFR”).

Disclosure Controls and Procedures

In accordance with NI 52-109, management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) of the Company, have evaluated the effectiveness of the Company’s DCP. Based upon the results of that evaluation, the Company’s CEO and CFO have concluded that as of September 30, 2021, the Company’s DCP to provide reasonable assurance that the information required to be disclosed by the Company in reports it files is recorded, processed, summarized and reported within the appropriate time periods and forms were effective.

Internal Control Over Financial Reporting

ICFR 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 applicable U.S. GAAP. Internal control over financial reporting should include those policies and procedures that establish the following:

•   maintenance of records in reasonable detail, that accurately and fairly reflect the transactions and dispositions of our assets;

•  reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with applicable U.S. GAAP

•  receipts and expenditures are only being made in accordance with authorizations of management and the Board of Directors; and

•  reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial instruments.

The Company’s management, with the participation of the CEO and CFO, assessed the effectiveness of the Company’s ICFR and concluded that as of September 30, 2021, the Company’s ICFR was effective. There were no changes to the Company’s ICFR during the three months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations of Controls and Procedures

Our management, including the CEO and CFO, believes that any DCP or ICFR, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are 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. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgements in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. The design of any control system also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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