UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO
RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of November, 2023.
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
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 13, 2023 |
/s/ Kyle Kazan |
|
|
By: Kyle Kazan |
|
|
Title: Chief Executive Officer |
EXHIBIT INDEX
Exhibit Number |
|
Description |
Exhibit 99.1
GLASS HOUSE BRANDS INC.
UNAUDITED CONDENSED INTERIM
CONSOLIDATED
FINANCIAL STATEMENTS
AS OF
SEPTEMBER 30, 2023 AND DECEMBER 31, 2022
AND FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2023 AND 2022
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 in Shareholders’ Equity |
3 – 4 |
|
|
Unaudited Condensed Interim Consolidated Statements of Cash Flows |
5 – 6 |
|
|
Notes to Unaudited Condensed Interim Consolidated Financial Statements |
7 – 26 |
GLASS HOUSE BRANDS INC.
Condensed Consolidated Balance Sheets
As of September 30,
2023 and December 31, 2022
| |
2023 | | |
2022 | |
| |
| Unaudited | | |
| | |
ASSETS | |
| | | |
| | |
Current Assets: | |
| | | |
| | |
Cash | |
$ | 34,892,822 | | |
$ | 11,143,502 | |
Restricted Cash | |
| 3,000,000 | | |
| 3,000,000 | |
Accounts Receivable, Net | |
| 4,199,139 | | |
| 5,652,949 | |
Prepaid Expenses and Other Current Assets | |
| 4,734,832 | | |
| 8,347,055 | |
Inventory | |
| 12,838,448 | | |
| 12,057,570 | |
Notes Receivable | |
| - | | |
| 1,255,843 | |
| |
| | | |
| | |
Total Current Assets | |
| 59,665,241 | | |
| 41,456,919 | |
| |
| | | |
| | |
Operating Lease Right-of-Use Assets, Net | |
| 9,338,083 | | |
| 10,847,642 | |
Finance Lease Right-of-Use Assets, Net | |
| 1,840,496 | | |
| 285,971 | |
Long Term Investments | |
| 2,109,557 | | |
| 4,246,192 | |
Property, Plant and Equipment, Net | |
| 212,813,030 | | |
| 216,430,924 | |
Intangible Assets, Net | |
| 29,330,598 | | |
| 48,651,835 | |
Goodwill | |
| 22,966,588 | | |
| 21,808,566 | |
Deferred Tax Asset | |
| - | | |
| 1,289,882 | |
Other Assets | |
| 3,529,856 | | |
| 3,650,468 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 341,593,449 | | |
$ | 348,668,399 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | | |
| | |
| |
| | | |
| | |
LIABILITIES: | |
| | | |
| | |
Current Liabilities: | |
| | | |
| | |
Accounts Payable and Accrued Liabilities | |
$ | 27,744,399 | | |
$ | 22,266,998 | |
Income Taxes Payable | |
| 20,639,827 | | |
| 7,549,878 | |
Contingent Shares and Earnout Liabilities | |
| 28,684,000 | | |
| 14,656,666 | |
Shares Payable | |
| 8,561,439 | | |
| 8,588,915 | |
Current Portion of Operating Lease Liabilities | |
| 1,524,675 | | |
| 1,077,971 | |
Current Portion of Finance Lease Liabilities | |
| 350,407 | | |
| 66,790 | |
Current Portion of Notes Payable | |
| 49,550 | | |
| 40,237 | |
| |
| | | |
| | |
Total Current Liabilities | |
| 87,554,297 | | |
| 54,247,455 | |
| |
| | | |
| | |
Operating Lease Liabilities, Net of Current Portion | |
| 7,993,150 | | |
| 9,859,232 | |
Finance Lease Liabilities, Net of Current Portion | |
| 1,508,499 | | |
| 214,017 | |
Other Non-Current Liabilities | |
| 5,805,386 | | |
| 4,291,319 | |
Deferred Tax Liabilities | |
| 3,829,846 | | |
| - | |
Notes Payable, Net of Current Portion | |
| 63,871,736 | | |
| 62,618,711 | |
| |
| | | |
| | |
TOTAL LIABILITIES | |
| 170,562,914 | | |
| 131,230,734 | |
| |
| | | |
| | |
MEZZANINE NON-CONTROLLING INTEREST: | |
| | | |
| | |
GH Group, Inc. Preferred Series B Shares (no par value, 55,000 shares authorized, 49,969 shares issued and outstanding as of September 30, 2023 and December 31, 2022) | |
| 56,069,182 | | |
| 51,774,193 | |
| |
| | | |
| | |
GH Group, Inc.
Preferred Series C Shares (no par value, 5,000 shares authorized, 5,000 and 4,700 shares issued and outstanding as of
September 30, 2023 and December 31, 2022, respectively) | |
| 5,467,136 | | |
| 4,759,925 | |
| |
| | | |
| | |
GH Group, Inc. Preferred Series D Shares (no par value, 15,000 shares authorized, 10,900 and nil shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively) | |
| 10,900,000 | | |
| - | |
| |
| | | |
| | |
SHAREHOLDERS' EQUITY: | |
| | | |
| | |
Multiple Voting Shares (No par value, unlimited shares authorized, 4,754,979 shares issued and outstanding as of September 30, 2023 and December 31, 2022) | |
| - | | |
| - | |
Subordinate Voting Shares (No par value, unlimited shares authorized, 60,984,747 and 55,653,855 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively) | |
| - | | |
| - | |
Exchangeable Shares (No par value, unlimited shares authorized, 9,198,780 and 12,566,550 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively) | |
| - | | |
| - | |
Additional Paid-In Capital | |
| 276,356,947 | | |
| 261,527,245 | |
Accumulated Deficit | |
| (160,372,732 | ) | |
| (96,362,182 | ) |
| |
| | | |
| | |
Total Shareholders' Equity Attributable to the Company | |
| 115,984,215 | | |
| 165,165,063 | |
Non-Controlling Interest | |
| (17,389,998 | ) | |
| (4,261,516 | ) |
| |
| | | |
| | |
TOTAL SHAREHOLDERS' EQUITY | |
| 171,030,535 | | |
| 217,437,665 | |
| |
| | | |
| | |
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | |
$ | 341,593,449 | | |
$ | 348,668,399 | |
The
accompanying notes are an integral part of these Unaudited Condensed Interim Consolidated Financial Statements.
GLASS HOUSE BRANDS INC.
Unaudited Condensed Interim Consolidated
Statements of Operations
For the Three and Nine Months Ended
September 30, 2023 and 2022
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
| |
Three Months Ended | | |
Nine Months Ended | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Revenues, Net | |
$ | 48,186,773 | | |
$ | 28,256,835 | | |
$ | 121,873,911 | | |
$ | 58,702,453 | |
Cost of Goods Sold (Exclusive of Depreciation and Amortization Shown Separately Below) | |
| 22,176,022 | | |
| 19,530,882 | | |
| 59,534,954 | | |
| 47,383,455 | |
| |
| | | |
| | | |
| | | |
| | |
Gross Profit | |
| 26,010,751 | | |
| 8,725,953 | | |
| 62,338,957 | | |
| 11,318,998 | |
| |
| | | |
| | | |
| | | |
| | |
Operating Expenses: | |
| | | |
| | | |
| | | |
| | |
General and Administrative | |
| 15,187,493 | | |
| 11,546,327 | | |
| 39,627,217 | | |
| 31,844,941 | |
Sales and Marketing | |
| 554,633 | | |
| 804,356 | | |
| 2,204,031 | | |
| 2,568,612 | |
Professional Fees | |
| 1,705,559 | | |
| 2,834,381 | | |
| 5,405,893 | | |
| 8,075,356 | |
Depreciation and Amortization | |
| 3,676,028 | | |
| 3,440,503 | | |
| 11,081,679 | | |
| 8,885,109 | |
Impairment Expense for Goodwill | |
| - | | |
| - | | |
| 17,480,983 | | |
| - | |
Impairment Expense for Intangible Assets | |
| - | | |
| - | | |
| 6,854,428 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Total Operating Expenses | |
| 21,123,713 | | |
| 18,625,567 | | |
| 82,654,231 | | |
| 51,374,018 | |
| |
| | | |
| | | |
| | | |
| | |
Income (Loss) from Operations | |
| 4,887,038 | | |
| (9,899,614 | ) | |
| (20,315,274 | ) | |
| (40,055,020 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other Expense (Income): | |
| | | |
| | | |
| | | |
| | |
Interest Expense | |
| 2,158,579 | | |
| 2,672,243 | | |
| 6,785,440 | | |
| 5,440,551 | |
Interest Income | |
| (34 | ) | |
| (35 | ) | |
| (45,103 | ) | |
| (507 | ) |
(Gain) Loss on Equity Method Investments | |
| (91,248 | ) | |
| 871,329 | | |
| 2,136,635 | | |
| 1,297,992 | |
Loss on Change in Fair Value of Derivative Liabilities | |
| 92,806 | | |
| 24,837 | | |
| 222,821 | | |
| 78,050 | |
(Gain) Loss on Change in Fair Value of Contingent Liabilities and Shares Payable | |
| (4,023,664 | ) | |
| (31,122,401 | ) | |
| 18,485,859 | | |
| (30,955,349 | ) |
Loss on Extinguishment of Debt | |
| - | | |
| 489,647 | | |
| - | | |
| 489,647 | |
Other Expense (Income), Net | |
| 466,411 | | |
| (633,779 | ) | |
| 1,837,868 | | |
| (568,142 | ) |
| |
| | | |
| | | |
| | | |
| | |
Total Other (Income) Expense, Net | |
| (1,397,150 | ) | |
| (27,698,159 | ) | |
| 29,423,520 | | |
| (24,217,758 | ) |
| |
| | | |
| | | |
| | | |
| | |
Income (Loss) from Operations Before Provision for Income Tax Expense | |
| 6,284,188 | | |
| 17,798,545 | | |
| (49,738,794 | ) | |
| (15,837,262 | ) |
Provision for Income Tax Expense | |
| 6,494,660 | | |
| 2,629,995 | | |
| 14,161,836 | | |
| 3,012,244 | |
| |
| | | |
| | | |
| | | |
| | |
Net (Loss) Income | |
| (210,472 | ) | |
| 15,168,550 | | |
| (63,900,630 | ) | |
| (18,849,506 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net Income (Loss) Attributable to Non-Controlling Interest | |
| 62,528 | | |
| (7,044 | ) | |
| 109,920 | | |
| (53,604 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net (Loss) Income Attributable to the Company | |
$ | (273,000 | ) | |
$ | 15,175,594 | | |
$ | (64,010,550 | ) | |
$ | (18,795,902 | ) |
| |
| | | |
| | | |
| | | |
| | |
(Loss) Earnings Per Share - Basic | |
$ | (0.10 | ) | |
$ | 0.05 | | |
$ | (1.07 | ) | |
$ | (0.55 | ) |
| |
| | | |
| | | |
| | | |
| | |
(Loss) Earnings Per Share - Diluted | |
$ | (0.10 | ) | |
$ | 0.04 | | |
$ | (1.07 | ) | |
$ | (0.55 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted-Average Shares Outstanding - Basic | |
| 72,018,714 | | |
| 61,647,076 | | |
| 72,216,018 | | |
| 59,271,500 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted-Average Shares Outstanding - Diluted | |
| 72,018,714 | | |
| 68,600,429 | | |
| 72,216,018 | | |
| 59,271,500 | |
The
accompanying notes are an integral part of these Unaudited Condensed Interim Consolidated Financial Statements.
GLASS HOUSE BRANDS INC.
Unaudited Condensed Interim Consolidated Statements
of Changes in Shareholders’ Equity
For the Nine Months Ended September 30,
2023
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
|
|
Units |
|
|
Units |
|
|
Units |
|
|
|
|
|
|
|
|
|
|
|
$
Amount |
|
|
$
Amount |
|
|
$
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
EQUITY |
|
|
Mezzanine
Non- |
|
|
Mezzanine
Non- |
|
|
Mezzanine
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchangeable |
|
|
Additional
Paid- |
|
|
|
|
|
ATTRIBUTABLE |
|
|
Controlling
Equity |
|
|
Controlling
Equity |
|
|
Controlling
Equity |
|
|
Non- |
|
|
TOTAL
|
|
|
|
Multiple
Voting |
|
|
Equity |
|
|
Voting |
|
|
In |
|
|
Accumulated |
|
|
TO |
|
|
Preferred |
|
|
Preferred |
|
|
Preferred |
|
|
Controlling |
|
|
SHAREHOLDERS' |
|
|
|
Shares |
|
|
Shares |
|
|
Shares |
|
|
Capital |
|
|
Deficit |
|
|
SHAREHOLDERS |
|
|
Series B |
|
|
Series C |
|
|
Series D |
|
|
Interest |
|
|
EQUITY |
|
BALANCE
AS OF DECEMBER 31, 2022 |
|
4,754,979 |
|
|
55,653,855 |
|
|
12,566,550 |
|
|
$ |
261,527,245 |
|
|
$ |
(96,362,182 |
) |
|
$ |
165,165,063 |
|
|
$ |
51,774,193 |
|
|
$ |
4,759,925 |
|
|
$ |
- |
|
|
$ |
(4,261,516 |
) |
|
$ |
217,437,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income |
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
(64,010,550 |
) |
|
|
(64,010,550 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
109,920 |
|
|
|
(63,900,630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-Based
Compensation from Options and RSU's |
|
- |
|
|
- |
|
|
- |
|
|
|
5,727,966 |
|
|
|
- |
|
|
|
5,727,966 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,727,966 |
|
Issuance
for Shares Payable - Plus Business Acquisition |
|
- |
|
|
1,300,006 |
|
|
- |
|
|
|
4,446,000 |
|
|
|
- |
|
|
|
4,446,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,446,000 |
|
Issuance
of Series C Preferred Shares and Warrants |
|
- |
|
|
- |
|
|
- |
|
|
|
84,174 |
|
|
|
- |
|
|
|
84,174 |
|
|
|
- |
|
|
|
215,826 |
|
|
|
- |
|
|
|
- |
|
|
|
300,000 |
|
Adjustment
of Series C Preferred Shares to Redemption Value |
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
84,174 |
|
|
|
- |
|
|
|
(84,174 |
) |
|
|
- |
|
Issuance
of Series D Preferred Shares and Warrants |
|
- |
|
|
- |
|
|
- |
|
|
|
3,925,738 |
|
|
|
- |
|
|
|
3,925,738 |
|
|
|
- |
|
|
|
- |
|
|
|
6,974,262 |
|
|
|
- |
|
|
|
10,900,000 |
|
Adjustment
of Series D Preferred Shares to Redemption Value |
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,925,738 |
|
|
|
(3,925,738 |
) |
|
|
- |
|
Issuance
for Payment of Interest on Convertible Debentures |
|
- |
|
|
130,984 |
|
|
- |
|
|
|
645,824 |
|
|
|
- |
|
|
|
645,824 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
645,824 |
|
Issuance
for Conversion of Exchangeable Shares |
|
- |
|
|
3,367,770 |
|
|
(3,367,770 |
) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Shares
Issued for Exercise of Restricted Stock Units |
|
- |
|
|
532,132 |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Distributions
to Non-Controlling Interest Holders |
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(136,682 |
) |
|
|
(136,682 |
) |
Dividends
- Preferred Shareholders |
|
- |
|
|
- |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,294,989 |
|
|
|
407,211 |
|
|
|
- |
|
|
|
(9,091,808 |
) |
|
|
(4,389,608 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
AS OF SEPTEMEBER 30, 2023 |
|
4,754,979 |
|
|
60,984,747 |
|
|
9,198,780 |
|
|
$ |
276,356,947 |
|
|
$ |
(160,372,732 |
) |
|
$ |
115,984,215 |
|
|
$ |
56,069,182 |
|
|
$ |
5,467,136 |
|
|
$ |
10,900,000 |
|
|
$ |
(17,389,998 |
) |
|
$ |
171,030,535 |
|
The
accompanying notes are an integral part of these Unaudited Condensed Interim Consolidated Financial Statements.
GLASS HOUSE BRANDS INC.
Unaudited Condensed Interim Consolidated Statements
of Changes in Shareholders’ Equity
For the Nine Months Ended September 30,
2022
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
| |
Units | | |
Units | | |
Units | | |
| | |
| | |
| | |
$
Amount | | |
$
Amount | | |
$
Amount | | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| | |
TOTAL
EQUITY | | |
Mezzanine
Non- | | |
Mezzanine
Non- | | |
Mezzanine
Non- | | |
| | |
| |
| |
| | |
| | |
Exchangeable | | |
Additional
Paid- | | |
| | |
ATTRIBUTABLE | | |
Controlling
Equity | | |
Controlling
Equity | | |
Controlling
Equity | | |
Non- | | |
TOTAL | |
| |
Multiple Voting | | |
Equity | | |
Voting | | |
In | | |
Accumulated | | |
TO | | |
Preferred | | |
Preferred | | |
Preferred | | |
Controlling | | |
SHAREHOLDERS' | |
| |
Shares | | |
Shares | | |
Shares | | |
Capital | | |
Deficit | | |
SHAREHOLDERS | | |
Series
B | | |
Series
C | | |
Series
D | | |
Interest | | |
EQUITY | |
BALANCE
AS OF DECEMBER 31, 2021 | |
4,754,979 | | |
38,563,405 | | |
18,256,784 | | |
$ | 241,896,900 | | |
$ | (60,827,290 | ) | |
$ | 181,069,610 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | (197,774 | ) | |
$ | 180,871,836 | |
| |
| | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net Loss | |
- | | |
- | | |
- | | |
| - | | |
| (18,795,902 | ) | |
| (18,795,902 | ) | |
| - | | |
| - | | |
| - | | |
| (53,604 | ) | |
| (18,849,506 | ) |
| |
| | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Share-Based
Compensation from Options and RSU's | |
- | | |
- | | |
- | | |
| 8,985,352 | | |
| - | | |
| 8,985,352 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 8,985,352 | |
Issuance
for Business Acquisition | |
- | | |
8,417,325 | | |
- | | |
| 25,121,230 | | |
| - | | |
| 25,121,230 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 25,121,230 | |
Fair Value
of Incentive Shares Issued in a Business Acquisition | |
- | | |
- | | |
- | | |
| 188,122 | | |
| - | | |
| 188,122 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 188,122 | |
Reclassification
of Series A Preferred Shares to Non-Controlling Interests | |
- | | |
- | | |
- | | |
| (29,487,835 | ) | |
| - | | |
| (29,487,835 | ) | |
| - | | |
| - | | |
| - | | |
| 29,487,835 | | |
| - | |
Issuance
of Series B Preferred Stock and Warrants | |
- | | |
- | | |
- | | |
| 4,942,061 | | |
| - | | |
| 4,942,061 | | |
| 14,558,139 | | |
| - | | |
| - | | |
| - | | |
| 19,500,200 | |
Exchange
of Series A Preferred Shares and Warrants For Series B Shares and Preferred Warrants | |
- | | |
- | | |
- | | |
| - | | |
| - | | |
| - | | |
| 17,044,814 | | |
| - | | |
| - | | |
| (17,044,814 | ) | |
| - | |
Adjustment
of Series B Preferred Shares to Redemption Value | |
- | | |
- | | |
- | | |
| - | | |
| - | | |
| - | | |
| 10,594,048 | | |
| - | | |
| - | | |
| (10,594,048 | ) | |
| - | |
Issuance
for Payment of Interest on Convertible Debentures | |
- | | |
92,864 | | |
- | | |
| 222,941 | | |
| - | | |
| 222,941 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 222,941 | |
Issuance
for Conversion of Exchangeable Shares | |
- | | |
4,692,621 | | |
(4,692,621 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Shares Issued for Exercise
of Options | |
- | | |
192,932 | | |
- | | |
| 225,694 | | |
| - | | |
| 225,694 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 225,694 | |
Shares Issued
for Exercise of Restricted Stock Units | |
- | | |
735,007 | | |
- | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Contributions | |
- | | |
- | | |
- | | |
| 888,727 | | |
| - | | |
| 888,727 | | |
| - | | |
| - | | |
| - | | |
| 4,616,273 | | |
| 5,505,000 | |
Fair Value
of Warrants Issued with Debt | |
- | | |
- | | |
- | | |
| 89,250 | | |
| - | | |
| 89,250 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 89,250 | |
Issuance
for Working Capital Adjustment | |
- | | |
- | | |
246,402 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Dividends
- Preferred Shareholders | |
- | | |
- | | |
- | | |
| - | | |
| - | | |
| - | | |
| 494,924 | | |
| - | | |
| - | | |
| (3,360,344 | ) | |
| (2,865,420 | ) |
| |
| | |
| | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
BALANCE
AS OF SEPTEMEBER 30, 2022 | |
4,754,979 | | |
52,694,154 | | |
13,810,565 | | |
$ | 253,072,442 | | |
$ | (79,623,192 | ) | |
$ | 173,449,250 | | |
$ | 42,691,925 | | |
$ | - | | |
$ | - | | |
$ | 2,853,524 | | |
$ | 218,994,699 | |
The
accompanying notes are an integral part of these Unaudited Condensed Interim Consolidated Financial Statements.
GLASS HOUSE BRANDS INC.
Unaudited Condensed Interim Consolidated Statements
of Cash Flows
For the Nine Months Ended September 30,
2023 and 2022
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
| |
2023 | | |
2022 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | |
| | | |
| | |
Net Loss | |
$ | (63,900,630 | ) | |
$ | (18,849,506 | ) |
Adjustments to
Reconcile Net Loss to Net Cash Provided By (Used In) Operating Activities: | |
| | | |
| | |
Deferred Tax Benefit | |
| (504,987 | ) | |
| (2,067,189 | ) |
Bad Debt Expense, Net of Recoveries | |
| 1,448,529 | | |
| 544,353 | |
Interest Capitalized to Notes Receivable | |
| (100,442 | ) | |
| - | |
Loss on Disposal of Property and Equipment | |
| 129,269 | | |
| - | |
Depreciation and Amortization | |
| 11,081,679 | | |
| 8,885,109 | |
Loss on Equity Method Investments | |
| 2,136,635 | | |
| 1,297,992 | |
Impairment Expense for Goodwill | |
| 17,480,983 | | |
| - | |
Impairment Expense for Intangible Assets | |
| 6,854,428 | | |
| - | |
Loss on Extinguishment of Debt | |
| - | | |
| 489,647 | |
Non-Cash Operating Lease Costs | |
| 879,953 | | |
| 4,141 | |
Accretion of Debt Discount and Loan Origination Fees | |
| 1,257,267 | | |
| 1,240,025 | |
Loss on Change in Fair Value of Derivative Liabilities | |
| 222,821 | | |
| 78,050 | |
Loss (Gain) on Change in Fair Value of Contingent Liabilities and Shares Payable | |
| 18,485,859 | | |
| (30,955,349 | ) |
Share-Based Compensation | |
| 5,727,966 | | |
| 8,985,352 | |
Changes in Operating Assets and Liabilities: | |
| | | |
| | |
Accounts Receivable | |
| 5,281 | | |
| (2,722,471 | ) |
Prepaid Expenses and Other Current Assets | |
| 3,612,223 | | |
| (1,400,326 | ) |
Inventory | |
| (530,878 | ) | |
| (2,164,315 | ) |
Other Assets | |
| (102,209 | ) | |
| (1,060,971 | ) |
Accounts Payable and Accrued Liabilities | |
| 3,785,226 | | |
| 1,404,406 | |
Income Taxes Payable | |
| 13,089,960 | | |
| 4,459,888 | |
Operating Lease Liabilities | |
| (789,772 | ) | |
| - | |
Other Non-Current Liabilities | |
| 1,514,067 | | |
| 347,308 | |
| |
| | | |
| | |
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | |
| 21,783,228 | | |
| (31,483,856 | ) |
| |
| | | |
| | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | | |
| | |
Purchases of Property and Equipment | |
| (6,233,541 | ) | |
| (23,678,377 | ) |
Proceeds From Payments on Note Receivable | |
| 63,267 | | |
| - | |
Issuance of Note Receivable | |
| (285,410 | ) | |
| (6,061,257 | ) |
Contributions to Equity Method Investments | |
| - | | |
| (400,346 | ) |
Distributions Received from Equity Method Investments | |
| - | | |
| 3,001,871 | |
Cash Acquired in Business Acquisition, Net of Cash Paid | |
| - | | |
| 2,788,939 | |
| |
| | | |
| | |
NET CASH USED IN INVESTING ACTIVITIES | |
| (6,455,684 | ) | |
| (24,349,170 | ) |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | | |
| | |
Proceeds from the Issuance of Notes Payable, Third Parties and Related Parties | |
| 42,638 | | |
| 9,421,000 | |
Proceeds from the Issuance of Preferred Shares | |
| 11,200,000 | | |
| 19,500,200 | |
Payment on Financing Lease | |
| (167,005 | ) | |
| - | |
Payments on Notes Payable, Third Parties and Related Parties | |
| (37,567 | ) | |
| (10,038,834 | ) |
Cash Received for Unissued Preferred Shares | |
| 1,910,000 | | |
| - | |
Contributions | |
| - | | |
| 3,060,000 | |
Cash Received Upon Exercise of Options | |
| - | | |
| 225,694 | |
Distributions to Non-Controlling Interest Holders | |
| (136,682 | ) | |
| - | |
Distributions to Preferred Shareholders | |
| (4,389,608 | ) | |
| (2,865,420 | ) |
| |
| | | |
| | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | |
| 8,421,776 | | |
| 19,302,640 | |
| |
| | | |
| | |
NET INCREASE (DECREASE) IN CASH, RESTRICTED CASH AND CASH EQUIVALENTS | |
| 23,749,320 | | |
| (36,530,386 | ) |
Cash, Restricted Cash and Cash Equivalents, Beginning of Period | |
| 14,143,502 | | |
| 54,066,831 | |
| |
| | | |
| | |
CASH, RESTRICTED CASH AND CASH EQUIVALENTS, END OF PERIOD | |
$ | 37,892,822 | | |
$ | 17,536,445 | |
The
accompanying notes are an integral part of these Unaudited Condensed Interim Consolidated Financial Statements.
GLASS HOUSE BRANDS INC.
Unaudited Condensed Interim Consolidated Statements
of Cash Flows
For the Nine Months Ended September 30,
2023 and 2022
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
| |
2023 | | |
2022 | |
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION | |
| | | |
| | |
Cash Paid for Interest | |
$ | 4,747,295 | | |
$ | 3,977,585 | |
Cash Paid for Taxes | |
$ | 40,506 | | |
$ | 284,521 | |
| |
| | | |
| | |
Non-Cash Investing and Financing Activities: | |
| | | |
| | |
Net Assets Acquired From an Acquisition, Excluding Cash Acquired | |
$ | - | | |
$ | 62,448,119 | |
Shares Issued to Settle Shares Payable - Plus Business Acquisition | |
$ | 4,446,000 | | |
$ | - | |
Purchase of Property and Equipment from Proceeds of Note Payable, Third Parties | |
$ | - | | |
$ | 242,868 | |
Reclass of Turlock Notes Receivable for Acquired Assets of NHC Turlock | |
$ | 1,578,428 | | |
$ | - | |
Issuance of Equity for Payment of Interest | |
$ | 645,824 | | |
$ | 222,941 | |
Recognition of Right-of-Use Asset and Lease Liability for Finance Lease | |
$ | 1,745,103 | | |
$ | - | |
Lease Terminations and Amendments | |
$ | 629,606 | | |
$ | - | |
Adjustment of Preferred Shares to Redemption Value | |
$ | 4,009,912 | | |
$ | - | |
Exchange of Series A Preferred Shares and Warrants For Series B Shares and Preferred Warrants | |
$ | - | | |
$ | 17,044,814 | |
Accretion of Series B Preferred Shares to Redemption Value | |
$ | - | | |
$ | 10,594,048 | |
Recognition of Right-of-Use Assets for Operating Leases | |
$ | - | | |
$ | 7,590,172 | |
Conversion of Note Receivable to Equity of Investee | |
$ | - | | |
$ | 5,461,257 | |
Fair Value of Warrants Issued in Connection with Debt | |
$ | - | | |
$ | 89,250 | |
Reclass of Intangible Asset to Goodwill | |
$ | 12,900,000 | | |
$ | - | |
Non-Cash Investment and Non-Controlling Interest Addition | |
$ | - | | |
$ | 2,445,000 | |
Interest Capitalized to Property and Equipment | |
$ | 273,699 | | |
$ | 958,563 | |
The
accompanying notes are an integral part of these Unaudited Condensed Interim Consolidated Financial Statements.
GLASS HOUSE BRANDS INC.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
1. NATURE
OF OPERATIONS
Glass
House Brands Inc. (the “Company”), formerly known as Mercer Park Brand Acquisition Corp. (“Mercer Park”), was
incorporated under the Business Corporations Act (British Columbia) on April 16, 2019. The Company is a vertically integrated
cannabis company that operates exclusively in the state of California. The Company, through its subsidiaries cultivates, manufactures,
and distributes cannabis bulk flower and trim to wholesalers and consumer packaged goods to third-party retail stores in the state of
California. The Company also owns and operates retail cannabis stores in the state of California. The Company’s subordinate voting
shares (the “Subordinate Voting Shares”), restricted voting shares (the “Restricted Voting Shares”) and limited
voting shares (the “Limited Voting Shares”, and collectively with the Subordinate Voting Shares and the Restricted Voting
Shares, the “Equity Shares”), and common share purchase warrants are listed on the NEO Exchange Inc., trading under the symbols
“GLAS.A.U” and “GLAS.WT.U”, respectively. The Equity Shares and common share purchase warrants also trade on the
OTCQX in the United States under the symbols “GLASF” and “GHBWF”,
respectively. The head office and principal address of the Company is 3645 Long Beach Boulevard, Long Beach, California 90807.
The Company’s registered office in Canada is 2200 HSBC Building 885 West Georgia Street, Vancouver, British Columbia, Canada V6C
3E8.
Liquidity
Historically, the Company’s primary source
of liquidity has been its operations, capital contributions made by equity investors and debt issuances. The Company is meeting its current
operational obligations as they become due from its current working capital and from operations. However, the Company has sustained losses
since inception and may require additional capital in the future. As of and for the nine months ended September 30, 2023, the Company
had an accumulated deficit of $160,372,732, a net loss attributable to the Company of $64,010,550 and net cash provided by operating activities
of $21,783,228. The Company estimates that based on current business operations and working capital, it will continue to meet its obligations
as they become due in the short term.
The Company is generating cash from revenues and
deploying its capital reserves to acquire and develop assets capable of producing additional revenues and earnings over both the immediate
and near term. Capital reserves are primarily being utilized for capital expenditures, facility improvements, product development and
marketing.
Liquidity
risk is the risk that the Company will not be able to meet its financial obligations associated with financial liabilities. The Company
manages its liquidity risk through the management of its capital structure. The Company’s approach to managing liquidity is to ensure
that it will have sufficient liquidity to settle obligations and liabilities when due. In the event sufficient cash flow is not available
from operating activities, the Company may continue to raise equity or debt capital from investors in order to meet liquidity needs.
If the Company is not able to secure adequate additional funding, the Company may be forced to make reductions in spending, extend payment
terms with suppliers, liquidate assets where possible, or suspend or curtail planned programs. Any of these actions could materially harm
the Company’s business, results of operations and future prospects. There can be no assurance that such financing will be available
or will be on terms acceptable to the Company.
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, 2022 and 2021, unless otherwise disclosed below. The Company’s audited Consolidated Financial
Statements for the years ended December 31, 2022 and 2021, filed on March 31, 2023, can be found on SEDAR+ at www.sedarplus.ca.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
The accompanying Unaudited Condensed Interim Consolidated
Financial Statements have been prepared on a going concern basis in accordance with generally accepted accounting principles in the United
States of America (“GAAP”) and reflect the accounts and operations of the Company and those of the Company’s subsidiaries
in which the Company has a controlling financial interest. Investments in entities in which the Company has significant influence, but
less than a controlling financial interest, are accounted for using the equity method.
All intercompany transactions and balances have
been eliminated upon 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, 2023 and December 31,
2022, the consolidated results of operations for the three and nine months ended September 30, 2023 and 2022 and cash flows for the
nine months ended September 30, 2023 and 2022 have been included.
GLASS HOUSE BRANDS INC.
Notes to Unaudited Condensed Interim Consolidated Financial Statements
(Amounts Expressed in United States Dollars Unless Otherwise Stated)
2. SUMMARY
OF 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, 2022, 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, 2023 and for the three and nine months ended September 30, 2023 and 2022 include the
accounts of the Company, its wholly-owned subsidiaries and entities over which the Company has control as defined in ASC 810. 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.
Non-Controlling Interest
Non-controlling interest represents equity interests
owned by parties that are not shareholders of the ultimate parent. The share of net assets attributable to non-controlling interests is
presented as a component of equity. Their share of net income or loss is recognized directly in equity. Changes in the parent company’s
ownership interest that do not result in a loss of control are accounted for as equity transactions.
Segmented Information
The Company currently operates in one segment,
the production and sale of cannabis products, which is how the Company’s Chief Operating Decision Maker manages the business and
makes operating decisions. All of the Company’s operations are in the United States of America in the State of California. Intercompany
sales and transactions are eliminated upon consolidation.
Reclassifications
Certain prior year amounts have been reclassified
for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. GH Group, Inc.
(“GH Group”), a wholly-owned subsidiary of the Company, issued Series A Preferred Shares which were classified initially
in error as additional paid-in-capital within shareholders’ equity whereas they should have been classified within shareholders’
equity as a non-controlling interest. The error resulted in an overstatement of total shareholders’ equity attributable to the Company
of approximately $29,487,000 and a corresponding understatement of non-controlling interest of approximately $29,487,000 for the year
ended December 31, 2021. An adjustment has been made to the Condensed Interim Consolidated Balance Sheet and Unaudited Condensed
Interim Consolidated Statement of Changes in Shareholders’ Equity as of and for the six months ended June 30, 2022 to reclassify
approximately $29,487,000 in shareholder’s equity. The reclassification was not considered material to any prior period. There were
no changes to total current assets, total assets, total current liabilities, total liabilities, total shareholders’ equity, cash
flows or profit and loss to any prior period as a result of this reclassification.
Employee Retention Tax Credits
On March 27, 2020, the U.S. government enacted
the Coronavirus Aid Relief and Security Act (the "CARES Act") to provide certain relief as a result of the COVID-19 pandemic.
The CARES Act provides tax relief, along with other stimulus measures, including a provision for an Employee Retention Credit ("ERC").
As there is no authoritative guidance under GAAP on accounting for government assistance to for-profit business entities, the Company
accounts for the ERC by analogy to International Accounting Standard, Accounting for Government Grants and Disclosure of Government Assistance
("IAS 20"). During the three months ended September 30, 2023, the Company filed with the Internal Revenue Service credits
totaling $9,457,023. The Company will not recognize the amounts claimed until such time that it has been determined that the Company has
reasonable assurance that the credits will be realized.
GLASS HOUSE BRANDS INC.
Notes to Unaudited Condensed Interim Consolidated
Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Restricted Cash
Restricted cash balances are those which meet
the definition of cash and cash equivalents but are not available for use by the Company. As of September 30, 2023 and December 31,
2022, restricted cash was $3.0 million and $3.0 million, respectively, which is held in an escrow account and used as an interest reserve
for the senior term loan agreement. See “Note 13 – Notes Payable and Convertible Debentures” for further discussion.
Loss per Share
The
Company calculates basic earnings or loss per share by dividing net earnings or loss by the weighted-average number of the Equity Shares
(including the Exchangeable Shares, as defined herein, on an as-exchanged basis) outstanding during the period. Multiple Voting Shares,
as defined herein, are excluded from the calculation of earnings or loss per share as they do not participate in earnings or losses. Diluted
loss per share is the same as basic loss per share if the issuance of shares on the exercise of convertible debentures, contingent shares,
warrants, restricted stock units and share options are anti-dilutive. Diluted earnings per share includes options, warrants, restricted
stock units, and contingently issuable shares that are determined to be dilutive using the treasury stock method for all equity instruments
issuable in equity units and the Company’s convertible debentures using the “if converted” method for. See “Note
16 – Loss Per Share” for further information.
Recently Adopted Accounting Standards
In October 2021, the FASB issued ASU 2021-08, “Business
Combinations (Subtopic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU
2021-08”), which is intended to improve the accounting for acquired revenue contracts with customers in a business combination by
addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and the effect of payment
terms on subsequent revenue recognized. ASU 2021-08 became effective for the Company beginning January 1, 2023. The adoption of the
standard did not have a material impact on the Company’s Unaudited Condensed Interim Consolidated Financial Statements.
On
March 31, 2022, the FASB issued ASU 2022-02, “Financial Instruments—Credit Losses (Topic 326) Troubled Debt
Restructurings and Vintage Disclosures” (“ASU 2022-02”), which eliminates the accounting guidance on troubled
debt restructurings for creditors and amends the guidance on “vintage disclosures” to require disclosure of current-period
gross write-offs by year of origination. ASU 2022-02 also updates the requirements related to accounting for credit losses under the current
guidance and adds enhanced disclosures for creditors with respect to loan refinancing and restructuring for borrowers experiencing financial
difficulty. ASU 2022-02 became effective for the Company beginning January 1, 2023. The adoption of the standard did not have
a material impact on the Company’s Unaudited Condensed Interim Consolidated Financial Statements.
Recently Issued Accounting Standards
In March 2023, the FASB issued ASU 2023-01,
Leases (Topic 842), Common Control Arrangements (ASU 2023-01), which requires an entity to determine whether a related party arrangement
between entities under common control is a lease. If the arrangement is determined to be a lease, an entity must classify and account
for the lease on the same basis as an arrangement with an unrelated party (on the basis of legally enforceable terms and conditions).
ASU 2023-01 is effective for the Company beginning January 1, 2024 with early adoption permitted. The Company is currently evaluating
the effect of adopting this accounting standard.
GLASS HOUSE BRANDS INC.
Notes to Unaudited Condensed Interim Consolidated
Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
3. CONCENTRATIONS
OF BUSINESS AND CREDIT RISK
The Company maintains cash balances at its physical
locations, which are not currently insured, and with various U.S. banks and credit unions with balances in excess of the Federal Deposit
Insurance Corporation and National Credit Union Share Insurance Fund limits, respectively. The failure of a bank or credit union where
the Company has significant deposits could result in a loss of a portion of such cash balances in excess of the insured limit, which could
materially and adversely affect the Company’s business, financial condition and results of operations. As of September 30,
2023 and December 31, 2022, the Company has not experienced any losses with regards to its cash balances.
The Company provides certain credit terms 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 and projected
future trends, and other information. For the three months ended September 30, 2023 and 2022, there were one (2023) and two (2022)
customers that comprised 27% and 50%, respectively, of the Company’s revenues. For the nine months ended September 30, 2023
and 2022, there were one (2023) and two (2022) customers, respectively, that comprised 21% and 43%, respectively, of the Company’s
revenues. As of September 30, 2023 and December 31, 2023, the customer had a balance due to the Company of $1,428,022 and $1,912,119,
respectively.
4. INVENTORY
As
of September 30, 2023 and December 31, 2022, inventory consists of the following:
| |
2023 | | |
2022 | |
Raw Materials | |
$ | 3,485,344 | | |
$ | 3,270,597 | |
Work-in-Process | |
| 5,528,384 | | |
| 4,428,440 | |
Finished Goods | |
| 3,824,720 | | |
| 4,358,533 | |
| |
| | | |
| | |
Total Inventory | |
$ | 12,838,448 | | |
$ | 12,057,570 | |
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 the Company accounting for these investments under the equity method.
| |
LOB Group, Inc. | | |
5042 Real Estate
Investment, LLC | | |
Lompoc TIC,
LLC | | |
TOTAL | |
Balance at December 31, 2022 | |
$ | 2,303,470 | | |
$ | 1,779,599 | | |
$ | 163,123 | | |
$ | 4,246,192 | |
| |
| | | |
| | | |
| | | |
| | |
(Loss) Gain on Equity Method Investments | |
| (2,303,470 | ) | |
| 142,088 | | |
| 24,747 | | |
| (2,136,635 | ) |
| |
| | | |
| | | |
| | | |
| | |
Balance at September 30, 2023 | |
$ | - | | |
$ | 1,921,687 | | |
$ | 187,870 | | |
$ | 2,109,557 | |
During the three and
nine months ended September 30, 2023, the Company recorded a net gain from equity method investments of $91,248 and recorded a net
loss of $2,136,635, respectively. During the three and nine months ended September 30, 2022, the Company recorded net loss from equity
method investments of $871,329 and $1,297,992, respectively. These investments are recorded at the amount of the Company’s initial
investment and adjusted for the Company’s share of the investee’s income or loss and dividends paid.
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, 2023 and December 31, 2022, property, plant and equipment consist of the following:
| |
2023 | | |
2022 | |
Land | |
$ | 70,888,383 | | |
$ | 70,888,383 | |
Buildings | |
| 143,161,371 | | |
| 140,042,534 | |
Furniture and Fixtures | |
| 750,405 | | |
| 471,696 | |
Leasehold Improvements | |
| 14,587,117 | | |
| 10,927,265 | |
Equipment and Software | |
| 8,954,419 | | |
| 8,050,827 | |
Construction in Progress | |
| 4,854,119 | | |
| 6,447,286 | |
| |
| | | |
| | |
Total Property, Plant and Equipment | |
| 243,195,814 | | |
| 236,827,991 | |
Less Accumulated Depreciation and Amortization | |
| (30,382,784 | ) | |
| (20,397,067 | ) |
| |
| | | |
| | |
Property, Plant and Equipment, Net | |
$ | 212,813,030 | | |
$ | 216,430,924 | |
During
the three and nine months ended September 30, 2023, the Company recorded depreciation expense of $3,436,911 and $10,186,443, respectively.
During the three and nine months ended September 30, 2022, the Company recorded depreciation expense of $3,063,503 and $8,210,776,
respectively. Construction in progress represents assets under construction for cultivation
not yet ready for use. Additionally, during the three and nine months ended September 30, 2023,
the Company capitalized interest to property and equipment of nil and $273,699, respectively.
7. BUSINESS
ACQUISITIONS
NHC Turlock
On April 21, 2023, the Company completed
the acquisition of NHC Turlock, a California retail dispensary, through GHG-NHC Turlock Inc., a wholly-owned subsidiary of the Company.
Pursuant to the terms of the merger agreement, calculation and payment of consideration for the acquisition of NHC Turlock will occur
at the end of its sixth full quarter of operations (“Turlock Earnout Date”), at twenty-four times its annualized EBITDA in
that quarter ("Turlock Contingent Consideration") offset by the amount owed by the seller of NHC Turlock to the Company under
a note receivable. The Turlock Contingent Consideration is comprised of 80% in deferred Equity Shares and 20% in long-term debt. The deferred
Equity Shares payable are to be issued upon the earlier of: 1) the Turlock Earnout Date or 2) April 21, 2025. The fair value of the
deferred Equity Shares payable is to be determined using the volume-weighted average price (VWAP) for the day immediately preceding the
date of issuance. The long-term debt portion of the Turlock Contingent Consideration will be in the form of an unsecured, subordinated
promissory note bearing interest of 8% annually and maturing after the four-year anniversary of the closing date.
As
of the date of acquisition, the fair value of the Turlock Contingent Consideration was determined to be nil based on the Company's forecasts
of future EBITDA, and as a result, the total consideration was estimated to be the balance of the note receivable of $1,578,428.
The Company recorded $250,000 in inventory and $1,328,428 of intangible assets for NHC Turlock’s cannabis license and assumed the
lease related to this entity. The Company analyzed the transaction under ASC 805 “Business Combination” and determined
that it did not meet the criteria of a business and accounted for this transaction as an asset acquisition. At
the acquisition date for NHC Turlock, the Company determined that NHC Turlock’s cannabis license was fully impaired and recorded
an impairment expense for intangible assets of $1,328,428 for the nine months ended September 30, 2023. See “Note 8 –
Intangible Assets” for further information.
Plus Products Holdings, Inc.
The purchase price allocation for the Plus Products
Holding Inc. (“Plus”) business acquisition completed on April 28, 2022, as set forth in the table below, reflect various
fair value estimates and analyses that were subject to change within the measurement period as the valuation is finalized. On April 28,
2023, the Company determined the allocation was finalized. The acquisition noted below was accounted for in accordance with ASC 805 “Business
Combinations”.
At the acquisition date for Plus, the Company
determined that it would surrender Plus’ cannabis license, and as a result the Company made a measurement period adjustment as of
March 31, 2023, to allocate the value from the cannabis license intangible asset to goodwill in the amount of $12,900,000. See “Note
8 – Intangible Assets” and “Note 9 – Goodwill” for further information. This adjustment was recognized
prospectively, and the Company determined the revised allocation of the consideration from the Plus Business Acquisition was completed
on April 28, 2023.
GLASS HOUSE BRANDS INC.
Notes to Unaudited Condensed Interim Consolidated
Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
7. BUSINESS
ACQUISITIONS (Continued)
Natural Healing Center, LLC
The purchase price allocation for the Natural
Healing Center, LLC (“Grover Beach”) business acquisition completed on September 6, 2022, as set forth in the table below,
reflect various fair value estimates and analyses that were subject to change within the measurement period as the valuation is finalized.
On September 6, 2023, the Company determined the allocation was finalized. The acquisition noted below was accounted for in accordance
with ASC 805 “Business Combinations”.
NHC Lemoore, LLC
The purchase price allocation for the NHC Lemoore,
LLC (“Lemoore”) business acquisition completed on September 6, 2022, as set forth in the table below, reflect various
fair value estimates and analyses that were subject to change within the measurement period as the valuation is finalized. On September 6,
2023, the Company determined the allocation was finalized. The acquisition noted below was accounted for in accordance with ASC 805 “Business
Combinations”.
NHC-MB, LLC
The purchase price allocation for the NHC-MB,
LLC (“Morro Bay”) business acquisition completed on September 14, 2022, as set forth in the table below, reflect various
fair value estimates and analyses that were subject to change within the measurement period as the valuation is finalized. On September 14,
2023, the Company determined the allocation was finalized. The acquisition noted below was accounted for in accordance with ASC 805 “Business
Combinations”.
The summary of purchase price allocation for the
business acquisitions as discussed above are as follows:
| |
Plus Products
Holding Inc. | | |
Natural Healing
Center, LLC | | |
NHC Lemoore,
LLC | | |
NHC-MB, LLC | | |
Total | |
Closing Date: | |
April 28, 2022 | | |
September 6,
2022 | | |
September 6, 2022 | | |
September 14, 2022 | | |
| |
Total Consideration | |
| | |
| | |
| | |
| | |
| |
Convertible Debenture Notes | |
$ | 16,257,104 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 16,257,104 | |
Restricted Stock Units Issued | |
| 188,122 | | |
| - | | |
| - | | |
| - | | |
| 188,122 | |
Derivative Asset | |
| (251,020 | ) | |
| - | | |
| - | | |
| - | | |
| (251,020 | ) |
Contingent Restricted Stock Units | |
| 5,460,000 | | |
| - | | |
| - | | |
| - | | |
| 5,460,000 | |
Fair Value of Equity Issued | |
| 9,707,414 | | |
| 5,938,298 | | |
| 3,272,515 | | |
| 5,248,569 | | |
| 24,166,796 | |
Shares Payable | |
| - | | |
| 2,262,000 | | |
| 1,234,000 | | |
| 1,933,000 | | |
| 5,429,000 | |
Cash Payment | |
| - | | |
| 590,795 | | |
| 1,642,522 | | |
| 305,427 | | |
| 2,538,744 | |
Loan Forgiveness | |
| - | | |
| 5,461,257 | | |
| - | | |
| - | | |
| 5,461,257 | |
Working Capital Adjustment | |
| - | | |
| 169,683 | | |
| 98,064 | | |
| 16,324 | | |
| 284,071 | |
Assumption of IRS Debt | |
| - | | |
| 6,753,499 | | |
| - | | |
| - | | |
| 6,753,499 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total Consideration | |
$ | 31,361,620 | | |
$ | 21,175,532 | | |
$ | 6,247,101 | | |
$ | 7,503,320 | | |
$ | 66,287,573 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Net Assets Acquired (Liabilities Assumed) | |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Current Assets (2) | |
$ | 6,454,308 | | |
$ | 4,134,643 | | |
$ | 147,259 | | |
$ | 459,585 | | |
$ | 11,195,795 | |
Operating Right-of-Use Asset | |
| 294,159 | | |
| 992,717 | | |
| 991,606 | | |
| 772,647 | | |
| 3,051,129 | |
Property, Plant and Equipment | |
| 789,779 | | |
| 273,679 | | |
| 1,788,166 | | |
| - | | |
| 2,851,624 | |
Non-Current Assets | |
| 93,662 | | |
| - | | |
| - | | |
| - | | |
| 93,662 | |
Current
Liabilities Assumed | |
| (1,339,301 | ) | |
| (2,375,611 | ) | |
| (697,558 | ) | |
| (634,434 | ) | |
| (5,046,904 | ) |
Lease Liabilities | |
| (111,970 | ) | |
| (832,060 | ) | |
| (833,989 | ) | |
| (652,654 | ) | |
| (2,430,673 | ) |
Deferred Tax Liabilities | |
| - | | |
| (3,665,852 | ) | |
| (363,787 | ) | |
| (1,595,065 | ) | |
| (5,624,704 | ) |
Intangible Assets: | |
| | | |
| | | |
| | | |
| | | |
| | |
Intellectual Property | |
| 5,100,000 | | |
| 1,100,000 | | |
| 300,000 | | |
| 600,000 | | |
| 7,100,000 | |
Customer Relationship | |
| 2,600,000 | | |
| - | | |
| - | | |
| - | | |
| 2,600,000 | |
Cannabis License | |
| - | | |
| 12,000,000 | | |
| 1,000,000 | | |
| 5,100,000 | | |
| 18,100,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total Intangible Assets | |
| 7,700,000 | | |
| 13,100,000 | | |
| 1,300,000 | | |
| 5,700,000 | | |
| 27,800,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total Identifiable Net Assets Acquired
(Net Liabilities Assumed) | |
| 13,880,637 | | |
| 11,627,516 | | |
| 2,331,697 | | |
| 4,050,079 | | |
| 31,889,929 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Goodwill (1) | |
| 17,480,983 | | |
| 9,548,016 | | |
| 3,915,404 | | |
| 3,453,241 | | |
| 34,397,644 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total Net Assets Acquired | |
$ | 31,361,620 | | |
$ | 21,175,532 | | |
$ | 6,247,101 | | |
$ | 7,503,320 | | |
$ | 66,287,573 | |
(1) Goodwill
arising from acquisition represents expected synergies, future income and growth, and other intangibles that do not qualify for separate
recognition. Generally, goodwill related to dispensaries acquired within a state adds to the footprint of the Company’s dispensaries
within the state, giving the Company’s customers more access to the Company’s branded stores. Goodwill related to cultivation
and wholesale acquisitions provides for lower costs and synergies of the Company’s growing and wholesale distribution methods which
allow for overall lower costs.
(2) Included
in current assets acquired in the business combination was cash acquired, accounts receivable, other current assets and inventory as of
the acquisition date.
GLASS HOUSE BRANDS INC.
Notes to Unaudited Condensed Interim Consolidated
Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
8. INTANGIBLE
ASSETS
As
of September 30, 2023 and December 31, 2022, intangible assets consist of the following:
| |
2023 | | |
2022 | |
Definite Lived Intangible Assets | |
| | | |
| | |
Customer Relationships | |
$ | 587,000 | | |
$ | 2,600,000 | |
Intellectual Property | |
| 4,777,000 | | |
| 8,290,000 | |
| |
| | | |
| | |
Total Definite Lived Intangible Assets | |
| 5,364,000 | | |
| 10,890,000 | |
Less Accumulated Amortization | |
| (2,081,902 | ) | |
| (1,186,665 | ) |
| |
| | | |
| | |
Definite Lived Intangible Assets, Net | |
| 3,282,098 | | |
| 9,703,335 | |
Indefinite Lived Intangible Assets | |
| | | |
| | |
Cannabis Licenses | |
| 26,048,500 | | |
| 38,948,500 | |
| |
| | | |
| | |
Total Indefinite Lived Intangible Assets | |
| 26,048,500 | | |
| 38,948,500 | |
| |
| | | |
| | |
Total Intangible Assets, Net | |
$ | 29,330,598 | | |
$ | 48,651,835 | |
For the three and nine months ended September 30,
2023, the Company recorded amortization expense related to intangible assets of $239,117 and $895,236, respectively. During the three
and nine months ended September 30, 2022, the Company recorded amortization expense related to intangible assets of $377,000 and
$674,333, respectively. During the nine months ended September 30, 2023, the Company recognized $1,328,428 of other than temporary
impairment for the NHC Turlock cannabis license (refer to “Note 7 – Business Acquisitions”) and recognized $2,013,000
and $3,513,000 of other than temporary impairment in customer relationships and intellectual property, respectively, related to the Plus
business acquisition. There were no impairments recognized during the nine months ended September 30, 2022.
The following is the future minimum amortization
expense to be recognized for the years ended December 31:
December 31: | |
| |
2023 (remaining) | |
$ | 315,560 | |
2024 | |
| 810,569 | |
2025 | |
| 758,700 | |
2026 | |
| 638,700 | |
2027 | |
| 505,367 | |
Thereafter | |
| 253,202 | |
Total Future Amortization Expense | |
$ | 3,282,098 | |
9. GOODWILL
As of September 30,
2023 and December 31, 2022, goodwill was $22,966,588 and $21,808,566, respectively.
Goodwill is assigned to the reporting unit, which
is the operating segment level or one level below the operating segment. Goodwill arises when the purchase price for acquired businesses
exceeds the fair value of tangible and intangible assets acquired less assumed liabilities. Goodwill is reviewed annually for impairment
or more frequently if impairment indicators arise. The goodwill impairment test compares the fair value of a reporting unit with its carrying
amount. The amount by which the carrying amount exceeds the reporting unit’s fair value is recognized as a goodwill impairment loss.
During
the three and nine months ended September 30, 2023, the Company made measurement period adjustments totaling $5,739,004 and $18,639,004,
respectively, related to the business acquisitions of Plus, Grover Beach, Lemoore and Morro Bay. The measurement period adjustments were
recognized prospectively and revised the allocation of consideration for the business acquisitions accordingly. See “Note 7 –
Business Acquisitions” and “Note 8 – Intangible Assets” for further information. During the nine months
ended September 30, 2023, management noted indications of impairment
on the goodwill of its consumer package goods reporting unit and recorded an impairment expense of $17,480,983.
No such indications of impairment were noted during the nine months ended September 30,
2022.
GLASS HOUSE BRANDS INC.
Notes to Unaudited Condensed Interim Consolidated
Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
10. ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES
As of September 30, 2023 and December 31,
2022, accounts payable and accrued liabilities consist of the following:
| |
2023 | | |
2022 | |
Accounts Payable | |
$ | 6,655,837 | | |
$ | 6,869,941 | |
Accrued Liabilities | |
| 14,563,394 | | |
| 12,116,887 | |
Accrued Payroll and Related Liabilities | |
| 3,038,091 | | |
| 2,009,598 | |
Sales Tax and Cannabis Taxes | |
| 3,487,077 | | |
| 1,270,572 | |
| |
| | | |
| | |
Total Accounts Payable and Accrued Liabilities | |
$ | 27,744,399 | | |
$ | 22,266,998 | |
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, 2023 and December 31, 2022, was approximately $1,103,000 and
$999,000, respectively.
11. CONTINGENT
SHARES AND EARNOUT LIABILITIES
As
of September 30, 2023, activity related to the contingent shares and earnout liabilities consist of the following:
Balance at December 31, 2022 | |
$ | 14,656,666 | |
Contingent Shares Issued | |
| (4,446,000 | ) |
Change in Fair Value of Contingent Liabilities | |
| 18,473,334 | |
| |
| | |
Balance at September 30, 2023 | |
$ | 28,684,000 | |
During
the three and nine months ended September 30, 2023, the Company recorded a net gain on the change in fair value of contingent
liabilities of $4,030,000 and net loss of $18,473,334, respectively. During the nine months ended September 30, 2023, the Company
determined the criteria for the $2,033,315 of sponsor earnout liability related to the Mercer Park Transaction was not met at the expiration
of the term and recorded the change in fair value of contingent consideration. Accordingly, as of September 30, 2023, the sponsor
earnout liability was nil. During the nine months ended September 30, 2023, the Company moved $4,446,000 of contingent shares payable
related to the Plus Business Acquisition to additional paid-in-capital. See “Note 14 – Shareholders’ Equity”
for further discussion. During the three and nine months ended September 30, 2022, the Company recorded net gains on changes in fair
value of contingent liabilities of $31,122,401 and $30,955,349, respectively.
12. LEASES
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, 2023 and 2022:
| |
Three Months Ended | | |
Nine Months Ended | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Finance Lease Cost: | |
| | | |
| | | |
| | | |
| | |
Amortization of Finance Lease Right-of-Use Assets | |
$ | 102,307 | | |
$ | - | | |
$ | 190,579 | | |
$ | - | |
Interest on Lease Liabilities | |
| 53,327 | | |
| - | | |
| 108,448 | | |
| - | |
Operating Lease Cost | |
| 600,846 | | |
| 427,807 | | |
| 1,801,683 | | |
| 884,800 | |
Short-Term Lease Costs | |
| 410,480 | | |
| 243,005 | | |
| 885,428 | | |
| 668,275 | |
| |
| | | |
| | | |
| | | |
| | |
Total Lease Expenses | |
$ | 1,166,960 | | |
$ | 670,812 | | |
$ | 2,986,138 | | |
$ | 1,553,075 | |
GLASS HOUSE BRANDS INC.
Notes to Unaudited Condensed Interim Consolidated
Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
12. LEASES
(Continued)
| |
Nine Months Ended | |
| |
2023 | | |
2022 | |
Cash Paid for Amounts Included in the Measurement of Lease Liabilities: | |
| | |
| |
Operating Cash Flows from Finance Leases | |
$ | 95,721 | | |
$ | - | |
Operating Cash Flows from Operating Leases | |
$ | 1,711,503 | | |
$ | 880,661 | |
Financing Cash Flows from Finance Leases | |
$ | 167,005 | | |
$ | - | |
| |
| | | |
| | |
Non-Cash Additions to Right-of-Use Assets and Lease Liabilities: | |
| | | |
| | |
Recognition of Right-of-Use Assets for Finance Leases | |
$ | 1,745,103 | | |
$ | - | |
Recognition of Right-of-Use Assets for Operating Leases | |
$ | - | | |
$ | 7,590,172 | |
| |
| | | |
| | |
Weighted-Average Remaining Lease Term (Years) - Finance Leases | |
| 4 | | |
| - | |
Weighted-Average Remaining Lease Term (Years) - Operating Leases | |
| 7 | | |
| 7 | |
Weighted-Average Discount Rate - Finance Leases | |
| 11.32 | % | |
| - | |
Weighted-Average Discount Rate - Operating Leases | |
| 11.49 | % | |
| 12.32 | % |
Future
minimum lease payments under non-cancelable finance and operating leases as of September 30, 2023 are as follows:
| |
Operating Leases | | |
Finance Leases | | |
| |
December 31: | |
Third Parties | | |
Related Parties | | |
Third Parties | | |
Total | |
2023 (remaining) | |
$ | 347,054 | | |
$ | 274,863 | | |
$ | 134,021 | | |
$ | 755,938 | |
2024 | |
| 1,399,456 | | |
| 979,393 | | |
| 544,445 | | |
| 2,923,294 | |
2025 | |
| 1,399,104 | | |
| 554,267 | | |
| 587,824 | | |
| 2,541,195 | |
2026 | |
| 1,372,745 | | |
| 570,895 | | |
| 452,342 | | |
| 2,395,982 | |
2027 | |
| 1,126,862 | | |
| 588,022 | | |
| 465,913 | | |
| 2,180,797 | |
Thereafter | |
| 2,138,205 | | |
| 2,926,604 | | |
| 156,827 | | |
| 5,221,636 | |
| |
| | | |
| | | |
| | | |
| | |
Total Future Minimum Lease Payments | |
| 7,783,426 | | |
| 5,894,044 | | |
| 2,341,372 | | |
| 16,018,842 | |
Less Imputed Interest | |
| (2,289,597 | ) | |
| (1,870,048 | ) | |
| (482,466 | ) | |
| (4,642,111 | ) |
Present Value of Lease Liability | |
| 5,493,829 | | |
| 4,023,996 | | |
| 1,858,906 | | |
| 11,376,731 | |
Less Current Portion of Lease Liability | |
| (795,318 | ) | |
| (729,357 | ) | |
| (350,407 | ) | |
| (1,875,082 | ) |
| |
| | | |
| | | |
| | | |
| | |
Present Value of Lease Liability, Net of Current Portion | |
$ | 4,698,511 | | |
$ | 3,294,639 | | |
$ | 1,508,499 | | |
$ | 9,501,649 | |
On
September 14, 2021, the Company entered into an agreement to lease out a portion of its real property at approximately $500,000 per
month for 36 months. However, lease payments to the Company are abated if certain contingencies are met by the lessee. As of September 30,
2023, such contingencies are expected to be met, and as a result, no rental income was recognized by the Company.
The
Company leases certain business facilities from related parties and third parties under non-cancellable operating lease agreements that
specify minimum rentals. The operating leases require monthly payments ranging from $800 to $56,000 and expire through November 2032.
Certain lease monthly payments may escalate up to 5.0% each year. In such cases, the variability in lease payments is included within
the current and noncurrent operating lease liabilities.
GLASS HOUSE BRANDS INC.
Notes to Unaudited Condensed Interim Consolidated
Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
13. NOTES
PAYABLE AND CONVERTIBLE DEBENTURES
As
of September 30, 2023 and December 31, 2022, notes payable consist of the following:
| |
2023 | | |
2022 | |
Term loan payable maturing in November 30, 2026, bearing interest at 10.00 percent per annum | |
$ | 50,000,000 | | |
$ | 50,000,000 | |
| |
| | | |
| | |
Convertible Debentures | |
| 16,006,084 | | |
| 16,006,084 | |
| |
| | | |
| | |
Other | |
| 447,293 | | |
| 442,222 | |
| |
| | | |
| | |
Total Notes Payable | |
| 66,453,377 | | |
| 66,448,306 | |
| |
| | | |
| | |
Less Unamortized Debt Issuance Costs and Loan Origination Fees | |
| (2,532,091 | ) | |
| (3,789,358 | ) |
| |
| | | |
| | |
Net Amount | |
$ | 63,921,286 | | |
$ | 62,658,948 | |
| |
| | | |
| | |
Less Current Portion of Notes Payable | |
| (49,550 | ) | |
| (40,237 | ) |
| |
| | | |
| | |
Notes Payable, Net of Current Portion | |
$ | 63,871,736 | | |
$ | 62,618,711 | |
Senior Secured Credit Agreement
On December 9, 2021 (the “Senior Secure
Closing Date”), the Company entered into a senior secured term loan agreement, as amended (the “Credit Agreement”),
for total available proceeds of up to $100,000,000 with funds managed by a U.S.-based private credit investment fund and other third-party
lenders (together, the “Senior Secured Lender”). Effective December 10, 2021, the Company closed on an initial term loan
through the Credit Agreement of $50,000,000. The principal amount under the Credit Agreement will be paid in monthly installments in an
aggregate amount equal to 1.25% per annum of the original principal amount, 24 months following the Senior Secure Closing Date, with a
maturity date through November 30, 2026. Interest will be paid, beginning December 31, 2021, in monthly installments equal to
the floating base rate plus the applicable term margin, or 5.25%. The interest rate will not be less than 10% per annum or exceed 12%
per annum. As of September 30, 2023 and December 31, 2022, the interest rate was 10%.
Two additional delayed draw term loans may be
requested by the Company in an amount equal to the principal amount of $25,000,000 (or such lesser amount as agreed) each. The Company
has optional and mandatory prepayments. Mandatory prepayments include any voluntary and involuntary sale or disposition of assets by the
Company or any restricted subsidiaries. The outstanding principal amount of the obligation will be repaid with all cash proceeds received
from the sale or disposition of assets with certain exemptions as defined in the Credit Agreement. As of the Senior Secure Closing Date,
the Company deposited an interest reserve in the amount of $3,000,000 into an escrow account and included as restricted cash in the Condensed
Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022. Additionally, the Company’s real properties
held in Glass House Farm LLC, Magu Farm LLC and GH Camarillo LLC were pledged as security.
Amendments to the Senior Secured Credit
Agreement
On January 21, 2022, the Company amended
and restated the Credit Agreement (the “1st Amendment”) wherein certain events of default were waived.
On May 12, 2022, the Company amended and
restated the Credit Agreement (the “2nd Amendment”) wherein certain events of default were waived, and the Company
entered into an incremental term loan in the amount of $10,000,000 (the “Incremental Term Loan”), for total available proceeds
of $110,000,000. The Incremental Term Loan bore interest at a rate of 10% per annum and payable in monthly installments. In addition,
a 1% fee of the outstanding principal amount of the Incremental Term Loan was payable in monthly installments beginning August 1,
2022, with a maturity date through October 31, 2022. In connection with the Incremental Term Loan, the Company issued 175,000 warrants
to the Senior Secured Lender, with an exercise price of $11.50 per share, to acquire each Equity Share until June 26, 2026. The fair
value of the warrants were determined using Level 1 inputs as these warrants are openly traded on a stock exchange. During the year ended
December 31, 2022, the Company recorded an additional debt discount of $89,250 related to the change in terms of the Credit Agreement.
In addition to receiving the $10,000,000 in Incremental Term Loan, the Company paid $579,000 in direct loan fees, which are recorded as
a debt discount.
GLASS HOUSE BRANDS INC.
Notes to Unaudited Condensed Interim Consolidated
Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
13. NOTES
PAYABLE AND CONVERTIBLE DEBENTURES (Continued)
The Credit Agreement contains a financial covenant
which requires the Company to maintain liquidity in excess of $10,000,000 at all times. In March 2023, the Company entered into an
amendment to the Credit Agreement by which the Senior Secured Lender waived and deferred enforcement of certain covenants which require
the company to maintain a specific minimum debt service coverage ratio beginning with the quarter ending on June 30, 2023. As of
September 30, 2023, the Company was in compliance with the Credit Agreement covenant. In connection with the amendment to the Credit
Agreement, the Company will pay an amount equal to 2% of the aggregate principal amount of the loan outstanding as of August 1, 2023.
The Company recognized amendment fees of $1,000,000 as other expense and paid such fee on July 27, 2023.
Convertible Debentures
The
Company has an aggregate of 20,005 unsecured convertible debenture notes which consist of 12,003 debenture notes (the “Series A
Notes”) and 8,002 debenture notes (the “Series B Notes”) (collectively, the “Plus Convertible Notes”).
The Plus Convertible Notes accrue interest at 8.00% per annum payable in semi-annual arrears until April 15, 2027 (the “Maturity
Date”). Interest is payable in cash, by the issuance of the Company’s Equity Shares or a combination of both at the sole discretion
of the Company, based on the 10-day VWAP of the Equity Shares ending 5 trading days prior to the interest payment date with a fixed exchange
rate of USD$1.00 to CAD$1.27.
The Series A Notes are redeemable, at the
sole option of the Company, in full or in part on a pro rata basis, and payable in cash, by the issuance of the Company’s Equity
Shares, or a combination of both, at any time through the Maturity Date based on the higher of (i) the 10-day VWAP of the Equity
Shares ending 5 trading days prior to the redemption date, or (ii) $4.08.
The
Series B Notes are redeemable, at the sole option of the Company, in full or in part on a pro rata basis, and payable in cash, by
the issuance of the Company’s Equity Shares, or a combination of both, at any time through the Maturity Date based on the lower
of (i) the 10-day VWAP of the Equity Shares ending 5 trading days prior to the redemption date, or (ii) $10.00 per Equity Share.
In the event the Company’s Equity Shares achieve a closing price of $10.00 per share over any period greater than or equal to 20
consecutive trading days, each holder of the Series B Notes may elect to convert all or a portion of their holdings into the Company’s
Equity Shares based on a conversion price of $10.00 per Equity Share. As of September 30, 2023, the Company recorded $11,894,989
and $4,111,095 for the Series A Notes and Series B Notes, respectively. The conversion features of the Series A Notes and
Series B Notes were bifurcated from the related notes and classified as derivatives due to the variability of price in accordance
with ASC 815. Accordingly, the fair value of the conversion features for the Series A Notes and Series B Notes was measured
using a discounted cash flow model that is based on unobservable inputs. During the three and nine months ended September 30,
2023, the Company recorded a change in derivative asset of approximately $92,800 and $222,800, respectively, as a component of change
in fair value of derivatives in the Unaudited Condensed Interim Consolidated Statements of Operations. During the three and nine months
ended September 30, 2022, the Company recorded a change in derivative asset of approximately $24,800 and $78,100, respectively, as
a component of change in fair value of derivatives in the Unaudited Condensed Interim Consolidated Statements of Operations.
Scheduled maturities of notes payable for the
years ended December 31:
December 31: | |
Principal
Payments | |
2023 (remaining) | |
$ | 637,884 | |
2024 | |
| 7,554,232 | |
2025 | |
| 7,557,658 | |
2026 | |
| 7,561,308 | |
2027 | |
| 7,761,211 | |
Thereafter | |
| 35,381,084 | |
| |
| | |
Total Future Minimum Principal Payments | |
$ | 66,453,377 | |
GLASS
HOUSE BRANDS INC.
Notes
to Unaudited Condensed Interim Consolidated Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
14. SHAREHOLDERS’
EQUITY
As
of September 30, 2023 and December 31, 2022, the authorized share capital of the Company is comprised of an unlimited
number of (i) the Subordinate Voting Shares, (ii) the Restricted Voting Shares, (iii) the Limited Voting Shares, (iv) the
Multiple Voting Shares and (v) the Preferred Shares.
Multiple Voting Shares
The
Company is authorized to issue an unlimited number of Multiple Voting Shares without nominal or par value. Holders of Multiple Voting
Shares are 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 entitles the holder thereof to 50 votes per Multiple Voting Share. Multiple Voting Shares are not entitled to dividends
and are not convertible. The Multiple Voting Shares have a three (3)-year sunset period that will expire June 29, 2027, upon
which they will be automatically redeemed for $0.001 per Multiple Voting Share.
Equity Shares
The holders of each class of the Equity Shares
are entitled to receive notice of, to attend (if applicable, virtually) and to vote at all meetings of shareholders of the Company, except
that they are not able to vote (but are entitled to receive notice of, to attend and to speak) at those meetings at which the holders
of a specific class are entitled to vote separately as a class under the Business Corporations Act (British Columbia) and except
that holders of the Limited Voting Shares are not entitled to vote for the election of directors of the Company. The Subordinate Voting
Shares and the Restricted Voting Shares carry one vote per share on all matters. The Limited Voting Shares carry one vote per share on
all matters except the election of directors, as the holders of the Limited Voting Shares do not have any entitlement to vote in respect
of the election for directors of the Company.
In the case of liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders
for the purpose of winding up its affairs, the holders of the Equity Shares are entitled, subject to the prior rights of the holders
of any shares of the Company ranking in priority to the Equity Shares (including any liquidation preference on any issued and outstanding
Multiple Voting Shares and/or Preferred Shares), to participate ratably the Company’s remaining property along with all holders
of the other classes of the Equity Shares (on a per share basis).
Exchangeable Shares of MPB Acquisition
Corp.
Exchangeable Shares are part of the authorized
share capital of MPB, a wholly-owned subsidiary of the Company, which entitle their holders to rights that are comparable to those rights
attached to the Equity Shares. The Exchangeable Shares carry one vote per share, and the aggregate voting power of the Exchangeable Shares
must not exceed 49.9% of the total voting power of all classes of shares of MPB. Until a holder exchanges their Exchangeable Shares for
the Equity Shares, the holder of such Exchangeable Shares will not have the right to vote at meetings of the shareholders 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 are exchangeable at any time, on a one-for-one basis, for the Equity
Shares at the option of the holder.
The Company treats the Exchangeable Shares as
options, each with a value equal to an Equity Share, which represents the holder’s claim on the equity of the Company. Pursuant
to the terms of the Exchangeable Shares, the Company and MPB are required to maintain the economic equivalency of such Exchangeable Shares
with the publicly traded Equity 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 Equity 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 Equity Shares, and (ii) the holders of the Exchangeable Shares are subject to
restrictions on transfer under US securities laws but may dispose of the Exchangeable Shares without such restriction by exchanging them
for Equity Shares. 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.
GLASS
HOUSE BRANDS INC.
Notes
to Unaudited Condensed Interim Consolidated Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
14. SHAREHOLDERS’
EQUITY (Continued)
Preferred Shares GH Group, Inc.
The
authorized total number of preferred shares (the “GH Group Preferred Shares”) of GH Group is 50,000,000 of which 45,000,000
shares are designated as shares of Series A Preferred Shares (“GH Group Series A Preferred”), 55,000 shares are
designated as shares of Series B Preferred Shares (“GH Group Series B Preferred”), 5,000 shares of Series C
Preferred Shares (“GH Group Series C Preferred”) and 15,000 shares of Series D Preferred Shares (“GH Group
Series D Preferred”). Holders of the GH Group Preferred Shares are entitled to receive notice of and attend any meeting of
the shareholders of GH Group but are not entitled to vote. The GH Group Preferred Shares do not carry any voting rights and are
not convertible. In the event of a liquidation, voluntary or involuntary, dissolution or winding-up of GH Group, the holders of outstanding
GH Group Preferred Shares are entitled to be paid out of the assets of GH Group available for distribution to it stockholders, before
any payment shall be made to the holders of GH Group common stock, of which holders of GH Group Series B Preferred are to receive
payment prior to holders of GH Group Series A Preferred, GH Group Series C Preferred and GH Group Series D Preferred.
GH Group has the right to redeem all or a portion of the GH Group Preferred Shares from a holder for an amount equal to the liquidation
value and all unpaid accrued and accumulated dividends.
The
GH Group Series A Preferred carries a 15% cumulative dividend rate, which increases by 5% in the year following the first
anniversary of the date of issuance. The GH Group Series B Preferred and the GH Group Series C Preferred carry a 20% cumulative
dividend rate, which increases by 2.5% annually after the second anniversary and until the 54-month anniversary of the initial issuance.
The GH Group Series D Preferred carry a 15% cumulative dividend rate, which increases by 5% following the fifth anniversary of the
original issuance. Dividends are payable if and when declared by GH Group’s board of directors.
There
were nil shares of the GH Group Series A Preferred issued and outstanding as of September 30, 2023 and December 31,
2022; there were 49,969 shares of the GH Group Series B Preferred issued and outstanding as of September 30, 2023 and December 31,
2022; there were 5,000 and 4,700 shares of the GH Group Series C Preferred issued and outstanding as of September 30, 2023
and December 31, 2022, respectively; and there were 10,900 and nil shares of the GH Group Series D Preferred issued and outstanding
as of September 30, 2023 and December 31, 2022, respectively. In accordance with the provisions above, the Company recorded
dividends to the holders of the GH Group Preferred Shares in the amount of $3,344,325 and $9,091,808 for the three and nine months ended
September 30, 2023, respectively. The Company recorded distributions to the holders of GH Group Preferred Shares in the amount of
$1,630,566 and $3,360,344, respectively, for the three and nine months ended September 30, 2022.
Non-Controlling Interest
Non-controlling interest represents equity interests
owned by parties that are not shareholders of the ultimate parent. The share of net assets attributable to non-controlling interests
is presented as a component of equity. Their share of net income or loss is recognized directly in equity. Changes in the parent company’s
ownership interest that do not result in a loss of control are accounted for as equity transactions.
The Company recorded net income attributable
to non-controlling interest during the three and nine months ended September 30, 2023 of $62,528 and $109,920, respectively.
Share and Equity Transactions During the
Period
On
March 31, 2023, the Company through its subsidiary, GH Group, closed on a private placement financing of 300 GH Group Series C
Preferred Shares with an aggregate face value of $300,000. In conjunction with these transactions, the Company issued 60,000 Company
warrants. The warrants have an exercise price of $5.00 per warrant which expire in August 2027. The Company recorded the fair value
of the Series C Preferred Shares in the amount of $215,826, which is net of the value allocated to the newly issued warrants of
$84,174. The Series C Preferred Shares are accounted for as mezzanine non-controlling Interest as the Series C Preferred Shares
redemption feature is not in the sole control of the Company. The Series C Preferred Shares were accreted by accrued but unpaid
dividends and were therefore adjusted to their redemption value as of September 30, 2023 with an adjustment of $84,174.
During
the second quarter of 2023, the Company issued 1,300,006 Equity Shares in relief of the shares payable as contractually required. Accordingly,
the Company reclassified $4,446,000 of shares payable to equity. See “Note 11 – Contingent Shares and Earnout Liabilities”
for further disclosure.
During
the second quarter of 2023, the Company issued 130,984 shares in payment of $645,824 of accrued interest.
GLASS
HOUSE BRANDS INC.
Notes
to Unaudited Condensed Interim Consolidated Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
14. SHAREHOLDERS’
EQUITY (Continued)
On
August 23, 2023, the Company through its subsidiary, GH Group, closed on a private placement financing of 10,900 GH Group Series D
Preferred Shares with an aggregate face value of $10,900,000. In conjunction with these transactions, the Company issued 2,180,000 Company
warrants. The warrants have an exercise price of $6.00 per warrant which expire in August 2028. The Company recorded the fair value
of the Series D Preferred Shares in the amount of $6,974,262, which is net of the value allocated to the newly issued warrants of
$3,925,738. The Series D Preferred Shares are accounted for as mezzanine non-controlling Interest as the Series D Preferred
Shares redemption feature is not in the sole control of the Company. The Series D Preferred Shares were accreted by accrued but
unpaid dividends and were therefore adjusted to their redemption value as of September 30, 2023 with an adjustment of $3,925,738.
Variable Interest Entity (“VIE”)
The below table summarizes information for entities
the Company has concluded to be VIE’s as the Company possesses the power to direct activities through various agreements. Through
these agreements, the Company can significantly impact the VIE and thus holds a controlling financial interest. This information represents
amounts before intercompany eliminations.
As
of and for the nine months ended September 30, 2023, the aggregate balances of the VIE included in the accompanying Condensed
Consolidated Balance Sheets and Unaudited Condensed Interim Consolidated Statements of Operations are as follows below.
| |
2023 | |
Current Assets | |
$ | 161,492 | |
Non-Current Assets | |
$ | 4,195,369 | |
Total
Assets | |
$ | 4,356,861 | |
| |
| | |
Current Liabilities | |
$ | 2,115 | |
Non-Current Liabilities | |
$ | 238,602 | |
Total
Liabilities | |
$ | 240,717 | |
| |
| | |
Revenues, Net | |
$ | 180,000 | |
Net Income Attributable to Non-Controlling
Interest | |
$ | 102,869 | |
15. SHARE-BASED
COMPENSATION
The Company has an amended and restated 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 Equity Shares, to employees, officers, consultants and non-employee directors. The types
of equity instruments issuable under the Incentive Plan encompass, among other things, stock options, unrestricted stock bonus, and restricted
stock units (together, the “Awards”). The Awards are expensed and recorded as a component of general and administrative costs.
The maximum number of the Awards that may be issued under the Incentive Plan is 10% of the fully-diluted Equity Shares of the Company
(inclusive of the Equity Shares issuable in exchange for unrestricted Exchangeable Shares) as calculated using the treasury method. The
Incentive Plan is an “evergreen” plan, meaning that if an Award expires, becomes un-exercisable, or is cancelled, forfeited
or otherwise terminated without having been exercised or settled in full, as the case may be, the Equity Shares allocable to the unexercised
portion of an Award shall again become available for future grant or sale under the Incentive Plan (unless the Incentive Plan has terminated
by its terms), and the number of the Awards available for grant will increase as the number of issued and outstanding Equity Shares increases.
Granting and vesting of the Awards are determined by and recommended to the Board for approval by the Compensation, Nomination and Corporate
Governance Committee of the Board of Directors. 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.
GLASS
HOUSE BRANDS INC.
Notes
to Unaudited Condensed Interim Consolidated Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
Stock Options
A reconciliation of the beginning and ending
balance of stock options outstanding is as follows:
| |
Number
of Stock
Options | | |
Weighted-
Average Exercise
Price | |
Balance as of December 31, 2022 | |
| 1,452,887 | | |
$ | 2.84 | |
Forfeited | |
| (17,093 | ) | |
$ | 2.77 | |
Balance as of September 30, 2023 | |
| 1,435,794 | | |
$ | 2.84 | |
The
following table summarizes the stock options that remain outstanding as of September 30, 2023:
Security Issuable | |
Exercise
Price | | |
Expiration Date | |
Stock Options
Outstanding | |
Equity Shares | |
$ | 2.26 | | |
October 2024 | |
| 623,415 | |
Equity Shares | |
$ | 3.08 | | |
April 2025 | |
| 115,917 | |
Equity Shares | |
$ | 3.08 | | |
January 2026 | |
| 587,767 | |
Equity Shares | |
$ | 4.60 | | |
October 2026 | |
| 108,695 | |
| |
| | | |
| |
| 1,435,794 | |
As of September 30, 2023 and December 31,
2022, options vested and exercisable were 1,397,929 and 1,400,593, respectively. During the three and nine months ended September 30,
2023, the Company recognized $44,646 and $252,782, respectively, in share-based compensation expense related to these stock options and
is included as a component of general and administrative expense in the Unaudited Condensed Interim Consolidated Statements of Operations.
During the three and nine months ended September 30, 2022, the Company recognized $579,271 and $1,769,266, respectively, in share-based
compensation expense related to these stock options. As of September 30, 2023 options outstanding have a weighted-average remaining
contractual life of 1.7 years.
Restricted Stock Units
A reconciliation of the beginning and ending
balance of restricted stock units outstanding is as follows:
| |
Number
of
Restricted Stock
Units | |
Balance
as of December 31, 2022 | |
2,000,534 | |
Granted | |
1,753,554 | |
Converted | |
(532,132 | ) |
Forfeited | |
(12,499 | ) |
Balance
as of September 30, 2023 | |
3,209,457 | |
During
the three and nine months ended September 30, 2023, the Company recognized $2,520,717 and $5,475,184, respectively, in stock-based
compensation related to restricted stock units and is included as a component of general and administrative expense in the Unaudited
Condensed Interim Consolidated Statements of Operations. During the three and nine months ended September 30, 2022, the Company
recognized $2,323,875 and $7,216,086, respectively, in stock-based compensation related to restricted stock units. The fair value of
the restricted stock units issued during the nine months ended September 30, 2023 were determined using the value of the Equity
Shares at the time of grant.
Stock Appreciation Right Units
GH
Group issued 230,752 stock appreciation rights (“SARs units”) to various employees of the Company. The SARs vest 33% one
year after the grant date and the remaining 67% vest monthly over two years. Vested and exercised SARs will receive cash in the amount
of the SARs exercised multiplied by the excess of the fair market value of an Equity Share over the stated strike price of the SAR. As
the SARs are cash-settled, the Company recognizes the value of the SAR as liabilities which are included in accounts payable and accrued
liabilities in the Condensed Consolidated Balance Sheets. As of September 30, 2023, the Company recorded a liability of $100,573.
GLASS
HOUSE BRANDS INC.
Notes
to Unaudited Condensed Interim Consolidated Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
15. SHARE-BASED
COMPENSATION (Continued)
A reconciliation of the beginning and ending
balance of the SARs outstanding is as follows:
| |
Number
of Stock
Appreciation
Rights Units | |
Balance
as of December 31, 2022 | |
| 99,861 | |
Forfeited | |
| (23,160 | ) |
Balance
as of September 30, 2023 | |
| 76,701 | |
During
the three and nine months ended September 30, 2023, the Company recognized $86,412 and $100,573, respectively, in expense
related to the SARs units. During the three and nine months ended September 30, 2022, the Company recognized expense of nil and
a net gain of $35,422, respectively, related to the SARs units.
Warrants
A reconciliation of the beginning and ending
balance of warrants outstanding is as follows:
| |
Number of Warrants | | |
Weighted-
Average
Exercise Price | |
Balance as of December 31, 2022 | |
| 44,258,882 | | |
$ | 9.80 | |
Granted | |
| 2,240,000 | | |
$ | 5.97 | |
Balance as of September 30, 2023 | |
| 46,498,882 | | |
$ | 9.62 | |
The
following table summarizes the warrants that remain outstanding as of September 30, 2023:
Security Issuable | |
Exercise
Price | | |
Expiration Date | |
Warrants
Outstanding | |
Warrants
Exercisable | |
Equity Shares | |
$ | 11.50 | | |
June 2026 | |
| 30,664,500 | |
| 30,664,500 | |
Equity Shares | |
$ | 10.00 | | |
June 2024 | |
| 2,654,445 | |
| 2,654,445 | |
Equity Shares | |
$ | 5.00 | | |
August 2027 | |
| 10,999,937 | |
| 10,999,937 | |
Equity Shares | |
$ | 6.00 | | |
August 2028 | |
| 2,180,000 | |
| 2,180,000 | |
| |
| | | |
| |
| 46,498,882 | |
| 46,498,882 | |
For the three and nine months ended September 30,2023,
the fair value of the warrants granted with a fixed exercise price and fair valued using level 3 inputs, was determined using the Black-Scholes
option-pricing model with the following assumptions at the time of grant:
| |
2023 | |
Weighted-Average Risk-Free Annual Interest Rate | |
| 0.10 | % |
Weighted-Average Expected Annual Dividend Yield | |
| 0.0 | % |
Weighted-Average Expected Stock Price Volatility | |
| 2.83 | % |
Weighted-Average Expected Life in Years | |
| 0.13 | |
Weighted-Average Estimated Forfeiture Rate | |
| 0.0 | % |
During the nine months ended September 30,
2023, the weighted-average fair value of warrants granted was $2.79, per warrant. There were no warrants issued during the three and
nine months ended September 30, 2022 that required fair valuing using level 3 inputs. As of September 30, 2023, warrants outstanding
have a weighted-average remaining contractual life of 3.0 years.
GLASS
HOUSE BRANDS INC.
Notes
to Unaudited Condensed Interim Consolidated Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
16. EARNINGS
(LOSS) PER SHARE
The following is a reconciliation for the calculation
of basic and diluted loss per share for the three and nine months ended September 30, 2023 and 2022:
| |
Three Months
Ended | | |
Nine Months
Ended | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Net (Loss) Income Attributable to the Company | |
$ | (273,000 | ) | |
$ | 15,175,594 | | |
$ | (64,010,550 | ) | |
$ | (18,795,902 | ) |
Less
Dividends and Increase in Redemption Values of GH Group Preferred Shares | |
| (7,270,063 | ) | |
| (12,224,614 | ) | |
| (13,101,720 | ) | |
| (13,954,392 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net (Loss) Income Attributable to the Company | |
| (7,543,063 | ) | |
| 2,950,980 | | |
| (77,112,270 | ) | |
| (32,750,294 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted-Average Shares Outstanding
- Basic | |
| 72,018,714 | | |
| 61,647,076 | | |
| 72,216,018 | | |
| 59,271,500 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted-Average Shares Outstanding
- Diluted | |
| 72,018,714 | | |
| 68,600,429 | | |
| 72,216,018 | | |
| 59,271,500 | |
| |
| | | |
| | | |
| | | |
| | |
(Loss) Earnings Per Share Attributable
to the Company - Basic | |
$ | (0.10 | ) | |
$ | 0.05 | | |
$ | (1.07 | ) | |
$ | (0.55 | ) |
| |
| | | |
| | | |
| | | |
| | |
(Loss) Earnings Per Share Attributable
to the Company - Diluted | |
$ | (0.10 | ) | |
$ | 0.04 | | |
$ | (1.07 | ) | |
$ | (0.55 | ) |
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.
17. 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, 2023 and 2022:
| |
Three Months
Ended | | |
Nine Months
Ended | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Current: | |
| | |
| | |
| | |
| |
Federal | |
$ | 4,947,764 | | |
$ | 1,959,267 | | |
$ | 10,994,640 | | |
$ | 3,638,725 | |
State | |
| 1,773,248 | | |
| 634,428 | | |
| 3,672,183 | | |
| 1,440,708 | |
Total Current | |
| 6,721,012 | | |
| 2,593,695 | | |
| 14,666,823 | | |
| 5,079,433 | |
Deferred: | |
| | | |
| | | |
| | | |
| | |
Federal | |
| (141,036 | ) | |
| 85,639 | | |
| (247,784 | ) | |
| (1,401,343 | ) |
State | |
| (85,316 | ) | |
| (49,339 | ) | |
| (257,203 | ) | |
| (665,846 | ) |
Total Deferred | |
| (226,352 | ) | |
| 36,300 | | |
| (504,987 | ) | |
| (2,067,189 | ) |
Total Provision
for Income Taxes | |
$ | 6,494,660 | | |
$ | 2,629,995 | | |
$ | 14,161,836 | | |
$ | 3,012,244 | |
The
Company has used a discrete effective tax rate method to calculate taxes for the three and nine months ended September 30,
2023 and 2022. 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-month periods ended
September 30, 2023 and 2022.
As the Company operates in the cannabis industry,
it is subject to the limits of IRC Section 280E (“Section 280E”) for U.S. federal income tax purposes under which
the Company is only allowed to deduct expenses directly related to the cost of goods sold. 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 less likely than not to be sustained on the merits
as required under ASC 740 “Income Taxes” due to the evolving interpretations of Section 280E. As a result, the
Company included in the balance of total unrecognized tax benefits as of September 30, 2023 and December 31, 2022, potential
benefits of $5,805,389 and $4,291,319, respectively, that if recognized would impact the effective tax rate on income from operations.
Unrecognized tax benefits that reduce a net operating loss, similar to tax loss or tax credit carryforwards, are presented as a reduction
to deferred income taxes.
The Company’s evaluation of tax positions
was performed for those tax years which remain open for audit. The Company on occasion may 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, 2023, the Company’s federal tax returns since 2019 and state tax returns since 2018 are still subject
to adjustment upon audit. The 2019 federal tax returns of Natural Healing Center LLC (pre-acquisition) are currently under IRS examination.
No other tax returns are currently being examined by any taxing authorities.
GLASS
HOUSE BRANDS INC.
Notes
to Unaudited Condensed Interim Consolidated Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
18. COMMITMENTS
AND CONTINGENCIES
Contingencies
The Company’s operations are subject to
a variety of local and state regulations. Failure to comply with one or more of these regulations could result in fines, restrictions
on its operations, or revocation, cancellation, non-renewal or other losses of permits, licensed and entitlements that could result in
the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and
state statues, regulations, and ordinances as of September 30, 2023 and December 31, 2022, cannabis laws and regulations continue
to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties or restrictions
in the future.
Royalty
Effective
as of May 9, 2019, Sweet & Salty, Inc., a California corporation (“Lender”), and GH Brands LLC, a California
limited liability company and subsidiary of the Company (“GH Brands”), entered into a License and Services Agreement, pursuant
to which Lender granted to GH Brands an exclusive, transferable, sublicensable, right and license to use, exploit and incorporate the
name, nicknames, initials, signature, voice, image, likeness, and photographic or graphic representations of likeness, statements and
biography of the artist Annabella Avery Thorne, professionally known as Bella Thorne, for all purposes relating to or in connection with
the development, quality control, cultivation, extraction, manufacture, production, branding, testing, advertising, marketing, promotion,
commercialization, packaging, distribution, exploitation and/or sale of the products of GH Brands and its affiliates. The term of the
License and Service Agreement is 3 years, with the right to renew upon 60 days prior notice for an additional 2-year term. Royalty fees
for Bella Thorne branded boxes are 10% for the 1st year and 12% for years 2 to 5. Royalty fees for flower products and accessories
are 6% for the 1st year, 7% for the 2nd year and 8% for years 3 to 5. Minimum guarantee fees are recoupable against
royalties for an initial term of $1,000,000 ($50,000 initial payment, $200,000 for the 1st year, $375,000 for the 2nd
year and $375,000 for the 3rd year). The agreement provides an option to renew for a 2-year term with a guaranteed minimum
fee of $1,500,000 ($750,000 for the 4th year and $750,000 for the 5th year). On May 31, 2023, the parties
agreed to settle the outstanding balances for $450,000. During the nine months ended September 30, 2023, the Company recognized
a gain related to these royalties in the amount of $58,333. As of September 30, 2023 and December 31, 2022, the Company has
$100,000 and $508,333, respectively, due under this royalty agreement which are included in accounts payable and accrued liabilities
in the Condensed Consolidated Balance Sheets. The Company has not exercised the option to renew the License and Services Agreement.
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, 2023 and December 31,
2022, there were no pending or threatening lawsuits that could be reasonably assessed to have resulted in a probable loss to the Company
in an amount that can be reasonably estimated. As such, no accrual has been made in the Consolidated Financial Statements relating to
claims and litigations. As of September 30, 2023 and December 31, 2022, there were also no proceedings in which any of the
Company’s directors, officers or affiliates were an adverse party to the Company or had a material interest adverse to the Company’s
interest.
Element 7 Transaction and Litigation
Effective February 23, 2021, GH Group entered
into a Merger and Exchange Agreement (the “E7 Merger Agreement”) with Element 7 CA, LLC (“E7”) whereby GH Group
had the right, subject to satisfactory completion of due diligence and other conditions, to obtain all of the limited liability company
membership or other equity interests held by E7 in seventeen holding companies that hold the rights to certain in-process state and local
cannabis retail licenses or license applications, some of which are partially owned. In addition, GH Group entered into a License Development
and Consulting Agreement (the “E7 License Agreement”, and together with the E7 Merger Agreement, the “E7 Agreements”)
with E7 to provide certain retail consulting services to develop and obtain up to thirty-four cannabis retail licenses in exchange for
the payment of certain fees as set forth in the E7 License Agreement. In November 2021, GH Group terminated the E7 Agreements based
on a breach of contractual terms by E7, and as of December 31, 2021, GH Group had converted certain pre-closing financing payments
and consulting fees into notes receivable in the amount of $2,274,167. As of September 30, 2023 and December 31, 2022, the
notes receivable was fully reserved by the Company. As of December 31, 2021, the Company had received certain limited liability
company membership or other equity interests in one E7 entity out of seventeen entities that were contractually committed to be transferred
under the E7 Merger Agreement.
On November 4, 2021, GH Group filed a lawsuit
in the Superior Court for the County of Los Angeles, Central District (Case No. 21STCV40401) against E7 and its principals and owners
Josh Black and Robert “Bobby” DiVito (together, “Element 7”) for a variety of claims, including fraud and breach
of contract and demanded performance under the E7 Agreements.
GLASS HOUSE BRANDS INC.
Notes to Unaudited Condensed Interim Consolidated
Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
18. COMMITMENTS
AND CONTINGENCIES (Continued)
The court proceeding was subsequently withdrawn
by the Company without prejudice, and on March 13, 2022, GH Group entered into an agreement with American Patriot Brands, Inc.
(“APB”) to jointly file suit against Element 7 to enforce the transfer of certain contractually committed licenses (the “Joint
Litigation Agreement”). GH Group and APB jointly refiled a complaint against Element 7 in the Superior Court of California, County
of Los Angeles (Case No. 22STCV09323). The Superior Court severed the claims of GH Group and APB, which resulted in APB’s
claims remaining in Superior Court and GH Group’s claims being adjudicated in Signature Arbitration (Case No. LQMGL) (collectively,
the “Element 7 Proceeding”).
Under the terms of the Joint Litigation Agreement,
GH Group will pay all legal fees for GH Group and APB’s joint litigation against Element 7. GH Group will have the option to purchase
any E7 license or licensed entity interests recovered by APB from Element 7 that were included in the E7 Merger Agreement, that either
have a state or local permit and a valid lease, or a local permit that is without a real property site but is in a competitive license
jurisdiction, in each case at a valuation of $750,000 per E7 license or licensed entity, paid in Equity Shares at the 10-day VWAP calculated
as of the date of such purchase. In addition, under the Joint Litigation Agreement, GH Group also has the right of first refusal to purchase
any other E7 licenses or licensed entity outside of the foregoing groups, and the right to terminate the Joint Litigation Agreement at
any time.
On September 19, 2023, Element 7, APB and
GH Group entered into a Settlement and General Mutual Release Agreement (the “Element 7 Settlement”), where Element 7 agreed
to pay GH Group $2,865,000 to settle the Element 7 Proceeding; provided, that if Element 7 pays GH Group $1,865,250 by December 15,
2023, then Element 7 shall be entitled to a credit of $999,750 towards the $2,865,000 payment. In addition, Element 7 retains ownership
of its retail licenses.
Catalyst Litigation
On June 6, 2023, 562 Discount Med, Inc.
(“Plaintiff”) filed a lawsuit against Glass House Brands Inc. (“GHB”) in the Los Angeles Superior Court Case
No. 23LBCV010125. The Plaintiff, an affiliate of South Cord Holdings dba Catalyst Cannabis, asserts a claim for violation of California
Business & Professions Code section 17200, et. seq., California’s Unfair Competition Law. The Plaintiff alleges that “…GHB
is one of the largest, if not the largest, black marketeers of cannabis in the State of California, if not the country, and that it has
purposefully structured its business so as to massively profit from the illegal sale of cannabis to the substantial financial detriment
of legal operators such as…” the Plaintiff. On July 24, 2023, GHB filed an answer generally denying the allegations
and asserting affirmative defenses. The Plaintiff has filed a demurrer to the answer which is scheduled to be heard on January 24,
2024. GHB has served written discovery whereby the Plaintiff served inadequate responses. GHB is in the process of meeting and conferring
but expects that it will need to file motions to compel discovery. Plaintiff has not yet served discovery but it is expected that it
will soon. The Plaintiff filed a motion to disqualify Venable LLP (“Venable”) as GHB’s counsel, and the motion is set
to be heard on December 7, 2023. Venable will oppose the motion. As the Plaintiff’s parent company lost a similar motion in
another lawsuit, it is expected that the Plaintiff will withdraw the motion, but thus far has refused to do so.
On June 20, 2023, Glass House Brands, Inc.,
Kyle Kazan and Graham Farrar (“Plaintiffs”) filed a lawsuit against South Cord Holdings LLC, South Cord Management LLC, Elliot
Lewis, Damian Martin and “Does 1-100” (Defendants”) in the Los Angeles Superior Court (Case No. 23STCV14403).
The Plaintiffs have alleged causes of action for defamation and violation of California Business & Professions Code section
17200, et. seq., California’s Unfair Competition Law arising out of the Defendants’ defamatory social media campaign accusing
the Plaintiffs, among other things, of being the largest black marketeer in American history, likening them to a drug cartel. The Defendants’
demurrer and motion to strike were denied by the Court, and the Defendants have since answered the complaint denying liability. Both
sides have propounded extensive discovery and there are many ongoing disputes between the parties with respect to discovery. The Defendant
South Cord Holdings has filed a motion to compel the deposition of GHB’s custodian of records and compliance with the accompanying
document requests, and the motion is set to be heard on February 16, 2024. The Plaintiffs are in the process of meeting and conferring
with the Defendants regarding their inadequate discovery response but expect motions to compel will be necessary. The Court denied the
Defendants’ motion seeking to disqualify Venable as the Plaintiffs’ counsel.
19. RELATED
PARTY TRANSACTIONS
Leases
Neo Street Partners LLC, a company partially
owned by an executive and board member of the Company, entered into a five-year lease with a subsidiary of the Company. The lease, which
commenced in October 2018, provides for an initial annual base rent payment of $213,049 increasing to $243,491 for years two to
five. Rent expense for the three and nine months ended September 30, 2023 were $223,628 and $345,373, respectively. Rent expense
for the three and nine months ended September 30, 2022 were $60,873 and $182,618, respectively.
GLASS HOUSE BRANDS INC.
Notes to Unaudited Condensed Interim Consolidated
Financial Statements
(Amounts
Expressed in United States Dollars Unless Otherwise Stated)
19. RELATED
PARTY TRANSACTIONS (Continued)
3645 Long Beach LLC, a company partially owned
by an executive and board member of the Company, entered into a five-year lease with a subsidiary of the Company. The lease, which commenced
in December 2019, provides for an initial annual base rent payment of $64,477 increasing to $69,352 for year two and increasing
five percent per annum thereafter. Rent expense for the three and nine months ended September 30, 2023 were $19,115 and $57,345,
respectively. Rent expense for the three and nine months ended September 30, 2022 were $18,205 and $54,903, respectively.
Isla Vista GHG LLC, a company partially owned
by executives and board members of the Company, entered into a ten-year lease with a subsidiary of the Company. The lease, which commences
on the first calendar day after the Company publicly announces the opening of the retail location at the leased property (“Commencement
Date”), provides for an initial monthly rent of $5,000 starting April 19, 2022 until the Commencement Date. Effective on the
Commencement Date, the initial annual base rent payment will be $144,000 and increasing three percent per annum thereafter. Rent expense
for the three and nine months ended September 30, 2023 were $67,250 and $201,750, respectively. Rent expense for the three and nine
months ended September 30, 2022 were $15,000 and $27,000, respectively.
In August 2022, Kazan Trust dated December 10,
2004, a trust owned by an executive and board member of the Company, acquired partial ownership of a real estate entity that entered
into a ten-year lease with a subsidiary of the Company. The lease, which commenced in July 2022, provides for an initial annual
base rent payment of $36,489, increasing three percent per annum thereafter. Rent expense for the three and nine months ended September 30,
2023 were $9,122 and $27,367, respectively. Rent expense for the three and nine months ended September 30, 2022 were $3,041 and
$3,041, respectively.
Consulting Agreement
Beach Front Property Management Inc, a company
that is majority-owned by an executive and board member of the Company, entered into a consulting agreement with the Company dated September 28,
2020. The monthly consulting fee is $10,860 for mergers and acquisitions advisory and assistance and real estate acquisition and financing
services. The agreement may be terminated by either party for any/or no reason without penalty upon seven days written notice. Consulting
fees for the three and nine months ended September 30, 2023 were $32,580 and $97,740, respectively. Consulting fees for the three
and nine months ended September 30, 2022 were $32,580 and $97,740, respectively.
20. REVENUES,
NET
Revenues, net of discounts, are disaggregated
as follows for the three and nine months ended September 30, 2023 and 2022:
| |
Three Months
Ended | | |
Nine Months
Ended | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
Retail | |
$ | 10,057,998 | | |
$ | 6,440,382 | | |
$ | 29,503,538 | | |
$ | 16,137,922 | |
Wholesale | |
| 38,128,775 | | |
| 21,816,453 | | |
| 92,370,373 | | |
| 42,564,531 | |
Revenues, Net | |
$ | 48,186,773 | | |
$ | 28,256,835 | | |
$ | 121,873,911 | | |
$ | 58,702,453 | |
21. SUBSEQUENT
EVENTS
ATES Enterprises, LLC Lease Settlement
On
November 2, 2023, GH Group entered into a settlement agreement and general release with respect to a lawsuit that was filed on August 16,
2023, against ATES Enterprises, LLC (“ATES”), a former subsidiary of the GH Group, concerning a breach of contract and breach
of personal guaranty relating to a lease for certain real property located at 2040-2050 W. 16th Street in Long Beach, California. While
GH Group was not a party to the lease and ATES was previously divested by GH Group, GH Group maintained certain indemnity obligations
related to the lease. In the lawsuit, the landlords were claiming over $750,000 in damages. GH Group ultimately agreed to
pay the landlords $400,000 to settle the case. As of September 30, 2023, the Company accrued the $400,000 settlement which is included
in accounts payable and accrued liabilities in the Condensed Consolidated Balance Sheets. On November 6, 2023, the Company paid $275,000 towards the settlement.
Exhibit 99.2
GLASS HOUSE BRANDS INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND UNAUDITED RESULTS OF OPERATIONS
FOR THE THREE AND NINE
MONTHS ENDED
SEPTEMBER 30, 2023 AND 2022
Introduction
This
management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided as
of November 13, 2023 and should be read together with Glass House Brands Inc.’s (the “Company”) Unaudited
Condensed Interim Consolidated Financial Statements (the “Financial Statements”) and accompanying notes, as of
September 30, 2023 and December 31, 2022 and for the three and nine months ended September 30, 2023 and 2022, and the
audited Consolidated Financial Statements and the accompanying notes for the years ended December 31, 2022 and 2021. The
financial results discussed herein have been prepared in accordance with generally accepted accounting principles in the United
States of America (“GAAP”) and, unless otherwise noted, are expressed in United States dollars. Additional information
relating to the Company can be found on SEDAR+ at www.sedarplus.ca.
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, through its subsidiaries, cultivates, manufactures, and distributes cannabis bulk flower and trim to wholesalers
and cannabis-related consumer packaged goods (“CPG”) 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 (the “Subordinate
Voting Shares”), restricted voting shares (the “Restricted Voting Shares”) and limited voting shares (the “Limited
Voting Shares”, and, collectively with the Subordinate Voting Shares and the Restricted Voting Shares, the “Equity Shares”),
and common share purchase warrants are listed on the NEO Exchange Inc., trading under the symbols “GLAS.A.U” and “GLAS.WT.U”,
respectively. The Equity Shares and common share purchase warrants also trade on the OTCQX in the United States under the symbols “GLASF”
and “GHBWF”, respectively. The head office and principal address of the Company is 3645 Long Beach Boulevard, Long Beach,
California 90807. The Company’s registered office in Canada is 2200 HSBC Building 885 West Georgia Street, Vancouver, British Columbia,
Canada V6C 3E8.
Major Business Lines and Geographies
The Company views its financial results under
one business line – the creation of extensible wholesale 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 and Camarillo, California, and its manufacturing production facility is located in Lompoc California.
The Company operates an approximately 5.5 million square foot hi-tech greenhouse facility located in Camarillo, California (“Camarillo
Facility”). The Company has completed Phase I of the Camarillo Facility which is licensed and operational. The Company completed
the first harvest in June 2022, four weeks earlier than expected.
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 raw cannabis, cannabis oil, and cannabis
consumer goods. The Company’s “Farmacy” branded dispensaries are currently located in Santa Barbara, Santa Ana, Berkeley, Isla
Vista and Santa Ynez, California. The Company also operates one dispensary located in Los Angeles, California under the brand “The
Pottery”. During the year ended December 31, 2022, the Company completed the acquisition of Plus Products Holdings Inc., a leading edibles brand
in California, as well as acquisitions of three Natural Healing Center retail dispensaries located in Grover Beach, Morro Bay and Lemoore,
California. In April 2023, the Company completed the acquisition of a Natural Healing Center retail dispensary located in Turlock, California.
Market Update and Objectives
The state of California represents the largest
single state-legalized market for cannabis in the U.S., with 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 1,000 operational dispensaries, greater than
1,000 brands and a significant illicit market. In addition to this, burdened with high taxes, competition and weakened consumer demand,
California operators may find it difficult to operate in this market. While in recent years the Company has seen wholesale prices decline
from years past, the Company has seen some recent improvement in wholesale prices, and, due to its operations, the Company believes it
is best fit to capitalize on that. With this backdrop, the Company looks to continue to use scale in cultivation and distribution (at
wholesale and through its own retail 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.
SELECTED FIANCIAL INFORMATION
Results of Operations (Unaudited)
The following are the results of our operations
(unaudited) for the three months ended September 30, 2023 compared to the three months ended September 30, 2022:
| |
Three Months Ended | |
| |
September 30, | | |
September 30, | |
| |
2023 | | |
2022 | |
| |
Unaudited | | |
Unaudited | |
Revenues, Net | |
$ | 48,186,773 | | |
$ | 28,256,835 | |
Cost of Goods Sold (Exclusive of Depreciation and Amortization Shown Separately Below) | |
| 22,176,022 | | |
| 19,530,882 | |
| |
| | | |
| | |
Gross Profit | |
| 26,010,751 | | |
| 8,725,953 | |
| |
| | | |
| | |
General and Administrative | |
| 15,187,493 | | |
| 11,546,327 | |
Sales and Marketing | |
| 554,633 | | |
| 804,356 | |
Professional Fees | |
| 1,705,559 | | |
| 2,834,381 | |
Depreciation and Amortization | |
| 3,676,028 | | |
| 3,440,503 | |
| |
| | | |
| | |
Total Operating Expenses | |
| 21,123,713 | | |
| 18,625,567 | |
| |
| | | |
| | |
Income (Loss) from Operations | |
| 4,887,038 | | |
| (9,899,614 | ) |
| |
| | | |
| | |
Other Expense (Income): | |
| | | |
| | |
Interest Expense | |
| 2,158,579 | | |
| 2,672,243 | |
Interest Income | |
| (34 | ) | |
| (35 | ) |
(Gain) Loss on Equity Method Investments | |
| (91,248 | ) | |
| 871,329 | |
Loss on Change in Fair Value of Derivative Liabilities | |
| 92,806 | | |
| 24,837 | |
(Gain) on Change in Fair Value of Contingent Liabilities and Shares Payable | |
| (4,023,664 | ) | |
| (31,122,401 | ) |
Loss on Extinguishment of Debt | |
| - | | |
| 489,647 | |
Other Expense (Income), Net | |
| 466,411 | | |
| (633,779 | ) |
| |
| | | |
| | |
Total Other (Income), Net | |
| (1,397,150 | ) | |
| (27,698,159 | ) |
| |
| | | |
| | |
Income from Operations Before Provision for Income Tax Expense | |
| 6,284,188 | | |
| 17,798,545 | |
Provision for Income Tax Expense | |
| 6,494,660 | | |
| 2,629,995 | |
| |
| | | |
| | |
Net (Loss) Income | |
| (210,472 | ) | |
| 15,168,550 | |
| |
| | | |
| | |
Net Income (Loss) Attributable to Non-Controlling Interest | |
| 62,528 | | |
| (7,044 | ) |
| |
| | | |
| | |
Net (Loss) Income Attributable to the Company | |
$ | (273,000 | ) | |
$ | 15,175,594 | |
| |
| | | |
| | |
(Loss) Earnings Per Share - Basic | |
$ | (0.10 | ) | |
$ | 0.05 | |
| |
| | | |
| | |
(Loss) Earnings Per Share - Diluted | |
$ | (0.10 | ) | |
$ | 0.04 | |
| |
| | | |
| | |
Weighted-Average Shares Outstanding - Basic | |
| 72,018,714 | | |
| 61,647,076 | |
| |
| | | |
| | |
Weighted-Average Shares Outstanding - Diluted | |
| 72,018,714 | | |
| 68,600,429 | |
Revenue
Revenue for the three months ended September 30,
2023 was $48.2 million, which represents an increase of $19.9 million, or 71%, from $28.3 million for the three months ended September 30,
2022. The Company’s cannabis retail operations and wholesale biomass revenue increased by $3.6 million and $16.3 million, or 56%
and 75%, respectively, for the three months ended September 30, 2023 as compared to the same period in the prior year. The increase
in cannabis retail operation revenues during the three months ended September 30, 2023, was primarily attributable to the Natural
Healing Center (“NHC”) retail dispensaries located in Grover Beach, Morro Bay, Lemoore and Turlock, California. The Company’s
retail revenues for the current period include the NHC retail dispensaries operations for the full reporting period whereas, Grover Beach,
Morro Bay and Lemoore were acquired during September 2022 and the acquisition of the Turlock location closed in April 2023 for
the comparative period. The increase in wholesale biomass revenue was primarily due to production from the Camarillo Facility which commenced
operations during the second fiscal quarter of 2022. During the current period the Camarillo Facility reported $33.9 million in wholesale
biomass revenue, an increase of $19.8 million, or 141%, as compared to the same period in the prior year.
Cost of Goods Sold and Gross Profit
Cost of goods sold for the three months ended
September 30, 2023 was $22.2 million, an increase of $2.7 million, or 14%, compared with $19.5 million for the three months ended
September 30, 2022. Gross profit for the three months ended September 30, 2023 was $26.0 million, representing a gross margin
of 54%, compared to a gross profit of $8.7 million, representing a gross margin of 31% for the three months ended September 30, 2022.
The increase in cost of goods sold during the quarter ended September 30, 2023 was primarily attributable to the Company’s
growth in revenue and accompanying increase in production. An increase in retail and cultivation capacity as well as the associated increase
in product, labor, and overhead costs during the three months ended September 30, 2023 supported the increase in production. The
increase in gross margin was primarily due to the increased revenue generated by the Camarillo Facility’s increased operations following
the completion of the first harvest in June 2022 coupled with lower per unit costs the Company was able to achieve.
Total Operating Expenses
Total operating expenses for the three months
ended September 30, 2023 was $21.1 million, an increase of $2.5 million, or 13%, compared to total operating expenses of $18.6 million
for the three months ended September 30, 2022. The increase in total operating expenses was attributable to the factors described
below.
General and administrative expenses for the three
months ended September 30, 2023 and 2022 were $15.2 million and $11.5 million, respectively, an increase of $3.7 million, or 32%.
The increase in general and administrative expenses is primarily attributed to the Company’s operational and cultivation expansion
initiatives and increased Company operations as compared to the same period in the prior year.
Sales and marketing expenses for the three months
ended September 30, 2023 and 2022 were $0.6 million and $0.8 million, respectively, a decrease of $0.2 million, or 31%. The Company’s
sales and marketing expenses are primarily driven by public relations, digital media expenses, promotions and trade shows, and digital
media expenses. 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,
2023 and 2022 were $1.7 million and $2.8 million, respectively, a decrease of $1.1 million, or 40%. The decrease in professional fees
is primarily attributable to a decrease in legal fees of $1.0 million which was driven by the Company’s acquisitions of the NHC
retail dispensaries completed during the three months ended September 30, 2022.
Depreciation and amortization for the three months
ended September 30, 2023 and 2022 were $3.7 million and $3.4 million, respectively, an increase of $0.3 million, or 7%. The increase
is attributed to the growth of the Company’s operations through acquisition, as well as significant property and equipment acquired
in recent periods as compared to the same period in the prior year.
Total Other Income
Total other income for the three months ended
September 30, 2023 and 2022 were $1.4 million and $27.7 million, respectively, a decrease of $26.3 million, or 95%. The decrease
was primarily due to an unfavorable change in fair value of contingent liabilities and shares payable of $27.1 million, or 87%, during
the third quarter of fiscal year 2023 as compared to the same period in the prior year. During the three months ended September 30,
2023 and 2022, the Company recorded a gain in fair value of contingent liabilities for the Camarillo earnout liability of $8.4 million
and $28.3 million, respectively, an unfavorable variance of $19.9 million as compared to the same period in the prior year. During the
three months ended September 30, 2023 and 2022, the Company recorded a loss in fair value of contingent liabilities for the Camarillo
contingent shares payable of $4.4 million and a gain of $1.8 million, respectively, an unfavorable variance of $6.2 million as compared
to the same period in the prior year. The unfavorable changes in the Camarillo earnout liability and Camarillo contingent shares payable
was due to actual and projected decreases in wholesale biomass revenue for the current reporting period.
Provision for Income Taxes
The provision for income tax expense for the three
months ended September 30, 2023 and 2022 was $6.5 million and $2.6 million, respectively, and increase of $3.9 million, or 147%.
The unfavorable change in provision for income taxes was directly impacted by the Company’s increased revenues and gross profit
for the current period.
The following are the results of our operations
(unaudited) for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022:
| |
Nine Months Ended | |
| |
September 30, | | |
September 30, | |
| |
2023 | | |
2022 | |
| |
Unaudited | | |
Unaudited | |
Revenues, Net | |
$ | 121,873,911 | | |
$ | 58,702,453 | |
Cost of Goods Sold (Exclusive of Depreciation and Amortization Shown Separately Below) | |
| 59,534,954 | | |
| 47,383,455 | |
| |
| | | |
| | |
Gross Profit | |
| 62,338,957 | | |
| 11,318,998 | |
| |
| | | |
| | |
Operating Expenses: | |
| | | |
| | |
General and Administrative | |
| 39,627,217 | | |
| 31,844,941 | |
Sales and Marketing | |
| 2,204,031 | | |
| 2,568,612 | |
Professional Fees | |
| 5,405,893 | | |
| 8,075,356 | |
Depreciation and Amortization | |
| 11,081,679 | | |
| 8,885,109 | |
Impairment Expense for Goodwill | |
| 17,480,983 | | |
| - | |
Impairment Expense for Intangible Assets | |
| 6,854,428 | | |
| - | |
| |
| | | |
| | |
Total Operating Expenses | |
| 82,654,231 | | |
| 51,374,018 | |
| |
| | | |
| | |
Loss from Operations | |
| (20,315,274 | ) | |
| (40,055,020 | ) |
| |
| | | |
| | |
Other Expense (Income): | |
| | | |
| | |
Interest Expense | |
| 6,785,440 | | |
| 5,440,551 | |
Interest Income | |
| (45,103 | ) | |
| (507 | ) |
Loss on Equity Method Investments | |
| 2,136,635 | | |
| 1,297,992 | |
Loss on Change in Fair Value of Derivative Liabilities | |
| 222,821 | | |
| 78,050 | |
Loss (Gain) on Change in Fair Value of Contingent Liabilities and Shares Payable | |
| 18,485,859 | | |
| (30,955,349 | ) |
Loss on Extinguishment of Debt | |
| - | | |
| 489,647 | |
Other Expense (Income), Net | |
| 1,837,868 | | |
| (568,142 | ) |
| |
| | | |
| | |
Total Other Expense (Income), Net | |
| 29,423,520 | | |
| (24,217,758 | ) |
| |
| | | |
| | |
Loss from Operations Before Provision for Income Tax Expense | |
| (49,738,794 | ) | |
| (15,837,262 | ) |
Provision for Income Tax Expense | |
| 14,161,836 | | |
| 3,012,244 | |
| |
| | | |
| | |
Net Loss | |
| (63,900,630 | ) | |
| (18,849,506 | ) |
| |
| | | |
| | |
Net Income (Loss) Attributable to Non-Controlling Interest | |
| 109,920 | | |
| (53,604 | ) |
| |
| | | |
| | |
Net Loss Attributable to the Company | |
$ | (64,010,550 | ) | |
$ | (18,795,902 | ) |
| |
| | | |
| | |
Loss Per Share - Basic | |
$ | (1.07 | ) | |
$ | (0.55 | ) |
| |
| | | |
| | |
Loss Per Share - Diluted | |
$ | (1.07 | ) | |
$ | (0.55 | ) |
| |
| | | |
| | |
Weighted-Average Shares Outstanding - Basic | |
| 72,216,018 | | |
| 59,271,500 | |
| |
| | | |
| | |
Weighted-Average Shares Outstanding - Diluted | |
| 72,216,018 | | |
| 59,271,500 | |
Revenue
Revenue for the nine months ended September 30,
2023 was $121.9 million, which represents an increase of $63.2 million, or 108%, from $58.7 million for the nine months ended September 30,
2022. During the nine months ended September 30, 2023, the Company’s cannabis retail operations and wholesale biomass revenue
increased by $13.4 million and $49.8 million, or 83% and 117%, respectively, as compared to the same period in the prior year. The increase
in cannabis retail operation revenues during the nine months ended September 30, 2023, was primarily attributable to the NHC retail
dispensaries located in Grover Beach, Morro Bay, Lemoore and Turlock California, which had not yet been acquired during the comparative
period. During the nine months ended September 30, 2023, the NHC retail dispensaries reported $14.5 million in revenue as compared
to $1.3 million during the same period in the prior year. The increase in wholesale biomass revenue was primarily due to production from
the Camarillo Facility, which completed their first harvest in June 2022. During the nine months ended September 30, 2023 and
2022, the Camarillo Facility reported $78.9 million and $16.2 million, respectively, an increase of $62.7 million, or 386%.
Cost of Goods Sold and Gross Profit
Cost of goods sold for the nine months ended September 30,
2023 was $59.5 million, an increase of $12.1 million, or 26%, compared with $47.4 million for the nine months ended September 30,
2022. Gross profit for the nine months ended September 30, 2023 was $62.3 million, representing a gross margin of 51%, compared with
a gross profit of $11.3 million, representing a gross margin of 19% for the nine months ended September 30, 2022. The increase in
cost of goods sold was related to the Company’s growth in revenue and accompanying increase in production. An increase in retail
and cultivation capacity as well as the associated increase in product, labor, and overhead costs during the nine months ended September 30,
2023 supported the increase in production. The increase in gross margin was primarily due to the Camarillo Facility’s increase in
revenue following the completion of their first harvest in June 2022 coupled with lower per unit costs the Company was able to achieve.
Total Operating Expenses
Total operating expenses for the nine months ended
September 30, 2023 was $82.7 million, an increase of $31.3 million, or 61%, compared to total operating expenses of $51.4 million
for the nine months ended September 30, 2022. The increase in total operating expenses was attributable to the factors described
below.
General and administrative expenses for the nine
months ended September 30, 2023 and 2022 were $39.6 million and $31.8 million, respectively, an increase of $7.8 million, or 24%.
The increase in general and administrative expenses is primarily attributed to the Company’s operational and cultivation expansion
initiatives and increased Company operations as compared to the same period in the prior year.
Sales and marketing expenses for the nine months
ended September 30, 2023 and 2022 were $2.2 million and $2.6 million, respectively, a decrease of $0.4 million, or 14%. The Company’s
sales and marketing expenses are primarily driven by public relations, digital media expenses, promotions and trade shows, and digital
media expenses. 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 nine months ended September 30,
2023 and 2022 were $5.4 million and $8.1 million, respectively, a decrease of $2.7 million, or 33%. The decrease in professional fees
is primarily attributable to a decrease in legal fees of $2.8 million which was driven by the completion of the Company’s acquisitions
during the second half of the comparative fiscal year of 2022, partially offset by increased accounting and consulting fees of $0.2 million
during the nine months ended September 30, 2023 as compared to the same period in the prior year.
Depreciation and amortization for the nine months
ended September 30, 2023 and 2022 were $11.1 million and $8.9 million, respectively, an increase of $2.2 million, or 25%. The increase
is attributed to the growth of the Company’s operations through acquisitions, as well as significant property and equipment acquired
in recent periods as compared to the same period in the prior year.
During the nine months ended September 30,
2023, management noted indicators of impairment related to CPG goodwill and intangible assets. The Company recorded impairment expense
for goodwill and intangible assets of $17.5 million and $6.9 million, respectively, for the nine months ended September 30, 2023.
See “Note 8 – Intangible Assets” and “Note 9 – Goodwill” for further information in
the Financial Statements for further information. There were no impairments to goodwill or intangible assets recorded for the nine months
ended September 30, 2022.
Total Other Expense
Total other expense for the nine months ended
September 30, 2023 was $29.4 million compared to income of $24.2 million, an unfavorable variance of $53.6 million, or 221%. The
unfavorable variance was primarily due to an unfavorable change in fair value of contingent liabilities and shares payable of $49.5 million
for the nine months ended September 30, 2023 as compared to the same period in the prior year. The Company’s contingent earnout
liability related to the Camarillo Facility, Camarillo contingent shares and Plus Products contingent RSU’s reported a net increase
in loss on change in fair value of contingent liabilities of $19.7 million. During the nine months ended September 30, 2023, the
Company determined the criteria for the $2,033,315 of sponsor earnout liability related to the Mercer Park Transaction was not met at
the expiration of the term and recorded the gain on change in fair value of contingent consideration accordingly.
Provision for Income Taxes
The provision for income tax expense for the nine
months ended September 30, 2023 and 2022 was $14.2 million and $3.0 million, respectively, an unfavorable change of $11.2 million,
or 370%. The unfavorable change in provision for income taxes was directly impacted by the Company’s increased revenues and gross
profit for the current period.
Non-GAAP Financial Measures
In addition to providing
financial measurements based on GAAP, the Company provides additional financial metrics that are not defined under, prepared in accordance
with or a standardized financial measure under 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 Income (Loss)
(GAAP) adjusted for interest and financing costs, income taxes, depreciation, and amortization. This non-GAAP measure represents the Company’s
current operating profitability and ability to generate cash flow.
|
Adjusted EBITDA |
EBITDA (non-GAAP) adjusted for share-based compensation, stock appreciation rights expense, change in equity method investments, impairment expense for goodwill and intangible assets, change in fair value of derivative liabilities, change in fair value of contingent liabilities and shares payable, acquisition-related professional fees, non-operational start-up costs and certain debt-related fees. Non-operational start-up costs are set-up costs to prepare a location for its intended use. Start-up costs are expensed as incurred and are not indicative of ongoing operations. This non-GAAP measure represents the Company’s current operating profitability and ability to generate cash flow excluding non-recurring, irregular or one-time expenditures in order improve comparability. |
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 certain material non-cash items, expenses and gains
and other adjustments that may be unusual in nature, infrequent or that the Company believes are not reflective of the Company’s
ongoing operating results and performance.
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
in the cannabis industry or otherwise. Accordingly, these non-GAAP financial measures are intended to provide additional information and
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. Such non-GAAP
financial measures should only be considered in conjunction with the GAAP financial measures presented herein and in the Company’s
Financial Statements.
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. 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.
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 non-GAAP 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 to the Company; |
| · | do not reflect any cash capital expenditure requirements for the assets being depreciated and amortized
that may have to be replaced in the future; |
| · | do not reflect changes in, or cash requirements for, working capital needs; and |
| · | do not reflect the interest expense, or the cash requirements 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.
Adjusted EBITDA (non-GAAP) (Unaudited)
The following table provides a reconciliation
of the Company’s net loss to Adjusted EBITDA (non-GAAP) for the three months ended September 30, 2023 compared to three months
ended September 30, 2022:
| |
Three Months Ended | |
| |
September 30, | | |
September 30, | |
| |
2023 | | |
2022 | |
| |
Unaudited | | |
Unaudited | |
Net (Loss) Income (GAAP) | |
$ | (210,472 | ) | |
$ | 15,168,550 | |
Depreciation and Amortization | |
| 3,676,028 | | |
| 3,440,503 | |
Interest Expense | |
| 2,158,579 | | |
| 2,672,243 | |
Income Tax Expense | |
| 6,494,660 | | |
| 2,629,995 | |
EBITDA (non-GAAP) | |
| 12,118,795 | | |
| 23,911,291 | |
Adjustments: | |
| | | |
| | |
Shared-Based Compensation | |
| 2,565,363 | | |
| 2,811,708 | |
Stock Appreciation Rights Expense | |
| 86,412 | | |
| - | |
(Gain) Loss on Equity Method Investments | |
| (91,248 | ) | |
| 871,329 | |
Change in Fair Value of Derivative Liabilities | |
| 92,806 | | |
| 24,837 | |
Change in Fair Value of Contingent Liabilities and Shares Payable | |
| (4,023,664 | ) | |
| (31,122,401 | ) |
Acquisition Related Professional Fees | |
| - | | |
| 934,962 | |
Non-Operational Start-up Costs | |
| - | | |
| (130,914 | ) |
Adjusted EBITDA (non-GAAP) | |
$ | 10,748,464 | | |
$ | (2,699,188 | ) |
On a non-GAAP basis, the Company recorded
Adjusted EBITDA (Non-GAAP) of $10.7 million for the three months ended September 30, 2023, compared to a negative
Adjusted EBITDA (Non-GAAP) of $2.7 million for the three months ended September 30, 2022, a favorable variance of $13.4
million, or 498%. The Company’s reported EBITDA (Non-GAAP) of $12.1 million and $23.9 million for the three months ended
September 30, 2023 and 2022, respectively, an unfavorable change of $11.8 million, or 49%. Adjustments to EBITDA reported a
favorable change of $25.2 million for the three months ended September 30, 2023 compared to the same period in the prior year.
The change was primarily driven by a favorable adjustment of change in fair value of contingent liabilities of $27.1 million and was
partially offset by a favorable change in results from equity method investments, a decrease in share-based compensation and lower
spend on acquisition related professional fees of $2.1 million, in aggregate, for the third quarter of fiscal year 2023 as compared
to the same period in the prior year.
The following table provides a reconciliation
of the Company’s net loss to Adjusted EBITDA (non-GAAP) for the nine months ended September 30, 2023 compared to nine months
ended September 30, 2022:
| |
Nine Months Ended | |
| |
September 30, | | |
September 30, | |
| |
2023 | | |
2022 | |
| |
Unaudited | | |
Unaudited | |
Net Loss (GAAP) | |
$ | (63,900,630 | ) | |
$ | (18,849,506 | ) |
Depreciation and Amortization | |
| 11,081,679 | | |
| 8,885,109 | |
Interest Expense | |
| 6,785,440 | | |
| 5,440,551 | |
Income Tax Expense | |
| 14,161,836 | | |
| 3,012,244 | |
EBITDA (Non-GAAP) | |
| (31,871,675 | ) | |
| (1,511,602 | ) |
Adjustments: | |
| | | |
| | |
Shared-Based Compensation | |
| 5,727,966 | | |
| 8,985,352 | |
Stock Appreciation Rights Expense | |
| 100,573 | | |
| (35,442 | ) |
Loss on Equity Method Investments | |
| 2,136,635 | | |
| 1,297,992 | |
Impairment Expense for Goodwill | |
| 17,480,983 | | |
| - | |
Impairment Expense for Intangible Assets | |
| 6,854,428 | | |
| - | |
Change in Fair Value of Derivative Liabilities | |
| 222,821 | | |
| 78,050 | |
Change in Fair Value of Contingent Liabilities and Shares Payable | |
| 18,485,859 | | |
| (30,955,349 | ) |
Acquisition Related Professional Fees | |
| - | | |
| 2,261,195 | |
Non-Operational Start-up Costs | |
| - | | |
| 1,122,561 | |
Loan Amendment Fee | |
| 1,000,000 | | |
| - | |
Adjusted EBITDA (Non-GAAP) | |
$ | 20,137,590 | | |
$ | (18,757,243 | ) |
On a non-GAAP basis, the Company recorded Adjusted
EBITDA (Non-GAAP) of $20.1 million for the nine months ended September 30,2023, compared to a negative Adjusted EBITDA
(Non-GAAP) of $18.8 million for the nine months ended September 30,2022, a favorable variance of $38.9 million, or 207%. For
the nine months ended September 30, 2023 and 2022, the Company’s EBITDA (Non-GAAP) was negative $31.9 million and negative
$1.5 million, respectively, an unfavorable change of $30.4 million, or 2,008%. Adjustments to EBITDA reported a favorable change of $69.3
million for the nine months ended September 30, 2023 compared to the same period in the prior year. The favorable change was primarily
driven by adjustments for an unfavorable change in fair value of contingent liabilities, non-recurring impairment expenses and loan amendment
fee of $74.9 million, in aggregate, partially offset by unfavorable adjustments related to lower share-based compensation, acquisition
related professional fees and non-operational start-up costs of $6.6 million, in aggregate, for the nine months ended September 30,
2023 as compared to the same period in the prior year.
Selected Quarterly Information
A summary of selected information for each of the quarters presented
is as follows:
| |
Revenues | | |
Net (Loss) Income
Before Non-Controlling Interest | | |
(Loss) Earnings
Per Share - Basic
Attributable to the
Company | | |
(Loss) Earnings Per
Share - Diluted
Attributable to the
Company | |
| |
Unaudited | | |
Unaudited | | |
| | |
| |
September 30, 2023 | |
$ | 48,186,773 | | |
$ | (210,472 | ) | |
$ | (0.10 | ) | |
$ | (0.10 | ) |
June 30, 2023 | |
$ | 44,665,134 | | |
$ | (24,905,057 | ) | |
$ | (0.39 | ) | |
$ | (0.39 | ) |
March 31, 2023 | |
$ | 29,022,004 | | |
$ | (38,785,101 | ) | |
$ | (0.57 | ) | |
$ | (0.57 | ) |
December 31, 2022 | |
$ | 32,188,634 | | |
$ | (16,747,061 | ) | |
$ | (0.32 | ) | |
$ | (0.32 | ) |
September 30, 2022 | |
$ | 28,256,835 | | |
$ | 15,168,550 | | |
$ | 0.05 | | |
$ | 0.04 | |
June 30, 2022 | |
$ | 16,473,247 | | |
$ | (14,192,292 | ) | |
$ | (0.24 | ) | |
$ | (0.24 | ) |
March 31, 2022 | |
$ | 13,972,371 | | |
$ | (19,825,764 | ) | |
$ | (0.35 | ) | |
$ | (0.35 | ) |
December 31, 2021 | |
$ | 18,360,442 | | |
$ | (18,766,598 | ) | |
$ | (0.32 | ) | |
$ | (0.32 | ) |
Revenue for the quarter ended September 30,
2023 was $48.2 million, an increase of $3.5 million, or 7%, as compared to revenue of $44.7 million for the quarter ended June 30,
2023. The increase in revenue was primarily due to higher biomass sales at the Camarillo Facility driven by increased production due to
seasonality of plant cycle due the higher biomass sales at the Camarillo Facility of $3.2 million for the quarter ended September 30,
2023 as compared to the prior quarter. Revenue for the quarter ended June 30, 2023 was $44.7 million, an increase of $15.6 million,
or 54%, from $29.0 million for the quarter ended March 31, 2023. The increase in revenue was primarily due to higher biomass sales
at the Camarillo Facility driven by increased production due to seasonality of plant cycle, and, to a lesser extent, an increase in average
wholesale biomass pricing. Revenue for the quarter ended March 31, 2023 was $29.0 million, a decrease of $3.2 million, or 10%, from
$32.2 million for the quarter ended December 31, 2022. The decrease in revenue was due to the seasonality of plant cycle during the
quarter ended March 31, 2023 as compared to the quarter ended December 31, 2022. Revenue for the quarter ended December 31,
2022 was $32.2 million, an increase of $3.9 million, or 14% from $28.3 million for the quarter ended September 30, 2022. The increase
in revenue during the fourth quarter of 2022 is primarily due to the acquisitions of the Natural Healing Center retail dispensaries located
in Grover Beach, Lemoore and Morro Bay, California which reported $5.4 million in revenue as compared to nil during the third quarter
of 2022. Revenues for the quarter ended September 30, 2022 were $28.3 million, an increase of $11.8 million, or 72% from $16.5 million
for the quarter ended June 30, 2022. The increase was primarily due to the Company’s expanded cultivation operations of the
Camarillo Facility which completed the first harvest in June 2022. Revenues for the quarter ended June 30, 2022 was $16.5 million,
which represents an increase of $2.5 million, or 18% from $14.0 million for the quarter ended March 31, 2022. The increase in revenue
was primarily due to the operations of the Camarillo Facility which had revenues of $2.2 million as compared to nil during the quarter
ended March 31, 2022. The Company completed phase one project work of the Camarillo Facility during the quarter ended June 30,
2022. Revenue for the quarter ended March 31, 2022 was $14.0 million, which represents a decrease of $4.4 million or 24% from $18.4
million for the quarter ended December 31, 2021. The decrease in revenues during the three months ended March 31, 2022 was driven
by decreased wholesale biomass pricing.
Net loss for the quarter ended
September 30, 2023 was $0.2 million, which represents a favorable change of $24.7 million, or 99%, from a net loss of $24.9
million for the quarter ended June 30, 2023. The favorable change was primarily due to loss on change in fair value of
contingent liabilities and shares payable of $19.1 million reported during the quarter ended June 30, 2023 as compared to a
gain of $4.0 million for the quarter ended September 30, 2023. Net loss for the quarter ended June 30, 2023 was $24.9
million, which represents a favorable change of $13.9 million, or 36%, from net loss of $38.8 million for the quarter ended
March 31, 2023. The favorable change was primarily due to an increase in gross profit coupled with a decrease in operating
expenses for the quarter ended June 30, 2023. Net loss for the quarter ended March 31, 2023 was $38.8 million, which
represents an unfavorable change of $22.1 million, or 132%, from net loss of $16.7 million for the quarter ended December 31,
2022. The unfavorable change was due to impairment expense of $23.0 million recognized related to CPG goodwill and intangible assets
during the quarter ended March 31, 2023. Net loss for the quarter ended December 31, 2022 was $16.7 million, which
represents an unfavorable change of $31.9 million, or 210% from net income of $15.2 million for the quarter ended September 30,
2022. The unfavorable change was due to a gain on change in fair value of contingent liabilities recognized during the quarter ended
September 30, 2022 of $31.1 million as compared to a loss on change in fair value of contingent liabilities of $2.1 million
during the fourth quarter of 2022. Net income for the quarter ended September 30, 2022 was $15.2 million, which represents a
favorable change of $29.4 million, or 207% from $14.2 million net loss for the quarter ended June 30, 2022. The decrease in net
loss was primarily due to the increase in other income of $25.1 million for the current quarter as a result of a gain on change in
fair value of contingent liabilities recognized. Net loss for the quarter ended June 30, 2022 was $14.2 million, which
represents a decrease of $5.6 million, or 28% from $19.8 million net loss for the quarter ended March 31, 2022. The decrease in
net loss was primarily due to a gain on change in fair value of contingent liabilities as a result of the unfavorable change in
Company stock price as of June 30, 2022 as compared to March 31, 2022. Net loss for the quarter ended March 31, 2022
was $19.8 million, which represents an increase of $1.1 million or 6% from a net loss of $18.8 million for the quarter ended
December 31, 2021. The difference in net loss was due to a decrease in gross profit for the quarter ended March 31, 2022,
coupled with increased operating expenses, including an increase in general and administrative expenses as well as depreciation and
amortization. The Company was building out the Camarillo Facility acquired during the fourth quarter of 2021, which resulted in a
$2.6 million net loss recognized for the quarter ended March 31, 2022.
Liquidity and Capital Resources
Overview
Historically,
the Company’s primary source of liquidity has been its operations, capital contributions made by equity investors and debt issuances.
The Company is meeting its current operational obligations as they become due from its current working capital and from operations. However,
the Company has sustained losses since inception and may require additional capital in the future. As of and for the nine months ended
September 30, 2023, the Company had an accumulated deficit of $160,372,732, a net loss attributable to the Company of $64,010,550
and net cash provided by operating activities of $21,783,228. The Company estimates that based on current business operations and working
capital, it will continue to meet its obligations as they become due in the short term. The Company is generating cash from revenues and
deploying its capital reserves to acquire and develop assets capable of producing additional revenues and earnings over both the immediate
and near term. Capital reserves are primarily being utilized for capital expenditures, facility improvements, product development and
marketing.
Liquidity risk is the risk that the Company will
not be able to meet its financial obligations associated with financial liabilities. The Company manages liquidity risk through the management
of its capital structure. The Company’s approach to managing liquidity is to ensure that it will have sufficient liquidity to settle
obligations and liabilities when due. In the event sufficient cash flow is not available from operating activities, the Company may continue
to raise equity or debt capital from investors in order to meet liquidity needs. If the Company is not able to secure adequate additional
funding, the Company may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible,
or suspend or curtail planned programs. Any of these actions could materially harm the Company’s business, results of operations
and future prospects. There can be no assurance that such financing will be available or will be on terms acceptable to the Company.
Private Placement Financing
On March 31,
2023, the Company through its subsidiary, GH Group, closed on a private placement financing of 300 GH Group Series C Preferred Shares
with an aggregate face value of $300,000. In conjunction with these transactions, the Company issued 60,000 Company warrants. The warrants
have an exercise price of $5.00 per warrant and expire in August 2027. The Company recorded the fair value of the Series C
Preferred Shares in the amount of $215,826, which is net of the value allocated to the newly issued warrants of $84,174. The Series C
Preferred Shares are accounted for as mezzanine non-controlling interests as the Series C Preferred Shares redemption feature is
not in the sole control of the Company. The Series C Preferred Shares were accreted by accrued but unpaid dividends and were therefore
adjusted to their redemption value as of September 30, 2023 with an adjustment of $84,174.
On August 23, 2023, the Company through
its subsidiary, GH Group, closed on a private placement financing of 10,900 GH Group Series D Preferred Shares with an aggregate
face value of $10,900,000. In conjunction with these transactions, the Company issued 2,180,000 Company warrants. The warrants have an
exercise price of $6.00 per warrant which expire in August 2028. The Company recorded the fair value of the Series D Preferred
Shares in the amount of $6,974,262, which is net of the value allocated to the newly issued warrants of $3,925,738. The Series D
Preferred Shares are accounted for as mezzanine non-controlling Interest as the Series D Preferred Shares redemption feature is
not in the sole control of the Company. The Series D Preferred Shares were accreted by accrued but unpaid dividends and were therefore
adjusted to their redemption value as of September 30, 2023 with an adjustment of $3,925,738.
Financial Condition
Cash Flows
The following table summarizes the Company’s
Unaudited Condensed Interim Consolidated Statements of Cash Flows from the Financial Statements for the nine months ended September 30,
2023 and 2022:
| |
2023 | | |
2022 | |
Net Cash Provided by (Used in) Operating Activities | |
$ | 21,783,228 | | |
$ | (31,483,856 | ) |
Net Cash Used in Investing Activities | |
| (6,455,684 | ) | |
| (24,349,170 | ) |
Net Cash Provided by Financing Activities | |
| 8,421,776 | | |
| 19,302,640 | |
| |
| | | |
| | |
Net Increase (Decrease) in Cash, Restricted Cash and Cash Equivalents | |
| 23,749,320 | | |
| (36,530,386 | ) |
Cash, Restricted Cash and Cash Equivalents, Beginning of Period | |
| 14,143,502 | | |
| 54,066,831 | |
| |
| | | |
| | |
Cash, Restricted Cash and Cash Equivalents,
End of Period | |
$ | 37,892,822 | | |
$ | 17,536,445 | |
Cash Flow from Operating Activities
Net cash provided by operating activities was
$21.8 million for the nine months ended September 30, 2023, an increase of $53.3 million, or 169%, compared to net cash used in
operating activities of $31.5 million for the nine months ended September 30, 2022. The Company had an increase in net loss of $45.1
million coupled with a favorable change in adjustments to reconcile net loss to net cash provided by operating activities of $76.7 million
as well as a net favorable change in operating assets and liabilities of $21.7 million for the nine months ended September 30, 2023,
when compared to the same period in the prior year.
Cash Flow from Investing Activities
Net cash used in investing activities was $6.5
million for the nine months ended September 30, 2023, a decrease of $17.8 million, or 73%, compared to $24.3 million for the nine
months ended September 30, 2022. This was primarily driven by a decrease in purchases of property and equipment of $17.4 million
for the nine months ended September 30, 2023, compared to the same period in the prior year.
Cash Flow from Financing Activities
Net cash provided by financing activities was
$8.4 million for the nine months ended September 30, 2023, a decrease of $10.9 million, or 56%, compared to net cash provided of
$19.3 million for the nine months ended September 30, 2022. This was primarily driven by decreased proceeds from issuance of notes
payable, issuance of preferred shares, contributions and increased distributions to preferred shareholders of $22.3 million, in aggregate,
partially offset by decreased payments on notes payable of $10.0 million and an increase in cash received for unissued preferred shares
of $1.9 million for the nine months ended September 30, 2023 as compared to the same period in the prior year.
As discussed in the “Liquidity and Capital
Resources” section above, the Company’s primary source of liquidity has been capital contributions and debt capital made
available from investors. 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.
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, 2023:
| |
2023 | | |
2024 | | |
2025-2026 | | |
After 2026 | | |
Total | |
| |
(remaining) | | |
| | |
| | |
| | |
| |
Notes Payable to Third Parties | |
$ | 637,884 | | |
$ | 7,554,232 | | |
$ | 15,118,966 | | |
$ | 43,142,295 | | |
$ | 66,453,377 | |
Lease Obligations | |
| 755,938 | | |
| 2,923,294 | | |
| 4,937,177 | | |
| 7,402,433 | | |
| 16,018,842 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total Contractual Obligations | |
$ | 1,393,822 | | |
$ | 10,477,526 | | |
$ | 20,056,143 | | |
$ | 50,544,728 | | |
$ | 82,472,219 | |
Off-Balance Sheet Arrangements
As of the date of this MD&A, 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 Ended
September 30, 2023
Related parties are defined as management and
members of the Company and/or members of their immediate family and/or other companies and/or entities in which a board member or senior
officer is a principal owner or senior executive. Other than disclosed elsewhere in the financial statements, related party transactions
and balances are as follows:
Consulting Agreement
Beach Front Property Management Inc, a company
that is majority-owned by an executive and board member of the Company, entered into a consulting agreement with the Company dated September 28,
2020. The monthly consulting fee is $10,860 for mergers and acquisitions advisory and assistance and real estate acquisition and financing
services. The agreement may be terminated by either party for any/or no reason without penalty upon seven days written notice. Consulting
fees for the three and nine months ended September 30, 2023 were $32,580 and $97,740, respectively. Consulting fees for the three
and nine months ended September 30, 2022 were $32,580 and $97,740, respectively.
Leases
Neo Street Partners LLC, a company partially
owned by an executive and board member of the Company, entered into a five-year lease with a subsidiary of the Company. The lease, which
commenced in October 2018, provides for an initial annual base rent payment of $213,049 increasing to $243,491 for years two to
five. Rent expense for the three and nine months ended September 30, 2023 were $223,628 and $345,373, respectively. Rent expense
for the three and nine months ended September 30, 2022 were $60,873 and $182,618, respectively.
3645 Long Beach LLC, a company partially owned
by an executive and board member of the Company, entered into a five-year lease with a subsidiary of the Company. The lease, which commenced
in December 2019, provides for an initial annual base rent payment of $64,477 increasing to $69,352 for year two and increasing
five percent per annum thereafter. Rent expense for the three and nine months ended September 30, 2023 were $19,115 and $57,345,
respectively. Rent expense for the three and nine months ended September 30, 2022 were $18,205 and $54,903, respectively.
Isla Vista GHG LLC, a company partially owned
by executives and board members of the Company, entered into a ten-year lease with a subsidiary of the Company. The lease, which commences
on the first calendar day after the Company publicly announces the opening of the retail location at the leased property (“Commencement
Date”), provides for an initial monthly rent of $5,000 starting April 19, 2022 until the Commencement Date. Effective on the
Commencement Date, the initial annual base rent payment will be $144,000 and increasing three percent per annum thereafter. Rent expense
for the three and nine months ended September 30, 2023 were $67,250 and $201,750, respectively. Rent expense for the three and nine
months ended September 30, 2022 were $15,000 and $27,000, respectively.
In August 2022, Kazan Trust dated December 10,
2004, a trust owned by an executive and board member of the Company, acquired partial ownership of a real estate entity that entered
into a ten-year lease with a subsidiary of the Company. The lease, which commenced in July 2022, provides for an initial annual
base rent payment of $36,489, increasing three percent per annum thereafter. Rent expense for the three and nine months ended September 30,
2023 were $9,122 and $27,367, respectively. Rent expense for the three and nine months ended September 30, 2022 were $3,041 and
$3,041, respectively.
Critical Accounting Estimates
Use of Estimates
The preparation of the 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 the 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 fully 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 ASC 842 “Leases”
(“ASC 842”), 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 options are considered. The Company reassesses the lease term if there is a significant event or change in
circumstances that is within its control and affects its ability to exercise or not to exercise the option to renew or to terminate.
The Company 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 Condensed Consolidated Balance Sheets of the Financial Statements. 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.
The Company applies 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” (“ASC 815-40”),
which simplifies the accounting for convertible instruments by eliminating the requirement to separate embedded conversion features from
the host contract when the conversion features are not required to be accounted for as derivatives under ASC 815, “Derivatives
and Hedging”, or that do not result in substantial premiums accounted for as paid-in capital. By removing the separation model,
a convertible debt instrument will be reported as a single liability instrument with no separate accounting for embedded conversion features.
This 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 Condensed Consolidated
Balance Sheets as current or non-current based on whether net-cash settlement of the derivative instrument could be required within twelve
months of the Balance Sheets dates.
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 Consolidated Statements of Operations
of the Financial Statements. Identifiable assets and liabilities, including intangible assets, of acquired businesses are recorded at
their fair value at the date of acquisition. When the Company acquires control of a business, any previously held equity interest is
also remeasured to fair value. The excess of the purchase consideration and any previously held equity interest over the fair value of
identifiable net assets acquired is goodwill. If the fair value of identifiable net assets acquired exceeds the purchase consideration
and any previously held equity interest, the difference is recognized in the Unaudited Condensed Interim Consolidated Statements of Operations
of the Financial Statements 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, “Business Combinations”.
Consolidation of Variable Interest Entities
(“VIE”)
ASC 810 requires a variable interest holder to
consolidate a VIE if that party has the power to direct the activities of the VIE that most significantly impact the VIE’s economic
performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits
from the VIE that could potentially be significant to the VIE. To determine whether or not a variable interest the Company holds could
potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size and
form of the Company’s involvement with the VIE. The equity method of accounting is applied to entities in which the Company is
not the primary beneficiary or the entity is not a VIE and the Company does not have effective control, but can exercise influence over
the entity with respect to its operations and major decisions. The Company does not consolidate a VIE in which it is not considered the
primary beneficiary. The Company evaluates its relationships with all the VIE’s on an ongoing basis to reassess if it continues
to be the primary beneficiary.
Share-Based Compensation
The Company has an equity incentive plan (the
“Incentive Plan”) under which the Company may issue various types of equity instruments or instruments that track to equity,
more particularly the Equity Shares, to employees, officers, consultants and non-employee directors. The types of equity instruments
issuable under the Incentive Plan encompass, among other things, stock options, unrestricted stock bonus and restricted stock units (together,
“Awards”). See “Note 15 – Share-Based Compensation” in the Financial Statements for further information.
The Company accounts for its share-based awards
in accordance with ASC 718, “Compensation – Stock Compensation”, which requires fair value measurement on the
grant date and recognition of compensation expense for all share-based payment awards made to employees and directors, including restricted
share awards. For stock options, the Company estimates the fair value using a closed option valuation (Black-Scholes) model. When there
are market-related vesting conditions to the vesting term of the share-based compensation, the Company uses a valuation model to estimate
the probability of the market-related vesting conditions being met and will record the expense. The fair value of restricted share awards
is based upon the quoted market price of the common shares on the date of grant. The fair value is then expensed over the requisite service
periods of the awards, which is generally the performance period, net of estimated forfeitures, and the related amount is recognized
in the Unaudited Condensed Interim Consolidated Statements of Operations of the Financial Statements.
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
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 available information, and forward-looking information that is reasonable and supportive. For accounts
receivable only, the Company applies the simplified approach as permitted by ASU 2016-13, “Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments”. The simplified approach to the recognition of expected
losses does not require the Company to track the changes in credit risk. Rather, the Company recognizes a loss allowance based on lifetime
expected credit losses at each reporting date from the date of the trade receivable.
Expected credit losses are measured as the difference
in the present value of the contractual cash flows that are due to the Company under the contract, and the cash flows that the Company
expects to receive. The Company assesses all information available, including past due status, credit ratings, the existence of third-party
insurance, and forward-looking macro-economic factors in the measurement of the expected credit losses associated with its assets carried
at amortized cost. The Company measures expected credit loss by considering the risk of default over the contract period and incorporates
forward-looking information into its measurement.
Changes in Accounting Policies Including Adoption
In October 2021,
the FASB issued ASU 2021-08, “Business Combinations (Subtopic 805), Accounting for Contract Assets and Contract Liabilities
from Contracts with Customers” (“ASU 2021-08”), which is intended to improve the accounting for acquired revenue
contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of
an acquired contract liability and the effect of payment terms on subsequent revenue recognized. ASU 2021-08 became effective for the
Company beginning January 1, 2023. The adoption of the standard did not have a material impact on the Company’s Unaudited
Condensed Interim Consolidated Financial Statements.
On March 31,
2022, the FASB issued ASU 2022-02, “Financial Instruments—Credit Losses (Topic 326) Troubled Debt Restructurings
and Vintage Disclosures” (“ASU 2022-02”), which eliminates the accounting guidance on troubled debt restructurings
for creditors and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by
year of origination. ASU 2022-02 also updates the requirements related to accounting for credit losses under the current guidance and
adds enhanced disclosures for creditors with respect to loan refinancing and restructuring for borrowers experiencing financial difficulty.
ASU 2022-02 became effective for the Company beginning January 1, 2023. The adoption of the standard did not have a material impact
on the Company’s Unaudited Condensed Interim Consolidated Financial Statements.
Recently Issued Accounting Standards
In March 2023,
the FASB issued ASU 2023-01, Leases (Topic 842), Common Control Arrangements (ASU 2023-01), which requires an entity to determine
whether a related party arrangement between entities under common control is a lease. If the arrangement is determined to be a lease,
an entity must classify and account for the lease on the same basis as an arrangement with an unrelated party (on the basis of legally
enforceable terms and conditions). ASU 2023-01 is effective for the Company beginning January 1, 2024 with early adoption permitted.
The Company is currently evaluating the effect of adopting this accounting standard.
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, 2023 and December 31, 2022 is the carrying values of cash and cash equivalents, accounts receivable and
notes receivable. 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, 2023 and December 31, 2022, cash generated from ongoing
operations was not sufficient to fund operations and growth strategy as discussed above in “Liquidity and Capital Resources”.
The Company has therefore depended on financing from sale of our equity and from debt financing to fund our operations. Overall, management
does not expect the net cash contribution from our operations and investments to be positive in the near term, and the Company therefore
expect to rely on financing from equity or debt.
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 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.
Tax Risk
Tax risk is the risk of changes in the tax environment
that would have a material adverse effect on the Company’s business, results of operations, and financial condition. Currently,
state licensed marijuana businesses are assessed a comparatively high effective federal tax rate due to Internal Revenue Code Section 280E,
which bars businesses from deducting all expenses except their cost of goods sold when calculating federal tax liability. Any increase
in tax levies resulting from additional tax measures may have a further adverse effect on the operations of the Company, while any decrease
in such tax levies will be beneficial to future operations.
REGULATORY ENVIRONMENT: ISSUERS WITH CANNABIS-RELATED
ASSETS IN THE UNITED STATES
In accordance with Staff Notice 51-352, below
is a discussion of the current federal and California regulatory regimes where the Company is currently directly and indirectly involved,
through its subsidiaries and investments, in the cannabis industry.
In accordance with Staff Notice 51-352, the Company
evaluates, monitors and reassesses this disclosure, and any related risks, on an ongoing basis and the same will be supplemented, amended
and communicated to investors in public filings, including in the event of government policy changes or the introduction of new or amended
guidance, laws or regulations regarding the cannabis industry. Any non-compliance, citations or notices of violation which may have an
impact on the Company’s licenses, business activities, or operations will be promptly disclosed by the Company.
The Company derives its revenues from the
cannabis industry in California, and the industry is illegal under U.S. federal law.
The Company is involved (through its licensed
subsidiaries) in the cannabis industry in the U.S. where local state laws permit such activities. Currently, its subsidiaries and managed
entities are directly engaged in the cultivation, manufacture, processing, sale and distribution of cannabis and hold licenses in the
adult-use and/or medicinal cannabis marketplace in the state of California.
The Company’s Statement of Financial
Position and Operating Statement Exposure to U.S. Cannabis Related Activities.
As of the date of this MD&A, the majority
of the Company’s business was directly derived from U.S. cannabis-related activities. As such, the Company’s statement of
financial position and statement of profits and losses exposure to U.S. cannabis-related activities is 100%.
U.S. Federal Overview
The Controlled Substances Act
The U.S. federal government regulates drugs through
the federal Controlled Substances Act (21 U.S.C. § 811) (the “CSA”), which places controlled substances, including cannabis,
in one of five different schedules. Cannabis, except hemp containing less than 0.3% (on a dry weight basis) of the psychoactive ingredient
in cannabis, is classified as a Schedule I drug. As a Schedule I drug, the federal U.S. Drug Enforcement Agency considers cannabis to
have a high potential for abuse, no currently accepted medical use in treatment in the U.S., and a lack of accepted safety for use of
the drug under medical supervision1. The classification of cannabis as a Schedule I drug is inconsistent with what the Company
believes to be many valuable medical uses for cannabis accepted by physicians, researchers, patients, and others. As evidence of this,
the U.S. Food and Drug Administration (“FDA”) on June 25, 2018, approved Epidiolex an oral solution with an active ingredient,
CBD, that is derived from the cannabis plant for the treatment of seizures associated with two rare and severe forms of epilepsy, Lennox-
Gastaut syndrome and Dravet syndrome, in patients two years of age and older. Epidiolex was initially placed on Schedule V, the least
restrictive schedule of the CSA. On April 6, 2020, the U.S. Drug Enforcement Administration (“DEA”) removed Epidiolex
entirely from the CSA. This is the first FDA-approved drug that contains a purified drug substance derived from the cannabis plant. CBD
is a chemical component of cannabis that does not contain the intoxicating properties of tetrahydrocannabinol (“THC”), the
primary psychoactive component of cannabis2. The Company believes the CSA categorization as a Schedule I drug is not reflective
of the medicinal properties of cannabis or the public perception thereof, and numerous studies show cannabis is not able to be abused
in the same way as other Schedule I drugs, has medicinal properties, and can be safely administered3.
The federal position is also not necessarily
consistent with democratic approval of cannabis at the state government level in the U.S. Unlike in Canada, which has federal legislation
uniformly governing the cultivation, distribution, sale and possession of cannabis under the Cannabis Act, S.C. 2018, c. 16, (Canada)
and the Cannabis for Medical Purposes Regulations, cannabis is largely regulated at the state and local level in the U.S. state laws
regulating cannabis conflict with the CSA, which makes cannabis use and possession federally illegal. Although certain states and territories
of the U.S. authorize medical or adult-use cannabis production and distribution by licensed or registered entities, under U.S. federal
law, the possession, use, cultivation, and transfer of cannabis and any related drug paraphernalia is illegal, and any such acts are
criminal acts. Although the Company’s activities are compliant with applicable state and local laws, strict compliance with state
and local laws with respect to cannabis may neither absolve the Company of liability under U.S. federal law nor provide a defense to
federal criminal charges that may be brought against the Company. The Supremacy Clause of the U.S. Constitution establishes that the
U.S. Constitution and federal laws made pursuant to it are paramount and, in case of conflict between federal and state law, federal
law shall apply.
Nonetheless, 47 U.S. states, the District of
Columbia, and the territories of Puerto Rico, the U.S. Virgin Islands, Guam, and the Northern Mariana Islands have legalized some form
of cannabis for medical use, while 21 states and the District of Columbia have legalized the adult-use of cannabis for recreational purposes.
As more and more states legalized medical and/or adult-use cannabis, the federal government attempted to provide clarity on the incongruity
between federal prohibition under the CSA and these state-legal regulatory frameworks. Notwithstanding the foregoing, cannabis remains
illegal under U.S. federal law, with cannabis listed as a Schedule I drug under the CSA.
121
U.S.C. 812(b)(1).
2Cannabis containing THC
in excess of 0.3% on a dry weight basis is defined federally as marijuana. The federal definition of marijuana is commonly incorporated
into state laws and regulations. Unless otherwise noted herein, we use cannabis and marijuana interchangeably.
3See Lachenmeier,
DW & Rehm, J. (2015). Comparative risk assessment of alcohol, tobacco, cannabis and other illicit drugs using the margin of
exposure approach. Scientific Reports, 5, 8126. doi: 10.1038/srep08126; see also Thomas, G & Davis, C. (2009). Cannabis,
Tobacco and Alcohol Use in Canada: Comparing risks of harm and costs to society. Visions Journal, 5. Retrieved from http://www.heretohelp.bc.ca/sites/default/files/visions_cannabis.pdf;
see also Jacobus et al. (2009). White matter integrity in adolescents with histories of marijuana use and binge drinking. Neurotoxicology
and Teratology, 31, 349-355. https://doi.org/10.1016/j.ntt.2009.07.006; Could smoking pot cut risk of head, neck cancer? (2009 August 25).
Retrieved from https://www.reuters.com/article/us-smoking-pot/could-smoking-pot-cut-risk-of-head-neck-cancer-idUSTRE57O5DC20090825; Watson,
SJ, Benson JA Jr. & Joy, JE. (2000). Marijuana and medicine: assessing the science base: a summary of the 1999 Institute of
Medicine report. Arch Gen Psychiatry Review, 57, 547-552. Retrieved from https://www.ncbi.nlm.nih.gov/pubmed/10839332; see also
Hoaken, Peter N.S. & Stewart, Sherry H. (2003). Drugs of abuse and the elicitation of human aggressive behavior. Addictive
Behaviours, 28, 1533-1554. Retrieved from http://www.ukcia.org/research/AgressiveBehavior.pdf; and see also Fals-Steward, W., Golden,
J. & Schumacher, JA. (2003). Intimate partner violence and substance use: a longitudinal day-to-day examination. Addictive
Behaviors, 28, 1555-1574. Retrieved from https://www.ncbi.nlm.nih.gov/pubmed/14656545.
Until 2018, the federal government provided guidance
to federal law enforcement agencies and banking institutions regarding cannabis through a series of memoranda from the Department of
Justice (“DOJ”). The most recent such memorandum was drafted by former Deputy Attorney General James Cole on August 29,
2013 (the “Cole Memorandum”)4. The Cole Memorandum offered guidance to federal enforcement agencies as to how
to prioritize civil enforcement, criminal investigations and prosecutions regarding cannabis in all states, and acknowledged that, notwithstanding
the designation of cannabis as a Schedule I controlled substance at the federal level, several states have enacted laws authorizing the
use of cannabis. The Cole Memorandum also noted that jurisdictions that have enacted laws legalizing cannabis in some form have also
implemented strong and effective regulatory and enforcement systems to control the cultivation, processing, distribution, sale and possession
of cannabis. As such, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. The
Cole Memorandum was seen by many state-legal cannabis companies as a safe harbor for their licensed operations that were conducted in
full compliance with all applicable state and local regulations. However, on January 4, 2018, former U.S. Attorney General Jeff
Sessions rescinded the Cole Memorandum. In the absence of a uniform federal policy, U.S. Attorneys with state-legal cannabis programs
within their jurisdictions are responsible for establishing enforcement priorities for their respective offices. For instance, Andrew
Lelling, a former U.S. Attorney for the District of Massachusetts, stated that while his office would not immunize any businesses from
federal prosecution, he anticipated focusing the office’s cannabis enforcement efforts on: (1) overproduction; (2) targeted
sales to minors; and (3) organized crime and interstate transportation of drug proceeds. Other U.S. attorneys provided less assurance,
promising to enforce federal law, including the CSA in appropriate circumstances.
Following his election, President Biden appointed
Merrick Garland to serve as the U.S. Attorney General. While Attorney General Garland indicated in his confirmation hearing that he did
not feel that enforcement of the federal cannabis prohibition against state-licensed business would not be a priority target of Department
of Justice resources, no formal enforcement policy has been issued to date. There is no guarantee that state laws legalizing and regulating
the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability
of state laws within their respective jurisdictions. Unless and until the U.S. congress (“Congress”) amends the CSA with
respect to cannabis (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that
federal authorities may enforce current U.S. federal law.
As an industry best practice, despite the rescission
of the Cole Memorandum, the Company abides by the following standard operating policies and procedures:
| 1. | Ensure that its operations are compliant with all licensing requirements
as established by the applicable state, county, municipality, town, township, borough, and
other political/administrative divisions; |
| 2. | Ensure that its cannabis related activities adhere to the scope of
the licensing obtained (for example: in the states where cannabis is permitted only for adult-use,
the products are only sold to individuals who meet the requisite age requirements); |
| 3. | Implement policies and procedures to ensure that cannabis products
are not distributed to minors; |
| 4. | Implement policies and procedures to ensure that funds are not distributed
to criminal enterprises, gangs or cartels; |
| 5. | Implement an inventory tracking system and necessary procedures to
ensure that such compliance system is effective in tracking inventory and preventing diversion
of cannabis or cannabis products into those states where cannabis is not permitted by state
law, or across any state lines in general; |
| 6. | Ensure that its state-authorized cannabis business activity is not
used as a cover or pretense for trafficking of other illegal drugs, is engaged in any other
illegal activity or any activities that are contrary to any applicable anti- money laundering
statutes; and |
| 7. | Ensure that its products comply with applicable regulations and contain
necessary disclaimers about the contents of the products to prevent adverse public health
consequences from cannabis use and prevent impaired driving. |
In addition, the Company conducts background
checks to ensure that the principals and management of its operating subsidiaries are of good character, have not been involved with
other illegal drugs, engaged in illegal activity or activities involving violence, or use of firearms in cultivation, manufacturing or
distribution of cannabis. The Company will also conduct ongoing reviews of the activities of its cannabis businesses, the premises on
which they operate and the policies and procedures that are related to possession of cannabis or cannabis products outside of the licensed
premises, including the cases where such possession is permitted by regulation. See “Compliance and Monitoring” section
herein for additional details.
4See James M. Cole,
Memorandum for all United States Attorneys re: Guidance Regarding Marijuana Enforcement (Aug. 29, 2013), available at https://www.justice.gov/iso/opa/resources/3052013829132756857467.pdf.
One legislative safeguard for the medical cannabis
industry remains in place: Congress has passed a so-called “rider” provision in the fiscal years 2015, 2016, 2017, 2018,
2019, 2020 and 2021 Consolidated Appropriations Acts to prevent the federal government from using congressionally appropriated funds
to enforce federal cannabis laws against regulated medical cannabis actors operating in compliance with state and local law. The rider
is known as the “Rohrabacher-Farr” Amendment after its original lead sponsors (it is also sometimes referred to as the “Rohrabacher-Blumenauer”
or “Joyce- Leahy” Amendment, but it is referred to in this MD&A as the “Rohrabacher-Farr Amendment”). The
Rohrabacher-Farr Amendment was included in the Consolidated Appropriations Act, 2023 and signed into law by President Biden on December 29,
2022. The Rohrabacher-Farr Amendment will remain in effect through the fiscal year, which ends September 30, 2023. There is no guarantee
that the Rohrabacher/Farr Amendment will be included in the omnibus appropriation package or a continuing budget resolution once the
current spending bill expires.
On October 6, 2022, President Biden announced
a series of marijuana-related initiatives. Included amongst them was a directive to the Secretary of Health and Human Services and the
Attorney General “to initiate the administrative process to review expeditiously how marijuana is scheduled under federal law.
Federal law currently classifies marijuana in Schedule I of the Controlled Substances Act, the classification meant for the most dangerous
substances.” This administrative review would be conducted by the FDA and the DEA. It is unclear when these agencies would complete
their respective reviews nor is it clear whether the reviews would result in any change in the classification of marijuana.
On December 2, 2022, President Biden signed
into law H.R. 8454, the “Medical Marijuana and Cannabidiol Research Expansion Act,” (the “Research Expansion Act”)
which establishes a new registration process for conducting research on marijuana and for manufacturing marijuana products for research
purposes and drug development. The Research Expansion Act is the first piece of standalone federal cannabis reform legislation in U.S.
history. Among other things, the Research Expansion Act; (i) directs the DEA to register practitioners to conduct cannabis and CBD
research and manufacturers to supply cannabis for research purposes; (ii) expressly allows the DEA to register manufacturers and
distributors of cannabis or CBD for the purposes of commercial production of a drug approved by the FDA; (iii) requires the DEA
to assess whether there is an adequate and uninterrupted supply of cannabis for research purposes; (iii) permits registered entities
to manufacture, distribute, dispense, or possess cannabis or CBD for purposes of medical research; (iv) clarifies that physicians
do not violate the CSA when they discuss the potential harms and benefits of cannabis and CBD with patients; and (v) directs the
DHHS to coordinate with the National Institutes of Health and other agencies to report on the “therapeutic potential” of
cannabis for conditions such as epilepsy, and the impact of cannabis on adolescent brain development.
Nevertheless, for the time being, cannabis remains
a Schedule I controlled substance at the federal level. The federal government of the U.S. has always reserved the right to enforce federal
law regarding the sale and disbursement of medical or adult-use cannabis, even if state law sanctions such sale and disbursement. If
the U.S. federal government begins to enforce U.S. federal laws relating to cannabis in states where the sale and use of cannabis is
currently legal, or if existing applicable state laws are repealed or curtailed, the Company’s business, results of operations,
financial condition and prospects could be materially adversely affected.
There is a growing consensus among cannabis businesses
and numerous members of Congress that prosecutorial discretion is not law and temporary legislative riders, such as the Rohrabacher-Farr
Amendment, are an inappropriate way to protect lawful medical cannabis businesses. Numerous bills have been introduced in Congress in
recent years to decriminalize aspects of state-legal cannabis trades. The Company has observed that each year more congressmen and congresswomen
sign on and cosponsor cannabis legalization bills. In light of all this, it is anticipated that the federal government will eventually
repeal the federal prohibition on cannabis and thereby leave the states to decide for themselves whether to permit regulated cannabis
cultivation, production and sale, just as states are free today to decide policies governing the distribution of alcohol or tobacco.
The most comprehensive proposal for reform of
federal legislation on cannabis was introduced on July 21, 2022, by U.S. Senate Majority Leader Chuck Schumer (D-NY) along with
Cory Booker (D-NJ), and Ron Wyden (D-OR) when they filed the Cannabis Administration and Opportunity Act (the “CAOA”). The
CAOA would have removed cannabis from Schedule 1 of the CSA, which would permit its decriminalization and allow the expungement of federal
non-violent cannabis crimes. The CAOA would also have imposed a federal tax on cannabis of 10% in its first year of enactment, eventually
increasing to 25% in 5% increments. The taxes raised would be used to petition fund programs to benefit communities disproportionately
impacted by the “War on Drugs”.
The CAOA would have enshrined the current state
cannabis licensing regimes but introduces additional federal permitting of cannabis wholesalers. Regulatory responsibility for cannabis
control would be transferred from the DEA to the Alcohol and Tobacco Tax and Trade Bureau and the Bureau of Alcohol Tobacco Firearms
and Explosives.
The filing of the CAOA by Democratic congressional
leaders in the 117th Congress represented a significant milestone in the move toward federal legalization of cannabis. While
the CAOA suggested that legalization may come with significant federal tax burden, federal legalization will also bring long-awaited
benefits to the industry of the removal of the Section 280E tax burden, clarity as to the status of state-licensed cannabis businesses,
broad access to the banking and card payment system, increased availability, and reduced cost, of capital.
The CAOA failed to pass the 117th
Congress.
Another bill, the Marijuana Opportunity Reinvestment
and Expungement (MORE) Act, proposed in the U.S. House of Representatives would have decriminalized and de-scheduled cannabis from the
CSA, provide for reinvestment in certain persons adversely impacted by the “War on Drugs,” and provide for expungement of
certain cannabis offenses, among other things. The MORE Act passed U.S. House of Representatives on April 1, 2022, but was not taken
up in the Senate before the end of the 117th Congress.
There can be no assurance that the CAOA, the
MORE Act or similar comprehensive legislation that would de-schedule cannabis and de-criminalize will be passed in the near future or
at all. If such legislation is passed, there is no guarantee that it will include provisions that preserve the current state-based cannabis
programs under which the Company’s subsidiaries operate or that such legislation will otherwise be favorable the Company and its
business.
Money Laundering Laws
Under U.S. federal law, it may potentially be
a violation of federal money laundering statutes for financial institutions to take any proceeds from the sale of any Schedule I controlled
substance. Due to the CSA categorization of marijuana as a Schedule I drug, federal law makes it illegal for financial institutions that
depend on the Federal Reserve’s money transfer system to take any proceeds from marijuana sales as deposits. Banks and other financial
institutions could be prosecuted and possibly convicted of money laundering for providing services to cannabis businesses under the U.S.
Currency and Foreign Transactions Reporting Act of 1970 (the “Bank Secrecy Act”). Therefore, under the Bank Secrecy Act,
banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business
loan, or any other service could be charged with money laundering or conspiracy.
While there has been no change in U.S. federal
banking laws to accommodate businesses in the large and increasing number of U.S. states that have legalized medical and/or adult-use
marijuana, in 2014, the Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) issued guidance to prosecutors
of money laundering and other financial crimes (the “FinCEN Guidance”) and notified banks that it would not seek enforcement
of money laundering laws against banks that service cannabis companies operating under state law, provided that strict due diligence
and reporting standards are met. The FinCEN Guidance advised prosecutors not to focus their enforcement efforts on banks and other financial
institutions that serve marijuana-related businesses so long as that business is legal in their state and none of the federal enforcement
priorities referenced in the Cole Memorandum are being violated (such as keeping marijuana away from children and out of the hands of
organized crime). The FinCEN Guidance also clarifies how financial institutions can provide services to marijuana-related businesses
consistent with their Bank Secrecy Act obligations, including thorough customer due diligence, but makes it clear that they are doing
so at their own risk. The customer due diligence steps include:
| 1. | Verifying with the appropriate state authorities whether the business
is duly licensed and registered; |
| 2. | Reviewing the license application (and related documentation) submitted
by the business for obtaining a state license to operate its marijuana-related business; |
| 3. | Requesting from state licensing and enforcement authorities available
information about the business and related parties; |
| 4. | Developing an understanding of the normal and expected activity for
the business, including the types of products to be sold and the type of customers to be
served (e.g., medical versus adult-use customers); |
| 5. | Ongoing monitoring of publicly available sources for adverse information
about the business and related parties; |
| 6. | Ongoing monitoring for suspicious activity, including for any of
the red flags described in this guidance; and |
| 7. | Refreshing information obtained as part of customer due diligence
on a periodic basis and commensurate with the risk. |
With respect to information regarding state licensure
obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided
by state licensing authorities, where states make such information available.
Because most banks and other financial institutions
are unwilling to provide any banking or financial services to cannabis businesses, these businesses can be forced into becoming “cash-only”
businesses. While the FinCEN Guidance decreased some risk for banks and financial institutions considering serving the industry, in practice
it has not increased banks’ willingness to provide services to cannabis businesses, and most banks continue to decline to operate
under the strict requirements provided under the FinCEN Guidance. This is because, as described above, the current law does not provide
banks immunity from prosecution, and it also requires banks and other financial institutions to undertake time-consuming and costly due
diligence on each cannabis business they accept as a customer.
The few state-chartered banks and/or credit unions
that have agreed to work with marijuana businesses are limiting those accounts to small percentages of their total deposits to avoid
creating a liquidity risk. Since, theoretically, the federal government could change the banking laws as it relates to marijuana businesses
at any time and without notice, these state- charted banks and credit unions must keep sufficient cash on hand to be able to return the
full value of all deposits from marijuana businesses in a single day, while also keeping sufficient liquid capital on hand to serve their
other customers. Those state-chartered banks and credit unions that do have customers in the marijuana industry charge marijuana businesses
high fees to pass on the added cost of ensuring compliance with the FinCEN Guidance. Unlike the Cole Memorandum, however, the FinCEN
Guidance from 2014 has not been rescinded.
The former Secretary of the U.S. Department of
the Treasury, Steven Mnuchin, publicly stated that he did not have a desire to rescind the FinCEN Guidance.5 The current Secretary
of the Treasury, Janet Yellen, has not yet articulated an official position of the U.S. Department of the Treasury with regard to the
FinCEN Guidance and thus as an industry best practice and consistent with its standard operating procedures, the Company adheres to all
customer due diligence steps in the FinCEN Guidance.
In both Canada and the U.S., transactions involving
banks and other financial institutions are both difficult and unpredictable under the current legal and regulatory landscape. Legislative
changes could help to reduce or eliminate these challenges for companies in the cannabis space and would improve the efficiency of both
significant and minor financial transactions.
In the absence of comprehensive reform of federal
cannabis legislation that would decriminalize the cannabis industry, a growing number of members of Congress have expressed support for
federal legislation that would eliminate from the scope of federal money laundering statutes the financing activity of businesses operating
under state-sanctioned cannabis programs. On September 26, 2019, the U.S. House of Representatives passed the Secured and Fair Enforcement
Banking Act of 2019 (commonly known as the “SAFE Banking Act”), which aims to provide safe harbor and guidance to financial
institutions that work with legal U.S. cannabis businesses. The SAFE Banking Act has since been introduced and has passed the U.S. House
of Representatives several times, but still awaits action from the U.S. Senate. The SAFE Banking Act has also been proposed as a rider
to federal annual budget bills and the National Defense Appropriations Act. However, such attempts have failed, most recently with respect
to inclusion the Consolidated Appropriate Act, signed by President Biden on December 29, 2022. While Congress may consider legislation
in the future that may permanently address these issues, there can be no assurance of the content of any proposed legislation or that
such legislation is ever passed. The Company’s inability, or limitations on the Company’s ability, to open or maintain bank
accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for the Company to operate
and conduct its business as planned or to operate efficiently.
Federal Taxation of Cannabis Businesses
An additional challenge to cannabis-related businesses
is that the provisions of Section 280E are being applied by the IRS to businesses operating in the medical and adult-use cannabis
industry. Section 280E prohibits businesses from deducting certain expenses associated with the trafficking of controlled substances
within the meaning of Schedule I and II of the CSA. The IRS has applied Section 280E broadly in tax audits against various cannabis
businesses in the U.S. that are permitted under applicable state laws, seeking substantial sums in tax liabilities, interest and penalties
resulting from underpayment of taxes due to the lack of deductibility of otherwise ordinary business expenses, the deduction of which
is prohibited by Section 280E. Although the IRS issued a clarification allowing the deduction of certain expenses that can be categorized
as cost of goods sold, the scope of such items is interpreted very narrowly, and the bulk of operating costs and general administrative
costs are not permitted to be deducted. Therefore, businesses in the state-legal cannabis industry are subject to higher effective tax
rates and thus may be less profitable than they would otherwise be.
5 Angell, Tom. (2018
February 6). Trump Treasury Secretary Wants Marijuana Money In Banks, available at https://www.forbes.com/sites/tomangell/2018/02/06/trump-treasury-secretary-wants-
marijuana-money-in-banks/#2848046a3a53; see also Mnuchin: Treasury is reviewing cannabis policies. (2018 February 7), available
at http://www.scotsmanguide.com/News/2018/02/Mnuchin-- Treasury-is-reviewing-cannabis-policies/.
Reform of Federal Legislation on Industrial
Hemp
On December 20, 2018, former President Donald
Trump signed the Agriculture Improvement Act of 2018, Pub. L. 115- 334, (popularly known as the “2018 Farm Bill”) into law.6
Under the 2018 Farm Bill, industrial and commercial hemp is no longer to be classified as a Schedule I controlled substance in
the U.S. Hemp includes the plant cannabis sativa L and any part of that plant, including seeds, derivatives, extracts, cannabinoids and
isomers, which contain no more than 0.3% of delta-9-THC concentration by dry weight. The 2018 Farm Bill allows states to create regulatory
programs allowing for the licensed cultivation of hemp and production of hemp-derived products. Hemp and products derived from it, such
as CBD, may then be sold into commerce and transported across state lines, provided that the hemp from which any product is derived was
cultivated under a license issued by an authorized state program approved by the U.S. Department of Agriculture and otherwise meets the
definition of hemp.
Despite the removal of CBD extracted from hemp
and other hemp extracts, produced under authorized state hemp programs from the Controlled Substance Act, the FDA’s stated position
remains that it is a prohibited act under the Federal Food, Drug, and Cosmetic Act to introduce into interstate commerce a food to which
CBD, THC or cannabinoids has been added, or to market a product containing these ingredients as a dietary supplement.7 However,
on January 26, 2023, the FDA concluded that a new regulatory pathway for CBD is needed that balances individual’s desire for
access to CBD products with the regulatory oversight needed to manage risks. The FDA is seeking support from Congress to develop a new
regulatory pathway.
On a state level, the November 2020 elections
included multiple initiatives on state ballots regarding cannabis, all of which passed. In Arizona and New Jersey, adult-use cannabis
ballot initiatives passed. Similarly, adult-use passed in Montana, medical use passed in Mississippi, and both adult-use and medical
use passed in South Dakota; the legalization of adult-use in South Dakota was later nullified by state courts for procedural reasons.
Barring any further legal challenges, these states are expected to adopt governing rules and regulations to expand their cannabis
programs accordingly. In the 2022 election cycle, voters in Arkansas, North Dakota and South Dakota rejected ballot measures aimed at
legalizing recreational use of cannabis while in two other states, Maryland and Missouri, votes approved measures legalizing cannabis
for adult use.
The results of the 2022 Congressional elections
may impact the likelihood of any legal developments regarding cannabis at the national level, including the passage of the CAOA, the
SAFE Banking Act and the MORE Act. While President Biden campaigned on a platform that included cannabis decriminalization and, as noted
above, has taken steps to review current federal agency policy concerning cannabis, the Republicans, who have tended to be less supportive
than Democrats of federal cannabis reforms, took control of the United States House of Representatives, which could impact the prospects
for cannabis reform legislation.
Service Providers
As a result of any adverse change to the approach
in enforcement of U.S. cannabis laws, adverse regulatory or political change, additional scrutiny by regulatory authorities, adverse
change in public perception in respect of the consumption of marijuana or otherwise, third party service providers to the Company could
suspend or withdraw their services, which may have a material adverse effect on the Company’s business, revenues, operating results,
financial condition, or prospects.
Ability to Access Capital
Given the current U.S. federal laws regarding
cannabis, traditional bank financing is typically not available to U.S. cannabis companies. Specifically, the federal illegality of marijuana
in the U.S. means that financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution
under money laundering statutes, the unlicensed money transmitter statute and the Bank Secrecy Act. As a result, businesses involved
in the cannabis industry often have difficulty finding a bank willing to accept their business. Banks who do accept deposits from cannabis-related
businesses in the U.S. must do so in compliance with the Cole Memorandum and the FinCEN guidance, both discussed above.
The Company requires equity and/or debt financing
to support on-going operations, to undertake capital expenditures or to undertake acquisitions or other business combination transactions.
There can be no assurance that additional financing will be available to the Company when needed or on terms which are acceptable. The
Company’s inability to raise financing through traditional banking to fund on-going operations, capital expenditures or acquisitions
could limit its growth and may have a material adverse effect upon the Company’s business, results of operations, financial condition
or prospects.
If additional funds are raised through further
issuances of equity or convertible debt securities, existing Company shareholders could suffer significant dilution, and any new equity
securities issued could have rights, preferences and privileges superior to existing holders of Equity Shares.
6 H.R.2 - 115th Congress
(2017-2018): Agriculture Improvement Act of 2018, Congress.gov (2018), https://www.congress.gov/bill/115th-congress/house-bill/2/text.
7 Notably, to date
the FDA’s enforcement activities in respect of the sale of CBD foods and supplements has been largely focused upon those manufacturers
and distributors that have made impermissible claims about the efficacy of CBD for treating certain diseases and medical conditions.
Heightened Scrutiny by Regulatory Authorities
For the reasons set forth above, the Company’s
existing operations in the U.S., and any future operations or investments of the Company, may become the subject of heightened scrutiny
by regulators, stock exchanges and other authorities in Canada. As a result, the Company may be subject to significant direct and indirect
interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of
certain restrictions on the Company’s ability to operate or invest in any other jurisdictions or have consequences for its stock
exchange listing or Canadian reporting obligations, in addition to those described herein.
Change to government policy or public opinion
may also result in a significant influence on the regulation of the cannabis industry in Canada, the U.S., or elsewhere. A negative shift
in the public’s perception of medical or adult-use cannabis in the U.S. or any other applicable jurisdiction could affect future
legislation or regulation, or enforcement. Such a shift could cause state jurisdictions to abandon initiatives or proposals to legalize
medical or adult-use cannabis, thereby limiting the number of new state jurisdictions into which the Company could expand. Any inability
to fully implement the Company’s business strategy in the state in which the Company currently operates may have a material adverse
effect on the Company’s business, financial condition, and results of operations. See the “Risk Factors” section of
the Annual Information Form for additional details.
Further, violations of any federal laws and regulations
could result in significant fines, penalties, administrative sanctions, convictions, or settlements arising from civil proceedings conducted
by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, asset
forfeiture, and cessation of business activities or divestiture. Any enforcement action against the Company or any of its licensed operating
facilities could have a material adverse effect on (1) the Company’s reputation, (2) the Company’s ability to conduct
business, (3) the Company’s holdings (directly or indirectly) of medical or adult-use cannabis licenses in the U.S., (4) the
listing or quoting of the Company’s securities on various stock exchanges, (5) the Company’s financial position, (6) the
Company’s operating results, profitability, or liquidity, or (7) the market price of the Company’s publicly traded shares.
In addition, it is difficult for the Company to estimate the time or resources that would be needed for the investigation of any such
matters or their final resolution because the time and resources that may be necessary depend on the nature and extent of any information
requested by the applicable authorities involved, and such time or resources could be substantial. See the “Risk Factors”
section of the Annual Information Form for additional details. The Company’s business activities, and the business activities
of its subsidiaries, while believed to be compliant with applicable U.S. state and local laws, currently are illegal under U.S. federal
law.
Further to the indication by CDS Clearing and
Depository Services Inc. (“CDS”), Canada’s central securities depository, clearing and settling trades in the Canadian
equity, fixed income and money markets that it would refuse to settle trades for cannabis issuers that have investments in the U.S.,
the TMX Group, the owner and operator of CDS, subsequently issued a statement in August 2017 reaffirming that there is no CDS ban
on the clearing of securities of issuers with cannabis-related activities in the U.S., despite media reports to the contrary and that
the TMX Group was working with regulators to arrive at a solution that will clarify this matter, which would be communicated at a later
time.
In February 2018, following discussions
with the Canadian Securities Administrators and recognized Canadian securities exchanges, the TMX Group announced the signing of a Memorandum
of Understanding (“MOU”) with The Aequitas NEO Exchange Inc., the CSE, the Toronto Stock Exchange, and the TSX Venture Exchange.
The MOU outlines the parties’ understanding of Canada’s regulatory framework applicable to the rules, procedures, and regulatory
oversight of the exchanges and CDS as it relates to issuers with cannabis-related activities in the U.S. The MOU confirms, with respect
to the clearing of listed securities, that CDS relies on the exchanges to review the conduct of listed issuers. As a result, there is
currently no CDS ban on the clearing of securities of issuers with cannabis-related activities in the U.S. However, there can be no guarantee
that this approach to regulation will continue in the future. If such a ban were to be implemented at a time when the Company’s
equity shares are listed on a stock exchange, it would have a material adverse effect on the ability of such holders to make and settle
trades. In particular, such equity would become highly illiquid as until an alternative was implemented, investors would have no ability
to affect a trade of securities through the facilities of the applicable stock exchange.
Compliance and Monitoring
As of the date of this MD&A, the Company
believes that each of its licensed operating entities (a) holds all applicable licenses to cultivate, manufacture, possess, and/or
distribute cannabis in California, and (b) is in good standing and in material compliance with California’s cannabis regulatory
program. The Company is in material compliance with its obligations under state laws related to its cannabis cultivation, processing
and dispensary licenses, other than minor violations that would not result in a material fine, suspension or revocation of any relevant
license.
The Company uses reasonable commercial efforts
to ensure that its business is in material compliance with laws and applicable licensing requirements and engages in the regulatory and
legislative process nationally and in the state where we operate through our compliance department, outside government relations consultants,
cannabis industry groups and legal counsel.
The compliance department is managed by our General
Counsel and Corporate Secretary, Benjamin Vega (the “General Counsel”). The Company’s compliance department is charged
with knowing the local regulatory process in the State of California and is responsible for monitoring developments with their governing
bodies. The compliance department regularly reports regulatory developments to the Company’s General Counsel through written and
oral communications and is charged with the creation and implementation of plans regarding all regulatory developments. The Company’s
General Counsel works with external legal advisors in California to ensure that the Company is in on-going compliance with applicable
state laws.
Although the Company believes that its business
activities are materially compliant with applicable and state and local laws of the U.S., strict compliance with state and local laws
with respect to cannabis may neither absolve the Company of liability under U.S. federal law nor provide a defense to any federal proceeding
which may be brought against the Company. Any such proceedings brought against the Company may result in a material adverse effect on
the Company. The Company derives 100% of its revenues from the cannabis industry in California, which industry is illegal under U.S.
federal law. Even where the Company’s cannabis-related activities are compliant with applicable state and local laws, such activities
remain illegal under U.S. federal law. The enforcement of relevant federal laws is a significant risk.
In addition to the above disclosure, please see
the “Risk Factors” section of the Annual Information Form for further risk factors associated with the operations
of the Company and the Company.
California Legal Framework and How It Affects
Our Business
California Licensing Scheme
California’s licensing body for medical
and adult-use cannabis is the Department of Cannabis Control (“DCC”). There is no limit to the number licenses California
may issue; however, some jurisdictions have a limit on the number of licenses they will issue. Each license grants one licensed premise
and the main classes of licenses are: cultivation, retailer, distributor, manufacturer, microbusiness, event organizer, and testing laboratory.
Additionally, a license may not be held by, or issued to, any person holding office in, or employed by, any agency of the State of California
or any of its political subdivisions when the duties of such person are associated with enforcement of laws or regulations regarding
cannabis or cannabis products. There are no requirements for vertical integration; however, California does define specific cultivation
license types by canopy size.
California Medical Patient Requirements
Edibles labeled as “FOR MEDICAL USE ONLY”
and only available for sale to a medicinal-use patient, may contain up to 500mg THC per package (adult use limit is 100mg THC/package).
Topicals labeled as “FOR MEDICAL USE ONLY” and only available for sale to a medicinal-use patient, may contain up to 2000mg
THC per package (adult use limit is 1000mg THC/package).
California Recent and Proposed Legislation
On October 6, 2021, California Governor
Gavin Newsom signed Assembly Bill 45 (“AB 45”) into law. AB 45 permits the manufacture and sale of products that contain
hemp derived CBD including foods, beverages, dietary supplements, cosmetics, and pet products. Under AB 45, the California Department
of Public Health (“CDPH”) will serve as the primary regulator of hemp derived CBD products. The CDPH has three primary requirements
to manufacture and sell hemp products in California: (1) possess a license or registration for your specific commodity (such as
processed food registration); (2) obtain an Industrial Hemp Enrollment and Oversight (IHEO) authorization for each commodity; and
(3) comply with CDPH law, such as the Sherman Food, Drug and Cosmetic law and the 2018 Farm Bill. The DCC plan to integrate industrial
hemp into the cannabis supply chain remains to be released and approved.
For a detailed
description of risk factors associated with the Company and its operations, please see the “Risk Factors” section of the
Company’s Annual Information Form for the year ended December 31, 2022, available on SEDAR+ at www.sedarplus.ca.
Shareholders’ Equity
As of September 30, 2023 and December 31,
2022, the authorized share capital of the Company is comprised of an unlimited number of (i) Subordinate Voting Shares, (ii) Restricted
Voting Shares, (iii) Limited Voting Shares, (iv) Multiple Voting Shares and (v) Preferred Shares:
Multiple Voting Shares
The Company is authorized to issue an unlimited
number of Multiple Voting Shares without nominal or par value. Holders of Multiple Voting Shares are 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 entitles the holder thereof to
50 votes per Multiple Voting Share. Multiple Voting Shares are not entitled to dividends and are not convertible. The Multiple Voting
Shares have a three (3)-year sunset period that will expire June 29, 2027, upon which they will be automatically redeemed for $0.001
per Multiple Voting Share.
Equity Shares
The holders of each class of Equity Shares are
entitled to receive notice of, to attend (if applicable, virtually) and to vote at all meetings of shareholders of the Company, except
that they are not able to vote (but are entitled to receive notice of, to attend and to speak) at those meetings at which the holders
of a specific class are entitled to vote separately as a class under the Business Corporations Act (British Columbia) and except
that holders of Limited Voting Shares are not entitled to vote for the election of directors of the Company. The Subordinate Voting Shares
and Restricted Voting Shares carry one vote per share on all matters. The Limited Voting Shares carry one vote per share on all matters
except the election of directors, as the holders of Limited Voting Shares do not have any entitlement to vote in respect of the election
for directors of the Company.
In the case of liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary, or in the event of any other distribution of assets of the Company among its shareholders
for the purpose of winding up its affairs, the holders of Equity Shares are entitled, subject to the prior rights of the holders of any
shares of the Company ranking in priority to the Equity Shares (including any liquidation preference on any issued and outstanding Multiple
Voting Shares and/or Preferred Shares), to participate ratably the Company’s remaining property along with all holders of the other
classes of Equity Shares (on a per share basis).
Exchangeable Shares of MPB Acquisition Corp.
Exchangeable Shares are part of the authorized
share capital of MPB Acquisition Corp. (“MPB”), a wholly-owned subsidiary of the Company, which entitle their holders to
rights that are comparable to those rights attached to the Equity Shares. The Exchangeable Shares must not exceed 49.9% of the total
voting power of all classes of shares of MPB. Until a holder exchanges their Exchangeable Shares for Equity Shares, the holder of such
Exchangeable Shares will not have the right to vote at meetings of the shareholders 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 are exchangeable at any time, on a one-for-one basis, for the Equity Shares at the option of the holder.
The Company treats the Exchangeable Shares as
options, each with a value equal to an Equity Share, which represents the holder’s claim on the equity of the Company. Pursuant
to the terms of the Exchangeable Shares, the Company and MPB are required to maintain the economic equivalency of such Exchangeable Shares
with the publicly traded Equity 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 Equity Shares. The Company has presented
these Exchangeable Shares as a part of shareholders’ equity within these Unaudited Condensed Interim Consolidated Financial Statements
due to (i) the fact that they are economically equivalent to the Equity Shares, and (ii) the holders of the Exchangeable Shares
are subject to restrictions on transfer under the U.S. securities laws but may dispose of the Exchangeable Shares without such restriction
by exchanging them for the Equity Shares. Changes in these assumptions would affect the presentation of the Exchangeable Shares from
shareholders’ equity to non-controlling interests; however, there would be no impact on earnings per share.
Preferred Shares of GH Group, Inc.
The authorized
total number of preferred shares (the “GH Group Preferred Shares”) of GH Group is 50,000,000 of which 45,000,000 shares are
designated as shares of Series A Preferred Shares (“GH Group Series A Preferred”), 55,000 shares are designated
as shares of Series B Preferred Shares (“GH Group Series B Preferred”), 5,000 shares of Series C Preferred
Shares (“GH Group Series C Preferred”) and 15,000 shares of Series D Preferred Shares (“GH Group Series D
Preferred”). Holders of the GH Group Preferred Shares are entitled to receive notice of and attend any meeting of the shareholders
of GH Group but are not entitled to vote. The GH Group Preferred Shares do not carry any voting rights and are not convertible. In the
event of a liquidation, voluntary or involuntary, dissolution or winding-up of GH Group, the holders of outstanding GH Group Preferred
Shares are entitled to be paid out of the assets of GH Group available for distribution to it stockholders, before any payment shall
be made to the holders of GH Group common stock, of which holders of GH Group Series B Preferred are to receive payment prior to
holders of GH Group Series A Preferred, GH Group Series C Preferred and GH Group Series D Preferred. GH Group has the
right to redeem all or a portion of the GH Group Preferred Shares from a holder for an amount equal to the liquidation value and all
unpaid accrued and accumulated dividends.
The GH Group Series A Preferred carries
a 15% cumulative dividend rate, which increases by 5% in the year following the first anniversary of the date of issuance. The GH Group
Series B Preferred and the GH Group Series C Preferred carry a 20% cumulative dividend rate, which increases by 2.5% annually
after the second anniversary and until the 54-month anniversary of the initial issuance. The GH Group Series D Preferred carry a
15% cumulative dividend rate, which increases by 5% following the fifth anniversary of the original issuance. Dividends are payable if
and when declared by GH Group’s board of directors.
There were nil shares of the GH Group Series A
Preferred issued and outstanding as of September 30, 2023 and December 31, 2022; there were 49,969 shares of the GH Group Series B
Preferred issued and outstanding as of September 30, 2023 and December 31, 2022; there were 5,000 and 4,700 shares of the GH
Group Series C Preferred issued and outstanding as of September 30, 2023 and December 31, 2022, respectively; and there
were 10,900 and nil shares of the GH Group Series D Preferred issued and outstanding as of September 30, 2023 and December 31,
2022, respectively.
Shares Outstanding
As of October 30, 2023, the Company had
4,754,979 Multiple Voting Shares and 61,328,362 Equity Shares issued and outstanding. There are 9,464,676 Exchangeable Shares issued
and outstanding in the capital of MPB Acquisition Corp. In addition, the Company had an aggregate of 44,318,882 warrants, 1,435,794 stock
options and 3,065,675 RSUs outstanding as of October 31,2023, 2023.
The following
table summarizes the Equity Shares that were issued and outstanding as of October 30, 2023:
Equity Shares | |
Issued and Outstanding | |
| |
| |
Subordinate Voting Shares (SVS) | |
| 11,285,596 | |
Restricted Voting Shares (RVS) | |
| 6,530,616 | |
Limited Voting Shares (LVS) | |
| 43,512,150 | |
| |
| | |
| |
| 61,328,362 | |
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; expectations of market size and growth in the United States and California, the State the Company operates in;
cannabis cultivation, production and extraction capacity estimates and projections; additional funding requirements; the Company’s
future objectives and strategies to achieve those objectives; the Company’s estimated cash flow and capitalization and adequacy
thereof; 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 Company’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 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 the federal legality and regulation of U.S.
controlled substances; 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; 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 Company’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 on the evaluation of the Company’s DCP as of September 30, 2023, the Company’s
CEO and CFO concluded that, as a result of the material weaknesses in our ICFR described below, the Company’s DCP were not effective
as of such date.
Internal Control Over Financial Reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act in relation to criteria described in Internal Control–Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). 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 GAAP; |
| · | receipts and expenditures are only
being made in accordance with authorizations of management and the board of directors of
the Company; 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. |
A material weakness is a deficiency, or combination
of control deficiencies, in ICFR, such that there is a reasonable possibility that a material misstatement of the annual or interim financial
statements will not be prevented or detected on a timely basis.
Management has
concluded that as of September 30, 2023, our DCP were not effective to ensure that information required to be disclosed in reports
we file or submit under the Exchange Act or under applicable Canadian securities laws is recorded, processed, summarized and reported
within the time periods specified therein, and accumulated and reported to management to allow timely discussions regarding required
disclosure. As a result, management noted the following material weaknesses:
As of December 31, 2022 we have material
weaknesses in our ICFR relating to use of estimates and assumptions that affect the reported amounts of certain assets and liabilities
at the dates of the Financial Statements and the reported amount of total expenses during the reporting period. The Company did not appropriately
review the accounting treatment relating to the accounting for complex financing transactions and for business combinations. The Company
did not appropriately assess the terms and conditions related to the GH Group Preferred Shares issued during the year, did not properly
value the Equity Shares issued in one of the business combinations that closed during the year and did not identify and account for certain
deferred Equity Share issuances that are a apart of the consideration of the acquisitions that closed during the year. As a result the
Company corrected the classification and the recorded amounts related to the GH Group Series B Preferred Shares and the treatment
and valuation of the acquisition transactions. No other material errors were identified in the Financial Statements as a result of the
material weaknesses. These material weaknesses create a reasonable possibility that material misstatements in interim or annual financial
statements would not be prevented or detected on a timely basis.
Remediation
of Material Weakness in ICFR
Management,
with oversight from the audit committee, will implement remediation measures related to the material weaknesses identified. The Company
will implement a plan which includes providing more comprehensive and timely training to control owners related to non-routine transactions.
The Company will proactively hire additional personnel with requisite skills to review complex non-routine transactions including, but
not limited to asset acquisition and credit worthiness of the holders of our financial instruments. Management believes these measures,
and others that may be implemented, will remediate the material weaknesses in ICFR described above. We will continue to monitor and evaluate
the effectiveness of our ICFR over financial reporting on an ongoing basis and are committed to taking further action and implementing
additional improvements as necessary and as funds allow.
No assurance can be provided at this time that
the actions and remediation efforts will effectively remediate the material weakness described above or prevent the incidence of other
material weaknesses in the Company’s ICFR in the future. Management, including the CEO and CFO, does not expect that disclosure
controls and procedures or ICFR will prevent all errors, even as the remediation measures are implemented and further improved to address
the material weakness. A control system is subject to inherent limitations and even those systems determined to be effective can provide
only reasonable, but not absolute, assurance that control objectives will be met with respect to financial statement preparation and
presentation.
Limitations of Controls and Procedures
Our management, including the CEO and CFO of
the Company, 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 judgments 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.
Additional Information
Additional information
relating to the Company, including the Company’s Annual Information Form for the year ended December 31, 2022, is available
on SEDAR+ at www.sedarplus.ca.
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