UNITED
STATES

SECURITIES
AND EXCHANGE COMMISSION

Washington,
D.C. 20549



Form
10-K



☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For
the fiscal year ended September 30, 2022

Or



☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For
the transition period from ___________ to ___________



Commission
file number: 000-55751



STEM
HOLDINGS, INC.

(Exact
name of registrant as specified in charter)



|Nevada                              |  | 61-1794883             
|----------------------------------- |  | -----------------------
|(State
    or other jurisdiction of |  | (I.R.S.
    Employer   
|incorporation
    or organization)  |  | Identification
    No.)



2201
NW Corporate Blvd., Suite 205

Boca
Raton, FL 33431

(Address
of principal executive offices) (Zip Code)



Registrant’s
telephone Number: (561) 948-5410



Securities
registered pursuant to Section 12(b) of the Act:



|Title
    of each class           |  | Trading
    Symbol |  | Name
    of exchange on which registered
|--------------------------------- |  | ------------------ |  | ----------------------------------------
|Common
    Stock par value $0.001 |  | STMH               |  | OTCQB                                   



Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No



Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☒ Yes ☐
No



Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No



Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes ☒ No ☐



Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”,
and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



|Large
    Accelerated Filer ☐ | Accelerated
    Filer ☐        
|----------------------------- | -------------------------------
|                              |                                
|Non-accelerated
    Filer ☒   | Smaller
    Reporting Company ☒
|                              |                                
|                              | Emerging
    Growth Company ☐  



Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No



State
the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s
most recently completed second fiscal quarter. $14,404,213 at $0.068 per share.



Indicate
the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 238,504,032
shares of common stock par value $0.001 as of January 12, 2023.



DOCUMENTS
INCORPORATED BY REFERENCE: NONE


















TABLE
OF CONTENTS



|             |                                                                                                             | Page
|------------ | ----------------------------------------------------------------------------------------------------------- | ----
|             | PART I                                                                                                      |     
|Item
    1.  | Business                                                                                                    | 2   
|Item
    1A  | Risk Factors                                                                                                | 28  
|Item
    1B  | Unresolved Staff Comments                                                                                   | 29  
|Item
    2.  | Properties                                                                                                  | 29  
|Item
    3.  | Legal Proceedings                                                                                           | 30  
|Item
    4.  | Mine Safety Disclosures                                                                                     | 31  
|             |                                                                                                             |     
|             | PART II                                                                                                     |     
|Item
    5.  | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities | 31  
|Item
    6   | Selected Financial Data                                                                                     | 32  
|Item
    7.  | Management’s Discussion and Analysis of Financial Condition and Results of Operation                        | 32  
|Item
    7A  | Quantitative and Qualitative Disclosures About Market Risk                                                  | 43  
|Item
    8.  | Financial Statements and Supplementary Data                                                                 | 43  
|Item
    9.  | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure                        | 44  
|Item
    9A. | Controls and Procedures                                                                                     | 44  
|Item
    9B. | Other Information                                                                                           | 45  
|             |                                                                                                             |     
|             | PART III                                                                                                    |     
|Item
    10. | Directors, Executive Officers, Promoters and Corporate Governance                                           | 46  
|Item
    11. | Executive Compensation                                                                                      | 52  
|Item
    12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters              | 54  
|Item
    13. | Certain Relationships and Related Transactions, and Director Independence                                   | 55  
|Item
    14. | Principal Accountant Fees and Services                                                                      | 55  
|             |                                                                                                             |     
|             | PART IV                                                                                                     |     
|Item
    15. | Exhibits, Financial Statement Schedules                                                                     | 55  
|             |                                                                                                            
|SIGNATURES   | 57                                                                                                         



1







PART
I



This
Form 10-K contains some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events.
You can identify these statements by the fact that they do not relate strictly to historical or current facts. Forward-looking statements
involve risks and uncertainties. Forward-looking statements include statements regarding, among other things, (a) our projected sales,
profitability, and cash flows, (b) our growth strategies, (c) anticipated trends in our industries, (d) our future financing plans and
(e) our anticipated needs for working capital. They are generally identifiable by use of the words “may,” “will,”
“should,” “anticipate,” “estimate,” “plans,” “potential,” “projects,”
“continuing,” “ongoing,” “expects,” “management believes,” “we believe,”
“we intend” or the negative of these words or other variations on these words or comparable terminology. These statements
may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,”
as well as in this Form 10-K generally. In particular, these include statements relating to future actions, prospective products or product
approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such
as legal proceedings, and financial results.



Any
or all of our forward-looking statements in this report may turn out to be inaccurate. They can be affected by inaccurate assumptions
we might make or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future
results may vary materially as a result of various factors, including, without limitation, the risks outlined under “Risk Factors”
and matters described in this Form 10-K generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking
statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.



The
forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities
laws, we undertake no obligation to publicly update any forward-looking statements, whether as the result of new information, future
events, or otherwise.



ITEM
1. DESCRIPTION OF BUSINESS.



Corporate
Structure



Stem
Holdings, Inc. was organized on June 7, 2016, as a Nevada corporation under Chapter 78 of the Nevada Revised Statutes. The Company’s
principal office is located at 2201 NW Corporate Blvd, Suite 205, Boca Raton, FL 33431.



Overview
of the Business



Stem
Holdings, Inc. (“Stem” or the “Company”) is a Nevada corporation incorporated on June 7, 2016, and is a leading
omnichannel, vertically-integrated cannabis branded products and technology company with state-of-the-art cultivation, processing, extraction,
retail, distribution, and delivery-as-a-service (DaaS) operations throughout the United States. Stem’s family of award-winning
brands includes TJ’s GardensTM, TravisxJamesTM, and Yerba BuenaTM flower and extracts; CannavoreTM edible confections;
and e-commerce delivery platforms provide direct-to consumer proprietary logistics and an omnichannel UX (user experience)/CX (customer
experience).



2







The
Company purchases, improves, leases, operates, and invests in properties for use in the production, distribution and sales of cannabis
and cannabis-infused products licensed under the laws of the states of Oregon, Nevada, and California. Stem has ownership interests in
23 state issued cannabis licenses including nine (9) licenses for cannabis cultivation, three (3) licenses for cannabis processing, two
(2) licenses for cannabis wholesale distribution, three (3) licenses for hemp production and (6) cannabis dispensary licenses.



The
Company has nine wholly-owned subsidiaries, including Stem Holdings Oregon, Inc., Stem Holdings IP, Inc., Opco, LLC, Stem Agri, Inc.,
Stem Holdings Oregon Acquisitions 1, Corp., Stem Holdings Oregon Acquisitions 2, Corp., Stem Holdings Oregon Acquisitions 3, Corp., Stem
Holdings Oregon Acquisitions 4 Corp., 2336034 Alberta Ltd., Stem, through its subsidiaries, is currently in the process of the acquisition
of entities or be acquired by entities directly in the production and sale of cannabis. Driven Deliveries, Inc., a former wholly-owned
subsidiary, was sold during the quarter ended December 31, 2021 (see Note 3).



The
Company’s stock is publicly traded and is listed on the Canadian Securities Exchange under the symbol “STEM” and the
OTCQX exchange under the symbol “STMH”.



In
June 2021, the Company’s shareholders approved a proposal to amend the Company’s Articles of Incorporation to increase the
number of authorized common shares from 300,000,000 shares to 750,000,000 shares.



Regulation
of Cannabis in the United States Federally



The
cultivation, production, distribution and sale of cannabis and cannabis extracts is illegal under U.S. federal law, and it is listed
as a Schedule I substance under the U.S. Controlled Substances Act. A Schedule I drug or substance is deemed to have a high potential
for abuse, to have no accepted medical use in the United States, and to lack an acceptable safe use of the drug under medical supervision.
The Company believes the U.S. Controlled Substances Act categorization as a Schedule I drug is not reflective of cannabis’ medicinal
properties and numerous related studies support rescheduling. Over the past decade, cannabis policy has been moving towards legalization
and liberalization of cannabis laws.



In
September 2018, Congress approved the Medical Cannabis Research Act. This bill requires the Department of Justice to issue additional
cultivation licenses to grow marijuana for federal research. The bill also clarifies that Department of Veterans Affairs (“VA”)
doctors can discuss medical marijuana with their patients and can refer them to participate in scientific studies on the drug’s
effects.



The
District of Columbia (“D.C.”) and 36 U.S. states, including the states of Oregon, Nevada and California, have legalized cannabis
for medical use. D.C. and 15 U.S. states, including the states of Oregon, Nevada and California, have also legalized adult recreational
use of cannabis.



As
discussed above, marijuana remains a Schedule I substance under U.S. federal law. However, the Treasury Department’s Financial
Crimes Enforcement Network (“FinCEN”) has issued guidance advising prosecutors of money laundering and other financial crimes
not to focus their enforcement efforts on banks that serve marijuana-related businesses (“MRBs”), so long as that business
is legal in the bank’s respective state and none of the federal enforcement priorities are being violated (such as keeping marijuana
away from children and out of the hands of organized crime). This guidance was published on February 14, 2014 and requires banks providing
such services to monitor strict compliance with FinCEN’s guidance.



The
few credit unions who have agreed to service marijuana businesses are limiting those accounts to no more than 5% of their total deposits
to avoid creating a liquidity risk. Because the federal government could change the banking laws as it relates to marijuana businesses
at any time and without notice, these 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 servicing the needs of their other customers.



3







In
March 2019, a congressional committee approved the Secure and Fair Enforcement (SAFE) Banking Act. Draft legislation of the SAFE Banking
Act received a historic hearing in the House Consumer Protection and Financial Institutions Subcommittee in February 2019, where the
National Cannabis Industry Association submitted written testimony along with the personal stories about the burdens and safety concerns
created by the current banking situation from nearly 100 cannabis industry professionals. On September 25, 2019 the U.S House of Representatives
passed the landmark legislation to reform federal cannabis laws and reduce the public safety risk in communities across the country.
H.R. 1595, the SAFE Banking Act of 2019 passed by a vote of 321 to 103. This bill generally prohibits a federal banking regulator from
penalizing a depository institution for providing banking services to a legitimate marijuana-related business. The Company believes this
progressive banking reform for the U.S. cannabis industry reflects a positive trajectory for marijuana banking reform.



The
Marijuana Opportunity Reinvestment and Expungement Act, also known as the MORE Act, is a proposed 2019 United States federal legislation
to legalize cannabis and expunge prior cannabis related convictions that was introduced into the U.S. House of Representatives on July
23, 2019. This would remove cannabis from the Controlled Substances Act and impose a 5% tax on cannabis and cannabis products manufactured
in or imported into the United States. This tax will be collected by the Treasury of the United States to create a trust fund to be known
as the Opportunity Trust Fund. The trust funds the Act would create include the Community Reinvestment Grant, which would provide funding
for services such as job training, re-entry services and legal aid; the Cannabis Opportunity Grant, which would provide funds to assist
small businesses in the cannabis industry; and the Equitable Licensing Grant, which minimizes barriers to gain access to marijuana licensing
and employment for those most impacted by the so-called war on drugs. The act would also establish a Cannabis Justice Office within the
Department of Justice Office of Justice Programs, responsible for administering the grants. On December 4, 2020, the U.S. House of Representatives
passed this legislation by a vote of 228-164.



Both
the MORE and SAFE Banking Acts have yet to receive action in the U.S. Senate. However, in late 2020 incoming Senate Majority Leader Charles
Schumer made multiple comments suggesting that passage of these bills and large-scale federal legalization of cannabis are on his agenda.
The Company continues to monitor both of these bills and the general status of cannabis legalization at the U.S. federal level.



On
December 14, 2020, former President Trump announced that William Barr would be resigning from his post as Attorney General, effective
December 23, 2020. Merrick Garland, President Biden’s nominee to succeed Mr. Barr, has served as the current attorney general since
March 2021. It is unclear what specific impact the Biden administration will have on U.S. federal government enforcement policy. 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 United
States 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.



The
Company believes it is too soon to determine if any prosecutorial policy at the federal level will be forthcoming or if the Biden administration
will reinstitute the prior posture of the Department of Justice or a similar guidance document for United States attorneys or by executive
order. The sheer size of the cannabis industry, in addition to various level of legalization at the State and local governments, suggests
that a largescale enforcement operation would possibly create unwanted political backlash for the Department of Justice. Moreover, State
and local tax revenues generated by the cannabis business has become an increasingly important source of funding for State and local
government programs.





4







Regulation
of the Cannabis Market at State and Local Levels



The
following chart sets out, for each of the subsidiaries and other entities through which the Company conducts is operations, the U.S.
state(s) in which it operates, the nature of its operations (adult-use/medicinal), whether such activities carried on are direct, indirect
or ancillary in nature (as such terms are defined in Staff Notice 51-352), the number of sales, cultivation and other licenses held by
such entity and whether such entity has any operational cultivation or processing facilities.





|State      |  |  | Entities |         |  | Adult-Use / Medical |         | Direct / Indirect / Ancillary |             | Dispensary Licenses |  |     | Cultivation / Processing / Distribution Licenses | 
|---------- |  |  | -------- | ------- |  | ------------------- | ------- | ----------------------------- | ----------- | ------------------- |  | --- | ------------------------------------------------ | 
|California |  |  |          | 7LV USA |  |                     | Medical |                               | Direct (1)  |                     |  | 1   |                                                  | 
|Nevada     |  |  |          | YMY     |  |                     | Both    |                               | Indirect(2) |                     |  | N/A |                                                  | 
|Oregon     |  |  |          | Various |  |                     | Both    |                               | Direct(3)   |                     |  | 5   |                                                  | 



Notes:



|(1) | The
    Company’s wholly owned subsidiary, 7LV USA, operates a cannabis dispensary in Sacramento, California.
|--- | -------------------------------------------------------------------------------------------------------------
|    |                                                                                                              
|(2) | The
    Company holds a 50% interest in YMY, which operates a cannabis facility in North Las Vegas, Nevada.  
|    |                                                                                                              
|(3) | The
    Company holds all licenses in Oregon directly, through wholly owned subsidiaries.                    



California



History



In
1996, California voters passed a medical cannabis law allowing physicians to recommend cannabis for an inclusive set of qualifying conditions
including chronic pain and providing immunity/defense to criminal proceedings. The law was amended in 2003 to expand the criminal defense
to groups of patients/caregivers, but there was no state licensing authority to oversee the businesses that emerged as a result of the
system. In September 2015, the California legislature passed three bills, collectively known as the “Medical Marijuana Regulation
and Safety Act” (“MMRSA” later referred to as MCRSA after an amendment changed the word “Marijuana”
to “Cannabis”). In 2016, California voters passed the “Adult Use of Marijuana Act” (“AUMA”),
which legalized adult-use cannabis for adults 21 years of age and older and created a licensing system for commercial cannabis business.
On June 27, 2017, Governor Brown signed SB-94 into law. SB-94 combines California’s medicinal and adult-use regulatory framework
into one licensing structure under the Medicinal and Adult-Use of Cannabis Regulation and Safety Act (“MAUCRSA”).



Regulatory
Summary



Pursuant
to MAUCRSA: (i) the California Department of Food and Agriculture, via CalCannabis, issues licenses to cannabis cultivators, (ii) the
California Department of Public Health, via the Manufactured Cannabis Safety Branch (the “MCSB”) issues licenses to
cannabis manufacturers and (iii) the California Department of Consumer Affairs, via the Bureau of Cannabis Control (the “BCC”),
issues licenses to cannabis distributors, testing laboratories, retailers, and micro-businesses. These agencies also oversee the various
aspects of implementing and maintaining California’s cannabis landscape, including the statewide track and trace system. All three
agencies released their emergency rulemakings at the end of 2017 and have begun issuing licenses.



5







In
July, 2017, the State of California established the MCSB to develop statewide standards, regulations, and licensing procedures in relation
to cannabis, and is addressing policy issues in support of cannabis manufacturers. MCSB is responsible for issuing licenses to manufacturers
of cannabis products.



To
operate legally under state law, cannabis operators must obtain the requisite state licensure and local approval. Local authorization
is a prerequisite to obtaining state licensure, and local governments are permitted to prohibit or otherwise regulate the types and number
of cannabis businesses allowed in their locality. The state license approval process is not competitive and there is no limit on the
number of state licenses an entity may hold. Although vertical integration across multiple license types is allowed under the MAUCRSA,
testing laboratory licensees may not hold any other licenses aside from a laboratory license. However, a licensee is not prohibited from
performing testing on the licensee’s premises for the purposes of quality assurance of a cannabis product in conjunction with reasonable
business operations (testing conducted on a licensee’s premises by the licensee does not meet the testing requirements required
under the MAUCRSA). There are also no residency requirements for ownership under MAUCRSA.



California
License Types



Once
an operator obtains local approval, the operator must obtain state licenses before conducting any commercial cannabis activity. There
are 12 different license types that cover all commercial activity. License types 1-3 and 5 authorize the cultivation of medical and/or
adult use cannabis plants. Type 4 licenses are for nurseries that cultivate and sell clones and “teens” (immature cannabis
plants that have established roots but require further vegetation prior to being sent into the flowering period). Type 6 and 7 licenses
authorize manufacturers to process cannabis biomass into certain value-added products such as shatter or cannabis distillate oil with
the use of volatile or non-volatile solvents, depending on the license type. Type 8 licenses are held by testing facilities who test
samples of cannabis products and generate “certificates of analysis,” which include important information regarding the potency
of products and whether products have passed or failed certain threshold tests for pesticide and microbiological contamination. Type
9 licenses are issued to “non-storefront” retailers, commonly called delivery services, who bring cannabis products directly
to customers and patients at their residences or other chosen deliver location. Type 10 licenses are known as “Transport-Only”
distribution licenses, and they allow the distributor to transport cannabis and cannabis products between licensees, but not to retailers.
Type 12 licenses are issued to distributors who move cannabis and cannabis products to all license types, including retailers.



Company
Licenses



On
March 29, 2019, the Company executed a definitive agreement to acquire Western Coast Ventures, Inc. (“WCV”), an arm’s
length private corporation incorporated under the laws of Nevada. Other than approximately $2,000,000 in cash, WCV’s sole asset
was a 51% ownership interest in ILCA. ILCA was issued a limited conditional use permit for a cannabis production facility by the City
of San Diego. Upon issuance of the final cannabis production facility permit and the completed construction of the facility, the ILCA
will: (i) operate an advanced cannabis facility to grow and cultivate cannabis; (ii) manufacture cannabis-derived products; and (iii)
distribute cannabis and cannabis-derived products state-wide throughout California. During the year ended September 30, 2021 the Company
determined the investment in ILCA was impaired and recognized an impairment expense of $2.2 million for the year ended September 30,
2021.



On
March 6, 2020, the Company closed the acquisition of Seven Leaf Ventures Corp. (“7LV”), an arm’s length private
corporation incorporated under the laws of Alberta, and its subsidiaries, pursuant to the terms of a share purchase agreement dated March
6, 2020. A subsidiary of 7LV, 7LV USA, owns Foothills Health and Wellness, a medical dispensary, in the greater Sacramento, California
area.



6







The
table below lists the licenses directly and indirectly held by the Company in the State of California:



|Holding
    Entity |  | Permit/License  |  | City,
    State            |  | Expiration
    Date  |  | Description                   
|------------------ |  | --------------- |  | -------------------------- |  | -------------------- |  | ------------------------------
|7LV
    USA        |  | C10-0000679-LIC |  | Sacramento,
    California |  | January
    14, 2023 |  | Medicinal
    Retailer License



California
Agencies Regulating the Commercial Cannabis Industry



From
2015 through July 2021, three agencies were tasked with regulating the cannabis industry in California. The California Department of
Food and Agriculture (“CDFA”) which oversaw nurseries and cultivators; the California Department of Public Health
(“CDPH”) which oversaw manufacturers, and the Bureau of Cannabis Control (BCC) which oversaw distributors, retailers,
delivery services and testing laboratories.



In
an effort to centralize and simplify regulatory and licensing oversight of the cannabis market, Gov. Gavin Newsom signed AB-141 into
law on July 12, 2021, creating the Department of Cannabis Control (DCC). Assembly Bill 141 consolidates three state cannabis programs
– the Bureau of Cannabis Control (BCC), the California Department of Food and Agriculture’s (CDFA) CalCannabis Cultivation
Licensing Division, and the California Department of Public Health’s (CDPH) Manufactured Cannabis Safety Branch into the DCC. The
law transfers to the DCC all of the “powers, duties, purposes, functions, responsibilities, and jurisdiction” of the BCC,
CDFA and CDPH.



California
Transportation



Transporting
cannabis goods between licensees and a licensed facility may only be performed by persons holding a distributor license. The vehicle
or trailer used must not contain any markings or features on the exterior which may indicate or identify the contents or purpose. All
cannabis products must be locked in a box, container, or cage that is secured to the inside of the vehicle or trailer. When left unattended,
vehicles must be locked and secured. At a minimum, the vehicle must be equipped with an alarm system, motion detectors, pressure switches,
duress, panic, and hold-up alarms.



California
Inventory/Storage



Each
licensee is required to assign an account manager to oversee the track and trace system. The account manager is fully trained on the
system and is accountable to record all commercial cannabis activities accurately and completely. The licensee is expected to correct
any data that is entered into the track and trace system in error within three business days of discovery of the error. The licensee
is required to report information in the track and trace system for each transfer of cannabis or non-manufactured cannabis products to,
or cannabis or non-manufactured cannabis products received from, other licensed operators. Licensees must use the track and trace system
for all inventory tracking activities at a licensed premise, including, but not limited to, reconciling all on-premise and in-transit
cannabis or non-manufactured cannabis product inventories at least once every 14 business days. The licensee must store cannabis and
cannabis products in a secure place with locked doors.



California
Record-keeping/Reporting



The
cultivation, processing, and movement of cannabis within the state is tracked by the METRC system, into which all licensees are required
to input their track and trace data (either manually or using another software that automatically uploads to METRC). Immature plants
are assigned a Unique Identifier number (UID), and this number follows the flowers and biomass resulting from that plant through the
supply chain, all the way to the consumer. Each licensee in the supply chain is required to meticulously log any processing, packaging,
and sales associated with that UID.



Retail
Compliance in California



California
requires that certain warnings, images and content information be printed on all cannabis packaging. BCC regulations also include certain
requirements about tamper-evident and child-resistant packaging. Distributors and retailers are responsible for confirming that products
are properly labeled and packaged before they are sold to a customer.



Consumers
aged 21 and up may purchase cannabis in California from a dispensary with an “adult-use” license. Some localities still only
allow medicinal dispensaries. Consumers aged 18 and up with a valid physician’s recommendation may purchase cannabis from a medicinal-only
dispensary or an adult-use dispensary. Consumers without valid physician’s recommendations may not purchase cannabis from a medicinal-only
dispensary. All cannabis businesses are prohibited from hiring employees under the age of 21.



7







California
Security



Each
local government in California has its own security requirements for cannabis businesses, which usually include comprehensive video surveillance,
intrusion detection and alarms and limited-access areas where only employees and other authorized individuals may enter. All licensee
employees must wear employee badges. The limited-access areas must be locked with “commercial-grade, non-residential door locks
on all points of entry and exit to the licensed premises.”



Each
licensed premises must have a digital video surveillance system that can “effectively and clearly” record images of the area
under surveillance. Cameras must be “in a location that allows the camera to clearly record activity occurring within 20 feet of
all points of entry and exit on the licensed premises.” The regulations list specific areas which must be under surveillance, including
places where cannabis goods are weighed, packed, stored loaded and unloaded, security rooms and entrances and exits to the premises.
Retailers must record point of sale areas on the video surveillance system.



Licensed
retailers must hire security personnel to provide on-site security services for the licensed retails premises during hours of operation.
All security personnel must be licensed by the Bureau of Security and Investigate Services.



California
Inspections



All
licensees are subject to annual and random inspections of their premises. Cultivators may be inspected by the California Department of
Fish and Wildlife, the California Regional Water Quality Control Boards, and the California Department of Food and Agriculture. Manufacturers
are subject to inspection by the California Department of Public Health, and Retailers, Distributors, Testing Laboratories, and Delivery
services are subject to inspection by the Department of Cannabis Control. Inspections can result in notices to correct, or notices of
violation, fines, or other disciplinary action by the inspecting agency.



Cannabis
taxes in California



Several
taxes are imposed at the point of sale and are required to be collected by the retailer. The State imposes an excise tax of 15%, and
a sales and use tax is assessed on top of that. Cities and Counties apply their sales tax along with the State’s sales and use
tax, and many cities and counties have also authorized the imposition of special cannabis business taxes which can range from 2% to 10%
of gross receipts of the business.



U.S.
Attorney Statements in California



To
the knowledge of management of Stem, other than as disclosed in this Document, there have not been any statements or guidance made by
federal authorities or prosecutors regarding the risk of enforcement action in California. See “Risk Factors”.



8









Nevada



History



Nevada’s
medical cannabis market was introduced in June 2013 when the legislature passed SB374, legalizing the medicinal use of cannabis for certified
patients. The first dispensaries opened to patients in August 2015.



The
Nevada Division of Public and Behavioral Health licensed medical cannabis establishments up until July 1, 2017, when the State’s
medical cannabis program merged with adult-use cannabis enforcement under the State of Nevada Department of Taxation, Marijuana Enforcement
Division (the “Nevada Taxation Department”). In 2014, Nevada accepted medical cannabis business applications and a few months
later the division approved 182 cultivation licenses, 118 licenses for the production of edibles and infused products, 17 independent
testing laboratories, and 55 medical cannabis dispensary licenses. The number of dispensary licenses was then increased to 66 by legislative
action in 2015. The application process is merit-based, competitive, and is currently closed. Residency is not required to own or invest
in a Nevada medical cannabis business. In addition, vertical integration is neither required nor prohibited. Nevada’s medical law
includes patient reciprocity, which permits medical patients from other States to purchase cannabis from Nevada dispensaries. Nevada
also allows for dispensaries to deliver medical cannabis to patients.



Each
medical cannabis establishment must register with the Nevada Taxation Department and apply for a medical cannabis establishment registration
certificate. As noted above, the application process is competitive, and, among other requirements, there are minimum liquidity requirements
and restrictions on the geographic location of a medical cannabis establishment as well as restrictions relating to the age and criminal
background of employees, owners, officers and board members of the establishment. All employees must be over 21 and all owners, officers
and board members must not have any previous felony convictions or had a previously granted medical cannabis registration revoked. Additionally,
each volunteer, employee, officer, board member, and owner of an effective 5% or greater interest of a medical cannabis establishment
must be individually registered with the Nevada Taxation Department as a medical cannabis agent and hold a valid medical cannabis establishment
agent card. The establishment must have adequate security measures and use an electronic verification system and inventory control system.
If the proposed medical cannabis establishment will sell or deliver edible cannabis products or cannabis-infused products, the proposed
establishment must establish operating procedures for handling such products, which must be preapproved by the Nevada Taxation Department.



In
response to the rescission of the Cole Memo, then-Nevada Attorney General Adam Laxalt had issued a public statement, pledging to defend
the law after it was approved by voters. Then-Governor Brian Sandoval also stated, “Since Nevada voters approved the legalization
of recreational cannabis in 2016, I have called for a well-regulated, restricted and respected industry. My administration has worked
to ensure these priorities are met while implementing the will of the voters and remaining within the guidelines of both the Cole and
Wilkinson federal memos,” and that he would like for Nevada to follow in the footsteps of Colorado, where the U.S. attorneys do
not plan to change the approach to prosecuting crimes involving recreational cannabis.



In
determining whether to issue a medical cannabis establishment registration certificate pursuant to NRS 453A.322, the Nevada Taxation
Department, in addition the application requirements set out, considers the following criteria of merit:



| | ● | the
    total financial resources of the applicant, both liquid and illiquid;                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                  
| | ● | the
    previous experience of the persons who are proposed to be owners, officers of board members of the proposed medical cannabis establishment
    at operating other businesses or non-profit organizations;                                                
| |   |                                                                                                                                                                                                                                                                  
| | ● | the
    educational achievements of the persons who are proposed to be owners, officers of board members of the proposed medical cannabis
    establishment;                                                                                                     
| |   |                                                                                                                                                                                                                                                                  
| | ● | any
    demonstrated knowledge or expertise on the part of the persons who are proposed to be owners, officers or board members of the proposed
    medical cannabis establishment with respect to the compassionate use of cannabis to treat medical conditions;



9







| | ● | whether
    the proposed location of the proposed medical cannabis establishment would be convenient to serve the needs of persons who are authorized
    to engage in the medical use of cannabis;                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                 
| | ● | whether
    the applicant has an integrated plan for the care, quality and safekeeping of medical cannabis from seed to sale;                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                 
| | ● | the
    amount of taxes paid to, or other beneficial financial contributions made to, the State of Nevada or its political subdivisions by
    the applicant or the persons who are proposed to be the owners, officers or board members of the proposed medical cannabis establishment;
    and
| |   |                                                                                                                                                                                                                                                                                                 
| | ● | any
    other criteria of merit that the Nevada Taxation Department determines to be relevant.                                                                                                                                                                                                  



A
medical cannabis establishment registration certificate expires 1 year after the date of issuance and may be renewed upon resubmission
of the application information and renewal fee to the Nevada Taxation Department.



The
sale of cannabis for adult-use in Nevada was approved by ballot initiative on November 8, 2016, and Nevada Revised Statute 453D exempts
a person who is 21 years of age or older from state or local prosecution for possession, use, consumption, purchase, transportation or
cultivation of certain amounts of cannabis and requires the Nevada Taxation Department to begin receiving applications for the licensing
of cannabis establishments on or before January 1, 2018. The legalization of retail cannabis does not change the medical cannabis program.



In
February 2017, the Nevada Taxation Department announced plans to issue “early start” recreational cannabis establishment
licenses in the summer of 2017. These licenses, which began on July 1, 2017, allowed cannabis establishments holding both a retail cannabis
store and dispensary license to sell their existing medical cannabis inventory as either medical or adult-use cannabis, and expired at
the end of the year. As of July 1, 2017, medical and adult-use cannabis have incurred a 15% excise tax on the first wholesale sale (calculated
on the fair market value) and adult-use cannabis has incurred an additional 10% special retail cannabis sales tax in addition to any
general State and local sales and use taxes.



On
January 16, 2018, the Nevada Taxation Department issued final rules governing its adult-use cannabis program, pursuant to which up to
sixty-six (66) permanent adult-use cannabis dispensary licenses will be issued. Existing adult-use cannabis licensees under the “early
start” regulations must re-apply for licensure under the permanent rules in order to continue adult-use sales.



Under
Nevada’s adult-use cannabis law, the Nevada Taxation Department licenses cannabis cultivation facilities, product manufacturing
facilities, distributors, retail stores and testing facilities. For the first 18 months, applications to the Nevada Taxation Department
for adult-use distribution establishment licenses can only be accepted from existing medical cannabis establishments and existing liquor
distributors.



In
September 2018, the Nevada Taxation Department accepted applications from existing Nevada medical cannabis establishment certificate
owners to be awarded licenses for approximately 65 retail cannabis stores throughout the State. The application period closed on September
20, 2018, and the additional retail store licenses were awarded by the Nevada Taxation Department on December 5, 2018.



Regulatory
Overview



The
State of Nevada utilizes Metrc as its statewide seed-to-sale tracking system for all cannabis and cannabis products. All licensees within
the State system are required, either directly or through third-party software systems that are capable of data integration, to report
to the State all creation and transfers of such inventory to other licensees and sales to consumers. CSAC intends to designate a third-party
computerized seed-to-sale inventory software tracking system designed to integrate with Metrc via an application programming interface.



10







Licensing
Requirements



There
are five certificate/license types issued in the State of Nevada:



“Marijuana
cultivation facility” means an entity licensed to cultivate, process, and package cannabis, to have cannabis tested by a cannabis
testing facility, and to sell cannabis to retail cannabis stores, to cannabis product manufacturing facilities, and to other cannabis
cultivation facilities, but not to consumers. NRS 453D.030(9).



“Marijuana
product manufacturing facility” means an entity licensed to purchase cannabis, manufacture, process, and package cannabis and cannabis
products, and sell cannabis and cannabis products to other cannabis product manufacturing facilities and to retail cannabis stores, but
not to consumers. NRS 453D.030(12).



“Retail
marijuana store” means an entity licensed to purchase cannabis from cannabis cultivation facilities, to purchase cannabis and cannabis
products from cannabis product manufacturing facilities and retail cannabis stores, and to sell cannabis and cannabis products to consumers.
NRS 453D.030(18).



“Marijuana
distributor” means an entity licensed to transport cannabis from a cannabis establishment to another cannabis establishment. NRS
453D.030(10).



“Marijuana
testing facility” means an entity licensed to test cannabis and cannabis products, including for potency and contaminants. NRS
453D.030(15).



Administration
of the regular retail program in Nevada is governed by Nevada Revised Statutes Section 453D and the Adopted Regulation of the Nevada
Department of Taxation, LCB File R092-17 (the “Nevada Adult-Use Regulation”). The Nevada Adult-Use Regulation was adopted
on February 27, 2018 and is a regulation relating to cannabis responsible for: (i) revising requirements relating to independent testing
laboratories; (ii) providing for the licensing of cannabis establishments and registration of cannabis establishment agents; (iii) providing
requirements concerning the operation of cannabis establishments; (iv) providing additional requirements concerning the operation of
marijuana cultivation facilities, marijuana distributors, marijuana product manufacturing facilities, marijuana testing facilities and
retail marijuana stores; (v) providing standards for the packaging and labeling cannabis and cannabis products; (vi) providing requirements
relating to the production of edible cannabis products and other cannabis products; (vii) providing standards for the cultivation and
production of cannabis; (viii) establishing requirements relating to advertising by cannabis establishments; (ix) establishing provisions
relating to the collection of excise taxes from cannabis establishments; (x) establishing provisions relating to dual licensees; and
(xi) providing other matters properly relating thereto.



In
the State of Nevada, only cannabis that is grown or produced in the state by a licensed establishment may be sold in the state. The Nevada
regulatory regime does not mandate or prohibit vertically integrated facilities and only permits the holder of a retail dispensary license
and registration certificate to purchase cannabis from cultivation facilities, cannabis and cannabis products from product manufacturing
facilities and cannabis from other retail stores, for the sale of such products to consumers.



A
medical cultivation license permits its holder to acquire, possess, cultivate, deliver, transfer, have tested, transport, supply or sell
cannabis and related supplies to medical cannabis dispensaries, facilities for the production of edible medical cannabis products and/or
medical cannabis-infused products, or other medical cannabis cultivation facilities.



The
medical product manufacturing license permits its holder to acquire, possess, manufacture, deliver, transfer, transport, supply, or sell
edible cannabis products or cannabis infused products to other medical cannabis production facilities or medical cannabis dispensaries.



Medical
marijuana establishment certificates and recreational cannabis facility licenses are issued independently to specific owners and at identified
locations. Ownership of certificates and licenses is transferable in accordance with the Nevada Taxation Department’s policies
and procedures, including completion of a background investigation. Establishment certificates and facility licenses may only be relocated
to a new location within the identified local jurisdiction.



All
licenses expire one year after the date of issue. The Nevada Taxation Department shall issue a renewal license within 10 days after the
receipt of a renewal application and applicable fee if the license is not then under suspension or has not been revoked.



11









Company
Licenses



YMY,
in which the Company owns a 50% interest, holds one medical cultivation license and one recreational cultivation license and one medical
product manufacturing license and one recreational product manufacturing license in the State of Nevada. The table below lists the licenses
indirectly held by the Company:



|Holding
    Entity |  | Permit/License       |  | City,
    State       |  | Expiration
    Date |  | Description                                   
|------------------ |  | -------------------- |  | --------------------- |  | ------------------- |  | ----------------------------------------------
|YMY(1)             |  | 18897864143987354009 |  | Las
    Vegas, Nevada |  | June
    30, 2023   |  | Medical
    Cultivation License               
|YMY(1)             |  | 49988620104464639364 |  | Las
    Vegas, Nevada |  | June
    30, 2023   |  | Recreational
    Cultivation License          
|YMY(1)             |  | 78715576282428558550 |  | Las
    Vegas, Nevada |  | June
    30, 2023   |  | Medical
    Product Manufacturing License     
|YMY(1)             |  | 32704290606712932888 |  | Las
    Vegas, Nevada |  | June
    30, 2023   |  | Recreational
    Product Manufacturing License



Note:



|(1) | The
    Company holds a 50% interest in YMY, which operates a cannabis facility in North Las Vegas, Nevada.
|--- | -----------------------------------------------------------------------------------------------------------



Nevada
Transportation



In
Nevada, cannabis may only be transported from a licensed cultivation or production facility to a licensed retail cannabis establishment
by a licensed marijuana distributor. Prior to transporting the cannabis or cannabis products, the distributor must complete a trip plan
which includes: the agent name and registration number providing and receiving the cannabis; the date and start time of the trip; a description,
including the amount, of the cannabis or cannabis products being transported; and the anticipated route of transportation.



During
the transportation of cannabis or cannabis products, the licensed marijuana distributor agent must: (a) carry a copy of the trip plan
with him or her for the duration of the trip; (b) have his or her cannabis establishment agent card in his or her immediate possession;
(c) use a vehicle without any identification relating to cannabis and which is equipped with a secure lockbox or locking cargo area which
must be used for the sanitary and secure transportation of cannabis, or cannabis products; (d) have a means of communicating with the
cannabis establishment for which he or she is providing the transportation; and (e) ensure that all cannabis or cannabis products are
not visible. After transporting cannabis or cannabis products a licensed marijuana distributor agent must enter the end time of the trip
and any changes to the trip plan that was completed.



Each
licensed marijuana distributor agent transporting cannabis or cannabis products must report any: (a) vehicle accident that occurs during
the transportation to a person designated by the marijuana distributor to receive such reports within two (2) hours after the accident
occurs; and (b) loss or theft of cannabis or cannabis products that occurs during the transportation to a person designated by the marijuana
distributor to receive such reports immediately after the cannabis establishment agent becomes aware of the loss or theft. A marijuana
distributor that receives a report of loss or theft pursuant to this paragraph must immediately report the loss or theft to the appropriate
law enforcement agency and to the Nevada Taxation Department. The distributor must report any unauthorized stop that lasts longer than
two (2) hours to the Nevada Taxation Department.



12







A
marijuana distributor shall maintain the required documents and provide a copy of the documents required to the Nevada Taxation Department
for review upon request. Each marijuana distributor shall maintain a log of all received reports.



Employees
of licensed marijuana distributors, including drivers transporting cannabis and cannabis products, must be 21 years of age or older and
must obtain a valid cannabis establishment agent registration card issued by the Nevada Taxation Department. If a marijuana distributor
is co-located with another type of business, all employees of co-located businesses must have cannabis establishment agent registration
cards unless the co-located business does not include common entrances, exits, break room, restrooms, locker rooms, loading docks, and
other areas as are expedient for business and appropriate for the site as determined and approved by Nevada Taxation Department inspectors.
While engaged in the transportation of cannabis and cannabis products, any person that occupies a transport vehicle when it is loaded
with cannabis or cannabis products must have their physical cannabis establishment agent registration card in their possession.



All
drivers must carry in the vehicle valid driver’s insurance at the limits required by the State of Nevada and the Nevada Taxation
Department. All drivers must be bonded in an amount sufficient to cover any claim that could be brought or disclose to all parties that
their drivers are not bonded. Cannabis establishment agent registration cardholders and the licensed marijuana distributor they work
for are responsible for the cannabis and cannabis product once they take control of the product and leave the premises of the cannabis
establishment.



There
is no load limit on the amount or weight of cannabis and cannabis products that are being transported by a licensed marijuana distributor.
Cannabis distributors are required to adhere to Nevada Taxation Department regulations and those required through their insurance coverage.
When transporting by vehicle, cannabis and cannabis product must be in a lockbox or locked cargo area. A trunk of a vehicle is not considered
secure storage unless there is no access from within the vehicle and it is not the same key access as the vehicle. Live plants can be
transported in a fully enclosed, windowless locked trailer or secured area inside the body/compartment of a locked van or truck so that
they are not visible to the outside. If the value of the cannabis and cannabis products being transported by vehicle is in excess of
$10,000 (the insured value per the shipping manifest), the transporting vehicle must be equipped with a car alarm with sound or have
no less than two (2) of the marijuana distributor’s cannabis establishment agent registration cardholders involved in the transportation.
All cannabis and cannabis product must be tagged for purposes of inventory tracking with a unique identifying label as required by the
Nevada Taxation Department and remain tagged during transport. This unique identifying label should be similar to the stamp for cigarette
distribution. All cannabis and cannabis product when transported by vehicle must be transported in sealed packages and containers and
remain unopened during transport. All cannabis and cannabis product transported by vehicle should be inventoried and accounted for in
the inventory tracking system. Loading and unloading of cannabis and cannabis products from the transporting vehicle must be within view
of existing video surveillance systems prior to leaving the origination location. Security requirements are required for the transportation
of cannabis and cannabis products.



Nevada
Inventory



Each
cannabis establishment must maintain an inventory control system to monitor and report on chain of custody of cannabis in real-time,
from the point of harvest at a cultivation facility until it is sold at a dispensary, or it is processed at a facility for the production
of edible cannabis products or cannabis-infused products. For this purpose, Nevada tracks information through METRC which maintains the
name of each person or cannabis establishment to cannabis is sold, for dispensaries, the date of sales, quantity, and potency. Cannabis
establishments must exercise vigilance to ensure personal identifying information contained in the inventory control system is encrypted,
protected and not divulged for any purpose not specifically authorized by law.



13







Nevada
Security



To
prevent unauthorized access to cannabis at a Nevada-licensed cannabis establishment, the cannabis establishment must have security equipment
to deter and prevent unauthorized entrance into limited access areas. This includes devices or a series of devices interconnected with
a radio frequency, such as cellular or private radio signals, or other mechanical device, covering the entirety of the facility. Exterior
lighting to facilitate surveillance, video cameras with a recording rate of at least 15 frames per second covering all entrances and
exits of the building, any room or area that hold a vault or point-of-sale location and which records 24 hours per day. Recordings must
be accessible remotely by law enforcement in real time upon request. Video quality providing coverage of a point-of-sale location must
allow for the identification of any person purchasing cannabis. Video recording must be restored for at least 30 days in a secure off-site
location or other service that provides on-demand access to the Department Nevada Taxation Department.



Department
Inspections



Each
establishment that has been granted a provisional operating certificate by the Nevada Taxation Department must undergo facility and audit
inspections by the Nevada Taxation Department prior to the issuance of a final registration certificate. Additionally, the issuance of
a registration certificate is considered provisional until the establishment is in compliance with all applicable local government requirements
including, without limitation, the issuance of a local business licenses.



After
an establishment registration certificate has been issued, the cannabis establishment is subject to reasonable inspection from the Nevada
Taxation Department and a licensee must make himself or herself, or an agent, available and present for any inspection required by the
Nevada Taxation Department.



Delivery
and Online Distribution



There
are specific situations in which the delivery of cannabis to customers is allowed under the Nevada Taxation Department regulations. Delivery
services to customers may only be carried out by retail stores that are licensed properly by the Nevada Taxation Department. Deliveries
can only be brought to the residential addresses of customers and only within the State of Nevada. Delivery was allowed as soon as retail
cannabis sales began on July 1, 2017, although those regulations were only temporary. Drivers may not deliver more than the legal amount
of cannabis, which is currently one ounce, in compliance with the existing seed-to-sale tracking system. Cannabis or cannabis products
may not be shipped via the US Postal Service or via any private courier.



U.S.
Attorney Statements in Nevada



In
response to the rescission of the Cole Memo, Nevada Attorney General Adam Laxalt had issued a public statement, pledging to defend the
law after it was approved by voters. Then-Governor Brian Sandoval also stated, “Since Nevada voters approved the legalization of
recreational cannabis in 2016, I have called for a well-regulated, restricted and respected industry. My administration has worked to
ensure these priorities are met while implementing the will of the voters and remaining within the guidelines of both the Cole and Wilkinson
federal memos,” and that he would like for Nevada to follow in the footsteps of Colorado, where the U.S. attorneys do not plan
to change the approach to prosecuting crimes involving recreational cannabis.



In
June 2019, incoming U.S. Attorney of the District of Nevada Nicholas Trutanich stated to the Reno Gazette Journal that he would not rule
out the possibility of prosecuting cases related to cannabis, but did emphasize that it also was not a priority. He stated cannabis remains
illegal under federal law, and his job is to enforce federal law. He stated, however, that one of his main priorities was to tackle the
opioid crisis and human trafficking. He further stated that he is following orders from the DOJ.



To
the knowledge of management of Stem, other than as disclosed in this Document, there have not been any statements or guidance made by
federal authorities or prosecutors regarding the risk of enforcement action in Nevada. See “Risk Factors”.



14







Oregon



History



Oregon’s
medical cannabis program was introduced in November 1998 when voters approved Measure 67, the Oregon Medical Marijuana Act, with 55%
of the vote. In November 2014, voters approved Measure 91, the ‘Oregon Legalized Marijuana Initiative,’ which legalized adult-use
cannabis in the state. In October 2015, the first adult-use dispensaries opened for sale.



Regulatory
Summary



There
are four types of adult-use cannabis licenses: producer, processor, wholesaler and retail. Additionally, the Oregon Liquor Control Commission
(“OLCC”) grants a certificate for research and a hemp certificate. A producer is permitted to cultivate cannabis.
A processor is permitted to transform raw cannabis into another product (topicals, edibles, concentrates, or extracts). A wholesaler
is permitted to buy cannabis in bulk and sell to licensees but not to consumers. A retailer is permitted to sell cannabis to consumers.
A laboratory is permitted to test cannabis based on rules established by the Oregon Health Authority. To receive a laboratory license,
the lab must be accredited by the Oregon Environmental Laboratory Accreditation program. The hemp certificate allows persons that are
registered with the Oregon Department of Agriculture to transfer hemp flower, extracts, or concentrates to OLCC licensed processors who
hold an industrial hemp processor endorsement.



Company
Licenses



Pursuant
to the purchase of the Operating Companies by the Company, Stem has acquired an interest in five retail licenses, five producer licenses,
two wholesaler license and three processing licenses.



The
table below lists the licenses that are: (i) directly held by the Company; and (ii) held by the Company’s operating partners:



|Holding
    Entity                     |  | Permit/License  |  | City,
    State          |  | License
    Expiration Date |  | Description                
|-------------------------------------- |  | --------------- |  | ------------------------ |  | --------------------------- |  | ---------------------------
|JV
    Foods LLC                       |  | 030-1014658322F |  | Eugene,
    Oregon       |  | September
    3, 2023       |  | Recreational
    Processor 
|JV
    Extraction LLC                  |  | 030-1014657D1EC |  | Eugene,
    Oregon       |  | September
    3, 2023       |  | Recreational
    Processor 
|JV
    Extraction LLC/JV Wholesale LLC |  | 030-101742659A2 |  | Eugene,
    Oregon       |  | September
    16, 2023      |  | Recreational
    Processor 
|JV
    Applegate LLC                   |  | 020-10146602629 |  | Jacksonville,
    Oregon |  | November
    11, 2023       |  | Recreational
    Producer  
|JV
    Wholesale LLC                   |  | 060-10146555C41 |  | Eugene,
    Oregon       |  | September
    3, 2023       |  | Recreational
    Wholesaler
|JV
    Extraction LLC/JV Wholesale LLC |  | 060-1017430C9B0 |  | Eugene,
    Oregon       |  | September
    16, 2023      |  | Recreational
    Wholesaler
|JV
    Wholesale LLC                   |  | 060-10118468E74 |  | Eugene,
    Oregon       |  | June
    2, 2023            |  | Recreational
    Wholesaler
|JV
    Production 3 LLC                |  | 020-1014656E7A7 |  | Eugene,
    Oregon       |  | September
    3, 2023       |  | Recreational
    Producer  
|OpCo
    Production 2 LLC              |  | 020-10146517BD5 |  | Mulino,
    Oregon       |  | September
    3, 2023       |  | Recreational
    Producer  
|OpCo
    Production 1 LLC              |  | 020-10146613F29 |  | Springfield,
    Oregon  |  | September
    5, 2023       |  | Recreational
    Producer  
|JV
    Retail 3 LLC                    |  | 050-1017428AB09 |  | Eugene,
    Oregon       |  | September
    16, 2023      |  | Recreational
    Retailer  
|JV
    Retail 4 LLC                    |  | 050-1017432812F |  | Salem,
    Oregon        |  | September
    16, 2023      |  | Recreational
    Retailer  
|OPCO
    Retail 1 LLC                  |  | 050-10146522DCF |  | Portland,
    Oregon     |  | September
    3, 2023       |  | Recreational
    Retailer  
|JV
    Retail 2 LLC                    |  | 050-1014653D811 |  | Eugene,
    Oregon       |  | September
    3, 2023       |  | Recreational
    Retailer  
|Kind
    Care, LLC                     |  | 050-10146546503 |  | Eugene,
    Oregon       |  | September
    3, 2023       |  | Recreational
    Retailer  
|Stem
    Holdings Oregon, Inc.         |  | 020-1013432D099 |  | Hillsboro,
    Oregon    |  | June
    23, 2023           |  | Recreational
    Producer  



15







Oregon
Transportation



Licensed
producers which transport cannabis to licensed retailers must comply with the following: (a) a licensee must keep cannabis items in transit
shielded from public view, (b) the cannabis items must be of secured (locked-up) during transport, (c) the transport must be equipped
with an alarm system, (d) the transport must be temperature controlled if perishable cannabis items are being transported, (e) the transport
must provide arrival date and estimated time of arrival information, (f) all cannabis items must be packaged in shipping containers and
labeled with a unique identifier, and (g) the transport must provide a copy of the printed manifest and any printed receipts for cannabis
items delivered to law enforcement officers or other representatives of a government agency if requested to do so while in transit.



Oregon
Inventory/Storage



OLCC
licensees must report the following to Oregon’s Cannabis Tracking System (“CTS”) (a) a reconciliation of all
on-premise and in-transit cannabis item inventories each day, (b) all information for seeds, usable cannabis, CBD concentrates and extracts
by weight, (c) the wet weight of all harvested cannabis plants immediately after harvest, (d) all required information for CBD products
by unit count, and (e) for retailer license holders, the price before tax and amount of each item sold to consumers and the date of each
transaction. The data must be transmitted for each individual transaction before the retailer opens the next business day. All cannabis
items on a licensed retailer’s premises must be held in a safe or vault. All usable cannabis, cut and drying mature cannabis plants,
CBD concentrates, extracts or products on the licensed premises of a licensee other than a retailer are to be kept in a locked, enclosed
area within the licensed premises that is secured with at a minimum, a steel door with a steel frame or equivalent, and a commercial
grade, non-residential door lock. All licensees must keep all video recordings and archived required records not stored electronically
in a locked storage area. Current records may be kept in a locked cupboard or desk outside the locked storage area during hours when
the licensed business is open.



Oregon
Record-keeping/Reporting



Oregon
uses the METRC trace and tracking system and allows other third-party system integration via an API to track cannabis. The Subsidiaries
in Oregon use a third-party trace and tracking system to push the data to the state through an API to meet all reporting requirements.
All cannabis products dispensed are documented at point of sale via the track and trace system. License holders must maintain the documentation
from the track and trace system in a secure locked location at each dispensing or growing location for three years as required by the
OLCC. The OLCC requires all cannabis licensees to have and maintain records that clearly reflect all financial transactions and the financial
condition of the business. The following records may be kept in either paper or electronic form and must be maintained for a three year
period and be made available for inspection if requested by the OLCC: (a) purchase invoices and supporting documents for items and services
purchased for use in the production, processing, research, testing and sale of cannabis items that include from whom the items were purchased
and the date of purchase, (b) bank statements for any accounts, (c) accounting and tax records, (d) documentation of all financial transactions,
including contracts and agreements for services performed or received, and (e) all employee records, including training.



Oregon
Security



A
licensed premise must have a fully operational security alarm system, activated at all times when the licensed premises is closed for
business. Among other features the security alarm system for the licensed premises must (a) be able to detect unauthorized entry onto
the licensed premises and unauthorized activity within any limited access area where mature cannabis plants, usable cannabis, CBD concentrates,
extracts or products are present, (b) be programmed to notify the licensee, a licensee representative or other authorized personnel in
the event of an unauthorized entry, and (c) either have at least two operational “panic buttons” located inside the licensed
premises that are linked with the alarm system that immediately notifies a security company or law enforcement, or have operational panic
buttons physically carried by all employees present on the licensed premises that are linked with the alarm system that immediately notifies
a security company or law enforcement.



16







A
licensed premise must have a fully operational video surveillance recording system. Among other requirements, a licensed premise must
have cameras that continuously record, 24 hours a day, seven days a week: (a) in all areas where mature cannabis plants, usable cannabis,
CBD concentrates, extracts or products may be present on the licensed premises; and (b) all points of ingress and egress to and from
areas where mature cannabis plants, usable cannabis, CBD concentrates, extracts or products are present. A licensee must keep all surveillance
recordings for a minimum of 90 calendar days and have the surveillance room or surveillance area with limited access.



Oregon
Inspections



All
cannabis licensees may be subject to safety inspections of licensed premises by state or local government officials to determine compliance
with state or local health and safety laws. The OLCC also may conduct an inspection at any time to ensure that a registrant, licensee
or permittee is in compliance with Oregon state laws. A licensee, licensee representative, or permittee must cooperate with the OLCC
during an inspection. If licensee, licensee representative or permittee fails to permit the OLCC to conduct an inspection the OLCC may
seek an investigative subpoena to inspect the premises and gather books, payrolls, accounts, papers, documents or records.



U.S.
Attorney Statements in Oregon



To
the knowledge of management of Stem, other than as disclosed in this Document, there have not been any statements or guidance made by
federal authorities or prosecutors regarding the risk of enforcement action in Oregon. See “Risk Factors”.



Compliance
with Applicable State Law in the United States



The
Company is classified as having both a direct and indirect involvement in the U.S. cannabis industry and is in compliance with applicable
state law, licensing requirements and the regulatory framework enacted by each U.S. state in which it operates. The Company is not subject
to any citations or notices of violation with applicable licensing requirements and the regulatory framework enacted by each applicable
U.S. state which may have an impact on its licenses, business activities or operations.



The
Company has in place a detailed compliance program, which oversees, maintains, and implements the compliance program and personnel. In
addition to the Company’s robust internal legal and compliance departments, the Company has state and local regulatory/compliance
counsel engaged in every jurisdiction in which it operates.



The
Company’s compliance department oversees training for all employees, including on the following topics: (i) compliance with state
and local laws; (ii) safe cannabis use; (iii) dispensing procedures; (iv) security and safety policies and procedures; (v) inventory
control; (vi) quality control; and (vii) transportation procedures. The Company’s compliance department includes the Chief Executive
Officer and Chief Operating Officer of the Company, as well as the Company’s managers in charge of cultivation, branding and sales.



The
Company monitors all compliance notifications from the regulators and inspectors in each market, timely resolving any issues identified.
The Company keeps records of all compliance notifications received from the state regulators or inspectors and how and when the issue
was resolved.





17









To
ensure compliance with the U.S. federal laws and the regulatory framework enacted by each U.S. state in which the Company operates, the
Company adheres to the following procedures and controls:



| | ● | The
    Company ensures the operations of its subsidiaries are compliant with all licensing requirements that are set forth by applicable
    state, county or municipal law by retaining appropriately experienced legal counsel;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | ● | The
    Company ensures that its activities adhere to the scope of the licensing obtained; and                                                                                                                                                                                                                               
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                              
| | ● | The
    Company only works through licensed operators, which must pass a range of requirements, adhere to strict business practice standards
    and be subjected to strict regulatory oversight whereby sufficient checks and balances ensure that no revenue is distributed to criminal
    enterprises, gangs and cartels.



The
Company will continue to monitor compliance on an ongoing basis in accordance with its compliance program and standard operating procedures.
While the Company’s operations are in full compliance with all applicable state laws, regulations and licensing requirements, such
activities remain illegal under United States federal law. For the reasons described above and the risks further described under “Risk
Factors” in this Document, there are significant risks associated with the business of the Company. Readers are strongly encouraged
to carefully read all of the risk factors described under “Risk Factors” in this Document



Ability
to Access Public and Private Capital



While
the Company is not able to obtain traditional bank financing in the U.S. or financing from other U.S. federally regulated entities, the
Company currently has access to equity financing through the private markets in Canada and the U.S. Since the use of cannabis is illegal
under U.S. federal law, and in light of concerns in the banking industry regarding money laundering and other federal financial crime
related to cannabis, U.S. banks have been reluctant to accept deposit funds from businesses involved with the cannabis industry. Consequently,
businesses involved in the cannabis industry often have difficulty finding a bank willing to accept its business. Likewise, cannabis
businesses have limited access, if any, to credit card processing services. As a result, cannabis businesses in the U.S. are largely
cash-based. This complicates the implementation of financial controls and increases security issues.



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



History
of the Business



The
Company was formed to purchase, lease, and improve certain real estate properties (the “Properties”), initially in the State
of Oregon, which are or will be utilized as either state-licensed cannabis selling retail establishments or state-licensed cannabis growing
and processing facilities. The Company previously operated primarily as a real estate holding company, and now engages in direct operations
with respect to its properties and activities other than the leasing of properties, funding of capital improvements, and administration
of its leases and provision of financing to certain lessees.



The
initial business of the Company was detailed in a multiparty agreement dated as of August 4, 2016, as revised on October 24, 2016 (“Multiparty
Agreement”), by and among the Company and the following entities, which are affiliates of the founders of the Company: Oregon Acquisitions,
JV LLC, Gated Oregon Holdings LLC, Kind Care Holdings, LLC, and Never Again Real Estate, LLC.



The
Multiparty Agreement contemplated that the initial Properties owned by the Company and identified in the Multiparty Agreement (and as
further described below) would be leased by the Company to subsidiaries of OpCo Holdings, Inc. (“OpCo”). Opco is a company
formed in 2016 by the Company’s founders and their affiliates for the purpose of operating multiple cannabis-related businesses
initially in the State of Oregon, and the Company’s founders and their affiliated entities directly and indirectly collectively
own approximately 24.06% of the outstanding stock of Opco.



18







The
following is an overview of acquisitions completed by the Company:



Investments
in Subsidiaries





In April 2018, the Company received a 37.5% interest
in NVD RE Corp. (“NVD”) upon its issuance to NVD of a commitment to contribute $1.275 million to NVD, which included the purchase
price of $600,000 and an additional commitment to pay tenant improvement costs of $675,000. As of September 30, 2019, the Company paid
$600,000 in cash for the real estate and not only fully funded its commitment but invested an additional $377,000 in capital over and
above its original obligation. NVD used the funds provided to date by the Company to construct a cannabis indoor grow building and processing
plant located near Las Vegas, Nevada and to continue the buildout of the property. The Company has no further commitment to fund the entity
beyond its initial equity purchase commitment. NVD leases its facilities to YMY Ventures, LLC. In the fiscal year ended September 30,
2019, NVD obtained $300,000 in proceeds from a mortgage on its property. The funds from this mortgage were advanced to the Company. As
of September 30, 2022, this obligation was paid in its entirety, and $400,000 in additional proceeds were received on new mortgage. In
May 2020, the Company acquired an additional 26.25% interest in NVD by issuing 386,035 common shares at par value of $0.001 which resulted
in a total investment of 63.75%.



In September 2018, the Company entered into an agreement
to acquire 50% of the membership interest of YMY Ventures LLC (“YMY”). YMY is a startup operation located near Las Vegas,
Nevada and owns licenses for the production and sale of cannabis. The purchase price for the 50% interest was $750,000, with the first
$375,000 paid into escrow upon signing, with the final $375,000 due upon closing, which under the agreement occurs when the license is
transferred by the Nevada Department of Taxation and receipt of approval in transfer of ownership by the Division of Public and Behavioral
Health of the City of North Las Vegas. As of June 30, 2019, the Company had funded the $375,000 into escrow and had provided the joint
venture with additional funds primarily in the form of payments for work performed to acquire four licenses from the Nevada Department
of Taxation in the amount of approximately $690,238. As of February 28, 2019, the Nevada Department of Taxation approved the change of
ownership for four medical and recreational cultivation and production licenses held by YMY Ventures now owned by Stem Holdings, Inc.
Pursuant to the agreement, the escrowed amount of $375,000 was released and an additional payment of $67,500 was issued in August 2019.
The balance of $307,500 was being held and negotiated with the partners due to the additional funds over and above the original obligation
to provide tenant improvements of $650,000. As of September 30, 2022, the balance has been paid in full.





On
October 8, 2018, the Company and Yerba Buena Oregon, LLC (“Yerba”) entered into an Asset Purchase Agreement which provided
for the Company to purchase certain assets and assume certain liabilities of Yerba. Yerba is a wholesale producer of recreational marijuana
flower, by-product and pre-roll product in the state of Oregon.



On
June 24, 2019, Stem received regulatory approval from the Oregon Liquor Control Commission and closed the previously announced acquisition
of Yerba. Yerba operates an award-winning state-of-the-art cultivation facility equipped with an in-house genetics program and a cannabis
library consisting of a few hundred strains.





19









Tilstar
Medical, LLC



In April 2019, the Company entered into an agreement
to acquire 48% of the membership interest of Tilstar Medical, LLC (“TIL”). TIL is a startup operation located in Laurel, Maryland
and owns a project management company which assists in procuring licenses for the production and sale of cannabis. The purchase price
for the 48% interest was $550,000 to capitalize TIL which under the operating agreement occurs upon the execution of the agreement. As
of September 30, 2019, the Company had funded the $550,000 and accounted for its investment using the equity method of accounting. The
Company was not made aware at time of its investment in the type and magnitude of expenses that would be funded with its investment capital
and is currently in the process of renegotiating the terms of the operating agreement. During the year ended September 30, 2019, Tilstar
Medical along with its partner, Stem Holdings, Inc. received a letter from the Maryland Medical Cannabis commission with notification
that we received stage one pre-approval for a processor license. The Companies application ranked amongst the top nine highest scoring
applications for a medical cannabis processor license. Final awards will be issued during calendar year 2021. During the years ended September
30, 2022 and 2021, the Company recognized minimal losses on investments related to TIL. During the year ended September 30, 2022, the
Company recorded impairment expense of approximately $288,000 related to its investment in TIL.





Community
Growth Partners, INC



On
January 6, 2020, the Company issued a convertible promissory note to Community Growth Partners Holdings, Inc., (“CGS”) which
will act as a line of credit. Subject to the terms and conditions of the note, CGS promises to pay the Company all of the outstanding
principal together with interest on the unpaid principal balance upon the date that is twelve months after the effective date and shall
be payable as follows: (a)The Company agrees to make several loans to CGS from time to time upon request of CGS in amounts not to exceed
the principal sum of $2,000,000, (b) Payment of principal and interest shall be immediately available funds, (c) This note may be prepaid
in whole or in part at any time without premium or penalty. Any partial prepayment shall be applied against the principal amount outstanding,
(d) The unpaid principal amount outstanding under this note shall bear interest commencing upon the first advance at the rate of 10%
per annum through the maturity date, calculated on the basis of a 365-day, until the entire indebtedness is fully paid, Upon the closing
of a $2,000,000 financing by the Company, all of the principal and interest shall automatically convert into equity shares of CGS at
the price obtained by the qualified financing. As of September 30, 2020, a portion of the note was converted into 7% equity. In March
2021, the balance of a note receivable was converted into an additional 6% equity leaving an equity investment of 13%. During the year ended September
30, 2022, pursuant to a secondary stock purchase agreement, the Company sold its equity investment in CGS in consideration for $1.65
million in cash.



Seven
Leaf Ventures Corp. (“7LV”)



On
March 6, 2020, the Company closed the acquisition of Seven Leaf Ventures Corp. (“7LV”), a private Alberta, Canada corporation,
and its subsidiaries, pursuant to the terms of a share purchase agreement dated March 6, 2020. 7LV owns Foothills Health and Wellness,
a medical dispensary, in the greater Sacramento, California area (the “Sacramento Dispensary”). Company management believes
that the Sacramento Dispensary is expected to drive synergies with Stem’s premium branded dispensaries in Eugene and Portland,
OR.



20







Company
purchase of Opco businesses



As
long as the Company has fully satisfied all of its obligations and milestones pursuant to the Multiparty Agreement, the Company had the
obligation to acquire the business operations of Opco Holdings and its subsidiaries, and Oregon Acquisitions, Gated Oregon and Kind Care
(the “Operating Companies”) has the obligation to sell such operations to the Company, within a reasonable time after the
Company receives a legal opinion that the operation of the Opco marijuana businesses in the State of Oregon by Stem will not violate
any federal or state laws. On August 12, 2019, the parties agreed to waive this condition with the Company proceeding with the purchase
of the operating companies.



Pursuant
to the terms of a merger agreement between the parties, Stem acquired Opco Holdings and its subsidiaries, and Oregon Acquisitions, Gated
Oregon and Kind Care for a deemed aggregate purchase price of 12.5 million shares of the Company’s common stock. The purchase price
was satisfied by releasing the shares which were being held in escrow, to the beneficial owners of above-mentioned entities. As previously
disclosed, certain beneficial owners of these entities are also directors, officers and/or shareholders of Stem. The transaction was
subject to receipt of all necessary regulatory approvals from government entities of the State of Oregon. Definitive agreements have
been executed and filed with the regulatory agency. On September 4, 2020, the Company received all of the necessary regulatory approvals
from government entities of the State of Oregon and, pursuant to the Merger Agreements, the transaction was consummated on that date.



NVD RE Corp.



In April 2018, the Company received a 37.5% interest
in NVD RE Corp. (“NVD”) upon its issuance to NVD of a commitment to contribute $1.275 million to NVD, which included the purchase
price of $600,000 and an additional commitment to pay tenant improvement costs of $675,000. As of September 30, 2019, the Company paid
$600,000 in cash for the real estate and not only fully funded its commitment but invested an additional $377,000 in capital over and
above its original obligation. NVD used the funds provided to date by the Company to construct a cannabis indoor grow building and processing
plant located near Las Vegas, Nevada and to continue the buildout of the property. The Company has no further commitment to fund the entity
beyond its initial equity purchase commitment. NVD leases its facilities to YMY Ventures, LLC. In the fiscal year ended September 30,
2019, NVD obtained $300,000 in proceeds from a mortgage on its property. The funds from this mortgage were advanced to the Company. As
of September 30, 2022, this obligation was paid in its entirety, and $400,000 in additional proceeds were received on new mortgage. In
May 2020, the Company acquired an additional 26.25% interest in NVD by issuing 386,035 common shares at par value of $0.001 which resulted
in a total investment of 63.75%.



Michigan RE 1



On January 4, 2021, the Company entered into a Securities
Purchase Agreement (“SPA”) with Michigan RE 1, Inc. (“MRE1”) pursuant to a private placement offering of up to
an aggregate amount of $510 comprising up to 510 shares of MRE1’s common stock which represents 51% ownership by the Company. On
January 5, 2021, the Company was party to an Asset Purchase Agreement between Leoni Wellness, LLC (“Seller”) and Organic Guyz,
LLC (“Purchaser”) whereas the Seller is engaged in the recreational cannabis business and the Purchaser desires to purchase
the local municipal license to operate an adult use retailer in the City of Kalamazoo, Michigan. The purchase price to be paid by the
Purchaser is $400,000. A non-refundable deposit of $250,000, except in the event of a material breach of the SPA, is due within three
days of the executed SPA. The deposit will be acknowledged by an execution of a joint escrow agreement. At closing the Purchaser will
pay $250,000 to the Seller by cashiers check or wire transfer. The remaining $150,000 shall be paid by the Purchaser to the Seller in
accordance with a promissory note to be executed at closing. The promissory note shall be paid in full on the earlier of the date the
Purchaser purchases the real property located at 3928 Portage Street, Kalamazoo, Michigan or eighteen months from the closing date. The
promissory note shall be secured by an escrow agent whereby three hundred thousand (300,000) shares (“Shares”) of Stem Holdings
shall be held in the benefit of Seller and a Collateral Assignment of Licenses and Permits whereby upon default on the promissory note,
the Purchaser shall assign the marijuana business permit back to the Seller. Upon the maturity date of the promissory note, in the event
that the borrower has not paid the principal balance of the note in full, Seller shall have the option to receive the Shares as payment
or $150,000 by wire transfer. As of September 30, 2021, the buildout of the Michigan retail dispensary has begun, however the project
has been delayed due to Department of Zoning and Planning coding issues. Subsequent to further investigation, due to related religious
reasons, the Department of Zoning and Planning will not issue a license, therefore, impairing this investment.



Kaya Holdings, Corp.



On April 13, 2021, the Company executed an Investors’
Rights Agreement in conjunction with a Subscription Agreement with Kaya Holdings, Corp. The Company purchased 2,875,000 shares of Class
B common stock of Kaya Holdings, Corp for a total investment of $230,000. In addition to the purchased Class B shares, the Company received
500,000 founder Class B shares resulting in a total of 3,375,000 Class B shares. For the year ended September 30, 2022, the Company, pursuant
to a securities purchase agreement sold all of these shares to a third party for $200,000, incurring a loss of $30,000.



21







Principal
Products and Markets



The
Company’s principal operations have historically related to the leasing of properties, funding of capital, tenant improvements,
and administration of its leases and provision of financing to certain lessees, engaged in the production and sale of cannabis. While
the Company originally operated primarily as a real estate holding company, it is now engaged in direct operations, primarily the production
and sale of cannabis in states where it is legal to do so, with respect to its properties and activities other than the leasing of properties,
funding of capital improvements and administration of its leases and provision of financing to certain lessees. Historically, the Company’s
principal market has been in the State of Oregon, but it is now engaged in expansion into other markets where sale of marijuana is legal,
including California, and Nevada.



Production
and Sales



The
Company’s business requires that it possess or be in a position to access specialized knowledge and expertise regarding the state-licensed
cannabis industry and those persons and entities who are involved in the industry. The Company believes that its management has such
specialized expertise and experience, and the Company retains legal counsel that has recognized expertise in the industry. The Company
does not believe that any aspect of its business is either: (i) cyclical or seasonal; or (ii) dependent on any particular franchise or
license or other agreement to use a patent, formula, trade secret, process or trade name. The Company has not identified any specific
environmental protection issues which will affect its business. The Company does not own significant identifiable intangible properties
outside of its cannabis licenses.



The
Company does not believe that its operations are dependent on any factors within the general economy. However, any material changes in
either U.S. federal law enforcement priorities or the law of the State of California, Oregon, and Nevada, or other states where the Company
operates affecting the cultivation and sale of cannabis could have a material impact on the Company’s business, particularly since
the growth, marketing, sale, and use of marijuana is illegal under federal law.



Company
Funding



Private
Placement Transactions



The
Company has sold shares of its common stock in private placement transactions under the exemption provided by Section 4(a)(2) of the
Securities Act of 1933, as amended (the “Securities Act”), and Regulation D promulgated thereunder and certain exemptions
of the laws of the jurisdictions where any offering is made. In the fiscal years ended September 30, 2022, and 2021, the Company raised
gross proceeds of approximately $285,000 and $2,695,000, respectively.



The
securities issued in the above-mentioned transactions were issued in connection with private placements exempt from the registration
requirements of Section 5 of the Securities Act of 1933, as amended, pursuant to the terms of Section 4(2) of that Act and Rule 506 of
Regulation D. Investors who acquired shares of our common stock in the foregoing private placement transactions were all accredited investors
and were required to complete, execute and deliver a subscription agreement and related documentation, which included customary representations
and warranties, certain covenants and restrictions and indemnification provisions.



Promissory
Note



In January 2020, the Company issued two promissory
notes with a principal balance of $500,000 to accredited investors (the “Note Holders”). The note matures in October 2020
and has an annual rate of interest of 12%. In connection with the issuance of the promissory note, the Company issued the Note Holders
100,000 common stock purchase warrants with a five-year term from the issuance date, $0.85 per. As of July 2020, in consideration of the
warrants being amended to $0.45 per share with an extended the term from five to a ten-year term, the maturity date has been extended
to December 13, 2020. As of September 30, 2021, the obligation outstanding is $425,000 and $358,996, net of debt discount of $66,004.
As of September 30, 2022, the obligation outstanding is $250,000 and the balance is $200,548, net of debt discount of $49,452. The Company
was notified that the maturity dates on these notes have been extended for the near-term.





22







In April 2022, the Company has completed a private
placement of a $500,000 unsecured promissory note and 500,000 common share purchase warrants to an arm’s length lender. The Note
becomes due and payable in three months, subject to extension by the Company for an additional three months upon payment of a $5,000 extension
fee to the lender. The Note bears interest at rate of 10% per annum payable at maturity. The Company may prepay the outstanding principal
amount of the obligation together with all accrued and unpaid interest, without penalty, at any time prior to the maturity date of the
note. Each warrant entitles the holder thereof to purchase one common share at a price of 0.07 for a period of thirty-six (36) months
after closing.  As of September 30, 2022, the Company made a payment of $250,000 leaving a balance outstanding of $250,000. A subsequent
payment of $250,000 has been tendered satisfying the entire obligation.





Convertible
Promissory Notes and Mortgages



Finance
liability



In
November 2020, the Company executed a mortgage payable on property located in Mulino, Oregon to acquire additional funds. The mortgage
bears interest at 15% per annum. The entire unpaid balance is due November 2022, the maturity date of the mortgage, and was secured by
the underlying property. The note was cross guaranteed by the former CEO and Director of the Company. On November 23, 2020, the Company
executed a real estate purchase agreement related to the Mulino Property which included the sale of the property and payoff of the mortgage.
Additionally, the Company entered into a lease agreement whereas the amount of $13,750 required as a rent payment through the lease is
being recorded as interest expense and the Company recorded a finance liability of $1,094,989 related to the lease under the guidance
of ASC 842 as a failed sale and leaseback transaction. During the year ended September 30, 2022, the Company executed a sale lease back agreement with the
Company’s Mulino property, and entered into a 15-year lease with an unrelated third party located in Englewood, CO. The lease requires
the Company to pay a starting base rental fee of $29,167 plus additional estimated triple net charges per month including real estate
taxes in which the base rental fee escalates each year by approximately 2%. All taxes (including reconciling real estate taxes), maintenance,
and utilities are included and paid monthly. This transaction resulted in net proceeds to the Company in the amount of $1.8 million.



Long-term
debt, mortgages



In January 2020, the Company refinanced a mortgage
payable on property located in Oregon to acquire additional funds. The mortgage bears interest at 15% per annum. Monthly interest only
payments began February 1, 2020, payments will continue each month thereafter until paid. The entire unpaid balance was due on January
31, 2022, the maturity date of the mortgage, and is secured by the underlying property. The mortgage terms do not allow participation
by the lender in either the appreciation in the fair value of the mortgaged real estate project or the results of operations of the mortgaged
real estate project. The note has been cross guaranteed by the former CEO and Director of the Company. As of September 30, 2022, the Company
paid off the existing debt of $400,000 and procured another mortgage in the amount of $450,000. This obligation has no personal guarantee;
however, a corporate guarantee has been perfected. The new interest is 12% on a three-year term.





In
March 2020, the Company executed a $400,000 mortgage payable on property located in Oregon to acquire additional funds. The mortgage
bears interest at 11.55% per annum. Monthly interest only payments began May 1, 2020, payments will continue each month thereafter until
paid. The entire unpaid balance was due on April 1, 2022, the maturity date of the mortgage, and is secured by the underlying property.
The Company paid costs of approximately $38,000 to close on the mortgage. The mortgage terms do not allow participation by the lender
in either the appreciation in the fair value of the mortgaged real estate project or the results of operations of the mortgaged real
estate project. The note has been cross guaranteed by the former CEO and Director of the Company. As of September 30, 2022, the obligation
outstanding is $400,000. Subsequently, the Company has exercised its right to extend the maturity date of the notes which is now on April
1, 2023.



In
March 2020, the Company refinanced a mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears interest
at 15% per annum. Monthly interest only payments began April 1, 2020, payments will continue each month thereafter until paid. The entire
unpaid balance was due on March 31, 2022, the maturity date of the mortgage, and is secured by the underlying property. The mortgage
terms do not allow participation by the lender in either the appreciation in the fair value of the mortgaged real estate project or the
results of operations of the mortgaged real estate project. The note has been cross guaranteed by the former CEO and Director of the
Company. The Company paid off the existing debt of $700,000 and procured another mortgage in the amount of $775,000. This obligation
has no personal guarantee; however, a corporate guarantee has been perfected. The new interest is 12% on a two-year term.



23







In
July 2020, the Company executed a mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears interest
at 14% per annum. Monthly interest only payments began August 1, 2020, payments will continue each month thereafter until paid. The entire
unpaid balance is due on July 31, 2023, the maturity date of the mortgage, and is secured by the underlying property. The mortgage terms
do not allow participation by the lender in either the appreciation in the fair value of the mortgaged real estate project or the results
of operations of the mortgaged real estate project. The note has been cross guaranteed by the former CEO and Director of the Company.
The obligation outstanding is $200,000.



In
April 2018, the Company received a 37.5% interest in NVD RE Corp. (“NVD”) upon its issuance to NVD of a commitment to contribute
$1.275 million to NVD which included the purchase price of $600,000 and an additional commitment to pay tenant improvement costs of $675,000.
In the year ended September 30, 2019, NVD obtained $300,000 in proceeds from a mortgage on its property. The funds from this mortgage
were advanced to the Company. The advance is undocumented, non-interest bearing and due on demand. As of September 30, 2019, the balance
due totals $300,000. In August 2020, the Company refinanced this obligation and paid the $300,000 balance. The refinanced mortgage term
is 36 months and includes and interest rate of 14% and monthly interest only payments of $4,667. The balance due totals $400,000.



The following is a table of the 5-year runoff of our
long-term debt as of September 30:





|2023                                    |  | $ | 1,000  |  
|--------------------------------------- |  | - | ------ | -
|2024                                    |  |   | 775    |  
|2025                                    |  |   | 450    |  
|2026                                    |  |   | -      |  
|2027                                    |  |   | -      |  
|Thereafter                              |  |   | -      |  
|                                        |  |   | 2,225  |  
|Less current portion of long-term debt: |  |   | (1,000 | )
|                                        |  | $ | 1,225  |  





CD
Special Warrant Offering



On
December 27, 2018, the Company entered into an Agency Agreement (the “Agency Agreement”) for a private offering of up to
10,000 convertible debenture special warrants of the Company (the “CD Special Warrants”) for aggregate gross proceeds of
up to CDN$10,000,000 (the “Offering”). The net proceeds of the Offering were used for expansion initiatives and general corporate
purposes. The Company’s functional currency is U.S. dollars.



In
December 2018 and January 2019, the Company issued 3,121 CD Special Warrants in the first closing of the Offering, at a price of CDN
$1,000 per CD Special Warrant, and received aggregate gross proceeds of CDN $3.1 million or $2.3 million USD. In connection with this
offering, the Company issued the agents in such offering 52,430 convertible debenture special warrants (the “Broker CD Special
Warrants”) as partial satisfaction of a selling commission.



On
March 14, 2019, the Company issued 962 CD Special Warrants in the second and final closing of the Offering, at a price of CDN $1,000
per CD Special Warrant, and received aggregate gross proceeds of CDN $1.0 million or $0.7 million USD. In connection with this offering,
the Company issued the agents in such offering 5,600 convertible debenture special warrants (the “Broker CD Special Warrants”)
as partial satisfaction of a selling commission.



The
total aggregate proceeds of the Offering totaled $4.1 million CDN or $3.1 million USD.



Each
CD Special Warrant will be exchanged (with no further action on the part of the holder thereof and for no further consideration) for
one convertible debenture unit of the Company (a “Convertible Debenture Unit”), on the earlier of: (i) the third business
day after the date on which both (A) a receipt (the “Receipt”) for a (final) document (the “Qualification Document”)
qualifying the distribution of the Convertible Debentures (as defined below) and Warrants (as defined below) issuable upon exercise of
the CD Special Warrants has been issued by the applicable securities regulatory authorities in the Canadian jurisdictions in which purchasers
of the CD Special Warrants are resident (the “Canadian Jurisdictions”), and (B) a registration statement (the “Registration
Statement”) registering the resale of the common shares underlying the Convertible Debentures and Warrants has been declared effective
by the U.S. Securities and Exchange Commission (the “Registration”); and (ii) the date that is six months following the closing
of the Offering. The Company has also provided certain registration rights to purchasers of the CD Special Warrants. The CD Special Warrants
were exchanged for Convertible Debenture Units after six months as U.S. and Canadian registrations were not effective at that time.



24







Each
Convertible Debenture Unit is comprised of CDN $1,000 principal amount 8.0% senior unsecured convertible debenture (each, a “Convertible
Debenture”) of the Company and 167 common share purchase warrants of the Company (each, a “Warrant”). Each Warrant
entitles the holder to purchase one common share of the Company (each, a “Warrant Share”) at an exercise price of CDN $3.90
per Warrant Share for a period of 24 months following the closing of the Offering.



The
Company has agreed to use its best efforts to obtain the Receipt and Registration within six months following the closing of the Offering.
If the Receipt and Registration have not been obtained on or before 5:00 p.m. (PST) on the date that is 120 days following the closing
of the Offering, each unexercised CD Special Warrant will thereafter entitle the holder thereof to receive, upon the exercise thereof
and at no additional cost, 1.05 Convertible Debenture Units per CD Special Warrant (instead of 1.0 Convertible Debenture Unit per CD
Special Warrant). Until the Receipt and Registration have been obtained, securities issued in connection with the Offering (including
any underlying securities issued upon conversion or exercise thereof) will be subject to a six (6)-month hold period from the date of
issue. Since the CD Special Warrants were exchanged for Convertible Debenture Units after six (6) months as U.S. and Canadian registrations
were not effective at that time, the holders received 1.05 Convertible Debenture Units per CD Special Warrant.



The
brokered portion of the Offering (CDN $2.5 million, $1.9 million USD) was completed by a syndicate of agents (collectively, the “Agents”).
The Company paid the Agents a cash commission equal to 7.0% of the gross proceeds raised in the brokered portion of the Offering. As
additional consideration, the Company issued the Agents such number of non-transferable broker convertible debenture special warrants
(the “Broker CD Special Warrants”) as is equal to 7.0% of the number of CD Special Warrants sold under the brokered portion
of the Offering. Each Broker CD Special Warrant shall be exchanged, on the same terms as the CD Special Warrants, into broker warrants
of the Company (the “Broker Warrants”). Each Broker Warrant entitles the holder to acquire one Convertible Debenture Unit
at an exercise price of CDN $1,000, until the date that is 24 months from the closing date of the Offering. The distribution of the Broker
Warrants issuable upon the exchange of the Broker CD Special Warrants shall also be qualified under the Qualification Document and the
resale of the common shares underlying the Broker Warrants will be registered under the Registration Statement. The Company also paid
the lead agent a commission noted above of CDN$157,290, corporate finance fee equal to CDN $50,000 in cash and as to $50,000 in common
shares of the Company at a price per share of CDN$3.00 plus additional expenses of CDN$20,000. In addition, the Company paid the trustees
legal fees of CDN$181,365. In total the Company approx. USD $0.32 million in fees and expenses associated with the offering.



The
issuance of the securities was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended
(the “Securities Act”), for the offer and sale of securities not involving a public offering, Regulation D promulgated under
the Securities Act, Regulation S, in Canada to “accredited investors” within the meaning of National Instrument 45106 and
other exempt purchasers in each province of Canada, except Quebec, and/or outside Canada and the United States on a basis which does
not require the qualification or registration. The securities being offered have not been registered under the Securities Act and may
not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons absent registration or an applicable
exemption from the registration requirements.



The
Convertible Debenture features contain the following embedded derivatives:



| | ● | Conversion
    Option - The Convertible Debentures provide the holder the right to convert all or any portion of the outstanding principal into
    common shares of the Company at a conversion price of C$3.00 such that 333.33 common shares are issued for each C$1,000 of principal
    of Convertible Debentures converted.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ● | Contingent
    Put - Upon an Event of Default, the Convertible Debentures settle for cash at the outstanding principal and interest amount (at discretion
    of the Indenture Trustee or upon request of Holders of 25% or more of principal of the Convertible Debentures).                                                    
| | ● | Contingent
    Put - Upon a Change in Control, the Convertible Debentures settle for cash at the outstanding amount and principal and interest *
    105% (where Holder accepts a Change of Control Offer).                                                                                                                      



25







The
conversion option, the contingent put feature upon an Event of Default, and the contingent put feature upon a Change in Control should
be bifurcated and recognized collectively as a compound embedded derivative at fair value at inception and at each quarterly reporting
period.



A
five percent penalty assessed for failure to timely file a registration statement to register the stock underlying the CD special warrants.



The
Company valued the warrants granted using the Black-Scholes pricing model and determined that the value at grant date was approximately
$424,000 USD (this includes the warrants issued as part of the penalty for failure to timely file the required registration statement
under the indenture agreement). The significant assumptions used in the valuation are as follows:



|Fair value of underlying common shares |  | $ | 1.78 to $2.10 |  
|-------------------------------------- |  | - | ------------- | -
|Exercise price (converted to USD)      |  | $ | 2.93          |  
|Dividend yield                         |  |   | -             |  
|Historical volatility                  |  |   | 85            | %
|Risk free interest rate                |  |   | 1.4% to 1.9   | %



The
warrants are not indexed to the Company’s own stock under ASC 815, Derivatives and Hedging. As such, the warrants do not meet the
scope exception in ASC 815-10-15-74(a) to derivative accounting and therefore were accounted for as a liability in accordance with the
guidance in ASC 815. The warrant liability was recorded at the date of grant at fair value with subsequent changes in fair value recognized
in earnings each reporting period.



In
April 2020, the Company received approval of the holders Warrant holders of the warrants and the holders debenture holders of the Convertible
Debentures to reprice the convertible securities issued in connection with the Company’s special warrant financing, which closed
on December 27, 2018, and June 14, 2019. The share purchase warrants of the Company issued in connection with the financing will be repriced
to C$1.50 per Common Share and the convertible debentures of the Company issued in connection with the financing will be repriced to
C$1.15 per common share. Additionally, the Debenture holders have approved the following amendments to the terms of the convertible debentures:
(i) an extension to the maturity date of the convertible debentures to three years from the date of issuance; and (ii) an amendment to
permit the Company to force the conversion of the principal amount of the then outstanding convertible debentures and any accrued and
unpaid interest thereof at the new conversion price on not less than June days’ prior written notice if the closing trading price
of the shares of common stock of the Company’s common shares exceeds C$1.90 for a period of 10 consecutive trading days on the
CSE. The Warrant holders have also approved the inclusion of an early acceleration feature in accordance with the policies of the Canadian
Securities Exchange, permitting the Company to accelerate the expiry date of the warrants should the closing trading price of the Common
Shares exceed C$1.87 for a period of 10 consecutive trading days on the CSE. As of September 30, 2021, the convertible debt related to
the above debentures is $2.9 million.



26







In
June 2022, the Company received approval of the holders Warrant holders of the warrants and the holders debenture holders of the Convertible
Debentures to reprice the convertible securities issued in connection with the Company’s special warrant financing, which initially
closed on December 27, 2018, and June 14, 2019. The share purchase warrants of the Company issued in connection with the financing will
be repriced to C$0.20 per Common Share and the convertible debentures of the Company issued in connection with the financing will be
repriced to C$0.10 per common share. Additionally, the Debenture holders have approved the following amendments to the terms of the convertible
debentures: (i) an extension to the maturity date of the convertible debentures to three years ; and (ii) an amendment to permit the
Company to force the conversion of the principal amount of the then outstanding convertible debentures and any accrued and unpaid interest
thereof at the new conversion price on not less than 30 days’ prior written notice if the closing trading price of the shares of
common stock of the Company’s common shares exceeds C$0.80 for a period of 10 consecutive trading days on the CSE, (iii) the payment
of 5% of the principle amount. Share purchase warrants of the Company were issued in connection this repricing at 167 common share warrants
for each $1,000 debenture unit held. A debt discount of $1.2 million was recorded and will be amortized over the remaining life of the
convertible debt, and as part of the modification of convertible debt. This transaction was accounted for as extinguishment of debt which
resulted in a gain of $803 thousand. As of September 30, 2022, the convertible debt related to the above debentures was $1.5 million
and $2.9 million, net of a debt discount of $1.1 million and $0, respectively.



The
table below shows the warrant liability and embedded derivative liability recorded in connection with the Canaccord convertible notes
and the subsequent fair value measurement for the period ended September 30, 2022, in USD, (in thousands):



|                                 |  | Warrant Liability |   |  | Derivative Liability |  
|-------------------------------- |  | ----------------- | - |  | -------------------- | -
|Balance as of September 30, 2021 |  | $                 | - |  |                      | $
|Modification of debentures       |  |                   | - |  |                      |  
|Change in fair value             |  |                   | - |  |                      |  
|Balance as of September 30, 2022 |  | $                 | - |  |                      | $



Merger
with Driven Deliveries, Inc.



On
October 13, 2020, Stem Holdings, Inc. (“STEM”), Driven Deliveries, Inc. (“DRVD”) and Stem Driven Acquisition,
Inc. (“SDA”) and entered into an Agreement and Plan of Merger (the “Merger Agreement”) wherein DRVD would
merge with and into SDA, with DRVD being the surviving entity and, following closing of the merger transaction, would become a wholly-owned
subsidiary of STEM. Pursuant to the Merger Agreement, STEM exchanged one newly-issued share of STEM common stock for each issued and
outstanding share of DRVD. The merger transaction closed on December 29, 2020 upon satisfaction of all terms and conditions of the Merger
Agreement and completion of due diligence by all entities.



STEM
is a vertically-integrated cannabis and hemp branded products company with state-of-the-art cultivation, processing, extraction, retail,
and distribution operations throughout the United States. DRVD is an e-commerce and DaaS (delivery-as-a-service) provider with proprietary
logistics and omnichannel UX/CX technology. At the closing, STEM would be re-named Driven by Stem and would maintain its corporate
headquarters in Boca Raton, Florida. Management of both DRVD and STEM believe that following completion of the merger transaction, Driven
by Stem will be the first vertically-integrated cannabis company with a DaaS platform, which will meet the needs of all cannabis
consumers in markets served.



Presently,
STEM is traded on the OTCQX market and Canadian Stock Exchange under the symbols STMH and STEM, respectively. DRVD is presently traded
on the OTCQB market. At the effective date of the closing of the merger transaction, all shares of DRVD will be converted into the right
to receive shares of STEM Common Stock (the “Merger Consideration”). The Merger Agreement includes interim covenant
provisions applicable prior to the earlier of the (i) closing of the Merger or (ii) termination of the Merger Agreement that, among other
things, restrict our ability to take certain actions with respect to the Company’s organizational documents, including but not
limited to amending the Certificate of Incorporation.



27







Under
the terms of the Merger Agreement, DRVD shareholders received (based on closing share prices as of October 13, 2020) an aggregate purchase
price of approximately US$27.5M. Based on the October 13, 2020 closing prices of both DRVD and STEM, Driven by Stem would had a combined
market capitalization of approximately US$54 million, based on to closing market price of the Stem Shares and Driven Shares on the OTCQX
and the OTCQB, respectively, on October 13, 2020 and 65M Stem Shares and 75M Driven Shares being outstanding on October 13, 2020.



The
intent of the merger was to integrate DRVD’s delivery capability and technology in every state in which STEM currently operates.
During the later part of 2021, it became obvious to the Company’s management and Board of Directors that the business model of
the combined STEM and DRVD entities was not working and, in fact, was generating substantial ongoing losses which could not be ameliorated.
Within any reasonable time frame.



As
a result, on December 17, 2021, pursuant to a Share Exchange Agreement, the Company sold Driven Deliveries and its subsidiaries to the
shareholders of Budee, Inc. in a transaction which STEM fully divested its interest in Driven Deliveries and its subsidiaries. Included
in the terms of the Share Exchange Agreement, the shareholders of Budee, and a prior officer of Driven Deliveries returned approximately
11.5 million shares of the Company’s common stock and assumed approximately $7.1 million of the Company’s liabilities. The
Company will be responsible for $210,753 of accounts payable assumed in the acquisition of Driven Deliveries which has been subsequently
partially satisfied.



Employees



As
of September 30, 2022, the Company had approximately one hundred fifty (150) employees, most of whom devote their full time to the Company’s
operations. No employee is covered by a collective bargaining agreement.



Website.



The
Company operates a website at www.stemholdings.com



ITEM
1A. RISK FACTORS



Smaller
reporting companies are not required to provide the information required by this item. Notwithstanding, in addition to risk factors highlighted
in previous reports, the Company adds the following additional risk factor:



We
could be substantially affected by the Coronavirus (COVID-19) pandemic



In
December 2019, an outbreak of a novel strain of coronavirus (COVID-19) originated in Wuhan, China, and has since spread to a number of
other countries, including the United States. On March 11, 2020, the World Health Organization characterized COVID-19 as a pandemic.
In addition, as of the time of the filing of this quarterly report on Form 10-Q, several states in the United States have declared states
of emergency, and several countries around the world, including the United States, have taken steps to restrict travel. The existence
of a worldwide pandemic, the fear associated with COVID-19, or any, pandemic, and the reactions of governments in response to COVID-19,
or any, pandemic, to regulate the flow of labor and products and impede the travel of personnel, may impact our ability to conduct normal
business operations, which could adversely affect our results of operations and liquidity. Disruptions to our supply chain and business
operations disruptions to our retail operations and our ability to collect rent from the properties which we own, personnel absences,
or restrictions on the shipment of our or our suppliers’ or customers’ products, any of which could have adverse ripple effects
throughout our business. If we need to close any of our facilities or a critical number of our employees become too ill to work, our
production ability could be materially adversely affected in a rapid manner. Similarly, if our customers experience adverse consequences
due to COVID-19, or any other, pandemic, demand for our products could also be materially adversely affected in a rapid manner. Global
health concerns, such as COVID-19, could also result in social, economic, and labor instability in the markets in which we operate. Any
of these uncertainties could have a material adverse effect on our business, financial condition or results of operations.



28







ITEM
1B. UNRESOLVED STAFF COMMENTS



None



ITEM
2. PROPERTIES



In
July 2016, the Company entered into a 10-year lease for a commercial building from an unrelated third party in Springfield, Oregon. The
lease requires the Company to pay a starting base rental fee of $7,033 plus an additional estimated $315 per month in real estate taxes
in which the base rental fee escalates each year by approximately 2%. All taxes (including reconciling real estate taxes), maintenance
and utilities are included at the end of each year as a one-time payment. In addition, the Company also remitted $14,000 for a security
deposit to the landlord. No amounts have been recorded for deferred rent in these financial statements as the amount was deemed immaterial
by the Company. The Company has subleased this space pursuant to a 10-year lease. On February 22, 2018, both parties executed a lease
addendum that adds contiguous property for 12,322 square feet. The term commences November 1, 2017, and continues through November 31,
2026 at a starting rate of $3,525 a month that escalates after the first year. The Company subleases this property to a related party
(see disclosures below under “Springfield Suites”). The Company eliminates this rental income in consolidation.



In
January 2019, the Company entered into a 5-year lease for the occupancy of real estate and a building located in Hillsboro, Oregon. The
lease requires the Company to pay a starting base rental fee of $9,696 per month with yearly increases thereafter.



In
February 2019, the Company entered into a 4-year lease for the occupancy of a store front retail location in California. The lease requires
the Company to pay a starting base rental fee of $3,820 per month with yearly increases thereafter.



In
September 2019, the Company entered into a 4-year lease for the occupancy of the Company’s new corporate office located in Boca
Raton, Florida. The lease requires the Company to pay a starting base rental fee of $4,285 per month with yearly increases thereafter.
As of November 23, 2020, the Company added an additional 2,000 rentable square feet to its current lease under the same terms and conditions.



Pursuant
to the execution of a sale lease back agreement with the Company’s Wallis property, a/k/a Never Again, the Company in May 2021,
entered into a 15-year lease for the Wallis commercial building from an unrelated third party located in New York, NY. The lease requires
the Company to pay a starting base rental fee of $31,500 plus an additional estimated triple net charges per month including real estate
taxes in which the base rental fee escalates each year by approximately 2.5%. All taxes (including reconciling real estate taxes), maintenance
and utilities are included and paid monthly and reserved until payments are due. In addition, the Company also remitted $60,000 for a
security deposit to the landlord.



In
September 2021, the Company executed an assignment and assumption of lease for the occupancy of a store front retail location in Oregon.
The lease requires the Company to pay a starting base rental fee of $4,520 per month with yearly increases thereafter.



In
September 2021, the Company entered into a 5-year lease for the occupancy of a store front retail location in Oregon. The first two months
of the lease rent is abated. The lease requires the Company to pay a starting base rental fee of $4,505 per month with yearly increases
thereafter.



In
May 2022, the Company executed a sale lease back agreement with the Company’s Mulino property, and entered into a 15-year lease
with an unrelated third party located in Englewood, CO. The lease requires the Company to pay a starting base rental fee of $29,167 plus
additional estimated triple net charges per month including real estate taxes in which the base rental fee escalates each year by approximately
2%. All taxes (including reconciling real estate taxes), maintenance, and utilities are included and paid monthly. This transaction resulted
in net proceeds to the Company in the amount of $2.2 million.



29







ITEM
3. LEGAL PROCEEDINGS



The
Company is subject from time to time to litigation, claims and suits arising in the ordinary course of business. To the best of our knowledge,
as of August 10, 2022, the Company was not a party to any other material litigation, claim or suit whose outcome could have a material
effect on the Company’s financial statements.



D.H.
Flamingo, Inc. v. Department of Taxation, et. al.



On
February 27, 2020, a subsidiary of the Company (YMY Ventures, LLC) was served with a Summons and Second Amended Complaint in a matter
pending in the District Court of Clark County Nevada (Case # A-19-787004-B) which is styled “D.H. Flamingo, Inc. v. Department
of Taxation, et. al.” (the DOT Litigation”). In this matter, the Plaintiff is alleging that certain parties (including
YMY Ventures, LLC) received Conditional Recreational Marijuana Establishment Licenses, while certain other parties (including Plaintiff)
were denied licenses. In the matter, Plaintiff seeks declaratory relief, injunctive relief, relief from violation of procedural and substantive
due process, violation of equal protection, unjust enrichment, judicial review of the entire matter, together with a Petition for Writ
of Mandamus. The Plaintiff seeks damages in an unspecified amount. Thereafter, on April 20, 2020, YMY Ventures, LLC filed a Notice of
Non-Participation and Request for Dismissal. The Company believes it will ultimately be dismissed from the action without any liability
exposure. Notwithstanding, there is no guarantee at this time that this will occur, and the ultimate result of the matter could potentially
be the loss of YMY Ventures, LLC’s Conditional Recreational Marijuana Establishment License. This matter has now been fully resolved
without any financial exposure on the part of the Company.



Chris
Hass, et al. vs Brian Hayek, et al.



Plaintiffs
filed their initial complaint in the instant action on May 22, 2020. Plaintiffs filed the operative first amended complaint on August
18, 2020. On March 28, 2022, Plaintiffs obtained a stipulated judgment in this action in the amount of $349,876.69 against Defendants
Driven Deliveries, Brian Hayek (“Hayek”), and Christian Schenk (“Schenk”) (collectively, “Defendants”).
(3/28/22 Judgment.) Plaintiffs declare that during the litigation of the instant action, Baumgartner negotiated the essential terms of
a settlement with Driven Deliveries’ President, Salvador Villanueva(“Villanueva”), and Villanueva represented to Baumgartner
that he was in charge of the litigation and a deal could be worked out between the two of them to resolve the case. Plaintiffs declare
the basic terms of a settlement were reached between Villanueva and Baumgartner, and Plaintiffs signed a settlement agreement (“Settlement
Agreement”) on November 24, 2020. Defendants, including Hayek, signed the Agreement on November 30, 2020. Plaintiffs declare they
signed the Settlement Agreement because they knew Driven Deliveries was merging with Stem. Plaintiffs declare that for this reason, they
made sure to state in the Settlement Agreement that in the event of a merger between Driven Deliveries and Stem, Stem would be bound
by the Settlement Agreement and would be named on the Judgment. Plaintiffs also declare that when they signed the Settlement Agreement,
they relied on the fact Hayek, Stem’s new Agreement to bind his new company. Plaintiffs declare Defendants made payments on the
Settlement Agreement until November 2021, when payments stopped. Plaintiffs declare the settlement checks were mostly written by Villanueva.
Plaintiffs declare that shortly after they signed the Settlement Agreement, Driven Deliveries officially completed its merger with Stem,
and all of Plaintiffs’ shares in Driven Deliveries were converted to shares of Stem. In January 2022, Villanueva listed himself
as President, Secretary, and Treasurer of Driven Deliveries. Plaintiffs filed the instant motion on September 8, 2022. On October 3,
2022, Defendant Driven Deliveries filed its notice of bankruptcy proceedings, and this Court ordered a stay as to Driven Deliveries.
On October 20, 2022, nonparty Stem filed its opposition. On October 26, 2022, Plaintiffs filed their reply. At the November 2, 2022 hearing
on the instant motion, this Court requested Plaintiffs and Stem submit supplemental briefs on which state law to apply regarding successor
liability.



30







Under
California law, Stem as Driven Deliveries’ prior parent company is legally required to assume Driven Deliveries’ debt to
Plaintiffs. If a domestic corporation owns all the outstanding shares, or owns less than all the outstanding shares but at least 90
percent of the outstanding shares of each class, of a corporation or corporations, domestic or foreign, the merger of the subsidiary
corporation or corporations into the parent corporation or the merger into the subsidiary corporation of the parent corporation and
any other subsidiary corporation or corporations, may be effected by a resolution or plan of merger adopted and approved by the
board of the parent corporation and the filing of a certificate of ownership as provided in subdivision . The resolution or plan of
merger shall provide for the merger and shall provide that the surviving corporation assumes all the liabilities of each
disappearing corporation and shall include any other provisions required by this section. Stem’s S-4 Statement to the SEC
states, “Driven is surviving the merger as a wholly owned subsidiary of Stem (the ‘Merger’). Stem, together with
Driven following the Merger, is referred to herein as the combined company. Following the completion of the Merger, Stem will also
assume Driven’s outstanding net indebtedness.” Plaintiffs argue that while the merger with Stem was pending, Driven and
Stem’s COO, Brian Hayek agreed to be bound by California law in executing the Settlement Agreement. Accordingly, applying
California law, Stem assumed Dirven’s liability to Plaintiffs. Accordingly, Plaintiffs have demonstrated Stem is Driven
Deliveries’ successor in interest. In the interest of justice this Court grants Plaintiffs’ motion to amend judgment to
add nonparty Stem Holdings Inc. as an additional defendant.



Additionally,
the Company is subject from time to time to litigation, claims and suits arising in the ordinary course of business.



ITEM
4. MINE SAFETY DISCLOSURES



Not
applicable



PART
II



ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.



The
Company’s common stock commenced trading on the OTCQB on May 23, 2018 under the symbol “STMH” and the Canadian Securities
Exchange (CSE) on July 13, 2018 under the symbol “STEM”. On October 3, 2019, the Company commenced trading on the OTCQX.
On September 1, 2022, the Company’s listing was assigned to the OTCQB.



The
following table shows the high and low prices of our common shares on the OTCQB/OTCQX for each quarter for quarter from October 1, 2020
through September 30, 2022. The following quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions:



|Period                            |  | High |      |  | Low |  
|--------------------------------- |  | ---- | ---- |  | --- | -
|October 1, 2020-December 31, 2020 |  | $    | 0.67 |  |     | $
|January 1, 2021-March 31, 2021    |  | $    | 1.39 |  |     | $
|April 1, 2021-June 30, 2021       |  | $    | 0.75 |  |     | $
|July 1, 2021-September 30, 2021   |  | $    | 0.40 |  |     | $
|October 1, 2021-December 31, 2021 |  | $    | 0.27 |  |     | $
|January 1, 2022-March 31, 2022    |  | $    | 0.14 |  |     | $
|April 1, 2022-June 30, 2022       |  | $    | 0.07 |  |     | $
|July 1, 2022-September 30, 2022   |  | $    | 0.04 |  |     | $



The
market price of our common stock, like that of other early-stage cannabis-related companies, is highly volatile and is subject to fluctuations
in response to variations in operating results, announcements of technological innovations or new products, or other events or factors.
Our stock price may also be affected by broader market trends unrelated to our performance.



31







Holders



As
of December 5, 2022, there were 227,693,335 shares of common stock par value $0.001 and there were approximately 436 shareholders of
record.



Transfer
Agent and Registrar



Our
transfer agent is Odyssey Stock Transfer, Inc., located at Suite 702, 67 Yonge Street, Toronto, ON M5E 1J8.



Dividend
Policy



We
have never paid any cash dividends on our Common Stock and do not anticipate paying any cash dividends on our Common Stock in the foreseeable
future. We intend to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination
to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon our financial condition, results
of operations, capital requirements and such other factors as the Board of Directors deems relevant.



RECENT
SALES OF UNREGISTERED SECURITIES



The
following table sets forth all securities issued by Stem between October 1, 2021, and September 30, 2022:



|                                               |  | Security     |  | No. Shares |            
|---------------------------------------------- |  | ------------ |  | ---------- | -----------
|Services                                       |  | Common Stock |  |            | 662,500    
|Consulting                                     |  | Common Stock |  |            | 630,000    
|Compensation                                   |  | Common Stock |  |            | 2,000,000  
|Issuance of common stock related to cash sales |  | Common Stock |  |            | 3,223,611  
|Interest and converted notes                   |  | Common Stock |  |            | 2,087,116  
|Director Fees                                  |  | Common Stock |  |            | 975,000    
|Cancelled                                      |  | Common Stock |  |            | (12,302,900
|Total                                          |  |              |  |            | (2,724,673 



The
securities issued in the abovementioned transactions were issued in connection with private placements exempt from the registration requirements
of Section 5 of the Securities Act of 1933, as amended, pursuant to the terms of Section 4(2) of that Act and Rule 506 of Regulation
D.



Share
Issuances to Consultants, Employees and Directors for Compensation and Severance



During
the year ended September 30, 2022, the Company issued 3,267,500 shares of its common stock and recorded compensation expense of $343
thousand.



ITEM
6. SELECTED FINANCIAL DATA



Pursuant
to permissive authority under Regulation S-K, Rule 301, we have omitted Selected Financial Data.



ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Cautionary
Note Regarding Forward-Looking Information and Factors That May Affect Future Results



This
annual report on Form 10-K contains forward-looking statements regarding our business, financial condition, results of operations and
prospects. The Securities and Exchange Commission (the “SEC”) encourages companies to disclose forward-looking information
so that investors can better understand a company’s future prospects and make informed investment decisions. This annual report
on Form 10-K and other written and oral statements that we make from time to time contain such forward-looking statements that set out
anticipated results based on management’s plans and assumptions regarding future events or performance. We have tried, wherever
possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,”
“project,” “intend,” “plan,” “believe,” “will” and similar expressions in
connection with any discussion of future operating or financial performance. In particular, these include statements relating to future
actions, future performance or results of current and anticipated sales efforts, expenses, the outcome of contingencies, such as legal
proceedings, and financial results. Factors that could cause our actual results of operations and financial condition to differ materially
are set forth in the “Risk Factors” section of this annual report on Form 10-K.



32







We
caution that these factors could cause our actual results of operations and financial condition to differ materially from those expressed
in any forward-looking statements we make and that investors should not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to
update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect
the occurrence of anticipated or unanticipated events or circumstances. New factors emerge from time to time, and it is not possible
for us to predict all such factors. Further, we cannot assess the impact of each such factor on our results of operations or the extent
to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statements.



The
following discussion should be read in conjunction with our audited financial statements and the related notes that appear elsewhere
in this annual report on Form 10-K.





RESULTS
OF OPERATIONS



The
following comparative analysis on results of operations was based primarily on the comparative consolidated financial statements, footnotes
and related information for the periods identified below and should be read in conjunction with the audited consolidated financial statements
and the notes to those statements for the years ended September 30, 2022, and 2021, which are included elsewhere in this annual report
on Form 10-K. The results discussed below are for the years ended September 30, 2022, and 2021 (in thousands).



|                                  |  | Years Ended September 30, |         |   | Change |  
|--------------------------------- |  | ------------------------- | ------- | - | ------ | -
|($ in thousands)                  |  | 2022                      |         |   | 2021   |  
|Gross Revenue                     |  | $                         | 19,291  |   |        | $
|Discounts and returns             |  |                           | (2,728  | ) |        |  
|Net Revenue                       |  |                           | 16,563  |   |        |  
|Cost of goods sold                |  |                           | (14,440 | ) |        |  
|Consulting fees                   |  |                           | (684    | ) |        |  
|Professional fees                 |  |                           | (2,672  | ) |        |  
|General and administration        |  |                           | (11,125 | ) |        |  
|Impairment expense                |  |                           | (8,670  | ) |        |  
|Loss on discontinued operations   |  |                           | (914    | ) |        |  
|Other income (expenses), net      |  |                           | 4,412   |   |        |  
|Loss from equity method investees |  |                           | -       |   |        |  
|Net loss                          |  | $                         | (17,530 | ) |        | $



Revenues



In
years ended September 30, 2022, and 2021, the Company engages directly in the cultivation, production and sale of cannabis and related
products.



In
2022 and 2021, the Company’s revenue was generated in the states of Oregon, Nevada, and California.



Cost
of Revenues



Cost
of goods sold for the year ended September 30, 2022, and 2021 totaled approximately $14.4 million and $14.4 million, respectively. The
cost of revenue consisted of cannabis product cost, which includes contracted labor, growing, and trimming expenses, and product testing.
The Company expects its cost of revenues to grow in line with its future revenue growth.



Operating
Expenses



Consulting
Fees



Consulting
fees for the years ended September 30, 2022, and 2021 totaled approximately $0.7 million and $2.9 million, respectively. The decrease
of $2.2 million is primarily related to stock-based compensation expenses recognized during the year ended September 30, 2021, for restricted
stock awards and warrants to acquire the Company’s common stock issued to consultants.



Professional
Fees



Professional
fees for the years ended September 30, 2022, and 2021 totaled approximately $2.7 million and $3.2 million, respectively. The decrease
of $.5 million is primarily related to legal, accounting, and other professional fees incurred as a result of acquisitions during the
year ended September 30, 2021. We expect our professional fees to increase as we continue to grow our business.



33







General
and Administrative



General
and administrative expenses for the years ended September 30, 2022, and 2021 totaled approximately $11.1 million and $11.8 million,
respectively. The decrease of approximately $0.7 million is primarily related to a decrease in costs related to advertising and
promotion, office expenses, and salaries.



Impairment
Expense



Impairment
expense – investments totaled approximately $795,000. The Company recorded impairment expense of approximately $288,000
related to equity method investments, $250,000 related to recission of a planning and zoning license, $256,725 related to other
investments for the year ended September 30, 2022.



During the year ended September
30, 2022, the Company recorded impairment expense to other intangible assets in the amount of $1,968 pertaining to Oregon cannabis licenses.



During the year ended September
30, 2022, the Company recorded impairment expense to goodwill in the amount of $5,907 pertaining to 7LV.



Other
Income



Other
income for the year ended September 30, 2022, and 2021 totaled approximately $4.4 and $3.3 million, respectively. Other income in the fiscal year ended September 30, 2022 included primarily a gain on extinguishment of debt of $0.8
million, change in fair value of warrant liability of $2.3 million, other income of $2.0 million, offset by interest expense of $0.7 million.



Loss
from Equity Method Investees



Related
to the year ended September 30, 2021, the Company recognized a loss $0.2 million from equity method investees.



LIQUIDITY
AND CAPITAL RESOURCES



On
September 30, 2022, we had negative working capital of approximately $802,000, which included cash and cash equivalents of $1.5 million.
We reported a net loss of approximately $17.5 million and our net cash used in operating expenses totaled $7.4 million, our cash provided
by investing activities was $3.2 million and net cash used in financing activities totaled $0.6 million.



Going
Concern



On
September 30, 2022, the Company had approximate balances of cash and cash equivalents of $1.5 million, negative working capital of $0.8
million, total stockholders’ equity of $17.0 million and an accumulated deficit of $133 million.



These
audited consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will be able to
realize its assets and discharge its liabilities in the normal course of business.



While
the recreational use of cannabis is legal under the laws of certain States, where the Company has and is working towards further finalizing
the acquisition of entities or investment in entities that directly produce or sell cannabis, the use and possession of cannabis is illegal
under United States Federal law for any purpose, by way of Title II of the Comprehensive Drug Abuse Prevention and Control Act of 1970,
otherwise known as the Controlled Substances Act of 1970 (the “ACT”). Cannabis is currently included under Schedule 1 of
the Act, making it illegal to cultivate, sell or otherwise possess in the United States.



On
January 4, 2018, the office of the Attorney General published a memo regarding cannabis enforcement that rescinds directives promulgated
under former President Obama that eased federal enforcement. In a January 8, 2018 memo, Jefferson B. Sessions, then Attorney General
of the United States, indicated enforcement decisions will be left up to the U.S. Attorney’s in their respective states clearly
indicating that the burden is with “federal prosecutors deciding which cases to prosecute by weighing all relevant considerations,
including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of federal
prosecution, and the cumulative impact of particular crimes on the community.” Subsequently, in April 2018, then President Trump
promised tosupport congressional efforts to protect states that have legalized the cultivation, sale and possession of cannabis;
however, a bill has not yet been finalized in order to implement legislation that would, in effect, make clear the federal government
cannot interfere with states that have voted to legalize cannabis. Further in December 2018, the US Congress passed legislation, which
the President signed on December 20, 2018, removing hemp from being included with Cannabis in Schedule I of the Act.



34







On
February 8, 2018 the Canadian Securities Administrators (the “CSA”) published a revised staff notice setting out the CSA’s
disclosure expectations for specific risks facing issuers with cannabis-related activities in the United States (“Staff Notice
51-352”). Staff Notice 51-352 confirms that a disclosure-based approach remains appropriate for issuers with U.S. cannabis-related
activities. Staff Notice 51-352 includes additional disclosure expectations that apply to all issuers with U.S. cannabis-related activities,
including those with direct and indirect involvement in the cultivation and distribution of cannabis, as well as issuers that provide
goods and services to third parties involved in the U.S. cannabis industry. The Company views Staff Notice 51-352 favorably, as it provides
increased transparency and greater certainty regarding the views of its exchange and its regulation of existing operations and strategic
business plan as well as the Company’s ability to pursue further investment and opportunities in the United States.



In
December 2019, an outbreak of a novel strain of coronavirus (COVID-19) originated in Wuhan, China, and has since spread to several other
countries, including the United States. On June 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. In addition,
as of the time of the filing of this Annual Report on Form 10-K, several states in the United States have declared states of emergency,
and several countries around the world, including the United States, have taken steps to restrict travel. The existence of a worldwide
pandemic, the fear associated with COVID-19, or any, pandemic, and the reactions of governments in response to COVID-19, or any, pandemic,
to regulate the flow of labor and products and impede the travel of personnel, may impact our ability to conduct normal business operations,
which could adversely affect our results of operations and liquidity. Disruptions to our supply chain and business operations disruptions
to our retail operations and our ability to collect rent from the properties which we own, personnel absences, or restrictions on the
shipment of our or our suppliers’ or customers’ products, any of which could have adverse ripple effects throughout our business.
If we need to close any of our facilities or a critical number of our employees become too ill to work, our production ability could
be materially adversely affected in a rapid manner. Similarly, if our customers experience adverse consequences due to COVID-19, or any
other, pandemic, demand for our products could also be materially adversely affected in a rapid manner. Global health concerns, such
as COVID-19, could also result in social, economic, and labor instability in the markets in which we operate. Any of these uncertainties
could have a material adverse effect on our business, financial condition or results of operations.



On
December 14, 2020, former President Trump announced that William Barr would be resigning from his post as Attorney General, effective
December 23, 2020. Merrick Garland, President Biden’s nominee to succeed Mr. Barr, has served as the current Attorney General since
March 2021. It is unclear what specific impact the Biden administration will have on reinstituting the prior U.S. federal government
enforcement policy directives promulgated under former President Obama that eased federal enforcement. 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 United States 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.



The
sheer size of the cannabis industry, in addition to various level of legalization at the State and local governments, suggests that a
largescale enforcement operation would possibly create unwanted political backlash for the Department of Justice (“DOJ”)
and the Biden administration. Moreover, State and local tax revenues generated by the cannabis business is an increasingly important
source of funding for State and local government programs.



These
conditions raise substantial doubt as to the Company’s ability to continue as a going concern. Should the United States Federal
Government choose to begin enforcement of the provisions under the Act, the Company through its wholly owned subsidiaries could be prosecuted
under the Act and the Company may have to immediately cease operations and/or be liquidated upon their closing of the acquisition or
investment in entities that engage directly in the production and or sale of cannabis.



Management
believes that the Company has access to capital resources through potential public or private issuances of debt or equity securities.
However, if the Company is unable to raise additional capital, it may be required to curtail operations and take additional measures
to reduce costs, including reducing its workforce, eliminating outside consultants, and reducing legal fees to conserve its cash in amounts
sufficient to sustain operations and meet its obligations. These matters raise substantial doubt about the Company’s ability to
continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might become
necessary should the Company be unable to continue as a going concern.



35







Critical
Accounting Policies



The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP)
requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements
and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of
estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be
material to the financial statements. The most significant accounting estimates inherent in the preparation of our financial statements
include estimates associated with revenue recognition, investments, intangible assets, stock-based compensation, and business combinations.



The
Company’s financial position, results of operations and cash flows are impacted by the accounting policies the Company has adopted.
In order to get a full understanding of the Company’s financial statements, one must have a clear understanding of the accounting
policies employed. A summary of the Company’s critical accounting policies follows:



Impairment
of Long-Lived Assets



The
Company reviews the carrying value of its long-lived assets, which include property and equipment, for indicators of impairment whenever
events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. The Company considers
the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or
losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use
of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s
overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant
decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates assets
for potential impairment indicators at least annually and more frequently upon the occurrence of such events. The Company does not test
for impairment in the year of acquisition of properties, as long as those properties are acquired from unrelated third parties.



The
Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the
related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying
amounts. In cases where estimated future net undiscounted cash flows are less than the carrying value, an impairment loss is recognized
equal to an amount by which the carrying value exceeds the fair value of the asset or asset group. Fair value is generally determined
using the assets expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined
to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values
of the long-lived assets are depreciated and amortized prospectively over the newly determined remaining estimated useful lives.



36







Asset
Acquisitions



The
Company has adopted ASU 2017-01, which clarifies the definition of a business with the objective of adding guidance to assist entities
with evaluating whether transactions should be accounted for as businesses acquisitions. As a result of adopting ASU 2017-01, acquisitions
of real estate and cannabis licenses do not meet the definition of a business combination and were deemed asset acquisitions, and the
Company therefore capitalized these acquisitions, including its costs associated with these acquisitions.



Goodwill
and Intangible Assets



Goodwill.Goodwill represents the excess acquisition cost over the fair value of net tangible and intangible assets acquired. Goodwill is not
amortized and is subject to annual impairment testing on or between annual tests if an event or change in circumstance occurs that would
more likely than not reduce the fair value of a reporting unit below its carrying value. In testing for goodwill impairment, the Company
has the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination
that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality
of events and circumstances, the Company concludes that it is not more likely than not that the fair value of a reporting unit is less
than its carrying amount, then performing the two-step impairment test is not required. If the Company concludes otherwise, the Company
is required to perform the two-step impairment test. The goodwill impairment test is performed at the reporting unit level by comparing
the estimated fair value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value,
goodwill at the reporting unit level is not impaired. If the estimated fair value is less than the carrying value, further analysis is
necessary to determine the amount of impairment, if any, by comparing the implied fair value of the reporting unit’s goodwill to
the carrying value of the reporting unit’s goodwill.



Intangible
Assets. Intangible assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives, where
the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash flows. Intangible
assets are reviewed for impairment on an interim basis when certain events or circumstances exist. For amortizable intangible assets,
impairment exists when the carrying amount of the intangible asset exceeds its fair value. At least annually, the remaining useful life
is evaluated.



An
intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events
or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment
exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative
assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely
than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required
to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of
the asset that is amortized over the remaining useful life of that asset, if any. Subsequent reversal of impairment losses is not permitted.



During
the year ended September 30, 2022, the Company recorded $250,000 related to recission of a planning and zoning license. The Company did
not recognize an impairment expense for the year ended September 30, 2021.



37







Business
Combinations



The
Company applies the provisions of ASC 805 in the accounting for acquisitions. ASC 805 requires the Company to recognize separately from
goodwill the assets acquired, and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date
is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the
liabilities assumed. While the Company uses its best estimates and assumptions to accurately apply preliminary value to assets acquired
and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates are inherently
uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date,
the Company records adjustments in the current period, rather than a revision to a prior period. Upon the conclusion of the measurement
period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments
are recorded in the consolidated statements of operations. Accounting for business combinations requires management to make significant
estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, contractual obligations assumed,
restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although the Company believes
the assumptions and estimates made have been reasonable and appropriate, they are based in part on historical experience and information
obtained from management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that
may affect the accuracy or validity of such assumptions, estimates, or actual results.



Contingent
Consideration



The
Company accounts for “contingent consideration” according to FASB ASC 805, “Business Combinations” (“FASB
ASC 805”). Contingent consideration typically represents the acquirer’s obligation to transfer additional assets or equity
interests to the former owners of the acquiree if specified future events occur or conditions are met. FASB ASC 805 requires that contingent
consideration be recognized at the acquisition-date fair value as part of the consideration transferred in the transaction. FASB ASC
805 uses the fair value definition in Fair Value Measurements, which defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As defined in FASB
ASC 805, contingent consideration is (i) an obligation of the acquirer to transfer additional assets or equity interests to the former
owners of an acquiree as part of the exchange for control of the acquiree, if specified future events occur or conditions are met or
(ii) the right of the acquirer to the return of previously transferred consideration if specified conditions are met.



Warrant
Liability



The
Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value
at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair
value is recognized in the Company’s consolidated statements of operations. The fair value of the warrants issued by the Company
has been estimated using a Black Scholes model.



Embedded
Conversion Features



The
Company evaluates embedded conversion features within convertible debt to determine whether the embedded conversion feature(s) should
be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in the statement
of operations. If the conversion feature does not require recognition of a bifurcated derivative, the convertible debt instrument is
evaluated for consideration of any beneficial conversion feature (“BCF”) requiring separate recognition. When the Company
records a BCF, the intrinsic value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument
(offset to additional paid-in capital) and amortized to interest expense over the life of the debt.



38







Revenue
Recognition



The
Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration
which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an
entity determines are within the scope of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic
606), the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations
in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract;
and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to
contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services
it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company
assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether
each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated
to the respective performance obligation when (or as) the performance obligation is satisfied.



Revenue
for the Company’s product sales has not been adjusted for the effects of a financing component as the Company expects, at contract
inception, that the period between when the Company’s transfers control of the product and when the Company receives payment will
be one year or less. Product shipping and handling costs are included in cost of product sales.



Effective
October 1, 2019, the Company adopted the requirements of ASU 2014-09 (ASC 606) and related amendments, using the modified retrospective
method. The adoption of ASC 606 did not have a significant impact on the Company’s revenue recognition policy as revenues related
to wholesale and retail revenue are recorded upon transfer of merchandise to the customer, which was the effective policy under ASC 605
previously.



The
following policies reflect specific criteria for the various revenue streams of the Company:



Cannabis
Dispensary, Cultivation and Production



Revenue
is recognized upon transfer of retail merchandise to the customer upon sale transaction, at which time its performance obligation is
complete. Revenue is recognized upon delivery of product to the wholesale customer, at which time the Company’s performance obligation
is complete. Terms are generally between cash on delivery to 30 days for the Company’s wholesale customers.



The
Company’s sales environment is somewhat unique, in that once the product is sold to the customer (retail) or delivered (wholesale)
there are essentially no returns allowed or warranty available to the customer under the various state laws.



39







Delivery



|1) | Identify
    the contract with a customer
|-- | -----------------------------------------



The
Company sells retail products directly to customers. In these sales there is no formal contract with the customer. These sales have commercial
substance and there are no issues with collectability as the customer pays the cost of the goods at the time of purchase or delivery.



|2) | Identify
    the performance obligations in the contract
|-- | --------------------------------------------------------



The
Company sells its products directly to consumers. In this case these sales represent a performance obligation with the sales and any
necessary deliveries of those products.



|3) | Determine
    the transaction price
|-- | -----------------------------------



The
sales that are done directly to the customer have no variable consideration or financing component. The transaction price is the cost
that those goods are being sold for plus any additional delivery costs.



|4) | Allocate
    the transaction price to performance obligations in the contract
|-- | -----------------------------------------------------------------------------



For
the goods that the Company sells directly to customers, the transaction price is allocated between the cost of the goods and any delivery
fees that may be incurred to deliver to the customer.



|5) | Recognize
    revenue when or as the Company satisfies a performance obligation
|-- | -------------------------------------------------------------------------------



For
the sales of the Company’s own goods the performance obligation is complete once the customer has received the product.



Leases



On
October 1, 2020, the Company adopted ASC 842 and elected to apply the new standard at the adoption date and recognize a cumulative effect
as an adjustment to retained earnings. Upon calculation the effect on retained earnings was immaterial and no adjustment was deemed necessary.
Leases with an initial term of twelve months or less are not recorded on the balance sheet. For lease agreements entered into or reassessed
after the adoption of Topic 842, we combine the lease and non-lease components in determining the lease liabilities and right of use
(“ROU”) assets.



Our
lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined
based on information available at lease commencement date for purposes of determining the present value of lease payments. We used the
incremental borrowing rate on September 30, 2022, for all leases that commenced prior to that date. In determining this rate, which is
used to determine the present value of future lease payments, we estimate the rate of interest we would pay on a collateralized basis,
with similar payment terms as the lease and in a similar economic environment.



Under
Topic 842, operating lease expense is generally recognized evenly over the term of the lease. Lease costs were $1,224 thousand and $599
thousand for the years ended September 30, 2022, and 2021, respectively. There was sublease rental income of $0 and $17 thousand, respectively
for the years ended September 30, 2022, and 2021. The Company has ten operating leases consisting with remaining lease terms ranging
from 4 months to 177 months.



40







Lease
Costs



|                                 |  | Year Ended    |      
|-------------------------------- |  | ------------- | -----
|                                 |  | September 30, |      
|                                 |  | 2022          |      
|Components of total lease costs: |  |               |      
|Operating lease expense          |  | $             | 1,224
|Total lease costs                |  | $             | 1,224
|                                 |  |               |      



Lease
positions as of September 30, 2022



ROU
lease assets and lease liabilities for our operating leases were recorded in the consolidated condensed balance sheet as follows:



|                                         |  | September 30, 2022 |      
|---------------------------------------- |  | ------------------ | -----
|Assets                                   |  |                    |      
|Right of use asset                       |  | $                  | 6,874
|Total assets                             |  | $                  | 6,874
|                                         |  |                    |      
|Liabilities                              |  |                    |      
|Operating lease liabilities – short term |  | $                  | 580  
|Operating lease liabilities – long term  |  |                    | 6,476
|Total lease liability                    |  | $                  | 7,056



Lease
Terms and Discount Rate



|Weighted average remaining lease term (in years) – operating lease |  |  | 12.23 |  
|------------------------------------------------------------------ |  |  | ----- | -
|Weighted average discount rate – operating lease                   |  |  | 11.04 | %



Cash
Flows



|                                                                           |  | Year Ended         |       
|-------------------------------------------------------------------------- |  | ------------------ | ------
|                                                                           |  | September 30, 2022 |       
|Cash paid for amounts included in the measurement of lease liabilities:    |  |                    |       
|ROU amortization                                                           |  | $                  | 1,224 
|Cash paydowns of operating liability                                       |  | $                  | (1,224
|Supplemental non-cash amounts of lease liabilities arising from obtaining: |  |                    |       
|ROU asset                                                                  |  | $                  | 6,874 
|Lease Liability                                                            |  | $                  | 7,056 



The
future minimum lease payments under the leases are as follows:



|2023                                |  | $ | 1,337  |  
|----------------------------------- |  | - | ------ | -
|2024                                |  |   | 1,147  |  
|2025                                |  |   | 1,053  |  
|2026                                |  |   | 1,033  |  
|2027                                |  |   | 825    |  
|Thereafter                          |  |   | 8,345  |  
|Total future minimum lease payments |  |   | 13,740 |  
|Less: Lease imputed interest        |  |   | (6,684 | )
|Total                               |  | $ | 7,056  |  



41







Disaggregation
of Revenue



In
the year ended September 30, 2022, and 2021, revenue reported was primarily from the sale of cannabis and related products accounted
for under ASC 606.



The
following table illustrates our revenue by type related to the years ended September 30, 2022, and 2021:



|                      |  | September 30, |       
|--------------------- |  | ------------- | ------
|                      |  | 2022          |       
|Revenue               |  |               |       
|Wholesale             |  | $             | 4,306 
|Retail                |  |               | 14,867
|Rental                |  |               | -     
|Other                 |  |               | 118   
|Total revenue         |  |               | 19,291
|Discounts and returns |  |               | (2,728
|Net Revenue           |  | $             | 16,563



Geographical
Concentrations



As
of September 30, 2022, the Company is primarily engaged in the production and sale of cannabis, which is only legal for recreational
use in 19 states and D.C., with lesser legalization, such as for medical use in an additional 21 states and D.C., as of the time of these
consolidated financial statements. In addition, the United States Congress has passed legislation, specifically the Agriculture Improvement
Act of 2018 (also known as the “Farm Bill”) that has removed production and consumption of hemp and associated products from
Schedule 1 of the Controlled Substances Act.



Cost
of Goods Sold



Cost
of sales represents costs directly related to manufacturing and distribution of the Company’s products. Primary costs include raw
materials, packaging, direct labor, overhead, shipping and handling and the depreciation of manufacturing equipment and production facilities.
Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance, and property taxes. The
Company recognizes the cost of sales as the associated revenues are recognized.



Fair
Value of Financial Instruments



As
defined in the authoritative guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.



To
estimate fair value, the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability,
including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable,
market corroborated or generally unobservable.



The
authoritative guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level 1” measurements)
and the lowest priority to unobservable inputs (“Level 3” measurements). The three levels of the fair value hierarchy are
as follows:



Level
1 — Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.



Level
2 — Other inputs that are observable, directly, or indirectly, such as quoted prices in markets that are not active, or inputs
which are observable, either directly or indirectly, for substantially the full term of the asset or liability.





Level
3 — Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about how market
participants would price the assets and liabilities.



In
instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input
that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.



42











Stock-based
Compensation



The
Company accounts for share-based payment awards exchanged for services at the estimated grant date fair value of the award. Stock options
issued under the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price
of the Company’s stock at the date of grant and expire up to ten years from the date of grant. These options generally vest on
the grant date or over a one-year period.



The
Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating
the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application
of management’s judgment.



Expected
Term - The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding
based on the simplified method, which is the half-life from vesting to the end of its contractual term.



Expected
Volatility - The Company computes stock price volatility over expected terms based on its historical common stock trading prices.



Risk-Free
Interest Rate - The Company bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon issues
with an equivalent remaining term.



Expected
Dividend - The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends
in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.



Effective
January 1, 2017, the Company elected to account for forfeited awards as they occur, as permitted by Accounting Standards Update (“ASU”)
2016-09. Ultimately, the actual expenses recognized over the vesting period will be for those shares that vested. Prior to making this
election, the Company estimated a forfeiture rate for awards at 0%, as the Company did not have a significant history of forfeitures.



Earnings
(Loss) per Share



ASC
260, Earnings Per Share, requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic
EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the
entity.



Basic
net loss per share of common stock excludes dilution and is computed by dividing net loss by the weighted average number of shares of
common stock outstanding during the period. Diluted net loss per share of common stock reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity unless inclusion of such shares would be anti-dilutive. Since the Company has only
incurred losses, basic and diluted net loss per share is the same. Securities that could potentially dilute loss per share in the future
that were not included in the computation of diluted loss per share as of September 30, 2022, and 2021 are as follows:



|Potentially dilutive share-based instruments: |  | September 30, |             |  | September 30, | 
|--------------------------------------------- |  | ------------- | ----------- |  | ------------- | 
|                                              |  | 2022          |             |  | 2021          | 
|Convertible notes                             |  |               | 34,736,220  |  |               | 
|Options to purchase common stock              |  |               | 5,518,185   |  |               | 
|Unvested restricted stock awards              |  |               | -           |  |               | 
|Warrants to purchase common stock             |  |               | 65,783,059  |  |               | 
|                                              |  |               | 106,037,464 |  |               | 



OFF-BALANCE
SHEET ARRANGEMENTS



The
Company does not have any off-balance sheet arrangements.



ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



As
a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide this information.



ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.



The
financial information required by Item 8 begins on the following page.





43







TABLE
OF CONTENTS FOR FINANCIAL STATEMENTS



|                                                          | Page
|--------------------------------------------------------- | ----
|Report of Independent Registered Public Accounting Firm   | F-2 
|                                                          |     
|Consolidated Balance Sheets                               | F-4 
|                                                          |     
|Consolidated Statements of Operations                     | F-5 
|                                                          |     
|Consolidated Statement of Changes in Stockholders’ Equity | F-6 
|                                                          |     
|Consolidated Statements of Cash Flows                     | F-7 
|                                                          |     
|Notes to Consolidated Financial Statements                | F-8 







F-1







REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To
the Shareholders and the Board of Directors

of
Stem Holdings, Inc



OPINION
ON THE FINANCIAL STATEMENTS



We
have audited the accompanying consolidated balance sheets of Stem Holdings, Inc. (the Company) as of September 30, 2022 and September
30, 2021, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years then
ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations
and its cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States
of America.



EXPLANATORY
PARAGRAPH – GOING CONCERN



The
financial statements have been prepared assuming that the Company will continue as a going concern. As more fully explained in Note 1,
the Company had a net loss of approximately $17.5 million, negative working capital of $0.8 million and an accumulated deficit of $133.1
million as of and for the year ended September 30, 2022. In addition, the Company has commenced operations in the production and sale
of cannabis and related products, an activity that is illegal under United States Federal law for any purpose, by way of Title II of
the Comprehensive Drug Abuse Prevention and Control Act of 1970, otherwise known as the Controlled Substances Act of 1970 (the “ACT”).
These facts raise substantial doubt as to the Company’s ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.



BASIS
FOR OPINION



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



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



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



CRITICAL
AUDIT MATTERS



The
critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated
or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial
statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters
does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the
critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they
relate.



F-2







Going
Concern



Critical
Audit Matter Description



As
discussed in both note 1 to the financial statements and above, the Company incurred significant losses since inception, and has an accumulated
deficit of approximately $133.1 million and a working capital deficit of $0.8 million as of September 30, 2022.



How
We Addressed the Matters in Our Audit



Our
audit procedures included (1) identifying the conditions and events noted above that, when considered in the aggregate, indicate there
is substantial doubt about the Company’s ability to continue as a going concern; (2) evaluating management’s plans in connection
with their intent to raise additional equity and debt financing in order to overcome the presumption of going concern; (3) reviewing
and evaluating the financial statement presentation and disclosure regarding the substantial doubt about the ability of the Company to
continue as a going concern.



Impairment
of Goodwill and Other Intangible Assets



Critical
Audit Matter Description



The
Company’s impairment evaluation of its goodwill, and finite-lived intangible assets involves the comparison of the fair value of
each reporting unit or intangible asset to its carrying value. For goodwill, the Company determined the fair value of its reporting units
using the market-based approach which incorporates assumptions it believes market participants would utilize. Under the market-based
approach, the Company determines fair value by comparing its reporting units to similar businesses or guideline companies whose securities
are actively traded in public markets. The Company assesses the recoverability of its finite-lived intangible assets by comparing projected
undiscounted net cash flows associated with the related group of finite-lived intangible assets over their remaining estimated useful
lives against their respective carrying amounts. In cases where estimated future net undiscounted cash flows are less than the carrying
value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the asset or asset group.
Fair value is generally determined using the assets expected future discounted cash flows or market value, if readily determinable.



During
the year the Company recorded $5.9 million impairment charge to its California reporting unit goodwill and a $2.0 million impairment
charge related to its Oregon reporting unit finite-lived intangible assets.



Given
the significant estimates and assumptions management makes to estimate the fair values of the goodwill and finite-lived assets, performing
audit procedures to evaluate the reasonableness of management’s estimates and assumptions with respect to the revenue growth rates,
the market-based valuation approach, and the valuation approach used for certain cannabis licenses, require a high degree of auditor
judgment.



How
the Critical Audit Matter Was Addressed in the Audit



Our
audit procedures with respect to revenue growth rates, the market-based valuation approach, and the valuation approach used for certain
cannabis licenses included the following, among others:



| | ● | We
    evaluated the reasonableness of the long-term growth rate, testing the mathematical accuracy of the calculation, and developing a
    range of independent estimates and comparing those to the long-term growth rate selected by management.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                     
| | ● | We
    evaluated management’s ability to accurately forecast the revenue growth rates by comparing forecasts used to historical growth
    rates.                                                                                                   
| |   |                                                                                                                                                                                                                                                     
| | ● | We
    considered the impact of changes in the regulatory environment on management’s forecasts of the revenue growth rates.                                                                                                                        
| |   |                                                                                                                                                                                                                                                     
| | ● | We
    evaluated the revenue multiple used in management’s fair value estimates by comparing a basket of comparable public companies
    and reviewed adjustments resulting from differences in size.                                               
| |   |                                                                                                                                                                                                                                                     
| | ● | We
    evaluated the fair values of cannabis licenses used by management by comparing them to publicly listed Oregon Liquor and Cannabis
    Commission licenses which were recently sold and licenses currently held for sale.                     



|/s/
    LJ Soldinger Associates, LLC                    | 
|------------------------------------------------------- | 
|                                                        | 
|We
    have served as the Company’s auditor since 2017. | 
|                                                        | 
|Deer
    Park, IL                                       | 
|                                                        | 
|January
    13, 2023                                    | 
|                                                        | 
|PCAOB
    ID: 0000318                                   | 



F-3







STEM
HOLDINGS, INC.

CONSOLIDATED
BALANCE SHEETS

(in
thousands except for share and per share amounts)



|                                                                                                                                                                                                 |  | September 30, |          |   | September 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -------- | - | ------------- | -
|                                                                                                                                                                                                 |  | 2022          |          |   | 2021          |  
|                                                                                                                                                                                                 |  |               |          |   |               |  
|ASSETS                                                                                                                                                                                           |  |               |          |   |               |  
|Current assets                                                                                                                                                                                   |  |               |          |   |               |  
|Cash and cash equivalents                                                                                                                                                                        |  | $             | 1,524    |   |               | $
|Accounts receivable, net of allowance for doubtful accounts                                                                                                                                      |  |               | 313      |   |               |  
|Note receivable                                                                                                                                                                                  |  |               | -        |   |               |  
|Inventory                                                                                                                                                                                        |  |               | 2,675    |   |               |  
|Prepaid expenses and other current assets                                                                                                                                                        |  |               | 929      |   |               |  
|Assets held for sale                                                                                                                                                                             |  |               | -        |   |               |  
|Total current assets                                                                                                                                                                             |  |               | 5,441    |   |               |  
|                                                                                                                                                                                                 |  |               |          |   |               |  
|Property and equipment, net                                                                                                                                                                      |  |               | 9,089    |   |               |  
|Investment in equity method investees                                                                                                                                                            |  |               | -        |   |               |  
|Investments in affiliates                                                                                                                                                                        |  |               | -        |   |               |  
|Deposits and other assets                                                                                                                                                                        |  |               | 13       |   |               |  
|Right of use asset                                                                                                                                                                               |  |               | 6,874    |   |               |  
|Intangible assets, net                                                                                                                                                                           |  |               | 8,014    |   |               |  
|Goodwill                                                                                                                                                                                         |  |               | 1,522    |   |               |  
|Due from related party                                                                                                                                                                           |  |               | 28       |   |               |  
|Total assets                                                                                                                                                                                     |  | $             | 30,981   |   |               | $
|                                                                                                                                                                                                 |  |               |          |   |               |  
|LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                             |  |               |          |   |               |  
|Current liabilities                                                                                                                                                                              |  |               |          |   |               |  
|Accounts payable and accrued expenses                                                                                                                                                            |  |               | 2,310    |   |               |  
|Convertible notes, net                                                                                                                                                                           |  |               | 1,477    |   |               |  
|Convertible notes, net related party                                                                                                                                                             |  |               | -        |   |               |  
|Current maturities of long-term debt                                                                                                                                                             |  |               | 1,000    |   |               |  
|Short term notes and advances                                                                                                                                                                    |  |               | 451      |   |               |  
|Due to related party                                                                                                                                                                             |  |               | -        |   |               |  
|Derivative liability                                                                                                                                                                             |  |               | 370      |   |               |  
|Lease liability                                                                                                                                                                                  |  |               | 580      |   |               |  
|Warrant liability                                                                                                                                                                                |  |               | 55       |   |               |  
|Liabilities held for sale                                                                                                                                                                        |  |               | -        |   |               |  
|Total current liabilities                                                                                                                                                                        |  |               | 6,243    |   |               |  
|                                                                                                                                                                                                 |  |               |          |   |               |  
|Lease liability - long term                                                                                                                                                                      |  |               | 6,476    |   |               |  
|Finance liability                                                                                                                                                                                |  |               | -        |   |               |  
|Long-term debt, mortgages                                                                                                                                                                        |  |               | 1,225    |   |               |  
|Total liabilities                                                                                                                                                                                |  |               | 13,944   |   |               |  
|                                                                                                                                                                                                 |  |               |          |   |               |  
|Commitments and contingencies (Note 20)                                                                                                                                                          |  |               | -        |   |               |  
|                                                                                                                                                                                                 |  |               |          |   |               |  
|Shareholders’ equity                                                                                                                                                                             |  |               |          |   |               |  
|Preferred stock, Series A; $0.001 par value; 50,000,000 shares authorized, none outstanding as of September 30, 2022 and September 30, 2021                                                      |  |               | -        |   |               |  
|Preferred stock, Series B; $0.001
    par value; 50,000,000
    shares authorized, none
    outstanding as of September 30, 2022 and September 30, 2021                                          |  |               | -        |   |               |  
|Preferred stock                                                                                                                                                                                  |  |               | -        |   |               |  
|Common stock, $0.001 par value; 750,000,000 shares authorized; 227,013,967 and 230,738,620 shares issued, issuable and outstanding as of September 30, 2022 and September 30, 2021, respectively |  |               | 227      |   |               |  
|Additional paid-in capital                                                                                                                                                                       |  |               | 148,450  |   |               |  
|Stock subscription receivable                                                                                                                                                                    |  |               | -        |   |               |  
|Accumulated deficit                                                                                                                                                                              |  |               | (133,118 | ) |               |  
|Total Stem Holdings stockholder’s equity                                                                                                                                                         |  |               | 15,559   |   |               |  
|Noncontrolling interest                                                                                                                                                                          |  |               | 1,478    |   |               |  
|Total shareholders’ equity                                                                                                                                                                       |  |               | 17,037   |   |               |  
|Total liabilities and shareholders’ equity                                                                                                                                                       |  | $             | 30,981   |   |               | $



The
accompanying notes are an integral part of these audited consolidated financial statements.



F-4







STEM
HOLDINGS, INC.

CONSOLIDATED
STATEMENTS OF OPERATIONS

For
the Years Ended September 30, 2022 and 2021

(in
thousands except for share and per share amounts)



|                                                                           |  | 2022                              |             |   | 2021 |  
|-------------------------------------------------------------------------- |  | --------------------------------- | ----------- | - | ---- | -
|                                                                           |  | For the Years Ended September 30, |            
|                                                                           |  | 2022                              |             |   | 2021 |  
|                                                                           |  |                                   |             |   |      |  
|Revenues                                                                   |  | $                                 | 16,563      |   |      | $
|Cost of goods sold                                                         |  |                                   | 14,440      |   |      |  
|Gross Profit                                                               |  |                                   | 2,123       |   |      |  
|                                                                           |  |                                   |             |   |      |  
|Operating expenses:                                                        |  |                                   |             |   |      |  
|Consulting fees                                                            |  |                                   | 684         |   |      |  
|Professional fees                                                          |  |                                   | 2,672       |   |      |  
|General and administration                                                 |  |                                   | 11,125      |   |      |  
|Impairment expense – investments                                           |  |                                   | 795         |   |      |  
|Impairment expense – other intangible assets                               |  |                                   | 1,968       |   |      |  
|Impairment expense – goodwill                                              |  |                                   | 5,907       |   |      |  
|Total operating expenses                                                   |  |                                   | 23,151      |   |      |  
|Loss from operations                                                       |  |                                   | (21,028     | ) |      |  
|                                                                           |  |                                   |             |   |      |  
|Other income (expenses), net                                               |  |                                   |             |   |      |  
|Interest expense                                                           |  |                                   | (650        | ) |      |  
|Change in fair value of derivative liability                               |  |                                   | (31         | ) |      |  
|Change in fair value of warrant liability                                  |  |                                   | 2,327       |   |      |  
|Foreign currency exchange gain (loss)                                      |  |                                   | (4          | ) |      |  
|Other income                                                               |  |                                   | 1,997       |   |      |  
|Gain on extinguishment of debt                                             |  |                                   | 803         |   |      |  
|Other loss                                                                 |  |                                   | (30         | ) |      |  
|Total other income (expense)                                               |  |                                   | 4,412       |   |      |  
|                                                                           |  |                                   |             |   |      |  
|Loss from continuing operations                                            |  |                                   | (16,616     | ) |      |  
|Loss from equity method investees                                          |  |                                   | -           |   |      |  
|Loss from discontinued operations, net of tax and gain on disposal of $831 |  |                                   | (914        | ) |      |  
|Net loss                                                                   |  | $                                 | (17,530     | ) |      | $
|                                                                           |  |                                   |             |   |      |  
|Net loss attributable to non-controlling interest                          |  |                                   | (162        | ) |      |  
|                                                                           |  |                                   |             |   |      |  
|Net loss attributable to Stem Holdings                                     |  | $                                 | (17,368     | ) |      | $
|                                                                           |  |                                   |             |   |      |  
|Net loss per share:                                                        |  |                                   |             |   |      |  
|Basic and diluted loss from continuing operations, per share               |  |                                   | (0.07       | ) |      |  
|Basic and diluted  loss from discontinued operations, per share            |  |                                   | (0.01       | ) |      |  
|Basic and diluted net loss, per share                                      |  |                                   | (0.08       | ) |      |  
|                                                                           |  |                                   |             |   |      |  
|Weighted-average shares outstanding                                        |  |                                   |             |   |      |  
|Basic                                                                      |  |                                   | 226,168,193 |   |      |  
|Diluted                                                                    |  |                                   | 226,168,193 |   |      |  





The accompanying notes are an integral part of these audited consolidated financial statements.



F-5







STEM
HOLDINGS, INC.

CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For
the Years Ended September 30, 2022 and 2021

(in
thousands, except for share and per share amounts)



|                                                                                 |  | Shares           |             |   | Amount                                                                                             |   |     | Capital      |  |   | Receivable  |   |  | Deficit                               |      |   | Equity          |   |          | Interest                |  |   | Equity  |  
|-------------------------------------------------------------------------------- |  | ---------------- | ----------- | - | -------------------------------------------------------------------------------------------------- | - | --- | ------------ |  | - | ----------- | - |  | ------------------------------------- | ---- | - | --------------- | - | -------- | ----------------------- |  | - | ------- | -
|                                                                                 |  | Common
    Stock |             |   | Additional
                                                                                Paid-in |   |     | Subscription |  |   | Accumulated |   |  | Total
    Stem Holdings Shareholders’ |      |   | Non-Controlling |   |          | Total
    Shareholders’ | 
|                                                                                 |  | Shares           |             |   | Amount                                                                                             |   |     | Capital      |  |   | Receivable  |   |  | Deficit                               |      |   | Equity          |   |          | Interest                |  |   | Equity  |  
|Balance
    as of September 30, 2020                                             |  |                  | 68,258,745  |   |                                                                                                    | $ | 68  |              |  | $ | 76,310      |   |  | $                                     | -    |   |                 | $ | (51,386  | )                       |  | $ | 24,992  |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of common stock in connection with consulting agreement             |  |                  | 4,790,070   |   |                                                                                                    |   | 5   |              |  |   | 2,027       |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 2,032   |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of common stock in related to commission expense                    |  |                  | 90,909      |   |                                                                                                    |   | 1   |              |  |   | 40          |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 41      |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of common stock pursuant to Driven Deliveries, Inc. S1 registration |  |                  | 6,833,069   |   |                                                                                                    |   | 7   |              |  |   | 2,863       |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 2,870   |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Stock
    based compensation                                                     |  |                  | 3,914,509   |   |                                                                                                    |   | 4   |              |  |   | 1,671       |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 1,675   |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of common stock in connection with convertible debt                 |  |                  | 9,480,259   |   |                                                                                                    |   | 10  |              |  |   | 4,903       |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 4,913   |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of common stock in connection with deposit for an asset acquisition |  |                  | 300,000     |   |                                                                                                    |   | -   |              |  |   | 2,582       |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 2,582   |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Cancellation
    of common stock related to convertible notes                    |  |                  | (525,400    | ) |                                                                                                    |   | (1  | )            |  |   | 1           |   |  |                                       | -    |   |                 |   | -        |                         |  |   | -       |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of common stock related to rent and interest expense                |  |                  | 847,117     |   |                                                                                                    |   | 1   |              |  |   | 426         |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 427     |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of subscription receivable                                          |  |                  | -           |   |                                                                                                    |   | -   |              |  |   | 600         |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 600     |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Cancellation
    of common stock related to investments                          |  |                  | (694,233    | ) |                                                                                                    |   | (1  | )            |  |   | 1           |   |  |                                       | -    |   |                 |   | -        |                         |  |   | -       |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of common stock related to settlement payment                       |  |                  | 500,000     |   |                                                                                                    |   | 1   |              |  |   | 5,439       |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 5,440   |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of common stock related to Private Placement Memorandum, net        |  |                  | 5,322,136   |   |                                                                                                    |   | 5   |              |  |   | 4,892       |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 4,897   |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of common stock related to Prospectus                               |  |                  | 19,276,340  |   |                                                                                                    |   | 19  |              |  |   | 7,900       |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 7,919   |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of common stock related to cash purchase                            |  |                  | 1,465,117   |   |                                                                                                    |   | 1   |              |  |   | 629         |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 630     |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of common stock related to exercise of options                      |  |                  | 10,000      |   |                                                                                                    |   | -   |              |  |   | 1           |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 1       |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of warrants in connection with employment agreement                 |  |                  | -           |   |                                                                                                    |   | -   |              |  |   | 238         |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 238     |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of options in connection with employment agreement                  |  |                  | -           |   |                                                                                                    |   | -   |              |  |   | 406         |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 406     |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Recognition
    of non-controlling interest related to asset acquisition         |  |                  | -           |   |                                                                                                    |   | -   |              |  |   | -           |   |  |                                       | -    |   |                 |   | -        |                         |  |   | -       |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Impairment
    of investment                                                     |  |                  | -           |   |                                                                                                    |   | -   |              |  |   | -           |   |  |                                       |      |   |                 |   | -        |                         |  |   | -       |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Share
    exchange agreement adjustment                                          |  |                  | -           |   |                                                                                                    |   | -   |              |  |   | -           |   |  |                                       | -    |   |                 |   | -        |                         |  |   | -       |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Cancellation
    of common stock in connection with Subscription Agreement       |  |                  | (58,140     | ) |                                                                                                    |   | -   |              |  |   | -           |   |  |                                       | -    |   |                 |   | -        |                         |  |   | -       |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of common stock in connection with asset acquisitions               |  |                  | 8,209,178   |   |                                                                                                    |   | 8   |              |  |   | -           |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 8       |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Acquisition
    of Driven Deliveries, Inc. and adjustments                       |  |                  | 101,968,944 |   |                                                                                                    |   | 102 |              |  |   | 37,320      |   |  |                                       | (135 | ) |                 |   | -        |                         |  |   | 37,287  |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Net
    loss                                                                     |  |                  | -           |   |                                                                                                    |   | -   |              |  |   | -           |   |  |                                       | -    |   |                 |   | (64,364  | )                       |  |   | (64,364 | )
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Balance
    as of September 30, 2021                                             |  |                  | 229,988,620 |   |                                                                                                    | $ | 230 |              |  | $ | 148,249     |   |  | $                                     | (135 | ) |                 | $ | (115,750 | )                       |  | $ | 32,594  |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Common
    stock issued for cash                                                 |  |                  | 3,223,611   |   |                                                                                                    |   | 3   |              |  |   | 282         |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 285     |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of common stock in connection with consulting agreement             |  |                  | 130,000     |   |                                                                                                    |   | -   |              |  |   | 30          |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 30      |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Stock
    based compensation                                                     |  |                  | 3,137,500   |   |                                                                                                    |   | 3   |              |  |   | 310         |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 313     |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of common stock related to interest expense                         |  |                  | 1,751,186   |   |                                                                                                    |   | 2   |              |  |   | 119         |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 121     |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Common
    stock issued related to conversion of debt                            |  |                  | 289,750     |   |                                                                                                    |   | 1   |              |  |   | 5           |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 6       |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Common
    stock cancelled related to discontinued operations                    |  |                  | (11,506,700 | ) |                                                                                                    |   | (12 | )            |  |   | (1,169      | ) |  |                                       | 135  |   |                 |   | -        |                         |  |   | (1,046  | )
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of warrants in connection with consulting agreement                 |  |                  | -           |   |                                                                                                    |   | -   |              |  |   | 158         |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 158     |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of options in connection with employment agreement                  |  |                  | -           |   |                                                                                                    |   | -   |              |  |   | 454         |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 454     |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Issuance
    of warrants in connection with extension of debenture maturity      |  |                  | -           |   |                                                                                                    |   | -   |              |  |   | 12          |   |  |                                       | -    |   |                 |   | -        |                         |  |   | 12      |  
|                                                                                 |  |                  |             |   |                                                                                                    |   |     |              |  |   |             |   |  |                                       |      |   |                 |   |          |                         |  |   |         |  
|Net
    loss                                                                     |  |                  | -           |   |                                                                                                    |   | -   |              |  |   | -           |   |  |                                       | -    |   |                 |   | (17,368  | )                       |  |   | (17,368 | )
|Balance
    as of September 30, 2022                                             |  |                  | 227,013,967 |   |                                                                                                    | $ | 227 |              |  | $ | 148,450     |   |  | $                                     | -    |   |                 | $ | (133,118 | )                       |  | $ | 15,559  |  





The
accompanying notes are an integral part of these audited consolidated financial statements.





F-6









STEM
HOLDINGS, INC.

CONSOLIDATED
STATEMENTS OF CASH FLOWS

For
the Years Ended September 30, 2022 and 2021

(in
thousands)



|                                                                               |  | 2022                |         |   | 2021 |  
|------------------------------------------------------------------------------ |  | ------------------- | ------- | - | ---- | -
|                                                                               |  | For the Years Ended |        
|                                                                               |  | September 30,       |        
|                                                                               |  | 2022                |         |   | 2021 |  
|Cash flows from operating activities                                           |  |                     |         |   |      |  
|Net loss                                                                       |  | $                   | (17,530 | ) |      | $
|Equity method investee loss                                                    |  |                     | -       |   |      |  
|Adjustments to reconcile net loss to net cash used in operating activities:    |  |                     |         |   |      |  
|Stock-based compensation expense                                               |  |                     | 797     |   |      |  
|Issuance of common stock in connection with consulting agreements              |  |                     | 263     |   |      |  
|Issuance of common stock related to rent and interest expense                  |  |                     | 264     |   |      |  
|Impairment of intangible assets                                                |  |                     | 1,961   |   |      |  
|Impairment of investments                                                      |  |                     | 795     |   |      |  
|Impairment of goodwill                                                         |  |                     | 5,907   |   |      |  
|Depreciation and amortization                                                  |  |                     | 1,612   |   |      |  
|Amortization of intangible assets                                              |  |                     | 881     |   |      |  
|Gain on extinguishment of debt                                                 |  |                     | (803    | ) |      |  
|Amortization of debt discount                                                  |  |                     | 96      |   |      |  
|Impairment of note receivable                                                  |  |                     | -       |   |      |  
|Gain on sale of equity method investments                                      |  |                     | (488    | ) |      |  
|Recognition of derivative liability                                            |  |                     | -       |   |      |  
|Change in fair value of warrant liability and derivative liability             |  |                     | (2,296  | ) |      |  
|Foreign currency adjustment                                                    |  |                     | 4       |   |      |  
|Gain on sale of property                                                       |  |                     | (1,370  | ) |      |  
|Other                                                                          |  |                     | -       |   |      |  
|Changes in operating assets and liabilities:                                   |  |                     |         |   |      |  
|Accounts receivable, net of allowance for doubtful accounts                    |  |                     | (53     | ) |      |  
|Prepaid expenses and other current assets                                      |  |                     | 2,367   |   |      |  
|Inventory                                                                      |  |                     | 451     |   |      |  
|Accounts payable and accrued expenses                                          |  |                     | (238    | ) |      |  
|Net cash used in continuing operating activities                               |  |                     | (7,380  | ) |      |  
|Net cash provided by (used in) discontinued operating activities               |  |                     | 914     |   |      |  
|Net cash used in operating activities                                          |  |                     | (6,466  | ) |      |  
|                                                                               |  |                     |         |   |      |  
|Cash flows from investing activities                                           |  |                     |         |   |      |  
|Purchase of property and equipment                                             |  |                     | (215    | ) |      |  
|Project costs                                                                  |  |                     | -       |   |      |  
|Cash received from sale of property                                            |  |                     | 1,832   |   |      |  
|Cash received related to sale of equity method investment and note receivable  |  |                     | 1,651   |   |      |  
|Issuance of note receivable                                                    |  |                     | -       |   |      |  
|Investments                                                                    |  |                     | (82     | ) |      |  
|Related party payments                                                         |  |                     | -       |   |      |  
|Net cash provided by continuing investing activities                           |  |                     | 3,186   |   |      |  
|Net cash provided by investing activities                                      |  |                     | 3,186   |   |      |  
|                                                                               |  |                     |         |   |      |  
|Cash flows from financing activities                                           |  |                     |         |   |      |  
|Proceeds from the issuance of common stock                                     |  |                     | 285     |   |      |  
|Notes payable and advanced proceeds                                            |  |                     | 252     |   |      |  
|Debt conversions                                                               |  |                     | -       |   |      |  
|PPP and debt forgiveness                                                       |  |                     | -       |   |      |  
|Repayments of notes payable                                                    |  |                     | (1,197  | ) |      |  
|Net cash provided by (used in) financing activities from continuing operations |  |                     | (660    | ) |      |  
|Net cash provided by financing activities                                      |  |                     | (660    | ) |      |  
|                                                                               |  |                     |         |   |      |  
|Net (decrease) increase in cash and cash equivalents                           |  |                     | (3,940  | ) |      |  
|Cash and cash equivalents at the beginning of the period                       |  |                     | 5,464   |   |      |  
|Cash and cash equivalents at the end of the period                             |  | $                   | 1,524   |   |      | $
|                                                                               |  |                     |         |   |      |  
|Supplemental disclosure of cash flow information:                              |  |                     |         |   |      |  
|Cash paid for interest                                                         |  | $                   | 308     |   |      | $
|Cash paid for taxes                                                            |  | $                   | -       |   |      | $
|Supplemental disclosure of noncash activities:                                 |  |                     |         |   |      |  
|Non-cash repayment of finance liability                                        |  | $                   | 1,092   |   |      | $
|Financed Insurance                                                             |  | $                   | 449     |   |      | $
|Interest paid in the form of common stock                                      |  | $                   | 67      |   |      | $
|Issuance of common stock related to separation agreement                       |  | $                   | -       |   |      | $
|Acquisition of JV Retail 3 and JV Retail 4                                     |  | $                   | -       |   |      | $
|Acquisition of Artifact                                                        |  | $                   | -       |   |      | $
|Conversion of debt and accrued interest to equity                              |  | $                   | -       |   |      | $
|Issuance of common stock for settlement                                        |  | $                   | -       |   |      | $
|Refinancing of mortgage                                                        |  | $                   | 1,100   |   |      | $



The accompanying notes are an integral part of these audited consolidated financial statements.



F-7









STEM
HOLDINGS, INC.

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS



1.
Incorporation and Operations and Going Concern



Stem
Holdings, Inc. (“Stem” or the “Company”) is a Nevada corporation incorporated on June 7, 2016, and is a leading
omnichannel, vertically-integrated cannabis branded products and technology company with state-of-the-art cultivation, processing, extraction,
retail, distribution, and delivery-as-a-service (DaaS) operations throughout the United States. Stem’s family of award-winning
brands includes TJ’s GardensTM, TravisxJamesTM, and Yerba BuenaTM flower and extracts; CannavoreTM edible confections;
and e-commerce delivery platforms provide direct-to consumer proprietary logistics and an omnichannel UX (user experience)/CX (customer
experience).



The
Company purchases, improves, leases, operates, and invests in properties for use in the production, distribution and sales of cannabis
and cannabis-infused products licensed under the laws of the states of Oregon, Nevada, and California. As of September, 30, 2022, Stem
had ownership interests in 23 state issued cannabis licenses including nine (9) licenses for cannabis cultivation, three (3) licenses
for cannabis processing, two (2) licenses for cannabis wholesale distribution, three (3) licenses for hemp production and (6) cannabis
dispensary licenses.



The
Company has nine wholly-owned subsidiaries, including Stem Holdings Oregon, Inc., Stem Holdings IP, Inc., Opco, LLC, Stem Agri,
Inc., Stem Holdings Oregon Acquisitions 1, Corp., Stem Holdings Oregon Acquisitions 2, Corp., Stem Holdings Oregon Acquisitions 3,
Corp., Stem Holdings Oregon Acquisitions 4 Corp., 2336034 Alberta Ltd. Stem, through its subsidiaries, is currently in the process
of seeking the acquisition of entities or to be acquired by entities directly in the production and sale of cannabis. Driven
Deliveries, Inc., a former wholly-owned subsidiary, was sold during the quarter ended December 31, 2021 (see Note 3).



The
Company’s stock is publicly traded and is listed on the Canadian Securities Exchange under the symbol “STEM” and the
OTCQB exchange under the symbol “STMH”.



In
June 2021, the Company’s shareholders approved a proposal to amend the Company’s Articles of Incorporation to increase the
number of authorized common shares from 300,000,000 shares to 750,000,000 shares.



Going
Concern



On
September 30, 2022, the Company had approximate balances of cash and cash equivalents of $1.5
million, and working capital deficit of approximately $802
thousand, and an accumulated deficit of $133
million.



These
audited consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will be able to
realize its assets and discharge its liabilities in the normal course of business.



The
United States federal government regulates drugs in large part through the Controlled Substances Act or CSA. Marijuana, which refers
to certain parts and derivatives of the cannabis plant, is classified as a Schedule I controlled substance. As a Schedule I controlled
substance, the federal Drug Enforcement Agency, or DEA, considers marijuana to have a high potential for abuse, no currently accepted
medical use in treatment in the United States, and a lack of accepted safety for use of the drug under medical supervision. According
to the U.S. federal government, cannabis having a concentration of tetrahydrocannabinol, or THC, greater than 0.3% is marijuana. Cannabis
with a THC content below 0.3% is classified as hemp. The scheduling of marijuana as a Schedule I controlled substance is inconsistent
with what we believe to be widely accepted medical uses for marijuana by physicians, researchers, customers, and others. Moreover, as
of December 31, 2021, and despite the conflict with U.S. federal law, at least 36 states, the District of Columbia, the Commonwealth
of the Northern Mariana Islands, Guam, Puerto Rico, and the U.S. Virgin Islands have legalized marijuana for medical use. Eighteen of
those states and the District of Columbia, the Commonwealth of the Northern Mariana Islands, and Guam have legalized the adult use of
cannabis for recreational purposes. In November 2020, voters in Arizona, Montana, New Jersey, and South Dakota voted by referendum to
legalize marijuana for adult use, and voters in Mississippi and South Dakota voted to legalize marijuana for medical use, although South
Dakota’s adult-use measure has been declared unconstitutional by the State Supreme Court. In 2021, the states of Connecticut, New
Mexico, New York, and Virginia enacted laws legalizing the adult use of cannabis.



Marijuana
is largely regulated at the state level in the United States. State laws regulating marijuana conflict with the CSA, making marijuana
use and possession federally illegal. Although certain states and territories of the United States authorize medical or adult-use marijuana
production and distribution by licensed or registered entities, under United States federal law, the possession, use, cultivation, and
transfer of marijuana and any related drug paraphernalia is illegal. Although our activities are compliant with the applicable state
and local laws in those states where we maintain such licenses, strict compliance with state and local laws with respect to cannabis
may neither absolve us of liability under United States federal law nor provide a defense to any federal criminal action that may be
brought against us.



F-8









In
2013, as more and more states began to legalize medical and/or adult-use marijuana, the federal government attempted to provide clarity
on the incongruity between federal law and these state-legal regulatory frameworks. Until 2018, the federal government provided guidance
to federal agencies and banking institutions through a series of DOJ memoranda. The most notable of this guidance came in the form of
a memorandum issued by former U.S. Deputy Attorney General James Cole on August 29, 2013, which we refer to as the Cole Memorandum.



The
Cole Memorandum offered guidance to federal agencies on how to prioritize civil enforcement, criminal investigations, and prosecutions
regarding marijuana in all states and quickly set a standard with which marijuana-related businesses would comply. The Cole Memorandum
put forth eight prosecution priorities:



1.
Preventing the distribution of marijuana to minors;



2.
Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels;



3.
Preventing the diversion of marijuana from states where it is legal under state law in some form to other states;



4.
Preventing the state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or
other illegal activity;



5.
Preventing violence and the use of firearms in the cultivation and distribution of marijuana;



6.
Preventing drugged driving and the exacerbation of other adverse public health consequences associated with marijuana use;



7.
Preventing the growing of marijuana on public lands and the attendant public safety and environmental dangers posed by marijuana production
on public lands; and



8.
Preventing marijuana possession or use on federal property.



On
January 4, 2018, former United States Attorney General Sessions rescinded the Cole Memorandum by issuing a new memorandum to all United
States Attorneys, which we refer to as the Sessions Memo. Rather than establishing national enforcement priorities particular to marijuana-related
crimes in jurisdictions where certain marijuana activity was legal under state law, the Sessions Memo simply rescinded the Cole Memorandum
and other Department of Justice memorandums providing prosecutorial guidance on state and tribally authorized medical and adult-use cannabis
activities and instructed that “[i]n deciding which marijuana activities to prosecute... with the [DOJ’s] finite resources,
prosecutors should follow the well- established principles that govern all federal prosecutions.” Namely, these include the seriousness
of the offense, history of criminal activity, deterrent effect of prosecution, the interests of victims, and other principles.



On
January 21, 2021, Joseph R. Biden, Jr. was sworn in as President of the United States. President Biden’s Attorney General, Merrick
Garland, was confirmed by the United States Senate on March 10, 2021. It is not yet known whether the Department of Justice, under President
Biden and Attorney General Garland, will re-adopt the Cole Memorandum or announce a substantive marijuana enforcement policy. During
his Senate confirmation, Merrick Garland told Senator Cory Booker (D-NJ), “It does not seem to me useful the use of limited resources
that we have to be pursuing prosecutions in states that have legalized and are regulating the use of marijuana, either medically or otherwise.”
Such statements are not official declarations or policies of the DOJ and are not binding on the DOJ, any United States Attorney, or the
United States federal courts. Substantial uncertainty regarding United States federal enforcement remains. To date, there have been no
new federal cannabis memorandums issued by the Biden Administration or any published change in federal enforcement policy.



Nonetheless,
there is no guarantee that state laws legalizing and regulating the sale and use of marijuana will not be repealed or overturned or that
local government authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the
United States Congress amends the CSA with respect to marijuana (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. Currently, in the absence of uniform
federal guidance, as had been established by the Cole Memorandum, enforcement priorities are determined by respective United States Attorneys.



F-9









As
an industry best practice, despite the rescission of the Cole Memorandum, we abide by the following standard operating policies and procedures,
which are designed to ensure compliance with the guidance provided by the Cole Memorandum:



1.
Continuously monitor our operations for compliance with all licensing requirements as established by the applicable state, county, municipality,
town, township, borough, and other political/administrative divisions;



2.
Ensure that our 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 prevent the distribution of our cannabis products to minors;



4.
Implement policies and procedures in place to avoid the distribution of the proceeds from our operations to criminal enterprises, gangs,
or cartels;



5.
Implement an inventory tracking system and necessary procedures to reliably track inventory and prevent the 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.
Monitor the operations at our facilities so that our state-authorized cannabis business activity is not used as a cover or pretense for
trafficking of other illegal drugs or engaging in any other illegal activity; and



7.
Implement quality controls so that our products comply with applicable regulations and contain necessary disclaimers about the contents
of the products to avoid adverse public health consequences from cannabis use and discourage impaired driving.



In
addition, we frequently conduct background checks to confirm that the principals and management of our operating subsidiaries are of
good character and have not been involved with other illegal drugs, engaged in illegal activity or activities involving violence, or
the use of firearms in the cultivation, manufacturing, or distribution of cannabis. We also conduct ongoing reviews of the activities
of our cannabis businesses, the premises on which they operate, and the policies and procedures related to the possession of cannabis
or cannabis products outside of the licensed premises.

Moreover,
in recent years, certain temporary federal legislative enactments that protect the medical marijuana and hemp industries have also been
in effect. For instance, certain marijuana businesses receive a measure of protection from federal prosecution by operation of temporary
appropriations measures that have been enacted into law as amendments (or “riders”) to federal spending bills passed by Congress
and signed by Presidents Obama, Trump, and, most recently, President Biden. For instance, in the Appropriations Act of 2015, Congress
included a budget “rider” that prohibits DOJ from expending any funds to enforce any law that interferes with a state’s
implementation of its own medical marijuana laws. The rider originally known as the “Rohrbacher-Farr” Amendment after its
original lead sponsors is now known as the “Joyce” Amendment after its current sponsor. Originally, a Republican-controlled
House and Democratic-controlled Senate passed the Rohrbacher-Farr Amendment. The bill was “a bipartisan appropriations measure
that looks to prohibit the DEA from spending funds to arrest state-licensed medical marijuana patients and providers.” Subsequently,
the rider t has been included in multiple budgets passed by successive Congresses controlled by both major political parties. Most recently,
on February 18, 2022, the Amendment was renewed through the signing of an additional stopgap spending bill, H.R.6617 - Further Additional
Extending Government Funding Act, effective through March 11, 2022. While the Amendment has been included in successive appropriations
legislation or resolutions since 2015, its inclusion or non-inclusion is subject to political change.



Notably,
Joyce Amendment has applied only to medical marijuana programs and has not provided the same protections to enforcement against adult-use
activities. If the Amendment is no longer in effect, the risk of federal enforcement and override of state marijuana laws would increase.



In
December 2019, an outbreak of a novel strain of coronavirus (COVID-19) originated in Wuhan, China, and has since spread to several other
countries, including the United States. On June 11, 2020, the World Health Organization characterized COVID-19 as a pandemic. In addition,
as of the time of the filing of this Annual Report on Form 10-K, several states in the United States have declared states of emergency,
and several countries around the world, including the United States, have taken steps to restrict travel. The existence of a worldwide
pandemic, the fear associated with COVID-19, or any, pandemic, and the reactions of governments in response to COVID-19, or any, pandemic,
to regulate the flow of labor and products and impede the travel of personnel, may impact our ability to conduct normal business operations,
which could adversely affect our results of operations and liquidity. Disruptions to our supply chain and business operations disruptions
to our retail operations and our ability to collect rent from the properties which we own, personnel absences, or restrictions on the
shipment of our or our suppliers’ or customers’ products, any of which could have adverse ripple effects throughout our business.
If we need to close any of our facilities or a critical number of our employees become too ill to work, our production ability could
be materially adversely affected in a rapid manner. Similarly, if our customers experience adverse consequences due to COVID-19, or any
other, pandemic, demand for our products could also be materially adversely affected in a rapid manner. Global health concerns, such
as COVID-19, could also result in social, economic, and labor instability in the markets in which we operate. Any of these uncertainties
could have a material adverse effect on our business, financial condition, or results of operations.



F-10









These
conditions raise substantial doubt as to the Company’s ability to continue as a going concern. Should the United States Federal
Government choose to begin enforcement of the provisions under the “ACT”, the Company through its wholly owned subsidiaries
could be prosecuted under the “ACT” and the Company may have to immediately cease operations and/or be liquidated upon its
closing of the acquisition or investment in entities that engage directly in the production and or sale of cannabis.



Management
believes that the Company has access to capital resources through potential public or private issuances of debt or equity securities.
However, if the Company is unable to raise additional capital, it may be required to curtail operations and take additional measures
to reduce costs, including reducing its workforce, eliminating outside consultants, and reducing legal fees to conserve its cash in amounts
sufficient to sustain operations and meet its obligations. These matters raise substantial doubt about the Company’s ability to
continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might become necessary
should the Company be unable to continue as a going concern.



2.
Summary of Significant Accounting Policies



Basis
of Presentation



The
Company’s consolidated financial statements been prepared in accordance with accounting principles generally accepted in the United
States (“GAAP”). The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary.
All material intercompany accounts and transactions have been eliminated during the consolidation process. The Company manages its operations
as a single segment for the purposes of assessing performance and making operating decisions.



Use
of Estimates



The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the application
of accounting policies and the reported amounts of assets, liabilities, income, and expenses. The most significant estimates included
in these consolidated financial statements are those associated with the assumptions used to value equity instruments, valuation of its
long live assets for impairment testing, valuation of intangible assets, and the valuation of inventory. These estimates and assumptions
are based on current facts, historical experience and various other factors believed to be reasonable given the circumstances that exist
at the time the financial statements are prepared. Actual results 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.



Reclassifications



Certain
amounts in the Company’s consolidated financial statements for prior periods have been reclassified to conform to the current period
presentation. These reclassifications have not changed the results of operations of prior periods.



Principles
of Consolidation



The
Company’s policy is to consolidate all entities that it controls by ownership of a majority of the outstanding voting stock. In
addition, the Company consolidates entities that meet the definition of a variable interest entity (“VIE”) for which it is
the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a VIE that most significantly
impact the entity’s economic performance and who has an obligation to absorb losses of the entity or a right to receive benefits
from the entity that could potentially be significant to the entity. For consolidated entities that are less than wholly owned, the third
party’s holding of equity interest is presented as noncontrolling interests in the Company’s Consolidated Balance Sheets
and Consolidated Statements of Changes in Stockholders’ Equity. The portion of net loss attributable to the noncontrolling interests
is presented as net loss attributable to noncontrolling interests in the Company’s Consolidated Statements of Operations.



F-11









The
accompanying consolidated financial statements include the accounts of Stem Holdings, Inc. and its wholly owned subsidiaries, Stem Holdings
Oregon, Inc., Stem Holdings IP, Inc., Opco, LLC, Stem Holdings Agri, Inc., Stem Oregon Acquisitions 2 Corp., Stem Oregon Acquisitions
3 Corp., Stem Oregon Acquisitions 4 Corp., 7LV USA Corporation, and Stem Oregon Acquisitions 1 Corp., and Driven Deliveries, Inc., which
was subsequently divested. In addition, the Company has consolidated YMY Ventures, WCV, LLC and NVD RE, Inc. under the variable interest
requirements.







Cash
and Cash Equivalents



The
Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. The
Company’s cash is primarily maintained in checking accounts. These balances may, at times, exceed the U.S. Federal Deposit Insurance
Corporation insurance limits. As of September 30, 2022, and 2021, the Company had no cash equivalents or short-term investments. The
Company has not experienced any losses on deposits of cash and cash equivalents.



Accounts
Receivable



Accounts
receivable is shown on the face of the consolidated balance sheets, net of an allowance for doubtful accounts. The Company analyzes the
aging of accounts receivable, historical bad debts, customer creditworthiness and current economic trends, in determining the allowance
for doubtful accounts. The Company does not accrue interest receivable on past due accounts receivable. As of September 30, 2022, and
2021 the reserve for doubtful accounts was $79 for both periods.



Inventory



Inventory
is comprised of raw materials, finished goods and work-in-progress such as pre-harvested cannabis plants and by-products to be extracted.
The costs of growing cannabis including but not limited to labor, utilities, nutrition, and irrigation, are capitalized into inventory
until the time of harvest. The Company recorded an adjustment to reduce inventory to net realizable value of $88 and $0 as of September 30,
2022 and 2021, respectively.



Inventory
is stated at the lower of cost or net realizable value, determined using weighted average cost. Cost includes expenditures directly related
to manufacturing and distribution of the products. Primary costs include raw materials, packaging, direct labor, overhead, shipping and
the depreciation of manufacturing equipment and production facilities determined at normal capacity. Manufacturing overhead and related
expenses include salaries, wages, employee benefits, utilities, maintenance, and property taxes.



Net
realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. At the end of each reporting period, the Company performs an assessment of inventory obsolescence to measure
inventory at the lower of cost or net realizable value. Factors considered in the determination of obsolescence include slow-moving or
non-marketable items.



Prepaid
Expenses and Other Current Assets



Prepaid
expenses consist of various payments that the Company has made in advance for goods or services to be received in the future. These prepaid
expenses include consulting, advertising, insurance, and service or other contracts requiring up-front payments.



Property
and Equipment



Property,
equipment, and leasehold improvements are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line
method over the estimated useful lives of the assets. Repairs and maintenance expenditures that do not extend the useful lives of related
assets are expensed as incurred.



Expenditures
for major renewals and improvements are capitalized, while minor replacements, maintenance, and repairs, which do not extend the asset
lives, are charged to operations as incurred. Upon sale or disposition, the cost and related accumulated depreciation are removed from
the accounts and any gain or loss is included in operations. The Company continually monitors events and changes in circumstances that
could indicate that the carrying balances of its property, equipment and leasehold improvements may not be recoverable in accordance
with the provisions of ASC 360, “Property, Plant, and Equipment.” When such events or changes in circumstances are present,
the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered
through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets,
the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. See “Note
3 – Property, Equipment and Leasehold Improvements”.



F-12









Property
and equipment are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line method over the estimated
useful lives of the assets. The Company estimates useful lives as follows:

Schedule
of Estimated Useful Life of Assets

|Buildings                   | 20
    years                                                
|--------------------------- | ------------------------------------------------------------
|Leasehold
    improvements  | Shorter
    of term of lease or economic life of improvement
|Furniture
    and equipment | 5
    years                                                 
|Signage                     | 5
    years                                                 
|Software
    and related    | 5
    years                                                 



Impairment
of Long-Lived Assets



The
Company reviews the carrying value of its long-lived assets, which include property and equipment, for indicators of impairment whenever
events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. The Company considers
the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or
losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use
of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s
overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant
decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates assets
for potential impairment indicators at least annually and more frequently upon the occurrence of such events. The Company does not test
for impairment in the year of acquisition of properties, as long as those properties are acquired from unrelated third parties.



The
Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the
related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying
amounts. In cases where estimated future net undiscounted cash flows are less than the carrying value, an impairment loss is recognized
equal to an amount by which the carrying value exceeds the fair value of the asset or asset group. Fair value is generally determined
using the assets expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined
to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values
of the long-lived assets are depreciated and amortized prospectively over the newly determined remaining estimated useful lives.



Equity
Method Investments



Investments
in unconsolidated affiliates are accounted for under the equity method of accounting, as appropriate. The Company accounts for investments
in limited partnerships or limited liability corporations, whereby the Company owns a minimum of 5.0% of the investee’s outstanding
voting stock, under the equity method of accounting. These investments are recorded at the amount of the Company’s investment and
adjusted each period for the Company’s share of the investee’s income or loss, and dividends paid.



During
the years ended September 30, 2022, and 2021, the Company recognized its share of investee losses of approximately $0 and $234 thousand,
respectively. The loss for the year ended September 30, 2021, was an aggregate of Community Growth Partners Holdings, Inc., (“CGP”)
of approximately $233 thousand and Tilstar Medical, LLC (“TIL”) of approximately $1 thousand.



Investments were impaired by $795 thousand and $2.2
million for the years ended September 30, 2022, and 2021 respectively.



Asset
Acquisitions



The
Company has adopted ASU 2017-01, which clarifies the definition of a business with the objective of adding guidance to assist entities
with evaluating whether transactions should be accounted for as businesses acquisitions. As a result of adopting ASU 2017-01, acquisitions
of real estate and cannabis licenses do not meet the definition of a business combination and were deemed asset acquisitions, and the
Company therefore capitalized these acquisitions, including its costs associated with these acquisitions.



F-13









Goodwill
and Intangible Assets



Goodwill.Goodwill represents the excess acquisition cost over the fair value of net tangible and intangible assets acquired. Goodwill is not
amortized and is subject to annual impairment testing on or between annual tests if an event or change in circumstance occurs that would
more likely than not reduce the fair value of a reporting unit below its carrying value. In testing for goodwill impairment, the Company
has the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination
that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality
of events and circumstances, the Company concludes that it is not more likely than not that the fair value of a reporting unit is less
than its carrying amount, then performing the two-step impairment test is not required. If the Company concludes otherwise, the Company
is required to perform the two-step impairment test. The goodwill impairment test is performed at the reporting unit level by comparing
the estimated fair value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value,
goodwill at the reporting unit level is not impaired. If the estimated fair value is less than the carrying value, further analysis is
necessary to determine the amount of impairment, if any, by comparing the implied fair value of the reporting unit’s goodwill to
the carrying value of the reporting unit’s goodwill.   Goodwill impairment expense of $5.9 million and $0 was incurred for the years ended September 30, 2022, and 2021 respectively.



Intangible
Assets. Intangible assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives, where
the useful life is the period over which the asset is expected to contribute directly, or indirectly, to our future cash flows. Intangible
assets are reviewed for impairment on an interim basis when certain events or circumstances exist. For amortizable intangible assets,
impairment exists when the carrying amount of the intangible asset exceeds its fair value. At least annually, the remaining useful life
is evaluated.   Definite-lived intangible assets were impaired by $1,961 and $0 for the years ended September 30, 2022, and 2021 respectively.



An
intangible asset with an indefinite useful life is not amortized but assessed for impairment annually, or more frequently, when events
or changes in circumstances occur indicating that it is more likely than not that the indefinite-lived asset is impaired. Impairment
exists when the carrying amount exceeds its fair value. In testing for impairment, the Company has the option to first perform a qualitative
assessment to determine whether it is more likely than not that an impairment exists. If it is determined that it is not more likely
than not that an impairment exists, a quantitative impairment test is not necessary. If the Company concludes otherwise, it is required
to perform a quantitative impairment test. To the extent an impairment loss is recognized, the loss establishes the new cost basis of
the asset that is amortized over the remaining useful life of that asset, if any. Subsequent reversal of impairment losses is not permitted.



Business
Combinations



The
Company applies the provisions of ASC 805 in the accounting for acquisitions. ASC 805 requires the Company to recognize separately from
goodwill the assets acquired, and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date
is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the
liabilities assumed. While the Company uses its best estimates and assumptions to accurately apply preliminary value to assets acquired
and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, these estimates are inherently
uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date,
the Company records adjustments in the current period, rather than a revision to a prior period. Upon the conclusion of the measurement
period or final determination of the values of the assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments
are recorded in the consolidated statements of operations. Accounting for business combinations requires management to make significant
estimates and assumptions, especially at the acquisition date, including estimates for intangible assets, contractual obligations assumed,
restructuring liabilities, pre-acquisition contingencies, and contingent consideration, where applicable. Although the Company believes
the assumptions and estimates made have been reasonable and appropriate, they are based in part on historical experience and information
obtained from management of the acquired companies and are inherently uncertain. Unanticipated events and circumstances may occur that
may affect the accuracy or validity of such assumptions, estimates, or actual results.



Contingent
Consideration



The
Company accounts for “contingent consideration” according to FASB ASC 805, “Business Combinations” (“FASB
ASC 805”). Contingent consideration typically represents the acquirer’s obligation to transfer additional assets or equity
interests to the former owners of the acquiree if specified future events occur or conditions are met. FASB ASC 805 requires that contingent
consideration be recognized at the acquisition-date fair value as part of the consideration transferred in the transaction. FASB ASC
805 uses the fair value definition in Fair Value Measurements, which defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As defined in FASB
ASC 805, contingent consideration is (i) an obligation of the acquirer to transfer additional assets or equity interests to the former
owners of an acquiree as part of the exchange for control of the acquiree, if specified future events occur or conditions are met or
(ii) the right of the acquirer to the return of previously transferred consideration if specified conditions are met.



Warrant
Liability



The
Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value
at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair
value is recognized in the Company’s consolidated statements of operations. The fair value of the warrants issued by the Company
has been estimated using a Black Scholes model.



F-14









Embedded
Conversion Features



The
Company evaluates embedded conversion features within convertible debt to determine whether the embedded conversion feature(s) should
be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in the statement
of operations. If the conversion feature does not require recognition of a bifurcated derivative, the convertible debt instrument is
evaluated for consideration of any beneficial conversion feature (“BCF”) requiring separate recognition. When the Company
records a BCF, the intrinsic value of the BCF is recorded as a debt discount against the face amount of the respective debt instrument
(offset to additional paid-in capital) and amortized to interest expense over the life of the debt.



Income
Taxes



The
provision for income taxes is determined in accordance with ASC 740, “Income Taxes”. The Company files a consolidated United
States federal income tax return. The Company provides for income taxes based on enacted tax law and statutory tax rates at which items
of income and expense are expected to be settled in our income tax return. Certain items of revenue and expense are reported for Federal
income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred
taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established
when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for
financial-reporting and tax-reporting purposes. As of September 30, 2022, and 2021, such net operating losses were offset entirely by
a valuation allowance.



The
Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely
than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50.0% likely of being ultimately
realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company
classifies income tax related interest and penalties as interest expense and selling, general and administrative expense, respectively,
on the consolidated statements of operations.



In
December 2017, the Tax Cuts and Jobs Act (TCJA or the Act) was enacted, which significantly changes U.S. tax law. In accordance with
ASC 740, “Income Taxes”, the Company is required to account for the new requirements in the period that includes the date
of enactment. The Act reduced the overall corporate income tax rate to 21.0%, created a territorial tax system (with a one-time mandatory
transition tax on previously deferred foreign earnings), broadened the tax base and allowed for the immediate capital expensing of certain
qualified property.



Revenue
Recognition



The
Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration
which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an
entity determines are within the scope of Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic
606), the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations
in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract;
and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to
contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services
it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company
assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether
each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated
to the respective performance obligation when (or as) the performance obligation is satisfied.



Revenue
for the Company’s product sales has not been adjusted for the effects of a financing component as the Company expects, at contract
inception, that the period between when the Company’s transfers control of the product and when the Company receives payment will
be one year or less. Product shipping and handling costs are included in cost of product sales.



F-15







The
following policies reflect specific criteria for the various revenue streams of the Company:



Cannabis
Dispensary, Cultivation and Production



Revenue
is recognized upon transfer of retail merchandise to the customer upon sale transaction, at which time its performance obligation is
complete. Revenue is recognized upon delivery of product to the wholesale customer, at which time the Company’s performance obligation
is complete. Terms are generally between cash on delivery to 30 days for the Company’s wholesale customers.



The
Company’s sales environment is somewhat unique, in that once the product is sold to the customer (retail) or delivered (wholesale)
there are essentially no returns allowed or warranty available to the customer under the various state laws.







Delivery



|1) | Identify
    the contract with a customer
|-- | -----------------------------------------



The
Company sells retail products directly to customers. In these sales there is no formal contract with the customer. These sales have commercial
substance and there are no issues with collectability as the customer pays the cost of the goods at the time of purchase or delivery.



|2) | Identify
    the performance obligations in the contract
|-- | --------------------------------------------------------



The
Company sells its products directly to consumers. In this case these sales represent a performance obligation with the sales and any
necessary deliveries of those products.



|3) | Determine
    the transaction price
|-- | -----------------------------------



The
sales that are done directly to the customer have no variable consideration or financing component. The transaction price is the cost
that those goods are being sold for plus any additional delivery costs.



|4) | Allocate
    the transaction price to performance obligations in the contract
|-- | -----------------------------------------------------------------------------



For
the goods that the Company sells directly to customers, the transaction price is allocated between the cost of the goods and any delivery
fees that may be incurred to deliver to the customer.



|5) | Recognize
    revenue when or as the Company satisfies a performance obligation
|-- | -------------------------------------------------------------------------------



For
the sales of the Company’s own goods the performance obligation is complete once the customer has received the product.



Leases



On
October 1, 2020, the Company adopted ASC 842 and elected to apply the new standard at the adoption date and recognize a cumulative effect
as an adjustment to retained earnings. Upon calculation the effect on retained earnings was immaterial and no adjustment was deemed necessary.
Leases with an initial term of twelve months or less are not recorded on the balance sheet. For lease agreements entered into or reassessed
after the adoption of Topic 842, we combine the lease and non-lease components in determining the lease liabilities and right of use
(“ROU”) assets.



F-16













Our
lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined
based on information available at lease commencement date for purposes of determining the present value of lease payments. We used the
incremental borrowing rate on September 30, 2022, for all leases that commenced prior to that date. In determining this rate, which is
used to determine the present value of future lease payments, we estimate the rate of interest we would pay on a collateralized basis,
with similar payment terms as the lease and in a similar economic environment.



Under
Topic 842, operating lease expense is generally recognized evenly over the term of the lease. Lease costs were $1,224 thousand and $599
thousand for the years ended September 30, 2022, and 2021, respectively. There was sublease rental income of $0 and $17 thousand, respectively
for the years ended September 30, 2022, and 2021. The Company has ten operating leases consisting with remaining lease terms ranging
from 4 months to 177 months.







Lease
Costs

Schedule of Lease Costs

|                                     |  | Year
    Ended    |      
|------------------------------------ |  | ----------------- | -----
|                                     |  | September
    30, |      
|                                     |  | 2022              |      
|Components
    of total lease costs: |  |                   |      
|Operating
    lease expense          |  | $                 | 1,224
|Total
    lease costs                |  | $                 | 1,224



Lease
positions as of September 30, 2022



ROU
lease assets and lease liabilities for our operating leases were recorded in the consolidated condensed balance sheet as follows:

Schedule
of Right-of-Use Assets and Lease Liabilities



|                                             |  | September
    30, 2022 |      
|-------------------------------------------- |  | ---------------------- | -----
|Assets                                       |  |                        |      
|Right
    of use asset                       |  | $                      | 6,874
|Total
    assets                             |  | $                      | 6,874
|                                             |  |                        |      
|Liabilities                                  |  |                        |      
|Operating
    lease liabilities – short term |  | $                      | 580  
|Operating
    lease liabilities – long term  |  |                        | 6,476
|Total
    lease liability                    |  | $                      | 7,056



Lease
Terms and Discount Rate

Schedule
of Lease Terms and Discount Rate

|Weighted average remaining lease term (in years) – operating lease |  |  | 12.23 |  
|------------------------------------------------------------------ |  |  | ----- | -
|Weighted average discount rate – operating lease                   |  |  | 11.04 | %



Cash
Flows

Schedule of Cash Flow Related to Lease

|                                                                           |  | Year Ended         |       
|-------------------------------------------------------------------------- |  | ------------------ | ------
|                                                                           |  | September 30, 2022 |       
|Cash paid for amounts included in the measurement of lease liabilities:    |  |                    |       
|ROU amortization                                                           |  | $                  | 1,224 
|Cash paydowns of operating liability                                       |  | $                  | (1,224
|Supplemental non-cash amounts of lease liabilities arising from obtaining: |  |                    |       
|ROU asset                                                                  |  | $                  | 6,874 
|Lease Liability                                                            |  | $                  | 7,056 



The
future minimum lease payments under the leases are as follows:

Schedule
of Future Minimum Lease Payments

|                                    |  |   | 2022   |  
|----------------------------------- |  | - | ------ | -
|2023                                |  | $ | 1,337  |  
|2024                                |  |   | 1,147  |  
|2025                                |  |   | 1,053  |  
|2026                                |  |   | 1,033  |  
|2027                                |  |   | 825    |  
|Thereafter                          |  |   | 8,345  |  
|Total future minimum lease payments |  |   | 13,740 |  
|Less: Lease imputed interest        |  |   | (6,684 | )
|Total                               |  | $ | 7,056  |  







Disaggregation
of Revenue



In
the year ended September 30, 2022, and 2021, revenue reported was primarily from the sale of cannabis and related products accounted
for under ASC 606.



The
following table illustrates our revenue by type related to the years ended September 30, 2022, and 2021:

Schedule of Disaggregation of Revenue

|                      |  | 2022          |        |   | 2021 |  
|--------------------- |  | ------------- | ------ | - | ---- | -
|                      |  | September 30, |       
|                      |  | 2022          |        |   | 2021 |  
|Revenue               |  |               |        |   |      |  
|Wholesale             |  | $             | 4,306  |   |      | $
|Retail                |  |               | 14,867 |   |      |  
|Rental                |  |               | -      |   |      |  
|Other                 |  |               | 118    |   |      |  
|Total revenue         |  |               | 19,291 |   |      |  
|Discounts and returns |  |               | (2,728 | ) |      |  
|Net Revenue           |  | $             | 16,563 |   |      | $







F-17







Geographical
Concentrations



As
of September 30, 2022, the Company is primarily engaged in the production and sale of cannabis, which is only legal for recreational
use in 19 states and D.C., with lesser legalization, such as for medical use in an additional 21 states and D.C., as of the time of these
consolidated financial statements. In addition, the United States Congress has passed legislation, specifically the Agriculture Improvement
Act of 2018 (also known as the “Farm Bill”) that has removed production and consumption of hemp and associated products from
Schedule 1 of the Controlled Substances Act.







Cost
of Goods Sold



Cost
of sales represents costs directly related to manufacturing and distribution of the Company’s products. Primary costs include raw
materials, packaging, direct labor, overhead, shipping and handling and the depreciation of manufacturing equipment and production facilities.
Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance, and property taxes. The
Company recognizes the cost of sales as the associated revenues are recognized.





Fair
Value of Financial Instruments



As
defined in the authoritative guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date.



To
estimate fair value, the Company utilizes market data or assumptions that market participants would use in pricing the asset or liability,
including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable,
market corroborated or generally unobservable.



The
authoritative guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives
the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (“Level 1” measurements)
and the lowest priority to unobservable inputs (“Level 3” measurements). The three levels of the fair value hierarchy are
as follows:



Level
1 — Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.



Level
2 — Other inputs that are observable, directly, or indirectly, such as quoted prices in markets that are not active, or inputs
which are observable, either directly or indirectly, for substantially the full term of the asset or liability.







Level
3 — Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about how market
participants would price the assets and liabilities.



In
instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input
that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.



Stock-based
Compensation



The
Company accounts for share-based payment awards exchanged for services at the estimated grant date fair value of the award. Stock options
issued under the Company’s long-term incentive plans are granted with an exercise price equal to no less than the market price
of the Company’s stock at the date of grant and expire up to ten years from the date of grant. These options generally vest on
the grant date or over a one-year period.



The
Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating
the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application
of management’s judgment.



Expected
Term - The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding
based on the simplified method, which is the half-life from vesting to the end of its contractual term.



Expected
Volatility - The Company computes stock price volatility over expected terms based on its historical common stock trading prices.



Risk-Free
Interest Rate - The Company bases the risk-free interest rate on the implied yield available on U. S. Treasury zero-coupon issues
with an equivalent remaining term.



Expected
Dividend - The Company has never declared or paid any cash dividends on its common shares and does not plan to pay cash dividends
in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.



Effective
January 1, 2017, the Company elected to account for forfeited awards as they occur, as permitted by Accounting Standards Update (“ASU”)
2016-09. Ultimately, the actual expenses recognized over the vesting period will be for those shares that vested. Prior to making this
election, the Company estimated a forfeiture rate for awards at 0%, as the Company did not have a significant history of forfeitures.



F-18









Earnings
(Loss) per Share



ASC
260, Earnings Per Share, requires dual presentation of basic and diluted earnings per share (“EPS”) with a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic
EPS excludes dilution. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the
entity.



Basic
net loss per share of common stock excludes dilution and is computed by dividing net loss by the weighted average number of shares of
common stock outstanding during the period. Diluted net loss per share of common stock reflects the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity unless inclusion of such shares would be anti-dilutive. Since the Company has only
incurred losses, basic and diluted net loss per share is the same. Securities that could potentially dilute loss per share in the future
that were not included in the computation of diluted loss per share as of September 30, 2022, and 2021 are as follows:

Schedule of Computation of Diluted Loss

|Potentially dilutive share-based instruments: |  | September 30, |             |  | September 30, | 
|--------------------------------------------- |  | ------------- | ----------- |  | ------------- | 
|                                              |  | 2022          |             |  | 2021          | 
|Convertible notes                             |  |               | 34,736,220  |  |               | 
|Options to purchase common stock              |  |               | 5,518,185   |  |               | 
|Unvested restricted stock awards              |  |               | -           |  |               | 
|Warrants to purchase common stock             |  |               | 65,783,059  |  |               | 
|Anti-dilutive Securities                      |  |               | 106,037,464 |  |               | 







Advertising
Costs



The
Company follows the policy of charging the cost of advertising to expense as incurred. Advertising expense was $266 thousand and $368 thousand
for the year ended September 30, 2022, and 2021, respectively.



Related
parties



Parties
are related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the
immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one
party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting
parties might be prevented from fully pursuing its own separate interests.



Segment
reporting



Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly
by the chief operating decision maker, or decision–making group in deciding how to allocate resources and in assessing performance.
The Company’s chief operating decision–maker is its chief executive officer. The Company currently operates in one segment.



Recent
Accounting Guidance



In
January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350)—Simplifying the Test for Goodwill Impairment.
ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the requirement to compare the implied fair value of goodwill
with its carrying amount as part of step two of the goodwill impairment test referenced in Accounting Standards Codification (“ASC”)
350, Intangibles - Goodwill and Other (“ASC 350”). As a result, an entity should perform its annual, or interim, goodwill
impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for
the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the impairment loss recognized should
not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for annual reporting periods beginning
after December 15, 2019. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements
and related disclosures.



F-19









In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes, modifies and adds certain disclosure
requirements in Topic 820 “Fair Value Measurement”. ASU 2018-13 eliminates certain disclosures related to transfers and the
valuations process, modifies disclosures for investments that are valued based on net asset value, clarifies the measurement uncertainty
disclosure, and requires additional disclosures for Level 3 fair value measurements. ASU 2018-13 is effective for the Company for annual
and interim reporting periods beginning January 1, 2020. The adoption of this standard did not have a material impact on the Company’s
consolidated financial statements and related disclosures.



In
February 2016, the FASB issued ASU No. 2016-02, Leases. The standard amends the existing lease accounting guidance and requires lessees
to recognize a lease liability and a right-of-use asset for all leases (except for short-term leases that have a duration of one year
or less) on their balance sheets. Lessees will continue to recognize lease expense in a manner similar to current accounting. For lessors,
accounting for leases under the new guidance is substantially the same as in prior periods but eliminates current real estate-specific
provisions and changes the treatment of initial direct costs. Entities are required to use a modified retrospective approach for leases
that exist or are entered into after the beginning of the earliest comparable period presented, with an option to elect certain transition
relief. Full retrospective application is prohibited. The standard was adopted as of October 1, 2020. As of September 30, 2022, the Company
recognized additional operating liabilities of approximately $7.1 million, with corresponding ROU assets of approximately $6.9 million.



In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments (“ASU 2016-13”). ASU 2016-13 provides guidance for recognizing credit losses on financial instruments based on
an estimate of current expected credit losses model. The amendments are effective for fiscal years beginning after December 15, 2019.
Recently, the FASB issued the final ASU to delay adoption for smaller reporting companies to calendar year 2023. The Company is currently
assessing the impact of the adoption of this ASU on its financial statements.



In
January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures
(Topic 323), and Derivative and Hedging (Topic 815), which clarifies the interaction of rules for equity securities, the equity method
of accounting, and forward contracts and purchase options on certain types of securities. The guidance clarifies how to account for the
transition into and out of the equity method of accounting when considering observable transactions under the measurement alternative.
The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those
annual periods, with early adoption permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements
and related disclosures.



In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts
in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.
This ASU amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity,
and also improves and amends the related EPS guidance for both Subtopics. The ASU will be effective for annual reporting periods beginning
after December 15, 2021 and interim periods within those annual periods and early adoption is permitted. We are currently evaluating
the impact of the new guidance on our consolidated financial statements.



3.
Discontinued Operations, Assets and Liabilities Held for Sale



Discontinued
Operations



On
December 15, 2021, pursuant to a Share Exchange Agreement, the Company sold Driven Deliveries and its subsidiaries to the shareholders
of Budee, Inc. in a transaction which the Company fully divested all of its interests in Driven Deliveries and all of its subsidiaries.
Included in the terms of the Share Exchange Agreement, the shareholder of Budee, Inc., and prior officer of Driven Deliveries returned
approximately 11.5 million shares of the Company’s common stock and assumed approximately $7.1 million of the Companies liabilities.
Notwithstanding, the Company was responsible for approximately $210,000 of accounts payable assumed in the acquisition of
Driven Deliveries , of which $130 thousand remains outstanding as of September 30, 2022.



F-20









The
following table presents the assets and liabilities associated with the divestiture of Driven Deliveries; Inc. as follows (in thousands):

Schedule
of Discontinued Operations of Assets and Liabilities

|                                          |  | December 15, |       |  | September 30, |  
|----------------------------------------- |  | ------------ | ----- |  | ------------- | -
|                                          |  | 2021         |       |  | 2021          |  
|                                          |  |              |       |  |               |  
|ASSETS                                    |  |              |       |  |               |  
|Current assets                            |  |              |       |  |               |  
|Cash and cash equivalents                 |  | $            | 47    |  |               | $
|Inventory                                 |  |              | 509   |  |               |  
|Prepaid expenses and other current assets |  |              | 242   |  |               |  
|Total current assets                      |  |              | 798   |  |               |  
|                                          |  |              |       |  |               |  
|Property and equipment, net               |  |              | 4     |  |               |  
|Right of use asset                        |  |              | 327   |  |               |  
|Intangible assets, net                    |  |              | 7,049 |  |               |  
|Total assets                              |  | $            | 8,178 |  |               | $
|                                          |  |              |       |  |               |  
|LIABILITIES AND SHAREHOLDERS’ EQUITY      |  |              |       |  |               |  
|Current liabilities                       |  |              |       |  |               |  
|Accounts payable and accrued expenses     |  |              | 7,551 |  |               |  
|Short term notes and advances             |  |              | 3     |  |               |  
|Settlement payable                        |  |              | -     |  |               |  
|Acquisition notes payable                 |  |              | -     |  |               |  
|Lease liability                           |  |              | 218   |  |               |  
|Total current liabilities                 |  |              | 7,772 |  |               |  
|                                          |  |              |       |  |               |  
|Lease liability - long term               |  |              | 108   |  |               |  
|Total liabilities                         |  | $            | 7,880 |  |               | $



The
total assets and total liabilities in the above table for the year ended September 30, 2021, are presented in the balance sheet as of
September 30, 2022, as Assets held for sale and Liabilities held for sale.



The
following table presents the operating results related to the divestiture of Driven Deliveries; Inc. (in thousands):



|                             |  | 2022                     |        |   | 2021 |  
|---------------------------- |  | ------------------------ | ------ | - | ---- | -
|                             |  | Year Ended September 30, |       
|                             |  | 2022                     |        |   | 2021 |  
|                             |  |                          |        |   |      |  
|Revenues                     |  | $                        | 3,805  |   |      | $
|Cost of goods sold           |  |                          | 3,772  |   |      |  
|Gross Profit                 |  |                          | 33     |   |      |  
|                             |  |                          |        |   |      |  
|Operating expenses:          |  |                          |        |   |      |  
|Consulting fees              |  |                          | 4      |   |      |  
|Professional fees            |  |                          | 24     |   |      |  
|General and administration   |  |                          | 1,749  |   |      |  
|Impairment expense           |  |                          | -      |   |      |  
|Total operating expenses     |  |                          | 1,777  |   |      |  
|Loss from operations         |  |                          | (1,744 | ) |      |  
|                             |  |                          |        |   |      |  
|Other income (expenses)      |  |                          |        |   |      |  
|Interest expense             |  |                          | (1     | ) |      |  
|Other income                 |  |                          | -      |   |      |  
|Total other income (expense) |  |                          | (1     | ) |      |  
|Net loss                     |  | $                        | (1,745 | ) |      | $



F-21







4.
Property, Plant & Equipment



Property
and equipment consist of the following (in thousands):

Schedule
of Property, Plant and Equipment

|                                    |  | September 30, |        |   | September 30, |  
|----------------------------------- |  | ------------- | ------ | - | ------------- | -
|                                    |  | 2022          |        |   | 2021          |  
|                                    |  |               |        |   |               |  
|Land                                |  | $             | 1,151  |   |               | $
|Automobiles                         |  |               | 93     |   |               |  
|Signage                             |  |               | 19     |   |               |  
|Furniture and equipment             |  |               | 2,590  |   |               |  
|Leasehold improvements              |  |               | 3,532  |   |               |  
|Buildings and property improvements |  |               | 7,460  |   |               |  
|Computer software                   |  |               | 59     |   |               |  
|Property and equipment, gross       |  |               | 14,904 |   |               |  
|Accumulated depreciation            |  |               | (5,815 | ) |               |  
|Property and equipment, net         |  | $             | 9,089  |   |               | $



Depreciation
expense was approximately $1.61 million and $1.93 million for the years ended September 30, 2022, and 2021, respectively. Depreciation
expense is included in general and administrative expense.



5.
Inventory



Inventory
consists of the following (in thousands):

Schedule
of Inventory

|                    |  | September
    30, |       |  | September
    30, |  
|------------------- |  | ----------------- | ----- |  | ----------------- | -
|                    |  | 2022              |       |  | 2021              |  
|                    |  |                   |       |  |                   |  
|Raw
    materials   |  | $                 | 569   |  |                   | $
|Work-in-progress    |  |                   | 450   |  |                   |  
|Finished
    goods  |  |                   | 1,656 |  |                   |  
|Total
    Inventory |  | $                 | 2,675 |  |                   | $





Raw
materials and work-in-progress include the costs incurred for cultivation materials and live plants. Finished goods consists of cannabis
products sent to retail locations or ready to be sold. No inventory reserve was recorded for the years ended September 30, 2022, and
2021 due to management’s assessment of the inventory on hand.



6.
Prepaid expenses and other current assets



Prepaid
expenses and other current assets are assets and payments previously made, that benefit future periods. The balance as of September
30, 2022, includes the Employee Retention Tax Credit (“ERTC”) program from the U.S Treasury, as part of the COVID-19
stimulus package. During the fiscal year ended September 30, 2021, the Company applied for certain ERTC credits in the approximate
amount of $5.1
million, which is reflected within the Statement of Operations as a reduction to general and administration expense. The remaining
balance of the ERTC receivable was approximately $201
thousand as of September 30, 2022.



Prepaid
and other current assets comprised of the following:

Schedule
of Prepaid Expenses and Other Current Assets

|                                                |  | September 30, |     |  | September 30, |  
|----------------------------------------------- |  | ------------- | --- |  | ------------- | -
|                                                |  | 2022          |     |  | 2021          |  
|                                                |  |               |     |  |               |  
|Prepaid expenses                                |  | $             | 538 |  |               | $
|ERTC credits                                    |  |               | 201 |  |               |  
|Deposits and other current assets               |  |               | 190 |  |               |  
|                                                |  |               |     |  |               |  
|Total prepaid expenses and other current assets |  | $             | 929 |  |               | $



F-22







7.
Equity method investments



Tilstar
Medical, LLC



In
April 2019, the Company entered into an agreement to acquire 48% of the membership interest of Tilstar Medical, LLC (“TIL”).
TIL is a startup operation located in Laurel, Maryland and owns a project management company which assists in procuring licenses for
the production and sale of cannabis. The purchase price for the 48% interest was $550,000 to capitalize TIL which under the operating
agreement occurs upon the execution of the agreement. As of September 30, 2019, the Company had funded the $550,000 and accounted for
its investment using the equity method of accounting. The Company was not made aware at time of its investment in the type and magnitude
of expenses that would be funded with its investment capital and is currently in the process of renegotiating the terms of the operating
agreement. During the year ended September 30, 2019, Tilstar Medical along with its partner, Stem Holdings, Inc. received a letter from
the Maryland Medical Cannabis commission with notification that we received stage one pre-approval for a processor license. The Companies
application ranked amongst the top nine highest scoring applications for a medical cannabis processor license. Final awards will be issued
during calendar year 2021. During the years ended September 30, 2022 and 2021, the Company recognized minimal losses on investments related
to TIL. During the year ended September 30, 2022, the Company recorded impairment expense of approximately $288,000 related to its investment
in TIL.



Community
Growth Partners, Inc



On
January 6, 2020, the
Company issued a convertible promissory note to Community Growth Partners Holdings, Inc., (“CGS”) which acted as a line
of credit. Subject to the terms and conditions of the note, CGS promised to pay the Company all of the outstanding principal
together with interest on the unpaid principal balance upon the date that is twelve months after the effective date and was payable
as follows: (a)The Company agreed to make several loans to CGS from time to time upon request of CGS in amounts not to exceed the
principal sum of $2,000,000,
(b) Payment of principal and interest shall be immediately available funds, (c) This note may be prepaid in whole or in part at any
time without premium or penalty. Any partial prepayment shall be applied against the principal amount outstanding, (d) The unpaid
principal amount outstanding under this note shall bear interest commencing upon the first advance at the rate of 10% per annum
through the maturity date, calculated on the basis of a 365-day, until the entire indebtedness is fully paid, Upon the closing of a
$2,000,000
financing by the Company, all of the principal and interest shall automatically convert into equity shares of CGS at the price
obtained by the qualified financing. As of September 30, 2020, a portion of the note was converted into 7%
equity. In March 2021, the balance of a note receivable was converted into an additional 6%
equity leaving an equity investment of 13%.
As of the year ended September 30, 2022, pursuant to a secondary stock purchase agreement, the Company sold its note receivable and
equity investment in CGS in consideration for $1.65
million in cash, and recorded a gain of $488 thousand for the year ended September 30, 2022.



8.
Note Receivable



On
January 4, 2020, the Company issued a $355,000 promissory note to Community Growth Partners Holdings, Inc., (“CGS”). CGS
is a cannabis license holder in Massachusetts. Subject to the terms and conditions of the note, CGS promises to pay the Company all of
the outstanding balance together with interest the date that is six months after the opening of the Great Barrington Dispensary which
was opened September 2020. Pursuant to a note purchase agreement dated April 13, 2022, the Company sold the note for $150,000 thousand
simultaneous with its equity investment in CGS in consideration for $1.65 million in cash.



On
January 6, 2020, the Company issued a convertible non-negotiable revolving credit promissory note up to $2,500,000 with a four-year term
to CGS. Subject to the terms and conditions of the note, CGS promises to pay the Company the lesser of $2,500,000 or the aggregate unpaid
principal amount of the loan. In the period of January 2020 through August 2020 the Company advanced $899,700 related to the note. In
September 2020, the Company converted $480,182 of the balance into approximately 7% ownership in CGS. In March 2021, the Company converted
the remaining balance plus accrued interest of $30,000 into an additional 6% ownership interest in CGS. As of the year ended September
30, 2022, pursuant to a secondary stock purchase agreement, the Company sold its equity investment in CGS in consideration for $1.65
million in cash.



In
September 2020 a former employee received funds on behalf of the Company. On October 1, 2020, the Company executed a $14thousand
promissory note to memorialize and structure a plan to receive the funds from the individual. The note was non-interest bearing and
was to be paid in equal monthly installments over an eighteen-monthterm
with a maturity date of March
1, 2022. As of September 30, 2022, and
September 30, 2021, the principal balance of the note was $0and
$3thousand, respectively.



On
October 1, 2020, the Company issued a $100,000 promissory note to Bushman Holdings, Inc., (“BHI”) BHI is a CBD Cannabis holding
company in Florida. During the year ended September 30, 2021, the Company issued additional promissory notes totaling $210,000. Subject
to the terms and conditions of the notes, BHI promised to pay the Company all outstanding balances on or before January 1, 2022. The
Company has determined that the note is uncollectible and recognized bad debt expense of $310,000 for the year ended September 30, 2021.



On
April 5, 2021, the Company issued a $250,000 non-negotiable convertible promissory note (“Note”) to Blake, Inc. The Note
has a maturity date which is six months after the close of the Arkannabis, a Colorado grow facility. The note has annual interest rate
of 5.75%. Per the terms of the note, the principal balance and related interest shall be made in immediately available funds in lawful
currency. The terms of the note call for automatic conversion upon the closing of the Arkannabis business of the outstanding principal
and interest on this Note and will convert into that number of shares of the equity securities equivalent to a non-dilutive 12.5% of
the issued and outstanding shares of the Arkannabis business. The Company has determined that the note is uncollectible and recognized
bad debt expense of $257,010 for the year ended September 30, 2021.



F-23







9.
Consolidated Asset Acquisitions



West
Coast Ventures



On
March 29, 2019, the Company entered into a definitive agreement to acquire Western Coast Ventures, Inc. (“WCV”). At the time
of acquisition, WCV was a shell with cash of $2,000,000 and a 51% ownership with ILCA Holdings, Inc. (“ILCA”). At the time
of acquisition of WCV, ILCA was also a shell with no operations, which has been issued a limited Conditional Use Permit for a Marijuana
Production Facility (a “MPF”) by the City of San Diego, California, which will only be granting a total of 40 MPFs. As consideration
for the acquisition, the Company issued 2,500,000 shares of its common stock, with a fair value of approximately $4.4 million or $1.47
per share, the Company’s closing stock price on March 29, 2019. The Company recorded $2.0 million of cash acquired and a $2.4 million
investment in ILCA. During the year ended September 30, 2021 the Company determined the investment in ILCA was impaired and recognized
an impairment expense of $2.2 million for the year ended September 30, 2021.



Michigan
RE 1



On
January 4, 2021, the Company entered into a Securities Purchase Agreement (“SPA”) with Michigan RE 1, Inc.
(“MRE1”) pursuant to a private placement offering of up to an aggregate amount of $510comprising
up to 510shares
of MRE1’s common stock which represents 51%
ownership by the Company. On January 5, 2021, the Company was party to an Asset Purchase Agreement between Leoni Wellness, LLC
(“Seller”) and Organic Guyz, LLC (“Purchaser”) whereas the Seller is engaged in the recreational cannabis
business and the Purchaser desired to purchase the local municipal license to operate an adult use retailer in the City of
Kalamazoo, Michigan. The purchase price to be paid by the Purchaser was $400,000.As
of September 30, 2021, the buildout of the Michigan retail dispensary had begun, however the project has been delayed due to
Department of Zoning and Planning coding issues. During the year ended September 30, 2022, due to related religious reasons, the
Department of Zoning and Planning had indicated that it would not issue a license, therefore, impairing this investment in full in the amount of $507 thousand.



Kaya
Holdings, Corp.



On
April 13, 2021, the Company executed an Investors’ Rights Agreement in conjunction with a Subscription Agreement with Kaya Holdings,
Corp. The Company purchased 2,875,000 shares of Class B common stock of Kaya Holdings, Corp for a total investment of $230,000. In addition
to the purchased Class B shares, the Company received 500,000 founder Class B shares resulting in a total of 3,375,000 Class B shares.
For the year ended September 30, 2022, the Company, pursuant to a securities purchase agreement sold all of these shares to a third party
for $200,000, incurring a loss of $30,000.



F-24







10.
Non-Controlling Interests



Non-controlling
interests in consolidated entities are as follows (in thousands):

Schedule of Non-Controlling Interests in Consolidated Entities

|                             |  | As of September 30, 2021 |      
|---------------------------- |  | ------------------------ | -----
|                             |  | NCI Equity Share         |      
|NVD RE Corp.                 |  | $                        | 587  
|Western Coast Ventures, Inc. |  |                          | 1,052
|YMY Ventures, Inc.           |  |                          | 243  
|Michigan RE 1, Inc.          |  |                          | -    
|                             |  | $                        | 1,882



|                             |  | As of September 30, 2022 |      
|---------------------------- |  | ------------------------ | -----
|                             |  | NCI Equity Share         |      
|NVD RE Corp.                 |  | $                        | 553  
|Western Coast Ventures, Inc. |  |                          | 842  
|YMY Ventures, Inc.           |  |                          | 299  
|Michigan RE 1, Inc.          |  |                          | (54  
|                             |  | $                        | 1,640



11.
Business Combination



Driven
Deliveries, Inc.



In
December 2020, the Company, through an Agreement and Plan of Merger became the parent of an 100% wholly owned subsidiary Driven Deliveries,
Inc., (“DRVD”, “Driven” or “Driven Deliveries”), its subsidiaries, a publicly held corporation on
December 29, 2020. DRVD is an e-commerce and DaaS (delivery-as-a-service) provider with proprietary logistics and omnichannel UX/CX technology.
Driven utilizes its own fulfillment centers, drivers, and proprietary technology. Driven provides two service levels to its customers:
(i) an “Express” delivery with a limited product selection that is usually delivered within 90 minutes or less; and (ii)
a “Next Day” scheduled delivery from a larger selection of 500+ products from a Driven fulfillment center. In connection
with the acquisition, the Company issued 101,968,944 shares of common stock to the existing shareholders of Driven (“DRVD Shares”).
As part of the Acquisition, the Company assumed the Driven stock options outstanding on the closing of the acquisition in the amount
of 4,530,495. Accordingly, the Company has assumed 30,249,184 common share purchase warrants (the “Warrants”), exercisable
into shares at an average exercise price of $.45 per share. Following the completion of the acquisition, Driven became a wholly-owned
subsidiary of the Company.



The
table below shows the warrant liability and embedded derivative liability recorded in connection with the Driven convertible notes and
the subsequent fair value measurement during the year ended September 30, 2021 in USD, (in thousands):

Schedule
of Liabilities Measured at Fair Value

|                                 |  | Warrant Liability |        |   | Derivative Liability |  
|-------------------------------- |  | ----------------- | ------ | - | -------------------- | -
|Balance as of September 30, 2020 |  | $                 | -      |   |                      | $
|Warrants acquired                |  |                   | 9,000  |   |                      |  
|Warrants converted into equity   |  |                   | (4,589 | ) |                      |  
|                                 |  |                   |        |   |                      |  
|Change in fair value             |  |                   | (2,415 | ) |                      |  
|Balance as of September 30, 2021 |  | $                 | 1,996  |   |                      | $



Purchase
Price Allocation



As
of December 29, 2020, the Company allocated the purchase consideration to the fair value of the assets acquired and liabilities assumed
as summarized in the table below (in thousands):



Consideration
Paid (in thousands)

Schedule of Purchasre Consideration to Fair value of assets Aquired and Liabilities Assumed

|Consideration Paid (in thousands)              |  |   |        |  
|---------------------------------------------- |  | - | ------ | -
|Estimated fair value of common stock issued    |  | $ | 40,048 |  
|Estimated fair value of warrants issued        |  |   | 9,000  |  
|Estimated fair value of options issued         |  |   | 500    |  
|Estimated fair value of debt assumed           |  |   | 4,389  |  
|Total consideration paid                       |  | $ | 53,937 |  
|                                               |  |   |        |  
|Assets acquired: (in thousands)                |  |   |        |  
|Cash and cash equivalents                      |  | $ | -      |  
|Fixed assets                                   |  |   | 47     |  
|Other Assets                                   |  |   | 1,526  |  
|Goodwill                                       |  |   | 11,740 |  
|Intangible assets                              |  |   | 47,900 |  
|Total assets acquired                          |  | $ | 61,213 |  
|                                               |  |   |        |  
|Liabilities assumed: (in thousands)            |  |   |        |  
|Accrued expenses and other current liabilities |  |   | (7,276 | )
|Total liabilities assumed                      |  | $ | (7,276 | )
|Net assets acquired (in thousands)             |  | $ | 53,937 |  



The
goodwill of $11,740,000 was not expected to be deductible for income tax expenses.



Based
on a review of long-lived tangible and intangible asset, and goodwill, an impairment expense of $52.5 million was recorded during the
fiscal year ended September 30, 2021.



On
December 17, 2021, pursuant to a Share Exchange Agreement, the Company sold Driven Deliveries and its subsidiaries to the shareholders
of Budee, Inc. in a transaction which STEM fully divested its interest in Driven Deliveries and its subsidiaries. Included in the terms
of the Share Exchange Agreement, the shareholders of Budee, and a prior officer of Driven Deliveries returned approximately 11.5 million
shares of the Company’s common stock and assumed approximately $7.9 million of the Company’s liabilities. Notwithstanding,
the Company was responsible for $210,753 of accounts payable assumed in the acquisition of Driven Deliveries. (see Note 3).



During
the year ended September 30, 2021, the Company also recorded adjustments for the elimination of other investments totaling $1.715 million.



Artifact



On
September 17, 2021, pursuant to an Agreement and Plan of Reorganization (“Agreement”) the Company acquired a marijuana processor
business and a marijuana retailer business located in Eugene, Oregon; a marijuana retailer business located in Salem, Oregon; and certain
intellectual property assets, including but not limited to the “ARTIFACT EXTRACTS” trademark that is used by the retail businesses
acquired in connection with the Agreement. In connection with the Agreement, the Company acquired fixed assets and intangible assets
in exchange for 8,209,178 common shares of the Company valued at $2,380,661 or $0.29 per share.





F-25









Purchase
Price Allocation



As
of September 17, 2021, the Company allocated the purchase consideration to the fair value of the assets acquired and liabilities assumed
as summarized in the table below (in thousands):

Schedule of Purchase Consideration to Fair value of assets Acquired and Liabilities Assumed

|Purchase Consideration      
|----------------------------
|                            
|Stock Consideration         
|                            
|Total Purchase Consideration





|                                     |  |   |       | 
|------------------------------------ |  | - | ----- | 
|Allocation of Purchase Consideration
|                                     |  |   |      
|Working Capital                      |  | $ | 189   | 
|                                     |  |   |       | 
|Fixed Assets                         |  |   | 14    | 
|                                     |  |   |       | 
|Customer Relationships               |  |   | 3     | 
|                                     |  |   |       | 
|License                              |  |   | 1,762 | 
|                                     |  |   |       | 
|Tradename                            |  |   | 206   | 
|                                     |  |   |       | 
|Goodwill                             |  |   | 207   | 
|                                     |  |   |       | 
|Total Purchase Consideration         |  | $ | 2,381 | 



The
goodwill of $207,000 is not expected to be deductible for income tax expenses.



The
following unaudited proforma condensed consolidated results of operations have been prepared as if the acquisition above occurred October
1, 2020.



Schedule
of Unaudited Proforma Information

|         |  | Year Ended                                                                                         |        
|-------- |  | -------------------------------------------------------------------------------------------------- | -------
|         |  | September 30,
                                                                                2021 |        
|Revenue  |  | $                                                                                                  | 43,821 
|Net loss |  | $                                                                                                  | (75,427



The
unaudited proforma condensed consolidated results of operations are not necessarily indicative of results that would have occurred had
the acquisitions occurred as of October 1, 2021, nor are they necessarily indicative of the results that may occur in the future.



12.
Intangible Assets, net



Intangible
assets as of September 2021, and 2020 (in thousands):



Schedule of Intangible Assets

|                               |  | Estimated Useful Life |             |  | Cannabis Licenses |   |        | Tradename |  |   | Customer Relationship |   |  | Non-compete |     |  | Technology |   |     | Accumulated Amortization |  |   | Net Carrying Amount |  
|------------------------------ |  | --------------------- | ----------- |  | ----------------- | - | ------ | --------- |  | - | --------------------- | - |  | ----------- | --- |  | ---------- | - | --- | ------------------------ |  | - | ------------------- | -
|Balance as September 30, 2021  |  |                       |             |  |                   | $ | 20,092 |           |  | $ | 951                   |   |  | $           | 645 |  |            | $ | 220 |                          |  | $ | 418                 |  
|YMY Ventures                   |  |                       | 15          |  |                   |   | -      |           |  |   | -                     |   |  |             | -   |  |            |   | -   |                          |  |   | -                   |  
|Western Coast Ventures, Inc.   |  |                       | 15          |  |                   |   | -      |           |  |   | -                     |   |  |             | -   |  |            |   | -   |                          |  |   | -                   |  
|Yerba Buena                    |  |                       | 3-15 years  |  |                   |   | (1,238 | )         |  |   | -                     |   |  |             | -   |  |            |   | -   |                          |  |   | -                   |  
|Foothill (7LV)                 |  |                       | 15          |  |                   |   | -      |           |  |   | -                     |   |  |             | -   |  |            |   | -   |                          |  |   | -                   |  
|Driven Deliveries (See Note 3) |  |                       | 10-15 years |  |                   |   | (9,315 | )         |  |   | (413                  | ) |  |             | -   |  |            |   | -   |                          |  |   | (413                | )
|JV Retail 3                    |  |                       | 3-15 years  |  |                   |   | (391   | )         |  |   | (129                  | ) |  |             | -   |  |            |   | -   |                          |  |   | -                   |  
|JV Retail 4                    |  |                       | 3-15 years  |  |                   |   | (391   | )         |  |   | (129                  | ) |  |             | -   |  |            |   | -   |                          |  |   | -                   |  
|JV Extraction                  |  |                       | 10-15 years |  |                   |   | (392   | )         |  |   | -                     |   |  |             | -   |  |            |   | -   |                          |  |   | -                   |  
|Other                          |  |                       | 5           |  |                   |   | -      |           |  |   | -                     |   |  |             | -   |  |            |   | -   |                          |  |   | -                   |  
|Balance as September 30, 2022  |  |                       |             |  |                   | $ | 8,365  |           |  | $ | 280                   |   |  | $           | 645 |  |            | $ | 220 |                          |  | $ | 5                   |  



Actual
amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions,
changes in useful lives or other relevant factors or changes. Amortization expense for the years ended September 30, 2022, and 2021 was
$881 thousand and $3,460, respectively.



The
following table is a runoff of expected amortization in the following 5-year period as of September 30:

Schedule of Expected Amortization

|                  |  |   |       | 
|----------------- |  | - | ----- | 
|2023              |  | $ | 680   | 
|2024              |  |   | 680   | 
|2025              |  |   | 680   | 
|2026              |  |   | 680   | 
|2027              |  |   | 680   | 
|Thereafter        |  |   | 4,614 | 
|Intangible assets |  | $ | 8,014 | 



F-26







13.
Accounts payable and accrued expenses



Accounts
payable and accrued expenses consist of the following (in thousands):

Schedule of Accounts Payable and Accrued Expenses

|                                            |  |               |       |  |               |  
|------------------------------------------- |  | ------------- | ----- |  | ------------- | -
|                                            |  | September 30, |       |  | September 30, |  
|                                            |  | 2022          |       |  | 2021          |  
|Accounts payable                            |  |               | 1,790 |  |               | $
|Accrued credit cards                        |  |               | 14    |  |               |  
|Accrued interest                            |  |               | 111   |  |               |  
|Accrued payroll                             |  |               | 109   |  |               |  
|Accrued sales tax liability                 |  |               | 120   |  |               |  
|Other                                       |  |               | 166   |  |               |  
|Total Accounts Payable and Accrued Expenses |  | $             | 2,310 |  |               | $
|                                            |  |               |       |  |               |  



14.
Notes Payable and Advances



The
following table summarizes the Company’s short-term notes and advances, acquisition note payable, due to related party loans, and
long-term debt, mortgages as of September 30, 2022, and 2021:

Schedule of Short-term Notes and Advances

|                                             |  |               |       |  |               |  
|-------------------------------------------- |  | ------------- | ----- |  | ------------- | -
|                                             |  | September 30, |       |  | September 30, |  
|                                             |  | 2022          |       |  | 2021          |  
|Equipment financing                          |  | $             | 20    |  |               | $
|Insurance financing                          |  |               | 230   |  |               |  
|Promissory note                              |  |               | 201   |  |               |  
|Total notes payable and advances             |  | $             | 451   |  |               | $
|                                             |  |               |       |  |               |  
|Current portion of long-term debt            |  | $             | 1,000 |  |               | $
|                                             |  |               |       |  |               |  
|Long-term mortgages, net of current portion  |  |               | 1,225 |  |               |  
|Total long-term debt, net of current portion |  | $             | 2,225 |  |               | $



Equipment
financing



Effective
April 29, 2018, the Company entered into a 36-month premium finance agreement in consideration for a John Deere Gator Tractor in the
principal amount of $15,710. The note bears no annual interest rate and requires the Company to make thirty-six monthly payments of $442
over the term of the note. As of September 30, 2022, and 2021, the obligation outstanding is $0. No amount was recorded for the premium
for the non-interest-bearing feature of the note as it was immaterial. The note was secured by the equipment financed.



Pursuant
to the Company’s acquisition of Yerba Buena the Company assumed a note payable obligation dated July 2017 related to a tractor
which had a 60-month premium finance agreement. The principal amount was $28,905. The note bears no annual interest rate and requires
the Company to make sixty monthly payments of $482 over the term of the note. No amount was recorded for the premium for the non-interest-bearing
feature of the note as it was immaterial. The note is secured by the equipment financed. As of September 30, 2022, the obligation outstanding
is $0.



January
2021, the Company entered into a promissory note in the amount of $27,880 for the acquisition of a truck. The promissory note bears an
interest rate of 13.29% per annum and is secured by the financed vehicle. The note has a sixty-month term with monthly payment of $642.
As of September 30, 2022, the balance outstanding is $20,465.



F-27









Insurance
financing



Effective
February 17, 2021, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $243,284. The note bears an annual interest rate of 7.46%. The Company paid $47,100 as a down payment on February
17, 2021, the note requires the Company to make 10 monthly payments of $17,835 over the remaining term of the note. In February 2022,
the total outstanding obligation was paid.



Effective
December 4, 2020, the Company entered into a 10-month premium finance agreement in partial consideration for an insurance policy in the
principal amount of $9,920. The note bears an annual interest rate of 12.8%. The Company paid $2,383 as a down payment on December 4,
2020, the note requires the Company to make 10 monthly payments of $754 over the remaining term of the note. As of September 30, 2022,
the obligation has been paid.



Effective
February 24, 2021, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $13,694. The note bears an annual interest rate of 7.369%. The Company paid $3,424 as a down payment on April
19, 2021, the note requires the Company to make 9 monthly payments of $1,199 over the remaining term of the note. As of September 30,
2022, the obligation has been paid.



Effective
April 10, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $78,750.
The note bears an annual interest rate of 8.35%. The Company paid $15,750 as a down payment on May 10, 2021, the note requires the Company
to make 9 monthly payments of $7,271 over the remaining term of the note. As of September 30, 2022, the obligation has been paid.



Effective
April 17, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $23,014.
The note bears an annual interest rate of 11.98%. The Company paid $4,871 as a down payment on March 16, 2021, the note requires the
Company to make 10 monthly payments of $1,814 over the remaining term of the note. As of September 30, 2022, the obligation outstanding
has been paid.



Effective
May 31, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $8,906.
The note bears an annual interest rate of 10.25%. The Company paid $2,537 as a down payment on May 28, 2021, the note requires the Company
to make 9 monthly payments of $741 over the remaining term of the note. As of September 30, 2022, the obligation has been paid.



Effective
July 16, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $11,830.
The note bears an annual interest rate of 1.06%. The Company paid $4,113 as a down payment in June 2021, the note requires the Company
to make 9 monthly payments of $771 over the remaining term of the note. As of September 30, 2022, the obligation has been paid.



Effective
July 17, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $16,850.
The note bears an annual interest rate of 3.96%. The note requires the Company to make 12 monthly payments of $1,351 over the term of
the note. As of September 30, 2022, the obligation has been paid.



Effective
August 30, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $58,899.
The note bears an annual interest rate of 7.99%. The Company paid $17,769 as a down payment on August 1, 2021, the note requires the
Company to make 9 monthly payments of $4,113 over the remaining term of the note. Additionally, effective August 30, 2021, the Company
entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $94,116. The note bears an annual
interest rate of 11.26%. The Company paid $27,102 as a down payment on August 27, 2021, the note requires the Company to make 9 monthly
payments of $7,446 over the remaining term of the note. During the year ended September 30, 2022, a new location was added to the policy,
therefore, creating a new finance agreement requiring 7 payments of $12,188 which has been satisfied.



Effective
October 26, 2021, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $10,411.
The note bears an annual interest rate of 10.65%. The Company paid $1,751 as a down payment in October 2021, the note requires the Company
to make 10 monthly payments of $866 over the remaining term of the note. As of September 30, 2022, the obligation has been paid.



Effective
February 9, 2022, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in the
principal amount of $430,657. The note bears an annual interest rate of 7.64%. The Company paid $86,131 as a down payment on February
14, 2022, the note requires the Company to make 10 monthly payments of $35,795 over the remaining term of the note. As of September 30,
2022, the obligation outstanding is $107,386.



F-28







Effective
February 24, 2022, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in
the principal amount of $17,551. The note bears an annual interest rate of 7.37%. The Company paid $18,033 as a down payment on February
24, 2022, the note requires the Company to make 10 monthly payments of $1,327 over the remaining term of the note. As of September 30,
2022, the obligation outstanding is $3,981.



Effective
April 6, 2022, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in the
principal amount of $29,060. The note bears an annual interest rate of 9.65%. The Company paid $5,812 as a down payment on April 6, 2022,
the note requires the Company to make 9 monthly payments of $2,697.47 over the remaining term of the note. As of September 30, 2022,
the obligation outstanding is $10,790.



Effective
May 23, 2022, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in the principal
amount of $7,599. The note bears an annual interest rate of 11.50%. The Company paid $2,121 as a down payment on May 23, 2022, the note
requires the Company to make 9 monthly payments of $640.41 over the remaining term of the note. As of September 30, 2022, the obligation
outstanding is $3,842.



Effective
April 5, 2022, the Company entered into a 12-month premium finance agreement in partial consideration for an insurance policy in the
principal amount of $20,931. The note bears an annual interest rate of 10.50%. The Company paid $5,347 as a down payment on April 5,
2022, the note requires the Company to make 9 monthly payments of $1,808.22 over the remaining term of the note. As of September 30,
2022, the obligation outstanding is $7,233.





Effective
July 7, 2022, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $10,150.
The note bears an annual interest rate of 11%. The Company paid $3,950 as a down payment in July 2022, the note requires the Company
to make 9 monthly payments of $837 over the remaining term of the note. As of September 30, 2022, the obligation outstanding is $5,861.



Effective
July 31, 2022, the Company entered into a 12-month premium finance agreement for an insurance policy in the principal amount of $144,500.
The note bears an annual interest rate of 9.49%. The Company paid $35,803 as a down payment in August 2022, the note requires the Company
to make 10 monthly payments of $11,348 over the remaining term of the note. As of September 30, 2022, the obligation outstanding is $90,784.



Promissory
note



In
January 2020, the Company issued two promissory notes with a principal balance of $500,000 to accredited investors (the “Note Holders”).
The note matures in October 2020 and has an annual rate of interest of 12%. In connection with the issuance of the promissory note, the
Company issued the Note Holders 100,000 common stock purchase warrants with a five-year term from the issuance date, $0.85 per. As of
July 2020, in consideration of the warrants being amended to $0.45 per share with an extended the term from five to a ten-year term,
the maturity date has been extended to December 13, 2020. As of September 30, 2021, the obligation outstanding is $425,000 and $358,996,
net of debt discount of $66,004. As of September 30, 2022, the obligation outstanding is $250,000 and the balance is $200,548, net of
debt discount of $49,452. The Company was notified that the maturity dates on these notes have been extended for the near-term.



In
April 2022, the Company has completed a private placement of a $500,000 unsecured promissory note and 500,000 common share purchase warrants
to an arm’s length lender. The Note becomes due and payable in three months, subject to extension by the Company for an additional
three months upon payment of a $5,000 extension fee to the lender. The Note bears interest at rate of 10% per annum payable at maturity.
The Company may prepay the outstanding principal amount of the obligation together with all accrued and unpaid interest, without penalty,
at any time prior to the maturity date of the note. Each warrant entitles the holder thereof to purchase one common share at a price
of 0.07 for a period of thirty-six (36) months after closing. As of September 30, 2020, the Company made a payment of $250,000 leaving
a balance outstanding of $250,000. A subsequent payment of $250,000 has been tendered satisfying the entire obligation.



In
January 2020, the Company issued two promissory notes with a principal balance of $500,000 to accredited investors (the “Note Holders”).
The notes mature in July 2020 and has an annual rate of interest of 12%. In connection with the issuance of the promissory notes, the
Company issued the Note Holders 100,000 common stock purchase warrants with a five-year term from the issuance date, $0.85 per share.
As of July 2020, in consideration of the warrants being amended to $0.45 per share with an extended the term from five to a ten-year
term, the maturity date has been extended to December 13, 2020. In May 2020, the Company made a principal payment of $20,000. As of September
30, 2021, these obligations were converted into equity.





F-29







In
July 2020, the Company’s wholly owned subsidiary in Oregon received loan proceeds of $220,564 pursuant to the Paycheck Protection
Program under the CARES Act. The Loan, which was in the form of a promissory note, dated July 09, 2020, between the Company and Cross
River Bank as the lender, matures on July 09, 2022 and bears interest at a fixed rate of 1% per annum, payable monthly commencing in
six months. Under the terms of the PPP, the principal may be forgiven if the Loan proceeds are used for qualifying expenses as described
in the CARES Act, such as payroll costs, benefits mortgage interest, rent, and utilities. No assurance can be provided that the Company
will obtain forgiveness of the Loan in whole or in part. In addition, details of the PPP continue to evolve regarding which companies
are qualified to receive loans pursuant to the PPP and on what terms, and the Company may be required to repay some or all of the Loan
due to these changes or different interpretations of the PPP requirements. As of September 30, 2021, the obligation outstanding of $220,565
was forgiven and recorded as other income.



The
Company received loan proceeds of $266,820 pursuant to the Paycheck Protection Program under the CARES Act. The Loan, which was in the
form of a promissory note, dated May 1, 2020, between the Company and Transportation Alliance Bank as the lender, matures on May 1, 2022
and bears interest at a fixed rate of 1% per annum, payable monthly commencing in six months. Under the terms of the PPP, the principal
may be forgiven if the Loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs, benefits
mortgage interest, rent, and utilities. No assurance can be provided that the Company will obtain forgiveness of the Loan in whole or
in part. In addition, details of the PPP continue to evolve regarding which companies are qualified to receive loans pursuant to the
PPP and on what terms, and the Company may be required to repay some or all of the Loan due to these changes or different interpretations
of the PPP requirements. As of September 30, 2021, the obligation outstanding of $266,820 was forgiven and recorded as other income.



The
Company’s related entity received loan proceeds of $245,400 pursuant to the Paycheck Protection Program under the CARES Act. The
Loan, which was in the form of a promissory note, dated June 03, 2020, between the Company and Coastal States Bank as the lender, matures
on June 03, 2022 and bears interest at a fixed rate of 1% per annum, payable monthly commencing in six months. Under the terms of the
PPP, the principal may be forgiven if the Loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll
costs, benefits mortgage interest, rent, and utilities. No assurance can be provided that the Company will obtain forgiveness of the
Loan in whole or in part. In addition, details of the PPP continue to evolve regarding which companies are qualified to receive loans
pursuant to the PPP and on what terms, and the Company may be required to repay some or all of the Loan due to these changes or different
interpretations of the PPP requirements. As of September 30, 2021, the obligation outstanding of $245,400 was forgiven and recorded as
other income.



The
Company’s subsidiary received loan proceeds of $62,500 pursuant to the Paycheck Protection Program under the CARES Act. The Loan,
which was in the form of a promissory note, dated June 25, 2020, between the Company and First Home Bank as the lender, matures on June
25, 2022, and bears interest at a fixed rate of 1% per annum, payable monthly commencing in six months. Under the terms of the PPP, the
principal may be forgiven if the Loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs,
benefits mortgage interest, rent, and utilities. No assurance can be provided that the Company will obtain forgiveness of the Loan in
whole or in part. In addition, details of the PPP continue to evolve regarding which companies are qualified to receive loans pursuant
to the PPP and on what terms, and the Company may be required to repay some or all of the Loan due to these changes or different interpretations
of the PPP requirements. As of September 30, 2021, the obligation outstanding of $62,500 was forgiven and recorded as other income.



The
Company’s subsidiary received loan proceeds of $140,407 pursuant to the Paycheck Protection Program under the CARES Act. The Loan,
which was in the form of a promissory note, dated July 15, 2020, between the Company and Cross River Bank as the lender, matures on December
30, 2020 and bears interest at a fixed rate of 1% per annum, payable monthly commencing in six months. Under the terms of the PPP, the
principal may be forgiven if the Loan proceeds are used for qualifying expenses as described in the CARES Act, such as payroll costs,
benefits mortgage interest, rent, and utilities. No assurance can be provided that the Company will obtain forgiveness of the Loan in
whole or in part. In addition, details of the PPP continue to evolve regarding which companies are qualified to receive loans pursuant
to the PPP and on what terms, and the Company may be required to repay some or all of the Loan due to these changes or different interpretations
of the PPP requirements. As of September 30, 2021, the obligation outstanding of $140,407 was forgiven and recorded as other income.



Settlement
payable



As
part of the Agreement and Plan of Merger with Driven Deliveries the Company assumed a settlement payable related to an employment claim
where Driven shall pay certain employees a total of $250,451. This settlement is payable in equal bi-monthly payments over a period of
seventeen (17) Months (36 pay periods), beginning in February 2021. As of September 30, 2021, the settlement payable is presented on
the balance sheet in the amount of $92,045. The balance was paid in full during the fiscal year ended September 30, 2022.



Long-term
debt, mortgages



In
January 2020, the Company refinanced a mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears
interest at 15% per annum. Monthly interest only payments began February 1, 2020, payments will continue each month thereafter until
paid. The entire unpaid balance was due on January 31, 2022, the maturity date of the mortgage, and is secured by the underlying property.
The mortgage terms do not allow participation by the lender in either the appreciation in the fair value of the mortgaged real estate
project or the results of operations of the mortgaged real estate project. The note has been cross guaranteed by the former CEO and Director
of the Company. As of September 30, 2022, the Company paid off the existing debt of $400,000 and procured another mortgage in the amount
of $450,000. This obligation has no personal guarantee; however, a corporate guarantee has been perfected. The new interest is 12% on
a three-year term.



F-30







In
March 2020, the Company executed a $400,000 mortgage payable on property located in Oregon to acquire additional funds. The mortgage
bears interest at 11.55% per annum. Monthly interest only payments began May 1, 2020, payments will continue each month thereafter until
paid. The entire unpaid balance was due on April 1, 2022, the maturity date of the mortgage, and is secured by the underlying property.
The Company paid costs of approximately $38,000 to close on the mortgage. The mortgage terms do not allow participation by the lender
in either the appreciation in the fair value of the mortgaged real estate project or the results of operations of the mortgaged real
estate project. The note has been cross guaranteed by the former CEO and Director of the Company. As of September 30, 2022, the obligation
outstanding is $400,000. Subsequently, the Company has exercised its right to extend the maturity and is now due April 1, 2023.



In
March 2020, the Company refinanced a mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears interest
at 15% per annum. Monthly interest only payments began April 1, 2020, payments will continue each month thereafter until paid. The entire
unpaid balance was due on March 31, 2022, the maturity date of the mortgage, and is secured by the underlying property. The mortgage
terms do not allow participation by the lender in either the appreciation in the fair value of the mortgaged real estate project or the
results of operations of the mortgaged real estate project. The note has been cross guaranteed by the former CEO and Director of the
Company. As of September 30, 2022, the Company paid off the existing debt of $700,000 and procured another mortgage in the amount of
$775,000. This obligation has no personal guarantee; however, a corporate guarantee has been perfected. The new interest is 12% on a
two-year term.



In
July 2020, the Company executed a mortgage payable on property located in Oregon to acquire additional funds. The mortgage bears interest
at 14% per annum. Monthly interest only payments began August 1, 2020, payments will continue each month thereafter until paid. The entire
unpaid balance is due on July 31, 2023, the maturity date of the mortgage, and is secured by the underlying property. The mortgage terms
do not allow participation by the lender in either the appreciation in the fair value of the mortgaged real estate project or the results
of operations of the mortgaged real estate project. The note has been cross guaranteed by the former CEO and Director of the Company.
As of September 30, 2022, the obligation outstanding is $200,000.



In
April 2018, the Company received a 37.5% interest in NVD RE Corp. (“NVD”) upon its issuance to NVD of a commitment to contribute
$1.275 million to NVD which included the purchase price of $600,000 and an additional commitment to pay tenant improvement costs of $675,000.
In the year ended September 30, 2019, NVD obtained $300,000 in proceeds from a mortgage on its property. The funds from this mortgage
were advanced to the Company. The advance is undocumented, non-interest bearing and due on demand. As of September 30, 2019, the balance
due totals $300,000. In August 2020, the Company refinanced this obligation and paid the $300,000 balance. The refinanced mortgage term
is 36 months and includes and interest rate of 14% and monthly interest only payments of $4,667. As of September 30, 2022, the balance
due totals $400,000.



The
following is a table of the 5-year runoff of our long-term debt as of September 30:

Schedule of Maturities of Long Term Debt

|                                        |  |   |        |  
|--------------------------------------- |  | - | ------ | -
|2023                                    |  | $ | 1,000  |  
|2024                                    |  |   | 775    |  
|2025                                    |  |   | 450    |  
|2026                                    |  |   | -      |  
|2027                                    |  |   | -      |  
|Thereafter                              |  |   | -      |  
|Total long-term debt                    |  |   | 2,225  |  
|Less current portion of long-term debt: |  |   | (1,000 | )
|Long
    term debt                      |  | $ | 1,225  |  



Finance
liability



In
November 2020, the Company executed a mortgage payable on property located in Mulino, Oregon to acquire additional funds. The
mortgage bears interest at 15%
per annum. The entire unpaid balance is due November 2022, the maturity date of the mortgage, and was secured by the underlying
property. The note was cross guaranteed by the former CEO and Director of the Company. On November 23, 2020, the Company executed a
real estate purchase agreement related to the Mulino Property which included the sale of the property and payoff of the mortgage.
Additionally, the Company entered into a lease agreement whereas the amount of $13,750
required as a rent payment through the lease is being recorded as interest expense and the Company recorded a finance liability of
$1,094,989
related to the lease under the guidance of ASC 842 as a failed sale and leaseback transaction. During the fiscal year ended
September 30, 2022, the Company executed a sale lease back agreement with the Company’s Mulino property, and entered into a
15-year lease with an unrelated third party located in Englewood, CO. The lease requires the Company to pay a starting base rental
fee of $29,167
plus additional estimated triple net charges per month including real estate taxes in which the base rental fee escalates each year
by approximately 2%.
All taxes (including reconciling real estate taxes), maintenance, and utilities are included and paid monthly. This transaction
resulted in net proceeds to the Company in the amount of $1.8
million and a gain on sale of $1.4 million, recorded in other income.



F-31







15.
Convertible debt



Canaccord



On
December 27, 2018, the Company entered into an Agency Agreement (the “Agency Agreement”) for a private offering of up to
10,000 convertible debenture special warrants of the Company (the “CD Special Warrants”) for aggregate gross proceeds of
up to CDN$10,000,000 (the “Offering”). The net proceeds of the Offering were used for expansion initiatives and general corporate
purposes. The Company’s functional currency is U.S. dollars.



In
December 2018 and January 2019, the Company issued 3,121 CD Special Warrants in the first closing of the Offering, at a price of CDN
$1,000 per CD Special Warrant, and received aggregate gross proceeds of CDN $3.1 million or $2.3 million USD. In connection with this
offering, the Company issued the agents in such offering 52,430 convertible debenture special warrants (the “Broker CD Special
Warrants”) as partial satisfaction of a selling commission.



On
March 14, 2019, the Company issued 962 CD Special Warrants in the second and final closing of the Offering, at a price of CDN $1,000
per CD Special Warrant, and received aggregate gross proceeds of CDN $1.0 million or $0.7 million USD. In connection with this offering,
the Company issued the agents in such offering 5,600 convertible debenture special warrants (the “Broker CD Special Warrants”)
as partial satisfaction of a selling commission.



The
total aggregate proceeds of the Offering totaled $4.1 million CDN or $3.1 million USD.



Each
CD Special Warrant will be exchanged (with no further action on the part of the holder thereof and for no further consideration) for
one convertible debenture unit of the Company (a “Convertible Debenture Unit”), on the earlier of: (i) the third business
day after the date on which both (A) a receipt (the “Receipt”) for a (final) document (the “Qualification Document”)
qualifying the distribution of the Convertible Debentures (as defined below) and Warrants (as defined below) issuable upon exercise of
the CD Special Warrants has been issued by the applicable securities regulatory authorities in the Canadian jurisdictions in which purchasers
of the CD Special Warrants are resident (the “Canadian Jurisdictions”), and (B) a registration statement (the “Registration
Statement”) registering the resale of the common shares underlying the Convertible Debentures and Warrants has been declared effective
by the U.S. Securities and Exchange Commission (the “Registration”); and (ii) the date that is six months following the closing
of the Offering. The Company has also provided certain registration rights to purchasers of the CD Special Warrants. The CD Special Warrants
were exchanged for Convertible Debenture Units after six months as U.S. and Canadian registrations were not effective at that time.



Each
Convertible Debenture Unit is comprised of CDN $1,000 principal amount 8.0% senior unsecured convertible debenture (each, a “Convertible
Debenture”) of the Company and 167 common share purchase warrants of the Company (each, a “Warrant”). Each Warrant
entitles the holder to purchase one common share of the Company (each, a “Warrant Share”) at an exercise price of CDN $3.90
per Warrant Share for a period of 24 months following the closing of the Offering.



The
Company has agreed to use its best efforts to obtain the Receipt and Registration within six months following the closing of the Offering.
If the Receipt and Registration have not been obtained on or before 5:00 p.m. (PST) on the date that is 120 days following the closing
of the Offering, each unexercised CD Special Warrant will thereafter entitle the holder thereof to receive, upon
the exercise thereof and at no additional cost, 1.05 Convertible Debenture Units per CD Special Warrant (instead of 1.0 Convertible Debenture
Unit per CD Special Warrant). Until the Receipt and Registration have been obtained, securities issued in connection with the Offering
(including any underlying securities issued upon conversion or exercise thereof) will be subject to a six (6)-month hold period from
the date of issue. Since the CD Special Warrants were exchanged for Convertible Debenture Units after six (6) months as U.S. and Canadian
registrations were not effective at that time, the holders received 1.05 Convertible Debenture Units per CD Special Warrant.



The
brokered portion of the Offering (CDN $2.5 million, $1.9 million USD) was completed by a syndicate of agents (collectively, the “Agents”).
The Company paid the Agents a cash commission equal to 7.0% of the gross proceeds raised in the brokered portion of the Offering. As
additional consideration, the Company issued the Agents such number of non-transferable broker convertible debenture special warrants
(the “Broker CD Special Warrants”) as is equal to 7.0% of the number of CD Special Warrants sold under the brokered portion
of the Offering. Each Broker CD Special Warrant shall be exchanged, on the same terms as the CD Special Warrants, into broker warrants
of the Company (the “Broker Warrants”). Each Broker Warrant entitles the holder to acquire one Convertible Debenture Unit
at an exercise price of CDN $1,000, until the date that is 24 months from the closing date of the Offering. The distribution of the Broker
Warrants issuable upon the exchange of the Broker CD Special Warrants shall also be qualified under the Qualification Document and the
resale of the common shares underlying the Broker Warrants will be registered under the Registration Statement. The Company also paid
the lead agent a commission noted above of CDN$157,290, corporate finance fee equal to CDN $50,000 in cash and as to $50,000 in common
shares of the Company at a price per share of CDN$3.00 plus additional expenses of CDN$20,000. In addition, the Company paid the trustees
legal fees of CDN$181,365. In total the Company approx. USD $0.32 million in fees and expenses associated with the offering.



F-32







The
issuance of the securities was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended
(the “Securities Act”), for the offer and sale of securities not involving a public offering, Regulation D promulgated under
the Securities Act, Regulation S, in Canada to “accredited investors” within the meaning of National Instrument 45106 and
other exempt purchasers in each province of Canada, except Quebec, and/or outside Canada and the United States on a basis which does
not require the qualification or registration. The securities being offered have not been registered under the Securities Act and may
not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons absent registration or an applicable
exemption from the registration requirements.



The
Convertible Debenture features contain the following embedded derivatives:



| | ● | Conversion
    Option - The Convertible Debentures provide the holder the right to convert all or any portion of the outstanding principal into
    common shares of the Company at a conversion price of C$3.00 such that 333.33 common shares are issued for each C$1,000 of principal
    of Convertible Debentures converted.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ● | Contingent
    Put - Upon an Event of Default, the Convertible Debentures settle for cash at the outstanding principal and interest amount (at discretion
    of the Indenture Trustee or upon request of Holders of 25% or more of principal of the Convertible Debentures).                                                    
| | ● | Contingent
    Put - Upon a Change in Control, the Convertible Debentures settle for cash at the outstanding amount and principal and interest *
    105% (where Holder accepts a Change of Control Offer).                                                                                                                      



The
conversion option, the contingent put feature upon an Event of Default, and the contingent put feature upon a Change in Control should
be bifurcated and recognized collectively as a compound embedded derivative at fair value at inception and at each quarterly reporting
period.



A
five percent penalty assessed for failure to timely file a registration statement to register the stock underlying the CD special warrants.



The
Company valued the warrants granted using the Black-Scholes pricing model and determined that the value at grant date was approximately
$424,000 USD (this includes the warrants issued as part of the penalty for failure to timely file the required registration statement
under the indenture agreement). The significant assumptions used in the valuation were as follows:



Schedule
of Assumptions Used for Valuation of Warrants

|Fair value of underlying common shares |  | $ | 1.78 to $2.10 |  
|-------------------------------------- |  | - | ------------- | -
|Exercise price (converted to USD)      |  | $ | 2.93          |  
|Dividend yield                         |  |   | -             |  
|Historical volatility                  |  |   | 85            | %
|Risk free interest rate                |  |   | 1.4% to 1.9   | %



The
warrants are not indexed to the Company’s own stock under ASC 815, Derivatives and Hedging. As such, the warrants do not meet the
scope exception in ASC 815-10-15-74(a) to derivative accounting and therefore were accounted for as a liability in accordance with the
guidance in ASC 815. The warrant liability was recorded at the date of grant at fair value with subsequent changes in fair value recognized
in earnings each reporting period.



In
April 2020, the Company received approval of the holders Warrant holders of the warrants and the holders debenture holders of the Convertible
Debentures to reprice the convertible securities issued in connection with the Company’s special warrant financing, which closed
on December 27, 2018, and June 14, 2019. The share purchase warrants of the Company issued in connection with the financing will be repriced
to C$1.50per Common Share and the convertible debentures
of the Company issued in connection with the financing will be repriced to C$1.15per common share. Additionally, the Debenture
holders have approved the following amendments to the terms of the convertible debentures: (i) an extension to the maturity date of the
convertible debentures to three years from the date of issuance; and (ii) an amendment to permit the Company to force the conversion
of the principal amount of the then outstanding convertible debentures and any accrued and unpaid interest thereof at the new conversion
price on not less than June days’ prior written notice if the closing trading price of the shares of common stock of the Company’s
common shares exceeds C$1.90for a period of 10 consecutive trading days on
the CSE. The Warrant holders have also approved the inclusion of an early acceleration feature in accordance with the policies of the
Canadian Securities Exchange, permitting the Company to accelerate the expiry date of the warrants should the closing trading price of
the Common Shares exceed C$1.87for a period of 10 consecutive trading days on
the CSE.



F-33







In
June 2022, the Company received approval of the holders Warrant holders of the warrants and the holders debenture holders of the
Convertible Debentures to reprice the convertible securities issued in connection with the Company’s special warrant
financing, which initially closed on December 27, 2018, and June 14, 2019. The share purchase warrants of the Company issued in
connection with the financing will be repriced to C$0.20
per Common Share and the convertible debentures of the Company issued in connection with the financing will be repriced to C$0.10
per common share. Additionally, the Debenture holders have approved the following amendments to the terms of the convertible
debentures: (i) an extension to the maturity date of the convertible debentures to three years ; and (ii) an amendment to permit the
Company to force the conversion of the principal amount of the then outstanding convertible debentures and any accrued and unpaid
interest thereof at the new conversion price on not less than 30 days’ prior written notice if the closing trading price of
the shares of common stock of the Company’s common shares exceeds C$0.80
for a period of 10 consecutive trading days on the CSE, (iii) the payment of 5%
of the principle amount. Share purchase warrants of the Company were issued in connection this repricing at 167 common share
warrants for each $1,000
debenture unit held. A debt discount of $1.2 million was recorded and will be amortized over the remaining life of the convertible
debt, and as part of the modification of convertible debt. This transaction was accounted for as extinguishment of debt which
resulted in a gain of $803 thousand. As of September 30, 2022, the convertible debt related to the above debentures was $1.5 million
and $2.9
million, net of a debt discount of $1.1 million and $0, respectively.



The
table below shows the warrant liability and embedded derivative liability recorded in connection with the Canaccord convertible notes
and the subsequent fair value measurement for the period ended September 30, 2022, in USD, (in thousands):



Schedule of Warrant Liability and Embedded Derivative Liability

|                                 |  | Warrant Liability |   |  | Derivative Liability |  
|-------------------------------- |  | ----------------- | - |  | -------------------- | -
|Balance as of September 30, 2021 |  | $                 | - |  |                      | $
|Modification of debentures       |  |                   | - |  |                      |  
|Change in fair value             |  |                   | - |  |                      |  
|Balance as of September 30, 2022 |  | $                 | - |  |                      | $



16.
Fair Value Measurements



In
accordance with ASC 820 (Fair Value Measurements and Disclosures), the Company uses various inputs to measure the outstanding warrants
and certain embedded conversion feature associated with convertible debt on a recurring basis to determine the fair value of the liability.
ASC 820 also establishes a hierarchy categorizing inputs into three levels used to measure and disclose fair value. The hierarchy gives
the highest priority to quoted prices available in active markets and the lowest priority to unobservable inputs. An explanation of each
level in the hierarchy is described below:



Level
1 – Unadjusted quoted prices in active markets for identical instruments that are accessible by the Company on the measurement
date



Level
2 – Quoted prices in markets that are not active or inputs which are either directly or indirectly observable



Level
3 – Unobservable inputs for the instrument requiring the development of assumptions by the Company



The
following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy
as of September 30, 2021 (in thousands):



Schedule of Liabilities Measured at Fair Value on a Recurring Basis

|                              |  |                                           |     |  |                   |   |   |                    |  |   |                     | 
|----------------------------- |  | ----------------------------------------- | --- |  | ----------------- | - | - | ------------------ |  | - | ------------------- | 
|                              |  | Fair value measured at September 30, 2022 |    
|                              |  |                                           |     |  | Quoted prices     |   |   | Significant other  |  |   | Significant         | 
|                              |  |                                           |     |  | in active
markets |   |   | observable 
inputs |  |   | unobservable inputs | 
|                              |  | Fair value                                |     |  | (Level 1)         |   |   | (Level 2)          |  |   | (Level 3)           | 
|Warrant liability             |  | $                                         | 55  |  |                   | $ | - |                    |  | $ | -                   | 
|Embedded derivative liability |  |                                           | 370 |  |                   |   | - |                    |  |   | -                   | 
|Total fair value              |  | $                                         | 425 |  |                   | $ | - |                    |  | $ | -                   | 



F-34







There
were no transfers between Level 1, 2 or 3 during the year ended September 30, 2022.



The
following table presents changes in Level 3 liabilities measured at fair value for the year ended September 30, 2022. Both observable
and unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category.
Unrealized gains and losses associated with liabilities within the Level 3 category include changes in fair value that were attributable
to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long- dated volatilities)
inputs (in thousands).



Schedule of Level 3 Liabilities Measured at Fair Value

|                                                          |  |                   |        |   | Embedded             |   |      |       | 
|--------------------------------------------------------- |  | ----------------- | ------ | - | -------------------- | - | ---- | ----- | 
|                                                          |  | Warrant Liability |        |   | Derivative Liability |   |      | Total | 
|Balance – September 30, 2020                              |  | $                 | 257    |   |                      | $ | 592  |       | 
|Warrants granted for stock-based compensation             |  |                   | 59     |   |                      |   | -    |       | 
|Warrants issued pursuant to acquisition (see Note 9)      |  |                   | 9,000  |   |                      |   | -    |       | 
|Issuance of convertible notes                             |  |                   | (66    | ) |                      |   | (15  | )     | 
|Change in fair value                                      |  |                   | (2,401 | ) |                      |   | (577 | )     | 
|Cancellation of warrants pursuant to settlement agreement |  |                   | (4,572 | ) |                      |   | -    |       | 
|                                                          |  |                   |        |   |                      |   |      |       | 
|Balance - September 30, 2021                              |  | $                 | 2,277  |   |                      | $ | -    |       | 
|Warrants granted                                          |  |                   | 105    |   |                      |   | -    |       | 
|Modification of debentures                                |  |                   | -      |   |                      |   | 339  |       | 
|Change in fair value                                      |  |                   | (2,327 | ) |                      |   | 31   |       | 
|                                                          |  |                   |        |   |                      |   |      |       | 
|Balance - September 30, 2022                              |  | $                 | 55     |   |                      | $ | 370  |       | 



A
summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s
warrant liabilities and embedded conversion feature that are categorized within Level 3 of the fair value hierarchy as of September 30,
2022, and 2021 is as follows:



Summary of Weighted Average Significant Unobservable Inputs

|                           |  | Warrant Liability   |     
|-------------------------- |  | ------------------- | ----
|                           |  | As of September 30, |     
|                           |  | 2022                |     
|Strike price               |  | $                   | 0.49
|Contractual term (years)   |  |                     | 1.43
|Volatility (annual)        |  |                     | 100 
|Risk-free rate             |  |                     | 4.1 
|Dividend yield (per share) |  |                     | 0   



|                           |  | Embedded Derivative Liability |          
|-------------------------- |  | ----------------------------- | ---------
|                           |  | As of September 30,           |          
|                           |  | 2022                          |          
|Strike price               |  | $                             | 0.10     
|Contractual term (years)   |  |                               | 2.8      
|Volatility (annual)        |  |                               | 141      
|Risk-free rate             |  |                               | 4.00     
|Dividend yield (per share) |  |                               | 0.00     
|Credit spread              |  |                               | 14% to 16



The
Company used a lattice based trinomial model developed by Tsiveriotis, K. and Fernades in which the three lattices incorporate (1) the
Company’s underlying common stock price; (2) the value of the debt components of the convertible notes; and (3) the value of the
equity component of the convertible notes. The main drivers of sensitivity for the model are volatility and the credit spread. The model
used will vary by approximately 1.5% for a 4% change in volatility and will vary by less than 1% for each 1% change in credit spread.



F-35







17.
Income Taxes



The
income tax expense (benefit) consisted of the following for the fiscal year ended September 30, 2022 and 2021:



Schedule of Income Tax Expenses (Benefit)

|                             |  |   | September 30, |  |  |   | September 30, | 
|---------------------------- |  | - | ------------- |  |  | - | ------------- | 
|                             |  |   | 2022          |  |  |   | 2021          | 
|Total current                |  | $ | -             |  |  | $ | -             | 
|Total deferred               |  |   | -             |  |  |   | -             | 
|Income tax expense (benefit) |  | $ | -             |  |  | $ | -             | 



Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.



The
following is a reconciliation of the expected statutory federal income tax provision to the actual income tax benefit for the fiscal
year ended September 30, 2022 and 2021:



Schedule of Reconciliation of Statutory Federal Income Tax Provision to Actual Income Tax Benefit

|                              |  | September 30, |        |   | September 30, |  
|----------------------------- |  | ------------- | ------ | - | ------------- | -
|                              |  | 2022          |        |   | 2021          |  
|Federal statutory rate        |  | $             | (4,382 | ) |               | $
|Permanent timing differences  |  |               | 3,272  |   |               |  
|Other                         |  |               | (58    | ) |               |  
|Change in valuation allowance |  |               | 1,168  |   |               |  
|Income tax expense            |  | $             | -      |   |               | $





For
the years ended September 30, 2022 and 2021, the expected tax benefit, temporary timing differences and long-term timing differences
are calculated at the 25% statutory rate.



Significant
components of the Company’s deferred tax assets and liabilities were as follows for the fiscal year ended September 30, 2022 and
2021:



Schedule of Deferred Tax Assets and Liabilities

|                                             |  | September 30, |         |   | September 30, |  
|-------------------------------------------- |  | ------------- | ------- | - | ------------- | -
|                                             |  | 2022          |         |   | 2021          |  
|Deferred tax assets:                         |  |               |         |   |               |  
|Net operating loss carryforwards             |  | $             | 10,110  |   |               | $
|Equity based compensation                    |  |               | 3,045   |   |               |  
|Impairment of investments and other property |  |               | 2,011   |   |               |  
|Total deferred tax assets                    |  |               | 15,166  |   |               |  
|                                             |  |               |         |   |               |  
|Deferred tax liabilities                     |  |               |         |   |               |  
|Depreciation                                 |  |               | 39      |   |               |  
|Total deferred tax liabilities               |  |               | 39      |   |               |  
|                                             |  |               |         |   |               |  
|Net deferred tax assets                      |  |               | 15,127  |   |               |  
|Less valuation allowance                     |  |               | (15,127 | ) |               |  
|Net deferred tax assets (liabilities)        |  | $             | -       |   |               | $



At
September 30, 2022, the Company had net operating loss carryforwards for federal and state income tax purposes of approximately $40 million.
The federal and state net operating loss carryforwards will expire beginning in 2038.



During
the fiscal year ended September 30, 2022 and 2021 the Company recognized no amounts related to tax interest or penalties related to uncertain
tax positions. The Company is subject to taxation in the United States and various state jurisdictions. The Company currently has no
years under examination by any jurisdiction.



F-36







18.
Shareholders’ Equity



In
2016, the Company adopted a plan to allow the Company to compensate prospective and current employees, directors, and consultants through
the issuance of equity instruments of the Company. The plan has an effective life of 10 years. The plan is administered by the board
of directors of the Company until such time as the board transfers responsibility to a committee of the board. The plan is limited to
issuing common shares of the Company up to 15% of the total shares then outstanding. No limitations exist on any other instruments issuable
under the plan. In the event of a change in control of the Company, all unvested instruments issued under the plan become immediately
vested.



Pursuant
to the shareholders meeting on June 25, 2021, the Company has amended its certificate of incorporation to increase the number of authorized
Company Common Shares from 300,000,000 to 750,000,000.



Preferred
shares



The
Company had two series of preferred shares designated with no preferred shares issued and outstanding as of September 30, 2022, and September
30, 2021.



Common
shares



During
the year ended September 30, 2022, the Company issued 3,223,611 shares of its common stock related to a stock purchase agreement for
cash of $285,000.



During
the year ended September 30, 2022, the Company issued 130,000 shares of its common stock related to various consulting agreements for
a fair value of approximately $30,000.



During
the year ended September 30, 2022, the Company issued 3,137,500 shares of its common stock valued at $313,000 as stock-based compensation.



During
the year ended September 30, 2022, the Company converted $13,000 of principal balance related to convertible debt in exchange for 289,750 shares
of the company’s common stock. The Company also issued 1,751,186 common shares in satisfaction of interest payments owed of $121,000.



During
the year ended September 30, 2022, the Company received 11,506,700
shares of its common stock related to a share exchange agreement pursuant to the divestiture of Driven (see Note 3).



During
the year ended September 30, 2021, the Company issued 3,914,509 shares of its common stock valued at $1,675,000 as stock-based compensation.



During
the year ended September 30, 2021, the Company issued 4,790,070 shares of its common stock related to various consulting agreements for
a fair value of approximately $2,032,000 with a price per share ranging from $0.29 to $0.51.



During
the year ended September 30, 2021, the Company sold 1,465,117 shares of its common stock for total cash received of $630,000.



During
the year ended September 30, 2021, the Company cancelled 525,400 common shares related to convertible notes.



During
the year ended September 30, 2021, the Company cancelled 58,140 common shares related to a subscription agreement.



During
the year ended September 30, 2021, the Company converted $309,121 of its accrued interest related to convertible debt in exchange for
553,417 shares of the company’s common stock. The Company also issued 293,700 common shares in satisfaction of rent payments owed
of $117,480.



During
the year ended September 30, 2021, as part of the Agreement and Plan of Merger with Driven Deliveries the Company issued 101,968,944
common shares.





F-37







During
the year ended September 30, 2021, the Company issued 300,000 shares of its common stock with a fair value of $210,000 on behalf of its
Michigan joint venture partner into escrow pursuant to a security agreement related to the commercial lease.



During
the year ended September 30, 2021, the Company converted $4,913,000 of principal balance related to convertible debt in exchange for
9,480,259 shares of the company’s common stock.



During
the year ended September 30, 2021, the Company issued 500,000 shares of its common stock in connection with a settlement agreement for
settlement liability of $5,439,855.



During
the year ended September 30, 2021, the Company raised $4,892,000 for the issuance of 5,322,136 shares of its common stock in connection
with a private placement memorandum.



During
the year ended September 30, 2021, the Company issued 10,000 shares of its common stock in connection with the exercise of the company’s
stock option plan.



During
the year ended September 30, 2021, the Company issued 90,909 shares of its common stock valued at $40,000 in connection with commission
expense.



During
the year ended September 30, 2021, the Company cancelled 694,233 common shares related to investment.



During
the year ended September 30, 2021, the Company issued 19,276,340 shares of its common stock valued at $7,919 million pursuant to its
Canadian prospectus.



During
the year ended September 30, 2021, the Company issued 8,209,178 shares of its common stock in connection with an asset acquisition valued
at $2,380,661.



During
the year ended September 30, 2021, the Company raised $2,869,889 for the issuance of 6,833,069 common shares pursuant to Driven Deliveries,
Inc. S1 registration.



19.
Stock Based Compensation



Stock
Options



The
fair value of the Company’s common stock was based upon the publicly quoted price on the date that the final approval of the awards
was obtained. The Company does not expect to pay dividends in the foreseeable future so therefore the expected dividend yield is 0%.
The expected term for stock options granted with service conditions represents the average period the stock options are expected to remain
outstanding and is based on the expected term calculated using the approach prescribed by the Securities and Exchange Commission’s
Staff Accounting Bulletin for “plain vanilla” options. The expected term for stock options granted with performance and/or
market conditions represents the period estimated by management by which the performance conditions will be met. The Company obtained
the risk-free interest rate from publicly available data published by the Federal Reserve. The Company uses a methodology in estimating
its volatility percentage from a computation that was based on a comparison of average volatility rates of similar companies to a computation
based on the standard deviation of the Company’s own underlying stock price’s daily logarithmic returns.



The
fair value of options granted during the years ended September 30, 2022, and 2021 were estimated using the following weighted-average
assumptions:



Options:



Schedule of Fair Value of Options Granted

|                                |  | For the Years Ended September 30, |     
|------------------------------- |  | --------------------------------- | ----
|                                |  | 2022                              |     
|Exercise price                  |  | $                                 | 0.07
|Expected term (years)           |  |                                   | 2.52
|Expected stock price volatility |  |                                   | 124 
|Risk-free rate of interest      |  |                                   | 2.42
|Expected dividend rate          |  |                                   | 0   



F-38







A
summary of option activity under the Company’s stock option plan for the year ended September 30, 2022 is presented below:



Schedule of Stock Option Activity

|                                     |  | Number of Shares |            |   | Weighted Average Exercise Price |   |       | Total Intrinsic Value |  |   | Weighted Average Remaining Contractual Life (in years) | 
|------------------------------------ |  | ---------------- | ---------- | - | ------------------------------- | - | ----- | --------------------- |  | - | ------------------------------------------------------ | 
|Outstanding as of October 1, 2020    |  |                  | 5,572,916  |   |                                 | $ | 1.77  |                       |  | $ | -                                                      | 
|Granted                              |  |                  | 1,125,000  |   |                                 |   | 0.28  |                       |  | $ | 54                                                     | 
|Outstanding as of September 30, 2021 |  |                  | 6,697,916  |   |                                 | $ | 1.07  |                       |  | $ | -                                                      | 
|Granted                              |  |                  | 1,500,000  |   |                                 |   | 0.07  |                       |  | $ | -                                                      | 
|Expired/cancelled                    |  |                  | (2,242,231 | ) |                                 |   | (0.67 | )                     |  | $ | -                                                      | 
|Outstanding as of September 30, 2022 |  |                  | 5,955,685  |   |                                 | $ | 1.07  |                       |  | $ | -                                                      | 
|Options vested and exercisable       |  |                  | 5,518,185  |   |                                 | $ | 0.03  |                       |  | $ | -                                                      | 



Estimated
future stock-based compensation expense relating to unvested stock options was nominal as of September 30, 2022, and 2021. Weighted
average remaining contractual life of the options is 2.60
years. The options had no intrinsic value as of September 30, 2022.



Restricted
Stock



A
summary of employee restricted stock activity for years ended September 30, 2022 and 2021 are presented below:



Schedule of
Employee Restricted Stock Activity

|                                     |  | Number of Shares |           |  | Weighted Average Exercise Price |  
|------------------------------------ |  | ---------------- | --------- |  | ------------------------------- | -
|Outstanding as of October 1, 2020    |  |                  | 2,471,317 |  |                                 |  
|Granted (1)                          |  |                  | 3,914,509 |  |                                 |  
|Outstanding as of September 30, 2021 |  |                  | 6,385,826 |  |                                 |  
|Granted                              |  |                  | 2,637,500 |  |                                 |  
|Outstanding as of September 30, 2022 |  |                  | 9,023,326 |  |                                 | $



A
summary of non-employee restricted stock activity under the Company’s for years ended September 30, 2022 and 2021 are presented
below:



Schedule of
Non Employee Restricted Stock Activity

|                                     |  | Number of Shares |           |  | Weighted Average Exercise Price |  
|------------------------------------ |  | ---------------- | --------- |  | ------------------------------- | -
|Outstanding as of September 30, 2020 |  |                  | 3,859,178 |  |                                 |  
|Granted                              |  |                  | 5,058,370 |  |                                 |  
|Outstanding as of September 30, 2021 |  |                  | 8,917,548 |  |                                 |  
|Granted                              |  |                  | 630,000   |  |                                 |  
|Outstanding as of September 30, 2022 |  |                  | 9,547,548 |  |                                 | $



F-39







Warrants



A
summary of the status of the Company’s outstanding warrants as of September 30, 2022 and 2021 and changes during the year then
ended are presented below:



Schedule of
Warrants Outstanding

|                                     |  | Number of Warrants |            |   | Weighted Average Exercise Price |   |      | Remaining Contractual Term | 
|------------------------------------ |  | ------------------ | ---------- | - | ------------------------------- | - | ---- | -------------------------- | 
|Outstanding as of September 30, 2020 |  |                    | 5,114,733  |   |                                 | $ | 2.13 |                            | 
|Warrants granted – equity            |  |                    | 32,666,266 |   |                                 |   | 0.53 |                            | 
|Warrants expired – equity            |  |                    | (114,300   | ) |                                 |   | 2.50 |                            | 
|Warrants granted – liability         |  |                    | 30,299,134 |   |                                 |   | 0.45 |                            | 
|Warrants expired – liability         |  |                    | (5,000,000 | ) |                                 |   | 0.20 |                            | 
|Outstanding as of September 30, 2021 |  |                    | 62,965,833 |   |                                 |   | 0.47 |                            | 
|Warrants exercised – equity          |  |                    | (1,000,000 | ) |                                 |   | 0.04 |                            | 
|Warrants granted – equity            |  |                    | 4,173,612  |   |                                 |   | 0.10 |                            | 
|Warrants expired – equity            |  |                    | (972,117   | ) |                                 |   | 0.10 |                            | 
|Warrants granted – liability         |  |                    | 615,731    |   |                                 |   | 0.12 |                            | 
|Outstanding as of September 30, 2022 |  |                    | 65,783,059 |   |                                 |   | 0.49 |                            | 



Stock-based
Compensation Expense



Stock-based
compensation expense for the years ended September 30, 2022, and 2021 was comprised of the following (in thousands):



Schedule of Stock-based Compensation Expenses

|                               |  | 2022                      |       |  | 2021 |  
|------------------------------ |  | ------------------------- | ----- |  | ---- | -
|                               |  | Years Ended September 30, |      
|                               |  | 2022                      |       |  | 2021 |  
|Restricted stock awards        |  | $                         | 296   |  |      | $
|Stock options                  |  |                           | 454   |  |      |  
|Warrants                       |  |                           | 263   |  |      |  
|Accrued stock compensation     |  |                           | -     |  |      |  
|Total stock-based compensation |  | $                         | 1,013 |  |      | $



20.
Commitments and contingencies



As
noted earlier in Note 1, the Company, engages in a business that constitutes an illegal act under the laws of the United States Federal
Government. This raises several possible issues which may impact the Company’s overall operations, not the least of which are related
to traditional banking and other key operational risks. Since cannabis remains illegal on the federal level, and most traditional banks
are federally insured, those financial institutions will not service cannabis businesses. In states where medical or recreational marijuana
is legal, dispensary owners, manufacturers, and anybody who “touches the plant,” continue to face a host of operational hurdles.
While local, state-chartered banks and credit unions now accept cannabis commerce, there remains a reluctance by traditional banks to
do business with them. Aside from a huge inconvenience and the need to find creative ways to manage financial flow, payroll logistics,
and payment of taxes, his also poses tremendous risks to controls as a result of operating a lucrative business in cash. This lack of
access to traditional banking may inhibit industry growth. For the year ended September 30, 2022, the Company’s has accounts with
a Florida bank and several credit unions located in Washington and California.



Despite
the uncertainties surrounding the Federal government’s position on legalized marijuana, the Company does not believe these risks
will have a substantive impact on its planned operations in the near term.





F-40









The
Company executed an Agency Agreement and in consideration of the services rendered by the Agent and in connection with the Offering,
the Company has agreed to pay the Agent, on the Closing Date a commission equal to 7% of the gross proceeds of the Offering (including
in respect of any exercise of the Over-Allotment Option, if any) payable in cash (the “Agent’s Commission”),
subject to a reduced fee equal to 1% for Units ‎sold to certain purchasers designated by the Company on a president’s list
(the “President’s ‎List”). In addition the Agent will receive ‎a number of share purchase warrants (the
“Broker Warrants”) to purchase up to that number of shares of common stock of the Company (each, a “Broker
Share”) that is equal to 7% of the aggregate number of Units issued under the Offering ‎(including any Additional Units
(as hereinafter defined) issued upon exercise of the Over-Allotment Option, if any), subject to a ‎reduced number of Broker Warrants
equal to 3.5% of the Units sold to purchasers on the President’s List‎, at an exercise price of $0.55 CAD per Broker Share,
exercisable for a period of 24 months following the Closing Date. Pursuant to the Agency Agreement, the Company also agreed to pay to
the Agent a corporate finance fee of $100,000 CAD (the “Corporate Finance Fee”), such Corporate Finance Fee to be
payable as to $50,000 CAD in cash and as to $50,000 CAD by the issuance of 90,909 shares of common stock of the Company (the “Corporate
Finance Fee Shares”) at the Offering Price. After deducting the Agent’s Commission ‎(assuming no President’s
List purchasers)‎, the estimated expenses of the Offering of $350,000 CAD and the cash portion of the Corporate Finance Fee, which
will be paid out of the general funds of the Company‎. The Company has also granted to the Agent an over-allotment option (the “Over-Allotment
Option”), exercisable in whole or in part, at the Agent’s sole discretion, to purchase up to an additional 15% of the
number of Units sold pursuant to the Offering, being up to an additional 2,590,909 Units in the case of the Maximum Offering (the “Additional
Units”), each Additional Unit to be comprised of one Unit Share and one Warrant, at the Offering Price to cover the Agent’s
over-allocation position, if any, and for market stabilization purposes. The Over-Allotment Option is exercisable, in whole or in part,
at any time or times until the date that is 30 days immediately following the Closing Date. A purchaser who acquires Additional Units
forming part of the Agent’s over-allocation position acquires such Additional Units under this Prospectus, regardless of whether
the over-allocation position is ultimately filled through the exercise of the Over-Allotment Option or secondary market purchases. If
the Over-Allotment Option is exercised in full, the total Price to the Public, Agent’s Commission and Net Proceeds to the Company
(before deducting expenses of the Offering and assuming no President’s List purchasers) will be $9,200,000 CAD, $644,000 CAD and
$8,556,000 CAD, respectively, in the case of the Minimum Offering and, ‎$10,925,000 CAD, $764,750 CAD and $10,160,250 CAD, respectively,
in the case of the Maximum Offering. Pursuant to the terms of the Agency Agreement, all subscription funds received from subscribers
will be retained in trust by the Agent until the Minimum Offering is obtained. Once the Minimum Offering has been obtained, the sale
of the Units shall be completed in accordance with the Agency Agreement. To date, all funds have been subscribed and will be held in
escrow for final approval. Additionally, the Company entered into an offering led by Canaccord Genuity Corp. (the “Agent”)
on a ‘commercially reasonable efforts’ basis and consisted of the sale of 16,926,019 Units (including 1,471,291 Units pursuant
to the partial exercise of the over-allotment option by the Agent) at a price of C$0.55 per Unit for aggregate gross proceeds of C$10,309,210
(including C$809,210.05 pursuant to the partial exercise of the over-allotment option by the Agent). Each Unit is comprised of one share
in the common stock of the Company (each a “Unit Share”) and one share purchase warrant of the Company (each, a “Warrant”).
Each Warrant is exercisable to acquire one share in the common stock of the Company (each, a “Warrant Share”) until April
23, 2023, at a price per Warrant Share of C$0.68, subject to adjustment in certain events. The net proceeds raised under the Offering
will be used for working capital and in furtherance of some or all of the business objectives described in the final short form prospectus
of the Company dated April 19, 2021 (the “Final Prospectus”). The Company has given notice to list the Unit Shares and the
Warrant Shares on the Canadian Securities Exchange (the “Exchange”). Listing will be subject to the Company fulfilling all
of the requirements of the Exchange. Concurrent with the Offering, the Company also conducted a non-brokered offering in the United States
of 972,092 units of the Company at a price of US$0.43 per unit for aggregate gross proceeds of approximately US$420,000 under the terms
of a registration statement on Form S-1, as amended, filed with the United States Securities and Exchange Commission under the U.S. Securities
Act on January 5, 2021.





Legal
Proceedings



D.H.
Flamingo, Inc. v. Department of Taxation, et. al.



On
February 27, 2020, a subsidiary of the Company (YMY Ventures, LLC) was served with a Summons and Second Amended Complaint in a matter
pending in the District Court of Clark County Nevada (Case # A-19-787004-B) which is styled “D.H. Flamingo, Inc. v. Department
of Taxation, et. al.” (the DOT Litigation”). In this matter, the Plaintiff is alleging that certain parties (including
YMY Ventures, LLC) received Conditional Recreational Marijuana Establishment Licenses, while certain other parties (including Plaintiff)
were denied licenses. In the matter, Plaintiff seeks declaratory relief, injunctive relief, relief from violation of procedural and substantive
due process, violation of equal protection, unjust enrichment, judicial review of the entire matter, together with a Petition for Writ
of Mandamus. The Plaintiff seeks damages in an unspecified amount. Thereafter, on April 20, 2020, YMY Ventures, LLC filed a Notice of
Non-Participation and Request for Dismissal. This matter has now been fully resolved
without any financial exposure on the part of the Company.





F-41









Chris
Hass, et al. vs Brian Hayek, et al.



Plaintiffs
filed their initial complaint in the instant action on May 22, 2020. Plaintiffs filed the operative first amended complaint on
August 18, 2020. On March 28, 2022, Plaintiffs obtained a stipulated judgment in this action in the amount of $349,876.69
against Defendants Driven Deliveries, Brian Hayek (“Hayek”), and Christian Schenk (“Schenk”) (collectively,
“Defendants”). (3/28/22 Judgment.) Plaintiffs declare that during the litigation of the instant action, Baumgartner
negotiated the essential terms of a settlement with Driven Deliveries’ President, Salvador
Villanueva(“Villanueva”), and Villanueva represented to Baumgartner that he was in charge of the litigation and a deal
could be worked out between the two of them to resolve the case. Plaintiffs declare the basic terms of a settlement were reached
between Villanueva and Baumgartner, and Plaintiffs signed a settlement agreement (“Settlement Agreement”) on November
24, 2020. Defendants, including Hayek, signed the Agreement on November 30, 2020. Plaintiffs declare they signed the Settlement
Agreement because they knew Driven Deliveries was merging with Stem. Plaintiffs declare that for this reason, they made sure to
state in the Settlement Agreement that in the event of a merger between Driven Deliveries and Stem, Stem would be bound by the
Settlement Agreement and would be named on the Judgment. Plaintiffs also declare that when they signed the Settlement Agreement,
they relied on the fact Hayek, Stem’s new Agreement to bind his new company. Plaintiffs declare Defendants made payments on
the Settlement Agreement until November 2021, when payments stopped. Plaintiffs declare the settlement checks were mostly written by
Villanueva. Plaintiffs declare that shortly after they signed the Settlement Agreement, Driven Deliveries officially completed its
merger with Stem, and all of Plaintiffs’ shares in Driven Deliveries were converted to shares of Stem. In January 2022,
Villanueva listed himself as President, Secretary, and Treasurer of Driven Deliveries. Plaintiffs filed the instant motion on
September 8, 2022. On October 3, 2022, Defendant Driven Deliveries filed its notice of bankruptcy proceedings, and the Court ordered
a stay as to Driven Deliveries. On October 20, 2022, nonparty Stem filed its opposition. On October 26, 2022, Plaintiffs filed their
reply. At the November 2, 2022 hearing on the instant motion, the Court requested Plaintiffs and Stem submit supplemental briefs on
which state law to apply regarding successor liability.





Under
California law, Stem, as Driven Deliveries’ prior parent company was legally required to assume Driven Deliveries’ debt
to Plaintiffs. If a domestic corporation owns all the outstanding shares, or owns less than all the outstanding shares but at least
90 percent of the outstanding shares of each class, of a corporation or corporations, domestic or foreign, the merger of the
subsidiary corporation or corporations into the parent corporation or the merger into the subsidiary corporation of the parent
corporation and any other subsidiary corporation or corporations, may be effected by a resolution or plan of merger adopted and
approved by the board of the parent corporation and the filing of a certificate of ownership as provided in subdivision . The
resolution or plan of merger shall provide for the merger and shall provide that the surviving corporation assumes all the
liabilities of each disappearing corporation and shall include any other provisions required by this section. Stem’s S-4
Statement to the SEC states, “Driven is surviving the merger as a wholly owned subsidiary of Stem (the ‘Merger’).
Stem, together with Driven following the Merger, is referred to herein as the combined company. Following the completion of the
Merger, Stem will also assume Driven’s outstanding net indebtedness.” Plaintiffs argue that while the merger with Stem
was pending, Driven and Stem’s COO, Brian Hayek agreed to be bound by California law in executing the Settlement Agreement.
Accordingly, applying California law, Stem assumed Dirven’s liability to Plaintiffs. Accordingly, Plaintiffs have demonstrated
Stem is Driven Deliveries’ successor in interest. In the interest of justice this Court grants Plaintiffs’ motion to
amend judgment to add nonparty Stem Holdings Inc. as an additional defendant.



Additionally,
the Company is subject from time to time to litigation, claims and suits arising in the ordinary course of business.



21.
Subsequent events



In
November 2022, the Company completed a private placement of a $250,000 unsecured promissory note and 250,000 common share purchase warrants
to an arm’s length lender. The Note becomes due and payable in three months, subject to extension by the Company for an additional
three months upon payment of a $5,000 extension fee to the lender. The Note bears an interest rate of 10% per annum payable at maturity.
The Company may prepay the outstanding principal amount of the obligation together with all accrued and unpaid interest, without penalty,
at any time prior to the maturity date of the note. Each warrant entitles the holder thereof to purchase one common share at a price
of $0.05 for a period of thirty-six (36) months after closing.



In
January 2023, the Company has partially converted a $250,000 unsecured convertible promissory note and issued 7,352,941 common shares
to convert 50% of the note. The remaining balance is recorded at $125,000.



In
January 2023, the Company has executed a $250,000 unsecured convertible promissory note and 500,000 common share purchase warrants to
an arm’s length lender. The Note becomes due and payable on March 31, 2023 and is subject to a voluntary conversion by the Holder
at the conversion rate of $0.01 a share. The Note bears an interest rate of 12% per annum payable at maturity. Each warrant entitles
the holder thereof to purchase one common share at a price of $0.005 for a period of thirty-six (36) months after closing.



In
January 2023, pursuant to an Oregon Real Estate Agreement, the Company sold its ownership interest in Never Again 2, LLC. The purchase
price for this land was $275,000 and did not include the license.





F-42









ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.



None



ITEM
9A. CONTROLS AND PROCEDURES.



| | (a) | Disclosure
                                            Controls and Procedures
| | --- | ------------------------------------------------------------------------------



We
are required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in
our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated
to our management, including our chief executive officer (also our principal executive officer) and our chief financial officer (also
our principal financial and accounting officer) to allow for timely decisions regarding required disclosure.





Pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company’s management, including
the Company’s Chief Executive Officer (“CEO”) (the Company’s principal executive officer) and Chief
Financial Officer (“CFO”) (the Company’s principal financial and accounting officer), has evaluated the
effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as
of the end of the period covered by this report. Based upon that evaluation the Company’s CEO and CFO concluded that the
Company’s disclosure controls and procedures were not effective as of September 30, 2022 to ensure that information required
to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is
accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate, to allow
timely decisions regarding required disclosure. The principal basis for this conclusion is the lack of segregation of duties within
our financial function and the lack of an operating Audit Committee.



(b)
Management’s Report on Internal Control over Financial Reporting



Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over
financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed
by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s
board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the
United States of America and includes those policies and procedures that:



|● | Pertain
    to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets
    of the company;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



|● | Provide
    reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
    accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being
    made only in accordance with authorizations of management and directors of the company; and
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                       
|● | Provide
    reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s
    assets that could have a material effect on the financial statements.                                                                                                                                                                  



Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed,
have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect
to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent
limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to
reduce, though not eliminate, this risk.





44











We
carried out an assessment, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness
of the design and operation of our internal controls over financial reporting, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as of September 30, 2022. In making this assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on that assessment
and on those criteria, our CEO and CFO concluded that our internal control over financial reporting was not effective as of September
30, 2022. The principal basis for this conclusion is (i) failure to engage sufficient resources regarding our accounting and reporting
obligations during our startup and (ii) failure to fully document our internal control policies and procedures.



This
annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules
of the SEC that permit us to provide only the management’s report in this annual report.



The
Company’s management, including the Company’s CEO and CFO, does not expect that the Company’s internal control over
financial reporting will prevent all errors and all fraud. Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures
may deteriorate.



(c)
Changes in Internal Controls



There
have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f)
under the Exchange Act) during the fiscal period to which this report relates that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial reporting.



The
Company’s management, including the Company’s CEO and CFO, does not expect that the Company’s internal control over
financial reporting will prevent all errors and all fraud. Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures
may deteriorate.



ITEM
9B. OTHER INFORMATION.



None.





45









PART
III



ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE



Set
forth below is certain biographical information concerning our current executive officers and directors.



|Name                    |  | Age |  | Position
    with the Company                                               
|----------------------- |  | --- |  | ----------------------------------------------------------------------------
|                        |  |     |  |                                                                             
|Matthew
    Cohen       |  | 63  |  | President,
    Chief Executive Officer, Chief Financial Officer and Director
|Roger
    Rai           |  | 51  |  | Director                                                                    
|Robert
    L. B. Diener |  | 74  |  | Director                                                                    



Matthew
J. Cohen (63)



Matthew
Cohen co-founded Stem Holdings, Inc. in 2016 and has been an independent consultant to the Company for the last five years. On March
30, 2022, Mr. Cohen was appointed Chief Executive Officer, Chief Financial Officer and a director of the Company; all titles of which
he currently serves. Mr. Cohen has over 38 years of experience serving in corporate leadership roles, investing capital, structuring,
and funding public/private partnerships, and providing strategic advisory services to companies throughout the U.S., Europe, Asia and
Latin America. Specifically, Mr. Cohen has held the titles of Chief Executive Officer, Chief Operating Officer, Chief Financial Officer
and Chief Recovery Officer, President, Vice President, and Secretary and has extensive experience in business combinations and valuations,
mergers and acquisitions, reverse mergers, revenue recognition, equity-based compensation, initial public offerings, secondary offerings,
debt offerings and REIT compliance. He is also knowledgeable regarding the requirements of the Sarbanes-Oxley Act of 2002, including
internal controls and Section 404 thereof, as well as the significant issues facing SEC registrants. In addition to being a senior executive
of other publicly traded companies, he served on many publicly traded company boards and as Chairman of the Audit Committee for several
companies. His experience spans a variety of industries including diagnostic services, aerospace, benefits and services company, consumer
retail, biotech and he previously worked in the Investment Banking Division at Oppenheimer & Co. as an Analyst. Mr. Cohen has a B.B.A.
degree in Accounting from New Paltz State University, New York (1980) and in that same year, was the recipient of the school’s
annual scholar athlete award. He is a member of the American Institute of Certified Public Accountants (AICPA).





Rajiv
“Roger” Rai (51)



Mr.
Rai was appointed a director of the Company on March 4, 2022, having previously served as a director of the Company from May 2018 to
February 2019. In his capacity as Special Advisor to the Chairman at Rogers Communications, Roger Rai advises Edward Rogers, who is the
representative controlling shareholder of Rogers Communications (TSX:RCI.b), on business development, revenue development, partnership
development, talent development and sports. Previously, Roger was the Managing Director for E.S. Rogers Enterprises from 2004 to 2018.
In that capacity, he gained extensive experience in strategic management services, including business processes assessment and advisory
services.



Roger
is currently the President of R3 Concepts Inc., a consulting and investments company located in Toronto, Canada. Since 2012, he has also
served as an advisor to Chobani, Inc., a retail food services company.



From
2010 to 2016, Roger was the Vice President, Business Development, Keek Inc. (TSXV:KEK). In this capacity, Roger was responsible for all
new business and partnership development at the Company.



Before
Keek Inc., Roger was the Director of Development at C.O.R.E. Feature Animation, a Company that produced the children’s animation
movie “The Wild.” He was the Founder and VP, Business Development of Fastvibe Inc., a web-streaming equipment and services
company located in Toronto. Roger also held various managerial positions at Rogers Cable Systems and Rogers Wireless, one Canada’s
largest Communications companies.



Roger
sits on the Board of Directors for CONSTANTINE Enterprises Inc., a privately held real estate Company based in Toronto, with operations
in Canada and the Bahamas.



He
is one of the founders and on the Board of Directors for the ONEXONE Foundation, a charitable organization focused on global child welfare.



Roger
holds a Bachelor of Arts from the University of Western Ontario and lives in Toronto.





46









Robert
L. B. Diener (74)



Mr.
Diener has been the principal of the Law Offices of Robert Diener for over twenty years. He has nearly 50 years of experience as an attorney,
senior corporate executive and director, counsel and advisor. The focus of his legal practice is corporate and securities law, mergers
and acquisitions, finance and real estate. He has an extensive background and experience in corporate governance, public accounting and
finance and strategic planning.



Mr.
Diener currently serves as counsel to public and private companies, investors and companies which are focused on formation or acquisition
of public companies in the United States. His principal focus is on “going public” transactions and as “virtual general
counsel” to smaller publicly-reporting companies. His experience runs the full gamut from corporate finance, mergers and acquisitions,
investment activities, corporate governance, state and federal securities law compliance and major contract negotiations.



During
his career, Mr. Diener has served as President, CEO and a member of the board of American Health Properties, Inc. (NYSE), then one of
the largest real estate investment trusts in the country (now part of Healthpeak Properties Inc. with $15 billion in assets); a senior
executive of American Medical International, Inc. (NYSE), one of the country’s largest health care services providers; Chairman
of the Board and CEO of a publicly traded (NASDAQ) telecommunications company and a partner in a boutique investment banking group. He
also has extensive experience in international business, having had direct responsibility for transactions and development projects in
the United Kingdom, Spain, Germany, Switzerland, Greece, Egypt, Singapore, Australia, Israel, Hong Kong, Japan, Korea, Malaysia, Mexico,
Brazil, Venezuela, Bolivia and Ecuador



Mr.
Diener has served as a member or advisor to the boards of many public and private companies, including over 20 individual for-profit
and not-for-profit hospitals and health care facilities. He has previously served as a director of the Federation of American Hospital
Systems and the National Association of Real Estate Investment Trusts. He is currently a director of Prime Healthcare Services, Inc.



Mr.
Diener has been an active member of the State Bar of California since 1973. He received a Bachelor of Arts degree in Social Sciences
and Communications from the University of Southern California in 1969 and a Juris Doctor degree (Magna Cum Laude) from the University
of Santa Clara School of Law in 1973, where he was the Business Editor of the Law Review. He has a strong working knowledge of U.S. generally
accepted accounting principles (GAAP). Mr. Diener served in the United States Marine Corps Reserve from 1969 through 1975.



All
of our directors hold office until the next annual meeting of stockholders and until their respective successors have been elected or
qualified. Officers serve at the discretion of the board of directors. There are no family relationships among our directors or executive
officers. There is no arrangement or understanding between or among our officers and directors pursuant to which any director or officer
was or is to be selected as a director or officer, and there is no arrangement, plan or understanding as to whether non-management stockholders
will exercise their voting rights to continue to elect the current board of directors.



None
of our directors and executive officers have during the past five years:



| | ● | had
    any bankruptcy petition filed by or against any business of which he was a general partner or executive officer, either at the time
    of the bankruptcy or within two years prior to that time;                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                     
| | ● | been
    convicted in a criminal proceeding and is not subject to a pending criminal proceeding;                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                     
| | ● | been
    subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,
    permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities,
    futures, commodities or banking activities;
| |   |                                                                                                                                                                                                                                                                                                                                     
| | ● | or
    been found by a court of competent jurisdiction (in a civil action), the Securities Exchange Commission or the Commodity Futures
    Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended
    or vacated.                                 





47









Compensation
Committee Interlocks and Insider Participation



None
of our executive officers serves as a member of the Board of Directors or compensation committee of any other entity that has one or
more of its executive officers serving as a member of our Board of Directors.



Section
16(a) Beneficial Ownership Reporting Compliance



Pursuant
to Section 16(a) of the Exchange Act and the rules thereunder, the Company’s executive officers and directors and persons who own
more than 10% of a registered class of the Company’s equity securities are required to file with the SEC reports of their ownership
of, and transactions in, the Company’s common stock.



Family
Relationships



None.



Committees
of the Board of Directors



Our
board of directors has established the following committees: an audit committee, a compensation committee and a nominating/corporate
governance committee. Our board of directors may from time to time establish other committees.



The
Board of Directors has approved charters for each committee.



Audit
Committee



The
Audit Committee is currently composed of Robert L. B. Diener, Chairman, and Roger Rai together with Matthew Cohen. Mr. Diener and Mr.
Rai are independent directors, and each considered financially literate.



The
purpose of the Audit Committee is to oversee the processes of accounting and financial reporting of the Company and the audits and financial
statements of the Company. The Audit Committee’s primary duties and responsibilities are to:



| | ● | Monitor
    the integrity of the Company’s financial reporting process and systems of internal controls regarding finance, accounting and
    legal compliance.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                
| | ● | Monitor
    the independence and performance of the Company’s independent auditors and the Company’s accounting personnel.                                     



| | ● | Provide
    an avenue of communication among the independent auditors, management, the Company’s accounting personnel, and the Board.            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                  
| | ● | Appoint
    and provide oversight for the independent auditors engaged to perform the audit of the financial statements.                         
| |   |                                                                                                                                                  
| | ● | Discuss
    the scope of the independent auditors’ examination.                                                                                  
| |   |                                                                                                                                                  
| | ● | Review
    the financial statements and the independent auditors’ report.                                                                        
| |   |                                                                                                                                                  
| | ● | Review
    areas of potential significant financial risk to the Company.                                                                         
| |   |                                                                                                                                                  
| | ● | Monitor
    compliance with legal and regulatory requirements.                                                                                   
| |   |                                                                                                                                                  
| | ● | Solicit
    recommendations from the independent auditors regarding internal controls and other matters.                                         
| |   |                                                                                                                                                  
| | ● | Make
    recommendations to the Board.                                                                                                           
| |   |                                                                                                                                                  
| | ● | Resolve
    any disagreements between management and the auditors regarding financial reporting.                                                 
| |   |                                                                                                                                                  
| | ● | Prepare
    the report required by Item 407(d) of Regulation S-K, as required by the rules of the Securities and Exchange Commission (the “SEC”).
| |   |                                                                                                                                                  
| | ● | Perform
    other related tasks as requested by the Board.                                                                                       



The
Audit Committee has the authority to conduct any investigation appropriate to fulfilling its responsibilities, and it has direct access
to the independent auditors as well as anyone in the organization. The Committee has the ability to retain, at the Company’s expense,
special legal, accounting, or other consultants or experts it deems necessary in the performance of its duties.



48







Compensation
Committee



The
Compensation Committee is currently composed of Roger Rai, Chairperson, and Robert L. B. Diener together with Matthew Cohen. Messrs.
Rai and Diener are independent directors



The
Compensation Committee’s responsibilities include, but are not limited to, the responsibilities which are required under the corporate
governance rules of NASDAQ, including the responsibility to determine compensation of the Chairman of the Board, the Chief Executive
Officer (“CEO”), the President and all other executive officers. The Compensation Committee’s actions shall generally
be related to overall considerations, policies, and strategies.



The
following are specific duties and responsibilities of the Compensation Committee:



| | ● | Review
    the competitiveness of the Company’s executive compensation programs to ensure (a) the attraction and retention of corporate
    officers, (b) the motivation of corporate officers to achieve the Company’s business objectives, and I the alignment of the
    interests of key leadership with the long-term interests of the Company’s stockholders.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                    
| | ● | Review
    and determine the annual salary, bonus, stock options, other equity-based incentives, and other benefits, direct and indirect, of
    the Company’s executive officers, including development of an appropriate balance between short-term pay and long-term incentives
    while focusing on long-term stockholder interests.                          
| |   |                                                                                                                                                                                                                                                                                                                                                                    
| | ● | Determine
    salary increases and bonus grants for the Chairman of the Board, the CEO, the President, and all other executive officers of the
    Company.                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                    
| | ● | Review
    and approve corporate goals and objectives for purposes of bonuses and long- term incentive plans.                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                    
| | ● | Review
    and approve benefit plans, including equity incentive plans, and approval of individual grants and awards.                                                                                                                                                                                                                                              



| | ● | Review
    and approve employment or other agreements relating to compensation for the Chairman of the Board, the CEO, the President, and the
    other executive officers of the Company.                                       
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                  
| | ● | Review
    and discuss with management the Company’s CD&A and recommend to the Board that the CD&A be included in the Post-Effective
    Amendment #1 to Form S-1 and/or proxy statement in accordance with applicable SEC rules.
| |   |                                                                                                                                                                                                                                  
| | ● | If
    required by SEC rules, provide a Compensation Committee Report on executive compensation to be included in the Company’s annual
    proxy statement in accordance with applicable SEC rules.                              
| |   |                                                                                                                                                                                                                                  
| | ● | Perform
    an annual evaluation of the performance of the Chairman of the Board, the CEO, the President, and the other executive officers.                                                                                      
| |   |                                                                                                                                                                                                                                  
| | ● | Perform
    an annual review of non-employee director compensation programs and recommend changes thereto to the Board when appropriate.                                                                                         
| |   |                                                                                                                                                                                                                                  
| | ● | Plan
    for executive development and succession.                                                                                                                                                                               



| | ● | Review
    and approve all equity-based compensation plans and amendments thereto, subject to any stockholder approval under the listing standards
    of NASDAQ.                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                        
| | ● | Recommend
    an appropriate method by which stockholder concerns about compensation may be communicated by stockholders to the Committee and,
    as the Committee deems appropriate, to respond to such stockholder concerns.                                        
| |   |                                                                                                                                                                                                                                                                        
| | ● | Perform
    such duties and responsibilities as may be assigned by the Board to the Committee under the terms of any executive compensation plan,
    incentive compensation plan or equity-based plan.                                                                
| |   |                                                                                                                                                                                                                                                                        
| | ● | Review
    risks related to the Company’s compensation policies and practices and review and discuss, at least annually, the relationship
    between the Company’s risk management policies and practices, corporate strategy and compensation policies and practices.



49







Nominating/Corporate
Governance Committee



The
Nominating/Corporate Governance Committee is currently composed of Robert L. B. Diener, Chairman, and Roger Rai together with Matthew
Cohen. Mr. Diener and Mr. Rai are independent directors.



The
Nominating/Corporate Governance Committee’s responsibilities include, but are not limited to, the responsibilities which are required
under the corporate governance rules of NASDAQ, including the responsibilities to identify individuals who are qualified to become directors
of the Company, consistent with criteria approved by the Board, and make recommendations to the Board of nominees, including Stockholder
Nominees (nominees whether by appointment or election at the Annual Meeting of Stockholders) to serve as a directors of the Company.
To fulfill its purpose, the responsibilities and duties of the Nominating/Corporate Governance Committee are as follows:



| | ● | Evaluate,
    in consultation with the Chairman of the Board and Chief Executive Officer (“CEO”), the current Composition, size, role
    and functions of the Board and its committees to oversee successfully the business and affairs of the Company in a manner consistent
    with the Company’s Corporate Governance Guidelines and make recommendations to the Board for approval.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| | ● | Determine,
    in consultation with the Chairman of the Board and CEO, director selection criteria consistent with the Company’s Corporate
    Governance Guidelines and conduct searches for prospective directors whose skills and attributes reflect these criteria.                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| | ● | Assist
    in identifying, interviewing, and recruiting candidates for the Board.                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                          
| | ● | Evaluate,
    in consultation with the Chairman of the Board and CEO, nominees, including nominees nominated by stockholders in accordance with
    the provisions of the Company’s Bylaws, and recommend nominees for election to the Board or to fill vacancies on the Board.                                                                                                          



| | ● | Before
    recommending an incumbent, replacement, or additional director, review his or her qualifications, including capability, availability
    to serve, conflicts of interest, and other relevant factors.                                                                                                           
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                            
| | ● | Evaluate,
    in consultation with the Chairman of the Board and CEO and make recommendations to the Board concerning the appointment of directors
    to Board committees and the selection of the Chairman of the Board and the Board committee chairs consistent with the Company’s
    Corporate Governance Guidelines.
| |   |                                                                                                                                                                                                                                                                                                                            
| | ● | Determine
    the methods and execution of the annual evaluations of the Board’s and each Board committee’s effectiveness and support
    the annual performance evaluation process.                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                            
| | ● | Evaluate
    and make recommendations to the Board regarding director retirements, director re-nominations and directors’ changes in circumstances
    in accordance with the Company’s Corporate Governance Guidelines.                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                            
| | ● | Review
    and make recommendations to the Board regarding policies relating to directors’ compensation, consistent with the Company’s
    Corporate Governance Guidelines.                                                                                                                                                



50







| | ● | As
    set forth herein, monitor compliance with, and at least annually evaluate and make recommendations to the Board regarding, the Company’s
    Corporate Governance Guidelines and overall corporate governance of the Company.                                       
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                            
| | ● | Assist
    the Board and the Company’s officers in ensuring compliance with an implementation of the Company’s Corporate Governance
    Guidelines.                                                                                                                        
| |   |                                                                                                                                                                                                                                                                            
| | ● | Develop
    and implement continuing education programs for all directors, including orientation and training programs for new directors.                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                            
| | ● | Annually
    evaluate and make recommendations to the Board regarding the Committee’s performance and adequacy of this Charter.                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                            
| | ● | Review
    the Code of Ethics periodically and propose changes thereto to the Board, if appropriate.                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                            
| | ● | Review
    requests from outside the Committee for any waiver or amendment of the Company’s Code of Business Conduct and Ethics and recommend
    to the Board whether a particular waiver should be granted or whether a particular amendment should be adopted.          
| |   |                                                                                                                                                                                                                                                                            
| | ● | Oversee
    Committee membership and qualifications and the performance of members of the Board.                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                            
| | ● | Review
    and recommend changes in (i) the structure and operations of Board Committees, and (ii) Committee reporting to the Board.                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                            
| | ● | Make
    recommendations annually to the Board as to the independence of directors under the Corporate Governance Guidelines.                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                            
| | ● | Review
    and make recommendations to the Board regarding the position the Company should take with respect to any proposals submitted by stockholders
    for approval at any annual or special meetings of stockholders.                                                
| |   |                                                                                                                                                                                                                                                                            
| | ● | Regularly
    report on Committee activities and recommendations to the Board.                                                                                                                                                                                             
| |   |                                                                                                                                                                                                                                                                            
| | ● | Perform
    any other activities consistent with this Charter, the Company’s Certificate of Incorporation and Bylaws, as amended from time
    to time, the NASDAQ company guide, and any governing law, as the Board considers appropriate and delegates to the Committee.



Code
of Business Conduct and Ethics



Effective
May 11, 2020, the Board of Directors (the “Board”) of Stem Holdings, Inc. (the “Company”) adopted a Code of Ethics
(the “Code of Ethics”) applicable to the Company and all subsidiaries and entities controlled by the Company and the Company’s
directors, officers and employees. Compliance with the Code of Ethics is required of all Company personnel at all times. The Company’s
senior management is charged with ensuring that the Code of Ethics and the Company’s corporate policies will govern, without exception,
all business activities of the Company. The Code of Ethics addresses, among other things, the use and protection of Company assets and
information, avoiding conflicts of interest, corporate opportunities and transactions with business associates and document retention.



Legal
Proceedings



Brian
Hayek



There
are no material proceedings to which any director or officer, or any associate of any such director or officer, is a party that is adverse
to our Company or any of our subsidiaries or has a material interest adverse to our Company or any of our subsidiaries. No director or
executive officer has been a director or executive officer of any business which has filed a bankruptcy petition or had a bankruptcy
petition filed against it during the past ten years. No director or executive officer has been convicted of a criminal offense or is
the subject of a pending criminal proceeding during the past ten years. No director or executive officer has been the subject of any
order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities, or banking activities during the past ten years. No director or officer has been found by a court
to have violated a federal or state securities or commodities law during the past ten years.



51







Officers
and Directors Indemnification



Under
our Articles of Incorporation and Bylaws of the corporation, the Company may indemnify an officer or director who is made a party to
any proceeding, including a lawsuit, because of his or her position, if he or she acted in good faith and in a manner he or she reasonably
believed to be in the Company’s best interest. The Company may advance expenses incurred in defending a proceeding. To the extent
that the officer or director is successful on the merits in a proceeding as to which he or she is to be indemnified, the Company must
indemnify the officer or director against all expenses incurred, including attorney’s fees. With respect to a derivative action,
indemnity may be made only for expenses actually and reasonably incurred in defending the proceeding, and if the officer or director
is judged liable, then only by a court order. The indemnification coverage is intended to be to the fullest extent permitted by applicable
laws.



Regarding
indemnification for liabilities arising under the Securities Act of 1933, which may be permitted to officers or directors under applicable
state law, the Company is informed that, in the opinion of the Securities and Exchange Commission, indemnification is against public
policy, as expressed in the Act and is, therefore, unenforceable.



ITEM
11. EXECUTIVE COMPENSATION.



The
following is a summary of the compensation we paid for each of the last two years ended September 30, 2022 and 2021, respectively (i)
to the persons who acted as our principal executive officer during our fiscal year ended September 30, 2022 and (ii) to the person who
acted as our next most highly compensated executive officer other than our principal executive officer who was serving as an executive
officer as of the end of our last fiscal year.



|                  |  |      |  |        |         |  |       |   |   |        |  |   |        |  |  | Non-Equity   |        |  | Non-Qualified |   |   |              |  |   |       | 
|----------------- |  | ---- |  | ------ | ------- |  | ----- | - | - | ------ |  | - | ------ |  |  | ------------ | ------ |  | ------------- | - | - | ------------ |  | - | ----- | 
|                  |  |      |  |        |         |  |       |   |   |        |  |   |        |  |  | Incentive    |        |  | Deferred      |   |   |              |  |   |       | 
|Name and          |  |      |  |        |         |  |       |   |   | Stock  |  |   | Option |  |  | Plan         |        |  | Compensation  |   |   | All other    |  |   |       | 
|Principal         |  |      |  | Salary |         |  | Bonus |   |   | Awards |  |   | Awards |  |  | Compensation |        |  | Earnings      |   |   | Compensation |  |   | Total | 
|Position          |  | Year |  | ($)    |         |  | ($)   |   |   | ($)    |  |   | ($)    |  |  | ($)          |        |  | ($)           |   |   | ($)          |  |   | ($)   | 
|Matthew J. Cohen  |  | 2022 |  | $      | 187,500 |  |       | $ | - |        |  | $ | 50,000 |  |  | $            | -      |  |               | $ | - |              |  | $ | -     | 
|CEO, CFO          |  |      |  |        |         |  |       |   |   |        |  |   |        |  |  |              |        |  |               |   |   |              |  |   |       | 
|                  |  |      |  |        |         |  |       |   |   |        |  |   |        |  |  |              |        |  |               |   |   |              |  |   |       | 
|Steven Hubbard    |  | 2022 |  | $      | 48,650  |  |       | $ | - |        |  | $ | -      |  |  | $            | 75,000 |  |               | $ | - |              |  | $ | -     | 
|Director, CFO     |  | 2021 |  | $      | 75,000  |  |       | $ | - |        |  | $ | -      |  |  | $            | -      |  |               | $ | - |              |  | $ | -     | 
|                  |  |      |  |        |         |  |       |   |   |        |  |   |        |  |  |              |        |  |               |   |   |              |  |   |       | 
|Garrett M. Bender |  | 2022 |  | $      | 1,250   |  |       | $ | - |        |  | $ | 3,250  |  |  | $            | -      |  |               | $ | - |              |  | $ | -     | 
|Director          |  | 2021 |  | $      | -       |  |       | $ | - |        |  | $ | -      |  |  | $            | -      |  |               | $ | - |              |  | $ | -     | 
|                  |  |      |  |        |         |  |       |   |   |        |  |   |        |  |  |              |        |  |               |   |   |              |  |   |       | 
|Lindy Snider      |  | 2022 |  | $      | 1,250   |  |       | $ | - |        |  | $ | 3,250  |  |  | $            | -      |  |               | $ | - |              |  | $ | -     | 
|Director          |  | 2021 |  | $      | -       |  |       | $ | - |        |  | $ | -      |  |  | $            | -      |  |               | $ | - |              |  | $ | -     | 
|                  |  |      |  |        |         |  |       |   |   |        |  |   |        |  |  |              |        |  |               |   |   |              |  |   |       | 
|Brian Hayek       |  | 2022 |  | $      | 34,964  |  |       | $ | - |        |  | $ | 4,875  |  |  | $            | -      |  |               | $ | - |              |  | $ | -     | 
|Director          |  | 2021 |  | $      | 35,000  |  |       | $ | - |        |  | $ | -      |  |  | $            | -      |  |               | $ | - |              |  | $ | -     | 
|                  |  |      |  |        |         |  |       |   |   |        |  |   |        |  |  |              |        |  |               |   |   |              |  |   |       | 
|Robert Diener     |  | 2022 |  | $      | 1,250   |  |       | $ | - |        |  | $ | 3,250  |  |  | $            | -      |  |               | $ | - |              |  | $ | -     | 
|Director          |  | 2021 |  | $      | 30,000  |  |       | $ | - |        |  | $ | -      |  |  | $            | -      |  |               | $ | - |              |  | $ | -     | 
|                  |  |      |  |        |         |  |       |   |   |        |  |   |        |  |  |              |        |  |               |   |   |              |  |   |       | 
|Roger Rai         |  | 2022 |  | $      | 1,250   |  |       | $ | - |        |  | $ | 3,250  |  |  | $            | -      |  |               | $ | - |              |  | $ | -     | 
|Director          |  | 2021 |  | $      | -       |  |       | $ | - |        |  | $ | -      |  |  | $            | -      |  |               | $ | - |              |  | $ | -     | 
|                  |  |      |  |        |         |  |       |   |   |        |  |   |        |  |  |              |        |  |               |   |   |              |  |   |       | 
|Daryl Simon       |  | 2022 |  | $      | 1,250   |  |       | $ | - |        |  | $ | 3,250  |  |  | $            | -      |  |               | $ | - |              |  | $ | -     | 
|Director          |  | 2021 |  | $      | -       |  |       | $ | - |        |  | $ | -      |  |  | $            | -      |  |               | $ | - |              |  | $ | -     | 



52







OUTSTANDING
EQUITY AWARDS



Grants
of Plan-Based Awards



|                          |  |                   |  | Option
    Awards  |  |                 |   |  |                 |  |           |               |  |   |            | 
|------------------------- |  | ----------------- |  | ------------------ |  | --------------- | - |  | --------------- |  | --------- | ------------- |  | - | ---------- | 
|                          |  |                   |  | Equity             |  |                 |   |  |                 |  |           |               |  |   |            | 
|                          |  | Grant
    Date    |  | Incentive
    Plan |  |                 |   |  |                 |  |           |               |  |   |            | 
|                          |  | Number            |  | Awards:            |  |                 |   |  | Number
    of   |  |           |               |  |   |            | 
|                          |  | of
    Securities |  | Number
    of      |  |                 |   |  | Securities      |  |           |               |  |   |            | 
|                          |  | Underlying        |  | Securities         |  |                 |   |  | Underlying      |  |           |               |  |   |            | 
|                          |  | Unexercised       |  | Underlying         |  |                 |   |  | Unexercised     |  |           | Option        |  |   | Option     | 
|                          |  | Options
    (#)   |  | Unexercised        |  |                 |   |  | Options
    (#) |  |           | Exercise      |  |   | Expiration | 
|Name                      |  | Exercisable       |  | Unearned           |  | Options
    (#) |   |  | Unexercisable   |  |           | Price
    ($) |  |   | Date       | 
|Brian
    Hayek, Director |  | 8/1/2022          |  | -                  |  |                 | - |  |                 |  | 1,538,910 |               |  | $ | 0.03       | 





|Equity Compensation Plan Information                      
|----------------------------------------------------------
|Plan category                                             
|Equity compensation plans approved by security holders    
|Equity compensation plans not approved by security holders
|Total                                                     



(1)
As of September 30, 2022



Warrants
Issued to Management



|Name |  | Grant
    Date |  |  | Number
    of
    Securities
    Underlying
    Unexercised
    Exercisable
    Warrants |  |  | Number
    of
    Securities
    Underlying
    Unexercised
    Exercisable
    Warrants |  |  | Warrant
    Exercise
    Price($) |  |  | Warrant
    Expiration
    Date | 
|---- |  | -------------- |  |  | ---------------------------------------------------------------------------------------- |  |  | ---------------------------------------------------------------------------------------- |  |  | --------------------------------- |  |  | ------------------------------- | 
|None |  |                |  |  |                                                                                          |  |  |                                                                                          |  |  |                                   |  |  |                                 | 



Employment
Agreements



Matthew
J. Cohen—On March 30, 2022, the Company entered into an Employment Agreement for an initial term of one year, subject to automatic
renewals for additional one-year periods until terminated, with the remaining term at all times being not less than one year. The Employment
Agreement provides salary at the rate of $250,000 per year. The salary shall be subject to annual review not later than March 15th of
each year by the Board or the Compensation Committee of the Board (the “Compensation Committee”), but
shall in no event be decreased from its then existing level without the mutual agreement of the parties. Mr. Cohen also received a restricted
stock grant of 1,000,000 shares of the Company’s common stock. Additionally, Mr. Cohen shall participate in an annual cash incentive
compensation plan being eligible to earn an annual bonus for each full calendar year completed. The target Annual Bonus will be twenty
percent (20%) of the Base Salary and may earn up to thirty percent (30%) of Base Salary, in each case based on Base Salary in effect
on January 1st of the applicable performance period. The actual Annual Bonus payable to the Executive with respect to a performance
period will be determined by the Compensation Committee based on achieving performance goals and objectives for such calendar year as
reasonably determined by the Compensation Committee. The Annual Bonus shall be paid as soon as administratively practicable after the
end of the performance period, but in no event later than the March 15th immediately following such period; provided, that the Mr. Cohen
remains employed by the Company through the last day of the annual calendar year performance period to be eligible to receive bonus.



Compensation
of Directors



Independent
members of the Board of Directors receive $5,000 per annum together periodic stock option grants (see Grants of Plan-Based Awards, above).
At this time, there is no other board of director compensation plan in place.



53









ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.



The
following table sets forth certain information with respect to the beneficial ownership of our voting securities by (i) any person or
group owning more than 5% of any class of voting securities, (ii) each director, (iii) our chief executive officer and president and
(iv) all executive officers and directors as a group as of December 30, 2022. Unless noted, the address for the following beneficial
owners and management is 2201 NW Corporate Blvd., Suite 205, Boca Raton, FL 33431.



|Title of Class |  | Name and Address of Beneficial Owner                        |  | Amount and Nature of Beneficial Owner (1) |           |  | Percent of Class | 
|-------------- |  | ----------------------------------------------------------- |  | ----------------------------------------- | --------- |  | ---------------- | 
|Common Stock   |  | Matthew Cohen (2)                                           |  |                                           | 1,359,961 |  |                  | 
|Common Stock   |  | Roger Rai (3)                                               |  |                                           | 2,494,853 |  |                  | 
|Common Stock   |  | Robert Diener (4)                                           |  |                                           | 555,500   |  |                  | 
|Common Stock   |  | All executive officers and directors as a group (3 persons) |  |                                           | 8,640,628 |  |                  | 



| | (1) | In
    determining beneficial ownership of our Common Stock, the number of shares shown includes shares which the beneficial owner may acquire
    upon exercise of debentures, warrants and options which may be acquired within 60 days. In determining the percent of Common Stock
    owned by a person or entity on December 5, 2022, (a) the numerator is the number of shares of the class beneficially owned by such
    person or entity, including shares which the beneficial ownership may acquire within 60 days of exercise of debentures, warrants
    and options; and (b) the denominator is the sum of (i) the total shares of that class outstanding on December 5, 2022 (227,693,335
    shares of Common Stock) and (ii) the total number of shares that the beneficial owner may acquire upon exercise of the debentures,
    warrants and options. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of its shares.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (2) | Comprises
    1,000,000 shares issued in connection with Employment Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (3) | Comprises
    2,169,853 shares purchased, and 325,000 shares issued for services as a director of the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (4) | Comprises
    shares issued for services as a director of the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     



54







ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE



Related
Party Transactions



Please
refer to Financial Statements, Notes 13,14 and 17, which are incorporated in their entirety by this reference.



Director
Independence



As
of December 30, 2022, of our three (3) directors, Robert Diener and Roger Rai are considered “independent” in accordance
with Rule 4200(a)(15) of the NASDAQ Marketplace Rules. The remaining director is not considered “independent”.



ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.



Audit
Fees



The
aggregate fees billed by our principal accountant for the audit of our annual financial statements, review of financial statements included
in the quarterly reports and other fees that are normally provided by the accountant in connection with statutory and regulatory filings
or engagements for the fiscal years ended September 30, 2022, and September 30, 2021, respectively, were approximately $240,000 and $630,000.



Tax
Fees



The
aggregate fees billed for professional services rendered by our principal accountant for tax compliance, tax advice and tax planning
for the fiscal years ended September 30, 2022, and 2021, respectively, were approximately $118,000 and $112,000.



All
Other Fees



The
other aggregate fees billed for professional services rendered by our principal accountant for work related to registration statements,
the Canadian prospectus, and consulting work related to the Employee Retention Tax Credit for the fiscal years ended September 30, 2022,
and 2021, respectively, were approximately $0 and $269,000.



PART
IV



ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES



The
following documents are filed as part of this 10-K:



1.
FINANCIAL STATEMENTS



The
following documents are filed in Part II, Item 8 of this annual report on Form 10-K:



| | ● | Report
    of L J Soldinger Associates, LLC, Independent Registered Certified Public Accounting Firm            
| | - | ----------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                 
| | ● | Consolidated
    Balance Sheets as of September 30, 2022 and 2021 (audited)                                     
| |   |                                                                                                                 
| | ● | Consolidated
    Statements of Operations for the year ended September 30, 2022 and September 30, 2021 (audited)
| |   |                                                                                                                 
| | ● | Statements
    of Stockholders’ Equity for the years ended September 30, 2022 and September 30, 2021 (audited)  
| |   |                                                                                                                 
| | ● | Statement
    of Cash Flows for the years ended September 30, 2022 and September 30, 2021 (audited)             
| |   |                                                                                                                 
| | ● | Notes
    to Financial Statements (audited)                                                                     



55







2.
FINANCIAL STATEMENT SCHEDULES



All
financial statement schedules have been omitted as they are not required, not applicable, or the required information is otherwise included.



3.
EXHIBITS



The
exhibits listed below are filed as part of or incorporated by reference in this report.



|Exhibit
    No. |  | Identification
    of Exhibit                                                                                                                         
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|                |  |                                                                                                                                                       
|31.1            |  | Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                           
|                |  |                                                                                                                                                       
|31.2            |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|                |  |                                                                                                                                                       
|32.1            |  | Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|                |  |                                                                                                                                                       
|32.2            |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.    



56







SIGNATURES



Pursuant
to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.



| | Stem
    Holdings, Inc.
| | -----------------------
| | (Registrant)           
| |                        
| | By:                    
| |                        
| |                        
| |                        
| | Date                   
| |                        
| | By:                    
| |                        
| |                        
| |                        
| |                        
| | Date                   



Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the
registrant and in the capacity and on the date indicated.



| | By:  | /s/
    Matthew J. Cohen                                                                                                                  
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------
| |      | Matthew
    J. Cohen                                                                                                                      
| |      | Chief Executive Officer and Director
                                                         (Principal Executive Officer)               
| |      |                                                                                                                                           
| | Date | January
    13, 2023                                                                                                                      
| |      |                                                                                                                                           
| | By:  | /s/
    Matthew J. Cohen                                                                                                                  
| |      | Matthew
    J. Cohen                                                                                                                      
| |      | Chief Financial Officer and Director
                                                         (Principal Financial and Accounting Officer)
| |      |                                                                                                                                           
| | Date | January
    13, 2023                                                                                                                      
| |      |                                                                                                                                           
| | By:  | /s/
    Roger Rai                                                                                                                         
| |      | Roger
    Rai                                                                                                                             
| |      | Director                                                                                                                                  
| |      |                                                                                                                                           
| | Date | January
    13, 2023                                                                                                                      
| |      |                                                                                                                                           
| | By:  | /s/
    Robert L. B. Diener                                                                                                               
| |      | Robert
    L. B. Diener                                                                                                                   
| |      | Director                                                                                                                                  
| |      |                                                                                                                                           
| | Date | January
    13, 2023                                                                                                                      



57