Exhibit 99.1







GLASS HOUSE BRANDS INC.

(FORMERLY MERCER PARK
BRAND ACQUISITION CORP.)



CONSOLIDATEDFINANCIAL STATEMENTS



FOR THE YEARS ENDED

DECEMBER 31, 2021

AND

DECEMBER 31, 2020













GLASS HOUSE BRANDS INC.

Table of
Contents



|                                                           |  | Page(s)
|---------------------------------------------------------- |  | -------
|Report of Independent Registered Public Accounting Firm    |  | 1      
|                                                           |  |        
|Consolidated Balance Sheets                                |  | 2      
|                                                           |  |        
|Consolidated Statements of Operations                      |  | 3      
|                                                           |  |        
|Consolidated Statements of Changes in Shareholders’ Equity |  | 4      
|                                                           |  |        
|Consolidated Statements of Cash Flows                      |  | 5 – 6  
|                                                           |  |        
|Notes to Consolidated Financial Statements                 |  | 7 – 41 

















Report of Independent Registered Public Accounting Firm



To the Board of Directors and Shareholders of Glass House
Brands Inc.



Opinion on the Financial Statements



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



Basis for Opinion



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



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



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



/s/ Macias Gini & O’Connell LLP



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



Los Angeles, California

March 22, 2022



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





- 1 -







GLASS HOUSE BRANDS INC.

Consolidated Balance Sheets

As of December 31, 2021 and 2020

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



|                                                                                                                                                                                     |  | 2021 |             |   | 2020 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ----------- | - | ---- | -
|ASSETS                                                                                                                                                                               |  |      |             |   |      |  
|                                                                                                                                                                                     |  |      |             |   |      |  
|Current Assets:                                                                                                                                                                      |  |      |             |   |      |  
|Cash                                                                                                                                                                                 |  | $    | 51,066,831  |   |      | $
|Restricted Cash                                                                                                                                                                      |  |      | 3,000,000   |   |      |  
|Accounts Receivable, Net                                                                                                                                                             |  |      | 2,893,911   |   |      |  
|Prepaid Expenses and Other Current Assets                                                                                                                                            |  |      | 5,562,963   |   |      |  
|Inventory                                                                                                                                                                            |  |      | 6,596,302   |   |      |  
|Current Portion of Notes Receivable                                                                                                                                                  |  |      | -           |   |      |  
|                                                                                                                                                                                     |  |      |             |   |      |  
|Total Current Assets                                                                                                                                                                 |  |      | 69,120,007  |   |      |  
|                                                                                                                                                                                     |  |      |             |   |      |  
|Operating Lease Right-of-Use Assets, Net                                                                                                                                             |  |      | 3,077,730   |   |      |  
|Investments                                                                                                                                                                          |  |      | 7,196,359   |   |      |  
|Property, Plant and Equipment, Net                                                                                                                                                   |  |      | 195,798,524 |   |      |  
|Intangible Assets, Net                                                                                                                                                               |  |      | 5,629,833   |   |      |  
|Goodwill                                                                                                                                                                             |  |      | 4,918,823   |   |      |  
|Other Assets                                                                                                                                                                         |  |      | 2,339,993   |   |      |  
|                                                                                                                                                                                     |  |      |             |   |      |  
|TOTAL ASSETS                                                                                                                                                                         |  | $    | 288,081,269 |   |      | $
|                                                                                                                                                                                     |  |      |             |   |      |  
|LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                                 |  |      |             |   |      |  
|                                                                                                                                                                                     |  |      |             |   |      |  
|LIABILITIES:                                                                                                                                                                         |  |      |             |   |      |  
|Current Liabilities:                                                                                                                                                                 |  |      |             |   |      |  
|Accounts Payable and Accrued Liabilities                                                                                                                                             |  | $    | 10,215,004  |   |      | $
|Income Taxes Payable                                                                                                                                                                 |  |      | 5,038,983   |   |      |  
|Contingent Shares and Earnout Liabilities                                                                                                                                            |  |      | 38,428,700  |   |      |  
|Shares Payable                                                                                                                                                                       |  |      | 2,756,830   |   |      |  
|Derivative Liabilities - Convertible Debt                                                                                                                                            |  |      | -           |   |      |  
|Current Portion of Operating Lease Liabilities                                                                                                                                       |  |      | 269,154     |   |      |  
|Current Portion of Notes Payable                                                                                                                                                     |  |      | 37,986      |   |      |  
|                                                                                                                                                                                     |  |      |             |   |      |  
|Total Current Liabilities                                                                                                                                                            |  |      | 56,746,657  |   |      |  
|                                                                                                                                                                                     |  |      |             |   |      |  
|Operating Lease Liabilities, Net of Current Portion                                                                                                                                  |  |      | 2,865,480   |   |      |  
|Other Non-Current Liabilities                                                                                                                                                        |  |      | 1,449,045   |   |      |  
|Deferred Tax Liabilities                                                                                                                                                             |  |      | 1,330,815   |   |      |  
|Notes Payable, Net of Current Portion                                                                                                                                                |  |      | 44,817,436  |   |      |  
|Notes Payable, Net of Current Portion - Related Parties                                                                                                                              |  |      | -           |   |      |  
|                                                                                                                                                                                     |  |      |             |   |      |  
|TOTAL LIABILITIES                                                                                                                                                                    |  |      | 107,209,433 |   |      |  
|                                                                                                                                                                                     |  |      |             |   |      |  
|SHAREHOLDERS' EQUITY:                                                                                                                                                                |  |      |             |   |      |  
|Multiple Voting Shares (No par value, unlimited shares authorized, 4,754,979 and nil shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively)      |  |      | -           |   |      |  
|Subordinate Voting Shares (No par value, unlimited shares authorized, 38,563,405 and nil shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively)  |  |      | -           |   |      |  
|Exchangeable Shares (No par value, unlimited shares authorized, 18,256,784 and 23,191,563 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively) |  |      | -           |   |      |  
|Additional Paid-In Capital                                                                                                                                                           |  |      | 241,896,900 |   |      |  
|Accumulated Deficit                                                                                                                                                                  |  |      | (60,827,290 | ) |      |  
|                                                                                                                                                                                     |  |      |             |   |      |  
|Total Shareholders' Equity Attributable to the Company                                                                                                                               |  |      | 181,069,610 |   |      |  
|Non-Controlling Interest                                                                                                                                                             |  |      | (197,774    | ) |      |  
|                                                                                                                                                                                     |  |      |             |   |      |  
|TOTAL SHAREHOLDERS' EQUITY                                                                                                                                                           |  |      | 180,871,836 |   |      |  
|                                                                                                                                                                                     |  |      |             |   |      |  
|TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                           |  | $    | 288,081,269 |   |      | $





- 2 -







GLASS HOUSE BRANDS INC.

Consolidated Statements of Operations

For the Years Ended December 31, 2021
and 2020

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



|                                                              |  | 2021 |             |   | 2020 |  
|------------------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|Revenues, Net                                                 |  | $    | 69,446,852  |   |      | $
|Cost of Goods Sold                                            |  |      | 53,427,461  |   |      |  
|                                                              |  |      |             |   |      |  
|Gross Profit                                                  |  |      | 16,019,391  |   |      |  
|                                                              |  |      |             |   |      |  
|Operating Expenses:                                           |  |      |             |   |      |  
|General and Administrative                                    |  |      | 33,780,783  |   |      |  
|Sales and Marketing                                           |  |      | 3,530,529   |   |      |  
|Professional Fees                                             |  |      | 9,078,289   |   |      |  
|Depreciation and Amortization                                 |  |      | 4,767,396   |   |      |  
|                                                              |  |      |             |   |      |  
|Total Operating Expenses                                      |  |      | 51,156,997  |   |      |  
|                                                              |  |      |             |   |      |  
|Loss from Operations                                          |  |      | (35,137,606 | ) |      |  
|                                                              |  |      |             |   |      |  
|Other Expense (Income):                                       |  |      |             |   |      |  
|Interest Expense                                              |  |      | 2,736,875   |   |      |  
|Interest Income                                               |  |      | (64,837     | ) |      |  
|Loss on Investments                                           |  |      | 1,089,047   |   |      |  
|(Gain) Loss on Change in Fair Value of Derivative Liabilities |  |      | (825,000    | ) |      |  
|(Gain) on Change in Fair Value of Contingent Liabilities      |  |      | (4,031,634  | ) |      |  
|Loss on Disposition of Subsidiary                             |  |      | 6,090,337   |   |      |  
|Impairment Expense                                            |  |      | 817,875     |   |      |  
|Other Expense (Income), Net                                   |  |      | 117,216     |   |      |  
|                                                              |  |      |             |   |      |  
|Total Other Expense, Net                                      |  |      | 5,929,879   |   |      |  
|                                                              |  |      |             |   |      |  
|Loss from Operations Before Provision for Income Tax Expense  |  |      | (41,067,485 | ) |      |  
|Provision for Income Tax Expense                              |  |      | 3,298,101   |   |      |  
|                                                              |  |      |             |   |      |  
|Net Loss                                                      |  |      | (44,365,586 | ) |      |  
|                                                              |  |      |             |   |      |  
|Net Loss Attributable to Non-Controlling Interest             |  |      | (197,774    | ) |      |  
|                                                              |  |      |             |   |      |  
|Net Loss Attributable to the Company                          |  | $    | (44,167,812 | ) |      | $
|                                                              |  |      |             |   |      |  
|Loss Per Share - Basic and Diluted                            |  | $    | (1.13       | ) |      | $
|                                                              |  |      |             |   |      |  
|Weighted-Average Shares Outstanding - Basic and Diluted       |  |      | 39,243,005  |   |      |  



- 3 -







GLASS HOUSE BRANDS INC.

Consolidated Statements of Changes in Shareholders’
Equity

For the Years Ended December 31, 2021 and 2020

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



|                                                                                              |  | $ Amount |             |   | Units           |  |           | Units              |  |  | Units               |  |  | Units          |            |   | $ Amount       |  |              | Units          |  |   | $ Amount       |   |  |                    |             |   |             |   |      |                               |  |   |                 |   |  |                     |            
|--------------------------------------------------------------------------------------------- |  | -------- | ----------- | - | --------------- |  | --------- | ------------------ |  |  | ------------------- |  |  | -------------- | ---------- | - | -------------- |  | ------------ | -------------- |  | - | -------------- | - |  | ------------------ | ----------- | - | ----------- | - | ---- | ----------------------------- |  | - | --------------- | - |  | ------------------- | -----------
|                                                                                              |  | Members' |             |   | Multiple Voting |  |           | Subordinate Voting |  |  | Exchangeable Voting |  |  | Class A Common |            |   | Class A Common |  |              | Class B Common |  |   | Class B Common |   |  | Additional Paid-In |             |   | Accumulated |   |      | TOTAL EQUITY ATTRIBUTABLE  TO |  |   | Non-Controlling |   |  | TOTAL SHAREHOLDERS' |            
|                                                                                              |  | Equity   |             |   | Shares          |  |           | Shares             |  |  | Shares              |  |  | Shares         |            |   | Shares         |  |              | Shares         |  |   | Shares         |   |  | Capital            |             |   | Deficit     |   |      | SHAREHOLDERS                  |  |   | Interest        |   |  | EQUITY              |            
|                                                                                              |  |          |             |   |                 |  |           |                    |  |  |                     |  |  |                |            |   |                |  |              |                |  |   |                |   |  |                    |             |   |             |   |      |                               |  |   |                 |   |  |                     |            
|BALANCE AS OF DECEMBER 31, 2019                                                               |  | $        | 35,047,515  |   |                 |  | -         |                    |  |  | -                   |  |  |                | -          |   |                |  | -            |                |  | $ | -              |   |  |                    | -           |   |             | $ | -    |                               |  | $ | -               |   |  | $                   | -          
|Retroactive Application of Recapitalization (1)                                               |  |          | (35,047,515 | ) |                 |  | -         |                    |  |  | -                   |  |  |                | 22,388,322 |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 38,602,246      |   |  |                     | -          
|                                                                                              |  |          |             |   |                 |  |           |                    |  |  |                     |  |  |                |            |   |                |  |              |                |  |   |                |   |  |                    |             |   |             |   |      |                               |  |   |                 |   |  |                     |            
|Balance at December 31, 2019, After Effect of Retroactive Application of Recapitalization (1) |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | 22,388,322 |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 38,602,246      |   |  |                     | -          
|                                                                                              |  |          |             |   |                 |  |           |                    |  |  |                     |  |  |                |            |   |                |  |              |                |  |   |                |   |  |                    |             |   |             |   |      |                               |  |   |                 |   |  |                     |            
|Net Loss                                                                                      |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | -               |   |  |                     | (16,659,478
|                                                                                              |  |          |             |   |                 |  |           |                    |  |  |                     |  |  |                |            |   |                |  |              |                |  |   |                |   |  |                    |             |   |             |   |      |                               |  |   |                 |   |  |                     |            
|Contributions                                                                                 |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 11,835          |   |  |                     | -          
|Share-Based Compensation from Options                                                         |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 2,547,792       |   |  |                     | -          
|Issuance of Warrants in Relief of Liabilities                                                 |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 426,887         |   |  |                     | -          
|Issuance for Business Acquisition (1)                                                         |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | 1,004,676  |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 3,095,642       |   |  |                     | -          
|Cancellation of Shares for Issuance of Convertible Debt (1)                                   |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | (201,435   | ) |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | (1,750,000      | ) |  |                     | -          
|                                                                                              |  |          |             |   |                 |  |           |                    |  |  |                     |  |  |                |            |   |                |  |              |                |  |   |                |   |  |                    |             |   |             |   |      |                               |  |   |                 |   |  |                     |            
|BALANCE AS OF DECEMBER 31, 2020                                                               |  | $        | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | 23,191,563 |   |                |  | -            |                |  | $ | -              |   |  |                    | -           |   |             | $ | -    |                               |  | $ | 42,934,402      |   |  | $                   | (16,659,478
|                                                                                              |  |          |             |   |                 |  |           |                    |  |  |                     |  |  |                |            |   |                |  |              |                |  |   |                |   |  |                    |             |   |             |   |      |                               |  |   |                 |   |  |                     |            
|BALANCE AS OF DECEMBER 31, 2020, As Previously Reported                                       |  | $        | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | -          |   |                |  | 205,900,164  |                |  | $ | 2,059          |   |  |                    | 32,295,270  |   |             | $ | 323  |                               |  | $ | 42,932,020      |   |  | $                   | (16,659,478
|Retroactive Application of Recapitalization (1)                                               |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | 23,191,563 |   |                |  | (205,900,164 | )              |  |   | (2,059         | ) |  |                    | (32,295,270 | ) |             |   | (323 | )                             |  |   | 2,382           |   |  |                     | -          
|                                                                                              |  |          |             |   |                 |  |           |                    |  |  |                     |  |  |                |            |   |                |  |              |                |  |   |                |   |  |                    |             |   |             |   |      |                               |  |   |                 |   |  |                     |            
|Balance at December 31, 2020, After Effect of Retroactive Application of Recapitalization (1) |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | 23,191,563 |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 42,934,402      |   |  |                     | (16,659,478
|                                                                                              |  |          |             |   |                 |  |           |                    |  |  |                     |  |  |                |            |   |                |  |              |                |  |   |                |   |  |                    |             |   |             |   |      |                               |  |   |                 |   |  |                     |            
|Net Loss                                                                                      |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | -               |   |  |                     | (44,167,812
|                                                                                              |  |          |             |   |                 |  |           |                    |  |  |                     |  |  |                |            |   |                |  |              |                |  |   |                |   |  |                    |             |   |             |   |      |                               |  |   |                 |   |  |                     |            
|Share-Based Compensation from Options and RSU's                                               |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 8,484,913       |   |  |                     | -          
|Share-Based Compensation from Common Shares (1)                                               |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | 48,682     |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 225,000         |   |  |                     | -          
|Issuance for Business Acquisition (1)                                                         |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | 731,369    |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 3,380,278       |   |  |                     | -          
|Issuance for Conversion of Convertible Debt (1)                                               |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | 646,096    |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 1,925,000       |   |  |                     | -          
|Preferred Shares of Subsidiary Issued for Conversion of Debt (1)                              |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 31,285,258      |   |  |                     | -          
|Derivative Liability Reclassed to Equity Upon Conversion of Debt                              |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 6,722,000       |   |  |                     | -          
|Issuance for Conversion of Preferred Shares (1)                                               |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | 2,577,227  |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | -               |   |  |                     | -          
|Issuance for Exercise of Warrants (1)                                                         |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | 160,149    |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | -               |   |  |                     | -          
|Issuance for Exercise of Options                                                              |  |          | -           |   |                 |  | -         |                    |  |  | 479,195             |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 88,654          |   |  |                     | -          
|Shares Payable for Asset Acquisition                                                          |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 748,500         |   |  |                     | -          
|Reclass of Shares Payable                                                                     |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | (2,756,830      | ) |  |                     | -          
|Fair Value of Warrants Issued in Connection with Debt                                         |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 3,276,764       |   |  |                     | -          
|Shares Issued in Business Combination for Cash                                                |  |          | -           |   |                 |  | 4,754,979 |                    |  |  | 22,335,908          |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 116,630,384     |   |  |                     | -          
|Issuance for Conversion of Exchangable Shares                                                 |  |          | -           |   |                 |  | -         |                    |  |  | 9,098,302           |  |  |                | (9,098,302 | ) |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | -               |   |  |                     | -          
|Cash Received for Shares Issued                                                               |  |          | -           |   |                 |  | -         |                    |  |  | 150,000             |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 1,500,000       |   |  |                     | -          
|Shares Issued for the Purchase of Property and Equipment                                      |  |          | -           |   |                 |  | -         |                    |  |  | 6,500,000           |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | 29,250,000      |   |  |                     | -          
|Distributions to Preferred Shareholders                                                       |  |          | -           |   |                 |  | -         |                    |  |  | -                   |  |  |                | -          |   |                |  | -            |                |  |   | -              |   |  |                    | -           |   |             |   | -    |                               |  |   | (1,797,423      | ) |  |                     | -          
|                                                                                              |  |          |             |   |                 |  |           |                    |  |  |                     |  |  |                |            |   |                |  |              |                |  |   |                |   |  |                    |             |   |             |   |      |                               |  |   |                 |   |  |                     |            
|BALANCE AS OF DECEMBER 31, 2021                                                               |  | $        | -           |   |                 |  | 4,754,979 |                    |  |  | 38,563,405          |  |  |                | 18,256,784 |   |                |  | -            |                |  | $ | -              |   |  |                    | -           |   |             | $ | -    |                               |  | $ | 241,896,900     |   |  | $                   | (60,827,290



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





- 4 -







GLASS HOUSE BRANDS INC.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2021 and 2020

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



|                                                                               |  | 2021 |              |   | 2020 |  
|------------------------------------------------------------------------------ |  | ---- | ------------ | - | ---- | -
|CASH FLOWS FROM OPERATING ACTIVITIES:                                          |  |      |              |   |      |  
|Net Loss                                                                       |  | $    | (44,365,586  | ) |      | $
|Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:    |  |      |              |   |      |  
|Deferred Tax Expense                                                           |  |      | (89,768      | ) |      |  
|Bad Debt Expense                                                               |  |      | 3,286,494    |   |      |  
|Interest Capitalized to Notes Payable                                          |  |      | 1,427,522    |   |      |  
|Interest Income Capitalized to Principal Balance                               |  |      | (64,085      | ) |      |  
|Depreciation and Amortization                                                  |  |      | 4,767,396    |   |      |  
|Loss on Investments                                                            |  |      | 1,089,047    |   |      |  
|Impairment Expense                                                             |  |      | 817,875      |   |      |  
|Loss on Disposition of Subsidiary                                              |  |      | 6,090,337    |   |      |  
|Gain on Extinguishment of Debt                                                 |  |      | -            |   |      |  
|Non-Cash Operating Lease Costs                                                 |  |      | 730,881      |   |      |  
|Accretion of Debt Discount and Loan Origination Fees                           |  |      | 953,549      |   |      |  
|(Gain) Loss on Change in Fair Value of Derivative Liabilities                  |  |      | (825,000     | ) |      |  
|(Gain) on Change in Fair Value of Contingent Liabilities                       |  |      | (4,031,634   | ) |      |  
|Share-Based Compensation                                                       |  |      | 8,709,913    |   |      |  
|Changes in Operating Assets and Liabilities:                                   |  |      |              |   |      |  
|Accounts Receivable                                                            |  |      | 2,182,335    |   |      |  
|Prepaid Expenses and Other Current Assets                                      |  |      | (2,915,401   | ) |      |  
|Inventory                                                                      |  |      | 612,989      |   |      |  
|Other Assets                                                                   |  |      | (1,881,146   | ) |      |  
|Accounts Payable and Accrued Liabilities                                       |  |      | 3,242,190    |   |      |  
|Cash Payments - Operating Lease Liabilities                                    |  |      | (712,358     | ) |      |  
|Income Taxes Payable                                                           |  |      | 89,514       |   |      |  
|Other Non-Current Liabilities                                                  |  |      | 599,687      |   |      |  
|                                                                               |  |      |              |   |      |  
|NET CASH USED IN OPERATING ACTIVITIES                                          |  |      | (20,285,249  | ) |      |  
|                                                                               |  |      |              |   |      |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                          |  |      |              |   |      |  
|Purchases of Property and Equipment                                            |  |      | (108,495,825 | ) |      |  
|Issuance of Note Receivable                                                    |  |      | (2,274,167   | ) |      |  
|Contributions to Equity Method Investments                                     |  |      | (787,502     | ) |      |  
|Distributions Received from Equity Method Investments                          |  |      | 340,780      |   |      |  
|Cash Paid for Business Acquisition, Net of Cash and Cash Equivalents Acquired  |  |      | (284,028     | ) |      |  
|                                                                               |  |      |              |   |      |  
|NET CASH USED IN INVESTING ACTIVITIES                                          |  |      | (111,500,742 | ) |      |  
|                                                                               |  |      |              |   |      |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                          |  |      |              |   |      |  
|Proceeds from the Issuance of Notes Payable, Third Parties and Related Parties |  |      | 58,209,714   |   |      |  
|Payments on Notes Payable, Third Parties and Related Parties                   |  |      | (954,092     | ) |      |  
|Cash Received Upon Issuance of Equity                                          |  |      | 125,859,372  |   |      |  
|Contributions                                                                  |  |      | -            |   |      |  
|Distributions to Preferred Shareholders                                        |  |      | (1,797,423   | ) |      |  
|                                                                               |  |      |              |   |      |  
|NET CASH PROVIDED BY FINANCING ACTIVITIES                                      |  |      | 181,317,571  |   |      |  
|                                                                               |  |      |              |   |      |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                      |  |      | 49,531,580   |   |      |  
|Cash and Cash Equivalents, Beginning of Period                                 |  |      | 4,535,251    |   |      |  
|                                                                               |  |      |              |   |      |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                       |  | $    | 54,066,831   |   |      | $





- 5 -







GLASS HOUSE BRANDS INC.

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2021
and 2020

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



|                                                                                |  | 2021 |            |  | 2020 |  
|------------------------------------------------------------------------------- |  | ---- | ---------- |  | ---- | -
|SUPPLEMENTAL DISCLOSURE FOR CASH FLOW INFORMATION                               |  |      |            |  |      |  
|Cash Paid for Interest                                                          |  | $    | 379,956    |  |      | $
|Cash Paid for Taxes                                                             |  | $    | 2,643,093  |  |      | $
|                                                                                |  |      |            |  |      |  
|Non-Cash Investing and Financing Activities:                                    |  |      |            |  |      |  
|Net Assets Acquired From an Acquisition, Excluding Cash Acquired                |  | $    | 5,709,615  |  |      | $
|Proceeds Deposited Into Escrow Account                                          |  | $    | 2,029,932  |  |      | $
|Purchase of Property and Equipment from Proceeds of Note Payable, Third Parties |  | $    | 255,757    |  |      | $
|Conversion of Convertible Debt and Derivative Liability to Equity               |  | $    | 39,932,258 |  |      | $
|Shares Payable for Asset Acquisition                                            |  | $    | 748,500    |  |      | $
|Issuance of Warrants for Relief of Liabilities                                  |  | $    | -          |  |      | $
|Cancellation of Shares for Issuance of Convertible Debt                         |  | $    | -          |  |      | $
|Recognition of Right-of-Use Assets for Operating Leases                         |  | $    | 1,419,650  |  |      | $
|Conversion of Note Receivable to Equity of Investee                             |  | $    | -          |  |      | $
|Fair Value of Warrants Issued in Connection with Debt                           |  | $    | 3,276,764  |  |      | $
|Acquisition of Non-Controlling Interest Upon Roll-Up                            |  | $    | -          |  |      | $
|Derivative Liability Incurred Upon Issuance of Convertible Debt                 |  | $    | 182,000    |  |      | $
|Reclass of Shares Payable                                                       |  | $    | 2,756,830  |  |      | $
|Shares Issued for the Purchase of Property and Equipment                        |  | $    | 29,250,000 |  |      | $
|Contingent Liabilities Recognized for the Purchase of Property and Equipment    |  | $    | 34,820,000 |  |      | $
|Contingent Earnout Recorded as a Liability                                      |  | $    | 7,640,334  |  |      | $





- 6 -







GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



| | 1. | NATURE OF OPERATIONS
| | -- | --------------------



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





Business Combination Transaction



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





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



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





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





- 7 -







GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



| | 1. | NATURE OF OPERATIONS (Continued)
| | -- | --------------------------------



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



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



COVID-19



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



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



Liquidity



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



The Company is generating cash from revenues and
deploying its capital reserves to acquire and develop assets capable of producing additional revenues and earnings over both the immediate
and near term. Capital reserves are primarily being utilized for capital expenditures, facility improvements, product development and
marketing.



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





| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
| | -- | ------------------------------------------



Basis of Preparation



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



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





- 8 -







GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



| | 2. | SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES(Continued)
| | -- | -----------------------------------------------------



Basis of Consolidation



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



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



Corporate Entities



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



Management and Operating Entities



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









Real Estate Entities



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









- 9 -













GLASS
HOUSE BRANDS INC.

Notes
to Consolidated Financial Statements

(Amounts
Expressed in United States Dollars Unless Otherwise Stated)



2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Non-Controlling Interest



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



Use of Estimates



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



Segmented Information



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



Reclassifications



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



Cash and Cash Equivalents



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



Restricted Cash



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



Accounts Receivable



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





- 10 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Inventory



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



Investments



Investments in unconsolidated affiliates are
accounted as follows:



Equity Method and Joint Venture Investments



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



Investments in Equity
without Readily Determinable Fair Value



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



Property, Plant and Equipment



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



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



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





- 11 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Intangible Assets



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



|Dispensary Licenses   | Indefinite
|--------------------- | ----------
|Intellectual Property | 5 Years   



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



Goodwill



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



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



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



Impairment of Long-Lived Assets



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





- 12 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Leased Assets



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



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



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



Income Taxes



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



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



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





- 13 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Convertible Instruments



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



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



Derivative Liabilities



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





- 14 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Business Combinations



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



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



Revenue Recognition



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



| | (1) | Identify a customer along with a corresponding
                                            contract;
| | --- | ----------------------------------------------------------------------------------------------------



| | (2) | Identify the performance obligation(s) in
                                            the contract to transfer goods or provide distinct services to a customer;
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Determine the transaction price the
                                            Company expects to be entitled to in exchange for transferring promised goods or services
                                            to a customer;
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Allocate the transaction price to the
                                            performance obligation(s) in the contract;
| | --- | ----------------------------------------------------------------------------------------------------------------------------



| | (5) | Recognize revenue when or as the Company
                                            satisfies the performance obligation(s).
| | --- | -----------------------------------------------------------------------------------------------------------------------------



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



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



Dispensary Revenue



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





- 15 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Cultivation and Wholesale CPG



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



Share-Based Compensation



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



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



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





Financial Instruments



Fair Value



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



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



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



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





- 16 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



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



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



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



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



Impairment



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



Loss per Share



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







- 17 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



2.SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES(Continued)



Recently Adopted Accounting Standards



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



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



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



3.CONCENTRATIONS
OF BUSINESS AND CREDIT RISK



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



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



4.INVENTORY



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



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





- 18 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



5.NOTES
RECEIVABLE



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



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



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



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





6.INVESTMENTS



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



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



|                                             |  | LOB
    Group,  Inc. |           |   | NRO
    Management, LLC |   |           | SoCal
    Hemp JV, LLC |  |   | ICANN,
     LLC |   |  | F/ELD |            |   | 5042
    Venice, LLC |   |            | Lompoc
    TIC, LLC |  |   | TOTAL     |  
|-------------------------------------------- |  | -------------------- | --------- | - | ----------------------- | - | --------- | ---------------------- |  | - | --------------- | - |  | ----- | ---------- | - | -------------------- | - | ---------- | ------------------- |  | - | --------- | -
|Fair
    Value as of December 31, 2019       |  | $                    | 2,865,896 |   |                         | $ | 2,455,966 |                        |  | $ | 186,707         |   |  | $     | -          |   |                      | $ | 2,815,130  |                     |  | $ | 2,245,863 |  
|Additions                                    |  |                      | -         |   |                         |   | -         |                        |  |   | 2,987,062       |   |  |       | 2,045,309  |   |                      |   | -          |                     |  |   | -         |  
|Distribution                                 |  |                      | -         |   |                         |   | -         |                        |  |   | -               |   |  |       | -          |   |                      |   |            |                     |  |   | (263,656  | )
|Disposition
    Due to Acquisition           |  |                      | -         |   |                         |   | -         |                        |  |   | -               |   |  |       | -          |   |                      |   | (2,815,130 | )                   |  |   | -         |  
|(Loss)
    Gain on Equity Method Investments |  |                      | (56,484   | ) |                         |   | (119,253  | )                      |  |   | (2,114,991      | ) |  |       | -          |   |                      |   | -          |                     |  |   | 240,488   |  
|Fair
    Value as of December 31, 2020       |  | $                    | 2,809,412 |   |                         | $ | 2,336,713 |                        |  | $ | 1,058,778       |   |  | $     | 2,045,309  |   |                      | $ | -          |                     |  | $ | 2,222,695 |  
|Additions                                    |  |                      | -         |   |                         |   | -         |                        |  |   | 701,254         |   |  |       | -          |   |                      |   | -          |                     |  |   |           |  
|Distributions                                |  |                      | -         |   |                         |   | -         |                        |  |   |                 |   |  |       | -          |   |                      |   | -          |                     |  |   | (243,880  | )
|Reclass
    of Investment for Acquisition    |  |                      | -         |   |                         |   | -         |                        |  |   | -               |   |  |       | (2,045,309 | ) |                      |   | -          |                     |  |   | -         |  
|Impairment                                   |  |                      | -         |   |                         |   | -         |                        |  |   | (817,875        | ) |  |       | -          |   |                      |   | -          |                     |  |   | -         |  
|(Loss)
    Gain on Equity Method Investments |  |                      | (48,271   | ) |                         |   | (317,764  | )                      |  |   | (942,157        | ) |  |       | -          |   |                      |   | -          |                     |  |   | 242,705   |  
|Fair
    Value as of December 31, 2021       |  | $                    | 2,761,141 |   |                         | $ | 2,018,949 |                        |  | $ | -               |   |  | $     | -          |   |                      | $ | -          |                     |  | $ | 2,221,520 |  



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







- 19 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



7.PROPERTY,
PLANT AND EQUIPMENT



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



|                                               |  | 2021 |             |   | 2020 |  
|---------------------------------------------- |  | ---- | ----------- | - | ---- | -
|Land                                           |  | $    | 70,782,068  |   |      | $
|Buildings                                      |  |      | 108,024,254 |   |      |  
|Furniture and Fixtures                         |  |      | 316,395     |   |      |  
|Leasehold Improvements                         |  |      | 8,412,489   |   |      |  
|Equipment and Software                         |  |      | 5,712,519   |   |      |  
|Construction in Progress                       |  |      | 11,867,167  |   |      |  
|Total Property, Plant and Equipment            |  |      | 205,114,892 |   |      |  
|Less Accumulated Depreciation and Amortization |  |      | (9,316,368  | ) |      |  
|Property, Plant and Equipment, Net             |  | $    | 195,798,524 |   |      | $



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



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



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



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







- 20 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)





8.DISPOSITION
OF SUBSIDARY







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



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



|ASSETS:                                   |  |   |          
|----------------------------------------- |  | - | ---------
|Accounts Receivable, Net                  |  | $ | 21,067   
|Prepaid Expenses and Other Current Assets |  |   | 430,654  
|Operating Lease Right-of-Use Assets, Net  |  |   | 976,417  
|Property, Plant and Equipment, Net        |  |   | 310,501  
|Intangible Assets, Net                    |  |   | 3,727,500
|Goodwill                                  |  |   | 2,095,918
|Other Assets                              |  |   | 95,419   
|TOTAL ASSETS                              |  | $ | 7,657,476
|                                          |  |   |          
|LIABILITIES:                              |  |   |          
|                                          |  |   |          
|Accounts Payable and Accrued Liabilities  |  | $ | 473,500  
|Operating Lease Liabilities               |  |   | 1,051,588
|Notes Payable                             |  |   | 42,051   
|TOTAL LIABILITIES                         |  | $ | 1,567,139
|NET ASSETS DISPOSED                       |  | $ | 6,090,337





- 21 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



9.BUSINESS
ACQUISITIONS





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



|                                                                 |  | 2021 |            |   | 2020 |  
|---------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Total Consideration                                              |  |      |            |   |      |  
|Cash                                                             |  | $    | 442,956    |   |      | $
|Equity Investment Converted                                      |  |      | 2,045,309  |   |      |  
|Prior Note Receivable Converted                                  |  |      | -          |   |      |  
|Fair Value of Equity Issued                                      |  |      | 3,380,278  |   |      |  
|Total Consideration                                              |  | $    | 5,868,543  |   |      | $
|Net Assets Acquired (Liabilities Assumed)                        |  |      |            |   |      |  
|Current Assets (3)                                               |  | $    | 562,221    |   |      | $
|Operating Right-of-Use Asset                                     |  |      | 1,160,730  |   |      |  
|Property, Plant and Equipment                                    |  |      | 692,645    |   |      |  
|Non-Current Assets                                               |  |      | -          |   |      |  
|Deferred Tax Assets, Net                                         |  |      | (209,466   | ) |      |  
|Current Liabilities Assumed                                      |  |      | (922,745   | ) |      |  
|Long-Term Liabilities Assumed                                    |  |      | (1,113,584 | ) |      |  
|Intangible Assets:                                               |  |      |            |   |      |  
|Intellectual Property                                            |  |      | 600,000    |   |      |  
|Dispensary License                                               |  |      | 2,900,000  |   |      |  
|Total Intangible Assets                                          |  |      | 3,500,000  |   |      |  
|Total Identifiable Net Assets Acquired (Net Liabilities Assumed) |  |      | 3,669,801  |   |      |  
|Goodwill (1)                                                     |  |      | 2,198,742  |   |      |  
|Total Net Assets Acquired                                        |  | $    | 5,868,543  |   |      | $
|Pro Forma Revenues (2)                                           |  |      | n/a        |   |      | $
|Pro Forma Net Loss (2)                                           |  |      | n/a        |   |      | $










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



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



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



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



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









- 22 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



10.INTANGIBLE
ASSETS



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



|                                         |  | 2021 |           |   | 2020 |  
|---------------------------------------- |  | ---- | --------- | - | ---- | -
|Definite Lived Intangible Assets         |  |      |           |   |      |  
|Intellectual Property                    |  | $    | 790,000   |   |      | $
|                                         |  |      |           |   |      |  
|Total Definite Lived Intangible Assets   |  |      | 790,000   |   |      |  
|Less Accumulated Amortization            |  |      | (208,667  | ) |      |  
|                                         |  |      |           |   |      |  
|Definite Lived Intangible Assets, Net    |  |      | 581,333   |   |      |  
|                                         |  |      |           |   |      |  
|Indefinite Lived Intangible Assets       |  |      |           |   |      |  
|Dispensary Licenses                      |  |      | 5,048,500 |   |      |  
|                                         |  |      |           |   |      |  
|Total Indefinite Lived Intangible Assets |  |      | 5,048,500 |   |      |  
|                                         |  |      |           |   |      |  
|Total Intangible Assets, Net             |  | $    | 5,629,833 |   |      | $



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



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



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



11.GOODWILL



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



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



12.ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES



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



|                                               |  | 2021 |            |  | 2020 |  
|---------------------------------------------- |  | ---- | ---------- |  | ---- | -
|Accounts Payable                               |  | $    | 4,777,435  |  |      | $
|Accrued Liabilities                            |  |      | 2,418,664  |  |      |  
|Accrued Payroll and Related Liabilities        |  |      | 1,699,253  |  |      |  
|Sales Tax and Cannabis Taxes                   |  |      | 1,319,652  |  |      |  
|                                               |  |      |            |  |      |  
|Total Accounts Payable and Accrued Liabilities |  | $    | 10,215,004 |  |      | $



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





- 23 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



13.DERIVATIVE
LIABILITIES



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



|                                                                         |  | 2021*  |   |  | 2020  |  
|------------------------------------------------------------------------ |  | ------ | - |  | ----- | -
|Weighted-Average Risk Free Annual Rate                                   |  | 0.25   | % |  | 0.82  | %
|Weighted-Average Average Probability at Maturity                         |  | 0.00   | % |  | 0.31  | %
|Weighted-Average Average Probability Before Maturity                     |  | 100.00 | % |  | 59.00 | %
|Weighted-Average Average Probability at Change of Control                |  | 0.00   | % |  | 33.00 | %
|Weighted-Average Expected Annual Dividend Yield                          |  | 0.0    | % |  | 9.0   | %
|Weighted-Average Expected Stock Price Volatility                         |  | 0.0    | % |  | 70.9  | %
|Weighted-Average Expected Life in Years                                  |  | -      |   |  | 2.28  |  
|* Represents inputs immediately prior to the conversion on June 29, 2021 |  |        |   |  |       |  



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



|                                                                |  | 2021 |            |   | 2020 |  
|--------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Balance at Beginning of Year                                    |  | $    | 7,365,000  |   |      | $
|                                                                |  |      |            |   |      |  
|Derivative Liability Incurred Upon Issuance of Convertible Debt |  |      | 182,000    |   |      |  
|Change in Fair Value                                            |  |      | (825,000   | ) |      |  
|Reclassed to Equity Upon Conversion of Debt                     |  |      | (6,722,000 | ) |      |  
|                                                                |  |      |            |   |      |  
|Balance at End of Year                                          |  | $    | -          |   |      | $





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



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





- 24 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



14.CONTINGENT
SHARES AND EARNOUT LIABILITIES





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



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





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



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





| | (ii) | Contingent Earnout – Camarillo Transaction
| | ---- | ------------------------------------------



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





- 25 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



14.CONTINGENT
SHARES AND EARNOUT LIABILITIES (Continued)



| | (iii) | Contingent Shares – Camarillo Transaction
| | ----- | -----------------------------------------



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





15.LEASES



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



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



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





- 26 -







GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



15.LEASES(Continued)



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



|                       |  | 2021 |           |  | 2020 |  
|---------------------- |  | ---- | --------- |  | ---- | -
|Operating Lease Cost   |  | $    | 730,881   |  |      | $
|Short-Term Lease Costs |  |      | 669,003   |  |      |  
|                       |  |      |           |  |      |  
|Total Lease Expenses   |  | $    | 1,399,884 |  |      | $



|                                                                        |  | 2021 |           |   | 2020 |  
|----------------------------------------------------------------------- |  | ---- | --------- | - | ---- | -
|Cash Paid for Amounts Included in the Measurement of Lease Liabilities: |  |      |           |   |      |  
|Operating Cash Flows from Operating Leases                              |  | $    | 712,358   |   |      | $
|                                                                        |  |      |           |   |      |  
|Non-Cash Additions to Right-of-Use Assets and Lease Liabilities:        |  |      |           |   |      |  
|Recognition of Right-of-Use Assets for Operating Leases                 |  | $    | 1,419,650 |   |      | $
|                                                                        |  |      |           |   |      |  
|Weighted-Average Remaining Lease Term (Years) - Operating Leases        |  |      | 8.00      |   |      |  
|Weighted-Average Discount Rate - Operating Leases                       |  |      | 17.00     | % |      |  



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



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



|December 31:                                        |  | Third Parties |            |   | Related Parties |   |           | Total | 
|--------------------------------------------------- |  | ------------- | ---------- | - | --------------- | - | --------- | ----- | 
|2022                                                |  | $             | 374,197    |   |                 | $ | 393,127   |       | 
|2023                                                |  |               | 384,088    |   |                 |   | 396,783   |       | 
|2024                                                |  |               | 384,088    |   |                 |   | 393,597   |       | 
|2025                                                |  |               | 365,566    |   |                 |   | 320,004   |       | 
|2026                                                |  |               | 310,000    |   |                 |   | 320,004   |       | 
|Thereafter                                          |  |               | 1,320,833  |   |                 |   | 560,007   |       | 
|Total Future Minimum Lease Payments                 |  |               | 3,138,772  |   |                 |   | 2,383,522 |       | 
|Less Imputed Interest                               |  |               | (1,479,098 | ) |                 |   | (908,562  | )     | 
|Total Amount Representing Present Value             |  |               | 1,659,674  |   |                 |   | 1,474,960 |       | 
|Less Current Portion of Operating Lease Liabilities |  |               | (109,136   | ) |                 |   | (160,018  | )     | 
|Operating Lease Liabilities, Net of Current Portion |  | $             | 1,550,538  |   |                 | $ | 1,314,942 |       | 



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





- 27 -







GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



16.NOTES
PAYABLE



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



|                                                                                                |  | 2021 |                     |       | 2020 |  
|----------------------------------------------------------------------------------------------- |  | ---- | ------------------- | ----- | ---- | -
|Note payable maturing in June 2021, bearing interest at 7.00 percent per annum                  |  |      | $                 - | (i)   |      |  
|Note payable maturing in December 2020, bearing interest at 8.00 percent per annum              |  |      | -                   | (ii)  |      |  
|Convertible notes payable maturing in February 2023, bearing interest at 8.00 percent per annum |  |      | -                   | (iii) |      |  
|Term loan payable maturing in November 30, 2026, bearing interest at 10.00 percent per annum    |  |      | 44,616,587          | (iv)  |      |  
|Other - Vehicle Loans                                                                           |  |      | 238,835             |       |      |  
|Total Notes Payable                                                                             |  |      | 44,855,422          |       |      |  
|Less Unamortized Debt Issuance Costs and Loan Origination Fees                                  |  |      | -                   |       |      |  
|Net Amount                                                                                      |  | $    | 44,855,422          |       |      | $
|Less Current Portion of Notes Payable                                                           |  |      | (37,986             | )     |      |  
|Notes Payable, Net of Current Portion                                                           |  | $    | 44,817,436          |       |      | $



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



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



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









- 28 -







GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



16.NOTES
PAYABLE(Continued)



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



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



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



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





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



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





- 29 -







GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



17.NOTES
PAYABLE – RELATED PARTIES



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



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



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





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



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





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







- 30 -









GLASS HOUSE BRANDS INC.



Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



17.NOTES
PAYABLE – RELATED PARTIES(Continued)





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



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



18.       SHAREHOLDERS’
EQUITY



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



Multiple Voting Shares



The
Company is authorized to issue an unlimited number of Multiple Voting Shares without nominal or par value. Holders of Multiple Voting
Shares will be entitled to receive notice of any meeting of shareholders of the Company, and to attend, vote and speak at such meetings,
except those meetings at which only holders of a specific class of shares are entitled to vote separately as a class under the Business
Corporations Act (British Columbia). On all matters upon which holders of Multiple Voting Shares are entitled to vote, each Multiple Voting
Share will be entitled to 50 votes per Multiple Voting Share. Multiple Voting Shares are not entitled to dividends. The Multiple
Voting Shares have three (3)-year sunset period that will expire June 29, 2024, upon which they will be automatically redeemed for $0.001
per Multiple Voting Share.



Equity Shares





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



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



Exchangeable Shares (MPB Acquisition Corp.)



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





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







- 31 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



18.SHAREHOLDERS’
EQUITY(Continued)



Preferred Shares (GH Group)



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



Non-Controlling Interest



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



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



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



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



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



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



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



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



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



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



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





- 32 -







GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



18.SHAREHOLDERS’
EQUITY(Continued)



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



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



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



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



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



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



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



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



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







19.SHARE-BASED
COMPENSATION



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





- 33 -







GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



19.SHARE-BASED
COMPENSATION(Continued)



Stock Options



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



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



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



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



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



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



|Security Issuable         |  | Exercise 
Price |      |  | Expiration Date |              | Stock Options Outstanding | 
|------------------------- |  | --------------- | ---- |  | --------------- | ------------ | ------------------------- | 
|Subordinate Voting Shares |  | $               | 2.26 |  |                 | October 2024 |                           | 
|Subordinate Voting Shares |  | $               | 3.08 |  |                 | April 2025   |                           | 
|Subordinate Voting Shares |  | $               | 3.08 |  |                 | January 2026 |                           | 
|Subordinate Voting Shares |  | $               | 4.60 |  |                 | October 2026 |                           | 
|                          |  |                 |      |  |                 |              |                           | 





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



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





- 34 -







GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



19.SHARE-BASED
COMPENSATION(Continued)



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



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



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



Restricted Stock Units



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



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



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



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



Stock Appreciation Right Units



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



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



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



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





- 35 -







GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



19.SHARE-BASED
COMPENSATION(Continued)



Warrants



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



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



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



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





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



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



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



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



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





- 36 -







GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



20.LOSS
PER SHARE



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



|                                                        |  | 2021 |             |   | 2020 |  
|------------------------------------------------------- |  | ---- | ----------- | - | ---- | -
|Net Loss                                                |  | $    | (44,167,812 | ) |      | $
|Weighted-Average Shares Outstanding - Basic and Diluted |  |      | 39,243,005  |   |      |  
|Loss Per Share - Basic and Diluted                      |  | $    | (1.13       | ) |      | $



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



21.PROVISION
FOR INCOME TAXES AND DEFERRED INCOME TAXES



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



|                                 |  | 2021 |           |   | 2020 |  
|-------------------------------- |  | ---- | --------- | - | ---- | -
|Current:                         |  |      |           |   |      |  
|Federal                          |  | $    | 3,382,708 |   |      | $
|State                            |  |      | 5,162     |   |      |  
|Total Current                    |  |      | 3,387,870 |   |      |  
|Deferred:                        |  |      |           |   |      |  
|Federal                          |  |      | (322,017  | ) |      |  
|State                            |  |      | 232,249   |   |      |  
|Total Deferred                   |  |      | (89,768   | ) |      |  
|Total Provision for Income Taxes |  | $    | 3,298,102 |   |      | $





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



|                                |  | 2021 |             |   | 2020 |  
|------------------------------- |  | ---- | ----------- | - | ---- | -
|Deferred Tax Assets:            |  |      |             |   |      |  
|Allowance for Doubtful Accounts |  | $    | 984,437     |   |      | $
|Inventory Reserve               |  |      | 219,474     |   |      |  
|Deferred Rent                   |  |      | 18,978      |   |      |  
|Accrued Expenses                |  |      | 131,916     |   |      |  
|Operating Lease Liabilities     |  |      | 606,718     |   |      |  
|Non-qualified Stock Options     |  |      | 809,992     |   |      |  
|Loss on Disposal of Subsidiary  |  |      | 1,720,979   |   |      |  
|Operating Losses                |  |      | 19,488,540  |   |      |  
|Other                           |  |      | -           |   |      |  
|Total Deferred Tax Assets       |  |      | 23,981,034  |   |      |  
|Valuation Allowance             |  |      | (22,495,563 | ) |      |  
|Net Deferred Tax Assets         |  | $    | 1,485,471   |   |      | $



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





- 37 -







GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



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



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



|                                   |  | 2021 |            |   | 2020 |  
|---------------------------------- |  | ---- | ---------- | - | ---- | -
|Income Tax Benefit at Federal Rate |  | $    | (8,634,892 | ) |      | $
|State Taxes and Fees               |  |      | 1,435,198  |   |      |  
|IRS Section 280E Disallowance      |  |      | 1,922,244  |   |      |  
|Uncertain Tax Position             |  |      | 420,976    |   |      |  
|Change in Valuation Allowance      |  |      | 15,810,756 |   |      |  
|State Tax Carryforwards            |  |      | (3,928,330 | ) |      |  
|Excess Accrual of Prior Year Taxes |  |      | (3,425,023 | ) |      |  
|Interest on Convertible Debt       |  |      | -          |   |      |  
|Other Permanent Differences        |  |      | (302,827   | ) |      |  
|Reported Income Tax Expense        |  | $    | 3,298,102  |   |      | $



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







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



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



|                                    |  | 2021 |           |  | 2020 |  
|----------------------------------- |  | ---- | --------- |  | ---- | -
|Balance at Beginning of Year        |  | $    | 849,358   |  |      | $
|IRS Section 280E Positions Acquired |  |      | 178,712   |  |      |  
|IRS Section 280E Positions          |  |      | 420,976   |  |      |  
|Balance at End of Year              |  | $    | 1,449,046 |  |      | $



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



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



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





- 38 -









GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



22.COMMITMENTS
AND CONTINGENCIES



Contingencies



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



Royalty



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





Claims and Litigation



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





Element 7 Transaction



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





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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



22.COMMITMENTS
AND CONTINGENCIES(Continued)



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



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





23.RELATED
PARTY TRANSACTIONS



Incubation Services



Effective January 1, 2019, GH Group and Magu
Capital LLC (“Magu Capital”), a company partially owned by an executive and board members of the Company, entered into a
Services and Incubation Agreement (the “Services and Incubation Agreement”), pursuant to which Magu Capital agreed to perform
certain advisory and business “incubation” services for GH Group (and incur certain fees and expenses on behalf of GH Group
as part of, and as performance for, such services) in consideration of GH Group’s agreement to issue to Magu Capital, upon a date
certain following the closing of the Roll-Up as reasonably determined by the board of directors of GH Group, a warrant to purchase a fixed
number of Class A Common shares of GH Group at an agreed upon strike price no later than three years following the grant date. On
July 23, 2020, GH Group issued to Magu Capital a warrant to purchase Class A Common shares of GH Group (the “Magu Capital
Warrant”), in full satisfaction of GH Group’s obligations under the Services and Incubation Agreement to compensate Magu Capital
for the incubation services. The Magu Capital Warrants were fair valued at approximately $427,000. The Company recorded a gain on extinguishment
of the liability in the amount of approximately $573,000 which was recorded as a component of other income in the accompanying Consolidated
Statements of Operations for the year ended December 31, 2020. On June 28, 2021, GH Group notified Magu Capital of its termination
of the Services and Incubation Agreement, and by extension the automatic exercise of Magu Capital’s warrant issued in connection
with the Services and Incubation Agreement.



Issuance of Exchangeable Shares for Management
Services



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





Leases



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



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





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GLASS HOUSE BRANDS INC.

Notes to Consolidated Financial Statements

(Amounts
Expressed in United States DollarsUnless Otherwise Stated)



23.RELATED
PARTY TRANSACTIONS(Continued)



Consulting Agreement



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



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



24.REVENUES,
NET



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



|              |  | 2021 |            |  | 2020 |  
|------------- |  | ---- | ---------- |  | ---- | -
|Retail        |  | $    | 21,734,403 |  |      | $
|Wholesale     |  |      | 47,712,449 |  |      |  
|Revenues, Net |  | $    | 69,446,852 |  |      | $



25.SUBSEQUENT
EVENTS



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



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







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