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TerrAscend Annual Report 2021
47415_rns_2022-03-17_cb75d567-3adc-4062-9e2e-f81ff98b72dc.pdf
Annual Report
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and the accompanying notes presented in this Form 10-K. Readers are cautioned that this Management's Discussion and Analysis ("MD&A") contains forward-looking statements and that actual events may vary from management's expectations. This discussion addresses matters the Company considers important for an understanding of its financial condition and results of operations.
In this section, we discuss the results of our operations for the year ended December 31, 2021 compared to the year ended December 31, 2020 and the year ended December 31, 2020 compared to the year ended December 31, 2019. For a discussion of the year ended December 31, 2019 compared to the year ended December 31, 2018, please refer to Item 2, "Financial Information—Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Registration Statement on Form 10, as amended, filed with the SEC on January 20, 2022. The financial condition and results of operations of TerrAscend is for the years ended December 31, 2021 and 2020 and the accompanying notes for each respective period. It is supplemental to, and should be read in conjunction with, the Company's consolidated financial statements for the year ended December 31, 2021, 2020 and 2019 and the accompanying notes for each respective period. The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Financial information presented in this MD&A is presented in United States dollars ("$"), unless otherwise indicated.
This MD&A contains certain "forward-looking statements" and certain "forward-looking information" as defined under applicable United States securities laws. Please refer to the discussion of forward-looking statements and information set out under the heading "Cautionary Note Regarding Forward-Looking Statements" at the forepart of this Form 10-K. As a result of many factors, the Company's actual results may differ materially from those anticipated in these forward-looking statements and information. This MD&A should be read in conjunction with the risk factors set forth in Item 1A – "Risk Factors."
Business Overview
TerrAscend is a leading North American cannabis operator with vertically integrated operations in Pennsylvania, New Jersey, and California, licensed cultivation and processing operations in Maryland, and licensed processing operations in Canada. TerrAscend operates a chain of The Apothecarium dispensary retail locations, as well as scaled cultivation, processing, and manufacturing facilities on both the east and west coasts of the United States. TerrAscend's cultivation and manufacturing practices yield consistent, high-quality cannabis, providing industry-leading product selection to both the medical and legal adult-use market. Notwithstanding various states in the US which have implemented medical marijuana laws, or which have otherwise legalized the use of cannabis, the use of cannabis remains illegal under US federal law for any purpose, by way of the CSA.
TerrAscend operates under one operating segment for the cultivation, production and sale of cannabis products.
TerrAscend's portfolio of operating businesses and brands include:
- Ilera Healthcare, a vertically integrated cannabis cultivator, processor and dispensary operator in Pennsylvania;
- TerrAscend NJ LLC, a majority owned subsidiary that holds a permit to operate up to three alternative treatment centers in New Jersey with the ability to cultivate and process;
- The Apothecarium, consisting of retail dispensaries in California, Pennsylvania and New Jersey;
- Valhalla Confections, a leading provider of premium edible products;
- State Flower, a California-based cannabis producer operating a licensed cultivation facility in San Francisco, California;
- HMS Health, LLC and HMS Processing, LLC, a producer and seller of cannabis flower for the wholesale medical cannabis market in Maryland;
- Arise Bioscience, a manufacturer and distributor of hemp-derived products, located in Boca Raton, Florida; and
TerrAscend Canada Inc., a Licensed Producer (as such term is defined in the Cannabis Act) of cannabis, whose principal business activities include processing and sale of cannabis flower and oil products in Canada.
TerrAscend also entered into the Arrangement Agreement on August 31, 2021 to acquire Gage, a company which provides support services to licensed Gage-branded cannabis cultivators, processors and provisioning centers, and Cookies-branded provisioning centers, in Michigan. For more information regarding the Acquisition of Gage, please see Item 1 – "Business" – "Recent Developments" – "The Acquisition of Gage Growth Corp."
Results from Operations - Years ended December 31, 2021, December 31, 2020, and December 31, 2019
The following tables represent the Company's results from operations for the twelve months ended December 31, 2021, December 31, 2020, and December 31, 2019:
Revenue, net
| For the years ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 31,2021 | December 31,2020 | December 31,2019 | ||||||
| Revenue | $222,067 | $ | 157,906 | $ | 66,164 | |||
| Excise and cultivation taxes | (11,648) | (10,073) | (2,351) | |||||
| Revenue, net | $210,419 | $ | 147,833 | $ | 63,813 | |||
| $ change | 62,586 | 84,020 | ||||||
| % change | 42% | 132% |
The increase in net revenue at December 31, 2021 as compared to December 31, 2020 was due to an increase of $42,410 in retail sales from $44,709 at December 31, 2020 to $87,119 at December 31, 2021, and an increase of $20,176 in wholesale sales from $103,124 at December 31, 2020 to $123,300 at December 31, 2021. The increase in retail sales was primarily a result of the increase in retail dispensaries across Pennsylvania, California, and New Jersey, which increased from nine at the end of 2020 to thirteen at the end of 2021. The increase in wholesale sales was primarily a result of the initial ramp up in New Jersey, expansion in Pennsylvania, as well as the acquisition of HMS.
The increase for the year ended December 31, 2020 as compared to December 31, 2019 was due to an increase of $56,431 in wholesale sales from $46,693 at December 31, 2019 to $103,124 at December 31, 2020, and an increase of $27,589 in retail sales from $17,120 at December 31, 2019 to $44,709 at December 31, 2020. The increase was primarily due to operational scale up as well as a full year of operations from the Company's acquisitions. The Company acquired The Apothecarium in June 2019, Ilera in September 2019, and State Flower in January 2020. The Company continued to expand organically through an increase in production and wholesale capacity in Pennsylvania and store expansions in Pennsylvania and California. In addition, the Company opened its first alternative treatment center in Phillipsburg, New Jersey during the year ended December 31, 2020.
Cost of Sales
| For the years ended | ||||||
|---|---|---|---|---|---|---|
| December 31,2021 | December 31,2020 | December 31,2019 | ||||
| Cost of sales | $94,104 | $ | 62,702 | $ | 54,299 | |
| Impairment of inventory | 4,211 | 4,111 | 6,956 | |||
| Total cost of sales | $98,315 | $ | 66,813 | $ | 61,255 | |
| $ change | 31,502 | 5,558 | ||||
| % change | 47% | 9% | ||||
| Cost of sales as a % of revenue | 44% | 42% | 93% |
The increase in cost of sales for the twelve months ended December 31, 2021 as compared to December 31, 2020 was a result of the increased volume of sales. The increase in the ratio of cost of sales relative to revenue is a result of yield declines in Pennsylvania and a higher mix of retail versus wholesale.
The increase in cost of sales from December 31, 2019 to December 31, 2020 was due to operational scale up as well as a full year of operations as a result of the Company's acquisitions of The Apothecarium in June 2019, Ilera in September 2019 and State Flower in January 2020. In addition, the Company has continued to expand production capacity and wholesale and retail sales presence. The Company's production facility in Pennsylvania tripled production capacity in the first quarter of 2020. The improvement in the ratio of cost of sales relative to net sales is a result of the Company becoming more cost efficient throughout its production process.
During the year ended December 31, 2021, the Company recorded impairment of $2,322, related to aged, obsolete, or unsaleable inventories at its Canada and Florida operations. Additionally, the Company recorded impairment of $1,889 at its Pennsylvania operations related to inventory that did not meet its quality standards. During the years ended December 31, 2020 and 2019, the Company recorded inventory impairments of $4,111 and $6,956, respectively, relating to raw materials and Cannabis products (finished goods) exceeding the net realizable value. Management determines net realizable value as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
Of the impairment charges during the twelve months ended December 31, 2020, $1,795 of the charges were related to write down of inventory purchased from a third-party supplier, during the current period, at prices per prior signed agreements. The impairment charges for the year ended December 31, 2019 were due to the carrying value of inventory exceeding the estimated net realizable value.
General and Administrative Expense (G&A)
| For the years ended | |||||||
|---|---|---|---|---|---|---|---|
| December 31,2021 | December 31,2020 | December 31,2019 | |||||
| General and administrative expense | $ | 80,973 | $ | 65,534 | $ | 45,898 | |
| $ change | 15,439 | 19,636 | |||||
| % change | 24% | 43% | |||||
| G&A as a % of revenue | 36% | 42% | 69% | ||||
| G&A excluding share-based compensation | 66,031 | 55,459 | 39,160 | ||||
| G&A excluding share-based compensation as a % of revenue | 30% | 35% | 59% |
The increase in G&A expenses for the years ended December 31, 2021 as compared to December 31, 2020 was primarily a result of increased salaries and wages of $11,716, mainly as a result of the increase in US operations. Additionally, the Company recognized increased share-based compensation expense of $4,867, primarily due to the greater number of options granted to new employees during the latter half of 2020, resulting in higher expenses during the twelve months ended December 31, 2021 as compared to the twelve months ended December 31, 2020, as well as expense related to the acceleration of options related to severance. In addition, the Company paid $2,121 in one-time legal settlements during the twelve months ended December 31, 2021.
The increase in G&A expenses for the twelve months ended December 31, 2021 was partially reduced by a decrease in professional fees from the twelve months ended December 31, 2020 as a result of payments due of $7,500 related to amounts payable to an entity controlled by the minority shareholders of TerrAscend NJ pursuant to services surrounding the granting of certain licenses. Excluding this payment, professional fees increased $6,283 primarily due to legal fees and fees for US filer preparation.
The increase in G&A expenses for the year ended December 31, 2020 as compared to December 31, 2019 was primarily driven by an increase in professional fees related to payments due of $7,500 to an entity controlled by the minority shareholders of TerrAscend New Jersey. Additionally, the Company recognized an increase in share-based compensation expense of $3,337 due to options granted to new employees in 2020 and vesting of RSU grants. No RSU grants vested during the twelve months ended December 31, 2019. The increase in G&A was also partially driven by the full year impact of the acquisitions of The Apothecarium, Ilera and State Flower in 2019 and the organic expansion of dispensaries in California and Pennsylvania.
Amortization and Depreciation Expense
| For the years ended | |||||||
|---|---|---|---|---|---|---|---|
| December 31,2021 | December 31,2020 | December 31,2019 | |||||
| Amortization and depreciation | $ | 7,656 | $ | 5,562 | $ | 3,067 | |
| $ change | 2,094 | 2,495 | |||||
| % change | 38% | 81% |
The increase in amortization and depreciation expense for the twelve months ended December 31, 2021 as compared to December 31, 2020 is primarily related to additions of property and equipment due to the Company's cultivation expansions and increase in dispensaries in Pennsylvania, New Jersey and California.
The increase in amortization and depreciation expense for the year ended December 31, 2020 as compared to December 31, 2019 was primarily driven by a full year of US operations as a result of the acquisitions that occurred during the year ended December 31, 2019. Additionally, the Company completed construction of the cultivation facility in New Jersey and began recording depreciation during the year ended December 31, 2020.
Revaluation of contingent considerations
| For the years ended | |||||||
|---|---|---|---|---|---|---|---|
| December 31,2021 | December 31,2020 | December 31,2019 | |||||
| Revaluation of contingent consideration | $3,584 | $ | 18,709 | $ | 46,857 | ||
| $ change | (15,125) | (28,148) | |||||
| % change | -81% | -60% |
The decrease in the revaluation of contingent consideration for the year ended December 31, 2021 as compared to December 31, 2020 is a result of a reduction in the liability as compared to December 31, 2020 due to payments for the earnout of Ilera of $29,668 made subsequent to December 31, 2020, reducing the amount outstanding. This decrease is partially offset by the accretion of contingent consideration payable, which was recorded at the present value of future payments upon initial recognition.
The decrease in the revaluation of contingent consideration for the year ended December 31, 2020 as compared to December 31, 2019 is a result of a reduction in the liability as compared to December 31, 2019 due to payments of $147,184, reducing the amount outstanding. This decrease was partially offset by the accretion of the contingent consideration payable for Ilera and State Flower which were recorded at the present value of future payments upon initial recognition.
(Gain) loss on fair value of warrants and purchase option derivative asset
| For the years ended | ||||||
|---|---|---|---|---|---|---|
| December 31,2021 | December 31,2020 | December 31,2019 | ||||
| (Gain) loss on fair value of warrants and purchase option derivativeasset | $ | (57,904) | $ | 110,518 | $ | — |
| $ change | (168,422) | 110,518 | ||||
| % change | -152% | 100% |
The Preferred Share warrant liability has been remeasured to fair value at December 31, 2021 using the Black Scholes model. The Company recognized a gain during the twelve months ended December 31, 2021 as a result of the reduction of the Company's share price from December 31, 2020 as compared to December 31, 2021, as well as from warrants exercised during the twelve months ended December 31, 2021. The combined impact resulted in a gain on fair value of warrants of $58,158 for the twelve months ended December 31, 2021.
For the year ended December 31, 2021, the purchase option derivative asset was remeasured to fair value using the Monte Carlo simulation model resulting in a loss of $254.
During the twelve months ended December 31, 2020, the Company recognized a loss on fair value of warrants of $110,518 as a result of the increase in the Company's share price from the valuation date.
Finance and other expenses
| For the years ended | |||||||
|---|---|---|---|---|---|---|---|
| December 31,2021 | December 31,2020 | December 31,2019 | |||||
| Finance and other expenses | $29,229 | $ | 8,193 | $ | 3,524 | ||
| $ change | 21,036 | 4,669 | |||||
| % change | 257% | 132% |
The increase in finance and other expenses for the year ended December 31, 2021 as compared to December 31, 2020 is primarily due to a full year of interest expense of $18,213 related to the Ilera term loan and Canopy Growth Arise loan issued in December 2020, as compared to $674 during the year ended December 31, 2020. In addition, during the year ended December 31, 2021, the Company recorded a reduction to the indemnification asset related to The Apothecarium's tax audit settlement
and statute expirations for tax years ended September 30, 2014 and September 30, 2015 in the amount of $4,504 included in finance and other expenses, with an offset recorded to reduce the Company's income tax provision (refer to "Provision for income taxes" below). During the current period, finance and other expenses is partially offset by $1,414 of other income related to the forgiveness of the Company's Paycheck Protection Program ("PPP") loans received by the Company's Arise business. The finance expense in the comparable prior year period was primarily related to borrowings on the $75,000 credit facility with JW Asset Management LLC, as well as the Canopy Growth loan (formerly RIV Capital loan) entered into in the latter half of 2019, and the Canopy Growth Canada Inc financing received in the first quarter of 2020.
The increase in finance and other expenses during the year ended December 31, 2020 as compared to December 31, 2019 was due to the Ilera term loan, Canopy Growth Arise loan, RIV Capital loan, and convertible debt entered into during the year ended December 31, 2020. The finance expense for the year ended December 31, 2019 was primarily related to borrowings on the $75,000 credit facility with JW Asset Management LLC, which was fully paid off in the first quarter of 2020 using proceeds received from the Canopy Growth Canada Inc. financing.
Transaction and restructuring costs
| For the years ended | |||||||
|---|---|---|---|---|---|---|---|
| December 31,2021 | December 31,2020 | December 31,2019 | |||||
| Transaction and restructuring costs | $3,111 | $ | 2,093 | $ | 8,444 | ||
| $ change | 1,018 | (6,351) | |||||
| % change | 49% | -75% |
The increase in transaction and restructuring costs for the year ended December 31, 2021 as compared to December 31, 2020 was primarily due to higher legal costs related to the acquisitions of KCR and HMS and the pending acquisition of Gage. The transaction and restructuring costs during the year ended December 31, 2020 are related to acquisition costs for State Flower and Preferred Share issuance costs.
Transaction and restructuring costs decreased for the year ended December 31, 2020 from the year ended December 31, 2019 mainly due to the acquisitions of Grander, The Apothecarium and Ilera during the year ended December 31, 2019.
Impairment of goodwill
| For the years ended | |||
|---|---|---|---|
| December 31,2021 | December 31,2020 | December 31,2019 | |
| Impairment of goodwill | $5,007 | $— | $45,802 |
| $ change | 5,007 | (45,802) | |
| % change | 100% | -100% |
The impairment recorded during the year ended December 31, 2021 relates to the Company's Florida reporting unit as the Company determined that the estimated cash flows of its Arise business did not support the carrying value of the intangible assets and goodwill. As a result, the Company recorded impairment to reduce the balance of goodwill at its Florida reporting unit to $nil.
During the year ended December 31, 2019, it was determined that the fair values of TerrAscend's Canada and California reporting units were more likely than not less than their carrying amounts and as such a one-step impairment test was performed. The following significant assumptions are applied in the determination of the fair value of the reporting units:
- Cash flows: estimated cash flows were projected based on actual operating results form internal sources, as well as industry and market trends. The forecasts were extended to a total of five years (with a terminal value thereafter);
- Terminal value growth rate: the terminal growth rate was based on historical and projected consumer price inflation, historical and projected economic indicators and projected industry growth;
- Post-tax discount rate: the post-tax discount rate is reflective of the reporting units weighted average cost of capital ("WACC"). The WACC was estimated based on the risk-free rate, equity risk premium, beta premium and after-tax cost of debt based on corporate bond yields; and
- Tax rate: the tax rate used in determining the future cash flows were those substantively enacted at the respective valuation date
As a result of the impairment tests performed, the Company determined that the carrying values of the Canada and California reporting units were less than their fair values. As such, the Company recorded impairment of $1,825 related to its Canada reporting unit, and $43,977 related to its California reporting unit.
Impairment of intangible assets
| For the years ended | |||||||
|---|---|---|---|---|---|---|---|
| December 31,2021 | December 31,2020 | December 31,2019 | |||||
| Impairment of intangible assets | $3,633 | $ | 766 | $ | 3,309 | ||
| $ change | 2,867 | (2,543) | |||||
| % change | 374% | -77% |
The impairment recorded during the year ended December 31, 2021 relates to the write-off of intellectual property at the Company's Arise business.
During the year ended December 31, 2020, the Company recorded impairment of $423 of intellectual property in Canada related to packaging designs that were written down to its recoverable amount, as well as impairment of $342 related to its customer relationships at Arise as a result of its termination of an agreement with one of its wholesale distributors.
For the year ended December 31, 2019, the Company recorded impairment of $2,928 related to the brand intangible assets at its California business as a result of the annual impairment test performed as it was determined that the carrying value exceeded its fair value.
Impairment of property and equipment
| For the years ended | ||||||
|---|---|---|---|---|---|---|
| December 31,2021 | December 31,2020 | December 31,2019 | ||||
| Impairment of property and equipment | $470 | $ | 823 | $ | 1,746 | |
| $ change | (353) | (923) | ||||
| % change | -43% | -53% |
During the year ended December 31, 2021, the Company determined that equipment purchased for the purpose of extracting CBD and THC oils to support the medical cannabis business in Canada needed to be assessed for impairment as the equipment was never put into use and the Company has since exited the medical cannabis business in Canada. The Company evaluated the recoverability of the asset to determine whether it would be recoverable, and it was determined that the carrying value of the asset exceeded its estimated future undiscounted cash flows and, therefore, recorded an impairment loss of $470.
The impairment losses for the year ended December 31, 2020 were a result of the Company's strategic decision to cease the growing and cultivation of cannabis in Canada. The Company performed an impairment analysis over the assets that could not be sold. As a result of the impairment analysis, the Company wrote down the net book value of the lighting and irrigation assets previously used in the Canadian cultivation business to $nil.
During the year ended December 31, 2019, the Company shut down its proposed Drug Preparation Premises business as management deemed that market conditions could not support this business and was determined to be no longer commercially viable. As a result, the Company recorded an impairment of $1,746 during the year ended December 31, 2019.
Loss on lease termination
| For the years ended | |||||||
|---|---|---|---|---|---|---|---|
| December 31,2021 | December 31,2020 | December 31,2019 | |||||
| Loss on lease termination | $ | 3,278 | $ | — | $ | — | |
| $ change | 3,278 | — | |||||
| % change | 100% | 0% |
The Company entered into a lease termination agreement ("Lease Termination") during the year ended December 31, 2021, with the landlord at its 22,000 square foot facility in Frederick, Maryland to enable the Company to terminate the lease prior to the end of the lease term. As a result of the Lease Termination, the Company recorded a loss on lease termination of $3,278.
Unrealized and realized foreign exchange loss
| For the years ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 31, | December 31, | December 31, | ||||||
| 2021 | 2020 | 2019 | ||||||
| Unrealized and realized foreign exchange loss | $ | 4,810 | $ | 178 | $ | 313 | ||
| $ change | 4,632 | (135) | ||||||
| % change | 2602% | -43% |
The increase in unrealized and realized foreign exchange loss is a result of the remeasurement of USD denominated cash and other assets recorded in C$ functional currency at the Company's Canadian operations.
Unrealized and realized (gain) loss on investments and notes receivable
| For the years ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 31,2021 | December 31,2020 | December 31,2019 | ||||||
| Unrealized and realized (gain) loss on investments and notesreceivable | $ | (6,192) | $ | (186) | $ | 4,394 | ||
| $ change | (6,006) | (4,580) | ||||||
| % change | 3229% | -104% |
The increase in the unrealized gain in the year ended December 31, 2021 relates to the acquisition of the remaining 90% of investment in Guadco LLC and KCR Holdings LLC during the first half of 2021.
The unrealized gain for the year ended December 31, 2020 relates to the equity income pick-up from the Company's 10% investment in Guadco LLC and KCR Holdings LLC.
The unrealized loss on investments during the year ended December 31, 2019 primarily relates to the unrealized loss on the Company's investment in Solace Rx as the Company obtained 65% ownership in Solace Rx on June 3, 2019. As a result it was determined that the Company controls Solace Rx and consolidated the financial results from June 3, 2019 onward.
Provision for income taxes
| For the years ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 31,2021 | December 31,2020 | December 31,2019 | ||||||
| Provision for income taxes | $28,314 | $ | 10,769 | $ | 1,769 | |||
| $ change | 17,545 | 9,000 | ||||||
| % change | 163% | 509% |
The increase in tax expense is related to operational scale up.
Liquidity and Capital Resources
| December 31, | |
|---|---|
| 2021 | 2020 |
| $ | $ |
| 79,642 | 59,226 |
| 143,221 | 95,546 |
| 438,713 | 331,698 |
| 70,362 | 93,484 |
| 282,618 | 347,076 |
| 72,859 | 2,062 |
| 228,954 | (13,316) |
| December 31, |
The calculation of working capital provides additional information and is not defined under GAAP. The Company defines working capital as current assets less current liabilities. This measure should not be considered in isolation or as a substitute for any standardized measure under GAAP.
At December 31, 2021, TerrAscend had cash and cash equivalents of $79,642, which is sufficient to fund the Company's ongoing operations. Any additional future requirements will be funded through the following sources of capital:
- Cash from ongoing operations
- Market offerings the Company has the ability to offer equity in the market for significant potential proceeds to a large investor base, as evidenced by oversubscriptions on previous recent private placements
- Debt the Company has the ability to obtain additional debt from additional creditors.
- Sale leaseback the Company has the ability to sell and lease back its capital properties.
- Exercise of options and warrants the Company would receive funds from exercise of options and warrants from the holders of such securities.
See Item 1A – "Risk Factors" – "Regulatory and Legal Risks to the Company's Business Due to the Nature of the Industry" – "The Company's business is subject to applicable anti-money laundering laws and regulations and have restricted access to capital markets, banking and other financial services, which may adversely affect TerrAscend's business" for further information.
The Company's objective with respect to its capital management is to ensure it has sufficient cash resources to maintain its ongoing operations and finance its research and development activities, corporate and administration expenses, working capital and overall capital expenditures. Since inception, the Company has primarily financed its liquidity needs through the issuance of shares and utilization of borrowings. The Company expects that its cash on hand and cash flows from operations, along with financing transactions, will be adequate to meet its capital requirements and operational needs for the next 12 months.
Cash Flows
Cash flows from operating activities
| For the years ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 31, | December 31, | December 31, | ||||||
| 2021 | 2020 | 2019 | ||||||
| Net cash used in operating activities | $(31,815) | $ | (36,971) | $ | (39,841) |
During the year ended December 31, 2021, the Company made payments in excess of the amount of fair value of the contingent consideration payable at the date of the Ilera acquisition on September 16, 2019 of $11,394 as compared to payments of $56,527 during the year ended December 31, 2020. Excluding these amounts, the Company had net cash used in operating activities of $22,669 and cash provided by operating activities of $19,556 (refer to "Reconciliation of Non-GAAP Measures" below) for the years ended December 31, 2021 and December 31, 2020, respectively. The increase in cash used in operating activities during the year ended December 31, 2021 is mainly the result of income tax payments of $37,060 during the year ended December 31, 2021, as compared to $11,204 during the year ended December 31, 2020, and interest payments of $21,694 during the year ended December 31, 2021, as compared to $2,192 during the year ended December 31, 2020. The increase in interest payments is primarily due to the Ilera term loan in which the Company received proceeds during December 2020. Excluding these payments, the Company saw an increase in cash provided by operating activities during the year ended December 31, 2021, which is primarily due to increased sales.
The improvement in the net cash used in operating activities for the year ended December 31, 2020, as compared to December 31, 2019, is primarily due to a ramp up of the US operations, partially offset by income tax payments of $11,204. Excluding the payments of contingent consideration for Ilera in excess of the amount of the fair value of the contingent consideration payable at the date of acquisition made during the year ended December 31, 2020, the Company had positive cash provided by operating activities of $19,556 (refer to "Reconciliation of Non-GAAP Measures" below).
Cash flows from investing activities
| For the years ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 31, | December 31, | December 31, | ||||||
| 2021 | 2020 | 2019 | ||||||
| Net cash used in investing activities | $(132,421) | $ | (45,890) | $ | (104,218) |
The net cash used in investing activities for the year ended December 31, 2021 primarily relates to cash consideration paid for the acquisitions of KCR and HMS totaling $42,736. During the year ended December 31, 2021, the Company made payments of $50,000 related to the purchase of the additional 12.5% of the issued and outstanding equity of TerrAscend NJ from BWH NJ, LLC and Blue Marble Ventures, LLC. Additionally, the Company had investments in property and equipment of $38,483 primarily related to the buildout of the New Jersey operations and expansions in Pennsylvania cultivation and $1,977 related to deposits paid for the expansion of the cultivation premises in Pennsylvania.
In comparison, the net cash used in investing activities for the year ended December 31, 2020 was primarily due to investments in property and equipment of $44,621 primarily relating to the buildout of the New Jersey operations and expansions in Pennsylvania and California cultivation.
The net cash used in investing activities for the twelve months ended December 31, 2019 was primarily due to cash consideration paid of $67,540 on the acquisitions of Grander, Ilera and The Apothecarium, as well as investments in property and equipment of $32,834, primarily related to the expansion of its Pennsylvania and initial buildout of its New Jersey operations, and investments in notes receivable of $10,456.
Cash flows from financing activities
| For the years ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 31, | December 31, | December 31, | ||||||
| 2021 | 2020 | 2019 | ||||||
| Net cash provided by financing activities | $182,201 | $ | 133,406 | $ | 136,934 |
Net cash provided by financing activities for the twelve months ended December 31, 2021, was mainly a result of the private placement on January 28, 2021, in which the Company issued 18,115,656 Common Shares at a price of $9.64 (C$12.35) per Common Share for total proceeds of $173,477, net of share issuance costs of $1,643. Additionally, during the twelve months ended December 31, 2021, 8,755,339 Common Share warrants were exercised for total proceeds of $21,735 and 1,376,496 stock options were exercised at $0.67-$6.93 (C$0.85-$8.52) per unit for total gross proceeds of $5,462. In addition, 1,968 Preferred Share warrants were exercised at $3,000 per unit for total gross proceeds of $3,588. The cash provided by financing activities was offset by payments of contingent consideration related to the acquisition of Ilera of $18,274 and by payments of loan principal of $4,500 related to the KCR loan.
Net cash provided by financing activities during the year ended December 31, 2020, was primarily due to loan proceeds in the amount of $201,496 and proceeds from private placements net of share issuance costs of $71,023. Additionally, 829,050 Common Share warrants were exercised for total gross proceeds of $2,075 and 1,816,496 stock options were exercised at $0.43-$6.52 per unit for total gross proceeds of $4,462. In addition, 625 Preferred Share warrants were exercised at $3,000 per unit for total gross proceeds of $750. The cash provided by financing activities was partially offset by payments of contingent consideration of $90,657 to the sellers of Ilera, as well as payments of principal on the Company's outstanding loans of $53,886 to pay off the remaining balance of the JW Asset Management credit facility, a financing loan in Canada, and the loans from management of Ilera.
During the year ended December 31, 2019, the Company received loan proceeds in the amount of $38,000 from JW Asset Management and management of Ilera, as well as proceeds from a mortgage assumed on the Canadian facility of $4,843. Additionally, the Company received proceeds from convertible debt in the amount of $15,336 from RIV Capital. Total private placement net of shares issuance proceeds amounted to $49,955. Additionally, 959,772 Common Share warrants and 28,636 proportionate share warrants were exercised for total gross proceeds of $24,927 and 1,117,936 stock options were exercised at a weighted average exercise price of $1.79 per unit for gross proceeds of $1,967.
Reconciliation of Non-GAAP Measures
In addition to reporting the financial results in accordance with GAAP, the Company reports certain financial results that differ from what is reported under GAAP. Non-GAAP measures used by management do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. The Company believes that certain investors and analysts use these measures to measure a company's ability to meet other payment obligations or as a common measurement to value companies in the cannabis industry, and the Company calculates Adjusted EBITDA as
EBITDA adjusted for certain material non-cash items and certain other adjustments management believes are not reflective of the ongoing operations and performance. Such information is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The Company believes this definition is a useful measure to assess the performance of the Company as it provides more meaningful operating results by excluding the effects of expenses that are not reflective of the Company's underlying business performance and other one-time or non-recurring expenses.
The table below reconciles net income (loss) to EBITDA and Adjusted EBITDA for the years ended December 31, 2021, December 31, 2020 and December 31, 2019.
| December 31, | December 31, | ||||
|---|---|---|---|---|---|
| Summary of EBITDA and Adjusted EBITDA | Notes | 2021 | 2020 | December 31, 2019 | |
| Net income (loss) | $ | 6,135 | $(142,256) | $ | (163,147) |
| Add (deduct) the impact of: | |||||
| Provision for income taxes | 28,314 | 10,769 | 1,769 | ||
| Finance expenses | 24,662 | 8,416 | 3,694 | ||
| Amortization and depreciation | 15,390 | 10,433 | 4,444 | ||
| EBITDA | (a) | 74,501 | $(112,638) | $ | (153,240) |
| Add (deduct) the impact of: | |||||
| Non-cash write downs of inventory | (b) | 2,417 | $3,668 | $ | 6,956 |
| Relief of fair value of inventory upon acquisition | (c) | 3,465 | (230) | 2,677 | |
| Share-based compensation | (d) | 14,941 | 10,475 | 7,661 | |
| Impairment of goodwill and intangible assets | (e) | 8,640 | 766 | 49,111 | |
| Impairment of property and equipment | (f) | 470 | 823 | 1,746 | |
| Loss on lease termination | (g) | 3,278 | — | — | |
| Revaluation of contingent consideration | (h) | 3,584 | 18,709 | 46,857 | |
| Restructuring costs and executive severance | (i) | 931 | 1,023 | 121 | |
| Legal settlements | (j) | 2,121 | — | — | |
| Fees for services related to NJ licenses | (k) | — | 7,500 | — | |
| Other one-time items | (l) | 6,070 | 1,070 | 8,323 | |
| (Gain) loss on fair value of warrants and purchase option derivative asset | (m) | (57,904) | 110,518 | — | |
| Indemnification asset release | (n) | 4,504 | — | — | |
| Unrealized and realized (gain) loss on investments and notes receivable | (o) | (6,192) | (186) | 4,394 | |
| Unrealized and realized foreign exchange loss | (p) | 4,810 | 178 | 313 | |
| Adjusted EBITDA | $ | 65,636 | $41,676 | $ | (25,081) |
(a) EBITDA is a non-GAAP measure and is calculated as earnings before interest, tax, depreciation and amortization.
(b) Represents inventory write downs outside the normal course of operations.
(c) In connection with the Company's acquisitions, inventory was acquired at fair value, which included a markup or markdown for profit. Recording inventory at fair value in purchase accounting has the effect of increasing or decreasing inventory and thereby increasing or decreasing cost of sales as compared to the amounts the Company would have recognized if the inventory was sold through at cost. The write-up or write-down of acquired inventory represents the incremental cost of sales that were recorded during purchase accounting.
(d) Represents non-cash share-based compensation expense.
(e) Represents impairment charges taken on the Company's intangible assets and goodwill.
(f) Represents impairment charges taken on the Company's property and equipment.
(g) Represents loss taken as a result of the Company's early termination payment on its Frederick, Maryland lease.
- (h) Represents the loss on period end revaluation of the Company's contingent consideration liabilities.
- (i) Represents costs associated with severance and restructuring of business units.
(j) Represents one-time legal settlement charges.
(k) Represents amounts payable to an entity controlled by the minority shareholders of TerrAscend NJ due upon NJ being granted an alternative treatment center license in the state of New Jersey and NJ making its first sale of medical cannabis to a patient in compliance with the New Jersey Compassionate Use Marijuana Act.
(l) Includes one-time fees incurred in connection with the Company's acquisitions, such as expenses related to professional fees, consulting, legal and accounting, that would otherwise not have been incurred. In addition, includes
one-time charges for work completed in preparation of becoming a US filer. These fees are not indicative of the Company's ongoing costs and are expected to be incurred only as additional acquisitions are completed.
- (m) Represents the (gain) loss on fair value of warrants, including effects of the foreign exchange of the US denominated Preferred Share warrants, as well as the revaluation of the fair value of the purchase option derivative asset.
- (n) Represents the reduction to the indemnification asset related to The Apothecarium's tax audit settlement and statute expirations for tax years ended September 30, 2014 and September 30, 2015.
- (o) Represents unrealized and realized loss and gains on fair value changes on strategic investments and note receivables held.
- (p) Represents the remeasurement of USD denominated cash and other assets recorded in C$ functional currency.
The increase in Adjusted EBITDA for year ended December 31, 2021 was primarily due to operational scale up, as well as the Company's acquisitions of KCR and HMS. The Company continued to expand in the US organically through an increase in production and wholesale capacity in Pennsylvania, store expansions in Pennsylvania, New Jersey, and California, and operations in New Jersey and Maryland.
The increase in Adjusted EBITDA for the year ended December 31, 2020 as compared to December 31, 2019, was a result of operational scale up as well as a full year of operations from the Company's acquisitions. The Company acquired The Apothecarium in June 2019, Ilera in September 2019, and State Flower in January 2020. The growth in the US was offset by the reduction of operations in Canada in 2020, which was driven by a shift in focus towards more profitable and sustainable sales.
The table below reconciles net cash used in operating activities to adjusted net cash used in operating activities for the years ended December 31, 2021, December 31, 2020, and December 31, 2019. The Company calculates adjusted net cash provided by (used in) operating activities to adjust net cash provided by (used in) operating activities for the onetime payments of contingent consideration as the Company does not believe that these payments are reflective of ongoing operations.
| For the years ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 312021 | December 31,2020 | December 312019 | ||||||
| Net cash used in operating activities | $ | (31,815) | $ | (36,971) | $ | (39,841) | ||
| Add the impact of: | ||||||||
| Contingent consideration payments in excess of fair value on acquisition | 11,394 | 56,527 | — | |||||
| Adjusted net cash provided by (used in) operating activities | $ | (20,421) | $ | 19,556 | $ | (39,841) |
The amount of contingent consideration paid in excess of the liability recognized at the date of acquisition is reflected as net cash used in operating activities in the Statements of Cash Flows. Excluding this amount, the Company had positive cash provided by operating activities of $19,556 for the year ended December 31, 2020 and net cash used in operating activities of $20,421 and $39,841 for the years ended December 31, 2021 and December 31, 2019, respectively.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The Company has $224,171 in principal amount of loans payable outstanding at December 31, 2021. Of this amount, $4,490 are due within the next twelve months. The Company has entered into operating leases for certain premises and offices for which it owes monthly lease payments.
In addition, the Company's undiscounted contingent consideration payable is $17,782 at December 31, 2021. The contingent consideration payable relates to the Company's business acquisitions of The Apothecarium and State Flower. Contingent consideration is based upon the potential earnout of the underlying business unit and is measured at fair value using a projection model for the business and the formulaic structure for determining the consideration under the agreement. The contingent consideration is revalued at the end of each reporting period using a probability weighted model based on the likelihood of achieving certain revenue outcomes.
The Company believes that it has sufficient liquidity, as described above under "Liquidity and Capital Resources", to allow the Company to meet these contractual obligations.
Subsequent Transactions
On March 10, 2022, the Company closed its previously announced acquisition of Gage Growth Corp. ("Gage") pursuant to an arrangement agreement dated August 31, 2021 (as amended) (the "Gage Acquisition"). The Company acquired all of the issued and outstanding subordinate voting shares (or equivalent) of Gage. At closing, Gage shareholders received 51,349,978 Common Shares and an additional 25,811,460 of Common Shares are reserved for issuance in connection with the exercise or exchange of former Gage convertible securities that will be settled with the Company's Common Shares if and when exercised or exchanged. Total consideration was approximately $386 million based on the closing price of the Common Shares on the Canadian Stock Exchange ("CSE") on March 9, 2022, to be issued in reliance upon the exemption from registration available under Section 3(a)(10) of the Securities Act of 1933, as amended (the "Securities Act").
Changes in or Adoption of Accounting Principles
New standards, amendments and interpretations adopted:
The Company adopted certain accounting and reporting standards during the year ended December 31, 2021. Information regarding the Company's adoption of new accounting and reporting standards is discussed in Note 2 to the accompanying consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
The preparation of the Company's consolidated financial statements requires management to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and assumptions are based on historical experience and other factors that are considered relevant. Actual results may differ from these estimates.
While the Company's significant accounting policies are described in more detail in Note 2 to the accompanying consolidated financial statements included in Item 8, "Financial Statements and Supplementary Data" in this Annual Report on the Form 10-K, the accounting estimates and assumptions discussed in this section are those that the Company considers to be the most critical in the preparation of the consolidated financial statements. An accounting estimate or assumption is considered critical if both (a) the nature of the estimate or assumption is material due to the levels of subjectivity and judgement involved, and (b) the impact within a reasonable range of outcomes of the estimate and assumption is material to the financial condition.
A quantitative sensitivity analysis is provided where information is available to reasonably estimate the impact and provides material information to investors.
Inventory
The net realizable value of inventory represents the estimated selling price in the ordinary course of business less the reasonably predictable costs of completion, disposal and transportation. The Company estimates the net realizable value of inventories, taking into account the most reliable evidence available at each reporting date. The determination of net realizable value requires significant judgment, including consideration of factors such as shrinkage, the aging of and future demand for inventory, expected future selling price the Company expects to realize by selling the inventory, and the contractual arrangements with customers. Reserves for excess and obsolete inventory are based upon quantities on hand, projected volumes from demand forecasts and net realizable value. The future realization of these inventories may be affected by market-driven changes that may reduce future selling prices. A change to these assumptions could impact the Company's inventory valuation and gross profit.
Revenue recognition
Revenues consist of wholesale and retail sales, which are recognized when control of the goods has transferred to the purchaser and the collectability is reasonably assured.
From time to time, the Company partakes in sales agreements with suppliers in which it also purchases inventory. As part of the five-step revenue model, the Company assesses whether instances of bulk sales made to suppliers of goods have commercial substance and should be recognized as revenue under ASC 606, or whether the transaction should be assessed under ASC 845 Nonmonetary Transactions. The determination of whether the sale has commercial substance requires management's judgment.
Share-based compensation
In calculating share-based compensation, key estimates are used such as, the rate of forfeiture of options granted, the expected life of the option, the volatility of the Company's stock price, the vesting period of the option and the risk-free interest rate. The fair value of each option grant is estimated using the Black-Scholes option-pricing model. While assumptions used to calculate and account for share-based compensation awards represent management's best estimates, these estimates involve inherent uncertainties and the application of management's judgment. As a result, if revisions are made to the underlying assumptions and estimates, share based compensation expense could vary significantly from period to period. The Company recognized share-based compensation expense of $14,942, $10,075, and $6,738 for the years ended December 31, 2021, 2020, and 2019, respectively.
Warrant Liability
The Company uses the Black-Scholes model to calculate the fair value of the warrants issued, which includes various unobservable inputs such as the volatility of the Company's stock price and the risk-free interest rate. The Company uses judgment to select methods used and in performing the fair value calculations at the initial measurement at issuance, as well as for subsequent measurement on a recurring basis. The assumptions could have a material impact on the valuation of the warrant liability. The warrant liability was remeasured to fair value of $54,986 and $132,257 at December 31, 2021 and 2020, respectively. An increase of 50 basis points to the discount rate and volatility would not have a material impact.
Income taxes
The extent to which deferred tax assets can be recognized is based on an assessment of the probability of the Company generating future taxable income against which the deferred tax assets can be utilized. In addition, significant judgment is required in classifying transactions and assessing probable outcomes of tax positions taken, and in assessing the impact of any legal or economic limits or uncertainties in various tax jurisdictions.
Provisions for taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors. The Company reviews the adequacy of these provisions at the end of the reporting period. It is possible, however, that at some future date, an additional liability could result from audits by taxing authorities. If the final outcome of these tax-related matters is different from the amounts that were initially recorded, such differences will affect the tax provisions in the period in which such determination is made.
Impairment of goodwill and indefinite lived intangible assets
Goodwill and indefinite lived intangible assets are reviewed for impairment annually and whenever there are events or changes in circumstances that indicate the carrying amount has been impaired. Definite lived intangible assets are tested for impairment when there are indications that an asset may be impaired. If it is determined that it is more likely than not that the fair value of a reporting unit exceeds its carrying value, additional quantitative impairment testing is performed which compares the carrying value of the reporting unit to its estimated fair value.
The Company uses an income-based approach as necessary to assess the fair values of intangible assets and its reporting units for goodwill testing purposes. Under the income approach, fair value is based on the present value of estimated cash flows. An impaired asset is written down to its estimated fair value based on the most recent information available.
Fair value is determined as the amount that would be obtained from the sale of the asset in an arm's length transaction between knowledgeable and willing parties. Determining the value in use requires the Company to estimate expected future cash flows associated with the assets and a suitable discount rate in order to calculate present value. A number of factors, including historical results, business plans, forecasts, and market data are used to determine the fair value of the reporting unit and intangible assets.
The Company's impairment loss calculation contains uncertainties because it requires management to make assumptions and apply judgement to qualitative factors as well as estimate future cash flows and asset fair values, including forecasting projected financial information and selecting the discount rate that reflects the risk inherent in future cash flows. If actual results are not consistent with the Company's estimates and assumptions, the Company may be exposed to non-cash impairment losses that could be material.
During the year ended December 31, 2021, the Company made a decision to undertake a strategic review process to explore, review, and evaluate potential alternatives for its Arise business. The Company also determined that the estimated future cash flows for the business did not support the carrying value of the intangible assets and goodwill, and therefore, the intangible
assets and goodwill were written down to $nil. The Company recorded impairment of intangible assets of $3,633 and impairment of goodwill of $5,007.
During the fourth quarter of 2021, the Company performed qualitative analyses over its goodwill and indefinite lived intangible assets for each of its reporting units. The Company determined that it was more likely than not that the fair value of its California and Maryland reporting units exceeded their carrying values, and therefore, no quantitative impairment analysis was performed. The Company performed a quantitative analysis over its Pennsylvania reporting unit and determined that the fair value exceeded its carrying value by approximately 15%, resulting in no impairment. An increase of the discount rate of 100 basis points would not cause an impairment. There is no goodwill or indefinite lived intangible assets at the Company's Canada reporting unit.
During the year ended December 31, 2020, the Company performed qualitative analyses over its goodwill and indefinite lived intangible assets for each of its reporting units and determined that it was more likely than not that the fair value of its California and Pennsylvania reporting units exceeded their carrying values, and therefore, no quantitative analyses was performed. The Company performed a quantitative analysis over its Florida reporting unit and determined that the fair value exceeded its carrying value by approximately 10%, resulting in no impairment. An increase in the discount rate of 100 basis points would not cause an impairment.
During the year ended December 31, 2019, the Company performed qualitative analyses over its goodwill and indefinite lived intangible assets for each of its reporting units and determined that the fair values of its Canada and California reporting units were more likely than not less than the respective carrying values, and therefore, the Company performed a one-step impairment test for each reporting unit. As a result of the one-step impairment tests, the Company recorded impairment loss on goodwill at its Canada reporting unit of $1,825 and impairment loss of $43,977 at its California reporting unit. Additionally, the Company recorded impairment of its indefinite lived intangible assets at its California reporting unit of $2,928.
Impairment of long-lived assets
The Company evaluates the recoverability of long-lived assets, including property and equipment, ROU assets, and definite lived intangible assets, whether events or changes in circumstances indicate that the carrying value of the asset, or asset group, may not be recoverable.
When the Company determines that the carrying value of the long-lived asset may not be recoverable based upon the existence of one or more of the indicators, the assets are assessed for impairment based on the estimate of future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying value of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset's carrying value over its fair value. Management judgement is required in the determination of indicators of impairment, as well as the estimation of future undiscounted cash flows, and as necessary, the fair value of those assets or asset groups in which indicators of impairment have been identified.
The Company recorded impairment of property and equipment of $470, $823, and $1,746 for the years ended December 31, 2021, 2020, and 2019, respectively.
Business combinations
Classification of an acquisition as a business combination or an asset acquisition depends on whether the asset acquire constitutes a business, which can be a complex judgement. The Company has determined that its acquisitions in Note 4 are business combinations under ASC 805 Business Combinations.
In a business combination, substantially all identifiable assets, liabilities and contingent liabilities acquired are recorded at the date of acquisition at their respective fair values. One of the most significant areas of judgment and estimation relates to the determination of the fair value of these assets and liabilities, including the fair value of contingent consideration, if applicable. If any intangible assets are identified, depending on the type of intangible asset and the complexity of determining its fair value, the Company may utilize an independent external valuation expert to develop the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows. These valuations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied.
The estimates are based upon assumptions that the Company believes are reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management's assumptions, which do not reflect unanticipated events and circumstances that may occur.
Contingent Consideration
Contingent consideration payable as the result of a business combination is recorded at the date of acquisition at fair value. The fair value of contingent consideration is subject to significant judgement and estimates, such as projected future revenue. Subsequent changes to the fair value of contingent consideration are measured at each reporting date, with changes recognized through profit or loss. Refer to Note 21 included in Item 8, "Financial Statements and Supplementary Data" in this Annual Report on Form 10-K for the sensitivity analysis performed over the contingent consideration liability.
Incremental borrowing rates
Lease payments are discounted using the rate implicit in the lease if that rate is readily available. If that rate cannot be easily determined, the lessee is required to use its incremental borrowing rate. The incremental borrowing rate is the rate of interest that the Company estimates it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms. The Company calculates its incremental borrowing rate as the interest rate the Company would pay to borrow funds necessary to obtain an asset of similar value over similar terms taking into consideration the economic factors and the credit risk rating at the commencement date of the lease.
In addition, the Company utilizes a discount rate to determine the appropriate fair value of convertible debentures and loans issued with warrants attached. The discount rate applied reflects the interest rate that the Company would have to pay to borrow a similar amount at a similar term and with a similar security.
Control, joint control or level of influence
When determining the appropriate basis of accounting for the Company's interests in affiliates, the Company makes judgments about the degree of influence that it exerts directly or through an arrangement over the investees' relevant activities.
Emerging Growth Company Status
The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that the Company (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided in the JOBS Act. As a result, the Company's consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.
The Company will remain an emerging growth company until the earlier to occur of: (i) the last day of the fiscal year (a) following the fifth anniversary of the date of the first sale of common equity securities of the issuer pursuant to an effective registration statement under the Securities Act, (b) in which the Company has total annual gross revenue of $1.07 billion or more, or (c) in which the Company is deemed to be a large accelerated filer, which means the market value of the Company's voting and non-voting common equity that is held by non-affiliates exceeds $700.0 million as of the prior June 30th; and (ii) the date on which the Company has issued more than $1.0 billion in non-convertible debt during the prior three-year period.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the Company's financial position due to adverse changes in financial market prices and rates. The Company's market risk exposure is primarily a result of exposure due to potential changes in inflation and interest rates. The Company does not hold financial instruments for trading purposes.
Financial Instruments and Risk Management
Financial instruments recorded at fair value are estimated by applying a fair value 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. The hierarchy is summarized as follows:
Level 1- quoted prices (unadjusted) in active markets for identical assets and liabilities
Level 2- inputs other than quoted prices that are observable for the asset or liability, either directly (prices) or indirectly (derived from prices) from observable market data
Level 3- inputs for assets and liabilities not based upon observable market data
Risk Management
The Company's risk exposure and the impact on the Company's financial instruments are summarized below:
(a) Credit risk
Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, accounts receivable, net and notes receivable. Company assesses the credit risk of trade receivables by evaluating the aging of trade receivables based on the invoice date. The carrying amounts of trade receivables is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statements of operations and comprehensive loss. When a trade receivable balance is considered uncollectible, it is written off against the allowance for expected credit losses.
The Company has reviewed the items comprising the accounts receivable balance and determined that the majority of accounts are collectible; accordingly, an allowance for doubtful accounts has been recorded. Subsequent recoveries of amounts previously written off are credited against operating expenses in the consolidated statements of operations. The Company regularly monitors credit risk exposure and takes steps to mitigate the likelihood of these exposures resulting in actual loss. The Company has no customers whose balance is greater than 10% of total trade receivables as of December 31, 2021.
(b) Liquidity risk
The Company is exposed to liquidity risk, or the risk that the Company will not be able to meet its financial obligations as they become due. The Company manages liquidity risk through ongoing review of its capital requirements. The Company's objective with respect to its capital management is to ensure it has sufficient cash resources to maintain its ongoing operations.
(c) Market Risk
The significant market risk exposures to which the Company is exposed are foreign currency risk and interest rate risk.
i) Foreign currency risk:
Foreign currency risk is the risk that a variation in exchange rates between the Canadian dollar and US dollar and other foreign currencies will affect the Company's operations and financial results.
The Company and its subsidiaries hold cash and cash equivalents in currencies other than their functional currency. The Company does not currently engage in currency hedging activities to limit the risks of currency fluctuations. Consequently, fluctuations in foreign currencies could have a negative impact on the profitability of the Company's operations. A 10% increase in the value of the U.S. dollar compared to the Canadian dollar resulted in $3,191 potential loss. A 10% decrease in the value of the U.S. dollar compared to the Canadian dollar resulted in a $3,900 potential gain. The estimated fair values of the Company's foreign currency exchange rate. Other than the cash and cash equivalents noted previously, the Company does not hold significant monetary assets or liabilities in currencies other than its functional currency.
ii) Interest rate risk:
Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. In respect of financial assets, the Company's policy is to invest excess cash at floating rates of interest in cash equivalents, in order to maintain liquidity, while achieving a satisfactory return. Fluctuations in interest rates impact the value of cash equivalents. The Company's investments in guaranteed investment certificates bear a fixed rate and are cashable at any time prior to maturity date.
The company does not have significant cash equivalents at year end. The Company's loans payable have fixed interest rates from 6% to 12.875% per annum. The mortgage payable bears interest at a fixed rate of 5.5% per annum. All other financial liabilities are non-interest-bearing instruments.
Item 8. Financial Statements and Supplementary Data
All information required by this item may be found on pages F-1 through F-55 of this Form 10-K.