TerrAscend — Interim / Quarterly Report 2020

Jun 1, 2020

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Condensed interim consolidated financial statements For the three and nine months ended March 31, 2020

In US dollars

Unaudited

NOTICE TO READER

The accompanying unaudited condensed interim consolidated financial statements of Highland Copper Company Inc. have been prepared by and are the responsibility of the Company’s management. The Company’s independent auditor has not performed a review of these unaudited condensed interim consolidated financial statements.

Highland Copper Company Inc. Condensed Interim Consolidated Statements of Financial Position

	March 31,	June 30,
(unaudited, in US dollars)	2020	2019
	$	$
ASSETS
Current
Cash (Note 4)	462,106	605,046
Sales taxes receivable	13,018	12,767
Prepaid expenses and other	38,950	36,899
	514,074	654,712
Non-current
Capital assets	71,330	81,768
Exploration and evaluation assets (Note 5)	20,597,940	20,385,814
TOTAL ASSETS	21,183,344	21,122,294
LIABILITIES
Current
Accounts payable and accrued liabilities	795,858	913,359
Credit facility, including accrued interest (Note 6)	4,816,140	2,495,484
Note payable (Note 7)	110,000	110,000
Lease liabilities (Note 8)	21,252	-
Promissory note, including accrued interest (Note 9)	16,228,013	15,128,068
	21,971,263	18,646,911
Non-current
Note payable (Note 7)	-	55,000
Environmental liability	263,864	257,004
TOTAL LIABILITIES	22,235,127	18,958,915
SHAREHOLDERS' EQUITY (DEFICIT)
Share capital (Note 10)	66,137,274	66,137,274
Contributed surplus	11,844,522	11,681,150
Deficit	(81,003,123)	(77,278,822)
Cumulative translation adjustment	1,969,544	1,623,777
TOTAL EQUITY (DEFICIT)	(1,051,783)	2,163,379
TOTAL LIABILITIES AND EQUITY(DEFICIT)	21,183,344	21,122,294

Going concern (Note 2); Event after the reporting date (Note 17).

The accompanying notes form an integral part of these unaudited condensed interim consolidated financial statements.

On behalf of the Board,

/s/ Denis Miville-Deschênes Denis Miville-Deschênes, Director

/s/ Jo Mark Zurel Jo Mark Zurel, Director

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Highland Copper Company Inc. Condensed Interim Consolidated Statements of Net Loss and Comprehensive Loss

	Three months	ended March 31,	Nine months	ended March 31,
(unaudited, in US dollars)	2020	2019	2020	2019
	$	$	$	$
Expenses and other items
Exploration and evaluation (Note 12)	108,490	478,383	678,943	2,105,942
Management and administration (Note 13)	316,142	315,048	791,369	1,173,805
Share-based compensation	1,719	30,623	26,811	139,058
Depreciation and amortization	19,130	13,464	61,411	38,040
Loss (gain) on sale of capital assets	541	(15,741)	1,280	(15,741)
Accretion on environmental liability	2,287	1,081	6,860	3,244
Finance expense (Note 14)	604,905	42,796	1,823,881	135,746
Finance income	(847)	(625)	(5,434)	(17,308)
Loss on foreign exchange	334,293	12,674	339,179	11,489
Net loss for the period	(1,386,660)	(877,703)	(3,724,301)	(3,574,275)
Other comprehensive income
Item that will not be subsequently reclassified to income
Foreign currency translation adjustment	721,365	(611,893)	665,477	418,244
Item that may be subsequently reclassified to income
Foreign currency translation adjustment	(370,362)	612,755	(319,710)	(412,282)
Comprehensive loss for theperiod	(1,035,657)	(876,841)	(3,378,534)	(3,568,313)
Basic and diluted loss per common share	(0.00)	(0.00)	(0.01)	(0.01)
Weighted average number of common shares-basic and diluted	472,933,689	472,933,689	472,933,689	472,933,689

The accompanying notes form an integral part of these unaudited condensed interim consolidated financial statements.

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Highland Copper Company Inc. Condensed Interim Consolidated Statements of Shareholders’ Equity (Deficit)

Number of issued and outstanding (unaudited, in US dollars) common shares Balance at June 30, 2019 472,933,689 Share-based compensation - Below market element of credit facility (Note 5) - Net loss for the period - Foreign currency translation adjustment - Balance at March 31, 2020 472,933,689 Balance at June 30, 2018 472,933,689 Share-based compensation - Net loss for the period - Foreign currency translation adjustment - Balance at March 31,2019 472,933,689	Cumulative Total Share Contributed translation shareholders’ capital surplus Deficit adjustment equity (deficit)
	$ $ $ $ $
	66,137,274 11,681,150 (77,278,822) 1,623,777 2,163,379 - 26,811 - - 26,811 - 136,561 - - 136,561 - - (3,724,301) - (3,724,301) - - - 345,767 345,767
	66,137,274 11,844,522 (81,033,123) 1,969,544 (1,051,783)
	66,137,274 11,349,577 (55,123,241) 1,681,591 24,045,201 - 139,058 - - 139,058 - - (3,574,275) - (3,574,275) - - - 5,962 5,962
	66,137,274 11,488,635 (58,697,516) 1,687,553 20,615,946

The accompanying notes form an integral part of these unaudited condensed interim consolidated financial statements.

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Highland Copper Company Inc. Condensed Interim Consolidated Statements of Cash Flows

	Nine months	ended March 31,
(unaudited, in US dollars)	2020	2019
	$	$
Operating activities
Net loss for the period	(3,724,301)	(3,574,275)
Adjustments
Share-based compensation	26,811	139,058
Depreciation and amortization	61,411	38,040
Loss (gain) on sale of capital assets	1,280	(15,741)
Accretion on environmental liability	6,860	3,244
Unrealized loss on foreign exchange	339,180	11,489
Finance expense	1,815,037	20,000
Finance income accrued	(5,434)	(17,308)
Finance income received	6,374	20,907
Changes in working capital items
Sales taxes receivable	(1,325)	130,213
Receivable from related parties	-	-
Prepaid expenses and other	(4,601)	38,211
Accounts payable and accrued liabilities	(150,364)	(3,767)
	(1,629,072)	(3,209,929)
Investing activities
Proceeds from sale of capital assets	5,727	21,777
Additions to exploration and evaluation assets (Note 5)	(153,410)	(125,253)
	(147,683)	(103,476)
Financing activities
Credit facility (Note 6)	1,750,000	-
Reimbursement of note payable (Note 7)	(55,000)	(55,000)
Repayment of lease liabilities (Note 8)	(46,264)	-
	1,648,736	(55,000)
Effect of exchange rate changes on cash held in foreign currency	(14,921)	(8,227)
Net change in cash and cash equivalents	(142,940)	(3,376,632)
Cash and cash equivalents, beginning of period	605,046	3,487,847
Cash,end ofperiod	462,106	111,215
Supplemental cash flow information
Accounts payable and accrued liabilities related to exploration and evaluation assets	87,500	70,000
Finance expense included in exploration and evaluation assets	-	1,402,765

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Highland Copper Company Inc. Notes to Condensed Interim Consolidated Financial Statements Three and nine months ended March 31, 2020 (unaudited - in US dollars)

1. GENERAL INFORMATION

Highland Copper Company Inc. is a Canadian-based company. Highland and its subsidiaries (together “Highland” or the “Company”) are primarily engaged in the acquisition, exploration and development of mineral properties in Michigan, USA.

The Company’s principal assets, located in Michigan’s Upper Peninsula region, include the 100%-owned Copperwood copper project (the “Copperwood Project”), the White Pine North copper project (subject to final closing pursuant to the May 2014 asset purchase agreement with Copper Range Company (“CRC”), a wholly-owned subsidiary of First Quantum Minerals Ltd.) (the “White Pine North Project”), and a mineral exploration property covering approximately 448,000 acres in the Upper Peninsula region, referred to as the UPX Property.

All financial results in these unaudited condensed interim consolidated financial statements are expressed in US dollars unless otherwise indicated. Highland’s common shares are listed on the TSX Venture Exchange under the symbol HI, and on the OTCQB Venture Marketplace under the symbol "HDRSF".

The Board of Directors approved these unaudited condensed interim consolidated financial statements on June 1, 2020.

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Highland Copper Company Inc. Notes to Condensed Interim Consolidated Financial Statements Three and nine months ended March 31, 2020 (unaudited - in US dollars)

2. GOING CONCERN

These unaudited condensed interim consolidated financial statements have been prepared on the basis of a going concern, which assumes that the Company will continue its operations in the foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the normal course of operations.

The Company is subject to a number of risks and uncertainties associated with its future exploration and development activities. The recovery of amounts recorded for exploration and evaluation assets depends on the ability of the Company to complete the acquisition of the White Pine North Project, the ability of the Company to obtain the necessary financing to complete the development of the projects, and future profitable production from the projects or proceeds from their disposition thereof.

To date, the Company has not earned revenues and is in the exploration and development stage. The Company has incurred a net loss of $3,724,301 during the nine months ended March 31, 2020 ($3,574,275 during the comparative period in 2019) and has a deficit of $81,003,123 at March 31, 2020 (a deficit of $77,278,822 at June 30, 2019). The Company also has a working capital deficiency of $21,457,189 at March 31, 2020 (a working capital deficiency of $17,992,199 at June 30, 2019), including the amount of the credit facility of $4,816,140 due on June 30, 2020 (Note 17) and the amount of $16,228,013 related to the promissory note described in Note 9, which amount is payable on demand following default by the Company of the payment of $3,000,000 which was due on May 30, 2019.

The Company requires additional funds to settle its working capital deficiency, to meet all existing commitments, to complete the acquisition of the White Pine North Project and to provide for management and administration expenses for the next 12 months. The Company has engaged BMO Nesbitt Burns Inc. in July 2019 to act as financial advisor to the Company to review all funding options available, including the sale of assets, the issuance of securities, a merger or other type of arrangement or a combination of assets or entities. However, there is no assurance that the Company will be successful in completing any such transactions. Should the Company not be successful in completing any such transactions, this will have a negative impact on the business, financial condition and results of operation of the Company.

The conditions and uncertainties described above indicate the existence of a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern. If the going concern assumption was not appropriate for these unaudited condensed interim consolidated financial statements, adjustments which could be material would be necessary to the carrying value of assets and liabilities, in particular an impairment of exploration and evaluation assets, as well as adjustments to reported expenses.

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Highland Copper Company Inc. Notes to Condensed Interim Consolidated Financial Statements Three and nine months ended March 31, 2020 (unaudited - in US dollars)

3. BASIS OF PRESENTATION AND CHANGE IN ACCOUNTING POLICY

Basis of presentation

These condensed interim consolidated financial statements have been prepared in accordance with IAS 34, Interim Financial Reporting and follow the same accounting policies as the Company’s most recent annual consolidated financial statements, except for the adoption of IFRS 16, Leases , described below. These condensed interim consolidated financial statements do not contain all of the information and disclosures required for annual financial statements, and should be read in conjunction with the Company’s audited consolidated financial statements for the years ended June 30, 2019 and 2018, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

Adoption of IFRS 16, Leases

On July 1, 2019, the Company has adopted IFRS 16 using the modified retrospective approach for transition. As a result, comparative information has not been restated. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases. IFRS 16 replaces IAS 17, Leases , and related interpretations. IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. All leases result in the lessee obtaining the right to use an asset at the start of the lease and incurring a financing obligation corresponding to the lease payments to be made over time.

The main impact of IFRS 16 relates to office space leases. At July 1, 2019, the Company recognized a right-of-use assets of $58,183 included in capital assets with a corresponding amount to lease liabilities. When measuring lease liabilities, the Company discounts lease payments using its incremental borrowing rate of 20%. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period. The right-of-use assets are amortized over the lease terms on a straight-line basis.

4. CASH

At March 31, 2020, the cash position of $462,106 ($605,046 at June 30, 2019) is restricted to be disbursed pursuant to an approved budget by the lenders of the Credit Facility (Note 6).

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Highland Copper Company Inc. Notes to Condensed Interim Consolidated Financial Statements Three and nine months ended March 31, 2020 (unaudited - in US dollars)

5. EXPLORATION AND EVALUATION ASSETS

Amounts invested in exploration and evaluation assets are as follows:

	Copperwood	White Pine	UPX	Other
	Project	North Project(1)	Property	Properties	Total
	$	$	$	$	$
Balance atJune 30,2019	**17,102,484 **	3,132,246	-	**151,084 **	20,385,814
Property payments	209,775	-	-	31,136	240,911
Effect of change in foreign exchange	-	-	-	(28,785)	(28,785)
	209,775	-	-	2,351	212,126
Balance at March 31, 2020	17,312,259	3,132,246	-	153,435	20,597,940
Balance at June 30, 2018	16,801,384	3,107,246	11,756,257	130,945	31,795,832
Property payments	168,600	-	-	26,652	195,252
Finance expense	-	-	1,402,765	-	1,402,765
Effect of change in foreign exchange	-	-	-	(14,182)	(14,182)
	168,600	-	1,402,765	12,470	1,583,835
Balance at March 31,2019	16,969,984	3,107,246	13,159,022	143,415	33,379,667

(1) The final closing of the acquisition of the White Pine North Project, which initially was to occur by December 31, 2015, was further extended on January 15, 2020, to June 30, 2020. Should the Company not be able to meet the final closing conditions, it will not be able to complete the acquisition of the White Pine North Project.

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Highland Copper Company Inc. Notes to Condensed Interim Consolidated Financial Statements Three and nine months ended March 31, 2020 (unaudited - in US dollars)

6. CREDIT FACILITY

On May 20, 2019, the Company entered into a loan agreement with Greenstone Resources II LP and Osisko Gold Royalties Ltd (collectively, the "Lenders"), which are deemed to have significant influence over the Company. Under the terms of the loan agreement, the Lenders have agreed to provide the Company with a loan of up to $4,500,000 (the “Principal Amount”). The loan bears interest at a rate of 12% per annum. On December 31, 2019, the Lenders agreed to extend the maturity date of the loan from February 28, 2020 to May 31, 2020 and effective on May 31, 2020, the Lenders agreed to further extend the maturity date to June 30, 2020 (Note 17). The Principal Amount of the loan as well as accrued interest are payable by June 30, 2020. The loan is secured by a mortgage on the Copperwood property and a general security agreement over all the assets of the Company.

During the nine months ended March 31, 2020, the Company made additional drawdowns on the credit facility totalling $1,750,000, with total drawdowns on the credit facility amounting to $4,500,000 at March 31, 2020. The Company accounted for the estimated fair value of the additional drawdowns using a discount rate of 20%. The fair value adjustment, representing the below market element of the loan, was recorded in contributed surplus. The fair value adjustments and the transaction costs initially incurred and presented as a reduction of the loan are amortized over the loan period using the effective interest rate method. The effective interest rate of the loan is 23.6%.

In December 2019, the balance of the loan was adjusted by $51,465 to reflect the impact of the modification of the maturity date of the loan, with a corresponding increase to the below market element of the loan recorded in contributed surplus.

The balance of the loan is determined as follows:

	Nine months ended March 31,
	2020
	$
Balance, beginning of period	2,495,484
Modification adjustment	(51,465)
Additional drawdowns, discounted at the rate of 20%	1,665,308
Interest payable	343,073
Accretion of loan and amortization of transactions costs	363,740
Balance,end ofperiod	4,816,140

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Highland Copper Company Inc. Notes to Condensed Interim Consolidated Financial Statements Three and nine months ended March 31, 2020 (unaudited - in US dollars)

7. NOTE PAYABLE

The note is payable to the Lessor of certain mineral rights located in White Pine, Michigan. It is reimbursable in four remaining equal quarterly principal amounts of $27,500, plus interest accruing at the rate of 8% per annum, until December 31, 2020. The balance of the Note Payable was determined as follows:

	Nine months ended March 31,
	2020
	$
Balance, beginning of period	165,000
Reimbursements	(55,000)
Balance,end ofperiod	110,000
Current liability	110,000
Non-current liability	-
	110,000

8. LEASE LIABILITIES

Following the adoption of IFRS 16 on July 1, 2019 (Note 3), the Company recorded lease liabilities of $58,183. The Company accounted for the estimated fair value of the lease liabilities using a discount rate of 20%. The balance of the lease liabilities at March 31, 2020 is as follows:

	Nine months ended March 31,
	2020
	$
Balance, beginning of period	-
Lease liabilities on adoption of IFRS 16	58,183
Accretion expense	9,333
Repayment of liabilities	(46,264)
Balance,end ofperiod	21,252

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Highland Copper Company Inc. Notes to Condensed Interim Consolidated Financial Statements Three and nine months ended March 31, 2020 (unaudited - in US dollars)

9. PROMISSORY NOTE

On May 30, 2017, the Company issued a $16 million secured non-interest-bearing promissory note (the “Note”) to Kennecott Exploration Company and Rio Tinto Nickel Company (“RTX”), as part of the consideration for the acquisition of the UPX Property. The Note provided for the payment of $1.0 million on the first anniversary of the acquisition (payment made on May 30, 2018) and $3.0 million on each of the second, third, fourth, fifth and sixth anniversaries of the acquisition. The Note has an effective interest rate of 20%. The Company did not make the payment of $3.0 million due on May 30, 2019. In accordance with the provisions of the Note, the failure to make the payment on May 30, 2019 constitutes an event of default, and upon such occurrence and continuance, the amount of the Note then outstanding bears interest at an annual rate of Libor plus 8% (a rate of 9.02% at March 31, 2020) and becomes payable on demand. The Note is secured by a mortgage over the acquired property and a general security agreement over all the assets of UPX Minerals Inc, an indirect wholly-owned subsidiary of the Company.

The balance of the Note is determined as follows:

	Nine months ended March 31,
	2020
	$
Balance, beginning of period	15,128,068
Interest payable from July 1, 2019 to March 31, 2020	1,099,945
Balance,end ofperiod	16,228,013

10. SHARE CAPITAL AND WARRANTS

Issued and fully paid

At March 31, 2020 and June 30, 2019, the Company had 472,933,689 issued and outstanding common shares.

Share purchase warrants

On March 17, 2020, 1,000,000 outstanding share purchase warrants expired unexercised, resulting in no remaining share purchase warrants outstanding at March 31, 2020 (1,000,000 outstanding share purchase at June 30, 2019 with an exercise price of C$0.15 per share).

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Highland Copper Company Inc. Notes to Condensed Interim Consolidated Financial Statements Three and nine months ended March 31, 2020 (unaudited - in US dollars)

11. STOCK OPTIONS

The following table sets out the activity in stock options:

	Nine months ended March 31, 2020	Nine months ended March 31, 2020
		Weighted
		average exercise
	**Number **	price (C$)
Options, beginning of period	13,685,000	0.17
Expired	(3,770,000)	(0.27)
Options,end ofperiod	9,915,000	0.13

The following table reflects the stock options issued and outstanding at March 31, 2020:

					Exercise
			Remaining	Number of	price of
	Number of	Exercise	contractual	exercisable	exercisable
Issue date	options	price	life	options	options
		C$	(years)		C$
April 21, 2015	1,240,000	0.25	0.1	662,500	0.25
August 28, 2017	7,925,000	0.11	2.4	7,925,000	0.11
October 26, 2017	750,000	0.17	2.6	750,000	0.17
	9,915,000	0.13	2.1	9,337,500	0.13

12. EXPLORATION AND EVALUATION EXPENSES

The Company incurred the following exploration and evaluation expenses:

	Three months ended March 31,	Three months ended March 31,	Nine months ended March 31,	Nine months ended March 31,
	2020	2019	2020	2019
	$	$	$	$
Labour	36,256	336,561	139,867	1,359,372
Studies and consultants	29,519	23,410	322,832	243,668
Drilling and assaying	-	705	-	40,973
Office, overhead and other administrative costs	42,715	117,707	216,244	461,929
	108,490	478,383	678,943	2,105,942

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Highland Copper Company Inc. Notes to Condensed Interim Consolidated Financial Statements Three and nine months ended March 31, 2020 (unaudited - in US dollars)

13. MANAGEMENT AND ADMINISTRATION EXPENSES

The Company incurred the following management and administration expenses:

	Three months ended March 31,	Three months ended March 31,	Nine months ended March 31,	Nine months ended March 31,
	2020	2019	2020	2019
	$	$	$	$
Administrative and general	171,594	249,982	474,378	787,339
Office	62,804	23,439	117,207	84,304
Professional fees	54,353	14,087	139,841	199,118
Investor relations and travel	16,063	18,142	41,914	75,619
Reporting issuer costs	11,328	9,398	18,029	27,425
	316,142	315,048	791,369	1,173,805

14. FINANCE EXPENSE

The Company incurred the following finance expense:

	Three months ended March 31,	Three months ended March 31,	Nine months ended March 31,	Nine months ended March 31,
	2020	2019	2020	2019
	$	$	$	$
Effective interest on credit facility (Note 6)	249,909	-	705,759	-
Interest on note payable (Note 7)	2,200	4,400	8,250	14,850
Accretion on lease liabilities (Note 8)	3,267	-	9,333	-
Interest on promissory note (Note 9)	349,529	-	1,099,945	-
Interest on balance of purchase price payable	-	37,500	-	120,000
Other	-	896	594	896
	604,905	42,796	1,823,881	135,746

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Highland Copper Company Inc. Notes to Condensed Interim Consolidated Financial Statements Three and nine months ended March 31, 2020 (unaudited - in US dollars)

15. FINANCIAL RISK MANAGEMENT

In the normal course of business, the Company is exposed to a number of financial risks that can affect its operating performance, including, liquidity risk, interest risk and currency risk. The Company thoroughly examines the various financial risks to which it is exposed and assesses the impact and likelihood of those risks. The Company’s condensed interim consolidated financial statements do not include all financial risk management information and disclosures required in its annual consolidated financial statements. There were no changes in the risk management or any of its policies since June 30, 2019, except as noted below:

COVID-19 Pandemic

The rapid spread of the COVID-19 virus and actions taken globally in response to COVID-19 have significantly disrupted business activities and capital markets throughout the world. The Company's business relies, to a certain extent, on free movement of goods, services, and capital within Canada and the United States. Given the ongoing and dynamic nature of the circumstances surrounding COVID-19, it is difficult to predict how significant the impact of COVID-19, including any responses to it, will be on the economy and the Company’s business in particular, or for how long any disruptions are likely to continue. The extent of such impact will depend on future developments, which are highly uncertain, rapidly evolving and difficult to predict, including new information which may emerge concerning the severity of COVID-19 and additional actions which may be taken to contain COVID-19. Such further developments could have a material adverse effect on the Company's business, financial condition, results of operations and cash flows.

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Highland Copper Company Inc. Notes to Condensed Interim Consolidated Financial Statements Three and nine months ended March 31, 2020 (unaudited - in US dollars)

16. SEGMENTED INFORMATION

The Company has one reportable operating segment being the acquisition and exploration of mineral properties in Michigan, USA. Assets are located as follows:

Michigan, USA. Assets are located as follows:
			March 31, 2020
	Canada	USA	Total
	$	$	$
Current assets	463,124	50,950	514,074
Capital assets	70,314	1,016	71,330
Exploration and evaluation assets	-	20,597,940	20,597,940
Total assets	533,438	20,649,906	21,183,344
			June 30, 2019
	Canada	USA	Total
	$	$	$
Current assets	586,867	67,845	654,712
Capital assets	9,156	72,612	81,768
Exploration and evaluation assets	-	20,385,814	20,385,814
Total assets	596,023	20,526,271	21,122,294

17. EVENT AFTER THE REPORTING DATE

Effective on May 31, 2020, the Lenders to the credit facility (Note 6) agreed to extend the maturity date of the repayment of the Principal Amount of the loan as well as accrued interest to June 30, 2020.

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