TerrAscend - Interim / Quarterly Report 2020

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TERRASCEND CORP.

Unaudited Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and March 31, 2019 (In Thousands of Canadian Dollars)

TerrAscend Corp.

Unaudited Condensed Interim Consolidated Statements of Financial Position

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

	As at	As at
Notes	March 31, 2020	December 31, 2019
Assets
Current Assets
Cashand cashequivalents $	15,772 $	11,900
Restricted cash 22	15,626	—
Receivables,net ofsalesreturns and allowances 4,17	7,951	7,623
Share subscriptionsreceivable 15	—	31,772
Notereceivable 5	—	5,986
Investments 6	—	465
Biologicalassets 8	10,336	5,484
Inventory 9	28,800	20,422
Prepaid expenses and other assets	6,447	7,081
	84,932	90,733
Non-Current Assets
Investmentinassociate	1,419	1,299
Property, plant and equipment 10	135,145	112,650
Intangible assets and goodwill 11	287,818	241,148
Indemnification asset 18	16,315	14,936
	440,697	370,033

Total Assets $	525,629 $	460,766

Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accruedliabilities $	27,463 $	25,002
Deferredrevenue	893	1,179
Loans payable 12	6,287	63,068
Contingent considerationpayable 7	214,528	31,182
Leaseliability 13	1,479	1,157
Corporate income taxpayable 18	29,827	21,276
	280,477	142,864
Non-Current Liabilities
Loanpayable 12	68,834	6,298
Contingent considerationpayable 7	—	175,848
Leaseliability 13	24,791	19,572
Convertible debentures 14	4,910	13,874
Deferred income tax liability 18	32,235	26,981
	130,770	242,573

Total Liabilities $	411,247 $	385,437

Shareholders’ Equity
Share capital 15	277,565	259,892
Contributed surplus 15	82,195	54,777
Cumulative translationadjustment	3,715	(1,992 )
Deficit	(256,669 )	(245,998 )
Non-controllinginterest 16	7,576	8,650
Total Shareholders’ Equity	114,382	75,329

Total Liabilities and Shareholders’ Equity $	525,629 $	460,766

Total Number of Common and Proportionate Voting Shares Outstanding 15	148,919,809	41,147,636

Subsequent events ( note 25 )

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

On behalf of the Board

“ Jason Ackerman ” “ Jason Wild ”

Chief Executive Officer

Chairman of the Board

TerrAscend Corp.

Unaudited Condensed Interim Consolidated Statements of Loss and Comprehensive Income (Loss)

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

	For the three months ended	For the three months ended
Notes	March 31, 2020	March 31, 2019
Sales, gross $	37,849 $	14,965
Excise taxes	(3,051 )	(383 )
Sales, net	34,798	14,582

Cost of sales 9	19,252	13,075

Gross profit before gainon fairvalue of biological assets	15,546	1,507

Unrealized gainonchangesin fairvalue ofbiologicalassets 8	14,889	444
Realizedfairvalue amountsincludedin inventory sold	(6,244 )	(17 )

Gross profit	24,191	1,934

Operating expenses:
Generaland administrative 19	14,600	8,821
Share-based payments 15	2,817	1,907
Amortizationand depreciation 10,11	1,637	752
Research and development	207	124
Total operating expenses	19,261	11,604

Income (loss) from operations	4,930	(9,670 )

Revaluationofcontingent consideration 7	5,575	—
Finance and otherexpenses	3,304	732
Transactionandrestructuring costs	576	—
Unrealizedloss on investments 6	465	618
Impairment of intangible assets 11	462	—
Foreign exchange loss	54	40

Loss before income taxes	(5,506 )	(11,060 )
Currentincome taxexpense 18	5,865	—
Deferred income tax expense(recovery) 18	2,493	(370 )
Net loss $	(13,864 ) $	(10,690 )
Currencytranslation adjustment	(5,707 )	510
Comprehensive loss $	(8,157 ) $	(11,200 )

Net loss attributable to:
Shareholders ofthe Company	(13,206 )	(10,530 )
Non-controllinginterests 16	(658 )	(160 )

Comprehensive loss attributable to:
Shareholders ofthe Company	(7,499 )	(11,040 )
Non-controllinginterests 16	(658 )	(160 )

Net loss per share, basic and diluted
Net loss per share – basic and diluted $	(0.09 ) $	(0.14 )
Weighted average number of outstanding common and proportionate voting shares	146,469,201	77,332,357

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

TerrAscend Corp.

Unaudited Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

								Cumulative	Cumulative
					Contributed			translation						Non-controlling
For the three months ended March 31, 2020	Notes	Share capital				surplus		adjustment				Deficit			Interest			Total
Balance at January 1, 2020	$		259,892	$		54,777	$		(1,992 )	$		(245,998 )	$		8,650	$		75,329

Private placement net of share issuance costs	15		12,782			—			—			—			—			12,782
Issuance of warrants	15		—			26,844			—			—			—			26,844
Options expired/forfeited	15		—			(2,535 )			—			2,535			—			—
Share-based compensation	15		4,891			3,109			—			—			—			8,000
Returnof capital	16		—			—			—			—			(322 )			(322 )
Unrealized foreign exchange on translation of NCI	16		—			—			—			—			(94 )			(94 )
Net income (loss) for the year			—			—			5,707			(13,206 )			(658 )			(8,157 )
Balance at March 31, 2020	$		277,565	$		82,195	$		3,715	$		(256,669 )	$		7,576	$		114,382
									Cumulative
						Contributed			translation					Non-controlling
For the three months ended March 31, 2019	Notes		Share Capital			surplus			adjustment			Deficit			Interest			Total
Balance at January 1, 2019		$	64,883		$	22,184		$	—		$	(30,596 )		$	1,431		$	57,902
Sharesissued-warrant exercises	15		103			(15 )			—			—			—			88
Sharesissued-stockoptionexercises	15		15			(6 )			—			—			—			9
Sharesissued-acquisitionofGrander	15		7,372			—			—			—			—			7,372
Warrantsissuedforservices	15		—			234			—			—			—			234
Share-based compensation	15		—			2,332			—			—			—			2,332
Net loss for the year			—			—			(510 )			(10,530 )			(160 )			(11,200 )
Balance at March 31, 2019		$	72,373		$	24,729		$	(510 )		$	(41,126 )		$	1,271		$	56,737

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

TerrAscend Corp.

Unaudited Condensed Interim Consolidated Statements of Cash Flow

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

For the three months ended	For the three months ended
Notes March 31, 2020	March 31, 2019
Operating activities
Netloss $ (13,864 )	$ (10,690 )
Add (deduct)itemsnotinvolving cash
Unrealized gainonchangesin fairvalue ofbiologicalassets 8 (14,889 )	(444 )
Realizedfairvalue amountsincludedin inventory sold 6,244	17
Non-cashwrite downs of inventory 9 1,833	307
Accretionand accruedinterest 3,036	732
Depreciationofproperty, plant and equipment 10 1,882	290
Amortizationof intangible assets 11 2,018	565
Share-based payments 15 3,109	2,566
Currentincome taxexpense 18 5,865	—
Deferredincome taxexpense (recovery) 18 2,493	(372 )
Unrealizedloss on investments 6 465	617
Revaluationofcontingent consideration 7 5,575	—
Impairment of intangible assets and goodwill 12 462	—
Changes in non-cash working capital items 21 (5,491 )	(7,479 )
Cash outflow from operating activities (1,262 )	(13,891 )

Financing activities
Proceedsfromwarrants exercised 15 —	88
Proceedsfromoptions exercised 15 —	9
Proceedsfrom loan includinginterest accrued 12 82,090	31,815
Returnofcapitaltonon-controllinginterests 16 (322 )	—
Loanprincipalandinterest paid 12 (64,750 )	(313 )
Loanorigination fee paid 12 —	(266 )
Proceedsfromprivate placement,net ofshareissuance costs 15 44,554	—
Lease payments 13 (833 )	(77 )
Cash inflow from financing activities 60,739	31,256

Investing activities
Investmentinproperty, plant and equipment 10 (11,790 )	(11,283 )
Investmentin intangible assets 11 (282 )	(619 )
Investmentin notesreceivable 5 —	(8,017 )
Principalandinterest paymentsreceived on leasereceivable 13 38	—
Investmentinjoint venture —	(475 )
Advances to joint venture partner —	(420 )
Payments ofcontingent consideration 7 (26,481 )	—
CashportionofconsiderationpaidinacquisitionofGrander,net ofcashacquired 7 —	(9,187 )
Cash received on acquisition of State Flower 7 971	—
Cash outflow from investing activities (37,544 )	(30,001 )

Increase (decrease) incash, cash equivalents and restricted cash during the period 21,933	(12,636 )
Net effects of foreignexchange (2,435 )	(510 )
Cash, cash equivalents and restricted cash, beginning of period 11,900	21,773
Cash, cash equivalents and restricted cash, end of period $ 31,398	$ 8,627

Supplemental cash flow information (note 21)

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

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

1. Nature of operations

TerrAscend Corp. (“TerrAscend” or the “Company”) was incorporated under the Ontario Business Corporations Act. on March 7, 2017. The Company’s wholly owned subsidiary, TerrAscend Canada Inc. is a Licensed Producer of medical and adult use cannabis (as such term is defined in the Cannabis Act ) and its current principal business activities include cultivation, processing, and sale of cannabis. TerrAscend Canada Inc. applied to Health Canada to become a Licensed Producer under the Access to Cannabis for Medical Purposes Regulations (the “ACMPR”) and on July 10, 2017, was granted that license (the “License”) for its 67,300 square foot Mississauga facility (the “Facility”). On February 5, 2018, TerrAscend Canada Inc. was granted an amendment to the License by Health Canada to allow for cannabis oil production pursuant to the ACMPR. A further amendment to the License was granted on March 9, 2018 and July 8, 2019 to allow for sales of dried cannabis and cannabis oil. The License expires on July 10, 2020. The Company has applied with Health Canada for renewal of the license, which is pending approval. The Company expects the license to be renewed before the expiry date. A further amendment to the License was granted on October 22, 2019 to allow for sales of cannabis extracts, topicals and edibles. Effective October 17, 2018, ACMPR was transitioned to The Cannabis Act.

On January 15, 2019, the Company purchased Arise Bioscience Inc. (“Arise”) (previously known as Grander Distribution), a Florida-based producer and distributor of hemp-derived wellness products to retail locations nationwide. On June 6, 2019, the Company acquired the California operations of a retail dispensary brand known as “The Apothecarium” and Valhalla Confections (“Valhalla”), a premier manufacturer of cannabis infused artisan edibles. On September 16, 2019, the Company acquired Ilera Healthcare Inc. (“Ilera”), a vertically integrated cannabis cultivator, processor, and dispensary operator in Pennsylvania. On January 16, 2020, the Company’s majority owned subsidiary, TerrAscend NJ, LLC (“NJ”) was awarded a permit in Boonton Township, New Jersey, to cultivate, process and dispense medical marijuana in the state of New Jersey. On January 22, 2020, the Company acquired ABI SF LLC (“State Flower”), which operates a cannabis cultivation facility and distributes the State Flower brand in California. These entities comprise the Company’s U.S. operations.

The Company is listed on the Canadian Stock Exchange, having the ticker symbol TER and effective October 22, 2018, the Company began trading on OTCQX under the ticker symbol TRSSF. The Company’s registered office is located at PO Box 43125, Mississauga, Ontario, L5C 1W2.

2. Basis of presentation

(a) Statement of compliance

These condensed interim consolidated financial statements for the three months ended March 31, 2020 and March 31, 2019 of the Company were prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. Certain information and footnote disclosures normally included in the audited annual consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”), have been omitted or condensed. These condensed interim consolidated financial statements should be read in conjunction with the Company’s December 31, 2019 audited annual consolidated financial statements and were authorized for issue by the Board of Directors on May 28, 2020.

(b) Basis of measurement

These condensed interim consolidated financial statements have been prepared on the going concern basis which assumes that the Company will continue operations for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. In accordance with the going concern basis, these condensed interim consolidated financial statements have been prepared under the historical cost convention except for certain financial instruments that are measured at fair value and biological assets that are measured at fair value less costs to sell, as detailed in the Company’s accounting policies.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

2. Basis of presentation (continued)

(c) Functional and presentation currency

The Company’s functional currency, as determined by management, is the Canadian dollar. Management has determined that the functional currency of its Canadian subsidiaries is the Canadian dollar and the functional currency of its US subsidiaries is the US dollar. These condensed interim consolidated financial statements are presented in Canadian dollars unless otherwise specified.

(d) Basis of consolidation

Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly and indirectly, to govern the financial and operating policies of an entity and be exposed to the variable returns from its activities. The financial statements of subsidiaries are included in the condensed interim consolidated financial statements from the date that control commences until the date that control ceases.

Intragroup balances, and any unrealized gains and losses or income and expenses arising from transactions with jointly controlled entities are eliminated to the extent of the Company’s interest in the entity. Unrealized losses are eliminated to the extent of the gains, but only to the extent that there is no evidence of impairment.

(e) Use of significant estimates and judgments

The preparation of condensed interim consolidated financial statements requires the use of certain critical accounting estimates. It also requires management to exercise judgment in applying the Company’s accounting policies. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements are consistent with those disclosed in the notes to the annual consolidated financial statements for the year ended December 31, 2019.

(f) COVID-19 Estimation Uncertainty

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. Government measures to limit the spread of COVID-19, including the closure of non-essential businesses, did not materially disrupt the Company’s operations during the first quarter of 2020. The production and sale of cannabis have been recognized as essential services across Canada and the United States and the Company has not experienced production delays or prolonged retail closures as a result. As at March 31, 2020, we have not observed any material impairments of our assets or a significant change in the fair value of assets due to the COVID-19 pandemic.

Due to the rapid developments and uncertainty surrounding COVID-19, it is not possible to predict the impact that COVID-19 will have on our business, financial position, and operating results in the future. In addition, it is possible that estimates in the Company’s financial statements will change in the near term as a result of COVID-19 and the effect of any such changes could be material, which could result in, among other things, impairment of long-lived assets including intangibles and goodwill. An impairment test has not been performed as at March 31, 2020 for the Company’s goodwill and indefinite life intangibles. Management is closely monitoring the impact of the pandemic on all aspects of its business.

3. Significant accounting policies

The same accounting policies are applied in these unaudited condensed interim consolidated financial statements as those disclosed in the notes to the annual consolidated financial statements for the year ended December 31, 2019, except as described below.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

3. Significant accounting policies (continued)

New standards, amendments and interpretations adopted

IFRS 3 – “Business Combinations (Amendment)”, the amendments clarify the definition of a business, permitting a simplified assessment to determine whether a transaction should be accounted for as a business combination or as an asset acquisition. The amendments are effective for transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2020. Earlier application is permitted. The Company has adopted this standard effective January 1, 2020.

4. Sales and receivables, net of expected credit losses

		March 31,		December 31,
		2020		2019
Tradereceivables	$	8,402	$	7,994
Sales tax receivables		1,367		1,158
Other receivables		102		1,088
Provision for sales returns and allowances		(1,920 )		(2,617 )
Receivables, net of sales returns and allowances	$	7,951	$	7,623

Sales tax receivables represents input tax credits arising from sales tax levied on the supply of goods purchased or services received in Canada. Other receivables at March 31, 2020 are related to advances to employees. Other receivables at December 31, 2019 are related to amounts due from the sellers of the Apothecarium (Note 7) which were forgiven during the first quarter of 2020. The loss on forgiveness of $1,126 (US$0.8 million) is included in general and administrative expenses on the consolidated statement of loss.

Expected credit losses have been recorded in the amount of $511 (December 31, 2019 – $607) and are included in trade receivables on the condensed interim consolidated statements of financial position and in general and administrative operating expenses on the condensed interim consolidated statements of loss.

5. Note receivable

The reconciliation of the Company’s note receivable is as follows:

Think AHLOT F&F Howard Street RHMT State Flower Total	Think AHLOT F&F Howard Street RHMT State Flower Total
Carrying amount, December 31, 2018 $ 1,561 $ — $ — $ — $ — $	1,561
Issuance of notereceivable — 4,188 6,381 1,595 5,766	17,930
Unrealizedloss (1,655 ) — — — —	(1,655 )
Interest accrued 94 — 106 25 276	501
Principalandinterest payments — — (6,528 ) (1,631 ) —	(8,159 )
Conversionof notereceivable to commonshares — (4,188 ) — — —	(4,188 )
Foreign exchange impact — — 41 11 (56 )	(4 )
Carrying amount, December 31, 2019 — — — — 5,986	5,986
Interest accrued — — — — 120	120
Conversion of note receivable on acquisition of
StateFlower — — — — (6,679 )	(6,679 )
Foreign exchange impact — — — — 573	573
Carrying amount, March 31, 2020 $ — $ — $ — $ — $ — $	—

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

5. Note receivable (continued)

State Flower

On July 18, 2019, the Company provided US$2.85 million in cash and received a secured convertible note receivable from ABI SF LLC (“State Flower”), which operates a California cannabis cultivation facility and the State Flower brand. Interest on the note was 12% per annum compounded annually with a maturity date of July 15, 2023 or earlier based on certain conditions. On August 28, 2019, the Company announced the signing of a definitive agreement to acquire 49.9% of the equity of State Flower for total consideration of US$2.85 million from conversion of the note. The Company also agreed to purchase the remaining 50.1% equity of State Flower under a Securities Purchase Agreement at a future date to be determined for total consideration based on future sales over a predetermined period, which is subject to regulatory approvals by various local and state authorities. The Company also extended to State Flower a separate line of credit of up to US$3.75 million for cultivation facility improvements to expand its production capacity, with $2,694 (US$2.05 million) drawn on the line of credit as of January 22, 2020.

On January 23, 2020, the Company completed the conversion of the note principal and accrued interest into 4,880.44 Class B units of State Flower representing a 49.9% equity interest. The Company has consolidated State Flower into its financial statements beginning on the date it obtained control, which was the conversion date (Note 7).

6. Investments

During the year ended December 31, 2019, the Company sold its shares of F&F for aggregate proceeds of $3,204, less $31 in brokerage commission charges. As at March 31, 2020, the investment in F&F warrants has been recorded at fair value of $nil (December 31, 2019- $465). Subsequent to quarter-end on April 20, 2020, the warrants expired.

	Number of Shares	Number of Warrants	$
Fair value, December 31, 2018	3,125,000	3,125,000	7,690
Units converted tonotesreceivable	(3,125,000 )	—	(4,188 )
Units convertedfrom notesreceivable	3,125,000	—	3,594
Shares sold	(3,125,000 )	—	(3,204 )
Realized gainonsale of F&Fshares	—	—	1,400
Unrealized loss	—	—	(4,827 )
Fair value, December 31, 2019	—	3,125,000	465
Unrealized loss	—	—	(465 )
Fair value, March 31, 2020	—	3,125,000	—

The fair value of F&F warrants outstanding as at March 31, 2020 was estimated using the Black-Scholes valuation model based on the following weighted average assumptions:

Weighted Average Assumptions	Weighted Average Assumptions	Weighted Average Assumptions
March 31, 2020 December 31, 2019
Volatility	100 %	100 %
Risk-freeinterestrate	0.46 %	1.71 %
Expectedlife (years)	0.05	0.31
Dividend yield Nil Nil
Numberof F&Fwarrants valued	3,125,000	3,125,000
F&Festimated share price $	0.42 $	0.90
Value per F&F warrant $	— $	0.1489

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

7. Acquisitions

Acquisition of ABI SF, LLC (“State Flower”)

On January 23, 2020, the Company, through a wholly owned subsidiary, WDB Holding CA, Inc. (“WDB CA”), acquired ABI SF LLC (“State Flower”), which operates a California cannabis cultivation facility and the State Flower brand.

As consideration, the Company converted its previously issued note receivable and accrued interest in the amount of $3,985 (US$3.03 million) into a 49.9% equity interest in State Flower. The Company also recorded contingent consideration payable of $10,462 (US$7.96 million), representing the expected consideration payable to acquire the remaining 50.1% of State Flower, which comprises 100% of its Class A common shares, subject to regulatory approval. The contingent consideration is based on a multiple of future revenue. Effective with the conversion, the Company controls the appointment of three out of five seats on the board of directors and controls strategic and financial operations of State Flower.

On a standalone basis had the Company acquired the business on January 1, 2020, sales estimates would have been $400 for the three months ended March 31, 2020 and net loss estimates would have been $1,200.

		$
Cashand cashequivalents		971
Receivables		139
Inventory		568
Prepaid expenses and deposits		184
Right-of-use asset		3,558
Property, plant and equipment		1,597
Intangible assets		6,571
Goodwill		8,253
Accounts payable and accruedliabilities		(499)
Leaseliability		(3,558)
Deferred tax liability Net assets acquired		(643) 17,141

Considerationpaid on conversion of note receivable		3,985
Contingent considerationpayable		10,462
Line of credit advances at date of acquisition		2,694
Total consideration		17,141
Cash and cash equivalents acquired, net cash inflow		971

Acquisition related expense included in transaction and restructuring costs		56

Goodwill arose in this acquisition because purchase consideration included a control premium. In addition, the consideration paid reflected the benefit of expected sales growth and future market and product development. These benefits were not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. The goodwill arising on this acquisition is expected to be deductible for tax purposes.

The accounting for this acquisition has been provisionally determined at March 31, 2020. The fair value of net assets acquired, specifically with respect to inventory, intangible assets and goodwill, and total consideration have been determined provisionally and subject to adjustment. Upon completion of a comprehensive valuation and finalization of the purchase price allocation, the amounts above may be adjusted retrospectively to the acquisition date in future reporting periods.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

7. Acquisitions (continued)

Costs related to this transaction were $56, including legal, accounting, due diligence, and other transaction-related expenses. As part of the transaction, the Company entered into a put/call arrangement with the non-controlling shareholders of the State Flower principals. As a result, the non-controlling interest in State Flower does not qualify for equity treatment under IAS 32, Financial Instruments: Presentation. Under the put/call arrangement, the noncontrolling interest is redeemable by either party to the agreement after certain regulatory approvals are met. The Company has classified the non-controlling interest as a liability on the consolidated statements of financial position as other contingent consideration payable. The initial 50.1% non-controlling interest liability was recorded at a fair value of $10,462 million. This amount was calculated as a multiple of estimated revenues for the one-year period beginning three months after the completion of the first harvest following the installation of additional growing equipment, which is expected to be completed in October 2020. Any fair value adjustments to the liability are recorded in the consolidated statements of loss. No profit or loss with respect to State Flower operations is allocated to the non-controlling interest.

Contingent consideration

Contingent consideration as at March 31, 2020 and for the year ended December 31, 2019 are as follows:

		Grander	Apothecarium	Ilera	Total
Carrying amount, December 31, 2018	$	— $	— $	— $	—
Contingent consideration recognized onacquisition		776	4,051	144,312	149,139
Revaluationofcontingent consideration		(772)	—	62,623	61,851
Effects of movements in foreign exchange		(4)	(118)	(3,838)	(3,960)
Carrying amount, December 31, 2019	$	— $	3,933 $	203,097 $	207,030
Amountrecognized onacquisitionofStateFlower		—	10,462	—	10,462
Payments ofcontingent consideration		—	—	(26,481)	(26,481)
Revaluationofcontingent consideration		—	—	5,575	5,575
Effects of movements in foreign exchange		—	1,194	16,748	17,942
Carrying amount, March 31, 2020		—	15,589	198,939	214,528
Less: current portion		—	(15,589)	(198,939)	(214,528)
Non-current contingent consideration	$	— $	— $	— $	—

Contingent consideration recorded relates to the Company’s asset acquisition and business acquisitions. 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 terms of the agreement. The determination of the fair value of the contingent consideration payable is primarily based on the Company’s expectations of the amount of revenue to be achieved by the underlying business units within the specified time period of the agreement.

The fair value of contingent consideration is considered a Level 3 financial instrument in the fair value hierarchy. The fair value of contingent consideration was determined using a probability weighted model based on the likelihood of achieving certain revenue and EBITDA scenario outcomes. A discount rate range of 11.8% to 13.69% (December 31, 2019 – 11.8%) was utilized to determine the present value of the liabilities, resulting in a loss on revaluation of contingent consideration of $5,575 for the three months ended March 31, 2020.

On December 27, 2019, the Company and the sellers of Ilera amended the terms of the transaction to reduce the amount deposited into escrow from $16,237 (US$12.5 million) to $649 (US$0.5 million), which is deferred until the final earnout payment is due on March 15, 2021. The Company also agreed to pay to the sellers of Ilera an additional amount equal to $2,269 (US$1.75 million), payable in five installments, due every three months beginning April 15, 2020. This additional amount was included in the loss on revaluation of contingent consideration in the condensed interim consolidated statement of loss for the year ended December 31, 2019.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

7. Acquisitions (continued)

On January 15, 2020, the Company made the first earnout payment to the former owners of Ilera in the amount of $25,137 (US$19.35 million), with an additional $15,588 (US$12 million) deferred until the final earnout payment is due, no later than March 15, 2021.

It is management’s expectation that the full amount of $231,840 (US$175 million) will be paid. The illustrative variance of the contingent consideration as at March 31, 2020 based on a range of revenue results and discount rates is outlined in the following table:

	Implied value of contingent consideration
Discount Rate Sensitivity
Increase of 100 Basis Points	$197,262
Increase of 50 Basis Points	198,097
Decrease of 50 Basis Points	199,789
Decrease of 100 Basis Points	200,646

Contingent consideration recognized on the acquisition of State Flower is included under Apothecarium as management considers it to be a member of the Apothecarium group of entities.

8. Biological assets

The Company’s biological assets consist of 36,658 cannabis plants as at March 31, 2020. The reconciliation of biological assets is as follows:

biological assets is as follows:
				December 31,
		March 31, 2020		2019
Opening amount	$	5,484	$	545
Increasein fairvalue due to biologicaltransformation		14,889		5,480
Additions on IleraAcquisition		—		3,547
Capitalized costs		3,046		3,797
Transferred toinventories upon harvest		(13,760 )		(7,884 )
Effect of movements in foreign exchange		677		—
Fairvalueless costs to sellofcultivated plants		10,336		5,485
Cannabis seeds purchased (planted)		—		(1 )
Ending balance	$	10,336	$	5,484

The fair value measurements for biological assets are categorized as Level 3 in the fair value hierarchy based on the inputs to the selected valuation technique. The fair value was determined using an expected cash flow model which assumes the biological assets at the balance sheet date will grow to maturity, be harvested and converted into finished goods inventory and sold in the retail recreational or medical cannabis market. The Company’s method of accounting for biological assets attributes value accretion on a straight-line basis throughout the life of the biological asset from the flowering stage to the point of harvest and assumes that the value of clones is nominal. The Company also deducts a distribution margin of 10% along with the excise price when estimating the fair value of biological assets.

The Company’s estimates, by their nature, are subject to changes that could result from volatility of market prices, unanticipated regulatory changes, harvest yields, loss of crops, changes in estimates and other uncontrollable factors that could significantly affect the future fair value of biological assets.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

8. Biological assets (continued)

Dry bud

The dry bud model utilizes the following significant assumptions:

		Canada	Canada	Canada		United States	United States
		Weighted		Weighted		Weighted	Weighted
		Average		Average		Average	Average
		March 31,		December		March 31,	December
		2020		31, 2019		2020	31, 2019
Weighted average of expected loss of plants until
harvest		18 %		18 %		5 % 7 %
Expected yields for cannabis plants (average grams per
plant)		88 grams		107 grams		32 grams	38 grams
Expectednumberofgrowing weeks		15 weeks		15 weeks		13 weeks	13 weeks
Estimated selling price (pergram)	$	5.34	$	5.26	$	9.75	$ 8.51
Post-harvest cost to complete and sell (per gram)	$	2.07	$	2.43	$	1.97	$ 2.36

Trim

The trim model utilizes the following significant assumptions:

		Canada	Canada	Canada		United States	United States
		Weighted		Weighted		Weighted	Weighted
		Average		Average		Average	Average
		March 31,		December		March 31,	December
		2020		31, 2019		2020	31, 2019
Weighted average of expected loss of plants until
harvest		18 %		18 %		5 % 7 %
Expected yields for cannabis plants (average grams per
plant)		56 grams		81grams		61 grams	71grams
Expectednumberofgrowing weeks		15 weeks		15 weeks		13 weeks	13 weeks
Estimated selling price (pergram)	$	1.00	$	1.00	$	6.26	$ 2.42
Post-harvest cost to complete and sell (per gram)	$	0.11	$	0.22	$	0.27	$ 0.14

These estimates are subject to volatility in market prices and a number of uncontrollable factors, which could significantly affect the fair value of biological assets in future periods.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

8. Biological assets (continued)

The following table presents the effect of a 10% change on the fair valuation of biological assets as at March 31, 2020 and December 31, 2019 which would be reported as part of the gross profit (loss) on the statement of loss and comprehensive loss.

		Canada	Canada	United States	United States
						10%
		10% change	10% change	10% change	change as
		as at	as at	as at		at
		March 31,	December	March 31,	December
		2020	31, 2019	2020	31,	2019
Weighted average of expected loss of plants until
harvest	$	30 $	39 $	21 $		21
Expected yields for cannabis plants (average grams per
plant)		30	39	982		480
Expectednumberofgrowing weeks		27	27	884		272
Estimated selling price (pergram)		49	112	1,119		700
Post-harvest cost to complete and sell (per gram)		19	51	334		220

9. Inventory

The Company’s inventory of dry cannabis includes both purchased and internally produced inventory. The recorded oil inventory was externally purchased. The Company’s inventory is comprised of the following items:

				December 31,
		March 31, 2020		2019
Rawmaterials	$	15,159	$	9,911
Finished goods		7,778		5,628
Work inprocess		4,425		3,439
Accessories		410		265
Supplies and consumables		1,028		1,179
	$	28,800	$	20,422

During the three months ended March 31, 2020, management assessed that the net book value of inventory held at its Canadian facility relating to raw materials and Cannabis 1.0 products exceeded the net realizable value and thus recorded an impairment of $1,833 (December 31, 2019- $9,184). Management determined 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. In addition, during the three months ended March 31, 2020, management wrote off $74 (December 31, 2019 - $5,078) of inventory that it deemed unsaleable.

As at March 31, 2020, the fair value adjustment component included in inventory is $7,708 (December 31, 2019 – $3,057).

Total inventory acquired through business combinations for the three months ended March 31, 2020 was $568 (year ended December 31, 2019 – $8,643).

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

10. Property, plant and equipment

Property, plant and equipment for the three months ended March 31, 2020 are as follows:

		Assets in Proces s
				Irrigation &		Machinery	Office	Right
			Buildings and	Lighting	Security	&	Furniture &	of Use
	Land		Improvements	Systems	Systems	Equipment	Equipment	Assets	Total
	$	$	$	$	$	$	$	$	$
Cost
Balance at December 31,		29,095	48,681	1,013	742	9,168	3,076
2019	4,706							20,126	116,607
Additions	—	3,604	3,853	223	—	4,039	71	—	11,790
Completionofconstruction	—	(21,840 )	21,840	—	—	—	—	—	—
Additions on State Flower		1,352	212	—	—	—	33
acquisition	—							3,558	5,155
Effects of movements in		970	3,439	—	—	716	175
foreign exchange	343							2,086	7,729
Balance at March 31, 2020	5,049	13,181	78,025	1,236	742	13,923	3,355	25,770	141,281

Accumulated Depreciation
Balance at December 31,		—	1,486	88	248	260	737
2019	—							1,138	3,957
Depreciation	—	—	926	13	37	244	153	509	1,882
Effects of movements in		—	131	—	—	13	33
foreign exchange	—							120	297
Balance at March 31, 2020	—	—	2,543	101	285	517	923	1,767	6,136

Net book value at		13,181	75,482	1,135	457	13,406	2,432
March 31, 2020	5,049							24,003	135,145

As at March 31, 2020, assets in process of $13,181 (December 31, 2019 – $29,095) are not being depreciated. Depreciation will commence when the related construction projects are complete and facilities ready for use. During the three months ended March 31, 2020, borrowing costs were not capitalized because the assets in process did not meet the criteria of a qualifying asset. During the year ended December 31, 2019, the Company capitalized $836 of borrowing costs in assets in process using a weighted average capitalization rate of 11.82%.

Right of use assets are comprised entirely of the Company’s leased premises and offices and are depreciated on a straight-line basis over each respective lease term.

For the three months ended March 31, 2020, $851 (March 31, 2019 – $102) of depreciation was capitalized into biological assets and inventory and expensed to cost of sales upon the sale of goods.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

10. Property, plant and equipment (continued)

Property, plant and equipment for the year ended December 31, 2019 were as follows:

	Land	Assets in Process	Building and Improvements	Irrigation &		Machinery & Equipment	Office Furniture & Equipment	Right of Use Assets
				Lighting	Security
				Systems	System				Total
	$	$	$	$	$	$	$	$	$
Cost
Balance at December 31,	994	6,786	14,715	809	703	1,083	1,350	—
2018									26,440
Effect of adoption of	—	—	—	—	—	—	—	234
IFRS 16, January 1,
2019									234
Additions	3,419	18,543	16,105	204	39	4,330	701	3,918	47,259
Effect of derecognition	—	—	—	—	—	—	—	(894 )	(894 )
Additions on	372	6,044	18,518	—	—	4,053	1,073	17,356
acquisitions									47,416
Impairment	—	(2,121 )	—	—	—	(184 )	—	—	(2,305 )
Effects of movements in	(79 ) 4,706	(157 ) 29,095	(657 ) 48,681	— 1,013	— 742	(114 ) 9,168	(48 ) 3,076	(488 ) 20,126
foreign exchange									(1,543 )
Balance at December 31,
2019									116,607

Accumulated	—	—	644	46	105	—	218	—
Depreciation
Balance at December 31,
2018									1,013
Depreciation	—	—	855	42	143	263	514	1,159	2,976
Effects of movements in	— —	— —	(13 ) 1,486	— 88	— 248	(3 ) 260	5 737	(21 ) 1,138
foreign exchange									(32 )
Balance at December 31,
2019									3,957

Net book value at	4,706	29,095	47,195	925	494	8,908	2,339	18,988
December 31, 2019									112,650

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

11. Intangible assets and goodwill

Software & Licenses $ Intellectual Property $ Brand Name $ Customer Relationships $ Non- Compete Agreements $ Goodwill $	Software & Licenses $ Intellectual Property $ Brand Name $ Customer Relationships $ Non- Compete Agreements $ Goodwill $	Software & Licenses $ Intellectual Property $ Brand Name $ Customer Relationships $ Non- Compete Agreements $ Goodwill $	Software & Licenses $ Intellectual Property $ Brand Name $ Customer Relationships $ Non- Compete Agreements $ Goodwill $	Software & Licenses $ Intellectual Property $ Brand Name $ Customer Relationships $ Non- Compete Agreements $ Goodwill $	Software & Licenses $ Intellectual Property $ Brand Name $ Customer Relationships $ Non- Compete Agreements $ Goodwill $	Software & Licenses $ Intellectual Property $ Brand Name $ Customer Relationships $ Non- Compete Agreements $ Goodwill $
							Total
	$	$	$	$	$	$	$
Cost
Balance atDecember31,2019	2,435	106,531	32,979	5,781	1,753	95,772	245,251
Additions	282	10,071	—	—	—	—	10,353
Additions onStateFloweracquisition	—	4,416	1,761	—	394	8,253	14,824
Impairment	—	—	—	(672)	—	—	(672)
Effects of movements in foreign exchange 58 11,064 3,100 497 157 9,534
exchange	58	11,064	3,100	497	157	9,534	24,410
Balance at March 31, 2020	2,775	132,082	37,840	5,606	2,304	113,559	294,167

Accumulated Amortization
Balance atDecember31,2019	424	1,990	—	1,111	578	—	4,103
Amortization	144	1,378	—	462	34	—	2,018
Impairment	—	—	—	(210)	—	—	(210)
Effects of movements in foreign exchange 5 260 — 118 55 —
exchange	5	260	—	118	55	—	438
Balance at March 31, 2020	573	3,628	—	1,481	667	—	6,349

Net book value at March 31, 2020	2,202	128,454	37,840	4,125	1,637	113,559	287,818

For the three months ended March 31, 2020, $545 (March 31, 2019 – $nil) of amortization was capitalized into biological assets and inventory and expensed to cost of sales upon the sale of goods.

During the three months ended March 31, 2020, the Company capitalized $9,782 (US$7.5 million) related to two success fees payable to an entity controlled by the minority shareholders of NJ. The first success fee payment of $4,891 (US$3.75 million) was due upon NJ being granted an Alternative Treatment Center (“ATC”) license in the state of New Jersey. The first success fee payment was settled in shares on March 25, 2020 at a fair value determined on the date NJ received the license. The second success fee payment of $4,891 (US$3.75 million) is due upon NJ making its first sale of medicinal marijuana to a patient in compliance with the New Jersey Compassionate Use Marijuana Act (Note 24), which management believes is probable to occur during fiscal 2020. The payments were capitalized as an intellectual property intangible asset as costs to obtain the ATC license. The useful life of the assets is based on the ATC license.

At the end of each reporting period, the Company assesses whether there were events or changes in circumstances that would indicate that a Cash Generating Unit (“CGU”) or group of CGUs were impaired. The Company considers external and internal factors, including overall financial performance and relevant entity-specific factors, as part of this assessment. With respect to the Company’s Florida CGU, a reduction in forecasted revenue driven by the cessation of a distribution agreement as well as the COVID-19 pandemic was identified as an indicator of impairment.

Florida CGU

The Company’s Florida CGU grouping represents its operations dedicated to the sale of hemp derived products within the state of Florida. This CGU grouping is attributed to the Company’s United States operating segment. The recoverable amount of the Florida CGU was determined based on a fair value less costs to dispose (“FVLCD”) method using level 3 inputs in a discounted cash flow (“DCF”) model.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

11. Intangible assets and goodwill (continued)

The significant assumptions applied in the determination of the recoverable amount are described as follows:

i) Cash flows: Estimated cash flows forecasted for a total of five years (terminal year thereafter); ii) Terminal value growth rate: Based on historical and projected consumer price inflation, historical and projected economic indicators, and projected industry growth;
iii) Post-tax discount rate: Reflective of the CGUs weighted average cost of capital, estimated based on the risk-free rate, equity risk premium, beta adjustment to the equity risk premium based on a direct comparison approach, an unsystematic risk premium, and post-tax cost of debt based on bond yields;
iv) Tax rate: tax rates used were those substantively enacted at the valuation date.

Key assumptions used in calculating the recoverable amount for the Florida CGU were: terminal value growth rate - 3%; discount rate – 19.5%; forecasted sales growth rate – 17.9%; and recoverable amount - $18,724. As a result of the impairment test, management concluded that the carrying value was lower than the recoverable amount and recorded no impairment related to goodwill. An increase in the discount rate of 50 basis points would cause an impairment in the CGU grouping related to goodwill. The Company recorded impairment of $462 related to its customer relationships as a result of its termination of an agreement with one of its wholesale distributors.

Intangible assets for the year ended December 31, 2019 were as follows:

	Software $	Intellectual Property $	Brand Name $	Customer Relationships $	Non- Compete Agreements $	Goodwill $	Total $

Cost
Balance atDecember31,2018	1,698	417	—	—	—	—	2,115
Additions	955	30	740	—	—	—	1,725
Additions on Grander	10	—	1,861	5,887	1,794	6,647	16,199
acquisition
Additions on Apothecarium	—	30,435	19,064	—	—	64,665	114,164
acquisition
Additions on Solace Rx	—	—	—	—	—	2,407	2,407
acquisition
Additions on Ilera acquisition	—	78,494	16,030	—	—	91,089	185,613
Impairment	(223 )	(417 )	(3,865 )	—	—	(66,213 )	(70,718 )
Effects of movements in foreign	(5 )	(2,428 )	(851 )	(106 )	(41 )	(2,823 )	(6,254 )
exchange
Balance at December 31, 2019	2,435	106,531	32,979	5,781	1,753	95,772	245,251

Accumulated Amortization
Balance atDecember31,2018	69	21	—	—	—	—	90
Amortization	429	2,064	—	1,242	605	—	4,340
Impairment	(74 )	(64 )	—	—	—	—	(138 )
Effects of movements in foreign	—	(31 )	—	(131 )	(27 )	—	(189 )
exchange
Balance at December 31, 2019	424	1,990	—	1,111	578	—	4,103

Net book value at December	2,011	104,541	32,979	4,670	1,175	95,772	241,148
31, 2019

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

12. Loans payable

		Credit facility		Mortgage payable		Loans from related parties		Canopy Rivers Loan		Canopy Growth Financing		March 31, 2020
Opening carrying amount	$	59,691	$	6,428	$	3,247	$	—	$	—	$	69,366
Loanprincipal		—		—		1,963		—		80,127		82,090
Convertedfromconvertible debt		—		—		—		12,833		—		12,833
Less:fairvalue ofwarrants		—		—		—		(3,781)		(26,844)		(30,625)
Interest accretion		1,574		—		—		350		366		2,290
Principalandinterest paid		(64,718)		(32)		—		—		—		(64,750)
Effects of movements in foreign exchange		3,453		—		464		—		—		3,917
Ending carrying amount	$	—	$	6,396	$	5,674	$	9,402	$	53,649	$	75,121
Less: current portion		—		(132)		(5,674)		(198)		(283)		(6,287)
Non-current loans payable	$	—	$	6,264	$	—	$	9,204	$	53,366	$	68,834

Credit Facility

On December 14, 2018, the Company entered into a US$75 million ($97.4 million) credit facility (the “Credit Facility”) with certain funds managed by JW Asset Management LLC, where Jason Wild, Chairman of the Board of TerrAscend, is the President and Chief Investment Officer. The Credit Facility bears interest at 8.75% per annum, with a ($970 (US$0.75 million) origination fee payable on a quarterly basis. Any principal amount drawn will be due in one year and interest will be payable monthly.

On December 2, 2019, the Company and JW Asset Management agreed to an amendment of the Credit Facility whereby upon maturity on March 15, 2020, the Company would be extended a Term Loan for all outstanding principal and interest still outstanding on the Credit Facility. As of December 2, 2019, the interest rate of the Credit Facility was amended to 12.5% per annum. The expected Term Loan bears an interest rate of 12.5% per annum, payable semi-annually and the maturity date is no later than March 15, 2022. On March 11, 2020, a portion of the proceeds received from Canopy Growth loan financing were used to fully pay off the outstanding principal and interest amounts under the Credit Facility with JW Asset Management.

The Credit Facility was recorded at its fair value at inception and subsequently carried at amortized cost.

		March 31, 2020		December 31, 2019
Opening carrying amount	$	59,691	$	12,683
Loanprincipal		—		47,085
Interest expense		1,574		5,105
Principalandinterest paid		(64,718 )		(3,569 )
Effects of movements in foreign exchange		3,453		(1,613 )
Ending carrying amount	$	—	$	59,691

Mortgage Payable

On April 23, 2019, the Company completed a $6,500 mortgage financing secured by its manufacturing facility in Mississauga, bearing interest of 5.5% and a balance due date of May 1, 2022. The mortgage payable is recorded at its fair value at inception and subsequently carried at amortized cost. As at March 31, 2020, the carrying value of the current portion of the mortgage payable is $132, while the long-term portion is $6,264.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

12. Loans payable (continued)

Loan from Related Parties

The Company received loan proceeds of $1,299 (US$1 million), $1,299 (US$1 million), and $649 (US$0.5 million) on November 6, 2019, November 12, 2019, and December 16, 2019, respectively, from key management of the Company’s subsidiary. The loans collectively bear interest at a rate of 12% per annum, payable monthly, and have a balance due date of June 30, 2020.

In January 2020, the Company received additional loan proceeds of $1,963 (US$1.5 million) from key management of the Company’s subsidiary. The loan bears interest at a rate of 12% per annum, payable monthly, and has a balance due date of June 30, 2020. As at March 31, 2020 the total balance owing including accrued interest is $5,674.

Canopy Rivers Loan

On February 5, 2020, the Company and Canopy Rivers Corporation (“Canopy Rivers”) agreed to amend the terms of their previously issued convertible debentures with a face value of $13,243 (US$10 million). Pursuant to the amended terms, the convertible debentures were converted into a $13,243 loan payable bearing interest at a rate of 6% per annum, payable annually, with a balance due date of October 2, 2024. The Company also issued Canopy Rivers 2,225,714 common share purchase warrants, exercisable at $5.95 upon the occurrence of certain triggering events. The warrants were issued such that they can be exercised upon maturity of the loan payable in a cashless exercise by offsetting the principal value of the loan payable.

Canopy Growth Financing

On March 10, 2020, TerrAscend Canada Inc. entered into a loan financing agreement with Canopy Growth in the amount of $80,526 pursuant to a secured debenture. In connection with the funding of the loan, the Company has issued 17,808,975 common share purchase warrants to Canopy Growth.

The secured debenture bears interest at a rate of 6.10% per annum, with an effective interest rate of 11.9%, and matures on March 10, 2030. The debenture is secured by the assets of TerrAscend Canada, is not convertible and is not guaranteed by the Company. The warrants are comprised of 15,656,242 common share purchase warrants entitling Canopy Growth to acquire one common share of TerrAscend at an exercise price of $5.14 per share, expiring on March 10, 2030, and 2,152,733 common share purchase warrants entitling Canopy Growth to acquire one common share of TerrAscend at an exercise price of $3.74 per share, expiring on March 10, 2031. All warrants will be exercisable following changes in U.S. federal laws permitting the cultivation, distribution, and possession of marijuana or to remove the regulation of such activities from the federal laws of the United States. The warrants were issued such that they can be exercised upon maturity of the loan payable in a cashless exercise by offsetting the principal value of the loan payable. The fair value of the debt was calculated using the effective interest rate method, with the residual value allocated to contributed surplus.

Of the total proceeds received from Canopy Growth, $64,718 was used to fully pay off the outstanding principal and interest amounts under the Credit Facility with JW Asset Management and $8,494 is restricted for use in Canadian operations and is held in a segregated bank account (Note 22).

Total interest paid on all loan payables during the three months ended March 31, 2020 was $2,251 (March 31, 2019 – $313).

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

13. Leases

The Company’s lease liabilities for the three months ended March 31, 2020 are as follows:

				December 31,
		March 31, 2020		2019
Openingleaseliability	$	20,729	$	—
Effect ofadoptionof IFRS16, January1,2019		—		234
Additions onGranderasset acquisition		—		169
Additions on Apothecariumacquisition		—		16,126
Additions on Ilera acquisition		—		1,971
Additions onStateFloweracquisition		3,558		—
Non-acquisition related additions		—		2,901
Lease payments		(833)		(1,382)
Interest expense		667		1,259
Effects of movements in foreign exchange		2,149		(549)
Ending lease liability	$	26,270	$	20,729
Less: current portion		(1,479)		(1,157)
Non-current lease liability	$	24,791	$	19,572

The Company recognized a total of $nil expenses related to short-term leases and leases of low-value assets for the three months ended March 31, 2020 (March 31, 2019- $35).

Undiscounted lease obligations are as follows:

Less thanone year	$ 3,000
One tofive years	12,190
More than five years	30,322
Total	45,512

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

14. Convertible debentures

On October 2, 2019, the Company completed the first tranche of a non-brokered private placement of convertible debentures and warrants. The Company issued 13,243 units, having a maturity date of five years from the date of issue and bearing interest at 6% per annum, compounded and payable annually, at face value of $13,243. Each unit comprises one convertible debenture and 25.2 common share purchase warrants. The convertible debentures are convertible at the holders’ option into common shares of the Company at a conversion price of $5.95.

On November 16, 2019, the Company completed the second tranche of the non-brokered private placement noted above. The Company issued 4,763 convertible debentures under the same terms, at face value of $4,763. On November 26, 2019, the Company completed the third tranche of the non-brokered private placement noted above. The Company issued 2,654 convertible debentures under the same terms, at face value of $2,654.

		March 31, 2020		December 31, 2019
Opening carrying amount	$	13,874	$	—
Convertible debenturesissued,net oftransactioncosts		—		20,343
Less:fairvalue ofconversionoption		—		(5,798)
Less:fairvalue ofwarrants		—		(863)
Convertedloanpayable		(9,052)		—
Interest accretion		199		192
Ending carrying amount	$	5,021	$	13,874
Less: current portion		(111)		—
Non-current convertible debt		4,910		13,874

The fair value of the equity portion was calculated as the residual value after determining the fair value of the convertible debentures using the effective interest method. The fair value of the equity portion is allocated to the conversion option and warrants using the relative fair value method.

On February 5, 2020, the Company amended the terms of its previously announced $13,243 (US$10 million) convertible debenture issuance to Canopy Rivers. Under the original terms the issuance had a maturity date of five years, bore interest at 6% per annum, compounded and payable annually, and were convertible at the holders’ option into common shares of the Company at a conversion price of $5.95. Pursuant to the amended terms, the debentures have been converted into a $13,243 loan agreement entered into between Canopy Rivers and the Company. Interest on the principal amount outstanding will accrue at a rate of 6% per annum and all interest payments are payable in cash. The effective interest rate on the loan is 15.4%. The principal amount matures on October 2, 2024. The Company has also issued 2,225,714 common share purchase warrants, exercisable at $5.95 and expiring on October 2, 2024. The carrying value of the debt was converted to a loan payable as of the amendment date (Note 12). The amendment resulted in a reallocation of the previously recorded conversion option to warrants reserve in contributed surplus and had no impact on the consolidated statement of loss.

15. Share capital and contributed surplus

Authorized share capital

The authorized share capital of the Company consists of an unlimited number of common shares, unlisted proportionate voting shares, and unlisted exchangeable shares.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

15. Share capital and contributed surplus (continued)

Outstanding share capital

		Exchangeable Shares	Proportionate Voting Shares	Amount $
	Common
	Shares
Outstanding, December 31, 2018	41,147,636	38,890,571	35,022	64,883
Sharesissued–warrant exercises	959,772	—	28,636	33,179
Sharesissued–stockoptionexercises	1,101,562	—	—	2,620
Sharesissued–acquisitionofGranderassets	1,362,343	—	—	6,729
Sharesissued–acquisitionof Apothecarium	—	—	6,700	41,259
Sharesissued–acquisitionof Ilera	—	—	5,059	27,488
Sharesissued–private placementnet ofshareissue costs	21,992,009	—	—	97,110
Issuance ofconvertible units	—	—	—	614
Warrantsissued	—	—	—	(29,820 )
Reallocation fromwarrantsreserve	—	—	—	13,701
Reallocation from share-based payment reserve	—	—	—	2,129
Outstanding, December 31, 2019	66,563,322	38,890,571	75,417	259,892
Sharesissued–private placementnet ofshareissue costs	5,313,786	—	—	12,782
Shares issued – compensation for services	1,625,701	—	—	4,891
Outstanding, March 31, 2020	73,502,809	38,890,571	75,417	277,565

Private Placements

On May 15, 2019, the Company completed the first tranche of a private placement and issued 5,257,662 common shares at a price of $7.64 per common share for total proceeds of $40,169. On May 27, 2019, the Company completed the second tranche and issued 3,766,022 common shares at a price of $7.64 per common share for total proceeds of $28,772. Total proceeds of the private placement were $67,176, net of share issue costs of $1,765.

On December 30, 2019, the Company completed the first tranche of a private placement and issued 12,968,325 units at a price of $2.45, each comprised of one common share and one common share purchase warrant, for total proceeds of $31,772. The Company allocated proceeds of $29,933, net of share issue costs of $541, to the common shares. At December 31, 2019, share subscriptions receivable totalled $31,772 and was collected subsequent to yearend.

On January 10, 2020, the Company closed the second tranche of the non-brokered private placement announced on December 30, 2019, issuing 3,450,127 units at an issue price of $2.45 per unit, resulting in proceeds of $8,343, net of share issue costs of $110. Each unit consists of one common share and one common share purchase warrant, exercisable into one common share prior to January 14, 2022 at an exercise price of $3.25.

On January 27, 2020, the Company closed the third tranche of the non-brokered private placement announced on December 30, 2019, issuing 1,863,659 units at an issue price of $2.45 per unit, resulting in proceeds of $4,439, net of share issue costs of $127. Each unit consists of one common share and one common share purchase warrant, exercisable into one common share prior to January 14, 2022 at an exercise price of $3.25.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

15. Share capital and contributed surplus (continued)

Share-based payments

On March 25, 2020, the Company issued 1,625,701 common shares to Regulatory Consulting Group Inc., an entity controlled by the minority shareholders of NJ, pursuant to a success fee surrounding the granting of certain licenses in the state of New Jersey to NJ. The issuance of theses shares resulted in the Company capitalizing licensing costs of $4,891.

Warrants reserve

The following is a summary of the outstanding warrants for Common Shares as at March 31, 2020 and December 31, 2019.

					Weighted
					Average	Weighted
	Number of	Number of			Exercise	Average
Number outstanding as at March 31,	Warrants	Warrants	Issue	Expiry	Price	Remaining
2020	Outstanding	Exercisable	Date	Date	$	Life (years)
Issuedinpaymentforservices	320,000	160,000	06/06/18	06/06/23	4.16	3.18
Issued inpayment for services	70,000	70,000	08/09/18	08/09/23	4.25	3.36
Issuedinconvertible debt	333,723	333,723	10/02/19	10/02/24	6.49	4.51
Issued in convertible debt	120,027	120,027	11/06/19	11/06/24	6.49	4.61
Issuedinconvertible debt	66,880	66,880	11/26/19	11/26/24	6.49	4.66
Issued during privateplacement	12,968,325	12,968,325	12/30/19	01/14/22	3.25	1.79
Issued during private placement	3,450,127	3,450,127	01/10/20	01/14/22	3.25	1.79
Issued during privateplacement	1,863,659	1,863,659	01/27/20	01/14/22	3.25	1.79
Issuedindebt arrangement	2,225,714	—	02/05/20	10/02/24	5.95	4.51
Issued in debt arrangement	15,656,242	—	03/11/20	03/10/30	5.14	9.95
Issued in debt arrangement	2,152,733	—	03/11/20	03/10/31	3.74	10.95
	39,227,430	19,032,741			4.24	5.75

					Weighted
					Average	Weighted
	Number of	Number of			Exercise	Average
Number Outstanding as at December	Warrants	Warrants	Issue	Expiry	Price	Remaining
31, 2019	Outstanding	Exercisable	Date	Date	$	Life (years)
Issued inpayment for services	320,000	160,000	06/06/18	06/06/23	4.16	3.43
Issuedinpaymentforservices	70,000	70,000	08/09/18	08/09/23	4.25	3.61
Issued in convertible debt	333,723	333,723	10/02/19	10/02/24	6.49	4.76
Issuedinconvertible debt	120,027	120,027	11/06/19	11/06/24	6.49	4.85
Issued in convertible debt	66,880	66,880	11/26/19	11/26/24	6.49	4.91
Issued during private placement	12,968,325	12,968,325	12/30/19	01/14/22	3.25	2.04
	13,878,955	13,718,955			3.40	2.18

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

15. Share capital and contributed surplus (continued)

The fair value of private placement warrants issued during the three months ended March 31, 2020 were estimated on their respective grant dates using the Black-Scholes valuation model based on the following assumptions:

Issue date		January 27, 2020		January 10, 2020
Volatility		87.50 %		87.50 %
Risk-freeinterestrate		1.44 %		1.65 %
Expectedlife (years)		2.00		2.00
Dividend yield		Nil		Nil
Forfeiturerate		0 %		0 %
NumberofWarrantsissued		1,863,659		3,450,127
Share price	$	2.94	$	2.71
Value per warrant	$	—	$	—

The relative fair value of the warrants issued in connection with the Canopy Growth financing were determined using the residual value method and recorded as a reduction to contributed surplus.

The following is a summary of the outstanding warrants for Proportionate Voting Shares as at March 31, 2020. These warrants are exercisable for 0.001 of a Proportionate Voting Share. The Proportionate Voting Shares are exchangeable into Common Shares on a basis of 1,000 Common Shares per Proportionate Voting Share.

					Weighted
					Average	Weighted
	Number of	Number of			Exercise	Average
Number outstanding as at March 31,	Warrants	Warrants	Issue	Expiry	Price	Remaining
2020	Outstanding	Exercisable	Date	Date	$	Life (years)
Issued as incentive compensation	8,590,908	8,590,908	08/23/19	08/23/22	7.21	2.40
	8,590,908	8,590,908			7.21	2.40

On August 23, 2019, the Company issued 8,590,908 warrants for proportionate voting shares to JW Entities, as incentive warrants upon the exercise of 28,636,361 warrants for common shares. The fair value of these warrants issued were determined using the Black-Scholes model at a value of $29,820 and recorded as a reduction to share capital.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

15. Share capital and contributed surplus (continued)

Options

The Company’s Stock Option Plan (the “Plan”) provides for the granting of stock options to directors, officers, employees, and consultants of the Company. Share options are granted for a term not to exceed ten years at an exercise price which is the greater of the closing market price of the shares on the CSE on the trading day immediately preceding the date the options are granted and on the same day of the option grant, in accordance with CSE policy. The options are not transferrable. The Plan is administered by the Board of Directors, which determines individual eligibility under the Plan, number of shares reserved for optioning to each individual (not to exceed 5% of issued and outstanding shares to any one individual) and the vesting period. The maximum number of shares of the Company that are issuable pursuant to the Plan is limited to 10% of the issued and outstanding shares of the Company as at the date of the grant of options.

The fair value of the various stock options granted during the three months ended March 31, 2020 were estimated using the Black-Scholes option pricing model with the following weighted average assumptions: Stock price volatility – 87.09% (March 31, 2019 – 97%); Risk-free interest rate – 0.68% to 1.62% (March 31, 2019 – 1.44% to 1.96%); Dividend yield – 0% (March 31, 2019 – 0%); Forfeiture rate – 26.5% (March 31, 2019 – 26.5%); and Expected lives – 5 years (March 31, 2019 – 5 years).

The following is a summary of the changes in the Company’s options for the three months ended March 31, 2020, and year ended December 31, 2019.

		Weighted
		Average	Weighted
		Remaining	Average
	Number of	Life in	Exercise
	Options	Years	Price $
Balance Outstanding at December 31, 2018	8,473,129	5.88	4.28
Options Granted	6,844,000	N/A	6.69
OptionsExercised	(1,117,936 )	N/A	2.45
Options Forfeited/Cancelled	(3,706,178 )	N/A	5.71
Balance Outstanding at December 31, 2019	10,493,015	4.04	5.53
Options Granted	3,500,000	N/A	2.49
Options Forfeited/Cancelled	(1,120,534 )	N/A	5.75
Balance Outstanding as at March 31, 2020	12,872,481	4.10	4.68

The following is a summary of the outstanding stock options as at March 31, 2020 and December 31, 2019.

			Weighted Average
Number Outstanding as at		Weighted Average	Remaining Contractual	Number Exercisable as at
March 31, 2020		Exercise Price	Life (years)	March 31, 2020
12,872,481	$	4.68	4.10	2,128,054
			Weighted Average
Number Outstanding at		Weighted Average	Remaining Contractual	Number Exercisable at
December 31, 2019		Exercise Price	Life (years)	December 31, 2019
10,493,015	$	5.53	4.04	2,443,578

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

15. Share capital and contributed surplus (continued)

At March 31, 2020, the weighted average exercise price of options outstanding and options exercisable was $4.68 (December 31, 2019 – $5.53) and $3.41 (December 31, 2019 – $3.65) respectively.

Contributed surplus

The Company’s contributed surplus balances include the following:

		Share-
		based
	Warrants	payments	Contributed
	reserve	reserve	surplus	Total
Outstanding, December 31, 2018	14,335	7,849	—	22,184
Share-based compensation	587	12,236	—	12,823
Exercise ofstockoptions	—	(2,129)	—	(2,129)
Exercise ofwarrants	(13,701)	—	—	(13,701)
Private placement	1,298	—	—	1,298
Issuance ofproportionate voting warrants	29,820	—	—	29,820
Issuance ofconvertible units	863	—	4,005	4,868
Warrants expired	(2)	—	—	(2)
Options expired/forfeited	—	(384)	—	(384)
Outstanding, December 31, 2019	33,200	17,572	4,005	54,777
Share-based compensation	70	3,039	—	3,109
Issuance ofconvertible debt	26,844	—	—	26,844
Reallocation on Canopy Rivers convertible debt
amendment	3,781	—	(3,781)	—
Options expired/forfeited	—	(2,535)	—	(2,535)
Outstanding, March 31, 2020	63,895	18,076	224	82,195

16. Non-controlling interest

Non-controlling interest at March 31, 2020 was $7,576 (December 31, 2019- $8,650) and consisted of the following amounts:

		March 31,		December 31,
		2020		2019
Opening carrying amount balance	$	8,650	$	1,431
Additions of non-controllinginterest onacquisitiondate		—		8,154
Capitalcontributions (paid)received		(322 )		2,346
Netloss attributable tonon-controllinginterest		(658 )		(3,164 )
Effects of movements in foreign exchange		(94 )		(117 )
Endingcarryingamount balance	$	7,576	$	8,650

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

17. Related parties

(a) Key management includes directors and officers of the Company. Total compensation, comprised of salaries and share-based payments, awarded to key management for the three months ended March 31, 2020 and March 31, 2019 respectively were as follows:

2020 and March 31, 2019 respectively were as follows:
		March 31,		March 31,
		2020		2019
Salaries and wages	$	965	$	416
Share-based payments		830		17
Total	$	1,795	$	433

(b) During the three months ended March 31, 2020, the Company had sales of $nil (March 31, 2019 - $6,732) to Canopy Growth and other income of $nil (March 31, 2019 - $3) related to patient referral fees. There are no amounts payable or receivable to or from Canopy Growth at March 31, 2020 or December 31, 2019.
(c) On August 26, 2019, the Company issued 8,590,908 Proportionate Voting Share purchase warrants as incentive compensation to entities controlled by Jason Wild, Chairman of the Board of TerrAscend. Each warrant is exercisable at $7.21 per 0.001 share and expires at 36 months from the respective closing date. These warrants resulted in a reduction in share capital of $29,820.
(d) On December 14, 2018, the Company agreed to terms on a US$75 million credit facility with certain funds managed by JW Asset Management LLC, where Jason Wild, Chairman of the Board of TerrAscend, is the President and Chief Investment Officer. On March 11, 2020, the Company repaid the entire line of credit amount. Refer to note 12 for details.
(e) The Company received loan proceeds of $3,247 (US$2.5 million) and $1,958 (US$1.5 million) during the year ended December 31, 2019 and the three months ended March 31, 2020 respectively, from key management of the Company’s subsidiary. The loans collectively bear interest at a rate of 12% per annum, payable monthly, and have a balance due date of June 30, 2020. As at March 31, 2020 the total balance owing including accrued interest is $5,674. See Note 12 for details.
(f) On March 25, 2020, the Company issued 1,625,701 common shares to Regulatory Consulting Group Inc., an entity controlled by the minority shareholders of NJ, pursuant to a success fee surrounding the granting of certain licenses in the state of New Jersey to NJ (Note 11).
(g) As at March 31, 2020, the Company has a loan payable to Canopy Rivers with a face value of $13,243 and a discounted value of $9,402. During the three months ended March 31, 2020, the Company has not repaid any portion of the principal or interest of the loan outstanding. Refer to note 12 for details.
(h) As at March 31, 2020, the Company has a loan payable to Canopy Growth with a face value of $80,526 and a discounted value of $53,649. During the three months ended March 31, 2020, the Company has not repaid any portion of the principal or interest of the loan outstanding. Refer to note 12 for details.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

18. Income taxes

The reconciliation of the combined Canadian and U.S. federal and provincial and state corporate income taxes, and to the Company’s effective income tax expenses is as follows:

to the Company’s effective income tax expenses is as follows:
		31-Mar-20		31-Mar-19
Loss beforeincome tax	$	(5,506) $		(11,060)
Statutory tax rate		26.5%		26.5%
Expectedincome tax recovery		(1,459)		(2,931)

Effect on income taxes ofdeductible &non-deductible adjustments
IRC280Eadjustment		2,672		—
Transactioncosts andlegal fees adjustment		12		—
FIN48liability change		830		—
Foreign income taxes at different statutoryrate		791		—
Lease adjustment		—		—
Share based compensationandnon-deductible expenses		277		2,561
Changesintaxbenefitsnotrecognized		4,859		—
Other adjustments		376		—
Income tax expense (recovery)	$	8,358	$	(370)
The Company'sincome taxexpense (recovery)is allocated asfollows:
Current taxexpense	$	5,865	$	—
Deferred tax expense (recovery)		2,493		(370)
Income tax expense (recovery)	$	8,358	$	(370)

The Company’s combined Canadian federal and provincial statutory rates are at 26.5% (December 31, 2018 – 26.5%)

As many of the Company’s U.S. subsidiaries operate in the cannabis industry and are subject to the limitations of IRC Section 280E explained below, the impact results in a permanent tax difference as a disallowed tax deduction. Therefore, the U.S. effective tax rate can be highly variable and may not necessarily correlate with pre-tax income or loss due to the material impact of Section 280E.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

18. Income taxes (continued)

The Company’s current tax liability of $29,827 as of March 31, 2020 (December 31, 2019 – $21,276) includes a liability related to a tax matter arising from application of United States Internal Revenue Code (“IRC”) Section 280E to the Apothecarium. Under Section 280E, all ordinary and necessary business deductions are disallowed if the taxpayer’s trade or business is “trafficking” in a Schedule I or II Controlled Substance under the Controlled Substances Act. Cannabis remains a Schedule I controlled substance. While the Internal Revenue Service (the “IRS”) accepted that the figures on the filed tax returns were substantiated and accurate, it nevertheless sought a complete disallowance of certain expenses under Section 280E for income tax returns for the fiscal years ended September 30, 2014 and September 30, 2015. Through deficiency notices, the IRS asserted that the Apothecarium is liable for a tax deficiency for each of these tax years as well as negligence penalties pursuant to IRC Section 6662(d). The Company disagreed with the IRS assertion and filed a petition with the US Tax Court contesting the IRS’s findings and challenging its calculations regarding the disallowed deductions. While the Company cannot predict the outcome and timing of the case at this time, it has recorded a liability of $21,915 related to the years covered by the tax deficiency notices and certain other years, as at March 31, 2020 (December 31, 2019- $19,261). On the acquisition of the Apothecarium, the seller set aside cash in an escrow account to be used on future tax indemnifications. As at March 31, 2020, an indemnification asset of $16,315 has been recorded on the statement of financial position (December 31, 2019 – $14,936).

Movement in net deferred tax liabilities:

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----- Start of picture text -----

31-Mar-20 31-Dec-19
----- End of picture text -----

Balance at the beginning ofthe year	$	(26,981)	$	(688)
Recognizedinprofit/loss		(2,440)		2,346
Recognizedingoodwill		(643)		(28,090)
Recognizedinequity		—		(1,195)
Other		(97)		—
Cumulative translation adjustment		(2,074)		646
Balance at the end of the period	$	(32,235)	$	(26,981)

19. General and administrative expenses by nature

The Company’s general and administrative expenses for the three months ended March 31, 2020 and 2019 are as follows:

follows:
		For the three months ended
		March 31, 2020	March 31, 2019
Office and general	$	3,738	$	949
Professional fees		1,747		2,755
Occupancy costs		858		225
Salaries and wages		7,436		3,009
Sales and marketing		637		1,703
Travel		184		180
Total	$	14,600	$	8,821

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

20. Segment disclosure

The Company has one operating segment, being the cultivation and sale of cannabis, with subsidiaries located in Canada and the United States.

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----- Start of picture text -----

Canada United States Total
As at March 31, 2020
Current assets $ 32,618 $ 52,314 $ 84,932
Non-current assets 44,910 395,787 440,697
Current liabilities 8,493 271,984 280,477
Non-current liabilities 74,073 56,697 130,770
For the three months ended March 31, 2020
----- End of picture text -----

For the three months ended March 31, 2020
Sales,net	$	3,842	$	30,956	$	34,798
Gross profit (loss) before gain on fair value of biological
assets		(2,066 )		17,612		15,546
Gross (loss) profit		(2,074 )		26,265		24,191
Income(loss)from operations		(8,913 )		13,843		4,930
Net loss attributable to controlling interest		(10,542 )		(2,664 )		(13,206 )
		Canada		United States		Total
As at December 31, 2019
Current assets	$	53,131	$	37,602	$	90,733
Non-current assets		45,015		325,018		370,033
Currentliabilities		9,822		133,042		142,864
Non-current liabilities		20,529		222,044		242,573
For the three months ended March 31, 2019
Sales,net	$	8,860	$	5,722	$	14,582
Gross profit (loss) before gain on fair value of biological
assets		(128 )		1,635		1,507
Grossprofit		299		1,635		1,934
Lossfromoperations		(7,006 )		(2,664 )		(9,670 )
Net loss attributable to controlling interest		(7,591 )		(2,939 )		(10,530 )

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

21. Supplemental cash flow information

Non-cash transactions during the three months ended March 31, 2020 and 2019 are as follows:

	For the three months ended	For the three months ended
	March 31,	March 31,
	2020	2019
Sharesissued as consideration foracquisitionofGrander	—	7,372
Sharesissued toRegulatory Consulting Group	4,891	—
Right ofuse assets additions	—	3,465
Fair value of harvested plants transferred to inventory	13,760	461

The changes in non-cash working capital items during the three months ended March 31, 2020 and 2019 are as follows:

follows:
	For the three	months ended
Receivables	March 31, 2020 March 31, 2019 $ (189) $ (3,832)
Biologicalassets	—	—
Inventory	(5,173)	4,685
Prepaid expenses and deposits	780	(101)
Deferred costs	—	(24)
Accounts payable and accruedliabilities	(3,309)	(8,500)
Corporateincome taxpayable	2,686	—
Deferred revenue	(286)	293
	(5,491)	(7,479)

22. Capital management and restricted cash

The Company’s objective in managing capital is to ensure a sufficient liquidity position to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders. In order to achieve this objective, the Company prepares a capital budget to manage its capital structure. The Company defines capital as borrowings, equity comprised of issued share capital, share-based payments, accumulated deficit, as well as funds borrowed from related parties.

Since inception, the Company has primarily financed its liquidity needs through the issuance of Common Shares. On December 14, 2018, the Company agreed to terms on a US$75 million credit facility of which the Company had borrowed US$45.5 million. On March 10, 2020, TerrAscend Canada Inc. entered into a loan financing agreement with Canopy Growth in the amount of $80,526 pursuant to a secured debenture. On March 11, 2020, a portion of the proceeds received from Canopy Growth loan financing were used to fully pay off the outstanding principal and interest amounts under the Credit Facility with JW Asset Management.

There have been no changes to the Company’s objectives pertaining to capital management during the three months ended March 31, 2020 or during the year ended December 31, 2019. The Company is not subject to externally imposed capital requirements.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

22. Capital management and restricted cash (continued)

The Company holds an escrowed cash balance of $7,132 related to funds restricted to the use of extinguishing its mortgage payable related to its Canadian facility. Additionally, under the terms of the Canopy Growth Financing agreement, $8,494 of the proceeds received is restricted for use in Canadian operations and is held in a segregated bank account.

23. Financial instruments and risk management

Financial instruments

The Company has classified its cash and cash equivalents, notes receivable, investments, and contingent consideration payable as fair value through profit and loss (“FVTPL”), and receivables (excluding sales tax receivable), accounts payable and accrued liabilities, loans payable, and convertible debentures as amortized cost.

Fair value hierarchy

Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The hierarchy is summarized as follows:

Level 1 – quoted prices (unadjusted) in active markets for identical assets and liabilities

Level 2 – inputs 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

The carrying values of cash and cash equivalents, note receivable, lease receivable, receivables, F&F warrants, accounts payable and accrued liabilities, income tax payable, convertible debentures, and loan payable approximate their fair values due to their short periods to maturity. The fair value of the F&F warrants (Note 6) and contingent consideration (Note 7) have been determined based on Level 2 and Level 3 of the fair value hierarchy, respectively.

Financial risk factors

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, other receivables, and notes receivable. The Company’s cash and cash equivalents are held at a major Canadian bank. The 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 condensed interim consolidated statements of loss and comprehensive loss. When a trade receivable balance is considered uncollectible, it is written off against the allowance for expected credit losses. Management has reviewed the items comprising the accounts receivable balance and determined that the majority of accounts are collectible; accordingly, allowance for doubtful accounts of $511 (December 31, 2019– $607) have been recorded. Subsequent recoveries of amounts previously written off are credited against operating expenses in the condensed interim consolidated statements of loss and comprehensive loss. 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 at March 31, 2020 and December 31, 2019.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

23. Financial instruments and risk management (continued)

The following tables set forth details of trade receivables, including aging of trade receivables that are not overdue, as well as an analysis of overdue amounts and related allowance for doubtful accounts and sales return provisions:

				December 31,
		March 31, 2020		2019
Tradereceivables	$	8,402	$	7,994
Less: provision for sales returns and allowances		(1,920)		(2,617)
Total trade receivables, net	$	6,482	$	5,377
Ofwhich
Current	$	7,567	$	6,506
31-90 days		83		880
Over90 days		752		608
Less: provision for sales returns and allowances		(1,920)		(2,617)
Total trade receivables, net	$	6,482	$	5,377

(b) Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company is exposed to liquidity risk or the risk of not meeting its financial obligations as they come due. The Company monitors and manages its cash flows to assess the liquidity necessary to fund operations. As at March 31, 2020, the Company had a cash and cash equivalents, restricted cash, and receivables balance of $39,349 (December 31, 2019- $25,509) to settle current liabilities of $280,477 (December 31, 2019- $142,864). All of the Company's financial current liabilities have contractual maturities of less than one year with trade accounts payable being due within 30 days on average. Contingent consideration arising from acquisitions are due as specified and as per conditions in the various acquisition agreements. The Company manages liquidity risk through access to public capital markets. On March 10, 2020, TerrAscend Canada Inc. entered into a 10-year maturity loan financing agreement with Canopy Growth in the amount of $80,526 with interest of 6.10% per annum payable annually. The Company used part of the proceeds from a loan financing agreement with Canopy Growth to fully pay off the Credit Facility with JW Asset Management (see Note 12).

(c) Market Risk

The significant market risk exposures to which the Company is exposed are foreign currency risk, interest rate risk and other price risk.

i) Foreign currency risk:

Foreign currency risk is the risk that a variation in exchange rates between the Canadian dollar and United States dollar and other foreign currencies will affect the Company’s operations and financial results.

The Company and its subsidiaries do not hold significant monetary assets or liabilities in currencies other than their functional currency and as a result the Company is not exposed to significant currency risk. Therefore, the Company has not entered into any agreements or purchased any instruments to hedge possible currency risks at this time.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

23. Financial instruments and risk management (continued)

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.

In respect of financial liabilities, the Company’s loan payables have fixed interest rates of 6.0% 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.

24. Commitments and contingencies

On October 15, 2018, the Company’s wholly owned subsidiary TerrAscend Canada entered into a multi-year cultivation agreement with PharmHouse Inc. (“PharmHouse”), a joint venture between Canopy Rivers and the principals and operators of a leading North American greenhouse produce company. Under the terms of the agreement, PharmHouse will grow and supply cannabis to TerrAscend Canada from an existing 1.3 million square foot greenhouse located in Leamington, Ontario. Once fully licensed, the production of flower, trim and clones from up to 20% of the dedicated flowering space at the greenhouse will be made available to TerrAscend Canada.

On October 20, 2018, Investments International Inc. (“Investments”) signed a lease agreement with the Company and its wholly owned subsidiaries, 2627685 Ontario Inc. and 2151924 Alberta Inc. On February 8, 2019, Investments filed a statement of claim under the Court of Alberta against the Company and its wholly owned subsidiaries, for breach of the lease agreement. The amount claimed is $2,700 plus interest from and after the termination date of an unexecuted lease. The Company has paid initial lease deposits in addition to submitting a statement of defence. The Company does not expect the claim to have a material adverse impact on the Company and no amount has been accrued in the condensed interim consolidated statements of loss.

On March 31, 2020, the Company’s subsidiary, TerrAscend Canada Inc., signed an amended agreement with MediPharm Labs Inc. (“MediPharm”) whereby TerrAscend Canada Inc. agreed to purchase from MediPharm certain quantities of cannabis crude oil and/or distillate. The maximum purchase commitments under this agreement are $4,800.

Pursuant to the success fee noted in Note 11, a second success fee payment of $4,981 (US$3.75 million) is due upon NJ making its first sale of medicinal marijuana to a patient in compliance with the New Jersey Compassionate Use Marijuana Act. The Company expects to make its first sale of medicinal marijuana in accordance with the above noted terms some time in fiscal 2020.

Subsequent to quarter-end on April 17, 2020, the Company’s subsidiary, the Apothecarium, entered into a lease agreement to rent retail storefront in Oxnard, California. The term of the lease is 120 months with two options to extend the term for 60 months each. The lease term does not commence until the earlier of the date the required permits have been issued by the City of Oxnard’s Commercial Cannabis Business Retail unit and January 1, 2021. Total lease payments over the initial term of the lease amount to $4,372 (US$3.08 million).

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Amounts expressed in thousands of Canadian dollars, except for per share amounts)

25. Subsequent events

i) On April 14, 2020, the Company announced the appointment of Jason Ackerman as the Chief Executive Officer. In addition, the Company announced its plans to relocate its financial operations to the US headquarters of New York City and as part of the move, Toronto-based Adam Kozak resigned as the Chief Financial Officer.
ii) On April 17, 2020, the Company’s subsidiary, the Apothecarium, entered into a lease agreement to rent a retail storefront in Oxnard, California. The term of the lease is 120 months with two options to extend the term for 60 months each. The lease term does not commence until the earlier of the date the required permits have been issued by the City of Oxnard’s Commercial Cannabis Business Retail unit and January 1, 2021. Total lease payments over the initial term of the lease amount to $4,372 (US$3.08 million).
iii) On April 24, 2020, the Company announced the appointment of Keith Stauffer as Chief Financial Officer.
iv) On May 19, 2020, the Company announced a non-brokered private placement to issue units for gross proceeds of approximately US$30 million, with the ability, at the Company’s discretion, to upsize the amount to aggregate gross proceeds of between US$35 million and US$40 million. The Company has received initial investor commitments totaling US$28 million, including a US$20 million lead order from JW Asset Management LLC. Each unit shall be issued at a price of US$2 thousand per unit and is comprised of one convertible preferred share in the capital of the Company and one convertible preferred share purchase warrant. Each warrant will entitle the holder to purchase one convertible preferred share in the capital of the Company at a price of US$3 thousand per share and expire 36 months from the date of issuance. Each convertible preferred share converts to 1,000 common shares (for non-U.S. investors) and the economic equivalent in proportionate voting shares (for U.S. investors).
v) Subsequent to March 31, 2020, the Company granted 4,825,000 options to employees, consultants, and directors of the Company. The options have a weighted average exercise price of $2.96. Additionally, subsequent to March 31, 2020, the Company awarded 125,000 options to employees, consultants, and directors of the Company pursuant to employment agreements and such awarded options will be granted in Q2 2020.
vi) Subsequent to March 31, 2020, 150,000 options were exercised at an average exercise price of $0.60 for gross proceeds of $90. Subsequent to March 31, 2020, 553,639 options were forfeited.
vii) Subsequent to March 31, 2020, the Company issued 13,646 warrants to purchase convertible preferred shares. The warrants have a weighted average exercise price of US$3 thousand.

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TerrAscend — Interim / Quarterly Report 2020

47415_rns_2020-05-28_154e334f-759f-48a3-a757-950e826853c5.pdf

TERRASCEND CORP.

TerrAscend Corp.

Unaudited Condensed Interim Consolidated Statements of Financial Position

Unaudited Condensed Interim Consolidated Statements of Loss and Comprehensive Income (Loss)

TerrAscend Corp.

Unaudited Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity

Unaudited Condensed Interim Consolidated Statements of Cash Flow

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

1. Nature of operations

2. Basis of presentation

(a) Statement of compliance

(b) Basis of measurement

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

2. Basis of presentation (continued)

(c) Functional and presentation currency

(d) Basis of consolidation

(e) Use of significant estimates and judgments

(f) COVID-19 Estimation Uncertainty

3. Significant accounting policies

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

3. Significant accounting policies (continued)

New standards, amendments and interpretations adopted

4. Sales and receivables, net of expected credit losses

5. Note receivable

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

5. Note receivable (continued)

State Flower

6. Investments

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

7. Acquisitions

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

7. Acquisitions (continued)

Contingent consideration

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

7. Acquisitions (continued)

8. Biological assets

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

8. Biological assets (continued)

Dry bud

Trim

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

8. Biological assets (continued)

9. Inventory

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

10. Property, plant and equipment

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

10. Property, plant and equipment (continued)

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

11. Intangible assets and goodwill

Florida CGU

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

11. Intangible assets and goodwill (continued)

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

12. Loans payable

Credit Facility

Mortgage Payable

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

12. Loans payable (continued)

Loan from Related Parties

Canopy Rivers Loan

Canopy Growth Financing

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

13. Leases

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

14. Convertible debentures

15. Share capital and contributed surplus

Authorized share capital

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three months ended March 31, 2020 and 2019

15. Share capital and contributed surplus (continued)

Outstanding share capital

Private Placements

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

15. Share capital and contributed surplus (continued)

Share-based payments

TerrAscend Interim / Quarterly Report 2020