TerrAscend - Interim / Quarterly Report 2021

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TERRASCEND CORP.

Unaudited Condensed Interim Consolidated Financial Statements

As of and for the three and nine months ended September 30, 2021 and 2020 (In Thousands of United States Dollars)

TerrAscend Corp.

Unaudited Condensed Interim Consolidated Statements of Financial Position

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

	At	At	At
Notes	September 30, 2021	December 31, 2020*	January 1,
			2020*
Assets
Current Assets
Cashand cashequivalents	$102,638	$59,226	$9,162
Receivables,net ofsalesreturns and allowances 4	10,831	10,876	5,869
Share subscriptionsreceivable	—	—	24,463
Notereceivable	—	—	4,609
Investments	—	—	358
Biologicalassets 6	12,578	17,816	4,222
Inventory 7	71,158	34,696	15,723
Prepaid expenses and other assets	5,745	5,165	4,757
	202,950	127,779	69,163
Non-Current Assets
Investmentinassociate 5	—	1,379	1,000
Property, plant and equipment 8	161,626	129,735	86,734
Intangible assets and goodwill 9	296,429	199,985	185,670
Indemnificationasset 16	4,581	11,500	11,500
Prepaid expenses and other assets	5,776	3,923	695
	468,412	346,522	285,599
Total Assets	$671,362	$474,301	$354,762

Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable and accruedliabilities 5	$48,992	$27,176	$19,256
Deferredrevenue	925	638	908
Loans payable 10	10,669	5,734	48,559
Contingent considerationpayable 5	10,488	30,966	24,008
Leaseliability 12	2,601	1,710	891
Corporate income taxpayable 16	10,924	27,739	16,381
	84,599	93,963	110,003
Non-Current Liabilities
Loans payable 10	182,208	178,804	4,849
Contingent considerationpayable 5	1,115	6,590	135,393
Leaseliability 12	28,626	22,609	15,070
Warrantliability 22	69,432	132,257	—
Convertible debentures 11	—	4,083	10,682
Deferredincome tax liability 16	54,304	27,263	20,774
Other non-current liabilities 9	3,750	—	—
	339,435	371,606	186,768
Total Liabilities	$424,034	$465,569	$296,771

Shareholders’ Equity
Share capital 13	492,656	242,336	196,978
Contributed surplus 13	31,264	69,205	41,874
Cumulative translationadjustment	(105)	(3,819)	(826)
Deficit	(285,458)	(306,423)	(186,496)
Non-controllinginterest 14	8,971	7,433	6,461
Total Shareholders’ Equity	247,328	8,732	57,991

Total Liabilities and Shareholders’ Equity	$671,362	$474,301	$354,762
Total Number of Common and Proportionate Voting Shares Outstanding 13	184,540,757	155,834,272
			141,980,314

*Change in presentation currency (Note 23) Subsequent events (N ote 25 )

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

On behalf of the Board “Jason Wild”

Executive Chairman

TerrAscend Corp.

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

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(Amounts expressed in thousands of United States dollars, except for per share amounts)
For the three months ended For the nine months ended
September 30, September 30, September 30, September 30,
Notes 2021 2020 2021 2020
Sales, gross $50,537 $40,416 $169,010 $104,926
Excise and cultivation taxes (1,398) (2,288) (7,794) (6,709)
Sales, net 18 49,139 38,128 161,216 98,217
Cost of sales 7 26,541 15,659 68,966 44,973
Gross profit before gain on fair value of
biological assets 22,598 22,469 92,250 53,244
Unrealized gain on changes in fair value of
biological assets 6 24,581 18,885 75,789 46,678
Realized fair value amounts included in inventory
sold 7 (23,726) (15,505) (60,785) (33,896)
Gross profit 23,453 25,849 107,254 66,026
Operating expenses:
General and administrative 17 14,966 10,324 45,546 32,525
Share-based payments 13 1,496 3,129 11,910 7,710
Amortization and depreciation 8, 9 2,310 1,912 6,969 5,429
Research and development - 17 — 292
Total operating expenses 18,772 15,382 64,425 45,956
Income from operations 4,681 10,467 42,829 20,070
Revaluation of contingent consideration 5, 22 (338) 6,047 2,652 14,667
Finance and other expenses 10,11,12,16 7,822 2,476 25,055 7,199
Transaction and restructuring costs 1,034 195 1,466 1,889
Unrealized (gain) loss on investments 5 - (304) (6,192) (60)
Impairment of goodwill 9 - - 5,007 —
Impairment of intangible assets 9 - - 3,633 734
(Gain) loss on fair value of warrants 22 (69,016) 17,833 (43,715) 17,833
Unrealized foreign exchange (gain) loss (1,256) 34 4,582 111
Income (loss) before income taxes 66,435 (15,814) 50,341 (22,303)
Current income tax expense 16 5,966 2,122 22,054 13,596
Deferred income tax (benefit) expense 16 (1,880) (3,336) 1,811 (1,163)
Net income (loss) $62,349 $(14,600) $26,476 $(34,736)
Items that will be subsequently reclassified to
profit or loss:
Currency translation adjustment 1,267 90 (3,714) 2,099
Comprehensive income (loss) $61,082 $(14,690) $30,190 $(36,835)
Net income (loss) attributable to:
Shareholders of the Company 60,371 (14,123) 20,417 (33,122)
Non-controlling interests 1,978 (477) 6,059 (1,614)
Comprehensive income (loss) attributable to:
Shareholders of the Company 59,104 (14,213) 24,131 (35,221)
Non-controlling interests 1,978 (477) 6,059 (1,614)
Net income (loss) per share, basic and diluted
Net income (loss) per share – basic $0.33 $(0.09) $0.11 $(0.22)
Weighted average number of outstanding common and
proportionate voting shares 184,438,603 149,492,681 179,441,224 148,335,223
Net income (loss) per share – diluted $0.28 $(0.09) $0.10 $(0.22)
Weighted average number of outstanding common and
proportionate voting shares, assuming dilution 214,134,641 149,492,681 214,756,569 148,335,223
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The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.

TerrAscend Corp.

Unaudited Condensed Interim Consolidated Statements of Changes in Shareholders’ Equity

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

				Cumulative
For the nine months ended September 30,			Contributed	translation		Non-controlling
2021	Notes	Share capital	surplus	adjustment	Deficit	Interest	Total
Balance at January 1, 2021		$242,336	$69,205	$(3,819)	$(306,423)	$7,433	$8,732
Private placement net of share issuance costs	13	173,477	—	—	—	—	173,477
Shares issued - stock option, warrant and RSU exercises	13	36,289	(2,965)	—	—	—	33,324
Shares issued -acquisitions		34,427	—	—	—	—	34,427
Shares issued- liability settlement		80	—	—	—	—	80
Issuance of warrants	13	—	560	—	—	—	560
Options expired/forfeited	13	—	(548)	—	548	—	—
Share-based compensation expense	13	—	11,910	—	—	—	11,910
Conversion of convertible debt	13	6,047	(1,593)	—	—	—	4,454
Investment inNJ partnership	5	—	(45,305)			(4,695)	(50,000)
Capital contributions and return of capital		—	—	—	—	174	174
Net income for the period		—	—	—	20,417	6,059	26,476
Cumulative translation adjustment		—	—	3,714	—	—	3,714
Balance at September 30, 2021		$492,656	$31,264	$(105)	$(285,458)	$8,971	$247,328

				Cumulative
			Contributed	translation				Non-controlling
For the nine months ended September 30, 2020	Notes	Share Capital	surplus	adjustment		Deficit		Interest		Total
Balance at January 1, 2020		$196,978	$41,874	$(826)		$(186,496)		$6,461		$57,991
Private placementnet ofshareissuance costs	13	29,572	—		—		—		—		29,572
Shares issued - stock option, warrant and
RSU exercises	13	3,491	(385)		—		—		—		3,106
Issuance ofwarrants	16	—	14,299		—		—		—		14,299
Options expired/forfeited	16	—	(3,140)		—		3,140		—		—
Share-based compensationexpense	16	—	8,109		—		—		—		8,109
Sharesissued-compensation forservices	16	3,420	—		—		—		—		3,420
Capitalcontribution	13	—	—		—		—		647		647
Netlossforthe period		—	—		—	(33,122)		(1,614)		(34,736)
Cumulative translation adjustment	11	—	—	(2,099)			—		—		(2,099)
Balance at September 30, 2020		$233,461	$60,757	$(2,925)		$(216,478)		$5,494		$80,309

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

TerrAscend Corp.

Unaudited Condensed Interim Consolidated Statements of Cash Flow

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

		For the nine	months ended
	Notes	September 30, 2021	September 30, 2020*
Operating activities
Netincome (loss)		$26,476	$(34,736)
Add (deduct)itemsnotinvolving cash
Unrealized gainonchangesin fairvalue ofbiologicalassets	6	(75,789)	(46,678)
Realizedfairvalue amountsincludedin inventory sold	7	60,785	33,896
Non-cashwrite downs of inventory	7	961	3,258
Accretion, accruedinterest andloan forgiveness	10	17,938	7,213
Depreciationofproperty, plant and equipment	8	7,218	4,382
Amortizationof intangible assets	9	5,523	4,395
Share-based payments	13	11,910	8,109
Currentincome taxexpense	16	22,054	13,596
Deferredincome taxexpense	16	1,811	(1,163)
(Gain)loss on fairvalue ofwarrants	22	(43,715)	17,833
Unrealized (gain)loss on investments Revaluationofcontingent consideration Impairment of intangible assets	5 9	(6,192) 2,652 3,633	(60) 14,667 734
Impairment ofgoodwill	9	5,007	—
Release of indemnificationasset	16	3,891	—
Forgiveness of loanprincipalandinterest		(766)	—
Unrealizedforeignexchange gain(loss)		4,582	111
Changesinworking capital items	20	(11,149)	(13,304)
Income taxes paid	16	(37,032)	(7,023)
Cash inflow from operating activities		(202)	5,230

Financing activities
Proceedsfromwarrants exercised	13	10,365	1,426
Proceedsfromoptions exercised	13	3,677	467
Proceedsfrom loan	10	766	65,769
Capital contributions and return of capital to non-controlling	14
interests		174	662
Loanprincipalandinterest paid	10	(15,932)	(56,656)
Proceedsfromprivate placement,net ofshareissuance costs	13	173,477	70,700
Lease payments	12	(2,963)	(2,026)
Cash inflow from financing activities		169,564	80,342

Investing activities
Investmentinproperty, plant and equipment	8	(26,706)	(29,368)
Investmentin intangible assets	9	(342)	(1,092)
Principalandinterest paymentsreceived on leasereceivable		559	131
Distributionofearnings to associates		469	—
Advances to joint venture partner		—	153
Depositsforbusiness acquisition	5	—	(1,000)
Depositsforproperty, plant and equipment		(1,739)	—
InvestmentinNJ partnership	13	(25,000)	—
Payments ofcontingent consideration	5	(29,668)	(31,039)
Cashportionofconsiderationpaid onacquisitionof KCR	5	(20,337)	—
Cashportionofconsiderationpaid onacquisitionof HMS	5	(22,399)	—
Cash received on acquisition of State Flower		—	739
Cash outflow from investing activities		(125,163)	(61,476)

Increase (decrease) incash and cash equivalents during the period		44,199	24,096
Net effects of foreignexchange		(787)	742
Cash and cash equivalents, beginning of period		59,226	9,162
Cash and cash equivalents, end of period		$102,638	$34,000

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

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

(Amounts expressed in thousands of United States 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. TerrAscend is a leading North American cannabis operator with vertically integrated operations in Pennsylvania, New Jersey and California, licensed cultivation and processing operations in Maryland, and licensed production in Canada. TerrAscend operates a chain of Apothecarium dispensary retail locations, as well as scaled cultivation, processing, and manufacturing facilities on both the East and West coasts of the United States. TerrAscend’s cultivation and manufacturing practices provide industry-leading product selection to both the medical and legal adult-use market. TerrAscend operates a number of synergistic businesses, including The Apothecarium (“Apothecarium”); Arise Bioscience Inc., a manufacturer and distributor of hemp-derived products; Ilera Healthcare (“Ilera”), Pennsylvania’s medical cannabis cultivator, processor and dispenser; HMS Health, LLC and HMS Processing, LLC (collectively “HMS”), a medical cannabis cultivator and processor based in Maryland; Valhalla Confections, a manufacturer of cannabis-infused edibles; and State Flower a California-based cannabis producer operating a licensed cultivation facility in San Francisco.

The Company was listed on the Canadian Stock Exchange effective May 3, 2017, 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 unaudited condensed interim consolidated financial statements for the nine months ended September 30, 2021 and September 30, 2020 of the Company were prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. The Company followed the same accounting policies and methods of application as those disclosed in the audited annual consolidated financial statements for the year ended December 31, 2020 prepared in accordance with International Financial Reporting Standards (“IFRS”). These condensed interim consolidated financial statements should be read in conjunction with the Company’s December 31, 2020 audited annual consolidated financial statements and were authorized for issue by the Board of the Directors on August 18, 2021.

(b) Basis of measurement

These unaudited 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 unaudited 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.

(c) Functional and presentation currency

The functional currency of the Company and its Canadian subsidiaries is the Canadian dollar (“CAD”). The functional currency of the Company’s US subsidiaries is the US dollar (“USD”). The Company’s presentation currency is in USD. All amounts are presented in USD unless otherwise specified. Certain items presented in these financial statements are expressed in Canadian dollars (“CAD”) and are identified as such.

Change in presentation currency

On March 31, 2021, the Company changed its presentation currency from the CAD to USD to better reflect the Company’s business activities (Note 23). In making this change in presentation currency to USD, the Company followed the guidance in IAS 21 The Effects of Changes in Foreign Exchange Rates and have applied the change retrospectively as if the new presentation currency had always been the Company’s presentation currency, as follows:

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

2. Basis of presentation (continued)

Assets and liabilities have been translated into USD at the rate of exchange prevailing at the respective reporting dates;
The statements of loss and comprehensive loss were translated at the average exchange rates for the respective reporting periods, or at the exchange rates prevailing at the applicable transaction date;
Equity transactions have been translated at the exchange rate prevailing at the date of the transactions; and
Exchange differences arising on translation were recorded in cumulative translation adjustment in shareholders’ equity.

(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 unaudited condensed interim consolidated financial statements from the date that control commences until the date that control ceases.

All intercompany balances and transactions were eliminated on consolidation.

(e) Use of significant estimates and judgments

The preparation of unaudited 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, 2020.

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, 2020.

New standards, amendments and interpretations adopted

All recently issued accounting pronouncements are not expected to have a material effect on the condensed interim consolidated financial statements.

4. Receivables, net of sales returns and allowances

	September 30, 2021	December 31, 2020*
Tradereceivables	$10,936	$12,443
Sales tax receivables	39	45
Other receivables	303	150
Provision for sales returns and allowances	(447)	(1,762)
Receivables, net of sales returns and allowances	$10,831	$10,876

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

4. Receivables, net of sales returns and allowances (continued)

Sales tax receivable represents input tax credits arising from sales tax levied on the supply of goods purchased or services received in Canada. Other receivables at September 30, 2021 and at December 31, 2020 includes amounts due from the sellers of the Apothecarium (Note 5).

	September 30, 2021	December 31, 2020*
Tradereceivables	$10,936	$12,443
Less: provision for sales returns and allowances	(447)	(1,762)
Total trade receivables, net	$10,489	$10,681
Ofwhich
Current	$10,128	$9,893
31-90 days	528	2,445
Over90 days	280	105
Less: provision for sales returns and allowances	(447)	(1,762)
Total trade receivables, net	$10,489	$10,681

5. Acquisitions

Acquisition of KCR

Upon the acquisition of Ilera on September 16, 2019, the Company acquired a $1,000 investment in GuadCo LLC and KCR Holdings LLC (collectively “KCR”). KCR holds a permit from the Pennsylvania Department of Health which grants the right to operate three dispensaries in the state of Pennsylvania. The Company’s investment represented a 10% equity share in KCR. The Company had significant influence over KCR as the Company’s Ilera business supplies a significant portion of inventory, and therefore, the investment in KCR was accounted for using the equity method and was included in investment in associate on the Company’s Statement of Financial Position. The acquisition was adjusted for earnings and cash distributions. On April 30, 2021, the investment had a carrying value of $1,223. The fair value of the investment on April 30, 2021 was estimated to be $7,101, which was implied based on the overall purchase price. A gain of $5,878 was recorded as an unrealized gain on investment in the statement of loss and comprehensive loss.

On April 30, 2021, the Company acquired the remaining 90% of equity of KCR for total consideration of $69,847, comprised of $34,427 in common shares, $20,506 in cash, $7,101 related to the fair value of previously owned shares, and a $6,750 note which bears 10.0% annual interest, due April 2022. The transaction added three retail dispensaries located in Bethlehem, Allentown and Stroudsburg, Pennsylvania to complement the Company’s existing retail footprint in Southeastern Pennsylvania. The acquisition has been accounted for as a business combination as KCR met the definition of a business combination under IFRS 3, Business Combinations (“IFRS 3”).

The Company will pay up to $6,300 in shares if (i) within two years of the closing date, legislation is enacted into law by the General Assembly of the Commonwealth of Pennsylvania, which permits the cultivation, processing and/or sale of adult use cannabis; and (ii) the legislation provides that any Pennsylvania medical marijuana dispensary permit holder existing on the date of enactment of the legislation may be issued an additional adult-use dispensing organization permit (or similar permit) to operate at least three locations to serve adult use purchasers in Pennsylvania; and (iii) if as a result of the legislation, within three years of the date the legislation is enacted and effective, the Company commences retail sales at an additional two dispensaries under, through or on account of the GuadCo license or any other Pennsylvania license acquired from a third-party after the closing date. The total value of the potential purchase consideration payable by the Company under the terms of the agreement is approximately $75,084, and the fair value of the contingent consideration was $1,063 at acquisition.

On a standalone basis, had the Company acquired the business on January 1, 2021, sales estimates would have been $22,907 for the nine months ended September 30, 2021 and net income estimates would have been $3,978.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

5. Acquisitions (continued)

The following table presents the fair value of assets acquired and liabilities assumed as of the April 30, 2021 acquisition date and an allocation of the consideration to net assets acquired:

The consideration paid reflected the benefit of expected sales growth, future market and product development, synergies and workforce. These benefits were not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. None of the goodwill recognized is expected to be deductible for income tax purposes.

income tax purposes.
		$
Cashand cashequivalents		169
Inventory		2,461
Prepaid expenses and otherassets		559
Right-of-use asset		1,699
Property, plant and equipment		4,237
Intangible assets		49,228
Goodwill		31,991
Accounts payable and accruedliabilities		(457)
Leaseliability		(1,687)
Deferred tax liability		(18,353)
Net assets acquired		69,847

Considerationpaidincash		20,506
Considerationpaidinshares		34,427
Promissorynote payable		6,750
Contingent considerationpayable		1,063
Fair value in previously owned shares		7,101
Total consideration		69,847

Considerationpaidincash		20,506
Less: cash and cash equivalents acquired		169
Net cash outflow		20,337

Costs related to this transaction were $145, including legal, accounting, due diligence, and other transaction-related expenses, and were included in transaction and restructuring costs in the consolidated statements of loss and comprehensive loss.

Acquisition of HMS

On May 3, 2021, the Company acquired HMS Health, LLC (“HMS Health”) and HMS Processing, LLC (“HMS Processing” and together with HMS Health “HMS”), a cultivator and processor of medical cannabis products in the state of Maryland. TerrAscend acquired 100% of the equity of HMS Health and the rights to acquire 100% of the equity of HMS Processing post-closing following receipt of certain regulatory approvals, for total consideration of $24,488, comprised of $22,399 in cash and a $2,089 note, which bears 5.0% annual interest, due April 2022. 100% of HMS’ economics is retained by the Company through full ownership of HMS Health and a master services agreement with HMS Processing. The acquisition has been accounted for as a business combination as HMS met the definition of a business combination under IFRS 3.

On a standalone basis, had the Company acquired the business on January 1, 2021, sales estimates would have been $7,877 for the nine months ended September 30, 2021 and net income estimates would have been $11,105.

The following table presents the fair value of assets acquired and liabilities assumed as of the May 3, 2021 acquisition date and an allocation of the consideration to net assets acquired:

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three and nine months ended September 30, 2021 and 2020

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

5. Acquisitions (continued)

The consideration paid reflected the benefit of expected sales growth, future market conditions, and product development. These benefits were not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. None of the goodwill recognized is expected to be deductible for income tax purposes.

purposes.
		$
Receivables		758
Inventory		2,315
Biological Assets		936
Prepaid expenses and deposits		68
Right-of-use asset		1,646
Property, plant and equipment		756
Intangible assets		19,750
Goodwill		9,519
Accounts payable and accruedliabilities		(1,054)
Leaseliability		(1,646)
Corporateincome taxpayable		(1,195)
Deferred tax liability		(7,365)
Net assets acquired		24,488

Considerationpaidincash		22,399
Promissory note payable		2,089
Total consideration		24,488
Cash outflow		22,399

The accounting for this acquisition has been provisionally determined at September 30, 2021. The fair value of net assets acquired, specifically with respect to inventory, intangible assets and goodwill, biological assets, and total consideration have been determined provisionally and are 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.

Costs related to this transaction were $69, including legal, accounting, due diligence, and other transaction-related expenses, and were included in transaction and restructuring costs in the consolidated statements of loss and comprehensive loss.

New Jersey Partnership

On August 20, 2021, the Company purchased an additional 12.5% of the issued and outstanding equity of TerrAscend NJ from BWH NJ, LLC and Blue Marble Ventures, LLC for a total consideration of $50,000. Upon closing of the agreement, the Company now owns 87.5% of the issued and outstanding equity of TerrAscend NJ. The Company has the option to purchase an additional 6.25% ownership, for a total of 93.75%, at a predetermined valuation during the period commencing April 1, 2023 through June 15, 2023. The Company made an initial cash payment of $25,000 during the nine months ended September 30, 2021 and will make an additional $25,000 payment to be paid on or before December 31, 2021. This $25,000 payment was included in accounts payable and accrued liabilities in the Company’s unaudited condensed interim consolidated statements of financial position.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three and nine months ended September 30, 2021 and 2020

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

5. Acquisitions (continued)

This transaction was accounted for as an equity transaction in accordance with IFRS 10. The carrying amount of the non-controlling interest was adjusted by $4,695 to reflect the change in the net book value ownership interest in TerrAscend. Any difference from the consideration paid is recognized in equity and attributed to the parent’s equity holders.

Contingent consideration

Contingent consideration recorded relates to the Company’s 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 a specified time period based on the agreement. Refer to Note 22 for further discussion surrounding the fair value of the contingent consideration.

The balance of contingent consideration is as follows:

KCR Carrying amount, December 31, 2019 $ — Amount recognized on acquisition of State Flower —	Apothecarium State Flower Ilera Total $3,028 $ — $156,373 $159,401 — 6,630 — 6,630
Payments ofcontingent consideration —	— — (147,184) (147,184)
Revaluation of contingent consideration —	— (40) 18,749 18,709
Carrying amount, December 31, 2020 $ —	$3,028 $6,590 $27,938 $37,556
Amountrecognized onacquisitionof KCR 1,063	— — — 1,063
Payments ofcontingent consideration —	— — (29,668) (29,668)
Revaluation of contingent consideration 52	— 870 1,730 2,652
Carrying amount, September 30, 2021 $1,115	$3,028 $7,460 $ — $11,603
Less: current portion —	(3,028) (7,460) — (10,488)
Non-current contingent consideration $1,115	$ — $ — $ — $1,115

The contingent consideration for Ilera was calculated based on fiscal year 2019 and 2020 performance. The final earn out has been calculated and the remaining amount of $29,668 was paid on June 30, 2021.

Refer to Note 22 for discussion of valuation methods used when determining the fair value of the contingent consideration liability at September 30, 2021, and the changes in fair value during the nine months ended September 30, 2021.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

6. Biological assets

The Company’s biological assets consist of 81,943 cannabis plants at September 30, 2021 (December 31, 2020 - 91,080). The reconciliation of biological assets is as follows:

	September 30, 2021	December 31, 2020*
Opening amount	$17,816	$4,222
Increasein fairvalue due to biologicaltransformation	75,789	81,225
Additions onbusiness acquisitions	936	61
Capitalized costs	17,551	16,649
Transferred toinventories upon harvest	(99,514)	(84,766)
Effect of movements in foreign exchange	—	425
Ending balance	$12,578	$17,816

The fair value measurements for biological assets have been categorized as Level 3 in the fair value hierarchy based on the inputs to the valuation technique used. 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 and cultivation tax 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.

Dry bud

The dry bud valuation model utilizes the following significant assumptions:

	Weighted Average	Weighted Average
	September 30, 2021	December 31, 2020
Weighted average ofexpectedloss ofplants until harvest	10%	8%
Expected yields for cannabis plants (average grams per
plant)	47 grams	63 grams
Expectednumberofgrowing weeks	13 weeks	13 weeks
Estimated selling price (pergram)	$6.86	$6.69
Post-harvest cost to complete and sell (per gram)	$1.07	$0.84

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

6. Biological assets (continued)

Trim

The trim valuation model utilizes the following significant assumptions:

	Weighted Average	Weighted Average
	September 30, 2021	December 31, 2020
Weighted average ofexpectedloss ofplants until harvest	10%	8%
Expected yields for cannabis plants (average grams per
plant)	53 grams	51grams
Expectednumberofgrowing weeks	13 weeks	13 weeks
Estimated selling price (pergram)	$3.96	$4.59
Post-harvest cost to complete and sell (per gram)	$0.18	$0.25

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.

The following table presents the potential effect of a 10% change on the fair valuation of biological assets at September 30, 2021 and December 31, 2020 which would be reported as part of the gross profit (loss) on the statement of loss and comprehensive loss:

	10% change at	10% change at
	September 30, 2021	December 31, 2020
Weighted average ofexpectedloss ofplants until harvest	$105	$51
Expected yields for cannabis plants (average grams per
plant)	1,256	1,779
Expectednumberofgrowing weeks	1,129	1,589
Estimated selling price (pergram)	1,427	1,999
Post-harvest cost to complete and sell (per gram)	368	525

7. Inventory

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

	September 30, 2021	September 30, 2021	September 30, 2021	December 31, 2020*	December 31, 2020*	December 31, 2020*
		Fair Value			Fair Value
	Cost	Component	Total	Cost	Component	Total
Rawmaterials	$5,408	$-	$5,408	$3,322	$-	$3,322
Finished goods	9,292	3,742	13,034	8,254	3,776	12,030
Work inprocess	14,509	34,752	49,261	2,811	13,954	16,765
Accessories	76	—	76	145	—	145
Supplies and consumables	3,379	—	3,379	2,434	—	2,434
	$32,664	$38,494	$71,158	$16,966	$17,730	$34,696

Realized fair value amounts included in inventory sold were $60,785 for the nine months ended September 30, 2021 (September 30, 2020-$33,896).

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

7. Inventory (continued)

During the nine months ended September 30, 2021, management wrote down its inventory by $1,087 (September 30, 2020- $100) related to unsaleable disposable vape pens with faulty batteries as well as inventory in Canada deemed unsaleable.

The inventory change is mainly due to an increase in distillate being held for the processing of manufactured products in Pennsylvania. In addition, in New Jersey, the Company has made a strategic decision to build up inventory for its own dispensaries in advance of expected adult-use transition.

The inventory acquired through business combinations for the nine months ended September 30, 2021 is $4,776.

8. Property, plant and equipment

Property, plant and equipment for the nine months ended September 30, 2021 were as follows:

	Land Assets in Process Buildings & Improvements Machinery & Equipment Office Furniture & Equipment Right of Use Assets Total

	$ $ $ $ $ $ $
Cost
Balance atDecember31,2020	3,640 2,275 92,633 15,862 2,742 22,106 139,258
Additions	— 2,552 18,867 5,010 388 4,125 30,942
Additions onacquisition	542 — 3,458 756 237 3,345 8,338
Completionofconstruction	— (2,366) 2,330 17 19 — —
Disposals	— (12) (567) (147) — (100) (826)
Effects of movements in foreign	(2) — (11) (6) 6 2 (11)
exchange
Balance at September 30, 2021	4,180 2,449 116,710 21,492 3,392 29,478 177,701

Accumulated Depreciation
Balance atDecember31,2020	— — 3,705 2,269 1,114 2,435 9,523
Depreciation	— — 3,271 1,407 1,075 1,465 7,218
Disposals	— — (549) — — (96) (645)
Effects of movements in foreign	— — (6) (9) (6) — (21)
exchange
Balance at September 30, 2021	— — 6,421 3,667 2,183 3,804 16,075

Net book value at September 30,	4,180 2,449 110,289 17,825 1,209 25,674 161,626
2021

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

8. Property, plant and equipment (continued)

Property, plant and equipment for the year ended December 31, 2020 were as follows:

	Land Assets in Process Buildings and Improvements Machinery & Equipment Office Furniture & Equipment Right of Use Assets Total

	$ $ $ $ $ $ $
Cost
Balance atDecember31,2019	3,623 22,404 37,733 8,428 2,575 15,463 90,226
Additions	— 15,462 17,810 8,539 312 6,240 48,363
Additions on Acquisition of State	— 1,029 164 — 22 2,707 3,922
Flower
Completionofconstruction	— (36,013) 36,013 — — — —
Disposals	— — (16) (139) (127) (2,146) (2,428)
Impairment	— — — (934) (40) — (974)
Effects of movements in foreign	17 (607) 929 (32) — (158) 149
exchange
Balance at December 31, 2020	3,640 2,275 92,633 15,862 2,742 22,106 139,258

Accumulated Depreciation
Balance atDecember31,2019	— — 1,398 480 770 844 3,492
Depreciation	— — 2,280 1,952 330 1,698 6,260
Disposals	— — — (60) (4) (84) (148)
Impairment	— — — (112) — — (112)
Effects of movements in foreign	— — 27 9 18 (23) 31
exchange
Balance at December 31, 2020	— — 3,705 2,269 1,114 2,435 9,523

Net book value at December 31,	3,640 2,275 88,928 13,593 1,628 19,671 129,735
2020

During the nine months ended September 30, 2021 and the twelve months ended December 31, 2020, borrowing costs were not capitalized because the assets in process did not meet the criteria of a qualifying asset.

For the nine months ended September 30, 2021, $3,728 (September 30, 2020 – $1,784) of depreciation was expensed to cost of sales.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

9. Intangible assets and goodwill

Intangible assets and goodwill for the nine months ended September 30, 2021 were as follows:

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 atDecember31,2020	2,447	92,971	29,101	4,000	1,630	78,948	209,097
Additions	342	—	—	—	—	—	342
Additions onacquisition	—	70,395	1,144	—	—	38,949	110,488
Disposal	(211)	—	—	—	—	—	(211)
Impairment	(10)	—	(1,400)	(4,000)	(1,350)	(5,007)	(11,767)
Effects of movements in foreign exchange (5) (3) — — — —
exchange	(5)	(3)	—	—	—	—	(8)
Balance at September 30, 2021	2,563	163,363	28,845	—	280	112,890	307,941

Accumulated Amortization
Balance atDecember31,2020	733	5,781	—	1,601	997	—	9,112
Amortization	380	4,443	—	400	300	—	5,523
Impairment	(1)	—	—	(2,001)	(1,125)	—	(3,127)
Effects of movements in foreign exchange (4) 8 — — — —
exchange	(4)	8	—	—	—	—	4
Balance at September 30, 2021	1,108	10,232	—	—	172	—	11,512

Net book value at September 30, 2021 1,455 153,131 28,845 — 108 112,890
2021	1,455	153,131	28,845	—	108	112,890	296,429

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three and nine months ended September 30, 2021 and 2020

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

9. Intangible assets and goodwill (continued)

Intangible assets for the year ended December 31, 2020 were as follows:

	Software				Non-
	&	Intellectual	Brand	Customer	Compete
	Licenses	Property	Name	Relationships	Agreements	Goodwill	Total
	$	$	$	$	$	$	$
Cost
Balance atDecember31,2019	1,875	82,593	24,821	4,500	1,350	73,764	188,903
Additions	596	7,800	—	—	—	—	8,396
Additions onacquisition	—	3,140	1,350	—	280	5,187	9,957
Disposal	(45)	—	—	—	—	—	(45)
Impairment	(1)	(423)	2,928	(498)	—	—	2,006
Effects of movements in foreign
exchange	22	(139)	2	(2)	—	(3)	(120)
Balance at December 31, 2020	2,447	92,971	29,101	4,000	1,630	78,948	209,097

Accumulated Amortization
Balance atDecember31,2019	327	1,531	—	925	450	—	3,233
Amortization	389	4,299	—	847	557	—	6,092
Impairment	—	—	—	(157)	—	—	(157)
Effects of movements in foreign
exchange	17	(49)	—	(14)	(10)	—	(56)
Balance at December 31, 2020	733	5,781	—	1,601	997	—	9,112

Net book value at December 31, 2020	1,714	87,190	29,101	2,399	633	78,948	199,985

During the year ended December 31, 2020, the Company capitalized $7,500 related to two success fees payable to an entity controlled by the minority shareholders of TerrAscend NJ. The first success fee payment of $3,750 was due upon TerrAscend NJ being granted an alternative treatment center 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 TerrAscend NJ received the license. The second success fee payment of $3,750 was due upon TerrAscend NJ making its first sale of medical cannabis to a patient in compliance with the New Jersey Compassionate Use Marijuana Act, which occurred during the fourth quarter of 2020. On July 16, 2021, the Company amended the original agreement and will now make the second success fee payment on the earlier of (i) March 31, 2023, and (ii) fifteen days after TerrAscend NJ shall have made distributions to one or more of its members totaling at least $15,000 in aggregate. The second success fee payment is included in other non-current liabilities at September 30, 2021. 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.

During the nine months ended September 30, 2021, the Company made the decision to undertake a strategic review process to explore, review, and evaluate potential alternatives for its Arise business. The Company also determined that the estimated future cash flows for the business did not support the carrying value of the intangible assets and goodwill, and therefore the intangible assets and goodwill were written down to $nil. The Company recorded impairment of goodwill of $5,007 and impairment of intangible assets of $3,633.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

9. Intangible assets and goodwill (continued)

During the nine months ended September 30, 2020, the cessation of a distribution agreement at the Company’s Florida CGU was identified as an indicator of impairment, resulting in the agreement recorded in customer relationships to be written down to its recoverable value of $nil. In addition, the Company’s Canada CGU recorded an impairment of $390 of intellectual property related to packaging designs that were written down to its recoverable value of $nil.

For the nine months ended September 30, 2021, $2,044 (September 30, 2020– $1,564) of amortization was expensed to cost of sales.

10. Loans payable

10. Loans payable
	Credit Facility	Canopy Growth Loans	Other Loans	Ilera Term Loan	KCR Loan		Total
Balance atDecember31,2019	$45,959	$-	$7,449	$-		$-	$53,408
Loan principal net of transaction costs	—	78,156	7,414	115,926		—	201,496
Loan discount - origination fee paid	—	—	—	(2,250)		—	(2,250)
Convertedfromconvertible debt	—	9,657	—	—		—	9,657
Less:fairvalue ofwarrants	—	(32,671)	—	—		—	(32,671)
Interest accretion	1,173	5,168	269	606		—	7,216
Principal and interest paid and loan forgiveness	(47,085)	—	(8,993)	—		—	(56,078)
Effects of movements in foreign exchange	(47)	3,615	192	—		—	3,760
Ending carrying amount at December 31, 2020	—	63,925	6,331	114,282		—	184,538
Loan principal net of transaction costs	—	—	2,855	—	6,750		9,605
Interest accretion	—	5,781	510	8,920	263		15,474
Principalandinterest paid	—	(4,721)	(357)	(8,378)	(2,476)		(15,932)
Forgiveness of principal and interest	—	—	(766)	—		—	(766)
Effects of movements in foreign exchange	—	(37)	(5)	—		—	(42)
Ending carrying amount at September 30, 2021	$-	$64,948	$8,568	$114,824	$4,537		$192,877
Less: current portion	—	(2,621)	(3,470)	(41)	(4,537)		(10,669)
Non-current loans payable	$-	$62,327	$5,098	$114,783		$-	$182,208

Total interest paid on all loan payables during the nine months ended September 30, 2021 was $13,682 (September 30, 2020 - $2,046).

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

10. Loans payable (continued)

Credit Facility

On December 14, 2018, the Company entered into a $75,000 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 $75 origination fee payable on a quarterly basis. Any principal amount drawn will be due in one year and interest will be payable monthly. The Credit Facility was recorded at its fair value at inception and subsequently carried at amortized cost. On December 2, 2019, the interest rate of the Credit Facility was amended to 12.5% per annum. On March 11, 2020, a portion of the proceeds received from Canopy Growth were used to fully pay off the outstanding principal and interest amounts under the Credit Facility with JW Asset Management.

Canopy Growth Loans

Formerly Canopy Rivers

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 $10,000. Pursuant to the amended terms, the first tranche of the convertible debentures was converted into a $10,000 loan payable bearing interest at a rate of 6% per annum, payable annually, with a balance due date of October 2, 2024. The effective interest rate on the loan is 15.4%. The Company also issued Canopy Rivers 2,225,714 common share purchase warrants, exercisable at $4.48 (CAD$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. The amendment was treated as a modification of the convertible debenture and as a result, no gains or losses were recorded for the transaction.

During the year ended December 31, 2020, Canopy Growth acquired the common share purchase warrants previously issued to Canopy Rivers as well as the loan payable outstanding balance.

Canopy Growth Canada Inc. loan

On March 10, 2020, TerrAscend Canada Inc. entered into a loan financing agreement with Canopy Growth in the amount of $58,645 pursuant to a secured debenture. In connection with the funding of the loan, the Company had 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 CAD $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 $2.72 (CAD $3.74) per share, expiring on March 10, 2031.

All warrants will be exercisable following changes in US federal laws permitting the cultivation, distribution, and possession of cannabis or to remove the regulation of such activities from the federal laws of the US. The warrants were issued such that they can be exercised upon maturity of the loan payable 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.

In accordance with the terms of the loan financing agreement, the funds cannot be used, directly or indirectly, in connection with or for any cannabis or cannabis-related operations in the US, unless and until such operations are permitted by the federal and applicable state laws of the US.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

10. Loans payable (continued)

Of the total proceeds received from Canopy Growth, $48,243 was used to fully pay off the outstanding principal and interest amounts under the Credit Facility with JW Asset Management.

Canopy Growth Arise loan

On December 10, 2020, the Company, through a wholly owned subsidiary Arise Bioscience Inc. (“Arise”) entered into a loan financing agreement with Canopy Growth in the amount of $20,000 pursuant to a secured debenture. In connection with the funding of the loan, the Company has issued 2,105,718 common share purchase warrants to Canopy Growth.

The secured debenture bears interest at a rate of 6.10% per annum commencing four years from the effective date, with an effective interest rate of 12.76%, and matures on December 9, 2030. The debenture is secured by the assets of Arise, is not convertible, and is not guaranteed by the Company. The warrants are comprised of 1,926,983 common share purchase warrants entitling Canopy Growth to acquire one common share of TerrAscend at an exercise price of $12.00 (CAD $15.28) per share, expiring on December 9, 2030, and 178,735 common share purchase warrants entitling Canopy Growth to acquire one common share of TerrAscend at an exercise price of $13.50 (CAD $17.19) per share, expiring on December 9, 2030.

All warrants will be exercisable following changes in U.S. federal laws permitting the cultivation, distribution, and possession of cannabis or to remove the regulation of such activities from the federal laws of the US. The warrants were issued such that they can be exercised upon maturity of the loan payable 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.

Other Loans

Mortgage financing

On April 23, 2019, the Company completed a $4,843 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 was recorded at its fair value at inception and subsequently carried at amortized cost. The loan principal and interest were fully paid in June 2020. The Company has capitalized $190 of transaction costs in loan payable.

To replace the previous mortgage financing discussed above, on June 19, 2020, the Company completed a $5,336 loan financing secured by its manufacturing facility in Mississauga, bearing interest of 8.25% and a balance due date of July 1, 2023. The mortgage payable was recorded at its fair value at inception and subsequently carried at amortized cost.

Paycheck Protection Program loan

On March 13, 2021, the Company’s Arise business was granted a loan from Bank of America in the aggregate amount of $766, pursuant to the Paycheck Protection Program (the “PPP”), bearing interest at 1.00% per annum. The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) provides for loans to qualifying businesses with the proceeds to be used for payroll costs, rent, utilities, and interest on other debt obligations. The loans and accrued interest are forgivable after eight weeks as long as the funds are used for qualifying expenses as described in the CARES Act.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

10. Loans payable (continued)

Loans from related parties

During the year ended December 31, 2019, the Company received loan proceeds of $2,500 from key management of the Company’s subsidiary, Ilera. In January 2020, the Company received additional loan proceeds of $1,500. The loans bear interest at a rate of 12% per annum, payable monthly. The principal and interest were fully paid during the year ended December 31, 2020.

HMS loan

The acquisition of HMS included a $2,500 note payable which bears a 5.0% annual interest, due October 2022. The note was recorded at its fair value at inception of $2,089 and subsequently carried at amortized cost.

Ilera Term Loan

On December 18, 2020, Ilera Healthcare entered into a senior secured term loan with a syndicate of lenders in the amount of $120,000. The term loan bears interest at 12.875% per annum and matures on December 17, 2024. The Company has the ability to increase the facility by up to $30,000. The term loan is secured by the Ilera Healthcare Division. The loan is callable after 18 months from the closing date subject to a premium payment due. Of the total proceeds received, $105,767 was used to satisfy the remaining Ilera earn-out payments.

KCR Loan

The acquisition of KCR included a $6,750 note payable which bears interest at 10.00% per annum and matures on April 30, 2022. The note was recorded at its fair value at inception and subsequently carried at amortized cost. During the nine months ended September 30, 2021, the Company made principal payments of $2,250.

11. Convertible debentures

Private Placement

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, at a face value of $10,000, having a maturity date of five years from the date of issue and bearing interest at 6% per annum, compounded and payable annually. 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 $4.48 (CAD $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 term, at face value of $3,614.

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 $1,997. 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.

The Company shall have the right to require the holder to convert the outstanding principal amount of the debentures into common shares at the exercise price if certain criteria are met including if the average trading price equals or exceeds CAD $10.82 over a five-day trading window. During the nine months ended September 30, 2021, the Company converted the remaining convertible debentures for 1,284,221 common shares.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

11. Convertible debentures (continued)

11. Convertible debentures (continued)
	September 30,	December 31,
	2021	2020
Opening carrying amount	$4,479	$10,682
Convertedloanpayable	—	(6,812)
Conversionofconvertible debt	(4,459)	—
Interest accretion	38	657
Effects of movements in foreign exchange	(58)	(48)
Ending carrying amount	$-	$4,479
Less: current portion	—	(396)
Non-current convertible debt	$-	$4,083

The fair value of the equity portion was calculated at 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 conversion option and warrants using the relative fair value method.

12. Leases

The Company’s leases are comprised of leased premises and offices. The Company’s lease liabilities were as follows:

	September 30, 2021	December 31, 2020*
Openingleaseliability	$24,319	$15,961
Additions onacquisition	3,333	2,707
Non-acquisition related additions	4,118	6,183
Termination	(33)	—
Lease payments	(2,963)	(3,055)
Interest expense	2,426	2,534
Effects of movements in foreign exchange	27	(11)
Ending lease liability	$31,227	$24,319
Less: current portion	(2,601)	(1,710)
Non-current lease liability	$28,626	$22,609

Undiscounted lease obligations are as follows:

	$
Less thanone year	4,472
One tofive years	18,447
More than five years	40,421
Total	63,340

13. Share capital and contributed surplus

Authorized share capital

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

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

13. Share capital and contributed surplus (continued)

Outstanding share capital

	Common Shares Exchangeable Shares Proportionate Voting Shares Preferred Shares Total Shares(a) Amount $ 66,563,322 38,890,571 75,417 — 180,870,422 196,978 5,313,786 — — 18,679 23,992,786 29,641

Outstanding, December 31,
2019
Shares issued – private
placement net of share issuance
costs
Shares issued – stock option	1,816,496 — — — 1,816,496 4,462
exercises
Shares issued – warrant	1,229,186 — — — 1,229,186 2,810
exercises
Shares issued – compensation	1,625,701 — — — 1,625,701 3,420
forservices
Sharesissued– RSU	157,788 — — — 157,788 434
Sharesissued–conversion	2,820,506 — 890 (3,711) — —
Reallocation from share-based	— — — — — 4,591 79,526,785 38,890,571 76,307 14,968 209,692,379 242,336 18,115,656 — — — 18,115,656 173,477
payment reserve
Outstanding, December 31,
2020
Shares issued – private
placement net of share issuance
costs
Shares issued – stock option	829,675 — — — 829,675 3,678
exercises
Shares issued – warrant	2,932,549 — — 1,437 4,369,661 29,839
exercises
Sharesissued–acquisition	3,464,870 — — — 3,464,870 34,427
Shares issued – liability	8,000 — — — 8,000 80
settlement
Sharesissued– RSU	20,233 — — — 20,233 125
Shares issued – conversion of	1,284,221 — — — 1,284,221 6,047
convertible debt
Sharesissued–conversion	78,358,768 — (76,307) (2,051) — —
Reallocation from share-based	— — — — — 2,647 184,540,757 38,890,571 — 14,354 237,784,695 492,656
payment reserve
Outstanding, September 30,
2021

(a) on an as converted basis

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three and nine months ended September 30, 2021 and 2020

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

13. Share capital and contributed surplus (continued)

Private Placements

On January 28, 2021, the Company completed a private placement and issued 18,115,656 common shares at a price of $9.64 (CAD $12.35) per common share for total proceeds of $173,477, net of share issuance costs of $1,643.

During the year ended December 31, 2020, the Company closed a non-brokered private placement, issuing 18,679 units at an issue price of $2,000 per unit, resulting in proceeds of $37,358. Each unit consists of one non-voting Preferred Share and one Preferred Share Warrant. Each preferred share will be convertible to 1,000 common shares of the Company (or the economic equivalent in proportionate voting shares for US investors) at the option of the holder, subject to customary anti-dilution provisions. If the Company completes a qualified financing for gross proceeds in excess of $30,000 at a price that in the good faith determination of the Company’s board of directors is less than the average price paid in the private placement, the Company’s board of directors may increase the conversion ratio of the preferred shares to an amount that it considers equitable in the circumstances to provide equivalent value to participants in the private placement. This price protection will be in effect until May 22, 2021.

Each warrant can be used to acquire one preferred share at an exercise price of $3,000, subject to customary antidilution provisions. Warrants have a term of 3 years and can be exercised cashless.

On issuance date the total proceeds were allocated as follows:

			Preferred				Preferred
	Preferred		Shares		Preferred		Shares
	Shares Units		Equity		Shares		Warrant		Total
Date of Issuance	Issued		Component		Liability		Liability		Proceeds
22-May-20	13,646	$	14,750	$	3,917	$	8,624	$	27,291
28-May-20	3,561		3,850		1,022		2,251		7,123
5-Jun-20	1,397		1,510		401		883		2,794
8-Jun-20	75		82		21		47		150
Total	18,679	$	20,192	$	5,361	$	11,805	$	37,358

The price protection derivative liability and warrant liability have been measured at fair value at issuance date and subsequently remeasured using the Black Scholes model and have been classified as Level 3 in the fair value hierarchy.

Refer to Note 22 for discussion regarding changes in fair value of the preferred share derivative liability and warrant liability during the nine months ended September 30, 2021, as well as the key inputs and assumptions used in the model.

Transaction costs associated with the brokered preferred share issuance amounted to $754 and have been allocated pro rata between the preferred share liability, preferred share warrant liability, and share capital. Transaction costs allocated to the liability component was $370 and immediately expensed and transaction costs related to the equity component was $384 netted with share capital.

On January 27, 2020, the Company closed the third tranche of the non-brokered private placement accounted on December 30, 2019, issuing 1,863,659 units at an issue price of $1.86 (CAD $2.45) per unit, resulting in proceeds of $3,368, net of share issue costs of $96. 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 $2.47 (CAD $3.25). The fair value of the warrants issued was determined through the residual method and as a result, no value was assigned to the warrants as the market price exceeded the subscription price.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

13. Share capital and contributed surplus (continued)

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 $1.88 (CAD $2.45) per unit, resulting in proceeds of $6,393, net of share issue costs of $84. 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 $2.49 (CAD $3.25). The fair value of the warrants issued was determined through the residual method and as a result, no value was assigned to the warrants as the market price exceeded the subscription price.

On December 30, 2019, the Company completed the first tranche of a private placement and issued 12,968,325 units at a price of $1.88 (CAD $2.45), each comprised of one common share and one common share purchase warrant, for total proceeds of $24,330. The proceeds were collected in January 2020.

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 $5.68 (CAD $7.64) per common share for total proceeds of $29,863. On May 27, 2019 the Company completed the second tranche and issued 3,766,022 common shares at a price of $5.68 (CAD $7.64) per common share for total proceeds of $21,404. Total proceeds of the private placement were $49,955, net of share issue costs of $1,312.

Warrants reserve

The following is a summary of the outstanding warrants for Common Shares at September 30, 2021.

					Weighted
					Average	Weighted
	Number of	Number of			Exercise	Average
Number outstanding at September 30,	Warrants	Warrants	Issue	Expiry	Price	Remaining
2021	Outstanding	Exercisable	Date	Date	CAD$	Life (years)
Issuedinpaymentforservices	320,000	320,000	06/06/18	06/06/23	4.16	1.68
Issuedinpaymentforservices	35,000	35,000	08/09/18	08/09/23	4.25	1.86
Issuedinconvertible debt	333,723	333,723	10/02/19	10/02/24	6.49	3.01
Issuedinconvertible debt	120,027	120,027	11/06/19	11/06/24	6.49	3.10
Issuedinconvertible debt	66,880	66,880	11/26/19	11/26/24	6.49	3.16
Issued during privateplacement	11,094,929	11,094,929	12/30/19	01/14/22	3.25	0.29
Issued during private placement	1,939,295	1,939,295	01/10/20	01/14/22	3.25	0.29
Issued during privateplacement	1,863,659	1,863,659	01/27/20	01/14/22	3.25	0.29
Issuedindebt arrangement	2,225,714	—	02/05/20	10/02/24	5.95	3.01
Issued in debt arrangement	15,656,242	—	03/11/20	03/10/30	5.14	8.45
Issuedindebt arrangement	2,152,733	—	03/11/20	03/10/31	3.74	9.45
Issued in debt arrangement	1,926,983	—	12/11/20	12/09/30	15.28	9.20
Issued in debt arrangement	178,735	—	12/11/20	12/09/31	17.19	10.20
	37,913,920	15,773,513			4.95	4.89

In connection with the Canopy Growth and Canopy Rivers financings, the Company determined the fair value of the liability component (Note 10) and allocated the residual amount to the equity component to determine the fair value of the warrants issued. The fair value of the warrants was recorded as an increase to contributed surplus.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

13. Share capital and contributed surplus (continued)

The following is a summary of the outstanding warrants for Proportionate Voting Shares as at September 30, 2021. 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.

	Number of	Number of			Weighted Average Exercise	Weighted Average
Number outstanding at September 30,	Warrants	Warrants	Issue	Expiry	Price	Remaining
2021	Outstanding	Exercisable	Date	Date	CAD$	Life (years)
Issued as incentive compensation	8,590,908	8,590,908	08/23/19	08/23/22	7.21	0.90
	8,590,908	8,590,908			7.21	0.90

The following is a summary of the outstanding warrants for Preferred Shares at September 30, 2021. These warrants are exercisable into 1 preferred share:

	Number of	Number of			Weighted Average Exercise	Weighted Average
Number outstanding at September 30,	Warrants	Warrants	Issue	Expiry	Price	Remaining
2021	Outstanding	Exercisable	Date	Date	US $	Life (years)
Issued during private placement	13,646	13,646	05/22/20	05/22/23	3,000	1.64
Issued during private placement	1,848	1,848	05/28/20	05/28/23	3,000	1.66
Issued during private placement	487	487	06/05/20	06/05/23	3,000	1.68
Issued during private placement	75	75	06/08/20	06/08/23	3,000	1.69
	16,056	16,056			3,000	1.64

Restricted Share Units

The Company’s Share Unit Plan effective November 19, 2019 (the “Share Unit Plan”) provides for the granting of performance share units (PSUs) and restricted share units (RSUs) to directors, officers, employees, and consultants of the Company. The PSUs generally become vested upon attainment of established performance conditions, as well as service conditions. The RSUs generally become vested upon completion of continuous employment, or service, with the Company. During the nine months ended September 30, 2021, the Company granted 174,408 RSUs, which will vest over a four-year term, and recognized the grant date fair value of $449 as a share-based payment expense. There are no PSUs outstanding as of September 30, 2021.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

13. Share capital and contributed surplus (continued)

The following is a summary of changes in the Company’s RSUs for the nine months ended September 30, 2021 and the year ended December 31, 2020:

the year ended December 31, 2020:
	Number of	Number of RSU
	RSU	Vested
Balance Outstanding at December 31, 2019	—	—
RSU Granted	280,099	N/A
RSUExercised	(157,788)	N/A
RSU Forfeited/Cancelled	—	N/A
Balance Outstanding as at December 31, 2020	122,311	33,733
RSU Granted	174,408	N/A
RSUExercised	(20,233)	N/A
RSU Forfeited/Cancelled	(75,547)	N/A
Balance Outstanding as at September 30, 2021	200,939	13,500

Stock Options

The Company’s Stock Option Plan (the “Plan”) effective March 8, 2017 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 fully diluted shares of the Company as at the date of the grant of options.

The stock options outstanding noted below consist of service-based options granted to employees, directors, officers, and consultants to purchase common stock, which vest over a one to four-year period and have a five to ten-year expiry term. These awards are subject to the risk of forfeiture until vested by virtue of continued employment or service to the Company.

The fair value of the various stock options granted during the nine months ended September 30, 2021 were estimated using the Black-Scholes option pricing model with the following weighted average assumptions: Stock price volatility – 81.51% (September 30, 2020- 83.00%); risk-free interest rate – 0.90% to 1.46% (September 30, 2020- 0.35%); dividend yield – 0% (September 30, 2020- 0%); forfeiture rate – 23.21% (September 30, 2020- 26.1%); and expected lives – 4.57 to 10.00 years (September 30, 2020- 4.78 to 5.31 years). The expected volatility of the Company’s equity instruments was estimated based on the historical volatility.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

13. Share capital and contributed surplus (continued)

The following is a summary of the changes in the Company’s options for the nine months ended September 30, 2021, and year ended December 31, 2020:

		Weighted	Weighted
		Average	Average
		Remaining	Exercise	Number of
	Number of	Life in	Price	options
	Options	Years	CAD$	Exercisable
Balance Outstanding at December 31, 2019	10,493,015	4.04	5.53	2,443,578
Options Granted	12,861,050	N/A	3.76	N/A
OptionsExercised	(1,816,496)	N/A	3.18	N/A
Options Forfeited/Cancelled	(4,174,221)	N/A	5.62	N/A
Balance Outstanding as at December 31, 2020	17,363,348	3.96	4.44	2,703,689
Options Granted	2,185,000	N/A	14.15	N/A
OptionsExercised	(829,675)	N/A	5.55	N/A
Options Forfeited/Cancelled/Expired	(6,412,854)	N/A	4.91	N/A
Balance Outstanding as at September 30, 2021	12,305,819	4.54	5.75	8,086,641

Contributed surplus

The Company’s contributed surplus balances include the following:

				Share-based
		Warrants		payments		Contributed
		reserve		reserve		surplus		Total
Outstanding, December 31, 2019	$	25,504	$	13,352	$	3,018	$	41,874
Share-based compensationexpense		89		11,644		686		12,419
Warrant and stock option and RSU
exercise		(43)		(3,319)		(434)		(3,796)
Issuance ofwarrants		21,876		—		—		21,876
Reallocation on Canopy Rivers convertible
debt amendment		2,846		—		(2,846)		—
Options expired/forfeited		—		(3,168)		—		(3,168)
Outstanding, December 31, 2020	$	50,272	$	18,509	$	424	$	69,205
Share-based compensationexpense		—		11,338		572		11,910
Warrant and stock option and RSU
exercise		(192)		(2,648)		(125)		(2,965)
Issuance ofwarrants		560		—		—		560
Conversionofconvertible debt		—		—		(1,593)		(1,593)
InvestmentinNJ partnership		—		—		(45,305)		(45,305)
Options Forfeited/Cancelled/Expired		—		(548)		—		(548)
Outstanding, September 30, 2021	$	50,640	$	26,651	$	(46,027)	$	31,264

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

13. Share capital and contributed surplus (continued)

During the nine months ended September 30, 2021, $nil (September 30, 2020- $399) of share-based payments expense was included in cost of goods sold.

14. Non-controlling interest

Non-controlling interest includes the Company’s ownership minority interest in New Jersey operations and its minority owned subsidiary at its Ilera business, IHC Real Estate, and consists of the following amounts at September 30, 2021 and December 31, 2020:

		September 30, 2021		December 31, 2020*
Opening carrying amount balance	$	7,433	$	6,461
Capitalcontributionsreceived		174		394
InvestmentinNJ partnership		(4,695)		—
Net income attributable to non-controlling interest		6,059		578
Endingcarryingamount balance	$	8,971	$	7,433

15. 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 nine months ended September 30, 2021 and September 30, 2020 respectively were as follows:

	For the nine months ended	For the nine months ended
	September 30, 2021	September	30, 2020*
Salaries and wages	$2,158		$1,421
Share-based payments	4,055		4,262
Total	$6,213		$5,683

(b) A small number of related persons participated in the Ilera Term Loan (Note 10), which makes up $3,550 of the total loan principal balance.

(d) 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 9).

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

16. Income taxes

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

the Company’s effective income tax expenses is as follows:
		September 30, 2021			September 30, 2020*
Income (loss) beforeincome tax	$	50,341	$		(22,303)
Statutory tax rate		21.0%			26.5%
Expectedincome taxexpense (recovery)		10,572			(5,910)

Effect on income taxes of deductible & non-deductible
adjustments
IRC280Eadjustment		12,304			7,863
Transactioncosts andlegal fees adjustment		—			219
IFRIC23 uncertaintaxposition		(3,751)			(2,872)
U.S. stateincome taxes		7,123			—
Canadaincome taxes at different statutoryrate		(584)			—
U.S.income taxes at different statutoryrate		—			3,515
(Gain)loss on revaluationof Equity/Warrants		(9,180)			4,730
Loss on revaluationofcontingent consideration		569			3,887
Loss on foreignexchange		959			—
Gainon revaluationofequityinterest		(1,219)			—
Share based compensation and non-deductible
expenses		2,536			1,947
Changesintaxbenefitsnotrecognized		5,538			(936)
Other adjustments		(1,002)			(10)
Income tax expense	$	23,865		$	12,433
The Company's income tax expense (recovery) is allocated
asfollows:
Current taxexpense	$	22,054		$	13,596
Deferred tax expense (recovery)		1,811			(1,163)
Income tax expense	$	23,865		$	12,433

As the operations of the Company are predominantly US based, the Company has prepared the tax rate table for nine months ended September 30, 2021 using the US Federal tax rate of 21.0%. The Company’s combined Canadian federal and provincial statutory rates are at 26.5% (September 30, 2020 – 26.5%).

As many of the Company’s U.S. subsidiaries operate in the cannabis industry and are subject to the limitations of the United States Internal Revenue Code (“IRC”) Section 280E, the impact results in a permanent tax difference as a disallowed tax deduction. Therefore, the US 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. The Company’s provision for income taxes for the nine months ended September 30, 2021 was reduced by a $3,908 recovery resulting from the Apothecarium tax audit settlement for tax years ended September 30, 2014 and September 30, 2015 and statute expirations. A corresponding reduction to the indemnification asset related to the Apothecarium tax audit settlement and statute expirations in the amount of $3,891 is included in finance and other expenses for the nine months ended September 30, 2021.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

16. Income taxes (continued)

The Company’s current tax liability of $10,924 as of September 30, 2021 (December 31, 2020 – $27,739) includes a liability related to the application of IRC Section 280E prior to the acquisition of Apothecarium by the Company. 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 Company cannot predict the outcome and timing of these matters, it has recorded a liability of $4,581 related to the pre-acquisition periods of Apothecarium as of September 30, 2021 (December 31, 2020- $11,500). On the acquisition of the Apothecarium, the seller set aside cash in an escrow account to be used on future tax indemnifications. As of September 30, 2021, an indemnification asset of $4,581 (December 31, 2020 - $11,500), has been recorded on the statement of financial position.

17. General and administrative expenses

The Company’s general and administrative expenses were as follows:

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For the nine months ended
September 30, 2021 September 30, 2020
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Office and general	$7,557	$8,355
Professional fees	10,676	4,155
Facility andmaintenance	1,321	1,667
Salaries and wages	23,805	16,484
Sales and marketing	2,187	1,864
Total	$45,546	$32,525

18. Revenue

The Company’s disaggregated revenue by source, primarily due to the Company’s contracts with its external customers for the nine months ended September 30, 2021 and September 30, 2020 were as follows:

	For the nine months ended	For the nine months ended
	September 30, 2021	September	30, 2020
Brandedmanufacturing	$98,935		$69,483
Retail	62,281		28,734
Total	$161,216		$98,217

For the nine months ended September 30, 2021 and September 30, 2020, the Company did not have any single customer that accounted for 10% or more of the Company’s revenue.

19. Segment disclosure

Operating Segment

The Company operates under one operating segment, being the cultivation, production and sale of cannabis products.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

19. Segment disclosure (continued)

Geography

The Company operates with subsidiaries located in Canada and the US. The Company’s net sales for the nine months ended September 30, 2021 and September 30, 2020 were as follows:

	For the nine	months ended
	September 30, 2021	September	30, 2020
United States	$148,263		$87,208
Canada	12,953		11,009
Total net sales	$161,216		$98,217

The Company had non-current assets at September 30, 2021 and December 31, 2020 as follows:

	September 30, 2021	December 31, 2020*
United States	$437,602	$313,992
Canada	30,810	32,530
Total non-current assets	$468,412	$346,522

20. Supplemental cash flow information

The changes in working capital items during the nine months ended September 30, 2021 and September 30, 2020 were as follows:

as follows:
		For the nine months ended
		September 30,		September	30,
		2021		2020*
Receivables	$	1,316	$	(1,734)
Inventory		(11,544)		(6,376)
Prepaid expenses and deposits		(689)			(358)
Deferred taxasset		—			—
Otherasset		(115)			(630)
Accounts payable and accruedliabilities		(4,154)		(3,896)
Other liability		3,750			—
Deferred revenue		287			(310)
	$	(11,149)	$	(13,304)

21. Capital management

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 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 share capital and debentures. The equity issuances are outlined in Note 13 and debt issuances are outlined in Note 10.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

21. Capital management

The Company is subject to financial covenants as a result of its loans payable with various lenders. The Company is in compliance with its debt covenants as of September 30, 2021. Other than these items related to loans payable as of September 30, 2021 and December 31, 2020, the Company is not subject to externally imposed capital requirements.

22. Financial instruments and risk management

Financial instruments

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 following table represents the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy:

		At September 30, 2021	At September 30, 2021
		Measurement basis		Fair value hierarchy
	Financial assets at amortized cost	Financial liabilities at amortized cost	Fair value through profit or loss	Level 3
Fairvalue of assets
Cashand cashequivalents	102,638	—	—	—
Receivables, net of sales returns and
allowances	10,831	—	—	—
Share subscriptionsreceivable	—	—	—	—
Fairvalue of liabilities
Accounts payable and accruedliabilities	—	48,992	—	—
Corporateincome taxpayable	—	10,924	—	—
Loans payable	—	192,877	—	—
Warrantliability	—	—	69,432	69,432
Contingent consideration payable	—	—	11,603	11,603

		At December 31, 2020	At December 31, 2020
		Measurement basis		Fair value hierarchy
	Financial assets at amortized cost	Financial liabilities at amortized cost	Fair value through profit or loss	Level 3
Fairvalue of assets
Cashand cashequivalents	59,226	—	—	—
Receivables, net of sales returns and
allowances	10,876	—	—	—
Fairvalue of liabilities
Accounts payable and accruedliabilities	—	27,176	—	—
Corporateincome taxpayable	—	27,739	—	—
Loans payable	—	184,538	—	—
Convertible debentures	—	4,083	—	—
Warrantliability	—	—	132,257	132,257
Contingent consideration payable	—	—	37,556	37,556

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

22. Financial instruments and risk management (continued)

There were no transfers between the levels of fair value hierarchy during the nine months ended September 30, 2021 or the year ended December 31, 2020.

The carrying values of financial assets and liabilities measured at amortized cost approximate their fair values due to their short periods to maturity.

Fair Value of Warrant and Derivative Liabilities

The preferred share warrant liability has been remeasured to fair value at September 30, 2021 using the Black Scholes model. In addition, warrants were exercised during the quarter. The combined impact resulted in a gain of fair value of warrants of $43,715 for the nine months ended September 30, 2021 related to the warrant liability of the USD denominated Preferred Share Warrants described in Note 13 .

Key inputs and assumptions used in the Black Scholes valuation at September 30, 2021 were as follows:

	September 30, 2021
CommonStock Price of TerrAscend Corp.	$7.04
Warrant exercise price	$3,000
Warrant conversion ratio	1,000
Annualvolatility	63.9%
Annual risk-freerate	0.3%
Term	1.64 years

Contingent Consideration Payable

Note 5 Acquisitions describes the nature of contingent consideration liabilities. The fair value of contingent consideration at September 30, 2021 was determined using a probability weighted model based on the likelihood of achieving certain revenue and EBITDA scenario outcomes. A discount rate of 12.2% (December 31, 2020 – 12.3% to 12.9%) was utilized to determine the present value of the liabilities, resulting in a loss on revaluation of contingent consideration of $2,652 for the nine months ended September 30, 2021 (September 30, 2020- $14,667).

The illustrative variance of the total contingent consideration at September 30, 2021 based on reasonably possible changes to one of the significant unobservable inputs, holding other inputs constant, would have the following effects:

Discount rate sensitivity	KCR
Increase100 basis points	$1,017
Increase 50 basis points	1,093
Decrease 50 basis points	1,138
Decrease 100 basis points	1,162

Revenue sensitivity	State Flower
Increase100 basis points	$7,610
Increase 50 basis points	7,530
Decrease 50 basis points	7,390
Decrease 100 basis points	7,320

The contingent consideration for Ilera was calculated based on fiscal year 2019 and 2020 performance and the final earn out has been calculated as of September 30, 2021 (Note 5).

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

22. Financial instruments and risk management (continued)

Financial risk factors

The financial risk factors significant to the Company’s condensed interim financial statements are consistent with those disclosed in the notes to the annual consolidated financial statements for the year ended December 31, 2020.

23. Change in Presentation Currency

For comparative purposes, the consolidated statements of financial position at January 1, 2020 and December 31, 2020 includes adjustments to reflect the change in accounting policy resulting from the change in presentation currency to US dollars. The amounts previously reported in Canadian dollars as shown below have been translated into US dollars at December 31, 2020 and January 1, 2020 exchange rates (Note 2(c)). The effect of the translation is as follows:

	As of December
	Previously Reported	Translated
	(in CAD)	(in USD)
Current assets	$162,689	$127,779
Non-current assets	441,192	346,522
Total assets	$603,881	$474,301
Currentliabilities	$119,635	$93,963
Non-current liabilities	473,129	371,606
Total liabilities	$592,764	$465,569

	As of January
	Previously Reported	Translated
	(in CAD)	(in USD)
Current assets	$89,830	$69,163
Non-current assets	370,936	285,599
Total assets	$460,766	$354,762
Currentliabilities	$142,864	$110,003
Non-current liabilities	242,573	186,768
Total liabilities	$385,437	$296,771

For comparative purposes, the consolidated statements of loss and comprehensive loss for the three and nine months ended September 30, 2021 includes adjustments to reflect the change in accounting policy resulting from the change in presentation currency to US dollars. The amounts previously reported in Canadian dollars as shown below have been translated into US dollars using the average 2020 exchange rate (Note 2(c)). The effect of the translation is as follows for the nine months ended September 30, 2020:

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

23. Change in Presentation Currency (continued)

	For the three months ended September 30, 2020	For the three months ended September 30, 2020	For the nine months ended September 30, 2020	For the nine months ended September 30, 2020
	Previously Reported (in CAD)	Translated (in USD)	Previously Reported (in CAD)	Translated (in USD)
Sales,net	$50,968	$38,128	$132,996	$98,217
Gross profit (loss) before gain on fair value ofbiologicalassets	30,088	22,469	72,098	53,244
Gross profit	34,562	25,849	89,406	66,026
Incomefromoperations	14,092	10,467	27,198	20,070
Net loss attributable to non-controlling interests	(633)	(477)	(2,185)	(1,614)
Net loss attributable to shareholders of the Company	(16,917)	(14,123)	(42,854)	(33,122)

Net lossper share – basic and diluted	(0.11)	(0.09)	(0.29)	(0.22)

For comparative purposes, the consolidated statements of cash flow for the nine months ended September 30, 2021 includes adjustments to reflect the change in accounting policy resulting from the change in presentation currency to US dollars. The amounts previously reported in Canadian dollars as shown have been translated into US dollars (Note (Note 2(c)). The effect of the translation is as follows for the nine months ended September 30, 2020:

	For the nine months ended	For the nine months ended
	September	30, 2020
	Previously Reported		Translated
	(in CAD)		(in USD)
Cash inflowfromoperating activities	$8,726		$5,230
Cash inflowfrom financing activities	109,255		80,342
Cash outflow from investing activities	(82,322)		(61,476)

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

24. Commitments and Contingencies

On October 15, 2018, the Company’s wholly owned subsidiary TerrAscend Canada entered into a multi-year cultivation agreement (the “PharmHouse Agreement”) with PharmHouse Inc. (“PharmHouse”), a joint venture between Canopy Rivers Inc. and 2615975 Ontario Inc., the operators of a leading North American greenhouse produce company (“261”). Under the terms of the PharmHouse Agreement, it was expected that PharmHouse would grow and supply cannabis to TerrAscend Canada from its 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 planted at the greenhouse was expected to be made available to TerrAscend Canada. To date, PharmHouse has not yet delivered product in accordance with the terms of the PharmHouse Agreement. On September 11, 2020, the Company and TerrAscend Canada were informed that a statement of claim was issued on August 31, 2020 in the Ontario Superior Court of Justice by 261 against Canopy Rivers Inc., Canopy Growth Corporation, the Company and TerrAscend Canada (the “261 Claim”). In the 261 Claim, 261 seeks damages from the defendants in the amount of $500 million and alleges certain causes of action, including bad faith, fraud, civil conspiracy, breach of the duty of honesty and good faith in contractual relations and breach of fiduciary duty. The 261 Claim, as against the Company and TerrAscend Canada, is completely baseless and without merit, and the Company will vigorously defend itself, if necessary, in the appropriate forum. On September 16, 2020, PharmHouse obtained an order from the Ontario Superior Court of Justice granting PharmHouse creditor protection under the Companies’ Creditors Arrangement Act (“CCAA”). Pursuant to the CCAA order, the 261 Claim has been stayed. During a CCAA hearing in November, 261 objected to the stay of the 261 Claim. The judge presiding over the CCAA process agreed to allow 261 to discontinue the 261 Claim against the defendants ‘without prejudice’ to its right to recommence the 261 Claim against all parties except PharmHouse Inc., provided that such recommenced claim can only be brought after January 1, 2021. This does not affect any of the defendants’ ability to move for a stay of the recommenced 261 Claim. On February 10, 2021, 261 served the Issuer and TerrAscend Canada with the recommenced 261 Claim. On March 11, 2021, the Ontario Superior Court of Justice approved a settlement agreement (the “Settlement Agreement”) between the Company, TerrAscend Canada and PharmHouse. The Settlement Agreement provides that the Company make a one-time purchase of a specific quantity of cannabis that was grown under the PharmHouse Agreement for a set price per gram, and for a one-time cash payment to PharmHouse for full and final satisfaction of any claims or obligations between the Company, TerrAscend Canada and PharmHouse. Both payments are immaterial to the Company and the Company plans to monetize the purchased cannabis. The Settlement Agreement does not affect the recommenced 261 Claim issued on February 10, 2021, which the Company believes is completely baseless and without merit.

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 $2,764 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 unaudited condensed interim consolidated financial statements.

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. At September 30, 2021, there were no pending lawsuits other than those disclosed that could reasonably be expected to have a material effect on the results of the Company’s unaudited condensed interim consolidated financial statements.

TerrAscend Corp.

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

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

25. Subsequent events

On November 12, 2021, the Company through its wholly owned subsidiary WDB Holding MD, Inc. completed the acquisition of a property in Hagerstown, Maryland. The property was purchased from GB & J’s, LLC, the members of which include Jason Ackerman (former Director, Executive Chairman and CEO of the Company), Greg Rochlin (former CEO of Ilera), and several entities affiliated with Jason Wild (Chairman of TerrAscend) (the “GB & J Sellers”) for the purchase price of $2,808. The value of Jason Ackerman’s interest in the transaction is $401, the value of Greg Rochlin’s interest in the transaction is $401, and the value of the interests of funds controlled directly or indirectly by Jason Wild in the transaction is $401.

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TerrAscend — Interim / Quarterly Report 2021

47415_rns_2021-11-16_c2c87819-153d-4afc-86d7-db41b7ad4333.pdf

TERRASCEND CORP.

Unaudited Condensed Interim Consolidated Statements of Financial Position

Unaudited Condensed Interim Consolidated Statements of Income (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

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

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

1. Nature of operations

2. Basis of presentation

(a) Statement of compliance

(b) Basis of measurement

(c) Functional and presentation currency

Change in presentation currency

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

2. Basis of presentation (continued)

(d) Basis of consolidation

(e) Use of significant estimates and judgments

3. Significant accounting policies

New standards, amendments and interpretations adopted

4. Receivables, net of sales returns and allowances

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

4. Receivables, net of sales returns and allowances (continued)

5. Acquisitions

Acquisition of KCR

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

5. Acquisitions (continued)

Acquisition of HMS

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three and nine months ended September 30, 2021 and 2020

5. Acquisitions (continued)

New Jersey Partnership

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three and nine months ended September 30, 2021 and 2020

5. Acquisitions (continued)

Contingent consideration

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

6. Biological assets

Dry bud

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

6. Biological assets (continued)

Trim

7. Inventory

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

7. Inventory (continued)

8. Property, plant and equipment

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

8. Property, plant and equipment (continued)

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

9. Intangible assets and goodwill

Notes to the Unaudited Condensed Interim Consolidated Financial Statements For the three and nine months ended September 30, 2021 and 2020

9. Intangible assets and goodwill (continued)

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

9. Intangible assets and goodwill (continued)

10. Loans payable

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

10. Loans payable (continued)

Credit Facility

Canopy Growth Loans

Formerly Canopy Rivers

Canopy Growth Canada Inc. loan

Notes to the Unaudited Condensed Interim Consolidated Financial Statements

For the three and nine months ended September 30, 2021 and 2020

10. Loans payable (continued)

Canopy Growth Arise loan

Other Loans

Mortgage financing

Paycheck Protection Program loan

TerrAscend Interim / Quarterly Report 2021