TerrAscend — Interim / Quarterly Report 2023

May 11, 2023

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of TerrAscend's financial condition and results of operations should be read in conjunction with TerrAscend's unaudited interim condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial information and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the Securities and Exchange Commission, or SEC, on March 16, 2023, or the Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q including information with respect to TerrAscend's plans and strategy for its business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth under "Risk Factors" in our Annual Report, its actual results could differ materially from the results described in or implied by the "Cautionary Note Regarding Forward-Looking Statements" contained in this Quarterly Report on Form 10-Q and in the following discussion and analysis.

Unless otherwise noted, dollar amounts in this Item 2 are in thousands of U.S. dollars.

This Management's Discussion and Analysis ("MD&A") of the financial condition and results of operations of TerrAscend is for the three months ended March 31, 2023 and 2022 and the accompanying notes for each respective period.

Overview

TerrAscend is a leading North American cannabis operator with vertically integrated licensed operations in Pennsylvania, New Jersey, Michigan, Maryland and California, and is a cannabis retailer in Ontario, Canada with a minority-owned dispensary in Toronto, Ontario, Canada. TerrAscend's cultivation and manufacturing practices yield consistent and high-quality cannabis, providing industry-leading product selection to both the medical and legal adult-use markets. Notwithstanding the fact that various states in the U.S. have implemented medical marijuana laws or that have otherwise legalized the use of cannabis, the use of cannabis remains illegal under U.S. federal law for any purpose, by way of the Controlled Substances Act of 1970.

TerrAscend operates under one operating segment, which is the cultivation, production and sale of cannabis products. TerrAscend owns a portfolio of operating businesses and several synergistic brands including:

• Gage Growth ("Gage"), a vertically integrated cannabis cultivator, processor and dispensary operator in Michigan;
• KISA Enterprises MI, LLC and KISA Holdings, LLC (collectively "Pinnacle"), a dispensary operator in Michigan;
• Ilera Healthcare ("Ilera"), a vertically integrated cannabis cultivator, processor and dispensary operator in Pennsylvania;
• TerrAscend NJ, LLC ("TerrAscend NJ"), a majority owned subsidiary that operates three dispensaries in New Jersey with the ability to cultivate and process;
• HMS Health, LLC ("HMS Health") and HMS Processing, LLC ("HMS Processing" and together with HMS Health, "HMS"), a producer and seller of dried flower and oil products for the wholesale medical cannabis market in Maryland;
• Allegany Medical Marijuana Dispensary ("AMMD"), a medical dispensary in Cumberland, Maryland;
• The Apothecarium, consisting of retail dispensaries in California, Pennsylvania, and New Jersey;
• Valhalla Confections, a provider of premium edible products;
• State Flower, a California-based cannabis producer operating a licensed cultivation facility in San Francisco, California;
• TerrAscend Canada ("TerrAscend Canada" or "TCI") is a cannabis retailer in Ontario, Canada with a minority-owned dispensary in Toronto, Ontario, Canada ("Cookies Canada"). TerrAscend Canada was previously a Licensed Producer (as such term is defined in the Cannabis Act) of cannabis until TerrAscend commenced an optimization of its operations in Canada, whereby TerrAscend reduced its manufacturing footprint in order to focus on its Cookies Canada retail business, as well as monetize its intellectual property portfolio in Canada. TerrAscend ceased operations at its manufacturing facility during the three months ended December 31, 2022 and increased its ownership interest in Cookies Retail Canada Corp. to 95% of the issued and outstanding shares.

TerrAscend's head office and registered office is located at 77 City Centre Drive, Suite 501 - East Tower, Mississauga, Ontario, Canada, L5B 1M5.

TerrAscend's telephone number is 1.855.837.7295 and its website is www.terrascend.com. Information contained on or accessible through TerrAscend's website is not a part of this Quarterly Report, and the inclusion of TerrAscend's website address in this Quarterly Report on Form 10-Q is an inactive textual reference only.

Recent Developments

• On January 19, 2023, the Company announced that it entered into a multi-year agreement with Wana Brands ("Wana"), the leading edible manufacturer in North America, to introduce Wana's products at The Apothecarium retail stores and additional third-party retailers in New Jersey. The agreement will also transfer to TerrAscend, the manufacturing and sales of Wana's existing portfolio of products in Maryland. Pursuant to the agreement, the Company will serve as the exclusive sole manufacturer, supplier, and commercial partner for Wana's products in New Jersey.
• On January 27, 2023, the Company closed on its previously announced acquisition of Allegany Medical Marijuana Dispensary ("AMMD"), a medical dispensary in Maryland from Moose Curve Holdings, LLC. Under the terms of the agreement, TerrAscend acquired 100% equity interest in AMMD for total consideration of $10,000 in cash, in addition to entering into a long-term lease with the option to purchase the real estate. the Company intends to rebrand the 10,000 square foot dispensary as The Apothecarium.
• On January 30, 2023, the Company appointed Jeroen De Beijer as Chief People and Culture Officer.
• On February 13, 2023, the Company announced that it launched adult-use cannabis sales at its Cookies Detroit retail location.
• On March 14, 2023, the Company announced it has applied to list the Company's common shares on the Toronto Stock Exchange. In connection with the Company's proposed listing on the TSX, and in order to qualify for the TSX's minimum listing requirements, the Company expects to implement an internal reorganization. The Reorganization will require approval from the Company's shareholders. The listing of the Common Shares on the TSX remains subject to the review of the TSX and is contingent on the satisfaction of all listing and regulatory requirements. There is no assurance that the TSX will approve the listing application or that the Company will complete the Reorganization and the listing on the TSX as currently proposed.
• On March 31, 2023, the Company announced that it promoted Ziad Ghanem effective immediately to Chief Executive Officer, in addition to his existing role as President of the Company.

Subsequent Transactions

• On April 20, 2023, the Company announced that it increased its ownership interest in Cookies Retail Canada Corp. to 95% of the issued and outstanding shares.
• On April 25, 2023, the Company announced that it entered into a five year licensing agreement with Cookies, to cultivate and manufacture Cookies products in Maryland.

Components of Results of Operations

The following discussion sets forth certain components of our Unaudited Condensed Consolidated Statements of Comprehensive Loss as well as factors that impact those items.

Revenue

TerrAscend generates revenue from the sale of cannabis products, brands, and services to the United States and Canadian markets. Revenues consist of wholesale and retail sales in the medical and legal adult use market across Canada and in several U.S. states where cannabis has been legalized for medical or adult use.

Cost of sales

Cost of sales primarily consists of expenses related to providing cannabis products and services to TerrAscend's customers, including personnel-related expenses, the depreciation of property and equipment, amortization of acquired intangible assets, and other overhead costs.

General and administrative

General and administrative ("G&A") consists primarily of personnel costs related to finance, human resources, legal, and other administrative functions. Additionally G&A expense includes professional fees to third parties, as well as marketing expenses. In addition, G&A expense includes share-based compensation on options, restricted stock units and warrants. TerrAscend expects that G&A expense will increase in absolute dollars as the business grows.

Amortization and depreciation

Amortization and depreciation includes the amortization of intangible assets. Amortization is calculated on a straight line basis over the following terms:

Brand intangibles- indefinite lives	Indefinite useful lives
Brand intangibles- definite lives	3 years
Software	5 years
Licenses	5-30 years
Customer relationships	5 years
Non-compete agreements	3 years

Depreciation of property and equipment is calculated on a straight-line basis over the estimated useful life of the asset using the following terms:

Buildings and improvements	Lesser of useful life or 30 years
Land	Not depreciated
Machinery & equipment	5-15 years
Office furniture & production equipment	3-5 years
Right of use assets	Lease term
Assets in process	Not depreciated

Impairment of intangible assets and goodwill

Goodwill and indefinite lived intangible assets are reviewed for impairment annually and whenever there are events or changes in circumstances that indicate that the carrying amount has been impaired. TerrAscend first performs a qualitative assessment. If based on the results of a qualitative assessment it has been determined that it is more likely than not that the fair value of a reporting unit exceeds its carrying value, additional quantitative impairment test is performed which compares the carrying value of the reporting unit to its estimated fair value. If the carrying value exceeds the estimated fair value, an impairment is recorded.

Definite lived intangible assets are tested for impairment when there are indications that an asset may be impaired. When indicators of impairment exist, TerrAscend performs a quantitative impairment test which compares the carrying value of the assets for intangible assets to their estimated fair values. If the carrying value exceeds the estimated fair value, an impairment is recorded.

(Gain) loss from revaluation of contingent consideration

As a result of some of its acquisitions, TerrAscend recognizes a contingent consideration payable, which is an obligation to transfer additional assets to the seller if future events occur. The liability is revalued at the end of each reporting period to determine its fair value. A gain or loss is recognized as a result of the revaluation.

(Gain) loss on fair value of warrants and purchase option derivative asset

During the year ended December 31, 2020, TerrAscend closed a non-brokered private placement by issuing 18,679 convertible preferred stock units, each unit consisting of one non-voting, non-participating preferred share and one preferred share warrant ("Preferred Warrant"). The Preferred Warrants were recorded as a warrant liability and are remeasured to fair value at the end of each reporting unit using the Black Scholes model. A gain or loss is recognized as a result of the revaluation.

Finance and other expenses

Finance and other expenses consists primarily of interest expense on TerrAscend's outstanding debt obligations.

Transaction and restructuring costs

Transaction costs include costs incurred in connection with TerrAscend's acquisitions, such as expenses related to professional fees, consulting, legal and accounting. Restructuring costs are those costs associated with severance and restructuring of business units.

Impairment of property and equipment

TerrAscend evaluates the recoverability of property and equipment whenever events or changes in circumstances indicate that the carrying value of the asset, or asset group, may not be recoverable. When TerrAscend determines that the carrying value of the longlived asset may not be recoverable based upon the existence of one or more indicators, the assets are assessed for impairment based on the estimate of future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying value of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset's carrying value over its fair value.

Unrealized and realized foreign exchange loss

Unrealized and realized foreign exchange loss represents the loss recognized on the remeasurement of USD denominated cash and other assets recorded in the Canadian dollars functional currency at TerrAscend's Canadian operations.

Unrealized and realized gain on investments

TerrAscend accounts for its investment in equity securities without readily determinable fair values using a valuation technique which maximizes the use of relevant observable inputs, with subsequent holding changes in fair value recognized in unrealized gain or loss on investments in the consolidated statement of loss.

Provision for income taxes

Provision for income taxes consists of U.S. federal and state income taxes in certain jurisdictions in which TerrAscend conducts business.

Results from Operations- Three months ended March 31, 2023 and March 31, 2022

The following tables represent the Company's results from operations for the three months ended March 31, 2023 and 2022.

Revenue, net

	For the Three Months Ended
		March 31, 2023		March 31, 2022
Revenue	$	69,720	$	49,060
Excise and cultivation taxes		(322)	$	(475)
Revenue, net	$	69,398	$	48,585
$ change	$	20,813
% change	43%

Revenue increased from $49,060 to $69,720 driven by growth in retail offset by a decline in wholesale. Retail revenue increased from $25,718 during the three months ended March 31, 2022 to $55,422 during the three months-ended March 31, 2023. The increase is primarily a result of adult use coming online in New Jersey in April 2022 and the Gage acquisition, which closed on March 10, 2022. The increase in retail revenue is partially offset by $8,891 decrease in wholesale revenue related to the company's decision to discontinue bulk wholesale sales in Michigan.

Cost of Sales

	For the Three Months Ended
	March 31, 2023		March 31, 2022
Cost of sales	$34,701	$	31,888
Impairment and write downs of inventory	797		1,073
Total cost of sales	$35,498	$	32,961
$ change	$2,537
% change	8%
Cost of sales as a % of revenue	51%		67%

The increase of $2,537 in cost of sales for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 is mainly a result of the Gage, Pinnacle and AMMD acquisitions. The decrease in cost of sales as a percentage of revenue is primarily a result of greater operating leverage driven by adult use implementation in New Jersey in April 2022.

The company wrote off $797 of packaging inventory due primarily to defective cartridges during the three months ended March 31, 2023. On February 4, 2022, more than 500 vape products were recalled by the Pennsylvania's Department of Health, including several of the Company's SKUs. As a result of the recall, the Company wrote off $854 of inventory during the three months ended March 31,2022. In addition, management impaired its inventory by $219 as it was deemed unsaleable.

General and Administrative Expense (G&A)

		For the Three Months Ended
	March 31, 2023			March 31, 2022
General and administrative expense	$	27,730	$	21,424
$ change	$	6,306
% change		29%

The increase in G&A expense of $6,306 for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily a result of payroll and marketing expense increasing by $4,698 and $1,269, respectively, as a result of the Gage acquisition that closed on March 10, 2022.

Amortization and Depreciation Expense

	For the Three Months Ended
	March 31, 2023
Amortization and depreciation	$2,029	$	2,175
$ change	$(146)
% change	-7%

The decrease of $146 in amortization and depreciation expense for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 is primarily due to a brand intangible asset that was fully amortized during 2022.

Gain on fair value of warrants and purchase option derivative asset

	For the Three Months Ended
	March 31, 2023			March 31, 2022
Gain on fair value of warrants and purchase option derivative asset	$	(438)	$	(5,713)
$ change	$	5,275
% change		-92%

The Preferred Share warrant liability has been remeasured to fair value at March 31, 2023 using the Black Scholes model. The Company recognized a gain during the three months ended March 31, 2023 as a result of the reduction of the Company's share price from December 31, 2022 to March 31, 2023, as well as from warrants exercised during the three months ended March 31, 2023. The combined impact resulted in a gain on fair value of warrants of $438 for the three months ended March 31.2023.

The Preferred Share warrant liability was remeasured to fair value at March 31, 2022 using the Black Scholes model. The Company recognized a gain during the three months ended March 31, 2022 as a result of the reduction of the Company's share price from December 31, 2021 to March 31, 2022, as well as from warrants exercised during the three months ended March 31, 2022. The combined impact resulted in a gain on fair value of warrants of $7,208. Additionally, the Company remeasured the warrant liability acquired through the Gage Acquisition at March 31, 2022 using the Black Scholes model. The Company recognized a loss of $3,864 during the three months ended March 31, 2022 as a result of the increase in the Company's stock price between March 31, 2022 and the acquisition date of March 10, 2022.

For the three months ended March 31, 2022, the purchase option derivative asset related to the option to purchase an additional 6.25% ownership of the Company's New Jersey partnership, was remeasured using the Monte Carlo simulation model and resulted in a loss of $318.

Finance and other expenses

		For the Three Months Ended
	March 31, 2023			March 31, 2022
Finance and other expenses	$	10,087	$	6,655
$ change	$	3,432
% change		52%

The increase of $3,432 in finance and other expenses for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 is primarily due to the Gage acquisition which closed on March 10, 2022, the Pelorus loan agreement that was entered into on October 11, 2022 and the $2,235 employee retention credits transfer fee that was incurred during the three months ended March 31, 2023.

Transaction and restructuring costs

	For the Three Months Ended
	March 31, 2023		March 31, 2022
Transaction and restructuring costs	$3	$	615
$ change	$(612)
% change	-100%

The decrease of $612 in transaction and restricting costs for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 relates primarily to the Gage Acquisition, which closed on March 10, 2022.

Unrealized and realized foreign exchange loss

		For the Three Months Ended
	March 31, 2023			March 31, 2022
Unrealized and realized foreign exchange (gain) loss	$	(31)	$	356
$ change	$	(387)
% change		-109%

The decrease of $387 in unrealized foreign exchange loss for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 is a result of the remeasurement of US dollar denominated cash and other assets recorded in Canadian dollar functional currency at the Company's Canadian operations.

Provision for income taxes
	For the Three Months Ended
	March 31, 2023March 31, 2022
Provision for income taxes	$12,664	$	3,743
$ change	$8,921
% change	238%

The increase of 8,921 in provision for income taxes for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by the increase in gross profit as a result of growth in new jurisdictions.

Liquidity and Capital Resources

	March 31, 2023	December 31,2022
	$	$
Cash and cash equivalents	32,931	26,158
Current assets	113,784	121,993
Non-current assets	587,792	579,594
Current liabilities	156,072	137,905
Non-current liabilities	246,203	242,511
Working capital	(42,288)	(15,912)
Total shareholders' equity	299,301	321,171

The calculation of working capital provides additional information and is not defined under GAAP. TerrAscend defines working capital as current assets less current liabilities. This measure should not be considered in isolation or as a substitute for any standardized measure under GAAP.

Liquidity and going concern

At March 31, 2023, TerrAscend had an accumulated deficit of $641,517. During the three months ended March 31, 2023, TerrAscend incurred a net loss from continuing operations of $19,178. Additionally, as of March 31, 2023 the Company's current liabilities exceed its current assets. Therefore, TerrAscend expects that it will need additional capital to continue to fund its operations.

The aforementioned indicators raise substantial doubt about TerrAscend's ability to continue as a going concern for at least one year from the issuance of these financial statements. TerrAscend believes this concern is mitigated by steps to improve its operations and cash position, including (i) identifying access to future capital, (ii) continued sales growth from TerrAscend's consolidated operations, and (iii) various actions that were implemented during the latter part of 2022 and continued during the three months ended March 31, 2023 leading to general and administrative expense reductions and other cost and efficiency improvements.

Since its inception, TerrAscend's primary sources of capital have been through the issuance of equity securities or debt facilities, and TerrAscend has received aggregate net proceeds from such transactions totaling $608,315 as of March 31, 2023.

TerrAscend expects to fund any additional future requirements through the following sources of capital:

• cash from ongoing operations.
• market offerings.
• additional debt from additional creditors.
• sale of real property.
• sale leaseback transactions.
• exercise of options and warrants.

Capital requirements

The Company has $198,894 in principal amounts of loans payable at March 31, 2023. Of this amount, $48,292 are due within the next twelve months.

TerrAscend has entered into leases for certain premises and offices for which it owes monthly lease payments. TerrAscend has $74,457 in lease obligations. Of this amount, $6,264 are due in the next twelve months. Additionally, TerrAscend makes monthly payments on financing obligations on six of its real estate properties with $15,161 payable, $1,926 of which is due in the next twelve months

TerrAscend's undiscounted contingent consideration payable is $4,434 at March 31, 2023. The contingent consideration payable relates to TerrAscend's business acquisitions of the Apothecarium and State Flower and is due in the next twelve months.

During the year ended December 31, 2020, TerrAscend expensed $7,500 related to amounts payable to an entity controlled by the minority shareholders of TerrAscend NJ pursuant to services surrounding the granting of certain licenses. The final payment of $3,750 is expected to be due in 2023.

At March 31, 2023, the Company had accounts payable and accrued liabilities of $50,784 and corporate income taxes payable of $34,737.

TerrAscend does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on TerrAscend's results of operations or financial condition, including and without limitation, such consideration as liquidity and capital resources.

TerrAscend intends to meet its capital commitments through any or all of the sources of capital noted above. TerrAscend's objective with respect to its capital management is to ensure it has sufficient cash resources to maintain its ongoing operations and finance future obligations.

Debt facilities

Ilera Term Loan

On December 18, 2020, WDB Holding PA, a subsidiary of TerrAscend, entered into a senior secured term loan with a syndicate of lenders in the amount of $120,000 ("Ilera Term Loan"). The term loan bears interest at 12.875% per annum and matures on December 17, 2024. TerrAscend has the ability to increase the facility by up to $30,000. WDB Holding PA's obligation under the Ilera Term Loan and related transaction documents are guaranteed by TerrAscend, TerrAscend USA, Inc., and certain subsidiaries of WDB Holding PA, and secured by TerrAscend USA Inc.'s equity interest in WDB Holding PA and substantially all of the assets of WDB Holding PA and the subsidiary guarantors party thereto. The loan can be refinanced at the option of the borrower 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.

On April 28, 2022, the Ilera Term Loan was amended to provide WDB Holding PA with greater flexibility by resetting the minimum consolidated interest coverage ratio levels that must be satisfied at the end of each measurement period and extending the date in which WDB Holding PA is required to deliver its budget for the fiscal year ending December 31, 2021. In addition, the no-call period was extended from 18 months to 30 months, subject to a premium payment. This modification was not considered extinguishment of debt under ASC 470 Debt.

On November 11, 2022, WDB Holding PA, TerrAscend, TerrAscend USA Inc. and the subsidiary guarantors party to the Ilera Term Loan and the PA Agent (on behalf of the required lenders) entered into an amendment to the PA Credit Agreement, pursuant to which PA Agent and the required lenders agreed that WDB Holding PA's obligation to maintain the consolidated interest coverage ratio as set forth in the PA Credit Agreement for the period ended September 30, 2022, shall not apply, subject to certain conditions, including (but not limited to) an obligation to enter into a subsequent amendment agreement on or before December 15, 2022, documenting certain enhancements and amendments to the PA Credit Agreement to be agreed. In addition, WDB Holding PA offered a prepayment of $5,000 pro rata to all lenders holding outstanding loans thereunder at a price equal to 103.22% of the principal amount prepaid, plus accrued and unpaid interest.

On December 21, 2022, WDB Holding PA completed an amendment to reduce TerrAscend's principal debt by $35,000 and annual interest expense by $5,000. TerrAscend agreed to make a $35,000 payment at the original prepayment price of 103.22% to par, and agreed to use commercially reasonable efforts to add certain collateral to Ilera Term Loan, collectively by March 15, 2023. The amendment further provided that should WDB Holding PA not maintain the prescribed interest coverage ratio, the Company shall be required to deposit funds, as outlined in the amendment, into a restricted account, and no event of default shall occur. This amendment was not considered extinguishment of debt under ASC 470 Debt.

On March 15, 2023, WDB Holding PA, in exchange for a fee in the amount of 1% of the then outstanding principal loan balance, agreed to an amendment among other things, to (i) extend the obligation date to prepay TerrAscend's debt from March 15, 2023 to June 30, 2023 in which WDB Holding PA must use commercially reasonable efforts to add additional collateral to the Ilera Term Loan, (ii) increase the amount of debt to be reduced by up to $37,000, subject to certain reductions in amount based on meeting certain time based milestones, at a prepayment price of 103.22% to par, and (iii) extend the next test date in respect of the interest coverage ratio until June 30, 2023. This amendment was not considered extinguishment of debt under ASC 470 Debt. There is $115,000 of principal amounts outstanding at March 31, 2023.

Gage Loans

The Gage Acquisition included a senior secured term loan (the "Original Gage Term Loan") with an acquisition date fair value of $53,857. The credit agreement bears interest at a rate equal to the greater of (i) the Prime Rate plus 7% or (ii) 10.25%. The term loan is payable monthly and matures on November 30, 2022. The term loan is secured by a first lien on all Gage assets.

On August 10, 2022, the Original Gage Term Loan was amended as a result of the corporate restructure in conjunction with the Gage Acquisition. The amendment to the Original Gage Term Loan includes the addition of a borrower and guarantor under the term loan and a right of first offer in favor of the administrative agent for a refinancing of the term loan. This amendment was not considered extinguishment of debt under ASC 470 Debt.

On November 29, 2022, TerrAscend repaid $30,000 outstanding principal amount on the Original Gage Term Loan. On November 30, 2022, the remaining loan principal amount of $25,000 on the Original Gage Term Loan was amended (the "Amended Gage Term Loan"). The Amended Gage Term Loan bears interest on $25,000 at a per annum rate equal to the greater of (i) the U.S. "prime rate" plus 6.00%, and (ii) 13.0% and matures on November 1, 2024. Commencing on May 31, 2023, TerrAscend will make monthly principal repayments of 0.40% of the aggregate principal amount outstanding. Additionally, the unpaid principal amount of the loan shall bear paid in kind interest at a rate of 1.50% per annum. No prepayment fees are owed if TerrAscend voluntarily prepays the loan after 18 months. If such prepayment occurs prior to 18 months, a prepayment fee equal to all of the interest on the loans that would be due after the date of such prepayment, is owed. Under the Amended Gage Term Loan, TerrAscend has the ability to borrow incremental term loans of $30,000 at the option of TerrAscend and subject to consents from the required lenders. The additional $30,000 incremental term loans available under the amendment have not been drawn as of December 31, 2022. This loan represents a loan syndication, and therefore TerrAscend assessed each of the lenders separately under ASC 470 Debt to determine if this represents a modification, or an extinguishment of debt. For three of the four remaining lenders, it was determined that this was a modification. For the remaining lender, it was determined that this represented an extinguishment of debt and therefore the fees paid to the lenders on modification were expensed. As a result of this transaction, TerrAscend expensed $1,907 of fees paid to the lenders and third parties as they did not meet the criteria for capitalization under ASC 470 Debt.

Additionally, the Gage Acquisition included a loan payable to a former owner of a licensed entity with an acquisition date fair value of $2,683, and a promissory note with an acquisition date fair value of $4,065. The loan payable to the former owner bears interest at a rate of 0.2%. The promissory note bears interest at a rate of 6%. There is $4,583 of principal amounts outstanding at March 31, 2023 on the loan payable and promissory note.

Pinnacle Loans

The Pinnacle Acquisition purchase price included two promissory notes in an aggregate amount of $10,000 to pay down all Pinnacle liabilities and encumbrances. The promissory note matures on June 30, 2023 and bears interest rates of 6%. There is $8,833 of principal amounts outstanding at March 31, 2023 on the two promissory notes.

Pelorus Term Loan

On October 11, 2022, subsidiaries of TerrAscend, among others, entered into a loan agreement with Pelorus Fund REIT, LLC ("Pelorus") for a single-draw senior secured term loan ("Pelorus Term Loan") in an aggregate principal amount of $45,478. The Pelorus Term Loan bears interest at a variable rate tied to the one month secured overnight financing rate (SOFR), subject to a base rate, plus 9.5%, with interest-only payments for the first 36 months. The base rate is defined as, on any day, the greatest of (i) 2.5%, (b) the effective federal funds rate in effect on such day plus 0.5%, and (c) one month SOFR in effect on such day. The obligations of the borrowers under the Pelorus Term Loan are guaranteed by TerrAscend, TerrAscend USA Inc. and certain other subsidiaries of TerrAscend and secured by all of the assets of TerrAscend's Maryland and New Jersey businesses, including certain real estate in Maryland and New Jersey, but excluding the AMMD. The Pelorus Term Loan matures on October 11, 2027. There is $45,478 of principal amounts outstanding at March 31, 2023.

Cash Flows

Cash flows (used in) / provided by operating activities

		For the Three Months Ended
	March 31, 2023	March 31, 2022
Net cash (used in) / provided by operating activities	$8,434	$(18,847)

The increase of $27,281 in net cash provided by operating activities for the three months ended March 31, 2023 as compared to March 31, 2022 is due primarily to lower interest of $5,815, reduced taxes of $8,921 and an increase of $6,882 from December 31, 2022 to March 31, 2023 as compared to a decrease of $11,151 from December 31, 2021 to March 31, 2022 in accounts payable and accrued liabilities and other payables due to timing of those payments. Additionally, the Frederick lease termination fee of $3,300 was paid during the three months ended March 31, 2022.

Cash flows (used in) / provided by investing activities

	For the Three Months Ended
	March 31, 2023	March 31, 2022
Net cash (used in) / provided by investing activities	$(11,581)	$	13,913

The net cash used in investing activities for the three months ended March 31, 2023 primarily relates to the cash paid to AMMD of $9,611. Additionally, TerrAscend increased the investment in property and equipment by $2,497 during the three months ended March 31, 2023.

In comparison, the net cash provided by investing activities for the three months ended March 31, 2022 primarily relates to the cash acquired through the Gage Acquisition of $ 24,716. The cash provided by investing activities is offset by investments in property and equipment of $10,251 primarily related to the buildout of a cultivation site in Maryland, continuing renovations at the Company's Pennsylvania cultivation site, as well as the continued buildout of the Company's Lodi alternative treatment center in New Jersey.

Cash flows provided by financing activities

		For the Three Months Ended
	March 31, 2023	March 31, 2022
Net cash provided by financing activities	$9,398	$	17,068

Net cash provided by financing activities for the three months ended March 31, 2023 was primarily due to cash inflow as a result of transfer with recourse of Employee Retention Credit, offset by principal payments on loans of $1,204 and capital contributions paid to non-controlling interest holders of $1,884.

During the three months ended March 31, 2022, 7,989,436 Common Share warrants were exercised for total proceeds of $23,330 and 68,215 stock options were exercised at $1.93-$5.21 (C$2.42-$6.53) per unit for total gross proceeds of $192. The cash provided by financing activities was offset by payments of contingent consideration related to the acquisition of State Flower of $6,630.

Reconciliation of Non-GAAP Measures

In addition to reporting the financial results in accordance with GAAP, TerrAscend reports certain financial results that differ from what is reported under GAAP. Non-GAAP measures used by management do not have any standardized meaning prescribed by GAAP and may not be comparable to similar measures presented by other companies. TerrAscend believes that certain investors and analysts use these measures to measure a company's ability to meet other payment obligations or as a common measurement to value companies in the cannabis industry, and TerrAscend calculates (i) Adjusted gross profit as gross profit from continuing operations adjusted for certain material non-cash items, and (ii) Adjusted EBITDA from continuing operations as EBITDA from continuing operations adjusted for certain material non-cash items and certain other adjustments which management believes are not reflective of the ongoing operations and performance. Such information is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

TerrAscend believes Adjusted EBITDA from continuing operations is a useful performance measure to assess the performance of TerrAscend as it provides more meaningful ongoing operating results by excluding the effects of expenses that are not reflective of TerrAscend's underlying business performance and other one-time or non-recurring expenses. The table below reconciles net loss to EBITDA from continuing operations and Adjusted EBITDA from continuing operations for the three months ended March 31, 2023 and 2022.

		March 31, 2023		March 31, 2022
Net loss	Notes	$	(22,769)	$	(16,006)
Loss from discontinued operations			3,591		2,256
Loss from continuing operations			(19,178)		(13,750)
Add (deduct) the impact of:
Provision for income taxes			12,664		3,743
Finance expenses			7,875		6,605
Amortization and depreciation			4,771		4,525
EBITDA from continuing operations	(a)		6,132		1,123
Add (deduct) the impact of:
Relief of fair value upon acquisition	(b)		—		1,806
Vape recall	(c)		—		1,894
Share-based compensation	(d)		1,713		3,356
Loss on lease termination and derecognition of ROU asset	(e)		205		—
Loss from revaluation of contingent consideration	(f)		—		119
Other one-time items	(g)		1,358		1,974
Employee Retention Credits Transfer Fee	(h)		2,235		—
Gain on fair value of warrants and purchase option derivative asset	(i)		(437)		(5,713)
Indemnification asset release	(j)		—		(25)
Impairment of property and equipment and loss on disposal of fixed assets	(k)		334		—
Unrealized and realized loss on investments	(l)		699		—
Unrealized and realized foreign exchange loss	(m)		(31)		356
Adjusted EBITDA from continuing operations		$	12,208	$	4,890

For the Three Months Ended

TerrAscend calculates adjusted gross profit by adjusting gross profit for the one-time relief of fair value of inventory upon acquisition, non-cash write downs of inventory, vape recall, and other one time adjustments to gross profit as TerrAscend does not believe that these impacts are reflective of ongoing operations. The table below reconciles gross profit to adjusted gross profit for the three months ended March 31, 2023 and 2022:

	Notes	March 31, 2023		March 31, 2022
Gross profit		$	33,900	$	15,624
Add (deduct) the impact of:
Relief of fair value upon acquisition	(b)		-		1,806
Non-cash write downs of inventory	(c)		-		1,894
Other one time adjustments to gross profit	(n)		94		238
Adjusted gross profit		$	33,994	$	19,562

• a) EBITDA from continuing operations is a non-GAAP measure and is calculated as earnings from continuing operations before interest, tax, depreciation and amortization.

• b) In connection with TerrAscend's acquisitions, inventory was acquired at fair value, which included a markup or markdown for profit. Recording inventory at fair value in purchase accounting has the effect of increasing or decreasing inventory and thereby increasing or decreasing cost of sales as compared to the amounts TerrAscend would have recognized if the inventory was sold through at cost. The write-up or down of acquired inventory represents the incremental cost of sales that were recorded during purchase accounting.

• c) On February 4, 2022, more than 500 vape products were recalled by the Pennsylvania's Department of Health, including several of the TerrAscend's SKUs. As a result of the recall TerrAscend recorded sales returns of $1,040 and write-downs of inventory of $854 for the three months ended March 31, 2022.

• d) Represents non-cash share-based compensation expense.

• e) Represents loss taken as a result on the derecognition of right of use assets.

• f) Represents the revaluation of TerrAscend's contingent consideration liabilities.

• g) Includes one-time fees incurred in connection with TerrAscend's acquisitions, such as expenses related to professional fees, consulting, legal and accounting, that would otherwise not have been incurred. In addition, includes one-time charges for Sarbanes Oxley Act of 2022 implementation. These fees are not indicative of TerrAscend's ongoing costs.

• h) Represents expenses associated with ERC transfer of assets with recourse.

• i) Represents the (gain) loss on fair value of warrants, including effects of the foreign exchange of the U.S. denominated preferred share warrants, as well as the revaluation of the fair value of the purchase option derivative asset.

• j) Represents the reduction to the indemnification asset related to the Apothecarium tax audit settlement and statute expirations for tax years ended September 30, 2014 and September 30, 2015.

• k) Represents impairment charges taken on TerrAscend's property and equipment, as well as write-downs of property and equipment.

• l) Represents unrealized and realized gain on fair value changes on strategic investments.

• m) Represents the remeasurement of USD denominated cash and other assets recorded in C$ functional currency.

• n) Represents other one time adjustments to gross profit that are not indicative of ongoing costs.

The increase in Adjusted EBITDA from continuing operations for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to implementation of adult use sales in New Jersey and improvement in operations in Michigan.

Critical Accounting Policies and Estimates

The condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. The Company bases its estimates on historical experience and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and actual results, the Company's future financial statements will be affected.

There have been no significant changes to the critical accounting estimates from the information provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operation," included in the 2022 Form 10-K.

Emerging Growth Company Status

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that the Company (i) is no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, the condensed consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

The Company will remain an emerging growth company until the earlier to occur of: (i) the last day of the fiscal year (a) following the fifth anniversary of the completion of its initial public offering, (b) in which we have total annual gross revenue of $1.235 billion or more, or (c) in which the Company is deemed to be a large accelerated filer, which means the market value of our Common Stock that is held by non-affiliates exceeds $700.0 million as of the prior June 30th ; and (ii) the date on which the Company has issued more than $1.0 billion in non-convertible debt during the prior three-year period.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no material changes in the Company's primary risk exposures or management of market risks from those disclosed in its Annual Report on Form 10-K for the fiscal year ended December 31, 2022.