TerrAscend Corp.: Form 10-Q for the period ended Sep 30, 2023

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 the Company's 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 and nine months ended September 30, 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 majority-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:

• Allegany Medical Marijuana Dispensary ("AMMD"), a dispensary in Cumberland, Maryland;
• Blue Ridge Wellness (“Blue Ridge”), a dispensary located in Parkville, Maryland;
• Gage ("Gage"), a vertically integrated cannabis cultivator, processor and dispensary operator in Michigan;
• Herbiculture Inc ("Herbiculture"), a dispensary located in Burtonsville, Maryland;
• 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 cannabis market in Maryland;
• Ilera Healthcare ("Ilera"), a vertically integrated cannabis cultivator, processor and dispensary operator in Pennsylvania;
• KISA Enterprises MI, LLC and KISA Holdings, LLC (collectively "Pinnacle"), a dispensary operator in Michigan;
• Peninsula Alternative Health ("Peninsula"), a dispensary located in Salisbury, Maryland;
• 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 majority-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 effective April 14, 2023;
• TerrAscend NJ, LLC (“TerrAscend NJ”), a majority owned subsidiary that operates three dispensaries in New Jersey with the ability to cultivate and process;
• The Apothecarium, consisting of retail dispensaries in California, Pennsylvania, and New Jersey;
• Valhalla Confections, a provider of premium edible products.

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 1.717.610.4165 and its website is www.terrascend.com (http://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 July 4, 2023, the Company commenced trading of its common shares on the TSX under the new ticker symbol “TSND”. Subsequently, the ticker symbol on the OTC market was changed to “TSNDF” effective July 6, 2023.
• On July 10, 2023, the Company completed the acquisition of Herbiculture, a dispensary in Maryland.
• On July 28, 2023, $2,500 of the restricted cash was released from the required $5,000 on deposit in a restricted account, upon meeting certain criteria pursuant to the terms of the Stearns Loan.
• On August 2, 2023, the Company closed a private placement of 250 senior unsecured convertible debentures at a price of $1,000 per debenture for total gross proceeds of approximately $250.

Subsequent Transactions

• On October 2, 2023, pursuant to the terms of its senior secured term loan with WDB Holding PA, a subsidiary of the TerrAscend ("Ilera Term Loan"), the Company completed a prepayment of the Ilera Term Loan of $1,500 at the original prepayment price of 103.22% to par.

Components of Results of Operations

The following discussion sets forth certain components of the Company's 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:

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

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, an 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 in the other (income) expense in the Consolidated Statements of Operations and Comprehensive Loss as a result of the revaluation.

Loss (gain) on fair value of warrants and purchase option derivative asset

The Company's warrant liability consists of the warrant liability acquired through its Gage Acquisition, a detachable warrant liability issued through the private placement (Note 13), and a conversion option related to the convertible debenture offering (Note 12). These 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 in the other (income) expense in the Consolidated Statements of Operations and Comprehensive Loss 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 long-lived 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 (gain) loss

Unrealized and realized foreign exchange (gain) 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 loss (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 Statements of Operations and Comprehensive Loss.

Provision for (benefit from) 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 September 30, 2023 and September 30, 2022

The following tables represent the Company’s results from operations for the three months ended September 30, 2023 and 2022.

Revenue, net

Revenue increased from $66,243 to $89,240 for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 driven by the implementation of adult use sales in Maryland along with the acquisitions of Peninsula, Blue Ridge, and Herbiculture in the second quarter of 2023 combined with an increase in wholesale sales in New Jersey and an increase in both wholesale and retail sales in Pennsylvania.

Cost of sales

The increase of $6,323 in cost of sales for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was mainly due to an increase in sales. Cost of sales as a percentage of revenue improved to 46% from 53% for the three months ended September 30, 2023, as compared to the three months ended September 30, 2022, driven by increased yields in New Jersey, improved utilization in Maryland, lower costs in Pennsylvania as a result of scaling back the cultivation facility, and reduced discounting combined with improved verticalization in Michigan.

General and administrative expense

The increase in general and administrative ("G&A") expense of $1,895 for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was primarily a result of an increase in salaries and wages due to Maryland acquisitions during the third quarter of 2023. The Company continues to advance its plan to reduce administrative expenses in order to strengthen its position to generate positive cashflow from operations.

Amortization and depreciation expense

The increase of $64 in amortization and depreciation expense for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was primarily due to Maryland acquisitions during the third quarter of 2023.

(Gain) loss from revaluation of contingent consideration

The decrease in the revaluation of contingent consideration for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was due to a reduction in the contingent liability for Peninsula acquisition, which was a result of the increase in the Company's share price from June 30, 2023, as compared to September 30, 2023.

Loss (gain) on fair value of warrants and purchase option derivative asset

The warrant liability was remeasured to fair value at September 30, 2023 using the Black-Scholes model. The Company recognized a loss of $3,217 during the three months ended September 30, 2023 as a result of the rising share price from June 30, 2023, as compared to September 30, 2023.

During the three months ended September 30, 2022, the Company recognized a gain on fair value warrants of $5,497 as a result of the reduction of the Company's share price from June 30, 2022, as compared to September 30, 2022.

Finance and other expenses

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The increase of $838 in finance and other expenses for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 is primarily due to sublease income received in 2022.

Transaction and restructuring costs

The transaction and restructuring costs for the three months ended September 30, 2022 were primarily due to personnel related reorganization and severance costs in Canada.

Unrealized and realized foreign exchange (gain) loss

Unrealized foreign exchange (gain) loss changed from a loss of $583 for the three months ended September 30, 2023 as compared to a gain of $43 for the three months ended September 30, 2022 as a result of the Company's subsidiary TerrAscernd Growth Corp changing its functional currency to U.S. dollars from Canadian dollars during the third quarter of 2023.

Provision for (benefit from) income taxes

The change in provision for (benefit from) income taxes from a $34,033 benefit for the three months ended September 30, 2022 as compared to a provision for income taxes of $13,543 for the three months ended September 30, 2023 was primarily driven by the increase in pre-tax book income as a result of the impairment of Gage Growth Corp in 2022.

Results from Operations - Nine Months Ended September 30, 2023 and September 30, 2022

The following tables represent the Company’s results from operations for the nine months ended September 30, 2023 and 2022.

Revenue, net

Revenue increased from $178,788 to $230,762 during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 driven by growth in retail and wholesale market sales. The increase was primarily a result of the implementation of adult use sales in New Jersey in April 2022 and Maryland in July 2023 along with the acquisition of AMMD, Peninsula, Blue Ridge, and Herbiculture in the first and second quarters of 2023, and the acquisition of Gage in Michigan in March 2022. These increases were partially offset by a reduction in wholesale sales in Pennsylvania and retail sales in California.

Cost of sales

The increase of $4,749 in cost of sales for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 is mainly a result of impairments and write-downs of inventory in Pennsylvania of $7,422 for the nine months ended September 30, 2022 as well as increased yields in New Jersey, improved utilization in Maryland, lower costs in Pennsylvania as a result of scaling back the cultivation facility, and reduced discounting combined with improved verticalization in Michigan.

General and administrative expense

The increase in G&A expense of $5,752 for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was primarily a result of an increase in salaries and wages due to the addition of workforce in Maryland for the four retail acquisitions which occurred during the nine months ended September 30, 2023 combined with a full year of adult use sales in New Jersey. The Company continues to advance its plan to optimize administrative expenses to strengthen its position in order to generate positive cashflow from operations.

Amortization and depreciation expense

The decrease of $421 in amortization and depreciation expense for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was primarily due to a brand intangible asset that was fully amortized during 2022.

(Gain) loss from revaluation of contingent consideration

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The decrease in the revaluation of contingent consideration for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was a result of a reduction in the contingent liability for Peninsula acquisition due to increase in the Company's share price as of September 30, 2023.

Loss (gain) on fair value of warrants and purchase option derivative asset

The warrant liability was remeasured to fair value at September 30, 2023 using the Black-Scholes model. The Company recognized a loss of $2,564 during the nine months ended September 30, 2023 as a result of the rising share price from December 31, 2022, as compared to September 30, 2023.

The Preferred Share warrant liability expired during the nine months ended September 30, 2023. The purchase option derivative asset related to the option to purchase an additional 6.25% ownership of the Company's New Jersey partnership also expired during nine months ended September 30, 2023.

The warrant liability was remeasured to fair value at September 30, 2022 using the Black-Scholes model. The Company recognized a gain during the nine months ended September 30, 2022 as a result of the reduction of the Company's share price from December 31, 2021 as compared to September 30, 2022, as well as from warrants exercised during the nine months ended September 30, 2022. The combined impact resulted in a gain on fair value of warrants of $59,373. For the nine months ended September 30, 2022, the purchase option derivative asset related to the option to purchase an additional 6.25% of ownership of the Company's New Jersey partnership, were remeasured using the Monte Carlo simulation model and resulted in a loss of $818.

Finance and other expenses

The decrease of $1,222 in finance and other expenses for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 is primarily due to a loss recorded from the indemnification asset release related to the acquisition of Apothecarium during nine months ended September 30, 2022.

Transaction and restructuring costs

The decrease of $1,193 in transaction and restructering costs for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 relates primarily to the Gage Acquisition, which closed on March 10, 2022.

Unrealized and realized foreign exchange (gain) loss

The change in unrealized foreign exchange (gain) loss from a loss of $624 for the nine months ended September 30, 2022 to a gain of $175 for the nine months ended September 30, 2023 was a result of the Company's subsidiary TerrAscend Growth Corp, changing its functional currency to U.S. dollars from Canadian dollars in July 2023.

Provision for (benefit from) income taxes

The change in provision for (benefit from) income taxes from a $25,602 benefit for the nine months ended September 30, 2022 as compared to a provision for income taxes of $32,655 for the nine months ended September 30, 2023 was primarily driven by the decrease in pre-tax loss for 2023 as a result of the impairment of Gage Growth Corp in 2022.

Liquidity and Capital Resources

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 September 30, 2023, TerrAscend had an accumulated deficit of $662,075. During the three and nine months ended September 30, 2023, TerrAscend incurred a net loss from continuing operations of $8,439 and $40,472, respectively. Additionally, as of September 30, 2023 the Company’s current liabilities exceed its current assets. Therefore, it is possible that the Company may 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. The Company believes this concern is mitigated by steps to improve its operations and cash position, including: (i) identifying access to future capital required to meet the Company’s on-going obligations, (ii) improved cashflow growth from TerrAscend's consolidated operations, particularly in New Jersey and most recently Maryland with conversion to adult use sales, and (iii) various 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 $654,250 as of September 30, 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 $208,874 in principal amounts of loans payable at September 30, 2023. Of this amount, $18,448 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 $99,003 in lease obligations. Of this amount, $9,948 are due in the next twelve months. Additionally, TerrAscend makes monthly payments on financing obligations on one of its real estate properties with $971 payable, $181 of which is due in the next twelve months.

TerrAscend's undiscounted contingent consideration payable is $6,446 at September 30, 2023. The contingent consideration payable relates to TerrAscend's business acquisitions of the Apothecarium, State Flower, and Peninsula. Those payments are due in the next twelve months, with the exception of Peninsula.

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 was made in July 2023.

At September 30, 2023, the Company had accounts payable and accrued liabilities of $51,032 and corporate income taxes payable of $58,707.

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.

On April 14, 2023, WDB Holding PA agreed to an amendment to the Ilera Term Loan to, among other things, to (i) permit changes necessary for the TSX Transaction (as defined therein), and (ii) to waive certain tax provisions.

On June 8, June 15, and June 29, 2023, WBD Holding PA made repayments of principal in the amounts of $7,896, $442, and $28,236, respectively.

On June 22, 2023, WDB Holding PA further agreed to an amendment among other things, to (i) extend the next test date for the interest coverage ratio from June 30, 2023 to September 30, 2023, and (ii) amend the terms for which WDB Holding PA may incur certain indebtedness and liens. There is $78,427 of principal amounts outstanding at September 30, 2023.

On October 2, 2023, TerrAscend completed a prepayment of the Ilera Term Loan of $1,500 at the original prepayment price of 103.22% to par.

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 Growth Corp. 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 Growth Corp 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 Growth Corp 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 $2,979 of principal amounts outstanding at September 30, 2023 on the loan payable and promissory note.

On June 9, 2023, TerrAscend Growth Corp. agreed to an amendment among other things, to (i) permit changes necessary for the TSX Transaction (as defined therein) and (ii) to permit certain indebtedness and waive certain tax provisions.

This amendment was not considered extinguishment of debt under ASC 470 Debt.

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%. On June 27, 2023, Spartan Partners Properties, LLC, agreed to an amendment among other things, to extend the obligation date of the loan until December 1, 2023. There is $5,582 of principal amounts outstanding at September 30, 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 excludes all MD dispensaries. The Pelorus Term Loan matures on October 11, 2027. There is $45,478 of principal amounts outstanding at September 30, 2023.

On April 17, 2023, TerrAscend NJ, LLC agreed to an amendment among other things, to (i) permit changes necessary for the TSX Transaction (as defined therein), and (ii) to waive certain tax provisions. On June 22, 2023, TerrAscend NJ, LLC further agreed to an amendment to permit certain indebtedness.

This amendment was not considered extinguishment of debt under ASC 470 Debt.

Stearns Loan

On June 26, 2023, the Company closed on a $25,000 commercial loan with Stearns Bank, secured by the Company's cultivation facility in Pennsylvania and its AMMD dispensary in Cumberland, Maryland. The Company was required to hold $5,000 on deposit in a restricted account, of which $2,500 of the restricted cash was released on July 28, 2023 upon meeting certain criteria pursuant to the terms of the Stearns Loan. The loan carries an interest rate of prime plus 2.25% and matures in December 2024. The proceeds from the loan were used to pay down the Company's higher interest rate debt, thereby lowering the Company's overall interest expense. There is $24,913 of principal amounts outstanding at September 30, 2023.

Maryland Acquisition Loans

On June 28, 2023, related to the acquisition of Peninsula, the Company assumed existing indebtedness in the form of a promissory note in the amount of $7,698, which matures on June 28, 2025. The promissory note carries an interest rate of 8.25%. The Company will make monthly payments of principal and interest totaling $157 beginning on July 28, 2023. The Company is required to make a mandatory prepayment of 50% of the outstanding principal balance on January 28, 2025. The consideration for the Peninsula acquisition also included a promissory note in the amount of $3,927. The promissory note carries an interest of 7.25% and is payable in twelve quarterly installments, maturing on June 28, 2026.

On June 30, 2023, related to the acquisition of Blue Ridge, the Company entered into a promissory note in the amount of $3,750 payable in four quarterly installments of accrued interest commencing on September 30, 2023 and twelve equal quarterly installments of principal and accrued interest commencing on September 30, 2024. The remaining amount of the principal and accrued interest is due on June 30, 2027, the maturity date. The promissory note carries an interest rate of 7.0%.

On July 10, 2023, related to the acquisition of Herbiculture, the Company entered into a promissory note in the amount of $5,250. The promissory note carries a fixed interest rate of 10.50%. Commencing on September 30, 2023, and thereafter until December 31, 2024, all accrued interest during such quarter will be added to the outstanding principal balance on the last day of each fiscal quarter. Beginning on March 31, 2025, and thereafter until March 31, 2026, only interest payments will be due on the last day of each fiscal quarter. The entire outstanding balance of the principal and accrued interest is due on June 30, 2026, the maturity date of the note.

There is $20,991 of principal amounts outstanding at September 30, 2023 on the promissory notes.

Class A Share of TerrAscend Growth

As a part of the Reorganization (Note 3), TerrAscend Growth Corp. issued $1 million of Class A shares with a 20% guaranteed annual dividend. Under the Subscription Agreement, TerrAscend Growth Corp holds a call right to repurchase all of the Class A Shares, at any time, issuable to the holder of Class A shares and the holder of Class A shares is granted a put right that is exercisable at any time following the five-year anniversary of the closing of the investment. The instrument is considered as a debt due to the economic characteristics and risks. There is $1,000 of principal amounts outstanding at September 30, 2023.

IHC Real Estate LP Loan

On June 26, 2023, the Company bought out the minority interest in IHC Real Estate LP and entered into a promissory note of $7,500. The promissory note carries an interest rate of 15% and matures on January 15, 2024. On June 28, 2023 and July 31, 2023, the Company made a payment of $1,500 and $1,000, respectively. There is $5,000 of principal amounts outstanding at September 30, 2023.

Cash Flows

Cash flows provided by (used in) operating activities

The increase of $51,483 in net cash provided by operating activities for the nine months ended September 30, 2023 as compared to nine months ended September 30, 2022 is due primarily to an increase in income from operations, lower interest, reduced tax payments, partially offset by an increase in working capital.

Cash flows used in investing activities

The net cash used in investing activities for the nine months ended September 30, 2023 primarily relates to the cash paid for the acquisition of four dispensaries in Maryland. Additionally, the Company increased the investment in property and equipment by $6,224 during the nine months ended September 30, 2023. The Company also paid the success fee of $3,750 related to Alternative Treatment Center licenses issued by the New Jersey Department of Health during nine months ended September 30, 2023. These investments were partially offset by proceeds from the sale of the Company's Canadian facility of $14,285.

In comparison, the net cash used in investing activities for the nine months ended September 30, 2022 primarily relates to investments in property and equipment of $24,678, 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. Additionally, the Company had investments in intangible assets of $1,330, primarily related to adult use licenses in New Jersey. The cash used in investing activities was offset by cash inflows of $16,227 related to the cash acquired through the Gage Acquisition, offset by net cash paid for consideration for the Pinnacle Acquisition.

Cash flows (used in) provided by financing activities

Net cash used in financing activities for the nine months ended September 30, 2023 was primarily due to loan principal paid of $46,029 and distributions to minority partners of $6,966 and offset by the cash inflow of transfer with recourse of Employee Retention Credit of $12,677, net proceeds from the commercial loan with Stearns bank of $23,869, and net proceeds from private placements of $21,260.

Net cash provided by financing activities for the nine months ended September 30, 2022, ws primarily due to the exercise of warrants for total proceeds of $23,797 and stock options for total gross proceeds of $361. The cash provided by financing activities was partially offset by payments of contingent consideration related to the acquisition of State Flower of $6,630, loan principal payments of $6,088, loan amendment fees paid on the modification of the Ilera term loan and the Gage senior secured term loan of $2,309, tax distributions paid on behalf of the partners of the New Jersey operations of $1,436, and distributions to non-controlling interests of $1,237.

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 metrics 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 and nine months ended September 30, 2023 and 2022:

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 and nine months ended September 30, 2023 and 2022:

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) Represents inventory write downs outside of the normal course of operations. These inventory write-downs were related to the write down of aged inventory to lower of cost or market which was related to the Company's operational reconfiguration of its cultivation facility in Pennsylvania.

d) 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 recorded sales returns of $nil and $1,040 and write-downs of inventory of $nil and $1,925 for the three and nine months ended September 30, 2022, respectively

e) Represents non-cash share-based compensation expense.

f) Represents impairment charges taken on the Company's intangible assets and goodwill.

g) Represents the revaluation of TerrAscend’s contingent consideration liabilities.

h) Includes one-time fees incurred in connection with TerrAscend’s acquisitions, such as expenses related to professional fees, consulting, legal, settlements, 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.

i) Represents expenses associated with ERC transfer of assets with recourse.

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

k) 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.

l) 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.

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

n) Represents (gain) loss taken on write-down of property and equipment.

o) Represents unrealized and realized (gain) loss on fair value changes on strategic investments.

p) Represents the remeasurement of USD denominated cash and other assets recorded in CAD functional currency.

q) 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 and nine months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to implementation of adult use sales in New Jersey and Maryland along with the reduction of general and administrative expenses.

Critical Accounting Estimates

The condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires 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," other than the significant judgment relating to variable interest entities.

Variable interest entities

Management has applied significant judgment on the decision to consolidate its variable interest entity (“VIE”), TerrAscend Growth Corp.. The Company consolidates VIE when it has a variable interest that provide it with (1) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance (power) and (2) the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE (benefits). Key areas of judgment related to the assessment of the purpose and design of the VIE, the protection agreement in place, the board structure of TerrAscend Growth Corp., and substantive kick-out rights of the Class A shareholders.

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 the Company has total annual gross revenue of $1,235,000 or more, or (c) in which the Company is deemed to be a large accelerated filer, which means the market value of the Company's Common Stock that is held by non-affiliates exceeds $700,000 as of the last business day of the Company's most recent second fiscal quarter; and (ii) the date on which the Company has issued more than $1,000,000 in non-convertible debt during the prior three-year period.

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.

Evaluation of Disclosure Controls and Procedures

The Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, the Company's disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the Company's disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Investing in the Company's common shares involves a high degree of risk. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors described in Part I, Item 1.A. “Risk Factors” in the Company's Annual Report. The Company may disclose changes to risk factors or disclose additional factors from time to time in its future filings with the SEC. Additional risks and uncertainties not presently known to the Company or that the Company currently deems immaterial may impair its business operations.