TerrAscend Corp

1. Nature of operations

TerrAscend Corp. (the "Issuer") was incorporated under the Business Corporations Act (Ontario) on March 7, 2017. The Issuer, through its subsidiaries, TerrAscend Growth Corp. (“TerrAscend”) and its subsidiaries (collectively, the Company”), is a leading North American cannabis company. TerrAscend has vertically integrated licensed operations in Pennsylvania, New Jersey, Michigan, Maryland and California. In addition, the Company has retail operations in Ontario, Canada with a majority-owned dispensary in Toronto, Ontario, Canada. In the United States, TerrAscend’s cultivation and manufacturing provide product selection to both the medical and legal adult-use markets. Notwithstanding the fact that various states in the United States have implemented medical marijuana laws or 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.

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

The Company owns a portfolio of operating businesses, including:

•

TerrAscend New Jersey (“TerrAscend NJ”), a majority owned operation with three dispensaries, anda cultivation/processing facility;

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TerrAscend Maryland (“TerrAscend MD”), a wholly-owned operation with four dispensaries, anda cultivation/processing facility;

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TerrAscend Pennsylvania (“TerrAscend PA”), a wholly-owned operation withsix dispensaries, anda cultivation/processing facility;

•

TerrAscend Michigan (“TerrAscend MI”), a wholly-owned operation with twenty dispensaries, andthree cultivation and processing facilities;

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TerrAscend California (“TerrAscend CA”), a wholly-owned operation with four dispensaries, anda cultivation facility; and

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TerrAscend Canada Inc. (“TerrAscend Canada”), a cannabis retailer in Ontario, Canada with a majority-owned dispensary in Toronto, Ontario, Canada ("Cookies Canada").

The common shares in the capital of the Company ("Common Shares") commenced trading on the Canadian Securities Exchange ("CSE") on May 3, 2017 under the ticker symbol "TER" and continued trading on the CSE until the listing of the Common Shares on the Toronto Stock Exchange (the "TSX"). Effective July 4, 2023, the Common Shares commenced trading on the TSX under the ticker symbol "TSND". The Common Shares commenced trading on OTCQX on October 22, 2018 under the ticker symbol "TRSSF", which was subsequently changed to "TSNDF", effective July 6, 2023. The Company’s registered office is located at 77 City Centre Drive, Suite 501, Mississauga, Ontario, L5B 1M5, Canada.

Summary of significant accounting policies

(a)

Basis of presentation

These unaudited interim condensed consolidated financial statements included herein (the “Consolidated Financial Statements”) of the Company and its subsidiaries were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").

The accompanying Consolidated Financial Statements contained in this report are unaudited. In the opinion of management, these Consolidated Financial Statements have been prepared on the same basis as the annual consolidated financial statements and notes thereto of the Company and include all adjustments, consisting only of normal recurring adjustments, considered necessary for the fair presentation of the Company’s financial position and operating results. The results for the three and six months ended June 30, 2024 are not necessarily indicative of the operating results for the year ended December 31, 2024, or any other interim or future periods.

The accompanying Consolidated Financial Statements should be read in conjunction with the audited consolidated financial statements and notes thereto of the Company for the year ended December 31, 2023 contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the Securities and Exchange Commission (the "SEC") on March 14, 2024 (the "Annual Report"). There were no significant changes to the policies disclosed in Note 2 of the summary of significant accounting policies of the Company’s audited consolidated financial statements for the year ended December 31, 2023 in the Company's Annual Report.

The accompanying Consolidated Financial Statements have been prepared on the going concern basis, under the historical cost convention, except for certain financial instruments that are measured at fair value as described herein.

The Company previously concluded that substantial doubt existed as to its ability to continue as a going concern primarily due to the Company's current liabilities exceeding its current assets related to its loans maturing within the current year. On August 1, 2024, the Company entered into a four-year $140,000 senior secured term loan with an initial draw of $114,000 used to retire the majority of its loans coming due within the next year and a delayed draw of $26,000, expected to occur on September 30, 2024 which will be used to retire the Chicago Atlantic Term Loan resulting in positive net working capital for the Company (see Note 25).

Following the retiring and financing of the Company’s loans coming due within the next year, along with its ability to identify access to future capital, and continued improvement in cash flow from the Company's consolidated operations, management has determined that substantial doubt no longer exists in the Company's ability to continue as a going concern.

Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentation. Specifically, (Gain) loss on disposal of fixed assets has been reclassified out of Impairment of property and equipment and right of use assets and into Other operating (income) expense on the Consolidated Statements of Operations and Comprehensive Loss.

Consolidation

The Company consolidates entities in which it has a controlling financial interest by evaluating whether the entity is a voting interest entity (“VOE”) or a variable interest entity (“VIE”).

In connection with the listing of the Common Shares on the TSX, the Company reorganized its ownership structure to segregate the Company’s Canadian retail operations from TerrAscend's cultivation and manufacturing operations in the United States (the "Reorganization"). Following the completion of the Reorganization, the Company owns 95% of its Canadian retail business. The Company continues to consolidate both its Canadian and U.S. cannabis operations under two different consolidation models.

Subsequent to the Reorganization, all operations in the United States have a functional currency of the U.S. dollar ("USD"). Canadian operations continue to have a functional currency of the Canadian dollar ("CAD").

Voting Interest Entities

A VOE is an entity in which (1) the total equity investment at risk is deemed sufficient to absorb the expected losses of the entity, (2) the at-risk equity holders, as a group, have all of the characteristics of a controlling financial interest and (3) the entity is structured with substantive voting rights. The Company consolidates the Canadian operations under a VOE model based on the controlling financial interest obtained through Common Shares with substantive voting rights.

Variable Interest Entities

A VIE is an entity that lacks one or more characteristics of a controlling financial interest defined under the voting interest model. 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).

In connection with the Reorganization, TerrAscend issued and sold, on a private placement basis, Class A shares in the capital of TerrAscend ("Class A Shares") for aggregate gross proceeds of $1,000 to an investor ("Investment"). See Note 10 for accounting treatment of the Class A Shares. Following the closing of the Investment, the Class B shares ("Class B Shares") in the capital of TerrAscend held by the Company, representing all of the issued and outstanding Class B shares, were automatically exchanged for non-voting, non-participating exchangeable shares in the capital of TerrAscend ("Non-Voting Shares"), representing approximately 99.8% of the issued and outstanding shares of TerrAscend on an as-converted basis. As a result of the limited rights associated with Non-Voting Shares that the Company holds following the closing of the Investment, the Company and TerrAscend entered into a protection agreement dated April 18, 2023 ("Protection Agreement"). The Protection Agreement provides for certain negative covenants in order to preserve the value of the Non-Voting Shares until such time as the Non-Voting Shares are converted into Class A Shares.

The Issuer determined that TerrAscend is a VIE, as all of the Company’s U.S. activities continue to be conducted on behalf of the Company which has disproportionately few voting rights. After conducting an analysis of the following VIE factors; purpose and design of the VIE, the Protection Agreement in place, the structure of the Company's board of directors (the "Board"), and substantive kick-out rights of the holders of the Class A Shares, it was determined that the Company has the power to direct the activities of TerrAscend. In addition, given the structure of the Class A Shares where all of the losses and substantially all of the benefits of TerrAscend are absorbed by the Company, the Company consolidates as the primary beneficiary in accordance with Accounting Standards Codification ("ASC") 810, Consolidation.

The Company's U.S. operations are consolidated through the VIE model. Therefore, substantially all of the Company's current assets, non-current assets, current liabilities and non-current liabilities are consolidated through the VIE model. The Company's assets and liabilities that are not consolidated through the VIE model include convertible debt, and derivative liability. The Company also consolidates a minimal amount of assets and liabilities within Canada. See Note 21 for more information.

Accounts receivable, net

The Company's accounts receivable, net consisted of the following:

During the second quarter, the Company settled accounts receivable that had been previously accounted for as expected credit losses which resulted in a bad debt recovery of $4,188 within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Loss.

Acquisitions

Contingent consideration

The balances of the Company's contingent considerations are as follows:

During the six months ended June 30, 2024, the Company amended the original purchase agreement and issued an aggregate of 2,888,088 Common Shares and paid $250 of cash to the sellers of its previously-acquired State Flower and The Apothecarium businesses. The issuance of Common Shares fully settled the previous contingent consideration balances. The Company provided a price protection on the Common Shares issued. The remaining balance recorded as at June 30, 2024 relates to the fair value of the price protection clause using the Black-Scholes Option Pricing Model ("Black-Scholes Model")

Inventory

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

Discontinued operations

TerrAscend Canada operated out of a 67,300 square foot facility located in Mississauga, Ontario and was licensed to cultivate, process and sell cannabis for medical and adult-use purposes. These licenses allowed for sales of dried cannabis, cannabis oil and extracts, topicals, and edibles. The Company ceased operations at TerrAscend Canada’s manufacturing facility during the three months ended December 31, 2022. As such, TerrAscend Canada's Licensed Producer (as such term is defined in the Cannabis Act) results are presented in discontinued operations.

The results of operations for the discontinued operations includes revenues and expenses directly attributable to the disposed of operations. Corporate and administrative expenses, including interest expense, not directly attributable to the operations were not allocated to the Canadian Licensed Producer business. The results of discontinued operations were as follows:

Property and equipment

Property and equipment consisted of:

Assets in process primarily represent construction in progress related to both cultivation and dispensary facilities not yet completed, or otherwise not placed in service. During the six months ended June 30, 2024, the Company recorded an impairment loss of certain property and equipment of $2,438 due to the wind-down of one of its California dispensaries.

As of June 30, 2024 and December 31, 2023, borrowing costs werenot capitalized because the assets in process did not meet the criteria of a qualifying asset.

Depreciation expense was $3,055 and $6,092 for the three and six months ended June 30, 2024, respectively ($2,079 and $4,140 included in cost of sales) and $3,395 and $6,652 for the three and six months ended June 30, 2023, respectively ($2,023 and $4,040 included in cost of sales).

Intangible assets and goodwill

Intangible assets consisted of the following:

Amortization expense was $1,941 and $3,872 for the three and six months ended June 30, 2024, respectively, ($724 and $1,448 included in costof sales) and $1,595 and $3,109 for the three and six months ended June 30, 2023 ($725 and $1,450 included in cost of sales).

Estimated future amortization expense for finite lived intangible assets for the next five years is as follows:

As of June 30, 2024, the weighted average amortization period remaining on intangible assets was 25.0 years.

The Company's goodwill is allocated toone reportable segment. The following table summarizes the activity in the Company’s goodwill balance:

Loans payable

The Company's loans payable consisted of the following:

Total interest paid on all loan payables was $6,335 and $12,599 for the three and six months ended June 30, 2024, respectively, and $6,803 and $9,259 for the three and six months ended June 30, 2023, respectively. The Company had accrued interest on loans payable of $3,261 and $3,491 as of June 30, 2024 and December 31, 2023, respectively, included in accounts payable and accrued liabilities on the Consolidated Balance Sheets.

Chicago Atlantic Term Loan

In connection with the acquisition of Gage Growth on March 10, 2022 (the "Gage Acquisition"), the Company assumed a senior secured term loan that was amended to provide an amount of $25,000 (the “Chicago Atlantic Term Loan”)bearing an interest 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. The Chicago Atlantic Loan was secured by a first lien on all Gage Growth assets.

As of June 30, 2024, there was an outstanding principal amount of$24,196 under the Chicago Atlantic Term Loan.

Subsequent to June 30, 2024, the Company made a prepayment of the Chicago Atlantic Term Loan of $1,500 at par. On August 1, 2024, the Company entered into a four-year $140,000 senior secured term loan that matures in August 2028, of which, a portion of the proceeds will be used to retire the Chicago Atlantic Term Loan and pay the outstanding principal amount of $22,696 (see Note 25).

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 Ilera Term Loan is solely secured by the Company’s Pennsylvania-based Ilera Healthcare LLC (“Ilera”). The Ilera Term Loan bears interest at 12.875% matures on December 17, 2024.

On January 2, 2024, the Company completed a prepayment of the Ilera Term Loan of $4,800 at the prepayment price of 100% to par. On April 30, 2024, the Company made a prepayment of $3,200 of the Ilera Term Loan, at the prepayment price of 100% to par. In accordance with ASC 470, Debt, these amendments were not considered extinguishment of debt.

As of June 30, 2024, there was an outstanding principal amount of$68,927 under the Ilera Term Loan. Subsequent to June 30, 2024, the Company entered into a four-year $140,000 senior secured term loan that matures in August 2028, of which, a portion of the proceeds were used to retire the Ilera Term Loan and pay the outstanding principal amount of $68,927 (see Note 25).

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 Allegany Medical Marijuana Dispensary ("AMMD") dispensary in Cumberland, Maryland ("Stearns Loan"). The Stearns Loan bears an interest rate of prime plus 2.25% and matures on December 26, 2024.

As of June 30, 2024, there was an outstanding principal amount of$24,638 under the Stearns Loan. Subsequent to June 30, 2024, the Company entered into a four-year $140,000 senior secured term loan that matures in August 2028, of which, a portion of the proceeds were used to retire the Stearns Loan and pay the outstanding principal amount of $24,638 (see Note 25).

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 (the “Pelorus Term Loan") in an aggregate principal amount of $45,478. The Pelorus Term Loan is based on 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 and matures on October 11, 2027. 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 Secured Overnight Financing Rate ("SOFR") in effect on such day. The obligations of the borrowers under the Pelorus Term Loan are guaranteed by the Company, TerrAscend USA and certain other subsidiaries of TerrAscend and are 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.

As of June 30, 2024, there was an outstanding principal amount of$45,478 under the Pelorus Term Loan.

Maryland Acquisition Loans

In connection with the acquisition of Derby 1, LLC ("Peninsula"), Hempaid, LLC ("Blue Ridge"), and Herbiculture Inc. ("Herbiculture"), (collectively, the "Maryland Acquisitions"), the Company entered into promissory notes with an aggregate principal amount of $20,625 that bear interest at rates ranging from 7.0% to 10.5% with maturities ranging from June 28, 2025 to June 30, 2027.

As of June 30, 2024, there was an outstanding principal amount of$19,115 under the Maryland Acquisition Loans.

Other loans

Stadium Ventures

In connection with the Gage Acquisition, the Company assumed existing indebtedness in the form of a promissory note in the amount of $4,065, which matures on December 31, 2024. The promissory note bears interest at a rate of 6%.

As of June 30, 2024, there was an outstanding principal amount of $936 under the Stadium Ventures loan.

Class A Shares of TerrAscend Growth

In connection with the Reorganization (see Note 3), TerrAscend issued $1,000 of Class A shares with a 20%guaranteed annual dividend to an investor (the “Investor”) pursuant to the terms of a subscription agreement between TerrAscend and the Investor dated April 20, 2023 (the “Subscription Agreement”). Pursuant to the terms of the Subscription Agreement, TerrAscend holds a call right to repurchase allof the Class A Shares issued to the Investor for an amount equal to the sum of: (a) the Repurchase/Put Price (as defined in the Subscription Agreement); plus (b) the amount equal to 40% of the subscription amount less the aggregate dividends paid to the Investor as of the date of the exercise of the option. In addition, the Investor holds a put right that is exercisable at any time after four months’ advanced written notice following the five-year anniversary of the closing of the investment to put all (and only all) of the Class A Shares owned by the Investor to TerrAscend at the Repurchase/Put Price, payable in cash or shares. The instrument is considered as a debt for accounting purposes due to the economic characteristics and risks

Short-Term Debt

The average dollar amount of short-term debt for the six months ended June 30, 2024 was $8,727 with a weighted-average interest rate of 11.06% as of June 30, 2024.

On January 15, 2024, the Company paid off the IHC Real Estate LP promissory note with a payment of $5,000.

Subsequent to June 30, 2024, the Company entered into a four-year $140,000 senior secured term loan that matures in August 2028, of which, a portion of the proceeds were used to retire certain short-term debt and pay the outstanding principal amount of $1,715 (see Note 25).

Maturities of loans payable

Stated maturities of loans payable over the next five years are as follows:

Leases

The majority of the Company’s leases are operating leases used primarily for corporate offices, retail, cultivation and manufacturing. The operating lease periods generally range from 1 to 25 years. The Company hadtwo finance leases at June 30, 2024 and December 31, 2023.

Amounts recognized in the consolidated balance sheet were as follows:

The Company recognized operating lease expense of $2,204 and $4,024 for the three and six months ended June 30, 2024, respectively, and$1,254 and $2,451 for the three and six months ended June 30, 2023, respectively.

Other information related to operating leases at June 30, 2024 and December 31, 2023 consisted of the following:

Supplemental cash flow information related to leases are as follows:

Undiscounted lease obligations are as follows:

Convertible Debt

The Company's convertible debt consisted of the following:

The Company had $778 of accrued interest on convertible debt as of June 30, 2024 andno accrued interest on convertible debt as of December 31, 2023, included in accounts payable and accrued liabilities on the Consolidated Balance Sheets.

Shareholders' equity

Warrants

The following is a summary of the outstanding warrants for Common Shares:

The weighted-average exercise price in the above table is denominated in a currency that is different from the functional currency of the Company and can influence the USD conversion.

The following is a summary of the outstanding warrant liabilities that are exchangeable into Common Shares:

Share-based compensation plans

Share-based payments expense

Total share-based payments expense was as follows:

Stock Options

The following table summarizes the stock option activity for the six months ended June 30, 2024:

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Company’s closing stock price on June 30, 2024 and December 31, 2023, respectively, and the exercise price, multiplied by the number of the in-the-money options) that would have been received by the option holders had they exercised their in-the-money options on June 30, 2024 and December 31, 2023, respectively.

The total pre-tax intrinsic value (the difference between the market price of the Common Shares on the exercise date and the price paid by the option holder to exercise the option) related to stock options exercised is presented below:

The fair value of the various stock options granted were estimated using the Black-Scholes Model with the following assumptions:

Volatility was estimated by using the historical volatility of the Company's stock price. The expected life in years represents the period of time that the options issued are expected to be outstanding. The risk-free rate is based on U.S. treasury bond issues with a remaining term approximately equal to the expected life of the options. Dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay cash dividends in the foreseeable future.

The total estimated fair value of stock options that vested during the six months ended June 30, 2024 and 2023 was $4,594 and $5,563, respectively. As of June 30, 2024, there was $7,658 of total unrecognized compensation cost related to unvested options.

Restricted Share Units

The following table summarizes the activities for the RSUs for the six months ended June 30, 2024:

As of June 30, 2024, there was $4,194 of total unrecognized compensation cost related to unvested RSUs.

Non-controlling interest

Non-controlling interest consists mainly of a 12.5% minority ownership interest in TerrAscend's New Jersey operations.

On January 19, 2024, the Company reduced its non-controlling interest through the acquisition of the remaining 50.1% equity in both State Flower and three Apothecarium dispensaries in California. The carrying amount of non-controlling interest was adjusted by $1,374 and recognized in additional paid in capital and attributed to the parent's equity holders.

The following table summarizes the non-controlling interest activity for the six months ended June 30, 2024:

Related parties

Parties are related if one party has the ability to control or exercise significant influence over the other party in making financing and operating decisions. At June 30, 2024, amounts due to/from related parties consisted of:

(a)

Loans payable: During the year ended December 31, 2020, a small number of related persons, which consisted of key management of the Company, participated in the Ilera term loan (Note 10), which makesup $142 and $159 of the total loan principal balance at June 30, 2024 and December 31, 2023, respectively.

Income taxes

The Company's effective tax rate was 239% and (2,965)% for the three and six months ended June 30, 2024 and (101)% and (148)% for thethree and six months ended June 30, 2023.

The Company has computed its provision for income taxes based on the actual effective tax rate for the quarter as the Company believes this is the best estimate for the annual effective tax rate. The Company is subject to income taxes in the United States and Canada.

Significant judgment is required in evaluating the Company’s uncertain tax positions and determining the provision for income taxes. The Company recognizes benefits from uncertain tax positions based on the cumulative probability method whereby the largest benefit with a cumulative probability of greater than 50% is recorded. An uncertain tax position is not recognized if it has less than a 50% likelihood of being sustained.

A reconciliation of the beginning and ending amount of unrecognized tax benefits for the period presented:

A reconciliation of the beginning and ending amount of uncertain tax liabilities, inclusive of accruals for related penalties and interest, for the period presented:

The Company had an unrecognized tax benefits of $134,709 and $84,485 as of June 30, 2024 and December 31, 2023, respectively. The increase in uncertain tax positions is primarily due to legal interpretations that challenge the Company's tax liability under the Code (“280E Tax Position”). The Company believes that it is reasonably possible that the unrecognized tax benefits will increase over the next 12 months due to its 280E Tax Position. Of the unrecognized tax benefits amounts, $12,772 and $10,459 as of June 30, 2024 and December 31, 2023, respectively, is unrelated to its 280E Tax Position. The unrecognized tax liabilities are combined with other long term liabilities of $1,130 and $4,667 as at June 30, 2024 and December 31, 2023, respectively, on the consolidated balance sheets.

Related to its 280E Tax Position, the Company has filed the majority of its amended federal and state returns for tax years 2020 through 2022. During the period ended June 30, 2024, the Company received refunds related primarily to the amended federal tax return for tax year 2020 in the amount of $8,371, including interest.

General and administrative expenses

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

The Company’s disaggregated net revenue by source, primarily due to the Company’s contracts with its external customers was as follows:

For the three and six months ended June 30, 2024 and 2023, the Company didnot have any single customer that accounted for 10% or more of the Company’s revenue.

Finance and other expenses

The Company’s finance and other expenses included the following:

Segment information

Operating Segment

The Company determines its operating segments according to how the business activities are managed and evaluated by the Company’s chief operating decision maker. The Company operates underone operating segment, being the cultivation, production and sale of cannabis products.

Geography

The Company has subsidiaries located in Canada and the United States. For the three months ended June 30, 2024, net revenue was primarily generated from sales in the United States. As a result of the Reorganization (Note 3), the Company consolidated its retail location in Canada and generated net revenue of $274 and $538 the three and six months ended June 30, 2024, respectively.

The Company had non-current assets by geography of:

Capital management

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

Since inception, the Company has primarily financed its liquidity needs through the issuance of share capital and debt. The equity issuances are outlined in Note 13, debt modifications are outlined in Note 10, and debt financings are outlined in Note 12.

The Company is subject to financial covenants as a result of its loans payable with various lenders. The Company is in compliance with its debt covenants as of June 30, 2024. In the event that, in future periods, the Company’s financial results are below levels required to maintain compliance with any of its covenants, the Company will assess and undertake appropriate corrective initiatives with a view to allowing it to continue to comply with its covenants. Other than these items related to loans payable, the Company is not subject to externally imposed capital requirements.

Financial instruments and risk management

Assets and liabilities measured at fair value

Cash and cash equivalents, net accounts receivable, accounts payable and accrued liabilities, loans payable, convertible debentures, and other current receivables and payables represent financial instruments for which the carrying amount approximates fair value due to their short-term maturities.

The following table represents the fair value amounts of financial assets and financial liabilities measured at estimated fair value on a recurring basis:

There wereno transfers between the levels of fair value hierarchy during thethree and six months ended June 30, 2024.

The valuation approaches and key inputs for each category of assets or liabilities that are classified within levels of the fair value hierarchy are presented below:

Level 1

Cash, cash equivalents, and restricted cash, net accounts receivable, accounts payable and accrued liabilities, and other current receivables and payables represent financial instruments for which the carrying amount approximates fair value due to their short-term maturities.

Level 2

The following table summarizes the changes in the derivative liability for the six months ended June 30, 2024:

Warrant liability and conversion option

The Company's warrant liability consists of a detachable warrant issued through the private placement (Note 13), and a conversion option related to the convertible debenture offering (Note 12).

Detachable Warrants

The detachable warrants issued as a part of the June 2023 private placement (Note 13) have been measured at fair value as of June 30, 2024. Key inputs and assumptions used in the Black-Scholes Model were as follows:

Bifurcated conversion options

The conversion option issued as a part of the June and August 2023 private placement (Note 12) has been measured at fair value as of June 30, 2024. Key inputs and assumptions used in the Black-Scholes Model were as follows:

Contingent Consideration Payable

The fair value of the Peninsula Contingent Consideration was calculated using the Black-Scholes Model. Key inputs and assumptions were as follows:

The fair value of the State Flower and The Apothecarium Contingent Considerations were calculated using the Black-Scholes Model. Key inputs and assumptions were as follows:

Commitments and contingencies

Legal proceedings

In the ordinary course of business, the Company is involved in a number of lawsuits incidental to its business, including litigation related to intellectual property, employment, and commercial matters. Although it is difficult to predict the ultimate outcome of these matters, management believes that any ultimate liability would not have a material adverse effect on the Company’s Consolidated Balance Sheets or Consolidated Statements of Operations and Comprehensive Loss. At June 30, 2024, there were no pending lawsuits that could reasonably be expected to have a material effect on the results of the Company’s Consolidated Financial Statements, except for the proceedings described below.

Pure X Litigation

On August 9, 2023, AEY Capital LLC (“AEY”), a licensed subsidiary of TerrAscend, filed a lawsuit in Oakland County Circuit Court (the "Oakland Court") against Pure X, LLC (“Pure X”) seeking damages in the amount of $14,969 (the “AEY Claim”). The AEY Claim alleges breach of contract, quantum meruit/unjust enrichment, account stated and statutory conversion. AEY’s alleged damages were related to Pure X’s failure to pay for various cannabis products sold by AEY. This matter was settled between the parties and dismissed with prejudice by the Oakland Court on June 28, 2024.

Subsequent events

On July 19, 2024, the Company made a prepayment of the Chicago Atlantic Term Loan of $1,500 at par.

On August 1, 2024, the Company and TerrAscend USA, Inc., as guarantors, and each of WDB Holding CA, Inc., WDB Holding PA, Inc., WDB Holding MI, Inc., Moose Curve Holdings, LLC, and Hempaid, LLC, including certain of each of their respective subsidiaries, as borrowers (collectively, the “Borrowers”), and FG Agency Lending LLC, as the Administrative Agent (the “Agent”) entered into a Loan Agreement (the “FG Loan”). The FG Loan provides for afour-year, $140,000 senior-secured term loan with an initial draw on August 1, 2024, upon closing of the FG Loan, of $114,000 (the “Initial Draw”) and a delayed draw of $26,000 expected to occur on September 30, 2024 (the “Delayed Draw”). Proceeds from the Initial Draw were used to retire the Ilera Term Loan, the Stearns Loan and certain other indebtedness (collectively, the “Retired Loans”), in addition to being used for working capital and general corporate purposes. As a result, each outstanding obligation under the Retired Loans were repaid in full and subsequently terminated. The proceeds from the Delayed Draw will be used to retire the Chicago Atlantic Term Loan. The FG Loan is guaranteed by the Company and TerrAscend USA, Inc. and is secured by substantially all of the assets of the Borrowers. The FG Loan bears interest at 12.75% per annum and matures on August 1, 2028. Certain funds controlled by the Company’s Executive Chairman, Jason Wild, a related party of the Company, have invested approximately $7,500 under the FG Loan.