Financial Instruments and Risk Management

3 Months Ended

Mar. 31, 2022

Financial Instruments and Risk Management

20.

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:


	At March 31, 2022								At December 31, 2021
		Level 1		Level 2			Level 3			Level 1		Level 2			Level 3
Assets
Cash and cash equivalents		$	88,407	$	-	—	$	-		$	79,642	$	-	—	$	-
Purchase option derivative asset			—		—			550			—		—			868
Total Assets		$	88,407	$	-		$	550		$	79,642	$	-		$	868
Liabilities
Contingent consideration payable			—	$	-		$	5,700		$	-	$	-		$	12,535
Warrant liability			—		55,021			—			—		54,986			—
Total Liabilities		$	-	$	55,021		$	5,700		$	-	$	54,986		$	12,535

There were no transfers between the levels of fair value hierarchy during the three months ended March 31, 2022.

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

Level 2

Warrant liability

The following table summarizes the changes in the warrant liability for the three months ended March 31, 2022:


Balance at December 31, 2021	$	54,986
Addition on acquisition		6,756
Included in gain on fair value of warrants		(6,031	)
Exercises		(690	)
Balance at March 31, 2022	$	55,021

The warrant liability has been measured at fair value at March 31, 2022. Key inputs and assumptions used in the Black Scholes valuation were as follows:


	March 31, 2022			December 31, 2021
Common Stock Price of TerrAscend Corp.	$	5.70		$	6.11
Warrant exercise price	$	3,000		$	3,000
Warrant conversion ratio	$	1,000		$	1,000
Annual volatility		60.9	%		65.5	%
Annual risk-free rate		2.2	%		0.6	%
Expected term (in years)		1.2		1.4

Level 3

Purchase option derivative asset

The following table summarizes the changes in the purchase option derivative asset:


Balance at December 31, 2021	$	868
Revaluation of purchase option derivative asset		(318	)
Balance at March 31, 2022	$	550

The purchase option derivative asset has been measured at fair value at the transaction date using the Monte Carlo simulation model that relies on assumptions around the Company's EBITDA volatility and risk adjusted discount, among others. Key inputs and assumptions used in the Monte Carlo simulation model are summarized below:


	March 31, 2022			December 31, 2021
Term (in years)		1.2			1.3
Risk-free rate		1.4	%		0.4	%
EBITDA discount rate		15.0	%		15.0	%
EBITDA volatility		43.0	%		44.0	%

Contingent Consideration Payable

The fair value of contingent consideration at March 31, 2022 and December 31, 2021 was determined using a probability weighted model based on the likelihood of achieving certain revenue and EBITDA scenario outcomes. A discount rate of 12.2% (March 31, 2021 – 12.8%) was utilized to determine the present value of the liabilities, resulting in a loss on revaluation of contingent consideration of $119 for the three months ended March 31, 2022 (March 31, 2021 - $2,997).

The illustrative variance of the total contingent consideration at March 31, 2022 based on reasonably possible changes to one of the significant unobservable inputs, holding other inputs constant, would have the following effects:


Discount rate sensitivity	KCR
Increase 100 basis points	$	1,139
Increase 50 basis points	$	1,160
Decrease 50 basis points	$	1,203
Decrease 100 basis points	$	1,225