Financial Instruments and Risk Management

6 Months Ended

Jun. 30, 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 June 30, 2022								At December 31, 2021
		Level 1		Level 2			Level 3			Level 1		Level 2			Level 3
Assets
Cash and cash equivalents		$	48,426	$	-	—	$	-		$	79,642	$	-	—	$	-
Restricted cash			605		—			—			—		—			—
Purchase option derivative asset			—		—			50			—		—			868
Total Assets		$	49,031	$	-		$	50		$	79,642	$	-		$	868
Liabilities
Contingent consideration payable			—	$	-		$	5,648		$	-	$	-		$	12,535
Warrant liability			—		6,176			—			—		54,986			—
Total Liabilities		$	-	$	6,176		$	5,648		$	-	$	54,986		$	12,535

There were no transfers between the levels of fair value hierarchy during the three and six months ended June 30, 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 six months ended June 30, 2022:


Balance at December 31, 2021	$	54,986
Addition on acquisition		6,756
Included in gain on fair value of warrants		(53,876	)
Exercises		(1,690	)
Balance at June 30, 2022	$	6,176

The Company's warrant liability consists of its Series A, B, C, and D convertible preferred stock issued through its 2020 private placements ("private placement warrant liability"), as well as the warrant liability acquired through its Gage Acquisition ("Gage warrant liability") (refer to Note 4).

The private placement warrant liability has been measured at fair value at June 30, 2022. Key inputs and assumptions used in the Black Scholes valuation were as follows:


	June 30, 2022			December 31, 2021
Common Stock Price of TerrAscend Corp.	$	2.28		$	6.11
Warrant exercise price	$	3,000		$	3,000
Warrant conversion ratio	$	1,000		$	1,000
Annual volatility		65.7	%		65.5	%
Annual risk-free rate		2.9	%		0.6	%
Expected term (in years)		0.9		1.4

The Gage warrant liability has been remeasured at fair value at June 30, 2022. Key inputs and assumptions used in the Black Scholes valuation were as follows:


	June 30, 2022			March 10, 2022
Common Stock Price of TerrAscend Corp.	$	2.28		$	5.70
Warrant exercise price	$	8.66		$	8.66
Annual volatility	62.88% - 63.73%			61.65% - 61.87%
Annual risk-free rate		2.9	%		1.8	%
Expected term (in years)		1.5			1.7

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		(818	)
Balance at June 30, 2022	$	50

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:


	June 30, 2022			December 31, 2021
Term (in years)		0.8			1.3
Risk-free rate		2.5	%		0.4	%
EBITDA discount rate		15.5	%		15.0	%
EBITDA volatility		37.1	%		44.0	%

Contingent Consideration Payable

The fair value of contingent consideration at June 30, 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% (June 30, 2021 – 12.8%) was utilized to determine the present value of the liabilities, resulting in a loss on revaluation of contingent consideration of $34 and $153 for the three and six months ended June 30, 2022, respectively (June 30, 2021 - ($7) and $2,990, respectively).

The illustrative variance of the total contingent consideration at June 30, 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	$	1,175
Increase 50 basis points	$	1,195
Decrease 50 basis points	$	1,236
Decrease 100 basis points	$	1,258