Blüm Holdings Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

INTANGIBLE ASSETS AND GOODWILL

INTANGIBLE ASSETS AND GOODWILL

12 Months Ended

Dec. 31, 2021

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill

Goodwill arises from the purchase price for acquired businesses exceeding the fair value of tangible and intangible assets acquired less assumed liabilities.

Goodwill is reviewed annually for impairment or more frequently if impairment indicators arise. The Company conducts its annual goodwill impairment assessment as of the last day of the third quarter, or more frequently under certain circumstances. For the purpose of the goodwill impairment assessment, the Company has the option to perform a qualitative assessment (commonly referred to as “step zero”) to determine whether further quantitative analysis for impairment of goodwill or indefinite-lived intangible assets is necessary or a quantitative assessment (“step one”) where the Company estimates the fair value of each reporting unit using a discounted cash flow method (income approach). Goodwill is assigned to the reporting unit, which is the operating segment level or one level below the operating segment. The balance of goodwill at December 31, 2021 and 2020 was $48.13 million and $6.17 million, respectively.

The table below summarizes the changes in the carrying amount of goodwill:


Balance at December 31, 2019	$	21,471
Impairment	(15,300)
Balance at December 31, 2020	6,171
Goodwill arising from acquisitions	48,132
Impairment	(6,171)
Balance at December 31, 2021	$	48,132

The Company tests for impairment annually on September 30, and between annual tests if the Company becomes aware of an event or a change in circumstances that would indicate the carrying value may be impaired. During the first quarter of 2020, the impact of COVID-19 on the retail industry as well as uncertainty around when the Company would be able to resume its normal operations contributed to a significant and prolonged decline in the Company’s stock price, resulting in

the market capitalization of the Company falling below its carrying value. As a result, management determined that a triggering event had occurred as it was more likely than not that the carrying values of the Black Oak Gallery reporting unit exceeded its fair value. Accordingly, the Company performed a quantitative assessment of the fair value of Black Oak Gallery’s goodwill as of March 31, 2020 using a market capitalization approach. This analysis resulted in an impairment charge of $4.20 million recorded in the first quarter of 2021. The goodwill impairment charge was measured as the amount by which the carrying amount of the reporting unit, including goodwill, exceeded its fair value.

During the second quarter of 2020, COVID-19 and civil unrest in Oakland, California continued to have a material negative impact on the financial results of the Black Oak Gallery reporting unit. As a result, management determined that a triggering event had occurred as it was more likely than not the carrying value Black Oak Gallery’s goodwill exceeded its fair value. Accordingly, the Company performed a quantitative assessment of the fair value of Black Oak Gallery’s goodwill as of June 30, 2020 using an income approach. The analysis resulted in an impairment charge of $2.75 million recorded in the second quarter of 2020. The goodwill impairment charge was measured as the amount by which the carrying amount of the reporting unit, including goodwill, exceeded its fair value.

During the third quarter of 2020, COVID-19 and the aftermath of civil unrest in Oakland, California continued to have a material negative impact on the financial results of the Black Oak Gallery reporting unit. The Company completed its annual testing for impairment as of September 30, 2020 using the Guideline Public Company method. The results of the step one assessment indicated the carrying value of the reporting unit exceeded the fair value by $8.35 million as of September 30, 2020. As a result, the Company recognized an impairment charge of $8.35 million during the third quarter of 2020.

We recorded an impairment loss of $6.17 million following the performance of our 2021 annual goodwill impairment test, which was performed as of September 30, 2021 and was completed during the fourth quarter of 2021. The impairment loss represented the excess of the carrying value of our Black Oak Gallery reporting unit over the estimated fair value based on a discounted cash flow analysis. The impairment recognizes the impact of COVID-19 on the financial performance of Black Oak Gallery's operations, as well as declines in our forecasted revenue and earnings.

The impairment charges relating to goodwill and other assets are presented in the “Impairment of Assets” line in the Consolidated Statements of Operations.

Intangible Assets, Net

Intangible assets consisted of the following as of December 31, 2021 and 2020:


	(in Thousands)
		December 31, 2021						December 31, 2020
	Estimated Useful Life in Years	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Amortizing Intangible Assets:
Customer Relationships	3 to 5	$	7,400	$	(7,400)	$	—	$	7,400	$	(7,400)	$	—
Trademarks and Patent	2 to 8	4,500		(750)		3,750		196		(187)		9
Operating Licenses	14	100,701		(6,864)		93,837		10,270		(3,485)		6,785

Total Amortizing Intangible Assets		112,601		(15,014)		97,587		17,866		(11,072)		6,794

Non-Amortizing Intangible Assets:
Trade Name	Indefinite	32,050		—		32,050		920		—		920

Total Non-Amortizing Intangible Assets		32,050		—		32,050		920		—		920

Total Intangible Assets, Net		$	144,651	$	(15,014)	$	129,637	$	18,786	$	(11,072)	$	7,714

Long-lived assets other than goodwill and indefinite-lived intangible assets, held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company evaluates recoverability of assets to be held and used and if the carrying value is not recoverable, the Company fair values the asset and compares to the carrying value. If the asset is considered to be impaired, the impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. The analysis for impairment of long-lived assets other than goodwill and indefinite-lived intangible assets is the first impairment analysis performed and related impairment charges are recognized before the impairment of goodwill analysis.

During 2021, the impact of COVID-19 on the retail industry had a negative impact on our revenues and management was forced to limit store operating hours due to the pandemic. Management believes the COVID-19 outbreak will continue to have a material negative impact on the Company’s financial results. These factors, including management’s revised forecast for the future performance of our Black Oak Gallery reporting unit, indicated the carrying value of Black Oak Gallery’s customer relationships and trade name may not be recoverable. Management evaluated the recoverability of the customer relationships using level 3 inputs and a probability-weighted approach to assess the potential impact of a long-term decline in our existing customer base due to the COVID-19 pandemic. The recoverability test indicated that the book value of customer relationships exceeded fair value. As a result, the Company recognized impairment charges of $0.46 million during 2021.

The company evaluates impairment of the Black Oak Gallery trade name using level 3 inputs and an income approach. The recoverability test indicated that the fair value of the trade name exceeded the book value. Accordingly, no impairment charge has been recognized.

The Company recorded amortization expense of $3.39 million and $2.55 million for the years ended December 31, 2021 and 2020, respectively. Based solely on the amortizable intangible assets recorded as of December 31, 2021, the Company estimates amortization expense for the next five years to be as follows:


	(in thousands)
	Year Ending December 31,
	2022		2023		2024		2025		2026 and thereafter		Total
Amortization expense	$	9,443	$	8,693	$	7,193	$	7,193	$	65,065	$	97,587

Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives or other relevant factors or changes.