NOTE 8 - INTANGIBLE ASSETS AND GOODWILL

Intangible Assets, Net

Intangible assets, net consisted of the following:

Amortization expense for the six months ended June 30, 2020 and 2019 was $1.78 and $1.51 million, respectively.

Impairment of Long-Lived Assets Other than Goodwill and Indefinite-Lived Intangible Assets

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 the first two quarters of 2020, 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 of June 30, 2020. As a result, the Company recognized an impairment charge of $0.38 million in the six months ended June 30, 2020. Management evaluated the recoverability of the Black Oak Gallery trade name using level 3 inputs and an income approach to assess the potential impact of a long-term decline in cash flows due to the pandemic. The recoverability test indicated that the book value of the trade name exceeded the fair value as of June 30, 2020. As a result, the Company recognized an impairment charge of $2.48 million in the six months ended June 30, 2020.

During the second quarter of 2020, the COVID-19 pandemic had a negative impact on the results of operations for our OneQor reporting unit, as the Company experienced an overall decline in cash flows from retail operations, which inhibited our ability to fund our CBD operations. 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 the OneQor reporting unit, indicated the carrying value of OneQor’s customer relationships and trade name may not be recoverable. Management evaluated the recoverability of the customer relationships and trade names using level 3 inputs and a probability-weighted approach to assess the potential impact of a long-term decline in our revenues due to the COVID-19 pandemic. The recoverability test indicated that the book values of customer relationships and trade name exceeded their fair values as of June 30, 2020. As a result, the Company recognized an impairment charge of $1.84 million and $0.41million for OneQor’s customer relationships and trade name intangible assets, respectively, in the second quarter of 2020.

Goodwill

The table below summarizes the changes in the carrying amount of goodwill during the six months ended June 30, 2020:

Impairment of Goodwill

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 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 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 second quarter of 2020, the COVID-19 pandemic had a negative impact on the results of operations for our OneQor reporting unit, as the Company experienced an overall decline in cash flows from retail operations, which inhibited our ability to fund our CBD operations. 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 the OneQor reporting unit, indicated potential impairment of OneQor’s goodwill as of June 30, 2020. Accordingly, the Company performed a quantitative assessment of the fair value of OneQor’s goodwill as of June 30, 2020 using an income approach. The analysis resulted in an impairment charge of $4.06 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.