Intangible Assets and Goodwill

9 Months Ended

Sep. 30, 2022

Goodwill and Intangible Assets Disclosure [Abstract]

Intangible Assets and Goodwill

7.Intangible assets and goodwill

Intangible assets consisted of the following:

At September 30, 2022	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Finite lived intangible assets
Software	$	2,677	$	(1,985	)	$	692
Licenses		172,593		(16,166	)		156,427
Brand intangibles		1,144		(540	)		604
Non-compete agreements		280		(257	)		23
Total finite lived intangible assets		176,694		(18,948	)		157,746
Indefinite lived intangible assets
Brand intangibles		82,757		—			82,757
Total indefinite lived intangible assets		82,757		—			82,757
Intangible assets, net	$	259,451	$	(18,948	)	$	240,503

At December 31, 2021	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Finite lived intangible assets
Software	$	2,626	$	(1,353	)	$	1,273
Licenses		153,300		(11,311	)		141,989
Brand intangibles		1,144		(254	)		890
Non-compete agreements		280		(221	)		59
Total finite lived intangible assets		157,350		(13,139	)		144,211
Indefinite lived intangible assets
Brand intangibles		24,773		—			24,773
Total indefinite lived intangible assets		24,773		—			24,773
Intangible assets, net	$	182,123	$	(13,139	)	$	168,984

Amortization expense was $4,104 and $10,722 for the three and nine months ended September 30, 2022, respectively ($1,555 and $4,631, respectively, were included in cost of sales) and $2,056 and $5,335 for the three and nine months ended September 30, 2021, respectively ($750 and $1,858, respectively, were included in cost of sales).

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

2022	$	2,166
2023	$	7,594
2024	$	7,167
2025	$	6,768
2026	$	6,780

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

Balance at December 31, 2021	$	90,326
Acquisitions (see Note 4)		160,201
Measurement period adjustment (see Note 4)		18,113
Impairment of goodwill		(178,314	)
Balance at September 30, 2022	$	90,326

Impairment of Intangible Assets

	For the Three Months Ended					For the Nine Months Ended
		September 30, 2022		September 30, 2021			September 30, 2022		September 30, 2021
Finite lived intangible assets
Software		$	-	$	-		$	-	$	9
Licenses			133,728		—			133,728		—
Customer Relationships			—		—			—		2,000
Non-compete agreements			—		—			—		224
Total impairment of finite lived intangible assets			133,728		—			133,728		2,233
Indefinite lived intangible assets
Brand intangibles			19,200		—			19,200		1,400
Total impairment of indefinite lived intangible assets			19,200		—			19,200		1,400
Total impairment of intangible assets		$	152,928	$	-		$	152,928	$	3,633

Long-lived assets

The Company evaluates the recoverability of long-lived assets, including definite lived intangible assets, whether events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. The Company determined that changes in market

expectations of cash flows in its Michigan business, as well as increased competition and supply in the state, were indicators that an impairment test was appropriate.

The impairment test for long-lived assets is a two-step test, whereby management first determines the recoverable amount by calculating the undiscounted cash flows of each asset group. If the recoverable amount is lower than the carrying value of the asset group, then impairment is indicated. The Company then determines the fair value of the asset group and allocates the impairment to the assets, being the (i) cultivation and processing licenses, and (ii) retail licenses, acquired through the Gage Acquisition. The Company compared the carrying value of the assets to its fair value and determined that the carrying value exceeded the fair value for both the retail and the cultivation and processing licenses. As such, the Company recorded impairment of $78,998 and $54,730 for the cultivation and processing licenses and retail licenses, respectively, reducing both the carrying values to $nil.

The fair value of each asset group was determined using cash flows expected to be generated by market participants, discounted at a weighted average cost of capital. The fair value of the specific assets that were impaired was determined using the multi period excess earnings method based on the following key assumptions:

•Cash flows: estimated cash flows were projected based on actual operating results from internal sources, as well as industry and market trends. The forecasts were extended through the estimated useful lives of the assets;

•Post-tax discount rate: the post-tax discount rate is reflective of the weighted average cost of capital ("WACC"). The WACC was estimated based on the risk-free rate, equity risk premium, beta premium, and after-tax cost of debt based on corporate bond yields; and

•Tax rate: the tax rates used in determining future cash flows were those substantively enacted at the respective valuation date.

Indefinite lived intangible assets

Indefinite lived intangible assets are reviewed for impairment annually and whether there are events or changes in circumstances that indicate that the carrying amount has been impaired. The Company determined that the existence of impairment on certain long-lived assets, together with the changes in market expectations of cash flows in Michigan, as well as increased competition and supply in the state since the Company acquired the indefinite lived assets, indicate that the fair value of the Gage brand intangible assets are more likely than not lower than the carrying value. As such, the Company performed an impairment analysis and determined the fair value of its brand intangibles using the relief of royalty method. As a result of the quantitative analysis performed, the Company recognized impairment of $19,200, reducing the carrying value of the brand intangibles to $57,985.

In August 2021, the Company made the decision to undertake a strategic review process to explore, review and evaluate potential alternatives for its Arise business focused on maximizing shareholder value. As a result of this review, the Company recorded impairment of intangible assets of $3,633 for the nine months ended September 30, 2021.

Impairment of goodwill

Goodwill is reviewed for impairment annually and whenever there are events or changes in circumstances that indicate the carrying value has been impaired. Based on the indicators of impairment noted previously, the Company determined that there were indicators that the fair value of its reporting units are more likely than not lower than its carrying value. As such, a one-step quantitative impairment test was performed over its Michigan reporting unit, which includes goodwill acquired through the Gage Acquisition and the Pinnacle Acquisition. The following significant assumptions were applied in the determination of the fair value of the reporting unit using a discounted cash flow model:

•Cash flows: estimated cash flows were projected based on actual operating results from internal sources, as well as industry and market trends. The forecasts were extended to a total of five years (with a terminal value thereafter);

•Terminal value growth rate: The terminal growth rate was based on historical and projected consumer price inflation, historical and projected economic indicators and projected industry growth;

•Post-tax discount rate: the post-tax discount rate is reflective of the WACC. The WACC was estimated based on the risk-free rate, equity risk premium, beta premium, and after-tax cost of debt based on corporate bond yields; and

•Tax rate: the tax rates used in determining future cash flows were those substantively enacted at the respective valuation date.

During the nine months ended September 30, 2022, the Company recorded impairment of goodwill of $178,314 at its Michigan reporting unit, reducing the carrying value of the goodwill acquired through the Gage Acquisition and Pinnacle Acquisition to $nil.

As discussed in Note 4, the accounting for the acquisitions is provisional and subject to adjustment. Therefore, the impairment loss recognized for intangible assets and goodwill are also provisional until management has finalized the accounting for the acquisitions.