In August 2020, the Company acquired by merger Industrial Seed Innovations (“ISI”), an Oregon-based industrial hemp breeding and seed company. As a result of the acquisition, the Company acquired ISI’s commercial and genetic assets, including seed varieties, germplasm library and intellectual property. ISI’s Rogue, Umpqua and Santiam seed varieties are now part of Arcadia’s portfolio, alongside the Company’s GoodHemp line of hemp seeds.

The acquisition was recorded as a business combination, in accordance with ASC Topic 805. The purchase price consideration for the acquisition totaled an estimated $1,212,000, of which $500,000 in cash and $432,000, in the form of 132,626 shares of the Company’s common stock, was paid during the month of August 2020. The remaining amount of $280,000 was eligible to be recognized in two annual installments, each of up to 132,626 shares of the Company’s common stock, subject to the achievement of revenue milestones in 2021 and 2022, and is recorded as a contingent liability at fair value in the consolidated balance sheets as of December 31, 2021. A change in fair value of contingent consideration of $210,000 was recognized for the year ended December 31, 2021 as the annual revenue milestone was not met for this year. The cash consideration paid for the acquisition was funded by cash on hand.

Acquisition costs are not included as components of consideration transferred and instead are accounted for as expenses in the period in which the costs are incurred. The Company incurred costs related to the ISI acquisition of approximately $67,000 included in selling, general and administrative expenses in the Company's condensed consolidated statements of operations and comprehensive loss for the year ended December 31, 2020.

The pro forma impact of the acquisition to the historical financial results was determined not to be significant.

The following table presents the allocation of the purchase price of ISI assets acquired, based on their fair values.


	Purchase Price Allocation
Inventory	$	511
Intangible assets, net		400
Goodwill		408
Deferred tax liability		(107	)
Total consideration allocated	$	1,212

A deferred tax liability arising from the difference between book purchase price allocation and tax basis has been assessed in the amount of $107,000. Deferred tax liabilities are required to be recorded in purchase accounting independently of whether the acquiror has a valuation allowance on its own net deferred tax assets. As a result, the combined entity now has additional deferred tax liabilities available to reduce the amount of valuation allowance necessary. Future reversals of existing taxable temporary differences are an objective source of future taxable income. Accordingly, the purchase accounting deferred tax liabilities enabled the realization of a portion of the existing deferred tax assets, thus allowing for a reduction in the valuation allowance. The reduction in the valuation allowance is not accounted for as part of the purchase accounting but is recognized in the consolidated statements of operations and comprehensive loss as a discrete tax benefit in the income tax provision.

The former shareholders of ISI remain responsible for ISI’s pre-acquisition liabilities. Pursuant to the acquisition agreement, the Company entered into a lease agreement with ISI for the use of land, equipment, greenhouses and buildings. The lease was effective upon the execution of the definitive acquisition agreement and had a term of 3 years with the option to renew for three additional 3-year terms. The lease was terminated effective December 31, 2021, as no further hemp seed production is deemed necessary as the inventory balance on hand is deemed sufficient.