10-Q 1 d431451d10q.htm 10-Q 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2022.
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
    
    
    
    
to
    
    
    
    
Commission file number
0-17988
 
 
Neogen Corporation
(Exact name of registrant as specified in its charter)
 
 
 
     
Michigan
 
38-2367843
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification Number)
620 Lesher Place
Lansing, Michigan 48912
(Address of principal executive offices, including zip code)
(517)
372-9200
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
         
Title of each Class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock, $0.16 par value per share
 
NEOG
 
NASDAQ Global Select Market
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    
YES
  ☒    NO  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
             
Large accelerated filer
     Accelerated filer  
Non-accelerated
filer
     Smaller Reporting Company  
Emerging growth company  
        
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act):    YES  ☐    NO  
As of November 30, 2022 there were 216,154,283 shares of Common Stock outstanding.
 
 
 


NEOGEN CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

 

     Page No.  

PART I. FINANCIAL INFORMATION

  

Item 1.

  Interim Consolidated Financial Statements (unaudited)      2  
  Consolidated Balance Sheets – November 30, 2022 and May 31, 2022      2  
  Consolidated Statements of Income (Loss) – Three and six months ended November 30, 2022 and 2021      3  
  Consolidated Statements of Comprehensive Income (Loss) – Three and six months ended November 30, 2022 and 2021      4  
  Consolidated Statements of Equity – Three and six months ended November 30, 2022 and 2021      5  
  Consolidated Statements of Cash Flows – Six months ended November 30, 2022 and 2021      6  
  Notes to Interim Consolidated Financial Statements – November 30, 2022      7  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      24  

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      36  

Item 4.

  Controls and Procedures      36  

PART II. OTHER INFORMATION

  

Item 1.

  Legal Proceedings      37  

Item 1A.

  Risk Factors      37  

Item 6.

  Exhibits      38  

SIGNATURES

     39  
  CEO Certification   
  CFO Certification   
  Section 906 Certification   

 

1


P3YP3YP5YP7Y

PART I – FINANCIAL INFORMATION
Item 1. Interim Consolidated Financial Statements
Neogen Corporation and Subsidiaries
Consolidated Balance Sheets (unaudited)
(in thousands, except share and
per share amounts)
 
    
November 30,
2022
   
May 31,

2022
 
Assets
                
Current Assets
                
Cash and cash equivalents
   $ 100,000     $ 44,473  
Marketable securities
     176,338       336,578  
Accounts receivable, net of allowance of $1,950 and $1,650
     142,711       99,674  
Inventories
     136,069       122,313  
Prepaid expenses and other current assets
     88,215       23,760  
    
 
 
   
 
 
 
Total Current Assets
     643,333       626,798  
Net Property and Equipment
     148,170       110,584  
Other Assets
                
Right of use assets
     3,707       3,184  
Goodwill
     2,122,397       142,704  
Other
non-amortizable
intangible assets
     15,216       15,397  
Amortizable intangible and other assets, net of accumulated amortization of $78,046 and $55,416
     1,626,514       92,106  
Other
non-current
assets
     3,905       2,156  
    
 
 
   
 
 
 
Total Assets
   $ 4,563,242     $ 992,929  
    
 
 
   
 
 
 
Liabilities and Stockholders’ Equity
                
Current Liabilities
                
Accounts payable
   $ 79,251     $ 34,614  
Accrued compensation
     15,014       11,123  
Income tax payable
     9,049       2,126  
Accrued interest
     13,974           
Deferred revenue
     5,083       5,460  
Other accruals
     30,187       24,521  
    
 
 
   
 
 
 
Total Current Liabilities
     152,558       77,844  
Deferred Income Tax Liability
     364,252       17,011  
Non-current
debt
     923,962           
Other
non-current
liabilities
     16,207       10,700  
    
 
 
   
 
 
 
Total Liabilities
     1,456,979       105,555  
Commitments and Contingencies
(note 12)
                
Equity
                
Preferred stock, $1.00 par value, 100,000 shares authorized, none issued and outstanding
                  
Common stock, $0.16 par value, 315,000,000 shares authorized, 216,154,283 and 107,801,094 shares issued and outstanding at November 30, 2022 and May 31, 2022, respectively
     34,584       17,248  
Additional
paid-in
capital
     2,560,898       309,984  
Accumulated other comprehensive loss
     (40,498     (27,769
Retained earnings
     551,279       587,911  
    
 
 
   
 
 
 
Total Stockholders’ Equity
     3,106,263       887,374  
    
 
 
   
 
 
 
Total Liabilities and Stockholders’ Equity
   $     4,563,242     $     992,929  
    
 
 
   
 
 
 
See notes to interim consolidated financial statements.
 
2

Neogen Corporation and Subsidiaries
Consolidated Statements of Income (Loss) (unaudited)
(in thousands, except per share amounts)
 
 
  
Three Months Ended
November 30,
 
 
Six Months Ended
November 30,
 
 
  
2022
 
 
2021
 
 
2022
 
 
2021
 
Revenues
  
 
 
 
Product revenues
   $ 203,317     $ 106,111  
$ 310,109     $ 210,124  
Service revenues
     26,716       24,406  
  52,273       48,698  
    
 
 
   
 
 
 
 
 
   
 
 
 
Total Revenues
     230,033       130,517  
  362,382       258,822  
Cost of Revenues
                
             
Cost of product revenues
     102,530       56,374  
  157,971       111,100  
Cost of service revenues
     14,964       13,549  
  29,602       27,120  
    
 
 
   
 
 
 
 
 
   
 
 
 
Total Cost of Revenues
     117,494       69,923  
  187,573       138,220  
    
 
 
   
 
 
 
 
 
   
 
 
 
Gross Margin
     112,539       60,594  
  174,809       120,602  
Operating Expenses
                
             
Sales and marketing
     36,348       21,188  
  59,731       41,743  
General and administrative
     77,001       22,605  
  104,945       35,988  
Research and development
     6,846       4,332  
  11,727       8,657  
    
 
 
   
 
 
 
 
 
   
 
 
 
Total Operating Expenses
     120,195       48,125  
  176,403       86,388  
    
 
 
   
 
 
 
 
 
   
 
 
 
Operating Income (Loss)
     (7,656     12,469  
  (1,594     34,214  
Other Income (Expense)
                
             
Interest income
     553       246  
  1,523       455  
Interest expense
     (20,545     (22     (20,547     (28
Other income (expense)
     (6,443     235  
  (6,814     14  
    
 
 
   
 
 
 
 
 
   
 
 
 
Total Other Income (Expense)
     (26,435     459  
  (25,838     441  
    
 
 
   
 
 
 
 
 
   
 
 
 
Income (Loss) Before Taxes
     (34,091     12,928  
  (27,432     34,655  
Provision for Income Taxes
     7,750       2,100  
  9,200       6,750  
    
 
 
   
 
 
 
 
 
   
 
 
 
Net Income (Loss)
   $ (41,841   $ 10,828  
$ (36,632   $ 27,905  
    
 
 
   
 
 
 
 
 
   
 
 
 
Net Income (Loss) Per Share
                
             
Basic
   $ (0.19   $ 0.10  
$ (0.23   $ 0.26  
Diluted
   $ (0.19   $ 0.10  
$ (0.23   $ 0.26  
Weighted Average Shares Outstanding
                
             
Basic
     216,134       107,641  
  161,690       107,565  
Diluted
     216,134       108,122  
  161,690       108,099  
See notes to interim consolidated financial statements.
 
3

Neogen Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss) (unaudited)
(in thousands)
 
    
Three Months Ended
November 30,
   
Six Months Ended
November 30,
 
    
2022
   
2021
   
2022
   
2021
 
Net income (loss)
   $ (41,841   $     10,828     $ (36,632   $ 27,905  
Foreign currency translations
     1,102       (7,649     (10,031     (12,272
Unrealized gain (loss) on marketable securities, net of tax
     154       (382     (270     (588
Unrealized loss on derivative instruments, net of tax
     (2,428              (2,428         
    
 
 
   
 
 
   
 
 
   
 
 
 
Total comprehensive income (loss)
   $ (43,013   $ 2,797     $ (49,361   $ 15,045  
    
 
 
   
 
 
   
 
 
   
 
 
 
See notes to interim consolidated financial statements.
 
4

Neogen Corporation and Subsidiaries
Consolidated Statements of
Equity (unaudited)
(in thousands)
 
                  
Additional
    
Accumulated
Other
             
    
Common Stock
    
Paid-in
    
Comprehensive
   
Retained
       
    
Shares
    
Amount
    
Capital
    
Loss
   
Earnings
   
Total
 
Balance, June 1, 2022
  
 
107,801
 
  
$
17,248
 
  
$
309,984
 
  
$
(27,769
 
$
587,911
 
 
$
887,374
 
Exercise of options and share-based compensation expense
     4        1        1,904        —         —         1,905  
Issuance of shares under employee stock purchase plan
     33        5        862        —         —         867  
Net income for the three months ended August 31, 2022
     —          —          —          —         5,209       5,209  
Other comprehensive loss for the three months ended August 31, 2022
     —          —          —          (11,557     —         (11,557
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, August 31, 2022
  
 
107,838
 
  
$
17,254
 
  
$
312,750
 
  
$
(39,326
 
$
593,120
 
 
$
883,798
 
Exercise of options and share-based compensation expense
     46        7        2,630        —         —         2,637  
Issuance of shares for 3M transaction
     108,270        17,323        2,245,518                        2,262,841  
Net loss for the three months ended November 30, 2022
     —          —          —          —         (41,841     (41,841
Other comprehensive loss for the three months ended November 30, 2022
     —          —          —          (1,172     —         (1,172
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance, November 30, 2022
  
 
216,154
 
  
$
34,584
 
  
$
2,560,898
 
  
$
(40,498
 
$
551,279
 
 
$
3,106,263
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
 
                         
Accumulated
              
                  
Additional
    
Other
              
    
Common Stock
    
Paid-in
    
Comprehensive
   
Retained
        
    
Shares
    
Amount
    
Capital
    
Loss
   
Earnings
    
Total
 
Balance, June 1, 2021
  
 
107,468
 
  
$
17,195
 
  
$
294,953
 
  
$
(11,375
 
$
539,604
 
  
$
840,377
 
Exercise of options and share-based compensation expense
     6        1        1,838        —         —          1,839  
Issuance of shares under employee stock purchase plan
     19        3        896        —         —          899  
Net income for the three months ended August 31, 2021
     —          —          —          —         17,077        17,077  
Other comprehensive loss for the three months ended August 31, 2021
     —          —          —          (4,829     —          (4,829
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
 
Balance, August 31, 2021
  
 
107,493
 
  
$
17,199
 
  
$
297,687
 
  
$
(16,204
 
$
556,681
 
  
$
855,363
 
Exercise of options and share-based compensation expense
     275        44        7,272        —         —          7,316  
Net income for the three months ended November 30, 2021
     —          —          —          —         10,828        10,828  
Other comprehensive loss for the three months ended November 30, 2021
     —          —          —          (8,031     —          (8,031
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
 
Balance, November 30, 2021
  
 
107,768
 
  
$
17,243
 
  
$
304,959
 
  
$
(24,235
 
$
567,509
 
  
$
865,476
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
    
 
 
 
See notes to interim consolidated financial statements.
 
5

Neogen Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
(in thousands)

 
 
  
Six Months Ended
November 30,
 
 
  
2022
 
 
2021
 
Cash Flows (For) From Operating Activities
                
Net Income (Loss)
   $ (36,632   $ 27,905  
Adjustments to reconcile net income to net cash (for) from operating activities:
                
Depreciation and amortization
     32,467       11,511  
Deferred income taxes
     (1,983 )     (88
Share-based compensation
     4,499       3,438  
Disposal of property and equipment
     (456         
Change in operating assets and liabilities, net of business acquisitions:
                
Accounts receivable
     (44,452 )     (1,500
Inventories
     6,478       (6,929
Prepaid expenses and other current assets
     (37,833 )     (3,709
Accounts payable, accruals and other changes
     30,070       10,429  
Financing fee amortization
     999           
Interest expense accrual
     13,974           
    
 
 
   
 
 
 
Net Cash (For) From Operating Activities

     (32,869     41,057  
Cash Flows (For) From Investing Activities
                
Purchases of property, equipment and other
non-current
intangible assets
     (25,102 )     (5,235
Proceeds from the sale of marketable securities
     172,763       197,941  
Purchases of marketable securities
     (12,523 )     (230,586
Proceeds from the sale of property and equipment
     606           
Business acquisitions, net of working capital adjustments and cash acquired
     38,896       (26,864
    
 
 
   
 
 
 
Net Cash (For) From Investing Activities
     174,640       (64,744
Cash Flows (For) From Financing Activities
                
Exercise of stock options and issuance of employee stock purchase plan shares
     920       6,619  
Financing fees paid
     (19,276         
Repayment of debt
     (60,000         
    
 
 
   
 
 
 
Net Cash (For) From Financing Activities
     (78,356 )       6,619  
Effect of Foreign Exchange Rates on Cash
     (7,888 )     (7,415
    
 
 
   
 
 
 
Net Increase (Decrease) In Cash and Cash Equivalents
     55,527       (24,483
Cash and Cash Equivalents, Beginning of Period
     44,473       75,602  
    
 
 
   
 
 
 
Cash and Cash Equivalents, End of Period
   $ 100,000     $ 51,119  
    
 
 
   
 
 
 
See notes to interim consolidated financial statements.
 
6

NEOGEN CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS
Neogen Corporation and subsidiaries develop, manufacture and market a diverse line of products and services dedicated to food and animal safety. Our Food Safety segment consists primarily of diagnostic test kits and complementary products (e.g., culture media) sold to food producers and processors to detect dangerous and/or unintended substances in human food and animal feed, such as foodborne pathogens, spoilage organisms, natural toxins, food allergens, genetic modifications, ruminant
by-products,
meat speciation, drug residues, pesticide residues and general sanitation concerns. Our diagnostic test kits are generally easier to use and provide greater accuracy and speed than conventional diagnostic methods. The majority of the test kits are disposable,
single-use,
immunoassay and DNA detection products that rely on proprietary antibodies and RNA and DNA testing methodologies to produce rapid and accurate test results. Our expanding line of food safety products also includes genomics-based diagnostic technology, and advanced software systems that help testers to objectively analyze and store their results and perform analysis on the results from multiple locations over extended periods.
MERGER WITH THE FOOD SAFETY BUSINESS OF 3M
On September 1, 2022, the Company completed its merger (the “Merger”) with Garden SpinCo, a newly formed
,
wholly owned subsidiary of 3M created to carve out 3M’s Food Safety Division (“3M FSD”, “FSD”), in a Reverse Morris Trust transaction. The purchase price consideration was
 $3.2 billion, net of customary purchase price adjustments and transaction costs, which consisted of 108.3 million shares of Neogen common stock issued on closing. Immediately following the transaction, Garden SpinCo stockholders owned, in the aggregate,
approximately 50.1% of the issued and outstanding shares of Neogen common stock and
pre-merger
Neogen shareholders owned, in the aggregate, approximately 49.9% of the issued and outstanding shares of Neogen common stock.
Neogen was deemed to be the accounting acquiror of the 3M FSD for accounting purposes under U.S. generally accepted accounting principles. 
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying unaudited consolidated financial statements include the accounts of Neogen Corporation (“Neogen” or the “Company”) and its wholly owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles) for interim financial information and with the instructions to Form
10-Q
and Article 10 of Regulation
S-X.
Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results of the interim period have been included in the accompanying unaudited consolidated financial statements. All intercompany balances and transactions have been eliminated in consolidation. The results of operations for the three and six month periods ended November 30, 2022 are not necessarily indicative of the results to be expected for the fiscal year ending May 31, 2023. For more complete financial information, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on
Form 10-K
for the fiscal year ended May 31, 2022.
Our functional currency is the U.S. dollar. We translate our
non-U.S.
operations’ assets and liabilities denominated in foreign currencies into U.S. dollars at current rates of exchange as of the balance sheet date and income and expense items at the average exchange rate for the reporting period. Translation adjustments resulting from exchange rate fluctuations are recorded in other comprehensive income (loss). Gains or losses from foreign currency transactions are included in other income (expense) on our consolidated statements of
income (loss).
 
 
7

ACCOUNTING POLICIES
Comprehensive Income (Loss)
Comprehensive income (loss) represents net income and any revenues, expenses, gains and losses that, under U.S. generally accepted accounting principles, are excluded from net income and recognized directly as a component of equity. Accumulated other comprehensive income (loss) consists of foreign currency translation adjustments and unrealized gains or losses on our marketable securities and derivative instruments.
Fair Value of Financial Instruments

Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. The Company utilizes a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The carrying amounts of certain financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, our revolving credit agreement, and long-term debt, approximate their fair value based on either their short maturity or current terms for similar instruments.
Leases
We lease various manufacturing, laboratory, warehousing and distribution facilities, administrative and sales offices, equipment and vehicles under operating leases. We evaluate our contracts to determine if an arrangement is a lease at inception and classify it as a finance or operating lease. Currently, all our leases are classified as operating leases. The Company recognizes a lease liability in the statement of financial position to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term.
Right-of-use
assets are recorded in other assets on our consolidated balance sheets. Current and
non-current
lease liabilities are recorded in other accruals within current liabilities and other
non-current
liabilities, respectively, on our consolidated balance sheets. Costs associated with operating leases are recognized on a straight-line basis within operating expenses over the term of the lease. The
right-of-use
assets were $
3,707,000 and $3,184,000 at November 30, 2022 and May 31, 2022, respectively. The total current and
non-current
lease liabilities were $3,630,000 and $3,228,000 at November 30, 2022 and May 31, 2022, respectively.
Derivatives
We operate on a global basis and are exposed to the risk that our financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates. and changes in interest rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions and have also entered into interest rate swap contracts as a hedge against changes in interest rates. All derivatives are recognized as assets or liabilities and measured at fair value. For derivatives that are determined to be effective hedges, changes in fair value are recognized on other comprehensive income (loss) until the underlying hedged item is recognized in earnings. Derivatives that are not determined to be effective hedges are adjusted to fair value with a corresponding adjustment to earnings. We do not use financial instruments for trading or speculative purposes.
ESTIMATES AND ASSUMPTIONS
The preparation of these financial statements requires that management make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, management evaluates the estimates, including, but not limited to, variable consideration related to revenue recognition, allowances for doubtful accounts, the market value of, and demand for, inventories, stock-based compensation, provision for income taxes and related balance sheet accounts, accruals, goodwill and other intangible assets and derivatives. These estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
 
8

Accounts Receivable and Concentrations of Credit Risk
Financial instruments which potentially subject Neogen to concentrations of credit risk consist principally of accounts receivable. Management attempts to minimize credit risk by reviewing customers’ credit histories before extending credit and by monitoring credit exposure on a regular basis. Collateral or other security is generally not required for accounts receivable. We maintain an allowance for customer accounts that reduces receivables to amounts that are expected to be collected. In estimating the allowance for doubtful accounts, management considers relevant information about past events, current conditions and reasonable and supportable forecasts that affect the collectability of financial assets. Once a receivable balance has been determined to be uncollectible, generally after all collection efforts have been exhausted, that amount is charged against the allowance for doubtful accounts. No customer accounted for more than 10% of accounts receivable November 30, 2022 or May 31, 2022, respectively.
Inventory
The reserve for obsolete and slow-moving inventory is reviewed at least quarterly based on an analysis of the inventory, considering the current condition of the asset as well as other known facts and future plans. The reserve required to record inventory at lower of cost or net realizable value is adjusted as conditions change. Product obsolescence may be caused by shelf-life expiration, discontinuance of a product line, replacement products in the marketplace or other competitive situations.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over fair value of tangible net assets of acquired businesses after amounts are allocated to other identifiable intangible assets. Other intangible assets include customer relationships, trademarks, licenses, trade names, covenants
not-to-compete
and patents. Customer-based intangibles are amortized on either an accelerated or straight-line basis, reflecting the pattern in which the economic benefits are consumed, while all other amortizable intangibles are amortized on a straight-line basis; intangibles are generally amortized over 5 to 25 years. We review the carrying amounts of goodwill and other
non-amortizable
intangible assets annually, or when indications of impairment exist, to determine if such assets may be impaired. If the carrying amounts of these assets are deemed to be less than fair value based upon a discounted cash flow analysis and comparison to comparable EBITDA multiples of peer companies, such assets are reduced to their estimated fair value and a charge is recorded to operations.
Long-Lived Assets
Management reviews the carrying values of its long-lived assets to be held and used, including definite-lived intangible assets, for
possible impairment whenever events or changes in business conditions warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated separately identifiable undiscounted cash flows over the remaining useful life of the asset indicate that the carrying amount of the asset may not be recoverable. In such an event, fair value is determined using discounted cash flows and, if lower than the carrying value, impairment is recognized through a charge to operations.
Business Combinations
We utilize the acquisition method of accounting for business combinations. This method requires, among other things, that results of operations of acquired companies are included in Neogen’s results of operations beginning on the respective acquisition dates and that assets acquired and liabilities assumed are recognized at fair value as of the acquisition date. Any excess of the fair value of consideration transferred over the fair values of the net assets acquired is recognized as goodwill. Contingent consideration liabilities are recognized at the estimated fair value on the acquisition date; these are recorded in either other accruals within current liabilities (for expected payments in less than a year) or other
non-current
liabilities (for expected payments in greater than a year), both on our consolidated balance sheets. Subsequent changes to the fair value of contingent consideration liabilities are recognized in other income (expense) in the consolidated statements of income
 
(loss)
. Contingent consideration payments made soon after the acquisition date are classified as investing activities in the consolidated statements of cash flows. Contingent consideration payments not made soon after the acquisition date that are related to the acquisition date fair value are reported as financing activities in the consolidated statements of cash flows, and amounts paid in excess of the original acquisition date fair value are reported as operating activities in the consolidated statements of cash flows. The fair value of assets acquired and liabilities assumed in certain cases may be subject to revision based on the final determination of fair value during a period of time not to exceed 12 months from the acquisition date. Legal costs, due diligence costs, business valuation costs and all other business acquisition costs are expensed when incurred.
 
9

Equity Compensation Plans
Share options awarded to employees, restricted stock units (RSUs) and shares of stock awarded to employees under certain stock purchase plans are recognized as compensation expense based on their fair value at grant date. The fair market value of options granted under the Company stock option plans was estimated on the date of grant using the Black-Scholes option-pricing model with assumptions for inputs such as interest rates, expected dividends, an estimate of award forfeitures, volatility measures and specific employee exercise behavior patterns based on statistical data. Some of the inputs used are not market-observable and have to be estimated or derived from available data. Use of different estimates would produce different option values, which in turn would result in higher or lower compensation expense recognized. For RSUs, we use the intrinsic value method to value the units.
To value equity awards, several recognized valuation models exist; none of these models can be singled out as being the best or most correct. The model applied by us can accommodate most of the specific features included in the options granted, which are the reason for their use. If different models were used, the option values could differ despite using the same inputs. Accordingly, using different assumptions coupled with using a different valuation model could have a significant impact on the fair value of employee stock options. Fair value could be either higher or lower than the number provided by the model applied and the inputs used. Further information on our equity compensation plans, including inputs used to determine the fair value of options, is disclosed in Note 7.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and for tax credit carryforwards and are measured using the enacted tax rates in effect for the years in which the differences are expected to reverse. Deferred income tax expense represents the change in net deferred income tax assets and liabilities during the year. 
New Accounting Pronouncements Not Yet Adopted
Acquired contract assets and liabilities in a business combination
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends ASC 805 to require an acquirer to, at the date of acquisition, recognize and measure contract assets and contract liabilities acquired in accordance with ASU 2014-9, Revenue from Contracts with Customers (Topic 606) as if the entity had originated the contracts. The guidance is effective for fiscal years beginning after December 15, 2022. The Company will adopt this guidance in the event of a business combination subsequent to the effective date of the guidance.
Accounting Pronouncements Recently Adopted
Reference Rate Reform
In March 2020, the FASB issued Update
2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides temporary optional expedients to applying the reference rate reform guidance to contracts that reference LIBOR or another reference rate expected to be discontinued. Under this update, contract modifications resulting in a new reference rate may be accounted for as a continuation of the existing contract. We adopted this standard in the second quarter of fiscal 2023, and now use the Secured Overnight Financing Rate (SOFR). Adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.
2. CASH AND MARKETABLE SECURITIES
Cash and Cash Equivalents
Cash and cash equivalents consist of bank demand accounts, savings deposits, certificates of deposit and commercial paper with original maturities of 90 days or less. Cash and cash equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has not experienced losses related to these balances and believes it is not exposed to significant credit risk regarding its cash and cash equivalents. Cash and cash equivalents were $100,000,000 and $
44,473,000
at November 30, 2022 and May 31, 2022, respectively. The carrying value of these assets approximates fair value due to the short maturity of these instruments and is classified as Level 1 in the fair value hierarchy.
Marketable Securities
The Company has marketable securities held by banks or broker-dealers at November 30, 2022. Changes in market value are monitored and recorded on a monthly basis; in the event of a downgrade in credit quality subsequent to purchase, the marketable securities investment is evaluated to determine the appropriate action to take to minimize the overall risk to our marketable securities portfolio. These securities are classified as available for sale. The primary objective of management’s short-term investment activity is to preserve capital for the purpose of funding current operations, capital expenditures and business acquisitions; short-term investments are not entered into for trading or speculative purposes. These securities
 
10

are recorded at fair value based on recent trades or pricing models and therefore meet the Level 2 criteria. Interest income on these investments is recorded within other income on the income statement. Adjustments in the fair value of these assets are recorded in other comprehensive income.
Marketable Securities as of November 30, 2022 and May 31, 2022 are listed below by classification and remaining maturities.
 
(in thousands)
  
Maturity
    
November 30,
2022
    
May 31,
2022
 
Commercial Paper & Corporate Bonds
     0 - 90 days      $ 61,104      $ 106,497  
       91 - 180 days        34,200        61,373  
      
181 days - 1 year
       57,151        91,706  
       1 - 2 years        23,883        77,002  
             
 
 
    
 
 
 
Total Marketable Securities
            $ 176,338      $ 336,578  
             
 
 
    
 
 
 
The components of marketable securities, consisting of commercial paper and corporate bonds, at November 30, 2022 are as follows:
 
(in thousands)
  
Amortized
Cost
    
Unrealized
Gains
    
Unrealized
Losses
    
Fair Value
 
Commercial Paper & Corporate Bonds
   $ 179,650      $         $ (3,312    $ 176,338  
The components of marketable securities, consisting of commercial paper and corporate bonds, at May 31, 2022 are as follows:
 
(in thousands)
  
Amortized
Cost
    
Unrealized
Gains
    
Unrealized
Losses
    
Fair Value
 
Commercial Paper & Corporate Bonds
   $ 339,540      $ 7      $ (2,969    $ 336,578  
3. INVENTORIES
Inventories are stated at the lower of cost, determined by the
first-in,
first-out
method, or net realizable value. The components of inventories follow:
 
(in thousands)
  
November 30,
2022
    
May 31,
2022
 
Raw materials
   $ 68,884      $ 58,667  
Work-in-process
     6,013        6,388  
Finished and purchased goods
     61,172        57,258  
    
 
 
    
 
 
 
     $ 136,069      $ 122,313  
    
 
 
    
 
 
 
 
11

4. REVENUE RECOGNITION
The Company determines the amount of revenue to be recognized through application of the following steps:
 
   
Identification of the contract with a customer;
 
   
Identification of the performance obligations in the contract;
 
   
Determination of the transaction price;
 
   
Allocation of the transaction price to the performance obligations in the contract; and
 
   
Recognition of revenue when, or as, the Company satisfies the performance obligations.
Essentially all of Neogen’s revenue is generated through contracts with its customers. A performance obligation is a promise in a contract to transfer a product or service to a customer. We generally recognize revenue at a point in time when all of our performance obligations under the terms of a contract are satisfied. Revenue is recognized upon transfer of control of promised products and services in an amount that reflects the consideration we expect to receive in exchange for those products or services. The collectability of consideration on the contract is reasonably assured before revenue is recognized. To the extent that customer payment has been received before all recognition criteria are met, these revenues are initially deferred in other accruals on the balance sheet and the revenue is recognized in the period that all recognition criteria have been met.
Certain agreements with customers include discounts or rebates on the sale of products and services applied retrospectively, such as volume rebates achieved by purchasing a specified purchase threshold of goods and services. We account for these discounts as variable consideration and estimate the likelihood of a customer meeting the threshold in order to determine the transaction price using the most predictive approach. We typically use the most-likely-amount method for incentives that are offered to individual customers, and the expected-value method for programs that are offered to a broad group of customers. Variable consideration reduces the amount of revenue that is recognized. Rebate obligations related to customer incentive programs are recorded in accrued liabilities; the rebate estimates are adjusted at the end of each applicable measurement period based on information currently available.
The performance obligations in Neogen’s contracts are generally satisfied well within one year of contract inception. In such cases, management has elected the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component. Management has elected to utilize the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred because the amortization period for the prepaid costs that would otherwise have been deferred and amortized is one year or less. We account for shipping and handling for products as a fulfillment activity when goods are shipped. Shipping and handling costs that are charged to and reimbursed by the customer are recognized as revenues, while the related expenses incurred by Neogen are recorded in sales and marketing expense. Revenue is recognized net of any tax collected from customers; the taxes are subsequently remitted to governmental authorities. Our terms and conditions of sale generally do not provide for returns of product or reperformance of service except in the case of quality or warranty issues. These situations are infrequent; due to immateriality of the amount, warranty claims are recorded in the period incurred.
The Company derives revenue from two primary sources—product revenue and service revenue.
Product revenue consists of shipments of:
 
   
Diagnostic test kits, dehydrated culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation;
 
   
Consumable products marketed to veterinarians, retailers, livestock producers and animal health product distributors; and
 
   
Rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities.
Revenues for our products are recognized and invoiced when the product is shipped to the customer.
Service revenue consists primarily of:
 
   
Genomic identification and related interpretive bioinformatic services; and
 
   
Other commercial laboratory services.
Revenues for Neogen’s genomics and commercial laboratory services are recognized and invoiced when the applicable laboratory service is performed and the results are conveyed to the customer.
 
12

Payment terms for products and services are generally 30 to 60 days.
The Company has no contract assets; contract liabilities represent deposits made by customers before the satisfaction of performance obligation(s) and recognition of revenue. Upon completion of the performance obligation(s) that the Company has with the customer, the liability for the customer deposit is relieved and revenue is recognized. These customer deposits are listed as Deferred Revenue on the consolidated balance sheets.
On September 1, 2022, Neogen closed on a Reverse Morris Trust transaction to combine with 3M’s Food Safety business. Similar to Neogen, 3M’s former Food Safety business sells diagnostic test kits, dehydrated culture media, and related products used by food producers and processors to detect foodborne bacteria, allergens and levels of general sanitation. Revenue for these products are recognized and invoiced when the product is shipped to the customer. These products are currently invoiced and distributed by 3M on behalf of Neogen under a number of transition service contracts.
The following table presents disaggregated revenue by major product and service categories for the three and six month periods ended November 30, 2022 and
2021:
 
 
  
Three Months ended November 30,
 
  
Six Months ended November 30,
 
(in thousands)
  
2022
 
  
2021
 
  
2022
 
  
2021
 
Food Safety
  
  
  
  
Natural Toxins, Allergens & Drug Residues
   $ 22,251      $ 21,028      $ 42,038      $ 41,432  
Bacterial & General Sanitation
     41,121        12,252        51,849        23,421  
Culture Media & Other
     82,084        19,935        101,338        37,981  
Rodent Control, Insect Control & Disinfectants
     10,377        8,232        19,952        15,882  
Genomics Services
     5,510        5,685        10,809        11,138  
    
 
 
    
 
 
    
 
 
    
 
 
 
       161,343        67,132        225,986        129,854  
Animal Safety
                                   
Life Sciences
     1,427        1,309        3,016        2,672  
Veterinary Instruments & Disposables
     16,433        15,572        31,106        30,909  
Animal Care & Other
     10,569        10,849        21,095        20,068  
Rodent Control, Insect Control & Disinfectants
     20,665        18,269        42,879        40,418  
Genomics Services
     19,596        17,386        38,300        34,901  
    
 
 
    
 
 
    
 
 
    
 
 
 
       68,690        63,385        136,396        128,968  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total Revenues
   $ 230,033      $ 130,517      $ 362,382      $ 258,822  
    
 
 
    
 
 
    
 
 
    
 
 
 
5. NET INCOME (LOSS) PER SHARE
The calculation of net income (loss) per share
follows:
 
 
  
Three Months Ended
November 30,
 
  
Six Months Ended
November 30,
 
(in thousands, except per share amounts)
  
2022
 
  
2021
 
  
2022
 
  
2021
 
Numerator for basic and diluted net income (loss) per share:
                                   
Net income (loss) attributable to Neogen
   $ (41,841    $ 10,828      $ (36,632    $ 27,905  
Denominator for basic net income (loss) per share:
                                   
Weighted average shares
     216,134        107,641        161,690        107,565  
Effect of dilutive stock options and RSUs
            481               534  
    
 
 
    
 
 
    
 
 
    
 
 
 
Denominator for diluted net income (loss) per share
  
$
216,134     
$
108,122     
$
161,690     
$
108,099  
Net income (loss) per share:
                                   
Basic
   $ (0.19    $ 0.10      $ (0.23    $ 0.26  
Diluted
   $ (0.19    $ 0.10      $ (0.23    $ 0.26  

 
Note:
Due to the net loss for the Three and Six month periods end November 30, 2022, the dilutive stock options and RSUs are anti-dilutive for those periods.
 
1
3

6. SEGMENT INFORMATION AND GEOGRAPHIC DATA
We have two reportable segments:
Food Safety and Animal Safety. The Food Safety segment is primarily engaged in the development, production and marketing of diagnostic test kits, culture media and related products used by food producers and processors to detect harmful natural toxins, foodborne bacteria, allergens and levels of general sanitation. All new products from the merger of the 3M FSD, effective September 1, 2022, are reported through the Food Safety segment. The Animal Safety segment is primarily engaged in the development, production and marketing of products dedicated to animal safety, including a complete line of consumable products marketed to veterinarians and animal health product distributors; this segment also provides genomic identification and related interpretive bioinformatic services. Additionally, the Animal Safety segment produces and markets rodenticides, disinfectants and insecticides to assist in the control of rodents, insects and disease in and around agricultural, food production and other facilities. 
Our international operations in the United Kingdom, Mexico, Brazil, China and India originally focused on the Company’s food safety products, and each of these units reports through the Food Safety segment. In recent years, these operations have expanded to offer our complete line of products and services, including those usually associated with the Animal Safety segment such as cleaners, disinfectants, rodenticides, insecticides, veterinary instruments and genomics services. These additional products and services are managed and directed by existing management and are reported through the Food Safety segment.
Neogen’s operation in Australia originally focused on providing genomics services and sales of animal safety products and reports through the Animal Safety segment. With the acquisition of Cell BioSciences in February 2020, this operation expanded to offer our complete line of products and services, including those usually associated with the Food Safety segment. These additional products are managed and directed by existing management at Neogen Australasia and report through the Animal Safety segment.
The accounting policies of each of the segments are the same as those described in Note 1.
Segment information follows:


(in thousands)
  
Food

Safety
 
  
Animal
Safety
 
  
Corporate and
Eliminations (1)
 
  
Total
 
As of and for the three months ended November 30, 2022
                                   
Product revenues to external customers
   $ 154,223      $ 49,094      $         $ 203,317  
Service revenues to external customers
     7,120        19,596                  26,716  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues to external customers
  
$
161,343     
$
68,690     
$
       
$
230,033  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
  
$
21,446     
$
12,806     
$
(41,908   
$
(7,656
Total assets
  
$
3,955,488     
$
329,177     
$
278,577     
$
4,563,242  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of and for the three months ended November 30, 2021
                                   
Product revenues to external customers
   $ 60,112      $ 45,999      $ —        $ 106,111  
Service revenues to external customers
     7,020        17,386        —          24,406  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues to external customers
  
$
67,132     
$
63,385     
$
—       
$
130,517  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
  
$
10,894     
$
12,701     
$
(11,126   
$
12,469  
Total assets
  
$
298,437     
$
278,994     
$
390,503     
$
967,934  

(1)
Includes corporate assets, consisting principally of cash and cash equivalents, marketable securities, current and deferred tax accounts and overhead expenses not allocated to specific business segments. Also includes the elimination of intersegment transactions.
 
14

(in thousands)
  
Food
Safety
    
Animal
Safety
    
Corporate and
Eliminations (1)
    
Total
 
As of and for the six months ended November 30, 2022
                                   
Product revenues to external customers
   $ 212,013      $ 98,096      $         $ 310,109  
Service revenues to external customers
     13,973        38,300                  52,273  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues to external customers
  
$

225,986     
$
136,396     
$
       
$
362,382  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
  
$
30,042     
$
24,687     
$
(56,323   
$
(1,594
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As of and for the six months ended November 30, 2021
                                   
Product revenues to external customers
   $ 116,057      $ 94,067      $ —        $ 210,124  
Service revenues to external customers
     13,797        34,901        —          48,698  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenues to external customers
  
$
129,854     
$
128,968     
$
—       
$
258,822  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss)
  
$
21,026     
$
25,463     
$
(12,275   
$
34,214  
 
(1)
Includes elimination of intersegment transactions.
The following table presents the Company’s revenue disaggregated by geographic location:
 
    
Three months ended
November 30,
    
Six months ended
November 30,
 
(in thousands)
  
2022
    
2021
    
2022
    
2021
 
Domestic
   $ 114,413      $ 76,378      $ 195,055      $ 154,156  
International
     115,620        54,139        167,327        104,666  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total revenue
   $ 230,033      $ 130,517        362,382        258,822  
7. EQUITY COMPENSATION PLANS
Incentive and
non-qualified
options to purchase shares of common stock have been granted to directors, officers and employees of Neogen under the terms of the Company’s stock option plans. These options are granted at an exercise price of not less than the fair market value of the stock on the date of grant. Options vest ratably over three and five year periods and the contractual terms are generally five, seven or ten years. A summary of stock option activity during the six months ended November 30, 2022 follows:
(options in thousands)
  
Shares
 
  
Weighted-
Average
Exercise Price
 
Options outstanding June 1, 2022
     3,244      $ 32.13  
Granted
     1,687        14.63  
Exercised
     (4      10.75  
Forfeited/Expired
     (592      29.75  
    
 
 
          
Options outstanding November 30, 2022
     4,335      $ 25.66  
During the three and six month periods ended November 30, 2022 and 2021, the Company recorded $2,632,000 and $1,748,000, and $4,499,000 and $3,438,000,
respectively, of expense related to its share-based awards, recorded in general and administrative expense in the consolidated income statement. 
 
15

The weighted-average fair value per share of stock options granted during the first six months of fiscal years 2023 and 2022, estimated on the date of grant using the Black-Scholes option pricing model, was $
4.59
and $
9.54
.
The fair value of stock options granted was estimated using the following weighted-average assumptions.
 
    
FY 2023
   
FY 2022
 
Risk-free interest rate
     3.3     0.4
Expected dividend yield
     0.0     0.0
Expected stock price volatility
     34.0     32.8
Expected option life
     4.61 years       3.12 years  
The company grants restricted stock units (RSUs) to directors, officers and employees under the terms of the 2018 Omnibus Incentive Plan, which vest ratably over three and five year periods. The current units are expensed straight-line over the remaining weighted-average period of 3.2 years. On November 30, 2022 there was $12,820,000 in unamortized compensation cost related to
non-vested
RSUs. A summary of RSU activity during the six months ended November 30, 2022 follows:
 
(RSUs in thousands)
  
Shares
    
Weighted-
Average
Fair Value
 
RSUs outstanding June 1, 2022
     257      $ 36.14  
Granted
     584        13.72  
Released
     (47      37.62  
Forfeited/Cancelled
     (5      37.63  
    
 
 
          
RSUs outstanding November 30, 2022
     789      $ 19.46  
Under the terms of an agreement entered into with 3M as part of the combination of the FSD, the Company issued stock options and RSUs to conveying 3M employees to replace their existing unvested 3M awards under an exchange ratio based on the closing prices of Neogen and 3M common stock on August 31, 2022, the day before the transaction.
 These substitute options and RSUs retained their original vesting and expiration terms
(originally three year vesting and ten year lives). There were a total of 131,746 substitute options and 29,770 substitute RSUs issued during the second quarter to the conveying
3M employees as part of the employee matters agreement; the Company recognized
 $184,000
in compensation expense (included in the overall compensation expense of
 $
2,632,000
) during the quarter for these awards.
The Company offers eligible employees the option to purchase common stock at a 5% discount to the lower of the market value of the stock at the beginning or end of each participation period under the terms of the 2021 Employee Stock Purchase Plan; the discount is recorded in general and administrative expense. Total individual purchases in any year are limited to 10% of compensation.

8. BUSINESS COMBINATIONS
The consolidated statements of income (loss) reflect the results of operations for business acquisitions since the respective dates of purchase. All are accounted for using the acquisition method. Goodwill recognized in the acquisitions discussed below relates primarily to enhancing the Company’s strategic platform for the expansion of available product offerings.
On September 17, 2021, the Company acquired all of the stock of CAPInnoVet, Inc., a companion 
animal health business that provides pet medications to the veterinary market. This acquisition provides entry into the retail parasiticide market and enhances the Company’s presence in companion animal markets. Consideration for the purchase was net cash of $17.9 million paid at closing, including $150,000 of cash placed in escrow payable to the former owners in 12 months. There is also the potential for performance milestone payments to the former owners of up to $6.5 million and the Company could incur up to $14.5 million in future royalty payments. The final purchase allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $308,000, inventory of $531,000, prepayments of $296,000, accounts payable of $120,000, other current liabilities of $84,000,
non-current
liabilities of $6.5 million (contingent consideration accrual calculated using a Monte Carlo simulation utilizing inputs such as probability and timing of milestone achievements, revenue forecasts and volatility, and estimated discount rates relating to established future cash flows of the business), intangible assets of $19.2 million (with an estimated life of
15-20
years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. The $150,000 placed in escrow was paid to the former owners on September 21, 2022. The business is operated from our location in Lexington, KY, reporting within the Animal Safety segment.
 
16

On November 30, 2021, the Company acquired all of the stock of Delf (U.K.) Ltd., a United Kingdom-based manufacturer and supplier of animal hygiene and industrial cleaning products, and Abbott 
Analytical Ltd., a related service provider. This acquisition will expand the Company’s line of dairy hygiene products and will enhance our cleaner and disinfectant product portfolio. Consideration for the purchase was net cash of $9.5 million paid at closing, including $722,000 of cash placed in escrow payable to the former owner in one year. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $1,059,000, inventory of $972,000, net property, plant and equipment of $152,000, prepayments of $31,000, accounts payable of $497,000, other current liabilities of $378,000,
non-current
deferred tax liabilities of $780,000, intangible assets of $3.1 million (with an estimated life of
10-15
years) and the remainder to goodwill
(non-deductible
for tax purposes). These values are Level 3 fair value measurements. The companies continue to operate from their current location in Liverpool, England, reporting within the Food Safety segment and are managed through Neogen’s Scotland operation.
On December 9, 2021, the Company acquired all of the stock of Genetic Veterinary Sciences, Inc., a companion animal genetic testing business providing genetic information for dogs, cats and birds to animal owners, breeders and veterinarians. This acquisition will further expand the Company’s presence in the companion animal market.
 
Consideration for the purchase was $11.4 million in net cash. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $38,000, net inventory of $292,000, net property, plant and equipment of $399,000, prepayments of $54,000, accounts payable of $325,000, unearned revenue of $1.9 million, other current liabilities of $321,000, intangible assets of $5.5 million (with an estimated life of
5-15
years) and the remainder to goodwill (deductible for tax purposes). These values are Level 3 fair value measurements. The business is operated from its current location in Spokane, Washington, reporting within the Animal Safety segment.
On July 1, 2022, Neogen acquired all of the stock of
Thai-Neo
Biotech Co., Ltd., a longstanding distributor of Neogen’s food safety products to Thailand and Southeast Asia. This acquisition gives Neogen a direct sales presence in Thailand. Consideration for the purchase was $1,581,000 in net cash, with $1,310,000 paid at closing, $37,000 paid on November 29, 2022 as a working capital adjustment and $234,000 payable on October 1, 2023. The final purchase price allocation, based upon the fair value of these assets and liabilities determined using the income approach, included accounts receivable of $177,000, inventory of $232,000, prepaids of $3,000, net property, plant and equipment of $16,000, other
non-current
assets of $6,000, accounts payable of $98,000, other payables of $6,000,
non-current
tax liabilities of $124,000, intangible assets of $620,000 (with an estimated life of 10 years) and the remainder to goodwill
(non-deductible
for tax purposes). The business continues to operate in Bangkok, Thailand, reporting within the Food Safety segment.
For each completed acquisition listed above, the revenues and net income were not considered material and were therefore not disclosed.

3M Food Safety transaction
On September 1, 2022, Neogen, 3M Company (“3M”), and Garden SpinCo Corporation (“Garden SpinCo”), a newly formed, wholly owned subsidiary of 3M created to carve out 3M’s Food Safety Division (“3M FSD”, “FSD”), closed on the transaction combining 3M’s FSD with Neogen in a Reverse Morris Trust transaction and Garden SpinCo became a
 
wholly owned
 
subsidiary of Neogen (“FSD transaction”). Following the FSD transaction,
pre-merger
Garden SpinCo stockholders own, in the aggregate, approxim
ately
 
50.1% of the issued and outstanding shares of Neogen common stock and
pre-merger
Neogen shareholders own, in the aggregate, approximately 49.9% of the issued and outstanding shares of Neogen common stock. This transaction is a business combination and will be accounted for using the acquisition method.
The acquired business is a leading provider of food safety testing solutions. It offers a broad range of food safety testing products that support multiple industries within food and beverage, helping producers to prevent and protect consumers from foodborne illnesses. The business has a broad global presence with products used in more than 60 countries and a diversified revenue base of more than 100,000
end-user
customers. The combination of Neogen and the 3M FSD creates a leading innovator with an enhanced geographic footprint, innovative product offerings, digitization capabilities, and financial flexibility to capitalize on robust growth trends in sustainability, food safety, and supply chain integrity. The acquired Food Safety business continues to primarily operate in facilities in Minnesota and the United Kingdom, and is being managed overall in Michigan, reporting within the Food Safety segment.
The purchase price consideration for the 3M FSD was
 $3.2 billion, net of customary purchase price adjustments and transaction costs, which consisted of 108,269,946 shares of Neogen common stock issued on closing with a fair value of $2.3 billion and cash consideration of $1 
billion, funded by the additional financing secured by the Company.
See Note 10 – Long Term
 Debt for further detail on the debt incurred.
 
17

As of November 30, 2022, the Company has recorded a preliminary allocation of the purchase consideration to assets acquired and liabilities assumed based on initial fair value estimates and is subject to continuing management analysis, with assistance from third party valuation advisors. The excess of the purchase price over the fair value of the net tangible assets and identifiable intangible assets
of $
1.96
 
billion was recorded as goodwill, of which $1.90 billion is not deductible for tax purposes. Goodwill includes value associated with profits earned from market and expansion capabilities, expected synergies from integration and streamlining operational activities, the expertise and reputation of the assembled workforce and other intangible assets that do not qualify for separate recognition. These values are Level 3 fair value measurements. The preliminary fair values of net tangible assets and intangible assets acquired were based on preliminary valuations, and our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The final determination may result in asset and liability fair values and tax bases that differ from the preliminary estimates and require changes to the preliminary amounts recognized.
The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as of the date of acquisition:
 
(in thousands)
    
 
Cash and cash equivalents
  
$
319  
Inventories
     21,402  
Other current assets
     14,855  
Property, plant and equipment
     20,010  
Intangible assets
     1,560,000  
Right of use asset
     882  
Lease liability
     (885
Deferred tax liabilities
     (353,760
Other liabil
i
ties
     (3,584 )
    
 
 
 
Total identifiable assets and liabilities acquired
     1,259,239  
Goodwill
     1,963,171  
    
 
 
 
Total purchase consideration
  
$
3,222,410  
    
 
 
 
The following table summarizes the intangible assets acquired and the useful life of these assets.
 
(in thousands)
  
Fair Value
 
  
Useful Life in Years
 
Trade Names and Trademarks
  
$
120,000
 
  
 
25
 
Developed Technology
  
 
280,000
 
  
 
15
 
Customer Relationships
  
 
1,160,000
 
  
 
20
 
  
 
 
 
  
Total intangible assets acquired
  
$
1,560,000
 
  
  
 
 
 
  
For the three and six months ended November 30, 2022, transaction costs of $39.1 million and $52.9 million, respectively, were expensed; in the prior year second quarter, acquisition related costs of $9.3 million were expensed. These costs are included in general and administrative expenses in the Company’s consolidated statements of income
 
(loss)
.
The operating results of the 3M FSD have been included in the Company’s consolidated statements of income
 
(loss)
 
since the acquisition date. In the second quarter of fiscal 2023, the 3M FSD’s total revenue
was
 $92.7 million and operating loss was approximately $29.7 million. The operating loss includes $39.1 million of transaction costs, $20.3 million of amortization expense for acquired intangible assets and $3.9 million of cost of goods sold related to the step up to fair value on acquired inventory.
The following table presents pro forma information as if the merger with the 3M FSD business had occurred on June 1, 2021 and had been combined with the results reported in our consolidated statements of income
 
(loss)
 
for all periods presented: 
 
     Three Months Ended      Six Months Ended  
     November 30,      November 30,  
in thousands, unaudited
   2022      2021      2022      2021  
Net sales
   $ 230,033      $ 225,700      $ 457,300      $ 448,200  
Operating Income (loss)
   $ (7,700    $ (1,600    $ (21,100    $ 6,100  
The unaudited pro forma information is presented for informational purposes only and is not indicative of the results that would have been achieved if the merger had taken place at such time. The unaudited pro forma information presented above includes adjustments primarily for amortization charges for acquired intangible assets and certain acquisition-related expenses for legal and professional fees.
In connection with the acquisition of the 3M FSD, the Company and 3M entered into several transition service agreements, including manufacturing, distribution and certain back-office support, that have been accounted for separately from the acquisition of assets and assumption of liabilities in the business combination. 3M periodically remits amounts charged to customers on our behalf and charges us for the associated cost of goods sold and transitions service fees. As of November 30, 2022, a net receivable from 3M of
 $36.5 
million was included in Prepaid expenses and other current assets in the Company’s consolidated balance sheets.