NEOGEN CORP [NEOG] Filings

10-Q 1 d431451d10q.htm 10-Q 10-Q

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.

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

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

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.

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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.

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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.

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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.

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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.

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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).

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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.

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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.

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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

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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

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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.

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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.

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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.

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(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.

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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.

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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.

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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.