# Neogen Corp: Form 10-Q for the period ended Aug 31, 2024

- Company: [Neogen Corp](/companies/neog.md) (CIK 711377)
- Form: 10-Q
- Filed: 2024-10-10
- Accepted by EDGAR: Oct 10, 2024, 14:14 ET
- Period: 2024-08-31
- Accession: 0000950170-24-114022
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/711377/000095017024114022/neog-20240831.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/711377/000095017024114022/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-08-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-06-01 to 2024-08-31 | $217.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-06-01 to 2024-08-31 | $112.0m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2024-06-01 to 2024-08-31 | $104.9m | us-gaap:GrossProfit |
| Research and development | 3 months, 2024-06-01 to 2024-08-31 | $5.2m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2024-06-01 to 2024-08-31 | $2.3m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2024-06-01 to 2024-08-31 | −$3.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-06-01 to 2024-08-31 | −$12.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-06-01 to 2024-08-31 | −$0.06 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-06-01 to 2024-08-31 | −$0.06 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-06-01 to 2024-08-31 | 216,695,348 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-06-01 to 2024-08-31 | −$17.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-06-01 to 2024-08-31 | $38.4m | us-gaap:PaymentsToAcquireProductiveAssets |
| Cash and equivalents | at 2024-08-31 | $120.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-08-31 | $540.6m | us-gaap:AssetsCurrent |
| Total assets | at 2024-08-31 | $4.50bn | us-gaap:Assets |
| Current liabilities | at 2024-08-31 | $122.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-08-31 | $1.37bn | us-gaap:Liabilities |
| Long-term debt | at 2024-08-31 | $889.1m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2024-08-31 | $3.14bn | us-gaap:StockholdersEquity |
| Shares outstanding | at 2024-08-31 | 216,698,138 shares | dei:EntityCommonStockSharesOutstanding |

## Management's discussion and analysis

As filed, 27,386 characters.

The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations contains both historical financial information and forward-looking statements. Neogen does not provide forecasts of future financial performance. While management is optimistic about the Company’s long-term prospects, historical financial information may not be indicative of future financial results.

### Safe Harbor and Forward-Looking Statements

Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Quarterly Report on Form 10-Q, including statements relating to management’s expectations regarding new product introductions; the adequacy of our sources for certain components, raw materials and finished products; and our ability to utilize certain inventory. For this purpose, any statements contained herein that are not statements of historical fact are deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are intended to provide our current expectations or forecasts of future events; are based on current estimates, projections, beliefs, and assumptions; and are not guarantees of future performance. Actual events or results may differ materially from those described in the forward-looking statements. There are a number of important factors that could cause Neogen’s results to differ materially from those indicated by such forward-looking statements, including many factors beyond our control. Factors that could cause actual results to differ from those contained within forward-looking statements include (without limitation) the continued integration of the 3M food safety business and the realization of the expected benefits from that acquisition; the relationship with and performance of our transition manufacturing partner; our ability to adequately and timely remediate certain identified material weaknesses in our internal control over financial reporting; competition; recruitment and retention of key employees; impact of weather on agriculture and food production; global business disruption caused by the Russia invasion in Ukraine and related sanctions and the conflict in the Middle East; identification and integration of acquisitions; research and development risks; intellectual property protection; increasing and developing government regulation; and other risks detailed from time to time in the Company’s reports on file at the Securities and Exchange Commission, including this Quarterly Report on Form 10-Q.

In addition, any forward-looking statements represent management’s views only as of the date this Quarterly Report on Form 10-Q was first filed with the Securities and Exchange Commission and should not be relied upon as representing management’s views as of any subsequent date. While management may elect to update forward-looking statements at some point in the future, it specifically disclaims any obligation to do so, even if its views change.

### TRENDS AND UNCERTAINTIES

In prior years, production was negatively impacted by broad supply chain challenges and labor market disruptions. Additionally, input cost inflation, including increases in certain raw materials, negatively impacted operating results. In fiscal 2024, despite a slowing of inflation rates, there were economic headwinds of softening consumer demand and higher interest rates, coupled with ongoing geopolitical tension in certain regions.

Interest rates have risen sharply, particularly in fiscal 2023, as a way to combat inflation. This increased our borrowing costs and raised the overall cost of capital. Although the federal funds rate was reduced in September and there are indications of future rate cuts, the overall interest rate we pay on our Credit Facilities remains higher than when the debt was incurred in 2022, which increases interest expense on the unhedged portion of our Term Loan. In response to the historically high inflationary environment, we took pricing actions to mitigate the impacts on the business in the prior two fiscal years. The impact of inflation continued to affect us through fiscal year 2024, although at a continually decreasing rate compared to fiscal years 2022 and 2023.

Beginning in the first half of fiscal year 2024, we implemented a new enterprise resource planning system and exited our transition distribution agreements with 3M, which led to certain shipment delays and an elevated backlog of open orders, specifically in the Food Safety segment. At the conclusion of fiscal year 2024, order fulfillment issues were largely resolved, and order fulfillment rates had improved to meet the needs of our customers.

Although we have no operations in or direct exposure to Russia, Belarus or Ukraine, we have experienced intermittent shortages in materials and increased costs for transportation, energy and raw materials due, in part, to the negative impact of the Russia-Ukraine military conflict, which began in February 2022, on the global economy. Our European operations and customer base have been negatively impacted by the conflict. Similarly, the military conflicts in the Middle East have increased overall geopolitical tensions. As the respective conflicts continue or worsen, they may further impact our business, financial condition or results of operations throughout fiscal year 2025.

We continue to evaluate the nature and extent to which these issues impact our business, including consolidated results of operations, financial condition and liquidity. We expect these issues to continue to impact us throughout fiscal year 2025.

### Executive Overview

|  | Three months ended August 31, 2024 | 2023 | % Change |
| --- | ---: | ---: | ---: |
| Total Revenues | $216,964 | $228,987 | $(12,023) |
| Cost of Revenues | 112,038 | 112,226 | (188) |
| Gross Profit | 104,926 | 116,761 | (11,835) |
| Operating Expenses |  |  |  |
| Sales and marketing | 45,799 | 45,783 | 16 |
| General and administrative | 51,671 | 45,121 | 6,550 |
| Research and development | 5,199 | 6,722 | (1,523) |
| Total Operating Expenses | 102,669 | 97,626 | 5,043 |
| Operating Income | 2,257 | 19,135 | (16,878) |
| Other Expense |  |  |  |
| Interest income | 993 | 1,790 | (797) |
| Interest expense | (18,615) | (18,456) | (159) |
| Other, net | (244) | (806) | 562 |
| Total Other Expense | (17,866) | (17,472) | (394) |
| (Loss) Income Before Taxes | (15,609) | 1,663 | (17,272) |
| Income Tax (Benefit) Expense | (3,000) | 160 | (3,160) |
| Net (Loss) Income | $(12,609) | $1,503 | $(14,112) |

### Results of Operations

### Revenues

Revenue decreased $12.0 million during the three months ended August 31, 2024 compared to the three months ended August 31, 2023. The decrease included a $9.0 million unfavorable foreign exchange rate impact and a $3.0 million decline in the business. The decline in the business was driven by lower genomics volume due to a strategic shift to focus primarily on large production animals, lower sales of insect control and cleaners and disinfectants, and lower sales of sample collection products, partially offset by strength in indicator sales and rodent control products due to vole outbreak in the Northwest region of the U.S.

#### Service Revenue

Service revenue, which consists primarily of genomics services provided to animal production and companion animal markets, was $24.4 million and $24.6 million during the three months ended August 31, 2024 and 2023, respectively. Growth in the Neogen Analytics software as a service platform and genomics sales into beef markets was offset by lower genomics sales into the domestic poultry market, primarily due to a shift towards large production animals, as well as lower sales into the companion animal market.

#### International Revenue

International sales were $112.6 million and $117.9 million during the three months ended August 31, 2024 and 2023, respectively. The decrease during the three months ended August 31, 2024 was due to $9.0 million of currency headwinds, partially offset by strength in Petrifilm® indicator sales.

### Gross Margin

Gross margin was 48.4% and 51.0% during the three months ended August 31, 2024 and 2023, respectively. The decrease in margin was primarily due to lower volume and continued higher distribution costs. The change also included $4.2 million of transaction and integration costs during the three months ended August 31, 2024 compared to $1.2 million during the three months ended August 31, 2023.

### Operating Expenses

Operating expenses were $102.7 million and $97.6 million during the three months ended August 31, 2024 and 2023, respectively. The increase during the three months ended August 31, 2024 was primarily the result of increased compensation, as well as higher shipping and information technology costs. The costs associated with our enterprise resource planning system, which was implemented on September 1, 2023, were not fully reflected in the prior year comparable period.

#### Sales and Marketing

Sales and marketing expenses were $45.8 million during the three months ended August 31, 2024 and 2023, respectively. We experienced higher shipping costs in the current year, as we took over distribution of FSD products from 3M during the second and third quarters of the prior fiscal year. This increase was offset by a decrease in fees paid to 3M for distribution services and lower royalty expense.

#### General and Administrative

General and administrative were $51.7 million and $45.1 million during the three months ended August 31, 2024 and 2023, respectively. For the Food Safety and Animal Safety segments, expenses were relatively consistent compared to the prior-year period. Within Corporate, increases were driven by compensation and related expenses, primarily due to additional headcount, and higher costs associated with our prior-year enterprise resource planning system implementation. Additionally, there were increases in stock compensation expense compared to the prior-year comparable period, primarily driven by the timing of our annual grant in the current year and increases in equity-based compensation.

General and administrative expenses includes amortization expense relating to definite-lived intangible assets of $23.6 million and $23.7 million during the three months ended August 31, 2024 and 2023, respectively. Estimated amortization expense for fiscal years 2025 through 2029 is expected to be in the range of approximately $91 million to $96 million per year.

#### Research and Development

Research and development expense was $5.2 million and $6.7 million during the three months ended August 31, 2024 and 2023, respectively. The decrease during the three months ended August 31, 2024 is primarily the result of lower contracted services and employee costs in the Food Safety segment, as we continue to integrate the 3M FSD business and realize synergies in certain areas.

### Other Expense

Other expense was $17.9 million and $17.5 million during the three months ended August 31, 2024 and 2023, respectively. The increase in expense was due to a reduction in interest income associated with our money market portfolio balance and an increase in foreign exchange transaction loss as a result of changes in the value of foreign currencies relative to the U.S. dollar in countries in which we operate.

### Provision for Income Taxes

Income tax benefit was $3.0 million during the three months ended August 31, 2024 compared to income tax expense of $0.2 million during the three months ended August 31, 2023. The net tax benefit for the quarter is primarily related to pre-tax losses due to amortization expense and interest expense from the 3M FSD acquisition. The OECD Pillar 2 global minimum tax rules, which generally provide for a minimum effective tax rate of 15%, are intended to apply for tax years beginning in 2024. We have included in our income tax benefit during the three months ended August 31, 2024, a forecasted amount of top-up tax for our foreign subsidiaries as required under the applicable rules of the countries that have adopted the Pillar Two directives.

The total amounts of unrecognized tax benefits that, if recognized, would affect the effective tax rate as of August 31, 2024 and May 31, 2024 were $3.3 million and $2.7 million, respectively. Increases in unrecognized tax benefits are primarily associated with the acquired 3M FSD, including positions for transfer pricing and research and development credits.

### Segment Results of Operations

|  | Three months ended August 31, 2024 | 2023 | Increase / (Decrease) | % Change |
| --- | ---: | ---: | ---: | ---: |
| Food Safety | $159,345 | $166,278 | $(6,933) | (4)% |
| Animal Safety | 57,619 | 62,709 | (5,090) | (8)% |
| Total Revenues | $216,964 | $228,987 | $(12,023) | (5)% |
| Food Safety | $17,905 | $22,241 | $(4,336) | (19)% |
| Animal Safety | 2,589 | 8,356 | (5,767) | (69)% |
| Segment Operating Income | $20,494 | $30,597 | $(10,103) | (33)% |
| Corporate | (18,237) | (11,462) | (6,775) | 59% |
| Operating Income | $2,257 | $19,135 | $(16,878) | (88)% |

### Revenues

Revenue for the Food Safety segment decreased $6.9 million during the three months ended August 31, 2024 compared to the three months ended August 31, 2023. The decline was primarily due to $9.0 million of currency headwind, partially offset by $1.8 million of growth in the business and a $0.3 million impact from discontinued products. The growth was driven by strength in the indicator testing, culture media and other product category, partially offset by lower sales in the bacterial and general sanitation and natural toxins and allergens product categories.

Revenue for the Animal Safety segment decreased $5.1 million during the three months ended August 31, 2024 compared to the three months ended August 31, 2023. The decrease included a $4.9 million decline in the business and a $0.2 million impact from discontinued product lines. The decline was driven primarily by lower sales in the biosecurity and animal care and other product categories, as well as lower genomics volume due to a shift to focus primarily on large production animals.

### Operating Income

Operating income for the Food Safety segment decreased $4.3 million during the three months ended August 31, 2024 compared to the three months ended August 31, 2023. The decline was due to lower gross profit and operating expenses that did not decrease at the same rate as the decrease in sales.

Operating income for the Animal Safety segment decreased $5.8 million during the three months ended August 31, 2024 compared to the three months ended August 31, 2023. The decline was due to lower gross profit and an increase in operating expenses.

The increased Corporate expense related to headcount increases and costs associated with our new enterprise resource planning system, which contributed to the overall decline in operating income.

### Non-GAAP Financial Measures

This report includes certain financial information for the Company that differs from what is reported in accordance with U.S. GAAP. These non-GAAP financial measures consist of EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin. These non-GAAP financial measures are included in this report because management believes that they provide investors with additional useful information to measure the performance of the Company, and because these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties as common performance measures to compare results or estimate valuations across companies in industries the Company operates in. The Company also uses Adjusted EBITDA as a performance target to establish and award certain executive compensation awards, as disclosed in our proxy statement filed with the Securities and Exchange Commission filed on September 13, 2024.

#### EBITDA

We define EBITDA as net income before interest, income taxes, and depreciation and amortization. We present EBITDA as a performance measure because it may allow for a comparison of results across periods and results across companies in the industries in which Neogen operates on a consistent basis, by removing the effects on operating performance of (a) capital structure (such as the varying levels of interest expense and interest income), (b) asset base and capital investment cycle (such as depreciation and amortization) and (c) items largely outside the control of management (such as income taxes). EBITDA also forms the basis for the measurement of Adjusted EBITDA (discussed below).

#### Adjusted EBITDA

We define Adjusted EBITDA as EBITDA, adjusted for share-based compensation and certain transaction fees and expenses. We present Adjusted EBITDA because it provides an understanding of underlying business performance by excluding the following:

- Share-based compensation
- FX translation (gain)/loss on loan revaluation and other revaluation
- Certain transaction fees and integration costs
- Severance and other employment costs
- Contingent consideration adjustments
- ERP Expense
- Discontinued product line expense
- Other income and expense items

#### Adjusted EBITDA margin

We define Adjusted EBITDA margin as Adjusted EBITDA as a percentage of total revenues. We present Adjusted EBITDA margin as a performance measure to analyze the level of Adjusted EBITDA generated from total revenue.

These non-GAAP financial measures are presented for informational purposes only. EBITDA, Adjusted EBITDA and Adjusted EBITDA margin are not recognized terms under GAAP and should not be considered in isolation or as a substitute for, or superior to, net (loss) income, operating income, cash flow from operating activities or other measures of financial performance. This information does not purport to represent the results Neogen would have achieved had any of the transactions for which an adjustment is made occurred at the beginning of the periods presented or as of the dates indicated. This information is inherently subject to risks and uncertainties. It may not give an accurate or complete picture of Neogen’s financial condition or results of operations for the periods presented and should not be relied upon when making an investment decision.

The use of the terms EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin may not be comparable to similarly titled measures used by other companies or persons due to potential differences in the method of calculation.

These non-GAAP financial measures have limitations as analytical tools. For example, for EBITDA-based metrics:

- they do not reflect changes in, or cash requirements for, Neogen’s working capital needs;
- they do not reflect Neogen’s tax expense or the cash requirements to pay taxes;
- they do not reflect the historical cash expenditures or future requirements for capital expenditures or contractual commitments;
- they do not reflect any cash requirements for future replacements of assets that are being depreciated and amortized; and
- they may be calculated differently from other companies in Neogen’s industries limiting their usefulness as comparative measures.

A reader should compensate for these limitations by relying primarily on the financial statements of Neogen and using these non-GAAP financial measures only as a supplement to evaluate Neogen’s performance.

For each of these non-GAAP financial measures below, we are providing a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure.

Reconciliation between net (loss) income and EBITDA and Adjusted EBITDA and between net (loss) income margin % and Adjusted EBITDA margin % are as follows:

|  | Three months ended August 31, 2024 | 2023 |
| --- | ---: | ---: |
| Net (loss) income | $(12,609) | $1,503 |
| Net (loss) income margin % | -5.8% | 0.7% |
| Income tax (benefit) expense | (3,000) | 160 |
| Depreciation and amortization | 29,800 | 28,734 |
| Interest expense, net | 17,622 | 16,666 |
| **EBITDA** | **$31,813** | **$47,063** |
| Share-based compensation | 3,982 | 2,638 |
| FX transaction gain on loan and other revaluation (1) | (320) | (290) |
| Certain transaction fees and integration costs (2) | 5,122 | 1,951 |
| Severance and other employment costs | 370 | 559 |
| Contingent consideration adjustments | — | 300 |
| ERP expense (3) | 1,835 | 128 |
| Discontinued product line expense (4) | 912 | 20 |
| **Adjusted EBITDA** | **$43,714** | **$52,369** |
| Adjusted EBITDA margin % | 20.1% | 22.9% |

(1) Net foreign currency transaction gain associated with the revaluation of foreign denominated intercompany loans established in connection with the 3M Food Safety transaction and other non-hedged foreign currency revaluation resulting from 3M agreements.

(2) Includes costs associated with the 3M transaction, including various transition agreements. $4.2 million is included within Cost of Revenues.

(3) Expenses related to ERP implementation.

(4) Expenses associated with certain discontinued product lines. Amounts are recorded within Cost of Revenues.

Adjusted EBITDA decreased $8.7 million during the three months ended August 31, 2024. Expressed as a percentage of revenue, Adjusted EBITDA was 20.1% and 22.9% during the three months ended August 31, 2024 and 2023, respectively. The lower Adjusted EBITDA in the current year was driven primarily by lower sales and higher operating expenses compared to the prior-year period.

### Financial Condition and Liquidity

Our primary sources of liquidity are cash and cash equivalents, cash flows from the operations of our business, and available borrowing capacity under our revolving facility. Our principal uses of cash include working capital-related items, capital expenditures, debt service, and strategic investments.

Our future cash generation and borrowing capacity may not be sufficient to meet cash requirements to fund the operating business, repay debt obligations, construct new manufacturing facilities, commercialize products currently under development or execute our future plans to acquire additional businesses, technology and products that fit within our strategic plan. Accordingly, we may be required, or may choose, to issue additional equity securities or enter into other financing arrangements for a portion of our future capital needs. However, we continuously monitor and forecast our liquidity situation in light of industry, customer and economic factors, and take the necessary actions to preserve our liquidity and evaluate other financial alternatives that may be available to us should the need arise. As a result, we believe that our cash flows from operations, cash on hand, and borrowing capacity will enable us to fund the operating business, repay debt obligations, construct new manufacturing facilities, commercialize products currently under development, and execute our strategic plans.

We are subject to certain legal and other proceedings in the normal course of business that have not had, and, in the opinion of management, are not expected to have, a material effect on our results of operations or financial position.

As of August 31, 2024, we had cash and cash equivalents of $120.5 million, and borrowings available under our revolving line of credit of $150.0 million.

In June 2022, Neogen Food Safety Corporation entered into a credit agreement consisting of a five-year senior secured term loan facility (“term loan facility”) in the amount of $650 million and a five-year senior secured revolving facility (“revolving facility”) in the amount of $150 million (collectively, the “Credit Facilities”). The term loan facility was drawn on August 31, 2022 while the revolving facility remained undrawn and continues to be undrawn as of August 31, 2024. The term loan facility matures on June 30, 2027 and the revolving facility matures at the earlier of June 30, 2027 and the termination of the revolving commitments.

In July 2022, Neogen Food Safety Corporation closed on an offering of $350 million aggregate principal amount of 8.625% senior notes due in 2030.

The finance lease is a building lease that is classified within property and equipment and the current portion of debt on the condensed consolidated balance sheets as of August 31, 2024. The Company intends to elect the purchase option within the lease agreement prior to the end of the lease term.

There are no required principal payments through fiscal year 2026. Financial covenants include maintaining specified levels of funded debt to EBITDA, and debt service coverage. As of August 31, 2024, the Company was in compliance with all financial covenants under the Credit Facilities.

#### Cash Flows

|  | Three months ended August 31, 2024 | 2023 | Increase / (Decrease) |
| --- | ---: | ---: | ---: |
| Net Cash (used for) provided by Operating Activities | $(17,914) | $23,009 | $(40,923) |
| Net Cash used for Investing Activities | $(33,662) | $(8,684) | $(24,978) |
| Net Cash provided by Financing Activities | $979 | $1,062 | $(83) |

### Net Cash (used for) provided by Operating Activities

Net cash (used for) provided by operating activities decreased $40.9 million during the three months ended August 31, 2024 compared to the three months ended August 31, 2023. The decrease is due to a reduction in income from operations and unfavorable changes in working capital. Changes in working capital are as follows:

- Unfavorable change in Accounts Receivable primarily due to a timing of sales during the three months ended August 31, 2024 and higher days sales outstanding.
- Unfavorable change in Inventory primarily due to lower sales in the first quarter of the current fiscal year and the buildup of higher-volume inventory items.
- Unfavorable change in Accounts Payable primarily due to the timing of payments and the impact of exiting the transition distribution agreements.

### Net Cash used for Investing Activities

Cash used for investing activities increased $25.0 million during the three months ended August 31, 2024, compared to the three months ended August 31, 2023. The increase was primarily the result of lower proceeds from marketable securities during the three months ended August 31, 2024 compared to the three months ended August 31, 2023 and an increase of purchases of property and equipment of $7.8 million, partially offset by proceeds from the sale of certain property and equipment during the three months ended August 31, 2024.

### Net Cash provided by Financing Activities

Cash provided by financing activities was flat during the three months ended August 31, 2024 compared to the three months ended August 31, 2023.

We continue to make investments in our business and operating facilities. Our estimate for capital expenditures in fiscal 2025 is $85 million. This includes approximately $55 million in capital expenditures related to the integration of the acquired 3M FSD products, the most significant portion of which is related to the construction of, and acquisition of equipment for, our new manufacturing facility in Lansing, Michigan.

## Market risk

As filed, 333 characters.

We continuously evaluate our exposure to currency exchange and interest rate risk. There have been no meaningful changes in our exposure to risk associated with fluctuations in foreign currency exchange rates and interest rates related to our variable-rate borrowings under the Credit Facilities from that discussed in our Form 10-K.

## Controls and procedures

As filed, 4,052 characters.

### Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of August 31, 2024 was carried out under the supervision and with the participation of the Company’s management, including the President & Chief Executive Officer and Chief Financial Officer (“the Certifying Officers”). Based on the evaluation, the Certifying Officers concluded that the Company’s disclosure controls and procedures were not effective because of previously reported material weaknesses in our internal control over financial reporting, which we describe in Part II, Item 9A of our Annual Report on Form 10-K for the year ended May 31, 2024.

### Material Weaknesses

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis.

As disclosed in Item 9A of our Annual Report on Form 10-K for the year ended May 31, 2024, management identified the following material weaknesses in internal controls over financial reporting that existed as of May 31, 2023 and continued as of May 31, 2024: (1) information technology general controls ("ITGCs") in the areas of user access and change management over certain information technology systems that support the Company’s financial reporting process and the manual business process controls dependent on the affected ITGCs, and (2) ineffective period-end invoice accrual controls.

### Ongoing Remediation Efforts to Address the Previously Identified Material Weaknesses

As previously disclosed in our Annual Report on Form 10-K for the year ended May 31, 2024, management concluded that our internal controls over financial reporting were not effective as of May 31, 2024. Management is in the process of enhancing, and will continue to enhance, the risk assessment process and design and implementation of internal controls over financial reporting. The remediation measures to correct the previously identified material weaknesses include enhancing the design and implementation of existing controls and creating new controls as needed to address identified risks.

As we continue to evaluate and to improve our internal control over financial reporting, management may determine to take additional measures to strengthen controls or to modify the remediation plan described above. When fully implemented and operational, we believe the controls we have designed or plan to design will remediate the control deficiency that has led to the material weaknesses that we have identified. The previously identified material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

### Changes in Internal Controls over Financial Reporting

Other than with respect to the remediation efforts described above in connection with the previously identified material weaknesses, no changes in our control over financial reporting were identified as having occurred during the quarter ended August 31, 2024 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

## Risk factors

As filed, 279 characters.

This Form 10-Q should be read in conjunction with Part I Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended May 31, 2024. There have been no material changes in the risk factors described in our Annual Report on Form 10-K for the year ended May 31, 2024.

Filed Oct 10, 2024.
Source: SEC EDGAR, the filing index for accession 0000950170-24-114022. Last ingested by Listed: Nov 4, 2026, 17:07 ET. No prices; not investment advice.