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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended
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Sep. 30, 2019
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. (b) Revenue Recognition In accordance with ASC 606, the Company disaggregates its revenue from clients into two revenue streams, service revenue and product revenue. At contract inception the Company assesses the services promised in the contract with the clients to identify performance obligations in the arrangements. Service revenue The Company enters into contracts with clients to provide drug discovery and development services with payments based on mainly fixed-fee arrangements. The Company also offers free archive storage services on certain contracts. Clients can also enter into separate archive storage contracts after the expiration of the free storage period. The Company’s drug discovery and development services contracts that include a free storage period are considered a single performance obligation because the Company provides a highly integrated service. The inclusion of free storage fee in the measurement of progress under the discovery and development service contracts creates a timing difference between the amounts the Company is entitled to receive in reimbursement of cost incurred and amount of revenue recognized on such costs, which is recognized as deferred revenue and classified as client advances on the condensed consolidated balance sheets. The Company’s fixed fee arrangements may involve bioanalytical, and pharmaceutical method development and validation, nonclinical research services and the analysis of bioanalytical and pharmaceutical samples. For bioanalytical and pharmaceutical method validation services and nonclinical research services, revenue is recognized over time using the input method based on the ratio of direct costs incurred to total estimated direct costs. For contracts that involve method development or the analysis of bioanalytical and pharmaceutical samples, revenue is recognized over time when samples are analyzed or when services are performed. The Company generally bills for services on a milestone basis. These contracts represent a single performance obligation and due to the Company’s right to payment for work performed, revenue is recognized over time. Research services contract fees received upon acceptance are deferred until earned, and classified within customer advances on the condensed consolidated balance sheets. Unbilled revenues represent revenues earned under contracts in advance of billings. Archive services provide climate controlled archiving for client’s data and samples. The archive revenue is recognized over time, generally when the service is provided. These arrangements typically include only one performance obligation. Amounts related to future archiving or prepaid archiving contracts for clients where archiving fees are billed in advance are accounted for as deferred revenue and recognized ratably over the period the applicable archive service is performed. Product revenue The Company’s products can be sold to multiple clients and have alternative use. Both the transaction sales price and shipping terms are agreed upon in the client order. For these products, all revenue is recognized at a point in time, generally when title of the product and control is transferred to the client based upon shipping terms. These arrangements typically include only one performance obligation. Certain products have maintenance agreements available for clients to purchase. These are typically billed in advance and are accounted for as deferred revenue and recognized ratably over the applicable maintenance period. (c) Cash Equivalents We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. At September 30, 2019, we did not have any cash accounts that exceeded federally insured limits. (d) Accounts Receivable We perform periodic credit evaluations of our clients’ financial conditions and generally do not require collateral on trade accounts receivable. We account for trade receivables based on the amounts billed to clients. Past due receivables are determined based on contractual terms. We do not accrue interest on any of our trade receivables. The allowance for doubtful accounts is determined by management based on our historical losses, specific client circumstances, and general economic conditions. Periodically, management reviews accounts receivable and adjusts the allowance based on current circumstances and charges off uncollectible receivables when all attempts to collect have failed. Our allowance for doubtful accounts was $1,759 and $1,948 at September 30, 2019 and 2018, respectively. A summary of activity in our allowance for doubtful accounts is as follows:
|  |  | Fiscal year ended September 30,
|  |  | 2019 |  |  | 2018
Opening balance |  | $ | 1,948 |  | $ | 2,404
Charged to expense |  |  | — |  |  | 16
Accounts written off |  |  | (13) |  |  | (20)
Amounts collected |  |  | (140) |  |  | —
Uncollected archive invoices |  |  | (36) |  |  | (452)
Ending balance |  | $ | 1,759 |  | $ | 1,948
(e) Inventories Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) cost method of accounting. We evaluate inventories on a regular basis to identify inventory on hand that may be obsolete or in excess of current and future projected market demand. For inventory deemed to be obsolete, we provide a reserve. Inventory that is in excess of current and projected use is reduced by an allowance to a level that approximates the estimate of future demand. A summary of activity in our inventory obsolescence is as follows for the years ended September 30, 2019 and 2018:
|  | Fiscal year ended September 30,
|  | 2019 |  | 2018
Opening balance |  | $ | 188 |  | $ | 211
Provision for slow moving and obsolescence |  |  | 97 |  |  | 79
Write-off of obsolete and slow moving inventory |  |  | (87) |  |  | (102)
Closing balance |  | $ | 198 |  | $ | 188
(f) Property and Equipment We record property and equipment at cost, including interest capitalized during the period of construction of major facilities. We compute depreciation, including amortization on capital leases, using the straight-line method over the estimated useful lives of the assets, which we estimate to be: buildings and improvements, 34 to 40 years; machinery and equipment, 5 to 10 years, and office furniture and fixtures, 10 years. Expenditures for maintenance and repairs are expensed as incurred unless the life of the asset is extended beyond one year, which would qualify for asset treatment. Depreciation expense was $2,223 in fiscal 2019 and $1,686 in fiscal 2018. Property and equipment, net, as of September 30, 2019 and 2018 consisted of the following:
|  | 2019 |  | 2018
Land and improvements |  | $ | 1,048 |  | $ | 1,029
Buildings and improvements |  |  | 22,418 |  |  | 22,194
Machinery and equipment |  |  | 25,323 |  |  | 23,818
Office furniture and fixtures |  |  | 905 |  |  | 829
Construction in progress |  |  | 6,010 |  |  | 565
|  |  | 55,704 |  |  | 48,435
Less: accumulated depreciation |  |  | (32,876) |  |  | (31,825)
Net property and equipment |  | $ | 22,828 |  | $ | 16,610
(g) Long-Lived Assets including Goodwill Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized of the amount by which the carrying amount of the asset exceeds the fair value of the asset. We carry goodwill at cost. Other intangible assets with definite lives are stated at cost and are amortized on a straight-line basis over their estimated useful lives. All intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented, or exchanged, are recognized as an asset apart from goodwill. Goodwill is not amortized. At September 30, 2019 and 2018, respectively, the remaining recorded goodwill was $3,617 and $3,072. The increase of $545 is attributable to the Smithers Avanza acquisition as described in Note 11. We review goodwill for impairment on an annual basis in accordance with ASC 350, Intangibles- Goodwill and Other. In evaluating the goodwill, we must make assumptions regarding the discounted future cash flows of the reporting unit with goodwill. If the discounted cash flows are less than the carrying value, we then determine if an impairment loss is recognized by evaluating the fair value of the goodwill. We utilize fair value techniques accepted by ASC 820, which include the income, market and cost approach. If the fair value of the goodwill is less than the carrying amount, we recognize an impairment loss. Considerable management judgment is necessary to evaluate the impact of operating and macroeconomic changes and to estimate future cash flows. Assumptions used in our impairment evaluations, such as forecasted sales growth rates and our cost of capital or discount rate, are based on the best available market information. Changes in these estimates or a continued decline in general economic conditions could change our conclusion regarding an impairment of goodwill and potentially result in a non-cash impairment loss in a future period. The assumptions used in our impairment testing could be adversely affected by certain risks. Our reporting units with goodwill at September 30, 2019 was Preclinical services and St. Louis services, which are included in our Services operating segment, based on the discrete financial information available which is reviewed by management. We performed our annual goodwill impairment test for the Preclinical and St. Louis Services reporting units at September 30, 2019 and there was no indication of impairment. There have been no significant events since the timing of our impairment tests that would have triggered additional impairment testing after fiscal year-end. We amortize costs of patents and licenses, which are included in other assets on the Consolidated Balance Sheets. For the fiscal years ended September 30, 2019 and 2018, the amortization expense associated with these was $6 and $6, respectively. At September 30, 2019 the intangible assets subject to amortization totaled $2,873 as compared to $3,318 at September 30, 2018. These consisted primarily of the intangible assets acquired from the Seventh Wave Acquisition described in Note 11. The changes in the balances of the intangible assets for the years ended September 30, 2019 and 2018 are as follows:
|  |  |  |  | Client |  | Non-Compete |  |  |  |  |  |
|  | Trademarks |  | Relationships |  | Agreements |  | Backlog |  | Totals
Balance as of October 1, 2017 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | —
Seventh Wave Acquisition |  |  | 1,170 |  |  | 1,980 |  |  | 190 |  |  | 143 |  |  | 3,483
Amortization |  |  | (20) |  |  | (62) |  |  | (12) |  |  | (71) |  |  | (165)
Balance as of September 30, 2018 |  | $ | 1,150 |  | $ | 1,918 |  | $ | 178 |  | $ | 72 |  | $ | 3,318
Amortization |  |  | (78) |  |  | (248) |  |  | (47) |  |  | (72) |  |  | (445)
Balance as of September 30, 2019 |  | $ | 1,072 |  | $ | 1,670 |  | $ | 131 |  | $ | — |  | $ | 2,873
Future amortization expense for intangible assets at September 30, 2019 for the next five years are as follows:
|  | 2020 |  | 2021 |  | 2022 |  | 2023 |  | 2024 |  | Thereafter |  | Totals
Trademarks |  |  | 78 |  |  | 78 |  |  | 78 |  |  | 78 |  |  | 78 |  |  | 682 |  |  | 1,072
Client Relationships |  |  | 248 |  |  | 248 |  |  | 248 |  |  | 248 |  |  | 248 |  |  | 430 |  |  | 1,670
Non-Compete Agreements |  |  | 47 |  |  | 47 |  |  | 37 |  |  | — |  |  | — |  |  | — |  |  | 131
Backlog |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | —
|  | $ | 373 |  | $ | 373 |  | $ | 363 |  | $ | 326 |  | $ | 326 |  | $ | 1,112 |  | $ | 2,873
(h) Stock-Based Compensation We have a stock-based employee compensation plan and a stock-based employee and outside director compensation plan, which are described more fully in Note 9. All options granted under these plans have an exercise price equal to the market value of the underlying common shares on the date of grant. We expense the estimated fair value of stock options over the vesting periods of the grants. Our policy is to recognize expense for awards subject to graded vesting using the straight-line attribution method, reduced for estimated forfeitures. We use a binomial option-pricing model as our method of valuation for share-based awards, requiring us to make certain assumptions about the future, which are more fully described in Note 9. (i) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We record valuation allowances based on a determination of the expected realization of tax assets. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount of the accrual for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that we believe is more likely than not to be realized upon settlement of the position. We record interest and penalties accrued in relation to uncertain income tax positions as a component of income tax expense. Any changes in the liability for uncertain tax positions would impact our effective tax rate. We do not expect the total amount of unrecognized tax benefits to significantly change in the next twelve months. (j) Fair Value of Financial Instruments The provisions of the Fair Value Measurements and Disclosure Topic defines fair value, establishes a consistent framework for measuring fair value and provides the disclosure requirements about fair value measurements. This Topic also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s judgment about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the inputs as follows:
| · |  | Level 1 – Valuations based on quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
| · |  | Level 2 – Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
| · |  | Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
The carrying amounts for cash and cash equivalents, accounts receivable, inventories, prepaid expenses and other assets, accounts payable and other accruals approximate their fair values because of their nature and respective duration. The carrying value of the credit facility entered into in fiscal 2017 approximates fair value since it was signed just over a year ago and subsequently amended in both fiscal years 2018 and 2019. As of September 30, 2019 and 2018, the Company did not have any financial assets or liabilities measured at fair value on a recurring basis. (k) Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Significant estimates as part of the issuance of these consolidated financial statements include but are not limited to the determination of fair values, allowance for doubtful accounts, inventory obsolescence, deferred tax valuations, depreciation, impairment charges and stock compensation. Our actual results could differ from those estimates. (l) Research and Development In fiscal 2019 and 2018, we incurred $627 and $596, respectively, on research and development. Separate from our contract research services business, we maintain applications research and development to enhance our products business. We expense research and development costs as incurred. (m) Debt issuance costs The Company capitalizes costs associated with the issuance of debt and amortizes them as additional interest expense over the lives of the debt on a straight-line basis, which approximates the effective interest method. The Company believes the difference between the straight-line basis and the effective interest method is not material to the consolidated financial statements. Debt issuance costs of $207 and $159, as of September 30, 2019 and 2018, respectively, were netted with long-term debt less current portion on the consolidated balance sheets. Upon prepayment of the related debt, the Company accelerates the recognition of an appropriate amount of the costs as refinancing or extinguishment of debt. (n) New Accounting Pronouncements In February 2016, the FASB issued updated guidance on leases which, for operating leases, requires a lessee to recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in its balance sheet. The standard also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term, on a generally straight-line basis. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. We are currently continuing to evaluate the effects of adoption and have not yet determined the impact the revised guidance will have on our consolidated financial statements and related disclosures.

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