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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended
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Sep. 30, 2020
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) Reclassification of Prior Year Presentation Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. (c) Revenue Recognition In accordance with Accounting Standards Codification (“ASC”) 606, the Company disaggregates its revenue from clients into three revenue streams, service revenue, product revenue and royalties. 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 archive storage services to our clients. The Company’s fixed fee arrangements may involve nonclinical research services (toxicology, pathology, pharmacology), 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 in-life study conduct, 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 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 include 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, are recognized ratably over the applicable maintenance period and are included in customer advances on the consolidated balance sheet. Royalty revenue The Company has an agreement with Teva Pharmaceuticals (formerly Biocraft Laboratories, Inc,) which manufactures and markets pharmaceutical products. The Company receives royalties in accordance with sales of certain pharmaceuticals that Teva manufactures and sells. The royalties are received on a quarterly basis and the revenue is recognized over the quarter. Royalty revenue is included in service revenue on the consolidated statement of operations. Total revenue recognized was $641 and $349 in the years ended September 30, 2020 and 2019, respectively. The following table presents changes in the Company’s contract liabilities for the year ended September 30, 2020.
|  | Fiscal year ended
|  | September 30,
|  | 2020 |  | 2019
Opening balance |  | $ | 6,726 |  | $ | 4,925
Additions |  |  | 106,956 |  |  | 34,650
Deductions |  |  | (102,290) |  |  | (32,849)
Ending balance |  | $ | 11,392 |  | $ | 6,726
(d) Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to certain limits. At times, cash in the bank deposit may exceed federally insured limits. (e) Accounts Receivable The Company performs 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 $561 and $1,759 at September 30, 2020 and 2019, respectively. A summary of activity in our allowance for doubtful accounts is as follows:
|  |  | Fiscal year ended September 30,
|  |  | 2020 |  |  | 2019
Opening balance |  | $ | 1,759 |  | $ | 1,948
Charged to expense |  |  | 180 |  |  | —
Uncollectible invoices written off |  |  | (1,378) |  |  | (49)
Amounts collected |  |  | — |  |  | (140)
Ending balance |  | $ | 561 |  | $ | 1,759
(f) Inventories Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (FIFO) cost method of accounting. The Company evaluates inventory 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, 2020 and 2019:
|  | Fiscal year ended September 30,
|  | 2020 |  | 2019
Opening balance |  | $ | 198 |  | $ | 188
Provision for slow moving and obsolescence |  |  | 84 |  |  | 97
Write-off of obsolete and slow moving inventory |  |  | (105) |  |  | (87)
Closing balance |  | $ | 177 |  | $ | 198
(g) Property and Equipment The Company records property and equipment acquired as part of business combinations at fair value while other property and equipment is recorded at cost, including interest capitalized during the period of construction of major facilities. Depreciation, including amortization on capital leases, is computed 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 $3,126 in fiscal 2020 and $2,223 in fiscal 2019. Property and equipment, net, as of September 30, 2020 and 2019 consisted of the following:
|  | 2020 |  | 2019
Land and improvements |  | $ | 1,755 |  | $ | 1,048
Buildings and improvements |  |  | 29,882 |  |  | 22,418
Machinery and equipment |  |  | 30,731 |  |  | 25,323
Office furniture and fixtures |  |  | 950 |  |  | 905
Construction in progress |  |  | 718 |  |  | 6,010
|  |  | 64,036 |  |  | 55,704
Less: accumulated depreciation |  |  | (35,307) |  |  | (32,876)
Net property and equipment |  | $ | 28,729 |  | $ | 22,828
(h) 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. The Company carries 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, 2020 and 2019, respectively, the remaining recorded goodwill was $4,368 and $3,617. The increase of $751 is attributable to the Pre-clinical Research Services, Inc., (PCRS) acquisition as described in Note 11. The Company reviews 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. The Company utilizes 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. The Company had one reporting unit with goodwill at September 30, 2020 which was our Services business, which is included in our Services operating segment, based on the discrete financial information available which is reviewed by management. An annual goodwill impairment test was performed for the Services reporting unit at September 30, 2020 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. At September 30, 2020 the intangible assets subject to amortization totaled $4,261 as compared to $2,883 at September 30, 2019. The increase in intangible assets relate to the PCRS acquisition described in Note 11. The changes in the balances of the intangible assets for the years ended September 30, 2020 and 2019 are as follows:
|  |  |  |  | Client |  | Non-Compete |  |  |  |  |  |  |  |  |
|  | Trademarks |  | Relationships |  | Agreements |  | Backlog |  | Patents |  | Totals
Balance as of October 1, 2018 |  | $ | 1,150 |  | $ | 1,918 |  | $ | 178 |  | $ | 72 |  | $ | 16 |  | $ | 3,334
Amortization |  |  | (78) |  |  | (248) |  |  | (47) |  |  | (72) |  |  | (6) |  |  | (451)
Balance as of September 30, 2019 |  | $ | 1,072 |  | $ | 1,670 |  | $ | 131 |  | $ | — |  | $ | 10 |  | $ | 2,883
Acquisition of PCRS |  |  | 460 |  |  | 1,280 |  |  | 220 |  |  | 121 |  |  | — |  |  | 2,081
Amortization |  |  | (103) |  |  | (380) |  |  | (93) |  |  | (121) |  |  | (6) |  |  | (703)
Balance as of September 30, 2020 |  | $ | 1,429 |  | $ | 2,570 |  | $ | 258 |  | $ | — |  | $ | 4 |  | $ | 4,261
Future amortization expense for intangible assets at September 30, 2020 for the next five years and a total, thereafter, are as follows:
|  | 2021 |  | 2022 |  | 2023 |  | 2024 |  | 2025 |  | Thereafter |  | Totals
Trademarks |  |  | 109 |  |  | 109 |  |  | 109 |  |  | 109 |  |  | 109 |  |  | 884 |  |  | 1,429
Client Relationships |  |  | 408 |  |  | 408 |  |  | 408 |  |  | 408 |  |  | 408 |  |  | 530 |  |  | 2,570
Non-Compete Agreements |  |  | 102 |  |  | 91 |  |  | 55 |  |  | 10 |  |  | - |  |  | - |  |  | 258
Patents |  |  | 4 |  |  | - |  |  | - |  |  | - |  |  | - |  |  | - |  |  | 4
|  | $ | 623 |  | $ | 608 |  | $ | 572 |  | $ | 527 |  | $ | 517 |  | $ | 1,414 |  | $ | 4,261
(i) Stock-Based Compensation The Company has a stock option plan and an equity incentive plan for officers, outside directors and employees, which are described more fully in Note 9. The Company recognizes the cost resulting from all share-based payment transactions in our financial statements using a fair-value based method. Compensation cost for all share-based awards are measured based on estimated fair values and compensation is recognized over the vesting period for awards. The Company uses the binomial option valuation model to determine the grant date fair value. The determination of fair value is affected by our common share price as well as assumptions regarding subjective and complex variables such as expected employee exercise behavior and our expected stock price volatility over the term of the award. Generally, our assumptions are based on historical information and judgment is required to determine if historical trends may be indicators of future outcomes. We estimated the following key assumptions for the binomial valuation calculation:
| · |  | Risk-free interest rate. The risk-free interest rate is based on U.S. Treasury yields in effect at the time of grant for the expected term of the option.
| · |  | Expected volatility. The Company uses our historical share price volatility on our common shares for our expected volatility assumption.
| · |  | Expected term. The expected term represents the weighted-average period the stock options are expected to remain outstanding. The expected term is determined based on historical exercise behavior, post-vesting termination patterns, options outstanding and future expected exercise behavior.
| · |  | Expected dividends. The Company assumes that we will pay no dividends.
Employee stock-based compensation expense recognized in fiscal 2020 and 2019 was calculated based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates and an adjustment will be recognized at that time. (j) 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 carryforwards. 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. The Company 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. The Company records 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. (k) 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 approximates fair value as it was amended during fiscal year 2020 and subsequent to the amendment, there have been no factors that would indicate a change in the carrying value As of September 30, 2020 and 2019, the Company did not have any financial assets or liabilities measured at fair value on a recurring basis. (l) 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. (m) Research and Development In fiscal 2020 and 2019, the Company incurred $950 and $627, respectively, on research and development. Separate from our contract research services business, we maintain applications research and development to enhance our products business. The Company expenses research and development costs as incurred. (n) 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 $235 and $207, as of September 30, 2020 and 2019, 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. (o) New Accounting Pronouncements In February 2016, the Financial Accounting Standards Board (“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. On October 1, 2019, the Company adopted ASC 842 Leases (ASU 2016-02) and all the related amendments to its lease contracts using the modified retrospective method. The effective date was used as the Company’s date of initial application with no restatement of prior periods. As such prior periods continue to be reported under the accounting standards in effect for those periods. The Company recorded upon adoption a financing right-of-use asset and lease liability on the consolidated balance sheet of $4,628 and $4,650, respectively, and an operating right-of-use asset and lease liability of $4,581 and $4,687, respectively. The lease liability reflects the present value of the Company’s estimated future minimum lease payments over the term of the lease, which includes options that are reasonably certain to be exercised, discounted utilizing a collateralized incremental borrowing rate. The impact of the new lease standard does not affect the Company’s operating cash flows. See Note 6 for additional information. In June 2016, the FASB issued ASU 2016-13 “Financial Instruments (Topic 326) Measurement of Credit Losses on Financial Instrument” “CECL”). ASU 2016-13 requires an allowance for expected credit losses on financial assets to be recognized as early as day one of the instrument. This ASU departs from the incurred loss model which means the probability threshold is removed. It considers more forward-looking information and requires the entity to estimate its credit losses as far as it can reasonably estimate. This update became effective for the Company on October 1, 2020. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. (p) Building Lease The Lease Agreement with Cook Biotech, Inc. (“lessee”) for a portion of the Company’s headquarters facility is recorded as an operating lease with the escalating rents being recognized on a straight-line basis once the lessee took full possession of the space on May 1, 2015 through the end of the lease on December 31, 2024. The straight-line rents of $53 per month are recorded as a reduction to general and administrative expenses on the consolidated statements of operations and other accounts receivable on the consolidated balance sheets. The cash rent received is recorded in lease rent receivable on the consolidated balance sheets. The variance between the straight-line rents recognized and the actual cash rents received will net to zero by the end of the agreement on December 31, 2024.

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