14. REVENUE RECOGNITION

In accordance with ASC 606, which the Company adopted as of October 1, 2018 using the modified retrospective approach, 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. Results for fiscal 2018 are not adjusted and continue to be reported in accordance with the Company's historical accounting under ASC Topic 605.

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 sheet.

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, including hours, to total estimated direct costs since this best depicts the transfer of assets to the client over the life of the contract. 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 sheet. 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.

Certain costs are incurred in obtaining new contracts for our services business. Since these costs would otherwise be amortized within one year or less due to the average length of contracts, the Company choose to adopt the practical expedient and expense these incremental costs as incurred.

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. In situations which the Company is responsible for shipping before control is transferred to the client, the Company elected the practical expedient to consider the shipment as a fulfillment activity and not a separate 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. Certain products manufactured by the Company have a standard limited one year warranty offered. Warranty expenses, though, are immaterial; thus, we have not established a separate warranty liability.

The following table prsents changes in the Company's contract liabilities for the year ended September 30, 2019.


	Balance at						Balance at
	September 30,						September 30,
	2018		Additions		Deductions		2019
Contract liabilities: Customer advances	$	4,925	$	34,650	$	(32,849)	$	6,726

The impact of adoption of ASC 606 to the Company’s condensed consolidated financial statements for the year ended September 30, 2019 is as follows:

Statements of Operations and Comprehensive Income (Loss)


			Effect of		Amount Without
			Change		Adoption of
	As Reported		Higher/(Lower)		ASC606
Service revenue	$	39,048	$	(26)	$	39,074
Product revenue		4,568		—		4,568
Total revenue		43,616		(26)		43,642
Total cost of revenue		30,695		—		30,695
Gross profit		12,921		(26)		12,947
Operating loss		(153)		(26)		(127)
Net loss before income taxes		(786)		(26)		(760)
Income taxes expense		4				4
Net Income	$	(790)	$	(26)	$	(764)
Diluted net loss per share	$	(0.08)	$	0.00	$	(0.08)

Balance Sheet


			Effect of		Amount Without
			Change		Adoption of ASC
	As Reported		Higher/(Lower)		606

Current Liabilities:
Client advances	$	6,726	$	(102)	$	6,624

Shareholder’s equity:
Accumulated deficit	$	(17,097)	$	102	$	(16,995)