PHARMA-BIO SERV, INC.
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark
One)
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended
October 31,
2019
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from _____________ to ______________
Commission
File No.
000-50956
PHARMA-BIO SERV, INC.
(Exact
Name of Registrant as Specified in Its Charter)
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Delaware
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20-0653570
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(State
or Other Jurisdiction of Incorporation or
Organization)
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(IRS Employer Identification
No.)
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Pharma-Bio Serv Building,
#6 Road 696
Dorado, Puerto Rico
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00646
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(Address
of Principal Executive Offices)
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(Zip
Code)
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787-278-2709
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(Registrant’s
Telephone Number, Including Area Code)
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Securities
registered pursuant to Section 12(b) of the Act: None
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.0001 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes ☐
No ☑
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes
☐ No ☑
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 such
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 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.
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Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☑
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Smaller
reporting company
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☑
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Emerging
growth company
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☐
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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 Act). Yes ☐ No
☑
The
aggregate market value of common stock held by non-affiliates of
the registrant, based on the closing price for the
registrant’s common stock on April 30, 2019 (the last
business day of the second quarter of the registrant’s
current fiscal year), was $14,350,924.
The
number of shares of the registrant’s common stock outstanding
as of January 24, 2020 was 22,995,881.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of the registrant’s Proxy Statement relative to the Annual
Meeting of Stockholders for the year ended October 31, 2019 are
incorporated by reference in Part III hereof.
PHARMA-BIO SERV, INC.
FORM 10-K
FOR THE YEAR ENDED OCTOBER 31, 2019
TABLE OF CONTENTS
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PART I
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PART II
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PART III
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PART IV
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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F-1
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PART I
I
TEM
1. BUSINESS.
GENERAL
Pharma-Bio Serv, Inc. is a Delaware corporation,
organized in 2004 under the name Lawrence Consulting Group, Inc. In
February 2006, our corporate name was changed to Pharma-Bio Serv,
Inc ("Pharma-Bio" or the “Company”).
On January 25, 2006, pursuant to an
agreement and plan of merger, Pharma-Bio
acquired Pharma-Bio Serv PR, Inc.
(“Pharma-PR”).
Pharma-PR business was established as a sole
proprietorship in 1993 and incorporated in 1997 to offer compliance
consulting services to the pharmaceutical industry. The business
operations provide services to the pharmaceutical, chemical,
biotechnology, medical devices, cosmetic and food industries, and
allied products companies principally in Puerto Rico, the United
States, Europe and Brazil.
Our
executive offices are located at Pharma-Bio Serv Building, #6 Road
696, Dorado, Puerto Rico 00646. Our telephone number is
(787) 278-2709. The financial information about our reporting
segments appear in Note M to our Consolidated Financial Statements
included in this Annual Report on Form 10-K.
Our
website is www.pharmabioserv.com. Information on our website or any
other website is not part of this Annual Report on Form
10-K.
References to
“we,” “us,” “our” and similar
words in this Annual Report on Form 10-K refer to Pharma-Bio Serv,
Inc. and its subsidiaries.
OVERVIEW
We are
a compliance and technology transfer services consulting firm with
headquarters in Puerto Rico, servicing the Puerto Rico, United
States, Europe and Brazil markets. The compliance consulting
service sector in those markets consists of local compliance and
validation consulting firms, United States dedicated validation and
compliance consulting firms, and large publicly traded and private
domestic and foreign engineering and consulting firms. We provide a
broad range of compliance related consulting services. We market
our services to pharmaceutical, chemical, biotechnology, medical
devices, cosmetic and food industries, and allied products
companies in Puerto Rico, the United States, Europe and Brazil. Our
consulting team includes experienced engineering and life science
professionals, former quality assurance managers and directors, and
professionals with bachelors, masters and doctorate degrees in
health sciences and engineering.
We have
a well-established and consistent relationships with the major
pharmaceutical, biotechnology, medical device and chemical
manufacturing companies in Puerto Rico and the United States, which
provides us access to affiliated companies in other markets. We
seek opportunities in markets that can yield profitable margins
using our professional consulting force.
We
believe the most significant factors to achieving future business
growth include our ability to: (i) continue to provide quality
value-added compliance services to our clients; (ii) recruit and
retain highly educated and experienced consultants; (iii) further
expand our products and services to address the expanding needs of
our clients; and (iv) expand our market presence in the United
States, Europe, Brazil and other emerging pharmaceutical markets in
order to respond to the international compliance needs of our
clients and potential clients. Our business is affected to the
extent economic conditions impact the decisions of our clients and
potential clients to establish operations or to continue or expand
their existing operations.
Our
revenue is derived from (i) time and materials contracts
(representing approximately 99% of total revenue), where the
clients are charged for the time, materials and expenses incurred
on a particular project or service and (ii) fixed-fee contracts or
from “not to exceed” contracts (approximately 1% of
total revenue), which are generally short-term contracts, in which
the value of the contract cannot exceed a stated amount. For time
and materials contracts, our revenue is principally a function of
the number of consultants and the number of hours billed per
consultant. To the extent that our revenue is based on fixed-fee or
“not to exceed” contracts, our ability to operate
profitably is dependent upon our ability to estimate accurately the
costs that we will incur on a project and to manage and monitor the
project. If we underestimate our costs on any contract, we could
sustain a loss on the contract or its profitability might be
reduced.
1
The
principal components for our consulting costs of services
are resource compensation to our consulting team and expenses
relating to the performance of the services. In order to ensure
that our pricing is competitive yet minimize the impact on our
margins, we manage increasing labor costs by (i)
selecting consultants according to our cost for specific
projects, (ii) negotiating, where applicable, rates with the
consultant, (iii) subcontracting labor and (iv) negotiating and
passing rate increases to our customers, as applicable. Although
this strategy has been successful in the past, we cannot give any
assurance that such strategy will continue to be
successful.
We have
established quality systems for our employees which
include:
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Training Programs -
including a current Good Manufacturing Practices exam prior to
recruitment and periodic refreshers;
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Recruitment Full
Training Program - including employee manual, dress code, time
sheets and good project management and control procedures, job
descriptions, and firm operating and administration
procedures;
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Safety Program -
including Occupational Safety and Health Act (“OSHA”)
and Environmental Health and Safety; and
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Code of Ethics and
Business Conduct - a code of ethics and business conduct is used
and enforced as one of the most significant company controls on
personal behavior.
In
addition, we have implemented procedures to respond to client
complaints and have in place customer satisfaction survey
procedures. As part of our employee performance appraisal annual
process, our clients receive an evaluation form for employee
project performance feedback, including compliance with our code of
ethics and business conduct.
On
September 17, 2018, based on a corporate strategy to refocus the
Company on consulting services, the Company sold substantially all
of its laboratory business assets. As a result of the sale, the
Company currently operates three reportable segments: (i) Puerto
Rico technical compliance consulting, (ii) United States technical
compliance consulting, and (iii) Europe technical compliance
consulting.
BUSINESS STRATEGY AND OBJECTIVES
We are
actively pursuing to expand our services in the United States,
European and Brazilian markets as part of our growth strategy,
while maintaining our position in the Puerto Rico market. We have a
well-established and consistent relationship with the major
pharmaceutical, biotechnology, medical device and chemical
manufacturing companies in Puerto Rico and the United States which
provides us access to affiliated companies in other markets. We
seek opportunities in markets that can yield profitable margins
using our professional consulting force.
Our
business strategy is based on a commitment to provide premium
quality and professional consulting services and reliable customer
service to our customer base. Our business strategy and objectives
are as follow:
●
Growth
in consulting services in each technical service, quality
assurance, regulatory compliance, technology transfer, validation,
engineering, and manufacturing departments by achieving greater
market penetration from our marketing and sales
efforts;
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Continue
to enhance our technical consulting services through internal
growth and acquisitions that provide solutions to our
customers’ needs;
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Motivate
our consulting and support staff by implementing a compensation
program which includes both individual performance and overall
company performance as elements of compensation;
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Create
a pleasant corporate culture and emphasize operational quality,
safety and timely service;
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Continue
to maintain our reputation as a trustworthy and highly ethical
partner; and
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Efficiently
manage our operating and financial costs and expenses.
2
TECHNICAL CONSULTING SERVICES
We have
established a reputation as a premier technical consulting services
firm to the pharmaceutical, chemical, biotechnology, medical
devices, cosmetic and food industries, and allied products
companies in various markets. These services include regulatory
compliance, validation, technology transfer, engineering, project
management and process support. We have approximately 65 clients
that are among the largest pharmaceutical, chemical manufacturing,
medical device and biotechnology companies. We are actively
participating in exhibitions, conferences, conventions and
seminars as either exhibitors, sponsors or conference
speakers.
MARKETING
We
conduct our marketing activities in Puerto Rico, United States,
Europe and other marketplaces. We actively utilize our project
managers and leaders who are currently managing consulting service
contracts at various client locations to also market consulting
services to their existing and past client relationships. Our
senior management is also actively involved in the marketing
process, especially in marketing to major accounts. Our senior
management and staff also concentrate on developing new business
opportunities and focus on the larger customer accounts (by number
of consultants or dollar volume) and responding to prospective
customers’ requests for proposals.
PRINCIPAL CUSTOMERS
We
provide a substantial portion of our services to five customers,
each of whom accounted for 10% or more of our revenues in either of
the years ended October 31, 2019 and 2018. During the years ended
October 31, 2019 and 2018, these customers accounted for, in the
aggregate, 66.5% and 51.7% of total revenue, respectively. Although
a few customers represent a significant source of revenue, our
functions are not a continuous process, accordingly, the client
base for which our services are typically rendered, on a
project-by-project basis, changes regularly. Therefore, in any
given year a small number of customers could represent a
significant source of our revenue for that year. The loss of, or
significant reduction in the scope of work performed for any major
customer or our inability to replace customers upon completion of
contracts could adversely affect our revenue and impair our ability
to operate profitably.
COMPETITION
We are
engaged in a highly competitive and fragmented industry. Some of
our competitors are, on an overall basis, larger than we are or are
subsidiaries of larger companies, and therefore may possess greater
resources than we do. Furthermore, because the technical
professional aspects of our consulting business do not usually
require large amounts of capital, there is relative ease of market
entry for a new entrant possessing acceptable professional
qualifications. Accordingly, we compete with regional, national,
and international firms. Within the Puerto Rico, United States,
Europe and Brazil markets, certain competitors, including local
competitors, may possess greater resources than we do as well as
better access to clients and potential clients.
Competition for
validation and consulting services used to be primarily based on
reputation, track record, experience, and quality of service.
However, given our clients' strategies to reduce costs, price of
service has become a major factor in sourcing our services. We
believe we benefit from competitive advantages over other
consulting service firms because of our historical market share
within Puerto Rico (over 26 years), brand name, reputation and
track record with many of the major pharmaceutical, biotechnology,
medical device and chemical manufacturing companies, which have a
presence in the markets we serve and are pursuing.
The
market of qualified and experienced consultants that are
capable of providing technical consulting services is very
competitive and consists primarily of our competitors as well as
companies in the pharmaceutical, chemical, biotechnology and
medical device industries who are our clients and potential
clients. In seeking qualified personnel, we market our name
recognition in the Puerto Rico market, our reputation with our
clients, and salary and benefit packages.
INTELLECTUAL PROPERTY RIGHTS
We have
no proprietary software or products. We rely on non-disclosure
agreements with our employees to protect the proprietary software
and other proprietary information of our clients. Any unauthorized
use or disclosure of this information could harm our
business.
EMPLOYEES
We
employ approximately 185 employees, all of whom are full time
employees. None of our employees are represented by a
labor union, and we consider our employee relations to be
good.
3
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The
following table sets forth certain information with respect to our
executive officers.
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Name
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Age
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Position
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Victor
Sanchez
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49
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Chief
Executive Officer, President and President of European
Operations
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Pedro
J. Lasanta
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60
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Chief
Financial Officer, Vice President - Finance and Administration and
Secretary
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Victor Sanchez
has served as our Chief
Executive Officer and President since January 1, 2015 and as the
President of the European Operations of the Company since January
2011. Prior to joining the Company, he served as Operations
Manager in the LOCM and OSD divisions of Merck Sharp & Dohme
(“MSD”), a pharmaceutical company, in Madrid, Spain
from April 2010 to January 2011 and as Operations Manager of the
LOCM division of Schering-Plough S.A., a pharmaceutical company, in
Madrid, Spain, from September 2004 to April 2010. He served
as Quality Control Validations Manager for Schering-Plough
Products, LLC, a pharmaceutical company
(“Schering-Plough”), in Puerto Rico from December 2000
to August 2004 and as Quality Control Laboratory Supervisor of
Schering-Plough from April 1996 to December 2000. Mr. Sanchez
holds a Bachelor of Science in Chemistry, summa cum laude, and a
M.B.A. in Industrial Management, cum laude, from the Interamerican
University of Puerto Rico. He holds a Post Graduate Diploma in
Pharmaceutical Validation Technology from the Dublin Institute of
Technology, Ireland. He also has a US Regulatory Affairs
certification from the Regulatory Affairs Professional Society. Mr.
Sanchez is a chemist licensed by the Puerto Rico State Department
and a member of the American Chemical Society, the Parenteral Drug
Association, the Regulatory Affairs Professional Society, and the
International Society for Pharmaceutical Engineers.
Pedro J. Lasanta
has served as our Chief
Financial Officer and Vice President - Finance and Administration
since November 2007, and our Secretary since December 1, 2014. From
2006 until October 2007, Mr. Lasanta was in private practice as an
accountant, tax and business counselor. From 1999 until 2006, Mr.
Lasanta was the Chief Financial Officer for Pearle Vision Center
PR, Inc. In the past, Mr. Lasanta was also an audit manager for
Ernst & Young, formerly Arthur Young & Company. He is a cum
laude graduate in business administration (accounting) from the
University of Puerto Rico. Mr. Lasanta is a Certified
Public Accountant. In 2012, he was awarded the Puerto Rico
Manufacturers Association (North Region) Service Manager of the
Year. Mr. Lasanta has served as a Member of the Puerto Rico
District Export Council for the U.S. Department of Commerce from
January 2014 until December 2018.
I
TEM 1A. RISK
FACTORS.
This
Annual Report on Form 10-K includes “forward-looking
statements” within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, including, in
particular, certain statements about our plans, strategies and
prospects. Although we believe that our plans, intentions and
expectations reflected in or suggested by such forward-looking
statements are reasonable, we cannot assure you that such plans,
intentions or expectations will be achieved. Important factors that
could cause our actual results to differ materially from our
forward-looking statements include those set forth in this Risk
Factors section.
If any
of the following risks, or other risks not presently known to us or
that we currently believe to not be significant, develop into
actual events, then our business, financial condition, results of
operations, cash flows or prospects could be materially adversely
affected.
Risks That Relate to our Business
Because our business is concentrated in the life science and
medical devices industries in Puerto Rico, the United States,
Europe and Brazil, any changes in those industries or in those
markets could impair our ability to generate revenue and realize a
profit.
Since
most of our business is performed in Puerto Rico, the United
States, Europe and Brazil, for pharmaceutical, biotechnology,
medical device and chemical manufacturing companies, our ability to
generate revenue and realize a profit could be impaired by factors
impacting those markets. For example, changes in tax
laws or regulatory, political or economic conditions, which
discourage businesses from operating in the markets we serve, which
affect the need for services such as those provided by us, could
impair our ability to generate revenue and realize a
profit.
Companies in the
pharmaceutical and related industries for which we perform services
are subject to economic pressures, which affect their global
operations, and which may influence the decision to reduce or
increase the scope of their operations in the markets we serve.
These companies consider a wide range of factors in making such a
decision, and may be influenced by a need to consolidate
operations, to reduce expenses, to increase their business in
geographical regions where there are large customer bases, tax,
regulatory and political considerations and many other factors. We
cannot assure you that our customers and potential customers will
not make extensive reductions or terminate their operations in the
markets we serve entirely, which could significantly impair our
ability to generate revenue and realize a profit.
4
Puerto Rico’s economy, including its governmental financial
crisis and the impact of Hurricanes Irma and Maria (the
“Hurricanes”) or any other natural disasters, including
the recent earthquakes, may affect the willingness of businesses to
commence or expand operations in Puerto Rico, or may also consider
closing operations located in Puerto Rico.
As a result of Puerto Rico’s governmental
financial crisis
and
the impacts of the Hurricanes or other natural disasters, including
the recent earthquakes, businesses may be reluctant to establish or
expand their operations in Puerto Rico, or might consider closing
operations currently in Puerto Rico.
The damage resulting from the
Hurricanes or other natural disasters to the operating conditions
of our clients, and insufficient federal recovery and rebuilding
assistance may cause lasting and severe damage to the
island’s economic base.
Further, since Puerto Rico’s economy is
petroleum-based, the fluctuating price of oil, combined with Puerto
Rico’s high level of debt, may make Puerto Rico a less
attractive place to expand existing operations or commence new
business activities. In the event that companies in the
pharmaceutical and related industries decide not to commence new
operations or not to expand their existing operations in Puerto
Rico, or consider closing operations in Puerto Rico,
the demand for our services could be negatively
affected.
Puerto Rico government enacted ACT 154-2010 may adversely affect
the willingness of our customers to do business in Puerto Rico and
consequently adversely affect our business.
On October 22, 2010, Act No. 154 was enacted by
the Puerto Rico government. The act primarily affects the
industries we serve and consequently our customer base. Act
154-2010, as amended, extends the circumstances under which a
non-resident alien individual or a non-resident corporation or
partnership can be treated as doing business in Puerto Rico and is
deriving income from sources within Puerto Rico for purposes of
income tax. It also provides for the imposition of a temporary
excise tax on some acquisitions by non-resident individuals,
corporations or partnerships, of products totally or partially
manufactured or produced in Puerto Rico and of related services to
said products of affiliated entities with the buyer. It basically
adopts a modified income sourcing rule and a temporary excise tax
that will be enforced until December 31,
2021.
US Federal Tax Reform may affect the willingness of companies to
continue or expand their operations in Puerto Rico.
Customers
and other companies with operations in Puerto Rico will be affected
by the Tax Cuts and Jobs Act of 2017 or the US Federal Tax Reform
(the “Reform”) enacted on December 22, 2017. The Reform
places a new 12.5 percent excise tax on profits derived from
patents and other intangible assets supporting their Puerto Rican
plants. Also, among other provisions, the Reform established a
mandatory repatriation of foreign accumulated undistributed
earnings and profits (the “E&Ps”). In the past,
most of these E&Ps were not repatriated since such E&Ps
were considered to be reinvested indefinitely on the foreign
location. As a result, the Reform affects the tax business model of
various US companies and their subsidiaries doing business in
Puerto Rico and other foreign jurisdictions, making them a less
attractive investment. Consequently, this affects the willingness
of such companies to continue, expand and/or bring new operations
to Puerto Rico, which may impair our ability to generate business
in this market.
Further changes in tax laws in Puerto Rico or in other
jurisdictions may adversely impact the willingness of our customers
to continue or to expand their Puerto Rico operations.
In
order to promote business activities in Puerto Rico, in July 2019
and May 2008 the Puerto Rico government enacted tax incentive laws
“Act 60” and “Act 73”, respectively. Act 60
and Act 73 provide tax exemption from various taxes, including
income tax, and investment credits for activities similar to those
of our customers and our Company. Any changes on these laws or
changes in laws of other jurisdictions that may be perceived as
more favorable than Act 60 or Act 73 may cause other companies to
develop and manufacture products outside of Puerto Rico, and as a
result, our ability to generate new business may be adversely
impacted.
Our business and operating results may be adversely impacted if we
are unable to maintain our certification as a minority-controlled
company.
Since
July 2008, we have held certification as a "minority-controlled
company" as defined by the National Minority Supplier Development
Council and Growth Initiative ("NMSDC"). The certification allows
us to participate in corporate diversity programs available from
various potential customers in the United States and Puerto Rico.
The certification is subject to renewal every year. Our business
and operating results may be adversely impacted if we are unable to
maintain our certification as a minority-controlled
company.
5
Because our business is dependent upon a small number of clients,
the loss of a major client could impair our ability to operate
profitably.
Our
business has been dependent upon a small number of clients. During
the years ended October 31, 2019 and 2018, a small number of
clients accounted for a disproportionately large percentage of our
revenue. In the years ended October 31, 2019 and 2018, five
customers accounted for, in aggregate, approximately 66.5% and
51.7% of total revenue, respectively.
The
loss of, or significant reduction in the scope of work performed
for, or any significant change in the financial terms related to,
any major customer, could impair our ability to operate profitably.
We cannot assure that we will not sustain significant decreases in
revenue from our major customers or that we will be able to replace
any major customers or the resulting decline in
revenue.
Customer procurement and sourcing practices intended to reduce
costs could have an adverse effect on our margins and
profitability.
In an
effort to reduce their costs, many of our customers are
establishing or extending the scope of their procurement
departments to include consulting and project management services,
such as ours. As a result, we have less interaction with the end
user of our services (typically labs or production units) when
bidding on a project, which we believe decreases the focus on the
quality of service provided and increases the emphasis on cost of
the service. This may cause us to lower the price of our bids,
which would reduce the margins in a given project. Also, some
customers have established vendor management/vendor
neutral-programs with third-parties (some of whom are also our
competitors). Because these vendor management programs may receive
a percentage of our fees, without a corresponding increase in the
fee itself, our margins may be adversely affected. In addition,
where a vendor management program is a competitor for a particular
service we provide, we may have difficulty securing that particular
project, which would adversely impact revenue. Some of these vendor
neutral programs are intended to limit our interaction with our
direct end user, and our interaction is limited to the
representative of the vendor neutral agency. This limitation
impairs our ability to establish and maintain our relationships
with our customers and recognition of the value added in the
service.
We may be unable to pass on increased labor costs to our
clients.
The
principal components of our cost of revenues are employee
compensation (salaries, wages, taxes and benefits) and expenses
relating to the performance of the services we provide. We face
increasing labor costs which we seek to pass on to our customers
through increases in our rates. To remain competitive, we may not
be able to pass these increased costs on to our clients, and, to
the extent that we are not able to pass these increased costs on to
our clients, our operating margin may be
reduced.
Consolidation
in the pharmaceutical industry may have a harmful effect on our
business.
In
recent years, the pharmaceutical industry has undergone
consolidation, and may in the future undergo further substantial
consolidation which may reduce the number of our existing and
potential customers. The consolidation in the
pharmaceutical industry may have a harmful effect on our business
and or ability to maintain and replace customers.
Because the pharmaceutical industry is subject to government
regulations, changes in government regulations relating to this
industry may affect the need for our services.
Because government regulations affect all aspects
of the pharmaceutical, biotechnology, medical device and chemical
manufacturing industries, including regulations relating to the
testing and manufacturing of pharmaceutical products and the
disposal of materials which are or may be considered toxic, any
change in government regulations could have a profound effect upon
not only these companies but companies, such as ours, that provide
services to these industries. If we are not able to adapt and
provide necessary services to meet the requirements of these
companies in response to changes in government regulations, our
ability to generate business may be
impaired.
6
Since our business is dependent upon the development and
enhancement of patented pharmaceutical products or processes by our
clients, the failure of our clients to obtain and maintain patents
could impair our ability to operate profitably.
Companies in the
pharmaceutical industry are highly dependent on their ability to
obtain and maintain patents for their products or processes. The
inability by our clients to obtain new patents and the expiration
of active patents may reduce the need for our services and thereby
impair our ability to operate profitably.
If we are unable to protect our clients’ intellectual
property, our ability to generate business will be
impaired.
Our
services either require us to develop intellectual property for
clients or provide our personnel with access to our clients’
intellectual property. Because of the highly competitive nature of
the pharmaceutical, biotechnology, medical device and chemical
manufacturing industries and the sensitivity of our clients’
intellectual property rights, our ability to generate business
would be impaired if we fail to protect those rights. Although all
of our employees and contractors are required to sign
non-disclosure agreements, any disclosure of a client’s
intellectual property by an employee or contractor may subject us
to litigation and may impair our ability to generate business
either from the affected client or other potential clients. In
addition, we are required to enter into confidentiality agreements
and our failure to protect the confidential information of our
clients may impair our business relationship.
We may be subject to liability if our services or solutions for our
clients infringe upon the intellectual property rights of
others.
It is
possible that in performing services for our clients, we may
inadvertently infringe upon the intellectual property rights of
others. In such event, the owner of the intellectual property may
commence litigation seeking damages and an injunction against both
us and our client, and the client may bring a claim against us. Any
infringement litigation would be costly. Even if we prevail, we
will incur significant expenses and our reputation could be hurt,
which would affect our ability to generate business and the terms
on which we would be engaged, if at all.
We may be held liable for the actions of our employees or
contractors when on assignment.
We may
be exposed to liability for actions taken by our employees or
contractors while on assignment, such as damages caused by their
errors, misuse of client proprietary information or theft of client
property. Due to the nature of our assignments, we cannot assure
you that we will not be exposed to liability as a result of our
employees or contractors being on assignment. Furthermore,
our reputation may be hurt and our ability to generate business may
be affected.
To the extent that we perform services pursuant to fixed-price or
incentive-based contracts, our cost of services may exceed our
revenue on the contract.
Some of
our revenue is derived from fixed-price contracts. Our costs of
services may exceed revenue of these contracts if we do not
accurately estimate the time and complexity of an engagement.
Further, we are seeking contracts by which our compensation is
based on specified performance objectives, such as the realization
of cost savings, quality improvements or other performance
objectives. Our failure to achieve these objectives would reduce
our revenue and could impair our ability to operate
profitably.
Our
profit margin is largely a function of the rates we are able to
charge and collect for our services and the utilization rate of our
consultants. Accordingly, if we are not able to maintain our
pricing for our services or an appropriate utilization rate for
our consultants without corresponding cost reductions, our
profit margin and profitability will suffer. The rates we are able
to charge for our services are affected by a number of factors,
including:
●
Our
clients’ perception of our ability to add value through our
services;
●
Our
ability to complete projects on time;
●
Pricing
policies of competitors;
●
Our
ability to accurately estimate, attain and sustain engagement
revenues, margins and cash flows over increasingly longer contract
periods; and
●
General
economic and political conditions.
7
Our
utilization rates are also affected by a number of factors,
including:
●
Our
ability to shift employees and contractors from completed projects
to new engagements; and
●
Our
ability to manage attrition of our employees and
contractors.
Because most of our contracts may be terminated on little or no
advance notice, our failure to generate new business could impair
our ability to operate profitably.
Most of
our contracts can be terminated by our clients with little or no
advance notice. Our clients typically retain us on a non-exclusive,
engagement-by-engagement basis, and the client may terminate,
cancel or delay any engagement or the project for which we are
engaged, at any time and on no advance notice. As a result, the
termination, cancellation, expiration or delay of contracts could
have a significant impact on our ability to operate
profitably.
Because
of the competitive nature of the pharmaceutical, biotechnology,
medical device and chemical manufacturing consulting market, we may
not be able to compete effectively if we cannot efficiently respond
to changes in the structure of the market and developments in
technology.
Because
of recent consolidations in the pharmaceutical, biotechnology,
medical device and chemical manufacturing consulting business, we
are faced with an increasing number of larger companies that offer
a wider range of services and have better access to capital than
us. We believe that larger and better-capitalized competitors have
enhanced abilities to compete for both clients and skilled
consultants. In addition, one or more of our competitors may
develop and implement methodologies that result in superior
productivity and price reductions without adversely affecting their
profit margins. We cannot assure you that we will be able to
compete effectively in an increasingly competitive
market.
Because we are dependent upon our management and technical
personnel, our ability to develop our business may be impaired if
we are not able to engage skilled personnel.
Our
future success will depend in part upon our ability to attract and
retain qualified management and technical personnel. Competition
for such personnel is intense and we compete for qualified
personnel with numerous other employers, including consulting
firms, some of which have greater resources than we have, as well
as pharmaceutical companies, most of which have significantly
greater financial and other resources than we do. We may experience
increased costs in order to retain and attract skilled employees.
Our failure to attract additional personnel or to retain the
services of key personnel and independent contractors could have a
material adverse effect on our ability to operate
profitably.
Our cash could be adversely affected if the financial institutions
in which we hold our cash fail.
The
Company maintains domestic cash deposits in Federal Deposit
Insurance Corporation ("FDIC") insured banks and in money market
obligation trusts registered under the US Investment Company Act of
1940, as amended. The domestic bank deposit balances may exceed the
FDIC insurance limits. In the foreign markets we serve, we also
maintain cash deposits in foreign banks, some of which are not
insured or partially insured by the FDIC or other similar agency.
These balances could be impacted if one or more of the financial
institutions in which we deposit monies fails or is subject to
other adverse conditions in the financial or credit markets. We can
provide no assurance that access to our invested cash will not be
impacted by adverse conditions in the financial and credit
markets.
We may be harmed if we do not penetrate markets and grow our
current business operations.
If we
fail to further penetrate our core and existing geographic markets,
or to successfully expand our business into new markets, the growth
in sales of our services, along with our operating results, could
be materially adversely impacted. A key element of our growth
strategy may be to grow our business through acquisitions.
Acquisitions involve many different risks, including (1) the
ability to finance acquisitions, either with cash, debt, or equity
issuances; (2) the ability to integrate acquisitions;
(3) the ability to realize anticipated benefits of the
acquisitions; (4) the potential to incur unexpected costs,
expenses, or liabilities; and (5) the diversion of
management’s attention and Company resources. Many of our
competitors may also compete with us for acquisition candidates,
which can increase the price of acquisitions and reduce the number
of available acquisition candidates. We cannot assure you that
efforts to increase market penetration in our core markets and
existing geographic markets will be successful. Our failure to
penetrate markets and grow our current business operations could
have a material adverse effect on our business, financial
condition, results of operations, and cash flows.
8
Risks Concerning our Securities
Because there is a limited market in our common stock, stockholders
may have difficulty in selling our common stock and our common
stock may be subject to significant price swings.
There
is a very limited market for our common stock. Since trading
commenced in December 2006, there has been limited volume and on
some days there has been no trading in our common stock. Because of
the limited market for our common stock, the purchase or sale of a
relatively small number of shares may have an exaggerated effect on
the market price for our common stock. We cannot assure
stockholders that they will be able to sell common stock or, that
if they are able to sell their shares, that they will be able to
sell the shares in any significant quantity at the quoted
price.
Our revenues, operating results and profitability will vary from
quarter to quarter, which may result in increased volatility of our
stock price.
Our
quarterly revenues, operating results and profitability have varied
in the past and are likely to vary significantly from quarter to
quarter, making them difficult to predict. This may lead to
volatility in our share price. The factors that are likely to cause
these variations are:
●
Seasonality,
including number of workdays and holiday and summer
vacations;
●
The
business decisions of clients regarding the use of our
services;
●
Periodic
differences between clients’ estimated and actual levels of
business activity associated with ongoing engagements, including
the delay, reduction in scope and cancellation of
projects;
●
The
stage of completion of existing projects and their
termination;
●
Our
ability to move employees quickly from completed projects to new
engagements and our ability to replace completed contracts with new
contracts with the same clients or other clients;
●
The
introduction of new services by us or our competitors;
●
Changes
in pricing policies by us or our competitors;
●
Our
ability to manage costs, including personnel compensation,
support-services and severance costs;
●
Acquisition
and integration costs related to possible acquisitions of other
businesses;
●
Changes
in estimates, accruals and payments of variable compensation to our
employees or contractors; and
●
Global
economic and political conditions and related risks, including acts
of terrorism.
The Company Stock Repurchase Program could affect the market price
of our common stock and increase its volatility.
On June
13, 2014, the Board of Directors of the Company approved the
Company Stock Repurchase Program authorizing the Company to
repurchase up to two million shares of its outstanding common
stock. The timing, manner, price and amount of any
repurchases is at the discretion of the Company, subject to the
requirements of the Securities Exchange Act of 1934, as amended,
and related rules. The Company Stock Repurchase Program could
affect the market price of our common stock and increase its
volatility.
9
The issuance of securities, whether in connection with an
acquisition or otherwise, may result in significant dilution to our
stockholders.
If we
are required to issue securities either as payment of all or a
portion of the purchase price of an acquisition or in order to
obtain financing for the acquisition or for other corporate
purposes, such an issuance could result in dilution to our
stockholders. The amount of such dilution will be dependent upon
the terms on which we issue securities. The issuance of securities
at a price which is less than the exercise price of outstanding
warrants or the conversion price of securities could result in
additional dilution if we are required to reduce the exercise price
or conversion price of the then outstanding options or warrants or
other convertible securities.
I
TEM 1B. UNRESOLVED
STAFF COMMENTS.
Not
applicable.
I
TEM
2. PROPERTIES.
In July
2016, the Company renegotiated a lease agreement, effective as of
January 1, 2016, with an affiliate of our Chairman of the Board,
for our headquarters and laboratory testing facilities in Dorado,
Puerto Rico. The renegotiated lease incorporates additional space
for the laboratory testing facility expansion. The lease agreement
is for a five-year term, with a renewal option of five years, and
monthly rental payments of $30,316 for the term of the lease
agreement and renewal option. The lease agreement also requires the
payment of utilities, property taxes, insurance and expenses
incurred by the affiliate in connection with the maintenance of
common areas. As part of the Laboratory Assets transaction (see
Note B), this lease was amended to (i) allow the Company to
sublease to the Laboratory Assets purchaser (the
“Subtenant”) the laboratory leased space area, and (ii)
if Subtenant defaults under the Sublease or terminates the
Sublease, the Company shall have the option to either (a) terminate
the Sublease and re-occupy the Subleased Premises pursuant to the
terms of the Lease, or (b) modify the Lease to terminate the Lease
for the portion of the Premises that is the Subleased Premises
only, without penalty. The Sublease calls for monthly rental
payments of $17,950 each, with an initial term commencing on
September 17, 2018 through December 31, 2019, a one-year automatic
renewal option, followed by a second automatic renewal option of
five years. On January 1, 2019, a second amendment to the lease
agreement was made to add a small storage area, increasing the
monthly rental payments by $1,088.
Also,
the Company maintains an office facility in Madrid, Spain, which is
under a month-to-month lease with monthly payment of approximately
$1,000.
We
believe that our present facilities are adequate to meet our needs
and that, if we require additional space, it will be available on
commercially reasonable terms.
I
TEM 3. LEGAL
PROCEEDINGS.
From
time to time, we may be a party to legal proceedings incidental to
our business. We do not believe that there are any
proceedings threatened or pending against us, which, if determined
adversely to us, would have a material effect on our financial
position or results of operations and cash flows.
I
TEM 4. MINE SAFETY
DISCLOSURES
Not
applicable.
10
PART II
I
TEM 5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Our
common stock has been quoted on the Over the Counter Bulletin Board
under the trading symbol PBSV since December 4, 2006. Any over the
counter market quotations reflect inter-dealer prices, without
retail markup, markdown, or commission, and may not represent
actual transactions.
On
January 24, 2020, there were approximately 65 holders of
record of our common stock.
On
November 15, 2019 and October 26, 2018, the Company paid cash
dividend of $0.075 per share to shareholders of record at the close
of business on November 4, 2019 and October 15, 2018,
respectively. The Board of Directors will continue to
evaluate the Company’s strategic plan, which might include
future acquisitions, sales of business units, dividends or any
combination of these opportunities while continuing its stock
repurchase plan.
Equity Compensation Plan Information
The
following table summarizes the equity compensation plans under
which our securities may be issued as of October 31,
2019.
|
Plan
Category
|
Number of
securities to be issued upon exercise of outstanding
options
|
Weighted-average
exercise price per share of outstanding options
|
Number of
securities remaining available for future issuance under equity
compensation plans
|
|
Equity compensation
plans approved by security holders:
|
|
|
|
|
2005 Long-Term
Incentive Plan
|
80,000
|
$
1.2800
|
-
|
|
2014 Long-Term
Incentive Plan
|
410,000
|
$
0.8615
|
1,580,000
|
|
Equity compensation
plans not approved by security holders
|
-
|
-
|
-
|
|
Total
|
490,000
|
|
1,580,000
|
The
2005 Long-Term Incentive Plan was approved by stockholders in April
2006, and amended by stockholder approval in April 2007. No further
awards may be issued under this equity compensation plan since its
term ended in October 2015.
The
2014 Long-Term Incentive Plan was approved by stockholders in April
2014.
Stock repurchase program
On June
13, 2014, the Board of Directors of the Company approved the
Company Stock Repurchase Program authorizing the Company to
repurchase up to two million shares of its outstanding common
stock. The timing, manner, price and amount of any repurchases will
be at the discretion of the Company, subject to the requirements of
the Securities Exchange Act of 1934, as amended, and related rules.
The Company Stock Repurchase Program does not oblige the Company to
repurchase any shares and it may be modified, suspended or
terminated at any time and for any reason. Under the program no
shares will be repurchased directly from directors or officers of
the Company.
The Repurchase Program
does not have an expiration date.
For the quarter ended on
October 31, 2019 no shares were bought within the repurchase
program. For the year ended October 31, 2019 a total of 23,450
shares of the Company’s common stock were purchased through
the repurchase program for an aggregate amount of
$24,919.
On
November 26, 2018, the Company repurchased 62,972 shares of common
stock, outside of the Company’s Stock Repurchase Program,
from the Company’s Chief Executive Officer at $1.00 per
share. These shares were repurchased at a discount to market to
provide for an orderly disposition of the shares.
I
TEM 6. SELECTED
FINANCIAL DATA.
Not
Applicable.
11
I
TEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The
following discussion of our results of operations and financial
condition should be read in conjunction with Part I, including
matters set forth in the “Risk Factors” section of this
Annual Report on Form 10-K, and our Consolidated Financial
Statements and notes thereto included elsewhere in this Annual
Report on Form 10-K.
Overview
We are
a compliance and technology transfer services consulting firm with
headquarters in Puerto Rico, servicing the Puerto Rico, United
States, Europe and Brazil markets. The compliance consulting
service sector in those markets consists of local compliance and
validation consulting firms, United States dedicated validation and
compliance consulting firms and large publicly traded and private
domestic and foreign engineering and consulting firms. We provide a
broad range of compliance related consulting services. We market
our services to pharmaceutical, chemical, biotechnology, medical
devices, cosmetics and food industries, and allied products
companies in Puerto Rico, the United States, Europe and Brazil. Our
consulting team includes experienced engineering and life science
professionals, former quality assurance managers and directors, and
professionals with bachelors, masters and doctorate degrees in
health sciences and engineering.
We
actively operate in Puerto Rico, the United States, Europe and
Brazil and pursue to further expand these markets by strengthening
our business development infrastructure and by constantly
realigning our business strategies as new opportunities and
challenges arise.
We
market our services with an active presence in industry trade
shows, professional conventions, industry publications and company
provided seminars to the industry. Our senior management is also
actively involved in the marketing process, especially in marketing
to major accounts. Our senior management and staff also concentrate
on developing new business opportunities and focus on the larger
customer accounts (by number of consultants or dollar volume)
and responding to prospective customers’ requests for
proposals.
We consider our core business to be Food and Drug
Administration (“FDA”) and international agencies
regulatory compliance consulting related services.
Accordingly,
based on a corporate strategy to refocus the
Company on consulting services, on September 17, 2018, we sold
substantially all of our laboratory business assets
(the “Laboratory Assets”) and
discontinued our efforts on pursuing businesses that were not
considered significant to the Company, including calibrations and a
small laboratory in Spain. The sale of the Laboratory Assets for $5
million generated a net tax gain of approximately $2.7 million. For
further details see Note B to our consolidated financial
statements.
In
line with the strategy to further penetrate the United States and
Puerto Rico markets, we submit annually for renewal the
certification as a "minority-controlled company" as defined by the
National Minority Supplier Development Council and Growth
Initiative ("NMSDC"). This certification, which has been held by us
since July 2008, allows us to participate in corporate diversity
programs available from various potential customers in the United
States and Puerto Rico.
The
Company holds a tax grant issued by the Puerto Rico Industrial
Development Company (“PRIDCO”), which provides relief
on various Puerto Rico taxes, including income tax, with certain
limitations, for most of the activities carried on within Puerto
Rico, including those that are for services to parties located
outside of Puerto Rico.
As
more fully disclosed in Note E of the Company’s consolidated
financial statements included herewith, the Company is subject to
the recent Tax Reform provisions, including an estimated one-time
non-recurring Transition Tax of $2.7 million, that was recorded as
of October 31, 2018, and which is payable within eight years which
started on February 2019. The payment is being funded from our
working capital.
The
following table sets forth information as to our revenue for the
years ended October 31, 2019 and 2018, by geographic regions
(dollars in thousands).
|
|
Year ended
October 31
|
|||
|
Revenues by
Region
|
2019
|
2018
|
||
|
Puerto
Rico
|
$
16,798
|
86.1
%
|
$
14,439
|
81.1
%
|
|
United
States
|
2,188
|
11.2
%
|
2,138
|
12.0
%
|
|
Europe
|
315
|
1.6
%
|
1,153
|
6.5
%
|
|
Other
|
206
|
1.1
%
|
67
|
0.4
%
|
|
|
$
19,507
|
100.0
%
|
$
17,797
|
100.0
%
|
12
For
the year ended October 31, 2019, the Company’s revenues from
continuing operations were $19.5 million, an increase of $1.7
million when compared to the same period last year. The revenue
increase is mainly attributable to increases in projects in the
Puerto Rico and Brazil consulting markets of $2.4 and $0.1 million,
respectively, partially offset by a decline in the European
consulting market of $0.8 million. When compared to the same period
last year, gross profit decreased 0.3 percentage points. The small
variance in gross margin is mainly attributable to the end of last
fiscal year’s more favorable consulting projects in the
Puerto Rico consulting market. Selling, general and administrative
expenses were approximately $4.5 million, a net decrease in
expenses of approximately $119,000 as compared to the same period
last year.
The decrease is
mainly attributable to end of current fiscal year savings on
promotions and operational support expenses. During April 2019, we
collected and recorded in other income approximately $0.2 million
for the settlement of the Company’s insurance claim for
business interruption losses and additional expenses incurred
resulting from the Hurricanes. These factors resulted in a net
income from continuing operations of approximately $2.1 million for
the year ended October 31, 2019, and including last year’s
non-recurring 2018 US Tax Reform $2.7 million Transition Tax
charge, this represented a net earnings improvement of $3.3
million. (See “Results of Operations”
below.)
In
September 2018, we sold our Laboratory Assets. After considering
last fiscal year’s $2.5 million net income from discontinued
operations and related gain on segment disposal and last year's
non-recurring 2018 US Tax Reform Transition Tax, our net income for
the year ended October 31, 2019 had an improvement in earnings of
approximately $0.8 million over fiscal last year’s
earnings.
The
Puerto Rico government financial crisis, the Tax Reform, other tax
reforms on the markets where we do business, and Puerto Rico Act
154-2010, all pose current and future challenges which may
adversely affect our future performance. We believe that our future
profitability and liquidity will be highly dependent on the effect
the local economy and global economy, changes in tax laws and
healthcare reform, and worldwide life science manufacturing
industry consolidations will have on our operations, and our
ability to seek service opportunities and adapt to industry
trends.
Results of Operations
On
September 17, 2018, the Company sold substantially all of its
Laboratory Assets. Accordingly, the operations of the Lab are
treated as a discontinued operation in the following table that
sets forth our statements of operations for the year ended October
31, 2019 and 2018 (dollars in thousands, and as a percentage of
revenues for continuing operations only):
|
|
Year ended
October 31,
|
|||
|
|
2019
|
2018
|
||
|
Revenues
|
$
19,507
|
100.0
%
|
$
17,797
|
100.0
%
|
|
Cost of
services
|
13,330
|
68.3
%
|
12,110
|
68.0
%
|
|
Gross
profit
|
6,177
|
31.7
%
|
5,687
|
32.0
%
|
|
Selling, general
and administrative expenses
|
4,480
|
23.0
%
|
4,599
|
25.8
%
|
|
Other income,
net
|
526
|
2.7
%
|
436
|
2.4
%
|
|
Income from
continuing operations before income taxes
|
2,223
|
11.4
%
|
1,524
|
8.6
%
|
|
Income tax and US
Tax Reform transition tax expense
|
136
|
0.7
%
|
2,785
|
15.6
%
|
|
Net income (loss)
from continuing operations
|
2,087
|
10.7
%
|
(1,261
)
|
-7.1
%
|
|
|
|
|
|
|
|
Discontinued
operations, net of tax
|
|
|
|
|
|
Net
loss from operations through disposal
|
-
|
|
(171
)
|
|
|
Gain
on disposal
|
-
|
|
2,712
|
|
|
Net income from
discontinued operations
|
-
|
|
2,541
|
|
|
|
|
|
|
|
|
Net
income
|
2,087
|
|
1,280
|
|
Revenues
. Revenues from continuing operations for the year
ended October 31, 2019 were $19.5 million, an increase of
approximately $1.7 million, or 9.6%, when compared to last year.
The
increase is mainly
attributable to increases in projects in the Puerto Rico and Brazil
consulting markets of $2.4 and $0.1 million, respectively,
partially offset by a decline in the European consulting market of
$0.8 million.
Cost of Services; gross profit
. The overall gross profit
from continuing operations for the year ended in October 31, 2019
reflected a gross profit decrease of 0.3 percentage points, when
compared to last year. The small variance in gross profit is mainly
attributable to the end of last fiscal year’s more favorable
consulting projects in the Puerto Rico consulting
market.
13
Selling, General and Administrative Expenses
. Selling,
general and administrative expenses from continuing operations for
the year ended in October 31, 2019 were approximately $4.5 million,
a net decrease in expenses of approximately $0.1 million as
compared to last year.
The decrease is
mainly attributable to end of current fiscal year savings on
promotions and operational support expenses.
Other Income, net
. Other income
for the year ended on October 31, 2019 was approximately $0.5
million, an increase of $0.1 million when compared to last
year.
As a result of the Hurricanes, the Company recorded other income
(i) insurance proceeds of $199,000 and $148,000 on fiscal year 2019
and fiscal year 2018, respectively, and (ii) a Salaries Subsidy of
$220,000 in fiscal year 2018. For additional information see Note L
to the Company’s consolidated financial statements included
herewith. By the end of fiscal year 2018 the Company sold its
Laboratory Assets and received from the Purchaser a Promissory
Note, which as of October 31, 2019 has generated approximately
$120,000 on interest income. For further information see Note C to
the Company’s consolidated financial statements included
herewith.
Income Tax and US Tax Reform Transition Tax
Expense
.
The income tax expense
is mainly attributable to (i) the
effect to the effective tax rate attained
considering the effect of the Puerto Rico Act 73 Tax Grant and (ii)
the US Transition Tax which impacted our fiscal year ended October
31, 2018. For additional information on the US Transition Tax, see
Note E of the Company’s consolidated financial statements
included herewith.
Net Income (Loss) from Continuing Operations.
Net income from continuing operations for the year
ended October 31, 2019 was approximately $2.1 million, an
improvement of $3.3 million when compared to the same period last
year.
After considering last year’s non-recurring 2018 US Tax
Reform $2.7 million Transition Tax charge, the increase in net
income from continuing operations for the year ended October 31,
2019 when compared to the same period last year is mainly
attributable to the improvement in revenue and related gross
profit,
savings on promotions and operational support
expenses,
plus net other
income.
For the year ended October 31, 2019, net income from continuing
operations per common share for both basic and diluted were $0.090,
an improvement of $0.145 per share, when compared to the same
period last year.
Net Income from Discontinued Operations.
The Company completed the sale of its Laboratory
Assets on September 17, 2018. The net income from this discontinued
operation for the year ended October 31, 2018 was approximately
$2.5 million. Discontinued operations net earnings per share for
the year ended October 31, 2018, for both basic and diluted was
$0.110.
Liquidity and Capital Resources
Liquidity is a
measure of our ability to meet potential cash requirements,
including planned capital expenditures. As of October 31, 2019, the
Company had approximately $22.3 million in working
capital.
On June
13, 2014, the Board of Directors of the Company authorized the
Company to repurchase up to two million shares of its common stock
(the "Company Stock Repurchase Program"). During the year ended
October 31, 2019,
the Company repurchased
an aggregate of 86,422 shares of its common stock, of which 23,450
shares were purchased within the repurchase
program.
Our
primary cash needs consist of the payment of compensation to our
consulting team, overhead expenses, and statutory taxes.
Additionally, we may use cash for the repurchase of our common
stock under the Company Stock Repurchase Program, capital
expenditures and business development expenses. Management
believes that based on the current level of working capital,
operations and cash flows from operations, and the collectability
of high quality customer receivables are sufficient to fund
anticipated expenses and satisfy other possible long-term
contractual commitments.
To the
extent that we pursue possible opportunities to expand our
operations, either by acquisition or by the establishment of
operations in a new market, we will incur additional overhead, and
there may be a delay between the period we commence operations and
our generation of net cash flow from operations.
While
uncertainties relating to the current local and global economic
condition, competition, the industries and geographical regions
served by us and other regulatory matters exist within the
consulting services industry, as described above, management is not
aware of any other trends or events likely to have a material
adverse effect on liquidity or its financial
statements.
14
Off-Balance Sheet Arrangements
We were
not involved in any significant off-balance sheet arrangements
during the fiscal year ended October 31, 2019.
Critical Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements,
which have been prepared in accordance with generally accepted
accounting principles (“GAAP”) in the United States. We
believe the following are the critical accounting policies that
impact the consolidated financial statements, some of which are
based on management’s best estimates available at the time of
preparation. Actual experience may differ from these
estimates.
Consolidation
-
The
accompanying consolidated financial statements include the accounts
of all of our wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated in
consolidation.
Segments
-
On
September 17, 2018, the Company sold substantially all of its
Laboratory Assets. As a result of the sale, the Company currently
operates three reportable business segments: (i) Puerto Rico
technical compliance consulting, (ii) United States technical
compliance consulting, and (iii) Europe technical compliance
consulting. Accordingly, the accompanying consolidated financial
statements are presented to show these three reportable segments as
continuing operations, while the Lab is presented as a discontinued
operation.
Use of Estimates
-
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results may differ
from these estimates.
Fair Value of Financial Instruments
-
Accounting standards have
established a fair value hierarchy that requires an entity to
maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. A financial
instrument’s categorization within the fair value hierarchy
is based upon the lowest level of input that is significant to the
fair value measurement. Accounting standards have established three
levels of inputs that may be used to measure fair
value:
|
Level 1
:
|
Quoted
prices in active markets for identical assets and
liabilities.
|
|
|
|
|
Level 2
:
|
Observable
inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities, quoted prices in markets with insufficient
volume or infrequent transactions (less active markets), or
model-derived valuations in which all significant inputs are
observable or can be derived principally from or corroborated by
observable market data for substantially the full term of the
assets or liabilities.
|
|
|
|
|
Level 3
:
|
Prices
or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(supported by little or no market activity).
|
The
carrying value of the Company's financial instruments (excluding
marketable securities and obligations under capital leases), cash
and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, are considered reasonable estimates of fair
value due to their liquidity or short-term nature. Management
believes, based on current rates, that the fair value of its
obligations under capital leases approximates the carrying
amount.
Revenue Recognition Continuing operations
- In May 2014, the
Financial Accounting Standards Board (FASB) issued a new accounting
standard that amends the guidance for the recognition of revenue
from contracts with customers to transfer goods and services. The
FASB subsequently issued additional, clarifying standards to
address issues arising from implementation of the new revenue
recognition standard. The new revenue recognition standard and
clarifying standards require an entity to recognize revenue when
control of promised goods or services is transferred to the
customer at an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or
services. We adopted this new standard as of November 1, 2018, by
applying the modified-retrospective method to those contracts that
were not completed as of that date. The results for reporting
periods beginning after November 1, 2018, are presented in
accordance with the new standard, although comparative information
has not been restated and continues to be reported under the
accounting standards and policies in effect for those periods. The
adoption of this new standard had an immaterial impact on our
reported total revenues and operating income as compared to what
reported amounts would have been under the prior
standard.
15
Revenue
is primarily derived from: (1) time and materials contracts
(representing approximately 99% of total revenues), which is
recognized by applying the proportional performance model, whereby
revenue is recognized as performance occurs, and (2) short-term
fixed-fee contracts or "not to exceed" contracts (representing
approximately 1% of total revenues), which revenue is recognized
similarly, except that certain milestones also have to be reached
before revenue is recognized. If the Company determines that a
contract will result in a loss, the Company recognizes the
estimated loss in the period in which such determination is
made.
Cash Equivalents
- For purposes of the consolidated
statements of cash flows, cash equivalents include investments in a
money market obligations trust that is registered under the U.S.
Investment Company Act of 1940 and liquid investments with original
maturities of three months or less.
Accounts Receivable
- Accounts receivable are recorded at
their estimated realizable value. Accounts are deemed past due when
payment has not been received within the stated time period. Our
policy is to review individual past due amounts periodically and
write off amounts for which all collection efforts are deemed to
have been exhausted. Due to the nature of our customers, bad debts
are mainly accounted for using the direct write-off method whereby
an expense is recognized only when a specific account is determined
to be uncollectible. The effect of using this method approximates
that of the allowance method.
Income Taxes
- We follow an asset and liability approach
method of accounting for income taxes. This method measures
deferred income taxes by applying enacted statutory rates in effect
at the balance sheet date to the differences between the tax basis
of assets and liabilities and their reported amounts on the
financial statements. The resulting deferred tax assets or
liabilities are adjusted to reflect changes in tax laws as they
occur. A valuation allowance is provided when it is more likely
than not that a deferred tax asset will not be
realized.
The
Company follows guidance from the Financial Accounting Standards
Board (“FASB”) related to
Accounting for Uncertainty in Income
Taxes,
which includes a two-step approach to recognizing,
de-recognizing and measuring uncertain tax positions. As of October
31, 2019, the Company had no significant uncertain tax positions
that would be reduced as a result of a lapse of the applicable
statute of limitations.
Property and equipment
- Owned
property and equipment, and leasehold improvements are stated at
cost. Vehicles under capital leases are stated at the lower of fair
market value or net present value of the minimum lease payments at
the inception of the leases.
Depreciation and amortization of owned assets are
provided for, when placed in service, in amounts sufficient to
relate the cost of depreciable assets to operations over their
estimated service lives, using straight-line basis. Assets under
capital leases and leasehold improvements are amortized, over the
shorter of the estimated useful lives of the assets or the lease
term, including renewals that have been determined to be reasonably
assured. Major renewals and betterments that extend the life of the
assets are capitalized, while expenditures for repairs and
maintenance are expensed when incurred.
We
evaluate for impairment our long-lived assets to be held and used,
and long-lived assets to be disposed of, whenever events or changes
in circumstances indicate that the carrying amount of an asset may
not be recoverable.
Based on management estimates, no
impairment of the operating properties was present.
Stock-based Compensation
- Stock-based compensation expense
is recognized in the consolidated financial statements based on the
fair value of the awards granted. Stock-based compensation cost is
measured at the grant date based on the fair value of the award and
is recognized as expense over the requisite service period, which
generally represents the vesting period, and includes an estimate
of awards that will be forfeited. We calculate the fair value of
stock options using the Black-Scholes option-pricing model at grant
date, while for restricted stock units the fair market value of the
units is determined by Company’s share market value at grant
date. Excess tax benefits related to stock-based compensation are
reflected as cash flows from financing activities rather than cash
flows from operating activities. We have not recognized such cash
flow from financing activities since there has been no tax benefit
related to the stock-based compensation.
Earnings (Loss) Per Share of Common Stock
- Basic earnings
(loss) per share of common stock is calculated by dividing net
income (loss) by the weighted average number of shares of common
stock outstanding. Diluted earnings (loss) per share includes the
dilution of common stock equivalents. The diluted weighted average
shares of common stock outstanding were calculated using the
treasury stock method for the respective periods.
Foreign Operations
-
The functional currency of our foreign subsidiaries are their
respective local currencies. The assets and liabilities of our
foreign subsidiary are translated into U.S. dollars at exchange
rates in effect at the balance sheet date. Income and expense items
are translated at the average exchange rates prevailing during the
period. The cumulative translation effect for subsidiaries using a
functional currency other than the U.S. dollar is included as a
cumulative translation adjustment in stockholders’ equity and
as a component of comprehensive income.
16
Our
intercompany accounts are typically denominated in the functional
currency of the foreign subsidiary. Gains and losses resulting from
the remeasurement of intercompany receivables that we consider to
be of a long-term investment nature are recorded as a cumulative
translation adjustment in stockholders’ equity and as a
component of comprehensive income, while gains and losses resulting
from the remeasurement of intercompany receivables from those
international subsidiaries for which we anticipate settlement in
the foreseeable future are recorded in the consolidated statements
of operations.
New Accounting Standards
In
February 2016, the FASB issued a new accounting standard that
amends the guidance for the accounting and disclosure of leases.
This new standard requires that lessees recognize the assets and
liabilities that arise from leases on the balance sheet and
disclose qualitative and quantitative information about their
leasing arrangements. The new standard is effective for interim and
annual periods beginning on January 1, 2019 and may be adopted
earlier. This standard is effective for the Company’s first
quarter of fiscal year 2020. The Company does not expect that this
standard will have a material impact to its Consolidated Statements
of Operations but expects that this standard will have a material
impact on the assets and liabilities on its Consolidated Balance
Sheets upon adoption.
Forward-Looking Statements
Our
business, financial condition, results of operations, cash flows
and prospects, and the prevailing market price and performance of
our common stock, may be adversely affected by a number of factors,
including the matters discussed below. Certain statements and
information set forth in this Annual Report on Form 10-K, as well
as other written or oral statements made from time to time by us or
by our authorized executive officers on our behalf, constitute
“forward-looking statements” within the meaning of the
Federal Private Securities Litigation Reform Act of 1995. These
statements include all statements other than those made solely with
respect to historical fact and identified by words such as
“believes”, “anticipates”,
“expects”, “intends” and similar
expressions, but such words are not the exclusive means of
identifying such statements. We intend for our
forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and we set forth this
statement and these risk factors in order to comply with such safe
harbor provisions. You should note that our forward-looking
statements speak only as of the date of this Annual Report on Form
10-K or when made and we undertake no duty or obligation to update
or revise our forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by
law. Although we believe that the expectations, plans, intentions
and projections reflected in our forward-looking statements are
reasonable, such statements are subject to known and unknown risks,
uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by
the forward-looking statements. The risks, uncertainties and other
factors that our stockholders and prospective investors should
consider are discussed in Item 1A Risk Factors above.
I
TEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
Not
applicable.
I
TEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
Our
Consolidated Financial Statements, together with the report of our
independent registered public accounting firm are included herein
immediately following the signature page of this report. See Index
to Consolidated Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
I
TEM 9A. CONTROLS AND
PROCEDURES.
Management’s Annual Report on Internal Control Over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
“internal control over financial reporting,” as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, for
the Company. This rule defines internal control over financial
reporting as a process designed by, or under the supervision of, a
company’s principal executive officer and principal financial
officer, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial
reporting includes those policies and procedures that:
17
●
pertain to the
maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of
the Company;
●
provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures
of the Company are being made only in accordance with
authorizations of management and directors of the Company;
and
●
provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
Because
of its inherent limitations, our internal control systems and
procedures may not prevent or detect misstatements. An internal
control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of
fraud, if any, have been detected. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risks that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies and
procedures may deteriorate.
We,
under the supervision of and with the participation of our
management, including the principal executive officer and principal
financial officer, assessed the effectiveness of the
Company’s internal control over financial reporting as of
October 31, 2019, based on criteria for effective internal control
over financial reporting described in “Internal Control
— Integrated Framework” issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this
assessment, our principal executive officer and principal financial
officer concluded that the Company maintained effective internal
control over financial reporting as of October 31,
2019.
Disclosure Controls and Procedures.
We
carried out an evaluation, under the supervision and with the
participation of our management, including our principal executive
officer and principal financial officer, of the effectiveness of
our disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered
by this Annual Report. Based upon that evaluation, our principal
executive officer and principal financial officer concluded that
our disclosure controls and procedures were effective as of the end
of the period covered by this Annual Report.
Changes in Internal Control Over Financial Reporting
Based
on an evaluation, under the supervision and with the participation
of our management, including our principal executive officer and
principal financial officer, there has been no change in our
internal control over financial reporting during our last fiscal
quarter identified in connection with that evaluation that has
materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
I
TEM 9B. OTHER
INFORMATION.
None.
18
PART III
I
TEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The
information required by this Item is incorporated by reference to
our Proxy Statement for our Annual Meeting of Stockholders for the
fiscal year ended October 31, 2019, which will be filed with
Securities and Exchange Commission no later than 120 days after the
end of the fiscal year covered by this Form 10-K, or,
alternatively, by amendment to this Form 10-K under cover of Form
10-K/A no later than the end of such 120 day period.
Information with
respect to our executive officers is included in Part
I.
I
TEM 11. EXECUTIVE
COMPENSATION.
The
information required by this Item is incorporated by reference to
our Proxy Statement for our Annual Meeting of Stockholders for the
fiscal year ended October 31, 2019, which will be filed with
Securities and Exchange Commission no later than 120 days after the
end of the fiscal year covered by this Form 10-K, or,
alternatively, by amendment to this Form 10-K under cover of Form
10-K/A no later than the end of such 120 day period.
I
TEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The
information required by this Item is incorporated by reference to
our Proxy Statement for our Annual Meeting of Stockholders for the
fiscal year ended October 31, 2019, which will be filed with
Securities and Exchange Commission no later than 120 days after the
end of the fiscal year covered by this Form 10-K, or,
alternatively, by amendment to this Form 10-K under cover of Form
10-K/A no later than the end of such 120 day period.
I
TEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The
information required by this Item is incorporated by reference to
our Proxy Statement for our Annual Meeting of Stockholders for the
fiscal year ended October 31, 2019, which will be filed with
Securities and Exchange Commission no later than 120 days after the
end of the fiscal year covered by this Form 10-K, or,
alternatively, by amendment to this Form 10-K under cover of Form
10-K/A no later than the end of such 120 day period.
I
TEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES.
The
information required by this Item is incorporated by reference to
our Proxy Statement for our Annual Meeting of Stockholders for the
fiscal year ended October 31, 2019, which will be filed with
Securities and Exchange Commission no later than 120 days after the
end of the fiscal year covered by this Form 10-K, or,
alternatively, by amendment to this Form 10-K under cover of Form
10-K/A no later than the end of such 120 day period.
19
PART IV
I
TEM 15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
The
following documents are filed as a part of this Annual Report on
Form 10-K:
1. All
Financial Statements: Consolidated Financial Statements
are included herein immediately following the signature page of
this report. See Index to Consolidated Financial Statements on page
F-1.
2. Financial
Statement Schedules: None.
3. Exhibits: The
following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Commission, as
indicated in the description of each.
|
|
|
Incorporated
By Reference
|
|||
|
Exhibit
Number
|
Exhibit
Description
|
Form
|
File
Number
|
Exhibit
|
Filing
Date
|
|
Asset
Purchase Agreement, dated August 13, 2018 by and between Scienza
Labs, Inc. and Romark Global Pharma, LLC (1)
|
8-K
|
000-50956
|
2.1
|
8/17/18
|
|
|
Restated
Certificate of Incorporation
|
8-K
|
000-50956
|
99.1
|
5/1/2006
|
|
|
Certificate
of Amendment to the Certificate of Incorporation
|
8-K
|
000-50956
|
3.1
|
4/12/13
|
|
|
By-laws
|
10-SB12G
|
000-50956
|
3.2
|
9/24/2004
|
|
|
Amendment
No. 1 to the By-laws
|
8-K
|
000-50956
|
3.1
|
6/6/2008
|
|
|
Amendment
No. 2 to the By-laws
|
8-K
|
000-50956
|
3.2
|
4/12/13
|
|
|
4.1
*
|
Description
of the Registrant’s securities
|
|
|
|
|
|
Consulting
Agreement, effective January 1, 2014, between Pharma-Bio Serv Inc.,
Strategic Consultants International, LLC and Elizabeth
Plaza.
|
8-K
|
000-50956
|
10.1
|
12/31/13
|
|
|
Consulting
Agreement Amendment, effective January 1, 2015, between Pharma-Bio
Serv Inc., Strategic Consultants International, LLC and Elizabeth
Plaza.
|
8-K
|
000-50956
|
10.1
|
1/5/2015
|
|
|
Consulting
Agreement Amendment, effective January 1, 2016, between Pharma-Bio
Serv Inc., Strategic Consultants International, LLC and Elizabeth
Plaza.
|
8-K
|
000-50956
|
10.1
|
1/5/2016
|
|
|
Consulting
Agreement Amendment, effective January 1, 2017, between Pharma-Bio
Serv Inc., Strategic Consultants International, LLC and Elizabeth
Plaza.
|
8-K
|
000-50956
|
10.1
|
1/20/2017
|
|
|
|
Consulting
Agreement Amendment, dated January 2, 2018, by and among Pharma-Bio
Serv, Inc., Strategic Consultants International, LLC and Elizabeth
Plaza, effective January 1, 2018.
|
8-K
|
000-50956
|
10.1
|
1/8/2018
|
|
|
Consulting
Agreement Amendment, dated December 31, 2018, by and among
Pharma-Bio Serv, Inc., Strategic Consultants International, LLC and
Elizabeth Plaza, effective January 1, 2019.
|
8-K
|
000-50956
|
10.1
|
1/4/2019
|
|
|
Consulting
Agreement Amendment, dated December 27, 2019, by and among
Pharma-Bio Serv, Inc., Strategic Consultants International, LLC and
Elizabeth Plaza, effective January 1, 2020.
|
8-K
|
000-50956
|
10.1
|
12/27/2019
|
|
Employment
Agreement, effective January 1, 2015, between Pharma-Bio Serv, Inc.
and Victor Sanchez
|
8-K
|
000-50956
|
10.2
|
1/5/2015
|
|
|
Employment
Agreement dated November 5, 2007 between the Pharma-Bio Serv, Inc.
and Pedro Lasanta
|
10-K
|
000-50956
|
10.8
|
1/29/2009
|
20
|
|
|
Incorporated
By Reference
|
|||
|
Exhibit Number
|
Exhibit Description
|
Form
|
File Number
|
Exhibit
|
Filing Date
|
|
Amendment
to Employment Agreement dated December 17, 2008 between the
Registrant and Pedro Lasanta
|
8-K
|
000-50956
|
99.1
|
12/23/2008
|
|
|
Amendment
to Employment Agreement, dated March 11, 2009, by and between the
Company and Pedro Lasanta
|
8-K
|
000-50956
|
10.3
|
3/17/2009
|
|
|
Employment
Agreement Amendment, effective as of January 1, 2010, by and
between the Company and Pedro Lasanta.
|
8-K
|
000-50956
|
10.2
|
1/07/2010
|
|
|
Employment
Agreement Amendment, dated January 31, 2012, by and between the
Company and Pedro J. Lasanta
|
8-K
|
000-50956
|
10.1
|
2/2/2012
|
|
|
Employment
Agreement Amendment, dated December 31, 2012, by and between the
Company and Pedro J. Lasanta
|
8-K
|
000-50956
|
10.1
|
1/7/2013
|
|
|
Employment
Agreement Amendment between Pharma-Bio Serv, Inc. and Pedro
Lasanta, effective January 1, 2014.
|
8-K
|
000-50956
|
10.2
|
2/21/2014
|
|
|
Employment
Agreement Amendment, dated October 7, 2019, by and between the
Company and Pedro Lasanta
|
8-K
|
000-50956
|
10.1
|
10/11/2019
|
|
|
2005
Long-Term Incentive Plan, as amended
|
DEF
14A
|
000-50956
|
Appendix
C
|
3/26/2007
|
|
|
Amendment
to 2005 Long-Term Incentive Plan
|
10-Q
|
000-50956
|
10.4
|
3/17/2014
|
|
|
Pharma-Bio
Serv, Inc. 2014 Long-Term Incentive Plan
|
8-K
|
000-50956
|
10.1
|
5/2/2014
|
|
|
Code of
business conduct and ethics for senior management
|
10-KSB
|
000-50956
|
14.1
|
2/2/2007
|
|
|
21.1
*
|
List of
Subsidiaries
|
|
|
|
|
21
|
|
|
Incorporated
By Reference
|
|||
|
Exhibit Number
|
Exhibit Description
|
Form
|
File Number
|
Exhibit
|
Filing Date
|
|
23.1
*
|
Consent
of Crowe PR PSC (formerly known as Horwath Vélez & Co,
PSC)
|
|
|
|
|
|
31.1
*
|
Certification
of chief executive officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
31.2
*
|
Certification
of chief financial officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
32.1
**
|
Certification
of chief executive officer and chief financial officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
101.INS*
|
XBRL
Instance Document
|
|
|
|
|
|
101.SCH*
|
XBRL
Taxonomy Extension Schema
|
|
|
|
|
|
101.CAL*
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
|
|
|
|
101.DEF*
|
XBRL
Taxonomy Extension Definition Linkbase
|
|
|
|
|
|
101.LAB*
|
XBRL
Taxonomy Extension Label Linkbase
|
|
|
|
|
|
101.PRE*
|
XBRL
Taxonomy Extension Presentation Linkbase
|
|
|
|
|
|
104*
|
Cover
page Interactive Data File (formatted as inline XBRL and contained
in Exhibit 101)
|
|
|
|
|
———————
*
Filed
herewith
**
Furnished
herewith
(1)
The schedule and
similar attachments to the Asset Purchase Agreement have been
omitted from this listing pursuant to Item 601(b)(2) of Regulation
S-K. The Company will furnish copies of any such schedules and
exhibits to the US Securities Exchange Commission upon
request.
Exhibits
10.1 through 10.19 are management contracts or compensatory plans,
contracts or arrangements.
I
TEM 16. FORM 10-K
SUMMARY.
None.
22
S
IGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
|
|
|
PHARMA-BIO SERV, INC.
|
|
|
|
|
|
|
|
|
Dated:
January 29, 2020
|
By:
|
/s/
Victor Sanchez
|
|
|
|
Name:
Victor Sanchez
|
|
|
|
|
Title: Chief
Executive Officer and
President Europe
Operations
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Victor Sanchez
|
|
Chief
Executive Officer and President Europe Operations
|
|
January
29, 2020
|
|
Victor
Sanchez
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Pedro J. Lasanta
|
|
Chief
Financial Officer, Vice President Finance and Administration and
Secretary
|
|
January
29, 2020
|
|
Pedro
J. Lasanta
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Elizabeth Plaza
|
|
Chairman
|
|
January
29, 2020
|
|
Elizabeth
Plaza
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Kirk Michel
|
|
Director
|
|
January
29, 2020
|
|
Kirk
Michel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Howard Spindel
|
|
Director
|
|
January
29, 2020
|
|
Howard
Spindel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Dov
Perlysky
|
|
Director
|
|
January
29, 2020
|
|
Dov
Perlysky
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Irving Wiesen
|
|
Director
|
|
January
29, 2020
|
|
Irving
Wiesen
|
|
|
|
|
23
PHARMA-BIO SERV, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Page
|
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
|
|
|
F-4
|
|
|
|
|
|
|
|
|
|
F-5
|
|
|
|
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
|
|
F-7
|
|
|
|
|
|
|
|
|
|
F-8
|
|
F-1
R
eport of Independent Registered
Public Accounting Firm
To the
Board of Directors and Stockholders of
Pharma-Bio
Serv, Inc.
Dorado,
Puerto Rico
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Pharma-Bio
Serv, Inc. (the “Company”) as of October 31, 2019 and
2018, and the related consolidated statements of operations,
comprehensive income (loss), changes in stockholders’ equity,
and cash flows for the years then ended, and the related notes
(collectively referred to as the "consolidated financial
statements"). In our opinion, the consolidated financial statements
present fairly, in all material respects, the consolidated
financial position of the Company at October 31, 2019 and 2018, and
the consolidated results of its operations and its cash flows for
the years then ended, in conformity with U.S. generally accepted
accounting principles.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion
on the Company's consolidated financial statements based on our
audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and
are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of
the Company's internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
We have
served as the Company's auditor since 2006.
/s/
CROWE PR PSC
Guaynabo,
Puerto Rico
January
29, 2020
Puerto
Rico Society of Certified Public Accountants
Stamp
number E394372 was
affixed
to the original of this report
F-2
PHARMA-BIO SERV, INC.
Consolidated Balance
S
heets
October 31, 2019 and 2018
|
|
October
31,
|
|
|
|
2019
|
2018
|
|
ASSETS
|
||
|
Current
assets
|
|
|
|
Cash and cash
equivalents
|
$
15,490,174
|
$
16,029,920
|
|
Marketable
securities
|
-
|
44,475
|
|
Accounts
receivable
|
8,781,026
|
5,193,385
|
|
Current portion -
promissory note receivable due from sale of assets from
discontinued operations
|
1,250,000
|
1,750,000
|
|
Prepaids and other
assets
|
453,780
|
394,017
|
|
Total current
assets
|
25,974,980
|
23,411,797
|
|
|
|
|
|
Promissory note
receivable due from sale of assets from discontinued
operations
|
-
|
1,250,000
|
|
Property and
equipment
|
290,658
|
298,020
|
|
Other
assets
|
367,437
|
418,495
|
|
Total
assets
|
$
26,633,075
|
$
25,378,312
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||
|
|
||
|
Current
liabilities
|
|
|
|
Current
portion-obligations under capital leases
|
$
11,030
|
$
13,768
|
|
Accounts payable
and accrued expenses
|
1,590,172
|
2,140,001
|
|
Dividend payable to
stockholders
|
1,725,295
|
-
|
|
Current
portion of US Tax Reform Transition Tax and income taxes
payable
|
344,043
|
411,903
|
|
Total current
liabilities
|
3,670,540
|
2,565,672
|
|
|
|
|
|
US Tax Reform Transition Tax
payable
|
2,270,000
|
2,485,000
|
|
Obligations
under capital leases
|
67,079
|
46,027
|
|
Other
liabilities
|
17,950
|
17,950
|
|
Total
liabilities
|
6,025,569
|
5,114,649
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
Preferred stock,
$0.0001 par value; authorized 10,000,000 shares; none issued or
outstanding
|
-
|
-
|
|
Common stock,
$0.0001 par value; authorized 50,000,000 shares; 23,397,707 and
23,373,817 shares issued, and 22,995,881 and 23,058,413 shares
outstanding at October 31, 2019 and 2018, respectively
|
2,340
|
2,337
|
|
Additional paid-in
capital
|
1,381,076
|
1,346,956
|
|
Retained
earnings
|
19,473,069
|
19,111.111
|
|
Accumulated other
comprehensive income
|
143,600
|
107,947
|
|
|
21,000,085
|
20,568,351
|
|
Treasury stock, at
cost; 401,826 and 315,404 common shares held at October 31, 2019
and 2018, respectively
|
(392,579
)
|
(304,688
)
|
|
Total stockholders'
equity
|
20,607,506
|
20,263,663
|
|
Total liabilities
and stockholders' equity
|
$
26,633,075
|
$
25,378,312
|
See
notes to consolidated financial statements.
F-3
PHARMA-BIO SERV, INC.
Consolidated Statements of
O
perations
For the Years Ended October 31, 2019 and 2018
|
|
Years ended
October 31,
|
|
|
|
2019
|
2018
|
|
REVENUES
|
$
19,506,911
|
$
17,797,425
|
|
|
|
|
|
COST OF
SERVICES
|
13,330,295
|
12,110,618
|
|
|
|
|
|
GROSS
PROFIT
|
6,176,616
|
5,686,807
|
|
|
|
|
|
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES
|
4,479,933
|
4,598,545
|
|
|
|
|
|
INCOME FROM
CONTINUING OPERATIONS
|
1,696,683
|
1,088,262
|
|
|
|
|
|
OTHER INCOME, NET
OF FOREIGN EXCHANGE SETTLEMENT
|
526,567
|
435,527
|
|
|
|
|
|
INCOME FROM
CONTINUING OPERATIONS BEFORE INCOME TAXES
|
2,223,250
|
1,523,789
|
|
|
|
|
|
I
NCOME TAX AND US TAX REFORM TRANSITION TAX
EXPENSE
|
135,994
|
2,785,525
|
|
|
|
|
|
NET INCOME (LOSS)
FROM CONTINUING OPERATIONS
|
2,087,256
|
(1,261,736
)
|
|
|
|
|
|
DISCONTINUED
OPERATIONS, NET OF TAX:
|
|
|
|
NET LOSS FROM
OPERATIONS THROUGH DISPOSAL
|
-
|
(170,774
)
|
|
GAIN ON
DISPOSAL
|
-
|
2,712,244
|
|
|
|
|
|
NET INCOME FROM
DISCONTINUED OPERATIONS
|
-
|
2,541,470
|
|
|
|
|
|
NET
INCOME
|
$
2,087,256
|
$
1,279,734
|
|
|
|
|
|
|
|
|
|
BASIC AND DILUTED
LOSSES PER COMMON SHARE (Continuing operations)
|
$
0.090
|
$
(0.055
)
|
|
BASIC AND DILIUTED
EARNINGS (LOSSES) PER COMMON SHARE (Discontinued
operations)
|
$
-
|
$
0.110
|
|
|
|
|
|
WEIGHTED AVERAGE
NUMBER OF COMMON
|
|
|
|
SHARES OUTSTANDING
– BASIC
|
23,054,653
|
23,080,995
|
|
|
|
|
|
WEIGHTED AVERAGE
NUMBER OF COMMON
|
|
|
|
SHARES OUTSTANDING
– DILUTED
|
23,113,857
|
23,096,252
|
See
notes to consolidated financial statements.
F-4
PHARMA-BIO SERV, INC.
Consolidated Statements of Comprehensive
I
ncome
For the Years Ended October 31, 2019 and 2018
|
|
Years ended
October 31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
NET
INCOME
|
$
2,087,256
|
$
1,279,734
|
|
|
|
|
|
OTHER COMPREHENSIVE
INCOME (LOSS), NET OF RECLASSIFICATION ADJUSTMENTS AND
TAXES:
|
|
|
|
|
|
|
|
Foreign currency
translation gain (loss):
|
|
|
|
Net unrealized gain
(loss)
|
(25,508
)
|
73,538
|
|
Intercompany
balances foreign exchange settlement, included in net
income
|
65,636
|
(121,137
)
|
|
Net unrealized gain
(loss) on available-for sale securities
|
(4,475
)
|
17,875
|
|
|
|
|
|
TOTAL OTHER
COMPREHENSIVE INCOME (LOSS)
|
35,653
|
(29,724
)
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
$
2,122,909
|
$
1,250,010
|
See
notes to consolidated financial statements.
F-5
PHARMA-BIO SERV, INC.
Consolidated Statements of Changes in Stockholders'
E
quity
For the Years Ended October 31, 2019 and 2018
|
|
|
|
|
|
Accumulated
|
|
|
||
|
|
|
|
Additional
|
|
Other
|
|
|
||
|
|
Common
Stock
|
Preferred Stock
|
Paid-in
|
Retained
|
Comprehensive
|
Treasury
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
(Loss)
|
Stock
|
Total
|
|
BALANCE AT OCTOBER 31,
2017
|
23,333,083
|
$
2,333
|
-
|
$
-
|
$
1,295,314
|
$
19,560,131
|
$
137,671
|
$
(248,163
)
|
$
20,747,286
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCK-BASED
COMPENSATION
|
-
|
-
|
-
|
-
|
51,642
|
-
|
-
|
-
|
51,642
|
|
|
|
|
|
|
|
|
|
|
|
|
ISSUANCE OF COMMON STOCK PURSUANT
TO THE CASHLESS EXERCISE OF STOCK OPTIONS
|
40,734
|
4
|
-
|
-
|
-
|
(4
)
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
PURCHASE OF TREASURY STOCK (71,952
SHARES)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(56,525
)
|
(56,525
)
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
-
|
-
|
-
|
-
|
-
|
1,279,734
|
-
|
-
|
1,279,734
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME, NET OF
TAX
|
-
|
-
|
-
|
-
|
-
|
-
|
(29,724
)
|
-
|
(29,724
)
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH DIVIDEND ($0.075 PER COMMON
SHARE AT RECORD DATE)
|
-
|
-
|
-
|
-
|
-
|
(1,728,750
)
|
-
|
-
|
(1,728,750
)
|
|
BALANCE AT OCTOBER 31,
2018
|
23,373,817
|
2,337
|
-
|
-
|
1,346,956
|
19,111,111
|
107,947
|
(304,688
)
|
20,263,663
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCK-BASED
COMPENSATION
|
-
|
-
|
-
|
-
|
34,120
|
-
|
-
|
-
|
34,120
|
|
|
|
|
|
|
|
|
|
|
|
|
ISSUANCE OF COMMON STOCK PURSUANT
TO THE CASHLESS EXERCISE OF STOCK OPTIONS
|
23,890
|
3
|
-
|
-
|
-
|
(3
)
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
PURCHASE OF TREASURY STOCK (86,422
SHARES)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(87,891
)
|
(87,891
)
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
-
|
-
|
-
|
-
|
-
|
2,087,256
|
-
|
-
|
2,087,256
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE
LOSS,
NET OF TAX
|
-
|
-
|
-
|
-
|
-
|
-
|
35,653
|
-
|
35,653
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH DIVIDEND ($0.075 PER COMMON
SHARE AT RECORD DATE)
|
-
|
-
|
-
|
-
|
-
|
(1,725,295
)
|
-
|
-
|
(1,725,295
)
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT OCTOBER 31,
2019
|
23,397,707
|
$
2,340
|
-
|
$
-
|
$
1,381,076
|
$
19,473,069
|
$
143,600
|
$
(392,579
)
|
$
20,607,506
|
See
notes to consolidated financial statements.
F-6
PHARMA-BIO SERV, INC.
For the Years Ended October 31, 2019 and 2018
|
|
Years ended
October 31,
|
|
|
|
2019
|
2018
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
|
Net
income
|
$
2,087,256
|
$
1,279,734
|
|
Add: net loss from
discontinued operations
|
-
|
(2,541,470
)
|
|
Net income (loss)
from continuing operations
|
2,087,256
|
(1,261,736
)
|
|
Adjustments to
reconcile net income (loss) from continuing operations to net cash
provided by (used in) continuing operating activities:
|
|
|
|
Gain on disposition
of property and equipment
|
(47,392
)
|
(6,000
)
|
|
Stock-based
compensation
|
34,120
|
51,642
|
|
Depreciation and
amortization
|
99,095
|
74,601
|
|
Other-than-temporary impairment on available-for-sale
securities
|
(4,475
)
|
-
|
|
(Increase) decrease
in accounts receivable
|
(3,593,069
)
|
1,158,809
|
|
Decrease in other
assets
|
47,676
|
64,815
|
|
Increase (decrease)
in liabilities
|
(830,950
)
|
3,636,553
|
|
NET CASH PROVIDED
BY (USED IN) OPERATING ACTIVITIES OF CONTINUING
OPERATIONS
|
(2,207,739
)
|
3,718,684
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES OF CONTINUING OPERATIONS:
|
|
|
|
Disposal of marketable securities
|
44,475
|
-
|
|
Acquisition of
property and equipment
|
(57,379
)
|
(122,009
)
|
|
Proceeds from
disposition of property and equipment
|
99,038
|
6,000
|
|
Collection from
promissory note receivable
|
1,750,000
|
-
|
|
NET CASH PROVIDED
BY (USED IN) INVESTING ACTIVITIES OF CONTINUING
OPERATIONS
|
1,836,134
|
(116,009
)
|
|
CASH FLOW FROM
FINANCING ACTIVITIES OF CONTINUING OPERATIONS:
|
|
|
|
Repurchase of
common stock
|
(87,891
)
|
(56,525
)
|
|
Payments on
obligations under capital lease
|
(67,686
)
|
(13,949
)
|
|
Cash dividends paid
to shareholders
|
-
|
(1,728,750
)
|
|
NET CASH USED IN
FINANCING ACTIVITIES OF CONTINUING OPERATIONS
|
(155,577
)
|
(1,799,224
)
|
|
EFFECT OF EXCHANGE
RATE CHANGES ON CASH
|
(12,564
)
|
(93,805
)
|
|
NET INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS FROM CONTINUING
OPERATIONS
|
(539,746
)
|
1,709,646
|
|
DISCONTINUED
OPERATIONS:
|
|
|
|
Net cash provided
by operating activities
|
-
|
728,726
|
|
Net cash provided
by investing activities
|
-
|
2,000,000
|
|
Net cash used in
financing activities
|
-
|
-
|
|
CASH PROVIDED BY
DISCONTINUED OPERATIONS
|
-
|
2,728,726
|
|
NET INCREASE
(DECREASE) IN CASH AND CASH EQUIVALENTS
|
(539,746
)
|
4,438,372
|
|
CASH AND CASH
EQUIVALENTS - BEGINNING OF YEAR
|
16,029,920
|
11,591,548
|
|
CASH AND CASH
EQUIVALENTS – END OF YEAR
|
$
15,490,174
|
$
16,029,920
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF
|
|
|
|
CASH FLOW
INFORMATION:
|
|
|
|
Cash paid during
the period for:
|
|
|
|
Income
taxes
|
$
326,898
|
$
-
|
|
Interest
|
$
4,062
|
$
1,498
|
|
SUPPLEMENTARY
SCHEDULES OF NON-CASH
INVESTING AND
FINANCING ACTIVITIES:
|
|
|
|
Promissory note
receivable received from sale of assets from discontinued
operations
|
$
-
|
$
3,000,000
|
|
Property and
equipment with accumulated depreciation of $86,773 and $32,795
disposed during the years ended October 31, 2019 and 2018,
respectively
|
$
138,419
|
$
32,795
|
|
Obligations under
capital lease incurred for the acquisition of a
vehicle
|
$
86,000
|
$
-
|
|
Income tax withheld
by clients to be used as a credit in the
Company’s
income tax
returns
|
$
36,681
|
$
16,691
|
|
Conversion of
cashless exercise of options to shares of common stock
|
$
3
|
$
4
|
See
notes to consolidated financial statements.
F-7
PHARMA-BIO SERV, INC.
Notes To Consolidated Financial
S
tatements
For the Years Ended October 31, 2019 and 2018
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION
Pharma-Bio
Serv, Inc. (“Pharma-Bio”) is a Delaware corporation
organized on January 14, 2004. Pharma-Bio is the parent company of
Pharma-Bio Serv PR, Inc. (“Pharma-PR”), Pharma Serv,
Inc. (“Pharma-Serv”), and Scienza Labs, Inc.
(“Scienza Labs”), each a Puerto Rico corporation,
Pharma-Bio Serv US, Inc. (“Pharma-US”), a Delaware
corporation, Pharma-Bio Serv Validation & Compliance Limited
(“Pharma-IR”), an Irish corporation currently inactive,
Pharma-Bio Serv SL (“Pharma-Spain”), a Spanish limited
liability company, and Pharma-Bio Serv Brasil Servicos de
Consultoria Ltda. (“Pharma-Brazil”), a Brazilian
limited liability company. Pharma-Bio, Pharma-PR, Pharma-Serv,
Scienza Labs, Pharma-US, Pharma-IR, Pharma-Spain and Pharma-Brazil
are collectively referred to as the “Company.” The
Company operates in Puerto Rico, the United States, Ireland, Spain
and Brazil under the name of Pharma-Bio Serv and is engaged in
providing technical compliance consulting service, and until
September 17, 2018 microbiological and chemical laboratory testing
(the “Lab”).
On
September 17, 2018 (the “Sales Closing Date”), the
Company sold substantially all of its Lab business assets (the
“Laboratory Assets”). See Note B for further
information.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The
accompanying consolidated financial statements include the accounts
of the Company and all of its wholly owned subsidiaries. All
intercompany transactions and balances have been eliminated in
consolidation.
Segments
On the
Sales Closing Date, the Company sold substantially all of its
Laboratory Assets. As a result of the sale, the Company currently
operates in three reportable business segments: (i) Puerto Rico
technical compliance consulting, (ii) United States technical
compliance consulting, and (iii) Europe technical compliance
consulting. Accordingly, the accompanying consolidated financial
statements are presented to show these three reportable segments as
continuing operations, while the Lab is presented as a discontinued
operation. See Note B for further information.
Use of Estimates
The
preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results
may differ from these estimates.
Fair Value of Financial Instruments
Accounting
standards have established a fair value hierarchy that requires an
entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. A financial
instrument’s categorization within the fair value hierarchy
is based upon the lowest level of input that is significant to the
fair value measurement. Accounting standards have established three
levels of inputs that may be used to measure fair
value:
|
Level 1
:
|
Quoted
prices in active markets for identical assets and
liabilities.
|
|
|
|
|
Level 2
:
|
Observable
inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities, quoted prices in markets with insufficient
volume or infrequent transactions (less active markets), or
model-derived valuations in which all significant inputs are
observable or can be derived principally from or corroborated by
observable market data for substantially the full term of the
assets or liabilities.
|
|
|
|
|
Level 3
:
|
Prices
or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable
(supported by little or no market activity).
|
The
carrying value of the Company's financial instruments (excluding
marketable securities and obligations under capital leases): cash
and cash equivalents, accounts receivable, accounts payable and
accrued liabilities, are considered reasonable estimates of fair
value due to their liquidity or short-term nature. Management
believes, based on current rates, that the fair value of its
obligations under capital leases approximates the carrying
amount.
F-8
Revenue Recognition
In May
2014, the Financial Accounting Standards Board (FASB) issued a new
accounting standard that amends the guidance for the recognition of
revenue from contracts with customers to transfer goods and
services. The FASB subsequently issued additional, clarifying
standards to address issues arising from implementation of the new
revenue recognition standard. The new revenue recognition standard
and clarifying standards require an entity to recognize revenue
when control of promised goods or services is transferred to the
customer at an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or
services. We adopted this new standard as of November 1, 2018, by
applying the modified-retrospective method to those contracts that
were not completed as of that date. The results for reporting
periods beginning after November 1, 2018, are presented in
accordance with the new standard, although comparative information
has not been restated and continues to be reported under the
accounting standards and policies in effect for those periods. The
adoption of this new standard had an immaterial impact on our
reported total revenues and operating income as compared to what
reported amounts would have been under the prior
standard.
Revenue
is primarily derived from: (1) time and materials contracts
(representing approximately 99% of total revenues), which is
recognized by applying the proportional performance model, whereby
revenue is recognized as performance occurs, and (2) short-term
fixed-fee contracts or "not to exceed" contracts (representing
approximately 1% of total revenues), which revenue is recognized
similarly, except that certain milestones also have to be reached
before revenue is recognized. If the Company determines that a
contract will result in a loss, the Company recognizes the
estimated loss in the period in which such determination is
made.
Cash Equivalents
For
purposes of the consolidated statements of cash flows, cash
equivalents include investments in money market obligation’s
trusts that are registered under the U.S. Investment Company Act of
1940 and liquid investments with original maturities of three
months or less.
Accounts Receivable
Accounts
receivable are recorded at their estimated realizable value.
Accounts are deemed past due when payment has not been received
within the stated time period. The Company's policy is to review
individual past due amounts periodically and write off amounts for
which all collection efforts are deemed to have been exhausted. Due
to the nature of the Company’s customers, bad debts are
mainly accounted for using the direct write-off method whereby an
expense is recognized only when a specific account is determined to
be uncollectible. The effect of using this method approximates that
of the allowance method.
Income Taxes
The
Company follows an asset and liability approach method of
accounting for income taxes. This method measures deferred income
taxes by applying enacted statutory rates in effect at the balance
sheet date to the differences between the tax basis of assets and
liabilities and their reported amounts on the financial statements.
The resulting deferred tax assets or liabilities are adjusted to
reflect changes in tax laws as they occur. A valuation allowance is
provided when it is more likely than not that a deferred tax asset
will not be realized.
The
Company follows guidance from the Financial Accounting Standards
Board (“FASB”) related to
Accounting for Uncertainty in Income
Taxes,
which includes a two-step approach to recognizing,
de-recognizing and measuring uncertain tax positions. As of October
31, 2019, the Company had no significant uncertain tax positions
that would be reduced as a result of a lapse of the applicable
statute of limitations.
Property and Equipment
Owned
property and equipment, and leasehold improvements are stated at
cost. Vehicles under capital leases are stated at the lower of fair
market value or net present value of the minimum lease payments at
the inception of the leases. Depreciation and amortization of owned
assets are provided for, when placed in service, in amount
sufficient to relate the cost of depreciable assets to operations
over their estimated service lives, using straight-line basis.
Assets under capital leases and leasehold improvements are
amortized, over the shorter of the estimated useful lives of the
assets or the lease term, including renewals that have been
determined to be reasonably assured. Major renewals and betterments
that extend the life of the assets are capitalized, while
expenditures for repairs and maintenance are expensed when
incurred.
The
Company evaluates for impairment its long-lived assets to be held
and used, and long-lived assets to be disposed of, whenever events
or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
Based on management estimates, no
impairment of the operating properties was present.
F-9
Stock-based Compensation
Stock-based
compensation expense is recognized in the consolidated financial
statements based on the fair value of the awards granted.
Stock-based compensation cost is measured at the grant date based
on the fair value of the award and is recognized as expense over
the requisite service period, which generally represents the
vesting period, and includes an estimate of awards that will be
forfeited. The Company calculates the fair value of stock options
using the Black-Scholes option-pricing model at grant date, while
for restricted stock units the fair market value of the units is
determined by Company’s share market value at grant date.
Excess tax benefits related to stock-based compensation are
reflected as cash flows from financing activities rather than cash
flows from operating activities. However, the Company has not
recognized such cash flow from financing activities since there has
been no tax benefit related to the stock-based
compensation.
Earnings (Loss) Per Share of Common Stock
Basic
earnings (loss) per share of common stock is calculated by dividing
net income (loss) by the weighted average number of shares of
common stock outstanding. Diluted earnings (loss) per share
includes the dilution of common stock equivalents.
The
diluted weighted average shares of common stock outstanding were
calculated using the treasury stock method for the respective
periods.
Foreign Operations
The
functional currency of the Company’s foreign subsidiaries is
its local currency. The assets and liabilities of the
Company’s foreign subsidiaries are translated into U.S.
dollars at exchange rates in effect at the balance sheet date.
Income and expense items are translated at the average exchange
rates prevailing during the period. The cumulative translation
effect for subsidiaries using a functional currency other than the
U.S. dollar is included as a cumulative translation adjustment in
stockholders’ equity and as a component of comprehensive
income.
The
Company’s intercompany accounts are typically denominated in
the functional currency of the foreign subsidiary. Gains and losses
resulting from the remeasurement of intercompany receivables that
the Company considers to be of a long-term investment nature are
recorded as a cumulative translation adjustment in
stockholders’ equity and as a component of comprehensive
income, while gains and losses resulting from the remeasurement of
intercompany receivables from those international subsidiaries for
which the Company anticipates settlement in the foreseeable future
are recorded in the consolidated statements of
operations.
Subsequent Events
The
Company has evaluated subsequent events to the date of the audit
report as of January 29, 2020. The Company has determined that
there are no events occurring in this period that required
disclosure or adjustment, except as disclosed in the accompanying
consolidated financial statements.
Reclassifications
Certain
reclassifications have been made to the October 31, 2018
consolidated financial statements to conform them to the October
31, 2019 consolidated financial statements presentation. Such
reclassifications do not have an effect on net income as previously
reported.
Recent Accounting Pronouncements
In February 2016, the FASB issued a new accounting standard that
amends the guidance for the accounting and disclosure of leases.
This new standard requires that lessees recognize the assets and
liabilities that arise from leases on the balance sheet and
disclose qualitative and quantitative information about their
leasing arrangements. The new standard is effective for interim and
annual periods beginning on January 1, 2019 and may be adopted
earlier. This standard is effective for the Company’s first
quarter of fiscal year 2020. The Company does not expect that this
standard will have a material impact to its Consolidated Statements
of Operations but expects that this standard will have a material
impact on the assets and liabilities on its Consolidated Balance
Sheets upon adoption.
NOTE B — LABORATORY ASSETS SALE
On September 17, 2018, the Company completed the sale of its
Laboratory Assets for $5 million. The gain related to this
transaction of approximately $2.7 million, net of a preferential
income tax rate, is included in the consolidated financial
statements as a component of discontinued operations for the year
ended October 31, 2018.
F-10
NOTE C – PROMISSORY NOTE
Upon the completion of the Laboratory Assets sale, the Company
received, as partial payment, a $3 million Promissory Note from the
purchaser. The Promissory Note is composed of two tranches; (i)
Tranche A for $2 million and secured with lab equipment and (ii)
Tranche B for $1 million which is unsecured. The interest rate
accrual is 3% for Tranche A and 5% for Tranche B. As of October 31,
2019, pursuant to the terms of the Promissory Note, the Company has
collected $1,750,000. The Promissory Note final installment of
$1,250,000 from Tranche A is due September 17, 2020.
NOTE D - PROPERTY AND EQUIPMENT
The
balance of property and equipment at October 31, 2019 and 2018
consisted of the following:
|
|
|
October
31,
|
|
|
|
Useful life
(years)
|
2019
|
2018
|
|
Vehicles
|
5
|
$
253,579
|
$
269,257
|
|
Leasehold
improvements
|
5-8
|
84,445
|
84,485
|
|
Computers
|
3
|
330,250
|
307,579
|
|
Equipment
|
3-7
|
130,110
|
132,089
|
|
Furniture and
fixtures
|
10
|
1,549
|
1,563
|
|
Total
|
|
799,933
|
794,973
|
|
Less: Accumulated
depreciation and amortization
|
|
(509,275
)
|
(496,953
)
|
|
Property and
equipment, net
|
|
$
290,658
|
$
298,020
|
NOTE E - INCOME TAXES
On
December 22, 2017, Public Law 115-97, commonly known as the Tax
Cuts and Jobs Act of 2017 (the “Tax Reform”), was
enacted. The Tax Reform is applicable to the Company commencing
with its fiscal year 2018. The Tax Reform imposed a mandatory
one-time transition tax (the “Transition Tax”) over
foreign subsidiaries undistributed earnings and profits
(“E&Ps”) earned prior to a date set by the statute.
Based on the Company’s E&Ps, the Transition Tax is
estimated to be approximately $2.7 million. The Transition Tax
liability may be paid over a period of eight years starting with
the Company’s fiscal year 2019. In the past, most of these
E&Ps’ were not repatriated since such E&Ps’
were considered to be reinvested indefinitely in the foreign
location, therefore no US tax liability was incurred unless the
E&Ps were repatriated as a dividend. After December 31, 2017,
the Tax Reform has established a 100% tax exemption on the
foreign-source portion of dividends received attributable to
E&Ps, with certain limitations.
In June
2011, Pharma-Bio, Pharma-PR and Pharma-Serv obtained a Grant of
Industrial Tax Exemption pursuant to the terms and conditions set
forth in Act No. 73 of May 28, 2008 (“the Grant”)
issued by the Puerto Rico Industrial Development Company
(“PRIDCO”). The Grant was effective as of November 1,
2009 and covers a fifteen-year period. The Grant provides relief on
various Puerto Rico taxes, including income tax, with certain
limitations, for most of the activities carried on within Puerto
Rico, including those that are for services to parties located
outside of Puerto Rico. Industrial Development Income
(“IDI”) covered under the Grant are subject to a fixed
income tax rate of 4%. In addition, IDI earnings distributions
accumulated since November 1, 2009 are totally exempt from Puerto
Rico earnings distribution tax.
For the
year ended October 31, 2019 and 2018, the favorable consolidated
net income aggregate dollar effect of the Grant was approximately
$952,000 and $652,000, or $0.041 and $0.028 per basic weighted
average share, respectively.
Puerto
Rico operations not covered in the exempt activities of the Grant
are subject to Puerto Rico income tax at a maximum tax rate of 39%
as provided by the 1994 Puerto Rico Internal Revenue Code, as
amended. The operations carried out in the United States by the
Company’s subsidiary was taxed in the United States at a
maximum regular federal income tax rate of 35%. Among the Tax
Reform provisions, effective with the Company’s fiscal year
ending on October 31, 2018, is a provision whereby the regular
federal income tax rate is reduced to a 23.5% blended rate and 21%
thereafter.
F-11
The reconciliation between the United States federal statutory rate
and our effective tax rate applicable to continuing operations for
the years ended October 31, 2019, and 2018 is as
follows:
|
|
October
31,
|
|
|
|
2019
|
2018
|
|
United States
federal statutory rate
|
21.0
%
|
23.5
%
|
|
US Tax Reform
Transition Tax Expense
|
-
%
|
177.2
%
|
|
Puerto Rico,
including foreign loss positionsfor which the resulting deferred
asset has been allowed, net
|
(15.0
)%
|
(16.5
)%
|
|
Other, including US
loss positions for which the resulting deferred tax asset has been
allowed, net
|
0.1
%
|
(1.4
)%
|
|
Effective tax
rate
|
6.1
%
|
182.8
%
|
At
October 31, 2019, Pharma-Spain, Pharma-IR and Pharma-Bio/Pharma-US
have unused operating losses of approximately $1,501,000, $127,000
and $2,774,000, respectively. These net operating losses are
available to offset future taxable income until October 31, 2028,
2029, 2030, 2031, 2032, 2033 and 2034 for the aggregate amounts of
$178,000, $332,000, $266,000, $181,000, $40,000, 273,000 and
$231,000, respectively for Pharma-Spain; indefinitely for
Pharma-IR; until October 31, 2035, 2036, 2037, 2038 and 2039 for
the aggregate amounts of $292,000, $834,000, $345,000, 1,224,000
and $79,000, respectively for Pharma-Bio/Pharma-US. After
considering various timing differences for income tax purposes,
these unused operating losses result in a potential deferred tax
asset for Pharma-Spain, Pharma-IR and Pharma-Bio of approximately
$300,000, $16,000, and $582,000, respectively. However, an
allowance has been provided covering the total amount of such
balance since it is uncertain whether the net operating losses can
be used to offset future taxable income. Realization of future tax
benefits related to a deferred tax asset is dependent on many
factors, including the Company’s ability to generate taxable
income. Accordingly, the income tax benefit will be recognized when
realization is determined to be more probable than
not.
The
Company files income tax returns in the United States (federal and
various states jurisdictions), Puerto Rico, Ireland, Spain and
Brazil. The 2015 (2014 for Puerto Rico) through 2018 tax years are
open and may be subject to potential examination in one or more
jurisdictions. Currently, the Company is not subject to a federal,
state, Puerto Rico or foreign income tax examination.
NOTE F – COMMITMENTS AND CONTINGENCIES
Capitalized lease obligations
- The Company leases vehicles
under non-cancelable capital lease agreements with a cost of
$86,000 and $77,470 for the years ended October 31, 2019 and 2018,
respectively (accumulated amortization of $11,467 and $21,163 as of
October 31, 2019 and 2018, respectively). Amortization expense for
vehicles under non-cancelable lease agreements amounted to $11,467
and $15,495 for the years ended October 31, 2019 and 2018,
respectively.
The
following is a schedule, by year, of future minimum lease payments
under the capitalized leases together with the present value of the
net minimum lease payments at October 31, 2019:
|
Twelve months
ending October 31,
|
Amount
|
|
2020
|
$
14,908
|
|
2021
|
14,908
|
|
2022
|
14,908
|
|
2023
|
14,908
|
|
2024
|
31,181
|
|
Total future
minimum lease payments
|
90,813
|
|
Less: Amount of
imputed interest
|
(12,704
)
|
|
Present value of
future minimum lease payments
|
78,109
|
|
Current portion of
obligation under capital leases
|
(11,030
)
|
|
Long-term portion
|
$
67,079
|
Operating facilities
- The Company conducts its
administrative operations in office facilities which are leased
under two different rental agreements.
F-12
In July
2016, with effective date January 1
st
, 2016, the Company
renegotiated a lease agreement with an affiliate of our Chairman of
the Board, for the headquarters and laboratory testing facilities
in Dorado, Puerto Rico. The renegotiated lease incorporates
additional space for the laboratory testing facility expansion. The
lease agreement is for a five-year term, with a renewal option of
five years, and monthly rental payments of $30,316 for the term of
the lease agreement and renewal option. The lease agreement also
requires the payment of utilities, property taxes, insurance and
expenses incurred by the affiliate in connection with the
maintenance of common areas. As part of the Laboratory Assets
transaction (see Note B), this lease was amended to (i) allow the
Company to sublease to the Laboratory Assets purchaser (the
“Subtenant”) the laboratory leased space area, and (ii)
if Subtenant defaults under the Sublease or terminates the
Sublease, the Company shall have the option to either (a) terminate
the Sublease and re-occupy the Subleased Premises pursuant to the
terms of the Lease, or (b) modify the Lease to terminate the Lease
for the portion of the Premises that is the Subleased Premises
only, without penalty. On January 1, 2019, a second amendment to
the lease agreement was made to add a small storage area,
increasing the monthly rental payments by $1,088.
Simultaneously
with the Laboratory Assets sale closing transaction the Company and
Subtenant entered into a sublease agreement (the
“Sublease”) with an initial term commencing at Sales
Closing Date through December 31, 2019. The Sublease contains a
one-year renewal option, followed by a second renewal option of
five years. Provided a six months’ notice of termination,
Subtenant may terminate without penalty the Sublease within the
term of the second renewal option of five years. The Sublease calls
for monthly rental payments of $17,950 each, and a 5% annual rent
increase beginning on the second lease year and thereafter until
the expiration of the Sublease initial term or the first renewal
option. No rent increase will apply to the five-year term renewal
option if exercised. The Sublease requires the payment of
utilities, property taxes, insurance and common area expenses
incurred and/or allocated to Subtenant.
The
Company maintains an office facility in Madrid, Spain. The facility
is under a month-to-month lease with monthly payments of
approximately $1,000.
The
Company leases certain apartments as dwellings for employees. The
leases are under short-term lease agreements and usually are
cancelable upon 30-day notification.
Minimum
future rental payments under non-cancelable operating leases having
remaining terms in excess of one year as of October 31, 2019 are as
follows:
|
|
Amount
|
|
2020
|
$
376,850
|
|
2021
|
62,808
|
|
Total minimum
future rental payments
|
$
439,658
|
Total
minimum future rental payments have not been reduced by
approximately $224,375 of sublease rentals to be received in the
future under non-cancelable subleases.
Rent
expense for the years ended October 31, 2019 and 2018 was
approximately $386,000 and $389,000, respectively.
Contingencies -
In the ordinary course of business, the
Company may be a party to legal proceedings incidental to the
business. These proceedings are not expected to have a material
adverse effect on the Company’s business or financial
condition.
NOTE G – WARRANTS
On
December 2014, the Company entered into an agreement with a firm
for providing (i) business development and (ii) mergers and
acquisition services to the Company. The Company warrants for the
purchase of 1,000,000 common shares issued to this firm for its
services expired on December 1, 2019.
NOTE H – EQUITY TRANSACTIONS
On June
13, 2014, the Board of Directors of the Company authorized the
Company to repurchase up to two million shares of its outstanding
common stock. The timing, manner, price and amount of any
repurchases will be at the discretion of the Company, subject to
the requirements of the Securities Exchange Act of 1934, as
amended, and related rules. The program does not oblige the Company
to repurchase any shares and it may be modified, suspended or
terminated at any time and for any reason. Under the program no
shares will be repurchased directly from directors or officers of
the Company. As of October 31, 2019 and 2018, a total of 338,854
and 315,404 shares of the Company’s common stock were
purchased for an aggregate amount of $329,607 and $304,688,
respectively.
Also, on
November 26, 2018, the Company repurchased 62,972 shares of common
stock, outside of the Repurchase Program, from the Company’s
Chief Executive Officer at $1.00 per share. These shares were
repurchased at a discount to market to provide for an orderly
disposition of the shares.
On
October 23, 2019 and October 3, 2018, the Board of Directors of the
Company declared cash dividends of $0.075 per common share for
shareholders of record as of the close of business on November 4,
2019 and October 15, 2018, respectively. Accordingly, aggregate
dividend payments of $1,725,295 and $1,728,750 were paid on
November 15, 2019 and October 26, 2018, respectively.
F-13
NOTE I – EARNINGS (LOSSES) PER SHARE
The computation of basic earnings and losses per share is based on
the weighted-average number of our common shares outstanding. The
computation of diluted earnings and losses per share is based on
the weighted-average number of our common shares outstanding and
dilutive potential common shares, which include principally shares
that may be issued under: warrants, our stock option and restricted
stock unit awards, determined using the treasury stock
method
. The following data show the amounts used in the
calculations of basic and diluted earnings per share.
|
|
Years
ended October 31,
|
|
|
|
2019
|
2018
|
|
Net income (loss)
available to common equity holders - used to compute basic and
diluted earnings (losses) per share (continuing
operations)
|
$
2,087,256
|
$
(1,261,736
)
|
|
Net income
available to common equity holders - used to compute basic and
diluted earnings (losses) per share (discontinued
operations)
|
$
-
|
$
2,541,470
|
|
|
|
|
|
Weighted average
number of common shares - used to compute basic earnings (losses)
per share
|
23,054,653
|
23,080,995
|
|
Effect of warrants
to purchase common stock
|
-
|
-
|
|
Effect of
restricted stock units to issue common stock
|
-
|
-
|
|
Effect of options
to purchase common stock
|
59,204
|
15,257
|
|
Weighted average
number of shares - used to compute diluted earnings (losses) per
share
|
23,113,857
|
23,096,252
|
For the
year ended October 31, 2019, warrants and options for the purchase
of 1,000,000 and 80,000 shares of common stock, respectively, were
not included in computing earnings per share because their effect
were antidilutive. Also, for the year ended on October 31, 2018,
warrants and options for the purchase of 1,000,000 and 419,600
shares of common stock, respectively, were not included in
computing diluted losses per share from continuing operations
because their effect were also antidilutive.
NOTE J - STOCK OPTIONS, RESTRICTED STOCK UNITS AND STOCK BASED
COMPENSATION
The
Company has two incentive plans, the 2005 Long-Term Incentive Plan
(the “2005 Plan”) and the 2014 Long-Term Incentive Plan
(the “2014 Plan”, together the “Plans”).
The 2005 Plan and the 2014 Plan cover 2,500,000 and 2,300,000
shares of the Company’s common stock, respectively. Both
Plans provide for the grant of incentive and non-qualified options,
stock grants, stock appreciation rights and other equity-based
incentives to employees, including officers, consultants and
directors for a period of ten years. The 2005 Plan expired in
October 2015, accordingly no further grants have been issued under
this plan. The Plans are to be administered by a committee of
independent directors. In the absence of a committee, the plans are
administered by the board of directors. Options intended to be
incentive stock options must be granted at an exercise price per
share which is not less than the fair market value of the common
stock on the date of grant and may have a term which is not longer
than ten years. If the option holder holds at least 10% of the
Company’s common stock, the exercise price must be at least
110% of the fair market value on the date of grant and the term of
the option cannot exceed five years.
Stock-based
compensation cost is measured at the grant date based on the fair
value of the award and is recognized as expense over the requisite
service period, which generally represents the vesting period, and
includes an estimate of awards that will be forfeited. The fair
value of stock-based awards to employees is calculated using the
Black-Scholes option pricing model. The Black-Scholes model
requires subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the
calculated values. The expected term of the option has been
estimated using the “simplified” method as provided in
the Securities and Exchange Commission (“SEC”) Staff
Accounting Bulletin No. 107, for plans with insufficient exercise
experience. Under this method, the expected term equals the
arithmetic average of the vesting term and the contractual term of
the option. The risk-free rate is based on the U.S. Treasury rates
in effect during the corresponding period of grant. The expected
volatility is based on the historical volatility of the
Company’s stock price. These factors could change in the
future, which would affect fair values of stock options granted in
such future periods, and could cause volatility in the total amount
of the stock-based compensation expense reported in future
periods.
F-14
The
2005 Plan stock options activity and status for the years ended
October 31, 2019 and 2018 was as follows:
|
|
Year ended
October 31,
|
|||
|
|
2019
|
2018
|
||
|
|
|
Weighted-
|
|
Weighted-
|
|
|
Number
of
|
Average
Option
|
Number
of
|
Average
Option
|
|
|
Shares
|
Exercise
Price
|
Shares
|
Exercise
Price
|
|
Outstanding at
beginning of year
|
160,000
|
$
1.6650
|
200,000
|
$
1.4820
|
|
Granted
|
-
|
$
-
|
-
|
$
-
|
|
Exercised
|
-
|
$
-
|
-
|
$
-
|
|
Expired
and/or forfeited
|
(80,000
)
|
$
2.0500
|
(40,000
)
|
$
0.7500
|
|
Total
outstanding at end of year
|
80,000
|
$
1.2800
|
160,000
|
$
1.6650
|
|
|
|
|
|
|
|
Outstanding
exercisable stock options at end of year
|
80,000
|
$
1.2800
|
160,000
|
$
1.6650
|
|
|
|
|
|
|
|
|
October
31,
2019
|
|
October
31,
2018
|
|
|
Weighted average
remaining years in contractual life for:
|
|
|
|
|
|
Total outstanding
options
|
0.2
years
|
|
0.7
years
|
|
|
Outstanding
exercisable options
|
0.2
years
|
|
0.7
years
|
|
|
Shares of common
stock available for issuance pursuant to future stock option
grants
|
-
|
|
-
|
|
The
2014 Plan stock options activity and status for the years ended
October 31, 2019 and 2018 was as follows:
|
|
Year ended
October 31,
|
|||
|
|
2019
|
2018
|
||
|
|
|
Weighted-
|
|
Weighted-
|
|
|
Number
of
|
Average
Option
|
Number
of
|
Average
Option
|
|
|
Shares
|
Exercise
Price
|
Shares
|
Exercise
Price
|
|
Outstanding at
beginning of year
|
329,600
|
$
0.8238
|
460,000
|
$
0.8887
|
|
Granted
|
180,000
|
$
0.9333
|
80,000
|
$
0.5200
|
|
Exercised
|
(99,600)
|
$
0.8666
|
(210,400)
|
$
0.8502
|
|
Expired and/or
forfeited
|
-
|
$
-
|
-
|
$
-
|
|
Total outstanding
at end of year
|
410,000
|
$
0.8615
|
329,600
|
$
0.8238
|
|
|
|
|
|
|
|
Outstanding
exercisable stock options at end of year
|
270,000
|
$
0.8341
|
190,000
|
$
0.8653
|
|
|
|
|
|
|
|
|
October 31,
2019
|
|
October 31,
2018
|
|
|
Weighted average
remaining years in contractual life for:
|
|
|
|
|
|
Total outstanding
options
|
3.2
years
|
|
2.8
years
|
|
|
Outstanding
exercisable options
|
2.5
years
|
|
2.9
years
|
|
|
Shares of common
stock available for issuance pursuant to future stock option
grants
|
1,580,000
|
|
1,760,000
|
|
The
following weighted average assumptions were used to estimate the
fair value of stock options granted under the 2014 Plan for the
years ended October 31, 2019 and 2018:
|
|
Year
ended October 31,
|
|
|
|
2019
|
2018
|
|
Expected dividend
yield
|
0.0
%
|
0.0
%
|
|
Expected stock
price volatility
|
78.9
%
|
73.6
%
|
|
Risk free interest
rate
|
1.9
%
|
2.0
%
|
|
Expected life of
options
|
3.4
years
|
3.2
years
|
|
Weighted average
fair value of options granted
|
$
0.5076
|
$
0.2624
|
F-15
As of
October 31, 2019, estimated stock based compensation expense to be
recognized in future periods for granted nonvested stock options is
attributable to stock options granted under the 2014 Plan. The
nonvested stock options compensation expense in the amount of
$55,211 will be recognized in a weighted average period of
approximately 1.6 years.
As of
October 31, 2019 and 2018, the aggregate intrinsic value of options
outstanding under the 2014 Plan were approximately $25,200 and
$74,570, respectively. As of October 31, 2019 and 2018, the
exercise price for all options outstanding under the 2005 Plan were
above the Company’s stock market value. The aggregate
intrinsic value represents the difference between the
Company’s stock price at year end and the exercise price,
multiplied by the number of in-the money options had all option
holders exercised their options. This amount changes based on the
fair market value of the Company’s stock.
The
following table presents the total stock-based compensation
included in the Company’s consolidated statement of income
and the effect in earnings per share:
|
|
Year
ended October 31,
|
|
|
|
2019
|
2018
|
|
Stock-based
compensation expense:
|
|
|
|
Cost of
services
|
$
-
|
$
-
|
|
Selling, general
and administrative
|
34,120
|
51,642
|
|
Stock-based
compensation before tax
|
34,120
|
51,642
|
|
Income tax benefit
|
-
|
-
|
|
Net stock-based
compensation expense
|
$
34,120
|
$
51,642
|
|
Effect on earnings
per share:
|
|
|
|
Basic earnings per
share
|
$
(0.001
)
|
$
(0.002
)
|
|
Diluted earnings
per share
|
$
(0.001
)
|
$
(0.002
)
|
NOTE K - CONCENTRATION OF RISKS
Cash and cash equivalents
The
Company domestic cash and cash equivalents consist of cash deposits
in FDIC insured banks (substantially covered by FDIC insurance by
the spread of deposits in multiple FDIC insured banks), a money
market obligations trust registered under the US Investment Company
Act of 1940, as amended, and U.S. Treasury securities with
maturities of three months or less. In the foreign markets we
serve, we also maintain cash deposits in foreign banks, which tend
to be not significant and have no specific insurance. No losses
have been experienced or are expected on these
accounts.
Accounts receivable and revenues
Management
deems all its accounts receivable to be fully collectible, and, as
such, does not maintain any allowances for uncollectible
receivables.
The
Company's revenues, and the related receivables, are concentrated
in the pharmaceutical industry in Puerto Rico, the United States of
America and Europe. Although a few customers represent a
significant source of revenue, the Company’s functions are
not a continuous process, accordingly, the client base for which
the services are typically rendered, on a project-by-project basis,
changes regularly.
The
Company provided a substantial portion of its services to five
customers, who accounted for 10% or more of its revenues in either
of the years ended October 31, 2019 or 2018. During the year ended
October 31, 2019, revenues from these customers were 25.3%, 10.4%,
11.7%, 10.2% and 5.6%, or a total of 63.2%, as compared to the same
period last year for 9.2%, 2.7%, 13.9%, 7.5%, and 15.7%, or a total
of 49.0%, respectively. At October 31, 2019 and 2018, amounts due
from these customers represented 82.0% and 52.7% of total accounts
receivable balance, respectively.
The
major customer information in the above paragraph is based on
revenues earned from said customers at the segment level because in
management’s opinion contracts by segments are totally
independent of each other, and therefore such information is more
meaningful to the reader. However, at the global level five groups
of affiliated companies accounted for 10% or more of our revenues
in either October 31, 2019 or 2018. During the year ended October
31, 2019, aggregate revenues from these global groups of affiliated
companies were 25.3%, 13.7%, 11.7%, 10.2% and 5.6%, or a total of
66.5%, as compared to the same period last year for 9.2%, 5.4%,
13.9%, 7.5%, and 15.7%, or a total of 51.7%, respectively. At
October 31, 2019 and 2018, amounts due from these global groups of
affiliated companies represented 83.4% and 55.5% of total accounts
receivable balance, respectively.
F-16
As of October 31, 2019, one of the Company’s customers
(representing 25.3% of revenues during the year ended October 31,
2019) owes the Company approximately $6.25 million (including $1.25
million from a Promissory Note), which represents approximately
27.5% of the Company’s total working capital. We are
providing multiple services to this customer related to their
construction of a manufacturing facility in Puerto Rico. From this
facility the customer will do the manufacturing and distribution of
an existing product and an investigational new drug to be marketed
to worldwide markets, once approved by regulators. A significant
portion of the customer’s funding comes from different
financing sourcing. Management estimates that collectability of the
account is reasonably assured, accordingly, no provision for
losses, if any, have been recorded in the financial statements.
Subsequent to our October 31, 2019, the Company collected $2
million from this customer.
NOTE L – OTHER INCOME
During September 2017, the Company’s Puerto Rico operations
were affected by hurricanes which severely impacted Puerto Rico
(“Hurricanes”). The Hurricanes related insurance claim
for business interruption losses and additional expenses incurred
by the Company until electrical power and other basic utilities
were restored was settled with the insurance carrier on April 2019
for the aggregate amount of approximately $199,000. In July 2018,
the insurance claim for property damages resulting from the
Hurricanes was settled with the insurance carrier for the aggregate
amount of approximately $148,000. Based on current accounting
guidance, the insurance proceeds were recognized upon collection,
as a gain contingency against other income in the accompanying
consolidated financial statements for the applicable
period.
Administered and disbursed by the Puerto Rico Treasury Department,
the United States federal government granted a salaries subsidy
(the “Salaries Subsidy”) to Puerto Rico employers which
retained employees for the period since the Hurricanes until the
sooner of (i) when the employer operations were fully able to
operate or (ii) December 31, 2017. In July 2018, the
Company’s Puerto Rico subsidiaries applied and collected from
the Salaries Subsidy an aggregate amount of approximately $220,000.
This Salaries Subsidy was recorded against other income in the
accompanying condensed financial statements.
NOTE M - SEGMENT DISCLOSURES
The
Company’s segments are based on the organizational structure
for which financial results are regularly evaluated by the
Company’s chief operating decision maker to determine
resource allocation and assess performance. Each reportable segment
is managed by its own management team and reports to executive
management. The Company has three reportable segments: (i) Puerto
Rico technical compliance consulting, (ii) United States technical
compliance consulting, and (iii) Europe technical compliance
consulting. These reportable segments provide services primarily to
the pharmaceutical, chemical, medical device and biotechnology
industries in their respective markets.
The
following table presents information about the reported revenue
from services and earnings from operations of the Company for the
years ended in October 31, 2019 and 2018. There is no intersegment
revenue for the mentioned periods. Corporate expenses that support
the operating units have been allocated to the segments. Asset
information by reportable segment is not presented, since the
Company does not produce such information internally, nor does it
use such data to manage its business.
|
|
Year
ended October 31,
|
|
|
|
2019
|
2018
|
|
REVENUES:
|
|
|
|
Puerto Rico
consulting
|
$
16,797,783
|
$
14,438,772
|
|
United States
consulting
|
2,188,276
|
2,137,748
|
|
Europe
consulting
|
315,329
|
1,153,740
|
|
Other
segments¹
|
205,523
|
67,165
|
|
Total consolidated
revenues
|
$
19,506,911
|
$
17,797,425
|
|
INCOME (LOSS)
BEFORE TAXES:
|
|
|
|
Puerto Rico
consulting
|
$
1,906,513
|
$
1,217,758
|
|
United States
consulting
|
(33,113
)
|
(119,140
)
|
|
Europe
consulting
|
(238,420
)
|
11,194
|
|
Other
segments¹
|
588,270
|
413,977
|
|
Total consolidated
income before taxes
|
$
2,223,250
|
$
1,523,789
|
|
1
Other segments
represent activities that fall below the reportable threshold and
are carried out in Puerto Rico and Brazil. These activities include
a Brazilian compliance consulting division and corporate
headquarters, as applicable.
|
|
F-17
Long
lived assets (property and equipment) and related depreciation and
amortization expense for the years ended October 31, 2019 and 2018,
were concentrated in the corporate headquarters in Puerto Rico.
Accordingly, depreciation expense and acquisition of property and
equipment, as presented in the statements of cash flows are mainly
related to the corporate headquarters.
NOTE N - RETIREMENT PLAN
Pharma-PR
and Pharma-US each have a separate qualified retirement plan in
accordance with the applicable laws of the Commonwealth of Puerto
Rico and the United States of America, for employees who meet
certain age and service period requirements. The Company makes
contributions to these plans as required by the provisions of the
plan document.
Following plan
provisions, during the year ended October 31, 2018 the Company
temporarily suspended contributions to the plan. During the year
ended October 31, 2019 the Company resumed contributions and
contributed to these plans $67,900.
NOTE O – RELATED PARTY TRANSACTIONS
On
December 31, 2013, the Company entered into a Consulting Agreement
with a company (the “Consultant”) affiliated to our
Chairman and our Chairman, effective as of January 1,
2014. Pursuant to the Consulting Agreement as amended,
the Consultant will consult with the Board regarding the
Company’s strategic initiatives, company services,
management, operations and other matters as may be requested from
time to time by the Board. The Chairman will receive a
company automobile and such insurance as she was provided by the
Company during her last year of employment with the
Company. The Consulting Agreement also included standard
provisions relating to non-competition, confidentiality,
non-transferability and non-disparagement. On December 27, 2019,
the Company extended the Consulting Agreement for an additional
year to December 31, 2020 and maintained the past compensation
structure. Pursuant to the Consulting Agreement the Company will
compensate Consultant a monthly retainer of $33,700 during the
Extension Term. In addition, in the event the Company achieves at
least eighty percent (80%) of its budget for the year, Consultant
shall receive a payment in the amount of $100,000 (the
“Incentive Fee”). If the Company achieves one hundred
percent (100%) or more of its budget for the year, the Incentive
Fee shall be $120,000.
As more
fully disclosed in Note G to the consolidated financial statements,
the Company leases its headquarters facilities in Dorado, Puerto
Rico, from an affiliate of our Chairman of the Board.
NOTE P – SUBSEQUENT EVENTS
On
December 27, 2019, the Company renewed the Consulting Agreement
with a company affiliated to our Chairman and our Chairman, as more
fully disclosed in Note O.
F-18
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement SchedulesItem 16. Form 10-k Summary