Pharma-Bio Serv, Inc. - Quarter Report: 2019 April (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 WASHINGTON, D.C. 20549

 

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 30, 2019

or

☐	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)

 

Delaware	20-0653570
(State or Other Jurisdiction of Incorporation or Organization)	(IRS  Employer  Identification No.)

 

Pharma-Bio Serv Building, # 6 Road 696 Dorado, Puerto Rico	00646 (Zip Code)
(Address of Principal Executive Offices)

 

Registrant’s Telephone Number, Including Area Code 787-278-2709

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

 

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 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, or a smaller reporting company, or an 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.

 

	Large accelerated filer ☐	Accelerated filer ☐
	Non-accelerated filer ☒	Smaller reporting company ☒
		Emerging growth company ☐

 

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 number of shares of the registrant’s common stock outstanding as of June 12, 2019 was 22,996,281.

 

 

 

PHARMA-BIO SERV, INC.

FORM 10-Q

FOR THE QUARTER ENDED APRIL 30, 2019

 

TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION
Item 1 – Financial Statements
Condensed Consolidated Balance Sheets as of April 30, 2019 and October 31, 2018 (unaudited)			1
Condensed Consolidated Statements of Operations for the three-month and six-month periods ended April 30, 2019 and 2018 (unaudited)			2
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three-month and six-month periods ended April 30, 2019 and 2018 (unaudited)			3
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three-month and six-month periods ended April 30, 2019 and 2018 (unaudited)			4
Condensed Consolidated Statements of Cash Flows for the three-month and six-month periods ended April 30, 2019 and 2018 (unaudited)			5
Notes to Condensed Consolidated Financial Statements (unaudited)			7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations			14
Item 4 – Controls and Procedures			19
PART II OTHER INFORMATION
Item 1 – Legal Proceedings			20
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds			20
Item 6 – Exhibits			20
SIGNATURES			21

 

 

 

 

  

PART I – FINANCIAL INFORMATION

 

Item 1.

FINANCIAL STATEMENTS

 

PHARMA-BIO SERV, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

 

ASSETS	April 30, 2019*	October 31, 2018**
Current assets
Cash and cash equivalents	$15,433,111	$16,029,920
Accounts receivable	6,663,424	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	316,209	438,492
Total current assets	23,662,744	23,411,797
Promissory note receivable due from sale of assets from discontinued operations	1,250,000	1,250,000
Property and equipment	322,536	298,020
Other assets	419,055	418,495
Total assets	$25,654,335	$25,378,312
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion-obligations under capital leases	$10,737	$13,768
Accounts payable and accrued expenses	1,510,603	2,140,001
Current portion of US Tax Reform Transition Tax and income taxes payable	414,955	411,903
Total current liabilities	1,936,295	2,565,672
US Tax Reform Transition Tax payable	2,270,000	2,485,000
Obligations under capital leases	72,668	46,027
Other liabilities	17,950	17,950
Total liabilities	4,296,913	5,114,649
Stockholders' equity
Preferred Stock, $0.0001 par value; authorized 10,000,000 shares; none outstanding	-	-
Common Stock, $0.0001 par value; authorized 50,000,000 shares; 23,397,707 and 23,373,817 shares issued, and 22,996,481 and 23,058,413 shares outstanding at April 30, 2019 and October 31, 2018, respectively	2,340	2,337
Additional paid-in capital	1,364,956	1,346,956
Retained earnings	20,289,611	19,111,111
Accumulated other comprehensive income	92,522	107,947
	21,749,429	20,568,351
Treasury stock, at cost; 401,226 and 315,404 common shares held at April 30, 2019 and October 31, 2018, respectively	(392,007)	(304,688)
Total stockholders' equity	21,357,422	20,263,663
Total liabilities and stockholders' equity	$25,654,335	$25,378,312

 

*	Unaudited.
**	Condensed from audited financial statements.

 

See notes to the condensed consolidated financial statements.

 

 

PHARMA-BIO SERV, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 

	Three months ended April 30,		Six months ended April 30,
	2019	2018	2019	2018
REVENUES	$5,150,344	$3,765,358	$9,716,541	$7,491,954
COST OF SERVICES	3,556,942	2,728,346	6,644,079	5,273,416
GROSS PROFIT	1,593,402	1,037,012	3,072,462	2,218,538
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES	1,116,474	1,066,374	2,163,033	2,036,962
INCOME (LOSS) FROM CONTINUING OPERATIONS	476,928	(29,362)	909,429	181,576
OTHER INCOME, NET	305,813	20,679	387,287	38,450
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX AND US TAX REFORM TRANSITION TAX EXPENSE	782,741	(8,683)	1,296,716	220,026
INCOME TAX AND US TAX REFORM TRANSITION TAX EXPENSE	75,258	-	118,213	2,701,023
NET INCOME (LOSS) FROM CONTINUING OPERATIONS	707,483	(8,683)	1,178,503	(2,480,997)
DISCONTINUED OPERATIONS NET LOSS FROM OPERATIONS, NET OF TAX	-	(119,665)	-	(311,363)
NET INCOME (LOSS)	$707,483	$(128,348)	$1,178,503	$(2,792,360)
BASIC AND DILUTED EARNINGS (LOSSES) PER COMMON SHARE (Continuing operations)	$0.031	$(0.001)	$0.051	$(0.108)
BASIC AND DILUTED LOSSES PER COMMON SHARE (Discontinued operations)	$-	$(0.005)	$-	$(0.013)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC	23,002,903	23,062,531	23,032,107	23,076,594
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED	23,068,923	23,062,531	23,105,166	23,078,143

 

See notes to the condensed consolidated financial statements.

 

 

PHARMA-BIO SERV, INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

 

	Three months ended April 30,		Six months ended April 30,
	2019	2018	2019	2018
NET INCOME (LOSS)	$707,483	$(128,348)	$1,178,503	$(2,792,360)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF RECLASSIFICATION ADJUSTMENTS AND TAXES:
Foreign currency translation gain (loss)	(23,267)	(47,262)	(10,950)	35,557
Available-for-sale securities:
Net unrealized gain	-	11,163	-	9,619
Other-than-temporary impairment included in net income	-	-	(4,475)	-
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)	(23,267)	(36,099)	(15,425)	45,176
COMPREHENSIVE INCOME (LOSS)	$684,216	$(164,447)	$1,163,078	$(2,747,184)

 

See notes to the condensed consolidated financial statements.

 

 

PHARMA-BIO SERV, INC.

Condensed Consolidated Statements of Changes in Stockholders' Equity

(Unaudited)

 

							Accumulated
					Additional		Other
FISCAL YEAR 2018	Common Stock		Preferred Stock		Paid-in	Retained	Comprehensive	Treasury
	Shares	Amount	Shares	Amount	Capital	Earnings	Income (Loss)	Stock	Total
BALANCE AT NOVEMBER 1, 2017	23,333,083	$2,333	-	$-	$1,295,314	$19,560,131	$137,671	$(248,163)	$20,747,286
STOCK-BASED COMPENSATION	-	-	-	-	17,550	-	-	-	17,550
PURCHASE OF TREASURY STOCK (27,100 SHARES)	-	-	-	-	-	-	-	(13,659)	(13,659)
NET LOSS	-	-	-	-	-	(2,664,012)	-	-	(2,664,012)

OTHER COMPREHENSIVE INCOME, NET OF TAX	-	-	-	-	-	-	81,275	-	81,275
BALANCE AT JANUARY 31, 2018	23,333,083	2,333	-	-	1,312,864	16,896,119	218,946	(261,822)	18,168,440
STOCK-BASED COMPENSATION	-	-	-	-	17,550	-	-	-	17,550
NET LOSS	-	-	-	-	-	(128,348)	-	-	(128,348)
OTHER COMPREHENSIVE LOSS, NET OF TAX	-	-	-	-	-	-	(36,099)	-	(36,099)
BALANCE AT APRIL 30, 2018	23,333,083	$2,333	-	$-	$1,330,414	$16,767,771	$182,847	$(261,822)	$18,021,543

 

							Accumulated
					Additional		Other
FISCAL YEAR 2019	Common Stock		Preferred Stock		Paid-in	Retained	Comprehensive	Treasury
	Shares	Amount	Shares	Amount	Capital	Earnings	Income (Loss)	Stock	Total
BALANCE AT NOVEMBER 1, 2018	23,373,817	$2,337	-	$-	$1,346,956	$19,111,111	$107,947	$(304,688)	$20,263,663
STOCK-BASED COMPENSATION	-	-	-	-	9,000	-	-	-	9,000
ISSUANCE OF COMMON STOCK PURSUANT TO THE CASHLESS EXERCISE OF STOCK OPTIONS	3,442	1	-	-	-	-	-	-	1
PURCHASE OF TREASURY STOCK (65,772 SHARES)	-	-	-	-	-	-	-	(65,755)	(65,755)
NET INCOME	-	-	-	-	-	471,020	-	-	471,020

OTHER COMPREHENSIVE INCOME, NET OF TAX	-	-	-	-	-	-	7,842	-	7,842
BALANCE AT JANUARY 31, 2019	23,377,259	2,338	-	-	1,355,956	19,582,131	115,789	(370,443)	20,685,771
STOCK-BASED COMPENSATION	-	-	-	-	9,000	-	-	-	9,000
ISSUANCE OF COMMON STOCK PURSUANT TO THE CASHLESS EXERCISE OF STOCK OPTIONS	20,448	2	-	-	-	(3)	-	-	(1)
PURCHASE OF TREASURY STOCK (20,050 SHARES)	-	-	-	-	-	-	-	(21,564)	(21,564)
NET INCOME	-	-	-	-	-	707,483	-	-	707,483
OTHER COMPREHENSIVE LOSS, NET OF TAX	-	-	-	-	-	-	(23,267)	-	(23,267)
BALANCE AT APRIL 30, 2019	23,397,707	$2,340	-	$-	$1,364,956	$20,289,611	$92,522	$(392,007)	$21,357,422

 

See notes to condensed consolidated financial statements

 

 

PHARMA-BIO SERV, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

	Three months ended April 30,		Six months ended April 30,
	2019	2018	2019	2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$707,483	$(128,348)	$1,178,503	$(2,792,360)
Add: net loss from discontinued operations	-	119,665	-	311,363
Net income (loss) from continuing operations	707,483	(8,683)	1,178,503	(2,480,997)
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)	-	(47,392)	-
Stock-based compensation	9,000	17,550	18,000	35,100
Depreciation and amortization	21,844	21,214	48,682	44,257
Other-than-temporary impairment on available-for-sale securities	-	-	(4,475)	-
(Increase) decrease in accounts receivable	(1,212,558)	(164,104)	(1,473,845)	986,459
Decrease in other assets	23,593	61,580	80,329	167,734
Increase (decrease) in liabilities	(324,887)	232,020	(840,431)	2,823,954
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF CONTINUING OPERATIONS	(822,917)	159,577	(1,040,629)	1,576,507
CASH FLOWS FROM INVESTING ACTIVITIES OF CONTINUING OPERATIONS:
Disposal of marketable securities	-	-	44,475	-
Acquisition of property and equipment	(35,761)	(6,649)	(38,844)	(57,764)
Proceeds from sale of property and equipment	99,038	-	99,038	-
Collection from promissory note receivable	500,000	-	500,000	-
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS	563,277	(6,649)	604,669	(57,764)
CASH FLOWS FROM FINANCING ACTIVITIES OF CONTINUING OPERATIONS:
Repurchase of common stock	(21,564)	-	(87,319)	(13,659)
Payments on obligations under capital lease	(58,993)	(3,327)	(62,390)	(6,613)
NET CASH USED IN FINANCING ACTIVITIES OF CONTINUING OPERATIONS	(80,557)	(3,327)	(149,709)	(20,272)
EFFECT OF EXCHANGE RATE CHANGES ON CASH	(25,218)	(28,161)	(11,140)	(17,423)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS	(365,415)	121,440	(596,809)	1,481,048
DISCONTINUED OPERATIONS:
Net cash used in operating activities	-	(277,995)	-	(155,652)
Net cash used in investing activities	-	-	-	-
Net cash used in financing activities	-	-	-	-
CASH USED IN DISCONTINUED OPERATIONS	-	(277,995)	-	(155,652)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(365,415)	(156,555)	(596,809)	1,325,396
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD	15,798,526	13,073,499	16,029,920	11,591,548
CASH AND CASH EQUIVALENTS – END OF PERIOD	$15,433,111	$12,916,944	$15,433,111	$12,916,944

 

See notes to the condensed consolidated financial statements.

 

 

PHARMA-BIO SERV, INC.

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited)

 

	Three months ended April 30,		Six months ended April 30,
	2019	2018	2019	2018
SUPPLEMENTAL DISCLOURES OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Income taxes	$326,898	$-	$326,898	$-
Interest	$1,425	$549	$1,904	$1,091
SUPPLEMENTARY SCHEDULES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Income tax withheld by clients to be used as a credit in the Company’s income tax return	$17,411	$16,478	$24,000	$18,245
Conversion of cashless exercise of options to shares of common stock and shares issued under restricted stock unit agreements	$2	$-	$3	$-
Obligations under capital lease incurred for the acquisition of a vehicle	$86,000	$-	$86,000	$-
Disposed property and equipment with accumulated depreciation of $86,773 for the three and six months ended April 30, 2019	$138,419	$-	$138,419	$-

 

See notes to the condensed consolidated financial statements.

 

 

PHARMA-BIO SERV, INC.

Notes To Condensed Consolidated Financial Statements

April 30, 2019

(Unaudited)

 

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”).

 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The condensed consolidated balance sheet of the Company as of October 31, 2018 is derived from audited consolidated financial statements but does not include all disclosures required by generally accepted accounting principles. The unaudited interim condensed consolidated financial statements, include all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods. The results of operations for the six months ended April 30, 2019 are not necessarily indicative of expected results for the full 2019 fiscal year.

 

The accompanying financial data as of April 30, 2019, and for the three-month and six-month periods ended April 30, 2019 and 2018 has been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally contained in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our audited Consolidated Financial Statements and the notes thereto for the fiscal year ended October 31, 2018.

 

Consolidation

 

The accompanying condensed 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.

 

Use of Estimates

 

The preparation of condensed 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 condensed 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 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

 

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, and we expect the impact of adoption in future periods to also be immaterial.

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, as amended, 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 April 30, 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 reasonable assured. Major renewals and betterments that extend the life of the assets are capitalized, while expenditures for repairs and maintenance are expensed when incurred. As of April 30, 2019 and October 31, 2018, the accumulated depreciation and amortization amounted to $458,862 and $496,953, respectively.

 

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 as of April 30, 2019 and October 31, 2018.

 

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 the 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. The Company has not recognized such cash flows 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 earnings (loss) by the weighted average number of shares of common stock outstanding. Diluted loss per share includes the dilution of common stock equivalents, which include principally shares that may be issued upon the exercise of warrants, stock option and restricted stock unit awards.

 

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 through the filing date of this report. The Company has determined that there are no events occurring in this period that required disclosure or adjustment.

 

 

Reclassifications

 

Certain reclassifications have been made to the April 30, 2018 condensed consolidated financial statements to conform them to the April 30, 2019 condensed consolidated financial statements presentation. Such reclassifications do not affect net loss as previously reported.

 

Recent accounting pronouncements not implemented

 

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 continues to evaluate the impact that this new standard will have on its consolidated financial statements. 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 – PROMISSORY NOTE

 

On September 17, 2018, the Company completed the sale of its Laboratory Assets for $5 million and 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. Interest is due semi-annually in arrears commencing on the six-month after the Sales Closing Date. Tranche A is due in two installments of $750,000 and $1,250,000, on September 17, 2019 and 2020, respectively. Tranche B first installment of $500,000 was collected during the quarter ended April 30, 2019, and a second installment of $500,000 is due on September 17, 2019.

NOTE C - 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.

 

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.

 

Deferred income tax assets and liabilities are computed for differences between the consolidated financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.

 

Pharma-Spain, Pharma-IR, Pharma-Bio/Pharma-US, Pharma-PR and Pharma-Serv have unused operating losses which result in a potential deferred tax asset. 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 before their expiration dates. 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. These net operating losses are available to offset future taxable income through 2033 for Pharma-Spain; indefinitely for Pharma-IR; until 2038 for Pharma-Bio/Pharma-US; until 2027 for Pharma-PR and Pharma-Serv.

 

The Company files income tax returns in the United States (federal and various states jurisdictions), Puerto Rico, Ireland, Spain and Brazil. The 2014 (2013 for Puerto Rico) through 2017 tax years are open and may be subject to potential examination in one or more jurisdictions. Currently, the Company has no federal, state, Puerto Rico or foreign income tax examination.

 

 

NOTE D – 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. Pursuant to the agreement terms, the Company issued warrants for the purchase of 1,000,000 common shares at an exercise price of $1.80 per share. The underlying common shares of the warrants are fully vested and expire on December 1, 2019.

 

NOTE E – 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 “Repurchase Program”). The timing, manner, price and amount of any repurchases under the Repurchase Program 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 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. No shares will be repurchased under the Repurchase Program directly from directors or officers of the Company. As of April 30, 2019 and October 31, 2018, a total of 338,254 and 315,404 shares of the Company’s common stock were purchased under the Repurchase Program for an aggregate amount of $329,035 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.

 

NOTE F – EARNINGS (LOSSES) PER SHARE

 

The following data shows the amounts used in the calculations of basic and diluted earnings (losses) per share.

 

	Three months ended April 30,		Six months ended April 30,
	2019	2018	2019	2018
Net income (loss) available to common equity holders - used to compute basic and diluted earnings (losses) per share (continuing operations)	$707,483	$(8,683)	$1,178,503	$(2,480,997)
Net income (loss) available to common equity holders - used to compute basic and diluted earnings (losses) per share (discontinued operations)	$-	$(119,665)	$-	$(311,363)
Weighted average number of common shares - used to compute basic earnings (losses) per share	23,002,903	23,062,531	23,032,107	23,076,594
Effect of warrants to purchase common stock	-	-	-	-
Effect of restricted stock units to common stock	-	-	-	-
Effect of options to purchase common stock	66,020	-	73,059	1,549
Weighted average number of shares - used to compute diluted earnings (losses) per share	23,068,923	23,062,531	23,105,166	23,078,143

 

For the three-month and six-month periods ended April 30, 2019 and 2018, warrants for the purchase of shares of 1,000,000 common stock were not considered in computing diluted earnings per share because the effect was antidilutive. In addition, options for the purchase of 80,000 shares of common stock for the three-month and six-month periods ended April 30, 2019, and 700,000 and 620,000 shares of common stock for the three-month and six-month periods ended April 30, 2018, respectively, were not included in computing diluted earnings (losses) per share because their effects were also antidilutive.

 

 

NOTE G - CONCENTRATIONS OF RISK

 

Cash and cash equivalents

 

The Company’s 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 have no specific insurance. No losses have been experienced or are expected on these accounts.

 

Accounts receivable and revenues

 

Management deems all of 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, Ireland, Spain and Brazil. 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 four customers, which accounted for 10% or more of its revenues in either of the three-month and six-month periods ended April 30, 2019 and 2018. During the three months ended April 30, 2019, revenues from these customers were 26.6%, 11.1%, 12.2% and 9.9%, or a total of 59.8%, as compared to the same period last year of 11.0%, 3.2%, 17.6% and 6.9%, or a total of 38.7%, respectively. During the six months ended April 30, 2019, revenues from these customers were 22.2%, 7.4%, 11.6% and 10.5%, or a total of 51.7%, as compared to the same period last year of 7.4%, 4.0%, 16.9% and 7.8%, or a total of 36.1%, respectively. At April 30, 2019, amounts due from these customers represented 65.9% of the Company’s total accounts receivable balance. This customer information 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.

 

At the global level, four global groups of affiliated companies accounted for 10% or more of its revenues in either of the three-month and six-month periods ended April 30, 2019 and 2018. During the three months ended April 30, 2019, aggregate revenues from these global groups of affiliated companies were 26.6%, 14.2%, 12.2%, and 9.9%, or a total of 62.9%, as compared to the same period last year for 11.0%, 5.3%, 17.6%, and 6.9%, or a total of 40.8%, respectively. During the six months ended April 30, 2019, aggregate revenues from these global group of affiliated companies were 22.2%, 10.7%, 11.6% and 10.5%, or a total of 55.0%, as compared to the same period last year for 7.4%, 6.7%, 16.9% and 7.8%, or a total of 38.8%, respectively. At April 30, 2019, amounts due from these global groups of affiliated companies represented 67.7% of total accounts receivable balance.

 

NOTE H – 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. Last fiscal year the insurance claim for property damages resulting from the Hurricanes was settled with the insurance carrier on July 2018 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 condensed financial statements for the applicable period.

 

 

 

NOTE I - 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 continuing operations of the Company for the three-month and six-month periods ended in April 30, 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.

 

	Three months ended April 30,		Six months ended April 30,
	2019	2018	2019	2018
REVENUES:
Puerto Rico consulting	$4,293,041	$3,214,364	$8,181,595	$5,912,729
United States consulting	661,356	341,196	1,188,001	627,831
Europe consulting	141,500	209,798	233,231	930,930
Other segments¹	54,447	-	113,714	20,464
Total consolidated revenues	$5,150,344	$3,765,358	$9,716,541	$7,491,954
INCOME (LOSS) BEFORE TAXES:
Puerto Rico consulting	$581,019	$(12,725)	$956,289	$(14,740)
United States consulting	14,230	(88,536)	2,320	(175,701)
Europe consulting	(8,014)	(43,797)	(57,925)	177,805
Other segments¹	195,506	136,375	396,032	232,662
Total consolidated income before taxes	$782,741	$(8,683)	$1,296,716	$220,026