Pharma-Bio Serv, Inc. - Quarter Report: 2020 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, 2020

 

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 # 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, 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, 2020 was 23,001,627.

 

 

PHARMA-BIO SERV, INC.

FORM 10-Q

FOR THE QUARTER ENDED APRIL 30, 2020

 

TABLE OF CONTENTS

 

		Page
PART I FINANCIAL INFORMATION
Item 1 – Financial Statements
Condensed Consolidated Balance Sheets as of April 30, 2020 and October 31, 2019 (unaudited)			1
Condensed Consolidated Statements of Operations for the three-month and six-month periods ended April 30, 2020 and 2019 (unaudited)			2
Condensed Consolidated Statements of Comprehensive Income for the three-month and six-month periods ended April 30, 2020 and 2019 (unaudited)			3
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three-month and six-month periods ended April 30, 2020 and 2019 (unaudited)			4
Condensed Consolidated Statements of Cash Flows for the three-month and six-month periods ended April 30, 2020 and 2019 (unaudited)			6
Notes to Condensed Consolidated Financial Statements (unaudited)			8
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations			15
Item 4 – Controls and Procedures			19
PART II OTHER INFORMATION
Item 1 – Legal Proceedings			20
Item 1 A – Risk Factors			20
Item 6 – Exhibits			21
SIGNATURES			22

 

 

  

PART I – FINANCIAL INFORMATION

 

Item 1.

FINANCIAL STATEMENTS

 

PHARMA-BIO SERV, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

 

ASSETS	April 30, 2020*	October 31, 2019**
Current assets
Cash and cash equivalents	$15,581,997	$15,490,174
Accounts receivable	9,976,981	8,781,026
Current portion - promissory note receivable due from sale of assets from discontinued operations	1,250,000	1,250,000
Prepaids and other assets	332,722	453,780
Total current assets	27,141,700	25,974,980
Property and equipment, net	250,752	290,658
Operating lease right-of-use	874,840	-
Other assets	368,631	367,437
Total assets	$28,635,923	$26,633,075
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion-obligations under finance leases	$11,331	$11,030
Loans short term portion	643,900	-
Current operating lease liabilities	156,496	-
Accounts payable and accrued expenses	1,423,139	1,590,172
Dividend payable to stockholders	-	1,725,295
Current portion of US Tax Reform Transition Tax and income taxes payable	476,881	344,043
Total current liabilities	2,711,747	3,670,540
US Tax Reform Transition Tax payable	2,058,512	2,270,000
Loans-long term portion	1,287,800	-
Obligations under finance leases	61,337	67,079
Long-term operating lease liabilities	696,916	-
Other liabilities	17,950	17,950
Total liabilities	6,834,262	6,025,569
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; 23,405,753 and 23,397,707 shares issued, and 23,001,627 and 22,995,881 shares outstanding at April 30, 2020 and October 31, 2019, respectively	2,341	2,340
Additional paid-in capital	1,403,936	1,381,076
Retained earnings	20,687,529	19,473,069
Accumulated other comprehensive income	102,133	143,600
	21,195,939	21,000,085
Treasury stock, at cost; 404,126 and 401,826 common shares held at April 30, 2020 and October 31, 2019, respectively	(394,278)	(392,579)
Total stockholders' equity	21,801,661	20,607,506
Total liabilities and stockholders' equity	$28,635,923	$26,633,075

 

*	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,
	2020	2019	2020	2019
REVENUES	$5,647,767	$5,150,344	$10,260,934	$9,716,541
COST OF SERVICES	3,778,867	3,556,942	6,806,142	6,644,079
GROSS PROFIT	1,868,900	1,593,402	3,454,792	3,072,462
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES	1,148,516	1,116,474	2,197,649	2,163,033
INCOME FROM OPERATIONS	720,384	476,928	1,257,143	909,429
OTHER INCOME, NET	48,584	305,813	94,020	387,287
INCOME BEFORE INCOME TAX	768,968	782,741	1,351,163	1,296,716
INCOME TAX EXPENSE	81,407	75,258	136,702	118,213
NET INCOME	$687,561	$707,483	$1,214,461	$1,178,503
BASIC AND DILUTED EARNINGS PER COMMON SHARE	$0.030	$0.031	$0.053	$0.051
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC	23,001,627	23,002,903	23,002,745	23,032,107
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED	23,029,203	23,068,923	23,025,958	23,105,166

 

See notes to the condensed consolidated financial statements.

 

 

PHARMA-BIO SERV, INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

 

	Three months ended April 30,		Six months ended April 30,
	2020	2019	2020	2019
NET INCOME	$687,561	$707,483	$1,214,461	$1,178,503
OTHER COMPREHENSIVE LOSS, NET OF RECLASSIFICATION ADJUSTMENTS AND TAXES:
Foreign currency translation loss	(29,733)	(23,267)	(41,467)	(10,950)
Available-for-sale securities other-than-temporary impairment included in net income	-	-	-	(4,475)
TOTAL OTHER COMPREHENSIVE LOSS	(29,733)	(23,267)	(41,467)	(15,425)
COMPREHENSIVE INCOME	$657,828	$684,216	$1,172,994	$1,163,078

 

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 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

 

 

 

							Accumulated
					Additional		Other
FISCAL YEAR 2020	Common Stock		Preferred Stock		Paid-in	Retained	Comprehensive	Treasury
	Shares	Amount	Shares	Amount	Capital	Earnings	Income (Loss)	Stock	Total
BALANCE AT NOVEMBER 1, 2019	23,397,707	$2,340	-	$-	$1,381,076	$19,473,069	$143,600	$(392,579)	$20,607,506
STOCK-BASED COMPENSATION	-	-	-	-	11,430	-	-	-	11,430
ISSUANCE OF COMMON STOCK PURSUANT TO THE CASHLESS EXERCISE OF STOCK OPTIONS	8,046	1	-	-	-	(1)	-	-	-
PURCHASE OF TREASURY STOCK (2,300 SHARES)	-	-	-	-	-	-	-	(1,699)	(1,699)
NET INCOME	-	-	-	-	-	526,900	-	-	526,900
OTHER COMPREHENSIVE LOSS, NET OF TAX		-	-	-	-	-	(11,734)	-	(11,734)
BALANCE AT JANUARY 31, 2020	23,405,753	2,341	-	-	1,392,506	19,999,968	131,866	(394,278)	21,132,403
STOCK-BASED COMPENSATION		-	-	-	11,430	-	-	-	11,430
NET INCOME		-	-	-	-	687,561	-	-	687,561
OTHER COMPREHENSIVE LOSS, NET OF TAX		-	-	-	-	-	(29,733)	-	(29,733)
BALANCE AT APRIL 30, 2020	23,405,753	$2,341	-	$-	$1,403,936	$20,687,529	$102,133	$(394,278)	$21,801,661

 

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,
	2020	2019	2020	2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$687,561	$707,483	$1,214,461	$1,178,503
Adjustments to reconcile net income to net cash used in operating activities:
Gain on disposition of property and equipment	(4,918)	(47,392)	(4,918)	(47,392)
Stock-based compensation	11,430	9,000	22,860	18,000
Depreciation and amortization	21,579	21,844	42,611	48,682
Other-than-temporary impairment on available-for-sale securities	-	-	-	(4,475)
Increase in accounts receivable	(2,262,929)	(1,212,558)	(1,200,788)	(1,473,845)
(Increase) decrease in other assets	111,919	23,593	(725,524)	80,329
Increase (decrease) in liabilities	(121,349)	(324,887)	609,610	(840,431)
NET CASH USED IN OPERATING ACTIVITIES	(1,556,707)	(822,917)	(41,688)	(1,040,629)
CASH FLOWS FROM INVESTING ACTIVITIES:
Disposal of marketable securities	-	-	-	44,475
Acquisition of property and equipment	(27,548)	(35,761)	(38,874)	(38,844)
Proceeds from sale of property and equipment	12,000	99,038	12,000	99,038
Collection from promissory note receivable	-	500,000	-	500,000
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	(15,548)	563,277	(26,874)	604,669
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans	1,931,700	-	1,931,700	-
Repurchase of common stock	-	(21,564)	(1,699)	(87,319)
Payments on obligations under finance lease	(2,739)	(58,993)	(5,441)	(62,390)
Cash dividends paid to shareholders	-	-	(1,725,295)	-
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	1,928,961	(80,557)	199,265	(149,709)
EFFECT OF EXCHANGE RATE CHANGES ON CASH	(29,461)	(25,218)	(38,880)	(11,140)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	327,245	(365,415)	91,823	(596,809)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD	15,254,752	15,798,526	15,490,174	16,029,920
CASH AND CASH EQUIVALENTS – END OF PERIOD	$15,581,997	$15,433,111	$15,581,997	$15,433,111

 

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,
	2020	2019	2020	2019
SUPPLEMENTAL DISCLOURES OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Income taxes	$211,763	$326,898	$211,763	$326,898
Interest	$988	$1,425	$2,004	$1,904
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	$3,649	$24,000
Conversion of cashless exercise of options to shares of common stock and shares issued under restricted stock unit agreements	$-	$2	$1	$3
Obligations under capital lease incurred for the acquisition of a vehicle	$-	$86,000	$-	$86,000
Disposed property and equipment with accumulated depreciation of $17,913 for the three and six months ended April 30, 2020 and $86,773 for the three and six months ended April 30, 2019	$24,995	$138,419	$24,995	$138,419

 

See notes to the condensed consolidated financial statements.

 

 

PHARMA-BIO SERV, INC.

Notes To Condensed Consolidated Financial Statements

April 30, 2020

(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.

 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The condensed consolidated balance sheet of the Company as of October 31, 2019 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, 2020 are not necessarily indicative of expected results for the full 2020 fiscal year.

 

The accompanying financial data as of April 30, 2020, and for the three-month and six-month periods ended April 30, 2020 and 2019 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, 2019.

 

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

 

The Company 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 condensed consolidated financial statements are presented to show these three reportable segments.

 

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 finance 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 finance 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.

 

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, 2020, 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 are stated at cost. Vehicles under finance 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 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 finance leases are amortized over the lease term. While expenditures for repairs and maintenance are expensed when incurred. As of April 30, 2020 and October 31, 2019, the accumulated depreciation amounted to $481,325 and $509,275, respectively.

 

Impairment of Long-Lived Assets

 

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 long-lived assets was present as of April 30, 2020 and October 31, 2019.

 

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 Per Share of Common Stock

 

Basic earnings per share of common stock is calculated by dividing net earnings by the weighted average number of shares of common stock outstanding. Diluted earnings 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, 2019 condensed consolidated financial statements to conform them to the April 30, 2020 condensed consolidated financial statements presentation. Such reclassifications do not affect net income as previously reported.

 

Recently Adopted Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 is intended to increase transparency and comparability of accounting for lease transactions. For all leases with terms greater than twelve months, the new guidance will require lessees to recognize right-of-use assets and corresponding lease liabilities on the balance sheet and to disclose qualitative and quantitative information about lease transactions. The new standard maintains a distinction between finance leases and operating leases. As a result, the effect of leases in the statement of operations and statement of cash flows is largely unchanged. In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements, to allow a company to elect an optional modified retrospective transition method that applies the new lease requirements through a cumulative-effect adjustment in the period of adoption.

 

Effective November 1, 2019, the Company adopted the new lease accounting standard using the modified retrospective transition option of applying the new standard at the adoption date. We categorize leases at their inception as either operating or finance leases. The Company leases include an operational lease for office space and a finance lease agreement for a vehicle. The adoption of the new standard resulted in the operating lease being included in operating lease right-of-use assets, current operating lease liabilities, and long-term operating lease liabilities in our condensed consolidated balance sheets, but did not have an impact on the Company’s beginning balance of retained earnings, consolidated statement of operations or statement of cash flows. Finance leases are included in net property and equipment, current installments of long-term debt, and long-term debt in our condensed consolidated balance sheets. The most significant impact was the recognition of right-of-use assets and lease liabilities on account of the Company’s operating leases. The Company recognized $941,009 of right-of-use assets and $911,922 in operating lease liabilities at November 1, 2019. As of April 30, 2020, the total right-of-use assets related to the Company’s operating leases was $874,840 and operating lease liabilities current and non-current were approximately $156,496 and $696,916, respectively.

 

Recent Accounting Pronouncements

 

Recent accounting pronouncements pending adoption not discussed above or in the 2019 Form 10-K are either not applicable or will not have or are not expected to have a material impact on us.

 

NOTE B – PROMISSORY NOTE

 

On September 17, 2018 (the “Sales Closing Date”), the Company sold substantially all of its Lab business assets (the “Laboratory Assets”). 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 April 30, 2020, 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 C – LOANS

 

On April 23, 2020, Pharma-PR, Pharma-Serv, and Pharma-US (collectively, the “Borrowers”) entered into loan agreements and related promissory notes (the “SBA Loan Documents”) to receive U.S. Small Business Administration Loans (the “SBA Loans”). These loans were originated pursuant to the Paycheck Protection Program (the “PPP”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and in the aggregate amount of $1,931,700 (the “Loan Proceeds”). The Borrowers received the Loan Proceeds on April 23, 2020. In accordance with the SBA Loan Documents, the SBA Loans (i) have a fixed interest rate of 1%, (ii) begin repayment six months from the date of disbursement of each SBA Loan, and (iii) mature two years from the date of first disbursement. These SBA Loans have no prepayment penalty.

 

NOTE D - 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 Company elected to pay the Transition Tax liability over an eight year period starting with the Company’s fiscal year 2019. In the past, most of these E&Ps’ were not repatriated and, considered to be reinvested indefinitely in the foreign location. Therefore no US tax liability was incurred with respect to these E&Ps, unless the E&Ps were repatriated as a dividend. After December 31, 2017, the Tax Reform established a 100% tax exemption on the foreign-source portion of dividends which are 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 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 37.5% as provided by the 1994 Puerto Rico Internal Revenue Code, as amended. The operations carried out in the United States by the Company’s subsidiaries, is taxed in the United States at a maximum regular federal income tax rate of 21%.

 

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 and Pharma-Bio/Pharma-US 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 2034 for Pharma-Spain; indefinitely for Pharma-IR; until 2039 for Pharma-Bio/Pharma-US.

 

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 has no federal, state, Puerto Rico or foreign income tax examination.

 

NOTE E – WARRANTS

 

On December 2014, the Company entered into a stock warrant agreement with a firm in exchange 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 expired on December 1, 2019 without being exercised.

 

NOTE F – EARNINGS PER SHARE

 

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

 

	Three months ended April 30,		Six months ended April 30,
	2020	2019	2020	2019
Net income available to common equity holders - used to compute basic and diluted earnings per share	$687,561	$707,483	$1,214,461	$1,178,503
Weighted average number of common shares - used to compute basic earnings per share	23,001,627	23,002,903	23,002,745	23,032,107
Effect of options to purchase common stock	27,576	66,020	23,213	73,059
Weighted average number of shares - used to compute diluted earnings per share	23,029,203	23,068,923	23,025,958	23,105,166

 

For the three-month and six-month periods ended April 30, 2020, options for the purchase of shares of 340,000 common stock were not considered in computing diluted earnings per share because the effect was antidilutive. In addition, warrants and options for the purchase of 1,000,000 and 80,000 shares of common stock, respectively, for the three-month and six-month periods ended April 30, 2019, were not included in computing diluted earnings per share because their effects were also antidilutive.

 

 

NOTE G – 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, 2020 and October 31, 2019, a total of 341,154 and 338,854 shares of the Company’s common stock were purchased under the Repurchase Program for an aggregate amount of $331,306 and $329,607, respectively. During April 2020, the Company suspended purchases under the Repurchase Program to conserve cash due to the economic uncertainty caused by the coronavirus pandemic. 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 H - 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 five customers, which accounted for 10% or more of its revenues in either of the three-month and six-month periods ended April 30, 2020 and 2019. During the three months ended April 30, 2020, revenues from these customers were 24.9%, 9.3%, 14.6%, 11.8% and 7.6%, or a total of 68.2%, as compared to the same period last year of 0.0%, 11.1%, 9.9%, 12.2% and 26.6%, or a total of 59.8%, respectively. During the six months ended April 30, 2020, revenues from these customers were 21.3%, 12.1%, 14.6%, 10.6% and 10.1%, or a total of 68.7%, as compared to the same period last year of 0.0%, 7.3%, 10.5%, 11.6% and 22.2%, or a total of 51.6%, respectively. At April 30, 2020, amounts due from these customers represented 85.2% 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, five 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, 2020 and 2019. During the three months ended April 30, 2020, aggregate revenues from these global groups of affiliated companies were 24.9%, 11.9%, 14.6%, 11.8%, and 7.6%, or a total of 70.8%, as compared to the same period last year for 0.0%, 14.2%, 9.9%, 12.2%, and 26.6%, or a total of 62.9%, respectively. During the six months ended April 30, 2020, aggregate revenues from these global group of affiliated companies were 21.3%, 14.9%, 14.6%, 10.6% and 10.1%, or a total of 71.5%, as compared to the same period last year for 0.0%, 10.7%, 10.5%, 11.6% and 22.2%, or a total of 55.0%, respectively. At April 30, 2020, amounts due from these global groups of affiliated companies represented 86.1% of total accounts receivable balance.