Pharma-Bio Serv, Inc. - Quarter Report: 2021 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, 2021

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.

 

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 11, 2021 was 23,029,215.

 

 

PHARMA-BIO SERV, INC.

FORM 10-Q

FOR THE QUARTER ENDED APRIL 30, 2021

 

TABLE OF CONTENTS

 

	Page
PART I FINANCIAL INFORMATION
Item 1 – Financial Statements
Condensed Consolidated Balance Sheets as of April 30, 2021 and October 31, 2020 (unaudited)	1
Condensed Consolidated Statements of Operations for the three-month and six-month periods ended April 30, 2021 and 2020 (unaudited)	2
Condensed Consolidated Statements of Comprehensive Income for the three-month and six-month periods ended April 30, 2021 and 2020 (unaudited)	3
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three-month and six-month periods ended April 30, 2021 and 2020 (unaudited)	4
Condensed Consolidated Statements of Cash Flows for the three-month and six-month periods ended April 30, 2021 and 2020 (unaudited)	6
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	18
PART II OTHER INFORMATION
Item 1 – Legal Proceedings	19
Item 1 A – Risk Factors	19
Item 6 – Exhibits	19
SIGNATURES	20

 

  

PART I – FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

PHARMA-BIO SERV, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

 

ASSETS	April 30, 2021*	October 31, 2020**
Current assets
Cash and cash equivalents	$16,066.487	$17,137,924
Accounts receivable	10,364,675	9,727,591
Current portion - promissory note receivable due from sale of assets from discontinued operations	-	1,250,000
Prepaids and other assets	309,573	468,703
Total current assets	26,740,735	28,584,218
Property and equipment, net	131,766	217,572
Operating lease right-of-use	756,139	846,714
Other assets	270,303	270,242
Total assets	$27,898,943	$29,918,746
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion-obligation under finance lease	$-	$11,640
Loans-short term portion	1,287,800	1,287,800
Current operating lease liabilities	169,516	162,917
Accounts payable and accrued expenses	1,650,657	1,938,305
Current portion of US Tax Reform Transition Tax and income taxes payable	169,760	392,131
Total current liabilities	3,277,733	3,792,793
US Tax Reform Transition Tax payable	1,850,536	2,062,024
Loans-long term portion	643,900	643,900
Long term portion - obligation under finance lease	-	55,439
Long-term operating lease liabilities	559,873	629,979
Other liabilities	17,950	17,950
Total liabilities	6,349,992	7,202,085
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; 23,433,341 and 23,405,753 shares issued, and 23,029,215 and 23,001,627 shares outstanding at April 30, 2021 and October 31, 2020, respectively	2,343	2,341
Additional paid-in capital	1,446,814	1,423,954
Retained earnings	20,304,927	21,523,990
Accumulated other comprehensive income	189,145	160,654
	21,943,229	23,110,939
Treasury stock, at cost; 404,126 common shares held at April 30, 2021 and October 31, 2020, respectively	(394,278)	(394,278)
Total stockholders' equity	21,548,951	22,716,661
Total liabilities and stockholders' equity	$27,898,943	$29,918,746

 

*	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,
	2021	2020	2021	2020
REVENUES	$5,041,666	$5,647,767	$9,529,975	$10,260,934
COST OF SERVICES	3,750,794	3,778,867	6,923,993	6,806,142
GROSS PROFIT	1,290,872	1,868,900	2,605,982	3,454,792
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES	1,026,093	1,148,516	2,022,082	2,197,649
INCOME FROM OPERATIONS	264,779	720,384	583,900	1,257,143
OTHER INCOME, NET	21,090	48,584	23,492	94,020
INCOME BEFORE INCOME TAX	285,869	768,968	607,392	1,351,163
INCOME TAX EXPENSE	45,598	81,407	99,089	136,702
NET INCOME	$240,271	$687,561	$508,303	$1,214,461
BASIC AND DILUTED EARNINGS PER COMMON SHARE	$0.010	$0.030	$0.022	$0.053
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC	23,029,215	23,001,627	23,019,765	23,002,745
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED	23,209,118	23,029,203	23,181,347	23,025,958

 

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,
	2021	2020	2021	2020
NET INCOME	$240,271	$687,561	$508,303	$1,214,461
OTHER COMPREHENSIVE INCOME (LOSS), NET OF RECLASSIFICATION ADJUSTMENTS AND TAXES:
Foreign currency translation gain (loss), net of tax	4,739	(29,733)	28,491	(41,467)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)	4,739	(29,733)	28,491	(41,467)
COMPREHENSIVE INCOME	$245,010	$657,828	$536,794	$1,172,994

 

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 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

 

 

PHARMA-BIO SERV, INC.

Condensed Consolidated Statements of Changes in Stockholders' Equity (continued)

(Unaudited)

 

							Accumulated
					Additional		Other
FISCAL YEAR 2021	Common Stock		Preferred Stock		Paid-in	Retained	Comprehensive	Treasury
	Shares	Amount	Shares	Amount	Capital	Earnings	Income (Loss)	Stock	Total
BALANCE AT NOVEMBER 1, 2020	23,405,753	$2,341	-	$-	$1,423,954	$21,523,990	$160,654	$(394,278)	$22,716,661
STOCK-BASED COMPENSATION	-	-	-	-	11,430	-	-	-	11,430
ISSUANCE OF COMMON STOCK PURSUANT TO THE CASHLESS EXERCISE OF STOCK OPTIONS	27,588	2	-	-	-	(2)	-	-	-
NET INCOME	-	-	-	-	-	268,032	-	-	268,032
OTHER COMPREHENSIVE INCOME, NET OF TAX	-	-	-	-	-	-	23,752	-	23,752
CASH DIVIDEND ($0.075 PER COMMONSHARE AT RECORD DATE)	-	-	-	-	-	(1,727,364)	-	-	(1,727,364)
BALANCE AT JANUARY 31, 2021	23,433,341	2,343	-	-	1,435,384	20,064,656	184,406	(394,278)	21,292,511
STOCK-BASED COMPENSATION	-	-	-	-	11,430	-	-	-	11,430
NET INCOME	-	-	-	-	-	240,271	-	-	240,271
OTHER COMPREHENSIVE INCOME, NET OF TAX	-	-	-	-	-	-	4,739	-	4,739
BALANCE AT APRIL 30, 2021	23,433,341	$2,343	-	$-	$1,446,814	$20,304,927	$189,145	$(394,278)	$21,548,951

 

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,
	2021	2020	2021	2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$240,271	$687,561	$508,303	$1,214,461
Adjustments to reconcile net income to net cash used in operating activities:
Gain on disposition of property and equipment	(7,404)	(4,918)	(7,404)	(4,918)
Stock-based compensation	11,430	11,430	22,860	22,860
Depreciation and amortization	18,831	21,579	40,255	42,611
Increase in accounts receivable	(797,930)	(2,262,929)	(621,066)	(1,200,788)
Decrease (increase) in other assets	113,385	111,919	249,851	(725,524)
Increase (decrease) in liabilities	(764,001)	(121,349)	(790,031)	609,610
NET CASH USED IN OPERATING ACTIVITIES	(1,185,418)	(1,556,707)	(597,232)	(41,688)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment	(2,048)	(27,548)	(4,616)	(38,874)
Proceeds from sale of property and equipment	57,571	12,000	57,571	12,000
Collection from promissory note receivable	-	-	1,250,000	-
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES	55,523	(15,548)	1,302,955	(26,874)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans	-	1,931,700	-	1,931,700
Repurchase of common stock	-	-	-	(1,699)
Payments on obligations under finance lease	(64,228)	(2,739)	(67,079)	(5,441)
Cash dividends paid to shareholders	(1,727,364)	-	(1,727,364)	(1,725,295)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	(1,791,592)	1,928,961	(1,794,443)	199,265
EFFECT OF EXCHANGE RATE CHANGES ON CASH	(365)	(29,461)	17,283	(38,880)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(2,921,852)	327,245	(1,071,437)	91,823
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD	18,988,339	15,254,752	17,137,924	15,490,174
CASH AND CASH EQUIVALENTS – END OF PERIOD	$16,066,487	$15,581,997	$16,066,487	$15,581,997

SUPPLEMENTAL DISCLOURES OF CASH FLOWS INFORMATION:
Cash paid during the period for:
Income taxes	$507,207	$211,763	$507,207	$211,763
Interest	$552	$988	$1.404	$2,004
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	$433	$-	$4,046	$3,649
Conversion of cashless exercise of options to shares of common stock and shares issued under restricted stock unit agreements	$-	$-	$2	$1
Disposed property and equipment with accumulated depreciation of $35,833 for the three and six months ended April 30, 2021 and $17,913 for the three and six months ended April 30, 2020	$86,000	$24,995	$86,000	$24,995

 

See notes to the condensed consolidated financial statements.

 

 

PHARMA-BIO SERV, INC.

Notes To Condensed Consolidated Financial Statements

April 30, 2021

(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. (currently inactive) (“Scienza Labs”), each a Puerto Rico corporation, Pharma-Bio Serv US, Inc. (“Pharma-US”), a Delaware corporation, 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-Spain and Pharma-Brazil are collectively referred to as the “Company.” The Company operates in Puerto Rico, the United States, Europe 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, 2020 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, 2021 are not necessarily indicative of expected results for the full 2021 fiscal year.

 

The accompanying financial data as of April 30, 2021, and for the three-month and six-month periods ended April 30, 2021 and 2020 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, 2020.

 

 

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

 

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

 

The Company records revenue under Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers. We evaluate our revenue contracts with customers based on the five-step model under ASC 606: (i) Identify the contract with the customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to separate performance obligations; and (v) Recognize revenue when (or as) each performance obligation is satisfied.

 

Revenue is primarily derived from: (1) time and material contracts (representing approximately 99% of total revenues), and (2) short-term fixed-fee contracts or "not to exceed" contracts (representing approximately 1% of total revenues). Time and material contracts are typically based on the number of hours worked at contractually agreed upon rates. These service contracts relate to work which have no alternative use and for which the Company has an enforceable right to payment for the work completed to date. As a result, revenue is recognized over time when or as the Company transfers control of the promised products or services (known as performance obligations) to its customers. Revenue for short term fixed fee contracts or “not to exceed” contracts 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, 2021, 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, 2021 and October 31, 2020, the accumulated depreciation amounted to $508,836 and $501,489, respectively.

 

Leases

 

We categorize leases at their inception as either operating or finance leases. The Company leases include an operating lease for office space and a finance lease agreement for a vehicle, which was disposed on April 2021. The adoption of the 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. However, the adoption of the standard 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. As of April 30, 2021 and October 31, 2020, the total right-of-use assets related to the Company’s operating leases were $756,139 and $846,714, respectively, As of April 30, 2021 operating lease liabilities current and non-current were approximately $169,516 and $559,873, respectively, while as of October 31, 2020 operating lease liabilities current and non-current were approximately $162,917 and $629,979, 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, 2021 and October 31, 2020.

 

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, 2020 condensed consolidated financial statements to conform them to the April 30, 2021 condensed consolidated financial statements presentation. Such reclassifications do not affect net income as previously reported.

 

Recent Accounting Pronouncements

 

Recent accounting pronouncements pending adoption not discussed above or in the Form 10-K for the year ended October 31, 2020 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 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 was composed of two tranches: (i) Tranche A for $2 million and secured with lab equipment and (ii) Tranche B for $1 million which was unsecured. The interest rate accrual was 3% for Tranche A and 5% for Tranche B. The Promissory Note's final payment installment of $1,250,000 from Tranche A was collected in November 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 to receive U.S. Small Business Administration 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. These SBA Loans terms follow the CARES Act provisions and the corresponding regulations issued by the SBA. Under regulations established by the Small Business Administration, the Company may seek forgiveness of the SBA Loans.

 

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 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 was determined to be approximately $2.7 million. The Transition Tax liability must be paid over a period of eight years which started with the Company’s second quarter of 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. However, foreign subsidiaries earnings are subject to U.S. tax at a reduced rate of 10.5%.

 

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 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 has 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. Pharma-Spain net operating loss is available to offset future taxable income through 2035.

 

The Company files income tax returns in the United States (federal and various states jurisdictions), Puerto Rico, Ireland, Spain and Brazil. The 2016 (2015 for Puerto Rico) through 2019 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 – 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,
	2021	2020	2021	2020
Net income available to common equity holders - used to compute basic and diluted earnings per share	$240,271	$687,561	$508.303	$1,214,461
Weighted average number of common shares - used to compute basic earnings per share	23,029,215	23,001,627	23,019,765	23,002,745
Effect of options to purchase common stock	179,903	27,576	161,582	23,213
Weighted average number of shares - used to compute diluted earnings per share	23,209,118	23,029,203	23,181,347	23,025,958

 

For the three-month and six-month periods ended April 30, 2021 and April 30, 2020, options for the purchase of shares of 80,000 common stock were not considered in computing diluted earnings per share because the effect was antidilutive.

 

NOTE F – 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. Since April 2020, the Company suspended purchases under the Repurchase Program. As of April 30, 2021, a total of 341,154 shares of the Company’s common stock were purchased under the Repurchase Program for an aggregate amount of $331,306.

 

On January 5, 2021 the Board of Directors of the Company declared a cash dividend of $0.075 per common share for shareholders of record as of the close of business on January 25, 2021. Accordingly, an aggregate dividend payment of $1,727,364 was paid on February 5, 2021.

 

 

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, 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 six customers, which accounted for 10% or more of its revenues in either of the three-month and six-month periods ended April 30, 2021 and 2020. During the three months ended April 30, 2021, revenues from these customers were 22.9%, 13.5%, 11.9%, 9.2%, 4.4% and 0.0%, or a total of 61.9%, as compared to the same period last year of 15.3%, 12.3%, 0.0%, 11.0%, 8.0%, and 25.8%, or a total of 72.4%, respectively. During the six months ended April 30, 2021, revenues from these customers were 21.4%, 11.9%, 10.1%, 12.4%, 5.5% and 0.1%, or a total of 61.4%, as compared to the same period last year of 14.9%, 10.8%, 0.1%, 12.3%, 10.4% and 21.7%, or a total of 70.2%, respectively. At April 30, 2021, amounts due from these customers represented 85.9% 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, six 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, 2021 and 2020. During the three months ended April 30, 2021, aggregate revenues from these global groups of affiliated companies were 22.9%, 13.5%, 11.9%, 11.8%, 4.4% and 0.0%, or a total of 64.5%, as compared to the same period last year for 15.3%, 12.3%, 0.0%, 13.7%, 8.0% and 25.8%, or a total of 75.1%, respectively. During the six months ended April 30, 2021, aggregate revenues from these global group of affiliated companies were 21.4%, 11.9%, 10.1%, 14.8%, 5.5% and 0.1%, or a total of 63.8%, as compared to the same period last year for 14.9%, 10.8%, 0.1%, 15.2%, 10.4% and 21.7%, or a total of 73.1%, respectively. At April 30, 2021, amounts due from these global groups of affiliated companies represented 87.3% of total accounts receivable balance.

 

As of April 30, 2021, one of the Company’s customers (representing 5.5% of revenues during the six months ended April 30, 2021) owes the Company approximately $5.2 million, which represents approximately 22.2% of the Company’s total working capital. 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 has been recorded in the financial statements.

 

 

NOTE H - 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 three-month and six-month periods ended in April 30, 2021 and 2020. 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,
	2021	2020	2021	2020
REVENUES:
Puerto Rico consulting	$3,744,725	$5,116,682	$7,112,076	$9,297,592
United States consulting	476,809	394,991	924,220	784,353
Europe consulting	674,826	133,762	1,205,322	155,950
Other segment1	145,306	2,332	288,357	23,039
Total consolidated revenues	$5,041,666	$5,647,767	$9,529,975	$10,260,934
INCOME (LOSS) BEFORE TAXES:
Puerto Rico consulting	$44,546	$819,750	$148,958	$1,493,421
United States consulting	(23,268)	(37,498)	(13,885)	(52,139)
Europe consulting	222,541	7,490	380,044	(61,684)
Other segment1	42,050	(20,774)	92,275	(28,435)
Total consolidated income before taxes	$285,869	$768,968	$607,392	$1,351,163