Pharma-Bio Serv, Inc. - FORM 10-Q - March 16, 2020

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EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - Pharma-Bio Serv, Inc.pbsv_ex321.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - Pharma-Bio Serv, Inc.pbsv_ex312.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - Pharma-Bio Serv, Inc.pbsv_ex311.htm
 

 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 January 31, 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 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, 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 March 14, 2020 was 23,001,627.
 

 
 
 

PHARMA-BIO SERV, INC.
FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 2020
 
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART I – FINANCIAL INFORMATION
 
Item 1. 
FINANCIAL STATEMENTS
PHARMA-BIO SERV, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
                                                        ASSETS
 
January 31, 2020*
 
 
October 31, 2019**
 
Current assets
 
 
 
 
 
 
Cash and cash equivalents
 $15,254,752 
 $15,490,174 
Accounts receivable
  7,716,573 
  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
  410,859 
  453,780 
Total current assets
  24,632,184 
  25,974,980 
Property and equipment
  251,865 
  290,658 
Operating lease right-of-use
  908,399 
  - 
Other assets
  367,797 
  367,437 
Total assets
 $26,160,245 
 $26,633,075 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
    
    
Current liabilities
Current portion-obligations under finance leases
 $11,179 
 $11,030 
Current operating lease liabilities
  153,763 
  - 
Accounts payable and accrued expenses
  1,384,932 
  1,590,172 
Dividend payable to stockholders
  - 
  1,725,295 
Current portion of US Tax Reform Transition Tax and income taxes payable
  396,401 
  344,043 
Total current liabilities
  1,946,275 
  3,670,540 
US Tax Reform Transition Tax payable
  2,270,000 
  2,270,000 
Obligations under finance leases
  64,228 
  67,079 
Long-term operating lease liabilities
  729,389 
  - 
Other liabilities
  17,950 
  17,950 
Total liabilities
  5,027,842 
  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 January 31, 2020 and October 31, 2019, respectively
  2,341 
  2,340 
Additional paid-in capital
  1,392,506 
  1,381,076 
Retained earnings
  19,999,968 
  19,473,069 
Accumulated other comprehensive income
  131,866 
  143,600 
 
  21,526,681 
  21,000,085 
Treasury stock, at cost; 404,126 and 401,826 common shares held at January 31, 2020 and October 31, 2019, respectively
  (394,278)
  (392,579)
Total stockholders' equity
  21,132,403 
  20,607,506 
Total liabilities and stockholders' equity
 $26,160,245 
 $26,633,075 
 
*
Unaudited.
**
Condensed from audited financial statements.
 
See notes to the condensed consolidated financial statements.
 
 
1
 
 
PHARMA-BIO SERV, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
 
 
 
Three months ended January 31,
 
 
 
 2020
 
 
2019
 
REVENUES
 $4,613,167 
 $4,566,197 
 
    
    
COST OF SERVICES
  3,027,275 
  3,087,137 
 
    
    
GROSS PROFIT
  1,585,892 
  1,479,060 
 
    
    
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
  1,049,133 
  1,046,559 
 
    
    
INCOME FROM OPERATIONS 
  536,759 
  432,501 
 
    
    
OTHER INCOME, NET
  45,436 
  81,474 
 
    
    
INCOME BEFORE INCOME TAX
  582,195 
  513,975 
 
    
    
INCOME TAX EXPENSE
  55,295 
  42,955 
 
    
    
NET INCOME
 $526,900 
 $471,020 
 
    
    
 
    
    
BASIC AND DILUTED EARNINGS PER COMMON SHARE
 $0.023 
 $0.020 
 
    
    
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC
  23,002,191 
  23,038,999 
 
    
    
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED
  23,018,537 
  23,119,027 
 
See notes to the condensed consolidated financial statements.
 
 
2
 
 
PHARMA-BIO SERV, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
 
 
 
Three months ended January 31,
 
 
 
 2020
 
 
2019
 
NET INCOME
 $526,900 
 $471,020 
 
    
    
OTHER COMPREHENSIVE INCOME (LOSS), NET OF
RECLASSIFICATION ADJUSTMENTS AND TAXES:
    
    
Foreign currency translation gain (loss)
  (11,734)
  12,317 
Available-for-sale securities other-than-temporary impairment included in net income
  - 
  (4,475)
 
    
    
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
  (11,734)
  7,842 
 
    
    
COMPREHENSIVE INCOME
 $515,166 
 $478,862 
 
See notes to the condensed consolidated financial statements.
 
 
3
 
 
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 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 
 
See notes to condensed consolidated financial statements
 
 
4
 
 
PHARMA-BIO SERV, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
Three months ended January 31,
 
 
 
2020
 
 
2019
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
Net income
 $526,900 
 $471,020 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
    
    
Stock-based compensation
  11,430 
  9,000 
Depreciation and amortization
  21,032 
  26,838 
Decrease (increase) in accounts receivable
  1,062,141 
  (261,287)
Decrease (increase) in other assets
  (837,443)
  52,261 
Increase (decrease) in liabilities
  730,959 
  (515,544)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
  1,515,019 
  (217,712)
 
    
    
CASH FLOWS FROM INVESTING:
    
    
Disposal of marketable securities
  - 
  44,475 
Acquisition of property and equipment
  (11,326)
  (3,083)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
  (11,326)
  41,392 
 
    
    
CASH FLOWS FROM FINANCING ACTIVITIES:
    
    
Repurchase of common stock
  (1,699)
  (65,755)
Payments on obligations under finance lease
  (2,702)
  (3,397)
Cash dividends paid to shareholders
  (1,725,295)
  - 
NET CASH USED IN FINANCING ACTIVITIES
  (1,729,696)
  (69,152)
 
    
    
EFFECT OF EXCHANGE RATE CHANGES ON CASH
  (9,419)
  14,078 
NET DECREASE IN CASH AND CASH EQUIVALENTS
  (235,422)
  (231,394)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD
  15,490,174 
  16,029,920 
CASH AND CASH EQUIVALENTS - END OF PERIOD
 $15,254,752 
 $15,798,526 
 
    
    
 
    
    
SUPPLEMENTAL DISCLOURES OF
CASH FLOWS INFORMATION:
    
    
Cash paid during the period for:
    
    
Income taxes
 $- 
 $- 
Interest
 $1,016 
 $479 
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
 $3,649 
 $6,589 
Conversion of cashless exercise of options to common stock
 $1 
 $1 
 
See notes to the condensed consolidated financial statements.
 
 
 
5
 
 
PHARMA-BIO SERV, INC.
Notes To Condensed Consolidated Financial Statements
January 31, 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 three months ended January 31, 2020 are not necessarily indicative of expected results for the full 2020 fiscal year.
 
The accompanying financial data as of January 31, 2020, and for the three-month period ended January 31, 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.
 
6
 
 
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.
 
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.
 
7
 
 
 
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 January 31, 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 January 31, 2020 and October 31, 2019, the accumulated depreciation amounted to $477,659 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 January 31, 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.
 
8
 
Reclassifications
 
Certain reclassifications have been made to the January 31, 2019 condensed consolidated financial statements to conform them to the January 31, 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 January 31, 2020, the total right-of-use assets related to the Company’s operating leases was $908,399 and operating lease liabilities current and non-current were approximately $153,763 and $729,389, 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 RECEIVABLE
 
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 January 31, 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 - 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 has to 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.
 
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.
 
9
 
 
 
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 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. The Company warrants for the purchase of 1,000,000 common shares issued to this firm for its services expired on December 1, 2019.
 
NOTE 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 January 31, 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. 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 PER SHARE
 
The following data shows the amounts used in the calculations of basic and diluted earnings per share.
 
 
Three months
ended January 31,
 
 
 
2020
 
 
2019
 
Net income available to common equity holders - used to compute basic and diluted earnings per share
 $526,900 
 $471,020 
 
    
    
Weighted average number of common shares - used to compute basic earnings per share
  23,002,191 
  23,038,999 
Effect of warrants to purchase common stock
  - 
  - 
Effect of options to purchase common stock
  16,346 
  80,028 
Weighted average number of shares - used to compute diluted earnings per share
  23,018,537 
  23,119,027 

 
10
 
 
Warrants for the purchase of 1,000,000 shares of common stock for the three-month periods ended in January 31, 2019 were not included in computing diluted earnings per share because their effects were antidilutive. In addition, options for the purchase of 340,000 and 80,000 shares of common stock for the three-month periods ended in January 31, 2020 and 2019, respectively, were not included in computing diluted earnings per share because their effects were also antidilutive.
 
NOTE G - 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 periods ended in January 31, 2020 and 2019. 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 January 31,
 
 
 
2020
 
 
2019
 
REVENUES:
 
 
 
 
 
 
Puerto Rico consulting
 $4,180,910 
 $3,888,554 
United States consulting
  389,361 
  526,645 
Europe consulting
  22,189 
  91,730 
Other segments¹
  20,707 
  59,268 
Total consolidated revenues
 $4,613,167 
 $4,566,197 
 
    
    
INCOME (LOSS) BEFORE TAXES:
    
    
Puerto Rico consulting
 $517,139 
 $375,270 
United States consulting
  (20,043)
  (11,910)
Europe consulting
  (69,173)
  (49,911)
Other segments¹
  154,272 
  200,526 
Total consolidated income before taxes
 $582,195 
 $513,975 
 
¹
Other segments represent activities that fall below the reportable threshold and are carried out in Puerto Rico and Brazil. These activities include a Brazilian compliance consulting division and corporate headquarters, as applicable.
 
 
Long lived assets (property and equipment) as of January 31, 2020 and October 31, 2019, and related depreciation and amortization expense for the three months ended January 31, 2020 and 2019, were concentrated in the corporate headquarters in Puerto Rico. Accordingly, depreciation expense and acquisition of property and equipment, as presented in the statements of cash flows are mainly related to the corporate headquarters.
 
NOTE 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 tend to be not significant and have no specific insurance. No losses have been experienced or are expected on these accounts.
 
 
11
 
 
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 six customers, which accounted for 10% or more of its revenues in either of the three-month periods ended January 31, 2020 and 2019. During the three months ended January 31, 2020, revenues from these customers were 16.8%, 13.4%, 15.1%, 14.0%, 9.0%, and 2.4%, or a total of 70.7%, as compared to the percentages for the same period last year of 0.0%, 3.1%, 18.0%, 11.1%, 11.0% and 14.2%, or a total of 57.4%, respectively. At January 31, 2020, amounts due from these customers represented 86.7% of the Company’s total accounts receivable balance.
 
The information related to major customers in the above paragraph is based on revenues earned from said customers at the segment level because in management’s opinion contracts by segments are totally independent of each other, and therefore such information is more meaningful to the reader. However, at the global level six customers accounted for 10% or more of the Company’s revenues in either of the three-month periods ended January 31, 2020 and 2019. During the three months ended January 31, 2020, aggregate revenues from these global groups of affiliated companies were 16.8%, 16.4%, 15.1%, 14.0%, 9.0% and 2.4%, or a total of 73.7%, as compared to the same period last year for 0.0%, 6.7%, 18.0%, 11.1%, 11.0% and 14.2%, or a total of 61.0%, respectively. At January 31, 2020 amounts due from these global groups of affiliated companies represented 87.5% of total accounts receivable balance.
 
As of January 31, 2020, one of the Company’s customers (representing 15.1% of revenues during the three months ended January 31, 2020) owes the Company approximately $4.9 million (including $1.25 million from a Promissory Note due September 2020). This outstanding obligation represents approximately 21.4% of the Company’s total working capital. The Company is providing multiple services to this customer related to their construction of a manufacturing facility in Puerto Rico. From this facility the customer will provide for the manufacturing and distribution of an existing product and an investigational new drug to be marketed to worldwide markets, once approved by regulators. A significant portion of the customer’s funding comes from different financing sourcing. Management estimates that collectability of the account is reasonably assured, accordingly, no provision for losses, if any, have been recorded in the financial statements.

 
 
12
 
 
ITEM 2.  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion of our results of operations and financial condition should be read in conjunction with the financial statements and the related notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto, and related Management’s Discussion and Analysis appearing in our Annual Report on Form 10-K for the year ended October 31, 2019. The following discussion includes forward-looking statements. For a discussion of important factors that could cause actual results to differ from results discussed in the forward-looking statements, see “Forward Looking Statements” below and the “Risk Factors” section in our Annual Report on Form 10-K for the year ended October 31, 2019.
 
Overview
 
We are a compliance and technology transfer services consulting firm with headquarters in Puerto Rico, servicing the Puerto Rico, United States, Europe and Brazil markets. The compliance consulting service sector in those markets consists of local compliance and validation consulting firms, United States dedicated validation and compliance consulting firms and large publicly traded and private domestic and foreign engineering and consulting firms. We provide a broad range of compliance related consulting services. We market our services to pharmaceutical, chemical, biotechnology, medical devices, cosmetics and food industries, and allied products companies in Puerto Rico, the United States, Europe and Brazil. Our consulting team includes experienced engineering and life science professionals, former quality assurance managers and directors, and professionals with bachelors, masters and doctorate degrees in health sciences and engineering.
 
We actively operate in Puerto Rico, the United States, Europe and Brazil and pursue to further expand these markets by strengthening our business development infrastructure and by constantly realigning our business strategies as new opportunities and challenges arise.
 
We market our services with an active presence in industry trade shows, professional conventions, industry publications and company provided seminars to the industry. Our senior management is also actively involved in the marketing process, especially in marketing to major accounts. Our senior management and staff also concentrate on developing new business opportunities and focus on the larger customer accounts (by number of consultants or dollar volume) and responding to prospective customers’ requests for proposals.
 
We consider our core business to be Food and Drug Administration (“FDA”) and international agencies regulatory compliance consulting related services.
 
In line with the strategy to further penetrate the United States and Puerto Rico markets, we submit annually for renewal the certification as a "minority-controlled company" as defined by the National Minority Supplier Development Council and Growth Initiative ("NMSDC"). This certification, which has been held by us since July 2008, allows us to participate in corporate diversity programs available from various potential customers in the United States and Puerto Rico.
 
The Company holds a tax grant issued by the Puerto Rico Industrial Development Company (“PRIDCO”), which provides relief on various Puerto Rico taxes, including income tax, with certain limitations, for most of the activities carried on within Puerto Rico, including those that are for services to parties located outside of Puerto Rico.
 
The following table sets forth information as to our revenue for the three-month periods ended January 31, 2020 and 2019, by geographic regions (dollars in thousands).
 
 
 
 Three months ended January 31,
 
Revenues by Region:
 
 2020
 
 
 2019
 
Puerto Rico
 $4,181 
  90.6%
 $3,888 
  85.2%
United States
  389 
  8.4%
  527 
  11.5%
Europe
  22 
  0.5%
  92 
  2.0%
Other
  21 
  0.5%
  59 
  1.3%
 
 $4,613 
  100.0%
 $4,566 
  100.0%
 
 
 
13
 
 
 
For the three-month period ended January 31, 2020, the Company’s total revenues were $4,613,000, a net increase of approximately $47,000 when compared to the same period last year. The Puerto Rico consulting market had a revenue increase in projects for approximately $292,000, while the US, Europe and Brazil markets had an aggregate decrease in revenue for approximately $245,000. When compared to the same period last year, gross margin increased 2 percentage points. The net increase in gross margin is mainly attributable to favorable consulting projects in the Puerto Rico consulting market. Selling, general and administrative expenses were approximately $1,049,000, reflecting no significant change when compared to the same period last year. These factors resulted in a net income of approximately $527,000 for the three-month period ended January 31, 2020.
 
The Puerto Rico government financial crisis, the Tax Reform, other tax reforms on the markets where we do business, and Puerto Rico Act 154-2010, all pose current and future challenges which may adversely affect our future performance. We believe that our future profitability and liquidity will be highly dependent on the effect the local and global economy, changes in tax laws and healthcare reform, and worldwide life science manufacturing industry consolidations will have on our operations, and our ability to seek service opportunities and adapt to industry trends.
 
Results of Operations
 
The following table that sets forth our statements of operations for the three-month periods ended January 31, 2020 and 2019 (dollars in thousands, and as a percentage of revenues):
 
 
 
Three months ended January 31,
 
 
 
2020
 
 
2019
 
Revenues 
 $4,613 
  100.0%
 $4,566 
  100.0%
Cost of services 
  3,027 
  65.6%
  3,087 
  67.6%
Gross profit 
  1,586 
  34.4%
  1,479 
  32.4%
Selling, general and administrative expenses
  1,049 
  22.7%
  1,046 
  22.9%
Other income, net
  45 
  0.9%
  81 
  1.8%
Income before income taxes
  582 
  12.6%
  514 
  11.3%
Income tax expense
  55 
  1.2%
  43 
  0.9%
Net income
  527 
  11.4%
  471 
  10.3%
 
Revenues. For the three-month period ended January 31, 2020, the Company’s total revenues were $4,613,000, a net increase of approximately $47,000 when compared to the same period last year. The Puerto Rico consulting market had a revenue increase in projects for approximately $292,000, while the US, Europe and Brazil markets had an aggregate decrease in projects revenue for approximately $245,000.
 
Cost of Services; gross margin. Gross margin for the three months ended January 31, 2020 increased 2 percentage points when compared to the same period last year. The net increase in gross margin is mainly attributable to favorable consulting projects in the Puerto Rico consulting market.
 
Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $1,049,000 for the three-month period ended January 31, 2020, reflecting no significant change when compared to the same period last year.
 
Net Income. Net income for the three months ended January 31, 2020 was approximately $527,000, reflecting no significant change when compared to the same period last year.
 
For the three-month period ended January 31, 2020, net income per common share for both basic and diluted was $0.023, an improvement of $0.003 per share when compared to the same period last year.
 
 
14
 
 
Liquidity and Capital Resources
 
Liquidity is a measure of our ability to meet potential cash requirements, including planned capital expenditures. As of January 31, 2020, the Company had approximately $22.7 million in working capital.
 
On June 13, 2014, the Board of Directors of the Company authorized the Company to repurchase up to two million shares of its common stock (the "Repurchase Program"). During the three-month period ended January 31, 2020, the Company repurchased an aggregate of 2,300 shares of its common stock within the Repurchase Program.
 
Our primary cash needs consist of the payment of compensation to our consulting team, overhead expenses, and statutory taxes. Additionally, we may use cash for the repurchase of our common stock under the Company Stock Repurchase Program, capital expenditures and business development expenses. Management believes that based on the current level of working capital, operations and cash flows from operations, and the collectability of high quality customer receivables are sufficient to fund anticipated expenses and satisfy other possible long-term contractual commitments.
 
To the extent that we pursue possible opportunities to expand our operations, either by acquisition or by the establishment of operations in a new market, we will incur additional overhead, and there may be a delay between the period we commence operations and our generation of net cash flow from operations.
 
While uncertainties relating to the current local and global economic condition, competition, the industries and geographical regions served by us and other regulatory matters exist within the consulting services industry, as described above, management is not aware of any other trends or events likely to have a material adverse effect on liquidity or its financial statements.
 
Off-Balance Sheet Arrangements
 
We were not involved in any significant off-balance sheet arrangement during the three months ended January 31, 2020.
 
Critical Accounting Policies and Estimates
 
There were no material changes during the three months ended January 31, 2020 to the critical accounting policies reported in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019.
 
New Accounting Pronouncements
 
There were no new accounting standards issued since our filing of the Annual Report on Form 10-K for the fiscal year ended October 31, 2019, which could have a significant effect on our condensed consolidated financial statements.
 
Forward-Looking Statements
 
Our business, financial condition, results of operations, cash flows and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Quarterly Report on Form 10-Q, as well as other written or oral statements made from time to time by us or by our authorized executive officers on our behalf, constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These statements include all statements other than those made solely with respect to historical fact and identified by words such as “believes”, “anticipates”, “expects”, “intends” and similar expressions, but such words are not the exclusive means of identifying such statements. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement and these risk factors in order to comply with such safe harbor provisions. You should note that our forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Although we believe that the expectations, plans, intentions and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that our stockholders and prospective investors should consider include the following:
 
 
 
15
 
 
● 
Because our business is concentrated in the life science and medical devices industries in Puerto Rico, the United States, Europe and Brazil, any changes in those industries or in those markets could impair our ability to generate revenue and realize a profit.
● 
Puerto Rico’s economy, including its governmental financial crisis and the impact of Hurricanes Irma and Maria, or any other natural disaster, including the recent earthquakes, may affect the willingness of businesses to commence or expand operations in Puerto Rico, or may also consider closing operations located in Puerto Rico.
● 
Puerto Rico government enacted ACT 154-2010 may adversely affect the willingness of our customers to do business in Puerto Rico and consequently adversely affect our business.
● 
US Federal Tax Reform may affect the willingness of companies to continue or expand their operations in Puerto Rico.
● 
Further changes in tax laws in Puerto Rico or in other jurisdictions may adversely impact the willingness of our customers to continue or expand their Puerto Rico operations.
● 
Our business and operating results may be adversely impacted if we are unable to maintain our certification as a minority-controlled company. 
● 
Because our business is dependent upon a small number of clients, the loss of a major client could impair our ability to operate profitably.
● 
Customer procurement and sourcing practices intended to reduce costs could have an adverse effect on our margins and profitability.
● 
We may be unable to pass on increased labor costs to our clients.
● 
Consolidation in the pharmaceutical industry may have a harmful effect on our business.
● 
Because the pharmaceutical industry is subject to government regulations, changes in government regulations relating to this industry may affect the need for our services.
● 
Since our business is dependent upon the development and enhancement of patented pharmaceutical products or processes by our clients, the failure of our clients to obtain and maintain patents could impair our ability to operate profitably.
● 
If we are unable to protect our clients’ intellectual property, our ability to generate business will be impaired.
● 
We may be subject to liability if our services or solutions for our clients infringe upon the intellectual property rights of others.
● 
We may be held liable for the actions of our employees or contractors when on assignment.
● 
To the extent that we perform services pursuant to fixed-price or incentive-based contracts, our cost of services may exceed our revenue on the contract.
● 
Because most of our contracts may be terminated on little or no advance notice, our failure to generate new business could impair our ability to operate profitably.
● 
Because we are dependent upon our management and technical personnel, our ability to develop our business may be impaired if we are not able to engage skilled personnel.
● 
Our cash could be adversely affected if the financial institutions in which we hold our cash fail.
● 
We may be harmed if we do not penetrate markets and grow our current business operations.
● 
Because there is a limited market in our common stock, stockholders may have difficulty in selling our common stock and our common stock may be subject to significant price swings.
● 
Our revenues, operating results and profitability will vary from quarter to quarter, which may result in increased volatility of our stock price.
● 
The Company Stock Repurchase Program could affect the market price of our common stock and increase its volatility. 
● 
The issuance of securities, whether in connection with an acquisition or otherwise, may result in significant dilution to our stockholders.
 
 
 
16
 
 
ITEM 4. CONTROLS AND PROCEDURES.
 
Evaluation of Disclosure Controls and Procedures
 
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.
 
Changes in Internal Control Over Financial Reporting
 
Based on an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, there has been no change in our internal control over financial reporting during our last fiscal quarter identified in connection with that evaluation that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
 
 
17
 
 
PART II– OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS.
 
From time to time, we may be a party to legal proceedings incidental to our business. We do not believe that there are any proceedings threatened or pending against us, which, if determined adversely to us, would have a material effect on our financial position or results of operations and cash flows.
 
ITEM 1A.  RISK FACTORS.
 
Except as set forth below, there have been no material changes to the risk factors included in our Form 10-K for the year ended October 31, 2019.
 
Any outbreak of contagious diseases, or other adverse public health developments, could have a material and adverse effect on our business operations, financial condition and results of operations.
 
    In December 2019, a novel strain of coronavirus was first identified in Wuhan, Hubei Province, China, and has since spread to a number of other countries, including the United States. Any outbreak of contagious diseases, or other adverse public health developments, could have a material and adverse effect on businesses, including ours. For example, the coronavirus may impact the global economy or negatively affect various aspects of our business, including our workforce and demand for our services.  An impact to our workforce could impact our ability to deliver our services to our customers and make it more difficult to meet our expectations and obligations.  The extent to which the coronavirus may impact our business will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus. A health epidemic or other outbreak could materially and adversely affect the global economy, and consequently our business, financial condition and results of operations.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
(c) The following table provides information about purchases by the Company of its shares of common stock during the three-month period ended January 31, 2020:
 
Period
 
 
Total Number
of Shares
Purchased
 
 
 
Average
Price Paid per Share
 
 
 
Total
Number of Shares
Purchased as
Part of Publicly
Announced Plans or Programs (1)
 
 
Maximum
Number of Shares
that May Yet Be
Purchased Under the Plans or
Programs (1)
 
November 1, 2019 through November 30, 2019
  1,900 
 $0.74 
  1,900 
  1,659,246 
December 1, 2019 through December 31, 2019
  400 
  0.72 
  400 
  1,658,846 
January 1, 2020 through January 31, 2020
  - 
  - 
  - 
  1,658,846 
Total
  2,300 
 $0.74 
  2,300 
    
 
(1)
On June 16, 2014, the Company announced that the Board of Directors of the Company approved the Repurchase Program authorizing the Company to repurchase up to two million shares of its outstanding common stock. The timing, manner, price and amount of any repurchases 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. The Repurchase Program has no expiration date. No shares will be repurchased under the Repurchase Program directly from directors or officers of the Company.
 
 
18
 
 
ITEM 6.  EXHIBITS
 
(a) 
Exhibits:
 
 
Consulting Agreement Amendment, dated December 27, 2019, by and among Pharma-Bio Serv, Inc., Strategic Consultants International, LLC and Elizabeth Plaza, effective January 1, 2020 (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 27, 2019 and incorporated herein by reference).+
 
Certification of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Certification of the chief executive officer and chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
———————
+
Management contracts or compensatory plans, contracts or arrangements.
*
Furnished herewith.
 
 
 
19
 
 
SIGNATURES
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
PHARMA-BIO SERV, INC.
 
 
 
/s/ Victor Sanchez
 
Victor Sanchez
 
Chief Executive Officer and President Europe Operations
 
(Principal Executive Officer)
 
 
 
/s/ Pedro J. Lasanta
 
Pedro J. Lasanta
 
Chief Financial Officer, Vice President Finance and Administration, and Secretary
 
(Principal Financial Officer and Principal Accounting
Officer)
 
 
Dated: March 16, 2020
 
 
 
 
 
20

Pharma-Bio Serv, Inc. Reports