PBSV 10-K
Pharma-Bio Serv, Inc. (PBSV)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
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.
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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 |
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
The aggregate market value of common stock held by non-affiliates of the registrant, based on the closing price for the registrant’s common stock on April 30, 2022 (the last business day of the second quarter of the registrant’s current fiscal year), was $
The number of shares of the registrant’s common stock outstanding as of January 25, 2023 was
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement relative to the Annual Meeting of Stockholders for the year ended October 31, 2022 are incorporated by reference in Part III hereof.
PHARMA-BIO SERV, INC.
FORM 10-K
FOR THE YEAR ENDED OCTOBER 31, 2022
TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS.
GENERAL
Pharma-Bio Serv, Inc. (“Pharma-Bio” or the “Company”) is a Delaware corporation organized on January 14, 2004. 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 services to the pharmaceutical, chemical, biotechnology, medical devices, cosmetic and food industries, and allied products companies.
Our executive offices are located at Pharma-Bio Serv Building, #6 Road 696, Dorado, Puerto Rico 00646. Our telephone number is (787) 278-2709. The financial information about our reporting segments appear in Note K to our Consolidated Financial Statements included in this Annual Report on Form 10-K.
Our website is www.pharmabioserv.com. Information on our website or any other website is not part of this Annual Report on Form 10-K.
References to “we,” “us,” “our” and similar words in this Annual Report on Form 10-K refer to Pharma-Bio Serv, Inc. and its subsidiaries.
OVERVIEW
We are a compliance and technology transfer services consulting firm with headquarters in Puerto Rico, servicing the Puerto Rico, United States, Europe and Brazil markets. The compliance consulting service sector in those markets consists of local compliance and validation consulting firms, United States dedicated validation and compliance consulting firms, and large publicly traded and private domestic and foreign engineering and consulting firms. We provide a broad range of compliance related consulting services. We market our services to pharmaceutical, chemical, biotechnology, medical devices, cosmetic and food industries, and allied products companies principally in Puerto Rico, the United States, Europe and Brazil. Our consulting team includes experienced engineering and life science professionals, former quality assurance managers and directors, and professionals with bachelors, masters and doctorate degrees in health sciences and engineering.
We have a well-established and consistent relationships with the major pharmaceutical, biotechnology, medical device and chemical manufacturing companies in Puerto Rico and the United States, which provides us access to affiliated companies in other markets. We seek opportunities in markets that can yield profitable margins using our professional consulting force.
We believe the most significant factors to achieving future business growth include our ability to: (i) continue to provide quality value-added compliance services to our clients; (ii) recruit and retain highly educated and experienced consultants; (iii) further expand our products and services to address the expanding needs of our clients; and (iv) expand our market presence in the United States, Europe, Brazil and other emerging pharmaceutical markets in order to respond to the international compliance needs of our clients and potential clients. Our business is affected to the extent economic conditions impact the decisions of our clients and potential clients to establish operations, or continue or expand their existing operations.
Our revenue is derived from (i) time and materials contracts (representing approximately 99% of total revenue), where the clients are charged for the time, materials and expenses incurred on a particular project or service and (ii) fixed-fee contracts or from “not to exceed” contracts (approximately 1% of total revenue), which are generally short-term contracts, in which the value of the contract cannot exceed a stated amount. For time and materials contracts, our revenue is principally a function of the number of consultants and the number of hours billed per consultant. To the extent that our revenue is based on fixed-fee or “not to exceed” contracts, our ability to operate profitably is dependent upon our ability to estimate accurately the costs that we will incur on a project and to manage and monitor the project. If we underestimate our costs on any contract, we could sustain a loss on the contract or its profitability might be reduced.
The principal components for our consulting costs of services are resource compensation to our consulting team and expenses relating to the performance of the services. In order to ensure that our pricing is competitive yet minimize the impact on our margins, we manage increasing labor costs by (i) selecting consultants according to our cost for specific projects, (ii) negotiating, where applicable, rates with the consultant, (iii) subcontracting labor and (iv) negotiating and passing rate increases to our customers, as applicable. Although this strategy has been successful in the past, we cannot give any assurance that such strategy will continue to be successful.
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We have established quality systems for our employees which include:
| · | Training Programs - including a current Good Manufacturing Practices exam prior to recruitment and periodic refreshers, |
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| · | Recruitment Full Training Program - including employee manual, dress code, time sheets and good project management and control procedures, job descriptions, and firm operating and administration procedures, |
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| · | Safety Program - including Occupational Safety and Health Act (“OSHA”) and Environmental Health and Safety, and |
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| · | Code of Ethics and Business Conduct - a code of ethics and business conduct is used and enforced as one of the most significant company controls on personal behavior. |
In addition, we have implemented procedures to respond to client complaints and have in place customer satisfaction survey procedures. As part of our employee performance appraisal annual process, our clients receive an evaluation form for employee project performance feedback, including compliance with our code of ethics and business conduct.
The Company currently operates three reportable segments: (i) Puerto Rico technical compliance consulting, (ii) United States technical compliance consulting, and (iii) Europe technical compliance consulting.
BUSINESS STRATEGY AND OBJECTIVES
We are actively pursuing to expand our services in the United States, European and Brazilian markets as part of our growth strategy, while maintaining our position in the Puerto Rico market. We have a well-established and consistent relationship with the major pharmaceutical, biotechnology, medical device and chemical manufacturing companies in Puerto Rico and the United States which provides us access to affiliated companies in other markets. We seek opportunities in markets that can yield profitable margins using our professional consulting force.
Our business strategy is based on a commitment to provide premium quality and professional consulting services and reliable customer service to our customer base. Our business strategy and objectives are as follow:
| ● | Grow consulting services in each technical service, quality assurance, regulatory compliance, technology transfer, validation, engineering, and manufacturing departments by achieving greater market penetration from our marketing and sales efforts; |
| ● | Continue to enhance our technical consulting services through internal growth and acquisitions that provide solutions to our customers’ needs; |
| ● | Motivate our consulting and support staff by implementing a compensation program which includes both individual performance and overall company performance as elements of compensation; |
| ● | Create a pleasant corporate culture and emphasize operational quality, safety and timely service; |
| ● | Continue to maintain our reputation as a trustworthy and highly ethical partner; and |
| ● | Efficiently manage our operating and financial costs and expenses. |
TECHNICAL CONSULTING SERVICES
We have established a reputation as a premier technical consulting services firm to the pharmaceutical, chemical, biotechnology, medical devices, cosmetic and food industries, and allied products companies in various markets. These services include regulatory compliance, validation, technology transfer, engineering, project management and process support. We have approximately 100 clients that are among the largest pharmaceutical, chemical manufacturing, medical device and biotechnology companies. We participate in exhibitions, conferences, conventions and seminars as either exhibitors, sponsors or conference speakers.
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MARKETING
We conduct our marketing activities in Puerto Rico, United States, Europe and other marketplaces. We actively utilize our project managers and leaders who are currently managing consulting service contracts at various client locations to also market consulting services to their existing and past client relationships. Our senior management is also actively involved in the marketing process, especially in marketing to major accounts. Our senior management and staff also concentrate on developing new business opportunities and focus on the larger customer accounts (by number of consultants or dollar volume) and responding to prospective customers’ requests for proposals.
PRINCIPAL CUSTOMERS
We provide a substantial portion of our services to three customers, each of whom accounted for 10% or more of our revenues in either of the years ended October 31, 2022 and 2021. During the years ended October 31, 2022 and 2021, these customers accounted for, in the aggregate, 38.8% and 40.9% of total revenue, respectively. Although a few customers represent a significant source of revenue, our functions are not a continuous process, accordingly, the client base for which our services are typically rendered, on a project-by-project basis, changes regularly. Therefore, in any given year a small number of customers could represent a significant source of our revenue for that year. The loss of, or significant reduction in the scope of work performed for any major customer or our inability to replace customers upon completion of contracts could adversely affect our revenue and impair our ability to operate profitably.
COMPETITION
We are engaged in a highly competitive and fragmented industry. Some of our competitors are, on an overall basis, larger than we are or are subsidiaries of larger companies, and therefore may possess greater resources than we do. Furthermore, because the technical professional aspects of our consulting business do not usually require large amounts of capital, there is relative ease of market entry for a new entrant possessing acceptable professional qualifications. Accordingly, we compete with regional, national, and international firms. Within the Puerto Rico, United States, Europe and Brazil markets, certain competitors, including local competitors, may possess greater resources than we do as well as better access to clients and potential clients.
Competition for validation and consulting services used to be primarily based on reputation, track record, experience, and quality of service. However, given our clients’ strategies to reduce costs, price of service has become a major factor in sourcing our services. We believe we benefit from competitive advantages over other consulting service firms because of our historical market share within Puerto Rico (over 29 years), brand name, reputation and track record with many of the major pharmaceutical, biotechnology, medical device and chemical manufacturing companies, which have a presence in the markets we serve and are pursuing.
The market of qualified and experienced consultants that are capable of providing technical consulting services is very competitive and consists primarily of our competitors as well as companies in the pharmaceutical, chemical, biotechnology and medical device industries who are our clients and potential clients. In seeking qualified personnel, we market our name recognition in the Puerto Rico market, our reputation with our clients, and salary and benefit packages.
INTELLECTUAL PROPERTY RIGHTS
We have no proprietary software or products. We rely on non-disclosure agreements with our employees to protect the proprietary software and other proprietary information of our clients. Any unauthorized use or disclosure of this information could harm our business.
EMPLOYEES
Our “workforce” (which includes approximately 140 employees, plus independent contractors), is vital to our success. As a human capital-intensive business, our ability to attract, develop, and retain exceptional and diverse employees and independent contractors is critical, not only in the current competitive labor market, but also to our long-term success. A diverse and inclusive workforce is a natural extension of our culture and original foundation. We are committed to ensuring that our workforce feels welcomed, valued, respected, and heard, so that they can fully contribute their unique talents for the benefit of their careers, our clients, our Company, and our communities.
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The physical, emotional, and financial well-being of our employees is a high priority of our Company. To that end and compete effectively, we offer competitive compensation, healthcare insurance, wellness programs, paid time off, family leave, and workplace flexibility, among others.
We also endeavor to foster and maintain our unique and long-standing values-based culture. Our workforce is expected to exhibit and promote honest, ethical and respectful conduct in the workplace. Employee satisfaction, morale, engagement and feedback is monitored through satisfaction surveys conducted by management.
All of our employees are full-time employees. None are represented by a labor union, and we consider our employee relations to be good.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following table sets forth certain information with respect to our executive officers.
Name |
| Age |
| Position |
Victor Sanchez |
| 52 |
| Chief Executive Officer, President and President of European Operations |
Pedro J. Lasanta |
| 63 |
| Chief Financial Officer, Vice President - Finance and Administration and Secretary |
Victor Sanchez has served as our Chief Executive Officer and President since January 1, 2015 and as the President of the European Operations of the Company since January 2011. Prior to joining the Company, he served as Operations Manager in the LOCM and OSD divisions of Merck Sharp & Dohme (“MSD”), a pharmaceutical company, in Madrid, Spain from April 2010 to January 2011 and as Operations Manager of the LOCM division of Schering-Plough S.A., a pharmaceutical company, in Madrid, Spain, from September 2004 to April 2010. He served as Quality Control Validations Manager for Schering-Plough Products, LLC, a pharmaceutical company (“Schering-Plough”), in Puerto Rico from December 2000 to August 2004 and as Quality Control Laboratory Supervisor of Schering-Plough from April 1996 to December 2000. Mr. Sanchez holds a Bachelor of Science in Chemistry, summa cum laude, and a M.B.A. in Industrial Management, cum laude, from the Interamerican University of Puerto Rico. He holds a Post Graduate Diploma in Pharmaceutical Validation Technology from the Dublin Institute of Technology, Ireland. He also has a US Regulatory Affairs certification from the Regulatory Affairs Professional Society. Mr. Sanchez is a chemist licensed by the Puerto Rico State Department and a member of the American Chemical Society, the Parenteral Drug Association, the Regulatory Affairs Professional Society, and the International Society for Pharmaceutical Engineers.
Pedro J. Lasanta has served as our Chief Financial Officer and Vice President - Finance and Administration since November 2007, and our Secretary since December 1, 2014. From 2006 until October 2007, Mr. Lasanta was in private practice as an accountant, tax and business counselor. From 1999 until 2006, Mr. Lasanta was the Chief Financial Officer for Pearle Vision Center PR, Inc. In the past, Mr. Lasanta was also an audit manager for Ernst & Young, formerly Arthur Young & Company. He is a cum laude graduate in business administration (accounting) from the University of Puerto Rico. Mr. Lasanta is a Certified Public Accountant. In 2012, he was awarded the Puerto Rico Manufacturers Association (North Region) Service Manager of the Year. Mr. Lasanta served as a Member of the Puerto Rico District Export Council for the U.S. Department of Commerce from January 2014 until December 2018.
ITEM 1A. RISK FACTORS.
This Annual Report on Form 10-K includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including certain statements about our plans, strategies and prospects. Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, we cannot assure you that such plans, intentions or expectations will be achieved. Important factors that could cause our actual results to differ materially from our forward-looking statements include those set forth in this Risk Factors section.
If any of the following risks, or other risks not presently known to us or that we currently believe to not be significant, develop into actual events, then our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected.
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Operational Risks
Because our business is concentrated in the life science and medical devices industries in Puerto Rico, the United States, Europe and Brazil, any changes in those industries or in those markets could impair our ability to generate revenue and realize a profit.
Since most of our business is performed in Puerto Rico, the United States, Europe and Brazil, for pharmaceutical, biotechnology, medical device and chemical manufacturing companies, our ability to generate revenue and realize a profit could be impaired by factors impacting those markets. For example, changes in tax laws or regulatory, political or economic conditions, exposure to foreign exchange variations, high inflation levels or interest rates, which discourage businesses from operating in the markets we serve, which affect the need for services such as those provided by us, could impair our ability to generate revenue and realize a profit.
Companies in the pharmaceutical and related industries for which we perform services are subject to economic pressures, which affect their global operations, and which may influence the decision to reduce or increase the scope of their operations in the markets we serve. These companies consider a wide range of factors in making such a decision, and may be influenced by a need to consolidate operations, to reduce expenses, to increase their business in geographical regions where there are large customer bases, tax, regulatory, economic and political considerations and many other factors. We cannot assure you that our customers and potential customers will not make extensive reductions or terminate their operations in the markets we serve entirely, and/or our operations may be adversely affected by foreign exchange variations, high inflation levels or interest rates, which could significantly impair our ability to generate revenue and realize a profit.
Puerto Rico’s economy, including its governmental budgetary constraints and the impact of hurricanes or any other natural disasters, including earthquakes, may affect the willingness of businesses to commence or expand operations in Puerto Rico, or may also consider closing operations located in Puerto Rico.
As a result of Puerto Rico’s governmental budgetary constraints being imposed by the Oversight and Management Board for Puerto Rico under the Puerto Rico Management and Economic Stability Act (PROMESA), and the impacts of hurricanes or other natural disasters, including earthquakes, businesses may be reluctant to establish or expand their operations in Puerto Rico, or might consider closing operations currently in Puerto Rico. Also, the damage resulting from the hurricanes or other natural disasters to the operating conditions of our clients, and insufficient federal recovery and rebuilding assistance may cause lasting and severe damage to the island’s economic base. Furthermore, since Puerto Rico’s economy is petroleum-based, the fluctuating price of oil, combined with Puerto Rico’s debt, and a weak energy infrastructure, may make Puerto Rico a less attractive place to expand existing operations or commence new business activities. In the event that companies in the pharmaceutical and related industries decide not to commence new operations or not to expand their existing operations in Puerto Rico, or consider closing operations in Puerto Rico, the demand for our services could be negatively affected.
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 (COVID-19) was first identified in Wuhan, Hubei Province, China, and has since spread to several 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 negatively affect various aspects of our business, including our workforce, demand for our services and the ability of our clients to pay for our services. Further, 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 our operations could be impacted by the pandemic would depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the pandemic and actions by government authorities to contain the outbreak or treat its impact, among other things. A health epidemic or other outbreak could materially and adversely affect the global economy, and consequently our business, financial condition and results of operations.
Because our business is dependent upon a small number of clients, the loss of a major client could impair our ability to operate profitably.
Our business is currently and has historically been dependent upon a small number of clients. During the years ended October 31, 2022 and 2021, a small number of clients accounted for a disproportionately large percentage of our revenue. In the years ended October 31, 2022 and 2021, three customers accounted for, in aggregate, approximately 38.8% and 40.9% of total revenue, respectively.
The loss of, or significant reduction in the scope of work performed for, or any significant change in the financial terms related to, any major customer could impair our ability to operate profitably. We cannot assure that we will not sustain significant decreases in revenue from our major customers or that we will be able to replace any major customers or the resulting decline in revenue.
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Customer procurement and sourcing practices intended to reduce costs could have an adverse effect on our margins and profitability.
In an effort to reduce their costs, many of our customers are establishing or extending the scope of their procurement departments to include consulting and project management services, such as ours. As a result, we have less interaction with the end user of our services (typically labs or production units) when bidding on a project, which we believe decreases the focus on the quality of service provided and increases the emphasis on cost of the service. This may cause us to lower the price of our bids, which would reduce the margins in a given project. Also, some customers have established vendor management/vendor neutral-programs with third-parties (some of whom are also our competitors). Because these vendor management programs may receive a percentage of our fees, without a corresponding increase in the fee itself, our margins may be adversely affected. In addition, where a vendor management program is a competitor for a particular service we provide, we may have difficulty securing that particular project, which would adversely impact revenue. Some of these vendor neutral programs are intended to limit our interaction with our direct end user, and our interaction is limited to the representative of the vendor neutral agency. This limitation impairs our ability to establish and maintain our relationships with our customers and recognition of the value added in the service.
We may be unable to pass on increased labor costs to our clients.
The principal components of our cost of revenues are employee compensation (salaries, wages, taxes and benefits), independent contractors fees and expenses relating to the performance of the services we provide. We face increasing labor costs which we seek to pass on to our customers through increases in our rates. To remain competitive, we may not be able to pass these increased costs on to our clients, and, to the extent that we are not able to pass these increased costs on to our clients, our operating margin may be reduced.
The collectability of our accounts receivable may be subject to our customers’ operations and funding sources.
If our customers’ cash flow, working capital, financial conditions or results of operations deteriorate, they may be unable to pay the accounts receivable owed to us promptly or at all. For example, the effects of the COVID-19 pandemic may cause our customers to be unable to satisfy their payment obligations, including their debts to us. As a result, we could be exposed to a certain level of credit risk. If a major customer experiences, or a significant number of customers experience, financial difficulties, the effect on us could be material and have an adverse effect on our business, financial condition and results of operations.
Consolidation in the pharmaceutical industry may have a harmful effect on our business.
In recent years, the pharmaceutical industry has undergone consolidation, and may in the future undergo further substantial consolidation which may reduce the number of our existing and potential customers. The consolidation in the pharmaceutical industry may have a harmful effect on our business and our ability to maintain and replace customers.
We may be held liable for the actions of our employees or contractors when on assignment.
We may be exposed to liability for actions taken by our employees or contractors while on assignment, such as damages caused by their errors, misuse of client proprietary information or theft of client property. Due to the nature of our assignments, we cannot assure you that we will not be exposed to liability as a result of our employees or contractors being on assignment. Furthermore, our reputation may be damaged and our ability to generate business may be affected.
To the extent that we perform services pursuant to fixed-price or incentive-based contracts, our cost of services may exceed our revenue on the contract.
Some of our revenue is derived from fixed-price contracts. Our costs of services may exceed the revenue of these contracts if we do not accurately estimate the time and complexity of an engagement. Further, we are seeking contracts by which our compensation is based on specified performance objectives, such as the realization of cost savings, quality improvements or other performance objectives. Our failure to achieve these objectives would reduce our revenue and could impair our ability to operate profitably.
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Our profit margin is largely a function of the rates we are able to charge and collect for our services and the utilization rate of our consultants. Accordingly, if we are not able to maintain our pricing for our services or an appropriate utilization rate for our consultants without corresponding cost reductions, our profit margin and profitability will suffer. The rates we are able to charge for our services are affected by a number of factors, including:
| ● | Our clients’ perception of our ability to add value through our services; |
| ● | Our ability to complete projects on time; |
| ● | Pricing policies of competitors; |
| ● | Our ability to accurately estimate, attain and sustain engagement revenues, margins and cash flows over increasingly longer contract periods; and |
| ● | General economic and political conditions. |
Our utilization rates are also affected by a number of factors, including:
| ● | Our ability to shift employees and contractors from completed projects to new engagements; and |
| ● | Our ability to manage attrition of our employees and contractors. |
Because most of our contracts may be terminated on little or no advance notice, our failure to maintain or generate new business could impair our ability to operate profitably.
Most of our contracts can be terminated by our clients with little or no advance notice. Our clients typically retain us on a non-exclusive, engagement-by-engagement basis, and the client may terminate, cancel or delay any engagement or the project for which we are engaged, at any time and on no advance notice. As a result, the termination, cancellation, expiration or delay of contracts could have a significant impact on our ability to operate profitably.
Because of the competitive nature of the pharmaceutical, biotechnology, medical device and chemical manufacturing consulting market, we may not be able to compete effectively if we cannot efficiently respond to changes in the structure of the market and developments in technology.
Because of consolidations in the pharmaceutical, biotechnology, medical device and chemical manufacturing consulting business, we are faced with an increasing number of larger companies that offer a wider range of services and have better access to capital than us. We believe that larger and better-capitalized competitors have enhanced abilities to compete for both clients and skilled consultants. In addition, one or more of our competitors may develop and implement methodologies that result in superior productivity and price reductions without adversely affecting their profit margins. We cannot assure you that we will be able to compete effectively in an increasingly competitive market.
Because we are dependent upon our management and technical personnel, our ability to develop our business may be impaired if we are not able to engage skilled personnel.
Our future success will depend in part upon our ability to attract and retain qualified management and technical personnel. Competition for such personnel is intense and we compete for qualified personnel with numerous other employers, including consulting firms, some of which have greater resources than we have, as well as pharmaceutical companies, most of which have significantly greater financial and other resources than we do. We may experience increased costs in order to retain and attract skilled employees. Our failure to attract additional personnel or to retain the services of key personnel and independent contractors could have a material adverse effect on our ability to operate profitably.
Our cash could be adversely affected if the financial institutions in which we hold our cash fail.
The Company maintains domestic cash deposits in Federal Deposit Insurance Corporation (“FDIC”) insured banks and in money market obligation trusts registered under the US Investment Company Act of 1940, as amended. The domestic bank deposit balances may exceed the FDIC insurance limits. In the foreign markets we serve, we also maintain cash deposits in foreign banks, some of which are not insured or partially insured by the FDIC or other similar agency. These balances could be impacted if one or more of the financial institutions in which we deposit monies fails or is subject to other adverse conditions in the financial or credit markets. We can provide no assurance that access to our invested cash will not be impacted by adverse conditions in the financial and credit markets.
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We may be harmed if we do not penetrate markets and grow our current business operations.
If we fail to further penetrate our core and existing geographic markets, or to successfully expand our business into new markets, the growth in sales of our services, along with our operating results, could be materially adversely impacted. A key element of our growth strategy may be to grow our business through acquisitions. Acquisitions involve many different risks, including (1) the ability to finance acquisitions, either with cash, debt, or equity issuances; (2) the ability to integrate acquisitions; (3) the ability to realize anticipated benefits of the acquisitions; (4) the potential to incur unexpected costs, expenses, or liabilities; and (5) the diversion of management’s attention and Company resources. Many of our competitors may also compete with us for acquisition candidates, which can increase the price of acquisitions and reduce the number of available acquisition candidates. We cannot assure you that efforts to increase market penetration in our core markets and existing geographic markets will be successful. Our failure to penetrate markets and grow our current business operations could have a material adverse effect on our business, financial condition, results of operations, and cash flow.
Disruptions in our information technology systems could adversely affect our business and the results of operations. If these systems fail or become unavailable for any period of time this could limit our ability to effectively monitor and control our operations and adversely affect our operations. Additionally, a breach or an alleged breach of our information technology systems could subject us to liability or reputational damage.
Our information technology systems facilitate our ability to transact business, monitor and control our operations and adjust to changing market conditions. Any disruption in our information technology systems or the failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively transact business, monitor and control our operations and adjust to changing market conditions in a timely manner.
In addition, because of recent advances in technology and well-known efforts on the part of computer hackers and cyber-terrorists to breach data security of companies, we may face risks associated with potential failure to detect breaches or adequately protect critical corporate, customer and employee data, which, if released, could adversely impact our customer relationships, our reputation, and even violate privacy laws. As part of our business, we develop, receive and retain confidential data about our company and our customers.
There can be no assurance that our efforts to protect our data and information technology systems will prevent breaches in our systems (or that of our third-party providers) that could adversely affect our business and result in financial and reputational harm to us, theft of trade secrets and other proprietary information, legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties.
Regulatory Risks
Changes in tax laws in the United States, Puerto Rico or in other jurisdictions where we do business may adversely impact the willingness of our customers to continue or to expand their operations where we do business and may also impact our tax business model.
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As a result of the continued changes in tax laws in the United States, Puerto Rico or other jurisdictions where we do business, the tax business model of various US or foreign companies and their subsidiaries, doing business in Puerto Rico and other foreign jurisdictions may be affected, making them a less attractive investment. Consequently, this may affect the willingness of such companies to continue, expand and/or bring new operations to jurisdictions where we do business, which may impair our ability to generate business in those markets, and may also impact our tax business model.
Because the pharmaceutical industry is subject to government regulations, changes in government regulations relating to this industry may affect the need for our services.
Because government regulations affect all aspects of the pharmaceutical, biotechnology, medical device and chemical manufacturing industries, including regulations relating to the testing and manufacturing of pharmaceutical products and the disposal of materials which are or may be considered toxic, any change in government regulations could have a profound effect upon not only these companies but companies, such as ours, that provide services to these industries. If we are not able to adapt and provide necessary services to meet the requirements of these companies in response to changes in government regulations, our ability to generate business may be impaired.
Intellectual Property Risks
Since our business is dependent upon the development and enhancement of patented pharmaceutical products or processes by our clients, the failure of our clients to obtain and maintain patents could impair our ability to operate profitably.
Companies in the pharmaceutical industry are highly dependent on their ability to obtain and maintain patents for their products or processes. The inability by our clients to obtain new patents and the expiration of active patents may reduce the need for our services and thereby impair our ability to operate profitably.
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If we are unable to protect our clients’ intellectual property, our ability to generate business will be impaired.
Our services either require us to develop intellectual property for clients or provide our personnel with access to our clients’ intellectual property. Because of the highly competitive nature of the pharmaceutical, biotechnology, medical device and chemical manufacturing industries and the sensitivity of our clients’ intellectual property rights, our ability to generate business would be impaired if we fail to protect those rights. Although all of our employees and contractors are required to sign non-disclosure agreements, any disclosure of a client’s intellectual property by an employee or contractor may subject us to litigation and may impair our ability to generate business either from the affected client or other potential clients. In addition, we are required to enter into confidentiality agreements and our failure to protect the confidential information of our clients may impair our business relationship.
We may be subject to liability if our services or solutions for our clients infringe upon the intellectual property rights of others.
It is possible that in performing services for our clients, we may inadvertently infringe upon the intellectual property rights of others. In such event, the owner of the intellectual property may commence litigation seeking damages and an injunction against both us and our client, and the client may bring a claim against us. Any infringement litigation would be costly. Even if we prevail, we will incur significant expenses and our reputation could be hurt, which would affect our ability to generate business and the terms on which we would be engaged, if at all.
Common Stock Risks
Because there is a limited market in our common stock, stockholders may have difficulty in selling our common stock and our common stock may be subject to significant price swings.
There is a very limited market for our common stock. Since trading commenced in December 2006, there has been limited volume and on some days there has been no trading in our common stock. Because of the limited market for our common stock, the purchase or sale of a relatively small number of shares may have an exaggerated effect on the market price for our common stock. We cannot assure stockholders that they will be able to sell common stock or, that if they are able to sell their shares, that they will be able to sell the shares in any significant quantity at the quoted price.
Our revenues, operating results and profitability will vary from quarter to quarter, which may result in increased volatility of our stock price.
Our quarterly revenues, operating results and profitability have varied in the past and are likely to vary significantly from quarter to quarter, making them difficult to predict. This may lead to volatility in our share price. The factors that are likely to cause these variations are:
| ● | Number of workdays, holidays and vacations; |
| ● | The business decisions of clients regarding the use of our services; |
| ● | Periodic differences between clients’ estimated and actual levels of business activity associated with ongoing engagements, including the delay, reduction in scope and cancellation of projects; |
| ● | The stage of completion of existing projects and their termination; |
| ● | Our ability to move employees quickly from completed projects to new engagements and our ability to replace completed contracts with new contracts with the same clients or other clients; |
| ● | The introduction of new services by us or our competitors; |
| ● | Changes in pricing policies by us or our competitors; |
| ● | Our ability to manage costs, including personnel compensation, support-services and severance costs; |
| ● | Acquisition and integration costs related to possible acquisitions of other businesses; |
| ● | Changes in estimates, accruals and payments of variable compensation to our employees or contractors; and |
| ● | Global economic and political conditions and related risks, including acts of terrorism. |
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The Company Stock Repurchase Program could affect the market price of our common stock and increase its volatility.
On June 13, 2014, the Board of Directors of the Company approved the Company Stock Repurchase Program authorizing the Company to repurchase up to two million shares of its outstanding common stock. The timing, manner, price and amount of any repurchases is at the discretion of the Company, subject to the requirements of the Securities Exchange Act of 1934, as amended, and related rules. To conserve cash due to the economic uncertainty caused by the COVID-19 pandemic, in April 2020 the Company suspended the purchases under the Company Stock Repurchase Program. During September 2021 the Company resumed its repurchase program. 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.
If we are required to issue securities either as payment of all or a portion of the purchase price of an acquisition or in order to obtain financing for the acquisition or for other corporate purposes, such an issuance could result in dilution to our stockholders. The amount of such dilution will be dependent upon the terms on which we issue securities. The issuance of securities at a price which is less than the exercise price of outstanding warrants or the conversion price of securities could result in additional dilution if we are required to reduce the exercise price or conversion price of the then outstanding options or warrants or other convertible securities.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2. PROPERTIES.
The Company conducts its headquarters administrative operations in office facilities located in Dorado, Puerto Rico (the “Office Facilities”). The lease agreement was for an initial five-year term commencing January 1, 2016, with a renewal option for five additional years which was exercised and became effective January 1, 2021. The lease agreement, as amended, has monthly rental payments of $14,561 through the end of the renewal option term. The lease agreement also requires the payment of utilities, property taxes, insurance and expenses incurred by the affiliate in connection with the maintenance of common areas.
Also, the Company maintains an office facility in Madrid, Spain, which is under a month-to-month lease with monthly payment of approximately $1,000.
We believe that our present facilities are adequate to meet our needs and that, if we require additional space, it will be available on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may be a party to legal proceedings incidental to our business. We do not believe that there are any proceedings threatened or pending against us, which, if determined adversely to us, would have a material effect on our financial position or results of operations and cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock has been quoted on the Over the Counter Bulletin Board under the trading symbol PBSV since December 4, 2006.
On January 27, 2023, there were approximately 62 holders of record of our common stock.
During the year ended October 31, 2022, the Company paid dividends of $0.075 per share of common stock on January 3, 2022 and March 15, 2022 to shareholders of record at the close of business on December 15, 2021 and February 25, 2022, respectively. The Board of Directors will continue to evaluate the Company’s strategic plan, which might include future acquisitions, sales of business units, dividends or any combination of these opportunities while continuing its stock repurchase plan.
Equity Compensation Plan Information
The following table summarizes the equity compensation plan under which our securities may be issued as of October 31, 2022.
Plan Category |
| Number of securities to be issued upon exercise of outstanding options |
|
| Weighted-average exercise price per share of outstanding options |
|
| Number of securities remaining available for future issuance under equity compensation plans |
| |||
Equity compensation plans approved by security holders: |
|
|
|
|
|
|
|
|
| |||
2014 Long-Term Incentive Plan |
|
| 500,000 |
|
| $ | 0.9764 |
|
|
| 1,280,000 |
|
Equity compensation plans not approved by security holders |
|
| - |
|
| $ | - |
|
|
| - |
|
Total |
|
| 500,000 |
|
|
|
|
|
|
| 1,280,000 |
|
The 2014 Long-Term Incentive Plan was approved by stockholders in April 2014.
Stock repurchase program
The following table provides information about purchases by the Company of its shares of common stock under the Company Stock Repurchase Program during the three-month period ended October 31, 2022:
Period |
| Total Number of Shares Purchased (1) |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
| ||||
August 1, 2022 through August 31, 2022 |
|
| 1,500 |
|
| $ | 0.75 |
|
|
| 1,500 |
|
|
| 1,550,443 |
|
September 1, 2022 through September 30, 2022 |
|
| 1,500 |
|
| $ | 0.84 |
|
|
| 1,500 |
|
|
| 1,548,943 |
|
October 1, 2022 through October 31, 2022 |
|
| - |
|
| $ | - |
|
|
| - |
|
|
| 1,548,943 |
|
Total |
|
| 3,000 |
|
| $ | 0.79 |
|
|
| 3,000 |
|
|
|
|
|
(1) | On June 13, 2014, the Board of Directors of the Company approved the Company Stock Repurchase Program authorizing the Company to repurchase up to two million shares of its outstanding common stock. The timing, manner, price and amount of any repurchases will be at the discretion of the Company, subject to the requirements of the Securities Exchange Act of 1934, as amended, and related rules. The Company Stock Repurchase Program does not oblige the Company to repurchase any shares and it may be modified, suspended or terminated at any time and for any reason. Under the program no shares will be repurchased directly from directors or officers of the Company. The Company Stock Repurchase Program does not have an expiration date. |
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ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our results of operations and financial condition should be read in conjunction with Part I, including matters set forth in the “Risk Factors” section of this Annual Report on Form 10-K, and our Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K.
Overview
We are a compliance and technology transfer services consulting firm with headquarters in Puerto Rico, servicing the Puerto Rico, United States, Europe and Brazil markets. The compliance consulting service sector in those markets consists of local compliance and validation consulting firms, United States dedicated validation and compliance consulting firms and large publicly traded and private domestic and foreign engineering and consulting firms. We provide a broad range of compliance related consulting services. We market our services to pharmaceutical, chemical, biotechnology, medical devices, cosmetics and food industries, and allied products companies in Puerto Rico, the United States, Europe and Brazil. Our consulting team includes experienced engineering and life science professionals, former quality assurance managers and directors, and professionals with bachelors, masters and doctorate degrees in health sciences and engineering.
We actively operate in Puerto Rico, the United States, Europe and Brazil and pursue to further expand these markets by strengthening our business development infrastructure and by constantly realigning our business strategies as new opportunities and challenges arise.
We market our services with a 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.
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 years ended October 31, 2022 and 2021, by geographic regions (dollars in thousands).
|
| Year ended October 31, |
| |||||||||||||
Revenues by Region |
| 2022 |
|
| 2021 |
| ||||||||||
Puerto Rico |
| $ | 12,142 |
|
|
| 62.6 | % |
| $ | 14,681 |
|
|
| 73.0 | % |
United States |
|
| 4,558 |
|
|
| 23.5 | % |
|
| 2,721 |
|
|
| 13.5 | % |
Europe |
|
| 2,651 |
|
|
| 13.7 | % |
|
| 2,329 |
|
|
| 11.6 | % |
Other |
|
| 48 |
|
|
| 0.2 | % |
|
| 384 |
|
|
| 1.9 | % |
Total revenue |
| $ | 19,399 |
|
|
| 100.0 | % |
| $ | 20,115 |
|
|
| 100.0 | % |
For the year ended October 31, 2022, the Company’s revenues were $19.4 million, a net decrease of $0.7 million when compared to last year. The Puerto Rico and Brazilian consulting markets had a revenue decrease in projects of approximately $2.5 and $0.3 million, respectively, which was partially offset by the increase in projects revenue in the United States and European markets of approximately $1.8 and $0.3 million, respectively. When compared to last year, gross profit decreased by 1.5 percentage points. The net decrease in gross profit percentage points is mainly attributable to overall lower margin projects in the Puerto Rico market. Selling, general and administrative expenses were approximately $3.7 million for the year ended October 31, 2022, a net decrease of approximately $5.5 million when compared to last year. The decrease is mainly attributable to a customer account receivable provision of approximately $5.2 million recorded last year, and the decrease in consulting fees, non-recurring legal fees and other administrative and general expenses. When compared to last year, other income decreased by approximately $2.0 million as the result of last year’s forgiveness of principal and accrued interest of the SBA Loans for approximately the same amount. For the year ended October 31, 2022, these factors resulted in (i) income from operations of approximately $1.2 million, or an increase of $5.0 million when compared to last year, and (ii) net income of approximately $1.0 million, or an increase of approximately $3.0 million when compared to last year.
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While we have not identified any material adverse effect resulting from the coronavirus (COVID-19) pandemic, (the “pandemic”) we continue to actively monitor the pandemic and any potential future impact it may have on our business and results of operations. The extent to which our operations will be impacted by the pandemic will depend largely on unknown developments which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning our customers, the severity of the pandemic and actions by government authorities to contain the outbreak or treat its impact, among other things.
The COVID-19 pandemic, the Puerto Rico government financial crisis, the Tax Cuts and Jobs Act of 2017 (the “Tax Reform”) and possible tax changes on jurisdictions where we do business, bio-pharmaceutical industry consolidations, trends on managing contract resources, all pose current and future challenges which may adversely affect our future performance. We believe that our future profitability and liquidity will be dependent on the effect the local and global economy, including any impacts of the coronavirus pandemic, changes in tax laws, worldwide life science manufacturing industry consolidations, operational constraints imposed by our customers due to the coronavirus pandemic and resources management trends, will have on our operations, and our ability to seek service opportunities and adapt to industry trends.
Results of Operations
The following table sets forth our statements of operations for the year ended October 31, 2022 and 2021 (dollars in thousands, and as a percentage of revenues):
|
| Year ended October 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
| ||||||||||
Revenues |
| $ | 19,399 |
|
|
| 100.0 | % |
| $ | 20,115 |
|
|
| 100.0 | % |
Cost of services |
|
| 14,517 |
|
|
| 74.8 | % |
|
| 14,755 |
|
|
| 73.3 | % |
Gross profit |
|
| 4,882 |
|
|
| 25.2 | % |
|
| 5,360 |
|
|
| 26.7 | % |
Selling, general and administrative expenses |
|
| 3,707 |
|
|
| 19.1 | % |
|
| 9,214 |
|
|
| 45.8 | % |
Other income, net |
|
| 13 |
|
|
| 0.0 | % |
|
| 1,978 |
|
|
| 9.8 | % |
Income before income taxes |
|
| 1,188 |
|
|
| 6.1 | % |
|
| (1,876 | ) |
|
| -9.3 | % |
Income tax expense |
|
| 181 |
|
|
| 0.9 | % |
|
| 213 |
|
|
| 1.1 | % |
Net income (loss) |
|
| 1,007 |
|
|
| 5.2 | % |
|
| (2,089 | ) |
|
| -10.4 | % |
Revenues. Revenues for the year ended October 31, 2022 were $19.4 million, a net decrease of $0.7 million when compared to last year. The net decrease is attributable to the decrease in projects revenue in the Puerto Rico and Brazilian consulting markets of approximately $2.5 and $0.3 million, respectively, partially offset by the increase in projects revenue in the United States and European markets of approximately $1.8 and $0.3 million, respectively.
Cost of Services; gross profit. Cost of services for the year ended October 31, 2022 were $14.5 million, a decrease of $0.2 million when compared to last year. The overall gross profit reflected a gross profit decrease of 1.5 percentage points, when compared to last year. The net decrease in gross profit percentage points is mainly attributable to overall lower margin projects in the Puerto Rico market.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were approximately $3.7 million, a net decrease of approximately $5.5 million when compared to last year. The decrease is mainly attributable to a customer account receivable provision of approximately $5.2 million recorded last year, and the decrease in consulting fees, non-recurring legal fees and other administrative and general expenses.
Other Income, net. For the year ended on October 31, 2022, other income decreased by approximately $2.0 million to $13,00. The decrease is mostly due to last year’s recording of the forgiveness of principal and accrued interest of the SBA Loans for approximately the same amount.
Net Income (loss). Net income for the year ended October 31, 2022 was approximately $1.0 million, an improvement of approximately $3.0 million when compared to last year. The variance in net income is mostly attributable to the last year recording of a $5.2 million provision for a customer account receivable, and decrease in consulting fees, non-recurring legal fees and other administrative and general expenses, partially offset by (i) last year’s recording of the forgiveness of principal and accrued interest of the SBA Loans, (ii) net decrease in revenues, and (iii) overall lower margin projects in the Puerto Rico market.
For the year ended October 31, 2022, net income per share of common stock for both basic and diluted was $0.044, an improvement of $0.135 per share when compared to last year.
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Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including planned capital expenditures. As of October 31, 2022, the Company had approximately $17.8 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”). The Repurchase Program does not have an expiration date. During the year ended October 31, 2022, the Company purchased an aggregate of 84,303 shares of its common stock under the Company Stock Repurchase Program. As of October 31, 2022, the Company has 1,548,943 shares of common stock available for future repurchases under 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 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 arrangements during the fiscal year ended October 31, 2022.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States. We believe the following are the critical accounting policies that impact the consolidated financial statements, some of which are based on management’s best estimates available at the time of preparation. Actual experience may differ from these estimates.
Consolidation - The accompanying consolidated financial statements include the accounts of all of our wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Segments - 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 consolidated financial statements are presented to show these three reportable segments.
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from these estimates.
Fair Value of Financial Instruments - The carrying value of the Company’s financial instruments, 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.
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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 a determination is made.
Cash Equivalents - For purposes of the consolidated statements of cash flows, cash equivalents include investments in a money market obligations trust that is registered under the U.S. Investment Company Act of 1940 and liquid investments with original maturities of three months or less.
Accounts Receivable - Accounts receivable are recorded at their estimated realizable value. Accounts are deemed past due when payment has not been received within the stated time period. 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 balance is determined to be uncollectible in full. The effect of using this method approximates that of the allowance method. However, in the event the Company determines that the collectability of any account receivable reaches a certain uncertainty threshold, the Company will provide an allowance for doubtful account to reduce said balance.
Income Taxes - We follow an asset and liability approach method of accounting for income taxes. This method measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts on the financial statements. The resulting deferred tax assets or liabilities are adjusted to reflect changes in tax laws as they occur. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized.
The Company follows guidance from the Financial Accounting Standards Board (“FASB”) related to Accounting for Uncertainty in Income Taxes, which includes a two-step approach to recognizing, de-recognizing and measuring uncertain tax positions. As of October 31, 2022, the Company had no significant uncertain tax positions that would be reduced as a result of a lapse of the applicable statute of limitations.
Leases – The Company follows accounting standards issued by the FASB for the accounting and disclosure of leases. Under those standards, assets and liabilities that arise from leases are recognized on the balance sheet, and the leases are categorized at their inception as either operating or finance leases.
Operating lease right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments under the lease. Lease recognition occurs at the commencement date, and lease liability amounts are based on the present value of lease payments made during the lease term.
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.
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 October 31, 2022 and 2021.
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Stock-based Compensation - Stock-based compensation expense is recognized in the consolidated financial statements based on the fair value of the awards granted. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate of awards that will be forfeited. We calculate the fair value of stock options using the Black-Scholes option-pricing model at grant date, while for restricted stock units the fair market value of the units is determined by Company’s share market value at grant date. Excess tax benefits related to stock-based compensation are reflected as cash flows from financing activities rather than cash flows from operating activities. We have not recognized such cash flow from financing activities since there has been no tax benefit related to the stock-based compensation.
Earnings (Loss) Per Share of Common Stock - Basic earnings (loss) per share of common stock is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share includes the dilution of common stock equivalents.
The diluted weighted average shares of common stock outstanding were calculated using the treasury stock method for the respective periods.
Foreign Operations - The functional currency of our foreign subsidiaries are their respective local currencies. The assets and liabilities of our foreign subsidiary are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. The cumulative translation effect for subsidiaries using a functional currency other than the U.S. dollar is included as a cumulative translation adjustment in stockholders’ equity and as a component of comprehensive income.
Our intercompany accounts are typically denominated in the functional currency of the foreign subsidiary. Gains and losses resulting from the remeasurement of intercompany receivables that we consider to be of a long-term investment nature are recorded as a cumulative translation adjustment in stockholders’ equity and as a component of comprehensive income, while gains and losses resulting from the remeasurement of intercompany receivables from those international subsidiaries for which we anticipate settlement in the foreseeable future are recorded in the consolidated statements of operations.
Recent Accounting Pronouncements
Recent accounting pronouncements pending adoption not discussed elsewhere in this Annual Report on Form 10-K or the Consolidated Financial Statements, are either not applicable, or will not have or are not expected to have a material impact on us.
Forward-Looking Statements
Our business, financial condition, results of operations, cash flows and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Annual Report on Form 10-K, as well as other written or oral statements made from time to time by us or by our authorized executive officers on our behalf, constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These statements include all statements other than those made solely with respect to historical fact and identified by words such as “believes”, “anticipates”, “expects”, “intends” and similar expressions, but such words are not the exclusive means of identifying such statements. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement and these risk factors in order to comply with such safe harbor provisions. You should note that our forward-looking statements speak only as of the date of this Annual Report on Form 10-K or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Although we believe that the expectations, plans, intentions and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that our stockholders and prospective investors should consider are discussed in Item 1A Risk Factors above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our Consolidated Financial Statements, together with the report of our independent registered public accounting firm are included herein immediately following the signature page of this report. See Index to Consolidated Financial Statements on page F-1.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate “internal control over financial reporting,” as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, for the Company. This rule defines internal control over financial reporting as a process designed by, or under the supervision of, a company’s principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
| · | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, |
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| · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and |
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| · | provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. |
Because of its inherent limitations, our internal control systems and procedures may not prevent or detect misstatements. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
We, under the supervision of and with the participation of our management, including the principal executive officer and principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of October 31, 2022, based on criteria for effective internal control over financial reporting described in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our principal executive officer and principal financial officer concluded that the Company maintained effective internal control over financial reporting as of October 31, 2022.
Disclosure Controls and Procedures.
We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report.
Changes in Internal Control Over Financial Reporting
Based on an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, there has been no change in our internal control over financial reporting during our last fiscal quarter identified in connection with that evaluation that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTION.
Not Applicable.
| 20 |
| Table of Contents |
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item is incorporated by reference to our Proxy Statement for our Annual Meeting of Stockholders for the fiscal year ended October 31, 2022, which will be filed with Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Form 10-K, or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120 day period.
Information with respect to our executive officers is included in Part I.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to our Proxy Statement for our Annual Meeting of Stockholders for the fiscal year ended October 31, 2022, which will be filed with Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Form 10-K, or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120 day period.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this Item is incorporated by reference to our Proxy Statement for our Annual Meeting of Stockholders for the fiscal year ended October 31, 2022, which will be filed with Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Form 10-K, or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120 day period.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference to our Proxy Statement for our Annual Meeting of Stockholders for the fiscal year ended October 31, 2022, which will be filed with Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Form 10-K, or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120 day period.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is incorporated by reference to our Proxy Statement for our Annual Meeting of Stockholders for the fiscal year ended October 31, 2022, which will be filed with Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this Form 10-K, or, alternatively, by amendment to this Form 10-K under cover of Form 10-K/A no later than the end of such 120 day period.
| 21 |
| Table of Contents |
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
The following documents are filed as a part of this Annual Report on Form 10-K:
| 1. | All Financial Statements: Consolidated Financial Statements are included herein immediately following the signature page of this report. See Index to Consolidated Financial Statements on page F-1. |
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| 2. | Financial Statement Schedules: None. |
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| 3. | Exhibits: The following exhibits are filed herewith or are incorporated by reference to exhibits previously filed with the Commission, as indicated in the description of each. |
| Incorporated By Reference | ||||
Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date |
8-K | 000-50956 | 99.1 | 5/1/2006 | ||
Certificate of Amendment to the Certificate of Incorporation | 8-K | 000-50956 | 3.1 | 4/12/2013 | |
10-SB12G | 000-50956 | 3.2 | 9/24/2004 | ||
8-K | 000-50956 | 3.1 | 6/6/2008 | ||
8-K | 000-50956 | 3.2 | 4/12/13 | ||
10-K | 000-50956 | 4.1 | 1/29/2020 | ||
Employment Agreement, effective January 1, 2015, between Pharma-Bio Serv, Inc. and Victor Sanchez | 8-K | 000-50956 | 10.2 | 1/5/2015 | |
Employment Agreement dated November 5, 2007 between the Pharma-Bio Serv, Inc. and Pedro Lasanta | 10-K | 000-50956 | 10.8 | 1/29/2009 | |
Amendment to Employment Agreement dated December 17, 2008 between the Registrant and Pedro Lasanta | 8-K | 000-50956 | 99.1 | 12/23/2008 | |
8-K | 000-50956 | 10.3 | 3/17/2009 | ||
8-K | 000-50956 | 10.2 | 1/07/2010 | ||
8-K | 000-50956 | 10.1 | 2/2/2012 | ||
8-K | 000-50956 | 10.1 | 1/7/2013 | ||
8-K | 000-50956 | 10.2 | 2/21/2014 | ||
| 22 |
| Table of Contents |
|
| Incorporated By Reference | |||
Exhibit Number | Exhibit Description | Form | File Number | Exhibit | Filing Date |
8-K | 000-50956 | 10.1 | 10/11/2019 | ||
DEF 14A | 000-50956 | Appendix C | 3/26/2007 | ||
10-Q | 000-50956 | 10.4 | 3/17/2014 | ||
8-K | 000-50956 | 10.1 | 5/2/2014 | ||
10-KSB | 000-50956 | 14.1 | 2/2/2007 | ||
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Consent of Crowe PR PSC (formerly known as Horwath Vélez & Co, PSC) |
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Certification of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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Certification of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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101.INS* | XBRL Instance Document |
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101.SCH* | XBRL Taxonomy Extension Schema |
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101.CAL* | XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF* | XBRL Taxonomy Extension Definition Linkbase |
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101.LAB* | XBRL Taxonomy Extension Label Linkbase |
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101.PRE* | XBRL Taxonomy Extension Presentation Linkbase |
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104* | Cover page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
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———————
* Filed herewith
** Furnished herewith
Exhibits 10.8 through 10.19 are management contracts or compensatory plans, contracts or arrangements.
ITEM 16. FORM 10-K SUMMARY.
None.
| 23 |
| Table of Contents |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| PHARMA-BIO SERV, INC. |
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Dated: January 30, 2023 | By: | /s/ Victor Sanchez |
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| Name: Victor Sanchez |
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| Title: Chief Executive Officer and President Europe Operations (Principal Executive Officer) |
| |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
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/s/ Victor Sanchez |
| Chief Executive Officer and President Europe Operations |
| January 30, 2023 |
Victor Sanchez |
| (Principal Executive Officer) |
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/s/ Pedro J. Lasanta |
| Chief Financial Officer, Vice President Finance and Administration and Secretary |
| January 30, 2023 |
Pedro J. Lasanta |
| (Principal Financial and Accounting Officer) |
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/s/ Kirk Michel |
| Chairman |
| January 30, 2023 |
Kirk Michel |
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/s/ Howard Spindel |
| Director |
| January 30, 2023 |
Howard Spindel |
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/s/ Dov Perlysky |
| Director |
| January 30, 2023 |
Dov Perlysky |
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/s/ Irving Wiesen |
| Director |
| January 30, 2023 |
Irving Wiesen |
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| 24 |
| Table of Contents |
PHARMA-BIO SERV, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| F-1 |
| Table of Contents |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of
Pharma-Bio Serv, Inc.
Dorado, Puerto Rico
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Pharma-Bio Serv, Inc. (“the Company”) as of October 31, 2022 and 2021, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of October 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
Crowe PR PSC is a member of the global network of Crowe LLP, the members of which are separate and independent legal entities.
We have served as the Company’s auditor since 2006.
/s/
January 30, 2023
Puerto Rico Society of Certified Public Accountants
Stamp number E509462 was
affixed to the original of this report
| F-2 |
| Table of Contents |
PHARMA-BIO SERV, INC.
Consolidated Balance Sheets
October 31, 2022 and 2021
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| October 31, |
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| 2022 |
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| 2021 |
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ASSETS |
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Current assets |
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Cash and cash equivalents |
| $ |
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| $ |
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Accounts receivable |
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Prepaids and other assets |
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Total current assets |
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Property and equipment |
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Operating lease right-of-use |
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Other assets |
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Total assets |
| $ |
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| $ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
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Current liabilities |
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Current operating lease liabilities |
| $ |
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Accounts payable and accrued expenses |
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Current portion of US Tax Reform Transition Tax and income taxes payable |
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Total current liabilities |
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US Tax Reform Transition Tax payable |
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Long term operating lease liabilities |
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Total liabilities |
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Commitments and contingencies |
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Stockholders’ equity |
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Preferred stock, $ |
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Common stock, $ and |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive income |
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Treasury stock, at cost; |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
| $ |
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| $ |
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See notes to consolidated financial statements.
| F-3 |
| Table of Contents |
PHARMA-BIO SERV, INC.
Consolidated Statements of Operations
For the Years Ended October 31, 2022 and 2021
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| Years ended October 31, |
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| 2022 |
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| 2021 |
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REVENUES |
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COST OF SERVICES |
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GROSS PROFIT |
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
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INCOME (LOSS) FROM OPERATIONS |
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OTHER INCOME, NET (INCLUDING LOANS FORGIVENESS DURING THE YEAR ENDED OCTOBER 31, 2021) |
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INCOME (LOSS) BEFORE INCOME TAX |
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INCOME TAX EXPENSE |
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NET INCOME (LOSS) |
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BASIC AND DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK |
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC |
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – DILUTED |
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See notes to consolidated financial statements.
| F-4 |
| Table of Contents |
PHARMA-BIO SERV, INC.
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended October 31, 2022 and 2021
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| Years ended October 31, |
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NET INCOME (LOSS) |
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF RECLASSIFICATION ADJUSTMENTS AND TAXES: |
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Foreign currency translation: |
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Net unrealized gain (loss) |
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TOTAL OTHER COMPREHENSIVE INCOME (LOSS) |
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COMPREHENSIVE INCOME (LOSS) |
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See notes to consolidated financial statements.
| F-5 |
| Table of Contents |
PHARMA-BIO SERV, INC.
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended October 31, 2022 and 2021
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BALANCE AT OCTOBER 31, 2020 |
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STOCK-BASED COMPENSATION |
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ISSUANCE OF COMMON STOCK PURSUANT TO THE CASHLESS EXERCISE OF STOCK OPTIONS |
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PURCHASE OF TREASURY STOCK (25,600 SHARES) |
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NET LOSS |
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OTHER COMPREHENSIVE LOSS, NET OF TAX |
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CASH DIVIDEND ($0.075 PER COMMON, SHARE AT RECORD DATE) |
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BALANCE AT OCTOBER 31, 2021 |
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STOCK-BASED COMPENSATION |
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ISSUANCE OF COMMON STOCK PURSUANT TO THE CASHLESS EXERCISE OF STOCK OPTIONS |
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| - |
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PURCHASE OF TREASURY STOCK (84,303 SHARES) |
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NET INCOME |
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OTHER COMPREHENSIVE INCOME, NET OF TAX |
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| - |
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CASH DIVIDENDS ($0.075 PER SHARE OF COMMON STOCK AT RECORD DATES) |
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BALANCE AT OCTOBER 31, 2022 |
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See notes to consolidated financial statements.
| F-6 |
| Table of Contents |
PHARMA-BIO SERV, INC.
Consolidated Statements of Cash Flows
For the Years Ended October 31, 2022 and 2021
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| Years ended October 31, |
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| 2021 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) |
| $ |
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| $ | ( | ) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Gain on disposition of property and equipment |
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Stock-based compensation |
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Depreciation and amortization |
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Loans forgiveness |
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Customer account receivable provision |
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Increase in accounts receivable |
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Decrease (increase) in prepaids and other assets |
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Increase (decrease) in liabilities |
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NET CASH PROVIDED BY OPERATING ACTIVITIES |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Acquisition of property and equipment |
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Proceeds from disposition of property and equipment |
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Collection of promissory note receivable |
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NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES |
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CASH FLOW FROM FINANCING ACTIVITIES: |
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Repurchase of common stock |
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Cash dividends paid to shareholders |
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NET CASH USED IN FINANCING ACTIVITIES |
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EFFECT OF EXCHANGE RATE CHANGES ON CASH |
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
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CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR |
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CASH AND CASH EQUIVALENTS – END OF YEAR |
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SUPPLEMENTAL DISCLOSURES OF |
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CASH FLOW INFORMATION: |
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Cash paid during the period for: |
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Income taxes |
| $ |
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Interest |
| $ |
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SUPPLEMENTARY SCHEDULES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: |
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Property and equipment with accumulated depreciation of $35,833 disposed during the year ended October 31, 2021 |
| $ |
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| $ |
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Income tax withheld by clients to be used as a credit in the Company’s income tax returns |
| $ |
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| $ |
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Conversion of cashless exercise of options to shares of common stock |
| $ |
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| $ |
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See notes to consolidated financial statements.
| F-7 |
| Table of Contents |
PHARMA-BIO SERV, INC.
Notes To Consolidated Financial Statements
For the Years Ended October 31, 2022 and 2021
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 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
Consolidation
The accompanying consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Segments
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 consolidated financial statements are presented to show these three reportable segments.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from these estimates.
Fair Value of Financial Instruments
The carrying value of the Company’s financial instruments, 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.
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 has 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 a determination is made.
| F-8 |
| Table of Contents |
Cash Equivalents
For purposes of the consolidated statements of cash flows, cash equivalents include investments in money market obligation’s trusts that are registered under the U.S. Investment Company Act of 1940 and liquid investments with original maturities of three months or less.
Accounts Receivable
Accounts receivable are recorded at their estimated realizable value. Accounts are deemed past due when payment has not been received within the stated time period. The Company’s policy is to review individual past due amounts periodically and write off amounts for which all collection efforts are deemed to have been exhausted. Due to the nature of the Company’s customers, bad debts are mainly accounted for using the direct write-off method whereby an expense is recognized only when a specific balance is determined to be uncollectible in full. The effect of using this method approximates that of the allowance method. However, in the event the Company determines that the collectability of any account receivable reaches a certain uncertainty threshold, the Company will provide an allowance for doubtful account to reduce said balance.
Income Taxes
The Company follows an asset and liability approach method of accounting for income taxes. This method measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts on the financial statements. The resulting deferred tax assets or liabilities are adjusted to reflect changes in tax laws as they occur. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized.
The Company follows guidance from the Financial Accounting Standards Board (“FASB”) related to Accounting for Uncertainty in Income Taxes, which includes a two-step approach to recognizing, de-recognizing and measuring uncertain tax positions. As of October 31, 2022, the Company had no significant uncertain tax positions that would be reduced as a result of a lapse of the applicable statute of limitations.
Leases
The Company follows accounting standards issued by the FASB for the accounting and disclosure of leases. Under those standards, assets and liabilities that arise from leases are recognized on the balance sheet, and the leases are categorized at their inception as either operating or finance leases.
Operating lease right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments under the lease. Lease recognition occurs at the commencement date, and lease liability amounts are based on the present value of lease payments made during the lease term.
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.
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 October 31, 2022 and 2021.
Stock-based Compensation
Stock-based compensation expense is recognized in the consolidated financial statements based on the fair value of the awards granted. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate of awards that will be forfeited. The Company calculates the fair value of stock options using the Black-Scholes option-pricing model at grant date, while for restricted stock units the fair market value of the units is determined by Company’s share market value at grant date. Excess tax benefits related to stock-based compensation are reflected as cash flows from financing activities rather than cash flows from operating activities. However, the Company has not recognized such cash flow from financing activities since there has been no tax benefit related to the stock-based compensation.
| F-9 |
| Table of Contents |
Earnings (Loss) Per Share of Common Stock
Basic earnings (loss) per share of common stock is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share includes the dilution of common stock equivalents.
The diluted weighted average shares of common stock outstanding were calculated using the treasury stock method for the respective periods.
Foreign Operations
The functional currency of the Company’s foreign subsidiaries is its local currency. The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. The cumulative translation effect for subsidiaries using a functional currency other than the U.S. dollar is included as a cumulative translation adjustment in stockholders’ equity and as a component of comprehensive income.
The Company’s intercompany accounts are typically denominated in the functional currency of the foreign subsidiary. Gains and losses resulting from the remeasurement of intercompany receivables that the Company considers to be of a long-term investment nature are recorded as a cumulative translation adjustment in stockholders’ equity and as a component of comprehensive income, while gains and losses resulting from the remeasurement of intercompany receivables from those international subsidiaries for which the Company anticipates settlement in the foreseeable future are recorded in the consolidated statements of operations.
Subsequent Events
The Company has evaluated subsequent events to the date of the issuance of the consolidated financial statements. The Company has determined that there are no events occurring in this period that require disclosure or adjustment.
Reclassifications
Certain reclassifications have been made to the October 31, 2021 consolidated financial statements to conform them to the October 31, 2022 consolidated financial statements presentation. Such reclassifications do not have an effect on net income (loss) as previously reported.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses” (ASU 2016-13), which changes the impairment model for most financial assets and certain other instruments from an incurred loss model to an expected loss model. In addition, the guidance also requires incremental disclosures regarding allowances and credit quality indicators. ASU 2016-13 is required to be adopted using the modified-retrospective approach. For the Company this guidance will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. Based on the Company’s assessment, it does not anticipate a material impact to the Company’s Consolidated Financial Statements.
NOTE B – CUSTOMER ACCOUNT RECEIVABLE
As of October 31, 2022 and 2021, one of the Company’s customers owed the Company approximately $
NOTE C – LOANS FORGIVENESS
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 $
| F-10 |
| Table of Contents |
NOTE D - PROPERTY AND EQUIPMENT
The balance of property and equipment at October 31, 2022 and 2021 consisted of the following:
|
|
|
| October 31, |
| |||||||
|
| Useful life (years) |
|
| 2022 |
|
| 2021 |
| |||
Vehicles |
|
|
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| $ |
|
| $ |
| |||
Computers |
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| |||
Equipment |
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| ||||
Furniture and fixtures |
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Total |
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Less: Accumulated depreciation and amortization |
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| ( | ) |
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| ( | ) |
Property and equipment, net |
|
|
|
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| $ |
|
| $ |
| ||
NOTE E - INCOME TAXES
On December 22, 2017, Public Law 115-97, commonly known as the Tax Cuts and Jobs Act of 2017 (the “Tax Reform”), was enacted. The Tax Reform 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 $
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
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
The reconciliation between the United States federal statutory rate and our effective tax rate applicable to continuing operations for the years ended October 31, 2022, and 2021 is as follows:
|
| October 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
United States federal statutory rate |
|
| % |
|
| ( | )% | |
Tax holiday (PRIDCO Grant) |
|
| ( | )% |
|
| ( | )% |
Other foreign jurisdictions earnings |
|
| % |
|
| ( | )% | |
PPP loans forgiveness |
| - | % |
|
| ( | )% | |
Allowance of resulting deferred tax asset |
| - | % |
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| % | ||
Other |
|
| % |
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| % | ||
Effective tax rate |
|
| % |
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| % | ||
| F-11 |
| Table of Contents |
The effective tax rates for the years ended October 31, 2022 and 2021 differ from the federal statutory rate mainly due to the impact of the jurisdictional mix of income and expenses. Except for the benefit derived from the PPP loans forgiveness for the year ended October 31, 2021, the benefit to our effective tax rate is mainly from foreign earnings results from the Company’s operations conducted in Puerto Rico, a territory of the United States that is treated as a foreign jurisdiction for U.S. tax purposes and is subject to tax incentive grants. As previously disclosed, these earnings are also subject to U.S. tax at a reduced rate of
As of October 31, 2022 and 2021 income tax expense includes US federal and state taxes of approximately $
Since October 31, 2021, Pharma-PR, Pharma-Serv and Scienza Labs have established an allowance against a customer account receivable for an aggregate expense amount of approximately $
The Company files income tax returns in the United States (federal and various states jurisdictions), Puerto Rico, Spain and Brazil. The 2018 (2017 for Puerto Rico) through 2021 tax years are open and may be subject to potential examination in one or more jurisdictions. Currently, the Company is not subject to a federal, state, Puerto Rico or foreign income tax examination.
NOTE F – LEASES
Operating facilities - The Company conducts its headquarters administrative operations in office facilities located in Dorado, Puerto Rico (the “Office Facilities”). The Office Facilities are leased from an affiliate of our past Chairman of the Board (the “Landlord”).
The Company maintains an office facility in Madrid, Spain. The facility is under a month-to-month lease with monthly payments of approximately $
The Company leases certain apartments as dwellings for employees. The leases are under short-term lease agreements and usually are cancelable upon 30-day notification.
Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year as of October 31, 2022 are as follows:
Twelve months ending October 31, |
| Amount |
| |
2023 |
| $ |
| |
2024 |
|
|
| |
2025 |
|
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| |
2026 |
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| |
Total future minimum operating lease payments |
|
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| |
Less: Amount of imputed interest |
|
| ( | ) |
Present value of future minimum operating lease payments |
|
|
| |
Current operating lease liabilities |
|
| ( | ) |
Long term operating lease liabilities |
| $ |
| |
Rent expense for the years ended October 31, 2022 and 2021 was approximately $
NOTE G – CONTINGENCIES
In the ordinary course of business, the Company may be a party to legal proceedings incidental to the business. These proceedings are not expected to have a material adverse effect on the Company’s business or financial condition.
| F-12 |
| Table of Contents |
NOTE H – EQUITY TRANSACTIONS
On June 13, 2014, the Board of Directors of the Company authorized the Company to repurchase up to two million shares of its outstanding common stock under the Company’s Stock Repurchase Program (the “Repurchase Program”). The timing, manner, price and amount of any repurchases under the Repurchase Program is 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. To conserve cash due to the economic uncertainty caused by the coronavirus pandemic, from April 2020 to September 2021, the Company suspended purchases under the Repurchase Program. As of October 31, 2022 and 2021, a total of
On November 15, 2021, the Board of Directors of the Company declared a cash dividend of $
NOTE I – EARNINGS (LOSS) PER SHARE
The computation of basic earnings (loss) per share is based on the weighted-average number of our common shares outstanding. The computation of diluted earnings (loss) per share is based on the weighted-average number of our common shares outstanding and dilutive potential common shares, which include principally shares that may be issued under: warrants, our stock option and restricted stock unit awards, determined using the treasury stock method. The following data show the amounts used in the calculations of basic and diluted earnings (loss) per share.
|
| Years ended October 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Net income (loss) available to common equity holders - used to compute basic and diluted earnings per share |
| $ |
|
| $ | ( | ) | |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares - used to compute basic earnings (loss) per share |
|
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|
| ||
Effect of options to purchase common stock |
|
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| ||
Weighted average number of shares - used to compute diluted earnings (loss) per share |
|
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| ||
For the years ended October 31, 2022 and 2021, options for the purchase of
NOTE J - STOCK OPTIONS AND STOCK BASED COMPENSATION
The Company has an incentive plan that covers 2,300,000 shares of the Company’s common stock, that provide for the grant of incentive and non-qualified options, stock grants, stock appreciation rights and other equity-based incentives to employees, including officers, consultants and directors for a period of ten years (the “2014 Long-Term Incentive Plan” also known as the “2014 Plan”). The 2014 Plan is to be administered by a committee of independent directors. In the absence of a committee, the plan is administered by the Board of Directors. Options intended to be incentive stock options must be granted at an exercise price per share which is not less than the fair market value of the common stock on the date of grant and may have a term which is not longer than ten years. If the option holder holds at least 10% of the Company’s common stock, the exercise price must be at least 110% of the fair market value on the date of grant and the term of the option cannot exceed five years.
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate of awards that will be forfeited. The fair value of stock-based awards to employees is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of the option has been estimated using the “simplified” method as provided in the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 107, for plans with insufficient exercise experience. Under this method, the expected term equals the arithmetic average of the vesting term and the contractual term of the option. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of the Company’s stock price. These factors could change in the future, which would affect the fair values of stock options granted in such future periods and could cause volatility in the total amount of the stock-based compensation expense reported in future periods.
| F-13 |
| Table of Contents |
The 2014 Plan stock options activity and status for the years ended October 31, 2022 and 2021 was as follows:
|
| Year ended October 31, |
| |||||||||||||
|
| 2022 |
|
| 2021 |
| ||||||||||
|
|
|
| Weighted- |
|
|
|
| Weighted- |
| ||||||
|
| Number of |
|
| Average Option |
|
| Number of |
|
| Average Option |
| ||||
|
| Shares |
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| Exercise Price |
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| Exercise Price |
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Outstanding at beginning of year |
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| $ |
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| $ |
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Granted |
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| $ |
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| $ |
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Exercised |
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| $ |
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| $ |
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Expired and/or forfeited |
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| - |
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| $ |
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| - |
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| $ |
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Total outstanding at end of year |
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| $ |
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Outstanding exercisable stock options at end of year |
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| $ |
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| $ |
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| October 31, 2022 |
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| October 31, 2021 |
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Weighted average remaining years in contractual life for: |
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Total outstanding options |
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Outstanding exercisable options |
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Shares of common stock available for issuance pursuant to future stock option grants |
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The following weighted average assumptions were used to estimate the fair value of stock options granted under the 2014 Plan for the years ended October 31, 2022 and 2021:
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| Year ended October 31, |
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| 2022 |
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| 2021 |
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Expected dividend yield |
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Expected stock price volatility |
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Risk free interest rate |
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Expected life of options |
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Weighted average fair value of options granted |
| $ |
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| $ |
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As of October 31, 2022, estimated stock based compensation expense to be recognized in future periods for granted nonvested stock options is attributable to stock options granted under the 2014 Plan. The nonvested stock options compensation expense in the amount of $
As of October 31, 2022 and 2021, the aggregate intrinsic value of options outstanding under the 2014 Plan were approximately $
The following table presents the total stock-based compensation included in the Company’s consolidated statement of income and the effect in earnings per share:
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| Year ended October 31, |
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| 2022 |
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| 2021 |
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Stock-based compensation expense: |
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Cost of services |
| $ |
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| $ |
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Selling, general and administrative |
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Stock-based compensation before tax |
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Income tax benefit |
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Net stock-based compensation expense |
| $ |
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| $ |
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Effect on earnings per share: |
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Basic earnings per share |
| $ | ( | ) |
| $ | ( | ) |
Diluted earnings per share |
| $ | ( | ) |
| $ | ( | ) |
| F-14 |
| Table of Contents |
NOTE K - 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 consulting, (ii) United States consulting, and (iii) Europe consulting. These reportable segments provide services primarily to the pharmaceutical, chemical, medical device and biotechnology industries in their respective markets.
The following table presents information about the reported revenue from services and earnings from operations of the Company for the years ended in October 31, 2022 and 2021. There is no intersegment revenue for the mentioned periods. Corporate expenses that support the operating units have been allocated to the segments. Asset information by reportable segment is not presented, since the Company does not produce such information internally, nor does it use such data to manage its business.
|
| Year ended October 31, |
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| 2022 |
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| 2021 |
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REVENUES: |
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Puerto Rico consulting |
| $ |
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| $ |
| ||
United States consulting |
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Europe consulting |
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Other |
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Total consolidated revenues |
| $ |
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| $ |
| ||
INCOME (LOSS) BEFORE TAXES: |
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Puerto Rico consulting, including loans and related interest forgiveness of approximately $1,861,000 for the year ended October 31, 2021 |
| $ |
|
| $ | ( | ) | |
United States consulting, including loan and related interest forgiveness of of approximately $95,000 for the year ended October 31, 2021 |
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Europe consulting |
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Other |
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| ( | ) |
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Total consolidated income before taxes |
| $ |
|
| $ | ( | ) | |
Long lived assets (property and equipment) and related depreciation and amortization expense for the years ended October 31, 2022 and 2021, 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 L - CONCENTRATION OF RISKS
Cash and cash equivalents
The Company domestic cash and cash equivalents consist of cash deposits in FDIC insured banks (substantially covered by FDIC insurance by the spread of deposits in multiple FDIC insured banks), a money market obligations trust registered under the US Investment Company Act of 1940, as amended, and U.S. Treasury securities with maturities of three months or less. In the foreign markets we serve, we also maintain cash deposits in foreign banks, which tend to be not significant and have no specific insurance. No losses have been experienced or are expected on these accounts.
Accounts receivable and revenues
Except as set forth in Note B - Customer Account Receivable, management deems all its accounts receivable to be fully collectible, and, as such, does not maintain any allowances for uncollectible receivables.
The Company’s revenues, and the related receivables, are concentrated in the pharmaceutical industry in Puerto Rico, the United States of America and Europe. Although a few customers represent a significant source of revenue, the Company’s functions are not a continuous process, accordingly, the client base for which the services are typically rendered, on a project-by-project basis, changes regularly.
| F-15 |
| Table of Contents |
The Company provided a substantial portion of its services to three customers, who accounted for 10% or more of its revenues in either of the years ended October 31, 2022 or 2021. During the year ended October 31, 2022, revenues from these customers were
The major customer information in the above paragraph is based on revenues earned from said customers at the segment level because in management’s opinion contracts by segments are totally independent of each other, and therefore such information is more meaningful to the reader. However, at the global level four groups of affiliated companies accounted for 10% or more of our revenues in either October 31, 2022 or 2021. During the year ended October 31, 2022, aggregate revenues from these global groups of affiliated companies were
NOTE M - RETIREMENT PLAN
Pharma-PR and Pharma-US each have a separate qualified retirement plan in accordance with the applicable laws of the Commonwealth of Puerto Rico and the United States of America, for employees who meet certain age and service period requirements. The Company makes contributions to these plans as required by the provisions of the plan document. During the years ended October 31, 2022 and 2021 the Company contributed to these plans $
NOTE N – RELATED PARTY TRANSACTIONS
On December 31, 2013, the Company entered into a Consulting Agreement with both our former Chairman and a company affiliated with our former Chairman (the “Consultant”), effective as of January 1, 2014. Pursuant to the Consulting Agreement as amended, the Consultant consulted with the Board regarding the Company’s strategic initiatives, company services, management, operations and other matters as requested from time to time by the Board. The compensation paid under this agreement was $
As more fully disclosed in Note F to the consolidated financial statements, the Company leases its headquarters facilities in Dorado, Puerto Rico, from an affiliate of our past Chairman of the Board.
| F-16 |