PBSV 10-Q
Pharma-Bio Serv, Inc. (PBSV)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to ______________
Commission File No.
(Exact Name of Registrant as Specified in Its Charter) |
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(State or Other Jurisdiction of Incorporation or Organization) |
| (IRS Employer Identification No.) |
| (Zip Code) | |
(Address of Principal Executive Offices) |
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Registrant’s Telephone Number, Including Area Code
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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 an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
|
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
The number of shares of the registrant’s common stock outstanding as of March 10, 2023 was
PHARMA-BIO SERV, INC.
FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 2023
TABLE OF CONTENTS
| 2 |
| Table of Contents |
PART I – FINANCIAL INFORMATION
Item 1.FINANCIAL STATEMENTS
PHARMA-BIO SERV, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
ASSETS |
| January 31, 2023* |
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| October 31, 2022** |
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Current assets |
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Cash and cash equivalents |
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Marketable securities |
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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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LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
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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Stockholders’ equity |
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Preferred Stock, $ |
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Common Stock, $ shares outstanding at January 31, 2023 and October 31, 2022, respectively |
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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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* | Unaudited. |
** | Condensed from audited financial statements. |
See notes to the condensed consolidated financial statements.
| - 1 - |
| Table of Contents |
PHARMA-BIO SERV, INC.
Condensed Consolidated Statements of Income
(Unaudited)
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| Three months ended January 31, |
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| 2023 |
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| 2022 |
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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 FROM OPERATIONS |
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OTHER INCOME, NET |
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INCOME BEFORE INCOME TAX |
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INCOME TAX EXPENSE |
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NET INCOME |
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BASIC AND DILUTED EARNINGS PER COMMON SHARE |
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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 the condensed consolidated financial statements.
| - 2 - |
| Table of Contents |
PHARMA-BIO SERV, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
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| Three months ended January 31, |
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| 2023 |
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| 2022 |
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NET INCOME |
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OTHER COMPREHENSIVE INCOME (LOSS): |
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Foreign currency translation: |
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Net unrealized gain (loss) |
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Intercompany balances foreign exchange settlement, included in net income |
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TOTAL OTHER COMPREHENSIVE LOSS |
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COMPREHENSIVE INCOME |
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| $ |
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See notes to the condensed consolidated financial statements.
| - 3 - |
| Table of Contents |
PHARMA-BIO SERV, INC.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
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| Other |
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FISCAL YEAR 2023 |
| Common Stock |
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| Preferred Stock |
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| Paid-in |
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| Retained |
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| Comprehensive |
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| Treasury |
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| Shares |
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| Amount |
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| Shares |
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| Amount |
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| Capital |
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| Earnings |
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| Income (Loss) |
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| Stock |
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| Total |
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BALANCE AT NOVEMBER 1, 2022 |
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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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NET INCOME |
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| - |
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| - |
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OTHER COMPREHENSIVE LOSS, NET OF TAX |
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BALANCE AT JANUARY 31, 2023 |
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| $ |
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| - |
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| $ |
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| $ |
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| $ |
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| $ |
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| $ | ( | ) |
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| Accumulated |
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| Additional |
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| Other |
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FISCAL YEAR 2022 |
| Common Stock |
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| Preferred Stock |
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| Paid-in |
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| Retained |
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| Comprehensive |
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| Treasury |
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| Shares |
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| Amount |
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| Shares |
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| Amount |
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| Capital |
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| Earnings |
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| Income (Loss) |
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| Stock |
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| Total |
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BALANCE AT NOVEMBER 1, 2021 |
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| $ |
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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 (54,603 SHARES) |
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| - |
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NET INCOME |
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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 JANUARY 31, 2022 |
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| $ |
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| $ | ( | ) |
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See notes to condensed consolidated financial statements.
| - 4 - |
| Table of Contents |
PHARMA-BIO SERV, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
| Three months ended January 31, |
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| 2023 |
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| 2022 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Stock-based compensation |
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Depreciation and amortization |
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Reinvested interests |
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Decrease (increase) in accounts receivable |
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Decrease (increase) in other assets |
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Decrease in liabilities |
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES |
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CASH FLOWS FROM INVESTING: |
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Acquisition of property and equipment |
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Marketable securities investment |
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NET CASH USED IN INVESTING ACTIVITIES |
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CASH FLOWS 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 DECREASE IN CASH AND CASH EQUIVALENTS |
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CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD |
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CASH AND CASH EQUIVALENTS - END OF PERIOD |
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SUPPLEMENTAL DISCLOURES OF CASH FLOWS 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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Income tax withheld by clients to be used as a credit in the Company’s income tax return |
| $ |
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| $ |
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Conversion of cashless exercise of options to common stock |
| $ |
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| $ |
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See notes to the condensed consolidated financial statements.
| - 5 - |
| Table of Contents |
PHARMA-BIO SERV, INC.
Notes To Condensed Consolidated Financial Statements
January 31, 2023
(Unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Pharma-Bio Serv, Inc. (“Pharma-Bio”) is a Delaware corporation organized on January 14, 2004. Pharma-Bio is the parent company of Pharma-Bio Serv PR, Inc. (“Pharma-PR”), Pharma Serv, Inc. (“Pharma-Serv”), and Scienza Labs, Inc. (currently inactive) (“Scienza Labs”), each a Puerto Rico corporation, Pharma-Bio Serv US, Inc. (“Pharma-US”), a Delaware corporation, Pharma-Bio Serv SL (“Pharma-Spain”), a Spanish limited liability company, and Pharma-Bio Serv Brasil Servicos de Consultoria Ltda. (currently insignificant) (“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, Spain and Brazil under the name of Pharma-Bio Serv and is engaged in providing technical compliance consulting service.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated balance sheet of the Company as of October 31, 2022 is derived from audited consolidated financial statements but does not include all disclosures required by generally accepted accounting principles. The unaudited interim condensed consolidated financial statements, include all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods. The results of operations for the three months ended January 31, 2023 are not necessarily indicative of expected results for the full 2023 fiscal year.
The accompanying financial data as of January 31, 2023, and for the three-month period ended January 31, 2023 and 2022 has been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally contained in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our audited Consolidated Financial Statements and the notes thereto for the fiscal year ended October 31, 2022.
Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Segments
The Company operates in three reportable business segments: (i) Puerto Rico technical compliance consulting, (ii) United States technical compliance consulting, and (iii) Europe technical compliance consulting. Accordingly, the accompanying condensed consolidated financial statements are presented to show these three reportable segments.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from these estimates.
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Fair Value of Financial Instruments
Accounting standards have established a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Accounting standards have established three levels of inputs that may be used to measure fair value:
| Level 1: | Quoted prices in active markets for identical assets and liabilities.
|
| Level 2: | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
|
| Level 3: | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity). |
Marketable securities consist of U.S. Treasury securities, which are categorized in Level 1 and have a short-term maturity.
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 have no alternative use and for which the Company has an enforceable right to payment for the work completed to date. As a result, revenue is recognized over time when or as the Company transfers control of the promised products or services (known as performance obligations) to its customers. Revenue for short term fixed fee contracts or “not to exceed” contracts is recognized similarly, except that certain milestones also have to be reached before revenue is recognized. If the Company determines that a contract will result in a loss, the Company recognizes the estimated loss in the period in which such determination is made.
Cash Equivalents
For purposes of the consolidated statements of cash flows, cash equivalents include investments in a money market obligations trust that is registered under the U.S. Investment Company Act of 1940, as amended, and liquid investments, including US Treasury securities, with 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 January 31, 2023, the Company had no significant uncertain tax positions that would be reduced as a result of a lapse of the applicable statute of limitations.
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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. 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. Expenditures for repairs and maintenance are expensed when incurred. As of January 31, 2023 and October 31, 2022, the accumulated depreciation amounted to $
Impairment of Long-Lived Assets
The Company evaluates for impairment its long-lived assets to be held and used, and long-lived assets to be disposed of, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on management estimates, no impairment of the long-lived assets was present as of January 31, 2023 and October 31, 2022.
Stock-based Compensation
Stock-based compensation expense is recognized in the consolidated financial statements based on the fair value of the awards granted. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate of awards that will be forfeited. The Company calculates the fair value of stock options using the Black-Scholes option-pricing model at the grant date, while for restricted stock units the fair market value of the units is determined by Company’s share market value at grant date. Excess tax benefits related to stock-based compensation are reflected as cash flows from financing activities rather than cash flows from operating activities. The Company has not recognized such cash flows from financing activities since there has been no tax benefit related to the stock-based compensation.
Earnings Per Share of Common Stock
Basic earnings per share of common stock is calculated by dividing net earnings by the weighted average number of shares of common stock outstanding. Diluted earnings per share includes the dilution of common stock equivalents, which include principally shares that may be issued upon the exercise of warrants, stock option and restricted stock unit awards.
The diluted weighted average shares of common stock outstanding were calculated using the treasury stock method for the respective periods.
Foreign Operations
The functional currency of the Company’s foreign subsidiaries is its local currency. The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. The cumulative translation effect for subsidiaries using a functional currency other than the U.S. dollar is included as a cumulative translation adjustment in stockholders’ equity and as a component of comprehensive income.
The Company’s intercompany accounts are typically denominated in the functional currency of the foreign subsidiary. Gains and losses resulting from the remeasurement of intercompany receivables that the Company considers to be of a long-term investment nature are recorded as a cumulative translation adjustment in stockholders’ equity and as a component of comprehensive income, while gains and losses resulting from the remeasurement of intercompany receivables from those international subsidiaries for which the Company anticipates settlement in the foreseeable future are recorded in the consolidated statements of operations.
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Subsequent Events
The Company has evaluated subsequent events through the filing date of this report. The Company has determined that there are no events occurring in this period that required disclosure or adjustment, except as disclosed in the accompanying condensed consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the January 31, 2022 condensed consolidated financial statements to conform them to the January 31, 2023 condensed consolidated financial statements presentation. Such reclassifications do not affect net income as previously reported.
Recent Accounting Pronouncements
Recent accounting pronouncements pending adoption not discussed above or in the Form 10-K for the year ended October 31, 2022 are either not applicable or will not have or are not expected to have a material impact on us.
NOTE B – MARKETABLE SECURITIES
Marketable securities consist of U.S. Treasury securities, which are held until maturity and accordingly, are measured at amortized cost.
NOTE C - INCOME TAXES
On December 22, 2017, Public Law 115-97, commonly known as the Tax Cuts and Jobs Act of 2017 (the “Tax Reform”), was enacted. The Tax Reform imposed a mandatory one-time transition tax (the “Transition Tax”) over foreign subsidiaries undistributed earnings and profits (“E&Ps”) earned prior to a date set by the statute. Based on the Company’s E&Ps, the Transition Tax was determined to be approximately $
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
Deferred income tax assets and liabilities are computed for differences between the consolidated financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Realization of future tax benefits related to a deferred tax asset is dependent on many factors. Accordingly, the income tax benefit will be recognized when realization is determined to be more probable than not.
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 2022 tax years are open and may be subject to potential examination in one or more jurisdictions. Currently, the Company has no federal, state, Puerto Rico or foreign income tax examination.
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NOTE D – EARNINGS PER SHARE
The following data shows the amounts used in the calculations of basic and diluted earnings per share.
|
| Three months ended January 31, |
| |||||
|
| 2023 |
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| 2022 |
| ||
Net income 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 per share |
|
|
|
|
|
| ||
Effect of options to purchase common stock |
|
|
|
|
|
| ||
Weighted average number of shares - used to compute diluted earnings per share |
|
|
|
|
|
| ||
Options for the purchase of
NOTE E – EQUITY TRANSACTIONS
On June 13, 2014, the Board of Directors of the Company authorized the Company to repurchase up to two million shares of its outstanding common stock under the Company Stock Repurchase Program (the “Repurchase Program”). The timing, manner, price and amount of any repurchases under the Repurchase Program will be at the discretion of the Company, subject to the requirements of the Securities Exchange Act of 1934, as amended, and related rules. The Repurchase Program does not oblige the Company to repurchase any shares and it may be modified, suspended or terminated at any time and for any reason. No shares will be repurchased under the Repurchase Program directly from directors or officers of the Company. During the three-month period ended January31, 2023, no shares of common stock were repurchased pursuant to the Repurchase Program. As of January 31, 2023 and October 31, 2022, a total of
NOTE F - SEGMENT DISCLOSURES
The Company’s segments are based on the organizational structure for which financial results are regularly evaluated by the Company’s chief operating decision maker to determine resource allocation and assess performance. Each reportable segment is managed by its own management team and reports to executive management. The Company has three reportable segments: (i) Puerto Rico technical compliance consulting, (ii) United States technical compliance consulting, and (iii) Europe technical compliance consulting. These reportable segments provide services primarily to the pharmaceutical, chemical, medical device and biotechnology industries in their respective markets.
The following table presents information about the reported revenue from services and earnings from operations of the Company for the three-month periods ended January 31, 2023 and 2022. There is no intersegment revenue for the mentioned periods. Corporate expenses that support the operating units have been allocated to the segments. Asset information by reportable segment is not presented, since the Company does not produce such information internally, nor does it use such data to manage its business.
|
| Three months ended January 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
REVENUES: |
|
|
|
|
|
| ||
Puerto Rico consulting |
| $ |
|
| $ |
| ||
United States consulting |
|
|
|
|
|
| ||
Europe consulting |
|
|
|
|
|
| ||
Other |
|
|
|
|
|
| ||
Total consolidated revenues |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE TAXES: |
|
|
|
|
|
|
|
|
Puerto Rico consulting |
| $ |
|
| $ |
| ||
United States consulting |
|
|
|
|
|
| ||
Europe consulting |
|
|
|
|
|
| ||
Other |
|
| ( | ) |
|
| ( | ) |
Total consolidated income before taxes |
| $ |
|
| $ |
| ||
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Long lived assets (property and equipment) as of January 31, 2023 and October 31, 2022, and related depreciation and amortization expense for the three months ended January 31, 2023 and 2022, were concentrated in the corporate offices 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 offices.
NOTE G - CONCENTRATIONS OF RISK
Cash and cash equivalents
The Company’s domestic cash and cash equivalents consist of cash deposits in FDIC insured banks (substantially covered by FDIC insurance by the spread of deposits in multiple FDIC insured banks), a money market obligations trust registered under the US Investment Company Act of 1940, as amended, and U.S. Treasury securities with maturities of three months or less. In the foreign markets we serve, we also maintain cash deposits in foreign banks, which tend to be insignificant and have no specific insurance. No losses have been experienced or are expected with respect to deposits in these accounts.
Accounts receivable and revenues
The Company has established a full allowance for doubtful accounts for those accounts receivable balances for which collectability have reached a certain uncertainty threshold. Management deems all other of the Company’s accounts receivable to be fully collectible, and, as such, does not maintain any additional allowance 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.
The Company provided a substantial portion of its services to four customers, which accounted for 10% or more of its revenues in either of the three-month periods ended January 31, 2023 and 2022. During the three months ended January 31, 2023, revenues from these customers were
The information related to major customers in the above paragraph is based on revenues earned from said customers at the segment level because in management’s opinion contracts by segments are totally independent of each other, and therefore such information is more meaningful to the reader. However, at the global level five customers accounted for 10% or more of the Company’s revenues in either of the three-month periods ended January 31, 2023 and 2022. During the three months ended January 31, 2023, aggregate revenues from these global groups of affiliated companies were
NOTE H – SUBSEQUENT EVENT
The Board of Directors of the Company declared on February 28, 2023, a cash dividend of $
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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our results of operations and financial condition should be read in conjunction with the financial statements and the related notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto, and related Management’s Discussion and Analysis appearing in our Annual Report on Form 10-K for the year ended October 31, 2022. The following discussion includes forward-looking statements. For a discussion of important factors that could cause actual results to differ from results discussed in the forward-looking statements, see “Forward Looking Statements” below and the “Risk Factors” section of our Annual Report on Form 10-K for the year ended October 31, 2022 and this Quarterly Report on Form 10-Q.
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 Latin America and pursue to further expand these markets by strengthening our business development infrastructure and by constantly realigning our business strategies as new opportunities and challenges arise.
We market our services with an active presence in industry trade shows, professional conventions, industry publications and company provided seminars to the industry. Our senior management is also actively involved in the marketing process, especially in marketing to major accounts. Our senior management and staff also concentrate on developing new business opportunities and focus on the larger customer accounts (by number of consultants or dollar volume) and responding to prospective customers’ requests for proposals.
We consider our core business to be Food and Drug Administration (“FDA”) and international agencies regulatory compliance consulting related services.
The Company holds a tax grant issued by the Puerto Rico Industrial Development Company (“PRIDCO”), which provides relief on various Puerto Rico taxes, including income tax, with certain limitations, for most of the activities carried on within Puerto Rico, including those that are for services to parties located outside of Puerto Rico.
The following table sets forth information as to our revenue for the three-month periods ended January 31, 2023 and 2022, by geographic regions (dollars in thousands).
|
| Three months ended January 31, |
| |||||||||||||
Revenues by Region: |
| 2023 |
|
| 2022 |
| ||||||||||
Puerto Rico |
| $ | 2,174 |
|
|
| 51.3 | % |
| $ | 3,364 |
|
|
| 67.0 | % |
United States |
|
| 1,094 |
|
|
| 25.8 | % |
|
| 1,187 |
|
|
| 23.6 | % |
Europe |
|
| 970 |
|
|
| 22.9 | % |
|
| 465 |
|
|
| 9.3 | % |
Other |
|
| - |
|
|
| 0.0 | % |
|
| 3 |
|
|
| 0.1 | % |
|
| $ | 4,238 |
|
|
| 100.0 | % |
| $ | 5,019 |
|
|
| 100.0 | % |
For the three-month period ended January 31, 2023, the Company’s total revenues were approximately $4.2 million, a net decrease of approximately $0.8 million when compared to the same period last year. The Puerto Rico and US consulting markets had a revenue decline in projects of approximately $1.2 and $0.1 million, respectively, which was partially offset by an increase in project revenue in Europe of approximately $0.5 million. As depicted below, when compared to the same period last year, gross profit increased by 4.5 percentage points. The net improvement in gross profit percentage points is mainly attributable to overall better margin projects in the US and the Europe markets for the three-month period ended January 31, 2023.
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Regional or global conflicts, including war or economic sanctions between nations, price inflation, the coronavirus pandemic, the Tax Reform, possible tax changes on jurisdictions where we do business, bio-pharmaceutical industry consolidations and the 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 regional or global conflicts, price inflation, 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 that sets forth our statements of operations for the three-month periods ended January 31, 2023 and 2022 (dollars in thousands, and as a percentage of revenues):
|
| Three months ended January 31, |
| |||||||||||||
|
| 2023 |
|
| 2022 |
| ||||||||||
Revenues |
| $ | 4,238 |
|
|
| 100.0 | % |
| $ | 5,019 |
|
|
| 100.0 | % |
Cost of services |
|
| 2,998 |
|
|
| 70.7 | % |
|
| 3,775 |
|
|
| 75.2 | % |
Gross profit |
|
| 1,240 |
|
|
| 29.3 | % |
|
| 1,244 |
|
|
| 24.8 | % |
Selling, general and administrative expenses |
|
| 911 |
|
|
| 21.5 | % |
|
| 889 |
|
|
| 17.7 | % |
Other income, net |
|
| 246 |
|
|
| 5.8 | % |
|
| 1 |
|
|
| 0.0 | % |
Income before income taxes |
|
| 575 |
|
|
| 13.6 | % |
|
| 356 |
|
|
| 7.1 | % |
Income tax expense |
|
| 149 |
|
|
| 3.5 | % |
|
| 51 |
|
|
| 1.0 | % |
Net income |
|
| 426 |
|
|
| 10.1 | % |
|
| 305 |
|
|
| 6.1 | % |
Revenues. For the three-month period ended January 31, 2023, the Company’s total revenues were approximately $4.2 million, a net decrease of approximately $0.8 million when compared to the same period last year. The Puerto Rico and US consulting markets had a revenue decline in projects of approximately $1.2 and $0.1 million, respectively, which was partially offset by an increase in project revenue in Europe of approximately $0.5 million.
Cost of Services; Gross Profit. For the three-month period ended January 31, 2023, cost of services were approximately $3.0 million, a decrease of $0.8 million, when compared to the same period last year. Furthermore, gross profit increased by 4.5 percentage points during the period. The net improvement in gross profit percentage points is mainly attributable to overall better margin projects in the US and the Europe markets for the three-month period ended January 31, 2023.
Selling, General and Administrative Expenses. For the three-month period ended January 31, 2023, selling, general and administrative expenses were approximately $0.9 million, no significant change when compared to the same period last year.
Other Income, Net. Other income, net for the three months ended January 31, 2023 was approximately $0.2 million, and mostly attributable to $0.1 million of interest income and $0.1 million from the settlement of foreign exchange rates on intercompany balances,
Net Income. Net income for the three months ended January 31, 2023 was approximately $0.4 million, an increase of approximately $0.1 million when compared to the same period last year.
For the three-month period ended January 31, 2023, net income per common share for both basic and diluted was $0.019, an increase of $0.006 per share when compared to the same period 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 January 31, 2023, the Company had approximately $18.3 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 three-month period ended January 31, 2023, the Company made no purchases under the Repurchase Program. As of January 31, 2023, 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 arrangement during the three months ended January 31, 2023.
Critical Accounting Policies and Estimates
There were no material changes during the three months ended January 31, 2023 to the critical accounting policies reported in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022.
New Accounting Pronouncements
There were no new accounting standards issued since our filing of the Annual Report on Form 10-K for the fiscal year ended October 31, 2022, which could have a significant effect on our condensed consolidated financial statements.
Forward-Looking Statements
Our business, financial condition, results of operations, cash flows and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the factors set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended October 31, 2022 and this Quarterly Report on Form 10-Q. Certain statements and information set forth in this Quarterly Report on Form 10-Q, as well as other written or oral statements made from time to time by us or by our authorized executive officers on our behalf, constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These statements include all statements other than those made solely with respect to historical fact and identified by words such as “believes”, “anticipates”, “expects”, “intends” and similar expressions, but such words are not the exclusive means of identifying such statements. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement and these risk factors in order to comply with such safe harbor provisions. You should note that our forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Although we believe that the expectations, plans, intentions and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that our stockholders and prospective investors should consider include, but are not limited to, those include the following: set forth in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended October 31, 2022 and this Quarterly Report on Form 10-Q .
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ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.
Changes in Internal Control Over Financial Reporting
Based on an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, there has been no change in our internal control over financial reporting during our last fiscal quarter identified in connection with that evaluation that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II– OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may be a party to legal proceedings incidental to our business. Currently, there are no 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.
On March 15, 2023, the Company’s subsidiaries Pharma-Bio Serv PR, Inc., Pharma Serv, Inc. and Scienza Labs, Inc., filed a complaint against Romark Global Pharma, LLC, Romark Properties, LLC, Romark Biosciences, LLC and Romark Holdings, LLC. (collectively, “Romark”) with the Commonwealth of Puerto Rico Court of First Instance San Juan Superior Section. The complaint sets forth a breach of contract by Romark for lack of payment of $5,246,781.81 for services rendered by the Company’s subsidiaries, plus interest. As previously disclosed by the Company, on October 31, 2021, the Company established a full allowance for doubtful accounts of approximately $5.2 million due by this customer.
ITEM 1A. RISK FACTORS.
There have been no material changes to the risk factors included in our Form 10-K for the year ended October 31, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 5. OTHER INFORMATION.
As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on February 9, 2023, the Board of the Company adopted the Amended and Restated Bylaws (the “Amended Bylaws”) of the Company, effective February 8, 2023. The Amended Bylaws provided, among other things, Article I, Section 6 (Notice Of Stockholder Business And Nominations). This section has been added in order to establish an advance notice bylaw representing the exclusive means by which a stockholder may properly present business and nominations before a stockholder meeting. The procedural requirements of the section do not affect the rights of stockholders to request inclusion of proposals in the Company’s proxy statement under applicable rules of the SEC. The foregoing summary of Article I, Section 6 of the Amended Bylaws is qualified in its entirety by the text of the Amended Bylaws, which are filed as Exhibit 3.1 to this Quarterly Report on Form 10-Q and incorporated by reference herein.
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| Table of Contents |
ITEM 6. EXHIBITS
(a) Exhibits:
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| Certification of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| Certification of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
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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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* | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PHARMA-BIO SERV, INC. |
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| /s/ Victor Sanchez |
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| Victor Sanchez |
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| Chief Executive Officer and President Europe Operations |
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| (Principal Executive Officer) |
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| /s/ Pedro J. Lasanta |
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| Pedro J. Lasanta |
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| Chief Financial Officer, Vice President Finance and Administration, and Secretary |
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| (Principal Financial Officer and Principal Accounting Officer) |
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Dated: March 17, 2023 |
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