10-Q
Pharma-Bio Serv, Inc. (PBSV)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE<br>SECURITIES EXCHANGE ACT<br>OF 1934 |
|---|
For the quarterly period ended July 31, 2020
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES<br>EXCHANGE ACT OF 1934 |
|---|
For the transition period from _____________ to ______________
Commission File No. 000-50956
PHARMA-BIO SERV, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 20-0653570 |
|---|---|
| (State<br>or Other Jurisdiction of<br><br><br>Incorporation<br>or Organization) | (IRS Employer<br><br><br>Identification<br>No.) |
| Pharma-Bio Serv<br><br><br># 6 Road 696<br><br><br>Dorado, Puerto Rico | 00646<br><br><br>(Zip<br>Code) |
| --- | --- |
| (Address<br>of Principal Executive Offices) |
Registrant’s Telephone Number, Including Area Code 787-278-2709
| N/A |
|---|
| (Former<br>name, former address and former fiscal year, if changed since last<br>report) |
Securities registered pursuant to Section 12(b) of the Act: None
| Title<br>of each class | Trading<br>Symbol(s) | Name of<br>each exchange on which registered |
|---|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large<br>accelerated filer ☐ | Accelerated<br>filer ☐ |
|---|---|
| Non-accelerated<br>filer ☒ | Smaller<br>reporting company☒ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The number of shares of the registrant’s common stock outstanding as of September 10, 2020 was 23,001,627.
PHARMA-BIO SERV, INC.
FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2020
TABLE OF CONTENTS
| Page | ||
|---|---|---|
| PART<br>I FINANCIAL INFORMATION | ||
| Item 1 –<br>Financial Statements | ||
| Condensed<br>Consolidated Balance Sheets as of July 31, 2020 and October 31,<br>2019 (unaudited) | 1 | |
| Condensed<br>Consolidated Statements of Operations for the three-month and<br>nine-month periods ended July 31, 2020 and 2019<br>(unaudited) | 2 | |
| Condensed<br>Consolidated Statements of Comprehensive Income for the three-month<br>and nine-month periods ended July 31, 2020 and 2019<br>(unaudited) | 3 | |
| Condensed<br>Consolidated Statements of Changes in Stockholders’ Equity<br>for the three-month and nine-month periods ended July 31, 2020 and<br>2019 (unaudited) | 4 | |
| Condensed<br>Consolidated Statements of Cash Flows for the three-month and<br>nine-month periods ended July 31, 2020 and 2019<br>(unaudited) | 6 | |
| Notes to Condensed<br>Consolidated Financial Statements (unaudited) | 8 | |
| Item 2 -<br>Management's Discussion and Analysis of Financial Condition and<br>Results of Operations | 15 | |
| Item 4 –<br>Controls and Procedures | 19 | |
| PART<br>II OTHER INFORMATION | ||
| Item 1 –<br>Legal Proceedings | 20 | |
| Item 1 A –<br>Risk Factors | 20 | |
| Item 6 –<br>Exhibits | 20 | |
| SIGNATURES | 21 |
PART I – FINANCIAL INFORMATION
| Item 1. | FINANCIAL STATEMENTS |
|---|
PHARMA-BIO SERV, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
| ASSETS | July<br>31,<br><br><br>2020* | October<br>31,<br><br><br>2019** |
|---|---|---|
| Current<br>assets | ||
| Cash and cash<br>equivalents | $16,814,041 | $15,490,174 |
| Accounts<br>receivable | 10,044,362 | 8,781,026 |
| Current<br>portion - promissory note receivable due from sale of assets from<br>discontinued operations | 1,250,000 | 1,250,000 |
| Prepaids<br>and other assets | 489,150 | 453,780 |
| Total current<br>assets | 28,597,553 | 25,974,980 |
| Property and<br>equipment, net | 231,720 | 290,658 |
| Operating lease<br>right-of-use | 841,067 | - |
| Other<br>assets | 430,737 | 367,437 |
| Total<br>assets | $30,101,077 | $26,633,075 |
| LIABILITIES<br>AND STOCKHOLDERS’ EQUITY | ||
| Current<br>liabilities | ||
| Current portion -<br>obligation under finance lease | $11,484 | $11,030 |
| Loans - short term<br>portion | 965,850 | - |
| Current operating<br>lease liabilities | 159,672 | - |
| Accounts payable<br>and accrued expenses | 2,044,485 | 1,590,172 |
| Dividend payable to<br>stockholders | - | 1,725,295 |
| Current<br>portion of US Tax Reform Transition Tax and income taxes<br>payable | 571,145 | 344,043 |
| Total current<br>liabilities | 3,752,636 | 3,670,540 |
| US Tax Reform<br>Transition Tax payable | 2,058,512 | 2,270,000 |
| Loans - long term<br>portion | 965,850 | - |
| Long term portion -<br>obligation under finance lease | 58,408 | 67,079 |
| Long term operating<br>lease liabilities | 663,786 | - |
| Other<br>liabilities | 17,950 | 17,950 |
| Total<br>liabilities | 7,517,142 | 6,025,569 |
| Stockholders'<br>equity | ||
| Preferred Stock,<br>$0.0001 par value; authorized 10,000,000 shares; none issued or<br>outstanding | - | - |
| Common Stock,<br>$0.0001 par value; authorized 50,000,000 shares; 23,405,753 and<br>23,397,707 shares issued, and 23,001,627 and 22,995,881 shares<br>outstanding at July 31, 2020 and October 31, 2019,<br>respectively | 2,341 | 2,340 |
| Additional paid-in<br>capital | 1,415,366 | 1,381,076 |
| Retained<br>earnings | 21,379,643 | 19,473,069 |
| Accumulated other<br>comprehensive income | 180,863 | 143,600 |
| 22,978,213 | 21,000,085 | |
| Treasury stock, at<br>cost; 404,126 and 401,826 common shares held at July 31, 2020 and<br>October 31, 2019, respectively | (394,278) | (392,579) |
| Total stockholders'<br>equity | 22,583,935 | 20,607,506 |
| Total liabilities<br>and stockholders' equity | $30,101,077 | $26,633,075 |
| * | Unaudited. | |
| --- | --- | |
| ** | Condensed<br>from audited financial statements. |
See notes to the condensed consolidated financial statements.
1
PHARMA-BIO SERV, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
| Three months<br>ended July 31, | Nine months<br>ended July 31, | |||
|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |
| REVENUES | $6,278,370 | $4,966,519 | $16,539,304 | $14,683,060 |
| COST OF<br>SERVICES | 4,424,151 | 3,400,595 | 11,230,293 | 10,044,674 |
| GROSS<br>PROFIT | 1,854,219 | 1,565,924 | 5,309,011 | 4,638,386 |
| SELLING, GENERAL<br>AND ADMINISTRATIVE EXPENSES | 1,037,529 | 1,205,228 | 3,235,178 | 3,368,261 |
| INCOME FROM<br>OPERATIONS | 816,690 | 360,696 | 2,073,833 | 1,270,125 |
| OTHER INCOME<br>(EXPENSE), NET | (30,198) | 81,844 | 63,822 | 469,131 |
| INCOME BEFORE<br>INCOME TAX | 786,492 | 442,540 | 2,137,655 | 1,739,256 |
| INCOME TAX<br>EXPENSE | 94,378 | 11,382 | 231,080 | 129,595 |
| NET<br>INCOME | $692,114 | $431,158 | $1,906,575 | $1,609,661 |
| BASIC<br>AND DILUTED EARNINGS PER COMMON SHARE | $0.030 | $0.019 | $0.083 | $0.070 |
| WEIGHTED AVERAGE<br>NUMBER OF COMMON SHARES OUTSTANDING – BASIC | 23,001,627 | 22,996,169 | 23,003,125 | 23,045,432 |
| WEIGHTED AVERAGE<br>NUMBER OF COMMON SHARES OUTSTANDING -<br>DILUTED | 23,032,641 | 23,038,236 | 23,030,066 | 23,108,752 |
See notes to the condensed consolidated financial statements.
2
PHARMA-BIO SERV, INC.
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
| Three months<br>ended July 31, | Nine months<br>ended July 31, | |||
|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |
| NET<br>INCOME | $692,114 | $431,158 | $1,906,575 | $1,609,661 |
| OTHER COMPREHENSIVE<br>GAIN (LOSS), NET OF<br><br><br>RECLASSIFICATION<br>ADJUSTMENTS AND TAXES: | ||||
| Foreign currency<br>translation gain (loss), net | 78,730 | (6,317) | 37,263 | (17,267) |
| Available-for-sale<br>securities other-than-temporary<br>impairment included in net income | - | - | - | (4,475) |
| TOTAL OTHER<br>COMPREHENSIVE GAIN (LOSS) | 78,730 | (6,317) | 37,263 | (21,742) |
| COMPREHENSIVE<br>INCOME | $770,844 | $424,841 | $1,943,838 | $1,587,919 |
See notes to the condensed consolidated financial statements.
3
PHARMA-BIO SERV, INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
| Accumulated | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Additional | Other | ||||||||
| FISCAL YEAR<br>2019 | Common<br>Stock | Preferred Stock | Paid-in | Retained | Comprehensive | Treasury | |||
| Shares | Amount | Shares | Amount | Capital | Earnings | Income<br>(Loss) | Stock | Total | |
| BALANCE AT NOVEMBER 1,<br>2018 | 23,373,817 | $2,337 | - | $- | $1,346,956 | $19,111,111 | $107,947 | $(304,688) | $20,263,663 |
| STOCK-BASED<br>COMPENSATION | - | - | - | - | 9,000 | - | - | - | 9,000 |
| ISSUANCE OF COMMON STOCK PURSUANT<br>TO THE CASHLESS EXERCISE OF STOCK OPTIONS | 3,442 | 1 | - | - | - | - | - | - | 1 |
| PURCHASE OF TREASURY STOCK (65,772<br>SHARES) | - | - | - | - | - | - | - | (65,755) | (65,755) |
| NET INCOME | - | - | - | - | - | 471,020 | - | - | 471,020 |
| OTHER COMPREHENSIVE INCOME, NET OF<br>TAX | - | - | - | - | - | - | 7,842 | - | 7,842 |
| BALANCE AT JANUARY 31, 2019 | 23,377,259 | 2,338 | - | - | 1,355,956 | 19,582,131 | 115,789 | (370,443) | 20,685,771 |
| STOCK-BASED<br>COMPENSATION | - | - | - | - | 9,000 | - | - | - | 9,000 |
| ISSUANCE OF COMMON STOCK PURSUANT<br>TO THE CASHLESS EXERCISE OF STOCK OPTIONS | 20,448 | 2 | - | - | - | (3) | - | - | (1) |
| PURCHASE OF TREASURY STOCK (20,050<br>SHARES) | - | - | - | - | - | - | - | (21,564) | (21,564) |
| NET INCOME | - | - | - | - | - | 707,483 | - | - | 707,483 |
| OTHER COMPREHENSIVE LOSS,NET OF<br>TAX | - | - | - | - | - | - | (23,267) | - | (23,267) |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| BALANCE AT APRIL 30,<br>2019 | 23,397,707 | 2,340 | - | - | 1,364,956 | 20,289,611 | 92,522 | (392,007) | 21,357,422 |
| STOCK-BASED<br>COMPENSATION | - | - | - | - | 9,000 | - | - | - | 9,000 |
| PURCHASE OF TREASURY<br>STOCK<br><br><br>(600 SHARES) | - | - | - | - | - | - | - | (572) | (572) |
| NET INCOME | - | - | - | - | - | 431,158 | - | - | 431,158 |
| OTHER COMPREHENSIVE LOSS, NET OF<br>TAX | - | - | - | - | - | - | (6,317) | - | (6,317) |
| BALANCE AT JULY 31,<br>2019 | 23,397,707 | $2,340 | - | $- | $1,373,956 | $20,720,769 | $86,205 | $(392,579) | $21,790,691 |
See notes to condensed consolidated financial statements
4
PHARMA-BIO SERV, INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity (Continued)
(Unaudited)
| Accumulated | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Additional | Other | ||||||||
| FISCAL YEAR<br>2020 | Common<br>Stock | Preferred Stock | Paid-in | Retained | Comprehensive | Treasury | |||
| Shares | Amount | Shares | Amount | Capital | Earnings | Income<br>(Loss) | Stock | Total | |
| BALANCE AT NOVEMBER 1,<br>2019 | 23,397,707 | $2,340 | - | $- | $1,381,076 | $19,473,069 | $143,600 | $(392,579) | $20,607,506 |
| STOCK-BASED<br>COMPENSATION | - | - | - | - | 11,430 | - | - | - | 11,430 |
| ISSUANCE OF COMMON STOCK PURSUANT<br>TO THE CASHLESS EXERCISE OF STOCK OPTIONS | 8,046 | 1 | - | - | - | (1) | - | - | - |
| PURCHASE OF TREASURY STOCK (2,300<br>SHARES) | - | - | - | - | - | - | - | (1,699) | (1,699) |
| NET INCOME | - | - | - | - | - | 526,900 | - | - | 526,900 |
| OTHER COMPREHENSIVE LOSS, NET OF<br>TAX | - | - | - | - | - | - | (11,734) | - | (11,734) |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| BALANCE AT JANUARY 31,<br>2020 | 23,405,753 | 2,341 | - | - | 1,392,506 | 19,999,968 | 131,866 | (394,278) | 21,132,403 |
| STOCK-BASED<br>COMPENSATION | - | - | - | - | 11,430 | - | - | - | 11,430 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| NET INCOME | - | - | - | - | - | 687,561 | - | - | 687,561 |
| OTHER COMPREHENSIVE LOSS, NET OF<br>TAX | - | - | - | - | - | - | (29,733) | - | (29,733) |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| BALANCE AT APRIL 30,<br>2020 | 23,405,753 | 2,341 | - | - | 1,403,936 | 20,687,529 | 102,133 | (394,278) | 21,801,661 |
| STOCK-BASED<br>COMPENSATION | - | - | - | - | 11,430 | - | - | - | 11,430 |
| NET INCOME | - | - | - | - | - | 692,114 | - | - | 692,114 |
| OTHER COMPREHENSIVE INCOME, NET OF<br>TAX | - | - | - | - | - | - | 78,730 | - | 78,730 |
| BALANCE AT JULY 31,<br>2020 | 23,405,753 | $2,341 | - | $- | $1,415,366 | $21,379,643 | $180,863 | $(394,278) | $22,583,935 |
See notes to condensed consolidated financial statements
5
PHARMA-BIO SERV, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
| Three months<br>ended July 31, | Nine months<br>ended July 31, | |||
|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |
| CASH FLOWS FROM<br>OPERATING ACTIVITIES: | ||||
| Net<br>income | $692,114 | $431,158 | $1,906,575 | $1,609,661 |
| Adjustments to<br>reconcile net income to net cash provided by (used in) operating<br>activities: | ||||
| Gain on disposition<br>of property and equipment | (8,409) | - | (13,327) | (47,392) |
| Stock-based<br>compensation | 11,430 | 9,000 | 34,290 | 27,000 |
| Depreciation and<br>amortization | 23,203 | 25,121 | 65,814 | 73,803 |
| Other-than-temporary<br>impairment on available-for-sale securities | - | - | - | (4,475) |
| Increase in<br>accounts receivable | (50,706) | (1,136,992) | (1,251,494) | (2,610,837) |
| Increase in other<br>assets | (126,072) | (121,694) | (851,596) | (41,365) |
| Increase (decrease)<br>in liabilities | 678,175 | 166,107 | 1,287,785 | (674,324) |
| NET<br>CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | 1,219,735 | (627,300) | 1,178,047 | (1,667,929) |
| CASH<br>FLOWS FROM INVESTING ACTIVITIES: | ||||
| Disposal<br>of marketable securities | - | - | - | 44,475 |
| Acquisition<br>of property and equipment | (10,462) | (9,402) | (49,336) | (48,246) |
| Proceeds<br>from sale of property and equipment | 14,700 | - | 26,700 | 99,038 |
| Collection from<br>promissory note receivable | - | - | - | 500,000 |
| NET<br>CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 4,238 | (9,402) | (22,636) | 595,267 |
| CASH<br>FLOWS FROM FINANCING ACTIVITIES: | ||||
| Proceeds from<br>loans | - | - | 1,931,700 | - |
| Repurchase<br>of common stock | - | (572) | (1,699) | (87,891) |
| Payments<br>on obligation under finance lease | (2,776) | (2,631) | (8,217) | (65,021) |
| Cash dividends paid<br>to shareholders | - | - | (1,725,295) | - |
| NET<br>CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | (2,776) | (3,203) | 196,489 | (152,912) |
| EFFECT<br>OF EXCHANGE RATE CHANGES ON CASH | 10,847 | 2,488 | (28,033) | (8,652) |
| NET<br>INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 1,232,044 | (637,417) | 1,323,867 | (1,234,226) |
| CASH<br>AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 15,581,997 | 15,433,111 | 15,490,174 | 16,029,920 |
| CASH AND CASH<br>EQUIVALENTS – END OF PERIOD | $16,814,041 | $14,795,694 | $16,814,041 | $14,795,694 |
See notes to the condensed consolidated financial statements.
6
PHARMA-BIO SERV, INC.
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)
| Three months<br>ended July 31, | Nine months<br>ended July 31, | |||
|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |
| SUPPLEMENTAL<br>DISCLOURES OF CASH FLOWS INFORMATION: | ||||
| Cash paid during<br>the period for: | ||||
| Income<br>taxes | $700 | $- | $212,463 | $326,898 |
| Interest | $951 | $1,096 | $2,955 | $3,000 |
| SUPPLEMENTARY<br>SCHEDULES OF NON-CASH<br><br><br>INVESTING AND<br>FINANCING ACTIVITIES: | ||||
| Income tax withheld<br>by clients to be used as a credit in the Company’s income tax<br>return | $1,120 | $2,526 | $4,769 | $26,526 |
| Conversion of<br>cashless exercise of options to shares of common stock and shares<br>issued under restricted stock unit agreements | $- | $- | $1 | $3 |
| Obligations under<br>capital lease incurred for the acquisition of a<br>vehicle | $- | $- | $- | $86,000 |
| Disposed property<br>and equipment with accumulated depreciation of $20,670 and $38,583<br>for the three and nine months ended July 31, 2020, respectively,<br>and $86,773 for the nine months ended July 31, 2019 | $26,961 | $- | $51,956 | $138,419 |
See notes to the condensed consolidated financial statements.
7
PHARMA-BIO SERV, INC.
Notes To Condensed Consolidated Financial Statements
July 31, 2020
(Unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Pharma-Bio Serv, Inc. (“Pharma-Bio”) is a Delaware corporation organized on January 14, 2004. Pharma-Bio is the parent company of Pharma-Bio Serv PR, Inc. (“Pharma-PR”), Pharma Serv, Inc. (“Pharma-Serv”), and Scienza Labs, Inc. (“Scienza Labs”), each a Puerto Rico corporation, Pharma-Bio Serv US, Inc. (“Pharma-US”), a Delaware corporation, Pharma-Bio Serv Validation & Compliance Limited (“Pharma-IR”), an Irish corporation currently inactive, Pharma-Bio Serv SL (“Pharma-Spain”), a Spanish limited liability company, and Pharma-Bio Serv Brasil Servicos de Consultoria Ltda. (“Pharma-Brazil”), a Brazilian limited liability company. Pharma-Bio, Pharma-PR, Pharma-Serv, Scienza Labs, Pharma-US, Pharma-IR, Pharma-Spain and Pharma-Brazil are collectively referred to as the “Company.” The Company operates in Puerto Rico, the United States, Europe and Latin America under the name of Pharma-Bio Serv and is engaged in providing technical compliance consulting service.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated balance sheet of the Company as of October 31, 2019 is derived from audited consolidated financial statements but does not include all disclosures required by generally accepted accounting principles. The unaudited interim condensed consolidated financial statements, include all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods. The results of operations for the nine months ended July 31, 2020 are not necessarily indicative of expected results for the full 2020 fiscal year.
The accompanying financial data as of July 31, 2020, and for the three-month and nine-month periods ended July 31, 2020 and 2019 has been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally contained in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our audited Consolidated Financial Statements and the notes thereto for the fiscal year ended October 31, 2019.
Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Segments
The Company operates in three reportable business segments: (i) Puerto Rico technical compliance consulting, (ii) United States technical compliance consulting, and (iii) Europe technical compliance consulting. Accordingly, the accompanying condensed consolidated financial statements are presented to show these three reportable segments.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from these estimates.
8
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<br>prices in active markets for identical assets and<br>liabilities. |
|---|---|
| Level 2: | Observable inputs<br>other than Level 1 prices such as quoted prices for similar assets<br>or liabilities, quoted prices in markets with insufficient volume<br>or infrequent transactions (less active markets), or model-derived<br>valuations in which all significant inputs are observable or can be<br>derived principally from or corroborated by observable market data<br>for substantially the full term of the assets or<br>liabilities. |
| Level 3: | Prices<br>or valuation techniques that require inputs that are both<br>significant to the fair value measurement and unobservable<br>(supported by little or no market activity). |
The carrying value of the Company's financial instruments (excluding obligations under finance leases), cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, are considered reasonable estimates of fair value due to their liquidity or short-term nature. Management believes, based on current rates, that the fair value of its obligations under finance leases approximates the carrying amount.
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (FASB) issued a new accounting standard that amends the guidance for the recognition of revenue from contracts with customers to transfer goods and services. The FASB subsequently issued additional, clarifying standards to address issues arising from implementation of the new revenue recognition standard. The new revenue recognition standard and clarifying standards require an entity to recognize revenue when control of promised goods or services is transferred to the customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted this new standard as of November 1, 2018, by applying the modified-retrospective method to those contracts that were not completed as of that date. The results for reporting periods beginning after November 1, 2018, are presented in accordance with the new standard, although comparative information has not been restated and continues to be reported under the accounting standards and policies in effect for those periods. The adoption of this new standard had an immaterial impact on our reported total revenues and operating income as compared to what reported amounts would have been under the prior standard.
Revenue is primarily derived from: (1) time and materials contracts (representing approximately 99% of total revenues), which is recognized by applying the proportional performance model, whereby revenue is recognized as performance occurs, and (2) short-term fixed-fee contracts or "not to exceed" contracts (representing approximately 1% of total revenues), which revenue is recognized similarly, except that certain milestones also have to be reached before revenue is recognized. If the Company determines that a contract will result in a loss, the Company recognizes the estimated loss in the period in which such determination is made.
Cash Equivalents
For purposes of the consolidated statements of cash flows, cash equivalents include investments in a money market obligations trust that is registered under the U.S. Investment Company Act of 1940, as amended, and liquid investments with original maturities of three months or less.
Accounts Receivable
Accounts receivable are recorded at their estimated realizable value. Accounts are deemed past due when payment has not been received within the stated time period. The Company's policy is to review individual past due amounts periodically and write off amounts for which all collection efforts are deemed to have been exhausted. Due to the nature of the Company’s customers, bad debts are mainly accounted for using the direct write-off method whereby an expense is recognized only when a specific account is determined to be uncollectible. The effect of using this method approximates that of the allowance method.
Income Taxes
The Company follows an asset and liability approach method of accounting for income taxes. This method measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts on the financial statements. The resulting deferred tax assets or liabilities are adjusted to reflect changes in tax laws as they occur. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized.
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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 July 31, 2020, the Company had no significant uncertain tax positions that would be reduced as a result of a lapse of the applicable statute of limitations.
Property and Equipment
Owned property and equipment are stated at cost. Vehicles under finance leases are stated at the lower of fair market value or net present value of the minimum lease payments at the inception of the leases.
Depreciation of owned assets are provided for, when placed in service, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, using straight-line basis. Assets under finance leases are amortized over the lease term. While expenditures for repairs and maintenance are expensed when incurred. As of July 31, 2020 and October 31, 2019, the accumulated depreciation amounted to $483,858 and $456,627, respectively.
Impairment of Long-Lived Assets
The Company evaluates for impairment its long-lived assets to be held and used, and long-lived assets to be disposed of, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on management estimates, no impairment of the long-lived assets was present as of July 31, 2020 and October 31, 2019.
Stock-based Compensation
Stock-based compensation expense is recognized in the consolidated financial statements based on the fair value of the awards granted. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate of awards that will be forfeited. The Company calculates the fair value of stock options using the Black-Scholes option-pricing model at the grant date, while for restricted stock units the fair market value of the units is determined by Company’s share market value at grant date. Excess tax benefits related to stock-based compensation are reflected as cash flows from financing activities rather than cash flows from operating activities. The Company has not recognized such cash flows from financing activities since there has been no tax benefit related to the stock-based compensation.
Earnings Per Share of Common Stock
Basic earnings per share of common stock is calculated by dividing net earnings by the weighted average number of shares of common stock outstanding. Diluted earnings per share includes the dilution of common stock equivalents, which include principally shares that may be issued upon the exercise of warrants, stock option and restricted stock unit awards.
The diluted weighted average shares of common stock outstanding were calculated using the treasury stock method for the respective periods.
Foreign Operations
The functional currency of the Company’s foreign subsidiaries is its local currency. The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. The cumulative translation effect for subsidiaries using a functional currency other than the U.S. dollar is included as a cumulative translation adjustment in stockholders’ equity and as a component of comprehensive income.
The Company’s intercompany accounts are typically denominated in the functional currency of the foreign subsidiary. Gains and losses resulting from the remeasurement of intercompany receivables that the Company considers to be of a long-term investment nature are recorded as a cumulative translation adjustment in stockholders’ equity and as a component of comprehensive income, while gains and losses resulting from the remeasurement of intercompany receivables from those international subsidiaries for which the Company anticipates settlement in the foreseeable future are recorded in the consolidated statements of operations.
Subsequent Events
The Company has evaluated subsequent events through the filing date of this report. The Company has determined that there are no events occurring in this period that required disclosure or adjustment.
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Reclassifications
Certain reclassifications have been made to the July 31, 2019 condensed consolidated financial statements to conform them to the July 31, 2020 condensed consolidated financial statements presentation. Such reclassifications do not affect net income as previously reported.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 is intended to increase transparency and comparability of accounting for lease transactions. For all leases with terms greater than twelve months, the new guidance will require lessees to recognize right-of-use assets and corresponding lease liabilities on the balance sheet and to disclose qualitative and quantitative information about lease transactions. The new standard maintains a distinction between finance leases and operating leases. As a result, the effect of leases in the statement of operations and statement of cash flows is largely unchanged. In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements, to allow a company to elect an optional modified retrospective transition method that applies the new lease requirements through a cumulative-effect adjustment in the period of adoption.
Effective November 1, 2019, the Company adopted the new lease accounting standard using the modified retrospective transition option of applying the new standard at the adoption date. We categorize leases at their inception as either operating or finance leases. The Company leases include an operational lease for office space and a finance lease agreement for a vehicle. The adoption of the new standard resulted in the operating lease being included in operating lease right-of-use assets, current operating lease liabilities, and long-term operating lease liabilities in our condensed consolidated balance sheets, but did not have an impact on the Company’s beginning balance of retained earnings, consolidated statement of operations or statement of cash flows. Finance leases are included in net property and equipment, current installments of long-term debt, and long-term debt in our condensed consolidated balance sheets. The most significant impact was the recognition of right-of-use assets and lease liabilities on account of the Company’s operating leases. The Company recognized $941,009 of right-of-use assets and $911,922 in operating lease liabilities at November 1, 2019. As of July 31, 2020, the total right-of-use assets related to the Company’s operating leases was $841,067 and operating lease liabilities current and non-current were approximately $159,672 and $663,786, respectively.
Recent Accounting Pronouncements
Recent accounting pronouncements pending adoption not discussed above or in the 2019 Form 10-K are either not applicable or will not have or are not expected to have a material impact on us.
NOTE B – PROMISSORY NOTE
On September 17, 2018 (the “Sales Closing Date”), the Company sold substantially all of its Lab business assets (the “Laboratory Assets”). Upon the completion of the Laboratory Assets sale, the Company received, as partial payment, a $3 million Promissory Note from the purchaser. The Promissory Note is composed of two tranches; (i) Tranche A for $2 million and secured with lab equipment and (ii) Tranche B for $1 million which is unsecured. The interest rate accrual is 3% for Tranche A and 5% for Tranche B. As of July 31, 2020, pursuant to the terms of the Promissory Note, the Company has collected $1,750,000. The Promissory Note final installment of $1,250,000 from Tranche A is due September 17, 2020.
NOTE C – LOANS
On April 23, 2020, Pharma-PR, Pharma-Serv, and Pharma-US (collectively, the “Borrowers”) entered into loan agreements and related promissory notes (the “SBA Loan Documents”) to receive U.S. Small Business Administration Loans (the “SBA Loans”). These loans were originated pursuant to the Paycheck Protection Program (the “PPP”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and in the aggregate amount of $1,931,700 (the “Loan Proceeds”). The Borrowers received the Loan Proceeds on April 23, 2020. These SBA Loans terms follow the CARES Act provisions and the corresponding regulations issued by the SBA.
NOTE D - INCOME TAXES
On December 22, 2017, Public Law 115-97, commonly known as the Tax Cuts and Jobs Act of 2017 (the “Tax Reform”), was enacted. The Tax Reform is applicable to the Company commencing with its fiscal year 2018. The Tax Reform imposed a mandatory one-time transition tax (the “Transition Tax”) over foreign subsidiaries undistributed earnings and profits (“E&Ps”) earned prior to a date set by the statute. The Company elected to pay the Transition Tax liability of approximately $2.7 million over an eight year period starting with the Company’s fiscal year 2019. In the past, most of these E&Ps’ were not repatriated and, considered to be reinvested indefinitely in the foreign location. Therefore, no US tax liability was incurred with respect to these E&Ps, unless the E&Ps were repatriated as a dividend. After December 31, 2017, the Tax Reform established a 100% tax exemption on the foreign-source portion of dividends which are received attributable to E&Ps, with certain limitations.
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In June 2011, Pharma-Bio, Pharma-PR and Pharma-Serv obtained a Grant of Industrial Tax Exemption pursuant to the terms and conditions set forth in Act No. 73 of May 28, 2008 (“the Grant”) issued by the Puerto Rico Industrial Development Company (“PRIDCO”). The Grant was effective as of November 1, 2009 and covers a fifteen-year period. The Grant provides relief on various Puerto Rico taxes, including income tax, with certain limitations, for most of the activities carried on within Puerto Rico, including services to parties located outside of Puerto Rico. Industrial Development Income (“IDI”) covered under the Grant are subject to a fixed income tax rate of 4%. In addition, IDI earnings distributions accumulated since November 1, 2009 are totally exempt from Puerto Rico earnings distribution tax.
Puerto Rico operations not covered in the exempt activities of the Grant are subject to Puerto Rico income tax at a maximum tax rate of 37.5% as provided by the 1994 Puerto Rico Internal Revenue Code, as amended. The operations carried out in the United States by the Company’s subsidiaries, is taxed in the United States at a maximum regular federal income tax rate of 21%.
Deferred income tax assets and liabilities are computed for differences between the consolidated financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
Pharma-Spain, Pharma-IR and Pharma-Bio/Pharma-US have unused operating losses which result in a potential deferred tax asset. However, an allowance has been provided covering the total amount of such balance since it is uncertain whether the net operating losses can be used to offset future taxable income before their expiration dates. Realization of future tax benefits related to a deferred tax asset is dependent on many factors, including the company’s ability to generate taxable income. Accordingly, the income tax benefit will be recognized when realization is determined to be more probable than not. These net operating losses are available to offset future taxable income through 2034 for Pharma-Spain; indefinitely for Pharma-IR; until 2039 for Pharma-Bio/Pharma-US.
The Company files income tax returns in the United States (federal and various states jurisdictions), Puerto Rico, Ireland, Spain and Brazil. The 2015 (2014 for Puerto Rico) through 2018 tax years are open and may be subject to potential examination in one or more jurisdictions. Currently, the Company has no federal, state, Puerto Rico or foreign income tax examination.
NOTE E – WARRANTS
On December 2014, the Company entered into a stock warrant agreement with a firm in exchange for providing (i) business development and (ii) mergers and acquisition services to the Company. The Company warrants for the purchase of 1,000,000 shares of common stock issued to this firm expired on December 1, 2019 without being exercised.
NOTE F – EARNINGS PER SHARE
The following data shows the amounts used in the calculations of basic and diluted earnings per share.
| Three<br>months ended July 31, | Nine<br>months ended July 31, | |||
|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |
| Net income available to common equity holders -<br>used to compute basic and diluted earnings per<br>share | $692,114 | $431,158 | $1,906,575 | $1,609,661 |
| Weighted average<br>number of common shares - used to compute basic earnings per<br>share | 23,001,627 | 22,996,169 | 23,003,125 | 23,045,432 |
| Effect of options<br>to purchase common stock | 31,014 | 42,067 | 26,941 | 63,320 |
| Weighted average<br>number of shares - used to compute diluted earnings per<br>share | 23,032,641 | 23,038,236 | 23,030,066 | 23,108,752 |
For the three-month and nine-month periods ended July 31, 2020, options for the purchase of shares of 340,000 common stock were not considered in computing diluted earnings per share because the effect was antidilutive. In addition, Warrants for the three-month and nine-month periods ended July 31, 2019 for the purchase of 1,000,000 shares of common stock, and options for the purchase of 240,000 and 80,000 shares of common stock for the three-month and nine-month periods ended July 31, 2019, respectively, were not included in computing diluted earnings per share because their effects were also antidilutive.
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NOTE G – EQUITY TRANSACTIONS
On June 13, 2014, the Board of Directors of the Company authorized the Company to repurchase up to two million shares of its outstanding common stock (the “Repurchase Program”). The timing, manner, price and amount of any repurchases under the Repurchase Program will be at the discretion of the Company, subject to the requirements of the Securities Exchange Act of 1934, as amended, and related rules. The Repurchase Program does not oblige the Company to repurchase any shares and it may be modified, suspended or terminated at any time and for any reason. No shares will be repurchased under the Repurchase Program directly from directors or officers of the Company. As of July 31, 2020 and October 31, 2019, a total of 341,154 and 338,854 shares of the Company’s common stock were purchased under the Repurchase Program for an aggregate amount of $331,306 and $329,607, respectively. Also, on November 26, 2018, the Company repurchased 62,972 shares of common stock, outside of the Repurchase Program, from the Company’s Chief Executive Officer at $1.00 per share. These shares were repurchased at a discount to market to provide for an orderly disposition of the shares. During April 2020, the Company suspended purchases under the Repurchase Program to conserve cash due to the economic uncertainty caused by the coronavirus pandemic.
NOTE H - CONCENTRATIONS OF RISK
Cash and cash equivalents
The Company’s domestic cash and cash equivalents consist of cash deposits in FDIC insured banks (substantially covered by FDIC insurance by the spread of deposits in multiple FDIC insured banks), a money market obligations trust registered under the US Investment Company Act of 1940, as amended, and U.S. Treasury securities with maturities of three months or less. In the foreign markets we serve, we also maintain cash deposits in foreign banks, which have no specific insurance. No losses have been experienced or are expected on these accounts.
Accounts receivable and revenues
Management deems all of its accounts receivable to be fully collectible, and, as such, does not maintain any allowances for uncollectible receivables.
The Company's revenues, and the related receivables, are concentrated in the pharmaceutical industry in Puerto Rico, the United States, Spain and Brazil. Although a few customers represent a significant source of revenue, the Company’s functions are not a continuous process, accordingly, the client base for which the services are typically rendered, on a project-by-project basis, changes regularly.
The Company provided a substantial portion of its services to five customers, which accounted for 10% or more of its revenues in either of the three-month and nine-month periods ended July 31, 2020 and 2019. During the three months ended July 31, 2020, revenues from these customers were 15.5%, 13.1%, 10.2%, 9.8% and 9.7%, or a total of 58.3%, as compared to the same period last year of 0.0%, 9.6%, 15.4%, 9.8% and 30.0%, or a total of 64.8%, respectively. During the nine months ended July 31, 2020, revenues from these customers were 18.9%, 14.0%, 11.3%, 10.2% and 10.0%, or a total of 64.4%, as compared to the same period last year of 0.0%, 10.2%, 9.7%, 11.0% and 24.8%, or a total of 55.7%, respectively. At July 31, 2020, amounts due from these customers represented 81.5% of the Company’s total accounts receivable balance. This customer information is based on revenues earned from said customers at the segment level because in management’s opinion contracts by segments are totally independent of each other, and therefore such information is more meaningful to the reader.
At the global level, five global groups of affiliated companies accounted for 10% or more of its revenues in either of the three-month and nine-month periods ended July 31, 2020 and 2019. During the three months ended July 31, 2020, aggregate revenues from these global groups of affiliated companies were 15.5%, 13.1%, 19.2%, 9.8%, and 9.7%, or a total of 67.3%, as compared to the same period last year for 0.0%, 9.6%, 18.6%, 9.8%, and 30.0%, or a total of 68.0%, respectively. During the nine months ended July 31, 2020, aggregate revenues from these global group of affiliated companies were 18.9%, 14.0%, 13.7%, 10.2% and 10.0%, or a total of 66.8%, as compared to the same period last year for 0.0%, 10.2%, 12.9%, 11.0% and 24.8%, or a total of 58.9%, respectively. At July 31, 2020, amounts due from these global groups of affiliated companies represented 82.5% of total accounts receivable balance.
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As of July 31, 2020, one of the Company’s customers (representing 10.0% of revenues during the nine months ended July 31, 2020) owes the Company approximately $5.6 million (including $1.25 million from a Promissory Note due September 2020). This outstanding obligation represents approximately 22.4% of the Company’s total working capital. A significant portion of the customer’s funding comes from different financing sources. Management estimates that collectability of the account is reasonably assured, accordingly, no provision for losses, if any, have been recorded in the financial statements.
NOTE I - SEGMENT DISCLOSURES
The Company’s segments are based on the organizational structure for which financial results are regularly evaluated by the Company’s chief operating decision maker to determine resource allocation and assess performance. Each reportable segment is managed by its own management team and reports to executive management. The Company has three reportable segments: (i) Puerto Rico technical compliance consulting, (ii) United States technical compliance consulting, and (iii) Europe technical compliance consulting. These reportable segments provide services primarily to the pharmaceutical, chemical, medical device and biotechnology industries in their respective markets.
The following table presents information about the reported revenue from services and earnings from operations of the Company for the three-month and nine-month periods ended in July 31, 2020 and 2019. There is no intersegment revenue for the mentioned periods. Corporate expenses that support the operating units have been allocated to the segments. Asset information by reportable segment is not presented, since the Company does not produce such information internally, nor does it use such data to manage its business.
| Three months<br>ended July 31, | Nine months<br>ended July 31, | |||
|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |
| REVENUES: | ||||
| Puerto Rico<br>consulting | $4,989,964 | $4,383,121 | $14,287,556 | $12,564,716 |
| United States<br>consulting | 939,421 | 502,998 | 1,723,774 | 1,690,999 |
| Europe<br>consulting | 310,974 | 33,379 | 466,924 | 266,610 |
| Other<br>segments¹ | 38,011 | 47,021 | 61,050 | 160,735 |
| Total consolidated<br>revenues | $6,278,370 | $4,966,519 | $16,539,304 | $14,683,060 |
| INCOME (LOSS)<br>BEFORE TAXES: | ||||
| Puerto Rico<br>consulting | $558,606 | $359,648 | $1,709,378 | $1,315,937 |
| United States<br>consulting | 85,014 | (38,037) | 23,084 | (35,717) |
| Europe<br>consulting | 1,781 | (87,968) | (59,903) | (145,893) |
| Other<br>segments¹ | 141,091 | 208,897 | 465,096 | 604,929 |
| Total consolidated<br>income before taxes | $786,492 | $442,540 | $2,137,655 | $1,739,256 |
| ¹ | Other<br>segments represent activities that fall below the reportable<br>threshold and are carried out in Puerto Rico and Brazil. These<br>activities include a Brazilian compliance consulting division and<br>corporate headquarters, as applicable. | |||
| --- | --- |
Long lived assets (property and equipment) as of July 31, 2020 and October 31, 2019, and related depreciation and amortization expense for the three and nine months ended July 31, 2020 and 2019, were concentrated in the corporate headquarters in Puerto Rico. Accordingly, depreciation expense and acquisition of property and equipment, as presented in the statements of cash flows are mainly related to the corporate headquarters.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF<br>FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
|---|
The following discussion of our results of operations and financial condition should be read in conjunction with the financial statements and the related notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto, and related Management’s Discussion and Analysis appearing in our Annual Report on Form 10-K for the year ended October 31, 2019. The following discussion includes forward-looking statements. For a discussion of important factors that could cause actual results to differ from results discussed in the forward-looking statements, see “Forward Looking Statements” below and the “Risk Factors” section in our Annual Report on Form 10-K for the year ended October 31, 2019 and in 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 Latin American 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 Latin America. 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 consider our core business to be Food and Drug Administration (“FDA”) and international agencies regulatory compliance consulting related services.
In line with the strategy to further penetrate the United States and Puerto Rico markets, we submit annually for renewal the certification as a "minority-controlled company" as defined by the National Minority Supplier Development Council and Growth Initiative ("NMSDC"). This certification, which has been held by us since July 2008, allows us to participate in corporate diversity programs available from various potential customers in the United States and Puerto Rico.
The Company holds a tax grant issued by the Puerto Rico Industrial Development Company (“PRIDCO”), which provides relief on various Puerto Rico taxes, including income tax, with certain limitations, for most of the activities carried on within Puerto Rico, including those that are for services to parties located outside of Puerto Rico.
The following table sets forth information as to our revenue for the three-month and nine-month periods ended July 31, 2020 and 2019, by geographic regions (dollars in thousands).
| Three months ended<br>July 31, | Nine months ended<br>July 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| Revenues<br>by Region: | 2020 | 2019 | 2020 | 2019 | ||||
| Puerto<br>Rico | $4,990 | 79.4% | $4,383 | 88.3% | $14,287 | 86.4% | $12,565 | 85.6% |
| United<br>States | 939 | 15.0% | 503 | 10.1% | 1,724 | 10.4% | 1,691 | 11.5% |
| Europe | 311 | 5.0% | 33 | 0.7% | 467 | 2.8% | 266 | 1.8% |
| Other | 38 | 0.6% | 47 | 0.9% | 61 | 0.4% | 161 | 1.1% |
| $6,278 | 100.0% | $4,966 | 100.0% | $16,539 | 100.0% | $14,683 | 100.0% |
For the nine-month period ended July 31, 2020, the Company’s total revenues were approximately $16,539,000, a net increase of approximately $1,856,000 when compared to the same period last year. The increase is attributable to increase in projects in Puerto Rico, US and European markets of approximately $1,723,000, $33,000 and $200,000, respectively, partially offset by a decrease in project revenue in the Latin America market of approximately $100,000. When compared to the same period last year, gross margin attained a marginal net increase of 0.5 percentage points. Selling, general and administrative expenses were approximately $3,235,000, a decrease of approximately $133,000 when compared to the same period last year. The decrease is mainly attributable to lower promotional and related expenses because of the coronavirus (COVID-19) pandemic environment. These factors resulted in a net income of approximately $1,907,000 for the nine-month period ended July 31, 2020.
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While we have not identified any material adverse effect on our reported results for the third quarter, resulting from the coronavirus (COVID-19) pandemic, we continue to actively monitor the pandemic and any potential impacts it may have on our business and results of operations for the fourth quarter and potentially beyond. The extent to which our operations will be impacted by the pandemic will 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.
The coronavirus pandemic, the Puerto Rico government financial crisis, the Tax Reform, other tax reforms on the markets where we do business, bio-pharmaceutical industry consolidations, trends on managing contract resources, and Puerto Rico Act 154-2010, all pose current and future challenges which may adversely affect our future performance. We believe that our future profitability and liquidity will be 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 that sets forth our statements of operations for the three-month and nine-month periods ended July 31, 2020 and 2019 (dollars in thousands, and as a percentage of revenues):
| Three<br>months ended July 31, | Nine<br>months ended July 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2020 | 2019 | 2020 | 2019 | |||||
| Revenues | $6,278 | 100.0% | $4,966 | 100.0% | $16,539 | 100.0% | $14,683 | 100.0% |
| Cost of<br>services | 4,424 | 70.5% | 3,400 | 68.5% | 11,230 | 67.9% | 10,045 | 68.4% |
| Gross<br>profit | 1,854 | 29.5% | 1,566 | 31.5% | 5,309 | 32.1% | 4,638 | 31.6% |
| Selling, general<br>and administrative expenses | 1,038 | 16.5% | 1,205 | 24.2% | 3,235 | 19.6% | 3,368 | 22.9% |
| Other income<br>(expense), net | (30) | (0.5%) | 81 | 1.6% | 64 | 0.4% | 469 | 3.2% |
| Income before<br>income taxes | 786 | 12.5% | 442 | 8.9% | 2,138 | 12.9% | 1,739 | 11.9% |
| Income tax<br>expense | 94 | 1.5% | 11 | 0.2% | 231 | 1.4% | 129 | 0.9% |
| Net<br>income | 692 | 11.0% | 431 | 8.7% | 1,907 | 11.5% | 1,610 | 11.0% |
Revenues. Revenues for the three and nine months ended July 31, 2020 were approximately $6,278,000 and $16,539,000, respectively, an increase of approximately $1,312,000 and $1,856,000, or 26.4% and 12.6%, respectively, when compared to the same periods last year.
The increase for the three months ended July 31, 2020, when compared to the same period last year, is mainly attributable to the increase in projects in the Puerto Rico, US and European markets of approximately $607,000, $436,000 and $278,000, respectively, partially offset by decrease in project revenue in Latin America of approximately $9,000.
The increase for the nine months ended in July 31, 2020, when compared to the same period last year, is mainly attributable to increases in projects in the Puerto Rico, US and European markets of approximately $1,723,000, $33,000 and $200,000, respectively, partially offset by a decrease in project revenue in the Latin America market of approximately $100,000.
Cost of Services; gross profit. Gross profit for the three months ended July 31, 2020 decreased by 2.0 percentage points when compared to the same period last year, while for the nine months ended July 31, 2020 attained a marginal net increase of 0.5 percentage points when compared to the same period last year. The net decrease in gross profit for the three months ended in July 31, 2020 is mainly attributable to lower margins on Puerto Rico consulting projects.
Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three and nine months ended July 31, 2020 were approximately $1,038,000 and $3,235,000, a decrease of approximately $167,000 and $133,000 when compared to the same periods last year, respectively. The decrease is mainly attributable to lower promotional and related expenses because of the Coronavirus pandemic environment.
Other Income (expense), net. Other expense for the three months ended July 31, 2020 was approximately $30,000, an unfavorable variance of approximately $111,000 when compared to the same period last year. For the nine months ended on July 31, 2020 other income was approximately $64,000, a net decline of approximately $405,000 when compared to the same period last year. The decrease is mainly attributable to proceeds from the 2017 Puerto Rico hurricanes insurance claim for business interruption losses and additional expenses incurred of approximately $200,000 collected during April 2019. Additionally, when compared to last year’s three and nine months periods ended July 31, 2019, the Company experienced (i) a decline on interest income of approximately $80,000 and $143,000, and (ii) on the disposition of fixed assets an improvement of approximately $8,000 and a decline of approximately $47,000, respectively, partially offset by other miscellaneous income and expenses.
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Net Income. Net income for the three and nine months ended July 31, 2020 was approximately $692,000 and $1,907,000, respectively, an improvement of approximately $261,000 and $297,000 when compared to the same periods last year, respectively. The improvement is mostly attributable to the revenue increase, savings on promotional and related expenses, partially offset by the net decrease in other income.
For the three and nine months ended July 31, 2020, net income per common share for both basic and diluted were $0.030 and $0.083, an improvement of $0.011 and $0.013 per share, respectively, when compared to the same periods last year.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including planned capital expenditures. As of July 31, 2020, the Company had approximately $24.8 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"). During the first quarter of Fiscal Year 2020, the Company repurchased an aggregate of 2,300 shares of its common stock pursuant to the Repurchase Program, while during the second and third quarters of Fiscal Year 2020 no shares were repurchased. During April 2020, the Company suspended purchases under the Repurchase Program to conserve cash due to the economic uncertainty caused by the coronavirus pandemic.
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, funds from the SBA Loans, 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, including any impacts of the coronavirus pandemic, 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 the Company’s financial statements.
Off-Balance Sheet Arrangements
We were not involved in any significant off-balance sheet arrangement during the nine months ended July 31, 2020.
Critical Accounting Policies and Estimates
There were no material changes during the nine months ended July 31, 2020 to the critical accounting policies reported in our Annual Report on Form 10-K for the fiscal year ended October 31, 2019.
New Accounting Pronouncements
There were no new accounting standards issued since our filing of the Annual Report on Form 10-K for the fiscal year ended October 31, 2019, which could have a significant effect on our condensed consolidated financial statements.
Forward-Looking Statements
Our business, financial condition, results of operations, cash flows and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Quarterly Report on Form 10-Q, as well as other written or oral statements made from time to time by us or by our authorized executive officers on our behalf, constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These statements include all statements other than those made solely with respect to historical fact and identified by words such as “believes”, “anticipates”, “expects”, “intends” and similar expressions, but such words are not the exclusive means of identifying such statements. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement and these risk factors in order to comply with such safe harbor provisions. You should note that our forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Although we believe that the expectations, plans, intentions and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that our stockholders and prospective investors should consider include the following:
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Because our business is concentrated in the lifescience and medical devices industries in Puerto Rico, the United States, Europe and Brazil, any changes in those industries or in those markets could impair our ability to generate revenue and realize a profit.
●
Puerto Rico’s economy, including its governmental financial crisis and the impact of Hurricanes Irma and Maria, or any other natural disaster, including the recent earthquakes, may affect the willingness of businesses to commence or expand operations in Puerto Rico, or may also consider closing operations located in Puerto Rico.
●
Puerto Rico government enacted ACT 154-2010 may adversely affect the willingness of our customers to do business in Puerto Rico and consequently adversely affect our business.
●
US Federal Tax Reform may affect the willingness of companies to continue or expand their operations in Puerto Rico.
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Further changes in tax laws in Puerto Rico or in other jurisdictions may adversely impact the willingness of our customers to continue or expand their Puerto Rico operations.
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Our business and operating results may be adversely impacted if we are unable to maintain our certification as a minority-controlled company.
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Because our business is dependent upon a small number of clients, the loss of a major client could impair our ability to operate profitably.
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Customer procurement and sourcing practices intended to reduce costs could have an adverse effect on our margins and profitability.
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We may be unable to pass on increased labor costs to our clients.
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Consolidation in the pharmaceutical industry may have a harmful effect on our business.
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Because the pharmaceutical industry is subject to government regulations, changes in government regulations relating to this industry may affect the need for our services.
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Since our business is dependent upon the development and enhancement of patented pharmaceutical products or processes by our clients, the failure of our clients to obtain and maintain patents could impair our ability to operate profitably.
●
If we are unable to protect our clients’ intellectual property, our ability to generate business will be impaired.
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We may be subject to liability if our services or solutions for our clients infringe upon the intellectual property rights of others.
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We may be held liable for the actions of our employees or contractors when on assignment.
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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.
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Because most of our contracts may be terminated on little or no advance notice, our failure to generate new business could impair our ability to operate profitably.
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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.
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Our cash could be adversely affected if the financial institutions in which we hold our cash fail.
●
We may be harmed if we do not penetrate markets and grow our current business operations.
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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.
●
Because there is a limited market in our common stock, stockholders may have difficulty selling our common stock and our common stock may be subject to significant price swings.
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Our revenues, operating results and profitability will vary from quarter to quarter, which may result in increased volatility of our stock price.
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The 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.
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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.
19
PART II– OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may be a party to legal proceedings incidental to our business. We do not believe that there are any proceedings threatened or pending against us, which, if determined adversely to us, would have a material effect on our financial position or results of operations and cash flows.
ITEM 1A. RISK FACTORS.
Except as set forth below, there have been no material changes to the risk factors included in our Form 10-K for the year ended October 31, 2019.
Any outbreak of contagious diseases, or other adverse public health developments, could have a material and adverse effect on our business operations, financial condition and results of operations.
In December 2019, a novel strain of coronavirus (COVID-19) was first identified in Wuhan, Hubei Province, China, and has since spread to a number of other countries, including the United States. Any outbreak of contagious diseases, or other adverse public health developments, could have a material and adverse effect on businesses, including ours. For example, the coronavirus may negatively affect various aspects of our business, including our workforce and demand for our services. An impact to our workforce could impact our ability to deliver our services to our customers and make it more difficult to meet our expectations and obligations. The extent to which our operations will be impacted by the pandemic will 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.
ITEM 6. EXHIBITS.
(a)
Exhibits:
| 31.1 | Certification of<br>chief executive officer pursuant to Section 302 of the<br>Sarbanes-Oxley Act of 2002. |
|---|---|
| 31.2 | Certification of<br>chief financial officer pursuant to Section 302 of the<br>Sarbanes-Oxley Act of 2002. |
| 32.1* | Certification of<br>the chief executive officer and chief financial officer pursuant to<br>Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | XBRL Instance<br>Document |
| 101.SCH | XBRL Taxonomy<br>Extension Schema |
| 101.CAL | XBRL Taxonomy<br>Extension Calculation Linkbase |
| 101.DEF | XBRL Taxonomy<br>Extension Definition Linkbase |
| 101.LAB | XBRL Taxonomy<br>Extension Label Linkbase |
| 101.PRE | XBRL Taxonomy<br>Extension Presentation Linkbase |
———————
| * | Furnished<br>herewith. |
|---|
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| PHARMA-BIO SERV, INC. | |
|---|---|
| /s/<br>Victor Sanchez | |
| Victor<br>Sanchez | |
| Chief<br>Executive Officer and President Europe Operations | |
| (Principal<br>Executive Officer) | |
| /s/<br>Pedro J. Lasanta | |
| Pedro<br>J. Lasanta | |
| Chief<br>Financial Officer and Vice President Finance and<br>Administration | |
| (Principal<br>Financial Officer and Principal Accounting<br><br><br>Officer) | |
| Dated:<br>September 14, 2020 |
21
pbsv_ex311
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Victor Sanchez, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Pharma-Bio Serv Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: September 14, 2020
| /s/<br>Victor Sanchez |
|---|
| Victor<br>Sanchez |
| Chief<br>Executive Officer<br><br><br>(principal<br>executive officer) |
pbsv_ex312
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Pedro J. Lasanta, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Pharma-Bio Serv Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: September 14, 2020
| /s/<br>Pedro J. Lasanta |
|---|
| Pedro<br>J. Lasanta |
| Chief<br>Financial Officer<br><br><br>(principal<br>financial and accounting officer) |
pbsv_ex321
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Pharma-Bio Serv, Inc. (the "Company") on Form 10-Q for the period ending July 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Victor Sanchez, Chief Executive Officer of the Company, and Pedro J. Lasanta, Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Dated: September 14, 2020
| /s/<br>Victor Sanchez | /s/<br>Pedro J. Lasanta |
|---|---|
| Victor<br>Sanchez | Pedro<br>J. Lasanta |
| Chief<br>Executive Officer<br><br><br>(principal<br>executive officer) | Chief<br>Financial Officer<br><br><br>(principal<br>financial and accounting officer) |