See notes to consolidated financial statements.
See notes to consolidated financial statements.
Notes To Consolidated Financial Statements
For the Years Ended October 31, 2021 and 2020
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Pharma-Bio Serv, Inc. (“Pharma-Bio”) is a Delaware corporation organized on January 14, 2004. Pharma-Bio is the parent company of Pharma-Bio Serv PR, Inc. (“Pharma-PR”), Pharma Serv, Inc. (“Pharma-Serv”), and Scienza Labs, Inc. (“Scienza Labs”), each a Puerto Rico corporation, Pharma-Bio Serv US, Inc. (“Pharma-US”), a Delaware corporation, Pharma-Bio Serv SL (“Pharma-Spain”), a Spanish limited liability company, and Pharma-Bio Serv Brasil Servicos de Consultoria Ltda. (“Pharma-Brazil”), a Brazilian limited liability company. Pharma-Bio, Pharma-PR, Pharma-Serv, Scienza Labs, Pharma-US, Pharma-Spain and Pharma-Brazil are collectively referred to as the “Company.” The Company operates in Puerto Rico, the United States, Europe and Brazil under the name of Pharma-Bio Serv and is engaged in providing technical compliance consulting service.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The accompanying consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Segments
The Company operates in three reportable business segments: (i) Puerto Rico technical compliance consulting, (ii) United States technical compliance consulting, and (iii) Europe technical compliance consulting. Accordingly, the accompanying consolidated financial statements are presented to show these three reportable segments.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from these estimates.
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments, cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, are considered reasonable estimates of fair value due to their liquidity or short-term nature.
Revenue Recognition
The Company records revenue under Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers. We evaluate our revenue contracts with customers based on the five-step model under ASC 606: (i) Identify the contract with the customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to separate performance obligations; and (v) Recognize revenue when (or as) each performance obligation is satisfied.
Revenue is primarily derived from: (1) time and material contracts (representing approximately 99% of total revenues), and (2) short-term fixed-fee contracts or "not to exceed" contracts (representing approximately 1% of total revenues). Time and material contracts are typically based on the number of hours worked at contractually agreed upon rates. These service contracts relate to work which 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 money market obligation’s trusts that are registered under the U.S. Investment Company Act of 1940 and liquid investments with original maturities of three months or less.
Accounts Receivable
Accounts receivable are recorded at their estimated realizable value. Accounts are deemed past due when payment has not been received within the stated time period. The Company's policy is to review individual past due amounts periodically and write off amounts for which all collection efforts are deemed to have been exhausted. Due to the nature of the Company’s customers, bad debts are mainly accounted for using the direct write-off method whereby an expense is recognized only when a specific balance is determined to be uncollectible in full. The effect of using this method approximates that of the allowance method. However, in the event the Company determines that the collectability of any account receivable reaches a certain uncertainty threshold, the Company will provide an allowance for doubtful account to reduce said balance.
Income Taxes
The Company follows an asset and liability approach method of accounting for income taxes. This method measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts on the financial statements. The resulting deferred tax assets or liabilities are adjusted to reflect changes in tax laws as they occur. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized. As of October 31, 2021 and 2020, the resulting deferred tax asset has been fully allowed.
The Company follows guidance from the Financial Accounting Standards Board (“FASB”) related to Accounting for Uncertainty in Income Taxes, which includes a two-step approach to recognizing, de-recognizing and measuring uncertain tax positions. As of October 31, 2021, the Company had no significant uncertain tax positions that would be reduced as a result of a lapse of the applicable statute of limitations.
Leases
The Company follows accounting standards issued by the FASB for the accounting and disclosure of leases. Under those standards, assets and liabilities that arise from leases are recognized on the balance sheet, and the leases are categorized at their inception as either operating or finance leases.
Operating lease right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments under the lease. Lease recognition occurs at the commencement date, and lease liability amounts are based on the present value of lease payments made during the lease term.
Property and Equipment
Owned property and equipment are stated at cost. Vehicles under finance leases are stated at the lower of fair market value or net present value of the minimum lease payments at the inception of the leases.
Depreciation of owned assets are provided for, when placed in service, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, using straight-line basis. Assets under finance leases are amortized over the lease term. While expenditures for repairs and maintenance are expensed when incurred.
Impairment of Long-Lived Assets
The Company evaluates for impairment its long-lived assets to be held and used, and long-lived assets to be disposed of, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on management estimates, no impairment of the long-lived assets was present as of October 31, 2021 and 2020.
Stock-based Compensation
Stock-based compensation expense is recognized in the consolidated financial statements based on the fair value of the awards granted. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate of awards that will be forfeited. The Company calculates the fair value of stock options using the Black-Scholes option-pricing model at grant date, while for restricted stock units the fair market value of the units is determined by Company’s share market value at grant date. Excess tax benefits related to stock-based compensation are reflected as cash flows from financing activities rather than cash flows from operating activities. However, the Company has not recognized such cash flow from financing activities since there has been no tax benefit related to the stock-based compensation.
Earnings (Loss) Per Share of Common Stock
Basic earnings (loss) per share of common stock is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted earnings (loss) per share includes the dilution of common stock equivalents.
The diluted weighted average shares of common stock outstanding were calculated using the treasury stock method for the respective periods.
Foreign Operations
The functional currency of the Company’s foreign subsidiaries is its local currency. The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. The cumulative translation effect for subsidiaries using a functional currency other than the U.S. dollar is included as a cumulative translation adjustment in stockholders’ equity and as a component of comprehensive income.
The Company’s intercompany accounts are typically denominated in the functional currency of the foreign subsidiary. Gains and losses resulting from the remeasurement of intercompany receivables that the Company considers to be of a long-term investment nature are recorded as a cumulative translation adjustment in stockholders’ equity and as a component of comprehensive income, while gains and losses resulting from the remeasurement of intercompany receivables from those international subsidiaries for which the Company anticipates settlement in the foreseeable future are recorded in the consolidated statements of operations.
Subsequent Events
The Company has evaluated subsequent events to the date of the issuance of the consolidated financial statements. The Company has determined that there are no events occurring in this period that required disclosure or adjustment, except as disclosed in the accompanying consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the October 31, 2020 consolidated financial statements to conform them to the October 31, 2021 consolidated financial statements presentation. Such reclassifications do not have an effect on net income as previously reported.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses” (ASU 2016-13), which changes the impairment model for most financial assets and certain other instruments from an incurred loss model to an expected loss model. In addition, the guidance also requires incremental disclosures regarding allowances and credit quality indicators. ASU 2016-13 is required to be adopted using the modified-retrospective approach. For the Company this guidance will be effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. Based on the Company’s preliminary assessment, it currently does not anticipate a material impact to the Company’s Consolidated Financial Statements.
NOTE B - CUSTOMER ACCOUNT RECEIVABLE
As of October 31, 2021, one of the Company’s customers owed the Company approximately $5.2 million ($4.6 million as of October 31, 2020). The Company has been actively monitoring this account. The Company is aware that in the ordinary course of this customer’s business a significant portion of this customer’s operations are subject to compliance and regulatory approvals. This customer has experienced significant negative changes in its financial terms and challenges in obtaining financing and is also in the process of developing a therapeutic drug for the treatment of COVID-19. At this time, the Company believes the collection of this customer’s account receivable is principally dependent on the commercial success of this therapeutic drug. As a result, the Company is unable to estimate the future cash flows this customer will generate to settle this obligation or the timing of such future cash flows, if any, and, as of October 31, 2021, the Company has fully allowed approximately $5.2 million for this customer’s account receivable. Nevertheless, the Company will continue to monitor this account and actively seek full payment from this customer.
NOTE C - PROMISSORY NOTE
On September 17, 2018, the Company sold substantially all of its Lab business assets (the “Laboratory Assets”). Upon the completion of the Laboratory Assets sale, the Company received, as partial payment, a $3 million Promissory Note from the purchaser. The Promissory Note was composed of two tranches: (i) Tranche A for $2 million and secured with lab equipment and (ii) Tranche B for $1 million which was unsecured. The interest rate accrual was 3% for Tranche A and 5% for Tranche B. The Promissory Note’s final payment installment of $1,250,000 from Tranche A was collected in November 2020.
NOTE D - LOANS FORGIVENESS
On April 23, 2020, Pharma-PR, Pharma-Serv, and Pharma-US (collectively, the “Borrowers”) entered into loan agreements and related promissory notes to receive U.S. Small Business Administration Loans. These loans were originated pursuant to the Paycheck Protection Program (the “PPP”) established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), and in the aggregate amount of $1,931,700 (the “Loan Proceeds”). The Borrowers received the Loan Proceeds on April 23, 2020. These SBA Loans terms followed the CARES Act provisions and the corresponding regulations issued by the SBA. Under regulations established by the Small Business Administration and the CARES Act, in July 2021 the Company applied for and obtained the full forgiveness of the SBA Loans and the related accrued interests. The forgiveness of these loans and related interest for the aggregate amount of approximately $1,956,000 were recorded as other income on the Consolidated Statements of Operations for the year ended October 31, 2021.
NOTE E - PROPERTY AND EQUIPMENT
The balance of property and equipment at October 31, 2021 and 2020 consisted of the following:
|
|
Useful life
|
|
|
October 31,
|
|
|
|
(years)
|
|
|
2021
|
|
|
2020
|
|
Vehicles
|
|
5
|
|
|
$
|
115,623
|
|
|
$
|
201,623
|
|
Computers
|
|
3
|
|
|
|
387,014
|
|
|
|
376,160
|
|
Equipment
|
|
3-7
|
|
|
|
139,685
|
|
|
|
139,685
|
|
Furniture and fixtures
|
|
10
|
|
|
|
1,584
|
|
|
|
1,593
|
|
Total
|
|
|
|
|
|
643,906
|
|
|
|
719,061
|
|
Less: Accumulated depreciation and amortization
|
|
|
|
|
|
(538,384
|
)
|
|
|
(501,489
|
)
|
Property and equipment, net
|
|
|
|
|
$
|
105,522
|
|
|
$
|
217,572
|
|
NOTE F - INCOME TAXES
On December 22, 2017, Public Law 115-97, commonly known as the Tax Cuts and Jobs Act of 2017 (the “Tax Reform”), was enacted. The Tax Reform imposed a mandatory one-time transition tax (the “Transition Tax”) over foreign subsidiaries undistributed earnings and profits (“E&Ps”) earned prior to a date set by the statute. Based on the Company’s E&Ps, the Transition Tax was determined to be approximately $2.7 million. The Transition Tax liability must be paid over a period of eight years which started with the Company’s second quarter of fiscal year 2019. In the past, most of these E&Ps’ were not repatriated since such E&Ps’ were considered to be reinvested indefinitely in the foreign location, therefore no US tax liability was incurred unless the E&Ps were repatriated as a dividend. After December 31, 2017, the Tax Reform has established a 100% tax exemption on the foreign-source portion of dividends received attributable to E&Ps, with certain limitations. However, foreign subsidiaries earnings are subject to U.S. tax at a reduced rate of 10.5%.
In June 2011, Pharma-Bio, Pharma-PR and Pharma-Serv obtained a Grant of Industrial Tax Exemption pursuant to the terms and conditions set forth in Act No. 73 of May 28, 2008 (“the Grant”) issued by the Puerto Rico Industrial Development Company (“PRIDCO”). The Grant was effective as of November 1, 2009 and covers a fifteen-year period. The Grant provides relief on various Puerto Rico taxes, including income tax, with certain limitations, for most of the activities carried on within Puerto Rico, including those that are for services to parties located outside of Puerto Rico. Industrial Development Income (“IDI”) covered under the Grant are subject to a fixed income tax rate of 4%. In addition, IDI earnings distributions accumulated since November 1, 2009 are exempt from Puerto Rico earnings distribution tax.
Puerto Rico operations not covered in the exempt activities of the Grant are subject to Puerto Rico income tax at a maximum tax rate of 37.5% as provided by the 1994 Puerto Rico Internal Revenue Code, as amended. The operations carried out in the United States by the Company’s subsidiaries, is taxed in the United States at a maximum regular federal income tax rate of 21%.
The reconciliation between the United States federal statutory rate and our effective tax rate applicable to continuing operations for the years ended October 31, 2021, and 2020 is as follows:
|
|
October 31,
|
|
|
|
2021
|
|
|
2020
|
|
United States federal statutory rate
|
|
|
(21.0)
|
%
|
|
|
21.0
|
%
|
Foreign earnings
|
|
|
(5.9)
|
%
|
|
|
(11.3
|
)%
|
PPP loans forgiveness
|
|
|
(21.6
|
)%
|
|
|
-
|
%
|
Allowance of resulting deferred tax asset
|
|
|
58.7
|
%
|
|
|
-
|
%
|
Other
|
|
|
1.2
|
%
|
|
|
0.7
|
%
|
Effective tax rate
|
|
|
11.4
|
%
|
|
|
10.4
|
%
|
The effective tax rates for the years ended October 31, 2021 and 2020 differ from the federal statutory rate mainly due to the impact of the jurisdictional mix of income and expenses. Except for the benefit derived from the PPP loans forgiveness for the year ended October 31, 2021, the benefit to our effective tax rate is mainly from foreign earnings results from the Company’s operations conducted in Puerto Rico, a territory of the United States that is treated as a foreign jurisdiction for U.S. tax purposes and is subject to tax incentive grants. As previously disclosed, these earnings are also subject to U.S. tax at a reduced rate of 10.5%.
As of October 31, 2021 and 2020 income tax expense includes US federal and state taxes of approximately $150,500 and $134,000, respectively, and foreign income taxes of $62,700 and $105,000, respectively.
As of October 31, 2021, Pharma-PR, Pharma-Serv and Scienza Labs have established an allowance against a customer account receivable for an aggregate expense amount of approximately $5,246,800, representing a potential deferred tax asset for those subsidiaries of approximately $209,900. However, an allowance has been provided covering the total amount of the potential deferred tax assets since it is uncertain whether they can be used in the future. 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. As of October 31, 2020, a deferred tax asset resulting from Pharma-Spain carryforward losses was fully allowed, however, as of October 31, 2021, remaining carryforward losses for Pharma-Spain were not significant.
The Company files income tax returns in the United States (federal and various states jurisdictions), Puerto Rico, Spain and Brazil. The 2017 (2016 for Puerto Rico) through 2020 tax years are open and may be subject to potential examination in one or more jurisdictions. Currently, the Company is not subject to a federal, state, Puerto Rico or foreign income tax examination.
NOTE G - LEASES
Operating facilities - The Company conducts its headquarters administrative operations in office facilities located in Dorado, Puerto Rico (the “Office Facilities”). The Office Facilities are leased from an affiliate of our past Chairman of the Board (the “Landlord”). Until November 2020 the leased facilities also included a subleased laboratory testing facility. This sublease arrangement was extinguished in November 2020, when the subtenant (the “Subtenant”) of the laboratory testing facility paid in full to the Company the then outstanding balance of a promissory note (the “Promissory Note”) related to the Company’s sale of its laboratory assets to the Subtenant. According to the sublease agreement (the “Sublease”), between the Company, Subtenant and Landlord, when Subtenant satisfied its obligations under the Promissory Note, the Sublease will become a direct lease between Subtenant and Landlord (the “Sublease Transfer”).
The Office Facilities lease agreement was for an initial five-year term commencing January 1, 2016, with a renewal option for five additional years which was exercised and became effective January 1, 2021. The lease agreement, as amended taking into consideration the Sublease Transfer, has monthly rental payments of $14,561 beginning as of the Sublease Transfer date through the end of the renewal option term. The lease agreement also requires the payment of utilities, property taxes, insurance and expenses incurred by the affiliate in connection with the maintenance of common areas.
The Company maintains an office facility in Madrid, Spain. The facility is under a month-to-month lease with monthly payments of approximately $1,000.
The Company leases certain apartments as dwellings for employees. The leases are under short-term lease agreements and usually are cancelable upon 30-day notification.
Minimum future rental payments under non-cancelable operating leases having remaining terms in excess of one year as of October 31, 2021 are as follows:
Twelve months ending October 31,
|
|
Amount
|
|
2022
|
|
$
|
174,730
|
|
2023
|
|
|
174,730
|
|
2024
|
|
|
174,730
|
|
2025
|
|
|
174,730
|
|
2026
|
|
|
29,121
|
|
Total future minimum operating lease payments
|
|
|
728,041
|
|
Less: Amount of imputed interest
|
|
|
(110,617
|
)
|
Present value of future minimum operating lease payments
|
|
|
617,424
|
|
Current operating lease liabilities
|
|
|
(130,060
|
)
|
Long term operating lease liabilities
|
|
$
|
487,364
|
|
Rent expense for the years ended October 31, 2021 and 2020 was approximately $187,000 and $190,000, respectively.
NOTE H - CONTINGENCIES
In the ordinary course of business, the Company may be a party to legal proceedings incidental to the business. These proceedings are not expected to have a material adverse effect on the Company’s business or financial condition.
NOTE I - 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 timing, manner, price and amount of any repurchases under the Company Stock 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 Company Stock Repurchase Program does not oblige the Company to repurchase any shares and it may be modified, suspended or terminated at any time and for any reason. No shares will be repurchased under the Company Stock Repurchase Program directly from directors or officers of the Company. To conserve cash due to the economic uncertainty caused by the coronavirus pandemic, in April 2020 the Company suspended the purchases under the Company Stock Repurchase Program, though this have resumed in September 2021. As of October 31, 2021 and 2020, a total of 366,754 and 341,154 shares of the Company’s common stock were purchased under the Company Stock Repurchase Program for an aggregate amount of $357,272 and $331,306, respectively.
On January 5, 2021 the Board of Directors of the Company declared a cash dividend of $0.075 per common share for shareholders of record as of the close of business on January 25, 2021. Accordingly, an aggregate dividend payment of $1,727,364 was paid on February 5, 2021.
NOTE J - EARNINGS (LOSS) PER SHARE
The computation of basic earnings (loss) per share is based on the weighted-average number of our common shares outstanding. The computation of diluted earnings (loss) per share is based on the weighted-average number of our common shares outstanding and dilutive potential common shares, which include principally shares that may be issued under: warrants, our stock option and restricted stock unit awards, determined using the treasury stock method. The following data show the amounts used in the calculations of basic and diluted earnings (loss) per share.
|
|
Years ended October 31,
|
|
|
|
2021
|
|
|
2020
|
|
Net income (loss) available to common equity holders - used to compute basic and diluted earnings per share
|
|
$
|
(2,089,240
|
)
|
|
$
|
2,050,922
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares - used to compute basic earnings per share
|
|
|
23,026,260
|
|
|
|
23,003,327
|
|
Effect of options to purchase common stock
|
|
|
135,467
|
|
|
|
36,748
|
|
Weighted average number of shares - used to compute diluted earnings per share
|
|
|
23,161,727
|
|
|
|
23,040,075
|
|
For the years ended October 31, 2021 and 2020, options for the purchase of 80,000 and 160,000 shares of common stock, respectively, were not included in computing earnings per share because their effect was antidilutive.
NOTE K - STOCK OPTIONS AND STOCK BASED COMPENSATION
The Company has an incentive plan that covers 2,300,000 shares of the Company’s common stock, that provide for the grant of incentive and non-qualified options, stock grants, stock appreciation rights and other equity-based incentives to employees, including officers, consultants and directors for a period of ten years (the “2014 Long-Term Incentive Plan” also known as the “2014 Plan”). The 2014 Plan is to be administered by a committee of independent directors. In the absence of a committee, the plan is administered by the board of directors. Options intended to be incentive stock options must be granted at an exercise price per share which is not less than the fair market value of the common stock on the date of grant and may have a term which is not longer than ten years. If the option holder holds at least 10% of the Company’s common stock, the exercise price must be at least 110% of the fair market value on the date of grant and the term of the option cannot exceed five years.
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate of awards that will be forfeited. The fair value of stock-based awards to employees is calculated using the Black-Scholes option pricing model. The Black-Scholes model requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The expected term of the option has been estimated using the “simplified” method as provided in the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 107, for plans with insufficient exercise experience. Under this method, the expected term equals the arithmetic average of the vesting term and the contractual term of the option. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding period of grant. The expected volatility is based on the historical volatility of the Company’s stock price. These factors could change in the future, which would affect fair values of stock options granted in such future periods, and could cause volatility in the total amount of the stock-based compensation expense reported in future periods.
The 2014 Plan stock options activity and status for the years ended October 31, 2021 and 2020 was as follows:
|
|
Year ended October 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average Option
|
|
|
Number of
|
|
|
Average Option
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding at beginning of year
|
|
|
470,000
|
|
|
$
|
0.8587
|
|
|
|
410,000
|
|
|
$
|
0.8615
|
|
Granted
|
|
|
80,000
|
|
|
$
|
1.4000
|
|
|
|
80,000
|
|
|
$
|
0.7600
|
|
Exercised
|
|
|
(80,000
|
)
|
|
$
|
0.9500
|
|
|
|
(20,000
|
)
|
|
$
|
0.5200
|
|
Expired and/or forfeited
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Total outstanding at end of year
|
|
|
470,000
|
|
|
$
|
0.9353
|
|
|
|
470,000
|
|
|
$
|
0.8587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding exercisable stock options at end of year
|
|
|
396,700
|
|
|
$
|
0.8931
|
|
|
|
363,300
|
|
|
$
|
0.8657
|
|
|
|
October 31,
2021
|
|
|
October 31,
2020
|
|
Weighted average remaining years in contractual life for:
|
|
|
|
|
|
|
Total outstanding options
|
|
|
2.3 years
|
|
|
|
2.6 years
|
|
Outstanding exercisable options
|
|
|
2.1 years
|
|
|
|
2.1 years
|
|
Shares of common stock available for issuance pursuant to future stock option grants
|
|
|
1,420,000
|
|
|
|
1,500,000
|
|
The following weighted average assumptions were used to estimate the fair value of stock options granted under the 2014 Plan for the years ended October 31, 2021 and 2020:
|
|
Year ended October 31,
|
|
|
|
2021
|
|
|
2020
|
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected stock price volatility
|
|
|
87.6
|
%
|
|
|
82.0
|
%
|
Risk free interest rate
|
|
|
0.2
|
%
|
|
|
1.6
|
%
|
Expected life of options
|
|
3.2 years
|
|
|
3.2 years
|
|
Weighted average fair value of options granted
|
|
$
|
0.7928
|
|
|
$
|
0.4152
|
|
As of October 31, 2021, estimated stock based compensation expense to be recognized in future periods for granted nonvested stock options is attributable to stock options granted under the 2014 Plan. The nonvested stock options compensation expense in the amount of $40,440 will be recognized in a weighted average period of approximately 0.8 years.
As of October 31, 2021 and 2020, the aggregate intrinsic value of options outstanding under the 2014 Plan were approximately $74,100 and $202,700, respectively. The aggregate intrinsic value represents the difference between the Company’s stock price at year end and the exercise price, multiplied by the number of in-the money options had all option holders exercised their options. This amount changes based on the fair market value of the Company’s stock.
The following table presents the total stock-based compensation included in the Company’s consolidated statement of income and the effect in earnings per share:
|
|
Year ended October 31,
|
|
|
|
2021
|
|
|
2020
|
|
Stock-based compensation expense:
|
|
|
|
|
|
|
Cost of services
|
|
$
|
-
|
|
|
$
|
-
|
|
Selling, general and administrative
|
|
|
56,239
|
|
|
|
42,878
|
|
Stock-based compensation before tax
|
|
|
56,239
|
|
|
|
42,878
|
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
Net stock-based compensation expense
|
|
$
|
56,239
|
|
|
$
|
42,878
|
|
Effect on earnings per share:
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
(0.002
|
)
|
|
$
|
(0.002
|
)
|
Diluted earnings per share
|
|
$
|
(0.002
|
)
|
|
$
|
(0.002
|
)
|
NOTE L - SEGMENT DISCLOSURES
The Company’s segments are based on the organizational structure for which financial results are regularly evaluated by the Company’s chief operating decision maker to determine resource allocation and assess performance. Each reportable segment is managed by its own management team and reports to executive management. The Company has three reportable segments: (i) Puerto Rico consulting, (ii) United States consulting, and (iii) Europe consulting. These reportable segments provide services primarily to the pharmaceutical, chemical, medical device and biotechnology industries in their respective markets.
The following table presents information about the reported revenue from services and earnings from operations of the Company for the years ended in October 31, 2021 and 2020. There is no intersegment revenue for the mentioned periods. Corporate expenses that support the operating units have been allocated to the segments. Asset information by reportable segment is not presented, since the Company does not produce such information internally, nor does it use such data to manage its business.
|
|
Year ended October 31,
|
|
|
|
2021
|
|
|
2020
|
|
REVENUES:
|
|
|
|
|
|
|
Puerto Rico consulting
|
|
$
|
14,680,665
|
|
|
$
|
18,214,656
|
|
United States consulting
|
|
|
2,720,662
|
|
|
|
2,283,370
|
|
Europe consulting
|
|
|
2,329,359
|
|
|
|
829,170
|
|
Other
|
|
|
384,489
|
|
|
|
237,164
|
|
Total consolidated revenues
|
|
$
|
20,115,175
|
|
|
$
|
21,564,360
|
|
INCOME (LOSS) BEFORE TAXES:
|
|
|
|
|
|
|
|
|
Puerto Rico consulting, including loans and related interest forgiveness of approximately $1,861,000 for the year ended October 31, 2021
|
|
$
|
(2,887,749
|
)
|
|
$
|
2,332,052
|
|
United States consulting, including loan and related interest forgiveness of approximately $95,000 for the year ended October 31, 2021
|
|
|
204,110
|
|
|
|
(80,635
|
)
|
Europe consulting
|
|
|
720,427
|
|
|
|
(9,661
|
)
|
Other
|
|
|
87,218
|
|
|
|
48,254
|
|
Total consolidated income (loss) before taxes
|
|
$
|
(1,875,994
|
)
|
|
$
|
2,290,010
|
|
Long lived assets (property and equipment) and related depreciation and amortization expense for the years ended October 31, 2021 and 2020, were concentrated in the corporate headquarters in Puerto Rico. Accordingly, depreciation expense and acquisition of property and equipment, as presented in the statements of cash flows are mainly related to the corporate headquarters.
NOTE M - CONCENTRATION OF RISKS
Cash and cash equivalents
The Company domestic cash and cash equivalents consist of cash deposits in FDIC insured banks (substantially covered by FDIC insurance by the spread of deposits in multiple FDIC insured banks), a money market obligations trust registered under the US Investment Company Act of 1940, as amended, and U.S. Treasury securities with maturities of three months or less. In the foreign markets we serve, we also maintain cash deposits in foreign banks, which tend to be not significant and have no specific insurance. No losses have been experienced or are expected on these accounts.
Accounts receivable and revenues
Except as set forth in Note B-Customer Account Receivable, management deems all its accounts receivable to be fully collectible, and, as such, does not maintain any allowances for uncollectible receivables.
The Company's revenues, and the related receivables, are concentrated in the pharmaceutical industry in Puerto Rico, the United States of America and Europe. Although a few customers represent a significant source of revenue, the Company’s functions are not a continuous process, accordingly, the client base for which the services are typically rendered, on a project-by-project basis, changes regularly.
The Company provided a substantial portion of its services to four customers, who accounted for 10% or more of its revenues in either of the years ended October 31, 2021 or 2020. During the year ended October 31, 2021, revenues from these customers were 20.1%, 12.3%, 8.8% and 0.0%, or a total of 41.2%, as compared to the same period last year for 14.2%, 10.5%, 11.6% and 16.2%, or a total of 52.5%, respectively. At October 31, 2021 and 2020, amounts due from these customers represented 9.2% and 27.9% of total accounts receivable balance, respectively.
The major customer information in the above paragraph is based on revenues earned from said customers at the segment level because in management’s opinion contracts by segments are totally independent of each other, and therefore such information is more meaningful to the reader. However, at the global level four groups of affiliated companies accounted for 10% or more of our revenues in either October 31, 2021 or 2020. During the year ended October 31, 2021, aggregate revenues from these global groups of affiliated companies were 20.1%, 12.3%, 11.1% and 0.0%, or a total of 43.5%, as compared to the same period last year for 14.2%, 10.5%, 13.8% and 16.2%, or a total of 54.7%, respectively. At October 31, 2021 and 2020, amounts due from these global groups of affiliated companies represented 10.6% and 28.8% of total accounts receivable balance, respectively.
NOTE N - RETIREMENT PLAN
Pharma-PR and Pharma-US each have a separate qualified retirement plan in accordance with the applicable laws of the Commonwealth of Puerto Rico and the United States of America, for employees who meet certain age and service period requirements. The Company makes contributions to these plans as required by the provisions of the plan document. During the years ended October 31, 2021 and 2020 the Company contributed to these plans $131,700 and $153,200, respectively.
NOTE O - RELATED PARTY TRANSACTIONS
On December 31, 2013, the Company entered into a Consulting Agreement with a company (the “Consultant”) affiliated with our former Chairman and our former Chairman, effective as of January 1, 2014. Pursuant to the Consulting Agreement as amended, the Consultant consulted with the Board regarding the Company’s strategic initiatives, company services, management, operations and other matters as requested from time to time by the Board. The compensation paid under this agreement was $67,400 and $524,400, for the years ended October 31, 2021 and 2020, respectively. The Consulting Agreement ended pursuant to its terms on December 31, 2020.
As more fully disclosed in Note G to the consolidated financial statements, the Company leases its headquarters facilities in Dorado, Puerto Rico, from an affiliate of our past Chairman of the Board.
NOTE P - SUBSEQUENT EVENTS
On November 15, 2021, the Board of Directors of the Company declared a cash dividend of $0.075 per common share. The dividend was paid on or about January 3, 2022 to shareholders of record as of the close of business on December 15, 2021.
Also, the Board of Directors of the Company declared, on February 7, 2022, a cash dividend of $0.075 per common share. This dividend is payable on or about March 15, 2022 to shareholders of record as of the close of business on February 25, 2022.