As filed with the Securities and Exchange Commission on March __, 2006
Registration No. 333-_______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PHARMA-BIO SERV, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 8742 20-0653570
(State or Other Jurisdiction of (Primary Standard Industrial (IRS Employer
Incorporation or Organization) Classification Code Number) Identification No.)
Sardinera Beach Building Suite 2,
Marginal Costa de Oro, Dorado, Puerto Rico 00646 (747) 278-2709
(Address and telephone number of Principal Executive Offices)
Sardinera Beach Building Suite 2,
Marginal Costa de Oro, Dorado, Puerto Rico 00646
(Address of principal place of business)
Ms. Elizabeth Plaza, Chief Executive Officer
Pharma-Bio Serv, Inc.
Sardinera Beach Building Suite 2, Marginal Costa de Oro
Dorado, Puerto Rico 00646
Telephone: (787) 278-2709
Fax: (787) 796-5168
(Name, address and telephone number of agent for service)
Please send a copy of all communications to:
Asher S. Levitsky P.C.
Katsky Korins LLP
605 Third Avenue
New York, NY 10158
Telephone: (212) 716-3239
Fax: (212) 716-3338
Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
CALCULATION OF REGISTRATION FEE
--------------------------- ------------------------ ------------------------ ------------------------ ------------------
Title of each class of Proposed maximum Proposed maximum
securities to be Amount to be registered offering price per aggregate offering Amount of
registered unit (1) price(1) registration fee
--------------------------- ------------------------ ------------------------ ------------------------ ------------------
Common Stock, par value 15,998,800 $ .7344 $11,750,000 $1257.25
$.0001 per share(2)
--------------------------- ------------------------ ------------------------ ------------------------ ------------------
Common Stock, par value 7,999,400 $ 1.375 $10,999,175 $1176.91
$.0001 per share(3)
--------------------------- ------------------------ ------------------------ ------------------------ ------------------
$2434.16
--------------------------- ------------------------ ------------------------ ------------------------ ------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) promulgated under the Securities Act of 1933, as
amended. The 15,998,800 represent the shares of common stock issuable upon
conversion of the series A convertible preferred stock and the proposed
maximum offering price is based on the purchase price of the preferred
stock, with no value being attributed to the warrants. The 7,999,400 are
shares of common stock issuable upon exercise of common stock purchase
warrants, and the proposed maximum offering price is equal to the average
exercise price of the warrants.
(2) Represents 15,998,800 outstanding shares of common stock issuable upon
conversion of series A convertible preferred stock.
(3) Represents 7,999,400 shares of common stock issuable upon exercise of
warrants at an average exercise price of $1.375 per share.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the commission, acting pursuant to said section 8(a),
may determine.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION DATED MARCH __, 2006
PROSPECTUS
23,998,200 Shares
PHARMA-BIO SERV, INC.
Common Stock
[Market] Trading Symbol:
The selling stockholders may offer and sell from time to time up to an
aggregate of 23,998,200 shares of our common stock that they acquired from us
upon conversion of series A convertible preferred stock and that they may
acquire from us upon exercise of warrants. For information concerning the
selling stockholders and the manner in which they may offer and sell shares of
our common stock, including limitation on the number of shares that may be
issued upon conversion of the series B preferred stock or certain of the
warrants, see "Selling Stockholders" and "Plan of Distribution" in this
prospectus.
We will not receive any proceeds from the sale by the selling stockholders
of their shares of common stock other than the exercise price of the warrants if
and when the warrants are exercised. We will pay the cost of the preparation of
this prospectus, which is estimated at $35,000.
On ______________, 2006, the last reported sales price for our common
stock on the [Market] was $ .
Investing in shares of our common stock involves a high degree of risk.
You should purchase our common stock only if you can afford to lose your entire
investment. See "Risk Factors," which begins on page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined whether
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The selling stockholders have not engaged any underwriter in connection
with the sale of their shares of common stock.
The date of this Prospectus is _________, 2006
You should rely only on the information contained in this prospectus. We have
not authorized any dealer, salesperson or other person to provide you with
information concerning us, except for the information contained in this
prospectus. The information contained in this prospectus is complete and
accurate only as of the date on the front cover page of this prospectus,
regardless when the time of delivery of this prospectus or the sale of any
common stock. This prospectus is not an offer to sell, nor is it a solicitation
of an offer to buy, our common stock in any jurisdiction in which the offer or
sale is not permitted.
TABLE OF CONTENTS
Page
Prospectus Summary 3
Risk Factors 6
Forward-Looking Statements 13
Use of Proceeds 13
Selling Stockholders 14
Plan of Distribution 16
Market for Common Stock and Stockholder Matters 18
Management's Discussion and Analysis of Financial Condition 19
and Results of Operations
Business 26
Management 30
Principal Stockholders 34
Certain Relationships and Related Transactions 36
Description of Capital Stock 37
Experts 40
Legal Matters 40
How to Get More Information 40
Financial Statements F-1
-2-
PROSPECTUS SUMMARY
This summary does not contain all of the information that is important to
you. You should read the entire prospectus, including the Risk Factors and our
consolidated financial statements and related notes appearing elsewhere in this
prospectus before making an investment decision.
Our Business
We are a Puerto Rico based company established by Elizabeth Plaza in 1997
to offer consulting services to the pharmaceutical industry. We have
successfully grown our business operation by providing quality, value-added
consulting services to the major pharmaceutical, biotechnology and chemical
manufacturing companies principally in Puerto Rico.
Our mission is to provide high quality services to the pharmaceutical and
related industries to maintain or improve their quality standards and
competitive value. We assist our clients in complying with government
regulations by offering a full range of consulting services in the areas of:
validation and qualification, technology transfer and post-approval changes,
technical documentation, environmental safety and occupational health,
microbiology/bio-control, process support and project management, compliance and
regulatory, training services and computer systems. We have utilized our
favorable market reputation and brand name to secure major contracts with many
major drug manufacturers throughout Puerto Rico. We provide validation,
regulatory compliance and value-added consulting services as problem solving
solutions to its customers in the pharmaceutical, chemical (bulk manufacturing),
biotechnology and medical devices industries in Puerto Rico.
Our engineering and life science professionals include former quality
assurance managers or directors from pharmaceutical companies, and experienced
and well-trained professionals with masters and doctorates in health sciences
and engineering. Our objective is to offer a flexible, common sense and cost
effective approach to meet our clients' needs, strategies and budget objectives.
Organization; Merger
On January 25, 2006, pursuant to the an agreement and plan of merger among
us, Plaza Acquisition Corp., Plaza and Elizabeth Plaza, the sole stockholder of
Plaza, Plaza Acquisition Corp. was merged into Plaza, with the result that Plaza
became our wholly-owned subsidiary. As a result of this our business is the
business of Plaza. The acquisition of Plaza is accounted for as a reverse
acquisition, with Plaza being the accounting acquiring party. The accounting
rules for reverse acquisitions require that beginning with the date of the
merger, January 25, 2006, our balance sheet includes the assets and liabilities
of Plaza and our equity accounts were recapitalized to reflect the net equity of
Plaza. In addition, our historical operating results will be the operating
results of Plaza.
Plaza is a Puerto Rico corporation founded in 1997. We are a Delaware
corporation, organized in 2004 under the name Lawrence Consulting Group, Inc.
Our corporate name was changed to Pharma-Bio Serv, Inc. in February 2006. Our
executive offices are located at Sardinera Beach Building Suite 2, Marginal
Costa de Oro, Dorado, Puerto Rico 00646, (787) 278-2709. Our website is
www.pharmaservpr.com. Information on our website or any other website is not
part of this prospectus.
References to "we," "us," "our" and similar words refer to the Company,
and includes the business and financial information relating to the Company and
Plaza on a combined basis. With respect to historical information, these terms
refer to Plaza.
-3-
Stock Distribution
On January 24, 2006, we effected a two-for-one share distribution with
respect to our common stock pursuant to which we issued one share of common
stock for each share outstanding on the record date, January 24, 2006
Issuance of Securities to the Selling Stockholders
On January 25, 2006, contemporaneously with the consummation of the
acquisition of Plaza, we sold, in a private placement, 47 units, each unit
consisting of 25,000 shares of series A preferred stock, warrants to purchase
85,100 shares of common stock at $1.10 per share and warrants to purchase 85,100
shares of common stock at $1.65 per share. In the private placement, we issued
an aggregate of 1,175,000 shares of series A preferred stock (which are
convertible into an aggregate of 15,998,800 shares of common stock), warrants to
purchase 3,999,700 shares of common stock at $1.10 per share, and warrants to
purchase 3,999,700 shares of common stock at $1.65 per share, to 42 accredited
investors. The Company paid brokerage commissions of 10% of the gross purchase
price and an aggregate non-accountable expense allowance of 3% of the gross
purchase price with respect to the units sold. In certain cases, the broker
waived the commission and non-accountable expense allowance, and the investor
paid the purchase price less the commission and non-accountable expense
allowance. The purchase price for the 47 units sold was $11,750,000.
Broker-dealers waived commission and non-accountable expense allowance with
respect to $628,750, the Company paid commissions and non-accountable expense
allowances totaling $898,750, and the Company issued warrants to purchase an
aggregate of 1,439,892 shares of common stock. The warrants have an exercise
price of $.7344 per share and a term of three years.
On April __, 2006, we amended our certificate of incorporation to increase
our authorized capital stock to 10,000,000 shares of preferred stock and
50,000,000 shares of common stock, at which time the series A preferred stock
was automatically converted, with no action on the part of the holders thereof,
into a total of 15,998,800 shares of common stock and the warrants became
immediately exercisable.
The warrants issued in the private placement expire five years from the
closing date and are callable by the Company if the closing price of the common
stock is at least twice the exercise price of the warrants for twenty (20)
consecutive trading days.
THE OFFERING
Common Stock Offered: The selling stockholders are offering a total of 23,998,200 shares of
common stock of which 15,998,800 shares are outstanding and 7,999,400
shares are issuable upon exercise of warrants
Outstanding Shares of Common Stock: 18,300,600 shares(1,2)
Common Stock to be Outstanding After 26,300,000 shares(1)
Offering:
Use of Proceeds: We will receive no proceeds from the sale of any shares by the selling
stockholders. In the event that any selling stockholders exercise their
warrants, we would receive the exercise price. If all warrants are
exercised, we would receive approximately $11.0 million, all of which, if
and when received, would be used for working capital and other corporate
purposes.
Principal Markets: The common stock is traded on the [market].
-4-
Trading Symbol:
(1) Does not include a total of 8,056,392 shares of common stock, of which
2,500,000 shares are reserved for options, stock grants or other
equity-based incentives under our 2005 long-term incentive plan, 5,539,892
shares are reserved for outstanding warrants other than the warrants held
by the selling stockholders, and 16,500 shares are reserved for issuance
as stock grants to employees.
(2) Does not include the 7,999,400 shares of common stock issuable upon
exercise of warrants held by the selling stockholders.
SUMMARY FINANCIAL INFORMATION
(in thousands, except per share amounts)
The following information as at October 31, 2005 and for the two years
then ended has been derived from our audited financial statements which appear
elsewhere in this prospectus. The following information as at January 31, 2006
and for the three months ended January 31, 2006 and 2005 has been derived from
our unaudited financial statements which appear elsewhere in this prospectus.
Statement of Operations Information:
Three Months Ended January 31, Year Ended October 31,
------------------------------ ----------------------
2006 2005 2005 2004
------- ------- ------- -------
Revenues $ 3,410 $ 4,695 $17,413 $16,930
Gross profit 1,337 2,038 8,011 7,568
Income before income taxes 727 1,559 6,390 5,743
Net income(1) 370 948 6,390 6,390
Net income per share of common $ .21 $ .54 $ 3.65 $ 3.28
stock, (basic)
Weighted average shares of 1,792 1,750 1,750 1,750
common stock outstanding
(basic)
Net income per share of common $ .11 $ .54 3.65 3.28
stock, (diluted)
Weighted average shares of 3,296 1,750 1,750 1,750
common stock outstanding
(diluted)
---------------
(1) Because we were treated as an N Corporation under the Puerto Rico Internal
Revenue Code, our income was taxed to our stockholder, and we did not pay income
tax. If income tax were paid at the statutory rate, our net income would have
been $3,898, or $2.23 per share, for the year ended October 31, 2005 and $3,505,
or $2.00 per share, for the year ended October 31, 2004.
-5-
Consolidated Balance Sheet Information:
January 31, 2006 October 31, 2005
---------------- ----------------
Working capital $2,981 $5,808
Total assets 7,427 7,218
Total liabilities 8,918 1,237
Retained earnings (deficiency) (1,051) 5,980
Stockholders' equity (deficiency) (1,491) 5,981
RISK FACTORS
An investment in our securities involves a high degree of risk. In
determining whether to purchase our securities, you should carefully consider
all of the material risks described below, together with the other information
contained in this prospectus before making a decision to purchase our
securities. You should only purchase our securities if you can afford to suffer
the loss of your entire investment.
Risks That Relate to our Business
Because our business is concentrated in the pharmaceutical industry in Puerto
Rico, any changes in that industry could impair our ability to generate
business.
Since substantially all of our business is performed in Puerto Rico for
pharmaceutical, biotechnology and chemical manufacturing companies, our ability
to generate revenue and profit would be impaired by such factors as changes in
taxes in Puerto Rico, or regulatory, tax or economic conditions which discourage
these businesses from operating in Puerto Rico and changes in U.S. government
regulations which affect the need for services such as those provided by Plaza.
Because our business is dependent upon a small number of clients, the loss of a
major client could impair its ability to operate profitably.
Our business has been dependent upon a small number of clients. During the
three months ended January 31, 2006 and the years ended October 31, 2005 and
2004, a very small number of clients accounted for a disproportionately large
percentage of our revenue. For the three months ended January 31, 2006, three
customers accounted for approximately 68.1% of revenue. For the year ended
October 31, 2005, two of these three customers accounted for approximately 62.4%
of revenue, and for the year ended October 31, 2004, these two customers
accounted for approximately 65.0% of revenue. The loss of or significant
reduction in the scope of work performed for any major customer could impair the
Company's ability to operate profitably. The scope of work for our largest
customer has declined significantly in the three months ended January 31, 2006,
and we cannot assure we will not sustain significant decreases in revenue from
our major customers or that we will be able to replace any decline in revenue.
We may be unable to pass on increased labor cost to our clients.
The principal components of our costs of revenue are employee compensation
(salaries, wages, taxes and benefits) and expenses relating to the performance
of the services. We face increasing labor costs which we seek to pass on to our
customers through increases in our rates. We may not be able to pass these cost
increases to our clients, and, to the extent that we are not able to pass these
increases to our clients, our gross margin will be reduced.
-6-
Our cash requirements include payments totaling $8.25 million due to Elizabeth
Plaza.
Pursuant to the merger agreement, we are required to makes three payments,
each in the amount of $2.75 million, on January 25, 2007, 2008 and 2009. These
payments are not contingent upon our earnings, earnings before interest, taxes,
depreciation and amortization or any other financial criteria. We may have not
have resources other than our operations from which to make the payments. We
cannot assure you that we will have available cash from which we can make these
payments and, even if we do have the available cash, our growth may be impaired
if we use our cash for that purpose.
Because the pharmaceutical industry is subject to government regulations, our
business may be affected by changes in government regulations.
Because government regulations affect all aspects of the pharmaceutical,
biotechnology and chemical manufacturing industries, including regulations
relating to the testing and manufacturing of pharmaceutical products and the
disposal of materials which are or may be considered toxic, any change in
government regulations could have a profound effect upon not only these
companies but companies, such as us, that provide services to these industries.
If we are not able to adapt and provide necessary services to meet the
requirements of these companies in response to changes in government
regulations, our ability to generate business may be impaired.
Changes in United States tax laws may affect the development of the
pharmaceutical industry in Puerto Rico which could significantly impair our
business.
Until 1996, the Internal Revenue Code provided certain tax benefits to
pharmaceutical companies operating in Puerto Rico by enabling their Puerto Rico
operations to operate free from federal income taxes. Partly as a result of the
tax benefits, numerous pharmaceutical companies established facilities in Puerto
Rico. In 1996, this tax benefit was eliminated, although companies that had
facilities in Puerto Rico could continue to receive these benefits for ten
years, at which time the benefits expire. Although some tax benefits remain, the
change in the tax law may affect the willingness of pharmaceutical companies to
continue or to expand their Puerto Rico operations. To the extent that
pharmaceutical companies choose to develop and manufacture products outside of
Puerto Rico, our ability to generate new business may be impaired.
If we are unable to protect our clients' intellectual property, our ability to
generate business will be impaired.
Our services either require us to develop intellectual property for
clients or provide our personnel with access to our clients' intellectual
property. Because of the highly competitive nature of the pharmaceutical,
biotechnology and chemical manufacturing industries and the sensitivity of our
clients' intellectual property rights, our ability to generate business would be
impaired if we fail to protect those rights. Although all of our employees are
required to sign non-disclosure agreements, any disclosure of a client's
intellectual property by an employee may subject us to litigation and may impair
our ability to generate business either from the affected client or other
potential clients.
-7-
We may be subject to liability if our services or solutions for our clients
infringe upon the intellectual property rights of others.
It is possible that in performing services for our clients, we may
inadvertently infringe upon the intellectual property rights of others. In such
event, the owner of the intellectual property may commence litigation seeking
damages and an injunction against both us and our client, and the client may
bring a claim against us. Any infringement litigation would be costly,
regardless of whether we ultimately prevail. Even if we prevail, we will incur
significant expenses and our reputation would be hurt, which would affect our
ability to generate business and the terms on which we would be engaged, if at
all.
We may be held liable for the actions of our employees when on assignment.
We may be exposed to liability for actions taken by our employees while on
assignment, such as damages caused by their errors, misuse of client proprietary
information or theft of client property. We currently do not maintain insurance
coverage against this risk. Due to the nature of our assignments, we cannot
assure you that we will not be exposed to liability as a result of our employees
being on assignment.
To the extent that we perform services pursuant to fixed-price or
incentive-based contracts, our cost of services may exceed our revenue on the
contract.
Some of our revenue is derived from fixed price contracts. Our costs of
services may exceed revenue of these contracts if we do not accurately estimate
the time and complexity of an engagement. Further, we are seeking contracts by
which our compensation is based on specified performance objectives, such as the
realization of cost savings or specified performance objectives. Our failure to
achieve these objectives would reduce our revenue and could impair our ability
to operate profitable.
Our profit margin is largely a function of the rates we are able to
recover for our services and the utilization rate of our professionals.
Accordingly, if we are not able to maintain our pricing for our services or an
appropriate utilization rate for our professionals without corresponding cost
reductions, our profit margin and profitability will suffer. The rates we are
able to recover for our services are affected by a number of factors, including:
o Our clients' perception of our ability to add value through our
services;
o Our ability to complete projects on time;
o Pricing policies of competitors;
o Our ability to accurately estimate, attain and sustain engagement
revenues, margins and cash flows over increasingly longer contract
periods; and
o General economic and political conditions.
Our utilization rates are also affected by a number of factors, including:
o Seasonal trends, primarily as a result of our hiring cycle;
o Our ability to move employees from completed projects to new
engagements; and
o Our ability to manage attrition of our employees.
-8-
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.
Our contracts can be terminated by our clients with short notice. Our
clients typically retain us on a non-exclusive, engagement-by-engagement basis,
and the client may terminate, cancel or delay any engagement or the project for
which we are engaged, at any time and on short notice. As a result, we need to
develop new business on an ongoing basis. Since our operations are generally
limited to companies operating in Puerto Rico and, to a lesser extent, Puerto
Rico businesses that operate elsewhere, the termination, cancellation,
expiration or delay of contracts could have a significant impact on our ability
to operate profitable.
Because of the competitive nature of the pharmaceutical, biotechnology and
chemical manufacturing consulting market, we may not be able to compete
effectively if it cannot efficiently respond to changes in the structure of the
market and developments in technology.
Because of recent consolidations in the pharmaceutical, biotechnology and
chemical manufacturing consulting business, we are faced with an increasing
number of larger companies that offer a wider range of services and have better
access to capital than we have. We believe that larger and better-capitalized
competitors have enhanced abilities to compete for both clients and skilled
professionals. In addition, one or more of our competitors may develop and
implement methodologies that result in superior productivity and price
reductions without adversely affecting their profit margins. We cannot assure
you that we will be able to compete effectively in an increasingly competitive
market.
We are dependent upon our management and we need to engage skilled personnel.
Our success to date has depended in large part on the skills and efforts
of Elizabeth Plaza, our president, chief executive officer and founder. The loss
of the services of Ms. Plaza could have a material adverse effect on the
development and success of our business. Although we entered into a three-year
contract with Ms. Plaza, the agreement only requires her to continue as an
employee for 18 months and as a consultant for the remaining 18 months, and it
does not guarantee that she will continue to be employed by us. During the term
of her employment, we will have to identify and hire a person to serve as
president and chief executive officer upon Ms. Plaza's retirement. Our failure
to hire a qualified person in a timely manner will impair our ability to grow.
In addition, because of the highly technical nature of the work that we perform
for our clients in the pharmaceutical, biotechnology and chemical manufacturing
industries, we need to hire highly skilled personnel who are familiar with the
needs of these companies in order to perform the services which we provide. Our
future success will depend in part upon our ability to attract and retain
additional qualified management and technical personnel. Competition for such
personnel is intense and we compete for qualified personnel with numerous other
employers, including consulting firms, some of which have greater resources than
we have, as well as pharmaceutical companies, all of which have significantly
greater financial and other resources than we. We may experience increased costs
in order to retain and attract skilled employees. Our failure to attract
additional personnel or to retain the services of key personnel and independent
contractors could have a material adverse effect on our ability to operate
profitably
-9-
We may not be able to continue to grow unless we consummate acquisitions or
enter markets outside of Puerto Rico.
An important part of our growth strategy is both to acquire other
businesses which can increase the range of services and products that we can
offer and to establish offices in countries where we do not presently operate,
either by acquisition or by internal growth. Any acquisitions we make may be
made with cash or our securities or a combination of cash and securities. To the
extent that we require cash, we may have to borrow the funds or sell equity
securities. The issuance of equity, if available, would result in dilution to
our stockholders. We have no commitments from any financing source and we may
not be able to raise any cash necessary to complete an acquisition. If we seek
to expand our business internally, we will incur significant start-up expenses
without any assurance of our ability to penetrate the market. If we fail to make
any acquisitions or otherwise expand our business, our future growth may be
limited. As of the date of this memorandum, we do not have any agreement or
understanding, either formal or informal, as to any acquisition.
If we make any acquisitions, they may disrupt or have a negative impact on our
business.
If we make acquisitions or establish operations in countries outside of
Puerto Rico, we could have difficulty integrating the acquired companies'
personnel and operations with our own. In addition, the key personnel of the
acquired business may not be willing to work for us. We cannot predict the
effect expansion may have on our core business. Regardless of whether we are
successful in making an acquisition, the negotiations could disrupt our ongoing
business, distract our management and employees and increase our expenses. In
addition to the risks described above, acquisitions are accompanied by a number
of inherent risks, including, without limitation, the following:
o the difficulty of integrating acquired products, services or
operations;
o the potential disruption of the ongoing businesses and distraction
of our management and the management of acquired companies;
o the potential loss of contracts from clients of acquired companies.
o the difficulty of maintaining profitability due to increased labor
and expenses from acquired company.
o difficulties in complying with regulations in other countries that
relate to both the pharmaceutical or other industry to which we
provide services as well as our own operations;
o difficulties in maintaining uniform standards, controls, procedures
and policies;
o the potential impairment of relationships with employees and
customers as a result of any integration of new management
personnel;
o the potential inability or failure to achieve additional sales and
enhance our customer base through cross-marketing of the products to
new and existing customers;
o the effect of any government regulations which relate to the
business acquired;
o potential unknown liabilities associated with acquired businesses or
product lines, or the need to spend significant amounts to retool,
reposition or modify the marketing and sales of acquired products or
the defense of any litigation, whether of not successful, resulting
from actions of the acquired company prior to our acquisition;
o difficulties in disposing of the excess or idle facilities of an
acquired company or business and expenses in maintaining such
facilities; and
o potential expenses under the labor, environmental and other laws of
other countries.
-10-
Our business could be severely impaired if and to the extent that we are
unable to succeed in addressing any of these risks or other problems encountered
in connection with an acquisition, many of which cannot be presently identified.
Further, the commencement of business in other countries may be subject to
significant risks in areas which we are not able to prepare for in advance.
Our quarterly revenues, operating results and profitability will vary from
quarter to quarter, which may result in increased volatility of our share price.
Our quarterly revenues, operating results and profitability have varied in
the past and are likely to vary significantly from quarter to quarter, making
them difficult to predict. This may lead to volatility in our share price. The
factors that are likely to cause these variations are:
o Seasonality, including number of workdays and holiday and summer
vacations;
o The business decisions of clients regarding the use of our services;
o Periodic differences between clients' estimated and actual levels of
business activity associated with ongoing engagements, including the
delay, reduction in scope and cancellation of projects;
o The stage of completion of existing projects and/or their
termination;
o Our ability to move employees quickly from completed projects to new
engagements;
o The introduction of new services by us or our competitors;
o Changes in pricing policies by us or our competitors;
o Our ability to manage costs, including personnel costs,
support-services costs and severance costs;
o Acquisition and integration costs related to possible acquisitions
of other businesses.
o Changes in estimates, accruals and payments of variable compensation
to our employees; and
o Global economic and political conditions and related risks,
including acts of terrorism.
We may not be able to raise additional funds in the future.
We may, in the future, require funds to expand our business or to make
acquisitions. We have no commitment by any person to provide us with funds if we
require funds. We cannot assure you that we will be able to raise any funds that
we may require, and, if we are able to raise funds, the terms on which we raise
funds may result in significant dilution to you.
No Dividends.
We have not paid any dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future. We intend to retain any
earnings to finance the growth of our business and to pay the deferred payments
of $8.25 million owed to Elizabeth Plaza, and we may never pay cash dividends.
-11-
Risks Concerning our Securities.
Because our stock is not currently traded, we cannot predict when or whether an
active market for our common stock will develop.
Our common stock is not traded on any trading market, and we do not have a
significant public float. If our common stock were to trade on the OTC Bulletin
Board or the Pink Sheets, we cannot assure you that any significant market for
our stock would develop. In the absence of an active trading market, you may
have difficulty buying and selling or obtaining market quotations for our stock;
the market visibility for our stock may be limited, and the lack of visibility
for our common stock may have a depressive effect on the market price for our
common stock.
Our stock price may be affected by our failure to meet projections and estimates
of earnings developed either by us or by independent securities analysts.
Our operating results may fall below the expectations of securities
analysts and investors as well as our own projections. In this event, the market
price of our common stock would likely be materially adversely affected.
The registration and sales of common stock being sold pursuant to this
prospectus may have a depressive effect upon the market for our common stock.
We have a nominal public float, and the shares of common stock being
offered by this prospectus constitute substantially all of the outstanding
shares of our common stock. If the selling stockholders sell a significant
number of shares of common stock, the market price of our common stock may
decline. Accordingly, the mere filing of the registration statement of which
this prospectus is part could have a significant depressive effect on our stock
price which could make it difficult both for us to raise funds from other
sources and for the public stockholders to sell their shares. Further, if the
registration statement is not declared effective in a timely manner, we may be
required to issue additional shares of series A preferred stock or common stock
as liquidated damages.
The exercise of outstanding options and warrants may have a dilutive effect on
the price of our common stock.
To the extent that outstanding stock options and warrants are exercised,
dilution to our stockholders will occur. Moreover, the terms upon which we will
be able to obtain additional equity capital may be adversely affected, since the
holders of the outstanding options and warrants can be expected to exercise them
at a time when we would, in all likelihood, be able to obtain any needed capital
on terms more favorable to us than the exercise terms provided by the
outstanding options and warrants.
Because we are not subject to compliance with rules requiring the adoption of
certain corporate governance measures, our stockholders have limited protections
against interested director transactions, conflicts of interest and similar
matters.
The Sarbanes-Oxley Act of 2002, as well as rule changes proposed and
enacted by the Commission, the New York and American Stock Exchanges and the
Nasdaq Stock Market as a result of Sarbanes-Oxley, require the implementation of
various measures relating to corporate governance. These measures are designed
to enhance the integrity of corporate management and the securities markets and
apply to securities which are listed on those exchanges or the Nasdaq Stock
Market. Because we are not presently required to comply with many of the
corporate governance provisions and because we chose to avoid incurring the
substantial additional costs associated with such compliance any sooner than
necessary, we have not yet adopted all of these measures. As of the date of this
memorandum, we are not in compliance with requirements relating to the
distribution of annual and interim reports, the holding of stockholders meetings
and solicitation of proxies for such meeting and requirements for stockholder
approval for certain corporate actions. Until we comply with such corporate
governance measures, regardless of whether such compliance is required, the
absence of such standards of corporate governance may leave our stockholders
without protections against interested director transactions, conflicts of
interest and similar matters and investors may be reluctant to provide us with
funds necessary to expand our operations.
-12-
FORWARD-LOOKING STATEMENTS
Statements in this prospectus may be "forward-looking statements."
Forward-looking statements include, but are not limited to, statements that
express our intentions, beliefs, expectations, strategies, predictions or any
other statements relating to our future activities or other future events or
conditions. These statements are based on current expectations, estimates and
projections about our business based, in part, on assumptions made by
management. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may, and are likely to, differ materially
from what is expressed or forecasted in the forward-looking statements due to
numerous factors, including those described above and those risks discussed from
time to time in this prospectus, including the risks described under "Risk
Factors," and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in this prospectus and in other documents which we file
with the Securities and Exchange Commission. In addition, such statements could
be affected by risks and uncertainties related to demand for our services, our
ability to diversify our client base and enter new markets for our services,
market and customer acceptance, our ability to raise any financing which we may
require for our operations, competition, government regulations and
requirements, pricing and development difficulties, our ability to make
acquisitions and successfully integrate those acquisitions with our business, as
well as general industry and market conditions and growth rates, and general
economic conditions. Any forward-looking statements speak only as of the date on
which they are made, and we do not undertake any obligation to update any
forward-looking statement to reflect events or circumstances after the date of
this current report.
USE OF PROCEEDS
We will not receive any proceeds from the sale by the selling stockholders
of their common stock. If the selling stockholders exercise any warrants, we
will receive the amount of the exercise price. The maximum total exercise price
is approximately $11 million, which we would receive only if all of the warrants
were exercised at their present exercise price. Any proceeds which we receive
from the exercise of the warrants would be used for working capital and general
corporate purposes.
-13-
SELLING STOCKHOLDERS
The following table sets forth the names of the selling stockholders, the
number of shares of common stock owned beneficially by the selling stockholders
as of February 28, 2006, the number of shares of our common stock that may be
offered by the selling stockholders pursuant to this prospectus, the number of
shares owned by the selling stockholders after completion of the offering.
Except for San Juan Holdings, Inc., which will beneficially own 3,100,000 shares
after completion of this offering, no selling stockholder will own more than 1%
of our outstanding common stock after the sale of shares owned by such selling
stockholder. The percentages of common stock owned by each selling stockholder
is based on the conversion of all of the outstanding series A preferred stock on
April __, 2006 and the sale of the shares issuable upon exercise of warrants
held by such selling stockholder. After completion of the sale of the shares
owned by San Juan Holdings and offered by this prospectus, San Juan Holdings
would beneficially own 3,100,000 shares of common stock, representing 14.9% of
our outstanding common stock. The table and the other information contained
under the captions "Selling Stockholders" and "Plan of Distribution" has been
prepared based upon information furnished to us by or on behalf of the selling
stockholders.
Shares Shares owned
Beneficially Shares Being after
Name Owned Sold offering
----- ------------ ------------ ------------
Venturetek LP (1) 4,695,573 4,695,173 400
Barron Partners, LP(2) 4,084,800 4,084,800 --
Fame Associates(3) 1,531,800 1,531,800 --
Pentland USA Inc.(4) 1,531,800 1,531,800 --
San Juan Holdings, Inc.(5) 4,631,800 1,531,800 3,100,000
LDP Family Partnership LP (6) 1,398,144 1,158,144 240,000
Ruki Renov (7) 884,345 880,345 4,000
Lakeside Partners LLC (8) 588,896 586,896 2,000
Esther Stahler (9) 577,248 571,248 6,000
Academia Nuestra Senora de la Providencia(10) 510,600 510,600 --
Fernando Lopez 510,600 510,600 --
Harry Edelson 510,600 510,600 --
Juan H. Vidal 510,600 510,600 --
Kema Advisors, Inc. (11) 510,600 510,600 --
Manuel Matienzo 510,600 510,600 --
Melvyn Weiss 510,600 510,600 --
SDS Capital 510,600 510,600 --
Wilfredo Ortiz 510,600 510,600 --
Brinkley Capital Limited (12) 357,420 357,420 --
Albert Milstein 255,300 255,300 --
David Jordan 229,770 229,770 --
Heller Capital Investments, LLC (13) 204,240 204,240 --
Jay Fialkoff 204,440 204,240 200
Stephen Wien 204,240 204,240 --
Arthur Falcone 153,180 153,180 --
Edward Falcone 153,180 153,180 --
Silverman & Roberts 44 Pipe LLC (14) 153,180 153,180 --
Nahum Shar 127,650 127,650 --
Richard Molinsky 102,120 102,120 --
Alan Bresler 51,060 51,060 --
-14-
Shares Shares owned
Beneficially Shares Being after
Name Owned Sold offering
----- ------------ ------------ ------------
Ben Greszes 51,060 51,060 --
Hendeles Grandchildren Trust #2 dated 12/23/93 (15) 51,060 51,060 --
Hendeles Grandchildren Trust dated 1/1/89 (15) 51,060 51,060 --
Hendeles Living Trust(15) 51,060 51,060 --
Herschel Kulefsky 51,060 51,060 --
Jay Kestenbaum 51,060 51,060 --
Nathan Eisen 51,060 51,060 --
Ari Renov 48,299 46,299 2,000
Eli Renov 48,299 46,299 2,000
Jill Renov 47,299 46,299 1,000
Kenneth Renov 48,299 46,299 2,000
Tani Renov (16) 50,299 46,299 4,000
Tova Katz (17) 53,299 46,299 7,000
(1) Mr. David Selengut, the manager of TaurusMax LLC, which is the general
partner of Venturetek, LP. has sole voting and dispositive power over the
shares beneficially owned by Venturetek. The shares beneficially owned by
Venturetek include 200 shares of common stock held by Mr. Selengut and 200
shares held by Mr. Selengut's wife. Mr. Selengut disclaims beneficial
ownership of the shares held by his wife.
(2) Mr. Andrew B. Worden, president of the general partner of Barron Partners,
has sole voting and dispositive power over the shares beneficially owned
by Barron Partners.
(3) FBE Limited, whose general partner is Abraham H. Fruchthandler, has voting
and dispositive power over the shares beneficially owned by Fame
Associates.
(4) Pentland USA, Inc. is owned by Pentland Brands, which is controlled by
Stephen Rubin, who has voting and dispositive power over the shares
beneficially owned by Pentland USA.
(5) Messrs. Ramon Dominguez and Addison M. Levi III have voting and
dispositive power over the shares beneficially owned by San Juan Holdings,
Inc.
(6) Laya Perlysky, as general partner, has voting and dispositive power over
the shares beneficially owned by LDP Family Partnership LP. The number of
shares beneficially owned by LDP Family Partnership (a) includes 240,000
shares owned by Krovim LLC, of which Dov Perlysky, the husband of Laya
Perlysky, is the managing member of the manager and (b) does not include
960,000 shares of common stock issuable upon exercise of warrants held by
Krovim LLC, which warrants are not exercisable until the earlier of (i)
September 1, 2007 or (ii) the date the closing price of the Company's
common stock equals or exceeds $0.50 per share for 10 consecutive trading
days on the OTC Bulletin Board, Nasdaq, New York Stock Exchange or other
exchange. Ms. Perlysky disclaims beneficial ownership of the shares and
warrants held by Krovim LLC.
(7) Includes a total of 2,000 shares held by Ms. Renov as custodian for her
two minor children. Ms. Renov disclaims beneficial ownership of these
shares.
(8) Jamie Stahler, as the managing member, has the voting and dispositive
power of over shares beneficially owned by of Lakeside Partners, LLC. The
shares beneficially owned by Lakeside Partners includes 2,000 shares held
by Mr. Stahler.
(9) Includes a total of 4,000 shares held by Ms. Stahler as custodian for her
four minor children. Ms. Stahler disclaims beneficial ownership of these
shares.
(10) Baudilio Merino, as president, has the voting and dispositive power over
the shares beneficially owned by Academia Nuestra Senora de la
Providencia.
(11) Kirk Michel, as managing director, has voting and dispositive power over
the shares beneficially owned by Kema Advisors, Inc.
-15-
(12) Comercio e Industria Multiformas Ltda., whose majority shareholder is
Emanuel Wolff, has the voting and dispositive power over the shares
beneficially owned by Brinkley Capital Limited.
(13) Ron Heller, as the controlling parter, has voting and dispositive power
over the shares beneficially owned by Heller Capital Investments, LLC.
(14) Marc Roberts, as the controlling party, has voting and dispositive power
over the shares beneficially owned by Silverman & Roberts 44 Pipe LLC.
(15) Moise Hendeles, as trustee, has voting and dispositive power over the
shares beneficially owned by Hendeles Grandchildren Trust #2 dated
12/23/93, Hendeles Grandchildren Trust dated 1/1/89 and Hendeles Living
Trust.
(16) Includes 2,000 shares held by Mr. Renov's wife. Mr. Renov disclaims
beneficial ownership of these shares.
(17) Includes a total of 3,000 shares held by Ms. Katz as custodian for her
three minor children and 2,000 shares held by her husband. Ms. Katz
disclaims beneficial ownership of these shares.
None of the selling stockholders has, or within the past three years has
had, any position, office or material relationship with us or any of our
predecessors or affiliates except as follows:
In consideration for investment banking services rendered by San Juan
Holdings, as advisor to Plaza and Elizabeth Plaza, we issued to San Juan
Holdings 600,000 shares of common stock and warrants to purchase 2,500,000
shares of common stock at an exercise price of $.06 per share. In connection
with the January 2006 private placement in which we issued the shares of series
A preferred stock to the selling stockholders, we paid RD Capital Group, an
affiliate of San Juan Holdings, $195,000 for commissions and non-accountable
expense allowance and we issued to RD Capital Group warrants to purchase 275,724
shares of common stock. RD Capital Group waived its commission and
non-accountable expense allowance on the securities purchased by San Juan
Holdings, and, as a result, the purchase price of the securities purchased by
San Juan Holdings was $652,500 rather than $750,000. The warrants have an
exercise price of $.7344 per share and a term of three years, and the holders of
the warrants have piggyback registration rights commencing six months after the
effective date of the registration statement of which this prospectus is a part.
Dov Perlysky is a director and, prior to the acquisition of Plaza, Mr.
Perlysky was the sole director and our sole executive officer.
Kirk Michel is a director. Mr. Michel was elected as a director at the
time of the closing of the acquisition of Plaza.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, donees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions or by gift. These sales may be made
at fixed or negotiated prices. The principal market for the common stock is the
[market]. The selling stockholders may use any one or more of the following
methods when selling or otherwise transferring shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
-16-
o block trades in which a broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
o sales to a broker-dealer as principal and the resale by the
broker-dealer of the shares for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions, including gifts;
o covering short sales made after the date of this prospectus.
o pursuant to an arrangement or agreement with a broker-dealer to sell
a specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method of sale permitted pursuant to applicable: law.
The selling stockholders may also sell shares pursuant to Rule 144 or Rule
144A under the Securities Act, if available, rather than pursuant to this
prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
A selling stockholder may from time to time pledge or grant a security
interest in some or all of the shares or common stock or warrant owned by them
and, if the selling stockholder defaults in the performance of the secured
obligations, the pledgees or secured parties may offer and sell the shares of
common stock from time to time under this prospectus, or under an amendment to
this prospectus under Rule 424(b)(3) or other applicable provision of the
Securities Act of 1933 amending the list of selling stockholders to include the
pledgee, transferee or other successors in interest as selling stockholders
under this prospectus.
In connection with the sale of our common stock or interests therein, the
selling stockholders may enter into hedging transactions with broker-dealers or
other financial institutions which may in turn engage in short sales of our
common stock in the course of hedging the positions they assume. The selling
stockholders may, after the date of this prospectus, also sell shares of our
common stock short and deliver these securities to close out their short
positions, or loan or pledge their common stock to broker-dealers that in turn
may sell these securities. The selling stockholders may also enter into option
or other transactions with broker-dealers or other financial institutions or the
creation of one or more derivative securities which require the delivery to such
broker-dealer or other financial institution of shares offered by this
prospectus, which shares such broker-dealer or other financial institution may
resell pursuant to this prospectus (as supplemented or amended to reflect such
transaction).
The selling stockholders also may transfer the shares of common stock in
other circumstances, in which case the transferees, pledgees or other successors
in interest will be the selling beneficial owners for purposes of this
prospectus.
-17-
In the event of a transfer by a selling stockholder of the warrants or the
common stock other than a transfer pursuant to this prospectus or Rule 144 of
the SEC, we may be required to amend or supplement this prospectus in order to
name the transferee as a selling stockholder.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling stockholders have
informed us that they do not have any agreement or understanding, directly or
indirectly, with any person to distribute the common stock.
Because the selling stockholders may be deemed to be "underwriters" within
the meaning of the Securities Act, they will be subject to the prospectus
delivery requirements of the Securities Act. Federal securities laws, including
Regulation M, may restrict the timing of purchases and sales of our common stock
by the selling stockholders and any other persons who are involved in the
distribution of the shares of common stock pursuant to this prospectus. None of
the selling stockholders have an agreement or understanding with any
broker-dealer with respect to the sale of their shares. However, RD Capital
Group, which is an affiliate of San Juan Holdings, may sell shares being offered
by San Juan Holdings. Selling stockholders who are broker-dealers or affiliates
of broker-dealers will be deemed underwriters in connection with their sales.
We are required to pay all fees and expenses incident to the registration
of the shares. We have agreed to indemnify the selling stockholders against
certain losses, claims, damages and liabilities, including liabilities under the
Securities Act.
MARKET FOR COMMON STOCK AND STOCKHOLDER MATTERS
There is no market for our common stock prior.
As of March 15, 2006, we had approximately 80 stockholders of record. At
that date, we had 2,301,000 shares of common stock outstanding, of which
1,750,000 were held by Elizabeth Plaza (1,150,000 shares) and San Juan Holdings
(600,000). Of the remaining 551,000 shares of common stock, 487,600 shares are
subject to an escrow agreement and cannot be released from escrow until the
earlier of September 1, 2007 or the date on which the closing price of a share
of our common stock is at least $1.00 for ten consecutive trading days on the
OTC Bulletin Board, the NASDAQ Stock Market or the American or New York Stock
Exchange. The remaining 64,200 shares of common stock were eligible for sale
pursuant to Rule 144.
In addition to the warrants held by the selling stockholders, warrants to
purchase 5,539,892 shares of common stock were outstanding as of March 15, 2006.
The holders of all of such warrants have registration rights with respect to the
underlying shares of common stock. The Company intends to register the 2,500,000
shares issuable pursuant to the 2006 long-term incentive plan on a Form S-8
following stockholder approval of the plan.
We have not paid dividends on our common stock. We plan to retain future
earnings, if any, for use in our business. We do not anticipate paying dividends
on our common stock in the foreseeable future.
-18-
Equity Compensation Plan Information
The following table summarizes the equity compensation plans under which
our securities may be issued as of January 31, 2006.
Number of securities to be Weighted-average Number of securities
issued upon exercise of exercise price of remaining available for
outstanding options and outstanding options and future issuance under
Plan Category warrants warrants equity compensation plans
------------- -------------------------- ----------------------- -------------------------
Equity compensation plans approved by -0- -- --
security holders
Equity compensation plan not approved 1,475,000 $.7344 1,025,000
by security holders
The 2006 long-term incentive plan was approved by the board of directors,
subject to stockholder approval, and the outstanding options are subject to
stockholder approval of the plan. The plan has not yet been submitted to the
stockholders for their approval. On or about March 27, 2006, we mailed an
information statement relating to obtaining stockholder consent to our
stockholders. The action to be taken pursuant to the information statement
include approval of the 2006 long-term incentive plan.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our results of operations and financial
condition should be read in conjunction with our financial statements and the
related notes appearing elsewhere in this prospectus. 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."
Overview
We are a validation and compliance consulting service firm in Puerto Rico.
The validation and compliance consulting service market in Puerto Rico consists
of local validation and compliance 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 and validation consulting services. We have been successful in
utilizing our favorable market reputation to secure contracts with many major
drug manufacturers throughout Puerto Rico. We market our services to
pharmaceutical, chemical, biotechnology and medical devices and allied products
companies in Puerto Rico, the United States and Europe through their Puerto Rico
operations. Our staff includes more than 140 experienced engineering and life
science professionals, and includes former quality assurance managers or
directors, and experienced and well-trained professionals with masters and
doctorates in health sciences and engineering.
Our revenue is derived from time and materials contracts, where the
clients are charged for the time, materials and expenses incurred on a
particular project, from fixed-fee contracts or from "not to exceed" contracts
in which the value of the contract to us cannot exceed a stated amount. For time
and materials contracts, our revenue is principally a function of the number of
its compliance and validation professional employees and the volume of hours
billed per professional. To the extent that our revenue is based on fixed-fee or
"not to exceed" contracts, our ability to operate profitably is dependent upon
our ability to estimate accurately the costs that we will incur on a project. If
we underestimate our costs on any contract, we would sustain a loss on the
contract.
-19-
We believe the most significant factors to achieving future business
growth are our ability to (a) continue to provide quality value-added validation
and compliance services to our clients in the Puerto Rico marketplace; (b)
recruit and retain highly educated and experienced validation and compliance
professionals; (c) further expand our products and services to address the
expanding compliance needs of the its clients; and (d) expand our market
presence into the United States, Latin America and Europe in order to respond to
the international validation and compliance demands of our clients.
Our business has been dependent upon a small number of clients. During the
three months ended January 31, 2006 and the years ended October 31, 2005 and
2004, a very small number of clients accounted for a disproportionately large
percentage of our revenue. For the three months ended January 31, 2006, three
customers accounted for approximately 68.1% of revenue. For the year ended
October 31, 2005, two of these three customers accounted for approximately 62.4%
of revenue, and for the year ended October 31, 2004, these two customers
accounted for approximately 65.0% of revenue. The loss of or significant
reduction in the scope of work performed for any major customer could impair our
ability to operate profitably. In particular, the Company had a contract with
its largest customer which expired on December 31, 2005. Although this contract
was extended through March 2006, the level of business has significantly
declined from the prior year.
On January 9, 2006, we acquired, for $300,000, from the individual who is
now our executive vice president and chief operating officer, certain assets of
a United States based company that performs consulting services for the
pharmaceutical and biotech industries. These assets include a client list and a
validation compliance service business. One-third of the purchase price was paid
in January 2006, one-third is payable on March 31, 2006 and one-third is payable
on June 30, 2006. We also hired nine former employees of the business. This
acquisition was made pursuant to our strategy to expand our operations beyond
Puerto Rico and Puerto Rico businesses with a view to lessening our dependence
upon a small number of Puerto Rico pharmaceutical companies. Revenues from these
operations for the quarter ended January 31, 2006 were not significant, and we
cannot give assurance that any significant revenues will be derived from these
operations.
The principal components of our costs of revenue are employee compensation
(salaries, wages, taxes and benefits) and expenses relating to the performance
of the services. We face increasing labor costs which we seek to pass on to our
customers through increases in our rates. However, there is often a delay
between the increase in our costs and the increases in our billing rate, which
may result in a reduced gross margin during that period. Although we have has
been successful in the past in being able to increase our billing rates to
reflect our increased labor costs, we cannot give any assurance that we will
continue to be able to do so.
During the three months ended January 31, 2006, our total expenses include
approximately $211,000 of non-recurring financial advisory, legal and accounting
transaction expenses directly related to the acquisition of Plaza.
As a condition to closing, Plaza was required to have a net tangible book
value of not less than $5,500,000, of which at least $2,000,000 was to be in
cash, as of November 30, 2005, with the excess to be paid to Elizabeth Plaza,
the selling stockholder. Based upon a preliminary determination, the amount
currently due to Ms. Plaza under this provision is estimated at $75,000, and
additional payments may be due when a final determination is made.
-20-
As part of the consideration for the acquisition of Plaza, we are required
to make three payments, each in the amount of $2,750,000, to Elizabeth Plaza on
January 25, 2007, 2008 and 2009. The first payment, net of imputed interest, is
a current liability at January 31, 2006, and, together with the costs incurred
by us in connection with the acquisition of Plaza and the additional cash
payment due Ms. Plaza, is a significant factor in the reduction in our working
capital at January 31, 2006, as discussed under "Liquidity and Capital
Resources."
Critical Accounting Policies and Estimates
On January 25, 2006, we acquired Plaza in a transaction which is accounted
for as a reverse acquisition, with Plaza being deemed the accounting acquirer.
Pursuant to the acquisition agreement, we paid Elizabeth Plaza, the sole
stockholder of Plaza, $10,000,000 plus 1,150,000 shares of our common stock. In
addition, Ms. Plaza will receive three payments, each in the amount of
$2,750,000, payable on January 25, 2007, 2008 and 2009.
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles ("GAAP") in
the United States. We believe the following are the critical accounting policies
that impact the financial statements, some of which are based on management's
best estimates available at the time of preparation. Actual experience may
differ from these estimates.
Cash and cash equivalents - For purposes of the statements of cash flows, cash
and cash equivalents include liquid investments with original maturities of
three months or less.
Revenue Recognition - We recognize revenues in the month when services are
rendered to our clients. In the case of fixed-fee contracts, revenue is
recognized based on the percentage that the services rendered bears to the
estimated services to be performed over the contract.
Bad Debt - Bad debts are 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.
Property and Equipment -- Property and equipment is stated at cost. Depreciation
is provided using the straight-line basis over the estimated useful lives of the
assets. Major renewals and betterments that extend the life of the assets are
capitalized, while expenditures for repairs and maintenance are expensed when
incurred.
Income Taxes -- We elected from our inception until January 25, 2006, to be
covered under the provisions of Subchapter N of Subtitle A of the Puerto Rico
Internal Revenue Code (the "Puerto Rico Code"), which is similar to Subchapter S
of the Internal Revenue Code in that we pay no income taxes since the taxable
income is taxed to our stockholder. Under the provisions of Puerto Rico Code, we
pays the Puerto Rico Secretary of Treasury, on behalf of its stockholder, an
amount equal to 33% of our taxable income. These payments, and any income tax
withheld, are included in the amount of distributions to stockholder in our
financial statements.
-21-
Commencing with the acquisition of Plaza on January 25, 2006, the Company will
be tax based on its taxable income under the applicable provisions of the Puerto
Rico Code and the Internal Revenue Code. The financial statements for the three
months ended January 31, 2006 and 2005 and the years ended October 31, 2005 and
2004 reflect a provision for income taxes based on the applicable provisions of
the Puerto Rico Code, since the income was earned in Puerto Rico.
Concentration of credit risk -- Financial instruments which potentially subject
us to concentrations of credit risk consist principally of cash deposits and
trade accounts receivable. We maintain our bank account in a high quality
financial institution. While we attempt to limit any financial exposure, our
deposit balances frequently exceed federally insured limits; however, no losses
have been experienced on this account.
Our revenues are concentrated in the pharmaceutical industry in the island
of Puerto Rico. Approximately $2.3 million, or 68.1%, of the revenues in the
January 31, 2006 quarter were generated by three customers. Two of these
customers accounted for revenue of approximately $3.0 million, or 63.4%, of
revenue for the January 31, 2005 quarter. The same customers had an outstanding
balance at January 31, 2006 representing 63.4% of the total receivables.
Approximately 62% and 61% of the revenues in years ended October 31, 2005 and
2004, respectively, were generated by two of these customers. The same customers
had an outstanding balance at October 31, 2005 and 2004 representing 63% and 60%
of the total receivables, respectively. We assess the financial strength of our
clients and, as a consequence, believe that our trade accounts receivable credit
risk exposure is limited.
Retirement Plan -- We adopted a qualified profit sharing plan in January 2002
(amended on November 30, 2003) in accordance with the applicable provisions of
the Puerto Rico Code, for employees who meet certain age and service period
requirements. We make contributions to this plan as required by the provisions
of the plan document, amounting to $7,537 for the January 31, 2006 quarter,
$35,908 for the year ended October 31, 2005 and $29,467 for the year ended
October 31, 2005.
Stock Option Plan --During the year ended October 31, 2004, we granted stock
options with an exercise price equal to the book value of the common stock as of
October 31, 2003, which we deemed to be the fair value of our common stock.. The
options expired ten years from the date of grant and generally vested over a
three-year period. In connection with our acquisition of Plaza, these options
were cancelled and we granted the option holders options to purchase an
aggregate of 776,186 shares of common stock and we granted options to purchase
an additional 623,814 shares of common stock to employees of Plaza, including
those whose options were cancelled, in addition to options to purchase 75,000
shares of common stock which were granted to our directors. All of our
outstanding options have an exercise price of $.7344, a term of five years and
are exercisable in installments. The grants by us are subject to stockholder
approval of the plan pursuant to which the options were issued.
Fair value of financial instruments - The carrying value of our financial
instruments (excluding obligations under capital leases): cash, accounts
receivable, accounts payable and accrued liabilities, are considered reasonable
estimates of fair value due to short period to maturity. We believe, based on
current rates, that the fair value of its obligations under capital leases
approximates the carrying amount.
Use of estimates - The preparation of 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 financial statements, and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
-22-
New Accounting Pronouncements
In March 2005, the FASB issued FASB Interpretation No. 47 "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the
term "conditional asset retirement obligation" as used in FASB Statement No. 143
"Accounting for Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within the
control of the entity. The obligation to perform the asset retirement activity
is unconditional even though uncertainty exists about the timing and (or) method
of settlement. Thus, the timing and (or) method of settlement may be conditional
on a future event. Accordingly, an entity is required to recognize a liability
for the fair value of a conditional asset retirement obligation if the fair
value of the liability can be reasonably estimated. The fair value of a
liability for the conditional asset retirement obligation should be recognized
when incurred, generally upon acquisition, construction or development and (or)
through the normal operation of the asset. Uncertainty about the timing and (or)
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. FASB Statement 143 acknowledges that in some cases, sufficient
information may not be available to reasonably estimate the fair value of an
asset obligation. This interpretation also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. We do not expect that the application of this standard
will have any effect on our results of operations or financial condition.
In December 2004, the FASB issued FASB Statement No. 153 "Exchanges of
Non-Monetary Transactions - an amendment of APB Opinion No. 29." The guidance in
APB Opinion No. 29, "Accounting for Non-monetary Transactions," is based on the
principle that exchanges of non-monetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however
included certain exceptions to that principle. This Statement amends Opinion 29
to eliminate the exception for non-monetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of non-monetary
assets that do not have commercial substance. A non-monetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. We do not expect that the
adoption of FAS-I53 will have a material impact on our results of operations and
financial position.
In December 2004, the FASB issued a revision of FASB Statement No. 123
"Accounting for Stock-Based Compensation." This Statement, No. 123R, supersedes
SPB Opinion No. 25 "Accounting for Stock Issued to Employees" and its related
implementation guide. This Statement establishes standards for the accounting
for transactions in which an entity exchanges instruments for goods and
services. It also addresses transactions in which an entity incurs in
liabilities in exchange of goods and services that are based on the fair value
of the entity's equity instruments. This Statement focuses primarily on
accounting for transactions in which an entity obtains employees services in
share-based payment transactions. We are required to comply with Statement 123R
beginning with the first interim or annual reporting period of the first fiscal
year that begins after December 15, 2005. As a result of the implementation of
Statement 123R, the grant of options will be treated as compensation based on
the value of the option, which will increase our selling, general and
administrative expenses.
-23-
In May 2005, the FASB issued FASB Statement No. 154 "Accounting for
Changes and Errors Corrections." This Statement replaces APB Opinion No. 20
"Accounting Changes" and FASB Statement No. 3 "Reporting Accounting Changes in
Interim Financial Statements," and changes the requirements for the accounting
for and reporting of a change in accounting principle. This Statement requires
retrospective application to prior periods' financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. When its is
impracticable to determine the period specific effects of an accounting change
on one or more individual prior periods presented, this Statement requires that
the new accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which retroactive
application is practicable and that a corresponding adjustment be made to the
opening balance of retained earnings (or other appropriate components of equity
or net assets in statement of financial position) for that period rather than
being reported in an income statement. When it is impracticable to determine the
cumulative effect of applying a change in accounting principle to all prior
periods, this Statement requires that the new accounting principle be applied as
if it were adopted prospectively from the earliest date practicable. We do not
expect that the adoption of FAS-154 will have a material impact on our results
of operations and financial position.
Results of Operations
The following table sets forth our statements of operations for the three
months ended January 31, 2006 and 2005 and the years ended October 31, 2005 and
2005, in dollars (dollars in thousands) and as a percentage of revenue:
Three Months Ended January 31, Year Ended October 31,
------------------------------ ----------------------------
2006 2005 2005 2004
---- ---- ---- ----
Revenue $ 3,410 100.0% $ 4,695 100.0% $17,413 100.0% $16,930 100.0%
Cost of revenue 2,033 59.6% 2,657 56.6% 9,401 54.0% 9,362 55.3%
Gross profit 1,377 40.4% 2,038 43.4% 8,012 46.0% 7,568 44.7%
Selling, general and 620 18.2% 458 9.8% 1,531 8.8% 1,775 10.5%
administrative costs
Depreciation and 30 0.9% 20 0.4% 90 0.5% 50 0.3%
amortization
Income before income 727 21.3% 1,559 33.2% 6,390 36.7% 5,743 33.9%
taxes
Provision for income 357 10.5% 611 13.0% -- -- -- --
taxes(1)
Net income(1) 370 10.8% 948 20.2% 6,390 36.7% 5,743 33.9%
-------------
(1) Because we were treated as an N Corporation under the Puerto Rico Internal
Revenue Code, our income was taxes to our stockholder, and we did not pay income
tax. If income tax were paid at the statutory rate, the provision for income tax
and net income for the years ended October 31, 2005 and 2004 would be as
follows:
Year Ended October 31,
----------------------
2005 2004
---- ----
Provision for income tax 2,492 14.3% 2,240 13.2%
Net income 3,898 22.4% 3,505 20.7%
Three Months Ended January 31, 2006 and 2005
Revenues. Revenues for the first quarter 2006 were $3.4 million, a decrease of
approximately $1.3 million, or 27.4%, compared to first quarter 2005 revenues.
This decline reflected a decrease in revenue of approximately $1.3 million in
the quarter ended January 31, 2006 from the comparable quarter of the prior year
from the two companies which were our two largest customers in both the quarter
ended January 31, 2005 and the year ended October 31, 2005. This decline is
revenue from our largest customers reflected an overall decline in revenue for
the quarter, which was partially offset by revenues of approximately $630,000
from a customer that generated revenue of $7,000 in the January 31, 2005
quarter.
-24-
Cost of Revenues; Gross Margin. Our gross margin decreased from 43.4% to 40.4%
during the first quarter of 2006 as compared to the first quarter of 2005. The
reduction of gross margin was attributable to increased labor costs.
Total Expenses. Total expenses were approximately $620,000 during first quarter
of 2006, an increase of approximately $172,000, or 35.9%, from first quarter of
2005. The increase in total expenses was the result of approximately $211,000 of
non-recurring transaction expenses associated with the merger transaction.
Provision for Income Taxes. The increase in the provision for income tax as a
percentage of income before income taxes increased from 39.1% in the January 31,
2005 quarter to 49.1% in the January 31, 2006 quarter results from the effects
of a permanent difference between book income and tax income.
Net Income. As a result of our decline in revenues, combined with a lower gross
margin resulting from inefficiencies caused by the decline in revenue and the
increase in selling, general and administrative expenses, our net income for the
January 31, 2006 quarter decreased to approximately $370,000, or $.21 per share
(basic) and $.11 per share (diluted), a decline of approximately $579,000, or
61.04%, from net income approximately $948,000, or $.54 per share (basis and
diluted), for the January 31, 2005 quarter.
Years Ended October 31, 2005 and 2004
Revenues. Revenues for 2005 were $17.4 million, an increase of $500,000, or
2.8%, compared to 2004 revenues. The increase in revenue is attributable to
continued demand from existing customers and business from current new
customers.
Cost of Revenues. Cost of revenues was $9.4 million in 2005, an increase of
$38,941, or 0.4%, from 2004. Our gross profit and margin increased to $8.0
million and 46.0% for 2005 from $7.6 million and 44.7% in 2004. The increase in
our gross margin is attributable to better management and negotiation with
respect to our fixed-rate service contracts and the more efficient utilization
of our professional staff.
Selling, general and administrative Expenses. Our selling, general and
administrative expenses were $1.5 million in 2005, a decrease of $243,773,
13.7%, from 2004. The decrease in these expenses was due to a reduction in our
administrative staff in 2004, which affected the results of our operations in
2005, and efficiencies in our corporate and administrative management, including
a reduction in turnover.
Net Income. During the years ended October 31, 2005 and 2004, Plaza was taxed as
an N Corporation under the Puerto Rico Internal Revenue Code, which is similar
to the treatment of an S Corporation under the Internal Revenue Code.
Accordingly, there is no provision for income tax for either period. As a result
of foregoing, our net income increased to $6.4 million, or $3.65 per share
(basic and diluted), for the year ended October 31, 2005, as compared with net
income of $5.7 million, or $3.28 per share (basic and diluted) for the year
ended October 31, 2004. If income tax were paid at the statutory rate, our net
income would have been $3.9 million or $2.23 per share (basic and diluted), for
the year ended October 31, 2005 and $3.5 million, or $2.00 per share (basic and
diluted), for the year ended October 31, 2004.
-25-
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements,
including planned capital expenditures. At January 31, 2006, we had had working
capital of approximately $3.0 million, a decrease of $2.8 million from the
working capital at October 31, 2005 of $5.8 million. Although we generated
approximately $2.0 million from operations in the quarter ended January 31,
2006, this increase was offset by the current obligation of $2.75 million
payable to Elizabeth Plaza in connection with the acquisition of Plaza. We also
have long term obligations to Ms. Plaza for the payments of $2.75 million due in
January 2008 and 2009. In connection with the requirement that Plaza have a
tangible net worth of $5.5 million with at least $2.0 million in cash, with Ms.
Plaza receiving any excess, a current payment of $75,000 is due to Ms. Plaza and
an additional payment may be required, based upon a final determination in
accordance with the agreement. We raised gross proceeds of $11.75 million from
the sale of series A preferred stock and warrants, and used $10 million to pay
Elizabeth Plaza the cash portion of the purchase price of the Plaza stock and
most of the balance to pay offering expenses and closing expenses.
For the three months ended January 31, 2006 and the year ended October 31,
2005, we made cash distributions of approximately $500,000 and $8.0 million,
respectively, to or on behalf of Elizabeth Plaza.
Our primary cash needs consist of payment of compensation to its
professional employees, overhead expenses and payment to the Puerto Rico
Secretary of the Treasury in respect of income allocable to Ms. Plaza. The
Company has a line of credit of $250,000 secured by the personal guarantee of
our chief executive officer who, at the time the credit line was established,
was Plaza's sole stockholder. This line of credit bears interest at 2.00% over
the prime rate and was unused at January 31, 2006.
Management believes that based on current levels of operations and
anticipated growth, cash flows from operations, high quality customer
receivables will be sufficient to fund anticipated expenses and satisfy other
possible long-term contractual commitments for the next twelve months.
While uncertainties relating to competition, the industries and
geographical regions served by the Company and other regulatory matters exist
within the consulting services industry, management is not aware of any trends
or events likely to have a material adverse effect on liquidity or its financial
statements.
BUSINESS
We are a Puerto Rico-based company established in 1997 to offer consulting
services to the pharmaceutical, biotechnology and chemical manufacturing
industries. We were founded by Ms. Elizabeth Plaza after many years of hands on
experience in technical services, process validation programs, cleaning
procedures, validation, product and process transfers, process optimization, and
quality and regulatory compliance programs. We have successfully grown our
business operation by providing quality, value-added consulting services to the
major pharmaceutical manufacturing companies located throughout the island of
Puerto Rico. To a lesser extent, we also provide consulting services to Puerto
Rico companies operating in the United States and in Europe. We have a team of
more than 140 qualified professionals with in-depth experience, and we have been
designated as a preferred supplier by our major clients.
-26-
Our mission is to provide high quality services to the pharmaceutical and
related industries to maintain or improve their quality standards and
competitive value. We assist our clients in complying with regulations by
offering a full range of consulting services in the areas of validation and
qualification, technology transfer and post-approval changes, technical
documentation, environmental safety and occupational health,
microbiology/bio-control, process support and project management, compliance and
regulatory, training services and computer systems. We have utilized our market
reputation and name recognition to generate contracts with many major drug
manufacturers throughout Puerto Rico. We market our proprietary validation,
regulatory compliance and pharmaceutical technology consulting services to
Puerto Rico pharmaceutical, chemical (bulk manufacturing), biotechnology and
medical devices companies in Puerto Rico, the United States and Europe.
Our highly-trained and experienced engineering and life science
professionals include former FDA investigators, former quality assurance
managers or directors, and experienced and well-trained professionals with
masters and doctorates in health sciences and engineering. Its professional
staff is committed to our objective to provide a flexible, common sense and cost
effective approach to meet our client's needs, strategies and budget objectives.
We have established quality systems for our employees which include:
o Training Programs - including a Current Good Manufacturing Practices
exam prior to recruitment and quarterly refreshers;
o Recruitment Full Training Program - including employee manual, dress
code, time sheets and good projects management and control
procedures, job descriptions, and firm operating and administration
procedures;
o Safety Program - including OSHA and health (medical surveillance,
certificate of good health, drug screening, background checks
including conduct certificates, alcohol and smoke free policy);
o Code of Ethics - A code of ethics and business conduct is used and
enforced as one of the most significant company controls on personal
ethics.
In addition, we have implemented procedures to respond to client
complaints and customer satisfaction survey procedures. As part of our employee
performance appraisal annual process, our clients receive an evaluation form for
employee project performance feedback.
In January 2006, we acquired certain assets for a purchase price of
$300,000, from Mr. Mark Fazio. The acquired assets include a client list and a
validation compliance service business. One-third of the purchase price was paid
in January 2006, one-third is payable on March 31, 2006 and one-third is payable
on June 30, 2006. We have also hired nine former employees of the business.
-27-
Business Strategy and Objectives
We have a well-established and consistent relationship with the major
pharmaceutical, biotechnology and chemical manufacturing companies in Puerto
Rico. Our business strategy is based on a commitment to provide premium quality
and professional consulting services and reliable customer service to our
customer base. Our business strategy and objectives are as follows:
o Continue growth in consulting services in each technical service,
quality assurance, regulatory compliance, validation, engineering, safety and
environmental and manufacturing departments by achieving greater market
penetration from our marketing and sales efforts;
o Continue to enhance our technical consulting services through an
increase in professional staff through internal growth and acquisitions that
provides the best solutions to our customers' needs;
o Motivate our professionals and support staff by implementing a
compensation program which includes both individual performance and overall
company performance as elements of compensation;
o Create a pleasant corporate culture and emphasize operational safety and
timely service;
o Continue to maintain our reputation as a trustworthy and highly ethical
partner; and
o Efficiently manage our operating and financial costs and expenses.
Technical Consulting Services
We have established a reputation as a premier technical consulting
services firm to the pharmaceutical, biotechnology and chemical manufacturing
industries in Puerto Rico. These services include regulatory compliance,
validation, technology transfer, engineering, safety and environmental,
training, project management and process support. We have approximately 14 major
clients that represent the largest pharmaceutical, chemical manufacturing and
biotechnology companies in Puerto Rico. We attend exhibitions, conferences,
conventions and seminars as either exhibitors, sponsors or conference speakers.
Marketing
We conduct our marketing activities primarily within the local Puerto Rico
marketplace. We actively utilizes our project managers and leaders who are
currently managing consulting service contracts at various client locations to
also market consulting services to their existing and past client relationships.
Our senior management is also actively involved in the marketing process,
especially in marketing to major accounts. Our Senior management and staff also
concentrate on developing new business opportunities and focus on the larger
customer accounts (by number of professionals or dollar volume) and responding
to prospective customers' requests for proposals.
Principal Customers
Three customers accounted for 10% or more of our revenue during the three
months ended January 31, 2006, two of which also accounted for more than 10% of
our revenue during the three months ended January 31, 2005 and the years ended
October 31, 2005 and 2004. The following table sets forth information as to
revenue and percentage of revenue for these periods (dollars in thousands) for
our principal clients, all of which are major pharmaceutical companies:
-28-
Three Months Ended Three Months Ended Fiscal Year Ended Fiscal Year Ended
Customer January 31, 2006 January 31, 2005 October 31, 2005 October 31, 2004
-------- ---------------- ---------------- ---------------- ----------------
Client A $7,523 (43.3%) $2,140 (45.6%) $7,523 (43.3%) $8,075 (47.8%)
Client B 3,312 (19.1%) 839 (17.9%) 3,312 (19.1%) 2,911 (17.2%)
Client C 630 (18.5%) 7 (0.1%) 637 (3.7%) 118 (0.7%)
Competition
We are engaged in a highly competitive and fragmented industry. Some of
our competitors are, on an overall basis, larger than we or are subsidiaries of
larger companies, and therefore may possess greater resources than we.
Furthermore, because the technical professional aspects of our business do not
usually require large amounts of capital, there is relative ease of market entry
for a new entrant possessing acceptable professional qualifications.
Accordingly, we compete with regional, national, and international firms. Within
the Puerto Rico marketplace, certain competitors, including local competitors,
may possess greater resources than we do as well as better access to clients and
potential clients.
Our competitors for validation and compliance consulting services include
Fluor Corporation, Foster Wheeler Corp., Siemens, Skanska Pharmaceutical, and
Washington Group International, as well as smaller validation companies in
Puerto Rico and mainland United States.
Competition for validation and consulting services is based primarily on
reputation, track record, experience, quality of service and price. We believe
that we enjoy significant competitive advantages over other consulting service
firms because of our historical market share within Puerto Rico, brand name,
reputation and track record with many of the major pharmaceutical, biotechnology
and chemical manufacturing companies in Puerto Rico.
Because of recent consolidations in the pharmaceutical consulting business
in Puerto Rico, we are faced with an increasing number of larger companies that
offer a wider range of services than we and which also have better access to
capital. We believe that larger and better-capitalized competitors have enhanced
abilities to compete for both clients and skilled professionals. In addition,
one or more of our competitors may develop and implement methodologies that
result in affecting their, and thus, potentially, our profit.
The market of qualified and/or experienced professionals that are capable
of providing technical consulting services is very competitive and consists
primarily of our competitors as well as companies in the pharmaceutical,
chemical, biotechnology and medical devices industries who are our clients and
potential clients. In seeking qualified personnel we market our name recognition
in the Puerto Rico market, our reputation with our client, salary and benefits,
quality training and a low turnover of professional employees.
Intellectual Property Rights
We have no proprietary software or products. We rely on non-disclosure
agreements with our employees to protect the proprietary software and other
proprietary information of our clients. Any unauthorized use or disclosure of
this information could harm our business.
-29-
Personnel
We currently employ twelve administrative and technical staff employees
and approximately 140 technical consultants who provide consulting services to
several of our clients. Most of our technical consultants are employees,
although we do engage independent consultants on a contract basis. In general,
when we hire independent consultants, it is for specific projects where we do
not expect to require their services on a long-term basis. We may replace the
independent consultants with our own employees or hire them if we see a longer
term requirement. None of our employees are represented by a labor union, and we
consider our employee relations to be good.
Property
In November 2004, we entered into a three-year lease with Plaza
Professional Center, Inc., a company controlled by Ms. Elizabeth Plaza, for
facilities used as our main offices. The rent is $28,800 per annum. We also
lease approximately 1,600 square feet pursuant to a ten-year lease with Plaza
Professional Center, Inc., that expires in July 2013. The lease covers land in
Dorado, Puerto Rico, on which we maintain a training facility for our employees,
and provides for an annual rental of $12,000.
We also lease office space in Hilltown, Pennsylvania pursuant to a
month-to-month lease at a monthly rental of $2,750.
We believe that are present facilities are adequate to meet our needs and
that, if we require additional space, it is available on commercially reasonable
terms.
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to our directors
and executive officers.
Name Age Position
Elizabeth Plaza 42 President, chairman of the board and director
Mark Fazio 50 Executive vice president and chief operating officer
Nelida Plaza 38 Vice president and secretary
Antonio L. Martinez 37 Chief financial officer
Dov Perlysky 43 Director
Kirk Michel(1) 50 Director
Howard Spindel(1) 60 Director
Irving Wiesen(1) 51 Director
----------------
(1) Member of the audit and compensation committees
Elizabeth Plaza has been president and sole director of Plaza since 1997,
and she has been our president and chief executive officer since January 25,
2006. Ms. Plaza holds a B.S. in Pharmaceutical Sciences, magna cum laude, from
the School of Pharmacy of the University of Puerto Rico. She was the 2003
recipient of Ernst & Young's Entrepreneur of the Year Award in Health Science, a
40 under 40 Caribbean Business Award recipient in 2002 and the 2003 recipient of
the Puerto Rico Powerful Business Women Award. Ms. Plaza is a registered
Pharmacist.
Mark Fazio has been executive vice president and chief operating officer
since February 2006. Mr. Fazio is also the general partner of Fazio Enterprises,
LP, a commercial real estate and development company. From 2005 until February
2006, Mr. Fazio was general manager of Thermo-IVS compliance Services, a
division of Thermo Electron Corporation, a company that provided laboratory
products and services. From 2003 until 2005, Mr. Fazio was vice president and
general manager of Kendro-IVS Compliance Services, a division of Kendro LP,
which provided laboratory products and services. During From 1995 until 2003, he
was president and chief executive officer of IVS Inc., a company which is in a
business similar to ours.
-30-
Nelida Plaza has been vice president of operations of Plaza since January
2004 and has been our vice president and secretary since January 25, 2006. In
July 2000, Ms. Plaza joined Plaza as a project management consultant. Prior
thereto, she was a unit operations leader and safety manager at E.I. Dupont De
Nemours where she was involved with the development, support and audit of
environmental, safety and occupational health programs. Ms. Plaza holds a M.S.
in Environmental Management from the University of Houston in Clear Lake and a
B.S. in Chemical Engineering from the University of Puerto Rico.
Antonio L. Martinez has been our interim chief financial officer since
January 25, 2006. Mr. Martinez is a certified public accountant and, for the
past ten years, he has owned his own accounting firm. Mr. Martinez has performed
accounting services for Plaza since 2003.
Dov Perlysky has been our president and a director since 2004 and has been
the managing member of Nesher, LLC a private investment firm since 2000. On
January 25, 2006, in connection with the reverse acquisition, Mr. Perlysky
resigned as president and became a consultant to us. From 1998 until 2002, Mr.
Perlysky was a vice president in the private client group of Laidlaw Global
Securities, a registered broker-dealer. He received his B.S. in Mathematics and
Computer Science from the University of Illinois in 1985 and a Masters in
Management from the JL Kellogg Graduate School of Northwestern University in
1991. Mr. Perlysky is a director of Engex, Inc., a closed-end mutual fund.
Kirk Michel, a director since January 25, 2006, has been a managing
director of KEMA Advisors, Inc., a boutique financial advisory firm located in
Hillsborough, North Carolina since 2002. KEMA Advisors provides financial
advisory services to middle market companies and governmental agencies. From
1995 to 2002, Mr. Michel was the co-founder and a managing director of Bahia
Group Holdings, LLC which provided corporate finance, public finance and merger
and acquisition services to middle market companies and governmental agencies.
Mr. Michel holds a M.B.A. degree from the Columbia University Graduate School of
Business and a B.A. in Economics from Northwestern University.
Howard Spindel, a director since January 25, 2006, has been a consultant
with Integrated Management Solutions, a securities industry consulting and
recruitment firm which he founded, since 1985. In this capacity, he has also
acted as a financial and operations principal, general securities principal,
registered representative and options principal for several broker-dealers
during this period. He is also a director of Engex, Inc., a closed-end mutual
fund. Mr. Spindel received a B.S. in accounting from Hunter College.
Irving Wiesen, a director since January 25, 2006, has practiced as an
attorney specializing in food and drug law and regulation in the pharmaceutical
and medical device industries for more than twenty-five years. For more than the
past five years he has been of counsel to the New York law firms, Ullman,
Shapiro and Ullman, LLP and Cohen, Tauber, Spievack & Wagner. Prior to that, Mr.
Wiesen was a partner in the New York food and drug law firm, Bass & Ullman, and
also served as division counsel of Boehringer Ingelheim Pharmaceuticals, Inc.
Mr. Wiesen represents pharmaceutical, medical device and biotechnology companies
in all aspects of FDA regulation, corporate practice and compliance, litigation
and allied commercial transactions. Mr. Wiesen received his J.D. degree from the
New York University School of Law and holds an M.A. in English Literature form
Columbia University and a B.A., cum laude, from Yeshiva University.
-31-
Elizabeth Plaza and Nelida Plaza are sisters. There is no other family
relationship among our officers and directors.
Board Committees
The board of directors has two committees, the audit committee and the
compensation committee. Kirk Michel, Howard Spindel and Irving Wiesen, each of
whom is an independent director, are the members of both committees. Mr. Spindel
is the audit committee financial expert.
Executive Compensation.
SUMMARY COMPENSATION TABLE
Prior to the reverse acquisition, we did not pay any compensation to any
executive officers. Set forth below is information for Plaza's chief executive
officer and each of its other officers whose compensation exceeded $100,000 for
the fiscal year ended October 31, 2005.
Fiscal Other
Name and Position Year Salary Compensation
Elizabeth Plaza, president
and chief executive officer 2005 -- $281,500
Nelida Plaza, vice president 2005 $84,723 54,688
No bonuses were paid to any of the officers and no stock or other equity
compensation was provided to any of the officers. Other compensation for
Elizabeth Plaza represents payment of her child care and tuition, and other
family and other personal expenses. Other compensation for Nelida Plaza
represents $48,688 of child care and tuition and other family and personal
expenses and a $6,000 automobile allowance.
Prior to the reverse acquisition, Plaza was taxed as a Subchapter N
corporation under the Puerto Rico tax law, which is similar to treatment as an S
Corporation under the Internal Revenue Code. As a result, Elizabeth Plaza was
taxed on Plaza's income. We did not pay Elizabeth Plaza any salary during the
year ended October 31, 2005, since we distributed $8.0 million to Ms. Plaza with
respect to that year.
As a result of our acquisition of Plaza, Plaza's status as a Subchapter N
corporation terminated on January 25, 2006, the date of our acquisition of
Plaza. Ms. Plaza is responsible for any taxes which are payable as a result of
the Plaza's loss of its Subchapter N status under the Puerto Rico tax laws.
However, we, and not Ms. Plaza, are responsible for any taxes on the Plaza's
taxable income during the period from the December 1, 2005 to January 25, 2006.
Employment Agreements
On January 25, 2006, we entered into employment agreements with Elizabeth
Plaza and Nelida Plaza. Our agreement with Elizabeth Plaza provides that Ms.
Plaza will serve as our president and chief executive officer for a period of 18
months, for which she will receive a salary at the annual rate of $250,000. For
18 months thereafter, Ms. Plaza will serve as a consultant for which she will
receive compensation at the annual rate of $75,000. During the term of her
employment, we will also provide Ms. Plaza with an automobile allowance at the
annual rate of $24,828, discretionary bonuses and stock options or other
equity-based incentives as shall be determined by our compensation committee,
except that her bonus shall not be less than 4% nor more than 50% of her salary.
If we terminate Ms. Plaza's employment other than for cause or as a result of
her death or disability, we are required to pay Ms. Plaza the balance of her
compensation for her employment terms and her consulting term and other
benefits, including a pro rata portion of the bonus that would have been paid to
her, and her obligations under her non-competition provision terminate.
-32-
Our agreement with Nelida Plaza provides that Ms. Plaza will serve as vice
president for a term of three years for which she will receive annual
compensation at the annual rate of $150,000. She is also entitled to such bonus
compensation as is determined by the compensation committee, not to exceed 50%
of her salary. We also agreed to make the lease payments on the automobile she
currently leases. Such payment are at the annual rate of approximately $11,600.
If we terminate Ms. Plaza's employment other than for cause or as a result of
her death or disability, we are required to pay Ms. Plaza her compensation for
the balance of the term and other benefits, including a pro rata portion of the
bonus that would have been paid to her, and her obligations under her
non-competition provision terminate.
In February 2006, we entered into a three-year employment agreement with
Mark Fazio pursuant to which he will serve as executive vice president and chief
operating officer. The agreement provides for an annual salary of $210,000, plus
a $9,000 bonus which was paid at the time he executed his agreement, and for the
grant of incentive stock options to purchase 300,000 shares of common stock at
an exercise price of $.7344 per share. We also provide Mr. Fazio with an
automobile allowance of $1,250 per month. If we terminate Mr. Fazio's employment
other than for cause or as a result of his death or disability, we are required
to pay Mr. Fazio his compensation for the balance of the term and continue his
certain insurance benefits for the balance of the term or such time as he has
insurance coverage provided by another employer. Mr. Fazio has the right to
terminate his employment in the event of a change of control, as defined, in
which event we are required to pay him his then current salary for six months
and continue his insurance benefits for such six month period or until such
earlier date as he has insurance coverage by an another employer.
Consulting Agreement
On January 26, 2006, we entered into a one-year consulting agreement with
Dov Perlysky, pursuant to which we agreed to pay Mr. Perlysky a 5% commission on
business generated by Mr. Perlysky's efforts.
2005 Long-Term Incentive Plan
In October 2005, our board of directors adopted the 2005 Long-Term
Incentive Plan, covering 2,500,000 shares of common stock. The 2005 plan
provides for the grant of incentive and non-qualified options, stock grants,
stock appreciation rights and other equity-based incentives to employees,
including officers, and consultants. The 2005 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. Independent directors are not eligible
for discretionary options. However, each newly elected independent director
receives at the time of his or her election, a five-year option to purchase
25,000 shares of common stock at the market price on the date of his or her
election. In addition, the plan provides for the annual grant of an option to
purchase 5,000 shares of common stock on the first trading day of January in
each year, commencing January 2007. The options to directors have a term of five
years and become exercisable cumulatively as to 50% of the shares subject to the
option six months from the date of grant and as to the remaining 50% 18 months
from the date of grant. Pursuant to this provision, on January 25, 2006, options
to purchase 25,000 shares at $.7344 per share, being the fair market value on
the date of grant, were automatically granted to Messrs. Kirk Michel, Howard
Spindel and Irving Wiesen. Pursuant to Mark Fazio's employment contract, we
granted him options to purchase 300,000 shares of common stock pursuant to the
2005 plan in February 2006. These option grants are subject to stockholder
approval of the 2005 plan.
-33-
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 10% of our 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. On January 25, 2006, we granted
incentive stock options to purchase an aggregate of 1,400,000 shares of common
stock at an exercise price of $.7344 per share, to 41 employees. These options
are subject to stockholder approval of the 2005 Plan.
Option holders do not recognize taxable income upon the grant of either
incentive or non-qualified stock options under the Internal Revenue Code of
1986. When employees exercise incentive stock options, they will not recognize
taxable income upon exercise of the option, although the difference between the
exercise price and the fair market value of the common stock on the date of
exercise is included in income for purposes of computing their alternative
minimum tax liability, if any. If certain holding period requirements are met,
their gain or loss on a subsequent sale of the stock will be taxed at capital
gain rates. Generally, long-term capital gains rates will apply to their full
gain at the time of the sale of the stock, provided that they do not dispose of
the stock made within two years from the date of grant of the option or within
one year after your acquisition of such stock, and the option is exercised while
they are employed by us or within three months of the termination of their
employment or one year in the event of death or disability, as defined in the
Internal Revenue Code. Employees who are residents of Puerto Rico are subject to
the Puerto Rico Code, which may be different from tax treatment under the
Internal Revenue Code.
In general, upon the exercise a non-qualified option, the option holder
will recognize ordinary income in an amount equal to the difference between the
exercise price of the option and the fair market value of the shares on the date
he or she exercises the option. Subject to certain limitations, we may deduct
that amount as an expense for federal income tax purposes. In general, when the
holders of shares issued on exercise of a nonqualified stock option sell their
shares, any profit or loss is short-term or long-term capital gain or loss,
depending upon the holding period for the shares and their basis in the shares
will be the fair market value on the date of exercise.
PRINCIPAL STOCKHOLDERS
The following table provides information as to shares of common stock
beneficially owned as of February 28, 2006 by:
o each director;
o each officer named in the summary compensation table;
o each person owning of record or known by us, based on information
provided to us by the persons named below, to own beneficially at
least 5% of our common stock; and
o all directors and executive officers as a group.
-34-
Shares of Common Stock
Name Beneficially Owned Percentage
---- ------------------ ----------
Elizabeth Plaza 1,150,000 50.0%
Sardinera Beach Building Suite 2,
Marginal Costa de Oro,
Dorado, Puerto Rico 00646
San Juan Holdings, Inc. 3,100,000 64.6%
MCS Plaza, Suite #305
255 Ponce de Leon Ave.
Hato Rey, PR 00917
Dov Perlysky 1,200,000 36.8%
445 Central Avenue, Suite 305
Cedarhurst, New York 11516
Kirk Michel -- 0%
Howard Spindel -- 0%
Irving Wiesen -- 0%
All officers and directors as a group (two 2,350,000 67.1%
individuals owning stock)
Except as otherwise indicated each person has the sole power to vote and
dispose of all shares of common stock listed opposite his name. Each person is
deemed to own beneficially shares of common stock which are issuable upon
exercise or warrants or options or upon conversion of convertible securities if
they are exercisable or convertible within 60 days of February 28, 2006.
The shares owned by San Juan Holdings, Inc. include 2,500,000 shares of
common stock issuable upon exercise of a warrant. The exercise price of the
warrant is $.06 per share. In addition, at February 28, 2006, San Juan Holding
also held 75,000 shares of series A preferred stock, convertible into 1,020,200
shares of common stock, and warrants to purchase 255,300 shares of common stock
at $1.10 per share and 255,300 shares of common stock at $1.65 per share. The
shares of series A preferred stock are not convertible into common stock and the
warrants issued in the private placement are not exercisable until we amend our
certificate of incorporation to increase our authorized common stock, the shares
of common stock issuable upon conversion of the series A preferred stock and
upon exercise of the warrants are not deemed to be beneficially owned by San
Juan Holdings as of January 26, 2006. Shares beneficially owned by San Juan
Holdings do not include 275,724 shares of common stock issuable upon exercise of
a warrant held by RD Capital Group, Inc., a broker-dealer and an affiliate of
San Juan Holdings.
In addition, at February 28, 2006, KEMA Advisors, of which Mr. Michel is
managing director, also held 25,000 shares of series A preferred stock,
convertible into 340,400 shares of common stock, and warrants to purchase 81,500
shares of common stock at $1.10 per share and 81,500 shares of common stock at
$1.65 per share.
The shares beneficially owned by Dov Perlysky are owned by Krovim, LLC.
Mr. Perlysky is the manager of Nesher, LLC, which is the manager of Krovim. Mr.
Perlysky disclaims beneficial interest in the shares owned by Krovim.
-35-
The shares of series A preferred stock are not convertible into common
stock and the warrants issued in the private placement are not exercisable until
we amend our certificate of incorporation to increase our authorized common
stock, the shares of common stock issuable upon conversion of the series A
preferred stock and upon exercise of the warrants are not deemed to be
beneficially owned by holders thereof as of January 26, 2006. Accordingly, the
shares of common stock issuable upon conversion of the series A preferred stock
or exercise of the warrants are not treated as outstanding for purposes of
determining which stockholders beneficially owned 5% of our common stock at such
date. See "Selling Stockholders" for information relating to the stock ownership
of the investors in our January 2006 private placement.
The following table sets forth information as to each investor who
purchased more than 4.5% of the units sold. Upon the filing of the certificate
of amendment which increased our authorized capital stock, each of these
stockholders became the beneficial owner of at least 5% of our capital stock.
Series A Common Stock Common Stock
Preferred Issuable on Issuable upon
Name Stock Conversion Warrant Exercise Total Percent
---- ------ ---------- ---------------- ----- -------
Venturetek LP 229,885 3,130,115 1,565,058 4,695,173 23.6%
370 Lexington Avenue
New York, NY 10017
Barron Partners LP 200,000 2,732,200 1,361,600 4,093,800 20.8%
730 Fifth Avenue
New York, NY 10019
San Juan Holdings, Inc. 75,000 1,021,200 510,600 4,631,800 21.7%
MCS Plaza, Suite #305
255 Ponce de Leon Ave.
Hato Rey, PR 00917
Pentland USA, Inc. 75,000 1,021,200 510,600 1,531,800 8.1%
3333 New Hyde Park Road
New Hyde Park, NY 11042
Fame Associates 75,000 1,021,200 510,600 1,531,800 8.1%
111 Broadway
New York, NY 10006
LDP Family Partnership, LP 56,705 722,096 386,048 1,108,144 5.9%
2 Lakeside Drive West
Lawrence, NY 11559
The shares shown in the "Total" column for San Juan Holdings including, in
addition to the securities purchased in the private placement, the 600,000
shares of common stock owned by San Juan Holdings and the 2,500,000 shares of
common stock issuable upon exercise of warrants held by San Juan Holdings.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 25, 2006, we acquired Plaza from Elizabeth Plaza, as the sole
stockholder of Plaza. At the closing, we paid Ms. Plaza $10,000,000 and issued
to Ms. Plaza 1,150,000 shares of common stock. In addition, we will pay Ms.
Plaza three payments, each in the amount of $2,750,000, on January 25, 2007,
2008 and 2009. As a condition to closing, Plaza was required to have a net
tangible book value of not less than $5,500,000, of which at least $2,000,000
was to be in cash, as of November 30, 2005, with the excess to be paid to Ms.
Plaza. Based upon a preliminary determination, the amount currently due to Ms.
Plaza under this provision is estimated at $75,000, and additional payments may
be due when a final determination is made.
-36-
San Juan Holdings represented Plaza and Elizabeth Plaza in connection with
the reverse acquisition. For such services, we issued 600,000 shares of common
stock and warrants to purchase 2,500,000 shares of common stock, with an
exercise price of $.06 per share, to San Juan Holdings. In our private placement
of series A preferred stock and warrants, San Juan Holdings purchased three
units. The purchase price for the three units was $750,000. The broker, which is
an affiliate of San Juan Holdings, waived the commission and non-accountable
expense allowance with respect to such sales, and as a result, San Juan Holdings
purchased the three units for a net payment of $652,500. The three units were
comprised of 75,000 shares of series A preferred stock and warrants to purchase
510,600 shares of common stock. The shares of series a preferred stock became
converted into 1,021,200 shares of common stock. We also paid an affiliate of
San Juan Holdings a broker's commission and non-accountable expense allowance of
$195,000 for sales made to other purchasers in the private placement, and we
issued to the affiliate three-year warrants to purchase an aggregate of 275,724
shares of common stock at an exercise price of $.7344 per share.
KEMA Advisors, Inc., of which Kirk Michel, a director, is managing
director, purchased one unit, consisting of 25,000 shares of series A preferred
stock and warrants to purchase an aggregate of 170,200 shares of common stock
for $250,000. The shares of series A preferred stock became converted into
340,400 shares of common stock. KEMA Advisors is a selling stockholder.
In January 2006, we acquired certain assets of a United States based
company that performs consulting services for the pharmaceutical and biotech
industries from Mr. Fazio for $300,000. The acquired assets include a client
list and a validation compliance service business. One-third of the purchase
price was paid in January 2006, one-third is payable on March 31, 2006 and
one-third is payable on June 30, 2006. At the time of the purchase we had no
relationship with Mr.Fazio, and he was subsequently elected as executive vice
president and chief operating officer.
DESCRIPTION OF CAPITAL STOCK
At March 27, 2006, our authorized capitalization consisted of 2,000,000
shares of preferred stock, par value $.0001 per share, and 10,000,000 shares of
common stock, par value $.0001 per share. On April __, 2006, we obtained
stockholder approval of an amendment to our certificate of incorporation to
increase our authorized capital stock to 10,000,000 shares of preferred stock
and 50,000,000 shares of common stock, and on April __, 2006, we filed a
restated certificate of incorporation which increased our authorized capital to
10,000,000 shares of preferred stock and 50,000,000 shares of common stock. At
March 27, 2006, there were 2,301,800 shares of common stock outstanding. As a
result of the filing of the restated certificate of incorporation, the shares of
series A preferred stock were automatically converted into 15,998,800 shares of
common stock, and, as a result, we had 18,300,600 shares of common stock
outstanding.
Common Stock
Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and are entitled to
share in such dividends as the board of directors, in its discretion, may
declare from funds legally available. In the event of liquidation, each
outstanding share entitles its holder to participate ratably in the assets
remaining after payment of liabilities.
Our directors are elected by a plurality vote. Because holders of common
stock do not have cumulative voting rights, holders or a single holder of more
than 50% of the outstanding shares of common stock present and voting at an
annual stockholders meeting at which a quorum is present can elect all of our
directors. Our stockholders have no preemptive or other rights to subscribe for
or purchase additional shares of any class of stock or of any other securities.
All outstanding shares of common stock are, and those issuable upon conversion
of the preferred stock and exercise of the warrants will be, upon such
conversion or exercise, validly issued, fully paid, and non-assessable
-37-
The transfer agent for our common stock is American Stock Transfer & Trust
Company.
Preferred Stock
The board of directors is authorized to issue up to 2,000,000 shares of
preferred stock (10,000,000 shares upon the filing of our restated certificate
of incorporation) which may be issued in series from time to time with such
designations, rights, preferences and limitations as the board of directors may
declare by resolution. The rights, preferences and limitations of separate
series of preferred stock may differ with respect to such matters as may be
determined by the board of directors, including, without limitation, the rate of
dividends, method and nature of payment of dividends, terms of redemption,
amounts payable on liquidation, sinking fund provisions (if any), conversion
rights (if any) and voting rights. The potential exists, therefore, that
additional shares of preferred stock might be issued which would grant dividend
preferences and liquidation preferences to preferred stockholders over common
stockholders. Unless the nature of a particular transaction and applicable
statute require such approval, the board of directors has the authority to issue
shares of preferred stock without stockholder approval. The issuance of
preferred stock may have the effect of delaying or preventing a change in
control without any further action by stockholders.
Series A Preferred Stock
The board of directors has created a series of 1,175,000 shares of series
A preferred stock. Each share of series A preferred stock automatically converts
into 13.616 shares of common stock upon the filing of a certificate of amendment
to our certificate of incorporation which increases the authorized capital stock
to 10,000,000 shares of preferred stock and 50,000,000 shares of common stock.
The board of directors has approved such an amendment, subject to stockholder
approval.
The holders of the series A preferred stock have no dividend rights,
except that, if a dividend is declared with respect to the common stock, the
holders of the series A preferred stock shall be entitled to dividends on the
preferred stock on an "as if converted" basis.
Except as provided by law and except for the following, the holders of the
series A preferred stock have no voting rights. The vote of the holders of a
majority of the outstanding shares of Series A Preferred Stock shall be required
for any amendment to this Certificate of Designation.
We cannot take any of the following actions without the approval of the
holders of a majority of the shares of series A preferred stock:
o The merger or consolidation of us with or into any other corporation
or other entity.
o The sale by us of all or a significant portion of our business and
assets.
o Our acquisition of any business or entity if such acquisition
provides for the payment of consideration, including equity, of more
than $1,000,000 or the resulting issuance of such number of shares
of capital stock (including convertible securities) which would be
more than 10% of the outstanding Common Stock (including common
stock that is issuable upon conversion or exercise of convertible
securities, including options and warrants).
o The creation or issuance of any class or series of capital stock
which is senior to or on a parity with the series A preferred stock
as to dividends, voting or voluntary or involuntary liquidation,
dissolution or winding up.
-38-
In the event of the liquidation, dissolution or winding up, the holders of
the series A preferred stock will be treated as if the series A preferred stock
were converted into common stock.
On April __, 2006, we filed our restated certificate of incorporation, as
a result of which the series A preferred stock was automatically converted into
common stock.
Investor Warrants
In connection with our January 2006 private placement, we issued warrants
to purchase 3,999,700 shares of common stock at an exercise price of $1.10 per
share and warrants to purchase an additional 3,999,700 shares of common stock at
an exercise price of $1.65 per shares. These warrants have a term which expires
five years from the closing date and are callable by us if the closing price of
our common stock is at least twice the exercise price of the warrants for twenty
(20) consecutive trading days. The warrants became exercisable when we filed our
restated certificate of incorporation with the Secretary of State of the State
of Delaware.
Other Warrants
As of December 31, 2005, warrants to purchase 1,600,000 shares of common
stock at an exercise price of $0.06 per share were outstanding. These warrants
are exercisable until January 16, 2014. The holders of these warrants have the
same registration rights as are granted to Elizabeth Plaza with respect to the
1,150,000 shares of common stock issuable to her pursuant to the merger
agreement.
At the closing we issued to San Juan Holdings warrants to purchase
2,500,000 shares of common stock at an exercise price of $.06 per shares. The
warrants are exercisable until January 16, 2014. San Juan Holding has the same
registration rights as are granted to Elizabeth Plaza with respect to the
1,150,000 shares of common stock issuable to her pursuant to the merger
agreement.
Broker-Dealer Warrants
At the closing of the reverse acquisition we issued to broker-dealers who
assisted us in our January 2006 private placement, three-year warrants to
purchase an aggregate of 1,439,892 shares of common stock at an exercise price
of $.7344 per shares. The holders of the warrants have piggyback registration
rights for the common stock issuable upon exercise of the warrants, which will
include a standard underwriters' right to exclude shares, commencing six months
after the effective date of the registration statement relating to the shares
issuable upon conversion of the series A preferred stock issued to the investors
in the January 2006 private placement.
Delaware Law Provisions
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law statute. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within the prior three years did own, 15% or
more of the corporation's voting stock.
-39-
Our certificate of incorporation contains certain provisions permitted
under Delaware General Corporation Law relating to the liability of directors.
The provisions eliminate a director's liability for monetary damages for a
breach of fiduciary duty, except in certain circumstances where such liability
may not be eliminated under applicable law. Further, our certificate of
incorporation contains provisions to indemnify our directors and officers to the
fullest extent permitted by Delaware General Corporation Law.
EXPERTS
The financial statements for the years ended October 31, 2005 and 2004,
included in this prospectus to the extent and for the periods indicated in its
report, have been audited by Kevane Soto Pasarell Grant Thornton LLP,
independent registered public accountants, and are included herein in reliance
upon the authority of such firm as an expert in accounting and auditing in
giving such report.
Our financial statements at June 30, 2005 and for the year then ended and
at June 30, 2004 and the period from January 14, 2004 (inception) to June 30,
2004 were audited by Raich Ende Malter & Co. LLP, independent registered public
accountants, and are included herein in reliance upon the authority of such firm
as an expert in accounting and auditing in giving such report.
LEGAL MATTERS
The validity of the shares of common stock offered through this prospectus
will be passed on by Katsky Korins, LLP.
HOW TO GET MORE INFORMATION
We file annual, quarter and periodic reports, proxy statements and other
information with the Securities and Exchange Commission using the Commission's
EDGAR system. You may inspect these documents and copy information from them at
the Commission's public reference room at 100 F Street, NE, 450 Fifth Street,
N.W., Washington, D.C. 20549. You may obtain information on the operation of the
public reference room by calling the SEC at 1-800-SEC-0330. The Commission
maintains a web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of such site is http//www.sec.gov.
We have filed a registration statement with the Commission relating to the
offering of the shares. The registration statement contains information which is
not included in this prospectus. You may inspect or copy the registration
statement at the Commission's public reference facilities or its website.
You should rely only on the information contained in this prospectus. We
have not authorized any person to provide you with any information that is
different.
-40-
PHARMA-BIO SERV, INC. AND SUBSIDIARY
Index to Financial Statements
Page
Plaza Consulting Group, Inc.
Report of Independent Registered Public Accounting Firm F-2
Balance Sheets as of October 31, 2005 and January 31, 2006 (unaudited) F-3
Statements of Operations for the Years Ended October 31, 2005 and 2004 and the three months F-4
ended January 31, 2006 and 2005 (unaudited)
Statements of Cash Flows for the Years Ended October 31, 2005 and 2004 and the three months F-5
ended January 31, 2006 and 2005 (unaudited)
Statement of Stockholders' Equity for the ears Ended October 31m 2005 and 2004 and the three F-6
months ended January 31, 2006 (unaudited)
Notes to Financial Statements F-8 - F-22
Pharma-Bio Serv, Inc. (formerly Lawrence Consulting Group, Inc.)
Report of Independent Registered Public Accounting Firm F-23
Balance Sheets as of June 30, 2005 and 2004 F-24
Statements of Operations for the Year Ended June 30, 2005 and the period January 14, 1004 F-25
(inception) to June 30, 2004
Statement of Stockholders' Equity (Deficiency) for the Year Ended June 30, 2005 and the
period January 14, 1004 (inception) to June 30, 2004 F-26
Statements of Cash Flows for the Year Ended June 30, 2005 and the period January 14, 1004 F-27
(inception) to June 30, 2004
Notes to Financial Statements F-28 - F-33
Balance Sheets as of December 31, 2005 (unaudited) and June 30, 2005 F-34
Statements of Operations for the Six Months Ended December 31, 2005 and 2004 (unaudited) F-35
Statements of Cash Flows for the Six Months Ended December 31, 2005 and 2004 (unaudited) F-36
Notes to Unaudited Financial Statements F-37 - F- 44
F-1
REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
To the Stockholder of
Plaza Consulting Group, Inc.:
We have audited the accompanying balance sheets of PLAZA CONSULTING GROUP,
INC. as of October 31, 2005 and 2004, and the related statements of income,
changes in stockholder's equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, as well as evaluating
the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Plaza Consulting Group, Inc.
as of October 31, 2005 and 2004, and the results of its operations, and its cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
KEVANE SOTO PASARELL GRANT THORNTON LLP
San Juan, Puerto Rico,
December 30, 2005, except for Note 12 (a), as to which the date is
January 9, 2006, and Note 12 (b) as to which date is January 25, 2006.
F-2
PHARMA-BIO SERV, INC.
Balance Sheets
At January 31, 2006 (consolidated and unaudited) and October 31, 2005
(Plaza-only and audited)
Consolidated Plaza-Only
(unaudited) (audited)
1/31/2006 10/31/2005
----------- -----------
Assets:
Current Assets
Cash $ 3,084,214 $ 1,791,557
Accounts receivable 3,449,022 4,927,422
Other 219,366 133,611
----------- -----------
Total Current Assets 6,752,602 6,852,590
Property and equipment 444,006 364,998
Intangible Assets 230,000 --
----------- -----------
Total Assets $ 7,426,608 $ 7,217,588
=========== ===========
Liabilities and Stockholders' Equity (Deficiency):
Current Liabilities:
Current portion-obligations under capital leases $ 36,875 $ 47,294
Accounts payable and accrued expenses 1,053,726 996,829
Due to Affiliate - current 2,323,701 --
Income Taxes Payable 357,023 --
----------- -----------
Total Current Liabilities 3,771,325 1,044,123
Due to Affiliate 4,976,299 --
Other Long-Term Liabilities 170,456 192,896
----------- -----------
Total Liabilities $ 8,918,080 $ 1,237,019
----------- -----------
Stockholder's Equity (Deficiency):
Preferred Stock, $0.0001 par value, Authorized
2,000,000 shares, of which 1,175,000 shares of Series A
Convertible Preferred Stock were authorized and outstanding
at January 31, 2006, and no shares of Preferred Stock
were outstanding at October 31, 2005 118 --
Common Stock,$0.0001 par value, Authorized 10,000,000 shares,
Issued and outstanding 2,301,800 shares as of January 31,
2006. $0.02 par value, Authorized 12,500,000 shares, 50,000
Issued and outstanding as of October 31, 2005 230 1,000
Additional Paid-In Capital -- --
Retained Earnings (Deficiency) (1,491,820) 5,979,569
----------- -----------
Total Stockholder's Equity (Deficiency) (1,491,472) 5,980,569
----------- -----------
Total Liabilities and Stockholders' Equity $ 7,426,608 $ 7,217,588
=========== ===========
F-3
PHARMA-BIO SERV, INC.
Consolidated Statements of Income
For the Three Months Ended January 31, 2006 and 2005 and years ended
October 31, 2005 and 2004
Unaudited Audited
----------------------------- -----------------------------
Three months Ended January 31, For the years ended October 31,
----------------------------- -----------------------------
Consolidated Combined Plaza-Only Plaza-Only
2006 2005 2005 2004
----------- ----------- ----------- -----------
REVENUES $ 3,410,482 $ 4,695,999 $17,412,869 $16,930,431
COST OF REVENUES 2,033,339 2,657,847 9,400,909 9,361,968
----------- ----------- ----------- -----------
GROSS PROFIT 1,377,143 2,038,152 8,011,960 7,568,463
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 620,377 458,940 1,531,476 1,775,249
DEPRECIATION & AMORTIZATION 30,144 19,741 90,332 50,359
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 726,622 1,559,471 6,390,152 5,742,855
PROVISION FOR INCOME TAXES 357,023 611,036 -- --
----------- ----------- ----------- -----------
NET INCOME $ 369,599 $ 948,435 $ 6,390,152 $ 5,742,855
=========== =========== =========== ===========
INCOME PER COMMON SHARE $ 0.21 $ 0.54 $ 2.23 $ 2.00
- BASIC
INCOME PER COMMON SHARE
- DILUTED $ 0.11 $ 0.54 $ 2.23 $ 2.00
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING - BASIC 1,791,985 1,750,000 1,750,000 1,750,000
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING - DILUTED 3,295,755 1,750,000 1,750,000 1,750,000
F-4
PHARMA-BIO SERV, INC.
Statements of Cash Flows
For the Three Months Ended January 31, 2006 and 2005 and years ended
October 31, 2005 and 2004
Unaudited Audited
------------------------------ -------------------------------
Three months Ended January 31, For the years ended October 31,
------------------------------ -------------------------------
Consolidated Combined Plaza-Only Plaza-Only
2006 2005 2005 2004
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) for the Period $ 369,599 $ 948,435 $ 6,390,152 $ 5,742,855
Loss (gain) on Disposition of Assets 3,664 -- (3,319) --
Depreciation 30,144 19,741 90,332 50,359
Bad debts expense -- -- 51,277 35,554
Decrease (increase) in Accounts Receivable 1,481,192 112,904 466,730 (901,455)
(Increase) decrease in Other Assets (65,744) (4,163) (18,275) 2,821
Increase (decrease) in Liabilities 208,849 289,513 (129,253) 633,982
------------ ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,027,704 $ 1,366,430 $ 6,847,644 $ 5,564,116
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Assets (72,595) -- (92,340) (68,575)
(Decrease) in Property and Equipment (14,433) (51,720) -- --
------------ ------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES $ (87,028) $ (51,720) $ (92,340) $ (68,575)
------------ ------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from the sale of Series A Preferred Stock $ 10,171,500 -- -- --
Payment for purchase of stock in Plaza Consulting Group (9,900,000) -- -- --
Payment for non-compete covenant (100,000) -- -- --
Payments on Lease Obligations (8,649) (9,818) (41,154) (25,144)
Distributions (834,115) (890,129) (7,959,318) (5,102,589)
------------ ------------ ------------ ------------
NET CASH USED IN FINANCING ACTIVITIES $ (671,264) $ (899,947) $ (8,000,472) $ (5,127,733)
------------ ------------ ------------ ------------
NET INCREASE IN CASH $ 1,269,412 $ 414,763 $ (1,245,168) $ 367,808
============ ============ ============ ============
CASH - BEGINNING OF PERIOD $ 1,814,802 $ 3,094,839 $ 3,036,725 $ 2,668,917
============ ============ ============ ============
CASH - END OF PERIOD $ 3,084,214 $ 3,509,602 $ 1,791,557 $ 3,036,725
============ ============ ============ ============
F-5
PHARMA-BIO SERV, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 2005 AND 2004 AND
THE THREE-MONTH PERIOD ENDED JANUARY 31, 2006
Additional Retained
Common Stock Preferred Stock Paid-in Earnings
Shares Amount Shares Amount Capital (Deficiency) Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, October 31, 2003 50,000 $ 1,000 -- $ -- $ -- $ 6,908,469 $ 6,909,469
NET INCOME -- -- -- -- -- 5,742,855 5,742,855
DISTRIBUTIONS -- -- -- -- -- (5,102,589) (5,102,589)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, October 31, 2004 50,000 1,000 -- -- -- 7,548,735 7,549,735
NET INCOME -- -- -- -- -- 6,390,152 6,390,152
DISTRIBUTIONS -- -- -- -- -- (7,959,318) (7,959,318)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, October 31, 2005 50,000 1,000 -- -- -- 5,979,569 5,980,569
RECLASSIFICATION OF $0.02
COMMON STOCK (50,000) (1,000) -- -- 1,000 -- --
ISSUANCE OF $0.0001
COMMON STOCK IN CONNECTION
WITH RECLASSIFICATION
OF EQUITY 275,900 28 -- -- 20,947 20,975
2:1 STOCK DIVIDEND 275,900 28 -- -- (28) -- --
ISSUANCE OF $0.0001
COMMON STOCK 1,750,000 175 -- -- 844,385 -- 844,560
ISSUANCE OF $0.0001
PREFERRED STOCK -- -- 1,175,000 118 10,171,383 -- 10,171,501
ISSUANCE OF $0.06 STOCK
WARRANTS -- -- -- -- -- -- --
DISTRIBUTIONS -- -- -- -- (11,037,688) (6,931,873) (17,969,560)
NET INCOME -- -- -- -- -- 369,599 369,599
DISTRIBUTIONS -- -- -- -- -- (909,115) (909,115)
------------ ------------ ------------ ------------ ------------ ------------ ------------
BALANCE, January 31, 2006 2,301,800 $ 230 1,175,000 $ 118 $ -- $ (1,491,820) $ (1,491,472)
============ ============ ============ ============ ============ ============ ============
F-6
Supplemental Schedule of Non-Cash Investing and Financing Activities
During the three-month period ended January 31, 2006 and the years ended October
31, 2005 and 2004, the Company incurred in the following non-cash transactions:
1. The Company retired property and equipment with a cost of $54,352, book value
of $27,876 and outstanding debt of $24,212 resulting in a loss of $3,664.
2. The Company acquired a validation service company for a total purchase price
of $300,000 of which $100,000 was paid before January 31, 2006 and $200,000 will
be paid subsequently.
3. Subject to the acquisition of Plaza Consulting Group, Inc., a deferred
payment of $8,250,000 including $1,025,000 of imputed interest is due to an
officer.
4. During the year ended October 31, 2005, the Company acquired vehicles in the
amount of $170,355 under capital lease obligations. In addition, it retired a
vehicle under a capital lease with a book value of $38,855 and an unpaid capital
lease debt of $42,174 resulting in a gain on disposal of $3,319.
5. During the year ended October 31, 2004, the Company acquired vehicles in the
amount of $84,109 under capital lease obligations. The Company traded-in a
vehicle with a book value of $33,726 and an outstanding lease of $40,164, which
was assumed in one of the new capital lease obligations.
F-7
PHARMA-BIO SERV, INC.
Notes to Financial Statements
As of October 31, 2005 and 2004 (audited) and
January 31, 2006 and 2005 (unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements and footnotes
have been condensed and therefore do not contain all disclosures required by
accounting principles generally accepted in the United States of America. In the
opinion of management, the information furnished reflects all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial position, results of operations and cash flows for the interim
periods. Interim periods are not necessarily indicative of results for a full
year.
Pharma-Bio Serv, Inc., formerly Lawrence Consulting Group, Inc. (the
"Company"), was organized under the laws of the State of Delaware on January 14,
2004. The Company is the parent company of Plaza, a Puerto Rico corporation,
which operates in Puerto Rico under the name of Pharma Serv and is engaged in
providing technical compliance consulting services primarily to the
pharmaceutical, chemical and biotechnology industries.
The accompanying financial statements present the accounts of the Company
and Plaza. All intercompany transactions and balances have been eliminated in
consolidation.
The statement of operations and of cash flows for the three month period
ended January 31, 2006 include consolidated financial information of the Company
and Plaza and the same statements for the comparative period ended January 31,
2005 include combined financial information for both entities.
Share Distribution
On January 24, 2006, the Company effected a two-for-one share distribution
with respect to its common stock pursuant to which the Company issued one share
of common stock for each share outstanding on the record date, January 24, 2006.
All share and per share information in these financial statements give
retroactive effect to this share distribution.
Reverse Acquisition
On January 25, 2006, pursuant to a plan and agreement of merger (the
"Plaza Agreement") dated as of October 31, 2005, among the Company, Plaza
Acquisition Corp., a wholly-owned subsidiary of the Company ("Acquisition
Company"), Plaza and Elizabeth Plaza, the sole stockholder of Plaza, the Company
acquired Plaza. The acquisition was effected by the merger of Acquisition
Company into Plaza. Pursuant to the Plaza Agreement, Ms. Plaza, as the sole
stockholder of Plaza, received at the closing $10,000,000 plus 1,150,000 shares
of the Company's common stock. In addition, Ms. Plaza will receive three
payments, each in the amount of $2,750,000, payable on January 25, 2007, 2008
and 2009.
F-8
PHARMA-BIO SERV, INC.
Notes to Financial Statements
As of October 31, 2005 and 2004 (audited) and
January 31, 2006 and 2005 (unaudited)
At the closing, all of the present officers and directors of the Company
resigned from their respective positions, except that Mr. Dov Perlysky, who was
president and a director of the Company, resigned as an officer, but continued
as a director. At the closing, the Company elected four directors, including Ms.
Plaza. The other three are independent directors.
Pursuant to the Plaza Agreement, at the closing, the Company issued
600,000 shares of common stock and warrants to purchase 2,500,000 shares of
common stock with an exercise price of $.06 per share to San Juan Holdings,
Inc., the investment banker for Plaza and Ms. Plaza. The Company provided
certain demand and piggyback registration rights to Ms. Plaza and San Juan
Holdings covering the shares of common stock issued to them at the closing and
the shares issuable upon exercise of the warrants issued to San Juan Holdings.
As a condition to closing, Plaza was required to have a net tangible book
value of not less than $5,500,000, of which at least $2,000,000 was in cash, as
of November 30, 2005. Subject to the requirement that Plaza have at least
$2,000,000 in cash as of November 30, 2005, the purchase price is to be adjusted
upward or downward depending on the net tangible book value, determined as
provided in the Plaza agreement. This provision will result in an additional
payment to Ms. Plaza in the amount of up to $131,734 of which $75,000 will be
paid during the second quarter 2006 and payment of the balance will be subject
to the subsequent resolution of certain tax withholding issues related to the
period prior to the reverse transaction.
The Company raised the funds necessary to make the $10,000,000 payment due
to Ms. Plaza through the private placement of units consisting of shares of a
series A preferred stock and warrants to purchase 7,999,400 common stock. The
series A preferred stock is automatically convertible into 15,998,800 shares of
common stock upon an increase in the Company's authorized common stock. See Note
C.
The acquisition of Plaza and the private placement resulted in a change of
control of the Company. As a result of the reverse acquisition accounting
treatment, Plaza is deemed to be the acquiring company for accounting purposes.
Because the reverse acquisition resulted in the former owners of Plaza, together
with the purchasers in the private placement who purchased the series A
preferred stock and warrants in connection with the acquisition of Plaza, gained
control of the Company, the transaction is accounted for as a reverse
acquisition. Effective on the acquisition date, the Company's balance sheet
includes the assets and liabilities of Plaza and its equity accounts have been
recapitalized to reflect the equity of Plaza. In addition, effective on the
acquisition date, and for all reporting periods thereafter, the Company's
operating activities, including any prior comparative periods, will include only
those of Plaza.
Summary of Significant Accounting Policies
Use of Estimates
The preparation of 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 financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
F-9
PHARMA-BIO SERV, INC.
Notes to Financial Statements
As of October 31, 2005 and 2004 (audited) and
January 31, 2006 and 2005 (unaudited)
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments (excluding
obligations under capital leases and amounts due affiliate): cash, accounts
receivable, accounts payable and accrued liabilities, are considered reasonable
estimates of fair value due to short period to maturity.
Management believes, based on current rates, that the fair value of its
obligations under capital leases and amounts due to affiliate approximates the
carrying amount.
Revenue Recognition
The Company recognizes revenues in the month when services are rendered to
customers. In the case of fixed-fee contracts, revenue is recognized based on
the percentage that the services rendered bears to the estimated services to be
performed over the contract.
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. Bad debts are 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 the provisions of Statement of Financial Accounting
Standards Board No. 109, "Accounting for Income Taxes," which requires 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.
Plaza, from its inception until January 25, 2006, was covered under the
provisions of Subchapter N of Subtitle A of the Puerto Rico Internal Revenue
Code (the "Puerto Rico Code"), which is similar to Subchapter S of the Internal
Revenue Code in that its taxable income is taxed to the stockholders and
therefore there is no income tax liability for that period. After the completion
of the reverse acquisition, Plaza and the Company are no longer eligible for
treatment as a Subchapter N corporation. Pursuant to the Plaza Agreement, (i)
any taxes which are payable as a result of the reverse acquisition and Plaza's
resulting loss of its Subchapter N status under the Puerto Rico tax laws, shall
be paid by Ms. Plaza, and (ii) the Company, and not Ms. Plaza, is responsible
for taxes on Plaza's income from December 1, 2005 until the closing date,
January 25, 2006. See Note F.
F-10
PHARMA-BIO SERV, INC.
Notes to Financial Statements
As of October 31, 2005 and 2004 (audited) and
January 31, 2006 and 2005 (unaudited)
Property and equipment
Property and equipment is stated at cost. Depreciation is provided using
the straight-line basis over the estimated useful lives of the assets. Major
renewals and betterments that extend the life of the assets are capitalized,
while expenditures for repairs and maintenance are expensed when incurred
Intangible assets
The goodwill reflects the excess of the purchase price over the fair value
of the assets acquired in connection with the acquisition of assets of a
business which performs in the United States consulting services similar to
those performed by the Company in Puerto Rico. The Company's policy is to
periodically evaluate the goodwill to determine whether there is any impairment.
See Note E.
Covenant not to compete of $100,000 at January 31, 2006 represents the
portion of the payment made in connection with the purchase of the Plaza stock
that was allocated to a non-competition covenant. Under this agreement, the sole
stockholder of Plaza agreed not to compete with the Company for a period of five
years. This amount will be amortized on the straight-line method over the term
of the non-competition covenant. Current portion amounting to $20,000 is
included in the other current assets caption in the accompanying balance sheet.
Stock-based Compensation
Through the quarter ended January 31, 2006, the Company has elected to use
the intrinsic value method of accounting for stock options issued to employees
under its stock option plans in accordance with APB Opinion No. 25 and related
interpretations whereby the amount of stock-based compensation expense is
calculated as the difference between the fair market value and the exercise
price on the date of issuance. For purposes of pro forma disclosures the amount
of stock-based compensation is calculated using the fair value method of
accounting for stock options issued to employees. The Company's pro forma
information is as follows:
F-11
PHARMA-BIO SERV, INC.
Notes to Financial Statements
As of October 31, 2005 and 2004 (audited) and
January 31, 2006 and 2005 (unaudited)
Three Months Ended January 31, Year Ended October 31,
---------------------------------- ---------------------------------
2006 2005 2005 2004
------------- ------------- ------------- -------------
Net income $ 369,599 $ 948,435 $ 3,897,993 $ 3,503,142
Deduct: Stock-based
employee compensation
as determined under the
fair value method, net
of tax effect 539,859 -- -- 272,522
------------- ------------- ------------- -------------
Pro forma net income
(loss) attributable to
common stockholders $ (170,251) $ 948,435 $ 3,897,993 $ 3,230,619
============= ============= ============= =============
Basic earnings (loss)
per share of common stock:
As reported $ 0.21 $ 0.54 $ 3.65 $ 3.28
Pro forma $ (0.10) $ 0.54 $ 3.65 $ 3.13
Diluted earnings (loss)
per share of common stock:
As reported $ 0.21 $ 0.54 $ 3.65 $ 3.28
Pro forma $ (0.10) $ 0.54 $ 3.65 $ 3.13
For the fiscal year ended October 31, 2004 Plaza granted stock options to
purchase 4,125 shares of its common stock. Pursuant to the reverse acquisition,
these Plaza option shares are equivalent to options to purchase 744,597 shares
of Pharma-Bio Serv common stock. Accordingly, the value of these options are
estimated on the same basis as the Pharma-Bio Serv options. There were no
additional Plaza options issued during the fiscal year ended October 31, 2005.
Income Per Share of Common Stock
Basic income per common share is calculated by dividing net income by the
weighted average number of shares of common stock outstanding. Diluted income
per share includes the dilution of common stock equivalents. Pursuant to reverse
acquisition accounting treatment, the weighted average number of shares
outstanding in the computation of basic income per share was derived by
weighting (i) for the period prior to the reverse acquisition transaction, the
number of shares outstanding represented the shares received by Plaza, and (ii)
for the period after the transaction, the number of share outstanding
represented the shares of the Company that are outstanding. Diluted income per
share includes the dilution of common equivalents. Accordingly, the convertible
preferred stock and the stock warrants were deemed to be outstanding from the
date of issuance to the end of the reporting period.
F-12
PHARMA-BIO SERV, INC.
Notes to Financial Statements
As of October 31, 2005 and 2004 (audited) and
January 31, 2006 and 2005 (unaudited)
Three months ended January 31, For the year ended October 31,
------------------------------ ------------------------------
2006 2005 2005 2004
-------- -------- -------- --------
Basic $ 0.21 $ 0.54 $ 3.65 $ 3.28
Diluted $ 0.11 $ 0.54 $ 3.65 $ 3.28
The weighted average common shares outstanding (basic and diluted) were
calculated using the treasury stock method as of the respective periods.
NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS
1. In March 2005, the FASB issued Interpretation No. 47 "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the
term conditional asset retirement obligation as used in FASB Statement No. 143
"Accounting for Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within the
control of the entity. The obligation to perform the asset retirement activity
is unconditional even though uncertainty exists about the timing and (or) method
of settlement. Thus, the timing and (or) method of settlement may be conditional
on a future event. Accordingly, an entity is required to recognize a liability
for the fair value of a conditional asset retirement obligation if the fair
value of the liability can be reasonably estimated. The fair value of a
liability for the conditional asset retirement obligation should be recognized
when incurred, generally upon acquisition, construction or development and (or)
through the normal operation of the asset. Uncertainty about the timing and (or)
method of settlement of a conditional asset retirement obligation should be
factored into the measurement of the liability when sufficient information
exists. FASB Statement 143 acknowledges that in some cases, sufficient
information may not be available to a reasonably estimate the fair value of an
asset obligation. This interpretation also clarifies when an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. The provisions of this interpretation are effective no
later than the end of fiscal years ending after December 15, 2005 Management
does not expect that the application of this standard will have any effect on
the Company's results of operations or its financial condition.
2. In December 2004, the FASB issued Statement No. 153 "Exchanges of
Non-Monetary Transactions - an amendment of APB Opinion No. 29." The guidance in
APB Opinion No. 29, "Accounting for Non-monetary Transactions," is based on the
principle that exchanges of non-monetary assets should be measured based on the
fair value of the assets exchanged. The guidance in that Opinion, however
included certain exceptions to that principle. This Statement amends Opinion 29
to eliminate the exception for non-monetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of non-monetary
assets that do not have commercial substance. A non-monetary exchange has
commercial substance if the future cash flows of the entity are expected to
change significantly as a result of the exchange. The provisions of this
Statement are effective for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. Earlier application is permitted for
non-monetary asset exchanges occurring in fiscal periods beginning after
December 16, 2004. The provisions of this Statement should be applied
prospectively. The Company does not expect that the adoption of FAS-153 will
have a material impact on its results of operations and financial position.
F-13
PHARMA-BIO SERV, INC.
Notes to Financial Statements
As of October 31, 2005 and 2004 (audited) and
January 31, 2006 and 2005 (unaudited)
3. In December 2004, the FASB published Statement No. 123R requiring that
the compensation cost relating to share-based payment transaction be recognized
in financial statements. That cost will be measured based on the fair value of
the equity or liability instruments issued. Statement No. 123R covers a wide
range of share-based compensation arrangements, including share option
restricted plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement No. 123(R) replaces FASB Statement No.
123 "Accounting for Stock-Based Compensation," and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees." Statement No. 123, as originally
issued in 1995, established as preferable a fair-value-based method of
accounting for share-based payment transactions with employees. However, that
Statement permitted entities the option of continuing to apply the guidance in
Opinion No. 25, as long as the footnotes to the financial statements disclosed
what net income would have been had the preferable fair-value-based method been
used.
This Statement is effective as of the beginning of the first interim or
annual reporting period of the first fiscal year that begins after December 15,
2005. One of the effects of the application of FASB123R is to treat the value
(as properly determined) of the options as compensation to the grantees, thus
increasing the company's selling, general and administrative expenses.
4. In May 2005, the FASB issued Statement No. 154 "Accounting for Changes
and Errors Corrections.' This Statement replaces APB Opinion No. 20 "Accounting
Changes" and FASB Statement No. 3 "Reporting Accounting Changes in Interim
Financial Statements," and changes the requirements for the accounting for and
reporting of a change in accounting principle.
This Statement requires retrospective application to prior periods'
financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. When its is impracticable to determine the period specific
effects of an accounting change on one or more individual prior periods
presented, this Statement requires that the new accounting principle be applied
to the balances of assets and liabilities as of the beginning of the earliest
period for which retroactive application is practicable and that a corresponding
adjustment be made to the opening balance of retained earnings (or other
appropriate components of equity or net assets in statement of financial
position) for that period rather than being reported in an income statement.
When it is impracticable to determine the cumulative effect of applying a change
in accounting principle to all prior periods, this Statement requires that the
new accounting principle be applied as if it were adopted prospectively from the
earliest date practicable. This Statement shall be effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. The Company does not expect that the adoption of FAS 154 will have a
material impact on its consolidated results of operations and financial
position.
F-14
PHARMA-BIO SERV, INC.
Notes to Financial Statements
As of October 31, 2005 and 2004 (audited) and
January 31, 2006 and 2005 (unaudited)
NOTE C - CAPITAL TRANSACTIONS
On January 25, 2006, contemporaneously with the consummation of the
acquisition, the Company sold, in a private placement, 47 units, each unit
consisting of 25,000 shares of series A preferred stock, warrants to purchase
85,100 shares of common stock at $1.10 per share and warrants to purchase 85,100
shares of common stock at $1.65 per share. In the private placement, the Company
issued an aggregate of 1,175,000 shares of series A preferred stock (which are
convertible into an aggregate of 15,998,800 shares of common stock), warrants to
purchase 3,999,700 shares of common stock at $1.10 per share, and warrants to
purchase 3,999,700 shares of common stock at $1.65 per share, to 42 accredited
investors. The Company paid brokerage commissions of 10% of the gross purchase
price and an aggregate non-accountable expense allowance of 3% of the gross
purchase price with respect to the units sold. In certain cases, the broker
waived the commission and non-accountable expense allowance, and the investor
paid the purchase price less the commission and non-accountable expense
allowance. The purchase price for the 47 units sold was $11,750,000.
Broker-dealers waived commission and non-accountable expense allowance with
respect to $628,750, the Company paid commissions and non-accountable expense
allowances totaling $898,750, and the Company issued warrants to purchase an
aggregate of 1,439,892 shares of common stock. The warrants have an exercise
price of $.7344 per share and a term of three years.
Each share of series A preferred stock automatically converts into 13.616
shares of common stock upon the filing of a certificate of amendment to our
certificate of incorporation which increases the authorized capital stock to
10,000,000 shares of preferred stock and 50,000,000 shares of common stock. The
board of directors has approved such an amendment, subject to stockholder
approval.
The holders of the series A preferred stock have no dividend rights,
except that, if a dividend is declared with respect to the common stock, the
holders of the Series A preferred stock shall be entitled to dividends on the
preferred stock on an "as if converted" basis.
These warrants issued in the private placement expire five years from the
closing date and are callable by the Company if the closing price of the common
stock is at least twice the exercise price of the warrants for twenty (20)
consecutive trading days. The warrants are not exercisable until the amendment
to the Company's certificate of incorporation increasing the number of
authorized shares of the Company's common stock has been approved by the
Company's stockholders and filed with the Secretary of State of the State of
Delaware.
The holders of the series A preferred stock and the warrants issued in the
private placement have demand and piggyback registration rights.
F-15
PHARMA-BIO SERV, INC.
Notes to Financial Statements
As of October 31, 2005 and 2004 (audited) and
January 31, 2006 and 2005 (unaudited)
NOTE D - PROPERTY & EQUIPMENT
The balance of property and equipment, as of January 31, 2006 and October 31,
2005 consists of:
Useful
Life January 31, October 31,
(years) 2006 2005
------- --------- ---------
Vehicles 5 $ 221,434 $ 273,086
Leasehold improvements 5 64,895 64,895
Computers 3 121,796 81,395
Equipment 5 116,810 22,885
Furniture and fixtures 10 67,907 67,907
--------- ---------
Total $ 592,842 $ 510,168
Less: Accumulated depreciation
And amortization (148,836) (145,170)
--------- ---------
Property and equipment, net $ 444,006 $ 364,998
========= =========
NOTE E - PURCHASE OF ASSETS
On January 9, 2006, Plaza acquired certain assets of a United States based
company that performs consulting services for the pharmaceutical and biotech
industries for $300,000. The seller was an individual who has since become the
Company's executive vice president and chief operating officer. The acquired
assets include equipment ($150,000) and goodwill ($150,000) for a client list
and a validation compliance service business. One-third of the purchase price
was paid in January 2006, one-third is payable on March 31, 2006 and one-third
is payable on June 30, 2006. The Company also hired eleven former employees of
the business.
NOTE F - INCOME TAXES
The Company's taxable income is subject to the Puerto Rico income tax at
the 20% to 39% rates provided by the 1994 Puerto Rico Internal Revenue Code, as
amended.
Provision for income tax is computed at statutory rates applied to income
calculated in accordance with the accounting practices described herein and as
shown in the financial statements. Deferred income tax assets and liabilities
are computed for differences between the 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.
The following table presents the Company's actual income tax expense for
the three-month period ended January 31, 2006 and the pro forma provision for
the comparative period in 2005 and the years ended October 31, 2005 and 2004.
F-16
PHARMA-BIO SERV, INC.
Notes to Financial Statements
As of October 31, 2005 and 2004 (audited) and
January 31, 2006 and 2005 (unaudited)
Pro Forma
-------------------------------------------------------
Unaudited Audited
------------------------- -------------------------
January 31, October 31,
------------------------- -------------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Theoretical income
tax expense by application
of statutory rates to the
book pre-tax income $ 283,383 $ 608,194 $2,492,159 $2,239,713
Effect of permanent
difference between
book and tax income 73,640 2,842 -- --
---------- ---------- ---------- ----------
Income tax expense $ 357,023 $ 611,036 $2,492,159 $2,239,713
========== ========== ========== ==========
NOTE G - RELATED PARTY TRANSACTIONS; DUE TO AFFILIATE
On January 25, 2006, pursuant to the Plaza Agreement, Elizabeth Plaza, as the
sole stockholder and affiliate of Plaza, received at the closing $10,000,000
plus 1,150,000 shares of the Company's common stock. In addition, the Company
will pay Mrs. Plaza, three payments of $2,750,000, including imputed interest
determined in accordance with Section 1274 of the Internal Revenue Code, on
January 25, 2007, 2008 and 2009 as follows:
January 31, Amount
----------- ------------
2007 $ 2,750,000
2008 2,750,000
2009 2,750,000
-----------
Total payments 8,250,000
Less: imputed interest (1,025,000)
-----------
Present value of minimum
payments $ 7,225,000
Current portion (2,248,701)
-----------
Long-term portion $ 4,976,299
===========
The current portion of the due to affiliate as reflected in the balance sheet
also includes $75,000 due to her for the excess of the Net Tangible Book Value
determined as provided in the Plaza agreement explained in Note A.
Current portion of deferred purchase price $2,248,701
Excess Net Tangible Book Value, payable in
2nd Qtr 2007 75,000
----------
Due to affiliate - current portion $2,323,701
==========
F-17
PHARMA-BIO SERV, INC.
Notes to Financial Statements
As of October 31, 2005 and 2004 (audited) and
January 31, 2006 and 2005 (unaudited)
San Juan Holdings represented Plaza and Elizabeth Plaza in connection with
the reverse acquisition. For such services, the Company issued 600,000 shares of
common stock and warrants to purchase 2,500,000 shares of common stock, with an
exercise price of $.06 per share, to San Juan Holdings. In the Company's private
placement of series A preferred stock and warrants, San Juan Holdings purchased
three units. The purchase price for the three units was $750,000. The broker,
which is an affiliate of San Juan Holdings, waived the commission and
non-accountable expense allowance with respect to such sales, and as a result,
San Juan Holdings purchased the three units for a net payment of $652,500. The
Company also paid an affiliate of San Juan Holdings a broker's commission and
non-accountable expense allowance of $195,000 for sales made to other purchasers
in the private placement, and the Company issued to the affiliate three-year
warrants to purchase an aggregate of 275,724 shares of common stock at an
exercise price of $.7344 per share.
NOTE H - COMMITMENTS
1. Contracts
On January 25, 2006, the Company entered into employment agreements with
Elizabeth Plaza and Nelida Plaza. The agreement with Elizabeth Plaza provides
that Ms. Plaza will serve as president and chief executive officer of the
Company for a period of 18 months, for which she will receive a salary at the
annual rate of $250,000. For 18 months thereafter, Ms. Plaza will serve as a
consultant for which she will receive compensation at the annual rate of
$75,000. During the term of her employment, the Company will also provide Ms.
Plaza with an automobile allowance at the annual rate of $24,828, discretionary
bonuses and stock options or other equity-based incentives as shall be
determined by the compensation committee's board of directors, except that her
bonus shall not be less than 4% nor more than 50% of her salary. If the Company
terminates Ms. Plaza's employment other than for cause or as a result of her
death or disability, the Company is required to pay Ms. Plaza the balance of her
compensation for her employment terms and her consulting term and other
benefits, including a pro rata portion of the bonus that would have been paid to
her, and her obligations under her non-competition provision terminate.
The Company's agreement with Nelida Plaza provides that Ms. Plaza will
serve as vice president for a term of three years for which she will receive
annual compensation at the annual rate of $150,000. She is also entitled to such
bonus compensation as is determined by the compensation committee, not to exceed
50% of her salary. The Company also agreed to make the lease payments on the
automobile she currently leases. Such payments are at the annual rate of
approximately $11,600. If the Company terminates Ms. Plaza's employment other
than for cause or as a result of her death or disability, the Company is
required to pay Ms. Plaza the balance of her compensation for her employment
terms and her consulting term and other benefits, including a pro rata portion
of the bonus that would have been paid to her, and her obligations under her
non-competition provision, terminate.
F-18
PHARMA-BIO SERV, INC.
Notes to Financial Statements
As of October 31, 2005 and 2004 (audited) and
January 31, 2006 and 2005 (unaudited)
On January 26, 2006, the Company entered into a one-year consulting
agreement with Dov Perlysky, pursuant to which the Company agreed to pay Mr.
Perlysky a 5% commission on business generated by Mr. Perlysky's efforts. This
agreement replaced his employment agreement.
2. Lease commitments
Capitalized lease obligations -As of January 31, 2006 and October 31,
2005, the Company owned vehicles acquired under non-cancelable capital leases
with a cost of $221,434 and $273,086 (accumulated depreciation of $33,646 and
$46,058), respectively. Depreciation expense for these assets amounted to $3,594
and $33,968 in quarters ended January 31, 2006 and 2005, respectively. The
following is a schedule, by year, of future minimum lease payments under the
capitalized leases together with the present value of the net minimum lease
payments at January 31, 2006:
January 31, Amount
----------- -----------
2007 $ 48,360
2008 48,360
2009 48,360
2010 66,947
2011 24,704
---------
Total minimum lease payments $ 236,731
Less: Amount of imputed interest (29,400)
---------
Present value of minimum lease payments $ 207,331
Current portion of obligation under
capital leases (36,875)
---------
Long-term portion $ 170,456
=========
Operating facilities - The Company conducts its administrative operations
in office facilities which are leased under different rental agreements with the
following terms:
Monthly
Description Rent Commitment Term
----------- ------- ---------------
Main resources facilities $ 3,200 Ending in October 2007
Human resources facilities $ 1,850 Ending in April 10, 2006
Housing for employees $ 1,800 Ending in January 2006
Land $ 1,000 Ten years until July 2013
Hilltown office space $ 2,720 Monthly beginning February 2006
The first three leases listed in the table are with the chief executive
officer or an affiliate of the chief executive officer.
F-19
PHARMA-BIO SERV, INC.
Notes to Financial Statements
As of October 31, 2005 and 2004 (audited) and
January 31, 2006 and 2005 (unaudited)
The following are the future minimum annual rent payments during each of
the next five years and thereafter:
Year Amount
------- -----------
2007 $ 55,950
2008 40,800
2009 12,000
2010 12,000
2011 12,000
Thereafter 12,000
----------
$ 157,750
==========
Rent expense during the three-month period ended January 31, 2006 and 2005
was $26,300 and $33,345, respectively, and $71,026 and 40,443 for the years
ended October 31, 2005 and 2004, respectively.
NOTE I - STOCK OPTIONS
In October 2005, the Company's board of directors adopted the 2005
Long-Term Incentive Plan, covering 2,500,000 shares of common stock. The 2005
plan provides for the grant of incentive and non-qualified options, stock
grants, stock appreciation rights and other equity-based incentives to
employees, including officers, and consultants. The 2005 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. Independent
directors are not eligible of discretionary options. However, each newly elected
independent director receives a the time of his or her election, a five-year
option to purchase 25,000 shares of common stock at the market price on the date
of his or her election. In addition, the plan provides for the annual grant of
an option to purchase 5,000 shares of common stock on the first trading day of
January of each year, commencing January 2007. The options to directors have a
term of five years and become exercisable cumulatively as to 50% of the shares
subject to the option six months from the date of grant and as to the remaining
50% 18 months from the date of grant. Pursuant to this provision, on January 25,
2006, options to purchase 25,000 shares at $.7344 per share, being the fair
market value on the date of grant, were automatically granted to each of the
three independent 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 10% of our 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.
Pursuant to the Plaza Agreement, all outstanding options issued by Plaza
were terminated, and the Company granted incentive stock options to purchase an
aggregate of 1,400,000 shares of common stock at an exercise price of $0.7344
per share to the holders of such terminated Plaza options, pursuant to the
Company's 2005 Long-Term Incentive Plan . Of the total options to purchase
1,400,000 shares of common stock, options to purchase 776,186 shares of common
stock were granted to 18 employees whose options to purchase Plaza common stock
were cancelled. The options to purchase the remaining 623,814 shares of common
stock were granted to both the 18 former holders of Plaza options and 23
additional Plaza employees.
F-20
All of the foregoing option grants are subject to stockholder approval of
the 2005 Long Term Incentive Plan.
Pursuant to the Plaza Agreement, the Company agreed that it would issue
100 shares of common stock to each of Plaza's eligible employees. Such shares
will not be issued until we are eligible to use a Form S-8 registration
statement in connection with the issuance of such shares. Approximately 16,500
shares of common stock may be issued pursuant to this program.
NOTE J - CONCENTRATION OF RISKS
The Company's cash balances are maintained in a high quality bank checking
account. Management deems all its accounts receivables to be fully collectible,
and, as such, does not maintain any allowances for uncollectible receivables.
The Company's revenues are concentrated in the pharmaceutical industry in
the island of Puerto Rico, and a small number of customers have accounted for a
significant percentage of its revenue. For the quarter ended January 31, 2006,
three customers accounted for approximately 68.1% of revenue. Two of these
customers accounted for approximately 63.4% of revenue in the quarter ended
January 31, 2005. The same customers had an outstanding balance at January 31,
2006 and 2005 representing 63.4% and 74.8% of the total receivables,
respectively. The Company assesses the financial strength of its customers and,
as a consequence, believes that its trade accounts receivable credit risk
exposure is limited. However, the loss or significant decline in business from
any of its major customers could have a material effect upon its revenue and
income.
NOTE K - RETIREMENT PLAN
The Company has a qualified profit sharing plan in accordance with the
provision of Section l165(a)(3)(A) of the Puerto Rico Code, for employees who
meet certain age and service period requirements. The Company makes
contributions to this plan as required by the provisions of the plan document.
Contributions for the three months ended January 31, 2006 and 2005 were $7,537
and $5,016, respectively. Contributions for the years ended October 31, 2005 and
2004 were $35,908 and $29,467, respectively.
NOTE L - SUBSEQUENT EVENTS
1. On February 22, 2006, the Company changed its fiscal year to the fiscal
year ended October 31. The change in fiscal year is reflected in the Form 10-QSB
for the quarter ended January 31, 2006. The change of fiscal year results from
the acquisition of Plaza.
F-21
2. In February 2006, the Company entered into a three-year employment
agreement with the Company's executive vice president and chief operating
officer. The agreement provides for an annual salary of $210,000, plus a $9,000
bonus, which was paid at the time he executed his agreement, and for the grant
of incentive stock options to purchase 300,000 shares of common stock at an
exercise price of $.7344 per share. The Company also provides the officer with
an automobile allowance of $1,250 per month. If the Company terminates the
officer's employment other than for cause or as a result of his death or
disability, the Company is required to pay him his compensation for the balance
of the term and continue his certain insurance benefits for the balance of the
term or such time as he has insurance coverage provided by another employer. He
has the right to terminate his employment in the event of a change of control,
as defined, in which event we are required to pay him his then current salary
for six months and continue his insurance benefits for such six month period or
until such earlier date as he has insurance coverage by an another employer.
3. On February 27, 2006, the Company filed a certificate of ownership and
merger merging our wholly-owned subsidiary, Pharma-Bio Serv, Inc., into the
Company. As a result of the filing of this certificate, our corporate name was
changed to Pharma-Bio Serv, Inc. At the time of the filing of the certificate of
ownership and merger, the subsidiary had no assets and the transaction was
effected solely to change the Company's name.
F-22
LAWRENCE CONSULTING GROUP, INC. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Lawrence Consulting Group, Inc.
Lawrence, NY 11559
We have audited the accompanying balance sheets of Lawrence Consulting
Group, Inc. as of June 30, 2004 and 2005, and the related statements of
operations, changes in stockholders' equity (deficiency) and cash flows for the
period from January 14, 2004 (inception) through June 30, 2004 and the year
ended June 30, 2005. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Lawrence Consulting Group,
Inc. Corp. as of June 30, 2004 and 2005, and the results of its operations and
its cash flows for the periods from January 14, 2004 (inception) through June
30, 2004 and the year period ended June 30, 2005 in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note I, the Company has restated its financial statements
as of June 30, 2004 and for the period from January 14, 2004 through June
30,2004.
/s/ Raich Ende Malter & Co. LLP
East Meadow, New York
September 28, 2005, except for Note J, as to which the date is
January 28, 2006 and Note K as to which the date is February 22, 2006
F-23
Lawrence Consulting Group, Inc.
Balance Sheets
As of June 30,
------------------------
2004 2005
(RESTATED)
-------- --------
ASSETS
CURRENT ASSETS
CASH $ 942 $ 46,423
ACCOUNTS RECEIVABLE 2,800
-------- --------
TOTAL CURRENT ASSETS 942 49,223
======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
CURRENT LIABILITIES
ACCRUED LIABILITIES $ 10,717 $ 4,450
-------- --------
STOCKHOLDERS' EQUITY (DEFICIENCY)
PREFERRED STOCK $0.0001 PAR VALUE,
AUTHORIZED 2,000,000 SHARES, ISSUED-NONE -- --
COMMON STOCK $0.0001 PAR VALUE,
AUTHORIZED 10,000,000 SHARES,
ISSUED & OUTSTANDING 450,000
SHARES as of June 30, 2004
AND 551,800 SHARES as of June 30, 2005 45 55
ADDITIONAL PAID IN CAPITAL 25,955 76,845
COMMON STOCK SUBSCRIPTION RECEIVABLE (25,000)
ACCUMULATED DEFICIT (10,775) (32,127)
-------- --------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (9,775) 44,773
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 942 $ 49,223
(DEFICIENCY) ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS
F-24
Lawrence Consulting Group, Inc.
Statements of Operations
For the period from
January 14, 2004 For the
(inception) Year Period
through Ended
June 30, 2004 June 30, 2005
(RESTATED)
--------- ---------
REVENUES:
CONSULTING INCOME $ 13,300
INTEREST INCOME $ 0 15
--------- ---------
TOTAL REVENUES
0 13,315
GENERAL & ADMINISTRATIVE EXPENSES 10,775 34,667
--------- ---------
NET LOSS $ (10,775) $ (21,352)
--------- ---------
LOSS PER COMMON SHARE
BASIC AND DILUTED $ (0.02) $ (0.04)
--------- ---------
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING-BASIC AND DILUTED 445,808 551,800
--------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS
F-25
Lawrence Consulting Group, Inc.
Statements of Changes in Stockholders' Equity (Deficiency)
For the period from
January 14, 2004 (inception) through June 30, 2004
and for the year ended June 30, 2005
COMMON
ADDITIONAL STOCK TOTAL
PREFERRED COMMON PAID-IN SUBSCRIPTION ACCUMULATED STOCKHOLDERS'
STOCK STOCK CAPITAL RECEIVABLE DEFICIT EQUITY
(DEFICIENCY)
-------- ------- ----------- --------------- ---------- -----------
Shares Amount Shares Amount
--- ------ ------ ------
BALANCE-
January 14, 2004 - $- - $ - $- $- $- $-
ISSUANCE OF COMMON
STOCK TO FOUNDERS 2,000,000 200 800 1,000
RECAPITALIZATION,
CONVERSION OF
80% FOUNDERS (1,600,000) (160) 160 -
SHARES TO WARRANTS
ISSUANCE OF
COMMON STOCK - $- 50,000 5 24,995 (25,000) -
NET LOSS (10,775) (10,775)
--------------------------------------------------------------------------------------------------
BALANCE-
June 30, 2004
(Restated) - - 450,000 45 25,955 (25,000) (10,775) (9,775)
ISSUANCE
OF COMMON STOCK - - 101,800 10 50,890 50,900
PROCEEDS FROM
COMMON STOCK
SUBSCRIPTION
RECEIVABLE 25,000 25,000
NET LOSS (21,352) (21,352)
--------------------------------------------------------------------------------------------------
BALANCE-
June 30, 2005 - $- 551,800 $55 $76,845 - $(32,127) $44,773
--- --- -------- --- ------- -------- ---------- --------
--- --- -------- --- ------- -------- ---------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS
F-26
Lawrence Consulting Group, Inc.
Statements of Cash Flow
For the period from January 14, 2004
(inception) through June 30, 2004
and for the year ended June 30, 2005
For the
Period from January Year
14, 2004 (inception) ended June 30,
through June 30, 2005 2005
(RESTATED)
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $ (10,775) $(21,352)
Adjustments to reconcile net loss to
net cash used in operating activities:
Changes in asset and liability balances:
Accounts receivable (2,800)
Accrued Liabilities 10,717 (6,267)
--------------- --------------
NET CASH USED IN OPERATING ACTIVITIES $ (58) $(30,419)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 1,000 50,900
Proceeds from stock subscription receivable 25,000
--------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,000 75,900
--------------- --------------
NET INCREASE IN CASH $ 942 $ 45,481
CASH -- beginning of period 0 $ 942
--------------- --------------
CASH -- end of period $ 942 $ 46,423
---------------- --------------
Supplemental disclosures of cash flow information:
Non-cash financing activities:
Subscription receivable $25,000
===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS
F-26
LAWRENCE CONSULTING GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2005
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
Lawrence Consulting Group, Inc. (the "Company") was organized under the
laws of the State of Delaware on January 14, 2004. The Company offers consulting
and business advisory services. In August 2004, the Company entered into its
first two consulting agreements. In May 2005, the Company entered into its third
consulting agreement. The Company's clients are currently located in New York
and Florida.
Use of Estimates
The preparation of 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 financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates. Significant estimates made by management include the valuation of the
deferred tax asset allowance.
Fair Value of Financial Instruments
The amounts at which current assets and current liabilities are presented
approximate their fair value due to their short-term nature.
Revenue Recognition
The Company's consulting agreements may require monthly fees and/or hourly
fees. These fees are recognized as revenue as services are rendered.
Accounts Receivable
Accounts receivable are recorded at their estimated realizable value. An
allowance for doubtful accounts is estimated by management through evaluation of
significant past due accounts. 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.
Income Taxes
The Company follows the provisions of Statement of Financial Accounting
Standards Board No. 109, "Accounting for Income Taxes," which requires the use
of the liability method of accounting for income taxes. The liability 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.
Loss Per Common Share
The Company has adopted Statement of Financial Accounting Standards No.
128, Earnings Per Share, which modified the calculation of earnings per share
("EPS"). This statement replaced the previous presentation of primary and fully
diluted EPS to basic and diluted EPS. Basic EPS is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS includes the dilution of common stock
equivalents, and is computed similarly to fully diluted EPS pursuant to
Accounting Principles Board (APB) Opinion 15.
Basic loss per common share is calculated by dividing net loss by the
weighted average number of shares of common stock outstanding. Stock warrants
have not been included in the calculation of diluted loss per share, as the
effect would have been antidilutive and the warrants were not exercisable during
the period covered by these financial statements as the Company's common stock
was not trading at $1.00 per share. Accordingly, basic and dilutive loss per
share are the same for the Company.
F-27
NOTE B - INCOME TAXES
Deferred tax assets and liabilities are determined using enacted tax rates
for the effects of net operating losses and temporary differences between the
book and tax bases of assets and liabilities. The Company records a valuation
allowance on deferred tax assets to reflect the expected future tax benefits to
be realized. In determining the appropriate valuation allowance, certain
judgments are made relating to recoverability of deferred tax assets, uses of
tax loss carry forwards, level of expected taxable income and available tax
planning strategies. These judgments are routinely reviewed by management. At
June 30, 2005, the Company had a net operating loss of $32,127 available to
reduce future taxable income expiring through 2024. These losses are subject to
limitations imposed under the Internal Revenue Code pursuant to Sections 382 and
383 regarding changes in ownership. Management Has determined that it is more
likely than not that the Company will not be able to utilize its net operating
loss carryforward in the future. and accordingly, the deferred tax asset of
$13,493 has been fully reserved. A reconcilliation of the statutory income tax
effective rate to the actual provision shown in the financial statements is as
follows:
For the period
January 14,
2004 (inception)
through For the Year ended
June 30, 2004 June 30, 2005
----------------- ------------------
Loss before income taxes $10,775 $32,127
-------- --------
-------- --------
Computed tax benefit at
statutory rate:
Federal ($3,663) (34%) ($10,923) (34%)
State (862) (8%) (2,570) (8%)
Net Operating Loss
Valuation reserve 4,525 42% 13,493 42%
------- ------ -------- ------
Total tax benefit $ - -% $ -- -%
------- ------ -------- -------
------- ------ -------- -------
NOTE C - CAPITAL TRANSACTIONS
On January 15, 2004, the Company issued to its founders 2,000,000 shares
of common stock in exchange for $1,000 (the "Equity Purchase Price"). The
Company was subsequently recapitalized so that as of January 16, 2004, the
Company had 400,000 shares of Common Stock and 1,600,000 warrants issued and
outstanding. Management allocated $160 of the Equity Purchase Price to the
warrants and the balance to the common stock. The warrants are exercisable at
$0.06 per share and expire on January 16, 2014. The warrants are not exercisable
until the earlier of (i) September 1, 2007 or (ii) date on which the closing
price of the shares of the Company's common stock has equaled or exceeded $0.50
per share on the NASDAQ Bulletin Board, NASDAQ National Market System or on the
American or New York Stock Exchange for at least ten (10) consecutive trading
days.
On March 1, 2004, 50,000 shares were sold for $0.50 per share. The Company
received no cash in connection with the sale of these shares during the period
from January 14, 2004 (inception) through June 30, 2004 and was issued a note
receivable for $25,000, which was collected on August 20, 2004.
On August 31, 2004, the Company completed a private placement of 101,800
shares of common stock at $0.50 per share.
F-28
NOTE D - RELATED PARTY TRANSACTIONS
During 2004 and 2005, the Company utilized the office space provided by
its president at no cost to the Company. The amount of office space utilized by
the Company is considered insignificant.
In March, 2004, the Company entered into an agreement with Krovim, LLC
("Krovim"), a principal shareholder of the Company, whereby Krovim agreed to
lend the Company up to a maximum of $25,000 at prime plus 2% per annum. No
drawdowns have been made to date and there are no formal repayment terms.
The President of Rivkalex Corp., a client of the Company's, owns 18.8% of
the Company's Common Stock.
NOTE E - LONG TERM EMPLOYMENT AGREEMENT
On August 20, 2004, the Company entered into a three year employment
agreement with its president, which shall be extended from year to year after
the initial term. The president, who is also the Company's Chairman and Chief
and Executive Officers, shall not be entitled to any cash compensation from the
Company for his services until the Company's annualized revenues exceed $500,000
on a quarterly basis. At such time, the president shall be entitled to receive a
salary of $50,000 per annum.
NOTE F - CONCENTRATION OF RISKS
The Company's cash balances are maintained in a high quality bank checking
account. Management deems all its accounts receivables to be fully collectible,
and, as such, does not maintain any allowances for uncollectable receivables.
NOTE G - MATERIAL BALANCE SHEET ACCOUNTS
As of June 30, 2005, two of the Company's clients each accounted for
approximately 36% of the Company's accounts receivable and a third client
accounted for the balance. As of June 30, 2005, all of the Company's accounts
payables were due to a professional services firm for bookkeeping services.
NOTE H - CHANGE OF AUDITORS
Silverstein & Weiss (S&W") previously audited the Company's financial
statements for the period ended June 30, 2004. S&W's report for this period did
not contain an adverse opinion or disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope or accounting principles.
The decision to change auditors was approved by the Company's sole
Director and was made because S&W is not registered with the Public Company
Accounting Oversight Board ("PCAOB") and thus cannot act as an auditor of a
public company. S&W resigned because it was not registered with the PCAOB. Such
resignation was effective August 25, 2005. On August 25, 2005, the Company
appointed Raiche Ende Malter & Co., LLP ("Raiche Ende") to serve as its new
independent auditor.
In connection with the audit of the period from January 14, 2004
(inception) to June 30, 2004 and the quarterly reports subsequent thereto and
prior to the resignation of S&W, there were no disagreements or reportable
events between the Company and S&W on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to the satisfaction of S&W, would have caused them to
make a reference to the subject matter of the disagreements or reportable events
in connection with their reports.
NOTE I - RESTATEMENT OF FINANCIAL STATEMENTS
The Company's financial statements as of June 30, 2004 and for the period
from January 14, 2004 (inception) to June 30, 2004 have been restated from prior
financial statements included in the Company's Form 10SB registration statement
filed with the SEC on September 24, 2004. In the restated financial statements
(i) $7,661 of organization costs originally capitalized were expensed, and (ii)
a $25,000 stock subscription receivable was reclassified from a current asset to
a contra-equity account.
F-29
NOTE J - SUBSEQUENT EVENTS
1. On January 24, 2006, the Company effected a two-for-one share
distribution with respect to its common stock pursuant to which the Company
issued one share of common stock for each share outstanding on the record date,
January 24, 2006. All share and per share data give retroactive effect to the
stock distribution.
2. On January 25, 2006, the Company acquired Plaza as a result of the
merger of Acquisition Company into Plaza. The acquisition of Plaza was completed
in a transaction accounted for as a reverse acquisition. As a result of the
reverse acquisition, the business conducted by Plaza became the Company's sole
business activity. Plaza provides consulting services to the pharmaceutical and
related industries in Puerto Rice. Plaza assists clients to comply with
government regulations by offering a full range of consulting services in the
areas of: validation and qualification, technology transfer and post-approval
changes, technical documentation, environmental safety and occupational health,
microbiology/bio-control, process support and project management, compliance and
regulatory, training services and computer systems.
Pursuant to the agreement, Elizabeth Plaza, as the sole stockholder, of
Plaza, received:
- $10,000,000 cash at the closing;
- 1,150,000 shares of the Company's common stock at the closing; and
- The right to receive three payments, each in the amount of
$2,750,000, payable on the first, second and third anniversaries of
the closing date.
As a condition to closing, Plaza was required to have a net tangible book
value of not less than $5,500,000, of which at least $2,000,000 was in cash, as
of November 30, 2005.
The Company raised the funds necessary to make the $10,000,000 payment due
to Ms. Plaza through the private placement of units consisting of shares of a
newly-created series of Series A convertible preferred stock and warrants to
purchase common stock (the "Private Placement").
At the closing, all of the present officers and directors of the Company
resigned from their respective positions, except that Mr. Dov Perlysky, who was
president and a director of the Company, resigned as an officer, but continued
as a director. At the closing, the Company elected four directors, including Ms.
Plaza. The other three are independent directors.
Pursuant to the Plaza Agreement, all outstanding options issued by Plaza
were terminated, and the Company granted incentive stock options to purchase an
aggregate of 1,400,000 shares of common stock at an exercise price of $0.7344
per share to the holders of such terminated Plaza options, pursuant to the
Company's 2005 Long-Tern Incentive Plan (described below). These options are
subject to stockholder approval of the 2005 Long Term Incentive Plan.
Pursuant to the Plaza Agreement, at the closing, the Company issued
600,000 shares of common stock and warrants to purchase 2,500,000 shares of
common stock with an exercise price of $.06 per share to San Juan Holdings,
Inc., the investment banker for Plaza and Ms. Plaza. The Company provided
certain demand and piggyback registration rights to Ms. Plaza and San Juan
Holdings covering the shares of common stock issued to them at the closing and
the shares issuable upon exercise of the warrants issued to San Juan Holdings.
Valuing the common stock issued to Plaza and San Juan Holdings, Inc.
("SJH") at $0.7344 per share and imputing a 7% interest rate on the three future
payments due Ms. Plaza ("the Future Payments") yields a value of the
consideration issued by the Company pursuant to the Plaza Agreement as follows:
$18,069,560 ($10 million cash plus $844,560 worth of common stock plus
$7,225,000 present value of the Future Payments at 7%) and $2,126,640 paid to
SJH ($440,640 worth of common stock plus $1,686,000 for the warrant to purchase
2,500,000 shares of common stock at $0.06/share).
F-30
The following condensed balance sheet summarizes the assets, liabilities
and shareholders' equity of Plaza as of January 31, 2006. There is no
significant difference between the condensed financial information as of January
31, 2006 and the date of the merger (January 25, 2006).
Plaza Consulting Group, Inc.
Condensed Balance Sheet as of January 31, 2006
(unaudited) ($ thousands)
Assets
Cash $3,055
Accounts Receivable 3,446
Other assets 793
------
Total Assets $7,294
------
------
Liabilities and Stockholders' Equity
Accounts Payable $1,025
Other liabilities 207
------
Total liabilities $1,232
Stockholders' Equity $6,062
------
Total liabilities and Stockholders' Equity $7,294
------
------
As a result of the reverse acquisition accounting treatment, Plaza is
deemed to be the acquiring company for accounting purposes.
Each share of series A preferred stock sold in the Private Placement
automatically converts into 13.616 shares of common stock upon the filing of a
certificate of amendment to our certificate of incorporation which increases the
authorized capital stock to 10,000,000 shares of preferred stock and 50,000,000
shares of common stock. The board of directors has approved such an amendment,
subject to stockholder approval.
The holders of the series A preferred stock have no dividend rights,
except that, if a dividend is declared with respect to the common stock, the
holders of the series A preferred stock shall be entitled to dividends on the
preferred stock on an "as if converted" basis.
In October 2005, the Company's board of directors adopted the 2005
Long-Term Incentive Plan, covering 2,500,000 shares of common stock. The 2005
plan provides for the grant of incentive and non-qualified options, stock
grants, stock appreciation rights and other equity-based incentives to
employees, including officers, and consultants. The 2005 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. Independent
directors are not eligible for discretionary options. However, each newly
elected independent director receives at the time of his or her election, a
five-year option to purchase 25,000 shares of common stock at the market price
on the date of his or her election. In addition, the plan provides for the
annual grant of an option to purchase 5,000 shares of common stock on the first
trading day of January in each year, commencing January 2007. The options to
directors have a term of five years and become exercisable cumulatively as to
50% of the shares subject to the option six months from the date of grant and as
to the remaining 50% 18 months from the date of grant. 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
10% of our 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.
F-31
In connection with the Private Placement, the Company issued warrants to
purchase 3,999,700 shares of common stock at an exercise price of $1.10 per
share and warrants to purchase an additional 3,999,700 shares of common stock at
an exercise price of $1.65 per shares. These warrants expire five years from the
closing date and are callable by the Company if the closing price of the common
stock is at least twice the exercise price of the warrants for twenty (20)
consecutive trading days. The warrants are not exercisable until the amendment
to the Company's certificate of incorporation increasing the number of
authorized shares of the Company's common stock has been approved by the
Company's stockholders and filed with the Secretary of State of the State of
Delaware.
At the closing of the Plaza Agreement, the Company issued to
broker-dealers who assisted the Company in the Private Placement, three-year
warrants to purchase an aggregate of 1,439,892 shares of common stock at an
exercise price of $0.7344 per shares. The holders of the warrants have piggyback
registration rights for the common stock issuable upon exercise of the warrants,
which will include a standard underwriters' right to exclude shares, commencing
six months after the effective date of the registration statement relating to
the shares issuable upon conversion of the series A preferred stock issued to
the investors in the Private Placement.
On January 25, 2006, the Company entered into employment agreements with
Elizabeth Plaza and Nelida Plaza. The agreement with Elizabeth Plaza provides
that Ms. Plaza will serve as president and chief executive officer of the
Company for a period of 18 months, for which she will receive a salary at the
annual rate of $250,000. For 18 months thereafter, Ms. Plaza will serve as a
consultant for which she will receive compensation at the annual rate of
$75,000. During the term of her employment, the Company will also provide Ms.
Plaza with an automobile allowance at the annual rate of $24,828, discretionary
bonuses and stock options or other equity-based incentives as shall be
determined by the compensation committee's board of directors, except that her
bonus shall not be less than 4% nor more than 50% of her salary. If the Company
terminates Ms. Plaza's employment other than for cause or as a result of her
death or disability, we are required to pay Ms. Plaza the balance of her
compensation for her employment terms and her consulting term and other
benefits, including a pro rata portion of the bonus that would have been paid to
her, and her obligations under her non-competition provision terminate.
The Company's agreement with Nelida Plaza provides that Ms. Plaza will
serve as vice president for a term of three years for which she will receive
annual compensation at the annual rate of $150,000. She is also entitled to such
bonus compensation as is determined by the compensation committee, not to exceed
50% of her salary. The Company also agreed to make the lease payments on the
automobile she currently leases. Such payment are at the annual rate of
approximately $11,600. If the Company terminates Ms. Plaza's employment other
than for cause or as a result of her death or disability, the Company is
required to pay Ms. Plaza the balance of her compensation for her employment
terms and her consulting term and other benefits, including a pro rata portion
of the bonus that would have been paid to her, and her obligations under her
non-competition provision, terminate.
On January 26, 2006, the Company entered into a one-year consulting
agreement with Dov Perlysky, pursuant to which the Company agreed to pay Mr.
Perlysky a 5% commission on business generated by Mr. Perlysky's efforts. This
agreement replaced his employment agreement.
Pursuant to the Company's Long Term Incentive Plan, on January 25, 2006,
options to purchase 25,000 shares at $.7344 per share, being the fair market
value on the date of grant, were automatically granted to Messrs. Kirk Michel,
Howard Spindel and Irving Wiesen. These option grants are subject to stockholder
approval of the 2005 Plan.
F-32
Note K - SUBSUBSEQUENT CHANGE OF FISCAL YEAR AND CORPORATE NAME
On February 22, 2006, the Company changed its name to Pharma-Bio Serv,
Inc. and changed its fiscal year to the twelve months ended October 31,
commencing with the year ending October 31, 2006
F-33
Lawrence Consulting Group, Inc.
Consolidated Balance Sheets
December 31, 2005 June 30, 2005
(unaudited)
------------------ ---------------
ASSETS
CURRENT ASSETS
CASH $ 4,397 $ 46,423
ACCOUNTS RECEIVABLE 5,900 2,800
---------------- ---------------
TOTAL CURRENT ASSETS $ 10,297 $ 49,223
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES
ACCRUED LIABILITIES $ 35,392 $ 4,450
--------------- ---------------
STOCKHOLDERS' EQUITY (DEFICIENCY)
PREFERRED STOCK, $0.0001 PAR VALUE,
AUTHORIZED 2,000,000 SHARES, ISSUED-NONE - -
COMMON STOCK, $0.0001 PAR VALUE,
AUTHORIZED 10,000,000 SHARES,
ISSUED AND OUTSTANDING 551,800 SHARES
AS OF DECEMBER 31, 2005, AND 55 55
JUNE 30, 2005
ADDITIONAL PAID IN CAPITAL 76,845 76,845
ACCUMULATED DEFICIT (101,995) (32,127)
---------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIENCY) (25,095) 44,773
---------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' $ 10,297 $ 49,223
EQUITY ================ =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS
F-34
Lawrence Consulting Group, Inc.
Consolidated Statements of Operations
(unaudited)
Six months ended
----------------
December 31, 2005 December 31, 2004
----------------- ----------------
Revenues:
CONSULTING INCOME $ 18,900 $ 4,000
OTHER INCOME - 15
----------- ------------
TOTAL REVENUES $ 18,900 $ 4,015
General and Administrative
Expenses 88,768 17,046
----------- ------------
NET LOSS $(69,868) $(13,301)
----------- ------------
----------- ------------
LOSS PER COMMON SHARE
BASIC AND DILUTED $ (0.13) $ (0.02)
----------- ------------
----------- ------------
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING AND DILUTED 551,800 517,498
----------- ------------
----------- ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS
F-35
Lawrence Consulting Group, Inc.
Consolidated Statements of Cash Flow
(UNAUDITED)
SIX MONTHS ENDED
------------------
December 31, 2005 December 31, 2004
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
NET LOSS $ (69,868) $ (13,031)
Adjustments to reconcile net loss to
net cash used in operating activities:
Changes in asset and liability balances:
Accounts receivable (3,100) (2,000)
Accrued Liabilities 30,942 (5,917)
-------------- -------------
NET CASH USED IN OPERATING ACTIVITIES $ (42,026) $ (20,948)
-------------- -------------
NET CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock - 50,900
Proceeds from Common Stock
subscription receivable - 25,000
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES - 75,900
-------------- --------------
NET INCREASE (DECREASE) IN CASH $ (42,026) $ 54,952
CASH - beginning of period 46,423 942
------------- ---------------
CASH - end of period $ 4,397 $ 55,894
-------------- ---------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE FINANCIAL STATEMENTS
F-36
Lawrence Consulting Group, Inc.
Notes to Financial Statements
DECEMBER 31, 2005
(Unaudited)
NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements and footnotes
have been condensed and therefore do not contain all disclosures required by
accounting principles generally accepted in the United States of America. In the
opinion of management, the information furnished reflects all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial position, results of operations and cash flows for the interim
periods. Interim periods are not necessarily indicative of results for a full
year.
These financial statements should be read in conjunction with the audited
financial statements of the Company for the year ended June 30, 2005 and the
notes thereto contained in the Company's Annual Report on Form 10-KSB, as filed
with the Securities and Exchange Commission on September 28, 2005, as amended on
December 14, 2005 and December 19, 2005.
Organization and Operations
Lawrence Consulting Group, Inc. ("Lawrence") was organized under the laws
of the State of Delaware on January 14, 2004. Lawrence offers consulting and
business advisory services. As of December 31, 2005, Lawrence had entered into
consulting agreements with three clients. Lawrence's clients are currently
located in New York and Florida.
On September 26, 2005, Plaza Acquisition Corp. ("Acquisition Company") was
formed in the Commonwealth of Puerto Rico and became a wholly-owned subsidiary
of Lawrence in October 2005. Acquisition Company was formed as a vehicle to
acquire Plaza.
Basis of Consolidation
The accompanying financial statements present the accounts of Lawrence and
Acquisition Company (collectively, the "Company"). All intercompany transactions
and balances have been eliminated in consolidation.
Use of Estimates
The preparation of 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 financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates. Significant estimates made by management include the valuation of the
deferred tax asset allowance.
Fair Value of Financial Instruments
The amounts at which current assets and current liabilities are presented
approximate their fair value due to their short-term nature.
Revenue Recognition
The Company's consulting agreements require monthly fees and/or hourly
fees. These fees are recognized as revenue as services are rendered.
Accounts Receivable
Accounts receivable are recorded at their estimated realizable value. An
allowance for doubtful accounts is estimated by management through evaluation of
significant past due accounts. 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.
F-37
Income Taxes
The Company follows the provisions of Statement of Financial Accounting
Standards Board No. 109, "Accounting for Income Taxes," which requires the use
of the liability method of accounting for income taxes. The liability 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.
Loss Per Common Share
Basic loss per common share is calculated by dividing net loss by the
weighted average number of shares of common stock outstanding. Diluted loss per
share includes the dilution of common stock equivalents. Stock warrants have not
been included in the calculation of diluted loss per share, as the effect would
have been antidilutive and the warrants were not exercisable during the period
covered by these financial statements as the Company's common stock was not
trading at or above $0.50 per share. Accordingly, basic and dilutive loss per
share are the same for the Company. All share and per share data give
retroactive effect to the stock distribution discussed in Note G.
Three months ended Six months ended
------------------- ----------------
December 31, 2005 December 31, 2004 December 31, 2005 December 31, 2004
---------------- ------------------ ----------------- ----------------
Basic $ (0.10) $ (0.02) $ (0.13) $ (0.02)
Diluted $ (0.10) $ (0.02) $ (0.13) $ (0.02)
NOTE B - CAPITAL TRANSACTIONS
On January 15, 2004, the Company sold 2,000,000 shares of common stock to
its founders for a total of $1,000, or ($0.0005 per share). The Company was
recapitalized as of January 16, 2004, and the Company issued to the founders
400,000 shares of Common Stock and warrants to purchase 1,600,000 shares of
common stock at $0.06 per share. The Company allocated the $1,000 purchase price
80% to the warrants and 20% to the common stock. The warrants are exercisable at
$0.06 per share and expire on January 16, 2014. The warrants are not exercisable
until the earlier of (i) September 1, 2007 or (ii) the date on which the closing
price of the shares of the Company's common stock has equaled or exceeded $0.50
per share on the NASDAQ Bulletin Board, NASDAQ National Market System or on the
American or New York Stock Exchange for at least ten (10) consecutive trading
days.
On March 1, 2004, the Company sold 50,000 shares for $0.50 per share for a
$25,000 promissory note which was paid on August 20, 2004.
On August 31, 2004, the Company sold 101,800 shares of common stock at
$0.50 per share in a private placement.
F-38
NOTE C - INCOME TAXES
Deferred tax assets and liabilities are determined using enacted tax rates
for the effects of net operating losses and temporary differences between the
book and tax bases of assets and liabilities. The Company records a valuation
allowance on deferred tax assets to reflect the expected future tax benefits to
be realized. In determining the appropriate valuation allowance, certain
judgments are made relating to recoverability of deferred tax assets, uses of
tax loss carry forwards, level of expected taxable income and available tax
planning strategies. These judgments are routinely reviewed by management. At
December 31, 2005 and December 31, 2004, the Company had net operating loss
carryforwards of $101,995 and $ 23,806, respectively, available to reduce future
taxable income expiring through 2024. These losses are subject to limitations
imposed under the Internal Revenue Code pursuant to Sections 382 and 383
regarding changes in ownership. Management has determined that it is more likely
than not that these carryforwards cannot be utilized in the future, and,
accordingly, the tax asset of $ 42,838 and $9,998 has been fully reserved as of
December 31, 2005 and December 31, 2004, respectively. A reconciliation of the
statutory income tax effective rate to the actual provision shown in the
financial statements is as follows:
For the six months ended
---------------------------------------------
December 31, 2005 December 31, 2004
-------------------- -------------------
Loss before income taxes ($69,868) ($13,301)
--------- ---------
--------- ---------
Computed tax benefit at
statutory rate:
Federal ($23,755) (34%) ($4,522) (34%)
State (5,589) (8%) (1,064) (8%)
Net Operating Loss
Valuation reserve 29,344 42% 5,586 (42%)
-------- ------ -------- ---------
Total tax benefit $ -- -% $ -- $ --%
-------- ------- --------- ---------
-------- ------- --------- ---------
F-39
NOTE D - RELATED PARTY TRANSACTIONS
During 2004 and through September 30, 2005, the Company utilized the
office space provided by its president at no cost to the Company. No rent was
paid during these periods because the Company had very limited use of the space
and no specific office space was allocated to the Company. Beginning October 1,
2005, the Company began to sublease space at fair value from an entity
affiliated with its president. The sublease was month-to-month through January,
2006. Also beginning October 1, 2005, the Company began to reimburse an
affiliate of its president the cost of certain office expenses incurred by the
Company.
In March 2004, the Company entered into an agreement with Krovim, LLC
("Krovim"), a principal stockholder of the Company, whereby Krovim agreed to
lend the Company up to a maximum of $25,000 at prime plus 2% per annum. No
drawdowns have been made to date and there are no formal repayment terms. The
agreement has been terminated.
The president of Rivkalex Corp., a client of the Company, owns 18.8% of
the Company's common stock. Revenue from Rivkalex were not significant.
NOTE E - COMMITMENTS
On August 20, 2004, the Company entered into a three year employment
agreement with its president, which shall be extended from year to year after
the initial term. The president, who was, until the reverse acquisition, the
Company's only officer, does not receive any cash compensation from the Company
for his services until the Company's annualized revenues exceed $500,000 on a
quarterly basis. At such time, the president shall be entitled to receive a
salary of $50,000 per annum.
In October 2005, the Company's board of directors adopted the 2005
Long-Term Incentive Plan, covering 2,500,000 shares of common stock. The 2005
plan provides for the grant of incentive and non-qualified options, stock
grants, stock appreciation rights and other equity-based incentives to
employees, including officers, and consultants. The 2005 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. Independent
directors are not eligible for discretionary options. However, each newly
elected independent director receives at the time of his or her election, a
five-year option to purchase 25,000 shares of common stock at the market price
on the date of his or her election. In addition, the plan provides for the
annual grant of an option to purchase 5,000 shares of common stock on the first
trading day of January in each year, commencing January 2007. The options to
directors have a term of five years and become exercisable cumulatively as to
50% of the shares subject to the option six months from the date of grant and as
to the remaining 50% 18 months from the date of grant. 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
10% of our 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.
NOTE F - CONCENTRATION OF RISKS
The Company's cash balances are maintained in a high quality bank checking
account. Management deems all its accounts receivables to be fully collectible,
and, as such, does not maintain any allowances for uncollectable receivables.
F-40
NOTE G - SUBSEQUENT EVENTS
1. On January 24, 2006, the Company effected a two-for-one share
distribution with respect to its common stock pursuant to which the Company
issued one share of common stock for each share outstanding on the record date,
January 24, 2006.
2. On January 25, 2006, the Company acquired Plaza as a result of the
merger of Acquisition Company into Plaza. The acquisition of Plaza was completed
in a transaction accounted for as a reverse acquisition. As a result of the
reverse acquisition, the business conducted by Plaza became the Company's sole
business activity. Plaza provides consulting services to the pharmaceutical and
related industries in Puerto Rice. Plaza assists clients to comply with
government regulations by offering a full range of consulting services in the
areas of: validation and qualification, technology transfer and post-approval
changes, technical documentation, environmental safety and occupational health,
microbiology/bio-control, process support and project management, compliance and
regulatory, training services and computer systems.
Pursuant to the agreement, Elizabeth Plaza, as the sole stockholder, of
Plaza, received:
- $10,000,000 cash at the closing;
- 1,150,000 shares of the Company's common stock at the closing; and
- The right to receive three payments, each in the amount of
$2,750,000, payable on the first, second and third anniversaries of
the closing date.
As a condition to closing, Plaza was required to have a net tangible book
value of not less than $5,500,000, of which at least $2,000,000 was in cash, as
of November 30, 2005.
The Company raised the funds necessary to make the $10,000,000 payment due
to Ms. Plaza through the private placement of units consisting of shares of a
newly-created series of Series A convertible preferred stock and warrants to
purchase common stock (the "Private Placement").
At the closing, all of the present officers and directors of the Company
resigned from their respective positions, except that Mr. Dov Perlysky, who was
president and a director of the Company, resigned as an officer, but continued
as a director. At the closing, the Company elected four directors, including Ms.
Plaza. The other three are independent directors.
Pursuant to the Plaza Agreement, all outstanding options issued by Plaza
were terminated, and the Company granted incentive stock options to purchase an
aggregate of 1,400,000 shares of common stock at an exercise price of $0.7344
per share to the holders of such terminated Plaza options, pursuant to the
Company's 2005 Long-Tern Incentive Plan (described below). These options are
subject to stockholder approval of the 2005 Long Term Incentive Plan.
Pursuant to the Plaza Agreement, at the closing, the Company issued
600,000 shares of common stock and warrants to purchase 2,500,000 shares of
common stock with an exercise price of $.06 per share to San Juan Holdings,
Inc., the investment banker for Plaza and Ms. Plaza. The Company provided
certain demand and piggyback registration rights to Ms. Plaza and San Juan
Holdings covering the shares of common stock issued to them at the closing and
the shares issuable upon exercise of the warrants issued to San Juan Holdings.
Valuing the common stock issued to Plaza and San Juan Holdings, Inc.
("SJH") at $0.7344 per share and imputing a 7% interest rate on the three future
payments due Ms. Plaza ("the Future Payments") yields a value of the
consideration issued by the Company pursuant to the Plaza Agreement as follows:
$18,069,560 ($10 million cash plus $844,560 worth of common stock plus
$7,225,000 present value of the Future Payments at 7%) and $2,126,640 paid to
SJH ($440,640 worth of common stock plus $1,686,000 for the warrant to purchase
2,500,000 shares of common stock at $0.06/share).
F-42
The following condensed balance sheet summarizes the assets, liabilities
and shareholders' equity of Plaza as of November 30, 2005. The actual balance
sheet of Plaza as of the closing (January 25, 2006) differs from the balance
sheet shown below because under the terms of the Plaza Agreement (i) at closing
Plaza must have a tangible net worth of no less than $5.5 million, of which at
least $2 million must be cash, and (ii) the Economic Effective Date (as such
term is defined in the Plaza Agreement) of the merger is November 30, 2005 which
means no income or loss of Plaza is allocated to Ms. Plaza for any period
subsequent to November 30, 2005. Thus, Plaza will have a tangible net worth as
of January 25, 2006 equal to $5.5 million (of which at least $2 million will be
cash) plus an amount equal to the income or loss earned by Plaza during the
period December 1, 2005 through January 25, 2006.
Plaza Consulting Group, Inc.
Condensed Balance Sheet as of November 30, 2005
(unaudited) ($ thousands)
Assets
Cash $1,819
Accounts Receivable 5,275
Other assets 478
-------
Total Assets $7,572
-------
-------
Liabilities and Stockholders' Equity
Accounts Payable $648
Other liabilities 238
Total liabilities $886
Stockholders' Equity $6,686
------
Total liabilities and Stockholders' Equity $7,572
------
------
As a result of the reverse acquisition accounting treatment, Plaza is
deemed to be the acquiring company for accounting purposes. As a result,
commencing with the quarter ending March 31, 2006, the Company's historical
financial statements will be those of Plaza.
Each share of series A preferred stock sold in the Private Placement
automatically converts into 13.616 shares of common stock upon the filing of a
certificate of amendment to our certificate of incorporation which increases the
authorized capital stock to 10,000,000 shares of preferred stock and 50,000,000
shares of common stock. The board of directors has approved such an amendment,
subject to stockholder approval.
The holders of the series A preferred stock have no dividend rights,
except that, if a dividend is declared with respect to the common stock, the
holders of the series A preferred stock shall be entitled to dividends on the
preferred stock on an "as if converted" basis.
F-43
In connection with the Private Placement, the Company issued warrants to
purchase 3,999,700 shares of common stock at an exercise price of $1.10 per
share and warrants to purchase an additional 3,999,700 shares of common stock at
an exercise price of $1.65 per shares. These warrants expire five years from the
closing date and are callable by the Company if the closing price of the common
stock is at least twice the exercise price of the warrants for twenty (20)
consecutive trading days. The warrants are not exercisable until the amendment
to the Company's certificate of incorporation increasing the number of
authorized shares of the Company's common stock has been approved by the
Company's stockholders and filed with the Secretary of State of the State of
Delaware.
At the closing of the Plaza Agreement, the Company issued to
broker-dealers who assisted the Company in the Private Placement, three-year
warrants to purchase an aggregate of 1,439,892 shares of common stock at an
exercise price of $0.7344 per shares. The holders of the warrants have piggyback
registration rights for the common stock issuable upon exercise of the warrants,
which will include a standard underwriters' right to exclude shares, commencing
six months after the effective date of the registration statement relating to
the shares issuable upon conversion of the series A preferred stock issued to
the investors in the Private Placement.
On January 25, 2006, the Company entered into employment agreements with
Elizabeth Plaza and Nelida Plaza. The agreement with Elizabeth Plaza provides
that Ms. Plaza will serve as president and chief executive officer of the
Company for a period of 18 months, for which she will receive a salary at the
annual rate of $250,000. For 18 months thereafter, Ms. Plaza will serve as a
consultant for which she will receive compensation at the annual rate of
$75,000. During the term of her employment, the Company will also provide Ms.
Plaza with an automobile allowance at the annual rate of $24,828, discretionary
bonuses and stock options or other equity-based incentives as shall be
determined by the compensation committee's board of directors, except that her
bonus shall not be less than 4% nor more than 50% of her salary. If the Company
terminates Ms. Plaza's employment other than for cause or as a result of her
death or disability, we are required to pay Ms. Plaza the balance of her
compensation for her employment terms and her consulting term and other
benefits, including a pro rata portion of the bonus that would have been paid to
her, and her obligations under her non-competition provision terminate.
The Company's agreement with Nelida Plaza provides that Ms. Plaza will
serve as vice president for a term of three years for which she will receive
annual compensation at the annual rate of $150,000. She is also entitled to such
bonus compensation as is determined by the compensation committee, not to exceed
50% of her salary. The Company also agreed to make the lease payments on the
automobile she currently leases. Such payment are at the annual rate of
approximately $11,600. If the Company terminates Ms. Plaza's employment other
than for cause or as a result of her death or disability, the Company is
required to pay Ms. Plaza the balance of her compensation for her employment
terms and her consulting term and other benefits, including a pro rata portion
of the bonus that would have been paid to her, and her obligations under her
non-competition provision, terminate.
On January 26, 2006, the Company entered into a one-year consulting
agreement with Dov Perlysky, pursuant to which the Company agreed to pay Mr.
Perlysky a 5% commission on business generated by Mr. Perlysky's efforts. This
agreement replaced his employment agreement.
Pursuant to the Company's Long Term Incentive Plan, on January 25, 2006,
options to purchase 25,000 shares at $.7344 per share, being the fair market
value on the date of grant, were automatically granted to Messrs. Kirk Michel,
Howard Spindel and Irving Wiesen. These option grants are subject to stockholder
approval of the 2005 Plan.
F-44
For more information on the Plaza Agreement and a description of the
business and financial statements of Plaze, reference is made to a Form 8-K
filed by the Company with the SEC on January 31, 2006. For more information on
the share distribution, reference is made to a Form 8-K filed by the Company
with the SEC on January 31, 2006.
F-45
Part II
INFORMATION NOT REQUIRED TO BE IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses including attorneys' fees, judgments, fines and
amounts paid in settlement in connection with various actions, suits or
proceedings, whether civil, criminal, administrative or investigative other than
an action by or in the right of the corporation, a derivative action, if they
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, if they had no reasonable cause to believe their
conduct was unlawful. A similar standard is applicable in the case of derivative
actions, except that indemnification only extends to expenses including
attorneys' fees incurred in connection with the defense or settlement of such
actions, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's certificate of
incorporation, bylaws, agreement, a vote of stockholders or disinterested
directors or otherwise.
Our certificate of incorporation provides that we will indemnify and hold
harmless, to the fullest extent permitted by Section 145 of the Delaware General
Corporation Law, as amended from time to time, each person that such section
grants us the power to indemnify.
The Delaware General Corporation Law permits a corporation to provide in
its certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for any breach
of the director's duty of loyalty to the corporation or its stockholders; acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; payments of unlawful dividends or unlawful stock
repurchases or redemptions, or any transaction from which the director derived
an improper personal benefit.
Our certificate of incorporation provides that, to the fullest extent
permitted by applicable law, none of our directors will be personally liable to
us or our stockholders for monetary damages for breach of fiduciary duty as a
director.
Each selling stockholder and the Company have agreed to mutual
indemnification provisions with respect to certain liabilities incurred in
connection with this offering as the result of claims made under the Securities
Act of 1933, the Securities Exchange Act of 1934 or state law.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, offices or controlling persons of the
Company, pursuant to the foregoing provisions, or otherwise, the Company has
been advised that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered hereunder, the Company will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-1
Item 25. Other Expenses of Issuance and Distribution
The estimated expenses of the registration, all of which will be paid by the
Company, are as follows:
Item Amount
---- ------
SEC filing fee 698.43
Printing and filing *
Legal expenses, including blue sky *
Accounting expenses *
Miscellaneous *
Total *
* To be supplied by Amendment.
Item 26. Recent Sales of Unregistered Securities
See "Selling Stockholders" in the prospectus for more information
concerning the securities issued in the January 2006 private placement.
The securities above were offered and sold in reliance upon exemptions
from the registration requirements of Section 5 of the Securities Act of 1933,
as amended, pursuant to Sections 4(2) and 4(6) of the Securities Act and Rule
506 of SEC. The securities were sold exclusively to accredited investors as
defined by Rule 501(a) under the Securities Act. The stock issuances prior to
the reverse acquisition were made by Lawarence Consulting Group, Inc.
In January 2006, we granted options to purchase common stock to key
employees. The shares issuable upon exercise of the warrants will be registered
pursuant to the Securities Act on a Form S-8.
Item 27. Exhibits
Exhibit Number Exhibit Description
--------------------------------------------------------------------------------
3.1 Certificate of Incorporation(1)
3.2 By-laws(1)
4.1 Certificate of Designation for the series A convertible
preferred stock(2)
4.2 Form of warrant issued to Investors(2)
4.3 Form of warrant held by initial warrant holders(2)
4.4 Form of warrant held by San Juan Holdings(2)
4.5 Form of warrants issued to broker-dealers in January 2006
private placement(2)
5 Opinion of Katsky Korins LLP(3)
10.1 Form of subscription agreement for January 2006 private
placement(2)
10.2 Registration rights provisions for the subscription agreement(2)
10.3 Registration rights provisions for Elizabeth Plaza and San Juan
Holdings, Inc. (2)
10.4 Employment agreement dated January 25, 2006, between the
Registrant and Elizabeth Plaza(2)
10.4 Employment agreement dated January 25, 2006, between the
Registrant and Nelida Plaza(2)
10.5 Consulting agreement dated January 25, 2006, between the
Registrant and Dov Perlysky(2)
10.6 Employment agreement dated February __, 2006, between the
Registrant and Mark Fazio(4)
II-2
Exhibit Number Exhibit Description
--------------------------------------------------------------------------------
10.7 2006 Long-term incentive plan(2)
10.8 Registration rights provisions for the subscription agreement(2)
10.9 Lease dated March 16, 2004 between Plaza Professional Center,
Inc. and the Registrant(4)
10.10 Lease dated November 1. 2004 between Plaza Professional Center,
Inc. and the Registrant(4)
21 List of Subsidiaries(4)
23.1 Consent of Katsky Korins LLP (Included in Exhibit 5)
23.2 Consent of Kevane Soto Pasarell Grant Thornton LLP (page II-6)
23.3 Consent of Raich Ende Malter & Co. LLP (page II-7)
(1) Filed as an exhibit to the Company's registration statement of Form 10-SB
and incorporated herein by reference.
(2) Filed as an exhibit to the Company's current report on Form 8-K which was
filed with the Commission on January 13, 2006 and incorporated herein by
reference.
(3) To be filed by amendment. (4) Filed herewith.
Item 28. Undertakings
(a) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to the Registration Statement to: (i)
include any prospectus required by Section 10(a)(3) of the
Securities Act; (ii) reflect in the prospectus any facts or events
arising after the effective date of the Registration Statement
which, individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration Statement;
and notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum
offering range may be reelected in the form of a prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration" table in the effective registration
statement; and (iii) include any material information with respect
to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in
the Registration Statement, provided however, that provisions (i)
and (ii) of this undertaking are inapplicable if the information to
be filed thereunder is contained in periodic reports filed by the
Company pursuant to the Exchange Act that are incorporated by
reference into the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment any
of the securities being registered which remains unsold at the
termination of the offering.
II-3
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by the Company is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant certifies that it has reasonable grounds to believe that it meets
all the requirements for filing on Form SB-2 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dorado, Commonwealth of Puerto Rico on this 27th
day of March, 2006.
PHARMA-BIO SERV, INC.
By: /s/ Elizabeth Plaza
-----------------------------------
Elizabeth Plaza, President and CEO
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons on behalf
of the registrant and in the capacities and on the dates indicated. Each person
whose signature appears below hereby authorizes Elizabeth Plaza as his true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this registration statement, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission.
Signature Title Date
/s/ Elizabeth Plaza. President, Chief Executive Officer March 27, 2006
---------------------------------------- and Director
Elizabeth Plaza. (Principal Executive Officer)
/s/Antonio L. Martinez Chief Financial Officer March 27, 2006
--------------------------------------- (Principal Financial
Antonio L. Martinez and Accounting Officer)
/s/ Dov Perlysky Director March 27, 2006
---------------------------------------
Dov Perlysky
/s/ Kirk Michel Director March 27, 2006
---------------------------------------
Kirk Michel
/s/ Howard Spindel Director March 27, 2006
---------------------------------------
Howard Spindel
/s/ Irving Wiesen Director March 27, 2006
---------------------------------------
Irving Wiesen
II-5
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S CONSENT
We consent to the use in this Registration Statement on Form SB-2, of our
report dated December 30, 2005, except for Note 12 (a), as to which the date is
January 9, 2006, and Note 12 (b) as to which date is January 25, 2006 with
respect to our audit of the financial statements of Plaza Consulting Group, Inc.
for the years ended October 31, 2005 and 2004, and to the reference to our firm
under the heading "Experts" in the Prospectus.
Kevane Soto Pasarell Grant Thornton LLP
Registered Public Accounting Firm
San Juan, Puerto Rico
March 27, 2006
II-6
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM'S CONSENT
We consent to the use in this Registration Statement on Form SB-2, of our
report dated September 28, 2005, except for Note J as to which the date is
January 28, 2006, and Note K as to which the date is February 22, 2006 with
respect to our audit of the financial statements of Lawrence Consulting Group,
Inc. for the year ended June 30, 2005 and the period January 14, 2004
(inception) to June 30, 2004, and to the reference to our firm under the heading
"Experts" in the Prospectus.
Raich Ende Malter & Co. LLP
Registered Public Accounting Firm
East Meadow, New York
March 28, 2006
II-7