UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

For the quarterly period ended July 31, ~~2013~~2014

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to ______________

Commission File No. 000-50956

PHARMA-BIO SERV, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		20-0653570
~~(State~~ (State or Other Jurisdiction of Incorporation or Organization)		~~(IRS~~ (IRS Employer Identification No.)

Pharma-Bio Serv Building, # 6 Road 696 Dorado, Puerto Rico		00646
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code 787-278-2709

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filero	¨	Accelerated filer	o
	Non-accelerated filero	¨	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨o No þ

The number of shares of the registrant’s common stock outstanding as of September ~~13, 2013~~11, 2014 was ~~22,702,186.~~23,047,462.

PHARMA-BIO SERV, INC.

FORM 10-Q

FOR THE QUARTER ENDED JULY 31, ~~2013~~2014

TABLE OF CONTENTS

			Page
PART I FINANCIAL INFORMATION

Item 1 –	Financial Statements

	Condensed Consolidated Balance Sheets as of July 31, ~~2013~~2014 and October 31, ~~2012~~2013 (unaudited)			31

	Condensed Consolidated Statements of Income for the three-month and nine-month periods ended July 31, ~~2013~~2014 and ~~2012~~2013 (unaudited)			42

	Condensed Consolidated Statements of Comprehensive Income for the three-month and nine-month periods ended July 31, ~~2013~~2014 and ~~2012~~2013 (unaudited)			53

	Condensed Consolidated Statements of Cash Flows for the three-month and nine-month periods ended July 31, ~~2013~~2014 and ~~2012~~2013 (unaudited)			64

	Notes to Condensed Consolidated Financial Statements (unaudited)			75

Item 2 –	- Management's Discussion and Analysis of Financial Condition and Results of Operations			1312

Item 4 –	Controls and Procedures		17

PART II OTHER INFORMATION

Item 1 – Legal Proceedings		18

~~PART II OTHER INFORMATION~~Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds			18

Item 16 –	~~Legal Proceedings~~ Exhibits			1918

~~Item 1A –~~	~~Risk Factors~~SIGNATURES			19

~~Item 6 –~~	~~Exhibits~~			19

~~SIGNATURES~~				20

PART I – FINANCIAL INFORMATION

~~ITEM 1.~~ ~~FINANCIAL STATEMENTS~~

Item 1.

FINANCIAL STATEMENTS

PHARMA-BIO SERV, INC.

Condensed Consolidated Balance Sheets

~~(Unaudited)~~

	July 31, 2013*			October 31, 2012**
ASSETS							July 31, 2014*			October 31, 2013**
Current assets
Current assets:
Cash and cash equivalents	$	9,099,619		$	6,538,113		$	13,796,618		$	12,045,923
Marketable securities		95,000			95,000			66,983			71,260
Accounts receivable		8,051,867			7,580,167			6,386,019			7,403,987
Other		792,819			382,773			807,343			767,452
Total current assets		18,039,305			14,596,053			21,056,963			20,288,622

Property and equipment		1,038,805			1,113,371			952,593			976,423
Other assets		28,109			25,592			17,349			16,891
Total assets	$	19,106,219		$	15,735,016		$	22,026,905		$	21,281,936

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current liabilities:
Current portion-obligations under capital leases	$	35,357		$	39,436		$	38,221		$	32,188
Accounts payable and accrued expenses		1,938,551			2,562,462			2,059,555			2,825,532
Income taxes payable		297,750			173,620			165,996			322,731
Total current liabilities		2,271,658			2,775,518			2,263,772			3,180,451

Obligations under capital leases		58,711			83,912			100,674			51,724
Total liabilities		2,330,369			2,859,430			2,364,446			3,232,175

Stockholders' equity:
Preferred Stock, $0.0001 par value; authorized 10,000,000 shares; none outstanding		-			-			-			-
Common Stock, $0.0001 par value; authorized 50,000,000 shares; issued and outstanding 22,702,186
and 20,758,695 shares at July 31, 2013 and October 31, 2012, respectively		2,271			2,076
Common Stock, $0.0001 par value; authorized 50,000,000 shares; 23,049,462 and 22,702,186 shares issued and 23,047,462 and 22,702,186 shares outstanding, at July 31, 2014 and October 31, 2013, respectively								2,305			2,271
Additional paid-in capital		884,376			678,214			982,339			931,039
Retained earnings		15,973,754			12,286,714			18,779,940			17,193,203
Accumulated other comprehensive loss		(84,551	)		(91,418	)		(99,845	)		(76,752	)
								19,664,739			18,049,761
Treasury stock, at cost; 2,000 common shares held at July 31, 2014								(2,280	)		-
Total stockholders' equity		16,775,850			12,875,586			19,662,459			18,049,761
Total liabilities and stockholders' equity	$	19,106,219		$	15,735,016		$	22,026,905		$	21,281,936

~~____________~~

*	Unaudited.
**	Condensed from audited financial statements.

See notes to condensed consolidated financial statements.

~~TABLE OF CONTENTS~~

PHARMA-BIO SERV, INC.

Condensed Consolidated Statements of Income

(Unaudited)

													Three months ended July 31,					Nine months ended July 31,
	Three months ended July 31,						Nine months ended July 31,							2014			2013		2014			2013
	2013			2012			2013			2012
REVENUES	$	8,363,709		$	7,655,044		$	24,273,820		$	21,056,366		$	6,836,166		$	8,363,709	$	20,418,773		$	24,273,820

COST OF SERVICES		5,383,657			5,056,218			15,605,375			13,814,752			4,657,930			5,383,657		13,778,422			15,605,375

GROSS PROFIT		2,980,052			2,598,826			8,668,445			7,241,614			2,178,236			2,980,052		6,640,351			8,668,445


SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		1,446,627			1,026,160			4,097,002			2,881,190			1,479,976			1,446,627		4,695,208			4,097,002

INCOME FROM OPERATIONS		1,533,425			1,572,666			4,571,443			4,360,424			698,260			1,533,425		1,945,143			4,571,443

OTHER INCOME (EXPENSE):
Interest expense		(1,704	)		(1,915	)		(5,707	)		(6,243	)
Interest income		2,318			2,320			7,305			8,301
Gain on disposition of property and equipment		-			-			-			190
OTHER (EXPENSE) INCOME, NET														(809	)		614		(1,660	)		1,598
		614			405			1,598			2,248

INCOME BEFORE TAX		1,534,039			1,573,071			4,573,041			4,362,672
INCOME BEFORE INCOME TAXES														697,451			1,534,039		1,943,483			4,573,041

INCOME TAX EXPENSE		287,524			297,173			886,001			752,231			100,391			287,524		356,712			886,001

NET INCOME	$	1,246,515		$	1,275,898		$	3,687,040		$	3,610,441		$	597,060		$	1,246,515	$	1,586,771		$	3,687,040

BASIC EARNINGS PER COMMON SHARE	$	0.055		$	0.061		$	0.167		$	0.174		$	0.026		$	0.055	$	0.069		$	0.167

DILUTED EARNINGS PER COMMON SHARE	$	0.053		$	0.056		$	0.155		$	0.158		$	0.025		$	0.053	$	0.067		$	0.155

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING – BASIC		22,668,354			20,758,695			22,032,790			20,758,695
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC														23,049,212			22,668,354		22,957,160			22,032,790

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING – DILUTED		23,338,649			22,980,475			23,724,872			22,877,147
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – DILUTED														23,609,317			23,338,649		23,715,758			23,724,872

See notes to condensed consolidated financial statements.

~~TABLE OF CONTENTS~~

PHARMA-BIO SERV, INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

Three months ended July 31, Nine months ended July 31,
2013 2012 2013 2012
NET INCOME $ 1,246,515 $ 1,275,898 $ 3,687,040 $ 3,610,441

OTHER COMPREHENSIVE INCOME (LOSS):

Foreign currency translation adjustment, net of tax 9,959 (56,488 ) 6,867 (113,162 )

TOTAL OTHER COMPREHENSIVE INCOME (LOSS) 9,959 (56,488 ) 6,867 (113,162 )

COMPREHENSIVE INCOME $ 1,256,474 $ 1,219,410 $ 3,693,907 $ 3,497,279

	Three months ended July 31,					Nine months ended July 31,
	2014			2013		2014			2013
NET INCOME	$	597,060		$	1,246,515	$	1,586,771		$	3,687,040

OTHER COMPREHENSIVE (LOSS) INCOME, NET OF RECLASSIFICATION ADJUSTMENTS AND TAXES:

Foreign currency translation (loss) gain		(23,854	)		9,959		(18,816	)		6,867
Net unrealized losses on available-for-sale securities		(1,427	)		-		(4,277	)		-

TOTAL OTHER COMPREHENSIVE (LOSS) INCOME		(25,281	)		9,959		(23,093	)		6,867

COMPREHENSIVE INCOME	$	571,779		$	1,256,474	$	1,563,678		$	3,693,907

See notes to condensed consolidated financial statements.

~~TABLE OF CONTENTS~~

PHARMA-BIO SERV, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three months ended July 31,						Nine months ended July 31,						Three months ended July 31,						Nine months ended July 31,
	2013			2012			2013			2012			2014			2013			2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,246,515		$	1,275,898		$	3,687,040		$	3,610,441		$	597,060		$	1,246,515		$	1,586,771		$	3,687,040
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Gain on disposition of property and equipment		-			-			-			(190	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Stock-based compensation		2,166			2,166			6,498			21,498			17,100			2,166			51,300			6,498
Depreciation and amortization		86,028			80,268			250,131			231,969			93,882			86,028			281,387			250,131
Increase in accounts receivable		(390,891	)		(292,059	)		(380,652	)		(2,414,997	)
Increase in other assets		(344,201	)		(138,018	)		(417,772	)		(116,685	)
Decrease (increase) in accounts receivable														631,762			(390,891	)		1,038,841			(380,652	)
(Increase) in other assets														(95,899	)		(344,201	)		(40,553	)		(417,772	)
(Decrease) increase in liabilities		91,047			214,805			(491,837	)		(394,728	)		(148,221	)		91,047			(952,632	)		(491,837	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		690,664			1,143,060			2,653,408			937,308			1,095,684			690,664			1,965,114			2,653,408

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment		(75,630	)		(59,983	)		(175,363	)		(155,822	)		(106,208	)		(75,630	)		(171,820	)		(175,363	)
Proceeds from disposition of property and equipment		-			-			-			681
NET CASH USED IN INVESTING ACTIVITIES		(75,630	)		(59,983	)		(175,363	)		(155,141	)		(106,208	)		(75,630	)		(171,820	)		(175,363	)

CASH FLOWS FROM FINANCING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock		-			-			109,859			-			-			-			-			109,859
Repurchase of common stock														(2,280	)		-			(2,280	)		-
Payments on obligations under capital lease		(9,958	)		(7,869	)		(29,280	)		(23,107	)		(10,359	)		(9,958	)		(31,012	)		(29,280	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(9,958	)		(7,869	)		80,579			(23,107	)
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES														(12,639	)		(9,958	)		(33,292	)		80,579
EFFECT OF EXCHANGE RATE CHANGES ON CASH		1,457			(23,545	)		2,882			(48,600	)		(8,808	)		1,457			(9,307	)		2,882
NET INCREASE IN CASH AND CASH EQUIVALENTS		606,533			1,051,663			2,561,506			710,460			968,029			606,533			1,750,695			2,561,506

CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD		8,493,086			3,975,522			6,538,113			4,316,725			12,828,589			8,493,086			12,045,923			6,538,113

CASH AND CASH EQUIVALENTS – END OF PERIOD	$	9,099,619		$	5,027,185		$	9,099,619		$	5,027,185		$	13,796,618		$	9,099,619		$	13,796,618		$	9,099,619

SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION
SUPPLEMENTAL DISCLOURES OF CASH FLOWS INFORMATION
Cash paid during the period for:
Income taxes	$	280,735		$	163,527		$	1,069,390		$	1,148,309		$	37,782		$	280,735		$	510,267		$	1,069,390
Interest	$	1,705		$	1,915		$	5,708		$	6,243		$	1,359		$	1,705		$	5,362		$	5,708

SUPPLEMENTARY SCHEDULES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Income tax withheld by clients to be used as a credit in the Company’s income tax return	$	35,035		$	27,428		$	77,491		$	39,120		$	37,454		$	35,035		$	74,474		$	77,491
Property and equipment with accumulated depreciation of $982 disposed during the nine months ended July 31, 2012	$	-		$	-		$	-		$	1,473
Capital lease obligation incurred for the acquisition of a vehicle													$	-		$	-		$	85,995		$	-
Conversion of cashless exercise of warrants and options to shares of common stock													$	-		$	-		$	34		$	-
Issuance of common stock pursuant to agreement with investor relations firm	$	30,000		$	-		$	90,000		$	-		$	-		$	30,000		$	30,000		$	90,000

See notes to condensed consolidated financial statements.

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PHARMA-BIO SERV, INC.

Notes To Condensed Consolidated Financial Statements

July 31, ~~2013~~2014

(Unaudited)

NOTE A –- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Pharma-Bio Serv, Inc. (“Pharma-Bio”) is a Delaware corporation organized on January 14, 2004. Pharma-Bio is the parent company of Pharma-Bio Serv PR, Inc. (“Pharma-PR”), Pharma Serv, Inc. (“Pharma-Serv”), both Puerto Rico corporations, Pharma-Bio Serv US, Inc. (“Pharma-US”), a Delaware corporation, ~~and~~ Pharma-Bio Serv Validation & Compliance Limited (“Pharma-IR”), an Irish corporation, and Pharma-Bio Serv SL (“Pharma-Spain”), a Spanish limited liability company. Pharma-Bio, Pharma-PR, Pharma Serv, Pharma-US, Pharma-IR and Pharma-Spain are collectively referred to as the “Company.” The Company operates in Puerto Rico, the United States, Ireland and Spain under the name of Pharma-Bio Serv and is engaged in providing technical compliance consulting service, and microbiological and chemical laboratory testing services primarily to the pharmaceutical, chemical, medical device and biotechnology industries.

Pharma-Spain is a wholly owned subsidiary, which started operations in January 2013. During the nine months ended July 31, 2013, Pharma-Spain did not earn significant revenues or incur significant expenses.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The condensed consolidated balance sheet of the Company as of October 31, ~~2012~~2013 is derived from audited consolidated financial statements but does not include all disclosures required by generally accepted accounting principles. The unaudited interim condensed consolidated financial statements, include all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations and cash flows for the interim periods. The results of operations for the nine months ended July 31, ~~2013~~2014 are not necessarily indicative of expected results for the full ~~2013~~2014 fiscal year.

The accompanying financial data as of July 31, ~~2013,~~2014, and for the three-month and nine-month periods ended July 31, ~~2013~~2014 and ~~2012~~2013 has been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally contained in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes contained in our audited Consolidated Financial Statements and the notes thereto for the fiscal year ended October 31, ~~2012.~~2013.

Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from these estimates.

Fair Value of Financial Instruments

Accounting standards have established a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Accounting standards have established three levels of inputs that may be used to measure fair value:

Level 1:		Quoted prices in active markets for identical assets and liabilities.

Level 2:		Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets with insufficient volume or infrequent transactions (less active markets), or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.


Level 3:3:		Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

~~TABLE OF CONTENTS~~

Marketable securities available-for-sale consist of U.S. Treasury securities and an obligation offrom the Puerto Rico Government Development Bank valued using quoted market prices in active ~~markets with no valuation adjustment.~~markets. Accordingly, ~~this security is~~these securities are categorized in Level 1.

The carrying value of the Company's financial instruments (excluding marketable securities and obligations under capital leases):, cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, are considered reasonable estimates of fair value due to their liquidity or short-term nature. Management believes, based on current rates, that the fair value of ~~its~~the Company’s obligations under capital leases approximates the carrying amount.

Revenue Recognition

Revenue is primarily derived from: (1) time and materials contracts (representing approximately 93% of total revenues), which is recognized by applying the proportional performance model, whereby revenue is recognized as performance occurs, (2) short-term fixed-fee contracts or "not to exceed" contracts (representing approximately 1% of total revenues), which revenue is recognized similarly, except that certain milestones also have to be reached before revenue is recognized, and (3) laboratory testing revenue (representing approximately 6% of total revenues) is mainly recognized as the testing is completed and certified (normally within days of sample receipt from the customer). If the Company determines that a contract will result in a loss, the Company recognizes the estimated loss in the period in which such determination is made.

Cash Equivalents

For purposes of the consolidated statements of cash flows, cash equivalents include investments in a money market obligations trust that is registered under the U.S. Investment Company Act of 1940, as amended, and liquid investments with original maturities of three months or less.

Marketable Securities

We consider our marketable security investment portfolio and marketable equity investments as available-for-sale and, accordingly, these investments are recorded at fair value with unrealized gains and losses generally recorded in other comprehensive income; whereas realized gains and losses are included in earnings and determined based on the specific identification method.

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~~write off amounts for which all collection efforts are deemed to have been exhausted. Due to the nature of the Company’s customers, bad debts are mainly accounted for using the direct write-off method whereby an expense is recognized only when a specific account is determined to be uncollectible. The effect of using this method approximates that of the allowance method.

Income Taxes

The Company follows an asset and liability approach method of accounting for income taxes. This method measures deferred income taxes by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts on the financial statements. The resulting deferred tax assets or liabilities are adjusted to reflect changes in tax laws as they occur. A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized.

The Company follows guidance from the Financial Accounting Standards Board (“FASB”) related to Accounting for Uncertainty in Income Taxes, which includes a two-step approach to recognizing, de-recognizing and measuring uncertain tax positions. As of July 31, ~~2013,~~2014, the Company had no significant uncertain tax positions that would be reduced as a result of a lapse of the applicable statute of limitations.

Property and ~~equipment~~Equipment

Owned property and equipment, and leasehold improvements are stated at cost. Vehicles under capital leases are stated at the lower of fair market value or net present value of the minimum lease payments at the inception of the leases.

~~TABLE OF CONTENTS~~

Depreciation and amortization of owned assets are provided for, when placed in service, in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, using straight-line basis. Assets under capital leases and leasehold improvements are amortized over the shorter of the estimated useful lives of the assets or initial lease term. Major renewals and betterments that extend the life of the assets are capitalized, while expenditures for repairs and maintenance are expensed when incurred. As of July 31, ~~2013~~2014 and October 31, ~~2012,~~2013, the accumulated depreciation and amortization amounted to ~~$1,790,489~~$2,161,733 and ~~$1,540,358,~~$1,880,346, respectively.

The Company evaluates for impairment its long-lived assets to be held and used, and long-lived assets to be disposed of, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based on management estimates, no impairment of the operating properties was ~~present as of July 31, 2013.~~present.

Stock-based Compensation

Stock-based compensation expense is recognized in the consolidated financial statements based on the fair value of the awards granted. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally represents the vesting period, and includes an estimate of awards that will be forfeited. The Company calculates the fair value of stock options using the Black-Scholes option-pricing model at the grant date. Excess tax benefits related to stock-based compensation are reflected as cash flows from financing activities rather than cash flows from operating activities. The Company has not recognized such cash flow from financing activities since there has been no tax benefit related to the stock-based compensation.

Income Per Share of Common Stock

Basic income per share of common stock 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.~~equivalents, which include principally shares that may be issued upon the exercise of warrants, stock option and restricted stock unit awards.

The diluted weighted average shares of common stock outstanding were calculated using the treasury stock method for the respective periods.

Foreign Operations

The functional currency of the Company’s foreign subsidiaries is its local currency. The assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. The cumulative translation effect for subsidiaries using a functional currency other than the U.S. dollar is included as a cumulative translation adjustment in stockholders’ equity and as a component of comprehensive income.

The Company’s intercompany accounts are typically denominated in the functional currency of the foreign subsidiary. Gains and losses resulting from the remeasurement of intercompany receivables that the Company considers to be of a long-term investment nature are recorded as a cumulative translation adjustment in stockholders’ equity and as a component of comprehensive income, while gains and losses resulting from the remeasurement of intercompany receivables from those international subsidiaries for which the Company anticipates settlement in the foreseeable future are recorded in the consolidated statements of operations. The net gains and losses recorded in the condensed consolidated statements of income were not significant for the periods presented.

Reclassifications

Certain reclassifications have been made to the July 31, ~~2012~~2013 condensed consolidated financial statements to conform them to the July 31, ~~2013~~2014 condensed consolidated financial statements presentation. Such reclassifications do not affect net income as previously reported.

Recently Issued Accounting Standards

In March 2013, the FASB issued ~~and adopted~~guidance on a parent’s accounting ~~standards~~for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The new guidance will be effective for us beginning November 1, 2014. We do not anticipate material impacts on our consolidated financial statements upon adoption.

~~Recently~~In May 2014, as part of its ongoing efforts to assist in the convergence of U.S. GAAP and International Financial Reporting Standards, the FASB issued a new standard related to revenue recognition. Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new standard will be effective for us beginning November 1, 2017 and early adoption is not permitted. We are currently evaluating its impact in our consolidated financial statements.

Other recently issued FASB pronouncements, ~~including~~and SEC Staff Accounting Bulletins, have either been implemented or are not applicable to the Company.

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NOTE B – MARKETABLE SECURITIES AVAILABLE FOR SALE

The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of available-for-sale securities by type of security were as follows as of July 31, 2014 and October 31, 2013:

Type of security as of July 31, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasury securities	$	4,500,000	$	—	$	—		$	4,500,000
Other government-related debt securities:
Puerto Rico Commonwealth Government Development Bond		95,000		—		(28,017	)		66,983
Total interest-bearing and available-for-sale securities	$	4,595,000	$	—	$	(28,017	)	$	4,566,983

Type of security as of October 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasury securities	$	4,500,000	$	—	$	—		$	4,500,000
Other government-related debt securities:
Puerto Rico Commonwealth Government Development Bond		95,000		—		(23,740	)		71,260
Total interest-bearing and available-for-sale securities	$	4,595,000	$	—	$	(23,740	)	$	4,571,260

At July 31, 2014 and October 31, 2013, the above marketable securities ~~of $95,000 consisted of~~included a 5.4% Puerto Rico Commonwealth Government Development Bank Bond in the amount of $95,000, purchased at par and maturing in August 2019.

The ~~bond balance approximates its~~ fair ~~market value, therefore no realized or unrealized gains or losses have been recorded.~~values of available-for-sale securities by classification in the Condensed Consolidated Balance Sheets were as follows as of July 31, 2014 and October 31, 2013:

Classification in the Consolidated Balance Sheets	July 31, 2014		October 31, 2013
Cash and cash equivalents	$	4,500,000	$	4,500,000
Marketable securities		66,983		71,260
Total available-for-sale securities	$	4,566,983	$	4,571,260

Cash and cash equivalents in the table above exclude cash in banks of approximately $9.3 million and $7.5 million as of July 31, 2014 and October 31, 2013, respectively.

The primary objectives of the Company’s investment portfolio are liquidity and safety of principal. Investments are made with the objective of achieving the highest rate of return consistent with these two objectives. ~~The Company’s~~Our investment policy limits investments to certain types of debt and money market instruments issued by institutions primarily with investment grade credit ratings and places restrictions on maturities and concentration by type and issuer.

~~The Company reviews its~~We review our available-for-sale securities for other-than-temporary declines in fair value below their ~~cost~~recorded basis on a quarterly basis and whenever events or changes in circumstances indicate that the ~~cost~~recorded basis of an asset may not be recoverable. This evaluation is based on a number of factors including, the length of time and extent to which the fair value has been less than ~~its cost~~our recorded basis and adverse conditions specifically related to the security including any changes to the rating of the security by a rating agency. As of July 31, 2014 and October 31, 2013, ~~the Company believes~~we believe that the ~~cost basis~~recorded base for ~~its~~our available-for-sale securities iswere recoverable in all material respects.

NOTE C –- INCOME TAXES

In June 2011, Pharma-Bio, Pharma-PR and Pharma-Serv obtained a Grant of Industrial Tax Exemption pursuant to the terms and conditions set forth in Act No. 73 of May 28, 2008 (“the Grant”) issued by the Puerto Rico Industrial Development Company (“PRIDCO”). The Grant was effective as of November 1, 2009 and covers a ~~fifteen year~~fifteen-year period. The Grant provides relief on various Puerto Rico taxes, including income tax, with certain limitations, for most of the activities carried on within Puerto Rico, including those that are for services to parties located outside of Puerto Rico. The Grant establishes a threshold (“Baseline”) on the Industrial Development Income (“IDI”) subject to the favorable income tax rates. Within a four year term ending with the taxable year ending October 31, 2013, the Baselines ~~are~~were gradually reduced to zero. Certain activities covered under the Grant ~~are~~were not subject to a Baseline and ~~are~~were allowed a four year gradual phase-in from the maximum income tax rate of 30%, as provided by the 1994 Puerto Rico Internal Revenue Code, to the ~~Grant~~ favorable fixed Act 73 income tax rate of 4%, which iswas effective to the taxable year ended in October 31, 2013. In addition, IDI earnings distributions accumulated since November 1, 2009 are ~~totally~~fully exempt from Puerto Rico earnings distribution tax.

Effective with our fiscal year ended October 31, 2014, Puerto Rico operations not covered in the exempt activities of the Grant are subject to Puerto Rico income tax at a maximum tax rate of ~~30%~~39% as provided by the 1994 Puerto Rico Internal Revenue Code, as amended. The operations carried out in the United States by the Company’s subsidiary are taxed in the United States at a maximum regular federal income tax rate of 35%.

Distribution of earnings by the Puerto Rican subsidiaries to its parent are taxed at the federal level, however, the parent is able to receive a credit for the taxes paid by the subsidiary on its operations in Puerto Rico, to the extent of the federal taxes that result from those earnings. As a result, the income tax expense of the Company, under its present corporate structure, would normally be the Puerto Rico taxes on operations in Puerto Rico, federal ~~and state~~ taxes on operations in the United States, plus the earnings distribution tax in Puerto Rico from dividends paid to the Puerto Rican subsidiaries’ parent, and the parent’s federal income tax, if any, incurred upon the subsidiary’s earnings distribution.

Deferred income tax assets and liabilities are computed for differences between the consolidated financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.

The Company has not recognized deferred income taxes on undistributed earnings of its Puerto Rican subsidiaries, since such earnings are considered to be reinvested indefinitely. If the earnings were distributed in the form of dividends, the Company would be subject to Puerto Rico earnings distribution tax and United States federal income tax, as applicable.

Pharma-Spain and Pharma-IR ~~has~~have unused operating losses which result in a potential deferred tax asset. However, an allowance has been provided covering the total amount of such balance since it is uncertain whether the net operating losses can be used to offset future taxable income before their expiration dates. Realization of future tax benefits related to a deferred tax asset is dependent on many factors, including the Company’s ability to generate taxable income. Accordingly, the income tax benefit will be recognized when realization is determined to be more probable than not. These net operating losses are available to offset future taxable income, ~~indefinitely.~~until October 31, 2018 for Pharma-Spain, and indefinitely for Pharma-IR.

The statutory income tax rate differs from the effective rate, mainly due to the effect of the Puerto Rico Act 73 Tax Grant over income tax expense, and income tax permanent differences between financial and tax books income.

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The Company files income tax returns in the United States (federal and various states jurisdictions), Puerto Rico and Ireland. The ~~2007~~2010 (2009 for Puerto Rico) through ~~2012~~2013 tax years are open and may be subject to potential examination in one or more jurisdictions. ~~Pharma-Bio's federal income tax return for the year ended October 31, 2008 was examined by the United States Internal Revenue Service, no deficiencies were assessed.~~ Currently, the Company has no federal, state, Puerto Rico or foreign income tax examination.

NOTE D – WARRANTS

At ~~July~~October 31, 2013, ~~and October 31, 2012,~~ the Company had outstanding warrants to purchase 240,800 shares of the Company’s common stock ~~as follows:~~

Outstanding Warrants
Exercise Price Expiration Date
July 31,
2013

October 31,
2012

Original Warrants A $ 0.0600 January 16, 2014 240,800 240,800
Broker Warrants B $ 0.0600 January 24, 2014 - 1,830,991
Warrants Total 240,800 2,071,791

at an exercise price of $0.06. In January ~~2013, the holder~~2014, all of ~~Broker Warrants B~~these warrants were exercised ~~its warrants to purchase 1,830,991~~on a cashless basis, resulting in a net issuance of 233,763 shares of common stock. As of July 31, 2014, the Company had no warrants outstanding.

NOTE E – CAPITAL TRANSACTIONS

On January 23, 2013, the Company entered into an agreement with an investor relations firm to assist in the Company’s shareholder communication efforts. For these services, in addition to a monthly fee of $10,000, the Company agreed to issue to the investor relations firm a total of 150,000 shares during the one year term of the agreement (75,000, 37,500 and 37,500 shares in January 2013, July 2013 and January 2014, respectively). ~~On January 23, 2013 and July 23, 2013,~~Pursuant to the terms of the agreement with the investor relations firm, all shares have been issued. Effective February 1, 2014, the agreement with the investor relations firm was renegotiated for a term of one year. Under the new provisions of the agreement, the Company ~~issued 75,000 and 37,500~~will no longer grant common shares ~~respectively,~~ to the investor relations firm, all other provisions of the original agreement were maintained.

During the nine months ended July 31, 2014, in addition to the 37,500 common shares issued pursuant to the ~~agreement.~~agreement with the investor relations firm, warrants and options were exercised on a cashless basis resulting in a net issuance of Company’s common shares for 233,763 and 76,013, respectively, or a total of 309,776 of the Company’s common shares.

On June 13, 2014, the Board of Directors of the Company authorized the Company to repurchase up to two million shares of its outstanding common stock. The timing, manner, price and amount of any repurchases will be at the discretion of the Company, subject to the requirements of the Securities Exchange Act of 1934, as amended, and related rules. The program does not oblige the Company to repurchase any shares and it may be modified, suspended or terminated at any time and for any reason. No shares will be repurchased directly from directors or officers of the Company. As of July 31, 2014, pursuant to the program a total of 2,000 shares of the Company’s common stock were purchased for an aggregate amount of $2,280.

NOTE F – EARNINGS PER SHARE

The following data shows the amounts used in the calculations of basic and diluted earnings per share.

	Three months ended July 31,				Nine months ended July 31,				Three months ended July 31,				Nine months ended July 31,
	2013		2012		2013		2012		2014		2013		2014		2013
Net income available to common equity holders - used to compute basic and diluted earnings per share	$	1,246,515	$	1,275,898	$	3,687,040	$	3,610,441	$	597,060	$	1,246,515	$	1,586,771	$	3,687,040
Weighted average number of common shares - used to compute basic earnings per share		22,668,354		20,758,695		22,032,790		20,758,695		23,049,212		22,668,354		22,957,160		22,032,790
Effect of warrants to purchase common stock		227,651		1,923,648		809,921		1,913,879		-		227,651		63,883		809,921
Effect of restricted stock units to common stock										49,391		-		38,592		-
Effect of options to purchase common stock		442,644		298,132		882,161		204,573		510,714		442,644		656,123		882,161
Weighted average number of shares - used to compute diluted earnings per share		23,338,649		22,980,475		23,724,872		22,877,147		23,609,317		23,338,649		23,715,758		23,724,872

Options for the purchase of 80,000 shares of common stock for the three-month and nine-month periods ended in July 31, 2014 were not included in computing diluted earnings per share because their effect were antidilutive.

NOTE G –- CONCENTRATIONS OF RISK

Cash and ~~cash equivalents~~

Cash Equivalents

The Company ~~maintains~~ domestic cash and cash equivalents consist of cash deposits in an FDIC insured ~~bank and~~banks (substantially covered by FDIC insurance by the spread of deposits in multiple FDIC insured banks), a money market ~~obligation trusts~~obligations trust registered under the US Investment Company Act of 1940, as ~~amended. The domestic bank deposit balances usually exceed federally insured limits.~~amended, and U.S. Treasury securities with maturities of three months or less. In the foreign markets we serve, we also maintain cash deposits in foreign banks, which tend to be not significant and ~~have no specific~~tend not to be covered by insurance. No losses have been experienced or are expected on these accounts. ~~In addition, as of July 31, 2013, the Company has approximately $4.5 million in United States Treasury Bills with maturities of three months or less.~~

Accounts ~~receivable~~Receivable and ~~revenues~~

Revenues

Management deems all of its accounts receivable to be fully collectible, and, as such, does not maintain any allowances for uncollectible receivables.

~~TABLE OF CONTENTS~~

The Company's revenues, and the related receivables, are concentrated in the pharmaceutical industry in Puerto Rico, the United States of America, Ireland and Spain. Although a few customers represent a significant source of revenue, the Company’s functions are not a continuous process, accordingly, the client base for which the services are typically rendered, on a project-by-project basis, changes regularly.

The Company provided a substantial portion of its services to three customers, which accounted for 10% or more of its revenues in either of the three-month and nine-month periods ended July 31, ~~2013~~2014 and ~~2012.~~2013. During the three months ended July 31, ~~2013,~~2014, revenues from these customers were 17.9%, 17.4% and 1.1%, or a total of 36.4%, as compared to the same period last year of 27.5%, 15.7%, and 10.8%, or a total of 54.0%, ~~as compared to the same period last year for 22.7%, 19.8%, and 7.7%, or a total of 50.2%,~~ respectively. During the nine months ended July 31, ~~2013,~~2014, revenues from these customers were ~~28.2%~~21.7%, ~~14.8%,~~17.5% and ~~12.7%~~3.8%, or a total of ~~55.7%~~43.0%, as compared to the same period last year ~~for 22.3%~~of 28.2%, ~~20.8%~~14.8% and ~~6.3%~~12.7%, or a total of ~~49.4%~~55.7%, respectively. At July 31, ~~2013,~~2014, amounts due from these customers represented ~~57.2%~~31.3% of the Company’s total accounts receivable balance.

The major customers information in the above paragraph is based on revenues earned from ~~said~~these customers at the segment ~~level because in~~level. In management’s opinion contracts by segments are ~~totally~~ independent of each other, and therefore such information is more meaningful to the reader. These revenues pertain to two global groups of affiliated companies. During the three months ended July 31, ~~2013,~~2014, aggregate revenues from these global groups of affiliated companies were 39.6% and 1.1%, or a total of 40.7%, as compared to the same period last year of 52.4% and 10.8%, or a total of 63.2%, ~~as compared to the same period last year for 52.6% and 7.7%, or a total of 60.3%,~~ respectively. During the nine months ended July 31, ~~2013,~~2014, aggregate revenues from these global groups of affiliated companies were 44.0% and 3.8%, or a total of 47.8%, as compared to the same period last year of 51.6% and 12.7%, or a total of 64.3%, ~~as compared to the same period last year for 53.5% and 6.6%, or a total of 60.1%,~~ respectively. At July 31, ~~2013~~2014, amounts due from these global groups of affiliated companies represented ~~66.3%~~38.9% of total accounts receivable balance.

NOTE H –- SEGMENT DISCLOSURES

The Company’s segments are based on the organizational structure for which financial results are regularly evaluated by the Company’s ~~chief operating decision maker~~senior executive management to determine resource allocation and assess performance. Each reportable segment is managed by its own management team and reports to executive management. The Company has four reportable segments: (i) Puerto Rico technical compliance consulting, (ii) United States technical compliance consulting, (iii) Europe technical compliance consulting, and (iv) a Puerto Rico microbiological and chemical laboratory testing division (“Lab”). These reportable segments provide services primarily to the pharmaceutical, chemical, medical device and biotechnology industries in their respective markets.

The following table presents information about the reported revenue from services and earnings from operations of the Company for the three-month and nine-month periods ended in July 31, ~~2013~~2014 and ~~2012.~~2013. There is no intersegment revenue for the mentioned periods. Corporate expenses that support the operating units have been allocated to the segments. Asset information by reportable segment is not presented, since the Company does not produce such information internally, nor does it use such data to manage its business.

	Three months ended July 31,						Nine months ended July 31,						Three months ended July 31,						Nine months ended July 31,
	2013			2012			2013			2012			2014			2013			2014			2013
REVENUES:
Puerto Rico consulting	$	4,092,630		$	4,014,807		$	11,435,537		$	11,364,021		$	3,972,819		$	4,092,630		$	11,002,394		$	11,435,537
United States consulting		2,748,448			2,446,263			8,359,679			6,023,782			1,820,426			2,748,448			6,154,845			8,359,679
Europe consulting		901,963			780,044			2,605,786			2,381,693			548,528			901,963			1,699,472			2,605,786
Lab (microbiological and chemical testing)		524,881			222,268			1,533,242			613,135			370,594			524,881			1,263,860			1,533,242
Other segments¹		95,787			191,662			339,576			673,735			123,799			95,787			298,202			339,576
Total consolidated revenues	$	8,363,709		$	7,655,044		$	24,273,820		$	21,056,366		$	6,836,166		$	8,363,709		$	20,418,773		$	24,273,820

INCOME (LOSS) BEFORE TAXES:
INCOME (LOSS) BEFORE INCOME TAXES:
Puerto Rico consulting	$	942,305		$	1,037,934		$	2,669,212		$	2,941,390		$	619,369		$	942,305		$	1,587,666		$	2,669,212
United States consulting		494,428			678,071			1,725,167			1,636,945			205,175			494,428			711,519			1,725,167
Europe consulting		(85,939	)		(84,695	)		(290,803	)		(258,193	)		(88,998	)		(85,939	)		(411,957	)		(290,803	)
Lab (microbiological and chemical testing)		109,871			(124,399	)		294,680			(241,756	)		(113,521	)		109,871			(91,423	)		294,680
Other segments¹		73,374			66,160			174,785			284,286			75,426			73,374			147,678			174,785
Total consolidated income before taxes	$	1,534,039		$	1,573,071		$	4,573,041		$	4,362,672		$	697,451		$	1,534,039		$	1,943,483		$	4,573,041


¹	Other segments represent activities that fall below the reportable threshold and are carried out in Puerto Rico and the United States. These activities include a technical seminars/training division, an information technology services and consulting division, and corporate headquarters, as applicable.

Long lived assets (property and equipment and intangible assets) as of July 31, ~~2013~~2014 and October 31, ~~2012,~~2013, and related depreciation and amortization expense for the three-month and nine-month periods ended July 31, ~~2013~~2014 and ~~2012,~~2013, were concentrated in the domestic markets (Puerto Rico and the United States). The aggregate amount of long lived assets for the international operations (Europe) is considered insignificant.

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~~ITEM 2.~~ ~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.~~

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of our results of operations and financial condition should be read in conjunction with the financial statements and the related notes included under Part I, Item 1 of this Quarterly Report on Form 10-Q. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related Management’s Discussion and Analysis appearing in our Annual Report on Form 10-K for the year ended October 31, ~~2012.~~2013. The following discussion includes forward-looking statements. For a discussion of important factors that could cause actual results to differ from results discussed in the forward-looking statements, see “Forward Looking Statements” below and the “Risk Factors” section in our Annual Report on Form 10-K for the year ended October 31, ~~2012.~~2013.

Overview

We are a compliance, ~~services~~project management and technology transfer support consulting firm with a laboratory testing facility with headquarters in Puerto Rico, servicing the Puerto Rico, United States and Europe markets. The compliance consulting service sector in those markets consists of local compliance and validation consulting firms, ~~United States~~ dedicated validation and compliance consulting firms and large publicly traded and private domestic and foreign engineering and consulting firms. We provide a broad range of compliance related consulting services. We also provide microbiological testing services and chemical testing services through our laboratory testing facility (“Lab”) in Puerto Rico. We also provide information technology consulting services and technical ~~trainings/~~training/seminars, which services are not currently significant to our operating results. We market our services to pharmaceutical, chemical, biotechnology and medical devices, and allied products companies in Puerto Rico, the United States and Europe. Our team includes more than ~~285~~245 experienced engineering and life science professionals, and includes former quality assurance managers orand directors, and experienced and trained professionals with bachelors, masters and doctorate degrees in health sciences and engineering.

We actively operate in Puerto Rico, the United States, Ireland and Spain and ~~continue to~~ pursue to further expand these markets by strengthening our business development infrastructure and by constantly realigning our business strategies as new opportunities and challenges arise.

We market our services with an active presence in industry trade shows, professional conventions, industry publications and company provided seminars to the industry. Our senior management is also actively involved in the marketing ~~process, especially in marketing to major accounts.~~process. 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.

While our core business is ~~U.S. Food and Drug Administration (“FDA”)~~FDA and international agencies regulatory compliance related services, we feel that our clients are in need of other services that we can provide and ~~allow~~allows us to present the Company as a global solution provider with a portfolio of integrated services that will bring value added solutions to our customers. Accordingly, our portfolio of services include a laboratory testing facility, an information technology consulting practice and a training center that provides seminars/~~trainings~~training to the industry.

The Lab incorporates the latest technology and ~~testing~~test methodologies meeting pharmacopoeia industry standards and regulations. It currently offers services to our core industries already serviced as well as the cosmetic and food industries.

We also provide technical seminars/~~trainings~~training that incorporate the latest regulatory trends and standards as well as other related areas. A network of leading industry professional experts in their field, which include resources of our own, provide these seminars/~~trainings~~training to the industry through our “Pharma Serv Academy” division. These services are provided in the markets we currently serve, as well as others, and position our ~~Company~~company as a key leader in the industry.

Our information technology services and consulting division based in Puerto Rico (“Integratek”) provides a variety of information technology services such as web pages and portals development, digital art design, intranets, extranets, software development including database integration, Windows and web applications development, software technical training and learning management systems, technology project management, and compliance consulting services, among others. Integratek is a Microsoft Certified Partner and a reseller for technology products from leading vendors in the market.

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In line with the strategy to further penetrate the United States and Puerto Rico markets, we submit annually for renewal the certification as a "minority-controlled company" as defined by the National Minority Supplier Development Council and Growth Initiative ("NMSDC"). This certification allows us to participate in corporate diversity programs available from various potential customers in the United States and Puerto Rico.

The Company holds a tax grant issued by the Puerto Rico Industrial Development Company (“PRIDCO”), which provides relief on various Puerto Rico taxes, including income tax, with certain limitations, for most of the activities carried on within Puerto Rico, including those that are for services to parties located outside of Puerto Rico.

Industry consolidations, the pharmaceutical regulatory environment, changes in tax laws, customers’ price sensitive procurement processes, and the local and global economies recession continue to be factors and uncertainties that affect our business. As such, we are constantly realigning our business strategies as new opportunities and challenges arise.

For the nine months ended July 31, ~~2013,~~2014, net revenues for the Company ~~increased its net revenues by $3.2~~were $20.4 million, a decrease of $3.9 million, or ~~15%~~15.9% when compared to the same period last year. ~~The~~This decline is mainly attributable to a $2.2, $0.9, $0.4 and $0.3 million revenue decrease in the United States, Europe and Puerto Rico consulting ~~market division~~markets and the Lab, ~~led the revenue improvement for the nine months ended July 31, 2013 with an increase in revenues of $2.3 and $0.9 million, respectively, when compared to the same period last year.~~respectively. Other Company divisions sustained minor revenue gains/losses or remained constant, when compared to the same period last year. ~~Business~~The Company continues to invest in its business development and ~~operations~~operational support expenses for all its divisions in the United States and Puerto Rico markets were increased to follow the consulting business favorable revenue trend of last fiscal year. In addition, we have made business development investments in Spainorder to diversify ~~our European division~~their market, services and ~~also continue our efforts to broaden the Lab’s~~ customer base.

The revenue ~~growth, offset by the~~decline, combined with an investment increase in business development and operational support ~~and business development~~ expenses, ~~has~~have led our nine months ended July 31, ~~2013~~2014 net income to be approximately ~~$3.7~~$1.6 million, a ~~slight increase~~decrease of ~~approximately $0.1~~$2.1 million, when compared with the same period last year.

The following table sets forth information as to our revenue for the three-month and ~~nine-month~~nine month periods ended July 31, ~~2013~~2014 and ~~2012,~~2013, by geographic regions (dollars in thousands).

	Three months ended July 31,								Nine months ended July 31,								Three months ended July 31,						Nine months ended July 31,
Revenues by Region:	2013				2012				2013				2012				2014			2013			2014			2013
Puerto Rico	$	4,713	56.3	%	$	4,429	57.9	%	$	13,308	54.8	%	$	12,651	60.1	%	$	4,425	64.7%	$	4,713	56.3%	$	12,490	61.2%	$	13,308	54.8	%
United States		2,749	32.9	%		2,446	31.9	%		8,359	34.5	%		6,024	28.6	%		1,863	27.3%		2,749	32.9%		6,229	30.5%		8,359	34.5	%
Europe		902	10.8	%		780	10.2	%		2,606	10.7	%		2,381	11.3	%		548	8.0%		902	10.8%		1,699	8.3%		2,606	10.7	%
	$	8,364			$	7,655			$	24,273			$	21,056			$	6,836		$	8,364		$	20,418		$	24,273

Weak economies where we do business and worldwide industry consolidations will continue to be unfavorable factors going forward. These factors, and the impact on the industry, if any, of the enacted U.S. health care reform (Patient Protection and Affordable Care Act) and Puerto Rico Act ~~154-2010,~~154, which imposed temporary excise taxes, and ~~recently~~was extended through December 2017, to the industry we serve, remain as industry uncertainties that might adversely affect our future performance. We believe that our future profitability and liquidity will be highly dependent on the effect the global economy, changes in tax laws and worldwide lifescience manufacturing industry consolidations will have ~~over~~on our operations, and our ability to seek service opportunities and adapt to the current industry trends.

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Results of Operations

The following table sets forth our statements of operations for the three-month and nine-month periods ended July 31, ~~2013~~2014 and ~~2012,~~2013 (dollars in thousands) and as a percentage of revenue:

	Three months ended July 31,							Nine months ended July 31,
	2014				2013			2014					2013
Revenues	$	6,836		100.0%	$	8,364	100.0%	$	20,418		100.0	%	$	24,273	100.0	%
Cost of services		4,658		68.1%		5,384	64.4%		13,778		67.5	%		15,605	64.3	%
Gross profit		2,178		31.9%		2,980	35.6%		6,640		32.5	%		8,668	35.7	%
Selling, general and administrative costs		1,480		21.7%		1,447	17.3%		4,695		23.0	%		4,097	16.9	%
Other (expense) income, net		(1	)	0.0%		1	0.0%		(2	)	0.0	%		2	0.0	%
Income before income taxes		697		10.2%		1,534	18.3%		1,943		9.5	%		4,573	18.8	%
Income tax expense		100		1.5%		288	3.4%		356		1.7	%		886	3.7	%
Net income		597		8.7%		1,246	14.9%		1,587		7.8	%		3,687	15.2	%

Three months ended July 31,
Nine months ended July 31,

2013 2012 2013 2012
Revenues $ 8,364 100.0 % $ 7,655 100.0 % $ 24,273 100.0 % $ 21,056 100.0 %
Cost of services 5,384 64.4 % 5,056 66.0 % 15,605 64.3 % 13,814 65.6 %
Gross profit 2,980 35.6 % 2,599 34.0 % 8,668 35.7 % 7,242 34.4 %
Selling, general and
administrative costs 1,447 17.3 % 1,026 13.4 % 4,097 16.9 % 2,882 13.7 %
Other income, net 1 0.0 % - 0.0 % 2 0.0 % 2 0.0 %
Income before income taxes 1,534 18.3 % 1,573 20.6 % 4,573 18.8 % 4,362 20.7 %
Income tax expense 288 3.4 % 297 3.9 % 886 3.7 % 752 3.6 %
Net income 1,246 14.9 % 1,276 16.7 % 3,687 15.2 % 3,610 17.1 %

Revenues. Revenues for the three and nine months ended July 31, ~~2013~~2014 were ~~$8.3~~$6.8 and ~~$24.3~~$20.4 million, ~~an increase~~respectively, a decrease of approximately ~~$0.7~~$1.5 and ~~$3.2~~$3.9 million, or 9%18.3% and ~~15%~~15.9%, respectively, when compared to the same periods last year.

The ~~improvement~~revenue decrease for the ~~three months~~three-month and nine-month periods ended in July 31, ~~2013,~~2014, over the same periods last year, are mainly attributable to a decline from projects in the United States, Europe and Puerto Rico consulting markets and the Lab for $0.9, $0.4, $0.1 and $0.2 million, respectively, for the three-month period ended July 31, 2014, and $2.2, $0.9, $0.4 and $0.3 million, respectively, for the nine-month period ended July 31, 2014. Other Company divisions sustained minor revenue gains/losses or remained constant, when compared to the same period last year, is mainly attributable to revenue increase in the United States consulting market and Lab services, each in the amount $0.3 million, plus other minor revenue gains from other Company divisions, offset by a decrease in revenues in the Integratek division of $0.1 million.year.

The revenue increase for the nine months ended July 31, 2013, when compared against the same period last year, is mostly attributable to an increase in revenues in the United States consulting market and Lab services in the amount of $2.3 and $0.9 million, respectively, plus other minor revenue gains from other Company divisions offset by a decrease in revenues in the Integratek division of $0.3 million.

The United States consulting operation has been able to capture and maintain projects within existing customers, while the Lab has attracted some additional customers that brought non-recurring volume. Integratek has been affected by the loss of volume of one of its major customers. A significant portion of the revenues for the European market is mostly attributable to one customer located in Ireland. Most of the European revenue decline is attributable to the loss of project headcount within this Ireland customer.

Cost of Services; gross margin. ~~The overall gross~~Gross margin for the ~~three~~three-month and ~~nine months~~nine-month periods ended July 31, ~~2013 reflected a gross margin net increase of 1.6~~2014 decreased 3.7 and ~~1.3~~3.2 percentage points, respectively, when compared to last year.

~~For~~The decrease in gross margin for the three months ended July 31, 2014 is mainly attributable to the decrease of 1.1 and 2.6 percentage points in consulting services and Lab gross margin, respectively. For the nine months ended in July 31, ~~2013,~~2014, the ~~net increase~~decline in gross margin is mainly attributable to ~~gains~~the decrease of 1.9 and 1.3 percentage points in ~~the~~consulting services and Lab gross margin, ~~of 2.4 and 1.6 percentage points,~~ respectively. ~~This gain~~The decline in gross margin is mostly attributable to United States and Puerto Rico consulting projects closing/ending by the ~~favorable~~end of our first quarter, which had an above average gross margin, and the Lab’s unfavorable yield ~~attained due to~~resulting from the ~~increase~~decrease in testing volume, versus ~~cost~~the absorption of ~~services, and partially offset by Integratek’s projects decline, which attained a low gross margin yield as a function of billings versus~~ fixed ~~costs~~cost of services.

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three and nine months ended July 31, ~~2013~~2014 were approximately ~~$1.4~~$1.5 and ~~$4.1~~$4.7 million, ~~respectively, a net increase in expenses of approximately $0.4 and $1.2 million, respectively,~~respectively. Expenses when compared towith the same period last ~~year. Business~~year, remained constant for the three-month period ended July 31, 2014 and had a net increase of approximately $0.6 million for the nine-month period ended July 31, 2014. In the current fiscal year, the Company continued investing in its business development and operations support expenses for all its divisions in ~~the Puerto Rico and United States markets were increased to follow the consulting business favorable revenue trend. In addition, we have made business development investments in Spain~~order to diversify ~~our European division market.~~their market, services and customer base.

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Income Taxes Expense. The ~~favorable variance~~reduction in income tax expense for the three and nine months ended July 31, 2014, as compared to the same period last year, is a function of the decrease in income before tax for the same period, after giving effect to the effective ~~income~~ tax rate ~~from the statutory rate is attributable to~~attained considering the effect of the Puerto Rico Act 73 Tax Grant over income tax expense. For the nine months ended July 31, 2013, the effective income tax rate increased when compared to the same period last year by 2.1 percentage points. The increase is mainly attributable to the United States segment increase in income before tax, which is taxed at a rate higher than nondomestic jurisdictions.Grant.

Net Income. Our net income for the three and nine months ended July 31, ~~2013~~2014 was approximately ~~$1.2~~$0.6 and ~~$3.7~~$1.6 million, ~~respectively,~~ a ~~slight increase~~decrease of ~~approximately $0.1~~$0.6 and $2.1 million, ~~for the nine month period, and no change for the three month period,~~respectively, when compared with the same periods last year. Our net income variance, when compared to the same periods last year, is mainly attributable ~~mainly~~ to the ~~aggregate increase~~decline in ~~overall gross margin, offset by~~revenue, the increase in selling general and administrative expenses ~~to support~~for the ~~favorable revenue trend,~~ business ~~development expenses~~and operations investments incurred aimed to diversify ~~our~~ markets, services and customer base, and the impact of the effective income tax rates (including Puerto Rico favorable tax grants) over income before tax.

Earnings per common share basic and diluted for the three months ended July 31, ~~2013~~2014 were ~~$0.055~~$0.026 and ~~$0.053,~~$0.025, respectively, a decrease of ~~$0.006~~$0.029 and ~~$0.003~~$0.028 per share, respectively, when compared to the same period last year. The ~~slight~~ decrease is mainly attributable to the decrease in net income, and the increase in ~~weighted average~~ common shares basic and diluted of approximately ~~1.9~~0.4 and ~~0.4~~0.3 million shares, respectively, when compared to the same period last year.

For the nine months ended July 31, ~~2013,~~2014, earnings per common share basic and diluted were ~~$0.167~~$0.069 and ~~$0.155,~~$0.067, respectively, a decrease of ~~$0.007~~$0.098 and ~~$0.003~~$0.088 per share, respectively, when compared to the same period last year. The ~~slight~~ variance is mainly attributable to the decrease in net income, and the increase in ~~weighted average~~ common shares basic ~~and diluted~~ of approximately ~~1.3 and 0.8~~0.9 million shares, ~~respectively,~~ when compared to the same period last year.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including planned capital expenditures. For the nine months ended July 31, ~~2013,~~2014, we have generated a working capital increase of approximately ~~$3.9~~$1.7 million, when compared to October 31, ~~2012.~~2013.

On June 13, 2014, the Board of Directors of the Company authorized the Company to repurchase up to two million shares of its common stock (the "Company Stock Repurchase Program"). During the three months ended July 31, 2014, the Company repurchased 2,000 shares of its common stock.

Our primary cash needs consist of the payment of compensation to our professional staff, overhead expenses, and statutory taxes. Additionally, we may use cash for the repurchase of our common stock under the Company Stock Repurchase Program. Management believes that based on the current level of operations and cash flows from operations, the collectability of high quality customer receivables will be sufficient to fund anticipated expenses and satisfy other possible long-term contractual commitments for the next twelve months.

To the extent that we pursue possible opportunities to expand our operations, either by acquisition or by the establishment of operations in a new locale, we will incur additional overhead, and there may be a delay between the period we commence operations and our generation of net cash flow from operations. Management believes the Company has adequate liquidity to fund such delays.

While uncertainties relating to the current local and global economic condition, competition, the industries and geographical regions served by us and other regulatory matters exist within the consulting services industry, as described above, management is not aware of any trends or events likely to have a material adverse effect on liquidity or its ~~company’s~~Company’s finances.

Off-Balance Sheet Arrangements

We were not involved in any significant off-balance sheet arrangement during the nine months ended July 31, ~~2013.~~2014.

Critical Accounting Policies and Estimates

There were no material changes during the nine months ended July 31, ~~2013~~2014 to the critical accounting policies reported in our Annual Report on Form 10-K for the fiscal year ended October 31, ~~2012.~~2013.

New Accounting Pronouncements

There were no new accounting standards, issued since our filing of the Annual Report on Form 10-K for the fiscal year ended October 31, ~~2012,~~2013, which could have a significant effect on our condensed consolidated financial statements.

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Forward-Looking Statements

Our business, financial condition, results of operations, cash flows and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Quarterly Report on Form 10-Q, as well as other written or oral statements made from time to time by us or by our authorized executive officers on our behalf, constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These statements include all statements other than those made solely with respect to historical fact and identified by words such as “believes”, “anticipates”, “expects”, “intends” and similar expressions, but such words are not the exclusive means of identifying such statements. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement and these risk factors in order to comply with such safe harbor provisions. You should note that our forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise, except as ~~requested~~required by law. Although we believe that the expectations, plans, intentions and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that our stockholders and prospective investors should consider include the following:

●

Because our business is concentrated in the pharmaceutical industry, any changes in that industry or in the markets we serve could impair our ability to generate revenue and realize a profit.

●

Puerto Rico government enacted ACT ~~154-2010~~154 of October 22, 2010, as amended, may affect the willingness of our customers, or potential new customers, to do business in Puerto Rico and consequently affect our business.

●

Changes in tax benefits may affect the willingness of companies to continue or expand their operations in Puerto Rico.

●

Puerto Rico’s economy, including its governmental financial crisis, may affect the willingness of businesses to commence or expand operations in Puerto Rico.

●

Other factors, including economic factors, may affect the decision of businesses to continue or expand their operations in the markets we serve.

●

Our business and operating results may be impacted if we are unable to maintain our certification as a minority-controlled company.

●

Because our business is dependent upon a small number of clients, the loss of a major client could impair our ability to operate profitably.

●

Customer procurement and sourcing practices intended to reduce costs could have an adverse affect on our margins and profitability.

●

Since our business is dependent upon the development and enhancement of patented pharmaceutical products or processes by our clients, the failure of our clients to obtain and maintain patents could impair our ability to operate profitably.

●

We may be unable to pass on increased labor costs to our clients.

●

Consolidation in the pharmaceutical industry may have a harmful effect on our business.

●

Because the pharmaceutical industry is subject to government regulations, changes in government regulations relating to this industry may affect the need for our services.

●

Our reputation and divisions may be impacted by regulatory standards impacting our customer products.

●

If we are unable to protect our clients’ intellectual property, our ability to generate business will be impaired.

●

We may be subject to liability if our services or solutions for our clients infringe upon the intellectual property rights of others.

●

We may be held liable for the actions of our employees or contractors when 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.

●

Because most of our contracts may be terminated on little or no advance notice, our failure to generate new business could impair our ability to operate profitably.

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●

Because we are dependent upon our management, our ability to develop our business may be impaired if we are not able to engage skilled personnel.

●

We may not be able to continue to grow unless we consummate acquisitions or enter markets outside of Puerto Rico, the United States, Ireland and ~~Ireland.~~Spain.

●

Our cash could be adversely affected if the financial institutions in which we hold our cash fail.

●

If we identify a proposed acquisition, we may require substantial cash to fund the cost of the acquisition.

●

~~Our cash could be adversely affected if the financial institutions in which we hold our cash fail.~~

●

If we make any acquisitions, they may disrupt or have a negative impact on our business.

●

Because there is a limited market in our common stock, stockholders may have difficulty in selling our common stock and our common stock may be subject to significant price swings.

●

Our revenues, operating results and profitability will vary from quarter to quarter, which may result in increased volatility of our stock price.

●

The Company Stock Repurchase Program could affect the market price of our common stock and increase its volatility.

●

The issuance of securities, whether in connection with an acquisition or otherwise, may result in significant dilution to our stockholders.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our ~~Chief~~Principal Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report. Based upon that evaluation, our ~~Chief~~Principal Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report.

Changes in Internal Control Over Financial Reporting

Based on an evaluation, under the supervision and with the participation of our management, including our ~~Chief~~Principal Executive Officer and Chief Financial Officer, there has been no change in our internal control over financial reporting during our last fiscal quarter identified in connection with that evaluation that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II– OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may be a party to legal proceedings incidental to our business. We do not believe that there are any proceedings threatened or pending against us, which, if determined adversely to us, would have a material effect on our financial position or results of operations and cash flows.

ITEM ~~1A. RISK FACTORS.~~2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

~~In our report on Form 10-K for~~(c) The following table provides information about purchases by the ~~year~~Company of its shares of common stock during the three month period ended ~~October~~July 31, 2012, filed with the Securities Exchange Commission on January 29, 2013 (“Form 10-K”), we identify under Item 1A important factors which could affect our financial performance and could cause our actual results for future periods to differ materially from our anticipated results or other expectation, including those expressed in any forward-looking statements made in this Form 10-Q. See section titled Forward-Looking Statements located in Part 1, Item 2 of this report. The risk described below supplements the risk described in our Form 10-K.

~~Our cash could be adversely affected if the financial institutions in which we hold our cash fail.~~2014:

The Company maintains domestic cash deposits in Federal Deposit Insurance Corporation ("FDIC") insured banks and in money market obligation trusts registered under the US Investment Company Act of 1940, as amended. The domestic bank deposit balances usually exceed the FDIC insurance limits. In the foreign markets we serve, we also maintain cash deposits in foreign banks, some of which are not insured or partially insured by the FDIC or other similar agency. These balances could be impacted if one or more of the financial institutions in which we deposit monies fails or is subject to other adverse conditions in the financial or credit markets. To date, we have experienced no loss or lack of access to our invested cash; however, we can provide no assurance that access to our invested cash will not be impacted by adverse conditions in the financial and credit markets.

~~ITEM 6. EXHIBITS~~

~~(a) Exhibits:~~

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
May 1, 2014 through May 31, 2014		-		-		-		-
June 1, 2014 through June 30, 2014		-		-		-		-
July 1, 2014 through July 31, 2014		2,000	$	1.14		2,000		1,998,000
Total		2,000	$	1.14		2,000		1,998,000

~~10.1~~(1)

On June 13, 2014, the Board of Directors of the Company approved the Company Stock Repurchase Program authorizing the Company to repurchase up to two million shares of its outstanding common stock. The timing, manner, price and amount of any repurchases will be at the discretion of the Company, subject to the requirements of the Securities Exchange Act of 1934, as amended, and related rules. The Company Stock Repurchase Program does not oblige the Company to repurchase any shares and it may be modified, suspended or terminated at any time and for any reason. No shares will be repurchased directly from directors or officers of the Company.

ITEM 6. EXHIBITS.

(a)

Exhibits:

		Approval of Compensation Committee, dated July 17, 2013, to increase the hours of service pursuant to the Consulting Agreement between the Company and Elizabeth Plaza (a description of such approval was included in the Company's Current Report on Form 8-K, filed with the SEC on July 23, 2013, and incorporated herein by reference).

31.1		Certification of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the chief executive officer and chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*101.INS		XBRL Instance Document

101.SCH*101.SCH		XBRL Taxonomy Extension Schema

101.CAL*101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF*101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB*101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE*101.PRE		XBRL Taxonomy Extension Presentation Linkbase

~~_________________~~

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PHARMA-BIO SERV, INC.

~~Dated: September 16, 2013~~	~~By:~~	~~/s/ Nelida Plaza~~
		~~Nelida Plaza~~
		~~Acting President and Chief Executive Officer and President of Puerto Rico Operations and Secretary~~
		~~(Principal Executive Officer)~~

	~~By:~~/s/ Elizabeth Plaza
	Elizabeth Plaza
	Chairman
	(Principal Executive Officer)

	/s/ Pedro J. Lasanta
		Pedro J. Lasanta
		Chief Financial Officer and Vice President Finance and Administration
		(Principal Financial Officer and Principal Accounting Officer)

Dated: September 15, 2014

				Outstanding Warrants
	Exercise Price		Expiration Date	July 31, 2013		October 31, 2012
Original Warrants A	$	0.0600	January 16, 2014		240,800		240,800
Broker Warrants B	$	0.0600	January 24, 2014		-		1,830,991
Warrants Total					240,800		2,071,791