| A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | ORGANIZATION Pharma-Bio Serv, Inc. (“Pharma-Bio”)
is a Delaware corporation organized on January 14, 2004. Pharma-Bio is the parent company of Pharma-Bio Serv PR, Inc. (“Pharma-PR”),
Pharma Serv, Inc. (“Pharma-Serv”), and Scienza Labs, Inc. (“Scienza Labs”), each a Puerto Rico corporation,
Pharma-Bio Serv US, Inc. (“Pharma-US”), a Delaware corporation, Pharma-Bio Serv Validation & Compliance Limited
(“Pharma-IR”), an Irish corporation currently inactive, Pharma-Bio Serv SL (“Pharma-Spain”), a Spanish
limited liability company, and Pharma-Bio Serv Brasil Servicos de Consultoria Ltda. (“Pharma-Brazil”), a Brazilian
limited liability company. Pharma-Bio, Pharma-PR, Pharma-Serv, Scienza Labs, Pharma-US, Pharma-IR, Pharma-Spain and Pharma-Brazil
are collectively referred to as the “Company.” The Company operates in Puerto Rico, the United States, Ireland, Spain
and Brazil under the name of Pharma-Bio Serv and is engaged in providing technical compliance consulting service, and until September
17, 2018 microbiological and chemical laboratory testing (the “Lab”). On September 17, 2018 (the “Sales Closing
Date”), the Company sold substantially all of its Lab business assets (the “Laboratory Assets”). SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The condensed consolidated balance sheet of
the Company as of October 31, 2018 is derived from audited consolidated financial statements but does not include all disclosures
required by generally accepted accounting principles. The unaudited interim condensed consolidated financial statements, include
all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation
of the financial position and results of operations and cash flows for the interim periods. The results of operations for the three
months ended January 31, 2019 are not necessarily indicative of expected results for the full 2019 fiscal year. The accompanying financial data as of January
31, 2019, and for the three-month period ended January 31, 2019 and 2018 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, 2018. Consolidation The accompanying condensed consolidated financial
statements include the accounts of the Company and all of its wholly owned subsidiaries. All intercompany transactions and balances
have been eliminated in consolidation. Segments On the Sales Closing Date, the Company sold
substantially all of its Laboratory Assets. As a result of the sale, the Company currently operates in three reportable business
segments: (i) Puerto Rico technical compliance consulting, (ii) United States technical compliance consulting, and (iii) Europe
technical compliance consulting. Accordingly, the accompanying consolidated financial statements are presented to show these three
reportable segments as continuing operations, while the Lab is presented as a discontinued operation. 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 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). The carrying value of the Company's financial
instruments (excluding 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 obligations under capital leases approximates the carrying amount. Revenue Recognition In May 2014, the Financial Accounting Standards
Board (FASB) issued a new accounting standard that amends the guidance for the recognition of revenue from contracts with customers
to transfer goods and services. The FASB subsequently issued additional, clarifying standards to address issues arising from implementation
of the new revenue recognition standard. The new revenue recognition standard and clarifying standards require an entity to recognize
revenue when control of promised goods or services is transferred to the customer at an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. We adopted this new standard as of November
1, 2018, by applying the modified-retrospective method to those contracts that were not completed as of that date. The results
for reporting periods beginning after November 1, 2018, are presented in accordance with the new standard, although comparative
information has not been restated and continues to be reported under the accounting standards and policies in effect for those
periods. The adoption of this new standard had an immaterial impact on our reported total revenues and operating income as
compared to what reported amounts would have been under the prior standard, and we expect the impact of adoption in future periods
to also be immaterial. Revenue is primarily derived from: (1) time
and materials contracts (representing approximately 99% of total revenues), which is recognized by applying the proportional performance
model, whereby revenue is recognized as performance occurs, and (2) short-term fixed-fee contracts or "not to exceed" contracts
(representing approximately 1% of total revenues), which revenue is recognized similarly, except that certain milestones also have
to be reached before revenue is recognized. If the Company determines that a contract will result in a loss, the Company recognizes
the estimated loss in the period in which such determination is made. Cash Equivalents For purposes of the consolidated statements
of cash flows, cash equivalents include investments in a money market obligations trust that is registered under the U.S. Investment
Company Act of 1940, as amended, and liquid investments with original maturities of three months or less. Accounts Receivable Accounts receivable are recorded at their estimated
realizable value. Accounts are deemed past due when payment has not been received within the stated time period. The Company's
policy is to review individual past due amounts periodically and write off amounts for which all collection efforts are deemed
to have been exhausted. Due to the nature of the Company’s customers, bad debts are mainly accounted for using the direct
write-off method whereby an expense is recognized only when a specific account is determined to be uncollectible. The effect of
using this method approximates that of the allowance method. Income Taxes The Company follows an asset and liability approach
method of accounting for income taxes. This method measures deferred income taxes by applying enacted statutory rates in effect
at the balance sheet date to the differences between the tax basis of assets and liabilities and their reported amounts on the
financial statements. The resulting deferred tax assets or liabilities are adjusted to reflect changes in tax laws as they occur.
A valuation allowance is provided when it is more likely than not that a deferred tax asset will not be realized. The Company follows guidance from the Financial
Accounting Standards Board (“FASB”) related to Accounting for Uncertainty in Income Taxes, Property and 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. 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 the lease term, including renewals that have been determined to be reasonable
assured. 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 January 31, 2019 and October 31, 2018, the accumulated depreciation and amortization
amounted to $523,791 and $496,953, 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. Stock-based Compensation Stock-based compensation expense is recognized
in the consolidated financial statements based on the fair value of the awards granted. Stock-based compensation cost is measured
at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which generally
represents the vesting period, and includes an estimate of awards that will be forfeited. The Company calculates the fair value
of stock options using the Black-Scholes option-pricing model at the grant date, while for restricted stock units the fair market
value of the units is determined by Company’s share market value at grant date. Excess tax benefits related to stock-based
compensation are reflected as cash flows from financing activities rather than cash flows from operating activities. The Company
has not recognized such cash flows from financing activities since there has been no tax benefit related to the stock-based compensation. Earnings (Loss) Per Share of Common Stock Basic earnings (loss) per share of common stock
is calculated by dividing net earnings (loss) by the weighted average number of shares of common stock outstanding. Diluted loss
per share includes the dilution of common stock equivalents, which include principally shares that may be issued upon the exercise
of warrants, stock option and restricted stock unit awards. The diluted weighted average shares of common
stock outstanding were calculated using the treasury stock method for the respective periods. Foreign Operations The functional currency of the Company’s
foreign subsidiaries is its local currency. The assets and liabilities of the Company’s foreign subsidiaries are translated
into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average
exchange rates prevailing during the period. The cumulative translation effect for subsidiaries using a functional currency other
than the U.S. dollar is included as a cumulative translation adjustment in stockholders’ equity and as a component of comprehensive
income. The Company’s intercompany accounts are
typically denominated in the functional currency of the foreign subsidiary. Gains and losses resulting from the remeasurement of
intercompany receivables that the Company considers to be of a long-term investment nature are recorded as a cumulative translation
adjustment in stockholders’ equity and as a component of comprehensive income, while gains and losses resulting from the
remeasurement of intercompany receivables from those international subsidiaries for which the Company anticipates settlement in
the foreseeable future are recorded in the consolidated statements of operations. Subsequent Events The Company has evaluated subsequent events
through the filing date of this report. The Company has determined that there are no events occurring in this period that
required disclosure or adjustment. Reclassifications Certain reclassifications have been made to
the January 31, 2018 condensed consolidated financial statements to conform them to the January 31, 2019 condensed consolidated
financial statements presentation. Such reclassifications do not affect net loss as previously reported. Recent accounting pronouncements not implemented In February 2016, the FASB issued a new accounting
standard that amends the guidance for the accounting and disclosure of leases. This new standard requires that lessees recognize
the assets and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about
their leasing arrangements. The new standard is effective for interim and annual periods beginning on January 1, 2019 and may be
adopted earlier. The Company continues to evaluate the impact that this new standard will have on its consolidated financial statements.
The Company does not expect that this standard will have a material impact to its Consolidated Statements of Operations but expects
that this standard will have a material impact on the assets and liabilities on its Consolidated Balance Sheets upon adoption. |
