RELV Reliv International Inc

 

1. Accounting Polic ies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with the instructions to Form 10-Q and reflect all adjustments (which primarily include normal recurring accruals) which we believe are necessary to present fairly the financial position, results of operations and cash flows. All significant intercompany accounts and transactions have been eliminated. These statements, however, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States. Interim results may not necessarily be indicative of results that may be expected for any other interim period or for the year as a whole. These financial statements should be read in conjunction with the audited consolidated financial statements and footnotes included in the annual report on Form 10-K for the year ended December 31, 2018, filed March 29, 2019 with the Securities and Exchange Commission.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

Reclassifications

 

To conform to the current year presentation, certain previously reported 2018 amounts have been reclassified. 

 

Inventories

 

Inventories are valued at the lower of cost or market and are accounted for on a first-in, first-out basis. Effective January 1, 2019, finished goods inventories primarily consist of purchased products held for resale. Prior to 2019, finished goods inventories were primarily comprised of internally manufactured products consisting of the costs associated with raw materials, labor, and overhead. On a periodic basis we review our inventory levels, as compared to future demand requirements and the shelf life of the various products. Based on this review, we record inventory write-downs when necessary.

 

Sales aids and promotional materials inventories represent distributor kits, product brochures, and other sales and business development materials which are held for sale to distributors. Cost of the sales aids and promotional materials held for sale are capitalized as inventories and subsequently recorded to costs of goods sold upon recognition of revenue when sold to distributors. All other advertising and promotional costs are expensed when incurred.

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

1. Accounting Policies (continued)

 

Variable Interest Entities (VIE) - Unconsolidated

 

Effective January 1, 2019, we have a financial interest in Nutracom LLC (Nutracom). If we are the primary beneficiary of a VIE, we are required to consolidate the VIE in our consolidated financial statements. To determine if we are the primary beneficiary, we evaluate whether we have the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our VIE evaluation requires significant assumptions and judgments.

 

We do not have the power to direct the significant activities of Nutracom, primarily because we do not have governance rights. We also do not participate in the annual profits or losses of Nutracom. Therefore, we do not consolidate the financial results of Nutracom in our consolidated financial statements. We account for our financial interest in Nutracom as an equity investment measured at cost minus impairment, if any. A cost method equity investment is subject to periodic impairment review using the other-than-temporary impairment model, which considers the severity and duration of a decline in fair value below cost and our ability and intent to hold the investment for a sufficient period of time to allow for recovery.

 

See Note 2 and Note 3 for further information on our financial relationship with Nutracom.

 

Concentrations of Risk

 

Effective January 1, 2019, we have entered into outsourcing agreements with Nutracom to manufacture our nutritional and dietary supplements and for warehousing and fulfillment services for the U.S. distribution of our products. Nutracom has also issued promissory notes to us for the acquisition of our manufacturing and fulfillment operations. Any inability of Nutracom to deliver these contracted services or to repay the promissory notes could adversely impact our future operating results. See Note 2 and Note 3 for further discussion of our relationship with Nutracom.

 

New Accounting Pronouncements – Not Yet Adopted

 

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updated (“ASU”) No. 2016-13, Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which requires entities to use a current lifetime expected credit loss methodology to measure impairments of certain financial assets. Using this methodology may result in earlier recognition of losses than under the current incurred loss approach, which requires waiting to recognize a loss until it is probable of having been incurred. There are other provisions within the standard that affect how impairments of other financial assets may be recorded and presented, and that expand disclosures. This standard will be effective for our interim and annual financial periods beginning January 1, 2020, with early adoption permitted. Adoption of this standard must be applied on a modified retrospective basis. We are evaluating the potential impact of this standard on our consolidated financial statements and related disclosures.

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

1. Accounting Policies (continued)

 

New Accounting Pronouncements – Adopted January 1, 2019

 

Lessee Accounting

On January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842) (including subsequent issued lease-related ASU’s), and applied the new lease accounting standard to all lessee operating leases using the prospective transition method. Under this method, prior financial reporting periods are not restated. The adoption of the new lease accounting standard resulted in the recording of assets and obligations of our operating leases of approximately $451,000 and $457,000, respectively, on our consolidated balance sheets. Certain amounts previously recorded for prepaid and accrued rent associated with historical operating leases were reclassified to the newly captioned Operating lease right-to-use assets.

 

At adoption, we used the new lease accounting standard’s package of practical expedients permitted under the transition guidance that allowed us to not reassess: (a) whether any expired or existing contracts are or contain leases, (b) lease classification for any expired or existing leases, and (c) initial direct costs for any expired or existing leases. We also used the lease standard’s practical expedient that allows lessees to treat the lease and implicit non-lease components of our leases as a single lease component and we do not record on the balance sheet leases with an initial term of twelve months or less. Fixed lease expense on all of our operating leases is recognized on a straight-line basis over the contractual lease term, including our estimate of any renewal or early termination lease terms. Operating lease expense is presented within Selling, General and Administrative expense in our operating results.

 

Operating lease liabilities and related operating lease right-to-use assets are recognized at commencement date of the lease based on the present value of lease payments over the lease term. When leases do not provide an implicit discount rate, we use a country specific incremental borrowing rate based upon the lease term.

 

See Note 7 for additional lease disclosures.

 

Less or Accounting – Other Revenue

 

Other revenue consists of revenue derived from our leasing a portion of our headquarters building to Nutracom, LLC (Nutracom). We recognize lessor rent revenue on a straight-line basis over the term of the lease. As part of this straight-line methodology, the cumulative rental billings may be greater or less than the financial period’s recognized revenue; such timing differences are recognized on the balance sheet as an accrued other liability or an unbilled rent revenue receivable.

 

Also included in other revenue are billings to the tenant for its share of the facility’s common area costs such as real estate taxes, maintenance, and utilities. These same common area costs plus the tenant’s share of the facilities’ depreciation are recorded as cost of goods sold.

 

See Note 2 and Note 3 for further information on our financial relationship with Nutracom. See Note 7 for further information on our leases.

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

1. Accounting Policies (continued)

 

Going Concern

 

We have incurred operating losses, declining net sales, and negative net cash flows over our most recent five years. Our management estimates that these unfavorable trends are more likely than not to continue for the foreseeable future, and as a result, we will require additional financial support to fund our operations and execute our business plan. As of June 30, 2019, we had $1,918,721 in cash and cash equivalents which may not be sufficient to fund our planned operations through one year subsequent to the date of the issuance of these condensed financial statements, and accordingly, there is substantial doubt about our ability to continue as a going concern. The analysis used to determine our ability to continue as a going concern does not include cash sources outside of our direct control that our management expects to be available within the next twelve months.

 

We may not be able to obtain sufficient additional funding through monetizing certain of our existing assets, sourcing additional borrowings, and issuing additional equity, or any other means, and if we are able to do so, these available sources of funds may not be on satisfactory terms. Our ability to raise additional capital in the equity markets, should we choose to do so, is dependent on a number of factors, including, but not limited to, the market demand for our common stock, which itself is subject to a number of business risks and uncertainties, as well as the uncertainty that we would be able to raise such additional capital at a price or on terms that we believe are favorable.

 

We have taken several steps in 2019 which we believe will result in improvement to our financial position, operating results, and cash flows. We have borrowed $500,000 of our available $750,000 revolving line of credit balance. In addition, our lender has agreed to extend the available $750,000 revolving line of credit agreement to April 28, 2020.

 

As detailed in Note 2 of these condensed consolidated financial statements, on January 1, 2019, we sold the assets previously used by us in our manufacturing operations to Nutracom LLC (Nutracom). We financed the assets purchased by Nutracom from us under payment terms scheduled to provide incoming funds to us of $100,000 or more per year. We have also entered into an agreement for Nutracom to lease a significant portion of our headquarters building. Our management believes that these transactions with Nutracom will be favorable to our financial position, operating results, and cash flows; however, there are risks and uncertainties which arise from these Nutracom transactions and their impact to our operations.

 

Should the aforementioned changes to our operations not provide sufficient cash flow improvement or should we be unable to obtain sufficient additional capital or borrowings, we may have to engage in any or all of the following activities: (i) seek to monetize our headquarters building via traditional bank lending or a sale and leaseback-type transaction; (ii) monetizing the note receivable from a distributor; (iii) modify our distributor promotions, incentives, and other activities; (iv) cease operations in certain geographic regions, and (v) reduce employee compensation and benefits.

 

These actions may have a material adverse impact on our ability to achieve certain of our planned objectives. Even if we are able to source additional funding, we may be forced to significantly reduce our operations or shut down our operations if our business operating performance does not improve. These condensed consolidated financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary in the event we can no longer continue as a going concern.

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

2. Sale of Manufacturing Operations’ Assets

 

On January 1, 2019, we entered into a Purchase Agreement with Nutracom, LLC (Nutracom) pursuant to which Nutracom purchased the following assets previously used by us in our manufacturing operations:

 

●

Inventories (sold at cost of $1.56 million) and,

●

Machinery and other equipment with a net book value of $565,000 (sold for $1 million; gain on disposal of approximately $435,000).

 

Nutracom was formed by our manufacturing operations management which included former officers of the Company. Employees of our manufacturing operations were offered employment by Nutracom.

 

Prior to its approval of the transaction, our Board of Directors formed a special committee consisting of the Board’s independent directors to review the transaction. To assist in its review, the special committee engaged a qualified third-party expert to render a fairness opinion on the transaction.

 

Concurrently with the execution of the Purchase Agreement, we entered into several agreements with Nutracom including a product supply agreement for a term of seven years, a fulfillment agreement, and a facility lease agreement whereby Nutracom will lease manufacturing, warehouse, and certain office space of our headquarters building from us for a term of seven years, with a Nutracom option for an additional five-year term. Annual lease amounts range from $193,000 to $410,000 over the seven-year term.

 

Nutracom provided the following consideration to us for the manufacturing operations and related identified assets and agreements:

 

●

$1 million secured promissory note, seven year term, fixed interest rate of 5.5%, principal and interest payable monthly. (See June 1, 2019 note modification within this Note 2).

●

$764,344 unsecured promissory note, seven year term, fixed interest rate of 7.0%, interest only payable for the first two years with monthly payment of principal and interest thereafter under a ten-year amortization schedule. The face value of the unsecured note includes the first year’s rent due under the facility lease agreement.

●

Nutracom management transferred to us its ownership of 99,200 shares of our common stock valued at $540,144.

●

Nutracom issued to us a non-voting Class B 15% equity membership interest in Nutracom, LLC. The Class B interest does not share in any profits or losses from operations of Nutracom. As defined within the Nutracom Operating Agreement, upon any merger, consolidation, disposition, or liquidation of Nutracom, the Class B equity membership interest converts to a Class A equity membership interest.

●

Commencing January 1, 2020, our Class B interest will be entitled to receive a percentage, (ranging from 1.0% to 1.25%) of Nutracom’s annual revenues (excluding Nutracom’s revenues from sales to us).

 

Our non-voting Class B 15% equity membership interest in Nutracom was valued by the aforementioned third-party expert at $505,000. As our non-voting membership interest does not participate in the management of Nutracom, nor do we share in any Nutracom operating profits or losses, we are accounting for our Nutracom equity investment under the cost method.

 

At December 31, 2018, we presented inventories and machinery and other equipment sold to Nutracom as a current asset under the caption of “Assets held for sale” in the accompanying condensed consolidated balance sheets. We have accounted for the Nutracom aforementioned transactions in our first quarter 2019 financial results.

 

Promissory Note Modification – June 1, 2019

 

On June 1, 2019, we entered into an Agreement with Nutracom to modify the Secured Promissory Note originally issued to us by Nutracom on January 1, 2019, as follows:

 

●

Effective June 1, 2019, the outstanding balance of the Secured Promissory Note was reduced by $500,000 to $460,583 with a corresponding reduction of $500,000 to our outstanding vendor obligation due Nutracom under our ongoing product supply agreement.

●

The $460,583 remaining Secured Promissory Note was exchanged with Nutracom for a newly issued June 1, 2019 Nutracom unsecured promissory note for the same amount under the following terms: fixed interest rate of 6.0% with interest only payable monthly through December 2020. Beginning January 1, 2021, principal and interest of $8,904 will be payable monthly for 60 months.

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

3. Related Parties

 

The following summarizes our related party activities with Nutracom and a significant distributor of the Company.

 

 

The following table presents scheduled principal payments to be received on the distributor and Nutracom promissory notes receivable:

 

Remainder of 2019		$	62,441
2020			130,629
2021			274,844
2022			292,377
2023			311,033
Thereafter			1,498,116
		$	2,569,440

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

3. Related Parties (continued)

 

		Six months ended June 30
Revenue and expense - related parties		2019				2018
Other revenue		$	332,657			$	-
Selling, general and administrative expense:
Fullfillment & professional fees			305,910				-
Interest income on promissory notes			92,668				44,778
Gain on sale of fixed assets			434,549				-
Finished goods inventory purchased from Nutracom		$	2,763,000				-

 

At June 30, 2019, we had $1.4 million in commitments (net of deposits) to purchase finished goods inventory from Nutracom.

 

S upplementary Disclosure of Cash Flows Information :

 

We incurred the following noncash investing and financing transactions on January 1, 2019 and June 1, 2019 relating to our transactions with Nutracom:

 

		2019
January 1, 2019
Sale of fixed assets		$	1,000,000
Sale of inventories			1,559,488
First year building rental received in advance			250,000
Acquire company common stock for treasury			540,144
Acquire equity investment in Nutracom			505,000
Secured promissory note received			1,000,000
Unsecured promissory note received			764,344
June 1, 2019
Secured promissory note receivable balance decreased; applied as reduction to outstanding trade accounts payable			500,000
Unsecured promissory note received in exchange for remaining secured promissory note balance and other considerations			460,583

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

4. Basic and Diluted Earnings (Loss) per Share

 

Basic earnings (loss) per common share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed using the weighted average number of common shares and potential dilutive common shares that were outstanding during the period. Potential dilutive common shares consist of outstanding stock options, outstanding stock warrants, and convertible preferred stock.

 

The following table sets forth the computation of basic and diluted earnings (loss) per share:

 

		Three months ended								Six months ended
		June 30								June 30
		2019				2018				2019				2018
Numerator:
Net income (loss)		$	(388,105	)		$	(977,954	)		$	235,539			$	(1,216,259	)
Denominator:
Denominator for basic earnings (loss) per share – weighted average shares			1,746,000				1,845,000				1,746,000				1,845,000
Dilutive effect of employee stock options and other warrants			-				-				-				-
Denominator for diluted earnings (loss) per share – adjusted weighted average shares			1,746,000				1,845,000				1,746,000				1,845,000
Basic earnings (loss) per share		$	(0.22	)		$	(0.53	)		$	0.13			$	(0.66	)
Diluted earnings (loss) per share		$	(0.22	)		$	(0.53	)		$	0.13			$	(0.66	)

 

Options and warrants to purchase 85,203 shares of common stock for the three months and six months ended June 30, 2019, respectively, were not included in the denominator for diluted earnings (loss) per share because their effect would be antidilutive or because the shares were deemed contingently issuable. Options and warrants to purchase 120,242 shares of common stock for the three months and six months ended June 30, 2018, respectively, were not included in the denominator for diluted earnings (loss) per share because their effect would be antidilutive or because the shares were deemed contingently issuable.

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

5 . Fair Value of Financial Instruments

 

Fair value can be measured using valuation techniques such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). Accounting standards utilize a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those levels:

 

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets or similar assets or liabilities in markets that are not active.

 

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

 

The carrying amount and fair value of financial instruments were approximately as follows:

 

		Carrying				Fair
Description		Amount				Value				Level 1				Level 2				Level 3
June 30, 2019
Revolving line of credit		$	500,000			$	500,000				-			$	500,000				-
Note receivable - distributor			1,344,513				1,474,000				-				1,474,000				-
Notes receivable - Nutracom			1,224,927				1,224,927				-				1,224,927				-
Marketable securities			408,000				408,000			$	408,000				-				-
December 31, 2018
Note receivable - distributor		$	1,405,112			$	1,529,000				-			$	1,529,000				-
Marketable securities			339,000				339,000			$	339,000				-				-

 

Revolving line of credit : The fair value of our revolver loan approximates carrying value as this loan was amended within the past year and has a variable market-based interest rate that resets every thirty days.

 

Note receivable - distributor : The note receivable - distributor is a variable rate residential mortgage-based financial instrument. An average of published interest rate quotes for a fifteen-year residential jumbo mortgage, a comparable financial instrument, was used to estimate fair value of this note receivable under a discounted cash flow model.

 

Note s receivable - Nutracom : The fair value of the notes receivable – Nutracom balance approximates carrying value as these notes were received at fair value within the current fiscal year.

 

Marketable securities : The assets (trading securities) of our Supplemental Executive Retirement Plan are recorded at fair value on a recurring basis, and are presented within Other Assets in the consolidated balance sheets.

 

The carrying value of other financial instruments, including cash, accounts receivable and accounts payable, and accrued liabilities approximate fair value due to their short maturities or variable-rate nature of the respective balances.

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

6 . Debt

 

On September 30, 2015, we entered into a series of lending agreements with our primary lender which included agreements for a term loan and a revolving credit facility. The term loan was repaid in 2018 and the revolver has been periodically amended and extended.

 

Effective with a September 11, 2018 amendment, the revolving line of credit’s maximum borrowing amount was $750,000. The revolver’s maturity date was April 29, 2019 and the revolver’s interest rate was based on the 30-day LIBOR plus 2.25%. As of December 31, 2018, there were no outstanding borrowings on the revolving line of credit. In January 2019, the Company borrowed $500,000 under its revolving line of credit.

 

Effective with a March 25, 2019 amendment, the revolving line of credit’s maturity date was extended to April 28, 2020 and the interest rate was revised to the 30-day LIBOR plus 3.00%. As amended, the revolver’s maximum borrowing amount remains $750,000. At June 30, 2019, outstanding borrowings under the revolving line of credit were $500,000 at an interest rate of 5.48%.

 

Borrowings under the lending agreement continue to be secured by all of our tangible and intangible assets and by a mortgage on the real estate of our headquarters facility. At June 30, 2019, the Company was in compliance with its loan covenant requirements.

 

7. Leases

 

Less ee

 

The Company leases certain office facilities, storage, and equipment. These leases have varying terms, are generally one to five years in length, and certain real estate leases have options to extend or early terminate. Several of our operating leases are subject to annual changes in the Consumer Price or similar indexes (CPI). The changes to the lease payment due to CPI changes are treated as variable lease payments and recognized in the period in which the obligation for those payments was incurred.

 

The following table represents the maturity of our operating lease liabilities as of June 30, 2019:

 

Remainder of 2019		$	118,728
2020			185,980
2021			19,588
2022			14,781
2023			5,557
Thereafter			-
Total operating lease payments			344,634
Less: imputed interest			(14,250	)
Total operating lease liabilities		$	330,384

 

Operating lease expense:		Three months ended				Six months ended
		June 30, 2019				June 30, 2019
Fixed		$	60,269			$	124,972
Variable			4,023				9,472
Short-term			5,265				15,036
Total		$	69,557			$	149,480

 

As of June 30, 2019, our operating leases have a weighted-average remaining lease term of 1.8 years and a weighted-average discount rate of 5.2%. Cash paid for amounts included in the measurement of operating lease liabilities was approximately $134,600 for the six months ended June 30, 2019.

 

Less or – Other Revenue

 

Other revenue consists of revenue derived from our leasing a portion of our headquarters building to Nutracom, LLC (Nutracom) effective January 1, 2019. The leased space, encompassing manufacturing, warehouse, and certain office space, is for a term of seven years, with a tenant option for an additional five-year term. Annual lease amounts range from $193,000 to $410,000 over the seven-year term.

 

We recognize lessor rent revenue on a straight-line basis over the term of the lease. As part of this straight-line methodology, the cumulative rental billings may be greater or less than the financial period’s recognized revenue; such timing differences are recognized on the balance sheet as an accrued other liability or an unbilled rent revenue receivable.

 

Also included in other revenue are billings to the tenant for its share of the facility’s common area costs such as real estate taxes, maintenance, and utilities. These same common area costs plus the tenant’s share of the facilities’ depreciation are recorded as cost of goods sold.

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

7. Leases (continued)

 

Less or – Other Revenue (continued)

 

The following table details lessor’s estimated remaining straight-line rent revenue over the seven-year lease term as compared with fixed rent amounts under the lease agreement.

 

		Estimated
		Straight-line				Lease Agreement
		Rent Revenue				Fixed Rent
Remainder of 2019		$	172,866			$	125,000
2020			345,732				192,900
2021			345,732				385,800
2022			345,732				385,800
2023			345,732				385,800
Thereafter			691,465				819,825
Total		$	2,247,259			$	2,295,125

 

 

 

8 . Income Taxes

 

During the fiscal years of 2016 through 2018, we determined that it was more likely than not that U.S. federal and various state net operating losses generated in those years will not be realized based on projections of future U.S. taxable income, estimated reversals of existing taxable timing differences, and other considerations.

 

In prior years, we recorded a valuation allowance on all of our domestic and foreign deferred tax assets. The effective income tax rate was 32.0% and (3.4)% for the year to date periods ended June 30, 2019 and 2018, respectively. The income tax provision amounts primarily represent estimated income taxes for one of the Company’s foreign subsidiaries and certain U.S. states.

 

One of our foreign subsidiaries is presently under local country audit for alleged deficiencies (totaling approximately $800,000 plus interest at 20% per annum) in value-added tax (VAT) and withholding tax for the years 2004 through 2006. In consultation with our legal counsel, we believe that there are strong legal grounds that we should not be liable to pay the majority of the alleged tax deficiencies. In 2011, we made good faith deposits of approximately $173,000 to the local tax authority under the tax agency’s administrative judicial resolution process.

 

As of December 31, 2018, our estimated reserve (net of deposits) for this matter was approximately $172,500 and remains unchanged in 2019. In May 2018, we received a formal notice of denial of one of our appeals under the tax agency’s administrative judicial resolution process; however, we continue to pursue other available legal processes as we continue to maintain our position that we are not liable for the majority of the alleged tax deficiencies.

 

 

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

 

9 . Revenue Recognition

 

We recognize revenue from product sales under a five step process with our independent distributors (including customers) when there is a legally enforceable contract, the rights of the parties are identified, the contract has commercial substance, and collectability of the contract consideration is probable. Product sales revenue (principally nutritional and dietary supplements) and commission expenses are recorded when control is transferred to the independent distributors, which occurs at the time of shipment. Generally, net sales reflect product sales less the distributor discount of 20 percent to 40 percent of the suggested retail price. We present distributor royalty and commission expense as an operating expense, rather than a reduction to net sales, as these payments are not made to the purchasing distributor. At point of sale, we receive payment by credit card, personal check, or guaranteed funds for contracts from independent distributors and make related commission payments in the following month.

 

We recognize the performance obligation for membership fees-type revenue over the membership term of generally twelve months. We receive payment for membership fees revenue at the beginning of the membership term and recognize membership fees revenue on a straight-line basis in correlation with the completion of our performance obligation under the membership term. Our remaining unearned membership fees obligation is reported as deferred revenue liability.

 

We record freight income as a component of net sales and record freight costs as a component of cost of goods sold. Total sales do not include sales tax as we consider ourselves a pass-through conduit for collecting and remitting applicable sales taxes.

 

Other revenue is defined in Note 7 - Leases.

 

Actual and estimated sales returns are classified as a reduction of net sales. We estimate and accrue a reserve for product returns based on our return policy and historical experience. Our product returns policy allows for distributors to return product only upon termination of his or her distributorship. Allowable returns are limited to saleable product which was purchased within twelve months of the termination for a refund of 100% of the original purchase price less any distributor royalties and commissions received relating to the original purchase of the returned products. For the year to date periods ending June 30, 2019 and 2018, total returns as a percent of net sales were approximately 0.07% and 0.26%, respectively.

 

We classify our net sales into two categories of sales products, plus freight income, and other revenue:

 

		Three months ended June 30								Six months ended June 30
		2019				2018				2019				2018
Net sales by product category
Nutritional and dietary supplements		$	7,284,897			$	7,606,674			$	15,782,247			$	16,676,031
Sales aids, membership fees, and other			318,144				313,922				631,791				635,946
Freight income			479,881				539,145				999,822				1,151,003
Other revenue			174,091				-				332,657				-
Total net sales		$	8,257,013			$	8,459,741			$	17,746,517			$	18,462,980

 

We operate in one reportable segment, a network marketing segment consisting of six operating units that sell nutritional and dietary products to a sales force of independent distributors that sell the products directly to customers. These operating units are based on geographic regions, as follows:

 

		Three months ended June 30								Six months ended June 30
		2019				2018				2019				2018
Net sales by geographic region
United States		$	5,904,605			$	6,336,387			$	13,016,378			$	14,006,448
Australia/New Zealand			132,330				177,536				309,377				409,464
Canada			140,029				161,557				339,428				403,677
Mexico			152,569				112,411				288,595				219,782
Europe (1)			756,264				1,030,546				1,694,933				2,195,430
Asia (2)			1,171,216				641,304				2,097,806				1,228,179
Total net sales		$	8,257,013			$	8,459,741			$	17,746,517			$	18,462,980

 

(1)	Europe consists of United Kingdom, Ireland, France, Germany, Austria, and the Netherlands.
(2)	Asia consists of Philippines, Malaysia, and Singapore.

 

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