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

percent to

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

- 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

September 30, 2019

and

2018,

total returns as a percent of net sales were approximately

0.10%

and

0.23%,

respectively.

Reliv’ International, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Revenue Recognition (continued)

We classify our net sales into

two

categories of sales products, plus freight income, and other revenue:

	Three months ended				Nine months ended
	September 30				September 30
	2019		2018		2019		2018
Net sales by product category
Nutritional and dietary supplements	$	8,072,320	$	7,514,349	$	23,854,568	$	24,190,379
Sales aids, membership fees, and other		323,621		303,177		955,411		939,124
Freight income		521,192		519,519		1,521,014		1,670,522
Other revenue		231,732		-		564,389		-
Total net sales	$	9,148,865	$	8,337,045	$	26,895,382	$	26,800,025

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				Nine months ended
	September 30				September 30
	2019		2018		2019		2018
Net sales by geographic region
United States	$	6,842,640	$	6,498,778	$	19,859,018	$	20,505,226
Australia/New Zealand		135,123		155,663		444,500		565,126
Canada		139,991		153,189		479,418		556,866
Mexico		155,847		127,859		444,442		347,641
Europe (1)		727,038		807,097		2,421,971		3,002,528
Asia (2)		1,148,226		594,459		3,246,033		1,822,638
Total net sales	$	9,148,865	$	8,337,045	$	26,895,382	$	26,800,025

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