NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements are prepared in accordance with GAAP and include the accounts of the Company and its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Reclassifications

Certain reclassifications have been made to the prior year data to conform with the current period’s presentation.

Comprehensive Income

For the fiscal periods covered by this Annual Report, the only component of the Company’s comprehensive income (loss) is the Company’s net earnings. Accordingly, the Company does not present a consolidated statement of comprehensive income.

Use of Estimates and Assumptions

The preparation of financial statements in accordance with GAAP requires the use of judgment and requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosures about contingent assets and liabilities, if any. Matters that require the use of estimates and assumptions include: the recoverability of accounts receivable, the valuation of inventory, the useful lives of fixed assets, the assessment of long-lived assets for impairment, the nature and timing of satisfaction of multiple performance obligations resulting from contracts with customers, allocation of the transaction price to multiple performance obligations in a sales transaction, the measurement and recognition of right-of-use assets and related lease liabilities, the valuation of derivative liabilities, the valuation of share-based compensation awards, the measurement and recognition of uncertain tax positions, and the valuation of loss contingencies, if any. Actual results may differ from these estimates in amounts that may be material to our consolidated financial statements. We believe that the estimates and assumptions used in the preparation of our consolidated financial statements are reasonable.

Cash and cash equivalents

Cash and cash equivalents include cash on hand, demand deposits in banking institutions, and cash equivalents, if any. At April 30, 2020 and 2019, cash and cash equivalents also include $11.1 million and $3.5 million, respectively, of deposits with our merchant processors, consisting of proceeds from recent sales transactions, which are unrestricted and are not insured by any federal agency.

Cash equivalents, if any, represent highly liquid short-term investments with an original maturity of 90 days or less and are stated at cost, which approximates fair value.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consists primarily of amounts due from our merchant processors of $4.2 million and $4.5 million, as of April 30, 2020 and 2019, respectively, including $4.0 million and $4.1 million, respectively, receivable from one merchant processor. We assess the adequacy of our allowance for doubtful accounts, if any, on the basis of our historical collection data and current information. Account balances are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Inventory and Cost of Goods Sold

Inventory consists of product held for sale in the normal course of our business. Inventory is stated at the lower of cost, determined using the first-in, first-out (“FIFO”) method, or net realizable value. Inventory cost reflects direct product costs and certain shipping and handling costs, such as in-bound freight. When estimating the net realizable value of inventory, we consider several factors including estimates of future demand for the product, historical turn-over rates, the age and sales history of the inventory, and historic and anticipated changes in our product offerings.

Physical inventory counts are performed at all facilities at least annually. Upon completion of physical inventory counts, our consolidated financial statements are adjusted to reflect actual quantities on hand. Between physical counts, we estimate inventory shrinkage based on our historical experience. We have policies and processes in place that are intended to minimize inventory shrinkage.

Cost of goods sold includes actual product costs, vendor rebates and allowances, if any, inventory shrinkage and certain shipping and handling costs, such as in-bound freight, associated with product sold. All other shipping and handling costs, including the cost to ship product to customers, are included in selling and marketing expenses in our consolidated statements of operations when incurred.

Property and Equipment

Property and equipment are recorded at cost and reported net of accumulated depreciation. Depreciation expense is recognized over an asset’s estimated useful life using the straight-line method. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the term of the related lease, including lease renewals considered reasonably assured. The estimated useful lives of other property and equipment are as follows:

The estimated useful lives are periodically reviewed and, when appropriate, changes are made prospectively. The recoverability of long-lived assets is assessed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable, by comparing the net carrying amount of each asset to the total estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset.

Revenue Recognition

The Company derives revenue only from the sale of its products and services and recognizes revenue net of amounts due to taxing authorities (such as local and state sales tax). Our customers place sales orders online and through our “back-office” operations, which creates a contract and establishes the transaction price. The Company recognizes revenue when (or as) it transfers control of the promised goods and services to the customer. With respect to products sold, our performance obligation is satisfied upon receipt of the products by the customer. With respect to subscription-based revenue, including Elepreneurs membership fees, our performance obligation is satisfied over time (up to one year). The timing of our revenue recognition may differ from the time when we invoice and/or collect payment. The Company has elected to treat shipping and handling costs as an activity to fulfill its performance obligations, rather than a separate performance obligation.

Deferred sales revenue associated with product invoiced but not received by customers at the balance sheet date was $2.7 million and $2.5 million as of April 30, 2020 and 2019, respectively. In addition, as of April 30, 2020 and 2019, deferred sales revenue associated with our performance obligations for services offered on a subscription basis was $433,386 and $515,087, and deferred sales revenue associated with our performance obligations for customers’ right of return was $263,117 and $194,042, respectively. Deferred sales revenue is expected to be recognized over one year.

During the fiscal year ended April 30, 2020, no individual customer, or related group of customers, represents 10% or more of our consolidated net sales, and approximately 47% of our consolidated net sales were to recurring customers (which we refer to as “SmartShip” sales), approximately 26% were to new customers and approximately 27% were to our independent distributors. During the fiscal year ended April 30, 2020 and 2019, approximately 95% and 96%, respectively, of our consolidated net sales are to our customers and/or independent distributors located in the United States.

During the fiscal year ended April 30, 2020 and 2019, approximately 98% and 97%, respectively, of our consolidated net sales are from our health and wellness products (including approximately 25% from the sales of coffee and coffee-related products and approximately 52% from the sale of all other health and wellness products).

During the fiscal year ended April 30, 2020 and 2019, product purchases from one supplier accounted for approximately 98% and 96%, respectively, of our total product purchases.

The Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), effective May 1, 2018, using the cumulative effect transition method. The following table summarizes the impact of the adoption of ASC 606 on our condensed consolidated balance sheet as of April 30, 2019 and consolidated statement of operations for the fiscal year ended April 30, 2019:

Impact of Adoption on the Company’s Condensed Consolidated Balance Sheet

Impact of Adoption on the Company’s Condensed Consolidated Statement of Operations

The “ASC 606 Impact” indicated in the table above reflects the additional deferral of revenue (and related cost of goods sold) in connection with performance obligations yet to be satisfied at the balance sheet date. In addition, the “ASC 606 Impact” reflects recognition of a right to recover asset associated with our customers’ right of return.

Sales Commissions

The Company recognizes sales commission expense when incurred. In the fiscal year ended April 30, 2020 and 2019, sales commission expense was $59.0 million and $41.5 million, respectively, and is included in selling and marketing expenses in our consolidated statements of operations.

In the fiscal year ended April 30, 2019, the Company offered to members of its independent sales force who had met certain sales targets, fully vested warrants to purchase up to 11,000,000 shares its common stock with an estimated fair value of $1,805,287 (the “2019 Sales-related Warrants”). The warrants are exercisable for a period of two years from the issuance date, subject to certain default provisions, at the exercise price of $0.25 per share. The rights conferred by the warrants are not subject to service conditions and all other conditions necessary to earn the award have been satisfied, The Company deems the fair value of warrants to be an element of sales compensation expense. In the fiscal year ended April 30, 2019, the Company issued warrants to purchase up to 1,582,600 shares of its common stock, with a fair value of $267,620, pursuant to the program and recorded an estimated liability in the amount of $1,365,705 in connection with warrants offered but not issued. In the fiscal year ended April 30, 2020, the Company issued warrants to purchase up to 628,800 shares of its common stock, with a fair value of $95,445, pursuant to the program. The Company periodically assesses the amount of its estimated liability, including as it relates to the probability that the additional warrants will be issued pursuant to the program.

In the fiscal year ended April 30, 2019, sales commission expense includes $1,633,325 associated with the program, including the estimated liability discussed above. At April 30, 2020 and 2019, accrued sales commission payable was $7,983,536 and $7,402,659, respectively, and included $1,290,477 and $1,365,705, respectively, in estimated sales compensation payable with stock warrants in connection with the 2019 Sales-related Warrants.

Share-Based Payments

Prior to its fiscal quarter ended April 30, 2019, the Company accounted for share-based consideration issued in exchange of services by consultants in accordance with the provisions of ASC Topic No. 505, Equity: Equity-based Payments to Non-Employees, (“ASC 505”). Under ASC 505, the measurement of share-based payment transactions with non-employees is based on whichever is more reliably determinable: (a) the fair value of the goods or services received, or (b) the fair value of equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of the performance commitment date or the performance completion date.

In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-based Payment Accounting which extended the provisions of ASC Topic 718, Compensation – Stock Compensation (“ASC 718”) to share-based awards issued to non-employees by public companies. Under ASC 718, among other things, share-based awards to non-employees must generally be measured at the grant-date fair value of the equity instrument that an entity is obligated to issue, provided that the services have been rendered and all other conditions necessary to earn the award have been satisfied. As permitted, the Company adopted the provisions of ASU 2018-07, prospectively, effective February 1, 2019.

In the fiscal year ended April 30, 2019, sales commission expense includes $1,633,325 in connection the 2019 Sales-related Warrants discussed above. Please see Note 16 – “Stockholders’ Equity (Deficit)” below for more information about the Company’s share-based awards.

Lease Accounting

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02), which requires lessees to report on their balance sheets a right-of-use asset and a lease liability in connection with most lease agreements classified as operating leases under the prior guidance (ASC Topic 840). Under the new guidance, codified as ASC Topic 842, the lease liability must be measured initially based on the present value of future lease payments, subject to certain conditions. The right-of-use asset must be measured initially based on the amount of the liability, plus certain initial direct costs. The new guidance further requires that leases be classified at inception as either (a) operating leases or (b) finance leases. For operating leases, periodic expense generally is flat (straight-line) throughout the life of the lease. For finance leases, periodic expense declines over the life of the lease. The new standard, as amended, provides an option for entities to use the cumulative-effect transition method. As permitted, the Company adopted ASC Topic 842 effective May 1, 2019 using the optional cumulative-effect transition method, and adoption resulted in an initial lease liability of approximately $1.4 million and a right to use asset in the same amount. The adoption of ASC Topic 842 did not otherwise have a material impact on the Company’s consolidated financial statements.

The Company leases space for its corporate headquarters, and additional office and warehouse space, under lease agreements classified as operating leases under the prior guidance. Please see Note 13 – “Leases” below for more information about the Company’s leases.

Income Taxes

The Company uses the asset and liability method in accounting for income taxes. Accordingly, we recognize deferred income taxes for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are anticipated to be recovered or settled. The effect on deferred taxes of a change in income tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets to the amount expected to be realized unless it is more-likely-than-not that such assets will be realized.

The Company uses the two-step approach to measure and recognize uncertain tax positions. First, we evaluate the tax position by determining if the weight of available evidence indicates it is more-likely-than-not that the position will be sustained on audit, including resolution through related appeals or litigation processes, if any. Secondly, we measure the tax position as the largest amount which is more-likely-than-not of being realized. The Company considers many factors when evaluating and estimating the Company’s tax positions, which may require periodic adjustments when new facts and circumstances become known. Please see Note 14 – “Income Taxes” below for more information about the Company’s accounting for income taxes.

Recently Issued Accounting Standard - Recently Adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) which modifies the disclosure requirements on fair value measurements under ASC Topic No. 820, Fair Value Measurement, as amended (“ASC 820”). For public companies, ASU 2018-13 removes (a) the prior requirement to disclose the amount and reason for transfers between Level 1 and Level 2 of the fair value hierarchy (please see Note 3 – “Fair Value Measurements of Financial Instruments” below), (b) the policy for timing of transfers between levels, and (c) the valuation processes used for level 3 fair value measurements. For public companies, ASU 2018-13 also adds, among other things, a requirement to disclose the range and weighted average of significant unobservable inputs used in Level 3 fair value measurements. The Company adopted ASU 2018-13 effective February 1, 2020 and such adoption did not have a material effect on its consolidated financial statements.

Recently Issued Accounting Standards - Pending Adoption

In November 2019, the FASB issued ASU No. 2019-08, Compensation – Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements – Share-based Consideration Payable to a Customer (“ASU 2019-08”). ASU 2019-08 requires that an entity apply the guidance in ASC 718 to measure and classify share-based payment awards granted to a customer. Under ASC 718, among other things, share-based awards to non-employees must generally be measured at the grant-date fair value of the equity instrument. For entities that have adopted the provisions of ASU 2018-07, Compensation – Stock Compensation (Topic 718) – Improvements to Nonemployee Share-based Payment Accounting, this amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. As discussed above, the Company has adopted the provisions of ASU 2018-07. The Company has not adopted ASU 2019-08 but, based on its preliminary assessment, does not believe the impact of adoption will be material on its consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12, among other things, (a) eliminates the exception to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income (or a gain) from other items, (b) eliminates the exception to the general methodology for calculating income taxes in an interim period when the year-to-date loss exceeds the anticipated loss for the year, (c) requires than an entity recognize a franchise tax (or a similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, and (d) requires than an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation for the interim period that includes the enactment date. For public companies, these amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted but must involve the adoption of all amendments contained in ASU 2019-12 concurrently. The Company has not adopted ASU 2019-12 and is evaluating the potential impact of adoption on its consolidated financial statements.