Life On Earth, Inc. - Annual Report: 2018 (Form 10-K)

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One) 

For Fiscal Year Ended: May 31, 2018

OR

For the transition period from _______________ to _______________

Commission file number: 333-190788

Registrant’s telephone number: (866) 928-5070

Securities registered under Section 12(b) of the Act: None

Securities registered under Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes x No ¨

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding past 12 months (or for 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 x No ¨

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 x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes ¨ No x

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

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

As of May 31, 2018 (the last day of the registrant’s most recently completed fourth fiscal quarter), the aggregate market value of the registrant’s 23,581,586 shares of common stock held by non-affiliates of the registrant was $10,635,295 (based on its reported last sale price on May 31, 2018 of $0.451 per share).

As of August 24, 2018, there were 26,564,720 shares of the registrant's common stock, par value $0.001, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

TABLE OF CONTENTS

FORWARD - LOOKING STATEMENTS

This report contains forward-looking statements. Such forward-looking statements involve risks and uncertainties, including, among other things, statements regarding our business strategy, future revenues and anticipated costs and expenses. Such forward-looking statements include, among others, those statements using words such as “expects,” “anticipates,” “intends,” “believes” and similar language.

Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the sections “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

All references in this Annual Report on Form 10-K to “LFER,” “Life On Earth, Inc. (formerly Hispanica International Delights of America,)” the “Company,” “we,” “us” or “our” mean Life On Earth, Inc.

PART I

ITEM 1. BUSINESS

COMPANY OVERVIEW

Life On Earth, Inc. is an innovative brand accelerator, incubator and distribution platform focused on building and scaling concepts in the all-natural consumer products category. Our mission is to bring our strategic focus and long-term forward looking vision to consumers in the health, wellness and active lifestyle spaces through superior branding, product quality, targeted acquisitions and retail experience in the functional beverage category.

Our objective is to grow as rapidly as possible (both organically and via strategic alliances and acquisitions) using the public capital markets for access to capital. The companies and assets sought by us will be those that already have market penetration in the following segments: (1) Sales (2) Marketing (3) Distribution and (4) Manufacturing;

Our management team has over 30 years of combined experience in the food and beverage industry. In July 2016, we acquired the company’s first Direct Store Delivery (“DSD”) in an all cash purchase. Since then, we have also acquired the Victoria’s Kitchen brand and The Giant Beverage Company, giving LFER bi-coastal distribution coverage. LFER has now engaged with a management advisor that is providing direct hands on, management advice, strategic planning, exploring the build out of a Digital Marketing Platform to address the explosion in Online, Social and Mobile marketing and other assistance similar to services seen in more advanced companies.

Corporate Overview

Life On Earth, Inc. (formerly Hispanica International Delights of America, Inc.) was incorporated in April 2013.

In October 2013, we signed a distribution agreement with Gran Nevada Beverage, Inc. (“Gran Nevada”), an entity related through common management and ownership. The agreement provides us with the right to sell and distribute Gran Nevada's beverages in the United States with purchase prices at the then applicable wholesale prices charged to Gran Nevada's distributors. The agreement is for an initial term of five years with automatic renewals of successive five year terms unless terminated. We initiated sales and distribution operations in March 2014.

In July, 2016, we entered into a Stock Purchase and Sale Agreement to acquire all of the issued and outstanding common stock of Energy Sources Distributors, Inc. (“ESD”) from its three founding shareholders. ESD provides wholesale distribution of specialty beverage products from its headquarters in Gilroy, California. The total purchase price for the acquisition was $450,000 in cash. We retained one of the selling founders as General Manager for a term of twelve (12) months pursuant to an employment agreement to manage operations at the ESD facility in Gilroy, California. ESD is now a wholly-owned subsidiary of the Company. The acquisition of ESD in July 2016 allowed LFER to expand distribution on the West Coast.

In October 2017, LFER acquired Victoria’s Kitchen, LLC ("VK"). On April 30^th, 2018, LFER acquired The Giant Beverage Company Inc. (“Giant” or “GBC”). Giant is a Direct Store Delivery (DSD) business that covers the five boroughs of New York City under an eight route distribution system. The company services over 600 accounts in the five boroughs. Giant services mainly independent retailers but is expanding to service authorized chain accounts. The acquisitions of Giant in April 2018, VK in October 2017, and ESD in July 2016 has allowed us to expand distribution.

Sales and Distribution

The Company currently markets and sells mainstream functional beverage products through its Direct Store Delivery (DSD) platforms of ESD and Giant subsidiaries as well as through other distributors including KeHe and UNFI as well as independent distributors. The Company also sells it Victoria’s Kitchen brands direct to consumers via Amazon online. Brands sought by LFER primarily engaged in the business of developing, manufacturing, marketing and selling unique, premium, all natural nonalcoholic functional beverages that are targeted towards LFER active lifestyle consumers.

Production

The Company Life On Earth, Inc. uses third party vendors to outsource and purchase raw materials as well as contract manufactures (co-packers) its products. These co-packers are independently owned and operated and function as a third party manufacturing partner in order fulfill the inventory needs of LFER’s brands. These co-packers are located in different geographic locations throughout the United States and currently the Company uses two co-packers.

Competition 

LFER is functional beverage company. What sets us apart in the industry, is our consolidated corporate structure that handles all aspects of sales, marketing and proprietary distribution from a centralized location. The LFER platform is built for accelerating emerging growth brands in the United States by leveraging sales, supply chain, and distribution relationships. At LFER, we are forward-thinking. We have identified ways to build out distribution channels that are more flexible and responsive to today’s needs. Our innovations have given rise to distribution channels, which provide robust capabilities embedded in an extended enterprise.

We realize that by sharing resources and capabilities in novel ways with new products in new situations, we can take advantage of profit-making opportunities that individual companies could not exploit alone. Our creation of a more flexible and responsive distribution system is not only a concept; we have applied the practice through implementation with our own functional beverage brands.

The Consumers Packaged Goods market is highly competitive especially in the beverage category. Competitors in our market compete for brand recognition, ingredient sourcing, qualified personnel, distribution and product shelf space. As a developing company, a majority of our competitors are more established and better capitalized. The packaged beverage market is generally dominated by the largest beverage providers. Many of our competitors enjoy significant brand recognition and consumer confidence and can readily secure shelf space and media attention for their products. Many of our competitors also have existing relationships with the same distribution channels and retailers through which we sell our products. We intend to compete in the market by offering consumers affordable products that taste better and possess a longer shelf life than most products in the market.

Government Regulation

Packaged beverage and juice products are governed by the U.S. Food and Drug Administration. As such, it is necessary for the Company to ensure its products distributed establish, maintain and make available for inspection, records and labels with nutrition information that meet legal food labeling requirements. The Company’s products are manufactured by contracted production facilities that are subject to many regulations, including Food Facility Registration, recordkeeping, Good Manufacturing Practice Requirements, reporting, preventive controls and inspections.

The Company has not incurred research and development expenses for new product development.

Employees

The Company currently has 20 full-time employees. Certain positions are being filled with paid independent contractors or insider owners who do not receive cash compensation but may receive stock compensation. In certain regions of the United States, we utilize the services of direct sales and distribution companies, which sell our products through their distribution channels. This can mitigate the need for a large sales and merchandising force. The Company also outsources its logistics to third-parties, which can reduce the need for employees in these roles.

Going Concern Qualification

Several conditions and events cast substantial doubt about the Company’s ability to continue as a going concern. The Company has incurred net losses of $2,476,855 and $2,980,031 for the years ended May 31, 2018 and 2017, respectively, has limited revenues and requires additional financing in order to finance its business activities on an ongoing basis. The Company’s future capital requirements will depend on numerous factors including, but not limited to, continued progress in finding business opportunities. At May 31, 2018, we had cash on hand of $189,317 and an accumulated deficit of $6,271,434. See “Liquidity and Capital Resources.”

Intellectual Property Protection

The Company has secured a registered trademark for its name and logo. LFER does have its trademark registered for Life On Earth Inc. As of the date of this annual report, we have the trademarks for our intellectual property.

Emerging Growth Company

The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Stamps Act of 2012 (“JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of section 404(b) of the Sarbanes-Oxley Act, and exemptions from the requirements of Sections 14A(a) and (b) of the Securities Exchange Act of 1934 to hold a nonbinding advisory vote of shareholders on executive compensation and any golden parachute payments not previously approved.

The Company has elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

We will remain an “emerging growth company: until the earliest of (1) the last day of the fiscal year during which our revenues exceed $1 billion, (2) the date on which we issue more than $1 billion non-convertible debt in a three year period, (3) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement filed pursuant to the Securities Act of 1933, as amended, or (4) when the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter.

To the extent that we continue to qualify as a “smaller reporting company,” as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, after we cease to qualify as an emerging growth company, certain of the exemptions available to us as an emerging growth company may continue to be available to us as a smaller reporting company, including (1) not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act; (2) scaled executive compensation disclosures; and (3) the requirements to provide only two years of audited financial statements, instead of three years.

ITEM 1A. RISK FACTORS

As a “Smaller Reporting Company”, we are not required to provide this information.

ITEM 1B. UNRESOLVED STAFF COMMENTS

As a “Smaller Reporting Company”, we are not required to provide this information.

ITEM 2. PROPERTIES

We maintain our principal office at 575 Lexington Avenue, 4^th Floor, New York, NY 10022. Our telephone number at that office is (866) 928-5070.

Our executive offices are in New York City and we have distribution operations in the New York City Tri-State Region and the Northern California Region.

In connection with the acquisition of ESD, the Company assumed a lease for approximately 13,000 square feet of warehouse space located in Gilroy, California at a base rent of $5,248 per month. The lease terminates on June 30, 2021.

In connection with the acquisition of Giant Beverage, the Company assumed a lease for approximately 6,000 square feet of warehouse space located in Staten Island, New York at a base rent of $8,500 per month. The lease terminates on April 26, 2023.

We believe that our existing facilities are suitable and adequate to meet our current business requirements, but we will require a larger, more permanent space as we add personnel consistent with our business plan. We anticipate we will be able to acquire additional facilities as needed on terms consistent with our current lease(s).

We maintain a website at http://www.lifeonearthinc.com/ and the information contained on that website is not deemed to be a part of this annual report.

ITEM 3. LEGAL PROCEEDINGS

On July 5, 2016, the Company entered into a Senior Secured Revolving Credit Facility Agreement (the “Credit Facility”) with TCA Global Credit Master Fund L.P. (“TCA”) for a total amount of $7.5 million. However, as of the execution date of the Credit Facility, only $1.6 million was allocated by TCA to the Company for working capital financing and for any other purpose permitted under the terms of the Credit Facility. Energy Source Distributors, Inc. (“ESD”) is Corporate Guarantor to the Credit Facility. Under the terms of the Credit Facility, the Company paid advisory fees to TCA in the amount of $350,000, through the issuance of 374,332 shares of common stock. On July 5, 2016, the Company borrowed $650,000 from the Credit Facility and used the proceeds to acquire ESD for $450,000; payoff a note payable in the amount of $32,534; $74,466 was used to pay vendors for inventory purchases and $93,000 was paid to TCA for closing fees. The credit facility had a maturity date of January 5, 2017 which was extended for an additional six mo. The credit facility requires fees and interest only payments at 12% during the first two months. Principal payments begin in the third month. At the maturity date all unpaid principal and interest is due. During the current quarter the Company issued an additional 157,480 shares of common stock to satisfy a default notice in the amount of $200,000.

On June 14, 2017, LFER has initiated a lawsuit against TCA Global Credit Master Fund, LP (“TCA”). In the lawsuit, LFER has asserted five claims against TCA: (i) declaratory judgment (for application of Florida law, as opposed to Nevada law); (ii) usury; (iii) violation of the Florida Deceptive and Unfair Trade Practices Act; (iv) breach of contract; and (v) breach of the implied covenant of good faith and fair dealing. Specifically, LFER seeks a declaratory judgment against TCA finding (i) the Nevada choice-of-law clause in the loan documents is invalid and unenforceable; (ii) Florida law applies and governs the loan documents; (iii) the loan documents are illegal, unconscionable, unenforceable, and usurious; (iv) any debt owed and stock issued pursuant to the loan documents should be cancelled and forfeited by TCA, and thus TCA is estopped from collecting such debt and stock; (v) monetary damages should be awarded in an amount according to proof; and (vi) reasonable attorneys’ fees and costs should be awarded.

TCA, not knowing LFER had sued it on June 14, 2017, sued LFER the next day on June 15, 2017. In the lawsuit filed by TCA, TCA has asserted four claims against LFER: (i) amount due on the subject debenture; (ii) amount due on the subject guaranty (only against guarantor Energy Source Distributors, Inc. (“ESD”)); (iii) foreclosure on security; and, (iv) breach of the subject securities purchase agreement. TCA seeks monetary damages of $952,323, plus default interest of 25%, attorneys’ fees and costs, and to foreclose on its purported first-priority, perfected security interest on the existing and future assets of LFER (and/or ESD, the guarantor).

TCA and Life On Earth Inc. entered into a binding settlement agreement, and on August 1, 2018, the court dismissed the case without prejudice.

There are no other legal or governmental proceedings that are presently pending or, to our knowledge, threatened, to which we are a party.

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

We have two classes of stock outstanding, Common Stock and Preferred Stock. Our Common Stock is quoted on the OTC Bulletin Board under the symbol “LFER.” The table below sets forth the high and low reported closing prices per share of Common Stock for the period’s indicated. There is no established public trading market for the Preferred Stock.

The Company has not declared dividends and does not intend to in the foreseeable future. The amount and frequency of future dividends will be determined by the Company’s Board of Directors in light of the earnings and financial condition of the Company at such time, and no assurance can be given that dividends will be declared or paid in the future.

Holders

As of August 24, 2018, there were 26,564,720 shares of Common Stock issued and outstanding held by 378 shareholders of record. As of August 24, 2018, there were 1,200,000 shares of Preferred Stock issued and outstanding held by 4 shareholders of record. Preferred shares are not convertible and do not receive dividends.

Dividends

We have never declared any cash dividends with respect to our Common Stock. Future payment of dividends is within the discretion of the Board of Directors and will depend on earnings, capital requirements, financial condition and other relevant factors. Although there are no material restrictions limiting or that are likely to limit, our ability to pay dividends on our Common Stock, we presently intend to retain future earnings, if any, for use in our business. We have no present intention to pay cash dividends on our Common Stock.

Recent Sales of Unregistered Securities

During the year ended May 31, 2017 the company issued a total of 2,046,421 shares of common stock to 12 investors for services provided to the Company, at prices ranging from $0.12 to $1.00 per share.

In June 2016, the Company issued 18,315 shares of common stock to Typenex Co-Investment LLC at $0.68 per share for repayment of a debt owed by the Company plus interest accrued to the date of repayment.

In July 2016, the Company issued 52,053 shares of common stock to Typenex Co-Investment LLC at $0.29 per share for repayment of a debt owed by the Company plus interest accrued to the date of repayment.

In September 2016, the Company issued 69,404 shares of common stock to Typenex Co-Investment LLC at $0.28 per share for repayment of a debt owed by the Company plus interest accrued to the date of repayment.

In September 2016, the Company issued 200,000 shares of common stock to Chesapeake Group, Inc.at $0.28 per share for repayment of a debt owed by the Company plus interest accrued to the date of repayment.

In February 2017, the Company issued 1,501,258 shares of common stock to Typenex Co-Investment LLC at $0.12 per share for warrants exercised by Typenex Co-Investment LLC.

In March 2017, 1,790,000 shares of common stock that were issued in September and October of 2016, to seven (7) investors as additional compensation to the convertible debt holders, became effective through an S1 Registration.

During the year ended May 31, 2018, the Company issued 766,998 shares of common stock to seven (7) vendors at prices ranging from $0.085 to $0.52 per share for services provided to the Company.

In September 2017, the Company purchased 1,100,000 of common stock from Anson Investments Master Fund, LP for a total amount of $63,844 and the shares were subsequently canceled.

In November 2017, the Company issued 2,300,000 of common stock to Shircoo, Inc. at $0.42 per share for convertible debt.

In November 2017, the Company issued 433,333 of common stock to Shircoo, Inc. at $0.40 per share for consulting fees.

In February 2018, the Company issued 343,333 of common stock to the Gankaku Living Trust LLC at $0.30 per share for convertible debt.

In March 2018, the Company issued 40,000 of common stock to a related party at $0.30 per share for convertible debt.

In November 2017, the Company issued 312,500 of common stock to David & Deborah Menanie at $0.40 per share for the acquisition of Victoria’s Kitchen, LLC

In January 2018, the Company issued 312,500 of common stock to Deborah Menanie at $0.51 per share for consulting fees.

In April 2018, the Company issued 727,500 of common stock to Anthony Iemmiti at $0.428 per share for the acquisition of The Giant Beverage Company, Inc.

In April 2018, the Company issued 727,500 of common stock to Frank Iemmiti at $0.428 per share for the acquisition of The Giant Beverage Company, Inc.

Each of the foregoing transactions were deemed exempt from the registration requirements of the Securities Act of 1933,as amended, in reliance on the exemption at Section 4(a)(2) and/or Regulation A Rule 506 for transaction not involving a public offering.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report includes a number of forward looking statements that reflect our current views with respect to future events and financial performance. Forward looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward looking statements, which apply only as of the date of this annual report. These forward looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.

CURRENT OPERATIONS

Life On Earth, Inc. (the “Company” or “LFER”, “us”, “we” “our”) was incorporated in April 2013 as Hispanica International Delights of America, Inc. as a Delaware company and changed its name to Life On Earth, Inc. in February 2018 and is engaged in the distribution of its own proprietary, licensed and third party functional beverages throughout the United States.

Life On Earth, Inc. is an innovative brand accelerator, incubator and distribution platform focused on building and scaling concepts in the all-natural consumer products category. Our mission is to bring our strategic focus and long-term forward looking vision to consumers in the health, wellness and active lifestyle spaces through superior branding, product quality, targeted acquisitions and retail experience in the functional beverage category.

Our objective is to grow as rapidly as possible (both organically and via strategic alliances and acquisitions) using the public capital markets for access to capital. The companies and assets sought by us will be those that already have market penetration in the following segments: (1) Sales (2) Marketing (3) Distribution and (4) Manufacturing;

Our management team has over 30 years of combined experience in the food and beverage industry. In July 2016, we acquired the company’s first Direct Store Delivery (“DSD”) in an all cash purchase. Since then, we have also acquired the Victoria’s Kitchen brand and The Giant Beverage Company, Inc. giving LFER bi-coastal distribution coverage. LFER has now engaged with a management advisor that is providing direct hands on, management advice, strategic planning, exploring the build out of a Digital Marketing Platform to address the explosion in Online, Social and Mobile marketing and other assistance similar to services seen in more advanced companies.

Our principal executive offices are located at 575 Lexington Avenue, 4th Floor, New York NY 10022 and our telephone number is (866) 928-5070.

Emerging Growth Company

The Company is an “emerging growth company”, as defined in the Jumpstart Our Business Stamps Act of 2012 (“JOBS Act”), and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of sec on 404(b) of the Sarbanes-Oxley Act, and exemptions from the requirements of Sections 14A(a) and (b) of the Securities Exchange Act of 1934 to hold a nonbinding advisory vote of shareholders on executive compensation and any golden parachute payments not previously approved.

The Company has elected to use the extended transition period for complying with new or revised accounting standards under Sec on 102(b)(1) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.

We will remain an “emerging growth company: until the earliest of (1) the last day of the fiscal year during which our revenues exceed $1 billion, (2) the date on which we issue more than $1 billion non-convertible debt in a three year period, (3) the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement filed pursuant to the Securities Act of 1933, as amended, or (4) when the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter.

GOING CONCERN QUALIFICATION

Several conditions and events cast substantial doubt about the Company’s ability to continue as a going concern. The Company has incurred net losses from inception of $6,271,434, has limited revenues and requires additional financing in order to finance its business activities on an ongoing basis. The Company’s future capital requirements will depend on numerous factors including, but not limited to, continued progress in finding business opportunities.

At May 31, 2018, we had cash on hand of $189,317 and an accumulated deficit of $6,271,434. See “Liquidity and Capital Resources.”

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change, and the best estimates and judgments routinely require adjustment. The amounts of assets and liabilities reported in our balance sheet and the amounts of revenues and expenses reported for each of our fiscal periods, are affected by estimates and assumptions which are used for, but not limited to, the accounting for allowance for doubtful accounts, goodwill and intangible asset impairments, restructurings, inventory and income taxes. Actual results could differ from these estimates. The following critical accounting policies are significantly affected by judgments, assumptions and estimates used in the preparation of our financial statements.

Off-Balance Sheet Arrangements

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

Inflation

The amounts presented in the financial statements do not provide for the effect of inflation on our operations or financial position. The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.

LIQUIDITY AND CAPITAL RESOURCES

During the years ended May 31, 2018 and 2017, the Company did not receive cash proceeds from the sale of the Company’s common stock.

During the years ended May 31, 2018 and 2017, the Company received $1,250,000 and $1,453,000, respectively, from the issuance of convertible promissory notes.

CASH FLOW

Our primary sources of liquidity have been cash from sales of shares, the issuance of a convertible promissory notes and line of credit.

WORKING CAPITAL

As of May 31, 2018 the Company had total current assets of $812,031 and total current liabilities of $3,464,476 resulting in negative working capital of $2,652,445. As of May 31, 2017, the Company had total current assets of $671,111 and total current liabilities of $1,795,764 resulting in negative working capital of $1,124,653.

RESULTS OF OPERATIONS

FOR THE YEAR ENDED MAY 31, 2018 COMPARED TO MAY 31, 2017.

Sales

The acquisitions of ESD during 2017 and VK and GBC during 2018 have allowed us to expand distribution thereby increasing sales by $797,642 to a total amount of $3,255,679 for the year ended May 31, 2018 as compared to $2,458,037 for the year ended May 31, 2017.

Gross Profit

The acquisitions have also allowed us to achieve a positive gross operating margin for each individual subsidiary as stand-alone operations

Operating Expenses

Operating expenses decreased by $585,032 during the year ended May 31, 2018 mainly due to decreases in consultancy - share based compensation of $818,905 and, offset in part by increases in salary costs of $91,442. Salaries are expected to increase as our business expands.

Other Expense

During the year ended May 31, 2018, the Company recorded interest and finance costs of $1,450,523, as compared to $1,418,496 during the year ended May 31, 2017. The interest and finance costs incurred by the Company reflect the cost of the debt incurred by the Company to finance operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

As a “Smaller Reporting Company”, the Company is not required to provide this information.

ITEM 8. FINANCIAL STATEMENTS

The audited financial statements are included beginning immediately following the signature page to this report. See Item 15 for a list of the financial statements included herein.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure the information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the me periods specified in the Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As of May 31, 2018, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and our principal financial officer of the effectiveness of the design and opera on of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report.

The determination that our disclosure controls and procedures were not effective as of May 31, 2018 is a result of inadequate staffing and supervision within the accounting operations of our Company. The Company plans to expand its accounting operations as the business of the Company expands.

MANAGEMENT’S REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

There have been no changes in our internal controls over financial reporting during the quarter ended May 31, 2018 that have materially affected, or are reasonably likely to materially affect our internal controls.

ITEM 9B. OTHER INFORMATION

Not applicable.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Executive Officers and Directors

Below are the names and certain information regarding our current executive officers and directors:

Directors are elected to serve until the next annual meeting of stockholders and until their successors are elected and qualified. Biographical information of each current officer and director is set forth below.

The Chairman and Chief Executive Officer, Mr. Fernando “Oswaldo” Leonzo, is a founder of, and has been employed by LFER since its inception in April of 2013. Mr. “Oswaldo” Leonzo has over 13 years’ experience in the Food and Beverage industry both from the distribution side as well as the brand side. He has also been working with contract manufacturers and suppliers as well as logistics companies for transshipments both in the U.S. and overseas for both Export and Imports- primarily in Latin America. For the past 14 years Fernando Oswaldo Leonzo has worked for the following companies: Deep River Snacks (NYC Regional Sales Manager from February to December, 2011), Reeds, Inc. (New York Metropolitan Area Sales Manager from January to December, 2010), Cheeseworks, Inc. (Sales Director from December 2008 to December 2009), Presto Food & Beverage, Inc. (President & CEO from July 2001 to December 2008).; Gran Nevada Beverage, Inc. (President from November 2011 to present). He served on the board of directors and founded Presto Food & Beverage, Inc. in 2001. Presto’s LFER beverage brand, SolMaya, grew from zero to over $2 million in sales. This is primarily why he was selected as a director of LFER. Previously, he worked for almost a decade in the financial industry, initially as a sales executive with regional financial firms and later for a major clearinghouse on Wall Street. Prior to his financial service industry experience, he successfully operated a business that distributed recorded music to retailers in the U.S., Mexico and Colombia. He received his undergraduate degree (B.A.) in International Studies from New York University (NYU). He currently serves on the board of directors of LFER.

The Chief Operations Officer, Treasurer and Director, Robert Gunther is a founder of LFER since its inception in April of 2013. He has 25 years’ experience in manufacturing. For the past five years, he has managed his own sales business under his own name specializing in products for apparel and construction. From December 1988 to December 2008 he was a Sr. Account Executive with Georgia Narrow Fabrics / Premier Narrow Fabrics in New York City. As the one of the firm's producing Account Executives, he generated sales to major accounts including Jockey, Fruit of the Loom, Warner, and VF. The product line included a broad range of knit and woven elastic products. In the mid-80s, he helped develop new apparel customers and manufacturing facilities for Hewlett Manufacturing. From July 1971 to April 1986, he was vice president at Gunther & Sharfman, a family-owned apparel manufacturing business. He participated in design, merchandising, sales, purchasing and manufacturing. His background includes 25 years of experience managing in purchasing and negotiation contracts for materials. Gunther has a BS from Long Island University. Mr. Gunther’s extensive business experience combined with his personal interest in the business is expected to provide the Board with insight and guidance in matters of corporate finance, business development and industry strategy.

President and Director, John Romagosa, is currently the managing director and founder of Latin Sales & Marketing, LLC. (“LSM“), founded in 2012. LSM is a leading brokerage/marketing/consulting firm innovating the retail, foodservice and private label sector of the Hispanic consumer packed goods industry. LSM facilitates the emergence of major Latin manufacturers and US manufacturers for the steadily growing Hispanic market in the USA. Mr. Romagosa's extensive experience and relationships, within the Hispanic and Ethnic Food industry, will benefit the Board of LFER as it positions the company, its management, its products, and its distribution channels in becoming a leading edge company in the fastest growing segment of the food industry.

Mr. Romagosa was the managing director and partner of Falcon International Distributors, LLC, a leading ethnic foods distributor on the east coast, holding a chief procurement role for over ten years. Mr. Romagosa helped build that company from $9 million in revenues to over $100 million in revenues during his tenure before successfully selling the business in 2011. He has received Chamber of Commerce awards in New York and New Jersey, and has been responsible for the contribution of over a million pounds of donated products to food banks in the Northeast of the US. Mr. Romagosa is an Alumni of Saint John's University where he studied Finance, Business Administration, and Marketing.

Randy Berholtz – Independent Director

Mr. Randy Berholtz is our Executive Vice President, Corporate Development and General Counsel. He is also the Secretary of the Company. He was the founding partner of the Sorrento Valley Law Group and is the former Executive Vice President, General Counsel and Secretary of Apricus Biosciences, Inc. (NASDAQ: APRI), a specialty pharmaceutical company. Prior to that time, he was the Vice President, General Counsel and Secretary of ACON Laboratories, Inc., a group of Chinese and US life sciences companies. He has also been the Chief Operating Officer and General Counsel of IngleWood Ventures, L.P., a life sciences venture capital company and the Interim General Counsel and Secretary of Nanogen, Inc. (NASDAQ: NGEN), a genomics tools company. He has also been an attorney with the law firms of Heller Ehrman, LLP, Cooley Godward, LLP, Kirkpatrick & Lockhart, LLP (now K&L Gates) and Cravath, Swaine & Moore. He has a Bachelor of Arts degree from Cornell University, a Master of Arts degree from Oxford University, where he was a Rhodes Scholar, and a Juris Doctor degree from Yale Law School where he was a Senior Editor of The Yale Law Journal and an MBA from the University of San Diego School of Business.

Roy H. DiBenerdini -- Independent Director

Roy is an accomplished Entrepreneur, Senior Executive, and CEO with more than 30 years of success across the investment, technology, analytics, and marketing industries. Throughout his executive career, Mr. DiBenerdini has held leadership positions at companies including iiON Corporation, AOL Digital Marketing Services, Computer and Information Sciences, Inc. and American Airlines / AMR Corporation. He is the CEO and Managing Partner at Green Room Fund, LLC and Managing Director at College Hill Ventures, PBC. He implemented the very first online customer loyalty program – AOL Rewards, which resulted in significant growth from 10M subscribing customers to more than 34M. He has also seen tremendous success as a CEO and an entrepreneur, raising more than $22M in funding for his companies. He raised $10M of funding for iiON Corporation whose clients included AOL, Disney, ESPN, Microsoft, Fast Company, Red Herring, Inc. Magazine, and Sony. He is a former Airline Advisory Board member to the United States Travel & Tourism Administration (U.S. Dept. of Commerce) and currently serves on the board of several early stage companies. Mr. DiBenerdini has a B.S. in Aerospace Engineering from The University of Texas at Arlington.

Board Committees

The Company has not established any committees of the Board of Directors. Our Board of Directors may designate from among its members an executive committee and one or more other committees in the future. We do not have a nominating committee or a nominating committee charter. Further, we do not have a policy with regard to the consideration of any director candidates recommended by security holders. To date, no security holders have made any such recommendations. Our three directors perform all functions that would otherwise be performed by committees. Given the present size of our board it is not practical for us to have committees. If we are able to grow our business and increase our operations, we intend to expand the size of our board and allocate responsibilities accordingly.

Shareholder Communications

Currently, we do not have a policy with regard to the consideration of any director candidates recommended by security holders. To date, no security holders have made any such recommendations.

Code of Ethics

We have adopted a written code of ethics (the “Code of Ethics”) that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. We believe that the Code of Ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code. To request a copy of the Code of Ethics, please make written request to our Company at 575 Lexington Ave., 4^th Floor, New York, NY 10022.

Compliance with Section 16(a) of the Exchange Act

Our Common Stock is not registered pursuant to Section 12 of the Exchange Act. On July 7^th 2015, our common stock became registered pursuant to section 12g of the exchange act. Accordingly, our officers, directors and principal shareholders are subject to the beneficial ownership reporting requirements of Section 16(a) of the Exchange Act.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth information concerning the total compensation paid or earned by each of our named executive officers (as defined under SEC rules) for the fiscal year ended May 31, 2018. 

Summary Compensation Table for Fiscal Year Ended May 31, 2018

_____________ 

The Summary Compensation Table omits columns for Bonus, Stock Awards, Option Awards, Non-Equity Incentive Plan Compensation as no such amounts were paid to the named executive officers during the fiscal year ended May 31, 2018.

The following table sets forth information concerning the total compensation paid or earned by each of our named executive officers (as defined under SEC rules) for the fiscal year ended May 31, 2017.

___________

 The Company has no other plans in place and has never maintained any plans that provide for the payment of retirement benefits or benefits that will be paid primarily following retirement including, but not limited to, tax qualified deferred benefit plans, supplemental executive retirement plans, tax-qualified deferred contribution plans and nonqualified deferred contribution plans.

Employment Agreements

As a result of our acquisition of ESD, we retained Mr. Jose Castaneda, one of the selling founders, as Sales Manager for a term of twelve (12) months at an annual salary of $58,000, pursuant to an employment agreement to manage operations at the ESD facility in Gilroy, California. The agreement expired in July 2017.

As a result of our acquisition of GBC during 2018, we retained Mr. Frank Iemmitti, one of the selling founders, as Sales Manager for a term of twenty-four (24) months at an annual salary of $75,000, pursuant to an employment agreement to manage operations at the GBC facility in Staten Island, New York.

There are no other employment agreements; however, the Company anticipates entering into more employment agreements with key management positions as the Company grows. The Company does not have a standing compensation committee, audit committee, nomination committee, or committees performing similar functions. We anticipate that we will form such committees of the Board of Directors once we have a full Board of Directors.

Outstanding Equity Awards at Fiscal Year-End

As of May 31, 2018 and 2017, there were no outstanding options or warrants to purchase, or other instruments convertible into, common equity of the Company, related to equity awards.

Director Compensation

The Company is currently creating an Independent Compensation committee, reporting to the Board, with a compensation schedule for both Independent Board members as well as Executives of the Company which is intended to be retroactive to June 1, 2018.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth information with respect to the beneficial ownership of our Common Stock known by us as of August 24, 2018 by:

Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of our Common Stock owned by them, except to the extent such power may be shared with a spouse.

The percent of class is based on 26,393,942 shares of common stock issued and outstanding as of August 24, 2018 plus 6,493,718 shares beneficially owned from the conversion of debt and the execution of warrants.

Securities Authorized For Issuance Under Equity Compensation Plans

We have not adopted any Equity Compensation Plans as of May 31, 2018.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Our CEO, Fernando “Oswaldo” Leonzo, owns no shares in Gran Nevada, however he serves as Gran Nevada’s current President. Robert Gunther, our Chief Operating Officer owns 12% of the common stock of Gran Nevada.

The Company leased its offices on a month to month basis from Mr. Robert Gunther for $750 per month. The current officers and directors of the Company are involved in other business activities and may, in the future, become involved in additional business opportunities. There are no contracts, options, warrants, rights, licensing agreements, employment agreements or any other agreements of any kind between LFER and any of its current officers and directors. If a specific business opportunity becomes available, such person may face a conflict in selecting between our business interest and their other business interests. The policy of the Board is that any personal business or corporate opportunity incurred by an officer or director of LFER must be examined by the Board and turned down by the Board in a timely basis before an officer or director can engage or take advantage of a business opportunity which could result in a conflict of interest.

The founder's Common Shares as disclosed herein were sold to our officers and directors in April 2013. The Company believes that the issuance of these shares was exempt from registration pursuant to Section (2) of the Securities Act of 1933, as amended, as a transaction by an issuer not involving any public offering. The Founders, Fernando “Oswaldo” Leonzo (Chairman & CEO), Robert Gunther (Treasurer, Secretary, Director & Chief Operations Officer), and Jerry Gruenbaum were issued the following Preferred Shares as founders for services rendered as Officers and Directors as of April 30, 2013, 600,000 Preferred Shares, 300,000 Preferred Shares, and 100,000 Preferred Shares respectively. Jerry Gruenbaum resigned as a director on April 16, 2015. None of the following parties has, since the date of incorporation, had any material interest, direct or indirect, in any transaction with the Company or in any presently proposed transaction that has or will materially affect us:

Director Independence

We are not currently subject to listing requirements of any national securities exchange or inter-dealer quotation system which has requirements that a majority of the board of directors be “independent” and, as a result, we are not at this time required to (and we do not) have our Board of Directors comprised of a majority of “Independent Directors.”

Our Board of Directors has considered the independence of its directors in reference to the definition of “independent director” established by the NASDAQ Marketplace Rule 5605(a)(2). In doing so, the Board of Directors has reviewed all commercial and other relationships of each director in making its determination as to the independence of its directors.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

In July 2015, the Company engaged Raich Ende Malter & Co. LLP as its independent registered public accounting firm. 

The aggregate fees billed to the Company for services rendered in connection with the years ended May 31, 2018 and 2017 are set forth in the table below:

___________ 

Audit Committee’s Pre-Approval Practice

We currently do not have an audit committee. Our board of directors has approved the services described above.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

Financial Statement Schedules

The financial statements of Life On Earth, Inc. are listed on the Index to Financial Statements on this annual report on Form 10-K beginning on page F-1.

Exhibits

The following Exhibits are being filed with this Annual Report on Form 10-K:

__________ 

(*) Filed herewith

(a) Incorporated by reference to the Registrant’s Registration Statement on Form S-1/A filed October 15, 2013

(b) Incorporated by reference to the Registrant’s Reports in Form 8-K filed November 4, 2015 and July 8, 2016.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

PART IV - FINANCIAL INFORMATION

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Life On Earth, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Life On Earth, Inc. and its Subsidiaries (the “Company”) as of May 31, 2018 and 2017, and the related consolidated statements of operations, changes in stockholders’ deficiency, and cash flows for each of the years in the two-year period ended May 31, 2018, and the related notes, collectively referred to as the consolidated financial statements. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of May 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended May 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 19 to the consolidated financial statements, the Company has incurred losses from operations since its inception, has negative working capital, and a stockholders’ deficit that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 19. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

Life On Earth, Inc. 

Consolidated Statements of Changes in Stockholders' Deficiency

The accompanying notes are an integral part of these consolidated financial statements.

Life On Earth, Inc.

Notes to Consolidated Financial Statements

May 31, 2018 and 2017

Note 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Basis of Presentation

Life On Earth, Inc. is an innovative brand accelerator, incubator and distribution platform focused on building and scaling concepts in the all-natural consumer products category. We focus on building brands within the alternative beverage space. We are a dynamic and innovative all-natural consumer packaged goods company focused but not limited to the emerging beverage and snack industry. We manufacture and distribute our brands through our distribution subsidiaries in New York and California.

The accompanying consolidated financial statements include the financial statements of Life On Earth, Inc. (“LFER”) and its wholly owned subsidiaries, Energy Source Distributors Inc., (“ESD”), Victoria’s Kitchen, LLC (“VK”) and The Giant Beverage Company, Inc. (“GBC”)

LFER was incorporated in Delaware in April 2013 and acquired ESD in July 2016, VK in October 2017, and GBC in April 2018. The Company currently markets and sell beverages, primarily in New York and California.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP").

Revenue Recognition

The Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. Provision for sales returns is estimated based on the Company's historical return experience. Revenue is presented net of returns.

In March 2017, the Company discontinued an exclusive distribution agreement with a vendor. In accordance with the distribution agreement, the Company received a “Termination Payment”, as defined, in the amount of $97,731, which was recorded as other income during the year ended May 31, 2017.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated balance sheets and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Net Loss Per Common Share

Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share is calculated by dividing net loss by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods in which the Company incurs losses, common stock equivalents, if any, are not considered, as their effect would be anti -dilutive. As of May 31, 2018 and 2017, warrants and convertible notes payable could be converted into approximately 4,335,000 and 730,000 shares of common stock, respectively.

Income Taxes

The Company utilizes the accrual method of accounting for income taxes. Under the accrual method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and the tax basis of the assets and liabilities, and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recognized when it is more likely than not that such tax benefits will not be realized.

The Company recognizes the financial statement benefit of an uncertain tax position only after considering the probability that a tax authority would sustain the position in an examination. For tax positions meeting a “more-likely-than-not” threshold, the amount recognized in the consolidated financial statements is the benefit expected to be realized upon settlement with the tax authority. For tax positions not meeting the threshold, no financial statement benefit is recognized. The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. The Company did not have any unrecognized tax benefits as of May 31, 2018, and does not expect this to change significantly over the next 12 months.

Stock-Based Compensation

The Company accounts for equity instruments issued to employees in accordance with ASC 718, Compensation - Stock Compensation. ASC 718 requires all share-based compensation payments to be recognized in the financial statements based on the fair value on the issuance date.

Equity instruments granted to non-employees are accounted for in accordance with ASC 505, Equity. The final measurement date for the fair value of equity instruments with performance criteria is the date that each performance commitment for such equity instrument is satisfied or there is a significant disincentive for non-performance.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Accounts Receivable

The Company extends credit to its customers in the normal course of business and performs ongoing credit evaluations of its customers, maintaining an allowance for potential credit losses. Uncollectible accounts are written off at the time they are deemed uncollectible.

Accounts receivable is reported net of an allowance for doubtful accounts. The allowance is based on management's estimate of the uncollectible accounts receivable. As of May 31, 2018 and 2017, the allowance for doubtful accounts was $14,000 and $0, respectively.

Inventory

Inventory consists of finished goods and raw materials which are stated at the lower of cost (first-in, first-out) and net realizable value.

Equipment

Equipment is stated at cost. The Company provides for depreciation based on the useful lives of the assets using straight-line methods. Expenditures for maintenance, repairs, and betterments that do not materially prolong the normal useful life of an asset have been charged to operations as incurred. Upon sale or other disposition of assets, the cost and related accumulated depreciation and amortization are removed from these accounts, and the resulting gain or loss, if any, is reflected in operations.

Advertising

Advertising and promotion costs are expensed as incurred. Advertising and promotion expense amounted to approximately $72,900 and $23,800 for the years ended May 31, 2018 and 2017, respectively.

Shipping and Handling

Shipping and handling costs are included in costs of goods sold.