Q1
2017
First Quarter Report
Period Ended May 31, 2017
Contents
Note: The financial statements accompanying this report have not been audited or reviewed by the Company's auditors.
2
| LEADING BRANDS, INC. |
| FIRST QUARTER ENDED MAY 31, 2017 |
| (Expressed in Canadian dollars) |
To our Shareholders:
The Company’s net loss from continuing operations for Q1 was $778,000 (or $0.28 per share) versus a net loss of $549,000 (or $0.19 per share) the prior year.
Gross revenue for Q1 2017 was $439,000, versus $427,000 in the comparable period of last year.
Discounts, rebates and slotting fees were $94,000 in Q1 2017, a decrease of $54,000 compared to the same period of the prior year. Selling, General and Administrative Expenses (“SG&A”) were $748,000 in Q1 of fiscal 2017, versus $783,000 in Q1 of the previous year.
Gross profit margin for the quarter was (2.5%), up from (15.6%) in the same quarter last year. The Company continues to adjust its operations from a bottler/distributor to simply that of a distributor and has made strides to reduce its cost of goods. Overheads allocated to cost of goods sold have taken longer to adjust.
Non-GAAP Net Income (Loss) before SBC is determined as follows:
| Q1 2017 | Q1 2016 | |||||
| Net Income (Loss) from continuing operations | $ | (778,000 | ) | $ | (549,000 | ) |
| Add Back SBC | - | - | ||||
| Net income (loss) before SBC | $ | (778,000 | ) | $ | (549,000 | ) |
Non-GAAP Net Income (Loss) per share before SBC is determined as follows:
| Q1 2017 | Q1 2016 | |||||
| Net Income (Loss) per share from continuing operations | $ | (0.28 | ) | $ | (0.19 | ) |
| Add Back SBC | - | - | ||||
| Net income (loss) per share before SBC | $ | (0.28 | ) | $ | (0.19 | ) |
Pro-forma results for EBITDAS, as defined below, are determined as follows:
| Q1 2017 | Q1 2016 | |||||
| Net Income (Loss) from continuing operations | $ | (778,000 | ) | $ | (549,000 | ) |
| Add Back: | ||||||
| Interest, net | (9,000 | ) | - | |||
| Depreciation and amortization | 32,000 | 56,000 | ||||
| Non-cash stock based compensation | - | - | ||||
| Non-cash income tax expense | - | - | ||||
| Total Add Backs | 23,000 | 56,000 | ||||
| EBITDAS | $ | (755,000 | ) | $ | (493,000 | ) |
3
EBITDAS per share reconciles to earnings per share as follows:
| Q1 2017 | Q1 2016 | |||||
| Net Income (Loss) per share from continuing operations | $ | (0.28 | ) | $ | (0.19 | ) |
| Add Back: | ||||||
| Interest, net | - | - | ||||
| Depreciation and amortization | 0.01 | 0.02 | ||||
| Non-cash stock based compensation | - | - | ||||
| Non-cash income tax expense | - | - | ||||
| Total Add Backs | 0.01 | (0.02 | ) | |||
| EBITDAS | $ | (0.27 | ) | $ | (0.17 | ) |
As at May 31, 2017 the Company had 2,802,412 outstanding common shares.
Ralph McRae
Ralph D. McRae
Chairman & CEO
Safe Harbor for Forward-Looking Statements
This report includes “forward-looking information” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements which are not historical facts, are forward-looking statements. The Company, through its management, makes forward-looking public statements concerning its expected future operations, performance and other developments. The words “believe”, “intend”, “expect”, “anticipate”, “project”, “estimate”, “predict” and similar expressions are also intended to identify forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to a wide range of known and unknown risks and uncertainties and although the Company believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will be realized. Forward-looking statements relate to, among other things:
- business objectives, goals and strategic plans;
- operating strategies;
- expected future revenues, earnings and margins;
- anticipated operating, selling and general and administrative costs;
- availability of raw materials, including water, sugar, cardboard and closures and flavoring;
- effects of seasonality on demand for our products;
- anticipated exchange rates, fluctuations in exchange rates and effects of exchange rates on our cost of goods sold;
- anticipated contribution to earnings in the current year from investment in new product development;
- our expectation that we will have adequate cash from operations and credit facility borrowings to meet all future debt service, capital expenditure and working capital requirements in fiscal year 2017;
- anticipated capital expenditures; and
- anticipated increased sales volumes with certain product lines;
Such forward-looking statements are necessarily estimates reflecting the Company's best judgment based upon current information and involve a number of risks and uncertainties, and there can be no assurance that other factors will not affect the accuracy of such forward-looking statements. It is impossible to identify all such factors. Factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, those listed under Risk Factors, as well as other possible risk factors such as general economic conditions, weather conditions, changing beverage consumption trends, pricing, availability of raw materials, economic uncertainties (including currency exchange rates), government regulation, managing and maintaining growth, the effect of adverse publicity, litigation, competition and other factors which may be identified from time to time in the Company's public announcements. For all such forward-looking statements, we claim the safe harbor for forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
All forward-looking statements speak only as of the date made. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. Except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.
4
| Management’s Discussion & Analysis |
| For the three months ended May 31, 2017 |
July 10, 2017
The following information should be read in conjunction with Leading Brands, Inc.’s (“the Company”) February 28, 2017 audited consolidated financial statements. These statements, along with the Company’s annual report on Form 20-F, are available on SEDAR at www.sedar.com.
The financial statements have been prepared in accordance with United States generally accepted accounting principles (“US GAAP”).
The Company maintains its financial records in Canadian dollars. In this report, unless otherwise specified, all dollar amounts are expressed in Canadian dollars.
Overview
Leading Brands, Inc. (the “Company”) and its subsidiaries are involved in the development, production, marketing, and distribution of the Company’s branded beverage products.
The Company sells branded beverage products through its Integrated Distribution System (IDS) of distributors, wholesalers, and retail chains. Its principal product lines include premium waters.
Non-GAAP Measures
In addition to GAAP measures, the Company uses the non-GAAP measures “Earnings Before Interest, Taxes, Depreciation, Amortization, and Stock Based Compensation” (“EBITDAS”), “Net Income Before Stock Based Compensation”, “Margin”, “Margin Percentage”, and “Total Net Working Capital” to make strategic decisions and provide investors with a basis to evaluate operating performance. Non-GAAP measures do not have a standardized meaning prescribed by GAAP and may not be comparable to similar measures used by other companies. Included in this report is a table reconciling GAAP Net Income to Net Income Before Stock Based Compensation. In addition, included in other information in this report are tables calculating EBITDAS, Margin, Margin Percentage, and Total Net Working Capital.
Overall Performance
For the quarter ended May 31, 2017, the Company reported gross sales from continuing operations of $439,244 and a net loss from continuing operations of $778,004 as compared to gross sales of $426,553 and a net loss of $549,348 in the corresponding quarter of the prior year.
For the quarter ended May 31, 2017, the Company’s margin percentage increased to (2.5%) from (15.6%) for the same period in 2016.
| Results of Operations | |||||||||
| Revenue | |||||||||
| Quarter ended | Quarter ended | ||||||||
| May 31, 2017 | May 31, 2016 | Change | |||||||
| Gross Revenue | $ | 439,244 | $ | 426,553 | $ | 12,691 | |||
| Discounts, Allowances and Rebates | (93,611 | ) | (147,584 | ) | 53,973 | ||||
| Net Revenue | $ | 345,633 | $ | 278,969 | $ | 66,664 |
Gross revenue from continuing operations for the quarter ended May 31, 2017 was $439,244 compared to $426,553 for the same period of the previous year, representing an increase of $12,691 or 3.0% .
Discounts, rebates and slotting fees from continuing operations for the quarter ended May 31, 2017 decreased by $53,973 compared to the same period of the prior year, due to significant new listing fees and promotions for Happy Water® in the prior year.
| Cost of Sales | |||||||||
| Quarter ended | Quarter ended | ||||||||
| May31, 2017 | May 31, 2016 | Change | |||||||
| Cost of Sales | $ | 354,132 | $ | 322,559 | $ | 31,573 |
Cost of sales from continuing operations for the quarter ended May 31, 2017 were $354,132 compared to $322,559 for the same period of the previous year, representing an increase of $31,573 or 9.8% .
| Margin | |||||||||
| Quarter ended | Quarter ended | ||||||||
| May 31, 2017 | May 31, 2016 | Change | |||||||
| Margin | $ | (8,499 | ) | $ | (43,590 | ) | $ | 35,091 | |
| Margin percentage | (2.5% | ) | (15.6% | ) | 13.1% |
Margin from continuing operations for the quarter ended May 31, 2017 was ($8,499) compared to ($43,590) for the same quarter of the previous year. The margin percentage of (2.5%) for the quarter ended May 31, 2017 represents 13.1% increase from the prior comparative year. The margin increase was caused by the significant new listing fees and promotions for Happy Water® in the prior year that were not repeated.
Selling, General and Administration Expenses
Selling, general and administration expenses in the quarter ended May 31, 2017 decreased by $34,226 or 4.4% from $782,634 in the same quarter of the prior year to $748,408.
Summary of Quarterly Results
| May 31 (Q1) | February 28/29 (Q4) | November 30 (Q3) | August 31 (Q2) | |||||
2017 | 2016 | 2017 | 2016 | 2016 | 2015 | 2016 | 2015 | |
| Net sales / revenue from continuing operations | $345,633 | $278,969 | $256,277 | $95,099 | $291,911 | $229,539 | $385,372 | $199,975 |
| Net loss from continuing operations | ($778,004) | ($549,348) | ($727,978) | ($782,712) | ($876,566) | ($759,472) | ($949,429) | ($1,223,571) |
| Net income (loss) from discontinued operations | ($54,774) | $844,223 | ($955,067) | $288,039 | ($4,096,489) | $374,418 | $801,505 | $1,220,785 |
| Net income (loss) | ($832,778) | $294,875 | ($1,683,585) | ($494,673) | ($4,973,055) | ($385,054) | ($147,924) | ($12,786) |
| Earnings (loss) per share, basic – continuing operations | ($0.28) | ($0.19) | ($0.26) | ($0.26) | ($0.31) | ($0.26) | ($0.33) | ($0.42) |
6
| May 31 (Q1) | February 28/29 (Q4) | November 30 (Q3) | August 31 (Q2) | |||||
2017 | 2016 | 2017 | 2016 | 2016 | 2015 | 2016 | 2015 | |
| Earnings (loss) per share, basic – discontinued operations | ($0.02) | $0.29 | ($0.34) | $0.09 | ($1.46) | $0.13 | $0.28 | $0.42 |
| Earnings (loss) per share, diluted - continuing operations | ($0.28) | ($0.19) | ($0.26) | ($0.26) | ($0.31) | ($0.26) | ($0.33) | ($0.42) |
| Earnings (loss) per share, diluted - discontinued operations | ($0.02) | $0.29 | ($0.34) | $0.09 | ($1.46) | $0.13 | $0.28 | $0.42 |
The Company recognizes stock based compensation expense as a selling, general and administration expense. This non-cash charge relates to options granted to officers, directors and consultants of the Company.
Net Income (Loss) before Stock Based Compensation Expense is as follows:
| May 31 (Q1) | February 28/29 (Q4) | November 30 (Q3) | August 31 (Q2) | |||||
2017 | 2016 | 2017 | 2016 | 2016 | 2015 | 2016 | 2015 | |
| Net income (loss) from continuing operations | ($778,004) | ($549,348) | ($727,978) | ($782,712) | ($876,566) | ($759,472) | ($949,429) | ($1,223,571) |
| Stock based compensation | - | - | - | - | - | - | - | 83,880 |
| Net income (loss) before stock based compensation | ($778,004) | ($549,348) | ($727,978) | ($782,712) | ($876,566) | ($759,472) | ($949,429) | ($1,139,691) |
Other Information
| EBITDAS | Quarter ended | Quarter ended | ||||
| May 31, 2017 | May 31, 2016 | |||||
| Net income (loss) from continuing operations | $ | (778,004 | ) | $ | (549,348 | ) |
| Interest, net | (9,377 | ) | - | |||
| Depreciation and amortization | 31,616 | 55,939 | ||||
| Stock based compensation expense | - | - | ||||
| Income taxes | - | - | ||||
| EBITDAS | $ | (755,765 | ) | $ | (493,409 | ) |
7
| Margin | Quarter ended | Quarter ended | ||||
| May 31, 2017 | May 31, 2016 | |||||
| Net revenue from continuing operations | $ | 345,633 | $ | 278,969 | ||
| Less: cost of sales | (354,132 | ) | (322,559 | ) | ||
| Margin | $ | (8,499 | ) | $ | (43,590 | ) |
| Margin % of Net Revenue | (2.5% | ) | (15.6% | ) |
Related Party Transactions
| Quarter ended | Quarter ended | ||||||||
| May 31, 2017 | May 31, 2016 | ||||||||
| i) | Incurred marketing consulting services with a company related by a director in common, Ralph McRae | $ | 2,812 | $ | 1,500 | ||||
| ii) | Incurred management service fees with a company related by an officer in common, Dave Read | $ | - | $ | 37,500 | ||||
| iii) | Incurred bottling services from a company related by a director in common, Ralph McRae | $ | 51,598 | $ | 70,745 |
Cash flows
| Cash provided by (used in): | Quarter ended | Quarter ended | |||||||
| May 31, 2017 | May 31, 2016 | Change | |||||||
| Operating activities | $ | (682,461 | ) | $ | 235,065 | $ | (917,526 | ) | |
| Investing activities | $ | 5,628 | $ | 283,421 | $ | (277,793 | ) | ||
| Financing activities | $ | - | $ | (7,874 | ) | $ | 7,874 |
During the quarter, cash generated from operating activities decreased by $917,526 compared to the same period of the prior year.
Cash utilized by investing activities is a result of the Company spending $5,372 on intangible assets and offset by $11,000 proceeds on sales of two Company vehicles.
Cash utilized for financing activities was $nil during the quarter.
Liquidity and Capital Resources
Net working capital has decreased by 19.3% since the prior year ended February 28, 2017. As at May 31, 2017, the Company has net working capital of $ 3,215,750 ($3,986,232 at February 28, 2017).
| Total Net Working Capital | May31, 2017 | February28, 2017 | ||||
| Total Current Assets | $ | 4,055,264 | $ | 4,891,278 | ||
| Less: Total Current Liabilities | (839,514 | ) | (905,046 | ) | ||
| Total Net Working Capital | $ | 3,215,750 | $ | 3,986,232 |
Considering the positive net working capital position, including the cash on hand at May 31, 2017, the Company believes that it has sufficient working capital.
8
Contractual Obligations
The following table presents our contractual obligations as of May 31, 2017:
| Payments due by period | |||||
| Contractual obligations | Total | Less than 1 year | 1-3 years | 4-5 years | More than 5 years |
| Operating lease obligations | $ 735,056 | $ 123,073 | $ 253,449 | $ 260,752 | $ 97,782 |
| Purchase obligations | 62,482 | 18,051 | 39,522 | 4,909 | - |
| Total | $ 797,538 | $ 141,124 | $ 292,971 | $ 265,661 | $ 97,782 |
Risks and uncertainties
The types of risks and uncertainties that may affect the Company are included in the February 28, 2017 annual Management’s Discussion and Analysis.
Credit Risk
The Company’s credit risk is primarily attributable to its accounts receivable. The credit risk related to accounts receivable arises from customers’ potential inability to meet their obligations as agreed. The accounts receivable are presented on the balance sheet net of a provision for bad debts, which is estimated by the Company’s management based on past experience and its assessment of current economic conditions.
As at May 31, 2017 the Company is exposed to credit risk through the following assets:
| May 31, 2017 | February 28, 2017 | |||||
| Trade receivables | $ | 52,471 | $ | 74,865 | ||
| Other receivables | 12,767 | 10,763 | ||||
| Allowance for doubtful accounts | - | - | ||||
| $ | 65,238 | $ | 85,628 |
Any credit risk exposure on cash balances is considered insignificant as the Company holds cash and cash equivalents only in major financial institutions in Canada. On the basis that these financial institutions are believed by Management to be financially sound, relatively minimal credit risk is deemed to exist.
The Company’s customers consist mainly of beverage distributors and wholesale and retail grocery suppliers and distributors principally located in North America. During the quarter ended May 31, 2017, the Company’s ten largest customers comprised approximately 81% of sales compared with 93% in the last fiscal year ended February 28, 2017. One customer comprised 23% of sales compared with 74% in the last fiscal year. In addition, to cover credit risk, the Company performs ongoing credit evaluations of its customers’ financial condition and applies rigorous procedures to assess the credit worthiness of new clients. It sets a specific credit limit per client and regularly reviews this limit.
As at May 31, 2017, 100% of the trade receivables are classified as current, or have been provided for.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company manages liquidity risk through the management of its capital structure and financial leverage as outlined in Note 10 of the interim financial statements. Managing liquidity requires monitoring of projected cash inflows and outflows using forecasts of the Company’s financial position to ensure adequate and efficient use of cash resources. The appropriate liquidity level is established based on historical volatility and seasonal requirements, as well as planned investments.
9
Market risk
Currency risk
The Company concludes sales in U.S. dollars to customers in the U.S. The Company also purchases raw materials as well as equipment in U.S. dollars. Consequently, it is exposed to the risk of exchange rate fluctuations with respect to the receivable and payable balances denominated in U.S. Dollars. The Company has not hedged its exposure to currency fluctuations.
A 5% U.S. dollar rise per Canadian dollar would have an unfavourable impact of approximately $5,863 on net earnings for the quarter ended May 31, 2017. A 5% U.S./Canadian dollar decrease would have a positive impact of similar magnitude.
Interest rate risk
As at May 31, 2017, the Company held no debt such that a 1% change in the interest rate would have no impact.
Fair Value of Financial Instruments
The Company’s financial instruments measured at fair value on the balance sheet are limited to cash and cash equivalents which are classified as level 1, and a non-employee stock option embedded derivative liability which is classified as level 3. See Note 7 for results of fair valuation of the derivative liability in the period.
Disclosure of Outstanding Share Data
At July 10, 2017, the Company had 2,802,412 issued and outstanding common shares, 694,000 issued and outstanding stock options, all of which were vested.
Disclosure of Controls and Procedures and Internal Control over Financial Reporting
The Chief Executive Officer and the Principal Financial Officer, together with other members of management, have designed the Company’s disclosure controls and procedures in order to provide reasonable assurance that material information relating to the Company and its consolidated subsidiaries would have been known to them, and by others, within those entities.
Management has also designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements in accordance with U.S. GAAP. There have been no changes in the Company’s internal controls over financial reporting during the period, which would materially affect, or are likely to materially affect, the Company’s internal controls.
While the officers of the Company have designed the Company’s disclosure controls and procedures and internal controls over financial reporting, they expect that these controls and procedures may not prevent all errors and fraud. A control system, no matter how well conceived or operated, can only provide reasonable, not absolute assurance that the objectives of the control system are met.
10
| LEADING BRANDS, INC. |
| CONDENSED CONSOLIDATED INTERIM BALANCE SHEET |
| (UNAUDITED) |
| (EXPRESSED IN CANADIAN DOLLARS) |
| May 31, 2017 | February 28, 2017 | |||||
| ASSETS | ||||||
| Cash | $ | 3,638,195 | $ | 4,315,028 | ||
| Accounts receivable | 65,238 | 85,628 | ||||
| Inventory (Note 2) | 274,443 | 361,102 | ||||
| Prepaid expenses and deposits (Note 4) | 77,388 | 129,520 | ||||
| 4,055,264 | 4,891,278 | |||||
| Property, plant and equipment (Note 3) | 729,900 | 765,024 | ||||
| Intangible assets (Note 5) | 294,005 | 297,189 | ||||
| Deferred tax assets | - | - | ||||
| Assets attributable to discontinued operations (Note 12) | - | 26,195 | ||||
| Total Assets | $ | 5,079,169 | $ | 5,979,686 | ||
| LIABILITIES | ||||||
| Accounts payable and accrued liabilities | $ | 539,514 | $ | 605,046 | ||
| Liabilities attributable to discontinued operations (Note 12) | 300,000 | 300,000 | ||||
| Derivative liability - non-employee stock options (Note 6) | 44,145 | 46,352 | ||||
| 883,659 | 951,398 | |||||
| SHAREHOLDERS' EQUITY | ||||||
| Share capital (Note 7) | ||||||
| Common shares | 31,305,247 | 31,305,247 | ||||
| Treasury stock | - | - | ||||
| Additional paid-in capital | 19,455,359 | 19,455,359 | ||||
| �� Accumulated other comprehensive income - currency translation adjustment | 577,916 | 577,916 | ||||
| Accumulated deficit | (47,143,012 | ) | (46,310,234 | ) | ||
| 4,195,510 | 5,028,288 | |||||
| Total Liabilities and Shareholders' Equity | $ | 5,079,169 | $ | 5,979,686 |
The accompanying notes are an integral part of these consolidated interim financial statements.
These consolidated interim financial statements have not been audited or reviewed by the Company's auditors.
11
| LEADING BRANDS, INC. |
| CONDENSED CONSOLIDATED INTERIM STATEMENT OF INCOME (LOSS) |
| (UNAUDITED) |
| (EXPRESSED IN CANADIAN DOLLARS) |
| Three months ended | ||||||
| May 31, 2017 | May 31, 2016 | |||||
| Gross Revenue | $ | 439,244 | $ | 426,553 | ||
| Less: Discount, rebates and slotting fees | (93,611 | ) | (147,584 | ) | ||
| Net Revenue | 345,633 | 278,969 | ||||
| Cost of sales | 354,132 | 322,559 | ||||
| Operations, selling, general & administration expenses | 748,408 | 782,635 | ||||
| Depreciation of property, plant and equipment | 31,616 | 55,939 | ||||
| Interest, net | (9,377 | ) | - | |||
| Change in fair value of derivative liability (Note 6) | (2,207 | ) | (26,042 | ) | ||
| Gain (loss) on disposal of assets | 1,065 | (306,774 | ) | |||
| 1,123,637 | 828,317 | |||||
| Net income (loss) before taxes from continuing operations | (778,004 | ) | (549,348 | ) | ||
| Income tax expense | - | - | ||||
| Net income (loss) from continuing operations | (778,004 | ) | (549,348 | ) | ||
| Net income (loss) from discontinued operations (note 12) | $ | (54,774 | ) | $ | 844,223 | |
| Net and Comprehensive income (loss) | $ | (832,778 | ) | $ | 294,875 | |
| Basic earnings (loss) per common share | ||||||
| Continuing operations | $ | (0.28 | ) | $ | (0.19 | ) |
| Discontinued operations | (0.02 | ) | 0.29 | |||
| Net basic earnings (loss) per common share | $ | (0.30 | ) | $ | 0.10 | |
| Diluted earnings (loss) per common share | ||||||
| Continuing operations | $ | (0.28 | ) | $ | (0.19 | ) |
| Discontinued operations | (0.02 | ) | 0.29 | |||
| Net diluted earnings (loss) per common share | $ | (0.30 | ) | $ | 0.10 | |
| Weighted average common shares outstanding | ||||||
| Basic | 2,802,412 | 2,859,697 | ||||
| Diluted | 2,802,412 | 2,859,697 | ||||
The accompanying notes are an integral part of these consolidated interim financial statements.
These consolidated interim financial statements have not been audited or reviewed by the Company's auditors.
12
| LEADING BRANDS, INC. |
| CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS |
| (UNAUDITED) |
| (EXPRESSED IN CANADIAN DOLLARS) |
| Three months ended | ||||||
| May 31, 2017 | May 31, 2016 | |||||
| Cash provided by (used in) | ||||||
| Operating activities | ||||||
| Net loss from continuing operations | $ | (778,004 | ) | $ | (549,348 | ) |
| Net income (loss) from discontinued operations | (54,774 | ) | 844,223 | |||
| Net income for the period | (832,778 | ) | 294,875 | |||
| Items not involving cash | ||||||
| Depreciation of property, plant and equipment | 31,616 | 170,253 | ||||
| Amortization of leasehold inducement | - | (1,212 | ) | |||
| Loss on disposal of assets | 1,065 | (306,774 | ) | |||
| Stock-based compensation | - | - | ||||
| Change in derivative liability (Note 6) | (2,207 | ) | (26,042 | ) | ||
| Change in deferred tax asset | - | 27,159 | ||||
| Changes in non-cash operating working capital items | ||||||
| Accounts receivable, net | 20,390 | (104,975 | ) | |||
| Inventory, net | 86,658 | (50,798 | ) | |||
| Prepaid and other assets | 78,327 | 108,304 | ||||
| Accounts payable | (65,532 | ) | 124,275 | |||
| (682,461 | ) | 235,065 | ||||
| Investing activities | ||||||
| Purchase of capital assets | - | - | ||||
| Purchase of intangible assets | (5,372 | ) | (23,353 | ) | ||
| Proceeds on sale of capital assets | 11,000 | 306,774 | ||||
| 5,628 | 283,421 | |||||
| Financing activities | ||||||
| Repurchase of common shares | - | (7,874 | ) | |||
| Issue of common shares | - | - | ||||
| Repayment of long-term debt | - | - | ||||
| - | (7,874 | ) | ||||
| Increase (decrease) in cash | (676,833 | ) | 510,612 | |||
| Cash, beginning of period | 4,315,028 | 282,819 | ||||
| Cash, end of period | $ | 3,638,195 | $ | 793,431 | ||
| Supplementary disclosure of cash flow information | ||||||
| Cash paid (received) during the period | ||||||
| Interest received | $ | 9,377 | $ | - | ||
| Interest paid | $ | - | $ | - | ||
The accompanying notes are an integral part of these consolidated interim financial statements.
These consolidated interim financial statements have not been audited or reviewed by the Company's auditors.
13
| LEADING BRANDS, INC. |
| CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY |
| (UNAUDITED) |
| (EXPRESSED IN CANADIAN DOLLARS) |
| Three Months ended | ||||||||||||
| May 31, 2017 | May 31, 2016 | |||||||||||
| Shares | Amount | Shares | Amount | |||||||||
| Common Stock | ||||||||||||
| Beginning of period | 2,802,412 | $ | 31,305,247 | 2,859,837 | $ | 31,946,732 | ||||||
| Shares issued during the period | - | - | - | - | ||||||||
| Shares cancelled during the period | - | - | (3,890 | ) | (43,455 | ) | ||||||
| 2,802,412 | $ | 31,305,247 | 2,855,947 | $ | 31,903,277 | |||||||
| Treasury Stock | ||||||||||||
| Beginning of period | $ | - | $ | - | ||||||||
| Shares issued during the period | - | (43,455 | ) | |||||||||
| Shares cancelled during the period | - | 43,455 | ||||||||||
| $ | - | $ | - | |||||||||
| Additional Paid-In Capital | ||||||||||||
| Beginning of period | $ | 19,455,359 | $ | 18,953,663 | ||||||||
| Shares cancelled during the period | - | 35,581 | ||||||||||
| Stock based compensation on issued options | - | - | ||||||||||
| Exercise of stock options | - | - | ||||||||||
| $ | 19,455,359 | $ | 18,989,244 | |||||||||
| Accumulated Other Comprehensive Income | ||||||||||||
| Beginning of period | $ | 577,916 | $ | 577,916 | ||||||||
| Foreign exchange translation adjustment | - | - | ||||||||||
| $ | 577,916 | $ | 577,916 | |||||||||
| Accumulated Deficit | ||||||||||||
| Beginning of period | $ | (46,310,234 | ) | $ | (39,800,545 | ) | ||||||
| Net income (loss) | (832,778 | ) | 294,875 | |||||||||
| $ | (47,143,012 | ) | $ | (39,505,670 | ) | |||||||
| Total Shareholders’ Equity | $ | 4,195,510 | $ | 11,964,767 | ||||||||
The accompanying notes are an integral part of these consolidated interim financial statements.
These consolidated interim financial statements have not been audited or reviewed by the Company's auditor.
| LEADING BRANDS, INC. |
| Notes to Consolidated Interim Financial Statements |
| For the three months ended May 31, 2017 |
| (UNAUDITED) |
| (EXPRESSED IN CANADIAN DOLLARS) |
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Leading Brands, Inc. (the “Company”) and its subsidiaries are involved in the development, marketing, and distribution of the Company’s branded beverage products.
Basis of Presentation
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) without audit or review by the company’s auditors.
These consolidated interim financial statements do not include all the disclosures required under U.S.
GAAP and should be read in conjunction with the Company’s audited consolidated financial statements for the year ended February 28, 2017.
Interim Financial Reporting
These unaudited consolidated interim financial statements follow the same accounting policies and methods of their application as the figures presented in the audited financial statements for the year ended February 28, 2017. Results of operations for interim periods are not necessarily indicative of the results to be expected in future periods or annual results. The Company’s financial results are impacted by seasonal factors with stronger sales occurring in the warmer months.
2. INVENTORY
| May 31, 2017 | February 28, 2017 | |||||
| Finished goods | $ | 146,018 | $ | 279,666 | ||
| Raw materials | 128,425 | 81,436 | ||||
| $ | 274,443 | $ | 361,102 |
3. PROPERTY, PLANT AND EQUIPMENT
| May 31, 2017 | |||||||||
| Cost | Accumulated | Net | |||||||
| Depreciation & | |||||||||
| Impairment | |||||||||
| Plant and equipment | $ | 379,689 | $ | 96,194 | $ | 283,495 | |||
| Buildings | - | - | - | ||||||
| Automotive equipment | 27,800 | 17,321 | 10,479 | ||||||
| Land | - | - | - | ||||||
| Land improvements | - | - | - | ||||||
| Leasehold improvements | 500,724 | 232,186 | 268,538 | ||||||
| Furniture and fixtures | 212,652 | 189,019 | 23,633 | ||||||
| Computer hardware and software | 1,761,497 | 1,617,742 | 143,755 | ||||||
| $ | 2,882,362 | $ | 2,152,462 | $ | 729,900 | ||||
15
3. PROPERTY, PLANT AND EQUIPMENT (continued)
| February 28, 2017 | |||||||||
| Cost | Accumulated | Net | |||||||
| Depreciation & | |||||||||
| Impairment | |||||||||
| Plant and equipment | $ | 379,688 | $ | 94,431 | $ | 285,257 | |||
| Buildings | - | - | - | ||||||
| Automotive equipment | 61,550 | 38,251 | 23,299 | ||||||
| Land | - | - | - | ||||||
| Land improvements | - | - | - | ||||||
| Leasehold improvements | 500,724 | 220,510 | 280,214 | ||||||
| Furniture and fixtures | 212,652 | 187,768 | 24,884 | ||||||
| Computer hardware and software | 1,761,497 | 1,610,127 | 151,370 | ||||||
| $ | 2,916,111 | $ | 2,151,087 | $ | 765,024 | ||||
4. PREPAID EXPENSES AND DEPOSITS
| May 31, 2017 | February 28, 2017 | |||||
| Slotting fees | $ | 2,167 | $ | 3,792 | ||
| Insurance premiums | 25,301 | 52,561 | ||||
| Rental deposits and other | 49,920 | 99,362 | ||||
| 77,388 | $ | 155,715 | ||||
| Attributable to discontinued operations | $ | - | 26,195 | |||
| Attributable to continuing operations | $ | 77,388 | 129,520 |
5. INTANGIBLE ASSETS
| May 31, 2017 | |||||||||
| Cost | Amortization | Net | |||||||
| Brand license and patent | $ | 336,409 | $ | 42,404 | $ | 294,005 | |||
| February28, 2017 | |||||||||
| Cost | Amortization | Net | |||||||
| Brand license and patent | $ | 331,037 | $ | 33,848 | $ | 297,189 | |||
6. DERIVATIVE LIABILITY
In accordance with the guidance of ASC 815-40-15, stock options granted to non-employees that are exercisable in a currency other than the functional currency of the Company are required to be accounted for as derivative liabilities because they are considered not to be indexed to the Company’s stock due to their exercise price being denominated in a currency other than the Company’s functional currency.
The non-employee options are required to be re-valued with the change in fair value of the liability recorded as a gain or loss on the change in fair value of derivative liability and included in other items in the Company’s Consolidated Statements of Income (Loss) at the end of each reporting period. The fair value of the options will continue to be classified as a liability until such a time as they are exercised, expire or there is an amendment to the respective agreements that renders these financial instruments to be no longer classified as a liability.
16
The change in derivative liability for non-employee options is summarized as follows:
| May 31, 2017 | February 28, 2017 | |||||
| Derivative liability, beginning of period | $ | 46,352 | $ | 59,990 | ||
| Warrants issued during the period | - | - | ||||
| Change in fair value of non-employee options | (2,207 | ) | (13,638 | ) | ||
| Derivative liability, end of period | $ | 44,145 | $ | 46,352 |
An estimate for the fair value of non-employee stock options is determined through use of the Black-Scholes Model. Assumptions applied by management as at May 31, 2017 were as follows: (1) risk-free rate of 0.73%; (2) dividend yield of nil; (3) an expected volatility of 72.95%; (4) an expected life of 31 months; and (5) an exercise price of USD $2.82.
7. SHARE CAPITAL
As of May 31, 2017 the company had outstanding 2,802,412 common shares.
| Stock Options | ||||||
| Outstanding | Weighted Average | |||||
| Options | Exercise Price - USD | |||||
| Options outstanding as at February 28, 2017 | 868,000 | $ | 2.94 | |||
| Options granted first quarter | - | $ | - | |||
| Options cancelled first quarter | (174,000 | ) | $ | 3.07 | ||
| Options outstanding as at May 31, 2017 | 694,000 | $ | 2.86 | |||
8. RELATED PARTY TRANSACTIONS
| Quarter ended | Quarter ended | ||||||||
| May 31, 2017 | May 31, 2016 | ||||||||
| i) | Incurred marketing consulting services with a company related by a director in common, Ralph McRae | $ | 2,813 | $ | 1,500 | ||||
| ii) | Incurred management service fees with a company related by an officer in common, Dave Read | $ | - | $ | 37,500 | ||||
| iii) | Incurred bottling services from a company related by a director in common, Ralph McRae | $ | 51,598 | $ | 70,745 |
9. COMMITMENTS AND CONTINGENCIES
The Company is committed to certain agreements and operating leases. The minimum amounts due over the remaining terms of those agreements are as follows:
| Year 1 | $ | 141,124 | |
| Year 2 | 142,924 | ||
| Year 3 | 150,047 | ||
| Year 4 | 135,285 | ||
| Year 5 and thereafter | 228,158 | ||
| Total future minimum payments | $ | 797,538 |
The Company is party to legal claims which have arisen in the normal course of business, none of which are expected to have a material adverse effect on the financial position or results of the Company.
17
10. CAPITAL MANAGEMENT
The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide opportunities for growth to shareholders and to maintain financial flexibility in, or to take advantage of opportunities as they arise.
In the management of capital, the Company includes shareholder’s equity and cash. The Company manages its capital structure and can adjust it in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may purchase shares for cancellation pursuant to normal course issuer bids, issue new shares, issue new debt, or refinance its existing indebtedness.
11. SEGMENTED INFORMATION
The Company operates in one industry segment being the distribution of beverages. The Company’s principal operations are comprised of a distribution system for beverages and waters. Substantially all of the Company’s operations, assets and employees are located in Canada and net revenue from export sales during all periods reported are less than 10%.
12. DISCONTINUED OPERATIONS
On December 15, 2016 the Company approved the discontinuation of all activities relating to the Company’s co-packing operations. As a result the co-packing operations have ceased and all assets have been liquidated and all liabilities will be settled. All costs associated with the discontinuation were recorded as of February 28, 2017.
In conjunction with the discontinuance of the co-packing operations, the Company has presented the assets and liabilities under the captions “assets of discontinued operations” and “liabilities of discontinued operations” respectively in the accompanying balance sheets as at May 31, 2017 and February 28, 2017, and consist of the following:
| Assets of discontinued operations: | May 31, 2017 | February 28, 2017 | ||||
| Accounts Receivable | $ | - | $ | - | ||
| Prepaid expenses and deposits | - | 26,195 | ||||
| Total current assets | - | 26,195 | ||||
| Property, plant and equipment | - | - | ||||
| Deferred tax assets | - | - | ||||
| Total assets | $ | - | $ | 26,195 | ||
| Liabilities of discontinued operations: | ||||||
| Accounts payable and accrued liabilities | $ | 300,000 | $ | 300,000 | ||
| Lease inducement | - | - | ||||
| Total liabilities | $ | 300,000 | $ | 300,000 |
18
Amounts presented for the quarters ended May 31, 2017 and May 31, 2016 have been reclassified to conform to the current presentation. The following table provides the amounts reclassified for the periods then ended:
| Amounts reclassified | May 31, 2017 | May 31, 2016 | ||||
| Gross Revenue | $ | 56,937 | $ | 2,607,169 | ||
| Less: Discounts, rebates slotting fees | (18,086 | ) | (32,428 | ) | ||
| Net Revenue | 38,851 | 2,574,741 | ||||
| Cost of sales | 51,944 | 1,426,420 | ||||
| Selling, general, and administrative | 9,121 | 162,625 | ||||
| Depreciation of property, plant, equipment and intangible assets | - | 114,314 | ||||
| (61,065 | ) | (1,703,359 | ) | |||
| Net Income (loss) before taxes | (22,214 | ) | 871,382 | |||
| Income tax provision (recovery) | 27,159 | |||||
| Total amount reclassified as discontinued operations | $ | (22,214 | ) | $ | 844,223 |
19
LEADING BRANDS, INC. AT A GLANCE
Shareholder Information:
Leading Brands, Inc.
NASDAQ:LBIX
| Toll Free: | 1-866-685-5200 |
| Website: | www.LBIX.com |
The Company’s annual report on Form 20-F, along with all other publicly reported documents, is available on SEDAR atwww.sedar.com.
| LEADING BRANDS, INC. |
| Unit 101 – 33 West 8thAvenue |
| Vancouver BC Canada V5Y 1M8 |
| Tel: 604-685-5200 |
| Toll free: 1-866-685-5200 |
| www.LBIX.com |
20