Contents
Note: The financial statements accompanying this report have not been audited or reviewed by the Company's auditors.
2
LEADING BRANDS, INC.
THIRD QUARTER ENDED November 30, 2017
(Expressed in Canadian dollars)
To our Shareholders:
On September 18, 2017 the Company announced that it had entered into a Definitive Arrangement Agreement with Liquid of Vancouver, Canada whereby LBIX would acquire 100% of Liquid pursuant to a plan of arrangement. Existing LBIX shareholders were anticipated to hold 22.637% and Liquid Shareholders were anticipated to hold 77.363% of the post-transaction entity. For those purposes, existing LBIX shares were valued at $1.50 US. As matters progressed and the transaction evolved, it became apparent that LBIX would have more cash available and that an adjustment of the exchange ratio to account for various transactions was appropriate. Consequently existing LBIX shares will now be valued at $1.78 US and the percentages of the combined entity held by each group of shareholders will be adjusted accordingly.
With the concurrent completion of the Liquid developments described below, it is anticipated that this transaction will now be completed by April 30, 2018.
Non-GAAP Net Income (Loss) before Stock Based Compensation (“SBC”) is determined as follows:
Q3 2017 | Q3 2016 | YTD 2017 | YTD 2016 | |||||||||
Net Income (Loss) from continuing operations | $ | (352,000 | ) | $ | (144,000 | ) | $ | (553,000 | ) | $ | (530,000 | ) |
Add Back SBC | - | - | - | - | ||||||||
Net income (loss) before SBC | $ | (352,000 | ) | $ | (144,000 | ) | $ | (553,000 | ) | $ | (530,000 | ) |
Non-GAAP Net Income (Loss) per share before Stock Based Compensation (“SBC”) is determined as follows:
Q3 2017 | Q3 2016 | YTD 2017 | YTD 2016 | |||||||||
Net Income (Loss) from continuing operations | $ | (0.13 | ) | $ | (0.05 | ) | $ | (0.20 | ) | $ | (0.19 | ) |
Add Back SBC | - | - | - | - | ||||||||
Net income (loss) before SBC | $ | (0.13 | ) | $ | (0.05 | ) | $ | (0.20 | ) | $ | (0.19 | ) |
Pro-forma results for EBITDAS, as defined below, are determined as follows:
Q3 2017 | Q3 2016 | YTD 2017 | YTD 2016 | |||||||||
Net Income (Loss) from continuing operations | $ | (352,000 | ) | $ | (144,000 | ) | $ | (553,000 | ) | $ | (530,000 | ) |
Add Back: | ||||||||||||
Interest, net | (1,000 | ) | - | (17,000 | ) | - | ||||||
Depreciation and amortization | - | - | 1,000 | 1,000 | ||||||||
Non-cash stock based compensation | - | - | - | - | ||||||||
Non-cash income tax expense | - | - | - | - | ||||||||
Total Add Backs | (1,000 | ) | - | (16,000 | ) | 1,000 | ||||||
EBITDAS | $ | (353,000 | ) | $ | (144,000 | ) | $ | (569,000 | ) | $ | (529,000 | ) |
3
EBITDAS per share reconciles to earnings per share as follows:
Q3 2017 | Q3 2016 | YTD 2017 | YTD 2016 | |||||||||
Net Income (Loss) from continuing operations | $ | (0.13 | ) | $ | (0.05 | ) | $ | (0.20 | ) | $ | (0.19 | ) |
Add Back: | ||||||||||||
Interest, net | - | - | (0.01 | ) | - | |||||||
Depreciation and amortization | - | - | - | - | ||||||||
Non-cash stock based compensation | - | - | - | - | ||||||||
Non-cash income tax expense | - | - | - | - | ||||||||
Total Add Backs | - | - | (0.01 | ) | - | |||||||
EBITDAS | $ | (0.13 | ) | $ | (0.05 | ) | $ | (0.21 | ) | $ | (0.19 | ) |
As at November 30, 2017 the Company had 2,802,412 outstanding common shares.
LIQUID:
Today, Liquid issued a News Release that, as it relates to LBIX and the transactions between the parties, the pertinent excerpt is as follows:
“LIQUID MEDIA GROUP ACQUIRES PROVEN GAMING PUBLISHER
MAJESCO ENTERTAINMENT, ANNOUNCES $4M PREFERRED SHARE
FINANCING AND AMMENDS ARRANGEMENT AGREEMENT
“VANCOUVER, BC – January 15, 2017– Liquid Media Group Ltd. (“LMG” or the “Company”) is pleased to announce that that it has acquired 51 percent of Majesco Entertainment Company, a proven gaming publisher that has had such hits as Zumba and A Boy and His Blob.
“The Board of Directors of LMG is excited to add the Majesco assets to its portfolio of synergistic operations. Majesco is led by its current CEO Jesse Sutton who will now serve as LMG’s Gaming Advisor. LMG will use its production service capabilities to re-release Majesco’s library of gaming assets for all platforms including consoles, PC and mobile and extend Majesco’s assets into film and television verticals. The acquisition of Majesco fulfills LMG’s obligation to acquire a studio under the arrangement agreement with Leading Brands, Inc. (the “Arrangement Agreement”), announced on September 19, 2017.
“LMG is also pleased to announce that it intends to complete a non-brokered private placement of newly created Class B Series I preferred shares (the “Preferred Shares”) for gross proceeds of up to U.S.$4,000,000. LMG has received and accepted a subscription agreement for the entire offering…”
The full text of the Liquid News Release may be found at www.LiquidMediaGroup.co
Ralph McRae
Ralph D. McRae
Chairman & CEO
4
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 occurrenceof anticipated or unanticipated events or circumstances.
5
Management’s Discussion & Analysis
For the three and nine months ended November 30, 2017
January 15, 2018
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 were involved in the development, production, marketing, and distribution of the Company’s branded beverage products.
The Company sold 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.
Results of Operations
Revenue
Revenue from discontinued operations for the three month ended November 30, 2017 was 78,345 compared to $2,534,800 for the same period of the previous year, representing a decrease of $2,456,455. The decrease is due to the Company’s exit from the co-pack business and disposition of the legacy beverage business on September 15, 2017.
Selling, General and Administration Expenses
Selling, general and administration expenses in the quarter ended November 30, 2017 increased by $151,601 from $174,325 in the same quarter of the prior year to $325,926.
Summary of Quarterly Results
November 30 (Q3) | August 31 (Q2) | May 31 (Q1) | February 28/29 (Q4) | |||||
2017 | 2016 | 2017 | 2016 | 2017 | 2016 | 2017 | 2016 | |
Net sales / revenue from continuing operations | - | - | - | - | - | - | - | - |
Net loss from continuing operations | ($352,307) | ($143,991) | ($110,754) | ($224,644) | ($90,420) | ($161,781) | ($183,529) | ($211,476) |
Net income (loss) from discontinued operations | ($1,193,334) | ($4,829,063) | ($620,972) | $76,720 | ($742,358) | $456,656 | ($1,500,057) | ($283,197) |
Net income (loss) | ($1,545,641) | ($4,973,054) | ($731,726) | ($147,924) | ($832,778) | $294,875 | ($1,683,586) | ($494,673) |
Earnings (loss) per share, basic – continuing operations | ($0.13) | ($0.05) | ($0.04) | ($0.08) | ($0.03) | ($0.06) | ($0.07) | ($0.07) |
Earnings (loss) per share, basic – discontinued operations | ($0.43) | ($1.72) | ($0.22) | $0.03 | ($0.26) | $0.16 | ($0.54) | ($0.10) |
Other Information
EBITDAS | Quarter ended | Quarter ended | Nine months ended | Nine months ended | ||||||||
November 30, 2017 | November 30, 2016 | November 30, 2017 | November 30, 2016 | |||||||||
Net income (loss) from | ||||||||||||
continuing operations | $ | (352,307 | ) | $ | (143,991 | ) | $ | (553,109 | ) | $ | (530,416 | ) |
Interest, net | (873 | ) | - | (17,240 | ) | - | ||||||
Depreciation and amortization | 263 | 263 | 789 | 789 | ||||||||
Stock based compensation expense | - | - | - | - | ||||||||
Income taxes | - | - | - | - | ||||||||
EBITDAS | $ | (352,917 | ) | $ | (143,728 | ) | $ | (569,560 | ) | $ | (529,627 | ) |
7
Related Party Transactions
Quarter ended | Quarter ended | Nine months ended | Nine months ended | ||||||||||
November 30, | November 30, | November 30, | November 30, | ||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||
i) | Incurred marketing consulting services with a company related by a director in common, Ralph McRae | $ | - | $ | 1,613 | $ | 2,812 | $ | 3,113 | ||||
ii) | Incurred bottling services from a company related by a director in common, Ralph McRae | - | 87,962 | 158,983 | 272,916 | ||||||||
iii) | Incurred management service fees with a company related by an officer in common, Ralph McRae | 37,500 | - | 37,500 | - | ||||||||
iv) | Incurred management service fees with a company related by an officer in common, Dave Read | - | 37,500 | - | 112,500 |
On September 15, 2017, the Company entered into an agreement with a company that has certain officers and directors in common with the Company, to dispose of its legacy beverage assets.
Cash flows
Cash provided by (used in): | Nine months ended | Nine months ended | ||||||||
November 30, 2017 | November 30, 2016 | Change | ||||||||
Operating activities | $ | (2,288,372 | ) | $ | 2,363 | $ | (2,290,735 | ) | ||
Investing activities | $ | (948,817 | ) | $ | 240,602 | $ | (1,189,419 | ) | ||
Financing activities | $ | - | $ | (139,789 | ) | $ | 139,789 |
For the nine months ended November 30, 2017, cash generated from operating activities decreased by $2,290,735.
Cash utilized by investing activities decreased by $1,189,419 compared to the same period of the prior year.
Cash utilized for financing activities was $nil this year.
Liquidity and Capital Resources
Net working capital has decreased by 65.3% since the prior year ended February 28, 2017. As at November 30, 2017, the Company has net working capital of $ 1,382,282 ($3,986,232 at February 28, 2017).
Total Net Working Capital | November 30, 2017 | February 28, 2017 | |||||
Total Current Assets | $ | 1,737,051 | $ | 4,891,278 | |||
Less: Total Current Liabilities | (354,769 | ) | (905,046 | ) | |||
Total Net Working Capital | $ | 1,382,282 | $ | 3,986,232 |
Considering the positive net working capital position, including the cash on hand at November 30, 2017, the Company believes that it has sufficient working capital.
8
Contractual Obligations
As of November 30 2017, Company has no contractual obligations other than certain employment arrangements and whatever obligations it may have under the Arrangement Agreement with Liquid.
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 was 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 November 30, 2017 the Company is exposed to credit risk through the following assets:
November 30, 2017 | February 28, 2017 | |
Trade receivables | $ - | $ 74,865 |
Other receivables | - | 10,763 |
Allowance for doubtful accounts | - | - |
$ - | $ 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. Restricted cash is held by the Company's legal counsel in a trust account pursuant to the terms of an Escrow Agreement arising from the disposition of the Company’s legacy beverage business. On the basis that these financial institutions are believed by Management to be financially sound, relatively minimal credit risk is deemed to exist. As of November 30, 2017, trade receivable balance is “Nil” due to sale of legacy beverage operation in September 15, 2017.
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.
Market risk
Currency risk
The Company currently is not engaged in any transactions that contain an element of currency risk.
Interest rate risk
As at November 30, 2017, the Company held no debt such that a 1% change in the interest rate would have no impact.
9
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 6 for results of fair valuation of the derivative liability in the period.
Disclosure of Outstanding Share Data
At January 15, 2018 the Company had 2,802,412 issued and outstanding common shares, 684,000 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)
November 30, 2017 | February 28, 2017 | |||||
ASSETS | ||||||
Cash | $ | 1,077,839 | $ | 4,315,028 | ||
Restricted Cash (Note 13) | 600,000 | - | ||||
Accounts receivable | - | 85,628 | ||||
Inventory (Note 2) | - | 361,102 | ||||
Prepaid expenses and deposits (Note 4) | 59,212 | 129,520 | ||||
1,737,051 | 4,891,278 | |||||
Property, plant and equipment (Note 3) | 3,420 | 765,024 | ||||
Intangible assets (Note 5) | - | 297,189 | ||||
Assets attributable to discontinued operations (Note 12) | - | 26,195 | ||||
Total Assets | $ | 1,740,471 | $ | 5,979,686 | ||
LIABILITIES | ||||||
$ | 54,769 | $ | 605,046 | |||
Accounts payable and accrued liabilities | ||||||
Liabilities attributable to discontinued operations (Note 12) | 300,000 | 300,000 | ||||
Derivative liability - non-employee stock options (Note 6) | 45,475 | 46,352 | ||||
400,244 | 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 | ||||
Accumulated deficit | (49,420,379 | ) | (46,310,234 | ) | ||
1,340,227 | 5,028,288 | |||||
Total Liabilities and Shareholders' Equity | $ | 1,740,471 | $ | 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 | Nine months ended | |||||||||||
November 30, 2017 | November 30 2016 | November 30, 2017 | November 30, 2016 | |||||||||
Gross Revenue | $ | - | $ | - | $ | - | $ | - | ||||
Less: Discount, rebates and slotting fees | - | - | - | - | ||||||||
Net Revenue | - | - | - | - | ||||||||
Cost of sales | - | - | - | - | ||||||||
Operations, selling, general & administration expenses | 325,926 | 174,325 | 570,437 | 547,550 | ||||||||
Depreciation of property, plant and equipment | 263 | 263 | 789 | 789 | ||||||||
Interest, net | (873 | ) | - | (17,240 | ) | - | ||||||
Change in fair value of derivative liability (Note 6) | 26,991 | (30,597 | ) | (877 | ) | (17,924 | ) | |||||
(352,307 | ) | (143,991 | ) | (553,109 | ) | (530,416 | ) | |||||
Net income (loss) before taxes from | ||||||||||||
continuing operations | (352,307 | ) | (143,991 | ) | (553,109 | ) | (530,416 | ) | ||||
Income tax expense | - | - | - | - | ||||||||
Net income (loss) from continuingoperations | (352,307 | ) | (143,991 | ) | (553,109 | ) | (530,416 | ) | ||||
Net income (loss) from discontinuedoperations (note 12) | $ | (1,193,334 | ) | $ | (4,829,063 | ) | $ | (2,557,036 | ) | $ | (4,295,687 | ) |
Net income (loss) | $ | (1,545,641 | ) | $ | (4,973,054 | ) | $ | (3,110,145 | ) | $ | (4,826,103 | ) |
Basic earnings (loss) per commonshare | ||||||||||||
Continuing operations | $ | (0.13 | ) | $ | (0.05 | ) | $ | (0.20 | ) | $ | (0.19 | ) |
Discontinued operations | (0.42 | ) | (1.72 | ) | (0.91 | ) | (1.52 | ) | ||||
Net basic earnings (loss) per common share | $ | (0.55 | ) | $ | (1.77 | ) | $ | (1.11 | ) | $ | (1.71 | ) |
Diluted earnings (loss) per commonshare | ||||||||||||
Continuing operations | $ | (0.13 | ) | $ | (0.05 | ) | $ | (0.20 | ) | $ | (0.19 | ) |
Discontinued operations | (0.42 | ) | (1.72 | ) | (0.91 | ) | (1.52 | ) | ||||
Net diluted earnings (loss) per common share | $ | (0.55 | ) | $ | (1.77 | ) | $ | (1.11 | ) | $ | (1.71 | ) |
Weighted average commonshares outstanding | ||||||||||||
Basic | 2,802,412 | 2,802,412 | 2,802,412 | 2,826,614 | ||||||||
Diluted | 2,802,412 | 2,802,412 | 2,802,412 | 2,826,614 |
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) |
Nine months ended | ||||||
November 30, 2017 | November 30, 2016 | |||||
Cash provided by (used in) | ||||||
Operating activities | ||||||
Net loss from continuing operations | $ | (553,109 | ) | $ | (530,416 | ) |
Net loss from discontinued operations | (2,557,036 | ) | (4,295,687 | ) | ||
Net loss for the period | (3,110,145 | ) | (4,826,103 | ) | ||
Items not involving cash | ||||||
Depreciation of property, plant and equipment | 74,135 | 514,283 | ||||
Amortization of leasehold inducement | - | (3,638 | ) | |||
Loss on disposal of assets | 752 | 1,493,309 | ||||
Loss on sale of legacy beverage operations | 1,071,396 | - | ||||
Stock-based compensation | - | - | ||||
Change in derivative liability (Note 6) | (877 | ) | (17,924 | ) | ||
Change in deferred tax asset | - | 2,480,257 | ||||
Changes in non-cash operating working capital items | ||||||
Accounts receivable, net | (53,808 | ) | (59,043 | ) | ||
Inventory, net | 102,137 | 357,946 | ||||
Prepaid and other assets | 41,187 | 187,426 | ||||
Accounts payable | (413,149 | ) | (124,150 | ) | ||
(2,288,372 | ) | 2,363 | ||||
Investing activities | ||||||
Purchase of capital assets | - | (10,451 | ) | |||
Purchase of intangible assets | (20,053 | ) | (112,721 | ) | ||
Proceeds on sale of capital assets | 11,000 | 363,774 | ||||
Cash outflow on business disposition | (339,764 | ) | - | |||
Restricted cash pursuant to escrow agreement | (600,000 | ) | - | |||
(948,817 | ) | 240,602 | ||||
Financing activities | ||||||
Repurchase of common shares | - | (139,789 | ) | |||
Issue of common shares | - | - | ||||
Repayment of long-term debt | - | - | ||||
- | (139,789 | ) | ||||
Increase (decrease) in cash | (2,637,189 | ) | 103,176 | |||
Cash, beginning of period | 4,315,028 | 282,819 | ||||
Cash, end of period | 1,077,839 | $ | 385,995 | |||
Supplementary disclosure of cash flow information | ||||||
Cash paid (received) during the period | ||||||
Interest received | $ | 17,240 | $ | - | ||
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)
November 30, 2017 | November 30, 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 | - | - | (57,425 | ) | (641,485 | ) | ||||||
2,802,412 | $ | 31,305,247 | 2,802,412 | $ | 31,305,247 | |||||||
Treasury Stock | ||||||||||||
Beginning of period | $ | - | $ | - | ||||||||
Shares issued during the period | - | (641,485 | ) | |||||||||
Shares cancelled during the period | - | 641,485 | ||||||||||
$ | - | $ | - | |||||||||
Additional Paid-In Capital | ||||||||||||
Beginning of period | $ | 19,455,359 | $ | 18,953,663 | ||||||||
Shares cancelled during the period | - | 501,696 | ||||||||||
Stock based compensation on issued options | - | - | ||||||||||
Exercise of stock options | - | - | ||||||||||
$ | 19,455,359 | $ | 19,455,359 | |||||||||
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) | (3,110,145 | ) | (4,826,103 | ) | ||||||||
$ | (49,420,379 | ) | $ | (44,626,648 | ) | |||||||
Total Shareholders’ Equity | $ | 1,340,227 | $ | 6,711,874 |
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.
14
LEADING BRANDS, INC.
Notes to Consolidated Interim Financial Statements
For the three and nine months ended November 30, 2017
(UNAUDITED)
(EXPRESSED IN CANADIAN DOLLARS)
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Leading Brands, Inc. (the “Company”) and its subsidiaries were involved in the development, marketing, and distribution of the Company’s branded beverage products. As of September 18, 2017 the Company decided to exit the beverage business and pursue the production of film, television and gaming content via the acquisition of Liquid pursuant to a plan of arrangement.
Basis of Presentation
The accompanying audited consolidated interim financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial statements.
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 were impacted by seasonal factors with stronger sales occurring in the warmer months.
2. INVENTORY
November 30, 2017 | February 28, 2017 | |||||
Finished goods | $ | - | $ | 279,666 | ||
Raw materials | - | 81,436 | ||||
$ | - | $ | 361,102 |
3. PROPERTY, PLANT AND EQUIPMENT
November 30, 2017 | |||||||||
Cost | Accumulated | Net | |||||||
Depreciation & | |||||||||
Impairment | |||||||||
Plant and equipment | $ | - | $ | - | $ | - | |||
Buildings | - | - | - | ||||||
Automotive equipment | - | - | - | ||||||
Land | - | - | - | ||||||
Land improvements | - | - | - | ||||||
Leasehold improvements | - | - | - | ||||||
Furniture and fixtures | 59,190 | 58,780 | 410 | ||||||
Computer hardware and software | 271,176 | 268,166 | 3,010 | ||||||
$ | 330,366 | $ | 326,946 | $ | 3,420 |
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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
November, 2017 | February 28, 2017 | |||||
Slotting fees | $ | - | $ | 3,792 | ||
Insurance premiums | 55,730 | 52,561 | ||||
Rental deposits and other | 3,482 | 99,362 | ||||
59,212 | $ | 155,715 | ||||
Attributable to discontinued operations | $ | - | 26,195 | |||
Attributable to continuing operations | $ | 59,212 | 129,520 |
5. INTANGIBLE ASSETS
November 30, 2017 | |||||||||
Cost | Amortization | Net | |||||||
Brand license and patent | $ | - | $ | - | $ | - |
February 28, 2017 | |||||||||
Cost | Amortization | Net | |||||||
Brand license and patent | $ | 331,037 | $ | 33,848 | $ | 297,189 |
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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.
The change in derivative liability for non-employee options is summarized as follows:
November 30, 2017 | February 28, 2017 | |||||
Derivative liability, beginning of period | $ | 18,484 | $ | 59,990 | ||
Warrants issued during the period | - | - | ||||
Change in fair value of non-employee options | 26,991 | (13,638 | ) | |||
Derivative liability, end of period | $ | 45,475 | $ | 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 November 30, 2017 were as follows: (1) risk-free rate of 1.09%; (2) dividend yield of nil; (3) an expected volatility of 68.8%; (4) an expected life of 25 months; and (5) an exercise price of USD $2.82.
7. SHARE CAPITAL
As of November 30, 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 | |||
Options granted second quarter | - | $ | - | |||
Options cancelled second quarter | - | $ | - | |||
Options outstanding as at August 31, 2017 | 694,000 | $ | 2.86 | |||
Options granted third quarter | - | - | ||||
Options cancelled third quarter | (10,000 | ) | $ | 15.75 | ||
Options outstanding as at November 30, 2017 | 684,000 | $ | 2.67 |
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8. RELATED PARTY TRANSACTIONS
Quarter ended | Quarter ended | Nine months ended | Nine months ended | ||||||||||
November 30, | November 30, | November 30, | November 30, | ||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||
i) | Incurred marketing consulting services with a company related by a director in common, Ralph McRae | $ | - | $ | 1,613 | $ | 2,812 | $ | 3,113 | ||||
ii) | Incurred bottling services from a company related by a director in common, Ralph McRae | - | 87,962 | 158,983 | 272,916 | ||||||||
iii) | Incurred management service fees with a company related by an officer in common, Ralph McRae | 37,500 | - | 37,500 | - | ||||||||
iv) | Incurred management service fees with a company related by an officer in common, Dave Read | - | 37,500 | - | 112,500 |
On September 15, 2017, the Company entered into an agreement with a company that has certain officers and directors in common with the Company, to dispose of its legacy beverage asset (see Note 12).
9. COMMITMENTS AND CONTINGENCIES
The Company has no committed to any agreements and operating leases.
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.
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%.
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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.
On September 15, 2017 the Company has disposed of its legacy beverage assets to a company that has certain officers and directors in common with the Company for $325,000, which amount is net of assumed liabilities for certain employee obligations and other matters, all of which is subject to certain working capital adjustments. All costs associated with the discontinuation were recorded as of November 30, 2017.
In conjunction with the discontinuance of the co-packing operations and legacy beverage sales 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 November 30, 2017 and February 28, 2017, and consist of the following:
Assets of discontinued operations: | November 30, 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 |
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Amounts presented for the quarters and nine months ended November 30, 2017 and November 30, 2016 have been reclassified to conform to the current presentation. The following table provides the amounts reclassified for the periods then ended:
Three months ended | Nine months ended | |||||||||||
Amounts reclassified | November 30, | November 30, | November 30, | November 30, | ||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Gross Revenue | $ | 78,345 | $ | 2,534,800 | $ | 1,090,788 | $ | 8,795,677 | ||||
Less: Discounts, rebates slotting fees | (18,473 | ) | (139,036 | ) | (291,688 | ) | (579,805 | ) | ||||
Net Revenue | 59,872 | 2,395,764 | 799,100 | 8,215,872 | ||||||||
Cost of sales | 80,504 | 2,010,149 | 878,173 | 5,725,900 | ||||||||
Selling, general, and administrative | 90,548 | 752,240 | 1,331,919 | 2,298,610 | ||||||||
Loss on disposal of assets | - | - | 752 | (279,505 | ) | |||||||
Loss on asset adjustments | - | 1,772,814 | - | 1,772,814 | ||||||||
Loss on disposition of legacy beverage operations | 1,071,946 | - | 1,071,946 | - | ||||||||
Depreciation of property, plant, equipment and intangible assets | 10,208 | 199,190 | 73,346 | 513,493 | ||||||||
(1,253,206 | ) | 4,734,393 | (3,356,136 | ) | 10,031,312 | |||||||
Net Income (loss) before taxes | (1,193,334 | ) | (2,338,629 | ) | (2,557,036 | ) | (1,815,440 | ) | ||||
Income tax provision (recovery) | - | 2,490,435 | - | 2,480,257 | ||||||||
Total amount reclassified as discontinued operations | $ | (1,193,334 | ) | $ | (4,829,063 | ) | (2,557,036 | ) | (4,295,697 | ) |
13. Restricted Cash
Restricted cash is held by the Company’s legal counsel in a trust account pursuant to the term of an Escrow Agreement arising from the disposition of the Company’s legacy beverage business.
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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
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