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 | ) |
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.
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.
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.
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.