Securities registered or to be registered pursuant to Section
12(b) of the Act:
Securities registered or to be registered pursuant to Section
12(g) of the Act:
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
Indicate the number of outstanding shares of each of the
issuer’s classes of capital or common stock as of the close of the period
covered by the annual report:
As of February 28, 2017, Leading Brands, Inc. had 2,802,412
Common Shares, without par value, outstanding.
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by
check mark if the Registrant is not required to file reports pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934.
Note – Checking the box above will not relieve any registrant
required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter
period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated
filer,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.
If an emerging growth company that prepares its financial
statements in accordance with U.S. GAAP, indicate by check mark if the
registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards † provided pursuant to
Section 13(a) of the Exchange Act. [ ]
The term “new or revised financial accounting standard” refers
to any update issued by the Financial Accounting Standards Board to its
Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the Registrant
has used to prepare the financial statements included in this filing:
If “Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the Registrant
has elected to follow:
If this is an annual report, indicate by check mark whether the
Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
The terms “Leading Brands”, the “Company”, “we”, “us” and “our”
as used in this Annual Report on Form 20-F, or “Annual Report,” refer to Leading
Brands, Inc. and its consolidated subsidiaries, except where the context
requires otherwise.
Unless otherwise specified, all references to “dollars” or “$”
in this Annual Report are expressed in Canadian dollars (“CDN”), unless
otherwise indicated, and all references to “U.S. dollars,” “US$” or “USD$” are
expressed in the currency of the United States of America.
This Annual Report includes “forward-looking statements” within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). Statements which are not historical facts are
forward-looking statements. The Company, through its management, makes
forward-looking statements concerning its expected future operations,
performance, results and other developments. The words “may,” “continue,”
“plan,” “believe,” “intend,” “expect,” “anticipate,” “project,” “estimate,”
“predict” and similar expressions are also intended to identify forward-looking
statements. Forward-looking statements relate to, among other things:
Such forward-looking statements are estimates reflecting the
Company’s 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 “Item 3.D. Risk Factors,” as well as other possible risks
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. Events may occur in the future that the Company is unable to accurately predict,
or over which it has no control. If one or more of those uncertainties
materialize, or if the underlying assumptions prove incorrect, actual outcomes
may vary materially from those forward-looking statements included in this
Annual Report.
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.
Item 1. – Identity of Directors, Senior Management and
Advisers
This item is not applicable for an Annual Report.
Item 2. – Offer Statistics and Expected Timetable
This item is not applicable for an Annual Report.
Item 3. – Key Information
|
A.
|
Selected financial
data.
|
1. and 2.
The following table sets forth certain selected consolidated
financial information with respect to Leading Brands for the periods indicated.
It should be read in conjunction with this Annual Report and the Company’s
consolidated financial statements listed in “Item 18 – Financial Statements” of
this Annual Report. The following table is derived from, and is qualified by,
the Company’s financial statements and the notes thereto which have been
prepared in accordance with generally accepted accounting principles in the
United States (“U.S. GAAP”).
|
FISCAL
YEAR
ENDED
Feb. 28, 2017
|
FISCAL
YEAR
ENDED
Feb. 29, 2016
|
FISCAL
YEAR
ENDED
Feb. 28, 2015
|
FISCAL
YEAR
ENDED
Feb. 28, 2014
|
FISCAL
YEAR
ENDED
Feb. 28, 2013
|
Net sales / revenue
from continuing
operations
|
$1,212,529
|
$794,541
|
$523,833
|
$428,913
|
$627,714
|
|
Net loss from
continuing
operations
|
($3,103,321)
|
($3,919,581)
|
($3,834,724)
|
($4,046,094)
|
($4,129,691)
|
Net income (loss)
from discontinued
operations
|
($3,406,368)
|
$2,616,297
|
$4,170,306
|
$ 5,209,389
|
$4,720,995
|
|
Net income (loss)
|
($6,509,689)
|
($1,303,284)
|
$335,582
|
$1,163,295
|
$591,304
|
Earnings (loss) per
share, basic –
continuing
operations
|
($1.10)
|
($1.36)
|
($1.31)
|
($1.38)
|
($1.37)
|
Earnings (loss) per
share, basic –
discontinued
operations
|
($1.21)
|
$0.91
|
$1.42
|
$1.78
|
$1.57
|
Earnings (loss) per
share, diluted -
continuing
operations
|
($1.10)
|
($1.36)
|
$(1.26)
|
($1.25)
|
($1.25)
|
Earnings (loss) per
share, diluted -
discontinued
operations
|
($1.21)
|
$0.91
|
$1.30
|
$1.62
|
$1.42
|
|
Total assets
|
$5,979,686
|
$13,274,708
|
$14,755,112
|
$15,140,842
|
$14,127,121
|
|
Net assets
|
$5,028,288
|
$11,677,766
|
$13,073,486
|
$12,820,201
|
$11,742,831
|
|
Share Capital
|
$31,305,247
|
$31,946,732
|
$32,401,440
|
$32,713,370
|
$33,096,167
|
|
Long-term debt
|
NIL
|
NIL
|
NIL
|
NIL
|
$75,027
|
Cash dividends
declared per
common
share
|
NIL
|
NIL
|
NIL
|
NIL
|
NIL
|
Weighted average
common shares
outstanding
basic and diluted
|
Basic:
2,820,647
Diluted:
2,820,647
|
Basic:
2,880,882
Diluted:
2,880,882
|
Basic:
2,922,684
Diluted:
3,192,963
|
Basic:
2,929,722
Diluted:
3,246,223
|
Basic:
3,012,647
Diluted:
3,314,762
|
6
|
Exchange Rate – May 1, 2017: 1.3660
|
Exchange rates for the previous six months: US$1 equivalent to
the following in Canadian dollars:
|
Apr. 1-30,
2017
|
Mar. 1-31,
2017
|
Feb. 1-28,
2017
|
Jan. 1-31,
2017
|
Dec. 1-31,
2016
|
Nov. 1-30,
2016
|
|
High
|
1.3662
|
1.3508
|
1.3281
|
1.3433
|
1.3555
|
1.3551
|
|
Low
|
1.3275
|
1.3299
|
1.3020
|
1.3012
|
1.3133
|
1.3305
|
Average exchange rates for each of the five most recent fiscal
years: US$1equivalent to the following in Canadian dollars:
|
Mar. 1, 2016 to
Feb. 28,
2017
|
Mar. 1, 2015 to
Feb. 29,
2016
|
Mar. 1, 2014 to
Feb. 28,
2015
|
Mar. 1, 2013 to
Feb. 28,
2014
|
Mar. 1, 2012 to
Feb. 28,
2013
|
|
Average
|
1.3109
|
1.3058
|
1.1255
|
1.0462
|
0.9988
|
|
B.
|
Capitalization and
indebtedness.
|
This item is not applicable for an Annual Report.
|
C.
|
Reasons for the offer and use of
proceeds.
|
This item is not applicable for an Annual Report.
7
Risks Related To Our Business
The Company is vulnerable to exchange rate fluctuations.
Our operations are carried out primarily in Canada and in the
United States. The Company purchases certain raw materials and goods, priced in
U.S. dollars, for resale in Canada and also sells certain products, manufactured
in Canada, into the United States. As a result, the Company is vulnerable to
exchange rate fluctuations and it does not presently use any financial
instruments to hedge foreign currency fluctuations. A significant increase in
the value of the U.S. dollar in relation to the Canadian dollar would negatively
impact our earnings.
The Company uses a limited number of suppliers.
The Company relies on a limited number of suppliers for certain
raw materials. While other sources of supply do exist for these materials, an
unexpected disruption in supply or an increase in pricing would have a negative
impact on production and our earnings.
The Company is exposed to varying degrees of competition.
Increased consolidations of our competitors with and into
larger companies, increased market place competition, and more competitive
product and pricing pressures could impact the Company’s earnings, market share
and volume growth. This competition is likely to continue, and we cannot assure
you that it will not intensify in the future, which could materially and
adversely affect our financial condition and results of operations.
Changes in the nonalcoholic beverages business environment
could adversely affect our financial results.
The nonalcoholic beverages business environment is constantly
evolving as a result of, among other things, changes in consumer preferences,
including changes based on health and nutrition considerations, shifting
consumer tastes and needs, changes in consumer lifestyles and competitive
product and pricing pressures. If we are unable to successfully adapt to this
constantly changing environment, our earnings and sales could be negatively
affected.
Changes in laws and regulations could negatively affect our
operations.
The Company is subject to various laws and regulations, and
changes in such laws and regulations could have a negative impact on our
operations. For example:
|
♦
|
the Company has significant tax loss carry-forwards
available, and a change in legislation affecting these losses could
negatively impact future earnings;
|
|
♦
|
changes in environmental laws affecting beverage
containers could add costs to the Company’s operations and/or could
decrease consumer demand for the Company’s products; and,
|
8
|
♦
|
changes in laws and regulations, such as those of the
U.S. Food and Drug Administration or Canadian Food Inspection Agency,
could affect the way in which our products are marketed and produced,
which could have a negative impact on our production and our earnings.
|
The Company depends on protections afforded by trademarks
and copyrights.
The Company holds a number of trademarks and copyrights
relating to certain significant products. We rely on trademark laws and
contractual provisions to protect these trademarks and copyrights, and there can
be no assurance that third parties will not infringe or misappropriate our
trademarks and copyrights. If we lose some or all of our intellectual property
rights, our business may be materially adversely affected.
The Company is vulnerable to operating losses.
The Company’s beverage business is seasonal and fixed costs can
result in operating losses in colder Fall and Winter months.
Increases in costs and/or shortages of raw materials and/or
ingredients could harm our business.
The principal raw materials used by us are plastic bottles and
other packaging materials, the costs of which are subject to fluctuations. We
are uncertain whether the prices of any of the above or any other raw materials
or ingredients may rise in the future. We are unsure whether we will be able to
pass any of such increases on to our customers. We generally do not use hedging
agreements or alternative instruments to manage the risks associated with
securing sufficient ingredients or raw materials. In addition, some of these raw
materials are available from a limited number of suppliers. An increase in these
costs or a loss of a supplier and/or materials could have a material adverse
effect on the Company.
Our failure to accurately estimate demand for our products
could adversely affect our business and financial results.
We may not correctly estimate demand for our products. Our
ability to estimate demand for our products is imprecise, particularly with new
products, and may be less precise during periods of rapid growth, particularly
in new markets. If we materially underestimate demand for our products or are
unable to secure sufficient ingredients or raw materials, we might not be able
to satisfy demand on a short-term basis. Moreover, industry-wide shortages of
certain raw materials could, from time to time in the future, be experienced.
Such shortages could interfere with and/or delay production of certain of our
products and could have a material adverse effect on our business and financial
results. We generally do not use hedging agreements or alternative instruments
to manage this risk.
The Company depends on key management employees.
Our business is dependent upon the continued support of
existing senior management, including Ralph D. McRae, who is the Chairman,
President, Chief Executive Officer and a director of the Company. Mr. McRae has
been with Leading Brands since March 1996, and he has been responsible for our
business planning, corporate and brand initiatives and financings. The loss of
Mr. McRae, or any other key members of our existing management, could adversely
affect our business and prospects. There may be a limited number of
personnel with the requisite skills to serve in these positions and we may be
unable to locate or employ such qualified personnel on acceptable terms.
9
Possible conflicts of interest may arise with our directors,
officers, and other members of management.
Certain of our directors, officers, and other members of
management presently serve as directors, officers, promoters or members of
management of other companies, and therefore it is possible that a conflict may
arise between their duties to Leading Brands and their duties to such other
companies. All such conflicts will be disclosed in accordance with the
provisions of applicable corporate legislation and directors and officers will
govern themselves in respect thereof to the best of their ability in accordance
with the obligations imposed upon them by law.
Litigation or legal proceedings could expose us to
significant liabilities and thus negatively affect our financial results.
We are a party, from time to time, to litigation claims and
legal proceedings. Defending such proceedings could result in significant
ongoing expenditures and the continued diversion of our management’s time and
attention from the operation of our business, which could have a negative effect
on our business operations. Our failure to successfully defend or settle any
litigation or legal proceedings could result in liability that, to the extent
not covered by our insurance, could have a material adverse effect on our
financial condition, revenue and profitability, and could cause the market value
of our common shares to decline.
Other risks related to our business may arise and affect our
sales and earnings.
For example, such risks may include:
|
♦
|
whether the Company’s marketing programs are effective
and successful, especially for newer brands;
|
|
♦
|
changes in consumer tastes and preferences and market
demand for new and existing products;
|
|
♦
|
changes in general economic and business conditions; and
|
|
♦
|
adverse weather conditions, which could reduce demand for
the Company’s beverage products, sales of which are negatively affected by
cooler temperatures.
|
Risks Related To Our Industry
The Company competes with large companies with greater
resources.
Leading Brands competes, to some degree, with other larger
companies in the beverage industry. Some of these competitors have substantially
greater marketing, cash, distribution, production, technical and other resources
than the Company. We cannot assure you that such competition will not intensify
in the future, which could materially and adversely affect our financial
condition and operations.
10
Our industry is subject to various regulations and we must
be in compliance with current and changing rules and regulations.
The production and marketing of our beverages, including
contents, labels, caps and containers, are subject to the rules and regulations
of various federal, provincial, state and local health agencies. If a regulatory
authority finds that a current or future product or production run is not in
compliance with any of these regulations, we may be fined, or production may be
stopped, thus adversely affecting our financial condition and operations.
Similarly, any adverse publicity associated with any non-compliance may damage
our reputation and our ability to successfully market our products.
Significant additional labeling or warning requirements may
inhibit sales of affected products.
Regulatory or governmental authorities may seek to adopt
significant additional product labeling or warning requirements relating to the
chemical content or perceived adverse health consequences of certain of our
products. These types of requirements, if they become applicable to one or more
of our products under current or future environmental or health laws or
regulations may inhibit sales of such products.
Risks Related To Our Capital Stock
Our common shares have experienced significant price
volatility.
Our common share price has experienced significant price
volatility, with closing trading prices on the NASDAQ Capital Market ranging
from a low of US$1.31 to a high of US$5.83 during the five year period from
March 1, 2012 to February 28, 2017. During this period, the stock market for
other small capitalization stocks has also experienced significant price
fluctuations, which have often been unrelated to the operating performance of
the affected companies. Such future fluctuations could adversely affect the
market price of our common shares. The Company has had periods where the bid
price of the Company’s common shares closed below US$1.00 per share, and
therefore there is a risk that the Company will not continue to meet the minimum
requirement for continued listing under NASDAQ’s Marketplace Rule
5550(a)(2).
Sales of a substantial number of our common shares into the
public market could result in significant downward pressure on the price of our
common shares.
Our common shares are traded on the NASDAQ Capital Market under
the symbol “LBIX.” As of February 28, 2017, there were 2,802,412 common shares
issued and outstanding. The concurrent sale of a substantial number of our
common shares in the public market could cause a reduction in the market price
of our common shares.
We may lose our foreign private issuer status in the future,
which could result in significant additional costs and expenses to us.
In order to maintain our current status as a “foreign private
issuer” (as such term is defined in Rule 405 under the Securities Act), where
more than 50% of our outstanding voting securities are directly or indirectly
owned by residents of the United States, we must not have any of the following:
(i) a majority of our executive officers or directors being U.S. citizens or
residents, (ii) more than 50% of our assets being located in the United States,
or (iii) our business being principally administered in the United States. If we
were to lose our “foreign private issuer” status:
11
|
♦
|
we would no longer be exempt from certain of the
provisions of U.S. securities laws, such as Regulation FD and the Section
16 short swing profit rules;
|
|
♦
|
we would be required to commence reporting on forms
required of U.S. companies, such as Forms l0-K, 10- Q and 8- K, rather
than the forms currently available to us, such as Forms 20-F and 6-K;
|
|
♦
|
we would be subject to additional restrictions on offers
and sales of securities outside the United States, including in Canada;
|
|
♦
|
we may lose the ability to rely upon exemptions from
NASDAQ corporate governance requirements that are available to foreign
private issuers; and
|
|
♦
|
if we engage in capital raising activities after losing
our foreign private issuer status, there is a higher likelihood that
investors may require us to file resale registration statements with the
Securities and Exchange Commission (the “SEC”) as a condition to any such
financing.
|
We are incorporated in British Columbia, Canada, all of our
directors and officers live in Canada, and most of our assets are in Canada;
therefore, investors may have difficulty initiating legal claims and enforcing
judgments against us and our directors and officers.
We are a corporation existing under the laws of British
Columbia, all of our directors and officers are citizens of Canada and the
majority of our assets and operations are located outside of the United States.
It may not be possible for shareholders to enforce, in Canada, judgments against
us obtained in the United States, including actions predicated upon the civil
liability provisions of the U.S. federal securities laws.
While reciprocal enforcement of judgment legislation exists
between Canada and the United States, we and our insiders may have defenses
available to avoid, in Canada, the effect of U.S. judgments under Canadian law,
making enforcement difficult or impossible. As such, there is uncertainty as to
whether Canadian courts would enforce (a) judgments of U.S. courts obtained
against us or such persons predicated upon the civil liability provisions of the
U.S. federal and state securities laws or (b) in original actions brought in
Canada, liabilities against us or such persons predicated upon the U.S. federal
and state securities laws. Therefore, our shareholders in the United States may
have to avail themselves of remedies under Canadian corporate and securities
laws for any perceived oppression, breach of fiduciary duty and like legal
complaints. Canadian law may not provide for remedies equivalent to those
available under U.S. law.
We may be deemed to be a controlled foreign corporation or a
passive foreign investment company under the Internal Revenue Code of 1986, as
amended (the “Code”).
If more than 50% of the voting power of all of our classes of
shares or total value of our shares is owned, directly or indirectly, by
citizens or residents of the United States, U.S. domestic partnerships and
corporations or estates or trusts other than foreign estates or trusts (“U.S.
Shareholders”), each of which owns 10% or more of the total combined voting
power of all of our classes of shares (“10% U.S. Shareholders”), we could be
treated as a “controlled foreign corporation,” as such term is defined under
Subpart F of the Code. This classification would affect many complex results,
including the required inclusion by such U.S. Shareholders in income of their
pro rata shares of our “Subpart F income” (as specifically defined by the Code),
if any, and the requirement that 10% U.S. Shareholders comply with certain
additional U.S. tax reporting obligations. While we do believe that we are a
controlled foreign corporation, we have not made a determination as to whether
we are a controlled foreign corporation under the Code, and cannot give any
assurance that we would not be determined to be a controlled foreign corporation
under the Code now or in the future.
12
Even if we are not a controlled foreign corporation, we could
be treated as a “passive foreign investment company” under the Code, depending
upon the nature of our income and assets and those of our subsidiaries. Such a
status would affect many complex results to our U.S. Shareholders, including
those who own less than 10% of the total combined voting power of our
outstanding shares. These results might include imposition of higher rates of
tax on certain dividends and on gains from sale of our shares than would
otherwise apply. While we do not believe that we are a passive foreign
investment company nor ever have been, we have not made a determination as to
whether we are or have ever been a passive foreign investment company and so
cannot give any assurance in this regard, whether now or in the future.
Item 4. – Information on the Company
|
A.
|
History and development of the
Company.
|
|
1.
|
The legal name of the Company is “Leading Brands,
Inc.”
|
|
|
|
|
2.
|
The Company was incorporated under the
Company Act
(British Columbia) on February 4, 1986 under the name “2060
Investments Ltd.” On May 21, 1986, the Company changed its name to
“Camfrey Resources Ltd.” On March 16, 1993, the Company changed its name
to “Brio Industries Inc.,” and on October 25, 1999, the Company changed
its name to Leading Brands, Inc.
|
|
|
|
|
3.
|
The Company is a corporation incorporated under the laws
of the province of British Columbia, Canada, and is governed by the
Business Corporations Ac
t (British Columbia). The head office of
the Company is located at:
|
33 W. 8
th
Avenue – Unit 101
Vancouver BC
Canada V5Y 1M8
Tel: 604-685-5200
|
4.
|
During the period since the beginning of the last fiscal
year to May 1, 2017 there have been no material reclassifications, mergers
or consolidations of the Company or any of its subsidiaries, other than
the sale of the Company’s Edmonton, Alberta bottling plant.
|
|
|
|
|
|
Effective December 31, 2016, the Company’s contract with
its largest bottling customer expired and, as a result of the Company
exiting the co-packing business, the Company sold its Edmonton bottling
plant, land and building as of February 1, 2017 (reference is made to Item
4, Section B.2. of this Form 20 -F).
|
|
|
|
|
5.
|
The Company expended $10,449 on the purchase of property,
plant and equipment in the fiscal year ended February 28, 2017, of which
$8,039 was for bottling equipment, and $2,410 was for office equipment, computers and software.
On February 1, 2017 the Company sold its Edmonton bottling plant for
$4,687,900. The Company subsequently sold the bottling and related
equipment at the plant and neighbouring warehouse for $602,723, in
aggregate.
|
13
|
|
The Company expended $200,221 on the purchase of
property, plant and equipment in the fiscal year ended February 29, 2016,
of which $46,576 was for bottling equipment, $96,720 was for leasehold
improvements, $40,426 was for coolers, and $16,499 was for office
equipment, computers and software.
|
|
|
|
|
|
The Company expended $525,182 on the purchase of
property, plant and equipment in the fiscal year ended February 28, 2015,
of which $433,404 was for bottling equipment, and $91,778 was for office
equipment, computers and software.
|
|
|
|
|
6.
|
Capital expenditures that are planned for the fiscal year
ending February 28, 2018 are in Canada and will be funded with cash on
hand.
|
|
|
|
|
7.
|
There have been no indications of public takeover offers
by third parties in respect of the Company’s shares or by the Company in
respect of other companies’ shares during the last and current fiscal
year.
|
|
1.
|
The Company and its subsidiaries are engaged in beverage
distribution, sales, merchandising, brand development and brand management
of beverage products with customers across Canada, the western United
States, and Asia.
|
|
|
|
|
|
In the fiscal year ended February 28, 2017, Leading
Brands of Canada, Inc. was the principal operating subsidiary engaged in
the Company’s beverage business in Canada, and Neurogenesis Inc. (formerly
Blue Beverage Company, Inc.) was the principal sales subsidiary in the
United States.
|
|
|
|
|
2.
|
Beverage Bottling, Distribution and Sales and
Marketing
|
|
|
|
|
|
Bottling Plant.
Until February 1, 2017, the
Company operated a 50,000 square foot bottling plant in Edmonton, Alberta.
The Company bottled juices and new age beverages for a “co-pack customer”
(as defined below) and the Company’s own branded products.
|
|
|
|
|
|
The Company provided beverage packaging (“co-pack”)
services to a major branded beverage company. “Co-pack” customers own
their brands, and handle the distribution of the product to market. The
Company simply “co-packs” or makes the product at the customers’ request.
The Company charges a “co -pack fee” that equates to the packaging service
provided and also bills for any materials not supplied by the
customer.
|
|
|
|
|
|
The Company’s goal for beverage operations during the
coming year is to expand the distribution of the Company’s branded product
lines .
|
14
Distribution
. The Company’s
sales and distribution system utilizes a regional warehouse distribution center
located in Greater Vancouver, British Columbia. In addition, there are third
party distribution centers in, Metro Toronto and the State of Washington. The
sales and distribution system distributes a variety of bottled and packaged
water products to retail, wholesale and distribution outlets. As a market of
approximately 34,000,000 people, covering more than 2,000,000 square miles, the
Company believes that it is more cost effective for the Company to use a network
of distributors to assist in the distribution of its products in Canada.
Sales and Marketing
. The Company
believes it differentiates itself in the marketplace with its customer service
and product innovation. By selecting the right mix of products and flavours and
determining the merchandising strategy for those items, the Company has been
successful in increasing the turns of its customers’ beverage inventory.
The Company has a sales and marketing
team and outside broker network that covers most of Canada and the western
United States. In Asia, the Company employs country-specific distributors that
are familiar with their particular markets. Through its distribution network,
broker network and the Company’s sales team, the Company maintains contact with
its customers and provides the sales and merchandising services necessary to
ensure proper presentation of the Company’s brands on store shelves and to
assure appropriate ordering and pull-through of the Company’s products.
The sales and marketing team in Canada
covers all aspects of the retail trade, including chain grocery and drug stores,
mass merchandise centers, food service outlets and convenience stores.
The Company’s marketing department
continuously develops and implements innovative marketing programs for all the
brands represented. From sales booklets and point of sale materials to contests,
sampling events, interactive websites and in-store demonstrations, the Company
works to bring its brands to the top of its consumers’ minds. The Company
strives to promote and market all the brands it represents in a healthy,
positive and informed environment.
Other Business Overview
Information
Substantially all of the Company’s
operations, assets and employees are located in Canada. In the year ended
February 28, 2017, net export sales were less than 10% of the Company’s net
revenues.
|
3.
|
Demand for the Company’s beverage products is somewhat
seasonal, with the warmer months producing more demand than the cooler
months.
|
|
|
|
|
4.
|
Sourcing and pricing of raw materials for the Company’s
branded and private label products are the risk and responsibility of the
Company. Sourcing and pricing of raw materials used in co- packing were
generally the responsibility of the Company’s former co-pack
customer.
|
15
Raw materials used in the water packaging and distribution
business consist primarily of bottles, closures, cardboard and spring water.
|
|
♦
|
Bottles are generally purchased in the United States, but
there is a polyethylene teraphalate (“PET”) bottle supplier in Canada from
whom the Company occasionally purchases bottles. PET pricing is affected
by changing oil prices.
|
|
|
|
|
|
|
♦
|
Closures and flavorings are generally purchased in the
United States, but Canadian suppliers are becoming available and the
Company reviews these options as they come available.
|
|
|
|
|
|
|
♦
|
Cardboard is widely available and, while pricing
fluctuates from year to year, it is generally stable in the short term.
|
|
5.
|
The Company’s marketing and sales are handled principally
by the Company’s sales force. In markets outside of Canada, principally in
Asia, the Company uses third- party contractors for market development and
sales.
|
|
|
|
|
6.
|
Currently, no material portion of the Company’s business
is dependent on a single or connected group of patents or licenses,
industrial, commercial or financial contracts or new manufacturing
processes. Prior to the expiration of the co- pack bottling contract on
December 31, 2016, the Company's business was significantly dependent on
the co-pack customer and contract.
|
|
|
|
|
7.
|
The Company makes no statements concerning its
competitive position.
|
|
|
|
|
8.
|
The Company is subject to regulations of the Canadian
Food Inspection Agency, Health Canada and Natural Health Product
Directorate, as well as the U.S. Food and Drug Administration, with regard
to ingredients and labeling of the Company’s products.
|
|
|
|
|
|
The Company is also subject to compliance with the Canada
Border Services Agency and the United States Department of Homeland
Security, Customs and Border Protection, for border security and customs
functions related to the cross-border movement of raw materials and
finished goods.
|
|
C.
|
Organizational
structure.
|
Following is a list of the Company’s significant subsidiaries
as of February 28, 2017:
|
♦
|
Leading Brands of Canada, Inc. (“LBCI”):
|
|
|
-
|
incorporated provincially in Alberta, Canada;
|
|
|
-
|
100% owned by Leading Brands, Inc.;
|
|
|
-
|
is the Company’s principal operating subsidiary
in Canada; and
|
16
|
|
-
|
incorporated provincially in British Columbia,
Canada;
|
|
|
-
|
100% owned by Leading Brands, Inc.; and
|
|
|
-
|
owns certain of the Company’s proprietary
brands, trademarks and other intellectual property.
|
|
|
-
|
incorporated federally in Canada;
|
|
|
-
|
100% owned by Leading Brands, Inc.; and
|
|
|
-
|
operating company for the Happy Water brand.
|
|
|
-
|
incorporated in Nevada, USA;
|
|
|
-
|
100% owned by Leading Brands, Inc.; and
|
|
|
-
|
is the Company’s principal operating subsidiary
in the United States.
|
|
D.
|
Property, plant and
equipment.
|
The Company’s head office is located at Unit 101 – 33 W.
8
th
Avenue, Vancouver BC Canada. The space occupies 6,955 square feet
and is leased until February 2023.
The Company bottles Happy Water
®
at a co-packing
facility at 19500 – 56
th
Avenue, Surrey, B.C. Canada.
Until February 1, 2017, the Company owned and operated a 50,000
square foot bottling plant in Edmonton, Alberta. The Company sold the plant on
February 1, 2017. The Company also terminated a property lease in Edmonton,
Alberta on March 23, 2017 that was used as a regional warehouse and distribution
centre.
Item 4A. – Unresolved Staff Comments
None.
Item 5. – Operating and Financial Review and Prospects
Introduction
Leading Brands and its subsidiaries are involved in the
development, marketing and distribution of the Company’s beverage brands.
The Company sells branded beverage products through its
Integrated Distribution System (IDS) of distributors, wholesalers, and grocery
chains. Its principal product lines include
premium spring waters.
The Company uses the services of a third party bottler to meet its objectives.
Until February 1, 2017, the Company owned a bottling plant that provided
bottling services for the Company’s own products and for external customers, as
requested.
17
Overall Performance – Continuing operations
The major developments during the year ended February 28, 2017
included:
The Company saw its net loss of
$1,303,284 for the fiscal year ended February 29, 2016 on $1.2 million in gross
sales increase to a net loss of $6,509,689 in the fiscal year-ended February 28,
2017 on $1.7 million in gross sales, principally due to eliminated deferred tax
asset of $2,480,257 and discontinuation of co-packing operations.
Sales
|
Revenue
|
|
Fiscal Year ended
|
|
|
Fiscal Year ended
|
|
|
Change
|
|
|
|
|
February 28, 2017
|
|
|
February 29, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Revenue
|
$
|
1,717,521
|
|
$
|
1,194,796
|
|
$
|
522,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounts,
Allowances
and Rebates
|
$
|
(
504,992
|
)
|
$
|
(
400,255
|
)
|
$
|
(
104,737
|
)
|
|
Net Revenue
|
$
|
1,212,529
|
|
$
|
794,541
|
|
$
|
417,988
|
|
Gross sales for the fiscal year ended February 28, 2017 were
$1,717,521 compared to $1,194,796 for the previous fiscal year, representing an
increase of 43.8% . This increase of $522,725 in gross sales for the year ended
February 28, 2017 was due to an increase in the sales of Happy
Water
®
.
Discounts, rebates and slotting fees for the fiscal year ended
February 28, 2017 increased $104,737 compared to the prior fiscal year.
Cost of Sales and Margin
|
Cost of Sales
|
|
Fiscal Year ended
|
|
|
Fiscal Year ended
|
|
|
Change
|
|
|
|
|
February 28, 2017
|
|
|
February 29, 2016
|
|
|
|
|
|
Cost of Sales
|
$
|
1,349,734
|
|
$
|
946,909
|
|
$
|
402,825
|
|
Cost of sales, excluding depreciation of $207,993 (2016:
$229,347), for the fiscal year ended February 28, 2017 was $1,349,734 compared
to $946,909 for the previous fiscal year, representing an increase of 42.5%
.
|
Margin
|
|
Fiscal Year ended
|
|
|
Fiscal Year ended
|
|
|
Change
|
|
|
|
|
February 28, 2017
|
|
|
February 29, 2016
|
|
|
|
|
|
Margin
|
$
|
( 137,205
|
)
|
$
|
(152,368
|
)
|
$
|
15,163
|
|
|
Margin Percentage
|
|
(11.3%
|
)
|
|
(19.2%
|
)
|
|
7.9%
|
|
18
Margin for the fiscal year ended February 28, 2017 was
($137,205) compared to ($152,368) for the previous fiscal year, representing an
increase in margin as a percentage of net sales of 7.9% . The increase in margin
percentage for the fiscal year ended February 28, 2017 was due to significant
new listing fees and promotions for Happy Water
®
in the prior fiscal
year.
Selling, General and Administrative Expenses
For the fiscal year ended February 28, 2017, selling, general
and administrative expenses decreased $558,279 from $ 3,612,461 in the fiscal
year ended February 29, 2016 to $ 3,054,182 in the year ended February 28, 2017
as a result of:
|
♦
|
decreased stock compensation cost of $ 104,850;
|
|
♦
|
decreased legal and public company expense of
$268,313;
|
|
♦
|
decreased wages and outside service expense of
$144,563; and
|
|
♦
|
decreased administrative costs of $40,553.
|
Other Expenses
The Company recorded $nil interest expense on current and
long-term debt as compared to $85 in the prior fiscal year as the Company repaid
its debt in the year.
In the fiscal year ended February 28, 2017, the Company
recorded $nil interest income from bank balances compared to $4,900 in the prior
fiscal year.
The Company recorded a non-cash income tax expense within net
loss from discontinued operations of $2,480,257 in the fiscal year ended
February 28, 2017, as compared to a $436,654 tax recovery in the prior fiscal
year.
Depreciation expense decreased to $207,993 for the fiscal year
ended February 28, 2017, as compared to $229,347 in the prior fiscal year.
Fiscal Year Ended February 29, 2016 – Continuing
operations
Sales
|
Revenue
|
|
Fiscal Year ended
|
|
|
Fiscal Year
ended
|
|
|
Change
|
|
|
|
|
February 29, 2016
|
|
|
February 28,
2015
|
|
|
|
|
|
Gross Revenue
|
$
|
1,194,796
|
|
$
|
661,099
|
|
$
|
533,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounts, Allowances
and
Rebates
|
$
|
( 400,255
|
)
|
$
|
( 137,266
|
)
|
$
|
( 262,989
|
)
|
|
Net Revenue
|
$
|
794,541
|
|
$
|
523,833
|
|
$
|
270,708
|
|
19
Gross sales for the fiscal year ended February 29, 2016 were
$1,194,796 compared to $661,099 for the previous fiscal year, representing an
increase of 80.7% . This increase of $533,697 in gross sales for the year ended
February 29, 2016 was due to an increase in Happy Water
®
sales.
Discounts, rebates and slotting fees for the fiscal year ended
February 29, 2016 increased $262,989 compared to the prior fiscal year as a
result of significant new listing fees and promotions for Happy Water
®.
Cost of Sales and Margin
|
Cost of Sales
|
|
Fiscal Year ended
|
|
|
Fiscal Year ended
|
|
|
Change
|
|
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
|
|
|
|
Cost of Sales
|
$
|
946,909
|
|
$
|
551,656
|
|
$
|
395,253
|
|
Cost of sales, excluding depreciation totaling $229,347 (2015:
$222,291) for the fiscal year ended February 29, 2016 was $946,909 compared to
$551,656 for the previous fiscal year, representing an increase of 71.6% .
|
Margin
|
|
Fiscal Year ended
|
|
|
Fiscal Year ended
|
|
|
Change
|
|
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
|
|
|
|
Margin
|
$
|
(152,368
|
)
|
$
|
(27,823
|
)
|
$
|
( 124,545
|
)
|
|
Margin Percentage
|
|
(19.2%
|
)
|
|
(5.3%
|
)
|
|
(13.9%
|
)
|
Margin for the fiscal year ended February 29, 2016 was
($152,368) compared to ($27,823) for the previous fiscal year, representing a
decrease in margin as a percentage of net sales of 13.9% . The decrease in
margin of $124,545 for the fiscal year ended February 29, 2016 was due to
significant new listing fees and promotions for Happy Water
®
.
Selling, General and Administrative Expenses
For the fiscal year ended February 29, 2016, selling, general
and administrative expenses decreased $156,801 from $3,769,262 in the fiscal
year ended February 28, 2015 to $3,612,461 in the year ended February 29, 2016
as a result of:
|
♦
|
decreased wages and benefits expense of
$290,484;
|
|
♦
|
increased stock compensation expense of
$56,044;
|
|
♦
|
increased administrative costs of $38,312; and
|
|
♦
|
increased sales and marketing costs of $39,327.
|
Other Expenses
In the fiscal year ended February 29, 2016, the Company
recorded interest income from bank balances of $4,900 compared to $11,965 in the
prior fiscal year.
20
The Company recorded a non-cash income tax recovery of $436,654
in the fiscal year ended February 29, 2016 relating to discontinued Canadian
operations, as compared to a $108,965 expense in the prior fiscal year. Deferred
tax assets in other operating entities are offset by a valuation allowance.
Depreciation expense decreased to $229,347 for the fiscal year
ended February 29, 2016, as compared to $222,291 in the prior fiscal year.
|
B.
|
Liquidity and Capital
Resources.
|
Fiscal Year Ended February 28, 2017
As of February 28, 2017, the Company had working capital of
$4,012,427 compared to working capital of $477,354 at the prior fiscal year end.
The Company held $4,315,028 in cash account balances at February 28, 2017
compared with $282,819 at the prior fiscal year end.
Considering the positive working capital position, including
the cash on hand at February 28, 2017, available debt and other internal
resources, the Company believes that it has sufficient working capital to
continue operations for the next twelve months.
Cash provided by
(used
in):
|
Fiscal Year ended
February 28, 2017
|
Fiscal Year ended
February 29, 2016
|
Change
|
|
Operating
Activities
|
($ 1,351,804)
|
($ 833,873)
|
($ 517,931)
|
|
Investing
Activities
|
$ 5,523,802
|
($ 409,914)
|
$ 5,933,716
|
|
Financing
Activities
|
($ 139,789)
|
($ 176,316)
|
$ 36,527
|
The decrease in cash utilized in the fiscal year ended February
28, 2017 for operating activities is the result of the lower net income this
fiscal year.
The increase in cash utilized in the fiscal year ended February
28, 2017 for investing activities is the result of the sale of the Edmonton
bottling plant, land and building and sale of a long-unused internet domain.
Cash used for financing activities in the fiscal year ended
February 28, 2017 decreased in comparison to the prior fiscal year due to less
cash being used for the Company’s share repurchase program.
Other sources of financing are more fully described in the
consolidated financial statements appearing in “Item 18 – Financial Statements”
of this Annual Report.
The Company generally maintains cash or cash equivalents in
Canadian and U.S. funds and does not use financial instruments for hedging
purposes.
21
The Company has no material commitments for capital
expenditures in the fiscal year ending February 28, 2018.
Fiscal Year Ended February 29, 2016
As of February 29, 2016, the Company had working capital of
$477,354 compared to working capital of $2,050,974 at the prior fiscal year end.
The Company held $282,819 in cash account balances at February 29, 2016 compared
with $1,702,922 at the prior fiscal year end.
Considering the positive working capital position, including
the cash on hand at February 29, 2016, available debt and other internal
resources, the Company believed that it had sufficient working capital to
continue operations for the next twelve months.
Cash provided by
(used
in):
|
Fiscal Year ended
February 29, 2016
|
Fiscal Year ended
February 28, 2015
|
Change
|
|
Operating
Activities
|
($ 833,873)
|
($ 19,007)
|
($ 814,866)
|
|
Investing
Activities
|
($ 409,914)
|
($ 498,295)
|
$ 88,381
|
|
Financing
Activities
|
($ 176,316)
|
($ 173,560)
|
($ 2,756)
|
The decrease of $814,866 was the result of the lower net income
this fiscal year and increase of prepaid expense and offset by a decrease of
inventory and increase of prepaid expenses.
The increase in cash utilized in the fiscal year ended February
29, 2016 for investing activities was due to an increase of cash used for
intangible assets as compared to the prior fiscal year, offset by less cash
being used for bottling equipment.
Cash used for financing activities in the fiscal year ended
February 29, 2016 increased in comparison to the prior fiscal year due to more
cash being used for the Company’s share repurchase program.
The Company had an operating bank loan with a credit limit of
$3,500,000 (the “Revolving Facility”), subject to the availability of eligible
collateral, with an interest rate of the Canadian prime rate of its lender plus
1.00% to 1.50% per annum. At February 29, 2016, the availability under the
Revolving Facility, was determined by the amount of eligible collateral, as
$315,700. The Company’s requirement for operating capital increases in the
summer months due to increased sales and decreases in winter months due to
decreased sales.
The Revolving Facility agreement contained three financial
covenants: (i) a tangible net worth covenant; (ii) a current ratio covenant; and
(iii) a debt coverage covenant; The Company was in compliance with all covenants
at February 29, 2016. The revolving credit facility was subject to an annual
review process.
The credit facility was closed on February 1, 2017.
22
Other sources of financing are more fully described in the
consolidated financial statements appearing in “Item 18 – Financial Statements”
of this Annual Report.
The Company generally maintains cash or cash equivalents in
Canadian and U.S. funds and does not use financial instruments for hedging
purposes.
The Company had no material commitments for capital
expenditures in the fiscal year ending February 28, 2017.
|
C.
|
Research and development, patents and licenses,
etc.
|
The Company does not have any deferred product costs at this
time. The Company does not have a formal research and development program. It
develops products as and when it sees fit by working with existing staff and
outside consultants, where appropriate.
The Company has a large inventory of formulations for a wide
variety of juices and new age beverages, as well as many U.S., Canadian and
foreign trademarks.
Since 2009, the Company has focused on producing and selling
beverage products that can generate superior margins. At times that has meant
sacrificing sales volume for profitability. Over the same time the Company has
strived to eliminate its reliance on brands licensed from third parties. The
Company continues to develop its own branded beverages that it trials and from
time to time releases to market. Those brands can take a year or more to gain
consumer recognition and replace the volume of more established, but lower
margin brands. Consequently, the Company has recently experienced a decline in
gross revenues and gross margin.
The Company has been significantly dependent upon the revenues
from its principal bottling contract, which expired on December 31, 2016. The
Company intends to strive to increase sales of branded products in ensuing years
to absorb the loss from the Company's dependence on that contract and to further
diversify its business.
|
E.
|
Off- balance sheet
arrangements.
|
|
1.
|
The Company is committed to operating leases for premises
and equipment and other agreements as disclosed in Note 11 of the
consolidated financial statements appearing in “Item 18 – Financial
Statements” of this Annual Report.
|
|
|
|
|
2.
|
The Company had no off balance sheet arrangements during
the fiscal year ended February 28, 2017.
|
23
|
F.
|
Tabular disclosure of contractual
obligations.
|
The following table presents our contractual obligations as of
February 28, 2017:
|
|
Payments due by period
|
|
Contractual Obligations
|
Total
|
less than 1
year
|
1-3
years
|
4-5
years
|
more than
5 years
|
|
Long-term Debt Obligations
|
-
|
-
|
-
|
-
|
-
|
|
Capital (Finance) Lease Obligations
|
-
|
-
|
-
|
-
|
-
|
|
Operating Lease Obligations (1)
|
$767,650
|
$123,073
|
$253,449
|
$260,752
|
$130,376
|
|
Purchase Obligations
|
$69,149
|
$19,756
|
$39,575
|
$9,818
|
-
|
|
Other Long-term Liabilities Reflected on the Company’s
Balance Sheet under the GAAP of the primary financial statements
|
-
|
-
|
-
|
-
|
-
|
|
Interest on Capital Lease
|
-
|
-
|
-
|
-
|
-
|
|
Total
|
$836,799
|
$142,829
|
$293,024
|
$270,570
|
$130,376
|
|
(1)
|
The Company is committed to operating leases for premises
and equipment as disclosed in Note 11 of the consolidated financial
statements appearing in “Item 18 – Financial Statements” of this Annual
Report.
|
Critical Accounting Policies
The Company’s annual financial statements have been prepared in
accordance with U.S. GAAP. Some accounting policies have a significant impact on
the amount reported in these financial statements. A summary of those
significant accounting policies can be found in the Summary of Significant
Accounting Policies in the annual financial statements. Note that the
preparation of this Annual Report requires the Company to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. There can be no assurance that actual results will not differ
from those estimates. The Company believes, as explained below, that the most
critical accounting policies cover the following areas: accounts receivable;
inventory; revenue recognition; stock-based compensation, derivative liability
and income taxes.
24
Accounts Receivable
Accounts receivable invoices are recorded when the products are
delivered and title transfers to customers or when bottling services are
performed and collection of related receivables is reasonably assured.
Allowances for doubtful accounts are based primarily on historical write-off
experience. Account balances that are deemed uncollectible are charged off
against the allowance after all means of collection have been exhausted and the
potential for recovery is considered remote. Allowances for doubtful accounts of
$nil are netted against accounts receivable as at February 28, 2017 (2016:
$nil). A 10% change in the estimates for doubtful accounts would not result in a
material change to the financial statements.
Inventory
Raw materials and finished goods purchased for resale are
valued at the lower of cost, determined on a first-in, first-out basis, and
market value. Finished goods, produced from manufacturing operations, are valued
at the lower of standard cost which approximates average cost of raw materials,
direct labour and overhead and market value. The provisions for obsolete or
excess inventory are based on estimated forecasted usage of inventories. A
significant change in demand for certain products as compared to forecasted
amounts may result in recording additional provisions for obsolete inventory.
Provisions for obsolete or excess inventory are recorded as cost of goods sold.
At February 28, 2017, the inventory balance was presented net of a provision for
obsolete inventory in the amount of $15,638 (2016: $39,870). A 10% change in the
estimates of provision for obsolete inventory would not result in a material
change to the financial statements.
Revenue Recognition
Revenue on sales of products is recognized when the products
are delivered and title transfers to customers. Revenues from the provision of
manufacturing, bottling or other services are recognized when the services are
performed and collection of related receivables is reasonably assured. The
Company records shipping and handling revenue as a component of sales revenue,
and shipping and handling costs are included in the cost of sales. Incentives
offered to customers including rebates, cash discounts, volume discounts, and
slotting fees are recorded as a reduction of net sales when the sales are
recognized.
Stock-based Compensation
Under U.S. GAAP, the Company follows Accounting Standards
Codification (“ASC”) 718 Share-Based Payment (“ASC 718”). ASC 718 requires the
Company to recognize in the statement of operations the grant date fair value of
share-based compensation awards granted to employees over the requisite service
period. Compensation expense recognized reflects estimates of award forfeitures
and any changes in estimates thereof are reflected in the period of change.
Compensation costs are charged to the Consolidated Statements
of Comprehensive Income (loss).
25
Derivative Liability
Under ASC 815-40-15 Derivatives and Hedging, non-employee stock
options granted during the year ended February 28, 2011 met the criteria of a
derivative instrument liability because they were exercisable in a currency
other than the functional currency of the Company and thus did not meet the
“fixed-for-fixed” criteria of that guidance. As a result, the Company was
required to separately account for the stock options as a derivative instrument
liability recorded at fair value and marked-to-market each period with the
changes in the fair value each period charged or credited to income. Changes in
fair value are recognized as stock compensation until fully vested, and after
that time as change in fair value.
Income Taxes
Deferred income tax assets and liabilities are computed based
on differences between the carrying amount of assets and liabilities on the
balance sheet and their corresponding tax values using the enacted income tax
rates by tax jurisdiction at each balance sheet date. Deferred income tax assets
also result from unused loss carry-forwards and other deductions. The valuation
of deferred income tax assets is reviewed annually and adjusted, if necessary,
by use of a valuation allowance to reflect the estimated realizable amount.
Significant management judgment is required in determining our provision for
income taxes, our deferred income tax assets and liabilities and any valuation
allowance recorded against our net deferred income tax assets. We evaluate all
available evidence, such as recent and expected future operating results by tax
jurisdiction, and current and enacted tax legislation and other temporary
differences between book and tax accounting to determine whether it is more
likely than not that some portion or all of the deferred income tax assets will
not be realized. There is a risk that management estimates for operating results
could vary significantly from actual results, which could materially affect the
valuation of the deferred income tax asset. Although the Company has tax loss
carry-forwards and other deferred income tax assets, management has determined
certain of these deferred income tax assets do not meet the more likely than not
criteria, and accordingly, these deferred income tax asset amounts have been
offset by a valuation allowance as disclosed in Note 10 of the
consolidated financial statements appearing in “Item 18 – Financial Statements”
of this Annual Report.
New Pronouncements
In May 2014, the Financial Accounting Standard Board, or FASB,
issued Accounting Standards Update No. 2014-09, Revenue from Contracts with
Customers: Topic 606 (ASU 2014-09) to supersede existing revenue recognition
guidance under generally accepted accounting principles in the United States, or
GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised
goods or services are transferred to customers in an amount that reflects the
consideration that is expected to be received for those goods or services.
ASU 2014-09 defines a five steps process to achieve this core
principle and, in doing so, it is possible more judgment and estimates may be
required within the revenue recognition process than required under existing
GAAP including identifying performance obligations in the contract, estimating
the amount of variable consideration to include in the transaction price and
allocating the transaction price to each separate performance obligation. ASU
2014-09 is effective for the fiscal and interim reporting periods beginning
after December 15, 2016 using either of two methods: (i) retrospective to each
prior reporting period presented within the option to elect certain practical
expedients as defined within ASU 2014-09; or (ii) retrospective
with the cumulative effect of initially applying ASU 2014-09 recognized at the
date of initial application and providing certain additional disclosures as
defined per ASU 2014-09. In August 2015, ASU 2015-14 was issued which delayed
the effective date to reporting periods beginning after December 15, 2017. The
Company will adopt ASU 2014-09, and its related clarifying ASUs, as of February
28, 2018. The Company is continuing to assess the potential effects of these
ASUs on its consolidated financial statements, business processes, systems and
controls. While the assessment process is ongoing, the Company anticipates
adopting the standard using the modified retrospective transition approach.
Under this approach, the new standard would apply to all new contracts initiated
on or after March 1, 2018. For existing contracts that have remaining
obligations as of March 1, 2018, any difference between the recognition criteria
in these ASUs and the Company’s current revenue recognition practices would be
recognized using a cumulative effect adjustment to the opening balance of
retained earnings. The Company does not expect the adoption of these ASUs to
have a material impact on our consolidated financial statements.
26
In July 2015, the FASB issued ASU 2015-11, “Simplifying the
Measurement of Inventory” (“ASU 2015-11”). Under ASU 2015-11, inventory will be
measured at the “lower of cost and net realizable value” and options that
currently exist for “market value” will be eliminated. ASU 2015-11 defines net
realizable value as the “estimated selling prices in the ordinary course of
business, less reasonably predictable costs of completion, disposal, and
transportation.” No other changes were made to the current guidance on inventory
measurement. ASU 2015-11 is effective for interim and annual periods beginning
after December 15, 2016. Early application is permitted and should be applied
prospectively. Management is evaluating the provisions of this statement,
including which period to adopt, and has not determined what impact the adoption
of ASU 2015-11 will have on the Company's financial position or results of
operations.
In February 2016, the FASB issued Accounting Standards Update
No. 2016-02 (ASU 2016-2), Leases, which supersedes ASC Topic 840, Leases. ASU
2016-2 requires lessees to recognize a lease liability and a lease asset for all
leases, including operating leases, with a term greater than twelve months to
its balance sheets. ASU 2016-2 also expands the required quantitative and
qualitative disclosures surrounding leases. ASU 2016-2 is effective for the
Company beginning January 1, 2019. Early adoption is permitted. The Company has
not determined the impact the adoption of ASU 2016 -2 will have on its
consolidated financial statements.
In March 2016, the FASB issued authoritative guidance under ASU
2016-09, Compensation-Stock Compensation (Topic 718) “Improvements to Employee
Share-Based Payment Accounting”. ASU 2016-09 provides for simplification of
several aspects of the accounting for share-based payment transactions,
including income tax consequences, classification of awards as either equity or
liabilities and classification on the statement of cash flows. ASU 2016-09 is
effective for annual periods beginning after December 15, 2016. The Company is
currently evaluating the potential impact of adoption of this standard on its
consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments” (“ASU 2016-13”). Financial Instruments—Credit Losses (Topic 326)
amends guidelines on reporting credit losses for assets held at amortized cost
basis and available-for-sale debt securities. For assets held at amortized cost
basis, Topic 326 eliminates the probable initial recognition threshold in
current GAAP and, instead, requires an entity to reflect its current estimate of
all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the
amortized cost basis of the financial assets to present the net amount expected
to be collected. For available-for-sale debt securities, credit losses should be
measured in a manner similar to current GAAP, however Topic 326 will require
that credit losses be presented as an allowance rather than as a write-down. ASU
2016-13 affects entities holding financial assets and net investment in leases
that are not accounted for at fair value through net income. The amendments
affect loans, debt securities, trade receivables, net investments in leases, off
balance sheet credit exposures, reinsurance receivables, and any other financial
assets not excluded from the scope that have the contractual right to receive
cash. The amendments in this ASU will be effective for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years. We
are currently evaluating the impact of the adoption of ASU 2016-13 on our
consolidated financial statements.
27
In August 2016, the FASB issued ASU No. 2016-15, “Statement of
Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments” (“ASU 2016-15”), which addresses the following eight specific cash
flow issues: debt prepayment or debt extinguishment costs; settlement of
zero-coupon debt instruments or other debt instruments with coupon interest
rates that are insignificant in relation to the effective interest rate of the
borrowing; contingent consideration payments made after a business combination;
proceeds from the settlement of insurance claims; proceeds from the settlement
of corporate-owned life insurance policies (including bank-owned life insurance
policies; distributions received from equity method investees; beneficial
interests in securitization transactions; and separately identifiable cash flows
and application of the predominance principle. The amendments in this ASU are
effective for public business entities for fiscal years beginning after December
15, 2017, and interim periods within those fiscal years. Early adoption is
permitted, including adoption in an interim period. We are currently evaluating
the impact of the adoption of ASU 2016-15 on our consolidated financial
statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement
of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), which requires that
a statement of cash flows explain the change during the period in the total of
cash, cash equivalents, and amounts generally described as restricted cash or
restricted cash equivalents. Therefore, amounts generally described as
restricted cash and restricted cash equivalents should be included with cash and
cash equivalents when reconciling the beginning-of-period and end-of-period
total amounts shown on the statement of cash flows. The amendments in this ASU
do not provide a definition of restricted cash or restricted cash equivalents.
The amendments in this ASU are effective for public business entities for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal
years. Early adoption is permitted, including adoption in an interim period. We
are currently evaluating the impact of the adoption of ASU 2016-18 on our
consolidated financial statements.
28
Item 6. – Directors, Senior Management and Employees
|
A.
|
Directors and senior
management.
|
The following is a list of the current directors and senior
officers of the Company, their municipalities of residence, their current
positions with the Company, areas of experience, and principal business
activities performed outside the Company:
|
Name and Municipality
|
Principal Occupation and Areas of
Experience
|
|
of Residence
|
|
|
|
|
James Corbett
West Vancouver, BC
Canada
|
Mr. Corbett has been a director of Leading Brands, Inc.
since June 2008. He trained as a Chartered Accountant, and is the founder
and president of Canadian Outback Adventures.
Mr. Corbett has served as a
member of the Tourism Management Advisory Committee of Capilano
University, and is also a guest lecturer at various colleges.
|
|
|
|
Darryl R. Eddy
Vancouver, BC
Canada
|
Mr. Eddy has been a director of Leading Brands, Inc.
since July 2009. He is also a director of various other public and private
corporations.
Mr. Eddy is a retired partner of PricewaterhouseCoopers LLP
and a past Managing Director of PricewaterhouseCoopers Corporate Finance
Inc.
|
|
|
|
Stephen K. Fane, FCA
Vancouver, BC
Canada
|
Mr. Fane has been a director of Leading Brands, Inc.
since October 2007. He is also President of New Century Holdings Ltd.
Mr. Fane was President and CEO of Hot House Growers
Income Fund, a publicly traded income trust, from December 2003 to October
2006.
|
|
|
|
|
|
He is a former partner in a predecessor firm to
PricewaterhouseCoopers.
|
|
|
A graduate of the University of British Columbia, he
became a Chartered Accountant in 1972 and was elected a Fellow of the
Institute of Chartered Accountants in 1997.
|
|
|
|
R.
Thomas Gaglardi
Vancouver, BC
Canada
|
Mr. Gaglardi has been a director of Leading Brands, Inc.
since October 1998.
He is also the President of Northland Properties
Corporation, a hotel, real estate and restaurant company, and Chairman and
CEO of Sandman Hotels, Inns & Suites, Moxie’s Restaurants LP, Shark
Clubs of Canada, Inc. and Denny’s Restaurants of Canada.
|
29
|
Name and Municipality
|
Principal Occupation and Areas of
Experience
|
|
of Residence
|
|
|
|
|
Ralph D. McRae
Vancouver, BC
Canada
|
Mr. McRae is a director and the Chairman, President and
Chief Executive Officer of the Company and has been with Leading Brands,
Inc. since March 1996. He is also a director and the Chairman, CEO and
Secretary/Treasurer of Leading Brands of Canada, Inc.
|
|
|
Mr. McRae is also a director and the Chairman and CEO of
Revolution Resource Recovery, Inc. and its affiliates, engaged in waste
management, farming, real estate development and water extraction, based
in Surrey, British Columbia.
He is a member of the Bar of British Columbia, and holds
a Bachelor of Commerce (1980) and J.D. (1981) from the University of
British Columbia.
|
|
|
|
Thor
Matson
Delta, BC
Canada
|
Mr. Matson is the Vice President of Business Development
for Leading Brands of Canada, Inc.
Prior to joining Leading Brands in July 2014, he had a 25 year career
with Pepsico where he held numerous sales and marketing roles of
increasing responsibility.
Mr. Matson has a business degree from the
University of British Columbia.
|
|
|
|
Fei
Xu
Coquitlam, BC
Canada
|
Ms. Xu is the Corporate Controller and the Principal
Financial Officer of the Company. She has been with Leading Brands since
2001.
|
There are no arrangements or understandings pursuant to which
any of the above was selected as a director or executive officer. There are no
family relationships between any of the persons named above.
Compensation Principles
The Company is committed to the philosophy of sharing the
benefits of success with those who help the Company grow and prosper. The
Company's strength and ability to sustain growth is based on an organization
that perceives people as its single most important asset. The Company's
philosophy is to provide sufficient compensation opportunities in order to
attract and retain key executive officers critical to the Company's long-term
success. The Company has developed an informal employee share option plan to
increase the risk/reward ratio of its executive compensation program, to focus
management on long term strategic issues, and to align management's interests
with those of the shareholders of the Company in the sustained growth of
shareholder value.
30
The Company does not have a formal compensation committee. The
Company relies on the independent members of the Board for determining executive
compensation. The Board may, from time to time, retain independent consultants
to advise on compensation matters.
Compensation Program
The Company's executive compensation program includes base
salary, annual cash or short-term incentives (bonuses) and long-term incentive
compensation in the form of stock options.
The compensation program is designed to:
|
♦
|
promote an ownership mentality among key
leadership and the Board of Directors;
|
|
|
|
|
♦
|
enhance the overall performance of the Company;
and
|
|
|
|
|
♦
|
recognize and reward individual performance and
responsibility.
|
Base Compensation
The Company determines base salary based on a combination of
factors, including comparable market data, experience, expertise and job
responsibilities. The Company's process for determining executive compensation
is relatively simple and does not include formal targets, criteria or
analysis.
Salary levels are reviewed periodically and adjustments may be
made, if warranted, after an evaluation of executive and Company performance,
salary trends in the Company's business sector, and any increase in
responsibilities assumed by the executive.
Short-Term Incentives
Bonuses for senior management are, with limited exceptions,
discretionary and are intended to reward senior managers for exceptional
performance that positively impacts the profitability and growth of the Company.
Depending on the Company's financial and operating performance,
performance-based bonuses may be awarded.
Long-Term Incentives
The long-term incentives are intended to align executive and
shareholder interests by creating a strong and direct link between executive
compensation and shareholder return, and to enable executive officers to develop
and maintain a significant, long-term stock ownership position in the Company's
common shares. Long-term incentives may be granted in the form of stock options
which generally vest over several years of service with the Company. Further
discussion follows in the section titled "Option-Based Awards".
Risk Considerations
As the Company does not have a bonus program in place for its
employees generally, and any significant bonuses for the Named Executive
Officers (as defined below in the section "Summary Compensation Table") must be
approved by the Board, the Board has not considered the implications of risks
associated with the Company's compensation policies and practices. While the
Board of Directors does not formally analyse risks associated with the Company's
compensation policies and practices, these policies and practices do not include
structural inconsistencies that are likely to unduly encourage or cause an
executive officer to expose the Company to inappropriate or excessive risks.
31
Financial Instruments
No Named Executive Officer or director is permitted to purchase
financial instruments to hedge or offset a decrease in market value of equity
securities granted as compensation or held, directly or indirectly, by the Named
Executive Officer or director.
Option-Based Awards
The Company does not have a formal stock option plan. Options
for the purchase of common shares of the Company are granted from time to time
to directors, officers and employees as an incentive. These options are
long-term incentives that generally vest over several years of service with the
Company. The options granted are exercisable at a price which is equal to or
greater than the fair market value of the common shares at the date the options
are granted. Options are granted in consideration of the level of responsibility
of the employee as well as his or her impact or contribution to the long-term
operating performance of the Company. In determining the amount and frequency of
such grants, a variety of factors are evaluated, including job level, and past,
current and prospective services rendered. The Board also takes into account the
number of options, if any, previously granted, and the exercise price of any
outstanding options to ensure that such grants are in accordance with all
applicable regulatory policies.
Compensation Governance
Please see the sections above titled "Base Compensation",
"Short-Term Incentives", and "Long Term Incentives" for a discussion of the
practices adopted by the Board to determine compensation for directors and
executive officers. The Company does not have a formal compensation
committee.
Summary Compensation Table
The following table (presented in accordance with Canada's
National Instrument Form 51-102F6
Statement of Executive Compensation
)
sets forth all annual and long term compensation for services in all
capacities to the Company for the three most recently completed financial years
of the Company in respect of:
|
(a)
|
each individual who acted as the Chief Executive Officer
("
CEO
") or the Chief Financial Officer ("
CFO
") or acted in a
similar capacity for all or any portion of the most recently completed
financial year,
|
|
|
|
|
(b)
|
each of the three most highly compensated executive
officers, or the three most highly compensated individuals acting in a
similar capacity, other than the CEO and the CFO, at the end of the most
recently completed financial year whose total compensation was,
individually, more than $150,000 for that financial year, and
|
|
|
|
|
(c)
|
each individual who would have satisfied the criteria
under paragraph (b) but for the fact that the individual was neither an
executive officer of the Company, nor acting in a similar capacity, at the
end of the most recently completed financial year.
|
|
|
|
|
|
(collectively the "
Named Executive Officers
" or
"
NEOs
").
|
32
|
Name and
|
Fiscal
|
Salary
|
Share-based
|
Option-Based
|
Non-Equity Annual
|
All Other
|
Total
|
|
Principal
|
Year
|
|
awards
|
Awards
(1)
|
Incentive Plans
|
Compensation
|
Compensation
|
|
Position
|
Ending
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
|
|
|
|
|
|
Annual
|
Long-Term
|
|
|
|
|
|
|
|
|
Incentive
|
Incentive
|
|
|
|
|
|
|
|
|
Plans
|
Plans
|
|
|
Ralph McRae
Chairman,
President and CEO
|
2017
|
472,209
|
nil
|
nil
|
nil
|
nil
|
nil
|
472,209
|
|
2016
|
318,657
|
nil
|
nil
|
nil
|
nil
|
132,000
(2)
|
471,657
|
|
|
|
|
|
|
|
21,000
(3)
|
|
|
2015
|
nil
|
nil
|
nil
|
nil
|
nil
|
528,000
(2)
|
618,947
|
|
|
|
|
|
|
|
84,000
(3)
|
|
|
|
|
|
|
|
|
6,947
(4)
|
|
Fei Xu
Corporate
Controller
and Principal
Financial Officer
|
2017
|
90,891
|
nil
|
nil
|
nil
|
nil
|
nil
|
90,891
|
|
2016
|
91,596
|
nil
|
nil
|
nil
|
nil
|
nil
|
91,596
|
|
2015
|
92,018
|
nil
|
nil
|
nil
|
nil
|
nil
|
92,018
|
Sinan
ALZubaidi
Vice
President
of Bottling Operations
|
2017
|
133,789
(5)
|
nil
|
nil
|
33,500
|
nil
|
73,635
(6)
|
240,924
|
|
2016
|
154,000
|
nil
|
nil
|
33,500
|
nil
|
6,000
(7)
|
193,500
|
|
2015
|
159,778
|
nil
|
nil
|
33,500
|
nil
|
7,438
(7)
|
200,716
|
Dave Read
Executive
Vice
President
|
2017
|
nil
|
nil
|
nil
|
nil
|
nil
|
212,811
(8)
|
212,811
|
|
2016
|
nil
|
nil
|
nil
|
nil
|
nil
|
150,000
(8)
|
150,000
|
|
2015
|
nil
|
nil
|
nil
|
nil
|
nil
|
150,030
(8)
|
150,030
|
Thor Matson
Vice President
of Business
Development
|
2017
|
160,615
|
nil
|
nil
|
15,906
|
nil
|
10,842
(7)
|
187,363
|
|
2016
|
160,000
|
nil
|
nil
|
11,546
|
nil
|
10,800
(7)
|
182,346
|
|
2015
|
100,644
(9)
|
nil
|
nil
|
3,870
|
nil
|
4,464
(7)
|
108,978
|
|
(1)
|
The value of option awards reflects the grant date fair
value of option based awards in the 2015, 2016, and 2017 fiscal years. The
estimated fair value of the stock options granted was determined using the
Black-Scholes option pricing model. The options are granted in U.S.
dollars and are converted into Canadian dollars at the Bank of Canada
closing rate as of the date of the options grant for accounting
purposes.
|
|
|
|
|
(2)
|
Amounts paid to McRae Ventures, Inc., a company of which
Mr. McRae is also a director, for consulting services provided by Mr.
McRae. Effective June 1, 2015 the contractual arrangements between Mr.
McRae, McRae Ventures, Inc., BBI Holdings Inc. and the Company ended and
was replaced with one executive employment agreement between Mr. McRae,
the Company and Leading Brands of Canada, Inc. providing for an aggregate
salary of $420,000 per annum, which represents a reduction of Mr. McRae's
salary of 31.4% over prior years.
|
|
|
|
|
(3)
|
Amounts paid to BBI Holdings Inc., a company of which Mr.
McRae is also a director, for consulting services provided by Mr. McRae.
This arrangement was terminated effective June 1, 2015.
|
|
|
|
|
(4)
|
This amount represents payments for medical
benefits.
|
|
|
|
|
(5)
|
This amount represents 11 months in the fiscal
year.
|
|
|
|
|
(6)
|
This amount represents 11 months in the fiscal year and
includes a car allowance and a bonus amount paid to Mr. ALZubaidi for
de-commissioning the Company's bottling plant in Edmonton AB. Mr.
ALZubaidi's employment with the company ended with the closure and sale of
the bottling plant in February 2017.
|
33
|
(7)
|
This amount represents payments for car
allowance.
|
|
|
|
|
(8)
|
VE Services Ltd., a company owned by Mr. Read, received
these amounts for consulting services provided by Mr. Read. The current
year amount represents 11 months in the fiscal year and includes a bonus
amount paid to Mr. Read for de-commissioning the Company's bottling plant
in Edmonton AB. Mr. Read's employment with the company ended with the
closure and sale of the bottling plant in February 2017.
|
|
|
|
|
(9)
|
Mr. Matson joined the Company in July 2014. This amount
represents 7.5 months in the fiscal year.
|
The Company does not have formal employment or consulting
agreements other than an executive employment agreement with its Chairman,
President and CEO, Ralph McRae, effective June 1, 2015. Effective that date, all
executives are paid as employees of the Company with the exception of Mr. Read,
who invoices the Company for his services.
Outstanding Option-Based Awards for Named Executive Officers
The following table sets forth information concerning all stock
option awards outstanding at the end of the most recently completed fiscal year,
including awards granted before the most recently completed fiscal year, to each
of the Named Executive Officers. The Company has not granted any share-based
awards.
|
Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
|
Option Exercise
Price
($USD
)
|
Option Expiration
Date
|
Value
of Unexercised
In-The-Money
Options
(1)
($USD )
|
|
Ralph McRae
|
20,000
245,000
|
3.00
2.45
|
June 26, 2018
June 1, 2020
|
nil
nil
|
|
Fei Xu
|
2,000
2,000
|
6.20
2.45
|
April 4, 2018
June 1,
2020
|
nil
nil
|
|
Dave Read
|
20,000
100,000
|
7.10
2.45
|
January 10, 2018
June 1,
2020
|
nil
nil
|
|
Sinan ALZubaidi
|
5,000
|
6.20
|
April 4, 2018
|
nil
|
|
Thor Matson
|
nil
|
-
|
-
|
nil
|
|
(1)
|
This amount is calculated based on the difference between
the market value of the Shares underlying the options at the end of the
most recently completed fiscal year, which was USD$1.80, and the exercise
or base price of the option. The Shares are traded on the Nasdaq Capital
Market in U.S. dollars. The effective exchange rate to convert from U.S.
dollars to Canadian dollars at the end of the fiscal year was US$1 =
CAD$1.3249. Mr. Read and Mr. AlZubaidi departed the Company on February 3,
2017 and February 2, 2017, respectively and their stock options expired 30
days thereafter.
|
The terms of the Company's stock options are discussed under
the "Option-Based Awards" section above.
Option Exercises During the Most Recently Completed Fiscal
Year
No stock options were exercised by the Named Executive Officers
during the most recently completed fiscal year.
Option Repricing
The Company did not reprice any stock options during the most
recent fiscal year.
34
Value Vested or Earned During the Year
The following table sets out the value vested or earned of all
stock options that vested during
the most recently completed fiscal year
for each of the Named Executive Officers:
|
Name
|
Option-Based Awards -
Value Vested
During
The Year
(1)
($USD)
|
|
Ralph McRae
|
nil
|
|
Fei Xu
|
nil
|
|
Dave Read
|
nil
|
|
Sinan ALZubaidi
|
nil
|
|
Thor Matson
|
nil
|
|
|
(1)
|
This amount is the dollar value that would have been
realized as computed by obtaining the difference between the market price
of the underlying Shares at exercise and the exercise or base price of the
options under the option-based award on the vesting date. The actual value
of the options granted to the Named Executive Officers will be determined
based on the market price of the Shares at the time of exercise of such
options, which may be greater or less than the value at the date of
vesting referred to in the table above.
|
The Company does not have a formal stock option plan. Stock
options generally vest over several years of service with the Company. The value
vested during the year varies according to the vesting date and the market price
of the underlying securities on a selected exercise date.
Further details regarding stock options may be found in the
sections above titled "Option-Based Awards for Named Executive Officers" and
below titled "Outstanding Option-Based Awards for Directors".
Pension Plan Benefits
The Company does not have a pension plan or defined
contribution plan that provides for payments or benefits to the Named Executive
Officers at, following, or in connection with retirement.
Termination of Employment, Change in Responsibilities and
Employment Contracts
The executive employment agreement between the Company, Leading
Brands of Canada Inc. and Ralph McRae (the "
Executive
"), effective June
1, 2015 (the "
Agreement
") provides for a severance payment to the
Executive in the event of termination by the Executive for Good Reason (as
defined below) or termination by the Company without cause. "Good Reason" means
(i) a material diminution of the Executive's title, authority, status, duties or
responsibilities; (ii) any reduction of the salary of the Executive; (iii) a
material breach by the Company of the Agreement; (iv) a relocation of the
principal place of work outside the City of Vancouver; (v) a Change of Control
(as defined below); (vi) the Executive ceasing to be the chairperson of the
Board of Directors for any reason other than his own voluntary resignation;
(vii) the Executive ceasing to be a director of the Company or Leading Brands of
Canada, Inc. for any reason other than his own voluntary resignation; or (viii)
any other change that would constitute a “constructive dismissal” at common law.
"Change of Control" means the occurrence of any of the following events: (i) the
acquisition, whether directly or indirectly, by any person or company, or any
persons or companies acting jointly or in concert (as determined in accordance
with the
Securities Act
(British Columbia)), of voting securities of the
Company which, together with all other voting securities of the Company held by
such person or company or persons or companies, constitute, in the aggregate,
more than 50% of all outstanding voting securities of the Company; (ii) an
amalgamation, arrangement or other form of business combination of the Company
with another person or company which results in the holders of securities of
that other person or company holding, directly or indirectly,
in the aggregate, more than 50% of all outstanding voting securities of the
combined entity resulting from the business combination; (iii) the sale, lease
or exchange of all or substantially all of the assets of the Company to another
person or company, other than to a subsidiary of the Company; or (iv) less than
a majority of the Board of Directors being composed of Continuing Directors.
"Continuing Director" means any individual who either: (i) is a director of the
Company as of the Agreement; or (ii) becomes a director after the date of the
Agreement after having been appointed or recommended for election by at least a
majority of the Continuing Directors in office at the time of such appointment
or election. In the event of termination by the Executive for Good Reason or by
the Company without cause, the Executive is entitled to be paid $900,000 less
statutory withholdings within 10 days following the date of termination and to
the continuation of the Executive's benefits under the Agreement for 18 months,
or, at the Executive's request, a lump sum payment equal to the projected cost
of maintaining such benefits.
35
Assuming the Agreement had been in force and a triggering event
took place on the last business day of the Company’s most recently completed
financial year, the Executive would have been entitled to estimated incremental
payments, payables and benefits totalling the same amount.
Other than the Agreement, the Company and its subsidiaries have
no arrangements that provide for payments to a Named Executive Officer at,
following or in connection with any termination (whether voluntary, involuntary
or constructive), resignation, retirement, change in control of the Company or
change in a Named Executive Officer's responsibilities.
Director Compensation
Directors who are not paid executives of the Company receive
$1,500 per quarter (pro-rated for those serving less than a full quarter) and
$500 for each Board meeting and committee meeting attended. Directors who are
also executives of the Company do not receive director's fees. Reference is made
to the Summary Compensation Table above for details of compensation paid to
directors who are also Named Executive Officers, in their capacity as executive
officers of the Company. Directors are also compensated for their services in
their capacity as directors by the granting from time to time of incentive stock
options.
The following table sets forth all amounts of compensation
provided to the directors, who are not Named Executive Officers, for the
Company's most recently completed fiscal year:
Director
Name
|
Fees
Earned
($)
|
Share-based
Awards
($)
|
Option-Based
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|
James Corbett
|
11,000
|
nil
|
nil
|
nil
|
nil
|
11,000
|
|
Darryl Eddy
|
11,000
|
nil
|
nil
|
nil
|
nil
|
11,000
|
|
Stephen Fane
|
11,000
|
nil
|
nil
|
nil
|
nil
|
11,000
|
|
R. Thomas Gaglardi
|
8,000
|
nil
|
nil
|
nil
|
nil
|
8,000
|
|
(1)
|
The value of option awards reflects the grant date fair
value of option based awards in the 2017 fiscal year. The estimated fair
value of the stock options granted was determined using the Black -Scholes
option pricing model. The options are granted in U.S. dollars and are
converted into Canadian dollars at the Bank of Canada closing rate as of
the date of the options grant for accounting
purposes.
|
36
Outstanding Option-Based Awards for Directors
Options for the purchase of Shares of the Company are granted
from time to time to directors under the same terms as those granted to
employees, and described above in "Option-Based Awards".
The following table sets forth information concerning all stock
option awards outstanding at the end of the most recently completed fiscal year,
including awards granted before the most recently completed fiscal year, to each
of the directors. The Company has not granted any share-based awards.
|
Director Name
|
Number of
Securities
Underlying
Unexercised
Options
(#)
|
Option
Exercise
Price
($USD)
|
Option
Expiration
Date
|
Value of
Unexercised
In-The-Money
Options
(1)
($USD)
|
|
James Corbett
|
20,000
10,000
50,000
|
3.00
3.50
2.45
|
June 26, 2018
Sept. 28, 2019
June 1,
2020
|
nil
nil
nil
|
|
Darryl Eddy
|
10,000
50,000
20,000
|
3.50
2.45
3.69
|
Sept. 28, 2019
June 1,
2020
July 12, 2025
|
nil
nil
nil
|
|
Stephen Fane
|
10,000
20,000
10,000
50,000
|
15.75
3.00
3.50
2.45
|
Oct. 4, 2017
June 26,
2018
Sept. 28, 2019
June 1, 2020
|
nil
nil
nil
nil
|
|
R. Thomas Gaglardi
|
20,000
10,000
50,000
|
3.00
3.50
2.45
|
June 26, 2018
Sept. 28,
2019
June 1, 2020
|
nil
nil
nil
|
|
(1)
|
This amount is calculated based on the difference between
the market value of the securities underlying the options at the end of
the most recently completed fiscal year, which was USD$1.80 and the
exercise price of the option. The Company's shares are traded on the
Nasdaq Capital Market in U.S. dollars. The effective exchange rate to
convert from U.S. dollars to Canadian dollars at the end of the fiscal
year was US$1 = CAD$1.3249.
|
No stock options were exercised by the directors during the
most recently completed fiscal year, nor were any of the stock options repriced
during that period.
Value Vested or Earned During the Year
The following table sets out the value vested or earned of all
stock options that vested during
the most recently completed fiscal year
for each of the directors who are not Named Executive Officers:
|
Director Name
|
Option-Based Awards -
Value Vested
During
The Year
(1)
($USD)
|
|
James Corbett
|
nil
|
|
Darryl Eddy
|
nil
|
|
Stephen Fane
|
nil
|
|
R. Thomas Gaglardi
|
nil
|
37
|
|
(1)
|
This amount is the dollar value that would have been
realized as computed by obtaining the difference between the market price
of the underlying Shares at exercise and the exercise or base price of the
options under the option-based award on the vesting date. The actual value
of the options granted to the Named Executive Officers will be determined
based on the market price of the Shares at the time of exercise of such
options, which may be greater or less than the value at the date of
vesting referred to in the table above.
|
The Company does not have a formal stock option plan. Options
granted generally vest over several years of service with the Company. The value
vested during the year varies according to the vesting date and the market price
of the underlying Shares on a selected exercise date. In the Company's fiscal
year ended February 28, 2017, no stock options were exercised by directors.
Further details regarding stock options may be found in the
sections above titled "Option-Based Awards for Named Executive Officers" and
"Outstanding Option-Based Awards for Directors".
|
1.
|
The Company’s Board of Directors has been set at five
directors and is divided into three classes designated as Class I, Class
II and Class III, to provide for a rotation of three year terms of office.
Any director whose term has expired is eligible for re-election subject to
Board approval.
|
|
|
|
|
|
The following table lists the current terms of office for
the directors and the period during which the directors have
served:
|
|
|
Name
|
Class
|
Term of Office
|
Director Since
|
|
|
James Corbett
|
II
|
July 2014 to Annual General
Meeting (“AGM”)
2017
|
June 2008
|
|
|
Stephen K. Fane
|
III
|
June 2015 to AGM 2018
|
October 2007
|
|
|
|
|
|
|
|
|
R. Thomas Gaglardi
|
III
|
June 2015 to AGM 2018
|
October 1998
|
|
|
|
|
|
|
|
|
Ralph D. McRae
|
I
|
June 2016 to AGM 2019
|
March 1996
|
|
|
|
|
|
|
|
|
Darryl R. Eddy
|
I
|
June 2016 to AGM 2019
|
July 2009
|
Three of the five current directors are
independent based upon the tests for independence set forth in applicable
Canadian and U.S. securities legislation. Ralph McRae is not independent as he
is the Chairman, President and CEO of the Company. R. Thomas Gaglardi is not
independent as he has beneficial ownership of more than 10% of the common shares
of the Company.
|
2.
|
Other than the executive employment agreement for Mr.
McRae, referenced earlier, there are no directors’ service contracts with
the Company or any of its subsidiaries providing for benefits upon
termination of service.
|
38
The members of the Company’s Audit
Committee are:
|
|
♦
|
James Corbett
|
|
|
♦
|
Darryl R. Eddy
|
|
|
♦
|
Stephen Fane
|
All members of the Audit Committee are
independent directors, are financially literate, and are considered “financial
experts” as defined by the SEC. For details on their professional careers, see
“Item 6.-A. Directors, Senior Management and Employees”.
The Audit Committee has a written
charter which specifies the scope of its authority and responsibility. A copy of
the Audit Committee Charter was previously filed as an exhibit to the Company’s
Annual Report on Form 20-F, filed on May 30, 2008, and is incorporated by
reference. The Audit Committee reviews and re-assesses the adequacy of its
written charter on an annual basis. The function of the Audit Committee is one
of review and oversight. The committee also is responsible for monitoring the
independence, qualifications and performance of the Company’s external auditors,
overseeing the audits of the Company’s financial statements and approving any
non-audit services. The committee reports to the Board of Directors from time to
time with respect to its activities and its recommendations and provides
background and supporting information as may be necessary for the Board of
Directors to make an informed decision.
Nomination of Directors
The Board has adopted a charter for the
Nominating and Corporate Governance Committee. The committee is currently
comprised of the three independent directors:
|
|
♦
|
James Corbett
|
|
|
♦
|
Darryl R. Eddy
|
|
|
♦
|
Stephen K. Fane
|
Pursuant to its charter, the
responsibilities, powers and operation of the committee include: identifying and
recommending new candidates for Board nomination; evaluating the effectiveness
of the Board, its committees and its directors; monitoring and reviewing the
Company’s corporate governance practices and policies and making recommendations
for changes when appropriate; and ensuring that a comprehensive orientation is
received by new directors and that continuing education opportunities are
available.
In connection with its responsibilities
relating to Board nominations, the committee is responsible for identifying and
recommending new candidates for nomination to the Board based upon: (i) the
competencies and skills necessary for the Board as a whole to possess; (ii) the
competencies and skills necessary for each individual director to possess; (iii)
the competencies and skills which each new nominee to the Board is expected to
bring; and (iv) whether the proposed nominee to the Board will be able to devote
sufficient time and resources to the Company. Other members of the Board and
representatives of the food and beverage industry are consulted for possible
candidates.
39
The size of the Board is reviewed on a
regular basis by the committee and the Board. The committee and the Board will
take into account the number of directors required to carry out the Board’s
duties effectively, and to maintain a diversity of view and experience.
Compensation of Directors and the
CEO
The independent directors have the
responsibility for determining and reviewing compensation for the directors and
senior management of the Company. Reference is made to the Compensation section
above for further information.
Assessments
The Board conducts informal assessments
of the Board's effectiveness, the individual directors and each of its
committees on a regular basis. As part of the assessments, the Board reviews the
mandates or charters and conducts reviews of applicable corporate policies.
As of May 1, 2017, the executive
officers of Leading Brands, Inc. are:
|
|
Ralph D. McRae
|
Chairman, President and Chief Executive Officer
|
|
|
Thor Matson
|
Vice-President, Business Development
|
Following are the number of employees of
the Company for the past three fiscal years as at the end of each fiscal year:
|
|
February 28, 2017
|
February 29, 2016
|
February 28, 2015
|
|
Canada
|
24
|
73
|
76
|
|
United States
|
0
|
0
|
0
|
Options to purchase common shares from the Company are granted
from time to time to directors, officers and employees of the Company on terms
and conditions acceptable to the Board of Directors.
As of May 1, 2017, the Company had 868,000 issued and
outstanding options, with a weighted average exercise price of US$2.939.
Of the total stock options granted, 868,000 have vested and are
available for exercise as of May 1, 2017.
40
The following table provides share ownership information with
respect to the directors and officers listed in “Item 6 – Directors, Senior
Management and Employees" above, as at May 1, 2017.
|
Name
|
Common
Shares Held
(1)
(#)
|
# of Common
Shares
under
Options Granted
|
Date of Grant
|
Exercise Price ($USD)
|
Expiration Date
|
|
Ralph McRae
|
176,126
(6.3%)
|
20,000
245,000
|
June 26, 2008
June 1, 2010
|
$3.00
$2.45
|
June 26, 2018
June 1, 2020
|
|
James Corbett
|
<1%
|
20,000
10,000
50,000
|
June 26, 2008
Sept. 28, 2009
June 1,
2010
|
$3.00
$3.50
$2.45
|
June 26, 2018
Sept. 28, 2019
June 1,
2020
|
|
Darryl R. Eddy
|
89,834
(3.2%)
|
10,000
50,000
20,000
|
Sept. 28, 2009
June 1, 2010
July 13,
2015
|
$3.50
$2.45
$3.69
|
Sept. 28, 2019
June 1, 2020
July 12,
2025
|
|
Stephen K. Fane
|
<1%
|
10,000
20,000
10,000
50,000
|
October 4, 2007
June 26, 2008
Sept.
28, 2009
June 1, 2010
|
$15.75
$3.00
$3.50
$2.45
|
October 4, 2017
June 26, 2018
Sept.
28, 2019
June 1, 2020
|
|
R. Thomas Gaglardi
|
419,125
(2)
(15.0%)
|
20,000
10,000
50,000
|
June 26, 2008
Sept. 28, 2009
June 1,
2010
|
$3.00
$3.50
$2.45
|
June 26, 2018
Sept. 28, 2019
June 1,
2020
|
|
Thor Matson
|
< 1%
|
nil
|
n/a
|
na/
|
n/a
|
|
Fei Xu
|
< 1%
|
2,000
2,000
|
Apr. 4, 2008
June 1, 2010
|
$6.20
$2.45
|
Apr. 4, 2018
June 1, 2020
|
|
(1)
|
The information as to number of shares beneficially owned
(directly or indirectly or over which control or direction is exercised)
is not within the direct knowledge of the management of the Company and
has been furnished by the respective director or officer.
|
|
(2)
|
404,125 of these shares are held by Northland Properties
Corporation, a company affiliated with Mr.
Gaglardi.
|
Further information regarding stock options with respect to the
directors and officers may be found in the sections above, titled “Outstanding
Option-Based Awards for Named Executive Officers” and “Outstanding Awards for
Directors.”
There are no other arrangements involving the employees in the
capital of the Company.
Item 7. – Major Shareholders and Related Party Transactions
As at May 5, 2017 the Company had 2,802,412 common shares
without par value issued and outstanding.
41
|
1.
|
Following are the shareholders that are the beneficial
owners of 5% or more of the Company’s voting securities, as of May 15,
2017:
|
(a)
|
Shareholder
|
Number of Shares
|
Percentage of Issued
Capital
|
R. Thomas Gaglardi/
Northland Properties
Corporation
(1)
|
419,125
|
15.0%
|
|
Salzhauer family
|
197,971
|
7.1%
|
|
Ralph McRae
|
176,126
|
6.3%
|
|
|
(1)
|
Northland Properties Corporation is an affiliate of R.
Thomas Gaglardi, a director of Leading Brands, Inc. 404,125 of Mr.
Gaglardi’s Shares are held by Northland Properties
Corporation.
|
|
(b)
|
To the best of the Company's knowledge, there has been no
significant change in the percentage ownership held by any major
shareholders during the past three fiscal years, other than that according
to a Schedule 13 G/A filed by Global Value Investment Corp. on June 17,
2016, Global Value Investment Corp. no longer holds their 272,753 Shares
in the Company.
|
|
|
|
|
(c)
|
The Company’s major shareholders do not have different
voting rights than other shareholders.
|
|
2.
|
The Company’s register of 259 members showed that as of
May 1, 2017, 1,551,406 of the Company’s common shares, or 55.36%, were
held by 219 registered shareholders residing in the United States. The
register includes Cede and Co., an American depository holding shares on
behalf of beneficial shareholders.
|
|
|
|
|
3.
|
To the Company’s knowledge, the Company is not owned or
controlled, directly or indirectly, by another corporation, any foreign
government, or by any other natural or legal persons.
|
|
|
|
|
4.
|
To the Company’s knowledge, there are no arrangements the
operation of which at a subsequent date may result in a change in control
of the Company. A substantial number of common shares of the Company are
held by depositories, brokerage firms and financial institutions in
“street form”.
|
42
|
B.
|
Related party
transactions.
|
|
1.
|
The Company has not at any time during the period since
the beginning of the last fiscal year to May 1, 2017 been a party to any
material transactions in which any director or officer of the Company, or
any relative or spouse, or any relative of any such spouse, has any direct
or indirect material interest except as
follows:
|
|
a)
|
A company with a director in common with the Company
supplied sales and marketing services in the amount of $3,113.
|
|
|
|
|
b)
|
A company with a director in common with the Company
supplied bottling services in the amount of $305,289.
|
|
|
|
|
c)
|
A company with an officer in common with the Company
provided consulting service in the amount of $213,311.
|
|
|
|
|
d)
|
A company with a director in common with the Company
supplied garbage services in the amount of $1,775.
|
|
|
|
|
e)
|
A company with an officer in common with the Company
provided supplies in the amount of $1,728.
|
|
|
|
|
|
The Company believes that the services described above
were provided to the Company on a basis not less favorable than would be
provided to an unrelated third party.
|
|
2.
|
There are no outstanding loans or guarantees made by the
Company or any of its subsidiaries to or for the benefit of any of the
persons listed above.
|
|
C.
|
Interest of experts and counsel.
|
|
|
|
|
|
This Item is not applicable for an Annual
Report.
|
Item 8. – Financial Information
|
A.
|
Consolidated Statements and Other Financial
Information.
|
|
|
|
|
|
Please see “Item 18 - Financial Statements” for a list of
the financial statements filed as part of this Annual
Report.
|
A-7.
Legal Proceedings
The Company is subject to certain legal proceedings and claims
that arise in the ordinary course of its business, none of which are expected to
have significant effects on the Company’s financial position, profitability, or
cash flows.
43
A-8.
Dividend Distributions
The Company intends to consider dividend distributions when it
determines that it cannot realize better returns to investors by investing
internally.
There have been no significant changes since the date of the
annual financial statements.
Item 9. – The Offer and Listing
|
A.
|
Offer and listing
details.
|
Following is information regarding the
price history of the Company’s common shares on the NASDAQ Capital Market, in
U.S. dollars.
|
|
(a)
|
For the five most recent full fiscal
years:
|
|
Period
|
High $
|
Low $
|
|
March 1, 2016 to Feb. 28, 2017
|
3.34
|
1.31
|
|
March 1, 2015 to Feb. 29, 2016
|
4.27
|
1.62
|
|
March 1, 2014 to Feb. 28, 2015
|
5.05
|
2.83
|
|
March 1, 2013 to Feb. 28, 2014
|
5.83
|
3.30
|
|
March 1, 2012 to Feb. 28, 2013
|
4.50
|
3.26
|
|
|
(b)
|
For each full financial quarter of the two most recent
full fiscal years:
|
|
Period
|
High $
|
Low $
|
4
th
Quarter
Dec. 1, 2016 – Feb. 28, 2017
|
2.92
|
1.47
|
3
rd
Quarter
Sept. 1, 2016 – Nov. 30, 2016
|
2.43
|
1.38
|
2
nd
Quarter
June 1, 2016 – Aug. 31, 2016
|
3.34
|
1.38
|
1
st
Quarter
Mar. 1, 2016 – May 31, 2016
|
2.65
|
1.31
|
4
th
Quarter
Dec. 1, 2015 – Feb. 29, 2016
|
3.50
|
1.62
|
3
rd
Quarter
Sept. 1, 2015 – Nov. 30, 2015
|
3.90
|
2.88
|
2
nd
Quarter
June 1, 2015 – Aug. 31, 2015
|
4.27
|
3.21
|
1
st
Quarter
Mar. 1, 2015 – May 31, 2015
|
4.01
|
2.90
|
44
|
|
(c)
|
For the most recent six
months:
|
|
Period
|
High $
|
Low $
|
|
April 1 - 30, 2017
|
2.49
|
1.72
|
|
March 1 – 31, 2017
|
1.93
|
1.63
|
|
February 1 – 29, 2017
|
2.92
|
1.66
|
|
January 1 – 31, 2017
|
1.84
|
1.47
|
|
December 1 – 31, 2016
|
1.84
|
1.47
|
|
November 1 – 30, 2016
|
1.85
|
1.38
|
The Company’s common shares have been
quoted on the NASDAQ Capital Market (formerly called the NASDAQ Small-cap
Market) since August 3, 1993. The ticker symbol is LBIX.
Item 10. – Additional Information
|
A.
|
Share capital
|
|
|
|
|
|
This item is not applicable for an Annual
Report.
|
|
B.
|
Memorandum and articles of
association.
|
|
|
|
|
|
The Notice of Articles relating to the consolidation of
the Company’s common shares and the increase in authorized share capital
that were filed with the British Columbia Registry Services on February 1,
2010 were filed on a Form 6- K on February 3, 2010.
|
|
|
|
|
|
All other information required by this “Item 10.B” was
previously reported to the SEC in the Company’s registration statement on
Form F-3, filed on September 24, 2007, and is incorporated by
reference.
|
|
C.
|
Material contracts.
|
|
|
|
|
|
Effective January 1, 2015, the Company entered into a new
contract with its largest bottling customer; this contract expired on
December 31, 2016. A copy of the contract was filed on SEDAR (Canada) and
EDGAR (U.S.A.) on March 17, 2015. The contract established the terms under
which the Company would provide “hot fill” bottling services to its major
customer. The amounts paid by this customer to the Company were $7,159,729
in 2017 and $9,639,066 in 2016.
|
45
|
D.
|
Exchange controls.
|
|
|
|
|
|
Canada has no system of exchange controls. There are no
exchange restrictions on borrowing from foreign countries or on the
remittance of dividends, interest, royalties and similar payments,
management fees, loan repayments, settlement of trade debts, or the
repatriation of capital. Any such remittances to U.S. residents, however,
may be subject to withholding tax.
|
|
|
|
|
E.
|
Taxation.
|
|
|
|
|
|
A brief and general description is included below of
certain taxes, including withholding taxes, to which U.S. security holders
may be subject under the existing tax laws and regulations of Canada. The
consequences, if any, of provincial taxes are not considered.
|
|
|
|
|
|
Please note that the following information is a brief
summary only and security holders should seek the advice of their own tax
advisors with respect to the applicability or effect on their own
individual circumstances of the matters referred to herein and of any U.S.
federal, state or local taxes.
|
|
|
|
|
|
Taxation on Dividends
|
|
|
|
|
|
Generally, cash dividends paid or deemed to be paid by a
Canadian-corporation to non-resident shareholders are subject to a
withholding tax of 25% (unless an income tax convention applies to reduce
the withholding tax rate to some other amount). Dividends paid to U.S.
residents are subject to a withholding tax of 15%, and dividends paid to a
U.S. resident company which owns 10% or more of the voting shares of the
Canadian corporation are subject to a withholding tax of 5%. Dividends
paid by a Canadian corporation to shareholders residing in Canada are not
subject to withholding tax.
|
|
|
|
|
|
Taxation on Capital Gains
|
|
|
|
|
|
Generally, the disposition by a non-resident of shares of
a Canadian public corporation is not subject to Canadian income tax,
unless such shares are “taxable Canadian property” within the meaning of
the Income Tax Act (Canada) and no relief is afforded under any applicable
tax treaty. The shares of the Company would be taxable Canadian property
of a non-resident purchaser if the non- resident purchaser used the shares
in carrying on a business in Canada, or if the non-resident, together with
persons with whom he does not deal at arm’s length, owned 25% or more of
the issued shares of any class of the capital stock of the Canadian
corporation at any time during the five-year period immediately preceding
the disposition.
|
|
|
|
|
|
In addition, Canada may tax capital gains realized by an
individual resident in the United States on the disposition of shares of a
Canadian corporation if the following conditions are
met:
|
46
|
|
♦
|
the individual was resident in Canada for 120 months
during any period of 20 consecutive years preceding, and at any time
during the 10 years immediately preceding, the disposition of shares; and
|
|
|
|
|
|
|
♦
|
the individual owned the shares when he ceased to be
resident in Canada.
|
Holders of common shares of the Company
should seek independent advice from their own professional tax advisers with
respect to the income tax consequences arising from the holding of common shares
of the Company.
|
F.
|
Dividends and paying agents.
|
|
|
|
|
|
This item is not applicable for an Annual
Report.
|
|
|
|
|
G.
|
Statement by experts.
|
|
|
|
|
|
This item is not applicable for an Annual
Report.
|
|
|
|
|
H.
|
Documents on display.
|
|
|
|
|
|
Copies of documents concerning the Company, which are
referred to in this Annual Report, are available for inspection at the
head office of the Company located at Unit 101 - 33 W. 8
th
Avenue, Vancouver BC Canada V5Y 1M8.
|
|
|
|
|
I.
|
Subsidiary Information.
|
|
|
|
|
|
This item is not applicable for an Annual
Report.
|
Item 11. – Quantitative and Qualitative Disclosures About
Market Risk
Interest Rate Risk
The Company’s primary market risk exposure is risk related to
interest rates from changes in the Canadian prime rate of its lenders under its
Revolving Facility.
Currency risk
The Company concludes sales in U.S. dollars to customers in the
U.S. and other foreign countries. 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.
At February 28, 2017, the Company’s cash balances included
$88,825 denominated in U.S. dollars (2016 - $33,000), accounts receivable
balances included $2,688 denominated in U.S. dollars (2016 - $65), and the
Company’s accounts payable and accrued liabilities balance included $130,517
denominated in U.S. dollars (2016 - $132,200).
47
As at February 28, 2017, all other factors being equal, a 5%
U.S. dollar rise per Canadian dollar would have an unfavourable impact of
approximately $9,000 on net earnings for the year. A 5% U.S.-to-Canadian dollar
decrease would have a positive impact of similar magnitude.
Item 12. – Description of Securities Other than Equity
Securities
This item is not applicable for an Annual Report, except for
“Item 12.D.3” and “Item 12.D.4.” The Company does not have securities
represented by American Depositary Receipts.
P A R T II
The accompanying summary of significant accounting policies and
notes are an integral part of these consolidated financial statements.
The accompanying summary of significant accounting policies and
notes are an integral part of these consolidated financial statements.
The accompanying summary of significant accounting policies and
notes are an integral part of these consolidated financial statements.
The accompanying summary of significant accounting policies and
notes are an integral part of these consolidated financial statements.
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
1.
|
Operations and Summary of Significant Accounting
Principles (continued)
|
|
Accounts
|
|
Allowances for Doubtful Accounts
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
Receivable
|
|
Balance at beginning of year
|
|
$
|
-
|
|
$
|
36,329
|
|
$
|
51,579
|
|
|
(continued)
|
|
Write-off of receivables
|
|
|
-
|
|
|
(36,329
|
)
|
|
(15,250
|
)
|
|
|
|
Balance at end of year
|
|
$
|
-
|
|
$
|
-
|
|
$
|
36,329
|
|
|
Inventory
|
|
Raw materials and finished goods purchased for resale are
valued at the lower of cost, determined on a first-in, first-out basis,
and market value. Finished goods, produced from manufacturing operations,
are valued at the lower of standard cost which approximates average cost
of raw materials, direct labour and overhead and market value. The
provisions for obsolete or excess inventory are based on estimated
forecasted usage of inventories. A significant change in demand for
certain products as compared to forecasted amounts may result in recording
additional provisions for obsolete inventory. Provisions for obsolete or
excess inventory are recorded as cost of goods sold.
|
|
|
|
|
Property, plant
and equipment
|
|
Property, plant and equipment are recorded at cost and
are amortized using the declining-balance method at annual rates as
follows:
|
|
Plant and equipment
|
7% - 20%
|
|
Buildings
|
5%
|
|
Automotive equipment
|
20%
|
|
Land improvements
|
8%
|
|
Furniture, fixtures, computer hardware and
software
|
20%
|
|
|
|
Leasehold improvements are amortized over the lesser of
their expected life or the lease term.
|
|
|
|
|
|
|
|
Management reviews property, plant and equipment for
impairment when conditions exist that indicate the carrying amount of the
assets may not be fully recoverable. If required an undiscounted operating
cash flow analysis is completed to determine if impairment exists. When
testing for impairment of assets held for use, assets and liabilities are
grouped at the lowest level for which cash flows are separately
identifiable. If impairment is determined to exist, the loss is calculated
based on estimated fair value.
|
|
|
|
|
|
Intangible Assets
|
|
Licenses and patents are recorded at cost and are
amortized over their expected useful life of ten years.
|
|
|
|
|
|
|
|
Management reviews intangible assets for impairment when
conditions exist that indicate the carrying amount of the assets may not
be fully recoverable. If required an undiscounted operating cash flow
analysis is completed to determine if impairment exists. When testing for
impairment of assets held for use, assets and liabilities are grouped at
the lowest level for which cash flows are separately identifiable. If
impairment is determined to exist, the loss is calculated based on
estimated fair value.
|
|
|
|
|
|
Leases
|
|
Leases are classified as either capital or operating in
nature. Capital leases are those which substantially transfer the benefits
and risks of ownership to the lessee. Obligations recorded under capital
leases are reduced by the principal portion of lease payments. The imputed
interest portion of the lease payment is charged to expense.
|
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
1.
|
Operations and Summary of Significant Accounting
Principles (continued)
|
Revenue
Recognition
|
|
Revenue on sales of products is recognized when the
products are delivered and title transfers to customers. Revenues from the
provision of manufacturing, packaging or other services are recognized
when the services are performed and collection of related receivables is
reasonably assured. The Company records shipping and handling revenue as a
component of sales revenue, and shipping and handling costs are included
in the cost of sales.
|
|
|
|
|
|
|
|
Incentives offered to customers including rebates, cash
discounts, volume discounts, and slotting fees are recorded as a reduction
of net sales when sales are recognized.
|
|
|
|
|
|
Advertising Costs
|
|
Advertising costs, which also include samples, trade
show, product demo, media promotion costs are expensed as incurred. During
the years ended February 28 2017, February 29, 2016 and February 28, 2015,
the Company incurred advertising costs of $496,456, $603,502 and $553,187,
respectively.
|
|
|
|
|
Earnings (loss)
per common
share
|
|
Basic Earnings (Loss) Per Share (“EPS”) is computed by
dividing net loss available to common shareholders by the weighted average
number of common shares outstanding during the year. Diluted EPS gives
effect to all dilutive potential common shares outstanding during the year
including stock options and warrants using the treasury stock method. In
computing diluted EPS, the average stock price for the year is used in
determining the number of shares assumed to be purchased from the exercise
of stock options or warrants.
|
|
|
|
|
|
Stock-Based
Compensation
|
|
Compensation costs are charged to the Consolidated
Statements of Comprehensive Income (loss). Compensation costs for
employees are amortized over the period from the grant date to the date
the options vest. Compensation expense for non-employees is recognized
over the vesting period. Compensation for non-employees is re-measured at
each balance sheet date until the earlier of the vesting date or the date
of completion of the service. Upon exercise of stock options, the
consideration paid by the option holder, together with the amount
previously recognized in additional paid-in capital, is recorded as an
increase to share capital.
|
|
|
|
|
|
|
|
The Company uses the Black-Scholes option valuation model
to calculate the fair value of stock options at the date of grant. Option
pricing models require the input of highly subjective assumptions,
including the expected price volatility. Changes in these assumptions can
materially affect the fair value estimate.
|
|
|
|
|
|
|
|
Changes in fair value of options granted to non-employees
that are accounted for as liabilities are recognized as stock compensation
until fully vested, and after that time as change in fair value.
|
|
|
|
|
|
Income Tax
|
|
Deferred income tax assets and liabilities are computed
based on differences between the carrying amount of assets and liabilities
on the balance sheet and their corresponding tax values using the enacted
income tax rates by tax jurisdiction when these differences are expected
to be realized. Deferred income tax assets also result from unused loss
carry-forwards and other deductions. The valuation of deferred income tax
assets is reviewed annually and adjusted, if necessary, by use of a
valuation allowance to reflect the estimated realizable amount.
Significant management judgement is required in determining the provision
for income taxes, the deferred income tax assets and liabilities and any
valuation allowance recorded against the net future income tax assets.
|
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
1.
|
Operations and Summary of Significant Accounting
Principles (continued)
|
|
Income Tax
(continued)
|
|
Management evaluates all available evidence, such as
recent and expected future operating results by tax jurisdiction, and
current and enacted tax legislation and other temporary differences
between book and tax accounting to determine whether it is more likely
than not that some portion or all of the deferred income tax assets will
not be realized. Management has determined certain of these deferred tax
assets do not meet the more likely than not criteria, and accordingly,
these deferred income tax asset amounts have been offset by a
valuation allowance (Note 10). No reserves for an uncertain tax position
have been recorded for the years ended February 28, 2017 and February 29,
2016.
|
|
|
|
|
Comprehensive
Income (loss)
|
|
Comprehensive income (loss) includes both net earnings
and other comprehensive income which are presented in a single continuous
statement.
|
|
|
|
|
|
Fair Value
Measurements
|
|
The book value of cash and cash equivalents, accounts
receivable, and accounts payable and accrued liabilities approximate their
fair values due to the immediate or short-term maturity of those
instruments. The fair value hierarchy under US GAAP is based on three
levels of inputs, of which the first two are considered observable and the
last unobservable, that may be used to measure fair value which are the
following:
|
|
|
|
|
|
|
|
Level 1 - quoted prices (unadjusted) in active markets
for identical assets or liabilities;
|
|
|
|
|
|
|
|
Level 2 - observable inputs other than Level 1, quoted
prices for similar assets or liabilities in active markets, quoted prices
for identical or similar assets and liabilities in markets that are not
active, and model-derived prices whose inputs are observable or whose
significant value drivers are observable; and
|
|
|
|
|
|
|
|
Level 3 - assets and liabilities whose significant value
drivers are unobservable by little or no market activity and that are
significant to the fair value of the assets or liabilities.
|
|
|
|
|
|
|
|
The Company had certain financial liabilities required to
be recorded at fair value on a recurring basis in accordance with US GAAP.
As at February 28, 2017 and February 29, 2016, the derivative liability on
non-employee stock options and warrants is a financial liability
classified for Level 3 fair value measurement. See Note 14 for more
information.
|
|
|
|
|
|
Reclassification
|
|
Certain prior period amounts have been reclassified to
conform to current year presentation. There was no change to previously
reported shareholders’ equity or accumulated deficit.
|
|
|
|
|
Recent
Accounting
Pronouncements
|
|
In May 2014, the Financial Accounting Standard Board, or
FASB, issued Accounting Standards Update No. 2014-09, Revenue from
Contracts with Customers: Topic 606 (ASU 2014-09) to supersede existing
revenue recognition guidance under generally accepted accounting
principles in the United States, or GAAP. The core principle of ASU
2014-09 is to recognize revenues when promised goods or services are
transferred to customers in an amount that reflects the consideration that
is expected to be received for those goods or services.
|
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
1.
|
Operations and Summary of Significant Accounting
Principles (continued)
|
|
Recent
Accounting
Pronouncements
(continued)
|
|
ASU 2014-09 defines a five steps process to achieve this
core principle and, in doing so, it is possible more judgment and
estimates may be required within the revenue recognition process than
required under existing GAAP including identifying performance obligations
in the contract, estimating the amount of variable consideration to
include in the transaction price and allocating the transaction price to
each separate performance obligation. ASU 2014-09 is effective for the
fiscal and interim reporting periods beginning after December 15, 2016
using either of two methods: (i) retrospective to each prior reporting
period presented within the option to elect certain practical expedients
as defined within ASU 2014-09; or (ii) retrospective with the cumulative
effect of initially applying ASU 2014-09 recognized at the date of initial
application and providing certain additional disclosures as defined per
ASU 2014-09. In August 2015, ASU 2015- 14 was issued which delayed the
effective date to reporting periods beginning after December 15, 2017. The
Company will adopt ASU 2014-09, and its related clarifying ASUs, as of
February 28, 2018. The Company is continuing to assess the potential
effects of these ASUs on its consolidated financial statements, business
processes, systems and controls. While the assessment process is ongoing,
the Company anticipates adopting the standard using the modified
retrospective transition approach. Under this approach, the new standard
would apply to all new contracts initiated on or after March 1, 2018. For
existing contracts that have remaining obligations as of March 1, 2018,
any difference between the recognition criteria in these ASUs and the
Company’s current revenue recognition practices would be recognized using
a cumulative effect adjustment to the opening balance of retained
earnings. The Company does not expect the adoption of these ASUs to have a
material impact on our consolidated financial statements.
|
|
|
|
|
|
|
|
In July 2015, the FASB issued ASU 2015-11, “Simplifying
the Measurement of Inventory” (“ASU 2015-11”). Under ASU 2015-11,
inventory will be measured at the “lower of cost and net realizable value”
and options that currently exist for “market value” will be eliminated.
ASU 2015-11 defines net realizable value as the “estimated selling prices
in the ordinary course of business, less reasonably predictable costs of
completion, disposal, and transportation.” No other changes were made to
the current guidance on inventory measurement. ASU 2015-11 is effective
for interim and annual periods beginning after December 15, 2016. Early
application is permitted and should be applied prospectively. Management
is evaluating the provisions of this statement, including which period to
adopt, and has not determined what impact the adoption of ASU 2015-11 will
have on the Company's financial position or results of operations.
|
|
|
|
|
|
|
|
In February 2016, the FASB issued Accounting Standards
Update No. 2016-02 (ASU 2016-2), Leases, which supersedes ASC Topic 840,
Leases. ASU 2016-2 requires lessees to recognize a lease liability and a
lease asset for all leases, including operating leases, with a term
greater than twelve months to its balance sheets. ASU 2016-2 also expands
the required quantitative and qualitative disclosures surrounding leases.
ASU 2016-2 is effective for the Company beginning January 1, 2019. Early
adoption is permitted. The Company has not determined the impact the
adoption of ASU 2016 -2 will have on its consolidated financial
statements.
|
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
1.
|
Operations and Summary of Significant Accounting
Principles (continued)
|
|
Recent
Accounting
Pronouncements
(continued)
|
|
In March 2016, the FASB issued authoritative guidance
under ASU 2016-09, Compensation-Stock Compensation (Topic 718)
“Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09
provides for simplification of several aspects of the accounting for
share-based payment transactions, including income tax consequences,
classification of awards as either equity or liabilities and
classification on the statement of cash flows. ASU 2016-09 is effective
for annual periods beginning after December 15, 2016. The Company is
currently evaluating the potential impact of adoption of this standard on
its consolidated financial statements.
|
|
|
|
|
|
|
|
In June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments” (“ASU 2016-13”). Financial Instruments—Credit
Losses (Topic 326) amends guidelines on reporting credit losses for assets
held at amortized cost basis and available-for-sale debt securities. For
assets held at amortized cost basis, Topic 326 eliminates the probable
initial recognition threshold in current GAAP and, instead, requires an
entity to reflect its current estimate of all expected credit losses. The
allowance for credit losses is a valuation account that is deducted from
the amortized cost basis of the financial assets to present the net amount
expected to be collected. For available-for-sale debt securities, credit
losses should be measured in a manner similar to current GAAP, however
Topic 326 will require that credit losses be presented as an allowance
rather than as a write- down. ASU 2016-13 affects entities holding
financial assets and net investment in leases that are not accounted for
at fair value through net income. The amendments affect loans, debt
securities, trade receivables, net investments in leases, off balance
sheet credit exposures, reinsurance receivables, and any other financial
assets not excluded from the scope that have the contractual right to
receive cash. The amendments in this ASU will be effective for fiscal
years beginning after December 15, 2019, including interim periods within
those fiscal years. We are currently evaluating the impact of the adoption
of ASU 2016-13 on our consolidated financial statements.
|
|
|
|
|
|
|
|
In August 2016, the FASB issued ASU No. 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments” (“ASU 2016-15”), which addresses the following
eight specific cash flow issues: debt prepayment or debt extinguishment
costs; settlement of zero-coupon debt instruments or other debt
instruments with coupon interest rates that are insignificant in relation
to the effective interest rate of the borrowing; contingent consideration
payments made after a business combination; proceeds from the settlement
of insurance claims; proceeds from the settlement of corporate-owned life
insurance policies (including bank-owned life insurance policies;
distributions received from equity method investees; beneficial interests
in securitization transactions; and separately identifiable cash flows and
application of the predominance principle. The amendments in this ASU are
effective for public business entities for fiscal years beginning after
December 15, 2017, and interim periods within those fiscal years. Early
adoption is permitted, including adoption in an interim period. We are
currently evaluating the impact of the adoption of ASU 2016-15 on our
consolidated financial statements.
|
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
1.
|
Operations and Summary of Significant Accounting
Principles (continued)
|
|
Recent
Accounting
Pronouncements
(continued)
|
|
In November 2016, the FASB issued ASU No. 2016-18,
“Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”),
which requires that a statement of cash flows explain the change during
the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Therefore,
amounts generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts shown
on the statement of cash flows. The amendments in this ASU do not provide
a definition of restricted cash or restricted cash equivalents. The
amendments in this ASU are effective for public business entities for
fiscal years beginning after December 15, 2017, and interim periods within
those fiscal years. Early adoption is permitted, including adoption in an
interim period. We are currently evaluating the impact of the adoption of
ASU 2016-18 on our consolidated financial statements.
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Finished goods, net
|
$
|
279,666
|
|
$
|
304,453
|
|
|
|
Raw materials
|
|
81,436
|
|
|
663,577
|
|
|
|
|
$
|
361,102
|
|
$
|
968,030
|
|
The ending balance above includes a
total inventory obsolescence provision of $15,638 as at February 28, 2017 (2016
- $39,870).
|
|
Inventory Obsolescence Provision
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
$
|
39,870
|
|
$
|
114,744
|
|
$
|
100,058
|
|
|
|
Obsolescence provision
|
|
404,767
|
|
|
75,000
|
|
|
45,000
|
|
|
|
Write-off
of inventory
|
|
(428,999
|
)
|
|
(149,874
|
)
|
|
(30,314
|
)
|
|
|
Balance at end of year
|
$
|
15,638
|
|
$
|
39,870
|
|
$
|
114,744
|
|
|
3.
|
Property, Plant and
Equipment
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
|
|
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
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Net
|
|
|
|
Plant and equipment
|
$
|
16,262,932
|
|
$
|
9,608,770
|
|
$
|
6,654,162
|
|
|
|
Buildings
|
|
1,950,446
|
|
|
1,307,391
|
|
|
643,055
|
|
|
|
Automotive equipment
|
|
286,252
|
|
|
158,665
|
|
|
127,587
|
|
|
|
Land
|
|
433,613
|
|
|
-
|
|
|
433,613
|
|
|
|
Land improvements
|
|
1,861
|
|
|
1,367
|
|
|
494
|
|
|
|
Leasehold improvements
|
|
791,902
|
|
|
349,363
|
|
|
442,539
|
|
|
|
Furniture and fixtures
|
|
688,314
|
|
|
613,570
|
|
|
74,744
|
|
|
|
Computer hardware and software
|
|
2,339,906
|
|
|
2,119,341
|
|
|
220,565
|
|
|
|
|
$
|
22,755,226
|
|
$
|
14,158,467
|
|
$
|
8,596,759
|
|
Property, plant and equipment includes
equipment acquired under capital leases with an initial cost of $nil (2016 -
$2,687,820). Accumulated amortization of assets acquired under capital leases is
$nil (2016 - $1,251,634).
As at February 28, 2017 $nil asset are
attributable to discontinued operations. (2016: $6,830,148)
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
4.
|
Prepaid Expenses and
Deposits
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Slotting fees
|
$
|
3,792
|
|
$
|
146,918
|
|
|
|
Insurance premiums
|
|
52,561
|
|
|
84,338
|
|
|
|
Rental deposits and other
|
|
99,362
|
|
|
185,390
|
|
|
|
|
$
|
155,715
|
|
$
|
416,646
|
|
|
|
Attributable to discontinued operations
|
$
|
26,195
|
|
$
|
51,195
|
|
|
|
Attributable to continuing operations
|
$
|
129,520
|
|
$
|
365,451
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand Licence and Patent
|
$
|
331,037
|
|
$
|
33,848
|
|
$
|
297,189
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brand Licence and Patent
|
$
|
210,892
|
|
$
|
5,272
|
|
$
|
205,620
|
|
|
|
Amortization expense related to intangible assets, net is
estimated to be approximately $33,000 in each of the next 10
years.
|
|
|
|
|
6.
|
Lease Inducement
|
|
|
|
|
|
On March 26, 2015 the Company entered into a lease
agreement commencing September 26, 2015, and expiring September 25, 2020
with free occupation from September 26, 2015 to October 25, 2015. The rent
expense includes the allocation of rental payments from the start date of
the lease to commencement on a straight line basis over the life of the
lease.
|
|
|
|
|
7.
|
Shareholders’ Equity
|
|
|
a)
|
Share capital
|
|
Number of Authorized Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
Common shares without par value
|
|
500,000,000
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares without par
value
|
|
9,999,900
|
|
|
|
|
Series “A” preferred shares
|
|
1,000,000
|
|
|
|
|
Series “B” preferred shares
|
|
100
|
|
|
|
|
Series “C” preferred shares
|
|
1,000,000
|
|
|
|
|
Series “D” preferred shares
|
|
4,000,000
|
|
|
|
|
Series “E” preferred shares
|
|
4,000,000
|
|
|
|
|
|
|
20,000,000
|
|
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
7.
|
Shareholders’ Equity (continued)
|
|
|
|
|
|
|
a)
|
Share capital (continued)
|
|
|
|
|
|
|
|
There are no preferred shares outstanding as at February
28, 2017 (2016 - Nil).
|
|
|
|
|
|
|
|
In the year ended February 28, 2017, the Company
repurchased and cancelled 57,425 of its issued and outstanding shares in
the amount of $139,789. Since the average issue price of cancelled common
shares at the time of repurchase was $11.17, share capital has been
reduced by $641,485 and additional paid-in capital has been increased by
$501,696.
|
|
|
|
|
|
|
|
In the year ended February 29, 2016, the Company
repurchased and cancelled 40,705 of its issued and outstanding shares in
the amount of $176,316. Since the average issue price of cancelled common
shares at the time of repurchase was $11.17, share capital has been
reduced by $454,708 and additional paid-in capital has been increased by
$278,392.
|
|
|
|
|
|
|
|
In the year ended February 28, 2015, the Company
repurchased and cancelled 41,008 of its issued and outstanding shares in
the amount of $175,094. Since the average issue price of cancelled common
shares at the time of repurchase was $11.17, share capital has been
reduced by $458,129 and additional paid-in capital has been increased by
$283,035.
|
|
|
|
|
|
|
b)
|
Shareholder protection rights plan
|
|
|
|
|
|
|
|
On August 26, 2003, a Shareholder Protection Rights Plan
was adopted whereby one share purchase right is attached to each
outstanding common share, exercisable only in the case of a specific
event, such as the acquisition by an acquirer of 20% or more of the issued
common shares of the Company, and at a predetermined calculated price. At
the Annual General Meeting on June 30, 2010, shareholders approved the
updating and five- year extension of the Company’s Shareholder Protection
Rights Plan to 2015. At the Annual General Meeting in June 2015,
shareholders approved an updated and five-year extension of the Company’s
Shareholder Protection Rights Plan to 2020.
|
|
|
|
|
|
|
c)
|
Stock options
|
|
|
|
|
|
|
|
The Company occasionally grants stock options to its
employees, officers, directors and consultants to purchase common shares
of the Company. The options granted are exercisable at a price which is
equal to or greater than the fair market value of the common shares at the
date the options are granted. The options are granted with varied vesting
periods including immediately, one and five years. Options granted
generally have a life of 10 years. The Company does not have a formal
stock option plan.
|
|
|
|
|
|
|
|
At February 28, 2017, stock options were outstanding and
exercisable as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Number of
|
|
|
Remaining
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
|
Range of
|
|
Options
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Options
|
|
|
Exercise
|
|
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Life
(Years)
|
|
|
Price
(USD)
|
|
|
Exercisable
|
|
|
Price
(USD)
|
|
|
|
$2.45 to $2.99
|
|
637,000
|
|
|
3.16
|
|
|
2.45
|
|
|
637,000
|
|
|
2.45
|
|
|
|
$3.00 to $3.99
|
|
189,000
|
|
|
2.62
|
|
|
3.26
|
|
|
189,000
|
|
|
3.26
|
|
|
|
$4.00 to $15.75
|
|
42,000
|
|
|
0.87
|
|
|
8.90
|
|
|
42,000
|
|
|
8.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
868,000
|
|
|
|
|
|
|
|
|
868,000
|
|
|
|
|
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
7.
|
Shareholders’ Equity (continued)
|
|
|
|
|
|
|
c)
|
Stock options(continued)
|
|
|
|
|
|
|
|
A summary of the Company’s stock option activity is as
follows:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
|
|
|
Options
|
|
|
(USD)
|
|
|
|
Options outstanding as at February 28, 2014
|
|
923,569
|
|
|
3.06
|
|
|
|
Granted
|
|
-
|
|
|
-
|
|
|
|
Expired
|
|
(36,249
|
)
|
|
5.12
|
|
|
|
Exercised
|
|
(28,553
|
)
|
|
2.52
|
|
|
|
Cancelled
|
|
(2,000
|
)
|
|
6.20
|
|
|
|
Options outstanding as at February 28, 2015
|
|
856,767
|
|
|
2.98
|
|
|
|
Granted
|
|
25,000
|
|
|
3.69
|
|
|
|
Expired
|
|
(1,767
|
)
|
|
5.35
|
|
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
|
Cancelled
|
|
-
|
|
|
-
|
|
|
|
Options outstanding as at February 29, 2016
|
|
880,000
|
|
|
2.99
|
|
|
|
Granted
|
|
-
|
|
|
-
|
|
|
|
Expired
|
|
-
|
|
|
-
|
|
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
|
Cancelled
|
|
(12,000
|
)
|
|
6.91
|
|
|
|
Options exercisable, February 28, 2017
|
|
868,000
|
|
|
2.94
|
|
|
|
Options vested and expected to vest
|
|
868,000
|
|
|
2.94
|
|
The aggregate intrinsic value of stock
options exercised during the year ended February 28, 2017 was $Nil USD (2016 -
$Nil, 2015 - $45,158).
The aggregate intrinsic value of stock
options outstanding as at February 28, 2017 was $Nil USD (2016 - $Nil, 2015 -
$606,060).
The aggregate intrinsic value of stock
options exercisable as at February 28, 2017 was $Nil USD (2016 - $Nil, 2015 -
$606,060).
As of February 28, 2017, the Company
has Nil (2016 – Nil) non-vested stock options.
As of February 28, 2017, there was
$Nil of total unrecognized compensation cost related to non-vested stock options
(2016 – Nil).
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
7.
|
Shareholders’ Equity (continued)
|
|
|
|
|
|
|
d)
|
Warrants
|
|
|
|
|
|
|
|
A summary of the Company’s warrant activity and related
information for the year ended February 28, 2017 is as
follows:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Outstanding
|
|
|
Exercise
|
|
|
|
|
|
Warrants
|
|
|
Price
(USD)
|
|
|
|
Warrants outstanding February
28, 2014
|
|
-
|
|
|
-
|
|
|
|
Granted (Notes 8 and 9)
(1)
|
|
25,000
|
|
|
3.40
|
|
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
|
Expired
|
|
-
|
|
|
-
|
|
|
|
Warrants outstanding at
February 28, 2015 , February 29, 2016 and February 28, 2017
|
|
25,000
|
|
|
3.40
|
|
|
|
(1)
|
The warrants are exercisable until January 26,
2018
|
|
|
e)
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
For the years ended February 28, 2017, February 29, 2016,
and February 28, 2015, common equivalent shares (consisting of shares
issuable on exercise of stock options and warrants) totaling nil, 905,000
and 72,767 respectively, were not included in the computation of diluted
earnings per share because the effect was
anti-dilutive.
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares – Basic EPS
|
|
2,820,647
|
|
|
2,880,882
|
|
|
2,922,684
|
|
|
|
Plus: incremental shares from assumed exercise of stock
options
|
|
-
|
|
|
-
|
|
|
270,279
|
|
|
|
Weighted average shares – diluted EPS
|
|
2,820,647
|
|
|
2,880,882
|
|
|
3,192,963
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing
operations
|
$
|
(3,103,321
|
)
|
$
|
(3,919,581
|
)
|
$
|
(3,834,724
|
)
|
|
|
Net income (loss) from discontinued operations
|
|
(3,406,368
|
)
|
|
2,616,297
|
|
|
4,170,306
|
|
|
|
Net income (loss)
|
$
|
(6,509,689
|
)
|
$
|
(1,303,284
|
)
|
$
|
335,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) from change in fair value of
dilutive stock options
|
|
-
|
|
|
-
|
|
|
(196,428
|
)
|
|
|
Adjusted net income (loss)
|
$
|
(6,509,689
|
)
|
$
|
(1,303,284
|
)
|
$
|
139,154
|
|
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
7.
|
Shareholders’ Equity
(continued)
|
|
|
Basic earnings(loss) per common
share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
(1.10
|
)
|
$
|
(1.36
|
)
|
$
|
(1.31
|
)
|
|
|
Discontinued operations
|
|
(1.21
|
)
|
|
0.91
|
|
|
1.42
|
|
|
|
Net basic earnings (loss) per common share
|
$
|
(2.31
|
)
|
$
|
(0.45
|
)
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common
share
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
$
|
(1.10
|
)
|
$
|
(1.36
|
)
|
$
|
(1.26
|
)
|
|
|
Discontinued operations
|
|
(1.21
|
)
|
|
0.91
|
|
|
1.30
|
|
|
|
Net diluted
earnings (loss) per common share
|
$
|
(2.31
|
)
|
$
|
(0.45
|
)
|
$
|
0.04
|
|
|
8.
|
Stock-Based Compensation
|
|
|
|
|
|
The weighted average date-of-grant fair value of the
options granted during the year ended February 28, 2017 was Nil (February
29, 2016: $3.29 USD) per option. The estimated fair value of the stock
options granted was determined using the Black-Scholes option pricing
model with the following weighted-average
assumptions:
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free rate
|
|
-
|
|
|
1.45%
|
|
|
-
|
|
|
|
Dividend yield
|
|
Nil%
|
|
|
Nil%
|
|
|
Nil%
|
|
|
|
Volatility factor of the expected market
price of the Company’s common shares
|
|
-
|
|
|
99%
|
|
|
-
|
|
|
|
Weighted average expected life of the options (months)
|
|
-
|
|
|
120
|
|
|
-
|
|
|
|
On January 26, 2015 the Company entered into a consulting
agreement where the Company is committed to issue 25,000 warrants, with an
exercise price of US$3.40 and an expiry date of January 26, 2018. The
warrants had a grant date fair value of $32,570 (Note 9). As at February
28, 2015, the warrants had been earned, and are included in the
outstanding warrants table in Note 7(d). There were no options granted
during the year ended February 28, 2017 (February 29, 2016:
none).
|
|
|
|
|
|
In connection with the vesting of certain employees’,
officers’ and directors’ stock options, and warrants for the year ended
February 28, 2017, the Company has recorded stock option compensation of
$Nil (2016 - $83,880; 2015 - $16,236) which was credited to additional
paid- in capital and expensed in selling, general and administrative
expenses in the year.
|
|
|
|
|
9.
|
Derivative Liability
|
|
|
|
|
|
In accordance with ASC 815-40-15, stock options and
warrants granted to non-employees that are exercisable in US dollars 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 and warrants are required to be
re-valued with the change in fair value of the liability recorded as a
gain or loss on the change of fair value of derivative liability and
included in other items in the Company’s Consolidated Statements of
Comprehensive Income at the end of each reporting period. The fair value
of the options will continue to be classified as a liability until such
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.
|
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
9.
|
Derivative Liability (continued)
|
|
|
|
|
|
The non-employee share purchase option and warrant
liabilities are accounted for at their respective fair values and are
summarized as follows:
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
Derivative liability, opening balance
|
$
|
59,990
|
|
$
|
120,337
|
|
$
|
284,195
|
|
|
|
Warrants issued during the year
|
|
-
|
|
|
-
|
|
|
32,570
|
|
|
|
Options issued during the year
|
|
-
|
|
|
20,970
|
|
|
-
|
|
|
|
Change in fair value of options and warrants
|
|
(13,638
|
)
|
|
(81,317
|
)
|
|
(196,428
|
)
|
|
|
Derivative liability, closing balance
|
$
|
46,352
|
|
$
|
59,990
|
|
$
|
120,337
|
|
|
|
An estimate for the fair value of non-employee stock
options and warrants is determined through use of the Black-Scholes Model.
Assumptions applied by management as at February 28, 2017 were as follows:
(1) weighted average risk-free rate of 0.67% (2016 – 0.69%; 2015 – 0.69%);
(2) weighted average dividend yield of nil (2016 – nil; 2015 – nil); (3) a
weighted average expected volatility of 91.47% (2016 – 59.9%; 2015 –
58.6%); (4) a weighted average expected life of 27 months (2016 - 38
months; 2015 – 43 months); and (5) a weighted average exercise price of
$2.75 USD. These options have been included in the stock options data
presented in Note 7(c).
|
|
|
|
|
|
As at February 28, 2017 the warrants granted to
consultants had not been exercised.
|
|
|
|
|
|
The exercise of non-employee options and warrants will
result in a reduction of the derivative liability.
|
|
|
|
|
10.
|
Income Tax
|
|
|
|
|
|
Earnings before income taxes and the provision for income
taxes consisted of the following for the years ended February 28, 2017,
February 29, 2016, and February 28, 2015:
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) before tax from continuing operations
|
$
|
(3,103,321
|
)
|
$
|
(3,919,581
|
)
|
$
|
(3,834,724
|
)
|
|
|
Earnings (loss) before tax from discontinued operations
|
|
(926,111
|
)
|
|
2,179,643
|
|
|
3,373,649
|
|
|
|
Earnings (loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
$
|
(4,029,432
|
)
|
$
|
(1,739,938
|
)
|
$
|
461,075
|
|
|
|
United States
|
|
-
|
|
|
-
|
|
|
(16,528
|
)
|
|
|
Total
|
|
(4,029,432
|
)
|
$
|
(1,739,938
|
)
|
$
|
444,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (recovery) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
Deferred, Canada
|
|
2,480,257
|
|
|
(436,654
|
)
|
|
108,965
|
|
|
|
Deferred, United States
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
Total
|
$
|
2,480,257
|
|
$
|
(436,654
|
)
|
$
|
108,965
|
|
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
10.
|
Income Tax (continued)
|
|
|
|
|
|
Income tax computed at statutory tax rates reconciles to
the income tax provision, using a 26% (2016 – 26%, 2015 – 26%) statutory
tax rate, as follows:
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
Tax at statutory rates at CDN
rates
|
$
|
(1,047,652
|
)
|
$
|
(452,384
|
)
|
$
|
115,582
|
|
|
|
Foreign loss taxed at US rates
|
|
-
|
|
|
-
|
|
|
(4,297
|
)
|
|
|
Effect of foreign exchange on
loss carry-forwards
|
|
-
|
|
|
(704,281
|
)
|
|
(174,257
|
)
|
|
|
Non-deductible expenses (revenue)
|
|
(55,681
|
)
|
|
7,352
|
|
|
(37,861
|
)
|
|
|
Other items, net
|
|
-
|
|
|
-
|
|
|
42,380
|
|
|
|
Change in valuation allowance
|
|
3,583,590
|
|
|
712,659
|
|
|
167,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (recovery) for year
|
$
|
2,480,257
|
|
$
|
(436,654
|
)
|
$
|
108,965
|
|
As at February 28, 2017, the Company
and its subsidiaries have accumulated net operating losses in the amount of
approximately $8 million which can be applied against future earnings in Canada
and $10.8 million in the United States. The net operating loss carry forward
amounts commence to expire in 2027 through 2037.
Significant components of the Company’s
deferred tax assets and liabilities are as follows:
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and other losses
carried forward
|
$
|
6,589,096
|
|
$
|
6,127,452
|
|
|
|
Property, plant and equipment
|
|
1,451,069
|
|
|
809,380
|
|
|
|
Trademark and deferred costs
|
|
112,245
|
|
|
112,245
|
|
|
|
Financing costs
|
|
-
|
|
|
-
|
|
|
|
Total deferred tax assets
|
|
8,152,410
|
|
|
7,049,077
|
|
|
|
Valuation allowance
|
|
(8,152,410
|
)
|
|
(4,568,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
$
|
-
|
|
$
|
2,480,257
|
|
Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of tax assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. The Company has recognized a valuation allowance for those
deferred tax assets for which realization is not more likely than not to occur.
The tax years that remain open to
examination by the tax authorities are generally 2012-2017. The net operating
losses from prior years are subject to adjustment under examination to the
extent they remain unutilized in an open year.
There are no uncertain tax positions to
recognize at February 28, 2017 and February 29, 2016.
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
11.
|
Commitments
|
|
|
|
|
|
The Company is committed to certain agreements and
operating leases. The minimum amounts due over the remaining terms of
those agreements are as follows:
|
|
2018
|
$
|
123,073
|
|
|
2019
|
|
123,073
|
|
|
2020
|
|
130,376
|
|
|
2021
|
|
130,376
|
|
|
2022
|
|
130,376
|
|
|
and thereafter
|
|
130,376
|
|
|
|
|
|
|
|
Total future minimum payments
|
$
|
767,650
|
|
During the years ended February 28,
2017, February 29, 2016 and February 28, 2015, the Company incurred rental
expenses of $553,763, $705,765, and $750,879 respectively.
The Company has committed to certain
purchase obligations as follows:
|
2018
|
$
|
19,756
|
|
|
2019
|
|
19,850
|
|
|
2020
|
|
19,725
|
|
|
2021
|
|
9,818
|
|
|
2022
|
|
-
|
|
|
and thereafter
|
|
-
|
|
|
|
|
|
|
|
Total future minimum payments
|
$
|
69,149
|
|
|
12.
|
Contingencies
|
|
|
|
|
|
The Company is a party to various 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, results of
operations, or cash flows of the Company.
|
|
|
|
|
13.
|
Related Party Transactions
|
|
|
|
|
|
Related party transactions not disclosed elsewhere are as
follows:
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
i)
|
Incurred consulting fees with a
company related by a director in common
|
$
|
-
|
|
$
|
21,000
|
|
$
|
84,000
|
|
|
|
ii)
|
Incurred professional service fees with a
company related by a director in common
|
$
|
-
|
|
$
|
132,000
|
|
$
|
528,000
|
|
|
|
iii)
|
Incurred marketing consulting
services with a company related by a director in common
|
$
|
3,113
|
|
$
|
5,619
|
|
$
|
124,225
|
|
|
|
iv)
|
Incurred bottling services from a company
related by a director in common
|
$
|
305,289
|
|
$
|
218,812
|
|
$
|
183,186
|
|
|
|
v)
|
Incurred consulting fees with a
company related by an officer in common
|
$
|
213,311
|
|
$
|
150,000
|
|
$
|
150,000
|
|
|
|
vi)
|
Incurred services from a company related by a
director in common
|
$
|
1,775
|
|
$
|
1,055
|
|
$
|
-
|
|
|
|
vii)
|
Purchased supplies from a
company related by an officer in common
|
$
|
1,728
|
|
$
|
1,273
|
|
$
|
15,026
|
|
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
14.
|
Fair Value of Financial Instruments
|
|
|
|
|
|
The Company’s financial assets and financial liabilities
as at February 28, 2017, measured at fair value on a recurring basis are
summarized below:
|
|
|
|
|
Quoted
|
|
|
Significant
|
|
|
Significant
|
|
|
Balance,
|
|
|
|
|
|
Prices in
|
|
|
Observable
|
|
|
Unobservable
|
|
|
February 28,
|
|
|
|
|
|
Active Market
|
|
|
Inputs
|
|
|
Inputs
|
|
|
2017
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
Cash
|
$
|
4,315,028
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,315,028
|
|
|
|
Derivative liability
|
|
-
|
|
|
-
|
|
|
(46,352
|
)
|
|
(46,352
|
)
|
|
|
|
$
|
4,315,028
|
|
$
|
-
|
|
$
|
(46,352
|
)
|
$
|
4,268,676
|
|
The Company’s financial assets and
financial liabilities as at February 29, 2016, measured at fair value on a
recurring basis are summarized below:
|
|
|
|
Quoted
|
|
|
Significant
|
|
|
Significant
|
|
|
Balance,
|
|
|
|
|
|
Prices in
|
|
|
Observable
|
|
|
Unobservable
|
|
|
February 29,
|
|
|
|
|
|
Active Market
|
|
|
Inputs
|
|
|
Inputs
|
|
|
2016
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
Cash
|
$
|
282,819
|
|
$
|
-
|
|
$
|
-
|
|
$
|
282,819
|
|
|
|
Derivative liability
|
|
-
|
|
|
-
|
|
|
(59,990
|
)
|
|
(59,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
282,819
|
|
$
|
-
|
|
$
|
(59,990
|
)
|
$
|
222,829
|
|
|
|
The fair value of cash and cash equivalents approximates
its carrying value.
|
|
|
|
|
|
The fair value of the derivative liability for
non-employee stock options is determined through use of the Black-Scholes
model (Note 9).
|
|
|
|
|
15.
|
Segment Information
|
|
|
|
|
|
The Company presently operates in one industry segment
being the development, marketing and distribution of beverages. The
Company’s principal operations are comprised of an integrated distribution
system for beverages. Substantially, all of the Company’s operations,
assets and employees are located in Canada and net revenue from export
sales during all the years reported are less than 10%.
|
|
|
|
|
|
During the year ended February 28, 2017, the Company’s
ten largest customers comprised approximately 93% (2016 - 96%; 2015 - 95%)
of revenue and no one customer comprised more than 74% (2016 - 84%; 2015 -
90%) of revenue.
|
|
|
|
Leading Brands, Inc.
|
|
Notes to the Consolidated Financial
Statements
|
|
(Expressed in Canadian Dollars)
|
|
|
|
16.
|
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. All liabilities will be settled. All costs
associated with the discontinuation have been 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 February 28, 2017 and February 29, 2016, and consist of the
following:
|
|
Assets of discontinued operation:
|
|
2017
|
|
|
2016
|
|
|
|
Accounts Receivable
|
$
|
-
|
|
$
|
230,275
|
|
|
|
Prepaid expenses and deposits
|
|
26,195
|
|
|
51,195
|
|
|
|
Total current assets
|
|
26,195
|
|
|
281,470
|
|
|
|
Property, plant and equipment
|
|
-
|
|
|
6,830,148
|
|
|
|
Deferred tax assets
|
|
-
|
|
|
2,480,257
|
|
|
|
Total assets
|
$
|
26,195
|
|
$
|
9,591,875
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operation
|
|
|
|
|
|
|
|
|
Accounts payable and accrued
liabilities
|
$
|
300,000
|
|
$
|
-
|
|
|
|
Lease inducement
|
|
-
|
|
|
22,234
|
|
|
|
Total liabilities
|
$
|
300,000
|
|
$
|
22,234
|
|
Amounts presented for the years ended
February 28, 2017, February 29, 2016, and February 28, 2015 have been
reclassified to conform to the current presentation. The following table
provides the amounts reclassified for the years then ended:
|
|
Amounts reclassified
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Revenue
|
$
|
7,907,960
|
|
$
|
10,318,493
|
|
$
|
13,201,338
|
|
|
|
Less: Discounts, rebates slotting fees
|
|
(191,667
|
)
|
|
(101,830
|
)
|
|
(352,207
|
)
|
|
|
Net Revenue
|
|
7,716,293
|
|
|
10,216,663
|
|
|
12,849,131
|
|
|
|
Cost of sales
|
|
5,350,213
|
|
|
6,909,442
|
|
|
7,360,651
|
|
|
|
Selling, general, and
administrative
|
|
1,004,315
|
|
|
651,901
|
|
|
701,171
|
|
|
|
Depreciation of property, plant, equipment
and intangible assets
|
|
426,699
|
|
|
475,677
|
|
|
501,319
|
|
|
|
Loss on disposal of assets
|
|
1,861,177
|
|
|
-
|
|
|
719
|
|
|
|
|
|
8,642,404
|
|
|
8,037,020
|
|
|
8,569,860
|
|
|
|
Net Income (loss) before
taxes
|
|
(926,111
|
)
|
|
2,179,643
|
|
|
4,279,271
|
|
|
|
Income tax provision (recovery)
|
|
2,480,527
|
|
|
(436,654
|
)
|
|
108,965
|
|
|
|
Total amount reclassified as
discontinued operations
|
$
|
(3,406,368
|
)
|
$
|
2,616,297
|
|
$
|
4,170,306
|
|
In accordance with ASC 855, the Company evaluated subsequent events through May 30, 2017, the
date these financial statements were issued. There were no material subsequent events that
required recognition or additional disclosure in these financial statements.
SIGNATURES
The registrant hereby certifies that it meets all of the
requirements for filing on Form 20-F and that it has duly caused and authorized
the undersigned to sign this Annual Report on its behalf.
LEADING BRANDS, INC.
/s/ Ralph McRae
Ralph D. McRae
Chairman and Chief Executive Officer
Dated: May 29, 2017
INDEX TO EXHIBITS
*Filed herewith
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