Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual
report:
As of February 28, 2018, 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. Yes ☐ No ☒
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. Yes ☐ No ☒
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. Yes ☒ No ☐
Indicate by check mark whether the
Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T
(§232.405 of
this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
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 12b2 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. ☐
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: Item 17 ☐ Item 18 ☐
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): Yes ☒ No ☐
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 Companys 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 shareholder and regulatory approvals of the Companys planned acquisition of Liquid Media Group Ltd. (
Liquid
) by way of plan of arrangement, general economic conditions, changing trends in the film and gaming media
industries, pricing, 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 Companys 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.
PART I
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.
|
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 Companys consolidated financial statements listed in Item 18 Financial Statements of this Annual Report. The following table is derived
from, and is qualified by, the Companys financial statements and the notes thereto which have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP).
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FISCAL
YEAR ENDED
Feb. 28, 2018
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FISCAL
YEAR ENDED
Feb. 28, 2017
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FISCAL
YEAR ENDED
Feb. 29, 2016
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FISCAL
YEAR ENDED
Feb. 28, 2015
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FISCAL
YEAR ENDED
Feb. 28, 2014
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Net sales / revenue from continuing operations
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NIL
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|
|
NIL
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|
|
|
NIL
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|
|
|
NIL
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|
|
|
NIL
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Net income (loss) from continuing operations
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($
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830,115
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)
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($
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713,945
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)
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($
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1,192,226
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)
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($
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1,009,400
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)
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($
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1,132,028
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)
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Net income (loss) from discontinued operations
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($
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2,557,034
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)
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($
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5,795,744
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)
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$
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(111,058
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)
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$
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1,344,982
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$
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2,295,323
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Net income (loss)
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($
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3,387,149
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)
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($
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6,509,689
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)
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($
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1,303,284
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)
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$
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335,582
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$
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1,163,295
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Earnings (loss) per share, basic continuing operations
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(0.30
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)
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($
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0.25
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)
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($
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0.41
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)
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($
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0.35
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)
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($
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0.39
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)
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Earnings (loss) per share, basic discontinued operations
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(0.91
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)
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($
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2.05
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)
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$
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(0.04
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)
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$
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0.46
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$
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0.78
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Earnings (loss) per share, diluted - continuing operations
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(0.30
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)
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($
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0.25
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)
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($
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0.41
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)
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($
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0.32
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)
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($
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0.35
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)
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Earnings (loss) per share, diluted - discontinued operations
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(0.91
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)
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($
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2.05
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)
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$
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(0.04
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)
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$
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0.42
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$
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0.72
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5
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Total assets
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$
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1,453,652
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$
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5,979,686
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$
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13,274,708
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$
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14,755,112
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$
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15,140,842
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Net assets
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$
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1,063,223
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$
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5,028,288
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$
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11,677,766
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$
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13,073,486
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$
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12,820,201
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Share Capital
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$
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31,305,247
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$
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31,305,247
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$
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31,946,732
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$
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32,401,440
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$
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32,713,370
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Long-term debt
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NIL
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NIL
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NIL
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NIL
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NIL
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Cash dividends declared per common share
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NIL
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NIL
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|
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NIL
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|
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NIL
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NIL
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Weighted average common shares outstanding
basic and diluted
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Basic:
2,802,412
Diluted:
2,802,412
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Basic:
2,820,647
Diluted:
2,820,647
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|
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Basic:
2,880,882
Diluted:
2,880,882
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|
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Basic:
2,922,684
Diluted:
3,192,963
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|
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Basic:
2,929,722
Diluted:
3,246,223
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Exchange Rate May 1, 2018: 1.2867
Exchange rates for the previous six months: US$1 equivalent to the following in Canadian dollars:
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Apr. 1-30, 2018
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Mar. 1-30, 2018
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Feb. 1-28, 2018
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Jan. 1-31, 2018
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Dec. 1-29, 2017
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Nov. 1-30, 2017
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High
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1.2908
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1.3088
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1.2809
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1.2535
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1.2886
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1.2888
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Low
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1.2552
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1.2830
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|
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1.2288
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|
|
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1.2293
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|
|
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1.2545
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|
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1.2683
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Average exchange rates for each of the five most recent fiscal years: US$1equivalent to the following in Canadian dollars:
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Mar. 1, 2017 to
Feb. 28, 2018
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Mar. 1, 2016 to
Feb. 28, 2017
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Mar. 1, 2015 to
Feb. 29, 2016
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Mar. 1, 2014 to
Feb. 28, 2015
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Mar. 1, 2013 to
Feb. 28, 2014
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Average
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1.2880
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1.3109
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1.3058
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|
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1.1255
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1.0462
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B.
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Capitalization and indebtedness.
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This item is not applicable for an Annual Report.
C.
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Reasons for the offer and use of proceeds.
|
This item is not applicable for an Annual Report.
Risks Related To Our Business
The Company is a shell company as defined in Rule
12b-2
of the Exchange Act.
6
Following the sale and disposition of the Companys water brand and remaining beverage assets by virtue of
the disposition of the shares of its subsidiaries, including Leading Brands of Canada, Inc. (
LBCI
) on September 15, 2017, the Company became a shell company. As a shell company, the Companys common shares are not
eligible to be sold pursuant to Rule 144 promulgated pursuant to the Securities Act. In addition, it is possible that Nasdaq (as defined below) may not determine that the Company has regained compliance with the Nasdaq rules due to the
Companys shell company status. See The Companys Plan to regain compliance with the Nasdaqs minimum $2.5 million stockholders equity and other requirements for continued listing is contingent upon the Company
successfully closing its planned acquisition of Liquid below.
There can be no certainty that the Transaction will be completed.
As previously announced on September 18, 2017, the Company entered into a definitive arrangement agreement dated September 17, 2017 (the
Arrangement Agreement
) with Liquid to acquire Liquid by way of a plan of arrangement pursuant to the
Business Corporations Act
(British Columbia) (the
Transaction
) and is seeking to list the
post-acquisition entity on The Nasdaq Capital Market (the
Nasdaq
). In accordance with the applicable Canadian securities laws, the Company plans to hold a special meeting of shareholders to consider resolutions to approve the
issuance of the shares forming the consideration to be paid to Liquid shareholders pursuant to the Transaction, among other things. A special meeting of Company shareholders is expected to be held concurrently with a special meeting of Liquid
shareholders, which will be called by Liquid to consider the Transaction. Closing of the Transaction is subject to Liquid receiving approval from its shareholders for the Transaction. The Transaction will also require the approval of Company
shareholders and the Supreme Court of British Columbia (the
Court
), as well as certain regulatory approvals. If the requisite approvals of the Liquid shareholders, the Company shareholders, and the Court are not obtained and/or
the regulatory approvals and other conditions of the Transaction are not satisfied, the Company may not be able to close the Transaction which may result in the Company being unable to maintain its public listing on the Nasdaq.
Completion of the Transaction is subject to certain conditions that may be outside the control of both the Company and Liquid, including, without limitation,
the requisite approvals of the Company shareholders and the Liquid Shareholders and the receipt of the final order from the Court. There can be no assurance that these conditions will be satisfied or that the Transaction will be completed as
currently contemplated or at all.
There is also no certainty, nor can either party provide any assurance, that the Amended and Restated Arrangement
Agreement will not be terminated by either party before completion of the Transaction.
If the Transaction is not completed, the market price of the
Company shares and the Liquid shares may decline and their respective businesses may suffer. In addition, the Company and Liquid will each remain liable for significant consulting, accounting and legal costs relating to the Transaction and will not
realize anticipated synergies, growth opportunities and other benefits of the Transaction. Liquid and the Company may, if the Transaction is not consummated, be required to raise significant additional capital through the capital markets and/or
incur significant borrowings to meet capital requirements. If the Transaction is delayed, the achievement of synergies and the realization of growth opportunities could be delayed and may not be available to the same extent.
7
The Companys plan to regain compliance with the Nasdaqs minimum $2.5 million
stockholders equity and other requirements for continued listing is contingent upon the Company successfully closing its planned acquisition of Liquid.
On January 23, 2018, the Company received notice from the Nasdaq Listing Qualifications Staff (
Nasdaq Staff
) indicating that the
Company no longer complied with Listing Rule 5550(b) (the
Rule
), based in part upon the Companys
non-compliance
with the minimum $2.5 million stockholders equity requirement
for continued listing on the Nasdaq as of November 30, 2017 and the Company was granted a
45-day
period to submit a plan to regain compliance with the Rule. On March 23, 2018, the Nasdaq Staff
granted the Company an extension of time to regain compliance with the Rule. The terms of the extension are as follows: on or before July 23, 2018, the Company will submit an application for the post Transaction entity to list on the Nasdaq,
comply with all initial listing standards of the Nasdaq, and receive approval to trade the securities of the post Transaction entity on the Nasdaq. The Company believes that upon closing the Transaction, that the resulting combined entity will meet
all applicable requirements for listing on the Nasdaq. If the Company is unable to complete the Transaction, or, if the Company is able to complete the Transaction but unable to satisfy the Rule and the other requirements of the Nasdaq, then the
Company may be unable to maintain its listing on the Nasdaq and could be
de-listed.
The Company depends on key
management employees.
The Companys 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 the Company since March 1996, and he has been responsible for the Companys business planning, corporate and brand initiatives and
financings. The loss of Mr. McRae, or any other key members of the Companys existing management, could adversely affect the Companys business and prospects. There may be a limited number of personnel with the requisite skills to
serve in these positions and the Company may be unable to locate or employ such qualified personnel on acceptable terms.
Possible conflicts of
interest may arise with the Companys directors, officers, and other members of management.
Certain of the Companys 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 the Company 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 the Company to significant liabilities and thus negatively affect
the Companys financial results.
The Company is 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 Company managements time and attention from the operation of the Companys business, which could have a negative effect on the Companys
business operations. The Companys failure to
8
successfully defend or settle any litigation or legal proceedings could result in liability that, to the extent not covered by the Companys insurance, could have a material adverse effect
on the Companys financial condition, revenue and profitability, and could cause the market value of the Companys common shares to decline. Following the disposition of LBCIs Edmonton bottling plant (the
Plant
)
during the fiscal year ended February 28, 2017, LBCI was involved in a legal dispute with former employees of the Plant. The Company assumed liability for any claims and LBCI posted a $600,000 deposit with its lawyers to secure payment of
that and any other claims and associated professional fees. The parties have agreed to settle the matter and are in the process of finalizing the resulting releases and legal documentation. The settlement severance has been accrued in the
Companys consolidated financial statements.
Other risks related to the Companys business may arise and affect the Companys sales and
earnings.
For example, such risks may include:
|
|
|
whether the Company is able to successfully close the Transaction; and
|
|
|
|
changes in general economic and business conditions.
|
Risks Related to the Transaction
The Transaction, if completed, will fundamentally change the Companys primary business from beverage
co-packing
and distribution to film and gaming content creation and distribution
.
The integration of the
Company and Liquid may not occur as planned.
The ability to realize the benefits of the Transaction will depend in part on successfully consolidating
functions and integrating operations, procedures and personnel in a timely and efficient manner, as well as on the combined companys ability to realize the anticipated growth opportunities and synergies, efficiencies and cost savings from
integrating the Companys and Liquids businesses following completion of the Transaction. This integration will require the dedication of substantial management effort, time and resources which may divert managements focus and
resources from other strategic opportunities following completion of the Transaction and from operational matters during this process. The integration process may result in the loss of key employees and the disruption of ongoing business and
employee relationships that may adversely affect the ability of the combined company to achieve the anticipated benefits of the Transaction.
The value
of the Company shares that Liquid shareholders receive under the Transaction or of the Company shares that existing Company shareholders retain following the Transaction, may be less than the value of the Liquid shares or Company Shares, as
applicable, as of the date of the Amended and Restated Arrangement Agreement (as defined herein) or the date of the shareholder meetings.
The
consideration payable to Liquid shareholders pursuant to the Transaction is based on a fixed exchange ratio and there will be no adjustment for changes in the market price of Company shares or Liquid shares prior to the consummation of the
Transaction. None of the parties are permitted to terminate the Amended and Restated Arrangement Agreement (as defined herein) and abandon the Transaction solely because of changes in the market price of the Company shares or Liquid shares.
9
There may be a significant amount of time between the date when Company shareholders and Liquid shareholders vote
at their respective shareholder meetings and the date on which the Transaction is completed. As a result, the relative or absolute prices of the Company shares or the Liquid shares may fluctuate significantly between the dates of the Amended and
Restated Arrangement Agreement, the shareholder meetings and completion of the Transaction.
These fluctuations may be caused by, among other factors,
changes in the businesses, operations, results and prospects of the companies, market expectations of the likelihood that the Transaction will be completed and the timing of its completion, the prospects for the combined companys
post-combination operations, the effect of any conditions or restrictions imposed on or proposed with respect to the combined company by governmental authorities and general market and economic conditions.
As a result of such fluctuations, historical market prices are not indicative of future market prices or the market value of the Company shares that Liquid
shareholders will receive on completion of the Transaction. There can be no assurance that the market value of the Company shares that Liquid shareholders will receive on completion of the Transaction will equal or exceed the market value of the
Liquid shares held by such Liquid shareholders prior to such time. In addition, there can be no assurance that the trading price of the Company shares will not decline following completion of the Transaction.
Following the Transaction the trading price of the Company shares may be volatile.
The trading prices of the Company shares and the Liquid shares have been and may continue to be subject to and, following completion of the Transaction, the
common shares of the combined company may be subject to, material fluctuations and may increase or decrease in response to a number of events and factors. Following the completion of the Transaction, a significant number of additional Company shares
will be available for trading in the public market. The increase in the number of Company shares may lead to sales of such shares or the perception that such sales may occur, either of which may adversely affect the market for, and the market price
of, Company shares. The potential that such a shareholder may sell its Company shares in the public market (commonly referred to as market overhang), as well as any actual sales of such Company shares in the public market, could
adversely affect the market price of the Company shares.
The Company will be vulnerable to exchange rate fluctuations.
Liquids film and gaming content creation and distribution business is carried out primarily in Canada. However, Liquid purchases certain hardware,
software, and digital content production equipment priced in U.S. dollars, for the use of its operations in Canada. Liquid also sells or is planning to sell certain developed media and entertainment content into the United States as well as into the
Peoples Republic of China (via Liquids 51% equity stake in Majesco Entertainment Company (
Majesco
) which is currently developing products for sale in the Peoples Republic of China). As a result, after the
Companys planned acquisition of Liquid, the Company will be 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 (USD) or Chinese Renminbi (CNY) in relation to the Canadian dollar would negatively impact the Companys earnings.
10
The Company will use a limited number of suppliers.
Liquid relies on a limited number of suppliers for hardware, software, and film and gaming production equipment. While other sources of supply do exist for
this equipment, an unexpected disruption in supply or an increase in pricing could have a negative impact on the Companys earnings after it acquires Liquid.
The Company is exposed to varying degrees of competition.
Increased consolidations of the Companys competitors within the media and entertainment industry with and into larger companies, increased market place
competition, and more competitive product and pricing pressures could impact the Companys earnings, market share and volume growth. The competition in the media and entertainment industry is likely to continue, and the Company cannot make any
assurance that this competition will not intensify in the future, which could materially and adversely affect the Companys financial condition and results of operations.
Changes in the film and gaming entertainment industries could adversely affect the Companys financial results.
The film and gaming media business environment is constantly evolving as a result of, among other things, changes in consumer preferences, evolving technology,
shifting consumer tastes and needs, changes in consumer lifestyles and competitive product and pricing pressures. If the Company is unable to successfully adapt to this constantly changing environment, the Companys earnings and sales could be
negatively affected.
Changes in laws and regulations could negatively affect the Companys operations
.
After the completion of the Transaction, the Company will be subject to various laws and regulations, and changes in such laws and regulations could have a
negative impact on the Companys operations. For example:
|
|
|
the Company has significant tax loss carry-forwards available, and a change in its business from
hot-fill
beverage
co-packing
to film and
gaming content creation and/or changes in legislation affecting these losses could negatively impact future earnings; and
|
|
|
|
changes in laws and regulations affecting film and television tax credits in the Province of British Columbia and other jurisdictions where Liquid and its subsidiaries conduct business could add costs to the
Companys operations and/or could decrease consumer demand for the Companys products.
|
The Company depends on protections
afforded by trademarks and copyrights.
Liquid and its subsidiaries hold a number of trademarks and copyrights relating to certain significant
products. The Company will 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 the Companys trademarks and
copyrights. If the Company loses some or all of its intellectual property rights, the Companys business may be materially adversely affected.
11
The Company is vulnerable to operating losses.
Liquids film and gaming content creation operations are relatively capital intensive while revenue-generating opportunities depend on the availability of
projects in the market. During periods of low project volumes, fixed costs can result in operating losses. Additionally, following Liquids acquisition of a 51% control interest in Majesco on January 15, 2018, Liquid will have exposure to
additional financial risks resulting from the performance of Majescos business operations.
The Companys failure to accurately estimate
demand for Liquids media and entertainment products and services could adversely affect the Companys business and financial results.
The
Company may not correctly estimate demand for Liquids products and services. The Companys ability to estimate demand for Liquids products and services is imprecise, particularly as Liquid enters new markets in Asia. If the Company
materially underestimates or overestimates demand for Liquids products and services, the Companys financial results may be adversely affected.
General Risks Related To The Film and Gaming Industry
Liquid competes with large companies with greater resources.
Liquid competes, to some degree, with other larger companies in the film and gaming industry. Some of these competitors have substantially greater marketing,
cash, distribution, production, technical and other resources than Liquid. The Company cannot make any representation that such competition will not intensify in the future which could materially and adversely affect the Companys financial
condition and operations.
The Film and Gaming industry is subject to various regulations and the Company will need to be in compliance with current
and changing rules and regulations.
The creation and distribution of film and gaming content is subject to the rules and regulations of various
federal and provincial agencies. Any adverse publicity associated with any
non-compliance
may damage the Companys reputation and its ability to successfully market its products and services.
Risks Related To The Companys Capital Stock
The
Companys common shares have experienced significant price volatility.
The Companys common share price has experienced significant price
volatility, with closing trading prices on the Nasdaq ranging from a low of US$0.82 to a high of US$5.62 during the five-year period from March 1, 2013 to February 28, 2018. 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
12
fluctuations could adversely affect the market price of the Companys common shares. The Company has had periods where the bid price of the Companys common shares closed below US$1.00
per share and on January 23, 2018, the Company received notice that it was
non-compliant
under the Rule. The Company was granted a
45-day
period to submit a plan to
regain compliance with the Rule. On March 23, 2018, the Nasdaq Staff granted the Company an extension of time until July 23, 2018 to regain compliance with the Rule. The terms of the extension are as follows: on or before July 23,
2018, the Company will submit an application for the post Transaction entity to list on the Nasdaq, comply with all initial listing standards of the Nasdaq, and receive approval to trade the securities of the post Transaction entity on the Nasdaq.
The Company believes that upon closing the Transaction, that the resulting combined entity will meet all applicable requirements for listing on the Nasdaq. If the Company is unable to complete the Transaction, or, if the Company is able to complete
the Transaction but unable to satisfy the Rule, then the Company may be unable to maintain its listing on the Nasdaq and could be
de-listed.
If the Company is
de-listed,
the price of the Companys common shares may fall and there may be a limited trading market for the common shares on other trading markets such that investors may not be able to trade the desired number of shares.
Sales of a substantial number of the Companys common shares into the public market could result in significant downward pressure on the price of the
Companys common shares.
The Companys common shares are traded on the Nasdaq under the symbol LBIX. As of February 28,
2018, there were 2,802,412 common shares issued and outstanding. The concurrent sale of a substantial number of the Companys common shares in the public market could cause a reduction in the market price of the Companys common shares.
The Company may lose its foreign private issuer status in the future, which could result in significant additional costs and expenses to the Company.
In order to maintain the Companys current status as a foreign private issuer (as such term is defined in Rule 405 under the
Securities Act), where more than 50% of the Companys outstanding voting securities are directly or indirectly owned by residents of the United States, the Company must not have any of the following: (i) a majority of the Companys
executive officers or directors being U.S. citizens or residents, (ii) more than 50% of the Companys assets being located in the United States, or (iii) the Companys business being principally administered in the United States.
If the Company were to lose its foreign private issuer status, either as a result of the acquisition of Liquid or otherwise:
|
|
|
the Company 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;
|
|
|
|
the Company 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 the Company, such as Forms
20-F
and
6-K;
|
|
|
|
the Company would be subject to additional restrictions on offers and sales of securities outside the United States, including in Canada;
|
|
|
|
the Company may lose the ability to rely upon exemptions from the Nasdaq corporate governance requirements that are available to foreign private issuers; and
|
|
|
|
if the Companys engages in capital raising activities after losing its foreign private issuer status, there is a higher likelihood that investors may require the Company to file resale registration statements with
the Securities and Exchange Commission (the SEC) as a condition to any such financing.
|
13
The Company is incorporated in British Columbia, Canada, and all of the Companys directors and officers
live in Canada, and most of the Companys assets are in Canada; therefore, investors may have difficulty initiating legal claims and enforcing judgments against the Company and its directors and officers.
The Company is a corporation existing under the laws of British Columbia, all of its directors and officers are citizens of Canada and the majority of the
Companys assets and operations are located outside of the United States. It may not be possible for shareholders to enforce, in Canada, judgments against the Company 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, the Company and its 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 the Company 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 the Company or such persons predicated upon the U.S. federal and state securities laws. Therefore, the Companys 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.
The Company 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 the Companys classes of shares or total value of the
Companys 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 the Companys classes of shares (10% U.S. Shareholders), the Company could be treated as a controlled foreign corporation, as such term is defined under
Subpart F of the Code. This classification would effect many complex results, including the required inclusion by such U.S. Shareholders in income of their pro rata shares of the Companys 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 the Company believes that it is a controlled foreign corporation, the Company has not made a determination as
to whether it is a controlled foreign corporation under the Code, and cannot give any assurance that it would not be determined to be a controlled foreign corporation under the Code now or in the future.
As the Company currently does not have active operations, even if the Company is not a controlled foreign corporation, it could be treated as a passive
foreign investment company under the Code, depending upon the nature of the Companys income and assets and those of its subsidiaries. Such a status would effect many complex results to the Companys U.S. Shareholders, including
those who own less than 10% of the total combined voting power of the Companys outstanding shares.
14
These results might include imposition of higher rates of tax on certain dividends and on gains from sale of the Companys shares than would otherwise apply. While the Company does not
believe that it is a passive foreign investment company nor ever has been, the Company has not made a determination as to whether it is or ever has 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 Companys fiscal years ended February 28, 2017 and February 28, 2018, the Company realized several material changes to both its organizational structure as well as the nature of its business.
|
On September 22, 2016, the Company announced its intention to exit the
co-pack
business and wind down operations at its
hot-fill
bottling plant in Edmonton, Alberta.
On
October 31, 2016, the Company announced that it had entered into a binding agreement to sell its Edmonton bottling plant, land, and buildings with a scheduled closing date of February 1, 2017.
On February 1, 2017, the Company sold its Edmonton bottling plant and adjusted its operations from a bottler/distributor to just that of a
distributor.
On September 15, 2017, in preparation for the Companys planned entry into the film and gaming content creation
business, the Company disposed of its legacy beverage assets through the disposition of its subsidiaries to a company in which Mr. McRae, a director and officer of the Company, is an officer, director and indirect minority shareholder, for
$325,000, which is net of assumed liabilities for certain employee obligations and other matters, all of which is subject to certain working capital adjustments. An additional $600,000 is held in escrow as security for payment of certain liabilities
that remain the
15
responsibility of the Company. In addition, the Company is entitled to any excess amounts realized via a sublease of office and warehouse premises in Vancouver, Canada between LBCI and Richmond
Holdings Ltd. (
Richmond Holdings
) after all costs and expenses arising in relation to that head lease (the
Lease
). The transaction was reviewed and approved by the disinterested directors of the Company.
On September 17, 2017, the Company entered into the Arrangement Agreement to acquire 100% of Liquid pursuant to the Transaction.
Liquids primary business is aggregating mature production service studios and creating a vertically integrated studio system for producing film, television, and gaming content from inspiration to distribution. At the time of this announcement,
the Company anticipated that its shareholders would hold 22.637% and Liquid shareholders would hold 77.363% of the post-transaction entity. The Company also announced its intention that at the time of the closing of the Transaction, that all of its
Board members, with the exception of Mr. Tom Gaglardi, would resign and be replaced by Messrs. Jackson, Brezer and Cruz, and Ms. Katsoolis, who are directors and an officer of Liquid.
On January 15, 2018, the Company announced an amendment to the Arrangement Agreement by entering into the amended and restated definitive
arrangement agreement dated January 14, 2018 (the
Amended and Restated Arrangement Agreement
) with Liquid relating to the Transaction whereby the original agreed valuation of existing Company shares was increased from
USD$1.50 per share to USD$1.78 per share. As a result, the Companys shareholders are anticipated to hold 25.8% and Liquid shareholders are anticipated to hold 74.2% of the post-transaction entity. At the same time, the Company announced that
Liquid had acquired 51% of Majesco, a proven gaming publisher. The acquisition of Majesco by Liquid satisfied one of the key terms of the Amended and Restated Arrangement Agreement relating to the Transaction whereby Liquid shall acquire a gaming
studio.
On January 23, 2018, the Company received notice from the Nasdaq Staff indicating that the Company no longer complied with
the Rule, based in part upon the Companys
non-compliance
with the minimum $2.5 million stockholders equity requirement for continued listing on the Nasdaq as of November 30, 2017 and the
Company was granted a
45-day
period to submit a plan to regain compliance with the Rule. On March 23, 2018, the Nasdaq Staff granted the Company an extension of time to regain compliance with the Rule.
The terms of the extension are as follows: on or before July 23, 2018, the Company will submit an application for the post Transaction entity to list on the Nasdaq, comply with all initial listing standards of the Nasdaq, and receive approval
to trade the securities of the post Transaction entity on the Nasdaq. The Company believes that upon closing the Transaction, that the resulting combined entity will meet all applicable requirements for listing on the Nasdaq. If the Company is
unable to complete the Transaction, or, if the Company is able to complete the Transaction but unable to satisfy the Rule and the other requirements of the Nasdaq, then the Company may be unable to maintain its listing on the Nasdaq and could be
de-listed.
On February 8, 2018, the Company announced that it had entered into a support agreement
with Liquids subsidiary, Majesco, whereby the Company will invest in the exploitation of Majescos gaming properties in Asia. In order to assist Liquid with the development of its
16
gaming business (and in advance of the closing of the preferred share financing investment), the Company agreed to advance funds to Majesco so that Majesco can retain Web Presence in China
(
WPIC
)
to assist Majesco develop its intellectual properties and gaming content in the Peoples Republic of China. Under the terms of the support agreement, the Company agreed to invest USD$50,000 to Majesco as
consideration for receiving 5% of Majescos net profits from its sales of gaming assets in Asia for a period of 5 years. On February 5, 2018, the Company advanced an initial tranche of USD$25,000 of its planned USD$50,000 investment to
Majesco. This amount is refundable from Majesco if the Transaction is not completed by June 1, 2018
5.
|
The Company expended $nil on the purchase of property, plant and equipment in the fiscal year ended February 28, 2018.
|
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.
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.
|
There are no significant capital expenditures that are planned for the fiscal year ending February 28, 2019. However, this may change after the planned acquisition of Liquid is completed by way of plan of
arrangement.
|
7.
|
There have been no indications of public takeover offers by third parties in respect of the Companys shares or by the Company in respect of other companies shares during the last and current fiscal year.
|
1.
|
During the fiscal years ended February 28, 2017 and February 28, 2018, the Company exited the beverage bottling, distribution, sales, merchandising, and branding business in order to take advantage of
perceived growth opportunities in the film and gaming content creation and distribution business. As set out elsewhere herein, the Company has entered into an Amended and Restated Arrangement Agreement to acquire a 100% interest in Liquid pursuant
to the Transaction. Liquids primary business is aggregating mature production service studios and creating a vertically integrated studio system for producing film, television, and gaming content from inspiration to distribution. The
acquisition of Liquid is subject to the Company obtaining various regulatory, exchange, and court approvals which are outside the Companys direct control. As such, the Company is unable to make any representation that the acquisition will be
successfully completed or approved.
|
17
2.
|
Exiting the Beverage
Co-Pack
and Distribution Business
|
Sale of Legacy Beverage Assets.
In the fiscal year ended February 28, 2017, the Company sold its 50,000 square foot bottling plant
in Edmonton, Alberta. As part of the sale of its legacy beverage assets, on September 15, 2017 the Company disposed of its subsidiaries to a company in which Mr. McRae, a director and officer of the Company, is an officer, director and
indirect minority shareholder, for $325,000, which is net of assumed liabilities for certain employee obligations and other matters, all of which is subject to certain working capital adjustments. An additional $600,000 is held in escrow as security
for payment of certain liabilities that remain the responsibility of the Company. In addition, the Company is entitled to any excess amounts realized via a sublease of office and warehouse premises in Vancouver, Canada between LBIC and Richmond
Holdings after all costs and expenses arising in relation to the Lease. The transaction was reviewed and approved by the disinterested directors of the Company.
3.
|
Entering the Film and Gaming Content Creation and Distribution Business
|
Pending
Acquisition of Liquid
. On September 17, 2017, the Company entered into the Arrangement Agreement to acquire 100% of Liquid by way of a plan of arrangement. Liquids primary business is aggregating mature production service studios and
creating a vertically integrated studio system for producing film, television, and gaming content from inspiration to distribution. Based on the agreed valuation of the Companys shares at USD$1.78 per share pursuant to the Amended and Restated
Arrangement Agreement, Company shareholders are anticipated to hold 25.8% and Liquid shareholders are anticipated to hold 74.2% of the post-transaction entity.
Acquisition of Majesco
. On January 15, 2018, the Company announced that Liquid had successfully acquired 51% of Majesco, a proven
gaming publisher. The acquisition of Majesco by Liquid satisfied one of the key terms of the Amended and Restated Arrangement Agreement whereby Liquid shall acquire a gaming studio. Majesco is the developer of mobile, console, and desktop
downloadable games including such hits as A Boy and his Blob and Gone Home. In order to advance Majescos development of its gaming business in the growing Asian market, in Q1 of 2018, the Company announced that it had
entered into a support agreement with Majesco, whereby the Company will invest in the exploitation of Majescos gaming properties in Asia. In order to assist Liquid with the development of its gaming business (and in advance of the closing of
the preferred share financing investment), the Company agreed to advance funds to Majesco so that Majesco can retain WPIC
to assist Majesco to develop its intellectual properties and gaming content in the Peoples Republic of China
.
Under the terms of the support agreement, the Company agreed to invest USD$50,000 to Majesco as consideration for receiving 5% of Majescos net profits from its sales of gaming assets in Asia for a period of 5 years. On February 5,
2018, the Company advanced an initial tranche of USD$25,000 of its planned USD$50,000 investment to Majesco. This amount is refundable from Majesco if the Transaction is not completed by June 1, 2018.
18
4.
|
Other Business Overview Information
|
All of the Companys operations and assets are
located in Canada. As at February 28, 2018, the Company did not have any employees and consolidated its operations through its offices and independent contractors.
5.
|
The Company makes no statements concerning its competitive position.
|
C.
|
Organizational structure.
|
The Company had no subsidiaries as at February 28, 2018. On
September 15, 2017, in preparation for the Companys planned entry into the film and gaming content creation business, the Company disposed of its legacy beverage assets through the disposition of its subsidiaries to a company in which
Mr. McRae, a director and officer of the Company, is an officer, director and indirect minority shareholder, for $325,000, which is net of assumed liabilities for certain employee obligations and other matters, all of which is subject to
certain working capital adjustments. An additional $600,000 is held in escrow as security for payment of certain liabilities that remain the responsibility of the Company. In addition, the Company is entitled to any excess amounts realized via a
sublease of office and warehouse premises in Vancouver, Canada between LBIC and Richmond Holdings after all costs and expenses arising in relation to the Lease. The transaction was reviewed and approved by the disinterested directors of the Company.
For additional clarity, a list of the names of each of the Companys subsidiaries that were disposed of during the fiscal year ended February 28, 2018 is included below:
|
|
|
Leading Brands of Canada, Inc.;
|
|
|
|
Neurogenesis Inc. (Canada);
|
|
|
|
Neurogenesis Inc.: (Nevada);
|
|
|
|
Leading Brands USA, Inc.; and
|
|
|
|
Leading Brands of America, Inc.
|
D.
|
Property, plant and equipment.
|
On February 1, 2017, the Company sold its Edmonton bottling
plant and exited its lease of its regional warehouse and distribution center in Edmonton.
On September 15, 2017 in connection with the
Companys sale of its subsidiaries, the purchase price was deposited in escrow as a security for the payment of certain liabilities that were to remain the responsibility of the Company, including certain obligations. Certain other amounts
relating to sublease receipts will be added to the escrow relating to the Lease. . The Lease expires in February 2023.
19
|
Item 4A. Unresolved Staff Comments
|
None.
Item 5. Operating and Financial Review and Prospects
Introduction
The Company is in the process of undergoing a fundamental change in business from beverage
co-packing
and distribution
to film and gaming content production and distribution.
During the fiscal year ended February 28, 2018, the Company entered into the Amended and
Restated Arrangement Agreement to acquire 100% of Liquid pursuant to the Transaction. Liquids primary business is aggregating mature production service studios and creating a vertically integrated studio system for producing film, television,
and gaming content from inspiration to distribution. The acquisition of Liquid is subject to the Company obtaining various regulatory, exchange, and court approvals which are outside the Companys direct control. As such, the Company is unable
to make any representation that the acquisition will be successfully completed or approved.
Overall Performance Continuing operations
The major developments during the year ended February 28, 2018 included:
Net loss decreased by $3,122,540 to $3,387,149 for the year ended February 28, 2018 from a net loss of $6,509,689 in the comparable period last year. This
change principally occurred due to the Companys loss on the discontinued
co-packing
and legacy beverage operations. The discontinued operations in the fiscal year ended February 28, 2018 included
the Companys legacy beverage operations. The Companys continuing operations that are presented for the current year and prior years represent the results of the parent company, Leading Brands Inc.
Selling, General and Administrative Expenses
For the
fiscal year ended February 28, 2018, selling, general and administrative expenses increased by $149,558 from $726,530 in the fiscal year ended February 28, 2017 to $876,088 in the year ended February 28, 2018 primarily as a result of:
|
|
|
increased legal and public company expense of $219,474;
|
|
|
|
increased administrative costs of $122,497; and
|
|
|
|
decreased wages and outside service expense of $192,413.
|
20
Other Expenses
Depreciation expense was recorded at $1,053 for the fiscal year ended February 28, 2018, which was the same as $1,053 recorded in the prior fiscal year.
The Company also recognized depreciation expense within discontinued operations.
In the fiscal year ended February 28, 2018, the Company recorded
$19,703 in interest income from bank balances compared to $nil in the prior fiscal year.
The Company recorded $3,995 in other income in fiscal year ended
February 28, 2018, compared to $nil in the prior fiscal year. This income represents the net proceeds on the sublease revenue derived from the office on 33 West 8
th
Avenue in Vancouver,
British Columbia.
Discontinued Operations
Net loss
from discontinued operations decreased by $3,238,710 to $2,557,034 for the year ended February 28, 2018 from a net loss of $5,795,744 in the comparable period last year. During the fiscal year ended February 28, 2018, the Company disposed
of its legacy beverage operations. The decrease in the loss from discontinued operations compared to the prior year is principally due to the
write-off
of a deferred tax asset of $2,480,257 recognized in the
prior year as well as increased losses as a result from the discontinuation of
co-packing
operations. This decrease was offset by the loss recognized on the disposal of the legacy beverage operations of
$1,071,946 in the fiscal year ended February 28, 2018.
Fiscal Year Ended February 28, 2017 Continuing operations
Selling, General and Administrative Expenses
For the
fiscal year ended February 28, 2017, selling, general and administrative expenses decreased $550,597 from $1,277,127 in the fiscal year ended February 29, 2016 to $726,530 in the year ended February 28, 2017 primarily as a result of:
|
|
|
decreased stock compensation cost of $104,850;
|
|
|
|
decreased legal and public company expense of $241,472;
|
|
|
|
decreased wages and outside service expense of $131,721; and
|
|
|
|
decreased administrative costs of $4,875.
|
Other Expenses
Depreciation expense decreased to $1,053 for the fiscal year ended February 28, 2017, as compared to $1,316 in the prior fiscal 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.
21
Discontinued Operations
Net loss from discontinued operations increased by $5,684,686 to $5,795,744 for the year ended February 28, 2018 from a net loss of $111,058 in the
comparable period last year. The increase in the loss from discontinued operations compared to the prior year is principally the
write-off
of a deferred tax asset of $2,480,257 recognized in the fiscal year
ended February 28, 2017, as well as increased losses as a result from the discontinuation of
co-packing
operations.
B.
|
Liquidity and Capital Resources.
|
Fiscal Year Ended February 28, 2018
As of February 28, 2018, the Company had working capital of $1,060,066 compared to working capital of $3,939,880 at the prior fiscal year end. The Company
held $1,369,352 in cash account balances (including restricted cash) at February 28, 2018 compared with $4,315,028 at the prior fiscal year end.
Considering the positive working capital position, including the cash on hand at February 28, 2018, the Company believes that it has sufficient working
capital to continue operations for the next twelve months.
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used
in):
|
|
Fiscal Year ended
February 28, 2018
|
|
|
Fiscal Year ended
February 29, 2017
|
|
|
Change
|
|
Operating Activities
|
|
($
|
2,596,859
|
)
|
|
($
|
1,351,804
|
)
|
|
($
|
1,245,055
|
)
|
Investing Activities
|
|
$
|
(348,817
|
)
|
|
$
|
5,523,802
|
|
|
($
|
5,872,619
|
)
|
Financing Activities
|
|
$
|
nil
|
|
|
($
|
139,789
|
)
|
|
$
|
139,789
|
|
The increase in cash utilized in the fiscal year ended February 28, 2018 for operating activities is the result of the
higher
non-cash
expenses (e.g. depreciation, loss on disposal, deferred income tax provisions) associated with the net loss recorded in the prior fiscal year.
The decrease in cash utilized in the fiscal year ended February 28, 2018 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 in the prior fiscal year.
Cash used for financing activities in the fiscal year ended
February 28, 2018 was $nil and changed from the prior fiscal year due to cash being used for the Companys share repurchase program in the prior fiscal year.
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 has no material commitments for capital expenditures in the fiscal year ending February 28, 2019.
22
Fiscal Year Ended February 28, 2017
As of February 28, 2017, the Company had working capital of $3,939,880 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 Companys 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.
The Company has no material commitments for capital expenditures in the fiscal year ending February 28, 2018.
C.
|
Research and development, patents and licenses, etc.
|
As a shell company, 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.
|
As part of the sale of the Companys subsidiaries in the fiscal year ended February 28, 2018, the Company disposed of its inventory of formulations for a wide variety of juices and new age beverages, as well as many U.S.,
Canadian and foreign trademarks.
|
23
From 2009 until the last fiscal year ended February 28, 2018, the
Company was focused on producing and selling beverage products that can generate superior margins. The Company now plans to enter the film and gaming content and distribution business via its planned acquisition of Liquid by way of plan of
arrangement.
The Company believes that growing demand in the film and gaming content production and distribution business represent growth opportunities
for the Company and its shareholders.
E.
|
Off-balance
sheet arrangements.
|
1.
|
The Company is committed to operating leases for a premise 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, 2018.
|
24
F.
|
Tabular disclosure of contractual obligations.
|
The following table presents our contractual
obligations as of February 28, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
$
|
143,585
|
|
|
$
|
123,073
|
|
|
$
|
20,512
|
|
|
|
|
|
|
|
|
|
Purchase Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-term Liabilities Reflected on the Companys Balance Sheet under the GAAP of the
primary financial statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on Capital Lease
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143,585
|
|
|
$
|
123,073
|
|
|
$
|
20,512
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 Companys 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.
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, 2018 (2017: $nil). A
10% change in the estimates for doubtful accounts would not result in a material change to the financial statements.
25
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, 2018, the inventory balance was presented net of a provision for obsolete inventory in the amount of $nil (2017: $15,638). 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 Loss.
26
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
27
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 March 1, 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 Companys 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 the 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. The Company adopted this standard, which did not have
a material impact on the consolidated financial statements.
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
2016-02
is effective for annual periods, and interim periods within
those annual periods, beginning after December 15, 2018, which will be our fiscal year beginning March 1, 2019 (fiscal 2020). Early adoption is permitted. The Company continues to evaluate the impact that the adoption will have on its
consolidated financial statements and disclosures.
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 adopted this standard, which did not have a material impact on the consolidated financial statements.
In June 2016, the FASB issued ASU
No. 2016-13,
Financial InstrumentsCredit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments (ASU
2016-13).
Financial InstrumentsCredit 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
28
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. The Company will adopt this guidance in the first quarter of fiscal 2019. The adoption of this amendment is
not expected to have a material impact 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. The adoption of this amendment was included in these consolidated financial statements within the consolidated Statements of Cash Flows.
In
January 2017, the FASB issued Accounting Standards Update
2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU
2017-01).
ASU
2017-01
clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions of
assets or businesses. ASU
2017-01
is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, which will be our fiscal year beginning March 1,
2018 (fiscal 2019). Early adoption is not permitted. The Company will adopt this guidance in the first quarter of fiscal 2019. The adoption of this amendment is not expected to have a material impact on our consolidated financial statements.
29
In January 2017, the FASB issued Accounting Standards Update
2017-04,
Intangibles Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU
2017-04).
ASU
2017-04
simplifies how an
entity is required to test goodwill for impairment. ASU
2017-04
is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019, which will be our
fiscal year beginning March 1, 2020 (fiscal 2021). Early adoption is permitted. The Company will adopt this guidance in the first quarter of fiscal 2021. The adoption of this amendment is not expected to have a material impact on our
consolidated financial statements.
In May 2017, the FASB issued Accounting Standards Update
2017-09,
Compensation Stock Compensation (Topic 718): Scope of Modification Accounting (ASU
2017-09).
ASU
2017-09
clarifies the guidance on when to
apply modification accounting for share-based payment awards. ASU
2017-09
is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, which will be
our fiscal year beginning March 1, 2018 (fiscal 2019). Early adoption is permitted. The Company will adopt this guidance in the first quarter of fiscal 2019. The adoption of this amendment is not expected to have a material impact on our
consolidated financial statements.
30
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
of Residence
|
|
Principal Occupation and Areas of Experience
|
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.
|
|
|
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, Moxies Restaurants LP, Shark Clubs of Canada, Inc. and Dennys Restaurants of Canada.
|
|
|
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. Effective March 23, 2018, Mr. McRae assumed the role of Interim Principal Financial Officer of the Company. He is also a director and the Chairman, CEO and Secretary/Treasurer of LBIC.
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.
|
31
|
As of March 23, 2018, Ms. Fei Xu is no longer Corporate Controller and Principal Financial Officer of the Company.
|
|
As of September 15, 2017, Mr. Thor Matson is no longer Vice President of Business Development.
|
|
The Company regrets to inform the passing of Mr. Stephen Fane, Director, on November 10, 2017. The Company is eternally grateful for Mr. Fanes contributions over his many years with the Company.
|
|
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 Companys strength and
ability to sustain growth is based on an organization that perceives people as its single most important asset. The Companys philosophy is to provide sufficient compensation opportunities in order to attract and retain key executive officers
critical to the Companys 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 managements interests with those of the shareholders of the Company in the sustained growth of shareholder value.
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 Companys executive
compensation program includes base salary, annual cash or short-term incentives (bonuses) and long-term incentive compensation in the form of stock options.
32
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
Companys 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 Companys 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 Companys 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 Companys 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 Companys compensation policies and practices. While the Board of
Directors does not formally analyse risks associated with the Companys 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.
33
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 Canadas 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 $150,000 for that financial year, and
|
(c)
|
each individual who would have satisfied the criteria under paragraph (b) but for the fact that the individual was neither an executive officer of the Company, nor acting in a similar capacity, at the end of the
most recently completed financial year.
|
(collectively the
Named Executive Officers
or
NEOs
).
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name and
Principal
Position
|
|
Fiscal
Year
Ending
|
|
|
Salary
($)
|
|
|
Share-based
awards
($)
|
|
|
Option-Based
Awards
(1)
($)
|
|
|
Non-Equity
Annual
Incentive Plans
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
Compensation
($)
|
|
|
|
|
|
|
Annual
Incentive
Plans
|
|
|
Long-Term
Incentive
Plans
|
|
|
|
Ralph McRae
Chairman, President and CEO
|
|
|
2018
2017
2016
|
|
|
|
254,800
472,209
318,657
|
(2)
|
|
|
nil
nil
nil
|
|
|
|
nil
nil
nil
|
|
|
|
nil
nil
nil
|
|
|
|
nil
nil
nil
|
|
|
|
85,313
nil
132,000
21,000
|
(3)(9)
(4)
(5)
|
|
|
337,300
472,209
471,657
|
|
Fei Xu
Corporate Controller and Principal Financial Officer
|
|
|
2018
2017
2016
|
|
|
|
91,596
90,891
91,596
|
(6)
|
|
|
nil
nil
nil
|
|
|
|
nil
nil
nil
|
|
|
|
nil
nil
nil
|
|
|
|
nil
nil
nil
|
|
|
|
nil
nil
nil
|
|
|
|
91,596
90,891
91,596
|
|
Thor Matson
Vice President of Business Development
|
|
|
2018
2017
2016
|
|
|
|
86,667
160,615
160,000
|
(7)
|
|
|
nil
nil
nil
|
|
|
|
nil
nil
nil
|
|
|
|
5,904
15,906
11,546
|
|
|
|
nil
nil
nil
|
|
|
|
5,850
10,842
10,800
|
(8)
|
|
|
98,421
187,363
182,346
|
|
(1)
|
The value of option awards reflects the grant date fair value of option based awards in the 2016, 2017, and 2018 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)
|
Mr. McRae was paid salary up until September 15, 2017. From September 16, 2017 until January 31, 2018, Mr. McRae (via McRae Ventures) was paid consulting fees of $15,000 per month. Beginning
February 1, 2018, Mr. McRae elected to receive the monthly consulting fees of $15,000 in his personal name.
|
(3)
|
An aggregate of $85,313 was paid to Mr. McRae (via McRae Ventures) for consulting fees during the period from September 16, 2017 until January 31, 2018. During this period, Mr. McRae (via McRae
Ventures) was paid consulting fees of $15,000 per month. Beginning February 1, 2018, Mr. McRae began receiving monthly consulting fees of $15,000 in his personal name.
|
(4)
|
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 LBIC providing for an aggregate salary of $420,000 per annum, which
represents a reduction of Mr. McRaes salary of 31.4% over prior years.
|
(5)
|
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.
|
(6)
|
Effective March 23, 2018, Ms. Xu is no longer with the Company.
|
(7)
|
Effective September 15, 2017, Mr. Matson is no longer with the Company. Mr. Matsons total compensation was calculated up until September 15, 2017.
|
(8)
|
This amount represents an automobile allowance to Mr. Matson up until he left the Company on September 15, 2017.
|
(9)
|
As part of the sale of the Companys legacy beverage assets on September 15, 2017, the Company disposed of its subsidiaries to a company in which Mr. McRae, a director and officer of the Company, is an
officer, director and, together with members of his family, a majority shareholder, described herein as the Legacy Transaction. In connection with the Legacy Transaction, Mr. McRae waived his right to receive his $900,000 severance
payment as provided for in his Executive Employment Agreement (as defined below).
|
35
The Company does not have formal employment or consulting agreements. The executive employment agreement with
Chairman, President and CEO, Ralph McRae, effective June 1, 2015 (the
Executive Employment Agreement
), ended on September 15, 2017. Effective September 15, 2017, Mr. McRae invoices the Company for his
consulting services.
Outstanding Option-Based Awards for Named Executive Officers
The following table sets forth information concerning all stock option awards outstanding at the end of the most recently completed fiscal year, including
awards granted before the most recently completed fiscal year, to each of the Named Executive Officers. The Company has not granted any share-based awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
|
|
|
Option Exercise Price
($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
(2)
June 1, 2020
(2)
|
|
|
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$1.27, and the exercise or base price
of the option. The Shares are traded on the Nasdaq 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 = CDN$1.2809.
|
(2)
|
Ms. Xu departed the Company on March 23, 2018 and her stock options expired 30 days thereafter.
|
The
terms of the Companys stock options are discussed under the Option-Based Awards section above.
Option Exercises During the Most
Recently Completed Fiscal Year
No stock options were exercised by the Named Executive Officers during the most recently completed fiscal year.
Option Repricing
The Company did not reprice any stock
options during the most recent fiscal year.
36
Value Vested or Earned During the Year
The following table sets out the value vested or earned of all stock options that vested during
the most recently completed fiscal year for each of the
Named Executive Officers:
|
|
|
|
|
Name
|
|
Option-Based Awards -
Value Vested
During The Year
(1)
($USD)
|
|
Ralph McRae
|
|
|
nil
|
|
Fei Xu
|
|
|
nil
|
|
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, LBIC and Ralph D. McRae (the
Executive
), effective June 1, 2015 was terminated
on September 15, 2017. In connection with the Legacy Transaction as described below under Item 7. B. 1. a) Major Shareholders and Related Property Transaction Related party transactions, the $900,000 severance
obligation was fully satisfied on September 15, 2017.
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 Officers responsibilities.
37
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 $500 for each Board meeting and committee meeting attended. Directors who are also executives of the Company do not receive directors fees. Reference is made to the Summary Compensation Table above for details of
compensation paid to directors who are also Named Executive Officers, in their capacity as executive officers of the Company. Directors are also compensated for their services in their capacity as directors by the granting from time to time of
incentive stock options.
The following table sets forth all amounts of compensation provided to the directors, who are not Named Executive Officers, for
the Companys most recently completed fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
Name
|
|
Fees Earned
($)
|
|
|
Share-based
Awards
($)
|
|
|
Option-Based
Awards
($)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
|
All Other
Compensation
($)
|
|
|
Total
($)
|
|
James Corbett
|
|
|
11,000
|
|
|
|
nil
|
|
|
|
nil
|
|
|
|
nil
|
|
|
|
20,000
|
(2)
|
|
|
31,000
|
|
Darryl Eddy
|
|
|
11,000
|
|
|
|
nil
|
|
|
|
nil
|
|
|
|
nil
|
|
|
|
40,000
|
(2)
|
|
|
51,000
|
|
Stephen Fane
|
|
|
6,000
|
(1)
|
|
|
nil
|
|
|
|
nil
|
|
|
|
nil
|
|
|
|
50,000
|
(2)
|
|
|
56,000
|
|
R. Thomas Gaglardi
|
|
|
8,000
|
|
|
|
nil
|
|
|
|
nil
|
|
|
|
nil
|
|
|
|
nil
|
|
|
|
8,000
|
|
(1)
|
The Company regrets to inform that Mr. Stephen Fane ended his tenure as Director upon his passing on November 10, 2017.
|
(2)
|
The other compensation received by Mr. James Corbett, Mr. Darryl Eddy and Mr. Stephen Fane pertained to a special independent committee to advise the Company on the plan of arrangement with Liquid and the
following transition.
|
Outstanding Option-Based Awards for Directors
Options for the purchase of Shares of the Company are granted from time to time to directors under the same terms as those granted to employees, and described
above in Option-Based Awards.
The following table sets forth information concerning all stock option awards outstanding at the end of the
most recently completed fiscal year, including awards granted before the most recently completed fiscal year, to each of the directors. The Company has not granted any share-based awards.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director Name
|
|
Number of Securities
Underlying Unexercised
Options
(#)
|
|
|
Option Exercise
Price
($USD)
|
|
|
Option Expiration
Date
|
|
Value of Unexercised
In-The-Money Options
(1)
($USD)
|
|
James Corbett
|
|
|
20,000
10,000
50,000
|
|
|
|
3.00
3.50
2.45
|
|
|
June 26, 2018
Sept. 28, 2019
June 1, 2020
|
|
|
nil
nil
nil
|
|
Darryl Eddy
|
|
|
10,000
50,000
20,000
|
|
|
|
3.50
2.45
3.69
|
|
|
Sept. 28, 2019
June 1, 2020
July 12, 2025
|
|
|
nil
nil
nil
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director Name
|
|
Number of Securities
Underlying Unexercised
Options
(#)
|
|
|
Option Exercise
Price
($USD)
|
|
|
Option Expiration
Date
|
|
Value of Unexercised
In-The-Money Options
(1)
($USD)
|
|
Stephen Fane
(2)
|
|
|
20,000
10,000
50,000
|
(2)
(2)
(2)
|
|
|
3.00
3.50
2.45
|
|
|
June 26, 2018
Sept. 28, 2019
June 1, 2020
|
|
|
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$1.27 and the exercise price of the
option. The Companys shares are traded on the Nasdaq 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 = CDN$1.2809.
|
(2)
|
The Company regrets to inform that Mr. Stephen Fane ended his tenure as Director upon his passing on November 10, 2017. Mr. Fanes options will expire on November 10, 2018.
|
No stock options were exercised by the directors during the most recently completed fiscal year, nor were any of the stock options repriced during that
period.
Value Vested or Earned During the Year
The
following table sets out the value vested or earned of all stock options that vested during
the most recently completed fiscal year for each of the directors who are not Named Executive Officers:
|
|
|
|
|
Director Name
|
|
Option-Based Awards -
Value Vested
During The Year
(1)
($USD)
|
|
James Corbett
|
|
|
nil
|
|
Darryl Eddy
|
|
|
nil
|
|
Stephen Fane
(2)
|
|
|
nil
|
|
R. Thomas Gaglardi
|
|
|
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.
|
(2)
|
The Company regrets to inform that Mr. Stephen Fane ended his tenure as Director upon his passing on November 10, 2017.
|
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 Companys fiscal year ended February 28, 2018, no stock options were exercised by directors.
39
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 Companys 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. Due to Mr. Stephen Fanes passing on November 10, 2017, the Board of Directors is currently comprised of four directors. 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
|
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
|
Two 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 Chief Executive Officer 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 and which has been terminated, there are no directors service contracts with the Company or any of its subsidiaries providing
for benefits upon termination of service.
|
The members of the Companys Audit Committee are:
40
Two out of the three members of the Audit Committee, being James Corbett and Darryl R. Eddy, are
independent directors, are financially literate, and are considered financial experts as defined by the SEC. Ralph McRae, by virtue of acting as the Chairman, President and Chief Executive Officer of the Company, is not considered
independent. 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 Companys 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 Companys external auditors, overseeing the audits of the
Companys 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 two independent directors:
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 Companys 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.
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 Boards duties effectively, and to maintain a diversity of view and experience.
41
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 Boards 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, 2018, the executive officers of Leading Brands, Inc. are:
Ralph D. McRae Chairman, President and Chief Executive Officer
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,
2018
|
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Canada
|
|
|
0
|
|
|
|
24
|
|
|
|
73
|
|
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 February 28, 2018, the
Company had 669,000 issued and outstanding options, with a weighted average exercise price of US$2.675.
Of the total stock options granted, 669,000 have
vested and are available for exercise as of May 1, 2018.
42
The following table provides share ownership information with respect to the directors and officers listed in
Item 6 Directors, Senior Management and Employees above, as at May 1, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Common Shares
Held
(1)
(#)
|
|
|
# of Common
Shares under
Options
Granted
|
|
|
Date of Grant
|
|
Exercise
Price
($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
|
R. Thomas Gaglardi
|
|
|
419,125
(15.0
|
(2)
%)
|
|
|
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
|
(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.
43
Item 7. Major Shareho
lders and Related Party Transactions
As at May 1, 2018 the Company had 2,802,412 common shares without par
value issued and outstanding.
1.
|
Following are the shareholders that are the beneficial owners of 5% or more of the Companys voting securities, as of May 1, 2018:
|
(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. Gaglardis Shares are held by Northland Properties Corporation.
|
(b)
|
To the best of the Companys 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 Companys major shareholders do not have different voting rights than other shareholders.
|
2.
|
The Companys register of 259 members showed that as of May 1, 2018, 1,551,406 of the Companys 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. However, since the Company meets the Business Contacts Test of the definition of a Foreign Private Issuer, the Companys status as a
Foreign Private Issuer has not changed.
|
3.
|
To the Companys 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 Companys 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.
|
44
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, 2018 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)
|
As part of the sale of the Companys Legacy Transaction, on September 15, 2017 the Company disposed of its subsidiaries to a company in which Mr. McRae, a director and officer of the Company, is an
officer, director and together with members of his family, a majority shareholder, for $325,000, which is net of assumed liabilities for certain employee obligations and other matters, all of which is subject to certain working capital adjustments.
In connection with the Legacy Transaction agreement, the severance obligation under the Executive Employment Agreement was satisfied. An additional $600,000 is held in escrow as security for payment of certain liabilities that remain the
responsibility of the Company. In addition, the Company is entitled to any excess amounts realized via a sublease of office and warehouse premises in Vancouver, Canada between LBIC and Richmond Holdings after all costs and expenses arising in
relation to the Lease. The transaction was reviewed and approved by the disinterested directors of the Company.
|
|
b)
|
A company with a director in common with the Company provided consulting services in the amount of $2,813.
|
|
c)
|
A company with an officer in common with the Company provided management services in the amount of $67,500.
|
|
d)
|
A company with a director in common with the Company supplied bottling services in the amount of $160,642.
|
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.
45
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 Companys financial position, profitability, or cash flows. The settlement severance related to the Companys Edmonton bottling plant legal dispute has been accrued in the Companys consolidated financial
statements.
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 closing price history of the Companys common shares on the Nasdaq, in
U.S. dollars.
|
(a) For the five most recent full fiscal years:
|
|
|
|
|
|
|
|
|
Period
|
|
High $
|
|
|
Low $
|
|
March 1, 2017 to Feb. 28, 2018
|
|
|
2.82
|
|
|
|
0.82
|
|
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
|
|
(b) For each full financial quarter of the two most recent full fiscal years:
|
|
|
|
|
|
|
|
|
Period
|
|
High $
|
|
|
Low $
|
|
4
th
Quarter
Dec. 1, 2017 Feb. 28, 2018
|
|
|
1.85
|
|
|
|
1.27
|
|
3
rd
Quarter
Sept. 1, 2017 Nov. 30, 2017
|
|
|
2.82
|
|
|
|
0.82
|
|
2
nd
Quarter
June 1, 2017 Aug. 31, 2017
|
|
|
2.01
|
|
|
|
0.85
|
|
1
st
Quarter
Mar. 1, 2017 May 31, 2017
|
|
|
2.14
|
|
|
|
1.66
|
|
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
|
|
46
(c) For the most recent six months:
|
|
|
|
|
|
|
|
|
Period
|
|
High $
|
|
|
Low $
|
|
April 1 30, 2018
|
|
|
1.22
|
|
|
|
1.04
|
|
March 1 30, 2018
|
|
|
1.38
|
|
|
|
1.19
|
|
February 1 28, 2018
|
|
|
1.46
|
|
|
|
1.27
|
|
January 1 31, 2018
|
|
|
1.85
|
|
|
|
1.53
|
|
December 1 29, 2017
|
|
|
1.74
|
|
|
|
1.41
|
|
November 1 30, 2017
|
|
|
2.03
|
|
|
|
1.60
|
|
The Companys common shares have been quoted on the Nasdaq
(formerly called the Nasdaq
Small-cap
Market) since August
3, 1993. The ticker symbol is LBIX.
Item 10. Additional Information
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 Companys 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
Companys registration statement on Form
F-3,
filed on September 24, 2007, and is incorporated by reference.
As part of the sale of the Companys Legacy
Transaction, on September 15, 2017 the Company disposed of its subsidiaries to a company in which Mr. McRae, a director and officer of the Company, is an officer, director and together with members of his family, a majority shareholder,
for $325,000, which is net of assumed liabilities for certain employee obligations and other matters, all of which is subject to certain working capital adjustments. In connection with the Legacy Transaction agreement, the severance obligation under
the Executive Employment Agreement was satisfied. An additional $600,000 is held in escrow as security for payment of certain liabilities that remain the responsibility of the Company. In addition, the Company is entitled to any excess amounts
realized via a sublease of office and warehouse premises in Vancouver, Canada between LBIC and Richmond Holdings after all costs and expenses arising in relation to the Lease. The transaction was reviewed and approved by the disinterested directors
of the Company.
47
On September 17, 2017, the Company entered into the Arrangement Agreement to complete the
Transaction and is seeking to list the post-acquisition entity on The Nasdaq. In accordance with the applicable Canadian securities laws, the Company plans to hold a special meeting of shareholders to consider resolutions to approve the issuance of
the shares forming the consideration to be paid to Liquid shareholders pursuant to the Transaction, among other things. A special meeting of Company shareholders is expected to be held concurrently with a special meeting of Liquid shareholders,
which will be called by Liquid to consider the Transaction. Closing of the Transaction is subject to Liquid receiving approval from its shareholders for the Transaction. The Transaction will also require the approval of Company shareholders and the
Supreme Court of British Columbia (the
Court
), as well as certain regulatory approvals. A copy of the contract was filed on SEDAR (Canada) and EDGAR (U.S.A.) on September 18, 2017.
On January 14, 2018, the Company entered into the Amended and Restated Arrangement Agreement whereby the original valuation of existing
Company shares as part of the transaction was increased from USD$1.50 per share to USD$1.78 per share. As a result, Company shareholders are anticipated to hold 25.8% and Liquid shareholder are anticipated to hold 74.2% of the post-transaction
entity. At the same time, the Company announced that Liquid had acquired 51% of Majesco, a proven gaming publisher. The acquisition of Majesco by Liquid satisfied one of the key terms of the Amended and Restated Arrangement Agreement whereby Liquid
shall acquire a gaming studio.
On February 8, 2018, the Company announced that it had entered into a support agreement with
Liquids subsidiary, Majesco, whereby the Company will invest in the exploitation of Majescos gaming properties in Asia. In order to assist Liquid with the development of its gaming business (and in advance of the closing of the preferred
share financing investment), the Company agreed to advance funds to Majesco so that Majesco can retain WPIC to assist Majesco develop its intellectual properties and gaming content in the Peoples Republic of China. Under the terms of the
support agreement, the Company agreed to invest USD$50,000 to Majesco as consideration for receiving 5% of Majescos net profits from its sales of gaming assets in Asia for a period of 5 years. On February 5, 2018, the Company advanced an
initial tranche of USD$25,000 of its planned USD$50,000 investment to Majesco. This amount is refundable from Majesco if the Transaction is not completed by June 1, 2018.
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.
48
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 arms 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:
|
|
|
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.
49
This item is not applicable for an Annual Report.
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. The
Company sold all of its subsidiaries (as defined in Rule
1-02(w)
of Regulation
S-X)
during the fiscal year ended February 28, 2018.
Item 11. Quantitative and Qualitative Dis
closures About Market Risk
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, 2018, the Companys
cash balances included $1,457 denominated in U.S. dollars (2017 - $88,825), accounts receivable balances included $nil denominated in U.S. dollars (2017 - $2,688), and the Companys accounts payable and accrued liabilities balance included
$4,095 denominated in U.S. dollars (2017 - $130,517).
As at February 28, 2018, all other factors being equal, a 5% U.S. dollar rise per Canadian
dollar would have an unfavourable impact of approximately $100 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 Sec
urities 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.
50
PA
RT III
Item 17. Financial Statements
Item 18. Financial Statements
Leading Brands, Inc.
Consolidated Financial Statements
February 28, 2018 and 2017
(Expressed in
Canadian Dollars)
55
|
|
|
|
|
|
|
|
|
Tel: 604 688 5421
Fax: 604 688 5132
www.bdo.ca
|
|
BDO Canada LLP
600 Cathedral
Place
925 West Georgia Street
Vancouver BC V6C 3L2
Canada
|
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Leading Brands Inc.
Vancouver, Canada
Opinion on the Consolidated Financial Statements
We have
audited the accompanying consolidated financial statements of Leading Brands Inc. (the Company) and subsidiaries, which comprise the consolidated balance sheets as at February 28, 2018 and 2017 and the related consolidated
statements of comprehensive loss, cash flows and changes in shareholders equity, for each of the three years in the period ended February 28, 2018 and related notes, including a summary of significant accounting policies and other
explanatory information (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and
subsidiaries at February 28, 2018 and 2017, and the results of their operations and their cash flows for each of the three years in the period ended February 28, 2018, in conformity with accounting principles generally accepted in the
United States of America.
Basis for Opinion
Managements Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles
generally accepted in the United States of America, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or
error.
Auditors Responsibility
Our
responsibility is to express an opinion on the Companys consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. Further, we are required to be
independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and to fulfill our other ethical responsibilities in accordance with these requirements.
We conducted our audits in accordance with the standards of the PCAOB and Canadian generally accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO CANADA LLP
Chartered Professional Accountants
Vancouver, Canada
May 29, 2018
We have served as the Companys auditor
since 2001.
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and
forms part of the international BDO network of independent member firms.
F-1
Leading Brands, Inc.
Consolidated Balance Sheets
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
As at
|
|
Feb. 28, 2018
|
|
|
Feb. 28, 2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
786,340
|
|
|
$
|
4,315,028
|
|
Restricted cash (note 2)
|
|
|
583,012
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
|
|
85,628
|
|
Inventory (Note 3)
|
|
|
|
|
|
|
361,102
|
|
Prepaid expenses and deposits (Note 5)
|
|
|
81,143
|
|
|
|
129,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,450,495
|
|
|
|
4,891,278
|
|
Property, plant and equipment
(Note 4)
|
|
|
3,157
|
|
|
|
765,024
|
|
Intangible assets
(Note 6)
|
|
|
|
|
|
|
279,189
|
|
Assets attributable to discontinued operations
(Note 16)
|
|
|
|
|
|
|
26,195
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,453,652
|
|
|
$
|
5,979,686
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
117,405
|
|
|
$
|
605,046
|
|
Liabilities attributable to discontinued operations (Note 16)
|
|
|
250,000
|
|
|
|
300,000
|
|
Derivative Liability
non-employee
stock options
(Note 9)
|
|
|
23,024
|
|
|
|
46,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390,429
|
|
|
|
951,398
|
|
|
|
|
|
|
|
|
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Share Capital (Note 7(a))
|
|
|
|
|
|
|
|
|
Authorized 500,000,000 common shares without par value 20,000,000 preferred shares without par
value
|
|
|
|
|
|
|
|
|
Issued 2,802,412 common shares (2017 2,802,412)
|
|
|
31,305,247
|
|
|
|
31,305,247
|
|
Additional
paid-in
capital
|
|
|
19,455,359
|
|
|
|
19,455,359
|
|
Accumulated other comprehensive income
currency translation adjustment
|
|
|
|
|
|
|
577,916
|
|
Accumulated deficit
|
|
|
(49,697,383
|
)
|
|
|
(46,310,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
1,063,223
|
|
|
|
5,028,288
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
1,453,652
|
|
|
$
|
5,979,686
|
|
|
|
|
|
|
|
|
|
|
Approved on behalf of the Board:
/s/ Ralph
McRae
Director
/s/ Darryl
Eddy
Director
The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements.
F-2
Leading Brands, Inc.
Consolidated Statements of Comprehensive Loss
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
Feb. 28, 2018
|
|
|
Feb. 28, 2017
|
|
|
Feb. 29, 2016
|
|
Expenses (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
$
|
876,088
|
|
|
$
|
726,530
|
|
|
$
|
1,277,127
|
|
Depreciation of property, plant, equipment and
intangible asset
|
|
|
1,053
|
|
|
|
1,053
|
|
|
|
1,316
|
|
Interest income
|
|
|
(19,703
|
)
|
|
|
|
|
|
|
(4,900
|
)
|
Other income
|
|
|
(3,995
|
)
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liability
|
|
|
(23,328
|
)
|
|
|
(13,638
|
)
|
|
|
(81,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
830,115
|
|
|
|
713,945
|
|
|
|
1,192,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
|
(830,115
|
)
|
|
|
(713.945
|
)
|
|
|
(1,192,226
|
)
|
Income tax provision (recovery)
(Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(830,115
|
)
|
|
$
|
(713,945
|
)
|
|
$
|
(1,192,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations
(Note 16)
|
|
$
|
(2,557,034
|
)
|
|
$
|
(5,795,744
|
)
|
|
$
|
(111,058
|
)
|
Net and Comprehensive loss
|
|
$
|
(3,387,149
|
)
|
|
$
|
(6,509,689
|
)
|
|
$
|
(1,303,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.30
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.41
|
)
|
Discontinued operations
|
|
|
(0.91
|
)
|
|
|
(2.05
|
)
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net basic loss per common share
|
|
$
|
(1.21
|
)
|
|
$
|
(2.31
|
)
|
|
$
|
(0.45
|
)
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (Note 7(e))
|
|
|
2,802,412
|
|
|
|
2,820,647
|
|
|
|
2,880,882
|
|
The accompanying summary of significant accounting policies and notes are an integral part of these
consolidated financial statements.
F-3
Leading Brands, Inc.
Consolidated Statements of Cash Flows
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
Feb 28, 2018
|
|
|
Feb. 28, 2017
|
|
|
Feb. 29, 2016
|
|
Cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(830,115
|
)
|
|
$
|
(713,945
|
)
|
|
$
|
(1,192,226
|
)
|
Net loss from discontinued operations
|
|
|
(2,557,034
|
)
|
|
|
(5,795,744
|
)
|
|
|
(111,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
|
(3,387,149
|
)
|
|
|
(6,509,689
|
)
|
|
|
(1,303,284
|
)
|
Items not involving cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant, equipment and intangible asset
|
|
|
74,398
|
|
|
|
634,692
|
|
|
|
705,024
|
|
Leasehold inducement
|
|
|
|
|
|
|
(22,234
|
)
|
|
|
22,234
|
|
Loss on disposal of assets
|
|
|
752
|
|
|
|
1,581,672
|
|
|
|
1,757
|
|
Loss on sale of legacy beverage operations
|
|
|
1,071,396
|
|
|
|
|
|
|
|
|
|
Stock based compensation (Note 8)
|
|
|
|
|
|
|
|
|
|
|
104,850
|
|
Change in derivative liability (Note 9)
|
|
|
(23,328
|
)
|
|
|
(13,638
|
)
|
|
|
(81,317
|
)
|
Deferred income tax provision (recovery)
|
|
|
|
|
|
|
2,480,257
|
|
|
|
(436,654
|
)
|
Changes in
non-cash
operating working capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(53,809
|
)
|
|
|
238,949
|
|
|
|
(21,445
|
)
|
Inventory, net
|
|
|
102,137
|
|
|
|
606,928
|
|
|
|
348,596
|
|
Prepaid expenses and other assets
|
|
|
19,257
|
|
|
|
260,931
|
|
|
|
(127,063
|
)
|
Accounts payable and accruals
|
|
|
(400,513
|
)
|
|
|
(609,672
|
)
|
|
|
(46,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,596,859
|
)
|
|
|
(1,351,804
|
)
|
|
|
(833,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
|
|
|
|
|
(10,449
|
)
|
|
|
(200,221
|
)
|
Purchase of intangible asset
|
|
|
(20,053
|
)
|
|
|
(120,146
|
)
|
|
|
(210,892
|
)
|
Proceeds on disposal of assets
|
|
|
11,000
|
|
|
|
5,654,397
|
|
|
|
1,199
|
|
Cash outflow on business disposition
|
|
|
(339,764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(348,817
|
)
|
|
|
5,523,802
|
|
|
|
(409,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activity
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common shares
|
|
|
|
|
|
|
(139,789
|
)
|
|
|
(176,316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(139,789
|
)
|
|
|
(176,316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in cash and cash equivalents
|
|
|
(2,945,676
|
)
|
|
|
4,832,209
|
|
|
|
(1,420,104
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
4,315,028
|
|
|
|
282,819
|
|
|
|
1,702,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, including restricted cash
,
end of year
|
|
$
|
1,369,352
|
|
|
$
|
4,315,028
|
|
|
$
|
282,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest received
|
|
$
|
(23,698
|
)
|
|
$
|
|
|
|
$
|
(4,900
|
)
|
Interest paid
|
|
|
|
|
|
|
|
|
|
|
85
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying summary of significant accounting policies and notes are an integral part of these
consolidated financial statements.
F-4
Leading Brands, Inc.
Consolidated Statements of Changes in Shareholders Equity
(Expressed in Canadian Dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Treasury
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
AOCI
|
|
|
Accum.
Deficit
|
|
|
Total
Shareholders
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
Balance at February 28, 2015
|
|
|
2,900,542
|
|
|
$
|
32,401,440
|
|
|
$
|
|
|
|
$
|
18,591,391
|
|
|
$
|
577,916
|
|
|
$
|
(38,497,261
|
)
|
|
$
|
13,073,486
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,303,284
|
)
|
|
|
(1,303,284
|
)
|
Shares repurchased under provisions of the
share repurchase plan
|
|
|
|
|
|
|
|
|
|
|
(454,708
|
)
|
|
|
278,392
|
|
|
|
|
|
|
|
|
|
|
|
(176,316
|
)
|
Shares cancelled
|
|
|
(40,705
|
)
|
|
|
(454,708
|
)
|
|
|
454,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,880
|
|
|
|
|
|
|
|
|
|
|
|
83,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 29, 2016
|
|
|
2,859,837
|
|
|
$
|
31,946,732
|
|
|
$
|
|
|
|
$
|
18,953,663
|
|
|
$
|
577,916
|
|
|
$
|
(39,800,545
|
)
|
|
$
|
11,677,766
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,509,689
|
)
|
|
|
(6,509,689
|
)
|
Shares repurchased under provisions of the
share repurchase plan
|
|
|
|
|
|
|
|
|
|
|
(641,485
|
)
|
|
|
501,696
|
|
|
|
|
|
|
|
|
|
|
|
(139,789
|
)
|
Shares cancelled
|
|
|
(57,425
|
)
|
|
|
(641,485
|
)
|
|
|
641,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2017
|
|
|
2,802,412
|
|
|
$
|
31,305,247
|
|
|
$
|
|
|
|
$
|
19,455,359
|
|
|
$
|
577,916
|
|
|
$
|
(46,310,234
|
)
|
|
$
|
5,028,288
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,387,149
|
)
|
|
|
(3,387,149
|
)
|
Foreign exchange translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(577,916
|
)
|
|
|
|
|
|
|
(577,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2018
|
|
|
2,802,412
|
|
|
$
|
31,305,247
|
|
|
$
|
|
|
|
$
|
19,455,359
|
|
|
$
|
|
|
|
$
|
(49,697,383
|
)
|
|
$
|
1,063,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying summary of significant accounting policies and notes
are an integral part of these consolidated financial statements.
F-5
Leading Brands, Inc.
Notes to the Consolidated Financial Statements
(Expressed in Canadian Dollars)
1.
|
Operations and Summary of Significant Accounting Principles
|
|
|
|
|
|
|
|
Nature of
Operations
|
|
Leading Brands, Inc. (the Company) and its former subsidiaries were previously involved in the development, marketing and
distribution of the Companys beverage brands. As of September 18, 2017, the Company decided to exit the beverage business and pursue the production of film, television and gaming content via the acquisition of Liquid Media Group
(
Liquid
) pursuant to a plan of arrangement (
Arrangement
). To clear the way for this transaction, the Company concurrently disposed of its remaining legacy beverage assets. The transaction has not yet been
finalized.
The Company entered into the Arrangement to acquire 100% of Liquid
pursuant to the transaction. The Companys shareholders are anticipated to hold 25.8% and Liquid shareholders are anticipated to hold 74.2% of the post-transaction entity. The agreed valuation of existing Company shares was determined to be
$1.78 USD per share. The Company also announced its intention, that at the time of the closing of the transaction, that all of its Board members, with the exception of Mr. Tom Gaglardi, would resign and be replaced by Messrs. Jackson, Brezer
and Cruz, and Ms. Katsoolis, who are directors and an officer of Liquid.
|
|
|
|
|
|
Basis of Presentation
|
|
The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting
principles (U.S. GAAP). The consolidated financial statements include the accounts of the Company and its former subsidiaries until disposal. All intercompany transactions and balances have been eliminated in consolidation.
The Company has experienced losses, negative operating cash flows and has discontinued
its former operating businesses which raises substantial doubt about its ability to continue operating as a going concern within one year of the date of the financial statements.
To alleviate this situation, the Company has plans in place to improve its financial
position and liquidity by reducing costs that are not expected to have an adverse impact on the Companys ability to transition to a new business segment. These include, among other cost reduction measures, the directors fees as well as
the CEOs consulting fees being waived for a specified period if certain criteria are not met in relation to the Liquid transaction.
As of the date of these financial statements, the Company has sufficient liquidity to meet its ongoing cash requirements for one year after the issuance date
of the financial statements due to its planned cost management and reduction measures. Therefore, although substantial doubt has been raised, this has been alleviated by managements plans.
|
|
|
|
|
|
Use of
Estimates
|
|
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
amounts reported and disclosed in the financial statements and the accompanying notes.
On an ongoing basis, the Company evaluates its estimates, including those related to inventories, trade receivables, useful lives of property, plant and
equipment, capitalization of intangible assets, the useful lives of intangible assets, income taxes, and stock-based compensation, among others. The reported amounts and note disclosure are determined using managements best estimates based on
assumptions that reflect the most probable set of economic conditions and planned course of action. Actual results could differ from those estimates. To the extent there are material differences between the estimates and the actual results, future
results of operations will be affected.
|
F-6
Leading Brands, Inc.
Notes
to the Consolidated Financial Statements
(Expressed in Canadian Dollars)
1.
|
Operations and Summary of Significant Accounting Principles (continued)
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
The Companys functional and reporting currency is the Canadian dollar. Foreign-currency denominated transactions are translated at the rate of exchange prevailing at the time of the transaction. Monetary assets and liabilities
have been translated into Canadian dollars at the
year-end
exchange rate. All such exchange gains and losses are included in the determination of income.
|
|
|
|
|
|
Cash & Cash Equivalents
|
|
Amounts recognized as cash and cash equivalents include investments of surplus cash in highly liquid securities with maturities at date of purchase of three months or less.
|
|
|
|
|
|
Restricted Cash
|
|
Restricted cash is comprised of cash held in a trust account pursuant to the terms of an escrow agreement arising from the disposition of the Companys legacy beverage business.
|
|
|
|
|
|
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 and $nil as of February 28, 2018 and February 28, 2017, respectively, are netted against accounts receivable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Allowances for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
36,329
|
|
Write-off
of receivables
|
|
|
|
|
|
|
|
|
|
|
(36,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
The remainder of this page is intentionally left blank.
F-7
Leading Brands, Inc.
Notes
to the Consolidated Financial Statements
(Expressed in Canadian Dollars)
1.
|
Operations and Summary of Significant Accounting Principles (continued)
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
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, and media promotion costs are expensed as incurred. During the years ended February 28, 2018, February 28, 2017 and February 29, 2016, the
Company incurred advertising costs of $171,075, $496,456 and $603,502, respectively.
|
F-8
Leading Brands, Inc.
Notes
to the Consolidated Financial Statements
(Expressed in Canadian Dollars)
1.
|
Operations and Summary of Significant Accounting Principles (continued)
|
|
|
|
|
|
|
|
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 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.
|
|
|
|
|
|
|
|
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 partially offset by a valuation allowance (Note 10). No reserves for an uncertain tax position have been recorded for the years ended February 28, 2018 and February 28,
2017.
|
F-9
Leading Brands, Inc.
Notes
to the Consolidated Financial Statements
(Expressed in Canadian Dollars)
1.
|
Operations and Summary of Significant Accounting Principles (continued)
|
|
|
|
|
|
|
|
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, restricted cash, 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 1quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2observable 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 3assets 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, 2018 and February 28, 2017, 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.
|
|
|
|
|
|
|
|
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
|
F-10
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)
|
|
after December 15, 2017. 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 Companys current revenue recognition practices would be recognized using a cumulative effect adjustment to the opening
balance of retained earnings. The Company continues to evaluate the impact that the adoption will have on its consolidated financial statements and disclosures.
|
|
|
|
|
|
|
|
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.
The Company adopted this standard, which did not have a material impact on the consolidated financial statements.
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
2016-02
is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, which
will be our fiscal year beginning March 1, 2019 (fiscal 2020). Early adoption is permitted. The Company continues to evaluate the impact that the adoption will have on its consolidated financial statements and disclosures.
|
|
|
|
|
|
|
|
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 adopted this standard, which did not have a material impact on the
consolidated financial statements.
|
|
|
|
|
|
|
|
In June 2016, the FASB issued ASU
No. 2016-13,
Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU
2016-13).
Financial InstrumentsCredit 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
|
F-11
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)
|
|
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. The Company will adopt this guidance in the first quarter of fiscal 2019. The adoption of this amendment is not expected to have a
material impact 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. The
adoption of this amendment was included in these consolidated financial statements within the consolidated Statements of Cash Flows.
|
F-12
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 January 2017, the FASB issued Accounting Standards Update
2017-01,
Business Combinations
(Topic 805): Clarifying the Definition of a Business (ASU
2017-01).
ASU
2017-01
clarifies the definition of a business to assist entities with
evaluating whether transactions should be accounted for as acquisitions of assets or businesses. ASU
2017-01
is effective for annual periods, and interim periods within those annual periods, beginning after
December 15, 2017, which will be our fiscal year beginning March 1, 2018 (fiscal 2019). Early adoption is not permitted. The Company will adopt this guidance in the first quarter of fiscal 2019. The adoption of this amendment is not
expected to have a material impact on our consolidated financial statements.
In
January 2017, the FASB issued Accounting Standards Update
2017-04,
Intangibles Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU
2017-04).
ASU
2017-04
simplifies how an entity is required to test goodwill for impairment. ASU
2017-04
is effective for annual
periods, and interim periods within those annual periods, beginning after December 15, 2019, which will be our fiscal year beginning March 1, 2020 (fiscal 2021). Early adoption is permitted. The Company will adopt this guidance in the
first quarter of fiscal 2021. The adoption of this amendment is not expected to have a material impact on our consolidated financial statements.
In May 2017, the FASB issued Accounting Standards Update
2017-09,
Compensation Stock Compensation (Topic
718): Scope of Modification Accounting (ASU
2017-09).
ASU
2017-09
clarifies the guidance on when to apply modification accounting for share-based
payment awards. ASU
2017-09
is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017, which will be our fiscal year beginning March 1, 2018
(fiscal 2019). Early adoption is permitted. The Company will adopt this guidance in the first quarter of fiscal 2019. The adoption of this amendment is not expected to have a material impact on our consolidated financial statements.
The remainder of this page is intentionally left blank.
|
The remainder of this page is intentionally left blank.
F-13
Leading Brands, Inc.
Notes
to the Consolidated Financial Statements
(Expressed in Canadian Dollars)
As at February 28, 2018, the Company held $583,012 in restricted
cash (2017$nil). Restricted cash is held by the Companys legal counsel in a trust account pursuant to the terms of an escrow agreement arising from the disposition of the Companys legacy beverage business. These funds are held
aside for the purpose of existing claims, excluded liabilities and financial lease liabilities during the escrow period as specified in the terms of the sale agreement in relation to the Companys legacy beverage business.
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Finished goods, net
|
|
$
|
|
|
|
$
|
279,666
|
|
Raw materials
|
|
|
|
|
|
|
81,436
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
361,102
|
|
|
|
|
|
|
|
|
|
|
The ending balance above includes a total inventory obsolescence provision of $nil as at February 28, 2018
(2017$15,638).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Inventory Obsolescence Provision
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
15,638
|
|
|
$
|
39,870
|
|
|
$
|
114,744
|
|
Obsolescence provision
|
|
|
278,646
|
|
|
|
404,767
|
|
|
|
75,000
|
|
Write-off
of inventory
|
|
|
(294,284
|
)
|
|
|
(428,999
|
)
|
|
|
(149,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
|
|
|
$
|
15,638
|
|
|
$
|
39,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
Cost
|
|
|
Accumulated
Depreciation
|
|
|
Net
|
|
Furniture and fixtures
|
|
$
|
59,190
|
|
|
$
|
58,812
|
|
|
$
|
378
|
|
Computer hardware and software
|
|
|
271,177
|
|
|
|
268,398
|
|
|
|
2,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
330,367
|
|
|
$
|
327,210
|
|
|
$
|
3,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
Cost
|
|
|
Accumulated
Depreciation
|
|
|
Net
|
|
Plant and equipment
|
|
$
|
379,688
|
|
|
$
|
94,431
|
|
|
$
|
285,257
|
|
Automotive equipment
|
|
|
61,550
|
|
|
|
38,251
|
|
|
|
23,299
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment does not include any assets acquired under capital leases (2017$nil).
Accumulated amortization does not include any assets acquired under capital leases (2017$nil).
As at February 28, 2018, $nil
assets are attributable to discontinued operations (2017$760,814). The 2017 property, plant and equipment assets that are attributable to discontinued operations pertains to the Companys legacy beverage business.
F-14
Leading Brands, Inc.
Notes
to the Consolidated Financial Statements
(Expressed in Canadian Dollars)
5.
|
Prepaid Expenses and Deposits
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Slotting fees
|
|
$
|
|
|
|
$
|
3,792
|
|
Insurance premiums
|
|
|
43,347
|
|
|
|
52,561
|
|
Rental deposits and other
|
|
|
37,796
|
|
|
|
99,362
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,143
|
|
|
$
|
155,715
|
|
|
|
|
|
|
|
|
|
|
Attributable to discontinued operations
|
|
$
|
|
|
|
$
|
26,195
|
|
Attributable to continuing operations
|
|
$
|
81,143
|
|
|
$
|
129,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
Brand Licence and Patent
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
Brand Licence and Patent
|
|
$
|
331,037
|
|
|
$
|
33,848
|
|
|
$
|
297,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The brand licence and patent were sold as part of the disposition of the legacy beverage operations. The loss
on the disposition of these intangible assets was included in the loss on disposition of the legacy beverage operations (see Note 16).
a)
Share capital
|
|
|
|
|
|
|
Number of Authorized Shares
|
|
|
|
2018
|
|
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
|
|
|
|
|
|
|
F-15
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, 2018 (2017Nil).
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.
|
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 Companys Shareholder Protection Rights Plan to 2015. At the Annual General
Meeting in June 2015, shareholders approved an updated and five-year extension of the Companys Shareholder Protection Rights Plan to 2020.
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, 2018, stock options were outstanding and exercisable as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
Number of
Options
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted
Average
Exercise
Price (USD)
|
|
|
Number of
Options
Exercisable
|
|
|
Weighted
Average
Exercise
Price
(USD)
|
|
$2.45
|
|
|
447,000
|
|
|
|
2.25
|
|
|
$
|
2.45
|
|
|
|
447,000
|
|
|
$
|
2.45
|
|
$2.45
|
|
|
50,000
|
|
|
|
0.70
|
|
|
$
|
2.45
|
|
|
|
50,000
|
|
|
$
|
2.45
|
|
$3.00
|
|
|
80,000
|
|
|
|
0.32
|
|
|
$
|
3.00
|
|
|
|
80,000
|
|
|
$
|
3.00
|
|
$3.50
|
|
|
10,000
|
|
|
|
0.70
|
|
|
$
|
3.50
|
|
|
|
10,000
|
|
|
$
|
3.50
|
|
$3.50
|
|
|
55,000
|
|
|
|
1.50
|
|
|
$
|
3.50
|
|
|
|
55,000
|
|
|
$
|
3.50
|
|
$3.69
|
|
|
25,000
|
|
|
|
7.37
|
|
|
$
|
3.69
|
|
|
|
25,000
|
|
|
$
|
3.69
|
|
$6.20
|
|
|
2,000
|
|
|
|
0.10
|
|
|
$
|
6.20
|
|
|
|
2,000
|
|
|
$
|
6.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
669,000
|
|
|
|
|
|
|
|
|
|
|
|
669,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
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 Companys stock option activity is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Options
|
|
|
Weighted Average
Exercise Price
(USD)
|
|
Options outstanding as at February 28, 2015
|
|
|
856,767
|
|
|
|
2.98
|
|
Granted
|
|
|
25,000
|
|
|
|
3.69
|
|
Expired
|
|
|
(1,767
|
)
|
|
|
5.35
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as at February 29, 2016
|
|
|
880,000
|
|
|
|
2.99
|
|
Cancelled
|
|
|
(12,000
|
)
|
|
|
6.91
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, February 28, 2017
|
|
|
868,000
|
|
|
|
2.94
|
|
Expired
|
|
|
(10,000
|
)
|
|
|
15.75
|
|
Cancelled
|
|
|
(189,000
|
)
|
|
|
3.20
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, February 28, 2018
|
|
|
669,000
|
|
|
|
2.68
|
|
Options vested and expected to vest
|
|
|
669,000
|
|
|
|
2.68
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of stock options exercised during the year ended February 28, 2018 was $nil
USD (2017$nil, 2016$nil).
The aggregate intrinsic value of stock options outstanding as at February 28, 2018 was $nil USD
(2017$nil, 2016$nil).
The aggregate intrinsic value of stock options exercisable as at February 28, 2018 was $nil USD
(2017$nil, 2016$nil).
As of February 28, 2018, the Company has Nil (2017 nil)
non-vested
stock options.
As of February 28, 2018, there was $nil of total unrecognized
compensation cost related to
non-vested
stock options (2017 $nil).
F-17
Leading Brands, Inc.
Notes
to the Consolidated Financial Statements
(Expressed in Canadian Dollars)
7.
|
Shareholders Equity (continued)
|
A summary of the Companys warrant activity and related information for
the year ended February 28, 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Outstanding
Warrants
|
|
|
Weighted Average
Exercise Price
(USD)
|
|
Warrants outstanding at February 28, 2015 February 29, 2016 and February 27,
2017
|
|
|
25,000
|
|
|
|
3.40
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Expired
(1)
|
|
|
(25,000
|
)
|
|
|
3.40
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at February 28, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
e)
|
(1) The warrants expired on January
26, 2018
|
Earnings (loss) per
common share
For the years ended February 28, 2018, February 28, 2017, and February 29, 2016, common equivalent shares
(consisting of shares issuable on exercise of stock options and warrants) totaling nil, nil and 905,000 respectively, were not included in the computation of diluted earnings per share because the effect was anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Weighted average shares Basic EPS
|
|
|
2,802,412
|
|
|
|
2,820,647
|
|
|
|
2,880,882
|
|
Plus: incremental shares from assumed exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted EPS
|
|
|
2,802,412
|
|
|
|
2,820,647
|
|
|
|
2,880,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net loss from continuing operations
|
|
$
|
(830,115
|
)
|
|
$
|
(713,945
|
)
|
|
$
|
(1,192,226
|
)
|
Net loss from discontinued operations
|
|
|
(2,557,034
|
)
|
|
|
(5,795,744
|
)
|
|
|
(111,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,387,149
|
)
|
|
$
|
(6,509,689
|
)
|
|
$
|
(1,303,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of dilutive stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net loss
|
|
$
|
(3,387,149
|
)
|
|
$
|
(6,509,689
|
)
|
|
$
|
(1,303,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
Leading Brands, Inc.
Notes
to the Consolidated Financial Statements
(Expressed in Canadian Dollars)
7.
|
Shareholders Equity (continued)
|
Basic and diluted loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Continuing operations
|
|
|
(0.30
|
)
|
|
$
|
(0.25
|
)
|
|
$
|
(0.41
|
)
|
Discontinued operations
|
|
|
(0.91
|
)
|
|
|
(2.05
|
)
|
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net basic earnings (loss) per common share
|
|
|
(1.21
|
)
|
|
$
|
(2.31
|
)
|
|
$
|
(0.45
|
)
|
8.
|
Stock-Based Compensation
|
The weighted average
date-of-grant
fair value of the options granted during the year ended February 28, 2018 was $nil (2017: $nil) 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Risk-free rate
|
|
|
|
|
|
|
|
|
|
|
1.45
|
%
|
Dividend yield
|
|
|
Nil
|
%
|
|
|
Nil
|
%
|
|
|
Nil
|
%
|
Volatility factor of the expected market price of the Companys 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, 2018 (2017: nil).
In
connection with the vesting of certain employees, officers and directors stock options, and warrants for the year ended February 28, 2018, the Company has recorded stock option compensation of $nil (2017$nil;
2016$83,880) which was credited to additional
paid-in
capital and expensed in selling, general and administrative expenses in the year.
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 Companys stock due to their exercise price being denominated in a currency other than the Companys 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 Companys Consolidated Statements
of Comprehensive Loss 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.
F-19
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Derivative liability, opening balance
|
|
$
|
46,352
|
|
|
$
|
59,990
|
|
|
$
|
120,337
|
|
Warrants issued during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
Options issued during the year
|
|
|
|
|
|
|
|
|
|
|
20,970
|
|
Change in fair value of options and warrants
|
|
|
(23,328
|
)
|
|
|
(13,638
|
)
|
|
|
(81,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability, closing balance
|
|
$
|
23,024
|
|
|
$
|
46,352
|
|
|
$
|
59,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2018 were as follows: (1) weighted average risk-free rate of 1.90% (2017 0.67%; 2016 0.69%); (2) weighted
average dividend yield of nil (2017 nil; 2016 nil); (3) a weighted average expected volatility of 105.99% (2017 91.47%; 2016 59.9%); (4) a weighted average expected life of 33 months (2017 27 months; 2016 38
months); and (5) a weighted average exercise price of $4.11 USD. These options have been included in the stock options data presented in Note 7(c).
As at February 28, 2018 the warrants granted to consultants expired unexercised.
The exercise of
non-employee
options and warrants will result in a reduction of the derivative
liability.
Earnings before income taxes and the provision for income taxes consisted of
the following for the years ended February 28, 2018, February 28, 2017, and February 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
(Loss) from continuing operations
|
|
$
|
(830,115
|
)
|
|
$
|
(713,945
|
)
|
|
$
|
(1,192,226
|
)
|
(Loss) from discontinued operations
|
|
|
(2,557,034
|
)
|
|
|
(3,315,217
|
)
|
|
|
(547,712
|
)
|
(Loss) before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
$
|
(3,387,149
|
)
|
|
$
|
(4,029,162
|
)
|
|
$
|
(1,739,938
|
)
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3,387,149
|
)
|
|
$
|
(4,029,162
|
)
|
|
$
|
(1,739,938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (recovery) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Deferred, Canada
|
|
|
|
|
|
|
2,480,257
|
|
|
|
(436,654
|
)
|
Deferred, United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
2,480,257
|
|
|
$
|
(436,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
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% (2017 26%, 2016 26%) statutory tax rate, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Tax at statutory rates at CDN rates
|
|
$
|
(880,659
|
)
|
|
$
|
(1,047,652
|
)
|
|
$
|
(452,384
|
)
|
Foreign loss taxed at US rates
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange on loss
carry-forwards
|
|
|
|
|
|
|
|
|
|
|
(704,281
|
)
|
Non-deductible
expenses (revenue)
|
|
|
8,122
|
|
|
|
(55,681
|
)
|
|
|
7,352
|
|
Deferred tax assets transferred upon disposition of subsidiaries
|
|
|
8,614,637
|
|
|
|
|
|
|
|
|
|
Change in estimates and other items, net
|
|
|
(141,625
|
)
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(7,600,475
|
)
|
|
|
3,583,590
|
|
|
|
712,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (recovery) for year
|
|
$
|
|
|
|
$
|
2,480,257
|
|
|
$
|
(436,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at February 28, 2018, the Company has accumulated net operating losses in the amount of approximately
$2.1 million which can be applied against future earnings in Canada and $nil in the United States. The net operating loss carry forward amounts commence to expire in 2036 through 2038.
Significant components of the Companys deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Operating and other losses carried forward
|
|
$
|
552,145
|
|
|
$
|
6,589,096
|
|
Property, plant and equipment
|
|
|
(210
|
)
|
|
|
1,451,069
|
|
Trademark and deferred costs
|
|
|
|
|
|
|
112,245
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
551,935
|
|
|
|
8,152,410
|
|
Valuation allowance
|
|
|
(551,935
|
)
|
|
|
(8,152,410
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
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 2013-2018. 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, 2018 and 2017.
F-21
Leading Brands, Inc.
Notes
to the Consolidated Financial Statements
(Expressed in Canadian Dollars)
The Company is committed to an operating lease pertaining to an office
space. On September 15, 2017 in connection with the Companys sale of its former subsidiaries, the Company entered into a series of share purchase and escrow agreements whereby the Company deposited $600,000 in escrow as security for
potential financial lease liabilities (as well as excluded liabilities and existing claims) relating to the office lease between Leading Brands of Canada, Inc. and the landlord. The office lease is currently being subleased and has not resulted in
additional payments from the Company since the sale of the Companys subsidiaries. The Company expects that the remaining exposure of the office lease commitment is until April 2019. The minimum amounts due over the remaining terms of that
agreement is as follows:
|
|
|
|
|
2019
|
|
$
|
123,073
|
|
2020
|
|
|
20,512
|
|
|
|
|
|
|
Total future minimum payments
|
|
$
|
143,585
|
|
|
|
|
|
|
During the years ended February 28, 2018, February 28, 2017 and February 29, 2016, the Company
incurred rental expenses of $101,542, $553,763, and $705,765 respectively.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
i)
|
|
Incurred consulting fees with a company related by a director in common
|
|
$
|
2,813
|
|
|
$
|
|
|
|
$
|
21,000
|
|
ii)
|
|
Incurred management service fees with a company related by an officer in common
|
|
$
|
67,500
|
|
|
$
|
|
|
|
$
|
|
|
iii)
|
|
Incurred professional service fees with a company related by a director in common
|
|
$
|
|
|
|
$
|
|
|
|
$
|
132,000
|
|
iv)
|
|
Incurred marketing consulting services with a company related by a director in common
|
|
$
|
|
|
|
$
|
3,113
|
|
|
$
|
5,619
|
|
v)
|
|
Incurred bottling services from a company related by a director in common
|
|
$
|
160,642
|
|
|
$
|
305,289
|
|
|
$
|
218,812
|
|
vi)
|
|
Incurred consulting fees with a company related by an officer in common
|
|
$
|
|
|
|
$
|
213,311
|
|
|
$
|
150,000
|
|
vii)
|
|
Incurred services from a company related by a director in common
|
|
$
|
|
|
|
$
|
1,775
|
|
|
$
|
1,055
|
|
viii)
|
|
Purchased supplies from a company related by a director in common
|
|
$
|
|
|
|
$
|
1,728
|
|
|
$
|
1,273
|
|
F-22
Leading Brands, Inc.
Notes
to the Consolidated Financial Statements
(Expressed in Canadian Dollars)
13.
|
Related Party Transactions (continued)
|
On September 15, 2017, the Company entered into an agreement with a company that has
certain officers and directors in common with the Company, to dispose of its legacy beverage assets for $325,000 (see Note 16). Further, the executive employment agreement between the Company, Leading Brands of Canada Inc. and Ralph McRae, effective
June 1, 2015 was terminated on September 15, 2017. Upon termination of the agreement, and pursuant to the severance payment clause, the $900,000 severance obligation was fully satisfied.
14.
|
Fair Value of Financial Instruments
|
The Companys financial assets and financial
liabilities as at February 28, 2018, measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
Prices in
Active Market
(Level 1)
|
|
|
Significant
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance,
February 28,
2018
|
|
Cash and restricted cash
|
|
$
|
1,369,352
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,369,352
|
|
Derivative liability
|
|
|
|
|
|
|
|
|
|
|
(23,024
|
)
|
|
|
(23,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,369,352
|
|
|
$
|
|
|
|
$
|
(23,024
|
)
|
|
$
|
1,346,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys financial assets and financial liabilities as at February 28, 2017, measured at
fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
Prices in
Active Market
(Level 1)
|
|
|
Significant
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Balance,
February 28,
2017
|
|
Cash
|
|
$
|
4,315,028
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,315,028
|
|
Derivative liability
|
|
|
|
|
|
|
|
|
|
|
(46,352
|
)
|
|
|
(46,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,315,028
|
|
|
$
|
|
|
|
$
|
(46,352
|
)
|
|
$
|
4,268,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of cash and cash equivalents and restricted cash 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.
|
Segmented Information
|
The Company previously operated in one industry segment being the
production and distribution of beverages. The Companys principal operations were comprised of an integrated bottling and distribution system for beverages. Substantially, all of the Companys 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, 2018,
the Companys ten largest customers comprised approximately 75% (201793%; 201696%) of revenue and no one customer comprised more than 26% (201774%; 201684%) of revenue.
F-23
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 Companys
co-packing
operations. As a result, the
co-packing
operations have ceased and all assets have been
liquidated and all liabilities will be settled. All costs associated with the discontinuation were recorded as of February 28, 2017.
On September 15, 2017 the Company disposed of its legacy beverage assets to a company that has certain officers and directors in common
with the Company for $325,000, which amount is net of assumed liabilities for certain employee obligations and other matters, all of which is subject to certain working capital adjustments. All costs associated with the discontinuation were recorded
as of February 28, 2018.
In conjunction with the discontinuance of the
co-packing
operations
and legacy beverage sales the Company has presented the assets and liabilities under the captions assets of discontinued operations and liabilities of discontinued operations respectively in the accompanying balance sheets as
at February 28, 2018 and February 28, 2017, and consist of the following:
|
|
|
|
|
|
|
|
|
Assets of discontinued operation:
|
|
2018
|
|
|
2017
|
|
Accounts Receivable
|
|
$
|
|
|
|
$
|
|
|
Prepaid expenses and deposits
|
|
|
|
|
|
|
26,195
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
|
26,195
|
|
Property, plant and equipment
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
|
|
|
$
|
26,195
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operation
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
250,000
|
|
|
$
|
300,000
|
|
Lease inducement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
250,000
|
|
|
$
|
300,000
|
|
|
|
|
|
|
|
|
|
|
Amounts presented for the years ended February 28, 2018, February 28, 2017, and February 29,
2016 have been reclassified to conform to the current presentation. The following table provides the amounts reclassified for the years then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Gross Revenue
|
|
$
|
1,114,877
|
|
|
$
|
9,625,481
|
|
|
$
|
11,513,289
|
|
Less: Discounts, rebates slotting fees
|
|
|
(291,689
|
)
|
|
|
(696,659
|
)
|
|
|
(502,085
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenue
|
|
|
823,188
|
|
|
|
8,928,822
|
|
|
|
11,011,204
|
|
Cost of sales
|
|
|
902,087
|
|
|
|
6,699,947
|
|
|
|
7,856,351
|
|
Selling, general, and administrative
|
|
|
1,337,951
|
|
|
|
3,331,967
|
|
|
|
2,987,235
|
|
Depreciation
|
|
|
73,345
|
|
|
|
633,639
|
|
|
|
703,708
|
|
Foreign exchange (gain) loss
|
|
|
(5,859
|
)
|
|
|
(3,186
|
)
|
|
|
9,865
|
|
Loss on disposition of legacy beverage operations
|
|
|
1,071,946
|
|
|
|
|
|
|
|
|
|
Loss on disposal of assets
|
|
|
752
|
|
|
|
1,581,672
|
|
|
|
1,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,380,222
|
|
|
|
12,244,039
|
|
|
|
11,558,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) before taxes
|
|
|
(2,557,034
|
)
|
|
|
(3,315,217
|
)
|
|
|
(547,712
|
)
|
Income tax provision (recovery)
|
|
|
|
|
|
|
2,480,527
|
|
|
|
(436,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount reclassified as discontinued operations
|
|
$
|
(2,557,034
|
)
|
|
$
|
(5,795,744
|
)
|
|
$
|
(111,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
Leading Brands, Inc.
Notes
to the Consolidated Financial Statements
(Expressed in Canadian Dollars)
On March 23, 2018, the Nasdaq Listing Qualifications Staff
(
Nasdaq Staff
) granted the Company an extension of time until July 23, 2018 to regain compliance with Listing Rule 5550(b) (the
Listing Rule
). The Company had previously received notice from Nasdaq Staff on
January 23, 2018 of
non-compliance
with the Listing Rule and submitted a plan of compliance. The plan was based on the expectation that the combined company will meet all applicable requirements for
initial listing on The Nasdaq Capital Market. It is expected that the combined entity will be required to meet all applicable requirements for initial listing on The Nasdaq Capital Market. Notwithstanding the foregoing, there can be no assurances
that the Company will be able to complete the Transaction or that the combined entity will meet all applicable requirements for initial listing on The Nasdaq Capital Market.
F-25
Item 19. Exhibits