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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
U.S.A.

FORM 20-F

[   ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 29, 2016 OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

OR

[   ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

Commission File No. 0-19884

LEADING BRANDS, INC.
[Exact name of Registrant as specified in its charter]

Not Applicable
[Translation of Registrant’s name into English]

British Columbia, Canada
[Jurisdiction of incorporation or organization]

Unit 101 – 33 West 8^th Avenue, Vancouver, BC, Canada V5Y 1M8
[Address of principal executive offices]

Marilyn Kerzner, Director of Corporate Affairs
Phone Number: 604-675-2778
Facsimile: 604-685-5249
Unit 101 – 33 West 8^th Avenue
Vancouver, British Columbia Canada V5Y 1M8
(Name, telephone, e-mail and/or facsimile number and address of Company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

                              Title of each class:                                                                                       Name of each exchange on which registered:
Common Shares Without Par Value                                                       NASDAQ Capital Market

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None
(Title of Class)

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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None
(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

As of February 29, 2016, Leading Brands, Inc. had 2,859,837 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 [ X ]

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 [ X ]

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  [ X ]        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 [ X ]        No  [  ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark which basis of accounting the Registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  [ X ]	International Financial Reporting Standards as issued	Other  [   ]
	by the International Accounting Standards Board  [   ]

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  [ X ]

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Index

P A R T I	6
ITEM 1. – IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	6
ITEM 2. – OFFER STATISTICS AND EXPECTED TIMETABLE	6
ITEM 3. – KEY INFORMATION	6
ITEM 4. – INFORMATION ON THE COMPANY	13
ITEM 4A. – UNRESOLVED STAFF COMMENTS	18
ITEM 5. – OPERATING AND FINANCIAL REVIEW AND PROSPECTS	19
ITEM 6. – DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	30
ITEM 7. – MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	44
ITEM 8. – FINANCIAL INFORMATION	45
ITEM 9. – THE OFFER AND LISTING	46
ITEM 10. – ADDITIONAL INFORMATION.	47
ITEM 11. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	49
ITEM 12. – DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	50
P A R T II	50
ITEM 13. – DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.	50
ITEM 14. – MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.	50
ITEM 15. – CONTROLS AND PROCEDURES.	51
ITEM 16A. – AUDIT COMMITTEE FINANCIAL EXPERT	52
ITEM 16B. – CODE OF ETHICS	52
ITEM 16C. – PRINCIPAL ACCOUNTANT FEES AND SERVICES	52
ITEM 16D. – EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	53
ITEM 16E. – PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.	53
ITEM 16F. – CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	54
ITEM 16G. – CORPORATE GOVERNANCE	54
ITEM 16H. – MINE SAFETY DISCLOSURE	55
P A R T III	55
ITEM 17. – FINANCIAL STATEMENTS.	55
ITEM 18. – FINANCIAL STATEMENTS.	55
ITEM 19. – EXHIBITS.	56

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INTRODUCTION

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.

Forward-Looking Statements.

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:

♦	business objectives, goals and strategic plans;
♦	operating strategies;
♦	expected future revenues, earnings and margins;
♦	we rely upon one customer for a preponderance of our revenue;
♦	anticipated operating, selling and general and administrative costs;
♦	availability of raw materials, including water, sugar, cardboard , closures and flavoring;
♦	effects of seasonality on demand for our products;
♦	anticipated exchange rates, fluctuations in exchange rates and effects of exchange rates on our cost of goods sold;
♦	our expectation that we will have adequate cash from operations and credit facility borrowings to meet all future debt service, capital expenditure and working capital requirements in fiscal year 2017;
♦	anticipated capital expenditures; and
♦	anticipated increased sales volumes with certain product lines.

Such forward-looking statements are estimates reflecting the Company’s judgment based upon current information and involve a number of risks and uncertainties, and there can be no assurance that other factors will not affect the accuracy of such forward-looking statements. It is impossible to identify all such factors. Factors which could cause actual results to differ materially from those estimated by the Company include, but are not limited to, those listed under “Item 3.D. Risk Factors,” as well as other possible risks such as general economic conditions, weather conditions, changing beverage consumption trends, pricing, availability of raw materials, economic uncertainties (including currency exchange rates), government regulation, managing and maintaining growth, the effect of adverse publicity, litigation, competition and other factors which may be identified from time to time in the Company’s public announcements. Events may occur in the future that the Company is unable to accurately predict, or over which it has no control. If one or more of those uncertainties materialize, or if the underlying assumptions prove incorrect, actual outcomes may vary materially from those forward-looking statements included in this Annual Report.

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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.

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P A R T 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.

1. and 2.

The following table sets forth certain selected consolidated financial information with respect to Leading Brands for the periods indicated. It should be read in conjunction with this Annual Report and the Company’s consolidated financial statements listed in “Item 18 – Financial Statements” of this Annual Report. The following table is derived from, and is qualified by, the Company’s financial statements and the notes thereto which have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).

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3.	Exchange Rates

Exchange Rate – May 2, 2016: 1.2536

Exchange rates for the previous six months: US$1 equivalent to the following in Canadian dollars:

Average exchange rates for each of the five most recent fiscal years: US$1equivalent to the following in Canadian dollars:

B.	Capitalization and indebtedness.

This item is not applicable for an Annual Report.

C.	Reasons for the offer and use of proceeds.

This item is not applicable for an Annual Report.

D.	Risk factors.

Risks Related To Our Business

The Company is vulnerable to exchange rate fluctuations.

Our operations are carried out primarily in Canada and in the United States. The Company purchases certain raw materials and goods, priced in U.S. dollars, for resale in Canada and also sells certain products, manufactured in Canada, into the United States. As a result, the Company is vulnerable to exchange rate fluctuations and it does not presently use any financial instruments to hedge foreign currency fluctuations. A significant increase in the value of the U.S. dollar in relation to the Canadian dollar would negatively impact our earnings.

The Company uses a limited number of suppliers.

The Company relies on a limited number of suppliers for certain raw materials. While other sources of supply do exist for these materials, an unexpected disruption in supply or an increase in pricing would have a negative impact on production and our earnings.

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The Company is exposed to varying degrees of competition.

Increased consolidations of our competitors with and into larger companies, increased market place competition, and more competitive product and pricing pressures could impact the Company’s earnings, market share and volume growth. This competition is likely to continue, and we cannot assure you that it will not intensify in the future, which could materially and adversely affect our financial condition and results of operations.

Changes in the nonalcoholic beverages business environment could adversely affect our financial results.

The nonalcoholic beverages business environment is constantly evolving as a result of, among other things, changes in consumer preferences, including changes based on health and nutrition considerations, shifting consumer tastes and needs, changes in consumer lifestyles and competitive product and pricing pressures. If we are unable to successfully adapt to this constantly changing environment, our earnings and sales could be negatively affected.

Changes in laws and regulations could negatively affect our operations.

The Company is subject to various laws and regulations, and changes in such laws and regulations could have a negative impact on our operations. For example:

♦	the Company has significant tax loss carry-forwards available, and a change in legislation affecting these losses could negatively impact future earnings;
♦	changes in environmental laws affecting beverage containers could add costs to the Company’s operations and/or could decrease consumer demand for the Company’s products; and,
♦	changes in laws and regulations, such as those of the U.S. Food and Drug Administration or Canadian Food Inspection Agency, could affect the way in which our products are marketed and produced, which could have a negative impact on our production and our earnings.

The Company depends on protections afforded by trademarks and copyrights.

The Company holds a number of trademarks and copyrights relating to certain significant products. We rely on trademark laws and contractual provisions to protect these trademarks and copyrights, and there can be no assurance that third parties will not infringe or misappropriate our trademarks and copyrights. If we lose some or all of our intellectual property rights, our business may be materially adversely affected.

The Company is vulnerable to operating losses.

The Company’s bottling operations are relatively capital intensive and in periods of low volumes, such as during seasonal fluctuations, fixed costs can result in operating losses.

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Increases in costs and/or shortages of raw materials and/or ingredients could harm our business.

The principal raw materials used by us are juice concentrates, sugar, corrugate and plastic bottles, the costs of which are subject to fluctuations. We are uncertain whether the prices of any of the above or any other raw materials or ingredients may rise in the future. We are unsure whether we will be able to pass any of such increases on to our customers. We generally do not use hedging agreements or alternative instruments to manage the risks associated with securing sufficient ingredients or raw materials. In addition, some of these raw materials are available from a limited number of suppliers.

Our failure to accurately estimate demand for our products could adversely affect our business and financial results.

We may not correctly estimate demand for our products. Our ability to estimate demand for our products is imprecise, particularly with new products, and may be less precise during periods of rapid growth, particularly in new markets. If we materially underestimate demand for our products or are unable to secure sufficient ingredients or raw materials, we might not be able to satisfy demand on a short-term basis. Moreover, industry-wide shortages of certain raw materials could, from time to time in the future, be experienced. Such shortages could interfere with and/or delay production of certain of our products and could have a material adverse effect on our business and financial results. We generally do not use hedging agreements or alternative instruments to manage this risk.

A significant portion of the Company’s revenue is derived from certain major customers.

The Company derives a substantial portion of its revenue from certain major customers, with the largest customer contributing 83.7% of our total revenue and the ten largest customers comprising 96.1% of revenue. The loss of certain major customers would have a negative impact on earnings.

The Company depends on key management employees.

Our business is dependent upon the continued support of existing senior management, including Ralph D. McRae, who is the Chairman, President, Chief Executive Officer and a director of the Company. Mr. McRae has been with Leading Brands since March 1996, and he has been responsible for our business planning, corporate and brand initiatives and financings. The loss of Mr. McRae, or any other key members of our existing management, could adversely affect our business and prospects. There may be a limited number of personnel with the requisite skills to serve in these positions and we may be unable to locate or employ such qualified personnel on acceptable terms.

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Possible conflicts of interest may arise with our directors, officers, and other members of management.

Certain of our directors, officers, and other members of management presently serve as directors, officers, promoters or members of management of other companies, and therefore it is possible that a conflict may arise between their duties to Leading Brands and their duties to such other companies. All such conflicts will be disclosed in accordance with the provisions of applicable corporate legislation and directors and officers will govern themselves in respect thereof to the best of their ability in accordance with the obligations imposed upon them by law.

The Company relies on credit facilities that may not be renewed.

The Company has credit facilities that are renewed annually in order to make sure that sufficient funds are available to meet its financial needs. There is a risk that these credit facilities will not be renewed by the existing lender and that the Company would then be required to seek an alternative source of financing.

Litigation or legal proceedings could expose us to significant liabilities and thus negatively affect our financial results.

We are a party, from time to time, to litigation claims and legal proceedings. Defending such proceedings could result in significant ongoing expenditures and the continued diversion of our management’s time and attention from the operation of our business, which could have a negative effect on our business operations. Our failure to successfully defend or settle any litigation or legal proceedings could result in liability that, to the extent not covered by our insurance, could have a material adverse effect on our financial condition, revenue and profitability, and could cause the market value of our common shares to decline.

Other risks related to our business may arise and affect our sales and earnings.

For example, such risks may include:

♦	whether the Company’s marketing programs are effective and successful, especially for newer brands;
♦	changes in consumer tastes and preferences and market demand for new and existing products;
♦	changes in general economic and business conditions; and
♦	adverse weather conditions, which could reduce demand for the Company’s beverage products, sales of which are negatively affected by cooler temperatures.

Risks Related To Our Industry

The Company competes with large companies with greater resources.

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Leading Brands competes, to some degree, with other larger companies in the beverage industry. Some of these competitors have substantially greater marketing, cash, distribution, production, technical and other resources than the Company. We cannot assure you that such competition will not intensify in the future which could materially and adversely affect our financial condition and operations.

Our industry is subject to various regulations and we must be in compliance with current and changing rules and regulations.

The production and marketing of our beverages, including contents, labels, caps and containers, are subject to the rules and regulations of various federal, provincial, state and local health agencies. If a regulatory authority finds that a current or future product or production run is not in compliance with any of these regulations, we may be fined, or production may be stopped, thus adversely affecting our financial condition and operations. Similarly, any adverse publicity associated with any non-compliance may damage our reputation and our ability to successfully market our products.

Significant additional labeling or warning requirements may inhibit sales of affected products.

Regulatory or governmental authorities may seek to adopt significant additional product labeling or warning requirements relating to the chemical content or perceived adverse health consequences of certain of our products. These types of requirements, if they become applicable to one or more of our products under current or future environmental or health laws or regulations may inhibit sales of such products.

Risks Related To Our Capital Stock

Our common shares have experienced significant price volatility.

Our common share price has experienced significant price volatility, with closing trading prices on the NASDAQ Capital Market ranging from a low of US$1.62 to a high of US$5.83 during the five year period from March 1, 2011 to February 29, 2016. During this period, the stock market for other small capitalization stocks has also experienced significant price fluctuations, which have often been unrelated to the operating performance of the affected companies. Such future fluctuations could adversely affect the market price of our common shares. The Company has had periods where the bid price of the Company’s common shares closed below US$1.00 per share, and therefore there is a risk that the Company will not continue to meet the minimum requirement for continued listing under NASDAQ’s Marketplace Rule 5550(a)(2).

Sales of a substantial number of our common shares into the public market could result in significant downward pressure on the price of our common shares.

Our common shares are traded on the NASDAQ Capital Market under the symbol “LBIX.” As of February 29, 2016, there were 2,859,837 common shares issued and outstanding. The concurrent sale of a substantial number of our common shares in the public market could cause a reduction in the market price of our common shares.

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We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses to us.

In order to maintain our current status as a “foreign private issuer” (as such term is defined in Rule 405 under the Securities Act), where more than 50% of our outstanding voting securities are directly or indirectly owned by residents of the United States, we must not have any of the following: (i) a majority of our executive officers or directors being U.S. citizens or residents, (ii) more than 50% of our assets being located in the United States, or (iii) our business being principally administered in the United States. If we were to lose our “foreign private issuer” status:

♦	we would no longer be exempt from certain of the provisions of U.S. securities laws, such as Regulation FD and the Section 16 short swing profit rules;
♦	we would be required to commence reporting on forms required of U.S. companies, such as Forms l0-K, 10- Q and 8- K, rather than the forms currently available to us, such as Forms 20-F and 6 -K;
♦	we would be subject to additional restrictions on offers and sales of securities outside the United States, including in Canada;
♦	we may lose the ability to rely upon exemptions from NASDAQ corporate governance requirements that are available to foreign private issuers; and
♦	if we engage in capital raising activities after losing our foreign private issuer status, there is a higher likelihood that investors may require us to file resale registration statements with the Securities and Exchange Commission (the “SEC”) as a condition to any such financing.

We are incorporated in British Columbia, Canada, all of our directors and officers live in Canada, and most of our assets are in Canada; therefore, investors may have difficulty initiating legal claims and enforcing judgments against us and our directors and officers.

We are a corporation existing under the laws of British Columbia, all of our directors and officers are citizens of Canada and the majority of our assets and operations are located outside of the United States. It may not be possible for shareholders to enforce, in Canada, judgments against us obtained in the United States, including actions predicated upon the civil liability provisions of the U.S. federal securities laws.

While reciprocal enforcement of judgment legislation exists between Canada and the United States, we and our insiders may have defenses available to avoid, in Canada, the effect of U.S. judgments under Canadian law, making enforcement difficult or impossible. As such, there is uncertainty as to whether Canadian courts would enforce (a) judgments of U.S. courts obtained against us or such persons predicated upon the civil liability provisions of the U.S. federal and state securities laws or (b) in original actions brought in Canada, liabilities against us or such persons predicated upon the U.S. federal and state securities laws. Therefore, our shareholders in the United States may have to avail themselves of remedies under Canadian corporate and securities laws for any perceived oppression, breach of fiduciary duty and like legal complaints. Canadian law may not provide for remedies equivalent to those available under U.S. law.

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We may be deemed to be a controlled foreign corporation or a passive foreign investment company under the Internal Revenue Code of 1986, as amended (the “Code”).

If more than 50% of the voting power of all of our classes of shares or total value of our shares is owned, directly or indirectly, by citizens or residents of the United States, U.S. domestic partnerships and corporations or estates or trusts other than foreign estates or trusts (“U.S. Shareholders”), each of which owns 10% or more of the total combined voting power of all of our classes of shares (“10% U.S. Shareholders”), we could be treated as a “controlled foreign corporation,” as such term is defined under Subpart F of the Code. This classification would effect many complex results, including the required inclusion by such U.S. Shareholders in income of their pro rata shares of our “Subpart F income” (as specifically defined by the Code), if any, and the requirement that 10% U.S. Shareholders comply with certain additional U.S. tax reporting obligations. While we do believe that we are a controlled foreign corporation, we have not made a determination as to whether we are a controlled foreign corporation under the Code, and cannot give any assurance that we would not be determined to be a controlled foreign corporation under the Code now or in the future.

Even if we are not a controlled foreign corporation, we could be treated as a “passive foreign investment company” under the Code, depending upon the nature of our income and assets and those of our subsidiaries. Such a status would effect many complex results to our U.S. Shareholders, including those who own less than 10% of the total combined voting power of our outstanding shares. These results might include imposition of higher rates of tax on certain dividends and on gains from sale of our shares than would otherwise apply. While we do not believe that we are a passive foreign investment company nor ever have been, we have not made a determination as to whether we are or have ever been a passive foreign investment company and so cannot give any assurance in this regard, whether now or in the future.

Item 4. – Information on the Company

A.	History and development of the Company.

1.	The legal name of the Company is “Leading Brands, Inc.”
2.	The Company was incorporated under the Company Act (British Columbia) on February 4, 1986 under the name “2060 Investments Ltd.” On May 21, 1986, the Company changed its name to “Camfrey Resources Ltd.” On March 16, 1993, the Company changed its name to “Brio Industries Inc.,” and on October 25, 1999, the Company changed its name to Leading Brands, Inc.
3.	The Company is a corporation incorporated under the laws of the province of British Columbia, Canada, and is governed by the Business Corporations Ac t (British Columbia). The head office of the Company is located at:

33 W. 8^th Avenue – Unit 101
Vancouver BC
Canada V5Y 1M8
Tel: 604-685-5200

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4.	During the period since the beginning of the last fiscal year to May 1, 2016 there have been no material reclassifications, mergers or consolidations of the Company or any of its subsidiaries; acquisitions or dispositions of material assets other than in the ordinary course of business; material changes in the mode of conducting the business; material changes in the types of products produced or services rendered; or bankruptcy, receivership or similar proceedings with respect to the Company or its subsidiaries.
	Effective January 1, 2015, the Company entered into a new contract with its largest bottling customer. That contract expires on December 31, 2016, unless earlier extended.
5.	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.
	The Company expended $565,015 on the purchase of property, plant and equipment in the fiscal year ended February 28, 2014, of which $344,967 was for bottling equipment, $100,452 was for leasehold improvements, $10,898 was for vehicles, and $108,698 was for office equipment, computers and software.
6.	Capital expenditures that are planned for the fiscal year ending February 28, 2017 are in Canada and will be funded with cash on hand, by the Company’s primary lender, or some combination of the two.
7.	There have been no indications of public takeover offers by third parties in respect of the Company’s shares or by the Company in respect of other companies’ shares during the last and current fiscal year.

B.	Business overview.

1.

The Company and its subsidiaries are engaged in beverage bottling, distribution, sales, merchandising, brand development and brand management of beverage products. The Company has evolved into a fully integrated bottling and distribution operation with customers across Canada, the western United States, and Asia.

In the fiscal year ended February 29, 2016, Leading Brands of Canada, Inc. was the principal operating subsidiary engaged in the Company’s beverage business in Canada, and Neurogenesis Inc. (formerly Blue Beverage Company, Inc.) was the principal sales subsidiary in the United States.

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2.	Beverage Bottling, Distribution and Sales and Marketing

Bottling Plant. In the fiscal year ended February 29, 2016, the Company operated a 50,000 square foot bottling plant in Edmonton, Alberta. The Company bottles juices and new age beverages for a “co-pack customer” (as defined below) and the Company’s own branded products. The Company’s plant is primarily a “hot fill” plant designed to allow for extended shelf life of products without the use of preservatives. In a “hot fill” process, the liquid is heated to a high temperature prior to filling. The bottle is filled and capped while the liquid remains at the high temperature and then the filled bottle is sent through a cooling tunnel. The cooling causes a pressure seal which preserves the product without the need to add any artificial preservatives.

The Company provides beverage packaging (“co-pack”) services to a major branded beverage company. “Co-pack” customers own their brands, and handle the distribution of the product to market. The Company simply “co-packs” or makes the product at the customers’ request. The Company charges a “co-pack fee” that equates to the packaging service provided and also bills for any materials not supplied by the customer.

Co-pack customers are charged only the “co-pack fee” because they supply all raw materials to make the product.

The Company’s Edmonton plant is designed and equipped to handle various types of containers on its two lines that can fill containers of glass or polyethylene teraphalate (“PET”). The Company’s goal for beverage operations during the coming year is to expand the volume of cases packaged through co-pack operations and to expand the distribution of the Company’s own branded product lines. Although distribution of the Company's branded products expanded, they did not keep up with the decline in the Company's co-pack volumes.

The Company operates in Canada as a fully integrated healthy beverage bottler and distributor.

Distribution. In addition to the bottling plant, the sales and distribution system has a regional warehouse distribution center located in Edmonton, Alberta. In addition, there are third party distribution centers in Greater Vancouver, Metro Toronto and the State of Washington. The sales and distribution system distributes a variety of beverages to retail, wholesale and distribution outlets. As a market of approximately 34,000,000 people, covering more than 2,000,000 square miles, the Company believes that it is more cost effective for the Company to use a network of distributors to assist in the distribution of its products in Canada.

Sales and Marketing. The Company believes it differentiates itself in the marketplace with its customer service and product innovation. By selecting the right mix of products and flavours and determining the merchandising strategy for those items, the Company has been successful in increasing the turns of its customers’ beverage inventory.

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The Company has a sales and marketing team and outside broker network that covers most of Canada and the western United States. Through its distribution network, broker network and the Company’s sales team, the Company maintains contact with its customers and provides the sales and merchandising services necessary to ensure proper presentation of the Company’s brands on store shelves and to assure appropriate ordering and pull-through of the Company’s products.

The sales and marketing team in Canada covers all aspects of the retail trade, including chain grocery and drug stores, mass merchandise centers, food service outlets and convenience stores.

The Company’s marketing department continuously develops and implements innovative marketing programs for all the brands represented. From sales booklets and point of sale materials to contests, sampling events, interactive websites and in-store demonstrations, the Company works to bring its brands to the top of its consumers’ minds. The Company strives to promote and market all the brands it represents in a healthy, positive and informed environment.

Brand Licensing and Brand Development

The Company has increased its focus on the development of its own brands. Several of the Company’s branded products, including TrueBlue^®, PureBlue^®, TrueBlack^® , Happy Water^®, WaterBox™ and Canada FreshAir™ are packaged and/or managed by the Company.

Other Business Overview Information

Substantially all of the Company’s operations, assets and employees are located in Canada. In the year ended February 29, 2016, net export sales were less than 10% of the Company’s net revenues.

3.	Demand for the Company’s beverage products is somewhat seasonal, with the warmer months producing more demand than the cooler months.
4.	Sourcing and pricing of raw materials used in co-packing are generally the responsibility of the Company’s co-pack customers. For the Company’s branded and private label products, this risk remains with the Company.
	Raw materials used in the beverage packaging business consist primarily of sugar, bottles, closures, flavoring, cardboard and juice concentrate. The Company generally uses filtered municipal water to manufacture products. The Company's Happy Water® brand is produced by blending two different spring and mineral waters.

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	♦	Sugar is commodity priced and is generally purchased under a one-year contract. There are several suppliers in both Canada and the United States.
	♦	Bottles are generally purchased in the United States, but there is a PET bottle supplier in Canada from whom the Company occasionally purchases bottles . PET pricing is affected by changing oil prices.
	♦	Closures and flavorings are generally purchased in the United States, but Canadian suppliers are becoming available and the Company reviews these options as they come available.
	♦	Cardboard is widely available and, while pricing fluctuates from year to year, it is generally stable in the short term.
	♦	Juice concentrates are commodity priced and generally purchased under volume contracts. Pricing varies with availability and demand and is impacted by crop performance in the respective growing regions.

5.	The Company’s marketing and sales are handled principally by the Company’s sales force. In markets outside of Canada, principally in Asia, the Company uses third- party contractors for market development and sales.
6.	Other than the bottling contract on which the Company's business is significantly dependent, no material portion of the Company’s business is dependent on a single or connected group of patents or licenses, industrial, commercial or financial contracts or new manufacturing processes.
7.	The Company makes no statements concerning its competitive position.
8.	The Company is subject to regulations of the Canadian Food Inspection Agency, Health Canada and Natural Health Product Directorate, as well as the U.S. Food and Drug Administration, with regards to ingredients and labeling of the Company’s products.
	The Company is also subject to compliance with the Canada Border Services Agency and the United States Department of Homeland Security, Customs and Border Protection, for border security and customs functions related to the cross-border movement of raw materials and finished goods.

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C.	Organizational structure.

Following is a list of the Company’s significant subsidiaries as of February 29, 2016:

♦	Leading Brands of Canada, Inc. (“LBCI”):

	-	incorporated provincially in Alberta, Canada;
	-	100% owned by Leading Brands, Inc.;
	-	is the Company’s principal operating subsidiary in Canada; and
	-	also operates as North American Bottling (a division of LBCI).

♦	LBI Brands, Inc.:

	-	incorporated provincially in British Columbia, Canada;
	-	100% owned by Leading Brands, Inc.; and
	-	owns certain of the Company’s proprietary brands, trademarks and other intellectual property.

♦	Neurogenesis Inc.:

	-	incorporated federally in Canada;
	-	100% owned by Leading Brands, Inc.; and
	-	operating company for the Happy Water brand

♦	Neurogenesis Inc.: (formerly Blue Beverage Company, Inc.)

	-	incorporated in Nevada, USA;
	-	100% owned by Leading Brands, Inc.; and
	-	is the Company’s principal operating subsidiary in the United States.

D.	Property, plant and equipment.

Leading Brands owns and operates a 50,000 square foot bottling plant in Edmonton, Alberta. The plant contains two lines for a combined 144 oz. equivalent case capacity of approximately 10,000,000 cases per annum.

The Company leases a property occupying 38,808 square feet in Edmonton, Alberta which serves as a regional warehouse and distribution centre. The Company also utilizes third party distribution centres in Ontario and British Columbia, and the State of Washington.

The Company’s head office is located at Unit 101 – 33 W. 8^th Avenue, Vancouver BC Canada. The space occupies 6,955 square feet and is leased until February 2023.

The Company bottles Happy Water^® at a co-packing facility at 19500 – 56^th Avenue, Surrey, B.C. Canada. The Company owns substantially all of the equipment utilized in the production of Happy Water^®.

Item 4A. – Unresolved Staff Comments

None.

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Item 5. – Operating and Financial Review and Prospects

A.	Operating results.

Introduction

Leading Brands and its subsidiaries are involved in the development, production, marketing and distribution of the Company’s branded and licensed beverage brands as well as production services for certain other customers.

The Company sells branded and licensed beverage products through its Integrated Distribution System (IDS) of distributors, wholesalers, and grocery chains. Its principal product lines include juices and other premium beverages. The Company’s bottling plant provides bottling services for the Company’s own products and for external customers, as requested. The Company also uses the services of third party bottlers as required to meet its objectives.

Overall Performance

The major developments during the year ended February 29, 2016 included:

♦	The Company’s gross margin percentage declined, excluding depreciation totaling $705,024 (2015: $723,610), from 40.8% in the fiscal year ended February 28, 2015 to 28.7% in the fiscal year ended February 29, 2016; and
♦	The Company saw a decrease in its net income from net income of $335,582 for the fiscal year ended February 28, 2015 on $13.9 million in gross sales to a net loss of $1,303,284 in the fiscal year-ended February 29, 2016 on $11.5 million gross sales, principally due to a decrease in gross sales and lower pricing offered to its principal bottling customer.

Sales

Gross sales for the fiscal year ended February 29, 2016 were $11,513,289 compared to $13,862,437 for the previous fiscal year, representing a decrease of 16.9% . This decrease of $2,349,148 in gross sales for the year ended February 29, 2016 was due to a reduction in per case co-pack fee and reduction of co-pack volume which was partially offset by an increase in the Company’s branded beverage sales, particularly Happy Water^®.

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Discounts, rebates and slotting fees for the fiscal year ended February 29, 2016 increased $12,612 compared to the prior fiscal year as a result of significant new listing fees and promotions for the Company’s branded beverage products, offset by lower discounts on co-packing service.

Cost of Sales and Margin

Cost of Sales	Fiscal Year ended	Fiscal Year ended	Change
	February 29, 2016	February 28, 2015
Cost of Sales	$ 7,856,351	$ 7,912,307	($ 55,956)

Cost of sales, excluding depreciation totaling $705,024 (2015: $723,610) for the fiscal year ended February 29, 2016 was $7,856,351 compared to $7,912,307 for the previous fiscal year, representing a decrease of 0.7% . This decrease in cost of sales of $55,956 for the year ended February 29, 2016 was the result of reduction of co-pack volume and improved productivity.

Margin	Fiscal Year ended	Fiscal Year ended	Change
	February 29, 2016	February 28, 2015
Margin	$ 3,154,853	$ 5,460,657	($ 2,305,804)
Margin Percentage	28.7%	40.8%	(12.1%)

Margin for the fiscal year ended February 29, 2016 was $3,154,853 compared to $5,460,657 for the previous fiscal year, representing a decrease in margin as a percentage of net sales of 12.1% . The decrease in margin of $2,305,804 for the fiscal year ended February 29, 2016 was due to lower per case co-pack fees and reduction of co-pack volume and significant new listing fees and promotions for the Company’s branded beverage products.

Selling, General and Administrative Expenses

For the fiscal year ended February 29, 2016, selling, general and administrative expenses decreased $210,802 from $4,475,079 in the fiscal year ended February 28, 2015 to $4,264,277 in the year ended February 29, 2016 as a result of:

♦	decreased wages and benefits expense of $340,904;
♦	decreased legal and public company expense of $3,581; offset by,
♦	increased stock compensation expense of $56,044;
♦	increased administrative costs of $38,312; and
♦	increased sales and marketing costs of $39,327.

Other Expenses

The Company recorded interest expense on current and long-term debt of $85 as compared to $1,355 in the prior fiscal year as the Company repaid its debt in the year.

In the fiscal year ended February 29, 2016, the Company recorded interest income from bank balances of $4,900 compared to $11,965 in the prior fiscal year.

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The Company recorded a non-cash income tax recovery of $436,654 in the fiscal year ended February 29, 2016 relating to Canadian operations, as compared to a $108,965 expense in the prior fiscal year. Deferred tax assets in other operating entities are offset by a valuation allowance.

Depreciation expense decreased to $705,024 for the fiscal year ended February 29, 2016, as compared to $723,610 in the prior fiscal year.

Fiscal Year Ended February 28, 2015

Sales

Gross sales for the fiscal year ended February 28, 2015 were $13,862,437 compared to $15,952,929 for the previous fiscal year, representing a decrease of 13.1% . This decrease of $2,090,492 in gross sales for the year ended February 28, 2015 was the result of the following:

♦	decreased revenues from manufactured products of $2,010,529 due to a reduction of co-pack revenue and reduced sales of certain branded beverage products; and
♦	decreased sales of products that the Company purchases for resale of $79,963 due to the discontinuation by the Company of a licensed brand.

Discounts, rebates and slotting fees for the fiscal year ended February 28, 2015 decreased $149,988 compared to the prior fiscal year as a result of lower discounts on co-packing service and the Company’s branded beverages due to lower demand.

Cost of Sales and Margin

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Cost of sales, excluding depreciation totaling $723,610 (2014: $753,210) for the fiscal year ended February 28, 2015 was $7,912,307 compared to $8,408,558 for the previous fiscal year, representing a decrease of 5.9% . This decrease in cost of sales of $496,251 for the year ended February 28, 2015 was the result of the following:

♦	lower cost of sales from products that the Company purchases for resale of $65,778 in comparison to the prior fiscal year due to the discontinuation by the Company of a licensed brand; and
♦	decreased cost of sales of products that the Company manufactures of $430,473 primarily due to reduced co-pack volume and improved productivity.

Margin for the fiscal year ended February 28, 2015 was $5,460,657 compared to $6,904,910 for the previous fiscal year, representing a decrease in margin as a percentage of net sales of 4.3% . The decrease in margin of $1,444,253 for the fiscal year ended February 28, 2015 was the result of decreased margin from manufactured products of $1,431,035 and decreased margin from products that the Company purchases for resale of $13,218.

Selling, General and Administrative Expenses

For the fiscal year ended February 28, 2015, selling, general and administrative expenses decreased $207,497 from $4,682,576 in the fiscal year ended February 28, 2014 to $4,475,079 in the year ended February 28, 2015 as a result of:

♦	decreased stock-based compensation expense of $38,235;
♦	decreased legal cost of $383,641; offset by,
♦	increased administrative cost of $16,454;
♦	increased sales and marketing cost of $197,925.

Other Expenses

For the fiscal year ended February 28, 2015, the Company recorded interest expense on current and long-term debt of $1,355 as compared to $9,474 in the prior fiscal year as the Company repaid its debt in the year.

In the fiscal year ended February 28, 2015, the Company recorded interest income from bank balances of $11,965 compared to $7,012 in the prior fiscal year.

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The Company recorded a non-cash income tax expense of $108,965 in the fiscal year ended February 28, 2015 relating to Canadian operations, as compared to a $255,408 expense in the prior fiscal year. Deferred tax assets in other operating entities are offset by a valuation allowance.

Depreciation expense decreased to $723,610 for the fiscal year ended February 28, 2015, as compared to $753,210 in the prior fiscal year.

B.	Liquidity and Capital Resources.

Fiscal Year Ended February 29, 2016

As of February 29, 2016, the Company had working capital of $477,354 compared to working capital of $2,050,974 at the prior fiscal year end. The Company held $282,819 in cash account balances at February 29, 2016 compared with $1,702,922 at the prior fiscal year end.

Considering the positive working capital position, including the cash on hand at February 29, 2016, available debt and other internal resources, the Company believes that it has sufficient working capital to continue operations for the next twelve months.

The decrease of $814,866 is the result of the lower net income this fiscal year and increase of prepaid expense and offset by a decrease of inventory and increase of prepaid expenses.

The increase in cash utilized in the fiscal year ended February 29, 2016 for investing activities is due to an increase of cash used for intangible assets as compared to the prior fiscal year, offset by less cash being used for bottling equipment.

Cash used for financing activities in the fiscal year ended February 29, 2016 increased in comparison to the prior fiscal year due to more cash being used for the Company’s share repurchase program.

The Company has an operating bank loan with a credit limit of $3,500,000 (the “Revolving Facility”), subject to the availability of eligible collateral, with an interest rate of the Canadian prime rate of its lender plus 1.00% to 1.50% per annum. At February 29, 2016, the availability under the Revolving Facility, as determined by the amount of eligible collateral, was $315,700. The Company’s requirement for operating capital increases in the summer months due to increased sales and decreases in winter months due to decreased sales. The unused portion of the Revolving Facility is expected to accommodate those requirements as inventory and accounts receivable levels increase with sales volumes.

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The Revolving Facility agreement contains three financial covenants: (i) a tangible net worth covenant; (ii) a current ratio covenant; (iii) a debt coverage covenant; The Company was in compliance with all covenants at February 29, 2016. The revolving credit facility is subject to an annual review process.

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, 2017.

Fiscal Year Ended February 28, 2015

As of February 28, 2015, the Company had working capital of $2,050,974 compared to working capital of $1,617,209 at the prior fiscal year end. The Company held $1,702,922 in cash account balances at February 28, 2015 compared with $2,393,784 at the prior fiscal year end.

The decrease of $3,208,644 was the result of the lower net income this fiscal year and an increase of inventory.

The decrease in cash utilized in the fiscal year ended February 28, 2015 for investing activities was due to less cash being used for vehicle and leasehold improvement, offset by an increase of cash used for bottling equipment as compared to the prior fiscal year.

Cash used for financing activities in the fiscal year ended February 28, 2015 decreased in comparison to the prior fiscal year due to less cash being used for the Company’s share repurchase program and repayment of long-term debt.

The Company has an operating bank line with a credit limit of $3,500,000 (the “Revolving Facility”), subject to the availability of eligible collateral, with an interest rate of the Canadian prime rate of its lender plus 1.00% to 1.50% per annum. At February 28, 2015, the availability under the Revolving Facility, as determined by the amount of eligible collateral, was $613,400. The Company’s requirement for operating capital increases in the summer months due to increased sales and decreases in winter months due to decreased sales. The unused portion of the Revolving Facility is expected to accommodate those requirements as inventory and accounts receivable levels increase with sales volumes.

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The Revolving Facility agreement contains three financial covenants: (i) a tangible net worth covenant; (ii) a current ratio covenant; (iii) a debt coverage covenant; The Company was in compliance with all covenants at February 28, 2015. A capital expenditure limitation was removed from the advance conditions during the 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.

C.	Research and development, patents and licenses, etc.

The Company does not have any deferred product costs at this time. The Company does not have a formal research and development program. It develops products as and when it sees fit by working with existing staff and outside consultants, where appropriate.

The Company has a large inventory of formulations for a wide variety of juices and new age beverages, as well as many U.S., Canadian and foreign trademarks.

D.	Trend Information.

Since 2009, the Company has focused on producing and selling beverage products that can generate superior margins. At times that has meant sacrificing sales volume for profitability. Over the same time the Company has eliminated its reliance on brands licensed from third parties. The Company continues to develop its own branded beverages that it trials and from time to time releases to market. Those brands can take a year or more to gain consumer recognition and replace the volume of more established, but lower margin brands. Consequently, the Company has recently experienced a decline in gross revenues and gross margin.

The Company is significantly dependent upon the revenues from its principal bottling contract. Although that dependence is anticipated to lessen as sales of branded products increase in ensuing years, it is likely that the Company's dependence on that contract will continue for the foreseeable future.

E.	Off- balance sheet arrangements.

1.	The Company is committed to operating leases for premises and equipment and other agreements as disclosed in Note 11 of the consolidated financial statements appearing in “Item 18 – Financial Statements” of this Annual Report.
2.	The Company had no off balance sheet arrangements during the fiscal year ended February 29, 2016.

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F.	Tabular disclosure of contractual obligations.

The following table presents our contractual obligations as of February 29, 2016:

(1)	The Company is committed to operating leases for premises and equipment as disclosed in Note 11 of the consolidated financial statements appearing in “Item 18 – Financial Statements” of this Annual Report.

Critical Accounting Policies

The Company’s annual financial statements have been prepared in accordance with U.S. GAAP. Some accounting policies have a significant impact on the amount reported in these financial statements. A summary of those significant accounting policies can be found in the Summary of Significant Accounting Policies in the annual financial statements. Note that the preparation of this Annual Report requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates. The Company believes, as explained below, that the most critical accounting policies cover the following areas: accounts receivable; inventory; revenue recognition; stock-based compensation, derivative liability and income taxes.

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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 29, 2016. A 10% change in the estimates for doubtful accounts would not result in a material change to the financial statements.

Inventory

Raw materials and finished goods purchased for resale are valued at the lower of cost, determined on a first-in, first-out basis, and market value. Finished goods, produced from manufacturing operations, are valued at the lower of standard cost which approximates average cost of raw materials, direct labour and overhead and market value. The provisions for obsolete or excess inventory are based on estimated forecasted usage of inventories. A significant change in demand for certain products as compared to forecasted amounts may result in recording additional provisions for obsolete inventory. Provisions for obsolete or excess inventory are recorded as cost of goods sold. At February 29, 2016, the inventory balance was presented net of a provision for obsolete inventory in the amount of $39,870. A 10% change in the estimates of provision for obsolete inventory would not result in a material change to the financial statements.

Revenue Recognition

Revenue on sales of products is recognized when the products are delivered and title transfers to customers. Revenues from the provision of manufacturing, bottling or other services are recognized when the services are performed and collection of related receivables is reasonably assured. The Company records shipping and handling revenue as a component of sales revenue, and shipping and handling costs are included in the cost of sales. Incentives offered to customers including rebates, cash discounts, volume discounts, and slotting fees are recorded as a reduction of net sales when the sales are recognized.

Stock-based Compensation

Under U.S. GAAP, the Company follows Accounting Standards Codification (“ASC”) 718 Share-Based Payment (“ASC 718”). ASC 718 requires the Company to recognize in the statement of operations the grant date fair value of share-based compensation awards granted to employees over the requisite service period. Compensation expense recognized reflects estimates of award forfeitures and any changes in estimates thereof are reflected in the period of change.

Compensation costs are charged to the Consolidated Statements of Comprehensive Income (loss).

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.

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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 partially 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. The valuation allowance represents tax losses and deferred income tax assets from inactive United States subsidiaries, with a tax rate of 37%, totaling $4,365,475; and inactive Canadian subsidiaries, with a tax rate of 26%, totaling $203,346.

If management’s estimates of the cash flows or operating results do not materialize due to errors in estimates or unforeseen changes to the economic conditions affecting the Company, it could result in an impairment adjustment in future periods up to the carrying value of the deferred income tax balance of $2,480,257. A 10% change in revenue estimates without a corresponding reduction in overhead costs, gross margins or operating costs could materially change the valuation of the deferred income tax assets. The majority of the deferred income tax asset commences expiration at February 28, 2026.

New Pronouncements

In May 2014, the Financial Accounting Standard Board, or FASB, issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers: Topic 606 (ASU 2014-09). To supersede existing revenue recognition guidance under generally accepted accounting principles in the United States, or GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five steps process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for the fiscal and interim reporting periods beginning after December 15, 2016 using either of two methods: (i) retrospective to each prior reporting period presented within the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. In August 2015, ASU 2015-14 was issued which delayed the effective date to reporting periods beginning after December 15, 2017. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our financial statements.

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In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements – Going Concern: Topic 915 (ASU 2014-15) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which states that in connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 is effective for fiscal and interim reporting periods ending after December 15, 2016. The Company is currently evaluating the impact of this new guidance on our financial statements.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”). Under ASU 2015-11, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. ASU 2015-11 defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. Management is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of ASU 2015-11 will have on the Company's financial position or results of operations.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-2), Leases, which supersedes ASC Topic 840, Leases. ASU 2016-2 requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than twelve months to its balance sheets. ASU 2016-2 also expands the required quantitative and qualitative disclosures surrounding leases. ASU 2016-2 is effective for the Company beginning January 1, 2019. Early adoption is permitted. The Company has not determined the impact the adoption of ASU 2016 -2 will have on its consolidated financial statements.

In March 2016, the FASB issued authoritative guidance under ASU 2016-09, Compensation - Stock Compensation (Topic 718) “Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 provides for simplification of several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016. The Company is currently evaluating the potential impact of adoption of this standard on its consolidated financial statements.

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Item 6. – Directors, Senior Management and Employees

A.	Directors and senior management.

The following is a list of the current directors and senior officers of the Company, their municipalities of residence, their current positions with the Company, areas of experience, and principal business activities performed outside the Company:

Name and Municipality	Principal Occupation and Areas of Experience
of Residence
James Corbett West Vancouver, BC Canada	Mr. Corbett has been a director of Leading Brands, Inc. since June 2008. He trained as a Chartered Accountant, and is the founder and president of Canadian Outback Adventures.
	Mr. Corbett has served as a member of the Tourism Management Advisory Committee of Capilano University, and is also a guest lecturer at various colleges.
Darryl R. Eddy Vancouver, BC Canada	Mr. Eddy has been a director of Leading Brands, Inc. since July 2009. He is also a director of various other public and private corporations.
	Mr. Eddy is a retired partner of PricewaterhouseCoopers LLP and a past Managing Director of PricewaterhouseCoopers Corporate Finance Inc.
Stephen K. Fane, FCA Vancouver, BC Canada	Mr. Fane has been a director of Leading Brands, Inc. since October 2007. He is also President of New Century Holdings Ltd.
	Mr. Fane was President and CEO of Hot House Growers Income Fund, a publicly traded income trust, from December 2003 to October 2006.
	He is a former partner in a predecessor firm to PricewaterhouseCoopers.
	A graduate of the University of British Columbia, he became a Chartered Accountant in 1972 and was elected a Fellow of the Institute of Chartered Accountants in 1997.
R. Thomas Gaglardi Vancouver, BC Canada	Mr. Gaglardi has been a director of Leading Brands, Inc. since October 1998.
	He is also the President of Northland Properties Corporation, a hotel, real estate and restaurant company, and Chairman and CEO of Sandman Hotels, Inns & Suites, Moxie’s Restaurants LP, Shark Clubs of Canada, Inc. and Denny’s Restaurants of Canada.

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Name and Municipality	Principal Occupation and Areas of Experience
of Residence
Ralph D. McRae Vancouver, BC Canada	Mr. McRae is a director and the Chairman, President and Chief Executive Officer of the Company and has been with Leading Brands, Inc. since March 1996. He is also a director and the Chairman, CEO and Secretary/Treasurer of Leading Brands of Canada, Inc.
	Mr. McRae is also a director and the Chairman and CEO of Revolution Resource Recovery, Inc. and its affiliates, engaged in waste management, farming, real estate development and water extraction, based in Surrey, British Columbia.
	He is a member of the Bar of British Columbia, and holds a Bachelor of Commerce (1980) and J.D. (1981) from the University of British Columbia.
Sinan ALZubaidi Edmonton, AB Canada	Mr. ALZubaidi is the Vice-President of Bottling Operations for Leading Brands of Canada, Inc.
	Prior to joining Leading Brands in 1998, Mr. ALZubaidi worked for Sweet Ripe Drinks (Ontario & Nova Scotia) for 7.5 years as a Director of Operations. Prior to this he worked for 12 years as a senior Statistician for the federal government of UAE.
	Mr. ALZubaidi has a BA degree in Statistics and post graduate courses in the same field.
Thor Matson Delta, BC Canada	Mr. Matson is the Vice President of Business Development for Leading Brands of Canada, Inc.
	Prior to joining Leading Brands in July 2014, he had a 25 year career with Pepsico where he held numerous sales and marketing roles of increasing responsibility.
	Mr. Matson has a business degree from the University of British Columbia.
Dave Read Edmonton, AB Canada	Mr. Read is the Executive Vice-President of Leading Brands of Canada, Inc.
	Prior to joining Leading Brands in 1999, Mr. Read owned and operated (with a partner) distribution and food production companies. Those companies were sold to the Company in 1999.
Fei Xu Coquitlam, BC Canada	Ms. Xu is the Corporate Controller and the Principal Financial Officer of the Company. She has been with Leading Brands since 2001.

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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.

B.	Compensation.

Compensation Principles

The Company is committed to the philosophy of sharing the benefits of success with those who help the Company grow and prosper. The Company's strength and ability to sustain growth is based on an organization that perceives people as its single most important asset. The Company's philosophy is to provide sufficient compensation opportunities in order to attract and retain key executive officers critical to the Company's long-term success. The Company has developed an informal employee share option plan to increase the risk/reward ratio of its executive compensation program, to focus management on long term strategic issues, and to align management's interests with those of the shareholders of the Company in the sustained growth of shareholder value.

The Company does not have a formal compensation committee. The Company relies on the independent members of the Board for determining executive compensation. The Board may, from time to time, retain independent consultants to advise on compensation matters.

Compensation Program

The Company's executive compensation program includes base salary, annual cash or short-term incentives (bonuses) and long-term incentive compensation in the form of stock options.

The compensation program is designed to:

♦	promote an ownership mentality among key leadership and the Board of Directors;
♦	enhance the overall performance of the Company; and
♦	recognize and reward individual performance and responsibility.

Base Compensation

The Company determines base salary based on a combination of factors, including comparable market data, experience, expertise and job responsibilities. The Company's process for determining executive compensation is relatively simple and does not include formal targets, criteria or analysis. Salary levels are reviewed periodically and adjustments may be made, if warranted, after an evaluation of executive and Company performance, salary trends in the Company's business sector, and any increase in responsibilities assumed by the executive.

Short-Term Incentives

Bonuses for senior management are, with limited exceptions, discretionary and are intended to reward senior managers for exceptional performance that positively impacts the profitability and growth of the Company. Depending on the Company's financial and operating performance, performance-based bonuses may be awarded.

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Long-Term Incentives

The long-term incentives are intended to align executive and shareholder interests by creating a strong and direct link between executive compensation and shareholder return, and to enable executive officers to develop and maintain a significant, long-term stock ownership position in the Company's common shares. Long-term incentives may be granted in the form of stock options which generally vest over several years of service with the Company. Further discussion follows in the section titled "Option-Based Awards".

Risk Considerations

As the Company does not have a bonus program in place for its employees generally, and any significant bonuses for the Named Executive Officers (as defined below in the section "Summary Compensation Table") must be approved by the Board, the Board has not considered the implications of risks associated with the Company's compensation policies and practices. While the Board of Directors does not formally analyse risks associated with the Company's compensation policies and practices, these policies and practices do not include structural inconsistencies that are likely to unduly encourage or cause an executive officer to expose the Company to inappropriate or excessive risks.

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.

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Summary Compensation Table

The following table (presented in accordance with Canada's National Instrument Form 51-102F6 Statement of Executive Compensation) sets forth all annual and long term compensation for services in all capacities to the Company for the three most recently completed financial years of the Company in respect of:

(a)	each individual who acted as the Chief Executive Officer ("CEO") or the Chief Financial Officer ("CFO") or acted in a similar capacity for all or any portion of the most recently completed financial year,
(b)	each of the three most highly compensated executive officers, or the three most highly compensated individuals acting in a similar capacity, other than the CEO and the CFO, at the end of the most recently completed financial year whose total compensation was, individually, more than $150,000 for that financial year, and
(c)	each individual who would have satisfied the criteria under paragraph (b) but for the fact that the individual was neither an executive officer of the Company, nor acting in a similar capacity, at the end of the most recently completed financial year.
	(collectively the "Named Executive Officers" or "NEOs")

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(1)	The value of option awards reflects the grant date fair value of option based awards in the 2014, 2015, and 2016 fiscal years. The estimated fair value of the stock options granted was determined using the Black-Scholes option pricing model. The options are granted in U.S. dollars and are converted into Canadian dollars at the Bank of Canada closing rate as of the date of the options grant for accounting purposes.
(2)	Amounts paid to McRae Ventures, Inc., a company of which Mr. McRae is also a director, for consulting services provided by Mr. McRae. During the most recently completed financial year, McRae Ventures, Inc. received $132,000 for consulting services provided by Mr. McRae. Effective June 1, 2015 the contractual arrangements between Mr. McRae, McRae Ventures, Inc., BBI Holdings Inc. and the Company ended and was replaced with one executive employment agreement between Mr. McRae, the Company and Leading Brands of Canada, Inc. providing for an aggregate salary of $420,000 per annum, which represents a reduction of Mr. McRae's salary of 31.4% over prior years.
(3)	Amounts paid to BBI Holdings Inc., a company of which Mr. McRae is also a director, for consulting services provided by Mr. McRae. During the most recently completed financial year, BBI Holdings Inc. received $21,000 for consulting services provided by Mr. McRae. This arrangement was terminated effective June 1, 2015.
(4)	This amount represents payments for medical benefits.
(5)	VE Services Ltd., a company owned by Mr. Read, received these amounts for consulting services provided by Mr. Read.
(6)	This amount represents payments for car allowance.
(7)	Mr. Matson joined the Company in July 2014. This amount represents 7.5 months in the fiscal year.

The Company does not have formal employment or consulting agreements other than an executive employment agreement with its Chairman, President and CEO, Ralph McRae, effective June 1, 2015. Effective that date, all executives are paid as employees of the Company with the exception of Mr. Read, who invoices the Company for his services.

Outstanding Option-Based Awards for Named Executive Officers

The following table sets forth information concerning all stock option awards outstanding at the end of the most recently completed fiscal year, including awards granted before the most recently completed fiscal year, to each of the Named Executive Officers. The Company has not granted any share-based awards.

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(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$2.20, and the exercise or base price of the option. The Shares are traded on the Nasdaq Capital Market in U.S. dollars. The effective exchange rate to convert from U.S. dollars to Canadian dollars at the end of the fiscal year was US$1 = CAD$1.3531.

The terms of the Company's stock options are discussed under the "Option-Based Awards" section above.

Option Exercises During the Most Recently Completed Fiscal Year

No stock options were exercised by the Named Executive Officers during the most recently completed fiscal year.

Option Repricing

The Company did not reprice any stock options during the most recent fiscal year.

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:

(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 vesting date. The actual value of the options granted to the Named Executive Officers will be determined based on the 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.

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The Company does not have a formal stock option plan. Stock options generally vest over several years of service with the Company. The value vested during the year varies according to the vesting date and the market price of the underlying securities on a selected exercise date.

Further details regarding stock options may be found in the sections above titled "Option-Based Awards for Named Executive Officers" and below titled "Outstanding Option-Based Awards for Directors".

Pension Plan Benefits

The Company does not have a pension plan or defined contribution plan that provides for payments or benefits to the Named Executive Officers at, following, or in connection with retirement.

Termination of Employment, Change in Responsibilities and Employment Contracts

The executive employment agreement between the Company, Leading Brands of Canada Inc. and Ralph McRae (the "Executive"), effective June 1, 2015 (the "Agreement") provides for a severance payment to the Executive in the event of termination by the Executive for Good Reason (as defined below) or termination by the Company without cause. "Good Reason" means (i) a material diminution of the Executive's title, authority, status, duties or responsibilities; (ii) any reduction of the salary of the Executive; (iii) a material breach by the Company of the Agreement; (iv) a relocation of the principal place of work outside the City of Vancouver; (v) a Change of Control (as defined below); (vi) the Executive ceasing to be the chairperson of the Board of Directors for any reason other than his own voluntary resignation; (vii) the Executive ceasing to be director of the Company or Leading Brands of Canada, Inc. for any reason other than his own voluntary resignation; or (viii) any other change that would constitute a “constructive dismissal” at common law. "Change of Control" means the occurrence of any of the following events: (i) the acquisition, whether directly or indirectly, by any person or company, or any persons or companies acting jointly or in concert (as determined in accordance with the Securities Act (British Columbia)), of voting securities of the Company which, together with all other voting securities of the Company held by such person or company or persons or companies, constitute, in the aggregate, more than 50% of all outstanding voting securities of the Company; (ii) an amalgamation, arrangement or other form of business combination of the Company with another person or company which results in the holders of securities of that other person or company holding, directly or indirectly, in the aggregate, more than 50% of all outstanding voting securities of the combined entity resulting from the business combination; (iii) the sale, lease or exchange of all or substantially all of the assets of the Company to another person or company, other than to a subsidiary of the Company; or (iv) less than a majority of the Board of Directors being composed of Continuing Directors. "Continuing Director" means any individual who either: (i) is a director of the Company as of the Agreement; or (ii) becomes a director after the date of the Agreement after having been appointed or recommended for election by at least a majority of the Continuing Directors in office at the time of such appointment or election. In the event of termination by the Executive for Good Reason or by the Company without cause, the Executive is entitled to be paid 900,000 less statutory withholdings within 10 days following the date of termination and to the continuation of the Executive's benefits under the Agreement for 18 months, or, at the Executive's request, a lump sum payment equal to the projected cost of maintaining such benefits. Assuming the Agreement had been in force and a triggering event took place on the last business day of the Company’s most recently completed financial year, the Executive would have been entitled to estimated incremental payments, payables and benefits totalling the same amount.

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Other than the Agreement, the Company and its subsidiaries have no arrangements that provide for payments to a Named Executive Officer at, following or in connection with any termination (whether voluntary, involuntary or constructive), resignation, retirement, change in control of the Company or change in a Named Executive Officer's responsibilities.

Director Compensation

Directors who are not paid executives of the Company receive $1,500 per quarter (pro-rated for those serving less than a full quarter) and $500 for each Board meeting and committee meeting attended. Directors who are also executives of the Company do not receive director's fees. Reference is made to the Summary Compensation Table above for details of compensation paid to directors who are also Named Executive Officers, in their capacity as executive officers of the Company. Directors are also compensated for their services in their capacity as directors by the granting from time to time of incentive stock options.

The following table sets forth all amounts of compensation provided to the directors, who are not Named Executive Officers, for the Company's most recently completed fiscal year:

(1)

The value of option awards reflects the grant date fair value of option based awards in the 2016 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.

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.

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(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$2.20 and the exercise price of the option. The Company's shares are traded on the Nasdaq Capital Market in U.S. dollars. The effective exchange rate to convert from U.S. dollars to Canadian dollars at the end of the fiscal year was US$1 = CAD$1.3531.

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:

(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.

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The Company does not have a formal stock option plan. Options granted generally vest over several years of service with the Company. The value vested during the year varies according to the vesting date and the market price of the underlying Shares on a selected exercise date. In the Company's fiscal year ended February 29, 2016, no stock options were exercised by directors. Further details regarding stock options may be found in the sections above titled "Option-Based Awards for Named Executive Officers" and "Outstanding Option-Based Awards for Directors".

C.	Board Practices.

1.	The Company’s Board of Directors has been set at five directors and is divided into three classes designated as Class I, Class II and Class III, to provide for a rotation of three year terms of office. Any director whose term has expired is eligible for re-election subject to Board approval.
	The following table lists the current terms of office for the directors and the period during which the directors have served:

	Name	Class	Term of Office	Director Since
	Ralph D. McRae	I	July 2013 to Annual General Meeting ("AGM") 2016	March 1996
	Darryl R. Eddy	I	July 2013 to AGM 2016	July 2009
	James Corbett	II	July 2014 to AGM 2017	June 2008
	Stephen K. Fane	III	June 2015 to AGM 2018	October 2007
	R. Thomas Gaglardi	III	June 2015 to AGM 2018	October 1998

Three of the five current directors are independent based upon the tests for independence set forth in applicable Canadian and U.S. securities legislation. Ralph McRae is not independent as he is the Chairman, President and CEO of the Company. R. Thomas Gaglardi is not independent as he has beneficial ownership of more than 10% of the common shares of the Company.

2.	Other than the executive employment agreement for Mr. McRae, referenced earlier, there are no directors’ service contracts with the Company or any of its subsidiaries providing for benefits upon termination of service.

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3.	Audit Committee

The members of the Company’s audit committee are:

	♦	James Corbett
	♦	Darryl Eddy
	♦	Stephen Fane

All members of the audit committee are independent directors, are financially literate, and are considered “financial experts” as defined by the SEC. For details on their professional careers, see “Item 6.-A. Directors, Senior Management and Employees”.

The audit committee has a written charter which specifies the scope of its authority and responsibility. A copy of the Audit Committee Charter was previously filed as an exhibit to the Company’s Annual Report on Form 20-F, filed on May 30, 2008, and is incorporated by reference. The audit committee reviews and re-assesses the adequacy of its written charter on an annual basis. The function of the audit committee is one of review and oversight. The committee also is responsible for monitoring the independence, qualifications and performance of the Company’s external auditors, overseeing the audits of the Company’s financial statements and approving any non-audit services. The committee reports to the Board of Directors from time to time with respect to its activities and its recommendations and provides background and supporting information as may be necessary for the Board of Directors to make an informed decision.

Nomination of Directors

The Board has adopted a charter for the Nominating and Corporate Governance Committee. The committee is currently comprised of the three independent directors:

	♦	James Corbett,
	♦	Darryl R. Eddy
	♦	Stephen K. Fane.

Pursuant to its charter, the responsibilities, powers and operation of the committee include: identifying and recommending new candidates for Board nomination; evaluating the effectiveness of the Board, its committees and its directors; monitoring and reviewing the Company’s corporate governance practices and policies and making recommendations for changes when appropriate; and ensuring that a comprehensive orientation is received by new directors and that continuing education opportunities are available.

In connection with its responsibilities relating to Board nominations, the committee is responsible for identifying and recommending new candidates for nomination to the Board based upon: (i) the competencies and skills necessary for the Board as a whole to possess; (ii) the competencies and skills necessary for each individual director to possess; (iii) the competencies and skills which each new nominee to the Board is expected to bring; and (iv) whether the proposed nominee to the Board will be able to devote sufficient time and resources to the Company. Other members of the Board and representatives of the food and beverage industry are consulted for possible candidates.

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The size of the Board is reviewed on a regular basis by the committee and the Board. The committee and the Board will take into account the number of directors required to carry out the Board’s duties effectively, and to maintain a diversity of view and experience.

Compensation of Directors and the CEO

The independent directors have the responsibility for determining and reviewing compensation for the directors and senior management of the Company. Reference is made to the Compensation section above for further information.

Assessments

The Board conducts informal assessments of the Board's effectiveness, the individual directors and each of its committees on a regular basis. As part of the assessments, the Board reviews the mandates or charters and conducts reviews of applicable corporate policies.

As of May 1, 2016, the executive officer of Leading Brands, Inc. is:

Ralph D. McRae

Chairman, President and Chief Executive Officer

D.	Employees.

Following are the number of employees of the Company for the past three fiscal years as at the end of each fiscal year:

E.	Share ownership.

Options to purchase common shares from the Company are granted from time to time to directors, officers and employees of the Company on terms and conditions acceptable to the Board of Directors.

As of May 1, 2016, the Company had 880,000 issued and outstanding options, with a weighted average exercise price of US$2.993.

Of the total stock options granted, 880,000 have vested and are available for exercise as of May 1, 2016.

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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, 2016.

(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.

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Item 7. – Major Shareholders and Related Party Transactions

A.	Major shareholders.

As at May 5, 2016, the Company had 2,859,837 common shares without par value issued and outstanding.

1.	Following are the shareholders that are the beneficial owners of 5% or more of the Company’s voting securities, as of May 5, 2016:

(a)

Shareholder	Number of Shares	Percentage of Issued
		Capital
R. Thomas Gaglardi/ Northland Properties Corporation(1)	419,125	14.7%
Global Value Investment Corp.	272,753	9.5%
Salzhauer family	198,294	6.9%
Ralph McRae	176,126	6.2%

(1)

Northland Properties Corporation is an affiliate of R. Thomas Gaglardi, a director of Leading Brands, Inc. 404,125 of Mr. Gaglardi’s Shares are held by Northland Properties Corporation.

(b)	To the best of the Company's knowledge, there has been no significant change in the percentage ownership held by any major shareholders during the past three fiscal years.
(c)	The Company’s major shareholders do not have different voting rights than other shareholders.

2.	The Company’s register of 259 members showed that as of May 5, 2016, 1,608,831 of the Company’s common shares, or 56.26%, were held by 219 registered shareholders residing in the United States. The register includes Cede and Co., an American depository holding shares on behalf of beneficial shareholders.
3.	To the Company’s knowledge, the Company is not owned or controlled, directly or indirectly, by another corporation, any foreign government, or by any other natural or legal persons.
4.	To the Company’s knowledge, there are no arrangements the operation of which at a subsequent date may result in a change in control of the Company. A substantial number of common shares of the Company are held by depositories, brokerage firms and financial institutions in “street form”.

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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, 2016 been a party to any material transactions in which any director or officer of the Company, or any relative or spouse, or any relative of any such spouse, has any direct or indirect material interest except as follows:

	a)	A company with a director in common with the Company provided consulting service in the amount of $21,000.
	b)	A company with a director in common with the Company provided professional service in the amount of $132,000.
	c)	A company with a director in common with the Company supplied sales and marketing services in the amount of $5,619.
	d)	A company with a director in common with the Company supplied bottling services in the amount of $218,812.
	e)	A company with an officer in common with the Company provided consulting service in the amount of $150,000.
	f)	A company with a director in common with the Company supplied garbage services in the amount of $1,055.
	g)	A company with an officer in common with the Company provided supplies in the amount of $1,273.
		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.

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A-7.

Legal Proceedings

The Company is subject to certain legal proceedings and claims that arise in the ordinary course of its business, none of which are expected to have significant effects on the Company’s financial position, profitability, or cash flows.

A-8.

Dividend Distributions

The Company intends to consider dividend distributions when it determines that it cannot realize better returns to investors by investing internally.

B.	Significant Changes.

There have been no significant changes since the date of the annual financial statements.

Item 9. – The Offer and Listing

A.	Offer and listing details.

Following is information regarding the price history of the Company’s common shares on the NASDAQ Capital Market, in U.S. dollars.

(a)

For the five most recent full fiscal years:

(b)

For each full financial quarter of the two most recent full fiscal years:

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(c)

For the most recent six months:

C.	Markets.
	The Company’s common shares have been quoted on the NASDAQ Capital Market (formerly called the NASDAQ Small-cap Market) since August 3, 1993. The ticker symbol is LBIX.

Item 10. – Additional Information

A.	Share capital
	This item is not applicable for an Annual Report.
B.	Memorandum and articles of association.
	The Notice of Articles relating to the consolidation of the Company’s common shares and the increase in authorized share capital that were filed with the British Columbia Registry Services on February 1, 2010 were filed on a Form 6- K on February 3, 2010.
	All other information required by this “Item 10.B” was previously reported to the SEC in the Company’s registration statement on Form F-3, filed on September 24, 2007, and is incorporated by reference.

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C.	Material contracts.
	Effective January 1, 2015, the Company entered into a new contract with its largest bottling customer. A copy of the contract was filed on SEDAR (Canada) and EDGAR (U.S.A.) on March 17, 2015.
D.	Exchange controls.
	Canada has no system of exchange controls. There are no exchange restrictions on borrowing from foreign countries or on the remittance of dividends, interest, royalties and similar payments, management fees, loan repayments, settlement of trade debts, or the repatriation of capital. Any such remittances to U.S. residents, however, may be subject to withholding tax.
E.	Taxation.
	A brief and general description is included below of certain taxes, including withholding taxes, to which U.S. security holders may be subject under the existing tax laws and regulations of Canada. The consequences, if any, of provincial taxes are not considered.
	Please note that the following information is a brief summary only and security holders should seek the advice of their own tax advisors with respect to the applicability or effect on their own individual circumstances of the matters referred to herein and of any U.S. federal, state or local taxes.
	Taxation on Dividends
	Generally, cash dividends paid or deemed to be paid by a Canadian-corporation to non-resident shareholders are subject to a withholding tax of 25% (unless an income tax convention applies to reduce the withholding tax rate to some other amount). Dividends paid to U.S. residents are subject to a withholding tax of 15%, and dividends paid to a U.S. resident company which owns 10% or more of the voting shares of the Canadian corporation are subject to a withholding tax of 5%. Dividends paid by a Canadian corporation to shareholders residing in Canada are not subject to withholding tax.
	Taxation on Capital Gains
	Generally, the disposition by a non-resident of shares of a Canadian public corporation is not subject to Canadian income tax, unless such shares are “taxable Canadian property” within the meaning of the Income Tax Act (Canada) and no relief is afforded under any applicable tax treaty. The shares of the Company would be taxable Canadian property of a non-resident purchaser if the non- resident purchaser used the shares in carrying on a business in Canada, or if the non-resident, together with persons with whom he does not deal at arm’s length, owned 25% or more of the issued shares of any class of the capital stock of the Canadian corporation at any time during the five-year period immediately preceding the disposition.

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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.
G.	Statement by experts.
	This item is not applicable for an Annual Report.
H.	Documents on display.
	Copies of documents concerning the Company, which are referred to in this Annual Report, are available for inspection at the head office of the Company located at Unit 101 - 33 W. 8th Avenue, Vancouver BC Canada V5Y 1M8.
I.	Subsidiary Information.
	This item is not applicable for an Annual Report.

Item 11. – Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

The Company’s primary market risk exposure is risk related to interest rates from changes in the Canadian prime rate of its lenders under its Revolving Facility.

Currency risk

The Company concludes sales in U.S. dollars to customers in the U.S. and other foreign countries. The Company also purchases raw materials as well as equipment in U.S. dollars. Consequently, it is exposed to the risk of exchange rate fluctuations with respect to the receivable and payable balances denominated in U.S. dollars. The Company has not hedged its exposure to currency fluctuations.

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At February 29, 2016, the Company’s cash balances included $33,000 denominated in U.S. dollars (2015 - $227,000), accounts receivable balances included $65 denominated in U.S. dollars (2015 - $Nil), and the Company’s accounts payable and accrued liabilities balance included $132,200 denominated in U.S. dollars (2015 - $204,600).

As at February 29, 2016, all other factors being equal, a 5% U.S. dollar rise per Canadian dollar would have an unfavourable impact of approximately $35,000 on net earnings for the year. A 5% U.S.-to-Canadian dollar decrease would have a positive impact of similar magnitude.

Item 12. – Description of Securities Other than Equity Securities

This item is not applicable for an Annual Report, except for “Item 12.D.3” and “Item 12.D.4.” The Company does not have securities represented by American Depositary Receipts.

P A R T II

Item 13. – Defaults, Dividend Arrearages and Delinquencies

None.

Item 14. – Material Modifications to the Rights of Security Holders and Use of Proceeds

A.	On June 16, 2015, the Company’s shareholders approved a Further Amended and Restated Shareholder Rights Plan Agreement (the "Rights Plan"). A copy of the Rights Plan was filed with the SEC on Form 6-K on July 7, 2015 and is incorporated by reference. The Rights Plan will expire at the termination of the Company's annual general meeting in 2020. The Company has had a shareholders rights plan in place since 1991.
	On February 2, 2010, a 5:1 consolidation of the Company’s common shares, also known as a reverse stock split, became effective. Fractional shares were rounded to the nearest whole number. In connection with the share consolidation, the Company increased its authorized number of common shares to 500,000,000 common shares.
	The documents relating to the share consolidation were filed with the SEC on a Form 6- K on February 3, 2010 and are incorporated by reference.
B.	There were no material modifications to any class of securities during the fiscal year ended February 29, 2016.
C.	There has been no material withdrawal or substitution of assets securing any class of registered securities of the Company.
D.	There has been no change of trustee or paying agent for any registered securities.
E.	This item is not applicable.

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Item 15. – Controls and Procedures

Disclosure Controls and Procedures

Based on their evaluation as of February 29, 2016, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that the information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is:

♦	recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms regarding required disclosure; and
♦	accumulated and communicated to the Company’s management, including the Chief Executive Officer and principal financial officer, to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. The Company’s system of internal controls is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP.

Management recognizes that effective internal control over financial reporting may nonetheless not prevent or detect all possible misstatements or frauds. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

As part of its evaluation of the effectiveness of its internal control over financial reporting as required by paragraph (c) of Rules13a-15 or 5d-15 of the Exchange Act, the Company utilized the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) Internal Control – Integrated Framework (1992). The Company annually reviews the final documentation to ensure that controls are still functioning as described and serving the purposes for which they were designed.

Management has assessed the effectiveness of the Company’s internal control over financial reporting as of the fiscal year ended February 29, 2016. Based on this evaluation, management concluded that the Company’s internal control over financial reporting is effective as of February 29, 2016.

This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.

51

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Changes in internal control over financial reporting

There has been no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal year ended February 29, 2016 that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 16. – [Reserved]

Item 16A. – Audit Committee Financial Expert

The Company’s Board of Directors has determined that all three members of its Audit Committee, James Corbett, Darryl Eddy and Stephen Fane, satisfy the requirements of “audit committee financial expert”. All members of the Audit Committee are independent directors. For details on their professional careers, and for further information regarding the Company’s Audit Committee, see “Item 6.A” and “Item 6.C” above.

Item 16B. – Code of Ethics

The Company has adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that applies to the Company’s directors, officers and employees. A copy of this Code of Ethics was filed with the SEC on June 1, 2005 and is incorporated by reference. Copies will be provided at no charge upon request to the Company at Unit 101 - 33 W. 8^th Avenue, Vancouver BC Canada V5Y 1M8, or electronically to info@Lbix.com.

There were no amendments or waivers to the Code of Ethics during the most recently completed fiscal year.

Item 16C. – Principal Accountant Fees and Services

a)	Audit Fees – Audit fees billed for the fiscal years ended February 29, 2016 and February 28, 2015 totaled $84,000 and $80,000 respectively.
b)	Audit-Related Fees – No audit-related fees were billed for the fiscal years ended February 29, 2016 and February 28, 2015.
c)	Tax Fees - Tax fees billed for the fiscal years ended February 29, 2016 and February 28, 2015 totaled $16,300 and $17,350 respectively for tax compliance, advice and planning.
d)	All Other Fees – No other fees were billed for the fiscal years ended February 29, 2016 and February 28, 2015.
e)	The Audit Committee approves all audit, audit-related services, tax services and other services provided by BDO Canada LLP. Any services provided by BDO Canada LLP that are not specifically included within the scope of the audit must be pre-approved by the Audit Committee in advance of any engagement. Under the Sarbanes-Oxley Act of 2002, audit committees are permitted to approve certain fees for audit-related services, tax services and other services pursuant to a de minimus exception prior to the completion of an audit engagement. None of the fees paid to BDO Canada LLP were approved pursuant to the de minimus exception.

52

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Item 16D. – Exemptions from the Listing Standards for Audit Committees

None.

Item 16E. – Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Tender Offer

On June 18, 2012, the Company completed its previously announced modified “Dutch Auction” tender offer. In accordance with the terms and conditions of the tender offer, Leading Brands purchased an additional 2% of its outstanding shares and accepted for purchase 259,854 of its common shares at a price of US$4.10 per share, for an aggregate cost of approximately $1,096,511 (US$1,065,400), plus fees and expenses of $174,603 relating to the tender offer. These shares represented approximately 8% of Leading Brands’ then-outstanding common shares.

Share Buyback

From the fiscal year ended February 28, 2010 through to February 29, 2016, the Company’s Board of Directors authorized a share repurchase program for the repurchase of up to US$3,500,000 of the Company’s outstanding common shares. A total of 40,705 common shares were purchased during the fiscal year ended February 29, 2016 for a total cost of $176,317 (US$134,279). All shares repurchased in the fiscal year have been returned to treasury.

The following table provides details of the Company’s share repurchases during the fiscal year ended February 29, 2016.

53

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(a)	The share repurchase program was originally announced in a news release on September 9, 2009, followed by additional news releases on November 19, 2010, February 15, 2011, April 29, 2011, September 29, 2011, January 12, 2012, June 19, 2012, July 12, 2012 and July 11, 2013.
(b)	The total dollar amount approved for the share repurchase program from September 9, 2009 to February 29, 2016 was US$3,500,000.
(c)	The share repurchase plan does not have an expiration date.

Item 16F. – Change in Registrant’s Certifying Accountant

None.

Item 16G. – Corporate Governance

The NASDAQ Rules provide that foreign private issuers may follow home country practice in lieu of the NASDAQ corporate governance requirements, subject to certain exceptions and requirements and except to the extent that such exemptions would be contrary to U.S. federal securities laws and regulations. The Company has chosen to comply with the NASDAQ corporate governance rules as though it was a U.S. company, except for Rule 5635(c), requiring shareholder approval of equity compensation arrangements and Rule 5605(d) regarding Compensation Committees. The Company has notified NASDAQ that it has elected to follow British Columbia practice in lieu of these Nasdaq rules.

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Item 16H. – Mine Safety Disclosure

Not applicable.

P A R T III

Item 17. – Financial Statements

Not applicable.

Item 18. – Financial Statements

The following financial statements for the year ended February 29, 2016 are included in this report:

(a)	Balance sheets
(b)	Statements of Comprehensive Income (loss)
(c)	Statements of Cash Flows
(d)	Statements of Changes in Shareholders’ Equity
(e)	Notes to the Consolidated Financial Statements

55

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	Leading Brands, Inc.
	Consolidated Financial Statements
	February 29, 2016 and February 28, 2015
	(Expressed in Canadian Dollars)

Independent Auditors’ Report

Consolidated Financial Statements

Balance Sheets

Statements of Comprehensive Income (loss)

Statements of Cash Flows

Statements of Changes in Shareholders’ Equity

Notes to the Consolidated Financial Statements

 

 

 

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	Tel: 604 688 5421	BDO Canada LLP
	Fax: 604 688 5132	600 Cathedral Place
	www.bdo.ca	925 West Georgia Street
		Vancouver BC V6C 3L2 Canada

Independent Auditors’ Report

To the Shareholders of

Leading Brands, Inc.

We have audited the accompanying consolidated financial statements of Leading Brands, Inc. which comprise the Consolidated Balance Sheets as at February 29, 2016 and February 28, 2015 and the Consolidated Statements of Comprehensive Income, Cash Flows and Changes in Shareholders’ Equity for each of the years in the three-year period ended February 29, 2016, and a summary of significant accounting policies and other explanatory information.

Management's Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with United States Generally Accepted Accounting Principles, 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.

Auditor's Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Leading Brands, Inc. as at February 29, 2016 and February 28, 2015 and the results of its operations and its cash flows for each of the years in the three-year period ended February 29, 2016, in accordance with United States Generally Accepted Accounting Principles.

/s/ BDO CANADA LLP

Chartered Professional Accountants

Vancouver, Canada
May 12, 2016

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.

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Leading Brands, Inc.

Consolidated Balance Sheets

(Expressed in Canadian Dollars)

As at		Feb. 29, 2016			Feb. 28, 2015
Assets
Current
Cash	$	282,819		$	1,702,922
Accounts receivable		324,577			303,132
Inventory (Note 2)		968,030			1,316,626
Prepaid expenses and deposits (Note 4)		416,646			289,583
		1,992,072			3,612,263
Property, plant and equipment (Note 3)		8,596,759			9,099,246
Intangible assets (Note 5)		205,620			-
Deferred tax assets (Note 10)		2,480,257			2,043,603
Total Assets	$	13,274,708		$	14,755,112
Liabilities and Shareholders’ Equity
Liabilities
Current
Accounts payable and accrued liabilities	$	1,514,718		$	1,561,289
		1,514,718			1,561,289
Lease inducement (Note 6)		22,234			-
Derivative Liability – non-employee stock options (Note 9)		59,990			120,337
		1,596,942			1,681,626
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                         2,859,837 common shares (2015 – 2,900,542)		31,946,732			32,401,440
Additional paid-in capital		18,953,663			18,591,391
Accumulated other comprehensive income - currency translation adjustment		577,916			577,916
Accumulated deficit		(39,800,545	)		(38,497,261	)
		11,677,766			13,073,486
Total Liabilities and Shareholders’ Equity	$	13,274,708		$	14,755,112

Approved on behalf of the Board:

_____s/s Ralph McRae___________________________________ Director

_____s/s Stephen K. Fane________________________________ Director

The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements.

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Leading Brands, Inc.

Consolidated Statements of Comprehensive Income (loss)

(Expressed in Canadian Dollars)

For the year ended		Feb. 29, 2016			Feb. 28, 2015			Feb. 28, 2014
Gross Sales	$	11,513,289		$	13,862,437		$	15,952,929
Less: Discounts, rebates and slotting fees		(502,085	)		(489,473	)		(639,461	)
Net Sales		11,011,204			13,372,964			15,313,468
Expenses (income)
Cost of sales (excluding depreciation shown separately below)		7,856,351			7,912,307			8,408,558
Selling, general and administrative		4,264,277			4,475,079			4,682,576
Depreciation of property, plant, equipment and intangible asset		705,024			723,610			753,210
Interest		85			1,355			9,474
Foreign exchange loss		9,865			14,220			6,560
Interest income		(4,900	)		(11,965	)		(7,012	)
Change in fair value of derivative liability		(81,317	)		(196,428	)		39,304
Loss on disposal of assets		1,757			10,239			2,095
		12,751,142			12,928,417			13,894,765
Income (loss) before income tax		(1,739,938	)		444,547			1,418,703
Income tax provision (recovery) (Note 10)		(436,654	)		108,965			255,408
Net and Comprehensive income (loss)	$	(1,303,284	)	$	335,582		$	1,163,295
Earnings (loss) per share
Basic	$	(0.45	)	$	0.11		$	0.40
Diluted (Note 7(e))	$	(0.45	)	$	0.04		$	0.37
Weighted average common shares outstanding
Basic		2,880,882			2,922,684			2,929,722
Diluted (Note 7(e))		2,880,882			3,192,963			3,246,223

The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements.

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Leading Brands, Inc.

Consolidated Statements of Cash Flows

(Expressed in Canadian Dollars)

For the year ended		Feb. 29, 2016			Feb. 28, 2015			Feb. 28, 2014
Cash provided by (used in)
Operating activities
Net income (loss)	$	(1,303,284	)	$	335,582		$	1,163,295
Items not involving cash
Depreciation of property, plant, equipment and intangible asset		705,024			723,610			753,210
Leasehold inducement		22,234
Loss on disposal of assets		1,757			10,239			2,095
Stock based compensation (Note 8)		104,850			48,806			54,471
Change in derivative liability (Note 9)		(81,317	)		(196,428	)		39,304
Deferred income tax provision (recovery)		(436,654	)		108,964			255,408
Changes in non-cash operating working capital
Accounts receivable, net		(21,445	)		196,205			255,067
Inventory, net		348,596			(730,113	)		493,077
Prepaid expenses and other assets		(127,063	)		(115,742	)		133,316
Accounts payable		(46,571	)		(400,130	)		40,394
		(833,873	)		(19,007	)		3,189,637
Investing activities
Purchase of property, plant and equipment		(200,221	)		(525,182	)		(565,015	)
Purchase of intangible asset		(210,892	)		-			-
Proceeds on disposal of assets		1,199			26,887			-
		(409,914	)		(498,295	)		(565,015	)
Financing activities
Repurchase of common shares		(176,316	)		(175,094	)		(224,992	)
Proceeds from issuance of common shares		-			76,561			84,596
Repayment of long-term debt		-			(75,027	)		(143,347	)
		(176,316	)		(173,560	)		(283,743	)
Increase (Decrease) in cash and cash equivalents		(1,420,103	)		(690,862	)		2,340,879
Effect of exchange rates on cash		-			-			(447	)
Cash and cash equivalents, beginning of year		1,702,922			2,393,784			53,352
Cash and cash equivalents, end of year	$	282,819		$	1,702,922		$	2,393,784
Supplementary disclosure of cash flow information
Cash paid (received) during the year
Interest received	$	(4,900	)	$	(11,965	)	$	(7,012	)
Interest paid		85			1,346			9,474
Income taxes		-			-			-

The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements.

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Leading Brands, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Expressed in Canadian Dollars)

The accompanying summary of significant accounting policies and notes are an integral part of these consolidated financial statements.

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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 subsidiaries are involved in the development, production, marketing and distribution of the Company’s branded beverage brands and bottling for third parties.
		The Company sells branded beverage products through its Integrated Distribution System (IDS) of distributors, wholesalers, and grocery chains. Its principal product lines include waters, juices and other premium beverages. The bottling plant provides bottling services for certain of the Company’s own products and for an external customer. The Company also uses the services of third party bottlers as required to meet its objectives.
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 subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
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 management’s 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.
Foreign Currency Translation		The Company’s 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 and 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.
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 $36,329 as of February 29, 2016 and February 28, 2015, respectively, are netted against accounts receivable.

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Leading Brands, Inc.

Notes to the Consolidated Financial Statements

(Expressed in Canadian Dollars)

1.	Operations and Summary of Significant Accounting Principles (continued)

Inventory		Raw materials and finished goods purchased for resale are valued at the lower of cost, determined on a first-in, first-out basis, and market value. Finished goods, produced from manufacturing operations, are valued at the lower of standard cost which approximates average cost of raw materials, direct labour and overhead and market value. The provisions for obsolete or excess inventory are based on estimated forecasted usage of inventories. A significant change in demand for certain products as compared to forecasted amounts may result in recording additional provisions for obsolete inventory. Provisions for obsolete or excess inventory are recorded as cost of goods sold.
Property, plant and equipment		Property, plant and equipment are recorded at cost and are amortized using the declining- balance method at annual rates as follows:

	Plant and equipment		7% - 20%
	Buildings		5%
	Automotive equipment		20%
	Land improvements		8%
	Furniture, fixtures, computer hardware and software		20%

Leasehold improvements are amortized over the lesser of their expected life or the lease term.

Management reviews property, plant and equipment for impairment when conditions exist that indicate the carrying amount of the assets may not be fully recoverable. If required an undiscounted operating cash flow analysis is completed to determine if impairment exists. When testing for impairment of assets held for use, assets and liabilities are grouped at the lowest level for which cash flows are separately identifiable. If impairment is determined to exist, the loss is calculated based on estimated fair value.

Intangible Assets		Licenses and patents are recorded at cost and are amortized over their expected useful life of ten years.
		Management reviews intangible assets for impairment when conditions exist that indicate the carrying amount of the assets may not be fully recoverable. If required an undiscounted operating cash flow analysis is completed to determine if impairment exists. When testing for impairment of assets held for use, assets and liabilities are grouped at the lowest level for which cash flows are separately identifiable. If impairment is determined to exist, the loss is calculated based on estimated fair value.
Leases		Leases are classified as either capital or operating in nature. Capital leases are those which substantially transfer the benefits and risks of ownership to the lessee. Obligations recorded under capital leases are reduced by the principal portion of lease payments. The imputed interest portion of the lease payment is charged to expense.

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Leading Brands, Inc.

Notes to the Consolidated Financial Statements

(Expressed in Canadian Dollars)

1.	Operations and Summary of Significant Accounting Principles (continued)

Revenue Recognition		Revenue on sales of products is recognized when the products are delivered and title transfers to customers. Revenues from the provision of manufacturing, packaging or other services are recognized when the services are performed and collection of related receivables is reasonably assured. The Company records shipping and handling revenue as a component of sales revenue, and shipping and handling costs are included in the cost of sales.
		Incentives offered to customers including rebates, cash discounts, volume discounts, and slotting fees are recorded as a reduction of net sales when sales are recognized.
Advertising Costs		Advertising costs, which also include samples, trade show, product demo, media promotion costs are expensed as incurred. During the years ended February 29 2016, February 28, 2015 and February 28, 2014, the Company incurred advertising costs of $603,502, $553,187 and $509,433, respectively.
Earnings (loss) per common share		Basic EPS is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted EPS gives effect to all dilutive potential common shares outstanding during the year including stock options and warrants using the treasury stock method. In computing diluted EPS, the average stock price for the year is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants.
Stock-Based Compensation		Compensation costs are charged to the Consolidated Statements of Comprehensive Income. 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.

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Leading Brands, Inc.

Notes to the Consolidated Financial Statements

(Expressed in Canadian Dollars)

1.	Operations and Summary of Significant Accounting Principles (continued)

Income Tax (continued)		Management evaluates all available evidence, such as recent and expected future operating results by tax jurisdiction, and current and enacted tax legislation and other temporary differences between book and tax accounting to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. Management has determined certain of these deferred tax assets do not meet the more likely than not criteria, and accordingly, these deferred income tax asset amounts have been partially offset by a valuation allowance (Note 10). No reserves for an uncertain tax position have been recorded for the years ended February 29, 2016 or February 28, 2015.
Comprehensive Income (loss)		Comprehensive income (loss) includes both net earnings and other comprehensive income which are presented in a single continuous statement.
Fair Value Measurements		The book value of cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities approximate their fair values due to the immediate or short-term maturity of those instruments. The fair value hierarchy under US GAAP is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:
		Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities;
		Level 2 - observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and
		Level 3 - assets and liabilities whose significant value drivers are unobservable by little or no market activity and that are significant to the fair value of the assets or liabilities.
		The Company had certain financial liabilities required to be recorded at fair value on a recurring basis in accordance with US GAAP. As at February 29, 2016 and February 28, 2015, the derivative liability on non- employee stock options is a financial liability classified for Level 3 fair value measurement. See Note 14 for more information.
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.

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Leading Brands, Inc.

Notes to the Consolidated Financial Statements

(Expressed in Canadian Dollars)

1.	Operations and Summary of Significant Accounting Principles (continued)

Recent Accounting Pronouncements (continued)

ASU 2014-09 defines a five steps process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014- 09 is effective for the fiscal and interim reporting periods beginning after December 15, 2016 using either of two methods: (i) retrospective to each prior reporting period presented within the option to elect certain practical expedients as defined within ASU 2014-09; or (ii) retrospective with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014- 09. In August 2015, ASU 2015- 14 was issued which delayed the effective date to reporting periods beginning after December 15, 2017. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our financial statements.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements – Going Concern: Topic 915 (ASU 2014-15) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which states that in connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 is effective for fiscal and interim reporting periods ending after December 15, 2016. The Company is currently evaluating the impact of this new guidance on our financial statements.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015-11”). Under ASU 2015-11, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. ASU 2015-11 defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted and should be applied prospectively. Management is evaluating the provisions of this statement, including which period to adopt, and has not determined what impact the adoption of ASU 2015-11 will have on the Company's financial position or results of operations.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-2), Leases, which supersedes ASC Topic 840, Leases. ASU 2016-2 requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than twelve months to its balance sheets. ASU 2016-2 also expands the required quantitative and qualitative disclosures surrounding leases. ASU 2016-2 is effective for the Company beginning January 1, 2019. Early adoption is permitted. The Company has not determined the impact the adoption of ASU 2016 -2 will have on its consolidated financial statements.

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Leading Brands, Inc.

Notes to the Consolidated Financial Statements

(Expressed in Canadian Dollars)

In March 2016, the FASB issued authoritative guidance under ASU 2016-09, Compensation-Stock Compensation (Topic 718) “Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 provides for simplification of several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016. The Company is currently evaluating the potential impact of adoption of this standard on its consolidated financial statements.

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Leading Brands, Inc.

Notes to the Consolidated Financial Statements

(Expressed in Canadian Dollars)

2.

Inventory

			2016			2015
	Finished goods, net	$	304,453		$	410,193
	Raw materials		663,577			906,433
		$	968,030		$	1,316,626

The ending balance above includes a total inventory obsolescence provision of $39,870 as at February 29, 2016 (2015 - $114,744).

	Inventory Obsolescence Provision		2016			2015			2014
	Balance at beginning of year	$	114,744		$	100,058		$	129,106
	Obsolescence provision		75,000			45,000			156,000
	Write-off of inventory		(149,874	)		(30,314	)		(185,048	)
	Balance at end of year	$	39,870		$	114,744		$	100,058

3.	Property, Plant and Equipment

			2016
						Accumulated
			Cost			Depreciation			Net
	Plant and equipment	$	16,262,932		$	9,608,770		$	6,654,162
	Buildings		1,950,446			1,307,391			643,055
	Automotive equipment		286,252			158,665			127,587
	Land		433,613			-			433,613
	Land improvements		1,861			1,367			494
	Leasehold improvements		791,902			349,363			442,539
	Furniture and fixtures		688,314			613,570			74,744
	Computer hardware and software		2,339,906			2,119,341			220,565
		$	22,755,226		$	14,158,467		$	8,596,759

			2015
						Accumulated
			Cost			Depreciation			Net
	Plant and equipment	$	16,309,134		$	9,234,551		$	7,074,583
	Buildings		1,950,446			1,273,546			676,900
	Automotive equipment		286,252			126,751			159,501
	Land		433,613			-			433,613
	Land improvements		1,861			1,324			537
	Leasehold improvements		695,182			291,317			403,865
	Furniture and fixtures		687,260			594,929			92,331
	Computer hardware and software		2,324,461			2,066,545			257,916
		$	22,688,209		$	13,588,963		$	9,099,246

Property, plant and equipment includes equipment acquired under capital leases with an initial cost of $2,687,820 (2015 - $2,687,820). Accumulated amortization of assets acquired under capital leases is $1,251,634 (2015 - $1,143,534). No impairment of property, plant, and equipment was recognized in the year ended February 29, 2016 (2015 - nil).

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Leading Brands, Inc.

Notes to the Consolidated Financial Statements

(Expressed in Canadian Dollars)

4.	Prepaid Expenses and Deposits

			2016			2015
	Slotting fees	$	146,918		$	53,208
	Insurance premiums		84,338			79,877
	Rental deposits and other		185,390			156,498
		$	416,646		$	289,583

5.	Intangible Assets

			2016
			Cost			Amortization			Net
	Brand Licence and Patent	$	210,892		$	5,272		$	205,620

Amortization expense related to intangible assets, net is estimated to be approximately $21,000 in each of the next 10 years.

6.	Lease Inducement

On March 26, 2015 the Company entered into a lease agreement commencing September 26, 2015, and expiring September 25, 2020 with free occupation from September 26, 2015 to October 25, 2015. The rent expense includes the allocation of rental payments from the start date of the lease to commencement on a straight line basis up to February 29, 2016.

7.	Shareholders’ Equity

	a)	Share capital	Number of Authorized Shares
			2016
		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

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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 29, 2016 (2015 - Nil).

In the year ended February 29, 2016, the Company repurchased and cancelled 40,705 of its issued and outstanding shares in the amount of $176,316. Since the average issue price of cancelled common shares at the time of repurchase was $11.17, share capital has been reduced by $454,708 and additional paid-in capital has been increased by $278,392.

In the year ended February 28, 2015, the Company repurchased and cancelled 41,008 of its issued and outstanding shares in the amount of $175,094. Since the average issue price of cancelled common shares at the time of repurchase was $11.17, share capital has been reduced by $458,129 and additional paid-in capital has been increased by $283,035.

In the year ended February 28, 2014, the Company repurchased and cancelled 48,348 of its issued and outstanding shares in the amount of $224,992. Since the average issue price of cancelled common shares at the time of repurchase was $11.23, share capital has been reduced by $542,955 and additional paid-in capital has been increased by $317,963.

b)

Shareholder protection rights plan

On August 26, 2003, a Shareholder Protection Rights Plan was adopted whereby one share purchase right is attached to each outstanding common share, exercisable only in the case of a specific event, such as the acquisition by an acquirer of 20% or more of the issued common shares of the Company, and at a predetermined calculated price. At the Annual General Meeting on June 30, 2010, shareholders approved the updating and five-year extension of the Company’s Shareholder Protection Rights Plan to 2015. At the Annual General Meeting in June 2015, shareholders approved an updated and five-year extension of the Company’s Shareholder Protection Rights Plan to 2020.

c)

Stock options

The Company occasionally grants stock options to its employees, officers, directors and consultants to purchase common shares of the Company. The options granted are exercisable at a price which is equal to or greater than the fair market value of the common shares at the date the options are granted. The options are granted with varied vesting periods including immediately, one and five years. Options granted generally have a life of 10 years. The Company does not have a formal stock option plan.

At February 29, 2016, stock options were outstanding and exercisable as follows:

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Leading Brands, Inc.

Notes to the Consolidated Financial Statements

(Expressed in Canadian Dollars)

7.	Shareholders’ Equity (continued)

c)

Stock options(continued)

A summary of the Company’s stock option activity is as follows:

						Weighted Average
			Outstanding			Exercise Price
			Options			(USD)
	Options outstanding as at February 28, 2013		954,433			3.04
	Granted		-			-
	Expired		-			-
	Exercised		(30,864	)		2.64
	Options outstanding as at February 28, 2014		923,569			3.06
	Granted		-			-
	Expired		(36,249	)		5.12
	Exercised		(28,553	)		2.52
	Cancelled		(2,000	)		6.20
	Options outstanding as at February 28, 2015		856,767			2.98
	Granted		25,000			3.69
	Expired		(1,767	)		5.35
	Exercised
	Cancelled
	Options exercisable, February 29, 2016		880,000			2.99
	Options vested and expected to vest		880,000			2.99

The aggregate intrinsic value of stock options exercised during the year ended February 29, 2016 was $Nil USD (2015 - $45,158, 2014 - $38,372).

The aggregate intrinsic value of stock options outstanding as at February 29, 2016 was $Nil USD (2015 - $606,060, 2014 - $1,197,000).

The aggregate intrinsic value of stock options exercisable as at February 29, 2016 was $Nil USD (2015 - $606,060, 2014 - $1,193,000).

As of February 29, 2016, the Company has Nil (2015 – Nil) non-vested stock options.

As of February 29, 2016, there was $Nil of total unrecognized compensation cost related to non-vested stock options (2015 – Nil).

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Leading Brands, Inc.

Notes to the Consolidated Financial Statements

(Expressed in Canadian Dollars)

7.	Shareholders’ Equity (continued)

d)

Warrants

A summary of the Company’s warrant activity and related information for the year ended February 29, 2016 is as follows:

						Weighted Average
			Outstanding			Exercise
			Warrants			Price (USD)
	Warrants outstanding February 28, 2014		-			-
	Granted (Notes 8 and 9) (1)		25,000			3.40
	Exercised		-			-
	Expired		-			-
	Warrants outstanding at February 28, 2015 and February 29, 2016		25,000			3.40

(1)

The warrants are exercisable until January 26, 2018

e)

Earnings (loss) per common share

For the years ended February 29, 2016, February 28, 2015, and February 28, 2014, common equivalent shares (consisting of shares issuable on exercise of stock options and warrants) totaling 905,000, 72,767, and 83,600 respectively, were not included in the computation of diluted earnings per share because the effect was anti-dilutive.

			2016			2015			2014
	Weighted average shares – Basic EPS		2,880,882			2,922,684			2,929,722
	Plus: incremental shares from assumed exercise of stock options		-			270,279			316,501
	Weighted average shares – diluted EPS		2,880,882			3,192,963			3,246,223

			2016			2015			2014
	Net income (loss)	$	(1,303,284	)	$	335,582		$	1,163,295
	(Gain)/Loss from change in fair value of dilutive stock options		-			(196,428	)		39,304
	Adjusted net income		(1,303,284	)		139,154			1,202,599
	Earnings (loss) per share, basic	$	(0.45	)	$	0.11		$	0.40
	Earnings (loss) per share, diluted	$	(0.45	)	$	0.04		$	0.37

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Leading Brands, Inc.

Notes to the Consolidated Financial Statements

(Expressed in Canadian Dollars)

8.	Stock-Based Compensation

The weighted average date-of-grant fair value of the options granted during the year ended February 29, 2016 was $3.29 USD per option. The estimated fair value of the stock options granted was determined using the Black-Scholes option pricing model with the following weighted-average assumptions:

			2016			2015			2014
	Risk-free rate		1.45%			-			-
	Dividend yield		Nil%			Nil%			Nil%
	Volatility factor of the expected market price of the Company’s common shares		99%			-			-
	Weighted average expected life of the options (months)		120			-			-

On January 26, 2015 the Company entered into a consulting agreement where the Company is committed to issue 25,000 warrants, with an exercise price of US$3.40 and an expiry date of January 26, 2018. The warrants had a grant date fair value of $32,570 (Note 9). As at February 28, 2015, the warrants had been earned, and are included in the outstanding warrants table in Note 7(d).

In connection with the vesting of certain employees’, officers’ and directors’ stock options, and warrants for the year ended February 29, 2016, the Company has recorded stock option compensation of $83,880 (2015 - $16,236; 2014 - $54,471) which was credited to additional paid-in capital and expensed in selling, general and administrative expenses in the year.

9.	Derivative Liability

In accordance with ASC 815-40-15, stock options and warrants granted to non-employees that are exercisable in US dollars are required to be accounted for as derivative liabilities because they are considered not to be indexed to the Company’s stock due to their exercise price being denominated in a currency other than the Company’s functional currency.

The non-employee options and warrants are required to be re-valued with the change in fair value of the liability recorded as a gain or loss on the change of fair value of derivative liability and included in other items in the Company’s Consolidated Statements of Comprehensive Income at the end of each reporting period. The fair value of the options will continue to be classified as a liability until such time as they are exercised, expire or there is an amendment to the respective agreements that renders these financial instruments to be no longer classified as a liability.

The non-employee share purchase option and warrant liabilities are accounted for at their respective fair values and are summarized as follows:

			2016			2015			2014
	Derivative liability, opening balance	$	120,337		$	284,195		$	244,891
	Warrants issued during the year		-			32,570			-
	Options issued during the year		20,970			-			-
	Change in fair value of options and warrants		(81,317	)		(196,428	)		39,304
	Derivative liability, closing balance	$	59,990		$	120,337		$	284,195

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Leading Brands, Inc.

Notes to the Consolidated Financial Statements

(Expressed in Canadian Dollars)

9.	Derivative Liability (continued)

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 29, 2016 were as follows: (1) weighted average risk-free rate of 0.69% (2015 – 0.69%; 2014 – 2.01%); (2) weighted average dividend yield of nil (2015 – nil; 2014 – nil); (3) a weighted average expected volatility of 59.9% (2015 – 58.6%; 2014 – 111.6%); (4) a weighted average expected life of 38 months (2015 - 43 months; 2014 – 75 months); and (5) a weighted average exercise price of $2.91 USD. These options have been included in the stock options data presented in Note 7(c).

As at February 29, 2016 the warrants granted to consultants had not been issued.

The exercise of non-employee options and warrants will result in a reduction of the derivative liability.

10.	Income Tax

Earnings before income taxes and the provision for income taxes consisted of the following for the years ended February 29, 2016, February 28, 2015, and February 28, 2014:

			2016			2015			2014
	Earnings (loss) before income taxes:
	Canada	$	(1,739,938	)	$	461,075		$	1,441,059
	United States		-			(16,528	)		(22,356	)
	Total		(1,739,938	)	$	444,547		$	1,418,703
	Provision for income taxes:
	Current	$	-		$	-		$	-
	Deferred, Canada		(436,654	)		108,965			255,408
	Deferred, United States		-			-			-
	Total	$	(436,654	)	$	108,965		$	255,408

Income tax computed at statutory tax rates reconciles to the income tax provision, using a 26% (2015 – 26%, 2014 – 25.75%) statutory tax rate, as follows:

			2016			2015			2014
	Tax at statutory rates at CDN rates	$	(452,384	)	$	115,582		$	367,903
	Foreign loss taxed at US rates		-			(4,297	)		(3,360	)
	Effect of foreign exchange on loss carry-forwards		(704,281	)		(174,257	)		(236,464	)
	Non-deductible expenses (revenue)		7,352			(37,861	)		26,232
	Expiry of loss carry-forwards		-			-			-
	Other items, net		-			42,380			(156,542	)
	Change in valuation allowance		712,659			167,418			257,639
	Income tax provision for year	$	(436,654	)	$	108,965		$	255,408

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Leading Brands, Inc.

Notes to the Consolidated Financial Statements

(Expressed in Canadian Dollars)

10.	Income Tax (continued)

Effective July 1, 2013, the British Columbia provincial rate increased from 10.00% to 11.00%. The tax rate for the Federal corporate tax remained the same at 15.00%.

As at February 29, 2016, the Company and its subsidiaries have accumulated net operating losses in the amount of approximately $6.6 million which can be applied against future earnings in Canada and $10.8 million in the United States. The net operating loss carry forward amounts commence to expire in 2026 through 2036.

Significant components of the Company’s deferred tax assets and liabilities are as follows:

			2016			2015
	Operating and other losses carried forward	$	6,127,452		$	5,168,877
	Property, plant and equipment		809,380			612,706
	Trademark and deferred costs		112,245			114,965
	Un-realized foreign exchange loss		-			(801	)
	Financing costs		-			4,017
	Total deferred tax assets		7,049,077			5,899,764
	Valuation allowance		(4,568,820	)		(3,856,161	)
	Net deferred tax assets	$	2,480,257		$	2,043,603

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 2011-2016. 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 29, 2016 and February 28, 2015.

The valuation allowance represents tax losses and deferred income tax assets from inactive United States subsidiaries, with a tax rate of 37%, totaling $4,365,475; and inactive Canadian subsidiaries, with a tax rate of 26%, totaling $203,346.

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Leading Brands, Inc.

Notes to the Consolidated Financial Statements

(Expressed in Canadian Dollars)

11.	Commitments

The Company is committed to certain agreements and operating leases. The minimum amounts due over the remaining terms of those agreements are as follows:

	2017	$	510,121
	2018		515,941
	2019		521,761
	2020		534,877
	2021		366,297
	and thereafter		251,064
	Total future minimum payments	$	2,700,061

During the years ended February 29, 2016, February 28, 2015 and February 28, 2014, the Company incurred rental expenses of $705,765, $750,879, and $723,437 respectively.

The Company has committed to certain purchase obligations as follows:

	2017	$	153,924
	2018		15,267
	2019		19,957
	2020		19,635
	2021		9,818
	and thereafter		-
	Total future minimum payments	$	218,601

12.	Contingencies

The Company is a party to various legal claims which have arisen in the normal course of business, none of which are expected to have a material adverse effect on the financial position, results of operations, or cash flows of the Company.

13.	Related Party Transactions

Related party transactions not disclosed elsewhere are as follows:

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Leading Brands, Inc.

Notes to the Consolidated Financial Statements

(Expressed in Canadian Dollars)

14.	Fair Value of Financial Instruments

The Company’s financial assets and financial liabilities as at February 29, 2016, measured at fair value on a recurring basis are summarized below:

The Company’s financial assets and financial liabilities as at February 28, 2015, measured at fair value on a recurring basis are summarized below:

The fair value of cash and cash equivalents approximates its carrying value.

The fair value of the derivative liability for non-employee stock options is determined through use of the Black-Scholes model (Note 9).

15.	Bank Line of Credit

The Company has an operating bank line with a credit limit of $3,500,000 (2015 - $3,500,000) subject to the availability of eligible collateral. As at February 29, 2016, $315,700 (2015 - $613,400) of the facility was available, due to a limit on eligible collateral available. Interest is charged on the drawn-down amounts at the bank prime rate plus 1.00% to 1.50% (2015 - 1.00% to 1.50%). The operating line is collateralized by a charge on all assets of the Company and an assignment of all risk insurance on land, buildings, equipment and inventory owned by the Company. The credit facility contains four financial covenants. The bank line is subject to an annual review process.

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Leading Brands, Inc.

Notes to the Consolidated Financial Statements

(Expressed in Canadian Dollars)

16.	Segmented Information

The Company operates in one industry segment being the production and distribution of beverages. The Company’s principal operations are comprised of an integrated bottling and distribution system for beverages. Substantially, all of the Company’s operations, assets and employees are located in Canada and net revenue from export sales during all the years reported are less than 10%.

During the year ended February 29, 2016, the Company’s ten largest customers comprised approximately 96% (2015 - 95%; 2014 - 96%) of revenue and no one customer comprised more than 84% (2015 - 90%; 2014 - 90%) of revenue. As at February 29, 2016 and February 28, 2015, one customer comprised more than 10% of trade receivables.

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Item 19. – Exhibits

Exhibit No.	Description
1.1	Certificate of Incorporation and Articles and amendments to the Articles and Memorandum of the Company, incorporated by reference from prior filing as Exhibit 3.1 to the Form F-3, filed with the Securities and Exchange Commission on September 24, 2007.
1.2	Notice of Articles, incorporated by reference from prior filing as Exhibits 99.1 and 99.2 to the Form 6-K filed with the Securities Exchange Commission on February 3, 2010.
4.1	Further Amended and Restated Shareholder Rights Plan Agreement, incorporated by reference from prior filing on Form 6-K filed with the Securities and Exchange Commission on July 7, 2015.
4.2	Master Agreement for Contract Manufacturing and Packaging Services entered into by North American Bottling Division of Leading Brands of Canada, Inc., a wholly-owned subsidiary of the Company, made effective as of January 1, 2015, incorporated by reference as Exhibit 99.1 to the Form 6- K filed with the Securities Exchange Commission on March 18, 2015.
8.1*	Subsidiaries of the Registrant
12.1*	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2*	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1*	Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15.1*	Consent of Independent Registered Public Accounting Firm

*Filed herewith.

56

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.

LEADING BRANDS, INC.

/s/ Ralph McRae

Ralph D. McRae
Chairman and Chief Executive Officer

Dated: May 12, 2016

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INDEX TO EXHIBITS

Exhibit No.	Description
1.1	Certificate of Incorporation and Articles and amendments to the Articles and Memorandum of the Company, incorporated by reference from prior filing as Exhibit 3.1 to the Form F-3, filed with the Securities and Exchange Commission on September 24, 2007.
1.2	Notice of Articles, incorporated by reference from prior filing as Exhibits 99.1 and 99.2 to the Form 6-K filed with the Securities Exchange Commission on February 3, 2010.
4.1	Further Amended and Restated Shareholder Rights Plan Agreement, incorporated by reference from prior filing on Form 6-K filed with the Securities and Exchange Commission on July 7, 2015.
4.2	Master Agreement for Contract Manufacturing and Packaging Services entered into by North American Bottling Division of Leading Brands of Canada, Inc., a wholly-owned subsidiary of the Company, made effective as of January 1, 2015, incorporated by reference as Exhibit 99.1 to the Form 6- K filed with the Securities Exchange Commission on March 18, 2015.
8.1*	Subsidiaries of the Registrant
12.1*	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2*	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1*	Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15.1*	Consent of Independent Registered Public Accounting Firm

*Filed herewith

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