Leading Brands has reported a net loss in its second quarter following an increase in sales and marketing costs.

The US beverage company said that its net loss for the second quarter was US$158,000, versus a net income of US$512,000 in the same period last year. Gross revenue for the quarter was US$11.4m versus US$11.1m last year, an increase of 2.5%.

In the first six months, net income reached US$142,000, compared to US$909,000 last year. Year to date gross revenue was US$20.55m versus US$20.495m in the prior year.

In a statement, the company said: "The difference in net income, when comparing both the quarter and year to date performance, is directly attributable to increases in sales and marketing costs - including grocery chain slotting fees - totalling US$683,000 for the six month period and a one time gain of US$667,000 payment received in Q2 of last year."

Leading Brands said the increased sales and marketing expenses were necessarily invested to support the North American-wide launch of the company's TrueBlue blueberry brand. "The company has adopted a policy of expensing all grocery chain slotting fees over a 12-month period and those expenses were a material cost in Q2," the statement said.

The majority of incremental sales and marketing expenses were incurred in the US as the company expanded sales there.

Consequently, the company recorded income tax expense of US$164,000 in the quarter in connection with earnings in its Canadian subsidiary.

Leading Brands chairman and CEO Ralph McRae said: "If you add back our increase in spending on sales and marketing and the one time contract termination gain in Q2 2004, Q2 this year was a much improved financial result over last year. Most importantly, our three-year revenue decline has stopped, and now reversed itself. The investment we made in expanding the distribution of our brands during the first half of this year has resulted in sales growth in Q2 that is accelerating in the first part of Q3. We continue to see rising per store sales of TrueBlue and our listing base is increasing every month."

During the quarter, the company discontinued its Pez 100% Juice brand to focus on more successful and profitable products. The company said that revenues will not be impacted materially from this event, and that it has sufficient financial reserves to deal with the disposition of any remaining inventory.