10-K 1 form10k.htm FORM 10-K Crailar Technologies Inc.: Form 10-K - Filed by newsfilecorp.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 28, 2013

or

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

For the transition period from ______to ______

Commission File No.:000-50367

Crailar Technologies Inc.
(Exact name of registrant in its charter)

British Columbia 98-0359306
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  
   
Suite 305 - 4420 Chatterton Way  
Victoria, British Columbia, Canada V8X 5J2
(Address of principal executive offices) (Zip Code)

(250) 658-8582
(Registrant’s telephone number, including area code)

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

Title of each class: Name of each exchange on which registered:
None N/A

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

Common Stock, without par value
(Title of Class)

Indicate by checkmark if registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[   ] Yes [X] No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.
[   ] Yes [X] No

Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days.
[X] Yes [   ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[ X ] Yes [   ] No


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ] Accelerated filer [  ]
Non-accelerated filer [   ] (Do not check if smaller reporting company) Smaller reporting company [X]

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X]

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $44,399,388.

The registrant had 50,679,097 shares of common stock outstanding as of March 24, 2014.

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TABLE OF CONTENTS

PART I   4
ITEM 1. BUSINESS 4
ITEM 1A. RISK FACTORS 17
ITEM 1B. UNRESOLVED STAFF COMMENTS 24
ITEM 2. PROPERTIES 24
ITEM 3. LEGAL PROCEEDINGS 25
ITEM 4. MINE SAFETY DISCLOSURES 25
PART II   25
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES   25
ITEM 6. SELECTED FINANCIAL DATA 29
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   71
ITEM 9A. CONTROLS AND PROCEDURES 71
ITEM 9B. OTHER INFORMATION 71
PART III   72
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 72
ITEM 11. EXECUTIVE COMPENSATION 78
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 85
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE   86
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 87
ITEM 15. EXHIBITS 88

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Forward-Looking Statements

Statements made in this Form 10-K that are not historical or current facts are “forward-looking statements” as that term is defined in applicable securities laws. These statements often can be identified by the use of terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “approximate,” “potential” or “continue,” or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, which may cause our or our industry’s actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management’s best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events.

Available Information

We file annual, quarterly, current reports, proxy statements, and other information with the Securities and Exchange Commission (the “SEC”). You may read and copy documents referred to in this Annual Report on Form 10-K that have been filed with the SEC at the SEC’s Public Reference Room, 100 F Street, N.E., Washington, D.C., 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also obtain copies of our SEC filings by going to the SEC’s website at www.sec.gov. In addition, we post our SEC filings, including any amendments thereto, on our Internet website at www.crailar.com as soon reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

References

As used in this annual report: (i) the terms “we,” “us,” “our,” or the “Company” refer to Crailar Technologies Inc. and our subsidiaries, unless the context otherwise requires; (ii) “SEC” refers to the Securities and Exchange Commission; (iii) “Securities Act” refers to the United States Securities Act of 1933, as amended; (iv) “Exchange Act” refers to the United States Securities Exchange Act of 1934, as amended; and (v) all dollar amounts refer to United States dollars unless otherwise indicated.

PART I

ITEM 1. BUSINESS

Corporate Structure and Subsidiaries

We were incorporated under the laws of British Columbia, Canada, on October 6, 1998, under the name “Hemptown Clothing Inc.” The current corporate structure is a single public company, incorporated under the Business Corporations Act (British Columbia).

On February 22, 2006, our Board of Directors authorized and approved the change in our corporate name to “Naturally Advanced Technologies Inc.” and the subsequent filing of the Amendment with the Registrar of Companies for the Province of British Columbia. This name change to Naturally Advanced Technologies Inc. became effective March 21, 2006, and our trading symbol for our shares of common stock trading on the OTC Bulletin Board was changed to “NADVF”. Our shares of common stock commenced trading under the symbol “NAT” on the TSX Venture Exchange (the “TSX-V”) at the opening of market on July 8, 2008.

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Effective October 31, 2012, we effected a name change to Crailar Technologies Inc. This name change was effective under the Business Corporations Act (British Columbia) as of October 31, 2012, pursuant to a Notice of Alteration that was filed with the British Columbia Registrar of Companies on October 22, 2012. The name change became effective with the TSX-V on October 31, 2012 under the stock symbol “CL” and with the OTC Bulletin Board at the opening for trading on November 1, 2012 under the stock symbol “CRLRF”. Since July 18, 2013, our shares of common stock have been quoted on the OTCQB under the symbol “CRLRF”.

We were founded in response to the growing demand for environmentally friendly, socially responsible clothing, and we adhere to a “triple bottom line” philosophy, respecting the human rights of employees, the environmental impact of our operations and fiscal responsibility to our shareholders.

Our wholly-owned subsidiaries are as follows:

Crailar Inc. (formerly known as Naturally Advanced Technologies US Inc.)

Naturally Advanced Technologies US Inc. was incorporated under the laws of the State of Nevada on August 24, 2010, to manage our U.S. business operations. This company was also issued a Certificate of Authorization by the State of South Carolina to transact business on October 21, 2010. Effective November 30, 2012, the name of this entity was changed to “Crailar Inc.”

CRAiLAR® Fiber Technologies Inc.

Our wholly owned subsidiary CRAiLAR® Fiber Technologies Inc. (“CRAiLAR®”) was incorporated under the laws of the Province of British Columbia on April 5, 2005. It was incorporated for the purpose of developing Bast Fiber Technology for uses in textiles, cellulose pulp, paper, and composites.

HTnaturals Apparel Corp.

HTnaturals Apparel Corp. (“HTnaturals”) was incorporated under the laws of the Province of British Columbia on December 7, 2007, for the purpose of carrying out the natural and sustainable apparel portion of our business. We, through our wholly owned subsidiary HTnaturals, were also a provider of environmentally sustainable hemp, bamboo, organic cotton and soy blended apparel.

During our fiscal year ended December 31, 2009, we discontinued our apparel division in order to focus our resources on our CRAiLAR® technology, and this subsidiary has been inactive since that time.

0697872 B.C. Ltd.

Our wholly-owned subsidiary, 0697872 B.C. Ltd., was incorporated under the laws of the Province of British Columbia on June 18, 2004, and held the title to real property located in Craik, Saskatchewan. During 2008 we elected against proceeding with the intended use of the property and returned all rights to the town of Craik. This subsidiary has been inactive since that time.

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Hemptown USA, Inc.

Our wholly-owned subsidiary, Hemptown USA, Inc., was incorporated under the laws of the State of Nevada on November 22, 2004, for factoring purposes so that business dealings could be accomplished daily without currency valuations and fluctuations, as well as to provide an American base inventory control to customers. With the closing of the apparel business, Hemptown USA, Inc. became inactive during 2009.

CRAiLAR Europe NV

Our wholly-owned subsidiary, CRAiLAR Europe NV, was incorporated under the laws of Belgium on February 11, 2014, in order facilitate our European operations.

Our principal offices are located at Suite 305, 4420 Chatterton Way, Victoria, British Columbia V8X 5J2, our telephone number is (250) 658-8582, and our web site address is www.crailar.com.

Overview

We are focused on bringing sustainable bast fiber-based products to market that are environmentally friendly natural fiber alternatives with equivalent or superior performance characteristics to cotton, wood or fossil-fuel based fibers. Our business operations consist primarily of the deployment and production of our natural and proprietary CRAiLAR® Flax fibers, as well CRAiLAR® processing technologies targeted at the natural yarn and textile and the cellulose pulp and composites industries.

We hold the exclusive worldwide license to the patented CRAiLAR® technologies. We believe that fibers and yarns produced with the CRAiLAR® process will be competitively priced relative to current natural and synthetic fibers and have the benefit of being environmentally responsible. The CRAiLAR® patented process effectively cleans and polishes raw bast fiber, such as flax, hemp, kenaf and jute bast fibers, into fiber substantially equivalent to ginned cotton. It is our belief that the CRAiLAR® brand has the potential to become a recognized sustainable performance brand that is valued and demanded by the market.

We believe that entering into development and supply agreements with some of the world’s largest fiber consuming companies is the best path to successful commercialization of a number of products incorporating our CRAiLAR® technologies. In execution of this strategy, we have entered into development and supply agreements with companies such as adidas AG, Georgia-Pacific, Hanesbrands Inc., IKEA, Lenzing and Levis Strauss & Co. to supply approximately 7.4 million pounds of CRAiLAR® Flax fibers in 2014 and approximately 8.5 million pounds in 2015 (when multi-year requirements are averaged to an annual amount) in order to retain their exclusive right.

Industry

With the projected increase in the global population and continued development of market economies, we expect to see a rise in the need for textile fibers worldwide. According to Gherzi, a global management consulting company focused on the textile industry, the global demand for textile fibers is expected to exceed 100 million tons by 2020.

Gherzi estimates there were 81.0 million tons of fibers produced globally in 2011 and synthetic fibers (such as polyester) accounted for 59.2% of such fibers, cotton accounted for 33.7%, cellulose-based fibers (such as viscose and rayon) accounted for 5.7% and wool accounted for 1.4% . More generally, according to Gherzi, it is estimated that the demand for textile fibers is expanding approximately 3% per year, mainly due to the following two macroeconomic trends:

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  • Ongoing population growth. UNESCO expects the global population to rise from its current total of approximately 7 billion to 7.7 billion people in 2020 when global demand for fibers is expected to exceed 100 million tons.
  • Increase in prosperity. Increasing prosperity generates additional demand, particularly in emerging economies as they catch up with western industrialized nations.

In addition, sustainability and climate change concerns have contributed to consumers increasingly preferring products manufactured with a minimal environmental impact and use of resources.


While some of the increase in demand is likely to be filled by synthetic fibers, we believe that the consumer preference for natural fibers will continue to rise and, as societal trends to live both sustainably and naturally increase. We believe that we have a unique opportunity to fill this shortfall through the production of CRAiLAR® fiber. With mill delivered cotton priced between $0.90 and $1.00 per pound, flax is a cost-effective raw material for fiber production. We expect our fiber will be cost competitive with other fibers currently available in the fiber industry once the Company has a fully integrated production facility in operation.

The CRAiLAR Solution

We hold the exclusive worldwide license to the patented CRAiLAR® technologies. The CRAiLAR® patented technologies and processes effectively clean and polish raw bast fiber, such as flax, hemp, kenaf and jute bast fibers, into fiber substantially equivalent to ginned cotton. This solution is clean, sustainable, and environmentally responsible. Bast fiber plants grow abundantly and, when compared with cotton, require 97% less water and substantially less herbicides, fertilizers and pesticides. In April 2012, the USDA designated CRAiLAR as a 100% BioPreferred® product. CRAiLAR® Flax fibers have been recently awarded a ‘B’ classification by the MADE-BY organization. This classification certifies that the benefits of CRAiLAR® Flax far outweigh that of polyester and conventional cotton (both ranked Less Sustainable).

MADE-BY is a European not-for-profit organization with a mission to improve environmental and social conditions in the fashion industry. The organization and environmental benchmark supports brands and manufacturers in limiting the impact of its materials on the environment and advises them on sustainable alternatives. In this benchmark, the processing of a large range of materials from raw to yarn are compared in relation to emissions produced, their use of land space, pesticides, chemicals, water and energy.

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The CRAiLAR® fiber technology was developed by Dr. Wing Sung and his team at the National Research Council of Canada (the “NRC”). The NRC granted to us the exclusive worldwide license to the patented technology, which currently includes two patents covering the extraction of hemp fibers and preparation of bast fibers. Under development since 2004, this technology has undergone successful final demonstration scale testing and we are now delivering CRAiLAR® Flax fiber to our customers. We anticipate that CRAiLAR® Flax fibers will generally be used in union with cotton and all other mainstream fibers, which, when blended together, should result in a much better performing fabric than cotton or other mainstream fibers alone. We continue to work with NRC on the development of enhancements to our core technologies that are covered by the NRC license. The license expires upon the expiration of the last patent claim covered by the license, which is currently in December 2029.

Products

CRAiLAR® Fiber

The CRAiLAR® fiber technology is a clean, sustainable, environmentally responsible process, which works with bast fiber feedstocks. Bast fiber plants grow abundantly generally without excessive water, herbicide, fertilizer and pesticide use. As a result, CRAiLAR® was designated as a 100% BioPreferred® product by the USDA in April 2012. In December 2013, CRAiLAR® Flax fibers were awarded a ‘B’ classification by the MADE-BY organization, alongside and equal to organic cotton and Lenzing Tencel.

Relative to existing bast fiber processing methods, the CRAiLAR® fiber enzymatic process is significantly faster, produces highly consistent results, and is environmentally low impact. The resulting CRAiLAR® fibers have characteristics that are superior to traditionally processed bast fibers for textile applications. Because the CRAiLAR® fiber enzymatic processing is very effective at cleaning bast fiber, it can be spun on traditional cotton equipment at commercially viable speeds. CRAiLAR® Flax fibers can integrate seamlessly with cotton fibers and, when blended together, results in a superior performing fabric than cotton alone. The blended fabric at 80% cotton and 20% CRAiLAR takes on many of the superior characteristics of CRAiLAR® Flax fibers, including enhanced moisture management and comfort, durability, superior dye uptake and garment shrinkage reduction.

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CRAiLAR® Shive and Seed Products

We are already in the process of investigating by-product opportunities utilizing seed and shive. IKEA has confirmed shive suitably for use in particle board manufacturing for furnishings. We believe we have the potential ability to use the straw of the linseed flax crop, which is primarily cultivated for food and industrial applications. This straw would normally be discarded and/or burned following the seed harvest. Flax shive can be transformed into fuel pellets, animal bedding particle board, molded products and consumer goods packaging while the flax seed can be used for dietary supplements, linseed oil and feed for livestock. Making use of this waste by-product will only further enhance the CRAiLAR® Flax fiber sustainability rating and could increase potential revenues.

Our Competitive Strengths

We believe that the following strengths differentiate our company and create the foundation for continued sales and profitable growth:

Product Performance. All of our fiber products are designed to deliver superior performance. In apparel, CRAiLAR® Flax fibers will generally be blended with cotton, which should result in a better performing fabric than cotton alone. The resulting fabric, blended 80 percent cotton/20 percent CRAiLAR® fibers, takes on the many characteristics of CRAiLAR® Flax fibers. Key elements include:

  • A fiber with wicking characteristics greater than unblended cotton and almost as good as high performance synthetic fibers, making fabrics breathable;

  • Superior dye uptake resulting in a potential ten percent dye reduction for same color specification;

  • Reduced garment shrinkage of up to fifty percent from washing compared to unblended cotton; and

  • Comparable feel of comfort to cotton.

Innovative Process. We offer high quality natural fibers that provide an alternative to cotton and paper pulp users. We attribute our ability to develop superior products to a number of factors, including:

  • Intellectual property and patents surrounding the CRAiLAR® process and technologies;

  • Close collaboration with our customers to formulate innovative and technically advanced natural fabrics; and

  • The capital costs involved in building a commercial CRAiLAR® fibers processing facility have been determined to be relatively modest and we believe we can utilize existing industry equipment.

Experienced Management Team. We have a proven and experienced senior management team. Our Chief Executive Officer, Ken Barker, has been with us since 2007 and has significant experience in the apparel industry. Many of the members of our senior management team have extensive experience in the textile industry and with leading consumer brands.

Our Business Strategy

We believe that our market presence and revenues will continue to expand with the continued development of our growers and customers, allowing the CRAiLAR® brand to be recognized, similar to ingredient brand successes such as Gore-Tex® and Tencel®. We are pursuing the following several growth strategies to continue to build our business:

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Further Develop Our Customer Ecosystem. We have established a strong set of relationships with other organizations in our customer ecosystem to deliver superior natural fibers to our customers. We believe these customers will enable us to increase the speed of deployment and functionality of our fibers and offer a wider range of applications to our customers. We intend to support our customers in the growth of their products, as well as increase the number of suppliers who work with our customers. We understand that in order for new initiatives to be pulled from corporate concept to market viability, support from senior management of our customers is critical. We have established relationships with large apparel and paper pulp manufacturers such as Hanesbrands and Georgia Pacific. As we expand the commercialization of our fibers, we expect our customers will successfully integrate our CRAiLAR® Flax fiber within their product categories, but are also discover benefits and enhancements that are exclusive to their developments. This allows the CRAiLAR® brand to evolve and gain greater brand recognition while servicing both the consumer and customer needs. We believe that the development of customer relationships is an important strategy and that additional relationships with consumer brands will also be important for additional branding opportunities.

Expand Penetration and Consumer Base. We intend to increase the number of consumers who buy our products by using the co-branding opportunities provided by our customers, as they communicate our sustainability and performance benefits to their consumers. We plan to further this support with grassroots marketing, social media tools and industry advertising. We believe these efforts will educate consumers about our brand and the benefits of sustainable natural fibers, creating demand for our products and, ultimately, expand our consumer base. We will continue to collaborate with our customers to formulate innovative and technically advanced fibers. We believe that our products can provide significant value to both the consumer and industrial markets. We also believe that there is a substantial opportunity for us to continue to increase the size of our customer base across a broad range of industries, given the relatively high level of performance of our products. We intend to continue to invest aggressively in our direct and indirect sales and marketing capabilities to continue to acquire new customers.

Continue Innovation and Broaden Product Offering. Our customers’ ability to deploy new products rapidly and cost-effectively will be central to our financial results. We intend to continue expanding the functionality of our products in the future. In the near term, we expect that our research and development investments will continue to be highly focused on our CRAiLAR fiber for textile applications and in high grade dissolving pulps for use in the additives, ethers and performance apparel markets. Over the longer term, we intend to continue our investment in the development of new applications that address additional market opportunities, which may include composites manufacturing, medical, dental and feminine hygiene products. By collaborating with our customers and partners in these efforts, we intend to enable our customers to increase their performance capabilities through rapid and cost-effective deployments of products incorporating our fibers.

Expand Globally. We recognize that our patented technologies have global, multi-industry applications, and represent a significant opportunity for us. We plan to expand our sales capabilities internationally by expanding our sales force and by collaborating with strategic customers and partners around the world.

Stay True to Our Values. We are a focused business with long-standing core values. We need to rapidly and positively affect the international footprint of “dirtier” fibers and processes. We continue to strive to operate in a socially responsible and environmentally sustainable manner. We believe our sustainability and performance better cultivates brand loyalty and trust with customers and helps attract consumers. We plan to work in tandem with our customers to communicate the benefits of CRAiLAR® through co-branding, ingredient call-outs, co-op marketing efforts and in-store signage.

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Invest in Infrastructure and Capabilities. We invest in our people, supply chain and systems to ensure that our business is scalable and profitable. We expect to add new employees to our sales, marketing, operations and finance teams as necessary to support our growth. Additionally, we continue to invest in our systems and technology, to create a platform for growth and to increase efficiency.

Sales and Marketing

We are pursuing a pull-through marketing model, which focuses on working directly with some of the leading consumer brands in a variety of target markets, including apparel, textiles and industrial products, to develop additional products incorporating our CRAiLAR® fibers. In this regard, we plan to leverage our partners’ direct-to-consumer marketing programs to accelerate and expand the brand recognition for our proprietary fibers.

Strategic Relationships/Customer Developments

Because CRAiLAR® fibers can be an ingredient in a broad range of products, we believe that entering into development and supply agreements with large, successful consumer brands is the path to successful commercialization. We believe that these relationships will allow us to leverage the considerable branding and marketing talent of these brands to increase the power of the CRAiLAR® brand.

To grow our business and our brand, we have entered into a number of development and supply agreements including, among others:

  • Cone Denim LLC. On March 11, 2013, we entered into a Marketing and Development Agreement with Cone Denim LLC (“Cone”) to market and develop the use of CRAiLAR® fiber in Cone’s denim fabric line. We are working directly with Cone and its customer, Levi Strauss & Co., for the development of certain denim products using our CRAiLAR® Flax fiber. Subject to certain exceptions, CRAiLAR has agreed to not sell CRAiLAR® fiber to any other denim manufacturer through December 31, 2015 without providing Cone with a right of first refusal on any denim development opportunity. We believe our relationship with Cone and Levi Strauss should expand the demand for our fiber in the denim market.

  • Cotswold Industries Inc. On February 12, 2013, we entered into a Development Agreement with Cotswold Industries Inc. (“Cotswold”). CRAiLAR and Cotswold will try to develop or create commercially viable pocketing, interlining and waist banding products containing our CRAiLAR® fibers.

  • Hanesbrands Inc. In January 2011, we announced a cooperative research project with Hanesbrands Inc. and the U.S. Department of Agriculture’s Agricultural Research Service designed to cultivate and evaluate the viability of various flax strains for use in CRAiLAR® technology. In March 2011, we entered into a ten-year CRAiLAR® fiber supply agreement with Hanesbrands Inc. to commercialize our proprietary fibers. Hanesbrands may terminate the agreement with 180 days’ advance notice to us, and we can terminate the agreement beginning January 1, 2022 with 180 days’ advanced notice to Hanesbrands. During the term of the agreement, we may not supply our proprietary fibers to third parties for knit apparel applications.

  • Georgia Pacific Consumer Products LLC. In September 2011, we entered into a three year CRAiLAR® fiber supply agreement with Georgia Pacific Consumer Products LLC, for the use of CRAiLAR® fiber in formed substrates for the industrial and personal care markets provided that Georgia Pacific continues to meet annual minimum purchase requirements. Georgia Pacific may automatically extend the agreement for an additional seven years by notifying us at least six months before the expiration of the initial term.

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  • Target Corp. In November 2011, we entered into an agreement with Target to evaluate the use of our CRAiLAR® Flax fiber in Target’s domestic textiles category beginning December 1, 2011. In connection with this agreement, Target has used our CRAiLAR® Flax fiber in certain domestic textile products, including in a drapery line. While our agreement with Target has expired, we continue to work with Target in connection with the development of certain woven and knit apparel using our CRAiLAR® fibers.

  • Lenzing AG. In April 2012, we entered into a joint development agreement with Lenzing, headquartered in Austria, and one of the world’s largest suppliers of viscose, Modal and Tencel® to the apparel, non-woven and auto industries. CRAiLAR and Lenzing are jointly developing fiber solutions in the performance apparel industries for global athletic brands as well as fashion brands.

  • IKEA. In December 2013, we entered into a general supply agreement and development agreement with IKEA. The general supply agreement provides exclusivity in certain domestic textile categories as long as IKEA meets specified minimum order quantities. The agreement expires on December 31, 2016 but IKEA may extend the term up to two times for 3 years each by notifying us at least six months before the expiration of the then effective term. We have received orders and have begun flax fiber production at our European production facility for IKEA.

  • adidas AG. In December 2013, adidas AG took a shareholder position in CRAiLAR through their investment arm, Hydra Ventures BV. As one of the largest athletic brands in the world, adidas is a driving force in innovation and performance for athletes and fashionistas alike. CRAiLAR is working in close tandem with adidas to further their development and execution of sustainable production practices, with a goal of reducing the brand’s dependency on conventional cotton and petro-chemical fibers.

We are currently evaluating additional opportunities for multiple product development and commercialization of our proprietary CRAiLAR® technology for environmentally sustainable bast fiber processing and production. Exclusive international licensing rights allow us to protect our investment to date in the development of CRAiLAR® and while confidently moving forward in seeking appropriate development and commercialization relationships.

Plan of Operation

Production Plan

One of the keys to the successful adoption of CRAiLAR® into the mainstream textile market is the scale up of our in-house production capabilities.

In December 2013 we acquired a European fiber dyeing facility with similar equipment used to produce CRAiLAR® Flax fiber. The acquisition was made pursuant to an Asset Purchase Agreement dated November 6, 2013, which was amended and restated on December 13, 2013. The new plant allowed us to accelerate our timeline for establishing a company-controlled CRAiLAR® enzyme processing capability. Production of CRAiLAR® fibers at this facility commenced in January 2014. We believe the plant has the capacity to produce over 280,000 pounds (127 metric tons) of CRAiLAR® Flax fiber per week with space to expand the capacity to over 800,000 pounds per week. We are presently relying on a third party processor to do one step of the CRAiLAR process and have purchased the equipment for this step. Installation of this equipment and overhauling existing equipment to optimize the plant is currently underway and we expect completion by the end of Q-2 2014.

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The facility was previously family owned and operated for four generations and offers access to considerable textile expertise. The facility is located in an area of flax growing excellence and offers an abundant supply of feedstock from a by-product of the linen industry. Purchasing the by-product of the linen industry has significant working capital advantages because it is bought as needed and is processed, shipped and billed shortly after receipt. This compares with straw purchased directly from farmers for approximately the same cost where a year’s supply of straw must be paid when harvested by the farmer. We have developed relationships with various European and Eastern European flax processors and brokers to purchase cleaned feedstock. We have also purchased equipment to clean the feedstock for CRAiLAR® processing that will allow us to buy partially cleaned fiber, providing access to additional sources of feedstock. We expect to have this equipment installed by the end of 2014. On an annual basis, the amount of fiber created in Europe during the linen scutching processing ranges from 80,000 to 140,000 metric tons.

We also believe that it is necessary to develop contracted acreage of flax to avoid disrupting supply and demand for by-product of the linen industry. We believe that there are opportunities to secure farm acreage dedicated to supplying our plants. This would require a decortication capability in these growing regions. Our suppliers also believe that additional farmers would be attracted to grow flax for CRAiLAR because the farming techniques are very simple and efficient compared with traditional linen flax farming techniques. Also, the retting requirements for the CRAiLAR® process are less stringent than for linen flax.

We commenced operations in Pamplico, South Carolina in January 2013. We encountered problems with the bale opening system and have suspended operations until new equipment can be built and installed. This fiber will be used for CRAiLAR® Flax in Belgium or sold into the U.S. paper market. We do not plan on planting flax in the U.S. this fall given that we have enough supply from the 2013 crop to last through the year. Also, given our focus on Europe we will have reduced operations in the U.S. unless a strategic customer will support our presence in South Carolina. Some of the assets used in Pamplico could be redeployed to other locations. We currently lease a 147,000 square foot building on 52 acres outside of Pamplico, South Carolina, which we plan to use as an integrated processing facility.

In addition to the installation of our full scale processing line, CRAiLAR continues to improve upon its patented enzymatic process thereby increasing efficiencies. In March 2012, we announced an improvement of our CRAiLAR® wet process time by 40 percent, thereby significantly increasing anticipated volume capabilities at planned facilities. The evaluation and resulting improvements were conducted internally in conjunction with research partners. The resulting changes encompass processes, as well as the utilization of industry standard equipment.

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Production Model

Note on Plan of Operation

While we expect that profitable operations will be achieved in the future, there can be no assurance that revenue, margins, or profitability will increase, or be sufficient to support operations over the long term. We expect that we will need to raise additional capital to meet short and long-term operating requirements. We may also encounter business endeavors that require significant cash commitments or unanticipated problems or expenses that could result in a requirement for additional cash. If we raise additional funds through the issuance of equity or convertible debt securities other than to current shareholders, the percentage ownership of current shareholders would be reduced, and such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, on a timely basis, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective business endeavors or opportunities, which could significantly and materially restrict business operations. We are continuing to pursue external financing alternatives to improve our working capital position and to grow the business to the greatest possible extent.

Raw Materials

Flax is the principal raw material used in the manufacture of our natural fibers products. Flax is a cost-effective raw material for fiber production because it is generally easy to grow with minimal use of herbicides and requires only regular rainfall for irrigation, which significantly reduces costs as compared to other natural fibers.

We have relationships with several European companies to supply feedstock to our European facility. The European feedstock is a linen industry waste product or fiber unsuitable for linen due to fiber length. As there are approximately 640,276 acres of flax under cultivation in Western Europe for the linen industry and a similar acreage under cultivation in Eastern Europe and Russia, we believe these regions represent a significant source of available feedstock. We have also identified other suitable Eastern European and North American growing regions should we decide to contract directly with farmers, and we have developed improved planting and harvesting techniques from our agronomic experience in North America. These techniques include improved planting and harvesting techniques in North America which should allow us to increase the yield per acre and faster and more cost effective harvesting techniques.

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Seasonality

Our operating results are subject to some variability due to seasonality and other factors. Sales levels in any period are also impacted by customers’ decisions to increase or decrease their inventory levels in response to anticipated consumer demand.

Collaboration and Research Agreements

National Research Council of Canada

In October 2007, we entered into a joint collaboration agreement with the National Research Council of Canada to continue to develop a patentable enzyme technology for the processing of hemp fibers. The agreement was for three years and initially expired on May 9, 2010. On February 19, 2010, we signed an amendment to the agreement to extend the term of the agreement to May 9, 2012. While this agreement has expired, we continue to work with the NRC on certain enhancements and additions to the NRC technology and negotiations are underway to continue our joint collaboration.

De Montfort University

In 2011, we entered into a research and development agreement with De Montfort University in Leicester, United Kingdom. De Montfort’s textile division is renowned for their work on bast fibers such as flax and hemp and specializes in their textile applications. De Montfort has been working on process optimization and works closely with CRAiLAR’s wet processing partners. In addition to processing improvements, De Montfort has experience with flax and hemp agronomics and has recommended various harvesting improvements that have been implemented into our CRAiLAR® technologies.

Intellectual Property

Under the CRAiLAR® technology platform, we have secured the exclusive worldwide licensing rights to the patented intellectual property arising from our collaborative research agreements with the NRC. The NRC license covers our proprietary processes and includes a license to two patents covering the extraction of hemp fibers and preparation of bast fibers. The patents have been issued or allowed in the U.S., Canada, China, Europe and certain other jurisdictions, and are based on applications filed under the Patent Cooperation Treaty. We pay an ongoing royalty of 3% of sales of products derived from the CRAiLAR® process to the NRC with a minimum annual payment set at $14,750 (CAD$15,000) per year. Once we have reached $44,450,000 (CAD$50,000,000) in CRAiLAR® sales, the royalty percentage drops to 1.5% . The license expires upon the expiration of the last patent claim covered by the license, which is currently in December 2029, but may be terminated earlier by NRC upon our breach of the license agreement or in the event we become bankrupt or insolvent.

We believe that our intellectual property has substantial value and has contributed significantly to the success of our business. Our primary trademark is CRAiLAR®, which is registered with the U.S. Patent and Trademark Office and in Canada. We also rely on unpatented proprietary expertise, formulations, continuing innovation and other trade secrets to develop and maintain our competitive position.

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Research and Development

We have invested a considerable amount of time and effort into product research and development. Research and development costs are charged to operations as incurred. Our research and development costs for the fiscal year ended December 28, 2013, the fiscal year ended December 31, 2012 and the fiscal year ended December 31, 2011 were $355,099, $660,229 and $757,443, respectively, all of which were attributable to our CRAiLAR® and related bast fiber technology development.

Competition

There are relatively few specialty natural bast fibers producers when compared with the much larger cotton and paper pulp commodity markets. The technical demands and patented processes of CRAiLAR® differentiates us on the basis of our ability to meet the customer’s particular set of needs, rather than simply focusing only on pricing alone.

Employees

CRAiLAR had a total of 16 full-time employees and one part-time employee as of December 28, 2013 located in the United States, Canada and Europe. Employee relations are considered to be good. None of our employees are subject to a collective bargaining agreement.

Backlog

CRAiLAR does not have any order backlog as of December 28, 2013.

Properties

On June 30, 2011, we entered into a lease for our principal offices, consisting of approximately 1,571 square feet of office space in Victoria, British Columbia for a monthly basic net rent of CAD$2,749.25 (US$2,763.34 based on the exchange rate on December 31, 2012 of CAD$1.00 = US$1.0051) . The lease is for a term of three years commencing on August 1, 2011 and expires on July 31, 2014 with one renewal term of three years.

Effective August 9, 2010, we signed a ten-month sublease of a facility at 164 County Camp Road, Kingstree, South Carolina, at a rental cost of $4,400 per month. We attained the space for use as an initial scale-up flax fiber facility to conduct the decortication process of CRAiLAR® fibers. The property is housed near 300 acres of flax crops that we intend to use to conduct our flax fiber growing trials. On July 1, 2011, we signed a one year lease, through June 30, 2012, for this same property and facility for a monthly rent of $3,300. Subsequent to June 30, 2012, we agreed to continue to lease the facility for a monthly rent of $3,400 until March 31, 2014.

Effective August 15, 2011, we entered into a lease for 1,468 square feet of office space in Lake Oswego, Oregon for a monthly rent of $3,000 during the first year, $3,500 during the second year and $4,000 during the third year. This lease is for a term of three years expiring on August 14, 2014.

In March 2012, we entered into a lease for a 147,000 square foot building on 52 acres outside of Pamplico, South Carolina. We plan to use this building as an integrated processing facility. The initial term of the lease is for ten years with two additional five-year extension terms. No rent was due prior to January 1, 2014.

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Commencing January 1, 2014, the annual basic rent will be $146,930 per year, increasing to $220,395 per year from June 1, 2018 to May 31, 2022.

In November 2013, in connection with the acquisition of our European production facility in Ieper, Belgium, we committed to lease the building housing the facilityPursuant to an oral agreement, the initial term of the lease commitment is ten years with the option to extend the lease for an additional ten-year term. Commencing on December 1, 2013, the annual basic rent will be $62,636 for the first year with annual rent adjustments calculated as the sum of €1,300,000 multiplied by the Belgium risk-free interest rate. After five years the building will be reappraised and the base rents will be calculated using the new appraisal value. Pursuant to the agreement, we have the option to purchase the building for its appraised value after the fifth anniversary. We are currently in the process of formalizing the foregoing oral arrangements.

Government Regulation

Trade Regulation

Our operations are subject to the effects of international treaties and regulations such as the North American Free Trade Agreement (NAFTA). We are also subject to the effects of international trade agreements and embargoes by entities such as the World Trade Organization. Generally, these international trade agreements benefit our business rather than burden it because they tend to reduce trade quotas, duties, taxes and similar impositions. However, these trade agreements may also impose restrictions that could have an adverse impact on our business, by limiting the countries from whom we can purchase our fabric or other component materials, or limiting the countries where we may market and sell our products.

Environmental Regulation

Our operations are subject to various environmental and occupational health and safety laws and regulations. We believe that we are in compliance with all applicable regulatory requirements. We will continue to make expenditures to comply with these requirements, and we do not believe that compliance will have a material adverse effect on our business. As is the case with manufacturers in general, if a release of hazardous substances occurs on or from our properties or any associated offsite disposal locations, or if contamination from prior activities is discovered at any of our properties, we may be held liable. While the amount of such liability could be material, we endeavor to conduct our operations in a manner that reduces such risks.

Transfer Agent

Our transfer agent is Computershare Investor Services Inc., 510 Burrard Street, 2nd Floor, Vancouver, BC V6C 3B9.

ITEM 1A. RISK FACTORS

An investment in our common stock involves a number of very significant risks. You should carefully consider the following risks and uncertainties in addition to other information in evaluating our company and its business before purchasing shares of our common stock. Our business, operating results and financial condition could be seriously harmed due to any of the following risks. The risks described below are all of the material risks that we are currently aware of that are facing our company. Additional risks not presently known to us may also impair our business operations. You could lose all or part of your investment due to any of these risks.

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Risks Related to Our Business

We Have a History of Operating Losses and There Can Be No Assurance We Will Be Profitable in the Future.

We have a history of operating losses, expect to continue to incur losses, may never be profitable, and must be considered to be in the development stage. Further, we have been dependent on sales of our equity securities and debt financing to meet our cash requirements. We have incurred net losses totaling approximately $15,169,933 for our fiscal year ended December 28, 2013 (“Fiscal 2013”), $9,135,360 for the year ended December 31, 2012 and $6,998,922 for the year ended December 31, 2011. As of December 28, 2013, we had accumulated deficits of $35,937,596. As at December 28, 2013 we had cash and cash equivalents of $1,193,365 and a working capital deficit of $3,426,427.

We Will Need to Raise Capital to Continue Our Operations.

Based upon our historical losses from operations, we anticipate we will require additional funding after the offering. If we cannot obtain capital through additional financings or otherwise, our ability to execute our development plans and achieve profitable operational levels will be greatly limited. Historically, we have funded our operations through the issuance of equity and convertible debentures and bank debt financing arrangements. We may not be able to obtain additional financing on favorable terms, on a timely basis, if at all. Our future cash flows and the availability of financing will be subject to a number of variables, including the demand for and market acceptance of CRAiLAR® technologies. Further, debt financing could lead to a diversion of cash flow to satisfy debt-servicing obligations and create restrictions on business operations. If we are unable to raise additional funds on acceptable terms on a timely basis, it would have a material adverse effect upon our operations.

We May Have Insufficient Earnings Or Liquidity to Meet Our Future Debt Obligations.

We currently have outstanding convertible debentures and other debt (including a debt repayment obligation relating to our European production facility, a loan from IKEA and loans from two of our officers and a director) in the aggregate principal amount of $23,033,246. We intend to use a portion of the proceeds from this offering to repay the loans from our officers and director in the aggregate principal amount of $621,406. The maturity dates of the remaining debt and convertible debentures range from 2016 to 2017. The interest payments on our outstanding debentures and loans are expected to be $1,865,960 and $1,862,582 for 2014 and 2015, respectively. Our inability to generate cash flow sufficient to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms, could materially and adversely affect our business. In addition, servicing these debt obligations will reduce the availability of our cash flow to fund working capital and capital expenditures to continue to expand our business and operations.

Our Success Is Dependent upon the Acceptance of CRAiLAR® Technology.

Our success depends upon our achieving significant market acceptance of our CRAiLAR® technology and products containing our CRAiLAR® fiber. Acceptance of our CRAiLAR® technology will depend on the success of our and our customers’ promotional and marketing efforts and ability to attract customers. If such efforts fail to develop an awareness of and demand for our CRAiLAR® technology and products, we may never be able to generate any significant future revenues. Even if awareness of our CRAiLAR® technology increases, we may not be able to timely produce enough of our fibers to meet demand.

In addition, the acceptance of our CRAiLAR® technology may be adversely affected by decreases in the price of cotton. A decrease in the price of cotton could reduce our customers’ desire for natural fiber alternatives, and thereby reduce the demand for and acceptance of our proprietary fibers, which could have a material adverse effect on our financial results.

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We Are Dependent upon Third Parties to Increase the Awareness of and Demand for Our Crailar® Fibers and Technology.

We are pursuing a pull-through marketing model, which focuses on working directly with some of the leading consumer brands in a variety of target markets to develop additional products incorporating our CRAiLAR® fibers. To date, we have not spent significant funds on marketing and promotional efforts, but we expect our customers to spend a significant amount on promotion, marketing and advertising of the benefits of our fibers and their products containing such fibers in the future, which we believe will increase awareness of our products. However, we do not currently have any customer agreements which require any significant expenditures to be made by the customer specifically to promote our brand or our products. In addition, we have little control over the actions of our customers with respect to the specific products and quality and number of such products that our customers sell or market that include our CRAiLAR® fibers, or the relative mix of our fibers in such products, all of which can have an effect on the perception and acceptance of our products. If our customers do not promote and market our products in the future as we expect or their products are not well-accepted in the market or do not effectively demonstrate the benefits of our products and technologies, the acceptance of our brand and products may suffer or we may be required to incur significant additional costs for promotion and marketing, which would adversely affect our financial results and condition.

An Early Termination of the NRC License Will Have a Material Adverse Effect on Our Business.

Our CRAiLAR® technologies are based on patents and other intellectual property licensed to us from the NRC. The license agreement expires upon the expiration of the last patent claim covered by the license, which is currently in December 2029, but may be terminated earlier by the NRC upon our breach of the license agreement or in the event we become bankrupt or insolvent. An early termination of the license agreement would have an immediate and material adverse effect on our business. In addition, due to the substantial dependence of our technologies on the patents held by the NRC, our business and financial results may be adversely affected if such patents are not adequately enforced or protected.

Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern.

Our financial statements have been prepared under the assumption that we will continue as a going concern. Our independent registered public accounting firm has issued a report that included an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern in light of our continuing net losses and anticipated future operating losses. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our ability to continue as a going concern is dependent upon our ability to obtain additional financings or other capital, reduce expenditures or attain further operating efficiencies and generate revenue. If adequate funds are not available to us when we need it, or we are unable to generate revenues as required, we will be required to curtail our operations which would, in turn, further raise substantial doubt about our ability to continue as a going concern.

A Commercial Market Must Be Found for Our By-products.

North American markets need to be found and developed for the by-products of our decortication process. Although several opportunities for the sale of our by-products are being explored, no contracts for the off take of our by-products have been signed as of the date of this annual report, and we cannot assume that we will enter into any such contracts in the future or that such development will lead to usable products.

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We May Be Unable to Retain Key Employees or Management Personnel.

The loss of any of our key officers and management personnel would have an adverse impact on our future development and could impair our ability to succeed. Our performance is substantially dependent upon the expertise of our Chief Executive Officer, Mr. Kenneth Barker, and our Chief Innovation Officer, Mr. Jason Finnis, and other key management personnel and our ability to continue to hire and retain such personnel. It may be difficult to find sufficiently qualified individuals to replace Messrs. Barker and Finnis or other key management personnel, including Mr. Ted Sanders, our Chief Financial Officer and Treasurer, Mr. Jay Nalbach, our Chief Marketing Officer, and Mr. Guy Prevost, our Corporate Controller and Compliance Officer, if we lose any one or more of them. The loss of any such persons could have a material adverse effect on our business, development, financial condition, and operating results. We maintain “key person” life insurance on our senior executive officers.

Our Officers and Directors May Be Subject to Conflicts of Interest.

Certain of our officers and directors may be subject to conflicts of interest. Such conflicts include deciding how much time to devote to our affairs, as well as what business opportunities should be presented to us. Certain of our directors devote part of their working time to other business endeavors, including consulting relationships with other entities, and have responsibilities to other entities. Because of these relationships, such directors may be subject to conflicts of interest. Currently, we have no policy in place to address such conflicts of interest. However, such directors have acknowledged their fiduciary duty to perform their duties in our best interest and those of our shareholders.

Government Regulation and Trade Restrictions Could Have a Negative Impact on Our Business.

Governments or special interest groups may attempt to protect existing industries through the use of duties, tariffs or public relations campaigns. These efforts may adversely affect interest in and demand for our CRAiLAR® technology.

Moreover, any negative changes to international treaties and regulations such as NAFTA and international trade agreements, and embargoes imposed by entities such as the World Trade Organization, which could result in a rise in trade quotas, duties, taxes and similar impositions or which could limit the countries from whom we can purchase component materials, or which could limit the countries where we or our customers might market and sell products created using CRAiLAR® technology, could have an adverse effect on our business.

The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction may be changed, applied or interpreted in a manner which will fundamentally alter our ability to carry on business. The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitability.

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If Our Competitors Misappropriate Unpatented Proprietary Know-How and Our Trade Secrets, It May Have a Material Adverse Effect on Our Business.

The loss of or inability to enforce our CRAiLAR® trademark and our proprietary know-how and trade secrets could adversely affect our business. We depend heavily on trade secrets and the design expertise of our employees. If any of our competitors copy or otherwise gains access to our trade secrets or develops similar technologies or processes independently, we would not be able to compete as effectively. The measures we take to protect our trade secrets and design expertise may not be adequate to prevent their unauthorized use. Further, the laws of foreign countries may provide inadequate protection of such intellectual property rights. We may need to bring legal claims to enforce or protect such intellectual property rights. Any litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources. In addition, notwithstanding the rights we have secured in our intellectual property, other persons may bring claims against us that we have infringed on their intellectual property rights or claims that our intellectual property right interests are not valid. Any claims against us, with or without merit, could be time consuming and costly to defend or litigate and therefore could have an adverse effect on our business and financial condition.

Currency Fluctuations May Cause Translation Gains and Losses.

A significant portion of our expenses are incurred in Canadian dollars and Euros. As a result, appreciation in the value of these currencies relative to the United States dollar could adversely affect our operating results. Foreign currency translation gains and losses arising from normal business operations are credited to or charged against other income for the period incurred. Fluctuations in the value of Canadian dollars and Euros relative to United States dollars may cause currency translation gains and losses.

We May Not Successfully Identify or Complete Future Acquisitions, Which Could Have a Material Adverse Effect on Our Business, Financial Condition, Results of Operations and Cash Flow.

We may seek to expand our business partly through acquisitions. However, if any reasonable acquisition candidates were to be identified, we cannot assure you that we will succeed in:

  • completing acquisitions;
  • integrating acquired operations into our existing operations; or
  • expanding into new markets.

We also cannot assure you that any current or future acquisitions will not have an adverse effect on our operating results, particularly in the fiscal quarters immediately following their completion while we integrate the operations of the acquired business. The integration of newly acquired businesses or operations may prove to be more challenging, take more time than originally anticipated and result in significant additional costs and/or operational issues, all of which could adversely affect our financial condition and result of operations. Once integrated, acquired operations may not achieve levels of revenues, profitability or productivity comparable with those achieved by our existing operations, or otherwise perform as expected.

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Risks Related to Our Common Stock

Sales of a Substantial Number of Shares of Our Common Stock May Result in Significant Downward Pressure on the Price of Our Common Stock and Could Affect Your Ability to Realize the Current Trading Price of Our Common Stock.

As of December 28, 2013, there were 47,806,031 shares of our common stock issued and outstanding (as of March 24, 2014, there were 50,679,097 shares of our common stock issued and outstanding). Further, as of December 28, 2013, there were outstanding options exercisable into 6,468,799 shares of common stock at a weighted average exercise price of $1.81 per share and warrants exercisable into 6,887,580 shares of common stock at a weighted average exercise price of $1.15 per share. We also completed three convertible debenture offerings of $10,051,262 (CAD$10,000,000), $4,943,642 (CAD$5,000,000) and $3,363,606 (CAD$3,535,000) on September 20, 2012 (the “2012 Notes”), February 25, 2013 (the “February 2013 Notes”) and July 26, 2013 (the “July 2013 Notes”), respectively. Holders of the 2012 Notes and the February 2013 Notes have the option to convert such notes at a price of $2.85 (CAD$2.90) per share of common stock at any time prior to September 30, 2017. Holders of the July 2013 Notes have the option to convert such notes at a price of $1.21 (CAD$1.25) per share of common stock at any time prior to July 26, 2016. Any sales in the public market of the common shares issuable upon exercise or conversion of the outstanding options and warrants, the 2012 Notes, the February 2013 Notes and the July 2013 Notes may dilute our stockholders’ ownership percentages and could result in a decrease in the market value of our equity securities.

In addition, any significant downward pressure on the price of our common stock as certain stockholders sell their shares of our common stock may encourage short sales. Any such short sales could place further downward pressure on the price of our common stock.

The Trading Price of Our Common Stock on the OTCQB Has Been and May Continue to Fluctuate Significantly and Stockholders May Have Difficulty Reselling Their Shares.

During Fiscal 2013, our common stock has traded as low as $0.36 and as high as $2.63. In addition to volatility associated with OTCQB securities in general, the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock:

  • changes in the demand for flax and other eco-friendly products;
  • market acceptance of our products and the products that incorporate our CRAiLAR® fiber;
  • disappointing results from our or our customers’ marketing and sales efforts;
  • failure to meet our revenue or profit goals or operating budget;
  • decline in demand for our common stock;
  • downward revisions in securities analysts’ estimates or changes in general market conditions;
  • lack of funding generated for our operations and existing debt obligations;
  • investor perception of our industry or our business prospects; and
  • general economic trends.

In addition, stock markets have experienced extreme price and volume fluctuations and the market prices of securities have been highly volatile. These fluctuations are often unrelated to operating performance and may adversely affect the market price of our common stock. As a result, investors may be unable to sell their shares at a fair price and you may lose all or part of your investment.

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Additional Issuances of Equity Securities May Result in Dilution to Our Existing Stockholders.

Our Articles of Incorporation authorize the issuance of 100,000,000 shares of common stock. The Board of Directors has the authority to issue additional shares of our capital stock to provide additional financing in the future and the issuance of any such shares may result in a reduction of the book value or market price of the outstanding shares of our common stock. If we do issue any such additional shares, such issuance also will cause a reduction in the proportionate ownership and voting power of all other stockholders. As a result of such dilution, if you acquire shares of our common stock, your proportionate ownership interest and voting power could be decreased. Further, any such issuances could result in a change of control.

We are not authorized to issue shares of preferred stock. However, there are provisions of British Columbia law that permit a company’s board of directors, without shareholder approval, to issue shares of preferred stock with rights superior to the rights of the holders of shares of common stock. As a result, shares of preferred stock could be issued quickly and easily, adversely affecting the rights of holders of shares of common stock and could be issued with terms calculated to delay or prevent a change in control or make removal of management more difficult. Although we currently do not have any authorized preferred stock, have no plans to create authorized preferred stock, and have no present plans to issue any shares of preferred stock, any creation and issuance of preferred stock in the future could adversely affect the rights of the holders of common stock and reduce the value of the common stock.

Our Common Stock is Classified as a “Penny Stock” Under SEC Rules Which Limits the Market for Our Common Stock.

Because our stock is not traded on any national securities exchange in the U.S. and because the market price of the common stock is less than $5 per share, the common stock is classified as a “penny stock.” Our stock has never traded above $5 per share. SEC Rule 15g-9 under the Exchange Act imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as an “established customer” or an “accredited investor.” This includes the requirement that a broker-dealer must make a determination that investments in penny stocks are suitable for the customer and must make special disclosures to the customers concerning the risk of penny stocks. Many broker-dealers decline to participate in penny stock transactions because of the extra requirements imposed on penny stock transactions. Application of the penny stock rules to our common stock reduces the market liquidity of our shares, which in turn affects the ability of holders of our common stock to resell the shares they purchase, and they may not be able to resell at prices at or above the prices they paid.

We Are a Canadian Company and a Majority of Our Directors and Many of Our Officers Are Canadian Citizens and/or Residents, Which Could Make It Difficult for Investors to Enforce Judgments Against Us in the United States.

We are a company incorporated under the laws of the Province of British Columbia, Canada and a majority of our directors and many of our officers reside in Canada. Therefore, it may be difficult for investors to enforce within the United States any judgments obtained against us or any of our directors or officers. All or a substantial portion of such persons’ assets may be located outside the United States. As a result, it may be difficult for investors to effect service of process on our directors or officers, or enforce within the United States or Canada any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, you may be effectively prevented from pursuing remedies under U.S. federal securities laws against them. In addition, investors may not be able to commence an action in a Canadian court predicated upon the civil liability provisions of the securities laws of the United States. We have been advised by our Canadian counsel that there is doubt as to the enforceability, in original actions in Canadian courts, of liability based upon the U.S. federal securities laws and as to the enforceability in Canadian courts of judgments of U.S. courts obtained in actions based upon the civil liability provisions of the U.S. federal securities laws. Therefore, it may not be possible to enforce those actions against us or any of our directors or officers.

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A Decline in the Price of Our Common Stock Could Affect Our Ability to Raise Further Working Capital and Adversely Impact Our Operations.

A decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise additional capital for our operations. Because our operations to date have been principally financed through the sale of equity securities, a decline in the price of our common stock could have an adverse effect upon our liquidity and our continued operations. A reduction in our ability to raise equity capital in the future would have a material adverse effect upon our business plan and operations, including our ability to continue our current operations. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

As of the date of this Annual Report, there are no unresolved comments pending from either the SEC or the British Columbia Securities Commission.

ITEM 2. PROPERTIES

On June 30, 2011, we entered into a lease for our principal offices, consisting of approximately 1,571 square feet of office space in Victoria, British Columbia for a monthly basic net rent of CAD$2,749.25 (US$2,763.34 based on the exchange rate on December 31, 2012 of CAD$1.00 = US$1.0051) . The lease is for a term of three years commencing on August 1, 2011 and expires on July 31, 2014 with one renewal term of three years.

Effective August 9, 2010, we signed a ten-month sublease of a facility at 164 County Camp Road, Kingstree, South Carolina, at a rental cost of $4,400 per month. We attained the space for use as an initial scale-up flax fiber facility to conduct the decortication process of CRAiLAR® fibers. The property is housed near 300 acres of flax crops that we intend to use to conduct our flax fiber growing trials. On July 1, 2011, we signed a one year lease, through June 30, 2012, for this same property and facility for a monthly rent of $3,300. Subsequent to June 30, 2012, we agreed to continue to lease the facility for a monthly rent of $3,400 until March 31, 2014.

Effective August 15, 2011, we entered into a lease for 1,468 square feet of office space in Lake Oswego, Oregon for a monthly rent of $3,000 during the first year, $3,500 during the second year and $4,000 during the third year. This lease is for a term of three years expiring on August 14, 2014.

In March 2012, we entered into a lease for a 147,000 square foot building on 52 acres outside of Pamplico, South Carolina. We plan to use this building as an integrated processing facility. The initial term of the lease is for ten years with two additional five-year extension terms. No rent was due prior to January 1, 2014. Commencing January 1, 2014, the annual basic rent will be $146,930 per year, increasing to $220,395 per year from June 1, 2018 to May 31, 2022.

In November 2013, in connection with the acquisition of our European production facility in Ieper, Belgium, we committed to lease the building housing the facility. Pursuant to an oral agreement, the initial term of the lease commitment is ten years with the option to extend the lease for an additional ten-year term. Commencing on December 1, 2013, the annual basic rent will be $62,636 for the first year with annual rent adjustments calculated as the sum of €1,300,000 multiplied by the Belgium risk-free interest rate. After five years the building will be reappraised and the base rents will be calculated using the new appraisal value. Pursuant to the agreement, we have the option to purchase the building for its appraised value after the fifth anniversary. We are currently in the process of formalizing the foregoing oral arrangements.

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ITEM 3. LEGAL PROCEEDINGS

Management is not aware of any material legal proceedings pending or contemplated by any governmental authority or any other party involving us or our properties. As of the date of this Annual Report, no director, officer or affiliate is a party adverse to us in any legal proceeding, or has an adverse interest to us in any legal proceedings. Management is not aware of any other material legal proceedings pending or that have been threatened against us or our properties.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Common Stock

Shares of our common stock have been quoted on the OTC Bulletin Board from March 21, 2006 until July 18, 2013, when the quotation moved to the OTCQB. Our shares were quoted initially under the symbol “NADVF” (until October 31, 2012) and now under the symbol “CRLRF” (since November 1, 2012). The market for our common stock is limited, and can be volatile. The following table sets forth the high and low bid prices relating to our common stock on a quarterly basis for the periods indicated as quoted by the OTC Bulletin Board (until July 18, 2013) and the OTCQB (from and after July 18, 2013). These quotations reflect inter-dealer prices without retail mark-up, mark-down, or commissions, and may not reflect actual transactions.

Quarter Ended High Bid Low Bid
December 28, 2013    $0.995 $0.42
September 28, 2013    $1.27 $0.36
June 29, 2013    $2.30 $0.95
March 30, 2013    $2.63 $2.05
December 31, 2012    $2.71 $1.90
September 30, 2012    $2.75 $2.00
June 30, 2012    $3.54 $2.39
March 31, 2012    $3.58 $1.75

In addition, shares of our common stock have been listed on the TSX-V since July 8, 2008, initially under the symbol under the symbol “NAT” (until October 30, 2012) and now under the symbol “CL” (since October 31, 2012). The following table sets forth the high and low sales prices of our common stock on a quarterly basis for the periods indicated as quoted by the TSX-V.

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Quarter Ended High Low
December 28, 2013 CAD$1.10 CAD$0.48
September 28, 2013 CAD$1.30 CAD$0.375
June 29, 2013 CAD$2.25 CAD$0.99
March 30, 2013 CAD$2.76 CAD$2.05
December 31, 2012 CAD$2.71 CAD$1.95
September 30, 2012 CAD$2.75 CAD$2.01
June 30, 2012 CAD$3.50 CAD$2.28
March 31, 2012 CAD$3.59 CAD$1.76

As of March 24, 2014, there were approximately 85 shareholders of record of our common shares as reported by our transfer agent, Computershare Investor Services Inc., which does not include shareholders whose shares are held in street or nominee names. There are no other classes of shares issued or outstanding.

Dividend Policy

No dividends have ever been declared by the Board of Directors on our common stock. Our losses do not currently indicate the ability to pay any cash dividends, and we do not indicate the intention of paying cash dividends either on our common stock in the foreseeable future.

Securities Authorized for Issuance under Compensation Plans

We have one equity compensation plan: our 2011 Fixed Share Option Plan. As described below, the 2011 Plan adopted all options outstanding under our previous stock option plans, including our 2006 Stock Option Plan (the “2006 Plan”), our 2008 Fixed Share Option Plan (the “2008 Plan”) and our 2010 Fixed Share Option Plan (the “2010 Plan”). The table set forth below presents information relating to our equity compensation plans as of December 28, 2013.

                Number of Securities  
                Remaining Available for  
    Number of Securities to     Weighted-Average     Future Issuance Under  
    be Issued Upon Exercise     Exercise Price of     Equity Compensation  
    of Outstanding Options,     Outstanding Options,     Plans (excluding column  
Plan Category   Warrants and Rights     Warrants and Rights     (a))  
                   
    (a)     (b)     (c)  
                   

Equity Compensation Plans Approved by Security Holders (2011 Plan Stock Options, Including Stock Options Originally Granted Under 2006 Plan, 2008 Plan and 2010 Plan)

  6,468,799   $ 1.81     399,049  

 

                 

Equity Compensation Plans Not Approved by Security Holders

  N/A     N/A     N/A  

 

                 

Total

  6,468,799   $ 1.81     399,049  

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2011 Fixed Share Option Plan

Effective August 9, 2011, our Board of Directors authorized and approved the adoption of our 2011 Fixed Share Option Plan (the “2011 Plan”) as of such date, under which an aggregate of 8,224,240 of our shares, representing 20% of the issued and outstanding common share capital of the Company as of August 9, 2011, may be issued. Our shareholders approved the 2011 Plan at our annual general meeting held on September 15, 2011. Our shareholders approved an amendment to the 2011 Plan at our annual general meeting held on August 8, 2012, to increase the number of common shares reserved for issuance under such plan from 8,224,240 to 8,512,976. Our shareholders approved a further amendment to the 2011 Plan at our annual general meeting held on November 6, 2013, to increase the number of common shares reserved for issuance under such plan from 8,512,976 to 8,894,539 and to remove the vesting schedule attached as Schedule “B” to the 2011 Plan. We received the required TSX-V acceptance with respect to these amendments to the 2011 Plan on January 21, 2014. As described below, all options issued under our Previous Option Plan (as defined below) are covered by our 2011 Plan.

Prior to the adoption of the 2011 Plan, we had a stock option plan outstanding, the 2010 Fixed Share Option Plan (the “Previous Option Plan”). Under the Previous Option Plan, a maximum of 7,057,640 options were reserved for issuance. As of August 9, 2011, 4,499,421 options were issued and outstanding under the Previous Option Plan. All outstanding options under the Previous Option Plan were rolled into the 2011 Plan and are counted against the number of common shares available for option under the 2011 Plan.

The purpose of the 2011 Plan is to enhance our long-term stockholder value by offering opportunities to our directors, officers, employees and eligible consultants to acquire and maintain stock ownership in order to give these persons the opportunity to participate in our growth and success, and to encourage them to remain in our service.

The 2011 Plan is to be administered by our Board of Directors or a committee appointed by the Board of Directors, which shall determine, among other things:

  • the persons to be granted options under the 2011 Plan;

  • the number of options to be granted; and

  • the terms and conditions of the options granted.

An option may not be exercised after the termination date of the option and may be exercised following the termination of an eligible participant’s continuous service only to the extent provided by the terms of the 2011 Plan.

Based on the terms of the individual option grants, options granted under the 2011 Plan generally expire three to ten years after the grant date (with a maximum exercise period of 10 years from grant) and become exercisable over a period of one year based on continued employment, either with monthly vesting or upon achievement of pre-determined deliverable.

Common Stock Purchase Warrants

As of December 28, 2013, there were an aggregate of 6,887,580 common stock purchase warrants issued and outstanding at a weighted average exercise price of $1.15 per share.

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Recent Sales of Unregistered Securities

During our fiscal year ended December 28, 2013, we sold the following equity securities that were not registered under the Securities Act:

On December 20, 2013, we issued 3,333,333 units pursuant to a private placement to one purchaser at a price of $0.56 (CAD$0.60) per unit for total gross proceeds of $1,872,600 (CAD$2,000,000). Each unit consists of one common share and one common share purchase warrant. Each common share purchase warrant entitles the holder to purchase one additional common share at an exercise price of $0.66 (CAD$0.70) per share for a period of five years, expiring on December 20, 2018. We relied on exemptions from registration under the Securities Act provided by Regulation S based on representations and warranties provided by the purchaser in the subscription agreement entered into between us and the purchaser. Pursuant to the subscription agreement, the purchaser received a pre-emptive right with respect to the issuance of any of our equity securities other than the issue of equity securities: (i) for compensatory purposes to our officers, employees, directors and consultants under compensation plans in existence on the date hereof; (ii) pursuant to any of our convertible securities outstanding on December 20, 2013; or (iii) as consideration for the arm’s length purchase of businesses or assets by us or our subsidiaries; whereby the purchaser shall have the right to subscribe for and purchase up to that number of equity securities necessary to maintain the purchaser’s equity ownership percentage as at the date immediately prior to the closing of such equity financing.

On July 26, 2013, we issued an aggregate of CAD$3,535,000 in convertible secured debentures having a term until July 26, 2016 or on such earlier date as the principal amount of the Debentures may become due in accordance with the provisions of the indenture for such debentures and having an interest rate of 10% per annum which shall accrue and be payable semi-annually on March 31 and September 30 in each year commencing on September 30, 2013 with the last interest payment to fall due on the maturity date. The debentures are governed and issued pursuant to the indenture entered into between us and Computershare Trust Company of Canada (the “Trustee”). The debentures are issuable only in denominations of $972 (CAD$1,000) and integral multiples thereof. The principal amount of the debentures is convertible, at the option of the holder thereof, into shares of our common stock at any time prior to the close of business on the maturity date and the close of business on the last business day immediately preceding the date specified by us for redemption of the debentures. The conversion price, subject to adjustment in certain circumstances, will be $1.94 (CAD$2.00) per share, being a conversion rate of 500 shares for each $972 (CAD$1,000) principal amount of Debentures, all subject to the terms and conditions and in the manner set forth in the indenture for such debentures. No fractional shares will be issued on any conversion but in lieu thereof, we will pay cash equal to the market price of such fractional interest determined in accordance with the indenture. The debentures will not be redeemable by us before July 26, 2015. On or after July 26, 2015 and at any time prior to the maturity date, we may, at our option, subject to providing not more than 60 and not less than 30 days’ prior notice, redeem the debentures, in whole or in part, at par plus accrued and unpaid interest. However, in the event we complete an aggregate of $19,434,000 (CAD$20,000,000) or more in any equity financing(s) between July 26, 2013 and the maturity date, we shall, subject to providing not less than 60 days prior notice to each holder of debentures, redeem the debentures in whole at par plus accrued and unpaid interest. In addition, we issued 800 transferable common share purchase warrants for each $972 (CAD$1,000) of principal amount tendered to us by the investors, resulting in an aggregate of 2,828,000 warrants, with each warrant entitling the holder thereof to purchase one additional share of common stock at an exercise price of $1.21 (CAD$1.25) per share until July 26, 2016. In connection with this private placement of debentures and warrants, we paid a finder’s fees of $138,079 (CAD$142,100) in cash and 113,680 finder’s warrants to an entity in Ontario, Canada and $95,567 (CAD$98,350) in cash and 78,680 finder’s warrants to an entity in British Columbia, Canada. The finder’s warrants have the same attributes as the warrants. We relied on exemptions from registration under the Securities Act provided by Regulation S for all investors, based on representations and warranties provided by the investors in the debentures and in their respective subscription agreements entered into between us and each investor.

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On April 16, 2013, we issued 37,500 unregistered, restricted common shares upon the exercise of previously issued warrants at an exercise price of $1.25 per share for total proceeds of $46,875. With respect to such issuance, relied on an exemption from the registration requirements of the Securities Act provided by Rule 506 of Regulation D thereunder, based on the representations and warranties provided by the investor upon exercise of such warrants.

On February 25, 2013, we issued an aggregate of $4,943,642 (CAD$5,000,000) in convertible secured debentures having a term until September 30, 2017 or on such earlier date as the principal amount of the debentures may become due in accordance with the provisions of the indenture for such debentures and having an interest rate of 10% per annum which shall accrue and be payable semi-annually on March 31 and September 30 in each year commencing on September 30, 2013 with the last interest payment to fall due on the Maturity Date. The debentures are governed and issued pursuant to the indenture entered into between us and Computershare Trust Company of Canada (the “Trustee”). The debentures are issuable only in denominations of $974 (CAD$1,000) and integral multiples thereof. The principal amount of the debentures is convertible, at the option of the holder thereof, into shares of our common stock at any time prior to the close of business on the maturity date and the close of business on the last business day immediately preceding the date specified by us for redemption of the debentures. The conversion price, subject to adjustment in certain circumstances, will be $2.85 (CAD$2.90) per share, being a conversion rate of approximately 344.828 shares for each $974 (CAD$1,000) principal amount of debentures, all subject to the terms and conditions and in the manner set forth in the indenture for such debentures. No fractional shares will be issued on any conversion but in lieu thereof, we will pay cash equal to the market price of such fractional interest determined in accordance with the indenture for such debentures. We relied on exemptions from registration under the Securities Act provided by Regulation S for all investors, based on representations and warranties provided by the investors in the debentures in their respective subscription agreements entered into between us and each investor.

On February 13, 2013, we issued 25,000 unregistered shares to a corporation at an issuance price of $0.95 per share upon exercise of options previously granted to such corporation in connection with an agreement pursuant to which such corporation processed CRAiLAR® fibers for us. We relied on an exemption from the registration requirements of the Securities Act provided by Rule 506 and/or Section 4(a)(2) thereunder.

ITEM 6. SELECTED FINANCIAL DATA

Not required because we are a smaller reporting company.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our results of operations and financial position should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this prospectus. Our consolidated financial statements are prepared in accordance with U.S. GAAP. All references to dollar amounts in this section are in U.S. dollars unless expressly stated otherwise. The matters discussed in these sections that are not historical or current facts deal with potential future circumstances and developments. Such forward-looking statements include, but are not limited to, statement regarding our development plans, market trends, anticipated operating expenses, capital requirements and capital resources. As such, these forward-looking statements may include words such as “plans”, “intends”, “anticipates”, “should”, “estimates”, “expects”, “believes”, “indicates”, “targeting”, “suggests”, and similar expressions. The actual results may differ from these forward-looking statements and these differences may be material.

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Overview

We are focused on bringing sustainable bast fiber-based products to market that are environmentally-friendly natural fiber alternatives with equivalent or superior performance characteristics to cotton, wood or fossil-fuel based competitors. Our business operations consist primarily of the deployment and production of our natural and proprietary CRAiLAR® Flax fibers, as well as our patented CRAiLAR® processing technologies targeted at the natural yarn, textile and the cellulose pulp and composites industries. We believe that we offer two key opportunities for development (i) CRAiLAR® fiber for textiles, which is flax, hemp (or other sustainable bast fiber) available in a variety of blends, textures, colors and applications; and (ii) CRAiLAR® technologies for the processing of cellulose-based fibers in pulp and paper, and high grade dissolving pulp for use in the additives, ethers and the performance apparel industries.

Effective in Fiscal 2013, we began to report our first, second, third, and fourth quarters on a 4-4-5 basis, with each quarter ending on the Saturday closest to the last day of each third month. In Fiscal 2013, our first quarter ended on March 30, 2013, the second quarter ended on June 29, 2013, the third quarter ended on September 28, 2013 and the fourth quarter ended on December 28, 2013.

Acquisition of Production Facility

In December 2013, we acquired a European fiber dyeing facility with similar equipment used to produce CRAiLAR® Flax fiber. The acquisition was made pursuant to an Asset Purchase Agreement dated November 6, 2013, which was amended and restated on December 13, 2013. The new facility allowed us to accelerate our timeline for establishing a company-controlled CRAiLAR® enzyme processing capability. Production of CRAiLAR® fibers at this facility commenced in January 2014. We believe the facility has the capacity to produce over 280,000 pounds (127 metric tons) of CRAiLAR® Flax fiber per week with space to expand the capacity to over 800,000 pounds per week.

Debentures

On September 20, 2012, we completed the offering of $10,051,261 (CAD$10,000,000) worth of convertible debentures (the “September 2012 Debentures”), which bear interest at a rate of 10% per year, payable semi-annually on March 31st and September 30th of each year and mature on September 20, 2017. The holders of the September 2012 Debentures have the option to convert the September 2012 Debentures into shares of our common stock at a price of $2.85 (CAD$2.90) per share for each $972 (CAD$1,000) principal amount at any time prior to the maturity date. On February 25, 2013, we completed another offering of $4,943,642 (CAD$5,000,000) convertible debentures (the “February 2013 Debentures”) with essentially the same terms as the previously mentioned offering. Furthermore, on July 26, 2013 we completed a third offering of $3,363,606 (CAD$3,535,000) worth of convertible debentures (the “July 2013 Debentures”) with an interest rate of 10% payable semi-annually on March 31st and September 30th of each year, which mature on July 26, 2016. Originally, the holders of the July 2013 Debentures had the option to convert such debentures into shares of our common stock at a price of $1.94 (CAD$2.00) per share for each $972 (CAD$1,000) principal amount of debentures at any time prior to the maturity date. However, pursuant to the Amended and Restated Convertible Debenture Indenture, dated December 23, 2013, the conversion price for the July 2013 Debentures has been reduced to $1.21 (CAD$1.25) per share of common stock. The holders of the July 2013 Debentures also each received warrants to purchase 800 shares of our common stock at an exercise price of $1.21 (CAD$1.25) per share for each $972 (CAD$1,000) principal amount of July 2013 Debentures purchased, exercisable at any time prior to the maturity date of the debentures.

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Discontinued Operations

During Fiscal 2009, we decided to discontinue our apparel business, which operated under the brand name “HTnaturals,” to focus on developing our bast fiber technology. The financial results of that business are reported as discontinued operations for all periods presented.

Corporate Structure and Subsidiaries

We were incorporated under the laws of British Columbia, Canada, on October 6, 1998, under the name “Hemptown Clothing Inc.” We changed our name to “Naturally Advanced Technologies Inc.” effective March 21, 2006. We further changed our name to “Crailar Technologies, Inc.” effective October 31, 2012. We have six wholly-owned subsidiaries: Crailar Inc., a Nevada corporation; Crailar Fiber Technologies Inc., a British Columbia corporation; HTnaturals Apparel Corp., a British Columbia corporation; 0697872 B.C. Ltd., a British Columbia corporation; and Hemptown USA, Inc., a Nevada corporation, and Crailar Europe NV, a Belgian corporation.

CRITICAL ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its five wholly-owned subsidiaries as of December 28, 2013: Crailar Inc., a Nevada incorporated company; Hemptown USA, Inc., a Nevada incorporated company; 0697872 B.C. Ltd., a British Columbia incorporated company; Crailar Fiber Technologies Inc., a British Columbia incorporated company, and HTNaturals Apparel Corp, a British Columbia incorporated company. All inter-company transactions and account balances have been eliminated upon consolidation.

Cash and Cash Equivalents

Cash equivalents consist of cash on deposit and term deposits with original maturities of one year or less at the time of issuance. As at December 28, 2013, the Company held $15,000 (2012 - $20,000) in cash equivalents.

Inventory

The raw flax fiber feedstock, decorticated fiber and Crailar fiber is valued at the lower of cost and market. All direct costs are capitalized to raw flax fiber inventory, decorticated fiber inventory and Crailar fiber.

Seed inventory was valued at the lower of average cost and market. Cost comprised the cost to purchase seed and/or growing cost plus any related shipping costs.

Other inventories, which consists of production consumables, are recorded at the lower of cost and replacement cost which approximates net realizable value.

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Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant areas requiring management’s estimates and assumptions are inventory costing and net realizable value, the expected future use and other impairment considerations of property and equipment, fair value of warrants, options, derivative liabilities, provision for income taxes, depreciation and financial instruments.

Property and Equipment

Property and equipment are stated at cost and are depreciated as follows:

Automobiles 20% declining balance
Computer equipment 30% declining balance
Computer software 100% declining balance
Equipment 30% declining balance
Furniture and fixtures 20% declining balance
Production Equipment 30% declining balance
Leasehold improvements Term of lease
Website development 100% declining balance

Depreciation is claimed at one-half of the regular rate in the year of addition, no depreciation is claimed in the year of disposal.

Intangible Assets

Intangible assets are stated at cost and are amortized as follows:

Trademarks 5 year straight - line
License Fee 10 year straight - line
Patent 10 year straight – line

Revenue Recognition

Revenue is recognized when there is persuasive evidence of a sale arrangement, delivery to the customer has occurred, the fee is fixed and determinable, and collectability is considered probable.  

Foreign Currency Translation

The Company’s functional currency is Canadian dollars. The Company translates its financial statements to U.S. dollars using the following method:

All assets and liabilities are translated into U.S. dollars at the exchange rate in effect at the year-end. Revenues and expenses are translated throughout the year at the weighted average exchange rate. Exchange gains or losses from such translations are included in accumulated comprehensive income (loss), as a separate component of stockholders’ equity.

Foreign currency transaction gains and losses are included in the statement of operations and comprehensive loss.

Income Taxes

The Company utilizes the liability method of accounting for deferred income taxes. Under the liability method, deferred income taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is recorded when it is more likely than not that potential the future tax assets will not be realized.

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Comprehensive Loss

Comprehensive loss is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners.  Other comprehensive income (loss) comprises items of income and expenses that are not recognized in net loss as required or permitted by GAAP.

Stock-based Compensation

The Company accounts for stock-based payment transactions in which an enterprise receives services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Company uses the Black-Scholes option-pricing model to establish the fair-value of stock-based awards.

Earnings (Loss) Per Share

Basic and diluted earnings (loss) per share are computed using the weighted average number of shares outstanding during the year. Common stock equivalents from stock options and warrants were excluded from the calculation of net loss per share for the years ended December 28, 2013 and December 31, 2012 as their effect is anti-dilutive.

Long-Lived Asset Impairment

Long-lived assets of the Company are reviewed when changes in circumstances suggest their carrying value has become impaired. Management considers assets to be impaired if the carrying value exceeds the estimated discounted future projected cash flows to result from the use of the asset and its eventual disposition. If impairment is deemed to exist, the assets will be written down to fair value. Fair value is generally determined using a hierarchy of fair value methodologies under GAAP, primarily based on a discounted cash flow analysis.

Risk Management

Currency risk. The Company is exposed to currency risk to the extent that certain inventory and equipment is purchased from Europe. The purchase price for such inventory and equipment is generally in Euros. The Company does not currently hedge its foreign currency exposure, and accordingly, is at risk for foreign currency exchange fluctuations. The Company and its subsidiaries do not have significant transactions or hold significant cash denominated in currencies other than their functional currencies.

Credit risk. The risk in cash accounts is managed through the use of a major financial institution, which has high credit quality as determined by the rating agencies. As at December 28, 2013, $158,000 is due from a single customer and therefore 61% of receivables are exposed to concentration of credit risk.

Interest rate risk.  Approximately $1,026,000 of the Company’s debt bears interest at fluctuating rates.  Consequentially the Company is exposed to interest rate fluctuations.  The Company does not currently hedge its exposure to interest rate risk.

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Commodity price risk.  Commodity price risk is the risk that the fair value of future cash flows will fluctuate because of changes in the market prices of commodities. The Company is exposed to commodity price risk as it purchases fiber feedstock from the flax producers in Europe. The Company purchases the short fiber waste product called “tow” and the price fluctuates based on supply. The Company has relationships with several short fiber producers and anticipates little issue in obtaining sufficient fiber for its needs. The Company does not currently enter into futures contracts or otherwise hedge its exposure to commodity price risk.

Research and Development

Research and development costs are charged to operations as incurred.

Recent Pronouncements

There are no recent pronouncements that are applicable to the Company.

RESULTS OF OPERATIONS

Fiscal Year Ended December 28, 2013 Compared to Fiscal Year Ended December 31, 2012

The table below reconciles consolidated net loss to Adjusted EBITDA for the periods presented (in thousands):

 

  Fifty-Two Weeks Ended  

 

  December 28, 2013     December 31, 2012  

Net Loss

$  (15,170 ) $  (9,315 )

Interest expense, net

  2,059     100  

Provision for income taxes

  -     -  

Depreciation of production property and equipment

  681     -  

Amortization and depreciation

  175     279  

EBITDA

  (12,255 )   (8,936 )

Stock based compensation

  2,005     2,398  

Impairment loss on inventory

  4,642     304  

Write off of equipment

  13     594  

Rent inducement expense

  152     120  

Fair value adjustment derivative liabilities

  (453 )   98  

Bargain purchase

  (426 )   -  

Adjusted EBITDA

$  (6,322 ) $  (5,422 )

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Fiscal Year Ended December 28, 2013 Compared to Fiscal Year Ended December 31, 2012

 

  Fifty-Two Weeks Ended  

 

  December 28, 2013     December 31, 2012  

Revenues

$  587,225   $  -  

Cost of sales

           

   Materials and direct production costs

  470,115     -  

   Facility commissioning costs

  1,896,822     -  

   Depreciation

  680,839     -  

   Impairment loss on inventory

  4,642,262     -  

 

  7,690,038     -  

Gross profit

  (7,102,813 )   -  

Expenses:

           

   Marketing and promotion

  663,438     672,305  

   Amortization and depreciation

  174,555     278,805  

   General and administrative

  5,681,467     6,608,524  

 

  6,519,459     7,559,634  

Loss before other items

  (13,622,272 )   (7,559,634 )

Other income (expense):

           

   Gain on disposal of assets

  790     -  

   Interest

  (2,058,738 )   (99,655 )

   Write off of equipment

  (13,368 )   (593,894 )

   Research and development

  (355,099 )   (660,229 )

   Fair value adjustment derivative liabilities

  452,845     (98,285 )

   Impairment loss on inventory

  -     303,663  

   Bargain purchase

  425,909     -  

 

  (1,547,661 )   (1,755,726 )

Net loss

  (15,169,933 )   (9,315,360 )

Exchange differences on translating to presentation currency

  1,044,337     (35,685 )

Total comprehensive loss

  (14,125,596 )   (9,351,045 )

Loss per share (basic and diluted)

$  (0.34 ) $  (0.22 )

Revenue and Gross Margins

In Fiscal 2013 our revenue consisted of Crailar fiber sales, flax seed sales, and other fiber (non-Crailar) sales at our new European processing facility and customer payments to retain product exclusivity. In Fiscal 2012 we had no revenues and no gross margin.

Our gross profit for Fiscal 2013 was ($7,102,813) reflecting $4,642,000 of feedstock inventory write-downs; $1,896,822 of plant pre-commissioning expenses; $680,839 of related plant depreciation; and $470,115 of costs directly attributable to sales. The inventory write-down of $4,642,262 includes the write-down of raw flax fiber feedstock of $2,279,887; flax seed of $1,891,217; CRAiLAR fiber of $274,297 and decorticated fiber of $196,861, to net realizable value. The write-down of raw flax fiber feedstock was because of expected reduced fiber yield from extreme weather conditions. The write-down of seeds was the result the decision not to plant during the fall of 2013 in North America and the seed was sold as lower value oil seed. The write-down of CRAiLAR fiber and decorticated fiber was a result of the cost of the fiber exceeding its market price. Pre-commissioning expenses of $1,896,822 related to the South Carolina plant incurred from mid January 2013 and ceased at the end of the third quarter. Pre-commissioning expenses that were incurred during the start-up/commissioning period include indirect wages, training, repairs and maintenance, rent, utilities, supplies, equipment rentals, and equipment calibration. Depreciation of production property and equipment during the pre-commissioning period of $680,839 was charged to cost of sales.

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Operating Expenses

During Fiscal 2013, we recorded operating expenses of $6,519,459 compared to operating expenses of $7,559,634 for Fiscal 2012, a decrease of $1,040,175 or 13.8% . The primary cause of the decrease in operating expenses was the reduction in depreciation expense of the pilot scale facility and the reduction in general and administrative expense, primarily stock-based compensation and bonus expense.

Marketing and promotion expenses comprised of investor and public relation services and sales development costs decreased to $663,438 for Fiscal 2013, from $672,305 for Fiscal 2012 a decrease of $8,867 or 1%.

General and administrative (G&A) expenses decreased to $5,681,467 for Fiscal 2013, from $6,608,524 for Fiscal 2012, a decrease of $927,075 or 14%. The decrease was caused primarily by a $608,000 reduction in salaries and consultant expenses due to a decrease in stock-based compensation and fewer consultants. Also, $319,000 of expenses previously recorded in G&A is now reported as facility pre-commissioning expense in 2013. These decreases in G&A were partially offset by increased travel expenses $122,000 and professional fees $192,800 from increased business activity.

Amortization of intangible assets and depreciation of tangible assets decreased to $174,555 for Fiscal 2013 from $278,805 for Fiscal 2012 a decrease of $104,550 or 37%. Depreciation of equipment of the pilot scale facility during 2012 that was decommissioned in late 2012 was the cause of the higher depreciation in 2012.

Other Items

Interest expense increased to $2,058,738 for Fiscal 2013, compared to $99,655 for Fiscal 2012, an increase of $1,959,083, resulting from a full year’s interest on certain convertible debentures in 2013 and the issuance of $8,435,000 of additional promissory notes. Interest expense is attributable to the convertible debenture interest of $1,489,000, the amortization of the deferred debt issuance costs of $339,000, the accretion expense from the amendment of the July 26 convertible debenture of $173,000, and the accretion expense on the promissory notes conversion feature of $33,000.

Research and development costs decreased to $355,099 for Fiscal 2013, compared to $660,229 for Fiscal 2012, a decrease of $305,130 or 46%, as we transitioned from a focus on R&D to commercial production.

Write-down of equipment declined to ($13,368) in Fiscal 2013 from ($593,894) in Fiscal 2012, a decrease of $580,526 or 98%, because we wrote down ($593,894) of decortication equipment used in the pilot scale facility in Kingstree, South Carolina as it was deemed commercially unviable.

The fair value adjustment for derivative liabilities was a gain of $452,845 for Fiscal 2013, compared to a loss of ($98,285) for Fiscal 2012 reflecting a decline in the market value of our stock price.

Net Loss

Our net loss during Fiscal 2013 was $15,169,933, or $0.34 per share, compared to $9,315,360, or $0.22 per share during Fiscal 2012. The increase in net loss was primarily due to a $4,339,000 increase in raw flax fiber feedstock and seed inventory write-offs to reflect lower of cost or market and $1,959,000 of interest expense from increased borrowings.

For Fiscal 2013, the weighted average number of shares outstanding was 44,508,011 compared to 43,009,226 for Fiscal 2012.

36


LIQUIDITY AND CAPITAL RESOURCES

Fiscal Year Ended December 28, 2013 Compared to Fiscal Year Ended December 31, 2012

    2013     2012  
Cash and cash equivalents $ 1,193,365   $ 2,877,210  
Working capital   ($3,426,427 ) $ 2,585,862  
Total assets $ 21,489,962   $ 20,328,540  
Total liabilities $ 23,503,816   $ 13,426,339  
Shareholders’ equity   ($2,013,854 ) $ 6,902,201  

Historically, the Company has relied on equity financings from the sale of its common shares, and more recently from the sale of equity and convertible debentures, to fund its operations. On March 20, 2014 the Company completed an equity financing for proceeds of $3,143,750. On December 20, 2013, the Company completed an equity financing for proceeds of $1,872,600 (CAD$2,000,000). On December 19, 2013, but having an effective date of November 29, 2013, we entered into a loan agreement for $3,028,300 (€2,190,000, approximately CAD$3,200,000). At the end of Fiscal 2013 the Company had not drawn on the loan but as of the date of this document the Company has drawn $2,208,300 (€1,597,000), which was used for working capital and capital expenditures for the Belgium facility. In February 2013, the Company completed a convertible debt financing for proceeds of $4,943,642 (CAD$5,000,000). In July 2013, the Company completed an additional convertible debt financing for proceeds of $3,363,606 (CAD$3,535,000). In September 2012, the Company completed a convertible debt financing for proceeds of $10,051,262 (CAD$10,000,000). The Company expects to fund future operations and expansion through bank debt, government loan programs, customer financing, lease programs, and equity and debt financings and cash flow from operations.

As at December 28, 2013, total assets were $21,489,962, consisting of:

  • $1,193,365 in cash and cash equivalents;
  • $223,105 in accounts receivable;
  • $945,040 in inventory;
  • $290,872 in prepaid expenses and other;
  • $1,442,023, in deferred debenture issuance costs;
  • $17,240,012 in property and equipment;
  • $155,545 in intangible assets.

As at December 28, 2012, total liabilities were $23,503,816 and were comprised of:

  • $2,377,901 in accounts payable;
  • $2,342,153 in accrued liabilities;
  • $247,655 in unearned revenue
  • $476,614 in notes payable;
  • $634,486 in current portion of loans
  • $199,131 in future income tax liability
  • $551,190 in loans payable and
  • $16,674,686 in convertible debentures.

Stockholders’ equity decreased by $8,916,055 from $6,902,201 at December 31, 2012, to ($2,013,854) at December 28, 2013.

37


Cash Flows Used in Operating Activities

The cash flows used in operating activities for Fiscal 2013 were ($8,080,507) compared with ($5,893,631) in Fiscal 2012. Cash flows used in operations for Fiscal 2013 consisted primarily of a net loss of $15,169,933, offset by the following items: accretion of expense of $127,525 (2012: $0); amortization and depreciation of $855,394 (2012: $278,805); amortization of deferred debt issuance costs of $346,789 (2012: $90,220); fair value adjustment of derivative liability of ($452,845) (2012: $98,285); gain on disposal of assets of ($790) (2012: $0); rent of $151,539 (2012: $119,836); stock-based compensation of $2,004,647 (2012: $2,397,819); write off of equipment of $13,368 (2012: $593,894); impairment of inventory of $4,642,262 (2012: $303,663); bargain purchase of ($425,909) (2012: $0); (an decrease (increase) in accounts receivable of ($86,763) (2012: $78,622); an increase in inventory of ($2,682,650) (2012: ($2,172,349)); an (increase) in prepaid expenses of ($184,087) (2012: ($59,538)); an increase in accounts payable of $971,483 (2012: $1,170,703); an increase in unearned revenue $247,655 (2012: $0); and an increase in accrued liabilities of $709,990 (2012: $521,769).

Cash Flows Used in Investing Activities

The cash flows used in investing activities for Fiscal 2013 were ($3,961,324) compared to ($10,450,213) for Fiscal 2012. Cash flows used in investing activities in Fiscal 2013 consisted of sale of equipment of $35,790 (2012: $0); acquisition of property and equipment used for decortication equipment, yard equipment, harvesting equipment and the build out of the Pamplico, South Carolina facility totaling ($3,907,808) (2012: ($10,419,945)); and the acquisition of trademarks and licenses totaling ($89,306) (2012: $(30,268)).

Cash Flows from Financing Activities

Cash flows provided by financing activities for Fiscal 2013 totaled $10,160,671 compared to $12,916,234 during Fiscal 2012. In Fiscal 2013, we issued capital stock and warrants for proceeds of $239,746 (2012: $3,948,908); promissory notes for proceeds of $621,009 (2012: $0); convertible debentures for net proceeds of $7,420,516 (2012: $8,967,326). We also received funds from a private placement for $1,879,400 (2012: $0).

Effect of Exchange Rate

The effect of exchange rates on cash resulted in an unrealized gain of $197,315 for Fiscal 2013, as compared with an unrealized loss of $($35,685) in fiscal 2012.

MATERIAL COMMITMENTS

Debt Offerings

We completed the following three convertible debt offerings in 2012 and 2013: (i) we sold the September 2012 Debentures with proceeds of $10,051,262 (CAD$10,000,000) on September 20, 2012; (ii) we sold the February 2013 Debentures with proceeds of $4,943,642 (CAD$5,000,000) on February 25, 2013; and (iii) we sold the July 2013 Debentures with proceeds of $3,363,606 (CAD$3,535,000) on July 26, 2013. The September 2012 Debentures mature on September 30, 2017 and bear interest at a rate of 10% per year, payable semi-annually on March 31 and September 30 of each year, starting March 31, 2013. The February 2013 Debentures mature on September 30, 2017 and bear interest at a rate of 10% per year, payable semi-annually on March 31 and September 30 of each year, starting on September 30, 2013. The February 2013 Debentures are ranked subordinate to the September 2012 Debentures. Non-Canadian resident holders of the

38


February 2013 Debentures will receive additional interest for the amount of the withholding taxes paid by us for Canadian tax purposes. The July 2013 Debentures mature on July 26, 2016 and bear interest at a rate of 10% per year, payable semi-annually on March 31 and September 30 of each year, commencing on September 30, 2013. The July 2013 Debentures are secured by production equipment and fixtures located at our Pamplico, South Carolina facility that are different from the production equipment and fixtures at the Pamplico, South Carolina facility that were used to secure the September 2012 Debentures and the February 2013 Debentures. In the event we complete one or more equity financings between July 26, 2013 and July 26, 2016 with proceeds of at least an aggregate of $19,434,000 (CAD$20,000,000), we must, subject to providing no less than 60 days prior notice to each holder of the July 2013 Debentures, redeem the July 2013 Debentures in whole at face value plus all accrued and unpaid interest thereon. The initial conversion rates of each of the September 2012 Debentures, the February 2013 Debentures and the July 2013 Debentures were $$2.85 (CAD$2.90), $2.85 (CAD$2.90) and $1.94 (CAD$2.00), respectively, and are subject to anti-dilution provisions.

Holders of the September 2012 Debentures and the February 2013 Debentures have the option to convert their debentures into common stock at a price of $2.85 (CAD$2.90) per share of common stock at any time prior to their respective maturity date. We may redeem the September 2012 Debentures and the February 2013 Debentures after September 30, 2015 provided that the market price at the time of the redemption notice is not less than 125% of the conversion price.

In accordance with the conditions of the IKEA Loan (defined below), we approached the debenture holders (the “Debenture holders”) of the July 2013 Debentures about releasing their security over certain assets held by our subsidiary, CRAiLAR Inc., having an acquisition cost of $1,331,794, which form a portion of the assets securing the July 2013 Debentures pursuant to the Guaranty and Security Agreement (the “Guaranty”) between CRAiLAR Inc. (the “Guarantor”) and Computershare Trust Company of Canada (the “Trustee”), dated July 26, 2013, as set forth in Schedule “A” to the Guaranty, to be used as separate security for the IKEA Loan to us. As consideration for such alteration to the secured assets, the conversion price of the July 2013 Debentures was reduced from $1.94 (CAD$2.00) per share to $1.21 (CAD$1.25) per share. On December 23, 2013, the Trustee and us entered into an Amended and Restated Convertible Debenture Indenture which reflects the modification and alteration of the rights of the Debenture holders and the Trustee against us with respect to (i) the secured assets to now only include those specific assets held by the Guarantor as set forth in Schedule “F” to the Amended and Restated Convertible Debenture Indenture having an acquisition cost of $3,922,240, and (ii) the reduction of the conversion price of the July 2013 Debentures from $1.94 (CAD$2.00) per share to $1.21 (CAD$1.25) per share. In addition, on the same date, the Guarantor and the Trustee entered into an Amended and Restated Guaranty and Security Agreement which forms Schedule “G” to the Amended and Restated Convertible Debenture Indenture, and which reflects the modification and alteration with respect to the secured assets as discussed above.

Debt

On December 1, 2013 we purchased certain assets of a European fiber dyeing facility. We acquired these assets by assuming $1,172,000 of the seller’s debt. On December 13, 2013, we entered into an amended asset purchase agreement for such assets, which replaced the initial asset purchase agreement and provides that the title to and economic risk in respect of the environmental permit and the employees passed to us on December 1, 2013, however, the title to the equipment at the facility shall only pass to us upon full payment of the foregoing assumed indebtedness of the seller, notwithstanding the fact that physical possession and economic risk of all assets of the acquired facility passed to us on December 1, 2013. We have reached an oral agreement with the seller to lease the real property for the facility and are in the process of formalizing that oral agreement.

39


On December 19, 2013, but having an effective date of November 29, 2013, we entered into a loan agreement (the “Loan Agreement”) with IKEA Supply AG (“IKEA”), whereby IKEA agreed to loan us $3,028,300 (€2,190,000, approximately CAD$3,200,000) (the “IKEA Loan”) having a term until June 25, 2016 and bearing interest at a rate of 1.9% per annum. As security for the IKEA Loan, IKEA required that the IKEA Loan be secured by assets purchased with the proceeds of the IKEA Loan, as well as a portion of the secured assets used to secure the July 2013 Debentures. The proceeds from the IKEA Loan are designated for the installation of equipment to support and expand our European production facility and for working capital to fulfill IKEA orders.

We entered into the following loan arrangements with each of our following directors: Jason Finnis (“Finnis”), Kenneth Barker (“Barker”) and Robert Edmunds (“Edmunds”; and each of Messrs. Finnis, Barker and Edmunds being singularly and collectively referred to as the “Lender” and “Lenders”, respectively, as the context may require):

Finnis

  (i)

pursuant to an original Convertible Promissory Note, dated for reference effective on October 11, 2013 (the “Original Finnis Promissory Note”), Mr. Finnis therein granted us a loan in the principal amount of $96,290 (CAD$100,000) (the “Finnis Loan”) bearing interest at a rate of 12% per annum, and the Original Finnis Promissory Note provided that the Finnis Loan and the interest thereunder must be repaid by us to Finnis on December 11, 2013;

     
  (ii)

effective on November 7, 2013, we repaid to Finnis $47,885 (CAD$50,000) of the Finnis Loan, such that a principal amount of $47,885 (CAD$50,000) was then owing under the Finnis Loan pursuant to the Original Finnis Promissory Note;

     
  (iii)

pursuant to a Loan Extension Agreement, dated for reference effective on December 18, 2013 (which together with the Original Finnis Promissory Note being, collectively, the “Underlying Finnis Agreements”), and as a then condition precedent to the completion by us of the private placement with Hydra Ventures BV, which closed on December 20, 2013 (the “Private Placement”), the parties therein agreed to extend the term for repayment of the Finnis Loan and the interest under the Original Finnis Promissory Note until the earlier of (i) December 20, 2014, and (ii) such time as we complete our next public offering of registered securities by way of a registration statement on Form S-1 of not less than $2,808,900 (CAD$3,000,000) in gross proceeds to us (the “New Term of the Finnis Loan”); and

     
  (iv)

as a consequence of the completion by us of the Private Placement effective on December 20, 2013, the parties agreed to provide for a new Amended And Restated Promissory Note, dated for reference January 21, 2014 (the “Finnis Amended Promissory Note”), which bears interest at a rate of 12% per annum, and which amended and replaced, in their entirety, each of the Underlying Finnis Agreements.

Barker

  (i)

pursuant to an original Convertible Promissory Note, dated for reference effective on October 11, 2013 (the “Original Barker Promissory Note”), Mr. Barker therein granted us a loan in the principal amount of US$50,000.00 (the “Barker Loan”) bearing interest at a rate of 12% per annum, and the Original Barker Promissory Note provided that the Barker Loan and the interest thereunder must be repaid by us to Barker on December 11, 2013;

40



  (ii)

pursuant to a Loan Extension Agreement, dated for reference effective on December 18, 2013 (which together with the Original Barker Promissory Note being, collectively, the “Underlying Barker Agreements”), and as a then condition precedent to the completion by us of the Private Placement, the parties therein agreed to extend the term for repayment of the Barker Loan and the interest under the Original Barker Promissory Note on same basis as the above-referenced New Term of the Finnis Loan; and

     
  (iii)

as a consequence of the completion by us of the Private Placement effective on December 20, 2013, the parties agreed to provide for a new Amended And Restated Promissory Note, dated for reference January 21, 2014 (the “Barker Amended Promissory Note”), which bears interest at a rate of 12% per annum, and which amended and replaced, in their entirety, each of the Underlying Barker Agreements.

Edmunds

  (i)

pursuant to original Demand Convertible Promissory Notes, dated for reference effective on October 11, 2013 and December 4, 2013, respectively (collectively, the “Original Edmunds Promissory Notes”), Mr. Edmunds therein granted us loans in the aggregate principal amount of $523,521 (CAD$545,000) (collectively, the “Edmunds Loan”) bearing interest at a rate of 20% per annum, and the Original Edmunds Promissory Notes provided that the Edmunds Loan and the interest thereunder must be repaid by us to Edmunds on demand;

     
  (ii)

pursuant to a Loan Extension and Bonus Share Agreement, dated for reference effective on December 18, 2013 (the “Loan Extension”; which together with the Original Edmunds Promissory Notes being, collectively, the “Underlying Edmunds Agreements”), and as a then condition precedent to the completion by us of the Private Placement, the parties therein agreed to extend the term for repayment of the Edmunds Loan and the interest under the Original Edmunds Promissory Notes on same basis as the above-referenced New Term of the Finnis Loan and, as additional consideration thereof, subject to TSX Venture Exchange (the “TSX-V”) approval, allot and issue to Mr. Edmunds, as fully paid and non-assessable shares, an aggregate of up to 187,878 shares of our common stock (each a “Bonus Share”), representing a deemed value of 20% of the outstanding balance of the Loan and Interest based on an agreed value and deemed issuance price of $0.56 (CAD$0.60) per Bonus Share (the “Bonus Share Issuance”).

     
  (iii)

by letter dated January 20, 2014, the TSX-V approved the final Bonus Share Issuance by us to Mr. Edmunds of 181,666 shares of our common stock at a deemed value of $0.56 (CAD$0.60) per Bonus Share (the “TSX-V Approval”); and

     
  (iv)

as a consequence of the completion by us of the Private Placement, effective on December 20, 2013, and the receipt of TSX-V Approval to the above-referenced Bonus Share Issuance, the parties agreed to provide for a new Amended And Restated Promissory Note, dated for reference January 21, 2014 (the “Edmunds Amended Promissory Note”), which bears interest at a rate of 20% per annum, and which amended and replaced, in their entirety, each of the Underlying Edmunds Agreements.

41


We are committed to annual debt and debenture interest payments over the next five years as follows:

2014 $  1,865,960  
2015   1,862,582  
2016   1,768,770  
2017   1,417,695  
2018   13,202  
Total $  6,928,209  

Annual Leases

We are committed to current annual lease payments totaling $1,238,764 for all of our premises under lease. Approximate minimum lease payments over the next five years are as follows:

2014 $  294,544  
2015   209,539  
2016   209,539  
2017   209,539  
2018   209,539  
Total $  1,134,735  

OFF-BALANCE SHEET ARRANGEMENTS

As of the date of this prospectus, we do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest; or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

SUBSEQUENT EVENT

On March 20, 2014, we completed a private placement equity financing consisting of the sale of 2,515,000 units at $1.25 per unit for gross proceeds of $3,143,750. Each Unit is comprised of one common share and one-half of one transferable common share purchase warrant of the Company, and each whole warrant will entitle the holder thereof to purchase one additional common share of the Company at an exercise price of $1.75 per warrant share for a period of two years from closing, that is, until March 20, 2016. In addition, finders’ fees of an aggregate of 176,400 shares were issued to certain finders in conjunction with the closing of this private placement.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Not required because we are a smaller reporting company.

42



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as at December 28, 2013 and December 31, 2012.

Consolidated Statements of Operations for Years Ended December 28, 2013 and December 31, 2012 and for the Period from October 1, 2009 to December 28, 2013.

Consolidated Statements of Cash Flows for the Years Ended December 28, 2013 and December 31, 2012 and for the Period from October 1, 2009 to December 28, 2013.

Consolidated Statement of Stockholders’ Equity.

Notes to the Consolidated Financial Statements.

43


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of CRAiLAR Technologies Inc.

We have audited the accompanying consolidated balance sheets of CRAiLAR Technologies Inc. (the “Company”) (a development stage company) as of December 28, 2013 and December 31, 2012 and the related consolidated statements of operations and comprehensive loss, cash flows and stockholders’ equity (deficit) for the years ended December 28, 2013 and December 31, 2012, and the period from October 1, 2009 (date of re-entry into the development stage) to December 28, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits of the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. A financial statement audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. A financial statement audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 28, 2013 and December 31, 2012, and the results of its operations and its cash flows for the years ended December 28, 2013 and December 31, 2012, and the period from October 1, 2009 (date of re-entry into the development stage) to December 28, 2013 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred losses in developing its business, and further losses are anticipated in the future. The Company requires additional funds to meet its obligations and the costs of its operations and there is no assurance that additional financing can be raised when needed. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in this regard are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ DMCL LLP

Dale Matheson Carr-Hilton Labonte LLP
CHARTERED ACCOUNTANTS
Vancouver, Canada
March 26, 2014


CRAiLAR Technologies Inc.
(A Development Stage Company)
Consolidated Balance Sheets
(In US Dollars)

 

  December 28,     December 31,  

 

  2013     2012  

ASSETS

           

Current

           

   Cash and cash equivalents

$  1,193,365   $  2,877,210  

   Receivables

  223,105     72,292  

   Inventory (Note 4)

  945,040     2,904,652  

   Prepaid expenses and deposits

  290,872     106,785  

 

  2,652,382     5,960,939  

 

           

Deferred Debt Issuance Costs (Note 9)

  1,442,023     1,024,294  

Property and Equipment, net (Note 5)

  17,240,012     13,248,688  

Intangible Assets, net (Note 6)

  155,545     94,619  

 

$  21,489,962   $  20,328,540  

LIABILITIES

           

Current

           

   Accounts payable

$  2,377,901   $  1,406,418  

   Accrued liabilities

  2,342,153     1,480,624  

   Unearned revenue

  247,655     -  

   Notes payable (Note 8)

  476,614     -  

   Current portion of loans (Note 12)

  634,486     -  

   Derivative liabilities (Note 7)

  -     488,035  

 

  6,078,809     3,375,077  

Deferred Income Tax Liability (Note 14)

  199,131     -  

Loans Payable (Note 12)

  551,190     -  

Long Term Debt (Note 9)

  16,674,686     10,051,262  

 

  23,503,816     13,426,339  

 

           

STOCKHOLDERS’ EQUITY (DEFICIT)

           

Capital Stock (Note 10)

           

   Authorized: 100,000,000 common shares without par value

           

   Issued and outstanding : 47,806,031 common shares

  34,889,370     32,616,795  

   (December 31, 2012 - 44,239,198)

           

Subscription receivable

  -     (64,050 )

Additional Paid-in Capital

  9,934,322     7,061,406  

Accumulated Other Comprehensive Income (Loss)

  585,301     (459,036 )

Deficit

  (11,485,251 )   (11,485,251 )

Deficit accumulated in the development stage

  (35,937,596 )   (20,767,663 )

 

  (2,013,854 )   6,902,201  

 

$  21,489,962   $  20,328,540  

Commitments (Note 13) Subsequent Events (Note 16) The accompanying notes are an integral part of these consolidated financial statements.

45


CRAiLAR Technologies Inc.
(A Development Stage Company)
Consolidated Statements of Operations and Comprehensive Loss
(In US Dollars)

 

  Year ended     Year ended     Cumulative from  

 

  December 28,     December 31,     October 1, 2009 to  

 

  2013     2012     December 28, 2013  

Revenues

$  587,225   $  -   $  587,225  

 

                 

Cost of sales

                 

     Materials and direct production costs

  470,115     -     470,115  

     Facility commissioning costs

  1,896,822     -     1,896,822  

     Depreciation

  680,839     -     680,839  

     Impairment loss on inventory (Note 4)

  4,642,262     -     4,642,262  

 

  7,690,038     -     7,690,038  

 

                 

Gross loss

  (7,102,813 )   -     (7,102,813 )

 

                 

Expenses

                 

       Marketing and promotion

  663,438     672,305     1,594,475  

       Amortization and depreciation

  174,555     278,805     560,418  

       General and administrative

  5,681,467     6,608,524     20,936,061  

 

  6,519,459     7,559,634     23,090,953  

Loss before other items

  (13,622,272 )   (7,559,634 )   (30,193,766 )

 

                 

Other income (expense):

                 

       Research and development

  (355,099 )   (660,229 )   (2,595,116 )

       Gain on disposal of assets

  790     -     790  

       Interest (Notes 8, 9 and 12)

  (2,058,738 )   (99,655 )   (2,455,400 )

       Write off of equipment

  (13,368 )   (593,894 )   (704,516 )

       Impairment loss on inventory (Note 4)

  -     (303,663 )   (303,663 )

       Fair value adjustment derivative liabilities (Note 7)

  452,845     (98,285 )   (113,011 )

       Bargain purchase (Note 12)

  425,909     -     425,909  

       Other

  -     -     1,177  

 

  (1,547,661 )   (1,755,726 )   (5,743,830 )

Net loss

$  (15,169,933 ) $  (9,315,360 ) $  (35,937,596 )

Other comprehensive income (loss)

                 

Exchange differences on translating to presentation currency

  1,044,337     (35,685 )      

Comprehensive loss

$  (14,125,596 ) $  (9,351,045 )      

 

                 

Loss per share (basic and diluted)

$  (0.34 ) $  (0.22 )      

 

                 

Weighted average number of common shares outstanding

  44,508,011     43,009,226        

The accompanying notes are an integral part of these consolidated financial statements.

46



CRAiLAR Technologies Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(In US Dollars)

 

              Cumulative
from
 

 

              October 1,  

 

  Year ended     Year ended     2009 to  

 

  December     December 31,     December  

 

  28, 2013     2012     28, 2013  

 

                 

Cash flows used in operating activities

                 

   Net loss

$  (15,169,933 ) $  (9,315,360 ) $  (35,937,596 )

   Adjustments to reconcile net loss to net cash from

                 

   operating activities

                 

         Accretion expense

  127,525     -     127,525  

         Amortization and depreciation

  855,394     278,805     1,241,257  

         Amortization of deferred debt issuance costs

  346,789     90,220     437,009  

         Fair value adjustment of derivative liability

  (452,845 )   98,285     113,011  

         Gain on disposal of assets

  (790 )   -     (790 )

         Rent

  151,539     119,836     271,375  

         Stock-based compensation

  2,004,647     2,397,819     8,142,956  

         Write off of equipment

  13,368     593,894     704,516  

         Impairment of inventory

  4,642,262     303,663     4,945,925  

         Bargain purchase

  425,909     -     425,909  

         Gain on foreign exchange

  -     -     (71,990 )

 

                 

Changes in working capital assets and liabilities

                 

   Decrease (increase) in accounts receivable

  (86,763 )   78,622     (82,108 )

   Increase in inventory

  (2,682,650 )   (2,172,349 )   (5,890,965 )

   Increase in prepaid expenses

  (184,087 )   (59,538 )   (220,747 )

   Increase in accounts payable

  971,483     1,170,703     2,108,705  

   Increase in unearned revenue

  247,655     -     247,655  

   Increase in accrued liabilities

  709,990     521,769     1,454,498  

   Increase in loans payable

  -     -     56,945  

   Net cash used in operating activities

  (8,080,507 )   (5,893,631 )   (21,926,910 )

 

                 

Cash flows used in investing activities

                 

   Sale of equipment

  35,790     -     35,790  

   Acquisition of property and equipment

  (3,907,808 )   (10,419,945 )   (17,547,230 )

   Acquisition of intangible assets

  (89,306 )   (30,268 )   (194,175 )

   Net cash flows used in investing activities

  (3,961,324 )   (10,450,213 )   (17,705,615 )

47



 

              Cumulative  

 

              from  

 

              October 1,  

 

  Year ended     Year ended     2009 to  

 

  December     December 31,     December  

 

  28, 2013     2012     28, 2013  

 

                 

Cash flows from financing activities

                 

   Issuance of capital stock and warrants

  239,746     3,948,908     22,203,727  

   Net proceeds from promissory notes

  621,009     -     421,009  

   Proceeds from private placement

  1,879,400     -     1,879,400  

   Proceeds from convertible debenture

  8,307,249     10,051,262     18,358,511  

   Deferred issuance costs

  (886,733 )   (1,083,936 )   (1,970,669 )

   Related parties payments

  -     -     (1,025,960 )

   Net cash flows from financing activities

  10,160,671     12,916,234     39,866,018  

 

                 

Effect of exchange rate changes on cash and cash equivalents

  197,315     (35,685 )   (93,575 )

 

                 

Increase (decrease) in cash and cash equivalents

  (1,683,845 )   (3,463,295 )   139,918  

 

                 

Cash and cash equivalents, beginning

  2,877,210     6,340,505     1,053,447  

 

                 

Cash and cash equivalents, ending

$  1,193,365   $  2,877,210     1,193,365  

 

                 

SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH FINANCING AND INVESTING ACTIVITIES:

   Cash paid for interest

$  1,347,905   $  9,435   $    

   Cash paid for income taxes

$  -   $  -   $    

The accompanying notes are an integral part of these consolidated financial statements.

48


CRAiLAR Technologies Inc.
(A Development Stage Company)
Consolidated Statement of Stockholders’ Equity (Deficit)
December 28, 2013
(In US Dollars)

 

                        Accumulated                    

 

                        other                    

 

              Additional     Subscription      Comprehensive           Deficit        

 

  Common shares     paid-in     Receivable      income \           (Development        

 

  Shares     Amount     capital       (loss)     Deficit     stage)     Total  

 

                                               

 

                       

 

                                               

Balance, December 31, 2009

  33,354,215     9,422,178     2,011,047           (12,840 )   (11,485,251 )   (1,159,942 )   (1,224,808 )

 

                                               

Issuance of common stock on January 12, 2010 for exercise of options at $0.80 per share

3,700 2,960 - - - - 2,960

Issuance of common stock on January 27, 2010 for exercise of options at $0.80 per share

2,800 2,240 - - - - 2,240

Issuance of common stock on February 4, 2010 for exercise of options at $0.80 per share

6,300 5,040 - - - - 5,040

Issuance of common stock on February 23, 2010 for exercise of options at $0.80 per share

3,075 2,460 - - - - 2,460

Issuance of common stock on March 5, 2010 for exercise of options at $0.37 per share

25,000 9,250 - - - - 9,250

Issuance of common stock on March 11, 2010 for exercise of options at $0.50 per share

10,000 5,000 - - - - 5,000

Issuance of common stock on March 15, 2010 for exercise of options at $0.50 per share

10,000 5,000 - - - - 5,000

Issuance of common stock on March 23, 2010 for exercise of options at $0.50 per share

20,000 10,000 - - - - 10,000

Issuance of common stock on March 23, 2010 for exercise of options at $0.50 per share

10,000 5,000 - - - - 5,000

Issuance of common stock on March 23, 2010 for exercise of options at $0.50 per share

10,000 5,000 - - - - 5,000

Issuance of common stock on March 29, 2010 for exercise of options at $0.80 per share

1,750 1,400 - - - - 1,400

Issuance of common stock on April 13, 2010 for exercise of options at $0.80 per share

25,000 20,000 - - - - 20,000

Issuance of common stock on April 29, 2010 for exercise of options at $0.50 per share

48,000 24,000 - - - - 24,000

Issuance of common stock on May 5, 2010 for exercise of options at $0.50 per share

24,000 12,000 - - - - 12,000

Issuance of common stock on May 7, 2010 for exercise of options at $0.50 per share

68,000 34,000 - - - - 34,000

Issuance of common stock on May 13, 2010 for exercise of options at $0.50 per share

50,000 25,000 - - - - 25,000

Issuance of common stock on May14, 2010 for exercise of options at $0.50 per share

120,000 60,000 - - - - 60,000

Issuance of common stock on May 19, 2010 for cash - $1.00, net of share issue costs

1,424,739 1,362,587 - - - - 1,362,587

Issuance of common stock on June 15, 2010 for exercise of options at $0.80 per share

25,000 20,000 - - - - 20,000

Issuance of common stock on June 15, 2010 for exercise of options at $0.80 per share

12,500 10,000 - - - - 10,000

Issuance of common stock on July 19, 2010 for exercise of options at $0.80 per share

17,061 13,649 - - - - 13,649

Issuance of common stock on July 19, 2010 for exercise of options at $0.80 per share

17,062 13,650 - - - - 13,650

Issuance of common stock on August 4, 2010 for exercise of options at $0.80 per share

25,000 20,000 - - - - 20,000

 

                                               

Transfer addition paid-in capital for options exercised in the year

  -     171,289     (171,289 )         -     -     -     -  

 

                                               

Stock-based compensation

  -     -     930,644           -     -     -     930,644  

 

                                               

Set up derivative liabilities for warrants granted in the year

  -     (482,960 )   -           -     -     -     (482,960 )

 

                                               

Foreign currency translation

  -     -     -           (112,314 )   -     -     (112,314 )

 

                                               

Net loss

  -     -     -           -     -     (3,293,439 )   (3,293,439 )

 

                                               

Balance, December 31, 2010

  35,313,202     10,778,742     2,770,402           (125,154 )   (11,485,251 )   (4,453,381 )   (2,514,642 )

 

                                               

 

                                               

Issuance of common stock on January 11, 2011 for exercise of options at US$0.87per share

10,000 8,700 8,700

49



Issuance of common stock on January 18, 2011 for exercise of options at US$1.15 per share

60,000 69,000 69,000

Issuance of common stock on January 27, 2011 for exercise of options at US$1.15 per share

10,800 12,420 12,420

Issuance of common stock on January 27, 2011 for exercise of options at US$0.87 per share

1,775 1,544 1,544

Issuance of common stock on January 31, 2011 for exercise of options at US$1.15 per share

10,000 11,500 11,500

Issuance of common stock on February 1, 2011 for exercise of options at US$1.15 per share

10,000 11,500 11,500

Issuance of common stock on February 1, 2011 for exercise of options at US$1.15 per share

2,500 2,875 2,875

Issuance of common stock on February 1, 2011 for exercise of options at US$0.87 per share

2,500 2,175 2,175

Issuance of common stock on February 10, 2011 for exercise of options at US$0.87 per share

1,000 870 870

Issuance of common stock on February 17, 2011 for exercise of options at US$1.12 per share

25,000 28,000 28,000

Issuance of common stock on February 24, 2011 for exercise of warrants at US$1.25 per share

50,000 62,500 62,500

Issuance of common stock on February 25, 2011 for exercise of options at US $0.87 per share

5,750 5,003 5,003

Issuance of common stock on March 8, 2011 for exercise of options at US$0.87 per share

4,706 4,094 4,094

Issuance of common stock on March 10, 2011 for exercise of warrants at US$1.25 per share

25,000 31,250 31,250

Issuance of common stock on March 16, 2011 for exercise of options at US$0.96 per share

6,250 6,000 6,000

Issuance of common stock on March 16, 2011 for exercise of options at US$1.12 per share

18,750 21,000 21,000

Issuance of common stock on March 22, 2011 for exercise of options at US$1.12 per share

20,000 22,400 22,400

Issuance of common stock on March 25, 2011 for exercise of options at US$0.87 per share

4,000 3,480 3,480

Issuance of common stock on March 28, 2011 for exercise of warrants at CAD $1.20 per share

14,273 15,700 15,700

Issuance of common stock on March 29, 2011 for exercise of options at US$0.96 per share

320,000 307,200 307,200

Issuance of common stock on March 30, 2011 for exercise of options at US$0.96 per share

30,000 28,800 28,800

Issuance of common stock on April 7, 2011 for exercise of warrants at CAD $1.50 per share

2,000 2,760 2,760

Issuance of common stock on April 8, 2011 for exercise of options at US$0.87 per share

10,000 8,700 8,700

Issuance of common stock on April 8, 2011 for exercise of options at $1.12 per share

40,000 44,800 44,800

Issuance of common stock on April 14, 2011 for exercise of options at US$1.12 per share

30,000 33,600 33,600

Issuance of common stock on April 14, 2011 for exercise of options at US$1.02 per share

11,500 11,730 11,730

Issuance of common stock on April 19, 2011 for exercise of options at US$0.87 per share

5,000 4,350 4,350

Issuance of common stock on April 19, 2011 for exercise of warrants at CAD $1.95 per share

5,000 9,750 9,750

Issuance of common stock on April 21, 2011 for exercise of options at US$1.12 per share

36,000 40,320 40,320

Issuance of common stock on April 25, 2011 for exercise of warrants at CAD $1.50 per share

7,137 9,849 9,849

Issuance of common stock on April 25, 2011 for exercise of warrants at US$1.25 per share

25,000 31,250 31,250

Issuance of common stock on April 28, 2011 for exercise of warrants at CAD $1.95 per share

100,000 195,000 195,000

Issuance of common stock on April 28, 2011 for exercise of options at US$1.12 per share

50,000 56,000 56,000

Issuance of common stock on May 2, 2011 for exercise of options at US$1.12 per share

20,000 22,400 22,400

Issuance of common stock on May 2, 2011 for exercise of options at US$1.12 per share

20,000 22,400 22,400

Issuance of common stock on May 2, 2011 for exercise of warrants at CAD $1.95 per share

32,556 63,484 63,484

Issuance of common stock on May 4, 2011 for exercise of warrants at CAD $1.95 per share

18,708 36,480 36,480

Issuance of common stock on May 4, 2011 for exercise of warrants at US $1.25 per share

3,000 3,750 3,750

Issuance of common stock on May 4, 2011 for exercise of warrants at US $1.25 per share

50,000 62,500 62,500

Issuance of common stock on May 5, 2011 for exercise of warrants at CAD $1.95 per share

8,334 16,251 16,251

Issuance of common stock on May 5, 2011 for exercise of options at US$1.12 per share

1,000 1,120 1,120

Issuance of common stock on May 9, 2011 for exercise of warrants at US $1.25 per share

28,864 36,080 36,080

Issuance of common stock on May 10, 2011 for exercise of warrants at CAD $1.95 per share

5,000 9,750 9,750

Issuance of common stock on May 12, 2011 for exercise of warrants at CAD $1.50 per share

2,000 2,760 2,760

50



Issuance of common stock on May 12, 2011 for exercise of warrants at CAD $1.95 per share

  70,593     137,656                         137,656  

Issuance of common stock on May 17, 2011 for exercise of options at US$1.12 per share

  1,500     1,680                         1,680  

Issuance of common stock on May 17, 2011 for exercise of warrants at CAD $1.95 per share

  5,556     10,834                         10,834  

Issuance of common stock on May 19, 2011 for exercise of warrants at CAD $1.95 per share

  1,852     3,611                         3,611  

Issuance of common stock on May 19, 2011 for exercise of options at US$1.12 per share

  1,200     1,344                         1,344  

Issuance of common stock on May 24, 2011 for exercise of warrants at CAD $1.95 per share

  20,000     39,000                         39,000  

Issuance of common stock on May 26, 2011 for exercise of warrants at CAD $1.20 per share

  34,960     38,456                         38,456  

Issuance of common stock on May 26, 2011 for exercise of warrants at CAD 1.50 per share

  17,480     24,123                         24,123  

Issuance of common stock on June 1 , 2011 for exercise of warrants at CAD 1.95 per share

  114,654     223,575                         223,575  

Issuance of common stock on June 9, 2011 for exercise of options at US $1.02 per share

  9,000     9,180                         9,180  

Issuance of common stock on June 10, 2011 for exercise of warrants at CAD 1.95 per share

  40,741     79,445                         79,445  

Issuance of common stock on June 13, 2011 for exercise of warrants at CAD 1.95 per share

  30,558     59,588                         59,588  

Issuance of common stock on June 16, 2011 for exercise of warrants at CAD 1.95 per share

  26,760     52,182                         52,182  

Issuance of common stock on June 16, 2011 for exercise of warrants at CAD $1.50 per share

  5,000     6,900                         6,900  

Issuance of common stock on June 23, 2011 for exercise of warrants at CAD $1.50 per share

  5,834     8,050                         8,050  

Issuance of common stock on June 23, 2011 for exercise of warrants at CAD $1.95 per share

  16,852     32,861                         32,861  

Issuance of common stock on June 28, 2011 for exercise of warrants at CAD $1.95 per share

  116,680     227,529                         227,529  

Issuance of common stock on June 28, 2011 for exercise of warrants at CAD $1.95 per share

  56,704     110,573                         110,573  

Issuance of common stock on July 4, 2011 for exercise of warrants at CAD $1.95 per share

  58,175     113,442                         113,442  

Issuance of common stock on July 5, 2011 for exercise of options at US$1.12 per share

  6,500     7,280                         7,280  

Issuance of common stock on July 5, 2011 for exercise of options at US$1.02 per share

  10,000     10,200                         10,200  

Issuance of common stock on July 8, 2011 for cash $3.45 net of share issuance costs

  3,800,000     11,617,021     562,634                     12,179,655  

Issuance of common stock on July 20, 2011 for exercise of warrants at CAD$3.45 per unit

  212,500     729,622     18,386                     748,008  

Issuance of common stock on July 25, 2011 for exercise of options at US$1.12 per share

  1,500     1,680                         1,680  

Issuance of common stock on Sep 7, 2011 for exercise of options at US$1.12 per share

  2,500     2,800                         2,800  

Issuance of common stock on Oct 14, 2011 for exercise of options at US$1.45 per share

  500,000     725,000                         725,000  

Issuance of common stock on Oct 18, 2011 for exercise of options at US$0.87 per share

  20,000     17,400                         17,400  

Issuance of common stock on Nov 2, 2011 for exercise of options at US$1.02 per share

  2,000     2,040                         2,040  

Issuance of common stock on Nov 14, 2011 for exercise of options at US$1.12 per share

  3,750     4,200                         4,200  

Issuance of common stock on Nov 14, 2011 for exercise of options at US$0.87 per share

  6,250     5,437                         5,437  

Issuance of common stock on Nov 17, 2011 for exercise of options at US$1.12 per share

  2,000     2,240                         2,240  

Issuance of common stock on Nov 25, 2011 for exercise of options at US$0.95 per share

  25,000     23,750                         23,750  

Issuance of common stock on Dec 5, 2011 for exercise of options at US$0.87 per share

  10,000     8,700                         8,700  

Issuance of common stock on Dec 15, 2011 for exercise of options at US$0.87 per share

  7,500     6,525                         6,525  

Issuance of common stock on Dec 19, 2011 for exercise of options at US$1.12 per share

  1,400     1,568                         1,568  

 

                                               

Transfer addition paid-in capital for options exercised in the year

  -     770,452     (770,452 )         -     -     -     -  

 

                                               

Stock-based compensation

  -     -     2,561,066           -     -     -     2,561,066  

 

                                               

Transfer derivative liability for warrants exercised in the year

        153,063                                   153,063  

 

                                               

Proceeds from issue of warrants

              32,798                             32,798  

 

                                               

Foreign currency translation

  -     -     -           (298,197 )   -     -     (298,197 )

 

                                               

Net loss

  -     -     -           -     -     (6,998,922 )   (6,998,922 )

 

                                               

Balance, December 31, 2011

  41,701,604     27,428,844     5,174,834           (423,351 )   (11,485,251 )   (11,452,303 )   9,242,773  

 

                                               

 

                                               

Issuance of common stock on January 16, 2012 for exercise of options at US$1.12per share

  60,000     67,200                         67,200  

51



Issuance of common stock on January 23, 2012 for exercise of options at US$1.12per share

  196,900     220,528                           220,528  

Issuance of common stock on January 24, 2012 for exercise of options at US$0.87per share

  20,000     17,400                           17,400  

Issuance of common stock on February 7, 2012 for exercise of options at US$0.87per share

  1,100     957                           957  

Issuance of common stock on February 16, 2012 for exercise of options at CAD$1.05per share

  2,100     2,205                           2,205  

Issuance of common stock on February 20, 2012 for exercise of options at US$0.87per share

  10,000     8,700                           8,700  

Issuance of common stock on February 24, 2012 for exercise of options at US$0.87per share

  100,000     101,000                           101,000  

Issuance of common stock on February 24, 2012 for exercise of options at US$0.87per share

  10,000     8,700                           8,700  

Issuance of common stock on February 28, 2012 for exercise of options at US$0.87per share

  5,000     4,350                           4,350  

Issuance of common stock on March 2, 2012 for exercise of warrants at CAD$1.50per share

  25,000     37,500                           37,500  

Issuance of common stock on March 2, 2012 for exercise of options at US$0.95per share

  25,000     23,750                           23,750  

Issuance of common stock on March 6, 2012 for exercise of options at US$0.87per share

  5,000     4,350                           4,350  

Issuance of common stock on March 8, 2012 for exercise of options at CAD$1.05per share

  600     630                           630  

Issuance of common stock on March 15, 2012 for exercise of warrants at CAD$1.25per share

  250,000     291,600                           291,600  

Issuance of common stock on March 15, 2012 for exercise of options at CAD$1.05per share

  5,500     5,775                           5,775  

Issuance of common stock on March 15, 2012 for exercise of options at CAD$0.87per share

  5,000     4,350                           4,350  

Issuance of common stock on March 23, 2012 for exercise of options at CAD$0.87per share

  5,000     4,350                           4,350  

Issuance of common stock on March 29, 2012 for exercise of warrants at CAD$1.50 per share

  15,000     22,500                           22,500  

Issuance of common stock on April 3, 2012 for exercise of options at US$0.96per share

  43,750     42,000                           42,000  

Issuance of common stock on April 3, 2012 for exercise of options at CAD$2.74per share

  14,585     40,770                           40,770  

Issuance of common stock on April 3, 2012 for exercise of warrants at CAD$1.50 per share

  20,000     30,000                           30,000  

Issuance of common stock on April 4, 2012 for exercise of options at US$0.87per share

  9,994     8,695                           8,695  

Issuance of common stock on April 12, 2012 for exercise of options at CAD$1.05per share

  1,000     1,050                           1,050  

Issuance of common stock on April 13, 2012 for exercise of warrants at CAD$1.25 per share

  3,000     3,750                           3,750  

Issuance of common stock on May 15, 2012 for exercise of warrants at CAD$1.50 per share

  5,000     7,500                           7,500  

Issuance of common stock on May 22, 2012 for exercise of warrants at CAD$1.50 per share

  10,000     15,000                           15,000  

Issuance of common stock on May 22, 2012 for exercise of warrants at CAD$1.25 per share

  2,000     2,500                           2,500  

Issuance of common stock on June 4, 2012 for exercise of warrants at CAD$1.50 per share

  1,500     2,250                           2,250  

Issuance of common stock on June 11, 2012 for exercise of options at CAD$0.87per share

  1,250     1,088                           1,088  

Issuance of common stock on June 11, 2012 for exercise of options at US$1.03per share

  10,000     10,300                           10,300  

Issuance of common stock on July 4, 2012 for exercise of options at US$1.17per share

  7,500     8,775                           8,775  

Issuance of common stock on July 9, 2012 for exercise of options at US$1.01per share

  62,500     63,125                           63,125  

Issuance of common stock on July 13, 2012 for exercise of options at US$1.01per share

  62,500     63,125                           63,125  

Issuance of common stock on July 19, 2012 for exercise of warrants at CAD$1.50 per share

  41,667     62,501                           62,501  

Issuance of common stock on August 30, 2012 for exercise of warrants at CAD$1.50 per share

  2,500     3,750                           3,750  

Issuance of common stock on August 30, 2012 for exercise of options at CAD$0.87per share

  9,450     8,222                           8,222  

Issuance of common stock on September 6, 2012 for exercise of options at US$0.96per share

  20,000     19,200                           19,200  

Issuance of common stock on September 6, 2012 for exercise of options at US$1.17per share

  10,000     11,700                           11,700  

Issuance of common stock on September 12, 2012 for exercise of warrants at CAD$1.50 per share

  2,500     3,750                           3,750  

Issuance of common stock on September 12, 2012 for exercise of warrants at US$1.38 per share

  2,000     2,760                           2,760  

Issuance of common stock on September 13, 2012 for cash - USD$2.21, net of share issue costs

  418,429     889,383                           889,383  

Issuance of common stock on September 17, 2012 for exercise of warrants at US$1.38 per share

  15,000     20,700                           20,700  

Issuance of common stock on September 17, 2012 for exercise of warrants at CAD$1.30 per share

  21,840     28,392                           28,392  

Issuance of common stock on September 17, 2012 for exercise of warrants at CAD$1.50 per share

  2,084     3,126                           3,126  

52



Issuance of common stock on September 19, 2012 for exercise of warrants at US$1.38 per share

  150,000     207,000                         207,000  

Issuance of common stock on September 21, 2012 for exercise of warrants at US$1.38 per share

  50,000     69,000                         69,000  

Issuance of common stock on September 21, 2012 for exercise of warrants at CAD$1.50 per share

  29,500     44,250                         44,250  

Issuance of common stock on September 24, 2012 for cash - USD$2.21, net of share issue costs

  450,758     958,100                         958,100  

Issuance of common stock on October 10, 2012 for cash - USD$2.21, net of share issue costs

  198,587     438,877         (64,050 )               374,827  

Issuance of common stock on October 17, 2012 for exercise of options at US$1.17per share

  7,500     8,775                         8,775  

Issuance of common stock on November 2, 2012 for exercise of options at US$0.96per share

  100,000     96,000                         96,000  

Issuance of common stock on November 20, 2012 for exercise of options at US$1.17per share

  10,000     11,700                         11,700  

 

                                               

Set up derivative liabilities for warrants granted in the year

        (280,496 )                                 (280,496 )

 

                                               

Transfer addition paid-in capital for options exercised in the year

        511,247     (511,247 )                           -  

 

                                               

Transfer derivative liability for warrants exercised in the year

        873,728                                   873,728  

 

                                               

Transfer derivative liability for warrants expired in the year

        70,514                                   70,514  

 

                                               

Stock based compensation

              2,397,819                             2,397,819  

 

                                               

Foreign currency translation

                          (35,685 )               (35,685 )

 

                                               

Net loss

                                      (9,315,360 )   (9,315,360 )

 

                                               

Balance, December 31, 2012

  44,239,198     32,616,795     7,061,406     (64,050 )   (459,036 )   (11,485,251 )   (20,767,663 )   6,902,201  

 

                                               

 

                                               

Issuance of common stock on January 9, 2013 for exercise of options at US$1.17per share

  5,000     5,850                         5,850  

Issuance of common stock on January 22, 2013 for exercise of options at US$1.02per share

  26,000     26,520                         26,520  

Issuance of common stock on February 5, 2013 for exercise of options at US$1.17per share

  5,000     5,850                         5,850  

Issuance of common stock on February 13, 2013 for exercise of options at CAD$0.95 per share

  25,000     23,750                         23,750  

Issuance of common stock on March 1, 2013 for exercise of options at CAD$0.96 per share

  120,000     116,951                         116,951  

Issuance of common stock on March 8, 2013 for exercise of options at CAD$0.96 per share

  10,000     9,600                         9,600  

Issuance of common stock on March 23, 2013 for exercise of options at CAD$0.87 per share

  5,000     4,350                         4,350  

 

                                               

Transfer addition paid-in capital for options exercised in the year

  -     118,239     (118,239 )                           -  

Issuance of common stock on April 16, 2013 for exercise of

                                               

warrants

  37,500     46,875                                   46,875  

 

                                               

Debenture warrants

              754,829                             754,829  

 

                                               

Adjustment to warrant conversion price

              79,931                             79,931  

 

                                               

Issuance costs of debenture warrants

              (102,670 )                           (102,670 )

Issuance costs of long term debt and debenture warrants

                                               

– broker’s warrants

              66,278                             66,278  

 

                                               

Transfer from derivative liability warrants exercise

        35,190                                   35,190  

 

                                               

Private placement

  3,333,333     1,879,400                                   1,879,400  

 

                                               

Stock based compensation

              2,004,647                             2,004,647  

 

                                               

Beneficial conversion feature on notes payable

              188,140                             188,140  

 

                                               

Write off of subscription receivable

                    64,050                       64,050  

 

                                               

Foreign currency translation

                          1,044,337                 1,044,337  

 

                                               

Net loss

                                      (15,169,933 )   (15,169,933 )

 

                                               

Balance, December 28, 2013

  47,806,031     34,889,370     9,934,322     -     585,301     (11,485,251 )   (35,937,596 )   (2,013,854 )

The accompanying notes are an integral part of these consolidated financial statements.

53


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

1.

Nature of Operations and Basis of Presentation

CRAiLAR Technologies Inc. (the “Company”) was incorporated in the Province of British Columbia, Canada, on October 6, 1998, and is in the business of technological development and of natural sustainable fibers. Effective October 1, 2009, the Company decided to exit the apparel business, which operated under the brand “HTnaturals”. As a result, the Company re-entered the development stage and has focused on its CRAiLAR® technology.

The Company’s shares of common stock trade under the symbol “CL”, on the TSX Venture Exchange (“TSX-V”) and under the symbol “CRLRF” on the OTCQB.

Going concern

The Company’s consolidated financial statements are prepared using generally accepted accounting principles (“GAAP”) in the United States of America applicable to a going concern, which contemplates the realization of assets and payment of liabilities in the normal course of business. The Company has incurred losses since inception of $47,422,847 and further losses are anticipated in the development of its business. There can be no assurance that the Company will be able to achieve or maintain profitability. Accordingly, these factors raise doubt as to the Company’s ability to continue as a going concern. During 2013 the Company raised $2,119,146 from equity funding for capacity expansion and working capital requirements. The Company plans to raise additional financing in 2014 through equity placements for future capacity expansion. However, there can be no assurance that capital will be available or, if the capital is available, that it will be on terms acceptable to the Company.

2.

Significant Accounting Policies


a)

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its five wholly-owned subsidiaries as of December 28, 2013: Crailar Inc., a Nevada incorporated company; Hemptown USA, Inc., a Nevada incorporated company; 0697872 B.C. Ltd., a British Columbia incorporated company; Crailar Fiber Technologies Inc., a British Columbia incorporated company, and HTNaturals Apparel Corp, a British Columbia incorporated company. All inter-company transactions and account balances have been eliminated upon consolidation.

b)

Cash and Cash Equivalents

Cash equivalents consist of cash on deposit and term deposits with original maturities of one year or less at the time of issuance. As at December 28, 2013, the Company held $15,000 (2012 - $20,000) in cash equivalents.

c)

Inventory

The raw flax fiber feedstock, decorticated fiber and Crailar fiber is valued at the lower of cost and market. All direct costs are capitalized to raw flax fiber inventory, decorticated fiber inventory and Crailar fiber.

Seed inventory was valued at the lower of average cost and market. Cost comprised the cost to purchase seed and/or growing cost plus any related shipping costs.

54


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

Other inventories, which consists of production consumables, are recorded at the lower of cost and replacement cost which approximates net realizable value.

d)

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant areas requiring management’s estimates and assumptions are inventory costing and net realizable value, the expected future use and other impairment considerations of property and equipment, fair value of warrants, options, derivative liabilities, provision for income taxes, depreciation and financial instruments.

e)

Property and Equipment

Property and equipment are stated at cost and are depreciated as follows:

  Automobiles 20% declining balance
  Computer equipment 30% declining balance
  Computer software 100% declining balance
  Equipment 30% declining balance
  Furniture and fixtures 20% declining balance
  Production Equipment 30% declining balance
  Leasehold improvements Term of lease
  Website development 100% declining balance

Depreciation is claimed at one-half of the regular rate in the year of addition, no depreciation is claimed in the year of disposal.

f)

Intangible Assets

Intangible assets are stated at cost and are amortized as follows:

  Trademarks 5 year straight - line
  License Fee 10 year straight - line
  Patent 10 year straight – line

g)

Revenue Recognition

Revenue is recognized when there is persuasive evidence of a sale arrangement, delivery to the customer has occurred, the fee is fixed and determinable, and collectability is considered probable.

h)

Foreign Currency Translation

The Company’s functional currency is Canadian dollars. The Company translates its financial statements to U.S. dollars using the following method:

55


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

All assets and liabilities are translated into U.S. dollars at the exchange rate in effect at the year-end. Revenues and expenses are translated throughout the year at the weighted average exchange rate. Exchange gains or losses from such translations are included in accumulated comprehensive income (loss), as a separate component of stockholders’ equity.

Foreign currency transaction gains and losses are included in the statement of operations and comprehensive loss.

i)                        Income Taxes

The Company utilizes the liability method of accounting for deferred income taxes. Under the liability method, deferred income taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is recorded when it is more likely than not that potential the future tax assets will not be realized.

j)                        Comprehensive Loss

Comprehensive loss is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners. Other comprehensive income (loss) comprises items of income and expenses that are not recognized in net loss as required or permitted by GAAP.

k)                        Stock-based Compensation

The Company accounts for stock-based payment transactions in which an enterprise receives services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Company uses the Black-Scholes option-pricing model to establish the fair-value of stock-based awards.

l)                        Earnings (Loss) Per Share

Basic and diluted earnings (loss) per share are computed using the weighted average number of shares outstanding during the year. Common stock equivalents from stock options and warrants were excluded from the calculation of net loss per share for the years ended December 28, 2013 and December 31, 2012 as their effect is anti-dilutive.

m)                        Long-Lived Asset Impairment

Long-lived assets of the Company are reviewed when changes in circumstances suggest their carrying value has become impaired. Management considers assets to be impaired if the carrying value exceeds the estimated discounted future projected cash flows to result from the use of the asset and its eventual disposition. If impairment is deemed to exist, the assets will be written down to fair value. Fair value is generally determined using a hierarchy of fair value methodologies under GAAP, primarily based on a discounted cash flow analysis.

56


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

 n)                        Risk Management

Currency risk. The Company is exposed to currency risk to the extent that certain inventory and equipment is purchased from Europe. The purchase price for such inventory and equipment is generally in Euros. The Company does not currently hedge its foreign currency exposure, and accordingly, is at risk for foreign currency exchange fluctuations. The Company and its subsidiaries do not have significant transactions or hold significant cash denominated in currencies other than their functional currencies.

Credit risk. The risk in cash accounts is managed through the use of a major financial institution, which has high credit quality as determined by the rating agencies. As at December 28, 2013, $158,000 is due from a single customer and therefore 61% of receivables are exposed to concentration of credit risk.

Interest rate risk. Approximately $1,026,000 of the Company’s debt bears interest at fluctuating rates. Consequentially the Company is exposed to interest rate fluctuations. The Company does not currently hedge its exposure to interest rate risk.

Commodity price risk. Commodity price risk is the risk that the fair value of future cash flows will fluctuate because of changes in the market prices of commodities. The Company is exposed to commodity price risk as it purchases fiber feedstock from the flax producers in Europe. The Company purchases the short fiber waste product called “tow” and the price fluctuates based on supply. The Company has relationships with several short fiber producers and anticipates little issue in obtaining sufficient fiber for its needs. The Company does not currently enter into futures contracts or otherwise hedge its exposure to commodity price risk.

o)                        Research and Development

Research and development costs are charged to operations as incurred.

p)                        Recent Pronouncements There are no recent pronouncements that are applicable to the Company.

3.

Financial Instruments

As at December 28, 2013, the Company concluded that the carrying amount of cash and cash equivalents, receivables, accounts payable, and notes payable to approximate fair value because of the short maturity of these financial instruments. The Company has concluded that the carrying amount of loans payable and long-term debt approximate fair value as they bear interest at market rates. Derivative liabilities are recorded at fair value.

57


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

4.

Inventory


    December 28, 2013     December 31, 2012  

CRAiLAR fiber

$  186,464   $  -  

Decorticated fiber

  252,263     51,504  

Flax seed

  -     1,172,155  

Raw flax fiber feedstock

  369,590     1,680,993  

Other

  136,723     -  
  $  945,040   $  2,904,652  

The Company wrote down inventory by the following amounts to reduce the book value to net realizable value:

    December 28, 2013     December 31, 2012  

CRAiLAR fiber

$  274,297   $  -  

Decorticated fiber

  196,861     -  

Flax seed

  1,891,217     303,663  

Raw flax fiber feedstock

  2,279,887     -  
  $  4,642,262   $  303,663  

5.

Property and Equipment


 

              Net Book Value     Net Book Value  

 

        Accumulated     December 28,     December 31,  

 

  Cost     Depreciation     2013     2012  

Automobiles

$  58,743   $  8,876   $  49,867   $  57,559  

Computer equipment

  126,192     69,019     57,180     48,398  

Equipment

  754,902     98,556     656,346     359,445  

Equipment held for sale

  70,000     -     70,000     105,045  

Furniture and fixtures

  62,339     36,918     25,421     29,980  

Leasehold improvements

  6,327,333     615,459     5,498,633     4,979,548  

Production equipment

  5,095,961     277,681     4,818,280     -  

Production equipment in construction

  6,060,849     -     6,060,849     7,606,837  

Website development costs

  121,330     117,365     3,436     61,876  

 

$  18,464,408   $  1,224,396   $  17,240,012   $  13,248,688  

Depreciation of production equipment and leasehold improvements commenced on January 1, 2013 as the Company’s manufacturing facility started production. In August, the company temporarily ceased production and therefore ceased amortization expense on the assets that were not in use.

58


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

6.

Intangible Assets


 

        Accumulated     Net Book Value     Net Book Value  

 

  Cost     Amortization     December 28, 2013     December 31, 2012  

Patents

$  158,367   $  72,885   $  85,482   $  77,961  

Trademarks

  121,968     93,903     28,065     7,639  

License fee

  62,710     20,712     41,998     9,019  

 

$  343,045   $  187,500   $  155,545   $  94,619  

7.

Derivative liability

Derivate liability consists of warrants that were issued in private placements which have exercise prices denominated in a currency other than the Canadian dollar, the Company’s functional currency. This derivative liability is a non-cash liability which the Company is not required to expend any cash to settle. The fair value of the warrants are as follows:

 

        December 28,     December 31,    

 

  Exercise price     2013     2012  

275,506 warrants expired on May 19, 2013

  US$ 1.25   $  -   $   257,564  

533,887 warrants expiring on Oct 14, 2014

  US$ 3.45     -     230,471  

 

      $  -   $ 488,035  

The fair value of these warrants was determined using the Black-Scholes option pricing model, using the following assumptions:

  December 28, 2013 December 31, 2012
Volatility 60% 57% - 83%
Dividend yield - -
Risk-free interest rate 0.09% 0.14 – 0.72%
Expected life 0.62 years 0.38 – 1.18 yrs.

During the year ended December 28, 2013, 37,500 warrants were exercised and the Company recognized $35,190 of the derivative liability in share capital.

8.

Notes Payable


    December 28, 2013  
Principal $ 669,335  
Interest   23,781  
Repayment   (47,885 )
Beneficial conversion feature   (188,140 )
Accretion expense   33,495  
Effect of foreign exchange   (13,872 )
  $  476,614  

On October 11, 2013, the Company issued a demand convertible promissory note in favor of Mr. Robert Edmunds, one of its directors, in the principal amount of $467,369 (CAD$500,000). On December 4, 2013,

59


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

the Company issued an additional demand convertible promissory note in favor of Mr. Robert Edmunds, pursuant to a loan from Mr. Robert Edmunds to the Company in the principal amount of $42,255 (CAD$45,000). The promissory notes bear interest on the principle amount at a rate of 20% per annum, is unsecured and payable in full on repayment of the principal amount. The convertible promissory note included 181,666 bonus common shares of the Company, subject to TSX-V approval which was received subsequent to year end (Note 16). At December 28, 2013 the balance outstanding, including accrued interest of $20,896 (CAD$22,667), was $532,576 (CAD$567,267).

On October 11, 2013, the Company issued a convertible promissory note in favor of Mr. Jason Finnis, one of its directors, in the principal amount of $96,180 (CAD$100,000). The promissory notes bear interest on the principal amount at the rate of 12% per annum, is unsecured and payable in full on repayment of the principle amount. On November 7, 2013, the company repaid Mr. Jason Finnis $48,326 (CAD$50,000) of principal including interest of $441 (CAD$460). At December 28, 2013, the balance outstanding, include accrued interest of $1,210 (CAD$1,290), was $48,132 (CAD$51,290).

On October 11, 2013, the Company issued a convertible promissory note in favor of Mr. Kenneth Barker, one of its directors, in the principal amount of $50,000. The promissory note bears interest on the principle amount at the rate of 12% per annum, is unsecured and payable in full on repayment of the principal amount. At December 28, 2013, the outstanding balance, including accrued interest of $1,234, was $51,234.

The promissory notes issued during the year ended December 28, 2013 contain conversion features. Each lender has the right to convert any portion of the outstanding principal and interest payables for units at an exercise price of $0.60 per unit. Each unit is comprised of one common share and one common share purchase warrant of the Company. Each warrant entitles the holder to acquire one common share of the Company at an exercise price of CAD$0.70 per common share for a term of five years. The Company recognized a beneficial conversion feature of $188,140 (CAD$200,000) based on the excess of the conversion price over the commitment date fair value of the stock. The Company incurred an accretion expense of $33,495 (CAD$34,483) during the year reducing the value of the beneficial conversion feature to a balance of $154,645 (CAD$165,517).

The promissory notes issued during the year ended December 28, 2013 mature on the earliest of December 20, 2014 or at such time the Company completes a public offering of registered securities by way of registration statement on Form S-1 of not less than CAD$3,000,000 in gross proceeds.

9.

Long term debt

Long term debt:

    December 28, 2013     December 31, 2012  

Balance, beginning

$  10,051,262   $  -  

Convertible debenture issued

  8,307,249     10,051,262  

Discount on debentures

  (754,829 )   -  

Amendment of debentures – conversion price

  (79,931 )   -  

Accretion expense

  94,030     -  
Effect of foreign exchange   (943,095 )   -  

Balance, ending

$  16,674,686   $  10,051,262  

60


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

Deferred debt issuance costs:

    December 28, 2013     December 31, 2012  

Balance, beginning

$  1,024,294   $  -  

Issuance costs – cash

  886,733     1,083,936  

Issuance costs – warrants

  66,278     -  

Issuance costs allocated to additional paid in capital

  (102,670 )   -  

Amortization of issuance costs

  (346,789 )   (59,642 )
Effect of foreign exchange   (85,823 )   -  

 

$  1,442,023   $  1,024,294  

On September 20, 2012, the Company completed the offering of $10,051,262 (CAD$10,000,000) convertible debentures (the “2012 Notes”). The 2012 Notes mature on September 20, 2017. The 2012 Notes bear interest at a rate of 10% per year, payable semi-annually on March 31 and September 30, starting March 31, 2013. As at December 28, 2013, accrued interest of $264,143 (2012 - $277,513) (CAD$281,471) (2012 – CAD$277,397) was included in accrued liabilities. During the year ended December 31, 2012, the Company paid a total of $1,083,936 (CAD$1,019,069) in cash issuance costs which have been recorded as deferred debt issuance costs.

On February 26, 2013, the Company completed an offering of $4,943,643 (CAD$5,000,000) convertible debentures (the “2013 Notes”). The 2013 Notes mature on September 30, 2017. The 2013 Notes bear interest at a rate of 10% per year, payable semi-annually on March 31 and September 30, starting September 30, 2013. As at December 28, 2013, accrued interest of $114,412 (CAD$121,918) was included in accrued liabilities. The Company paid a total of $427,049 (CAD$487,830) in cash issuance costs which have been recorded as deferred debt issuance costs.

Holders of the 2012 Notes and 2013 Notes have the option to convert at a price of $2.85 (CAD$2.90) per common shares in the capital of the Company at any time prior to the maturity date. The Company may redeem the 2012 Notes and the 2013 Notes after September 30, 2015 provided that the market price at the time of the redemption notice is not less than 125% of the conversion price. The conversion rate is subject to standard anti-dilution provisions.

The 2012 Notes and 2013 Notes are secured by a Guaranty and Security Agreement signed with the Company’s wholly-owned subsidiary, Crailar Inc. (“CI”), a Nevada incorporated company. CI provides a security interest over its assets, having an aggregate acquisition cost of no less than $5,500,000, as security for its guarantee obligation which shall rank in priority to all other indebtedness of CI.

The 2012 Notes and 2013 Notes do not contain a beneficial conversion feature, as the fair value of the Company’s common stock on the date of issuance was less than the conversion price. All proceeds from the notes were recorded as a debt instrument.

On July 26, 2013, the Company closed a convertible debenture offering for gross proceeds of $3,363,606 (CAD$3,535,000) (the “2013A Notes”). The 2013A Notes will mature on July 26, 2016 and will accrue interest at a rate of 10% per year, payable semi-annually in arrears on March 31 and September 30 commencing September 30, 2013. As at December 28, 2013, accrued interest of $80,893 (CAD$86,200) was included in accrued liabilities. At the holder’s option, the debentures may be converted into common shares in the capital of the Company at any time up to the earlier of the maturity date and the business day immediately preceding the date specified by the Company for redemption of the debentures. The conversion price, will be CAD$1.25 per share.

61


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

In addition, the Company issued 800 transferable common share purchase warrants (each, a “Warrant”) for each CAD$1,000 of principal amount, resulting in an aggregate of 2,828,000 Warrants, with each Warrant entitling the holder thereof to purchase one additional Share (each, a “Warrant Share”) at an exercise price of $2.00 per Warrant Share until July 26, 2016. The Company determined the fair value of the warrants to be $974,387 (CAD$1,003,910) using the Black-Scholes Option Pricing Model with the following assumptions: Expected dividend yield – 0; expected stock price volatility – 56%; risk-free interest rate – 0.59%; expected life – 2.83 years.

The proceeds were allocated to the 2013A Notes and the Warrants based on their relative fair values and accordingly, $2,295,309 (CAD$2,757,300) was allocated to the 2103A Notes and $754,829 (CAD$777,700) was allocated to the Warrants and recorded as a reduction in the 2013A Notes and an increase in additional paid-in capital.

The Company incurred a total of $440,139 in issuance and commission costs relating to the 2013A Notes. This included $373,861 in cash issuance costs and the fair value of 192,360 broker’s warrants of $66,278. Each broker’s warrant entitles the holder to purchase one common share for $1.25 per share for three years from the date of issuance. The fair value of the brokers’ warrants was calculated using the Black-Scholes Option Pricing Model with the following assumptions: expected dividend yield – 0; expected stock price volatility – 56%; risk-free interest rate – 0.59%; expected life – 2.83 years. The allocation of the 2013A Note issuance costs were based on the relative fair value of the 2013A Notes and the Warrants accordingly, $337,469 was allocated to deferred debt issuance costs and $102,670 was allocated to additional paid-in capital.

The 2013A Notes included a continuing security interest in the Company’s assets. On December 17, 2013 the Guaranty and Security Agreement was amended to only include certain specific assets held by the Company which had an acquisition cost of $3,922,240. As consideration for the modification, the conversion price of the debentures was amended to $1.25 per warrant. The Company determined the fair value of the additional debt discount to be $79,931 using the Black-Scholes Option Pricing Model with the following assumptions: Expected dividend yield – 0; Expected stock price volatility – 56%; Risk-free interest rate – 0.59%; Expected life – 2.42 years.

During the year ending December 28, 2013 the Company recorded amortization of the 2013A Notes debt discount in the amount of $94,030 which was included in interest expense.

During the year ended December 28, 2013, the Company recorded $346,789 (2012: $59,642) in interest expense for the amortization of deferred issuance costs.

10.

Common Stock

During the year ended December 28, 2013, the Company issued shares of common stock as follows:

  a)

The Company closed a private placement with a closing date of December 20, 2013 for 3,333,333 units for aggregate gross proceeds of $1,879,400 (CAD$2,000,000). Each unit is comprised of one common share and one common share purchase warrant of the Company. Each warrant entitles the holder thereof to acquire one common share of the Company at an exercise price of CAD$0.70 per common share for a term of five years. The Company used the residual method to value the warrants and determined the value to be nominal.

62


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

 

b)

The Company issued a total of 196,000 common shares pursuant to the exercise of employee and consultants’ options between the exercise prices of $0.87 and $1.17 per share for gross proceeds of $192,871. Of this amount, a total of 166,000 options with total proceed of $163,020 were exercised by the directors and officers of the Company.

     
 

c)

The Company issued 37,500 common shares pursuant to the exercise of warrants with an exercise price of $1.25 per share for proceeds of $46,875.

     
  During the year ended December 31, 2012, the Company issued shares of common stock as follows:
     
 

a)

The Company closed three tranches of a private placement with the last closing on October 10, 2012 for 1,067,774 units for aggregate gross proceeds of $2,359,780. Proceeds of $64,050 were included in subscription receivable as at December 31, 2012. This was subsequently written off during the year ended December 28, 2013. Each unit is comprised of one common share and one half of one common share purchase warrant of the Company. Each warrant entitles the holder thereof to acquire one common share of the Company at an exercise price of $3.45 per common share for a term of two years. The fair value of the warrants was estimated to be $280,496 using the Black Scholes option pricing model, a 2 year term, an expected volatility of 66% to 67% and a risk free interest rate of 0.23% to 25%. The fair value of the warrants was recorded in the derivative liability as the warrants have an exercise price in a currency other than the Company’s functional currency.

     
 

b)

The Company issued 821,299 common shares pursuant to the exercise of employee and consultants’ options between $0.87 and $2.77 per share for proceeds of $868,768, of this a total of 565,635 options for total proceeds of $608,376 were exercised by the directors and officers of the Company.

     
 

c)

The Company issued 648,591 common shares pursuant to the exercise of warrants with an exercise price between $1.20 and $1.38 per share for proceeds of $859,285.

Warrants

Stock purchase warrants outstanding at December 28, 2013 are summarized as follows:

      Weighted Average
  Remaining
  Range of Exercise Prices   Number of Warrants Contractual Life
  $0.70 - $3.45 6,887,580 3.60 years

63


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

A summary of the Company’s stock purchase warrants are as follows:

          Weighted-  
          Average  
    Shares     Exercise Price  
Warrants outstanding at December 31, 2011   3,294,229     3.57  
Warrants granted during the year   541,167     3.42  
Warrants expired during the year   (29,957 )   1.38  
Warrants exercised during the year   (648,591 )   1.32  
Warrants outstanding at December 31, 2012   3,156,848     4.02  
Warrants granted during the year   6,353,963     0.96  
Warrants expired during the year   (2,585,731 )   4.17  
Warrants exercised during the year   (37,500 )   1.25  
Warrants outstanding at December 28, 2013   6,887,580     1.15  

11.              Stock Options

Amended 2011 Fixed Share Option Plan

On June 26, 2012, the board amended the Company’s 2011 Fixed Share Option Plan to increase the number of common shares reserved for the issuance under the Company’s 2011 Fixed Share Option Plan from 8,224,240 to 8,512,976 thereunder. On September 9, 2013, the board further amended the Company’s 2011 Fixed Share Option Plan to increase the number of common shares reserved for the issuance under the Company’s 2011 Fixed Share Option Plan from 8,512,976 to 8,894,539 thereunder and to remove the vesting schedule attached as Schedule “B” to the 2011 Fixed Share Option Plan. All other terms of the 2011 Fixed Share Option Plan will remain unchanged.

The fair value of options issued during the years ended December 28, 2013 and 2012 were determined using the Black-Scholes option pricing model with the following assumptions:

    Year ended     Year ended  
    December 28, 2013     December 31, 2012  
Risk-free interest rates   0.75% to 0.90%     0.18% to 0.39%  
Volatility factor   63% to 66%     74% to 75%  
Expected life of options, in years   4.20     4.17  
Weighted average fair value of options granted $1.15   $1.34  

During the year ended December 28, 2013, the Company granted a total of 285,000 (2012 – 1,849,500) common stock options to directors, officers, employees, eligible consultants, exercisable between $2.24 to $2.30 per share (2012 - $2.23 to $2.31), with a term of five years and an estimated fair value of $328,757 (2012 - $1,973,289).

During the year ended December 28, 2013, 2,253,762 (2012 – 303,250) options vested. Total expense of $1,889,307 (2012 - $325,724) was recorded as stock-based compensation, $1,582,705 (2012 - $279,914) was charged to salaries and benefits expense and $306,602 (2012 - $45,810) was charged to consulting and contract labor expense.

64


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

Original 2011 Fixed Share Option Plan

In September 2011, the Company’s Board of Directors approved the 2011 Fixed Share Option Plan (the “2011 Plan”), a non-shareholder approved plan for grants of stock options to directors, officers, employees, eligible consultants of the Company and any related company. Based on the terms of the individual option grants, options granted under the 2011 Plan generally expire three to ten years after the grant date and become exercisable over a period of one year, based on continued employment, either with monthly vesting or upon achievement of predetermined deliverables. The 2011 Plan permits the granting of incentive stock options and nonqualified stock options up to an aggregate at any point in time of 8,224,240 shares.

The fair value of options issued during the year ended December 31, 2012 was determined using the Black-Scholes option pricing model with the following assumptions:

    Year ended  
    December 31, 2012  
Risk-free interest rates   0.78% to 0.92%  
Volatility factor   88% to 89%  
Expected life of options, in years   5  
Weighted average fair value of options granted $2.14  

During the year ended December 28, 2013, the Company granted a total of nil (2012 - 125,000) common stock options to directors, officers, employees, eligible consultants, exercisable at $1.31 to $2.09 per share, with a term of five years with an estimated fair value of $nil (2012 - $210,136).

During the year ended December 28, 2013, 25,000 (2012 – 85,423) options vested. Total expense of $38,273 (2012 – $210,275) was recorded as stock-based compensation and $38,273 (2012 – $210,275) was charged to salaries and benefits expense.

2010 Fixed Share Option Plan

In September 2010, the Company’s Board of Directors approved the 2010 Fixed Share Option Plan (the “2010 Plan”), a non-shareholder approved plan for grants of stock options to directors, officers, employees, eligible consultants of the Company and any related company. Based on the terms of the individual option grants, options granted under the 2010 Plan generally expire three to ten years after the grant date and become exercisable over a period of one year, based on continued employment, either with monthly vesting or upon achievement of predetermined deliverables. The 2010 Plan permits the granting of incentive stock options and nonqualified stock options up to an aggregate at any point in time of 7,057,640 shares.

The fair value of options issued during the years ended December 31, 2012 were determined using the Black-Scholes option pricing model with the following assumptions:

    Year ended  
    December 31, 2012  
Risk-free interest rates    0.90% to 0.1.56%  
Volatility factor   68% to 91%  
Expected life of options, in years   5  
Weighted average fair value of options granted $1.66  

65


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

During the year ended December 28, 2013, 500,000 (2012 - 862,356) options vested. Total expense of $77,067 (2012 - $1,861,820) was recorded as stock-based compensation, $77,067 (2012 - $1,602,219) was included in salaries and benefits expense and $nil (2012 - $259,601) was included in consulting and labour expense.

A summary of the Company’s stock options are as follows:

          Weighted-Average  
    Shares     Exercise Price  

Options outstanding, December 31, 2011

  5,281,945   $  1.48  

Options exercised during the year

  (821,229 )   1.06  

Options granted during the year

  1,974,500     2.25  

Options cancelled during the year

  (19,173 )   1.93  

Options outstanding, December 31, 2012

  6,416,043     1.77  

Options exercised during the year

  (196,000 )   0.98  

Options granted during the year

  285,000     2.25  

Options cancelled/expired during the year

  (36,244 )   2.09  

Options outstanding, December 28, 2013

  6,468,799     1.81  

  December 28, 2013  
Options Outstanding     Options Exercisable  
    Weighted      
    Average Weighted   Weighted
Range of   Remaining Average   Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (yr.) Price Exercisable Price
$0.87 - $3.05 6,468,799 2.46 $1.81 6,301,720 $1.81
           
  December 31, 2012  
Options Outstanding     Options Exercisable  
    Weighted      
    Average Weighted   Weighted
Range of   Remaining Average   Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (yr.) Price Exercisable Price
$0.87 - $3.05 6,416,043 4.98 $1.77 4,304,990 $1.69

12. Business Combination

On December 1, 2013 the Company acquired the assets of Schrurs NV, a textile company located in Ieper, Belgium, by means of an asset purchase agreement. The assets purchased include all of the production equipment, computer equipment and the rights to all of the employee contracts. The purchase price of the assets of Schrurs NV was settled by the Company assuming outstanding debt of $1,172,081 (€861,551). The general decline in the textile business in Europe had left assets available at a favorable price for the Company. This acquisition resulted in a bargain purchase gain of $425,909 as follows:

66



CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

Fair value of assets acquired

$

 1,797,121

 

Fair value of debt assumed

 

(1,172,081

)

Deferred income tax liability

 

(199,131

)

Bargain purchase gain

$

 425,909

 

Under the terms of the asset purchase agreement, for a term of five years from the closing date of December 1, 2013, the repayment of the debt assumed by the Company shall be made in accordance with the terms of such debts and / or the repayment terms agreed upon between the seller and the respective creditors of the seller’s debts. On the fifth anniversary of the closing date, the aggregate outstanding amount under the seller’s debts at that point in time, shall be repaid in whole by the Company to the respective creditors of the seller’s debts. Between December 1, 2013 and December 28, 2013, no payments were made.

At December 28, 2013 the debt assumed consists of the following, including a foreign exchange effect of $13,596:

Bank line of credit, bearing interest at 3.25%, repayable June 25, 2014

$  313,088  

Bank term loans, bearing interest ranging from 3.1% to 4.55%, repayable between

     

September 2014 and August 2022.

  712,881  

Loan payable on demand bearing interest at 4% per annum

  90,897  

Loan payable on demand bearing no interest

  68,810  

 

  1,185,676  

Less: current portion

  634,486  

 

$  551,190  

All of the above debt is denominated in Euros.

13.

Commitments

a)                    Leases

The Company is committed to lease payments totaling approximately $1,930,000 for premises under lease. The minimum lease payments over the next five years are as follows:

2014 $  296,579  
2015   209,539  
2016   209,539  
2017   209,539  
2018   209,539  
Total $  1,134,735  

b)

National Research Council of Canada (“NRC”)

Joint Collaboration Agreement

In October 2007, the Company entered into a joint collaboration agreement with the NRC to continue to develop a patentable enzyme technology for the processing of hemp fibers. The agreement was for three years and expired on May 9, 2010. On February 19, 2010, the Company signed an amendment to the agreement to extend expiry to May 9, 2012. The Company intends to continue its joint collaboration of enzyme technology with the NRC; however the research will refocus on cellulose technology for the production of lignocellulosic ethanol. The NRC is to be paid as it conducts work on the joint collaboration. There are no further costs or other off-balance sheet liabilities associated with the NRC agreement.

67


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

Technology License Agreement

On November 1, 2006, the Company entered into a technology license agreement with the NRC. The license agreement provides the Company a worldwide license to use and sublicense the NRC technology called CRAiLAR®. The Company paid an initial $20,525 (CAD $25,000) fee and will pay an ongoing royalty of 3% on sales of products derived from the CRAiLAR® process to the NRC with a minimum annual payment set at $14,750 (CAD$15,000) per year in two installments. During the year ended December 28, 2013 the Company paid $7,375 (CAD$7,500) and accrued $7,375 (CAD$7,500) of the minimum annual royalty.

14.                    Income Taxes

As at December 28, 2013, the Company has estimated Canadian tax loss carry forwards for tax purposes of approximately $21,672,697 (2012 - $17,964,466) which expire between 2014 and 2033. Tax losses may be applied against future taxable income. Management has determined that the realization of the potential deferred tax assets resulting from these losses and other temporary differences is uncertain at this time, and cannot be viewed as more likely than not. Accordingly, the Company has recorded a full valuation allowance for the potential deferred tax asset.

The reported income taxes differ from the amounts obtained by applying statutory rates to the loss before income taxes as follows:

    2013     2012  

Loss before income taxes

$  15,169,933   $  9,315,360  

Combined Canadian and US corporate tax rate

  30.48%     28.85%  

Expected income tax recovery

  (4,623,968 )   (2,654,878 )

 

           

Increase (decrease) resulting from:

           

   Permanent differences and others

  255,649     468,899  

   Change in valuation allowance

  5,155,729     2,324,647  

   Impact of foreign exchange changes

  (564,191 )   (101,609 )

   Impact of tax rate changes

  (223,219 )   (37,059 )

Future income tax expense

$  -   $  -  

68


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

The tax effects of temporary differences that give rise to the Company’s future tax asset (liability) are as follows:

    2013     2012  

Property and equipment, and intangible assets

$  (168,845 ) $  89,513  

Research and development costs

  999,811     806,068  

Share issue costs

  165,590     196,805  

Other finance costs

  1,883     124,546  

Loss carry forwards

  10,999,463     5,824,372  

 

  11,997,902     7,041,304  

Valuation allowance

  (12,197,033 )   (7,041,304 )

 

$  (199,131 ) $  -  

The Company’s non-capital losses expire as follows:

Year of Expiry   Canada     USA  
2014 $  992,010   $  -  
2015   1,119,758     -  
2026   1,219,361     -  
2027   1,346,174     -  
2028   2,160,578     -  
2029   2,744,383     -  
2030   1,873,136     75,478  
2031   2,960,048     594,348  
2032   2,443,098     3,476,071  
2033   4,814,151     9,361,551  
  $  21,672,697   $  13,507,448  

15.                    Related Party Transactions

During the year ended December 28, 2013, $1,513,412 (2012 - $1,410,203) was incurred as remuneration to officers and directors of the Company. Of this amount, $1,455,282 (2012 - $1,410,203) is recorded in salaries and benefits expense.

During the year ended December 28, 2013, $1,382,147 (2012 - $1,681,761) was recorded as stock-based compensation to officers and directors of the Company. Of this amount, $1,382,147 (2012 - $1,681,761) is recorded in salaries and benefits expense.

Refer to Note 8.

16.                    Subsequent Events

a)

On January 20, 2014, the TSX-V approved the Company’s proposal to issue 181,666 bonus shares at to Mr. Robert Edmunds in consideration of the CAD$545,000 convertible promissory note (Note 8).

69


CRAiLAR TECHNOLOGIES INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 28, 2013
(In US Dollars)

b)

Subsequent to year end, the Company received $2,197,153 (€1,597,000) pursuant to a loan agreement entered into with IKEA Supply AG (“IKEA”) with an effective date of November 29, 2013. The loan bears an interest rate of 1.9% per annum and is payable in monthly installments of €11,000 from December 20, 2014 through June 20, 2016 with the remainder due in full on June 25, 2016. IKEA agreed to loan the Company $3,028,300 (€2,190,000) leaving $831,147 (€593,000) as an unused credit facility. The loan is secured by assets purchased with the proceeds, as well as a portion of the secured assets used to secure the 2013A Notes.

   
c)

On March 20, 2014, the Company completed a private placement equity financing consisting of the sale of 2,515,000 units at $1.25 per unit for gross proceeds of $3,143,750. Each Unit is comprised of one common share and one-half of one transferable common share purchase warrant of the Company, and each whole warrant will entitle the holder thereof to purchase one additional common share of the Company at an exercise price of $1.75 per warrant share for a period of two years from closing, that is, until March 20, 2016. In addition, finders’ fees of an aggregate of 176,400 shares were issued to certain finders in conjunction with the closing of this private placement.

70



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.                   CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Kenneth Barker, our Chief Executive Officer, and Theodore Sanders, our Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this Annual Report. Based on that evaluation, they concluded that our disclosure controls and procedures were effective as of December 28, 2013.

Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) under the Exchange Act.

Management assessed the effectiveness of our internal control over financial reporting based on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that we maintained effective internal control over financial reporting as of December 28, 2013.

This Annual Report does not include an attestation report of our registered public accounting firm regarding our internal control over financial reporting. This attestation report by our registered public accounting firm was not required pursuant to rules of the SEC that permit us to provide only our management’s report on internal control over financial reporting.

We will continue to monitor and evaluate the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and are committed to taking further action by implementing additional enhancements or improvements, or deploying additional human resources as may be deemed necessary.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting that occurred during the last quarter of our fiscal year ended December 28, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

Not applicable.

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers

All of our directors hold office until the next annual general meeting of the shareholders or until their successors are elected and qualified. Our officers are appointed by our board of directors and hold office until their earlier death, retirement, resignation or removal.

Our directors and executive officers, their ages, positions held are as follows:

Name Age Position with the Company
Kenneth C. Barker 57 Chief Executive Officer and a Director
Jason Finnis 42 President/Chief Innovation Officer and a Director
Theodore Sanders 59 Chief Financial Officer and Treasurer
Guy Prevost 55 Corporate Controller and Compliance Officer
Jay Nalbach 42 Chief Marketing Officer
Robert Edmunds 55 Director
Jeremy Jones 59 Director
Peter C. Moore 69 Director
Lesley Hayes 51 Director and Chairperson

The following is a brief account of the education and business experience of each director, executive officer and key employee during at least the past five years, indicating each person’s principal occupation during the period, and the name and principal business of the organization by which he or she was employed, and including other directorships held in reporting companies.

Kenneth C. Barker. Mr. Barker has been our Chief Executive Officer since August 24, 2006, and a member of our Board of Directors since January 11, 2006. Mr. Barker has over twenty years of apparel experience, including merchandising, sourcing and full profit and loss responsibility, public market experience and corporate governance. Mr. Barker was the co-president of The Meriwether Group, Inc. of Portland, Oregon from April 2005 until June 2010, which is a corporate investment and business acceleration consulting firm. From approximately October 2003 through March 2005, Mr. Barker was the head of apparel for the North American region for adidas International, where he was responsible for all strategic product and marketing functions within the region. His duties also included providing overall apparel direction and strategy for the adidas North American apparel business, creation of the global brand vision of apparel, and being responsible for sales delivery and brand strategy in the North American marketplace. From approximately January 2001 to October 2003, Mr. Barker was the director of apparel for adidas America, where he was responsible for overall profit and loss for the entire apparel business in the United States. Mr. Barker also previously worked for adidas Canada Limited in Toronto, Canada and Levi Strauss & Co.

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Jason Finnis. Mr. Finnis has been a member of the Board of Directors since December 15, 2000, our President since March 31, 2004 and our Chief Innovation Officer since September 7, 2011. He previously served as our Chief Operating Officer from December 7, 2005 until September 7, 2011. Mr. Finnis has been working as an entrepreneur in the natural fiber industry since 1994. In 1998, he co-founded Hemptown Clothing, which, after several name changes reflecting changing business focus, became CRAiLAR Technologies Inc. in 2012. Mr. Finnis now guides the company’s development of innovative applications for sustainable bast fiber, cellulose pulp, and their resulting byproducts. In this capacity, he works closely with CRAiLAR’s research partners, including the NRC, the U.S. Department of Agriculture’s Agricultural Research Service, and customers to identify unique applications for CRAiLAR Flax among a range of apparel and industrial global brands. Mr. Finnis attended the University of Victoria in the faculty of Fine Arts and possesses broad experience in textile fiber production, processing, apparel manufacturing, marketing and sales.

Theodore Sanders. Mr. Sanders was appointed our Chief Financial Officer on March 1, 2013 and was appointed our Treasurer on November 6, 2013. Mr. Sanders brings 20 years of financial management experience in publicly traded and private businesses from startups to multi-billion dollar global companies. Mr. Sanders brings to our executive management team a proven track record of success, most recently as Chief Financial Officer of U.S. Auto Parts Network, Inc. (NASDAQ: PRTS), an internet provider of aftermarket auto parts, from February 2009 to January 2012, where revenues doubled during his three-year tenure to more than $325 million through organic growth and acquisition, and as Chief Financial Officer at PCM Inc. (NASDAQ: PCMI) from May 1997 to June 2007, where he oversaw revenues of $1.2 billion, acquisitions and subsidiary IPOs with a team of 60 during his ten year tenure. Mr. Sanders received a Bachelor of Science, Business Administration from Nichols College (Massachusetts) and is a Certified Public Accountant.

Guy Prevost. Mr. Prevost was a member of our Board of Directors from November 2005 to November 6, 2013. Since March 1, 2013, he has been our Corporate Controller and Compliance Officer. Previously, from May 2, 2005 to March 1, 2013, he served as our Chief Financial Officer. Mr. Prevost has over twenty-five years of public market experience in accounting, finance and corporate governance. Mr. Prevost’s duties and responsibilities on our behalf will generally entail financial reporting and establishing internal procedures and controls. Mr. Prevost is a member of the Certified General Accountants Association of British Columbia and Canada.

Jay Nalbach. Mr. Nalbach has been our Chief Marketing Officer since August 31, 2011. Mr. Nalbach has more than 16 years of experience in the sports and fashion industries, mostly recently serving as Brand Director at adidas Group Japan KK from February 2009 to January 2011 leading the execution of subsidiary brand Reebok’s first ever 360-degree product and marketing campaigns in Japan. Before this, he was Global Head of Men’s Lifestyle Footwear for Reebok International from July 2006 to February 2009 during the critical period of Reebok post-acquisition by adidas. Mr. Nalbach has also held senior roles with adidas AG in Portland, Oregon, U.S.A. from 1995 to 1997, Amsterdam, Netherlands from 1997 to 2000 and London, England from 2000 to 2003, including key work with Reebok, adidas Originals, Foot Locker Europe, in footwear, apparel, supply chain and account management. Mr. Nalbach also worked as European Key Account Director with Fila Spa from 2003 to 2006 in London, England, where he was responsible for developing the firm’s world-class management team and increasing its market share in the athletic footwear and apparel category. Mr. Nalbach graduated from Boston University in 1993 with a B.A. degree in Pure and Applied Mathematics and German.

Robert Edmunds. Mr. Edmunds has been a member of the Board of Directors since December 15, 2000 and previously our Chief Financial Officer until his resignation effective April 27, 2005. Mr. Edmunds received a Chartered Accountant designation in 1992. He worked as the proprietor of a public practice from 1992 through 1998. Since 1998, Mr. Edmunds has been an independent consultant with No Drama Media Corporation, providing Chief Financial Officer services, as well as business strategy, financial planning and accounting services for various clients in the entertainment and E-commerce industries.

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Jeremy Jones. Mr. Jones has been one of our directors since August 5, 2009 and was on our Advisory Board from March 2009 to August 2009. Since August 2009, Mr. Jones has been Chairman and Chief Executive Officer of Nitride Solutions Inc., a company he founded that is commercializing a low-cost, high volume manufacturing process for Aluminum Nitride, an enabling material for next generation LEDs, communication and power electronic. Prior to Nitride Solutions Inc., Mr. Jones was Vice President of Koch Genesis, the venture arm of Koch Industries, Inc. (“Koch”), from 2007 through 2009. At Koch, he was responsible for deal sourcing, diligence and structuring in areas such as renewable fuels, biopolymers, medical textiles and advanced fibers for Koch’s operating businesses INVESTA, Georgia-Pacific and Flint Hills Resources. Prior to Koch, Mr. Jones was in leadership and corporate officer roles in Fortune 500 companies such as Polaroid, Motorola and Cabot Microelectronics, where he built several businesses in optical and electronic materials, as well as in start-ups such as Crosslink, a St. Louis company commercializing conductive polymer materials. Mr. Jones holds a Bachelor’s Degree in Mechanical Engineering and a Master’s Degree in Materials Engineering from Worcester Polytechnic Institute and an MBA from Babson College’s F.W. Olin Graduate School of Business.

Peter C. Moore. Mr. Moore has been one of our directors since July 11, 2006, and was on our Advisory Board from October 2004 to July 2006. Mr. Moore has been the President of What’a Ya Think Inc? (“WYTI”) since 2008. WYTI is a design firm specializing in brand image work including symbols. They have been retained by adidas A.G. and have done work for several brands within the adidas Group, including the Taylor Made brand and the Reebok brand as well as working on image and direction for brands including Rogue Ales, and Specialized bicycles. We believe Mr. Moore is generally considered one of the top branding and design experts in the industry. He has over twenty years of footwear and apparel experience, including design and development, involving Nike, adidas and several other prominent brands and concepts in sportswear history. His roles have included creative director at Nike (Air Jordan, Nike Air). Mr. Moore was one of two individuals responsible for creation of the Air Jordan concept during the mid-1980s after which he subsequently left with a colleague to form Sports Inc., a sports marketing company in Portland, Oregon. Mr. Moore was also previously the Chief Executive Officer of adidas North America and Worldwide Creative Director of adidas AG.

Lesley Hayes. Ms. Hayes served as a member of our Board of Directors and as our Vice President of Communications from December 15, 2000 through February 20, 2004. On November 6, 2013, Ms. Hayes was appointed as a member of the Board of Directors and as the non-executive Chairperson of our Board of Directors. Ms. Hayes has been the COO of NoDramaMedia Ltd. since 2002, providing financial and mentoring services to a number of private and public companies. Ms. Hayes has founded and grown a number of private and public companies in her career, and as an owner and/or director of these firms has raised over $150 million, managed an IPO as VP Technology, and created shareholder value in a hostile takeover process. From 1999 to 2002, Ms. Hayes was Practice Manager Creative Services for Burntsand Inc. where she managed a team of 20 web interface designers. Over the past 10 years, Ms. Hayes has served as a director and audit committee member of a number of public companies including Vicom Multimedia Inc. from 1993 to 1999, Tyler Resources Inc. from 1997 to 2008 and Northern Abitibi Mining Corp. (TSX-V: NAI) from 1996 to present. Ms. Hayes’ education includes completing the Canadian Securities Course in 2002 and three masters level accounting courses, Financial Accounting, Managerial Accounting and Operations Accounting while obtaining her MBA at the University of Calgary/University of Alberta joint MBA program, which she received in May 2007. She is currently enrolled in the Ph.D. program at Athabasca University studying Entrepreneurial Leadership. Ms. Hayes is deeply involved in global entrepreneurship education, chairing the global Leadership committee for the Entrepreneur’s Organization, leading events in North and South America, Europe and Asia.

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Term of Office

All of our directors hold office until the next annual general meeting of the shareholders or until their successors are elected and qualified. Our officers are appointed by our board of directors and hold office until their earlier death, retirement, resignation or removal.

Family Relationships

Ms. Hayes and Mr. Edmunds are married to each other. Mr. Finnis is married to Larisa Harrison, who was a director and an executive officer of our Company until November 6, 2013. Otherwise, there are no family relationships among our directors or executive officers.

Involvement in Certain Legal Proceedings

Except as disclosed in this annual report, during the past ten years none of the following events have occurred with respect to any of our directors or executive officers:

  1.

A petition under the Federal bankruptcy laws or any state insolvency law was filed by or against, or a receiver, fiscal agent or similar officer was appointed by a court for the business or property of

       
 

such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;

       
  2.

Such person was convicted in a criminal proceeding or is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);

       
  3.

Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:

       
  i.

Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;

       
  ii.

Engaging in any type of business practice; or

       
  iii.

Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;

       
  4.

Such person was the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (3)(i) above, or to be associated with persons engaged in any such activity;

       
  5.

Such person was found by a court of competent jurisdiction in a civil action or by the SEC to have violated any Federal or State securities law, and the judgment in such civil action or finding by the SEC has not been subsequently reversed, suspended, or vacated;

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  6.

Such person was found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;

       
  7.

Such person was the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:

       
  i.

Any Federal or State securities or commodities law or regulation; or

       
  ii.

Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or

       
  iii.

Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or 8. Such person was the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

There are currently no legal proceedings to which any of our directors or officers is a party adverse to us or in which any of our directors or officers has a material interest adverse to us.

Significant Employees

The Company does not have any significant employees other than the officers disclosed above.

Audit Committee

Messrs. Edmunds and Jones are the members of our audit committee. The Board of Directors has determined that all of the audit committee members qualify as independent audit committee members under the listing standards of the NYSE MKT. The Board of Directors has determined that Mr. Robert Edmunds, C.A., chairman of the audit committee, qualifies as a financial expert.

The audit committee operates under a written charter adopted by the board of directors on February 28, 2008. The audit committee’s primary function is to provide advice with respect to our financial matters and to assist the Board of Directors in fulfilling its oversight responsibilities regarding finance, accounting, and legal compliance. The audit committee’s primary duties and responsibilities will be to:

  • serve as an independent and objective party to monitor our financial reporting process and internal control system;

  • review and appraise the audit efforts of our independent accountants;

  • evaluate our quarterly financial performance as well as our compliance with laws and regulations;

  • oversee management’s establishment and enforcement of financial policies and business practices; and

  • provide an open avenue of communication among the independent accountants, management and the Board of Directors.

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Code of Ethics

Our Board of Directors has adopted a code of ethics applicable to all our employees and directors (the “Code of Ethics”).

The Code of Ethics is intended to describe our core values and beliefs and to provide the foundation for all business conduct. The Code of Ethics is further intended to focus our Board of Directors and each director, officer and employee on areas of ethical risk, provide guidance to our directors, officers and employees to help them recognize and deal with ethical issues, provide mechanisms to report unethical conduct, and help foster a culture of honesty and accountability. Our guidelines for conducting business are consistent with the highest standards of business ethics. Each director, officer and employee must comply with the letter and spirit of this Code of Ethics.

We have posted the text of the Code of Ethics on our Internet website at www.crailar.com Furthermore, upon request, we shall provide to any person without charge a copy of the Code of Ethics. Any such requests should be directed to Ms. Larisa Harrison, Corporate Administrative Officer and Corporate Secretary, Suite 305, 4420 Chatterton Way, Victoria, British Columbia, Canada V8X 5J2.

Other Corporate Governance Matters

Effective February 28, 2008, our Board of Directors adopted certain policies, terms of reference, charters and guidelines (collectively, the “Corporate Governance Policies”), for our Board of Directors and senior management to follow:

  • Corporate Governance Policy;

  • Corporate Disclosure Policy;

  • Securities Trading Policy (Revised January 1, 2011);

  • Board of Directors’ Charter;

  • Audit Committee Charter;

  • Corporate Governance Committee Charter;

  • Compensation Committee Charter;

  • Disclosure Charter Policy; and

  • Code of Conduct.

In general, the Corporate Governance Policies set forth our governance policies and our practice among our Board of Directors and senior management, including the constitution and independence of the Board, the functions to be performed by the Board of Directors and its committees and the effectiveness of the administration by Board members. The Corporate Governance Policies can also be found on our website at www.crailar.com.

Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act requires the executive officers and directors, and persons who beneficially own more than ten percent of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Based solely on the reports received by us and on the representations of the reporting persons, we believe that all such reports were timely filed during the fiscal year ended July 31, 2013, within two business days as required by the SEC, except as follows:

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Name Number of Late Reports Number of Transactions Not
Reported on Timely Basis
Larisa Harrison (1) 1 2
Jason Finnis 1 2
Kenneth Barker 1 2
Robert Edmunds 1 2

(1)

Ms. Harrison served as a director and as our Chief Administrative Officer and Secretary/Treasurer until November 6, 2013. Since November 6, 2013, she has served as our Corporate Administration Officer and Corporate Secretary, which is not an executive officer position.


ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

The Compensation Committee of our Board of Directors is responsible for the development and supervision of our approach to compensation for directors, officers and senior management as well as bonuses and any increases in compensation to employees or staff that would have a material impact on our expenses. The Compensation Committee shall review and make recommendations regarding compensation issues, in particular:

  • compensation philosophy and policies;
  • competitive positioning;
  • annually review the performance of the CEO, the COO and the CFO on behalf of the Board;
  • make recommendations to the Board for payment and awards to Senior Officers under the Company’s salary and incentive plans;
  • make recommendations to the Board for annual aggregate incentive compensation payouts to management, including security based compensation arrangements, and profit sharing to employees; and
  • make recommendations to the Board regarding Director compensation.

The Board assumes responsibility for reviewing and monitoring the long-range compensation strategy for our senior management although the Compensation Committee guides it in this role. Our Compensation Committee receives independent competitive market information on compensation levels for executives. It uses salary data of comparable private and public companies as a benchmark for setting executive compensation. This data is obtained from various sources including online research and market surveys.

Philosophy and Objectives

The compensation program for our senior management is designed to ensure that the level and form of compensation achieves certain objectives, including:

  • attracting and retaining talented, qualified and effective executives;
  • motivating the short and long-term performance of these executives; and
  • better aligning their interests with those of our shareholders.

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In compensating our senior management, we have employed a combination of base salary, bonus compensation and equity participation through its stock option plan.

Base Salary

In the Board’s view, paying base salaries which are competitive in the markets in which we operate is a first step to attracting and retaining talented, qualified and effective executives. Competitive salary information on comparable companies within the industry is compiled from a variety of sources, including surveys conducted by independent consultants and national and international publications.

Bonus Incentive Compensation

Our objective is to achieve certain strategic objectives and milestones. The Board will consider executive bonus compensation dependent upon our meeting those strategic objectives and milestones and sufficient cash resources being available for the granting of bonuses. The Board approves executive bonus compensation dependent upon compensation levels based on recommendations of the Compensation Committee, and such recommendations are generally based on survey data provided by independent consultants. Each Named Executive Officer (as defined below) receives a base salary and is also eligible for an annual bonus. Annual bonuses are calculated and approved by the Company’s compensation committee on a discretionary basis and can range from 25% to 125% of a Named Executive Officer’s base salary.

Equity Participation

We believe that encouraging our executives and employees to become shareholders is the best way of aligning their interests with those of our shareholders. Equity participation is accomplished through our 2011 Fixed Share Option Plan. Stock options are granted to executives and employees taking into account a number of factors, including the amount and term of options previously granted, base salary and bonuses and competitive factors. The amounts and terms of options granted are determined by the Compensation Committee. Given the evolving nature of our business, the Board continues to review and redesign the overall compensation plan for senior management so as to continue to address the objectives identified above.

Compensation Committee Interlocks and Insider Participation

Our Compensation Committee is comprised of Jeremy Jones (the committee chair), Robert Edmunds, and Lesley Hayes. No person who served as a member of our Compensation Committee during our fiscal year ended December 28, 2013 was a current or former officer or employee of our Company (except that Mr. Edmunds served as our Chief Financial Officer until his resignation from such position on April 27, 2005 and Ms. Hayes served as our Vice President of Communications from December 15, 2000 until February 20, 2004). Similarly, except for Mr. Robert Edmunds, no person who served as a member of our Compensation Committee during our fiscal year ended December 28, 2013 had any relationship requiring disclosure by us under Regulation S-K Item 404 (Transactions with Related Persons, Promoters and Certain Control Persons) in this annual report. Additionally, during our fiscal year ended December 28, 2013, there were no Compensation Committee “interlocks,” which generally means that no executive officer of our Company served: (a) as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity which had an executive officer serving as a member of our Company’s Compensation Committee; (b) as a director of another entity which had an executive officer serving as a member of our Company’s Compensation Committee; or (c) as a member of the compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of another entity which had an executive officer serving as a director of CRAiLAR.

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Compensation Committee Report

The Compensation Committee has reviewed and discussed the foregoing compensation discussion and analysis with Company management. Based on that review and those discussions, the Compensation Committee recommended to the Board of Directors that the compensation discussion and analysis be included in this Annual Report. This report is provided by the following independent directors, who comprise the Compensation Committee:

By: Jeremy Jones (the committee chair), Robert Edmunds and Lesley Hayes.

Compensation of Named Executive Officers

The following table sets forth the compensation paid for Fiscal 2013 and Fiscal 2012 to (i) our Chief Executive Officer, (ii) our Chief Financial Officer and (iii) those other executive officers that earned in excess of $100,000 for the fiscal year ended December 28, 2013 (collectively, the “Named Executive Officers”):

Summary Compensation Table

        Option  
Name and Principal       Awards  
Position(s) Year Salary Bonus (1) Total
Kenneth Barker, 2013 300,000 150,000 - 450,000
Chief Executive Officer 2012 275,000 125,000 549,204 949,204
Theodore Sanders,          
Chief Financial Officer and Treasurer (2) 2013 187,500 - 264,767 452,267
Jason Finnis, 2013 174,812 48,082 - 222,894
President & Chief Innovation Officer 2012 165,145 65,333 232,604 463,802
Guy Prevost, 2013 174,812 30,597 - 205,409
(former CFO) Corporate Controller and Compliance Officer (3) 2012 165,145 65,333 226,143 456,621
Larisa Harrison, 2013 121,388 30,347 - 151,735
(Former Chief Administrative Officer) (4) 2012 117,590 50,257 200,298 368,145
Jay Nalbach, 2013 180,000 49,500 - 229,500
Chief Marketing Officer 2012 165,000 25,000 193,837 383,837

(1)

Amounts presented in this column represent the fair value as of the grant date of such stock options determined in accordance with Financial Accounting Standards Board Accounting Standards Codification 718 Compensation—Stock Compensation (“FASB ASC 718”). For a discussion of valuation assumptions used in the calculations, see Note 2 to our consolidated financial statements included with this Annual Report. See also our discussion of stock-based compensation under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

   
(2)

Mr. Sanders was appointed as Chief Financial Officer on March 1, 2013 and as Treasurer on November 6, 2013.

   
(3)

Mr. Prevost served as our Chief Financial Officer until March 1, 2013 but has served as Corporate Controller and Compliance Officer since March 1, 2013.

   
(4)

Ms. Harrison served as our Chief Administrative Officer and Secretary/Treasurer until November 6, 2013. Since November 6, 2013, she has served as our Corporate Administration Officer and Corporate Secretary, which is not an executive officer position.

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Stock Option Grants

We granted options to purchase shares of our common stock to the Named Executive Officers in the fiscal year ended December 28, 2013 as set out in the table below. The options vest over a twelve-month period with 1/12th of the aggregate amount vesting monthly on the last day of each month from the date of grant.

Grants of Plan-Based Awards

          Number of           Grant  
          Securities           Date Fair  
          Underlying     Exercise     Value of  
Name   Grant Date     Options     Price     Option  
Theodore Sanders, Chief Financial Officer and Treasurer (1)   March 1, 2013     200,000   $ 2.24   $ 1.32  

(1) Mr. Theodore Sanders was appointed as our Chief Financial Officer on March 1, 2013 and as our Treasurer on November 13, 2013.

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Outstanding Equity Awards Held by Named Executive Officers at Fiscal Year End

The following table sets forth information as at December 28, 2013, relating to outstanding equity awards held by each Named Executive Officer:

      Option    
      Awards    
      Equity    
      Incentive    
      Plan    
      Awards:    
  Number of Number of Number of    
  Securities Securities Securities    
  Underlying Underlying Underlying    
  Unexercised   Unexercised Unexercised Option Option
  Options Options Unearned Exercise    Expiration
  Exercisable Unexercisable Options Price Date
Name (#) (#) (#) ($) (mm/dd/yyyy)
Kenneth Barker 500,000 - - $1.17 10/20/2014
  250,000 - - $0.96 08/26/2015
  500,000 - - $0.87 11/25/2015
  125,000 - - $1.55 04/08/2016
  325,000 - - $2.77 08/19/2016
  425,000 - - $2.23 10/11/2017
           
Ted Sanders (1) 166,668 33,332 - $2.24 03/01/2018
           
Jason Finnis 300,000 - - $1.17 10/20/2014
  119,939 - - $1.02 08/09/2015
  125,000 - - $0.87 11/25/2015
  100,000 - - $1.55 04/08/2016
  125,000 - - $2.77 08/19/2016
  180,000 - - $2.23 10/11/2017
           
Guy Prevost 255,000 - - $1.17 10/20/2014
  175,000 - - $1.55 04/08/2016
  125,000 - - $2.77 08/19/2016
  175,000 - - $2.23 10/11/2017
           
Larisa Harrison (2) 119,938 - - $1.02 08/09/2015
  125,000 - - $0.87 11/25/2015
  125,000 - - $2.77 08/19/2016
  155,000 - - $2.23 10/11/2017
           
Jay Nalbach 100,000 - - $2.77 08/19/2016
  150,000 - - $2.23 10/11/2017

(1)

The option granted to Mr. Sanders vests over a twelve-month period with 1/12th of the aggregate amount vesting monthly on the last day of each month from the date of grant, which was March 1, 2013.

   
(2)

Ms. Harrison served as our Chief Administrative Officer and Secretary/Treasurer until November 6, 2013. Since November 6, 2013, she has served as our Corporate Administration Officer and Corporate Secretary, which is not an executive officer position.

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Option Exercises

The following table sets forth information regarding the exercise of stock options by each Named Executive Officer on an aggregated basis during the year ended December 28, 2013:

    Number of        
    Shares     Value  
    Acquired on     Realized on  
Name   Exercise     Exercise  
    (#)     ($)  
Kenneth Barker   130,000   $  163,000  
Theodore Sanders   -     -  
Jason Finnis   13,000     19,000  
Guy Prevost   10,000     11,100  
Larisa Harrison (1)   13,000     19,000  
Jay Nalbach   -     -  

(1)

Ms. Harrison served as our Chief Administrative Officer and Secretary/Treasurer until November 6, 2013. Since November 6, 2013, she has served as our Corporate Administration Officer and Corporate Secretary, which is not an executive officer position.

Executive Services Agreements

Senior Executive Employment Agreement with Kenneth Barker

On April 2, 2012, we entered into a Senior Executive Employment Agreement with Kenneth Barker, with an initial term of five years, commencing on July 1, 2011. Pursuant to the terms of the agreement, Mr. Barker is to provide services as Chief Executive Officer of the Company. In consideration therefor, he is to receive a base salary of $250,000 per year. In the event that the Company terminates the agreement without just cause, or in the event of termination upon a change in control, the Company is required to pay Mr. Barker: (i) 24 months of his then base salary, (ii) the portion of any then declared and/or earned bonus (prorated to the end of the six-month period from the effective date of the termination) and (iii) any outstanding vacation pay and expenses as at the effective date of the termination. In addition, the Company is obligated to (i) maintain the group medical services plan and management employee benefits programs Mr. Barker is entitled to under the terms of the agreement for a period of one year from the effective date of the termination, and (ii) subject to the Company’s then stock option plan and the rules and policies of any regulatory authority and stock exchange having jurisdiction over the Company, allow for Mr. Barker to exercise any unexercised and fully vested portion of his stock options on the effective date of the termination at any time during 12 months from the effective date of the termination.

Senior Executive Employment Agreement with Jason Finnis

On April 2, 2012, we entered into a Senior Executive Employment Agreement with Jason Finnis, with an initial term of five years, commencing on July 1, 2011. Pursuant to the terms of the agreement, Mr. Finnis is to provide services as Chief Innovation Officer of the Company. In consideration therefor, he is to receive a base salary of CAD$150,000 per year. In the event that the Company terminates the agreement without just cause, or in the event of termination upon a change in control, the Company is required to pay Mr. Finnis: (i) 24 months of his then base salary, (ii) the portion of any then declared and/or earned bonus (prorated to the end of the six-month period from the effective date of the termination) and (iii) any outstanding vacation pay and expenses as at the effective date of the termination. In addition, the Company is obligated to (i) maintain the group medical services plan and management employee benefits programs Mr. Finnis is entitled to under the terms of the agreement for a period of one year from the effective date of the termination, and (ii) subject to the Company’s then stock option plan and the rules and policies of any regulatory authority and stock exchange having jurisdiction over the Company, allow for Mr. Finnis to exercise any unexercised and fully vested portion of his stock options on the effective date of the termination at any time during 12 months from the effective date of the termination.

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Senior Executive Employment Agreement with Guy Prevost

On April 2, 2012, we entered into a Senior Executive Employment Agreement with Guy Prevost, with an initial term of five years, commencing on July 1, 2011. Pursuant to the terms of the agreement, Mr. Prevost is to provide services as Chief Financial Officer of the Company. In consideration therefor, he is to receive a base salary of CAD$150,000 per year. In the event that the Company terminates the agreement without just cause, or in the event of termination upon a change in control, the Company is required to pay Mr. Prevost: (i) 24 months of his then base salary, (ii) the portion of any then declared and/or earned bonus (prorated to the end of the six-month period from the effective date of the termination) and (iii) any outstanding vacation pay and expenses as at the effective date of the termination. In addition, the Company is obligated to (i) maintain the group medical services plan and management employee benefits programs Mr. Prevost is entitled to under the terms of the agreement for a period of one year from the effective date of the termination, and (ii) subject to the Company’s then stock option plan and the rules and policies of any regulatory authority and stock exchange having jurisdiction over the Company, allow for Mr. Prevost to exercise any unexercised and fully vested portion of his stock options on the effective date of the termination at any time during 12 months from the effective date of the termination.

Mr. Prevost resigned as Chief Financial Officer on March 1, 2013, but he continues to provide services as Corporate Controller and Compliance Officer pursuant to the terms of this agreement.

Senior Executive Employment Agreement with Jay Nalbach

On April 24, 2012, we entered into a Senior Executive Employment Agreement with Jay Nalbach, with an initial term of five years, commencing on August 1, 2011. Pursuant to the terms of the agreement, Mr. Nalbach is to provide services as Chief Marketing Officer of the Company. In consideration therefore, he is to receive a base salary of $150,000 per year. In the event that the Company terminates the agreement without just cause, the Company is required to pay Mr. Nalbach: (i) six months of his then base salary, less any required statutory deductions, if any, if the termination takes place within 24 months of the effective date of the agreement or 12 months of the then base salary, less any required statutory deductions, if any, thereafter, (ii) the portion of any then declared and/or earned bonus (prorated to the end of the six-month period from the effective date of the termination) and (iii) any outstanding vacation pay and expenses as at the effective date of the termination. In addition, the Company is obligated to (i) maintain the group medical services plan and management employee benefits programs Mr. Nalbach is entitled to under the terms of the agreement for a period of six months from the effective date of the termination if the termination takes places within 24 months of the effective date of the agreement or 12 months from the effective date of the termination if the termination take place more than 24 months after the effective date of the agreement, and (ii) subject to the Company’s then stock option plan and the rules and policies of any regulatory authority and stock exchange having jurisdiction over the Company, allow for Mr. Nalbach to exercise any unexercised and fully vested portion of his stock options on the effective date of the termination at any time during 12 months from the effective date of the termination.

Engagement of Theodore Sanders

We appointed Theodore Sanders as our Chief Financial Officer on March 1, 2013. In accordance with Mr. Sanders’ appointment, he will be paid a base salary of $225,000 per year and has been granted stock option to acquire up to 200,000 shares of common stock of the Company at an exercise price of $2.24 per share. This option vests over a twelve month period with 1/12th of the aggregate amount vesting monthly on the last day of each month from the date of grant and is exercisable for a period of up to five years from the date of grant. Mr. Sanders was appointed Treasurer or our Company on November 6, 2013.

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Director Compensation
 

No compensation was paid to our directors in such year for their service as directors during fiscal year ended December 28, 2013. Our directors do not have specific compensation arrangements based on attendance at board or committee meetings or serving as a committee chair. From time to time directors may receive bonus payments or options, which are granted on a discretionary basis. The amount of any bonus payments or the number of options granted is based on the experience of the director, time spent on our matters and the compensation paid to other directors of companies in the industry. Our directors who are also Named Executive Officers do not receive any additional compensation for service as directors beyond what is disclosed above in relation to their service as officers.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information, as of March 24, 2014, with respect to the beneficial ownership of our common stock by each stockholder known by us to be the beneficial owner of more than 5% of our common stock and by each of our current directors and executive officers. Each person has sole voting and investment power with respect to the shares of common stock indicated below opposite such person’s name, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated. As of March 24, 2014, there were 50,679,097 shares of common stock issued and outstanding.

 

  Amount and Nature of     Percentage of  

Name and Address of Beneficial Owner (1)

  Beneficial Ownership(2)     Beneficial Ownership  

Directors and Officers:

           

Kenneth Barker

  2,141,299 (3)   4.1%  

Jason Finnis

  3,053,670 (4)   5.9%  

Theodore Sanders

  261,800 (5)   (*)  

Guy Prevost

  737,500 (6)   1.4%  

Jay Nalbach

  251,500 (7)   (*)  

Robert Edmunds and Lesley Hayes (8)

  2,564,807 (9)   5.0%  

Jeremy Jones

  80,000 (10)   (*)  

Peter Moore

  150,000 (11)   (*)  

All Officers and Directors as a Group (9 individuals)

  9,240,576 (12)   16.5%  

 

           

5% or Greater Beneficial Owners

           

Dennis Howitt Trust

           

1221 Pinecrest SE,

           

Grand Rapids, Michigan, U.S.A., 49506

  3,487,275 (13)   6.9%  

 

           

Hydra Ventures B.V.

           

Hoogoorddreef 9a

           

1101 BA Amsterdam South East

           

The Netherlands

  6,666,666 (14)   12.3%  

(*) Less than 1%.

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(1)

The address for each director and officer is Suite 305, 4420 Chatterton Way, Victoria, British Columbia, Canada, V8X 5J2. (2) Shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power.

   
(3)

This figure includes: (i) 16,299 shares of common stock; (ii) options to purchase 2,125,000 shares of common stock, which are exercisable within 60 days of March 24, 2014.

   
(4)

This figure includes (i) 1,578,793 shares of common stock; and (ii) options to purchase 1,474,877 shares of common stock, which are exercisable within 60 days of March 24, 2014.

   
(5)

This figure includes: (i) 61,800 shares of common stock; and (ii) options to purchase 200,000 shares of common stock, which are exercisable within 60 days of March 24, 2014.

   
(6)

This figure includes: (i) 7,500 shares of common stock; and (ii) options to purchase 730,000 shares of common stock, which are exercisable within 60 days of March 24, 2014.

   
(7)

This figure includes: (i) 1,500 shares of common stock; and (ii) options to purchase 250,000 shares of common stock, which are exercisable within 60 days of March 24, 2014.

   
(8)

Robert Edmunds and Lesley Hayes are married.

   
(9)

This figure includes: (i) 2,269,807 shares of common stock; (ii) options to purchase 135,000 shares of common stock, which are exercisable within 60 days of March 24, 2014; (iii) 10% convertible secured debenture of $100,000 convertible into 80,000 shares of common stock before July 26, 2016; and (iv) warrants to purchase 80,000 shares of common stock, which are exercisable within 60 days of March 24, 2014.

   
(10)

This figure includes: (i) 5,000 shares of common stock; and (ii) options to purchase 75,000 shares of common stock, which are exercisable within 60 days of March 24, 2014.

   
(11)

This figure includes: (i) 75,000 shares of common stock; and (ii) options to purchase 75,000 shares of common stock, which are exercisable within 60 days of March 24, 2014.

   
(12)

This figure includes: (i) 4,015,699 shares of common stock; (ii) options to purchase 5,064,877 shares of common stock, which are exercisable within 60 days of March 24, 2014; (iii) 10% convertible secured debenture of $100,000 convertible into 80,000 shares of common stock before July 26, 2016; and (iv) warrants to purchase 80,000 shares of common stock, which are exercisable within 60 days of March 24, 2014.

   
(13)

This figure consists of 3,487,275 shares of common stock.

   
(14)

This figure includes: (i) 3,333,333 shares of common stock; and (ii) warrants to purchase 3,333,333 shares of common stock, which are exercisable within 60 days of March 24, 2014.

Changes in Control

We are unaware of any contract, or other arrangement or provision, the operation of which may at a subsequent date result in a change of co