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 endedDecember 31, 2012or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT 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
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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.
[ X ]
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 [X] Non-accelerated filer [ ] (Do not check if smaller reporting company) Smaller reporting company [ ]
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$92,316,000.
The registrant had 44,430,198 shares of common stock outstanding as of March 13, 2013.
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TABLE OF CONTENTS
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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” made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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. We intend that such forward-looking statements be subject to the safe harbors for such 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”.
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 on April 5, 2005. It was incorporated for the purpose of developing BastFiber 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.
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. We decided against proceeding with the intended use of the property and returned all rights to the town of Craik.
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.
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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 iswww.crailar.com.
Business Operations
We are bringing sustainable bast fiber-based products to market, providing environmentally friendly natural fiber alternatives for a broad range of existing and emerging product applications, with equivalent or superior performance characteristics to cotton, wood or fossil-fuel based competitors. As of the date of this report, our business operations consists primarily of the deployment and execution of our proprietary and natural CRAiLAR®Flax Fibers, as well as our bast fiber processing technologies targeted at the textile, pulping, composite and plastics industries.
Industry Opportunity
With a projected increase of global population and continued development of market economies, we expect to see a rise in the need for fibers worldwide. Management estimates that global demand for fiber will increase by almost 30 million tons in the next ten years. We do not believe that this increased demand can be met by the existing natural fibers market. While some demand is likely to be filled by synthetic fibers, management expects that the desires for consumers to live both sustainably and naturally will outweigh their desire for un-naturally derived products. We believe that the Company has a unique opportunity to fill this shortfall through the production of CRAiLAR®fiber.
CRAiLAR®Fiber
CRAiLAR®Fiber processing involves the enzymatic processing of bast fibers by removing the lignin which binds the fibers together, to produce individual, separated fibers into the equivalent of ginned cotton. The CRAiLAR®Fiber technology has been developed by Dr. Wing Sung and his team at the National Research Council of Canada. Under development since 2004, this technology has undergone successful final demonstration scale testing. The technology involves the use of enzymes to effectively clean and polish the raw bast fiber such as flax, hemp, kenaf and jute.
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The CRAiLAR®Fiber enzymatic process is significantly faster than existing methods of bast fiber processing, produces highly consistent results, and is environmentally benign, as compared to the toxic chemical baths employed elsewhere for the processing of bast fibers. The resulting CRAiLAR®Fibers are vastly superior to traditionally processed bast fibers for textile applications, and integrate seamlessly with cotton fibers. Because the CRAiLAR®Fiber enzymatic processing is so effective at cleaning bast fiber, it can be spun on traditional cotton equipment at commercially viable speeds.
The capital costs involved in building a commercial CRAiLAR®Fibers processing facility have been determined to be relatively modest. All of our final products can be processed utilizing existing industry equipment.
CRAiLEX Advanced Materials technology was developed with Alberta Innovates — Technology Futures. The unique pulping process does not require the numerous harsh chemicals or expensive pressurized equipment used in the traditional kraft pulping industry. The result is a superior dissolving pulp from the flax and hemp plants to be used in performance yarns, industrial additives and absorbent pulp and paper products. After extensive evaluation of our CRAiLAR®dissolving pulp by our development partner Ashland, it has been determined that in fact our CRAiLAR®Flax Fibers create a higher grade dissolving pulp than our CRAiLAR®technology, due to the effectiveness of the Crailar process in creating clean, uncontaminated fibers. We expect Ashland to confirm that direction with regard to fiber execution and direction, once all of their testing parameters have been completed.
We hold the exclusive worldwide license to these patented technologies.
CRAiLAR®is a versatile technology which performs well on all bast fiber crops. At the end of April of 2010, we announced that we had successfully spun flax-cotton and help-cotton yarns. We found the CRAiLAR®flax to be of very high quality and ideally suited for fine knit items such as T-shirts. The environmental sustainability of flax is virtually identical to hemp. Differences are that hemp produces more biomass per acre while flax generates a higher percentage of bast fiber. We feel for a wide range of applications and a superior hand-feel that flax is the right crop with which to launch our CRAiLAR®brand.
Flax has the potential to be a zero waste crop. We are already in the process of investigating by-product opportunities that are beneficial to both the consumer and economy (those by-products being seed and shive).
Flax has been used for textile applications for thousands of years and is known as linen when it is processed using traditional mechanical techniques. It is labor intensive, costly to process and has a rougher hand feel than cotton and polyester. In addition, it is prone to wrinkling and high shrinkage if washed in hot water and tumble dried. Traditionally processed flax must also be spun on specialty linen machinery making it unviable for mass production.
Flax is a cost-effective raw material for fiber production. Flax is 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.
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We also enjoy the ability to use the straw of the oilseed flax crop, which is cultivated for food and industrial applications. This straw would normally be discarded and burned following the seed harvest. Making use of this waste byproduct will only further enhance the CRAiLAR®Flax Fiber sustainability rating.
With mill delivered cotton priced between $0.90 and $1.00 per pound, flax is a cost-effective raw material for fiber production. Flax is easy to grow with minimal use of herbicides, pesticides and engineered irrigation that significantly reduces costs as compared to other natural fibers.
The CRAiLAR®Fiber process is a clean, sustainable, environmentally responsible process, which works with bast fiber feed stocks. Bast fiber plants grow abundantly, without excessive water, herbicide, fertilizer and pesticide use. In fact, CRAiLAR®was designated as a 100% BioPreferred®product by the USDA in April 2012. CRAiLAR®Flax Fibers will be used in union with cotton, which when blended together, results in a much better performing fabric than cotton alone. The resulting fabric (if simply an 80/20 blend) takes on the characteristics of CRAiLAR®Flax Fibers, which are enhanced moisture management and comfort (wicking), durability, superior dye uptake characteristics (a potential minimal dye reduction of 10%), and garment shrinkage reduction (a potential minimum of 50%).
Supply, Development and Other Partnerships
On January 18, 2011, we announced that we joined forces with Hanesbrands Inc. and the U.S. Department of Agriculture’s Agricultural Research Service (USDA-ARS) in a cooperative research project designed to cultivate and evaluate the viability of various flax strains for use in CRAiLAR®technology. The project takes place in South Carolina and has an initial term of one year with a renewal option for two additional years. In 2012 we initiated the second year of the collaboration and expanded the study’s focus to include fungicide application trials along with generating data which will be used to substantiate a crop insurance application.
On March 17, 2011, we announced that we signed a ten-year CRAiLAR®fiber supply agreement with Hanesbrands Inc. to commercialize the Company’s proprietary fibers.
On April 14, 2011, we announced that we had entered into a short term CRAiLAR®Flax fiber development agreement with Levi Strauss & Co. beginning in April 2011 to support evaluation of processing CRAiLAR®flax fiber in woven casual apparel products, specifically denim and non-denim, bottom and top weight fabrics.
In June 2011 the Company entered into a short-term CRAiLAR®Flax fiber development agreement with Cintas Corporation beginning June 2011 to support evaluation of processing CRAiLAR®flax fiber in corporate identity uniform programs.
In June 2011 the Company entered into a joint development agreement with Hercules Incorporated, a subsidiary of Ashland Inc., beginning June 2011 to support evaluation of CRAiLEXTMcellulosic products for multiple products.
On July 14, 2011 the Company entered into an agreement with Carolina Eastern Precision Ag, of Pamplico, S.C., to provide agronomic consultation to the Company and its contractors in the region. Under the terms of the agreement, Carolina Eastern will assist us in the recruitment of growers and contractors, and advise on all cultivation related to flax that will be turned into its branded CRAiLAR®fiber including seeding rates, fertilization, and weed control.
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In September, 2011, the Company 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. The agreement is automatically extendable to ten years upon notification by GP of the intention to do so.
In September, 2011, the Company entered into an agreement with Westex Inc., for the evaluation and development of CRAiLAR®Fibers in flame and arc resistant fabrics for the industrial, military and service sector industries. Westex Inc. is the market leader in this category.
In September, 2011, the Company entered into a purchasing agreement for a minimum of one and a half million pounds of CRAiLAR®Flax fiber with Brilliant Global LTD, the Hong Kong-based private label knitwear manufacturer which produces a broad spectrum of sweater and accessory items in natural fibers for globally recognized brands and retailers.
In October 2011, the Company entered into an agreement with Carhartt Inc., for the evaluation and development of CRAiLAR®Fiber in work wear apparel. Carhartt is the industry leader in work wear apparel, with a broad distribution of product in both retail and corporate markets. CRAiLAR®Fibers are expected to add performance improvements to Carhartt garments in durability, moisture management and dye chemical savings.
In December 2011, the Company entered into an agreement with Target to evaluate the use of its CRAiLAR®Flax fiber in Target’s domestic textiles category beginning December 1, 2011. The agreement includes two years of exclusivity in the category and calls for target’s evaluation of CRAiLAR®Flax in a number of products including sheets, top or bed, shower curtains, window treatments, table linens, decorative pillows, towels, and more. In July 2012, the Company announced it commenced delivery of an initial 100,000 pounds of fiber to Target’s designated vendor. In the spring of 2013 Target introduced a new drapery line, called Threshold, containing 20% CRAiLAR®Fiber. These items are sold on Target’s website and in their stores.
In January 2012, the Company entered into a non-exclusive and non-transferable license with Tuscarora Yarns, one of the world’s premier yarn innovators, to explore a host of new blended yarns and related products using CRAiLAR®Flax, which Tuscarora is expected to design and manufacture for sale and distribution to third party licensees of CRAiLAR®.
In March 2012, we entered into an agreement with Tintoria Piana to execute the CRAiLAR®enzymatic process, augmenting the Company’s plans for manufacturing capacity. Tintoria’s history in textiles dates to 1582 in Biella, Italy. The privately held, family-owned business has dyed fiber for the traditional apparel business for more than 60 years, and operates principally out of Cartersville, Georgia in North America. The Company believes that outsourced manufacturing allows for faster expansion of our technology proposition while significantly reducing the capital requirements to scale up to meet demand. Tintoria commenced production in Q3 2012.
In April 2012, we entered into a short term CRAiLAR®Flax fiber development agreement with PVH Corp (NYSE: PVH), one of the largest global apparel companies, to evaluate the processing of CRAiLAR®Flax fiber in dress and sports shirt lines. Product development with PVH has expanded in early 2013 to include sweater knits and bottom weight fabrics.
In April 2012, we entered a joint development agreement with Austria-based Lenzing GroupLenzing Group(LNZ: Vienna), the worldwide leader in cellulosic manmade fibers. The agreement calls for the companies to evaluate the blending of CRAiLAR®Flax fibers with TENCEL(R) (Lyocell) and Lenzing Modal(R).
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Recent Developments
In January 2013, we commenced running production grade fiber at our new Pamplico, South Carolina manufacturing facility. Decorticated fiber through-put continues to ramp up over the first quarter as modifications and adjustments are made to the line.
On January 10, 2013, we entered into a Supply Agreement with Kowa Company Ltd. (“KOWA”), a Japanese company which is engaged in the design, development, manufacture, marketing and sale of textiles. Pursuant to this agreement, KOWA agrees to purchase CRAiLAR®fiber that meets the specifications to be determined by the parties on or before April 10, 2013, for evaluation purposes in fabrics, apparel and non-woven goods. However, since we have currently granted exclusivity for non-woven goods with respect to the CRAiLAR®fiber to a third party, if KOWA wishes to produce non-woven goods for the Japanese market, KOWA may do so using such third party’s non-woven substrate made from the CRAiLAR®fiber. The initial term of the agreement is for a period of six months and may be renewed for successive periods by written agreement between the parties. If KOWA develops any possible products for commercial purposes (the “KOWA Products”) during the initial term or any renewal term of this agreement which contains or uses the CRAiLAR®fiber, then the parties shall make a good faith discussion to conclude a joint development agreement to facilitate the development of the KOWA Products.
On February 12, 2013, we entered into a Development Agreement with Cotswold Industries Inc. (“Cotswold”) to encompass sustainable pocketing and waist banding for its branded apparel customers. Pursuant to this agreement, the Company and Cotswold will work jointly and individually at their respective facilities, will co-operate in their research and development activities as may be required or expedient, and will use commercially reasonable efforts to develop or create commercially viable CRAiLAR®fibers in order to facilitate the introduction of CRAiLAR®fibers into pocketing, interlining and waist banding products. This development program will encompass all research, design, development, improvement and other experimentation and performance testing of CRAiLAR®fibers during the 240-day term of the agreement.
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. Pursuant to the Agreement, Crailar will supply to Cone CRAiLAR fiber®utilizing Crailar’s technology of enzyme-based processing of natural bast fibers. The price for the CRAiLAR fiber®shall be negotiated by Crailar and Cone in good faith as soon as practicable every six months, based upon forecast accuracy and annual volume. The term of the Agreement shall be for a period terminating on December 31, 2015. Unless expressly agreed to in writing by Cone, or as otherwise provided in the Agreement, Crailar will not sell CRAiLAR fiber®to any manufacturer of denim other than Cone during the term of the Agreement.
Strategic Alliances
National Research Council of Canada
Collaboration Agreement
In October 2007, we entered into a joint collaboration agreement with the National Research Council of Canada (the “NRC”) to continue to develop a patentable enzyme technology for the processing of hemp fibers. The agreement was for three years and was set to expire on May 9, 2010. On February 19, 2010, we signed an amendment to the agreement which expired on May 9, 2012. We are currently negotiating a new joint collaboration agreement 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.
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Over the term of the amended agreement, we will pay the NRC a total of $280,536 divided into nine payments up to May 9, 2012. As of the date of this report all payments due in 2012 ($33,183) have been paid.
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 (CDN$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 CDN$15,000 per year (US$14,750) During the year ended December 31, 2012, the Company paid CDN$7,500 (US$7,375) and accrued CDN$7,500 (US$7,375) of the minimum annual royalty.
Alberta Innovates – Technology Futures
In June 2007, the Company’s subsidiary, Crailar Fiber Technologies Inc. (“CFT”), entered into a Master Agreement for Technology Development with Alberta Innovates – Technology Futures (“AITF”, formerly Alberta Research Council) (the “Technology Agreement”) to further develop and commercialize bast fiber technology. The Technology Agreement is intended to act as an umbrella agreement for further bast fiber development planned to be performed by AITF under separate Project Agreements. Under the terms of the Technology Agreement, commencing July 1, 2007, we will pay $20,525 (CDN$25,000) per quarter to the AITF and can terminate the agreement with 90 days’ notice, unless there are Project Agreements in effect. In addition to the above payments, CFT will be responsible for providing work-in-kind with a value of $20,525 (CDN$25,000) per calendar quarter commencing with the first Project Agreement. During 2012 the Company paid AITF $2,000 for specific tasks to further the development of AITF’s Technology (2011 -$135,890 and 2010 - $7,991). Under the terms of the Project Agreements signed with AITF the Company will be entitled to an exclusive, worldwide, royalty-bearing license to use any new intellectual property developed pursuant to the Project Agreements. The royalty based on this option will be 3% of gross sales for the first $50,000,000 and 1.5% of gross sales on excess of $50,000,000. The Technology Agreement is in effect as long as there is an active Project Agreement. The Company currently has a Project Agreement with Ashland Inc. for testing the AITF technology.
Research and Development
During fiscal year 2007, CRAiLAR®completed proof of concept testing on three separate bast fiber processing techniques with the NRC in Ottawa and the AITF in Edmonton. Proof of concept testing at the NRC included the completion of the first CRAiLAR®Fiber processing equipment which was constructed in Montreal and installed at the NRC facility in Ottawa. Ongoing tests with this equipment continue to establish the efficacy of CRAiLAR®enzymatic processes, with early test fibers meeting the requirements of the textile producing industry.
During the fourth quarter of 2007, and first three quarters of 2008, we began scaling CRAiLAR®Fiber processing equipment at a pilot plant facility in Montreal. The equipment became operational during the second quarter of 2008. During the third and fourth quarters of 2008, the pilot plant facility processed 1000kgs of fiber, a portion of which was sent to North Carolina State’s Textile College, where it was spun and then knitted into a fabric suitable for T-shirt or other knit garments.
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In May 2007, AITF filed two provisional patent applications related to decortication and degumming technologies for which we have secured exclusive worldwide licensing rights from the AITF. We completed the installation of proprietary decortication equipment at the AITF. We completed proof of concept testing on the proprietary degumming technology at the NRC’s Industrial Materials Institute in Montreal. Test results were in line with expectations and suitable for industrial use.
During 2009, our research and development efforts for CRAiLAR®Fibers were concentrated on producing fiber for spinning trials. Different variations of our enzymatic process, drying, carding and equipment was tested to optimize the fiber for spinning using traditional cotton spinning equipment. These research and development efforts led to the successful initial spinning trials of CRAiLAR®fibers. The spinning trials were sponsored by Hanesbrands Inc. at North Carolina State University. We carded and spun a blended CRAiLAR®yarn on a cotton ring spinning system with no modifications using CRAiLAR®Fiber Technology. The resulting 20/1 Ne* ring spun yarn was knitted into a 5-ounces per square yard jersey fabric. (Ne* is a measurement count for yarn, the higher the number the finer the yarn.) Management believes that this was the first time hemp was processed on conventional cotton spinning equipment.
Through CRAiLEXTMAdvanced Materials we concentrated our research and development to refining our decortication technology and producing enough decorticated fiber for tests using our proprietary pulp. We engaged an independent testing company to verify the quality of our dissolving pulp and their test results confirmed our AITF lab results and showed the CRAiLEXTMdissolving pulp has qualities far in excess of standard soft or hardwood pulps on the market. We also began commercial trials at a leading North American consumer paper products company where paper products made from our pulp were successfully made and further market applications for CRAiLEXTMpulp were determined.
The primary function of the R&D team in 2012 was focused on improving the economics of the CRAiLAR process. Specifically, a reduction in processing time, and an improvement in bleaching efficiency were both high on the priority list. An overall reduction of 40% in processing time was achieved which translates into significant cost savings for the Company. Additionally, the efficiency of the bleaching stage was improved and produced much brighter fibers that had not been damaged by the bleaching chemicals.
The R&D team also worked to refine the decortication platform that was installed in Pamplico. Management was able to achieve improvements in the line and identify additional areas that can be improved in 2013.
In the agricultural department, CRAiLAR continued work with the USDA to determine optimum harvest times for maximum straw yield, chemical input research, and varietal trials for the South Carolina climate.
We have invested a considerable amount of time and effort into product research and development. Our research and development costs for our fiscal year ended December 31, 2012 totaled $660,229 (2011 -$757,443), all of which was attributable to the CRAiLAR®and CRAiLEXTMtechnology development.
Trademark and Domain Name Rights
In September 2005, we trademarked the term CRAiLAR®to identify our proprietary technology platform relating to the engineering, processing and production of bast fibers including technology co-developed with and licensed from the NRC. Under the CRAiLAR®Technology platform, we have secured the exclusive worldwide licensing rights to intellectual property arising from our collaborative research agreements. In May 2007, the NRC filed a patent application for intellectual property related to the extraction of hemp fibers, under the Patent Cooperation Treaty simultaneously seeking protection in up to 117 countries worldwide. We have secured the exclusive worldwide licensing rights from AITF related to the CRAiLEXTMTechnology for use in textile, composite and pulp applications.
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We are currently evaluating partnering opportunities for multiple product development and commercialization of our proprietary CRAiLAR®and CRAiLEXTMTechnologies for environmentally sustainable bast fiber processing and production. Exclusive international licensing rights to these patent applications allow us to protect our investment to date in the development of CRAiLAR®and CRAiLEXTMTechnologies and confidently move forward in seeking an appropriate development and commercialization partner.
We also own the web sites www.naturallyadvanced.com, www.crailar.com and www.crailex.com.
Marketing Strategy
Our primary target markets are the natural yarn, the cellulose pulp and composites markets. We believe that our technologies have the potential to redefine the platform of sustainable yarns, delivering a complete solution from a consumer’s perspective. This implies market relevant performance attributes that are also cost benefit relevant, in a delivery that is sustainable and transparent. The current areas of focus, from a comparison and proof of concept perspective, are the cotton, high performance yarn and pulping industries. Each have entrenched market plays that are either toxic, resource limited, or potentially offensive to informed consumers. Our technologies provide enhanced performance solutions to these industries, whilst delivering a triple bottom line philosophy, respecting the human rights of employees, the environmental impact of our operations and fiscal responsibility to our shareholders. We believe that we offer two key opportunities for development:
CRAiLAR®Fiber for textiles, which fiber will be flax, hemp (or other sustainable bast fiber) available in a variety of blends, textures, colors and applications; and
CRAiLEXTMAdvanced Materials, which develops technologies for the processing of these cellulose-based fibers in pulp and paper, high grade dissolving pulp and performance apparel industries.
Marketing Initiatives
Because CRAiLAR®Fibers can be an ingredient in countless products, management believes that partnering with the largest, most successful brands, all of which are top of mind to the North American consumer, is the path to successful commercialization. The Company has signed development and supply agreements with some of the world’s largest fiber consuming companies such as Hanesbrands Inc, Levis Strauss & Co., Georgia-Pacific, and Target. Sustainability, risk mitigation, consumer satisfaction and product enhancement are all offered within the CRAiLAR®experience.
We believe that our marketing model will drive a pull-through marketing strategy, which draws from detailed brand building and delivers that promise directly to consumers. Brand building strategies imply a strong direct to consumer platform, which will allow us to build equity in a consumer focused model ultimately allowing transfer of that equity to establishing branding partnerships with some of the world’s leading consumer brands. We further believe that the CRAiLAR®and CRAiLEXTMprocesses will entice those in North America to ramp up flax and hemp farming and/or processing as it is expected to create significant margins. Another target market will be partners. We believe that the creation of partnerships is an important strategy for a small company, and our public partnerships with NRC and AITF have been very important to us. We believe additional partnerships with consumer brands will also be important for the branding opportunities that these global brands will provide.
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Further down the road, the Company will be working in tandem with our partners to communicate the benefits of CRAiLAR®through co-branding, ingredient call-outs, co-op marketing efforts, in-store signage, point of purchase and with links to the relevant social media networks and websites. The Company believes that our own presence and prosperity will grow in concert with the growth of our growers and business partners, allowing CRAiLAR®to be top of mind, similar to ingredient brand successes such as Gore-Tex®and Intel®.
Pricing Strategy
It is expected that fibers and yarns produced with the CRAiLAR®process will be competitively priced vis-a-vis current natural and synthetic fibers and allow us to realize significant margins. Add to that, a transparent and certifiable sustainability platform, and we believe that CRAiLAR®has the potential to establish a new industry standard.
Global Strategies
Global Industry Partners
We recognize that our patented technologies have global, multi industry applications, and as such represents a significant opportunity for companies currently in those industries. Additionally, speed to market and being first to establish new industry standards is a crucial and strategic marketing advantage. With that understanding in mind, we are evaluating potential strategic partnerships with global leaders in the pulp and paper, yarn, fabric, carpeting, upholstery and composites industries.
In addition, we believe that the opportunity exists to partner with global brands, which we believe will allow us to leverage the considerable branding and marketing talent of global brands to increase the brand power of CRAiLAR®and CRAiLEXTM. More than just an enzyme or pulping technology, we believe that CRAiLAR®and CRAiLEXTMcan be consumer recognized performance brands that are valued and demanded by an informed public.
We have negotiated and signed agreements with some of the largest fiber consuming companies in the world. We have done this by following through on enquiries from CEOs, COOs, CMOs as well as Innovation Officers to confirm the attributes and benefits of CRAiLAR®fibers. We have been able to showcase an extraordinary opportunity that has been worked into the fabric of corporate responsibility and sustainability platforms. We understand that in order for new initiatives to be pulled through the corporate system to market reality, you need to start at the top. By linking our sales and marketing goals to our production and operations plans, we decided very early that if we are here for good, and are willing to assist the consumer on the path to sustainability, we need to positively affect the national footprint of “dirtier” fibers and processes as quickly as we can.
As we move forward to commercialization, our partners are not only successfully integrating our CRAiLAR®flax fiber within their biggest product categories, but as well, discovering benefits and enhancements which are exclusive to their developments, allowing the CRAiLAR®brand to evolve and grow, while servicing both the consumer and business needs.
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.
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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.
Employees
We currently employ 25 full time employees.
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.
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 $9,315,360 and $6,998,922, respectively, for fiscal years ended December 31, 2012 and 2011. As of December 31, 2012, we had accumulated deficits of $32,252,914. As at December 31, 2012 we had cash and cash equivalents of $2,877,210 and working capital of $2,585,862. Further, we do not expect positive cash flow from operations until Q4 2013.
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We Will Need to Raise Capital To Continue Our Operations.
Based upon our historical losses from operations, we may require additional funding in the future. If we cannot obtain capital through 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, convertible debenture and bank debt financing arrangements. We may not be able to obtain additional financing on favorable terms, if at all. Our future cash flows and the availability of financing will be subject to a number of variables, including demand for CRAiLAR®and CRAiLEXTMtechnologies. 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, it would have a material adverse effect upon our operations.
A Commercial Market Must Be Found for Our By-products.
Markets need to be found and developed for the by-products of our decortication process or it could have an effect on our profitability. 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 report.
Our Success is Dependent Upon the Acceptance of CRAiLAR®Technology.
Our success depends upon our achieving significant market acceptance of our CRAiLAR®Technology and demand for our products. Acceptance of our CRAiLAR®Technology will depend on the success of our and our partners’ promotional and marketing efforts and ability to attract customers. To date, we have not spent significant funds on marketing and promotional efforts, although in order to increase awareness of our products we expect our partners to spend a significant amount on promotion, marketing and advertising in the future. If these expenses fail to develop an awareness of our CRAiLAR®Technology and products, these expenses may never be recovered and we may never be able to generate any significant future revenues. In addition, even if awareness of our CRAiLAR®Technology increases, we may not be able to produce enough product to meet demand.
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. Messrs. Barker, Sanders, Finnis, Prevost, Robinson and Nalbach spend substantially all, or most, of their working time with us and our subsidiaries. It may be difficult to find sufficiently qualified individuals to replace Mr. Barker, Mr. Sanders, Mr. Finnis, Mr. Prevost, Mr. Robinson, Mr. Nalbach, Ms. Harrison or other key management personnel if we were to lose any one or more of them. The loss of Mr. Barker, Mr. Sanders, Mr. Finnis, Mr. Robinson, Mr. Nalbach or Mr. Prevost, or any of our other key management personnel 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. 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. Such conflicts include deciding how much time to devote to our affairs, as well as what business opportunities should be presented to us. Because of these relationships, certain of our 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.
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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 to the effects of international trade agreements and embargoes imposed by such 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, which 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.
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 trademark CRAiLAR®and other proprietary know-how, including our CRAiLAR®and CRAiLEXTMprocess, 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 copies 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 diversions 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.
Currency Fluctuations May Cause Translation Gains and Losses.
A significant portion of our expenses are incurred in Canadian dollars. 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 relative to United States dollars may cause currency translation gains and losses.
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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 31, 2012, there were 44,239,198 shares of our common stock issued and outstanding. (As of March 13, 2013, there were 44,430,198 shares of our common stock issued and outstanding). Further, as of December 31, 2012 there were an aggregate of 6,366,045 stock options (4,307,990 of which were vested and exercisable into 4,307,990 shares of common stock at a weighted average exercise price of $1.69 per share) and 3,156,848 share purchase warrants outstanding exercisable into 3,156,848 shares of common stock at a weighted average exercise price of $4.02 per share.
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 OTC Bulletin Board Has Been and May Continue to Fluctuate Significantly and Stockholders May Have Difficulty Reselling Their Shares.
During our fiscal year ended December 31, 2012, our common stock has traded as low as $1.75 and as high as $3.58. In addition to volatility associated with Bulletin Board 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;
disappointing results from our or our partners’ 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 operations;
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.
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.
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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 have no present plans to issue any shares of preferred stock, the 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 the NASDAQ National Market or the NASDAQ Small Cap Market, 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 not 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.
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.
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| 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 approximately 1,571 square feet of office space in Victoria, British Columbia for a monthly basic net rent of CDN$2,749.25 (US$2,763.34 based on the exchange rate on December 31, 2012 of CDN$1.00 = US$1.0051) . The lease is for a term of three (3) years commencing on August 1, 2011 and expiring on July 31, 2014 with one renewal term of three (3) years.
Effective August 9, 2010, we signed a ten-month sublease of a facility at 164 County Camp Road, Kingstree, SC, 29556, 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 for this same property and facility in Kingstree, South Carolina, for a monthly rent of $3,300 expiring on June 30, 2012. Subsequent to June 30, 2012, we agreed to continue to lease the facility for a monthly rent of $3,400 until June 30, 2013.
Effective August 15, 2011, we entered into a lease for approximately 1468 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 (3) years expiring on August 14, 2014.
In March 2012, we signed a lease for an approximately 147,000 square foot building on 52 acres outside of Pamplico, South Carolina. The initial term of the lease is for ten years with two additional five-year extension terms. Commencing January 1, 2014, the annual basic rent will be $146,930 and increasing to $220,395 from June 1, 2018 to May 31, 2022.
| ITEM 3. | LEGAL PROCEEDINGS |
Management is not aware of any legal proceedings 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 legal proceedings pending or that have been threatened against us or our properties.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market for Common Stock
Shares of our common stock have been quoted on the OTC Bulletin Board since March 21, 2006, 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. 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 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 |
| December 31, 2011 | $2.55 | $1.57 |
| September 30, 2011 | $3.45 | $1.95 |
| June 30, 2011 | $4.50 | $1.87 |
| March 31, 2011 | $1.98 | $1.03 |
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.
| Quarter Ended | High | Low |
| December 31, 2012 | CDN$2.71 | CDN$1.95 |
| September 30, 2012 | CDN$2.75 | CDN$2.01 |
| June 30, 2012 | CDN$3.50 | CDN$2.28 |
| March 31, 2012 | CDN$3.59 | CDN$1.76 |
| December 31, 2011 | CDN$2.66 | CDN$1.50 |
| September 30, 2011 | CDN$3.30 | CDN$2.05 |
| June 30, 2011 | CDN$4.49 | CDN$1.73 |
| March 31, 2011 | CDN$1.87 | CDN$0.98 |
As of March 13, 2013, there were approximately 81 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.
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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 31, 2012.
| 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) | 6,366,045 | $1.77 | 124,066 |
| Equity Compensation Plans Not Approved by Security Holders | N/A | N/A | N/A |
| Total | 6,366,045 | $1.77 | 124,066 |
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. 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.
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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.
Form S-8 Registration Statement
On February 16, 2012, we filed a registration statement on Form S-8 relating to a maximum of 8,124,240 shares of common stock, without par value, issuable directly by us under our 2011 Plan or pursuant to the exercise of options that have been or may be granted under the 2011 Plan (including options granted under our Previous Stock Option Plan as described above).
Common Stock Purchase Warrants
As of December 31, 2012, there were an aggregate of 3,156,848 common stock purchase warrants issued and outstanding. As of March 13, 2012, there were an aggregate of 3,156,848 common stock purchase warrants issued and outstanding.
Recent Sales of Unregistered Securities
During our fiscal year ended December 31, 2012, we sold the following equity securities that were not registered under the Securities Act:
Unit Offerings
On September 13, 2012, we issued an aggregate of 418,429 units of the Company to 15 investors at a price of $2.21 per unit for gross proceeds of $924,728.09. Each unit is comprised of one share of common stock and one half of one share purchase warrant. Each whole share purchase warrant is exercisable into one share of common stock at an exercise price of $3.45 per share until September 13, 2014. The Company relied on exemptions from registration under the Securities Act provided by Rule 506 of Regulation D and Regulation S, based on representations and warranties provided by the purchasers of the shares in their respective subscription agreements entered into between each purchaser and the Company.
On September 24, 2012, we issued an aggregate of 450,758 units of the Company to five investors at a price of $2.21 per unit for gross proceeds of $996,175.18. Each unit is comprised of one share of common stock and one half of one share purchase warrant. Each whole share purchase warrant is exercisable into one share of common stock at an exercise price of $3.45 per share until September 24, 2014. The Company relied on exemptions from registration under the Securities Act provided by Rule 506 of Regulation D, based on representations and warranties provided by the purchasers of the shares in their respective subscription agreements entered into between each purchaser and the Company.
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On October 10, 2012, we issued an aggregate of 198,587 units of the Company to six investors at a price of $2.21 per unit for gross proceeds of $438,877.27. Each unit is comprised of one share of common stock and one half of one share purchase warrant. Each whole share purchase warrant is exercisable into one share of common stock at an exercise price of $3.45 per share until October 10, 2014. The Company relied on exemptions from registration under the Securities Act provided by Rule 506 of Regulation D, based on representations and warranties provided by the purchasers of the shares in their respective subscription agreements entered into between each purchaser and the Company.
Convertible Debenture Offering
On September 20, 2012, we completed an underwritten offering of $10,051,262 (CDN$10,000,000) convertible debentures (the “Notes”). Cormark Securities Inc. acted as underwriter. The Notes mature on September 20, 2017. The Notes bear interest at a rate of 10% per year, payable semi-annually on March 31 and September 30, starting March 31, 2013.
Holders of the Notes have the option to convert the Notes at a price of $2.90 per common stock into common stock of the Company at any time prior to the maturity date. The Company may redeem the 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 Notes are secured by a Guaranty and Security Agreement signed with the Company’s wholly-owned subsidiary, Crailar Inc., a Nevada incorporated company. Crailar Inc. provides security interests over its assets, having an aggregate acquisition cost of no less than US$5,500,000, as security for its guarantee obligation which shall rank in priority to all other indebtedness of Crailar Inc.
We paid a total of $1,083,936 (CDN$1,078,408) for agent commission and other expenses in connection with this offering. We granted an Over-Allotment Option to the underwriter for purchasing up to 15% of the principal amount of the Notes on the same terms and conditions. The Over- Allotment Option expired without being exercised.
In connection with this issuance, we relied on the exemption from registration under the U.S. Securities Act provided by Regulation S.
Comparative Stock Performance
Our shares of common stock commenced trading on the OTC Bulletin Board on March 21, 2006. Our shares of common stock were also listed for trading on the TSX Venture Exchange since July 8, 2008. The graph below compare the cumulative total stockholder return on our common stock for the years ended December 31, 2007 through to December 31, 2012, with the cumulative total return on the shares of common stock of Ecosphere Technologies Inc. (“ETI”), Provectus Pharmaceuticals, Inc. (“PPI”) and White Mountain Titanium Corp. (“WMT”) and the cumulative total return on the S&P 600 over the same periods (assuming an investment of $100 in our common stock, Ecosphere Technologies Inc., Provectus Pharmaceuticals, Inc., White Mountain Titanium Corp. and the S&P 600 on December 31, 2007, and the reinvestment of all dividends, if any).
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Since we were not able to identify a published industry or line-of-business index and were not able to reasonably identify a peer group, we selected the comparative issuers based on such issuers having a similar market capitalization.
| 31-Dec-07 | 31-Dec-08 | 31-Dec-09 | 31-Dec-10 | 31-Dec 11 | 31-Dec 12 | |
| Crailar Technologies Inc. | $100.00 | $113.48 | $114.60 | $140.44 | $246.06 | $243.82 |
| Ecosphere Technologies Inc. | $100.00 | $155.00 | $235.00 | $239.95 | $245.00 | $184.15 |
| Provectus Pharmaceuticals, Inc. | $100.00 | $53.49 | $52.90 | $54.65 | $47.09 | $32.56 |
| White Mountain Titanium Corp. | $100.00 | $40.80 | $89.60 | $77.60 | $187.20 | $76.00 |
| S&P 600 | $100.00 | $68.01 | $84.18 | $105.21 | $105.04 | $120.61 |
| ITEM 6. | SELECTED FINANCIAL DATA |
The following selected financial data has been derived from and should be read in conjunction with (i) our audited financial statements as at and for the years ended December 31, 2012, 2011, 2010, 2009 and 2008, together with the notes to these financial statements, and (ii) the section of this annual report entitled “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
During fiscal 2009 we decided to discontinue the apparel business to focus on developing our bast fiber technology. We did not renew our warehouse lease which expired in 2009 and no longer have sales staff or any selling expenses. In addition, we restated our audited financial statements for the fiscal period ended December 31, 2009 to correct the accounting for warrants that were issued in connection with a previous private placement. The exercise price of these warrants is denominated in United States dollars, which differs from the Company’s functional currency (Canadian dollars) and therefore these warrants cannot be considered to be indexed to the Company’s own stock. Accordingly the fair value of the warrants must be accounted for as a derivative liability with changes in fair value recorded in the statement of operations. Accordingly, the financial information presented below may not be comparable from period to period.
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Selected Financial Data:
Balance Sheet Data
| As at December 31, | |||||
| Item | 2012 | 2011 | 2010 | 2009 | 2008 |
| Cash and cash equivalents | $2,877,210 | $6,340,505 | $18,493 | $421,452 | $319,358 |
| Working capital (deficiency) | $2,585,862 | $5,932,991 | ($2,646,925) | ($57,687) | ($13,862) |
| Total Assets | $20,328,540 | $10,884,414 | $258,894 | $740,845 | $1,786,438 |
| Total Liabilities | $13,426,339 | $1,641,641 | $2,773,536 | $1,965,653 | $1,466,722 |
| Total stockholders’ equity | $6,902,201 | $9,242,773 | ($2,514,643) | ($1,224,808) | $319,716 |
Statement of Operations Data
| Under U.S. GAAP | For the years ended December 31, | ||||
| Item | 2012 | 2011 | 2010 | 2009 | 2008 |
| Revenue | Nil | Nil | Nil | Nil | $2,607,153 |
| Expenses | $8,319,518 | $6,430,084 | $3,308,769 | $3,118,988 | $4,312,307 |
| Loss from continuing operations | ($9,315,360) | ($6,998,922) | ($3,304,756) | ($2,391,294) | ($3,382,718) |
| Profit (loss) from discontinued operations | n/a | n/a | $11,317 | ($659,946) | n/a |
| Net Loss | ($9,315,360) | ($6,998,922) | ($3,293,439) | ($3,051,240) | ($3,382,718) |
| Loss from continuing operations per common share | ($0.22) | ($0.18) | ($0.10) | ($0.07) | ($0.12) |
| Earnings (Loss) from discontinued operations per common share (basic and diluted) | n/a | n/a | n/a | ($0.02) | n/a |
| Weighted average number of common shares outstanding (basic and diluted) | 43,009,226 | 38,582,587 | 34,584,288 | 32,939,968 | 29,378,370 |
| Common shares issued and outstanding | 44,239,198 | 41,701,604 | 35,313,202 | 33,354,215 | 30,827,046 |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS |
The following discussion and analysis of our results of operations and financial position should be read in conjunction with our financial statements and the notes thereto included elsewhere in this Report. Our consolidated financial statements are prepared in accordance with U.S. GAAP. All references to dollar amounts in this section are in U.S. dollars unless expressly stated otherwise.
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The matters discussed in these sections that are not historical or current facts deal with potential future circumstances and developments. Such forward-looking statements include, but are not limited to, the development plans for the Company’s growth, trends in the results of the Company’s development, anticipated development plans, operating expenses and the Company’s anticipated capital requirements and capital resources. As such, these forward-looking statements may include words such as “plans”, “intends”, “anticipates”, “should”, “estimates”, “expects”, “believes”, “indicates”, “targeting”, “suggests”, and similar expressions. The actual results are expected to differ from these forward-looking statements and these differences may be material.
RESULTS OF OPERATIONS
Fiscal Year Ended December 31, 2012 Compared to Fiscal Year Ended December 31, 2011 and Compared to Fiscal Year Ended December 31, 2010
| Twelve months ended December 31st | |||
| 2012 ($) | 2011 ($) | 2010 ($) | |
| Loss from Continuing Operations | (9,315,360) | (6,998,922) | (3,304,756) |
| Gain (Loss) from Discontinued Operations | - | - | 11,317 |
| Net Loss | (9,315,360) | (6,998,922) | (3,293,439) |
| Exchange differences on translating foreign controlled entities | (35,685) | (298,197) | (40,324) |
| Total comprehensive loss | (9,351,045) | (7,297,119) | (3,333,763) |
| Loss/share | (0.22) | (0.18) | (0.10) |
Revenue and Gross Margins
Our net operational loss from continuing operations during the twelve-month period ended December 31, 2012, was ($9,315,360) compared to ($6,998,922) during the twelve-month period ended December 31, 2011 and compared to ($3,293,439) for the twelve-month period ended December 31, 2010. The Company has continued to increase expenses in preparation for the commercialization of CRAiLAR. Specifically, the increase in loss was due to an increase in amortization and depreciation expense, advertising and promotion expense, an increase in general and administrative expense, professional fees, and salaries and benefits expense as well as a loss from the write down of obsolete equipment and the write down of inventory.
Operating Expenses
During the twelve-month period ended December 31, 2012, we recorded operating expenses of $9,315,360 compared to operating expenses of $6,998,922 for the same period in 2011 and operating expenses of $3,293,439 in 2010. The continued increase in operating expenses reflects the growing preparation of the Company for commercialization in 2013.
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Operating expenses consisted of:
- $406,945 (2011: $236,488), (2010 - $216,937) in advertising and promotion;
- $278,805 (2011: $61,809), (2010 - $34,486) in amortization and depreciation;
- $762,668 (2011: $1,304,960), (2010 - $682,796) in consulting and contract labour;
- $886,935 (2011: $605,837), (2010 - $352,996) in general and administrative;
- $99,655 (2011: $96,975), (2010 - $161,990) in interest;
- $798,384 (2011: $401,254), (2010 - $226,985) in professional fees;
- $660,229 (2011: $757,443), (2010 - $596,212) in research and development;
- $4,425,897 (2011: $2,965,318), (2010 - $1,036,367) in salaries and benefits;
- $593,894 (2011: $2,768), (2010 - $94,486) in write down of equipment;
- $303,663 (2011: $Nil), (2010 - $Nil) in write down of inventory; and
- $98,285 (2011: $566,070), (2010 - a gain of $98,499) in fair value adjustment of derivative liability.
Advertising and promotion expenses increased to $406,945 for the twelve-month period ended December 31, 2012, from $236,488 for the same period in 2011and $216,937 for the same period in 2010. The increase in advertising and promotion in fiscal 2012 was primarily due to payments made to growers as incentives for the growing of flax fiber in the spring 2012 harvest.
Amortization and depreciation expenses increased to $278,805 for the twelve-month period ended December 31, 2012, from $61,809 for the same period in 2011 and $34,486 for the same period in 2010. The increase in plant equipment depreciation, harvesting equipment depreciation and the amortization of our website and of computer software was the cause for the increase in expense in fiscal 2012.
Consulting and contract labor expenses decreased to $762,668 for the twelve-month period ended December 31, 2012, from $1,304,960, compared to the same period in 2011 and $682,796 for the same period in 2010. The decrease in 2012 was due to a decrease in the amount of stock based compensation and the classification of certain management to salaries and employees from consulting and contract labour compared to fiscal 2011. The amount for fiscal 2011 increased over fiscal 2010 due to an increase in stock based compensation and the hiring of consultants to assist in agronomics.
General and administrative expenses increased to $886,935 for the twelve-month period ended December 31, 2012, compared to $605,837 for fiscal 2011 and $352,996 for fiscal 2010. The expansion of the Company’s activities has led to an increase in general and administrative expenses, primarily office administration costs, travel, insurance and rent costs.
Interest expenses increased to $99,655 for the twelve-month period ended December 31, 2012, compared to $96,975 for the same period in 2011 and $161,990 in 2010. Interest in fiscal 2012 is attributable to the convertible debenture financing completed in September 2012. A portion of that interest has been allocated to certain assets. Interest in 2011 decreased over fiscal 2010 as all outstanding loans were repaid during 2011.
Professional fees were $798,384 for the twelve-month period ended December 31, 2012, compared to $401,254 for the same twelve-month period in 2011 and $226,985 for the same period in 2010. The primary cause for the increase was fees related to the Company’s preparation for listing on a more senior exchange, the fees involved in determining the Company’s status as a US Domestic Issuer, certain re-organizational costs including the Company’s name change, the fees involved in the application for certain grants and tax credits and the initiation of business in South Carolina.
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Research and development costs were $660,229 for the twelve-month period ended December 31, 2012, compared to $757,443 for the same twelve-month period in 2011 and $596,212 for the same period in 2010. Increased amounts of CRAiLAR®fiber have been produced for testing purposes for our development partners and the cost of that fiber has been expensed to research and development. Our development partners also purchased approximately $173,820 of Crailar fiber, which has been subtracted from those costs.
Salaries and benefits expenses increased to $4,425,897 for the twelve-month period ended December 31, 2012, compared with $2,965,318 for the same period in 2011 and $1,036,367 for the same period in 2010. This increase was caused by an increase in stock based compensation, employee bonuses and additional hires in administration, line workers, logistics, agronomics and specialty fiber sales as the company prepared for commercialization.
During fiscal 2012 the Company wrote down the value of the decortication equipment used in the pilot scale facility in Kingstree. The equipment and modifications had been used for R&D purposes and its capacity was not commercially viable.
During fiscal 2012 the Company wrote down the value of its seed inventory as it was determined a portion had a low germination rate.
Net Loss
Our net loss during the twelve-month period ended December 31, 2012, was ($9,315,360 or $0.22 per share) compared to ($6,998,922, or $0.18 per share) during the twelve-month period ended December 31, 2011, and ($3,293,439, or $0.10 per share) for the twelve-month period ended December 31, 2010. The increase in loss each year over the past three years was due to an increase in activity in all aspects of the Company’s operations and administration. In fiscal 2012, the primary reasons for the increase in costs were amortization and depreciation expense, advertising and promotion expense, an increase in general and administrative expense, professional fees, and salaries and benefits expense as well as a loss from the write down of obsolete equipment and the write down of inventory.
For the twelve-month period ended December 31, 2012, the weighted average number of shares outstanding was 43,009,226 compared to 38,582,587 at December 31, 2011, and 34,584,288 at December 31, 2010.
Liquidity and Capital Resources
| 2012 ($) | 2011 ($) | 2010 ($) | |
| Cash and cash equivalents | 2,877,210 | 6,340,505 | 18,493 |
| Working capital | 2,585,862 | 5,932,991 | (2,646,925) |
| Total assets | 20,328,540 | 10,884,414 | 258,894 |
| Total liabilities | 13,462,339 | 1,641,641 | 2,773,536 |
| Shareholders’ Equity | 6,902,201 | 9,242,773 | (2,514,642) |
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Historically, the Company has been reliant on equity financings from the sale of its common shares, and more recently from the sale of convertible debentures, to fund its operations. In February 2013 the Company completed an additional convertible debt financing for net proceeds of $4,673,837. The Company expects to fund future operations and expansion through bank debt, government loan programs, partner financing, lease programs and equity financings. Initial stages of commercialization have commenced through previous financings, however, future phases of commercialization will be dependent on the financings described above.
As at December 31, 2012, total assets were $20,328,540, consisting of:
- $2,877,210 in cash and cash equivalents;
- $72,292 in accounts receivable;
- $2,904,652 in inventory;
- $106,785 in prepaid expenses and other;
- $1,024,294 in deferred debenture issuance costs;
- $13,248,688 in property and equipment; and
- $94,619 in intangible assets.
As at December 31, 2012, total liabilities were $13,426,339 and were comprised of:
- $1,406,418 in accounts payable;
- $1,480,624 in accrued liabilities;
- $488,035 in derivative liabilities; and
- $10,051,262 in convertible debenture.
Stockholders’ Equity decreased by $2,340,572 from $9,242,773 at December 31, 2011, to $6,902,201at December 31, 2012.
Cash Flows from Operating Activities
The cash flows used in operations of continuing operations for the twelve-month period ended December 31, 2012, were ($5,893,631) compared with (2011 – ($5,323,521)) and (2010 – ($2,038,060)). Cash flows used in operations for the twelve-month period ended December 31, 2012, consisted primarily of a net loss of ($9,315,360) from continuing operations, offset by certain items, amortization & depreciation of $278,805 (2011 – $61,809), (2010 - $34,486); interest $90,220 (2011 & 2010 - $Nil); rent $119,836 (2011 & 2010 - $Nil); write down of equipment of $593,894 (2011 – $2,768), (2010 - $94,486); stock based compensation of $2,397,819 (2011 - $2,561,066), (2010 - $930,644); write down of inventory of $303,663 (2011 - $Nil), (2010 - $Nil); fair value adjustment of derivative liability $98,285 (2011 – $566,070), (2010 –($98,499)); an decrease (increase) in accounts receivable $78,622, (2011 – ($120,088)), (2010 - $19,274); and increase in inventory of ($2,172,349) (2011 – ($1,035,966)), (2010 - $Nil);(increase) decrease in prepaid expenses of ($59,538) (2011 - $27,699), (2010 – ($26,579)); increase (decrease) in accounts payable of $1,170.703 (2011 – ($290,524)), (2010 - $291,926); an increase in customer deposits of nil$ (2011 –($125,000)), (2010 - $125,000); and an increase in accrued liabilities of $521,769 (2011 – $27,567), (2010 -$22,102).
Cash Flows from Investing Activities
The cash flows used in investing activities for the twelve-month period ended December 31, 2012, were ($10,659,289) compared to (2011 - $3,242,076) and (2010 - $43,999). Cash flows used in investing activities consisted of a purchase of property and equipment totaling ($10,419,945) in (2011 - ($3,180,390)), (2010 – ($31,084)) and the acquisition of trademarks and licenses totaling ($30,268) in (2011 – ($61,686)), (2010 – ($12,915)).
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Cash Flows from Financing Activities
Cash flows provided by financing activities for the year ended December 31, 2012, totaled $12,916,232 versus $15,183,460 during the same period in 2011 and $1,668,235 for the same period in 2010. The Company issued capital stock for proceeds of $3,948,908 (2011 - $16,340,405), (2010 - $1,668,235) and convertible debentures for net proceeds of $8,967,326, (2011, 2010 - $Nil), made related party payments of $nil, (2011 – ($956,945)), (2010 - $Nil) and repaid notes payable $nil (2011 – ($200,000)), (2010 - $Nil).
Effect of Exchange Rate
The effect of exchange rates on cash resulted in an unrealized loss of ($35,685) for the twelve months ended December 31, 2012, as compared with an unrealized loss of ($298,197) in the same period of 2011 and an unrealized loss of ($40,234) in 2010.
Discontinued Operations - HTNaturals
During fiscal 2009, we closed our apparel business, which operated under the brand name “HTnaturals”. The apparel business is classified as discontinued operations in our consolidated financial statements. We decided to close our apparel division to focus on our CRAiLAR®and CRAiLEXTMtechnology. The warehouse lease was not renewed, the sales team was terminated or re-assigned and all other elements of our apparel division were discontinued.
PLAN OF OPERATION
Partnerships and Industry Expertise
The Company has identified South and North Carolina as an ideal region for growing winter flax crops.
As a result of identifying this geographical area as an ideal growing region, we decided to locate our initial development in the Williamsburg and Florence counties of South Carolina. The Company is developing a flax fiber industry based around our CRAiLAR®fiber technology; from the contracting of crops through to the processing of the fiber.
Our first commercialization partner, Hanesbrands, is headquartered in North Carolina. Hanesbrands uses contract spinners located throughout the states of North and South Carolina. Therefore, being able to grow textile grade fiber in this region allows the Company to take advantage of strategic logistical opportunities.
We entered into a sub-lease of a low volume decortication facility located in Kingstree, South Carolina, in early August of 2010. The facility was originally established under a USDA flax initiative. The equipment in this facility is designed to mechanically separate the flax fiber from the rest of the plant. This stage is called decortication. This is the first step of our process before it goes through our patented CRAiLAR®wet process. We have used this facility to prove the viability of flax farming in this region, perfect our decortication process and to commence early volumes of CRAiLAR®fiber to our commercial partners. We have extended the original lease until June 30, 2013, and plan to use the facility for flax cleaning and storage purposes. The Company plans to decommission the facility during June 2013 at a minimum expense.
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In addition to signing our joint development agreements with key consumer brands such as Hanesbrands and Georgia Pacific, CRAiLAR has licensed several industry leading third party processors to assist in the scale-up of our fiber processing and yarn development.
Earlier this year, CRAiLAR completed agreements with industry leaders, all of whom are critical to various parts of the overall process. In an effort to increase capacity, share industry knowledge and spur innovation, the following experts were enlisted to partner and participate in CRAiLAR’s growth and expansion:
Tuscarora Yarns of Greensboro NC are a highly innovative yarn spinner, capable of blending CRAiLAR®with fibers other than cotton, to broaden our market capabilities in performance sportswear, higher end fashion and outerwear. This is a strategic initiative that will add to the CRAiLAR®list of performance attributes, while strengthening our brand capabilities at the consumer interface.
Tintoria Piana, a textile company dating back to 1582 in Biella, Italy, which is a privately held family-owned business which has dyed fiber for the traditional apparel business for more than 60 years and operates principally out of Cartersville, Georgia, will execute the CRAiLAR®enzymatic process, augmenting the Company’s plans for manufacturing capacity. Tintoria Piana processed fiber for research and development purposes in 2012.
In an effort to further streamline the overall supply chain for brand partners, CRAiLAR is currently in discussions with Parkdale Mills of Gastonia, NC. Founded in 1916, Parkdale has successfully managed to sustain—and enhance its reputation as a market leading yarn spinner through a commitment to innovation. Parkdale Mills has 25 plants and 2,300 employees operating in three different countries: the U.S., Colombia and Mexico.
Agronomics Plan - USDA
In order to further develop our agronomic know-how and our ability to produce fiber capable of being spun into finer-gauge yarns suitable for undergarments, shirting and finer-knit garments CRAiLAR entered into growing trials with Hanesbrands and the USDA-ARS in January of 2011. These trials were designed to enable us to move to an unprecedented level of flax-fiber refinement by allowing us to develop flax strains capable of accessing all sectors of the industry. The research project has resulted in test acres of flax being planted in the Kingstree region the past two winters. In addition, we contracted 3000 acres of flax in South and North Carolina in the fall of 2011. Harvest began in May of 2012 and the flax was left to dew ret in the fields before being baled and then entering the CRAiLAR®process. Growers were then able to plant summer crops, such as soybeans, in time for a full summer season proving the viability of flax as a winter rotation crop in the South East. We have also identified other suitable North American growing regions, such as Minnesota and Maine, and have planted test plots in Alabama and Georgia in the fall of 2012.
In March 2012, the Company appointed Mr. Steve Sandroni as Vice President of Agriculture. Mr. Sandroni brings more than 34 years of experience working in various aspects of agribusiness to the Company. Mr. Sandroni oversees the Company’s global agricultural efforts. He liaises with farmers and has hired regional support staff in the Company’s primary growing regions.
By July of 2012 harvesting of the contracted flax acreage in South and North Carolina was completed. All fiber from the harvest is now on CRAiLAR’s property in Pamplico,South Carolina and is being processed through the recently commissioned decortication line.
Planting for the 2013 spring harvest has taken place during October and November and the Company contracted with growers approximately 3,000 acres of flax fiber in South Carolina and North Carolina. The Company will have 2,400 acres under cultivation in Minnesota for harvest in the fall. For additional flax fiber, the Company also has a relationship with a European company to supply fiber to cover any shortfall in raw feedstock availability.
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In the fall of 2012 the Company undertook further flax trials with the USDA-ARS and the Pee-Dee REC on the suitability of various flax varietals and crop disease prevention. The results of these trials will be available to the Company in early summer 2013.
The Company has initiated the necessary steps to obtain approval under the Federal Crop Insurance Act for crop insurance for growers. The Company believes that with crop insurance available to growers the number of acres grown in 2014 will increase substantially.
CRAiLAR is expanding its agronomic focus to include multiple North American and International growing regions. Expansion of the growing region will mitigate climate risk and large expenditures associated with harvest. In the summer 2012, CRAiLAR contracted 770 acres of flax to be grown in Canada for the purpose of seed multiplication. For the summer of 2013, CRAiLAR plans to use the flax planted in Minnesota for seed multiplication in Canada and North Dakota. The seed produced from this harvest is expected to provide enough seed to plant approximately 20,000 acres of flax to be used as raw feedstock for the CRAiLAR®process.
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.
With the proceeds of our financing in July 2011, we installed our first fully integrated CRAiLAR®Fiber processing facility in the Florence region of South Carolina. The Company has signed a lease of an existing building in the region, for the housing of its first fully integrated decortication and enzyme treatment processing facility. The installation of our full-scale decortication facility is currently underway and purchase orders plus deposits for the equipment needed to enzymatically process CRAiLAR®Fiber have been issued. The installation of the equipment in the new facility commenced during the second quarter of 2012. With the completion of the September 2012 financing the Company will complete the Phase I portion (see below) of the facility build-out along with the necessary equipment purchases for the decortication process. The Company expects the decortication phase of the new facility to become operational in the first quarter of 2013, and to ramp up production throughout 2013. At full capacity, the new facility will be capable of producing 400,000 pounds per week of decorticated bast fiber ready for the CRAiLAR®wet process. Feedstock in 2013 will come from the American Southeast, Minnesota and Europe.
In addition to the installation of our full scale processing line, CRAiLAR continues to improve upon its patented enzymatic process 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, including that which was purchased by the Company for its first production facility.
These reductions in overall cycle time increase throughput and production capacity in each planned facility. These efficiencies also allowed the Company to evaluate third-party manufacturers to increase overall production volume of CRAiLAR®Flax through a quicker expansion model.
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As a result of this optimized process, we entered into the agreements with Tintoria Piana to execute the CRAiLAR®enzymatic process, augmenting the Company’s plans for manufacturing capacity.
During the third and fourth quarters of 2012, the Company processed fiber through its third party manufacturing partner using decorticated fiber from its smaller scale facility in Kingstree, S.C. and European sources. This fiber was used by the Company’s development partners to initiate their sales programs in preparation for commercialization in 2013.
The Company believes that outsourced manufacturing allows for faster expansion of our technology proposition while significantly reducing the capital requirements to scale up to meet demand.
The Pamplico facility will start production in two phases:
Phase I
In the first phase the Company will commence the mechanical separation of the bast fiber from the byproduct shive in a process called decortication. The line was commissioned in December 2012 and has been producing decorticated fiber in quarter one, 2013. CRAiLAR will then use third party manufacturers for the enzymatic process for initial CRAiLAR®sales. Using third party manufacturing for the enzyme process during Phase I allows CRAiLAR to manage its feedstock flow while simplifying its business model and building Phase II. At full capacity, the new facility will be capable of producing enough decorticated bast fiber for approximately 400,000 pounds of CRAiLAR®Fiber per week. Feedstock will come from the American Southeast and Europe. Phase I has be financed from the proceeds of previous capital market financings.Phase II
In the fourth quarter, 2013, the Company plans to install its own wet processing facility. Once commissioned, this will provide an additional 600,000 lbs. per week of potential CRAiLAR®capacity to the 400,000 lbs. from third party manufacturers. Decorticated fiber for the additional capacity will come from the Company’s Pamplico decortication facility and European decorticated fiber. With the installation of the enzymatic wet processing facility the Company will have a fully integrated decortication/wet facility at its Pamplico location.
Phase II will have an approximate initial cost of $19 million and will create an additional 30 – 40 jobs as production comes on-line. Included in the estimate for the initial cost is the equipment necessary for Phase II with an approximate cost of $8.4 million, of which $5.2 million has already been paid. The company plans to pay for the remainder of Phase II through bank financing, lease programs and or the sale of equity.
The facility in Pamplico is large enough, and the product flow layout so designed, that we can easily expand its capacity (400,000 lbs. per week) by adding equipment without the need for large additional build-out costs. The Company’s current plans are to expand this facility in 2014.
The Company also plans to expand into Europe beginning in the third quarter, 2013. The Company will purchase special cleaning line equipment to be used in the cleaning of European fiber. The cost of this equipment, installed, will be approximately $800,000. This capital cost will be paid by the proceeds of previous financings.
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In 2014 the Company plans to build an additional wet processing facility with a planned capacity of 600,000 lbs. per week. To pay for this facility the Company plans to use partner financing and alternative debt instruments.
Company expansion will take place at a rate that can be realistically managed from available logistical, agronomic, financial and management resources.
Production Model
Note on Plan of Operation
While the Company expects that profitable operations will be achieved in the future, there can be no assurance that revenue, margins, and profitability will increase, or be sufficient to support operations over the long term. Management expects that the Company will need to raise additional capital to meet short and long-term operating requirements. Management believes that private placements of equity capital and debt financing may be adequate to fund the Company’s long-term operating requirements. Management 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 the Company raises 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 the Company’s common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, the Company may not be able to take advantage of prospective business endeavors or opportunities, which could significantly and materially restrict business operations. Management is continuing to pursue external financing alternatives to improve the Company’s working capital position and to grow the business to the greatest possible extent.
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MATERIAL COMMITMENTS
Loans from Directors
As at December 31, 2012, the Company owed $Nil (2011 - $Nil) to directors of the Company.
Debentures
On September 20, 2012, the Company completed the offering of $10,051,261 ($10,000,000 CDN) worth of convertible debentures (the “Notes”). The Notes bear interest at a rate of 10% per year, payable semi-annually on March 31stand September 30thand mature on September 20, 2017. Furthermore, an additional $4,870,900 (CDN - $5,000,000) convertible debenture was completed on February 26, 2013 with essentially the same terms as the previously mentioned offering.
The Company is committed to annual interest payments over the next five years as follows:
| 2013 | $ | 1,333,798 | |
| 2014 | 1,515,900 | ||
| 2015 | 1,515,900 | ||
| 2016 | 1,515,900 | ||
| 2017 | 1,515,900 | ||
| Total | $ | 7,397,398 |
The holders of the Notes have the option to convert the Notes at a price of $2.90 per Common Stock for each $1,000 principal amount of Debentures at any time prior to the maturity date.
Annual Leases
The Company is committed to current annual lease payments totaling $743,919 for premises under lease. Approximate minimum lease payments over the remainder of the leases are as follows:
36
| 2013 | $ | 116,082 | |
| 2014 | 230,612 | ||
| 2015 | 198,612 | ||
| 2016 | 198,612 | ||
| 2017 | 146,930 | ||
| Total | $ | 743,919 |
NRC Agreements
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.
Over the term of the amended agreement, the Company will pay the NRC a total of $280,536 (CDN$294,822) divided into nine payments up to May 9, 2012. As of the date of these statements all payments due in 2012 ($33,183) have been paid.
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 (CDN $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 (CDN$15,000) per year in two installments. During the year ended December 31, 2012, the Company paid $7,375 (CDN$7,500) and accrued $7,375 (CDN$7,500) of the minimum annual royalty.
Alberta Innovates – Technology Futures
In June 2007, the Company’s subsidiary, Crailar Fiber Technologies Inc. (“CFT”), entered into a Master Agreement for Technology Development with Alberta Innovates – Technology Futures (“AITF”, formerly Alberta Research Council) (the “Technology Agreement”) to further develop and commercialize bast fiber technology. The Technology Agreement is intended to act as an umbrella agreement for further bast fiber development planned to be performed by AITF under separate Project Agreements. Under the terms of the Technology Agreement, commencing July 1, 2007, we will pay $20,525 (CDN$25,000) per quarter to the AITF and can terminate the agreement with 90 days’ notice, unless there are Project Agreements in effect. In addition to the above payments, CFT will be responsible for providing work-in-kind with a value of $20,525 (CDN$25,000) per calendar quarter commencing with the first Project Agreement. During 2012 the Company paid AITF $2,000 for specific tasks to further the development of AITF’s Technology (2011 - $135,890 and 2010 - $7,991). Under the terms of the Project Agreements signed with AITF the Company will be entitled to an exclusive, worldwide, royalty-bearing license to use any new intellectual property developed pursuant to the Project Agreements. The royalty based on this option will be 3% of gross sales for the first $50,000,000 and 1.5% of gross sales on excess of $50,000,000. The Technology Agreement is in effect as long as there is an active Project Agreement. The Company currently has a Project Agreement with Ashland Inc. for testing the AITF technology.
37
Investor Relations Agreement
On August 9, 2012, the Company renewed the agreement for a third party firm to perform investor relations activities. The agreement term is one year with ninety days’ notice of termination by either party. The monthly fee is $10,000 with 70,000 stock options exercisable at $2.77 expiring August 19, 2016. The options were granted under the 2010 Option Stock Plan and were valued at $148,862 using the Black-Scholes option pricing model with the assumptions disclosed in Note 12. During February 2013 the monthly amount payable was reduced to $4,000. The third party firm will continue to provide strategic advice to Crailar Technologies Inc.
On February 8, 2013, the company retained another third party group to perform investor relations services. The monthly fee is $8,000 with 50,000 stock options exercisable at $2.30, expiring Feb 8, 2018. The options were granted under the 2012 option stock plan and were valued at $163,992 using the Black Scholes Option model with the assumptions disclosed in Note 10. The agreement term is one year with thirty days’ notice of termination by either party after six months from the effective date.
Research Agreement
Starting in December 2010, a co-operative research project designed to cultivate and evaluate the viability of various flax strains for use in CRAiLAR®technology was signed with the United States Department of Agriculture, Hanesbrands and CRAiLAR Inc. The project has an initial term of one year with a renewal option for two additional years. CRAiLAR Inc. will contribute annually $51,000 of in-kind expenses towards the project.
Farming and Consulting Agreements
During the year ended December 31, 2012, the Company signed agreements with farmers to plant and to produce flax using the seed provided by the Company. The resulting harvest of flax straw and flaw seed will be purchased by the Company at the agreed upon prices.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this Annual Report, we do 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.
38
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS |
Currency risk.The Company is exposed to currency risk to the extent that certain inventory and equipment is purchased from Europe. The purchase price is 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 31, 2012, the Company does not have significant concentrations of credit exposure.
Interest rate risk.All term debt has fixed interest rates and the Company has no significant exposure to interest rate fluctuation 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 flax seed in the production of fiber. The Company does not currently enter into futures contracts or otherwise hedge its exposure to commodity price risk.
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Report of Independent Registered Public Accounting Firm Dated March 18, 2012.
Consolidated Balance Sheets as at December 31, 2012 and December 31, 2011.
Consolidated Statements of Operations and Comprehensive Loss For Fiscal Years Ended December 31, 2012, December 31, 2011 and December 31, 2010 and For the Period From October 1, 2009 to December 31, 2012.
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2012, December 31, 2011, and December 31, 2010 and For the Period From October 1, 2009 to December 31, 2012.
Consolidated Statement of Stockholders’ Equity.
Notes to the Consolidated Financial Statements.
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of CRAiLAR Technologies Inc. (formerly Naturally Advanced Technologies Inc.)
Consolidated financial statements
We have audited the accompanying consolidated balance sheets of CRAiLAR Technologies Inc. (formerly Naturally Advanced Technologies Inc) (the “Company”) (a development stage company) as of December 31, 2012 and 2011 and the related consolidated statements of operations and comprehensive loss, cash flows and stockholders’ equity for the years ended December 31, 2012, 2011 and 2010, and the period from October 1, 2009 (date of re-entry into the development stage) to December 31, 2012. 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 consolidated financial statements are free of material misstatement. 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 31, 2012 and 2011 and the results of its operations and its cash flows for the years ended December 31, 2012, 2011 and 2010, and the period from October 1, 2009 (date of re-entry into the development stage) to December 31, 2012 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.
Internal control over financial reporting
We have also audited the Company’s internal control over financial reporting as at December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, which is set out in Management’s Report on Internal Control Over Financial Reporting included in Management’s Discussion and Analysis. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
…cont’d
40
We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provide a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as at December 31, 2012 based on criteria established in Internal Control — Integrated Framework issued by the COSO.
| /s/ Dale Matheson Carr-Hilton Labonte LLP |
| Dale Matheson Carr-Hilton Labonte LLP |
| CHARTERED ACCOUNTANTS |
| Vancouver, Canada |
| March 18, 2013 |
41
| CRAiLAR Technologies Inc. |
| (formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| Consolidated Balance Sheets |
| (In US Dollars) |
| December 31, | December 31, | |||||
| 2012 | 2011 | |||||
| ASSETS | ||||||
| Current | ||||||
| Cash and cash equivalents | $ | 2,877,210 | $ | 6,340,505 | ||
| Receivables | 72,292 | 150,914 | ||||
| Inventory (Note 4) | 2,904,652 | 1,035,966 | ||||
| Prepaid expenses and other | 106,785 | 47,247 | ||||
| 5,960,939 | 7,574,632 | |||||
| Deferred Debt Issuance Costs(Note 8) | 1,024,294 | - | ||||
| Property and Equipment, net(Notes 5 and 11) | 13,248,688 | 3,202,611 | ||||
| Intangible Assets, net(Note 6) | 94,619 | 107,171 | ||||
| $ | 20,328,540 | $ | 10,884,414 | |||
| LIABILITIES | ||||||
| Current | ||||||
| Accounts payable | $ | 1,406,418 | $ | 235,715 | ||
| Accrued liabilities (Note 8) | 1,480,624 | 352,428 | ||||
| Derivative Liability (Note 7) | 488,035 | 1,053,498 | ||||
| 3,375,077 | 1,641,641 | |||||
| Convertible Long Term Debt(Note 8) | 10,051,262 | - | ||||
| 13,426,339 | 1,641,641 | |||||
| STOCKHOLDERS’ DEFICIT | ||||||
| Capital Stock(Note 9) | ||||||
| Authorized:100,000,000 common shares without par value Issued and outstanding : 44,239,198 commons shares (December 31, 2011 - 41,701,604) | 32,616,795 | 27,428,844 | ||||
| Subscription receivable(Note 9) | (64,050 | ) | - | |||
| Additional Paid-in Capital | 7,061,406 | 5,174,834 | ||||
| Accumulated Other Comprehensive Loss | (459,036 | ) | (423,351 | ) | ||
| Deficit | (11,485,251 | ) | (11,485,251 | ) | ||
| Deficit accumulated in the development stage | (20,767,663 | ) | (11,452,303 | ) | ||
| 6,902,201 | 9,242,773 | |||||
| $ | 20,328,540 | $ | 10,884,414 |
Commitments (Notes 5 and 11)
Subsequent Events (Note 15)
The accompanying notes are an integral part of these consolidated financial statements.
42
| CRAiLAR Technologies Inc. |
| (formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| Consolidated Statements of Operations and Comprehensive Loss |
| (In US Dollars) |
| Year ended December 31, | Cumulative from | |||||||||||
| October 1, 2009 to | ||||||||||||
| December 31, | ||||||||||||
| 2012 | 2011 | 2010 | 2012 | |||||||||
| Expenses | ||||||||||||
| Advertising and promotion | $ | 406,945 | $ | 236,488 | $ | 216,937 | $ | 931,037 | ||||
| Amortization and depreciation | 278,805 | 61,809 | 34,486 | 385,863 | ||||||||
| Consulting and contract labour (Notes 9 and 13) | 762,668 | 1,304,960 | 682,796 | 2,872,779 | ||||||||
| General and Administrative | 886,935 | 605,837 | 352,996 | 2,022,966 | ||||||||
| Interest (Note 8) | 99,655 | 96,975 | 161,990 | 396,662 | ||||||||
| Professional Fees | 798,384 | 401,254 | 226,985 | 1,541,486 | ||||||||
| Research and development | 660,229 | 757,443 | 596,212 | 2,251,334 | ||||||||
| Salaries and benefits (Notes 9 and 13) | 4,425,897 | 2,965,318 | 1,036,367 | 8,817,363 | ||||||||
| 8,319,518 | 6,430,084 | 3,308,769 | 19,219,490 | |||||||||
| Loss before other items | (8,319,518 | ) | (6,430,084 | ) | (3,308,769 | ) | (19,219,490 | ) | ||||
| Other items: | ||||||||||||
| Write down of equipment (Note 5) | (593,894 | ) | (2,768 | ) | (94,486 | ) | (691,148 | ) | ||||
| Write down of inventory (Note 4) | (303,663 | ) | - | - | (303,663 | ) | ||||||
| Fair Value adjustment derivative liabilities (Note 7) | (98,285 | ) | (566,070 | ) | 98,499 | (565,856 | ) | |||||
| Other income | - | - | - | 1,177 | ||||||||
| Loss from continuing operations | (9,315,360 | ) | (6,998,922 | ) | (3,304,756 | ) | (20,778,980 | ) | ||||
| Profit from discontinued operations(Note 14) | - | - | 11,317 | 11,317 | ||||||||
| Net loss | $ | (9,315,360 | ) | $ | (6,998,922 | ) | $ | (3,293,439 | ) | $ | (20,767,663 | ) |
| Other comprehensive loss | ||||||||||||
| Exchange differences on translating to | ||||||||||||
| presentation currency | $ | (35,685 | ) | $ | (298,197 | ) | $ | (40,324 | ) | |||
| Total comprehensive loss | $ | (9,351,045 | ) | $ | (7,297,119 | ) | $ | (3,333,763 | ) | |||
| Loss from continuing operations per share(basic and diluted) | $ | (0.22 | ) | $ | (0.18 | ) | $ | (0.10 | ) | |||
| Earnings from continuing operations pershare (basic and diluted) | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||
| Weighted average number of common sharesoutstanding | 43,009,226 | 38,582,587 | 34,584,288 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
43
| CRAiLAR Technologies Inc. |
| (formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| Consolidated Statements of Cash Flows |
| (In US Dollars) |
| Cumulative from | ||||||||||||
| For twelve months ended December 31, | October 1, 2009 to | |||||||||||
| 2012 | 2011 | 2010 | December 31, 2012 | |||||||||
| Cash flows used in operating activities | ||||||||||||
| Net loss from continuing operations | $ | (9,315,360 | ) | $ | (6,998,922 | ) | $ | (3,304,756 | ) | $ | (20,778,980 | ) |
| Adjustments to reconcile net loss to net cash from operating activities | ||||||||||||
| Amortization and depreciation | 278,805 | 61,809 | 34,486 | 385,863 | ||||||||
| Interest | 90,220 | - | - | 90,220 | ||||||||
| Rent | 119,836 | - | - | 119,836 | ||||||||
| Stock based compensation | 2,397,819 | 2,561,066 | 930,644 | 6,138,309 | ||||||||
| Write down of equipment | 593,894 | 2,768 | 94,486 | 691,148 | ||||||||
| Write down of inventory | 303,663 | - | - | 303,663 | ||||||||
| Fair value adjustment of derivative liability | 98,285 | 566,070 | (98,499 | ) | 565,856 | |||||||
| Gain on foreign exchange | - | - | (71,990 | ) | (71,990 | ) | ||||||
| Changes in working capital assets and liabilities | - | |||||||||||
| (Increase) decrease in receivables | 78,622 | (120,088 | ) | (19,274 | ) | 4,655 | ||||||
| Increase in inventory | (2,172,349 | ) | (1,035,966 | ) | - | (3,208,315 | ) | |||||
| Decrease (increase) in prepaid expenses | (59,538 | ) | 27,699 | (26,579 | ) | (36,660 | ) | |||||
| Increase in accounts payable | 1,170,703 | (290,524 | ) | 291,926 | 1,068,557 | |||||||
| Increase in customer deposits | - | (125,000 | ) | 125,000 | - | |||||||
| Increase (decrease) in accrued liabilities | 521,769 | 27,567 | (22,102 | ) | 744,508 | |||||||
| Increase in due to related parties | - | - | 28,598 | 56,945 | ||||||||
| Net cash used in operating activities of continuing operations | (5,893,631 | ) | (5,323,521 | ) | (2,038,060 | ) | (13,926,385 | ) | ||||
| Net cash provided by discontinued operations | - | 2,346 | 51,189 | 79,982 | ||||||||
| Cash flows used in investing activities | ||||||||||||
| Purchase of property and equipment | (10,419,945 | ) | (3,180,390 | ) | (31,084 | ) | (13,639,422 | ) | ||||
| Acquisition of intangible assets | (30,268 | ) | (61,686 | ) | (12,915 | ) | (104,869 | ) | ||||
| Net cash flows used in investing activities | (10,659,289 | ) | (3,242,076 | ) | (43,999 | ) | (13,744,291 | ) | ||||
| Cash flows used in financing activities | ||||||||||||
| Issuance of capital stock and warrants | 3,948,908 | 16,340,405 | 1,668,235 | 21,963,981 | ||||||||
| Notes payable | - | (200,000 | ) | - | (200,000 | ) | ||||||
| Convertible Debenture | 10,051,262 | - | - | 10,051,262 | ||||||||
| Deferred issuance costs for convertible debenture | (1,083,936 | ) | - | - | (1,083,936 | ) | ||||||
| Related parties payments | - | (956,945 | ) | - | (1,025,960 | ) | ||||||
| Net cash flows from financing activities | 12,916,232 | 15,183,460 | 1,668,235 | 29,705,347 | ||||||||
| Effect of exchange rate changes on cash and cash equivalents | (35,685 | ) | (298,197 | ) | (40,324 | ) | (290,890 | ) | ||||
| Increase (decrease) in cash and cash equivalents | (3,463,295 | ) | 6,322,012 | (402,959 | ) | 1,823,763 | ||||||
| Cash and cash equivalents, beginning | 6,340,505 | 18,493 | 421,452 | 1,053,447 | ||||||||
| Cash and cash equivalents, ending | $ | 2,877,210 | $ | 6,340,505 | $ | 18,493 | $ | 2,877,210 | ||||
| SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH FINANCING AND INVESTING ACTIVITIES: | ||||||||||||
| Cash paid for interest | $ | 9,435 | $ | 289,798 | $ | 84,646 | ||||||
| Cash paid for income taxes | $ | - | $ | - | $ | - | ||||||
| Capital stock issued as share issue costs | $ | - | $ | 562,634 | $ | - | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
44
| CRAiLAR Technologies Inc. |
| (formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| Consolidated Statement of Stockholders’ Equity |
| (In US Dollars) |
| Accumulated | ||||||||||||||||||||||||
| Additional | other | Deficit | ||||||||||||||||||||||
| Common shares | paid-in | Subscription | comprehensive | (Development | ||||||||||||||||||||
| Shares | Amount | capital | Receivable | income \ (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 | 1,362,586 | - | - | - | - | - | 1,362,586 | ||||||||||||||||
| 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 | ) | ||||||||||||||
| Loss from continuing operations | - | - | - | - | - | - | (3,304,756 | ) | (3,304,756 | ) | ||||||||||||||
| Profit from discontinued operations | - | - | - | - | - | - | 11,317 | 11,317 | ||||||||||||||||
| 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 | ||||||||||||||||
| 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 | ||||||||||||||||
45
| Accumulated | ||||||||||||||||||||||||
| Additional | other | Deficit | ||||||||||||||||||||||
| Common shares | paid-in | Subscription | comprehensive | (Development | ||||||||||||||||||||
| Shares | Amount | capital | Receivable | income \ (loss) | Deficit | stage) | Total | |||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 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 CDN$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 CDN$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 CDN$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 CDN$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 CDN$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 CDN$1.95 per share | 32,556 | 63,484 | - | - | - | - | - | 63,484 | ||||||||||||||||
| Issuance of common stock on May 4, 2011 for exercise of warrants at CDN$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 CDN$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 CDN$1.95 per share | 5,000 | 9,750 | - | - | - | - | - | 9,750 | ||||||||||||||||
| Issuance of common stock on May 12, 2011 for exercise of warrants at CDN$1.50 per share | 2,000 | 2,760 | - | - | - | - | - | 2,760 | ||||||||||||||||
| Issuance of common stock on May 12, 2011 for exercise of warrants at CDN$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 CDN$1.95 per share | 5,556 | 10,834 | - | - | - | - | - | 10,834 | ||||||||||||||||
| Issuance of common stock on May 19, 2011 for exercise of warrants at CDN$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 CDN$1.95 per share | 20,000 | 39,000 | - | - | - | - | - | 39,000 | ||||||||||||||||
46
| Accumulated | ||||||||||||||||||||||||
| Additional | other | Deficit | ||||||||||||||||||||||
| Common shares | paid-in | Subscription | comprehensive | (Development | ||||||||||||||||||||
| Shares | Amount | capital | Receivable | income \ (loss) | Deficit | stage) | Total | |||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Issuance of common stock on May 26, 2011 for exercise of warrants at CDN$1.20 per share | 34,960 | 38,456 | - | - | - | - | 38,456 | |||||||||||||||||
| Issuance of common stock on May 26, 2011 for exercise of warrants at CDN1.50 per share | 17,480 | 24,123 | - | - | - | - | 24,123 | |||||||||||||||||
| Issuance of common stock on June 1 , 2011 for exercise of warrants at CDN1.95 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 CDN1.95 per share | 40,741 | 79,445 | - | - | - | - | 79,445 | |||||||||||||||||
| Issuance of common stock on June 13, 2011 for exercise of warrants at CDN1.95 per share | 30,558 | 59,588 | - | - | - | - | 59,588 | |||||||||||||||||
| Issuance of common stock on June 16, 2011 for exercise of warrants at CDN1.95 per share | 26,760 | 52,182 | - | - | - | - | 52,182 | |||||||||||||||||
| Issuance of common stock on June 16, 2011 for exercise of warrants at CDN$1.50 per share | 5,000 | 6,900 | - | - | - | - | 6,900 | |||||||||||||||||
| Issuance of common stock on June 23, 2011 for exercise of warrants at CDN$1.50 per share | 5,834 | 8,050 | - | - | - | - | 8,050 | |||||||||||||||||
| Issuance of common stock on June 23, 2011 for exercise of warrants at CDN$1.95 per share | 16,852 | 32,861 | - | - | - | - | 32,861 | |||||||||||||||||
| Issuance of common stock on June 28, 2011 for exercise of warrants at CDN$1.95 per share | 116,680 | 227,529 | - | - | - | - | 227,529 | |||||||||||||||||
| Issuance of common stock on June 28, 2011 for exercise of warrants at CDN$1.95 per share | 56,704 | 110,573 | - | - | - | - | 110,573 | |||||||||||||||||
| Issuance of common stock on July 4, 2011 for exercise of warrants at CDN$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 CDN$3.45 per unit , net | ||||||||||||||||||||||||
| of commission | 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 | ) | |||||||||||||||
| Loss from continuing operations | - | - | - | - | - | - | (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 | |||||||||||||||||
| 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 CDN$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 | |||||||||||||||||
47
| Accumulated | ||||||||||||||||||||||||
| Additional | other | Deficit | ||||||||||||||||||||||
| Common shares | paid-in | Subscription | comprehensive | (Development | ||||||||||||||||||||
| Shares | Amount | capital | Receivable | income \ (loss) | Deficit | stage) | Total | |||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 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 CDN$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 CDN$1.05per share | 600 | 630 | - | - | - | - | - | 630 | ||||||||||||||||
| Issuance of common stock on March 15, 2012 for exercise of warrants at CDN$1.25per share | 250,000 | 291,600 | - | - | - | - | - | 291,600 | ||||||||||||||||
| Issuance of common stock on March 15, 2012 for exercise of options at CDN$1.05per share | 5,500 | 5,775 | - | - | - | - | - | 5,775 | ||||||||||||||||
| Issuance of common stock on March 15, 2012 for exercise of options at CDN$0.87per share | 5,000 | 4,350 | - | - | - | - | - | 4,350 | ||||||||||||||||
| Issuance of common stock on March 23, 2012 for exercise of options at CDN$0.87per share | 5,000 | 4,350 | - | - | - | - | - | 4,350 | ||||||||||||||||
| Issuance of common stock on March 29, 2012 for exercise of warrants at CDN$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 CDN$2.74per share | 14,585 | 40,770 | - | - | - | - | - | 40,770 | ||||||||||||||||
| Issuance of common stock on April 3, 2012 for exercise of warrants at CDN$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 CDN$1.05per share | 1,000 | 1,050 | - | - | - | - | - | 1,050 | ||||||||||||||||
| Issuance of common stock on April 13, 2012 for exercise of warrants at CDN$1.25 per share | 3,000 | 3,750 | - | - | - | - | - | 3,750 | ||||||||||||||||
| Issuance of common stock on May 15, 2012 for exercise of warrants at CDN$1.50 per share | 5,000 | 7,500 | - | - | - | - | - | 7,500 | ||||||||||||||||
| Issuance of common stock on May 22, 2012 for exercise of warrants at CDN$1.50 per share | 10,000 | 15,000 | - | - | - | - | - | 15,000 | ||||||||||||||||
| Issuance of common stock on May 22, 2012 for exercise of warrants at CDN$1.25 per share | 2,000 | 2,500 | - | - | - | - | - | 2,500 | ||||||||||||||||
| Issuance of common stock on June 4, 2012 for exercise of warrants at CDN$1.50 per share | 1,500 | 2,250 | - | - | - | - | - | 2,250 | ||||||||||||||||
| Issuance of common stock on June 11, 2012 for exercise of options at CDN$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 CDN$1.50 per share | 41,667 | 62,501 | - | - | - | - | - | 62,501 | ||||||||||||||||
| Issuance of common stock on August 30, 2012 for exercise of warrants at CDN$1.50 per share | 2,500 | 3,750 | - | - | - | - | - | 3,750 | ||||||||||||||||
| Issuance of common stock on August 30, 2012 for exercise of options at CDN$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 CDN$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 CDN$1.30 per | ||||||||||||||||||||||||
| share | 21,840 | 28,391 | - | - | - | - | 28,391 | |||||||||||||||||
| Issuance of common stock on September 17, 2012 for exercise of warrants at CDN$1.50 per | ||||||||||||||||||||||||
| share | 2,084 | 3,126 | - | - | - | - | 3,126 | |||||||||||||||||
| 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 CDN$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 | ||||||||||||||||
48
| Accumulated | ||||||||||||||||||||||||
| Additional | other | Deficit | ||||||||||||||||||||||
| Common shares | paid-in | Subscription | comprehensive | (Development | ||||||||||||||||||||
| Shares | Amount | capital | Receivable | income \ (loss) | Deficit | stage) | Total | |||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| 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 | ) | |||||||||||||||
| Loss from continuing operations | - | - | - | - | - | - | (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 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
49
| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 1. | Nature of Operations and Basis of Presentation |
CRAiLAR Technologies Inc. (formerly Naturally Advanced 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 of natural sustainable fibers. As of the date of this report, the Company’s business operations consist primarily of the deployment and execution of our proprietary and natural CRAiLAR© Flax Fibers, as well as our bast fiber processing technologies targeted at the textile, pulping, composite and plastics industries.
Effective on October 31, 2012, the Company changed its name to Crailar Technologies Inc. and the trading symbols were changed to “CRLRF” on the OTC Bulletin Board and to “CL” on TSX Venture Exchange.
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 $ 32,007,514 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 substantial doubt as to the Company’s ability to continue as a going concern.
During 2012 the Company raised approximately $13,200,000 million to finance operations, acquisition of production equipment and construction of its production facility. The Company will need raise additional financing in 2013 through equity or debt financing 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 wholly-owned subsidiaries, 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 31, 2012, the Company held $20,000 (2011 - $10,000) in cash equivalents.
50
| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 2. | Significant Accounting Policies – cont’d |
| c) | Inventory |
Inventory consists of flax seed purchased to be used for cultivation in the future, flax seed planted but not yet harvested, harvested raw flax fiber feedstock, and decorticated fiber.
The seed is valued at the lower of average cost or market. Cost comprises the cost to purchase seed and/or growing costs plus any related shipping costs.
The harvested raw flax fiber is valued at the lower of cost or market. Cost comprises the cost of the seed used, growing costs plus any related shipping costs.
The decorticated fiber is valued at cost. Cost comprises the cost of the raw flax fiber plus processing costs.
| d) | Use of Estimates |
The preparation of financial statements in conformity with United States generally accepted accounting principles 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 the fair value of inventory, common stock, warrants, options, derivative liability, provision for income tax and depreciation.
| 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 | 50% 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) | Interest and Similar Costs |
Interest and similar costs are capitalized to property and equipment to the extent that the related loan proceeds were used in the acquisition and construction of the related asset. These costs are only capitalized from the time that costs are first incurred until the asset is ready for use.
51
| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 2. | Significant Accounting Policies – cont’d |
| g) | Government Assistance |
Grants received from government institutions that are for the acquisition or development of property and equipment are recorded as a reduction to the depreciable cost of the related asset.
| h) | 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 |
| i) | Foreign Currency Translation |
The Company’s functional currency is the Canadian Dollar (“CDN”). 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 period-end. Revenues and expenses are translated throughout the period 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 results of operations.
| j) | Income Taxes |
The Company utilizes the liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the deferred income tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective income tax bases (temporary differences). Deferred income tax assets and liabilities are measured using enacted income tax rates expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is included in income in the period in which the change occurs. The amount of deferred income tax assets recognized is limited to the amount that is more likely than not to be realized.
| k) | Comprehensive Income |
The Company presents changes in accumulated comprehensive income in its Statement of Stockholders’ Equity. Total comprehensive income includes, in addition to net loss, changes in equity that are excluded from the Statements of Operations.
52
| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 2. | Significant Accounting Policies – cont’d |
| l) | 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.
| m) | Earnings (Loss) Per Share |
Basic and diluted earnings (loss) per share are computed using the weighted average number of shares outstanding during the period. Common stock equivalents from stock options and warrants were excluded from the calculation of net loss per share for December 31, 2012, 2011 and 2010 as their effect is anti-dilutive.
| n) | 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.
| o) | Risk Management |
Currency risk. The Company is exposed to currency risk to the extent that certain inventory and equipment is purchased 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 31, 2012, the Company does not have significant concentrations of credit exposure.
Interest rate risk. All term debt has fixed interest rates and the Company has no significant exposure to interest rate fluctuation 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 flax seed in the production of fiber. The Company does not currently enter into futures contracts or otherwise hedge its exposure to commodity price risk.
53
| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 2. | Significant Accounting Policies – cont’d |
| p) | Research and Development |
Research and development costs are charged to operations as incurred. The Company has entered into various joint development agreements with third parties. The agreements require that both parties will incur certain development expenses. The Company records only its portion of the developments costs incurred.
| q) | Adoption of New Accounting Pronouncements |
The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements. Management does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on the financial statements.
| 3. | Financial Instruments |
As at December 31, 2012, the Company concluded that the carrying amount of cash and cash equivalents, receivables and accounts payable to approximate fair value because of the short maturity of these financial instruments.
| 4. | Inventory |
As at December 31, 2012, the inventory consists of the cost of:
| December 31, 2012 | December 31, 2011 | |||||
| Flax seed | $ | 1,172,155 | $ | 1,011,966 | ||
| Raw flax fiber feedstock | 1,680,993 | 24,000 | ||||
| Decorticated fiber | 51,504 | - | ||||
| $ | 2,904,652 | $ | 1,035,966 |
During the year ended December 31, 2012, the Company wrote off $303,663 (2011 - $Nil and 2010 - $Nil) of flax seed inventory.
54
| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 5. | Property and Equipment |
| Net Book Value | Net Book Value | |||||||||||
| Accumulated | December 31, | December 31, | ||||||||||
| Cost | Depreciation | 2012 | 2011 | |||||||||
| Automobiles | $ | 58,769 | $ | 1,210 | $ | ��57,559 | $ | - | ||||
| Computer equipment | 91,410 | 43,012 | 48,398 | 21,586 | ||||||||
| Equipment | 396,576 | 37,131 | 359,445 | 32,224 | ||||||||
| Furniture and fixtures | 62,714 | 32,734 | 29,980 | 35,239 | ||||||||
| Leasehold improvements under construction (Note 8) | 4,979,548 | - | 4,979,548 | - | ||||||||
| Production equipment | - | - | - | 452,054 | ||||||||
| Production equipment under construction | 7,606,837 | - | 7,606,837 | 2,661,508 | ||||||||
| Website development costs | 123,760 | 61,884 | 61,876 | - | ||||||||
| Equipment held for sale | 105,045 | - | 105,045 | - | ||||||||
| $ | 13,424,659 | $ | 175,971 | $ | 13,248,688 | $ | 3,202,611 |
During the year, the Company purchased production equipment for a total price of $8,357,812 (including €5,893,275). Payment of $7,056,305 has been made with $800,089 to be paid upon the completion of installation and commissioning.
During the year, the Company wrote off $593,894 (2011 - $Nil and 2010 - $94,486) of production equipment to a net realizable value of $105,045 (2011 - $Nil and 2010 - $Nil). The assets written off during the year ended December 31, 2012 are held for sale and are not being amortized.
During the year, the Company wrote off $Nil (2011 - $2,768 and 2010 - $Nil) of leasehold improvements.
55
| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 6. | Intangible Assets |
| Net Book Value | Net Book Value | |||||||||||
| Accumulated | December 31, | December 31, | ||||||||||
| Cost | Amortization | 2012 | 2011 | |||||||||
| Patents | $ | 126,396 | $ | 48,435 | $ | 77,961 | $ | 76,953 | ||||
| Trademarks | 104,929 | 97,290 | $ | 7,639 | 18,983 | |||||||
| License fee | 25,128 | 16,109 | 9,019 | 11,235 | ||||||||
| $ | 256,453 | $ | 161,834 | $ | 94,619 | $ | 107,171 |
| 7. | Derivative liability |
Derivate liability consist of warrants that were originally issued in private placements which have exercise prices denominated in a currency other than the Canadian dollar, the Company’s functional currency. These warrants are non-cash liabilities and the Company is not required to expend any cash to settle these liabilities. The fair value of these warrants as at December 31, 2012 and 2011 is as follows:
| 2012 | 2011 | ||||||||
| Exercise price | |||||||||
| 416,532 warrants expiring on September 21, 2012 | US$ 1.38 | $ | - | $ | 418,836 | ||||
| 275,506 warrants expiring on May 19, 2013 | US$ 1.25 | 257,564 | 634,662 | ||||||
| 533,887 warrants expiring on October 14, 2014 | US$ 3.45 | 230,471 | - | ||||||
| $ | 488,035 | $ | 1,053,498 |
The fair value of these warrants was determined using the Black-Scholes option pricing model, using the following assumptions:
| 2012 | 2011 | |||||
| Volatility | 57% - 66% | 81% - 86% | ||||
| Dividend yield | - | - | ||||
| Risk-free interest rate | 0.12 – 0.25% | 0.12% | ||||
| Expected life | 0.38 – 1.73 yrs. | 0.72 – 1.38 yrs. |
56
| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 8. | Convertible long term debt |
On September 20, 2012, the Company completed the offering of $10,051,262 (CDN$10,000,000) convertible debentures (the “Notes”). The Notes mature on September 20, 2017. The 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 31, 2012, accrued interest of $277,513 (CDN$277,397) was included in accrued liabilities. Based on the use of the proceeds, the Company capitalized $246,935 (CDN$246,831) in leasehold improvement and expensed $30,578 (CDN$30,566) in interest during the year.
Holders of the Notes have the option to convert the Notes at a price of $2.90 per common stock into common stock of the Company at any time prior to the maturity date. The Company may redeem the 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 Notes are secured by a Guaranty and Security Agreement signed with the Company’s wholly-owned subsidiary, Crailar Inc., a Nevada incorporated company. Crailar Inc. provides security interests over its assets, having an aggregate acquisition cost of no less than US$5,500,000, as security for its guarantee obligation which shall rank in priority to all other indebtedness of Crailar Inc.
In accordance with Accounting Standards Codification 470-20, the 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. The Company paid a total of $1,083,936 (CDN$1,078,408) for agent commission and other expenses which has been recorded as deferred debt issuance costs. These costs are being amortized over the term of the debt. During the year, the Company recorded $59,642 (CDN$54,663) as interest expenses for the amortization of the deferred issuance costs. The Company granted an Over-Allotment Option (the “Over-Allotment Option”) to the underwriter for purchasing up to 15% of the principal amount of the Notes on the same terms and conditions. The Over-Allotment Option expired without being exercised.
| 9. | Common Stock |
During the year ended December 31, 2012, the Company issued 2,537,594 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 (the “Units) for aggregate gross proceeds of $2,359,780. Proceeds of $64,050 were included in subscription receivable as at December 31, 2012. Each Unit is comprised of one common share and one half of one common share purchase warrant of the Company (each whole common share purchase warrant, a “Warrant”). 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 year. 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 is recorded in the derivative liability as the warrants have an exercise price in a currency other than the Company’s functional currency (Note 7). |
57
| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 9. | Common Stock – cont’d |
| b) | Total of 821,299 shares were issued pursuant to the exercise of employee and consultants options between $0.87 and $2.77 per share for proceeds of $868,768. Total of 565,635 options for total proceeds of $608,376 were exercised by the directors and officers of the Company. |
| c) | Total of 648,591 shares were issued pursuant to the exercise of warrants between $1.20 and $1.38 per share for proceeds of $859,285. |
During the period ended December 31, 2011, the Company issued 6,388,402 shares of common stock as follows:
a)
On July 8, 2011 the Company completed an offering of 3,800,000 units (the “Units”) of the Company at a price of $3.52 (CDN$3.45) per Unit for aggregate gross proceeds of $13,376,133 (CDN$13,110,000) (the “Offering”). Each Unit is comprised of one common share and one half of one common share purchase warrant of the Company (each whole common share purchase warrant, a “Warrant”). Each Warrant entitles the holder thereof to acquire one common share of the Company at an exercise price of $4.59 (CDN$4.50) per common share at any time prior to July 8, 2013. The fair value of the Warrants was estimated to be $2,107,462 using the Black Scholes option pricing model, a 2 year term, an expected volatility of 88% and a risk free interest rate of 1.20% . The fair value of the Warrants is included in share capital. The warrants are exercisable in Canadian dollars only, which is the functional currency, and as a result they did not give rise to a derivative liability as described in Note 7.
The Company granted to the syndicate of underwriters, an option (the “Over-Allotment Option”), exercisable in whole or in part at any time up to 30 days following the closing of the Offering, to purchase up to an additional 15% of the Offering solely to cover over-allotments. The Over-Allotment Option entitles the underwriter to purchase a maximum of 570,000 units (the “Over-Allotment Unit”) at the Offering price, and 285,000 warrants (the “Over-Allotment Warrant”) at $0.33 (CDN$0.32) . The estimated fair value of the Over-Allotment Option was estimated to be $261,065 using the Black Scholes option pricing model using a 30-day term, an expected volatility of 61% and a risk free interest rate of 1.00% . The fair value of the Over-Allotment Option was recorded as share issue costs.
Prior to the expiry of the Over-Allotment Option, the Underwriters purchased 212,500 Over-Allotment Unit for gross proceeds of $748,007 and 100,445 Over-Allotment Warrant for gross proceeds of $32,795. Each Over-Allotment Unit is comprised of one common share and one half of one common share purchase warrant of the Company. Each whole warrant entitles the holder thereof to acquire one common share of the Company at an exercise price of $4.59 (CDN$4.50) per common share at any time prior to July 8, 2013. The estimated fair value of the warrants is $129,074 using the Black Scholes option pricing model using a 2 year term, an expected volatility of 88% and a risk free interest rate of 1.20% . The fair value of the warrants is included in share capital. The gross proceed of the Over-Allotment Warrant is included in share capital. Each Over-Allotment Warrant entitles the holder to acquire one common share of the Company at an exercise price of $4.59 (CDN$4.50) per common share at any time prior to July 8, 2013.
58
| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 9. | Common Stock – cont’d |
The Company paid 6% of the gross proceeds of the offering as a cash commission. The cash commission and other expenses totaling $1,196,478 were recorded as share issue costs. The Company also granted an option (the “Compensation Option”) equal to 6% of the Offering including the issue of Over-Allotment Units. The total 240,750 Compensation Option entitles the underwriter to purchase one unit (the “Compensation Unit”) for 24 months after closing of the Offering. Each Compensation unit includes one common share (the “Compensation Share”) and one half of one warrant (the “Compensation Warrant”). Each Compensation Warrant is exercisable for 24 months after closing at $4.59 (CDN$4.50) per warrant. The estimated fair value of the Compensation Options was estimated to be $319,956 using the Black Scholes option pricing model using a 2 year term, an expected volatility of 88% and a risk free interest rate of 1.20%. The fair value of the Over-Allotment Option was recorded as share issue costs. | |
| b) | Total of 1,376,631 shares were issued pursuant to the exercise of employee and consultants options between $0.87 and $1.45 per share for proceeds of $1,623,005. Total of 1,245,731 options with total proceed of $1,483,521 were exercised by the directors and officers of the Company. |
| c) | Total of 910,587 shares issued pursuant to the exercise of warrants between $1.25 and $1.95 per share for proceeds of $1,648,440. |
| d) | Total of 39,451 shares issued pursuant to the exercise of agent’s warrants at $1.38 per share for proceeds of $ 54,442. |
| e) | Total of 49,233 units were issued pursuant to the exercise of agent’s warrants at $1.10 for proceeds of $ 54,156. Each agent’s unit consists of one common share and one half non- transferable common stock purchase warrant exercisable at $1.38 per share expiring September 2012. |
Warrants
Stock purchase warrants outstanding at December 31, 2012 are summarized as follows:
| Range of Exercise Prices | Number of Warrants | Weighted Average |
| Remaining | ||
| Contractual Life | ||
| $1.25 - $4.59 | 3,156,848 | 0.71 years |
59
| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 9. | Common Stock – cont’d |
A summary of the Company’s stock purchase warrants are as follows:
| Weighted- | ||||||
| Warrants | Average | |||||
| Exercise Price | ||||||
| Warrants outstanding at December 31, 2010 | 1,928,918 | 1.54 | ||||
| Warrants granted during the year | 3,227,072 | 3.92 | ||||
| Warrants expired during the year | (549,545 | ) | 2.43 | |||
| Warrants exercised during the year | (1,312,226 | ) | 1.93 | |||
| Warrants outstanding at December 31, 2011 | 3,294,219 | 3.57 | ||||
| Warrants granted during the year | 541,167 | 3.42 | ||||
| Warrants expired during the year | (29,947 | ) | 1.38 | |||
| Warrants exercised during the year | (648,591 | ) | 1.32 | |||
| Warrants outstanding at December 31, 2012 | 3,156,848 | 4.02 |
| 10. | Stock Options |
Amended 2011 Fixed Share Option Plan
On June 26, 2012, the board amended the Company’s 2011 Fixed Share Option Plan (the “Amended 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 under the Amended Plan. All other terms of the 2011 Fixed Share Option Plan will remain unchanged.
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 | 0.65% to 0.70% |
| Volatility factor | 66% |
| Expected life of options, in years | 4.2 |
| Weighted average fair value of options granted | $1.07 |
During the year ended December 31, 2012, the Company granted a total of 1,849,500 common stock options to directors, officers, employees, eligible consultants, exercisable at $2.23 to $2.31 per share, with a term of five years with an estimated fair value of $1,973,289.
During the year ended December 31, 2012, 303,250 options vested. Total expense of $325,724 was recorded as stock-based compensation, $279,914 was charged to Salaries and Benefits expense and $45,810 was charged to Consulting and Contract Labour expense.
60
| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 10. | Stock Options – cont’d |
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 | Year ended | |
| December 31, 2012 | December 31, 2011 | |
| Risk-free interest rates | 0.78% to 0.92% | 1.08% |
| Volatility factor | 88% to 89% | 87.70% |
| Expected life of options, in years | 5 | 5 |
| Weighted average fair value of options granted | $2.14 | $1.47 |
During the year ended December 31, 2012, the Company granted a total of 125,000 (2011 - 50,000) common stock options to directors, officers, employees, eligible consultants, exercisable at $1.91 to $3.05 per share, with a term of five years with an estimated fair value of $210,136.
During the year ended December 31, 2012, 85,423 (2011 – 8,333) options vested. Total expense of $210,275 (2011 – $12,248) was recorded as stock-based compensation, $ 210,275 (2011 – 12,248) 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.
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| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 10. | Stock Options – cont’d |
The fair value of options issued during the year ended December 31, 2011 was determined using the Black-Scholes option pricing model with the following assumptions:
| Year ended | |
| December 31, 2011 | |
| Risk-free interest rates | 0.90% to 1.56% |
| Volatility factor | 85% to 91% |
| Expected life of options, in years | 5 |
| Weighted average fair value of options | $1.72 |
| granted |
During the year ended December 31, 2012, the Company granted Nil (2011 - 1,720,000) common stock options.
During the year ended December 31, 2012, 862,356 (2011 – 1,752,206 and 2010 – Nil) options vested. Total expense of $1,803,050 (2011 - $2,548,818 and 2010 - $24,196) was recorded as stock-based compensation, $259,601 (2011 - $976,268 and 2010 - $2,319) was included in Consulting and Contract Labour expense and $1,543,449 (2011 - $1,572,650 and 2010 -$21,877) was included in Salaries and Benefits expense.
During the year ended December 31, 2012, 92,079 (2011 – 1,376,631) options were exercised and a total of $64,425 (2011 - $770,452) has been reclassified from additional paid-in capital to capital stock.
2008 Fixed Share Option Plan
Under the 2008 Stock Option Plan, 300,000 (2011 – Nil and 2010 - 825,409) options vested. Total expense of $58,770 (2011 - $Nil and 2010 - $906,448) was recorded as stock-based compensation, $Nil (2011- $Nil and 2010- $464,723) was included in Consulting and Contract Labour expense, $58,770 (2011 - $Nil and 2010 - $441,725) was included in Salaries and Benefits expense.
During the year ended December 31, 2012, 729,150 (2011 - Nil) options were exercised and a total of $510,169 (2011 - $Nil) has been reclassified from additional paid-up capital to capital stock.
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| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 10. | Stock Options – cont’d |
A continuality of the Company’s outstanding stock options is as follows:
| Weighted-Average | ||||||
| Shares | Exercise Price | |||||
| Options outstanding, December 31, 2010 | 5,339,877 | $ | 1.08 | |||
| Options exercised during the year | (1,376,631 | ) | 1.18 | |||
| Options granted during the year | 1,770,000 | 2.39 | ||||
| Options expired during the year | (444,225 | ) | 1.15 | |||
| Options cancelled during the year | (7,076 | ) | 2.10 | |||
| 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 | (69,171 | ) | 2.12 | |||
| Options outstanding, December 31, 2012 | 6,366,045 | $ | 1.77 |
| 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 | 6,366,045 | 4.98 | $1.77 | 4,307,990 | $1.69 |
| December 31, 2011�� | |||||
| 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 - $2.77 | 5,281,945 | 3.50 | $1.48 | 3,444,445 | $1.27 |
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| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 11. | Commitments |
| a) | Leases |
The Company is committed to lease payments totaling $743,919 for premises under lease. The minimum lease payments over the next five years are as follows:
| 2013 | 116,082 |
| 2014 | 230,612 |
| 2015 | 198,612 |
| 2016 | 198,612 |
| 2017 | 146,930 |
| Total | 890,848 |
| 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 costs or off-balance sheet liabilities associated with the NRC agreement.
Over the term of the amended agreement, the Company will pay the NRC a total of $280,536 (CDN$294,822) divided into nine payments up to May 9, 2012. As of the date of these statements all payments due in 2012 ($33,183) have been paid.
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 (CDN$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 (CDN$15,000) per year in two installments. During the year ended December 31, 2012 the Company paid $7,375 (CDN$7,500) and accrued $7,375 (CDN$7,500) of the minimum annual royalty.
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| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 11. | Commitments – cont’d |
| c) | Alberta Innovates – Technology Futures (“AITF”) |
In June 2007, the Company’s subsidiary, Crailar Fiber Technologies Inc. (“CFT”), entered into a Master Agreement for Technology Development with AITF (the “Technology Agreement”) to further develop and commercialize bast fiber technology. The Technology Agreement is intended to act as an umbrella agreement for further bast fiber development planned to be performed by AITF under separate Project Agreements. Under the terms of the Technology Agreement, commencing July 1, 2007, the Company will pay $20,525 (CDN$25,000) per quarter to the AITF and can terminate the agreement with 90 days’ notice, unless there are Project Agreements in effect. In addition to the above payments, CFT will be responsible for providing work-in-kind with a value of $20,525 (CDN$25,000) per calendar quarter commencing with the first Project Agreement. During 2012 the Company paid AITF $2,000 for specific tasks to further the development of AITF’s Technology (2011 - $135,890 and 2010 - $7,991). Under the terms of the Project Agreements signed with AITF the Company will be entitled to an exclusive, worldwide, royalty-bearing license to use any new intellectual property developed pursuant to the Project Agreements. The royalty based on this option will be 3% of gross sales for the first $50,000,000 and 1.5% of gross sales on excess of $50,000,000. The Technology Agreement is in effect as long as there is an active Project Agreement. The Company currently has a Project Agreement with Ashland Inc. for testing the AITF technology.
| d) | Investor Relations Agreement |
On August 9, 2012, the Company renewed an agreement with a third party firm to perform investor relations activities. The agreement term is one year with ninety days notice of termination by either party. The monthly fee is $10,000 with 70,000 stock options, which we granted during the year ended December 31, 2012, exercisable at $2.23 expiring October 11, 2017. The options were granted under the Amended 2011 Fixed Share Option Plan and were valued at $74,501 using the Black-Scholes option pricing model with the assumptions disclosed in Note 10.
| e) | Research Agreement |
Starting in December 2010, a co-operative research project designed to cultivate and evaluate the viability of various flax strains for use in CRAiLAR® technology was signed with the United States Department of Agriculture, HanesBrands and CRAiLAR Inc. The project has an initial term of one year with a renewal option for two additional years. CRAiLAR Inc. will contribute annually $51,000 of in-kind expenses towards the project.
| f) | Farming Agreements |
During the year ended December 31, 2012, the Company signed agreements with farmers to plant and to produce flax using the seed provided by the Company. Flax straw and flaw seed harvested will be purchased by the Company at the agreed prices.
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| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 11. | Commitments – cont’d |
| g) | Government Grant |
During the year ended December 31, 2012, the Company received $263,000 (the “Grant”) from Economic Development Set-Aside Fund of South Carolina in assisting the Company with the construction of its manufacturing facility in South Carolina. The Company recorded the Grant as a reduction of leasehold improvements (Note 5). The Grant will be amortized throughout the lease term of the facility.
Under the terms of the Grant, the Company is required to satisfy and maintain a Minimum Job Requirement by creating and maintaining no fewer than 25 new, full-time jobs; and to make and maintain a Minimum Investment Requirement by investing capital investment of not less than $5,748,000 for building and machinery and equipment within a five year period ending on March 7, 2017. Failure to satisfy and maintain the Minimum Job Requirement and the Minimum Investment Requirement may result in repayment of all or a portion of the Grant.
| 12. | Discontinued Operations |
During fiscal 2009 the Company decided to discontinue the apparel business to focus on developing its bast fiber technology.
The following table summarizes the operating results of the discontinued operations for the fiscal year ended December 31:
| 2012 | 2011 | 2010 | |||||||
| Revenue | $ | - | $ | - | $ | 53,470 | |||
| Expenses | - | - | 42,153 | ||||||
| Profit (loss) from discontinued operations | $ | - | $ | - | $ | 11,317 |
| 13. | Income Taxes |
As at December 31, 2012, the Company has estimated tax loss carry forwards for tax purposes of approximately $22,012,000 (2011 - $15,356,000) which expire between 2015 and 2032. This amount may be applied against future federal taxable income. Management has determined that the realization of the potential deferred tax assets resulting from these tax pools 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.
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| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 13. | Income Taxes – cont’d |
The reported income taxes differ from the amounts obtained by applying statutory rates to the loss before income taxes as follows:
| 2012 | 2011 | 2010 | |||||||
| Loss before income taxes | 9,315,360 | $ | 6,998,922 | $ | 3,202,929 | ||||
| Corporate tax rate | 28.85% | 27.31% | 28.50% | ||||||
| Expected income tax recovery | (2,654,878 | ) | (1,911,117 | ) | (912,835 | ) | |||
| Increase (decrease) resulting from: | |||||||||
| Permanent differences and others | 487,246 | 831,044 | 239,798 | ||||||
| Change in valuation allowance | 2,324,647 | 1,306,095 | 815,004 | ||||||
| Impact of foreign exchange changes | (101,609 | ) | 20,850 | (257,614 | ) | ||||
| Impact of tax rate changes | (37,059 | ) | 60,499 | 115,647 | |||||
| Effect on share issue costs recognized | (18,347 | ) | (307,371 | ) | - | ||||
| Future income tax recovery | $ | - | $ | - | $ | - |
The tax effects of temporary differences that give rise to the Company’s future tax asset (liability) are as follows:
| 2012 | 2011 | 2010 | |||||||
| Property and equipment | $ | 51,057 | $ | 69,945 | $ | 53,667 | |||
| Intangible assets | (11,521 | ) | (4,611 | ) | (7,553 | ) | |||
| Research and development costs | 673,128 | 603,622 | 401,776 | ||||||
| Share issue costs | 191,188 | 248,042 | 36,007 | ||||||
| Other finance costs | (379,770 | ) | - | - | |||||
| Loss carry forwards | 6,076,085 | 3,908,068 | 3,035,074 | ||||||
| 7,111,669 | 4,825,066 | 3,518,971 | |||||||
| Valuation allowance | (7,111,669 | ) | (4,825,066 | ) | (3,518,971 | ) | |||
| $ | - | $ | - | $ | - |
As the criteria for recognizing future income tax assets have not been met due to the uncertainty of realization, a valuation allowance of 100% has been recorded for the current and prior years.
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| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 13. | Income Taxes – cont’d |
The Company’s non-capital losses, which can be applied to reduce future taxable income, expire as follows:
| Year of Expiry | Amount | ||
| 2014 | $ | 1,060,000 | |
| 2015 | 1,198,000 | ||
| 2026 | 1,604,000 | ||
| 2027 | 1,439,000 | ||
| 2028 | 2,313,000 | ||
| 2029 | 2,939,000 | ||
| 2030 | 1,772,000 | ||
| 2031 | 3,765,000 | ||
| 2032 | 5,922,000 | ||
| $ | 22,012,000 |
| 14. | Related Party Transactions |
During the year ended December 31, 2012, $1,410,203 (2011 - $1,274,505 and 2010 - $624,310) was incurred as remuneration to officers and directors of the Company. Of this amount, $1,410,203 (2011 -$1,103,505 and 2010 - $441,310) is recorded as Salaries and Benefits expense and $Nil (2011 - $171,000 and 2010 - $183,000) is recorded as Consulting and Contract Labour expense.
During the year ended December 31, 2012, $1,681,761 (2011 - $2,243,274 and 2010 - $788,534) was recorded as stock-based compensation to officers and directors of the Company. Of this amount, $1,681,761 (2011 - $1,269,236 and 2010 - $472,859) is recorded as Salaries and Benefits expense and $Nil (2011 -$974,038 and 2010 - $315,675) is recorded as Consulting and Contract Labour expense.
During the year ended December 31, 2012, three directors of the Company advanced a total of $300,000 in loans to the Company. The loans were repaid within the year and the Company paid $5,780 in interest.
| 15. | Subsequent Events |
| a) | Subsequent to December 31, 2012, the Company granted 250,000, five year common stock options to employees and consultants, exercisable at prices between $2.24 and $2.35 per share with an aggregate fair value of $311,460. These options were granted under the terms of the Company’s 2012 Fixed Share Option Plan. |
| b) | Subsequent to December 31, 2012, 281,000 shares were issued pursuant to the exercise of stock options at prices between $0.95 and $1.17 per share for total proceeds of $273,170. |
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| CRAiLAR TECHNOLOGIES INC. |
| (Formerly Naturally Advanced Technologies Inc.) |
| (A Development Stage Company) |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| DECEMBER 31, 2012 |
| (In US Dollars) |
| 15. | Subsequent Events – cont’d |
| c) | On February 8, 2013 the Company retained a third party group to perform investor relations services. The monthly fee is $8,000 with 50,000 stock options exercisable at $2.30, expiring February 8, 2018. The options were granted under the 2012 Fixed Share Option Plan and were calculated to have a fair value of $65,383. The agreement term is one year with thirty days’ notice of termination by either party after six months from the effective date. |
| d) | On February 26, 2013, the Company completed an offering (the “Offering”) of $4,870,900 (CDN$5,000,000) convertible debenture (the “Notes”). The Notes mature on September 30, 2017 and will accrue interest at 10% per year, payable semi-annually on March 31stand September 30th, starting March 31, 2013. The cost of completing the offering was $210,748 (CDN$216,650). The Offering has been completed on essentially the same terms as the Notes described in Note 8. |
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| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING 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 31, 2012.
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 31, 2012.
The independent registered public accounting firm that audited the financial statements has issued an attestation report on our internal control over financial reporting which has been included in the financial statements.
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 31, 2012, 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 | 56 | Chief Executive Officer and a Director |
| Jason Finnis | 41 | President/Chief Innovation Officer and a Director |
| Larisa Harrison | 40 | Chief Administration Officer and Secretary/Treasurer and a Director |
| Theodore Sanders | 58 | Chief Financial Officer |
| Guy Prevost | 54 | Corporate Controller and Compliance Officer and a Director |
| Thomas C. Robinson | 51 | Chief Operating Officer |
| Jay Nalbach | 41 | Chief Marketing Officer |
| Robert Edmunds | 54 | Director |
| Miljenko Horvat | 52 | Director |
| Jeremy Jones | 58 | Director |
| Peter C. Moore | 69 | Director |
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 February 6, 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 is currently a co-president of The Meriwether Group, Inc. of Portland, Oregon, which is a corporate investment and business acceleration firm. From approximately October 2003 through April 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. The Board of Directors has concluded that Mr. Barker should serve as a director given his significant experience in the apparel business over the past twenty years as well as his involvement with our Company since 2006.
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Jason Finnis.Mr. Finnis has been a member of the Board of Directors and our President since December 15, 2000, Chief Innovation Officer since September 7, 2011 and previously our Chief Operating Officer until September 7, 2011. Mr. Finnis has been working as an entrepreneur in the hemp industry since 1994. He has started and grown three different hemp enterprises since 1994 and has built a market for his products. Mr. Finnis has established strong ties with the Federal Government of Canada and was instrumental in removing the Canadian tariff on all imported hemp fabric. Mr. Finnis has been a sought after speaker at many North American universities and conferences speaking on a wide variety of business and industrial hemp related topics. Mr. Finnis attended the University of Victoria in the Faculty of Fine Arts, and possesses broad experience in apparel manufacturing, marketing and sales. The Board of Directors has concluded that Mr. Finnis should serve as a director given his involvement with our Company since 2000 as well as his experience as an entrepreneur in the hemp industry since 1994.
Larisa Harrison.Ms. Harrison has been a member of the Board of Directors and our Chief Administration Officer and Secretary/Treasurer since December 15, 2000. Ms. Harrison has been working in the hemp clothing industry since 1995. Ms. Harrison was instrumental in creating the growth in demand for our products over the past years. From 1998 to 2005, Ms. Harrison worked as a self-employed administrative consultant providing human resource management, developing customizing computer databases, and providing bookkeeping services for several Canadian businesses. In May of 1998, Ms. Harrison was employed by one of Canada’s largest providers of private label fashion to North American department and chain stores. In this role, Ms. Harrison provided product development, sales support and production management for a number of clients. Ms. Harrison possesses extensive experience in the apparel industry, network administration, and graphic design. Ms. Harrison is a graduate of the University of Victoria with a Fine Arts degree from the School of Music. The Board of Directors has concluded that Ms. Harrison should serve as a director given her involvement with our Company since 2000 as well as her experience in the hemp clothing industry since 1995.
Theodore Sanders.Mr. Sanders was appointed Chief Financial Officer of our Company on March 1, 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 (NASDAQ: PRTS), where revenues doubled during his three-year tenure to more than $325 million through organic growth and acquisition, and at PCM Inc. (NASDAQ: PCMI), where he oversaw revenues of $1.2 billion, acquisitions and subsidiary IPOs with a team of 60 during his 10-year tenure.
Guy Prevost.Mr. Prevost is a member of our Board of Directors and, since March 1, 2013, 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. The Board of Directors has concluded that Mr. Prevost should serve as a director given his involvement with our Company since 2005 as well as his experience in accounting, finance and corporate governance.
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Thomas C. Robinson. Mr. Robinson has been our Chief Operating Officer since September 7, 2011. Mr. Robinson is a 27 year veteran of the textiles industry where he was most recently Vice President of Cotton Operations Planning and Technical Support in International Textile Group’s (“ITG”) apparel division. Mr. Robinson began his textiles career in 1984 with Burlington Industries, a full service apparel solutions organization for apparel manufacturers and retailers. From 1984 to 2004 he held a number of leadership roles for Burlington Industries, culminating in Executive Vice President of Manufacturing and Operations Planning. His experience included greenfieldstartup manufacturing facilities as well as oversight of multiplant operations throughout the U.S., China, Mexico, India, Vietnam and Nicaragua. ITG later purchased Burlington Industries to become one of its six current companies, and positioned it alongside Cone Mills, a denim manufacturer and wholesaler. In 2004, Mr. Robinson became Vice President of Operations Planning and Customer Support at Cone Mills, where he was responsible for global denim operations planning, customer service, technical product development and quality control. He played a key operations role in the integration of Burlington Industries and Cone Mills as they each became part of ITG. Mr. Robinson has a BA in economics and business from North Carolina State University and an Executive Program Certificate from the University of North Carolina.
Jay Nalbach. Mr. Nalbach has been our Chief Marketing Officer since August 31, 2011. Mr. Nalbach has more than 16 years in the sports and fashion industries, mostly recently serving as Brand Director at adidas Group Japan KK, 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. This came at the critical post-acquisition period of Reebok by adidas. Mr. Nalbach has also held senior roles with adidas AG, including key work with Reebok, adidas Originals, Foot Locker Europe in footwear, apparel, supply chain and account management. Mr. Nalbach’s time with adidas, where he began in 1995, paused briefly for a nearly three-year senior role with Fila International.
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 has worked as the proprietor of a public practice from 1992 through 1998. Since 1998, Mr. Edmunds has been performing consulting work, providing business strategy, financial planning and accounting services for various clients in the entertainment and E-commerce industries. The Board of Directors has concluded that Mr. Edmunds should serve as a director given his involvement with our Company since 2000 as well as his experience in accounting.
Miljenko Horvat.Mr. Horvat has been one of our directors since July 11, 2006. Mr. Horvat has over twenty years of experience in the investment banking and private investing industry. Mr. Horvat currently is the President of Horvat Capital Corp., a Vancouver-based investment firm. Mr. Horvat’s duties include sourcing and managing leverage buyout transactions throughout Canada on behalf of The Riverside Company, a private equity firm that has over $1.5 billion under management involving investments in industry segment-leading companies with enterprise values between $15,000,000 and $150,000,000. Previously, Mr. Horvat was the president and chief executive officer of NewspaperDirect, Inc., a corporation based in New York and Vancouver, Canada, which is an Internet based, print on demand distributor of daily newspapers. While at NewspaperDirect, Inc., Mr. Horvat was responsible for raising a total of $12,500,000 in funding, establishing relationships with 185 publishers of daily newspapers around the world, expanding market presence to 65 countries, implementing a radical restructuring in response to market conditions during 2001, and growing revenues of 450% in twelve months resulting in sales for fiscal year 2003 of $1,500,000. Mr. Horvat’s prior experience also includes employment at Citicorp as managing director, Russia Direct Equity, and at Citibank, Russia, where he led the creation of Citibank’s full service commercial banking operations in Russia. Mr. Horvat is also a member of the Advisory Board of the Maurice Young Center for Entrepreneurship. He earned an M.A. in International Relations at Yale University and a B.A. in Political Science from Zagreb University. The Board of Directors has concluded that Mr. Horvat should serve as a director given his involvement with our Company since 2006 as well as his business experience, financial expertise and proven ability to raise funding.
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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. Mr. Jones was Vice President of Koch Genesis, the venture arm or Koch Industries, the largest private company in the United States 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. The Board of Directors has concluded that Mr. Jones should serve as a director given his experience in building small companies as well as his specific experience with companies involved in renewable fuels, biopolymers, textiles and fibres.
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. 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-1980’s 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 adidas North America and worldwide creative director of adidas AG. The Board of Directors has concluded that Mr. Moore should serve as a director given his involvement with our Company since 2004 as well as his branding and design expertise.
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.
Significant Employees
Mr. Gregg Wright.Mr. Wright has been our Vice President of Strategic Fiber Markets, since February of 2012.Mr.Wright joins the Company from International Paper Company (“IP”) in National Accounts, Business Development, and Regional Management. He served in several advisory roles during his 12+ years with IP. He earned his BA from Denison University in 1990.
Mr. Steve Sandroni.Mr. Sandroni has been Vice President of Agriculture for the Company since March 2012. Mr. Sandroni brings more than 34 years of experience working in various aspects of agribusiness to the Company. Most recently, Mr. Sandroni served as Director of Production and Logistics at Sustainable Oils, where he oversaw the production of Camelina sativa, a member of the mustard family that is closely related to canola, for innovative bio-fuel applications such as jet fuel for the U.S. Navy and Air Force. In that position, he led campaigns to strengthen Sustainable Oils’ relationships with researchers and contract growers, while building a foundational commercial production program for camelina throughout the United States and Canada. Mr. Sandroni’s professional experience also includes time spent at Monsanto Company, Emergent Genetics Stoneville, and the Delta and Pine Land Company. His roots in the industry, though, began as a farmer, growing cotton, rice, and soybeans in the fertile Mississippi Delta from 1978 to 1990.
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Family Relationships
Ms. Harrison and Mr. Finnis are married. Otherwise, there are no family relationships among our directors or 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; | ||
| 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 | ||
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| 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.
Audit Committee
Mr. Edmunds, Mr. Horvat and Mr. Jones are the members of our audit committee. The Board of Directors has determined that one of the audit committee members, Mr. Horvat, qualifies as an independent director under the listing standards of the NYSE MKT Equities Exchange. The Board of Directors has determined that Mr. Robert Edmunds, C.A., chairman of the audit committee, qualifies as a financial expert. Mr. Edmunds is not considered independent under the listing standards of the NYSE MKT Equities Exchange.
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.
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.
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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, Chief Administration Officer, 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 atwww.crailar.com.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires directors and officers, and the persons who beneficially own more than 10% of common stock, of certain companies to file reports of ownership and changes in ownership with the SEC. During our fiscal year ended December 31, 2012, we were considered a “foreign private issuer,” such that our officers, directors and holders of more than 10% of our common stock were not required to file reports under Section 16 of the Exchange Act. As of January 1, 2013, we are no longer considered a “foreign private issuer”, such that our officers, directors and holders of more than 10% of our common stock have been required to file reports under Section 16 of the Exchange Act as of January 1, 2013.
| ITEM 11. | EXECUTIVE COMPENSATION |
Compensation Discussion and Analysis
The Compensation Committee of the Board of Directors of the Company is responsible for the development and supervision of the Company’s 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 the Company’s expenses. The Compensation Committee shall:
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| A. | Review and make recommendations regarding compensation issues, in particular: | |
| (i) | compensation philosophy and policies; | |
| (ii) | competitive positioning; | |
| (iii) | annually review the performance of the CEO, the COO and the CFO on behalf of the Board; | |
| (iv) | make recommendations to the Board for payment and awards to Senior Officers under the Company’s salary and incentive plans; | |
| (v) | make recommendations to the Board for annual aggregate incentive compensation payouts to management, including security based compensation arrangements, and profit sharing to employees; and | |
| (vi) | make recommendations to the Board regarding Director compensation. | |
| B. | Review: | |
| (i) | senior management succession planning; | |
| (ii) | senior management development and training; and | |
| (iii) | significant changes in organizational structure. | |
| C. | Ensure for each meeting that minutes are recorded, drafted and circulated on a timely basis to committee members. | |
The Board assumes responsibility for reviewing and monitoring the long-range compensation strategy for the senior management of the Company although the Compensation Committee guides it in this role. The Company’s Compensation Committee receives independent competitive market information on compensation levels for executives.
Philosophy and Objectives
The compensation program for the senior management of the Company is designed to ensure that the level and form of compensation achieves certain objectives, including:
| (a) | attracting and retaining talented, qualified and effective executives; | |
| (b) | motivating the short and long-term performance of these executives; and | |
| (c) | better aligning their interests with those of the Company’s shareholders. |
In compensating its senior management, the Company has 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 the Company operates 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
The Company’s objective is to achieve certain strategic objectives and milestones. The Board will consider executive bonus compensation dependent upon the Company 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 receives a base salary and is also eligible for an annual bonus. Annual bonuses are calculated and approved by the Company’s compensation committee and can range from 25% to 125% of a Named Executive Officer’s base salary.
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Equity Participation
The Company believes that encouraging its executives and employees to become shareholders is the best way of aligning their interests with those of its shareholders. Equity participation is accomplished through the Company’s 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 the Company’s 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 Miljenko Horvat (the committee chair), Robert Edmunds and Jeremy Jones. No person who served as a member of our Compensation Committee during our fiscal year ended December 31, 2012 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). Similarly, no person who served as a member of our Compensation Committee during our fiscal year ended December 31, 2012 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 31, 2012, 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 our Company.
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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: Miljenko Horvat (the committee chair), Robert Edmunds and Jeremy Jones.
Compensation of Named Executive Officers
The following table sets forth the compensation paid to our Chief Executive Officer and those executive officers that earned in excess of $100,000 during fiscal years ended December 31, 2012 and 2011 (collectively, the “Named Executive Officers”):
Summary Compensation Table
Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards (1) ($) | Non- Equity Incentive Plan Compen- sation ($) | Non- Qualified Deferred Compen- sation Earnings ($) | All Other Compen- sation ($) | Total ($) |
| Kenneth Barker Chief Executive Officer | 2012 | 275,000 | 125,000 | Nil | 549,204 | Nil | Nil | Nil | 949,204 |
2011 | 221,000 | 75,000 | Nil | 805,546 | Nil | Nil | Nil | 1,101,546 | |
| Jason Finnis President & Chief Innovation Officer | 2012 | 165,145 | 65,333 | Nil | 232,604 | Nil | Nil | Nil | 463,802 |
2011 | 126,844 | 86,726 | Nil | 379,727 | Nil | Nil | Nil | 593,297 | |
| Guy Prevost CFO (2) | 2012 | 165,145 | 65,333 | Nil | 226,143 | Nil | Nil | Nil | 456,621 |
| 2011 | 126,844 | 86,726 | Nil | 480,696 | Nil | Nil | Nil | 694,266 | |
| Larisa Harrison CAO, Secretary and Treasurer | 2012 | 117,590 | 50,257 | Nil | 200,298 | Nil | Nil | Nil | 368,145 |
2011 | 126,844 | 86,726 | Nil | 480,696 | Nil | Nil | Nil | 694,266 | |
| Tom Robinson Chief Operations Officer | 2012 | 165,000 | 25,000 | Nil | 193,837 | Nil | Nil | Nil | 383,837 |
2011 | 50,000 | Nil | Nil | 146,978 | Nil | Nil | Nil | 196,978 | |
| Jay Nalbach Chief Marketing Officer | 2012 | 165,000 | 25,000 | Nil | 193,837 | Nil | Nil | Nil | 383,837 |
2011 | 62,500 | Nil | Nil | 192,693 | Nil | Nil | Nil | 255,193 |
| (1) | Amounts presented in this column represent the fair value as of the grant date of such stock options. |
| (2) | Mr. Prevost served as our Chief Financial Officer throughout 2011 and 2012. He resigned as Chief Finanical Officer on March 1, 2013. |
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Stock Option Grants
We granted options to purchase shares of our common stock to the Names Executive Officers in the fiscal year ended December 31, 2012 as follows:
Grants of Plan-Based Awards
Name | Grant Date | Number of Securities Underlying Options | Exercise Price | Grant Date Fair Value of Option |
| Kenneth Barker CEO | October 11, 2012 | 425,000 | $2.23 | $452,329 |
| Jason Finnis President and Chief Innovation Officer | October 11, 2012 | 180,000 | $2.23 | $191,575 |
| Guy Prevost CFO (1) | October 11, 2012 | 175,000 | $2.23 | $186,253 |
| Larisa Harrison CAO, Secretary and Treasurer | October 11, 2012 | 155,000 | $2.23 | $164,967 |
| Tom Robinson Chief Operations Officer | October 11, 2012 | 150,000 | $2.23 | $159,646 |
| Jay Nalbach Chief Marketing Officer | October 11, 2012 | 150,000 | $2.23 | $159,646 |
| (1) | Mr. Prevost served as our Chief Financial Officer throughout 2011 and 2012. He resigned as Chief Finanical Officer on March 1, 2013. |
Outstanding Equity Awards Held by Named Executive Officers at Fiscal Year End
The following table sets forth information as at December 31, 2012, relating to unexercised options, stock that has not vested, and equity incentive plan awards for each Named Executive Officer:
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| Outstanding Equity Awards At Fiscal Year-End | |||||||||
| Option Awards | Stock Awards | ||||||||
Name | Number of Securities Underlying Unexercised Options Exercisable (#) | Number of Securities Underlying Unexercised Options Unexercisable (#) | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (#) |
| Kenneth Barker | 500,000 | Nil | Nil | $1.17 | Oct-20-14 | Nil | Nil | Nil | Nil |
| 380,000 | Nil | Nil | $0.96 | Aug -26-15 | Nil | Nil | Nil | Nil | |
| 500,000 | Nil | Nil | $0.87 | Nov-25-15 | Nil | Nil | Nil | Nil | |
| 125,000 | Nil | Nil | $1.55 | Apr-8-16 | Nil | Nil | Nil | Nil | |
| 325,000 | Nil | Nil | $2.77 | Aug-19-16 | Nil | Nil | Nil | Nil | |
| 70,833 | 354,167 | Nil | $2.23 | Oct-11-17 | Nil | Nil | Nil | Nil | |
| Jason Finnis | 300,000 | Nil | Nil | $1.17 | Oct-20-14 | Nil | Nil | Nil | Nil |
| 132,939 | Nil | Nil | $1.02 | Aug-9-15 | Nil | Nil | Nil | Nil | |
| 125,000 | Nil | Nil | $0.87 | Nov-25-15 | Nil | Nil | Nil | Nil | |
| 100,000 | Nil | Nil | $1.55 | Apr-8-16 | Nil | Nil | Nil | Nil | |
| 125,000 | Nil | Nil | $2.77 | Aug-19-16 | Nil | Nil | Nil | Nil | |
| 30,000 | 150,000 | Nil | $2.23 | Oct-11-17 | Nil | Nil | Nil | Nil | |
| Guy Prevost | 265,000 | Nil | Nil | $1.17 | Oct-20-14 | Nil | Nil | Nil | Nil |
| 175,000 | Nil | Nil | $1.55 | Apr-8-16 | Nil | Nil | Nil | Nil | |
| 125,000 | Nil | Nil | $2.77 | Aug-19-16 | Nil | Nil | Nil | Nil | |
| 29,167 | 145,833 | Nil | $2.23 | Oct-11-17 | Nil | Nil | Nil | Nil | |
| Larisa Harrison | 132,938 | Nil | Nil | $1.02 | Aug-9-15 | Nil | Nil | Nil | Nil |
| 125,000 | Nil | Nil | $0.87 | Nov-25-15 | Nil | Nil | Nil | Nil | |
| 125,000 | Nil | Nil | $2.77 | Aug-19-16 | Nil | Nil | Nil | Nil | |
| 25,833 | 129,167 | Nil | $2.23 | Oct-11-17 | Nil | Nil | Nil | Nil | |
| Tom Robinson | 100,000 | Nil | Nil | $2.20 | Sept-29-16 | Nil | Nil | Nil | Nil |
| 25,000 | 125,000 | Nil | $2.23 | Oct-11-17 | Nil | Nil | Nil | Nil | |
| Jay Nalbach | 100,000 | Nil | Nil | $2.77 | Aug-19-16 | Nil | Nil | Nil | Nil |
| 25,000 | 125,000 | Nil | $2.23 | Oct-11-17 | Nil | Nil | Nil | Nil | |
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Director Compensation
The following table sets forth information relating to compensation paid to our directors during fiscal year ended December 31, 2012. Our Directors who are also Named Executive Officers do not receive any additional compensation beyond what is disclosed above in relation to their service as directors. As such, such Named Executive Officers are not listed in the table below.
Director Compensation Table
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Option Awards (1) ($) | Non-Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) |
| Robert Edmunds | Nil | Nil | 53,210 | Nil | Nil | Nil | 53,210 |
| Peter Moore | Nil | Nil | 26,608 | Nil | Nil | Nil | 26,608 |
| Miljenko Horvat | Nil | Nil | 26,608 | Nil | Nil | Nil | 26,608 |
| Jeremy Jones | Nil | Nil | 26,608 | Nil | Nil | Nil | 26,608 |
| Scott Staff | Nil | Nil | 31,001 | Nil | Nil | Nil | 31,001 |
| (1) | Amounts presented in this column represent the fair value as of the grant date of such stock options. |
| (2) | Mr. Staff served as a director of our Company from February 3, 2012 until his resignation on May 25, 2012. |
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 Company matters and the compensation paid to other directors of companies in the industry.
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 therefore, 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 24 months of his then base salary, 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), as well as certain payments with respect to the value of his benefits under the agreement.
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 therefore, he is to receive a base salary of CDN$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 24 months of his then base salary, 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), as well as certain payments with respect to the value of his benefits under the agreement.
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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 therefore, he is to receive a base salary of CDN$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 24 months of his then base salary, 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), as well as certain payments with respect to the value of his benefits under the agreement. 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 Larisa Harrison
On April 2, 2012, we entered into a Senior Executive Employment Agreement with Larisa Harrison, with an initial term of five years, commencing on July 1, 2011. Pursuant to the terms of the agreement, Mr. Harrison is to provide services as Chief Administration Officer, Secretary and Treasurer of the Company. In consideration therefore, she is to receive a base salary of CDN$108,000 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 Ms. Harrison 24 months of her then base salary, 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), as well as certain payments with respect to the value of her benefits under the agreement.
Senior Executive Employment Agreement with Tom Robinson
On June 18, 2012, we entered into a Senior Executive Employment Agreement with Tom Robinson, with an initial term of five years, commencing on October 1, 2011. Pursuant to the terms of the agreement, Mr. Robinson is to provide services as Chief Operating 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. Robinson six months of his then base salary, 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), as well as certain payments with respect to the value of his benefits under the agreement. In the event that the Company terminates the agreement upon a change in control, the Company is required to pay Mr. Robinson twelve months of his then base salary, 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), as well as certain payments with respect to the value of his benefits under the 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 six months of his then base salary, 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), as well as certain payments with respect to the value of his benefits under the agreement. In the event that the Company terminates the agreement upon a change in control, the Company is required to pay Mr. Nalbach twelve months of his then base salary, 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), as well as certain payments with respect to the value of his benefits under the agreement.
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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 a vesting (over 12 months) stock option to acquire up to 200,000 common shares of the Company at an exercise price of $2.24 per common share and for a period of up to five years from the date of grant.”
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS |
As of March 13, 2013, the following table sets forth certain information 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, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of common stock, except as otherwise indicated. As of March 13, 2013, there were 44,430,198 shares of common stock issued and outstanding.
| Amount and Nature of | Percentage of Beneficial | |
| Name and Address of Beneficial Owner(1) | Beneficial Ownership(1) | Ownership |
| Directors and Officers: | ||
| Kenneth Barker Suite 305, 4420 Chatterton Way Victoria, British Columbia Canada V8X 5J2 | 1,964,211(2) | 4.2% |
| Jason Finnis and Larisa Harrison(3) Suite 305, 4420 Chatterton Way Victoria, British Columbia Canada V8X 5J2 | 2,619,181(4) | 5.8% |
| Theodore Sanders Suite 305, 4420 Chatterton Way Victoria, British Columbia Canada V8X 5J2 | 95,132(5) | Less than 1% |
| Guy Prevost Suite 305, 4420 Chatterton Way Victoria, British Columbia Canada V8X 5J2 | 664,581(6) | 1.5% |
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| Amount and Nature of | Percentage of Beneficial | |
| Name and Address of Beneficial Owner(1) | Beneficial Ownership(1) | Ownership |
| Thomas C. Robinson Suite 305, 4420 Chatterton Way Victoria, British Columbia Canada V8X 5J2 | 187,500(7) | Less than 1% |
| Jay Nalbach Suite 305, 4420 Chatterton Way Victoria, British Columbia Canada V8X 5J2 | 189,000(8) | Less than 1% |
| Robert Edmunds Suite 305, 4420 Chatterton Way Victoria, British Columbia Canada V8X 5J2 | 2,202,303(9) | 4.9% |
| Miljenko Horvat Suite 305, 4420 Chatterton Way Victoria, British Columbia Canada V8X 5J2 | 301,581(10) | Less than 1% |
| Jeremy Jones Suite 305, 4420 Chatterton Way Victoria, British Columbia Canada V8X 5J2 | 84,581(11) | Less than 1% |
| Peter Moore Suite 305, 4420 Chatterton Way Victoria, British Columbia Canada V8X 5J2 | 139,582(12) | Less than 1% |
| All Officers and Directors as a Group (11 individuals) | 8,447,652(13) | 17.3% |
| 5% or Greater Beneficial Owners | ||
| Dennis Howitt Trust Suite 305, 4420 Chatterton Way Victoria, British Columbia Canada V8X 5J2 | 3,487,275(14) | 7.8% |
| (1) | Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, 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. As of March 13, 2013, there were 44,430,198 issued and outstanding. |
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| (2) | This figure includes: (i) 6,299 shares of common stock; (ii) 1,887,080 stock options which have vested and are exercisable into 1,887,080 shares of common stock; and (iii) 70,832 stock options which will vest within 60 days and are exercisable into 70,832 shares of common stock. |
| (3) | Jason Finnis and Larisa Harrison are married. |
| (4) | This figure includes: (i) 1,583,893 shares of common stock; (ii) 979,456 stock options which have vested and exercisable into 979,456 shares of common stock; and (iii) 55,832 stock options which will vest within 60 days and are exercisable into 55,832 shares of common stock. |
| (5) | This figure includes: (i) 61,800 shares of common stock; (ii) 33,332 stock options which will vest within 60 days and are exercisable into 33,332 shares of common stock. |
| (6) | This figure includes: (i) 7,500 shares of common stock; (ii) 627,915 stock options which have vested and are exercisable into 627,915 shares of common stock; and (iii) 29,166 stock options which will vest within 60 days and are exercisable into 29,166 shares of common stock. |
| (7) | This figure includes: (i) 162,500 stock options which have vested and are exercisable into 162,500 shares of common stock; and (ii) 25,000 stock options which will vest within 60 days and are exercisable into 25,000 shares of common stock. |
| (8) | This figure includes: (i) 1,500 shares of common stock; (ii) 162,500 stock options which have vested and are exercisable into 162,500 shares of common stock; and (iii) 25,000 stock options which will vest within 60 days and are exercisable into 25,000 shares of common stock. |
| (9) | This figure includes: (i) 1,815,641 shares of common stock held of record by Robert Edmunds; (ii) 272,500 shares of common stock held of record by Lesley Hayes, the wife of Robert Edmunds; (iii) 95,830 stock options held of record by Robert Edmunds which have vested and are exercisable into 95,830 shares of common stock; (iv) 8,332 stock options held of record by Robert Edmunds which will vest within 60 days and are exercisable into 8,332 shares of common stock; and (v) 10,000 stock options held of record by Lesley Hayes which have vested and are exercisable into 10,000 shares of common stock. |
| (10) | This figure includes: (i) 276,585 shares of common stock; (ii) 20,830 stock options which have vested and are exercisable into 20,830 shares of common stock; and (iii) 4,166 stock options which will vest within 60 days and are exercisable into 4,166 shares of common stock. |
| (11) | This figure includes: (i) 20,000 shares of common stock; (ii) 60,415 stock options which have vested and are exercisable into 60,415 shares of common stock; and (iii) 4,166 stock options which will vest within 60 days and are exercisable into 4,166 shares of common stock. |
| (12) | This figure includes: (i) 75,000 shares of common stock; (ii) 60,416 stock options which have vested and are exercisable into 60,416 shares of common stock; and (iii) 4,166 stock options which will vest within 60 days and are exercisable into 4,166 shares of common stock. |
| (13) | This figure includes: (i) 4,120,718 shares of common stock; (ii) 4,066,942 stock options which have vested and are exercisable into 4,066,942 shares of common stock; (iii) 259,992 stock options which will vest within 60 days and are exercisable into 259,992 shares of common stock. |
| (14) | This figure consists of 3,487,275 shares of common stock. |
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 control of our Company.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTORINDEPENDENCE |
Except for the transactions described below, none of our directors, officers or principal stockholders, nor any associate or affiliate of the foregoing, have any interest, direct or indirect, in any transaction during our fiscal years ended December 31, 2012 and 2011, or in any currently proposed transaction.
During the year ended December 31, 2012, $1,410,203 (2011 - $1,274,505 and 2010 - $624,310) was incurred as remuneration to officers and directors of the Company.
During the year ended December 31, 2012, $1,681,761 (2011 - $2,243,274 and 2010 - $788,534) was recorded as stock-based compensation to officers and directors of the Company.
During the year ended December 31, 2012, three directors of the Company advanced a total of $300,000 in loans to the Company. The loans were repaid within the year and the Company paid $5,780 in interest.
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| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Dale Matheson Carr-Hilton LaBonte LLP served as our independent registered public accounting firm and audited our financial statements for the fiscal years ended December 31, 2012 and December 31, 2011. Aggregate fees for professional services rendered to us by our auditor are set forth below:
| Year Ended | Year Ended | |||||
| December 31, 2012 | December 31, 2011 | |||||
| Audit Fees | $ | 118,000 | $ | 108,500 | ||
| Audit-Related Fees | Nil | Nil | ||||
| Tax Fees | $ | 12,400 | $ | 10,500 | ||
| All Other Fees | Nil | Nil | ||||
| Total | $ | 130,400 | $ | 119,000 |
Audit Fees
Audit fees are the aggregate fees billed for professional services rendered by our independent auditors for the audit of our annual financial statements, the review of the financial statements included in each of our quarterly reports and services provided in connection with statutory and regulatory filings or engagements.
Audit Related Fees
Audit related fees are the aggregate fees billed by our independent auditors for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not described in the preceding category.
Tax Fees
Tax fees are billed by our independent auditors for tax compliance, tax advice and tax planning.
All Other Fees
All other fees include fees billed by our independent auditors for products or services other than as described in the immediately preceding three categories.
Policy on Pre-Approval of Services Performed by Independent Auditors
It is our audit committee’s policy to pre-approve all audit and permissible non-audit services performed by the independent auditors. We approved all services that our independent accountants provided to us in the past two fiscal years.
| ITEM 15. | EXHIBITS |
The following exhibits are filed as part of this Annual Report.
| Exhibit No. | Document |
| 3.1 | Articles of Crailar Technologies Inc. (15) |
| 3.2 | Bylaws (1) |
| 4.1 | Convertible Debenture Indenture among Crailar Technologies Inc. and Computershare Trust Company of Canada, dated September 20, 2012 * |
| 4.2 | Convertible Debenture Indenture among Crailar Technologies Inc. and Computershare Trust Company of Canada, dated February 25, 2013 (18) |
| 4.3 | Form of Subscription Agreement for February 2013 Secured Subordinated Convertible Debentures (18) |
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| 10.1 | Collaboration Agreement dated effective May 7, 2004 between Hemptown Clothing, Inc., and the National Research Council of Canada (2) |
| 10.2 | Renewed Collaboration Agreement dated effective December 7, 2007 between Crailar Fiber Technologies, Inc., and the National Research Council of Canada (2) |
| 10.3 | Amendment to the Renewed Collaboration Agreement dated effective February 19, 2010 between Naturally Advanced Technologies, Inc. and the National Research Council of Canada (2) |
| 10.4 | Master Agreement for Technology Development between Alberta Research Council and Crailar Fiber Technologies dated January 1, 2007 (3) |
| 10.5 | CEO Executive Services Agreement between Naturally Advanced Technologies Inc. and Meriwether Accelerators LLC dated November 27, 2007 with effective date of August 24, 2007 (4) |
| 10.6 | 2006 Stock Option Plan (5) |
| 10.7 | Letter Agreement dated September 2, 2008 between Naturally Advanced Technologies Inc. and Lipper/Heilshorn & Associates, Inc. (6) |
| 10.8 | Renewal of CEO Executive Services Agreement Between Naturally Advanced Technologies Inc. And Meriwether Accelerators LLC dated October 14, 2008 (7) |
| 10.9 | 2008 Fixed Share Stock Option Plan (8) |
| 10.10 | CEO Executive Services Agreement between Naturally Advanced Technologies Inc. and Kenneth Barker, dated for reference August 24, 2009 (10) |
| 10.11 | Service Agreement between Naturally Advanced Technologies Inc. and OrganicWorks Marketing LLC dated November 25, 2010 (10) |
| 10.12 | Equipment Lease and Location Sublease dated August 9, 2010 between Naturally Advanced Technologies, Inc. and Eastern Flax of South Carolina, LLC (11) |
| 10.13 | 2010 Fixed Share Option Plan (12) |
| 10.14 | Lease Agreement, dated June 30, 2011 between 0702311 BC Ltd. and Naturally Advanced Technologies Inc. (14) |
| 10.15 | Office Lease Agreement dated August 8, 2011 between Naturally Advanced Technologies Inc. and MDW Properties, LLC (14) |
| 10.16 | Lease Agreement dated July 1, 2011 between Naturally Advanced Technologies Inc. and Jessie Dale McCollough (14) |
| 10.17 | 2011 Fixed Share Option Plan (13) |
| 10.18 | Supply Agreement among Crailar Technologies Inc. and Kowa Company Ltd., dated January 10, 2013 (16) |
| 10.19 | Development Agreement among Crailar Technologies Inc. and Cotswold Industries Inc., dated February 10, 2013 (17) |
| 10.20 | Senior Executive Employment Agreement between the Company and Kenneth Barker, dated April 2, 2012 * |
| 10.21 | Senior Executive Employment Agreement between the Company and Guy Prevost, dated April 2, 2012 * |
| 10.22 | Senior Executive Employment Agreement between the Company and Jason Finnis, dated April 2, 2012 * |
| 10.23 | Senior Executive Employment Agreement between the Company and Larisa Harrison, dated April 2, 2012 * |
| 10.24 | Senior Executive Employment Agreement between the Company and Jay Nalbach, dated April 24, 2012 * |
| 10.25 | Senior Executive Employment Agreement between the Company and Tom Robinson dated June 18, 2012 * |
| 10.26 | Marketing and Development Agreement among Crailar Technologies Inc. and Cone Denim LLC., dated March 11, 2013 (19) |
| 14.1 | Corporate Governance Policy (9) |
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| 14.2 | Corporate Disclosure Policy (9) |
| 14.3 | Securities Trading Policy (9) |
| 14.4 | Board of Directors Charter (9) |
| 14.5 | Terms of Reference for the Chief Financial Officer (9) |
| 14.6 | Terms of Reference of Committee Chairs (9) |
| 14.7 | Audit Committee Charter (9) |
| 14.8 | Corporate Governance Committee Charter (9) |
| 14.9 | Compensation Committee Charter (9) |
| 14.10 | Disclosure Charter Policy (9) |
| 14.11 | Code of Ethics (9) |
| 14.12 | Insider Trading and Reporting Guidelines (9) |
| 23.1 | |
| 31.1 | |
| 31.2 | |
| 32.1 |
| * Filed herewith. |
| (1) Filed as an exhibit to our Form 10-KSB for fiscal year ended December 31, 2004, as filed with the SEC on March 31, 2005. |
| (2) Filed as an exhibit to our Form 8-K as filed with the SEC on March 8, 2010. |
| (3) Filed as an exhibit to our Form 8-K as filed with the SEC on June 25, 2007. |
| (4) Filed as an exhibit to our Form 8-K as filed with the SEC on December 21, 2007. |
| (5) Filed as an exhibit to our Form 10-KSB for fiscal year ended December 31, 2006 as filed with the SEC Commission on March 31, 2007. |
| (6) Filed as an exhibit to our Form 8-K as filed with the SEC on September 8, 2008. |
| (7) Filed as an exhibit to our Form 8-K as filed with the SEC on October 28, 2008. |
| (8) Filed as an exhibit to our Form S-8 as filed with the SEC on October 10, 2008. |
| (9) Filed as an exhibit to our Form 10-KSB for fiscal year ended December 31, 2007 as filed with the SEC on April 11, 2008. |
| (10) Filed as an exhibit to our Form 10-K for the fiscal year ended December 31, 2010, as filed with the SEC on April 13, 2010. |
| (11) Filed as an exhibit to our Form 8-K as filed with the SEC on August 12, 2010. |
| (12) Filed as an exhibit to our Form 10-Q for the quarter ended September 30, 2010, as filed with the SEC on November 15, 2010. |
| (13) Filed as an exhibit to our Form S-8 as filed with the SEC on February 16, 2012. |
| (14) Filed as an exhibit to our Form 10-Q for the quarter ended March 31, 2012, as filed with the SEC on May 11, 2012. |
| (15) Filed as an exhibit to our Form 8-K as filed with the SEC on November 2, 2012. |
| (16) Filed as an exhibit to our Form 8-K as filed with the SEC on January 16, 2013. |
| (17) Filed as an exhibit to our Form 8-K as filed with the SEC on February 14, 2013. |
| (18) Filed as an exhibit to our Form 8-K as filed with the SEC on February 26, 2013. |
| (19) Filed as an exhibit to our Form 8-K as filed with the SEC on March 14, 2013. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CRAILAR TECHNOLOIGES INC. | |
| Dated: March 18, 2013 | By:/s/ Kenneth C. Barker |
| Kenneth C. Barker, Chief Executive Officer | |
| (Principal Executive Officer) | |
| Dated: March 18, 2013 | By:/s/ Theodore Sanders |
| Theodore Sanders, Chief Financial Officer | |
| (Principal Financial Officer) | |
| Dated: March 18, 2013 | By:/s/ Guy Prevost |
| Guy Prevost, Corporate Controller and Compliance Officer | |
| (Controller) |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons no behalf of the registrant and in the capacities and on the dates indicated.
| Dated: March 18, 2013 | By:/s/ Kenneth C. Barker |
| Kenneth C. Barker, Chief Executive Officer and a director | |
| Dated: March 18, 2013 | By:/s/ Larisa Harrison |
| Larisa Harrison, Chief Administrative Officer, Secretary, Treasurer | |
| and a director | |
| Dated: March 18, 2013 | By:/s/ Theodore Sanders |
| Theodore Sanders, Chief Financial Officer | |
| Dated: March 18, 2013 | By:/s/ Guy Prevost |
| Guy Prevost, Corporate Controller and Compliance Officer and a | |
| director | |
| Dated: March 18, 2013 | By:/s/ Robert Edmunds |
| Robert Edmunds, Director | |
| Dated: March 18, 2013 | By:/s/ Jeremy Jones |
| Jeremy Jones, Director | |
| Dated: March 18, 2013 | By:/s/ Peter C. Moore |
| Peter C. Moore, Director |