U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended March 31, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
COMMISSION FILE NUMBER: 0-50367
NATURALLY ADVANCED TECHNOLOGIES, INC.
______________________________________________
(Name of small business issuer in its charter)
BRITISH COLUMBIA, CANADA 98-0359306
_______________________________ ___________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1008 HOMER STREET, SUITE 402, VANCOUVER, BRITISH COLUMBIA, CANADA V6B 2X1
_________________________________________________________________________
(Address of principal executive offices)
(604) 683-8582
___________________________
(Issuer's telephone number)
Securities registered pursuant to Section Name of each exchange on which
12(b) of the Act: registered:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
__________________________________________________________
(Title of Class)
Indicate by checkmark whether the issuer: (1) 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 (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No[ ]
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Applicable Only to Issuer Involved in Bankruptcy Proceedings During the
Preceding Five Years.
N/A
Indicate by checkmark whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 and 15(d) of the Securities Exchange Act
of 1934 after the distribution of securities under a plan confirmed by a court.
Yes[ ] No[ ]
Applicable Only to Corporate Registrants
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the most practicable date:
Class Outstanding as of May 12, 2008
Common Stock, no par value 28,761,804
Documents Incorporated By Reference
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
2
NATURALLY ADVANCED TECHOLOGIES, INC.
FORM 10-Q
Quantitative and Qualitative Disclosures About Market Risk
PART I. FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition or
Plan of Operation
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
Item 2 Unregistered Sales of Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits
3
NOTE REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report includes or is based upon estimates projections or other
"forward looking statements". Such forward-looking statements include any
projections or estimates made by us and our management in connection with our
business operations. Such forward-looking statements are based on the beliefs of
Naturally Advanced Technologies, Inc. When used in this Annual Report, the words
"anticipate," "believe," "estimate," "expect," "intends" and similar
expressions, as they relate to us, are intended to identify forward-looking
statements, which include statements relating to, among other things, our
ability to continue to successfully compete in the apparel and fiber markets.
While these forward looking statements, and any assumptions upon which they are
based, are made in good faith and reflect our current information and judgment
regarding the direction of our business, actual results will almost always vary,
sometimes materially, from any estimates, predictions, projections, assumptions
or other future performance suggested herein.
Such estimate, projections or other "forward looking statements" involve various
risks and uncertainties. We caution the reader that important factors in some
cases have affected and, in the future, could materially affect actual results
and cause actual results to differ materially from the results expressed in any
such estimates, projections or other "forward-looking statements".
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NATURALLY ADVANCED TECHNOLOGIES, INC.
Consolidated Financial Statements
(In US Dollars)
March 31, 2008
(unaudited)
INDEX
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
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NATURALLY ADVANCED TECHNOLOGIES, INC.
Consolidated Balance Sheets
(In US Dollars)
___________________________________________________________________________________________________
March 31, December 31,
2008 2007
___________________________________________________________________________________________________
(unaudited)
ASSETS
Current
Cash and cash equivalents $ 196,411 $ 660,407
Accounts receivable 529,596 510,640
Inventory 874,463 843,531
Prepaid expenses and other 277,162 150,789
___________________________________________________________________________________________________
1,877,632 2,165,367
Property and Equipment (Note 8) 185,413 78,740
Intangible Assets (Note 9) 60,160 65,720
___________________________________________________________________________________________________
$ 2,123,205 $ 2,309,827
===================================================================================================
LIABILITIES
Current
Accounts payable $ 450,889 $ 555,833
Accrued Liabilities 29,248 110,883
Due to related party (Note 7) 711,308 543,322
Capital lease obligation, current portion (Note 6) 1,263 1,582
Note payable (Note 4) 100,000 100,000
Short term debt (Note 10) 21,141 21,729
___________________________________________________________________________________________________
1,313,849 1,333,349
Note Payable (Note 4) 200,000 200,000
Long Term Debt (Note 10) 10,410 10,942
___________________________________________________________________________________________________
1,524,259 1,544,291
___________________________________________________________________________________________________
COMMITMENTS and CONTINGENCIES (Note 1 and 13)
STOCKHOLDERS' EQUITY
Capital Stock (Note 11)
Authorized: 100,000,000 common shares without par value
Issued and outstanding: 28,496,804 common shares
(December 31, 2007 - 27,913,589) 6,386,714 6,026,436
Additional Paid-in Capital 710,619 650,153
Accumulated Other Comprehensive Income 138,649 176,048
Deficit (6,637,036) (6,087,101)
___________________________________________________________________________________________________
598,946 765,536
___________________________________________________________________________________________________
$ 2,123,205 $ 2,309,827
===================================================================================================
The accompanying notes are an intergral part of these consolidated financial statements.
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NATURALLY ADVANCED TECHNOLOGIES, INC.
Consolidated Statements of Operations
(In US Dollars)
(unaudited)
___________________________________________________________________________________________
For three months ended
March 31,
2008 2007
___________________________________________________________________________________________
Sales $ 953,659 $ 616,061
Cost of sales 602,628 380,736
___________________________________________________________________________________________
Gross profit 351,031 235,325
___________________________________________________________________________________________
Expenses
Advertising and Promotion 61,491 67,463
Amortization & Depreciation 6,561 4,580
Consulting & Contract Labour 98,082 102,035
General & Administrative 119,483 67,189
Interest 32,858 26,038
Professional Fees 40,609 23,647
Research & Development (net of Government Grant) 153,460 (13,547)
Salaries & Benefits 388,422 117,642
___________________________________________________________________________________________
900,966 395,047
___________________________________________________________________________________________
Loss from operations (549,935) (159,722)
___________________________________________________________________________________________
NET LOSS $(549,935) $ (159,722)
===========================================================================================
Loss per share (basic and diluted) (0.02) $ (0.01)
===========================================================================================
Weighted average number of common shares outstanding 28,057,184 24,159,678
===========================================================================================
The accompanying notes are an intergral part of these consolidated financial statements.
7
Naturally Advanced Technologies, Inc.
Consolidated Statements of Cash Flows
(In US Dollars)
(unaudited)
____________________________________________________________________________________________________________
For three months ended
March 31,
2008 2007
____________________________________________________________________________________________________________
Cash flows from (used in) operating activities
Net loss $ (549,935) $ (159,722)
Adjustments to reconcile net loss to net cash from operating activities
Depreciation & amortization 6,561 4,580
Stock based compensation 89,158 36,008
Shares issued for services -
Changes in working capital assets and liabilities
Decrease (increase) in accounts receivable (18,956) (222,845)
Decrease (increase) in government grant receivable - (37,952)
Decrease (increase) in inventory (30,932) (122,851)
Decrease (increase) in prepaid expenses (126,373) 22,583
(Decrease) increase in accounts payable and accrued liabilities (186,579) 25,998
(Decrease) Increase in due to related parties (15,014) (6,283)
____________________________________________________________________________________________________________
Net cash flows used in operating activities (832,070) (460,484)
____________________________________________________________________________________________________________
Cash flows from (used in) investing activities
Purchase of property and equipment (111,178) (13,226)
Acquisition of trademarks & license (437) (4,322)
____________________________________________________________________________________________________________
Net cash flows used in investing activities (111,615) (17,548)
____________________________________________________________________________________________________________
Cash flows from (used in) financing activities
Issuance of capital stock for cash 334,407 150,000
Related parties advances 183,000 180,000
Long term debt repayment - 322
Short term debt (repayment) - -
Capital lease obligation (319) (1,901)
____________________________________________________________________________________________________________
Net cash flows from financing activities 517,088 328,421
____________________________________________________________________________________________________________
Effect of exchange rate changes on cash and cash equivalents (37,399) (5,329)
____________________________________________________________________________________________________________
Increase (decrease) in cash and cash equivalents (463,996) (154,940)
Cash and cash equivalents, beginning 660,407 414,233
____________________________________________________________________________________________________________
-
Cash and cash equivalents, end $ 196,411 $ 259,293
============================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
AND NON-CASH FINANCING AND INVESTING ACTIVITIES:
Cash paid for interest $ 80,452 $ 2,512
Cash paid for income taxes $ - $ -
Capital stock issued as compensation $ - $ -
The accompanying notes are an intergral part of these consolidated finan
8
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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 designing and distributing apparel made from eco textiles, and
the technological development of natural sustainable fibers. The Company
changed its name from Hemptown Clothing Inc. on March 21, 2006.
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 $6,637,036, and further
losses are anticipated in the development of its business and 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.
The continued operations of the Company and the recoverability of the
carrying value of assets is dependent upon the ability of the Company to
obtain necessary financing as required to fund ongoing losses, and upon
future profitable operations. The accompanying financial statements do not
include any adjustments relative to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities
that might result from the outcome of this uncertainty.
The Company plans to raise additional financing as needed in 2008 through
equity placements. However, there can be no assurance that capital will
continue to be available as necessary to meet the Company's ongoing working
capital requirements or, if the capital is available, that it will be on
terms acceptable to the Company.
COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform to the
current year's presentation.
9
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
2. SIGNIFICANT ACCOUNTING POLICIES
a) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, Hemptown USA, Inc., a
Nevada incorporated company; 0697872 B.C. Ltd., a British Columbia
incorporated company with extra-provincial registration; and its 100%
ownership in Crailar Fiber Technologies Inc., a British Columbia
incorporated company with extra-provincial registration. 0697872 B.C.
Ltd. was incorporated to hold ownership of a proposed fibre processing
plant in Saskatchewan. Hemptown USA, Inc. was incorporated in order to
enable the Company to factor its U.S. sales invoices as required by
Spectrum Financial Corporation ("Spectrum") (see Note 6). Hemptown USA
Inc. and 0697872 B.C. Ltd. were incorporated by the Company during
2004. Crailar Fiber Technologies Inc was incorporated during 2005 and
a 25% interest was subsequently sold during the year ended December
31, 2005 and repurchased August 21, 2006 (Refer to Note 4). All
significant inter-company transactions and account balances have been
eliminated upon consolidation.
b) Cash and Cash Equivalents
Cash equivalents consist of term deposits with original maturities of
three months or less.
c) Use of Estimates
The preparation of financial statements in conformity with 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 determining the allowance for doubtful accounts, the
fair value of transactions involving common stock and financial
instruments and deferred tax balances
d) Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded net of allowance for doubtful
accounts and reserves for returns. In the normal course of business,
the Company extends credit to customers that satisfy predefined credit
criteria. The Company is required to estimate the collectibility of
its receivables. Reserves for returns are based on historical return
rates and sales patterns. Allowances for doubtful accounts are
established through the evaluation of aged accounts receivable and
prior collection experience to estimate the ultimate realization of
these receivables.
10
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
e) Business Segment Information
The Company discloses information about its reportable segments in
accordance with SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION." The Company's reportable segments
are operating divisions. The accounting policies of the operating
segments are the same as those for the Company.
f) Revenue Recognition
Revenue is derived from the sale of textile products sold directly to
retailers or indirectly through distributors. The Company follows the
provisions of Staff Accounting Bulletin No. 104; "REVENUE RECOGNITION
IN FINANCIAL STATEMENTS". Revenue from the sale of products is only
recognized upon shipment of the goods to customers, when persuasive
evidence of an arrangement exists, the price is fixed or determinable
and collection is probable. If collection is not considered probable,
revenue will be recognized when it is collected.
In accordance with Emerging Issues Task Force ("EITF") No. 00-10,
"ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS", freight and
handling charges billed to customers are recorded as revenue while the
corresponding freight and handling costs are recorded as cost of sales
g) Inventory
Inventory consists solely of finished goods and value is determined at
the lower of either a first-in, first-out basis, or net realizable
value. Cost includes all direct materials, labour and freight costs
incurred during the manufacturing process.
h) Property and Equipment
Property and equipment are stated at cost and are depreciated as
follows:
Computer equipment 30% declining balance
Equipment 30% declining balance
Computer software 100% declining balance
Furniture and fixtures 20% declining balance
Leasehold improvements 30% declining balance
Production equipment 30% declining balance
Craik Facility equipment 30% declining balance
Craik Facility building straight-line over 10 years
Assets under capital lease straight-line over term of lease
11
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
i) Intangible Assets
Intangible assets are stated at cost and are amortized as follows
Trademarks 5 year straight - line
NRC License Fee 10 year straight - line
j) Foreign Currency Translation
The Company's functional currency is Canadian dollars. The Company
translates its financial statements to U.S. dollars using the
following method:
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
comprehensive income, as a separate component of stockholders' equity.
Foreign currency transaction gains and losses are included in results
of operations.
k) Income Taxes
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for uncertainty in Income Taxes," ("FIN 48") an interpretation of FASB
Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a
recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The interpretation requires that
the entities recognize in the financial statements, the impact of a
tax position, if that position is more likely than not of being
sustained on audit, based on the technical merits of the position. FIN
48 also provides guidance on de-recognition, classification, interest
and penalties, accounting in interim periods and disclosure. The
provisions of FIN 48 are effective beginning January 1, 2007 with the
cumulative effect of the change in accounting principle recorded as an
adjustment to the opening balance of retained earnings. The Company
adopted FIN 48 on January 1, 2007 and it has not had an impact on its
financial position, results of operations or cash flows.
The Company utilizes the liability method of accounting for income
taxes as set forth in SFAS No. 109, "ACCOUNTING FOR INCOME TAXES".
Under the liability method, future taxes are determined based on the
temporary differences between the financial statement and tax bases of
assets and liabilities using enacted tax rates. A valuation allowance
is recorded when it is more likely than not that some of the future
tax assets will not be realized.
12
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
l) Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards
No. 130 (SFAS 130), "REPORTING COMPREHENSIVE INCOME", which
establishes standards for reporting comprehensive income, its
components and accumulated balances. The Company presents
comprehensive income in its Statement of Changes in Stockholders'
Equity. Total comprehensive income includes, in addition to net loss,
changes in equity that are excluded from the Statements of Operations
and are recorded directly into the separate section of stockholders'
equity on the Balance Sheets.
m) Stock-based Compensation
On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004)
(SFAS No. 123R), "SHARE-BASED PAYMENT", which addresses the accounting
for stock-based payment transactions in which an enterprise receives
employee 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. In January 2005, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No.
107, which provides supplemental implementation guidance for SFAS No.
123R. SFAS No. 123R eliminates the ability to account for stock-based
compensation transactions using the intrinsic value method under
Accounting Principles Board (APB) Opinion No. 25, "ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES", and instead generally requires that such
transactions be accounted for using a fair-value-based method. The
Company uses the Black-Scholes-Merton ("BSM") option-pricing model to
determine the fair-value of stock-based awards under SFAS No. 123R.
n) Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share is computed using the
weighted average number of shares outstanding during the period. The
Company has adopted SFAS No. 128, "EARNINGS PER Share". Common stock
equivalents from stock options and warrants were excluded from the
calculation of net loss per share for March 31, 2008, and 2007 as
their effect is anti-dilutive.
o) 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 undiscounted future projected cash flows to
result from the use of the asset and its eventual disposition. If
impairment is deemed to exist, the assets will be written down to fair
value. Fair value is generally determined using a discounted cash flow
analysis.
13
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
p) Risk Management
CURRENCY RISK. Although the Company conducts its business principally
in Canada, the majority of its purchases are made in U.S. currency.
Additionally, the majority of the Company's debt is denominated in
U.S. currency. The Company does not currently hedge its foreign
currency exposure and accordingly is at risk for foreign currency
exchange fluctuations.
CREDIT RISK. Credit risk is managed by dealing with customers whose
credit standing meet internally approved policies, and by ongoing
monitoring of credit risk. As at March 31, 2008, the Company had
significant concentrations of credit exposure to two customers however
management has determined that these customers do not pose a credit
risk.
INTEREST RATE RISK. All term debt has fixed interest rates and no
significant exposure to interest rate fluctuation risk.
q) Recent Accounting Pronouncements
In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities ("SFAS 161"). SFAS 161
is intended to improve financial reporting about derivative
instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity's
financial position, financial performance, and cash flows. SFAS 161
achieves these improvements by requiring disclosure of the fair values
of derivative instruments and their gains and losses in a tabular
format. It also provides more information about an entity's liquidity
by requiring disclosure of derivative features that are credit
risk-related. Finally, it requires cross-referencing within footnotes
to enable financial statement users to locate important information
about derivative instruments. SFAS 161 will be effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008, will be adopted by the Company beginning in the
first quarter of 2009. The Company does not expect there to be any
significant impact of adopting SFAS 161 on its financial position,
cash flows and results of operations.
14
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
r) Research and Development
Research and development costs are charged to operations as incurred.
Development costs of $153,460 ($27,892 - 2007) for the three month
period ended March 31, 2008 were attributable to Crailar Fiber
Technologies development of its bast fiber technology and research and
development costs associated with apparel are $6,550 ($5,224 - 2007).
A grant of $46,663 was offset against research and development costs
in 2007 ( "Government Grants")
s) Government Grants
The Company is eligible for certain grants from the Government of
Canada under its Scientific Research and Development tax credit
program ("SRED Program"). The Company recognizes these grants upon
confirmation from the Government of their eligibility and amount.
Government grants are accounted for as an offset of research and
development expenses.
3. FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, loans payable, notes payable, accounts payable and
accrued liabilities, capital lease obligation, PEMD payable and due to
related parties. It is management's opinion that the Company is not exposed
to significant interest or credit risks arising from these financial
instruments. The fair value of the Company's financial instruments are
estimated by management to approximate their carrying values due to their
immediate or short-term maturity. The fair value of advances due to related
parties and the PEMD payable is not determinable due to the nature of their
repayment terms and conditions.
15
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
4. NOTE PAYABLE
Celestine Asset Management Loan
On April 21, 2004, the Company received $400,000 by way of a secured and
subordinated loan agreement from Celestine Asset Management ("Celestine").
The term of the loan was from April 21, 2004 to October 21, 2005, and the
interest rate thereunder was 10% per annum, calculated semi-annually, with
interest payments due semi-annually.
The security granted was by way of a fixed charge and a security interest
in the Company's existing accounts receivable insurance policy through
Export Development Canada and St. Paul Guarantee Insurance Company
respecting losses sustained by the Company, and a floating charge and a
security interest in all assets of the Company, subject and subordinate, to
any borrowing by the Company with banks and lending institutions.
A fee of $20,000 was paid in connection with arranging the funding of the
loan. The fee was amortized on a straight-line basis over the initial term
of the loan (18 months). As of December 31, 2006 the fee has been
completely amortized.
As of October 22, 2005, Celestine renewed the loan until April 22, 2007, at
12% per annum, calculated semi-annually, with interest payments due
semi-annually. The loan was due as follows: (a) $100,000 on July 21, 2006;
and (b) $300,000 on April 22, 2007. The security granted under the renewed
loan was unchanged. There was no fee paid for arranging the loan renewal.
The $100,000 due on July 21, 2006, was paid on November 2, 2006. On April
21, 2007, the Company was granted an extension of 90 days by Celestine with
the same terms.
Rana Corp. Loan
On July 21, 2007, the Celestine loan was assumed and renewed by Rana Corp.
until April 22, 2009, at 12% per annum, calculated semi-annually, with
interest payments due semi-annually. The loan is due as follows: (a)
$100,000 on July 22, 2008; and (b) $200,000 on July 22, 2009. Included in
accrued liabilities at March 31, 2008 is an accrual for interest of $9,023.
There was no fee paid for arranging the loan renewal.
The security granted is by way of a fixed charge and a security interest in
the Company's existing accounts receivable insurance policy through Export
Development Canada and St. Paul Guarantee Insurance Company respecting
losses sustained by the Company, and a floating charge and a security
interest in all assets of the Company, subject and subordinate, to any
borrowing by the Company with banks and lending institutions
16
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
5. SHORT TERM LOAN
Spectrum Financial Corporation ("Spectrum")
On December 18, 2004 the Company entered into an agreement with Spectrum to
factor a portion of the Company's accounts receivable. Spectrum advances
funds based on Spectrum approved sales invoices ("non-recourse") and
Company approved sales invoices ("recourse") and charges a commission of
one and one-quarter percent (1.25%) of all approved invoice amounts.
Spectrum advances 70% of the sales invoice when the goods are shipped. The
remainder of the invoice less factoring commissions and less any interest
owing are paid to the Company upon receipt of funds by Spectrum. In the
event of non-receipt by Spectrum, the Company is only responsible to
reimburse Spectrum for recourse invoices. Interest is charged by Spectrum
on amounts advanced at the rate of one and one-half percent (1.5%) over the
Wall Street Journal designated prime or base rate.
Minimum factoring commissions payable under this agreement will be $12,000
over each consecutive year, payable at the rate of $1,000 per month.
The Company has granted a subordinated security interest to Spectrum over
all accounts receivable, all bank deposits and any tax refunds subject to
the priority claims of the note payable to Rana Corp.(Note 4)
6. CAPITAL LEASE OBLIGATIONS
The Company has capital leases for equipment with payments totaling $1,392,
including interest, remaining due on these leases which will expire during
2008. The principal amount outstanding on these leases is $1,263.
7. DUE TO RELATED PARTIES
On May 5, 2006, the Company received a short-term working capital loan of
$100,000 from a director, which was originally due and payable on September
30, 2006. The interest rate is 12% per annum and the loan is secured by a
subordinated charge on the assets of the Company. On October 1, 2006, the
director agreed to extend the short-term loan under the same terms and the
loan is due on January 15, 2007. The interest accrued under the initial
loan was paid on October 25, 2006, and an accrual for interest was made on
December 31, 2006, in the amount of $3,025 which has been included in
accrued liabilities. On January 15, 2007 the director agreed to extend the
short-term loan until April 30, 2007. The loan was repaid on June 7, 2007,
along with interest of $ 8,219.
On February 19, 2007, the Company signed a secured loan agreement with the
same director for financing of apparel manufacturing. Under the terms of
this agreement, the Company can borrow up to $400,000 at an interest rate
of 12% with a 1% charge for each draw on the loan. On August 28, 2007, this
17
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
amount was increased to $550,000. The loan is secured by a subordinated
charge on the assets of the Company and will mature on February 28, 2008.
The loan was subsequently renewed and will now mature on February 28, 2009.
On March 21, 2007, the Company made a draw on the loan of $180,000 and
further draws totaling $330,000 were made during the remainder of 2007,
which remain outstanding at March 31, 2008. On March 7, 2008 the Company
increased the amount available from the secured loan agreement to $700,000
and made an additional draw against the loan for $183,000 on March 8, 2008.
An accrual for interest of $18,777 has been included in accrued liabilities
as at March 31, 2008.
8. PROPERTY AND EQUIPMENT
Accumulated Net Book Value Net Book Value
Cost Depreciation March 31, 2008 December 31, 2007
___________________________________________________________________
Computer equipment $ 16,406 $ 8,503 $ 7,903 $ 3,935
Equipment 10,006 4,004 6,002 7,001
Furniture and fixtures 33,032 6,967 26,065 27,071
Leasehold improvements 21,446 10,840 10,606 11,873
Computer equipment under
capital lease 51,594 50,331 1,263 1,583
Craik facility equipment 101,161 - 101,161 7,793
Craik facility building 32,413 - 32,413 19,484
___________________________________________________________________
$ 266,058 $ 80,645 $ 185,413 $ 78,740
18
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
9. INTANGIBLE ASSETS
The aggregate amortization expense for the three month period ended March
31, 2008 was $3,274. (2007 - $2,318). Trademarks acquired in 2007 and 2006
consist of the cost of registration of the tradename CRAILAR in various
countries. License fee consists of the Company's initial payment to the
National Research Council of Canada under the terms of a technology license
agreement (refer to Note 13(b)).
Accumulated Net Book Value Net Book Value
Cost Depreciation March 31, 2008 December 31, 2007
___________________________________________________________________
Trademarks $53,897 $14,237 $39,660 $ 43,863
Licence Fee 24,355 3,855 20,500 21,857
___________________________________________________________________
$78,252 $18,092 $60,160 $ 65,720
===================================================================
10. PEMD PAYABLE
The Company has been advanced funds in the amount of $31,551 (CDN $32,360)
from the Canadian Department of Foreign Affairs and International Trade
under its Program for Export Market Development ("PEMD") to be used to
promote the sales of Canadian goods into foreign markets. The agreement was
signed on January 7, 2004, and there is no interest charged on the
outstanding amount. The loan is to be paid back each year at 4% of
incremental foreign sales over the base year amount by December of the
following year. The base year amount was approximately $814,354 (CDN
$835,934). The Company owes approximately $21,141 for the year 2007,
($0-2006). If at the end of year five the loan is not paid back, then the
outstanding balance of the loan will be forgiven.
11. CAPITAL STOCK
During the period ended March 31, 2008, the Company issued 583,215 shares
of common stock as follows:
a) In February 2008, 97,500 shares pursuant to the exercise of employee
options at $0.20 per share for proceeds of $ 19,500.
b) In February 2008, 25,000 shares pursuant to the exercise of employee
options at $0.31 per share for proceeds of $ 7,750.
c) In February 2008, 10,000 shares pursuant to the exercise of employee
options at $0.50 per share for proceeds of $ 5,000.
19
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
d) In February 2008, 40,000 shares pursuant to the exercise of employee
options at $0.37 per share for proceeds of $ 14,800.
e) In March 2008, 25,000 shares pursuant to the exercise of employee
options at $0.81 per share for proceeds of $ 20,250.
f) In March 2008, 285,715 shares pursuant to the exercise of warrants at
$0.75 per share for proceeds of $ 214,286.
g) In March 2008, 100,000 shares pursuant to the exercise of warrants at
$0.50 per share for proceeds of $50,000.
During the year ended December 31, 2007, the Company issued 4,163,435
shares of common stock as follows:
a) In January 2007, 428,573 units at $0.35 per unit, for proceeds of
$150,000. Each unit consists of one common share and one
non-transferable common stock purchase warrant exercisable at $0.75
per share, expiring in January, 2009. The estimated fair value of the
warrants is $60,960 using the Black Scholes option pricing model using
a 2 year term, an expected volatility of 81% and a risk free interest
rate of 4.85%.
b) In May 2007, 750,000 units at $0.40 per unit, for proceeds of
$300,000. Each unit consists of one common share and one
non-transferable common stock purchase warrant exercisable at $0.70
per share, expiring in May, 2009. The estimated fair value of the
warrants is $143,502 using the Black Scholes option pricing model
using a 2 year term, an expected volatility of 84% and a risk free
interest rate of 4.66%.
c) In August 2007, 166,666 units at $0.60 per unit, for proceeds of
$100,000. Each unit consists of one common share and one
non-transferable common stock purchase warrant exercisable at $0.90
per share, expiring in August, 2009. The estimated fair value of the
warrants is $56,257 using the Black Scholes option pricing model using
a 2 year term, an expected volatility of 80% and a risk free interest
rate of 4.64%.
d) In September 2007, 235,000 units at $0.70 per unit, for proceeds of
$164,500. Each unit consists of one common share and one
non-transferable common stock purchase warrant exercisable at $1.00
per share, expiring in September, 2009. The estimated fair value of
the warrants is $60,222 using the Black Scholes option pricing model
using a 2 year term, an expected volatility of 74% and a risk free
interest rate of 4.64%.
20
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
e) In May, June, July and November 2007, 234,164 shares pursuant to the
exercise of employee options at $0.20 per share for proceeds of
$46,833.
f) In July and November 2007, 39,585 shares pursuant to the exercise of
employee options at $0.31 per share for proceeds of $12,271.
g) In December 2007, 1,947 shares pursuant to the exercise of employee
options at $0.80 per share for proceeds of $ 1,558.
h) In November and December 2007, 2,300,000 shares pursuant to the
exercise of warrants at $0.50 per share for proceeds of $1,150,000.
i) In November 2007, 7,500 bonus shares for work performed, the shares
had a fair value of $6,150.
Stock issuance costs of $30,000 were paid during the year ended
December 31, 2007 and stock issuance costs of $4,500 were accrued
during the same period. These costs have been recorded as a cost of
capital.
Share purchase warrants outstanding at March 31, 2008 are summarized as
follows:
Range of Exercise Prices Number of Shares Weighted Average Remaining
Contractual Life (yr)
__________________________________________________________________________
$0.70 - $1.00 2,059,527 0.90
$0.75 - $1.00 485,000 0.86
__________________________________________________________________________
Total 2,544,527 0.89
==========================================================================
Share purchase warrants outstanding are
Weighted-Average
Shares Exercise Price
Warrants outstanding at December 31, 2006 9,587,093 $ 0.83
Warrants granted during the year 1,580,239 $ 0.78
Warrants expired during the year (5,877,090) $ 0.97
21
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
Warrants exercised during the year (2,300,000) $ 0.50
___________________________________________________________________________
Warrants outstanding at December 31, 2006 2,990,242 $ 0.78
Warrants expired during the period ( 60,000) $ 1.00
Warrants exercised during the period ( 385,715) $ 0.69
___________________________________________________________________________
Warrants outstanding at March 31, 2008 2,544,527 $ 0.79
===========================================================================
12. STOCK OPTION PLAN
2006 STOCK OPTION PLAN
In September 2006, the Company's Board of Directors approved the 2006 Stock
Option Plan (the "2006 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 2006 Plan generally expire 3-10
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 2006 Plan permits the
granting of incentive stock options and nonqualified stock options.
The fair value of options issued during the three month period ended March
31, 2008 and the year ended December 31, 2007 was determined using the BSM
option pricing model with the following assumptions:
Period ended Year ended
March 31, 2008 December 31, 2007
________________________________________________________________________________
Risk-free interest rates 2.22% 4.48% to 4.66%
Volatility factor 77% 81% to105%
Contractual life of options, in years 3 3
Weighted average fair value of options
granted $0.59 $0.40
22
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
During the three month period ended March 31, 2008, the company granted
611,500 three year common stock options to consultants and employees,
exercisable at $1.15, which were valued at $358,903. These options were
granted under the terms of the Company's 2006 Plan.
During the three month period ended March 31, 2008, 189,444 options vested
and an expense of $79,223 has been recorded with respect to those options.
$70,072 was included in Salaries & Benefits expense and $9,151 was included
in Consulting & Contract Labour expense.
During the year ended December 31, 2007, the Company granted 2,100,000
three year common stock options to consultants and employees, exercisable
at $0.37 (85,000), $0.50 (380,000), $0.80 (560,000), $0.75 (1,000,000) and
$0.81 (75,000) which were valued at $849,440. These options were granted
under the terms of the Company's 2006 Plan.
During the year ended December 31, 2007, 1,572,862 options vested and
accordingly an expense of $404,898 has been recorded with respect to those
options. $126,491 was included in Consulting and Contract Labour expense
and $278,407 was included in Salaries & Benefits expense.
2004 STOCK OPTION PLAN
The 2004 Stock Option Plan (the "2004 Plan") is a shareholder approved Plan
that provides for grants to key individuals. Based on the terms of the
individual option grants, options granted under the 2004 Plan generally
expire 3-10 years after the grant date and generally become exercisable
over a period of one year, based on continued employment, with monthly
vesting. The 2004 Plan permits the granting of incentive stock options
only.
During the three month period ended March 31, 2008, 50,000 options vested
under the Company's 2004 Plan. Accordingly, an expense of $9,934 was
included in Consulting & Contract Labour expense.
23
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
A SUMMARY OF THE COMPANY'S STOCK OPTIONS ARE AS FOLLOWS:
___________________________________________________________________________
Weighted-Average
Shares Exercise Price
___________________________________________________________________________
Options outstanding, December 31, 2006 3,598,664 $0.51
Options exercised during the year (275,696) 0.22
Options expired during the year (1,242,000) 0.89
Options granted during the year 2,100,000 0.70
Options cancelled during the year (320,968) 0.49
Options outstanding, December 31, 2007 3,860,000 0.52
Options exercised during the period (197,500) 0.34
Options granted during the period 611,500 1.15
___________________________________________________________________________
Options outstanding, March 31, 2008 4,274,000 $0.62
===========================================================================
_______________________________________________________________________________________
March 31, 2008
_______________________________________________________________________________________
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
__________________________________________________________ ________________________
$0.01 - $0.50 2,107,500 1.33 $0.35 2,075,681 $0.35
$0.51 - $1.00 2,166,500 2.51 $0.88 328,752 $0.80
__________________________________________________________ ________________________
4,274,000 1.93 $0.62 2,404,433 $0.41
========================================================== ========================
13. COMMITMENTS AND CONTINGENCIES
a) ANNUAL LEASES
The Company is committed to current annual lease payments totaling
$289,137 for premises under lease. The lease expires in 2011.
24
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
Approximate minimum lease payments over the remainder of the leases
are as follows:
$
_________________________________
2008 83,488
2009 75,663
2010 70,144
2011 59,842
_________________________________
Total 289,137
=================================
b) NATIONAL RESEARCH COUNCIL OF CANADA ("NRC") COLLABORATION
JOINT COLLABORATION AGREEMENT
In May 2004, the Company entered into a joint collaboration agreement
with the NRC to develop a patentable enzyme technology for the
processing of hemp fibres. The agreement was for three years and
expired on May 9, 2007. The NRC was paid as it conducted 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 agreement, the Company paid the NRC $283,474 (CDN
$282,000) in cash. In addition to cash payments, the Company
contributed research and development valued at approximately $556,393
(CDN $553,500). All amounts payable pursuant to the terms of the
original agreement have been paid. In October 2007, the Company
entered into a new joint collaboration agreement with the NRC to
continue to develop a patentable enzyme technology for the processing
of hemp fibres. The agreement is for three years and expires on May 9,
2010. 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 agreement, the Company will pay the NRC, $356,551
($366,000CDN) of which $28,933 ($29,700CDN) was due and paid in the
three month period ended March 31, 2008. In addition to cash payments
the Company is to contribute $2,300,000 CDN of "in kind", research and
development over the course of the collaboration agreement.
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
25
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
CRAILAR(R). The Company has paid an initial $24,355 (CDN $25,000) fee
and will pay an ongoing royalty of 3% on sales of products derived
from the CRAILAR(R) process to the NRC with a minimum annual payment
set at $15,130 (CDN$15,000) per year.
c) ALBERTA RESEARCH COUNCIL ("ARC") COLLABORATION
In June 2007, the Company's subsidiary, Crailar Fiber Technologies
Inc. ("CFT"), entered into a Master Agreement For Technology
Development with the Alberta Research Council ("ARC") (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 the ARC under different Project Agreements. Under the terms of the
Technology Agreement, commencing July 1, 2007, the Company will pay
$24,402 (CDN $25,000 ) per quarter to the "ARC" and can terminate the
agreement with 90 days notice, unless there are Project Agreements in
effect, in which case this Technology Agreement shall expire when
there are no longer any Project Agreements in effect. The Company has
paid all amounts due for 2007, and $24,402 (CDN $25,000) was due and
paid for the first quarter of 2008. In addition to the above payments,
CFT will be responsible for providing work-in-kind with a value of
$24,402 (CDN $25,000) per calendar quarter commencing with the first
Project Agreement. Under the terms of the Technology Agreement the
Company will be entitled to an option for an exclusive, worldwide,
royalty-bearing license to use any new intellectual property developed
pursuant to a Project Agreement. 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.
d) CEO AGREEMENT
On August 15, 2007, the Company signed an agreement with its Chief
Executive Officer who will receive $12,500 a month for the period of
one year and 1,000,000 options that will not vest until certain
conditions are met. The contract can be cancelled by either party with
30 days notice. As at March 31, 2008, none of the options had vested.
e) CONTINGENCY
On May 10, 2006, the Company's prior Chief Operating Officer (the
"Plaintiff") initiated legal proceedings against the Company by filing
a Writ of Summons and Statement of Claim in the Supreme Court of
British Columbia, civil action no. S-063043. The claim is for wrongful
dismissal and the Plaintiff has claimed the following:
26
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
i. an Order that the Company pay the Plaintiff US $163,090 (CDN
$182,988)
ii. damages in an unspecified amount for wrongful dismissal, and
iii. an Order that the Company provide options to the Plaintiff in the
following amounts and at the following prices: 100,000 shares at
market price, 100,000 shares at US $0.75 per share, 120,000
shares at US $0.20 per share, and 250,000 shares at a price equal
to that offered to other directors of the Company under the
Company's Stock Option Plan,
iv. plus costs and interest.
The parties have come to an agreement in regards to this dispute and
the Company has agreed to pay the Plaintiff US $132,500 in two
payments, six months apart with the first payment due in April 2008.
An accrual for this amount has been included in the statements as at
March 31, 2008. The first payment of $65,000 was made on April 8,
2008.
14. INCOME TAXES
As at December 31, 2007, the Company has estimated tax loss carry forwards
for tax purposes of approximately $6,191,000 (2006 - $3,795,000) which
expire between 2008 and 2027. This amount may be applied against future
federal taxable income. The Company evaluates its valuation allowance
requirements on an annual basis based on projected future operations. When
circumstances change and this causes a change in management's judgment
about the realizability of future tax assets, the impact of the change on
the valuation allowance is generally reflected in current income.
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 year.
27
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
15. RELATED PARTY TRANSACTIONS
During the three month period ended March 31, 2008, $116,409 (2007 -
$110,453) was incurred as remuneration to officers and directors of the
Company. Of this amount, $78,909 (2007 - $28,169) is recorded as salaries
and employee benefits expense and $37,500 (2007 - $82,284) is recorded as
contract labour expense.
During April and May, 2007, the Company granted 465,000 three year stock
options at an exercise price of $0.37 and $0.50 per share, under the
Company's 2006 Stock Option Plan to employees and directors. These options
were valued at $145,424 and are being expensed as certain conditions are
met with approval of the board of directors; accordingly, an expense of
$116,824 has been recognized in the year ended December 31, 2007.
During August and September, 2007, the Company granted 1,635,000 three year
stock options at an exercise price of $0.80, $0.75 and $0.81 per share,
under the Company's 2006 Stock Option Plan to employees, directors and
consultants. These options were valued at $704,016 and are being expensed
as certain conditions are met with approval of the board of directors;
accordingly, an expense of $94,853 has been recognized in the year ended
December 31, 2007.
During February 2008, the Company granted 611,500 three year options at an
exercise price of $1.15 per share, under the Company's 2006 Stock Option
Plan to employees, directors and consultants. These options were valued at
$359,903 and are being expensed as they vest. For the three month period
ended March 31, 2008 none of the options had vested and accordingly no
expense has been recorded.
In January, 2007, a private company, in which the Company's CEO has a 1/3
equity ownership, purchased 428,573 units at $0.35 per unit, for proceeds
of $150,000. Each unit consists of one common share and one
non-transferable common stock purchase warrant exercisable at $0.75 per
share, expiring in January, 2009. The estimated fair value of the warrants
is $60,960 using the Black Scholes option pricing model using a 2 year
term, an expected volatility of 81% and a risk free interest rate of 4.85%.
In May, 2007, a private company, in which the Company's CEO has a 1/3
equity ownership, purchased 250,000 units at $0.40 per unit, for proceeds
of $100,000. Each unit consists of one common share and one
non-transferable common stock purchase warrant exercisable at $0.70 per
share, expiring in May, 2009. The estimated fair value of the warrants is
$47,834 using the Black Scholes option pricing model using a 2 year term,
an expected volatility of 84% and a risk free interest rate of 4.66%.
In December 2007, a private company, in which the Company's CEO has a 1/3
equity ownership, exercised 200,000 warrants for 200,000 shares at $0.50
per share for proceeds of $100,000.
28
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
A private company, in which the Company's CEO has a 1/2 equity ownership,
received $30,000 as commission on funds raised during 2007. These costs
along with an accrual of a $4,500 were recorded as share issuance costs.
In 2007, a director purchased 500,000 units at $0.40 per unit, for proceeds
of $200,000. Each unit consists of one common share and one
non-transferable common stock purchase warrant exercisable at $0.70 per
share, expiring in May, 2009. The estimated fair value of the warrants is
$95,668 using the Black Scholes option pricing model using a 2 year term,
an expected volatility of 84% and a risk free interest rate of 4.66%.
All related party transactions are in the normal course of operations and
are measured at the exchange amount, which is the amount of consideration
established and agreed to by the related parties. (See also Notes 7 and
13(d).)
16. CONCENTRATION RISK
For the three month period ended March 31, 2008, three suppliers accounted
for 100% of the Company's purchases of inventory. One supplier is located
in China and supplied 96% of the Company's purchases; the other two
suppliers are located in North America and India and supply approximately
4%.
For the three month period ended March 31, 2007, four suppliers accounted
for 100% of the Company's purchases of inventory. One supplier is located
in China and supplied 68% of the Company's purchases; the other three
suppliers are located in North America and supply approximately 32%.
For the three month period ended March 31, 2008. One customer accounted for
55% of the Company's sales. The Company is confident that this relationship
will continue until year end.
29
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
17. PROPERTY TRANSFER
On July 3, 2004, the Company received 80 acres of industrial property in
Craik, Saskatchewan for development of a hemp fiber mill. The Company,
through its subsidiary 068782 B.C. Ltd., was granted title to the land from
the Town of Craik and the Rural Municipality of Craik No. 222 in exchange
for $1. Provided the Company is successful in the development of a mill, by
July 1, 2007, there will be no further obligations to the Town of Craik. In
June, 2007, the Company received a 1 year extension to develop a mill on
the property until July 1, 2008. In January 2008, the Company commissioned
a geo tech study of the land which was completed in February 2008 as part
of the Company's preparation to develop a mill in Craik. However, if
development of the facility proves unsuccessful, the Company will either
purchase the land for $35,000 or surrender the land back to the Town of
Craik. The transfer of the registration of title was completed on February
8, 2005.
18. GOVERNMENT GRANT
The Company is eligible for certain non-refundable grants from Government
of Canada under its Scientific Research and Development tax credit program
("SRED Program").
During 2007, the Company recorded and received a grant of $46,663
($37,952-2006).
The above government grants have been recorded as a recovery of research
and development expenses.
30
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
19. SEGMENTED INFORMATION
The Company's consolidated operations are conducted in two business
segments, Naturally Advanced Technologies Inc, which includes apparel sales
and Crailar Fiber Technologies Inc which is developing Crailar technology.
FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 2008
Naturally Advanced Crailar Fiber
Technologies Inc Technologies Inc Total
$ $ $
Revenue 953,659 - 953,659
Operating profit (loss) (318,395) (231,540) (549,935)
AS AT MARCH 31, 2008
Total assets 1,833,127 290,078 2,123,205
Intangible Assets 3,290 56,870 60,160
FOR THE THREE MONTH PERIOD ENDED
MARCH 31, 2007
Naturally Advanced Crailar Fiber
Technologies Inc Technologies Inc Total
$ $ $
Revenue 616,061 - 616,061
Operating profit (loss) (178,206) 18,484 (159,722)
AS AT MARCH 31, 2007
Total assets 1,124,610 298,560 1,423,170
Intangible Assets 55,001 55,001
The reconciliation of the segment profit (loss) to net income (loss) as
reported in the financial statements is as follows:
For the Three Month Period Ended
March 31, 2008 2007
$ $
Segment (Loss) (549,935) (159,722)
Minority Interest - -
Net Income (loss) (549,935) (159,722)
31
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
20. SUBSEQUENT EVENTS
a) In April & May 2008, 290,000 shares were issued pursuant to the
exercise of employee and consultant options at $0.20 per share for
proceeds of $58,000.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion and analysis of our results of operations and financial
position should be read in conjunction with our audited financial statements and
the notes thereto included elsewhere in this Interim 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.
The following discussion is intended to provide an analysis of our financial
condition and should be read in conjunction with our audited financial
statements and the notes thereto. The matters discussed in this section 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 our growth, trends in the results of our development,
anticipated development plans, operating expenses and our anticipated capital
requirements and capital resources. Our actual results could differ materially
from the results discussed in the forward-looking statements.
In this Quarterly Report, "NAT", "we", "us" or "our" refer to Naturally Advanced
Technologies Inc. and our subsidiaries, unless the context otherwise requires.
OVERVIEW
Naturally Advanced Technologies Inc. is a Cleantech company focused on providing
environmentally friendly textile, composite, biomass and pulping solutions
through the cost effective process of industrial hemp and other bast fiber
crops. We are committed to unlocking the potential of renewable and
environmentally sustainable biomass resources from hemp and other bast fibers.
As of the date of this Quarterly Report, we have two business operations, which
we will be expanding as follows: (i) the development and execution of our
proprietary processing platform called CRAILAR(R) technology, which is a series
of bast fiber processing technologies targeted at the textile, composite and
plastics industries; and (ii) the expansion of our HTnaturals apparel business
to meet the growing demand of corporate and individual customers.
CRAILAR FIBER TECHNOLOGIES, INC.
Through Crailar Fiber Technologies Inc., our wholly-owned subsidiary
("CRAILAR(R)"), we are developing our CRAILAR(R) technology for production of
bast fibers, cellulose pulp, and their resulting byproducts in collaboration
with Canada's National Research Council (the "NRC") and the Alberta Research
Council (the "ARC"). We own the exclusive global licensing rights for the
CRAILAR(R) technology. During 2004, we entered into collaboration with the NRC
to commercialize our CRAILAR(R) technology for extracting and cleaning hemp
33
fiber and converting it into a proprietary fiber called CRAILAR(R). We believe
that our CRAILAR(R) technology offers cost-effective and environmentally
sustainable processing and production of bast fibers such as hemp and flax,
resulting in advanced performance characteristics for use in textiles,
industrial, energy, medical and composite materials industries. CRAILAR(R) is a
replacement for cotton and organic cotton use in textiles, polyester and nylon
use in performance textiles, fiberglass use in composite materials, wood pulp
use in pulp and paper applications and oil and gas use in energy markets. The
feedstock source for CRAILAR(R) is environmentally efficient industrial hemp.
However, the feedstock source can also use other environmentally efficient bast
fibers such as flax.
In addition to our CRAILAR(R) technology, the ARC has developed additional
product solutions for advanced, sustainable high performance yarns that open up
access to performance apparel and advanced composites markets. Both processes
are currently in the testing and development phase at the ARC Edmonton facility
and at the NRC facility in Ottawa. In addition to work at the NRC and ARC, we
have utilized industry and university testing facilities in Quebec, Ontario and
the United States to process and validate the CRAILAR(R) technology and
resulting fibers and yarns.
As of the date of this Quarterly Report, we continue testing and developing the
patented CRAILAR(R) technology. ARC tests indicate that the CRAILAR(R)
technology can be effectively processed on equipment currently used in related
industries (i.e. woolen, cotton and pulp and paper industries). Existing
facilities in Canada may be able to process several tons of CRAILAR(R) fiber per
hour with minimal modifications. We are actively developing, in conjunction with
the ARC, costs and requirements for building a full scale manufacturing facility
in Craik, Saskatchewan. This plant would be capable of producing in excess of
thirty tons of bast fiber per day and would provide high volume process and
fiber to enable the other key components of the production value chain to commit
to the CRAILAR(R) technology. In addition, we have initiated conversation with a
number of global corporations with market expertise and experience for further
partnership and development agreements.
COLLABORATION AGREEMENT
We entered into a three-year collaboration agreement dated May 7, 2004, (the
"Collaboration Agreement") with NRC pursuant to which we have developed the
CRAILAR(R) technology enzymatic process for hemp-derived fiber. Pursuant to the
terms and provisions of the Collaboration Agreement: (i) NRC shall provide
certain expertise and know-how for the process and engineering of enzymes
beneficial to the textile industry; (ii) NRC shall contribute to the project
work valued at approximately $671,498 Canadian Dollars; and (iii) we shall
contribute research and development to the project valued at approximately
$553,500 Canadian Dollars (US Dollars $556,393). As of the date of this
Quarterly Report, all amounts payable for fiscal years 2004, 2005, 2006 and 2007
have been paid, with a total of $24,000 Canadian Dollars paid during fiscal year
2007 under the terms of the first Collaboration Agreement. The final amount due
and owing on March 1, 2007, of $24,000 (US Dollar $20,595) was paid on that
date.
PHASE II. On approximately December 7, 2007, we entered into a three-year
renewal of the terms and provisions of the Collaboration Agreement concerning
the continued scientific research and development of the advanced enzyme
34
technology for the extraction and cleaning of industrial hemp fiber for the
textile sector (the "Project"). The Project commenced approximately May 10,
2007, and the Collaboration Agreement expires on May 9, 2010. We believe that
the extended Collaboration Agreement will assist us with continued work on
patentable enzyme technology for the processing of hemp fibers and ensure the
continuing of the original research team to facilitate ongoing collaboration. We
believe that further research and development of the CRAILAR(R) technology is
consistent with the NRC's mandate to contribute to the global competitiveness of
Canadian industry and the NRC National Program in Bioproducts announced in March
2007.
Pursuant to the terms and provisions of the Collaboration Agreement as renewed:
(i) NRC shall provide to the Project certain expertise and know-how for the
process and engineering of enzymes beneficial to the textile industry; (ii) NRC
shall contribute to the Project work valued at approximately $893,033 Canadian
Dollars; (iii) we shall contribute "in kind" research and development to the
Project valued at approximately $2,300,000 Canadian Dollars; and (iv) we shall
pay to NRC an aggregate of $366,000 Canadian Dollars ($356,551 U.S. Dollars)
over the three-year term in accordance with a schedule. During the three-month
period ended March 31, 2008, we paid to NRC approximately $29,700 Canadian
Dollars ($28,933 U.S. Dollars).
A secondary fiber product is also being researched and developed for the
composites industry to be used in reinforced composite resin products (a natural
fiberglass replacement). We estimated that the overall aggregate cost of the
projects to be conducted under the Collaboration Agreement to be approximately
$1,500,000 Canadian Dollars.
HTNATURALS APPAREL CORP.
Through our wholly-owned subsidiary, HTnaturals Apparel Corp. ("Htnaturals"), we
believe we are a leading provider of environmentally sustainable hemp, bamboo,
organic cotton and soy blended apparel. HTnaturals sells our natural and
sustainable fiber clothing and fabric under the HTnaturals brand. The HTnaturals
brand has been extended to encompass bamboo, soy and other sustainable fibers in
addition to hemp. Extensive focus on assortment planning, merchandising, design
and sourcing during the past year has resulted in a completely revamped product
assortment. We believe that effort is now generating repeat orders with existing
retailers, is attracting new customers, and has confirmed our ability to joint
venture with large global brands such as Starbucks Coffee Co. We believe the
HTnaturals brand stands poised to capitalize on our past activities and expand
our reach directly into a growing number of like-minded corporate customers who
value sustainability in their business platforms. We believe that today's
growing consumer awareness of environmental issues, and the desire to reflect
that concern with appropriate apparel purchases, will create a real opportunity
to build a strong, consumer focused apparel label that speaks directly to
sustainability. With the ability to execute through the entire chain of the
yarn, fabric and apparel business, we have the opportunity to create an
exclusive CRAILAR(R) branded apparel line that validates performance and builds
brand equity.
HTnaturals' customers are located in North America, Europe and Asia and include
retail operators, such as COSTCO Canada, as well as corporate clients such as
Starbucks and Google. Business development efforts continue to grow HTnaturals'
customer base while an increasing global awareness for environmentally friendly
clothing is bringing new prospects to HTnaturals' target markets. We expect
35
continued robust growth at HTnaturals, providing a strong financial foundation
for the continuation of the development of the CRAILAR(R) technology platform.
HTnaturals has secured new procurement systems, which will improve product
quality and gross margin and implement a focused strategy for sales growth in
three areas: corporate sales, private label sales, and a seasonal retail line.
RESULTS OF OPERATIONS
__________________________________________________________________________
THREE-MONTH PERIOD ENDED MARCH 31
__________________________________________________________________________
2008 2007 % Change
Sales $ 953,659 $ 616,061 55%
Gross Profit $ 351,031 $ 235,325 49%
Net Loss/Income ($ 549,935) ($159,722) 244%
Earnings (Loss)/ ($0.02) ($0.01) 100%
share
__________________________________________________________________________
THREE-MONTH PERIOD ENDED MARCH 31, 2008 COMPARED WITH THREE-MONTH PERIOD ENDED
MARCH 31, 2007
REVENUE AND GROSS MARGINS
Our net operational losses during the three-month period ended March 31, 2008,
was ($549,935) compared to ($159,722) during the three-month period ended March
31, 2007, (an increase of $390,213, an overall increase of 244%). The increase
in net loss was due to increased costs related to the development and
commercialization of the CRAILAR(R) technology platform, an increase in stock
based compensation and an increase in overhead costs as discussed below.
However, during the three-month period ended March 31, 2008, we generated
$953,659 in gross revenues compared to $616,061 in gross revenues for the
three-month period ended March 31, 2007 (an increase of $337,598, an overall
increase of 66%). The ongoing growth in revenues is attributable to continued
success at our apparel division through HTnaturals' and the continued marketing
success. HTnaturals saw continued customer interest and market uptake for our
natural fiber garments among retail customers including COSTCO Canada, as well
as an increase in corporate orders.
Cost of goods sold increased during the three-month period ended March 31, 2008
to $602,628 from $380,736 for the same period in 2007 resulting in net sales or
a gross margin of $351,031 compared to $235,325 for the same period in 2007.
Cost of goods sold as a percentage of sales was 63% for the three-month period
ended March 31, 2008 compared to 61% for the three-month period ended March 31,
2007. This change was attributed to streamlined inventory procedures, increased
product margins and internal cost controls. As a percentage of revenues, gross
profit was nearly unchanged, going from 38% for the three-month period ended
March 31, 2007, to 37% for the most recent three months ended March 31, 2008.
36
OPERATING EXPENSES
During the three-month period ended March 31, 2008, we recorded operating
expenses of $900,966 compared to operating expenses of $395,047 during the
three-month period ended March 31, 2007 (an increase of $505,919). When measured
as a percentage of sales, operating expenses increased to 94% in the three-month
period ended March 31, 2008 from 64% in the three-month period ended March 31,
2007. Although management has focused on creating a more competitive operating
framework, certain expenses as discussed below resulted in an increase in
operating expenses.
Operating expenses consisted of: (i) $61,491 (2007: $67,463) in advertising and
promotion; (ii) $6,561 (2007: $4,580) in amortization and depreciation; (iii)
$98,082 (2007: $102,035) in consulting and contract labor; (iv) $119,483 (2007:
$67,189) in general & administrative; (v) $32,858 (2007: $26,038) in interest;
(vi) $40,609 (2007: $23,647) in professional fees; (vii) $153,460 (2007:
($13,547)) in research & development; and (viii) $388,422 (2007: $117,642) in
salaries & benefits. Our net loss from operations during the three-month period
ended March 31, 2008, was ($549,935) or ($0.02) per share compared to a net loss
of ($159,722) or ($0.01) per share for the three-month period ended March 31,
2007. For the three-month period ended March 31, 2008, the weighted average
number of shares outstanding was 28,057,184 compared to 24,159,678 at March 31,
2007.
Advertising and promotion expenses decreased by 9% to $61,491 for the
three-month period ended March 31, 2008, from $67,463 compared to the same
period in 2007 due to the streamlined marketing operations as well as leveraging
of our developed internet presence, which provides a lower-cost marketing
platform.
Consulting and contract labor expenses decreased to $98,082 for the three-month
period ended March 31, 2008, from $102,035 compared to the same period in 2007
due to the conversion of certain of our consulting and contract labour expenses
to salaried expenses.
General and administrative expenses increased to $119,483 for the three-month
period ended March 31, 2008, compared to $67,189 for the same period in 2007.
The increase in general and administrative expenses was related to increased
business infrastructure requirements that are necessary for management to
continue to execute our long-term growth strategy.
Interest costs for the three-month period ended March 31, 2008, were $32,858
compared with $26,038 for the same period in 2007. The increase in interest
costs relates to the loan from a director, which has been used to underwrite
apparel production.
Research and development costs were $153,460 for the three-month period ended
March 31, 2008, compared to ($13,547) for the same three-month period in 2007.
This increase is attributed to the increase in testing associated with the
successes achieved in the development of the CRAILAR(R) technology platform.
Salaries and benefits expenses increased to $388,422 for the three-month period
ended March 31, 2008, compared with $117,642 for the same period in 2007. This
increase was due to the addition of key personnel in sales, warehousing and
accounting to support our growth, as well as an increase in stock based
compensation and increased management costs. During the three-month period ended
37
March 31, 2008, an aggregate of $116,409 was incurred as remuneration to our
officers and directors. Of this amount, $78,909 was recorded as salaries and
employee benefits expense and $37,500 was recorded as contract labor. During the
three-month period ended March 31, 2008, we granted 611,500 stock options
exercisable at $1.15 per share for a three-year period under our 2006 Stock
Option Plan to employees, directors and consultants. These stock options were
valued at $359,903 and are being expensed as they vest. For the three-month
period ended March 31, 2008, none of these stock options have vested and
accordingly no expense has been recorded.
Professional fees increased to $40,609 for the three-month period ended March
31, 2008, compared with $23,647 for the same period in 2007. This increase was
due to legal fees associated with the company listing on an additional exchange.
NET LOSS
The net loss for the three-month period ended March 31, 2008, was ($549,935)
compared to a loss of ($159,722) for the same period in 2007, which is an
increase in net loss of ($390,213). The increase in loss was primarily because
of the increase in operating expenses, which were related to our growth and
development objectives. The loss as a percentage of gross revenues increased to
156% for the three-month period ended March 31, 2008, from 68% for the same
period in 2007. For the three-month period ended March 31, 2008, the weighted
average number of shares outstanding was 28,057,184 compared to 24,159,678 at
March 31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2008
As at March 31, 2008, our current assets were $1,877,632 and our current
liabilities were $1,313,849, which resulted in working capital surplus of
$563,783. As at March 31, 2008, total assets were $2,123,205 consisting of: (i)
$196,411 in cash; (ii) $529,596 in accounts receivable; (iii) $874,463 in
inventory; (iv) $277,162 in prepaid expenses and other; (v) $60,160 in
intangible assets; and (vi) $185,413 in property and equipment.
As at March 31, 2008, liabilities were comprised of: (i) $450,889 in accounts
payable; (ii) $29,248 in accrued liabilities; (iii) $711,308 in amounts due
related parties; (iv) $1,263 capital lease obligation; (v) $300,000 in notes
payable; and (vi) $31,551 in short and long term debt.
Stockholders' Equity (Deficit) decreased from $765,536 at December 31, 2007 to
$598,946 at the three-month period ended March 31, 2008.
As of March 31, 2008, we had cash of $196,411 compared with $660,407 at December
31, 2007.
The cash flows used in operations for the three-month period ended March 31,
2008, was ($832,070) compared with ($460,484) for the same period in 2007. Cash
flows used in operations for the three-month period ended March 31, 2008,
consisted primarily of a net loss of ($549,935), with changes in working capital
assets and liabilities consisting of an increase in accounts receivable of
38
($18,956), an increase in inventory of ($30,932), an increase in prepaid
expenses of ($126,373), a decrease in accounts payable and accrued liabilities
of ($186,579) and a decrease in amounts due to related parties of ($15,014).
Adjustments to cash flows used in operations for the three-month period ended
March 31, 2008, consisted of $6,561 in depreciation and amortization and $89,158
in stock based compensation.
The cash flows used in investing activities for the three-month period ended
March 31, 2008, was ($111,615) compared to ($17,548) for the same period in
2007. Cash flows used in investing activities consisted of a purchase of
property and equipment totaling ($111,178) and the acquisition of trademarks &
licenses of ($437).
Cash flows provided from financing activities was $517,088 compared to $328,421
during the same period in 2007 as we issued $334,407 of capital stock for cash
(2007 - $150,000) and received $183,000 in advances from related parties (2007:
$180,000).
The effect of exchange rates on cash resulted in an unrealized loss of ($37,399)
for the three-month period ended March 31, 2008, compared with a ($1,901)
unrealized loss in the same period of 2007. These gains and losses are the
direct result of fluctuations in the Canadian dollar versus the US dollar.
PLAN OF OPERATION
Management expects to continue expanding its business platform through the
commercialization of CRAILAR(R) technology for bast fiber processing and
production, with resulting textile, composite, pulp and fiber products expected
to address inherent environmental problems currently affecting these industries.
Management recognizes the disruptive force that the CRAILAR(R) technology
platform possesses for global textile, composite material, pulp and paper, and
plastics markets. As such, management is focusing on our growth through the
commercialization of CRAILAR(R), which is expected to begin generating revenues
in Q1 of 2009.
CRAILAR(R)
During fiscal year 2007, CRAILAR(R) completed proof of concept testing on three
separate bast fiber processing techniques with the NRC in Ottawa and the ARC in
Edmonton. Proof of concept testing at the NRC included the completion of the
first CRAILAR(R) F-Series 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(R) enzymatic processes, with early
test fibers meeting the requirements of the textile producing industry. In
January 2008, we signed phase II of the Collaboration Agreement with the NRC,
extending the Collaboration Agreement for an additional three years. Phase II of
the Collaboration Agreement will assist us in further development and
commercialization of CRAILAR(R), and will ensure the continuity of the original
research team to facilitate ongoing collaboration with us.
During the fourth quarter of 2007, we began scaling three sets of CRAILAR(R)
processing equipment at a pilot plant facility in Montreal. The first set is
expected to be operational by the second quarter of 2008, with an initial
processing capacity of approximately 1,000 pounds of fiber per batch. Once this
39
initial quantity of fiber is produced, we expect to move onto larger scale
spinning trials that should result in sufficient yarn for the production of
CRAILAR(R) F-Series garments.
In May 2007, the ARC filed two provisional patent applications related to
decortication and degumming technologies for which we have secured exclusive
worldwide licensing rights from the ARC. We, through CFT, completed the
installation of proprietary decortication equipment at the ARC. 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. CFT is currently working with a
third party to produce a sufficient quantity of cellulose pulp for larger
extrusion trials in Q2 of 2008. We expect these trials to produce enough
extruded fiber to produce sample CRAILAR(R) X-Series apparel. CRAILAR(R)
X-Series fiber produced with this degumming technology is expected to be used in
performance moisture management apparel applications along with composite
materials.
As of the date of this Quarterly Report, we have completed geotechnical surveys
on the proposed site of our first processing mill in Craik, Saskatchewan. Costs
for the processing mill is expected to be between $4,000,000 and $6,000,000, and
outside funding will be required to finance the building of this facility. The
potential outside sources of funding include government and industry partners
and no funding has been finalized as of the date of this Quarterly Report. Upon
completing financing, the facility is expected to be built in 2008 and
operational in 2009. The facility will have a nameplate production capacity of
52 million kilograms (114 million pounds) of feedstock fiber per year for
X-Series processes.
HTNATURALS
During fiscal year 2007, HTnaturals continued to see strong growth in its
apparel sales, in both the seasonal retail line and the higher volume corporate
wear line. HTnaturals apparel is made from eco fabrics crafted from a
proprietary combination of fibers including Hemp, organic cotton, bamboo, soy,
recycled polyester, and other organic textiles. Consumer interest and uptake of
both the spring 2007 and fall 2007 lines increased repeat sales among our retail
customer base. Sales through COSTCO Canada increased during this time as well,
as Costco's customers continued to respond positively to the HTnaturals lines
with additional programs now extending into Q4 2008. Continued emphasis on
corporate responsibility with respect to the environment and climate change has
increased demand for HTnaturals' corporate items, called HTbasics, which are
sold directly to screen printers and corporate clients. HTnaturals also
completed sales order delivery for internet search giant Google in Q4 2007
adding them to a list of corporate customers that already includes Starbucks and
Volkswagen.
NOTE ON PLAN OF OPERATION
While we expect that profitable operations will be achieved in the future, there
can be no assurance that revenue, margins, and profitability will increase, or
be sufficient to support operations over the long term. Management expects that
we 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 our long-term operating requirements.
40
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 we raise additional funds through the
issuance of equity or convertible debt securities other than to current
shareholders, the percentage ownership of current shareholders would be reduced,
and such securities might have rights, preferences or privileges senior to our
common stock. Additional financing may not be available upon acceptable terms,
or at all. If adequate funds are not available or are not available on
acceptable terms, we may not be able to take advantage of prospective business
endeavors or opportunities, which could significantly and materially restrict
business operations. Management is continuing to pursue external financing
alternatives to improve our working capital position and to grow the business to
the greatest possible extent.
MATERIAL COMMITMENTS
RANA CORP
A significant commitment for us during fiscal year 2008 is the principal amount
of $300,000 due and owing pursuant to a secured and subordinated loan agreement
with Rana Corp (Rana). The term of the loan is from July 21, 2007, until April
22, 2009 at 12% per annum, calculated semi-annually, with interest payments due
semi-annually. The loan is now due as follows: (i) $100,000 on July 22, 2008;
and (ii) $200,000 on July 22, 2009. There was no fee paid for arranging the
renewal of the loan. The security granted to Rana is: (i) a fixed charge and a
security interest in our existing accounts receivable insurance policy obtained
through Export Development Canada and St. Paul Guarantee Insurance Company
respecting losses sustained by us; and (ii) a floating charge and a security
interest in all of our assets, subject and subordinate to any borrowing by us
with banks and lending institutions.
LOAN FROM DIRECTOR
Another significant commitment for us in fiscal year 2008 is the amount of
$550,000 advanced by a director to facilitate the production of the new apparel
designs. During the period ending March 31, 2008, the amount of the loan was
increased to $700,000, we made a draw in the amount of $183,000 and currently
owe principal of $693,000. The loan has an interest rate of 12% with a 1% charge
for each advance. The loan matures on February 28, 2009.
COLLABORATION AGREEMENT
An additional significant commitment for us in fiscal year 2008 is the
Collaboration Agreement we entered into with NRC to continue to develop a
patentable enzyme technology for the processing of hemp fibers. Phase II of this
agreement is for a three year term, which expires on May 9, 2010. The NRC is to
be paid as it conducts work on the joint collaboration. As the NRC completes
research and development work, the monies become due. There are no further costs
or other off-balance sheet liabilities associated with the NRC JCA agreement.
Over the term of the Collaboration Agreement, we will pay the NRC $366,000
Canadian Dollars ($356,551 U.S. Dollars) of which $29,700 Canadian Dollars
($28,933 U.S. Dollars) was due by March 31, 2008. As of the date of this
Quarterly Report, we have paid the $28,933 U.S. Dollars to NRC. In addition to
41
cash payments, we are required to contribute $2,300,000 Canadian Dollars in
research and development costs "in kind" over the course of the Collaboration
Agreement. As of the date of this Quarterly Report, our "in kind" obligations
have been met as defined in the Collaboration Agreement.
TECHNOLOGY AGREEMENT
On approximately June 13, 2007, CRAILAR(R) entered into a master agreement for
technology development dated effective as of January 1, 2007, (the "Technology
Development Agreement") with the ARC. The purpose of the Technology Development
Agreement is to further develop the CRAILAR(R) technology for use in textile,
composite and pulp applications. The Technology Development Agreement is an
umbrella agreement for the development of the CRAILAR(R) Series Fiber Products.
Under the terms of the Technology Development Agreement, we are entitled to the
option of an exclusive, worldwide royalty bearing license to use any new
intellectual property developed pursuant to a Project Agreement.
During prior fiscal years and as discussed above, CRAILAR(R) has been conducting
development work with the NRC on the CRAILAR(R) technology bast fiber enzymatic
processes to facilitate the commercialization of bast fibers for fabric,
composite and plastics use (the " CRAILAR(R) Series Fiber"). CRAILAR(R) entered
into the Technology Development Agreement with ARC to formalize the
collaboration and licensing duties of each party regarding development of the
technology related to the CRAILAR(R) Series Fiber and identification of
associated potential opportunities, applications and projects related to the
development of the CRAILAR(R) Series Fiber and subsequent manufacture,
marketing, distribution and sale of CRAILAR(R) Series Fiber Products
(collectively, the "Project Agreements").
In accordance with the terms and provisions of the Technology Development
Agreement: (i) CRAILAR(R) shall initially pay to ARC $10,000 Canadian Dollars on
April 1, 2007, (which was paid) and subsequently $25,000 Canadian Dollars per
calendar quarter on the first day of each calendar quarter commencing July 1,
2007, which sums shall be used exclusively for the purpose of CRAILAR(R)
contributions required pursuant to the Project Agreements all of which were paid
in 2007; (ii) CRAILAR(R) shall provide work-in-kind of a value of $25,000
Canadian Dollars per calendar quarter commencing April 1, 2007, as part of
CRAILAR(R) contributions to the Project Agreements, which are contingent upon
there being in effect one or more Project Agreements requiring financial
contributions from and services by CRAILAR(R); (iii) CRAILAR(R) shall pay to ARC
the fees and expenses set out in each Project Agreement; (iv) with respect to
all Project Agreements, CRAILAR(R) shall be entitled to an option for an
exclusive worldwide royalty-bearing license to use the intellectual property
developed pursuant to such Project Agreement; and (v) CRAILAR(R) shall pay to
ARC a royalty of 3% of the gross sales for the first $50,000,000 of gross sales
and 1.5% of gross sales for all gross sales in excess of $50,000,000.
As of the date of this Quarterly Report, all amounts due for 2007 were paid to
ARC and $25,000 Canadian Dollars ($24,402 U.S. Dollars) was paid during the
three-month period ended March 31, 2008, relating to the payments required under
the Technology Development Agreement.
42
SETTLEMENT
A significant commitment for us in fiscal year 2008 will be the settlement of
legal proceedings with our prior Chief Operating Officer. The parties have come
to an agreement in regards to this dispute and we will pay Mr. Guy Carpenter
$132,500 US Dollars in two payments, six months apart with the first payment due
in April 2008. As of the date of this Quarterly Report, the first payment of
$65,000 was made.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this Quarterly Report, we do not have any off-balance sheet
arrangements that have, or are reasonably likely to have, a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors. The term "off-balance sheet
arrangement" generally means any transaction, agreement or other contractual
arrangement to which an entity unconsolidated with us is a party, under which we
have: (i) any obligation arising under a guarantee contract, derivative
instrument or variable interest; or (ii) 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.
AUDIT COMMITTEE REPORT
The Board of Directors has established an Audit Committee. The members of the
Audit Committee are Ms. Larisa Harrison, Mr. Robert Edmunds and Mr. Miljenko
Horvat. Two of the three members of the audit committee are "independent" within
the meaning of Rule 10A-3 under the Exchange Act. The Audit Committee was
organized in November 20, 2004, and operates under a written charter adopted by
our Board of Directors. The Audit Committee has reviewed and discussed with
management the Company's financial statements as of and for the three-month
period ended March 31, 2008. The Audit Committee has also discussed with Dale
Matheson Carr-Hilton LaBonte the matters required to be discussed by Statement
on Auditing Standards No. 61, Communication with Audit Committees, as amended,
by the Auditing Standards Board of the American Institute of Certified Public
Accountants. The Audit Committee has received and reviewed the written
disclosures and the letter from Dale Matheson Carr-Hilton LaBonte required by
Independence Standards Board Standard No. 1, Independence Discussions with Audit
Committees, as amended, and has discussed with Dale Matheson Carr-Hilton LaBonte
their independence. Based on the reviews and discussions referred to above, the
Audit Committee has recommended to the Board of Directors that the financial
statements referred to above be included in our Quarterly Report on Form 10-Q
for the three-month period ended March 31, 2008, filed with the Securities and
Exchange Commission.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
Market risk represents the risk of loss that may impact our financial position,
results of operations or cash flows due to adverse change in foreign currency
and interest rates.
EXCHANGE RATE
Our reporting currency is United States Dollars ("USD"). The Canadian Dollar has
been formally pegged to the USD. However, rate fluctuations may have an impact
43
on our consolidated financial reporting. As the Canadian Dollar is our and our
subsidiaries' functional currency, the fluctuation of exchange rates of the
Canadian Dollar may have positive or negative impacts on our results of
operations. However, since all of our sales revenue and expenses and that of our
subsidiaries are denominated in Canadian Dollar, the net income effect of
appreciation and devaluation of the currency against the US Dollar will be
limited to the net operating results of the subsidiary companies attributable to
us.
INTEREST RATE
Interest rates in Canada are low and stable and inflation is well controlled due
to the habit of the population to deposit and save money in the banks (among
with other reasons, such as Canada's perennial balance of trade surplus. Our
loans relate mainly to trade payables and are mainly short-term. However our
debt is likely to rise with the establishment of our physical plants in
connection with expansion and, were interest rates to rise at the same time,
this could become a significant impact on our operating and financing
activities.
We have not entered into derivative contracts either to hedge existing risks or
for speculative purposes.
ITEM 4. INTERNAL CONTROLS AND PROCEDURES
An evaluation was conducted under the supervision and with the participation of
our management, including Jason Finnis, our Chief Operating Officer, and Guy
Prevost, our Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of March 31, 2008. Based
on that evaluation, Messrs. Finnis and Prevost concluded that our disclosure
controls and procedures were effective as of such date to ensure that
information required to be disclosed in the reports that we file or submit under
the Exchange Act, is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms. Such officers also confirm that
there was no change in our internal control over financial reporting during the
three-month period ended March 31, 2008, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
We maintain "disclosure controls and procedures," as such term is defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"),
that are designed to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. We
conducted an evaluation (the "Evaluation"), under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer of the
effectiveness of the design and operation of our disclosure controls and
procedures ("Disclosure Controls") as of the end of the period covered by this
Quarterly Report pursuant to Rule 13a-15 of the Exchange Act. The evaluation of
our disclosure controls and procedures included a review of the disclosure
controls' and procedures' objectives, design, implementation and the effect of
the controls and procedures on the information generated for use in this report.
In the course of our evaluation, we sought to identify data errors, control
problems or acts of fraud and to confirm the appropriate corrective actions, if
44
any, including process improvements, were being undertaken. Our Chief Executive
Officer and our Chief Financial Officer concluded that, as of the end of the
period covered by this Quarterly Report, our disclosure controls and procedures
were effective and were operating at the reasonable assurance level.
PART II
ITEM 1. LEGAL PROCEEDINGS.
On May 10, 2006, Guy Carpenter, our prior chief operating officer and a director
("Carpenter"), initiated legal proceedings against us by filing a Writ of
Summons and Statement of Claim in the Supreme Court of British Columbia, civil
action no. S-063043 (the "Complaint"). The Complaint generally alleges that: (i)
we have breached an employment agreement between us and Carpenter and wrongfully
terminated Carpenter's employment; and (ii) we are indebted to Carpenter for
un-reimbursed business expenses incurred by Carpenter and for accrued and unpaid
salary due and owing to Carpenter for a specified period of time.
The parties have come to an agreement in regards to this dispute and we will pay
Mr. Carpenter $132,500 US Dollars in two payments, which will be six months
apart with the first payment due in April 2008. As of the date of this Quarterly
Report, we have made the first payment of $65,000 to Mr. Carpenter.
As of the date of this Quarterly Report, we are not aware of any other pending
or existing legal proceedings involving our company or its officers and
directors. We are not aware of any other proceedings being contemplated by any
person or governmental authority against us, our properties or our officers and
directors.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three-month period ended March 31, 2008, and up to the date of this
Quarterly Report, we have issued 583,215 shares of our common stock pursuant to
contractual debts or financings as follows.
o During the three-month period ended March 31, 2008, we issued an
aggregate of 97,500 shares of our common stock pursuant to the
exercise of stock options by our employees at $0.20 per share for
total proceeds of $19,500.
o During the three-month period ended March 31, 2008, we issued an
aggregate of 25,000 shares of our common stock pursuant to the
exercise of stock options by our employees at $0.31 per share for
total proceeds of $7,750.
o During the three-month period ended March 31, 2008, we issued an
aggregate of 10,000 shares of our common stock pursuant to the
exercise of stock options by our employees at $0.50 per share for
proceeds of $5,000.
45
o During the three-month period ended March 31, 2008, we issued an
aggregate of 40,000 shares of our common stock pursuant to the
exercise of stock options by our employees at $0.37 per share for
total proceeds of $14,800.
o During the three-month period ended March 31, 2008, we issued an
aggregate of 25,000 shares of our common stock pursuant to the
exercise of stock options by our employees at $0.81 per share for
total proceeds of $20,250.
o During the three-month period ended March 31, 2008, we issued an
aggregate of 285,715 shares of our common stock pursuant to the
exercise of warrants at $0.75 per share for total proceeds of
$214,286.
o During the three-month period ended March 31, 2008, we issued an
aggregate of 100,000 shares of our common stock pursuant to the
exercise of warrants at $0.50 per share for total proceeds of $30,000.
o During April and May 2008, we issued an aggregate of 290,000 shares of
our common stock pursuant to the exercise of stock options by our
employees and consultants at $0.20 per share for proceeds of $58,000.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are included in this report: See "Exhibit Index"
immediately following the following the signature page of this Form 10-QSB.
31.1 Certification of Chief Executive Officer pursuant to Securities Exchange
Act of 1934 Rule 13a-14(a) or 15d-14(a).
31.2 Certification of Chief Financial Officer pursuant to Securities Exchange
Act of 1934 Rule 13a-14(a) or 15d-14(a).
32.1 Certifications pursuant to Securities Exchange Act of 1934 Rule 13a-14(b)
or 15d-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
46
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NATURALLY ADVANCED TECHNOLOGIES INC.
Date: May 15, 2008 By: /s/ KENNETH C. BARKER
_____________________________________
Kenneth C. Barker,
Chief Executive Officer
Date: May 15, 2008 By: /s/ GUY PREVOST
_____________________________________
Guy Prevost
Chief Financial Officer