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
EXCHANEG ACT OF 1934
For the period ended June 30, 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 (I.R.S. Employer
of 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 Name of each exchange on which
to Section 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 August 11, 2008
Common Stock, no par value 30,293,830
Documents Incorporated By Reference
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
2
NATURALLY ADVANCED TECHOLOGIES, INC.
FORM 10-Q
PART 1 FINANCIAL INFORMATION 4
Item 1 FINANCIAL STATEMENTS 4
Consolidated Balance Sheets 5
Consolidated Statements of Operations 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition or Plan of Operation 31
Item 3. Quantitative and Qualitative Disclosures About
Market Risks 42
Item 4. Controls and Procedures 43
PART II. OTHER INFORMATION 44
Item 1 Legal Proceedings 44
Item 2 Unregistered Sales of Securities and Use of Proceeds 44
Item 3 Defaults Upon Senior Securities 46
Item 4 Submission of Matters to a Vote of Security Holders 46
Item 5 Other Information 48
Item 6 Exhibits 49
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".
PART I
ITEM 1. FINANCIAL STATEMENTS
NATURALLY ADVANCED TECHNOLOGIES, INC.
Consolidated Financial Statements
(In US Dollars)
June 30, 2008
(unaudited)
INDEX
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
4
NATURALLY ADVANCED TECHNOLOGIES, INC.
Consolidated Balance Sheets
(In US Dollars)
____________________________________________________________________________________________________
June 30, December 31,
2008 2007
____________________________________________________________________________________________________
(unaudited)
ASSETS
CURRENT
Cash and cash equivalents $ 16,915 $ 660,407
Accounts receivable 369,952 510,640
Inventory 812,965 843,531
Prepaid expenses and other 253,123 150,789
____________________________________________________________________________________________________
1,452,955 2,165,367
PROPERTY AND EQUIPMENT (NOTE 8) 234,014 78,740
INTANGIBLE ASSETS (NOTE 9) 61,284 65,720
____________________________________________________________________________________________________
$ 1,748,253 $ 2,309,827
====================================================================================================
LIABILITIES
CURRENT
Accounts payable $ 477,511 $ 555,833
Accrued Liabilities 63,571 110,883
Due to related party (Note 7) 775,255 543,322
Capital lease obligation, current portion 998 1,582
Note payable (Note 4) 100,000 100,000
Short term loan (Note 10) 21,251 21,729
____________________________________________________________________________________________________
1,438,586 1,333,349
NOTE PAYABLE (NOTE 4) 200,000 200,000
LONG TERM DEBT (NOTE 10) 10,510 10,942
____________________________________________________________________________________________________
1,649,096 1,544,291
____________________________________________________________________________________________________
COMMITMENTS (Note 13)
STOCKHOLDERS' EQUITY
CAPITAL STOCK (NOTE 11)
Authorized: 100,000,000 common shares without par value
Issued and outstanding: 28,796,404 common shares
(December 31, 2007 - 27,913,589) 6,454,314 6,026,436
ADDITIONAL PAID-IN CAPITAL 801,880 650,153
ACCUMULATED OTHER COMPREHENSIVE INCOME 138,927 176,048
DEFICIT (7,295,964) (6,087,101)
____________________________________________________________________________________________________
99,157 765,536
____________________________________________________________________________________________________
$ 1,748,253 $ 2,309,827
====================================================================================================
The accompanying notes are an intergral part of these consolidated financial statements.
5
NATURALLY ADVANCED TECHNOLOGIES, INC.
Consolidated Statements of Operations
(In US Dollars)
(unaudited)
___________________________________________________________________________________________________________
For three months ended For six months ended
June 30, June 30,
2008 2007 2008 2007
___________________________________________________________________________________________________________
SALES $ 579,728 $ 475,118 $ 1,533,387 $ 1,091,179
COST OF SALES 368,451 351,365 971,080 732,101
___________________________________________________________________________________________________________
GROSS PROFIT 211,277 123,753 562,307 359,078
___________________________________________________________________________________________________________
EXPENSES
Advertising and promotion 55,314 75,279 116,805 142,742
Amortization & depreciation 6,966 5,093 13,527 9,673
Consulting & Contract Labour 92,286 159,516 190,368 261,551
General & Administrative 119,290 80,811 230,636 147,279
Interest 33,814 22,264 66,672 48,302
Legal & Accounting 61,049 29,853 101,658 53,500
Research & Development 121,323 122,958 282,921 84,507
Salaries & Benefits 380,161 182,364 768,583 300,006
___________________________________________________________________________________________________________
870,203 678,138 1,771,170 1,047,560
___________________________________________________________________________________________________________
NET LOSS FOR THE PERIOD $ (658,926) $ (554,385) $(1,208,863) $ (688,482)
===========================================================================================================
Loss per share (basic and diluted) $ (0.02) $ (0.02) $ (0.04) $ (0.03)
===========================================================================================================
Weighted average number of
common shares outstanding 28,689,411 24,750,854 28,373,297 24,457,647
===========================================================================================================
The accompanying notes are an intergral part of these consolidated financial statements.
6
NATURALLY ADVANCED TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(In US Dollars)
(unaudited)
___________________________________________________________________________________________________
For six months ended June 30,
2008 2007
___________________________________________________________________________________________________
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net loss for the period $(1,208,863) (688,482)
Adjustments to reconcile net loss to net cash
from operating activities
Depreciation & amortization 13,527 9,673
Stock based compensation 151,727 121,464
CHANGES IN WORKING CAPITAL ASSETS AND LIABILITIES
Decrease (increase) in accounts receivable 140,688 (4,372)
Decrease (increase) in government grant receivable - (46,663)
Decrease (increase) in inventory 30,566 (59,587)
Decrease (increase) in prepaid expenses (102,334) (27,897)
(Decrease) increase in accounts payable (68,691) (122,607)
(Decrease) increase in accrued liabilities (47,312)
(Decrease) Increase in due to related parties 6,933 (89,354)
___________________________________________________________________________________________________
Net cash flows used in operating activities (1,083,759) (907,825)
___________________________________________________________________________________________________
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Purchase of property and equipment (162,053) (20,639)
Acquisition of trademarks & license (2,343) (7,508)
___________________________________________________________________________________________________
Net cash flows used in investing activities (164,396) (28,147)
___________________________________________________________________________________________________
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Issuance of capital stock for cash 418,278 490,833
Related parties advances 225,000 180,000
Long term debt (432) 2,629
Short term debt (478) -
Capital lease obligation (584) (3,052)
___________________________________________________________________________________________________
Net cash flows from financing activities 641,784 670,410
___________________________________________________________________________________________________
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (37,121) 49,445
___________________________________________________________________________________________________
INCREASE (DECREASE) IN CASH (643,492) (216,117)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 660,407 414,233
___________________________________________________________________________________________________
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,915 $ 198,116
===================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
AND NON-CASH FINANCING AND INVESTING ACTIVITIES:
Cash paid for interest $ 83,717 $ 30,549
Cash paid for income taxes $ - $ -
Capital stock issued in settlement of accounts payable $ 9,600 $ -
Capital stock issued in settlement of related party debt $ - $ -
Capital stock issued as compensation $ $ -
The accompanying notes are an intergral part of these consolidated financial statements.
7
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
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,
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 $7,295,964, 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.
Subsequent to the quarter the Company raised additional capital.
(Refer to Note 20)
COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
to the current year's presentation.
8
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
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
9
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
accounts are established through the evaluation of aged
accounts receivable and prior collection experience to
estimate the ultimate realization of these receivables.
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
10
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
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
11
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
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.
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 June 30, 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
12
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
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.
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
June 30, 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.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy
of Generally Accepted Accounting Principles ("SFAS
13
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
No.162"). SFAS No. 162 is intended to improve financial
reporting by identifying a consistent framework, or
hierarchy, for selecting accounting principles to be used
in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting
principles (GAAP) for nongovernmental entities. SFAS No.
162 is effective 60 days following the SEC's approval of
the Public Company Accounting Oversight Board Auditing
amendments to AU Section 411, THE MEANING OF Present
Fairly in Conformity with Generally Accepted Accounting
Principles.
In May 2008, the Financial Accounting Standards Board
("FASB") issued SFAS No. 163, "ACCOUNTING FOR FINANCIAL
GUARANTEE INSURANCE CONTRACTS - AN INTERPRETATION OF FASB
STATEMENT NO. 60". SFAS 163 requires that an insurance
enterprise recognize a claim liability prior to an event
of default when there is evidence that credit
deterioration has occurred in an insured financial
obligation. It also clarifies how Statement 60 applies to
financial guarantee insurance contracts, including the
recognition and measurement to be used to account for
premium revenue and claim liabilities, and requires
expanded disclosures about financial guarantee insurance
contracts. It is effective for financial statements issued
for fiscal years beginning after December 15, 2008, except
for some disclosures about the insurance enterprise's
risk-management activities. SFAS 163 requires that
disclosures about the risk-management activities of the
insurance enterprise be effective for the first period
beginning after issuance. Except for those disclosures,
earlier application is not permitted. The adoption of this
statement is not expected to have a material effect on the
Company's financial statements.
r) Research and Development
Research and development costs are charged to operations
as incurred. Development costs of $266,951 ($63,949 -
2007) for the six month period ended June 30, 2008 were
attributable to Crailar Fiber Technologies development of
its bast fiber technology and research and development
costs associated with apparel are $15,970 ($20,558 -
2007).
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.
14
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
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.
4. NOTE PAYABLE
Rana Corp. Loan
On July 21, 2007, a previous 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 June 30, 2008 is an
accrual for interest of $18,057. The July 22, 2008 payment of
$100,000 was made on July 31, 2008.
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.
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)
15
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
6. CAPITAL LEASE OBLIGATIONS
The Company has capital leases for equipment with payments totaling
$1,077, including interest, remaining due on these leases which will
expire during 2008. The principal amount outstanding on these leases
is $1,017.
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 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. On June 13, 2008 the Company made of draw of $7,000 on the
secured loan agreement and also received an additional $35,000 loan.
An accrual for interest of $40,726 has been included in accrued
liabilities as at June 30, 2008. The additional loan of $35,000 and
outstanding interest of $40,726 were paid back to the director on July
22, 2008.
16
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
8. PROPERTY AND EQUIPMENT
Accumulated Net Book Value Net Book Value
Cost Depreciation June 30, 2008 December 31, 2007
Computer equipment $ 20,309 $ 9,139 $ 11,170 $ 3,935
Equipment 9,602 4,324 5,278 7,001
Furniture and fixtures 33,252 8,361 24,891 27,071
Leasehold improvements 21,589 11,778 9,811 11,873
Computer Software 6,028 5,302 726 -
Computer equipment under capital
lease 51,938 50,940 998 1,583
Craik facility equipment 147,168 - 147,168 7,793
Craik facility building 33,972 - 33,972 19,484
$323,858 $ 89,844 $234,014 $78,740
17
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
9. INTANGIBLE ASSETS
The aggregate amortization expense for the six month period ended
June 30, 2008 was $6,779 (2007 - $4,489). 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 14(b)).
Accumulated Net Book Value Net Book Value
Cost amortization June 30, 2008 December 31, 2007
Trademarks $ 71,356 29,983 $ 41,372 $ 43,863
Licence Fee 24,517 4,605 19,912 21,857
$ 95,873 $ 34,589 $ 61,284 $ 65,720
10. PEMD PAYABLE
The Company has been advanced funds in the amount of $31,761 (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 $819,784 (CDN $835,934). The Company owes
approximately $21,251 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 June 30, 2008, the Company issued 882,815
shares of common stock as follows:
a) In April and May 2008, 290,000 shares pursuant to the
exercise of employee options at $0.20 per share for
proceeds of $58,000.
b) In May 2008, 9,600 bonus shares for work performed, the
shares had a fair value of $9,600.
c) In February 2008, 97,500 shares pursuant to the exercise
of employee options at $0.20 per share for proceeds of $
19,500.
18
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
d) In February 2008, 25,000 shares pursuant to the exercise
of employee options at $0.31 per share for proceeds of $
7,750.
e) In February 2008, 10,000 shares pursuant to the exercise
of employee options at $0.50 per share for proceeds of $
5,000.
e) In February 2008, 40,000 shares pursuant to the exercise
of employee options at $0.37 per share for proceeds of $
14,800.
f) In March 2008, 25,000 shares pursuant to the exercise of
employee options at $0.81 per share for proceeds of $
20,250.
g) In March 2008, 285,715 shares pursuant to the exercise of
warrants at $0.75 per share for proceeds of $ 214,286.
h) 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
19
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
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%.
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 cost 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 June 30, 2008 are summarized
as follows:
Weighted Average
Remaining
Range of Exercise Prices Number of Shares Contractual Life (yr)
_______________________________________________________________________
$0.70 - $1.00 2,059,527 0.72
$0.75 - $1.00 485,000 0.84
_______________________________________________________________________
Total 2,544,527 0.74
=======================================================================
20
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
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
Warrants exercised during the year (2,300,000) $ 0.50
_____________________________________________________________________________
Warrants outstanding at December 31, 2007 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 June 30, 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 six month period ended
June 30, 2008 and the year ended December 31, 2007 was determined
using the BSM option pricing model with the following assumptions:
Period ended Year ended
June 30, 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
21
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
During the six month period ended June 30, 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 six month period ended June 30, 2008, 392,148 options
vested and an expense of $170,485 has been recorded with respect to
those options. $139,760 was included in Salaries & Benefits expense
and $30,725 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 six month period ended June 30, 2008, 50,000 options
vested under the Company's 2004 Plan. Accordingly, an expense of
$9,934 was included in Consulting & Contract Labour expense.
22
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
A SUMMARY OF THE COMPANY'S STOCK OPTIONS ARE AS FOLLOWS:
_____________________________________________________________________
Weighted-
Average
Exercise
Shares 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 (487,500) 0.26
Options granted during the period 611,500 1.15
Options cancelled during the year (8,496) 1.05
_____________________________________________________________________
Options outstanding, June 30, 2008 3,975,504 $0.65
=====================================================================
______________________________________________________________________________________
June 30, 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 1,817,500 1.27 $0.37 1,817,500 $0.37
$0.51 - $1.00 2,158,004 2.26 $0.88 499,637 $0.82
__________________________________________________________ ________________________
3,975,504 1.81 $0.64 2,317,137 $0.47
========================================================== ========================
23
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
13. COMMITMENTS AND CONTINGENCIES
a) ANNUAL LEASES
The Company is committed to current annual lease payments
totaling $257,047 for premises under lease. The lease
expires in 2011. Approximate minimum lease payments over the
remainder of the leases are as follows:
$
2008 54,837
2009 74,398
2010 68,971
2011 58,841
_____________________________________
Total 257,047
=====================================
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
$276,552 (CDN $282,000) in cash. In addition to cash
payments, the Company contributed research and development
valued at approximately $542,807 (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, $358,929 ($366,000CDN).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.
24
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
TECHNOLOGY LICENSE AGREEMENT
On November 1, 2006, the Company entered into a technology
license agreement with the NRC. The license agreement
provides the Company a worldwide license to use and
sublicense the NRC technology called CRAILAR(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 $24,517 (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 $24,517 (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 $24,517 (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 is paid $12,500 a month for the
period of one year and 1,000,000 options that will not vest
until certain performance conditions are met. The contract
can be cancelled by either party with 30 days notice. As at
June 30, 2008, none of the options had vested.
25
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
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.
15. RELATED PARTY TRANSACTIONS
During the six month period ended June 30, 2008, $248,870 (2007 -
$241,248) was incurred as remuneration to officers and directors of
the Company. Of this amount, $158,870 (2007 - $62,758) is recorded as
salaries and employee benefits expense and $90,000 (2007 - $178,490)
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 six month period ending June 30, 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%.
26
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
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.
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 six month period ended June 30, 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 six month period ended June 30, 2007, four suppliers
accounted for 100% of the Company's purchases of inventory. One
supplier is located in China and supplied 75% of the Company's
purchase orders, the other three suppliers are located in North
America and supplied approximately 25%.
For the six month period ended June 30, 2008. One customer accounted
for 48% of the Company's sales. The Company is confident that this
relationship will continue until year end.
27
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
17. PROPERTY TRANSFER
On July 3, 2004, the Company received 80 acres of industrial
property in Craik, Saskatchewan for development of a hemp fibre
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. In June
2008, the Company received an extension until October 31, 2008.
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.
28
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
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 SIX MONTH PERIOD ENDED
JUNE 30, 2008
Naturally Advanced Crailar Fiber
Technologies Inc. Technologies Inc. Total
$ $ $
Revenue 1,533,387 - 1,533,387
Operating profit (loss) (780,781) (428,082) (1,208,863)
AS AT JUNE 30, 2008
Total assets 1,438,653 309,600 1,748,253
Intangible Assets 3,584 57,700 61,284
___________________________________________________________________________________
FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 2007
Naturally Advanced Crailar Fiber
Technologies Inc. Technologies Inc. Total
$ $ $
Revenue 1,091,179 - 1,091,179
Operating profit (loss) (614,936) (73,546) (688,482)
AS AT JUNE 30, 2007
Total assets 1,187,267 235,903 1,423,170
Intangible Assets 60,505 60,505
___________________________________________________________________________________
The reconciliation of the segment profit (loss) to net income (loss)
as reported in the financial statements is as follows:
______________________________________________________________
For the Six Month Period Ended
June 30, 2008 2007
$ $
______________________________________________________________
Segment (Loss) (1,208,863) (688,482)
Minority Interest - -
Net Income (loss) (1,208,863) (688,482)
______________________________________________________________
29
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2008
(UNAUDITED)
20. SUBSEQUENT EVENTS
a) On July 8, 2008 the Company listed its common shares on the
TSX Venture Exchange (the 'TSX-V'). In connection with the
TSX-V listing, the Company closed a brokered and non brokered
private placement on July 3, 2008 for gross proceeds of just
under $1.98 million. Pursuant to the private placements, the
Company issued a total of 1,472,426 units at $1.35 per unit,
representing just over 5% of the Company's common shares
outstanding. Each unit ('Unit') is comprised of one common
share (a 'Share') and one half of one Share purchase warrant
(a 'Warrant'). Each whole Warrant will entitle the holder to
purchase one Share at a price of $1.95 until July 3, 2010.
1,117,426 Units were placed under the brokered portion of the
deal, while 355,000 Units were placed under the non-brokered
portion. Net proceeds to the Company from this private
placement amount to $1,834,656. In connection with the
brokered private placement, the Company paid the Broker a
cash commission, as well as granted 111,742 agent's options.
Each agent's option is exercisable for a Unit at a price of
$1.35, consisting of one Share and one half of one Warrant.
Each full Warrant entitles the agent Warrant holder to
purchase an additional Share at $1.35 until July 3, 2010.
All securities issued in connection with the private
placements are subject to a four month hold period in Canada.
The funds from the private placements will be used to fund
CRAILAR(R) development, repay debt, and general and
administrative expenses.
30
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.
Crailar Fiber Technologies Inc. ("CFT") is developing proprietary technology for
the engineering, processing and production of textile fibers, composite
materials, cellulose pulp, and their resulting byproducts. Developed in
collaboration with the National Research Council of Canada and the Alberta
Research Council, the CRAILAR(R) biomass technology platform offers
cost-effective and environmentally friendly processing and production of
industrial Hemp for global textile, composite material, pulp and paper and
energy markets. CRAILAR(R) has the global exclusive rights to any new
intellectual property developed under these collaborations. The technology
developed is expected to displace some cotton and organic cotton use in
31
textiles, some polyester and nylon use in performance textiles, some fiberglass
use in composite materials, some wood pulp use in pulp and paper applications
and some 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.
CRAILAR FIBER TECHNOLOGIES is organized into four divisions to best develop,
test and commercialize its various technology platforms. These divisions
include:
1. CRAILAR(R) ADVANCED MATERIALS: Focused on applications for our eco-friendly
cellulosic pulp, the Advanced Materials division develops technologies for
the processing of these cellulose-based fibers in Pulp and Paper,
Bioplastics and Performance Apparel industries.
2. CRAILAR(R) ORGANIC FIBERS: The Organic Fibers division is responsible for
CRAILAR(R) applications in the apparel and textile industries. Using the
core fiber from the hempseed crop, CRAILAR Organic Fibers can be spin into
a traditional yarn that rivals the very best long line cotton.
3. CRAILAR(R) BIO-FUELS: This division is developing third generation biofuels
that can be made from hempseed as well as cellulosic sources like residual
fibers.
4. CRAILAR(R) AGRICULTURE: The Agriculture division is concerned with
developing the most optimal plants for each type of CRAILAR(R) application.
HTNATURALS APPAREL CORP.
We, through our wholly owned HTnaturals Apparel Corp. ("HT") division, are also
a leading provider of environmentally sustainable Hemp, bamboo, organic cotton
and soy blended apparel. Founded in 1998 in response to the growing demand for
environmentally friendly, socially responsible clothing, we adhere to a "triple
bottom line" philosophy, respecting the human rights of employees, the
environmental impact of our operations and fiscal responsibility to its
shareholders.
HT 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 HT's customer base,
while an increasing global awareness for environmentally friendly clothing is
bringing new prospects to HT's target markets. We expect continued robust growth
at HT, providing a strong financial foundation for the continuation of the
development of the CRAILAR(R) technology platform.
TSX VENTURE EXCHANGE
On April 9, 2008, our Board of Directors made a public announcement and press
release disclosing that we had received final approval to list our shares of
common stock on the TSX Venture Exchange (the "TSX-V"). Our shares of common
stock commenced trading under the symbol "NAT" on the TSX-V at the opening of
market on Tuesday, July 8, 2008.
32
Q2 2008 RESULTS OF OPERATIONS
Comparison of Q2 2008 financial results with Q2 2007 financial results.
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30,
_______________________________________________________ ______________________________________
2008 2007 % Change 2008 2007 %Change
Sales $579,728 $475,118 22% $1,533,387 $1,091,179 41%
Gross Profit $211,277 $123,753 70% $ 562,307 $ 359,078 57%
Net Income ($658,926 ($554,385) 19% ($1,208,863) $ (688,482) 76%
Earnings ($0.02) ($0.02) - ($0.04) ($0.03)
(Loss)/share
SIX-MONTH PERIOD ENDED JUNE 30, 2008 COMPARED WITH SIX-MONTH PERIOD ENDED JUNE
30, 2007
REVENUE AND GROSS MARGINS
Our net operational losses during the six-month period ended June 30, 2008 was
($1,208,863) compared to ($688,482) during the six-month period ended June 30,
2007 (an increase of $520,381, an overall increase of 76%). 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
six-month period ended June 30, 2008, we generated $1,533,387 in gross revenues
compared to $1,091,179 in gross revenues for the six-month period ended June 30,
2007 (an increase of $442,208, an overall increase of 41%). 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 six-month period ended June 30, 2008 to
$971,080 from $732,101 for the same period in 2007 resulting in net sales or a
gross margin of $562,307 compared to $359,078 for the same period in 2007. Cost
of goods sold as a percentage of sales was 63% for the six-month period ended
June 30, 2008 compared to 67% for the six-month period ended June 30, 2007. This
change was attributed to streamlined inventory procedures, increased product
margins and internal cost controls. Our gross profit as a percentage of sales
rose from 32% for the six-month period ended June 30, 2007 to 36% for the
six-month period ended June 30, 2008.
OPERATING EXPENSES
During the six-month period ended June 30, 2008, we recorded operating expenses
of $1,771,170 compared to operating expenses of $1,047,560 during the six-month
period ended June 30, 2007 (an increase of $723,610). When measured as a
33
percentage of sales, operating expenses increased to 115% in the six-month
period ended June 30, 2008 from 96% in the six-month period ended June 30, 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) $116,805 (2007: $142,742) in advertising
and promotion; (ii) $13,527 (2007: $9,673) in amortization and depreciation;
(iii) $190,368 (2007: $261,551) in consulting and contract labor; (iv) $230,636
(2007: $147,279) in general & administrative; (v) $66,672 (2007: $48,302) in
interest; (vi) $101,658 (2007: $53,500) in legal and accounting; (vii) $282,921
(2007: ($84,507)) in research & development; (viii) $768,583 (2007: $300,006) in
salaries & benefits. Our net loss from operations during the six-month period
ended June 30, 2008 was ($1,208,863) or ($0.04) per share compared to a net loss
of ($688,482) or ($0.03) per share for the six-month period ended June 30, 2007.
For the six-month period ended June 30, 2008, the weighted average number of
shares outstanding was 28,373,297 compared to 24,457,647 at June 30, 2007.
Advertising and promotion expenses decreased to $116,805 for the six-month
period ended June 30, 2008 from $142,742 compared to the same period in 2007 due
to the streamlined marketing operations and the Company no longer uses an
outside marketing firm.
Consulting and contract labor expenses decreased to $190,368 for the six-month
period ended June 30, 2008 from $261,551 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 $230,636 for the six-month
period ended June 30, 2008 compared to $147,279 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 six-month period ended June 30, 2008 were $66,672
compared with $48,302 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 $282,921 for the six-month period ended June
30, 2008 compared to $84,507 for the same six-month period in 2007. This
increase is attributed to the increase in testing associated in the development
of the CRAILAR(R) technology platform as well as a Government Grant received in
2007 ($46,663) which was offset against the expense that year.
Salaries and benefits expenses increased to $768,583 for the six-month period
ended June 30, 2008 compared with $300,006 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 six-month period ended
June 30, 2008, an aggregate of $248,870 was incurred as remuneration to our
officers and directors. Of this amount, $158,870 was recorded as salaries and
employee benefits expense and $90,000 was recorded as contract labor. During the
34
six-month period ended June 30, 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 $358,903 and are being expensed as they vest. For the six-month period
ended June 30, 2008, 392,148 stock options vested and accordingly an expense of
$170,485 has been recorded, of which $139,760 was recorded under salaries and
benefits and $30,725 was recorded under consulting and contract labor expense.
Legal and accounting increased to $101,658 for the six-month period ended June
30, 2008 compared with $53,500 for the same period in 2007. This was due to
increased regulatory costs.
NET INCOME
The net loss for the six-month period ended June 30, 2008 was ($1,208,863)
compared to a loss of ($688,482) for the same period in 2007, which is an
increase in net loss of ($520,381). The increase in loss was primarily because
of the increase in operating expenses, which were related to our growth and
development objectives. For the six-month period ended June 30, 2008, the
weighted average number of shares outstanding was 28,373,297 compared to
24,457,647 at June 30, 2007.
THREE-MONTH PERIOD ENDED JUNE 30, 2008 COMPARED WITH THREE-MONTH PERIOD ENDED
JUNE 30, 2007
REVENUE AND GROSS MARGINS
Our net operational losses during the three-month period ended June 30, 2008 was
($658,926) compared to ($554,385) during the three-month period ended June 30,
2007 (an increase of $104,541, an overall increase of 19%). 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 June 30, 2008, we generated $579,728 in gross revenues
compared to $475,118 in gross revenues for the three-month period ended June 30,
2007 (an increase of $104,610, an overall increase of 22%). 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 June 30, 2008
to $368,451 from $351,365 for the same period in 2007 resulting in net sales or
a gross margin of $211,277 compared to $123,753 for the same period in 2007.
Cost of goods sold as a percentage of sales was 63% for the three-month period
ended June 30, 2008 compared to 73% for the three-month period ended June 30,
2007. This change was attributed to streamlined inventory procedures, increased
product margins and internal cost controls. Our gross profit as a percentage of
sales rose from 26% for the three-month period ended June 30, 2007 to 36% for
the three-month period ended June 30, 2008.
35
OPERATING EXPENSES
During the three-month period ended June 30, 2008, we recorded operating
expenses of $870,203 compared to operating expenses of $678,138 during the
three-month period ended June 30, 2007 (an increase of $192,065). When measured
as a percentage of sales, operating expenses increased to 150% in the
three-month period ended June 30, 2008 from 143% in the three-month period ended
June 30, 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) $55,314 (2007: $75,279) in advertising and
promotion; (ii) $6,966 (2007: $5,093) in amortization and depreciation; (iii)
$92,286 (2007: $159,516) in consulting and contract labor; (iv) $119,290 (2007:
$80,811) in general & administrative; (v) $33,814 (2007: $22,264) in interest;
(vi) $61,049 (2007: $29,853) in legal and accounting; (vii) $121,323 (2007:
($122,958) in research & development; and (viii) $380,161 (2007: $182,364) in
salaries & benefits. Our net loss from operations during the three-month period
ended June 30, 2008 was ($658,926) or ($0.02) per share compared to a net loss
of ($554,385) or ($0.02) per share for the three-month period ended June 30,
2007. For the three-month period ended June 30, 2008, the weighted average
number of shares outstanding was 28,689,411 compared to 24,750,854 at June 30,
2007.
Advertising and promotion expenses decreased to $55,314 for the three-month
period ended June 30, 2008 from $75,279 compared to the same period in 2007 due
to the streamlined marketing operations and the Company no longer uses an
outside marketing firm.
Consulting and contract labor expenses decreased to $92,286 for the three-month
period ended June 30, 2008 from $159,516 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 $119,290 for the three-month
period ended June 30, 2008 compared to $80,811 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 June 30, 2008 were $33,814
compared with $22,264 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 $121,323 for the three-month period ended
June 30, 2008 compared to $122,958 for the same three-month period in 2007.
Salaries and benefits expenses increased to $380,161 for the three-month period
ended June 30, 2008 compared with $182,364 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.
36
Legal and accounting increased to $61,049 for the three-month period ended June
30, 2008 compared with $29,853 for the same period in 2007. This was due to
increased regulatory costs.
NET INCOME
The net loss for the three-month period ended June 30, 2008 was ($658,926)
compared to a loss of ($554,385) for the same period in 2007, which is an
increase in net loss of ($104,541). The increase in loss was primarily because
of the increase in operating expenses, which were related to our growth and
development objectives. For the three-month period ended June 30, 2008, the
weighted average number of shares outstanding was 28,689,411 compared to
24,750,854 at June 30, 2007.
LIQUIDITY AND CAPITAL RESOURCES
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2008
As at June 30, 2008, our current assets were $1,452,955 and our current
liabilities were $1,438,586, which resulted in working capital surplus of
$14,369. As at June 30, 2008, total assets were $1,748,253 consisting of: (i)
$16,915 in cash and cash equivalents; (ii) $369,952 in accounts receivable;
(iii) $812,965 in inventory; (iv) $253,123 in prepaid expenses and other; (v)
$61,284 in intangible assets; and (vi) $234,014 in property and equipment.
As at June 30, 2008, liabilities were comprised of: (i) $477,511 in accounts
payable ; (ii) $63,571 in accrued liabilities; (iii) $775,255 in amounts due
related parties; (iv) $998 in capital lease obligation; (v) $300,000 in notes
payable; and (vi) $31,761 in short and long term debt.
Stockholders' Equity (Deficit) decreased from $765,536 at December 31, 2007 to
$99,157 at the six-month period ended June 30, 2008.
As of June 30, 2008, we had cash of $16,915 compared with $660,407 at December
31, 2007.
The cash flows used in operations for the six-month period ended June 30, 2008
was ($1,083,759) compared with ($907,825) for the same period in 2007. Cash
flows used in operations for the six-month period ended June 30, 2008 consisted
primarily of a net loss of ($1,208,863), with changes in working capital assets
and liabilities consisting of a decrease in accounts receivable of $140,688, a
decrease in inventory of $30,566, an increase in prepaid expenses of ($102,334),
an increase in accounts payable of ($68,691), a decrease in accrued liabilities
of ($47,312), and an increase in amounts due to related parties of $6,933.
Adjustments to cash flows used in operations for the six-month period ended June
30, 2008 consisted of $13,527 in depreciation and amortization and $151,727 in
stock based compensation.
The cash flows used in investing activities for the six-month period ended June
30, 2008 was ($164,396) compared to ($28,147) for the same period in 2007. Cash
flows used in investing activities consisted of a purchase of property and
equipment totaling ($162,053) and the acquisition of trademarks & licenses of
($2,343).
37
Cash flows provided from financing activities was $641,784 compared to $670,410
during the same period in 2007 as we issued $418,278 of capital stock for cash
(2007 - $490,833) and received $225,000 in advances from related parties (2007:
$180,000). Cash flows provided from financing activities was decreased by ($432)
in long term debt, ($478) in short term debt, and ($584) in capital lease
obligation.
The effect of exchange rates on cash resulted in an unrealized loss of ($37,121)
for the six-month period ended June 30, 2008 compared with a $49,445 unrealized
gain 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
CRAILAR(R)
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
energy 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. Management believes that an ongoing relationship in the form of
joint ventures with established market leaders in both the Organic Fibers
division and the Advanced Materials division would be the optimum
commercialization strategy. Currently, testing and further development of fiber
is taking place in conjunction with leading global brands. As of the date of
this document, no agreements have been signed with any potential partner.
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) ORGANIC FIBERS 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, and first two quarters of 2008, we began
scaling three sets of CRAILAR(R) processing equipment at a pilot plant facility
in Montreal. The first set became operational during the second quarter of 2008,
and management anticipates an initial processing capacity of approximately 1,000
pounds of fiber per batch. Once this 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) ORGANIC FIBERS garments.
38
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 Q3 of 2008. We expect these trials to produce enough
extruded fiber to produce sample CRAILAR(R) ADVANCED MATERIALS apparel.
CRAILAR(R) ADVANCED MATERIALS 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.
Construction is expected to start in 2008 with the facility operational in 2009.
The facility will have a nameplate production capacity of 52 million kilograms
(114 million pounds) of feedstock fiber per year for ADVANCED MATERIALS
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 2008 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 Q2 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.
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,
39
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 payments due
semi-annually. The loan is now due as follows: (i) $100,000 on July 22, 2008
(which amount was paid on July 31, 2008); and (ii) $200,000 on July 22, 2009.
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 obligation for us in fiscal 2008 are loans made by a
director to facilitate the production of new apparel designs. As of June 30,
2008, $700,000 in principal was outstanding. We also received an additional
$35,000 loan from the same director. An accrual for interest of $40,726 had been
included in accrued liabilities as at June 30, 2008. The additional loan of
$35,000 and outstanding interest of $40,726 were paid back to the director on
July 22, 2008. 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).. In addition to cash payments, we are
required to contribute $2,300,000 Canadian Dollars in research and development
over the course of the Collaboration Agreement.
40
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 potentially medical 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 under the Technology
Development Agreement were paid to ARC.
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 on April 8, 2008.
41
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 six-month period
ended June 30, 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 six-month period ended June 30, 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
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.
42
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 June 30, 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
six-month period ended June 30, 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
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.
43
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 Superior 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
On April 9, 2008, our Board of Directors made a public announcement and press
release disclosing that we had received final approval to list our shares of
common stock on the TSX Venture Exchange (the "TSX-V"). Our shares of common
stock commenced trading under the symbol "NAT" on the TSX-V at the opening of
market on Tuesday, July 8, 2008.
Effective on July 3, 2008 and in connection with the TSX-V listing, we closed a
brokered and non-brokered private placement offering for gross proceeds of
approximately $1,980,000 (collectively, the "Private Placement Offering") with
certain non-United States residents (collectively, the "Investors"). In
accordance with the terms and provisions of the Private Placement Offering, we
issued to the Investors an aggregate of 1,472,426 units at a per unit price of
$1.35 (the "Unit") in our capital. Each Unit was comprised of one share of
restricted common stock and one-half of one share purchase warrant (the
"Warrant"). Each whole Warrant is exercisable at $1.95 per share until July 3,
2010.
The Units under the Private Placement were sold to approximately 41 non-United
States Investors in reliance on Regulation S promulgated under the United States
Securities Act of 1933, as amended (the "Securities Act"). The Private Placement
Offering has not been registered under the Securities Act or under any state
securities laws and may not be offered or sold without registration with the
United States Securities and Exchange Commission or an applicable exemption from
the registration requirements. The per share price of the Units was arbitrarily
determined by our Board of Directors based upon analysis of certain factors
including, but not limited to, the listing of our shares on the TSX-V, our stage
of development, industry status, investment climate, perceived investment risks,
our assets and net estimated worth. The Investors executed subscription
44
agreements and acknowledged that the securities to be issued have not been
registered under the Securities Act, that they understood the economic risk of
an investment in the securities, and that they had the opportunity to ask
questions of and receive answers from our management concerning any and all
matters related to acquisition of the securities.
In connection with the brokered Private Placement Offering pursuant to which
Canaccord Capital Corporation ("Canaccord") placed 1,117,426 Units (with the
remaining 355,000 Units placed under the non-brokered portion of the Private
Placement Offering), we paid Canaccord a cash commission as well as the grant of
109,942 agent's options to Canaccord and 1,800 agent's options to Bolder
Investment Partners Ltd. Each agent's option is exercisable for a Unit at a
price of $1.35 consisting of one share of restricted common stock and one-half
of one Warrant. Each full Warrant entitled the agent to purchase an additional
share of common stock at $1.35 until July 3, 2010.
During the six-month period ended June 30, 2008 and up to the date of this
Quarterly Report, we have also issued an additional 882,815 shares of our common
stock pursuant to contractual debts or financings as follows.
o During the six-month period ended June 30, 2008, we issued an
aggregate of 290,000 shares of our common stock pursuant to the
exercise of stock options by our employees at $0.20 per share for
total proceeds of $58,000.
o During the six-month period ended June 30, 2008, we issued an
aggregate of 9,600 shares of our common stock as bonus shares for
services performed.
o During the six-month period ended June 30, 2008, we issued an
additional 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 six-month period ended June 30, 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 six-month period ended June 30, 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.
o During the six-month period ended June 30, 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 six-month period ended June 30, 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 six-month period ended June 30, 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 six-month period ended June 30, 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 $50,000.
45
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On July 10, 2008, an annual meeting of our shareholders (the "Meeting") was held
for the following purposes: (i) to table and consider our audited financial
statements for the fiscal year ended December 31, 2007, the report of the
auditor thereon and the related management discussion and analysis; (ii) to
approve and ratify the appointment of Dale Matheson Carr-Hilton LaBonte,
Chartered Accountants, as our independent public accountant and auditor; (iii)
to set the number of directors at seven; (iv) to elect the following nominees to
the Board of Directors: Kenneth C. Barker, Jason Finnis, Larisa Harrison, Robert
Edmunds, Guy Prevost, Peter Moore and Miljenko Horvat; and (v) to approve our
Stock Option Plan. We distributed an Information Circular dated June 5, 2008 and
supporting documentation, including a proxy, to our shareholders.
Only shareholders of record at the close of business on June 5, 2008 (the
"Record Date") were entitled to notice and or to vote the shares of common stock
held by them on such date at the Meeting or any and all adjournments thereof. As
of the Record Date, an aggregate 28,771,404 shares of common stock were
outstanding. There was no other class of voting securities outstanding at that
date. Each share of common stock held by a shareholder entitled such shareholder
to one vote on each matter that was voted at the Meeting. The presence, in
person or by proxy, of the holders of a majority of the outstanding share of
common stock was necessary to constitute a quorum at the Meeting. Assuming that
a quorum was present, the affirmative vote of the holders of a majority of the
shares of common stock outstanding was required to approve the matters presented
for approval at the Meeting.
On July 10, 2008, the Meeting of shareholders was held with the resulting votes
cast either in person or proxy as below:
1. To table and consider and approve the audited financial statements for
the fiscal year ended December 31, 2007, the report of the auditor
thereon and the related management discussion and analysis.
For 19,160,785
Against 0
Abstain 0
Broker non-vote 0
46
2. Approval and ratification of the appointment of Dale Matheson
Carr-Hilton LaBonte, Chartered Accountants, as our independent public
accountants.
For 19,160,785
Against 0
Abstain 0
Broker non-vote 0
3. To set the number of directors at seven.
For 19,161,385
Against 0
Abstain 0
Broker non-vote 0
4. Approval of the election of the members of our Board of Directors.
Kenneth C. Barker, Jason Finnis, Larisa Harrison, Robert Edmunds, Guy
Prevost, Peter Moore and Miljenko Horvat were elected members to our
Board of Directors to hold office until our next annual general
meeting or until their successors are elected or appointed subject to
the provisions of our constating documents.
NUMBER OF SHARES
_______________________
FOR WITHHELD
__________ ________
Kenneth Barker 19,161,385 0
Jason Finnis 19,161,385 0
Larisa Harrison 19,156,385 0
Robert Edmunds 19,161,385 0
Guy Prevost 19,161,385 0
Peter Moore 19,123,985 0
Miljenko Horvat 19,156,385 0
47
5. Approval and ratification of the Stock Option Plan.
For 15,688,578
Against 0
Abstain 0
Broker non-vote 0
ITEM 5. OTHER INFORMATION.
ANNUAL MEETING OF BOARD OF DIRECTORS
On July 10, 2008, an annual meeting of our board of directors (the "Board of
Directors' Meeting") was held for the following purposes: (i) to ratify the
appointment of directors of the Board of Directors; (ii) to ratify the
appointment of officers; (iii) to ratify the appointment of auditors; (iv) to
ratify the appointment of members to the Audit Committee; (v) to ratify the
appointment of members to the Compensation Committee; and (vi) to approve the
acquisition of the land in Craik, Saslatchewan for $35,000.
Pursuant to unanimous consent, the following individuals were appointed as
officers of the Company to serve until their respective successor has been duly
qualified and appointed:
OFFICER POSITION
Kenneth Barker Chief Executive Officer
Miljenko Horvat Chairman of the Board of Directors
Jason Finnis President and Chief Operating Officer
Larisa Harrison Chief Administration Officer, Secretary
and Treasurer
Guy Prevost Chief Financial Officer
Pursuant to unanimous consent, the following individuals were appointed as
members of the Audit Committee and as members of the Compensation Committee: (i)
Larisa Harrison, Robert Edmunds, and Miljenko Horvat.
48
ADOPTION OF AMENDED INSIDER TRADING POLICY AND CODE OF ETHICS
On April 12, 2007,our Board of Directors, pursuant to written consent
resolutions unanimously approved and adopted the amended insider trading policy
(the "Insider Trading Policy"), and ratified the adoption of the code of ethics
as prepared effective August 18, 2004 (the "Code of Ethics"). The Amended
Insider Trading Policy and the Code of Ethics can be located on our website at
WWW.NATURALLYADVANCED.COM. We will also provide, without charge and upon
request, a copy of the Code of Ethics and/or Amended Insider Trading Policy.
Request for a copy of the Code of Ethics or Amended Insider Trading Policy
should be mailed to Naturally Advanced Technologies, Inc., 1307 Venables Street,
Vancouver, British Columbia, Canada V5L 2G1, Attn: Ms. Larisa Harrison, Chief
Administration Officer.
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.
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: August 13, 2008 By: /s/ KENNETH C. BARKER
___________________________
Kenneth C. Barker
Chief Executive Officer
Date: August 13, 2008 By: /s/ GUY PREVOST
___________________________
Guy Prevost
Chief Financial Officer
49