U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Mark One
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
COMMISSION FILE NO. 0-50367
NATURALLY ADVANCED TECHNOLOGIES INC.
____________________________________
(Exact name of registrant in its charter)
BRITISH COLUMBIA 98-0359306
________________ __________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1008 HOMER STREET, SUITE 402, BRITISH COLUMBIA, CANADA V6B 2X1
______________________________________________________________
(Address of principal executive offices)
(604) 683-8582
______________
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which
registered:
NONE N/A
____ ___
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001
____________________
(Title of Class)
Indicate by checkmark if registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. [ ] Yes [X] No
Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (ii) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if smaller reporting company)
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter. $34,389,086.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding as of March 25, 2009
Common Stock, no par value 31,273,547
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NATURALLY ADVANCED TECHNOLOGIES, INC.
FORM 10-K
INDEX
Item 1. Business 4
Item 1A. Risk Factors 18
Item 1B Unresolved Staff Comments 25
Item 2 Properties 25
Item 3. Legal Proceedings 26
Item 4 Submission of Matters to a Vote of Security Holders 26
Item 5 Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 27
Item 6 Selected Financial Data 33
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 33
Item 7A Quantitative and Qualitative Disclosures About Market
Risks 42
Item 8. Financial Statements and Supplementary Data 42
Item 9 Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 73
Item 9A Controls and Procedures 73
Item 9B Other Information 75
Item 10 Directors, Executive Officers and Corporate Governance 76
Item 11. Executive Compensation 80
Item 12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 85
Item 13 Certain Relationships and Related Transactions and
Director Independence 87
Item 14 Principal Accounting Fees and Services 88
Item 15 Exhibits and Financial Statement Schedules 89
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Statements made in this Form 10-K that are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
Section 27A of the Securities Act of 1933 (the "Act") and Section 21E of the
Securities Exchange Act of 1934. These statements often can be identified by the
use of terms such as "may," "will," "expect," "believe," "anticipate,"
"estimate," "approximate" or "continue," or the negative thereof. We intend that
such forward-looking statements be subject to the safe harbors for such
statements. We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. Any
forward-looking statements represent management's best judgment as to what may
occur in the future. However, forward-looking statements are subject to risks,
uncertainties and important factors beyond our control that could cause actual
results and events to differ materially from historical results of operations
and events and those presently anticipated or projected. We disclaim any
obligation subsequently to revise any forward-looking statements to reflect
events or circumstances after the date of such statement or to reflect the
occurrence of anticipated or unanticipated events.
AVAILABLE INFORMATION
Naturally Advanced Technologies Inc. files annual, quarterly, current reports,
proxy statements, and other information with the Securities and Exchange
Commission (the "Commission"). You may read and copy documents referred to in
this Annual Report on Form 10-K that have been filed with the Commission at the
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You
may obtain information on the operation of the Public Reference Room by calling
the Commission at 1-800-SEC-0330. You can also obtain copies of our Commission
filings by going to the Commission's website at http://www.sec.gov
PART I
ITEM 1. BUSINESS
BUSINESS DEVELOPMENT
CORPORATE STRUCTURE AND SUBSIDIARIES
Naturally Advanced Technologies, Inc. was incorporated under the laws of British
Columbia, Canada, on October 6, 1998, under the name "Hemptown Clothing Inc."
The current corporate structure is a single public company, incorporated under
the Business Corporations Act (British Columbia). On February 22, 2006, our
Board of Directors authorized and approved the change in our corporate name to
"Naturally Advanced Technologies, Inc." and the subsequent filing of the
Amendment with the Registrar of Companies for the Province of British Columbia.
This name change to Naturally Advanced Technologies, Inc. became effected March
23, 2006, and our trading symbol for our shares of common stock trading on the
Over-the-Counter Bulletin Board has been changed to "NADVF:BB". Our shares of
common stock commenced trading under the symbol "NAT" on the TSX Venture
Exchange (the "TSX-V") at the opening of market on Tuesday, July 8, 2008.
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Please note that throughout this Annual Report, and unless otherwise noted, the
words "we," "our," "us," the "Company," or "NAT," refer to Naturally Advanced
Technologies, Inc.
CRAILAR FIBER TECHNOLOGIES INC.
Our wholly owned subsidiary CRAILAR Fiber Technologies Inc. ("CRAILAR(R)) was
incorporated on April 5, 2005. It was incorporated for the purpose of developing
Bast Fiber Technology for uses in textiles, cellulose pulp, paper, and
composites.
HTNATURALS APPAREL CORP.
HTnaturals Apparel Corp. ("HTnaturals") was incorporated under the laws of the
Province of British Columbia on December 7, 2007, for the purpose of carrying
out the natural and sustainable apparel portion of our business. We, through our
wholly owned HTnaturals, 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 our shareholders.
0697072 B.C. LTD.
Our wholly-owned subsidiary, 0697072 B.C. Ltd., was incorporated under the laws
of the Province of British Columbia on June 18, 2004, and held the title to real
property located in Craik, Saskatchewan. The Company decided against proceeding
with the intended use of the property and returned all rights to the town of
Craik.
HEMPTOWN USA, INC.
Our wholly-owned subsidiary, Hemptown USA, Inc., was incorporated under the laws
of the State of Nevada on November 22, 2004, for factoring purposes so that
business dealings can be accomplished daily without currency valuations and
fluctuations, as well as to provide an American base inventory control to
customers.
TRADEMARKS AND DOMAIN NAME RIGHTS
We have obtained trademark protection for the name "CRAILAR" within Canada and
the United States as well as relevant worldwide markets. We also own the web
sites www.naturallyadvanced.com, www.crailar.com, and www.htnaturals.com.
TRANSFER AGENT
Our transfer agent is Computershare Investor Services Inc., 510 Burrard Street,
2nd Floor Vancouver, B.C. V6C 3B9
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RECENT DEVELOPMENTS
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 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.
CURRENT BUSINESS OPERATIONS
We are 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 Annual Report,
we have two operating units: (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 use for sustainable feedstocks
in pulp, paper, apparel, textile and composites; and (ii) our HTnaturals
business to pioneer and brand for true organic and sustainable products to meet
the apparel demands of corporate and individual customers.
CRAILAR(R)
CRAILAR(R)(.)is developing proprietary technology for the engineering,
processing and production of textile fibers, composite materials, cellulose
pulp, and 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 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(R)(.) 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. Our dissolving pulp, developed in collaboration with
ARC, can be used for performance apparel, biodegradable plastics,
consumer paper products and much more. CRAILAR(R) Advanced
Materials fiber begins with hemp harvested at maturity, which is
then de-corticated (a mechanical process that separate the plants
outer fiber from the inner woody core) and cut to a uniform
length. This fiber then enters the CRAILAR(R) pulping process
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which does not require the numerous harsh chemicals or expensive
pressurized equipment used in the traditional kraft pulping
industry. The result of the mild process is a dissolving pulp with
characteristics that are far superior to the best dissolving pulps
on the market today. This eco-pulp can be extruded into a yarn for
the performance apparel industry or used as a basis for
biodegradable plastics and consumer products like paper towels.
Tests conducted on CRAILAR(R) Advanced Materials dissolving pulp
with ARC indicate that our CRAILAR(R) technology produces a very
high grade dissolving pulp with high viscosity, brightness and
alpha cellulose values, and low ash content and acetone
extractives. CRAILAR(R) Advanced Materials dissolving pulp was
determined to also yield higher levels of pulp (55%) than is
currently yielded by today's softwood dissolving pulp (32-36%).
Viscosity gives an indication of the average degree of
polymerization of the cellulose and is a measure of a fluid's
thickness. Brightness is a measure of how much light a sheet of
pulp will reflect, and speaks to the materials' whiteness. The
alpha cellulose figure corresponds to the pulp's purity and the
amount of non-cellulose impurities that exist in the pulp.
Viscosity, brightness and alpha cellulose metrics are more optimal
the higher the number. Other metrics such as ash content and
acetone extractives speak further to the material's purity and
efficiency of processing with lower results be more optimal.
The test results indicated that our CRAILAR(R) Advanced Materials
dissolving pulp can deliver cost-effective, natural fiber-based
solutions for textile, pulp and paper and bioplastics
applications. Management believes that CRAILAR(R)'s superior
performance profile is apparent in the test results and we are
looking forward to bringing CRAILAR(R)'s stream of value added
products to market during fiscal year 2009.
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 spun into a traditional yarn.
CRAILAR(R) Organic Fibers are the building blocks for the first
truly sustainable yarn in the apparel industry. Organic Fibers are
processed through a patent pending enzymatic bath created in
collaboration with the NRC. Prior to the bath, the fibers, of up
to a meter in length, are cut to the desired staple length
rivaling the best long line cotton. These fibers then enter
specialized processing equipment which turns the straw-like fibers
into soft, white fibers similar to organic cotton. The expected
result is a yarn with the same warmth and feel of organic cotton,
but with characteristics, that organic cotton simply can never
achieve. As every step of the process can be certified organic, we
anticipate that CRAILAR(R) Organic Fibers will become the first
truly sustainable yarn in the apparel industry.
Our Proof of Concept facility in Montreal, Canada , has completed
initial spinning trials and moved into fiber processing for bulk
spinning and testing. The trials were conducted with hemp fiber
grown specifically for CRAILAR(R) Organic Fibers, which yielded
positive benefits in fiber applications and performance
characteristics. Using the CRAILAR(R) Technology platform for
processing and production of sustainable bast fibers such as hemp,
our objective is to develop fiber that is more environmentally
sustainable alternative to organic cotton. Spinning trials were
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also conducted in the United States at the NCS University, and
initial results were in line with our objectives of creating a
certifiable organic and sustainable fiber from seed to yarn
3. CRAILAR(R) BIO-FUELS: This division will be developing third
generation biofuels that can be made from hempseed as well as
cellulosic sources like residual fibers.
CRAILAR(R) Bio Fuels will be an exciting future development to our
technology platform. Bio Fuels are generated from the hemp seeds
that can be harvested as a result of using a robust hemp variety.
These seeds, in turn, can be converted into bio fuels. As a result
of the commercialization of the Advanced Materials division, a
surplus of hemp seed will be created. This surplus will far exceed
the food market's demands leaving a very high quality seed ideally
suited for bio fuels. Management believes that these fuels have
great advantages over the current bio fuels on the market today,
which are energy, land and resource intensive. Management believes
that CRAILAR(R) Bio Fuels could present an ideal and sustainable
vehicle for transitioning away from gasoline as a transportation
fuel.
4. CRAILAR(R) AGRICULTURE: The Agriculture division is concerned with
developing the most optimal plants for each type of CRAILAR(R)
application. CRAILAR(R) Agriculture division forms the foundation
for all CRAILAR(R) products, allowing us to work with one of the
most environmentally effective and performance oriented plants.
This science can also be tuned to create hemp plants for different
kinds of fibers for difference uses altogether. The CRAILAR(R)
Agriculture division harnesses one of the best natural feedstocks
and allows us to select the best plants for CRAILAR(R) product
streams. Part of the ongoing collaborations with the ARC, and
covered by the exclusive Master Agreement for Technology
Development signed with the ARC, are seed creation capabilities of
the ARC agricultural research facility in Vegreville, Alberta.
With over 440 current varieties of hemp strains, the ARC is able
to develop non-GMO (genetically modified organism) hemp plants
that will maximize fiber production, and allow CRAILAR(R)
processing to be more economically executed. In addition, there
exists the ability to mark CRAILAR(R) branded hemp crops, a
critical capability in the certification process that is going to
be the backbone of a co-branded direct to consumer campaign
HTNATURALS
We are also a leading provider of sustainable, environmentally friendly fibers
and fabrics through HTnaturals, specializing in the market and sale of a line of
natural and sustainable fiber clothing, active wear and fabric under our
"HTnaturals" brand, including T-shirts, sweatshirts and golf shirts to
wholesalers for imprinting, to retail stores as well as directly to consumers.
We believe that sustainability is the way of the future and that every decision
should be based on three things: people, planet and profit. Known as the
triple-bottom-line ("3BL"), this pervasive philosophy is upheld. Originally
formed in response to the growing demand for environmentally friendly, socially
responsible clothing, we adhere to the 3BL philosophy: (i) respecting the human
rights of employees; (ii) respecting the environmental impact of our operations;
and (iii) recognizing our fiscal responsibility to our shareholders. We practice
the 3BL philosophy from overseas manufacturing to domestic warehousing and
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purchasing practices. All overseas manufacturing facilities are inspected by our
HTnaturals' production department representative on a quarterly basis and all
have been certified by third party inspection agencies for quality working
conditions. Domestically, we uphold the 3BL philosophy in day-to-day operations
through several initiatives including a comprehensive recycling program, the
purchase of wind power credits to offset the electricity used by our computers,
and the purchase of energy efficient light bulbs and appliances.
THE HEMP INDUSTRY - WHY HEMP?
Hemp is a centuries old plant that is hardy, strong and grows largely pest free.
Management believes that the advantages of this rugged crop are many and they
extend right through the value chain. Benefits to the farmers include little
requirement for pesticides and a high climate adaptability. Management further
believes that the processing and manufacturing steps are less environmentally
taxing than those of many other fibers (notably cotton), requiring less toxic
chemicals and dyes to create finished fabric. High quality consumer goods are
the end result, as hemp yields a fiber with four times the tensile strength and
twice the abrasion resistance of cotton. Hemp products are naturally resistant
to mold, mildew and UV rays.
Currently, industrial hemp is being grown in almost every Province in Canada,
primarily for food and cosmetic oil production. Hemp grows easily in the
Canadian climate, and when grown for textile use, a secondary revenue stream is
available. When hemp is used for textiles, only the long fibers of the plant are
required, which leaves the short fibers as a by-product. This surplus substance
is ideal as a fiberglass replacement, as well, the inner "woody" core of the
plant is ideal for the production of fiberboard, paper and agricultural bedding.
Management believes organic textiles are experiencing a rapid increase in
demand. The relevance of green products in today's market is shown by the move
of several global brands such as Walmart, Nike, Timberland and adidas towards
sustainable fabrics. .As consumers hold companies responsible and accountable
for their environmental practices, the market is changing. Our goal is to help
build this awakening market space, and be positioned to supply the market by
offering high quality, eco-smart products globally. We intend to build on a
strong and sustainable foundation, thereby leveraging the growing demands of
eco-aware consumers.
Over the past few years, HTnaturals has diversified its offerings to include
such fibers as soy, bamboo and organic cotton. We have also replaced the
conventional cotton in our apparel blends with certified organic cotton.
ENVIRONMENTAL CONCERNS
Management believes that the majority of clothing today is fabricated from
petrochemical based synthetics or cotton. Conventional cotton is simply not as
eco-friendly as hemp. Petrochemical based fabrics require the consumption of
non-renewable resources which many believe are becoming scarce and expensive.
The environmental cost of cotton cultivation is enormous. Based on studies by
the World Wildlife Federation, a typical 100% cotton T-shirt requires one-third
of a pound of pesticide and synthetic fertilizer and 1,740 gallons of water to
produce. Management believes that if just 1.4 million cotton T-shirts were
replaced with a 100% hemp--or CRAILAR(R) -- garments, the water savings would
satisfy all U.S. household water consumption for six months. As a cleaner crop,
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hemp has no such pesticide or synthetic fertilizer requirement and does not
require vast quantities of water to grow. Management believes that our 55 / 45%
blend of hemp/ organic cotton greatly reduces pollution, while maintaining a
comfortable, cost efficient garment.
Worldwide, the growing of cotton has contributed to massive irrigation, chemical
use and water pollution. We believe that one of the most notable examples is one
of the world's worst environmental disasters - the drying and pollution of the
Aral Sea. A primary contributor to this tragedy was extensive irrigation and
pesticide use for growing cotton.
Cellulose and petroleum based `man made' fibers have gained strong market
acceptance and market share in the last few decades. As consumers begin to
better understand the ecological price to be paid for these intensely chemical
production processes, as well as water management concerns, they are beginning
to demand better options.
The intellectual property that CRAILAR(R) is developing will address many of
these environmental concerns by offering a sustainable alternative to existing
industries and harvesting methods.
As standards of living rise in the developing world, history shows that this
will create increasing demands for more and `better' food and clothing.
Satisfying this demand creates a growing need for textile crops that require
fewer resources and cause less pollution.
RESEARCH AND DEVELOPMENT
CRAILAR(R)
The fiber of industrial hemp is the strongest and most durable among all plant
fibers. "Clean fiber" is the prerequisite for the use of hemp in the
manufacturing of fabric or advanced bio-composite. Therefore, an efficient
protocol for clean extraction that maintains fiber integrity, is environmentally
acceptable and economically viable is crucial. Current procedures are
ineffective and the chemicals used during the extraction process often work in a
non-discriminating manner, damaging to the fiber.
CRAILAR(R) Organic Fibers - During 2008, our research and development efforts
for CRAILAR(R)Organic Fibers was concentrated on producing fiber for spinning
trials. Different variations of our enzymatic process, drying, carding and
equipment was tested to optimize the fiber for spinning using traditional cotton
spinning equipment. These research and development efforts led to the successful
initial spinning trials of CRAILAR(R) organic fibers. The spinning trials were
sponsored by Hanesbrands Inc. at NC State University. We carded and spun a
blended CRAILAR(R) yarn on our cotton ring spinning system with no modifications
using CRAILAR(R) organic fibers technology. The resulting 20/1 Ne* ring spun
yarn was knitted into a 5-ounces per square yard jersey fabric. Management
believes that this was the first time hemp was processed on conventional cotton
spinning equipment.
Through CRAILAR(R) Advanced Materials we concentrated our research and
development to refining our decortication technology and producing enough
decorticated fiber for tests using our proprietary pulp. We engaged an
independent testing company to verify the quality of our dissolving pulp and
their test results confirmed our ARC lab results and showed the CRAILAR(R)
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dissolving pulp has qualities far in excess of standard soft or hardwood pulps
on the market. We also began commercial trials at a leading North American
consumer paper products company where paper products made from our pulp were
successfully made and further market applications for CRAILAR(R) pulp were
determined.
We have invested a considerable amount of time and effort into product research
and development. Research and development costs totaled, of $548,231 was
primarily attributable in 2008 to the CRAILAR(R) fiber technology development.
The remaining research and development costs were for new apparel development.
See "Item 6. Management's Discussion and Analysis or Plan of Operation."
HTNATURALS PRODUCTS/MARKETS
Through our wholly-owned subsidiary HTnaturals, which was founded in 1998 in
response to the growing demand for environmentally friendly, socially
responsible clothing, we believe we are a leading provider of environmentally
sustainable hemp, bamboo, organic cotton and soy blended apparel. HTnaturals
sells our natural and sustainable fiber clothing and fabric under the
"HTnaturals" brand. The HTnaturals brand has been extended to encompass bamboo,
soy and other sustainable fibers in addition to hemp. We believe the HTnaturals
brand stands poised to capitalize on our past activities and expand our reach
directly into a growing number of like-minded corporate customers who value
sustainability in their business platforms. We believe that today's growing
consumer awareness of environmental issues, and the desire to reflect that
concern with appropriate apparel purchases, will create a real opportunity to
build a strong, consumer focused apparel label that speaks directly to
sustainability. With the ability to execute through the entire chain of the
yarn, fabric and apparel business, we have the opportunity to create an
exclusive CRAILAR(R) branded apparel line that validates performance and builds
brand equity.
HTnaturals' customers are located in North America, Europe and Asia and include
retail operators, such as COSTCO Canada, as well as corporate clients such as
Starbucks and Google. Business development efforts continue to grow HTnaturals'
customer base while an increasing global awareness for environmentally friendly
clothing is bringing new prospects to HTnaturals' target markets
HTnaturals has secured new procurement systems, which will improve product
quality and gross margin and implement a focused strategy for sales growth in
three areas: corporate sales, private label sales, and a seasonal retail line.
As of the date of this Annual Report, our product line consists of the following
core items: (i) Corporate / At Once business: consisting of basic blank apparel
such as T-shirts, hooded sweatshirts, polo shirts, and tote bags, this line is
targeted towards corporate clients and events where it is silk screen printed or
embroidered as a uniform or incentive, which items are inventoried in our
Canadian and US warehouses and colors and styles are kept at a minimum to reduce
inventory risk; (ii) HTnaturals Retail Line: consisting of more fashion forward
apparel items for men and women and sold to various retail stores across North
America, these items are produced on a pre sold basis and inventory risk is low
as items are not typically produced until sold to the retailer; and (iii)
Private Label business: as a recognized brand in the industry with a successful
track record, HTnaturals is approached by other companies looking to produce eco
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apparel under their own brand name, which has no inventory risk as all items are
produced as ordered.
STATEGIC ALLIANCES
NATIONAL RESEARCH COUNCIL OF CANADA
COLLABORATION AGREEMENT
Through our wholly owned subsidiary, CRAILAR(R), we entered into a three-year
collaboration agreement dated May 7, 2004, (the "Collaboration Agreement") with
the National Research Council of Canada ("NRC"), pursuant to which we have
developed the CRAILAR(R) Technology patentable enzymatic process for extracting
and cleaning hemp fiber and converting it into a proprietary fiber called
CRAILAR(R). This entails researching and developing an environmentally-friendly
and economically viable system based on industry-grade (or NRC-designed) enzymes
for the extraction of clean fibers from industrial hemp, including: (i) the
removal of dirt and the residual pectin from the sought-after hemp fibers; and
(ii) the separation of fine fibers in a manner that is environmentally
acceptable while maintaining characteristics suitable for the textile industry.
Pursuant to the terms and provisions of the Collaboration Agreement: (i) NRC
shall provide certain expertise and know-how for the process and engineering of
enzymes beneficial to the textile industry; (ii) NRC shall contribute to the
project work valued at approximately $671,498 Canadian Dollars; and (iii) we
shall contribute research and development to the project valued at approximately
$553,500 Canadian Dollars (US Dollars $460,483). Under the terms of the
Collaboration Agreement, we paid NRC CDN $282,000 (US $231,527) in cash. In
addition to cash payments, we contributed research and development valued at
approximately CDN $553,500 (US $454,439). All amounts payable pursuant to the
terms of the Collaboration Agreement have been paid.
PHASE II.
On approximately December 7, 2007, we entered into a three-year renewal of the
terms and provisions of the Collaboration Agreement with NRC concerning the
continued scientific research and development of the advanced enzyme technology
for the extraction and cleaning of industrial hemp fiber for the textile sector
(the "Project"). The Project commenced approximately May 10, 2007, and the
Collaboration Agreement expires on May 9, 2010. We believe that the extended
Collaboration Agreement will assist us with continued work on patentable enzyme
technology for the processing of hemp fibers and ensure the continuing of the
original research team to facilitate ongoing collaboration. We believe that
further research and development of the CRAILAR(R) Technology is consistent with
the NRC's mandate to contribute to the global competitiveness of Canadian
industry and the NRC National Program in Bioproducts announced in March 2007.
Pursuant to the terms and provisions of the Collaboration Agreement as renewed:
(i) NRC shall provide to the Project certain expertise and know-how for the
process and engineering of enzymes beneficial to the textile industry; (ii) NRC
shall contribute to the Project work valued at approximately $2,300,000 Canadian
Dollars; (iii) we shall contribute research and development to the Project
valued at approximately $893,033 Canadian Dollars; and (iv) we shall pay to NRC
an aggregate of $366,000 over the three-year term in accordance with a schedule.
As of the date of this Annual Report, we has paid to NRC approximately $98,861.
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The next scheduled payment of $30,237CDN was due February 1, 2009, which has
been paid.
LICENSE AGREEMENT
On November 1, 2006, we entered into a technology license agreement with NRC
(the "License Agreement"). In accordance with the terms and provisions License
Agreement: (i) NRC granted to us a worldwide license to use the NRC Technology
to reproduce, make, use, import, export and sell any products and to engage
contractors to use the NRC Technology to reproduce or make any products to be
used or sold by us; (ii) we shall pay to NRC a lump sum upon execution of the
License Agreement and an annual maintenance fee payable on the anniversary of
the execution date of this License Agreement; (iii) we shall pay to NRC a
minimum royalty and an ongoing royalty on sales revenue for products and
services; (iv) we shall also pay to NRC a royalty on other revenue as received
by us; and (v) the rights granted by NRC to us are exclusive relating to certain
components underlying the NRC Technology and non-exclusive thereafter, and
non-exclusive with respect to the remaining components underlying the NRC
Technology.
As of the date of this Annual Report, we have paid an initial CDN $25,000 (US
Dollars $20,636 to NRC and will pay an ongoing royalty percentage on sales of
products derived from the CRAILAR(R) process of 3% to NRC with a minimum annual
payment set at CDN $15,000 (US Dollars $12,315). During fiscal year ended
December 31, 2008, we paid an aggregate of CDN $7,500 (US $6,157) pertaining to
the royalty.
ALBERTA RESEARCH COUNCIL
MASTER AGREEMENT FOR TECHNOLOGY DEVELOPMENT
On approximately June 13, 2007, through our wholly-owned subsidiary, CRAILAR(R),
we entered into a master agreement for technology development dated effective as
of January 1, 2007, (the "Technology Development Agreement") with Alberta
Research Council, Inc. ("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"). We
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").
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In accordance with the terms and provisions of the Technology Development
Agreement: (i) we shall initially pay to ARC $10,000 on April 1, 2007, (which
has been paid) and subsequently $25,000 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 our contributions required pursuant to the
Project Agreements all of which were paid in 2007; (ii) we shall provide
work-in-kind of a value of $25,000 Canadian Dollars per calendar quarter
commencing April 1, 2007, as part of our 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 us; (iii) we
shall pay to ARC the fees and expenses set out in each Project Agreement; (iv)
with respect to all Project Agreements, we 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) we 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 Annual Report, all amounts owing to the ARC relating to
the payments required under the Technology Development Agreement have been paid
and $Nil has been paid to ARC relating to the 3% royalty fee. The Technology
Development Agreement is in effect as long as there is an active Project
Agreement.
PRODUCTION
We currently have the majority of our HTnaturals apparel products manufactured
in China and source our raw materials in bulk from several manufacturers in
Asia. Although there are only several dozen suppliers of hemp material found in
both Asia and Europe, consistency can become an issue when comparing one
supplier's product to another. Through the development of good relationships
with our key suppliers, we have been able to negotiate favorable payment terms
while ensuring that the consistency of the cloth is maintained. In China, our
representatives oversee all aspects of production, from the quality of the
fabric to the shipping of products to our warehouses in Canada and the United
States. Our representatives work closely with the farmers, the fabric suppliers
and sewers to ensure our quality control standards are maintained. We have also
increased our sourcing to include India, South East Asia, and South America in
order to expand our supply of quality fabrics.
MARKETING STRATEGY
The primary target markets for CRAILAR(R) fiber are the natural yarn, the
cellulose pulp and composites markets. We believe that CRAILAR(R) has the
potential to redefine the platform of sustainable yarns, delivering a complete
solution from a consumer's perspective. This implies market relevant performance
attributes that are also cost benefit relevant, in a delivery that is
sustainable and transparent. The current areas of focus, from a comparison and
proof of concept perspective, are the cotton, high performance yarn and pulping
industries. Each have entrenched market plays that are either toxic, resource
limited, or offensive to informed consumers. CRAILAR(R) provides enhanced
performance solutions to these industries, whilst delivering a triple bottom
line philosophy. We believe that CRAILAR(R) offers a number of key opportunities
for development: (i) CRAILAR(R) Organic Fiber for textiles, which fiber will be
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100% hemp (or other sustainable bast fiber) or a hemp blend available in a
variety of weaves, textures, colors and applications; and (iii) CRAILAR(R)
Advanced Materials develops technologies for the processing of these
cellulose-based fibers in pulp and paper, bioplastics and performance apparel
industries.
GLOBAL INDUSTRY PARTNERS - JOINT VENTURES
We recognize that CRAILAR(R) has global, multi industry applications, and as
such represents a significant opportunity for companies currently in those
industries. Additionally, speed to market and being first to establish new
industry standards is a crucial and strategic marketing advantage. With that
understanding in mind, we are evaluating potential strategic partnerships with
global leaders in the pulp and paper, yarn, fabric, carpeting, upholstery and
composites industries.
GLOBAL LICENSING OPPORTUNITIES
In addition, the opportunity exists to partner with global brands, which will
allow us to create value added performance based characteristics to a company
controlled end product. This strategy allows us to bring to bear its
considerable branding and marketing talent, and dramatically increases the value
proposition of CRAILAR(R). More than just an enzyme or pulping technology,
CRAILAR(R) can be a consumer recognized performance brand that is valued and
demanded by an informed public.
GLOBAL ORGANIC TEXTILE STANDARD
We have been a member of the Organic Trade Association since 2005 and intend to
develop our CRAILAR(R) bast fiber technology to meet existing and proposed
international standards for organic textile certification. This will include
meeting organic standards in the harvesting of raw materials, fiber processing
and production, and environmentally and socially responsible manufacturing and
labeling.
PRICING STRATEGY
It is expected that fibers and yarns produced with the CRAILAR(R) process will
be competitively priced vis-a-vis current organic fibers and allow us to realize
significant margins. Add to that, a transparent and certifiable sustainability
platform, and we believe that CRAILAR(R) has the potential to establish a new
industry standard.
MARKETING INITIATIVES
We believe that our marketing model will drive a pull-through marketing
strategy, which draws from detailed brand building and delivers that promise
directly to consumers. Brand building strategies imply a strong direct to
consumer platform, which will allow us to build equity in a consumer focused
model ultimately allowing transfer of that equity to establishing branding
partnerships with some of the worlds leading consumer brands. A secondary target
market exists for the enzyme among hemp processors. We believe that the
CRAILAR(R) enzymatic process will be very attractive for those currently
processing via traditional costly methods with the largest source of these
customers coming from India and China. We further believe that the CRAILAR(R)
process will entice those in North America to ramp up hemp farming and/or
15
processing as it is expected to create significant margins. Another target
market will be partners. We believe that the creation of partnerships is an
important strategy for a small company, and our public partnerships with NRC and
ARC have been very important to us. We believe additional partnerships with
consumer brands will also be important for the branding opportunities that these
global brands will provide.
HTnaturals has worked hard for over ten years to gain a foothold in the
wholesale side of the apparel business and we believe that we can leverage this
channel to provide early introduction to the market for CRAILAR(R). We aim to
develop strategic partners with industry leaders, in target markets, to
facilitate quick market penetration and acceptance. HTnaturals' main focus is
the sale of active wear. HTnaturals continues with our most recent line of
apparel that was first available for sale in the third quarter of 2006. New
items are added to the line to maintain the line's "freshness" and slower moving
items are dropped with each new season. Our market research indicates a strong
interest by the retail sector for our products. We intend to gain market share
in the casual wear and active wear sector by converting suppliers, distributors,
retailers and the buying public from environmentally unfriendly cotton products
to eco-friendly apparel. HTnaturals focus is also on wholesale sales, which has
grown to include direct to corporate sales and retail establishments. We will
continue to expand our marketing efforts towards these leaders in apparel sales.
We will continue to focus on two main areas for sales growth. Corporate Sales --
these high volume items will be inventoried and immediately available to
customers. Seasonal Retail Line -- the seasonal retail line is designed in house
and pre-sold to the retail customer base, after which it is produced and
delivered. HTnaturals apparel is made from "eco-fabrics" crafted from a
proprietary combination of fabric blends including hemp, organic cotton, bamboo,
soy, and other organic textiles.
We are currently focusing on the use of a small sales force to market our
products. Our sales staff is currently comprised of two internal sales
representatives.
Internet sales and marketing are integral parts of our vision. E-commerce on
both retail and wholesale (password required) levels are important aspects of
the site, as is direct access to inventory and manufacturing schedules for our
authorized representatives. We currently process retail orders through our
website and will add B2B functions if, and when, our customers start demanding
it.
Our environmentally beneficial message is compelling. However, we do not have
sufficient funds for a broad based information marketing campaign. We have
undertaken a strategic effort using well connected individuals, social media and
marketing companies to cost effectively get our message to key accounts.
GOVERNMENT REGULATION
TRADE REGULATION
Our operations are subject to the effects of international treaties and
regulations such as the North American Free Trade Agreement (NAFTA). We are also
subject to the effects of international trade agreements and embargoes by
entities such as the World Trade Organization. Generally, these international
16
trade agreements benefit our business rather than burden it because they tend to
reduce trade quotas, duties, taxes and similar impositions. However, these trade
agreements may also impose restrictions that could have an adverse impact on our
business, by limiting the countries from whom we can purchase our fabric or
other component materials, or limiting the countries where we may market and
sell our products.
The textile and apparel industries in both the United States and Canada have
historically received a relatively higher degree of international trade
protection than some other industries. However, this protection is diminishing
as a result of the implementation of trade agreements reached in the last ten
years. Taken as a whole, we believe that the current regulatory trade regime is
no more burdensome to us than to our competitors.
Hemp apparel may be manufactured, imported and exported to and from the United
States and Canada with no special regulations. We must, however, adhere to
textile labeling laws which stipulate what information is to be included on the
garment tags and where those tags are to be located on the garment. Labeling and
advertising of our products is subject to regulation by the Federal Trade
Commission. We believe that we are in substantial compliance with these
regulations.
ENVIRONMENTAL REGULATION
Our operations are subject to various environmental and occupational health and
safety laws and regulations. We believe that we are in compliance with the
regulatory requirements of British Columbia. We will continue to make
expenditures to comply with these requirements, and we do not believe that
compliance will have a material adverse effect on our business. As is the case
with manufacturers in general, if a release of hazardous substances occurs on or
from our properties or any associated offsite disposal locations, or if
contamination from prior activities is discovered at any of our properties, we
may be held liable. While the amount of such liability could be material, we
endeavor to conduct our operations in a manner that reduces such risks.
COMPETITION
SUSTAINABLE GARMENT INDUSTRY
As of the date of this Annual Report, there are a number of companies that are
manufacturing and/or distributing a variety of organic or environmentally
friendly products from hemp, soy, bamboo and organic cotton. Many of these
companies have significant distribution and are enjoying considerable success.
We consider these companies as competition since they are also focused upon the
active wear market and retail fashion industry.
CRAILAR(R) - REGISTERED TRADEMARK
In September 2005, we trademarked the term CRAILAR(R) to identify our
proprietary technology platform relating to the engineering, processing and
production of bast fibers including all technology co-developed with and
licensed from the NRC and ARC. Under the CRAILAR(R) Technology platform, we have
secured the exclusive worldwide licensing rights to intellectual property
17
arising from our collaborative research agreements. In May 2007, the NRC filed a
patent application for intellectual property related to the extraction of hemp
fibers, under the Patent Cooperation Treaty simultaneously seeking protection in
up to 117 countries worldwide. We have secured the exclusive worldwide licensing
rights from ARC related to the CRAILAR(R) Technology for use in textile,
composite and pulp applications.
We anticipate additional provisional patent applications to be filed in the
first half of 2009 by the NRC and the ARC, both of which will be under exclusive
worldwide license to us as set out in existing agreements. We will continue to
work with public and private sector partners to develop the CRAILAR(R)
Technology platform, as well as other proprietary technologies that contribute
to sustainability in the textile and composite industries.
We are currently evaluating partnering opportunities for multiple product
development and commercialization of our proprietary CRAILAR(R) Technology
platform for environmentally sustainable bast fiber processing and production.
Exclusive international licensing rights to these patent applications allow us
to protect our investment to date in the development of CRAILAR(R) Technology
and confidently move forward in seeking an appropriate development and
commercialization partner.
EMPLOYEES
We currently employ eight employees, seven are full-time employees and one is
part-time.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a number of very significant risks.
You should carefully consider the following risks and uncertainties in addition
to other information in evaluating our company and its business before
purchasing shares of our common stock. Our business, operating results and
financial condition could be seriously harmed due to any of the following risks.
The risks described below are all of the material risks that we are currently
aware of that are facing our company. Additional risks not presently known to us
may also impair our business operations. You could lose all or part of your
investment due to any of these risks.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF OPERATING LOSSES AND THERE CAN BE NO ASSURANCE WE WILL BE
PROFITABLE IN THE FUTURE; NEED TO RAISE CAPITAL TO CONTINUE OUR GROWTH.
We have a history of operating losses, expect to continue to incur losses, may
never be profitable, and must be considered to be in the development stage.
Further, we have been dependent on sales of our equity securities and debt
financing to meet our cash requirements. We have incurred losses totaling
approximately $3,382,718 and $1,937,171, respectively, for fiscal years ended
December 31, 2008 and 2007. As of December 31, 2008, we had an accumulated
deficit of $9,469,819. Further, we do not expect positive cash flow from
operations in the near term. There is no assurance that actual cash requirements
will not exceed our estimates. In particular, additional capital may be required
in the event that we encounter greater costs associated with general and
administrative expenses or offering costs.
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WE MAY NEED TO RAISE CAPITAL TO CONTINUE OUR GROWTH.
Based upon our historical losses from operations, we will require additional
funding in the future. If we cannot obtain capital through financings or
otherwise, our ability to execute our development plans and achieve profitable
operational levels will be greatly limited. Historically, we have funded our
operations through the issuance of equity and short-term debt financing
arrangements. We may not be able to obtain additional financing on favorable
terms, if at all. Our future cash flows and the availability of financing will
be subject to a number of variables, including potential production and the
market prices of our hemp products. Further, debt financing could lead to a
diversion of cash flow to satisfy debt-servicing obligations and create
restrictions on business operations. If we are unable to raise additional funds,
it would have a material adverse effect upon our operations.
OUR SUCCESS DEPENDS ON THE ABILITY OF OUR FABRIC PRODUCERS WITH WHOM WE HAVE
BUSINESS ARRANGEMENTS TO PROVIDE RAW MATERIALS ON A CONSISTENT BASIS.
We depend on a small number of overseas fabric producers to provide the raw
material from which we make our products. Failure to maintain continuous access
to this raw material would have a materially adverse affect our business,
including possibly requiring us to significantly curtail or cease our
operations. Fabric producers may experience equipment failures and service
interruptions, of which we have no control, which could adversely affect
customer confidence, our business operations and our reputation. Moreover, we
may have to compete with other companies for the production capacity of our
fabric producers. Because we are a small enterprise and many of these companies
with whom we may compete for production capacity may have greater financial and
other resources than we have, they may have an advantage in the competition for
production capacity. If we experience a significant increase in demand, we may
have to expand our third party fabric producers. We cannot be assured that
additional fabric producers will be available to us, or that if available it
will be available on terms that are acceptable to us. If we cannot produce a
sufficient quantity of our products to meet demand or delivery schedules, our
customers might reduce demand, reduce the purchase price they are willing to pay
for our products or replace our product with the product of a competitor, any of
which could have a material adverse effect on our financial condition and
operations.
WE RELY ON VENDORS AND INDEPENDENT DISTRIBUTORS WHO ARE NOT UNDER OUR CONTROL.
We have relied on and will continue to rely on vendors and independent
distributors who are not employees of ours, to distribute market and sell our
products. While we believe that vendors and distributors will continue to
provide their services, there can be no assurance that the vendors and
distributors will be available in the future, and if available, will be
available on terms deemed acceptable to us. Any such delay or increased costs
could have a materially adverse effect on our business.
WE MAY FACE CASH FLOW SHORTAGES DUE TO THE BENEFICIAL CREDIT TERMS WE MAKE
AVAILABLE TO OUR CUSTOMERS.
Due to the shorter credit terms made available to us from the raw material
providers from whom we buy product, as compared to the credit terms made
available by us to our customers, we, from time-to-time, require infusions of
19
cash in order to maintain our preferential buying/purchasing terms with our
suppliers. Such cash flow needs are also affected by the timing of large
purchases by us, which we make from time-to-time to take advantage of favorable
pricing opportunities. To date, we have satisfied these cash requirements by
private sales of our equity securities and retention of profits and through a
factoring arrangement with Crestmark Financial. We have also arranged a credit
facility with a current director to facilitate our production. We continue to
seek financing to provide us with liquidity to meet our future needs. There is
no assurance that we will be able to obtain such financing on commercially
reasonable terms, or otherwise, or that we will be able to otherwise satisfy our
short-term cash flow needs from other sources in the future.
OUR GROWTH COULD HARM OUR FUTURE BUSINESS RESULTS.
We expect to experience significant and rapid growth. If we are unable to hire
staff to manage our operations, our growth could harm our future business
results and may strain our managerial and operational resources. As we proceed
with the design production, marketing and sale of our existing and anticipated
products, we expect to experience significant and rapid growth of our business.
We may need to add staff to manage operations, handle sales and marketing
efforts and perform finance and accounting functions. We may be required to hire
a broad range of additional personnel in order to successfully advance our
operations. This growth is likely to place a strain on our management and
operational resources. The failure to develop and implement effective
operational and financial systems, or to hire and retain sufficient personnel
for the performance of all of the functions necessary to effectively service and
manage our potential business, or the failure to manage growth effectively,
could have a material adverse affect on our business and financial condition.
OUR BUSINESS COULD SUFFER FROM THE FINANCIAL INSTABILITY OF OUR CUSTOMERS.
We are a developmental company and relatively poorly financed. We sell our
products primarily to distribution and retail companies in the United States and
Canada on factored 30 to 45 day payment terms. If a large unfactored purchaser
of our goods failed to pay, we would be put in a difficult financial position
from which we may not be able to recover. Financial difficulties with any
customer could result in serious losses for our company.
OUR SUCCESS IS DEPENDENT UPON THE ACCEPTANCE OF OUR CRAILAR(R)TECHNOLOGY,
PRODUCTS AND OUR BUSINESS.
Our success depends upon our achieving significant market acceptance of our
companies and CRAILAR(R) Technology, hemp and eco products. We cannot guarantee
that retail outlets or consumers will stock or purchase our products. Acceptance
of our products will depend on the success of our advertising, promotional and
marketing efforts and our ability to provide the products to retail outlets and
consumers. To date, we have not spent significant funds on marketing and
promotional efforts, although in order to increase awareness of our hemp and
other eco products we expect to spend a significant amount on promotion,
marketing and advertising in the future. If these expenses fail to develop an
awareness of our products, these expenses may never be recovered and we may
never be able to generate any significant future revenues. In addition, even if
20
awareness of our products increases, we may not be able to produce enough of our
product to meet retail demand.
WE MAY BE UNABLE TO RETAIN KEY EMPLOYEES OR MANAGEMENT PERSONNEL.
The loss of Messrs. Jason Finnis, Kenneth Barker, Guy Prevost or any of our key
management personnel would have an adverse impact on our future development and
could impair our ability to succeed. Our performance is substantially dependent
upon the expertise of our Chief Operating Officer, Mr. Jason Finnis, and our
Chief Executive Officer, Mr. Kenneth Barker, and other key management personnel
and our ability to continue to hire and retain such personnel. Messrs. Finnis,
Barker and Prevost spend substantially all, or most, of their working time with
us and our subsidiaries. It may be difficult to find sufficiently qualified
individuals to replace Mr. Finnis, Mr. Barker, Mr. Prevost or other key
management personnel if we were to lose any one or more of them. The loss of Mr.
Finnis, Mr. Barker or Mr. Prevost, or any of our other key management personnel
could have a material adverse effect on our business, development, financial
condition, and operating results. We do not maintain "key person" life insurance
on any of our directors or senior executive officers.
OUR OFFICERS AND DIRECTORS MAY BE SUBJECT TO CONFLICTS OF INTEREST.
Certain of our officers and directors may be subject to conflicts of interest.
Certain of our directors devote part of their working time to other business
endeavors, including consulting relationships with other entities, and have
responsibilities to other entities. Such conflicts include deciding how much
time to devote to our affairs, as well as what business opportunities should be
presented to us. Because of these relationships, certain of our directors may be
subject to conflicts of interest. Currently, we have no policy in place to
address such conflicts of interest. However, such directors have acknowledged
their fiduciary duty to perform their duties in our best interest and those of
our shareholders.
MANY OF OUR COMPETITORS ARE LARGER AND HAVE GREATER FINANCIAL AND OTHER
RESOURCES THAN WE DO.
The garment industry, in general, is intensely competitive and fragmented. In
particular, the T-shirt segment of the garment industry is intensely
competitive. Our eco active wear products compete with cotton and synthetic
based products. Cotton and synthetic based products are currently marketed by
well-established, successful companies that possess greater financial,
marketing, distribution, personnel and other resources than us. Using these
resources, these companies can implement extensive advertising and promotional
campaigns, both generally and in response to specific marketing efforts by
competitors, to enter into new markets rapidly and to introduce new products.
Competitors with greater financial resources also may be able to enter the
sustainable apparel market in direct competition with us, offering attractive
incentive packages to retailers to encourage them to carry products that compete
with our products, or present cost features which consumers may find attractive.
GOVERNMENT REGULATION AND TRADE RESTRICTIONS.
21
Trade restrictions may be created that may have an adverse affect on our ability
to ship its products internationally. Governments or special interest groups may
attempt to protect existing cotton industries through the use of duties, tariffs
or public relations campaigns. These efforts may adversely affect our ability to
ship its products in a cost effective manner.
Moreover, any negative changes to international treaties and regulations such as
NAFTA and to the effects of international trade agreements and embargoes imposed
by such entities such as the World Trade Organization which could result in a
rise in trade quotas, duties, taxes and similar impositions or which could limit
the countries from whom we can purchase our fabric or other component materials,
or which could limit the countries where we might market and sell our products,
could have an adverse effect on our business.
The laws, regulations, policies or current administrative practices of any
government body, organization or regulatory agency in the United States or any
other jurisdiction, may be changed, applied or interpreted in a manner which
will fundamentally alter our ability to carry on business. The actions, policies
or regulations, or changes thereto, of any government body or regulatory agency,
or other special interest groups, may have a detrimental effect on us. Any or
all of these situations may have a negative impact on our ability to operate
and/or our profitability.
IF OUR COMPETITORS MISAPPROPRIATE UNPATENTED PROPRIETARY KNOW-HOW AND OUR TRADE
SECRETS, IT MAY HAVE A MATERIAL ADVERSE AFFECT ON OUR BUSINESS.
The loss of or inability to enforce our trademark "HTnaturals" and other
proprietary know-how, including our CRAILAR(R) process, and trade secrets could
adversely affect our business. We depend heavily on trade secrets and the design
expertise of our employees. If any of our competitors copies or otherwise gains
access to our trade secrets or develops similar hemp products independently, we
would not be able to compete as effectively. The measures we take to protect our
trade secrets and design expertise may not be adequate to prevent their
unauthorized use. Further, the laws of foreign countries may provide inadequate
protection of such intellectual property rights. We may need to bring legal
claims to enforce or protect such intellectual property rights. Any litigation,
whether successful or unsuccessful, could result in substantial costs and
diversions of resources. In addition, notwithstanding the rights we have secured
in our intellectual property, other persons may bring claims against us that we
have infringed on their intellectual property rights or claims that our
intellectual property right interests are not valid. Any claims against us, with
or without merit, could be time consuming and costly to defend or litigate and
therefore could have an adverse affect on our business.
CURRENCY FLUCTUATIONS MAY CAUSE TRANSLATION GAINS AND LOSSES.
A significant portion of our expenses are incurred in Canadian dollars. As a
result, appreciation in the value of these currencies relative to the United
States dollar could adversely affect our operating results. Foreign currency
translation gains and losses arising from normal business operations are
credited to or charged against other income for the period incurred.
Fluctuations in the value of Canadian dollars relative to United States dollars
may cause currency translation gains and losses.
22
RISKS RELATED TO OUR COMMON STOCK
SALES OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY RESULT IN
SIGNIFICANT DOWNWARD PRESSURE ON THE PRICE OF OUR COMMON STOCK AND COULD AFFECT
YOUR ABILITY TO REALIZE THE CURRENT TRADING PRICE OF OUR COMMON STOCK.
As of the date of this Annual Report, there are 31,273,547 shares of our common
stock issued and outstanding. Of those shares, there are 8,457,715 outstanding
shares of our common stock that are restricted securities as that term is
defined in Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). Although the Securities Act and Rule 144 place certain
prohibitions on the sale of restricted securities, restricted securities may be
sold into the public market under certain conditions. Further, as of the date of
this Annual Report, there are an aggregate of 4,419,257 Stock Options and
2,068,003 share purchase warrants outstanding that are exercisable into
4,419,257 shares of common stock and 2,068,003 shares of common stock,
respectively. See "Item 6."Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities."
Any significant downward pressure on the price of our common stock as certain
stockholders sell their shares of our common stock may encourage short sales.
Any such short sales could place further downward pressure on the price of our
common stock.
THE TRADING PRICE OF OUR COMMON STOCK ON THE OTC BULLETIN BOARD HAS BEEN AND MAY
CONTINUE TO FLUCTUATE SIGNIFICANTLY AND STOCKHOLDERS MAY HAVE DIFFICULTY
RESELLING THEIR SHARES.
Our common stock has traded as low as $0.15 and as high as $2.10. In addition to
volatility associated with Bulletin Board securities in general, the value of
your investment could decline due to the impact of any of the following factors
upon the market price of our common stock: (i) changes in the demand for our
products; (ii) disappointing results from our marketing and sales efforts; (iii)
failure to meet our revenue or profit goals or operating budget; (iv) decline in
demand for our common stock; (v) downward revisions in securities analysts'
estimates or changes in general market conditions; (vi) lack of funding
generated for operations; (vii) investor perception of our industry or our
business prospects; and (viii) general economic trends.
In addition, stock markets have experienced extreme price and volume
fluctuations and the market prices of securities have been highly volatile.
These fluctuations are often unrelated to operating performance and may
adversely affect the market price of our common stock. As a result, investors
may be unable to sell their shares at a fair price and you may lose all or part
of your investment.
ADDITIONAL ISSUANCES OF EQUITY SECURITIES MAY RESULT IN DILUTION TO OUR EXISTING
STOCKHOLDERS.
Our Articles of Incorporation authorize the issuance of 100,000,000 shares of
common stock. The Board of Directors has the authority to issue additional
shares of our capital stock to provide additional financing in the future and
the issuance of any such shares may result in a reduction of the book value or
market price of the outstanding shares of our common stock. If we do issue any
such additional shares, such issuance also will cause a reduction in the
proportionate ownership and voting power of all other stockholders. As a result
23
of such dilution, if you acquire shares of our common stock, your proportionate
ownership interest and voting power could be decreased. Further, any such
issuances could result in a change of control.
We are not authorized to issue shares of preferred stock. However, there are
provisions of British Columbia law that permit a company's board of directors,
without shareholder approval, to issue shares of preferred stock with rights
superior to the rights of the holders of shares of common stock. As a result,
shares of preferred stock could be issued quickly and easily, adversely
affecting the rights of holders of shares of common stock and could be issued
with terms calculated to delay or prevent a change in control or make removal of
management more difficult. Although we have no present plans to issue any shares
of preferred stock, the issuance of preferred stock in the future could
adversely affect the rights of the holders of common stock and reduce the value
of the common stock.
OUR COMMON STOCK IS CLASSIFIED AS A "PENNY STOCK" UNDER SEC RULES WHICH LIMITS
THE MARKET FOR OUR COMMON STOCK.
Because our stock is not traded on the NASDAQ National Market or the NASDAQ
Small Cap Market, and because the market price of the common stock is less than
$5 per share, the common stock is classified as a "penny stock." Our stock has
not traded above $5 per share. SEC Rule 15g-9 under the Exchange Act imposes
additional sales practice requirements on broker-dealers that recommend the
purchase or sale of penny stocks to persons other than those who qualify as an
"established customer" or an "accredited investor." This includes the
requirement that a broker-dealer must make a determination that investments in
penny stocks are suitable for the customer and must make special disclosures to
the customers concerning the risk of penny stocks. Many broker-dealers decline
to participate in penny stock transactions because of the extra requirements
imposed on penny stock transactions. Application of the penny stock rules to our
common stock reduces the market liquidity of our shares, which in turn affects
the ability of holders of our common stock to resell the shares they purchase,
and they may not be able to resell at prices at or above the prices they paid.
WE ARE A CANADIAN COMPANY AND A MAJORITY OF OUR DIRECTORS AND OFFICERS ARE
NATIONALS AND/OR RESIDENTS OF CANADA.
We are a company incorporated under the laws of the Province of British
Columbia, Canada and a majority of our directors and officers reside in Canada.
Therefore, it may be difficult for investors to enforce within the United States
any judgments obtained against us or any of our directors or officers. All or a
substantial portion of such persons' assets may be located outside the United
States. As a result, it may be difficult for investors to effect service of
process on our directors or officers, or enforce within the United States or
Canada any judgments obtained against us or our officers or directors, including
judgments predicated upon the civil liability provisions of the securities laws
of the United States or any state thereof. Consequently, you may be effectively
prevented from pursuing remedies under U.S. federal securities laws against
them. In addition, investors may not be able to commence an action in a Canadian
court predicated upon the civil liability provisions of the securities laws of
the United States. We have been advised by our Canadian counsel that there is
doubt as to the enforceability, in original actions in Canadian courts, of
24
liability based upon the U.S. federal securities laws and as to the
enforceability in Canadian courts of judgments of U.S. courts obtained in
actions based upon the civil liability provisions of the U.S. federal securities
laws. Therefore, it may not be possible to enforce those actions against us or
any of our directors or officers.
A DECLINE IN THE PRICE OF OUR COMMON STOCK COULD AFFECT OUR ABILITY TO RAISE
FURTHER WORKING CAPITAL AND ADVERSELY IMPACT OUR OPERATIONS.
A decline in the price of our common stock could result in a reduction in the
liquidity of our common stock and a reduction in our ability to raise additional
capital for our operations. Because our operations to date have been principally
financed through the sale of equity securities, a decline in the price of our
common stock could have an adverse effect upon our liquidity and our continued
operations. A reduction in our ability to raise equity capital in the future
would have a material adverse effect upon our business plan and operations,
including our ability to continue our current operations. If our stock price
declines, we may not be able to raise additional capital or generate funds from
operations sufficient to meet our obligations.
REPORTS TO STOCKHOLDERS
We are currently a reporting issuer in the U.S. and are subject to reporting
requirements under section 13 or 15(d) of the U.S. Securities Exchange Act of
1934, as amended. We are required to file the following with the U.S. Securities
and Exchange Commission (the "SEC"): (i) quarterly reports on Form 10-Q; (ii) an
annual report on Form 10-K; and (iii) a Form 8-K to report the occurrence of
certain reportable events. We are currently required to deliver an annual report
to our stockholders prior to or with the distribution of proxy materials
relating to annual stockholder meetings. We are also subject to the reporting
requirements of the British Columbia Securities Exchange (BCSC) in Canada.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As of the date of this Annual Report, there are no unresolved comments pending
from either the Securities and Exchange Commission or the British Columbia
Securities Exchange.
ITEM 2. PROPERTIES
On July 3, 2004, we received 80 acres of industrial property in Craik,
Saskatchewan for development of a hemp fiber mill. Through our subsidiary 068782
B.C. Ltd., we were granted title to the land from the Town of Craik and the
Rural Municipality of Craik No. 222 in exchange for $1. Provided we were
successful in the development of a mill by July 1, 2007, there would be no
further obligations to the Town of Craik. In June, 2007, we received a 1 year
extension to develop a mill on the property until July 1, 2008. In September,
2008 we decided not to proceed with the construction of a facility in Craik, and
returned all rights to the property to the town.
The majority of our production currently takes place in China. In Vancouver, we
occupy approximately 2,000 square feet for office space. The lease expires
December 1, 2011. We pay monthly rent of CDN $5,500.00.
25
ITEM 3. 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 came to an agreement in regards to this dispute and we paid Mr.
Carpenter $132,500 US Dollars in two payments, which were six months apart with
the first payment due in April 2008. We made the first payment of $65,000 on
April 8, 2008 to Mr. Carpenter and the second payment of $67,500 to Mr.
Carpenter on September 16, 2008.
Management is not aware of any legal proceedings contemplated by any
governmental authority or any other party involving us or our properties. As of
the date of this Annual Report, no director, officer or affiliate is (i) a party
adverse to us in any legal proceeding, or (ii) has an adverse interest to us in
any legal proceedings. Management is not aware of any other legal proceedings
pending or that have been threatened against us or our properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ANNUAL MEETING OF SHAREHOLDERS
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 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.
26
On July 10, 2008, the Meeting of shareholders was held with the resulting votes
cast either in person or proxy as below:
1. 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 1,000
Non-vote 0
2. To set the number of directors at seven.
For 19,161,385
Against 500
Abstain 0
Non-vote 0
3. 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 19,161,385 500
Jason Finnis 19,161,385 500
Larisa Harrison 19,156,385 5,500
Robert Edmunds 19,161,385 500
Guy Prevost 19,161,385 500
Peter Moore 19,123,985 37,900
Miljenko Horvat 19,156,385 5,500
4. Approval and ratification of the Stock Option Plan.
For 15,688,578
Against 42,100
Abstain 0
Non-vote 3,431,207
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR COMMON EQUITY
Shares of our common stock commenced trading on the OTC Bulletin Board under the
symbol "NADVF:BB". The market for our common stock is limited, and can be
volatile. The following table sets forth the high and low bid prices relating to
our common stock on a quarterly basis for the periods indicated as quoted by the
NASDAQ stock market. These quotations reflect inter-dealer prices without retail
mark-up, mark-down, or commissions, and may not reflect actual transactions.
QUARTER ENDED HIGH BID LOW BID
December 31, 2008 $1.39 $0.85
September 30, 2008 $1.57 $1.22
June 30, 2008 $1.67 $1.42
March 31, 2008 $1.76 $1.26
December 31, 2007 $1.16 $0.76
September 30, 2007 $0.91 $0.69
June 30, 2008 $0.89 $0.46
March 31,2008 $0.52 $0.35
As of March 26, 2009, there were approximately 59 shareholders of record of our
common shares as reported by our transfer agent, Computershare Investor Services
Inc. which does not include shareholders who shares are held in street or
nominee names. We believe that there are approximately 300 beneficial owners of
our common stock. There are no other classes of shares issued or outstanding
DIVIDEND POLICY
No dividends have ever been declared by the Board of Directors on our common
stock. Our losses do not currently indicate the ability to pay any cash
dividends, and we do not indicate the intention of paying cash dividends either
on our common stock in the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER COMPENSATION PLANS
We have one equity compensation plan: our 2008 Fixed Share Option Plan (the
"2008 Plan"). As described below, the 2008 Plan adopted all options outstanding
under our previous stock option plans, including our the 2006 Stock Option Plan
(the "2006 Plan"). The table set forth below presents information relating to
our equity compensation plans as of the date of this Annual Report. (For ease of
presentation, we have shown options originally granted under our 2006 Plan even
though such options have been adopted under our 2008 Plan.
27
NUMBER OF SECURITIES TO BE NUMBER OF SECURITIES
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE REMAINING AVAILABLE FOR
OUTSTANDING OPTIONS, PRICE OF OUTSTANDING FUTURE ISSUANCE UNDER
WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
PLAN CATEGORY (A) (B) (EXCLUDING COLUMN (A))
Equity Compensation Plans
Approved by Security Holders
(2006 Plan Stock Options 3,860,000 $0.56 6,140,000
Granted) 611,500 1.15 5,528,500
2008 Plan Stock Options
Granted 600,000 $1.42 5,458,766
Total Stock Options 4,419,257*
Equity Compensation Plans Not
Approved by Security Holders
Warrants 2,990,24 $0.78 -0-
2008 Warrants Granted 860,465 $1.87 -0-
Total 2,869,277**
28
*Total outstanding Stock Options granted is adjusted at fiscal year ended
December 31, 2008, to take into account a total of 635,001 Stock Options
exercised and 17,242 Stock Options cancelled during fiscal year ended December
31, 2008.
**Total outstanding Warrants granted is adjusted at fiscal year ended December
31, 2008, to take into account a total of 210,000 Warrants expired and 771,430
Warrants exercised during fiscal year ended December 31, 2008.
ADOPTION OF 2008 FIXED SHARE OPTION PLAN/REGISTRATION STATEMENT ON FORM S-8
2008 FIXED SHARE OPTION PLAN
Effective September 24, 2008, our Board of Directors authorized and approved the
adoption of our 2008 Fixed Share Option Plan (the "2008 Fixed Share Option
Plan") as of such date, under which an aggregate of 6,058,766 of our shares,
representing 20% of the issued and outstanding common share capital of the
Company as of September 24, 2008, may be issued. As described below, all options
issued under our Previous Option Plans (as defined below) are covered by our
2008 Fixed Share Option Plan.
Pursuant to certain consent resolutions of our Board of Directors dated for
reference effective on each of July 9, 2004, May 10, 2005, and September 4,
2006, respectively, our Board of Directors had thereby adopted each of a certain
"2004 Stock Option Plan", a then "Amended 2004 Stock Option Plan" and, finally,
a then "2006 Stock Option Plan" (collectively, the "Previous Stock Option
Plans") for the Company and, in conjunction therewith, and in accordance with
the form of stock-based compensation agreements utilized with the Previous Stock
Option Plans, an aggregate of 3,826,000 common shares of the common stock of the
Company had been allotted, reserved for issuance, authorized to be issued and,
when fully paid for and non-assessable, issuable to certain eligible
participants under certain stock options (collectively, the "Previous Options")
in and to the Company which have been granted and as of September 24, 2008 were
outstanding under our Previous Stock Option Plans.
In accordance with the Company's application for and listing of the Company's
common shares on the TSX Venture Exchange (the "Exchange") and the various
policies of the Exchange applicable to the Company resulting therefrom, our
Board of Directors determined, in accordance with the policies of and subject to
the prior approval of the Exchange, to replace, in their entirety, each of our
Previous Stock Option Plans and to substitute therefore and adopt our new "2008
Fixed Share Option Plan" for the Company and, in conjunction therewith, to adopt
all Previous Options of the Company under the 2008 Fixed Share Option Plan
consequent upon the adoption of the same. As indicated above, our Board of
Directors adopted the 2008 Fixed Share Option Plan effective as of September 24,
2008. The Company intends to present the 2008 Fixed Share Option Plan to
shareholders for approval at the Company's next annual general meeting.
The purpose of the 2008 Fixed Share Option Plan is to enhance our long-term
stockholder value by offering opportunities to our directors, officers,
employees and eligible consultants to acquire and maintain stock ownership in
order to give these persons the opportunity to participate in our growth and
success, and to encourage them to remain in our service.
The 2008 Fixed Share
Option Plan is to be administered by our Board of Directors or a committee
appointed by the Board of Directors, which shall determine, among other things,
(i) the persons to be granted options under the 2008 Fixed Share Option Plan;
(ii) the number of options to be granted; and (iii) the terms and conditions of
the options granted. As indicated above, an aggregate of 6,058,766 of our shares
may be issued pursuant to the grant of options under the 2008 Fixed Share Option
Plan (which number includes those certain 3,826,000 shares issuable pursuant to
Previous Options, which are deemed to have been granted under our 2008 Fixed
Share Option Plan and are governed by the terms thereof, as well as an
additional 600,000 shares issuable pursuant to options that have been granted
under our 2008 Fixed Share Option Plan since its adoption).
An option may not be exercised after the termination date of the option and may
be exercised following the termination of an eligible participant's continuous
service only to the extent provided by the terms of the 2008 Fixed Share Option
Plan.
Based on the terms of the individual option grants, options granted under the
2008 Fixed Share Option Plan generally expire three to ten years after the grant
date and become exercisable over a period of one year based on continued
employment, either with monthly vesting or upon achievement of pre-determined
deliverable.
FORM S-8 REGISTRATION STATEMENT
29
On October 10, 2008, we filed a registration statement on Form S-8 relating to a
maximum of 6,058,766 shares of common stock, without par value, issuable
directly by us under our 2008 Fixed Share Option Plan or pursuant to the
exercise of options that have been or may be granted under the 2008 Fixed Share
Option Plan (including options granted under our Previous Stock Option Plans as
described above.
INCENTIVE STOCK OPTIONS
During fiscal year ended December 31, 2006, we granted to our officers,
directors, consultants and employees an aggregate of 1,675,000 Stock Options
under the 2006 Plan which are exercisable within a three-year period at $0.31
per share. Of this amount, 925,000 Stock Options vested during fiscal year 2006.
During fiscal year ended December 31, 2006, an aggregate of 0 Stock Options were
exercised. As of the date of this Annual Report, 1,472,500 Stock Options remain
outstanding exercisable into 1,472,500 shares of our common stock. The 2006 Plan
expires on September 4, 2016.
During fiscal year ended December 31, 2007, we granted to our officers,
directors, consultants and employees an aggregate of 2,100,000 Stock Options
under the 2006 Plan, which are exercisable within a three-year period at $0.37
per share (85,000 Stock Options), $0.50 per share (560,000 Stock Options), $0.75
per share (1,000,000 Stock Options), and $0.82 per share (75,000 Stock Options).
Of this amount, 1,572,862 shares vested during fiscal year 2007.
During fiscal year ended December 31, 2008, we granted to our officers,
directors, consultants and employees an aggregate of 1,211,500 Stock Options,
611,500 under the 2006 Plan and 600,000 under the 2008 plan, which are
exercisable within a three-year period at US $1.15 per share (611,500 Stock
Options), US $1.25 per share (100,000 Stock Options) and US $1.45 per share
(500,000 options). Of this amount, 284,939 shares vested during fiscal year
2008.
COMMON STOCK PURCHASE WARRANTS
During fiscal year ended December 31, 2008, we granted an aggregate of 860,465
common stock purchase warrants (the "Warrants") at varying exercise prices
ranging from $1.35 to $1.95. As of the date of this Annual Report, there are an
aggregate of 2,068,003 Warrants issued and outstanding. The Warrants to purchase
shares of common stock and the shares of common stock underlying the Warrants
were issued in private placements by us during fiscal year 2008 as follows: (i)
during July 2008, we issued 748,723 Warrants to acquire up to 748,723 shares of
our common stock at an exercise price of $1.95 per share expiring July 3, 2010,
(ii) during July 2008, we issued 111,742Agents Warrants to acquire up to 111,742
shares of our common stock at an exercise price of $1.35 per share expiring July
3, 2010 (the "July 2008 Warrants"). See "Recent Sales of Unregistered
Securities."
RECENT SALES OF UNREGISTERED SECURITIES
As of the date of this Annual Report and during fiscal year ended December 31,
2008, to provide capital, we sold stock in private placement offerings, issued
stock in exchange for our debts or pursuant to contractual agreements as set
forth below.
30
LISTING OF TSX/PRIVATE PLACEMENT OFFERING
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.V" 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
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 of $163,119, 25,000
bonus shares, as well as the grant of 109,942 agent's warrants to Canaccord and
1,800 agent's options to Bolder Investment Partners Ltd. Each agent's warrants
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 $1.95 until July 3,
2010.
ISSUANCES OF STOCK
During fiscal year ended December 31, 2008 and up to the date of this Annual
Report, we have also issued an additional 1,887,532 shares of our common stock
pursuant to contractual debts or financings as follows.
o During fiscal year ended December 31, 2008, we issued an aggregate
of 285,715 shares of our common stock pursuant to the exercise of
Warrants at $0.75 per share for total proceeds of $214,286.
31
o During fiscal year ended December 31, 2008, we issued an aggregate
of 100,000 shares of our common stock pursuant to the exercise of
Warrants at $1.00 per share for total proceeds of $100,000.
o During fiscal year ended December 31, 2008, we issued an aggregate
of 25,000 shares of our common stock as a corporate finance fee
with a fair value of $33,750.
o During fiscal year ended December 31, 2008, we issued an aggregate
of 135,000 shares of our common stock pursuant to the exercise of
Stock Options by our employees at $0.31 per share for total
proceeds of $41,850.
o During fiscal year ended December 31, 2008, we issued an aggregate
of 12,501 shares of our common stock pursuant to the exercise of
Stock Options by our employees at $0.80 per share for total
proceeds of $10,000.
o During fiscal year ended December 31, 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 fiscal year ended December 31, 2008, we issued an aggregate
of 9,600 shares of our common stock as bonus shares for services
performed.
o During fiscal year ended December 31, 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 fiscal year ended December 31, 2008, we issued an aggregate
of 25,000 shares of our common stock pursuant to the exercise of
Stock Options by our employees at $0.31 per share for total
proceeds of $7,750.
o During fiscal year ended December 31, 2008, we issued an aggregate
of 10,000 shares of our common stock pursuant to the exercise of
Stock Options by our employees at $0.50 per share for proceeds of
$5,000.
o During fiscal year ended December 31, 2008, we issued an aggregate
of 40,000 shares of our common stock pursuant to the exercise of
Stock Options by our employees at $0.37 per share for total
proceeds of $14,800.
o During fiscal year ended December 31, 2008, we issued an aggregate
of 25,000 shares of our common stock pursuant to the exercise of
Stock Options by our employees at $0.81 per share for total
proceeds of $20,250.
o During fiscal year ended December 31, 2008, we issued an aggregate
of 285,715 shares of our common stock pursuant to the exercise of
Warrants at $0.75 per share for total proceeds of $214,286.
32
o During fiscal year ended December 31, 2008, we issued an aggregate
of 100,000 shares of our common stock pursuant to the exercise of
Warrants at $0.50 per share for total proceeds of $30,000.
o In January and February 2009, 52,500 shares were issued pursuant
to the exercise of employee and consultants options between $0.31
and $0.37 per share for proceeds of $16,875.
o In March of 2009, 394,001 shares were issued pursuant to the
exercise of warrant shares at $0.75 per share for proceeds of
$295,501.
ITEM 6. SELECTED FINANCIAL DATA
Because we are a smaller reporting company, we are not required to provide the
information required by this Item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The summarized financial data set forth in the table below is derived from and
should be read in conjunction with our audited financial statements for fiscal
years ended December 31, 2008 and 2007, including the notes to those financial
statements which are included in this Annual Report. The following discussion
should be read in conjunction with our audited financial statements and the
related notes that appear elsewhere in this Annual Report. The following
discussion contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results could differ materially from those discussed in
the forward looking statements. Factors that could cause or contribute to such
differences include, but are not limited to those discussed below and elsewhere
in this Annual Report, particularly in the section entitled "Risk Factors". Our
audited financial statements are stated in United States Dollars and are
prepared in accordance with United States Generally Accepted Accounting
Principles.
RESULTS OF OPERATION
FISCAL YEAR ENDED DECEMBER 31, 2008 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2007.
REVENUE AND GROSS MARGINS
Our net operational loss during the twelve-month period ended December 31, 2008,
was ($3,382,718) compared to ($1,937,171) during the twelve-month period ended
December 31, 2007, an overall increase of 75%. We generated gross revenues of
$2,607,153 during fiscal year 2008, compared to $2,490,885 in gross revenues for
the twelve-month period ended December 31, 2007, up 6%. Sales in apparel in 2008
started with year over year gains in Q1 & Q2, while the sales in Q3 & Q4 were
both lower than the comparable quarters in 2007 as the global recession took
effect.
33
Cost of goods sold decreased during the twelve-month period ended December 31,
2008, to $1,677,564 from $1,696,339 for fiscal year 2007, resulting in net
sales, or a gross profit, of $929,589 for fiscal year 2008, compared to $794,546
for the same period in 2007. Cost of goods sold as a percentage of sales
decreased from fiscal year 2007 to 2008, dropping from 68% to 64%. 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 fiscal year 2007 to 36% for fiscal year 2008.
OPERATING EXPENSES
During the twelve-month period ended December 31, 2008, we recorded operating
expenses of $4,312,307 compared to operating expenses of $2,731,717 for the same
period in 2007, an increase of $1,580,590. Operating expenses consisted of: (i)
$317,020 (2007: $287,766) in advertising and promotion ; (ii) $26,156 (2007:
$24,144) in amortization and depreciation; (iii) $640,902 (2007: $562,069) in
consulting and contract labour (iv) $600,639 (2007: $413,322) in general &
administrative; (v) $126,277 (2007: $96,855) in interest; (vi) $436,349 (2007:
$188,706) in professional fees; (vii) $579,806 (2007: $254,746) in research &
development; and (viii) $1,585,158 (2007: $904,109) in salaries & benefits. A
government grant in the amount of $46,663 was paid to us in 2007, which offset
some of the above noted operating expenses in that year. Our net loss from
operations during the twelve-month period ended December 31, 2008, was
($3,282,718 or ($0.12) per share compared to a net loss of ($1,937,171) or
($0.08) per share for fiscal year 2007. For the twelve-month period ended
December 31, 2008, the weighted average number of shares outstanding was
29,378,370 compared to 25,140,373 at December 31, 2007.
Advertising and promotion expenses increased to $317,020 for the twelve-month
period ended December 31, 2008, from $287,766 for the same period in 2007. This
increase was due to the hiring of a new public relations firm, as well as
attendance by us at several major tradeshows during fiscal year 2008.
Consulting and contract labor expenses increased to $640,902 for the
twelve-month period ended December 31, 2008, from $562,069 for the same period
in 2007, due to an increase in stock based compensation.
General and administrative expenses grew to $600,639 for the twelve-month period
ended December 31, 2008, compared to $413,322 for the same period in 2007. The
increase in general and administrative expenses was related to increased office
space, additional expenses associated with the commercialization of CRAILAR(R)
and currency exchange losses.
Interest costs for the twelve-month period ended December, 31, 2008, were
$126,277 compared with $96,855 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.
Professional fees were $436, 349 for the twelve month period ended December 31,
2008, compared to $188,706 for the same twelve month period in 2007. This
increase was due to costs associated with the company's new listing on the TSX
Venture exchange and to meet regulatory conditions.
34
Research and development costs were $579,806 for the twelve-month period ended
December 31, 2008, compared to $254,746 for the same twelve-month period in
2007, an increase of 27%. This increase is attributed to the increase in testing
associated with the successes achieved in the development of the CRAILAR(R)
technology platform.
Salaries and benefits expenses increased to $1,585,158 for the twelve-month
period ended December 31, 2008, compared with $904,109 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.
NET INCOME
The net loss for the twelve-month period ending December 31, 2008, was
($3,382,718) compared to a loss of ($1,937,171) for the same period in 2007,
which is an increase in the net loss of ($1,445,547) or 75%. This increase in
loss was primarily due to the increase in research and development costs, stock
based compensation costs and general and administrative costs associated with
the commercialization of CRAILAR(R)technology. For the twelve-month period ended
December 31, 2008, the weighted average number of shares outstanding was
29,378,370 compared to 25,140,373 at December 31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
For the twelve-month period ended December 31, 2008, our current assets were
$1,452,860 and our current liabilities were $1,466,722 which resulted in a
working capital deficiency of $13,862. As at December 31, 2008, total assets
were $1,786,438 consisting of: (i) $319,358 in cash; (ii) $233,683 in trade
accounts receivable; (iii) $765,430 in inventory; (iv) $134,389 in prepaid
expenses and other; (v) $275,355 in property and equipment; and (vi) $58,223 in
intangible assets.
As at December 31, 2008, total liabilities were $1,466,722 and were comprised of
(i) $301,129 in accounts payable; (ii) $217,645 in accrued liabilities; (iii)
$721,358 in amounts due related parties; (iv) $200,000 in notes payable; (v)
$26,590 in short term debt.
Stockholders' Equity decreased by $445,820 from $765,536, at December 31, 2007,
to $319,716 at the twelve-month period ended December 31, 2008.
As of December 31, 2008, we had cash of $319,358 compared with $660,407 at
December 31, 2007 a decrease of $341,049.
CASH FLOWS FROM OPERATING ACTIVITIES
The cash flows used in operations for the twelve-month period ended December 31,
2008, were ($2,464,930) compared with ($2,068,184) for the same period in 2007.
Cash flows used in operations for the twelve-month period ended December 31,
2008, consisted primarily of a net loss of ($3,382,718), $26,156 in depreciation
and amortization; stock based compensation of $672,062; a decrease in accounts
receivable of $276,957; a decrease in inventory of $78,101; a decrease in
35
prepaid expenses of $16,400; a decrease in accounts payable and accrued
liabilities of ($139,924); and (e) a decrease in amounts due to related parties
of ($11,964).
CASH FLOWS FROM INVESTING ACTIVITIES
The cash flows used in investing activities for the twelve-month period ended
December 31, 2008, were ($215,274) compared to ($108,917) for the same period in
2007. Cash flows used in investing activities consisted of (i) a purchase of
property & equipment totalling ($209,660); and (ii) the acquisition of
trademarks & licenses for ($5,614).
CASH FLOWS FROM FINANCING ACTIVITITES
Cash flows provided by financing activities at December 31, 2008, totalled
$2,637,477 versus $2,300,763 during the same period in 2007 as the Company (i)
issued $2,553,558 of capital stock for cash (2007: $1,890,662); (ii) received
$190,000 as a manufacturing loan from a director; (iii) long term debt decreased
by ($10,942); (iv) short term debt increased by $4,861; and (vi) notes payables
was reduced by ($100,000).
The effect of exchange rates on cash resulted in an unrealized loss of $298,322
for the twelve-months ending December 31, 2008, compared with $122,512 of
unrealized gain in the same period of 2007. These losses are the direct result
of the appreciation of the US dollar versus the Canadian dollar in calendar year
2008.
PLAN OF OPERATION
We have restructured our ongoing operations to focus on the commercialization of
our CRAILAR(R) fiber technology. We have allowed the lease to expire on our
apparel warehouse location and will be moving all future warehousing to a third
party logistics company. By consolidating operations in one location we
streamline systems and human resources.
CRAILAR(R)
Management expects to continue expanding its business platform through the
development and 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 potential 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 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 Annual Report, 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
36
first CRAILAR(R) Organic Fiber processing equipment which was constructed in
Montreal and installed at the NRC facility in Ottawa. Ongoing tests with this
equipment continue to establish the efficacy of CRAILAR(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 three quarters of 2008, we began
scaling CRAILAR(R) Organic Fiber processing equipment at a pilot plant facility
in Montreal. The equipment became operational during the second quarter of 2008.
During the third and fourth quarters of 2008, the pilot plant facility processed
1000kgs of fiber, a portion of which was sent to North Carolina State's Textile
College, where it was spun and then knitted into a fabric suitable for T-shirt
or other knit garments.
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 CRAILAR(R) Fiber
Technologies, 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 pulping trials in Q1 and Q2 of 2009. These trials will further test
and confirm CRAILAR(R) Advanced Materials pulp's attributes in the pulp and
paper industry.
As of the date of this Yearly Report, we continue testing and development of its
CRAILAR(R)-Organic Fiber, with fibre produced at our Montreal Pilot Plant
facility and then spun, knitted/woven at North Carolina State University. This
testing is being performed for Hanesbrands as they continue to show interest in
CRAILAR(R) Organic fibers. We have has also produced one metric ton of
decorticated fibre using its patent pending decortication technique for further
pulp and paper testing with an industry leader in pulp and paper products.
HTNATURALS
Early in fiscal year 2008, HTnaturals continued to see strong growth in its
apparel sales, in both the seasonal retail line and the higher volume corporate
wear line. However, during both the third and fourth quarters, sales declined as
demand lessened as the affect of the global recession took hold. In 2009,
HTnaturals plans to continue selling its spring 2009 line and to continue with
its line of basics. 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.
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
37
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,
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 are 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 $200,000 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 on July 22, 2009. There was no fee paid for
arranging the renewal of the loan. As at December 31, 2008, accrued interest on
the loan was $74,912, which was included in accrued liabilities. The security
granted to Rana is: (i) a fixed charge and a security interest in our existing
accounts receivable insurance policy obtained through Export Development Canada
and St. Paul Guarantee Insurance Company respecting losses sustained by us; and
(ii) a floating charge and a security interest in all of our assets, subject and
subordinate to any borrowing by us with banks and lending institutions.
LOAN FROM DIRECTOR
Another significant commitment for us in fiscal year 2008 is the amount of
$700,000 advanced by a director to facilitate the production of the new apparel
designs. The loan has an interest rate of 12% with a 1% charge for each advance.
The loan matures on February 28, 2009. On February 16, 2009 the director
advanced to us an additional $200,000 for a total amount due to the director, of
$900,000. A new secured loan agreement, with an interest rate of 12% is due in
February, 2011 and is for the total amount outstanding ($900,000).
NRC AGREEMENT
An additional significant commitment for us during fiscal year 2009 is the Joint
Collaboration Agreement we entered into with the NRC during 2008 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 Joint Collaboration Agreement, we will pay the
NRC $300,493 ($366,000 CDN) of which $98,861 ($120,413 CDN) was due in 2008. The
38
amount due in 2008 was paid as of the date of these financial statements. In
addition to cash payments, we agreed to contribute $2,300,000 in research and
development over the course of the JCA.
PUBLIC RELATIONS AGREEMENT
On September 2, 2008, our Board of Directors authorized the execution of a
twelve-month agreement (the "Agreement") with Lippert/Heilshorn & Associates,
Inc. ("LHA"), to augment our shareholder and investor relations activities. The
Agreement came into effect with approval from the TSX on October 2, 2008 In
accordance with the further terms and provisions of the Agreement, we shall: (i)
pay to LHA a monthly retainer in the amount of $15,000 for the first two months
of the agreement; (ii) pay to LHA a monthly retainer in the amount of $9,000 for
the remainder of the contract; and (iii) grant to LHA stock options to acquire
up to an aggregate of 100,000 shares of our common stock for a period of three
years from the date of grant at an exercise option price of $1.25 per share and
vesting as to exercise equally over 18 months from the date of grant.
As of the date of this Annual Report, all payments to LHA are up to date.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this Annual Report, we do have any off-balance sheet
arrangements that have, or are reasonably likely to have, a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors. The term "off-balance sheet
arrangement" generally means any transaction, agreement or other contractual
arrangement to which an entity unconsolidated with us is a party, under which we
have: (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
the Company's Board of Directors. The Audit Committee has reviewed and discussed
with management our financial statements as of and for the twelve-month period
ended December 31, 2008. The Audit Committee has also discussed with Dale
Matheson Carr-Hilton LaBonte the matters required to be discussed by Statement
on Auditing Standards No. 61, Communication with Audit Committees, as amended,
by the Auditing Standards Board of the American Institute of Certified Public
Accountants. The Audit Committee has received and reviewed the written
disclosures and the letter from Dale Matheson Carr-Hilton LaBonte required by
Independence Standards Board Standard No. 1, Independence Discussions with Audit
Committees, as amended, and has discussed with Dale Matheson Carr-Hilton LaBonte
their independence. Based on the reviews and discussions referred to above, the
Audit Committee has recommended to the Board of Directors that the financial
39
statements referred to above be included in our Annual Report on Form 10-K for
the twelve-month period ended December 31, 2008 filed with the Securities and
Exchange Commission.
CORPORATE GOVERNANCE POLICIES
Effective February 27, 2008, our Board of Directors adopted certain policies,
terms of reference, charters and guidelines (collectively, the "Corporate
Governance Policies"), for our Board of Directors and senior management to
follow: (i) Corporate Governance Policy; (ii) Corporate Disclosure Policy; (iii)
Securities Trading Policy; (iv) Board of Directors' Charter; (v) Terms of
Reference for the Chief Financial Officer; (vi) Terms of Reference for Committee
Chairs; (vii) Audit Committee Charter; (viii) Corporate Governance Committee
Charter; (ix) Compensation Committee Charter; (x) Disclosure Charter Policy;
(xi) Code of Conduct; and (xi) Insider Trading and Reporting Guidelines.
In general, the Corporate Governance Policies set forth our governance policies
and our practice among our Board of Directors and senior management, including
the constitution and independence of the Board, the functions to be performed by
the Board of Directors and its committees and the effectiveness of the
administration by Board members. The Corporate Governance Policies are made a
part of this Annual Report as listed in the Exhibits. The Corporate Governance
Policies can also be found on our website at WWW.NATURALLYADVANCED.COM. See
"Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act - Committees of the Board of
Directors."
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., 402-1008 Homer St.,
Vancouver, British Columbia, Canada V6B 2X1, Attn: Ms. Larisa Harrison, Chief
Administration Officer.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2008, the FASB issued FSP FAS 157-3, "DETERMINING THE FAIR VALUE OF A
FINANCIAL ASSET WHEN THE MARKET FOR THAT ASSET IS NOT ACTIVE" ("SFAS 157-3").
The FSP provides guidance clarifying how SFAS No. 157 should be applied when
valuing securities in markets that are not active. The guidance states that
significant judgment is required in valuing financial assets and clarifies how
management's internal assumptions should be considered when relevant observable
data does not exist, how observable market information in a market that is not
active should be considered when measuring fair value, and how the use of market
quotes should be considered when assessing the relevance of observable and
unobservable data available to measure fair value. The FSP is effective upon
40
issuance and includes financial statements for the period ending on or before
September 30, 2008. The Company has adopted SFAS 157-3 prospectively beginning
July 1, 2008, and the adoption of FSP FAS 157-3 did not have a material impact
on the Company.
In May 2008, the FASB issued SFAS No. 163, ACCOUNTING FOR FINANCIAL GUARANTEE
INSURANCE CONTRACTS ("SFAS 163"). SFAS 163 clarifies how SFAS 60, ACCOUNTING AND
REPORTING BY INSURANCE ENTERPRISES applies to financial guarantee insurance
contracts issued by insurance enterprises, including the recognition and
measurement of premium revenue and claim liabilities. It also requires expanded
disclosures about financial guarantee insurance contracts. SFAS 163 is effective
for our interim period commencing January 1, 2009, except for disclosures about
an insurance enterprise's risk-management activities, which are effective for
our interim period commencing July 1, 2008. We do not expect the adoption of
SFAS 163 to have a material impact on our financial position, cash flows and
results of operations.
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 December 2007, the FASB issued SFAS No. 160, NONCONTROLLING INTEREST IN
CONSOLIDATED FINANCIAL STATEMENTS, AN AMENDMENT OF ARB NO. 51 ("SFAS No. 160"),
which will change the accounting and reporting for minority interests, which
will be recharacterized as noncontrolling interests and classified as a
component of equity within the consolidated balance sheets. SFAS No. 160 is
effective as of the beginning of an entity's first fiscal year beginning on or
after December 15, 2008. Earlier adoption is prohibited. Management has not
determined the effect that adopting this statement would have on our financial
position or results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), BUSINESS
COMBINATIONS ("SFAS No. 141R"). SFAS No. 141R will change the accounting for
business combinations. Under SFAS No. 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS No. 141R will
change the accounting treatment and disclosure for certain specific items in a
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
41
entity's first annual reporting period beginning on or after December 15, 2008.
Accordingly, any business combinations completed by us prior to January 1, 2009
will be recorded and disclosed following existing GAAP. Management has not
determined the effect that adopting this statement would have on our financial
position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Because we are a smaller reporting company, we are not required to provide the
information required by this Item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM DATED MARCH 24, 2009.
CONSOLIDATED BALANCE SHEETS AS AT DECEMBER 31, 2008 AND DECEMBER 31, 2007.
CONSOLIDATED STATEMENTS OF OPERATIONS FOR FISCAL YEARS ENDED DECEMBER 31, 2008
AND DECEMBER 31, 2007.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FISCAL YEARS ENDED DECEMBER 31,
2008 AND DECEMBER 31, 2007.
42
DALE MATHESON
CARR-HILTON LABONTE LLP
_______________________
DMCL CHARTERED ACCOUNTS
Partnership of:
Vancouver Robert J. Burkart Inc. James F. Carr-Hilton Ltd.
Kenneth P. Chong Inc. Alvin F. Dale Ltd.
Reginald J. LaBonte Ltd. Barry S. Hartley Inc.
Robert J. Mattheson Inc. Rakesh I. Patel Inc.
F.M. Yada FCA Inc.
South Surrey Michael K. Braun Inc. Peter J. Donaldson Inc.
Port Coquitlam Wilfred A. Jacobson Inc. Brian A. Shaw Inc.
Fraser G. Ross Ltd. G.D. Lee, Inc.
________________________________________________________________________________
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Naturally Advanced Technologies
Inc.
We have audited the accompanying consolidated balance sheets of Naturally
Advanced Technologies Inc. as of December 31, 2008 and 2007 and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of Naturally Advanced Technologies
Inc. as of December 31, 2008 and 2007 and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred losses in developing its
business, and further losses are anticipated in the future. The Company requires
additional funds to meet its obligations and the costs of its operations and
there is no assurance that additional financing can be raised when needed. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in this regard are described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
"DMCL"
DALE MATHESON CARR-HILTON LABONTE LLP
CHARTERED ACCOUNTANTS
Vancouver, Canada
March 24, 2009
VANCOUVER (HEAD OFFICE) SUITE 1500 - 1140 WEST PENDER STREET, VANCOUVER,
B.C., CANADA V6E 4G1, TEL: 604 687 4747 * FAX: 604 689 2778 -
MAIN RECEPTION
South Surrey Suite 301 - 1659 Martin Drive, White Rock, B.C., Canada V4A 6E7,
Tel: 604 531 1154 * Fax: 604 538 2613
Port Coquitlam Suite 700 - 2755 Lougheed Highway, Port Coquitlam, B.C., Canada
V3B 5Y9, Tel: 604 941 8266 * Fax 604 941 0971
43
NATURALLY ADVANCED TECHNOLOGIES, INC.
Consolidated Financial Statements
(In US Dollars)
December 31, 2008
INDEX
Consolidated Balance Sheets 45
Consolidated Statements of Operations 46
Consolidated Statements of Cash Flows 48
Notes to Consolidated Financial Statements 49
44
NATURALLY ADVANCED TECHNOLOGIES, INC.
Consolidated Balance Sheets
(In US Dollars)
_______________________________________________________________________________________________________________
December 31, December 31,
2008 2007
_______________________________________________________________________________________________________________
ASSETS
CURRENT
Cash and cash equivalents $ 319,358 $ 660,407
Accounts receivable 233,683 510,640
Inventory 765,430 843,531
Prepaid expenses and other 134,389 150,789
_______________________________________________________________________________________________________________
1,452,860 2,165,367
PROPERTY AND EQUIPMENT (NOTE 6) 275,355 78,740
INTANGIBLE ASSETS (NOTE 7) 58,223 65,720
_______________________________________________________________________________________________________________
$ 1,786,438 $ 2,309,827
===============================================================================================================
LIABILITIES
CURRENT
Accounts payable $ 301,129 $ 557,415
Accrued Liabilities 217,645 110,883
Due to related party (Note 5) 721,358 543,322
Note payable (Note 4) 200,000 100,000
Short term loan (Note 8) 26,590 21,729
_______________________________________________________________________________________________________________
NOTE PAYABLE (NOTE 4) - 200,000
LONG TERM DEBT - 10,942
_______________________________________________________________________________________________________________
1,466,722 1,544,291
_______________________________________________________________________________________________________________
COMMITMENTS (NOTE 11)
STOCKHOLDERS' EQUITY
CAPITAL STOCK (NOTE 9)
Authorized:100,000,000 common shares without par value
Issued and outstanding : 30,827,046 common shares
(December 31, 2007 - 27,913,589) 8,541,484 6,026,436
ADDITIONAL PAID-IN CAPITAL 1,370,325 650,153
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (122,274) 176,048
DEFICIT (9,469,819) (6,087,101)
_______________________________________________________________________________________________________________
319,716 765,536
_______________________________________________________________________________________________________________
$ 1,786,438 $ 2,309,827
===============================================================================================================
The accompanying notes are an intergral part of these consolidated
financial statements.
45
NATURALLY ADVANCED TECHNOLOGIES, INC.
Consolidated Statements of Operations
(In US Dollars)
_______________________________________________________________________________________________________________
For year ended
December 31,
2008 2007
_______________________________________________________________________________________________________________
SALES $ 2,607,153 $ 2,490,885
COST OF SALES 1,677,564 1,696,339
GROSS PROFIT 929,589 794,546
EXPENSES
Advertising and promotion 317,020 287,766
Amortization & depreciation 26,156 24,144
Consulting & Contract Labour 640,902 562,069
General & Administrative 600,639 413,322
Interest 126,277 96,855
Professional Fees 436,349 188,706
Research & Development 579,806 254,746
Salaries & Benefits 1,585,158 904,109
_______________________________________________________________________________________________________________
4,312,307 2,731,717
_______________________________________________________________________________________________________________
NET LOSS FOR THE YEAR $ (3,382,718) $ (1,937,171)
===============================================================================================================
Loss per share (basic and diluted) $ (0.12) $ (0.08)
===============================================================================================================
Weighted average number of common shares outstanding (basic and diluted) 29,378,370 25,140,373
===============================================================================================================
The accompanying notes are an intergral part of these consolidated
financial statements.
46
NATURALLY ADVANCED TECHNOLOGIES INC.
Consolidated Statement of Stockholders' Equity
December 31, 2008
(In US Dollars)
______________________________________________________________________________________________________________________________
Accumulated
Additional other
Common shares paid-in comprehensive
Shares Amount capital income\(loss) Deficit Total
$ $ $ $ $
______________________________________________________________________________________________________________________________
BALANCE, December 31, 2006 23,750,154 4,120,646 254,232 53,536 (4,149,930) 278,484
-
Exercise of stock options 275,696 69,640 (8,977) - - 60,663
Issuance of common stock for cash 1,580,239 680,000 - - - 680,000
Issuance of common stock on exercise of warrants 2,300,000 1,150,000 - - - 1,150,000
Issuance of common stock on settlement of debt 7,500 6,150 - - - 6,150
Stock-based compensation - - 404,898 - - 404,898
Components of comprehensive income (loss) -
Foreign currency translation - - - 122,512 - 122,512
Net Loss (1,937,171) (1,937,171)
______________________________________________________________________________________________________________________________
BALANCE, December 31, 2007 27,913,589 6,026,436 650,153 176,048 (6,087,101) 765,536
Exercise of stock options 635,001 213,431 (36,279) - - 177,152
Issuance of common stock for cash(net) 1,472,426 1,679,695 - - - 1,679,695
Issuance of common stock on exercise of warrants 771,430 578,572 578,572
Issuance of common stock as compensation 25,000 33,750 33,750
Issuance of common stock on settlement of debt 9,600 9,600 9,600
Stock-based compensation - - 756,451 - - 756,451
Components of comprehensive income (loss) -
Foreign currency translation - - - (298,322) - (298,322)
Net loss - - - - (3,382,718) (3,382,718)
______________________________________________________________________________________________________________________________
BALANCE, December 31, 2008 30,827,046 8,541,484 1,370,325 (122,274) (9,469,819) 319,716
==============================================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
47
NATURALLY ADVANCED TECHNOLOGIES, INC.
Consolidated Statements of Cash Flows
(In US Dollars)
____________________________________________________________________________________________________
For year ended December 31,
2008 2007
___________________________________________________________________________________________________
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
Net loss for the year $ (3,382,718) $ (1,937,171)
Adjustments to reconcile net loss to net cash from operating
activities
Amortization & depreciation 26,156 24,144
Stock based compensation 672,062 404,898
Shares issued for services - 6,150
CHANGES IN WORKING CAPITAL ASSETS AND LIABILITIES
Decrease (increase) in accounts receivable 276,957 (130,697)
Decrease (increase) in inventory 78,101 (583,356)
Decrease (increase) in prepaid expenses 16,400 (60,750)
(Decrease) increase in accounts payable (246,686) 196,905
(Decrease) increase in accrued liabilities 106,762 -
(Decrease) Increase in due to related parties (11,964) 11,693
___________________________________________________________________________________________________
Net cash flows used in operating activities (2,464,930) (2,068,184)
___________________________________________________________________________________________________
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Purchase of property and equipment (209,660) (96,194)
Acquisition of trademarks & license (5,614) (12,723)
___________________________________________________________________________________________________
Net cash flows used in investing activities (215,274) (108,917)
___________________________________________________________________________________________________
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Issuance of capital stock 2,553,558 1,890,662
Notes payable (repayment) (100,000) -
Related parties advances 225,000 410,000
Related parties payments (35,000) -
Long term debt (10,942) (16,828)
Short term loan 4,861 21,729
Capital lease obligation - (4,800)
___________________________________________________________________________________________________
Net cash flows from financing activities 2,637,477 2,300,763
___________________________________________________________________________________________________
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (298,322) 122,512
___________________________________________________________________________________________________
INCREASE (DECREASE) IN CASH (341,049) 246,174
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 660,407 414,233
___________________________________________________________________________________________________
CASH AND CASH EQUIVALENTS, END OF YEAR $ 319,358 $ 660,407
SUPPLEMENTAL CASH FLOW INFORMATION
AND NON-CASH FINANCING AND INVESTING ACTIVITIES:
Cash paid for interest $ 106,546 $ 39,340
Cash paid for income taxes $ - $ -
Capital stock issued in settlement of accounts payable $ 9,600 $ -
Capital stock issued as finance fee $ 33,750 $ 6,150
The accompanying notes are an intergral part of these consolidated
financial statements.
48
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Naturally Advanced Technologies Inc. (the "Company") was incorporated
in the Province of British Columbia, Canada, on October 6, 1998, and
is in the business of technological development, design and
distribution of apparel made from natural sustainable fibers.
The Company's shares of common stock commenced trading under the
symbol "NAT.V" on the TSX Venture Exchange on July 8, 2008.
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 $9,469,819 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.
During 2008 the Company raised $2,553,558 from equity funding for
working capital requirements. The Company plans to raise additional
financing as needed in 2009 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, particularly in the current economic environment.
COMPARATIVE FIGURES
Certain of the comparative figures have been reclassified to conform
to the current year's presentation.
49
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
2. SIGNIFICANT ACCOUNTING POLICIES
a) Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Hemptown USA,
Inc., a Nevada incorporated company; 0697872 B.C. Ltd., a
British Columbia incorporated company with extra-provincial
registration; its 100% ownership in Crailar Fiber Technologies
Inc., a British Columbia incorporated company with
extra-provincial registration, and its 100% ownership in
HTNaturals Apparel Corp. 0697872 B.C. Ltd. was incorporated to
hold ownership of a proposed fibre processing plant in
Saskatchewan, but in which the company is not proceeding.
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 5).
Hemptown USA Inc. and 0697872 B.C. Ltd. were incorporated by
the Company during 2004. Crailar Fiber Technologies Inc was
incorporated during 2005 and is focused on bast fibre research
and development. In 2007 HTNaturals Apparel Corp was
incorporated by the Company for all apparel sales. HTNaturals
Apparel Corp is 100% owned by the Company. 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 at the time of issuance.
2008 2007
_______ _______
Cash and cash equivalents consist of:
Cash 312,709 655,363
GIC 6,639 5,044
_______ _______
319,348 660,407
======= =======
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, provision for income taxes, depreciation and financial
instruments.
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
50
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
returns are based on historical return rates and sales
patterns. Allowances for doubtful accounts are established
through the evaluation of aged accounts receivable and prior
collection experience to estimate the ultimate realization of
these receivables.
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 cost determining by 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
Assets under capital lease straight-line over term of lease
51
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
i) Intangible Assets
Intangible assets are stated at cost and are amortized as
follows
Trademarks 5 year straight - line
NRC License Fee 10 year straight - line
Patent 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 accumulated comprehensive income
(loss), as a separate component of stockholders' equity.
Foreign currency transaction gains and losses are included in
the results of operations.
k) Income Taxes
The Company utilizes the liability method of accounting for
income taxes as set forth in SFAS No. 109, "ACCOUNTING FOR
INCOME TAXES". Under the liability method, future taxes are
determined based on the temporary differences between the
financial statement and tax bases of assets and liabilities
using enacted tax rates. A valuation allowance is recorded
when it is more likely than not that some of the future tax
assets will not be realized.
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.
52
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
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 December 31, 2008, and 2007 as their effect is
anti-dilutive.
o) Long-Lived Asset Impairment
Long-lived assets of the Company are reviewed when changes in
circumstances suggest their carrying value has become
impaired. Management considers assets to be impaired if the
carrying value exceeds the estimated undiscounted future
projected cash flows to result from the use of the asset and
its eventual disposition. If impairment is deemed to exist,
the assets will be written down to fair value. Fair value is
generally determined using a discounted cash flow analysis.
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.
53
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
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 December 31, 2008,
the Company had significant concentrations of credit exposure
to two customers however management has determined that these
customers do not pose a credit risk.
INTEREST RATE RISK. All term debt has fixed interest rates and
no significant exposure to interest rate fluctuation risk.
q) Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 160 "Noncontrolling
Interests in Consolidated Financial Statements-an amendment of
ARB No. 51". SFAS 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and
for the deconsolidation of a subsidiary. The guidance will
become effective for the fiscal year beginning after December
15, 2008. The management is in the process of evaluating the
impact SFAS 160 will have on the Company's financial
statements upon adoption.
In December 2007, the FASB issued SFAS No. 141 (Revised)
"Business Combinations". SFAS 141 (Revised) establishes
principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree. The statement also
provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what
information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the
business combination. The guidance will become effective for
the fiscal year beginning after December 15, 2008. The
management is in the process of evaluating the impact SFAS 141
(Revised) will have on the Company's financial statements upon
adoption.
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
54
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
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 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
and interim periods beginning on or 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.
In October 2008, the FASB issued FSP FAS 157-3, "DETERMINING
THE FAIR VALUE OF A FINANCIAL ASSET WHEN THE MARKET FOR THAT
ASSET IS NOT ACTIVE" ("SFAS 157-3"). The FSP provides guidance
clarifying how SFAS No. 157 should be applied when valuing
securities in markets that are not active. The guidance states
that significant judgment is required in valuing financial
assets and clarifies how management's internal assumptions
should be considered when relevant observable data does not
exist, how observable market information in a market that is
not active should be considered when measuring fair value, and
how the use of market quotes should be considered when
assessing the relevance of observable and unobservable data
available to measure fair value. The FSP is effective upon
55
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
issuance and includes financial statements for the period
ending on or before September 30, 2008. The Company has
adopted SFAS 157-3 prospectively beginning July 1, 2008, and
the adoption of FSP FAS 157-3 did not have a material impact
on the Company..
r) Research and Development
Research and development costs are charged to operations as
incurred and costs of $548,231 (net $220,445 - 2007) for the
year ended December 31, 2008 were attributable to Crailar
Fiber Technologies development of its bast fiber technology
and research and development costs associated with apparel are
$31,575 ($34,301 - 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.
3. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments -- SFAS No. 107, Disclosures
about Fair Value of Financial Instruments, requires management to
disclose the estimated fair value of certain assets and liabilities
defined by SFAS No. 107 as financial instruments. As at December 31,
2008, the Company believes that the carrying amount of cash and cash
equivalents, accounts receivable, loans payable, notes payable,
accounts payable and accrued liabilities and due to related parties
approximate fair value because of the short maturity of these
financial instruments.
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. Of the
amount assumed, $100,000 was due on July 22, 2008, with the balance
$200,000 due on July 22, 2009. The amount due in July 2008 was paid.
Included in accrued liabilities at December 31, 2008 is an accrual
for interest of $74,912. There was no fee paid for arranging the loan
renewal in 2007.
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
56
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
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. DUE TO RELATED PARTIES
On February 19, 2007, the Company signed a secured loan agreement
with a director for financing of apparel manufacturing. Under the
terms of this agreement, the Company can borrow up to $400,000 at an
annual 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 was originally due on February 28, 2008 which was subsequently
extended to February 28, 2009. During 2007, the Company made draws on
the loan totaling $510,000. 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.
The additional loan of $35,000 and outstanding interest of $40,726
were paid back to the director on July 22, 2008. An accrual for
interest of $21,358 has been included in amounts due to related party
as at December 31, 2008 ( 2007 - $33,322).
On February 16, 2009 the director advanced the Company an additional
$200,000 for a total amount due to the director, of $900,000. A new
secured loan agreement, with an interest rate of 12% is due in
February, 2011 and is for the total amount outstanding ($900,000).
Following is a schedule of directors and officers compensation for
the years ended December 31, 2008 and 2007.
FAIR VALUE OF
STOCK OPTIONS NUMBER OF
ANNUAL STOCK OPTIONS ISSUED IN YEAR OPTIONS VESTED FAIR VALUE OF
COMPENSATION ISSUED IN YEAR IN YEAR IN YEAR OPTIONS VESTED
2008 $524,412 950,000 $567,384 1,267,059 $ 563,246
2007 $420,777 1,755,000 $713,266 1,175,438 $ 297,869
57
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
6. PROPERTY AND EQUIPMENT
Accumulated Net Book Value Net Book Value
Cost Depreciation December 31, 2008 December 31, 2007
Computer equipment $ 17,002 $ 8,654 $ 8,348 $ 3,935
Equipment 8,039 4,111 3,928 7,001
Furniture and fixtures 28,258 9,273 18,985 27,071
Leasehold improvements 18,073 11,310 6,763 11,873
Computer Software 5,044 4,611 433 -
Computer equipment under capital
lease 43,482 43,124 358 1,583
Crailar facility equipment 215,245 - 215,245 7,793
Crailar facility building 21,295 - 21,295 19,484
______________________________________________________________________________________________________________________
$ 356,438 $ 81,083 $275,355 $ 78,740
======================================================================================================================
The Crailar facility equipment and building are not yet operational
and therefore no depreciation has been recorded.
7. INTANGIBLE ASSETS
The aggregate amortization expense for the year ended December 31,
2008 was $13,111. (2007 - $11,173). Trademarks acquired in 2008 and
2007 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 12(b)). Patent costs
were incurred at end of year. Amortization of patents will start in
2010.
Accumulated Net Book Value Net Book Value
Cost Amortization December 31, 2008 December 31, 2007
______________________________________________________________________________________________________________________
Patents $ 10,499 $ - $ 10,499 -
Trademarks 61,904 29,808 32,096 $ 43,863
Licence Fee 20,525 4,897 15,628 21,857
______________________________________________________________________________________________________________________
$ 92,928 $ 34,705 $ 58,223 $ 65,720
======================================================================================================================
58
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
8. PEMD PAYABLE
The Company has been advanced funds in the amount of $26,590 (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
sales amount was approximately $686,317 (CDN $835,934) and
accordingly the Company owes the full amount advanced as at December
31, 2008 ($21,729-2007). The total amount owing to PEMD was paid on
February 13, 2009.
9. CAPITAL STOCK
During the year ended December 31, 2008, the Company issued 2,913,457
shares of common stock as follows:
a) In December 2008, 285,715 shares pursuant to the exercise of
warrants at $0.75 per share for proceeds of $214,286.
b) In December 2008, 100,000 shares pursuant to the exercise of
warrants at $1.00 per share for proceeds of $100,000.
c) In August and September 2008, 135,000 shares pursuant to the
exercise of employee options at $0.31 per share for proceeds
of $ 41,850.
d) In August and September 2008, 12,501 shares pursuant to the
exercise of employee options at $0.80 per share for proceeds
of $ 10,000.
e) In July 2008, 1,472,426 units at $1.35 per unit pursuant to
private placement, for a gross proceeds of $1,987,775. Each
unit consists of one common share and one/half
non-transferable common stock purchase warrant exercisable at
$1.95 per share, expiring in July, 2010. The estimated fair
value of the warrants is $442,837 using the Black Scholes
option pricing model using a 2 year term, an expected
volatility of 83% and a risk free interest rate of 2.77%. The
Company paid a total $189,940 for agent commissions and other
expenses which have been recorded as share issue costs.
The Company also granted 111,742 agent's warrants, exercisable
to purchase an additional unit at a price of $1.35 per unit,
expiring in July, 2010. Each unit consists of one common share
and one/half non-transferable common stock purchase warrant
exercisable at $1.95 per share, expiring in July, 2010. The
estimated fair value of the agent's warrants is $84,390 using
the Black Scholes option pricing model using a 2 year term, an
59
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
expected volatility of 83% and a risk free interest rate of
2.54%, which has been recorded as share issue costs.
f) In July 2008, 25,000 shares as a corporate finance fee,
related to the above private placement, the shares had a fair
value of $33,750, which has been recorded as share issue
costs.
g) 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.
h) In May 2008, 9,600 bonus shares for work performed, the shares
had a fair value of $9,600.
i) In March 2008, 25,000 shares pursuant to the exercise of
employee options at $0.81 per share for proceeds of $ 20,250.
j) In March 2008, 285,715 shares pursuant to the exercise of
warrants at $0.75 per share for proceeds of $ 214,286.
k) In March 2008, 100,000 shares pursuant to the exercise of
warrants at $0.50 per share for proceeds of $50,000.
l) In February 2008, 97,500 shares pursuant to the exercise of
employee options at $0.20 per share for proceeds of $ 19,500.
m) In February 2008, 25,000 shares pursuant to the exercise of
employee options at $0.31 per share for proceeds of $ 7,750.
n) In February 2008, 10,000 shares pursuant to the exercise of
employee options at $0.50 per share for proceeds of $ 5,000.
o) In February 2008, 40,000 shares pursuant to the exercise of
employee options at $0.37 per share for proceeds of $ 14,800.
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
60
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
$300,000. Each unit consists of one common share and one
non-transferable common stock purchase warrant exercisable at
$0.70 per share, expiring in May, 2009. The estimated fair
value of the warrants is $143,502 using the Black Scholes
option pricing model using a 2 year term, an expected
volatility of 84% and a risk free interest rate of 4.66%.
c) In August 2007, 166,666 units at $0.60 per unit, for proceeds
of $100,000. Each unit consists of one common share and one
non-transferable common stock purchase warrant exercisable at
$0.90 per share, expiring in August, 2009. The estimated fair
value of the warrants is $56,257 using the Black Scholes
option pricing model using a 2 year term, an expected
volatility of 80% and a risk free interest rate of 4.64%.
d) In September 2007, 235,000 units at $0.70 per unit, for
proceeds of $164,500. Each unit consists of one common share
and one non-transferable common stock purchase warrant
exercisable at $1.00 per share, expiring in September, 2009.
The estimated fair value of the warrants is $60,222 using the
Black Scholes option pricing model using a 2 year term, an
expected volatility of 74% and a risk free interest rate of
4.64%.
e) In May, June, July and November 2007, 234,164 shares pursuant
to the exercise of employee options at $0.20 per share for
proceeds of $46,833.
f) In July and November 2007, 39,585 shares pursuant to the
exercise of employee options at $0.31 per share for proceeds
of $12,271.
g) In December 2007, 1,947 shares pursuant to the exercise of
employee options at $0.80 per share for proceeds of $ 1,558.
h) In November and December 2007, 2,300,000 shares pursuant to
the exercise of warrants at $0.50 per share for proceeds of
$1,150,000.
i) In November 2007, 7,500 bonus shares for work performed, the
shares had a fair value of $6,150.
Stock issuance costs of $30,000 were paid during the year
ended December 31, 2007 and stock issuance costs of $4,500
were accrued during the same period. These costs have been
recorded as a cost of capital.
The fair value of the warrants have been included in the Additional
Paid-in Capital.
Share purchase warrants outstanding at December 31, 2008 are
summarized as follows:
61
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Range of Exercise Price Number of Shares Contractual Life (yr)
_____________________________________________________________________
$0.70 - $1.00 1,773,812 .25
$1.00 - $1.95 1,095,465 1.35
_____________________________________________________________________
Total 2,869,277 .68
=====================================================================
Share purchase warrants outstanding are:
Weighted-
Average
Exercise
Shares 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 granted during the year 860,465 $ 1.87
Warrants expired during the year (210,000) $ 1.00
Warrants exercised during the year (771,430) $ 0.75
_____________________________________________________________________
Warrants outstanding at December 31, 2008 2,869,277 $ 1.10
=====================================================================
10. STOCK OPTION PLAN
2008 FIXED SHARE OPTION PLAN
In September 2008, the Company's Board of Directors approved the 2008
Fixed Share Option Plan ("the 2008 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
2008 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 2008 Plan permits the granting of incentive stock
options and nonqualified stock options up to an aggregate at any
point in time of 6,068,266 shares.
The fair value of options issued during the year ended December 31,
2008 was determined using the Black-Scholes option pricing model with
the following assumptions:
62
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
Year ended Year ended
December 31, 2008 December 31, 2007
__________________________________________
Risk-free interest rates 2.06% to 2.22% 4.48% to 4.66%
Volatility factor 74% to 77% 81% to105%
Expected life of options, in years 3 3
Weighted average fair value of options granted $1.28 $0.70
During the year ended December 31, 2008, the Company granted a total
of 600,000, three year common stock options to consultants,
exercisable at $1.25 and $1.45 per share, which were valued at
$353,336. These options were granted under the terms of the Company's
2008 Fixed Share Option Plan.
During the year ended December 31, 2008, 11,120 options vested and
accordingly an expense of $5,567 has been recorded as Consulting and
Contract Labour expense.
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.
During the year ended December 31, 2008, the Company granted a total
of 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 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, 2008, 1,470,778 (2007 - 1,572,862)
options vested and accordingly an expense of $672,061 (2007 -
$404,898) as been recorded with respect to those options, $355,923
(2007 - $126,491)was included in Consulting and Contract Labour
expense and $316,138 (2007 - $278,407) was included in Salaries &
Benefits expense.
63
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
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 year (635,001) 0.28
Options granted during the year 1,211,500 1.28
Options cancelled during the year (17,242) 1.10
Options outstanding, December 31, 2008 4,419,257 $ 0.76
___________________________________________________________________________________
December 31, 2008
___________________________________________________________________________________
Options Outstanding Options Exercisable
_________________________________________________________ ________________________
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (yr) Price Exercisable Price
_________________________________________________________ ________________________
$0.01 - $0.50 1,682,500 .78 $0.38 1,642,500 $0.38
$0.51 - $1.00 2,736,757 1.98 $0.99 1,574,939 $0.84
_________________________________________________________ ________________________
4,419,257 1.52 $0.76 3,217,439 $0.60
========================================================= ========================
___________________________________________________________________________________
December 31, 2007
___________________________________________________________________________________
Options Outstanding Options Exercisable
_________________________________________________________ ________________________
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (yr) Price Exercisable Price
_________________________________________________________ ________________________
$0.01 - $0.50 2,280,000 1.53 $0.34 2,150,454 $0.34
$0.51 - $1.00 1,580,000 2.60 $0.77 210,088 $0.80
_________________________________________________________ ________________________
3,860,000 1.97 $0.52 2,360,542 $0.38
========================================================= ========================
64
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
11. COMMITMENTS
a) ANNUAL LEASES
The Company is committed to current annual lease payments
totaling $206,791 for premises under lease. The lease expires
in 2011. Approximate minimum lease payments over the remainder
of the leases are as follows:
$
2009 87,706
2010 69,823
2011 49,261
_________________________________________
Total 206,791
=========================================
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
$231,527 (CDN $282,000) in cash. In addition to cash payments,
the Company contributed research and development valued at
approximately $454,439 (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
65
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
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,
$300,493 (CDN$366,000) of which $98,861 (CDN$120,413) was due
and paid in 2008.
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
$20,525 (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 $12,315
(CDN$15,000) per year. During the year ended December 31, 2008
the Company paid $ 6,157 (CDN$7,500) and accrued $6,157
(CDN$7,500) of the minimum annual royalty.
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 $20,525 (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 paid $8,210 (CDN
$10,000) on April 1, 2007, and $20,525 (CDN $25,000) as due
per quarter for 2007 and 2008. In addition to the above
payments, CFT will be responsible for providing work-in-kind
with a value of $20,525 (CDN $25,000) per calendar quarter
commencing with the first Project Agreement. 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
66
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
On August 24, 2008, the Company signed an agreement with its
Chief Executive Officer who will receive $12,500 a month for
the period of one year and 500,000 options that will not vest
until certain conditions are met. The contract can be
cancelled by either party with 30 days notice. As at December
31, 2008, none of the options had vested.
e) INVESTOR RELATION AGREEMENT
On September 2, 2008, the Company signed a consulting
agreement with a company to provide investor relation
services. Pursuant to the agreement, the Company agreed to
$15,000 per month for September and October, 2008, $9,000 per
month from November 2008 to August 2009, and granted 100,000
three year common stock options, exercisable at $1.25, vesting
over eighteen months.
12. INCOME TAXES
As at December 31, 2008, the Company has estimated tax loss carry
forwards for tax purposes of approximately $6,322,000 (2007 -
$6,191,000) which expire between 2010 and 2028. 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.
The reported income taxes differ from the amounts obtained by
applying statutory rates to the loss before income taxes as follows:
2008 2007
_____________________________________
Loss before income taxes $ 3,382,718 $ 1,937,171
Corporate tax rate 31% 32%
Expected income tax provision (recovery) $ (1,048,643) $ (610,209)
Increase (Decrease) resulting from:
Permanent differences and others 289,312 136,255
Change in valuation allowance (74,105) 473,954
Expiring loss carryforwards 43,553 -
Impact of foreign exchange changes 457,536 -
Impact of tax rate changes 375,365 -
Future tax benefit of share issue costs not
credited to share capital (43,018) -
_____________________________________
Future income tax provision (recovery) $ - $ -
=====================================
67
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
The tax effects of temporary differences that give rise to the
Company's future tax asset (liability) are as follows:
2008 2007
_______________________________
Property and equipment $ 8,361 $ 22,836
Intangible assets 30,014 (17,400)
Research and development pool 118,964 -
Share issue costs 32,436 -
Loss carry forwards 1,683,970 1,950,213
_______________________________
1,873,745 1,955,649
Valuation allowance (1,873,745) (1,955,649)
________________________________
$ - $ -
================================
68
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
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.
The Company's non-capital losses, which can be applied to reduce
future taxable income, expire as follows:
Year of Expiry Amount
2010 256,000
2014 866,000
2015 979,000
2026 1,311,000
2027 1,317,000
2028 1,748,000
________________
$6,477,000
================
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
13. RELATED PARTY TRANSACTIONS
During the year ended December 31, 2008, $524,412 (2007 - $420,777)
was incurred as remuneration to officers and directors of the
Company. Of this amount, $374,412 (2007 - $221,679) is recorded as
salaries and employee benefits expense and $150,000 (2007 - $199,098)
is recorded as contract labour expense.
On October 14, 2008, the Company granted 500,000 three year stock
options at an exercise price of $1.45 per share, under the Company's
2008 Fixed Share Option Plan to a director. These options were valued
at $303,269 and are being expensed as certain conditions are met with
approval of the board of directors, none of the options had vested in
the year ended December 31, 2008.
On February 1, 2008, the Company granted 611,500 three year stock
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 $358,903 and are being expensed over their one
year vesting period commencing August 1, 2008. Accordingly an expense
of $160,710 has been recognized in the year ended December 31, 2008.
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 $26,236 has been recognized in
the year ended December 31, 2008.
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
$479,548 has been recognized in the year ended December 31, 2008.
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
69
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
warrants is $47,834 using the Black Scholes option pricing model
using a 2 year term, an expected volatility of 84% and a risk free
interest rate of 4.66%.
In December 2007, a private company, in which the Company's CEO has a
1/3 equity ownership, exercised 200,000 warrants for 200,000 shares
at $0.50 per share for proceeds of $100,000.
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 $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,
except for stock options which are recorded at estimated fair values.
(See also Notes 5 and 11(d).)
14. CONCENTRATION RISK
For the year ended December 31, 2008, three suppliers accounted for
100% of the Company's purchases of inventory. One supplier is located
in China and supplied 98% of the Company's purchases, the other two
suppliers are located in North America and India and supplied
approximately 2%.
For the year ended December 31, 2007, four suppliers accounted for
100% of the Company's purchases of inventory. Two suppliers are
located in China and supplied 87% of the Company's purchases, the
other two suppliers are located in North America and supplied
approximately 13%.
70
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
15. 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 was successful
in the development of a mill by July 1, 2007, there would 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 September, 2008 the Company decided not to proceed
with the construction of a facility in Craik, and returned all rights
to the property to the town.
16. GOVERNMENT TAX CREDITS
The Company is eligible for certain tax credits from Government of
Canada under its Scientific Research and Development tax credit
program ("SRED" program).
During 2007, the Company received a refundable grant of $46,663 which
was recorded as a recovery of research and development expenses. The
Company is no longer eligible for refundable grants but will continue
to file under the SRED program for tax credits.
17. 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 YEAR ENDED DECEMBER 31, 2008
Naturally Advanced Crailar Fiber
Technologies Inc Technologies Inc Total
$ $ $
__________________________________________________________________________________
Revenue 2,607,153 - 2,607,153
Operating profit (loss) (2,431,197) (951,521) (3,382,718)
AS AT DECEMBER 31, 2008
Total assets 1,394,330 392,108 1,786,438
Intangible Assets 3,417 54,806 58,223
71
NATURALLY ADVANCED TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008
FOR THE YEAR ENDED DECEMBER 31, 2007
Naturally Advanced Crailar Fiber
Technologies Inc Technologies Inc Total
$ $ $
__________________________________________________________________________________
Revenue 2,490,885 - 2,490,885
Operating profit (loss) (1,687,832) (249,339) (1,937,171)
AS AT DECEMBER 31, 2008
Total assets 2,019,045 290,782 2,309,827
Intangible Assets 4,096 61,624 65,720
18. SUBSEQUENT EVENTS
a) In January and February 2009, 52,500 shares were issued
pursuant to the exercise of employee and consultants options
between $0.31 and $0.37 per share for proceeds of $16,875.
b) In March of 2009, 394,001 shares were issued pursuant to the
exercise of warrant shares at $0.75 per share for proceeds of
$295,501.
c) Subsequent to year end, 463,144 warrants with exercise price
of $0.75 per share expired, unexercised.
72
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 12, 2004, our Board of Directors approved and authorized the engagement
of Dale Matheson Carr-Hilton LaBonte, Chartered Accountants ("DMCL"), as our
independent public accountants. On June 16, 2004, we engaged DMCL of Suite 1500,
1140 West Pender Street, Vancouver, British Columbia, Canada V6E 4G1, as our
principal independent accountant.
The reports of DMCL on our financial statements for each of the fiscal years
ended December 31, 2008 and 2007 did not contain an adverse opinion or
disclaimer of opinion, nor were they modified as to uncertainty, audit scope or
accounting principles, other than to state that there is substantial doubt as to
our ability to continue as a going concern. During our fiscal years ended
December 31, 2008 and 2007, there were no disagreements between us and DMCL,
whether or not resolved, on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which, if not
resolved to the satisfaction of DMCL, would have caused DMCL to make reference
thereto in their reports on our audited consolidated financial statements.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
73
Kenneth Barker, our Chief Executive Officer, Larisa Harrison, our Chief
Administration Officer, and Guy Prevost, our Chief Financial Officer, have
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end
of the period covered by this Annual Report. Based on that evaluation, our
management, including our CEO and CFO, concluded that our disclosure controls
and procedures were effective as of December 31, 2008, to provide reasonable
assurance that information required to be disclosed by us in the reports filed
or submitted by us under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) under the
Exchange Act.
Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
o pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
our assets;
o provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance
with authorizations of management and our directors; and
o provide reasonable assurance regarding prevention and timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial
statements.
Internal control over financial reporting has inherent limitations, which
include but are not limited to the use of independent professionals for advice
and guidance, interpretation of existing and/or changing rules and principles,
segregation of management duties, scale of organization, and personnel factors.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements on a timely basis, however these
inherent limitations are known features of the financial reporting process and
it is possible to design into the process safeguards to reduce, though not
eliminate, this risk. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial
reporting based on criteria for effective internal control over financial
74
reporting described in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on its
assessment, management concluded that we maintained effective internal control
over financial reporting as of December 31, 2008.
This Annual Report does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only the management's report in this Annual
Report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes to our internal control over financial reporting that
occurred during the last quarter of our fiscal year ended December 31, 2008,
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
75
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
All of our directors hold office until the next annual general meeting of the
shareholders or until their successors are elected and qualified. Our officers
are appointed by our board of directors and hold office until their earlier
death, retirement, resignation or removal.
Our directors and executive officers, their ages, positions held are as follows:
NAME AGE POSITION WITH THE COMPANY
Kenneth C. Barker 53 Chief Executive Officer and a Director
Jason Finnis 38 President/Chief Operating Officer and a
Director
Larisa Harrison 37 Chief Administration Officer and
Secretary/Treasurer and a Director
Guy Prevost 49 Chief Financial Officer and a Director
Robert Edmunds 52 Director
Peter Moore 66 Director
Miljenko Horvat 49 Director
BUSINESS EXPERIENCE
The following is a brief account of the education and business experience of
each director, executive officer and key employee during at least the past five
years, indicating each person's principal occupation during the period, and the
name and principal business of the organization by which he or she was employed,
and including other directorships held in reporting companies.
KENNETH C. BARKER, PORTLAND, OREGON. Mr. Barker has been our Chief Executive
Officer since August 24, 2006, and a member of our Board of Directors since
February 6, 2006. Mr. Barker has over twenty years of apparel experience,
including merchandising, sourcing and full profit and loss responsibility,
public market experience and corporate governance. Mr. Barker is currently a
co-president of The Meriwether Group, Inc. of Portland, Oregon, which is a
corporate investment and business acceleration firm (the "Meriwether Group").
From approximately October 2003 through April 2005, Mr. Barker was the head of
apparel for the North American region for adidas International, where he was
responsible for all strategic product and marketing functions within the region.
His duties also included providing overall apparel direction and strategy for
the adidas North American apparel business, creation of the global brand vision
76
of apparel, and responsible for sales delivery and brand strategy in the North
American marketplace. From approximately January 2001 to October 2003, Mr.
Barker was the director of apparel for adidas America, where he was responsible
for overall profit and loss for the entire apparel business in the United
States. Mr. Barker also previously worked for Adidas Canada Limited in Toronto,
Canada and Levi Strauss & Co.
JASON FINNIS, VANCOUVER, BRITISH COLUMBIA. Mr. Finnis has been a member of the
Board of Directors and our President since December 15, 2000 and our Chief
Operating Officer since December 7, 2005. Mr. Finnis has been working as an
entrepreneur in the hemp industry since 1994. He has started and grown three
different hemp enterprises since 1994 and has built a market for his products,
now marketed under the HT Naturals brand name, throughout North America and
several cities outside North America. Mr. Finnis has established strong ties
with the Federal Government of Canada and was instrumental in removing the
Canadian tariff on all imported hemp fabric. Mr. Finnis has been a sought after
speaker at many North American universities and conferences speaking on a wide
variety of business and industrial hemp related topics. Mr. Finnis attended the
University of Victoria in the Faculty of Fine Arts, and possesses broad
experience in apparel manufacturing, marketing and sales.
LARISA HARRISON, VANCOUVER, BRITISH COLUMBIA. Ms. Harrison has been a member of
the Board of Directors and our Chief Administration Officer and
Secretary/Treasurer since December 15, 2000. Ms. Harrison has been working in
the hemp clothing industry since 1995. Ms. Harrison was instrumental in creating
the growth in demand for our products over the past years. From 1998 to 2005,
Ms. Harrison worked as a self-employed administrative consultant providing human
resource management, developing customizing computer databases, and providing
bookkeeping services for several Canadian businesses. In May of 1998, Ms.
Harrison was employed by one of Canada's largest providers of private label
fashion to North American department and chain stores. In this role, Ms.
Harrison provided product development, sales support and production management
for a number of clients. Ms. Harrison possesses extensive experience in the
apparel industry, network administration, and graphic design. Ms. Harrison is a
graduate of the University of Victoria with a Fine Arts degree from the School
of Music.
GUY PREVOST, VANCOUVER, BRITISH COLUMBIA. Mr. Prevost is a member of our Board
of Directors and, since May 2, 2005, has been our Chief Financial Officer. Mr.
Prevost has over fifteen years of public market experience in accounting,
finance and corporate governance. From 2000 to 2004 , Mr. Prevost had been
engaged as the controller for Hotsports Internet Corporation. Mr. Prevost's
duties and responsibilities on our behalf will generally entail financial
reporting and establishing internal procedures and controls. Mr. Prevost is a
member of the Certified General Accountants Association of British Columbia and
of the Certified General Accountants' Association of Canada.
ROBERT EDMUNDS, C.A., CALGARY, ALBERTA. Mr. Edmunds has been a member of the
Board of Directors since December 15, 2000 and previously our Chief Financial
officer until his resignation effective April 27, 2005. Mr. Edmunds received a
Chartered Accountant designation in 1992. He has worked as the proprietor of a
public practice from 1992 through 1998. Since 1998, Mr. Edmunds has been
performing consulting work, providing business strategy, financial planning and
accounting services for various clients in the entertainment and E-commerce
industries.
77
PETER MOORE, PORTLAND, OREGON. Mr. Moore has been one of our directors since
July 11, 2006, and on our Advisory Board since October 2004. We believe Mr.
Moore is generally considered one of the top branding and design experts in the
industry. He has over twenty years of footwear and apparel experience, including
design and development, involving Nike, adidas and several other prominent
brands and concepts in sportswear history. His roles have included creative
director at Nike (Air Jordan, Nike Air). Mr. Moore was one of two individuals
responsible for creation of the Air Jordan concept during the mid-1980's after
which he subsequently left with a colleague to form Sports Inc. a sports
marketing company in Portland, Oregon. Mr. Moore was also previously the chief
executive officer adidas North America and worldwide creative director of adidas
AG.
MILJENKO HORVAT, VANCOUVER, BRITISH COLUMBIA. Mr. Horvat has been one of our
directors since July 11, 2006. Mr. Horvat has over twenty years of experience in
the investment banking and private investing industry. Mr. Horvat currently is
the President of Horvat Capital Corp., a Vancouver-based investment firm. Mr.
Horvat's duties include sourcing and managing leverage buyout transactions
throughout Canada on behalf of The Riverside Company, a private equity firm that
has over $1.5 billion under management involving investments in industry
segment-leading companies with enterprise values between $15,000,000 and
$150,000,000. Previously, Mr. Horvat was the president and chief executive
officer of NewspaperDirect, Inc., a corporation based in New York and Vancouver,
Canada, which is an Internet based, print on demand distributor of daily
newspapers. While at NewspaperDirect, Inc., Mr. Horvat was responsible for
raising a total of $12,500,000 in funding, establishing relationships with 185
publishers of daily newspapers around the world, expanding market presence to 65
countries, implementing a radical restructuring in response to market conditions
during 2001, and growing revenues of 450% in twelve months resulting in sales
for fiscal year 2003 of $1,500,000. Mr. Horvat's prior experience also includes
employment at Citicorp as managing director, Russia Direct Equity, and at
Citibank, Russia, where he led the creation of Citibank's full service
commercial banking operations in Russia. Mr. Horvat is also a member of the
Advisory Board of the Maurice Young Center for Entrepreneurship. He earned an
M.A. in International Relations at Yale University and a B.A. in Political
Science from Zagreb University.
FAMILY RELATIONSHIPS
As of the date of this Annual Report, Ms. Harrison and Mr. Finnis are married.
Otherwise, there are no family relationships among our directors or officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
During the past five years, none of our directors, executive officers or persons
that may be deemed promoters is or have been involved in any legal proceeding
concerning (i) any bankruptcy petition filed by or against any business of which
such person was a general partner or executive officer either at the time of the
bankruptcy or within two years prior to that time; (ii) any conviction in a
criminal proceeding or being subject to a pending criminal proceeding (excluding
traffic violations and other minor offenses); (iii) being subject to any order,
judgment or decree, not subsequently reversed, suspended, or vacated, of any
court of competent jurisdiction permanently or temporarily enjoining, barring,
suspending or otherwise limiting involvement in any type of business, securities
78
or banking activity; or (iv) being found by a court, the Securities and Exchange
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law (and the judgment has not been
reversed, suspended or vacated).
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
As of the date of this Annual Report, Mr. Edmunds, Mr. Horvat and Ms. Harrison
have been appointed as members to our audit committee. Two of the members are
"independent" within the meaning of Rule 10A-3 under the Exchange Act. The Board
of Directors has determined that there is a financial expert serving on its
audit committee. The financial expert and committee chair is Mr. Robert Edmunds,
C.A. The audit committee operates under a written charter adopted by the board
of directors on February 28, 2008.
The audit committee's primary function is to provide advice with respect to our
financial matters and to assist the Board of Directors in fulfilling its
oversight responsibilities regarding finance, accounting, and legal compliance.
The audit committee's primary duties and responsibilities will be to: (i) serve
as an independent and objective party to monitor our financial reporting process
and internal control system; (ii) review and appraise the audit efforts of our
independent accountants; (iii) evaluate our quarterly financial performance as
well as our compliance with laws and regulations; (iv) oversee management's
establishment and enforcement of financial policies and business practices; and
(v) provide an open avenue of communication among the independent accountants,
management and the Board of Directors.
ADVISORY BOARD
The Board of Directors has established an advisory board to consist of industry
experts and persons held in high regard within their industry. The advisory
board currently has three members who are available on a limited basis to
provide industry or market input as requested by our officers and directors. As
of the date of this Annual Report, the members of the advisory board do not
receive any compensation for their services. The members of the advisory board
provide a consultative function and they are not members of our Board of
Directors.
Mr. John Hoekman joined the advisory board in November 2005. Mr. Hoekman is the
senior vice-president with investment bank Stephens Inc. His focus is on
business development and he provides capital market fund raising and advice to
us.
Ms. Lesley Hayes joined the advisory board in 2006. Ms. Hayes is the president
of No Drama Media, an Alberta based business consultancy. She has founded or
been principle of three public companies and is currently completing her EMBA
through the University of Calgary/University of Alberta. As one of our former
board members, Ms. Hayes assists us with business planning and documentation.
Mr. Jeremy Jones joined the advisory board in March of 2009. Mr. Jones was Vice
President of Koch Genesis, the venture arm of Koch Industries, the largest
private company in the United States from 2007 through 2009. At Koch he was
79
responsible for deal sourcing, diligence and structuring in areas such as
renewable fuels, biopolymers, medical textiles and advanced fibers for Koch's
operating businesses INVISTA, Georgia-Pacific and Flint Hills Resources. Prior
to Koch, Jones was in leadership and corporate officer roles in Fortune 500
companies such as Polaroid, Motorola and Cabot Microelectronics, where he built
several businesses in optical and electronic materials, as well as in start-ups
such as Crosslink, a St. Louis company commercializing conductive polymer
materials. Jeremy has a Master of Science in Materials Engineering from
Worcester Polytechnic Institute and an MBA from Babson College. Mr. Jones
assists us in business development.
CODE OF ETHICS
Our Board of Directors has adopted a code of ethics applicable to all our
employees and directors (the "Code").
The Code is intended to describe our core values and beliefs and to provide the
foundation for all business conduct. The Code is further intended to focus our
Board of Directors and each director, officer and employee on areas of ethical
risk, provide guidance to our directors, officers and employees to help them
recognize and deal with ethical issues, provide mechanisms to report unethical
conduct, and help foster a culture of honesty and accountability. Our guidelines
for conducting business are consistent with the highest standards of business
ethics. Each director, officer and employee must comply with the letter and
spirit of this Code.
We have posted the text of the Code on our Internet website at
www.naturallyadvanced.com Furthermore, upon request, we shall provide to any
person without charge a copy of the Code. Any such requests should be directed
to Ms. Larisa Harrison, Chief Administration Officer, 402-1008 Homer Street,
Vancouver, British Columbia, Canada V6B 2X1.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires directors and officers, and the
persons who beneficially own more than 10% of common stock, of certain companies
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission. We are not required to file reports under Section 16 of the
Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to our Chief Executive
Officer and those executive officers that earned in excess of $100,000 during
fiscal years ended December 31, 2008 and 2007 and 2006 (collectively, the "Named
Executive Officers"):
80
SUMMARY COMPENSATION TABLE
________________________________________________________________________________________________________________________________
NON-QUALIFIED
NON-EQUITY DEFERRED
STOCK INCENTIVE PLAN COMPENSATION ALL OTHER
NAME AND PRINCIPAL SALARY BONUS AWARDS OPTION COMPENSATION EARNINGS COMPENSATION TOTAL
POSITION YEAR ($) ($) ($) AWARDS ($) ($) ($) ($) ($) (2)(3)
________________________________________________________________________________________________________________________________
Kenneth Barker, CEO (1) (2)
2006 $62,500 -0- -0- $146,913 --- --- --- $209,413
2007 50,000 -0- -0- 419,954 --- --- --- 569,954
2008 150,000 -0- -0- 303,269 --- --- --- 453,269
________________________________________________________________________________________________________________________________
Jason Finnis, President (3)
2006 $68,398 -0- -0- $24,836 --- --- --- $ 93,234
2007 88,268 -0- -0- 67,193 --- --- --- 155,461
2008 124,804 -0- -0- 73,365 --- --- --- 198,169
________________________________________________________________________________________________________________________________
Guy Prevost, CFO (4)
2006 $74,656 -0- -0- $24,836 --- --- --- $99,492
2007 98,276 -0- -0- 115,436 --- --- --- 213,712
2008 124,804 -0- -0- 73,365 --- --- --- 198,169
________________________________________________________________________________________________________________________________
Larisa Harrison, CAO
Secretary/ Treasurer (5)
2007 $84,233 -0- -0- $70,491 --- --- --- $154,725
2008 124,804 -0- -0- 73,365 --- --- --- 198,169
________________________________________________________________________________________________________________________________
(1) This amount represents fees This amount represents fees paid by us to the
Named Executive Officer during fiscal year ended December 31, 2008, 2007
and 2006 pursuant to an executive services agreement between us and the
Named Executive Officer, which is more particularly described in this
Annual Report.
(2) This amount represents the fair value of the 700,000 Stock Options at the
date of grant during fiscal year ended December 31, 2006, which was
estimated using the Black-Scholes option pricing model. This amount
represents the fair value of the 1,000,000 Stock Options at the date of
grant during fiscal year ended December 31, 2007, which was estimated using
the Black Scholes option pricing model. This amount represents the fair
value of the 500,000 Stock Options at the date of grant during fiscal year
ended December 31, 2008, which was estimated using the Black Scholes option
pricing model. The value of the Stock Options that have vested as of the
date of this Annual Report is $314,965.
81
(3) This amount represents the fair value of the 125,000 Stock Options at the
date of grant during fiscal year ended December 31, 2006, which was
estimated using the Black-Scholes option pricing model. This amount
represents the fair value of the 150,000 Stock Options at the date of grant
during fiscal year ended December 31, 2007, which was estimated using the
Black Scholes option pricing model. This amount represents the fair value
of the 125,000 Stock Options at the date of grant during fiscal year ended
December 31, 2008, which was estimated using the Black Scholes option
pricing model. The value of the Stock Options that have vested as of the
date of this Annual Report is $75,367.
(4) This amount represents the fair value of the 125,000 Stock Options at the
date of grant during fiscal year ended December 31, 2006, which was
estimated using the Black-Scholes option pricing model. This amount
represents the fair value of the 350,000 Stock Options at the date of grant
during fiscal year ended December 31, 2007, which was estimated using the
Black Scholes option pricing model. This amount represents the fair value
of the 125,000 Stock Options at the date of grant during fiscal year ended
December 31, 2008, which was estimated using the Black Scholes option
pricing model. The value of the Stock Options that have vested as of the
date of this Annual Report is $56,807.
(5) This amount represents the fair value of the 160,000 Stock Options at the
date of grant during fiscal year ended December 31, 2007, which was
estimated using the Black-Scholes option pricing model. This amount
represents the fair value of the 125,000 Stock Options at the date of grant
during fiscal year ended December 31, 2008, which was estimated using the
Black Scholes option pricing model. The value of the Stock Options that
have vested as of the date of this Annual Report is $75,367.
STOCK OPTIONS/SAW GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2008
The following table sets forth information as at December 31, 2008, relating to
Stock Options that have been granted to the Named Executive Officers:
82
____________________________________________________________________________________________________________________________________
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
____________________________________________________________________________________________________________________________________
OPTION AWARDS STOCK AWARDS
____________________________________________________________________________________________________________________________________
Equity
Incentive
Equity Plan
Incentive Awards:
Plan Market or
Awards: Payout
Equity Market Number of Value of
Incentive Plan Value of Unearned Unearned
Number of Number of Awards: Number Number of Shares Shares, Shares,
Securities Securities of Securities Shares or or Units Units or Units or
Underlying Underlying Underlying Units of of Stock Other Other
Unexercised Unexercised Unexercised Option Stock That That Rights That Rights That
Options Options Unearned Exercise Option Have Not Have Not Have Not Have Not
Exercisable Unexercisable Options Price Expiration Vested Vested Vested Vested
Name (#) (#) (#) ($) Date (#) ($) (#) (#)
____________________________________________________________________________________________________________________________________
Kenneth Barker, CEO 500,000 -0- -0- $1.45 10/14/11 -0- -0- -0- -0-
____________________________________________________________________________________________________________________________________
Jason Finnis, 125,000 -0- -0- $1.15 02/01/11 -0- -0- -0- -0-
President
____________________________________________________________________________________________________________________________________
Guy Prevost, CFO 125,000 -0- -0- $1.15 02/01/11 -0- -0- -0- -0-
Larisa Harrison,
____________________________________________________________________________________________________________________________________
Larisa Harrison, 125,000 -0- -0- $1.15 02/01/11 -0- -0- -0- -0-
Chief Administrative
Officer
____________________________________________________________________________________________________________________________________
The following table sets forth information relating to compensation paid to our
directors during fiscal year ended December 31, 2008 and 2007:
DIRECTOR COMPENSATION TABLE
Change in
Pension
Value and
Fees Non-Equity Nonqualified
Earned or Incentive Deferred All
Paid in Stock Option Plan Compensation Other
Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) ($) ($) ($) ($)
_____________________________________________________________________________________________________________________________
(1)
Kenneth Barker
2007 -0- -0- -0- -0- -0- -0- $ -0-
2008 -0- -0- -0- -0- -0- -0- -0-
(1)
Jason Finnis
2007 -0- -0- -0- -0- -0- -0- $ -0-
2008 -0- -0- -0- -0- -0- -0- -0-
(1)
Larisa Harrison
2007 -0- -0- -0- -0- -0- -0- $ -0-
2008 -0- -0- -0- -0- -0- -0- -0-
(1)
Guy Prevost
2007 -0- -0- -0- -0- -0- -0- $ -0-
2008 -0- -0- -0- -0- -0- -0- -0-
Robert Edmunds (2)
2007 -0- -0- $17,864 -0- -0- -0- $ 17,864
2008 -0- -0- 14,673 -0- -0- -0- 14,673
Peter Moore (3)
2007 -0- -0- $14,276 -0- -0- -0- $ 14,276
2008 -0- -0- 14,673 -0- -0- -0- 14,673
Miljenko Horvat (4)
2007 -0- -0- $17,864 -0- -0- -0- $ 17,864
2008 -0- -0- 14,673 -0- -0- -0- 14,673
83
(1) These individuals received compensation in accordance with their respective
positions as executive officers as reflected on the Summary Compensation Table
for Named Executive Officers, of which the grant of Stock Options has been
included.
(2) This amount represents the fair value of 35,000 Stock Options at the date of
grant during fiscal year ended December 31, 2007, which was estimated using the
Black-Scholes option pricing model. This amount represents the fair value of
35,000 Stock Options at the date of grant during fiscal year ended December 31,
2008, which was estimated using the Black-Scholes option pricing model.
(3) This amount represents the fair value of 25,000 Stock Options at the date of
grant during fiscal year ended December 31, 2007, which was estimated using the
Black-Scholes option pricing model. This amount represents the fair value of
25,000 Stock Options at the date of grant during fiscal year ended December 31,
2008, which was estimated using the Black-Scholes option pricing model.
(4) This amount represents the fair value of 35,000 Stock Options at the date of
grant during fiscal year ended December 31, 2007, which was estimated using the
Black-Scholes option pricing model. This amount represents the fair value of
25,000 Stock Options at the date of grant during fiscal year ended December 31,
2008, which was estimated using the Black-Scholes option pricing model.
EMPLOYMENT AND CONSULTING AGREEMENTS
RENEWAL OF CEO EXECUTIVE SERVICES AGREEMENT
On August 24, 2006, we entered into a one-year chief executive services
agreement with Meriwether Accelerators, LLC, the private limited liability
company ("Meriwether Accelerators"), through which we engage Kenneth Barker as
our Chief Executive Officer (the "2006 CEO Services Agreement"). In accordance
with the terms and provisions of the 2006 CEO Services Agreement: (i) we
retained Mr. Barker as our Chief Executive Officer and the Meriwether
Accelerators as a consultant to us; (ii) Mr. Barker provides such corporate
management related services as our Board of Directors shall from time to time
reasonably assign and as may be necessary for the ongoing maintenance and
development of our various business interests; (iii) we pay to Meriwether
Accelerators a monthly fee of $12,500 U.S. (with the acknowledgment that an
additional monthly fee of $2,500 U.S. has been paid and will continue to be paid
to the Meriwether Accelerators under a pre-existing services arrangement); and
(iv) we granted to Meriwether Accelerators an aggregate 200,000 stock options at
an exercise price of $0.31 per share exercisable for a period of three years
vesting immediately and a further 500,000 stock options at an exercise price of
$0.31 per share, which shall vest at certain dates upon the attainment by us of
certain initial deliverables which have been agreed upon by the parties in
advance.
84
On approximately November 27, 2007, we authorized the renewal of the 2006 CEO
Services Agreement (the "2007 CEO Services Agreement"). Pursuant to the 2007 CEO
Services Agreement, Mr. Barker was engaged for an additional one-year term to
serve as our Chief Executive Officer. We granted to Meriwether Accelerators an
aggregate of 1,000,000 stock options at an exercise price of $0.75 per share,
which shall vest in accordance with the attainment of certain deliverables.
On approximately October 23, 2008, we authorized the renewal of the 2007 CEO
Services Agreement (the "2008 CEO Services Agreement"). Pursuant to the 2008 CEO
Services Agreement, Mr. Barker was engaged was engaged for an additional
one-year term to serve as our Chief Executive Officer. In accordance with the
terms and provisions of the 2008 CEO Services Agreement: (i) we agreed to retain
Mr. Barker as our Chief Executive Officer and to further engage Meriwether
Accelerators as a consultant; (ii) we agreed to pay to Meriwether Accelerators a
gross monthly fee of $12,500, with the acknowledgement that an additional fee of
$2,500 per month has been paid and continues to be payable by us; and (iii) we
granted to Meriwether Accelerators an aggregate 500,000 Stock Options at an
exercise price of $1.45 per share, which shall vest in accordance with the
attainment of certain deliverables and our 2008 Fixed Share Option Plan and the
rules of the TSX Venture Exchange.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
As of the date of this Annual Report, the following table sets forth certain
information with respect to the beneficial ownership of our common stock by each
stockholder known by us to be the beneficial owner of more than 5% of our common
stock and by each of our current directors and executive officers. Each person
has sole voting and investment power with respect to the shares of common stock,
except as otherwise indicated. Beneficial ownership consists of a direct
interest in the shares of common stock, except as otherwise indicated. As of the
date of this Annual Report, there are 31,273,547 shares of common stock issued
and outstanding.
AMOUNT AND NATURE OF PERCENTAGE OF BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIAL OWNERSHIP(1) OWNERSHIP
DIRECTORS AND OFFICERS:
Kenneth Barker 3,723,887 (2) 11.91%
1008 Homer Street, Suite 402
Vancouver, British Columbia
Canada V6B 2X1
Jason Finnis and Larisa Harrison 3,125,550 (3) 9.99%
1008 Homer Street, Suite 402
Vancouver, British Columbia
Canada, V6B 2X1
Guy Prevost 729,563 (4) 2.33%
1008 Homer Street, Suite 402
Vancouver, British Columbia
Canada, V6B 2X1
Robert Edmunds 2,088,141 (5) 6.68%
1008 Homer Street, Suite 402
Vancouver, British Columbia
Canada, V6B 2X1
Peter Moore 2,100,000 (6) 6.71%
1008 Homer Street, Suite 402
Vancouver, British Columbia
Canada, V6B 2X1
Miljenko Horvat 1,919,044 (7) 6.14%
1008 Homer Street, Suite 402
Vancouver, British Columbia
Canada, V6B 2X1
ALL OFFICERS AND DIRECTORS AS A GROUP (7) 13,686,185 (8) 43.76%
10% OF GREATER BENEFICIAL OWNERS
Dennis Howitt Trust 3,255,000 (9) 10.56%
1008 Homer Street, Suite 402
Vancouver, British Columbia
Canada, V6B 2X1
* Less than one percent.
(1) Under Rule 13d-3, a beneficial owner of a security includes any person
who, directly or indirectly, through any contract, arrangement,
understanding, relationship, or otherwise has or shares: (i) voting power,
which includes the power to vote, or to direct the voting of shares; and
(ii) investment power, which includes the power to dispose or direct the
disposition of shares. Certain shares may be deemed to be beneficially
owned by more than one person (if, for example, persons share the power to
vote or the power to dispose of the shares). In addition, shares are
deemed to be beneficially owned by a person if the person has the right to
acquire the shares (for example, upon exercise of an option) within 60
days of the date as of which the information is provided. In computing the
percentage ownership of any person, the amount of shares outstanding is
deemed to include the amount of shares beneficially owned by such person
(and only such person) by reason of these acquisition rights. As a result,
the percentage of outstanding shares of any person as shown in this table
does not necessarily reflect the person's actual ownership or voting power
with respect to the number of shares of common stock actually outstanding
as of the date of this Annual Report. As of the date of this Annual
Report, there are 31,273,547 shares issued and outstanding.
(2) This figure includes: (i) 1,273,887shares of common stock, of which
300,000 shares are held of record by Meriwether Investments LLC (of which
Mr. Barker has a 50% equity ownership interest) and 964,287 shares are
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held of record by Meriwether Capital Partners LP (of which Mr. Barker has
a 1/3 equity ownership interest in Meriwether Ventures, the general
partnership which is the manager of Meriwether Capital Partners LP); (ii)
9,600 shares of common stock held of record by Abundanceforlife Living &
Interiors, a company solely owned by Di Barker, the wife of Kenneth
Barker, and who has sole dispositive and voting power over the shares of
common stock; (iii) 200,000 Stock Options held of record by Meriwether
Investments LLC exercisable into 200,000 shares of common stock at $0.50
per share expiring on May 15, 2009; (iv) 500,000 Stock Options held of
record by Meriwether Investments LLC exercisable into 500,000 shares of
common stock at $0.31 per share expiring on August 15, 2009; (v) 250,000
warrants held of record by Meriwether Capital Partners LP exercisable into
250,000 shares of common stock at $0.70 per share expiring on May 3, 2009;
(vi) 1,000,000 Stock Options held of record by Meriwether Investments LLC
exercisable into 1,000,000 shares of common stock at $0.75 per share
expiring on August 24, 2010; and (vii) 500,000 Stock Options held of
record by Meriwether Investments LLC exercisable into 500,000 shares of
common stock at $1.45 per share expiring October 14, 2011.
(3) This figure includes: (i) 2,065,550 shares of common stock held of record
jointly by Jason Finnis and Larisa Harrison who are husband and wife; (ii)
125,000 Stock Options held of record by Jason Finnis exercisable into
125,000 shares of common stock at $0.31 per share expiring on August 23,
2009; (iii) 125,000 Stock Options held of record by Larisa Harrison
exercisable into 125,000 shares of common stock at $0.31 per share
expiring on August 23, 2009; (iv) 150,000 Stock Options held of record by
Jason Finnis exercisable into 150,000 shares of common stock at $0.80 per
share expiring on August 8, 2010; (v) 150,000 Stock Options held of record
by Larisa Harrison exercisable into 150,000 shares of common stock at
$0.80 per share expiring on August 8, 2010; (vi) 10,000 Stock Options held
of record by Larisa Harrison exercisable into 10,000 shares of common
stock at $0.50 per share expiring on May 15, 2010; (vii) 125,000 Stock
Options held of record by Jason Finnis exercisable into 125,000 shares of
common stock at $1.15 per share expiring on February 1, 2011; (viii)
125,000 Stock Options held of record by Larisa Harrison exercisable into
125,000 shares of common stock at $1.15 per share expiring on February 1,
2011; (ix) 125,000 Stock Options held of record by Jason Finnis
exercisable into 125,000 shares of common stock at $1.12 per share
expiring on January 21, 2012; and (x) 125,000 Stock Options held of record
by Larisa Harrison exercisable into 125,000 shares of common stock at
$1.12 per share expiring on January 21, 2012.
(4) This figure includes: (i) 57,063 shares of common stock held of record;
(ii) 72,500 Stock Options exercisable into 72,500 shares of common stock
at $0.31 per share expiring on August 23, 2009; (iii) 350,000 Stock
Options exercisable into 350,000 shares of common stock at $0.50 per share
expiring on May 15, 2010; (iv) 125,000 Stock Options exercisable into
125,000 shares of common stock at $1.15 per share expiring on February 1,
2011; and (v) 125,000 Stock Options exercisable into 125,000 shares of
common stock at $1.12 per share expiring on January 21, 2012.
(5) This figure includes: (i) 1,703,604 shares of common stock held of record
by Robert Edmunds; (ii) 240,000 shares of common stock held by record by
Lesley Hayes, the wife of Robert Edmunds; (iii) 25,000 Stock Options held
of record by Robert Edmunds exercisable into 25,000 shares of common stock
at $0.80 per share expiring on August 8, 2010; (iv) 12,500 Stock Options
held of record by Lesley Hayes exercisable into 12,500 shares of common
stock at $0.80 per share expiring on August 8, 2010; (v) 25,000 Stock
Options held of record by Robert Edmunds exercisable into 25,000 shares of
common stock at $1.15 per share expiring on February 1, 2011; (vi) 10,000
86
Stock Options held of record by Lesley Hayes exercisable into 10,000
shares of common stock at $1.15 per share expiring on February 1, 2011;
(vii) 37,037 warrants exercisable into 37,037 shares of common stock at
CDN $1.95 per share expiring on July 3, 2010; (viii) 25,000 Stock Options
held of record by Robert Edmunds exercisable into 25,000 shares of common
stock at $1.12 per share expiring on January 21, 2012; and (ix) 10,000
Stock Options held of record by Lesley Hayes exercisable into 10,000
shares of common stock at $1.12 per share expiring on January 21, 2012;
(6) This figure includes: (i) 2,000,000 shares of common stock held of record;
(ii) 25,000 Stock Options exercisable into 25,000 shares of common stock
at $0.31 per share expiring on August 23, 2009; (iii) 25,000 Stock Options
exercisable into 25,000 shares of common stock at $0.80 per share expiring
on August 8, 2010; (iv) 25,000 Stock Options exercisable into 25,000
shares of common stock at $1.15 per share expiring on February 1, 2011;
and (v) 25,000 Stock Options exercisable into 25,000 shares of common
stock at $1.12 per share expiring on January 21, 2012.
(7) This figure includes: (i) 1,309,044 shares of common stock held of record;
(ii) 25,000 Stock Options exercisable into 25,000 shares of common stock
at $0.31 per share expiring on August 23, 2009; (iii) 10,000 Stock Options
exercisable into 10,000 shares of common stock at $0.50 per share expiring
on May 15, 2010; (iv) 500,000 Warrants exercisable into 500,000 shares of
common stock at $0.70 per share expiring on May 31 2009; (v) 25,000 Stock
Options exercisable into 25,000 shares of common stock at $0.80 per share
expiring on August 8, 2010; (vi) 25,000 Stock Options exercisable into
25,000 shares of common stock at $1.15 per share expiring on February 1,
2011; and (vii) 25,000 Stock Options exercisable into 25,000 shares of
common stock at $1.12 per share expiring on January 21, 2012.
(8) This figure includes: (i) 8,649,148 shares of common stock held of record;
(ii) 4,250,000 Stock Options exercisable into 4,250,000 shares of common
stock; and (iii) 787,037 Warrants exercisable into 787,037 shares of
common stock.
(9) This figure includes: (i) 3,200,000 shares of common stock held of record
by the Dennis Howitt Trust; and (ii) 55,000 shares of common stock held of
record in joint tenancy by Dennis Howitt and Linda M. Winks.
CHANGES IN CONTROL
We are unaware of any contract, or other arrangement or provision, the operation
of which may at a subsequent date result in a change of control of our company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Except for the transactions described below, none of our directors, officers or
principal stockholders, nor any associate or affiliate of the foregoing, have
any interest, direct or indirect, in any transaction or in any proposed
transactions, during our fiscal years ended December 31, 2007 and 2008.
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EMPLOYMENT AND CONSULTING AGREEMENTS
RENEWAL OF CEO EXECUTIVE SERVICES AGREEMENT
On August 24, 2006, we entered into a one-year chief executive services
agreement with Meriwether Accelerators, LLC, the private limited liability
company ("Meriwether Accelerators"), through which we engage Kenneth Barker as
our Chief Executive Officer (the "2006 CEO Services Agreement"). In accordance
with the terms and provisions of the 2006 CEO Services Agreement: (i) we
retained Mr. Barker as our Chief Executive Officer and the Meriwether
Accelerators as a consultant to us; (ii) Mr. Barker provides such corporate
management related services as our Board of Directors shall from time to time
reasonably assign and as may be necessary for the ongoing maintenance and
development of our various business interests; (iii) we pay to Meriwether
Accelerators a monthly fee of $12,500 U.S. (with the acknowledgment that an
additional monthly fee of $2,500 U.S. has been paid and will continue to be paid
to the Meriwether Accelerators under a pre-existing services arrangement); and
(iv) we granted to Meriwether Accelerators an aggregate 200,000 stock options at
an exercise price of $0.31 per share exercisable for a period of three years
vesting immediately and a further 500,000 stock options at an exercise price of
$0.31 per share, which shall vest at certain dates upon the attainment by us of
certain initial deliverables which have been agreed upon by the parties in
advance.
On approximately November 27, 2007, we authorized the renewal of the 2006 CEO
Services Agreement (the "2007 CEO Services Agreement"). Pursuant to the 2007 CEO
Services Agreement, Mr. Barker was engaged for an additional one-year term to
serve as our Chief Executive Officer. We granted to Meriwether Accelerators an
aggregate of 1,000,000 stock options at an exercise price of $0.75 per share,
which shall vest in accordance with the attainment of certain deliverables.
On approximately October 23, 2008, we authorized the renewal of the 2007 CEO
Services Agreement (the "2008 CEO Services Agreement"). Pursuant to the 2008 CEO
Services Agreement, Mr. Barker was engaged was engaged for an additional
one-year term to serve as our Chief Executive Officer. In accordance with the
terms and provisions of the 2008 CEO Services Agreement: (i) we agreed to retain
Mr. Barker as our Chief Executive Officer and to further engage Meriwether
Accelerators as a consultant; (ii) we agreed to pay to Meriwether Accelerators a
gross monthly fee of $12,500, with the acknowledgement that an additional fee of
$2,500 per month has been paid and continues to be payable by us; and (iii) we
granted to Meriwether Accelerators an aggregate 500,000 Stock Options at an
exercise price of $1.45 per share, which shall vest in accordance with the
attainment of certain deliverables and our 2008 Fixed Share Option Plan and the
rules of the TSX Venture Exchange.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Dale Matheson Carr-Hilton LaBonte LLP served as our independent registered
public accounting firm and audited our financial statements for the fiscal years
ended December 31, 2008 and December 31, 2007. Aggregate fees for professional
services rendered to us by our auditor are set forth below:
88
YEAR ENDED
DECEMBER 31, 2008 YEAR ENDED
(ESTIMATED) DECEMBER 31, 2007
_________________ _________________
Audit Fees $98,000 $95,000
Audit-Related Fees Nil Nil
Tax Fees 8,000 6,750
All Other Fees Nil Nil
Total $106,000 $101,750
AUDIT FEES
Audit fees are the aggregate fees billed for professional services rendered by
our independent auditors for the audit of our annual financial statements, the
review of the financial statements included in each of our quarterly reports and
services provided in connection with statutory and regulatory filings or
engagements.
AUDIT RELATED FEES
Audit related fees are the aggregate fees billed by our independent auditors for
assurance and related services that are reasonably related to the performance of
the audit or review of our financial statements and are not described in the
preceding category.
TAX FEES
Tax fees are billed by our independent auditors for tax compliance, tax advice
and tax planning.
ALL OTHER FEES
All other fees include fees billed by our independent auditors for products or
services other than as described in the immediately preceding three categories.
POLICY ON PRE-APPROVAL OF SERVICES PERFORMED BY INDEPENDENT AUDITORS
It is our audit committee's policy to pre-approve all audit and permissible
non-audit services performed by the independent auditors. We approved all
services that our independent accountants provided to us in the past two fiscal
years.
ITEM 15. EXHIBITS
The following exhibits are filed as part of this Annual Report.
EXHIBIT NO. DOCUMENT
3.1 Articles of Incorporation, as amended (1)
3.2 Bylaws (1)
89
10.1 Master Agreement for Technology Development
between Alberta research Council and Crailar Fiber
Technologies dated January 1, 2007. (2)
10.2 CEO Executive Services Agreement between
Naturally Advanced Technologies, Inc. and
Meriwether Accelerators LLC dated November 27,
2007 with effective date of August 24, 2007. (3)
10.3 2006 Stock Option Plan (4)
10.4 Renewal of CEO Executive Services Agreement
Between Naturally Advanced Technologies, Inc.
And Meriwether Accelerators LLC dated
October 14, 2008 (6)
10.5 2008 Fixed Share Stock Option Plan (7)
14.1 Corporate Governance Policy (5)
14.2 Corporate Disclosure Policy (5)
14.3 Securities Trading Policy (5)
14.4 Board of Directors Charter (5)
14.5 Terms of Reference for the Chief Financial Officer (5)
14.6 Terms of Reference of Committee Chairs (5)
14.7 Audit Committee Charter (5)
14.8 Corporate Governance Committee Charter (5)
14.9 Compensation Committee Charter (5)
14.10 Disclosure Charter Policy (5)
14.11 Code of Conduct (5)
14.12 Insider Trading and Reporting Guidelines (5)
23.1 Auditor Consent Letter
90
31.1 Certification of Chief Executive Officer Pursuant
to Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act.
31.2 Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) or 15d-14(a) of the Securities
Exchange Act.
32.1 Certification of Chief Executive Officer and Chief
Financial Officer, Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
(1) Filed as an exhibit to our Form 10-KSB for fiscal year ended December 31,
2004, as filed with the Securities and Exchange Commission on March 31, 2005.
(2) Filed as an exhibit to our Form 8-K as filed with the Securities and
Exchange Commission on June 25, 2007.
(3) Filed as an exhibit to our Form 8-K as filed with the Securities and
Exchange Commission on December 21, 2007.
(4) Filed as an exhibit to our Form 10-KSB for fiscal year ended December 31,
2006 as filed with the Securities and Exchange Commission on March 31, 2007.
(5) Filed as an exhibit to our Form 10-KSB for fiscal year ended December 31,
2007 as filed with the Securities and Exchange Commission on April 11, 2008.
(6) Filed as an exhibit to our Form 8-K as filed with the Securities and
Exchange Commission on October 28, 2008.
(7) Filed as an exhibit to our Form S-8 as filed with the Securities and
Exchange Commission on October 10, 2008.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act or 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NATURALLY ADVANCED TECHNOLOIGES INC.
Dated: April 10, 2009 By: /s/ KENNETH C. BARKER
____________________________________
Kenneth C. Barker, Chief Executive
Officer
Dated: April 10, 2009 By: /s/ GUY PREVOST
____________________________________
Guy Prevost, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons no behalf of the registrant and
in the capacities and on the dates indicated.
Dated: April 10, 2009 By: KENNETH C. BARKER
____________________________________
Kenneth C. Barker, Chief Executive
Officer and Director
Dated: April 10, 2009 By: /s/ GUY PREVOST
____________________________________
Guy Prevost, Chief Financial Officer
and Director
Dated: April 10, 2009 By: /s/ JASON FINNIS
____________________________________
Jason Finnis, President, Chief
Operating Officer and Director
Dated: April 10, 2009 By: /s/ LARISA HARRISON
____________________________________
Larisa Harrison, Chief
Administrative Officer, Secretary,
Treasurer and Director
Dated: April 10, 2009 By: /s/ ROBERT EDMUNDS
____________________________________
Robert Edmunds, Director
Dated: April 10, 2009 By: /s/ PETER MOORE
____________________________________
Peter Moore, Director
Dated: April 10, 2009 By: /s/ MILJENKO HORVAT
____________________________________
Miljenko Horvat, Director
92