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

FORM 10-Q

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

For the quarterly period ended March 30, 2013

[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number: 000-50367

CRAILAR TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)

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

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]     No [   ]

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

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

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.
44,472,698 shares of common stock as of May 6, 2013.

CRAILAR TECHNOLOGIES INC.

Quarterly Report On Form 10-Q
For The Quarterly Period Ended
March 30, 2013

INDEX

2

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Forward-looking statements in this quarterly report include, among others, statements regarding our capital needs, business plans and expectations. Such forward-looking statements include, but are not limited to, statements with respect to the following:

• our need for additional financing;
• the competitive environment in which we operate;
• our dependence on key personnel;
• conflicts of interest of our directors and officers;
• our ability to fully implement our business plan;
• our ability to effectively manage our growth; and
• other regulatory, legislative and judicial developments.

Forward-looking statements are made, without limitation, in relation to operating plans, property exploration and development, availability of funds, environmental reclamation, operating costs and permit acquisition. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors, including the risks outlined in our annual report on Form 10-K for the year ended December 31, 2012, this quarterly report on Form 10-Q, and, from time to time, in other reports that we file with the Securities and Exchange Commission (the “SEC”). These factors may cause our actual results to differ materially from any forward-looking statement. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

3

PART I – FINANCIAL INFORMATION

Item 1.              Financial Statements

The following unaudited interim financial statements of Crailar Technologies Inc. (formerly Naturally Advanced Technologies, Inc.) (sometimes referred to as “we”, “us” or “our Company”) are included in this quarterly report on Form 10-Q:

4

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

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

5

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

6

7

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

8

Crailar Technologies Inc.
(A development Stage Company)
Notes to Consolidated Financial Statements
March 30, 2013
(Unaudited)

As at March 30 2013, the Company wrote off $396,377 (2012 - $Nil) of raw flax fiber feedstock and decorticated fiber to net realizable value.

9

Crailar Technologies Inc.
(A development Stage Company)
Notes to Consolidated Financial Statements
March 30, 2013
(Unaudited)

10

Crailar Technologies Inc.
(A development Stage Company)
Notes to Consolidated Financial Statements
March 30, 2013
(Unaudited)

The weighted average remaining contractual life at March 30, 2013, is 1.29 years.

Stock options outstanding are:

11

Crailar Technologies Inc.
(A development Stage Company)
Notes to Consolidated Financial Statements
March 30, 2013
(Unaudited)

During the three month period ended March 30, 2013, 196,000 options were exercised and a total of $118,239 has been reclassified from additional paid-in capital to capital stock.

During the period ended March 30, 2013, the Company granted a total of 285,000 five year common stock options to employees, exercisable between $2.24 and $2.30 per share, with a fair value of $351,832. These options were granted under the terms of the Company’s amended 2011 Fixed Share Option Plan.

The fair value of options issued during the period ended March 30, 2013, was determined using the Black-Scholes option pricing model with the following assumptions:

12

Item 2.              Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our results of operations and financial position should be read in conjunction with our financial statements and the notes thereto included elsewhere in this Report. Our consolidated financial statements are prepared in accordance with U.S. GAAP. All references to dollar amounts in this section are in U.S. dollars unless expressly stated otherwise.

The matters discussed in these sections that are not historical or current facts deal with potential future circumstances and developments. Such forward-looking statements include, but are not limited to, the development plans for the Company’s growth, trends in the results of the Company’s development, anticipated development plans, operating expenses and the Company’s anticipated capital requirements and capital resources. As such, these forward-looking statements may include words such as “plans”, “intends”, “anticipates”, “should”, “estimates”, “expects”, “believes”, “indicates”, “targeting”, “suggests”, and similar expressions. The actual results are expected to differ from these forward-looking statements and these differences may be material.

RESULTS OF OPERATIONS

Thirteen Week Period Ended March 30, 2013 Compared to Thirteen Week Period Ended March 31, 2012

Revenue and Gross Margins

Our net operational loss from continuing operations during the thirteen week period ended March 30, 2013, was ($3,230,270) compared to ($2,788,967) for the same period in 2012. The Company has continued to increase expenses for the start of the commercialization process of CRAiLAR. Specifically, the increase in loss was due to an increase in advertising and promotion expense, amortization and depreciation expense, an increase in general and administrative expense, interest expense, professional fees, production costs, as well as a loss from the write down of impaired inventory.

Operating Expenses

During the thirteen week period ended March 30, 2013, we recorded operating expenses of $3,230,270 compared to operating expenses of $2,788,967 for the three months ended March 31, 2012. The continued increase in operating expenses reflects the growing preparation of the Company for commercialization in 2013.

Operating expenses consisted of:

• $144,428 (2012: $59,870), in advertising and promotion;

13

• $51,937 (2012: $50,372), in amortization and depreciation;

• $204,175 (2012: $216,309), in consulting and contract labour;

• $276,867 (2012: $185,931), in general and administrative;

• $311,525 (2012: $Nil), in interest;

• $253,436 (2012: $137,555), in professional fees;

• $730,902 (2012: $Nil), in production costs

• $56,270 (2012: $138,436), in research and development;

• $878,332 (2012: $1,108,273), in salaries and benefits;

• $396,377 (2012: $Nil), in write down of inventory; and

• $73,979 (2012: $892,221), gain on fair value adjustment of derivative liabilities.

Advertising and promotion expenses increased to $144,428 for the thirteen week period ended March 30, 2013, from $59,870 for the three months ended March 31, 2012. The increase is due to the hiring of two new public relations firms in the United States and Canada.

Amortization and depreciation expenses increased to $51,937 for the thirteen week period ended March 30, 2013, from $50,372 for the three months ended March 31, 2012. At quarter end, there was a reclassification of amortization and depreciation expense to production costs in the amount of $241,754. Therefore, there was an overall increase of amortization expense which is due to the amortization of the decortication equipment and leasehold improvements that commenced January 1, 2013 as the facility in Pamplico started production.

Consulting and contract labor expenses decreased to $204,175 for the thirteen week period ended March 30, 2013, from $216,309 for the three months ended March 31, 2012. The decrease was due to a reduction in the amount of stock based compensation expense for consultants and contractors as well as a reduction in the number of contractors used during the period.

General and administrative expenses increased to $276,867 for the thirteen week period ended March 30, 2013, from $185,931 for the three months ended March 31, 2012. The expansion of the Company’s activities has led to an increase in general and administrative expenses, primarily office administration costs, travel, insurance, property taxes, and facility and equipment rental costs. At quarter end, $147,264 of expenses was reclassified to production costs.

Interest expenses increased to $311,525 for the thirteen week period ended March 30, 2013, from $Nil for the three months ended March 31, 2012. Interest expense is attributable to the semi-annual interest payment on the convertible debenture interest.

Professional fees were $253,436 for the thirteen week period ended March 30, 2013, compared to $137,555 for the three months ended March 31, 2012. The primary cause for the increase was fees related to the Company’s preparation for listing on a more senior exchange, and the fees involved in the completion of the 2012 year-end audit.

Production costs were $730,902 for the thirteen week period ended March 30, 2013, compared to $Nil for the three months ended March 31, 2012. The reason for the increase is due commencement of production at January 1, 2013. Certain indirect expenses have been reclassified to production costs at the end of the quarter.

Research and development costs were $56,270 for the thirteen week period ended March 30, 2013, compared to $138,436 for the three months ended March 31, 2012. Increased amounts of CRAiLAR^® fiber have been produced for testing purposes for our development partners and the cost of that fiber has been expensed to research and development. Additionally, some costs associated with scaling up the facility were charged to development expenses. At quarter end, $55,433 of expenses was reclassified to production costs.

Salaries and benefits expenses decreased to $878,332 for the for the thirteen week period ended March 30, 2013, compared to $1,108,273 for the three months ended March 31, 2012. As at quarter end, there was a reclassification of salaries and benefits expenses to production costs in the amount of $286,451. Therefore, there was an overall increase which was caused by an increase in employee line workers and technicians as the company prepared for commercialization.

14

During the thirteen week period ended March 30, 2013, the Company wrote down the value of its raw flax fiber feedstock and decorticated fiber inventory to a lower net realizable value due to the expected decortication yield rate that was experienced during production.

Net Loss

Our net loss during the thirteen week period ended March 30, 2013, was ($3,230,270 or $0.08 per share) compared to ($2,788,967 or $0.07 per share) during the three months ended March 31, 2012. The increase in loss each year over the past two years was due to an increase in activity in all aspects of the Company’s operations and administration. The increase in loss was due primary to an increase in advertising and promotion, amortization and depreciation expense, general and administrative expense, interest, professional fees, and production costs as well as a loss from the impaired inventory.

For the thirteen week period ended March 30, 2013, the weighted average number of shares outstanding was 43,029,135 compared to 42,028,271 as at March 31, 2012.

Liquidity and Capital Resources

Historically, the Company has been reliant on equity financings from the sale of its common shares, and more recently from the sale of convertible debentures, to fund its operations. In February 2013 the Company completed an additional convertible debt financing for net proceeds of $4,231,276. The Company expects to fund future operations and expansion through bank debt, government loan programs, partner financing, lease programs and equity financings. Initial stages of commercialization have commenced through previous financings, however, future phases of commercialization will be dependent on the financings described above.

As at March 30, 2013, total assets were $22,201,864, consisting of:

• $2,947,499 in cash and cash equivalents;

• $53,720 in accounts receivable;

• $2,614,426 in inventory;

• $218,394 in prepaid expenses and other;

• $1,420,725 in deferred debenture issuance costs;

• $14,864,483 in property and equipment; and

• $82,617 in intangible assets.

As at March 30, 2013, total liabilities were $17,583,809 and were comprised of:

15

• $1,660,259 in accounts payable;

• $744,994 in accrued liabilities;

• $414,056 in derivative liabilities; and

• $14,764,500 in convertible debenture.

Stockholders’ Equity decreased by $2,284,146 from $6,902,201 at March 31, 2012, to $4,618,055 at March 30, 2013.

Cash Flows from Operating Activities

The cash flows used in operations of continuing operations for the thirteen week period ended March 30, 2013, were ($2,654,356) compared with ($1,302,751). Cash flows used in operations for the thirteen week period ended March 30, 2013 consisted primarily of a net loss of ($3,230,270) from continuing operations, offset by certain items, amortization & depreciation of $293,691 (2012 – $50,372); interest $85,531 (2012 - $Nil); rent $36,519 (2012 - $Nil); stock based compensation of $555,273 (2012 - $743,681); impairment of inventory of $396,377 (2012 - $Nil); gain on fair value adjustment of derivative liability ($73,979) (2012 – $892,221); an increase in accounts receivable $18,572 (2012 – $90,181); and increase in inventory of ($106,151) (2012 – ($164,876)); decrease in prepaid expenses of ($111,609) (2012 - $8,232); increase in accounts payable of $253,839 (2012 – $211,090); and a decrease in accrued liabilities of ($772,149) (2012 – ($344,685)).

Cash Flows from Investing Activities

The cash flows used in investing activities for the thirteen week period ended March 30, 2013, were ($1,897,484) compared to (2012 – ($771,680)). Cash flows used in investing activities consisted of a purchase of property and equipment totaling ($1,895,353) (2012 – ($756,227)), and the acquisition of trademarks and licenses totaling ($2,131) (2012 – ($15,453)).

Cash Flows from Financing Activities

Cash flows provided by financing activities for the thirteen week period ended March 30, 2013, totaled $4,424,149 versus $841,699 during the same period in 2012. The Company issued capital stock for proceeds of $192,873 (2012 - $841,699); convertible debentures for net proceeds of $4,713,238, (2012 - $Nil); and convertible issuance costs for convertible debenture of ($481,962) (2012 – $Nil).

Effect of Exchange Rate

The effect of exchange rates on cash resulted in an unrealized gain of $197,980 for the thirteen week period ended March 30, 2013, as compared with an unrealized gain of $58,199 in the same period of 2012.

Discontinued Operations - HTNaturals

During fiscal 2009, we closed our apparel business, which operated under the brand name “HTnaturals”. The apparel business is classified as discontinued operations in our consolidated financial statements. We decided to close our apparel division to focus on our CRAiLAR^® and CRAiLEX^TM technology. The warehouse lease was not renewed, the sales team was terminated or re-assigned and all other elements of our apparel division were discontinued.

Plan of Operation

The Company has identified South and North Carolina as an ideal region for growing winter flax crops.

As a result of identifying this geographical area as an ideal growing region, we decided to locate our initial development in the Williamsburg and Florence counties of South Carolina. The Company is developing a flax fiber industry based around our CRAiLAR^® fiber technology; from the contracting of crops through to the processing of the fiber.

Our first commercialization partner, Hanesbrands, is headquartered in North Carolina. Hanesbrands uses contract spinners located throughout the states of North and South Carolina. Therefore, being able to grow textile grade fiber in this region allows the Company to take advantage of strategic logistical opportunities.

We entered into a sub-lease of a low volume decortication facility located in Kingstree, South Carolina, in early August of 2010. The facility was originally established under a USDA flax initiative. The equipment in this facility is designed to mechanically separate the flax fiber from the rest of the plant. This stage is called decortication. This is the first step of our process before it goes through our patented CRAiLAR^® wet process. We have used this facility to prove the viability of flax farming in this region, perfect our decortication process and to commence early volumes of CRAiLAR^® fiber to our commercial partners. We have extended the original lease until June 30, 2013, and plan to use the facility for flax cleaning and storage purposes. The Company plans to decommission the facility during June 2013 at a minimum expense.

16

In addition to signing our joint development agreements with key consumer brands such as Hanesbrands and Georgia Pacific, CRAiLAR has licensed several industry leading third party processors to assist in the scale-up of our fiber processing and yarn development.

Earlier this year, CRAiLAR completed agreements with industry leaders, all of whom are critical to various parts of the overall process. In an effort to increase capacity, share industry knowledge and spur innovation, the following experts were enlisted to partner and participate in CRAiLAR’s growth and expansion:

Tuscarora Yarns of Greensboro NC are a highly innovative yarn spinner, capable of blending CRAiLAR^® with fibers other than cotton, to broaden our market capabilities in performance sportswear, higher end fashion and outerwear. This is a strategic initiative that will add to the CRAiLAR^® list of performance attributes, while strengthening our brand capabilities at the consumer interface.

Tintoria Piana, a textile company dating back to 1582 in Biella, Italy, which is a privately held family-owned business which has dyed fiber for the traditional apparel business for more than 60 years and operates principally out of Cartersville, Georgia, will execute the CRAiLAR^® enzymatic process, augmenting the Company’s plans for manufacturing capacity. Tintoria Piana processed fiber for research and development purposes in 2012.

Agronomics Plan - USDA

In order to further develop our agronomic know-how and our ability to produce fiber capable of being spun into finer-gauge yarns suitable for undergarments, shirting and finer-knit garments CRAiLAR entered into growing trials with Hanesbrands and the USDA-ARS in January of 2011. These trials were designed to enable us to move to an unprecedented level of flax-fiber refinement by allowing us to develop flax strains capable of accessing all sectors of the industry. The research project has resulted in test acres of flax being planted in the Kingstree region the past two winters. In addition, we contracted 3000 acres of flax in South and North Carolina in the fall of 2011. Harvest began in May of 2012 and the flax was left to dew ret in the fields before being baled and then entering the CRAiLAR^® process. Growers were then able to plant summer crops, such as soybeans, in time for a full summer season proving the viability of flax as a winter rotation crop in the South East. We have also identified other suitable North American growing regions, such as Minnesota and Maine, and have planted test plots in Alabama and Georgia in the fall of 2012.

In March 2012, the Company appointed Mr. Steve Sandroni as Vice President of Agriculture. Mr. Sandroni brings more than 34 years of experience working in various aspects of agribusiness to the Company. Mr. Sandroni oversees the Company’s global agricultural efforts. He liaises with farmers and has hired regional support staff in the Company’s primary growing regions.

By July of 2012 harvesting of the contracted flax acreage in South and North Carolina was completed. All fiber from the harvest is now on CRAiLAR’s property in Pamplico, South Carolina and is being processed through the recently commissioned decortication line.

Planting for the 2013 spring harvest has taken place during October and November and the Company contracted with growers approximately 3,000 acres of flax fiber in South Carolina and North Carolina. The harvesting of the Carolina crop will take place in late May and June. The Company also expects to have up to 3,000 acres under cultivation in Minnesota for harvest in the fall. For additional flax fiber, the Company also has a relationship with a European company to supply fiber to cover any shortfall in raw feedstock availability. With the experience gained from the 2012 crop the Company expects to receive higher yields from the 2013 crop as a result of improved planting and harvesting techniques.

In the fall of 2012 the Company undertook further flax trials with the USDA-ARS and the Pee-Dee REC on the suitability of various flax varietals and crop disease prevention. The results of these trials will be available to the Company in early summer 2013.

The Company has initiated the necessary steps to obtain approval under the Federal Crop Insurance Act for crop insurance for growers. The Company believes that with crop insurance available to growers the number of acres grown in 2014 will increase substantially.

17

CRAiLAR is expanding its agronomic focus to include multiple North American and International growing regions. Expansion of the growing region will mitigate climate risk and large expenditures associated with harvest. In the summer 2012, CRAiLAR contracted 770 acres of flax to be grown in Canada for the purpose of seed multiplication. For the summer of 2013, CRAiLAR plans to use the flax planted in Minnesota for seed multiplication in Canada and North Dakota. The seed produced from this harvest is expected to provide enough seed to plant approximately 20,000 acres of flax to be used as raw feedstock for the CRAiLAR^® process.

Production Plan

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

With the proceeds of our financing in July 2011, we installed our first fully integrated CRAiLAR^® Fiber processing facility in the Florence region of South Carolina. The Company has signed a lease of an existing building in the region, for the housing of its first fully integrated decortication and enzyme treatment processing facility. The installation of our full-scale decortication facility is currently underway and purchase orders plus deposits for the equipment needed to enzymatically process CRAiLAR^® Fiber have been issued. The installation of the equipment in the new facility commenced during the second quarter of 2012. With the completion of the September 2012 financing the Company will complete the Phase I portion (see below) of the facility build-out along with the necessary equipment purchases for the decortication process. The decortication phase of the new facility became operational in the first quarter of 2013, and production will ramp up throughout 2013. At full capacity, the new facility will be capable of producing 400,000 pounds per week of decorticated bast fiber ready for the CRAiLAR^® wet process. Feedstock in 2013 will come from the American Southeast, Minnesota and Europe.

In addition to the installation of our full scale processing line, CRAiLAR continues to improve upon its patented enzymatic process increasing efficiencies.

In March 2012, we announced an improvement of our CRAiLAR^® wet process time by 40 percent, thereby significantly increasing anticipated volume capabilities at planned facilities. The evaluation and resulting improvements were conducted internally in conjunction with research partners. The resulting changes encompass processes, as well as the utilization of industry standard equipment, including that which was purchased by the Company for its first production facility.

These reductions in overall cycle time increase throughput and production capacity in each planned facility. These efficiencies also allowed the Company to evaluate third-party manufacturers to increase overall production volume of CRAiLAR^® Flax through a quicker expansion model.

As a result of this optimized process, we entered into the agreements with Tintoria Piana to execute the CRAiLAR^® enzymatic process, augmenting the Company’s plans for manufacturing capacity.

During the third and fourth quarters of 2012, the Company processed fiber through its third party manufacturing partner using decorticated fiber from its smaller scale facility in Kingstree, S.C. and European sources. This fiber was used by the Company’s development partners to initiate their sales programs in preparation for commercialization in 2013.

The Company believes that outsourced manufacturing allows for faster expansion of our technology proposition while significantly reducing the capital requirements to scale up to meet demand.

The Pamplico facility will start production in two phases:

18

In the fourth quarter, 2013, the Company plans to install its own wet processing facility. Once commissioned, this will provide an additional 600,000 lbs. per week of potential CRAiLAR^® capacity to the 400,000 lbs. from third party manufacturers. Decorticated fiber for the additional capacity will come from the Company’s Pamplico decortication facility and European decorticated fiber. With the installation of the enzymatic wet processing facility the Company will have a fully integrated decortication/wet facility at its Pamplico location.

Phase II will have an approximate initial cost of $19 million and will create an additional 30 – 40 jobs as production comes on-line. Included in the estimate for the initial cost is the equipment necessary for Phase II with an approximate cost of $8.4 million, of which $5.2 million has already been paid. The company plans to pay for the remainder of Phase II through bank financing, lease programs and or the sale of equity.

Pamplico decorticated fiber (Phase 1) production started in the quarter with the facility encountering several malfunctions to the peripheral equipment of the main decortication machinery. The main decortication equipment has had no significant problems and the Company is confident that it will obtain its nameplate capacity. These malfunctions meant that the Company could not achieve the decorticated fiber numbers that were expected. Over the course of the quarter and as of the date of this document the Company had continued to correct these issues so that the amount of decorticated fiber produced has increased month over month. The Company expects to have successfully dealt with these issues by the completion of the second quarter in 2013.

The facility in Pamplico is large enough, and the product flow layout so designed, that we can easily expand its capacity (to 400,000 lbs. per week) by adding equipment without the need for large additional build-out costs. The Company’s current plans are to expand this facility in 2014.

The Company also plans to expand into Europe beginning in the third quarter, 2013. The Company will purchase special cleaning line equipment to be used in the cleaning of European fiber. The cost of this equipment, installed, will be approximately $800,000. This capital cost will be paid by the proceeds of previous financings.

In 2014 the Company plans to build an additional wet processing facility with a planned capacity of 600,000 lbs. per week. To pay for this facility the Company plans to use partner financing and alternative debt instruments.

Company expansion will take place at a rate that can be realistically managed from available logistical, agronomic, and financial and management resources.

19

Production Model

Note on Plan of Operation

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

MATERIAL COMMITMENTS

Debentures

On September 20, 2012, the Company completed the offering of $10,051,261 ($10,000,000 CDN) worth of convertible debentures (the “Notes”). The Notes bear interest at a rate of 10% per year, payable semi-annually on March 31 and September 30 and mature on September 20, 2017. Furthermore, an additional $4,713,238 (CDN - $5,000,000) convertible debenture was completed on February 26, 2013 with essentially the same terms as the previously mentioned offering.

The Company is committed to annual interest payments over the next five years as follows:

20

The holders of the Notes have the option to convert the Notes at a price of $2.85 (CDN$2.90) per share of Common Stock for each CDN$1,000 principal amount of Debentures at any time prior to the maturity date.

Annual Leases

The Company is committed to current annual lease payments totaling $630,408 for premises under lease. Approximate minimum lease payments over the remainder of the leases are as follows:

National Research Council Agreements

Joint Collaboration Agreement

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

Over the term of the amended agreement, the Company will pay the NRC a total of $280,536 (CDN$294,822) divided into nine payments up to May 9, 2012. As of the date of this report all payments due in 2012 ($33,183) have been paid.

Technology License Agreement

On November 1, 2006, the Company entered into a technology license agreement with the NRC. The license agreement provides the Company a worldwide license to use and sublicense the NRC technology called CRAiLAR^®. The Company paid an initial $20,525 (CDN $25,000) fee and will pay an ongoing royalty of 3% on sales of products derived from the CRAiLAR^® process to the NRC with a minimum annual payment set at $14,750 (CDN$15,000) per year in two installments. During the thirteen weeks ended March 30, 2013, the Company paid $Nil and accrued $Nil of the minimum annual royalty.

Investor Relations Agreements

On August 9, 2012, the Company renewed an agreement for a third party firm to perform investor relations activities. The agreement term is one year with ninety days notice of termination by either party. The monthly fee is $10,000 with 70,000 stock options exercisable at $2.77 expiring August 19, 2016. The options were granted under the 2011 Option Stock Plan and were valued at $148,862 using the Black-Scholes option pricing model with the assumptions disclosed in Note 6. During February 2013 the monthly amount payable was reduced to $4,000. The third party firm will continue to provide strategic advice to Crailar Technologies Inc.

During November 2012, the Company signed a consulting agreement with a third party firm to provide strategic corporate advice and related consulting services. The agreement term is one year and calls for a monthly payment of $15,000.

On February 8, 2013, the Company retained another third party group to perform investor relations services. The monthly fee is $8,000 with 50,000 stock options exercisable at $2.30, expiring Feb 8, 2018. The options were granted under the 2011 option stock plan and were valued at $63,838 using the Black Scholes Option model with the assumptions disclosed in Note 6. The agreement term is one year with thirty days notice of termination by either party after six months from the effective date.

21

Research Agreement

Starting in December 2010, a co-operative research project designed to cultivate and evaluate the viability of various flax strains for use in CRAiLAR^® technology was signed with the United States Department of Agriculture, Hanesbrands and CRAiLAR Inc. The project has an initial term of one year with a renewal option for two additional years. CRAiLAR Inc. will contribute annually $51,000 of in-kind expenses towards the project.

Farming and Consulting Agreements

During the previous year ended December 31, 2012, the Company signed agreements with farmers to plant and to produce flax using the seed provided by the Company. The resulting harvest of flax straw and flaw seed will be purchased by the Company at the agreed upon prices.

OFF-BALANCE SHEET ARRANGEMENTS

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

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

Item 3.              Quantitative and Qualitative Disclosures about Market Risk

Currency risk

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

Credit risk

The risk in cash accounts is managed through the use of a major financial institution which has high credit quality as determined by the rating agencies. As at December 31, 2012, the Company does not have significant concentrations of credit exposure.

Interest rate risk

All term debt has fixed interest rates and the Company has no significant exposure to interest rate fluctuation risk.

Commodity price risk

Commodity price risk is the risk that the fair value of future cash flows will fluctuate because of changes in the market prices of commodities. The Company is exposed to commodity price risk as it purchases flax seed in the production of fiber. The Company does not currently enter into futures contracts or otherwise hedge its exposure to commodity price risk.

22

Item 4.              Controls and Procedures

Disclosure Controls and Procedures

Kenneth Barker, our Chief Executive Officer, and Theodore Sanders, our Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on that evaluation, they concluded that our disclosure controls and procedures were effective as of March 30, 2013.

No Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our fiscal quarter ended March 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.              Legal Proceedings

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

Item 1A.            Risk Factors

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

Risks Related to Our Business

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

We have a history of operating losses, expect to continue to incur losses, may never be profitable, and must be considered to be in the development stage. Further, we have been dependent on sales of our equity securities and debt financing to meet our cash requirements. We have incurred net losses totaling approximately $3,230,270 for the period ended March 30, 2013 and $2,788,967 for the three month period ended March 31, 2012. As of March 30, 2013, we had accumulated deficits of $23,997,933. As at March 30, 2013 we had cash and cash equivalents of $2,947,499 and working capital of $3,014,730. Further, we do not expect positive cash flow until Q1 2014.

We Will Need to Raise Capital To Continue Our Operations.

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

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

Markets need to be found and developed for the by-products of our decortication process or it could have an effect on our profitability. Although several opportunities for the sale of our by-products are being explored, no contracts for the off take of our by-products have been signed as of the date of this report.

23

Our Success is Dependent Upon the Acceptance of CRAiLAR^® Technology.

Our success depends upon our achieving significant market acceptance of our CRAiLAR^® Technology and demand for our products. Acceptance of our CRAiLAR^® Technology will depend on the success of our and our partners’ promotional and marketing efforts and ability to attract customers. To date, we have not spent significant funds on marketing and promotional efforts, although in order to increase awareness of our products we expect our partners to spend a significant amount on promotion, marketing and advertising in the future. If these expenses fail to develop an awareness of our CRAiLAR^® Technology and products, these expenses may never be recovered and we may never be able to generate any significant future revenues. In addition, even if awareness of our CRAiLAR^® Technology increases, we may not be able to produce enough product to meet demand.

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

The loss of any of our key officers and management personnel would have an adverse impact on our future development and could impair our ability to succeed. Our performance is substantially dependent upon the expertise of our Chief Executive Officer, Mr. Kenneth Barker and our Chief Innovation Officer, Mr. Jason Finnis, and other key management personnel and our ability to continue to hire and retain such personnel. Messrs. Barker, Sanders, Finnis, Prevost, Robinson and Nalbach spend substantially all, or most, of their working time with us and our subsidiaries. It may be difficult to find sufficiently qualified individuals to replace Mr. Barker, Mr. Sanders, Mr. Finnis, Mr. Prevost, Mr. Robinson, Mr. Nalbach, Ms. Harrison or other key management personnel if we were to lose any one or more of them. The loss of Mr. Barker, Mr. Sanders, Mr. Finnis, Mr. Robinson, Mr. Nalbach or Mr. Prevost, or any of our other key management personnel could have a material adverse effect on our business, development, financial condition, and operating results. We maintain “key person” life insurance on our senior executive officers.

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

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

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

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

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

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

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

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

24

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.

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 March 30, 2013, there were 44,435,198 shares of our common stock issued and outstanding. Further, as of March 30, 2013 there were an aggregate of 6,505,045 stock options (4,601,031 of which were vested and exercisable into 4,601,031 shares of common stock at a weighted average exercise price of $1.78 per share) and 3,156,848 share purchase warrants outstanding exercisable into 3,156,848 shares of common stock at a weighted average exercise price of $4.02 per share.

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

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

During our fiscal year ended December 31, 2012, our common stock has traded as low as $1.75 and as high as $3.58. In addition to volatility associated with Bulletin Board securities in general, the value of your investment could decline due to the impact of any of the following factors upon the market price of our common stock:

• changes in the demand for flax and other eco-friendly products;

• disappointing results from our or our partners’ marketing and sales efforts;

• failure to meet our revenue or profit goals or operating budget;

• decline in demand for our common stock;

• downward revisions in securities analysts’ estimates or changes in general market conditions;

• lack of funding generated for operations;

• investor perception of our industry or our business prospects; and

• general economic trends.

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

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

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

25

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

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

Because our stock is not traded on the NASDAQ National Market or the NASDAQ Small Cap Market, and because the market price of the common stock is less than $5 per share, the common stock is classified as a “penny stock.” Our stock has not traded above $5 per share. SEC Rule 15g-9 under the Exchange Act imposes additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other than those who qualify as an “established customer” or an “accredited investor.” This includes the requirement that a broker-dealer must make a determination that investments in penny stocks are suitable for the customer and must make special disclosures to the customers concerning the risk of penny stocks. Many broker-dealers decline to participate in penny stock transactions because of the extra requirements imposed on penny stock transactions. Application of the penny stock rules to our common stock reduces the market liquidity of our shares, which in turn affects the ability of holders of our common stock to resell the shares they purchase, and they may not be able to resell at prices at or above the prices they paid.

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

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

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

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

Item 2.              Unregistered Sales of Equity Securities and Use of Proceeds

On February 13, 2013, the Company issued 25,000 unregistered shares to a corporation at an issuance price of $0.95 per share upon exercise of options previously granted to such corporation in connection with an agreement pursuant to which such corporation processed Crailar fibers for the Company. The Company relied on an exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Rule 506 and/or Section 4(a)(2) thereunder.

Item 3.              Defaults upon Senior Securities

None.

26

Item 4.              Mine Safety Disclosures

Not applicable.

Item 5.              Other Information

Not applicable

Item 6.              Exhibits

27

28

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CRAILAR TECHNOLOGIES INC.