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EXCEL - IDEA: XBRL DOCUMENT - CRAILAR TECHNOLOGIES INCFinancial_Report.xls
EX-31.2 - EXHIBIT 31.2 - CRAILAR TECHNOLOGIES INCexhibit31-2.htm
EX-32.1 - EXHIBIT 32.1 - CRAILAR TECHNOLOGIES INCexhibit32-1.htm
EX-31.1 - EXHIBIT 31.1 - CRAILAR TECHNOLOGIES INCexhibit31-1.htm

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 June 28, 2014

[  ] 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)

British Columbia 98-0359306
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
305-4420 Chatterton Way  
Victoria, British Columbia, Canada V8X 5J2
(Address of principal executive offices) (Zip Code)

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

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.

Large accelerated filer [   ] Accelerated filer                   [   ]
Non-accelerated filer   [   ] Smaller reporting company [X]
(Do not check if a smaller reporting company)    

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.
64,428,003 shares of common stock as of August 11, 2014.



CRAILAR TECHNOLOGIES INC.
 
Quarterly Report On Form 10-Q
For The Quarterly Period Ended
June 28, 2014
 
INDEX

PART I – FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 30
PART II – OTHER INFORMATION 30
Item 1. Legal Proceedings 30
Item 1A. Risk Factors 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 3. Defaults upon Senior Securities 30
Item 4 Mine Safety Disclosures 30
Item 5 Other Information 30
Item 6 Exhibits 31

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;
  • our ability to fully implement our business plan; and
  • our ability to effectively manage our growth; and

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 29, 2013, 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 the “Company”) are included in this quarterly report on Form 10-Q:

  Page
   
Consolidated Balance Sheets 5
   
Consolidated Statements of Operations and Comprehensive Loss 6
   
Consolidated Statements of Cash Flows 7
   
Notes to Consolidated Financial Statements 8

4



CRAiLAR Technologies Inc.
Consolidated Balance Sheets
(In US Dollars)

    June 28     December 28  
    2014     2013  
    (Unaudited)        
             
ASSETS            
Current            
       Cash and cash equivalents $  488,673   $ 1,193,365  
       Accounts receivable   1,151,966     223,105  
       Inventory   926,367     945,040  
       Prepaid expenses and deposits   755,874     290,872  
    3,322,880     2,652,382  
             
Deferred Debt Issuance Costs   1,271,499     1,442,023  
Property and Equipment, net   18,068,893     17,240,012  
Intangible Assets, net   154,953     155,545  
  $  22,818,225   $ 21,489,962  
             
LIABILITIES            
Current            
     Accounts payable $  2,596,758   $ 2,377,901  
     Accrued liabilities   1,364,069     2,342,153  
     Unearned revenue   263,901     247,655  
     Notes payable   -     476,614  
     Current portion of loans payable   587,278     634,486  
     Current portion of long term debt   104,935     -  
     Derivative liabilities (note 7)   395,231     -  
    5,312,172     6,078,809  
             
Deferred Income Tax Liability   197,219     199,131  
Loans Payable   477,195     551,190  
Long Term Debt   19,619,320     16,674,686  
    25,605,906     23,503,816  
             
             
STOCKHOLDERS' DEFICIT            
Capital Stock 
       Authorized: 100,000,000 common shares without par value 
       Issued and outstanding : 50,428,003 commons shares 
       (December 28, 2013 - 47,806,031)
  38,109,006     34,889,370  
             
Additional Paid-in Capital   10,382,729     9,934,322  
Accumulated Other Comprehensive Gain   683,980     585,301  
Deficit   (51,963,396 )   (47,422,847 )
    (2,787,681 )   (2,013,854 )
  $  22,818,225   $ 21,489,962  

Subsequent Events (Note 11)

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

5



CRAiLAR Technologies Inc.
Consolidated Statements of Operations and Comprehensive Loss
(In US Dollars)
(Unaudited)

    Thirteen week     Thirteen week     Twenty six week     Twenty six  
    period ended     period ended     period ended     period ended  
    June 28,     June 29,     June 28,     June 29,  
    2014     2013     2014     2013  
                         
Revenues $  742,564   $  182,376   $ 1,178,014   $ 182,376  
                         
Cost of sales                        
     Materials and direct product production costs   685,058     200,819     1,044,705     200,819  
     Fixed Overhead   76,749     163,188     174,984     163,188  
     Facility commissioning costs   250,983     207,127     502,808     207,127  
     Depreciation   131,508     257,347     235,359     257,347  
    1,144,298     828,481     1,957,856     828,481  
Gross loss   (401,734 )   (646,105 )   (779,842 )   (646,105 )
                         
Expenses                        
     Marketing and promotion   93,340     233,585     176,010     432,944  
     Amortization and depreciation   26,286     45,434     50,426     97,371  
     General and administrative   1,178,824     1,517,784     2,414,021     3,796,724  
    1,298,450     1,796,803     2,640,457     4,327,039  
                         
Loss before other items   (1,700,184 )   (2,442,908 )   (3,420,299 )   (4,973,144 )
                         
Other income (expense):                        
     Accretion expense   (174,816 )   -     (437,268 )   -  
     Research and development   (64,484 )   (36,686 )   (117,081 )   (92,956 )
     Interest   (523,775 )   (483,248 )   (1,064,408 )   (794,773 )
     Gain on disposal of assets   -     790     -     790  
     Gain on debt settlement   234,354     -     234,354     -  
     Write down of inventory   -     (477,378 )   -     (873,755 )
     Fair value adjustment derivative liabilities   264,153     407,620     264,153     481,599  
    (264,568 )   (588,902 )   (1,120,250 )   (1,279,095 )
                         
Net loss $  (1,964,752 )    $  (3,031,810 )    $  (4,540,549 )   $  (6,252,239 )
                         
Other comprehensive income (loss)                        
Exchange differences on translating to presentation currency   (481,445 )     525,273     98,679     723,253  
Comprehensive loss $  (2,446,197 )    $  (2,506,537 )    $  (4,441,870 )    $  (5,528,986 )
                         
Net loss per share (basic and diluted) $  (0.04 )   $  (0.07 )   $  (0.09 )    $  (0.14 )
                         
Weighted average number of common shares outstanding   50,892,464     44,407,621     49,540,232     44,392,374  

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

6



CRAiLAR Technologies Inc.
Consolidated Statements of Cash Flows
(In US Dollars)
(Unaudited)

    For twenty-six week     For twenty-six week  
    period ended     period ended  
    June 28, 2014     June 29, 2013  
             
Cash flows used in operating activities            
 Net loss $  (4,540,549 ) $  (6,252,239 )
 Adjustments to reconcile net loss to net cash from operating activities            
   Amortization and depreciation   285,785     586,638  
   Amortization of deferred debt issuance costs   170,524     176,712  
   Accretion   437,268     -  
   Fair value adjustment of derivative liability   (264,153 )   (481,599 )
   Gain on disposal of assets   -     (790 )
   Rent inducement   16,428     73,859  
   Stock-based compensation   448,407     1,035,217  
   Gain on settlement of debt   (234,354 )   -  
   Write down of equipment   -     -  
   Write down of inventory   -     873,755  
             
Changes in working capital assets and liabilities            
 Increase in accounts receivable   (928,861 )   (102,218 )
 Decrease (Increase) in inventory   18,673     (472,628 )
 Increase in prepaid expenses   (465,002 )   (165,227 )
 Increase in accounts payable   332,973     441,302  
 Decrease in accrued liabilities   (217,126 )   (94,070 )
 Net cash used in operating activities   (4,939,987 )   (4,381,288 )
             
Cash flows used in investing activities            
 Purchase of property and equipment   (1,090,622 )   (2,492,533 )
 Acquisition of intangible assets   (23,400 )   (49,545 )
Net cash flows used in investing activities   (1,114,022 )   (2,542,078 )
             
Cash flows from financing activities            
 Issuance of capital stock and warrants   3,147,925     192,876  
 Promissory notes payable   (661,452 )   -  
 Loans payable   (124,553 )   -  
 Proceeds from convertible debenture   -     4,218,144  
 Proceeds from long term debt   2,984,383     -  
 Deferred issuance costs for convertible debenture   -     (494,262 )
 Net cash flows from financing activities   5,346,303     3,916,758  
             
Effect of exchange rate changes on cash and cash equivalents   3,014     723,253  
             
Decrease in cash and cash equivalents   (704,692 )   (2,283,355 )
             
Cash and cash equivalents, beginning   1,193,365     2,877,210  
             
Cash and cash equivalents, ending $  488,673   $  593,855  
             
SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH FINANCING AND INVESTING ACTIVITIES:        
     Cash paid for interest $  982,730   $  277,397  
     Capital stock issued in settlement of accounts payable and accruals $  632,376   $  -  
     Capital stock issued as share issue costs $  220,500   $  -  

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

7



CRAiLAR Technologies Inc.
Notes to Consolidated Financial Statements
June 28, 2014
(In US dollars)
(Unaudited)

1.

Basis of Presentation

These unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial reporting and the rules and regulations of the Securities and Exchange Commission. They do not include all information and footnotes required by United States generally accepted accounting principles (“U.S. GAAP”) for complete financial statement disclosure. However, except as disclosed herein, there have been no material changes in the information contained in the audited consolidated financial statements for the year ended December 28, 2013, included in the Company’s Form 10-K filed with the U.S. Securities and Exchange Commission. Operating results for the twenty-six week period ended June 28, 2014 are not necessarily indicative of the results that may be expected for the year ending December 27, 2014. These interim unaudited consolidated financial statements should be read in conjunction with the information included in the Company’s Form 10-K filed on March 28, 2014 with the U.S. Securities and Exchange Commission.

Effective fiscal 2013, the Company began to report quarterly results on a 4-4-5 basis, with the quarter ending on the Saturday closest to the last day of each third month. In fiscal 2014, the Company's first quarter ended on March 29, 2014, the second quarter will end on June 28, 2014, the third quarter will end on September 27, 2014 and the fourth quarter will end on December 27, 2014.

In the opinion of management, the accompanying interim balance sheet and related interim statement of operations and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with U.S. GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results and outcomes may differ from management’s estimates and assumptions.

The Company’s consolidated financial statements are prepared using U.S. GAAP 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 $51,963,396 and further losses are anticipated in the development of its business. There can be no assurance that the Company will be able to achieve or maintain profitability. At June 28, 2014 there is a working capital deficiency of $1,989,292 and future operations are dependent on raising additional funding from debt or equity financings. These factors raise substantial doubt as to the Company's ability to continue as a going concern.

The Company evaluated events occurring between June 28, 2014 and the date financial statements were issued.

The Company has elected to early adopt the guidance in FASB Topic 915 this quarter and no longer provides the accounting disclosures for development stage companies. Accordingly, the figures for the period from inception to the current period are no longer provided and all references to development stage operations have been removed. Other recent accounting pronouncements with future effective dates are not expected to have an impact on the Company’s financial statements.

2.

Inventory


    June 28, 2014     December 28, 2013  
CRAiLAR fiber $  309,170   $  186,464  
Decorticated fiber   164,718     252,263  
Raw flax fiber feedstock   369,590     369,590  
Hemp   9,500     -  
Other   73,389     136,723  
  $  926,367   $  945,040  

8



CRAiLAR Technologies Inc.
Notes to Consolidated Financial Statements
June 28, 2014
(Unaudited)

3.

Property and Equipment


          Accumulated     Net Book Value     Net Book Value  
    Cost     Amortization     June 28, 2014     December 28, 2013  
Automobiles $  58,745     $  8,876     $  49,869     $  49,867  
Computer equipment   119,289     69,106     50,183     57,180  
Equipment   1,108,561     111,915     996,646     443,105  
Equipment held for sale   70,000     -     70,000     70,000  
Furniture and fixtures   62,248     39,390     22,858     25,421  
Leasehold improvements   6,366,911     621,414     5,745,497     5,711,874  
Production equipment   5,943,458     505,527     5,437,931     4,818,280  
Production equipment in construction   5,687,768     -     5,687,768     6,060,849  
Website development costs   128,046     119,905     8,141     3,436  
  $ 19,545,026     $ 1,476,133     $ 18,068,893     $  17,240,012  

4.

Intangible Assets


          Accumulated     Net Book Value     Net Book Value  
    Cost     Amortization     June 28, 2014     December 28, 2013  
Patents $  179,137     $ 88,943     $ 90,194     $  85,482  
Trademarks   121,723     95,324     26,399     28,065  
License fee   62,652     27,227     35,425     41,998  
Computer Software   11,081     8,145     2,935        
  $  374,593     $ 219,640     $ 154,953     $  155,545  

During the twenty-six week period ended June 28, 2014, the Company recorded amortization and depreciation expense of $285,785 (2013 - $354,718) of which $235,359 (2013 - $257,347) was classified as cost of sales.

9



CRAiLAR Technologies Inc.
Notes to Consolidated Financial Statements
June 28, 2014
(Unaudited)

5.

Long Term Debt

Long term debt:

    June 28, 2014     December 28, 2013  
Convertible debentures            
     Balance, beginning $  16,674,686   $  10,051,262  
     Convertible debentures issued   -     8,307,249  
     Discount on debentures   -     (754,829 )
     Amendment of debentures – conversion price   -     (79,931 )
     Accretion expense   125,768     94,030  
     Convertible debentures converted   (17,786 )   -  
     Effect of foreign exchange   (43,677 )   (943,095 )
     Balance, ending   16,738,991     16,674,686  
             
IKEA Loan            
     Balance, beginning   -     -  
     Loan issued   2,984,383     -  
     Effect of foreign exchange   881     -  
     Balance, ending   2,985,264     -  
Long term debt – long term   19,724,255     16,674,686  
Less: current portion   104,935     -  
  $  19,619,320   $  16,674,686  

10



CRAiLAR Technologies Inc.
Notes to Consolidated Financial Statements
June 28, 2014
(Unaudited)

Deferred issuance costs:

    June 28, 2014     December 28, 2013  
Balance, beginning $  1,442,023   $  1,024,294  
Issuance costs – cash   52,198     800,910  
Issuance costs – warrants   -     66,278  
Issuance costs allocated to additional paid in capital   -     (102,670 )
Amortization of issuance costs   (216,226 )   (346,789 )
Effect of foreign exchange   (6,496 )   -  
  $  1,271,499   $  1,442,023  

Convertible Debentures

On September 20, 2012, the Company completed the offering of $10,051,262 (CAD$10,000,000) convertible debentures (the “September 2012 Debentures”). The September 2012 Debentures mature on September 20, 2017. The September 2012 Debentures bear interest at a rate of 10% per year, payable semi-annually on March 31 and September 30, starting March 31, 2013. As at June 28, 2014, accrued interest of $228,144 (CAD$244,744) (2013 – 240,937, (CAD$246,575)) was included in accrued liabilities.

On February 26, 2013, the Company completed an offering of $4,943,643 (CAD$5,000,000) convertible debentures (the “February 2013 Debentures”). The February 2013 Debentures mature on September 30, 2017. The February 2013 Debentures bear interest at a rate of 10% per year, payable semi-annually on March 31 and September 30, starting September 30, 2013. As at June 28, 2014, accrued interest of $114,115 (CAD$121,918) (2013 – 164,640 (CAD$168,493)) was included in accrued liabilities. The Company paid a total of $427,049 (CAD$487,830) in cash issuance costs which have been recorded as deferred debt issuance costs.

Holders of the September 2012 Debentures and February 2013 Debentures have the option to convert the convertible debentures into shares of the Company’s common stock at a price of $2.85 (CAD$2.90) per common share at any time prior to the maturity date. The Company may redeem the September 2012 Debentures and the February 2013 Debentures after September 30, 2015 provided that the market price at the time of the redemption notice is not less than 125% of the conversion price. The conversion price is subject to standard anti-dilution provisions.

The September 2012 Debentures and February 2013 Debentures are secured by a Guaranty and Security Agreement signed with the Company’s wholly-owned subsidiary, Crailar Inc. (“CI”), a Nevada incorporated company. CI has provided a security interest over its assets, having an aggregate acquisition cost of no less than $5,500,000, as security for its guarantee obligation which shall rank in priority to all other indebtedness of CI.

The September 2012 Debentures and February 2013 Debentures do not contain a beneficial conversion feature, as the fair value of the Company’s common stock on the date of issuance was less than the conversion price. All proceeds from the debentures were recorded as a debt instrument.

On July 26, 2013, the Company closed a convertible debenture offering for gross proceeds of $3,363,606 (CAD$3,535,000) (the “July 2013 Debentures”). The July 2013 Debentures will mature on July 26, 2016 and will accrue interest at a rate of 10% per year, payable semi-annually in arrears on March 31 and September 30 commencing September 30, 2013. In the event the Company completes one or more equity financings between July 26, 2013 and July 26, 2016 with gross proceeds of at least an aggregate of $19.4 million (CAD$20.0 million), the Company must, subject to providing no less than 60 days prior notice to each holder of the July 2013 Debentures, redeem the July 2013 Debenture in whole at face value plus all accrued and unpaid interest thereon. As at June 28, 2014, accrued interest of $80,679 (CAD$86,196) was included in accrued liabilities. At the holder’s option, the debentures may be converted into common shares in the capital of the Company at any time up to the earlier of the maturity date and the business day immediately preceding the date specified by the Company for redemption of the debentures. The conversion price is CAD$1.25 per share.

11



CRAiLAR Technologies Inc.
Notes to Consolidated Financial Statements
June 28, 2014
(Unaudited)

In addition, in connection with the July 2013 Debentures, the Company issued 800 transferable common share purchase warrants (each, a “Warrant”) for each $904 (CAD$1,000) of principal amount, resulting in the issuance of an aggregate of 2,828,000 Warrants, with each Warrant entitling the holder thereof to purchase one additional common share (each, a “Warrant Share”) at an exercise price of $2.00 per Warrant Share until July 26, 2016. The Company determined the fair value of the Warrants to be $974,387 (CAD$1,003,910) using the Black-Scholes Option Pricing Model with the following assumptions: expected dividend yield – 0; expected stock price volatility – 56%; risk-free interest rate – 0.59%; expected life – 2.83 years.

The proceeds were allocated to the July 2013 Debentures and the Warrants based on their relative fair values and accordingly, $2,295,309 (CAD$2,757,300) was allocated to the 2103A Notes and $754,829 (CAD$777,700) was allocated to the Warrants and recorded as a reduction in the July 2013 Debentures and an increase in additional paid-in capital.

The Company incurred a total of $440,139 in issuance and commission costs relating to the July 2013 Debentures. This included $373,861 in cash issuance costs and the fair value of warrants to purchase 192,360 common shares issued to a finder of $66,278. The warrants entitle the holder to purchase common shares for $1.25 per share for three years from the date of issuance. The fair value of the warrants was calculated using the Black-Scholes Option Pricing Model with the following assumptions: expected dividend yield – 0; expected stock price volatility – 56%; risk-free interest rate – 0.59%; expected life – 2.83 years. The allocation of the 2013A Note issuance costs were based on the relative fair value of the July 2013 Debentures and the Warrants and, accordingly, $337,469 was allocated to deferred debt issuance costs and $102,670 was allocated to additional paid-in capital during the year ended December 28, 2013.

The July 2013 Debentures included a continuing security interest in certain of the Company’s assets pursuant to a Guaranty and Security Agreement. On December 17, 2013 the Guaranty and Security Agreement was amended to only provide a security interest in certain specific assets held by the Company which had an acquisition cost of $3,922,240. As consideration for the modification, the conversion price of the debentures was amended to $1.21 (CAD$1.25) per share. The Company determined the fair value of the additional debt discount to be $79,931 using the Black-Scholes Option Pricing Model with the following assumptions: expected dividend yield – 0; expected stock price volatility – 56%; risk-free interest rate – 0.59%; expected life – 2.42 years.

During the twenty-six week period ending June 28, 2014 the Company recorded amortization of the July 2013 Debentures debt discount in the amount of $125,768 which was included in interest expense.

During the twenty-six week period ended June 28, 2014, the Company recorded $205,867 (2013 - $158,043) in interest expense for the amortization of deferred issuance costs.

IKEA Supply AG Loan

During the quarter ended March 29, 2014 the Company received $2,197,153 (€1,597,000) pursuant to a loan agreement entered into with IKEA Supply AG (“IKEA”) with an effective date of November 29, 2013. The loan bears an interest rate of 1.9% per annum and is payable in monthly installments of $15,118 (€11,000) from December 20, 2014 through June 20, 2016 with the remainder due in full on June 25, 2016. IKEA agreed to loan the Company a total of $3,028,300 (€2,190,000) which was fully drawn during the second quarter. The loan is secured by assets purchased with the proceeds, as well as a portion of the secured assets used to secure the July 2013 Debentures. As at June 28, 2014, accrued interest of $14,212 (CAD$15,182) was included in accrued liabilities.

The Company incurred a total of $52,198 in issuance costs related to the IKEA loan. This included $37,079 in costs paid during the year ended December 28, 2013 and $15,119 paid during the twenty-six week period ended June 28, 2014. During the twenty-six week period ended June 28, 2014, the Company recorded $10,359 (2013 - $nil) in interest expense for the amortization of deferred issuance costs.

12



CRAiLAR Technologies Inc.
Notes to Consolidated Financial Statements
June 28, 2014
(Unaudited)

6.

Notes Payable


    June 28, 2014     December 28, 2013  
Balance, beginning $  476,614   $  -  
Principal   -     655,804  
Interest   29,384     23,781  
Repayment   (661,452 )   (48,326 )
Beneficial conversion feature   -     (188,140 )
Accretion expense – beneficial conversion feature   150,372     33,495  
Bonus shares issued   (131,744 )   -  
Accretion expense – bonus shares issued   131,744     -  
Effect of foreign exchange   (5,082 )   -  
  $  -   $  476,614  

On October 11, 2013, the Company issued a convertible promissory note in favor of Mr. Jason Finnis, one of its directors, in the principal amount of $96,180 (CDN$100,000). The promissory note is unsecured and bears interest on the principal amount at the rate of 12% per annum, which interest is payable in full on repayment of the principal amount. On November 7, 2013, the company repaid Mr. Finnis $48,326 (CDN$50,000) of principal including interest of $441 (CDN$460). On April 1, 2014 the Company repaid Mr. Finnis $49,427 (CAD $52,807) for the remaining balance of the note and interest.

On October 11, 2013, the Company issued a convertible promissory note in favor of Mr. Kenneth Barker, one of its directors, in the principal amount of $50,000. The promissory note is unsecured and accrues interest on the principal amount at the rate of 12% per annum, which interest is payable in full on repayment of the principal amount. On April 2, 2014 the Company repaid Mr. Barker $52,751 for the outstanding balance of the note including interest.

On October 11, 2013, the Company issued a demand convertible promissory note in favor of Mr. Robert Edmunds, one of its directors, in the principal amount of $467,369 (CDN$500,000). On December 4, 2013, the Company issued an additional demand convertible promissory note in favor of Mr. Edmunds, pursuant to a loan from Mr. Edmunds to the Company in the principal amount of $42,255 (CDN$45,000). The promissory notes are unsecured and accrue interest on the principal amount at a rate of 20% per annum, which interest is payable in full on repayment of the principal amount. In connection with the amendment of such convertible promissory notes, 181,666 bonus common shares of the Company were issued to Mr. Edmunds on January 30, 2014 with a fair value of $131,744. The value of the shares will be amortized over the term of the loan. During the twenty-six week period ended June 28, 2014, the Company recorded $131,744 in interest expense relating to the amortization of the value of the bonus shares. On April 1, 2014 the Company repaid Mr. Edmunds $559,274 for the outstanding balance of the note including interest.

The promissory notes issued to our directors during the year ended December 28, 2013 contain conversion features. Each lender has the right to convert any portion of the outstanding principal and interest payable for units at a conversion price of $0.60 per unit. Each unit is comprised of one common share and one common share purchase warrant of the Company. Each warrant entitles the holder to acquire one common share of the Company at an exercise price of CAD$0.70 per common share for a term of five years. The Company recognized a beneficial conversion feature of $188,140 (CAD$200,000) based on the excess of the fair value of the common stock over the conversion price. During the twenty-six week period ended June 28, 2014, the Company amended the loans and removed the beneficial conversion feature. The Company incurred an accretion expense of $150,372 during the twenty-six week period ended June 28, 2014, reducing the value of the beneficial conversion feature to a balance of $nil.

13



CRAiLAR Technologies Inc.
Notes to Consolidated Financial Statements
June 28, 2014
(Unaudited)

7.

Capital Stock

During the twenty-six week period ended June 28, 2014, the Company issued shares as follows:

  a.

The Company completed a private placement on March 20, 2014 of 2,515,000 units at $1.25 per unit for gross proceeds of $3,143,750. Each unit is comprised of one common share and one-half of one transferable common share purchase warrant of the Company. Each warrant entitles the holder thereof to acquire one common share of the Company at an exercise price of $1.75 per common share for a term of 2 years. In addition, finder’s fees of an aggregate of 176,400 shares were issued to two finders in conjunction with the closing of this private placement. The warrants have exercise prices denominated in United States dollars, which differs from the Company’s functional currency and are therefore classified as a derivative liability and recorded at fair value which was determined to be $578,450 on issuance and $314,375 at June 28, 2014. The fair value of warrants are re-measured at each balance sheet date and the change in fair value is recorded in the statement of loss. The fair value was determined using the Black-Scholes option pricing model with an expected life of two years and with the same assumptions used in Note 7.

     
  b.

The Company issued 181,666 common shares with a fair value of $131,744 as a bonus on an amendment of a promissory notes issued to one of our directors. Refer to Note 6.

     
  c.

On May 23, 2014, the Company issued 1,724 shares of common stock upon the conversion of $4,681 (CAD$5,000) principal amount of previously issued convertible debentures at the conversion price of $2.70 (CAD$2.90) per share. On June 17, 2014, the Company issued 4,827 shares of common stock upon the conversion of $13,105 (CAD$14,000) principal amount of previously issued convertible debentures at the conversion price of $2.68 (CAD$2.90) per share.

     
  d.

The Company completed a private placement of units to thirteen creditors in settlement of $927,944 in debt on June 2, 2014 of 742,355 units at an agreed issuance price of $1.25 per unit. Each unit was comprised of one common share and one-half of one transferable common share purchase warrant of the Company. Each whole warrant entitles the holder thereof to acquire one common share of the Company at an exercise price of $1.75 per common share for a term of 2 years. The warrants have exercise prices denominated in United States dollars, which differs from the Company’s functional currency and are therefore classified as a derivative liability and recorded at fair value which was determined to be $56,072 on issuance and $80,856 at June 28, 2014. The fair value of warrants are re-measured at each balance sheet date and the change in fair value is recorded in the statement of loss. The fair value was determined using the Black-Scholes option pricing model with an expected life of two years and with the same assumptions used in Note 7.

Share purchase warrants outstanding as at June 28, 2014 are:

  Warrants Weighted-Average Exercise Price
Warrants outstanding, December 28, 2013 6,887,580 $1.15
Warrants issued 1,628,680 $1.75
Warrants outstanding, June 28, 2014 8,516,260 $1.18

The weighted average remaining contractual life of outstanding warrants at June 28, 2014, is 3.04 years.

14



CRAiLAR Technologies Inc.
Notes to Consolidated Financial Statements
June 28, 2014
(Unaudited)

Stock options outstanding as at June 28, 2014 are:

  Shares   Weighted-Average Exercise Price
Options outstanding, December 28, 2013 6,468,799   $1.80
Options granted 1,688,000   $1.31
Options cancelled/expired    (67,504)   $2.28
Options outstanding, June 28, 2014 8,089,295   $1.70
Options exercisable, June 28, 2014 6,804,520   $1.78

Stock options outstanding at June 28, 2014, are summarized as follows:

    Weighted Average     Weighted
Range of Exercise Number Remaining Contractual Weighted Average Number Average
Prices Outstanding Life (yr) Exercise Price Exercisable Exercise Price
$0.87 - $3.05 8,089,295 2.58 $1.70 6,804,520 $1.78

During the twenty-six week period ended June 28, 2014, options to purchase 467,393 (2013 – 862,715) common shares vested under the Company’s amended 2011 Fixed Share Option Plan. A total expense of $448,407 (2013 - $1,035,217) was recorded as stock-based compensation, of which $13,468 (2013 - $137,473) was included in consulting and contract labour expense and $434,939 (2013 - $897,744) was included in salaries and benefits expense.

The fair value of options granted during the twenty-six week period ended June 28, 2014 was determined using the Black-Scholes option pricing model with the following assumptions:

Risk-free interest rates 0.63% to 0.70%
Volatility factor 73% to 88%
Expected life of options, in years 3 - 4.2

The weighted average fair value of the options granted during the twenty-six week period ended June 28, 2014 is $0.73.

15



CRAiLAR Technologies Inc.
Notes to Consolidated Financial Statements
June 28, 2014
(Unaudited)

8.

Business Combination

On December 1, 2013, the Company acquired certain assets of Schrurs NV, a textile company located in Ieper, Belgium, by means of an asset purchase agreement. The assets purchased include all of the production equipment, computer equipment and the rights to all of the employee contracts related to a production facility in Ieper, Belgium. The purchase price of the assets of Schrurs NV was settled by the Company assuming outstanding debt of $1,172,081 (€861,551). The general decline in the textile business in Europe had left assets available at a favorable price for the Company. This acquisition resulted in a bargain purchase gain of $425,909 as follows:

Fair value of assets acquired $  1,797,121  
Fair value of debt assumed   (1,172,081 )
Deferred income tax liability   (199,131 )
Bargain purchase gain $  425,909  

Under the terms of the asset purchase agreement, for a term of five years from the closing date of December 1, 2013, the repayment of the debt assumed by the Company shall be made in accordance with the terms of such debts and / or the repayment terms agreed upon between the seller and the respective creditors of the seller’s debts. On the fifth anniversary of the closing date, the aggregate outstanding amount under the seller’s debts at that point in time shall be repaid in whole by the Company to the respective creditors of the seller’s debts. During the twenty-six week period ended June 28, 2014, the Company made repayments of $123,790 and accrued interest of $12,084 .

At June 28, 2014 the debt assumed consists of the following, including a foreign exchange effect of $10,612:

Bank line of credit, bearing interest at 3.25%, repayable June 25, 2014 $  283,727  
Bank term loans, bearing interest ranging from 3.1% to 4.55%, repayable between September 2014 and
      December 2018
  622,628  
Loan payable on demand bearing interest at 4% per annum   89,998  
Loan payable on demand bearing no interest   68,130  
    1,064,483  
Less: current portion   587,288  
  $  477,195  

All of the above debt is denominated in Euros; the table above reflects applicable amounts in US dollars.

9.

Related Party Transactions

During the twenty-six week period ended June 28, 2014, $534,228 (2013 - $754,921) was incurred for remuneration to officers and directors of the Company.

Refer to Note 6.

16



CRAiLAR Technologies Inc.
Notes to Consolidated Financial Statements
June 28, 2014
(Unaudited)

10.

Commitments

The Company is committed to lease payments totaling approximately $1,930,000 for premises under lease. The minimum lease payments over the next five years are as follows:

2014 $  140,000  
2015   264,000  
2016   264,000  
2017   264,000  
2018   209,000  
Total $  1,141,000  

11.

Subsequent Events

a) On August 6, 2014, the Company completed the public offering of 13,000,000 units (the “Units”) of the Company at a price of $0.50 per unit for aggregate gross proceeds of $6,500,000 (the “Offering”). Each unit is comprised of one common share and one common share warrant of the Company (each common share purchase warrant, a “Warrant”). Each warrant entitles the holder thereof to acquire one common share of the Company at an exercise price of $0.535 per common share at any time prior to August 6, 2019.

The Company has paid 7% of gross proceeds of the offering to the underwriters and has granted them an option (the “Over-Allotment Option”), exercisable in whole or in part at any time up to 30 days following the closing of the Offering. The Over-Allotment Option allows the underwriters to purchase an additional 15% of the Offering solely to cover over-allotments, if any, and for market stabilization purposes. The Over-Allotment Option entitles the underwriters to purchase a maximum of 1,950,000 units or 1,950,000 common shares and/or 1,950,000 warrants.

b) The Over-Allotment Option has been partially exercised and the underwriters have purchased 1,950,000 warrants at $0.001 per warrant for proceeds of $1,950.

17


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 consolidated 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.

Overview

We are focused on bringing sustainable bast fiber-based products to market that are environmentally friendly natural fiber alternatives with equivalent or superior performance characteristics to cotton, wood or fossil-fuel based fibers. Our business operations consist primarily of the production of our natural and proprietary CRAiLAR® Flax fibers targeted at the natural yarn and textile industries, as well as the deployment of our CRAiLAR processing technologies in the cellulose pulp and composites industries. We believe that we offer two key opportunities for development:

CRAiLAR fibers (using flax, hemp or other sustainable bast fiber) for textiles (knit, woven and non-woven constructions) available in a variety of blends, textures, colors and applications; and

   

CRAiLAR technologies for processing cellulose-based fibers as a high grade dissolving pulp for use in the additives, ethers and performance apparel markets.

Effective in fiscal 2013, we began to report our first, second, third and fourth quarters on a 4-4-5 basis, with each quarter ending on the Saturday closest to the last day of each third month.

Acquisition of Production Facility

We commenced production of the first stage of the CRAiLAR flax fiber process in the first quarter of fiscal 2013 out of our decortication facility in Pamplico, South Carolina. Following the decortication process, the fibers were converted into CRAiLAR Flax fiber at a third party wet processing facility with initial fiber sales beginning in the second quarter of fiscal 2013. In December 2013, we acquired a European fiber dyeing facility with equipment similar to that used to produce CRAiLAR Flax fiber. The acquisition was made pursuant to an Asset Purchase Agreement dated November 6, 2013, which was amended and restated on December 13, 2013. The new facility allowed us to accelerate our timeline for establishing a company-controlled CRAiLAR wet processing capability. Production of CRAiLAR fibers at this facility commenced in January 2014. We believe the facility has the capacity to produce over 280,000 pounds of CRAiLAR Flax fiber per week with space to expand the capacity to over 800,000 pounds per week. Operations at our decortication facility in South Carolina have been suspended until improvements have been built and installed to the front end of the production line.

Debentures

On September 20, 2012, we completed the offering of $10.1 million (CAD$10.0 million) worth of convertible debentures (the “September 2012 Debentures”), which bear interest at a rate of 10% per year, payable semi-annually on March 31 and September 30 of each year and mature on September 20, 2017. The holders of the September 2012 Debentures have the option to convert, at any time prior to the maturity date, the September 2012 Debentures into shares of our common stock at a price of $2.85 (CAD$2.90) per share for each $972 (CAD$1,000) of principal amount converted. On February 25, 2013, we completed another offering of $4.9 million (CAD$5.0 million) convertible debentures (the “February 2013 Debentures”) with essentially the same terms as the previously mentioned offering. Furthermore, on July 26, 2013, we completed a third offering of $3.4 million (CAD$3.5 million) worth of convertible debentures (the “July 2013 Debentures”) with an interest rate of 10% payable semi-annually on March 31 and September 30 of each year, which mature on July 26, 2016. Originally, the holders of the July 2013 Debentures had the option to convert, at any time prior to the maturity date, such debentures into shares of our common stock at a price of $1.94 (CAD$2.00) per share for each $972 (CAD$1,000) of principal amount converted. However, pursuant to the Amended and Restated Convertible Debenture Indenture dated December 23, 2013, the conversion price for the July 2013 Debentures has been reduced to $1.21 (CAD$1.25) per share of common stock. The holders of the July 2013 Debentures also each received warrants to purchase 800 shares of our common stock at an exercise price of $1.21 (CAD$1.25) per share for each $972 (CAD$1,000) of principal amount of July 2013 Debentures purchased, which warrants are exercisable at any time prior to the maturity date of the debentures.

18


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its six wholly-owned subsidiaries as of June 28, 2014: Crailar Inc., a Nevada incorporated company; Hemptown USA, Inc., a Nevada incorporated company; 0697872 B.C. Ltd., a British Columbia incorporated company; Crailar Fiber Technologies Inc., a British Columbia incorporated company, HTnaturals Apparel Corp, a British Columbia incorporated company; and Crailar Europe NV, a Belgian corporation. All intercompany transactions and account balances have been eliminated upon consolidation.

Cash and Cash Equivalents

Cash equivalents consist of cash on deposit and term deposits with original maturities of one year or less at the time of issuance. As of June 28, 2014, the Company had $0.5 million in cash and cash equivalents.

Inventory

The raw flax fiber feedstock, decorticated fiber and CRAiLAR fiber are valued at the lower of cost and market. All direct costs are capitalized to raw flax fiber inventory, decorticated fiber inventory and CRAiLAR fiber. Seed inventory is valued at the lower of average cost and market. Cost represents the cost to purchase seed and/or growing cost plus any related shipping costs. Other inventories, which primarily consist of production consumables, are recorded at the lower of cost and replacement cost, which approximates net realizable value.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP 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 inventory costing and net realizable value, the expected future use and other impairment considerations of property and equipment, fair value of warrants, options, derivative liabilities, provision for income taxes, depreciation and financial instruments.

Property and Equipment

Property and equipment are stated at cost and are depreciated as follows:

Automobiles 20% declining balance
Computer equipment 30% declining balance
Computer software 100% declining balance
Equipment 30% declining balance
Furniture and fixtures 20% declining balance
Production equipment 30% declining balance
Leasehold improvements Term of lease
Website development 100% declining balance

Depreciation is claimed at one-half of the regular rate in the year of addition. No depreciation is claimed in the year of disposal.

Intangible Assets

Intangible assets are stated at cost and are amortized as follows:

Trademarks 5 year straight - line
License fee 10 year straight - line
Patent 10 year straight - line

Revenue Recognition

Revenue is recognized when there is persuasive evidence of a sale arrangement, delivery to the customer has occurred, the fee is fixed and determinable, and collectability is considered probable.

19


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: All assets and liabilities are translated into U.S. dollars at the exchange rate in effect at the period-end. Revenues and expenses are translated throughout the year 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 statement of operations and comprehensive loss.

Income Taxes

The Company utilizes the liability method of accounting for deferred income taxes. Under the liability method, deferred income 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 potential the future tax assets will not be realized.

Comprehensive Loss

Comprehensive loss is the change in equity during a period resulting from transactions and other events, other than those changes resulting from transactions with owners in their capacity as owners. Other comprehensive income (loss) includes items of income and expense that are not recognized in net loss as required or permitted by U.S. GAAP.

Stock-based Compensation

The Company accounts for stock-based payment transactions in which an enterprise receives services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The Company uses the Black-Scholes option-pricing model to establish the fair-value of stock-based awards.

Earnings (Loss) Per Share

Basic and diluted earnings (loss) per share are computed using the weighted average number of shares outstanding during the year. Common stock equivalents from stock options and warrants were excluded from the calculation of net loss per share for the periods ended June 28, 2014 and June 29, 2013 as their effect is anti-dilutive.

Long-Lived Asset Impairment

Long-lived assets of the Company are reviewed when changes in circumstances suggest their carrying value has become impaired. Management considers assets to be impaired if the carrying value exceeds the estimated discounted future projected cash flows to result from the use of the asset and its eventual disposition. If impairment is deemed to exist, the assets will be written down to fair value. Fair value is generally determined using a hierarchy of fair value methodologies under U.S. GAAP, primarily based on a discounted cash flow analysis.

Risk Management

Currency risk. The Company is exposed to currency risk to the extent that certain inventory and equipment is purchased from Europe. The purchase price for such inventory and equipment is generally 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. Receivables are managed through the use of Letters of Credit and therefore credit risk is minimal.

Interest rate risk. Approximately $340,000 of the Company’s debt bears interest at fluctuating rates. Consequentially the Company is exposed to interest rate fluctuations. The Company does not currently hedge its exposure to interest rate risk.

20


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 fiber feedstock from the flax producers in Europe. The Company purchases the short fiber waste product called “tow” and the price fluctuates based on supply. The Company has relationships with several short fiber producers and does not currently anticipate any issue in obtaining sufficient fiber for its needs. The Company does not currently enter into futures contracts or otherwise hedge its exposure to commodity price risk.

Research and Development

Research and development costs are charged to operations as incurred.

Recent Accounting Pronouncements.

There are no recent accounting pronouncements that are applicable to the Company.

RESULTS OF OPERATIONS

Thirteen-Week Period Ended June 28, 2014 Compared to Thirteen-Week Period Ended June 29, 2013

    Thirteen Weeks Ended  
    June 28, 2014     June 29, 2013  
    (amounts in thousands, except per share data)  
Revenues $  743   $  182  
Cost of sales            
       Materials and direct production costs   685     201  
       Facility commissioning costs   251     207  
       Production facility overhead costs   77     163  
       Depreciation   132     257  
    1,144     828  
Gross loss   (402 )   (646 )
Expenses:            
 Marketing and promotion   93     234  
 Amortization and depreciation   26     45  
 General and administrative   1,179     1,518  
    1,298     1,797  
Loss before other items   (1,700 )   (2,443 )
Other income (expense):            
   Accretion expense   (175 )      
   Interest   (524 )   (483 )
   Research and development   (64 )   (37 )
   Gain on disposal of assets         1  
   Gain on debt settlement   234     -  
   Write down of inventory   -     (477 )
   Fair value adjustment derivative liabilities   264     408  
    (265 )   (589 )
Net loss   (1,965 )   (3,032 )
Exchange differences on translating to presentation currency   (481 )   525  
Total comprehensive loss   (2,446 )   (2,507 )
Loss per share (basic and diluted) $  (0.04 ) $  (0.07 )
Non GAAP Financial Measures:            
EBITDA $  (1,108 )   (2,245 )
Adjusted EDITDA $  (977 ) $  (1,453 )

(1) EBITDA and Adjusted EBITDA are supplemental non-GAAP financial measures. EBITDA consist of net loss before (a) interest expense; (b) accretion expense; and (c) depreciation and amortization. “Adjusted EBITDA” further adjusts EBITDA to exclude stock-based compensation expense, facility commissioning expense, fair value adjustment derivative liabilities, gain on settlement of debt, gain on disposal of assets, impairment loss and rent inducement expense.

21


Revenue and Gross Margins

For the thirteen week period ended June 28, 2014 (“Second Quarter 2014”) our revenues were derived from sales of CRAiLAR fiber and other fiber (non-CRAiLAR) at our new European production facility. For the thirteen week period ended June 28, 2013 (“Second Quarter 2013”) our revenues were derived from CRAiLAR fiber.

Our gross loss for Second Quarter 2014 was $0.4 million (2013: $0.6 million). Cost of sales is comprised of $0.7 million (2013: $0.2 million) for flax feedstock, utilities, labor, chemicals and water directly related to sales of CRAiLAR Flax fiber and the non-CRAiLAR legacy fiber dyeing business; $0.3 million (2013: $0.2 million) to temporarily outsource the final CRAiLAR process until equipment is installed and training expenses for new employees to add more production shifts; $0.1 million (2013: $0.2 million) of facility overhead costs and $0.1 million (2013: $0.3 million) for depreciation of production equipment.

Operating Expenses

During the Second Quarter 2014 we recorded operating expenses of $1.3 million compared to operating expenses of $1.8 million for the Second Quarter 2013, a decrease of $0.5 million or approximately 27%. Causes for the reduction are a decrease in general and administrative expenses of $0.3 million and a reduction in marketing and promotion expense of $0.1 million.

Marketing and promotion expenses comprised of marketing salaries and sales development costs were $0.1 million for the Second Quarter 2014, a decrease of $0.1 million or approximately 40% from $0.2 million for the Second Quarter 2013. The decrease was primarily driven by a $0.1 million reduction in product development costs and investor relations and public relations expenses of $0.1 million.

General and administrative (G&A) expenses for the Second Quarter 2014 decreased to $1.2 million, a reduction of $0.3 million or approximately 23% from $1.5 million for the Second Quarter 2013. The decrease was primarily caused by a $0.2 million reduction in salaries and consultants expense, a decrease in professional fees of $0.2 million, and a $0.1 million reduction in stock-based compensation, partially offset by a $0.1 million cost increase associated with the South Carolina facility.

Other Items

Interest expense was $0.5 million for the Second Quarter 2014, approximately the same for the same period as last year Interest expense is attributable to the convertible debenture interest, European facility loan interest, IKEA loan interest and note payable interest of $0.4 million and the amortization of the deferred debt issuance costs of $0.1 million. Accretion expense was $0.2 million from the beneficial conversion feature of the promissory notes and amortization of bonus shares issued with promissory notes in the Second Quarter 2014. There was no accretion expense in the Second Quarter 2013. For Second Quarter 2014 compared to the Second Quarter 2013, research and development costs increased to $64,000 from $37,000 while the fair value adjustment of derivative liabilities was a gain of $264,000 compared to a gain of $407,000.

Net Loss

Our net loss for the Second Quarter 2014 was $2.0 million, or $0.04 per share, compared to $3.0 million, or $0.07 per share for the Second Quarter 2013. The reduction in loss was primarily attributable to the reduction in general and administration expenses of $0.3 million, a reduction in marketing and promotion expenses of $0.1 million, a reduction in gross margin loss of $0.2 million and a gain on settlement of debt of $0.3 million.

For the period ended June 28, 2014, the weighted average number of shares outstanding was 50,892,464 compared to 44,407,621 for the period ended June 29, 2013.

22


First Half 2014 Compared to First Half 2013

    Twenty-Six Weeks Ended  
    June 28, 2014     June 29, 2013  
    (amounts in thousands, except per share data)  
Revenues $  1,178   $  182  
          -  
Cost of sales            
       Materials and direct production costs   1,045     201  
       Facility commissioning costs   503     207  
       Production facility overhead costs   175     163  
       Depreciation   235     257  
    1,958     828  
Gross loss   (780 )   (646 )
Expenses:            
 Marketing and promotion   176     433  
 Amortization and depreciation   50     97  
 General and administrative   2,414     3,797  
    2,640     4,327  
Loss before other items   (3,420 )   (4,973 )
Other income (expense):            
   Accretion expense   (437 )   -  
   Interest   (1,064 )   (795 )
   Research and development   (117 )   (93 )
   Gain on disposal of assets   -     1  
   Gain on debt settlement   234     -  
   Impairment loss on inventory   -     (874 )
   Fair value adjustment derivative liabilities   264     482  
    (1,120 )   (1,279 )
Net loss   (4,541 )   (6,252 )
Exchange differences on translating to presentation currency   99     723  
Total comprehensive loss   (4,442 )   (5,529 )
Loss per share (basic and diluted) $  (0.09 ) $  (0.14 )
Non GAAP Financial Measures:            
EBITDA $  (2,754 )   (5,102 )
Adjusted EDITDA $  (2,301 ) $  (3,395 )

(1) EBITDA and Adjusted EBITDA are supplemental non-GAAP financial measures. EBITDA consist of net loss before (a) interest expense; (b) accretion expense; and (c) depreciation and amortization. “Adjusted EBITDA” further adjusts EBITDA to exclude stock-based compensation expense, facility commissioning expense, fair value adjustment derivative liabilities, gain on settlement of debt, gain on disposal of assets, impairment loss and rent inducement expense.

Revenue and Gross Margins

For the twenty-six week period ending June 28, 2014 (“First Half of 2014”) our revenues were derived from sales of CRAiLAR fiber and other fiber (non-CRAiLAR) at our new European production facility. For the twenty-six week period ended June 29, 2013 (“First Half of 2013”) our revenues were derived from CRAiLAR fiber.

Our gross loss for the First Half of 2014 was $0.8 million (2013: $0.6 million). Cost of sales is comprised of $1.0 million ( 2013: $0.2 million) for flax feedstock, utilities, labor, chemicals and water directly related to sales of CRAiLAR Flax fiber and the non-CRAiLAR legacy fiber dyeing business; $0.5 million (2013: $0.2 million) to temporarily outsource the final CRAiLAR process until equipment is installed and training expenses for new employees to add more production shifts; $0.2 million (2013:$0.2 million) of facility overhead costs and $0.2 million (2013: $0.3 million) for depreciation of production equipment.

23


Operating Expenses

During the First Half of 2014 we recorded operating expenses of $2.6 million compared to operating expenses of $4.3 million for the First Half of 2013, a decrease of $1.7 million or approximately 39%. Causes for the reduction are a decrease in general and administrative expenses of $1.4 million and a reduction in marketing and promotion expense of $0.3 million.

Marketing and promotion expenses comprised of marketing salaries and sales development costs were $0.2 million for the First Half of 2014, a decrease of $0.3 million or approximately 49% from $0.4 million for the First Half of 2013. The decrease was primarily driven by a $0.1 million reduction in product development costs and investor relations and public relations expenses of $0.1 million.

General and administrative (G&A) expenses for the First Half of 2014 decreased to $2.4 million, a reduction of $1.4 million or approximately 23% from $3.8 million for the First Half of 2013. The decrease was primarily caused by a $0.1 million reduction in salaries and consultants expense, a decrease in professional fees of $0.2 million, a $0.6 million reduction in stock-based compensation, and a reduction of $0.5 million in the costs associated with the South Carolina facility.

Other Items

Interest expense increased to $1.1 million for the First Half of 2014, compared to $0.8 million for the First Half of 2013, an increase of $0.3 million, resulting from a full year’s interest on certain convertible debentures in 2013, amortization of deferred debt issuance cost and debt discount. Interest expense is attributable to the convertible debenture interest, European facility loan interest, IKEA loan interest and note payable interest of $0.4 million and the amortization of the deferred debt issuance costs of $0.1 million. Accretion expense increased to $0.4 million from the beneficial conversion feature of the promissory notes and amortization of bonus shares issued with promissory notes in the First Half of 2014, compared to $0 for the First Half of 2013. During the First Half of 2014 there was a gain in the settlement of debt of $0.2 million, compared to $0 in the First Half of 2013. For the First Half of 2014 compared to the First Half of 2013, the fair value adjustment of derivative liabilities was a gain of $0.3 million compared to a gain of $0.5 million.

Net Loss

Our net loss for the First Half of 2014 was $4.5 million, or $0.09 per share, compared to $6.3 million, or $0.14 per share for the First Half of 2013..

For the First Half of 2014, the weighted average number of shares outstanding was 49,540,232 compared to 44,392,374 for the First Half of 2013.

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Non-GAAP Financial Measures

The table below reconciles net loss to Adjusted EBITDA for the periods presented (in thousands):

    Thirteen Weeks Ended     Twenty-six Weeks Ended  
    June 28,     June 29,     June 28,     June 29,  
    2014     2013     2014     2013  
 Consolidated                        
 Net loss $ (1,965 ) $ (3,032 ) $ (4,541 ) $ (6,252 )
 Interest expense   524     483     1,064     795  
 Accretion expense   175     -     437     -  
Depreciation and amortization   158     303     286     355  
 EBITDA   (1,108 )   (2,245 )   (2,754 )   (5,102 )
 Stock-based compensation   378     480     448     1,035  
 Facility commissioning expense   251     207     503     207  
 Fair value adjustment derivative liabilities   (264 )   (408 )   (264 )   (482 )
 Gain on settlement of debt   (234 )   -     (234 )   -  
 Gain on disposal of assets   -     (1 )   -     (1 )
 Impairment loss   -     477     -     874  
 Rent inducement expense   -     37     -     74  
 Adjusted EBITDA $ (977 ) $ (1,453 ) $ (2,301 ) $ (3,395 )

Regulation G, “Conditions for Use of Non-GAAP Financial Measures,” and other provisions of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) define and prescribe the conditions for use of certain non-GAAP financial information. We provide “EBITDA,” which is a non-GAAP financial measure that consists of net income (loss) before (a) interest expense, (b) accretion expense, and (c) depreciation and amortization. “Adjusted EBITDA” further adjusts EBITDA to exclude stock-based compensation expense, facility commissioning expense, fair value adjustment derivative liabilities, gain on settlement of debt, gain on disposal of assets, impairment loss and rent inducement expense.

We believe that these non-GAAP financial measures provide important supplemental information to management and investors. These non-GAAP financial measures reflects an additional way of viewing aspects of our operations that, when viewed with the U.S. GAAP results and the accompanying reconciliation to corresponding U.S. GAAP financial measures, provides a more complete understanding of factors and trends affecting our business and results of operations.

Our management uses EBITDA and Adjusted EBITDA as a measure of our Company’s operating performance because it assists in comparing our operating performance on a consistent basis by removing the impact of items not directly resulting from core operations. Internally, these non-GAAP measures are also used by management for planning purposes, including the preparation of internal budgets; for allocating resources to enhance financial performance; for evaluating the effectiveness of operational strategies; and for evaluating our capacity to fund capital expenditures and expand our business. We also believe that analysts and investors use these measures as supplemental measures to evaluate the overall operating performance of development stage companies. Additionally, we believe that lenders or potential lenders use EBITDA and Adjusted EBITDA to evaluate our ability to repay loans.

25


These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with U.S. GAAP and should not be relied upon to the exclusion of U.S. GAAP financial measures. Management strongly encourages investors to review our consolidated financial statements in their entirety and to not rely on any single financial measure. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names. In addition, we expect to continue to incur expenses similar to the non-GAAP adjustments described above, and exclusion of these items from our non-GAAP measures should not be construed as an inference that these costs are unusual, infrequent or non-recurring.

LIQUIDITY AND CAPITAL RESOURCES

First Half 2014 Compared to Fiscal Year Ended December 28, 2013

    2014     2013  
    (in thousands)  
Cash and cash equivalents $  489   $  1,193  
Working capital $  (1,989 ) $  (3,426 )
Total assets $  22,818   $  21,490  
Total liabilities $  25,606   $  23,504  
Shareholders’ equity (deficit) $  (2,788 ) $  (2,014 )

The Company has historically relied on equity financings, and more recently on sales of convertible debentures, to fund its operations. On June 2, 2014 the Company completed an equity financing for settlement of $927,944 in debts. On March 20, 2014, the Company completed an equity financing with gross proceeds of $3.1 million. On December 20, 2013, the Company completed an equity financing with gross proceeds of $1.9 million (CAD$2.0 million). On December 19, 2013, but having an effective date of November 29, 2013, we entered into a loan agreement to borrow up to $2.9 million (€2.2 million, approximately CAD$3.2 million). The Company has drawn on the loan $2.9 million (€2.2 million), which was used for capital expenditures for the European processing facility and general working capital. In February 2013, the Company completed a convertible debt financing for gross proceeds of $4.9 million (CAD$5.0 million). In July 2013, the Company completed an additional convertible debt financing for gross proceeds of $3.4 million (CAD$3.5 million). In September 2012, the Company completed a convertible debt financing for gross proceeds of $10.1 million (CAD$10.0 million). The Company expects to fund future operations and expansion through bank debt, government loan programs, customer financing, lease programs and additional equity and debt financings, as well as through cash generated from operations.

Net Cash Used in Operating Activities

Net cash flows used in operating activities for the First Half of 2014 were $4.9 million compared with $4.4 million for the First Half 2013. Cash flows used in operations for the First Half of 2014 consisted primarily of a net loss of $4.5 million offset by the following items: amortization and depreciation of $0.3 million (2013: $0.6 million), primarily related to production equipment in Europe for 2014 and to the decortication facility in the USA in 2013; accretion expense of $0.4 million (2013: $nil) related to the beneficial conversion feature of a promissory notes and amortization of the bonus shares issued pursuant to the promissory note; amortization of deferred debt issuance costs of $0.2 million (2013: $0.2 million); fair value adjustment of derivative liability of $(0.3 million) (2013: $(0.5 million)), the gain in 2013 related to the expiration of warrants having an exercise price in a currency other than the Company’s functional currency; rent of $(0.0 million) (2013: $0.1 million) related to the lease deferral at the South Carolina decortication facility; stock-based compensation of $0.4 million (2013; $1.0 million) was lower because of fewer options vesting in 2014 than in 2013; gain on settlement of debt $(0.2 million) (2013:$0); impairment of inventory of $0 (2013: $0.9 million) relating to the write down of raw feedstock and Crailar fiber to market price; (increase) decrease in accounts receivable of $(0.9 million) mainly due to sales tax receivable in Europe, and for Crailar sales (2013: $(0.1 million)); a decrease (increase) in inventory of $0.0 million (2013: $(0.5 million)); an (increase) in prepaid expenses of $(0.5 million) (2013: $0.2 million) mostly due to the timing of insurance and listing costs; an increase in accounts payable of $0.3 million (2013: $0.4 million) associated with the start of production in Europe; an increase (decrease) in accrued liabilities of $(0.2 million) (2013: $(0.1 million)) mostly related to debenture interest.

Net Cash Used in Investing Activities

Net cash flows used in investing activities for the First Half of 2014 were $1.1 million, compared to $2.5 million for the First Half of 2013. Cash flows used in investing activities consisted primarily of the acquisition of property and equipment for the European production facility of $1.1 million (compared with $2.5 million for the purchase of equipment at the U.S. decortication plant in 2013).

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Net Cash Provided by Financing Activities

Cash flows provided by financing activities for the First Half of 2014 totaled $5.3 million compared to $3.9 million during for the First Half of 2013. The Company received proceeds from private placements of $3.1 million (2013: $0.2 million); proceeds from long term debt of $3.0 million (2012: $0) and had debt issuance costs of $0 (2013: $0.5) . The Company also repaid promissory notes and loans $0.8 million (2013: $0). During the First Half of 2013, we received proceeds of $4.2 million from the issuance of convertible debentures.

Effect of Exchange Rate

The effect of exchange rates on cash resulted in an unrealized gain of $3,014 for the First Half of 2014, as compared with an unrealized gain of $723,253 for the First Half of 2013.

MATERIAL COMMITMENTS

Debt Offerings

We completed the following three convertible debt offerings in 2012 and 2013: (i) the September 2012 Debentures with gross proceeds of $10.1 million (CAD$10.0 million) on September 20, 2012; (ii) the February 2013 Debentures with gross proceeds of $4.9 million (CAD$5.0 million) on February 25, 2013; and (iii) the July 2013 Debentures with gross proceeds of $3.4 million (CAD$3.5 million) on July 26, 2013. The September 2012 Debentures mature on September 30, 2017 and bear interest at a rate of 10% per year, payable semi-annually on March 31 and September 30 of each year, starting March 31, 2013. The February 2013 Debentures mature on September 30, 2017 and bear interest at a rate of 10% per year, payable semi-annually on March 31 and September 30 of each year, starting on September 30, 2013. The February 2013 Debentures are ranked subordinate to the September 2012 Debentures. Non-Canadian resident holders of the February 2013 Debentures will receive additional interest equal to the amount of the withholding taxes paid by us for Canadian tax purposes. The July 2013 Debentures mature on July 26, 2016 and bear interest at a rate of 10% per year, payable semi-annually on March 31 and September 30 of each year, commencing on September 30, 2013. The July 2013 Debentures are secured by production equipment and fixtures located at our South Carolina facility that are different from the production equipment and fixtures at the South Carolina facility that were used to secure the September 2012 Debentures and the February 2013 Debentures. In the event we complete one or more equity financings between July 26, 2013 and July 26, 2016 with gross proceeds of at least an aggregate of $19.4 million (CAD$20.0 million), we must, subject to providing no less than 60 days prior notice to each holder of the July 2013 Debentures, redeem the July 2013 Debentures in whole at face value plus all accrued and unpaid interest thereon. The initial conversion rates of each of the September 2012 Debentures, the February 2013 Debentures and the July 2013 Debentures were $2.85 (CAD$2.90), $2.85 (CAD$2.90) and $1.94 (CAD$2.00), respectively, and are subject to anti-dilution provisions.

Holders of the September 2012 Debentures and the February 2013 Debentures have the option to convert their debentures into common stock at a conversion price of $2.85 (CAD$2.90) per share of common stock at any time prior to their respective maturity date. We may redeem the September 2012 Debentures and the February 2013 Debentures after September 30, 2015 provided that the market price at the time of the redemption notice is not less than 125% of the conversion price.

In accordance with the conditions of the IKEA Loan (defined below), we approached the debenture holders (the “Debentureholders”) of the July 2013 Debentures about releasing their security over certain assets held by our subsidiary, CRAiLAR Inc., having an acquisition cost of $1.3 million, which form a portion of the assets securing the July 2013 Debentures pursuant to the Guaranty and Security Agreement (the “Guaranty”) between CRAiLAR Inc. (the “Guarantor”) and Computershare Trust Company of Canada (the “Trustee”), dated July 26, 2013, as set forth in Schedule “A” to the Guaranty, to be used as separate security for the IKEA Loan to us. As consideration for such alteration to the secured assets, the conversion price of the July 2013 Debentures was reduced from $1.94 (CAD$2.00) per share to $1.21 (CAD$1.25) per share. On December 23, 2013, the Trustee and us entered into an Amended and Restated Convertible Debenture Indenture which reflects the modification and alteration of the rights of the Debentureholders and the Trustee against us with respect to (i) the secured assets to now only include those specific assets held by the Guarantor as set forth in Schedule “F” to the Amended and Restated Convertible Debenture Indenture having an acquisition cost of $3.9 million, and (ii) the reduction of the conversion price of the July 2013 Debentures from $1.94 (CAD$2.00) per share to $1.21 (CAD$1.25) per share. In addition, on the same date, the Guarantor and the Trustee entered into an Amended and Restated Guaranty and Security Agreement, which reflects the modification and alteration with respect to the secured assets as discussed above.

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Debt

On December 1, 2013, we purchased certain assets of a European fiber dyeing facility. We acquired these assets by assuming an aggregate of $1.2 million of the seller’s debts, which we have agreed to repay on the earlier of their respective due dates and December 1, 2018. On December 13, 2013, we entered into an amended asset purchase agreement for such assets, which replaced the initial asset purchase agreement and provides that the title to and economic risk in respect of the environmental permit and the employees passed to us on December 1, 2013, however, the title to the equipment at the facility shall only pass to us upon full payment of the foregoing assumed indebtedness of the seller, notwithstanding the fact that physical possession and economic risk of all assets of the acquired facility passed to us on December 1, 2013. We have reached an oral agreement with the seller to lease the real property for the facility and are in the process of formalizing that oral agreement.

On December 19, 2013, but having an effective date of November 29, 2013, we entered into a loan agreement (the “Loan Agreement”) with IKEA Supply AG (“IKEA”), whereby IKEA agreed to loan us $3.0 million (€2.2 million, approximately CAD$3.2 million) (the “IKEA Loan”) having a term until June 25, 2016 and bearing interest at a rate of 1.9% per annum. As security for the IKEA Loan, IKEA required that the IKEA Loan be secured by assets purchased with the proceeds of the IKEA Loan, as well as a portion of the secured assets used to secure the July 2013 Debentures. The proceeds from the IKEA Loan are designated for the installation of equipment to support and expand our European production facility and for working capital to fulfill IKEA orders. During the First Half 2014 the Company received $2,906,985 (€2,200,000) pursuant to the loan agreement.

We repaid the following loan arrangements with each of the following directors: Jason Finnis, Kenneth Barker and Robert Edmunds during Second Quarter 2014:

Finnis. Pursuant to a convertible promissory note, dated for reference October 11, 2013, Mr. Finnis provided us a loan in the principal amount of $96,180 (CAD$100,000) bearing interest at a rate of 12% per annum and due on December 11, 2013. On November 7, 2013, we repaid to Mr. Finnis $47,885 (CAD$50,000), such that a principal amount of $47,885 (CAD$50,000) remained due and payable on the loan. Pursuant to a loan extension agreement, dated for reference December 18, 2013, Mr. Finnis and we agreed to extend the term for repayment of the loan and interest thereon until the earlier of (i) December 20, 2014 and (ii) such time as we complete our next public offering of registered securities by way of a registration statement on Form S-1 of not less than $2.8 million (CAD$3.0 million) in gross proceeds to us. We repaid this loan and interest thereon in full in April 2014.

   

Barker. Pursuant to a convertible promissory note, dated for reference October 11, 2013, Mr. Barker provided us a loan in the principal amount of $50,000 bearing interest at a rate of 12% per annum and due and payable on December 11, 2013. Pursuant to a loan extension agreement, dated for reference December 18, 2013, Mr. Barker and we agreed to extend the term for repayment of the loan and interest thereon until the earlier of (i) December 20, 2014 and (ii) such time as we complete our next public offering of registered securities by way of a registration statement on Form S-1 of not less than $2.8 million (CAD$3.0 million) in gross proceeds to us. We repaid this loan and interest thereon in full in April 2014.

   

Edmunds. Pursuant to demand convertible promissory notes, dated for reference October 11, 2013 and December 4, 2013, respectively, Mr. Edmunds provided us loans in the aggregate principal amount of $509,624 (CAD$545,000) bearing interest at a rate of 20% per annum. Pursuant to a loan extension agreement, dated for reference December 18, 2013, Mr. Edmunds and we agreed to extend the term for repayment of the loan and interest thereon until the earlier of (i) December 20, 2014 and (ii) such time as we complete our next public offering of registered securities by way of a registration statement on Form S-1 of not less than $2.8 million (CAD$3.0 million) in gross proceeds to us. As consideration for the extension, we issued to Mr. Edmunds 181,666 shares of our common stock at a deemed value of $0.56 (CAD$0.60) per share. We repaid this loan and interest thereon in full in April 2014.

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We are committed to annual debt and debenture interest payments over the next five years as follows (in thousands):

2014 $  898  
2015   1,762  
2016   1,592  
2017   1,028  
2018   3  
Total $  5,283  

Annual Leases

We are committed to current annual lease payments totaling $1.1 million for all of our premises under lease. Approximate minimum lease payments over the next five years are as follows (in thousands):

2014 $  140  
2015   264  
2016   264  
2017   264  
2018   209  
Total $  1,141  

OFF-BALANCE SHEET ARRANGEMENTS

As of the date of this 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.

SUBSEQUENT EVENT

On August 6, 2014, we completed the public offering of 13,000,000 units (the “Units”) at a price of $0.50 per unit for aggregate gross proceeds of $6,500,000 (the “Offering”). Each unit is comprised of one common share and one common share warrant (each common share purchase warrant, a “Warrant”). Each warrant entitles the holder thereof to acquire one common share at an exercise price of $0.535 per common share at any time prior to August 6, 2019.

We paid 7% of gross proceeds of the offering to the underwriters and have granted them an option (the “Over-Allotment Option”), exercisable in whole or in part at any time up to 30 days following the closing of the Offering. The Over-Allotment Option allows the underwriters to purchase an additional 15% of the Offering solely to cover over-allotments, if any, and for market stabilization purposes. The Over-Allotment Option entitles the underwriters to purchase a maximum of 1,950,000 units or 1,950,000 common shares and/or 1,950,000 warrants.

The Over-Allotment Option has been partially exercised and the underwriters have purchased 1,950,000 warrants at $0.001 per warrant for proceeds of $1,950.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

29


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 June 28, 2014.

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 June 28, 2014 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 material 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 material legal proceedings pending or that have been threatened against us or our properties.

Item 1A. Risk Factors

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

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

On January 30, 2014, we issued 181,666 common shares to Robert Edmunds, a director of our Company, at a deemed value of CAD$0.60 share pursuant to the terms of a Loan Extension and Bonus Share Agreement, as previously disclosed in our Current Report on Form 8-K filed with the SEC on February 5, 2014. We relied on the exemption from registration under the U.S. Securities Act of 1933, as amended (the “U.S. Securities Act”) provided by Regulation S for the issuance to Mr. Edmunds.

On March 20, 2014, we completed a private placement equity financing to thirteen purchasers. The private placement consisted of the sale of 2,515,000 units at $1.25 per unit for gross proceeds of $3,143,750. Each unit is comprised of one common share and one-half of one transferable common share purchase warrant of the Company, and each whole warrant will entitle the holder thereof to purchase one additional common share of the Company at an exercise price of $1.75 per warrant share for a period of two years from closing, that is, until March 20, 2016. We relied on exemptions from registration under the U.S. Securities Act provided by Regulation S with respect to seven of the purchasers and by Rule 506 with respect to the remaining six purchasers, in each case based on representations and warranties provided by the purchasers of the units in their respective subscription agreements entered into between us and each of the purchasers.

In addition, on March 20, 2014, we issued 176,400 common shares to two finders in conjunction with the closing of the above-referenced private placement at a deemed issuance price of $1.25 per share. We relied on exemptions from registration under the U.S. Securities Act provided by Rule 506 based on representations and warranties provided by each of the finders.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable

30


Item 6. Exhibits

Exhibit Document
No.

3.1

Notice of Articles (23)

3.2

Articles, as amended (23)

4.1

Convertible Debenture Indenture among CRAiLAR Technologies Inc. and Computershare Trust Company of Canada, dated September 20, 2012 (18)

4.2

Convertible Debenture Indenture among CRAiLAR Technologies Inc. and Computershare Trust Company of Canada, dated February 25, 2013 (16)

4.3

Form of Subscription Agreement for Secured Subordinated Convertible Debentures (February 25, 2013) (16)

4.4

Convertible Debenture Indenture among CRAiLAR Technologies Inc. and Computershare Trust Company of Canada, dated July 26, 2013 (19)

4.5

Form of Subscription Agreement for Secured Convertible Debentures (July 26, 2013) (19)

4.6

Form of Warrant (July 26, 2013) (19)

4.7

Amended and Restated Convertible Debenture Indenture among Crailar Technologies Inc. and Computershare Trust Company of Canada, dated December 23, 2013 (21)

4.8

Form of Subscription Agreement for December 20, 2013 private placement (21)

4.9

Form of Warrant for December 20, 2013 private placement (21)

4.10

Form of Warrant for August 6, 2014 offering (26)

10.1

Collaboration Agreement dated effective May 7, 2004 between Hemptown Clothing, Inc., and the National Research Council of Canada (1)

10.2

Renewed Collaboration Agreement dated effective December 7, 2007 between CRAiLAR Fiber Technologies Inc., and the National Research Council of Canada (1)

10.3

Amendment to the Renewed Collaboration Agreement dated effective February 19, 2010 between Naturally Advanced Technologies Inc. and the National Research Council of Canada (1)

10.4

Master Agreement for Technology Development between Alberta Research Council and CRAiLAR Fiber Technologies dated January 1, 2007 (2)

10.5

CEO Executive Services Agreement between Naturally Advanced Technologies Inc. and Meriwether Accelerators LLC dated November 27, 2007 with effective date of August 24, 2007 (3)

10.6

2006 Stock Option Plan (4)

10.7

Letter Agreement dated September 2, 2008 between Naturally Advanced Technologies Inc. and Lipper/Heilshorn & Associates, Inc. (5)

10.8

Renewal of CEO Executive Services Agreement between Naturally Advanced Technologies Inc. and Meriwether Accelerators LLC dated October 14, 2008 (6)

10.9

2008 Fixed Share Stock Option Plan (7)

10.10

CEO Executive Services Agreement between Naturally Advanced Technologies Inc. and Kenneth Barker, dated for reference August 24, 2009 (9)

10.11

Service Agreement between Naturally Advanced Technologies Inc. and OrganicWorks Marketing LLC dated November 25, 2010 (9)

10.12

Equipment Lease and Location Sublease dated August 9, 2010 between Naturally Advanced Technologies Inc. and Eastern Flax of South Carolina, LLC (10)

10.13

2010 Fixed Share Option Plan (11)

10.14

Lease Agreement, dated June 30, 2011 between 0702311 BC Ltd. and Naturally Advanced Technologies Inc. (13)

10.15

Office Lease Agreement dated August 8, 2011 between Naturally Advanced Technologies Inc. and MDW Properties, LLC (13)

10.16

Lease Agreement dated July 1, 2011 between Naturally Advanced Technologies Inc. and Jessie Dale McCollough (13)

10.17

2011 Fixed Share Option Plan, as amended (23)

10.18

Lease Agreement dated March 14, 2012 between Colony Square Investment Company, LLC and Naturally Advanced Technologies US Inc. (13)

10.19

Supply Agreement among CRAiLAR Technologies Inc. and Kowa Company Ltd., dated January 10, 2013 (14)

10.20

Development Agreement among CRAiLAR Technologies Inc. and Cotswold Industries Inc., dated February 10, 2013 (15)

10.21

Senior Executive Employment Agreement between the Company and Kenneth Barker, dated April 2, 2012 (18)

10.22

Senior Executive Employment Agreement between the Company and Guy Prevost, dated April 2, 2012 (18)

10.23

Senior Executive Employment Agreement between the Company and Jason Finnis, dated April 2, 2012 (18)

10.24

Senior Executive Employment Agreement between the Company and Larisa Harrison, dated April 2, 2012 (18)

10.25

Senior Executive Employment Agreement between the Company and Jay Nalbach, dated April 24, 2012 (18)

31



10.26

Senior Executive Employment Agreement between the Company and Tom Robinson dated June 18, 2012 (18)

10.27

Marketing and Development Agreement among CRAiLAR Technologies Inc. and Cone Denim LLC., dated March 11, 2013 (17)

10.28

Demand Convertible Promissory Note from CRAiLAR Technologies Inc. to Robert Edmunds, dated October 11, 2013 (20)

10.29

Asset Purchase Agreement between Schrurs NV, CRAiLAR Technologies Inc. and Mr. Serge Schrurs, dated November 6, 2013 (24) (†)

10.30

Loan Agreement between Crailar Technologies Inc. and IKEA Supply AG, dated November 29, 2013 (24) (†)

10.31

General Supply Agreement between Crailar Technologies Inc. and IKEA Supply AG, dated December 9, 2013 (22) (†)

10.32

Asset Purchase Agreement between Schrurs NV, CRAiLAR Technologies Inc. and Mr. Serge Schrurs, dated December 13, 2013 (22) (†)

10.33

Framework Agreement Development Work between IKEA Supply AG, Crailar Technologies Inc. and Schrurs NV, dated December 13, 2013 (22) (†)

10.34

Tripartite Agreement between National Research Council of Canada, CRAiLAR Technologies Inc. and IKEA Supply AG, dated December 18, 2013 (21)

10.35

Amended and Restated Promissory Note from Crailar Technologies Inc. to Jason Finnis, dated January 21, 2014 (21)

10.36

Amended and Restated Promissory Note from Crailar Technologies Inc. to Kenneth Barker, dated January 21, 2014 (21)

10.37

Amended and Restated Promissory Note from Crailar Technologies Inc. to Robert Edmunds, dated January 21, 2014 (21)

10.38

Senior Executive Employment Agreement between Crailar Technologies Inc. and Ted Sanders, dated April 16, 2014 (25)

10.39

Form of Request for Wavier of Right to Exercise Options (26)

14.1

Code of Ethics (8)

31.1

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act *

31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a) of the 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 *

101.INS

XBRL Instance Document *

101.SCH

XBRL Taxonomy Extension Schema *

101.CAL

XBRL Taxonomy Extension Calculation Linkbase *

101.DEF

XBRL Taxonomy Extension Definition Linkbase *

101.LAB

XBRL Taxonomy Extension Label Linkbase *

101.PRE

XBRL Taxonomy Extension Presentation Linkbase *

* Filed herewith.
(1) Filed as an exhibit to our Form 8-K as filed with the SEC on March 8, 2010.
(2) Filed as an exhibit to our Form 8-K as filed with the SEC on June 25, 2007.
(3) Filed as an exhibit to our Form 8-K as filed with the SEC 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 SEC on March 31, 2007.
(5) Filed as an exhibit to our Form 8-K as filed with the SEC on September 8, 2008.
(6) Filed as an exhibit to our Form 8-K as filed with the SEC on October 28, 2008.
(7) Filed as an exhibit to our Form S-8 as filed with the SEC on October 10, 2008.
(8) Filed as an exhibit to our Form 10-KSB for fiscal year ended December 31, 2007 as filed with the SEC on April 11, 2008
(9) Filed as an exhibit to our Form 10-K for the fiscal year ended December 31, 2010, as filed with the SEC on April 13, 2010.
(10) Filed as an exhibit to our Form 8-K as filed with the SEC on August 12, 2010.
(11) Filed as an exhibit to our Form 10-Q for the quarter ended September 30, 2010, as filed with the SEC on November 15, 2011.
(12) Filed as an exhibit to our Form S-8 as filed with the SEC on February 16, 2012.
(13) Filed as an exhibit to our Form 10-Q for the quarter ended March 31, 2012, as filed with the SEC on May 11, 2012.
(14) Filed as an exhibit to our Form 8-K as filed with the SEC on January 16, 2013.
(15) Filed as an exhibit to our Form 8-K as filed with the SEC on February 14, 2013.
(16) Filed as an exhibit to our Form 8-K as filed with the SEC on February 26, 2013.
(17) Filed as an exhibit to our Form 8-K as filed with the SEC on March 14, 2013.
(18) Filed as an exhibit to our Form 10-K as filed with the SEC on March 18, 2013.
(19) Filed as an exhibit to our Form 8-K as filed with the SEC on July 31, 2013.
(20) Filed as an exhibit to our Form 10-Q as filed with the SEC on November 7, 2013.
(21) Filed as an exhibit to our Form 8-K as filed with the SEC on February 5, 2014.
(22) Filed as an exhibit to our Form 8-K/A as filed with the SEC on February 21, 2014.
(23) Filed as an exhibit to our Form 10-K for the fiscal year ended December 28, 2013, as filed with the SEC on March 28, 2014.
(24) Filed as an exhibit to our Form 8-K/A as filed with the SEC on May 6, 2014.
(25) Filed as an exhibit to our Form 10-Q for the quarter ended March 29, 2014, as filed with the SEC on May 19, 2014.
(26) Filed as an exhibit to our Registration Statement on Form S-1 (Amendment No. 2), as filed with the SEC on July 31, 2014.
(†) Portions of this exhibit have been omitted pursuant to a request for confidential treatment.

32


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.
   
By: /s/ Kenneth C. Barker
  Kenneth C. Barker
  Chief Executive Officer and a director
  Date: August 12, 2014
   
By: /s/ Theodore Sanders
  Theodore Sanders
  Chief Financial Officer
  Date: August 12, 2014

33