During the Second Quarter, the Company continued to optimize its European production facility purchased in December 2013 as it produced and shipped high quality CRAiLAR Flax fiber. The Company completed the installation of equipment necessary for the final step in the CRAiLAR process in May. However, air quality issues and related worker welfare delayed operating the equipment until late in the Quarter which impacted production. This delay resulted in approximately $0.1 million of CRAiLAR Fiber to remain unshipped at the end of the Quarter. The new equipment is producing fiber superior to our outsourced fiber and as a consequence we received order forecasts for Q3 2014-2015 from two customers in excess of our plant's current capacity. The installation eliminates the cost of outsourcing the final step of our production process and the Company expects the internal cost to be substantially less.

The Company incurred $0.3 million of incremental costs outsourcing certain production steps (prior to installing the aforementioned equipment) and training new employees. Although inefficiencies were created while the plant was undergoing modification, supplying customers was viewed as critically important as filling orders is necessary to create future demand. Additional equipment designed to provide energy, feedstock, chemical, and labor efficiencies are scheduled for installation during the Third Quarter. Once installed, further cost and quality improvements are anticipated.

"We made substantial progress in the Second Quarter bringing all processing steps in-house and further improving the quality of our fibers. Production volumes were reduced as air quality challenges were managed but despite this challenge we more than doubled CRAiLAR fiber production in the First Quarter," stated Kenneth C. Barker, Chief Executive Officer. "Customer feedback continues to be positive and we are encouraged by forecasts that exceed our current capacity. Our focus this Quarter will be on increasing production volume, gross margin and fiber quality. We are hiring and training to support longer hours and additional equipment including a fiber cleaning installation."

Cash and cash equivalents and investments at June 28, 2014 were $0.5 million down from $1.2 million at December 31, 2013. The decrease in cash equivalents of $0.7 million resulted from $4.9 million of cash used in operations and $1.1 million of cash invested in property and equipment offset by $5.3 million of cash from financing activities from a private placement of equity of $3.1 million and $3.0 million from the IKEA working capital and equipment financing loan partially offset by loan pay-downs of $0.8 million.

Although capacity will be constrained by a customary three-week shutdown and equipment installation during the Third Quarter, the Company expects Third Quarter 2014 sales to double sales for the Second Quarter 2014.

Non-GAAP Financial Measures

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.

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.

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

About CRAiLAR Technologies Inc.

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CRAiLAR Technologies Inc.
Consolidated Balance Sheets
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CRAiLAR Technologies Inc.
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CRAiLAR Technologies Inc.
Consolidated Statements of Cash Flows
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