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EX-32.1 - EXHIBIT 32.1 - CRAILAR TECHNOLOGIES INCexhibit32-1.htm
EX-31.1 - EXHIBIT 31.1 - CRAILAR TECHNOLOGIES INCexhibit31-1.htm
EX-31.2 - EXHIBIT 31.2 - CRAILAR TECHNOLOGIES INCexhibit31-2.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 27, 2015

[  ]  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  [  ]  (Do not check if a smaller reporting company) Smaller reporting company  [ X ]

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. 66,378,003 shares of common stock as of August 12, 2015.


CRAILAR TECHNOLOGIES INC.

Quarterly Report On Form 10-Q
For The Quarterly Period Ended
June 27, 2015

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 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
PART II – OTHER INFORMATION 23
Item 1. Legal Proceedings 23
Item 1A. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 23
Item 4. Mine Safety Disclosures 23
Item 5. Other Information 23
Item 6. Exhibits 24

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 27, 2014, 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. (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 6
   
Consolidated Statements of Cash Flows 7
   
Notes to Consolidated Financial Statements 8

4



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

    June 27, 2015     December 27, 2014  
    (Unaudited)        
ASSETS            
Current            
         Cash and cash equivalents $ 98   $  1,196  
         Accounts receivable   1,199     3,107  
         Inventory (Note 2)   421     449  
         Prepaid expenses and deposits   423     336  
    2,141     5,088  
             
Deferred Debt Issuance Costs (Note 5)   774     967  
Property and Equipment, net (Note 3)   9,499     10,013  
Intangible Assets, net (Net 4)   120     129  
  $  12,534   $  16,197  
             
LIABILITIES            
Current            
         Accounts payable $  1,793   $  2,017  
         Accrued liabilities   1,195     1,224  
         Unearned revenue   264     264  
         Current Portion of loans payable   479     546  
         Current portion of long term debt (Note 5)   148     161  
         Derivative liabilities   492     872  
    4,371     5,084  
             
Loans Payable   272     361  
Long Term Debt (Note 5)   16,996     18,024  
    21,639     23,469  
             
STOCKHOLDERS' DEFICIT            
Capital Stock            
        Authorized: unlimited common shares without par value
        Issued and outstanding: 66,378,003 common shares
        (December 27, 2014 – 66,378,003 common shares)
  39,665     39,665  
Additional Paid-in Capital   15,615     15,219  
Other Comprehensive Income   1,804     1,483  
Deficit   (66,189 )   (63,639 )
    (9,105 )   (7,272 )
  $  12,534   $  16,197  

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

5



CRAiLAR Technologies Inc.
Consolidated Statements of Operations
(In thousands of US Dollars)
(Unaudited)

    Thirteen week     Thirteen week     Twenty-six week     Twenty-six week  
    period ended     period ended     period ended     period ended  
    June 27, 2015     June 28, 2014     June 27, 2015     June 28,2014  
                         
Revenues $  1,804   $  743   $  3,531   $  1,178  
                         
Cost of sales                        
         Materials and direct product costs   1,617     685     3,106     1,045  
         Production facility overhead costs   68     77     137     175  
         Facility commissioning costs   -     251     -     503  
         Depreciation   206     132     415     235  
    1,891     1,145     3,658     1,958  
                         
Gross loss   (87 )   (402 )   (127 )   (780 )
                         
Expenses                        
         Marketing and promotion   57     93     184     176  
         Amortization and depreciation   19     26     37     50  
         General and administrative   830     1,179     1,864     2,414  
    906     1,298     2,085     2,640  
                         
Loss before other items   (993 )   (1,700 )   (2,212 )   (3,420 )
                         
Other income (expense):                        
         Accretion expense   (61 )   (175 )   (120 )   (437 )
         Research and development   (72 )   (64 )   (133 )   (117 )
         Interest   (439 )   (524 )   (973 )   (1,064 )
         Gain on debt settlement   -     234     -     234  
         Fair value adjustment derivative liabilities   206     264     380     264  
         Exchange gain (loss)   (1,013 )   -     508     -  
    (1,379 )   (265 )   (338 )   (1,120 )
                         
Net Loss   (2,372 )   (1,965 )   (2,550 )   (4,540 )
                         
Other comprehensive income (loss)                        
Exchange differences on translating to presentation currency   966     (481 )   321     99  
Comprehensive loss $  (1,406 ) $  (2,446 ) $  (2,229 ) $  (4,441 )
                         
Loss per share (basic and diluted) $  (0.04 ) $  (0.04 ) $  (0.04 ) $  (0.09 )
                         
Weighted average number of common shares outstanding $  66,378,003   $  50,892,464   $  66,378,003   $  49,540,232  

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

6



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

    Twenty-six week     Twenty-six week  
    period ended     period ended  
    June 27, 2015     June 28, 2014  
             
Cash flows used in operating activities            
   Net loss for the period $  (2,550 ) $  (4,540 )
   Adjustments to reconcile net loss to net cash from operating activities            
   Accretion expense   120     437  
   Amortization and depreciation   452     285  
   Amortization of deferred debt issuance costs   191     171  
   Fair value adjustment of derivative   (380 )   (264 )
   Rent inducement   (16 )   16  
   Stock based compensation   396     448  
   Gain on settlement of debt   -     (234 )
   Gain on foreign exchange   (508 )   -  
             
Changes in working capital assets and liabilities            
   Increase (decrease) in accounts receivable   1,874     (929 )
   Decrease (increase) in inventory   5     19  
   Increase in prepaid expenses   (106 )   (465 )
   Increase (decrease) in accounts payable   (307 )   333  
   Increase (decrease) in accrued liabilities   (36 )   (217 )
Net cash used in operating activities   (865 )   (4,940 )
             
Cash flows used in investing activities            
   Purchase of property and equipment   (316 )   (1,091 )
   Acquisition of intangible assets   (15 )   (23 )
Net cash flows used in investing activities   (331 )   (1,114 )
             
Cash flows used in financing activities            
   Issuance of capital stock and warrants   -     3,148  
   Payment of loans   (108 )   (661 )
   Loans payable   -     (125 )
   Proceeds from long term debt   -     2,984  
Net cash flows from (used in) financing activities   (108 )   5,346  
             
Effect of exchange rate changes on cash and cash equivalents   206     3  
             
Decrease in cash and cash equivalents   (1,098 )   (705 )
             
Cash and cash equivalents, beginning   1,196     1,193  
             
Cash and cash equivalents, ending $  98   $  489  
             
SUPPLEMENTAL CASH FLOW INFORMATION AND            
NON-CASH FINANCING AND INVESTING ACTIVITIES:            
   Cash paid for interest $  806   $  983  
   Capital stock issued for share issue costs $  -   $  221  

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

7


CRAiLAR Technologies Inc.
Notes to Consolidated Financial Statements
June 27, 2015
(In US Dollars)
(Unaudited)

1.

Basis of Presentation

These interim 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. The interim consolidated financial statements have been prepared on a consistent basis with the audited consolidated financial statements for the year ended December 27, 2014, 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 27, 2015 are not necessarily indicative of the results that may be expected for the year ending December 26, 2015. These interim unaudited consolidated financial statements should be read in conjunction with the information included in the Company’s Form 10-K filed on April 13, 2015 with the U.S. Securities and Exchange Commission.

In the opinion of management, the accompanying balance sheets and related statements 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 a working capital deficiency of $2,230,226 at June 27, 2015 and incurred losses since inception of $66,189,168 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 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 27, 2015 and the date financial statements were issued.

2.

Inventory


    June 27, 2015     December 27, 2014  
CRAiLAR fiber $  177,546   $  97,309  
Decorticated fiber   44,164     258,679  
Hemp   10,484     -  
Other   188,823     92,581  
  $  421,017   $  448,569  

3.

Property and Equipment


    Cost     Accumulated     Net Book Value     Net Book Value  
          Depreciation     June 27, 2015     December 27, 2014  
Automobiles $  79,980   $  9,938   $  70,042   $  49,869  
Computer Equipment   98,660     68,065     30,595     34,956  
Computer Software   10,095     9,292     803     1,749  
Equipment   676,521     74,654     601,867     612.079  
Equipment held for sale   25,000     -     25,000     37,160  
Furniture and fixtures   37,678     30,106     7,572     8,416  
Leasehold Improvements   250,885     31,768     219,117     203,705  
Production Equipment   6,488,287     1,074,502     5,413,785     5,929,684  
Production Equipment in construction   3,124,937     -     3,124,937     3,124,937  
Website development costs   129,561     124,131     5,430     10,857  
  $ 10,921,603   $ 1,422,456   $ 9,499,148   $ 10,013,413  

During the twenty-six week period ended June 27, 2015, the Company recorded depreciation expense $436,163 (2014 - $267,681) of which $415,932 (2014 - $235,359) was classified as cost of sales

8


CRAiLAR Technologies Inc.
Notes to Consolidated Financial Statements
June 27, 2015
(In US Dollars)
(Unaudited)

4.

Intangible Assets


          Accumulated     Netbook Value     Net Book Value  
    Cost     Amortization     June 27, 2015     December 27, 2014  
Patents $  182,270   $  109,294   $  72,976   $  75,345  
Trademarks   110,979     87,805     23,174     24,592  
License Fee   59,504     35,925     23,579     28,729  
  $  352,753   $  233,024   $  119,729   $  128,666  

During the twenty-six week period ended June 27, 2015, the Company recorded amortization expense of $16,723 (2014 - $18,104).

5.

Long Term Debt


    June 27, 2015     December 27, 2014  
Convertible debentures            
     Balance, beginning $  15,514,592   $  16,674,686  
     Accretion expense   120,038     251,528  
     Convertible debentures converted   -     17,786  
     Effect of foreign exchange   (912,702 )   (1,292,836 )
     Balance, ending   14,721,928     15,514,592  
             
IKEA Loan            
     Balance, beginning   2,670,398     -  
     Loan issued   -     2,999,983  
     Payments   (27,643 )   -  
     Effect of foreign exchange   (221,365 )   (329,585 )
     Balance, ending   2,421,390     2,670,398  
             
Total long-term debt   17,143,318     18,184,990  
Less: current portion   (147,642 )   (161,025 )
Long-term debt – long term portion $  16,995,676   $  18,023,965  

Deferred debt issuance costs:

    June 27, 2015     December 27, 2014  
Balance, beginning $  967,294   $  1,442,023  
Issuance costs – cash   -     52,114  
Amortization of issuance costs   (191,278 )   (428,073 )
Effect of foreign exchange   (1,697 )   (98,770 )
  $  774,319   $  967,294  

9


CRAiLAR Technologies Inc.
Notes to Consolidated Financial Statements
June 27, 2015
(In US Dollars)
(Unaudited)

6.

Capital Stock

During the twenty-six week period ended June 27, 2015, the Company did not issue shares.

Share purchase warrants outstanding as at June 27, 2015 are:

    Warrants     Weighted-Average Exercise Price  
Warrants outstanding, December 27, 2014   22,932,373   $ 0.74  
Warrants issued   -   $ 0.00  
Warrants expired   -   $ 0.00  
Warrants outstanding, June 27, 2015   22,932,373   $ 0.74  

The weighted average remaining contractual life of outstanding warrants at June 27, 2015, is 3.38 years.

Stock options outstanding as at June 27, 2015 are:

    Options     Weighted-Average Exercise Price  
Options outstanding, December 27, 2014   6,769,294   $ 1.79  
Options granted   -   $ 0.00  
Options cancelled/expired   (206,418 ) $ 2.10  
Options outstanding, June 27, 2015   6,562,876   $ 1.78  
Options exercisable, June 27, 2015   6,552,876   $ 1.75  

Stock options outstanding at June 27, 2015, are summarized as follows:

                            Weighted  
          Weighted Average                 Average  
Range of Exercise   Number     Remaining Contractual     Weighted Average     Number     Exercise  
Prices   Outstanding     Life (yr)     Exercise Price     Exercisable     Price  
$0.54 - $3.05   6,552,876     1.94   $ 1.78     6,552,876   $ 1.75  

During the twenty-six week period ended June 27, 2015, options to purchase 418,600 (2014 – 467,393) common shares vested under the Company’s amended 2011 Fixed Share Option Plan. A total expense of $396,122 (2014 - $448,407) was recorded as stock-based compensation, of which $107,181 (2014 - $13,468) was included in consulting and contract labour expense and $288,941 (2014 - $434,939) was included in salaries and benefits expense.

10


CRAiLAR Technologies Inc.
Notes to Consolidated Financial Statements
June 27, 2015
(In US Dollars)
(Unaudited)

7.

Segment Information

The Company currently has production facilities in North America and Europe. Operations at the North American facilities are currently suspended until the Company decides to install the necessary additional equipment to improve capacity or moves the equipment elsewhere for production.

For the twenty-six week period ended June 27, 2015 ( $ thousands)   North America     Europe     Total  
Sales to external customers $ 13   $ 3,518   $ 3,531  
Depreciation and amortization $ 32   $ 420   $ 452  
Segment net income (loss)   ($2,289 )   ($261 )   ($2,550 )
Total assets $ 7,384   $ 5,150   $ 12,534  

For the twenty-six week period ended June 28, 2014 ( $ thousands)   North America     Europe     Total  
Sales to external customers $ 27   $ 1,151   $ 1,178  
Depreciation and amortization $ 49   $ 237   $ 286  
Segment net income (loss)   ($3,695 )   ($845 )   ($4,540 )
Total assets $ 18,869   $ 3,949   $ 22,818  

Of the Company's sales in the period ended June 27, 2015, two customers represent 97% of the total.

8.

Related Party Transactions

During the twenty-six week period ended June 27, 2015, $348,597 (2014 - $534,228) was incurred for remuneration and $233,506 (2014 - $377,264) was incurred for stock-based compensation to officers and directors of the Company.

9.

Commitments

The Company is committed to lease payments totaling approximately $1,051,864 for premises under lease. The minimum lease payments over the next five years are as follows:

2015 $  129,943  
2016   239,486  
2017   225,600  
2018   236,440  
2019   220,395  
Total $  1,051,864  

11


Item 2. 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 and woven constructions) available in a variety of blends, textures, colors and applications;
     
  CRAiLAR® fibers for non-woven constructions.

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. We suspended operations at the South Carolina facility in third quarter of 2013 until improvements have been built and installed to the front end of the production line. In December 2013, we acquired a European fiber dyeing facility with equipment similar to that used to produce CRAiLAR® Flax fiber. The transaction was initiated 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.

Completion of Public Offering

On August 6, 2014, the Company completed the public offering of 13,000,000 units of the Company at a price of $0.50 per unit for gross proceeds of $6,500,000. 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 $0.535 per common share at any time prior to August 6, 2019.

The Company paid 7% of gross proceeds of the offering to the underwriters and 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 allowed 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 at a price of $0.50 per unit or 1,950,000 common shares at a price of $0.499 per share and/or 1,950,000 warrants at a price of $0.001 per warrant. Each warrant entitles the holder 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. On August 6, 2014 the Over-Allotment Option was partially exercised and the underwriters purchased 1,950,000 warrants at $0.001 per warrant for proceeds of $1,950. On August 15, 2014, the Over –Allotment Option was exercised for the remaining 1,950,000 shares of the Company at a price of $0.499 per share for gross proceeds of $973,050. The Company paid 7% of the gross proceeds of the Over-Allotment Option to the underwriters.

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 30, 2017. The holders of the September 2012 Debentures have the option to convert the September 2012 Debentures into shares of our common stock at a price of $2.85 (CAD$2.90) per share at any time prior to the maturity date. 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 such debentures into shares of our common stock at a price of $1.94 (CAD$2.00) per share at any time prior to the maturity date. 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 $904 (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.

12


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Principles of Consolidation

The consolidated financial statements for the Company’s fiscal year ended December 27, 2014 include the accounts of the Company and its six wholly-owned subsidiaries as of December 27, 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 27, 2015, the Company had $0.1 million in cash and cash equivalents.

Inventory

The raw flax fiber feedstock, decorticated fiber and CRAiLAR® fiber is 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.

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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.

Foreign Currency Translation

The functional currencies of the Company and its subsidiaries are as follows: Crailar Technologies Inc. – US$; Crailar Inc. - US$; Hemptown USA, Inc. – US$; 0697872 B.C. Ltd. – US$; Crailar Fiber Technologies Inc. – US$; HTNaturals Apparel Corp. – US$, and Crailar Europe NV – Euro.

Effective September 28, 2014 management determined that the functional currency of Crailar Technologies Inc., 0697872 B.C. Ltd. and Crailar Fiber Technologies Inc. changed from the Canadian dollar to the U.S. dollar. As a result, translation adjustments for prior periods were not removed from equity and the translated amounts for nonmonetary assets at the end of the prior period become the accounting basis for those assets in the period of the change and subsequent periods.

The Company translates its financial statements with other than US$ functional currencies 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 period at the weighted average exchange rate. Exchange gains or losses from such translations are included in accumulated comprehensive income (loss), as a separate component of stockholders’ deficit.

Foreign currency transaction gains and losses are included in the results of operations.

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 27, 2015 and June 28, 2014 as their effect is anti-dilutive.

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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. Although the Company conducts its business principally in Canada, the majority of its purchases are made in Euros while the majority of its sales are in USD. Currently, the majority of the Company’s debt is denominated in CAD currency. A 5% fluctuation in currency rates for the Company’s Euro debt of $158,000. The Company does not currently hedge its foreign currency exposure and accordingly is at risk for foreign currency exchange fluctuations.

Credit risk. Credit risk is managed by dealing with customers whose credit standing meets internally approved policies, and by ongoing monitoring of credit risk. The risk in cash accounts is managed through the use of a major financial institution which has high credit quality as determined by the rating agencies. As of June 27, 2015, $392,000 is due from a single customer and therefore 33% of receivables are exposed to concentration of credit risk.

Interest rate risk. Approximately $255,000 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.

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 anticipates little 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 Pronouncements.

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

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RESULTS OF OPERATIONS

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 27, 2015     June 28, 2014     June 27, 2015     June 28, 2014  
Consolidated                        
Net loss $ (2,372 ) $ (1,965 ) $ (2,550 ) $ (4,541 )
Interest expense   439     524     973     1,064  
Accretion expense   61     175     120     437  
Depreciation and amortization   225     158     452     286  
EBITDA   (1,647 )   (1,108 )   (1,005 )   (2,754 )
Stock-based compensation   12     378     396     448  
Facility commissioning expense   -     251     -     503  
Fair value adjustment derivative liabilities   (206 )   (264 )   (380 )   (264 )
Gain on settlement of debt   -     (234 )   -     (234 )
Exchange (gain) loss   1,013     -     (508 )   -  
Rent inducement expense   (8 )   -     (16 )   -  
                         
Adjusted EBITDA $ (836 ) $ (977 ) $ (1,513 ) $ (2,301 )

Regulation G, “Conditions for Use of Non-GAAP Financial Measures,” and other provisions of 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 before (a) interest expense; (b) accretion expense; and (c) depreciation and amortization. “Adjusted EBITDA” further adjusts EBITDA with respect to stock-based compensation, facility commissioning expense, fair value adjustment derivative liabilities, gain on settlement of debt, exchange (gain) loss, and rent inducement expense.

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

Our management uses 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, this non-GAAP measure is 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 Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of development stage companies. Additionally, we believe that lenders or potential lenders use Adjusted EBITDA to evaluate our ability to repay loans.

This non-GAAP financial measure is used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of 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.

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Thirteen-Week Period Ended June 27, 2015 Compared to Thirteen-Week Period Ended June 28, 2014

    Thirteen Weeks Ended  
    June 27, 2015     June 28, 2014  
    (amounts in thousands, except per share data)  
Revenues $  1,804   $  743  
Cost of sales            
       Materials and direct production costs   1,617     685  
       Facility commissioning costs   -     251  
       Production facility overhead costs   68     77  
       Depreciation   206     132  
    1,891     1,145  
Gross loss   (87 )   (402 )
Expenses:            
 Marketing and promotion   57     93  
 Amortization and depreciation   19     26  
 General and administrative   830     1,179  
    906     1,298  
Loss before other items   (993 )   (1,700 )
Other income (expense):            
   Accretion expense   (61 )   (175 )
   Interest   (439 )   (524 )
   Research and development   (72 )   (64 )
   Gain on debt settlement   -     234  
   Fair value adjustment derivative liabilities   206     264  
   Exchange gain (loss)   (1,013 )   -  
    (1,379 )   (265 )
Net loss   (2,372 )   (1,965 )
Exchange differences on translating to presentation currency   966     (481 )
Total comprehensive loss   (1,406 )   (2,446 )
Loss per share (basic and diluted) $  (0.04 ) $  (0.04 )

Revenue and Gross Margins

For the thirteen week period ended June 27, 2015 (“Second Quarter 2015”) and 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) produced mainly at our new European production facility. Revenue for the Second Quarter 2015 was $1.8 million, an increase of $1.1 million from Q2 2014. The $1.1 million increase in revenues in the Second Quarter 2015 compared with 2014 was the result of a 118% percent increase in the production of CRAiLAR fibers.

Our gross loss for the Second Quarter 2015 was $87 thousand (2014: $0.4 million). Our variable margin was 12% and was impacted negatively by labor inefficiencies and product re-work caused by equipment downtime. Cost of sales is comprised of $1.6 million (2014: $0.7 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; $0.1 million (2014: $0.1 million) of facility overhead costs and $0.2 million (2014: $0.1 million) for depreciation of production equipment.

Operating Expenses

During the Second Quarter 2015 we recorded operating expenses of $0.9 million compared to operating expenses of $1.3 million for the Second Quarter 2014, a decrease of $0.3 million or approximately 30%. Causes for the reduction are a decrease in general and administrative expenses of $0.4 million.

Marketing and promotion expenses comprised of marketing salaries and sales development costs were $0.1 million the same for the Second Quarter 2015 and 2014.

General and administrative expenses for the Second Quarter 2015 decreased to $0.8 million, a reduction of $0.4 million or approximately 30% from $1.2 million for the Second Quarter 2014. The decrease was primarily caused by a $0.4 million decrease in stock based compensation and $0.1 million decrease in salary expense; partially offset by a $0.1 million increase in consulting expense.

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Other Items

Interest expense was $0.4 million for the Second Quarter 2015 and $0.5 million for the Second Quarter 2014. Interest expense is attributable to the convertible debenture interest, European facility loan interest, IKEA loan interest and the amortization of the deferred debt issuance costs of $0.1 million. Accretion expense was $0.1 million from the amortization of bonus shares issued with promissory notes and a reduction of the conversion price for convertible debentures issued July 2013 compared with $0.2 million for the Second Quarter 2014. For the Second Quarter 2015 and 2014, research and development costs were $0.1 million while the fair value adjustment of derivative liabilities was a gain of $0.2 million compared to $0.3 million in 2014 as well as a loss in foreign exchange of $1.0 million compared to $0 in 2014.

Net Loss

Our net loss for the Second Quarter 2015 was $2.4 million, or $0.04 per share, compared to $2.0 million, or $0.04 per share for the Second Quarter ended June 28, 2014. The increase in loss was primarily attributable to a foreign exchange loss of $1.0 million while there was a reduction in gross loss of $0.3 million, a reduction of general and administration expenses of $0.3 million, a reduction of accretion expense of $0.1 million, and a reduction of interest expense of $0.1 million while in 2014 there was a gain on settlement of debt of $0.3 million.

For the period ended June 27, 2015, the weighted average number of shares outstanding was 66,378,003 compared to 50,892,464 for the period ended June 28, 2014.

Twenty-Six Week Period Ended June 27, 2015 Compared to Twenty-Six Week Period Ended June 28, 2014

    Twenty-Six Weeks Ended  
    June 27, 2015     June 28, 2014  
    (amounts in thousands, except per share data)  
Revenues $  3,531   $  1,178  
Cost of sales            
       Materials and direct production costs   3,106     1,045  
       Facility commissioning costs   -     503  
       Production facility overhead costs   137     175  
       Depreciation   415     235  
    3,658     1,958  
Gross loss   (127 )   (780 )
Expenses:            
 Marketing and promotion   184     176  
 Amortization and depreciation   37     50  
 General and administrative   1,864     2,414  
    2,085     2,640  
Loss before other items   (2,212 )   (3,420 )
Other income (expense):            
   Accretion expense   (120 )   (437 )
   Interest   (973 )   (1,064 )
   Research and development   (133 )   (117 )
   Gain on debt settlement   -     234  
   Fair value adjustment derivative liabilities   380     264  
   Exchange gain   508     -  
    (338 )   (1,120 )
Net loss   (2,550 )   (4,540 )
Exchange differences on translating to presentation currency   321     99  
Total comprehensive loss   (2,229 )   (4,441 )
Loss per share (basic and diluted) $  (0.04 ) $  (0.09 )

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Revenue and Gross Margins

For the twenty-six week period ended June 27, 2015 (“First Half of 2015”) and the twenty-six week period ended June 28, 2014 (“First Half of 2014”) our revenues were derived from sales of CRAiLAR® fiber and other fiber (non-CRAiLAR) produced mainly from our European production facility. Revenue for the First Half of 2015 was $3.5 million, an increase of $2.3 million from the First Half of 2014. The $2.3 million increase in revenues in the First Half of 2015 compared with 2014 was the result of a 218% percent increase in the production of CRAiLAR fibers.

Our gross loss for the First Half of 2015 was $0.1 million (2014: $0.8 million). Our variable margin was 13% and was impacted negatively by labor inefficiencies and product re-work caused by equipment downtime. Cost of sales is comprised of $3.1 million (2014: $1.0 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; $0.1 million (2014: $0.2 million) of facility overhead costs and $0.4 million (2014: $0.2 million) for depreciation of production equipment.

Operating Expenses

During the First Half of 2015 we recorded operating expenses of $2.1 million compared to operating expenses of $2.6 million for the First Half of 2014, a decrease of $0.5 million or approximately 21%. The primary cause for the reduction was a decrease in general and administrative expenses of $0.5 million.

Marketing and promotion expenses comprised of marketing salaries and sales development costs were $0.2 million, the same for the First Half of 2015 and 2014.

General and administrative expenses for the First Half of 2015 decreased to $1.9 million, a reduction of $0.5 million or approximately 21% from $2.4 million for the First Half of 2014. The decrease was primarily caused by a $0.1 million decrease in stock based compensation a $0.3 million decrease in salary expense and a decrease in professional fees of $0.1 million.

Other Items

Interest expense was $1.0 million for the First Half of 2015 and $1.1 million for the First Half of 2014. Interest expense is attributable to the convertible debenture interest, European facility loan interest, IKEA loan interest and the amortization of the deferred debt issuance costs of $0.2 million. For the First Half of 2015 accretion expense was $0.1 million from the amortization of bonus shares issued with promissory notes and a reduction of the conversion price for convertible debentures issued July 2013 compared with $0.4 million of accretion expense for the First Half of 2014. For the First Half of 2015 and 2014, research and development costs were $0.1 million while the fair value adjustment of derivative liabilities was a gain of $0.4 compared to $0.3 million in 2014 as well as a gain in foreign exchange of $0.5 million compared to $0 in 2014.

Net Loss

Our net loss for the First Half of 2015 was $2.6 million, or $0.04 per share, compared to $4.5 million, or $0.09 per share for the First Half of 2014. The reduction in loss was primarily attributable to the reduction in gross loss of $0.7 million and a reduction of general and administration expenses of $0.5 million, a reduction in accretion expense of $0.3 million, an increase in the gain in the fair value of derivative liabilities of $0.1 million and a gain in foreign exchange of $0.5 million, while in the First Half of 2014 there was a gain on debt settlement of $0.2 million.

For the period ended June 27, 2015, the weighted average number of shares outstanding was 66,378,003 compared to 49,540,232 for the period ended June 28, 2014.

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LIQUIDITY AND CAPITAL RESOURCES

First Half of 2015 Compared to Fiscal Year Ended December 27, 2014

    June 27, 2015     December 27, 2014  
    (in thousands)  
Cash and cash equivalents $  98   $  1,196  
Working capital (deficiency) $  (2,230 ) $  4  
Total assets $  12,534   $  16,197  
Total liabilities $  21,639   $  23,469  
Shareholders’ equity (deficit) $  (9,105 ) $  (7,272 )

The Company has historically relied on equity financings, and more recently from the sale of convertible debentures to fund its operations. On August 15, 2014 the Company completed a “Follow On” equity financing with gross proceeds of $1.0 million. On August 6, 2014 the Company completed an equity financing with gross proceeds of $6.5 million. On June 2, 2014 the Company completed an equity financing for settlement of $0.9 million 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 from the proceeds of this offering, through bank debt, government loan programs, customer financing, lease programs, additional equity and debt financings, as well as cash generated from operations.

Net Cash Used in Operating Activities

Net cash flows used in operating activities for the First Half of 2015 were $0.9 million compared with $4.9 million for the First Half of 2014. Cash flows used in operations for the First Quarter of 2015 consisted primarily of a net loss of $2.6 million offset by the following items: amortization and depreciation of $0.5 million (2014: $0.3 million), primarily related to production equipment in Europe; accretion expense of $0.1 million (2014: $0.4) related to the beneficial conversion feature of the promissory notes and amortization of the bonus shares issued pursuant to the promissory note; amortization of deferred debt issuance costs of $0.2 million (2014: $0.2 million); fair value adjustment of derivative liability gain of ($0.4 million) (2014: ($0.3 million)), related to the decrease in the value of the warrant liability; rent of ($0.0 million) (2014: $0.0 million) related to the lease deferral at the South Carolina decortication facility; stock-based compensation of $0.4 million (2014: $0.4 million); a gain on foreign exchange of $0.5 million (2014: $nil); an increase in accounts receivable of $1.9 million due to timing of shipments of Crailar sales in Europe in the First Quarter 2015, (2014: a decrease of ($0.9 million)); an increase in inventory of $0.0 million (2014: $0.0 million); an increase in prepaid expenses of ($0.1 million) (2014: ($0.5 million)) mostly due to the timing of insurance, financing and listing costs; a decrease in accounts payable of ($0.3 million) (2014: an increase $0.3 million); a decrease in accrued liabilities of $0.0 million (2014: $0.2 million) mostly related to debenture interest.

Net Cash Used in Investing Activities

Net cash flows used in investing activities for the First Half of 2015 were $0.3 million, compared to $1.1 million for the First Half of 2014. Cash flows used in investing activities consisted primarily of the acquisition of equipment for the European production facility of $0.3 million (2014: $1.1 million).

Net Cash Used in or Provided by Financing Activities

Cash flows used in financing activities for the First Half of 2015 totaled ($0.1 million) compared to $5.3 million provided by financing activities for the First Half of 2014. In the first half of 2015, the Company repaid loans $0.1 million (2014: $0.8 million).

Effect of Exchange Rate

The effect of exchange rates on cash resulted in an unrealized gain of $0.2 million for the First Half of 2015, as compared with an unrealized gain of $3 thousand for the First Half of 2014.

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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 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.

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 Three Quarters of 2014 the Company received $2,906,985 (€2,200,000) pursuant to the loan agreement.

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We entered into the following loan arrangements with each of the following directors: Jason Finnis, Kenneth Barker and Robert Edmunds:

Finnis. Pursuant to a convertible promissory note, dated for reference October 11, 2013, Mr. Finnis granted 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 granted 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 granted 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.

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

2015 $  786  
2016   1,417  
2017   920  
2018   13  
2019   12  
Total $  3,148  

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):

2015 $  130  
2016   239  
2017   227  
2018   236  
2019   220  
Total $  1,100  

OFF-BALANCE SHEET ARRANGEMENTS

As of the date of this prospectus, 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.

22


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.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Lesley Hayes, 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 27, 2015.

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 27, 2015 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

During our fiscal quarter ended June 27, 2015, we did not sell any equity securities that were not registered under the U.S. Securities Act of 1933, as amended.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable

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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 (28)

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)

10.26

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

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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 Consulting Services Agreement between Crailar Technologies Inc. and Kenneth C. Barker, dated November 10, 2014 (27)
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.

25



(27) Field as an exhibit to our Form 8-K filed with the SEC on November 17, 2014.
(28) Filed as an exhibit to our Form 10-K for fiscal year ended December 31, 2014, as filed with the SEC on April 13, 2015.
(†) Portions of this exhibit have been omitted pursuant to a request for confidential treatment.

26


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/ Lesley Hayes
  Lesley Hayes
  Chief Executive Officer and a director
  Date: August 17, 2015
   
By: /s/ Theodore Sanders
  Theodore Sanders
  Chief Financial Officer
  Date: August 17, 2015