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Highlights 2005
The past year has been marked with strong organic growth
in accordance with our business plan and with an eye
towards future development. We have identified eight key
milestones achieved in 2005:
• 37% increase in product sales
• 61% increase in active ingredient sales
• 10% increase in gross margins to 58%
• $433,000 increase in EBITDA to $156,000
• $1,000,000 increase in working capital
• $701,000 growth in assets
• 200% increase in manufacturing capacity
• 15 new patents filed to expand technology portfolio
Financial Performance
In Millions
Net Income
EBITDA
0.5
0.4
0.2
0.1
0.2
(0.1)
(0.2)
(0.3)
(0.2)
(0.3)
(0.8)
(0.9)
(0.8)
(0.9)
1999
2000
2001
2002
2003
2004
2005
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About Ceapro
Since 1997, Ceapro’s focus has been to develop and commercialize new
products using natural materials for the human and animal health markets.
Our vision is to be a profitable company recognized for the innovation,
the high quality, and the life-enhancing performance of its products. For
CeaProve®, our vision is to be the global-preferred diabetes screening,
diagnostic, and management test.
“Leading Innovation
Through Nature’s Vitality”
Our Mission:
• Innovate, discover, and commercialize natural plant extracts
• Add value to our extracts by manufacturing medical
and therapeutic products
• Introduce health and wellness services
by employing our CeaProve®
diagnostic technology
Our Values:
• Enhancing human and animal health
• Producing the highest quality of work
possible in products, science,
and business
• Developing personnel through
guidance, opportunities, and
encouragement
“Ceapro is focused on our core objective:
commercialization of products using natural
materials. Capturing Nature’s vitality and leading
innovation will continue to be our focus as our
company grows.”
Ken Pilip M.Sc., P. Eng.
Founder & Senior Advisor
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Dear Fellow Shareholder:
Over the last twelve months, Ceapro invested in its people, its physical assets, and its technology.
This investment in our future was accomplished within budget and according to our business
plan. As a result 2005 was a year of strong organic growth; we will now look to accelerating
growth through new partnerships and new opportunities.
Accomplishments
Our alliances with Symrise (Active Ingredients), Brennen Medical (Beta Glucan), and Daisen
(Animal Health) have stood the test of time. Collectively, these partnerships represent almost
thirty years of collaboration. Now Ceapro is working hard to forge other new partnerships.
These relationships will ensure that existing products and technologies will be sold in expanded
territories and that new products will be placed to receive the maximum exposure and create the
greatest impact.
Publication of landmark clinical studies in the International Journal of Cosmetic Science, a
peer-reviewed scientific journal, has created strong market and customer interest in beta glucan.
Building on this attention Symrise has advised Ceapro of increasing interest in beta glucan,
especially in Asia. Brennen Medical reports similarly raised awareness in the wound-care market.
Especially following the introduction of beta glucan-based hernia treatments by Genzyme Inc.
We expect even stronger sales of active ingredient in the 2006 due to publicity and
expanding markets.
Increased sales of animal health products to veterinarians in Japan was reported in the Fuji
Economic 2005 Report. The report confirmed Ceapro’s leadership position in OTC (over the
counter) shampoo and ear cleansing products, outperforming other global competitors. We have
used this data to demonstrate competitive performance benefits and market size to prospective
partners in the United States; we anticipate making US market announcements later this year.
Ceapro’s implementation plan for CeaProve® addresses markets in screening and monitoring, as
well as in diagnosis of diabetes and the related causes of the “Metabolic Syndrome”. We have
reached the point of forming alliances and partnerships that will ensure market penetration in
the workplace, pharmacies, clinical laboratories, and medical clinics.
Investment for the Future
In 2005 Ceapro added personnel, intellectual property, and capital equipment to the Company.
These costs are reflected in general and administrative expenses, and in research and
development expenses.
Staff salaries, Board costs, and consulting fees are a major budget item for Ceapro, as with
any growing biotechnology company. This expense is understandable and acceptable because
Ceapro’s people are a major asset. Ceapro’s personnel combine years of knowledge and
experience with new ideas and ingenuity to produce Ceapro’s products. Ceapro’s commitment to
retaining exceptional people provides returns to the Company in more ways than ensuring high
performance and standards of governance. In 2005 as in previous years, Ceapro’s team chose to
reinvest money in Ceapro; the Board, management, employees, and their families participated
in the Company’s financings. This confidence and degree of support provides insight into the
commitment of those closely associated with the Company.
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Patents figured prominently in Ceapro’s activities during 2005, and will ensure protection of
intellectual property essential to Ceapro’s operations. Ceapro filed for 15 patents in various
countries to protect new oat processing methods, beta glucan drug-delivery technology, and
new CeaProve® formulations. Ceapro also concluded a nine-year challenge of another company’s
patent in the European Patent Office. The ruling limited the use of the challenged oat extract
to a specific use in scalp treatment. In December, Ceapro commenced patent-related activities
to establish a clear patent position for a new processing technology. Our latest technological
advances will greatly enhance our productivity and pave the way for new partnerships in
nutraceuticals.
Ceapro has increased production capacity and expanded manufacturing operations at Leduc,
Alberta, which completes Phase 1 of the expansion plans announced in the 2004 Annual Report.
The investment in capital equipment has already provided returns through reduced costs and
higher margins, expanded volumes, and a greater diversity of products.
Phase 2 of the expansion plan began in the last quarter of 2005, as Ceapro commenced
engineering and design studies for the potential expansion of manufacturing space to 4,000
square feet. The expanded area would offer space to operate continuous processes, expand
production shifts, enhance production parameters, and allow streamlined production of
pharmaceutical-grade active ingredients. If approved, the expansion will take place during the
third quarter of 2006 and would provide Ceapro with adequate production capacity for the next
three years, based on our market forecasts and business plan.
Marketing Challenges
As an innovation-driven company, we face challenges in making the most of our technological
opportunities and realizing profits resulting from technology commercialization. Our greatest
challenge has been the merchandizing of the numerous products originating from our patents.
To meet this marketing challenge we have developed a successful sales and distribution model
that involves forging long-term partnerships that uses our partners’ sales teams and resources
to access customers. This model is particularly effective when our technical and scientific staff
become part of the sales process. As a result of applying this model our market for our products
has grown at a rate greater than the 70% per annum over the last five years.
Now, however, to increase that growth rate we have embarked upon a new partnership strategy
that extends beyond distribution. During 2005, we conducted applied research to meet our
partners’ specific product needs. In the future, we will increase activities in the areas of licensing
and foster even closer collaborations and joint ventures.
Financial Resources
Ceapro sells its products in US dollars but reports in Canadian dollars. As a result the foreign
exchange rates have had bearing on corporate performance and profitability, so influencing share
price. Comparing 2005 to 2004, the exchange rate increase had a $166,000 negative effect on
Ceapro’s revenues; this effect is even greater when comparing 2005 to 2003, with a $280,000
negative effect. Ceapro has neutralized the impact of the stronger Canadian dollar through
increased sales, improved margins, and enhanced efficiencies.
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Expansion of our CeaProve® programs required us to raise additional capital in 2005. During
the year, we raised $1.6 million using a number of different financing vehicles. To protect our
shareholders’ investments we did not issue large numbers of shares; however, we did acquire
additional performance-based debt (investments with repayments based on CeaProve® success).
The cost of this capital together with the previous Royalty Interest programs will have an effect
on profitability until the loans are repaid.
Human Resources
Over the last year, Alberta-based companies have experienced serious shortages with respect
to human resources. Ceapro itself has not been able to fill open positions in manufacturing and
marketing, and we have had to implement measures to ensure that we are able to retain our
valuable team members. We are fortunate and privileged to have an enthusiastic and dedicated
workforce; Ceapro understands the need to continue to recognize and reward their work.
We recently announced the promotion of two highly-qualified and talented individuals: Shawn
McMillan as Chief Financial Officer and David Fielder as Vice President Scientific Affairs.
The critical role that each of these individuals plays in Ceapro today makes these appointments
appropriate and an important part of Ceapro’s future.
Having experienced difficulties in recruiting employees, Ceapro has relied extensively on
consultants to work with management. We have supplemented to our long-term consultant base
of Mike Andrews (Finance) and Cark Maunsell (Technology), with additional consulting support
in marketing, communications, investor relations, business development, and engineering. While
consultants come at a cost, their use gives us flexibility and time to execute our business plans,
while continuing to seek the right individuals for full-time employment.
Outlook
Ceapro’s success will be based on these factors:
• We own unique technology to make exceptional products
• We have bright, knowledgeable employees
• We are partnered with the best companies in the world
• We have strong sales into major global markets
We are encouraged by strong first quarter sales and anticipate further revenue growth
throughout 2006. We expect the expansion of sales to existing customers, and the introduction
of new products to new customers to further increase sales of both active ingredients
and veterinary therapeutic products. Ceapro expects to undertake further expansion of
manufacturing capacity to meet this increased demand.
Ceapro has made strides in the development of CeaProve®, our diabetes screening product. Our
strategy has reached the point of forming alliances and partnerships that will ensure market
penetration in the workplace, pharmacies, clinical laboratories, and medical clinics. Ceapro
expects to generate revenues from CeaProve® in 2006 once utilization commences in the newly-
identified screening service markets and partners begin ordering product.
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Ceapro’s export sales should continue to increase despite the significant strengthening of
the Canadian dollar. We remain confident that enhanced production efficiencies and expanded
markets will enable us to continue to stimulate financial growth and corporate performance.
The executive and Board are positive about Ceapro’s future. During the last year, we have
achieved growth and set in motion activities which will ensure the sustained growth of the
Company and contribute to fulfilling our mission and our realizing our vision.
Mark Redmond
President & CEO
Ceapro Inc
April 3, 2006
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Diana Shaw, Ken Pilip, and Sarah Lord
The Ceapro Team
Highly talented and qualified individuals are the cornerstones
of Ceapro’s success. We are fortunate and privileged to have an
enthusiastic and dedicated workforce.
Executive
Mark Redmond, Ph.D.
President & Chief Executive Officer
Since its inception, Ceapro has relied on Dr. Redmond’s ingenuity and inventiveness to
develop the Company. Today, he is the driver, challenger, and visionary in expanding
Ceapro’s business.
Shawn McMillan, B.Comm., C.A.
Vice President Finance and Chief Financial Officer
Appointed in 2005, Mr. McMillan is responsible for corporate and financial reporting as well
as the management of all administrative departments.
David Fielder, M.Sc.
Vice President Scientific Affairs
Mr. Fielder joined Ceapro in 1996 and has played a major role in the discovery, conception,
and commercialization of all of Ceapro’s core technology. He is responsible for Ceapro’s
scientific developments as well as customer technical services.
Management
Laurie Lanuke
Manager of Customer Service and Logistics
Ms. Lanuke manages product orders and customer inquiries and
facilitates distribution of Ceapro products.
Sarah Lord, Ph.D.
Manager of Clinical Services
Dr. Lord is responsible for managing clinical studies and screenings
for Ceapro’s diabetes products.
Ken Pilip, M.Sc., P.Eng.
Founder and Senior Advisor
As Founder and Senior Advisor, Mr. Pilip is responsible for
corporate relations and engineering design and development.
Darrin Schmidt
Manager of Plant Operations
With over 20 years of experience in extract production
Mr. Schmidt leads Ceapro’s manufacturing team.
Diana Shaw, Ph.D.
Manager of Business Development
Dr. Shaw focuses on product development, pre-market testing,
and regulatory requirements for Ceapro’s diabetes products.
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Active Ingredients
Core Extraction Technology and Active Ingredients
Ceapro’s distinct competency stems from our ability to identify and extract unique and
functional materials from plants. Until recently, our focus was limited to extracts from oats;
today we have expanded the application of our technology to include other plants from the
Canadian north, developing the “extreme actives” brand.
Our unique extraction technology creates superior active ingredients with distinct formulation
and performance advantages. Our natural approach and quality control program ensures the
active ingredients are of the highest quality.
Ceapro’s range of active ingredients has grown beyond beta glucan, colloidal oat extract, and
oat oil to now include hydrolyzed oat protein, combinations of beta glucan with oat protein, and
legume proteins from forest plants.
Beta Glucan
Beta glucan is a polymer of glucose and functions as a key component in some plants, bacteria,
and fungi to give their cells strength and structure. For humans and animals, beta glucan
stimulates our cells to grow, promoting wound healing, and to produce collagen, which adds
tone to skin thus removing wrinkles.
The publication in 2005 of landmark clinical studies in the International Journal of Cosmetic
Science, has created strong market and customer interest in beta glucan.
In 2005, Ceapro increased its proprietary
technology position by filing patents for
methods of extracting beta glucan, as well
as patents for the use of beta glucan in
drug delivery and delivering oral hygiene
products. The drug delivery market is
projected to be worth $41billion by 2007
and is an important opportunity for
Ceapro to develop in the future.
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Colloidal Oat Extract
Colloidal oat extract contains avenanthramides, a chemical found only in oats. Ceapro scientists
discovered and characterized avenanthramides as having anti-histamine activity, proving
avenanthramides effective in reducing itching and redness.
During 2005, the collaboration between Symrise and Ceapro resulted in the discovery that
avenanthramides also block inflammation. It is expected that this new property will be valuable
in the development of medical and cosmetic products.
On the Market
Ceapro’s active ingredients are products which meet the demand of today’s cosmetics
and personal care industries, as well as the needs of human and veterinary medicine. Our
partnership strategy allows our products to be identified as key ingredients in a broad range of
personal care products and medicines.
Access to global markets for cosmetics is provided by Symrise, whose sales network is supported
by distribution centers in Germany, the United States, Brazil, and Singapore. Symrise’s market
strategy is to work with the Top 10 cosmetics companies to develop brands and inspire the
innovation which creates successful products.
Brennen Medical markets three beta glucan containing wound care products across North
America and Europe. GlucanPro, GlucanPro 3000, and MacroPro are used in the treatment of
burns and skin-loss injuries. Genzyme, a leader in biotechnology and medical devices, has begun
the worldwide marketing of beta glucan-based GlucaTex® and GlucaMesh® used in
the repair of hernias.
“Active ingredients are a core element of Ceapro’s
business and it is important that our distribution and
marketing partners have ready and available access to
our product.”
Laurie Lanuke
Manager of Customer Service & Logistics
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CeaProve®
What is CeaProve®?
CeaProve® is a tool for the early detection and monitoring of diabetes and pre-diabetes.
CeaProve® is a standardized meal in the form of calibrated wafers made from proprietary
formulations of proteins, fats, and complex carbohydrates. Once eaten the wafers elicit a
temporary rise in blood glucose which may be measured with a glucose meter. This measurement
indicates a person’s risk for diabetes and pre-diabetes.
For individuals having diabetes or pre-diabetes, CeaProve® is an effective monitoring device to
ensure that lifestyle changes and/or medications are effectively controlling their blood
glucose levels.
Ceapro will supply CeaProve® to hospital laboratories and clinics, doctors’ offices, pharmacies,
and other professional outlets offering point-of-care testing.
Why CeaProve®?
The prevalence of diabetes is reaching epidemic levels throughout the world. Diabetes can be a
devastating disease leading to complications such as blindness, kidney failure, amputation, heart
attack, and stroke. Prior to being diagnosed with diabetes, many people unknowingly live with
“pre-diabetes” for as many as five to ten years before their diagnosis. CeaProve® was developed for
the early detection of diabetes and pre-diabetes. An earlier diagnosis allows people to take action
to prevent the full onslaught of diabetes and its complications.
How Does CeaProve® Work?
Step 1:
Step 2:
Fast overnight.
Take a small blood sample (finger prick) and test the sample with a portable
blood glucose meter.
Consume CeaProve® wafers with a large glass of water within 10 minutes.
Step 3:
Step 4: Wait 50 minutes and take another blood sample with a portable blood
glucose meter.
Advantages of CeaProve®
Accurate: Clinically proven to be more accurate than a glucose drink.
Convenient: Can be completed at home, at work, or in the clinic within one hour with no
adverse side effects.
Accessible: Can be used with standard blood glucose meters.
Versatile: Can be used for detection or monitoring.
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“Know Your Numbers”
Ceapro recently began its “Know Your Numbers” marketing campaign. The campaign promotes
screening and awareness of diabetes testing in point-of-care and corporate environments.
The “Know Your Numbers” program uses CeaProve® as its core measure. Additional components
assembled into the program include:
• Risk factor determination, e.g., hereditary diabetes or heart disease
• Body measurements, e.g., weight and waist size
• Blood pressure reading
• Cholesterol/lipid determination
Knowing their numbers allows individuals to assess their overall health status.
As a part of a corporate wellness program, CeaProve® provides employers with a fast and
effective way to ensure employees are in good health.
We recommend that “Know Your Numbers” become an integral part of a three-step
program involving:
1.
2.
3.
A baseline CeaProve® “Know Your Numbers” health status measurement
An action plan to address health risks
A follow-up CeaProve® “Know Your Numbers”
measurement to assess progress towards health
“With CeaProve® our company is taking
dramatic steps in the early detection and
prevention of diabetes.”
Sarah Lord, Ph.D.
Manager of Clinical Programs
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Veterinary Therapeutic Products
Skin problems are a major health concern in animals and are responsible for over 20% of visits
to the veterinary clinic. In recognizing this issue and the potential benefits of oat extracts
in promoting skin health, Ceapro conceived and commercialized its line of products for the
prevention and treatment of animal skin disease.
7 %
Japan
6 %
U.K.
5 %
Germany
7 %
France
Ceapro’s current range of veterinary products is based on disease prevention: our products
include Oat Shampoo, Ear Cleanser, and Dermal Complex. In 2006 we will launch our first
treatment product aimed at bacterial infection.
14 %
Other
Market
The 2005 Fuji Economic Report (April, 2004-March, 2005 ) stated that the Dr. Redmond’s
Selection of dermatological products captured US$1.1 million of product sales to veterinarians.
61 %
With Japan representing 7% of the global pet market, Ceapro is working to establish a network
United States
of distributors to access a potential market of US$15.5 million. Further expansion of this
market may be anticipated as more products are added to the range.
6 %
U.K.
5 %
Germany
7 %
Japan
7 %
France
14 %
Other
61 %
United States
25 %
Dermal (Skin Irritation):
Food allergies 10 %
Shampoo treatable 6 %
Bacterial infections 4 %
Other dermal 5 %
Total Visits
Non-dermal 75 %
Dermal 25 %
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Dermal (Skin Irritation):
Food allergies 10 %
Shampoo treatable 6 %
Bacterial infections 4 %
Other dermal 5 %
25 %
Total Visits
Non-dermal 75 %
Dermal 25 %
Global Animal Health Partnerships
Ceapro’s veterinary products are sophisticated and technically advanced. As such, the products
benefit from user education; the veterinarian is the appropriate teacher. To ensure that the
veterinarian is fully informed, Ceapro is establishing a global network of specialized distributors.
Dr. Redmond’s Selection Japan, China, Korea, and Taiwan
The Dr. Redmond’s Selection brand has grown to be a market leader
in veterinary shampoos and ear cleansers in Japan. Our 12-year
relationship with Daisen Sangyo Co. Ltd. and Zenoaq has allowed us to
expand our products into Asia.
NaturOat Australia
Our continued partnership with PharmTech has enabled Ceapro to
deliver animal health products to the Australian market.
Avena Sativa Canada
Ceapro’s strategic alliance with Aventix Animal Health Corp. in Canada
has enabled the launch of our product under the Avena Sativa brand.
Ceapro’s ear cleanser has already established itself as a challenger to the
leardership position in this sector.
Oatderm United Kingdom
In 2005, Ceapro formed a strategic alliance with Pharmavet Ltd. in the
United Kingdom. Pharmavet is unique in its operation of veterinary
supply and internet businesses, as well as owning veterinary practices in
Wales.
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Management’s Discussion & Analysis
The MD&A provides commentary on the results of operations for the years ended December 31,
2005 and 2004, financial position as at December 31, 2005 and the outlook of Ceapro Inc. (“Ceapro”)
based on information available as at March 28, 2006. The following information should be read in
conjunction with the consolidated financial statements as at December 31, 2005, and related notes
thereto, which are prepared in accordance with Canadian generally accepted accounting principles
(Canadian GAAP). All comparative percentages are between the years ended December 31, 2005 and
2004 and all dollar amounts are expressed in Canadian currency, unless otherwise noted. Additional
information about Ceapro can be found on SEDAR at www.sedar.com.
Forward-looking Statements
This MD&A offers our assessment of Ceapro’s future plans and operations as at March 28, 2006,
and contains forward-looking statements. By their nature, forward-looking statements are subject
to numerous risks and uncertainties, including those discussed below. You are cautioned that the
assumptions used in the preparation of forward-looking information, although considered reasonable
at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be
placed on forward-looking statements. Actual results, performance or achievements could differ
materially from those expressed in, or implied by, these forward-looking statements. No assurance
can be given that any of the events anticipated will transpire or occur, or if any of them do so, what
benefits Ceapro will derive from them. We disclaim any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
Vision, Core Business, and Strategy
Ceapro Inc. (Ceapro) is incorporated under the Canada Business Corporations Act, and its wholly-
owned subsidiaries, Ceapro Technology Inc., Ceapro Veterinary Products Inc., and Ceapro Active
Ingredients Inc., are incorporated under the Alberta Business Corporations Act. Ceapro is an
innovation-driven biotechnology company. Our primary business activities relate to the development
and commercialization of organic products for medical, cosmetic, and animal health industries using
proprietary technology and natural, renewable resources.
Our products include:
• A commercial line of active ingredients, including beta glucan, avenanthramides (colloidal oat
extract and Drago-Calm), oat powder, and oat oil, which are marketed to the personal care and
cosmetic industry through an exclusive agreement with our distribution partner,
Symrise Inc.; and
• Veterinary therapeutic products, including an oat shampoo, an ear cleanser, and a dermal
complex/conditioner, which are marketed to veterinarians in Japan and Asia, through
distribution agreements with Daisen Sangyo Co. Ltd., in Canada by Aventix Animal Health,
and in the UK by Pharmavet Ltd.
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Other products and technologies are currently in the research and development or pre-commercial
stage. These new technologies include:
• CeaProve®, a diabetes test meal to identify Type 2 diabetes and pre-diabetes, to determine
dosage levels for diabetes oral therapy, and to monitor the condition of pre-diabetics. We are
working towards a Canadian product listing to make CeaProve® available across
Canada in 2006.
• A drug-delivery platform using our beta glucan technology to deliver compounds for uses
ranging from wound care and therapy, to skin care treatments that reduce the signs of aging.
• An extension to the active ingredients offering, through new protein and new cereal grain
extract products; and
• An extension to the existing veterinary products line, though new therapeutic
products/formulations.
Our vision is to be a global leader in developing and commercializing products for the human and
animal health markets through the use of proprietary technology and renewable resources. We act as
innovator, advanced processor and formulator in the development of new products. We deliver our
technology to the market through distribution partnerships. Our strategic focus is:
•
Increasing sales and expanding markets for active ingredients;
• Developing and marketing additional high-value proprietary therapeutic products
• Deploying CeaProve® and maximizing product utilization; and
• Advancing new technology to a partnering position.
As a knowledge-based enterprise, we will also expand and strengthen our patent portfolio and build
the necessary manufacturing infrastructure to become a global biotechnology company.
Our business growth depends on our ability to access global markets through distribution
partnerships. Our marketing strategy emphasizes providing technical support to our distributors
and their customers to maximize the value of our technology and product utilization. Our vision and
business strategy are supported by our commitment to the following core values:
• Adding value to everything that we touch;
• Enhancing the human and animal health;
• Discovering, extracting, and commercializing new, natural ingredients;
• Producing the highest quality work possible in products, science, and business; and
• Developing personnel through guidance, opportunities, and encouragement.
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To support these objectives, we believe we have the requisite resources (intellectual and human
capital) and the competitive advantages (partnerships) to exploit our technology. To fund our
operations, we rely upon revenues generated from the sale of active ingredients and veterinary
therapeutic products, and the proceeds of public and private offerings of equity securities,
debentures, and other income offerings.
Risks and Uncertainties
Biotechnology companies are subject to a number of risks and uncertainties inherent in the
development of any new technology. General business risks include: uncertainty in product
development and related clinical trials and validation studies; the regulatory environment, for
example, delays or denial of approvals to market our products; the impact of technological change
and competing technologies; the ability to protect and enforce our patent portfolio and intellectual
property assets; the availability of capital to finance continued and new product development; and
the ability to secure strategic partners for late stage development, marketing, and distribution of our
products. To the extent possible, we pursue and implement strategies to reduce or mitigate the risks
associated with our business.
As substantially all sales are export sales to two distributors, we are dependent on those distributors
to maintain and expand the volume of product sales to existing and new customers.
We have exposure to risk arising from volatility in foreign exchange rates as substantially all sales
of our products are denominated in US currency, while our expenses are primarily denominated
in Canadian dollars. We do not currently engage in hedging or use of derivatives to reduce foreign
exchange risk.
Ceapro’s long-term debt has fixed interest rates over the terms of the obligations. Our exposure to
interest rate and inflation risks are expected to be negligible as economic forecasts project a stable
outlook for both interest rates and inflation in the near future.
Ceapro’s share price is subject to equity market price risk, which may result in significant speculation
and volatility of trading due to the uncertainty inherent in our business and the biotechnology
industry. There is a risk that future issuance of common shares may result in material dilution of
share value, which may lead to further decline in share price. The expectations of securities analysts
and major investors about our financial or scientific results, the timing of such results and future
prospects, could also have a significant effect on the future trading price of Ceapro’s shares.
A variety of factors will affect our future growth and operating results, including the strength and
demand for our products, the extent of competition in our markets, the ability to recruit and retain
qualified personnel, and our ability to raise capital.
Our financial statements are prepared within a framework of GAAP selected by management and
approved by our Board of Directors. The assets, liabilities, revenues, and expenses reported in our
financial statements depend to varying degrees on estimates made by management. An estimate
is considered a critical accounting estimate if it requires management to make assumptions about
matters that are highly uncertain; and if different estimates that could have been used would
have a material impact. The significant areas requiring the use of management estimates relate
to amortization of property and equipment, the assumptions used in determining stock-based
compensation and employee future benefit obligation. These estimates are based on historical
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experience and reflect certain assumptions about the future that we believe to be both reasonable
and conservative. Actual results could differ from those estimates. We continually evaluate the
estimates and assumptions.
Disclosure Controls and Procedures
Disclosure controls and procedures have been designed to provide assurance that material
information relating to the Company is accumulated and communicated to the Company’s
management as appropriate to allow timely decisions regarding required disclosure. The Company’s
Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as at
December 31, 2005, that the Company’s disclosure controls and procedures are effective to provide
reasonable assurance that material information related to the Company is made known to them by
others within the Company. It should be noted that while the Company’s Chief Executive Officer
and Chief Financial Officer believe that the Company’s disclosure controls and procedures provide a
reasonable level of assurance that they are effective, they do not expect that the disclosure controls
and procedures will prevent all errors or fraud. A control system, no matter how well conceived or
operated, can only provide reasonable, not absolute, assurance that the objectives of the control
system are met.
Results of Operations – Years Ended December 31, 2005, 2004, and 2003
Selected Annual Information
$000s except per share data
Total revenues
Net (loss) income
EBITDA
Basic (loss) income per share
Diluted (loss) income per share
Total assets
Total liabilities
2005
2,763
(57)
156
(0.00)
(0.00)
2,419
1,958
2004
2,420
(398)
(277)
(0.01)
(0.01)
1,718
1,604
2003
2,424
442
550
0.01
0.01
1,255
873
During 2005 there was a 61% increase in active ingredient sales leading to an overall increase of
product sales of 37%.
In 2005, the net loss decreased by $341,000 resulting from an increase in revenues of $343,000. This
was offset by an increase in general and administration of $150,000, higher sales and marketing of
$125,000, amortization of $70,000, royalties of $45,000 and interest of $23,000.
EBITDA increased in the year by $433,000 due to an increase in product sales.
Ceapro’s assets grew by $701,000 in 2005 from the result of an increase in cash and receivables
offset by a reduction of inventory on hand.
The strong Canadian dollar had an impact on the revenues of Ceapro over the year. Ceapro’s
revenues are substantially all denominated in US currency, thus a strong Canadian dollar reduces the
value of each sale. The average exchange rate on Ceapro’s sales dropped 6% compared to 2004 and
11% compared to 2003. This had a substantial impact on Ceapro’s gross sales. With the continual
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strengthening of the Canadian dollar Ceapro has to increase actual volume of sales to sustain the
Canadian equivalent.
Revenue
$000s
Product sales
Active ingredients
Veterinary therapeutic products
Royalties, licenses, and product
development fees
Total revenues
Product Sales
2005
2,153
530
2,683
80
2,763
2004
Change
1,338
619
1,957
463
2,420
61%
(14%)
37%
(83%)
14%
In 2005, active ingredient sales rose $815,000 or 61% as a result of an increase of sales of colloidal
oat extract, increased sales of the new formulations of beta glucan, and new sales of oat powder.
The increase in sales of active ingredients has also been part of Ceapro’s continual sales efforts with
both the large and mid-size personal care and cosmetic companies. Ceapro continually looks for
new and innovative products to add to the current line.
Sales of veterinary therapeutic products were lower year over year due to having a one time order
from Daisen of $67,000 in the third quarter of 2004, and a new distributor in Canada stocking up in
2004.
Royalties, Licences, and Product Development Fees
Royalties, licenses, and product development fees are revenue derived from the addition of new
products to existing distribution agreements, activation of new distribution agreements, and scientific
and technical services provided to customers for the creation and development of new products.
Revenue from royalties, licenses, and product development fees decreased by $383,000 in 2005. In
2004, Ceapro received $463,000 of product development fees upon delivery of new products to our
distribution partners. No new product development fees were received in the current year. The
$80,000 earned in 2005 was the final portion of the product development fees, received in 2004, upon
delivery of product to the customer for testing.
Expenses
Cost of Goods Sold and Gross Margins
$000s
Sales
Cost of products sold
Gross margin
Gross margin %
2005
2,683
1,123
1,560
58%
2004
1,957
1,023
934
48%
Change
67%
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Cost of goods sold is comprised of the direct raw materials required for the specific formulation of
products, as well as direct labour, quality control, packaging, and transportation costs. Aside from
labour and quality control related expenses, the majority of costs are variable in relation to the
volume of product produced or shipped.
For 2005, the gross margin percentage improved to 58% from 48%, as a result of the increase in
product sales, and as fixed production labour costs were absorbed over the higher product sales. The
higher margin also reflects the increase in efficiencies from the new equipment installed in the prior
year that is realized with higher production volumes.
General and Administration
$000s
Salaries and benefits
Board of Directors compensation
Investor relations
Insurance
Legal
Other
Total general and administration
expenses
2005
314
102
102
100
96
269
983
2004
265
65
97
99
36
271
833
Change
18%
General and administration expense (G&A) for 2005 increased $150,000 primarily due to an increase
in legal costs of $52,000 related to patent expenses and an increase in regulatory and general legal
expenses. The Board of Directors compensation increased by $37,000 as a result of the change, in
the prior year, to a fee based compensation structure from a stock based compensation structure. To
date the Directors have reinvested their compensation by exercising stock options and participating
in private placements in Ceapro.
Sales and Marketing
$000s
Salaries and benefits
Other
Total sales and marketing
2005
207
49
256
2004
82
48
130
Change
97%
Sales and marketing expenses increased by 97% largely due to senior management and scientific
personnel spending time on marketing in the current year, versus in the most of 2004 senior
management and scientific personnel were required to spend significant time renewing, refreshing
and reformulating existing products. The increase in sales and marketing was to drive the increase in
sales, which aided in the 61% increase in active ingredient sales.
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Royalties
$000s
Royalty interest units
AVAC Royalty
Total royalties expenses
2005
230
92
322
2004
203
74
277
Change
16%
As at December 31, 2005, royalty investors receive royalties equal to 8.31% (2004 – 8.31%) of
revenues from product sales and royalty, license, and product development fees of active ingredients
and veterinary therapeutic products, to a maximum of two times the amount invested. AVAC Ltd.
receives royalties of up to 5% of revenues from eligible product sales, to a maximum of two times
the amount invested. Royalty expense throughout 2006 will vary directly with fluctuations in product
sales, royalty, license, and product development fees, product sales mix, and any new royalty interest
offerings or AVAC investments that may be completed.
Interest
$000s
Interest on callable debt, convertible
debentures, and other
Interest on long-term debt
Total interest expense
2005
2004
Change
10
41
51
18
10
28
82%
Interest expense increased $23,000 due to the increase in long term debt in 2004 which was used
to fund the expansion of the company’s manufacturing facility during the latter half of 2004. Total
interest expense in 2005 is significantly higher than 2004, as the debt incurred for equipment
financing was outstanding for the entire year in 2005 versus a portion of the year in 2004.
Amortization
Amortization expense increased by $70,000 or 76%, as capital expenditures for manufacturing
equipment acquired in the second half of 2004 are now being amortized.
Other Income (Expenses)
Research and Product Development
$000s
Salaries and benefits
Product development - CeaProve®
Other
Research and product development
expenditures
AVAC investment (Product Innovation)
AVAC investment (CeaProve®)
Net research and product development
expenses
2005
134
395
129
658
(100)
(395)
163
2004
101
231
121
453
-
(150)
303
Change
45%
(53%)
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Research and product development expenses increased 45% primarily due to an increase in
development and pre-market activities for CeaProve®. In 2005 Ceapro received funds under a
product pre-commercialization investment agreement that was offset against CeaProve® product
development charges. In 2005, $100,000 of active ingredient and animal health product development
expenses were offset against funds from AVAC under the Product Innovation Investment agreement.
Other Income (Expenses)
$000s
AVAC - product innovation investment
Non-operational legal and consulting
expense
Settlement of lawsuit
Foreign exchange gains (losses) and
other
Total other income (expenses)
2005
225
-
-
15
240
2004
(124)
(40)
46
(118)
Change
303%
Other income (expenses) increased in 2005, due to the receipt of $225,000 in AVAC product
innovation investment for costs that were incurred in 2004. In 2004, there was an increase in legal
and consulting expenses as a result of specific, one-time costs for new agreement development,
partnership negotiations, and due diligence processes that were unrelated to regular operations. A
stronger Canadian dollar foreign exchange rate at December 31, 2005 resulted in exchange gain due
to an unrealized gain of $21,000 on US dollar bank and accounts receivables balances.
Quarterly Information
The following selected financial information is derived from Ceapro’s unaudited quarterly financial
statements for each of the last eight quarters, all of which cover periods of three months.
$000s except per share data
Total revenues
Net (loss) income
Basic (loss) income per share
Diluted (loss) income per share
Q4
608
123
0.00
0.00
Q3
654
(125)
(0.00)
(0.00)
Q2
1,032
101
0.00
0.00
2005
Q1
469
(156)
(0.00)
(o.00)
Q4
469
(78)
(0.00)
(0.00)
Q3
414
(361)
(0.01)
(0.01)
Q2
975
(71)
(0.00)
(0.00)
2004
Q1
561
113
0.00
0.00
Ceapro’s quarterly sales and results fluctuate due to variations in the timing of product sales. For
example, a significant proportion of our annual veterinary therapeutic product sales are in the second
quarter of the year.
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Liquidity and Capital Resources
We rely upon revenues generated from the sale of active ingredients and veterinary therapeutic
products, the proceeds of public and private offerings of equity securities and debentures, and
income offerings to support our operations.
During 2005, 666,820 stock options were exercised at prices ranging from $0.12 to $0.28. The amount
credited to share capital upon exercise of the options is the cash consideration received, if applicable,
plus the fair value of the options at the time they were granted (stock-based compensation).
On March 31, 2005, Ceapro completed a private placement share offering of 682,666 Units, for
aggregate gross proceeds of $204,800. Each Unit was priced at $0.30 and contained one common
share of Ceapro and one common share purchase warrant entitling the holder thereof to acquire
one additional common share at an exercise price of $0.40 per share until September 30, 2005, and
thereafter at a price of $0.60 per common share, until September 30, 2006.
On December 28, 2005, Ceapro completed a private placement that resulted in the sale of 914 units
for a total of $502,700. Each unit consists of 100 common shares priced at $0.50 per share, 100
common share purchase warrants, and 100 royalty interest units at $5.00 per unit. Each warrant
entitles the holder thereof to acquire one additional common share at a price of $0.55 per share for
a period of six months until June 28, 2006 and thereafter at a price of $0.75 per share until December
28, 2007. The common shares issued under the private placement or upon exercise of the warrants
will be subject to a hold period which will expire on April 29, 2006. Each royalty interest unit entitles
the holder to a royalty equal to 0.000025% of the net proceeds received by Ceapro from the sale
or license of its Active Ingredients, Animal Health Products and CeaProve® up to a maximum
cumulative amount equal to $10.00 per royalty interest unit. Proceeds of $457,000 related to royalty
interest units and $45,700 for common shares.
Total common shares issued and outstanding as at March 28, 2006 were 37,098,670 (2005
– 36,355,950). In addition, 3,286,795 stock options (2005 – 3,548,115) and 774,066 warrants (2005 – nil)
were outstanding that are potentially convertible into an equal number of common shares at various
prices. Shareholders’ equity increased to $461,337 at December 31, 2005 from $114,066 at
December 31, 2004.
Ceapro’s working capital position improved to $1,003,000 at December 31, 2005, an improvement
of $1,059,000 from December 31, 2004. Ceapro continues to pursue additional financings to fund
ongoing working capital requirements, and to secure the financial resources required to support the
expected increases in sales of existing products, the introduction of new products to existing and
new markets, and the development of new technology.
To meet future requirements, we intend to raise additional cash through some or all of the following
methods: public or private equity or debt financing, income offerings, capital leases, collaborative and
licensing agreements, and joint venture or partnership financings. However, there is no assurance of
obtaining additional financing through these arrangements on acceptable terms, if at all. The ability to
generate new cash will depend on external factors, many beyond our control, as outlined in the Risks
and Uncertainties section. Should sufficient capital not be raised, we may have to delay, reduce the
scope of, eliminate, or divest one or more of our discovery, research, or development technology or
programs, any of which could impair the value of the business.
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Sources and Uses of Cash
The following table outlines our sources and uses of funds during the past two years.
$000s except per share data
Sources of funds
Funds generated from operations
(cash flow)
Change in non-cash working capital
items
Share capital issued, net of cost
Royalty interest proceeds
Change in long-term and callable
debt
Uses of funds
Purchase of property and equipment
Decrease in convertible debentures
Royalties payable
Net change in cash
Financings and Milestones
2005
238
(666)
356
457
(70)
315
(57)
(20)
104
27
342
2004
(247)
155
111
-
418
437
(542)
(10)
(37)
(589)
(152)
During the year ended December 31, 2005, investors agreed to purchase additional interests in the
net proceeds, if any, from the SGGF claim. At December 31, 2005, investors are entitled to 57.1% of
the net proceeds, if any, from the SGGF claim, to a maximum $14,264,780.
On April 25, 2005, Ceapro received an investment commitment from AVAC Ltd. for product innovation
development in the areas of Veterinary Therapeutics and Active Ingredients based on Alberta cereal
by-products of an amount up to $362,250 upon completion of project objectives as outlined and
agreed to by both parties. In the year ended December 31, 2005, $325,000 of this commitment has
been received or was receivable as at December 31, 2005. Ceapro will pay a 2.5% royalty on certain
sales to a maximum of $75,000 per quarter to a maximum of two times the amount received from
AVAC. These payments will commence when the royalty payments on other AVAC agreements
(dated May 13, 2002 and March 26, 2004) are fully satisfied.
In the year ended December 31, 2005, the Company received a commitment for financial assistance
totaling $800,000 for pre-market activities of CeaProve® (a health and wellness product) upon
completion of project objectives as outlined and agreed to by both parties. As of December 31, 2005,
$510,000 of this commitment was receivable and received subsequent to year end. The Company
is obligated to pay a royalty (to a maximum of one and a half times the financial assistance received)
on sales generated from CeaProve® on the following basis: 0% of net sales and net sub-licensing
revenues earned until royalty payments have been fully satisfied under the Investment Agreement
dated March 24, 2004, and 5% thereafter until repaid to a maximum of $125,000 per quarter. No
royalties were incurred or payable during the current year.
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Related Party Transactions
During 2005, $60,580 royalties were earned by employees and Directors from their investment in
previous Ceapro royalty offerings. Directors and employees invested $190,250 in the sale of royalty
interest units and lawsuit interests. At December 31, 2005, $13,336 of royalties were payable to
employees and Directors. Included in accounts receivable at December 31, 2005 is $50,000 due from
a Director for lawsuit financing. Prepaid expenses included $25,884 of Director fees paid for the term
ending May 31, 2006. These transactions are in the normal course of operations and are measured at
the exchange amount, which is the amount of consideration established and agreed to by the
related parties.
Legal Proceedings
On May 5, 1998, control of Ceapro’s wholly-owned subsidiary, Canamino Inc. (“Canamino”) was
assumed by Canamino’s Class B preferred shareholder, the Saskatchewan Government Growth
Fund Ltd. (“SGGF”) pursuant to a notice given March 30, 1998 by SGGF due to default of payment
of dividends due in October, 1997, and the failure to redeem 500,000 Class B preferred shares as
required under the subscription agreement. Control was gained through the assumption of 51% of
the voting entitlement attached to the Class A common shares.
On March 22, 2002, Ceapro filed a Statement of Claim (subsequently amended on April 6, 2004) in the
Court of Queen’s Bench of Saskatchewan against the Government of Saskatchewan, Saskatchewan
Government Growth Fund Management Corporation, Gary K. Benson, Janice MacKinnon, and Can-Oat
Milling Products Inc. (“SGGF et al.”). The action was launched to recover damages with respect to
assets claimed to be seized wrongfully as a result of the Defendant’s actions in 1998. With the filing
in Saskatchewan, Ceapro stayed its action in the Court of Queen’s Bench of Alberta. This action was
originally filed in September 1999. The claim alleges that Ceapro has suffered damage for its loss of
investment in Canamino and loss of reputation in the capital markets.
In 2003, Ceapro issued a bond relating to legal costs up to $305,000, which was secured by
personal guarantees of the Board of Directors and the Chief Executive Officer. At December 31,
2004, document production had occurred and Examinations for Discovery of the Defendants had
been concluded. The examination of Ceapro’s Chief Executive Officer commenced in October 2004,
continued through 2005, and resumed in into 2006 for 33 days. The examination of Ceapro’s Chief
Executive Officer should conclude in April 2006. The legal process will continue through the spring of
2006, moving to the pre-trial conference to be held in the last weeks of November where mandatory
judicial mediation will take place.
As of March 28, 2006, it is the opinion of Ceapro’s Corporate Counsel that, based on the document
production to date and examinations that have transpired, the likely outcome of the case is that
Ceapro will be successful. At this stage of the litigation, it is premature to quantify the damages
that may be awarded at the discretion of the Court; therefore, no amount has been accrued in the
financial statements with respect to this claim.
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Outlook
The initiatives undertaken during 2004 have resulted in an increase in product sales making 2005
our best revenue year in Ceapro’s history. We are encouraged with first quarter 2006 sales and look
forward to growing revenues throughout 2006. Ceapro incurred a minimal loss in the year of $57,000,
and there was significant improvement in our EBITDA, working capital, and cash flow. The expansion
of sales to existing customers, and the introduction of new products to new customers have boosted
sales of active ingredients. Ceapro’s export sales have continued to increase despite the significant
strengthening of the Canadian dollar over the last few years.
Ceapro has made strides in the development of CeaProve®, our diabetes screening product,
identifying new applications in the areas of diabetes monitoring and drug dosage determination.
During 2005 Ceapro has continued to further develop new products for our Active Ingredient and
Veterinary Therapeutic lines that will support further growth as these new products enter the market
place in 2006. During 2006 Ceapro will also under go an expansion of our Leduc production facilities
in order to ensure that we can increase our capacity to meet the anticipated increase in sales.
Ceapro will continue to pursue additional financings to fund ongoing working capital requirements
and to secure the financial resources required to support the expected increases in the volume of
sales of existing products, the introduction of new products to existing and new markets, and the
further development of new technology.
We intend to implement our operating plans in a measured and responsible manner. We caution
that additional investments may be required to continue to grow the business and product lines and
availability of these additional investments may affect the pace of growth.
Additional Information
Additional information relating to Ceapro Inc., including a copy of our Annual Report and Proxy
Circular, can be found on SEDAR at www.sedar.com.
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Management’s Report
To the Shareholders of CEAPRO INC.
The accompanying consolidated financial statements of Ceapro Inc., and all information presented
in this annual report, are the responsibility of Management and have been approved by the Board of
Directors.
The consolidated financial statements have been prepared by Management in accordance with
Canadian generally accepted accounting principles. The financial statements include some amounts
that are based on the best estimates and judgments of Management. Financial information used
elsewhere in the annual report is consistent with that in the financial statements.
To further the integrity and objectivity of data in the financial statements, Management of the
Company has developed and maintains a system of internal controls, which Management believes
will provide reasonable assurance that financial records are reliable and form a proper basis for
preparation of financial statements, and that assets are properly accounted for and safeguarded.
The Board of Directors carries out its responsibility for the financial statements in the annual report
principally through its Audit Committee. The Audit Committee is appointed by the Board, and all of its
members are outside and unrelated Directors. The Committee meets periodically with Management
and the external auditors to discuss internal controls over the financial reporting process and
financial reporting issues, to make certain that each party is properly discharging its responsibilities,
and to review quarterly reports, the annual report, the annual financial statements, management
discussion and analysis, and the external auditors’ report. The Committee reports its findings to the
Board for consideration when approving the financial statements for issuance to the shareholders.
The Company’s auditors have full access to the Audit committee, with and without Management
being present.
The financial statements have been audited by the Company’s auditors, Stout & Company LLP, the
external auditors, in accordance with auditing standards generally accepted in Canada on behalf of
the shareholders.
Sincerely,
Signed ‘‘Mark J. Redmond, Ph. D.’’
President and Chief Executive Officer
Signed ‘‘Shawn P. McMillan, CA’’
Corporate Controller
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Auditors’ Report
To the Shareholders of CEAPRO INC.
We have audited the consolidated balance sheet of Ceapro Inc. as at December 31, 2005 and 2004,
and the consolidated statements of net loss and deficit and cash flows for the years then ended.
These financial statements are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conduct our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2005 and 2004, and the results of its operations
and its cash flows for the years then ended in accordance with Canadian generally accepted
accounting principles.
Edmonton, Canada
March 1, 2006
SIGNED “Stout & Company LLP”
Chartered Accountants
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2
40
Ceapro Inc.
Consolidated Balance Sheets
As at December 31st
Assets
Current Assets
Cash
Accounts receivable
Inventories
Prepaid expenses and deposits
Restricted cash for the purchase of property and equipment
Property and equipment (note 3)
Liabilities and Shareholders’ Equity
Current Liabilities
Account payable and accrued liabilities
Deferred revenue
Current portion of convertible debentures (note 4)
Callable debt (note 5)
Current portion of long-term debt (note 6)
Current portion of royalties payable (note 7)
Deferred royalty revenue (note 7 (e))
Long-term debt (note 6)
Employee future benefit obligation (note 8)
Royalties payable (note 7)
Shareholders’ Equity
Share capital (note 9 (b))
Contributed surplus (note 9 (c))
Deficit
Approved on Behalf of the Board
Signed ‘‘ Edward A. Taylor ’’
Director
*See accompanying notes
2005
$
438,045
982,347
228,158
90,761
1,739,311
-
679,623
2,418,934
284,863
229,676
-
81,584
33,519
106,508
736,150
457,000
436,731
159,946
167,770
2004
$
96,266
425,160
345,424
66,473
933,323
64,430
720,067
1,717,820
636,615
80,000
17,510
122,296
28,234
104,498
989,153
-
471,766
76,586
66,249
1,957,597
1,603,754
2,414,830
106,888
(2,060,381)
461,337
2,418,934
1,995,443
121,997
(2,003,374)
114,066
1,717,820
Signed ‘‘ David B. Harvey ‘‘
Director
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Ceapro Inc.
Consolidated Statements
of Net Loss and Deficit
Years ended December 31st
Revenue
Sales (note 11)
Cost of goods sold
Gross margin
Royalties, licenses, and product development fees
Expenses
General and administration
Royalties
Sales and marketing
Amortization
Interest on long-term debt
Interest on callable debt, convertible debentures, and other
(Loss) income from operations
Other income (expenses)
Research and product development
Loss on disposal of property and equipment
Other income (expenses) (note 12)
Loss before income taxes
Income Taxes (note 13)
Current
Reduction as a result of applying non-capital losses carried forward
against the current year’s taxable income
Net loss for the year
Deficit, beginning of year
Deficit, end of year
Net loss per share: (note 14)
Basic
Diluted
*See accompanying notes
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2005
$
2,683,433
1,123,606
1,559,827
80,000
1,639,827
982,887
321,692
255,773
161,550
41,310
10,386
1,773,598
(133,771)
(162,833)
-
239,597
76,764
(57,007)
435,143
(435,143)
(57,007)
(2,003,374)
(2,060,381)
2004
$
1,956,961
1,022,831
934,130
462,758
1,396,888
833,346
277,149
130,578
91,962
10,662
17,841
1,361,538
35,350
(302,487)
(12,389)
(118,211)
(433,087)
(397,737)
654,483
(654,483)
(397,737)
(1,605,637)
(2,003,374)
(0.00)
(0.00)
(0.01)
(0.01)
Ceapro Inc.
Consolidated Statements of Cash Flows
Year ended December 31st
Operating Activities
Net loss for the year
Items not affecting cash
Amortization
Loss on disposal of property and equipment
Employee future benefits obligation
Stock based compensation
Changes in Non-Cash Working Capital Items
Accounts receivable
Inventories
Prepaid expenses and deposit
Accounts payable and accrued liabilities
Deferred revenue
Investing activities
Purchase of property and equipment
Restricted cash for the purchase of property and equipment
Financing Activities
Repayment of long-term debt
Proceeds of long-term debt
Repayment of callable debt
Repayment of convertible debenture
Proceeds from issuance of share capital
Proceeds from exercise of stock options
Proceeds from royalty interest
Increase (decrease) in royalties payable
Increase (decrease) in cash
Cash at beginning of year
Cash at the end of year
Supplementary information
Interest paid
Royalties paid
*See accompanying notes
2005
$
2004
$
(57,007)
(397,737)
161,550
-
83,360
50,007
237,910
(557,187)
117,266
(24,288)
(351,752)
149,676
(666,285)
(428,375)
(121,106)
64,430
(56,676)
(29,750)
-
(40,712)
(20,000)
238,817
117,944
457,000
103,531
826,830
341,779
96,266
438,045
51,906
218,161
91,962
12,389
27,049
19,006
(247,331)
88,994
(229,868)
(36,502)
252,558
80,000
155,182
(92,149)
(477,230)
(64,430)
(541,660)
(44,832)
500,000
(37,387)
(10,000)
111,131
-
-
(37,280)
481,632
(152,177)
248,443
96,266
26,300
312,502
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Notes to Consolidated Financial Statements
1. Nature of Business Operations
Ceapro Inc. (the “Company”) was incorporated under the Canada Business Corporations Act and
is listed on the TSX Venture Exchange. The Company’s primary business activities relate to the
marketing and development of various health and wellness products and technology relating to
oat extracts.
2. Accounting Policies
(a) Use of estimates
The preparation of consolidated financial statements in conformity with Canadian generally
accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of the assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. The significant areas requiring the use of
management estimates relates to amortization of property and equipment, the assumptions
used in determining stock based compensation and the discount rate used in determining the
employee future benefit obligation. Actual results could differ from those estimates.
(b) Principles of consolidation
The consolidated financial statements include the accounts of the Company and its wholly-
owned subsidiaries, Ceapro Technology Inc., Ceapro Veterinary Products Inc., and Ceapro Active
Ingredients Inc.
(c) Cash and equivalents
The Company considers cash and short term deposits with original maturities of three months or
less as cash and cash equivalants.
(d) Revenue recognition
Revenue from the sale of health and wellness products is recognized as revenue at the time the
products are shipped to customers.
The Canadian Institute of Chartered Accountants has issued an accounting pronouncement
effective January 1, 2004 concerning the recognition of revenue (EIC-141). Based on the
pronouncement, the sale of royalty interests have been recorded as deferred revenue and will be
matched to future related royalty expenses.
Royalty, licenses, and product development fees are recorded in accordance with the terms of the
applicable agreements.
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(e) Inventories
Inventory of raw materials is valued at the lower of cost and replacement cost on a first-in,
first-out basis.
Inventory of work-in-process and finished goods is valued at the lower of cost and net realizable
value on an average cost basis.
(f) Property and equipment
Property and equipment are recorded at cost and are amortized over their estimated useful lives
as follows:
Manufacturing equipment
20 % declining balance
Office equipment
Computer equipment
20 % declining balance
30 % declining balance
(g) Research and product development expenditures
Research costs are expensed when incurred. Product development costs are also expensed
when incurred unless they are are significant and meet generally accepted criteria for deferral.
Costs are reduced by government grants and investment tax credits where applicable.
(h) Foreign exchange
Monetary assets and liabilities denominated in foreign currencies are translated into Canadian
dollars at year end exchange rates and non-monetary assets at the exchange rates prevailing
when the assets were acquired. Foreign currency denominated revenue and expense items are
translated at the rate of exchange in effect at the time of the transaction. Foreign currency gains
or losses arising on translation are included in income.
(i) Income taxes
Income taxes are accounted for by the asset and liability method whereby future tax assets and
liabilities are recognized for the future tax consequences attributed to the difference between the
financial statement carrying amounts of existing assets and liabilities and their respective income
tax bases.
(j) Lease obligations
Leases are classified as capital or operating leases. A lease that transfers substantially all of the
benefits and risks incidental to the ownership of property is classified as a capital lease. At the
inception of a capital lease, an asset and an obligation are recorded at an amount equal to the
lesser of the present value of the minimum lease payments and the property’s fair value at the
beginning of the lease. All other leases are accounted for as operating leases where in payments
are expensed as incurred.
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(k) Government assistance
Government assistance is periodically granted to the Company under available government
incentive programs. Government assistance relating to research and development expenditures is
recorded as a reduction of the expenditures when received.
(l) Investment tax credits
Investment tax credits relating to qualifying scientific research and experimental development
expenditures are accrued provided there is a reasonable assurance that the credits will be
realized. When recorded, the investment tax credits are accounted for as a reduction of the
related expenditures.
(m) Net loss per share
Net loss per share is calculated based on the weighted average number of shares outstanding
during the year. Diluted net (loss) income per share reflects the assumed conversion of all dilutive
securities using the treasury stock method.
(n) Stock based compensation
Stock based compensation of employees, Directors, officers, and consultants is recorded in
accordance with the fair value method.
(o) Employee future benefits
The Company accrues its obligations under an employee defined retirement benefit plan, and
the related costs, net of plan assets. The cost of retirement benefits earned by employees is
determined using the accumulated benefit method and management’s best estimate of expected
plan investment performance and retirement ages of employees. Past service costs relating to
plan amendments are accured and recognized in the year the amendments occur.
(p) Impairments of long-lived assets
The Company accounts for the impairment of long-lived assets in accordance with CICA 3063
“Impairment of Long-lived Assets”. In the event that facts and circumstances indicate that the
carrying value of long-lived assets may be impaired, the Company performs a recoverability
evaluation. If the evaluation indicates that the carrying value of the asset is not recoverable
from undiscounted cash flows attributable to the asset, then an impairment loss is measured by
comparing the carrying amount of the asset to its fair value.
(q) Callable debt
The Canadian Institute of Chartered Accountants has issued an accounting pronouncement
concerning the classification of debt (EIC-122). Based on the pronouncement, one of the
Company’s loans payable is classified as a current liability since the lender has the right to
demand repayment within one year.
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3. Property and Equipment
Manufacturing equipment
Computer and office equipment
Manufacturing equipment
Computer and office equipment
4. Convertible Debentures
Original face value issued
Repaid
Remaining face value
Equity component
Less current portion
5. Callable Debt
Loan, payable at $4,166 per month, prinicipal and
interest at 8%, secured by specific manufacturing
equipment (carriying value of $191,877 (2004
- $239,847)) and a general security agreement, due
November 2007.
6. Long-Term Debt
Loan, payable at $ 6,161 per month, prinicipal and
interest at 8.85%, secured by a general security
agreement, due January 2010.
Less current portion
2005
2004
Cost
($)
Accumulated Amortization
($)
Net Book Value
($)
908,142
165,004
1,073,146
308,434
85,089
393,523
599,708
79,915
679,623
Cost
($)
Accumulated Amortization
($)
Net Book Value
($)
799,351
152,689
952,040
171,622
60,351
231,973
627,729
92,338
720,067
2005
Series 1 to 5
$
20,000
(20,000)
-
-
-
-
-
2005
$
81,584
2005
$
470,250
33,519
436,731
2004
Series 1 to 5
$
30,000
(10,000)
20,000
(2,490)
17,510
17,510
-
2004
$
122,296
2004
$
500,000
28,234
471,766
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Estimated principal payments due in the next five years are as follows:
2006
2007
2008
2009
2010
7. Royalties Payable
Royalties payable pursuant to financial assistance
received (note 7 (a))
Royalties payable pursuant to royalty interest
offering (note 7(c) and (d))
Less current portion
$
33,519
36,608
39,983
43,669
316,471
470,250
2005
$
223,694
50,584
274,278
106,508
167,770
2004
$
131,777
38,970
170,747
104,498
66,249
(a) In the year ended December 31, 1999, the Company received financial assistance in the amount of
$164,882 for the research and development of new products, patents, and markets. The Company
is obligated to pay a 5% royalty (to a maximum of two times the financial assistance received) on
sales generated from products developed using these funds. The portion of this obligation paid
or accrued as at December 31, 2005 was $325,166 (2004- $233,250). Pursuant to an amending
agreement the terms of repayment were amended to allow all royalties accrued to December 31,
2005 to be repaid $13,981 per quarter. Royalties incurred subsequent to December 31, 2005 are to
be repaid quarterly in arrears commencing with the quarter ending March 31, 2006.
(b) In the year ended December 31, 2004, the Company received a commitment for financial
assistance totaling $250,000 for pre-market activities of CeaProve® (a health and wellness
product) upon completion of project objectives as outlined and agreed to by both parties. As
of December 31, 2005, $225,000 (2004 - $100,000) of this commitment has been received. The
Company is obligated to pay a royalty (to a maximum of two times the financial assistance
received) on sales generated from CeaProve® on the following basis: 0% of revenues earned
to December 31, 2005, 2.5% of revenues earned to December 31, 2006, and 5% thereafter until
repaid. No royalties have been incurred during the current year. The Company has repaid at
December 31, 2005 $nil (2004- $nil) of this obligation. Upon completion of the repayment of the
financial assistance received, the company will be required to repay $19,750 advanced during the
year ended December 31, 2002. The portion of this obligation paid or accrued as at December 31,
2005 was nil (2004- nil).
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(c) In the year ended December 31, 2003, the Company completed a Royalty Income Unit offering
through the terms described in an Offering Memorandum. Each royalty interest has a right to
receive royalties equal to 0.00001% from the sale or licensing of the Company’s active ingredients
and animal health products, to a maximum cumulative amount of $2.08 per unit. Proceeds from
the offering were $516,348 (before related expenses) represent the sale of a 5.163% royalty
interest in the Company’s future sales and licensing of active ingredients and animal health
products. Maximum royalties payable are two times the amount invested or $1,032,695. The
portion of this obligation paid or accrued as at December 31, 2005 was $319,127 (2004- $176,277).
(d) In the year ended December 31, 2003, the Company sold a 1.418% royalty interest in the
Company’s future sales and licensing of active ingredients and animal health products for
$141,796. At December 31, 2004, the Company sold a cumulative royalty interest of 3.142% for
$314,197. Combined maximum royalties payable are two times the amount invested or $911,986.
The portion of this obligation paid or accrued as at December 31, 2005 was $239,917
(2004- $152,993).
(e) On December 28, 2005, the Company sold a 2.285% royalty interest in the Company’s future sales
and licensing of active ingredients, animal health, and CeaProve® products for $457,000.
Maximum royalties payable are two times the amount invested or $914,000. The profit of this
obligation paid or accrued as at December 31, 2005 was nil (2004- nil).
(f) In the year ended December 31, 2005, the Company received a commitment for financial
assistance totaling $362,250 for product innovation development in the area of Veterinary
Therapeutics and Active Ingredients. In the year ended December 31, 2005, $225,000 of this
commitment has been received and $100,000 was receivable at December 31,2005. The
Company is obligated to pay a 2.5% royalty to a maximum of $75,000 per quarter (to a maximum
of two times the financial assistance received) on sales generated from products developed
using these funds. These payments will commence when the royalty payments on investment
agreements in note 7(a) are fully satisfied. The portion of this obligation paid or accrued as at
December 31, 2005 was nil.
(g) In the year ended December 31, 2005, the Company received a commitment for financial
assistance totaling $800,000 for pre-market activities of CeaProve® (a health and wellness
product) upon completion of project objectives as outlined and agreed to by both parties. As of
December 31, 2005, $510,000 of this commitment has been set-up as recievable and was received
subsequent to year end. The Company is obligated to pay a royalty (to a maximum of one and a
half times the financial assistance received) on sales generated from CeaProve® on the following
basis: 0% of net sales and net sub-licensing revenues earned until royalty payments have been
fully satisfied under the investment agreement in note 7(b), and 5% thereafter until repaid to a
maximum of $125,000 per quarter. No royalties have been incurred during the current year. The
portion of this obligation paid or accrued as at December 31, 2005 was nil.
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8. Employee Future Benefit Obligation
The Company has an unfunded non-registered, non-indexed defined retirement benefit plan for
certain senior employees. The retirement benefit is two months’ salary for each year they are
employed by the Company.
During the current fiscal year the plan was amended to clarify the obligation and the date to which
the obligations accrue. As a result, past service obligations of $53,453 were recorded in the
current year.
Accrued Employee Future Benefit Obligation
Unfunded balance, beginning of year
Current service cost
Past service costs
Interest costs on accrued obligation
Unfunded balance, end of year
2005
$
76,586
22,152
53,453
7,755
159,946
2004
$
49,537
16,835
-
10,214
76,586
Management is required to make a significant estimate regarding the discount rate used to determine
the accrued employee future benefit obligation. These significant estimates are of a long-term
nature, which is consistent with the nature of the employee future benefits. The discount rate used to
determine the accrued benefit obligation as at December 31, 2005 was 5.58% (2004- 5.58%).
9. Share Capital
(a) Authorized
Unlimited number of Class A voting common shares
Unlimited number of Class B non-voting common shares
(b) Issued – Class A common shares
Balance at beginning of year
35,635,284
1,995,443
34,169,213
1,855,823
Number of
shares
2005
Amount
$
Number of shares
2004
Amount
$
Changes during the year
Equity placements
Exercise of options
Decrease in equity component of
convertible debentures
774,066
666,820
-
238,818
183,059
(2,490)
-
1,466,071
-
-
140,184
(564)
Balance at end of year
37,076,170
2,414,830
35,635,284
1,995,443
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(c) Contributed Surplus
The following table summarizes the changes in contributed surplus:
Balance at beginning of year
Stock based compensation expense
(note 9(d))
Exercise of stock options
Balance at end of year
2005
$
121,997
50,007
(65,116)
106,888
2004
$
132,044
19,006
(29,053)
121,997
(d) The Company has granted stock options to eligible employees, Directors, officers, and consultants
under stock option plans, which vest over periods ranging from eighteen months to 4 years, and
have a maximum term of five years.
The Company accounts for options granted under these plans in accordance with the fair value
based method of accounting for stock based compensation. The application of the fair value
based method requires the use of certain assumptions regarding the risk-free market interest
rate, expected volatility of the underlying stock and life of the options. The risk-free rate used
in 2003 was 4.08%, the expected volatility was 6.76% which was based on prior trading activity
of the Company’s shares, and the expected life of the options was 5 years. The stock based
compensation expense recorded during the current year relating to options granted in 2003 was
$2,104 (2004 - $19,006).
In the current year the Company granted 400,000 stock options. The application of the fair value
based method requires the use of certain assumptions regarding the risk-free market interest
rate, expected volatility of the underlying stock and life of the options. The risk-free rate used
in 2005 was 3.40%, the expected volatility was 110% which was based on prior trading activity
of the Company’s shares, and the expected life of the options was 5 years. The stock based
compensation expense recorded during the current year relating to options granted in 2005
was $47,903.
A summary of the status of the Company’s stock options at December 31, 2005 and 2004 and
changes during the years ended on those dates is as follows:
Number of
Options
3,586,115
400,000
(32,500)
(666,820)
3,286,795
3,081,795
2005
Weighted
Average
Exercise Price
$
2004
Number of Options Weighted Average
Exercise Price
$
0.21
0.28
0.25
0.18
0.23
0.19
5,077,186
-
(25,000)
(1,466,071)
3,586,115
3,421,115
0.22
-
1.00
0.22
0.21
0.21
Outstanding at beginning of year
Granted
Expired
Exercised
Outstanding at end of year
Exercisable at the end of the year
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The following table summarizes information about stock options outstanding at December 31, 2005
and 2004:
Exercise Price
$
0.28
0.25
0.17
0.20
0.12
Year of Expiration
Number of Options
Number of Options
2005
2004
2010
2008
2007
2006
2005
250,000
1,895,792
809,003
332,000
-
3,286,795
-
2,021,600
825,180
344,335
395,000
3,586,115
Subsequent to December 31, 2005, 22,500 Class A common shares were issued upon the exercise of
stock options for aggregate proceeds of $5,625. The fair value of the options at the time they were
granted of $1,069 will be transferred from contributed surplus to share capital.
(e) Warrants
A summary of the status of the Company’s warrants at December 31, 2005 and 2004 and changes
during the years ended on those dates is as follows:
Issued and outstanding at beginning
of year
Issued
Issued and outstanding at end of year
Number of
Warrants
-
774,066
774,066
2005
Average
Exercise price
$
Number of
Warrants
2004
Average
Exercise price
$
-
0.59
0.59
-
-
-
-
The following table summarizes information on warrants outstanding at December 31, 2005:
Exercise Price
$
0.60
0.55*
Number Outstanding
Expiry Date
682,666
91,400
774,066
September 30, 2006
December 31, 2007
* Warrants are exercisable at $0.55 until June 28, 2006 and thereafter at $0.75 until expiry.
(f) On March 31, 2005 the Company completed a private placement share offering of 682,666 Units,
for aggregate gross proceeds of $204,800. Each Unit was priced at $0.30 and contained one
common share of the Company and one common share purchase warrant entitling the holder
thereof to acquire one additional common share at an exercise price of $0.40 per share until
September 30, 2005 and there after at a price of $0.60 per common share until
September 30, 2006.
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(g) On December 28, 2005 the Company completed a private placement offering through the terms
described in an Offering Memorandum, which resulted in gross proceeds of $502,700 (914 units
at $550 per unit, net of related expense). Each unit is comprised of 100 Class A common shares
of the Company (“common shares”), 100 Class A common shares purchase warrants (“warrants”),
and 100 royalty interests (“royalty interests”). Each warrant entitled the holder thereof to acquire
one Class A common share at an exercise price of $0.55 per share until June 28, 2006 and
thereafter at a price of $0.75 per share until December 31, 2007. Each royalty interest is a right
to receive royalties equal to 0.000025% of the proceeds received by the Company from the sale
or licensing of its active ingredients, animal health products, and CeaProve®, up to a maximum
cumulative amount of amount of $10.00 per unit. Proceeds of $457,000 related royalty interest
units and $45,700 for common shares.
(h) During the year ended December 31, 2004 a senior employee and former employee exercised
950,000 stock options at exercise prices ranging from $0.19 to $0.25. The fair value of the options
at the time they were granted of $17,077 was transferred from contributed surplus to
share capital.
10. Contingencies and Commitments
(a) On May 5, 1998, control of the Company’s wholly-owned subsidiary, Canamino Inc. (“Canamino”)
was assumed by Canamino’s Class B preferred shareholder, the Saskatchewan Government
Growth Fund Ltd. (“SGGF”) pursuant to a notice given March 30, 1998 by SGGF due to default
of payment of dividends due in October, 1997, and failure to redeem 500,000 Class B preferred
shares as required under the subscription agreement. Control was gained through the
assumption of the 51% of the voting entitlement attached to the Class A common shares.
On March 22, 2002, the Company filed a statement of claim (“the claim”) (subsequently
amended on April 6, 2004) with the Court of Queen’s Bench of Saskatchewan. With the filing in
Saskatchewan, the Company stayed its action in the Court of Queen’s Bench in Alberta which was
originally filed in December 1999.
In 2003, the Company issued a bond relating to legal costs up to $305,000 which was secured by
guarantees of the Board of Directors and an Officer of the Company. At December 31, 2005 it is
the opinion of the Company’s Corporate Counsel that based on the document production to date
and the examinations which have transpired, the likely outcome of the case is that the Company
will be successful. At this stage of the litigation it is premature to quantify the damages which will
likely be awarded at the discretion of the Court; therefore no amount has been accrued in these
statements with respect to this claim.
During the year ended December 31, 2005, a Director agreed to invest $50,000 (2004 - $206,478) to
purchase an interest in the net proceeds, if any, from the SGGF claim. The Company also received
$225,000 (2004 - $227,500) from the sale of a 9.0% (2004 – 9.1%) interest in the net proceeds, if
any, from the claim. At December 31, 2005, the Directors and investors are entitled to 57.1% (2004
– 46.1%) of the net proceeds, if any, from the SGGF claim, to a maximum of $14,264,780
(2004 - $11,514,780).
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During the year ended December 31, 2005 the Company entered into an agreement with its SGGF
legal counsel whereby a portion of their fees are payable on a contingency basis. At December
31, 2005 that contingency was $106,160, which will be paid from the net proceeds, if any, from the
SGGF claim.
(b) On March 1, 2002 the Company received notice of a Statement of Claim filed on February 28,
2001 by a former employee. The statement alleged that the Company breached certain conditions
of contract between the former employee and the Company. During the year ended December
31, 2004, the Company settled the claim for $40,000. The settlement amount is included in other
income (expenses).
(c) In the normal course of operations the Company may be subject to litigation and claims from
customers, suppliers and former employees. Management believes that adequate provisions have
been recorded in the accounts where required. Although it is not possible to estimate the extent
of potential costs, if any, management believes that the ultimate resolution of such contingencies
would not have a material adverse effect on the financial position of the Company.
(d) Effective September 28, 2005, the Company modified its existing lease agreement for its office
premises. The lease requires the Company to pay annual rent of $70,639 per year which includes
its share of maintenance and operating costs until expiry April 30, 2006.
11. Sales
Substantially all sales are export sales to two distributors of the Company’s products. The Company
is therefore economically dependent on those distributors to maintain and expand the volume of
product sales to existing and new customers.
12. Other Income (Expenses)
Other income (expenses) is comprised as follows:
Product Innovation Investment (note 7(f))
Non-operational legal and consulting expenses
Settlement of lawsuit (note 10 (b))
Foreign exchange gains (losses)
Other
13. Income Taxes
(a) Non-capital losses
2005
$
225,000
-
-
3,920
10,677
239,597
2004
$
-
(123,911)
(40,000)
23,744
21,956
(118,211)
The company has accumulated non-capital losses carried forward for income tax purposes of
approximately $2,208,000 the benefit of which has not been reflected in these consolidated
financial statements.
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These losses may be applied against future taxable income within the limitations prescribed by the
Income Tax Act and expire as follows:
2006
2007
2008
2015
(b) Capital losses
$
661,000
683,000
571,000
293,000
2,208,000
The Company has capital losses of approximate $6,807,000, which can be carried forward
indefinitely to offset future capital gains.
(c) Scientific research and experimental development (SR & ED)
The company has accumulated SR & ED expenditure pool of approximately $1,506,000, which can
be carried forward indefinitely to be applied against future taxable income.
The company has accumulated SR & ED investment tax credits of approximately $194,000. These
credits may be applied against future federal income taxes payable and expire as follows:
2006
2007
2008
2009
2012
(d) Temporary differences
$
38,000
119,000
16,000
400
20,600
194,000
A future income tax asset reflects the net effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Significant components of the Company’s future income tax assets are as follows:
Income tax effect of deductible temporary differences
Non-capital losses and SR & ED expenditures carried forward
Net capital losses carried forward
SR & ED investment tax credits
Undepreciated capital cost for tax purposes in excess of net book value
Deferred revenue recognized for tax purposes
Valuation allowance
2005
$
1,423,000
1,144,000
194,000
3,123,00
231,000
2004
$
1,759,000
1,144,000
194,000
3,030,000
-
(6,115,000)
(6,127,000)
-
-
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For consolidated financial statement purposes, no future income tax asset has been recorded at
December 31, 2005 and 2004 as it is not, ‘more likely than not’ to be realized.
(e) Income tax reconciliation
The Company’s consolidated income tax position comprises tax benefits and provisions arising
from the respective tax positions of its taxable entities. The Company’s income tax provision
differs from that calculated by applying statutory rates for the following reasons:
Income taxes (recovery) based on federal and provincial statutory income
tax rate of 33.62 % (2004 - 33.87 %)
Tax effect of expenses that are not deductible for income tax purposes
Tax effect of current year non-capital losses not recognized
Tax effect of gain sale of technology and licences to subsidary
Tax effect of deferred revenue recognized for tax
Income tax reduction as a result of applying non-capital losses carried
forward against current year taxable income
2005
$
(19,166)
124,787
98,662
-
230,860
(435,143)
2004
$
(134,714)
107,245
19,982
661,970
(654,483)
-
-
14. Basic and Diluted Net Loss Per Share
The following table outlines the calculation of basic and diluted net loss per share:
Numerator
Numerator for basic and diluted net income per share:
Net (loss) income for the year
(57,007)
(397,737)
2005
$
2004
$
Denominator
Denominator for basic net income per share:
Weighted-average number of shares outstanding during the year
36,337,657
34,764,478
Effect of potentially dilutive securities:
Stock options
Warrants
Denominator for diluted net income per share:
Adjusted weighted-average number of shares outstanding during
the year
Basic net loss per share
Diluted net loss per share
-
-
-
-
36,337,657
34,764,478
(0.00)
(0.00)
(0.01)
(0.01)
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The dilutive effect of outstanding stock options on net loss per share is based on the application of
the treasury stock method. Under the treasury stock method, the proceeds from the exercise of
options is assumed to be used to purchase common shares.
For the year ended December 31, 2005 and 2004, no options, warrants, or convertible debentures
have been included in the calculation for net loss per share as the result would be anti-dilutive.
15. Related Party Transactions
Related party transactions during the years not otherwise disclosed in these consolidated financial
statements are as follows:
Royaties earned by employees and Directors
Sale of royalty and lawsuit interests to employees and Directors
Amounts payable to employees and Directors included in royalties
payable
Prepaid expense relating to Director fees
Amounts receivable from Directors included in accounts receivable
Reimbursement of legal fee expenses by Directors
2005
$
60,580
190,250
13,336
25,884
50,000
-
2004
$
52,985
10,000
10,274
-
206,748
206,748
These transactions are in the normal course of operations and are measured at the exchange
amount which is the amount of consideration established and agreed to by related parties.
16. Segmented Information
The Company operates in one industry segment, which is the active ingredient product technology
industry. The majority of the revenue is derived from sales in the Americas. All the assets of the
Company, which support the revenues of the Company, are also located in the Americas. The
distribution of revenue by location of customer is as follows:
Americas
Other
2005
$
1,827,692
935,741
2,763,433
2004
$
1,035,132
1,384,587
2,419,719
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17. Financial Instruments
The estimated fair value of cash, accounts receivable, accounts payable and accrued liabilities,
callable debt, current portions of long-term debt, royalties payable, and employee future benefit
obligation approximates their carrying value due to their short-term nature.
The fair value of long-term debt and royalties payable are estimated to approximate their carrying
value using the Company’s incremental borrowing rate or discount cash flow analysis for similar
types of borrowing arrangements.
The Company operates internationally, giving rise to exposure to market risks from changes in foreign
exchange rates in relation to the resulting accounts receivable and accounts payable and accrued
liabilities.
It is Management’s opinion that the Company is not exposed to significant interest or credit risks
arising from these financial instruments.
18. Comparative Figures
Certain comparative figures have been reclassified to conform with financial statement presentation
adopted for the current year.
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Information For Investors
Directors
Edward Taylor, Chairman
Donald Byers
David Harvey
Donald Oborowsky
John Yewchuk
John Zupancic
Mark J. Redmond
Officers
Mark J. Redmond, Ph. D
President and Chief Executive Officer
Shawn McMillan, CA
Chief Financial Officer and Corporate Secretary
David Fielder, M. Sc.
Vice President Scientic Affairs
Head Office
1008 RTF University of Alberta
8308 - 114 Street
Edmonton, AB T6G 2E1
Canada
Telephone: 1.780.421.4555
Fax: 1.780.421.1320
Website: www.ceapro.com
Email: info@ceapro.com
Registered Office
2900 Manulife Place
10180 - 101 Street
Edmonton, AB T5J 3V5
Canada
Auditors
Stout & Company LLP
1900 College Plaza
8215 - 112 Street
Edmonton, AB T6G 2C8
Canada
Corporate Counsel
Fraser Milner Casgrain LLP
2900 Manulife Place
10180 - 101 Street
Edmonton, AB T5J 3V5
Canada
Securities Counsel
Bryan & Company
2600 Manulife Place
10180 - 101 Street
Edmonton, AB T5J 3V5
Canada
Chartered Bank
TD Canada Trust
148 Edmonton Centre
1025 - 101 Street
Edmonton, AB T5J 2Y8
Stock Information
Listed on the TSX Venture Stock Exchange
Symbol: CZO
Transfer Agent & Registrar
Olympia Trust Company
460 Sunlife Place
10123 - 99 Street
Edmonton, AB T5J 3H1
Canada
Telephone: 1.780.496.9713
Fax: 1.780.408.3382
Change of Address
Registered Shareholders should notify the
Company’s Transfer Agent and Registrar at the
address set out above.
Beneficial Owners should contact their respective
brokerage firm to give notice of a change of
address.
Financial Calendar
The Company’s year-end is December 31.
The Annual Report is mailed in May.
Quarterly Reports are mailed in May, August,
and November.
Equal Opportunity Employer
Ceapro Inc. is an equal opportunity employer
and seeks to attract and retain the best-qualified
people regardless of race, religion, national origin,
gender, sexual orientation, age, or disability.
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