NURTURING GROWTH
CEAPRO ANNUAL REPORT 2006
GOING GREEN
Our approach to this annual report truly embodies Ceapro’s commitment to
the environment and our practice of “going green”.
The 2006 Ceapro Annual Report is certified by the Forest Stewardship Council
(FSC). FSC certification is the highest level of recognition in environmentally
conscious printing practices, earned by those who use only 100% post
consumer paper.
By using 100% post consumer paper, we have conserved approximately
13 million BTUs of energy, 720 kg. of CO2, 25,000 L. of water and 400 kg.
of waste.*
We invite our shareholders to visit our website at http://www.ceapro.com.
Cert no. SW-COC-2083
* Environmental impact estimates were made using the Environmental Defense Paper Calculator.
For more information visit http://www.papercalculator.org and http://www.fsc.org.
NURTURING GROWTH
Ceapro’s achievements during 2006 refl ected the Company’s diverse strengths and laid the ground for signifi cant
further growth. We increased sales, built new manufacturing capacity to fi ll our customers’ orders, paid down our debts,
and met our royalty obligations. Strategically we invested in the marketing plans for our own veterinary brand-name,
Ceapro Dermatology, and our breakthrough diabetes product, CeaProve®.
HIGHLIGHTS
· Achieved record revenues of $3.3 million
· Increased active ingredient sales by 35%
· Maintained strong gross margins of 57% despite a weaker U.S. dollar and challenging labour market
· Reduced equipment debt by $78,790 or 14%
· Reduced royalty obligations by $373,170
· Readied the markets for CeaProve® and Ceapro Dermatology
2006
2005
2004
2003
2002
2001
2000
1999
$0M
$1M
$2M
$3M
$4M
Cost of Sales
Gross Margin
AN N UA L RE P ORT 2006 | 1
DEAR FELLOW SHAREHOLDE R:
The pursuit of organic remedies and natural active ingredients is at an all-time high as a response to accelerating
consumer demands. This demand carries direct benefi ts for Ceapro. As a recognized forerunner in natural products,
Ceapro’s creations are sought by customers ranging from large pharmaceutical corporations to personal-care product
manufacturers. Ceapro truly incarnates the vision and practice of “going green.”
Our success to-date and for the future lies in understanding consumers’ demands, anticipating market trends, and applying
our intellectual capital. This capital lies in how to use and develop natural and renewable resources, understanding
plant chemistry, and using our expertise in medicine, biology, and process engineering to create innovative solutions.
In 2006 Ceapro’s sales and the potential of our technology gathered signifi cant momentum in the marketplace.
Revenues reached a record high, exceeding $3.3 million; Ceapro was profi table before R&D expenditures. At the same
time we invested heavily in marketing, which has primed Ceapro for major gains – and signifi cant shareholder value
creation – in the year ahead.
EXPANDING MARKETS
Ceapro’s active ingredient revenue for 2006 rose 35% over 2005. The growth came from increased sales to existing
customers and the introduction of new products to new customers. Our gross margins stood at 57% of sales revenue.
This performance owed its dynamism in part to greater economies of scale, improvements in process effi ciency, and the
strength of the relationship we enjoy with our marketing partners.
In 2006 our increased sales of beta glucan were particularly noteworthy. A number of new European clients placed
orders ahead of new product introductions. These export sales have continued to increase despite the upward direction
of the Canadian dollar over the last few years.
YEARS OF EFFORT REACH FRUITIO N
The news has spread about the benefi ts of incorporating Ceapro’s active ingredients into diverse categories
of products.
Cycles of product adoption exist in the life sciences industry. When Ceapro entered the market several years ago with
novel extracts having proven benefi ts and superior performance, acceptance was not immediate and sales were not
substantial. A lag occurred between introduction and acceptance. Based on indications received in 2006 the lag period
has ended.
Furthermore, our unique technical and manufacturing abilities have been recognized and are increasingly sought
after. For example, researchers at Tufts University in Boston have been exploring the use of oats as a treatment for
2 | CEAPRO
atherosclerosis and other diseases where infl ammation plays a major role. These researchers demonstrated the potency
of avenanthramides. However, to commercialize their technology they require large quantities of the material. They came
to the material’s leading producer – Ceapro.
BIO-ENERGY INITIATI VE
As specialists in grain processing and extraction technology we have been researching the bio-energy market for years.
Our expertise in agro sciences, together with the growing demand for ethanol, makes it clear that there are major
opportunities for Ceapro in this market.
Immediately subsequent to year end we formally entered the “green renewable fuels” sector with the establishment of
Ceapro BioEnergy Inc. (CBE), a wholly-owned subsidiary aimed at facilitating the production of ethanol and value-added
products. The potential impact of this initiative on Ceapro’s value creation cannot be overstated.
CBE is conducting a feasibility study to evaluate the application of Ceapro’s process technology toward improving
the effi ciency of ethanol manufacture. The concern in the marketplace is that without subsidies bio-ethanol is not
fi nancially viable. Our business strategy is to address that concern head-on. We aim to improve ethanol manufacturing
by increasing the value of otherwise unused side-streams which Ceapro regards as excellent raw materials for producing
active ingredients and other chemicals.
Our bio-energy initiative holds great promise of showing that the fi nancial benefi ts of ethanol processing need not be
dependent on a single stream of revenue. The opportunity exists for us to take ethanol itself as a raw material and
further process it into other high-value goods. This approach perfectly suits Ceapro’s fundamental strategy of adding
value along the plant processing chain.
Furthermore, there is growing interest in producing ethanol from straw and other cellulose. The technology for producing
ethanol from cellulose does not yet exist, but we will have evidence in the year ahead pertaining to Ceapro’s ability to
work with cellulose fermentation as opposed to grain fermentation. This direction respects the view that food should be
used for food – as opposed to food being used for energy generation – and that ethanol should derive from materials
not commonly destined for the human food chain. Ceapro’s opportunity here is clear and potentially vast, and CBE’s
feasibility study will reveal the optimal approach for seizing the opportunity.
EXPAN DED MANUFACTU RIN G CAPAC IT Y
Subsequent to our fi scal year end, Ceapro was preparing to relocate our production equipment to new, dedicated
operating space adjoining our current lease facility. The move will double capacity and cut production times in half, and
further enhance production effi ciencies and margins.
AN N UA L RE P ORT 2006 | 3
FURTHER GROWTH I N 2007
The new facility and manufacturing capacity will allow Ceapro to deliver strong corporate growth as we open new
doors in our traditional markets and introduce new active ingredients and therapeutic products. For example, in the
spring we will launch two new extracts into the global marketplace with the introduction of hydrolyzed oat protein and
hydrolyzed lupine protein.
H Y D R O LY Z E D P R O T E I N
is protein that has been broken down into its component amino acids. While there are many means of achieving
this, Ceapro uses proprietary enzymatic processes that produce a superior product for the personal care industry,
with a light colour, low odour, and standardized concentration.
Critical to Ceapro’s growth prospects are connections to pharmaceutical companies that can use Ceapro technology for
bio-medical applications. For instance, we have cultivated a relationship and worked closely with a new client who has
developed fi fteen over-the-counter skin treatments, all based on Ceapro’s beta glucan technology. These products are
already in the market in small quantities, and production is in scale-up.
Our core extraction technology will be used as an integrated commercialization engine, one that we expect to generate
ever-larger revenues and return on capital. With the aim of broadening our line of natural products, we have developed
new technologies that are currently in R&D or pre-commercial stages. These technologies focus on the areas of oral
hygiene, wound-care, and diabetes tests for animals. Plus we are broadening our sources of raw materials beyond oats
and working with natural sources of active ingredients to benefi t the health and vitality of humans and animals.
CEAPROVE ®
A signifi cant event for Ceapro’s shareholders in 2007 will be the marketing of CeaProve®, our patented diabetes
diagnostic. In development for more than twelve years, CeaProve® is now commercialized and entering broad market
distribution. Winner of the prestigious Frost & Sullivan Product Innovation Award and recognized as a revolutionary
technology, the CeaProve® screening test will be available in commercial quantities this spring.
This important product from Ceapro’s pipeline provides a uniquely simple solution for early detection of type-2 diabetes.
Diabetes is a metabolic disease that goes undetected for many years despite the presence of disease markers. People
at risk are in a condition known as pre-diabetes, a state that can be reversed through a change of diet and an exercise
regimen, or by using drugs specifi cally prescribed for pre-diabetes.
A key challenge has been to identify the condition early. Our product, CeaProve®, can forewarn of the onset of type-2
diabetes fi ve to ten years earlier than standard methods.
4 | CEAPRO
The product consists of a meal of calibrated wafers. Forty-fi ve minutes after eating the wafers, the user takes a blood
sample with a simple fi nger-prick and a hand-held glucose meter. The blood sugar analysis from that sample allows
detection of diabetes at a pre-disease state and indicates the likelihood of the subject developing the disease over
the next fi ve to ten years. Moreover, the test, when repeated at six-month intervals, can also show if dietary and other
lifestyle changes are being effective in forestalling the disease.
We are confi dent that CeaProve® is poised to make a signifi cant contribution to preventive healthcare globally. We
will introduce CeaProve® to North American corporations as part of corporate wellness programs, and to healthcare
providers internationally for point-of-care diagnosis. We also intend to make CeaProve® available through pharmacies
and medical laboratories in Canada.
The disease of diabetes has reached epidemic proportions in many parts of the world. We believe that CeaProve® will
become a fl agship product in the public eye. The market potential for CeaProve® is tens of millions of tests to be sold
annually. Ceaprove®’s function, ease-of-use, and unmistakable benefi ts represent immense potential value-creation.
OUTLOO K
Ceapro’s success will benefi t from the following factors:
· a growing base of revenues based on proprietary active ingredients and long-standing
distribution partnerships;
· important new technology and products poised to enter markets demonstrated to be receptive for
the technology;
· important technology under development in the fi elds of therapeutics, drug-delivery, and bio-energy.
All members of Ceapro are united in our mission to be a great company for our employees, our customers, and our
shareholders by creating exceptional long-term value through leadership in our chosen markets. I am pleased to report
that in 2006 we achieved signifi cant success. Like any dynamic and growing organization, we must and will raise
the bar for 2007. As entrepreneurial scientists, we look forward to rendering our opportunities into achievements
and rewards.
Mark Redmond
President & CEO
Ceapro Inc.
April 3, 2007
AN N UA L RE P ORT 2006 | 5
6 | CEAPRO
MAN AGEMENT’S DISCUSSION & ANALYSIS
AN N UA L RE PO RT 2006 | 7
The MD&A provides commentary on the results of operations for the years ended December 31, 2006 and 2005, fi nancial
position as at December 31, 2006 and the outlook of Ceapro Inc. (“Ceapro”) based on information available as at
March 19, 2007. The following information should be read in conjunction with the consolidated fi nancial statements as
at December 31, 2006, 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, 2006
and 2005 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.
FORWA RD-LOOKING STATEMENTS
This MD&A offers our assessment of Ceapro’s future plans and operations as at March 19, 2007, 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 benefi ts 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.
VIS ION, CORE BUSI NESS, A ND ST RAT EG Y
Ceapro Inc. (Ceapro) is incorporated under the Canada Business Corporations Act, and its wholly-owned subsidiaries,
Ceapro Technology Inc., Ceapro Veterinary Products Inc., Ceapro Active Ingredients Inc., and Ceapro Bioenergy Inc.
are incorporated under the Alberta Business Corporations Act. Ceapro is a growth stage 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. We will also be applying
our technology to become an active participant in the bioenergy sector.
Our products include:
· A commercial line of active ingredients, including beta glucan, avenanthramides (colloidal oat extract and
Drago-Calm), oat powder, oat oil, and new oat and lupin proteins 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 United Kingdom by Pharmavet
Ltd. In 2007 we will launch our own brand, Ceapro Dermatology and commence sales to the United
States market.
8 | CEAPRO
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, used 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 2007.
· 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 product range offering, through new plant extract products.
· 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;
· Advancing new technology to a partnering position; and
· Completing a Bio-energy feasibility study.
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 all aspects of our business;
· Enhancing the health of humans and animals;
· 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.
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.
AN N UA L RE PO RT 2006 | 9
RISKS AND UNCE RTAINTIES
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 fi nance 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 United States 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 fi xed interest rates over the terms of the obligations. Our exposure to interest rate and
infl ation risks are expected to be negligible as economic forecasts project a stable outlook for both interest rates and
infl ation in the near future.
Ceapro’s share price is subject to equity market price risk, which may result in signifi cant 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 fi nancial or scientifi c results,
the timing of such results and future prospects, could also have a signifi cant 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 qualifi ed personnel, and our ability
to raise capital.
Our fi nancial 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 fi nancial 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 signifi cant areas requiring the use of management estimates relate to
amortization of property and equipment, the assumptions used in determining stock-based compensation and the
discount rate used in determining the employee future benefi ts obligation. These estimates are based on historical
experience and refl ect 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.
10 | CEAPRO
DISCLO SURE CONTROLS A ND P RO C ED U R E S
Disclosure controls and procedures have been designed to provide reasonable 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 Offi cer and Chief Financial Offi cer have
concluded, based on their evaluation as at December 31, 2006, 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 Offi cer and Chief
Financial Offi cer 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 OPERATI ONS
YEARS ENDED DECEMBER 31, 2006, 2005, AND 2004
SELECTED ANNUA L INFORMATI ON
$000s except per share data
Total revenues
Net Loss
EBITDA
Basic loss per common share
Diluted loss per common share
Total assets
Total liabilities
2006
3,310
(272)
(79)
(0.01)
(0.01)
2,063
1,759
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
During 2006 there was a 35% increase in active ingredient sales leading to an overall increase of product sales
of 23%.
In 2006, the net loss increased by $215,000. Revenues increased $547,000 and gross margin increased $336,000. This
was offset by an increase in general and administration of $37,000, higher sales and marketing of $86,000, decreased
CeaProve® R&D funding of $205,000, and decreased AVAC Ltd. research funding of $187,750.
EBITDA decreased in the period by $235,000, due to the above factors.
AN N UA L RE PO RT 2006 | 11
The strong Canadian dollar had an impact on the revenues of Ceapro over the year. Ceapro’s revenues are substantially
all denominated in United States currency, thus a strong Canadian dollar reduces the value of each sale. The average
exchange rate on Ceapro’s sales dropped 7% compared to 2005 and 6% compared to 2004. This had a material
impact on Ceapro’s gross sales.
REVENUE
$000s
Product sales
Active ingredients
Veterinary therapeutic products
Royalties, licenses, and product development fees
Total revenues
2006
2005
Change
2,917
393
3,310
–
3,310
2,153
530
2,683
80
2,763
35%
(26%)
23%
(100%)
20%
PRODUCT SALES
In 2006, active ingredient sales rose $764,000 or 35% as a result of an increase of sales of colloidal oat extract,
increased sales of beta-glucan, and increased sales of oat oil offset by lower 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 differences in order timing. There were sales
orders fi lled in Q4 of 2005 but sales orders received in Q4 of 2006 are not being shipped until Q1 of 2007.
ROYA LTIES, LI CE NSES, A ND PRODUC T DEV ELOP ME NT FE ES
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 scientifi c and technical services provided to
customers for the creation and development of new products. No new royalties or product development fees were
received in the current year. The $80,000 earned in 2005 was the fi nal portion of the product development fees,
received in 2004, upon delivery of product to the customer for testing.
12 | CEAPRO
EXPEN SES
COST O F GOODS SO LD AND GROSS M AR GI NS
$000s
Sales
Cost of products sold
Gross margin
Gross margin %
2006
3,310
1,414
1,896
57%
2005
2,683
1,123
1,560
58%
Change
22%
Cost of goods sold is comprised of the direct raw materials required for the specifi c 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 2006, the gross margin percentage decreased slightly to 57% from 58%, primarily a result of a decrease in the
value of the United States dollar, the effects of labor shortages, a greater reliance on overtime hours worked, and the
effects of restrictions in the permitted operating hours of the plant. Factors decreasing margins were partly offset due
to spreading fi xed costs over higher product sales, effi ciencies from new equipment installed in recent years, and a
different product sales mix with higher sales of high margin products.
GEN ERAL AND ADMINI STRATI ON
$000s
Salaries and benefi ts
Board of Directors compensation
Investor relations
Insurance
Legal
Other
Total general and administration expenses
2006
349
97
93
100
33
348
1,020
2005
Change
314
102
102
100
96
269
983
4%
General and administration expense (G&A) for 2006 increased $37,000 primarily due to an increase in consulting
fees of $44,000 related to corporate development and transactional advisory services, executive recruitment fees of
$27,000, advertising for production employees of $10,000, and increased rent of $11,000 offset by legal fees which
decreased $63,000.
AN N UA L RE PO RT 2006 | 13
SALES A ND MARKETING
$000s
Salaries and benefi ts
Other
Total sales and marketing
2006
216
126
342
2005
207
49
256
Change
34%
Sales and marketing expenses increased by 34% largely due to the hiring of a full-time veterinary products marketing
manager and a signifi cant investment in creating the Ceapro Dermatology brand and developing marketing plans
and materials for Ceapro Veterinary Products for the United States market. These initiatives are expected to impact
2007 sales.
ROYA LTIES
$000s
Royalty interest units
AVAC Royalty
Less: Recognition of deferred royalty revenue
Total royalties expenses
2006
350
5
(38)
317
2005
230
92
–
322
Change
(2%)
As at December 31, 2006, royalty investors receive royalties equal to 10.59% (2005 – 8.31%) of revenues from product
sales and royalty, license, and product development fees of active ingredients, veterinary therapeutic products, and
CeaProve® 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 one and a half the amount invested and royalties of 2.5% of revenues
of eligible product sales to a maximum of two times the amount invested. Royalty expense throughout 2007 will vary
directly with fl uctuations 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. During 2006 one of the AVAC royalties was
fully earned and accrued. During 2006 the Company commenced the recognition of deferred royalty revenue for royalty
interest units issued in 2005 at a rate of one half the amount of the royalty interest expense.
14 | CEAPRO
INTEREST
$000s
Interest on callable debt, convertible debentures, and other
Interest on long-term debt
Total interest expense
2006
2005
Change
1
45
46
10
41
51
(10%)
Interest expense decreased $5,000 due to lower debt from previous debt repayment.
AMO RTI ZATIO N
Amortization expense decreased by $15,000 or 9%, due to a lower net book value of assets.
RESEARCH AN D PRODUCT DEVELOPM ENT
$000s
Salaries and benefi ts
Product development – CeaProve®
Other
Research and product development expenditures
AVAC investment (Product Innovation)
AVAC investment (CeaProve®)
Net research and product development expenses
2006
2005
Change
143
311
101
555
–
(190)
365
134
395
129
658
(100)
(395)
163
(16%)
124%
Net research and product development expenses increased 124% primarily due to a decrease in AVAC investments.
In 2005 Ceapro recognized $395,000 of investment 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.
AN N UA L RE PO RT 2006 | 15
OTHER INCOME
$000s
AVAC – product innovation investment
Foreign exchange gains and other
Total other income
2006
37
33
70
2005
225
15
240
Change
(71%)
Other income was lower in 2006, due to the receipt of $225,000 in 2005 in AVAC product innovation investment for
costs that were incurred in 2004. Stronger United States dollar exchange rates versus Canadian dollars at year end
resulted in recognized foreign currency gains in the amount of $33,000.
QUARTERLY I NFORMATIO N
The following selected fi nancial information is derived from Ceapro’s unaudited quarterly fi nancial 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
Q4
704
(122)
Q3
762
(96)
Q2
945
(3)
2006
Q1
899
(51)
Q4
608
123
Q3
Q2
654
1,032
2005
Q1
469
(125)
101
(156)
Basic (loss) income per share
(0.00)
(0.00)
(0.00)
(0.00)
0.00
(0.00)
0.00
(0.00)
Diluted (loss) income per share
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
Ceapro’s quarterly sales and results fl uctuate due to variations in the timing of product sales. For example, a signifi cant
proportion of our annual veterinary therapeutic product sales are in the second quarter of the year.
LIQUIDITY AND CAPITAL R ESO URC ES
The Company relies 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 2006, 429,335 stock options were exercised at prices ranging from $0.17 to $0.25. 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).
Total common shares issued and outstanding as at March 19, 2007 were 37,505,505 (March 28, 2006 – 37,098,670).
In addition, 3,082,460 stock options (March 28, 2006 – 3,286,795) and 774,066 warrants (March 28, 2006 –
16 | CEAPRO
774,066) were outstanding that are potentially convertible into an equal number of common shares at various prices.
Shareholders’ equity decreased to $303,799 at December 31, 2006 from $461,337 at December 31, 2005.
Ceapro’s working capital position decreased to $640,000 at December 31, 2006, a decrease of $363,000 from
December 31, 2005. Ceapro continues to pursue additional fi nancing to fund ongoing working capital requirements,
and to secure the fi nancial 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 fi nancing, income offerings, capital leases, collaborative and licensing agreements, and joint
venture or partnership fi nancing. However, there is no assurance of obtaining additional fi nancing 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 suffi cient 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.
SOU RCES AND USES OF CASH
The following table outlines our sources and uses of funds during the past two years.
($000s)
Sources of funds:
Funds generated from operations (cash fl ow)
Change in non-cash working capital items
Share capital issued, net of costs
Royalty interest proceeds
Uses of funds:
Purchase of property and equipment and deposits
Decrease in convertible debentures
Deferred royalty revenue
Change in long-term and callable debt
Royalties payable
Net change in cash
2006
2005
(41)
204
89
–
252
(245)
–
(38)
(79)
(17)
(379)
(127)
238
(666)
356
457
385
(57)
(20)
–
(70)
104
(43)
342
AN N UA L RE PO RT 2006 | 17
FINANCING AN D MIL ESTO NES
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. As at December 31, 2006,
$362,500 (2005-$325,000) of this commitment has been received or was receivable. 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, March
26, 2004, and March 14, 2006) are fully satisfi ed.
In the year ended December 31, 2005, the Company received a commitment for fi nancial 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, 2006, $510,000 of this commitment was received.
The Company is obligated to pay a royalty (to a maximum of one and a half times the fi nancial 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 satisfi ed 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.
During 2006, the Company received a commitment from Agriculture Financial Services Corporation to provide equipment
fi nancing for the expansion of the Company’s manufacturing capacity. The commitment is for a $750,000 5 year term
loan amortized over ten years at an interest rate of 8.25%. The Company expects to begin draw down on this facility
in Q1 2007 with payments commencing after draw downs begin on the loan.
The Company has received conditional approval for an award of up to $300,000 from the Federal Government Biofuels
Opportunities for Producers Initiative (BOPI) program. The non-repayable funding will support a feasibility study for the
construction and operation of a biorefi nery and processing plant.
RELATED PARTY TRANSAC TI ONS
During 2006, $118,098 (2005-$60,580) of royalties were earned by employees and Directors from their investment in
previous Ceapro royalty offerings. Directors and employees invested $195,000 (2005- $190,250) in the sale of royalty
interest units and lawsuit interests. At December 31, 2006, $25,107 (2005-$13,336) of royalties were payable to
employees and Directors. Included in accounts receivable at December 31, 2006 is $150,000 (2005-$50,000) due from a
Director for legal fees associated with the Saskatchewan litigation. Prepaid expenses included $44,066 (2005-$25,884)
of Director fees paid for the term ending May 31, 2007. 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.
18 | CEAPRO
LEGAL PROC EEDINGS
The Company is the plaintiff in legal proceedings claiming that in 1998 the Saskatchewan Government Growth
Fund (“SGGF”) and others improperly gained control of Canamino Inc. (“Canamino”) a wholly -owned subsidiary
of the Company at that time. The claim alleges that Ceapro has suffered damages for its loss of investment in
Canamino and loss of reputation in the capital markets. It is expected that this matter will go to trial commencing
November 19, 2007.
Legal fees and other direct costs associated with the lawsuit have been, and continue to be, fi nanced and funded by
Lawsuit Contributors who have, and continue to, purchase direct interests in the proceeds (if any) from the lawsuit;
and through agreements with the Company’s legal counsel to accept a portion of their fees on a contingency basis.
In addition, the Company was required to post a bond relating to legal costs up to $305,000 which was secured by
guarantees of the Board of Directors and an Offi cer of the Company. Consequently, no costs associated with the lawsuit
are included in the Company’s fi nancial statements.
As of March 19, 2007, it is the opinion of Ceapro’s Corporate Counsel that, based on the document production to
date and examinations of discovery that have transpired, the most likely outcome of this action is that Ceapro will be
successful. Given the uncertainty of the outcome of the proceeding, the direct interests of the Lawsuit Contributors,
and the contingency fee arrangement with the Company’s legal counsel, no amount has been accrued in the fi nancial
statements with respect to this claim.
OUTLOOK
The initiatives undertaken during 2005 have resulted in an increase in product sales making 2006 our best revenue year
in Ceapro’s history and creating an operating profi t before research expenses. We are encouraged with fi rst quarter
2007 sales and look forward to growing revenues throughout 2007. The expansion of sales to existing customers,
and the introduction of new products, and sales to new customers are expected to boost sales of active ingredients.
Ceapro’s export sales have continued to increase despite the signifi cant strengthening of the Canadian dollar over
the last few years and indications in early 2007 are that the Canadian dollar will weaken in 2007. This should have a
positive impact on sales.
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. The awareness of the potential of a diabetes
epidemic is now very high and the time is right for this product. We anticipate the product will be available for sale in
Q2 and the global market potential is huge.
During 2006 signifi cant marketing investments were made in our veterinary product business including the development
of our Ceapro Dermatology brand. Some pre-marketing activities have been completed in the United States and we
expect to launch the brand in the United States in Q2.
AN N UA L RE PO RT 2006 | 19
Ceapro BioEnergy Inc. is our new subsidiary that will undertake a feasibility study to examine the feasibility of new
biofuel alternatives. This activity is complementary to Ceapro’s core strength and allows for the opportunity for Ceapro
to integrate all of its extraction processes. The current market conditions are right for this activity.
Finally, we have received approval to begin our planned expansion into the Leduc incubator. This will allow
us to produce more products for sale and operate more effi ciently to meet our growing sales and new
business opportunities. Agriculture Financial Services Corporation has committed to fund $750,000 of the
equipment expansion.
We expect 2007 to be a very exciting year for Ceapro.
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.
20 | CEAPRO
AN N UA L RE PO RT 2006 | 21
22 | CEAPRO
FINANCIAL STATEMENTS
AN N UA L RE PO RT 2006 | 23
MANAGEMENT’S REPORT
To the Shareholders of Ceapro Inc.,
The accompanying consolidated fi nancial 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 fi nancial statements have been prepared by Management in accordance with Canadian generally
accepted accounting principles. The fi nancial 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 fi nancial statements.
To further the integrity and objectivity of data in the fi nancial statements, Management of the Company has developed
and maintains a system of internal controls, which Management believes will provide reasonable assurance that
fi nancial records are reliable and form a proper basis for preparation of fi nancial statements, and that assets are
properly accounted for and safeguarded.
The Board of Directors carries out its responsibility for the fi nancial 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 fi nancial reporting process and fi nancial reporting issues, to make certain that each party is properly
discharging its responsibilities, and to review quarterly reports, the annual report, the annual fi nancial statements,
management discussion and analysis, and the external auditors’ report. The Committee reports its fi ndings to the Board
for consideration when approving the fi nancial statements for issuance to the shareholders. The Company’s auditors
have full access to the Audit committee, with and without Management being present.
The fi nancial 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 Offi cer
SIGNED “Branko Jankovic, CA”
Chief Financial Offi cer
24 | CEAPRO
AUDITORS’ R EPORT
To the Shareholders of Ceapro Inc.,
We have audited the consolidated balance sheets of Ceapro Inc. as at December 31, 2006 and 2005, and the
consolidated statements of net loss and defi cit and cash fl ows for the years then ended. These fi nancial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these fi nancial
statements based on our audits.
We conducted 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 fi nancial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
fi nancial statements. An audit also includes assessing the accounting principles used and signifi cant estimates made by
management, as well as evaluating the overall fi nancial statement presentation.
In our opinion, these consolidated fi nancial statements present fairly, in all material respects, the fi nancial position of
the Company as at December 31, 2006 and 2005, and the results of its operations and its cash fl ows for the years then
ended in accordance with Canadian generally accepted accounting principles.
Edmonton, Canada
February 20, 2007
SIGNED “Stout & Company LLP”
Chartered Accountants
25 | CEAPRO
AN N UA L RE PO RT 2006 | 25
CONSOLIDATED BAL AN CE SHEETS
As at December 31
ASSETS
Current Assets
Cash and cash equivalents
Accounts receivable
Inventories
Prepaid expenses and deposits
Deposits on property and equipment
Property and equipment (note 3)
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities
Current portion deferred revenue
Callable debt (note 4)
Current portion of long-term debt (note 5)
Currrent portion of royalties payable (note 6)
Derferred royalty revenue
Employee future benefi ts obligation (note 7)
Long-term debt (note 5)
Royalties payable (note 6)
SHAREHOLDERS’ EQUITY
Share capital (note 8(b))
Contributed surplus (note 8(c))
Defi cit
See accompanying notes
Approved on Behalf of the Board
SIGNED “Edward A. Taylor”
Director
2006
$
2005
$
310,926
634,256
160,456
178,751
438,045
982,347
228,158
90,761
1,284,389
1,739,311
167,828
610,629
2,062,846
–
679,623
2,418,934
335,616
105,000
36,313
36,609
130,456
643,994
369,764
219,340
400,122
125,827
284,863
229,676
81,584
33,519
106,508
736,150
457,000
159,946
436,731
167,770
1,759,047
1,957,597
2,508,059
128,478
2,414,830
106,888
(2,332,738)
(2,060,381)
303,799
2,062,846
461,337
2,418,934
SIGNED “David B. Harvey”
Director
CONSOLIDATED STATEMENTS OF NET LOSS AND DEFICIT
Years ended December 31
REVENUE
Sales (note 10)
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
Income (loss) from operations
OTHER INCOME (EXPENSES)
Research and product development
Other income (note 11)
Loss before income taxes
Income taxes (note 12)
Current
Reduction as a result of applying non-capital losses carried forward against
the current year’s taxable income
NET LOSS FOR THE YEAR
Defi cit, beginning of year
DEFICIT, END OF YEAR
Net loss per common share:
Basic
Diluted
2006
$
3,310,323
1,413,976
1,896,347
–
2005
$
2,683,433
1,123,606
1,559,827
80,000
1,896,347
1,639,827
1,020,296
317,355
342,207
146,779
45,133
1,220
1,872,990
23,357
982,887
321,692
255,773
161,550
41,310
10,386
1,773,598
(133,771)
(365,424)
(162,833)
69,710
(295,714)
(272,357)
239,597
76,764
(57,007)
164,792
435,143
(164,792)
(272,357)
(435,143)
(57,007)
(2,060,381)
(2,003,374)
(2,332,738)
(2,060,381)
(0.01)
(0.01)
(0.00)
(0.00)
Weighted average number of common shares outstanding
37,188,901
36,337,657
See accompanying notes
AN N UA L RE PO RT 2006 | 27
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
OPERATING ACTIVITIES
Net loss for the year
Items not affecting cash and cash equivalents
Amortization
Employee future benefi ts obligation
Stock based compensation
CHANGES IN NON-CASH WORKING CAPITAL ITEMS
Accounts receivable
Inventories
Prepaid expenses and deposits
Accounts payable and accrued liabilities
Deferred revenue
INVESTING ACTIVITIES
Purchase of property and equipment
Deposits on property and equipment
Restricted cash for the purchase of property and equipment
FINANCING ACTIVITIES
Repayment of long-term debt
Repayment of callable debt
Repayment of convertible debentures
Proceeds from issuance of share capital
Proceeds from exercise of stock options
Deferred royalty revenue
Proceeds from royalty interest unit offering
(Decrease) increase in royalties payable
Decrease (increase) in cash and cash equivalents
Cash and cash equivalents at beginning of year
CASH AND CASH EQUIVALENTS AT END OF YEAR
Supplementary information
Interest paid
Royalties paid
Cash and cash equivalents consist of:
Cash on deposit with banks
US$ term deposit
See accompanying notes
2006
$
2005
$
(272,357)
(57,007)
146,779
59,394
25,592
(40,592)
348,091
67,702
(87,990)
50,753
(174,092)
204,464
163,872
(77,785)
(167,828)
–
(245,613)
(33,519)
(45,271)
–
–
89,227
(37,820)
–
(17,995)
(45,378)
(127,119)
438,045
310,926
46,353
373,170
165,251
145,675
310,926
161,550
83,360
50,007
237,910
(557,187)
117,266
(24,288)
(351,752)
149,676
(666,285)
(428,375)
(121,206)
–
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
438,045
–
438,045
1. NATURE OF BUSINE SS O PER AT I ON S
Ceapro Inc. (the “Company”) is 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 plant extracts.
2. ACCOUNTING POLI CI ES
a) Use of estimates
The preparation of consolidated fi nancial statements is 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 fi nancial statements
and the reported amounts of revenues and expenses during the reporting period. The signifi cant areas requiring the
use of management estimates relates to amortization of property and equipment, the assumptions used in
determining stock based compensation, and the interest rate used in determining the value of employee future
benefi ts obligation. Actual results could differ from those estimates.
b) Principles of consolidation
The consolidated fi nancial statements include the accounts of the Company and its wholly-owned subsidiaries,
Ceapro Technology Inc., Ceapro Veterinary Products Inc., Ceapro Active Ingredients Inc., and Ceapro BioEnergy Inc.
c) Cash and cash equivalents
Cash and cash equivalents are defi ned as amounts on deposit with banks and short term deposits with maturities
of three months or less.
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 sale of royalty interests are recorded as deferred royalty revenue and are matched to future royalty expenses.
Royalty, licenses, and product development fees are recorded in accordance with the terms of the applicable agreements.
AN N UA L RE PO RT 2006 | 29
e) Inventories
Inventory of raw materials is valued at the lower of cost and replacement cost on a fi rst-in, fi rst-out basis.
Inventory of work-in-process and fi nished 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
Offi ce equipment
Computer equipment
g) Research and product development expenditures
20% declining balance
20% declining balance
30% declining balance
Research costs are expensed when incurred. Product development costs are also expensed when incurred unless
they are signifi cant and meet generally accepted criteria for deferral. Costs are reduced by government grants and
investment tax credits where applicable.
h) Foreign currency
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
The liability method is used for determining income taxes. Under this method, future income tax assets and liabilities
are recognized for the estimated tax recoverable or payable that would arise if assets and liabilities were recovered
or settled at the fi nancial statement carrying amounts. Future tax assets and liabilities are measured using
substantively enacted tax rates expected to apply to taxable income in the year in which temporary differences
are expected to be recovered or settled. Changes to these balances, including changes due to changes in income
tax rates, are recognized in income in the period in which they occur. The amount of the future income tax assets
recognized is limited to the amount that is more likely than not to be realized.
j) Lease Obligations
Leases are classifi ed as capital or operating leases. A lease that transfers substantially all of the benefi ts and risks
incidental to the ownership of property is classifi ed as a capital lease. At the inception of a capital lease, an asset
30 | CEAPRO
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
wherein payments are expense as incurred.
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 scientifi c 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 common share
Net loss per common share is calculated based on the weighted average number of common shares outstanding
during the year. Diluted net loss per common share refl ects the assumed conversion of all dilutive securities
using the treasury stock method. When the Company is in a net loss position, stock options and warrants are
anti-dilutive.
n) Stock based compensation
Stock based compensation of employees, directors, offi cers, and consultants is recorded in accordance with the fair
value method.
o) Employee future benefi ts
The Company accrues its obligations under an employee defi ned retirement benefi t plan and related costs, net of plan
assets. The cost of retirement benefi ts earned by employees is determined using the accumulated benefi t method
and management’s best estimate of expected plan investment performance and retirement ages of employees. Past
service costs relating to plan amendments are accrued and recognized in the year the amendments occur.
p) Impairment of long-lived assets
In the event that facts and circumstances indicate that the carrying value of the long-lived assets may be impaired,
the Company performs a recoverability evaluation. If the evaluation indicates that the carrying value is not recoverable
from undiscounted cash fl ows attributable to the assets, then an impairment loss is measured by comparing the
carrying amount of the asset to its fair value.
AN N UA L RE PO RT 2006 | 31
3. PROPERTY AND EQUIPMENT
2006
2005
Cost
$
Accumulated Amortization
$
Net Book Value
$
964,280
186,650
1,150,930
431,389
108,912
540,301
532,891
77,738
610,629
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
Manufacturing equipment
Computer and offi ce equipment
Manufacturing equipment
Computer and offi ce equipment
4. CALL ABLE DEBT
Loan, payable at $4,166 per month, principal and interest at 8%, secured by
specifi c manufacturing equipment carrying value of $153,502 (2005 -$191,877)
and a general security agreement, due November, 2007.
5. LONG-TERM DEBT
Loan, payable at $6,161 per month, principal and interest at 8.85%, secured by a
general security agreement, due January, 2010.
Less current portion
32 | CEAPRO
2006
$
2005
$
36,313
81,584
2006
$
436,731
36,609
400,122
2005
$
470,250
33,519
436,731
Estimated principal payments due in the next four years are as follows:
2007
2008
2009
2010
$
36,609
39,983
43,669
316,470
436,731
Subsequent to the year-end the Company has been approved for a $750,000 term loan with Agricultural Financial
Services Corporation to purchase equipment and services related to the Company’s plant expansion. The loan is for a
fi ve-year term, amortized over ten years with an interest rate of 8.25%.
6. ROYALTIES PAYABLE
Royalties payable pursuant to fi nancial assistance received (note 6 (a))
Royalties payable pursuant to royalty interest offering (note 6 (c), (d), and (e))
Less current portion
2006
$
181,751
74,532
256,283
130,456
125,827
2005
$
223,694
50,584
274,278
106,508
167,770
a) In the year ended December 31, 1999, the Company received fi nancial 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 fi nancial assistance received) on sales generated from products developed using
these funds. The portion of this obligation paid or accrued as at December 31, 2006 was $329,764 (2005 -
$325,166). Pursuant to an agreement signed in March 2006, the terms of repayment were amended to allow all
royalties payable as at December 31, 2005 in the amount of $223,692 to be repaid $13,981 per quarter commencing
March 31, 2006. Royalties incurred subsequent to December 31, 2005 are to be repaid quarterly within 60 days of
the quarter end.
b) In the year ended December 31, 2004, the Company received a commitment for fi nancial 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. In the year ended December 31, 2006, $225,000 (2005
AN N UA L RE PO RT 2006 | 33
- $225,000) of this commitment has been received. The Company is obligated to pay a royalty (to a maximum
of two times the fi nancial 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 or prior years. The Company has
repaid at December 31, 2006 $nil (2005 - $nil) of this obligation. Upon completion of the repayment of the
fi nancial 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, 2006 was $nil
(2005 - $nil).
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 of $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 at December 31, 2006 was $490,055 (2005 - $319,127).
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. In the year ended December 31, 2004,
the Company sold an additional 1.724% royalty interest in the future sales and licensing of active ingredients and
animal health products for $172,401. The cumulative royalty interest of 3.142% for $314,197 results in combined
maximum royalties of two times the amount invested or $628,394. The portion of this obligation paid or accrued at
December 31, 2006 was $343,926 (2005 - $239,917).
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 portion of this obligation paid or accrued as at December 31, 2006 was
$75,640 (2005 - $nil).
f) In the year ended December 31,2005 , the Company received a commitment for fi nancial assistance totaling $362,250
for product innovation development in the area of Veterinary Therapeutics and Active Ingredients. In the year ended
December 31, 2006 $325,000 (2005 - $225,000) of the commitment has been received and $37,250 was receivable
at December 31, 2006 (2005 - $100,000). 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 fi nancial assistance received or $724,500) on sales generated from
products developed using these funds. These payments will commence when the royalty payments on investment
agreements in note 6(a) are fully satisfi ed. The portion of the obligation paid or accrued at December 31, 2006 was $nil
(2005 - $nil).
g) In the year ended December 31, 2005, the Company received a commitment for fi nancial 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, 2006 $510,000 of this commitment was received (2005
- $510,000 of commitment was receivable). The Company is obligated to pay a royalty (to a maximum of one and a
half times the fi nancial assistance received or $1,200,000) on sales of CeaProve® on the following basis: 0% of net
34 | CEAPRO
sales and net sub-licensing revenues earned until royalty payments have been fully satisfi ed under the investment
agreement in note 6(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 31,2006 was
nil (2005 - $nil).
7. EMPLOYEE FUTUR E B E NEFI T S O B LI GAT IO N
The Company has an unfunded non-reigstered, non-indexed defi ned retirement benefi t plan for certain senior employees.
The retirement benefi t is two months’ salary for each year they are employed by the Company.
During the year ended December 31, 2005, 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 prior year.
Unfunded balance, beginning of year
Current service cost
Past service costs
Interest costs on accrued obligation
Unfunded balance, end of year
2006
$
159,946
35,117
–
24,277
219,340
2005
$
76,586
22,152
53,453
7,755
159,946
Management is required to make a signifi cant estimate regarding the discount rate used to determine the accrued
employee future benefi t obligation. These signifi cant estimates are of a long-term nature, which is consistent with
the nature of the employee future benefi ts. The discount rate used to determine the accrued benefi t obligation as at
December 31, 2006 was 4.65% (2005 - 5.58%).
8. SHAR E CAPITAL
a) Authorized
Unlimited number of Class A voting common shares
Unlimited number of Class B non-voting common shares
AN N UA L RE PO RT 2006 | 35
b) Issued - Class A common shares
Number of
Shares
2006
$
Amount
Number of
Shares
2005
$
Amount
Balance at beginning of year
37,076,170
2,414,830
35,635,284
1,995,443
Changes during the year:
Equity placements
Exercise of options
Decrease in equity component of
convertible debentures
–
–
429,335
93,229
774,066
666,820
238,818
183,059
–
–
–
(2,490)
37,505,505
2,508,059
37,076,170
2,414,830
c) Contributed surplus
The following table summarizes the changes in contributed surplus:
Balance at beginning of year
Stock based compensation expense (note 8 (d))
Exercise of stock options
d) Stock Options
2006
$
106,888
25,592
(4,002)
128,478
2005
$
121,997
50,007
(65,116)
106,888
The Company has granted stock options to eligible employees, directors, offi cers, and consultants under stock option
plans that vest over periods ranging from eighteen months to four years and have a maximum term of fi ve years.
The Company accounts for options granted under these plans in accordance with the fair value based method of
accounting for stock based compensation. In the current year the Company granted 525,000 (2005 - 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 weighted average
risk-free rate used in 2006 was 4.23% (2005 - 3.40%), the weighted average expected volatility was 90% (2005
- 110%) which was based on prior trading activity of the Company’s shares, and the weighted average expected
life of the options was 5 years. The stock based compensation expense recorded during the current year relating to
options granted in 2006 and 2005 was $24,850 (2005 - $47,903).
36 | CEAPRO
In addition, the Company recorded stock based compensation expense of $742 (2005 - $2,104) relating to options
granted in 2003.
A summary of the status of the Company’s stock options at December 31, 2006 and 2005 and changes during the years
ended on those dates is as follows:
2006
$
Weighted
Average
Exercise Price
0.23
0.29
0.28
0.21
0.24
0.23
Number of
Options
3,286,795
525,000
(300,000)
(429,335)
3,082,460
2,757,460
2005
$
Weighted
Average
Exercise Price
0.21
0.28
0.25
0.18
0.23
0.19
Number of
Options
3,586,115
400,000
(32,500)
(666,820)
3,286,795
3,081,785
Outstanding at beginning of year
Granted
Expired
Exercised
Outstanding at end of year
Exercisable at end of year
The following table summarizes information about the Company’s stock options outstanding:
Exercise Price $
Year of Expiration
Number of Options
Number of Options
2006
2005
0.30
0.27
0.28
0.25
0.17
0.20
2011
2011
2010
2008
2007
2006
225,000
150,000
175,000
1,742,292
790,168
–
3,082,460
–
–
250,000
1,895,792
809,003
332,000
3,286,795
AN N UA L RE PO RT 2006 | 37
e) Warrants
A summary of the status of the Company’s warrants at December 31, 2006 and 2005 and changes during the years
ended on those dates is as follows:
Outstanding at beginning of year
Issued
Outstanding at end of year
2006
$
2005
$
Number of
Warrants
Average
Exercise Price
Number of
Warrants
Average
Exercise Price
774,066
–
774,066
0.59
–
0.59
–
774,066
774,066
–
0.59
0.59
The following table summarizes information about the Company’s warrants outstanding:
Exercise Prices
$
0.60
0.75
Exercise Prices
$
0.60
0.55
Expiration Date
2006 Number Outstanding
March 31, 2007*
December 28, 2007
682,666
91,400
774,066
Expiration Date
2005 Number Outstanding
September 30, 2006
December 28, 2007
682,666
91,400
774,066
*The expiry date on these warrants was extended from September 30, 2006 to March 31, 2007.
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 thereafter at a price of $0.60 per common
share until September 30, 2006. The expiry date on these warrants was extended from September 30, 2006 to
March 31, 2007.
38 | CEAPRO
g) On December 28, 2005 the Company completed a Royalty Income Unit offering through the terms described in
an Offering Memorandum, which resulted in 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 share purchase warrants (“warrants”), and 100 royalty interests (“royalty interests”). Each warrant
entitles 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 28, 2007. Each royalty interest is a right to
receive royalties equal to .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 to royalty interest units and $45,700 for common shares.
9. CONTINGENC IES A ND COM MI T M EN T S
a) The Company is the plaintiff in legal proceedings claiming that in 1998 the Saskatchewan Government Growth
Fund (“SGGF”) and others improperly gained control of Canamino Inc. (“Canamino”), a wholly-owned subsidiary
of the Company at that time. The claim alleges that Ceapro has suffered damages for its loss of investment
in Canamino and loss of reputation in the capital markets. It is expected that this matter will go to trial in the
fall of 2007.
Legal fees and other direct costs associated with the lawsuit have been, and continue to be, fi nanced and funded by
Lawsuit Contributors who have purchased, and continue to purchase, direct interests in the proceeds (if any) from the
lawsuit; and through agreements with the Company’s legal counsel to accept a portion of their fees on a contingency
basis. In addition, the Company was required to post a bond relating to legal costs up to $305,000 which was
secured by guarantees of the Board of Directors and an Offi cer of the Company. Consequently, no costs associated
with the lawsuit are included in the Company’s consolidated fi nancial statements.
As of March 19, 2007, it is the opinion of Ceapro’s Corporate Counsel that, based on the document production to
date and examinations of discovery that have transpired, the most likely outcome of this action is that Ceapro will be
successful. Given the uncertainty of the outcome of the proceeding, the direct interests of the Lawsuit Contributors,
and the contingency fee arrangement with the Company’s legal counsel, no amount has been accrued in the
consolidated fi nancial statements with respect to this claim.
b) 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 fi nancial position of
the Company.
AN N UA L RE PO RT 2006 | 39
10. 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.
11. OTHER INCOME
Other income is comprised of:
Product Innovation Investment (note 6(f))
Foreign exchange gains
Other
12. INCOME TAXES
a) Non-capital losses
2006
$
37,250
32,828
(368)
69,710
2005
$
225,000
3,920
10,677
239,597
The Company has accumulated non-capital losses carried forward for income tax purposes of approximately
$2,198,300, the benefi t of which has not been refl ected in these consolidated fi nancial statements. These losses
may be applied against future taxable income within the limitations prescribed by the Income Tax Act and expire
as follows:
2007
2008
2015
2026
40 | CEAPRO
$
682,600
570,800
293,400
651,500
2,198,300
b) Capital losses
The Company has accumulated capital losses of approximately $6,807,000, which can be carried forward indefi nitely
to offset future capital gains.
c) Scientifi c research and experimental development (SR&ED)
The Company has accumulated an SR&ED expenditure pool of approximately $1,506,000, which can be carried
forward indefi nitely to be applied against future taxable income.
The Company has accumulated SR&ED investment tax credits of approximately $156,000. These credits may be applied
against future federal income taxes payable and expire as follows:
2007
2008
2009
2012
d) Temporary differences
$
119,000
16,000
400
20,600
156,000
A future income tax asset refl ects the net effects of temporary differences between the carrying amounts of assets and
liabilities for fi nancial reporting purposes and the amounts used for income tax purposes. Signifi cant components of
the Company’s future income tax asset is 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
2006
$
2005
$
1,190,000
1,423,000
1,093,000
1,144,000
156,000
194,000
Undepreciated capital cost for tax purposes in excess of net book value
3,069,000
3,123,000
Deferred revenue recognized for tax purposes
Valuation allowance
152,000
231,000
(5,660,000)
(6,115,000)
–
–
For consolidated fi nancial statement purposes, no future income tax asset has been recorded at December 31, 2006
and 2005 as it is more likely not to be realized.
AN N UA L RE PO RT 2006 | 41
e) Income tax reconciliation
The Company’s consolidated income tax position comprises tax benefi ts 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 32.50% (2005 - 33.62%)
Tax effect of expenses that are not deductible
Tax effect of current year non-capital losses not recognized
Tax effect of deferred revenue recognized
Income tax reduction as a result of applying non-capital losses carried forward
against current year taxable income
2006
$
(88,516)
110,445
211,734
(68,871)
2005
$
(19,166)
124,787
98,662
230,860
(164,792)
(435,143)
–
–
13. RELATED PARTY TRANSAC TIO NS
Related party transactions during the years not otherwise disclosed in these consolidated fi nancial statements are
as follows:
Royalties 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
Amounts receivable from directors included in accounts receivable
Prepaid expense related to director fees
2006
$
118,098
195,000
25,107
150,000
44,066
2005
$
60,580
190,250
13,336
50,000
25,884
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.
42 | CEAPRO
14. SEGMENTED INFOR MATI ON
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 North America. All the assets of the Company, which support the revenues of the
Company, are also located in North America. The distribution of revenue by location of customer is as follows:
North America
Other
2006
$
2005
$
2,273,867
1,827,692
1,036,456
935,741
3,310,323
2,763,433
15. FINANCIAL INSTRU MENT S
The estimated fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities,
callable debt, and current portions of long-term debt and royalties payable are estimated to approximate their carrying
value due to their short-term nature.
The fair value of long-term debt, royalties payable, and employee future benefi ts obligation are estimated to approximate
their carrying value using the Company’s incremental borrowing rate or discounted cash fl ow 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 from these
fi nancial instruments.
16. SUB SEQUENT EVENT S
a) On January 17, 2007, the Company entered into an agreement for advisory services relating to fi nancial
communications and investor relations. The initial term of the agreement is for six months and can be extended for
further terms. Under the terms of the agreement, the Company has agreed to pay a monthly retainer fee of $5,000
and has granted 100,000 common share options at an exercise price of $0.30 per common share. Vesting of the
options occurs upon the Company achieving certain performance and investment milestones. All options vested are
exercisable for a period of fi ve (5) years.
b) On February 14, 2007, the Company received conditional approval for an award of up to $300,000 from the Federal
Government Biofuels Opportunities for Producers Initiative (BOPI) program. The non-repayable funding will support
a feasibility study for the construction and operation of a biorefi nery and processing plant.
AN N UA L RE PO RT 2006 | 43
CORPORATE COUNSEL
Fraser Milner Casgrain LLP
2900 Manulife Place
10180 - 101 Street
Edmonton, AB T5J 3V5
Canada
SECURITI ES 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
Canada
STOCK INFORMATI ON
Listed on the TSX Venture Stock Exchange
Symbol: CZO
TRANSF ER AGENT & REGISTRAR
Olympia Trust Company
2300 Palliser Square
125- 9 Avenue SE
Calgary, AB T2G 0P6
Canada
Telephone: 1.403.261.0900
Toll-free: 1.800.727.4493
Fax: 1. 403.265.1455
INVESTOR INFORMATION
DIRECTORS
Edward Taylor, Chairman
Donald Byers
David Harvey
Donald Oborowsky
John Yewchuk
John Zupancic
Mark J. Redmond
OFF ICERS
Mark J. Redmond, Ph. D.
President and Chief Executive Offi cer
Branko Jankovic, CA
Chief Financial Offi cer
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 O FFICE
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
44 | CEAPRO
CHA NG E O F ADDRESS
Registered Shareholders should notify the Company’s
Transfer Agent and Registrar at the address set
out above.
Benefi cial Owners should contact their respective
brokerage fi rm to give notice of a change of address.
FINANC IAL 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.
INVESTO R RELATI ONS
Sun International Communications
Suite 506, 1565 de l’Avenir Blvd.
Laval, QC H7S 2N5
Canada
Telephone: 1.450.627.6600
Email: nicole.blanchard@isuncomm.com
EQUAL O PPORTUNITY EMPL OYER
Ceapro Inc. is an equal opportunity employer and
seeks to attract and retain the best-qualifi ed people
regardless of race, religion, national origin, gender,
sexual orientation, age, or disability.
Designed by Optamedia Inc.
AN N UA L RE PO RT 2 006 | 45
1008 RTF, University of Alberta | 8308 114 Street | Edmonton, AB T6G 2E1 | t 780.421.4555 | f 780.421.1320 | www.ceapro.com