Ceapro Inc. Annual Report 2010

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FY2010 Annual Report · Ceapro Inc.

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Annual Report 2010

● ●

● ● Table of contents

Letter to Shareholders

Science and Products

Management’s Discussion and Analysis

Consolidated Financial Statements

Notes to Consolidated Financial Statements

Investor Information

Ceapro Inc.

develops and uses proprietary extraction technology
to produce active ingredients from renewable plant resources. Nature’s vitality
underlies all of Ceapro’s products as the Company fosters natural and sustainable
plant materials. We provide ‘‘green’’ and innovative functional ingredients to
manufacturers of personal care products, nutraceuticals, and developers of
therapeutics.

:: LETTER TO SHAREHOLDERS

Dear Fellow Shareholders

2010 has been one of the most exciting years since Ceapro’s inception and will certainly be recognized as a landmark
period for having fully completed a turn around and implementing a growth strategy which generated record sales and
a net profit.

In spite of a still challenging economic environment prevailing in 2010, we remained focused on our objectives and
maintained our commitment to quality science to increase sales of existing products, improve existing products,
develop new products, and keep manufacturing at a state-of-the-art level, lean and effective.

Our team of dedicated people deployed tremendous effort to transform your Company to a fully integrated
biotechnology company with activities ranging from R&D to commercialization.

We are very proud to reiterate the following key accomplishments that will have set the stage for value creation in 2011
and beyond:

(cid:127)

30% increase in output of finished goods from the plant in 2010 compared to 2009. This translated into record sales
of $5,577,000 in 2010 compared to $4,370,000 in 2009.

(cid:127)

Net profit of $501,000 in 2010 compared to a net loss of $69,000 in 2009.

(cid:127)

Completion of an exclusive license and distribution agreement with Oat Cosmetics for the sale of Ceapro’s ‘‘All
Natural’’ active ingredients in the United Kingdom.

Completion of a Research Collaboration with the National Research Council of Canada (NRC). Research studies were
conducted at the NRC Institute for Nutrisciences and Health (NRC-INH) located in Charlottetown, Prince Edward
Island. A press conference was held with Federal Ministers of Science and Technology and Fisheries and Oceans,
Honourable Gary Goodyear and Gail Shea respectively, to announce this collaboration.

(cid:127)

Opening of a new lab and hiring new staff at the NRC-INH Industrial Partnership Facility.

(cid:127)

Completion of Year 1 of a 3-year project involving supercritical extraction of active ingredients and downstream
purification of avenanthramides.

Initiation of a research project, with financial assistance of $124,000 from Alberta Ingenuity, to commercialize a
novel technology developed at the University of Alberta. Ceapro oat beta glucan is the first active ingredient tested
under this project to be produced as a highly soluble and pure powder.

Successful first year crop multiplication in multiple regions of Canada of in-licensed spearmint variety allowing
product development to commence in mid 2011.

Completion of the development of new formulations and testing for Ceapro’s second generation ‘‘all natural’’
product line. Obtained the EcoCert(cid:2) Certification.

2 CEAPRO Annual Report 2010

LETTER TO SHAREHOLDERS ::

(cid:127)

Ceapro’s newest product CP Sweet Blue Lupin is now in commercial production.

(cid:127)

Ceapro’s technology recognized by Canadian Agriculture Adaptation Program (CAAP) which will provide funding to
Ceapro up to $1,339,625 of eligible research and development expenditures. All amounts claimed under the CAAP
are repayable without interest over eight years beginning in 2013.

Balance sheet improvement as royalty holders elected to exchange $271,000 of royalty debt for equity and a further
$218,000 was paid in cash. Directors announced their intent to exchanged $175,000 of debt into equity. This was
finalized in January, 2011.

As mentioned in previous corporate updates, in order to secure the transition to an innovative, sustainable, and
profitable biotechnology company, it was important to design and implement a new Research and Development
strategy encompassing the formation of new partnerships and collaborations for the development of new and
innovative products, novel processes, and for the generation of new data to support our new Marketing and
Sales strategy.

Ceapro has then significantly increased its investment in this sector. Year 2010 has undoubtedly seen the largest growth
and output from Ceapro’s R&D team since the inception of the Company in 1997. Results to date are very encouraging
and exciting.

In summary, Ceapro’s team has delivered in 2010.

Looking forward, we expect Ceapro to sustain and grow sales and profitability in 2011 while maintaining quality and
scientific excellence in all aspects of our business.

We would like to thank our employees for their hard work and dedication. They are Ceapro’s biggest asset and they
make all of Ceapro’s achievements possible.

Finally, we would like to thank our customers and our shareholders for their support and confidence.

We believe Ceapro has never been in a better position to grow and create value.

GILLES R. GAGNON, M.SC., MBA
DIRECTOR AND ACTING CEO

ED TAYLOR, CGA
CHAIRMAN OF THE BOARD

May 17, 2011

CEAPRO Annual Report 2010 3

:: Science

The Strength Behind Our Products

Ceapro’s primary customers in the global personal care industry have a wide variety of choices of active
ingredients to choose from for their product formulations. Active ingredient suppliers must be prepared
to answer questions like, “What are the benefits of your product?”, “How does it compare to similar
products?”, and “Do you have the data to support your product claims?”. Early in 2010, Ceapro began to
increase its commitment to research and development by increasing the level of scientific data to support
product sales.

In addition to several research and development projects initiated in Edmonton, Ceapro opened a new lab
at the National Research Council - Institute of Nutrisciences and Health (NRC-INH) in Charlottetown, Prince
Edward Island. The benefits of this new partnership were immediate and included access to state-of-the-
art equipment, access to world class researchers, and new research collaboration partners. Ceapro’s first
collaborative research agreement predominantly involved investigating anti-allergic activity of one of our
core bio-actives, and a second agreement in 2011 will conduct further studies for this indication as well as new
wound healing and anti-aging studies. This partnership will allow Ceapro to provide the marketing support
for all of its current and future products.

While conducting in vitro and
ex vivo studies is the first step
in developing a new product,
performance testing is critical to
substantiate claims that we make.
In 2010, Ceapro also conducted
hair care performance testing
involving our peptide extracts
with further tests planned
in
2011 for both the hair care and
skin care market.

4 CEAPRO Annual Report 2010

:: Product imProvementS

Highly Purified Oat Beta Glucan Microfibrils

During 2010, Ceapro, with the financial assistance of Alberta Ingenuity and the Canadian Agricultural
Adaptation Program, established a program to examine the feasibility of using a novel patented drying
technology from the University of Alberta for its active ingredients. The first candidate chosen was Ceapro
Oat Beta Glucan. This product is currently sold as a preserved 1% liquid solution, with most of the bulk
weight being water. Ceapro recognized that substantial benefits and cost savings could result if the oat beta
glucan could be produced in higher purity dry form. Ceapro’s current oat beta glucan microfibrils are in ex-
cess of 97% pure; and because of the large surface area of the dry product, it facilitates the dissolution and
dispersion in liquids.

The final product from this process is not only expected to lower our carbon footprint by reducing
packaging and shipping costs, it will also have the added advantages of being preservative-free and having a
much longer shelf life. The customers that Ceapro serves in the personal care industry are also looking to their
active ingredient suppliers to commit to reducing their environmental footprint and this project is perfectly
aligned with this reality.

include the scale-up of manufacturing to a pilot
Plans for 2011
commercial scale, which could allow for initial sales of this product to
commence relatively quickly. A potential new pharmaceutical customer is
already testing this product for an existing medical market product.

CEAPRO Annual Report 2010 5

:: new ProductS

Bio-Actives From Spearmint

In 2008, Ceapro licensed a unique variety of spearmint from the University of Guelph. The appeal of this
special variety is the high level of bio-actives these plants can produce, typically shown to be up to five
times greater than other competing plant sources and thereby providing a substantial and sustainable
competitive advantage. During 2010, Ceapro initiated a multi-region program across Canada to test grow
the plant. Plants were grown in Southern Alberta, Southern Ontario, Northern Ontario, and Prince Edward
Island. The results were particularly impressive in Prince Edward Island where the crop propagated and
multiplied rapidly, being harvested twice within three months of its initial planting. This natural cultivar is
very different from conventional commercial spearmint varieties that are grown for their essential oils and are
only harvested once a season.

The high content value of the target active ingredients in this variety was validated, thereby confirming the
strong potential to develop a new product from the plant and the potential for agriculture producers to grow
a new cash crop. Good results were also found in Northern Ontario. The site in Southern Alberta was flooded
out in 2010 and illustrates the need to grow unique plant varieties in more than one location to mitigate
the risk of crop disaster. The 2010 crop harvested will provide the raw material for Ceapro to begin product
development work in 2011.

Ceapro intends to further multiply the crop
in 2011 and will commence cultivation with
commercial agricultural growers in the regions
that have shown the best potential. The activities
undertaken in 2010 have confirmed that this is a
very exciting project for Ceapro shareholders.

6 CEAPRO Annual Report 2010

MANAGEMENT’S DISCUSSION & ANALYSIS ::

:: MANAGEMENT’S DISCUSSION & ANALYSIS

The MD&A provides commentary on the results of operations for the years ended December 31, 2010 and 2009, the
financial position as at December 31, 2010, and the outlook of Ceapro Inc. (‘‘Ceapro’’) based on information available as
at April 18, 2011. The following information should be read in conjunction with the audited consolidated financial
statements as at December 31, 2010, 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, 2010 and 2009 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 April 18, 2011, 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. The
Company disclaims 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., Ceapro Active Ingredients Inc., and Ceapro BioEnergy Inc., are
incorporated under the Alberta Business Corporations Act. Ceapro (P.E.I.) Inc. is a wholly-owned subsidiary incorporated
in Prince Edward Island. Ceapro USA Inc. is a wholly-owned subsidiary incorporated in the state of Nevada. Ceapro is a
growth stage biotechnology company. Our primary business activities relate to the development and
commercialization of natural products for personal care, cosmetic, medical, and animal health industries using
proprietary technology and natural, renewable resources.

Our products include:

(cid:127) A commercial line of natural active ingredients, including beta glucan, avenanthramides (colloidal oat extract), oat
powder, oat oil, oat peptides, and lupin peptides, which are marketed to the personal care, cosmetic, medical, and
animal health industries through our distribution partners and direct sales; and

(cid:127) Veterinary therapeutic products, including an oat shampoo, an ear cleanser, and a dermal complex/conditioner,
which are manufactured and marketed to veterinarians in Japan and Asia, through agreements with Daisen
Sangyo Co. Ltd.

Other products and technologies are currently in the research and development or pre-commercial stage. These
technologies include:

(cid:127) CeaProve(cid:3), a diabetes test meal to screen pre-diabetes and to determine dosage levels for diabetes oral therapy, and
to monitor the condition of pre-diabetics;

(cid:127) 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;

(cid:127) An extension to the active ingredients product range offering, through new plant extract products;

(cid:127) A variety of novel manufacturing technologies.

CEAPRO Annual Report 2010 7

:: MANAGEMENT’S DISCUSSION & ANALYSIS

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 and direct sales efforts. Our strategic focus is in:

(cid:127) Increasing sales and expanding markets for our current active ingredients;

(cid:127) Developing and marketing additional high-value proprietary therapeutic products;

(cid:127) Developing and improving manufacturing technologies to ensure strong financial performance;

(cid:127) Advancing new partnerships and strategic alliances to develop new commercial active ingredients and
manufacturing technologies.

As a knowledge-based enterprise, we will also expand and strengthen our patent portfolio and build the necessary
manufacturing infrastructure to become a global technology company.

Our business growth depends on our ability to access global markets through distribution partnerships and direct sales.
Our marketing strategy emphasizes providing technical support to our distributors and their customers and generating
direct sales 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:

(cid:127) Adding value to all aspects of our business;

(cid:127) Enhancing the health of humans and animals;

(cid:127) Discovering, extracting, and commercializing new, natural ingredients;

(cid:127) Producing the highest quality work possible in products, science, and business; and

(cid:127) Developing personnel through guidance, opportunities, and encouragement.

To support these objectives, we believe we have strong intellectual and human capital resources and we are developing
a strong base of partnerships and strategic alliances to exploit our technology. The current economic environment
provides challenges in obtaining financial resources to fully exploit opportunities. To fund our operations, Ceapro relies
upon revenues primarily generated from the sale of active ingredients, and the proceeds of public and private offerings
of equity securities, debentures, grants, and other investment 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.

The Company’s consolidated financial statements for the year ended December 31, 2010 have been prepared on a
going concern basis, which assumes that the Company will continue in operation for the foreseeable future and
accordingly will be able to realize its assets and discharge liabilities in the normal course of operations. Since inception,
the Company has accumulated net losses, generated inconsistent operating cash flow, and has not yet achieved
consistent profitability. During the current year, the Company demonstrated that it has reached the critical mass to
operate profitably and generate funds to carry out its business vision. The Company has relied on the proceeds of public
and private offerings of equity securities and debentures, debt, and other income offerings to support the Company’s
operations. The Company’s ability to continue as a going concern is dependent on obtaining additional financial capital,
maintaining profitability, and generating positive cash flow. While there can be no assurance that the Company will be
able to access capital when needed, achieve consistent profitability, or generate sufficient cash flow, the Company

8 CEAPRO Annual Report 2010

MANAGEMENT’S DISCUSSION & ANALYSIS ::

believes it has accomplished these goals in 2010 as evidenced by improvements in working capital and shareholder’s
deficiency.

The consolidated financial statements as at December 31, 2010 do not reflect the adjustments that might be necessary
to the carrying amount of reported assets, liabilities, and revenues and expenses, and the balance sheet classification
used if the Company were unable to continue operations. Such adjustments could be material.

The Company has exposure to credit, liquidity, and market risk as follows:

A) CREDIT RISK:

The Company makes sales to customers that are well-established and well-financed within their respective industries.
There is always a risk relating to the financial stability of customers and their ability to pay, but management views this
risk as minimal. Approximately 81% of accounts receivable are due from three customers at December 31, 2010 and all
accounts receivable are current. The Company mitigates its exposure to credit risk on its cash balances by maintaining
its bank accounts with a Canadian Chartered Bank. The Company’s maximum exposure to credit risk on its cash and
accounts receivable is the carrying value of these items at December 31, 2010, a total of $757,052.

B) LIQUIDITY RISK:

Liquidity risk relates to the risk that the Company will encounter difficulty in meeting its financial obligations. The
long-term debt matures in January 2013. It is the intention of the Company that refinancing will be negotiated at that
time should it be required. The Company may be exposed to liquidity risks if it is unable to collect its trade accounts
receivable balances in a timely manner, which could in turn impact the Company’s long-term ability to meet
commitments under its current facilities. Royalties are in arrears as they have only been paid partially in cash since the
second quarter of 2008 due to the limited financial resources of the Company. In order to manage this liquidity risk, the
Company regularly reviews its aged accounts receivable listing to ensure prompt collections. The Company regularly
reviews its cash availability and whenever conditions permit, the excess cash is deposited in short-term interest bearing
instruments to generate revenue while maintaining liquidity. There is no assurance that the Company will obtain
sufficient funding to execute its strategic business plan.

Cash outflows related to financial liabilities are outlined in the table below.

0 - 1 YEAR

1 - 3 YEARS

4 - 5 YEARS

TOTAL

Accounts payable and accrued liabilities

862,163

–

Long-term debt, including interest

Royalties payable

Convertible debentures including interest

Employee future benefit obligation

Repayable research funding

Total

C) MARKET RISK:

208,613

378,051

540,000

–

12,500

1,135,148

–

37,500

–

184,037

–

862,163

1,343,761

378,051

540,000

184,037

50,000

$ 2,001,327

$ 1,172,648

184,037

$ 3,358,012

Market risk is comprised of interest rate risk and foreign currency risk. The Company’s exposure to market risk is
as follows:

i) Foreign currency risk

Foreign currency risk arises from the fluctuations in foreign exchange rates and the degree of volatility of these rates
relative to the Canadian dollar.

The Company is exposed to foreign currency fluctuations because a substantial portion of sales are denominated in
U.S. dollars. A one percent change in the Canadian/U.S. dollar exchange rate will impact revenues by approximately
$54,500 annually based upon 2010 U.S. dollar sales of $5,450,000. The Company does purchase some materials and
services in U.S. dollars and to a very minor extent in Euros. This amount will vary by product sold.

CEAPRO Annual Report 2010 9

:: MANAGEMENT’S DISCUSSION & ANALYSIS

The following table summarizes the impact of a 1% change in the foreign exchange rates of the Canadian dollar
against the US dollar (USD) on the financial assets and liabilities of the Company.

Financial assets

Accounts receivable

Financial Liabilities

CARRYING
AMOUNT
(USD)

FOREIGN EXCHANGE RISK (USD)

-1%

+1%

EARNINGS & EQUITY

$ 535,729

$ 5,357

$ (5,357)

Accounts payable and accrued liabilities

46,159

Total increase (decrease)

$ (462)

$ 4,895

462

$ (4,895)

The carrying amount of accounts receivable and accounts payable and accrued liabilities in USD represents the
Company’s exposure at December 31, 2010.

ii) Interest rate

The Company has minimal interest risk because its long-term debt is a fixed rate of 5.49%. However, in the event of a
default, the rate would increase to 7.49% and result in an increase in the required monthly principal and interest
payment by $1,541.

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 the Company’s business and the technology 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 Ceapro’s future growth and operating results, including the strength and demand for the
Company’s products, the extent of competition in our markets, the ability to recruit and retain qualified personnel, and
its ability to raise capital.

Ceapro’s financial statements are prepared within a framework of Canadian GAAP selected by management and
approved by the Board of Directors. The assets, liabilities, revenues, and expenses reported in the consolidated 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 provisions made for inventory valuation, amortization of property and equipment, the
assumptions used in determining stock-based compensation, the discount rate used in determining the employee
future benefits obligation, and the interest rate used to value convertible debentures. These estimates are based on
historical experience and reflect certain assumptions about the future that we believe to be both reasonable and
conservative. Actual results could differ from those estimates. Ceapro continually evaluates the estimates and
assumptions.

10 CEAPRO Annual Report 2010

MANAGEMENT’S DISCUSSION & ANALYSIS ::

D) PEOPLE AND PROCESS RISK:

i) Loss of key personnel

Ceapro relies on certain key employees whose skills and knowledge are critical to maintaining the Company’s
success. Ceapro has procedures in place to identify and retain key employees and always attempts to be competitive
with compensation and working conditions.

ii) Interruption of raw material supply

Interruption of key raw materials could significantly impact operations and our financial position. Interruption of
supply could arise from weather related crop failures, or from market shortages. Ceapro attempts to purchase key
raw materials well in advance of their anticipated use.

iii) Environmental issues

Violations of safety, health, and environmental regulations could limit operations and expose the Company to
liability, cost, and reputational impact. In addition to maintaining compliance with national and provincial standards,
Ceapro maintains internal safety and health programs.

iv) Regulatory compliance

As a natural extract producer, Ceapro is subject to various regulations; and violation of these could limit markets into
which we can sell. Ceapro has introduced a range of procedures which will ensure that Ceapro is well prepared for
new regulations and requirements that may be required.

FUTURE ACCOUNTING PRONOUNCEMENTS

IFRS

In 2006, Canada’s Accounting Standards Board (‘‘AcSB’’) ratified a strategic plan that would result in International
Financial Reporting Standards (‘‘IFRS’’) replacing Canadian GAAP for publicly accountable entities. In February 2008, the
AcSB confirmed January 1, 2011 as the date that Canadian public entities will be required to start reporting under IFRS.
Comparative financial information for 2010 will be required when companies begin reporting 2011 results under IFRS.

The Company will apply accounting policies consistent with IFRS beginning with its interim financial statements for the
quarter ended March 31, 2011. Interim and annual financial statements will include comparative 2010 financial
statements, adjusted to comply with IFRS.

The adoption of IFRS will result in some changes to the Company’s significant accounting policies that are applied in the
recognition, measurement, and disclosure of balances and transactions in its financial statements.

The Company has not yet determined the full effect of adopting IFRS on its financial statements and is still considering
additional exemptions available. Included below are highlights of the areas that are expected to result in a change to
the Company’s reported amounts under Canadian GAAP.

The Company has made a detailed evaluation of accounting policies and assessment of IFRS 1 First-time Adoption of
International Financial Reporting Standards and determined choices under this standard. The Company has chosen the
following optional exemptions under this standard:

i) Employee benefit

The Company intends to disclose the amounts required under IAS 19 Employee Benefits as the amounts are
determined for each accounting period prospectively from the transition date;

ii) Share-based payments

The Company has elected not to apply IFRS 2 Share-based payments to equity instruments granted after
November 7, 2002 that had vested by the transition date.

CEAPRO Annual Report 2010 11

:: MANAGEMENT’S DISCUSSION & ANALYSIS

The accounting policies the Company expects to apply and the estimated possible impact on financial statements
under the following IFRS standards are detailed below:

IFRS 2 Share-based Payments

The Company will be required to estimate forfeitures on issuance rather than being recorded when incurred under
Canadian GAAP. This is not expected to have a material impact on the Company’s financial statements.

IAS 16 Property and Equipment

The Company will adopt the cost model for property and equipment for measurement after initial recognition. This is
expected to have no impact on the Company’s financial statements.

IAS 39 Financial Instruments Recognition and Measurement

The Company is required to adopt this standard. The Company is currently assessing the impact of this standard.

IAS 37 Provisions, Contingent Liabilities, and Contingent Assets

The Company will be adopting this standard and is currently assessing the impact this standard will have on provisions
recognized for its royalty obligations.

IAS 12 Income Taxes

The Company will recognize a deferred tax liability for the equity component of convertible debentures offset by a
deferred tax asset on previously unrecognized tax assets of the same amount. This is expected to have no material
impact on the Company’s financial statements.

In general, the Company believes it is on schedule to make the changes required for IFRS reporting in 2011. The
adoption of IFRS is not expected to impact other daily business activities.

12 CEAPRO Annual Report 2010

MANAGEMENT’S DISCUSSION & ANALYSIS ::

RESULTS OF OPERATIONS – YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008

CONSOLIDATED INCOME STATEMENT

$000S EXCEPT PER SHARE DATA

Total revenues

Cost of goods sold

Gross margin

General and administration expenses

Royalties

Selling and marketing

Amortization

Interest and accretion expenses

Income (loss) from operations

Research and development expenses

Write off of property and equipment

Other income (loss)

Income (loss) before SGGF legal fees recovery
(expense) and income tax

SGGF legal fee recovery (expense)

Income before tax

Income tax

Net income

Basic net income (loss) per common share

Diluted net income (loss) per common share

Total assets

Total long-term financial liabilities

100%

55%

45%

22%

18%

14%

2010

5,577

(3,042)

2,535

(1,237)

(60)

(70)

(37)

(138)

993

(765)

(12)

(30)

186

315

501

–

501

0.01

2,820

1,445

2009

4,370

(2,252)

2,118

(1,424)

(251)

(184)

(45)

(77)

137

(578)

–

(55)

100%

52%

48%

33%

13%

2008

4,228

(2,942)

1,286

(1,689)

(402)

(385)

(35)

(84)

(1,309)

(897)

–

100%

70%

30%

40%

10%

2%
(cid:4)31%

21%

(496)

(cid:4)11%

(2,133)

(cid:4)50%

426

(69)

–

(69)

(0.00)

2,771

2,025

10%
(cid:4)2%

35%
(cid:4)85%

(1,466)

(3,599)

–

(cid:4)2%

(3,599)

(cid:4)85%

(0.08)

3,287

1,770

Revenue. The Company’s revenue has increased by 28%, to $5,577,000 from $4,370,000 in 2010.

Cost of Goods Sold. Cost of Goods Sold increased by 35% to $3,042,000 from $2,252,000.

Gross margin. Gross margin increased by $417,000 or 20% to $2,535,000 from $2,118,000.

The sales of active ingredients to the personal care industry increased by $1,513,000 due to higher sales volumes for
most products offset partially by a strengthening Canadian dollar versus the US dollar. There has been a decrease of
$306,000 in sales to the animal health industry segment in comparison to 2009.

Income from operations was $993,000 compared to $137,000 in 2009 largely due to higher product sales and lower
operating expenses and royalties. Research and development costs increased $187,000 due primarily to expenditures
undertaken as a result of new research projects.

There was a decrease in general and administration expenses of $187,000 and lower sales and marketing costs in the
amount of $114,000.

CEAPRO Annual Report 2010 13

:: MANAGEMENT’S DISCUSSION & ANALYSIS

Net income in 2010 of $501,000 includes the reversal of a legal fee accrual in the amount of $315,000 previously
recorded in 2008. There was a net loss of ($69,000) in 2009 including the reversal of $426,000 in disputed legal fees
accrued in 2008.

The fourth quarter revenues of $1,696,000 represent a sharp increase of $1,301,000 from 2009 fourth quarter revenues
of $395,000. Income from operations in the fourth quarter was $488,000 compared with loss ($443,000) in 2009, and net
income for the fourth quarter was $198,000 in comparison with net loss in the fourth quarter of 2009 ($634,000) as a
result of higher sales. There was a decrease in general and administration expenses of $17,000, decrease in sales and
marketing of $52,000, and increase in research and development costs of $65,000 during the fourth quarter. There was a
fourth quarter foreign exchange loss of $24,000 and other expenses of $2,000 in the current year, while in the same
period in 2009, there was a foreign exchange loss of $4,000 and other expenses of $1,000.

REVENUE

$000S

Total revenues

PRODUCT SALES

2010

5,577

2009

4,370

CHANGE

28%

In 2010, total sales rose $1,207,000 or 28% as a result of increased sales of active ingredients in the personal care
industry of $1,513,000, offset partially by decreased sales to the animal health industry segment of $306,000. The timing
of animal health orders varies by quarter. Total sales were negatively impacted by a stronger Canadian dollar versus the
U.S. dollar.

Sales in the fourth quarter 2010 increased sharply to $1,696,000 as a result of strong demand from the personal care
sector for Ceapro active ingredients as well as a sale to the animal health sector. This represents the highest fourth
quarter revenue in the history of the Company.

Sales of veterinary therapeutic products in 2010 and 2009 were represented by the sale of pre-mixes containing Ceapro
active ingredients. Sales in the fourth quarter were $160,000 versus nil in 2009.

EXPENSES

COST OF GOODS SOLD AND GROSS MARGINS

$000S

Sales

Cost of goods sold

Gross margin

Gross margin %

2010

5,577

3,042

2,535

45%

2009

4,370

2,252

2,118

48%

CHANGE

20%

Cost of goods sold is comprised of the direct raw materials required for the specific formulation of products, as well as
direct labour, quality assurance and control, packaging, transportation costs, plant costs, and amortization on plant and
equipment assets. Aside from labour, rent, quality control related expenses, overhead, and property and equipment
amortization, the majority of costs are variable in relation to the volume of product produced or shipped.

For 2010, the gross margin increased by 20% in dollar terms; but the percentage decreased to 45% from 48%, primarily
due to the strengthening of the Canadian dollar versus US dollar that negatively impacted sales, the write off of $99,000
of oat oil, and general increases for plant costs.

14 CEAPRO Annual Report 2010

MANAGEMENT’S DISCUSSION & ANALYSIS ::

The fourth quarter gross margin of $861,000 and gross margin percentage of 51% in 2010 increased significantly from
negative gross margin ($10,000) in 2009 due to higher sales volumes and resulting higher economies of scale of
manufacturing fixed costs.

GENERAL AND ADMINISTRATION

$000S

Salaries and benefits

Consulting

Board of Directors compensation

Investor relations

Insurance

Accounting and audit fees

Legal

Rent

Other

Total general and administration expenses

2010

2009

CHANGE

349

188

176

114

135

1,237

386

181

190

113

114

218

1,424

(cid:4)13%

General and administration expense for 2010 decreased by $187,000 or 13%. Salaries decreased as a result of lower staff
levels during the year. Directors’ compensation decreased due to lower stock based compensation expenses.
Accounting and audit fees increased during the year for the IFRS conversion project. Investor relations decreased as the
Company has not engaged investor relations consultants in 2010 as they did in 2009. Most other costs decreased, which
reflects efforts by the Company to reduce expenditures and focus on core areas of business.

General and administration costs for the fourth quarter decreased $17,000 from 2009 for the same reasons that full year
expenses decreased.

SALES AND MARKETING

$000S

Salaries and benefits

Courses & Conferences

Travel

Other

Total sales and marketing

2010

–

2009

184

Change

(cid:4)62%

Sales and marketing expenses in 2010 declined by 62% largely due to staff reductions for marketing activities. There
was a decrease in conference expenses associated with market expansion and production of corporate promotional
material in 2010.

The fourth quarter of 2010 showed a reduction in expenditures of 72% versus 2009 for the same reasons discussed for
the whole year.

Sales and marketing expenses decreased in the fourth quarter of 2010 by $52,000 versus 2009 as the Company made a
decision to evaluate different marketing strategies in 2009 and therefore incurred significantly less cost in 2010 when it
did not incur these costs. Most of these efforts in 2010 involved attending tradeshows focused on opportunities to
target personal care companies with specific needs and subsequent follow-up visits with these companies.

The Company is currently reviewing new marketing initiatives for 2011.

CEAPRO Annual Report 2010 15

:: MANAGEMENT’S DISCUSSION & ANALYSIS

ROYALTIES

$000S

Royalty interest units

Less: recognition of deferred royalty revenue

Total royalty expenses

2010

114

(54)

2009

301

(50)

251

CHANGE
(cid:4)62%

(cid:4)76%

As at December 31, 2010, royalty investors received royalties equal to 2.285% (2009 – 2.285%) of revenues from product
sales and royalty, license, and product development fees of active ingredients, veterinary therapeutic products, and
CeaProve(cid:3) to a maximum of two times the amount invested. AVAC Ltd. receives royalties of up to 2.5% to 5% of revenues
from eligible product sales, to a maximum of one and a half to twice the amount invested. Royalty expense will vary
directly with fluctuations in eligible product sales, royalty, license and product development fees, product sales mix, and
any new royalty interest offerings that may be completed. Royalty expense decreased as two royalties totaling 8.31%
were fully accrued in 2009.

The Company recognizes deferred royalty revenue for royalty interest units issued in 2005 at a rate of one half times the
amount of the royalty interest expense. Detailed royalty disclosure is provided in note 7 of the consolidated financial
statements.

During 2010, the Company settled royalty obligations in the amount of $270,560 through the issuance of
3,006,224 common shares of Ceapro Inc. During the fourth quarter, the Company further repaid a total of $218,000 with
cash toward the royalty obligation leaving an obligation of $378,000 at December 31, 2010.

Royalty expense in the fourth quarter was $21,000, an increase from $16,000 in the fourth quarter of 2009 as a result of
higher eligible product sales.

INTEREST & AMORTIZATION EXPENSES

$000S

Interest on long-term debt

Interest on convertible debentures

Accretion on convertible debentures

Total interest expenses

Amortization

2010

138

2009

CHANGE

–

79%

(cid:4)17%

Interest on long-term debt declined $7,000 as a result of a lower principal balance of long-term debt from the previous
year. Interest expense on long-term debt decreased $2,000 in the fourth quarter of 2010 from 2009 for the
same reasons.

For the year ended December 31, 2010, the total amortization of $291,000 (2009 – $357,000) was allocated as follows:
$37,000 (2009 – $45,000) to amortization expense, $4,000 to inventory (2009 – $23,000), and $250,000 (2009 –
$289,000) to cost of goods sold.

16 CEAPRO Annual Report 2010

MANAGEMENT’S DISCUSSION & ANALYSIS ::

OTHER INCOME (EXPENSES)

RESEARCH AND PRODUCT DEVELOPMENT

$000S

Salaries and benefits

Regulatory and patents

Other

Product development – CeaProve(cid:3)

Total research and product development
expenditures

2010

371

128

160

659

106

765

2009

CHANGE

400

115

(13)

502

577

31%

42%

33%

Research and product development expenses in 2010 increased by 31% from 2009 expenses as a result of new research
and development projects commenced in 2010 and higher costs for patents. There was an increase of 42% in costs for
CeaProve(cid:3) related to contract manufacturing of the product. As a result, total research and product development
expenditures increased by 33%, mainly to support the commercialization of new products.

For the fourth quarter, research and development expenses increased 49% while total research and development,
including CeaProve(cid:3), increased $65,000 or 35% for the same reasons discussed for the year.

OTHER INCOME (EXPENSES)

$000S

Interest and miscellaneous income (loss)

Foreign exchanges gain (loss)

Total other income (expenses)

2010

(2)

(28)

(30)

2009

(68)

(55)

CHANGE

(cid:4)46%

Other income in 2010 is comprised primarily of $28,000 of foreign exchange loss and $2,000 of miscellaneous expenses
compared to foreign exchange loss of $68,000 in 2009, mostly due to the strengthening of the Canadian dollar versus
the US dollar offset by $13,000 in other income. The foreign exchange loss in the fourth quarter of 2010 was $24,000 and
other expenses were $2,000 compared to a foreign exchange loss of $4,000 and other expenses of $1,000 in 2009.

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.

2010

2009

$000S EXCEPT
PER SHARE DATA

Total revenues

Net income (loss)

Basic net income (loss) per
common share

Diluted net income (loss)
per common share

1,696

198

1,708

115

1,018

237

1,155

(49)

395

(634)

1,261

(4)

1,212

466

1,502

103

0.004

0.002

0.005

(0.001)

(0.012)

(0.000)

0.010

0.002

0.004

0.002

0.005

(0.001)

(0.012)

(0.000)

0.010

0.002

CEAPRO Annual Report 2010 17

:: MANAGEMENT’S DISCUSSION & ANALYSIS

Ceapro’s quarterly sales and results primarily fluctuate due to variations in the timing of customer orders, different
product mixes, and the capacity to manufacture products.

LIQUIDITY AND CAPITAL RESOURCES

CAPITAL EMPLOYED

$000S

Non-current assets

Current assets

Current liabilities

Total assets less current liabilities

Non-current liabilities

Shareholders’ equity

Total capital employed

2010

1,713

1,107

(1,927)

893

1,445

(552)

893

2009

1,925

846

(2,119)

652

2,025

(1,373)

652

Non-current assets decreased $212,000 due to a write-off of property and equipment in the amount of $12,000 and an
amortization provision of $291,000 offset by the acquisition of $91,000 of property and equipment.

Trade and other receivables including deposits and prepaid expenses were higher than 2009 by $427,000, and cash
increased over 2009 by $71,000. Inventories were lower by $237,000.

Convertible debentures in the amount of $468,000 were reclassified in 2010 from non-current to current liabilities as the
debentures mature on December 31, 2011. It was presented under non-current liabilities in the amount of $440,000
in 2009.

Excluding the reclassification of convertible debentures described above, current liabilities totaling $1,927,000
decreased by the net amount of $660,000 ((1,927 - 468) – 2,559). This was due to an increase in trade payables and
accrued liabilities of $15,000, a reversal of an accrual in the amount of $315,000 created in 2008 for legal fees, and a net
royalty payable reduction of $380,000 due to repayments of $489,000 through cash $218,000 and shares $271,000 offset
by new accrued portion of $108,000. Current portion of long-term debt was increased by $8,000, and current portion of
repayable research funding was recognized in 2010 in the amount of $12,000.

Excluding the reclassification of convertible debentures described above, non-current liabilities totaling $1,445,000
decreased by the net amount of $139,000 due to principal repayment of financial liabilities in the amount of $147,000
and recognition of deferred royalty revenue in the amount of 54,000 offset by an additional accrued employee future
benefit obligation of $23,000, and the non-current portion of repayable research funding recognized in 2010 in the
amount of $38,000.

Shareholders’ deficiency of $552,000 at December 31, 2010 improved from a shareholders’ deficiency of $1,373,000 at
December 31, 2009 due to increases in share capital of $292,000 from the conversion of debt, the recognition of stock-
based compensation in contributed surplus of $28,000, and net income of $501,000.

18 CEAPRO Annual Report 2010

MANAGEMENT’S DISCUSSION & ANALYSIS ::

NET DEBT

$000S

Cash and cash equivalents

Current financial liabilities*

Non-current financial liabilities*

Total financial liabilities

Net Debt

2010

187

1,004

1,119

2,123

1,936

2009

116

897

1,667

2,564

2,448

* Includes long-term debt, current portion of long-term debt, convertible debentures, repayable research funding,

current portion of repayable research funding, and current portion of royalties payable.

The Company’s net debt decreased by $512,000 or 21% due to a long-term debt repayment in the amount of $139,000,
and cash increasing by $71,000 partially offset by convertible debentures accretion in the amount of $28,000, and
receiving repayable research funding of $50,000. Royalties were repaid by a total of $488,000 while new royalty
obligations of $108,000 were accrued.

SOURCES 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 flow)*

Changes in non-cash working capital items*

Share capital issued, net of costs

Repayable research funding

Convertible debentures proceeds

Uses of funds:

Purchase of property and equipment

Change in long-term debt

Royalties paid

Increase in royalties payable

Net change in cash

2010

829

(468)

–

411

(91)

(139)

(218)

108

(340)

2009

176

(1,145)

463

–

500

(6)

(52)

(132)

–

289

105

* Cash flows provided by operating activities comprise the cash generated by operating activities less changes in

working capital requirements.

The increase in 2010 in cash flows provided by operating activities resulted from a significant increase in cash generated
by operating activities of $1,330,000, which was due to a sharp increase in operating income of $855,000 and from
non-cash working capital item improvements primarily due to SGGF legal fees being written off.

CEAPRO Annual Report 2010 19

:: MANAGEMENT’S DISCUSSION & ANALYSIS

FREE CASH FLOW*

$000S

Cash flows provided by operating activities

Purchase of property and equipment and
deposits

Free Cash Flow

2010

361

(91)

270

2009

(969)

(52)

(1,021)

* Free cash flow (available cash) represents cash flow from operating activities less capital expenditures net of
proceeds from disposal. Free cash flow (FCF) represents the cash that a company is able to generate after laying
out the money required to maintain or expand its asset base. Free cash flow is important because it allows a
company to repay debt obligations and pursue opportunities that enhance shareholder value.

Free cash flow significantly improved in 2010 by $1,291,000 mostly due to improved cash flow from operating
activities – $1,330,000 partially offset by increased spending in 2010 on property and equipment in the amount
of $39,000.

The Company estimates that the cash flows generated by its operating activities as well as cash available through other
sources will be sufficient to finance its operating expenses, capital investment, and debt service needs.

The Company relies upon revenues generated from the sale of active ingredients, the proceeds of public and private
offerings of equity securities and debentures, and income offerings to support the Company’s operations.

Total common shares issued and outstanding as at April 18, 2011 were 56,578,948 (April 14, 2010 – 51,710,063). In
addition, 3,105,000 stock options as at April 18, 2011 (April 14, 2010 – 2,485,000) were outstanding that are potentially
convertible into an equal number of common shares at various prices.

Ceapro’s working capital position was ($820,000) at December 31, 2010, an improvement of $453,000 from ($1,273,000)
at December 31, 2009.

To meet future requirements, Ceapro intends 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 the Company’s control, as outlined in the Risks and Uncertainties section. Should sufficient capital not be raised,
Ceapro may have to delay, reduce the scope of, eliminate, or divest one or more of its discovery, research, or
development technology or programs, any of which could impair the value of the business.

The Company was approved for non-repayable funding in the amount of $124,000 from Alberta Ingenuity. During 2010,
the Company received $20,750 which was recorded as a reduction of research and development expenses. The
Company anticipates receiving an additional amount of $62,000 in 2011 and $41,250 in 2012 under this program.

The Company was approved for non-repayable funding for up to 50% of eligible costs to a maximum of $99,900 under
the Growing Forward Product Development program. The Company recognized $39,824 in 2010 under this program
with $22,574 recorded as a reduction of research and development expenses, and $17,250 recorded as a reduction of
prepaid expenses. An amount of $15,429 was included in accounts receivable at December 31, 2010 with respect to this
agreement. The Company anticipates the balance of eligible funding to be received in the first quarter of 2011.

The Company was approved for non-repayable funding in the amount of $50,000 for eligible costs from the Atlantic
Canada Opportunities Agency. The Company recorded $39,121 of funding in 2010 as a reduction of research and
development expenses and anticipates receiving further $10,879 in 2011 under this program. An amount of $11,272
was recorded in accounts receivable at December 31, 2010 with respect to this agreement.

20 CEAPRO Annual Report 2010

MANAGEMENT’S DISCUSSION & ANALYSIS ::

The Company was approved for non-repayable funding to a maximum of $21,250 of eligible expenditures under the
Novel Crops Initiative program from the Prince Edward Island Department of Agriculture. The Company recorded the
amount of $5,925 as a reduction of research and development expenditures under this program. An amount of $5,925 is
included in accounts receivable at December 31, 2010 with respect to this agreement. The Company anticipates
receiving further funding of up to $5,000 in 2011 and $5,000 in 2012.

The Company was approved for non-repayable funding of $7,055 under the Growing Forward Lean Manufacturing
Initiative. The Company recognized $5,823 as a reduction of cost of certain property and equipment, and $1,232 as a
reduction of research and development expenditures. The full amount of $7,055 was included in accounts receivable at
December 31, 2010.

The Company received a repayable non-interest bearing contribution for research and development expenditures in the
amount of $50,000 from Innovation PEI, which is recorded as a repayable research funding liability on the balance sheet.
The Company may be eligible for a further contribution of $50,000 in 2011. The contribution is repayable quarterly at a
rate of one percent of sales revenue subject to a minimum payment of $12,500 per quarter.

The Company is also eligible to claim up to $1,339,625 of eligible research and development expenditures in 2011 and
2012 under the Canadian Agricultural Adaptation Program. All amounts claimed under the program are repayable
interest free over eight years beginning in 2013.

The Company is currently reviewing additional options available to raise capital.

RELATED PARTY TRANSACTIONS

During 2010, $21,951 (2009 – $38,699) of royalties were earned by employees and directors from their investment in
previous Ceapro royalty offerings. As at December 31, 2010, $27,758 (2009 – $84,581) of royalties were payable to
employees and directors. During 2010, employees and directors converted $71,898 of royalties payable into common
shares of the Company. Consulting fees of $150,000 (2009 – $150,000) were earned by a company controlled by a
director during 2010. During 2010, officers and directors earned $5,753 of interest on convertible debentures (2009 –
$nil). During 2010, officers and directors converted $2,953 of convertible debenture interest into common shares of the
Company. As at December 31, 2010, officers and directors owned $70,000 (2009 – $70,000) of convertible debentures.
As at December 31, 2010, consulting fees of $nil (2009 – $37,500) were payable to a company controlled by a director
and included in accounts payable and accrued liabilities. 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.

COMMITMENTS AND CONTINGENCIES

a) During the year ended December 31, 2008, the Company recorded a provision for disputed legal fees from two legal
firms in the amount of $741,283 that related to a settled litigation case. In 2009, the Company recorded a recovery of
$426,300 of the previously disputed legal fees as one legal firm advised the Company that it would not be pursuing
their claim. Based upon review by management with legal counsel during the year and the circumstances applicable
at that time, management believes the Company is no longer exposed to the remaining accrued legal fee liability in
the amount of $314,983. The Company recorded a recovery of $314,983 of the remaining disputed legal fees. The
balance of $nil is recorded as a liability on the balance sheet in 2010 (2009 – $314,983) as SGGF legal fees.

CEAPRO Annual Report 2010 21

:: MANAGEMENT’S DISCUSSION & ANALYSIS

included in amortization on the income statement. The Company is obligated to pay the University an amount equal
to 8% of net sales from products derived from the mint plants subject to minimum payments as follows:

2011

2012

2013

2014

2015 to 2017

Total

$ 12,960

20,160

27,360

34,560

146,880

$241,920

For 2010, the Company recognized a minimum royalty expense of $5,760 (2009 – $5,760). Royalties payable at
December 31, 2010 are $13,920 (2009 – $8,160).

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.

OUTLOOK

Results obtained in 2010 are the best ever in the Company’s history. The very strong result from the third and fourth
quarters of 2010 is solid evidence of the successful implementation of Ceapro’s renewed and focused strategy.

From a financial perspective, these results translate into positive trends of improved working capital, a strengthened
balance sheet, an ability to reduce debt to royalty holders, and an improved foundation to pursue traditional
commercial financing.

This overall improving situation is being noticed by both private and public sectors that see tremendous value in Ceapro
technology to form partnerships. Recent contributions from the Atlantic Canada Opportunities Agency, Innovation PEI,
Alberta Ingenuity, and the Canadian Agricultural Adaptation Program reflect a vote of confidence in both Ceapro
technology and our ability to commercialize the novel technology that Ceapro is developing. We anticipate additional
partnerships will be completed in the near future.

Thanks to the contributions Ceapro has received, we are able to initiate innovative research projects in both Alberta and
Prince Edward Island. Ceapro’s participation is being sought in other projects by other parties which should lead to an
expanded base of opportunity for growth. We anticipate a need to expand our marketing and business development
and plan to commence expansion of our manufacturing facilities.

We believe that Ceapro has turned the corner in 2010. With our strong team of dedicated and hard working staff, we
believe Ceapro is well positioned to sustain and grow sales and profitability in 2011.

ADDITIONAL INFORMATION

Additional information relating to Ceapro Inc., including a copy of the Company’s Annual Report and Proxy Circular, can
be found on SEDAR at www.sedar.com.

22 CEAPRO Annual Report 2010

CONSOLIDATED FINANCIAL STATEMENTS ::

:: CONSOLIDATED FINANCIAL STATEMENTS

MANAGEMENT’S REPORT

TO THE SHAREHOLDERS OF CEAPRO INC.,

The accompanying consolidated financial statements of Ceapro Inc., and all information presented in this 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 consolidated financial statements include some amounts that are based on the
best estimates and judgments of Management. Financial information used elsewhere in this report is consistent with
that in the consolidated financial statements.

To further the integrity and objectivity of data in the consolidated 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 consolidated financials
statements, and that assets are properly accounted for and safeguarded.

The Board of Directors carries out its responsibility for the consolidated financial statements in the 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 consolidated financial
statements, management discussion and analysis, and the external auditors’ report. The Committee reports its findings
to the Board for consideration when approving the consolidated 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 consolidated financial statements have been audited by the Company’s auditors, Stout & Company LLP, in
accordance with auditing standards generally accepted in Canada on behalf of the shareholders.

SINCERELY,

SIGNED ‘‘Gilles Gagnon’’
Acting President and Acting Chief Executive Officer

SIGNED ‘‘Branko Jankovic, CA’’
Chief Financial Officer

CEAPRO Annual Report 2010 23

:::: CONSOLIDATED FINANCIAL STATEMENTS

INDEPENDENT AUDITORS’ REPORT

TO THE SHAREHOLDERS OF CEAPRO INC.

16MAY201111090026

We have audited the accompanying consolidated financial statements of Ceapro Inc. and its subsidiaries (‘‘the Company’’),
which comprise the consolidated balance sheets as at December 31, 2010 and 2009 and the consolidated statements of
net income (loss) and comprehensive income (loss) and deficit and cash flows for the years then ended, and the related
notes including a summary of significant accounting policies.

MANAGEMENT’S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS

Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with Canadian generally accepted accounting principles, and for such internal control as management
determines is necessary to enable the preparation of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.

AUDITORS’ RESPONSIBILITY

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted
our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply
with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of
material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the Company’s preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our
audit opinion.

OPINION

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
Ceapro Inc. as at December 31, 2010 and 2009 and the results of its operations and cash flows for the years then ended in
accordance with Canadian generally accepted accounting principles.

EMPHASIS OF MATTER

We draw attention to note 1 of the consolidated financial statements which describes the existence of uncertainties that
may cast significant doubt about the Company’s ability to continue as a going concern. Our opinion is not qualified in
respect of this matter.

16MAY201111091663

Chartered Accountants

Edmonton, Canada
April 18, 2011

24 CEAPRO Annual Report 2010

CONSOLIDATED BALANCE SHEETS

ASSETS

Current Assets

Cash

Accounts receivable

Inventories (note 3)

Prepaid expenses and deposits

License (note 10b)

Property and equipment (note 4)

LIABILITIES

Current Liabilities

Accounts payable and accrued liabilities

Current portion of deferred royalty revenue

Current portion of long-term debt (note 5)

Royalties payable (note 7)

Convertible debentures (note 6)

Current portion of repayable research funding (note 19)

SGGF legal fees (note 10a)

Deferred royalty revenue

Employee future benefits obligation (note 8)

Long-term debt (note 5)

Repayable research funding (note 19)

Convertible debentures (note 6)

SHAREHOLDERS’ DEFICIENCY

Share capital (note 9b)

Equity component of Convertible Debentures (note 6)

Contributed surplus (note 9c)

Deficit

CONTINGENCIES (note 10a and 10c)

See accompanying notes

Approved on Behalf of the Board

SIGNED: ‘‘Glenn Rourke’’
Director

CONSOLIDATED FINANCIAL STATEMENTS ::

December 31
2010
$

December 31
2009
$

186,690

570,362

279,425

70,230

1,106,707

24,000

1,689,052

2,819,759

862,163

60,000

146,426

378,051

467,500

12,500

–

1,926,640

166,198

160,187

1,081,000

37,500

–

3,371,525

5,770,858

60,000

507,188

(6,889,812)

(551,766)

2,819,759

115,502

151,144

516,821

62,309

845,776

27,000

1,897,878

2,770,654

846,538

60,000

138,806

758,436

–

314,983

2,118,763

220,422

136,786

1,227,426

–

440,000

4,143,397

5,479,202

60,000

478,945

(7,390,890)

(1,372,743)

2,770,654

SIGNED: ‘‘Edward Taylor’’
Director

CEAPRO Annual Report 2010 25

:: CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME
(LOSS) AND DEFICIT

Years ended December 31

REVENUE

Sales (note 11)

Cost of goods sold

Gross margin

EXPENSES

General and administration

Royalties

Sales and marketing

Amortization

Interest on convertible debentures

Accretion on convertible debentures

Interest on long-term debt

Income (loss) from operations

OTHER INCOME (EXPENSES)

Research and product development

Write off of property and equipment

Other income (loss) (note 12)

Income (loss) before SGGF legal fee recoveries and income taxes

SGGF legal fee recoveries (note 10a)

NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) FOR
THE YEAR

Deficit, beginning of year

DEFICIT, END OF YEAR

Net income (loss) per common share:

Basic (note 20)

Diluted (note 20)

2010
$

5,576,636

3,041,469

2,535,167

2009
$

4,370,070

2,252,024

2,118,046

1,237,240

1,424,344

59,985

69,513

37,227

41,096

27,500

69,808

1,542,369

992,798

(764,351)

(12,278)

(30,074)

186,095

314,983

501,078

(7,390,890)

(6,889,812)

250,663

183,693

44,842

–

77,031

1,980,573

137,473

(577,629)

–

(55,493)

(495,649)

426,300

(69,349)

(7,321,541)

(7,390,890)

0.01

(0.00)

Weighted average number of common shares outstanding

53,219,621

49,577,953

See accompanying notes

26 CEAPRO Annual Report 2010

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31

OPERATING ACTIVITIES

Net income (loss) for the year

Adjustments to reconcile net income (loss) to cash provided by

operating activities

Amortization

Write-off of property and equipment

Accretion on convertible debentures

Deferred royalty revenue

Employee future benefits obligation

Stock based compensation

CHANGES IN NON-CASH WORKING CAPITAL ITEMS

Accounts receivable

Inventories

Prepaid expenses and deposits

Accounts payable and accrued liabilities

SGGF legal fees

CONSOLIDATED FINANCIAL STATEMENTS ::

2010
$

2009
$

501,078

(69,349)

290,640

12,278

27,500

(54,224)

23,401

28,243

828,916

(419,218)

237,396

(7,921)

36,721

(314,983)

(468,005)

360,911

356,958

–

(49,647)

(167,226)

104,927

175,663

400,450

(109,854)

20,259

(304,276)

(1,151,300)

(1,144,721)

(969,058)

INVESTING ACTIVITY

Purchase of property and equipment

(91,092)

(52,096)

FINANCING ACTIVITIES

Repayment of long-term debt

Proceeds from convertible debenture issue

Proceeds from issuance of share capital

Repayable research funding

Share capital issue costs

Royalties paid

Increase in royalties payable

Increase in cash

Cash at beginning of year

Cash at end of year

SUPPLEMENTARY INFORMATION

Interest paid

Royalties paid

See accompanying notes

(138,806)

–

50,000

–

(218,274)

108,449

(198,631)

71,188

115,502

186,690

69,808

218,274

(131,582)

500,000

466,000

–

(3,193)

–

288,906

1,120,131

98,977

16,525

115,502

77,031

–

The non-cash transactions described in notes 6 and 9(b) have been excluded from the statement of cash flows.

CEAPRO Annual Report 2010 27

:: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF BUSINESS OPERATIONS AND GOING CONCERN

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.

The consolidated financial statements have been prepared on a going concern basis, which assumes that the Company
will continue in operation for the foreseeable future and will be able to realize its assets and discharge liabilities in the
normal course of operations. However, certain conditions may cast some doubt upon the validity of this assumption.
Since inception, the Company has accumulated net losses, generated inconsistent operating cash flow, and has not yet
achieved consistent profitability. The Company has relied on the proceeds of public and private offerings of equity
securities and debentures, debt, and other income offerings to support the Company’s operations. The Company’s
ability to continue as a going concern is dependent on obtaining additional financial capital, achieving profitability, and
generating consistent positive cash flow. There can be no assurance that the Company will be able to access capital
when needed, achieve profitability, or generate positive cash flow.

These financial statements do not reflect the adjustments that might be necessary to the carrying amount of reported
assets, liabilities, and revenues and expenses, and the balance sheet classification used if the Company were unable to
continue operations. Such adjustments could be material.

2. SIGNIFICANT ACCOUNTING POLICIES

A) USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with Canadian generally accepted accounting
principles (‘‘GAAP’’) 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 relate to provisions made for inventory valuation, amortization of property
and equipment, the assumptions used in determining stock based compensation, and the interest rates used in
determining the value of employee future benefits obligation and the liability portion of convertible debentures. 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., Ceapro Active Ingredients Inc., Ceapro BioEnergy Inc., Ceapro
(P.E.I) Inc., and Ceapro USA Inc.

C) CASH AND CASH EQUIVALENTS

Cash and cash equivalents are defined as amounts on deposit with financial institutions and readily convertible term
deposits with a maturity of 3 months or less on inception.

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 from royalty interest offerings are recorded as deferred royalty revenue and are
recorded against royalty expense on the basis of $1 of deferred revenue recognized for every $2 of royalty expense

28 CEAPRO Annual Report 2010

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ::

incurred. Royalty, licenses, and product development fees are recorded in accordance with the terms of the applicable
agreements.

E) INVENTORIES

Inventory of raw materials is valued at the lower of cost and net realizable value on a first-in, first-out basis. Inventory of
work-in-process and active ingredients is valued at the lower of cost and net realizable value on an average cost basis.

F) LICENSES

Licenses are recorded at cost and are amortized straight-line over the life of the license.

G) PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and are amortized over their estimated useful lives as follows:

Manufacturing equipment

Office equipment

Computer equipment

Leasehold improvements

10 years straight-line

20% declining balance

30% declining balance

Over the term of the lease

H) RESEARCH AND PRODUCT DEVELOPMENT EXPENDITURES

Research costs are expensed when incurred. Product development costs are also expensed when incurred unless they
are significant and meet generally accepted criteria for deferral. Costs are reduced by government grants and
investment tax credits where applicable.

I) 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.

J) 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 financial 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.

K) LEASE OBLIGATIONS

Leases are classified as capital or operating leases. A lease that transfers substantially the entire 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 wherein
payments are expensed as incurred.

L) 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.

CEAPRO Annual Report 2010 29

:: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

M) 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.

N) NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted average
number of common shares outstanding during the year. Diluted per share amounts reflect the potential dilution that
could occur if convertible securities and convertible debt were converted to common shares. The treasury stock method
of calculating diluted per share amounts is used whereby any proceeds from the conversion of convertible securities
that are in-the-money are assumed to be used to purchase common shares of the Company at the average market price
during the period. The ‘‘If Converted’’ method is used to calculate the dilutive effect of convertible debentures. When
the Company is in a net loss position, the conversion of convertible securities and debt is considered to be anti-dilutive.

O) STOCK BASED COMPENSATION

Stock based compensation is accounted for using the fair value method whereby compensation expense related to
these programs is recorded in the statement of net income (loss) and comprehensive income (loss) and deficit with a
corresponding increase to contributed surplus. The fair value of options granted is determined at the date of grant and
expensed over the vesting period. The value of warrants issued to agents is recorded as share issuance costs with a
corresponding increase to contributed surplus.

Consideration paid on the exercise of stock options and warrants is credited to share capital. Upon the exercise of the
stock options and warrants, consideration received together with the amount previously recognized in contributed
surplus is recorded as an increase to share capital. The Company does not incorporate an estimated forfeiture rate for
stock options and agents warrants that may not vest, but accounts for forfeitures as they occur.

P) EMPLOYEE FUTURE BENEFITS

The Company accrues its obligations under an employee defined retirement benefit plan and 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 accrued and recognized in the year the amendments occur.

Q) 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 is not recoverable from
undiscounted cash flows attributable to the assets, then an impairment loss is measured by comparing the carrying
amount of the asset to its fair value.

R) FUTURE ACCOUNTING PRONOUNCEMENTS

IFRS

In 2006, Canada’s Accounting Standards Board (‘‘AcSB’’) ratified a strategic plan that will result in Canadian GAAP, as used
by public entities, being converged with International Financial Reporting Standards (‘‘IFRS’’) over a transitional period.
In February 2008, the AcSB confirmed January 1, 2011 as the date that Canadian public entities will be required to start
reporting under IFRS. Comparative financial information for 2010 will be required when companies begin reporting
2011 results under IFRS.

During 2010 the Company has prepared its financial statements under Canadian GAAP and will produce financial
statements for the same periods under IFRS. The financial statements produced under IFRS will be for internal use only
in 2010, but in 2011 they will be released as comparative period financial statements.

30 CEAPRO Annual Report 2010

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ::

3. INVENTORIES

a) The Company had the following inventory at the end of each reporting period:

Raw materials

Work in progress

Finished goods

2010
$

224,262

15,996

39,167

279,425

2009
$

218,604

135,026

163,191

516,821

Inventories expensed in cost of goods sold during the year ended December 31, 2010 is $2,980,103 (2009 – $2,171,570).
During the year ended December 31, 2010, the Company decreased the carrying value of inventory by $99,272 (2009 –
$10,717) due to lower estimated realizable values from certain raw materials, work in progress, and finished goods.

4. PROPERTY AND EQUIPMENT

Manufacturing equipment

Office equipment

Computer equipment

Leasehold improvements

Manufacturing equipment

Office equipment

Computer equipment

Leasehold improvements

Cost $

2010

Accumulated
Amortization $

Net Book Value $

2,874,853

1,282,477

1,592,376

76,280

250,364

120,364

58,522

180,067

111,743

17,758

70,297

8,621

3,321,861

1,632,809

1,689,052

Cost $

2009

Accumulated
Amortization $

Net Book Value $

2,811,773

1,063,270

1,748,503

75,861

240,070

120,014

54,135

152,878

79,557

21,726

87,193

40,457

3,247,718

1,349,840

1,897,878

Manufacturing equipment with a net book value of $176,431 will not be amortized until it is put into service.

For the year ended December 31, 2010, the total amortization of $290,640 (2009 – $356,958) was allocated as follows:
$37,227 (2009 – $44,842) to amortization expense, $3,649 (2009 – 22,873) to inventory, and $249,764 (2009 – $289,243)
to cost of goods sold.

CEAPRO Annual Report 2010 31

:: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. LONG-TERM DEBT

Loan payable at $17,384 per month, principal and interest at 5.49%,
secured by a general security agreement, due January, 2013.

Less current portion

Estimated principal payments due in the next three years are as follows:

2010
$

1,227,426

146,426

1,081,000

2011

2012

2013

2009
$

1,366,232

138,806

1,227,426

146,426

154,465

926,535

1,227,426

The effective interest rate of 5.49% is a preferred rate and the monthly payments of $17,384 reflect this preferred rate. In
the event of default of any terms and conditions of the loan and enforcement of these terms and conditions by the
lender, the preferred interest rate will be cancelled from the date of enforcement of the action. If such a circumstance
were to arise, the interest rate would become 7.49% and result in monthly payments of $18,925. The security agreement
also includes a standard subjective acceleration clause for material adverse events. The Company is in compliance with
all terms and conditions.

6. CONVERTIBLE DEBENTURES

On December 31, 2009, the Company issued secured convertible debentures for cash of $500,000. The debentures bear
interest at 8% per annum, mature on December 31, 2011, and are convertible at any time at a price of $0.10 per
common share at the option of the holder. The debentures may be redeemed at the option of the Company upon
giving notice of 60 days. The Company may satisfy interest payments through the delivery of common shares at the
weighted average market price of the Common Shares for the 20 trading days the Common Shares traded on the TSX-V
immediately prior to the date on which the interest obligation is due. The debenture security ranks subordinate to the
Company’s existing long-term debt as well as $500,000 for a potential working capital facility. Currently there is no
working capital facility.

The convertible debentures contain both liability and equity components. The Company has allocated the total
proceeds received between the liability and equity components of the convertible debentures using the residual
method, based on a discount rate of 15%, which is the estimated cost of borrowing at which the Company could borrow
similar debt without a conversion feature. Interest and accretion on the liability component will be amortized using the
effective interest method until the debentures are converted or reach maturity.

32 CEAPRO Annual Report 2010

Total value of convertible debentures

Equity component

Liability component

Interest expense

Accretion

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ::

2010
$

527,500

60,000

467,500

2010
$

41,096

27,500

2009
$

500,000

60,000

440,000

2009
$

–

The Company paid $20,000 of interest and converted $21,096 into 271,752 common shares for full settlement of
interest. The non-cash transaction involving the issuance of common shares has been excluded from the consolidated
statements of cash flows.

7. ROYALTIES PAYABLE

Royalties payable pursuant to financial assistance received (note 7 (a))

Royalties payable pursuant to royalty interest offering (note 7
(c),(d),and (e))

2010
$

–

378,051

2009
$

111,844

646,592

758,436

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, 2010 was $329,764 (2009 – $329,764). In
October 2010, $111,844 was repaid and the balance of royalties payable under this agreement as at December 31, 2010
was $nil (2009 – $111,844).

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(cid:3) (a health and wellness product) upon completion of project objectives as
outlined and agreed to by both parties. As at December 31, 2010, $225,000 (2009 – $225,000) 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(cid:3) 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 paid or accrued during
the current or prior years. The Company has repaid at December 31, 2010 $nil (2009 – $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,
2010 was $nil (2009 – $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, 2010 was $1,032,695 (2009 – $1,032,695). During the year, the Company repaid $150,156 (2009 – $nil)
through cash payments totaling $56,849 and by issuing 1,036,744 common shares. The balance of royalties payable
under this offering as at December 31, 2010 was in arrears and totaled $170,536 (2009 – $320,692).

CEAPRO Annual Report 2010 33

:: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. ROYALTIES PAYABLE (CONTINUED)

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,
2010 was $628,394 (2009 – $628,394). During the year, the Company repaid $108,542 (2009 – $nil) through cash
payment totaling $13,634 and by issuing 1,054,533 common shares. The balance of royalties payable under this offering
as at December 31, 2010 was in arrears and totaled $40,903 (2009 – $149,445).

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(cid:3) 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, 2010 was $458,775
(2009 – $350,326). During the year, the Company repaid $118,292 ($2009 – $nil) through cash payments totaling
$35,947 and by issuing 914,947 common shares. The balance of royalties payable under this offering as at December 31,
2010 was in arrears and totaled $166,612 (2009 – $176,455).

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. As at December 31,
2010, $362,250 (2009 – $362,500) of the commitment has been received. 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 or $724,500)
on sales generated from products developed using these funds. These royalties will commence when the royalty
payments on investment agreements in note 7(a) are fully satisfied. The portion of the obligation paid or accrued at
December 31, 2010 was $nil (2009 – $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(cid:3) (a health and wellness product) upon completion of project objectives as
outlined and agreed to by both parties. As at December 31, 2010, $510,000 of this commitment has been received
(2009 – $510,000). The Company is obligated to pay a royalty (to a maximum of one and a half times the financial
assistance received or $765,000) on sales of CeaProve(cid:3) 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, 2010 was $nil (2009 – $nil).

8. EMPLOYEE FUTURE BENEFIT OBLIGATION

The Company has an unfunded, non-registered, non-indexed defined retirement benefit plan for certain officers. The
retirement benefit is two months’ salary for each year they are employed by the Company. During the year ended
December 31, 2008, pursuant to a termination agreement with the Company’s former President and Chief Executive
Officer, the Company has settled the benefit obligation with this senior officer. The Company completed all required
payments under the termination agreement on December 31, 2009.

Accrued benefit obligation

Unfunded balance, beginning of year

Benefits paid

Current service cost

Interest costs on accrued benefit obligation

34 CEAPRO Annual Report 2010

2010
$

136,786

–

17,297

6,104

160,187

2009
$

304,012

(187,000)

14,871

4,903

136,786

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ::

Elements of defined benefit costs recognized in the year

Current service cost

Interest cost on accrued benefit obligation

2010
$

17,297

6,104

23,401

2009
$

14,871

4,903

19,774

Management is required to make an estimate regarding the discount rate used to determine the accrued benefit
obligation. This estimate is 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, 2010 was 4.19% (December 31,
2009 – 4.19%).

9. SHARE CAPITAL

A) AUTHORIZED

i) Unlimited number of Class A voting common shares. Class A common shares have no par value.

ii) Unlimited number of Class B non-voting common shares. There are no issued Class B shares.

B) ISSUED – CLASS A COMMON SHARES

Balance at beginning of year

Changes during the year

Equity placements

Shares issued for debt

Share capital issue cost

2010

2009

Number of
Shares

51,710,063

Amount
$

5,479,202

Number of
Shares

47,050,063

–

4,660,000

3,277,976

291,656

–

––

Amount
$

5,016,395

466,000

–

(3,193)

54,988,039

5,770,858

51,710,063

5,479,202

During the year ended December 31, 2010, the Company issued 3,006,224 common shares for the settlement of royalty
payable obligations totaling $270,560 as described in notes 7(c), (d), and (e) and 271,752 common shares for full
settlement of interest due on convertible debentures in the amount of $21,096 as described in note 6. The non-cash
transactions have been excluded from the consolidated statement of cash flows.

During the year ended December 31, 2009, the Company issued 4,660,000 common shares at $0.10 per share for gross
proceeds of $466,000.

C) CONTRIBUTED SURPLUS

The following table summarizes the changes in contributed surplus:

Balance at beginning of year

Stock based compensation expense (note 9 (d))

2010
$

478,945

28,243

507,188

2009
$

374,018

104,927

478,945

CEAPRO Annual Report 2010 35

:: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. SHARE CAPITAL (CONTINUED)

D) STOCK OPTIONS AND STOCK BASED COMPENSATION

The Company has granted stock options to eligible employees, directors, officers, and consultants under stock option
plans that vest over periods ranging from 2 years to five 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. In the current year, the Company granted 650,000 (2009 – 900,000) 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 2010 was 2.29% (2009 – 2.11%), the weighted average expected volatility was 126% (2009 – 112%), which
was based on prior trading activity of the Company’s shares, the weighted average expected life of the options was
5 years (2009 – 5 years), and the expected dividends were nil (2009 – nil). The weighted average grant date fair value of
options granted during the year were $0.06 (2009 – $0.10) per option. The stock based compensation expense recorded
during the current year relating to options granted in 2010, 2009, 2008, 2007 and 2006 was $28,243 (2009 – $104,927).

A summary of the status of the Company’s stock options at December 31, 2010 and 2009 and changes during the years
ended on those dates is as follows:

Outstanding at beginning of year

Granted

Expired

Outstanding at end of year

Exercisable at end of year

2010

2009

Number of
Options

2,485,000

650,000

(30,000)

3,105,000

2,261,667

Weighted
Average
Exercise Price
$

0.18

0.10

0.12

0.16

0.18

Number of
Options

1,810,000

900,000

(225,000)

2,485,000

1,314,000

Weighted
Average
Exercise Price
$

0.21

0.13

0.20

0.18

0.20

The following table summarizes information about the Company’s stock options outstanding:

Exercise Price $

Year of Expiration

Number of Options

2010

2009

0.10

0.13

0.12

0.25

0.28

0.30

0.27

2015

2014

2013

2012

2011

650,000

900,000

630,000

210,000

390,000

100,000

75,000

150,000

–

900,000

660,000

210,000

390,000

100,000

75,000

150,000

3,105,000

2,485,000

36 CEAPRO Annual Report 2010

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ::

10. CONTINGENCIES AND COMMITMENTS

a) During the year ended December 31, 2008, the Company recorded a provision for disputed legal fees from two legal
firms in the amount of $741,283 that related to a settled litigation case. In 2009, the Company recorded a recovery of
$426,300 of the previously disputed legal fees as one legal firm advised the Company that it would not be pursuing
their claim. Based upon review by management with legal counsel during the year and the circumstances applicable at
that time, management believes the Company is no longer exposed to the remaining accrued legal fee liability in the
amount of $314,983. The Company recorded a recovery of $314,983 of the remaining disputed legal fees. The balance of
$nil is recorded as a liability on the balance sheet in 2010 (2009 – $314,983) as SGGF legal fees.

b) During the year ended December 31, 2008, the Company entered into a licensing agreement with the University of
Guelph for an exclusive variety of a mint plant. The Company paid a licensing fee of $30,000 and is amortizing the
license over 10 years. The license is carried on the balance sheet at $24,000 (2009 – $27,000), which reflects
accumulated amortization of $6,000 (2009 – $3,000). The amortization expense of $3,000 (2009 – $3,000) has been
included in amortization on the income statement. The Company is obligated to pay the University an amount equal to
8% of net sales from products derived from the mint plants subject to minimum payments as follows:

2011

2012

2013

2014

2015 to 2017

Total

12,960

20,160

27,360

34,560

146,880

241,920

For 2010, the Company recognized a minimum expense of $5,760 (2009 – $5,760) in royalty expense. Royalties payable
at December 31, 2010 are $13,920 (2009 – $8,160).

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.

11. SALES

Substantially all sales are export sales to five distributors of the Company’s products. The Company is therefore
dependent on those distributors to maintain and expand the volume of product sales to existing and new customers.

12. OTHER INCOME (LOSS)

Foreign exchange losses

Miscellaneous income (loss)

2010
$

(27,641)

(2,433)

(30,074)

2009
$

(68,047)

12,554

(55,493)

CEAPRO Annual Report 2010 37

:: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. INCOME TAXES

A) NON-CAPITAL LOSSES

The Company has accumulated non-capital losses carried forward for federal income tax purposes of approximately
$12,222,300, and for provincial income tax purposes of approximately $12,026,000, the benefit of which has not been
reflected in these consolidated financial statements. These losses may be applied against future taxable income within
the limitations prescribed by the Income Tax Act and expire as follows:

2015

2026

2027

2028

2029

2030

Total

Federal $

293,400

651,500

2,730,300

5,337,500

1,697,300

1,512,300

Alberta $

293,400

651,500

2,730,300

5,141,200

1,697,300

1,512,300

12,222,300

12,026,000

B) CAPITAL LOSSES

The Company has accumulated capital losses of approximately $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 an SR&ED expenditure pool of approximately $1,468,200, which can be carried forward
indefinitely to be applied against future taxable income.

The Company has accumulated SR&ED investment tax credits of approximately $78,700. These credits may be applied
against future federal income taxes payable and expire in 2029.

D) TEMPORARY DIFFERENCES

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 asset 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

Employee future benefit expense not recognized for tax purposes

Valuation allowance

2010
$

3,403,000

851,000

79,000

818,000

57,000

40,000

2009
$

3,289,000

851,000

–

1,073,000

70,000

–

(5,248,000)

(5,283,000)

–

For consolidated financial statement purposes, no future income tax asset has been recorded at December 31, 2010 and
2009 as it is not likely to be realized.

38 CEAPRO Annual Report 2010

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ::

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 28% (2009 – 29%)

Net tax effect of expenses that are (deductible) not deductible

Tax effect of current year non-capital losses not recognized

Tax effect of prior years non capital losses and investment tax credits
applied against current taxable income

Tax effect relating to property and equipment

Tax effect of deferred revenue recognized

Tax effect of employee future benefit expense not recognized

Tax effect of deductible employee future benefit obligation payments

2010
$

140,302

(17,540)

423,453

(272,536)

(265,049)

(15,183)

6,553

–

2009
$

(20,111)

13,942

492,219

(56,946)

(360,439)

(14,397)

–

(54,268)

–

14. RELATED PARTY TRANSACTIONS

Related party transactions during the years not otherwise disclosed in these consolidated financial statements are
as follows:

Royalties earned by employees and directors

Amounts payable to employees and directors included in royalties
payable

Convertible debentures owned by officers and directors

Interest earned in convertible debentures by officers and directors

Consulting fees earned by a company controlled by a director

Consulting fees payable to a company controlled by a director in
accounts payable and accrued liabilities

Royalties payable to employees and directors converted to common
shares

Convertible debenture interest payable to officers and directors
converted to common shares

2010
$

21,951

27,758

70,000

5,753

150,000

–

71,898

2,953

2009
$

38,699

84,581

70,000

–

150,000

37,500

–

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.

CEAPRO Annual Report 2010 39

:: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. SEGMENTED INFORMATION

a) 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 located in Canada. The distribution of revenue by location of customer is as follows:

United States

Other

Canada

16. FINANCIAL INSTRUMENTS

2010
$

4,109,206

1,467,006

424

5,576,636

2009
$

2,679,371

1,652,042

38,657

4,370,070

a) The Company has designated its financial instruments as follows: cash is classified as held-for-trading, which is
measured at fair value; accounts receivable are classified as loans and receivables, which are measured at amortized
cost; accounts payable and accrued liabilities, long-term debt, royalties payable, repayable research funding, and
convertible debentures are classified as other liabilities and are also measured at amortized cost.

The fair value of accounts receivable, accounts payable, the current portion of long term debt, royalties payable, and
repayable research funding approximate their carrying amount due to their short-term nature. The fair value of
long-term debt is estimated to approximate its carrying value because the interest rate does not differ significantly from
current interest rates for similar types of borrowing arrangements. The liability component of convertible debentures
was calculated using a 15% discount rate. Management considers that no events have occurred subsequent to the
inception of this financing arrangement that would indicate that fair value differs substantially from carrying value.

The Company accounts for regular-way purchases and sales of financial assets using trade date accounting, and
transaction costs on financial instruments are recognized in income in the period.

b) The Company has exposure to credit, liquidity, and market risk as follows:

i) Credit risk:

ii) Liquidity risk:

Liquidity risk relates to the risk that the Company will encounter difficulty in meeting its financial obligations. The
long-term debt matures in January 2013. It is the intention of the Company that refinancing will be negotiated at that
time should it be required. The Company may be exposed to liquidity risks if it is unable to collect its trade accounts
receivable balances in a timely manner, which could in turn impact the Company’s long-term ability to meet
commitments under its current facilities. Royalties are in arrears as they have only been paid partially in cash since the
second quarter of 2008 due to the limited financial resources of the Company. In order to manage this liquidity risk, the
Company regularly reviews its aged accounts receivable listing to ensure prompt collections. The Company regularly
reviews its cash availability; and whenever conditions permit, the excess cash is deposited in short-tem interest bearing

40 CEAPRO Annual Report 2010

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ::

instruments to generate revenue while maintaining liquidity. There is no assurance that the Company will obtain
sufficient funding to execute its strategic business plan.

The following are the contractual maturities of the Company’s financial liabilities and obligations.

Accounts payable and accrued liabilities

Long-term debt, including interest

Royalties payable

Convertible debentures including interest

Employee future benefit obligation

Repayable research funding

Total

iii) Market risk:

0 - 1 year
$

862,163

208,613

378,051

540,000

12,500

2,001,327

1 - 3 years
$

4 - 5 years
$

Total
$

862,163

1,343,761

378,051

540,000

184,037

50,000

184,037

3,358,012

1,135,148

37,500

1,172,648

Market risk is comprised of interest rate risk and foreign currency risk. The Company’s exposure to market risk is
as follows:

(1) Foreign currency risk

Foreign currency risk arises from the fluctuations in foreign exchange rates and the degree of volatility of these rates
relative to the Canadian dollar.

The following table summarizes the impact of a 1% change in the foreign exchange rates of the Canadian dollar
against the US dollar (USD) on the financial assets and liabilities of the Company.

Financial assets

Accounts receivable

Financial Liabilities

CARRYING
AMOUNT
(USD)

FOREIGN EXCHANGE RISK (USD)

(cid:4)1%

+1%

EARNINGS & EQUITY

$ 535,729

$ 5,357

$ (5,357)

Accounts payable and accrued liabilities

46,159

Total increase (decrease)

$ (462)

$ 4,895

462

$ (4,895)

The carrying amount of accounts receivable and accounts payable and accrued liabilities in USD represents the
Company’s exposure at December 31, 2010.

(2) Interest rate risk

The Company has minimal interest rate risk because its long-term debt is a fixed rate of 5.49%. However, in the event
of a default, the rate would increase to 7.49% and result in an increase in the required monthly principal and interest
payment by $1,541.

CEAPRO Annual Report 2010 41

:: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17. LEASE COMMITMENTS

The Company is committed to future annual payments under operating leases for manufacturing facilities and office
space as follows:

2011

2012

165,220

4,466

18. CAPITAL DISCLOSURES

The Company considers its capital to be its shareholder deficiency. The Company’s objective in managing capital is to
ensure a sufficient liquidity position to finance its manufacturing operations, research and development activities,
administration and marketing expenses, working capital, and overall capital expenditures, including those associated
with patents and trademarks. The Company makes every effort to manage its liquidity to minimize dilution to its
shareholders, when possible.

The Company has funded its activities through public offerings and private placements of common shares, royalty
offerings, loans, convertible debentures, and grant contributions.

The Company is not subject to externally imposed capital requirements, and the Company’s overall strategy with
respect to capital risk management remains unchanged from the year ended December 2009.

19. GOVERNMENT ASSISTANCE

The Company was approved for non-repayable funding in the amount of $50,000 for eligible costs from the Atlantic
Canada Opportunities Agency. The Company recorded $39,121 of funding in 2010 as a reduction of research and
development expenses and anticipates receiving a further $10,879 in 2011 under this program. An amount of $11,272
was recorded in accounts receivable at December 31, 2010 with respect to this agreement.

42 CEAPRO Annual Report 2010

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ::

The Company received a repayable non-interest bearing contribution for research and development expenditures in the
amount of $50,000 from Innovation PEI, which is recorded as a repayable research funding liability on the balance sheet.
The Company may be eligible for a further contribution of $50,000 in 2011. The repayable research funding is recorded
at the amount drawn under the agreement which represents the estimated fair value of the obligation plus the deferred
interest benefit. The contribution is repayable quarterly at a rate of one percent of sales revenue subject to a minimum
payment of $12,500 per quarter.

20. EARNINGS PER SHARE

Net income (loss) for the year

Interest not incurred on convertible
debentures if converted

Net income (loss) for the year for diluted
earnings per share calculation

Weighted average number of shares
outstanding

Potential shares to be issued for convertible
debentures outstanding

Diluted shares outstanding

Earning per share – basic

Earning per share – diluted

2010

$501,078

41,096

542,174

53,219,621

5,000,000

58,219,621

$0.01

2009

$(69,349)

–

(69,349)

49,577,953

–

49,577,953

$(0.00)

Outstanding stock options have not been included in the diluted earnings per share calculation for the year ended
December 31, 2010 because the options’ exercise prices were greater than the average market price of the common
shares during the year.

21. SUBSEQUENT EVENTS

Subsequent
1,590,909 common shares of the Company. The transaction will be recorded in the first quarter of 2011.

the Company’s directors exchanged debt obligations

to year end,

totaling $175,000

into

Subsequent to year end, the Company received the amount of $56,957 from the Canadian Agriculture Adaptation
Program (see note 19).

CEAPRO Annual Report 2010 43

:: INVESTOR INFORMATION MAY 2011

DIRECTORS

Edward Taylor, Chairman
Gilles Gagnon, Acting CEO
Donald Oborowsky
Glenn Rourke
John Zupancic

OFFICERS

Branko Jankovic, CA
Chief Financial Officer

David Fielder, M. Sc.
Chief Scientific Officer

REGISTERED OFFICE
2600 Manulife Place
10180 - 101 Street NW
Edmonton, AB T5J 3V5
Canada

AUDITORS

Stout & Company LLP
1900 College Plaza
8215 - 112 Street NW
Edmonton, AB T6G 2C8
Canada

CORPORATE COUNSEL

Bryan & Company
2600 Manulife Place
10180 - 101 Street NW
Edmonton, AB T5J 3V5
Canada

SECURITIES COUNSEL

Bryan & Company
2600 Manulife Place
10180 - 101 Street NW
Edmonton, AB T5J 3V5
Canada

CHARTERED BANK
TD Canada Trust
148 Edmonton Centre
10205 - 101 Street
Edmonton, AB T5J 2Y8
Canada

Printed in Canada

HEAD OFFICE

Suite 4174 Enterprise Square
10230 Jasper Avenue NW
Edmonton, AB T5J 4P6
Canada
Telephone: 1 780.421.4555
Fax: 1 780.421.1320
Website: www.ceapro.com
Email: bjankovic@ceapro.com

STOCK INFORMATION

Listed on the TSX Venture Stock Exchange
Symbol: CZO

TRANSFER AGENT & REGISTRAR

Olympia Trust Company
2300 Palliser Square
125-9 Avenue SE
Calgary, AB T6G 0P6
Canada

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 change of address.

FINANCIAL CALENDAR

The Company’s year-end is December 31. Quarterly
reports are mailed in May, August, and November.

ANNUAL GENERAL MEETING OF SHAREHOLDERS
The annual general meeting of shareholders will be
held on:

June 23, 2011 at 10am MDT

Location:
4th floor Enterprise Square
10230 Jasper Avenue
Edmonton, Alberta T5J 4P6

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.

Ceapro Inc.
Suite 4174 Enterprise Square
10230 Jasper Avenue NW
Edmonton, Alberta, Canada T5J 4P6
Telephone: 1 780.421.4555
Fax: 1 780.421.1320
www.ceapro.com