Ceapro Inc.
Annual Report 2012

Plain-text annual report

● ● ● ● Table of contents Letter to Shareholders New Manufacturing Facility Avenanthramides – Our Flagship Ingredient Oat Beta Glucan Management’s Discussion and Analysis Consolidated Financial Statements Notes to Consolidated Financial Statements Investor Information 2 4 5 6 7 24 31 56 14MAY201322075453 Ceapro Inc. is a Canadian biotechnology company involved in the development of proprietary extraction technology and the application of this technology to the production of extracts and ‘‘active ingredients’’ from oats and other renewable plant resources. Ceapro adds further value to its extracts by supporting their use in cosmeceutical, nutraceutical, and therapeutics products for humans and animals. - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- LETTER TO SHAREHOLDERS :: LETTER TO SHAREHOLDERS Dear Fellow Shareholders Year 2012 posed a tremendous challenge. On one hand, it was marked by the necessity for Ceapro to plan for the graduation from the Leduc-based incubator facility to a new facility. On the other hand, this special project needed to be conducted while keeping the business ‘‘up and running ‘‘. We are very pleased with the outcome from this project. Our team worked hard in conducting thorough feasibility studies to recommend the most suitable solution and place to manufacture our innovative products. Nine locations were considered within and outside Canada. While contract manufacturing scenarios were envisioned during this process, it became very clear that Ceapro needs its own facility given the nature of its specialized and unique proprietary technologies. We were very excited to find the best place right on ‘‘our door step’’ in Edmonton. This new site will house head office, laboratories, and manufacturing areas. It will be customized to our needs and will allow the implementation of improved processes and technologies that our research engineers have been working on for the last two years. Better product margins are expected from improved efficiencies. From a product portfolio investment perspective, and as a continuum to the product stories featured in our 2011 annual report, we continued to focus our activities on the development of new formulations and potential new indications for our value drivers, avenanthramides and beta glucan. No doubt that the successful development of technologies to produce dry formulations of our value drivers is the most important milestone so far achieved in our R&D program. These formulations should enable us to produce larger quantities of higher purity products that should allow the eventual transition to other sectors like nutraceuticals and pharmaceuticals. The next step is to assess the suitability of these formulations for such development as tablets and capsules. These products need to be strategically marketed and we are always looking at ways to market them better with enhanced representation around the globe. In line with our last year’s message, we have invested significantly in the assessment of different marketing strategies. While we will sell directly in some local markets in North America, we will concurrently pursue a global selling strategy mostly through a network of renowned distributors. For the cosmetics market, license and distribution agreements will be based on a key end customer basis and not necessarily on a ‘‘traditional’’ geographical basis. Discussions are ongoing with some major players in this industry and one such agreement has already been executed subsequent to year end. Looking at key accomplishments in 2012, we are very proud of the tremendous efforts deployed by our dedicated people in achieving the following: (cid:127) (cid:127) (cid:127) (cid:127) (cid:127) Completion of first phase of special project for the relocation of Ceapro’s facility (planning & process design) Successful scale-up of supercritical fluid drying technology to produce pilot scale batches of beta glucan formulations Signing of two agreements for technologies from Agriculture and Agri-Food Canada to improve the yield of Ceapro’s flagship product, avenanthramides Successful development of lupin peptide powders Completion of in vitro performance testing at the National Research Council Institute for Nutrisciences and Health (NRC-INH) with favourable data to support Ceapro’s product claims in cosmetics applications - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 2 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- LETTER TO SHAREHOLDERS (cid:127) (cid:127) Signing of agreements with distributors in Europe and Australia Subsequent to year end, Ceapro’s expertise recognized by German-based multinational Symrise through the signing of a licensing and distribution agreement including a major credit line for the next three years. From a financial perspective, year 2012 was more challenging and our year-end results were affected by two non-recurring events beyond our control. This resulted in the following: (cid:127) (cid:127) (cid:127) Sales of $5,165,000 compared to $5,786,000 in 2011, a decrease of 11% Loss from operations of $515,000 compared to income of $585,000 in 2011 Net loss of $538,000 compared to a net income of $578,000 for 2011 Based on our upcoming initiatives, we are very positive for the year 2013 which should be a benchmark year. In addition to providing new generation products for our current market, we are attracting serious interest in our innovative technology platforms and products from major players in new market sectors such as nutraceuticals and pharmaceuticals. In order to maintain this momentum, the successful implementation of our upcoming state-of-the-art facility remains our top priority for 2013. We are on track to complete this monumental milestone in the fourth quarter of 2013. We wish to thank our private and public partners like the Government of Alberta who is helping us to make it happen through a significant grant from Alberta Innovates Bio Solutions and Agriculture Financial Services Corporation who has been a long-term supporter and financial partner of Ceapro. Our vision is to be recognized as the Canadian leader in botanical actives and a centre of excellence in bioprocessing by 2015. Looking forward, we expect Ceapro to increase its sales in 2013. While securing a smooth transition to our new facility, we will pursue the development of key prioritized projects with our value drivers, avenanthramides and beta glucan. Our small group of employees has bought into these challenges and we wish to thank everyone for their efforts in striving to make Ceapro one of the best biotech companies in Canada. Finally, we would like to thank our customers and our shareholders for their support and confidence. GILLES R. GAGNON, M.SC., MBA PRESIDENT AND CEO ED TAYLOR, CGA CHAIRMAN OF THE BOARD May 10, 2013 - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 3 New MaNufacturiNg facility During 2012, Ceapro selected a suitable location and commenced the work for its new home in south Edmonton. The new and unique facility comprising about 20,000 sq. ft. will incorporate all Ceapro operations including its head office, research and development, and manufactur- ing. It will be a facility that will allow new potential products developed in our laboratory to be scaled up in the Pilot scale wing, prior to full commercial production. This has been a long process and has resulted from a significant corporate effort over the last two years. Prior to selecting the location, we undertook a thorough due diligence of alternative manufacturing options as well as alternative locations and the answers came back very clearly: Ceapro needs to do its own manufacturing and the location selected was the most preferable. Since we moved in to our Leduc facility in 2007, several factors besides revenue growth have contributed to the need to move. We anticipate that quality standards and regulation will con- tinue to increase in all the sectors we will serve. Accordingly, this facility has been planned to meet cGMP international standards. In addition, Ceapro will seek a Natural Health Products site license from Health Canada. Ceapro has a rich portfolio of technologies to support its platform products and many of these opportunities can only be developed in a new facility due to both space and regulatory restric- tions. The convergence of the personal care markets Ceapro currently serves as well as the food and nutrition and pharmaceutical markets provide a huge opportunity to provide solutions for the insatiable appetite for more natural health solutions. Our product platforms will finally have the opportunity to exploit new market opportunities as a result of technology advancements and this new facility. While we may sell oat beta glucan today in a liquid form for anti-aging products in personal care, we may be using our oat beta glucan powders under development for functional drinks to reduce the risk of high cholesterol and metabolic disease or for incorporating into wound healing products in the future. Our other products also have potential to enter new large markets. The combination of Ceapro’s strong technology, market sector convergence, health care market needs, and our new facility will allow for the potential of explosive growth in the coming years for Ceapro. A special thank you must be given to the Government of Alberta. They have recognized the huge potential of bio-industrial processing today and created an environment conducive to growing this sector. We will work very hard to become a Bio-Industrial Centre of Excellence that we can all be proud of. 4 aveNaNthraMides - Our flagship iNgredieNt Avenanthramides are a largely unknown group of therapeutic molecules found exclu- sively in oats, yet when it comes to our customers, it is how we are best recognized. Ceapro is the only commercial manufacturer of avenanthramides worldwide. Given their potent anti-inflammation, anti-histaminic, and anti-oxidant properties, these molecules are responsible for the therapeutic benefits and relief of symptoms in skin conditions resulting from eczema, chicken pox, and insect bites. Recent findings from third parties are also of the highest interest to Ceapro. Their data suggest that avenanthramides, when taken orally, could be beneficial in serious con- ditions like inflammatory bowel syndrome, atherosclerosis, colon cancer, and joint in- flammation. These findings led to the idea that avenanthramides could be developed as an active pharmaceutical ingredient (API). In order to achieve this, we need to produce them in adequate quantities to allow for a bioavailable formulation that will enable us to conduct clinical trials to demonstrate their safety and efficacy in targeted indications. So far, Ceapro has developed a robust process to extract avenanthramides from oats and this product has been sold exclusively to the personal care market. Due to the scarcity of suitable oats to extract, there have only been sufficient quantities available to serve the personal care market even though tremendous opportunities may exist in the func- tional food and pharmaceutical markets. We expect to change that in the near future. Agriculture and Agri-Food Canada (AAFC) Alliances During 2012, Ceapro entered into two key agreements with Agriculture and Agri-Food Canada (AAFC) that have the potential to be transfor- mative for Ceapro and allow for the exploitation of huge opportuni- ties not possible otherwise. The first was a form of patented malting technology and the second was a new variety of oats (non-GMO) with very unique characteristics. When these two technologies are used to- gether, Ceapro will have the ability to increase the content and con- centration of avenanthramides from typical very low, non-commercial levels to levels far in excess of the best commercial oats on the market and that Ceapro has used to date. Studies conducted at two Univer- sity hospitals in the United States have determined that oats will need higher levels of avenanthramides in order to obtain a dose with signifi- cant beneficial effects. The positive implications of these technologies are very substantial and include: 1. A large increase in extraction yield and gross margin for the exist- ing business. 2. The ability to consider avenanthramide-rich oat products as a ther- apeutic food or a nutraceutical as a solution to some of the medical indications. 3. The possibility to get into the trendy “botanical drugs” area to ad- dress unmet medical needs, especially with our new purification techniques currently being scaled up. Avenanthramides are a good illustration of Ceapro’s innovative capac- ity that, when combined with other technology advancements, can be- come a multi-platform product in large unmet health sectors. 5 Oat Beta glucaN Last year in our annual report, we included a story about our Supercritical Fluid Drying Tech- nology (SFD). We believe this technology is ideally suited for drying water soluble polysac- charides, gums, and biopolymers which require mild processing conditions to preserve the therapeutic properties of the active ingredients. Our work to date leads us to believe this can be developed into a platform novel drying technology and we would like to update you on the work we have done with our own oat beta glucan (OBG). Functional Food & Drinks/Nutraceuticals The therapeutic value of OBG in reducing cholesterol and attenuating blood sugar levels is well documented. Ceapro’s liquid OBG product is recognized as the highest quality product available today. Produced with our proprietary process, its superior quality is primarily due to its high purity, high molecular weight, and high viscosity. The absence of colour and very little odour is also making this product very attractive. During 2012, Ceapro showed that it could dry its OBG to a purity level in excess of 90% using SFD. Most importantly, the dried product retained its high molecular weight and viscosity, and was able to solubilize without clumping or agglomerating when placed in a liquid solution. These findings appear to make a strong case for producing an active ingredient to target high cholesterol and other conditions involved in metabolic diseases. Ceapro having shown it can make the product in a variety of formats including micro fibrils, fine powders, and granules, will take the next step in our re- search program to determine which format (powder for a drink, a tablet, or a capsule) will be the most suitable to provide the best therapeutic effect. In 2013, work will be conducted to scale up and automate the process and decrease the cost of production to the maximum extent possible. It is expected that the drink and nutraceutical markets are large and a large multi-national partner will be sought to capitalize globally on this opportunity. This is expected to be a truly unique product that requires Ceapro’s propri- etary wet process and its SFD under development. Medical Biopolymers, a huge potential Studies done by Ceapro have shown that its OBG is highly effective in stimulating collagen synthesis and can play a prominent role in skin restructuring and wound healing products. Ceapro OBG has also shown the unusual ability to penetrate skin deeply despite its large mo- lecular weight. As a result, the use of OBG as a potential delivery system has attracted inter- est from multiple parties looking to improve the delivery of their therapeutic products. The potential to impregnate or encapsulate bioactives with the SFD has increased the interest in determining the potential of this delivery vehicle. Ceapro intends to complete the development work of OBG and its feasibility models before the end of 2013. To date, the project has exceeded our expectations and the equipment de- signed and tested has performed as expected. Once again, this project exemplifies Ceapro’s high level of innovation capacity and the poten- tial of Ceapro’s products to penetrate new market opportunities that are very large. 6 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS :: MANAGEMENT’S DISCUSSION & ANALYSIS The MD&A provides commentary on the results of operations for the years ended December 31, 2012 and 2011, the financial position as at December 31, 2012, and the outlook of Ceapro Inc. (‘‘Ceapro’’) based on information available as at April 4, 2013. The following information should be read in conjunction with the audited consolidated financial statements as at December 31, 2012, and related notes thereto, as well as the audited consolidated financial statements for the year ended December 31, 2011 and the Management’s Discussion and Analysis (MD&A) for the year ended December 31, 2011 which are prepared in accordance with International Financial Reporting Standards (IFRS). All comparative percentages are between the periods ended December 31, 2012 and 2011 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 4, 2013, and contains forward- looking statements. By their nature, forward-looking statements are subject to numerous risks and uncertainties, including those discussed below. Readers 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 unless required by law. VISION, CORE BUSINESS, AND STRATEGY 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, human, 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:2), a diabetes test meal to screen pre-diabetes and to confirm diabetes diagnosis; (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 including products from a unique variety of spearmint; and - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- CEAPRO Annual Report 2012 7 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS (cid:127) A variety of novel manufacturing technologies including ‘‘Supercritical Fluid’’ drying technology, which is currently being tested on oat beta glucan but may have application for multiple classes of compounds. 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) Identifying unique plant sources and technologies capable of generating novel active natural products; (cid:127) Increasing sales and expanding markets for our current active ingredients; (cid:127) Developing and marketing additional high-value proprietary therapeutic natural products; (cid:127) Developing and improving manufacturing technologies to ensure efficiencies; and (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, therapeutic 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, government grants and loans, 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 has exposure to credit, liquidity, and market risk as follows: A) CREDIT RISK Accounts receivable The Company makes sales to customers that are well-established and well-financed within their respective industries. Based on previous experience, the counterparties have had very low default rates and management views - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 8 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS this risk as minimal. Approximately 97% of accounts receivable are due from four customers at December 31, 2012 and all accounts receivable are current. These main customers present good credit quality and historically have a high quality credit rating. Cash and cash equivalents The Company has cash and cash equivalents in the amount of $273,106 at December 31, 2012 and mitigates its exposure to credit risk on its cash balances by maintaining its bank accounts with Canadian Chartered Banks and investing in low risk, high liquidity investments. The Company received $750,000 under a capital expenditure grant agreement and has presented this amount as deferred revenue and considers it restricted cash as it can be spent only for qualified expenditures. During the year ended December 31, 2012, the Company has expended of $41,223. The balance of this grant of $708,777 is presented as deferred revenue and restricted cash and cash equivalents on the balance sheet. There are no past due or impaired financial assets. The maximum exposure to credit risk is the carrying amount of the Company’s accounts receivable, cash and cash equivalents, and restricted cash and cash equivalents. The Company does not hold any collateral as security. B) LIQUIDITY RISK Liquidity risk relates to the risk that the Company will encounter difficulty in meeting its financial obligations. Under the renewed agreement with AFSC, the long-term debt matures in January 2018. 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. 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. 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 interest payable Royalty financial liability Repayable CAAP funding Total C) MARKET RISK 0 - 1 YEAR $ 1 - 3 YEARS $ 4 - 7 YEARS $ 8 - 12 YEARS $ TOTAL $ 578,216 200,793 25,037 129,238 – 933,284 – – 600,246 216,756 – 118,354 177,590 896,190 – – 177,590 394,346 – – – – 118,393 118,393 578,216 1,017,795 25,037 247,592 473,573 2,342,213 Market risk is comprised of interest rate risk, foreign currency risk, and other price 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. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 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. CARRYING AMOUNT (USD) FOREIGN EXCHANGE RISK (USD) -1% +1% EARNINGS & EQUITY EARNINGS & EQUITY Financial assets Accounts receivable Financial liabilities 254,623 2,546 Accounts payable and accrued liabilities 27,436 Total increase (decrease) (274) 2,272 (2,546) 274 (2,272) The carrying amount of accounts receivable and accounts payable and accrued liabilities in USD represents the Company’s exposure at December 31, 2012. 2. Interest rate risk The Company has minimal interest rate risk because its long-term debt is a fixed rate of 3.71%. 3. Share price risk a) b) 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. 4. People and process risk 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 the ability to raise capital. Ceapro’s consolidated financial statements are prepared within a framework of IFRS 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, tax liabilities and tax assets, provisions, the assumptions used in determining share-based compensation, the interest rates used in determining the employee future benefits obligation, and the estimated sales projections to value the royalty financial liability. 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. 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. The current robust economy in Alberta does increase these risks. 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 --- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 10 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS materials well in advance of their anticipated use and is in-licensing technologies from third parties to reduce this risk. 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 obligations that may be required. Significant investments are being made to ensure compliance with the continually evolving regulatory environment. FUTURE ACCOUNTING PRONOUNCEMENTS FINANCIAL INSTRUMENTS The IASB intends to replace IAS 39 – Financial Instruments: Recognition and Measurement (‘‘IAS 39’’) in its entirety with IFRS 9 – Financial Instruments (‘‘IFRS 9’’) in three main phases. IFRS 9 will be the new standard for the financial reporting of financial instruments that is principle-based and less complex than IAS 39. In November 2009 and October 2010, phase 1 of IFRS 9 was issued and amended, respectively, which addressed the classification and measurement of financial assets and financial liabilities. IFRS 9 requires that all financial assets be classified as subsequently measured at amortized cost or at fair value based on the Company’s business model for managing financial assets and the contractual cash flow characteristics of the financial assets. Financial liabilities are classified as subsequently measured at amortized cost except for financial liabilities classified as at fair value through profit or loss, financial guarantees, and certain other exceptions. The effective date of IFRS 9 is for annual periods beginning on or after January 1, 2015 (with earlier application permitted). The Company does not anticipate these amendments to have a significant impact on its consolidated financial statements. CONSOLIDATION In May 2011, the IASB issued IFRS 10 – Consolidated Financial Statements (‘‘IFRS 10’’), which supersedes SIC 12 and the requirements relating to consolidated financial statements in IAS 27 – Consolidated and Separate Financial Statements (‘‘IAS 27’’). IFRS 10 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted under certain circumstances. IFRS 10 establishes control as the basis for an investor to consolidate its investees and defines control as an investor’s power over an investee with exposure, or rights, to variable returns from the investee and the ability to affect the investor’s returns through its power over the investee. In addition, the IASB issued IFRS 12 – Disclosure of Interest in Other Entities (‘‘IFRS 12’’) which combines and enhances the disclosure requirements for the Company’s subsidiaries, joint arrangements, associates, and unconsolidated structured entities. The requirements of IFRS 12 include reporting of the nature of risks associated with the Company’s interests in other entities and the effect of those interests on the Company’s consolidated financial statements. Concurrently with the issuance of IFRS 10, IAS 27, and IAS 28 – Investments in Associates (‘‘IAS 28’’) were revised and reissued as IAS 27 – Separate Financial Statements and IAS 28 – Investments in Associates and Joint Ventures to align with the new consolidation guidance. The Company does not anticipate these amendments to have a significant impact on its consolidated financial statements. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 11 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS JOINT VENTURES In May 2011, the IASB issued IFRS 11 – Joint Arrangements (‘‘IFRS 11’’), which supersedes IAS 31 – Interest in Joint Ventures and SIC-13 – Jointly Controlled Entities – Non-Monetary Contributions by Venturers. IFRS 11 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted under certain circumstances. Under IFRS 11, joint arrangements are classified as joint operations or joint ventures based on the rights and obligations of the parties to the joint arrangements. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (‘‘joint operators’’) have rights to the assets and obligations for the liabilities relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (‘‘joint ventures’’) have rights to the net assets of the arrangement. IFRS 11 requires that a joint operator recognizes its portion of assets, liabilities, revenues, and expenses of a joint arrangement, while a joint venturer recognizes its investment in a joint arrangement using the equity method. The Company does not anticipate this amendment to have a significant impact on its consolidated financial statements. FAIR VALUE MEASUREMENT In May 2011, as a result of a convergence project undertaken by the IASB and the US Financial Accounting Standards Board, to develop common requirements for measuring fair value and for disclosing information about fair value measurements, the IASB issued IFRS 13 – Fair value Measurement (‘‘IFRS 13’’). IFRS 13 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. IFRS 13 defines fair value and sets out a single framework for measuring fair value which is applicable to all IFRSs that require or permit fair value measurements or disclosures about fair value measurements. IFRS 13 requires that when using a valuation technique to measure fair value, the use of relevant observable inputs should be maximized while unobservable inputs should be minimized. The Company does not anticipate the application of IFRS 13 to have a significant impact on its consolidated financial statements. FINANCIAL STATEMENTS PRESENTATION In June 2011, the IASB issued amendments to IAS 1 – Presentation of Financial Statements (‘‘IAS 1’’) that require an entity to group items presented in the Statement of Comprehensive Income on the basis of whether they may be reclassified to earnings subsequent to initial recognition. For those items presented before taxes, the amendments to IAS 1 also require that the taxes related to the two separate groups be presented separately. The amendments are effective for annual periods beginning on or after July 1, 2012 with earlier adoption permitted. The Company does not anticipate the application of the amendments to IAS 1 to have a material impact on its consolidated financial statements. EMPLOYEE BENEFITS In June 2011, the IASB issued amendments to IAS 19 – Employee Benefits (‘‘IAS 19’’) that introduced changes to the accounting for the defined benefit plans and other employee benefits. The amendments include elimination of the options to defer, or recognize in full in earnings, actuarial gains and losses, and instead mandates the immediate recognition of all actuarial gains and losses in other comprehensive income, and requires use of the same discount rate for both the defined benefit obligation, and the expected asset return when calculating interest cost. Other changes include modification of the accounting for termination benefits and classification of other employee benefits. The amendments to IAS 19 are effective for annual periods beginning on or after January 1, 2013. The Company does not anticipate the application of the amendments to IAS 19 to have a material impact on its consolidated financial statements. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 12 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS RESULTS OF OPERATIONS – YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010 CONSOLIDATED INCOME STATEMENT $000S EXCEPT PER SHARE DATA Total revenues Cost of goods sold Gross margin Research and product development General and administration Sales and marketing Finance costs (Loss) income from operations Other operating loss Write-off of property and equipment SGGF legal fees recovery Net (loss) income Basic net (loss) income per common share Diluted net (loss) income per common share Total assets Long-term financial liabilities % 100% 44% 56% 17% 24% 2% 3% 10% 0% 0% 0% 10% % 100% 53% 47% 17% 35% 4% 2% (cid:3)10% 0% 0% 0% (cid:3)10% 2012 5,165 2,716 2,449 856 1,795 199 113 (514) (24) – – (538) (0.009) (0.009) 3,886 1,089 2011 5,786 2,538 3,248 997 1,374 111 181 585 (7) – – 578 0.009 0.009 4,171 1,206 2010 5,577 3,061 2,516 774 1,279 69 203 191 (30) (12) 315 464 0.009 0.009 2,820 1,384 % 100% 55% 45% 14% 23% 1% 4% 3% (cid:4)1% 0% 6% 8% During the year ended December 31, 2012, the Company’s revenue decreased by 11% or $621,000 to $5,165,000 from $5,786,000 and cost of goods sold increased by 7% or $178,000 to $2,716,000 from $2,538,000 in comparison with the same period of 2011. These changes resulted in a decrease in gross margin by 25% or $799,000 to $2,449,000 from $3,248,000. Income from operations has decreased by $1,091,000 to loss of $506,000 from income of $585,000. There was a net loss in the year ended December 31, 2012 of $538,000 in comparison with net income in the same period of 2011 of $578,000. During the fourth quarter of 2012, the Company’s revenue decreased by 23% or $350,000 to $1,202,000 from $1,552,000 and cost of goods sold increased by 21% or $135,000 to $769,000 from $634,000 in comparison with the same period of 2011. These changes resulted in a decrease in gross margin by 53% or $485,000 to $433,000 from $918,000. Income from operations has decreased by $476,000 to loss of $249,000 from income of $227,000 during the fourth quarter of 2012 in comparison with the same period of 2011. There was a net loss in the fourth quarter of 2012, $237,000 in comparison with net income of $252,000 in the same period of 2011 mostly due to a decrease in gross margin. --- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 13 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS REVENUE $000S Total revenues PRODUCT SALES Year Ended December 31 Quarter Ended December 31 2012 5,165 2011 5,786 CHANGE (cid:4)11% 2012 1,202 2011 1,552 CHANGE (cid:4)23% Total sales in the year ended December 31, 2012 decreased by $621,000 or 11% primarily as a result of lower sales volumes of beta glucan and veterinary shampoo premix that were rescheduled to 2013. The sales in the fourth quarter of 2012 decreased $350,000 or 23% primarily as a result of lower sales volumes of avenanthramides and veterinary shampoo premix that were rescheduled to 2013. EXPENSES COST OF GOODS SOLD AND GROSS MARGIN $000S Sales Cost of goods sold Gross margin Gross margin % Year Ended December 31 Quarter Ended December 31 2012 5,165 2,716 2,449 47% CHANGE (cid:4)11% 7% (cid:4)25% 2011 5,786 2,538 3,248 56% 2012 1,202 769 433 36% CHANGE (cid:4)23% 21% (cid:4)53% 2011 1,552 634 918 59% 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 plant and equipment amortization, the majority of costs are variable in relation to the volume of product produced or shipped. During the year ended December 31, 2012, the cost of goods sold increased by $178,000 or 7%, from $2,538,000 in 2011 to $2,716,000 in 2012. The gross margin in 2012 is lower by 25% mostly due to higher cost of goods sold and lower sales. The gross margin percentage decreased by 9% from 56% in 2011 to 47% in 2012. The main reasons for the decreases were lower quality of avenanthramide feed stocks and labor force retention challenges due to the robust Alberta economy. During the fourth quarter of 2012, the cost of goods sold rose by $135,000 or 21%, from $634,000 in 2011 to $769,000 in 2012. The gross margin in the fourth quarter of 2012 is lower by 53% due to lower revenue and higher cost of goods sold of certain higher margin products. The gross margin percentage decreased by 23% from 59% in the fourth quarter of 2011 to 36% in the same period of 2012. The same factors for the year end results were applicable in the fourth quarter. Additionally in the fourth quarter, certain products had to be written off and re-manufactured due to technical issues; these write-offs represent $98,634. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 14 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS RESEARCH AND PRODUCT DEVELOPMENT $000S Salaries and benefits Regulatory and patents Other Product development – CeaProve(cid:2) Total research and product development expenditures Year Ended December 31 Quarter Ended December 31 2012 2011 CHANGE 2012 2011 CHANGE 639 133 63 835 21 856 603 118 120 841 156 997 (cid:4)1% (cid:4)87% (cid:4)14% 151 59 (84) 126 3 129 172 42 (1) 213 29 242 (cid:4)41% (cid:4)90% (cid:4)47% During the year ended December 31, 2012, research and development expenses before CeaProve(cid:2) development decreased by 1% or $6,000 during the same period of 2011 due to increased expenditures incurred for third party technical services and collaboration agreements offset by grant revenue recognition of discounted CAAP funding and grant contributions from Alberta Innovates Technology Futures. CeaProve(cid:2) costs have decreased by 87% from $156,000 to $21,000 as a result of decreased costs for patents and decreased costs associated with contract manufacturing activities. During the fourth quarter of 2012, research and development expenses before CeaProve(cid:2) development have decreased by 41% mostly due to grant revenue recognition of discounted CAAP funding and grant contributions from Alberta Innovates Technology Futures. CeaProve(cid:2) costs have decreased by 90% from $29,000 to $3,000 as a result of decreased costs for patents and decreased costs associated with contract manufacturing activities. GENERAL AND ADMINISTRATION $000S Salaries and benefits Consulting Board of Directors compensation Insurance Accounting and Audit fees Rent Public Company Costs Travel Depreciation Legal Other Year Ended December 31 Quarter Ended December 31 2012 2011 CHANGE 2012 2011 CHANGE 475 407 155 120 76 97 82 113 45 123 102 390 211 174 121 113 90 53 83 35 16 88 129 133 33 33 25 25 13 36 12 20 23 110 62 41 32 35 28 2 29 12 10 20 Total general and administration expenses 1,795 1,374 31% 482 381 27% General and administration expense for the year ended December 31, 2012 increased by $421,000 or 31% from $1,374,000 to $1,795,000 as a result of increased expenses arising from several non-recurring events. Salaries and benefits increased $85,000 mainly as a result of engaging an engineer to oversee the new manufacturing facility activities. Consulting increased $196,000, most of which related to feasibility studies to review potential new --- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 15 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS manufacturing options, including an examination of a third party contract manufacturer, and the appointment of a permanent CEO. Public company costs increased $29,000 largely as a result of hiring an investor relations consultant in the first half of 2012. Legal fees increased by $107,000 primarily due to AVAC litigation expenses. Travel increased $30,000 with much of that increase related to new manufacturing options. Offsetting the increases, Board of Directors compensation decreased by $19,000 and accounting and audit fees decreased by $37,000 as a result of higher 2011 fees related to IFRS conversion work. During the fourth quarter of 2012, general and administration expenses increased by $101,000 or 27% mostly as a result of increased consulting costs of $71,000, and salaries and benefits of $19,000 partially offset by decreased expenses for directors’ compensation of $8,000, and accounting and audit fees of $10,000. In general, the same factors that influenced the general and administrative costs for the year ended December 31, 2012 were applicable to the fourth quarter. SALES AND MARKETING $000S Travel Consulting Advertising Courses & Conferences Other Total sales and marketing Year Ended December 31 Quarter Ended December 31 2012 60 101 20 3 15 199 2011 CHANGE 2012 2011 CHANGE 45 36 12 9 9 111 79% 13 16 6 3 2 40 10 9 3 1 3 26 54% Sales and marketing expenses in the year ended December 31, 2012 increased by $88,000 or 79% in comparison with the same period of 2011 due primarily to consultant fees incurred to examine marketing strategies and branding evaluation options. The fourth quarter of 2012 showed an increase in expenditures of $14,000 or 54% versus 2011 as a result of higher attendance at industry trade shows and for technical support to our new US-based distributors. The Company is continuing to evaluate marketing options and anticipates additional participation and expenditures at major personal care and cosmetic conferences. Our goal is to expand our business with existing customers and to explore potential opportunities with new customers. FINANCE COSTS $000S 2012 2011 CHANGE 2012 2011 CHANGE Year Ended December 31 Quarter Ended December 31 Interest on royalty financial liability Interest on long-term loan Interest on convertible debentures Accretion of convertible debentures Accretion of CAAP loan Bank charges 38 54 – – 18 3 44 60 40 32 4 1 113 181 (cid:4)38% 10 13 – – 6 2 31 5 13 10 9 4 1 42 (cid:4)26% - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- 16 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS As at December 31, 2012, royalty investors received royalties equal to 2.285% (2011 – 2.285%) of revenues from product sales and royalty, license, and product development fees of active ingredients and veterinary therapeutic products and CeaProve(cid:2), 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 two times 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. Finance costs decreased in the year ended December 31, 2012 in comparison with the same period of 2011 due to decreasing interest expenses on royalty financial liabilities of $6,000 and interest on a long-term loan of $6,000 as a result of lower principal due to repayments. On December 31, 2009, the Company issued secured convertible debentures for cash of $500,000. The debentures incurred interest at 8% per annum and matured on December 31, 2011. In the year ended December 31, 2011, the Company recorded interest expense on convertible debentures in the amount of $40,000 and accretion of $32,000, and for the three months ended December 31, 2011, interest was $10,000 and accretion of $9,000 versus no expenses in the year ended December 31, 2012. The Company entered into Canadian Agricultural Adaptation Program (‘‘CAAP’’) repayable contribution agreements for total possible funding of $1,339,625 receivable over the period from October 7, 2010 through September 30, 2012. During the year ended December 31, 2012, the Company voluntarily decommitted $668,557 as a result of lower anticipated project expenditures to the maximum possible funding under the agreement of $671,068. The end date for project expenditures and start date for repayments were also extended one year to September 30, 2013 and to December 31, 2014 respectively. As the contributions are non-interest bearing, the fair value at inception is estimated as the present value of the principal payments required, discounted using the prevailing market rates of interest for a similar instrument estimated to be 15% per annum. The difference between the fair value of the contributions and the cash received is accounted for as a government grant. The first payment was received in the first quarter of 2011. Accretion of the CAAP loan was $18,000 in the year ended December 31, 2012 (2011 – $4,000). OTHER OPERATING LOSS (INCOME) $000S Foreign exchange (gains) losses Other (income) expenses Year Ended December 31 Quarter Ended December 31 2012 2011 CHANGE 2012 2011 CHANGE 29 (5) 24 32 (25) 7 357% (9) (3) (12) (1) (24) (25) (cid:4)60% Foreign exchange losses in the year ended December 31, 2012 were $29,000 in comparison with $32,000 in 2011 due to the weaknesses of the Canadian dollar versus the US dollar during the year ended December 31, 2012 in comparison with 2011. Foreign exchange gains of $9,000 in the fourth quarter of 2012 in comparison with $1,000 gains in the same period of 2011 were due to the strengthening of the Canadian dollar versus the US dollar in the fourth quarter of 2012. DEPRECIATION AND AMORTIZATION EXPENSES In 2012, the total depreciation and amortization of $293,000 (2011 – $297,000) was allocated as follows: $46,000 to general and administration expense (2011 – $35,000), $43,000 to inventory (2011 – $35,000), and $204,000 (2011 – $227,000) to cost of goods sold. The amount of depreciation and amortization in 2012 was less than in 2011 because of full amortization of some equipment. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 17 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS 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. All amounts shown are in Canadian currency. 2012 2011 $000S EXCEPT PER SHARE DATA Total revenues Net income (loss) Basic net income (loss) per common share Diluted net income (loss) per common share Q4 1,202 (237) Q3 1,283 (137) Q2 1,490 (160) Q1 1,190 (4) Q4 1,552 252 Q3 1,515 (108) Q2 1,185 104 Q1 1,534 330 (0.004) (0.002) (0.003) (0.000) 0.005 (0.002) 0.002 0.006 (0.004) (0.002) (0.003) (0.000) 0.005 (0.002) 0.002 0.006 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 December 31, 2012 December 31, 2011 1,508 2,378 (2,566) 1,320 1,306 14 1,320 2,307 1,864 (1,510) 2,661 2,143 518 2,661 Non-current assets decreased by $799,000 due to reclassification of restricted cash and cash equivalent of $709,000 and decreased by $41,000, a depreciation provision of $293,000 offset by the acquisition of $200,000 of property and equipment, and $44,000 for a new license agreement for avenanthramide technology. Current assets increased by $514,000. Inventories were higher by $99,000; accounts receivables and prepaid expenses were higher by $25,000. Cash decreased over 2011 by $319,000 and restricted cash and cash equivalent was reclassified from non-current assets of $709,000. Current liabilities totaling $2,566,000 increased by the net amount of $1,056,000 mostly due to sales orders prepayments increased by $418,000 and restricted cash and cash equivalent received in 2011 under a capital expenditure grant agreement and recorded as deferred revenue, reclassified from non-current liabilities in the amount of $709,000, current portion of long-term debt increase of $14,000, royalty financial liability increased by $21,000, repayable research funding repayments of $52,000, trade payables and accrued liabilities decreased by $46,000, royalty interest accrued of $96,000 and repaid of $104,000. Non-current liabilities totaling $1,306,000 decreased by the net amount of $837,000 due to long-term debt reclassification to current liabilities of $14,000 and repayment of $154,000, repayable research funding repayment of $32,000, royalty financial liability decreased by $80,000 and deferred revenue reclassified to current liabilities in the - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 18 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS amount of $709,000 and decrease of $41,000; additional accrued employee future benefit obligation of $30,000, and a discounted CAAP loan recognized in the amount of $163,000. Equity of $14,000 at December 31, 2012 decreased by $504,000 from equity of $518,000 at December 31, 2011 due to net loss for the year ended December 31, 2012 of $538,000 offset by recognition of share-based compensation in contributed surplus of $34,000. NET DEBT $000S Cash and cash equivalents Current financial liabilities* Non-current financial liabilities* Total financial liabilities NET DEBT December 31, 2012 December 31, 2011 273 867 1,089 1,956 1,683 592 938 1,206 2,144 1,552 * Current and non-current financial liabilities include accounts payable and accrued liabilities, current and non-current portion of long-term debt, royalty interest payable, current and non-current portion of repayable research funding, current and non-current portion of royalty financial liability, and a CAAP loan. The Company’s net debt increased by $131,000 due to cash and cash equivalent decrease of $319,000 and CAAP loan discounted amount recognized of $163,000 offset by long-term debt repayment in the amount of $154,000, repayable research funding repayment of $85,000, royalty financial liability decreased by $58,000 and a royalty interest payable decreased by $8,000, accounts payable and accrued liabilities decrease of $46,000. SOURCES AND USES OF CASH The following table outlines our sources and uses of funds during 2012 and 2011. $000S Sources of funds: Funds generated from operations (cash flow) Changes in non-cash working capital items Deferred revenue Restricted cash received Repayable CAAP Funding Repayable research funding Uses of funds: Purchase of property and equipment Purchase of license Restricted cash received Deferred revenue reduction Interest paid Repayment of royalty financial liability Convertible debentures settlement Repayable research funding repayment Repayment of long term debt Net change in cash flows Year Ended December 31 Quarter Ended December 31 2012 2011 2012 2011 (274) 249 – 41 350 – 366 (200) (44) – (41) (92) (69) – (85) (154) (685) (319) 1,063 157 750 – 123 50 2,143 (126) (15) (750) – (411) (143) (130) (15) (147) (1,737) 406 (197) (36) – 41 167 – (25) (67) – (41) (13) (24) – (42) (39) (226) (251) 316 49 750 – – – 1,115 (38) (15) (750) – (61) (11) (130) (15) (38) (1,058) 57 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- CEAPRO Annual Report 2012 19 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS Net change in cash flow decreased $725,000 in 2012 and $308,000 in the fourth quarter of 2012 in comparison with the same periods of 2011. 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, maintain capital investment, and service debt 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 4, 2013 were 60,278,948 (April 27, 2012 – 60,278,948). In addition, 4,130,000 stock options as at April 4, 2013 (April 27, 2012 – 3,170,000) were outstanding that are potentially convertible into an equal number of common shares at various prices. Ceapro’s working capital deficiency was $189,000 at December 31, 2012, which was decreased by $543,000 from positive working capital of $354,000 at December 31, 2011. 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. Government Funding During the year ended December 31, 2010, the Company was approved for non-repayable funding in the amount of $124,000 from Alberta Innovates Technology Futures (AITF). During the year ended December 31, 2012, the Company received $32,083 (2011 – $62,000) which was recorded as a reduction of research and product development expenses. The Company anticipates receiving an additional amount of $9,166 in early 2013 under this agreement. During the year ended December 31, 2012, the Company was approved for a second agreement for non-repayable funding in the amount of $124,000 from AITF. During the year, the Company received $20,750 which was recorded as a reduction of research and project development expenses. The Company anticipates receiving additional funding of $62,000 in 2013 and $41,250 in 2014 under this agreement. 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 $nil during the year ended December 31, 2012 (2011 – $60,076) as a reduction of research and product development expenses. This program has now been completed. 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 recognized $nil during the year ended December 31, 2012 (2011 – $10,879) as a reduction of research and product development expenses. This program has now been completed. 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 $5,000 as a reduction of research and product development expenditures under this program in the period ended December 31, 2012 (2011 – $5,000). The Company anticipates receiving an additional amount of $5,000 in 2013 under this program. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 20 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS The Company received a repayable non-interest bearing contribution for research and development expenditures totaling $100,000 by 2011 (2010 – $50,000 of the $100,000 was received) from Innovation PEI which was recorded as a repayable research funding liability on the consolidated balance sheet. The amount of $15,367 was repaid during 2011. The contribution was repayable quarterly at a rate of one percent of sales revenue subject to a minimum payment of $12,500 per quarter. The Company repaid the full liability during the year ended December 31, 2012. In 2011, the Company was approved for non-repayable grant funding from Innovation PEI for a maximum of $100,000. During the year ended December 31, 2011, the Company received $30,000 and recognized $19,500 against eligible expenses and $10,500 as deferred revenue. During the year ended December 31, 2012, the balance of $70,000 potentially receivable was decommitted and the Company recognized $10,500 as deferred revenue. No further amount is expected. The Company entered into Canadian Agricultural Adaptation Program (‘‘CAAP’’) repayable contribution agreements for total possible funding of $1,339,625 receivable over the period from October 7, 2010 through September 30, 2012. During the year ended December 31, 2012, the Company voluntarily amended the maximum possible funding under the agreement to $671,068 as a result of lower anticipated project expenditures. The end date for project expenditures was also extended one year to September 30, 2013. All amounts claimed under the program are repayable interest free over eight years beginning in 2014. The Company has received funding of $473,573 to date under this program. A maximum funding amount of $197,495 is anticipated to be received in 2013. During the year ended December 31, 2011, the Company commenced a research and development project agreement. Under this project, the Company paid cash of $56,177 in 2011 and made additional payments of $28,236 in 2012. The other party to the research and development project agreement made an in-kind contribution to the project of $42,262. The agreement was completed in 2012. During the year ended December 31, 2011, the Company entered into a Contribution Agreement with Alberta Innovates Bio Solutions (AI-Bio Solutions) for a non-repayable grant contribution totaling up to $1,600,000 towards the construction of a new bio-processing facility and subject to compliance with all terms and conditions of the agreement. In accordance with the agreement, the Company received $750,000 in 2011 classified as restricted cash and cash equivalents and deferred revenue, and anticipates additional amounts will be received as follows: $690,000 in 2013 and $160,000 in 2014. An amount of $41,223 was recorded as a reduction of capitalized expenditures. During the year ended December 31, 2012, the Company entered into a contribution agreement with an agency of the federal government to provide funding of up to $253,000 for certain research activities. During the year ended December 31, 2012, the Company received or recorded as receivable the amount of $42,091. The Company estimates it will receive a further amount of $177,659 in 2013 and $33,250 in 2014. The Company is currently reviewing additional options available to raise capital. RELATED PARTY TRANSACTIONS During the year ended December 31, 2012, $19,000 (2011 – $22,000) of royalties were earned by employees and directors from their investment in previous Ceapro royalty offerings. As at December 31, 2012, $5,000 (2011 – $6,000) of royalties were payable to employees and directors. During the year ended December 31, 2012, officers and directors earned $nil of interest on convertible debentures (2011 – $6,000). During the year ended December 31, 2012, the Company paid key management salaries, short-term benefits, consulting fees and director fees totaling $657,000 (2011 – $485,000), and key management personnel received share-based payments of $34,000 (2011 – $49,000). - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 21 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS During the year ended December 31, 2012, directors converted $nil (2011 – $175,000) of fees payable to nil (2011 (cid:4)1,590,909) common shares of the Company. Directors and officers converted $nil (2011 – $70,000) of the principal amount of matured convertible debentures to 700,000 common shares of the Company. Amount payable to directors was $29,000 (2011 – $175,000). These transactions are in the normal course of operations and are measured at the amount of consideration established and agreed to by the related parties. COMMITMENTS AND CONTINGENCIES a) During the year ended December 31, 2011, the Company and its wholly-owned subsidiary, Ceapro Veterinary Products Inc. were served with a statement of claim from AVAC Ltd. alleging damages of $724,500 pursuant to a product development agreement. The Company and Ceapro Veterinary Products Inc. have filed a statement of defense to refute the claim and believe it has strong defenses to the AVAC allegations. However, at this time the outcome of the litigation is uncertain and no provisions have been made in the consolidated financial statements on account of this litigation. b) During the year ended December 31, 2012, the Company and its wholly-owned subsidiary, Ceapro Technology Inc. were served with a statement of claim from AVAC Ltd. alleging damages of $1,470,000 pursuant to two product development agreements. The Company and Ceapro Technology Inc. have filed a statement of defense to refute the claim and believe it has strong defenses to the AVAC allegations. However, at this time the outcome of the litigation is uncertain and no provisions have been made in the consolidated financial statements on account of this litigation. c) 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. During the year ended December 31, 2011, the Company has entered into a new licensing agreement with the University of Guelph for additional market rights for the exclusive variety of a mint plant. In accordance with the new agreement, there are future minimum royalty prepayments of $10,000 per annum starting in 2012 for royalty payments which will be calculated as 5% of net sales from products derived from the mint plants. The minimum royalty payments are creditable against royalties in years where royalties are due. The agreement is an executory contract and therefore all royalty payments under the contract will be recognized as they become due. d) During the year ended December 31, 2012, the Company has entered into a new license agreement for a new technology to increase the concentration of avenanthramides in oats. The Company shall pay an annual royalty percentage rate of 2% of sales, payable every January 1st and July 1st, subject to a minimum annual royalty payment according to the schedule below: Year 2012 2013 2014 2015 2016 Amount nil $12,500 $37,500 $50,000 $50,000 And $50,000 each year thereafter while the license agreement remains in force. The agreement is an executory contract and therefore all royalty payments under the contract will be recognized as they become due. e) 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. --- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 22 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- MANAGEMENT’S DISCUSSION & ANALYSIS OUTLOOK We have focused our research investments on the development of new formulations and potential new indications for our value drivers: avenanthramides and beta glucan. As well as assessing new marketing strategies, most of the effort, time, and money in 2012 have been deployed in planning for the establishment of a new state-of-the-art manufacturing facility which will also house our offices and laboratories. We expect the transition to the new site to be completed by end of 2013. This new centre should allow for cost reductions through increased extraction efficiencies and the integration of all our employees under one roof. In all, we expect to improve our margins on existing products and to commercially produce our new products that are the focus of today’s research activities. A comprehensive plan has been put in place to secure a smooth transition while maintaining and developing our business in a focused and prioritized manner. Financial results for 2012 were below expectations; however, based on our current strong order book and upcoming initiatives, we remain very positive for 2013. We are attracting serious interest in our innovative technology platforms and products from major players in new market sectors like nutraceuticals. In addition, the construction project for the new facility is on track for completion in the fourth quarter of 2013. Over and above these initiatives, and in line with our long-term strategy, we continue to evaluate additional opportunities for growth including contract manufacturing opportunities. Our vision is to be recognized as the Canadian leader in botanical actives and a centre of excellence in bioprocessing by 2015. 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. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 23 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- 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 International Financial Reporting Standards. The consolidated financial statements include some amounts that are based on the best estimates and judgments of Management. Financial information used elsewhere in the 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 financial 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’s 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, Grant Thornton LLP, the external auditors, in accordance with auditing standards generally accepted in Canada on behalf of the shareholders. SINCERELY, SIGNED ‘‘Gilles Gagnon’’ President and Chief Executive Officer SIGNED ‘‘Branko Jankovic, CA’’ Chief Financial Officer and Vice President, Finance - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - --- -- -- -- --- -- -- --- -- -- -- --- -- - 24 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- CONSOLIDATED FINANCIAL STATEMENTS 9DEC201019455442 Independent auditor’s report Grant Thornton LLP 1701 Scotia Place 2 10060 Jasper Avenue NW Edmonton, AB T5J 3R8 T +1 780 422 7114 F +1 780 426 3208 www.GrantThornton.ca To the Shareholders of Ceapro Inc. We have audited the accompanying consolidated financial statements of Ceapro Inc., which comprise the consolidated balance sheets as at December 31, 2012 and 2011, and the consolidated statements of net (loss) income and comprehensive (loss) income, changes in equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management’s responsibility for the financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, 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. Auditor’s 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 auditor’s 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 entity’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 entity’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. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 25 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- 9DEC201019455442 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Ceapro Inc. as at December 31, 2012 and 2011, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Emphasis of matter Without modifying our opinion, we draw attention to Note 1 in the consolidated financial statements which indicates that the Company incurred a net loss of $538,353 during the year ended December 31, 2012 and, as of that date, the Company had an accumulated deficit of $6,734,086. In fiscal 2013 the Company will also be required to obtain additional funding, estimated at $3,000,000, to finance leasehold improvements and the purchase of equipment for a new manufacturing facility. These conditions, along with other matters as set forth in Note 1, indicate the existence of a material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Edmonton, Canada April 4, 2013 Chartered Accountants 8MAY201323214477 - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - --- -- -- -- --- -- -- --- -- -- -- --- -- - 26 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS ASSETS Current Assets Cash and cash equivalents Restricted cash and cash equivalents (note 8) Accounts receivable Inventories (note 3) Prepaid expenses and deposits Non-Current Assets Restricted cash and cash equivalents (note 8) Licenses (note 4) Property and equipment (note 5) TOTAL ASSETS LIABILITIES AND EQUITY Current Liabilities Accounts payable and accrued liabilities Current portion of deferred revenue (note 8) Current portion of long-term debt (note 6) Royalties interest payable (note 7b) Current portion of royalty financial liability (note 7b) Current portion of repayable research funding (note 23) Non-Current Liabilities Royalty financial liability (note 7b) Employee future benefits obligation (note 9) Deferred revenue (note 8) Long-term debt (note 6) CAAP loan (note 11) Repayable research funding (note 23) Equity Share capital (note 10b) Contributed surplus (note 10c) Deficit TOTAL LIABILITIES AND EQUITY See accompanying notes Approved on Behalf of the Board SIGNED: ‘‘John Zupancic’’ Director December 31 2012 $ December 31 2011 $ 273,106 708,777 453,188 790,057 152,778 592,259 – 465,446 691,411 115,015 2,377,906 1,864,131 – 73,717 1,434,345 1,508,062 3,885,968 578,216 1,699,110 168,637 25,037 95,378 – 2,566,378 109,931 217,219 – 757,898 220,978 – 750,000 36,000 1,520,659 2,306,659 4,170,790 624,154 571,524 154,465 33,366 74,057 52,133 1,509,699 189,566 187,302 750,000 926,535 57,432 32,500 1,306,026 2,143,335 6,315,858 431,792 (6,734,086) 13,564 3,885,968 6,315,858 397,631 (6,195,733) 517,756 4,170,790 SIGNED: ‘‘Edward Taylor’’ Director - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 27 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF NET (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME Years ended December 31 Revenue (note 12) Cost of goods sold Gross margin Research and product development General and administration Sales and marketing Finance costs (note 15) (Loss) income from operations Other operating loss (note 14) Net (loss) income and comprehensive (loss) income for the year Net (loss) income per common share (note 24): Basic Diluted 2012 $ 5,165,276 2,716,605 2,448,671 856,191 1,795,476 198,650 112,900 (514,546) (23,807) (538,353) 2011 $ 5,786,174 2,538,347 3,247,827 996,719 1,374,030 111,359 180,808 584,911 (7,338) 577,573 (0.01) (0.01) 0.01 0.01 Weighted average number of common shares outstanding 60,278,948 56,561,513 See accompanying notes - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- 28 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Balance December 31, 2010 Share issued for debt Share-based payments Transfer to deficit Net income for the year Share Capital $ 5,770,858 545,000 – – – Balance December 31, 2011 6,315,858 Share-based payments Net loss for the year – – Balance December 31, 2012 6,315,858 See accompanying notes Equity component of convertible debentures $ Contributed surplus $ Deficit $ Equity $ 45,000 347,445 (6,818,306) (655,003) – – (45,000) – – – – – – 50,186 – – – – 45,000 577,573 397,631 (6,195,733) 34,161 – – (538,353) 431,792 (6,734,086) 545,000 50,186 – 577,573 517,756 34,161 (538,353) 13,564 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- CEAPRO Annual Report 2012 29 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 OPERATING ACTIVITIES Net (loss) income for the year Adjustments to reconcile net (loss) income to cash and cash 2012 $ 2011 $ (538,353) 577,573 equivalents provided by operating activities Finance costs Depreciation and amortization Accretion on convertible debentures Accretion of CAAP loan Grant revenue recognized Extinguishment of the original liabilities Recognition new liabilities Employee future benefits obligation Share-based payments Net (loss) income for the year adjusted for non-cash items CHANGES IN NON-CASH WORKING CAPITAL ITEMS Accounts receivable Inventories Prepaid expenses and deposits Deferred revenue Accounts payable and accrued liabilities Interest paid CASH GENERATED FROM OPERATIONS INVESTING ACTIVITIES Purchase of property and equipment Purchase of licenses FINANCING ACTIVITIES Repayment of long-term debt Repayable CAAP Funding Deferred revenue Restricted cash and cash equivalents Convertible debentures Repayable research funding Repayable research funding repayment Repayment of royalty financial liability (Decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year See accompanying notes 94,734 292,525 – 18,166 (188,312) (119,772) 102,972 29,917 34,161 (273,962) 12,258 (98,646) (37,763) 418,809 (45,954) 248,704 (25,258) (91,956) (117,214) (199,489) (44,439) (243,928) (154,465) 350,492 (41,223) 41,223 – – (84,633) (69,405) 41,989 (319,153) 592,259 273,106 143,967 297,282 32,500 4,341 (69,990) – – 27,115 50,186 1,062,974 104,915 (411,986) (44,785) 571,524 (63,009) 156,659 1,219,633 (411,393) 808,240 (125,889) (15,000) (140,889) (146,426) 123,081 750,000 (750,000) (130,000) 50,000 (15,367) (143,070) (261,782) 405,569 186,690 592,259 The non-cash transaction described in note 10(b) has been excluded from the statement of cash flows. Cash and cash equivalents are comprised of $137,150 (2011 – $334,681) on deposit with financial institutions and $135,956 (2011 – $257,578) held in money market mutual funds. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 30 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS :: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2012, AND 2011 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 Company’s head office address is Suite 4174 Enterprise Square, 10230 Jasper Avenue, Edmonton, AB T5J 4P6. 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 exist that may cast significant doubt upon the validity of this assumption. During the year ended December 31, 2012, the Company incurred a net loss of $538,353 and as of that date had accumulated a deficit of $6,734,086. In 2013, the Company will require additional funds, in excess of current committed funding, to construct leasehold improvements and purchase equipment for a new manufacturing facility to execute its business plan. The current total estimated financial commitments are $4,700,000 and additionally, future operating lease commitments as highlighted in note 20 have been made in support of the new manufacturing facility. As at December 31, 2012, the Company has cash and cash equivalents of $708,777 restricted for development of the new facility and commitments for an additional $1,030,000, $850,000 of which is with respect to note 23j in the consolidated financial statements. The Company anticipates that it will require additional funds in an amount currently estimated at $3,000,000 to complete the project. 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. Management is pursuing additional funding with long term partners, government programs, and other sources to fully fund its anticipated needs. There can be no assurance that the Company will be able to access capital when needed, achieve profitability, or generate positive cash flow. These consolidated financial statements do not reflect the adjustments that might be necessary to the carrying amount of reported assets and liabilities, 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) STATEMENT OF COMPLIANCE These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (‘‘IFRS’’) as issued by the International Accounting Standards Board (‘‘IASB’’). The Board of Directors authorized these consolidated financial statements for issue on April 4, 2013. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 31 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) B) BASIS FOR PRESENTATION These consolidated financial statements have been prepared on the historical cost basis. All transactions are recorded on an accrual basis. 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. All intercompany accounts and transactions have been eliminated on consolidation. C) USE OF MANAGEMENT CRITICAL JUDGMENTS, ESTIMATES, AND ASSUMPTIONS The preparation of consolidated financial statements requires management to make critical judgments, estimates, and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses recorded during the reporting period. In making estimates and judgments, management relies on external information and observable conditions where possible, supplemented by internal analysis as required. Actual results may differ from those estimates. Estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. Management critical judgments Policies that are critical for the presentation of the financial position and financial performance of the Company and that require judgments are discussed below. FUNCTIONAL CURRENCY The functional currency for the Company and each of the Company’s subsidiaries is the currency of the primary economic environment in which the respective entity operates; the Company has determined the functional currency of each entity to be the Canadian dollar. Such determination involves certain judgments to identify the primary economic environment. The Company reconsiders the functional currency of its subsidiaries if there is a change in events and/or conditions which determine the primary economic environment. LEASE Management considers all leases as operational. In making their judgment, management considered the detailed criteria for the capital lease recognition set out in IAS 17 Lease and, in particular, whether the Company had transferred substantially all the risks and rewards incidental to ownership. Management estimates and assumptions Policies that are critical for the presentation of the financial position and financial performance of the Company and that require estimates and assumptions are discussed below. EMPLOYEE BENEFITS The Company has an unfunded post-employment defined benefit pension plan. The liability for this plan is presented in the balance sheet of the Company. The costs related to this pension plan are included in profit or loss. The critical assumption used to determine the Company’s obligation is the discount rate applied to the obligation. Management determines the appropriate discount rate at the end of each year by considering the interest rate of high quality corporate bonds that have terms to maturity approximating the terms of the obligation. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 32 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PROVISIONS The Company records provisions for matters where a legal or constructive obligation exists at the balance sheet date, as a result of past events and a reliable estimate can be made of the obligation. These matters might include restructuring projects, legal matters, disputed issues, indirect taxes, and other items. These obligations may not be settled for a number of years and a reliable estimate has to be made of the likely outcome of each of these matters. These provisions represent our best estimate of the costs that will be incurred, but actual experience may differ from the estimates made and therefore affect future financial results. The effects would be recognized in profit or loss. TAXATION The Company makes estimates in respect of tax liabilities and tax assets. Full provision is made for future and current taxation at the rates of tax prevailing at the year end unless future rates have been substantively enacted. These calculations represent our best estimate of the costs that will be incurred and recovered, but actual experience may differ from the estimates made and therefore affect future financial results. The effects would be recognized in profit or loss, primarily through taxation. The Company recognizes the deferred tax benefit related to deferred tax assets to the amount that is probable to be realized. Assessing the recoverability of deferred tax assets requires management to make significant estimates of future taxable profit. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions from deferred tax assets. INVENTORIES Inventories are valued at the lower of cost and net realizable value. Cost of inventory includes cost of purchase (purchase price, import duties, transport, handling, and other costs directly attributable to the acquisition of inventories), cost of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realizable value for inventories is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Provisions are made in profit or loss of the current period on any difference between book value and net realizable value. PROPERTY AND EQUIPMENT The Company provides for depreciation expense on property and equipment at rates designed to amortize the cost of individual items and their material components over their estimated useful lives. Management makes estimates of future useful life based on patterns of benefit consumption and impairments based on past experience and market conditions. Impairment losses and depreciation expenses are presented in profit or loss of the current period. FINANCIAL INSTRUMENTS The Company has a royalty financial liability. The obligation is based on the present value of management’s best estimate for eventual repayment which is based on estimated future sales. Changes in the sales estimates could significantly affect the value of the obligation at each reporting date. SHARE-BASED PAYMENTS The fair value of share-based payments is determined using the Black Scholes option pricing model based on estimated fair values at the date of grant. The Black Scholes option pricing model utilizes subjective assumptions such as expected price volatility and expected life of the award. Changes in these assumptions can significantly affect the fair value estimate. For more information see note 10. D) CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, demand deposits, and all highly liquid short-term investments with original maturities of three months or less. E) REVENUE RECOGNITION Revenues from the sale of health and wellness products are recognized as revenues at the time the products are shipped to customers, title passes, significant risks and rewards have been transferred, and collectability is reasonably assured. Revenues are measured at the fair value of consideration received or receivable, less a provision for uncollectible amounts, excluding discounts, rebates, and sales taxes. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 33 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) F) INVENTORIES Inventories are valued at the lower of cost and net realizable value. Costs of inventory include costs of purchase, costs of conversion, and any other costs incurred in bringing the inventories to their present location and condition. Costs of conversion include direct costs (materials and labor) and indirect costs (fixed and variable production overheads). Fixed overheads are allocated based on normal capacity. Raw materials are assigned costs by using a first-in-first-out cost formula and work-in-progress, and finished goods are assigned costs by using a weighted average cost formula. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. G) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost less accumulated depreciation and any accumulated impairment losses. Depreciation methods and rates are calculated 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 Cost for property and equipment includes the purchase price, import duties, non-refundable taxes, and any other costs directly attributable to bringing the asset into the location and condition to be capable of operating. Significant parts of an item of property and equipment with different useful lives are recognized and depreciated separately. Depreciation commences when the asset is available for use. The asset’s residual values, useful lives, and method of depreciation are reviewed at each financial year end and adjustments are accounted for prospectively, if appropriate. An item of property and equipment is derecognized on disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of an asset is included in profit or loss in the period the asset is derecognized. H) BORROWING COSTS Borrowing costs are capitalized when such costs are directly attributable to the acquisition, construction, or production of a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to prepare for its intended use. All other borrowing costs are recognized as an expense in the period in which they are incurred. I) IMPAIRMENT OF NON-FINANCIAL ASSETS The carrying amounts of property and equipment and intangible assets with a finite life are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. For the purpose of measuring recoverable cash flows, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units or CGUs). If such indication exists, the Company estimates the recoverable amount of the assets, which is the higher of its fair value less cost to sell and its value in use. Value in use is estimated as the present value of future cash flows generated by this asset or CGU including eventual disposal. If the recoverable amount of an asset is less than its carrying amount, the carrying amount is reduced to its recoverable amount, and an impairment loss is recognized immediately in profit or loss. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the lesser of the revised estimated recoverable amount and the carrying amount that would have been recorded, had no impairment loss been recognized previously. Any such recovery is recognized immediately in profit or loss. J) LEASES Leases are classified as finance or operating leases. A lease is classified as a finance lease if it effectively transfers substantially the entire risks and rewards incidental to ownership. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 34 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At the commencement of the lease, the Company recognizes finance leases as an asset acquisition and an assumption of an obligation in the consolidated balance sheet at amounts equal to the lower of the fair value of the leased property or the present value of the minimum lease payments. The discount rate to be used in calculating the present value of the minimum lease payments is the interest rate implicit in the lease, if this is practicable to determine; if not, the incremental borrowing rate is used. The interest element of the lease payment is recognized as finance cost over the lease term to achieve a constant periodic rate of interest on the remaining balance of the liability. Any initial direct costs of the lessee are added to the amount recognized as an asset. The useful life and depreciation method is determined on a consistent basis with the Company’s policies for property and equipment. The asset is depreciated over the shorter of the lease term and its useful life. All other leases are accounted for as operating leases, wherein payments are expensed on a straight-line basis over the term of the lease. K) INTANGIBLE ASSETS Licenses Licenses are recorded at cost and are amortized straight-line over the life of the license. Research and product development expenditures Research costs are expensed when incurred. Product development costs are also expensed when incurred unless they meet recognition criteria for capitalization. Costs are reduced by government grants and investment tax credits where applicable. Following initial capitalization of product development expenditures, the asset is carried at cost less accumulated amortization and any accumulated impairment losses. Amortization commences when product development is completed and the asset is available for use. It is amortized over the period of expected future economic benefit. The expected lives of assets are reviewed on an annual basis, and if necessary, changes in useful lives are accounted for prospectively. L) TRADE RECEIVABLES Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in profit or loss within operating costs. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against other operating costs in profit or loss. M) FOREIGN CURRENCY TRANSACTIONS The Canadian dollar is the functional and presentation currency of the Company and each of the Company’s subsidiaries. Foreign currency monetary assets and liabilities of the Company and its subsidiaries are translated using the period end closing rate, and non-monetary assets and liabilities, measured at historic cost, are translated at the rate of exchange at the date of the transaction. Foreign currency transactions are translated at the spot exchange rate which is in effect at the date of the transaction. Foreign currency gains or losses arising on translation are included in other operating income (loss) in profit or loss. N) INCOME TAXES Income tax expense comprises current and deferred tax. Income tax is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case the tax expense is also recognized directly in equity. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates and laws enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. --- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 35 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Deferred tax assets and liabilities are provided for using the liability method on temporary differences between the tax bases and carrying amounts of assets and liabilities. Deferred tax assets and liabilities are measured using enacted or 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 profit or loss in the period in which they occur. Deferred tax assets are recognized to the extent future recovery is probable. Deferred tax assets are reduced to the extent it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. O) GOVERNMENT ASSISTANCE Government grants are recognized where there is a reasonable assurance that the grant will be received and all attached conditions will be complied with. Government grants are recognized as an offset to expenses over the periods in which the Company recognizes expenses which the grants are intended to compensate. Government grants related to assets are recognized as cost reduction of the assets and reduce depreciation over the expected useful life of the related assets. P) INVESTMENT TAX CREDITS Investment tax credits relating to qualifying scientific research and experimental development expenditures are accrued provided it is probable that the credits will be realized. When recorded, the investment tax credits are accounted for as a reduction of the related expenditures. Q) INCOME (LOSS) PER COMMON SHARE Basic income (loss) per common share is computed by dividing the 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 the Company’s convertible securities and convertible debentures were converted to common shares. Diluted income (loss) per common share is calculated by adjusting the profit or loss attributable to common shareholders and the weighted average number of common shares outstanding for the effect of all dilutive potential common shares. When the Company is in a net loss position, the conversion of convertible securities is considered to be anti-dilutive. R) SHARE-BASED PAYMENTS The Company issues equity-settled share-based awards to eligible employees, directors, officers, and consultants under stock option plans that vest over periods ranging from 2 years to 10 years and have a maximum term of ten years. Share- based payments are accounted for using the fair value method, whereby compensation expense related to these programs is recorded in profit or loss with a corresponding increase to contributed surplus. The fair value of options granted is determined using Black-Scholes option pricing model at the grant date and expensed over the vesting period. Expected forfeitures are estimated at the date of grant and subsequently adjusted if further information indicates estimated forfeitures will change. Upon the exercise of the stock options, consideration received together with the amount previously recognized in contributed surplus is recorded as an increase to share capital. S) EMPLOYEE FUTURE BENEFITS The Company accrues its obligations under an employee defined retirement benefit plan and related costs. The cost of retirement benefits earned by employees is determined using the projected unit credit method and management’s best estimate of expected retirement ages of employees. The discount rate used is based on the interest rates for high quality corporate bonds. Past service costs relating to plan amendments are accrued and recognized in the year the amendments occur. The Company recognizes actuarial gains and losses in profit or loss. T) PROVISIONS A provision is recognized when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate of the - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 36 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS obligation can be made. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The unwinding of the discount is recognized as a finance cost. U) TRADE AND OTHER PAYABLES Trade and other payables, including accruals, are recorded when the Company is required to make future payments as a result of purchases of assets or services. Trade and other payables are recognized initially at fair value and are subsequently measured at amortized cost using the effective interest rate method. V) FINANCIAL INSTRUMENTS All financial instruments are measured at initial recognition at fair value plus any transaction costs that are directly attributable to the acquisition of the financial instruments except for transaction costs related to financial instruments classified as at fair value through profit or loss (‘‘FVTPL’’) which are expensed as incurred. The Company has designated its financial instruments as follows: i) Cash and cash equivalents, restricted cash and cash equivalents, and accounts receivable have been classified as loans and receivables and are measured at amortized cost using the effective interest method, less any allowance for uncollectability. The Company recognizes purchase or sale of financial assets using trade date accounting. ii) Accounts payable and accrued liabilities, long-term debt, royalties payable, repayable research funding, the royalty financial liability, and the CAAP loan are classified as other financial liabilities and are measured at amortized cost using the effective interest rate method. W) CONSOLIDATED STATEMENT OF CASH FLOWS The Company prepares its consolidated statement of cash flows using the indirect method. X) FUTURE CHANGES IN ACCOUNTING POLICIES FINANCIAL INSTRUMENTS The IASB intends to replace IAS 39 – Financial Instruments: Recognition and Measurement (‘‘IAS 39’’) in its entirety with IFRS 9 – Financial Instruments (‘‘IFRS 9’’) in three main phases. IFRS 9 will be the new standard for the financial reporting of financial instruments that is principle-based and less complex than IAS 39. In November 2009 and October 2010, phase 1 of IFRS 9 was issued and amended, respectively, which addressed the classification and measurement of financial assets and financial liabilities. IFRS 9 requires that all financial assets be classified as subsequently measured at amortized cost or at fair value based on the Company’s business model for managing financial assets and the contractual cash flow characteristics of the financial assets. Financial liabilities are classified as subsequently measured at amortized cost except for financial liabilities classified as at fair value through profit or loss, financial guarantees, and certain other exceptions. The effective date of IFRS 9 is for annual periods beginning on or after January 1, 2015 (with earlier application permitted). The Company has not yet assessed the impact that this new standard is likely to have on its consolidated financial statements. CONSOLIDATION In May 2011, the IASB issued IFRS 10 – Consolidated Financial Statements (‘‘IFRS 10’’), which supersedes SIC 12 and the requirements relating to consolidated financial statements in IAS 27 – Consolidated and Separate Financial Statements (‘‘IAS 27’’). IFRS 10 is effective for annual periods beginning on of after January 1, 2013, with earlier application permitted under certain circumstances. IFRS 10 establishes control as the basis for an investor to consolidate its investees and defines control as an investor’s power over an investee with exposure, or rights, to variable returns from the investee and the ability to affect the investor’s returns through its power over the investee. In addition, the IASB issued IFRS 12 – Disclosure of Interest in Other Entities (‘‘IFRS 12’’) which combines and enhances the disclosure requirements for the Company’s subsidiaries, joint arrangements, associates, and unconsolidated structured entities. The requirements of IFRS 12 include reporting of the nature of risks associated with the Company’s interests in other entities and the effect of those interests on the Company’s consolidated financial statements. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 37 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Concurrently with the issuance of IFRS 10, IAS 27, and IAS 28 – Investments in Associates (‘‘IAS 28’’) were revised and reissued as IAS 27 – Separate Financial Statements and IAS 28 – Investments in Associates and Joint Ventures to align with the new consolidation guidance. The Company does not anticipate this new standard to have a significant impact on its consolidated financial statements. JOINT VENTURES In May 2011, the IASB issued IFRS 11 – Joint Arrangements (‘‘IFRS 11’’), which supersedes IAS 31 – Interest in Joint Ventures and SIC-13 – Jointly Controlled Entities – Non-Monetary Contributions by Venturers. IFRS 11 is effective for annual periods beginning on or after January 1, 2013, with earlier application permitted under certain circumstances. Under IFRS 11, joint arrangements are classified as joint operations or joint ventures based on the rights and obligations of the parties to the joint arrangements. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (‘‘joint operators’’) have rights to the assets and obligations for the liabilities relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (‘‘joint ventures’’) have rights to the net assets of the arrangement. IFRS 11 requires that a joint operator recognizes its portion of assets, liabilities, revenues, and expenses of a joint arrangement, while a joint venturer recognizes its investment in a joint arrangement using the equity method. The Company does not anticipate these amendments to have a significant impact on its consolidated financial statements. FAIR VALUE MEASUREMENT In May 2011, as a result of a convergence project undertaken by the IASB and the US Financial Accounting Standards Board to develop common requirements for measuring fair value and for disclosing information about fair value measurements, the IASB issued IFRS 13 – Fair value Measurement (‘‘IFRS 13’’). IFRS 13 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. IFRS 13 defines fair value and sets out a single framework for measuring fair value which is applicable to all IFRSs that require or permit fair value measurements or disclosures about fair value measurements. IFRS 13 requires that when using a valuation technique to measure fair value, the use of relevant observable inputs should be maximized while unobservable inputs should be minimized. The Company does not anticipate the application of IFRS 13 to have a significant impact on its consolidated financial statements. FINANCIAL STATEMENTS PRESENTATION In June 2011, the IASB issued amendments to IAS 1 – Presentation of Financial Statements (‘‘IAS 1’’) that require an entity to group items presented in the Statement of Comprehensive Income on the basis of whether they may be reclassified to earnings subsequent to initial recognition. For those items presented before taxes, the amendments to IAS 1 also require that the taxes related to the two separate groups be presented separately. The amendments are effective for annual periods beginning on or after July 1, 2012 with earlier adoption permitted. The Company does not anticipate the application of the amendments to IAS 1 to have a material impact on its consolidated financial statements. EMPLOYEE BENEFITS In June 2011, the IASB issued amendments to IAS 19 – Employee Benefits (‘‘IAS 19’’) that introduced changes to the accounting for the defined benefit plans and other employee benefits. The amendments include elimination of the options to defer, or recognize in full in earnings, actuarial gains and losses, and instead mandates the immediate recognition of all actuarial gains and losses in other comprehensive income, and requires use of the same discount rate - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 38 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for both the defined benefit obligation and the expected asset return when calculating interest cost. Other changes include modification of the accounting for termination benefits and classification of other employee benefits. The amendments to IAS 19 are effective for annual periods beginning on or after January 1, 2013. The Company does not anticipate the application of the amendments to IAS 19 to have a material impact on its consolidated financial statements. 3. INVENTORIES The Company had the following inventory at the end of each reporting period: Raw materials Work in progress Finished goods December 31 2012 $ December 31 2011 $ 258,439 113,399 418,219 790,057 251,010 227,888 212,513 691,411 Inventories expensed to cost of goods sold during the year ended December 31, 2012 is $2,655,930 (2011 – $2,475,938). During the year ended December 31, 2012, the Company decreased the carrying value of inventory by $98,634 (2011 – $nil) due to lower estimated realizable values from certain finished goods and included this amount in cost of goods sold. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 39 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. LICENSES During the year ended December 31, 2012, the Company has entered into a new license agreement for a new technology to increase the concentration of avenanthramides in oats. The Company paid a fee of $44,439 to cover previous patent costs and will amortize the license over 15 years commencing in April 2012. Amortization of $2,222 has been included in general and administration for the year ended December 31, 2012 (2011 – $nil) (see note 19(d)). During the year ended December 31, 2011, the Company entered into a new licensing agreement with the University of Guelph for an exclusive variety of a mint plant. This agreement replaced the agreement the Company entered during the year ended December 31, 2008. The Company paid a licensing fee of $30,000 in 2008 and $15,000 in 2011 and will amortize the total license over 10 years, being the term of the amended licensing agreement. Amortization of $4,500 has been included in general and administration for the year ended December 31, 2012 (2011 – $3,000) (see note 19(c)). Cost of Licenses Balance – December 31, 2010 Additions Balance – December 31, 2011 Additions Balance – December 31, 2012 Accumulated amortization Balance – December 31, 2010 Amortization Balance – December 31, 2011 Amortization Balance – December 31, 2012 Net book value Balance – December 31, 2012 Balance – December 31, 2011 $ 30,000 15,000 45,000 44,439 89,439 6,000 3,000 9,000 6,722 15,722 73,717 36,000 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- 40 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. PROPERTY AND EQUIPMENT Manufacturing Equipment $ Office Equipment $ Computer Equipment $ Leasehold Improvements $ Total $ Cost December 31, 2010 additions December 31, 2011 additions transfer to manufacturing equipment December 31, 2012 Accumulated depreciation December 31, 2010 depreciation December 31, 2011 depreciation December 31, 2012 Carrying value December 31, 2012 December 31, 2011 Equipment not available for use $ 176,431 31,319 207,750 20,921 2,698,422 86,540 2,784,962 138,306 (204,301) 204,301 24,370 3,127,569 – – – – – 24,370 207,750 1,282,477 263,031 1,545,508 255,451 1,800,959 1,326,610 1,239,454 76,280 1,001 77,281 2,753 – 80,034 58,522 3,586 62,108 3,426 65,534 14,500 15,173 250,364 7,029 257,393 37,509 – 120,364 3,321,861 – 125,889 120,364 3,447,750 – – 199,489 – 294,902 120,364 3,647,239 180,067 21,706 201,773 24,264 226,037 68,865 55,620 111,743 5,959 117,702 2,662 120,364 – 2,662 1,632,809 294,282 1,927,091 285,803 2,212,894 1,434,345 1,520,659 Total $ 285,803 294,282 Depreciation expense allocation for the following years: Cost of goods sold $ 204,222 227,150 Inventory $ 42,989 34,958 General and administration $ 38,592 32,174 Year ended December 31, 2012 Year ended December 31, 2011 6. LONG-TERM DEBT Loan payable secured by a general security agreement, due January, 2018. Less current portion December 31 2012 $ December 31 2011 $ 926,535 168,637 757,898 1,081,000 154,465 926,535 Interest expense is presented under finance costs for the following periods: Year Ended December 31, 2012 Year Ended December 31, 2011 54,148 59,842 During the year ended December 31, 2012, the loan was renewed to January 1, 2018 at an interest rate of 3.710% (2011 – 5.49%) with monthly payments of $16,674 (2011 – $17,384) starting February 1, 2013. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 41 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The loan is secured by a general security agreement covering all present and after acquired personal property. The Company is in compliance with all terms and conditions of the new agreement. 7. ROYALTIES PAYABLE a) In the year ended December 31, 2004, the Company’s wholly-owned subsidiary, Ceapro Technology Inc. (CTI), received a commitment for financial assistance totaling $250,000 for pre-market activities of CeaProve(cid:2) (a health and wellness product) upon completion of project objectives as outlined and agreed to by both parties. As at December 31, 2012, $225,000 (2011 – $225,000) of this commitment has been received and the remaining $25,000 was decommitted. CTI is obligated to pay a royalty (to a maximum of two times the financial assistance received) on sales generated from CeaProve(cid:2) 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. CTI has repaid at December 31, 2012 $nil (2011 – $nil) of this obligation. Upon completion of the repayment of the financial assistance received, CTI will also 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, 2012 was $nil (2011 – $nil). The potential amount payable per agreement as at December 31, 2012 is $469,750 (2011 – $469,750) (see note 7(e)). b) On December 28, 2005, the Company sold a 2.285% royalty interest in the Company’s future sales and licensing of certain active ingredients, animal health, and CeaProve(cid:2) products for $457,000. The maximum royalties payable are two times the amount invested or $914,000. The portion of this obligation paid or accrued as at December 31, 2012 was $666,407 (2011 – $570,157). During the year, the Company repaid $104,579 through cash payments (2011 – $244,628). The balance of royalties payable under this offering as at December 31, 2012 totaled $25,037 (2011 – $33,366). The potential amount payable per agreement as at December 31, 2012 is $247,593 (2011 – $343,843) (see note 7(e)). The balance outstanding was set up as a royalty financial liability which results in a discounted liability of $205,309 (2011 – $263,623). Royalty interest payable Opening amount of royalties interest payable Royalty expense recognized Amount paid during the year Closing amount of royalties interest payable Royalty financial liability Opening amount of royalty financial liability Principal repayment of the discounted amount during the year Closing amount of royalty financial liability Less current portion Interest expense paid during the year Year Ended December 31 2012 $ 33,366 96,250 (104,579) 25,037 Year Ended December 31 2012 $ 263,623 (58,314) 205,309 95,378 109,931 Year Ended December 31 2012 $ 37,936 Year Ended December 31 2011 $ 166,612 111,401 (244,647) 33,366 Year Ended December 31 2011 $ 329,435 (65,812) 263,623 74,057 189,566 Year Ended December 31 2011 $ 43,663 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- 42 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS c) In the year ended December 31, 2005, the Company and its wholly-owned subsidiary, Ceapro Veterinary Products Inc. (CVP), 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, 2012, $362,250 (2011 – $362,250) of the commitment has been received. The Company and CVP are 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. The portion of the obligation accrued and paid at December 31, 2012 was $584 (2011 – $234). The potential amount payable per agreement as at December 31, 2012 is $723,916 (2011 – $724,266) (see note 7(e)). d) In the year ended December 31, 2005, the Company’s wholly-owned subsidiary, Ceapro Technology Inc. (CTI), received a commitment for financial assistance totaling $800,000 for pre-market activities of CeaProve(cid:2) (a health and wellness product) upon completion of project objectives as outlined and agreed to by both parties. As at December 31, 2012, $510,000 of this commitment has been received (2011 – $510,000) and the remaining $290,000 has been decommitted. CTI 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:2) 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(a), 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, 2012 was $nil (2011 – $nil). The potential amount payable per agreement as at December 31, 2012 is $765,000 (2011- $765,000) (see note 7(e)). e) Potential royalties payable as at December 31, 2012, and 2011: Notes 7 (a) 7 (b) 7 (c) 7 (d) Total Potential amount payable at December 31, 2012 Potential amount payable at December 31, 2011 Year of agreement 2004 2005 2005 2005 469,750 247,593 723,916 765,000 469,750 343,843 724,266 765,000 2,206,259 2,302,859 As the funding received in items a), c) and d) above is contingently repayable, it constitutes a liability that is recognized initially at fair value and subsequently at amortized cost using the effective interest method. As the initial fair value was estimated to be negligible, funding received was recorded as revenue and no liability was recorded. Management updates the estimate of future cash flows required under these agreements at each reporting date to assess whether the expected repayments constitute a significant liability. 8. DEFERRED REVENUE During the year ended December 31, 2011, the Company received $750,000 under a non-repayable capital expenditure grant agreement with Alberta Innovates Bio-Solutions (AI-Bio Solutions) (note 23). During the year ended December 31, 2012, the Company has expended of $41,223. The balance of this grant of $708,777 (2011 – $750,000) is presented as deferred revenue and restricted cash and cash equivalents on the balance sheet. Deferred revenue also consists of $990,333 (2011 – $561,024) for prepaid sales orders and $nil (2011 – $10,500) for a research grant advanced in excess of expenditures made. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 43 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. EMPLOYEE FUTURE BENEFITS OBLIGATION The Company has an unfunded, non-registered, non-indexed defined retirement benefit plan for an officer. The retirement benefit is two months’ salary for each year the employee is employed by the Company up to age 55. 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, 2012 was 4.19% (2011 – 4.19%). Accrued benefit obligation Unfunded balance, beginning of year Current service cost Interest costs on accrued benefit obligation Elements of defined benefit costs recognized in the year Current service cost Interest cost on accrued benefit obligation Year Ended December 31 2012 $ 187,302 21,606 8,311 217,219 Year Ended December 31 2012 $ 21,606 8,311 29,917 Year Ended December 31 2011 $ 160,187 19,983 7,132 187,302 Year Ended December 31 2011 $ 19,983 7,132 27,115 Defined benefit costs have been presented under research and product development expenses in the consolidated statements of net (loss) income for the year. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 44 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. 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 the year Changes during the year Shares issued for debt Balance at end of the year Year Ended December 31, 2012 Year Ended December 31, 2011 Number of Shares 60,278,948 Amount $ 6,315,858 – – 60,278,948 6,315,858 Number of Shares 54,988,039 5,290,909 60,278,948 Amount $ 5,770,858 545,000 6,315,858 During the year ended December 31, 2011, the Company issued 3,700,000 common shares totaling $370,000 for the settlement of convertible debentures and 1,590,909 common shares totaling $175,000 for the settlement of debt owing to the Company’s directors. These non-cash transactions have been excluded from the consolidated statement of cash flows. C. CONTRIBUTED SURPLUS The following table summarizes the changes in contributed surplus: Balance at beginning of year Share-based payments (note 10 (d)) Balance at end of year 2012 $ 397,631 34,161 431,792 2011 $ 347,445 50,186 397,631 D. STOCK OPTIONS AND SHARE-BASED PAYMENTS The Company has granted stock options to eligible employees, directors, officers, and consultants under stock option plans that vest over periods ranging from two years to ten years and have a maximum term of ten years. The Company accounts for options granted under these plans in accordance with the fair value based method of accounting for share-based payments. In the current year, the Company granted 300,000 (2011 – 400,000) stock options. The application of the fair value based method requires the use of certain assumptions regarding the risk-free market interest rate, expected volatility of the underlying stock, life of the options, and forfeiture rate. The weighted average risk-free rate used in 2012 was 1.51% (2011 – 2.10%), the weighted average expected volatility was 111% (2011 – 127%) which was based on prior trading activity of the Company’s shares, the weighted average expected life of the options was 10 years (2011 – 5 years), forfeiture rate was 0% (2011-0%), the weighted average share price was $0.08 (2011 – $0.10), the weighted average exercise price was $0.10 (2011 – $0.15), and the expected dividends were nil (2011 – nil). The weighted average grant date fair value of options granted during the year were $0.09 (2011 – $0.11) per option. The share-based payments expense recorded during the current year relating to options granted in 2012, 2011, and 2010 was $34,161 (during 2011 relating to options granted in 2011, 2010, 2009, and 2007 – $50,186). - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 45 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the status of the Company’s stock options at December 31, 2012 and 2011 and changes during the years ended on those dates is as follows: Outstanding at beginning of year Granted Expired Forfeited Outstanding at end of year Exercisable at end of year 2012 2011 Number of Options 3,170,000 300,000 (490,000) (40,000) 2,940,000 2,606,667 Weighted Average Exercise Price $ 0.16 0.10 0.28 0.10 0.13 0.13 Number of Options 3,105,000 400,000 (225,000) (110,000) 3,170,000 2,713,333 Weighted Average Exercise Price $ 0.16 0.15 0.28 0.11 0.16 0.16 Subsequent to December 31, 2012, the Company granted 1,400,000 stock options at an exercise price of $0.10 per common share to directors and employees of the Company. E. STOCK OPTIONS OUTSTANDING ARE AS FOLLOWS: Fair Value at grant dates $ Exercise Price $ Year of Expiration Weighted Average Contractual Life Remaining (years) December 31 2012 Number of Options December 31 2011 Number of Options 0.09 0.11 0.06 0.10 0.08 0.15 0.19 0.22 0.10 0.15 0.10 0.13 0.12 0.25 0.28 0.30 2022 2016 2015 2014 2013 2013 2012 2012 9.5 3.5 2.7 1.5 0.7 0 0 0 2.5 300,000 400,000 530,000 900,000 600,000 210,000 – – – 400,000 570,000 900,000 600,000 210,000 390,000 100,000 2,940,000 3,170,000 11. CAAP LOAN The Company entered into Canadian Agricultural Adaptation Program (‘‘CAAP’’) repayable contribution agreements for total possible funding of $1,339,625 receivable over the period from October 7, 2010 through September 30, 2012. During the year ended December 31, 2012, the Company voluntarily decommitted $668,557 as a result of lower anticipated project expenditures resulting in amended maximum possible funding under the agreement of $671,068. The end date for project expenditures and start date for repayments were also extended one year to September 30, 2013 and December 31, 2014 respectively. All amounts claimed under the program are repayable interest free over eight years beginning in 2014. As the contributions are non-interest bearing, the fair value at inception is estimated as the present value of the principal payments required, discounted using the prevailing market rates of interest for a similar instrument estimated to be 15% per annum. The difference between the fair value of the contributions and the cash received is accounted for as a government grant. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 46 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. CAAP LOAN (CONTINUED) As the start date of principal repayment was changed to 2014, during the year ended December 31, 2012, the present value of the remaining cash flow was revised. The Company applied extinguishment accounting and derecognized the old loan and set up a new loan with the difference presented in the consolidated statements of net (loss) income under research and product development expenditures (consistent with the current treatment). The balance of repayable contribution is derived as follows: Opening balance Funding received or receivable Grant revenue recognized Extinguishment of the original liabilities Recognition new liabilities Accretion of CAAP loan Year Ended December 31 2012 $ Year Ended December 31 2011 $ 57,432 350,492 (188,312) (119,772) 102,972 18,166 220,978 – 123,081 (69,990) – – 4,341 57,432 Principal repayment required for amount received from inception to December 31, 2012 is $59,197 annually from 2014 through 2021. 12. SALES During the year ended December 31, 2012, the Company had export sales to two customers of the Company’s products in the amount of $4,806,152 (2011 – to five customers in the amount of $5,753,038). The Company is therefore dependent on those customers to maintain and expand the volume of product sales to existing and new customers. 13. RELATED PARTY TRANSACTIONS Related party transactions during the years not otherwise disclosed in these consolidated financial statements are as follows: Year Ended December 31 Royalties earned by employees and directors Amounts payable to employees and directors included in royalties payable Interest earned in convertible debentures by officers and directors Key management salaries, short-term benefits, consulting fees, and director fees Key management personnel share based payments Director fees converted by directors to common shares Conversion of principal amount of convertible debentures to common shares by officers and directors Amount payable to directors 2012 $ 19,482 4,632 – 656,555 33,817 – – 28,750 2011 $ 22,109 6,318 5,600 484,861 48,595 175,000 70,000 175,000 These transactions are in the normal course of operations and are measured at the amount of consideration established and agreed to by the related parties. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 47 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. OTHER OPERATING LOSSES (INCOME) Year Ended December 31 Foreign exchange losses Other income 15. FINANCE COSTS Year Ended December 31 Interest on royalty financial liability Interest on long-term loan Interest on convertible debentures Accretion of convertible debentures Accretion of CAAP loan Bank charges 16. INCOME TAXES A) NON-CAPITAL LOSSES 2012 $ 29,295 (5,488) 23,807 2012 $ 38,286 54,148 – – 18,166 2,300 112,900 2011 $ 31,609 (24,271) 7,338 2011 $ 43,663 59,842 40,000 32,500 4,341 462 180,808 The Company has accumulated non-capital losses carried forward for federal income tax purposes of approximately $13,650,200 and for provincial income tax purposes of approximately $13,497,500, 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 2031 2032 Total Federal $ 293,400 651,500 2,730,300 4,770,200 1,697,300 1,512,300 763,200 1,232,000 13,650,200 Alberta $ 293,400 651,500 2,730,300 4,617,500 1,697,300 1,512,300 763,200 1,232,000 13,497,500 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. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 48 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS C) SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT (SR & ED) The Company has accumulated an SR & ED expenditure pool of approximately $1,366,500, which can be carried forward indefinitely to be applied against future taxable income. The Company has accumulated SR & ED investment tax credits of approximately $213,000. These credits may be applied against future federal income taxes payable and expire in 2029. D) UNRECOGNIZED DEFERRED TAX ASSET A deferred 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. Components of the Company’s unrecognized deferred income tax asset are as follows: INCOME TAX EFFECT OF DEDUCTIBLE TEMPORARY DIFFERENCES: Deductible temporary differences Tax losses Unrecognized deferred tax assets 2012 $ 1,001,993 4,263,362 5,265,355 2011 $ 1,182,626 3,955,371 5,137,997 For consolidated financial statement purposes, no deferred income tax asset has been recorded at December 31, 2012 and 2011 as it is not likely to be realized. The Company has reflected the income tax effect of deductible temporary differences on the basis of the expected tax consequences that would follow from the manner in which the recovery or settlement of the carrying amount of assets and liabilities are expected. As a result of past asset transfers within the consolidated group, should the Company settle certain assets in a different manner the Company would have additional tax effected deductible temporary differences relating to the tax cost base of certain tax assets in the amount of $656,159 which is not reflected above. 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 based on federal and provincial statutory income tax rate of 25% (2011 – 26.5%) Tax effect of expenses that are not deductible Tax effect of government grant revenue not taxable Change in income tax rates Change in investment tax credits Other Current year items where deferred tax asset not recognized 2012 $ (134,589) 10,089 – – – (2,858) 127,358 – 2011 $ 153,057 24,350 (17,397) (9,057) (134,320) 22,895 (39,528) – - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- CEAPRO Annual Report 2012 49 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. SEGMENTED INFORMATION The Company operates in one industry segment, which is the active ingredient product technology industry. The majority of the revenue is derived from sales in 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: Year Ended December 31 United States Germany Other Canada 18. EMPLOYEE BENEFITS Employee benefits 2012 $ 3,797,565 1,151,132 125,630 90,949 5,165,276 2011 $ 4,150,970 1,293,116 254,891 87,197 5,786,174 Year Ended December 31 2012 $ Year Ended December 31 2011 $ 2,123,375 2,130,785 Employee benefits include wages, salaries, bonus, and CPP, EI, WCB contributions, and benefit premiums. 19. CONTINGENCIES AND COMMITMENTS a) During the year ended December 31, 2011, the Company and its wholly-owned subsidiary, Ceapro Veterinary Products Inc. were served with a statement of claim from AVAC Ltd. alleging damages of $724,500 pursuant to a product development agreement. The Company and Ceapro Veterinary Products Inc. have filed a statement of defense to refute the claim and believe it has strong defenses to the AVAC allegations. However, at this time, the outcome of the litigation is uncertain and no provisions have been made in the consolidated financial statements on account of this litigation. b) During the year ended December 31, 2012, the Company and its wholly-owned subsidiary, Ceapro Technology Inc. were served with a statement of claim from AVAC Ltd. alleging damages of $1,470,000 pursuant to two product development agreements. The Company and Ceapro Technology Inc. have filed a statement of defense to refute the claim and believe it has strong defenses to the AVAC allegations. However, at this time, the outcome of the litigation is uncertain and no provisions have been made in the consolidated financial statements on account of this litigation. c) 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. During the year ended December 31, 2011, the Company has entered into a new licensing agreement with the University of Guelph for additional market rights for the exclusive variety of a mint plant. In accordance with the new agreement, there are future minimum royalty prepayments of $10,000 per annum starting in 2012 for royalty payments which will be calculated as 5% of net sales from products derived from the mint plants. The minimum royalty payments are creditable against royalties in years where royalties are due. The agreement is an executory contract and therefore all royalty payments under the contract will be recognized as they become due. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 50 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS d) During the year ended December 31, 2012, the Company has entered into a new license agreement for a new technology to increase the concentration of avenanthramides in oats. The Company shall pay an annual royalty percentage rate of 2% of sales, payable every January 1st and July 1st, subject to a minimum annual royalty payment according to the schedule below: Year 2012 2013 2014 2015 2016 Amount nil $12,500 $37,500 $50,000 $50,000 And $50,000 each year thereafter while the license agreement remains in force. The agreement is an executory contract and therefore all royalty payments under the contract will be recognized as they become due. e) 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. 20. OPERATING LEASE The Company paid $346,248 in 2012 (2011 – $348,357) under operating lease. These amounts were recorded as follows: general and administration expenses of $96,819 (2011 – $89,664), research and development expenses of $14,754 (2011 – $13,718), and cost of goods sold of $234,675 (2011 – $244,975). The Company is committed to future annual payments under operating leases for manufacturing facilities and office space for twelve years starting April 1, 2013. Total lease commitments from January 1, 2013 until December 31, 2013 are $314,284; from January 1, 2014 until December 31, 2018 are $1,121,764, and thereafter $1,645,240. 21. FINANCIAL INSTRUMENTS The fair value of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and royalties interest payable 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 Canadian Agricultural Adaptation Program (‘‘CAAP’’) loan is recorded at the amount drawn under the agreement, discounted using the prevailing market rate of interest for a similar instrument, which represents the estimated fair value of the obligation. 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 that will be recognized systematically over the term of the loan. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 51 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. FINANCIAL INSTRUMENTS (CONTINUED) The fair value of the CAAP loan and the repayable research funding are not materially different from their carrying amounts as funding received has been discounted using an estimate of a market rate of interest and is being accreted back to its nominal amount. The royalty financial liability was estimated using a discount rate that results from the estimated future repayment of that obligation. As there has been no significant change in estimated future repayments, and as the estimated discount rate also approximates the Company’s estimated cost of capital for similar borrowing arrangements, management believes the carrying amount of this obligation does not differ significantly from its fair value. The Company has exposure to credit, liquidity, and market risk as follows: A) CREDIT RISK ACCOUNTS RECEIVABLE The Company makes sales to customers that are well-established and well-financed within their respective industries. Based on previous experience the counterparties had zero default rates and management views this risk as minimal. Approximately 97% of accounts receivable are due from four customers at December 31, 2012 and all accounts receivable are current. These main customers present good credit quality and historically have a high quality credit rating. CASH AND CASH EQUIVALENTS The Company has cash and cash equivalents in the amount of $273,106 at December 31, 2012 and mitigates its exposure to credit risk on its cash balances by maintaining its bank accounts with Canadian Chartered Banks and investing in low risk, high liquidity investments. The Company received $750,000 under a capital expenditure grant agreement and has presented this amount as deferred revenue and considers it restricted cash as it can be spent only for qualified expenditures. During the year ended December 31, 2012, the Company has expended $41,223 of this grant. The balance of this grant being $708,777 is presented as deferred revenue and restricted cash and cash equivalents on the balance sheet. There are no past due or impaired financial assets. The maximum exposure to credit risk is the carrying amount of the Company’s accounts receivable, cash and cash equivalents and restricted cash and cash equivalents. The Company does not hold any collateral as security. B) LIQUIDITY RISK Liquidity risk relates to the risk that the Company will encounter difficulty in meeting its financial obligations. Under the renewed agreement, the long-term debt matures in January 2018. 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. 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. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 52 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 interest payable Royalty financial liability Repayable CAAP funding Total C) MARKET RISK 0 - 1 Year $ 1 - 3 Years $ 4 - 7 Years $ 8 - 12 Years $ 578,216 200,793 25,037 129,238 – 933,284 – – 600,246 216,756 – 118,354 177,590 896,190 – – 177,590 394,346 – – – – 118,393 118,393 Total $ 578,216 1,017,795 25,037 247,592 473,573 2,342,213 Market risk is comprised of interest rate risk, foreign currency risk, and other price 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. CARRYING AMOUNT (USD) FOREIGN EXCHANGE RISK (USD) (cid:4)1% +1% EARNINGS & EQUITY EARNINGS & EQUITY Financial assets Accounts receivable Financial liabilities 254,623 2,546 Accounts payable and accrued liabilities 27,436 Total increase (decrease) (274) 2,272 (2,546) 274 (2,272) The carrying amount of accounts receivable and accounts payable and accrued liabilities in USD represents the Company’s exposure at December 31, 2012. (2) INTEREST RATE RISK The Company has minimal interest rate risk because its long-term debt is a fixed rate of 3.71%. 22. CAPITAL DISCLOSURES The Company considers its capital to be its equity. 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. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 53 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. CAPITAL DISCLOSURES (CONTINUED) 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 31, 2011. 23. GOVERNMENT ASSISTANCE a) During the year ended December 31, 2010, the Company was approved for non-repayable funding in the amount of $124,000 from Alberta Innovates Technology Futures (AITF). During the year ended December 31, 2012, the Company received $32,083 (2011 – $62,000) which was recorded as a reduction of research and product development expenses. The Company anticipates receiving an additional amount of $9,166 in early 2013 under this agreement. b) During the year ended December 31, 2012, the Company was approved for a second agreement for non-repayable funding in the amount of $124,000 from AITF. During the year, the Company received $20,750 which was recorded as a reduction of research and project development expenses. The Company anticipates receiving additional funding of $62,000 in 2013 and $41,250 in 2014 under this agreement. c) 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 $nil during the year ended December 31, 2012 (2011 – $60,076) as a reduction of research and product development expenses. This program has now been completed. d) 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 recognized $nil during the year ended December 31, 2012 (2011 – $10,879) as a reduction of research and product development expenses. This program has now been completed. e) 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 $5,000 as a reduction of research and product development expenditures under this program in the period ended December 31, 2012 (2011 – $5,000). The Company anticipates receiving an additional amount of $5,000 in 2013 under this program. f ) The Company received a repayable non-interest bearing contribution for research and development expenditures totaling $100,000 by 2011 (2010 – $50,000 of the $100,000 was received) from Innovation PEI which was recorded as a repayable research funding liability on the consolidated balance sheet. The amount of $15,367 was repaid during 2011. The contribution was repayable quarterly at a rate of one percent of sales revenue subject to a minimum payment of $12,500 per quarter. The Company repaid the full liability during the year ended December 31, 2012. g) The Company was approved for non-repayable grant funding from Innovation PEI for a maximum of $100,000. During the year ended December 31, 2011, the Company received $30,000 and recognized $19,500 against eligible expenses and $10,500 as deferred revenue. During the year ended December 31, 2012, the balance of $70,000 potentially receivable was decommitted and the Company recognized $10,500 as deferred revenue. No further amount is expected. h) The Company entered into Canadian Agricultural Adaptation Program (‘‘CAAP’’) repayable contribution agreements for total possible funding of $1,339,625 receivable over the period from October 7, 2010 through September 30, 2012. During the year ended December 31, 2012, the Company voluntarily amended the maximum possible funding under the agreement to $671,068 as a result of lower anticipated project expenditures. The end date for project expenditures was also extended one year to September 30, 2013. All amounts claimed under the program are repayable interest free - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- 54 CEAPRO Annual Report 2012 - -- - -------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- ------- ------- --- -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - - - -- - -- - ------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS over eight years beginning in 2014. The Company has received funding of $473,573 to date under this program. A maximum funding amount of $197,495 is anticipated to be received in 2013. i) During the year ended December 31, 2011, the Company commenced a research and development project agreement. Under this project the Company paid cash of $56,177 in 2011 and made additional payments of $28,236 in 2012. The other party to the research and development project agreement made an in-kind contribution to the project of $42,262. The agreement was completed in 2012. j) During the year ended December 31, 2011, the Company entered into a contribution agreement with Alberta Innovates Bio-Solutions (AI-Bio Solutions) for a non-repayable grant contribution totaling up to $1,600,000 towards the construction of a new bio-processing facility and subject to compliance with all terms and conditions of the agreement. In accordance with the agreement, the Company received $750,000 in 2011 classified as restricted cash and cash equivalents and deferred revenue, and anticipates additional amounts will be received as follows – $690,000 in 2013 and $160,000 in 2014. The amount of $41,223 was recorded as a reduction of capitalized expenditures. k) During the year ended December 31, 2012, the Company entered into a contribution agreement with an agency of the federal government to provide funding of up to $253,000 for certain research activities. During the year ended December 31, 2012, the Company received or recorded as receivable the amount of $42,091. The Company estimates it will receive a further amount of $177,659 in 2013 and $33,250 in 2014. This contribution agreement was amended to increase the potential non-repayable contribution amount to $345,000 from $253,000 subsequent to December 31, 2012. 24. (LOSS) INCOME PER COMMON SHARE Year Ended December 31 2012 2011 Net (loss) income for the year for basic and diluted earnings per share calculation Weighted average number of shares outstanding Potential shares to be issued for options exercisable Diluted shares outstanding (Loss) income per share – basic (Loss) income per share – diluted $(538,353) 60,278,948 – 60,278,948 $(0.01) $(0.01) $577,573 56,561,513 78,621 56,640,134 $0.01 $0.01 For the year ended December 31, 2011, of the Company’s 3,170,000 options outstanding, 2,600,000 stock options have not been included in the diluted income per share calculation because the options’ exercise prices were greater than the average market price of the common shares during the year. - -- --------------- - --- - --- - --- - ---- --- ----- --- ----- --- ----- --- --- -- -- - -- -- -- - -- - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - - - - - - -- - ------------------------------- CEAPRO Annual Report 2012 55 :: INVESTOR INFORMATION MAY 2013 DIRECTORS Edward Taylor, Chairman Gilles Gagnon, President & CEO Donald Oborowsky Glenn Rourke John Zupancic OFFICERS Branko Jankovic, CA Chief Financial Officer Vice President, Finance David Fielder, M. Sc. Chief Scientific Officer REGISTERED OFFICE 2600 Manulife Place 10180 - 101 Street NW Edmonton, AB T5J 3V5 Canada AUDITORS GRANT THORNTON LLP 1701 Scotia Place 2 10060 Jasper Avenue NW Edmonton, AB T5J 3R8 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 City Centre East 10205 - 101 Street NW 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 AND SPECIAL MEETING OF SHAREHOLDERS The annual general and special meeting of shareholders will be held on: June 20, 2013 at 10am MDT Location: 4th floor Enterprise Square 10230 Jasper Avenue NW Edmonton, AB 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. 

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