Ceapro Inc. Annual Report 2013

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FY2013 Annual Report · Ceapro Inc.

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● ● Table of contents

Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . .1

Unique Bioprocessing Expertise . . . . . . . . . . . . . . . . . .3

From Field to Formulation . . . . . . . . . . . . . . . . . . . . . . .4

From Plant to Pill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Management’s Discussion and Analysis . . . . . . . . . . . .7

Consolidated Financial Statements . . . . . . . . . . . . . . . .23

Notes to Consolidated Financial Statements . . . . . . . . .30

Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . .55

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 therapeutic products for
humans and animals.

LETTER TO SHAREHOLDERS

Dear Fellow Shareholders

Year 2013 will be remembered as the most solid year ever in the history of Ceapro. Not only did we achieve a
net profit and the best sales results with a 26.3% increase over 2012, but also we did it during a year of major
investments for the acquisition of equipment and the construction of a new facility. Keeping the business up and
running while implementing a special project is always a major challenge. We made it! And this achievement is
due to our dedicated employees who deployed tremendous efforts to respond to the growing demand while
working diligently to plan and implement what is going to be a unique “top notch” state-of-the-art bioprocess-
ing facility.

This major achievement would have not been possible without the unconditional support and vote of confi-
dence from our major long term partners, Symrise AG, Alberta Financial Services Corporation, AI Bio Solutions,
the NRC Industrial Research Assistance program, and the Growing Forward 2 program.

These partnerships allowed us to complete in a non-dilutive manner the financing for the acquisition of custom-
ized equipment and construction of the state-of-the-art facility in Edmonton, Alberta.

From a product portfolio investment perspective, and as a continuum to the product stories featured in our 2012
annual report, we focused our research activities on the development of our value drivers – avenanthramides
and beta glucan - new formulations for potential new indications. We are very encouraged by the development
of technologies to produce dry formulations of these value drivers and especially by the positive results obtained
from feasibility studies conducted with a Montreal-based organization to assess their potential to be developed
as active ingredients for the large nutraceutical and/or pharmaceutical markets.

In this trendy era of natural products and botanical drugs, we wish to pioneer the concept, “From Plant to Pill”,
according to the highest recognized pharmaceutical standards.

Looking at key accomplishments in 2013, we are very proud of our dedicated people who achieved the following:

(cid:116)(cid:1) Total sales of $6,524,000 compared to $5,165,000 in 2012, an increase of 26.3%
(cid:116)(cid:1) Net profit of $176,000 compared to a net loss of $538,000 in 2012
(cid:116)(cid:1) Near completion of a special project for the relocation of Ceapro’s facility
(cid:116)(cid:1) Signing of a long-term Licence and Distribution Agreement with German-based multinational, Symrise AG,

a leading provider of active ingredients for personal care

(cid:116)(cid:1) Signing of two loan agreements at attractive interest rates, which is demonstration of confidence in Ceapro
(cid:116)(cid:1) Signed an Agri-Processing Automation and Efficiency Grant Agreement with Alberta Agriculture and Rural

Development for a contribution up to $673,000

(cid:116)(cid:1) Successful development of dry formulations for beta glucan and avenanthramides with positive outcomes

for potential nutraceutical/pharmaceutical development

(cid:116)(cid:1) Obtained key patents for beta glucan in Europe and Japan and for avenanthramides in the USA.

While it takes years to build a company “brick by brick,” we are now very confident that we have established a
solid foundation for growth. We have all the key ingredients for success: a base business with the cosmetic sector,
which provides a revenue stream, a well advanced near-term catalyst with dry beta glucan as a functional food/
nutraceutical and a long-term catalyst with dry formulations of avenanthramides for the nutraceutical and/or
pharmaceutical markets.

With these conditions, combined with our current strong order book and upcoming strategic initiatives, this is
an exciting time for all of us at Ceapro, as well as for our partners and shareholders. Our vision is more than ever
to be recognized as the Canadian leader in botanical actives and a center of excellence in bioprocessing by 2015.

Our small group of employees has bought into these challenges and we thank everyone for their efforts in striv-
ing to make Ceapro one of the best biotech companies in Canada.

We wish to thank our customers and you as shareholders for your support and confidence.

GILLES R. GAGNON, M.Sc., MBA
PRESIDENT AND CEO

ED TAYLOR, CGA
CHAIRMAN OF THE BOARD

May 1, 2014

UNIQUE BIOPROCESSING EXPERTISE

Ceapro undertook a major relocation project back in 2012, following a significant corporate effort and thorough
due diligence of alternative manufacturing options as well as alternative locations. It was clear that Ceapro need-
ed its own manufacturing facility given its unique proprietary and innovative technologies. A suitable location was
selected in South Edmonton.

Today, the construction of this new and unique bioprocessing facility comprising about 20,000 sq. ft. is almost
completed. This is by far the largest and most exciting project we have undertaken.

Ceapro will be one of the very few bioprocessors in Canada and the only one capable of producing its unique oat-
derived products. Our facility will host the entire company under one roof, will hold a Natural Health Products site li-
cence from Health Canada, and will be GMP qualified to meet the standards of some of the largest and most stringent
multi-national companies. Furthermore, the new facility will, for the first time, allow Ceapro to leverage its expertise
in bioprocessing and generate additional revenue from custom bioprocessing for third party customers who have
their own products and extraction process.

The facility is expected to come on stream at a time when a host of positive influences are coming together for
Ceapro. These include the commercialization of our development projects that have shown positive results to date, a
heightened awareness and acceptance to incorporate mother nature into our daily health care regimes, and a sharply
increased awareness and amount of research being conducted on oat products, especially our core value drivers,
avenanthramides and beta glucan.

Our development projects have focussed on our expertise
in oats and developing new innovative natural health care
products to address global needs. Oats have a host of well
documented health care benefits. However, to exploit these
opportunities numerous challenges must be overcome in-
cluding adequate and quality feedstock, proper formulations,
manufacturing scale up, and scientific testing. Our activities
over the last few years have focussed on overcoming these
challenges and we have been thrilled with the results to date.

There is a tremendous value in these new health care tech-
nologies, a value that is separate and distinct from Ceapro’s
traditional bioprocessing business.

While we expect growth in our bioprocessing business as our
new facility is brought into commercial production, we ex-
pect an even bigger increase in value as we are able to com-
mercialize some of our development projects into new prod-
ucts for the medicinal food, nutraceutical, or pharmaceutical
markets. The next pages provide an update on these projects
and what it means for Ceapro.

FROM FIELD TO FORMULATION

Personal Care: Our Base Business

High quality feedstock

Our strategic path is clear: we will grow our customer base and presence in the per-
sonal care cosmetic market, while continuing to explore and clinically validate new
product applications for our value drivers, avenanthramides and beta glucan under
different formulations.

AVENANTHRAMIDES

Ceapro’s flagship product, avenanthramides, is a group of polyphenol compounds
found exclusively in oats. This group of molecules that work synergistically repre-
sent the active component of oats that provides relief for a host of skin conditions,
such as eczema, chicken pox, and insect bites. Ceapro is the only company in the
world producing the only commercial natural avenanthramide product which is
featured in several of the best-selling global personal care brands.

One of the challenges to further penetrate the personal care market is the relatively
small supply of commercial oats that have adequate quantities of avenanthramides
to be commercially profitable and therapeutic. Reliability of supply is also a chal-
lenge since the oat quality will vary widely from year to year; thus, making security
of supply an issue. In 2012, Ceapro entered into two technology agreements with
Agriculture and Agri Food Canada (AAFC) to address this situation. The first is an
oat process technology that, when applied to a certain oat variety post-harvest, can
drastically increase the avenanthramide content from non-commercial amounts to
amounts well beyond what Ceapro has ever purchased on the open market. The
second agreement provided access to a particular new oat variety (non-GMO),
which consequently requires Ceapro to grow the variety.

AAFC Process Technology - Update and Ceapro’s Opportunity

In 2013, the new oat variety was successfully grown in Alberta and Saskatchewan.
The harvest showed good yields and high quality. Also, using the AAFC technology
to get overexpression of avenanthramides, Ceapro has been able to boost the con-
centrations of avenanthramides from very low, nearly non-detectable levels up to
levels more than double what Ceapro typically commercially extracts. In 2014, scale
up of the process will continue and we expect that later in the year, we will run some
commercial scale test extractions on our stimulated oats.

The ability to grow large amounts of high yield oats that can be stimulated will over-
come any limitations caused by scarce supply or procurement issues and will allow
to serve larger markets. Furthermore, this project will provide a huge boost to the
gross margin for Ceapro’s bioprocessing business, since the contents of avenanth-
ramides in the grain have been increased to previously unheard of levels.

Molecule identification
and analytics

Optimization of
products from nature

Bioprocessing and production

Commercial phytochemicals

BETA GLUCAN

Ceapro’s value driver product, beta glucan, is known as
the anti-aging active ingredient included in well known
brands. Studies have shown that beta glucan is highly ef-
fective in stimulating collagen synthesis and can play a
prominent role in skin restructuring and wound healing.

Beta glucan extracted from oat is water soluble. Ceapro
has shown the unusual ability of its oat-based beta glu-
can to penetrate skin deeply despite its large molecular
weight. As a result, the use of oat beta glucan as a poten-
tial delivery system has attracted interest from multiple
parties looking to improve the delivery of their therapeu-
tic products. The potential to impregnate or encapsulate
bioactives with formulations of beta glucan has increased
the interest in determining its potential as a delivery plat-
form.

Supercritical Fluid Drying Technology - Update and Ceapro’s Opportunities

Ceapro’s oat beta glucan is currently sold as a liquid formulation. In order to fully exploit the potential of beta glucan,
Ceapro embarqued in 2012 in a major project to develop dry formulations. Ceapro then elected to conduct research
work by using a technology developed at the University of Alberta. Such technology, based on supercritical condi-
tions, enabled the successful development of dry formulations of beta glucan at the lab scale level.

In 2013, the goal was to scale up and automate the process while decreasing the production costs. Because this
Supercritical Fluid Technology and equipment is extremely rare, we did it in partnership with Prince Edward Is-
land (PEI) based BIOFOODTECH where the process was significantly scaled up. This pilot system produced dried oat
beta glucan that retained all of its valuable properties including high molecular weight and high viscosity. After
reaching maximum scale in PEI, work was transferred to a
new technical partner in Boston who provided small-scale,
commercial-grade equipment suitable for Ceapro’s needs
as well as engineering and fabrication services for building
needed equipment. In Boston, further improvements were
made to the process to drive costs down and in late 2013,
a multi-tonne per day flow rate was successfully achieved.
Further increases in scale and flow rates are being test-
ed in 2014 and we are pleased with all results this far.
A study to test the impregnation capabilities of beta glu-
can is now conducted at the prestigious Massachusetts
Institute of Technology.

FROM PLANT TO PILL

Traditional plant source

Healthcare: Our Near-Term
and Long-Term Catalysts

Our strategic path is clear: while we will grow our customer base and presence in the
personal care market, we will explore and clinically validate new product applications
for our value drivers, avenanthramides and beta glucan in nutraceutical and pharma-
ceutical markets.

AVENANTHRAMIDES

Ceapro’s flagship product, avenanthramides, is a group of polyphenol compounds.
In addition to cosmetics applications, it has been suggested that Ceapro’s flagship prod-
uct, avenanthramides, when taken orally could be beneficial in serious conditions like
inflammatory bowel syndrome, atherosclerosis, colon cancer, and joint inflammation.
These findings led to the idea that avenanthramides could be developed as an active
pharmaceutical ingredient (API). In order to achieve this, we have to be able to produce
it in adequate quantities to allow for a bioavailable formulation that will enable us to
conduct clinical trials to demonstrate the safety and efficacy of avenanthramides in tar-
geted indications.

High Purity Avenanthramides - Update and Ceapro’s Opportunity

As mentioned in the personal care section, Ceapro has developed a process to increase
concentrations of avenanthramides from oats. Also, in order to develop these com-
pounds as an API, avenanthramides need to be highly purified and well characterized.

In 2013, Ceapro successfully identified a chromatographic method and tailored it to
purify all the naturally occurring avenanthramides from our current wet extraction pro-
cess product. In addition, Ceapro has been able to scale up the processing volume and
achieve high purity levels. The resulting high purity product was subsequently freeze-
dried into high quality powder. This powder was then assessed for its suitability to be
developed as active ingredients for nutraceutical and/or pharmaceutical markets. Out-
comes from a feasibility study conducted with a Montreal based organization showed
very positive results.

BETA GLUCAN

Ceapro’s value driver product, beta glucan, is also well known for its cholesterol lower-
ing properties as well as modulating glucose metabolism. The high purity of the powder
obtained with our Supercritical Fluid Drying Technology leads us to the development of
beta glucan beyond the personal care market and look at nutraceutical and pharmaceu-
tical markets using beta glucan to target metabolic diseases.

Update and Ceapro’s Opportunity

A feasibility study to assess the potential of the powder to be developed as active ingre-
dients for nutraceutical and/or pharmaceutical markets showed very positive results.
The stage is now set for pre-clinical studies and further clinical trials for both avenanth-
ramides and beta glucan.

Molecule identification
and analytics

Process development
and purification

Purified avenanthramides
and betan glucan

Clinical validation

Commercial
phytopharmaceuticals

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MANAGEMENT’S DISCUSSION & ANALYSIS

:: MANAGEMENT’S DISCUSSION & ANALYSIS

The MD&A provides commentary on the results of operations for the years ended December 31, 2013 and 2012, the
financial position as at December 31, 2013, and the outlook of Ceapro Inc. (‘‘Ceapro’’) based on information available as
at April 14, 2014. The following information should be read in conjunction with the audited consolidated financial
statements as at December 31, 2013, and related notes thereto, as well as the audited consolidated financial statements
for the year ended December 31, 2012 and the Management’s Discussion and Analysis (MD&A) for the year ended
December 31, 2012 which are prepared in accordance with International Financial Reporting Standards (IFRS). All
comparative percentages are between the years ended December 31, 2013 and 2012 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 14, 2014, 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, natural, renewable resources, and developing innovation.

Our products include:

• 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
• 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:

• CeaProve(cid:3), a diabetes test meal to screen pre-diabetes and to confirm diabetes diagnosis;
• A drug delivery platform using our beta glucan technology to deliver compounds for uses ranging from wound care

and therapy, to skin care treatments that reduce the signs of aging;

• An extension to the active ingredients product range offering, through new plant extract products;

• 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; and

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CEAPRO Annual Report 2013 7

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MANAGEMENT’S DISCUSSION & ANALYSIS

• The development of a new oat variety and certain technologies to increase the content of avenanthramides to high
levels to enable new innovative products to be introduced to new markets including medicinal foods,
nutraceuticals, and botanical drugs.

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:

• Identifying unique plant sources and technologies capable of generating novel active natural products;

• Increasing sales and expanding markets for our current active ingredients;

• Developing and marketing additional high-value proprietary therapeutic natural products;

• Developing and improving manufacturing technologies to ensure efficiencies; and

• Advancing new partnerships and strategic alliances to develop new commercial active ingredients, manufacturing

technologies, and target markets.

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. Our marketing
strategy emphasizes providing technical support to our distributors and their customers to maximize the value of our
technology and product utilization. Our vision and business strategy are supported by our commitment to the following
core values:

• Adding value to all aspects of our business;
• Enhancing the health of humans and animals;
• Discovering and commercializing new, therapeutic natural ingredients and bioprocessing technologies;
• Producing the highest quality work possible in products, science, and business; and
• Developing personnel through guidance, opportunities, and encouragement.

To support these objectives, we believe we have 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

Trade and other receivables

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8 CEAPRO Annual Report 2013

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MANAGEMENT’S DISCUSSION & ANALYSIS

Approximately 94% of trade receivables are due from two customers at December 31, 2013 and all trade receivables
are current. These main customers present good credit quality and historically have a high quality credit rating.

Other receivables represent amounts due for research program claims, government goods and services taxes, and
scientific and research tax credits. Management has assessed the credit risk to be low.

Cash and cash equivalents

The Company has cash and cash equivalents in the amount of $1,953,019 at December 31, 2013 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.

There are no past due or impaired financial assets. The maximum exposure to credit risk is the carrying amount of the
Company’s trade and other receivables, 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. The
Company may be exposed to liquidity risks if it is unable to collect its trade and other receivables 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 trade receivables 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

Loan payable secured by certain
intellectual property due
January, 2019

Loan payable secured by a general
security agreement due
April, 2019

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
$

994,408

–

288,234

628,873

655,077

85,169

200,082

31,631

106,692

83,883

255,507

400,164

–

298,092

216,756

–

167,766

335,536

1,790,099

1,452,310

1,505,461

–

83,883

TOTAL
$

994,408

1,572,184

638,768

817,002

31,631

106,692

671,068

4,831,753

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.

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CEAPRO Annual Report 2013 9

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MANAGEMENT’S DISCUSSION & ANALYSIS

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

Financial assets

Accounts receivable

Financial liabilities

CARRYING
AMOUNT
(USD)

FOREIGN EXCHANGE RISK (USD)

(cid:4)1%

+1%

EARNINGS & EQUITY

231,017

2,310

(2,310)

Accounts payable and accrued liabilities

219,405

Total increase (decrease)

(2,194)

116

2,194

(116)

The carrying amount of accounts receivable and accounts payable and accrued liabilities in USD represents the
Company’s exposure at December 31, 2013.

2. Interest rate risk

The Company has minimal interest rate risk because its long-term debt agreements are all at fixed rates.

3. Share price risk

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, normal 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 always strives to identify and retain key employees and always strives 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

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10 CEAPRO Annual Report 2013

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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.

NEWLY ADOPTED ACCOUNTING POLICIES

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 previously recognized actuarial gains and losses in
profit or loss. Under the new standard, actuarial gains and losses will be recognized in other comprehensive income
or loss. The Company retrospectively adopted IAS 19 – Employee Benefits (‘‘IAS 19’’) amendment beginning the first
quarter of its 2013 financial year. The impact of adopting this section was not significant, and as such, retrospective
adjustment to actuarial gains and losses were not recorded.

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.

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 has adopted IFRS 10 – Consolidated Financial Statements (‘‘IFRS 10’’), IFRS 12 – Disclosure of Interest in
Other Entities (‘‘IFRS 12’’), reissued IAS 28 – Investments in Associates and Joint Ventures (‘‘IAS 28’’), and IAS 27 –
Separate Financial Statements beginning the first quarter of its 2013 fiscal year with no significant impact to its
consolidated financial statements.

JOINT VENTURES

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CEAPRO Annual Report 2013 11

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MANAGEMENT’S DISCUSSION & ANALYSIS

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 has adopted IFRS 11 – Joint Arrangements (‘‘IFRS 11’’) beginning the first quarter of its 2013 fiscal year
with no significant impact to 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 adopted IFRS 13 – Fair value Measurement (‘‘IFRS 13’’) beginning the first quarter of its 2013 fiscal year
with no significant impact to its consolidated financial statements.

FINANCIAL STATEMENTS PRESENTATION

The Company adopted 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 beginning the first quarter of its 2013 fiscal year with no significant
impact to its consolidated financial statements.

FUTURE ACCOUNTING POLICIES NOT YET ADOPTED

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 has not yet been
determined by the IASB. The Company has not yet assessed the impact that this new standard is likely to have on its
consolidated financial statements.

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12 CEAPRO Annual Report 2013

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MANAGEMENT’S DISCUSSION & ANALYSIS

RESULTS OF OPERATIONS – YEARS ENDED DECEMBER 31, 2013, 2012, AND 2011

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

Income (loss) from operations

Other operating loss

Net income (loss)

Basic net income (loss) per
common share

Diluted net income (loss) per
common share

100%

53%

47%

11%

26%

(cid:5)4%

2013

6,524

3,425

3,099

731

1,709

127

447

(271)

176

0.003

100%

53%

47%

17%

35%

2%
(cid:4)10%

0%
(cid:4)10%

2012

5,165

2,716

2,449

856

1,795

199

113

(514)

(24)

(538)

(0.009)

2011

5,786

2,538

3,248

997

1,374

111

181

585

(7)

578

0.009

100%

44%

56%

17%

24%

10%

During the year ended December 31, 2013, the Company’s revenue increased by 26% or $1,359,000 to $6,524,000 from
$5,165,000 in 2012 and cost of goods sold increased by 26% or $709,000 to $3,425,000 from $2,716,000 in comparison
with the same period of 2012. These changes resulted in an increase in the amount of gross margin by 27% or $650,000
to $3,099,000 in 2013 from $2,449,000 in 2012.

Income from operations has increased by $961,000 to an income of $447,000 in 2013 from a loss of $514,000 incurred
during the year ended December 31, 2012.

There was a net income in the year ended December 31, 2013 of $176,000 in comparison with a net loss of $538,000 in
the same period of 2012 mostly due to an increase in sales and decreased research and product development, general
and administration, and sales and marketing expenses, offset by higher other expenses, mainly rent on the new facility.

During the fourth quarter of 2013, the Company’s revenue increased by 25% or $300,000 to $1,502,000 from $1,202,000
in 2012 and cost of goods sold increased by 14% or $105,000 to $874,000 from $769,000 in comparison with the same
period of 2012. These changes resulted in an increase in the amount of gross margin by 45% or $195,000 to $628,000 in
2013 from $433,000 in 2012.

There was an increase in income from operations of $251,000 in the fourth quarter of 2013 from $250,000 loss to income
from operations of $1,000 in the same period of 2013.

There was a decrease in net loss in the quarter ended December 31, 2013 of $135,000 to $103,000 from $238,000 in
2012. The Company commenced paying rent on its new manufacturing facility in April 2013 which has been classified as
other operating loss as the facility is not yet in the condition necessary to commence operations.

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CEAPRO Annual Report 2013 13

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MANAGEMENT’S DISCUSSION & ANALYSIS

REVENUE

$000S

Total revenues

PRODUCT SALES

Year Ended
December 31

Quarter Ended
December 31

2013

6,524

2012

CHANGE

5,165

26%

2013

1,502

2012

CHANGE

1,202

25%

Sales in the year ended December 31, 2013 increased by $1,359,000 or 26% primarily as a result of higher sales volumes
of avenanthramides, oat oil, and veterinary shampoo.

Sales in the fourth quarter of 2013 increased by $300,000 or 25% primarily as a result of higher sales volumes of
avenanthramides and oat oil.

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

2013

6,524

3,425

3,099

48%

2012

CHANGE

26%

27%

5,165

2,716

2,449

47%

2013

1,502

874

628

42%

2012

CHANGE

25%

14%

45%

1,202

769

433

36%

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, 2013, the cost of goods sold rose by $709,000 or 26%, from $2,716,000 in 2012 to
$3,425,000 in 2013. The gross margin in the year ended December 31, 2013 is higher by 27% due to higher sales. The
gross margin percentage increased by 1% from 47% in the year ended December 31, 2012 to 48% in the same period of
2013 due to higher sales volume.

During the fourth quarter of 2013, the cost of goods sold increased by $105,000 or 14%, from $769,000 in 2012 to
$874,000 in 2013. The gross margin in the fourth quarter of 2013 is higher by 45% mostly due to higher sales. The gross
margin percentage increased by 6% from 36% in the fourth quarter of 2012 to 42% in the same period of 2013 due to
natural feedstock variations and a product sales mix weighted towards a higher margin product.

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14 CEAPRO Annual Report 2013

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MANAGEMENT’S DISCUSSION & ANALYSIS

RESEARCH AND PRODUCT DEVELOPMENT

$000S

Salaries and benefits

Regulatory and patents

Other

Product development – CeaProve(cid:3)

Total research and product development
expenditures

Year Ended
December 31

Quarter Ended
December 31

2013

629

256

(172)

713

731

2012

CHANGE

639

133

835

856

(cid:4)15%
(cid:4)14%

(cid:4)15%

2013

131

(3)

160

163

2012

CHANGE

151

(84)

126

27%

129

26%

During the year ended December 31, 2013, research and development expenses before CeaProve(cid:3) development have
decreased by 15% due to grant revenue recognition of discounted CAAP funding and grant contributions from Alberta
Innovates Technology Futures and a federal government program offset by a significant increase in expenses for
regulatory and patents of $123,000. The large increase in patent cost was due to the issue of key beta glucan patents in
several European countries. These patent costs are expected to provide significant value to Ceapro shareholders in
the future.

CeaProve(cid:3) costs have decreased by 14% from $21,000 to $18,000 as a result of lower costs for patent maintenance.

During the fourth quarter of 2013, research and development expenses before CeaProve(cid:3) development increased by
27% or $34,000 in comparison with the same period of 2012 due to increased research and development project
activities, lower grant contributions, partially offset by decreased expenses for regulatory and patents of $27,000.

CeaProve(cid:3) costs were unchanged in the fourth quarter of 2013 versus the fourth quarter of 2012.

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

Total general and administration expenses

Year Ended
December 31

Quarter Ended
December 31

2013

2012

CHANGE

626

274

139

115

124

111

1,709

475

407

155

120

113

123

102

2013

159

2012

CHANGE

129

133

1,795

(cid:4)5%

443

482

(cid:4)8%

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CEAPRO Annual Report 2013 15

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MANAGEMENT’S DISCUSSION & ANALYSIS

During the year ended December 31, 2013, general and administration expenses decreased by $86,000 or 5% from
$1,795 to $1,709 primarily due to lower consulting and legal costs due to plant related feasibility studies conducted in
2012 but not in 2013 and to lower legal expenses mainly related to AVAC litigation. This was offset by increased
expenses for salaries and benefits of $151,000 mainly as a result of new positions related to new business development
and engineering activities, and travel of $11,000 due to increased business development activities.

General and administration expenses for the fourth quarter of 2013 decreased by $39,000 or 8% from $482,000 to
$443,000 primarily as a result of decreased expenses for consulting, legal, public company, and accounting and audit
cost offset by increased expenses for salaries and benefits due to the same reasons as previously identified.

SALES AND MARKETING

$000S

Travel

Consulting

Courses, conferences & advertising

Other

Total sales and marketing

Year Ended
December 31

Quarter Ended
December 31

2013

2012

CHANGE

2013

2012

CHANGE

101

199

(cid:4)57%

–

(cid:4)73%

The year ended December 31, 2013 showed a decrease in expenditures of $114,000 or 57% versus 2012 due to a
completion of a marketing strategy and brand evaluation project in the first half of 2012.

Sales and marketing expenses in the fourth quarter of 2013 decreased by $29,000 or 73% in comparison with the same
period of 2012 due to lower travel and conference attendance.

The Company anticipates continued participation and expenditures at targeted conferences. Our goal is to expand our
business with existing customers and to explore potential opportunities with new customers.

FINANCE COSTS

$000S

2013

2012

CHANGE

2013

2012

CHANGE

Year Ended
December 31

Quarter Ended
December 31

Interest on royalty financial liability

Interest on long-term loan

New loan application and guarantee fees

Interest on royalties to Guelph & AAFC

Accretion of CAAP loan

Bank charges

–

127

113

12%

(15)

–

(cid:4)68%

As at December 31, 2012, royalty investors received royalties equal to 2.285% (2011 – 2.285%) of revenues from product
sales and royalty, licence, and product development fees of active ingredients and veterinary therapeutic products and
CeaProve(cid:3), to a maximum of two times the amount invested. AVAC Ltd. receives royalties of up to 2.5% to 5% of
revenues from eligible product sales, to a maximum of one and a half to two times the amount invested. Royalty
expenses will vary directly with fluctuations in eligible product sales, royalty, licence and product development fees,
product sales mix, and any new royalty interest offerings that may be completed.

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16 CEAPRO Annual Report 2013

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MANAGEMENT’S DISCUSSION & ANALYSIS

The Company entered into Canadian Agricultural Adaptation Program (‘‘CAAP’’) repayable contribution agreements for
total possible funding of $1,339,625 available 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 $42,000 in the year ended December 31, 2013 (2012 – $18,000).

OTHER OPERATING LOSS (INCOME)

Year Ended
December 31

Quarter Ended
December 31

$000S

2013

2012

CHANGE

2013

2012

CHANGE

Foreign exchange loss (income)

Loss on disposal of property and equipment

Other loss (income)

Plant relocation costs

(4)

240

271

–

(5)

–

(9)

–

(3)

–

1029%

105

(12) (cid:4)975%

Foreign exchange loss in the year ended December 31, 2013 was $23,000 in comparison with a loss of $29,000 in 2012
due to the fluctuations of the US dollar versus the Canadian dollar in comparison with the same period of 2012.

DEPRECIATION AND AMORTIZATION EXPENSES

In the year ended December 31, 2013, the total depreciation and amortization of $293,000 (2012 – $293,000) was
allocated as follows: $62,000 to general and administration expense (2012 – $46,000), $6,000 to inventory (2012 –
$43,000), and $225,000 (2012 – $204,000) to cost of goods sold.

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.

2013

2012

$000S EXCEPT
PER SHARE DATA

Total revenues

Net income (loss)

Basic net income (loss) per
common share

Diluted net income (loss)
per common share

1,503

(103)

1,997

123

1,012

(252)

2,012

408

1,202

(237)

1,283

(137)

1,490

(160)

1,190

(4)

(0.002)

0.002

(0.004)

0.007

(0.004)

(0.002)

(0.003)

(0.000)

(0.002)

0.002

(0.004)

0.007

(0.004)

(0.002)

(0.003)

(0.000)

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.

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CEAPRO Annual Report 2013 17

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MANAGEMENT’S DISCUSSION & ANALYSIS

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, 2013

December 31, 2012

1,948

3,149

(2,212)

2,885

2,640

245

2,885

1,508

2,378

(2,566)

1,320

1,306

1,320

Non-current assets increased by $440,000 due to a depreciation provision of $293,000 and a loss on disposal of $12,000
offset by the acquisition of $716,000 of property and equipment and deposit amounts of $29,000.

Current assets increased by $771,000. Inventories were lower by $466,000; accounts receivables and prepaid expenses
were higher by $266,000. Cash increased by $1,680,000 and restricted cash and cash equivalent decreased in the
amount of $709,000.

Current liabilities totaling $2,212,000 decreased by the net amount of $354,000 mostly due to increased sales that
resulted in decreased deferred revenue of $629,000, restricted cash and cash equivalent received in 2013 under a capital
expenditure grant agreement and recorded as deferred revenue expended in the amount of $709,000. These were
partially offset by the reclassification of employee future benefit obligation of $146,000, an increase in the current
portion of long-term debt of $331,000, an increase in trade payables and accrued liabilities of $416,000, a reclassification
of the current portion of CAAP loan of $73,000, and an increase in royalty interest obligations of $18,000.

Non-current liabilities totaling $2,640,000 increased by the net amount of $1,334,000 due to long-term debt increases of
$1,464,000 and a discounted CAAP loan increased in the amount of $70,000 offset by royalty financial liability decreased
by $110,000, and accrued employee future benefit obligation reclassified to current liabilities in the amount of $90,000.

Equity of $245,000 at December 31, 2013 increased by $231,000 from equity of $14,000 at December 31, 2012 due to
net income for the period ended December 31, 2013 of $176,000 and recognized share-based compensation of $72,000
offset by accumulated other comprehensive loss of $17,000.

NET DEBT

$000S

Cash and cash equivalents

Current financial liabilities*

Non-current financial liabilities*

Total financial liabilities

NET DEBT

December 31, 2013

December 31, 2012

1,953

1,705

2,513

4,218

2,265

273

867

1,089

1,956

1,683

* Current and non-current financial liabilities include accounts payable and accrued liabilities, current and non-current
portion of long term debt, royalties interest payable, current and non-current portion of royalty financial liability, and a
CAAP loan.

The Company’s net debt increased by $582,000 due to an increase of cash and cash equivalent in the amount of
$1,680,000, an accounts payable and accrued liabilities increase of $416,000, decreased royalty related obligations of

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18 CEAPRO Annual Report 2013

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MANAGEMENT’S DISCUSSION & ANALYSIS

$92,000, long-term debt increase in the amount of $1,795,000, and an increased CAAP loan discounted amount
recognized as $143,000.

SOURCES AND USES OF CASH

The following table outlines our sources and uses of funds during the year ended December 31, 2013 and 2012.

$000S

Sources of funds:

Funds generated from operations (cash flow)

Changes in non-cash working capital items

Restricted cash received and utilized

Grant used for capital assets

Repayable CAAP funding

Long-term debt, net of repayments

Uses of funds:

Year Ended
December 31

Quarter Ended
December 31

2013

2012

2013

2012

621

(50)

709

1,624

198

2,045

5,147

(274)

249

–

350

–

366

(34)

232

–

915

2,045

3,225

(214)

–

167

–

Purchase of property and equipment

(663)

(200)

(542)

(67)

Purchase of property and equipment for the new
manufacturing facility

Purchase of prepaid deposits from grant

Purchase of licence

Deferred revenue reduction

Interest paid

Repayment of royalty financial liability

Repayable research funding repayment

Transaction costs

Repayment of long-term debt

Net change in cash flows

(1,641)

–

(1,012)

(37)

–

(709)

(81)

(87)

–

(81)

(168)

(3,467)

1,680

(44)

(41)

(92)

(69)

(85)

(154)

(685)

(319)

–

(13)

(26)

–

(81)

(43)

(1,674)

1,551

–

(41)

(40)

(24)

(42)

(39)

(253)

(251)

Net change in cash flow increased by $1,999,000 during the year ended December 31, 2013 in comparison with the
same period of 2012.

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 and capital investment but believes there may be other cost
uncertainties pertaining to commissioning and start up of a new plant.

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

Total common shares issued and outstanding as at April 14, 2014 were 60,403,948 (April 4, 2013 – 60,278,948). In
addition, 3,950,000 stock options as at April 14, 2014 (April 4, 2013 – 4,130,000) were outstanding that are potentially
convertible into an equal number of common shares at various prices.

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CEAPRO Annual Report 2013 19

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MANAGEMENT’S DISCUSSION & ANALYSIS

Ceapro’s working capital was $937,000 at December 31, 2013, which was increased by $1,126,000 from working
deficiency of $189,000 at December 31, 2012.

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 licence agreements, and
government funding programs. 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

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, 2013, the
Company received $9,166 (2012 – $32,083) which was recorded as a reduction of research and product development
expenses. This agreement has now been completed.

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 current year, the Company received $62,000 (2012 –
$20,750) which was recorded as a reduction of research and project development expenses. The Company
anticipates receiving additional funding of $41,250 in 2014 under this agreement.

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 year
ended December 31, 2013 (2012 – $5,000). This agreement has now been completed.

The Company entered into Canadian Agricultural Adaptation Program (‘‘CAAP’’) repayable contribution agreements
for total possible funding of $1,339,625 receivable over the year 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 or recorded as receivable
funding of $671,068 to date under this program and no further funds are expected.

e) 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 received $690,000 in 2013. The amount of $1,398,777 (2012 –
$41,223) was recorded as a reduction of capitalized expenditures. An amount of $160,000 is expected to be received
in 2014.

f) 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. This contribution
agreement was amended to increase the potential non-repayable contribution amount to $345,000 from $253,000 in
2013. During the year ended December 31, 2013, the Company received or recorded as receivable the amount of
$302,909 (December 31, 2012 – $42,091). The agreement is now completed.

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20 CEAPRO Annual Report 2013

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MANAGEMENT’S DISCUSSION & ANALYSIS

g) During the year ended December 31, 2013, the Company entered into an agreement under the Growing Forward 2
program to provide non-repayable grant funding in an amount up to $673,000. During the year, the Company
received or recorded as receivable the amount of $192,345. The Company anticipates receiving up to $480,655
in 2014.

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

RELATED PARTY TRANSACTIONS

During the period ended December 31, 2013, $25,000 (2012 – $19,000) of royalties were earned by employees and
directors from their investment in previous Ceapro royalty offerings. As at December 31, 2013, $6,000 (2012 – $5,000) of
royalties were payable to employees and directors.

During the period ended December 31, 2013, the Company paid key management salaries, short-term benefits,
consulting fees, and director fees totaling $672,000 (2012 – $657,000) and key management personnel received share-
based payments of $41,000 (2012 – $34,000).

Amount payable to directors was $29,000 (2012 – $29,000).

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 licence 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 licence 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 licence agreement for a new
technology to increase the concentration of avenanthramides in oats. The Company shall pay an annual royalty

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CEAPRO Annual Report 2013 21

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MANAGEMENT’S DISCUSSION & ANALYSIS

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 licence agreement remains in force. The agreements remain in force until
the patents expire or are abandoned.

The agreement is an executory contract and therefore all royalty payments under the contract will be recognized as
they become due.

In the normal course of operations, the Company may be subject to litigation and claims from customers, suppliers,
and former employees. Management believes that adequate provisions have been recorded in the accounts where
required. Although it is not possible to estimate the extent of potential costs, if any, management believes that the
ultimate resolution of such contingencies would not have a material adverse effect on the financial position of
the Company.

OUTLOOK

We are very pleased with the 2013 results showing the highest full year revenue in Ceapro’s history with an increase of
26.3% or $ 1,359,000 over the full year ended December 31, 2012 as well as showing a net profit of $176,000 compared
to a net loss of $538,000 in 2012. These results were achieved while advancing the construction of a new state-of-the-art
manufacturing facility and investing in upcoming product launches.

The successful implementation and commissioning of the new facility remains our top priority for the first half of 2014.
We expect the completion of construction to occur in May 2014 and currently anticipate to start producing first
validation trials in Q3, 2014. In order to minimize supply continuity and start-up risks, we will run our two plants in
parallel for a period of three months to ensure that product specifications are exactly the same in both facilities. We
expect to exit the existing manufacturing facility by the end of September 2014. As part of our risk mitigation plan, we
will be building significant inventory for our flagship product, avenanthramides, from which we expect a significant
sales increase in 2014.

In addition, we expect to pursue our research and development program with dry formulations of our value drivers,
avenanthramides and beta glucan that would be produced in our new facility. We are well on track to develop them as
active ingredients to serve large markets like functional foods/drinks and nutraceuticals. New major investments would
then be needed to assess their safety and efficacy through pre-clinical and clinical research programs to be conducted
over a 24-month period. Transition to the functional food and/or nutraceutical sectors will represent a significant
opportunity for Ceapro.

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.

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22 CEAPRO Annual Report 2013

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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

April 14, 2014

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CEAPRO Annual Report 2013 23

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CONSOLIDATED FINANCIAL STATEMENTS

24FEB201422045893

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, 2013 and December 31, 2012, and the consolidated
statements of net income (loss) and comprehensive income (loss), 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.

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24 CEAPRO Annual Report 2013

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CONSOLIDATED FINANCIAL STATEMENTS

24FEB201422045893

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, 2013 and December 31, 2012, 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 to date the Company has not yet achieved consistent profitability. This condition, 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 14, 2014

Chartered Accountants

8MAY201323214477

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CEAPRO Annual Report 2013 25

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CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

December 31
2013
$

December 31
2012
$

ASSETS
Current Assets

Cash and cash equivalents
Restricted cash and cash equivalents (note 9)
Trade receivables
Other receivables
Inventories (note 4)
Prepaid expenses and deposits

Non-Current Assets

Deposit
Licences (note 5)
Property and equipment (note 6)

TOTAL ASSETS

LIABILITIES AND EQUITY
Current Liabilities

Accounts payable and accrued liabilities
Current portion of deferred revenue (note 9)
Current portion of long-term debt (note 7)
Current portion of employee future benefits obligation (note 10)
Current portion of CAAP loan (note 12)
Royalties interest payable (note 8b)
Current portion of royalty financial liability (note 8b)

Non-Current Liabilities

Royalty financial liability (note 8b)
Employee future benefits obligation (note 10)
Long-term debt (note 7)
CAAP loan (note 12)

Equity

Share capital (note 11b)
Contributed surplus (note 11c)
Accumulated other comprehensive loss
Deficit

TOTAL LIABILITIES AND EQUITY

See accompanying notes

Approved on Behalf of the Board

SIGNED: ‘‘John Zupancic’’
Director

SIGNED: ‘‘Edward Taylor’’
Director

1,953,019
–
250,859
279,413
323,582
342,289

3,149,162

28,562
66,254
1,853,024

1,947,840

5,097,002

994,408
361,309
499,718
145,973
72,942
31,631
106,692

2,212,673

–
127,009
2,222,298
290,529

2,639,836

6,315,858
503,829
(16,916)
(6,558,278)

244,493

5,097,002

273,106
708,777
253,401
199,787
790,057
152,778

2,377,906

–
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

1,306,026

6,315,858
431,792
–
(6,734,086)

13,564

3,885,968

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26 CEAPRO Annual Report 2013

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CONSOLIDATED FINANCIAL STATEMENTS

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

Year Ended December 31

Revenue (note 13)

Cost of goods sold

Gross margin

Research and product development

General and administration

Sales and marketing

Finance costs (note 16)

Income (loss) from operations

Other operating loss (note 15)

Net income (loss) for the year

Other comprehensive loss

Actuarial loss on employee future benefit obligation (note 10)

Total comprehensive income (loss) for the year

Net income (loss) per common share (note 25):

Basic

Diluted

2013
$

6,524,062

3,425,248

3,098,814

731,174

1,709,053

84,897

126,663

447,027

(271,219)

175,808

(16,916)

158,892

0.00

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)

–

(538,353)

(0.01)

Weighted average number of common shares outstanding

60,278,948

See accompanying notes

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CEAPRO Annual Report 2013 27

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CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

Share
Capital
$

Contributed
surplus
$

Deficit
$

Accumulated other
comprehensive loss
$

Balance December 31, 2011

6,315,858

397,631

(6,195,733)

Share-based payments

Net loss for the year

–

34,161

–

(538,353)

Balance December 31, 2012

6,315,858

431,792

(6,734,086)

Share-based payments

Net income for the year

Other comprehensive loss
(actuarial loss) (note 10)

–

72,037

–

175,808

–

Balance December 31, 2013

6,315,858

503,829

(6,558,278)

–

(16,916)

Equity
$

517,756

34,161

(538,353)

13,564

72,037

175,808

(16,916)

244,493

See accompanying notes

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28 CEAPRO Annual Report 2013

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CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31

OPERATING ACTIVITIES

Net income (loss) for the year
Adjustments to reconcile net income (loss) to cash and cash equivalents

2013
$

2012
$

175,808

(538,353)

provided by operating activities
Finance costs
Depreciation and amortization
Loss on disposal of property and equipment
Accretion of CAAP loan (note 12)
Grant revenue recognized
Extinguishment of the original liabilities
Recognition of new liabilities
Employee future benefits obligation
Share-based payments

Net income (loss) for the year adjusted for non-cash items

CHANGES IN NON-CASH WORKING CAPITAL ITEMS

Trade receivables
Other receivables
Inventories
Prepaid expenses and deposits
Deferred revenue
Royalty liability accrued
Accounts payable and accrued liabilities

Net income (loss) for the year adjusted for non-cash and working capital items

Interest paid

CASH GENERATED FROM OPERATIONS

INVESTING ACTIVITIES

Purchase of property and equipment
Purchase of leasehold improvements
Purchase of prepaid deposits from grant
Purchase of licences

FINANCING ACTIVITIES
Long-term debt
Transaction costs
Repayment of long-term debt
Grant used for purchasing of leaseholds, property and equipment, and prepaid

deposits
CAAP loan
Deferred revenue (note 9)
Restricted cash and cash equivalents (note 9)
Repayable research funding repayment
Repayment of royalty financial liability

Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

See accompanying notes

84,594
292,636
12,440
42,070
(97,072)
–
–
38,847
72,037

621,360

2,542
(79,626)
466,475
(218,073)
(629,024)
(5,234)
412,586

(50,354)

571,006
(80,988)

490,018

(662,639)
(1,640,714)
(36,926)
–

(2,340,279)

2,044,852
(80,869)
(168,502)

1,623,987
197,495
(708,777)
708,777
–
(86,789)

3,530,174

1,679,913
273,106

1,953,019

94,734
292,525
–
18,166
(188,312)
(119,772)
102,972
29,917
34,161

(273,962)

197,858
(185,600)
(98,646)
(37,763)
418,809
(41,042)
(4,912)

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

Cash and cash equivalents are comprised of $946,304 (2012 – $137,150) on deposit with financial institutions, $6,715
(2012 – $135,956) held in money market mutual funds, and $1,000,000 (2012 – $nil) held in guaranted investment
certificates.

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CEAPRO Annual Report 2013 29

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

:: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2013 AND 2012

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 under the symbol CZO. 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 may cast significant doubt upon the validity of this
assumption. Since inception, the Company has accumulated net losses, generated inconsistent operating cash flow, and
has not yet achieved consistent profitability. During the year ended December 31, 2013, the Company recorded net
income of $175,808 and as of that date had accumulated a deficit of $6,558,278.

The Company is currently in progress to complete a new manufacturing facility. This involves substantial capital
expenditures for engineering and design, permitting, construction of leaseholds, equipment, as well as other related
costs required to meet the requirements of major customers. The total investment required for these items is currently
estimated at $5,400,000, of which the Company has completed approximately $2,650,000. The Company believes that
based on work completed and paid to date and its cash resources, additional funds available to it under long-term debt
facilities described in note 7(c), additional grant funds available under agreements described in note 24(e) and
note 24(g), and other identified miscellaneous sources that it has the funding in place to complete the project.

When a new manufacturing facility is brought into commercial production, there is always a risk as to the magnitude of
investment of human and financial resources required for start up and commissioning activities. While the Company
intends to fully utilize its expertise to complete these activities and minimize risks, there is considerable risk inherent in
these activities. Additional funds may be required to conduct these essential activities.

The Company will have much higher debt repayment requirements in 2014 as a result of the two new long-term debt
facilities entered into in 2013. The Company may need to supplement its operating cash flows with additional cash
resources to maintain compliance with all debt agreements.

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 14, 2014.

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30 CEAPRO Annual Report 2013

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

LEASES

Management considers all current 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
been 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.

PROVISIONS

The Company records provision 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.

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CEAPRO Annual Report 2013 31

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

LICENCES

The Company amortizes licences over their estimated useful lives. Management makes estimates of future useful life
based on patterns of benefit consumption, terms of licence agreements, and impairments based on past experience
and market conditions. Impairment losses and depreciation expenses are presented in profit or loss of the
current period.

ROYALTIES

The Company has a royalty financial obligation 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. The effects are recognized in profit or loss in the
current period.

When funding from royalty agreements is received, management is required to recognize a liability initially at fair value.
To estimate the fair value of the obligation, the Company makes estimates of future cash flows and discounts those cash
flows at an estimated prevailing market rate of interest for a similar instrument. Management updates the estimated
future cash flows required under the royalty agreements at each reporting date to assess whether the value of
obligation should be adjusted. The effects of any change in the obligation are recognized in profit or loss in the
current period.

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32 CEAPRO Annual Report 2013

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 11.

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 are measured at the fair value of consideration received or receivable. Revenue is recognized when the
Company has transferred the significant risks and rewards of ownership to the customer, the amount of revenue can be
measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Company,
the costs incurred or to be incurred can be measured reliably, and the Company maintains no continuing managerial
involvement to the degree usually associated with ownership nor effective control over the goods sold.

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.

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CEAPRO Annual Report 2013 33

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 costs of disposal 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.

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

Licences

Licences are recorded at cost and are amortized straight-line over the life of the licence.

Research and product development expenditures

Research costs are expensed when incurred. Product development costs are also expensed when incurred unless the
Company can demonstrate all of the following:

(a) the technical feasibility of completing the intangible asset so that it will be available for use or sale;

(b) its intention to complete the intangible asset and use or sell it;

(d) how the intangible asset will generate probable future economic benefits. Among other things, the entity can
demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to
be used internally, the usefulness of the intangible asset;

(e) the availability of adequate technical, financial, and other resources to complete the development and to use or
sell the intangible asset;

(f ) its ability to measure reliably the expenditure attributable to the intangible asset during its development.

Costs are reduced by government grants and investment tax credits where applicable.

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34 CEAPRO Annual Report 2013

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Following initial capitalization of product development expenditures, the intangible 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 may 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.

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.

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CEAPRO Annual Report 2013 35

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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
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 trade and other receivables have been
classified as loans and receivables and are measured at amortized cost using the effective interest method, less any

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36 CEAPRO Annual Report 2013

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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, the royalty financial liability, deferred
revenue related to prepaid sales orders, 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.

3. CHANGES IN ACCOUNTING POLICIES

Newly adopted accounting policies

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 previously recognized actuarial gains and losses in profit or loss. Under the new
standard, actuarial gains and losses will be recognized in other comprehensive income or loss. The Company
retrospectively adopted IAS 19 – Employee Benefits (‘‘IAS 19’’) amendment beginning the first quarter of its 2013
financial year. The impact of adopting this section was not significant and as such retrospective adjustment to actuarial
gains and losses were not recorded.

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.

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CEAPRO Annual Report 2013 37

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. CHANGES IN ACCOUNTING POLICIES (CONTINUED)

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 has adopted IFRS 11 – Joint Arrangements (‘‘IFRS 11’’) beginning the first quarter of its 2013 fiscal year
with no significant impact to 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 adopted IFRS 13 – Fair value Measurement (‘‘IFRS 13’’) beginning the first quarter of its 2013 fiscal year
with no significant impact to its consolidated financial statements.

FINANCIAL STATEMENTS PRESENTATION

The Company adopted 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 beginning the first quarter of its 2013 fiscal year with no significant impact to
its consolidated financial statements.

Future accounting policies not yet adopted

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.

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38 CEAPRO Annual Report 2013

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. INVENTORIES

The Company had the following inventories at the end of each reporting period:

Raw materials

Work in progress

Finished goods

December 31
2013
$

December 31
2012
$

224,671

–

98,911

323,582

258,439

113,399

418,219

790,057

Inventories expensed to cost of goods sold during the year ended December 31, 2013 are $3,360,544 (December 31,
2012 – $2,655,930).

During the year ended December 31, 2013, the Company decreased the carrying value of inventory by $28,447 (2012 –
$98,634) due to lower estimated realizable values from certain finished goods and included this amount in cost of
goods sold.

5. LICENCES

During the year ended December 31, 2012, the Company entered into a new licence 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 commenced amortizing the licence over 15 years, in April 2012. Amortization of $2,963 has been included in
general and administration for the year ended December 31, 2013 (December 31, 2012 – $2,222) (see note 20(d)).

During the year ended December 31, 2011, the Company entered into a new licence 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 licencing fee of $30,000 in 2008 and $15,000 in 2011. The
remaining unamortized portion of the licence fee from 2008 and the new fee in 2011 is being amortized over 10 years,
being the term of the new licence agreement, commencing in 2011. Amortization of $4,500 has been included in
general and administration for the year ended December 31, 2013 (December 31, 2012 – $4,500) (see note 20(c)).

Cost of Licences

Balance – December 31, 2011

Additions

Balance – December 31, 2012

Additions

Balance – December 31, 2013

Accumulated amortization

Balance – December 31, 2011

Amortization

Balance – December 31, 2012

Amortization

Balance – December 31, 2013

Net book value

Balance – December 31, 2013

Balance – December 31, 2012

45,000

44,439

89,439

–

89,439

9,000

6,722

15,722

7,463

23,185

66,254

73,717

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CEAPRO Annual Report 2013 39

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. PROPERTY AND EQUIPMENT

Cost

December 31, 2011

Additions

Transfer to manufacturing
equipment

December 31, 2012

Additions

Disposal

Cost reduced by grant

December 31, 2013

Accumulated depreciation

December 31, 2011

Depreciation

December 31, 2012

Depreciation

Disposal

December 31, 2013

Carrying value

December 31, 2013

December 31, 2012

Equipment
not available
for use
$

207,750

20,921

(204,301)

24,370

3,569

–

Manufacturing
Equipment
$

Office
Equipment
$

Computer
Equipment
$

Leasehold
Improvements
$

Total
$

2,784,962

138,306

204,301

3,127,569

651,805

(31,045)

(103,284)

77,281

2,753

–

80,034

2,066

–

257,393

37,509

–

120,364

3,447,750

–

199,489

–

3,647,239

2,303,353

294,902

120,364

5,199

1,640,714

–

(31,045)

(1,483,777)

(1,587,061)

27,939

3,645,045

82,100

300,101

277,301

4,332,486

–

1,545,508

255,451

1,800,959

260,253

(18,605)

2,042,607

27,939

24,370

1,602,438

1,326,610

62,108

3,426

65,534

3,176

–

68,710

13,390

14,500

201,773

24,264

226,037

21,744

–

117,702

2,662

120,364

–

1,927,091

285,803

2,212,894

285,173

(18,605)

247,781

120,364

2,479,462

52,320

68,865

156,937

–

1,853,024

1,434,345

Leasehold improvements for the new manufacturing facility are not being amortized as the facility is not yet in the
condition necessary to commence commercial operations.

Depreciation expense allocation for the following periods:

Year Ended December 31, 2013

Year Ended December 31, 2012

Cost of goods sold
$

225,214

204,222

Inventory
$

6,273

42,989

General and
administration
$

53,686

38,592

Total
$

285,173

285,803

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40 CEAPRO Annual Report 2013

- - - - - - - -- - - - - -- - - - --- -- -- --- -- -- --- ----- ----- ---- ----- ---- ----- -------------------- ----- ---- ---- ---- ----- ---- ---- ---- ----- ---- - --- --- ---- --- --- ---- --- -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. LONG-TERM DEBT

Loan payable secured by a general security agreement due January, 2018 (a).

Loan payable secured by certain intellectual property due January, 2019 (b).

Loan payable secured by a general security agreement due April, 2019 (c).

Transaction costs

Less current portion

December 31
2013
$

758,033

1,465,500

579,352

(80,869)

2,722,016

499,718

2,222,298

December 31
2012
$

926,535

–

926,535

168,637

757,898

Interest expense is presented under finance costs for the following periods:

Year Ended December 31, 2013
Year Ended December 31, 2012

35,455
54,148

(a) During the year ended December 31, 2012, the loan was renewed to January 1, 2018 at an interest rate of 3.71%
with monthly payments of $16,674 starting February 1, 2013. The loan is secured by a general security agreement
covering all present and after acquired personal property subject by a subordination of the claim for certain
intellectual property that has been pledged as security for the long-term debt described in note 7 (b).

(b) During the year ended December 31, 2013, the Company entered into a new loan agreement which is secured by
certain intellectual property and due January 2, 2019. The loan, for 1 million Euro, is repayable over 5 years at an
interest rate of 2.85%. At December 31, 2013, the loan balance was $1,465,500 in Canadian currency. Monthly
blended principal and interest payments in the amount of $17,902 Euro commence February 1, 2014. Based on the
exchange rate at December 31, 2013, the monthly payment is $26,235 in Canadian currency.

(c) During the year ended December 31, 2013, the Company entered into a new loan secured by a general security
agreement and due April 1, 2019. The loan can be drawn to maximum $1,600,000 Canadian dollars, is repayable over
a 5-year term, and has an interest rate of 3.91%. At December 31, 2013, $579,352 was drawn on this loan. Assuming
the loan is fully drawn to $1,600,000, monthly blended principal and interest repayment in the amount of $29,352
will commence on May 1, 2014. The loan is secured by a general security agreement covering all present and after
acquired personal property subject by a subordination of the claim for certain intellectual property that has been
pledged as security for the long-term debt described in note 7(b).

The Company is in compliance with all terms and conditions of its long-term debt agreements.

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CEAPRO Annual Report 2013 41

- - - - - - - -- - - - - -- - - - --- -- -- --- -- -- --- ----- ----- ---- ----- ---- ----- -------------------- ----- ---- ---- ---- ----- ---- ---- ---- ----- ---- - --- --- ---- --- --- ---- --- -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. 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:3) (a health and
wellness product) upon completion of project objectives as outlined and agreed to by both parties. As at December 31,
2013, $225,000 (2012 – $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:3) on the following basis: 0% of revenues earned to December 31, 2005, 2.5% of revenues earned to
December 31, 2006, and 5% thereafter until repaid. No royalties have been paid or accrued during the current or prior
years. CTI has repaid at December 31, 2013 $nil (2012 – $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, 2013 was $nil (2012 – $nil). The
potential amount payable per agreement as at December 31, 2013 is $469,750 (2012 – $469,750) (see note 8(e)).

b) On December 28, 2005, the Company sold a 2.285% royalty interest in the Company’s future sales and licencing of
certain active ingredients, animal health, and CeaProve(cid:3) 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, 2013 was
$789,345 (2012 – $666,407). During the year, the Company repaid $116,343 through cash payments (2012 – $104,579).
The balance of royalties payable under this offering as at December 31, 2013 totaled $31,631 (2012 – $25,037). The
potential amount payable per agreement as at December 31, 2013 is $124,655 (2012 – $247,593) (see note 8(e)). The
balance outstanding was set up as a royalty financial liability which results in a discounted liability of $106,692 (2012 –
$205,309).

Opening amount of royalties interest payable

Royalty expense recognized

Amount paid during the year

Closing amount of royalties interest payable

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
2013
$

Year Ended
December 31
2012
$

25,037

122,937

(116,343)

31,631

205,309

(98,617)

106,692

–

24,320

33,366

96,250

(104,579)

25,037

263,623

(58,314)

205,309

95,378

109,931

37,936

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, 2013, $362,250 (2012 – $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, 2013 was $940 (2012 –
$584). The potential amount payable per agreement as at December 31, 2013 is $723,560 (2012 – $723,916)
(see note 8(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:3) (a health and
wellness product) upon completion of project objectives as outlined and agreed to by both parties. As at December 31,

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42 CEAPRO Annual Report 2013

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2013, $510,000 of this commitment has been received (2012 – $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:3) on the following basis: 0% of net sales and net sub-licencing revenues earned until
royalty payments have been fully satisfied under the investment agreement in note 8(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, 2013 was $nil (2012 – $nil). The potential amount payable per agreement
as at December 31, 2013 is $765,000 (2012- $765,000) (see note 8(e)).

e) Potential royalties payable as at December 31, 2013, and 2012:

Notes

8 (a)
8 (b)
8 (c)
8 (d)

Total

Potential amount
payable at
December 31,
2013

Potential amount
payable at
December 31,
2012

Year of agreement

2004
2005
2005
2005

469,750
124,655
723,560
765,000

469,750
247,593
723,916
765,000

2,082,965

2,206,259

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. When a liability needs to be recognized, a fair value
adjustment is required.

9. 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) and a subsequent amount of $690,000 in 2013
(note 24(e)). During the year ended December 31, 2013, the Company has expended $1,398,777 (2012 – 41,223). The
balance of this grant of $nil (2012 – $708,777) is presented as deferred revenue and restricted cash and cash equivalents
on the balance sheet.

Deferred revenue also consists of $361,309 (2012 – $990,333) for prepaid sales orders.

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CEAPRO Annual Report 2013 43

- - - - - - - -- - - - - -- - - - --- -- -- --- -- -- --- ----- ----- ---- ----- ---- ----- -------------------- ----- ---- ---- ---- ----- ---- ---- ---- ----- ---- - --- --- ---- --- --- ---- --- -

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. 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 short-term nature, which is consistent with the nature of the revised agreement.
Actuarial losses of $16,916 arose from changes of discount rate from 4.19% in 2012 to 2.3% in 2013.

The agreement was revised during the year ended December 31, 2013 and the total amount of $277,009 will be paid as
per the following installments:

January 1, 2014
July 1, 2014
January 1, 2015

Total:

$50,000
$100,000
$127,009

$277,009

As a result of an amendment to the agreement, the Company recorded a loss on curtailment of $14,815. The present
value of the installments at December 31, 2013 was $272,982 and no further expenses under current service costs will
be incurred as a result of this amendment.

Accrued benefit obligation

Unfunded balance, beginning of year

Current service cost

Loss on curtailment (or past service costs)

Interest costs on accrued benefit obligation

Actuarial losses, net of $nil tax

Less current portion

Elements of defined benefit costs recognized in the year

Current service cost

Loss on curtailment

Interest cost on accrued benefit obligation

Year Ended
December 31
2013
$

Year Ended
December 31
2012
$

217,219

18,301

14,815

5,731

16,916

272,982

145,973

127,009

187,302

21,606

–

8,311

–

217,219

–

217,219

Year Ended
December 31
2013
$

Year Ended
December 31
2012
$

18,301

14,815

5,731

38,847

21,606

–

8,311

29,917

Defined benefit costs have been presented under research and product development expenses in the consolidated
statements of net income (loss) for the year.

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44 CEAPRO Annual Report 2013

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. 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

Year Ended
December 31, 2013

Year Ended
December 31, 2012

Number of
Shares

60,278,948

–

Amount
$

6,315,858

–

Number of
Shares

60,278,948

–

Amount
$

6,315,858

–

60,278,948

6,315,858

60,278,948

6,315,858

Balance at beginning of the year

Share issued during the year

Balance at end of the year

C. CONTRIBUTED SURPLUS

The following table summarizes the changes in contributed surplus:

Balance at beginning of year

Share-based payments (note11(d))

2013
$

431,792

72,037

503,829

2012
$

397,631

34,161

431,792

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 year ended December 31, 2013, the Company granted 1,400,000
(December 31, 2012 – 300,000) 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 2013 was 1.62% (2012 – 1.51%), the weighted average
expected volatility was 111% (2012 – 111%) which was based on prior trading activity of the Company’s shares, the
weighted average expected life of the options was 10 years (2012 – 10 years), forfeiture rate was 0% (2012 – 0%), the
weighted average share price was $0.06 (2012 – $0.10), the weighted average exercise price was $0.10 (2012 – $0.10),
and the expected dividends were nil (2012 – nil). The weighted average grant date fair value of options granted in the
year ended December 31, 2013 were $0.05 (2012 – $0.09) per option.

The share-based payments expense recorded during the current year relating to options granted in 2013, 2012, and
2011 was $72,037 (during 2012 relating to options granted in 2012, 2011, and 2010 – $34,161).

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CEAPRO Annual Report 2013 45

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. SHARE CAPITAL (CONTINUED)

A summary of the status of the Company’s stock options at December 31, 2013 and 2012 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

2013

2012

Number of
Options

2,940,000

1,400,000

(810,000)

(385,000)

3,145,000

2,201,667

Weighted
Average
Exercise Price
$

0.13

0.10

0.15

0.12

0.11

0.12

Number of
Options

3,170,000

300,000

(490,000)

(40,000)

2,940,000

2,606,667

E. STOCK OPTIONS OUTSTANDING ARE AS FOLLOWS:

Fair Value
$

0.05

0.09

0.11

0.06

0.10

0.08

0.15

Exercise
Price
$

0.10

0.15

0.10

0.13

0.12

0.25

Year of
Expiration

2023

2022

2016

2015

2014

2013

Weighted
Average
Contractual
Life Remaining
(years)

9.0

8.5

2.5

1.7

0.5

–

5.1

December 31
2013
Number of
Options

1,265,000

300,000

325,000

430,000

825,000

–

Weighted
Average
Exercise Price
$

0.16

0.10

0.28

0.10

0.13

December 31
2012
Number of
Options

–

300,000

400,000

530,000

900,000

600,000

210,000

3,145,000

2,940,000

12. 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.

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46 CEAPRO Annual Report 2013

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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:

Year Ended December 31

Opening balance

Funding received or receivable

Grant revenue recognized

Extinguishment of the original liabilities

Recognition new liabilities

Accretion of CAAP loan

Less current portion

2013
$

220,978

197,495

(97,072)

–

42,070

363,471

72,942

290,529

2012
$

57,432

350,492

(188,312)

(119,772)

102,972

18,166

220,978

–

220,978

The principal repayment required for amounts received or receivable from inception to December 31, 2013 is $83,883
annually from 2014 through 2021.

13. SALES

During the year ended December 31, 2013, the Company had export sales to two customers of the Company’s products
in the aggregate amount of $6,042,428 (2012 – to two customers in the amount of $4,806,152). The Company is
therefore dependent on those customers to maintain and expand the volume of product sales.

14. 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

Key management salaries, short-term benefits, consulting fees, and
director fees

Key management personnel share based payments

Amount payable to directors

2013
$

24,889

5,967

671,838

40,754

28,750

2012
$

19,482

4,632

656,555

33,817

28,750

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.

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CEAPRO Annual Report 2013 47

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. OTHER OPERATING LOSS (INCOME)

Year Ended December 31

Foreign exchange loss

Loss on disposal of property and equipment

Other (income)

Plant relocation costs

16. FINANCE COSTS

Year Ended December 31

Interest on royalty financial liability

Interest on long-term loan

Transaction costs

Royalties to University of Guelph & AAFC

Accretion of CAAP loan

Bank charges

17. INCOME TAXES

A) NON-CAPITAL LOSSES

2013
$

22,803

12,440

(4,103)

240,079

271,219

2013
$

24,678

35,455

1,960

22,500

42,070

–

126,663

2012
$

29,295

–

(5,488)

–

23,807

2012
$

38,286

54,148

–

18,166

2,300

112,900

The Company has accumulated non-capital losses carried forward for federal income tax purposes of approximately
$13,214,029 and for provincial income tax purposes of approximately $13,061,364, 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 between 2015 and 2033.

B) CAPITAL LOSSES

The Company has accumulated capital losses of approximately $6,807,000, which can be carried forward indefinitely to
offset future capital gains.

C) SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT (SR & ED)

The Company has accumulated an SR & ED expenditure pool of approximately $1,887,300, which can be carried forward
indefinitely to be applied against future taxable income.

The Company has accumulated SR & ED investment tax credits of approximately $509,000. These credits may be applied
against future federal income taxes payable and expire between 2029 and 2032.

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48 CEAPRO Annual Report 2013

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

2013
$

1,284,347

4,139,160

5,423,507

2012
$

1,001,992

4,263,362

5,265,354

For consolidated financial statement purposes, no deferred income tax asset has been recorded at December 31, 2013
and 2012 as it is not likely to be realized.

E) INCOME TAX RECONCILIATION

The Company’s consolidated income tax position comprises tax benefits and provisions arising from the respective tax
positions of its taxable entities. The Company’s income tax provision differs from that calculated by applying statutory
rates for the following reasons:

Income taxes based on federal and provincial statutory income tax
rate of 25% (2012 – 25%)

Tax effect of expenses that are not deductible

Prior period tax adjustments

Other

Current year items where deferred tax asset not recognized

2013
$

43,952

20,137

(218,013)

–

153,924

–

2012
$

(134,589)

10,089

–

(2,858)

127,358

–

18. 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

2013
$

5,228,790

1,072,936

202,897

19,439

6,524,062

2012
$

3,797,565

1,151,132

125,630

90,949

5,165,276

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CEAPRO Annual Report 2013 49

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19. EMPLOYEE BENEFITS

Year Ended December 31

Employee benefits

2013
$

2012
$

2,312,480

2,123,375

Employee benefits include wages, salaries, bonus, and CPP, EI, WCB contributions, and benefit premiums.

20. 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.

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 entered into a new licence 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

And $50,000 each year thereafter while the licence agreement remains in force. The agreement remains in force until
the patents expire or are abandoned.

The agreement is an executory contract and therefore all royalty payments under the contract will be recognized as they
become due.

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50 CEAPRO Annual Report 2013

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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.

21. OPERATING LEASE

The Company incurred $508,626 in 2013 (2012 – $346,248) under operating leases. These amounts were recorded as
follows: general and administration expenses of $90,120 (2012 – $96,819), research and development expenses of $nil
(2012 – $14,754), and cost of goods sold of $267,103 (2012 – $234,675), and other operating loss of $151,403 (2012 –
$nil).

The Company is committed to future annual payments under operating leases for manufacturing facilities, office space
and warehouse starting April 1, 2013. Total lease commitments exclusive of operating costs from January 1, 2014 to
March 31, 2025 are disclosed in the table below:

New lease for plant

Warehouse

Total

0 - 1 Year
$

201,871

78,925

280,796

2 - 5 Years
$

822,620

179,375

6 - 12 Years
$

1,428,230

–

1,001,995

1,428,230

Total
$

2,452,721

258,300

2,711,021

The warehouse lease was executed subsequent to year end.

22.FINANCIAL INSTRUMENTS

The estimated fair value of the Company’s financial instruments approximates the amount for which the financial
instruments could currently be exchanged in an arms length transaction between willing parties who are under no
compulsion to act.

The fair value of cash and cash equivalents, restricted cash and cash equivalents, trade and other receivables, accounts
payable and accrued liabilities, deferred revenue related to prepaid sales orders, 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 (level 2).

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 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 (level 2).

The royalty financial liability was estimated using a discount rate that results from the estimated future repayment of
that obligation which is based on expected sales. 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 (level 3).

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CEAPRO Annual Report 2013 51

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

22.FINANCIAL INSTRUMENTS (CONTINUED)

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

A) CREDIT RISK

TRADE AND OTHER RECEIVABLES

The Company makes sales to customers that are well-established within their respective industries. Based on
previous experience, the counterparties had zero default rates and management views this risk as minimal.
Approximately 94% of trade receivables are due from two customers at December 31, 2013 and all trade receivables
are current. These main customers present good credit quality and historically have a high quality credit rating.

Other receivables represent amounts due for research program claims, government goods and services taxes, and
scientific and research tax credits. Management has assessed the credit risk to be low.

CASH AND CASH EQUIVALENTS

B) LIQUIDITY RISK

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

Accounts payable and accrued
liabilities

Loan payable secured by certain
intellectual property due
January, 2019.

Loan payable secured by a general
security agreement due
April, 2019.

Long-term debt, including interest

Royalties interest payable

Royalty financial liability

Repayable CAAP funding

Total

0 - 1 Year
$

1 - 3 Years
$

4 - 7 Years
$

8 - 12 Years
$

994,408

–

288,234

628,873

655,077

85,169

200,082

31,631

106,692

83,883

1,790,099

255,507

400,164

–

167,766

1,452,310

298,092

216,756

–

335,536

1,505,461

–

83,883

Total
$

994,408

1,572,184

638,768

817,002

31,631

106,692

671,068

4,831,753

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52 CEAPRO Annual Report 2013

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

C) MARKET RISK

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.

Financial assets

Accounts receivable

Financial liabilities

CARRYING
AMOUNT
(USD)

FOREIGN EXCHANGE RISK (USD)

(cid:4)1%

+1%

EARNINGS & EQUITY

231,017

2,310

(2,310)

Accounts payable and accrued liabilities

219,405

Total increase (decrease)

(2,194)

116

2,194

(116)

The carrying amount of accounts receivable and accounts payable and accrued liabilities in USD represents the
Company’s exposure at December 31, 2013.

(2) INTEREST RATE RISK

The Company has minimal interest rate risk because its long-term debt agreements are all at fixed rates.

23. 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.

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, 2013.

24. 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, 2013, the Company
received $9,166 (2012 – $32,083) which was recorded as a reduction of research and product development expenses.
This agreement has now been completed.

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 current year, the Company received $62,000 (2012 – $20,750)
which was recorded as a reduction of research and project development expenses. The Company anticipates receiving
additional funding of $41,250 in 2014 under this agreement.

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CEAPRO Annual Report 2013 53

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

24. GOVERNMENT ASSISTANCE (CONTINUED)

c) 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 year
ended December 31, 2013 (2012 – $5,000). This agreement has now been completed.

d) The Company entered into Canadian Agricultural Adaptation Program (‘‘CAAP’’) repayable contribution agreements
for total possible funding of $1,339,625 receivable over the year 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 or recorded as receivable funding of $671,068 to date
under this program and no further funds are expected.

e) During the year ended December 31, 2011, the Company entered into a Contribution Agreement with 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 received $690,000 in 2013. The amount of $1,398,777 (2012 – $41,223) was recorded as a reduction of
capitalized expenditures. An amount of $160,000 is expected to be received in 2014.

f ) 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. This contribution agreement
was amended to increase the potential non-repayable contribution amount to $345,000 from $253,000 in 2013. During
the year ended December 31, 2013, the Company received or recorded as receivable the amount of $302,909
(December 31, 2012 – $42,091). The agreement is now completed.

g) During the year ended December 31, 2013, the Company entered into an agreement under the Growing Forward
2 program to provide non-repayable grant funding in an amount up to $673,000. During the current year, the Company
received or recorded as receivable the amount of $192,345. The Company anticipates receiving up to $480,655 in 2014.

25. INCOME (LOSS) PER COMMON SHARE

Year Ended December 31

2013

2012

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

Weighted average number of shares outstanding

Diluted shares outstanding

Income (loss) per share – basic

Income (loss) per share – diluted

$175,808

60,278,948

$0.00

($538,353)

60,278,948

($0.01)

For the year ended December 31, 2013, the Company’s 3,145,000 stock options outstanding 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.

26. SUBSEQUENT EVENTS

Subsequent to the year end, the Company issued 930,000 stock options to officers, directors, and employees of the
Company. The stock options have an exercise price of $0.10 per common share and expire in 10 years.

Subsequent to the year end, 125,000 options were exercised for $0.10 per common share.

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54 CEAPRO Annual Report 2013

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:: INVESTOR INFORMATION MAY 2014

DIRECTORS

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

OFFICERS

Gilles Gagnon, M.Sc., MBA
President & CEO

Branko Jankovic, CA
Chief Financial Officer
Vice President, Finance

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

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 11, 2014 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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CEAPRO Annual Report 2013 55