MANAGEMENT’S DISCUSSION & ANALYSIS During the year ended December 31, 2012, directors converted $nil (2011 – $175,000) of fees payable to nil (2011 GLYPH<H11502> 1,590,909) common shares of the Company. Directors and officers converted $nil (2011 – $70,000) of the principal amount of matured convertible debentures to 700,000 common shares of the Company. Amount payable to directors was $29,000 (2011 – $175,000). These transactions are in the normal course of operations and are measured at the amount of consideration established and agreed to by the related parties. COMMITMENTS AND CONTINGENCIES a) During the year ended December 31, 2011, the Company and its wholly-owned subsidiary, Ceapro Veterinary Products Inc. were served with a statement of claim from AVAC Ltd. alleging damages of $724,500 pursuant to a product development agreement. The Company and Ceapro Veterinary Products Inc. have filed a statement of defense to refute the claim and believe it has strong defenses to the AVAC allegations. However, at this time the outcome of the litigation is uncertain and no provisions have been made in the consolidated financial statements on account of this litigation. b) During the year ended December 31, 2012, the Company and its wholly-owned subsidiary, Ceapro Technology Inc. were served with a statement of claim from AVAC Ltd. alleging damages of $1,470,000 pursuant to two product development agreements. The Company and Ceapro Technology Inc. have filed a statement of defense to refute the claim and believe it has strong defenses to the AVAC allegations. However, at this time the outcome of the litigation is uncertain and no provisions have been made in the consolidated financial statements on account of this litigation. c) During the year ended December 31, 2008, the Company entered into a licensing agreement with the University of Guelph for an exclusive variety of a mint plant. During the year ended December 31, 2011, the Company has entered into a new licensing agreement with the University of Guelph for additional market rights for the exclusive variety of a mint plant. d) During the year ended December 31, 2012, the Company has entered into a new license agreement for a new technology to increase the concentration of avenanthramides in oats. The Company shall pay an annual royalty percentage rate of 2% of sales, payable every January 1st and July 1st, subject to a minimum annual royalty payment according to the schedule below: 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. Year Amount 2012 nil 2013 $12,500 2014 $37,500 2015 $50,000 2016 $50,000 And $50,000 each year thereafter while the license agreement remains in force. The agreement is an executory contract and therefore all royalty payments under the contract will be recognized as they become due. e) In the normal course of operations, the Company may be subject to litigation and claims from customers, suppliers, and former employees. Management believes that adequate provisions have been recorded in the accounts where required. Although it is not possible to estimate the extent of potential costs, if any, management believes that the ultimate resolution of such contingencies would not have a material adverse effect on the financial position of the Company. 22 CEAPRO Annual Report 2012