MANAGEMENT’S DISCUSSION & ANALYSIS As at December 31, 2012, royalty investors received royalties equal to 2.285% (2011 – 2.285%) of revenues from product sales and royalty, license, and product development fees of active ingredients and veterinary therapeutic products and CeaProve GLYPH<H23006> , to a maximum of two times the amount invested. AVAC Ltd. receives royalties of up to 2.5% to 5% of revenues from eligible product sales, to a maximum of one and a half to two times the amount invested. Royalty expense will vary directly with fluctuations in eligible product sales, royalty, license and product development fees, product sales mix, and any new royalty interest offerings that may be completed. Finance costs decreased in the year ended December 31, 2012 in comparison with the same period of 2011 due to decreasing interest expenses on royalty financial liabilities of $6,000 and interest on a long-term loan of $6,000 as a result of lower principal due to repayments. On December 31, 2009, the Company issued secured convertible debentures for cash of $500,000. The debentures incurred interest at 8% per annum and matured on December 31, 2011. In the year ended December 31, 2011, the Company recorded interest expense on convertible debentures in the amount of $40,000 and accretion of $32,000, and for the three months ended December 31, 2011, interest was $10,000 and accretion of $9,000 versus no expenses in the year ended December 31, 2012. The Company entered into Canadian Agricultural Adaptation Program (‘‘CAAP’’) repayable contribution agreements for total possible funding of $1,339,625 receivable over the period from October 7, 2010 through September 30, 2012. During the year ended December 31, 2012, the Company voluntarily decommitted $668,557 as a result of lower anticipated project expenditures to the maximum possible funding under the agreement of $671,068. The end date for project expenditures and start date for repayments were also extended one year to September 30, 2013 and to December 31, 2014 respectively. As the contributions are non-interest bearing, the fair value at inception is estimated as the present value of the principal payments required, discounted using the prevailing market rates of interest for a similar instrument estimated to be 15% per annum. The difference between the fair value of the contributions and the cash received is accounted for as a government grant. The first payment was received in the first quarter of 2011. Accretion of the CAAP loan was $18,000 in the year ended December 31, 2012 (2011 – $4,000). Foreign exchange losses in the year ended December 31, 2012 were $29,000 in comparison with $32,000 in 2011 due to the weaknesses of the Canadian dollar versus the US dollar during the year ended December 31, 2012 in comparison with 2011. Foreign exchange gains of $9,000 in the fourth quarter of 2012 in comparison with $1,000 gains in the same period of 2011 were due to the strengthening of the Canadian dollar versus the US dollar in the fourth quarter of 2012. In 2012, the total depreciation and amortization of $293,000 (2011 – $297,000) was allocated as follows: $46,000 to general and administration expense (2011 – $35,000), $43,000 to inventory (2011 – $35,000), and $204,000 (2011 – $227,000) to cost of goods sold. The amount of depreciation and amortization in 2012 was less than in 2011 because of full amortization of some equipment. DEPRECIATION AND AMORTIZATION EXPENSES OTHER OPERATING LOSS (INCOME) Year Ended Quarter Ended December 31 December 31 $000S 2012 2011 CHANGE 2012 2011 CHANGE Foreign exchange (gains) losses 29 32 (9) (1) Other (income) expenses (5) (25) (3) (24) 24 7 357% (12) (25) GLYPH<H11502> 60% CEAPRO Annual Report 2012 17