xebec adsorption inc. management's discussion and analysis ... · or dried using what is...

Xebec Management’s Discussion and Analysis 1

Xebec Adsorption Inc. Management's Discussion and Analysis Third Quarter ended September 30, 2019 November 11, 2019


Additional information relating to the Company can be found on SEDAR at www.sedar.com

The following Management’s Discussion and Analysis (“MD&A”) of Xebec provides a review of the results of operations, financial conditions and cash flows of Xebec for the period ended September 30, 2019. This discussion should be read in conjunction with the information contained in the Company’s Condensed Interim Consolidated Financial Statements and related notes for the period ended September 30, 2019 and 2018 and with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2018. Additional information can be found on SEDAR at www.sedar.com. The financial information presented herein has been prepared based on International Financial Reporting Standards (IFRS) for financial statements and is expressed in Canadian dollars unless otherwise stated. In this MD&A, unless otherwise indicated or required by the context, “Xebec”, “the Company”, “we”, “us”, “our”, “our Company”, “the Group” and “our Group” designate, as the case may be, Xebec Adsorption Inc. or Xebec Adsorption Inc. and its subsidiaries. The Company’s other subsidiaries are designated as follows: “Xebec USA” for Xebec Adsorption USA, Inc., “Xebec Shanghai” for Xebec Adsorption (Shanghai) Co. Ltd and “Xebec Europe” for Xebec Adsorption Europe SRL. Also, the fiscal year ending December 31, 2018 and those ended in prior years are sometimes designated by the terms “Fiscal 2018”, “Fiscal 2017” and so on. The information contained in this MD&A and certain other sections of this report also includes some figures that are not performance measures consistent with IFRS, such as earnings (loss) before amortization, financial expenses, other items and income taxes ("EBITDA"). The Company uses EBITDA because this measure enables management to assess the Company’s operational performance. This measure is a widely accepted financial indicator of a company’s ability to repay and assume its debt. Investors should not regard it as an alternative to operating revenues or cash flows, or a measure of liquidity. As this measure is not established in accordance with IFRS, it might not be comparable to those of other companies. The information contained in this Management’s Report accounts for any major event occurring up to November 11, 2019, the date on which the Board of Directors approved the Condensed Interim Consolidated Financial Statements and Management’s Report for the period ended September 30, 2019. It presents the Company’s status and business context as they were, to management’s best knowledge, at the time this report was written. This document contains forward-looking statements, which are qualified by reference to, and should be read together with, the “Forward-looking Statements” cautionary notice on page 33 of this MD&A.

http://www.sedar.com/


Contents

1 OUR BUSINESS ............................................................................................................ 5

1.1. About Us .................................................................................................................................. 5

1.2. Vision, Mission, Purpose, People ............................................................................................ 6

1.3. Our Products ............................................................................................................................ 6

1.4. Our Customers and Suppliers .................................................................................................. 7

1.5. International Footprint ............................................................................................................. 7

1.6. Technology .............................................................................................................................. 8

1.7. International Certifications ...................................................................................................... 9

2 OUR BUSINESS SEGMENTS .......................................................................................... 9

2.1. CLEANTECH SYSTEMS ..................................................................................................... 10

2.1.1. Renewable Natural Gas (RNG) and Renewable Hydrogen (RH2) Market Size ........... 11

2.1.2. Product Line ................................................................................................................... 13

2.2. INUSTRIAL SERVICE AND SUPPORT............................................................................. 13

2.2.1. Market Size for Xebec’s Industrial Products ................................................................. 13

2.2.2. Product Line & Services ................................................................................................ 13

2.3. INFRASTRUCTURE (RENEWABLE GAS GENERATION) ............................................ 14

3 BUSINESS STRATEGY ................................................................................................. 14

3.1. External Business Drivers ...................................................................................................... 15

3.2. Path to Sustainable Growth .................................................................................................... 15

3.2.1. Key Milestones in 2019 ................................................................................................. 15

3.2.2. Strategy Moving Forward .............................................................................................. 15

1. Build & Market Renewable Gas Solutions ............................................................................ 15

3.3. Results 2019 ........................................................................................................................... 16

4 OPERATING RESULTS ................................................................................................ 17

5 FINANCIAL CONDITION ............................................................................................. 20

6 SUMMARY OF QUARTERLY RESULTS ......................................................................... 22

7 LIQUIDITY AND CAPITAL RESOURCES ......................................................................... 22

8 OUTSTANDING SHARE DATA ..................................................................................... 24

9 SUBSEQUENT EVENT ................................................................................................. 24

10 CRITICAL ACCOUNTING ESTIMATES ........................................................................... 24

11 CHANGES IN ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS ........... 26

12 OUTLOOK ................................................................................................................. 27


12.1. Current Market and Guidance for the remainder of 2019 .................................................. 27

12.2. Cleantech Systems ............................................................................................................. 27

12.3. Industrial Service and Support ........................................................................................... 27

12.4. Renewable Gas Infrastructure ............................................................................................ 27

12.5. Guidance for 2020 ............................................................................................................. 28

12.6. Delivery Outlook ............................................................................................................... 28

12.7. Outlook Summary .............................................................................................................. 28

13 RELATED PARTY TRANSACTIONS ............................................................................... 29

14 RECONCILIATION OF NON-IFRS MEASURES ............................................................... 29

15 ENTERPRISE RISK MANAGEMENT .............................................................................. 30

16 RISK FACTORS ........................................................................................................... 30

16.1. Macroeconomic and Geopolitical ...................................................................................... 30

16.2. Operating ........................................................................................................................... 31

16.3. Foreign Currency Exchange .............................................................................................. 32

17 FORWARD-LOOKING STATEMENTS ........................................................................... 32

18 CORPORATE GOVERNANCE ....................................................................................... 32

19 APPROVAL ................................................................................................................ 33

20 ADDITIONAL INFORMATION ..................................................................................... 33


1 OUR BUSINESS

1.1. About Us Established in 1967, Xebec has over 50 years of experience in adsorption technology, supplying more than 10,000 units to clients worldwide. Xebec specializes in compressed air and gas systems, developing products and technology solutions for environmentally responsible generation, purification, dehydration, separation, and filtration applications. Over the last 15 years, Xebec has increased its focus on renewable gas generation. Both Renewable Natural Gas (RNG) and Renewable Hydrogen (RH2) are low carbon fuel sources that are experiencing increasing demand as we take global action on climate change to reduce the use of fossil fuels.


1.2. Vision, Mission, Purpose, People

Profitable growth for a sustainable future is our purpose. Because only a profitable company will have the strength and resources to be able to support its employees, satisfy its shareholders, grow the company and the economy, and contribute positively to our society while preserving and safeguarding our environment.

Profitable growth is what drives our senior leaders to set direction, create customer focus, define clear and visible values, and communicate high expectations and goals for the organization. Our strategies, systems, and methods for achieving performance excellence are developed to stimulate innovation, build knowledge and capabilities in an environment of respect, trust, and teamwork.

Profitable growth is also the foundation for attracting and retaining talented, motivated and engaged employees. We are completely focused on building highly skilled and motivated teams that can meet the end-to-end needs of a rapidly developing company and support the evolving renewable gas industry.

• Over 130 employees to date • 16 departments in a full range of disciplines from A to Z -Assembly through Engineering to Welding

and Service • 5 engineering specialties including Electrical, Mechanical, Chemical, Industrial Design, and Process • A wealth of skills including 13 specialized degrees, 11 technical degrees, 9 masters and 6 doctorates • A culturally diverse workforce with more than a dozen languages from the global community

1.3. Our Products

• Systems and equipment to convert Biogas to Renewable Natural Gas (RNG) from agricultural digesters, source separated facilities, landfill sites and wastewater treatment plants (WWTP)

• Hydrogen Purification systems for fuel cell and industrial applications • Systems for renewable Hydrogen generation from Renewable Natural Gas • Gas Processing Systems for removal of CO2 from Natural Gas • Natural Gas Dryers for Natural Gas Vehicles (NGV) refueling stations • Energy-efficient Compressed Air Dryers & Compressed Air and Gas Filters for a broad range of industrial

applications • Custom gas purification systems for a variety of gas streams


1.4. Our Customers and Suppliers Our technologies are deployed throughout the industrial world and cover applications as diverse as hospitals, gas utilities, food processing, and algae production, from factory floors through to upstream gas wells.

1.5. International Footprint Xebec has established a direct presence and is focused on North America, Europe, and China. But our business is global with deliveries to countries like Madagascar, Kazakhstan, Malaysia, Thailand, Japan, South Korea, France, Italy, Austria, U.S., Mexico, Colombia, and Argentina to name a few. Xebec works with several partner firms to establish a presence in new markets of interest.


1.6. Technology

• Adsorption Technology Almost all industrial gases, whether they are inert, flammable, acid, reactive, or oxidizing, can be purified or dried using what is commonly known as adsorption technology. Adsorption technology is used to remove targeted impurities or separate bulk mixtures. This technology is used in many industrial gas treatment processes including biogas separation and purification, hydrogen recovery, air separation, and oxygen enrichment for medical applications as well as drying applications for air, natural gas, carbon monoxide, carbon dioxide, sulfur dioxide, acetylene, propylene, propane, and syngas.

• Pressure Swing Adsorption (PSA) Systems Xebec's proprietary technology replaces the complex and bulky network of piping and valves used in conventional Pressure Swing Adsorption (PSA) systems with two compact, integrated valves. Especially for biogas to RNG, Xebec’s advanced biogas upgrading systems improve methane recovery rates, reduce operating costs and, consequently, improve the profitability of the project for the owner. Xebec's rotary valve technology is also integrated into some of its advanced hydrogen and gas purification products which operate at significantly higher cycle speeds (up to 50 cycles/minute) than conventional PSA systems. This results in a direct reduction in the amount of adsorbent material, the size of the equipment and the amount of energy required to purify a given volume of feed gas. Xebec has the most compact, economical and reliable PSA systems available on the market. With minimal pressure drop, remarkable uptime performance, and occupying a fraction of the footprint of conventional systems, Xebec PSA systems have earned a reputation for easy, flexible installation and problem-free, economic performance.


Proprietary-proven technology Lowest life cycle cost equipment and systems Reliable, quality reputation with thousands of adsorption units in the field In-house capabilities in every relevant engineering discipline and complete production

expertise A unique, win-win business model: sell core technology to partners for them to develop

and serve local markets while Xebec drives aftermarket revenue with its proprietary technology, or offer complete systems to end-users in clearly identified markets

Commercial readiness to take advantage of opportunities driven by government incentives as well as regulations to curb CO2 emissions in transportation

• Filtration Technology

Air and gas filters are used to separate liquid droplets, particles or solid contaminants, and oil vapor out of air and gas flows. Xebec offers a range of specialized filters, including natural gas filters for onboard natural gas-fueled vehicles.

1.7. International Certifications Xebec has obtained a variety of product and process certifications for the delivery of its products and systems in several different jurisdictions, including Europe, North America, and China.

2 OUR BUSINESS SEGMENTS


2.1. CLEANTECH SYSTEMS Renewable Natural Gas (RNG) RNG is the most important opportunity for Xebec in the immediate term. Climate change is driving the energy transition toward 100% renewables, including the displacement of fossil natural gas with RNG. As much as wind and solar have been the prevalent renewable energy over the past 20 years, we are now at the cusp of similar explosive growth for renewable natural gas. Climate change is the macroeconomic driver for the adoption of renewable, zero-carbon energy, but for RNG we are seeing an additional driver for its adoption, namely gas utilities. As electricity utilities are successfully shifting to renewable solar and wind energy, gas utilities are 20 to 25 years behind in their adoption of renewable energy. It is leaving them in a precarious position as they face declining demand for their products and services, driven by an acceleration toward electrification of their customer base, especially in home-heating, water heaters, and gas stoves. Investors in gas utilities are starting to see the prospect of significant losses and hundreds of billions of dollars of stranded gas assets if the business model does not shift quickly towards renewable gases. The good news is the increasing alignment between policymakers and gas utilities to support this shift towards renewable natural gas with appropriate legislation and regulation. In Europe, several countries have announced targets to be completely fossil fuel-free by 2050, implying a complete shift to 100% renewable natural gas. Accordingly, gas utilities are assessing their transition timelines and some major energy players in Europe, like Engie in France (former Gaz de France), have announced their own plans to be 100% renewable gas by 2050. The transition toward 100% RNG will involve 3 phases. It starts with anaerobic digestion (organic waste converted to RNG), followed by pyro-gasification (the conversion of cellulosic forestry waste to RNG), followed by Power-to-Gas or P2G (the conversion of electricity to gas for energy storage). Xebec has a position in each of these commercial opportunities, either through gas purification or through methanation technology which is applicable to P2G.


Hydrogen and Renewable Hydrogen (RH2) Xebec considers hydrogen purification for fuel cell applications and Renewable Hydrogen as fuel for Fuel Cell Electric Vehicles (FCEV) to be another significant major opportunity over the next decade and beyond. As fuel cells gain traction, the market will look for specialized purification solutions in a compact design. Xebec is already working with several fuel cell manufacturers in Europe, North America and China to provide such equipment to their refueling and/or hydrogen production equipment. Xebec has also formed partnerships in the hydrogen space that will allow Xebec to offer integrated systems, from hydrogen generation to refueling, namely with FuruiHP in China, and JNK Heaters in South Korea. In Shanghai, Xebec Joint Venture partner, Shenergy Energy, has been nominated to build-out the Shanghai hydrogen refueling infrastructure Hydrogen generation and purification opportunities in China are currently found primarily in the refinery and petrol-chemical industries for off-gas purification. China will most likely emerge as the fuel cell leader over the next 10 years with plans to deploy 1 million FCEVs by 2030 and with a refueling infrastructure target of over 1,000 hydrogen refueling stations. Xebec China is already well positioned to actively promote our technology and capabilities. Xebec’s revenue growth over the last 18 months in China has been driven by hydrogen purification system sales. According to the Hydrogen Council, the demand for H2 will increase significantly, with impressive numbers by 2050.

2.1.1. Renewable Natural Gas (RNG) and Renewable Hydrogen (RH2) Market Size

• RNG market - for system and equipment sales currently exceeds $6B in Xebec target markets - based on announced projects Xebec estimates a potential of ~1,700 systems

• Urgency is driven by new environmental targets and governmental policy/regulations incentivizing utilities and businesses to use renewable gases. As a result, prices for RNG are anywhere from $9 to $105 MMBtu, or 3 to 30x the price of fossil natural gas

• Hydrogen market - It’s estimated that by 2050, demand in Asia and California for hydrogen will be 100 million tons per year.

• Fuel Cell & Hydrogen Energy Association’s pathway report shows by 2025, total U.S hydrogen demand could reach 13 million metric tons across applications, there could be 125,000 material-handling FCEVs in the field, and up to 200,000 light-, medium-, and heavy-duty FCEVs could travel on US roads.

• Each light duty FCEV requires about 0.5 to 1.5 kg of hydrogen per day.

http://hydrogencouncil.com/hydrogen-scaling-up-new-roadmap-launches-at-cop-23/


• The market for renewable hydrogen is expected to grow from about US$30 million currently to about US$365 million annually by 2027, excluding China. Currently, 95% of hydrogen in the U.S is created through fossil fuel sources; production worldwide equates to about 150 tons/day.

• Fossil hydrogen is produced either through electrolysis (today electricity comes mostly from coal or natural gas) or through steam methane reforming of fossil natural gas.

• Renewable hydrogen is produced through electrolysis using renewable electricity, or through steam methane reforming of renewable natural gas (upgraded biogas to renewable natural gas). Consequently, it has an extremely low carbon content compared to fossil hydrogen, making it ideal for low carbon transport fuels.

• China’s FCEV strategy is mainly focused on heavy-duty trucks and buses. They consume considerably more hydrogen than light duty FCEVs, the targeted vehicle category in North America. For trucks, we estimate approx. 5 to 7 kg per truck/day of hydrogen.

• China's installed capacity of hydrogen fuel cells has soared six-fold in the first seven months of 2019. • Organizations and countries around the world are becoming deeply invested in hydrogen such as

Hyundai’s $6.7 billion investment to boost fuel-cell output, Germany’s Green-Hydrogen research funding of €780 million, Japan’s Ministry of Economy, Trade, and Industry’s hydrogen funding of approximately $560 million for 2019

• US Department of Energy funding for hydrogen and fuel cells has ranged from approximately $100 million to $280 million per year over the last decade, with approximately $150 million per year since 2017

Low Carbon Fuels – The Renewable Natural Gas and Renewable Hydrogen Opportunity

Sources: NREL - Renewable Hydrogen Potential from Biogas in the United States, 2014, Department of Energy - https://energy.gov/eere, German Energy Agency, http://www.zevstates.us, Xinhua,

Bloomberg

http://www.zevstates.us/


2.1.2. Product Line

We offer a full suite of products based on proprietary technology in the following categories: • Biogas to renewable natural gas systems • Hydrogen purification systems • Natural gas dehydration units for refueling stations - NGX Solutions® • Solutions for the generation of renewable hydrogen (RH2), including filtration & separation products

2.2. INUSTRIAL SERVICE AND SUPPORT Xebec designs, develops, builds, and sells a range of products including compressed air dryers for industrial applications under its ADX Solutions® brand; a complete range of compressed air and gas filtration products under its FSX Solution® brand; as well as alternative brand replacement parts. With 50+ years of global experience servicing our 9,000+ units and 200+ gas installations, service, maintenance and operational support round out Xebec service offerings. With our current focus on renewable gas upgrading projects, our ability to provide local service and support is a foundational component to our future strategy and will become a key competitive differentiator. Key Notes:

• Xebec has established a roll-up strategy focused on acquiring small to mid-sized Compressed Air and Gas service businesses ($5-10 million revenue) throughout Canada and the U.S. to create a leading Compressed Air & Gas distribution business, capable of supporting North American renewable gas installations.

• Xebec can capitalize on this historically high margin business that creates a significant recurring revenue base from sales of parts and service to over 9,000 currently operating global installations

• Xebec has invested heavily over the last few years in product development of additional purification products that can be sold to existing and new customers, thanks to its strong reputation for quality

• Xebec is the only Canadian manufacturer of gas adsorption systems with a full product portfolio and all necessary Canadian and Provincial certifications (CRN, CSA etc.) and is well positioned for growth

2.2.1. Market Size for Xebec’s Industrial Products

• U.S. Market approx. USD$700 to USD$800 million • Canadian Market for Xebec products approx. $60 to $70 million, of which Xebec currently has a 15%

market share, with a target of 30% by 2021

2.2.2. Product Line & Services

• Compressed Air and Gas Dryers • Compressed Air and Gas Filters


• Spare Parts and Replacement Filter Elements • Dew-point Probes and Calibration Services

2.3. INFRASTRUCTURE (RENEWABLE GAS GENERATION) Activity in this segment is being driven by newly established renewable gas requirements in two Canadian provinces, combined with continuing efforts by the Canadian federal government to introduce a low carbon fuel standard, now targeted to come into force by mid 2020 (Canadian Clean Fuel Standard (CFS)). Xebec has started to identify locations and partners for the deployment of several high-quality renewable gas assets to produce low carbon RNG that can not only fill the current provincial requirements but also the future requirements under the potential federal legislation. The concept:

• Xebec develops, sets up, owns and operates - Build, Own, Operate (BOO) • Xebec signs off-take agreements with gas utilities and other third-party off-takers • Xebec enters into supply agreements with feedstock suppliers • Xebec provides financing – debt and equity • Xebec chooses sites where feedstock is easily available & gas interconnectivity is nearby • Xebec applies and receives all regulatory permits to erect and operate a plant

3 BUSINESS STRATEGY


Xebec’s goal is to profitably grow revenue and earnings, building a sustainable business that will drive shareholder value. 3.1. External Business Drivers

• Accelerating global warming and climate change is driving a transition from fossil energy sources towards renewable, zero-carbon energy.

• Continued build-out of clean natural gas refueling infrastructure in the U.S., Canada, and Europe combined with rapidly increasing demand for renewable natural gas as a transportation fuel.

• Implementation of low carbon fuel standards (LCFS) driving demand for renewable natural gas and hydrogen as a low carbon transportation fuel and establishment of RNG assets.

• Increasing demand for small scale decentralized hydrogen production and purification solutions for fuel cell applications in transport and industrial applications

• Hydrogen purification technologies poised to experience robust growth in the U.S., China, Japan, Canada, Germany, and India in refining and electronics industries (industrial applications)

• Increasing demand for Compressed Air and Gas equipment across the food & beverage, medical and pharma industries that can deliver cleaner, purer, oil-free, dry and sterile compressed air

• Acquisition opportunities in the Industrial Products segment driven by the retirement of owners of target companies that fall into the “boomer” category

3.2. Path to Sustainable Growth

3.2.1. Key Milestones in 2019

• On Sept 11th, 2019 Xebec announced $11.7 million in renewable gas contracts • On July 4th, 2019 Xebec announced the closing of an oversubscribed $11,592,000 bought deal financing • On June 11th, 2019, Xebec announced a $10 million bought deal public offering of units • On March 12th, 2019, Xebec announced that it has signed a $6+ million contract for a landfill biogas

upgrading plant in Italy, to be delivered in late 2019. Fully operational, it will produce ~5 million m3 of carbon-neutral Renewable Natural Gas (RNG) annually, replacing the equivalent of approx. 5 million liters of diesel fuel.

• On January 28th, 2019, Xebec announced that its first project in Italy – a biogas upgrading plant in Modena, Italy - is now operational. The AIMAG installation is successfully producing revenue-generating pure biomethane, also known as renewable natural gas (RNG), for injection into the local gas grid of AS RETIGAS. The biogas is produced from the anaerobic digestion (AD) of source-separated municipal organic waste.

3.2.2. Strategy Moving Forward

1. Build & Market Renewable Gas Solutions

• Expand RNG opportunities in France, Italy, Spain, California, and Canada (incl. BOO) • Focus on Hydrogen Purification for Fuel Cells (refinery off-gas applications in China) • Continue to grow national & Int’l partnerships


2. Drive Recurring Revenue

• Through increased sale of filtration, parts & service products • Optimize supply chain network • Continue to deploy an acquisition strategy for service companies in Canada and select U.S. locations

3.3. Results 2019 • For the nine-month period ended September 30, 2019, Xebec reports revenues of $35.7 million, a

$21.6 million increase compared to the same period in 2018, a 153% increase • Order bookings increased from $63.5 million as of August 12, 2019, to $71.0 million, representing a

11.8 % increase. (Note: $43.0 million to be delivered over two years) • Net profit for the nine-month period ended September 30, 2019, is $2.5 million, representing an EPS

of 0.04 compared to a net loss of $1.9 million representing a negative EPS of (0.04) for the same period last year

• Working capital increased from $2.4 million as at September 30, 2018, to $18.9 million as at September 30, 2019 (current ratio increases from 1.29 to 2.33)

• Quick Ratio increased from 1.18 as at December 31, 2018, to 2.03 as at September 30, 2019


4 OPERATING RESULTS

Highlights for the three-month period ended September 30, 2019, compared to the three-month period ended September 30, 2018 Revenues increase by $7.57 million to $13.15 million for the three-month period ended September 30, 2019, compared to $5.58 million for the same period the prior year. The increase is due to a higher volume of major cleantech contracts.

Selected Financial Information(in mill ions of $)

For the three-month period For the nine-month period ended September 30, ended September 30,

2019 2018 2019 2018

Systems 10.65 4.32 27.39 9.40 Support 2.50 1.26 8.30 4.72 Total revenue 13.15 5.58 35.69 14.12 Total COGS 9.12 3.84 24.32 9.95 Gross margin 4.03 1.74 11.37 4.17

Gross Margin % 31% 31% 32% 30%

Research and Development expenses 0.02 0.04 0.06 0.08 Selling and administrative expenses 2.73 1.76 7.68 4.89 (Gain) loss on foreign exchange (0.03) 0.17 0.19 0.17 (Gain) Loss on conversion of shares issued by a subsidiary (0.12) (0.22) (0.28) (0.10)

Operating profit (loss) 1.43 (0.01) 3.72 (0.87)

Finance expenses 0.38 0.40 1.23 1.03 Income taxes - - - -

Net profit (loss) 1.05 (0.41) 2.49 (1.90)

Net profit (loss) per share 0.02 (0.01) 0.04 (0.04)

AJUSTED EBITDA (1) 1.54 0.11 4.36 (0.04) Cash used in operating activities (0.72) 0.03 (3.55) (0.75) Cash and cash equivalents 10.24 0.87 10.24 0.87 Working capital 18.98 2.41 18.98 2.41 Total Assets 38.32 11.36 38.32 11.36 Total non-current liabilities 8.51 8.38 8.51 8.38

(1) EBITDA is Non-IFRS measure. Refer to section 13 - Reconcil iation of Non-IFRS Measure.


Gross margin increases from $1.74 million to $4.03 million.

Selling and administrative expenses (“SG&A”) for the three-month period ended September 30, 2019, of $2.73 million are higher by $0.97 million compared to $1.76 million for the same three months of 2018. This is primarily due to an organizational scale-up of employees and associated costs to support the increased level of sales, order backlog and building quote log. The SG&A ratio to sales decreased by 11 % to 21% in the three-month period ended September 2019, compared to 32 % in the same three months of 2018. Net profit of $1.05 million or $0.02 per share increases from $(0.41) million or $(0.01) per share in the three-month period ended September 30, 2019, compared to the same period the prior year. The increased profit mainly due to higher sales. EBIDTA increase to $1.54 million for the three-month period ended September 30, 2019, from $ (0.09) million for the same period last year.

Highlights for the nine-month period ended September 30, 2019, compared to the nine-month period ended September 30, 2018 Revenues increase by $21.57 million to $35.69 million for the nine-month period ended September 30, 2019, compared to $14.12 million for the same period the prior year. The increase is due to a higher volume of major cleantech contracts and the addition of CAI to our consolidated results. Gross margin increases from $4.17 million to $11.37 million, or 32% of revenue, from 30% of revenue. The Company has higher margins in the Cleantech segment.

Selling and administrative expenses (“SG&A”) for the nine-month period ended September 30, 2019, of $7.68 million are higher by $2.79 million compared to $4.89 million for the same nine months of 2018. This is primarily due to an organizational scale-up of employees and associated costs to support the increased level of sales, order backlog and building quote log. The SG&A ratio to sales decreased by 13 % to 22 % in the nine-month period ended September 30, 2019, compared to 35 % in the same nine months of 2018. Net profit of $2.49 million or $0.04 per share increases from $(1.90) million or $(0.04) per share in the nine-month period ended September 2019, compared to the same period the prior year. The increased profit mainly due to higher sales and margin. EBIDTA increase to $4.36 million for the nine-month period ended September 30, 2019, from $ (1.31) million for the same period last year. CURRENT BACKLOG The order backlog is calculated considering contracts received and considered as firm orders. Current backlog as of November 11, 2019:

Business Segment:

In million of $

November 11, 2019

August 12, 2019

May 27, 2019

April 16, 2019

November 8, 2018

Support 2.7 1.6 2.8 5.7 2.2 System 68.3 (1) 61.9 (1) 69.1 (1) 72.6 (1) 63.3 Infrastructure - - - - -

Consolidated Backlog 71.0 63.5 71.9 78.3 65.5


(1) Firm order commitment of $43 million to be delivered over two years

Business Segment Review We report our results in three business segments - Systems, Support and Infrastructure. Our reporting structure reflects the way we manage our business and how we classify our operations for planning and measuring performance. The corporate office and administrative support are reported under Corporate and Other. Systems - Cleantech

Revenues increase by $6.3 million for the three-month period ended September 30, 2019 and increase by $18.0 million for the six-month period ended September 30, 2019. The increase is mainly due to additional major contracts. Gross Margin % increases for the three-month period ended September 30, 2019, to 32% compared to 30% in the same period of 2018 and increases to 32% from 30% for the nine-month period ended September 30, 2019 compared to the same period the prior year. SG&A Expenses for the three-month period ended September 30, 2019, increase by $0.2 million to $0.5 million in the Systems segment. For the nine-month period SG&A expenses increase by $0.6 million compared to the same period the prior year from $0.8 million to $1.4 million. The increase is mainly due to market related consultant fees Support – Industrial Products and Service

(in millions of $)

For the three-month period For the nine-month period ended September 30, ended September 30,

2019 2018 2019 2018Revenues 10,65 4,32 27,39 9,40 COGS 7,27 3,06 18,55 6,97 Gross margin 3,38 1,26 8,84 2,43 Gross Margin % 32% 30% 32% 30%Research and Development expenses 0,02 0,04 0,06 0,08 Selling and administrative expenses 0,50 0,29 1,36 0,80 Segment gain 2,86 0,93 7,42 1,55

(in millions of $)

For the three-month period For the nine-month period ended September 30, ended September 30, 2019 2018 2019 2018

Revenues 2.50 1.26 8.30 4.72 COGS 1.86 0.79 5.77 2.98 Gross margin 0.64 0.47 2.53 1.74 Gross Margin % 26% 37% 30% 37%Selling and administrative expenses 0.44 0.20 1.57 0.64 Segment gain 0.20 0.27 0.96 1.10


Revenues increase by $1.24 million to $2.50 million for the three-month period ended September 30, 2019 and increase by $3.58 million to $8.30 million for the nine-month period ended September 30, 2019. The increase is mainly explained by the acquisition of CAI and some organic growth. Gross Margin increase by $0.17 million to $0.64 million for the three-month period ended September 30, 2019 and increase by $0.79 million to $2.53 for the nine-month period ended September 30, 2019. The gross margin % decrease to 26% for the three-month period ended September 30, 2019, compared to 37% at the same period last year. For the nine-month period ended September 30, 2019, gross margin decreases to 30% compared to 37% at the same period last year. The decrease is mainly explained by some higher operating costs and an inventory adjustment. SG&A Expenses for the three-month period ended September 30, 2019, show an increase of $0.2 million compared to the same period last year. For the nine-month period SG&A expenses increase by $0.9 million compared to the same period las year. This increase is mainly due to the integration of the new subsidiary. Infrastructure - Renewable Gas Generation This segment has no reportable activities for the nine-month period ended September 30, 2019. Corporate and Other

5 FINANCIAL CONDITION Summary Balance Sheet

The increase in the company’s total assets between September 30, 2019, and December 31, 2018, represents

(in millions of $)

2019 2018 2019 2018Selling and administrative expenses 1.79 1.27 4.75 3.44 Foreign exchange loss (gain) (0.03) 0.17 0.19 0.17 Loss on conversion of shares issued by a subsidiary (0.12) (0.22) (0.28) (0.10) Total 1.64 1.22 4.66 3.51 Financial income - - (0.02) - Financial expense 0.38 0.40 1.24 1.03 Finance loss 0.38 0.40 1.22 1.03 Corporate Expenses 2.02 1.62 5.88 4.54

For the nine-month periodFor the three-month periodended September 30, ended September 30,

September 30, December 31,

2019 2018

Current assets 33,237 14,404 Non-current assets 5,083 687

38,320 15,091 Current liabilities 14,254 9,145 Non-current liabilities 8,509 6,566 Shareholders’ equity 15,557 (620)

38,320 15,091

In thousands of $


$23.23 million. This is mainly due to the increases in trade and other receivables of $11.8 million, an increase of $0.72 million in the inventory, an increase in the asset acquired under right-of-use of $1.90 million and of $1.09 in the intangible assets, the goodwill of $1.28 million and an increase in cash and cash restricted of $6.32 million. The increase in liabilities of $7.05 million is mainly explained by the increase of the lease rental obligation of $2.10 million, an increase in the trade, other payables and accrued liabilities of $6.08 million, and an actualized earn-out to be paid following an acquisition of $0.58 million partially compensated by a decrease of $1.09 million in deferred revenues. On January 1st, 2019 the company adopted IFRS 16 Leases (“IFRS 16”), which replaces IAS 17, which specifies how the Company recognizes, measures, presents and discloses leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. Working capital amounted to $18.98 million for a current ratio of 2.33:1 as at September 30, 2019, compared with working capital of $5.26 million and a 1.58:1 ratio as at December 31, 2018. Shareholders’ equity totals $15.56 million as at September 30, 2019, an increase of $16.18 million from December 31, 2018. The change is mainly due to the proceeds of $10.3 million from the shares issued from the public offering and the proceeds of $2.41 from the warrant issued of and a net profit for the nine-month period ended September 30, 2019, of $2.49 million. Indebtedness

Total Indebtedness The total Indebtedness amounts to $10.51 million as at September 30, 2019, an increase of $2.12 million compared to December 31, 2018, mainly explained by the increase of the lease rental obligation of $2.10 million and an actualized earn-out to be paid following an acquisition of $0.58 million. Capital Stock Information The authorized share capital of the Company consists of an unlimited number of common shares and an unlimited number of preferred shares. As at September 30, 2019, Xebec Adsorption Inc. had 69,794,704 common shares issued. Share Purchase Warrants Outstanding As at September 30, 2019, the Company had 11,909,349 warrants outstanding. 8,776,800 warrants were issued in 2019.

September 30, December 31,

2019 2018

Bank loans - - Short-term debt 2 148 2 077 Long-term debt 8 359 6 310

10 507 8 387

In thousands of $


Stock Options Outstanding The Company Stock Option Plan (the “Plan”) allows for the issuance of stock options. Under the terms of the Plan, stock options are granted with an exercise price not less than the discounted market price (as such terms are defined in the Policies of the TSX Venture Exchange) of the common shares at the time of grant. Stock options generally vest quarterly over four years and are exercisable for five or seven years from the date of grant. The Board of Directors, with the approval of the shareholders of the Company at the annual meeting held on June 13, 2019, has amended the Plan in order to change the relevant provisions therein so that the aggregate number of common shares reserved for issuance under the amended plan be fixed at 11,505,347 common shares (being 16% of all issued and outstanding common shares of the Company). As at September 30, 2019, the Company had 4,889,925 options outstanding under the Plan with a weighted average exercise price of $0.32. 6 SUMMARY OF QUARTERLY RESULTS

7 LIQUIDITY AND CAPITAL RESOURCES

Analysis of principal cash flows for the nine-month period ended September 30, 2019 Operating activities in the three-month period ended September 30, 2019, used $0.72 million of cash, compared to $0.03 million of cash received for the same period in 2018, a difference of $0.75 million. The use of cash for the nine-month period ended September 2019, is mainly explained by an increase in trade and other receivables of $11.07 million and deferred revenues of $1.09 partially compensated by an increase of account payable of $5,41 and by net income of $2.49 million. Investing activities Cash outflow of $2.87 million for the nine-month period ended September 2019, relates mainly to a company acquisition for an amount of $1.46 million an acquisition of intangible asset for an amount of $1.20 million.

2017Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4

Revenues 13,153 12,766 9,769 6,092 5,584 5,317 3,215 3,259

Net income (loss) 1,048 1,017 423 (1,009) (410) (114) (1,372) (928)

Earnings (loss) per shareBasic 0.02 0.02 0.01 (0.02) (0.01) (0.003) (0.03) (0.020)

Diluted 0.01 0.02 0.01 (0.02) (0.01) (0.003) (0.03) (0.02)

In thousands of $,except net earnings (loss) per share

20182019

Cash flow from (used in)

in thousands of $ 2019 2018 Change 2019 2018 Change

Operating activities (721) 26 (747) (3,551) (754) (2,797) Investing activities (1,226) (18) (1,208) (2,866) (135) (2,731) Financing activities 11,021 231 10,790 12,809 444 12,365

For the three-month period ended September 30

For the nine-month period ended September 30,


Financing activities for the nine-month period ended September 2019, resulted in a cash inflow of $12.85 million explained mainly by the proceeds from issuance of share capital. Contractual Obligations

Credit Facilities The Company has access to credit facilities in the amount of $2,000,000 with National Bank of Canada which are guaranteed by Export Development Canada at 75%, and bear interest at the Canadian Prime Rate plus 2.75% per annum and are limited by certain margin requirements concerning trade and other receivables and inventories. The credit facilities were not used as at September 30, 2019. (December 31, 2018 – $ NIL). The credit facilities are secured by a first ranking hypothec of $2,100,000 on all movable property of the Company. As of September 30, 2019, the company has a guarantee facility of $12,000,000 with National Bank of Canada sponsored at 100% by Export Development Canada. Stand by fees at an annual rate of 0.75% are calculated on the unused portion of this operating credit. As at September 30, 2019, the guarantee facilities are used for a total of $4,991,787 (1,784,216 at December 31, 2018). The Company has a $2 million, three-year term, working capital line bearing interest at the rate of 11% per annum, payable every month. The Company has an unused PO facility of $9,000,000 that has been granted in order to assist in financing working capital needs directly associated with specific export contracts. It is available in multiple advances in Canadian dollars up to 70% of the supported export contract, excluding all applicable taxes, minus all customer advanced payments. The Company will repay to EDC outstanding advances in principal bi-monthly in an amount equivalent to cash receipt from Customers for the supported export contracts. Interest are calculated and payable in arrears at a rate of 11% per annum the 18th day of every month. During the quarter, 8,865,709 common shares were issued due to share issuance, warrants and debentures conversion. As at September 30, 2019, the Company had unsecured convertible debentures, maturing November 15, 2019, for aggregate gross proceeds of $1,394,149 outstanding. The debentures bear interest at a rate of 8% per annum. The debentures may be converted into common shares of the Company, at any time prior to the maturity date, at the request of the holder of debentures, at a conversion price of $0.65 per common share. For the nine-month period ended September 30, 2019, 930,770 common shares have been issued from conversion and 2,083,306 could still be converted.

in mill ions of $ Payments Due by Period1 year 2 -5 years Beyond 5 years Total

Operating leases 0.10 0.11 - 0.21

Total contractual obligations 0.10 0.11 - 0.21


8 OUTSTANDING SHARE DATA

As at November 11, 2019, the following common shares and stock options were outstanding:

9 SUBSEQUENT EVENT

After the reporting period, 2,083,306 common shares have been issued as a result of the exercise of the conversion option by all the debenture holders. The common shares issued included the carrying value of the liability component to the date of the conversion. The liability amount after the conversion is $ NIL. Debentures will reach maturity on November 15, 2019.

10 CRITICAL ACCOUNTING ESTIMATES

The Company makes estimates and assumptions concerning the future that will, by definition, seldom equal actual results. The following are the estimates and judgments applied by management that affect the Company’s audited consolidated financial statements. Inventories must be valued at the lower of cost and net realizable value. A write-down of inventory will occur when its estimated market value less applicable variable selling expenses is below its carrying amount. Materials and other supplies held for use in the production of inventories are not

Number of shares Exercise

Price Expiring Date Issued and outstanding Common Shares as of November 11, 2019 72,136,610 Stock Options

258,065 100,000 200,000 400,000 400,000

2,098,193 500,000

98,667

$0.16 $0.15 $0,14 $0.55 $0.05 $0.18 $0.49 $0.55

June 12, 2020 April 25, 2021 May 29, 2021

December 19,2022 January 7, 2023

March 5, 2024 August 29, 2024

December 19, 2024 100,000 $0.60 May 14,2025 735,000 $0.70 November 19,2025 4,889,925 $0.32 Warrants 2,815,931 $1.05 May 7, 2020 8,280,000 $1.85 July 4, 2020 Compensation shares 58,018 $0.75 May 7, 2020 496,800 $1.40 July 4,2020 Fully diluted as at November 11, 2019 88,677,284


written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. This estimation process involves significant management judgment and is based on the Company’s assessment of market conditions for its products determined by historical usage, estimated future demand and, in some cases, the specific risk of loss on specifically identified inventory. Any change in the assumptions used in assessing this valuation will impact the carrying amount of the inventory and have a corresponding impact on cost of goods sold.

Impairment of internally generated intangible assets The Company performs a test for internally generated intangible assets impairment when there is any indication that internally generated intangible assets have suffered any impairment in accordance with the accounting policy stated in the summary of significant accounting policies of these consolidated financial statements. The recoverable amounts of internally generated intangible assets have been determined based on value-in-use calculations. The value in use calculation is based on a discounted cash flow model. These calculations require the use of estimates and forecasts of future cash flows. Qualitative factors, including the strength of customer relationships, the degree of variability in cash flows as well as other factors are considered when making assumptions about future cash flows and the appropriate discount rate. A change in any of the significant assumptions or estimates used to evaluate internally generated intangible assets could result in a material change to the results of operations.

Percentage of completion and revenues from long-term production-type contracts Revenues recognized on long-term production-type contracts reflect management’s best assessment by taking into consideration all information available at the reporting date and the result on each ongoing contract and its estimated costs. The management assesses the profitability of the contract by applying important judgments regarding milestones marked, actual work performed and estimated costs to complete. Actual results could differ because of these unforeseen changes in the ongoing contracts’ models. Revenue recognition for obligations in China, previously accounted for using the percentage-of-completion method no longer meet the requirements for revenue recognition over time. The comparative information for the three-month and nine-month periods ended September 30, 2018 has been adjusted to reflect IFRS 15 application.

Allowance for expected credit loss The Company recognizes the impairment of financial assets in the number of expected credit losses by means of the simplified approach, measuring impairment losses as lifetime expected credit losses the trade receivables have been assessed on a collective basis as they possess shared credit risk characteristics and have been grouped based on the days past due.

Liquidity risk The assessment of the Company’s ability to continue as a going concern and to raise enough funds to pay for its ongoing operation’s expenditures to meet its liabilities for the ensuing year involves significant judgment based on historical experience and other factors, including the expectation of future events that are believed to be reasonable under the circumstances.


11 CHANGES IN ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS IFRS 16, “Leases” On January 1st, 2019 the company adopted IFRS 16 Leases (“IFRS 16”), which replaces IAS 17, which specifies how the Company recognizes, measures, presents and discloses leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. Some of the impacts of this standard on the interim consolidated financial statements are as follow:

New right-of-use assets have been recognized for an amount of $2,222,239. Total assets amount will increase affecting ratios such as asset turnover.

New liabilities such as building liabilities have been recognized for an amount of $2,372,089. Total

liabilities amount will increase affecting its financial leverage.

Depreciation expense on the right to use asset and interest expense on the lease liability will replace the operating lease expense.

The depreciation expense is included in operating costs and interest expenses are included in financing

costs, instead of being included as operating expenses in the period incurred.

Operating profit will increase as well as EBITDA amount, EBITDA is a non-IFRS financial measure. The Company has elected to use the exemptions proposed by the standard on lease contract for which the lease term ends within 12 months as of the date of initial application, and lease contracts for which the underlying asset is of low value. Right-of-use assets have been measured at cost, including the amount of the initial measurement of the lease liability less any lease incentives received, including deferred rent. The right-of-use asset is subsequently measured at cost less accumulated depreciation and accumulated impairment losses. The depreciation is recognized in a manner consistent with existing standards for property, plant, and equipment over the lease term. Lease liabilities have been measured at the present value of the lease payments that are not paid at January 1st, 2019 over the lease payments to be made over the lease term. The lease payments are discounted using the Company’s incremental borrowing rate. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability and reducing the carrying amount to reflect the lease payments made. New right-of-use assets and lease liabilities are non-cash transactions and thus excluded from the consolidated statement of cash flows.


12 OUTLOOK

12.1. Current Market and Guidance for the remainder of 2019 Our outlook for the Cleantech segment remains unchanged from our previous guidance. Our Industrial Service and Support segment continues to grow in line with our acquisition strategy. Overall, we expect significant revenue growth in 2019. This growth includes our European and Chinese subsidiaries. Our guidance for the remainder of 2019 is based on current orders being processed plus some short-term orders through year end, mainly in our Industrial Service segment. We adjust our revenue guidance for 2019 to between $48.0 to $49.0 million and basic earnings per share (EPS) of $0.06 to $0.07.

Execution and organizational development will be a key factor for the continued successful growth of Xebec. Management recognizes this and is fully focused on operational performance and the creation of an environment that will allow the company to scale. We are working on expanding our managerial capabilities by building strong results-driven teams that will deliver on the opportunities facing us.

12.2. Cleantech Systems Our renewable gas solutions are growing in line with our expectations and delivering anticipated results. We continue to regard quotes as an early indicator for future order activity. Our quote log continues to increase and now exceeds $880.0 million and our order backlog stands at $71.0 million. Xebec has also been awarded a total of $26.0 million in tenders (including a landfill) that will be contracted into our backlog over the next 12 to 14 weeks. Landfill orders will be instrumental to our continued growth in 2020 and beyond. These numbers reflect the status as of November 11th, 2019.

We maintain our 2019 guidance for RNG systems and equipment and expect segment growth between 130% to 150% in 2019, representing revenues in the $34 to $36 million range.

12.3. Industrial Service and Support Xebec continues to pursue organic and inorganic growth opportunities in this segment and expects to double revenues from $6.1 million in 2018 to about $11 to $12 million in 2019. We are on track to hit these numbers. We have introduced new products in 2019 and will be adding further products over the coming months to help boost our overall revenues and gross margins.

Our first acquisition, Compressed Air International (CAI) in Ontario, has performed exceptionally well in the first three quarters and is on track to grow revenues by 25% this year. As previously stated, Xebec is working on its next two acquisitions and expects to announce one acquisition on the West Coast before the end of 2019.

12.4. Renewable Gas Infrastructure Canada has two provinces that currently offer renewable gas off-take agreements or GPAs (Gas Purchase Agreements) with terms of up to 20 years and prices of up to $30/GJ. The Liberal Government has just won re-election and consequently, Xebec expects the Canadian Clean Fuel Standard (CFS) to come into law by the middle of 2020. The CFS will create significant demand for RNG over the next 10 years and, according to Xebec’s own estimates, will require investment into renewable gas infrastructure of approx. $15 to $18 billion and demand for RNG systems of approx. $2.2 to $2.7 billion over the next 10 years.

In addition, Southern California Gas Company (SoCalGas) earlier this year announced a target of 20% RNG by


2030, offering further unique investment opportunities. As previously stated, Xebec is actively working on the establishment of its RNG Infrastructure business which will build, own and operate (BOO) high-quality renewable gas assets in Canada and the United States, and sell renewable natural gas to obligated parties and other third-party off-takers. Xebec continues to work towards a first project, and we continue to anticipate an announcement before year-end. No revenues or costs have yet been recorded.

12.5. Guidance for 2020 For 2020 Xebec expects continued growth and improved profitability. Given the current order backlog of $71.0 million and our $26.0 million in awarded tenders, we expect consolidated revenues for 2020 in the range of $80 to $90 million, net earnings of 7 to 9% and EBITDA margins of 11 to 13%.

More specifically, revenues in our Cleantech segment are expected to be $50 to $55 million and revenues from our Industrial Service & Support segment are expected to grow to $30 to $35 million with half attributed to acquisitions, and the rest to organic growth. Lastly, Xebec does not expect revenues to be recorded for our Renewable Gas Infrastructure segment in 2020.

12.6. Delivery Outlook Our order lead times are normally between 12 weeks to 9 months, and we enjoy good visibility over at least two to three quarters. We operate in various end markets so our delivery outlook is subject to a number of factors that are within our control, such as product availability, delivery lead times, price and market engagement initiatives, as well as a number of factors beyond our control, such as macroeconomic conditions, environmental site permits, customer project financing, feedstock availability, off-take agreements etc. As part of our annual budget planning cycle, we make several underlying assumptions regarding delivery outlook in each of our relevant market segments in order to plan capacity and appropriately allocate our resources. We have furthermore taken steps to make sure contracts in Asia reflect the necessary language to allow for revenue recognition on a percentage of completion basis, allowing us to adequately predict future revenue streams. 12.7. Outlook Summary The timing and the full realization of the opportunities under the current market environment cannot be assured or specifically established. It is, however, important to understand the magnitude of these opportunities and the transformative impact that any one of them could have on the business going forward. Over the past few years, we have taken significant steps to streamline operating and production costs, and we continue the process of strengthening our consolidated financial position. While we may still see some volatility in our revenue over the short-term, we do expect that medium to longer-term our revenue trend will continue to improve significantly. As of November 11th,, 2019, our order backlog was $71.0 million with an additional $26.0 million in awarded but not yet signed contracts, spread across our two active business segments and numerous geographical regions. It includes firm order commitments of $43 million to be delivered over two years. Xebec will be converting a portion of this backlog into revenue in 2019 but most of it will be turned into revenues in 2020. Consequently, Xebec’s 2019 guidance is $48.0 to $49.0 million in revenue and $0.06 to $0.07 of EPS. As a global company, we are subject to the risks arising from adverse changes in global economic and political conditions. Political conditions such as government commitments and policies towards environmental protection and renewable energy may change over time. Economic conditions in leading and emerging economies have been, and remain, unpredictable. In particular, currency fluctuations could have the impact of significantly reducing revenue and gross margin as well as the competitive positioning of our product portfolio. These macroeconomic and geopolitical changes could result in our current or potential customers reducing purchases


or delaying shipment which could cause revenue recognition on these products to shift into 2020 or beyond. 13 RELATED PARTY TRANSACTIONS

14 RECONCILIATION OF NON-IFRS MEASURES EBITDA

EBITDA Is not a performance measure defined under IFRS and is not considered an alternative to income from operations or net (loss) earnings. EBITDA does not have a standardized meaning and is therefore not likely to be comparable with similar measures used by other publicly traded companies. The EBITDA for the three-month period ended September 30, 2019, has amounted to $1.54 million compared to $0.11 million in the same period of 2018, an increase of $1.43 million. For the nine-month period EBITDA increase by $4.80 million from $(0.44) million to $4.36 million mostly due to sales increases and higher margins.

In thousands of $ 2019 2018 2019 2018

Marketing and professional services expenses paid to companies controlled by members of the immediate family of an officer 28 15 94 142

Total 28 15 94 142

For the three-month For the nine-monthperiod ended September 30, period ended September 30,

In thousands of $

2019 2018 2019 2018

Net income (loss) 1 048 (409) 2 488 (1 895) Depreciation of property 134 17 405 57

Amortization of intangible assets 20 42 98 105 Interest expense 221 260 665 583 EBITDA 1 423 (90) 3 656 (1 150)

Stock-based compensation expenses 105 63 335 236

Impairment of inventories (5) 47 (102) (44)

Exchange gain/loss on the obligation arising from non controll ing interest participation in a subsidiairy (116) (224) (283) (101)

Foreign exchange loss (gain) (27) 170 188 173

Accretion of debt 159 144 562 443

Adjusted EBITDA 1 539 110 4 356 (443)

Adjusted EBITDA in percentage of sales 12% 2% 12% -3%

* EBITDA is a non-IFRS financial measure.

For the three-month period For the nine-month period

ended September 30, ended September 30,


The accretion of debt for the nine-month period ended September 30, 2019, includes the accretion of the obligation arising from shares issued by a subsidiary of $0.19 million, interest and accretion on convertible debentures of $0.14 million, accretion on debt liabilities of $0.19 million and accretion on the earn-out of $0.04 million.

15 ENTERPRISE RISK MANAGEMENT Our Definition of Business Risk We define business risk as the degree of exposure associated with the achievement of key strategic, financial, organizational and process objectives in relation to the effectiveness and efficiency of operations, the reliability of financial reporting, compliance with laws and regulations and the safeguarding of assets within an ethical organizational culture. Our enterprise risks are largely derived from the Corporation’s business environment and are fundamentally linked to our strategies and business objectives. We strive to proactively mitigate our risk exposures through rigorous performance planning and effective and efficient business operational management. We strive to avoid taking on undue risk exposures whenever possible and ensure alignment with business strategies, objectives, values and risk tolerances. The following sections summarize the principal risks and uncertainties that could affect our future business results going forward and our associated risk mitigation activities. 16 RISK FACTORS An investment in our common shares involves risk. Investors should carefully consider the risks and uncertainties described below and in our Annual Information Form. The risks and uncertainties described below and in our Annual Information Form are not the only ones we face. Additional risks and uncertainties, including those that we do not know about now or that we currently deem immaterial, may also adversely affect our business. For a more complete discussion of the risks and uncertainties which apply to our business and our operating results (which are summarized below), please see our Annual Information Form and other filings with Canadian Regulatory Authorities (www.sedar.com). Our business entails risks and uncertainties that affect our outlook and eventual results of our business and commercialization plans. The primary risks relate to meeting our product commercialization milestones, which require that our products exhibit the functionality, cost, and performance required to be commercially viable against competing technologies and that we have enough access to capital to fund these activities. There is also a risk that key markets for certain of our products may not be as large as we anticipate or never develop, or that market acceptance might take longer to develop than anticipated – in particular for applications such as advanced CO2 removal from natural gas, which requires industry acceptance and uptake, or our renewable natural gas (RNG) product offering which depends on government programs and regulatory support. A summary of our identified risks and uncertainties are listed below:

16.1. Macroeconomic and Geopolitical • The uncertain and unpredictable condition of the global economy could have a negative impact on our

business, results of operations and consolidated financial condition, or our ability to accurately forecast our results, and it may cause a number of the risks that we currently face to increase in likelihood, magnitude, and duration.


• Significant markets for renewable natural gas (RNG) and other hydrogen purification products may never develop or may develop more slowly than we anticipate. This would significantly harm our revenues and may cause us to be unable to recover the losses we have incurred.

• Changes in government policies and regulations could hurt the market for our products. • Lack of new government policies and regulations for renewable energy technologies could hurt the

development of our renewable natural gas (RNG) and hydrogen generation and purification products. • We currently face and will continue to face significant competition from other developers and manufacturers

of renewable natural gas (RNG) products and hydrogen purification systems. If we are unable to compete successfully, we could experience a loss of market share, reduced gross margins for our existing products and a failure to achieve acceptance of our proposed products.

• We face competition for CO2 removal from natural gas systems from developers and manufacturers of traditional technologies and other alternative technologies.

• Rapid technological advances or the adoption of new codes and standards could impair our ability to deliver our products in a timely manner and, as a result, our revenues would suffer.

• Our articles of incorporation authorize us to issue an unlimited number of common and preferred shares. Significant issuances of common or preferred shares could dilute the share ownership of our shareholders, deter or delay a takeover of us that our shareholders may consider beneficial or depress the trading price of our common shares.

• Our share price is volatile, and we may continue to experience significant share price and volume fluctuations.

16.2. Operating • We may not be able to implement our business strategy and the price of our common shares may decline. • Our quarterly operating results are likely to fluctuate significantly and may fail to meet the expectations of

securities analysts and investors causing the price of our common shares to decline. • We currently depend on a relatively limited number of customers for most of our revenues and a decrease

in revenue from these customers could materially adversely affect our business, consolidated financial condition, and results of operations.

• Our insurance may not be enough. • Hydrogen Fuel Cell systems and applications may not be readily available on a cost-effective basis, in which

case our hydrogen generation and purification products may not find a sufficient end market and our revenues and results of operations would be materially adversely affected.

• We could be liable for environmental damages resulting from our research, development or manufacturing operations.

• Our strategy for the sale of renewable natural gas products depends on developing partnerships with OEMs, governments, systems integrators, suppliers and other market channel partners who will incorporate our products into theirs.

• We are dependent on third party suppliers for key materials and components for our products. If these suppliers become unable or unwilling to provide us with enough materials and components on a timely and cost-effective basis, we may be unable to manufacture our products cost-effectively or at all, and our revenues and gross margins would suffer.

• We may not be able to manage successfully the anticipated expansion of our operations. • If we do not properly manage foreign sales and operations, our business could suffer. • We will need to recruit, train and retain key management and other qualified personnel to successfully

expand our business. • We may acquire technologies or companies in the future, and these acquisitions could disrupt our business

and dilute our shareholders’ interests.


• We must continue to lower the cost of our renewable natural gas and hydrogen generation and purification products and demonstrate their reliability or consumers will be unlikely to purchase our products and we will therefore not generate enough revenues to achieve and sustain profitability.

• Any failures or delays in field tests of our products could negatively affect our customer relationships and increase our manufacturing costs.

• The components of our products may contain defects or errors that could negatively affect our customer relationships and increase our development, service and warranty costs.

• We depend on intellectual property and our failure to protect that intellectual property could adversely affect our future growth and success.

• Our products use flammable fuels that are inherently dangerous substances and could subject us to product liabilities.

16.3. Foreign Currency Exchange Our operating results may be impacted by currency fluctuation. 17 FORWARD-LOOKING STATEMENTS This Management Discussion and Analysis (“MD&A”) contains forward-looking statements, including statements regarding the future success of the Company’s business, technology, and market opportunities. Forward-looking statements typically contain words such as “believes”, “expects”, “anticipates”, “continues”, “could”, “indicates”, “plans”, “will”, “intends”, “may”, “projects”, “schedules”, “would” or similar expressions suggesting future outcomes or events, although not all forward-looking statements contain these identifying words. Examples of such statements include, but are not limited to, statements concerning: (i) actions expected to be undertaken to achieve the Company’s strategic goals; (ii) the key market drivers impacting the Company’s success; (iii) intentions with respect to future biogas development work; (iv) expectations regarding business activities and orders that may be received in fiscal 2018 and beyond; (v) trends in, and the development of, the Company’s target markets; (vi) the Company’s market opportunities; (vii) the benefits of the Company’s products, (viii) the intention to enter into agreements with partners; (ix) future outsourcing; (x) expectations regarding competitors; (xi) the expected impact of the described risks and uncertainties; (xii) intentions with respect to the payment of dividends; (xiii) the management of the Company’s liquidity risks in light of the prevailing economic conditions; (xiv) the Company’s cost reduction plan; and (xv) the search for additional financing over the next months. These statements are neither promises nor guarantees but involve known and unknown risks and uncertainties that may cause the Company’s actual results, level of activity or performance to be materially different from any future results, levels of activity or performance expressed in or implied by these forward-looking statements. These risks include, generally, risks related to revenue growth, operating results, industry and products, technology, competition, the economy, and other factors. Although the forward-looking statements contained herein are based upon what management believes to be current and reasonable assumptions, the Company cannot assure readers that actual results will be consistent with these forward-looking statements. Examples of such assumptions include but are not limited to: (i) trends in certain market segments and the economic climate generally; (ii) the pace and outcome of technological development; (iii) the identity and expected actions of competitors and customers; and (iv) the value of the Canadian dollar. The forward-looking statements contained herein are made as of the date of this MD&A and are expressly qualified in their entirety by this cautionary statement. Except to the extent required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements contained herein. 18 CORPORATE GOVERNANCE

33

The Board of Directors of Xebec Adsorption Inc. is comprised of five directors, three of whom are independent. 19 APPROVAL The Board of Directors of Xebec Adsorption Inc. has approved the disclosure contained in this MD&A. A copy of this MD&A will be provided to anyone who requests it. 20 ADDITIONAL INFORMATION Additional information relating to Xebec Adsorption Inc. is on SEDAR at www.sedar.com or by contacting: Xebec Adsorption Inc., 730, Boulevard Industriel, Blainville, QC, Canada, J7C 3V4 Tel : (450) 797-8700 www.xebecinc.com email : [email protected] Attention: Louis Dufour, Chief Financial Officer

http://www.sedar.com/

http://www.xebecinc.com/

mailto:[email protected]

xebec adsorption inc. management's discussion and analysis ... · or dried using what is...

Documents