xebec adsorption inc management's discussion and analysis ...€¦ · xebec’s people work...

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Xebec Management’s Discussion and Analysis

Xebec Adsorption Inc

Management's Discussion and Analysis

First Quarter ended March 31, 2020

May 26, 2020

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

http://www.sedar.com/

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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 March 31, 2020. This discussion should be read in conjunction with the information contained in the Company’s. Consolidated Financial Statements and related notes for the periods ended December 31, 2019 and 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 Holding USA” for Xebec Holding USA Inc., “Xebec Shanghai” for Xebec Adsorption (Shanghai) Co. Ltd, “Xebec Europe” for Xebec Adsorption Europe SRL and “CAI” for Compressed Air International Inc., “RNG Holding” for Xebec RNG Holding Inc, “GNR Bromont” for GNR Bromont L.P. Xebec Holding USA Inc. has two subsidiaries, “CDA” for CDA Systems LLC and “Xebec USA” for Xebec USA Inc. Xebec RNG Holdings Inc has two subsidiaries GNR Bromont Management Inc which is wholly owned and the 1% remaining of GNR Bromont L.P. Also, the fiscal year ending December 31, 2019 and those ended in prior years are sometimes designated by the terms “Fiscal 2019”, “Fiscal 2018” 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 May 26, 2020, the date on which the Board of Directors approved the Consolidated Financial Statements and Management’s Report for the period ended March 31, 2020. 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 37 of this MD&A.

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Table of Contents

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

ABOUT US .............................................................................................................................................. 5 VISION. MISSION. PURPOSE. PEOPLE. ..................................................................................................... 5 OUR PRODUCTS ..................................................................................................................................... 6 OUR CUSTOMERS AND SUPPLIERS .......................................................................................................... 6 INTERNATIONAL FOOTPRINT / CERTIFICATIONS ......................................................................................... 6 TECHNOLOGY ......................................................................................................................................... 7

Adsorption Technology .................................................................................................................... 7 Pressure Swing Adsorption (PSA) Systems .................................................................................... 7 Filtration Technology ........................................................................................................................ 8

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

CLEANTECH SYSTEMS ............................................................................................................................ 9 Renewable Natural Gas (RNG) ....................................................................................................... 9 Hydrogen and Renewable Hydrogen (RH2) .................................................................................. 10 Renewable Natural Gas (RNG) and Renewable Hydrogen (RH2) Market Size ........................... 10 Product Line ................................................................................................................................... 11

INDUSTRIAL SERVICE AND SUPPORT ...................................................................................................... 11 Market Size for Xebec’s Industrial Products .................................................................................. 12 Product Line & Services ................................................................................................................. 12

INFRASTRUCTURE (RENEWABLE GAS GENERATION) ............................................................................... 12

3. BUSINESS STRATEGY ................................................................................................................ 13

EXTERNAL BUSINESS DRIVERS .............................................................................................................. 13 PATH TO SUSTAINABLE GROWTH ........................................................................................................... 13

Key Milestones in 2020 .................................................................................................................. 14 Key Milestones in 2019 .................................................................................................................. 14

STRATEGY MOVING FORWARD .............................................................................................................. 14 Build & Market Renewable Gas Solutions ..................................................................................... 14 Drive Recurring Revenue ............................................................................................................... 15

1Q RESULTS 2020 ............................................................................................................................... 15

4. OPERATING RESULTS ................................................................................................................ 16

CURRENT BACKLOG AS OF MAY 20TH, 2020 ........................................................................................... 19 BUSINESS SEGMENT REVIEW ................................................................................................................ 19

Systems - Cleantech ...................................................................................................................... 19 Support – Industrial Products and Service .................................................................................... 21 Infrastructure - Renewable Gas Generation .................................................................................. 21 Corporate and Other ...................................................................................................................... 21

5. FINANCIAL CONDITION .............................................................................................................. 22

SUMMARY BALANCE SHEET ................................................................................................................... 22 INDEBTEDNESS ..................................................................................................................................... 22 TOTAL INDEBTEDNESS .......................................................................................................................... 23 CAPITAL STOCK INFORMATION .............................................................................................................. 23 SHARE PURCHASE WARRANTS OUTSTANDING ....................................................................................... 23 STOCK OPTIONS OUTSTANDING ............................................................................................................ 23

6. SUMMARY OF QUARTERLY RESULTS ..................................................................................... 24

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7. USE OF FUNDS ............................................................................................................................ 24

8. LIQUIDITY AND CAPITAL RESOURCES .................................................................................... 26

ANALYSIS OF PRINCIPAL CASH FLOWS FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2020................. 26

CONTRACTUAL OBLIGATIONS ................................................................................................................ 26 CREDIT FACILITIES ................................................................................................................................ 27

9. OUTSTANDING SHARE DATA .................................................................................................... 27

10. SUBSEQUENT EVENTS .......................................................................................................... 28

11. CRITICAL ACCOUNTING ESTIMATES ................................................................................... 29

12. CHANGES IN ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS ......... 30

13. OUTLOOK ................................................................................................................................. 32

GUIDANCE FOR 2020 ............................................................................................................................ 32 Cleantech Systems ........................................................................................................................ 32 Industrial Service & Support .......................................................................................................... 32 Renewable Gas Infrastructure ....................................................................................................... 33

DELIVERY OUTLOOK ............................................................................................................................. 33 OUTLOOK SUMMARY ............................................................................................................................. 33

14. RELATED PARTY TRANSACTIONS ....................................................................................... 34

15. RECONCILIATION OF NON-IFRS MEASURES...................................................................... 35

16. ENTERPRISE RISK MANAGEMENT ....................................................................................... 36

17. RISK FACTORS ........................................................................................................................ 36

MACROECONOMIC AND GEOPOLITICAL RISKS ......................................................................................... 37 OPERATING RISKS ................................................................................................................................ 37 FOREIGN CURRENCY EXCHANGE RISK................................................................................................... 38 CORONAVIRUS IMPACT ON GLOBAL OPERATIONS ................................................................................... 39

18. FORWARD-LOOKING STATEMENTS .................................................................................... 39

19. CORPORATE GOVERNANCE ................................................................................................. 41

APPROVAL ............................................................................................................................................ 41 ADDITIONAL INFORMATION..................................................................................................................... 41

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1. OUR BUSINESS

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 developing products and technology solutions for environmentally

responsible generation, purification, dehydration, separation, and filtration applications for

gases. Over the last 15 years, Xebec has increased its focus on renewable gas generation.

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.

Vision. Mission. Purpose. People.

Xebec’s Vision is “A world powered by clean energy”.

Xebec’s Mission is to provide sustainable end-to-end gas generation, purification and

filtration solutions that transform raw gases into marketable sources of clean and renewable

energy.

Xebec’s Purpose is profitable growth for a sustainable future as only a profitable company

will have the strength and resources to support its employees, satisfy its shareholders, grow

the company and the economy, and contribute positively to society while preserving and

safeguarding our environment.

Xebec’s People work hard to deliver profitable growth. Our senior leaders 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, diversity 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 179 employees to date

• 16 departments in a full range of disciplines from Sales, Finance, HR, Design, Engineering, Welding, Assembly, Painting, Quality, Shipping, Service and Others

• 5 engineering specialties including Electrical, Mechanical, Chemical, Industrial Design, and Process

• A wealth of skills including 30 specialized degrees (Bachelor Degree), 35 technical

degrees, 13 masters and 7 doctorates

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• A culturally diverse workforce with more than a dozen nationalities and languages from the global community

• Xebec offers inclusion and equality with 23% of its workforce being women

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 generation and 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

• Air & Gas compressors and vacuum pumps

• Custom gas purification systems for a variety of gas streams

Our Customers and Suppliers

Our technologies are deployed throughout the world and cover industries as diverse as

hospitals, gas utilities, food processing, pharmaceutical, algae production, paint shops,

garages, farms, landfills, waste processing facilities, and laboratories through to upstream oil

and gas facilities.

International Footprint / Certifications

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,

Argentina, Nigeria and South Africa to name a few. Xebec works with several partner firms to

establish a presence in new markets of interest. Xebec has obtained a variety of product and

process certifications for the delivery of its products and systems in several different

jurisdictions, including Europe, Canada, United States, and China.

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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 systems

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• Reliable, quality reputation with thousands of adsorption units in the field

• In-house capabilities in relevant engineering discipline and complete production expertise

• A unique, win-win business model: sell innovative products to partners who then 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.

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2. OUR BUSINESS SEGMENTS

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.

( source: https://www.snam.it/en/Media/Press-releases/2018/gas-for-climate.html )

https://www.snam.it/en/Media/Press-releases/2018/gas-for-climate.html

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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 us 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 two years 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.

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

RNG market - 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.

• System and equipment sales currently exceed $6B in Xebec target markets. Based on announced

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

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projects in these regions, Xebec estimates a potential of ~1,700 systems

• In addition, as the cost of the biogas products continue to decrease there is a significant market for

small scale biogas solutions globally in the sub 250-300 Nm3/hr flow rates which can be 100’s of

systems per year in each of the markets we are operating in.

RH2 market - The emerging hydrogen demand is driven by the need for hydrogen as an

energy carrier for the transportation and energy storage markets.

• 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

• 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 while a heavy-duty FCEV could use

20-50 kg/day. China's installed capacity of hydrogen fuel cells has soared six-fold in the first seven

months of 2019. China’s FCEV strategy is mainly focused on heavy-duty trucks and buses where the

hydrogen consumption is much larger and the demand for hydrogen is higher.

• As the on-road FCEV market evolves globally the need for renewable hydrogen (RH2) is expected to

grow. The renewable hydrogen can be produced through electrolysis using renewable electricity, or

through steam methane reforming of renewable natural gas (upgraded biogas to renewable natural

gas). Consequently, as seen in the figure above, it has an extremely low carbon content compared to

fossil hydrogen, making it ideal for low carbon transport fuels.

• One of the pathways to make RH2 is the reforming of RNG in a steam methane reformer. As

announced by industry participants like Nikola, Budweiser, Cummins and Hanwha there is an urgent

need to deploy a distributed hydrogen fueling infrastructure to support the launch of the heavy-duty

trucking fleets with fuel cells. The potential for on-site hydrogen generators at truck stops is

significant, and according to available data could initially be 600 to 1.000 on-site containerized SMR

units.

Product Line

We offer a full suite of products based on proprietary technology in the following categories:

• Biogas to renewable natural gas systems under the BGX Solutions® brand

• Hydrogen purification systems under the H2X Solutions® brand

• Natural gas dehydration units for refueling stations - NGX Solutions®

• Solutions for the generation of renewable hydrogen (RH2), including filtration & separation products

Industrial 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

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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 10,000+ units and 250+ 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.

• 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 NA 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

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

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

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)

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• 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.

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

Path to Sustainable Growth

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Key Milestones in 2020 • On May 11th, 2020, Xebec announced the appointment of Mr. Peter Bowie as Advisor to the Board of

Directors. He will provide strategic, corporate finance and audit advice.

• On May 6th, 2020, Xebec announced financing with a $10 million unsecured loan facility with FSTQ

• On Feb 18th, 2020, Xebec announced its first Renewable Gas Infrastructure project

• On Feb 12th, 2020, Xebec announced a $27 million U.S. Dairy Farmer project

• On Jan 20th, 2020, Xebec welcomed Mr. Brian Levitt as Advisor to the Board of Directors. He will

provide strategic, commercial and corporate finance advice to the Board and management.

Key Milestones in 2019 • On December 27th, 2019, Xebec closed a bought deal public offering of units at a price of $2.10 per

unit for aggregate gross proceeds of $23.0 million (the “Offering”)

• On December 10th, 2019, Xebec finalized its second acquisition of a California-based service business,

CDA Systems LLC (CDA). The acquisition was effective immediately

• On December 5th, Xebec announced an LOI with Maas Energy for five biogas upgrading systems

• On August 28th, 2019, Xebec qualified to trade on the OTCQX® Best Market

• On August 13th, 2019, Xebec held its first webinar with shareholders. Close to 80 analysts, investors,

media representatives and other stakeholders joined to discuss Q2 results

• In August 2019, Xebec launched the first phase of a new Enterprise Resources Planning (ERP) system

• On July 11th, 2019, Xebec announced its inclusion in the U.S. Department of Energy’s (DOE) US$24

million commitment to a public-private collaboration funding 77 energy technology projects

• On July 4th, 2019 Xebec announced the closing of an oversubscribed $11,592,000 bought deal

financing

• 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

• On January 1st, 2019 Xebec closed the acquisition of Compressed Air International in Toronto

Strategy Moving Forward

Build & Market Renewable Gas Solutions

• Expand RNG opportunities in France, Italy, Spain, California, and Canada (incl. BOO)

• Introduce and market our small scale Biostream™ units in the markets we operate in

• Focus on Hydrogen Purification for Fuel Cells (refinery off-gas applications in China)

• Continue to grow national & international partnerships

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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

1Q Results 2020

• For the three-month period ended March 31, 2020, Xebec reports revenues of $12.20 million, a $2.43

increase compared to the same period in 2019, representing a 25% increase

• Order bookings increased from $71.9 million as of May 27, 2019, to $89.8 million as at May 20, 2020

representing a 24.9 % increase. (Note: $43.0 million to be delivered over two years. The balance to be

delivered within one year)

• Net loss for the three-month period ended March 31, 2020, is $0.74 million, representing an EPS of

($0.01) compared to a net profit of $0.42 million representing an EPS of $0.01 for the same period last

year

• Working capital increased from $5.05 million as at March 31, 2019, to $39.73 million as at March 31,

2020 (current ratio increases from 1.43 to 2.87)

• Quick Ratio decreased from 2.77 as at March 31, 2019, to 2.34 as at March 31, 2020

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4. OPERATING RESULTS

COVID-19 Impact on Operating Results

Q1/20 operating results were negatively impacted by Covid-19. During March the

company experienced business closures and interruptions at its facilities in China, Italy

and California, leading to reduced revenues of approx. $3.75 to 4.00 million. In addition,

the company incurred increased costs and reduced productivity at all of its operating

facilities due to the implementation of additional health and safety measures contributing

to the reduction of revenues and gross margins. Xebec has also increased its inventory

levels to ensure continued supply of critical materials and components.

In March Xebec established a “Business Continuity Committee” that has worked

diligently to safeguard our employees, partners and suppliers and we are pleased to report

that Xebec has not experienced any Covid-19 related cases throughout its worldwide

operations.

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Selected Financial Information

(in mill ions of $)

For the three-month period

ended March 31,

2020 2019

Systems 8,01 7,06

Support 4,19 2,71

Total revenue 12,20 9,77

Total COGS 9,15 6,47

Gross margin 3,05 3,30

Gross Margin % 25% 34%

Research and Development expenses 0,01 0,01

Selling and administrative expenses 3,86 2,51

(Gain) loss on foreign exchange (0,89) (0,04)

(Gain) Loss on conversion of shares issued by a subsidiary 0,31 0,02

Operating profit (loss) (0,24) 0,80

Finance expenses 0,47 0,38

Income taxes 0,03 -

Net profit (loss) (0,74) 0,42

Net profit (loss) per share (0,01) 0,01

AJUSTED EBITDA (1) 0,44 1,01

Cash used in operating activities (0,92) (2,65)

Cash and restricted cash 24,03 0,47

Working capital 39,73 5,05

Total Assets 71,97 20,75

Total non-current liabilities 8,99 8,76

(1) EBITDA is Non-IFRS measure. Refer to section 15 - Reconciliation of Non-IFRS Measure.

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Highlights for the three-month period ended March 31, 2020, compared to the three-month

period ended March 31, 2019:

• Revenues increased by $2.43 million to $12.20 million for the three-month period ended March 31,

2020, compared to $9.77 million for the same period the prior year. The increase is due to a higher

volume of major cleantech contracts.

• Gross profit of $3.0 million or 25% of revenues for the first quarter of 2020 compared to $3.3 million

for the same quarter in 2019, a 9% decrease compared to the same period in 2019. The decrease is

mainly explained by a different product mix, an increase in amortization expenses of $0.9 million, the

disruption in the manufacturing operations in China, Italy and California caused by the COVID-19

pandemic and the resulting reduced productivity.

• Gross margin decreased from $3.30 million to $3.05 million. The decrease is mainly due to a change in

product mix between PSAs and biogas plants. As Xebec develops and deploys a wide range of biogas

plant offerings, certain developmental engineering and manufacturing costs are allocated to the

specific projects. As these plant offerings are standardized, we expect that the margins for these

biogas projects to improve. As a part of the evolution of the company we are now focused on

establishing a global supply chain strategy for our biogas offerings so that we can leverage the demand

from China, Europe and NA with a strategic set of supplier partners. The company incurred increased

costs and reduced productivity at all of its operating facilities due to the implementation of additional

health and safety measures for the COVID-19.

• Selling and administrative expenses (“SG&A”) for the three-month period ended March 31, 2020, of

$3.86 million are higher by $1.35 million compared to $2.51 million for the same three months of

2019. 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. In addition, legal, consultant and

commission fees for the acquisitions and the establishments of the Xebec Build, Own and Operate

business are reflected in these numbers.

• Net loss of $(0.74) million or $(0.01) per share decreased from $0.42 million or $0.01 per share in the

three-month period ended March 31, 2020, compared to the same period the prior year. The decrease

is attributable to a combination of higher subcontract costs and higher SG&A expenses.

• Adjusted EBIDTA decreased to $0.44 million for the three-month period ended March 31, 2020, from

$ 1.01 million for the same period last year.

19


Current Backlog as of May 20th, 2020

The order backlog is calculated considering contracts received and considered as firm orders.

(1) Firm order commitment of $43 million to be delivered over 2 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 increased by $0.95 million to $8.01 million for the three-month period ended

March 31, 2020 compared to $7.06 million for the same period the prior year. The increase is

mainly due to additional major contracts.

Gross Margin decreased by $0.82 million to $1.48 million for the three-month period ended

March 31, 2020 compared to $2.30 million for the same period the prior year. The gross

margin decreased to 18% for the three-month period ended March 31, 2020, compared to 33%

in the same period of 2019. The decrease is mainly due to a different product mix between

Business Segment

In million of $

May 20,

2020

April 14,

2020

November 11,

2019

August 12,

2019

May 27,

2019

Support 9,4 11,5 2,7 1,6 2,8

System 80,4 (1) 87,8 (1) 68,3 (1) 61,9 (1) 69,1 (1)

Infrastructure - - - - -

Consolidated Backlog 89,8 99,3 71,0 63,5 71,9

(in millions of $)

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

ended March 31, ended June 30,

2020 2019

Revenues 8,01 7,06

COGS 6,53 4,76



Research and Development expenses 0,01 0,01


Segment gain 1,15 1,89

20


PSA and BGX plants. In 2019 there were more PSAs, which have a higher margin, and less

BGX plants with a lower margin.

SG&A Expenses for the three-month period ended March 31, 2020, decreased by $0.08

million to $0.32 million in the Systems segment compared to $0.40 million for the same

period the prior year. The decrease is mainly due to lower exhibition and travel costs in the

first quarter of 2020.

21


Support – Industrial Products and Service

Revenues increased by $1.48 million to $4.19 million for the three-month period ended March 31,

2020 compared to $2.71 for the same period the prior year. The increase is mainly explained by the

acquisition of CDA and some organic growth.

Gross Margin increased by $0.57 million to $1.57 million for the three-month period ended March 31,

2020 compared to $1.00 million for the same period the prior year. The gross margin remained stable

at 37% compared to the same period last year.

SG&A Expenses for the three-month period ended March 31, 2020, increased by $0.43 million to

$0.95 million compared to $0.52 million the same period last 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 three-month period ended March 31, 2020.

Corporate and Other

(in millions of $)

For the three month period For the three-month period

ended March 31, ended June 30,

2020 2019

Revenues 4,19 2,71

COGS 2,62 1,71




Segment gain 0,62 0,48

(in millions of $)

2020 2019


Foreign exchange loss (gain) (0,89) (0,04)

Loss on conversion of shares issued by a subsidiary 0,31 0,02

Total 2,01 1,58

Financial income (0,02) -

Financial expense 0,49 0,38

Finance loss 0,47 0,38

Income taxes 0,03 -

Corporate Expenses 2,51 1,96

For the three-mont period

ended March 31,

22


5. FINANCIAL CONDITION

Summary Balance Sheet

The increase in the Company’s total assets between March 31, 2020, and December 31, 2019,

represents $7.45 million. This is mainly due to the increase in cash and restricted cash of

$1.35 million, an increase in trade and other receivables of $1.99 million, an increase of $3.85

million in the inventory, an increase of $0.22 million of the property, plant and equipment and

of the goodwill of $0.61 million, partially compensated by a decrease of $0.67 million for the

intangible assets.

The increase in liabilities of $4.71 million is mainly explained by the increase of the deferred

revenues of $ 5.20 million partially compensated by a decrease of $1.39 million of the trade

payables and accrued liabilities.

Working capital amounted to $39.73 million for a current ratio of 2.87:1 as at March 31,

2020, compared with working capital of $36.9 million and a 3.20:1 ratio as at December 31,

2019.

Shareholders’ equity totals $41.7 million as at March 31, 2020, an increase of $2.74 million

from December 31, 2019. The change is mainly explained by a comprehensive income of

$0.56 million and the proceeds of $2.32 million from the warrants exercised from the public

offering.

Indebtedness

March 31, December 31,

2020 2019

Current assets 61 014 53 729

Non-current assets 10 957 10 789

71 971 64 518

Current liabilities 21 283 16 793

Non-current liabilities 8 991 8 768

Shareholders’ equity 41 697 38 957

71 971 64 518

In thousands of $

Indebtedness

March 31, December 31,

2020 2019

Bank loans - -

Short-term debt 1 864 1 460

Long-term debt 8 670 8 437

10 534 9 897

In thousands of $

23


Total Indebtedness

The total Indebtedness amounts to $10.53 million as at March 31, 2020, an increase of $0.64

million compared to December 31, 2019, mainly explained by the increase of $0.39 million of

the obligation arising from non-controlling interest participation in a subsidiary and an

increase of $0.25 million of an actualized earn-out to be paid following an acquisition.

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 March 31, 2020, Xebec Adsorption

Inc. had 86,195,511 common shares issued.

Share Purchase Warrants Outstanding

As at March 31, 2020, the Company had 10,258,071 warrants outstanding. 99,360 warrants

were issued in the three-month period ended March 31, 2020.

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, 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 14% of all issued and

outstanding common shares of the Company).

As at March 31, 2020, the Company had 4,081,860 options outstanding under the Plan with a

weighted average exercise price of $0.35.

24


6. SUMMARY OF QUARTERLY RESULTS

7. USE OF FUNDS

2020

Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2

Revenues 12 193 13 630 13 153 12 766 9 769 6 092 5 584 5 317

Net income (loss) (743) (468) 1 048 1 017 423 (1 009) (410) (114)

Earnings (loss) per share

Basic (0,01) (0,01) 0,02 0,02 0,01 (0,02) (0,01) (0,003)

Diluted (0,01) (0,01) 0,01 0,020 0,01 (0,02) (0,01) (0,003)

In thousands of $,

except net earnings (loss) per share

2019 2018

Public financing - December 27, 2019

Antic ipated use of

Proceeds

Actual use of proceeds as at

December 31, 2019

Mergers and Acquisitions

Funds will be used to expand product offering,

monitoring and service capabilities and support

the industrila products segment throught

potential mergers and acquistions

Working Capital

Working Capital Funds will be used for general

corporate purposes as well as for the integration

of future corporate acquistions, to increase

inventory, work in progress and to support

market development

Research and Development

Funds will be used for research and development

activities to expand the Corporation's presence in

the renewable gas space

Capital Equipment – Information Technology

and Production$500,000 -

Legal, Audit and other Fees related to the

Offering$400,000 $148 249

Total $21,620,432 $148 249

$14,170,432 -

$800,000 -

-$5,750,000

25


Use of funds as at March 31, 2020

a) On July 4, 2019, Xebec Adsorption Inc. closed a bought deal public offering of units and

listing warrants conducted by a syndicate of underwriters led by Desjardins Capital Markets

and including Beacon Securities Ltd., Paradigm Capital Inc., Canaccord Genuity Corp. and M

Partners Inc. In connection with the closing of the Offering, the Company issued a total of

8,280,000 Units, at a price of $1.40 per Unit, for aggregate gross proceeds of $11,592,000.

Each Unit is composed of one common share of the Company and one common share purchase

warrant (a "Warrant"). Each Warrant will entitle the holder thereof to acquire one additional

Common Share for a period of 12 months from the closing date of the offering at an exercise

price of $1.85 per Warrant Share.

A total of 8,280,000 units were issued under the offering at a price of $1.40 per unit for

aggregate gross proceeds of $11,592,000 for a total of 8,280,000 shares, 496,800 compensation

options and 8,280,000 warrants.

As at March 31, 2020, the Company has used $8.69 million of the net proceeds from the Public

Offering of July 4, 2019. From the net proceeds of $10.90 million, $2.77 million were used to

develop engineering processes on new projects in the renewable gas sector, $2.63 million for

the acquisition of CDA, $2.63 million for the working capital, $0.04 million for the R&D

activities, $0.26 million for the purchase of capital and information technology equipment and

$0.37 million were paid for legal, audit and other fees related to the Offering.

b) On December 27, 2019 Xebec Adsorption Inc. closed a bought deal public offering

conducted by a syndicate of underwriters led by Desjardins Capital Markets and including

Public financing - July 4, 2019

Antic ipated use of

Proceeds

Actual use of proceeds as at

December 31, 2019

New Project Development

Developing projects in the renewable gas

generation sector.

Mergers and Acquisitions

Potential mergers and acquisitions with targets in

the industrial business segments.

Working Capital $2 750 000 $2 629 595

Research and Development

Research and development activities in the energy

storage sector.

Capital Equipment – Information Technology

and Production$200 000 $255 532

Legal, Audit and other Fees related to the

Offering$400 000 $371 381

Total $10 896 480 $8 686 133

$4 396 480 $2 766 571

$2 800 000 $2 626 660

$350 000 $36 394

26


Beacon Securities Ltd., Canaccord Genuity Corp., TD Securities Inc., Paradigm Capital Inc.

and Raymond James Ltd.

A total of 10,952,600 common shares of Xebec were sold at a price of $2.10 per Common Share

for aggregate gross proceeds of $23,000,460 for a total of 10,952,600 shares and 657,156

compensation options.

At as March 31, 2020, the Company has used $0.15 million of the net proceeds from the

December 27, 2019 Offering for legal, audit and other fees related to the public offering.

8. LIQUIDITY AND CAPITAL RESOURCES

Analysis of principal cash flows for the three-month period ended March 31, 2020

Operating activities in the three-month period ended March 31, 2020, used $0.92 million of

cash, compared to $2.57 million of cash inflow for the same period in 2019, an increase of $3.49

million of the cash used. The use of cash for the three-month period is mainly explained by an

increase of $3.44 million of the inventories and an increase of $2.06 million of the trade

payables, other payables and accrued liabilities partially compensated by an increase of the

contract liabilities of $4.96 million.

Investing activities Cash outflow of $0.35 million for the three-month period ended March 31,

relates mainly to the acquisition of intangible assets for an amount of $0.27 million.

Financing activities for the three-month period ended March 31, 2020, resulted in a cash inflow

of $1.97 million explained mainly by the proceeds of $2.32 million from the warrants exercised

from the public offering.

Contractual Obligations

Cash flows from (used in)

in thousands of $2020 2019 Change

Operating activities (919) 2 572 (3 491)

Investing activities (349) (1 599) 1 250

Financing activities 1 969 433 1 536


ended March 31

in millions of $ Payments Due by Period

1 year 2 -5 years Beyond 5 years Total

Operating leases 0,20 0,12 - 0,32

Total contractual obligations 0,20 0,12 - 0,32

27


Credit Facilities

The Company has access to credit facilities in the amount of $2,500,000 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 Company also has access to credit

facilities through Compressed Air International with Toronto Dominion Bank (TD) in the

amount of $150,000 and bear interest at the TD prime rate plus 3.50% per annum. No credit

facilities were used as at March 31, 2020 ($526,982 as at March 31, 2019).

The credit facilities are secured by a first ranking hypothec of $3,000,000 on all movable

property of the Company.

As of March 31, 2020, 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% is calculated on the unused portion of this operating credit. As at March 31, 2020,

four guarantee facilities are used for a total of $7,447,322 ($1,698,225 as at March 31, 2019).

During the period ended March 31, 2020 all ratios and conditions have been respected by the

Company.

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 $23 million additional financial support obtained on July 23, 2018

from Export Development Canada (EDC), Canada’s export credit agency. The financial support

consists of a $12 million bonding facility, which will be used to support the issuance of multiple

bank guarantees. The bonding facility bears an interest at the rate of at the Canadian Prime Rate

of the Bank plus 2.50% per annum, payable every month. Stand-by fees at an annual rate of

0.75% calculated on the unused portion of the bonding facility shall be payable monthly.

The financial support is secured by a first ranking hypothec in all present and after acquired

inventory and accounts receivables related to contracts.

9. OUTSTANDING SHARE DATA

As at May 15, 2020, the following common shares and stock options were outstanding:

28


Number of shares Exercise

Price Expiring Date

Issued and outstanding Common Shares as of May 27, 2020 88,712,884

Stock Options

100,000 200,000 400,000 200,000

1,873.193 375,000

98,667

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

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

4,081,860 $0.35

Warrants 3,000,000 $4.58 May 5, 2022

6,966,177 $1.85 July 4, 2020

Compensation shares

248,400 476,438

$1.40 $2,10

July 4, 2020 Dec, 2020

Compensation warrants 298,080 $1.85 July 4, 2020

Fully diluted as at May 27, 2020 103,783,839

10. SUBSEQUENT EVENTS

On May 6th, 2020 the Company entered into a loan agreement with the Fonds de solidarité FTQ

for an unsecured loan facility of $10 million.

The loan facility has a term of 5 years and will be used for working capital, investments,

acquisitions and general corporate purposes. It will allow the Company to continue its rapid

scale-up through organic and inorganic growth and allow investments in renewable gas

infrastructure projects.

As part of the Agreement, the Fonds has been granted 3,000,000 warrants exercisable for a

period of two years from the date of closing. Each warrant will allow the Fonds to purchase one

29


common share at an exercise price of $4.58, representing a 40% premium to the 20-day volume

weighted average price as at closing of markets on May 4, 2020.

11. 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 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

30


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.

Acquisition valuation method

The Company uses valuation techniques when determining the fair value of certain assets and

liabilities acquired in a business combination. In particular, the fair value of the intangible

assets, goodwill and contingent consideration is dependent on the outcome of many variables

including the acquirees’ future profitability.

Leases

Recognizing leases requires judgment and use of estimates and assumptions. Judgement is used

to determine whether there is reasonable certainty that a lease extension or cancellation option

will be exercised. Furthermore, management estimates are used to determine the lease terms

and the appropriate interest rate to establish the lease liability.

Impairment of non-financial assets and goodwill

In assessing impairment, management estimates the recoverable amounts of each asset or cash-

generating unit based on expected future cash flows and uses an interest rate to discount them.

Estimation uncertainty relates to assumptions about future operating results and the

determination of a suitable discount rate.

12. 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 Audited consolidated financial statements are as

follows:

• New right-of-use assets have been recognized for an amount of $ 2,139,974. Total assets amount will

increase affecting ratios such as asset turnover.

31


• New liabilities such as building liabilities have been recognized for an amount of $2,278,065. 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.

32


13. OUTLOOK

Guidance for 2020

Despite the weaker than expected Q1/20 numbers, which were primarily tied to our inability to

ship products to customers and recognize revenues, Xebec expects to continue its rapid growth

and improve its profitability in 2020. As a result, the company maintains its previously

announced guidance. With the support of our strong order backlog of $89.9 million, 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 Systems 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 of the revenue attributed to acquisitions, and the rest to organic

growth. Lastly, Xebec does not expect to record revenues from our Renewable Gas

Infrastructure segment in 2020.

Cleantech Systems Due to the shutdown of our operations in China and Italy, including site construction and

commissioning activities, revenue and gross margin profitability came in lower than

anticipated. Xebec expects a stronger Q2/20 as the company’s operations in these markets have

since restarted.

We regard quote activity as an early indicator for future order activity. Our current quote log

remained static at $937.0 million (as of March 13th, 2020), and our order backlog is $89.8

million.

Xebec had recent success in the quarter with $27.0 million in U.S dairy farm orders announced

in February 2020, which will be delivered over the next few quarters. We see this as a reflection

of more customers recognizing Xebec’s competitive advantages which are lowest lifecycle

costs and local service and support offerings through our North American Xebec Service

Subsidiaries.

The company will continue to increase its effort in Europe and North America to market and

sell its new BGX Biostream™ product to gain market share in the small to medium size biogas

upgrading segment.

Industrial Service & Support Xebec continues to pursue organic and inorganic growth opportunities. The company views

acquisitions as a critical component in supporting Cleantech System’s growth by providing

service and support throughout North America.

On December 10th, 2019, we announced our 2nd acquisition as part of this strategy, and we

expect another two to three acquisitions in 2020. The targeted acquisitions are located in the

U.S and Canada.

Similar to our Cleantech Systems, the revenue growth and profitability was impacted due to

delays in product shipment to customers and restrictions providing on-site service as companies

33


regrouped with safer operating protocols. As economies begin to reopen and our acquisition

strategy continues, Xebec expects future quarters to be stronger.

Revenue in this segment is expected to triple from $11.5 million in 2019 to $30 to $35 million

in 2020, while gross margins should start improving from around 30% toward the targeted 40%

range. In the first quarter we demonstrated being on track for this target with gross margins of

37%.

Renewable Gas Infrastructure Xebec is in the final stages of formalizing its first strategic investment partnership to actively

participate in renewable gas projects in Canada. This partnership will support the growth of

companies developing renewable gas and waste recovery projects.

Xebec expects to announce this partnership within the next few days and it will be a key

milestone in allowing Xebec to rapidly scale up its efforts to invest in high-quality renewable

gas assets in Québec.

On February 18th , 2020, Xebec announced its first renewable natural gas (RNG) infrastructure

investment located in Québec, Canada. The $28 million project will be an integrated facility to

process various organic wastes to produce renewable natural gas and biofertilizer. The project

continues to progress well, and the plant is expected to be commissioned by mid- to late 2021.

This project marked the start of Xebec’s newest business segment, which aims to drive

predictable recurring and profitable revenue generation through 20-year Gas Purchase

Agreements (GPAs) with utilities, tipping fees and bio-fertilizer sales.

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.

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.

34


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 expect our medium to

longer-term revenue trend will continue to improve significantly. As of April 14, 2020, our

order backlog was $99.3 million 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 significant portion of this backlog into revenue in 2020

and the rest will be turned into revenues in 2021. Consequently, Xebec’s 2020 guidance is $80.0

to $90.0 million in revenues and $0.05 to $0.08 of EPS.

As a global company, we are subject to the risks arising from adverse changes in global

economic, political and health 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. Health conditions, like the current Covid-19 crisis have the potential to significantly

disrupt supply chain, manufacturing and sales opportunities. These macroeconomic,

geopolitical and general health condition changes could result in our current or potential

customers reducing purchases or delaying shipments which could cause revenue recognition on

these products to shift into 2021 or beyond.

14. RELATED PARTY TRANSACTIONS

In thousands of $ 2020 2019

Marketing and professional services expenses paid to companies

controlled by members of the immediate family of an officer 51 45

Salaries and short-term benefits paid to members of immediate family

of an officer 39 37

Material purchased to compagnies controlled by members of the

immediate family of an officer 9 9

Total 99 91

For the three-month

period ended March 31

35


15. RECONCILIATION OF NON-IFRS MEASURES

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 adjusted EBITDA for the three-month period ended March 31, 2020 has amounted to

$0.44 million compared to $1.01 million in the same period of 2019, a decrease of $0.57 million

mainly due to a foreign exchange loss of $0.89 million.

The accretion of debt for the three-month period ended March 31, 2020, includes the accretion

of the obligation arising from shares issued by a subsidiary of $0.07 million, accretion on debt

liabilities of $0.07 million, accretion of government royalty program obligation of $0.01 million

and accretion on the earn-out of $0.01 million.

EBITDA

In thousands of $

2020 2019

Net income (loss) (743) 423

Depreciation of property 232 131

Amortization of intangible assets 984 36

Interest expense 312 188

Income taxes 30 -

EBITDA 815 778

Stock-based compensation expenses 53 117

Impairment of inventories (6) (52)

Exchange gain/loss on the obligation arising from non

controlling interest participation in a subsidiairy 312 18

Foreign exchange loss (gain) (893) (41)

Accretion of debt 160 188

Adjusted EBITDA 441 1 008

Adjusted EBITDA in percentage of sales 4% 10%

* EBITDA is a non-IFRS financial measure.


ended March 31,

36


16. 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.

17. 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:

37


Macroeconomic and Geopolitical Risks

Global economic factors beyond our control such as sustained and far reaching negative

economic factors, more restrictive access to credit markets, the current state of the energy

markets and low fuel price differential, including the effects of the decision of Saudi Arabia to

reduce the price of its oil and to increase its production, pandemics or other outbreaks of

illness, disease or virus, such as the strain of coronavirus known as COVID-19, or other broad

economic issues may negatively affect the capital markets or market for our products, and

reduce demand for our products as partners and potential customers defer their projects. 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, such as:

• 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.

• Natural gas and oil prices are expected to remain volatile for the near future because of market

uncertainties over the supply and the demand of this commodity due to the current state of the world

economies, energy infrastructure and other factors, including Saudi Arabia’s recent decision and the

effects of COVID-19.

Operating Risks

• 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

38


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.

Foreign Currency Exchange Risk

The majority of Xebec’s revenues are in Canadian and U.S. dollars, Chinese Yuan and Euros,

while a significant portion of the operating expenses are in Canadian dollars, Chinese Yuan and

Euros. Foreign exchange gains and losses are included in results from operations. A large

decline in the U.S. dollar, Chinese Yuan or Euros relative to the Canadian dollar could impair

revenues, margins, and other financial results. Xebec has not entered into foreign exchange

contracts to hedge against gains and losses from foreign currency fluctuations.

39


Coronavirus Impact on Global Operations

The continued spread of COVID-19 around the globe and the responses of governmental

authorities and corporate entities, including through mandated or voluntary shutdowns, may

lead to a general slow-down in the economy and have led to disruptions to our work force and

facilities, our customers, our sales and operations and our supply chain.

Our bad debt expense may increase, our revenues and cash resources may be negatively

affected, and we may need to assist potential customers with obtaining financing or government

incentives to help customers fund their purchases of our products. Any temporary suspension

of production in Xebec facilities as a direct result of COVID-19 or any required suspensions of

any of Xebec’s suppliers, partners or customers may have a material adverse effect on Xebec.

Xebec’s manufacturing operations in Shanghai, China (“Xebec Shanghai”) were previously

affected by COVID-19 and were shut down for three additional weeks after the normal two-

week Chinese New Year holiday. The facility has since restarted and is now fully operational.

Over this period, the rest of the operations were working remotely to continue progress on

designs of various customer contracts. As a result, Xebec Shanghai experienced an impact on

Q1/20 revenues and earnings but does not expect a material impact on full-year 2020.

Our operations in Lombardy, Italy, were recently impacted by the mandated lockdown of the

country. Although Xebec does not have full manufacturing capabilities in Italy, projects are

mostly outsourced into the supply chain. We are now starting to see delays from suppliers based

in Northern Italy because of the transportation shutdown.

Lastly, Xebec’s operations in North America currently remain unaffected and we are operating

close to capacity. Our schedule for North American deliveries remains the same and no impact

has so far been experienced due to the coronavirus. We are working on a multitude of shipments

for the North American market as evidenced by recent contract announcements.

However, it is not possible to determine all the financial implications of these events at this

time.

18. 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

40


undertaken to achieve the Company’s strategic goals; (ii) the key market drivers impacting the

Company’s success; (iii) intentions with respect to future renewable gas work; (iv) expectations

regarding business activities and orders that may be received in fiscal 2020 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.

41

19. CORPORATE GOVERNANCE

The Board of Directors of Xebec Adsorption Inc. is comprised of five directors, three of

whom are independent.

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.

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]

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