Xebec Adsorption Inc Management's Discussion …...• Air & Gas compressors and vacuum pumps •...

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Xebec Management’s Discussion and Analysis

Xebec Adsorption Inc

Management's Discussion and Analysis

Second Quarter ended June 30, 2020

August 10, 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 June 30, 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 June 30, 2020 and December 31, 2019. 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 and GNR Quebec Capital LP. 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 and GNR Quebec Capital Management Inc. which are wholly owned. GNR Bromont Management Inc. owns the 1% remaining of GNR Bromont L.P. and GNR Quebec Capital Management Inc owns 0.001% of GNR Quebec Capital L.P. Also, the fiscal year ending December 31, 2019 and those ended in prior years are sometimes designated by the terms “Fiscal 2019” 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 August 10, 2020, the date on which the Board of Directors approved the Consolidated Financial Statements and Management’s Report for the period ended June 30, 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 38 of this MD&A.

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Table of Contents

1. OUR BUSINESS ................................................................................................................... 6

ABOUT US .............................................................................................................................................. 6

VISION. MISSION. PURPOSE. PEOPLE. ..................................................................................................... 6

OUR PRODUCTS ..................................................................................................................................... 7

OUR CUSTOMERS AND SUPPLIERS .......................................................................................................... 7

INTERNATIONAL FOOTPRINT / CERTIFICATIONS ......................................................................................... 7

TECHNOLOGY ......................................................................................................................................... 8

Adsorption Technology .................................................................................................................... 8

Pressure Swing Adsorption (PSA) Systems .................................................................................... 8

Filtration Technology ........................................................................................................................ 9

2. OUR BUSINESS SEGMENTS .............................................................................................. 10

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

Renewable Natural Gas (RNG) ..................................................................................................... 10

Hydrogen and Renewable Hydrogen (RH2) .................................................................................. 11

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

Product Line ................................................................................................................................... 12

INDUSTRIAL SERVICE AND SUPPORT ...................................................................................................... 12

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

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

INFRASTRUCTURE (RENEWABLE GAS GENERATION) ............................................................................... 13

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

EXTERNAL BUSINESS DRIVERS .............................................................................................................. 14

PATH TO SUSTAINABLE GROWTH ........................................................................................................... 15

Key Milestones in 2020 .................................................................................................................. 15

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

STRATEGY MOVING FORWARD .............................................................................................................. 16

Build & Market Renewable Gas Solutions ..................................................................................... 16

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Drive Recurring Revenue ............................................................................................................... 16

2020 RESULTS ..................................................................................................................................... 16

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

CURRENT BACKLOG AS OF AUGUST 10, 2020 ........................................................................................ 19

BUSINESS SEGMENT REVIEW ................................................................................................................ 20

Systems - Cleantech ...................................................................................................................... 20

Support – Industrial Products and Service..................................................................................... 21

Infrastructure - Renewable Gas Generation .................................................................................. 21

Corporate and Other ...................................................................................................................... 22

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

SUMMARY BALANCE SHEET ................................................................................................................... 22

INDEBTEDNESS ..................................................................................................................................... 23

TOTAL INDEBTEDNESS .......................................................................................................................... 23

CAPITAL STOCK INFORMATION .............................................................................................................. 23

SHARE PURCHASE WARRANTS OUTSTANDING ....................................................................................... 23

STOCK OPTIONS OUTSTANDING ............................................................................................................ 23

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

7. USE OF FUNDS .................................................................................................................. 25

8. LIQUIDITY AND CAPITAL RESOURCES ............................................................................. 27

ANALYSIS OF PRINCIPAL CASH FLOWS FOR THE THREE-MONTH AND THE SIX-MONTH PERIOD ENDED JUNE 30,

2020 ............................................................................................................................................ 27

CONTRACTUAL OBLIGATIONS ................................................................................................................ 28

CREDIT FACILITIES ................................................................................................................................ 28

9. OUTSTANDING SHARE DATA ............................................................................................ 29

10. SUBSEQUENT EVENTS ................................................................................................. 30

11. CRITICAL ACCOUNTING ESTIMATES ............................................................................ 30

12. CHANGES IN ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS......... 32

13. OUTLOOK ...................................................................................................................... 34

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DELIVERY OUTLOOK ............................................................................................................................. 35

OUTLOOK SUMMARY ............................................................................................................................. 36

14. RELATED PARTY TRANSACTIONS ................................................................................ 37

15. RECONCILIATION OF NON-IFRS MEASURES ................................................................ 38

16. ENTERPRISE RISK MANAGEMENT ................................................................................ 39

17. RISK FACTORS .............................................................................................................. 39

MACROECONOMIC AND GEOPOLITICAL RISKS ......................................................................................... 40

OPERATING RISKS ................................................................................................................................ 41

FOREIGN CURRENCY EXCHANGE RISK................................................................................................... 42

CORONAVIRUS IMPACT ON GLOBAL OPERATIONS ................................................................................... 42

18. FORWARD-LOOKING STATEMENTS .............................................................................. 43

19. CORPORATE GOVERNANCE ......................................................................................... 44

APPROVAL ............................................................................................................................................ 44

ADDITIONAL INFORMATION..................................................................................................................... 44

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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’s degrees), 35 technical

degrees, 13 masters and 7 doctorates • A culturally diverse workforce with more than a dozen nationalities and languages from the global

community

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• 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 and hydrogen 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 and hydrogen. 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 towards 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

hydrogen 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.

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

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

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, energy 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

Cleantech Service Network, 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

• Xebec is targeting Industrial service and product revenues of $180 to $200 million by 2025

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 the end of 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 co-invests in partnerships that develop, sets up, owns and operate assests - Build, Own, Operate

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(BOO)

• These partnerships sign off-take agreements with gas utilities and other third-party off-takers

• They enter into supply agreements with feedstock suppliers

• The partnership provides financing – debt and equity

• The specific project partnerships chooses sites where feedstock is easily available & gas

interconnectivity is nearby

• Project partnerships apply and receive 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

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Path to Sustainable Growth

Key Milestones in 2020 • On July 31st, 2020, Xebec finalized its third acquisition of a North Carolina-based service business,

Enerphase (Air Flow). The acquisition was effective immediately.

• On June 26th, 2020 Xebec Adsorption Inc. closed a bought deal public offering for aggregate gross

proceed of $29 million

• On June 25th, 2020, Xebec announced the appointment of Mr. Peter Bowie to the Board of Directors. He

has been appointed Chair of the Audit Committee

• 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

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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)

• Develop small to mid-size hydrogen generation capabilities through SMR and electolysis

• Continue to grow national & international partnerships

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 to

create the leading “Cleantech Service Network” in North America

2020 Results

• For the six-month period ended June 30, 2020, Xebec reports revenues of $31.78 million, a $9.24

increase compared to $22.54 million for the same period in 2019, representing a 41% increase

• Order bookings increased from 63.5 million as of August 12, 2019, to $85.5 million as at August 10, 2020

representing a 34.7 % increase.

• Net loss for the six-month period ended June 30, 2020, is $1.51 million, representing an EPS of ($0.02)

compared to a net profit of $1.44 million representing an EPS of $0.03 for the same period last year

• Working capital increased from $7.98 million as at June 30, 2019, to $87.17 million as at June 30, 2020

(current ratio increases from 1.77 to 6.54)

• Quick Ratio increased from 1.33 as at June 30, 2019, to 5.78 as at June 30, 2020

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4. OPERATING RESULTS

Highlights for the three-month period ended June 30, 2020, compared to the three-month period ended June 30, 2019:

• Revenues increased by $6.81 million to $19.58 million for the three-month period ended June 30, 2020,

compared to $12.77 million for the same period the prior year. The increase is due to a higher volume

of major cleantech contracts and the acquisition of CDA in the Support segment.

• Gross margin increased from $4.04 million to $4.28 million for the three-month period ended June 30,

Selected Financial Information

(in mill ions of $)

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

ended June 30, ended June 30,

2020 2019 2020 2019

Systems 13,94 9,68 21,95 16,74

Support 5,64 3,09 9,83 5,80

Total revenue 19,58 12,77 31,78 22,54

Total COGS 15,30 8,73 24,45 15,20

Gross margin 4,28 4,04 7,33 7,34

Gross Margin % 22% 32% 23% 33%

Research and Development expenses 0,01 0,03 0,02 0,04

Selling and administrative expenses 4,71 2,44 8,57 4,96

(Gain) loss on foreign exchange 0,14 0,26 (0,75) 0,22

(Gain) Loss on conversion of shares issued by a subsidiary (0,17) (0,18) 0,14 (0,17)

Operating profit (loss) (0,41) 1,49 (0,65) 2,29

Finance expenses 0,36 0,47 0,83 0,85

Income taxes (0,01) - 0,03 -

Net profit (loss) (0,76) 1,02 (1,51) 1,44

Net profit (loss) per share (0,01) 0,02 (0,02) 0,03

ADJUSTED EBITDA (1) (0,12) 1,81 0,32 2,82

Cash used in operating activities (12,10) (0,95) (13,02) (2,67)

Cash and restricted cash 60,35 1,20 60,35 1,20

Working capital 87,17 7,98 87,17 7,98

Total Assets 113,48 22,42 113,48 22,42

Total non-current liabilities 17,78 8,65 17,78 8,65

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

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2020 compared to the same period the prior year. The Gross margin % decrease from 32% to 22% is

mainly due to changes 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 will improve. As a part of the evolution of the company we are now focused

on establishing a global supply chain strategy for our product so that we can leverage the demand from

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

reduced productivity at all 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 June 30, 2020, of

$4.71 million are higher by $2.27 million compared to $2.44 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.

• Operating loss of $0.41 million for the second quarter of 2020 compared to an operating profit of $1.49

million for the same quarter in 2019. The decrease is mainly explained by a reduction of GM, an increase

of SG&A and the reduced productivity caused by the COVID-19 pandemic.

Net loss of $0.76 million or $(0.01) per share in the three-month period ended June 30, 2020 compared

to a net profit of $1.02 million or $0.02 per share for the same period the prior year.

• Adjusted EBIDTA decreased to ($0.12) million for the three-month period ended June 30, 2020, from $

1.81 million for the same period last year.

Highlights for the six-month period ended June 30, 2020, compared to the same period ended June 30, 2019

• Revenues increase by $9.24 million to $31.78 million for the six-month period ended June 30, 2020,

compared to $22.54 million for the same period the prior year. The increase is due to a higher volume

of major cleantech contracts and the acquisition of CDA in the Support segment.

• Gross margin decreased from $7.34 million to $7.33 million, or 23% of revenue compared to 33% of the

revenues for the same period the prior year. The decrease is mainly due to changes 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 will

improve. As a part of the evolution of the company we are now focused on establishing a global supply

chain strategy for our product 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

its operating facilities due to the implementation of additional health and safety measures for the

COVID-19.

19


Selling and administrative expenses (“SG&A”) for the six-month period ended June 30, 2020, of $8.57

million are higher by $3.61 million compared to $4.96 million for the same six 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.

• Operating loss of $0.65 million for the six-month period ended June 30, 2020 compared to an operating

profit of $2.29 million for the same period in 2019. The decrease is mainly explained by a reduction of

GM, an increase of SG&A and the reduced productivity caused by the COVID-19 pandemic.

• Net loss of $1.51 million or ($0.02) per share decreased from $1.44 million or $0.03 per share in the

six-month period ended June 30, 2020, compared to the same period prior year

• Adjusted EBIDTA decreased to $0.32 million for the six-month period ended June 30, 2020, compared

to $2.82 million for the same period last year.

Current Backlog as of August 10, 2020

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

Business Segment:

In million of $

August 10,

2020

May 20,

2020

April 14,

2020

November 11,

2019

August 12,

2019

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

System 78,1 80,4 87,8 68,3 61,9

Infrastructure - - - - -

Consolidated Backlog 85,5 89,8 99,3 71,0 63,5

20


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 $4.26 million to $13.94 million for the three-month period ended June

30, 2020 and increase by $5.21 million to $21.95 million for the six-month period ended June

30, 2020. The increase is mainly due to additional major contracts.

Gross Margin decreased by $0.89 million to $2.26 million for the three-month period ended

June 30, 2020 compared to $3.15 million in the same period of 2019 and decrease by $1.71

million to $3.74 million for the six-month period ended June 30, 2020. The gross margin

decreased to 16% for the three-month period ended June 30, 2020, compared to 33% in the

same period of 2019 and decrease from 33% to 17% for the six-month period ended June 30,

2020. The decrease is mainly due to a different product mix between 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 June 30, 2020, decreased by $0.04 million

to $0.42 million in the Systems segment compared to $0.46 million for the same period the

prior year. For the six-month period ended June 30, 2020, SG&A decrease by $0.12 million

compared to the same period the prior year. The decrease is mainly due to lower exhibition and

travel costs in the first semester of 2020.

(in millions of $)

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

ended June 30, ended June 30, ended March 31,

2020 2019 2020 2019

Revenues 13.94 9.68 21.95 16.74

COGS 11.68 6.53 18.21 11.29

Gross margin 2.26 3.15 3.74 5.45

Gross Margin % 16% 33% 17% 33%

Research and Development expenses 0.01 0.03 0.02 0.04

Selling and administrative expenses 0.42 0.46 0.74 0.86

Segment gain 1.83 2.66 2.98 4.55

21


Support – Industrial Products and Service

Revenues increased by $2.55 million to $5.64 million for the three-month period ended June 30, 2020

and increased by $4.03 million to $9.83 million for the six-month period ended June 30, 2020. The

increase is mainly explained by the acquisition of CDA and organic growth.

Gross Margin increased by $1.13 million for the three-month period ended June 30, 2020 and by $1.7

million for the six-month period ended June 30, 2020. The gross margin increased by 7 % for the three-

month period ended June 30,2020 and by 4% for the six-month period ended June 31, 2020 explained

by lower sales volume in the Air Dryer product line which has a lower margin.

SG&A Expenses for the three-month period ended June 30, 2020, increased by $0.33 million to $0.94

million compared to $0.61 million the same period last year. For the six-month period, SG&A expenses

increase by $0.76 million compared to the same period last year. This increase is mainly due to the

integration of the new subsidiary.

Infrastructure - Renewable Gas Generation

Since the joint venture with FSTQ and the agreement with an important partner costs are incurred in the

Infrastructure segment.

(in millions of $)

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

ended June 30, ended June 30, ended March 31,

2020 2019 2020 2019

Revenues 5.64 3.09 9.83 5.80

COGS 3.62 2.20 6.24 3.91

Gross margin 2.02 0.89 3.59 1.89

Gross Margin % 36% 29% 37% 33%


Segment gain 1.08 0.28 1.70 0.76

(in millions of $)

2020 2019 2020 2019

Selling and administrative expenses 0.14 - 0.14 -

Infrastucture Expenses 0.14 - 0.14 -



22


Corporate and Other

5. FINANCIAL CONDITION

Summary Balance Sheet

The increase in the Company’s total assets between June 30, 2020, and December 31, 2019,

represents $48.96 million. This is mainly due to the increase in cash and restricted cash of

$37.65 million, an increase in trade and other receivables of $6.83 million and an increase of

$4.71 million in the inventory.

The increase in liabilities of $7.96 million is mainly explained by the increase of the long-term

debt of $9.91 million compensated by a decrease of $2.04 million of the trade payables and

accrued liabilities.

Working capital amounted to $87.17 million for a current ratio of 6.54:1 as at June 30, 2020,

compared with working capital of $36.9 million and a 3.20:1 ratio as at December 31, 2019.

Shareholders’ equity totals $79.96 million as at June 30, 2020, an increase of $41.01 million

from December 31, 2019. The change is mainly explained by a share issuance of $26.71 million

and the proceeds of $14,54 million from the warrants exercised from the public offering.

(in millions of $)

2020 2019 2020 2019


Foreign exchange loss (gain) 0.14 0.26 (0.75) 0.22

Loss on conversion of shares issued by a subsidiary (0.17) (0.19) 0.14 (0.17)

Total 3.19 1.43 5.20 3.01

Financial income (0.08) (0.01) (0.10) (0.01)

Financial expense 0.44 0.48 0.93 0.86

Finance loss 0.36 0.47 0.83 0.85

Corporate Expenses 3.55 1.90 6.03 3.86


For the six-month periodFor the three-month period

June 30, December 31,

2020 2019

Current assets 102,903 53,729

Non-current assets 10,579 10,789

113,482 64,518

Current liabilities 15,737 16,793

Non-current liabilities 17,781 8,768

Shareholders’ equity 79,964 38,957

113,482 64,518

In thousands of $

23


Indebtedness

Total Indebtedness

The total Indebtedness amounts to $19.81 million as at June 30, 2020, an increase of $9,92

million compared to December 31, 2019, mainly explained by new acquisition loan and

Infrastructure segment financing.

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 June 30, 2020, Xebec Adsorption Inc. had

101,787,059 common shares issued.

Share Purchase Warrants Outstanding

As at June 30, 2020, the Company had 6,671,878 warrants outstanding. 3,727,605 warrants

were issued and 7,313,798 were exercised in the three-month period ended June 30, 2020.

Stock Options Outstanding

On June 25, 2020, the Shareholders of Xebec approved the adoption by the Company of the

long-term incentive plan (LTIP) replacing the prior Stock Option Plan. The LTIP permits the

granting of options (“LTIP Options”), Restricted Stock Units (“RSU”) and Deferred Share Unit

(“DSU”) to eligible participants of the Company and is administered by the Compensation

Committee.

Although the shareholders of the Corporation and the Exchange have approved a number of

Common Shares reserved for issuance under the LTIP of up to 20% of the total issued and

outstanding Common Shares, the Board of directors of the Corporation has fixed that reserved

to a lower number. Therefore, as per the Board of directors decision, the total number of

Common Shares reserved and available for grant and issuance pursuant to Awards (including

the Common Shares issuable upon exercise of the outstanding options previously granted

under the prior Stock Option Plan) shall not exceed 8,361,115 Common Shares (representing

8% of the total issued and outstanding Common Shares).

June 30, December 31,

2020 2019

Bank loans - -

Short-term debt 2,244 1,460

Long-term debt 17,568 8,437

19,812 9,897

In thousands of $

24


All existing options granted under the Stock Option Plan will remain outstanding and subject

to the current Stock Option Plan.

The LTIP provides that the aggregate number of Common Shares issued to insiders and

associates of such insiders under the LTIP or any other proposed or established share

compensation arrangement within any one-year period and issuable to insiders and associates

of such insider at any time under the LTIP or any other proposed or established share

compensation arrangement, shall not in each case exceed 10% of the issued and outstanding

Common Shares. OK

The aggregate number of Shares issuable to any one consultant, within any one-year period,

under the LTIP, or when combined with all of the Corporation’s other security-based

compensation arrangements, shall not exceed 2% of the Corporation’s total issued and

outstanding securities, calculated on the date the Award is granted to the Consultant.

The aggregate number of Shares issuable to all Participants retained to provide Investor

Relations Activities, within any one-year period, under the LTIP, or when combined with all

of the Corporation’s other security-based compensation arrangements, shall not exceed 2% of

the Corporation’s total issued and outstanding securities, calculated on the date the Award is

granted to the Participant, and Options granted to such Participants retained to provide

Investor Relations Activities must vest in stages over a period of not less than one year with

no more than ¼ of the Options vesting in any three month period.

The purchase price per share purchasable under an Option shall be determined by the

Committee and shall not be less than 100% of the Fair Market Value of a Share on the date of

grant of such Option; provided, however, that the Committee may designate a purchase price

below Fair Market Value on the date of grant if the Option is granted in substitution for a

stock option previously granted by an entity that is acquired by or merged with the Company

or an affiliate. The term of each Option shall be fixed by the Committee at the date of grant

but shall not be longer than 10 years from the date of grant.

6. SUMMARY OF QUARTERLY RESULTS

SUMMARY OF QUARTERLY RESULTS

Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3

Revenues 19 588 12 193 13 630 13 153 12 766 9 769 6 092 5 584

Net income (loss) (765) (743) (468) 1 048 1 017 423 (1 009) (410)

Earnings (loss) per share

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

Diluted (0,01) (0,01) (0,01) 0,01 0,02 0,01 (0,02) (0,01)

2019 2018In thousands of $,

except net earnings (loss) per share

2020

25


7. USE OF FUNDS

Public financing - June 26, 2020Antic ipated use of

Proceeds

Actual use of proceeds as at

June 30, 2020

Investments

Funds will be used to develop and invest in new

renewable natural gas infrastructure projects.

Working Capital

Funds will be used for general corporate purposes

as well as for the integration of future corporate

acquisitions, 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.

Legal, Audit and other Fees related to the

Offering$400,000 $122,475

Total $27,027,162 $122,475

$18,000,000 -

$7,627,162 -

$1,000,000 -

Public financing - December 27, 2019Antic ipated use of

Proceeds


June 30, 2020

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


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 $137 048


Offering$400,000 $197 892

Total $21,620,432 $9 897 143

$14,170,432 -

$800,000 -

$9 562 203 $5,750,000

26


Use of funds as at June 30, 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 June 30, 2020, the Company has used the total of the $10.90 million of the net

proceeds from the Public Offering of July 4, 2019. $2.91 million were used to develop

engineering processes on new projects in the renewable gas sector, $2.83 million for the

acquisition of CDA, $4.48 million for the working capital, $0.05 million for the R&D activities,

Public financing - July 4, 2019Antic ipated use of

Proceeds


June 30, 2020

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 $4 484 934


Research and development activities in the energy

storage sector.

Capital Equipment – Information Technology

and Production$200 000 $255 532


Offering$400 000 $371 381

Total $10 896 480 $10 896 480

$4 396 480 $2 905 634

$2 800 000 $2 830 559

$350 000 $48 439

27


$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

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 June 30, 2020, the Company has used $9.90 million of the net proceeds from the

December 27, 2019 Offering. $0.19 million were used to pay legal, audit and other fees related

to the public offering, $0.14 million for the purchase of capital equipment and $9.56 million for

the working capital to support general operations and the integration of the acquisitions.

c) On June 26, 2020, Xebec Adsorption Inc. closed a bought deal public offering conducted by

a syndicate of underwriters led by Desjardins Capital Markets and including Beacon Securities

Ltd., Canaccord Genuity Corp., TD Securities Inc., Stifel Nicolaus Canada Inc. and Raymond

James Ltd.

A total of 7,986,750 common shares of Xebec were sold at a price of $3.60 per Common Share

for aggregate gross proceeds of $28,752,300 for a total of 7,986,750 shares and 479,205

compensation options. The issuance costs, excluding the non-transferable options to the agents

were $1,847,613. The fair value of the 479,205 Compensation Options was $630,997.

At as June 30, 2020, the Company has used $0.12 million of the net proceeds from the June 26,

2020 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 and the six-month period ended June 30, 2020

Cash flow from (used in)

in thousands of $2020 2019 Change 2020 2019 Change

Operating activities (12,105) (95) (12,010) (13,023) (2,667) (10,356)

Investing activities (242) (40) (202) (590) (1,639) 1,049

Financing activities 48,888 959 47,929 50,857 1,626 49,231

For the three-month period

ended June 30,

for the six-month period

ended June 30,

28


Operating activities in the three-month period ended June 30, 2020, used $12,01 million of

cash, compared to $0.95 million for the same period in 2019. The use of cash for the three-

month period is mainly explained by an increase of $0.85 million in the inventories, an increase

of $10.08 million of the trade, other receivables and deferred revenues an increase of $0,98

million of the trade payable. For the six-month period ended June 30, 2020, operating activities

used $13.02 million of cash compare to $2.67 million used for the same period in 2019. The

use of cash for the six-month period is mainly explained by an increase of $4.69 million in the

inventories, an increase of $6.87 million of the trade, other receivables and an increase of $2,27

million of the trade payables.

Investing activities cash outflow of $0.24 million for the three-month period ended June 30,

and cash outflow of $0,59 million for the six-month period ended June 30 relates mainly to the

acquisition of tangible and intangible assets.

Financing activities for the three-month period ended June 30, 2020, resulted in a cash inflow

of $48.89 million and the financing activities for the six-month period ended June 30, 2020

resulted inflow of $50.86 million. The increase is mainly explained by the proceeds of issuance

of share capital of $39.40 million for the three-month period and of $41.53 million for the six-

month period ended June 30, 2020 combine with new long-term financings of $10.06 million

for both periods.

Contractual Obligations

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 June 30, 2020 ($ NIL as at June 30, 2019).

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

property of the Company.

in millions of $ Payments Due by Period

1 year 2 -5 years Beyond 5 years Total

Operating leases 0,21 0,09 - 0,30

Total contractual obligations 0,21 0,09 - 0,30

29


As of June 30, 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 June 30, 2020, three

guarantee facilities are used for a total of $5,556,595 ($3,701,240 as at June 30, 2019).

During the period ended June 30, 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 $14 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 August 10, 2020, the following common shares and stock options were outstanding:

Number of shares Exercise Price Expiring Date

Issued and outstanding Common Shares as of August 10, 2020 104,513,935

Stock Options

200,000 200,000 1,773,193 350,000 98,667

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

May 29, 2021 January 7, 2023 March 5, 2024 August 29, 2024 December 19, 2024

34,000 $0.60 May 14,2025

735,000 $0.70 November 19,2025

3,390,860 $0.35

30


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

Compensation shares

479,205 451,438

$3.60 $2,10

June 26, 2021 Dec, 2020

Fully diluted as at August 10, 2020 111,835,438

10. SUBSEQUENT EVENTS

On July 31, 2020, Xebec Holding USA Inc, a wholly owned subsidiary of Xebec Adsorption

Inc, has entered into an agreement to acquire all of the outstanding securities of Enerphase

Industrial Solutions Inc (doing business as “Air Flow”) for an approximate total consideration

of 6.0$M subject to certain holdbacks, adjustments and time-based payments.

Air Flow is a leading distributor and service provider of compressed air equipment in North

Carolina. Incorporated in 1981, the company brings decades of industry experience and has

built long standing relationships with major manufacturers and has developed a significant

service footprint through numerous equipment installations. Air Flow’s focus is on

preventative maintenance solutions, air energy system audits and analysis, and timely

machine rentals, and parts and service. Air Flow’s principals will remain with the Company

after the acquisition to optimize their integration into Xebec’s industrial service and support

business and to grow the operation over the coming years.

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

31


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.

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

32


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:

• In 2019, 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.

• In 2019, 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.

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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.

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13. OUTLOOK

Current Market and Guidance for 2020

Our market outlook for renewable natural gas and hydrogen purification equipment under our

Cleantech Systems remains unchanged from our previous guidance. We expect our Industrial

Service and Support segment to continue its revenue growth in line with our strategy.

We maintain our revenue guidance of $80 to $90 million but retract our earnings and EBITDA

guidance. Xebec expects to be profitable on a net earnings and EBITDA basis for FY2020 but

given the results of the first two quarters, we are unable to maintain the previous guidance.

Execution and organizational development will be key for continued growth. Management

recognizes this and is 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,

building strong, results-driven teams that will deliver on future opportunities.

Cleantech Systems

Our Cleantech segment continues to expand. We have signed several Letters of Intent (LOI)

for renewable natural gas (RNG) systems during the course of Q2, and we have received a

number of orders for hydrogen purification. We have also signed a significant order for

helium purification with a large industrial gas client. In addition, our short-term order outlook

looks very positive, which will lead to further solid order flow in Q3.

Europe has been slower than expected, mainly due to the COVID-19 shut-down of most of the

European economy during Q2. We expect that Italy will remain weak for the rest of the year,

but we expect further growth in France. We continue to guide for Cleantech revenue in the

$50 to $55 million range, but we are seeing lower than anticipated margins in the larger

biogas plants as we invest in the standardization of these designs. Our engineering and supply

chain teams are working on complexity reductions and sourcing synergies between different

product platforms, which will allow us to generate Cleantech margins in the 25% to 30%

range. Lastly, we regard quote activity as an early indicator for future order activity. Our

current quote log remained strong at $1.05 billion (as of August 10th, 2020), and our order

backlog is $85.5 million.

Yesterday, we announced a partnership with CarbonQuest which has opened a new

application for our purification and separation technologies. Although in the early stages, this

initiative could open another large-scale market for Xebec as NYC building owners look to

reduce their exposure to the new Local Law 97 or face significant penalties that increase in

severity over time. There are over 60,000 buildings in NYC alone that could benefit from the

carbon capture solution we are co-developing, and we look forward to providing updates on

this in the future.

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Industrial Service & Support

Xebec continues to pursue organic and inorganic growth opportunities and expects to grow

revenues from $11.5 million in 2019 to about $30 to $35 million in 2020. Our current run rate

for industrial service and support revenues is approximately $25 million, and we expect to

close 2 more acquisitions within the next 60 to 90 days. As a result, Xebec is on track to hit

revenue guidance of $30 million+ range for FY2020. In Q2/20 we achieved a gross margin of

37%, somewhat lower than the targeted 40%+. As our purchasing power increases, we should

be able to improve the margin into the targeted range.

Renewable Gas Infrastructure

On July 3rd, 2020 the Québec government announced its organic material management plan

with a target to recycle or recover 70% of organic waste in the province by 2030. In

conjunction with this target, the province earmarked $1.2 billion in funding to support

municipalities and private companies with the build out of organic matter collection services

and processing facilities. In addition, there is a specific program (PTMOBC) for the treatment

of organic materials by bio-methanation (RNG production) and composting, whose budget

will be increased by $308 million. In addition, the Québec government announced on July

4th, 2020, its commitment to provide $70 million in funding for RNG projects.

These developments are positive for Xebec’s recently announced fund (GNR Québec Capital

L.P.) with the Fonds de solidarité FTQ. This new investment vehicle aims to increase

renewable natural gas (RNG) production in Québec and when fully capitalized and

appropriately leveraged, could fund 12 to 15 renewable natural gas projects in the province.

Overall, the fund’s development is progressing well with three key hires being finalized. In

addition, the first RNG project (announced in February 2020) is in the process of being rolled

into the fund. This first project is located in the Eastern Townships and will process 45,000

tons of organic waste per year, generate 150,000 GJ of RNG and produce 7,500 metric tons of

biofertilizer annually. Lastly, there are several projects being evaluated for investment and

Xebec expects activity to pick up as the new hires assume their positions.

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

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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.

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 August 10, 2020, our

order backlog was $85.5 million spread across our two active business segments and numerous

geographical regions. 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 the company expects the generate positive

net earnings and EBITDA.

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.

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14. RELATED PARTY TRANSACTIONS

In thousands of $ 2020 2019 2020 2019

Marketing and professional services expenses paid to companies

controlled by members of the immediate family of an officer 10 21 61 66

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

of an officer 53 30 92 67

Material purchased to companies controlled by members of the

immediate family of an officer 5 10 14 19

Total 68 61 167 152

For the three-month For the six-month

period ended June 30, period ended June 30,

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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 June 30, 2020 has amounted to

($0.12) million compared to $1.81 million in the same period of 2019, a decrease of $1.93

million mainly due to the net loss of $0.76 for this period.

The accretion of debt for the three-month period ended June 30, 2020, includes the accretion of

the obligation arising from shares issued by a subsidiary of $0.08 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.

The adjusted EBITDA for the six-month period ended June 30, 2020 has amounted to

$0.32 million compared to $2.82 million in the same period of 2019, a decrease of $2.50 million

mainly due to the net loss of $1.51 for this period.

EBITDA

In thousands of $

2020 2019 2020 2019

Net income (loss) (764) 1 017 (1 508) 1 440

Depreciation of property 241 140 473 271

Amortization of intangible assets 43 43 1 027 78

Interest expense 203 257 516 445

Income taxes (7) - 23 - - -

EBITDA (284) 1 457 531 2 234

Stock-based compensation expenses 51 112 103 230

Impairment of inventories (15) (44) (21) (96)

Exchange gain/loss on the obligation arising from non

cotrolling interest participation in a subsidiary (171) (184) 141 (167)

Foreign exchnage loss (gain) 144 256 (748) 215

Accretion of debt 156 214 316 403

Adjusted EBITDA (119) 1 811 322 2 819

Adjusted EBITDA in percentage of sales -1% 14% 1% 13%

* EBITDA is a non-IFRS financial measure.



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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:

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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.

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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 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.

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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.

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 and Q2/20 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. We expect revenues in Italy to be

lower than originally anticipated.

Lastly, Xebec’s operations in North America currently remain largely 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.

Even so, at this time we remain on track to achieve our revenue guidance for 2020, we are

seeing an impact on our gross margin generation ability due to lower productivity and higher

costs.

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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

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.

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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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