Xebec Adsorption Inc. Management's Discussion and Analysis ...€¦ · Established in 1967, Xebec has over 50 years of experience in adsorption technology, supplying more than 10,000

Xebec Management’s Discussion and Analysis 1

Xebec Adsorption Inc. Management's Discussion and Analysis Second Quarter ended June 30, 2019 August 12, 2019


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

The following Management’s Discussion and Analysis (“MD&A”) of Xebec provides a review of the results of operations, financial conditions and cash flows of Xebec for the period ended June 30, 2019. This discussion should be read in conjunction with the information contained in the Company’s Condensed Interim Consolidated Financial Statements and related notes for the period ended June 30, 2019 and 2018 and with the Company’s audited consolidated financial statements and related notes for the year ended December 31, 2018. Additional information can be found on SEDAR at www.sedar.com. The financial information presented herein has been prepared based on International Financial Reporting Standards (IFRS) for financial statements and is expressed in Canadian dollars unless otherwise stated. In this MD&A, unless otherwise indicated or required by the context, “Xebec”, “the Company”, “we”, “us”, “our”, “our Company”, “the Group” and “our Group” designate, as the case may be, Xebec Adsorption Inc. or Xebec Adsorption Inc. and its subsidiaries. The Company’s other subsidiaries are designated as follows: “Xebec USA” for Xebec Adsorption USA, Inc., “Xebec Shanghai” for Xebec Adsorption (Shanghai) Co. Ltd, “Xebec Europe” for Xebec Adsorption Europe SRL, and “CAI” for Compressed Air International. Also, the fiscal year ending December 31, 2018 and those ended in prior years are sometimes designated by the terms “Fiscal 2018”, “Fiscal 2017” and so on. The information contained in this MD&A and certain other sections of this report also includes some figures that are not performance measures consistent with IFRS, such as earnings (loss) before amortization, financial expenses, other items and income taxes ("EBITDA"). The Company uses EBITDA because this measure enables management to assess the Company’s operational performance. This measure is a widely accepted financial indicator of a company’s ability to repay and assume its debt. Investors should not regard it as an alternative to operating revenues or cash flows, or a measure of liquidity. As this measure is not established in accordance with IFRS, it might not be comparable to those of other companies. The information contained in this Management’s Report accounts for any major event occurring up to August 12, 2019, the date on which the Board of Directors approved the Condensed Interim Consolidated Financial Statements and Management’s Report for the period ended June 30, 2019. It presents the Company’s status and business context as they were, to management’s best knowledge, at the time this report was written. This document contains forward-looking statements, which are qualified by reference to, and should be read together with, the “Forward-looking Statements” cautionary notice on page 31 of this MD&A.

http://www.sedar.com/


Contents

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

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

1.2. Our Employees and Organizational Development .................................................................. 5

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

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

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

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

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

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

2.1. RENEWABLE GAS SYSTEMS - CLEAN TECHNOLOGY ................................................ 9

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

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

2.2. SERVICE, SUPPORT AND PRODUCTS - INDUSTRIAL................................................. 12

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

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

2.3. RENEWABLE GAS GENERATION - INFRASTRUCTURE ............................................. 13

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

3.1. External Business Drivers ...................................................................................................... 14

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

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

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

3.3. Results 2019 ........................................................................................................................... 15

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

5 FINANCIAL CONDITION ............................................................................................. 19

6 SUMMARY OF QUARTERLY RESULTS ......................................................................... 21

7 LIQUIDITY AND CAPITAL RESOURCES ......................................................................... 21

8 OUTSTANDING SHARE DATA ..................................................................................... 22

9 SUBSEQUENT EVENT ................................................................................................. 23

10 CRITICAL ACCOUNTING ESTIMATES ........................................................................... 23

11 CHANGES IN ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS ........... 24

12 OUTLOOK ................................................................................................................. 26

12.1. Current Market and Guidance for 2019 ............................................................................. 26


12.2. Renewable Gas Systems - Clean Technology ................................................................... 26

12.3. Service, Support and Products - Industrial ......................................................................... 26

12.4. Renewable Gas Generation - Infrastructure ....................................................................... 26

12.5. Delivery Outlook ............................................................................................................... 27

12.6. Outlook Summary .............................................................................................................. 27

13 RELATED PARTY TRANSACTIONS ............................................................................... 27

14 RECONCILIATION OF NON-IFRS MEASURES ............................................................... 28

15 ENTERPRISE RISK MANAGEMENT .............................................................................. 28

16 RISK FACTORS ........................................................................................................... 29

16.1. Macroeconomic and Geopolitical ...................................................................................... 29

16.2. Operating ........................................................................................................................... 30

16.3. Liquidity............................................................................................................................. 30

16.4. Foreign Currency Exchange .............................................................................................. 31

17 FORWARD-LOOKING STATEMENTS ........................................................................... 31

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

19 APPROVAL ................................................................................................................ 32

20 ADDITIONAL INFORMATION ..................................................................................... 32


1 OUR BUSINESS

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

1.2. Our Employees and Organizational Development

Xebec recognizes that successful companies need engaged, motivated and skilled employees who are committed to their work, their environment, and their colleagues.

Profitable growth is the basis of all. It is our purpose. Only a profitable company will have the strength and resources to be able to support its employees, satisfy its shareholders, grow the company and the economy, and contribute positively to our society while preserving and safeguarding our environment.


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

Xebec leaders serve as role models through their ethical behavior and their personal involvement in performance reviews, communicating, coaching, and developing future leaders. Talented, motivated and engaged employees are at the heart of our organizational development. 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.

• Almost 125 employees to date • 16 departments in a full range of disciplines from A to Z -Assembly through Engineering to Welding • 5 engineering specialties including Electrical, Mechanical, Chemical, Industrial Design, and Process • A wealth of skills including 13 specialized degrees, 11 technical degrees, 9 masters and 6 doctorates • A culturally diverse workforce with more than a dozen languages from the global community

1.3. Our Products

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

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

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


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

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


1.6. Technology

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

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

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

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

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

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

• Filtration Technology

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


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

2 OUR BUSINESS SEGMENTS

2.1. RENEWABLE GAS SYSTEMS - CLEAN TECHNOLOGY Renewable Natural Gas (RNG) RNG is the most important opportunity for Xebec in the short term. Climate change is driving the energy transition toward 100% renewables, including the displacement of fossil natural gas with RNG. As much as wind and solar have been the prevalent renewable energy over the past 20 years, we are now at the cusp of similar explosive growth for renewable natural gas. Climate change is the macroeconomic driver for the adoption of renewable, zero-carbon energy, but for RNG we are seeing an additional driver for its adoption, namely gas utilities. As electricity utilities are successfully shifting to renewable solar and wind energy, gas utilities are 20 to 25 years behind in their adoption of renewable energy. It is leaving them in a precarious position as they face declining demand for their products and services, driven by an acceleration toward electrification of their customer base, especially in home-heating, water heaters, and gas stoves. Investors in gas utilities are starting to see the prospect of significant losses and hundreds of billions of dollars of stranded gas assets if the business model does not shift quickly towards renewable gases. The good news is the increasing alignment between policymakers and gas utilities to support this shift towards renewable


natural gas with appropriate legislation and regulation. In Europe, several countries have announced targets to be completely fossil fuel-free by 2050, implying a complete shift to 100% renewable natural gas. Accordingly, gas utilities are assessing their transition timelines and some major energy players in Europe, like Engie in France (former Gaz de France), have announced their own plans to be 100% renewable gas by 2050. The transition toward 100% RNG will involve 3 phases. It starts with anaerobic digestion (organic waste converted to RNG), followed by pyro-gasification (the conversion of cellulosic forestry waste to RNG), followed by Power-to-Gas or P2G (the conversion of electricity to gas for energy storage). Xebec has a position in each of these commercial opportunities, either through gas purification or through methanation technology which is applicable to P2G.

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


hydrogen refueling stations. Xebec China is already well positioned to actively promote our technology and capabilities. Xebec’s revenue growth over the last 18 months in China has been driven by hydrogen purification system sales. According to the Hydrogen Council, the demand for H2 will increase significantly, with impressive numbers by 2050.

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

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

• Urgency is driven by new environmental targets and governmental policy/regulations incentivizing utilities and businesses to use renewable gases. As a result, prices for RNG are anywhere from $9 to $75 MMBtu, or 3 to 20x the price of fossil natural gas

• North American annual production of light-duty FCEVs is forecast to reach 50,000 per year by 2025. • Each light duty FCEV requires about 0.5 to 1.5 kg of hydrogen per day, or about 125 to 375 tons/day by

2027 (30% legislated to be renewable hydrogen in California) • The market for renewable hydrogen is expected to grow from about US$30 million currently to about

US$365 million annually by 2027, these numbers do not include China • Currently, only fossil hydrogen is readily available; production worldwide equates to about 150 tons/day • Fossil hydrogen is produced either through electrolysis (today electricity comes mostly from coal or

natural gas) or through steam methane reforming of fossil natural gas. • Renewable hydrogen is produced through electrolysis using renewable electricity, or through steam

methane reforming of renewable natural gas (upgraded biogas to renewable natural gas). Consequently, it has an extremely low carbon content compared to fossil hydrogen, making it ideal for low carbon transport fuels.

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

• With 1 million trucks/buses planned to operate by 2030, the demand for hydrogen would be approx. 1.5 million tons per year, and at $2/kg this would equate to approx. $3 billion per year of hydrogen sales.

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


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

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

2.1.2. Product Line

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

2.2. SERVICE, SUPPORT AND PRODUCTS - INDUSTRIAL Xebec designs, develops, builds, sells, and services a range of products including desiccant, refrigerant and modular compressed air dryers for industrial applications under its ADX Solutions® brand. Xebec also provides a complete range of compressed air and gas filtration products under its FSX Solution® brand as well as alternative brand replacements. Service, Maintenance and Operational Support are foundational components that round out Xebec service offerings. Key Notes:

• 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

http://www.zevstates.us/


• 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

• Xebec has established a roll-up strategy focused on acquiring small to mid-sized Compressed Air and Gas service businesses ($3-5M revenue) throughout Canada and the U.S. to create a leading Compressed Air & Gas distribution business

2.2.1. Market Size for Xebec’s Industrial Products

• U.S. Market approx. USD$700 to USD$800 Million • Canadian Market for Xebec products approx. CDN$60 to CDN$70 Million, of which Xebec currently has

a 9% market share, with a target of 30 to 40% by 2021

2.2.2. Product Line & Services

• Compressed Air and Gas Dryers • Compressed Air and Gas Filters • Spare Parts and Replacement Filter Elements • Dew-point Probes and Calibration Services

2.3. RENEWABLE GAS GENERATION - INFRASTRUCTURE 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 in 2019 – The Canadian Clean Fuel Standard (CFS). Xebec has started to identify locations and partners for the deployment of several high-quality renewable gas assets to produce low carbon RNG that can not only fill the current provincial requirements but also the future requirements under the potential federal legislation. The concept:

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


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

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

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

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

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

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

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

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


3.2. Path to Sustainable Growth

3.2.1. Key Milestones in 2019

• On August 6th, 2019, Xebec stock price closed at $1.76, from $0.73 on December 31th, 2018. With that increased value, the convertible debt and the warrants from the October 2018 financing are in the money.

• On July 4th, 2019, Xebec closed a Bought Deal Offering for gross proceeds of $11.6 million. • On March 12th, 2019, Xebec announced it had signed a CDN$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 (CAI) in Ontario

3.2.2. Strategy Moving Forward

1. Build & Market Renewable Gas Solutions

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

2. Drive Recurring Revenue

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

3.3. Results 2019 • For the six-month period ended June 30, 2019, Xebec reports revenues of $22.5 million, a $14.0

million increase compared to the same period in 2018, or 165% • Order bookings decreased from $68.1 million as of August 6, 2018, to $63.5 million, representing an

6.8 % decrease. (Note: $43.0 million to be delivered over two years) • Net profit for the six-month period ended June 30, 2019, is $1.4 million (EPS 0.03) compared to a net

loss of $1.5 million (EPS (0.03)) for the same period last year • Working capital increased from $0.91 million as at June 30, 2018, to $7.98 million as at June 30, 2019

(current ratio increases from 1.1 to 1.8)


4 OPERATING RESULTS

Highlights for the three-month period ended June 30, 2019, compared to the three-month period ended June 30, 2018 Revenues increase by $7.46 million to $12.77 million for the three-month period ended June 30, 2019, compared to $5.31 million for the same period the prior year. The increase is due to a higher volume of cleantech contracts and a company acquisition. Gross margin increases from $1.65 million to $4.04 million, or 32% of revenue, from 31% of revenue.

Selected Financial Information(in mill ions of $)

For the three-month period For the six-month period ended June 30, ended June 30,

2019 2018 2019 2018

Systems 9.68 2.94 16.74 5.07 Support 3.09 2.37 5.80 3.46 Total revenue 12.77 5.31 22.54 8.53 Total COGS 8.73 3.66 15.20 6.10 Gross margin 4.04 1.65 7.34 2.43

Gross Margin % 32% 31% 33% 28%

Research and Development expenses 0.03 0.03 0.04 0.04 Selling and administrative expenses 2.44 1.61 4.96 3.12 (Gain) loss on foreign exchange 0.26 (0.08) 0.22 - (Gain) Loss on conversion of shares issued by a subsidiary (0.18) (0.12) (0.17) 0.13

Operating profit (loss) 1.49 0.21 2.29 (0.86)

Finance expenses 0.47 0.32 0.85 0.62 Income taxes - - - -

Net profit (loss) 1.02 (0.11) 1.44 (1.48)

Net profit (loss) per share 0.02 (0.003) 0.03 (0.03)

EBITDA (1)(2) 1.78 0.34 2.87 (0.59) Cash used in operating activities (0.18) (0.33) (2.83) (0.90) Cash and cash equivalents 1.20 0.62 1.20 0.62 Working capital 7.98 0.91 7.98 0.91 Total Assets 22.42 9.27 22.42 9.27 Total non-current liabilities 8.65 6.74 8.65 6.74

(1) EBITDA is Non-IFRS measure. Refer to section 16 - Reconcil iation of Non-IFRS Measure.(2) EBITDA is presented without the stock-based compensation expenses


Selling and administrative expenses (“SG&A”) for the three-month period ended June 30, 2019, of $2.44 million are higher by $0.83 million compared to $1.61 million for the same three months of 2018. This is primarily due to an organizational scale-up of employees and associated costs to support the increased level of sales, order backlog and building quote log. The SG&A ratio decreased by 11 % to 19% in the three-month period ended June 30, 2019, compared to 30 % in the same three months of 2018. Net profit of $1.02 million or $0.02 per share increases from $(0.11) million or $(0.003) per share in the three-month period ended June 30, 2019, compared to the same period the prior year. The increased profit is mainly due to higher sales. EBIDTA increases to $1.78 million for the three-month period ended June 30, 2019, from $ 0.34 million for the same period last year.

Highlights for the six-month period ended June 30, 2019, compared to the same period ended June 30, 2018 Revenues increase by $14.01 million to $22.54 million for the six-month period ended June 30, 2019, compared to $8.53 million for the same period the prior year. The increase is due to a higher volume of major cleantech contracts and a company acquisition. Gross margin increases from $2.43 million to $7.34 million, or 33% of revenue, from 28% of revenue. The Company has increased margin in the Cleantech segment.

Selling and administrative expenses (“SG&A”) for the six-month period ended June 30, 2019, of $4.96 million are higher by $1.84 million compared to $3.12 million for the same three months of 2018. This is primarily due to an organizational scale-up of employees and associated costs to support the increased level of sales, order backlog and building quote log. The SG&A ratio decreased by 15 % to 22 % in the six-month period ended June 30, 2019, compared to 37 % in the same six months of 2018. Net profit of $1.44 million or $0.03 per share increases from $(1.48) million or $(0.03) per share in the six-month period ended June 30, 2019, compared to the same period prior year. The increased profit is mainly due to higher sales and margin. EBIDTA increases to $2.87 million for the six-month period ended June 30, 2019, from $ (0.59) million for the same period last year. CURRENT BACKLOG The order backlog is calculated considering contracts received and considered as firm orders. Current backlog as of August 12, 2019:

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

Business Segment:

In million of $

August 12, 2019

May 27, 2019

April 16, 2019

November 8, 2018

August 6, 2018

Support 1.6 2.8 5.7 2.2 1.7 System 61.9 (1) 69.1 (1) 72.6 (1) 63.3 (1) 66.4 (1)

Infrastructure - - - - - Consolidated Backlog 63.5 71.9 78.3 65.5 68.1


Business Segment Review We report our results in three business segments – Clean Technology, Industrial, 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. Renewable Gas Systems - Clean Technology

Revenues increase by $6.74 million for the three-month period ended June 30, 2019 and increase by $11.67 million for the six-month period ended June 30, 2019. The increase is mainly due to additional sales of biogas equipment. Gross Margin increases for the three-month period ended June 30, 2019, to 33% compared to 27% in the same period of 2018 and increases to 33% from 23% for the six-month period ended June 30, 2019, compared to the same period prior year. SG&A Expenses for the three-month period ended June 30, 2019, increase by $0.23 million to $0.46 million in the Clean Technology segment. For the six-month period, SG&A expenses increase by $0.35 million compared to the same period the prior year, from $0.51 million to $0.86 million. The increase is mainly due to project manager wages. Service, Support, and Products - Industrial

(in millions of $)

For the three-month period For the six-month periodended June 30, ended June 30,

2019 2018 2019 2018Revenues 9.68 2.94 16.74 5.07 COGS 6.53 2.14 11.29 3.91 Gross margin 3.15 0.80 5.45 1.16 Gross Margin % 33% 27% 33% 23%Research and Development expenses 0.03 0.03 0.04 0.04 Selling and administrative expenses 0.46 0.23 0.86 0.51 Segment gain 2.66 0.54 4.55 0.61

(in millions of $)


2019 2018 2019 2018Revenues 3.09 2.37 5.80 3.46 COGS 2.20 1.52 3.91 2.19 Gross margin 0.89 0.85 1.89 1.27 Gross Margin % 29% 36% 33% 37%Selling and administrative expenses 0.61 0.19 1.13 0.44 Segment gain 0.28 0.66 0.76 0.83


Revenues increase by $0.72 million to $3.09 million for the three-month period ended June 30, 2019 and increase by $2.34 million to $5.80 million for the six-month period ended June 30, 2019. The increase is mainly explained by the acquisition of a company. Gross Margin decreases by 7% to 29% for the three-month period ended June 30, 2019, compared to the same period last year, explained by higher sales volume in the Air Dryer product line which has a lower margin, and the integration of the new subsidiary. For the six-month period ended June 30, 2019, gross margin decreases from 37% to 33% compared to the same period last year. SG&A Expenses for the three-month period ended June 30, 2019, show an increase of $0.42 million compared to the same period last year. For the six-month period, SG&A expenses increase by $0.69 million compared to the same period last year. This increase is mainly due to the integration of the new subsidiary. Renewable Gas Generation - Infrastructure This segment has no reportable activities for the six-month period ended June 30, 2019. Corporate and Other

5 FINANCIAL CONDITION Summary Balance Sheet

The increase in the company’s total assets between June 30, 2019, and December 31, 2018, represents $7.33 million. This is mainly due to the increases in trade and other receivables of $5.80 million, an increase of $0.81

(in millions of $)

2019 2018 2019 2018Selling and administrative expenses 1.36 1.18 2.96 2.17 Foreign exchange loss (gain) 0.26 (0.08) 0.22 - (Gain) on conversion of shares issued by a subsidiary (0.19) (0.13) (0.17) 0.12 Total 1.43 0.97 3.01 2.29 Financial income (0.01) - (0.01) - Financial expense 0.48 0.32 0.86 0.62 Finance loss 0.47 0.32 0.85 0.62 Corporate Expenses 1.90 1.29 3.86 2.91


June 30, December 31,

2019 2018

Current assets 18,383 14,404 Non-current assets 4,033 687

22,416 15,091 Current liabilities 10,399 9,145 Non-current liabilities 8,645 6,566 Shareholders’ equity 3,372 (620)

22,416 15,091

In thousands of $


million in the inventory, an increase in the asset acquired under right-of-use of $2.01 million, the goodwill of $1.28 million, and a decrease in cash and restricted cash of $2.72 million. The increase in liabilities of $3.33 million is mainly explained by the increase of the lease rental obligation of $2.21 million, an increase in the trade, other payables and accrued liabilities of $2.63 million, and an actualized earn-out to be paid following an acquisition of $0.54 million partially compensated by a decrease of $1.48 million in deferred revenues. On January 1st, 2019 the company adopted IFRS 16 Leases (“IFRS 16”), which replaces IAS 17, which specifies how the Company recognizes, measures, presents and discloses leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. Working capital amounted to $7.98 million for a current ratio of 1.76:1 as at June 30, 2019, compared with working capital of $5.26 million and a 1.58:1 ratio as at December 31, 2018. Shareholders’ equity totals $3.37 million as at June 30, 2019, an increase of $3.99 million from December 31, 2018. The change is mainly due to the warrant issue of $1.56 million and a net profit for the six-month period ended June 30, 2019, of $0.57 million, and the conversion of debenture and options for $0.19 million. Indebtedness

Total Indebtedness The total Indebtedness amounts to $10.67 million as at June 30, 2019, an increase of $2.28 million compared to December 31, 2018, mainly explained by the increase of the lease rental obligation of $2.21 million in the bank and an actualized earn-out to be paid following an acquisition of $0.54 million, partially compensated by the conversion of debenture for $0.41 million. Capital Stock Information The authorized share capital of the Company consists of an unlimited number of common shares and an unlimited number of preferred shares. As at June 30, 2019, Xebec Adsorption Inc. had 60,928,995 common shares issued. Share Purchase Warrants Outstanding As at June 30, 2019, the Company had 3,644,387 warrants outstanding. No warrants were issued in Q1 and Q2 2019. Stock Options Outstanding The Company Stock Option Plan (the “Plan”) allows for the issuance of stock options.

June 30, December 31,

2019 2018

Short-term debt 2,151 2,077 Long-term debt 8,514 6,310

10,665 8,387

In thousands of $


Under the terms of the Plan, stock options are granted with an exercise price not less than the discounted market price (as such terms are defined in the Policies of the TSX Venture Exchange) of the common shares at the time of grant. Stock options generally vest quarterly over four years and are exercisable for five or seven years from the date of grant. The Board of Directors, with the approval of the shareholders of the Company at the annual meeting held on June 13, 2019, have amended the Plan in order to change the relevant provisions therein so that the aggregate number of common shares reserved for issuance under the amended plan be fixed at 11,505,347 common shares (being 20% of all issued and outstanding common shares of the Company). As at June 30, 2019, the Company had 4,902,258 options outstanding under the Plan with a weighted average exercise price of $0.32. 6 SUMMARY OF QUARTERLY RESULTS

7 LIQUIDITY AND CAPITAL RESOURCES

Analysis of principal cash flows for the six-month period ended June 30, 2019 Operating activities in the six-month period ended June 30, 2019, used $2.83 million of cash, compared to $0.78 million of cash used for the same period in 2018, a difference of $2.05 million. The use of cash for the six-month period ended June 30, 2019, is mainly explained by an increase in trade and other receivables and deferred revenue of $5.38 million, partially compensated by an increase of accounts payable of $1.08 million and by net income of $1.44 million. Investing activities Cash outflow of $1.64 million for the six-month period ended June 30, 2019, relates mainly to a company acquisition for an amount of $1.46 million. Financing activities for the six-month period ended June 30, 2019, resulted in a cash inflow of $1.79 million explained mainly by the issuance of share capital of $1.82 million.

Q2 Q1 Q4 Q3 Q2 Q1 Q4 Q3Revenues 12,766 9,769 6,092 5,584 5,317 3,215 3,259 4,129

Net income (loss) 1,017 423 (1,009) (410) (114) (1,372) (928) 93

Earnings (loss) per shareBasic 0.02 0.01 (0.02) (0.01) (0.003) (0.03) (0.020) 0.00

Diluted 0.02 0.01 (0.02) (0.01) (0.003) (0.03) (0.02) 0.00

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

20182019 2017

Cash flow from (used in)

in thousands of $ 2019 2018 Change 2019 2018 Change

Operating activities (180) (458) 278 (2,830) (780) (2,050) Investing activities (40) (37) (3) (1,639) (118) (1,521) Financing activities 1,043 46 997 1,788 213 1,575

For the three-month period ended June 30,

for the six-month period ended June 30,


Contractual Obligations

Credit Facilities The Company has access to credit facilities in the amount of $2,000,000 with National Bank of Canada which are guaranteed by Export Development Canada at 75%, and bear interest at the Canadian Prime Rate plus 2.75% per annum and are limited by certain margin requirements concerning trade and other receivables and inventories. The credit facilities were not used as at June 30, 2019. (December 31, 2018 – $ NIL). The credit facilities are secured by a first ranking hypothec of $2,100,000 on all movable property of the Company. As of June 30, 2019, the company has a guarantee facility of $12,000,000 with National Bank of Canada sponsored at 100% by Export Development Canada (EDC). Stand by fees at an annual rate of 0.75% are calculated on the unused portion of this operating credit. As at June 30, 2019, the guarantee facilities are used for a total of $ 3,701,240, including $ 331,998 with Toronto-Dominion Bank of Canada. The Company has a $2 million, three-year term, working capital line bearing interest at the rate of 11% per annum, payable every month. The Company has an unused PO facility of $9,000,000 that has been granted in order to assist in financing working capital needs directly associated with specific export contracts. It is available in multiple advances in Canadian dollars up to 70% of the supported export contract, excluding all applicable taxes, minus all customer advanced payments. The Company will repay to EDC outstanding advances in principal, bi-monthly, in an amount equivalent to cash receipt from Customers for the supported export contracts. Interest is calculated and payable in arrears at a rate of 11% per annum the 18th day of every month. During the quarter, 3,422, 647 common shares were issued due to warrants and debentures conversion. As at June 30, 2019, the Company had unsecured convertible debentures, maturing November 15, 2019, for aggregate gross proceeds of $1,394,149 outstanding. The debentures bear interest at a rate of 8% per annum. The debentures may be converted into common shares of the Company, at any time prior to the maturity date, at the request of the holder of debentures, at a conversion price of $0.65 per common share. For the six-month period ended June 30, 2019, 869,231 common shares have been issued from conversion and 2,144,845 could still be converted. 8 OUTSTANDING SHARE DATA

As at August 12, 2019, the following common shares and stock options were outstanding:

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

Operating leases 0.13 0.13 - 0.26

Total contractual obligations 0.13 0.13 - 0.26


9 SUBSEQUENT EVENT On July 4, 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 (each whole common share purchase warrant, a "Warrant"). Each Warrant is exercisable 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. In connection with the Offering, the Company paid to the underwriters a cash commission equal to 6% of the gross proceeds of the Offering and compensation options equal to 6% of the units issued pursuant to the offering. Each compensation option will entitle the underwriters to purchase a unit at an exercise price of $1.40 for a period of 12 months from the closing date of the offering.

10 CRITICAL ACCOUNTING ESTIMATES

The Company makes estimates and assumptions concerning the future that will, by definition, seldom equal actual results. The following are the estimates and judgments applied by management that affect the Company’s audited consolidated financial statements.

Number of shares Exercise

Price Expiring Date Issued and outstanding Common Shares as of August 12, 2019 69,368,750 Debentures 2,144,845 $0.65 November 15,2019 Stock Options

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

2,098,193 500,000 400,000 111,000

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

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

January 7, 2023 March 5, 2024

August 29, 2024 December 19, 2022 December 19, 2024

100,000 $0.60 May 14,2025 735,000 $0.70 November 19,2025 4,902,258 $0.32 Warrants 3,178,014 $1.05 May 7, 2020 8,280,000 $1.85 July 4, 2020 Compensation shares 306,618 $0.75 May 7, 2020 496,800 $1.40 July 4,2020 Fully diluted as at August 12, 2019 88,677,285


Inventories must be valued at the lower of cost and net realizable value A write-down of inventory will occur when its estimated market value less applicable variable selling expenses is below its carrying amount. Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. This estimation process involves significant management judgment and is based on the Company’s assessment of market conditions for its products determined by historical usage, estimated future demand and, in some cases, the specific risk of loss on specifically identified inventory. Any change in the assumptions used in assessing this valuation will impact the carrying amount of the inventory and have a corresponding impact on cost of goods sold.

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

Percentage of completion and revenues from long-term production-type contracts Revenues recognized on long-term production-type contracts reflect management’s best assessment by taking into consideration all information available at the reporting date and the result on each ongoing contract and its estimated costs. The management assesses the profitability of the contract by applying important judgments regarding milestones marked, actual work performed and estimated costs to complete. Actual results could differ because of these unforeseen changes in the ongoing contracts’ models. Revenue recognition for obligations in China, previously accounted for using the percentage-of-completion method no longer meet the requirements for revenue recognition over time. The comparative information for the three-month and six-month periods ended June 30, 2018 has been adjusted to reflect IFRS 15 application. Allowance for expected credit loss The Company recognizes the impairment of financial assets in the number of expected credit losses by means of the simplified approach, measuring impairment losses as lifetime expected credit losses the trade receivables have been assessed on a collective basis as they possess shared credit risk characteristics and have been grouped based on the days past due.

Liquidity risk The assessment of the Company’s ability to continue as a going concern and to raise enough funds to pay for its ongoing operation’s expenditures to meet its liabilities for the ensuing year involves significant judgment based on historical experience and other factors, including the expectation of future events that are believed to be reasonable under the circumstances. 11 CHANGES IN ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS IFRS 16, “Leases”


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

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

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

liabilities amount will increase affecting its financial leverage.

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

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

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

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


12 OUTLOOK 12.1. Current Market and Guidance for 2019 We continue to see positive developments in our renewable gas, hydrogen, and industrial service and products segments. In the first six months of 2019, we have made good progress with revenues and profitability. Overall gross margin generation was satisfactory; nevertheless, we continue to work on gaining some additional GM points over the next 12 to 18 months. The outlook for the Renewable Natural Gas (RNG) and hydrogen purification Clean Technology segment remains unchanged from our previous guidance. Our Industrial Service, Support and Products segment continues to grow, and our CAI acquisition is out-performing expectations. The SG&A ratio decreased by 15 % to 22 % in the six-month period ended June 30, 2019, compared to 37 % for the same six months of 2018.

Xebec has been providing guidance for 2019 with revenues of $45 million plus, net earnings in the $4 to $5 million and EBITDA in the $6 to $7 million range. We are currently on track to meet these numbers. Nonetheless, we are adjusting our EPS range to between 0.07 and 0.10 cents due to the higher outstanding share count from our July 2019 equity raise (units), some warrant conversions of the November 2018 equity raise (units), and the likely exercise of the 2017 convertible debentures in November this year.

12.2. Renewable Gas Systems - Clean Technology We are seeing increased activity for RNG systems and we have accelerated our efforts across our operating geographies. Continued progress in Europe and North America, especially in the landfill gas space, is instrumental for our growth ambitions in 2020. We anticipate reporting progress on the landfill opportunities by year end. Our current quote log is close to $700 million, and our order backlog is over $63 million..

12.3. Service, Support and Products - Industrial Our Industrial segment continues to perform well, despite some weakness in our gross margins. Growth will be achieved organically, combined with our acquisition strategy. The acquisition of profitable compressed air service companies is crucial in supporting our growing RNG installations. As previously stated, the product mix is an important contributor to achieving our GM target in the Industrial segment. Our first acquisition, Compressed Air International (CAI) in Ontario, has performed above expectations in the first half of 2019 and is on track to grow revenues by 20% full year. Xebec is currently working on its next two acquisitions. 12.4. Renewable Gas Generation - Infrastructure In early May 2019, Xebec’s Board of Directors approved an expanded strategy for Xebec’s Infrastructure segment, allowing management to engage with a larger pool of potential partners to explore more opportunities. Currently, Canada has two provinces that offer renewable Gas Purchase Agreements (GPAs) with terms of up to 20 years, and prices of up to $30/GJ while California has recently announced a target of 20% RNG by 2030, offering unique investment opportunities. Xebec continues to actively work on the establishment of its RNG infrastructure business where we will build, own and operate (BOO) high-quality renewable gas assets in Canada and California, and sell renewable natural gas to obligated parties and other third-party off-takers. The Infrastructure investment opportunities for RNG facilities have created significant interest from a number of Industry participants. Xebec is currently evaluating these opportunities and potential partners. Great partnerships are paramount for success, so striking the right foundational balance is our priority for making this segment a reality. No revenues or costs have yet been recorded. Xebec still expects to announce its first BOO project in 2019.


12.5. Delivery Outlook Our order lead times are normally between 12 weeks to 9 months, and we enjoy good visibility over at least two to three quarters. We operate in various end markets so our delivery outlook is subject to a number of factors that are within our control, such as product availability, delivery lead times, price and market engagement initiatives, as well as a number of factors beyond our control, such as macroeconomic conditions, environmental site permits, customer project financing, feedstock availability, off-take agreements etc. As part of our annual budget planning cycle, we make several underlying assumptions regarding delivery outlook in each of our relevant market segments in order to plan capacity and appropriately allocate our resources. We have furthermore taken steps to make sure contracts in Asia reflect the necessary language to allow for revenue recognition on a percentage of completion basis, allowing us to adequately predict future revenue streams. 12.6. 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 are in the process of strengthening our consolidated financial position and repair our balance sheet. While we may still see some volatility in our revenue over the short-term, we do expect that for the medium and longer-term our revenue trend will continue to improve significantly. As of August 12th, 2019, our order backlog was $63.5 million (August 6th, 2018 – $68.1 million) spread across our two active business segments and numerous geographical regions. It includes firm order commitments of $43 million to be delivered over two years. Xebec expects to be converting a portion of this backlog into revenue in Fiscal 2019. Consequently, Xebec maintains its 2019 guidance of $45.5 million in revenue and net earnings of $4 to $5 million. As a global company, we are subject to the risks arising from adverse changes in global economic and political conditions. Political conditions such as government commitments and policies towards environmental protection and renewable energy may change over time. Economic conditions in leading and emerging economies have been, and remain, unpredictable. In particular, currency fluctuations could have the impact of significantly reducing revenue and gross margin as well as the competitive positioning of our product portfolio. These macroeconomic and geopolitical changes could result in our current or potential customers reducing purchases or delaying shipment which could cause revenue recognition on these products to shift into 2020 or beyond. 13 RELATED PARTY TRANSACTIONS

In thousands of $ 2019 2018 2019 2018

Marketing and professional services expenses paid to companies controlled by members of the immediate family of an officer 20 56 66 127

Total 20 56 66 127

For the three-month For the six-monthperiod ended June 30, period ended June 30,


14 RECONCILIATION OF NON-IFRS MEASURES EBITDA

EBITDA Is not a performance measure defined under IFRS and is not considered an alternative to income from operations or net (loss) earnings in the context of measuring a company’s performance. EBITDA does not have a standardized meaning and is therefore not likely to be comparable with similar measures used by other publicly traded companies. The EBITDA for the three-month period ended June 30, 2019, has amounted to $1.78 million compared to $0.34 million in the same period of 2018, an increase of $1,44 million. For the six-month period EBITDA increase by $3.45 million from $(0.59) million to $2.87 million mostly due by the sales increase and a higher margin. The net finance cost for the six-month period ended June 30, 2019, includes the accretion of the obligation arising from shares issued by a subsidiary $0.15 million, interest and accretion on convertible debentures $0.17 million, interest on obligation under a working capital line of $0.11 million, interest on lease rental obligation of $0.11 million and interest and bank charges of $0.23 million.

15 ENTERPRISE RISK MANAGEMENT Our Definition of Business Risk We define business risk as the degree of exposure associated with the achievement of key strategic, financial, organizational and process objectives in relation to the effectiveness and efficiency of operations, the reliability of financial reporting, compliance with laws and regulations and the safeguarding of assets within an ethical organizational culture. Our enterprise risks are largely derived from the Corporation’s business environment and are fundamentally linked to our strategies and business objectives. We strive to proactively mitigate our risk exposures through rigorous performance planning and effective and efficient business operational management. We strive to avoid taking on undue risk exposures whenever possible and ensure alignment with business strategies, objectives, values and risk tolerances. The following sections summarize the principal risks and uncertainties that could affect our future business results going forward and our associated risk mitigation activities.

In thousands of $

2019 2018 2019 2018

Net income (loss) 1,017 (114) 1,440 (1,486) Depreciation of property 140 20 271 40

Amortization of intangible assets 42 32 78 63 Stock-based compensation expenses 112 77 230 172 Finance cost net 471 325 847 622 EBITDA 1,782 340 2,866 (589)

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

ended June 30, ended June 30,


16 RISK FACTORS An investment in our common shares involves risk. Investors should carefully consider the risks and uncertainties described below and in our Annual Information Form. The risks and uncertainties described below and in our Annual Information Form are not the only ones we face. Additional risks and uncertainties, including those that we do not know about now or that we currently deem immaterial, may also adversely affect our business. For a more complete discussion of the risks and uncertainties which apply to our business and our operating results (which are summarized below), please see our Annual Information Form and other filings with Canadian Regulatory Authorities (www.sedar.com). Our business entails risks and uncertainties that affect our outlook and eventual results of our business and commercialization plans. The primary risks relate to meeting our product commercialization milestones, which require that our products exhibit the functionality, cost, and performance required to be commercially viable against competing technologies and that we have enough access to capital to fund these activities. There is also a risk that key markets for certain of our products may not be as large as we anticipate or never develop, or that market acceptance might take longer to develop than anticipated – in particular for applications such as advanced CO2 removal from natural gas, which requires industry acceptance and uptake, or our renewable natural gas (RNG) product offering which depends on government programs and regulatory support. A summary of our identified risks and uncertainties are listed below:

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

and dilute our shareholders’ interests. • We must continue to lower the cost of our renewable natural gas and hydrogen generation and purification

products and demonstrate their reliability or consumers will be unlikely to purchase our products and we will therefore not generate enough revenues to achieve and sustain profitability.

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

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

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

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

16.3. Liquidity

The Company has realized an operating income of $2,287,020, had cash outflows from operating activities of $2,829,506 for the six-month period ended June 30, 2019 and finished the period with cash and cash equivalent amounting to $1,199,201, a positive working capital of $7,984,650 and had access to credit facilities totaling $2,000,000 which has not been used (Nil as at December 31, 2018). During the quarter, management undertook various initiatives and developed a plan to manage its operating and liquidity risks considering prevailing economic conditions. The Company has prepared a budget and forecast for 2019 for which management believes the assumptions are reasonable. Achieving budgeted results is dependent on


improving the volume of revenues in Canada, United States, Europe, and China, delivering on sales and contracts schedules, meeting expected overall operating margin levels and controlling general and administrative costs.

The Company is thus faced with uncertainties that may have an impact on future operating results and liquidity. These uncertainties include reduced spending in biogas upgrading projects reflecting the uncertainties of an emerging market, fluctuations in foreign currency rates and achieving the Company’s business plan goals as mentioned in the previous paragraph, which includes the development of a new business segment. While management believes it has developed planned courses of action to mitigate operating and liquidity risks, there is no assurance that management will be able to achieve its business plan and maintain the necessary liquidity level, including accessing liquidities from China, if events or conditions develop that are not consistent with management’s expectations, key budget assumptions for 2019 and planned courses of action. Therefore, the Company may require additional external funding and there is no assurance that it would be successful. It is possible that future changes in capital markets conditions could result in such funding not being available when required or at acceptable costs. The Company is unable to predict the possible effects, if any, of such uncertainties and the potential adjustments to the carrying values of assets and liabilities that could be needed, should the Company have insufficient liquidity. Such adjustments could be material.

16.4. Foreign Currency Exchange Our operating results may be impacted by currency fluctuation. 17 FORWARD-LOOKING STATEMENTS This Management Discussion and Analysis (“MD&A”) contains forward-looking statements, including statements regarding the future success of the Company’s business, technology, and market opportunities. Forward-looking statements typically contain words such as “believes”, “expects”, “anticipates”, “continues”, “could”, “indicates”, “plans”, “will”, “intends”, “may”, “projects”, “schedules”, “would” or similar expressions suggesting future outcomes or events, although not all forward-looking statements contain these identifying words. Examples of such statements include, but are not limited to, statements concerning: (i) actions expected to be undertaken to achieve the Company’s strategic goals; (ii) the key market drivers impacting the Company’s success; (iii) intentions with respect to future biogas development work; (iv) expectations regarding business activities and orders that may be received in fiscal 2019 and beyond; (v) trends in, and the development of, the Company’s target markets; (vi) the Company’s market opportunities; (vii) the benefits of the Company’s products, (viii) the intention to enter into agreements with partners; (ix) future outsourcing; (x) expectations regarding competitors; (xi) the expected impact of the described risks and uncertainties; (xii) intentions with respect to the payment of dividends; (xiii) the management of the Company’s liquidity risks in light of the prevailing economic conditions; (xiv) the Company’s cost reduction plan; and (xv) the search for additional financing over the next months. These statements are neither promises nor guarantees but involve known and unknown risks and uncertainties that may cause the Company’s actual results, level of activity or performance to be materially different from any future results, levels of activity or performance expressed in or implied by these forward-looking statements. These risks include, generally, risks related to revenue growth, operating results, industry and products, technology, competition, the economy, and other factors. Although the forward-looking statements contained herein are based upon what management believes to be current and reasonable assumptions, the Company cannot assure readers that actual results will be consistent with these forward-looking statements. Examples of such assumptions include but are not limited to: (i) trends in certain market segments and the economic climate generally; (ii) the pace and outcome of technological development; (iii) the identity and expected actions of competitors and customers; and (iv) the value of the Canadian dollar. The forward-looking statements contained


herein are made as of the date of this MD&A and are expressly qualified in their entirety by this cautionary statement. Except to the extent required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements contained herein. 18 CORPORATE GOVERNANCE The Board of Directors of Xebec Adsorption, Inc. is comprised of five directors, three of whom are independent. 19 APPROVAL The Board of Directors of Xebec Adsorption Inc. has approved the disclosure contained in this MD&A. A copy of this MD&A will be provided to anyone who requests it. 20 ADDITIONAL INFORMATION Additional information relating to Xebec Adsorption Inc. is on SEDAR at www.sedar.com or by contacting: Xebec Adsorption, Inc., 730, Boulevard Industriel, Blainville, QC, Canada, J7C 3V4 Tel : (450) 797-8700 www.xebecinc.com email : [email protected] Attention: Louis Dufour, Chief Financial Officer

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Xebec Adsorption Inc. Management's Discussion and Analysis ...€¦ · Established in 1967, Xebec has over 50 years of experience in adsorption technology, supplying more than 10,000