Xebec Adsorption Inc.
Consolidated Financial Statements
December 31, 2009
PricewaterhouseCoopers
LLP/s.r.l./s.e.n.c.r.l.
Chartered Accountants
1250 René-Lévesque Boulevard West
Suite 2800
Montréal, Quebec
Canada H3B 2G4
Telephone +1 514 205 5000
Facsimile +1 514 876 1502
March 29, 2010
Auditors’ Report
To the Shareholders of
Xebec Adsorption Inc.
We have audited the consolidated balance sheet of Xebec Adsorption Inc. as at December 31, 2009
and the consolidated statement of income (loss) and comprehensive income (loss), changes in
shareholder’s equity and cash flows for the year then ended. These financial statements are the
responsibility of the company’s management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the
financial position of the company as at December 31, 2009 and the results of its operations and its cash
flows for the year then ended in accordance with Canadian generally accepted accounting principles.
The consolidated financial statements as at December 31, 2008 and for the year then ended, prior to the
adjustments for the change in accounting policy for start-up costs as described in note 3 of the
consolidated financial statements, were audited by other auditors who expressed an opinion without
reservation on those statements in their report dated March 6, 2009. We have audited the adjustments
made to the consolidated financial statements as at December 31, 2008 and in our opinion, such
adjustments, in all material respects, are appropriate and have been properly applied.
1 Chartered accountant auditor permit No. 15492
Xebec Adsorption Inc.
Consolidated Balance Sheet
As at December 31, 2009
Assets
Current assets
Cash
Accounts receivable
Inventories (note 6)
Prepaid expenses
Income taxes receivable
Investment tax credits receivable
Current portion of the loan to a joint venture
Derivative financial assets (note 11)
Loan to a joint venture, bearing interest at 7.93%, repayable by minimum annual
instalments of $37,777 plus accrued and unpaid interest and maturing on July 1, 2012
Property, plant and equipment (note 7)
Intangible assets (note 8)
Restricted cash (note 9)
Goodwill (note 5)
Liabilities
Current liabilities
Bank loan (note 10)
Accounts payable and accrued liabilities
Deferred revenues
Income taxes payable
Current portion of long-term debt (note 13)
Current portion of subordinated loan (note 15)
Future income taxes (note 20)
Derivative financial liabilities (note 11)
Long-term debt (note 13)
Government assistance (note 14)
Subordinated loan (note 15)
Future income taxes (note 20)
Shareholders’ Equity
Share capital (note 16)
Contributed surplus
Retained earnings (deficit)
2009
$
2008
$
(Restated-note 3)
5,447,702
3,105,834
2,867,922
183,564
62,492
80,843
37,777
-
11,786,134
75,554
2,604,931
279,046
223,261
5,942,152
20,911,078
496,900
5,578,505
146,228
-
321,653
62,496
-
96,645
6,702,427
1,763,496
37,083
156,256
-
8,659,262
17,942,821
216,368
(5,907,373)
12,251,816
20,911,078
550,377
4,538,842
2,579,877
221,143
-
258,785
-
229,906
8,378,930
-
1,822,209
148,319
324,577
-
10,674,035
1,760,931
4,320,860
679,938
268,194
230,186
-
99,070
-
7,359,179
1,874,087
42,083
250,000
23,545
9,548,894
300,100
-
825,041
1,125,141
10,674,035
The accompanying notes are an integral part of the consolidated financial statements.
Approved by the Board of Directors
(s) Kurt Sorschak Director (s) Peter Paul Praxmarer Director
Xebec Adsorption Inc.
Consolidated Statement of Income (Loss) and Comprehensive Income (Loss)
For the year ended December 31, 2009
Revenues
Cost of goods sold (note 6)
Gross margin
Operating expenses
Research and development (note 18)
Selling and administrative
Financial (note 19)
Foreign exchange loss (gain)
Amortization
Income (loss) before income taxes
Provision for (recovery of) income taxes (note 20)
Current
Future
2009
$
2008
$
(Restated-note 3)
18,693,788
16,840,622
14,462,614
10,700,381
4,231,174
6,140,241
1,080,638
8,783,201
233,862
518,319
527,389
108,865
4,754,017
348,106
(239,402)
194,381
11,143,409
5,165,967
(6,912,235)
974,274
(57,206)
(122,615)
(179,821)
249,746
72,576
322,322
651,952
Net income (loss) and comprehensive income (loss) for the year
(6,732,414)
Income (loss) per share
Basic and diluted
(0.42)
0.08
The accompanying notes are an integral part of the consolidated financial statements.
Xebec Adsorption Inc.
Consolidated Statement of Changes in Shareholders’ Equity
For the year ended December 31, 2009
Number
Amount
Warrants
Common
shares
Preferred
shares
Common
shares &
warrants
$
Preferred
shares
$
Contributed
surplus
$
Balance – January 1, 2008 – As previously reported (1)
5,868,108
8,638,496
300,000
Restatement – Change in accounting policy (note 3)
-
-
-
Balance – January 1, 2008 – As restated
5,868,108
8,638,496
300,000
Net income for the year – As restated
Adjusted balance – January 1, 2009
-
-
-
5,868,108
8,638,496
300,000
100
-
100
-
100
300,000
-
300,000
-
300,000
Conversion of preferred shares(1)
311,892
769,231
(300,000)
300,000
(300,000)
Deemed issuance of shares and warrants on reverse takeover
transaction (note 5)
Issuance of shares and warrants – Private placement, November 25,
2009 (note 16 c)
Financing costs – Private placement, November 25, 2009
Net loss for the year
Stock-based compensation
6,180,000
11,269,318
4,807,824
-
-
-
8,585,400
-
-
-
-
-
-
-
-
11,921,423
6,439,050
(717,752)
-
-
Balance – December 31, 2009
17,167,824
29,262,445
-
17,942,821
(1) These represent the shares and warrants issued to the shareholder’s of Xebec on reverse takeover note 5.
.
-
-
-
-
-
The accompanying notes are an integral part of the consolidated financial statements.
Retained
earnings
(deficit)
$
(Restated-
note 3)
Total
$
206,301
506,401
(33,212)
(33,212)
173,089
473,189
651,952
825,041
651,952
1,125,141
-
-
-
-
(6,732,414)
-
-
11,948,190
6,439,050
(552,752)
(6,732,414)
24,601
-
-
-
-
-
-
26,767
-
165,000
-
24,601
216,368
(5,907,373)
12,251,816
Xebec Adsorption Inc.
Consolidated Statement of Cash Flows
For the year ended December 31, 2009
Cash flows from
Operating activities
Net income (loss) for the year
Items not affecting cash
Amortization of property, plant and equipment
Amortization of intangible assets
Unrealized foreign exchange loss (gain) on derivative financial assets
Stock-based compensation expense (notes 16 b) and 17)
Future income taxes
Changes in non-cash working capital components
relating to operations
Accounts receivable
Inventories
Prepaid expenses
Investment tax credits receivable
Accounts payable and accrued liabilities
Deferred revenues
Income taxes receivable/payable
Investing activities
Acquisition of property, plant and equipment
Acquisition of intangible assets
Transaction costs paid on acquisition of a business (note 5)
Cash acquired on acquisition of a business (note 5)
Loan to a joint venture
Government assistance
Financing activities
Issuance of capital stock and warrants
Issuance costs of shareholders’ equity instruments
Increase (decrease) in bank loan
Loan to a joint venture
Long-term debt
Repayment of long-term debt
Payment of obligations under capital leases
Restricted cash
Increase in cash during the year
Cash – Beginning of year
Cash – End of year
Supplemental cash flow information (note 21)
The accompanying notes are an integral part of the consolidated financial statements.
2009
$
2008
$
(Restated-note 3)
(6,732,414)
465,261
62,128
326,551
24,601
(122,615)
(5,976,488)
2,888,309
1,923,637
210,933
177,942
(149,782)
(1,988,725)
(330,686)
(3,244,860)
(308,760)
(192,855)
(1,095,708)
5,122,028
(134,208)
(5,000)
3,385,497
6,439,050
(552,752)
(1,264,031)
20,877
289,402
(326,788)
(12,986)
163,916
651,952
145,435
48,946
(229,906)
-
72,576
689,003
(3,281,660)
(1,525,746)
74,515
(258,785)
3,009,198
209,398
222,580
(861,497)
(624,402)
(113,372)
-
-
-
(5,000)
(742,774)
-
-
1,760,931
-
193,387
(102,100)
(11,981)
(64,382)
4,756,688
1,775,855
4,897,325
550,377
5,447,702
171,584
378,793
550,377
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
1 Nature of operations and liquidity risk
a) Nature of operations
Xebec Adsorption Inc. (the “company”) is a global provider of clean energy solutions to corporations and
governments looking to reduce their carbon footprints. The company was formed upon the amalgamation of
Xebec Adsorption Inc. (“Xebec”) and QuestAir Technologies Inc. (“QuestAir”) on June 12, 2009. The
comparative financial statements are those of Xebec and the financial statements reflect the accounts of
QuestAir from June 12, 2009 (note 5).
b) Liquidity risk
Although the company has incurred an operating loss of $6,732,414 and had cash outflows from operations of
$3,244,860 for the year ended December 31, 2009, the company finished the year with cash amounting to
$5,447,702, working capital of $5,083,707 and had access to unused credit facilities totalling $1,500,000.
During the fourth quarter of 2009, management concluded a share offering which provided the company with
net proceeds of $5,886,298, the company also undertook various initiatives and developed a plan to manage its
operating and liquidity risks in light of prevailing economic conditions. The company has prepared a budget for
2010 for which management believes the assumptions are reasonable. Achieving budgeted results is dependent
on improving the volume of revenues, delivering on sales and contracts schedules, meeting expected overall
operating margin levels and controlling general and administrative costs. Management expects to meet its
budget and to have enough liquidity to fund operations to at least beyond December 31, 2010.
The company is thus faced with uncertainties that may have an impact on future operating results and liquidity.
These uncertainties include reduced spending in renewable energy projects reflecting the weakness in the
economy, 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 if
events or conditions develop that are not consistent with management’s expectations, key budget assumptions
for 2010 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. 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.
2 Basis of presentation
These consolidated financial statements have been prepared in accordance with Canadian generally accepted
accounting principles (“Canadian GAAP”). Certain comparative figures have been reclassified to conform to
the presentation adopted for the year ended December 31, 2009.
(1)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
3 Significant accounting policies
Basis of consolidation
These consolidated financial statements include the accounts of the company and its subsidiary, Xebec
Adsorption (Shanghai) Co. Ltd. They also include the company’s portion of the accounts of a joint venture,
Xebec Adsorption South East Asia PTE. Ltd., accounted for using the proportionate consolidation method.
Use of estimates
The preparation of financial statements in conformity with Canadian GAAP requires management to make
estimates and assumptions, which affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant areas requiring the use of management estimates relate to the
useful life of assets, inventory obsolescence, impairment of long-lived assets and goodwill, valuation allowance
with respect to future income taxes, fair value of certain financial instruments, stock options, warrants and
share awards. Actual results could differ from those estimates.
Inventories
Inventories are recorded at the lower of cost and net realizable value for raw materials, work-in-progress and
finished goods. Costs of raw materials are determined on an average cost basis. Work-in-progress and finished
goods include materials, direct labour and production overhead. Inventories are recorded net of any
obsolescence provision.
A new assessment is made of net realizable value in each subsequent period. When the circumstances that
previously caused inventories to be written down below cost no longer exist or when there is clear evidence of
an increase in net realizable value because of changed economic circumstances, the amount of the write-down
is reversed (i.e. the reversal is limited to the amount of the original write-down) so that the new carrying
amount is the lower of the cost and the revised net realizable value.
Property, plant and equipment
Property, plant and equipment are accounted for at cost. Amortization is based on their estimated useful life
using a straight-line basis at the following rates:
Building
Machinery and equipment
Office furniture and equipment
Computers
Moulds
Leasehold improvements
20 years
3-10 years
5 years
3 years
5 years
Lesser of economic
life or term of lease
(2)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
3 Significant accounting policies (continued)
Impairment of long-lived assets
Long-lived assets are tested for impairment whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. The company tests the recoverability of long-lived assets based on
future undiscounted cash flows expected to result from the use of the related assets to be realized upon sale. An
impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair
value.
Intangible assets
Intangible assets are comprised of software and engineering drawings which are accounted for at cost.
Engineering drawings consist of engineering costs incurred to develop product plans, and are amortized using
the straight-line method over three years which represents their expected benefit to future periods. Software is
amortized using the straight-line method over three years which represents its expected benefit to future
periods.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business
acquisition. Goodwill is not amortized.
On an annual basis, or more frequently if events or circumstances indicate that goodwill may be impaired,
management reviews the carrying amount of goodwill for possible impairment by conducting a two-step test. In
the first step, fair value of the reporting unit, as determined under an accepted valuation method, is compared to
its carrying value. If the fair value is less than the carrying value, the second step is conducted whereby the fair
value of goodwill is determined on the same basis as a business combination. If the fair value of goodwill is
less than its carrying value, goodwill is written down to its estimated fair value. The company has elected to
carry out its annual impairment test in June of each year for all of its reporting units.
Goodwill is assigned as at the date of the business combination to the reporting unit expected to benefit from
the business combination.
Revenue recognition
The company recognizes revenue on commercial equipment sales when title has transferred, the customer has
accepted the product, there is persuasive evidence of an arrangement, collection is probable and the price is
fixed or determinable. Provisions are established for estimated product returns and warranty costs at the time
revenue is recognized. The company records deferred revenue when cash is received in advance of all of these
revenue recognition criteria being met.
(3)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
3 Significant accounting policies (continued)
Revenue recognition (continued)
Revenues from long-term production-type contracts and engineering service contracts are determined under the
percentage-of-completion method whereby revenues are recognized based on the costs incurred to date in
relation to the total expected costs of a contract (costs being mainly composed of labour hours). Costs and
estimated profit on contracts in progress in excess of amounts billed are reflected as work-in-progress. Cash
received in advance of revenues being recognized on contracts is classified as deferred revenue.
The company monitors its contracts with customers on a regular basis to determine if a loss is likely to occur. If
a loss is anticipated on a contract, the entire estimated loss is recorded as a cost of sales and a reduction in
work-in-progress in the period in which the loss becomes evident and reasonably estimable.
Government assistance
Non-refundable capital asset grants are accounted for as deferred government assistance and amortized on the
same basis as the related property, plant and equipment.
Research and experimental development tax credits are recognized when there is reasonable assurance of their
recovery using the cost reduction method. Investment tax credits are subject to the customary approvals by the
pertinent tax authorities. Adjustments if required, are reflected in the year when such assessments are received.
Warranty provision
During the normal course of its operations, the company assumes certain maintenance and repair costs under
warranties offered on dryers and filters. The warranties cover a period ranging from 12 to 18 months. A
liability for the expected cost of the warranty-related claims is established when the product is delivered and
completed. In estimating the warranty liability, historical material replacement costs and the associated labour
costs are considered. Revisions are made when actual experience differs materially from historical experience.
Income taxes
The company uses the liability method to record income taxes. Under this method, future income tax assets and
liabilities are determined based on differences between the financial reporting and tax bases of assets and
liabilities, and are measured using substantively enacted rates in effect when the differences are expected to
reverse. The effect on future income tax assets and liabilities of a change in tax rates is included in income in
the period that includes the substantial enactment date. Future income tax assets are evaluated and if realization
is not considered to be more likely than not, a valuation allowance is provided.
(4)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
3 Significant accounting policies (continued)
Earnings per share
Basic earnings per share is determined using the weighted average number of common shares outstanding
during the year.
Diluted earnings per share is determined using the weighted average number of common shares outstanding
during the year, plus the effects of dilutive securities such as stock options. Diluted earnings per share is
calculated using the treasury stock method, which assumes that if all dilutive securities had been exercised at
the later of the beginning of the year or the date of issuance, as the case may be, the proceeds would be used to
purchase common shares of the company at the average market value during the year.
Foreign currency translation
The company uses the temporal method to translate its foreign currency transactions.
Monetary assets and liabilities in foreign currencies are translated into Canadian dollars at the exchange rate
prevailing at the end of the year. Non-monetary assets and liabilities are translated at historical rates and
transactions included in earnings are translated at exchange rates in effect at the date of transaction.
The company’s integrated foreign operations are translated using the temporal method. Under this method,
monetary assets and liabilities are translated into Canadian dollars at the rate of exchange prevailing at the
balance sheet date and non-monetary assets and liabilities at rates prevailing at the transaction date. Revenues
and expenses (other than amortization, which is translated at the rate applicable on the date of the acquisition of
the related assets) are translated at average rates for the year. Gains and losses arising on translation are
included in the statement of income (loss) for the year.
Stock-based compensation plans
The company accounts for stock options using the fair value method calculated using the Black-Scholes option
pricing model. The Black-Scholes model was developed to estimate the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, this model usually requires the input of
assumptions, including expected stock price volatility. For options granted to directors, officers and employees
of the company, the compensation cost is measured at fair value at the date of grant and is expensed to
operations over the award’s vesting period. For options granted to non-employees, the fair value is measured
when performance is complete, a performance commitment is made or the options are fully vested and non-
forfeitable, whichever is earliest, and the expense is recognized over the period in which the goods or services
from the non-employees are received. A corresponding increase in contributed surplus is recorded when stock
options are expensed. When stock options are exercised, capital stock is credited by the sum of the
consideration paid and the related portion previously recorded in contributed surplus.
Research and development expenses
Research expenses are charged to expenses as incurred. Development expenses are charged to expenses as
incurred unless they meet generally accepted accounting criteria for deferral and amortization. To date, no
development expenses have been deferred.
(5)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
3 Significant accounting policies (continued)
Financial instruments
The company classifies its financial instruments as follows:
Cash
Accounts receivable
Derivative financial assets
Loan to a joint venture
Restricted cash
Bank loan
Accounts payable and accrued liabilities
Loan from a shareholder of the joint venture
Long-term debt
Subordinated loan
held for trading
loans and receivables
held for trading
loans and receivables
held for trading
other financial liabilities
other financial liabilities
other financial liabilities
other financial liabilities
other financial liabilities
Financial assets and liabilities classified as held for trading are measured at fair value at each reporting period
with changes in fair value in subsequent periods included in net earnings. Loans and receivables assets and
other financial liabilities are initially measured at fair value and subsequently at amortized cost using the
effective interest method.
The company classifies derivative financial instruments which have not been designated as hedges for
accounting purposes and embedded derivatives as held for trading, and values them at fair value each period
with changes recorded in other income. The company does not designate these derivative financial instruments
as hedges.
Embedded derivatives
Derivatives may be embedded in other financial and non-financial instruments (the “host instrument”).
Embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not
clearly and closely related to those of the host instrument, the terms of the embedded derivative are the same as
those of a stand-alone derivative, and the combined contract is not held for trading or designated at fair value.
These embedded derivatives are measured at fair value with subsequent changes recognized in the statements
of income and comprehensive income and retained earnings as an element of foreign exchange gain or loss.
In the course of its operations, the company enters into certain contracts for the sale of non-financial items that
are denominated in currencies other than the Canadian dollar. In cases where the foreign exchange component
is not leveraged and does not contain an option feature and the contract is denominated in the functional
currency of the counterparty, the embedded derivative is considered to be closely related and is not accounted
for separately. If the contract is neither in Canadian currency nor the functional currency of the counterparty,
the embedded foreign currency derivative is separated unless the non-functional item delivered under the
contract is routinely denominated in the currency of the contract in international commerce or the currency the
contract is denominated in is commonly used in the economic environment in which the transaction takes place.
(6)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
3 Significant accounting policies (continued)
Changes in accounting policies
On January 1, 2009, the company adopted Canadian Institute of Chartered Accountants (“CICA”) Handbook
Section 3064, “Goodwill and Intangible Assets”, which replaces Section 3062, “Goodwill and Other Intangible
Assets”, and which resulted in (i) the withdrawal of Section 3450, “Research and Development Costs”, and
Emerging Issues Committee Abstract 27, “Revenues and Expenditures During the Pre-operating Period”, and
(ii) the amendment of Accounting Guideline 11, “Enterprises in the Development Stage”. This new standard
provides guidance on the recognition of intangible assets in accordance with the definition of an asset and the
criteria for asset recognition, whether those assets are separately acquired or internally developed, as well as
clarification on the application of the concept of matching revenues and expenses. The adoption of Section
3064 eliminated the deferral of start-up costs, which are now recognized as an expense when they are incurred.
Consequently, the company adjusted opening retained earnings as if the new rules had always been applied in
the past and the prior period figures have been restated. As well, the company made reclassifications in order to
present certain assets, mainly software, as intangible assets instead of presenting them as property, plant and
equipment.
As a result of the adoption of these new rules, the following table summarizes the adjustments that were
recorded in the consolidated balance sheet as at December 31, 2008 and to the statement of income for the year
then ended:
Balance sheet
Increase (decrease) in
Property, plant and equipment
Intangible assets
Future income tax liabilities
Retained earnings
Statement of income
Increase (decrease) in
Amortization of property, plant and equipment
Amortization of intangible assets
Cost of goods sold
Selling and administrative
Future income taxes
Net income for the year
Income per share – Basic and diluted
$
(143,619)
(446,022)
16,424
(573,217)
(44,839)
2,206
130,408
468,654
(16,424)
(540,005)
(0.06)
On January 20, 2009, the company adopted recommendation of the Emerging Issues Committee Abstract 173,
“Credit Risk and the Fair Value of Financial Assets and Financial Liabilities” (EIC – 173) issued by the CICA.
This Abstract clarifies that an entity’s own credit risk and the credit risk of its counterparty should be taken into
consideration in determining the fair value of financial assets and liabilities. The prospective adoption of this
standard had no material impact on the company’s consolidated financial statements.
(7)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
3 Significant accounting policies (continued)
Changes in accounting policies (continued)
In June 2009, the company adopted the amendments to Handbook Section 3862, “Financial Instruments –
Disclosures”, issued by the CICA. The amendments improved disclosures about fair value measurements of
financial instruments, including the relative reliability of the inputs used in those measurements and liquidity
risk, in light of concerns that the nature and extent of liquidity risk requirements were unclear and difficult to
apply. The amendments to Section 3862 apply to annual financial statements relating to fiscal years ending
after September 30, 2009. The prospective adoption of this Section had no measurable impact on the
company’s consolidated financial statements. The additional disclosure requirements are presented in note 27.
4 Recently issued accounting standards
In January 2009, the CICA issued three new accounting standards: Section 1582, “Business Combinations”;
Section 1601, “Consolidated Financial Statements”; and Section 1602, “Non-controlling Interests”, to converge
the accounting for business combinations and the reporting of non-controlling interests to International
Financial Reporting Standards (“IFRS”).
Business combinations
Section 1582 replaces Section 1581, “Business Combinations”, and establishes new guidance on the
recognition and measurement of all assets and all liabilities of the acquired business at fair value.
Non-controlling interests are measured at either their fair value or at their proportionate share of the fair value
of identifiable assets and liabilities. The measurement of consideration given now includes the fair value of any
contingent consideration as of the acquisition date, and subsequent changes in fair value of the contingent
consideration classified as a liability are recognized in income. Acquisition-related costs are excluded from the
purchase price and are expensed as incurred. In addition, restructuring costs related to a business combination
are no longer part of the purchase price equation and are expensed as incurred. Section 1582 applies
prospectively to business combinations realized in or subsequent to the first annual reporting period beginning
on or after January 1, 2011. Early adoption is permitted. The company is evaluating the impact of the adoption
of this new Section on its consolidated financial statements.
Consolidated financial statements and non-controlling interests
Section 1601 and Section 1602, which together replace Section 1600, “Consolidated Financial Statements”,
establish new guidance on accounting for non-controlling interests and for transactions with non-controlling
interests. The new sections require that non-controlling interests be presented as a separate component of
shareholders’ equity. In the statements of income, net income is calculated before non-controlling interests and
is then attributed to shareholders and non-controlling interests. In addition, changes in the company’s
ownership interest in a subsidiary that do not result in a loss of control are now accounted for as equity
transactions. These sections apply to interim and annual consolidated financial statements relating to financial
years beginning on or after January 1, 2011, and are required to be adopted concurrently with Section 1582.
Early adoption is permitted. The company is evaluating the impact of the adoption of this new Section on its
consolidated financial statements.
(8)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
5 Business combination
Pursuant to the arrangement between Xebec and QuestAir, the shareholders of Xebec (the “Vendors”) sold all
of the issued and outstanding shares in the capital of Xebec to QuestAir in exchange for up to an aggregate of
15,241,976 common shares in the capital of QuestAir and 6,180,000 warrants of QuestAir. As a result of this
transaction, the Vendors have received enough common shares of QuestAir to affect a reverse takeover of
QuestAir. Accordingly, the financial statements of the company reflect the accounts of QuestAir from June 12,
2009. The comparative financial statements included in these consolidated financial statements are those of
Xebec. Subsequent to that transaction, QuestAir and Xebec have amalgamated and have continued as one
corporation under the name of Xebec Adsorption Inc.
At the time of closing of the arrangement, the Vendors were issued 9,407,727 common shares, resulting in the
Vendors initially controlling 45% of the outstanding common shares of the amalgamated company. The
Vendors may increase their holdings in the amalgamated company by up to 5,834,249 common shares,
resulting in an increase in the Vendors’ holdings from 45% to 57% pursuant to the earn-out provisions
contained in the combination agreement if certain adjusted EBITDA performance targets are achieved by the
amalgamated company following completion of the arrangement (in respect of the 2009 and 2010 fiscal years).
These shares issued by QuestAir on completion of the arrangement are currently held in escrow (note 16 c)).
The acquisition is accounted for using the purchase method of accounting. This method requires the
determination of the aggregate purchase price, estimated at $13,043,898, for the net assets of QuestAir and
allocation of this amount to assets acquired and liabilities assumed based on their estimated fair value.
The following table represents the estimated fair value of the assets acquired and liabilities assumed on the
effective acquisition date. The excess of the purchase price over the net identifiable assets acquired is
preliminarily allocated to goodwill on the consolidated balance sheets. Within twelve months of the date of
acquisition, Management intends to complete a formal valuation of the tangible and intangible assets acquired
and liabilities assumed, including tax loss carry-forwards amounting to $42.2 million, in order to finalize
allocation of the total purchase price.
(9)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
5 Business combination (continued)
Assets acquired
Cash and cash equivalents
Accounts receivable – net
Inventories
Prepaid expenses
Property, plant and equipment
Goodwill
Restricted cash
Total assets
Liabilities assumed
Accounts payable and accrued liabilities
Deferred revenues
Total liabilities
Net assets acquired
Consideration
11,269,318 Common Shares
6,180,000 Warrants
199,347 options
Acquisition costs
$
5,122,028
1,455,301
2,211,682
173,354
939,223
5,942,152
62,600
15,906,340
1,407,427
1,455,015
2,862,442
13,043,898
10,139,164
1,782,259
26,767
11,948,190
1,095,708
13,043,898
The consideration excludes a portion of the fair value of 70,183 unvested options.
Subsequent to the closing, additional acquisition costs of $27,632 have been added to the purchase price
allocation, resulting in an increase of goodwill for the same amount.
The estimated fair value of the warrants was established using the Black-Scholes option pricing model with
the following assumptions: exercise price of $2.15, risk-free interest rate of 1.40%, expected volatility of 100%
and expected life of two years.
6
Inventories
Raw materials
Work in progress
Finished goods
2009
$
1,970,017
868,663
29,242
2008
$
1,880,618
699,259
-
2,867,922
2,579,877
Cost of goods sold is mainly composed of cost of inventories and includes an amount for the write-down of
inventory to the lower of cost and net realizable value of $355,012 ($59,573 in 2008).
(10)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
7 Property, plant and equipment
Land
Building
Machinery and equipment
Office furniture and equipment
Computers
Moulds
Leasehold improvements
Cost
$
173,180
981,353
787,495
120,595
325,812
201,871
678,358
Accumulated
amortization
$
-
126,436
138,125
27,234
149,622
36,438
206,060
2009
Net
$
173,180
854,917
649,370
93,361
176,190
165,433
472,298
Machinery and equipment under capital leases
24,967
4,785
20,182
3,268,664
683,915
2,584,749
3,293,631
688,700
2,604,931
Cost
$
173,180
981,353
310,109
62,498
126,205
79,094
254,895
Accumulated
amortization
$
-
77,368
33,945
5,422
24,451
2,462
43,947
2008
(restated-note3)
Net
$
173,180
903,985
276,164
57,076
101,754
76,632
210,948
1,987,334
187,595
1,799,739
Land
Building
Machinery and equipment
Office furniture and equipment
Computers
Moulds
Leasehold improvements
Machinery and equipment under capital leases
24,967
2,497
22,470
2,012,301
190,092
1,822,209
(11)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
8
Intangible assets
Software
Engineering drawing
Software
Engineering drawing
9 Restricted cash
Cost
$
406,590
4,700
Accumulated
amortization
$
130,677
1,567
411,290
132,244
Cost
$
212,580
4,700
217,280
Accumulated
amortization
$
68,961
-
68,961
2009
Net
$
275,913
3,133
279,046
2008
(restated-note3)
Net
$
143,619
4,700
148,319
Restricted cash consists of amounts which are restricted for specific purposes under certain contractual
obligations. Restricted cash is not expected to become unrestricted within the next 12 months.
10 Bank loan
The company has access to credit facilities in the amount of $1,500,000 which bear interest at the company’s
bank prime rate plus 0.60% per annum and are limited by certain margin requirements concerning accounts
receivable. In addition, the company has access to credit facilities in the amount of $500,000 which bear
interest at the company’s bank prime rate plus 1.50% per annum and are limited by certain requirements
concerning pre-shipment costs. The bank loan is secured by a first ranking hypothec of $4,000,000 on all
movable property of the company and is renewable annually upon certain conditions. The company must also
comply with covenants requiring a minimum current ratio and maximum funded debt to tangible net worth. As
at December 31, 2009, the company is in compliance with these covenants. As at year-end, the unused amount
is approximately $1,500,000 for the first credit facility and $3,100 for the second facility. As well, the company
has access to a revolving demand facility by way of letters of credit and letters of guarantee amounting to
$1,000,000. As at December 31, 2009, the unused portion of this demand facility is approximately $922,000
($869,000 in 2008).
(12)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
11 Derivative financial assets/liabilities
The company has entered into a sales contract with a foreign counterparty for which the contract is
denominated in a currency other than the Canadian dollar and the functional currency of the foreign party. As at
December 31, 2009, the fair market value of the bifurcated embedded derivatives was a liability of $96,645 (an
asset of $229,906 in 2008) and the change in fair value from the prior year amounting to $326,551 was
included in the foreign exchange gain (loss) on the statements of income (loss) and comprehensive income
(loss).
12 Joint venture
The following is a summary of the company’s proportionate share in the assets, liabilities, revenues, expenses,
and cash flows of the joint venture, included in the consolidated financial statements:
Current assets
Total assets
Current liabilities
Total liabilities
Revenue
Expenses
Net loss
Cash flows from:
Operations
Financing
Investment
2009
$
179,263
207,133
92,926
203,275
177,187
382,234
(205,047)
(224,216)
319,254
(34,494)
(13)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
13 Long-term debt
Term loan, matures June 2023, bears annual interest at the
bank’s floating base rate plus 0.75%, and is secured by a first
ranking hypothec on all present and future movable and
immovable property. It is repayable in monthly instalments of
$8,900 plus interest.
Revolving term loan, matures March 2011, bears annual interest
at the bank’s base rate plus 3.55 %, and is secured by a first
ranking hypothec on all present and future movable. It is
repayable in monthly instalments of $8,704 plus interest.
Term loan, matures June 2013, bears annual interest at the
bank’s floating base rate plus 0.75%, and is secured by a first
ranking hypothec on all present and future movable and
immovable property. It is repayable in monthly instalments of
$6,700 plus interest.
Term loan, matures July 2013, bears annual interest at the bank’s
floating base rate plus 2.50%, and is secured by a first ranking
hypothec on all present and future movable and immovable
property. It is repayable in monthly instalments of $2,500 plus
interest.
Loan from Canada Economic Development for a maximum of
$137,500, matures August 2016, bears no interest and is
repayable in monthly instalments of $1,156. The first instalment
is due 24 months after the project completion date.
Loan from Canada Economic Development for a maximum of
$100,000, matures February 2015, bears no interest and is
repayable in eight semi-annual instalments of $8,549. The first
instalment is due 24 months after the project completion date.
Obligations under capital lease bearing interest at 6%, repaid in
full in December 2009.
Less: Current portion
2009
$
2008
$
1,441,800
1,548,600
130,566
-
281,400
361,800
107,500
137,500
55,489
-
68,394
-
43,387
12,986
2,085,149
321,653
2,104,273
230,186
1,763,496
1,874,087
The aggregate capital repayments of long-term debt in subsequent years will be:
Fiscal year ending 2010
2011
2012
2013
2014
2015 - 2023
$
321,653
251,863
238,923
195,471
137,771
939,468
2,085,149
(14)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
14 Government assistance
The company accounted for a $50,000 non-refundable capital asset grant as deferred government assistance, of
which $5,000 was recognized in income during the year.
15 Subordinated loan
This loan from Investissement Québec matures on June 2013, bears annual interest commencing on June 2009
at the lender’s floating rate plus 2%, and is secured by a movable and immovable hypothec on all present and
future property of the company ranking after those mentioned in note 13. The loan is repayable in capital
monthly instalments of $5,208. The company must also comply with covenants requiring a minimum current
ratio and maximum funded debt to tangible net worth. As at December 31, 2009, the company is in compliance
with these covenants.
16 Share capital
a) The company is incorporated under the Canada Business Corporations Act and authorized share capital
consists of an unlimited number of common and preferred shares, without par value.
b)
Share purchase warrants – Issued and outstanding
As at December 31, 2009, 17,167,824 warrants are outstanding for a total amount of $1,947,259, of which
12,180,000 warrants entitle the holder to acquire one additional common share per warrant at a price of
$2.15 until May 13, 2010 and 180,000 warrants entitle the holder to acquire one common share per warrant
at a price of $1.50 until May 13, 2010. The remaining 4,807,824 warrants are described in the note below.
The ability to exercise the 6,180,000 warrants issued on the reverse takeover transaction is contingent on
the exercise of the remaining pre-existing warrants (note 5).
c) As a result of the business combination (note 5), the company issued 5,834,249 common shares which are
held in escrow as at December 31, 2009. These shares could be released to former Xebec shareholders on
the achievement of specified financial targets. These targets are measured at December 31, 2009 and 2010.
Consequently, these shares are considered restricted share awards that are issued but not outstanding. The
expense related to these awards is recorded based on management’s best estimate of the ultimate
achievement of the financial targets over the vesting periods, namely until December 31, 2009 and 2010.
For this year and as at December 31, 2009, no expense was recorded for these awards.
d) Loss per share is calculated using the weighted average number of common shares outstanding of
16,147,705 for the year ended December 31, 2009 (8,638,496 in 2008). Outstanding share options and
warrants to purchase common shares were not included in the computation of diluted income (loss) per
share as their impact is anti-dilutive.
(15)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
16 Share capital (continued)
e) On November 25, 2009 the company concluded a share offering for 8,585,400 of its common shares at a
price of $0.75 per share, for gross proceeds of $6,439,050. Each common share consists of one common
share and one half of one common share purchase warrant (“Warrant”). The net proceeds from the issuance
after underwriting fees and offering expenses amounted to $5,886,298. The warrants entitle the holder to
acquire one common share at a price of $1.10 until May 25, 2011. The warrants are subject to an
accelerated expiry if, at any time after December 31, 2009, the published closing trade price of the common
shares on the Toronto Stock Exchange (“TSX”) is equal or superior to $1.60 for any 20 consecutive trading
days, in which event the company may give the holder a written notice that the warrants will expire at 5:00
p.m. on the thirtieth day from the receipt of such notice. Using the residual value method, the estimated
value of the warrants issued is $nil. An additional 515,124 warrants were issued to the agent and entitle the
holder to acquire one common share per warrant at a price of $0.77 per share until May 25, 2011. Using the
Black-Scholes option pricing model, the estimated fair value of the warrants issued is $165,000. The
assumptions used are as follows: exercise price as noted above, risk-free interest rate of 0.93%, expected
volatility of 100% and expected life of 18 months. This amount is included in share issue expenses.
17 Stock options
Upon the reverse takeover, the company assumed QuestAir’s stock option plan (the “Plan”), which allows for
the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, performance
awards and other stock-based awards. Under the Plan, common shares approved for issuance under all stock-
based compensation arrangements are limited to the greater of 591,560 and 10% of the common shares issued
and outstanding. As at December 31, 2009, the maximum number of common shares available for issuance
under all stock-based compensation arrangements is 2,696,839.
Under the terms of the Plan, stock options are granted with an exercise price not less than the volume-weighted
average trading price of the common shares for the five trading days prior to the date of grant. Stock options
generally vest quarterly over four years and are exercisable for seven years from the date of grant.
Stock option activity since December 31, 2008, is presented below:
Outstanding – December 31, 2008
Assumed upon the closing of the
reverse takeover
Expired
Outstanding – December 31, 2009
(116,874 options exercisable)
Number
of options
-
199,347
(60,295)
139,052
Weighted
average
exercise
price
$
-
5.79
6.48
5.49
Expiry
dates
January 8, 2010
to September 26, 2016
(16)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
17 Stock options (continued)
As at December 31, 2009, options outstanding in the Plan and options exercisable are as follows:
Options outstanding –
December 31, 2009
Options exercisable –
December 31, 2009
Exercise
price range
$
0.44–2.40
4.60–6.90
9.00–13.90
16.20–17.50
Number
of options
outstanding
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price
$
Number
of options
exercisable
87,267
2,940
36,889
11,956
139,052
3.50
4.33
5.89
4.96
4.27
1.34
6.07
11.47
17.22
80,834
2,362
21,587
12,091
5.49
116,874
Weighted
average
exercise
price
$
1.39
6.29
11.00
17.22
4.90
18 Research and development expenses
Research and development expenses
Government grants
Research and development tax credits
19 Financial expenses
Interest and bank charges
Interest on bank loan
Interest on long-term debt and subordinated loan
2009
$
1,499,032
(332,790)
(85,604)
2008
$
430,989
(52,917)
(269,207)
1,080,638
108,865
2009
$
41,463
55,919
136,480
2008
$
92,789
57,875
197,444
233,862
348,108
(17)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
20 Income taxes
a)
Income tax expense
Income taxes included in the statement of operations are as follows:
Current income tax expense
Future income tax expense
b) Effective tax rate
2009
$
2008
$
(Restated-note 3)
(57,206)
(122,615)
(179,821)
249,746
72,576
322,322
The company’s effective income tax rate differs from the statutory federal and provincial income tax rate in Canada.
This difference arises from the following:
2009
%
2008
%
(Restated-note 3)
Combined statutory rate applied to pre-tax income
30.86
26.17
Difference between Canadian statutory rates and the rate
applicable to the foreign subsidiary
Non-deductible items
Valuation allowance
Impact of reduction in income tax rates on future income taxes
Other
Effective income tax rate
(0.36)
(2.09)
(20.77)
(3.71)
(1.33)
2.60
0.52
7.22
-
-
(0.83)
33.08
(18)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
20 Income taxes (continued)
c) Future income tax assets and liabilities
Future income tax assets
Property, plant and equipment
Intangible assets
Financing costs
Net operating losses carried-forward
Scientific research and development expenses
Tax credits
Other
Future income tax liabilities
Derivative assets
Property, plant and equipment
Tax credits
Valuation allowance
Net future income tax assets (liabilities)
Current portion
Long-term portion
2009
$
2008
$
(Restated-note 3)
142,559
79,925
313,759
13,233,128
6,387391
6,871,600
212,189
27,240,551
-
-
-
-
27,240,551
(27,240,551)
-
-
-
-
-
-
-
-
-
-
-
-
(61,477)
(23,545)
(37,593)
(122,615)
(122,615)
-
(122,615)
(99,070)
(23,545)
(122,615)
In assessing the realizability of future income tax assets, management considers whether it is more likely than
not that some portion or all of the future income tax assets will be realized. The ultimate realization of future
income tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. As management believes there is sufficient uncertainty regarding the
realization of future income tax assets, a full valuation allowance has been provided.
Most of this valuation allowance relates to the future income tax asset balance of QuestAir at acquisition date.
When a future income tax asset acquired in a business combination is not recognized at the date of acquisition,
any subsequent recognition of the tax benefit would first reduce any goodwill related to the acquisition to zero,
then reduce any unamortized intangible assets related to the acquisition to zero, and finally reduce income tax
expense, resulting in an increase in net earnings.
(19)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
20 Income taxes (continued)
d) Other
The company has non-capital losses carried forward in Canada of approximately $49,900,000 which are
available to reduce taxable income in future years, the benefit of which has not been recorded in the accounts,
and which expire as follows:
2014
2015
2025
2026
2027
2028
2029
$
4,900,000
5,900,000
6,900,000
7,200,000
6,800,000
10,500,000
7,700,000
49,900,000
The company also has non-capital losses carried forward in Singapore of approximately $205,000, which are
available to reduce taxable income in future years for an unlimited future period.
The company has scientific
research and experimental development expenses of approximately
$23,800,000 which are available to be carried forward indefinitely and deducted against future taxable income
otherwise calculated.
As at December 31, 2009, the company also has investment tax credits of approximately $8,300,000 available
to offset future Canadian federal and provincial income taxes payable. The potential benefit of the investment
tax credits has not been recognized in the accounts and expires as follows:
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2029
$
870,000
240,000
510,000
270,000
410,000
360,000
260,000
160,000
100,000
470,000
910,000
240,000
920,000
480,000
740,000
650,000
410,000
240,000
60,000
8,300,000
(20)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
21 Supplementary information to statements of cash flows
Cash flows from operating activities include the following amounts:
Interest paid
Income taxes paid
22 Commitments and contingencies
a) Leases
2009
$
239,605
27,351
266,956
2008
$
245,031
16,296
261,327
As at December 31, 2009, the company is committed under the terms of various operating leases with various
expiration dates, primarily for the rent of premises and office equipment. Minimum lease payments due in the
next years are as follows:
Fiscal year ending
b) TPC Program
2010
2011
2012
2013
$
630,508
412,182
133,669
25,187
1,201,546
The agreements under the TPC Program will be amended to reflect the transaction completed in
June 2009 (note 5).
Fast Cycle Pressure Swing Adsorption and Gas Management systems
On June 6, 2003, QuestAir entered into an agreement with the Industry Canada under the TPC Program to
receive financial contributions regarding the development and commercial exploitation of its Fast Cycle
Pressure Swing Adsorption (“FCPSA”) and Gas Management systems (“GMS”).
Pursuant to the agreement, total project costs for the period from October 1, 2002 to September 30, 2007 were
to be shared, subject to certain contribution limits, such that the Ministry’s contribution would not exceed the
lesser of 30% of eligible project costs and $9,600,000.
The agreement further provides that the Ministry shall provide QuestAir with financial contributions based on
the aforementioned limitations in exchange for:
i. the issuance of 19,230 transferable warrants convertible into common shares at a strike price of
$38.80, exercisable for a term of five years (which warrants expired unexercised), and
ii. repayable contributions to the Ministry during the royalty period based on 1.165% (0.471% from
October 1, 2009 thereafter) of gross business revenues.
(21)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
22 Commitments and contingencies (continued)
b) TPC Program (continued)
During the year ended December 31, 2008, QuestAir entered into an Amendment Agreement with Industry
Canada to amend the TPC contribution agreement in respect of QuestAir’s FCPSA and GMS development
programs. The Amendment Agreement:
iii. deleted certain milestones related to the GMS program
iv. extended certain milestones related to the FCPSA program, such that the work phase of the program
will end on September 30, 2008
v. reduced the Ministry’s contribution limit towards eligible project costs to $8.14 million, being the
amount received thus far by QuestAir
vi. reduced the ceiling on the conditional repayments under the agreement to $18.8 million and extended
the date by which the royalty period will end by 12 months to September 30, 2022, and
vii. provided for an unconditional, one-time royalty payment of $0.5 million paid in 2008.
Cumulative repayments of $797,967 have been made to December 31, 2009. Any amounts ultimately
determined to be repayable are accrued as a liability when the project revenues are known and reasonably
estimable and recorded as royalty expense. As at December 31, 2009, $165,557 has been accrued as a liability.
Pulsar Pressure Swing Adsorption project
On March 31, 1999, QuestAir entered into an agreement with the Industry Canada under the TPC Program to
receive financial contributions regarding the development and commercial exploitation of its Pulsar Pressure
Swing Adsorption project.
Pursuant to the agreement, total project costs for the period from October 1, 1998 to March 31, 2002 were to be
shared, subject to annual contribution limits, such that the Ministry’s contribution would not exceed the lesser
of 35% of eligible project costs and $4,947,330.
QuestAir received contributions aggregating $4,762,503. The agreement further provides that the contributions
are repayable solely based on a royalty of 1.8% of gross project revenues and revenues from fuel cell related
products to a maximum cumulative repayment of $8.75 million. Cumulative repayments of $56,736 have been
made to December 31, 2009. Any amounts ultimately determined to be repayable are accrued as a liability
when the project revenues are known and reasonably estimable and recorded as royalty expense. As at
December 31, 2009, no amount has been accrued as a liability. The agreement terminates on the later of the
date of payment of all amounts due to the Ministry and 2015.
(22)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
22 Commitments and contingencies (continued)
c) Natural Resources Canada Agreement
In January 2005, QuestAir received a grant of $225,000 from the Government of Canada under the Department
of Natural Resources Efficiency and Alternative Energy Program to support the development of structured
adsorbent that will possess enhanced properties to assist in high purity hydrogen separation. The agreement
provides that such contributions are repayable solely based on 0.12% of gross project revenues through March
31, 2015, to a maximum cumulative repayment of $225,000, whichever occurs first. Cumulative repayments of
$5,592 have been made to December 31, 2009. Any amounts ultimately determined to be repayable are accrued
as a liability when the project revenues are known and reasonably estimable and recorded as royalty expense.
In January 2004, QuestAir received a grant of $193,944 from the Government of Canada under the Department
of Natural Resources Efficiency and Alternative Energy Program to support the development of a device that
increases the efficiency of a High Temperature Fuel Cell system and permits the co-production of hydrogen.
The agreement provides that such contributions are repayable solely based on 0.12% of gross project revenues
through March 31, 2014, to a maximum cumulative repayment of $193,944, whichever occurs first. Any
amounts ultimately determined to be repayable are accrued as a liability when the project revenues are known
and reasonably estimable and recorded as royalty expense. To date, no such project revenue has been recorded.
23 Contingent liabilities
As at December 31, 2009, the company had an unpaid account receivable of $317,800 for which the company
sent a demand letter. In return, the customer filed a counterclaim in the amount of $729,533 if the file was not
resolved to the satisfaction of the parties. The company is contesting this counterclaim and, in the opinion of
management, this counterclaim is without merit. As of the date of this report, neither the outcome nor the
amount of possible settlement can be foreseen. Therefore, no amount has been provided for in these
consolidated financial statements with respect to such claim.
24 Related party transactions
The following table presents a summary of the related party transactions during the year:
Marketing and professional services expenses paid to companies
controlled by members of the immediate family of a
shareholder
2009
$
2008
$
161,020
100,704
These transactions are measured at the exchange amount, which is the amount of consideration established and
agreed to by the related parties.
(23)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
25 Capital management
The company’s objective when managing capital is to utilize short-term funding sources to manage its working
capital requirements and fund capital expenditures required to execute its operating and strategic plans. The
company has changed its strategy regarding the management of its capital structure since the last financial year
by acquiring access to short-term credit facilities to finance its expansion overseas.
The company’s capital structure is composed of the following:
Cash
Bank loan
Subordinated loan
Long-term debt
Shareholders’ equity
2009
$
(5,447,702)
496,900
218,752
2,085,149
(2,646,901)
12,251,816
2008
$
(550,377)
1,760,931
250,000
2,104,273
3,564,827
1,125,141
9,604,915
4,689,968
During the year, the capital of the company has been significantly affected by the acquisition described in
note 5 and the share offering described in note 16 e). The company is not subject to any capital requirements
imposed by regulators; however, the company must adhere to certain financial covenants related to the terms of
its bank loan and subordinated loan. As at December 31, 2009, the company was in compliance with the
required financial covenants.
26 Segmented information
The company has only one segment and specializes in the design and manufacture of filtration, purification,
separation and dehydration equipment for gases and compressed air. The company has four product lines and
provides related engineering services.
Revenue summarized by geographic area, as determined by the location of the customer, is as follows:
Revenue
North America
South America
Middle East
Asia
Europe
2009
$
2008
$
7,959,832
3,757,598
4,541,472
1,694,200
740,686
8,478,059
-
3,833,899
850,217
3,678,447
18,693,788
16,840,622
(24)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
26 Segmented information (continued)
Revenue summarized by product line is as follows:
Product line
Natural gas dryers
Compressed gas filtration
Air dryers
Gas purification
Engineering services
Major customers, representing 10% or more of total sales include:
Customers
Customer A
Customer B
Customer C
2009
$
2008
$
11,141,555
3,019,412
1,246,072
1,831,512
1,455,237
12,201,939
3,645,071
993,612
-
-
18,693,788
16,840,622
2009
$
2008
$
3,757,598
3,106,227
511,382
-
1,863,250
3,465,600
7,375,207
5,328,850
The location of the company’s property, plant and equipment, intangible assets and goodwill by geographic
region is as follows:
Property, plant and equipment, intangible assets and goodwill
Canada
Asia
2009
$
2008
$
(Restated-note 3)
8,357,870
468,259
1,420,013
550,515
8,826,129
1,970,528
(25)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
27 Financial instruments
Credit risk
Credit risk is the risk of an unexpected loss if a customer or third party fails to meet its contractual obligations.
The company’s primary credit risk is its cash and outstanding trade accounts receivable. The carrying amount
of its outstanding trade accounts receivable represents the company’s estimate of its maximum credit exposure.
The company regularly monitors its credit risk exposure and takes steps such as credit approval procedures,
establishing credit limits, utilizing credit assessments and monitoring practices to mitigate the likelihood of
these exposures from resulting in an actual loss. This year, a provision of $392,042 was taken for allowance for
doubtful accounts as determined by management’s best estimate, based on prior experience and an assessment
of current financial conditions of customers as well as the general economic environment. In the case where an
allowance for doubtful accounts provision is recorded and a receivable balance is considered uncollectible, it is
written off against the allowances for doubtful accounts. Bad debt expense amounted to $222,967 in 2009
($155,999 in 2008). As at December 31, 2009, the company’s three largest trade debtors accounted for 33 %
(21%, 7% and 5 %) of the total accounts receivable balance, compared to 75% in 2008 (39%, 26% and 10 %) .
Details of accounts receivable were as follows:
Current trade receivables
Trade receivables past due by:
1-30 days
31-60 days
61-90 days
Over 90 days
Total trade receivables
Allowances for doubtful accounts
Other receivables
Total accounts receivable
2009
$
2008
$
997,964
3,140,066
315,532
182,429
164,200
1,233,182
2,893,307
(392,042)
604,569
712,384
50,238
95,632
13,879
4,012,199
-
526,643
3,105,834
4,538,842
The company’s cash is maintained at major financial institutions; therefore, the company considers the risk of
non-performance on these instruments to be remote. To date, the company has not incurred any losses related to
these instruments.
Currency risk
The company realizes approximately 64% of its sales and 54% of its purchases in foreign currency.
Consequently, some assets and liabilities are exposed to foreign exchange fluctuations. As at December 31,
2009, the following amounts are shown in US dollars, Euros, Renminbis, British pounds and Singapore dollars
and converted into Canadian dollars. The company does not use financial instruments to reduce this risk.
Management does not believe that the impact of foreign exchange fluctuations will be significant and,
therefore, has not provided a sensitivity analysis of the impact of fluctuations on net loss and comprehensive
loss.
(26)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
27 Financial instruments (continued)
Currency risk (continued)
2009
US Dollars
2009
Euro
2009
Renminbi
Cash
Accounts receivable
Restricted cash
Accounts payable
569,032
593,566
15
(66,277)
436
414,098
128,700
(506,021)
2,351,045
6,827,861
-
(10,479,976)
2009
British
Pounds
-
-
-
(30,073)
1,096,336
37,213
(1,301,070)
(30,073)
Total Canadian Dollar
1,152,250
55,819
(199,454)
(50,878)
2009
Singapore
Dollars
68,624
106,855
-
(182,307)
(6,828)
(5,092)
2008
US Dollars
2008
Euro
2008
Renminbi
Cash
Accounts receivable
Restricted cash
Accounts payable
439,728
379,597
-
(127,476)
4,029
1,772,950
128,700
(12,374)
42,371
276,752
-
(10,361,398)
691,849
1,893,305
(10,042,275)
Total Canadian Dollar
842,672
3,227,328
(1,802,588)
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of financial instruments will fluctuate as
market interest rates change.
The company is exposed to interest rate risk on its bank debt, both short-term and long-term, for which the
interest rates charged fluctuate based on the bank prime rate. The short-term bank loan as at December 31,
2009 is $496,900 ($1,760,931 in 2008) and the long-term debt that is subject to the variability of the interest
rate fluctuation is $1,961,266 ($2,047,900 in 2008). The annual interest is the bank prime rate plus 0.60%. If
the interest rate on the bank debt had been 50 basis points higher (lower), related to the bank debt outstanding
during fiscal 2009, net loss/income would have been $12,300 ($21,800 in 2008) higher (lower).
(27)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
27 Financial instruments (continued)
Liquidity risk
Liquidity risk is the risk that the company will not be able to meet its financial obligations as they come due.
The following are the contractual maturities of financial liabilities as at December 31, 2009:
Carrying
amount
$
Contractual
cash flow
$
0 to 12
months
$
13 to 24
months
$
Thereafter
$
Financial liabilities
Accounts payable and accrued
liabilities
Bank loan
Total long-term debt
Derivative financial liabilities
5,578,505
496,900
2,303,901
96,645
5,578,505
496,900
2,853,420
96,645
5,578,505
496,900
484,844
96,645
-
-
396,700
-
-
-
1,971,876
-
8,475,951
9,025,470
6,656,894
396,700
1,971,876
The following are the contractual maturities of financial liabilities as at December 31, 2008:
Financial liabilities
Accounts payable and accrued
liabilities
Bank loan
Total long-term debt
Carrying
amount
$
Contractual
cash flow
$
0 to 12
months
13 to 24
months
$
$
Thereafter
$
4,320,860
1,760,931
2,354,273
4,320,860
1,760,931
3,526,634
4,320,860
1,760,931
487,581
-
-
447,806
-
-
2,591,246
8,436,064
9,608,425
6,569,372
447,806
2,591,246
Contractual interest amounts that are on floating interest rates are established based on the spot rates as at the
respective balance sheet date.
The company’s development is financed through a combination of borrowing under the existing credit
facilities, the issuance of debt and the issuance of equity.
It is the company’s intention to meet its obligations through the collection of accounts receivable and the
receipt of future progress payments on amounts not yet invoiced, as well as from current cash (note 1 b)).
(28)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2009
27 Financial instruments (continued)
Fair value
Amendments to CICA Handbook Section 3862, “Financial Instruments – Disclosures”, establish a fair value
hierarchy which requires the company to maximize the use of observable inputs when measuring fair value.
The company primarily applies the market approach for recurring fair value measurements. The Section
describes three input levels that may be used to measure fair value:
Level 1 – Unadjusted quoted prices in active markets for identical assets of liabilities. An active market for the
asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
Level 2 – Quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other
inputs that are observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the
fair value of the assets or liabilities.
Financial instruments whose carrying value approximate fair value
Cash, accounts receivable, bank loan and accounts payable and accrued liabilities are financial instruments
whose fair value approximates their carrying value due to their short-term maturity. The input level used by the
company to measure the fair value of its cash is Level 1.
Derivative financial instruments
The fair value of derivative financial instruments approximates the amounts for which the financial instruments
could be exchanged between willing parties, based on current market data for similar instruments. As estimates
must be used to determine fair value, the latter must not be interpreted as being realizable in the event of an
immediate settlement of the instruments.
The fair value of the derivative liabilities effective as at December 31, 2009, amounts to $96,645. The input
level used by the company to measure the fair value of its derivative liabilities is Level 2.
Other
The fair value of the loan to a joint venture and of the long-term debt, including the subordinated loan,
approximates their carrying value due to their variable interest rates or current market rates as regards of
instruments with fixed rates.
(29)