Xebec Adsorption Inc.
Consolidated Financial Statements
December 31, 2010 and 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 31, 2011
Independent Auditor’s Report
To the Shareholders of
Xebec Adsorption Inc.
We have audited the accompanying consolidated financial statements of Xebec Adsorption Inc. and its
subsidiary, which comprise the consolidated balance sheets as at December 31, 2010 and 2009 and the
consolidated statements of loss and comprehensive loss, changes in shareholders’ equity and cash
flows for the years then ended, and the related notes including a summary of significant accounting
policies.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with Canadian generally accepted accounting principles, and for such internal
control as management determines is necessary to enable the preparation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with Canadian generally accepted auditing standards.
Those standards require that we comply with ethical requirements and plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in
the consolidated financial statements. The procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in
order to design audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.
“PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership, which is a member
firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to
provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of Xebec Adsorption Inc. and its subsidiary as at December 31, 2010 and 2009 and
the results of their operations and their cash flows for the years then ended in accordance with
Canadian generally accepted accounting principles.
Emphasis of matter
Without qualifying our opinion, we draw attention to note 1(b) in the consolidated financial statements,
which describes matters and conditions that indicate the existence of a material uncertainty that may
cast significant doubt about Xebec Adsorption Inc.’s ability to continue as a going concern.
1 Chartered accountant auditor permit No. 15492
(2)
Xebec Adsorption Inc.
Consolidated Balance Sheets
As at December 31, 2010 and 2009
Assets
Current assets
Cash
Accounts receivable
Inventories (note 6)
Prepaid expenses
Income taxes recoverable
Investment tax credits receivable
Restricted cash (note 10)
Loan to a joint venture (note 13)
Property, plant and equipment (note 7)
Intangible assets (note 8)
Goodwill (notes 5 and 9)
Liabilities
Current liabilities
Bank loan (note 11)
Accounts payable and accrued liabilities
Deferred revenues
Income taxes payable
Derivative financial instruments (note 12)
Current portion of long-term debt (note 14)
Current portion of subordinated loan (note 16)
Long-term debt (note 14)
Government assistance (note 15)
Subordinated loan (note 16)
Shareholders’ Equity
Share capital (note 17)
Contributed surplus
Deficit
Going concern (note 1(b))
2010
$
2009
$
2,262,273
2,603,261
2,720,060
100,846
-
103,489
576,092
8,366,021
117,811
1,939,097
4,022,822
1,438,324
5,447,702
3,105,834
2,867,922
183,564
62,492
80,843
223,261
11,971,618
113,331
2,604,931
279,046
5,942,152
15,884,075
20,911,078
500,000
8,594,752
2,331,802
8,286
-
87,151
156,256
11,678,247
1,867,870
32,083
-
496,900
5,578,505
146,228
-
96,645
321,653
62,496
6,702,427
1,763,496
37,083
156,256
13,578,200
8,659,262
19,964,218
1,841,741
(19,500,084)
18,107,821
51,368
(5,907,373)
2,305,875
12,251,816
15,884,075
20,911,078
The accompanying notes are an integral part of the consolidated financial statements.
Approved by the Board of Directors
___________________________________ Director
___________________________________ Director
Xebec Adsorption Inc.
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31, 2010 and 2009
Number
Amount
Warrants
Common
shares
Preferred
shares
Share
capital –
Common
shares and
warrants
$
Preferred
shares
$
Contributed
surplus
$
Balance – January 1, 2009
5,868,108
8,638,496
300,000
100
300,000
Net loss for the year
Conversion of preferred shares
Deemed issuance of shares and warrants on
reverse takeover transaction (note 5)
Private placement, November 25, 2009 (note 17(e))
Shares and warrants issued to investors
Warrants issued to agent
Financing costs
Stock-based compensation
311,892
769,231
(300,000)
300,000
(300,000)
6,180,000
11,269,318
4,292,700
515,124
8,585,400
-
-
-
-
11,921,423
6,439,050
165,000
(717,752)
Balance – December 31, 2009
17,167,824
29,262,445
-
18,107,821
Net loss for the year
Exercise of warrants
Expiration of warrants, May 13, 2010
Private placement, November 2, 2010 (note 17(e))
Shares and warrants issued to investors
Shares and warrants issued to agent
(9,536)
(12,360,000)
9,536
-
9,491,886
1,166,250
9,491,886
600,000
Financing costs
Stock-based compensation
-
-
-
-
7,343
(1,782,259)
3,796,754
309,649
(475,090)
Retained
earnings
(deficit)
$
Total
$
825,041
1,125,141
(6,732,414)
-
(6,732,414)
-
-
11,948,190
-
-
-
-
6,439,050
165,000
(717,752)
24,601
-
-
-
26,767
-
-
-
24,601
51,368
(5,907,373)
12,251,816
-
-
1,782,259
(13,592,711)
-
-
(13,592,711)
7,343
-
-
-
-
8,114
-
-
-
-
3,796,754
309,649
(475,090)
8,114
-
-
-
-
-
-
-
-
-
-
Balance – December 31, 2010
15,456,424
39,363,867
-
19,964,218
-
1,841,741
(19,500,084)
2,305,875
The accompanying notes are an integral part of the consolidated financial statements.
Xebec Adsorption Inc.
Consolidated Statements of Loss and Comprehensive Loss
For the years ended December 31, 2010 and 2009
Revenues
Cost of goods sold (note 6)
Gross margin
Operating expenses
Research and development (note 19)
Selling and administrative
Financial (note 20)
Foreign exchange loss (gain)
Amortization
Loss before income taxes
Recovery of income taxes
Current
Future
2010
$
2009
$
13,475,211
18,693,788
13,226,426
14,462,614
248,785
4,231,174
2,550,638
10,132,192
443,042
(206,710)
922,334
1,080,638
8,738,521
278,542
518,319
527,389
13,841,496
11,143,409
(13,592,711)
(6,912,235)
-
-
-
(57,206)
(122,615)
(179,821)
Net loss and comprehensive loss for the year
(13,592,711)
(6,732,414)
Loss per share
Basic and diluted (note 17(d))
(0.44)
(0.42)
The accompanying notes are an integral part of the consolidated financial statements.
Xebec Adsorption Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2010 and 2009
Cash flows from
Operating activities
Net loss for the year
Items not affecting cash
Purchase price allocation adjustment (note 5)
Amortization of property, plant and equipment
Amortization of intangible assets
Loss on disposal of intangible assets
Loss on disposal of property, plant and equipment
Unrealized foreign exchange loss (gain) on derivative financial instruments
Unrealized foreign exchange loss on loan to a joint venture and restricted cash
Stock-based compensation expense
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
Investing activities
Acquisition of property, plant and equipment
Acquisition of intangible assets
Proceeds from disposal of property, plant and equipment
Transaction costs paid on acquisition of a business
Cash acquired on acquisition of a business
Loan to a joint venture
Government assistance
Decrease (increase) in restricted cash
Financing activities
Issuance of common shares
Issuance costs of shareholders’ equity instruments
Increase (decrease) in bank loan
Loan to joint venture
Long-term debt
Repayment of long-term debt
Payment of obligations under capital leases
Increase (decrease) in cash during the year
Cash – Beginning of year
Cash – End of year
2010
$
2009
$
(13,592,711)
(6,732,414)
303,066
640,110
282,224
184,000
117,036
(96,645)
9,994
8,114
-
-
465,261
62,128
-
-
326,551
-
24,601
(122,615)
(12,144,812)
(5,976,488)
502,573
147,862
82,718
(22,646)
3,007,009
2,185,574
70,778
5,973,868
2,888,309
1,923,637
210,933
177,942
(149,782)
(1,988,725)
(330,686)
2,731,628
(6,170,944)
(3,244,860)
(94,612)
-
3,300
-
-
-
(5,000)
(367,305)
(463,617)
3,804,097
(165,441)
3,100
-
181,101
(373,725)
-
3,449,132
(3,185,429)
5,447,702
2,262,273
(308,760)
(192,855)
-
(1,095,708)
5,122,028
(134,208)
(5,000)
163,916
3,549,413
6,439,050
(552,752)
(1,264,031)
20,877
289,402
(326,788)
(12,986)
4,592,772
4,897,325
550,377
5,447,702
The accompanying notes are an integral part of the consolidated financial statements.
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
1 Nature of operations and going concern
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 footprint. The Company was formed upon the amalgamation
of Xebec Adsorption Inc. (“Xebec”) and QuestAir Technologies Inc. (“QuestAir”) on June 12, 2009. The
consolidated financial statements reflect the accounts of QuestAir from June 12, 2009 (note 5).
b) Going concern
These consolidated financial statements have been prepared on the basis of accounting principles
applicable to a going concern, which assume the realization of assets and discharge of liabilities in the
normal course of business for the foreseeable future. The Company has incurred an operating loss of
$13,592,711 for the year ended December 31, 2010 and has a deficit of $19,500,084 and a negative
working capital of $3,312,226 as at December 31, 2010. The current financial position indicates that there
is substantial doubt about the Company’s ability to continue as a going concern.
The Company’s ability to continue as a going concern is primarily dependent on its ability to generate
sufficient future cash flows to fund its operations and to settle its obligations on a timely basis. On
November 2, 2010, management concluded a share offering which provided the Company with gross
proceeds of $3,796,754 (note 17(f)). On March 17, 2011, the Company signed a licence and engineering
service agreement amounting to US$3,250,000, including an upfront payment of US$1,750,000 (note 29).
In addition, the Company undertook various initiatives, such as announcing temporary layoffs and
adopting a cost reduction plan to manage its operations and liquidity risks in light of prevailing economic
conditions. There is no assurance that such efforts will be successful.
These consolidated financial statements do not reflect the adjustments to the carrying values of assets and
liabilities, the reported expenses and the balance sheet classifications that would be necessary if the
Company were unable to continue as a going concern, and these 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 figures in 2009 have been reclassified to conform to the
presentation adopted for the year ended December 31, 2010.
(1)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 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 of net realizable value is made 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 writedown is
reversed (i.e., the reversal is limited to the amount of the original writedown) so that the new carrying amount
is the lower of 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 on
a straight-line basis over the following periods:
Building
Machinery and equipment
Office furniture and equipment
Computers
Moulds
Vehicles
Leasehold improvements
20 years
3 to 10 years
5 years
3 years
5 years
5 years
Lesser of economic life
and term of lease
(2)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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 and the amount to be
realized upon their disposal. 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 comprise patents, customer relations, software and engineering drawings which are accounted
for at cost and amortized over their expected benefit to future periods.
Patent costs are amortized using the straight-line method over 15 years. Customer relations are amortized using
the straight-line method over a period of seven years. Engineering drawings, consisting of engineering costs
incurred to develop product plans, and software are amortized using the straight-line method over a period of
three years.
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 earns revenues mainly from the sale of natural gas dryers and hydrogen purification solutions
(“commercial equipment”). 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. Delivery is considered to have occurred when the product is
shipped to the customer or when the customer approves the satisfactory acceptance test. Provisions are
established for estimated product returns and warranty costs at the time revenue is recognized. Cash received in
advance of all of these revenue recognition criteria being met is recorded as deferred revenue.
(3)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Revenues from long-term production-type contracts such as biogas purification equipment 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 materials). 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 recorded
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 year 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 using the cost reduction method when there
is reasonable assurance of their recovery. 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 commercial equipment and biogas purification equipment. 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.
Earnings per share
Basic earnings per share is determined using the weighted average number of common shares outstanding
during the year.
(4)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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 rates
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 transaction dates.
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 rates of exchange prevailing at the
balance sheet date and non-monetary assets and liabilities at rates prevailing at the transaction dates. Revenues
and expenses (other than amortization, which is translated at the rate applicable on the date of acquisition of the
related assets) are translated at average rates for the year. Gains and losses arising on translation are included in
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
earnings over the award’s vesting period. For options granted to non-employees, the fair value is measured
when performance is completed, 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, 2010 and 2009
Financial instruments
The Company classifies its financial instruments as follows:
Cash
Accounts receivable
Restricted cash
Loan to a joint venture
Bank loan
Accounts payable and accrued liabilities
Derivative financial instruments
Long-term debt
Subordinated loan
Held for trading
Loans and receivables
Held for trading
Loans and receivables
Other financial liabilities
Other financial liabilities
Held for trading
Other financial liabilities
Other financial liabilities
Financial assets and financial 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 loss. Loans and receivables
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 as an item of
foreign exchange gain or loss in the consolidated statements of loss and comprehensive loss and changes in
shareholders’ equity.
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, 2010 and 2009
4 Future changes to accounting standards
The Company will cease to prepare its consolidated financial statements in accordance with Canadian GAAP as
set out in Part V of the Canadian Institute of Chartered Accountants (“CICA”) Handbook – Accounting
(“Canadian GAAP”) for the year beginning on January 1, 2011 when it will start to apply International
Financial Reporting Standards as published by the International Accounting Standards Board as set out in Part I
of the CICA Handbook – Accounting as its primary basis of accounting. Consequently, future accounting
changes to Canadian GAAP effective for periods beginning on or after January 1, 2011 are not discussed in
these consolidated financial statements as they will normally never be applied by the Company.
5 Business combination
Pursuant to the arrangement between Xebec and QuestAir on June 12, 2009, the shareholders of Xebec (the
“Vendors”) sold all of their 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 received enough common shares of QuestAir to affect a
reverse takeover of QuestAir. Accordingly, the consolidated 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 amalgamated and
have continued as one corporation under the name of Xebec Adsorption Inc.
At the 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 could
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 were achieved by the amalgamated
company following completion of the arrangement (in respect of the 2009 and 2010 fiscal years). As those
performance targets were not achieved, these shares issued by QuestAir on completion of the arrangement
currently held in escrow will be cancelled.
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.
During the year ended December 31, 2010, the Company finalized the purchase price allocation pertaining to
this acquisition. The final allocation noted below, completed by management with the assistance of an
independent valuator, resulted in increases in accounts receivable of $466,699, in contract asset of $330,886, in
customer relations of $1,900,000, in patents of $2,310,000, and in accounts payable and accrued liabilities of
$9,238, and decreases in inventories and deferred revenue of $1,724,201 and $1,229,682 respectively. As a
result of these changes, goodwill decreased by $4,503,828 and an adjustment of $303,066 was recorded to cost
of goods sold. The excess of the purchase price over the net identifiable assets acquired has been allocated to
goodwill on the consolidated balance sheet.
(7)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
The final purchase price allocation for the business combination is as follows:
Assets acquired
Cash
Accounts receivable – net
Contract asset
Inventories
Prepaid expenses
Restricted cash
Property, plant and equipment
Patents
Customer relations
Goodwill
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
1,922,000
330,886
487,481
173,354
62,600
939,223
2,310,000
1,900,000
1,438,324
14,685,896
1,416,665
225,333
1,641,998
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.
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.
(8)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
6
Inventories
Raw materials
Work in progress
Finished goods
2010
$
1,755,325
942,767
21,968
2009
$
1,970,017
868,663
29,242
2,720,060
2,867,922
Cost of goods sold is composed mainly of cost of inventories of $6,966,850 in 2010 (2009 – $8,573,338), and
includes an amount of $638,860 (2009 – $355,012) for the writedown of inventories to the lower of cost and
net realizable value. Inventories in the amount of $42,319 (2009 – nil) are recorded at their net realizable value.
7 Property, plant and equipment
Land
Building
Machinery and equipment
Office furniture and equipment
Computers
Moulds
Vehicles
Leasehold improvements
Cost
$
173,180
981,353
784,495
121,060
336,871
72,584
71,968
678,358
Accumulated
amortization
$
-
175,504
323,430
54,882
273,515
28,142
7,197
435,787
2010
Net
$
173,180
805,849
461,065
66,178
63,356
44,442
64,771
242,571
Machinery and equipment under capital leases
3,219,869
24,967
1,298,457
7,282
1,921,412
17,685
3,244,836
1,305,739
1,939,097
(9)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Land
Building
Machinery and equipment
Office furniture and equipment
Computers
Moulds
Leasehold improvements
Machinery and equipment under capital leases
8
Intangible assets
Patents*
Customer relations*
Software
Engineering drawings
Software
Engineering drawings
Cost
$
173,180
981,353
787,495
120,595
325,812
201,871
678,358
3,268,664
24,967
Accumulated
amortization
$
-
126,436
138,125
27,234
149,622
36,438
206,060
683,915
4,785
2009
Net
$
173,180
854,917
649,370
93,361
176,190
165,433
472,298
2,584,749
20,182
3,293,631
688,700
2,604,931
Cost
$
Accumulated
amortization
$
2010
Net
$
2,310,000
1,900,000
222,589
4,700
77,000
135,714
198,620
3,133
2,233,000
1,764,286
23,969
1,567
4,437,289
414,467
4,022,822
Cost
$
406,590
4,700
Accumulated
amortization
$
130,677
1,567
411,290
132,244
2009
Net
$
275,913
3,133
279,046
∗ During the year ended December 31, 2010, the Company allocated an amount of $4,210,000 (note 5) from goodwill to
intangible assets as a result of the finalization of the purchase price allocation.
(10)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
9 Goodwill
During the year ended December 31, 2010, the Company finalized the purchase price allocation pertaining to
the acquisition of QuestAir. As a result of the final allocation, goodwill decreased by $4,503,828 (note 5).
Balance – Beginning of year
Goodwill resulting from business acquisition (note 5)
Finalization of purchase price allocation (note 5)
2010
$
5,942,152
-
(4,503,828)
2009
$
-
5,942,152
-
Balance – End of year
1,438,324
5,942,152
Goodwill is not deductible for income tax purposes.
10 Restricted cash
Restricted cash consists of amounts which are restricted for specific purposes under certain contractual
obligations. Restricted cash will become unrestricted within the next 12 months.
11 Bank loan
As at December 31, 2010, the Company had access to credit facilities in the amount of $1,300,000 which bore
interest at the Company’s bank’s prime rate plus 2.50% per annum and which were limited by certain margin
requirements concerning accounts receivable. In addition, the Company had access to credit facilities in the
amount of $500,000 which bore interest at the Company’s bank’s prime rate plus 2.5% per annum and which
were limited by certain requirements concerning pre-shipment costs. The bank loan was secured by a first
ranking hypothec of $4,000,000 on all movable property of the Company and was renewable annually upon
certain conditions. As at December 31, 2010, the unused amount was approximately $1,050,000 for the first
credit facility and $500,000 for the second facility. As well, the Company had access to a revolving demand
facility by way of letters of credit and letters of guarantee amounting to $750,000. As at December 31, 2010,
the unused portion of this demand facility was approximately $596,000.
The credit facilities with Royal Bank of Canada and Export Development Canada matured on October 31, 2010
and have been extended under the same terms and conditions until March 18, 2011 and March 31, 2011
respectively. Management is currently negotiating an amended agreement with Royal Bank of Canada and
received confirmation, on March 29, 2011, from Export Development Canada that the agreement related to the
pre-shipment costs has been extended under the same terms and conditions until June 15, 2011.
(11)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
12 Derivative financial instruments
In 2009, the Company entered into a sales contract with a foreign counterparty which contract was
denominated in a currency other than the Canadian dollar and the functional currency of the foreign
counterparty. As at December 31, 2010, there are no such embedded derivative financial instruments (2009 –
liability of $96,645). The change in fair value of $96,645 from the prior year was included in foreign exchange
loss (gain) in the consolidated statements of loss and comprehensive loss.
13 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
Revenues
Expenses
Net loss
Cash flows from:
Operating activities
Financing activities
Investing activities
2010
$
176,138
195,188
152,845
174,548
437,904
558,113
(120,209)
(21,828)
-
-
2009
$
173,274
201,144
42,039
62,916
177,187
378,866
(201,679)
(269,114)
20,877
(34,494)
In addition, there is a loan to the joint venture bearing interest of 7.93%, repayable by minimum annual
instalments of $37,777 plus accrued and unpaid interest, and maturing in July 2012. An agreement was
concluded giving a one-year moratorium on repayment of the loan, including interest.
(12)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
14 Long-term debt
Term loan, matures June 2024, 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. An agreement was concluded giving a one-year
moratorium on the repayment of principal starting November
2010; thereafter the term loan is repayable in monthly instalments
of $8,900 plus interest
Revolving 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 property, repayable in
monthly instalments of $8,704 plus interest
Term loan, matures June 2014, 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. An agreement was concluded giving a one-year
moratorium on the repayment of principal starting November
2010; thereafter the term loan is repayable in monthly instalments
of $6,700 plus interest
Term loan, matures July 2014, 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. An agreement was concluded giving a one-year
moratorium on the repayment of principal starting December
2010; thereafter the term loan is repayable in monthly instalments
of $2,500 plus interest
Loan from Canada Economic Development for a maximum of
$137,500, matures December 2015, bears no interest and is
repayable in monthly instalments of $2,578 with the first
instalment 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 $12,500 starting
July 2011
Term finance contracts, mature May 2015 and June 2015, bear annual
interest of 5.99% and are secured by a lien on a vehicle. Each is
repayable in monthly instalments of $785 including capital and
interest
Less: Current portion
2010
$
2009
$
1,343,900
1,441,800
26,113
130,566
207,700
281,400
80,000
107,500
123,750
55,489
100,000
68,394
73,558
1,955,021
87,151
-
2,085,149
321,653
1,867,870
1,763,496
(13)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
The aggregate capital repayments of long-term debt in subsequent years will be:
Fiscal year ending 2011
2012
2013
2014
2015
2016 to 2024
$
87,151
288,889
289,859
231,489
158,733
898,900
1,955,021
15 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 revenues during the year.
16 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 14. 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, 2010, the Company is not in
compliance with these covenants, so the remaining long-term portion of the loan was classified with the current
portion.
17 Share capital
a) The Company is incorporated under the Canada Business Corporations Act and its authorized share capital
consists of an unlimited number of common and preferred shares, without par value.
(14)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
b) Share purchase warrants
Information that summarizes the activity related to the Company’s share purchase warrants for the year
ended December 31, 2010:
Balance – Beginning of year
Granted
Exercised
Expired
Balance – End of year
Number of
warrants
17,167,824
10,658,136
(9,536)
(12,360,000)
15,456,424
Weighted
average
exercise
price
$
1.83
0.45
0.77
2.13
0.64
The following table summarizes the share purchase warrants outstanding as at December 31, 2010, all of
which are exercisable:
Exercise
price
$
1.10
0.77
0.45
0.40
Warrants outstanding
Number of
warrants
outstanding
4,292,700
505,588
10,091,886
566,250
15,456,424
Weighted
average
remaining
contractual
life (years)
0.11
0.01
3.16
0.05
2.10
Weighted
average
exercise
price
$
1.10
0.77
0.45
0.40
0.64
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, 2010. These shares were to be released to former Xebec shareholders
on the achievement of specified financial targets. These targets are measured as at December 31, 2010 and
2009. Consequently, these shares are considered restricted share awards that are issued but not
outstanding. As those performance targets have not been achieved, no expense was recorded and these
shares will be cancelled.
d) Loss per share is calculated using the weighted average number of common shares outstanding of
30,803,752 for the year ended December 31, 2010 (2009 – 16,147,705). Outstanding share options and
warrants to purchase common shares were not included in the computation of diluted loss per share as
their impact is anti-dilutive.
(15)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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 per share for any 20
consecutive trading days, in which event the Company may give the holder 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.
f) On November 2, 2010, the Company concluded a share offering for 9,491,886 units (“Units”) at a price of
$0.40 per Unit, for gross proceeds of $3,796,754. Each Unit consists of one common share and one
common share purchase warrant (“Warrant”). The net proceeds from the issuance after underwriting fees
and offering expenses amounted to $3,631,313. The Warrants entitle the holder to acquire one common
share at a price of $0.45 until November 1, 2015, subject to adjustment under the indenture governing the
Warrants. The Warrants are subject to an accelerated expiry if, at any time after December 31, 2010, the
published closing trade price of the common shares on the TSX is equal or superior to $0.75 per share for
any 20 consecutive trading days, in which event the Company may give the holder written notice that the
Warrants will expire at the close of business day on the thirtieth day from the receipt of such notice. The
estimated fair value of the Warrants issued is $413,767. The assumptions used are as follows: exercise
prices as noted above, risk-free interest rate of 2.04%, expected volatility of 70% and expected life of 5
years. The agents received a commission relating to the offering in the form of an aggregate of 600,000
Units and, as additional consideration, were granted non-transferable warrants to purchase 566,250
common shares at an exercise price of $0.40 per share, subject to adjustment, until May 2, 2012. Using the
Black-Scholes option pricing model, the estimated fair value of the warrants issued is $69,649. The
assumptions used are as follows: exercise price as noted above, risk-free interest rate of 1.41%, expected
volatility of 82% and expected life of 18 months. This amount is included in share issue expenses.
18 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, 2010, the maximum number of common shares available for issuance
under all stock-based compensation arrangements is 3,798,967.
(16)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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 for the years ended December 31 is presented below:
2010
Weighted
average
exercise
price
$
5.49
-
3.78
5.99
5.20
2009
Weighted
average
exercise
price
$
-
5.79
6.48
5.49
4.90
Number
of options
-
199,347
(60,295)
139,052
116,874
Number
of options
139,052
-
(31,691)
107,361
88,738
Outstanding – Beginning
of year
Assumed upon closing of
reverse takeover
Expired
Outstanding – End of year
Exercisable – End of year
Compensation expenses with respect to these options amounted to $8,114 for the year ended December 31,
2010 (2009 – $24,601).
As at December 31, 2010, options outstanding in the Plan and options exercisable are as follows:
Exercise
price
range
$
0.44–2.40
4.60–6.90
9.00–13.90
16.20–17.50
Number
of options
63,600
1,381
31,632
10,748
107,361
Options outstanding
Options exercisable
Weighted
average
remaining
contractual
life (years)
Weighted
average
exercise
price
$
Number
of options
2.24
1.42
4.34
3.59
2.98
1.31
6.15
11.58
17.25
60,102
1,294
16,598
10,744
5.99
88,738
Weighted
average
exercise
price
$
1.36
6.25
11.21
17.25
5.20
(17)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
19 Research and development expenses
Research and development expenses
Government grants
Research and development tax credits
20 Financial expenses
Interest and bank charges
Interest on bank loan
Interest on long-term debt and subordinated loan
Interest charges
Other financial charges – TPC (note 23(b))
21 Income taxes
a)
Income tax expense
2010
$
2009
$
2,668,094
(54,984)
(62,472)
1,499,032
(332,790)
(85,604)
2,550,638
1,080,638
2010
$
58,095
25,614
111,300
82,893
165,140
2009
$
33,612
29,049
135,911
35,290
44,680
443,042
278,542
Income taxes included in the consolidated statements of loss and comprehensive loss are as follows:
Current income tax expense
Future income tax expense
2010
$
-
-
-
2009
$
(57,206)
(122,615)
(179,821)
(18)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
b) Effective tax rate
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:
Combined statutory rate applied to pre-tax income
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
c) Future income tax assets and liabilities
Future income tax assets
Property, plant and equipment
Net operating losses carried forward
Financing costs
Intangible assets
Scientific research and development expenses
Tax credits
Other
Future income tax liabilities
Valuation allowance
2010
%
29.30
-
(0.28)
(33.93)
5.99
(1.08)
-
2009
%
30.86
(0.36)
(2.09)
(20.77)
(3.71)
(1.33)
2.60
2010
$
2009
$
387,035
15,848,649
74,862
165,291
6,153,407
6,035,647
638,302
142,559
13,233,128
313,759
79,925
6,387,391
6,871,600
212,189
29,303,193
27,240,551
(29,303,193)
(27,240,551)
Net future income tax assets (liabilities)
-
-
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.
(19)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Most of this valuation allowance relates to the future income tax asset balance of QuestAir at the
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.
d) Other
The Company has non-capital losses carried forward in Canada of approximately $60,200,000 (2009 –
$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
2030
$
4,900,000
5,900,000
6,900,000
7,200,000
6,800,000
10,800,000
7,200,000
10,500,000
60,200,000
The Company also has non-capital losses carried forward in Singapore of approximately $243,000 which
are available to reduce taxable income in future years.
The Company has scientific research and experimental development expenses of approximately
$23,392,000 which are available to be carried forward indefinitely and deducted against future taxable
income otherwise calculated.
(20)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
As at December 31, 2010, the Company also has investment tax credits of approximately $7,430,000
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:
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2029
$
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
7,430,000
22 Supplementary information to consolidated statements of cash flows
Cash flows from operating activities include the following amounts:
Interest paid
Income taxes paid (recovered)
2010
$
295,681
(66,624)
229,057
2009
$
239,605
27,351
266,956
(21)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
23 Commitments and contingencies
a) Leases
As at December 31, 2010, 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 2011
2012
2013
2014
2015
$
584,304
418,239
281,874
168,282
171,504
1,624,203
b) Technologies Partnership Canada (“TPC”) Program
Fast Cycle Pressure Swing Adsorption and Gas Management systems
Upon the reverse takeover of QuestAir, the Company assumed the June 6, 2003 agreement with 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”). The agreement had been amended in 2008.
Pursuant to the agreement, total project costs for the period from October 1, 2002 to September 30, 2008
were to be shared, subject to certain contribution limits, such that the Department’s contribution would not
exceed the lesser of 30% of eligible project costs and $8,139,937.
The agreement further provides that the Department shall provide the Company with financial
contributions based on the aforementioned limitations in exchange for:
i)
ii)
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
repayable contributions to the Department during the royalty period which ends on
September 20, 2022, based on 1.165% (0.471% from October 1, 2009 thereafter) of gross
business revenues.
Cumulative repayments of $963,802 have been made to December 31, 2010 (2009 – $797,967). Any
amounts ultimately determined to be repayable are accrued as a liability when the project revenues are
known and reasonably estimable, and are recorded as royalty expense. As at December 31, 2010, $63,493
(2009 – $165,557) has been accrued as a liability.
(22)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Pulsar Pressure Swing Adsorption project
The Company assumed the March 31, 1999 agreement with Industry Canada under the TPC Program to
receive financial contributions regarding the development and commercial exploitation of QuestAir’s
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 Department’s contribution would not
exceed the lesser of 35% of eligible project costs and $4,947,330.
QuestAir had 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 $8,750,000. Cumulative repayments of
$56,736 have been made to December 31, 2010 (2009 – $56,736). Any amounts ultimately determined to
be repayable are accrued as a liability when the project revenues are known and reasonably estimable, and
are recorded as royalty expense. As at December 31, 2010, $101,370 (2009 – nil) has been accrued as a
liability. The agreement terminates on the later of the date of payment of all amounts due to the
Department and 2015.
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, 2010 (2009 – $5,592). Any
amounts ultimately determined to be repayable are accrued as a liability when the project revenues are
known and reasonably estimable, and are 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 are recorded as royalty
expense. To date, no such project revenue has been recorded.
24 Contingent liabilities
The Company is party to various ongoing and pending litigation along with other contingencies arising out of
the normal course of business. Management believes that these claims, when resolved, will not have any
material adverse effect on the consolidated financial position or results of operations of the Company.
(23)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
25 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
Sales to joint venture
2010
$
85,085
81,307
166,392
2009
$
161,020
-
161,020
These transactions are measured at the exchange amount, which is the amount of consideration established and
agreed to by the related parties.
26 Capital management
The Company’s objective when managing capital is to use short-term funding sources to manage its working
capital requirements and fund capital expenditures required to execute its operating and strategic plans. During
the year ended December 31, 2010, the Company changed its strategy regarding the management of its capital
structure from that of the previous 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
Long-term debt
Subordinated loan
Shareholders’ equity
2010
$
(2,262,273)
500,000
1,955,021
156,256
2009
$
(5,447,702)
496,900
2,085,149
218,752
349,004
2,305,875
(2,646,901)
12,251,816
2,654,879
9,604,915
In 2010 and 2009, the Company’s capital was significantly affected by the acquisition described in note 5 and
the share offerings described in note 17(e) and (f). The Company is not subject to any capital requirements
imposed by regulators; however, it must comply with certain financial covenants related to the terms of its
subordinated loan. As at December 31, 2010, the Company was in compliance with the required financial
covenants, except for the subordinated loan.
(24)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
27 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 country, as determined by location of the customers, is as follows:
Revenue
United States
Canada
South Korea
Austria
China
Middle East
Argentina
Other
Revenue summarized by product line is as follows:
Product line
Natural gas dryers
Compressed gas filtration
Air dryers
Gas purification
Engineering services
2010
$
2009
$
5,497,131
1,963,303
1,522,076
1,520,141
1,346,693
199,075
1,546
1,425,246
4,114,862
3,226,324
-
250,096
1,550,101
4,541,472
3,757,598
1,253,335
13,475,211
18,693,788
2010
$
2009
$
5,529,018
3,115,935
358,151
4,366,857
105,250
11,141,555
3,019,412
1,246,072
1,831,512
1,455,237
13,475,211
18,693,788
(25)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Major customers representing 10% or more of total sales include:
Customers
Customer A
Customer B
Customer C
Customer D
Customer E
2010
$
2009
$
1,863,821
1,326,037
1,127,630
1,101,921
4,447
5,681
-
-
3,757,598
3,106,227
5,423,856
6,869,506
The location of the Company’s property, plant and equipment, intangible assets and goodwill by geographic
region is as follows:
Canada
Asia
28 Financial instruments
Credit risk
2010
$
2009
$
7,170,006
230,237
8,357,870
468,259
7,400,243
8,826,129
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 employing credit approval
procedures, establishing credit limits, using credit assessments and monitoring practices to mitigate the
likelihood of these exposures from resulting in an actual loss. An allowance for doubtful accounts amounting to
$341,286 (2009 – $392,042) was established, 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 $8,501 in 2010 (2009 – $222,967).
As at December 31, 2010, the Company’s three largest trade debtors accounted for 24% (9%, 9% and 6%) of
the total accounts receivable balance (2009 – 33% (21%, 7% and 5 %)).
(26)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
Details of accounts receivable were as follows:
Current trade receivables
Trade receivables past due by:
1 to 30 days
31 to 60 days
61 to 90 days
Over 90 days
Total trade receivables
Allowances for doubtful accounts
Other receivables
Total accounts receivable
2010
$
2009
$
869,264
997,964
465,490
92,808
127,748
1,175,317
2,730,627
(341,286)
213,920
315,532
182,429
164,200
1,233,182
2,893,307
(392,042)
604,569
2,603,261
3,105,834
The Company’s cash is maintained at major financial institutions; therefore, it 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 78% of its sales and 44% of its purchases in foreign currencies.
Consequently, certain financial assets and financial liabilities are exposed to foreign exchange fluctuations. As
at December 31, 2010, the following amounts are shown in US dollars, euros, renminbis, British pounds
sterling and Singapore dollars and converted into Canadian dollars. The Company does not use financial
instruments to reduce this risk.
Taking into account the amounts denominated in the currencies indicated above and assuming that all of the
other variables remain unchanged, a fluctuation in exchange rates would have an impact on the Company’s net
loss. Management believes that a 10% change in exchange rates would be reasonably possible and that the
impact on net loss of a 10% change in exchange rates would be approximately $87,300.
(27)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
US
dollar
722,636
919,988
-
Euro
Renminbi
519
229,979
134,088
302,958
4,774,263
-
2010
Singapore
dollar
40,322
88,313
-
British
pound
sterling
698
2,000
-
(1,715,224)
(199,529)
(9,116,906)
(34,814)
(44,182)
(72,600)
165,057
(4,039,685)
(32,116)
84,453
(72,207)
219,839
(609,588)
(49,822)
65,460
US
dollar
569,032
593,566
15
Euro
Renminbi
436
414,098
128,700
2,351,045
6,827,861
-
2009
Singapore
dollar
68,624
106,855
-
British
pound
sterling
-
-
-
(66,277)
(506,021)
(10,479,976)
(30,073)
(182,307)
1,096,336
37,213
(1,301,070)
(30,073)
(6,828)
Cash
Accounts receivable
Restricted cash
Accounts payable and
accrued liabilities
Equivalent in
Canadian dollars
Cash
Accounts receivable
Restricted cash
Accounts payable and
accrued liabilities
Equivalent in
Canadian dollars
1,152,250
55,819
(199,454)
(50,878)
(5,092)
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 loan and long-term debt, for which the interest rates
charged fluctuate based on the bank’s prime rate. As at December 31, 2010, the bank loan amounts to $500,000
(2009 – $496,900). Long-term debt that is subject to the variability of interest rate fluctuations amounts to
$1,657,713 (2009 – $1,961,266). Annual interest is mainly at the bank’s prime rate plus 2.5%. If the interest
rate on the bank debt had been 50 basis points higher (lower) related to the bank loan and long-term debt
outstanding as at December 31, 2010, net loss would have been $10,800 (2009 – $12,300) higher (lower).
(28)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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:
2010
Thereafter
$
-
-
$
-
-
2009
Thereafter
$
-
-
$
-
-
Bank loan
Accounts payable and accrued
liabilities
Long-term debt and
subordinated loan
Carrying
amount
$
Contractual
cash flow
0 to 12
months
13 to 24
months
$
$
500,000
500,000
500,000
8,594,752
8,594,752 8,594,752
2,111,277
2,788,631
251,443
441,877
2,095,311
11,206,029
11,883,383 9,346,195
441,877
2,095,311
Bank loan
Accounts payable and accrued
liabilities
Long-term debt and
subordinated loan
Derivative financial instruments
Carrying
amount
$
Contractual
cash flow
0 to 12
months
13 to 24
months
$
$
496,900
496,900
496,900
5,578,505
5,578,505 5,578,505
2,303,901
96,645
2,853,420
96,645
484,844
96,645
396,700
-
1,971,876
-
8,475,951
9,025,470 6,656,894
396,700
1,971,876
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 its operations and 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. The Company
also intends to monetize some of its intellectual properties through strategic partnerships and thereby creating
additional liquidity (note 1(b)).
(29)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
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 or 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.
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 maturities. The Company uses the
Level 1 input to measure the fair value of its cash.
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 financial instruments effective December 31, 2010 is nil (2009 – $96,645). The
Company uses the Level 2 input to measure the fair value of its derivative financial instruments.
Other
The fair values of loan to a joint venture, long-term debt and subordinated loan approximate their carrying
values due to their variable interest rates or current market rates in respect of instruments with fixed rates.
(30)
Xebec Adsorption Inc.
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
29 Subsequent events
On March 17, 2011, the Company signed a licence and engineering service agreement with Nuvera Fuel Cells
for a total value of US$3,250,000. Under the terms of the agreement, the Company will receive an upfront
payment of US$1,750,000 and the remainder over the course of the development period.
On January 24, 2011, the Company announced it has signed an engineering services contract with ExxonMobil
Research and Engineering Company (“EMRE”) valued at US$2,000,000. The engineering services are to be
provided under an extension to an existing joint development agreement between the Company and EMRE.
On January 19, 2011, the Company announced that it has signed a contract valued at 6.0 million renminbis to
provide a complete upgrading plant with Heilongjiang Loonggas Investment Co., Ltd. in China.
(31)