Xebec Adsorption Inc.
Annual Report 2011

Plain-text annual report

Xebec Adsorption Inc. Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) March 30, 2012 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 subsidiaries, which comprise the consolidated statements of financial position as at December 31, 2011 and 2010 and January 1, 2010 and the consolidated statements of loss, comprehensive loss, changes in equity (deficiency) and cash flows for the years ended December 31, 2011 and 2010, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. 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 International Financial Reporting Standards, 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 LLP/s.r.l./s.e.n.c.r.l., Chartered Accountants 1250 René-Lévesque Boulevard West, Suite 2800, Montréal, Quebec, Canada H3B 2G4 T: +1 514 205 5000, F: +1 514 205 5675, www.pwc.com/ca “PwC” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership. 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 subsidiaries as at December 31, 2011 and 2010 and January 1, 2010 and their financial performance and their cash flows for the years ended December 31, 2011 and 2010 in accordance with International Financial Reporting Standards. . 1 Chartered accountant auditor permit No. 21277 (2) Xebec Adsorption Inc. Consolidated Statements of Financial Position (expressed in Canadian dollars) Assets Current assets Cash and cash equivalents Restricted cash (note 10) Trade and other receivables (note 6) Inventories (note 7) Income taxes recoverable Investment tax credits receivable Other current assets Total current assets Non-current assets Balance of sale (note 16b)) Loan to a joint venture (note 12) Property, plant and equipment (note 8) Intangible assets (note 9) Goodwill (note 9) Total non-current assets Total assets Liabilities Current liabilities Bank loan (note 11) Trade payables and accrued liabilities (note 13) Deferred revenues (note 14) Income taxes payable Derivative financial instruments Current portion of long-term debt and obligation (note 16) Current portion of Government royalty program obligation (note 16) Provisions (note 15) Total current liabilities Non-current liabilities Loan from a related party (note 28) Long-term debt (note 16 ) Government royalty program obligation (note 16) Government assistance Deferred rent Provisions (note 15) Total non-current liabilities Total liabilities Equity (Deficiency) Share capital (note 18) Contributed surplus Accumulated other comprehensive income (loss) Deficit Non-controlling interest (note 5) Total equity Total liabilities and equity As at December 31, 2011 $ As at December 31, 2010 $ As at January 1, 2010 $ 389,090 - 2,444,842 1,365,260 - 75,000 329,292 4,603,484 800,000 - 548,671 3,988,317 342,616 5,679,604 2,262,273 576,092 2,603,261 2,720,060 - 103,489 100,846 8,366,021 - 117,811 1,908,442 4,483,897 342,616 6,852,766 5,447,702 223,261 3,105,834 2,867,922 62,492 80,843 183,564 11,971,618 - 113,331 2,545,789 5,222,797 342,616 8,224,533 10,283,088 15,218,787 20,196,151 500,000 5,743,340 2,506,474 - - 141,786 195,949 156,000 500,000 7,089,760 2,331,802 8,286 - 243,407 - 1,036,095 9,243,549 11,209,350 23,562 236,729 752,972 27,083 6,596 299,718 1,346,660 10,590,209 19,802,272 2,168,550 (71,521) (22,211,793) (312,492) 5,371 (307,121) - 1,867,870 691,539 32,083 - 304,034 2,895,526 14,104,876 19,964,218 1,841,741 72,622 (20,764,670) 1,113,911 - 1,113,911 10,283,088 15,218,787 496,900 4,586,203 146,228 - 96,645 384,149 - 141,309 5,851,434 - 1,919,752 1,137,307 37,083 - 694,674 3,788,816 9,640,250 18,107,821 51,368 - (7,603,288) 10,555,901 - 10,555,901 20,196,151 The accompanying notes are an integral part of these consolidated financial statements. Approved by the Board of Directors ___________________________________ Director (signed) Kurt Sorchak (signed) John Shakeshaft ___________________________________ Director Xebec Adsorption Inc. Consolidated Statements of Loss For the years ended December 31, 2011 and 2010 (expressed in Canadian dollars) Revenue Cost of goods sold Gross margin Research and development expenses (note 21) Selling and administrative expenses Foreign exchange gain Loss (gain) on disposal of property, plant and equipment (note 16) Loss on loan to a joint venture (note 5) Operating Loss Finance income (note 22) Finance expense (note 23) Finance costs – net Net loss for the year Earnings (loss) attributable to: Shareholders of the Company Non-controlling interest Loss per share Basic and diluted (note 18 ) 2011 $ 2010 $ 14,203,463 13,475,211 9,999,460 13,388,833 4,204,003 550,345 6,846,178 (107,050) (2,275,092) 138,105 86,378 2,550,638 10,712,925 (130,807) 117,036 - 5,152,486 13,249,792 (948,483) (13,163,414) (9,410) 517,877 508,467 (659,558) 657,526 (2,032) (1,456,950) (13,161,382) (1,447,123) (9,827) (13,161,382) - (1,456,950) (13,161,382) (0.04) (0.43) The accompanying notes are an integral part of these consolidated financial statements. Xebec Adsorption Inc. Consolidated Statements of Comprehensive Loss For the years ended December 31, 2011 and 2010 (expressed in Canadian dollars) Net loss for the year Other comprehensive income (loss) Cumulative translation adjustment Comprehensive loss for the year Attributable to: Shareholders of the Company Non-controlling interest (note 5) 2011 $ 2010 $ (1,456,950) (13,161,382) (162,784) 72,622 (1,619,734) (13,088,760) (1,591,266) (28,468) (13,088,760) - (1,619,734) (13,088,760) The accompanying notes are an integral part of these consolidated financial statements. Xebec Adsorption Inc. Consolidated Statements of Changes in Equity (Deficiency) For the years ended December 31, 2011 and 2010 (expressed in Canadian dollars) Number Common shares Warrants Share capital – Common shares and warrants $ Contributed surplus $ Accumulated other comprehensive income (loss) $ Equity attributable to the Company $ Non- controlling interest $ Deficit $ Balance – January 1, 2010 29,262,445 17,167,824 18,107,821 51,368 - (7,603,288) 10,555,901 Net loss for the year Other comprehensive income (net of tax) Comprehensive loss for the year Issuance of shares Share-based compensation Expired warrants Private placement (note 18) - - - 9,536 - - - - (9,536) - - - - 7,343 - (12,360,000) (1,782,259) Shares and warrants issued to investors Shares and warrants issued to agent Financing costs 9,491,886 600,000 9,491,886 1,166,250 3,796,754 309,649 (475,090) - - - - 8,114 1,782,259 - - - - 72,622 72,622 - - - - - - (13,161,382) - (13,161,382) 72,622 (13,161,382) - - - - - - (13,088,760) 7,343 8,114 - 3,796,754 309,649 (475,090) Balance – December 31, 2010 39,363,867 15,456,424 19,964,218 1,841,741 72,622 (20,764,670) 1,113,911 Balance – January 1, 2011 39,363,867 15,456,424 19,964,218 1,841,741 72,622 (20,764,670) 1,113,911 - - - - - - - - - - - - Amount Total $ 10,555,901 (13,161,382) 72,622 (13,088,760) 7,343 8,114 - 3,796,754 309,649 (475,090) 1,113,911 1,113,911 Net loss for the year Other comprehensive loss (net of tax) Comprehensive loss for the year Expired warrants (note 18) Share-based compensation Non-controlling interest at business acquisition - - - - - - - - - (4,798,288) - - - - - (161,946) - - - - - (1,447,123) (144,143) - (1,447,123) (144,143) (9,827) (18,641) (1,456,950) (162,784) - 161,946 164,863 - (144,143) - - - (1,447,123) - - - (1,591,266) (28,468) (1,619,734) - 164,863 - - - 33,839 - 164,863 33,839 Balance – December 31, 2011 39,363,867 10,658,136 19,802,272 2,168,550 (71,521) (22,211,793) (312,492) 5,371 (307,121) Accumulated other comprehensive income relates solely to cumulative translation adjustments. Xebec Adsorption Inc. Consolidated Statements of Cash Flows For the years ended December 31, 2011 and 2010 (expressed in Canadian dollars) Cash flows from Operating activities Net loss for the year Items not affecting cash Amortization of property, plant and equipment Amortization of intangible assets Loss on disposal of intangible assets Loss (gain) on disposal of property, plant and equipment Gain on debt forgiveness Loss on loan to a joint venture Government assistance Unrealized foreign exchange gain on derivative financial instruments Unrealized foreign exchange loss (gain) on loan to a joint venture and restricted cash Accretion and revaluation of government royalty program obligation Stock-based compensation expense Changes in non-cash working capital components relating to operations Trade and other receivables Inventories Investment tax credits receivable Other current assets Trade payables and accrued liabilities Deferred revenues Income taxes payable (recoverable) Other operating liabilities Investing activities Acquisition of property, plant and equipment Acquisition of intangible assets Proceeds from disposal of property, plant and equipment Cash acquired on acquisition of a business (note 5) Decrease (increase) in restricted cash Financing activities Issuance of common shares Issuance costs of shareholders’ equity instruments Increase in bank loan Increase in long-term debt Loan from a Company director Repayment of long-term debt Repayment of government royalty program obligation Effect of exchange rate changes on cash and cash equivalents Decrease in cash during the year Cash – Beginning of year Cash – End of year Additional information Income tax recovered Interest paid 2011 $ 2010 $ (1,456,950) (13,161,382) 385,073 512,597 - (2,275,092) (101,701) 138,105 (5,000) - (1,603) 257,382 164,863 (2,382,326) 374,323 1,457,662 28,489 (226,618) (1,406,707) (144,852) (8,286) (885,566) (811,555) (3,193,881) (2,191) (16,972) 2,468,981 47,066 576,092 3,072,976 - - - 9,568 23,562 (1,742,329) - (1,709,199) (43,079) (1,873,183) 2,262,273 389,090 - 260,108 608,767 554,475 184,000 117,036 - - (5,000) (96,645) 9,994 (279,934) 8,114 (12,060,575) 502,573 147,862 (22,646) 82,718 3,007,703 2,185,574 70,778 - 5,974,562 (6,086,013) (94,612) - 3,300 - (367,305) (458,617) 3,804,097 (165,441) 3,100 181,101 - (373,725) (165,834) 3,283,298 75,903 (3,185,429) 5,447,702 2,262,273 (66,624) 277,131 The accompanying notes are an integral part of the consolidated financial statements. Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 1 Nature of business Xebec Adsorption Inc. (“Xebec” or 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 and QuestAir Technologies Inc. (“QuestAir”) on June 12, 2009. The Company is incorporated and domiciled in Canada and listed on the Toronto Stock Exchange. The address of its registered office is 730 Industriel Boulevard, Blainville, Quebec, Canada. 2 Basis of preparation and adoption of International Financial Reporting Standards (“IFRS”) In 2010, the Canadian Institute of Chartered Accountants (“CICA”) Handbook was revised to incorporate IFRS as issued by the International Accounting Standard Board (“IASB”), and requires publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011. Accordingly, these are the Company’s first annual consolidated financial statements prepared in accordance with IFRS as issued by the IASB. The Company’s consolidated financial statements were previously prepared in accordance with Canadian generally accepted accounting principles (“Previous GAAP”). Previous GAAP differs in some area from IFRS. In preparing these financial statements, management has amended certain accounting, measurement and consolidation methods previously applied in the Previous GAAP financial statements to comply with IFRS. Subject to certain transition elections and exceptions disclosed in note 32, the Company has consistently applied the accounting policies used in the preparation of its opening IFRS consolidated statement of financial position as at January 1, 2010 throughout all periods presented, as if these policies had always been in effect. Note 3 discloses the impact of the transition to IFRS on the Company’s reported financial position, financial performance and cash flows, including the nature and effect of significant changes in accounting policies. The Board of Directors approved the statements for issue on March 30, 2012. 3 Significant accounting policies Basis of measurement These consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value, including derivative instruments. Basis of consolidation These consolidated financial statements include the accounts of the Company and its subsidiaries. Subsidiaries are entities controlled by the Company. Control exists when Xebec is able to govern the financial and operating activities of those entities to generate returns for the Company. Intercompany transactions, balances and unrealized gains and losses on transactions between different entities within the Company are eliminated. Subsidiaries include Xebec Adsorption (Shanghai) Co. Ltd., which is wholly owned, and Xebec Adsorption South East Asia PTE. Ltd., which, since July 1, 2011, is 56.49% owned. Prior to that date, Xebec Adsorption South East Asia PTE. Ltd. was a joint venture in which the Company had a 40% interest and was accounted for (1) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) using the proportionate consolidation method. Subsidiaries are fully consolidated from the date on which control is obtained by the Company and are deconsolidated from the date that control ceases. Non-controlling interest represents equity interest in a subsidiary owned by an outside party. The share of net assets of subsidiaries attributable to non-controlling interest is presented as a component of equity. Its share of net earnings and comprehensive income is recognized directly in equity. Changes in the Company’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. The Company’s interests in jointly controlled entities are accounted for by proportionate consolidation. The Company combines its share of the joint ventures’ individual income and expenses, assets and liabilities and cash flows on a line-by-line basis with similar items in the Company’s consolidated financial statements. Cash Cash includes cash on hand, deposits held at call with banks. Trade receivables Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business. If collection is expected in one year or less (or in the normal operating cycle of the business if longer), they are classified as current assets. If not, they are presented as non-current assets. Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. Inventories Inventories are stated 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 (based on normal operating capacity). Net realizable value is the estimated selling price less applicable selling expenses. Inventories are recorded net of any obsolescence provision. A new assessment is made in each subsequent year when inventories are adjusted to net realizable value. 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 stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost can be measured reliably. The carrying amount of a replaced asset is derecognized when replaced. Repairs and maintenance costs are charged to the consolidated statement of loss during the year in which they are incurred. (2) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) The major categories of property, plant and equipment are depreciated on a straight-line basis as follows: Building Machinery and equipment Office furniture and equipment Computers Moulds Vehicles Leasehold improvements Asset under finance lease 20 years 3 to 10 years 5 years 3 years 5 years 5 years Lesser of economic life and lease term Lesser of economic life and lease term The Company allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant parts and depreciates each such part separately. Residual values, method of depreciation and useful lives of the assets are reviewed annually and adjusted if appropriate. Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included as part of other gains and losses in the consolidated statement of loss. Identifiable intangible assets The Company’s intangible assets include patents, customer relations, software and engineering drawings. These assets are capitalized and amortized on a straight-line basis in the consolidated statement of loss over the period of their expected useful lives. Patent costs are amortized over fifteen years. Customer relations are amortized over seven years. Engineering drawings, consisting of engineering costs incurred to develop product plans, and software are amortized over a period of three years. Impairment of non-financial assets Property, plant and equipment and intangible assets are tested for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. Long-lived assets that are not amortized are subject to an annual impairment test. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units or CGUs). The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use (being the present value of the expected future cash flows of the relevant asset or CGU). An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The Company evaluates impairment losses, other than goodwill impairment, for potential reversals when events or circumstances warrant such consideration. (3) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to CGUs for the purpose of impairment testing. The allocation is made to those CGUs that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segment. Trade payables Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method. Provisions Provisions for restructuring costs, warranties and legal claims, where applicable, are recognized in accrued liabilities when the Company has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are measured at management’s best estimate of the expenditure required to settle the obligation at the end of the reporting year, and are discounted to present value where the effect is material. The Company performs evaluations to identify onerous contracts and, where applicable, records provisions for such contracts. 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. Financial instruments Financial assets and financial liabilities are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets are derecognized when the rights to receive cash flows from the assets have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. (4) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) At initial recognition, the Company classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired: Cash Restricted cash Trade and other receivables Loan to a joint venture Bank loan Trade payables and accrued liabilities Derivative financial instruments Long-term debt Government royalty program obligation Subordinated loan Loans and receivables Loans and receivables Loans and receivables Loans and receivables Other financial liabilities Other financial liabilities Fair value through profit or loss Other financial liabilities Other financial liabilities Other financial liabilities A financial asset or financial liability is classified at fair value through profit or loss if acquired principally for the purpose of selling or repurchasing in the short term. Derivatives are also included in this category unless they are designated as hedges. Financial assets and financial liabilities classified as fair value through profit or loss are measured at fair value at each reporting year, with changes in fair value in subsequent years included in net loss. Transaction costs are expensed in the consolidated statement of loss. Financial assets and financial liabilities at fair value through profit or loss are classified as current except for the portion expected to be realized or paid beyond 12 months of the statement of financial position date, which is classified as non- current. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are initially recognized at the amount expected to be received, less, when material, a discount to reduce the loans and receivables to fair value. Subsequently, loans and receivables are measured at amortized cost using the effective interest method less a provision for impairment. Other financial liabilities are initially measured at fair value and subsequently at amortized cost using the effective interest method. Financial liabilities are classified as current liabilities if payment is due within 12 months. Otherwise, they are presented as non-current liabilities. The Company classifies derivative financial instruments and embedded derivatives as fair value through profit or loss, and values them at fair value at the end of each year, with changes recorded in other income. The Company does not designate these derivative financial instruments as hedges. Impairment of financial assets At each reporting date, the Company assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the Company recognizes an impairment loss. The loss on financial assets carried at amortized cost is the difference between the amortized cost of the loan or receivable and the present value of the estimated future cash flows, discounted using the instrument’s original effective interest rate. The carrying amount of the asset is reduced by this amount either directly or indirectly through the use of an allowance account. (5) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) Impairment losses on financial assets carried at amortized cost are reversed in subsequent years if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. Impairment losses on available-for-sale equity instruments are not reversed. 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 consolidated statement of comprehensive 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 dollars 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. Government royalty program obligations The Company receives from time to time, from different government agencies, funding designed to promote economic growth, create jobs and wealth, and support sustainable development. In some of these arrangements, the Company has a contractual obligation to repay the contributions to the government agency, with repayments determined as a percentage of specified revenues over a contractually defined royalty year. Such arrangements are recognized as government royalty program obligations at initial recognition when the contribution is received. These obligations are estimated based on future projections, discounted using a rate that reflects the liability-specific risks. Over time, interest expense is recognized as a result of accretion of the long-term obligations, while royalty payments are recorded against the obligations. Subsequently, the government royalty program obligations are remeasured when the future projections initially used to measure the obligations are revised using the original discount rate. Resulting changes in the carrying amount of these obligations are recognized in the consolidated statement of loss as Finance expense. Share capital Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a deduction from share capital. 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 it is probable that the economic benefits will flow to the Company and delivery has occurred, the sales price is fixed (6) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) or determinable, and collectability is reasonably assured. These criteria are generally met at the time the product is shipped and delivered to the customer and, depending on the delivery conditions, title and risk have passed to the customer and acceptance of the product has been obtained. 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. 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 composed mainly of materials and labour). 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 goods sold in the year in which the loss becomes evident and reasonably estimable. Revenues from licensing arrangements are recognized when it is probable that the economic benefits will flow to the Company and that the sales price is fixed or determinable, and collectability is reasonably assured. These criteria are generally met at the time the contract is signed and title and risk have passed to the customer. Revenue is measured based on the price specified in the sales contract, net of discounts and estimated returns at the time of sale. Historical experience is used to estimate and provide for discounts and returns. Government assistance Non-refundable grants relating to property, plant and equipment are accounted for as deferred government assistance and amortized on the same basis as the related assets. 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. Leases Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated statement of loss on a straight-line basis over the lease term. Leases where the Company has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the lease’s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges. The interest element of the finance cost is charged to the consolidated statement of loss over the lease year so as to produce a constant yearly rate (7) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) of interest on the remaining balance of the liability for each year. Assets acquired under finance leases are depreciated over the shorter of the useful life of the asset and the lease term. (8) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) Stock-based compensation plans The Company accounts for stock options using the fair value method. Each tranche in an award is considered a separate award with its own vesting year and grant date fair value. Fair value of each tranche is measured at the date of grant 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, compensation expense is recognized over the tranche’s vesting period by increasing contributed surplus based on the number of awards expected to vest. The number of awards expected to vest is reviewed at least annually. For options granted to non-employees, the transaction is measured with reference to the fair value of the goods or services when received. Related expense is recognized over the period during which the goods or services from the non-employees are received. A corresponding increase is recorded in contributed surplus when stock options are expensed. When stock options are exercised, capital stock is credited by the sum of the consideration paid and the related amount 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 criteria for deferral and amortization. To date, no development expenses have been deferred. Income taxes Income tax comprises current and deferred tax. Income tax is recognized in the consolidated statement of loss except to the extent that it relates to items recognized directly in equity, in which case the income tax is also recognized directly in equity. Current income tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the end of the reporting year, and any adjustment to tax payable in respect of previous years. In general, deferred income tax is recognized in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the statement of financial position date and are expected to apply when the deferred tax asset or liability is settled. Deferred income tax assets are recognized to the extent that it is probable that the assets can be recovered. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are presented as non-current. (9) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) Earnings per share Basic earnings per share (“EPS”) is calculated by dividing the net income for the year attributable to equity owners of the Company by the weighted average number of common shares outstanding during the year. Diluted EPS is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. The number of shares included with respect to options, warrants and similar instruments is computed using the treasury stock method, which assumes that if all dilutive securities had been exercised at the later of the beginning of the year and 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 a) Functional and presentation currency Items included in the financial statements of each consolidated entity in the Company group are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in Canadian dollars, which is the Company’s functional currency. The financial statements of entities that have a functional currency different from that of the Company (“foreign operations”) are translated into Canadian dollars as follows: assets and liabilities – at the closing rate at the date of the statement of financial position, and income and expenses – at the average rate of the year (to the extent this is considered a reasonable approximation to actual rates). All resulting changes are recognized in other comprehensive income as cumulative translation adjustment. When an entity disposes of its entire interest in a foreign operation, or loses control, joint control or significant influence over a foreign operation, the foreign currency gains or losses accumulated in other comprehensive income related to the foreign operation are recognized in profit or loss. If an entity disposes of part of an interest in a foreign operation which remains a subsidiary, a proportionate amount of foreign currency gains or losses accumulated in other comprehensive income related to the subsidiary is reallocated between controlling and non-controlling interests. b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Generally, foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in currencies other than an operation’s functional currency are recognized in the consolidated statement of income. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the steering committee. (10) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) Accounting standards issued but not yet applied Unless otherwise noted, the following revised standards and amendments are effective for the Company for annual periods beginning on or after January 1, 2013 with earlier application permitted. The Company has not yet assessed the impact of these standards and amendments or determined whether it will early adopt them. (i) IFRS 9, Financial Instruments, issued in November 2009, is mandatory for accounting periods beginning after January 1, 2015 and addresses classification and measurement of financial assets. It replaces the multiple category and measurement models in IAS 39, Financial Instruments – Recognition and Measurement for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments. Such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income. Where equity instruments are measured at fair value through other comprehensive income, dividends are recognized in profit or loss to the extent that they do not clearly represent a return of investment; however, other gains and losses (including impairments) associated with such instruments remain in accumulated comprehensive income indefinitely. Requirements for financial liabilities were added to IFRS 9 in October 2010 and they largely carried forward existing requirements in IAS 39, Financial Instruments – Recognition and Measurement, except that fair value changes due to credit risk for liabilities designated at fair value through profit or loss are generally recorded in other comprehensive income. IFRS 9 is applicable to the Company for the year beginning on January 1, 2015, with earlier application permitted. (ii) IFRS 10, Consolidated Financial Statements, requires an entity to consolidate an investee when it has power over the investee, is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC 12, Consolidation—Special Purpose Entities, and parts of IAS 27, Consolidated and Separate Financial Statements. (iii) IFRS 11, Joint Arrangements, requires a venturer to classify its interest in a joint arrangement as a joint venture or joint operation. Joint ventures will be accounted for using the equity method of accounting whereas for a joint operation, the venturer will recognize its share of the assets, liabilities, revenue and expenses of the joint operation. Under existing IFRS, entities have the choice to proportionately consolidate or equity account for interests in joint ventures. IFRS 11 supersedes IAS 31, Interests in Joint Ventures, and SIC 13, Jointly Controlled Entities—Non-monetary Contributions by Venturers. (iv) IFRS 12, Disclosure of Interests in Other Entities, establishes disclosure requirements for interests in other entities such as subsidiaries, joint arrangements, associates and unconsolidated structured entities. The standard carries forward existing disclosures and also introduces significant additional disclosures that address the nature of, and risks associated with, an entity’s interests in other entities. (v) IFRS 13, Fair Value Measurement, is a comprehensive standard for fair value measurement and disclosure for use across all IFRS standards. The new standard clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. Under existing IFRS, guidance on measuring and disclosing fair value is dispersed (11) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) among the specific standards requiring fair value measurements and does not always reflect a clear measurement basis or consistent disclosures. (vi) IAS 1, Presentation of Financial Statements, has been amended to require entities to separate items presented in other comprehensive income into two groups, based on whether or not items may be recycled in the future. Entities that choose to present other comprehensive income items before tax will be required to show the amount of tax related to the two groups separately. 4. Significant accounting judgments and estimation uncertainties Critical accounting estimates and judgments The Company makes estimates and assumptions concerning the future that will, by definition, seldom equal actual results. The following are the estimates and judgments applied by management that most significantly affect the Company’s consolidated financial statements. These estimates and judgments have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. i) Goodwill The Company tests annually whether goodwill has suffered any impairment. The recoverable amounts of CGUs have been determined based on value-in-use calculations. These calculations require the use of estimates. No impairment charge was recorded during the years. (12) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) ii) Inventory obsolescence Inventories must be valued at the lower of cost and net realizable value. A write down of the inventory will occur when its estimated market value less applicable variable selling expenses is below its carrying amount. Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. This involves significant management judgment and is based on the Company’s assessment of market conditions for its products determined by historical usage, estimated future demand and, in some cases, the specific risk of loss on specifically identified inventory. Any change in the assumptions used in assessing this valuation will impact the carrying amount of the inventory and have a corresponding impact on cost of goods sold. iii) Impairment of long-lived assets Long-lived assets or CGUs are reviewed for impairment upon the occurrence of events or changes in circumstances indicating that the carrying value of the assets may not be recoverable, as measured by comparing their carrying amounts to the recoverable amount, which is the higher of fair value less cost to sell, and estimated discounted future cash flows generated by their use and eventual disposal. Impairment, if any, is measured as the excess of the carrying amount of the asset or CGU over its recoverable amount. iv) Recognition of future income tax assets A deferred tax asset is recognized for all deductible temporary differences and unused tax losses to the extent that it is probable that taxable profit will be available against which the deductible temporary difference and unused tax losses can be used. Therefore, the Company has to estimate the amount of future taxable profits expected to be available. Such estimates are made by tax jurisdiction on an undiscounted basis. Management exercises judgment to determine the extent to which realization of future taxable benefits is probable, considering factors such as the number of years to include in the forecast period and the history of taxable profits. v) Government royalty program obligations Government royalty program obligations are recognized when the contributions, which can come from different government agencies, are received and the Company has a contractual obligation to repay the contributions (refer to note 16(c)) for a description of the programs). As repayments are determined based on a percentage of specified revenues over a contractually defined royalty year, these obligations are measured as the net present value of expected future royalties payable. The key estimates used in the initial recognition of these obligations are the projected annual revenues and the discount rate. Subsequent to initial recognition, the government royalty program obligations are remeasured when the projections of expected future royalties payable initially used to measure the obligations are revised, using the original discount rate. (13) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 5. Business acquisition On July 1, 2011, the Company acquired an additional 16.49% of the outstanding shares of Xebec Adsorption South East Asia PTE. Ltd. Accordingly, the Company now owns 56.49% of the outstanding shares and acquired control of the joint venture. The acquisition was settled by the conversion of its loan that it had previously made to the joint venture. The acquisition was accounted for under the purchase method, and the full operating results of the subsidiary are included in the consolidated financial statements from the acquisition date. The fair value of the net assets acquired is attributed as follows and is subject to certain subsequent adjustments and completion of a final evaluation of intangible assets: Assets acquired: Cash Accounts receivable Inventories Prepaid expenses Property, plant and equipment Liabilities assumed: Accounts payable and accrued liabilities Deferred revenues Provision Net assets acquired at fair value Net assets attributable to non-controlling interest Net assets attributable to initial investment held before acquisition Consideration paid in form of conversion of loan Total consideration deemed paid $ 78,443 320,174 26,971 3,046 15,411 444,045 178,179 229,086 1,925 409,190 34,855 15,166 13,942 5,747 34,855 From the date of its acquisition to December 31, 2011, the acquired business contributed revenues of $291,879 to the Company’s results. If the acquisition had occurred on January 1, 2011, the Company’s revenues for the current year would have increased by $244,948. (14) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 6 Trade and other receivables December 31, 2011 $ December 31, 2010 $ January 1, 2010 $ Trade receivables Other receivables Less: Allowance for doubtful accounts Trade receivables - net 2,009,939 629,176 194,273 2,444,842 2,730,627 213,920 341,286 2,893,307 604,569 392,042 2,603,261 3,105,834 Trades receivables include holdbacks amounting to $202,995 for the year ended December 31, 2011 (2010- $169,139 and 2009-nil). Trade receivables are pledged as security for the credit facilities (see note 11, Bank loan). 7 Inventories Raw materials Work in progress Finished goods Inventories December 31, 2011 $ December 31, 2010 $ January 1, 2010 $ 1,006,247 330,355 28,658 1,365,260 1,755,325 942,767 21,968 2,720,060 1,970,017 868,663 29,242 2,867,922 Cost of goods sold includes of cost of inventories amounting to $5,289,956 in 2011 (2010- $7,552,000). Cost of goods sold includes an amount $11,698 (2010 – nil) and $366,314 in selling and administrative expenses (2010 – $283,848) for the write-down of inventories to the lower of cost and net realizable value. Inventories in the amount of nil (December 31, 2010 – $42,319 – January 1, 2010 – nil) are recorded at their net realizable value. Work in progress inventories are pledged as security for the credit facilities (see note 11, Bank loan). (15) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 8 Property, plant and equipment Land and building Machinery and equipment Office furniture and equipment Computers Moulds Vehicles Leasehold improvements Cost Balance at January 1, 2010 Additions Disposals Writeoffs Effect of movements in exchange rates Balance at December 31, 2010 Additions Business combination Disposals Effect of movements in exchange rates Balance at December 31, 2011 Accumulated amortization Balance at January 1, 2010 Amortization Disposal Writeoffs Effect of movements in exchange rates Balance at December 31, 2010 Amortization Business combination Disposal Effect of movements in exchange rates Balance at December 31, 2010 Carrying Amount At January 1, 2010 At December 31, 2010 At December 31, 2011 1,154,533 - - - - 1,154,533 - - (1,154,533) - - 126,436 49,067 - - - 175,503 24,534 - (200,037) - - 1,028,097 979,030 - 796,252 - (3,000) - (1,435) 791,817 - 2,470 (58,159) 6,693 742,821 139,344 186,175 (450) - (400) 324,669 142,798 1,066 (25,671) 2,999 445,861 656,908 467,148 296,960 106,417 464 - - (283) 106,598 - 8,485 (12,185) 4,332 107,230 23,097 25,384 - - (163) 48,318 21,237 4,101 (5,280) 2,700 71,076 83,320 58,280 36,154 309,667 11,058 - - (1,097) 319,628 1,499 10,835 - 6,195 338,157 146,829 115,301 - - (636) 261,494 48,863 8,444 - 5,838 324,639 192,745 11,121 - (140,408) (931) 62,527 692 - - 4,429 67,648 33,879 12,833 - (22,622) (306) 23,784 12,721 - - 2,392 38,897 162,838 58,134 13,518 158,866 38,743 28,751 648,731 - - - (3,401) 645,330 - 5,522 (3,655) 15,826 663,023 192,971 212,810 - - (2,787) 402,994 120,527 4,454 (3,655) 15,793 540,113 455,760 242,336 122,910 - 71,968 - - - 71,968 - - - - 71,968 - 7,197 - - - 7,197 14,393 - - - 21,590 - 64,771 50,378 (16) Total 3,208,345 94,611 (3,000) (140,408) (7,147) 3,152,401 2,191 27,312 (1,228,532) 37,475 1,990,847 662,556 608,767 (450) (22,622) (4,292) 1,243,959 385,073 18,065 (234,643) 29,722 1,442,176 2,545,789 1,908,442 548,671 Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 9 Intangible assets Other Internally generated Patents $ Customer relations $ Software $ Engineering drawings $ Cost Balance at January 1, 2010 Write-offs Effect of movements in exchange rates Balance at December 31, 2010 Additions Effect of movements in exchange rates Balance at December 31, 2011 Accumulated amortization Balance at January 1, 2010 Amortization of the year Effect of movements in exchange rates Balance at December 31, 2010 Amortization of the year Effect of movements in exchange rates Balance at December 31, 2011 Carrying Amount At January 1, 2010 At December 31, 2010 At December 31, 2011 3,299,013 1,900,000 - - 3,299,013 16,972 - 3,315,985 - - 1,900,000 - - 1,900,000 393,906 (184,000) (1,206) 208,700 - 5,374 214,074 109,967 219,934 - 329,901 219,934 - 135,714 271,429 - 407,143 271,429 - 549,835 678,572 3,189,046 2,969,112 2,766,150 1,764,286 1,492,857 1,221,428 127,574 61,546 (781) 188,339 19,667 5,329 213,335 266,332 20,361 739 4,700 - - 4,700 - - 4,700 1,567 1,566 - 3,133 1,567 - 4,700 3,133 1,567 - Total intangible assets $ Goodwill $ 5,597,619 (184,000) (1,206) 5,412,413 16,972 5,374 5,434,759 374,822 554,475 (781) 928,516 512,597 5,329 1,446,442 342,616 - - 342,616 - - 342,616 - - - - - - - 5,222,797 4,483,897 3,988,317 342,616 342,616 342,616 Amortization of $512,597 (2010 - $554,475) is included in the consolidated statement of loss: $231,334 (2010 - $252,273) in ‘cost of goods sold’ and $281,263 (2010 - $302,202) in ‘selling and administrative expenses’. (17) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 10 Restricted cash Restricted cash consists of amounts which are restricted for specific purposes under certain contractual obligations. 11 Bank loan As at December 31, 2011, the Company had credit facilities in the amount of $1,300,000 with Royal Bank of Canada which bore interest at the Royal Bank’s prime rate plus 2.50% per annum and which were limited by certain margin requirements concerning accounts receivable. The Company had also a revolving demand facility by way of letters of credit and letters of guarantee amounting to $750,000. However, as at December 31, 2011, the Company was not allowed to draw on these facilities. In addition, the Company had access to credit facilities in the amount of $500,000 with Royal Bank of Canada which were guaranteed by Export Development of Canada and bore interest at the Royal Bank’s prime rate plus 2.5% per annum and were limited by certain requirements concerning pre-shipment costs. These credit facilities were fully used as at December 31, 2011. The bank loan is secured by a first ranking hypothec of $4,000,000 on all movable property of the Company. The credit facilities with Royal Bank of Canada matured on October 31, 2010 and have been verbally extended under certain conditions on an “as needed” basis. The agreement with Export Development of Canada has been extended under the same terms and conditions until April 30, 2012. (18) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 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 Revenues Expenses Loss Comprehensive loss Cash flows from: Operating activities Financing activities Investing activities December 31, 2011 $ December 31, 2010 $ January 1, 2010 $ - - - - - - - - - - - 176,138 192,286 152,845 174,548 437,904 556,587 (118,683) (123,111) (21,828) - - 173,274 195,999 42,039 62,916 - - - - - - On July 1, 2011, the Company acquired an additional 16.49% of the outstanding shares of Xebec Adsorption South East Asia PTE. Ltd. The Company now owns 56.49% of the outstanding shares and acquired control of the joint venture (see note 5). 13 Trade and other payables Trade payables Payables to related parties (note 28) Accrued expenses Other payable Trade and other payables December 31, 2011 $ December 31, 2010 $ 4,210,200 31,435 939,028 562,677 5,743,340 5,245,325 34,343 1,077,597 732,495 7,089,760 January 1, 2010 $ 2,579,142 10,830 1,285,675 710,556 4,586,203 (19) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 14 Deferred revenues December 31, 2011 $ December 31, 2010 $ January 1, 2010 $ Deferred revenue from long-term contracts Deferred revenue others Deferred revenue 1,816,275 690,199 2,506,474 932,731 1,399,071 2,331,802 48,000 98,228 146,228 Revenue recognized for long-term contracts amounted to $4,369,730 for the year ended December 31, 2011 (2010 - $3,294,498). Costs incurred for long-term contracts amounted to $2,017,805, for a profit of $2,351,925 for the year ended December 31, 2011 (2010 – costs of $3,905,188 for loss of $610,690 respectively). 15 Provision Restructuring costs $ Anticipated loss on long- term contract $ Warranty costs $ Total provision $ 141,309 276,577 (64,000) (77,309) 276,577 129,615 (106,552) (238,640) 61,000 - 759,518 - - 694,674 760 (162,333) (229,067) 835,983 1,036,855 (226,333) (306,376) 759,518 304,034 1,340,129 - (375,138) (289,380) 189,440 (169,621) (24,135) 319,055 (651,311) (552,155) 95,000 299,718 455,718 At January 1, 2010 Additional provisions Unused amount reversed Used during year At December 31, 2010 Additional provisions Unused amount reversed Used during year At December 31, 2011 (a) Restructuring costs On December 31, 2010, the Company decided to close its office in the United Kingdom. On December 31, 2011, a provision of $61,000 remains which is related to the termination benefits for one employee which are expected to be paid during 2012. (b) Warranty costs The Company offers warranties 18 months after shipping or 12 months after start-up to the purchasers of its gas purification and natural gas dryers. (20) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 16 Long-term debt a) Loans Term loan, bears annual interest at the bank’s floating base rate plus 0.75%, repaid in full during the year ended December 31, 2011 (see note 16b)) Revolving loan, bears annual interest at the bank’s base rate plus 3.55%, repaid in full during the year ended December 31, 2011 Term loan, bears annual interest at the bank’s floating base rate plus 0.75%, repaid in full during the year ended December 31, 2011 Term loan, bears annual interest at the bank’s floating base rate plus 0.75%, repaid in full during the year ended December 31, 2011 Loan from Canada Economic Development for a maximum of $133,318, matures December 2015, bears no interest and is repayable in monthly instalments of $2,777 with the first instalment due 24 months after the project completion date Loan from Canada Economic Development for a maximum of $100,000, matures January 2015, bears no interest and is repayable in eight semi-annual instalments of $12,500 Term finance contracts, mature May 2015 and June 2015, bear annual interest of 5.99% and are secured by a lien on a vehicle (net book value of $50,377). Each is repayable in monthly instalments of $785 including capital and interest Loan from Investissement Québec, bears annual interest at the lender’s floating rate plus 2%, matures on June 2013 and is repayable in monthly instalments of $5,208 (note 17) Less: Current portion 2011 $ 2010 $ - - - - 1,343,900 26,113 207,700 80,000 133,318 123,750 87,500 100,000 58,729 73,558 98,968 378,515 141,786 236,729 156,256 2,111,277 243,407 1,867,870 (21) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) b) Disposition of building and land: On September 30th, 2011, the Company sold and leased-back its building. With the proceeds, the Company repaid its mortgages and used the remainder to fund its working capital. There is also a balance of sale of $800,000 that will become available to the Company consisting of an amount of $200,000 on the second anniversary date of the sale and $600,000 on the fourth anniversary date of the sale. The balance of sale bears interest at four percent and the interest is receivable on each anniversary date of the sale. c) Government royalty program obligations: a)- Technologies Partnership Canada (“TPC”) Program Fast Cycle Pressure Swing Adsorption and Gas Management systems Upon 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 Ministry’s contribution would not exceed the lesser of 30% of eligible project costs and $8,139,937. The agreement further provides that the Ministry shall provide the Company 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 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, 2011 (2010 - $963,802). 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 Ministry’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 (22) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) fuel cell related products to a maximum cumulative repayment of $8,750,000. Cumulative repayments of $74,442 have been made to December 31, 2011 (2010 – $74,442). The agreement terminates on the later of the date of payment of all amounts due to the Ministry and 2015. Total government royalty program obligations can be broken down as follows: Fast Cycle Pressure Swing Adsorption and Gas Management systems Pulsar Pressure Swing adsorption project December 31, 2011 $ December 31, 2010 $ January 1, 2010 $ 727,978 220,943 948,921 579,278 112,261 691,539 1,055,116 82,191 1,137,307 The Company failed to pay its royalties has they become due during the year. Consequently, the Company was in default of its undertakings pursuant to the TPC agreements. The Company and the Minister of Industry negotiated during the year and reached a settlement agreement. (see note 33 a)). 17 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 11. The loan is repayable in capital monthly instalments of $5,208. As at December 31, 2011, the Company is not in compliance with these covenants. (23) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 18 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 Information that summarizes the activity related to the Company’s share purchase warrants for the year ended December 31, 2011: Balance – Beginning of year Granted Exercised Expired Balance – End of year Number of warrants 15,456,424 - - (4,798,288) Weighted average exercise price $ 0.64 - - 1.07 10,658,136 0.45 The following table summarizes the share purchase warrants outstanding as at December 31, 2011, all of which are exercisable: Exercise price $ 0.45 0.40 Warrants outstanding Number of warrants outstanding 10,091,886 566,250 10,658,136 Weighted average remaining contractual life (years) 3.84 0.34 3.65 Weighted average exercise price $ 0.45 0.40 0.45 c) As a result of the business combination in 2009, the Company issued 5,834,249 common shares which were held in escrow as at December 31, 2010. These shares could have been released to former Xebec shareholders on the achievement of specified financial targets. These targets were measured as at December 31, 2010 and 2009. Consequently, these shares were considered restricted share awards that are issued but not outstanding. As those performance targets were not achieved, no expense was recorded and these shares were cancelled. (24) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) d) Loss per share i) Basic Basic loss per share is calculated by dividing the net income attributable to owners of the parent by the weighted average number of common shares in issue during the year. For the year ended December 31, 2011 $ For the year ended December 31, 2010 $ Net loss attributable to owners of the parent Weighted average number of common shares in issue (1,447,123) 39,363,867 (13,161,382) 30,803,752 ($0.04) ($0.43) ii) Diluted Diluted loss per share is calculated by adjusting the weighted average number of common shares outstanding to assume conversion of all dilutive potential common shares. The Company has two categories of dilutive potential common shares: warrants and stock options. For both, a calculation is performed to determine the number of shares that could have been acquired at fair value (determined as the average market share price of the Company’s outstanding shares for the period), based on the monetary value of the subscription rights attached to the warrants and stock options. The number of shares calculated above is compared with the number of shares that would have been issued assuming exercise of the warrants and stock options. Outstanding share options and warrants to purchase common shares were not included in the computation of diluted loss per share as they do not have any dilutive impact. e) 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 $3,757,061. 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 (25) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 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. 19 Stock options The stock option plan (the “Plan”) 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, 2011, the maximum number of common shares available for issuance under all stock-based compensation arrangements is 3,936,387. 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. The terms and conditions for acquiring and exercising options are set by the Board of Directors. Stock options for employees vest no less than monthly and no more than quarterly. The vesting right acquisitions are gradual and equal over two years for the 2011 grants (except for 2,215,544 stock options which vested at the grant date) and over four years for previous grants and are exercisable for seven years from the date of grant. Stock options for directors vest at the grant date and are exercisable for seven years from the grant date. Stock option activity for the years ended December 31 is presented below: 2011 Weighted average exercise price $ 5.99 0.15 1.78 - 0.26 0.27 Number of options 139,052 - - (31,691) 107,361 88,738 Number of options 107,361 3,465,544 (146,782) - 3,426,123 2,454,789 Outstanding – Beginning of year Granted Forfeited Expired Outstanding – End of year Exercisable – End of year 2010 Weighted average exercise price $ 5.49 - - 3.78 5.99 5.20 (26) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) As at December 31, 2011, options outstanding in the Plan and options exercisable are as follows: Options outstanding Options exercisable 2011 Exercise price range $ 0.10 0.22-0.27 0.44-1.50 4.60-6.90 9.00-13.90 16.20-17.50 Weighted average remaining contractual life (years) 6.98 6.58 1.64 2.96 4.55 2.98 3.00 Number of options 2,160,000 1,208,461 30,900 300 17,871 8,591 3,426,123 Weighted average exercise price $ 0.10 0.23 1.34 4.60 11.65 17.43 Number of options 2,160,000 237,627 30,400 300 17,871 8,591 0.26 2,454,789 Weighted average exercise price $ 0.10 0.23 1.35 4.60 11.65 17.43 0.27 The fair value of the options granted has been estimated according to the Black-Scholes option pricing model and based on the weighted average of the following assumptions for options granted during the year: Dividend yield Exercise price Risk-free interest rate Estimated Life Expected volatility Non-employees Employees Employees 2011 2010 0% 0.14 0.91% 2.00 81% 0% 0.15 0.98% 2.00 81% - - - - - The weighted average fair value of the options granted to employees during the year is $0.14 (2010 - nil) and $0.13 (2010 - nil) for the options granted to non-employees. The weighted average exercise price of the options granted to employees during the year is $0.15 (2010 - nil) and $0.14 (2010 - nil) for the options granted to non- employees. Compensation expenses with respect to these options amounted to $127,741 for employees and $37,122 for non-employees for the year ended December 31, 2011 (2010 – $8,114 and none respectively). (27) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 20 Expenses by nature Employee benefits Stock-based compensation Material Subcontracting costs Professional fees Travel expenses Rent and repairs and maintenance Office expense Amortization Other 21 Research and development expenses Research and development expenses Government grants Research and development tax credits 22 Finance income Interest on loan to a joint venture Interest income Other finance income – TPC (note 32f) ii)) 2011 $ 6,631,496 164,863 5,350,771 479,178 1,096,386 537,744 811,444 549,180 897,671 326,905 2010 $ 8,446,343 8,114 7,801,433 1,689,003 2,453,781 797,069 853,919 773,856 831,983 446,257 16,845,638 24,101,758 2011 $ 627,672 (5,000) (72,327) 2010 $ 2,668,094 (54,984) (62,472) 550,345 2,550,638 2011 $ 6,340 3,070 - 9,410 2010 $ 11,635 6,194 641,729 659,558 (28) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 23 Finance expenses Interest and bank charges Interest on bank loan Interest on long-term debt and subordinated loan Interest charges Other finance charges – TPC (note 16) 24 Compensation of key management Compensation awarded to key management included: Salaries and short-term employee benefits Stock-based compensation 2011 $ 64,651 34,744 109,789 51,311 257,382 517,877 2010 $ 65,548 25,614 111,300 93,269 361,795 657,526 2011 $ 2010 $ 1,005,980 96,721 1,424,283 166 1,102,701 1,424,449 Key management included the Company’s senior management and members of the Board of Directors. 25 Income taxes a) Income tax expense Income taxes included in the consolidated statements of loss are as follows: Current Deferred b) Effective tax rate 2011 $ - - - 2010 $ - - - 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: (29) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) Combined statutory rate applied to pre-tax loss Non-deductible items Non-taxable portion of gain on disposal of property, plant and equipment Unrecognized deferred income tax assets Impact of reduction in income tax rates on deferred income taxes Other Effective income tax rate 2011 % 27.90 (14.73) 42.29 (38.71) (18.56) (1.81) - 2010 % 29.30 (0.28) - (33.93) 5.99 (1.08) - The applicable statutory tax rates are 27.90% in 2011 and 29.30% in 2010. The Company’s applicable tax rate is the Canadian combined rates applicable in the jurisdictions in which the Company operates. The decrease is mainly due to the reduction of the Federal income tax rate in 2011 from 18% to 16.5%. c) Deferred income tax assets and liabilities Deferred income tax assets Property, plant and equipment Net operating losses carried forward Financing costs Intangible assets Scientific research and development expenses Tax credits Other 2011 $ 2010 $ 452,785 15,173,061 146,356 147,595 6,329,223 5,917,676 111,206 387,035 15,848,649 74,862 165,291 6,153,407 6,035,647 638,302 28,277,902 29,303,193 Unrecognized deferred income tax assets (28,277,902) (29,303,193) Net future income tax assets (liabilities) - - In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent on 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 deferred income tax assets, these deferred income tax assets have not been recognized. (30) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) Most of these unrecognized deferred income tax assets relate to QuestAir’s deferred income tax asset balance at the acquisition date. When a deferred income tax asset acquired in a business combination is not recognized at the date of acquisition, any subsequent recognition of the tax benefit will 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 $57,400,000 (2010 - 60,200,000) 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 2025 2026 2027 2028 2029 2030 2031 $ 5,900,000 6,900,000 7,200,000 6,800,000 10,800,000 7,200,000 12,400,000 200,000 57,400,000 The Company also has non-capital losses carried forward in Singapore of approximately $790,000 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 $24,000,000 which are available to be carried forward indefinitely and deducted against future taxable income otherwise calculated. As at December 31, 2011, the Company also has investment tax credits of approximately $7,332,000 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: (31) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2029 2031 $ 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 32,000 170,000 7,332,000 26 Commitments i) Following is a summary of Xebec’s contractual obligations and commitments: As at December 31, 2011 Payment Due by Period Debt repayments (1) Government royalty program obligation (2) Operating leases 1 year 2 - 5 years Beyond 5 years Total $ 173,050 313,852 675,655 $ 205,465 739,130 1,376,719 $ - 10,323,719 3,163,416 $ 378,515 11,376,701 5,215,790 Total contractual obligations 1,162,557 2,321,314 13,487,135 16,971,006 As at December 31, 2010 Payment Due by Period Debt repayments (1) Government royalty program obligation (2) Operating leases 1 year 2 - 5 years Beyond 5 years Total $ 149,647 105,042 514,081 $ 1,062,714 795,789 570,916 $ 898,900 11,734,719 - $ 2,111,261 12,635,550 1,084,997 Total contractual obligations 768,770 2,429,419 12,633,619 15,831,808 (1) Long-term and short-term debt. (2) Royalties projected payments under TPC program. (32) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) (3) Operating leases include two buildings in Vancouver and one in Blainville (2010 – three buildings in Vancouver) and various equipment leases. ii) 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, 2011 (2010 – $5,592).The Company is not pursuing commercialization of this technology. 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. The Company is not pursuing commercialization this technology. 27 Contingent liabilities The Company is party to various ongoing and pending litigation along with other contingencies arising out of 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. (33) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 28 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 an officer Sales to joint venture before the acquisition (note 5) Loan from a Company director Accrued interest on a loan from a Company director 2011 $ 46,355 74,372 23,562 315 2010 $ 85,085 81,307 - - 144,604 166,392 These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. 29 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. The Company’s capital structure is composed of the following: Cash Bank loan Long-term debt Subordinated loan Equity (Deficiency) 2011 $ 309,090 (500,000) (378,515) (98,968) (668,393) (307,121) (975,514) 2010 $ 2,262,273 (500,000) (2,111,277) (156,256) (505,260) 1,113,911 608,651 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 subordinated loan. (34) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 30 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 Republic of China Indonesia Singapore South Korea Austria Other 2011 $ 2010 $ 8,355,044 1,819,934 1,246,519 828,273 622,612 251,742 216,033 863,306 5,497,131 1,963,303 1,346,693 118,463 520,254 1,522,076 1,520,141 987,150 14,203,463 13,475,211 (35) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) Revenue summarized by product line is as follows: Product line Natural gas dryers Gas purification Compressed gas filtration Engineering services Licensing Air dryers Major customers representing 10% or more of total sales include: Customer A Customer B Customer C Customer D Customer E Customer F 2011 $ 2010 $ 4,459,762 4,876,066 1,558,387 1,665,589 1,464,887 178,772 5,529,018 4,366,857 3,115,935 105,250 - 358,151 14,203,463 13,475,211 2011 $ 2010 $ 1,946,067 1,759,271 1,671,481 - 211,511 9,363 134,737 - 1,863,821 1,326,037 1,127,630 1,101,921 5,597,693 5,554,146 The location of the Company’s non-current assets by geographic region is as follows: Non-current assets Canada Asia 2011 $ 2010 $ 5,563,424 116,180 6,656,792 195,974 5,679,604 6,852,766 (36) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 31 Financial instruments (a) Measurement categories and fair values, including valuation methods and assumptions As explained in Note 3, financial assets and financial liabilities have been classified into categories that determine their basis of measurement and, for items measured at fair value, whether changes in fair value are recognized in the consolidated statement of income or comprehensive income. Those categories are: fair value through profit or loss; loans and receivables; and, for liabilities, amortized cost. The following table shows the carrying values and the fair values of assets and liabilities for each of these categories as at December 31, 2011 and 2010 and January 1, 2010: December 31, 2011 Loans and receivables Other financial liabilities Fair value through profit or loss Carrying amount $ Fair value $ Carrying amount $ Fair Value $ Carrying amount $ Fair Value $ Cash Trade and other receivables Bank loan Trade payables and accrued liabilities Long-term debt Government royalty program obligation Subordinated loan Loan from a related party 389,090 389,090 - - 2,444,842 - 2,444,842 - - 500,000 - 500,000 - - - - - - - - - - 5,743,340 279,547 5,743,340 279,547 948,921 98,968 23,562 948,921 90,134 22,526 - - - - - - - - - - - - - - - - (37) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) December 31, 2010 Cash Trade and other receivables Restricted cash Loan to a joint venture Bank loan Trade payables and accrued liabilities Long-term debt Government royalty program obligation Subordinated loan January 1, 2010 Cash Trade and other receivables Restricted cash Loan to a joint venture Bank loan Trade payables and accrued liabilities Derivative financial instruments Long-term debt Government royalty program obligation Subordinated loan Loans and receivables Carrying amount $ Fair value $ Other financial liabilities Fair value $ Carrying amount $ Fair value through profit or loss Fair value $ Carrying amount $ 2,262,273 2,262,273 - - 2,603,261 576,092 117,811 - 2,603,261 576,092 116,184 - - - - 500,000 - - - 500,000 - - - - - - 7,089,760 7,089,760 1,955,021 1,518,754 691,539 156,256 691,539 146,583 - - - - - - - - - - - - - - - - Loans and receivables Fair Value Carrying $ amount $ Other financial liabilities Fair value $ Carrying amount $ Fair value through profit or loss Fair value $ Carrying amount $ 5,447,702 5,447,702 - - 3,105,834 223,261 113,331 - 3,105,834 223,261 113,331 - - - - 496,900 - - - 496,900 4,586,203 4,586,203 - - - - - - - - - - - - - - - - - - - - - - - - 2,085,149 1,678,959 96,645 - 96,645 - 1,137,307 218,752 1,137,307 202,912 - - - - The carrying values of cash and cash equivalents, trade and other receivables, restricted cash, trade payables and accrued liabilities and bank overdraft approximate their fair value due to their short-term maturities. Interest income on loans and receivables measured at amortized cost was $6,340 (2010 - $19,391). The methods and assumptions used in estimating the fair values of other financial assets and financial liabilities are as follows: (38) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) • Loan to a joint venture: Fair value of the loan has been calculated by discounting the loan on a one-year period to the interest rate of a similar investment. • Derivative financial instrument: 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 Company uses the Level 2 input to measure the fair value of its derivative financial instrument. • Long-term debt and subordinated loan: The Company’s long-term debt and subordinated loan carry fixed interest rates. The fair value of the Company’s debt obligations and subordinated loan has been calculated by discounting the future cash flows of the respective long-term debt and subordinated loan at the interest rate of similar debt instruments. • Government royalty program obligation: Fair value of government royalty’ program obligation has been calculated by discounting the future royalties based on forecast revenue at the interest rate for a similar loan in the market. (b) Fair value hierarchy 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 – Quoted prices (unadjusted) in active markets for identical assets or liabilities Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) Level 3 – Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs). (c) 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 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 $194,273 (2010 – $341,286) 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 $138,348 in 2011 (2010 – $8,501). As at December 31, 2010, the Company’s three largest trade debtors accounted for 28% (11%, 9% and 8%) of the total accounts receivable balance (2010 – 24% (9%, 9% and 6%)). (39) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 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 December 31, 2011 $ December 31, 2010 $ January 1, 2010 $ 247,964 869,264 997,964 304,949 111,037 122,177 1,223,812 2,009,939 (194,273) 629,176 465,490 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 Total accounts receivable 2,444,842 2,603,261 3,105,834 The following table summarizes the changes in the allowance for doubtful accounts for trade receivables: At January 1, 2010 Provision for impairment Receivables written off during the year as uncollectible Unused amounts reversed At December 31, 2010 Provision for impairment Receivables written off during the year as uncollectible Unused amounts reversed At December 31, 2011 (392,042) - - 50,756 (341,286) (194,273) 341,286 - (147,013) A provision for impairment is generally recorded for trade receivable balances outstanding for more than 120 days. Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash. The Company’s cash is maintained at financial institutions with high credit ratings; 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. (40) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) (d) Market risk (i) Currency risk Certain financial assets and financial liabilities are exposed to foreign exchange fluctuations. Taking into account the amounts denominated in the currencies indicate below and assuming that all of the other variables remain unchanged, a fluctuation in exchanges 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 the net loss of such a change would be approximately $(9,160) for 2011 ( 2010 - $(44,633) and 2009 - $89 959). As at December 31, 2011, the following amounts are shown in US dollars, Euros, and British pounds sterling and converted into Canadian dollars. The Company does not use financial instruments to reduce this risk. Cash Accounts receivable Accounts payable and accrued liabilities US dollar 50,828 1,734,397 (961,399) Euro 1,630 2,991 (66,486) 823,826 (61,865) Equivalent in Canadian dollars 837,831 (81,617) Cash Accounts receivable Restricted cash Accounts payable and accrued liabilities US dollar 722,636 919,988 - (1,715,224) Euro 519 229,979 134,088 (199,529) 2011 British pound sterling - - (6,142) (6,142) (9,704) 2010 British pound sterling 698 2,000 - (34,814) Equivalent in Canadian dollars (72,207) 219,839 (49,822) (72,600) 165,057 (32,116) (41) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) (ii) 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 prime rate. As at December 31, 2011, the bank loan and the loan from Investissement Québec amount to $598,968 (2010 – $656,256). If the interest rate on the bank debt had been 50 basis points higher (lower), related to the bank loan as at December 31, 2011, net loss would have been $2,995 (2010 – $3,280) higher (lower). (e) 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: Carrying amount $ Contractual cash flow $ 0 to 12 months $ 500,000 500,000 500,000 5,743,340 5,743,340 5,743,340 23,562 23,562 23,562 2011 Thereafter $ - - 13 to 24 months $ - - Financial liabilities Bank loan Accounts payable and accrued liabilities Loan from a related party Government royalty program obligation 948,921 11,376,701 313,852 134,331 10,928,518 Long-term debt and subordinated loan 378,515 379,721 139,667 108,419 131,635 7,594,338 18,023,324 6,720,421 242,750 11,060,153 (42) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) Carrying amount $ Contractual cash flow $ 0 to 12 months $ 500,000 500,000 500,000 7,089,760 7,089,760 7,089,760 2010 Thereafter $ - - 13 to 24 months $ - - Financial liabilities Bank loan Accounts payable and accrued liabilities Government royalty program obligation 691,539 4,044,328 105,042 136,475 3,802,811 Long-term debt and subordinated loan 2,111,277 2,788,631 251,443 441,877 2,095,311 10,392,576 14,422,719 7,946,245 578,352 5,898,122 Contractual interest amounts that are on floating interest rates are established based on the spot rates as at the respective balance sheet dates. 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. The recent sale and lease back transaction of the Company's intellectual property portfolio together with the proceeds received from that transaction, provides the Company with the sufficient funding to support its operations for at least the next fiscal year (note 33(b)). (43) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) 32 Transition to IFRS The Company’s consolidated financial statements for the year ended December 31, 2011 are the first annual financial statements that comply with IFRS, and are prepared as described in note 2, including the application of IFRS 1. IFRS 1 requires an entity to adopt IFRS in its first annual financial statements prepared under IFRS by making an explicit and unreserved statement in these financial statements of compliance with IFRS. IFRS 1 also requires that comparative financial information be provided. As a result, the first date at which the Company has applied IFRS was January 1, 2010 (the “transition date”). IFRS 1 requires first-time adopters to retrospectively apply all effective IFRS standards as of the reporting date, which for the Company is December 31, 2011. However, it also provides for certain optional exemptions and certain mandatory exceptions for first-time IFRS adopters. The effect of the Company’s transition to IFRS is summarized in this note as follows: i) Transition elections ii) Reconciliation of financial position, shareholders’ equity and comprehensive loss as previously reported under previous GAAP to IFRS iii) Adjustments to the statement of cash flows i) Transition elections The Company has applied the following transition exemptions to full retrospective application of IFRS: Borrowing costs Cumulative translation adjustment Business combinations Leases Compound financial instruments As described in note 32(ii) (a) (b) (c) (d) (e) (44) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) ii) Reconciliation of statement of financial position as at December 31, 2010 and January 1, 2010 December 31, 2010 January 1, 2010 Note 30(ii) Canadian GAAP $ Adjustment (m),(n) $ IFRS $ Canadian GAAP $ Adjustment (l) $ IFRS $ Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Income taxes recoverable Investment tax credits receivable Restricted cash Other current assets Total current assets Non-current assets Loan to a joint venture Property, plant and equipment (g) Intangible assets Goodwill (f)(i), (f)(iii), (g), (f)(i), (f)(ii) 2,262,273 2,603,261 2,720,060 - 103,489 576,092 100,846 8,366,021 - - - - - - - - 2,262,273 2,603,261 2,720,060 - 103,489 576,092 100,846 5,447,702 3,105,834 2,867,922 62,492 80,843 223,261 183,564 8,366,021 11,971,618 - - - - - - - - 5,447,702 3,105,834 2,867,922 62,492 80,843 223,261 183,564 11,971,618 117,811 1,939,097 - (30,655) 117,811 1,908,442 113,331 2,604,931 - (59,142) 113,331 2,545,789 4,022,822 461,075 4,483,897 279,046 4,943,751 5,222,797 1,438,324 (1,095,708) 342,616 5,942,152 (5,599,536) 342,616 Total non-current assets 7,518,054 (665,288) 6,852,766 8,939,460 (714,927) 8,224,533 Total assets 15,884,075 (665,288) 15,218,787 20,911,078 (714,927) 20,196,151 Liabilities Current liabilities Bank loan Trade payables and accrued liabilities Deferred revenues Income taxes payable Derivative financial instruments Current portion of long-term debt (f)(i), (f)(iii), (h) 500,000 - 500,000 496,900 - 496,900 8,594,752 2,331,802 8,286 - (1,504,992) - - - 7,089,760 2,331,802 8,286 5,578,505 146,228 - - 96,645 (992,302) - - - 4,586,203 146,228 - 96,645 (k) 87,151 156,256 243,407 321,653 62,496 384,149 Current portion of subordinated loan Provisions (k) (h) 156,256 - (156,256) 1,036,095 - 1,036,095 62,496 - (62,496) 141,309 - 141,309 Total current liabilities 11,678,247 (468,897) 11,209,350 6,702,427 (850,993) 5,851,434 Non-current liabilities Long-term debt Government royalty program obligation Government assistance Provisions Subordinated loan (k) (f)(iii), (f)(iv), (k) (h) (k) 1,867,870 - 1,867,870 1,763,496 156,256 1,919,752 - 32,083 - - 691,539 - 304,034 - 691,539 32,083 304,034 - - 37,083 - 156,256 1,137,307 - 694,674 (156,256) 1,137,307 37,083 694,674 - Total non-current liabilities 1,899,953 995,573 2,895,526 1,956,835 1,831,981 3,788,816 Total liabilities Equity Share capital Contributed surplus Accumulated other comprehensive income Deficit 13,578,200 526,676 14,104,876 8,659,262 980,988 9,640,250 19,964,218 1,841,741 - - 19,964,218 1,841,741 18,107,821 51,368 72,622 72,622 - - - - 18,107,821 51,368 - - (b), (g) (b), (f)(i), (f)(ii), (f)(iii), (f)(iv), (g) (19,500,084) (1,264,586) (20,764,670) (5,907,373) (1,695,915) (7,603,288) Total equity 2,305,875 (1,191,964) 1,113,911 12,251,816 (1,695,915) 10,555,901 Total liabilities and equity 15,884,075 (665,288) 15,218,787 20,911,078 (714,927) 20,196,151 (45) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) Reconciliation of statement of loss and comprehensive loss as at December 31, 2010 Revenue Cost of goods sold December 31, 2010 Note 4 (ii) Previous GAAP $ Adjustment $ IFRS $ 13,475,211 - 13,475,211 (f)(i), (f)(iii), (g), (j), (k) 13,226,426 162,407 13,388,833 Gross margin 248,785 (162,407) 86,378 Research and development expenses Selling and administrative expenses Financial Foreign exchange loss (gain) Loss on disposal of property, plant & equipment Amortization (f)(i), (j) (i) (g) (k) (j) 2,550,638 10,132,192 443,042 (206,710) - 922,334 - 580,733 (443,042) 75,903 117,036 (922,334) 2,550,638 10,712,925 - (130,807) 117,036 - Finance income Finance expenses Finance costs – net 13,841,496 (591,704) 13,249,792 (f)(iii), (f)(iv), (i) (f)(iii), (i) - - - (659,558) 657,526 (659,558) 657,526 (2,032) (2,032) Loss before income taxes (13,592,711) 431,329 (13,161,382) Income taxes Net loss for the year - - - (13,592,711) 431,329 (13,161,382) Other comprehensive income (net of tax) Cumulative translation adjustment (b), (g) Other comprehensive income for the year - - 72,622 72,622 72,622 72,622 Comprehensive loss for the year (13,592,711) 503,951 (13,088,760) Explanatory notes a) b) c) In accordance with IFRS transitional provisions, the Company elected to apply IFRS relating to borrowing costs prospectively from January 1, 2010. As such, previous GAAP balances relating to borrowing costs entered into before that date have been carried forward without adjustment. In accordance with IFRS transitional provisions, the Company has elected to reset the cumulative translation adjustment account, which includes gains and losses arising from the translation of foreign operations, to zero at the date of transition to IFRS. Refer to note g) below for details. In accordance with IFRS transitional provisions, the Company has elected to apply IFRS 3, Business Combinations, prospectively from June 12, 2009. As such, Previous GAAP balances relating to business combinations entered into before that date, including goodwill, have been carried forward without adjustment, and the reverse takeover transaction with QuestAir, which occurred on June 12, 2009, was adjusted to meet IFRS requirements. Refer to note f) below. (46) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) d) In accordance with IFRS transitional provisions, the Company has elected to apply IFRIC 4, Determining Whether an Arrangement Contains a Lease, based on the circumstances existing at the date of transition to IFRS, to all arrangements other than those entered into or modified since January 1, 2005, as such arrangements have already been assessed under requirements similar to those of IFRIC 4. No impact resulted from the review of arrangements. e) In accordance with IFRS transitional provisions, the Company has elected not to apply retrospectively the requirement to separate liability and equity components of compound financial instruments to instruments for which the liability component was no longer outstanding on the transition date. f) As at December 31, 2009, formal valuation of the tangible and intangible assets acquired and liabilities assumed through the QuestAir acquisition was not completed. Accordingly, the excess of the purchase price over the net book value of identifiable assets acquired was, at that time, preliminarily allocated to goodwill in the previous GAAP consolidated balance sheet. During the second quarter of 2010, the Company finalized the purchase price allocation pertaining to this acquisition. IFRS 3 requirements were applied to the QuestAir acquisition. As a result, the final fair values established in 2010 were used in accounting for that transaction when establishing the IFRS opening statement of financial position as at January 1, 2010 as, per IFRS 3, adjustments to preliminary or provisional estimates are required to be treated retrospectively as if the adjustment had been determined at the acquisition date. i) As at June 12, 2009, the acquisition date, the IFRS consolidated statement of financial position was adjusted to reflect the final allocation, resulting 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. Consistent with these changes, goodwill has decreased by $4,503,828. ii) As per IFRS 3, transaction costs are required to be expensed as incurred. Consequently, goodwill further decreased by $1,095,708, with a corresponding entry in retained earnings. iii) Prior to the acquisition date, QuestAir received, from a number of government agencies such as Technology Partnerships Canada (“TPC”), funding designed to promote economic growth, create jobs and wealth, and support sustainable development. Funding was in the form of contributions determined as (a) a percentage of defined eligible costs; or (b) a maximum amount as specified in the government support agreement. In some of these arrangements, the Company has a contractual obligation to repay the contributions to the government agency, with repayments determined as a percentage of specified revenues over a contractually defined royalty year (refer to note 32(iv)) below for a description of the programs). Under Previous GAAP, the Company recorded government contributions as a reduction of the related R&D program costs or as a reduction in the program’s capitalized expenditures. A liability to repay the government contribution is recognized when conditions arise and the repayment thereof is reflected in the consolidated statement of comprehensive income when royalties become due. Under IFRS, such arrangements do not qualify as government grants and should therefore be recognized as liabilities at initial recognition as they fall under the scope of IAS 39. Consequently, repayable (47) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) government assistance arrangements are recognized as government royalty program obligations when the contribution is received and is estimated based on future projections. Therefore, as at June 12, 2009, the acquisition date, the IFRS consolidated statement of financial position was adjusted to reflect the recognition of government royalty program obligations amounting to $989,013, with a corresponding entry to intangible assets. The obligations were measured based on projected revenues and corresponding royalty payments expected at the transaction date, using a discount rate of 30%. Following this change in accounting treatment, interest expense is recognized as a result of accretion of the long-term obligations, while royalty payments are recorded against the obligations instead of as an expense as under previous GAAP. iv) In accordance with IAS 39, the government royalty program obligations are remeasured when the future projections used to measure the obligations are revised. Resulting changes in the carrying amount of these obligations are recognized in the consolidated statement of comprehensive income. Accordingly, as at December 31, 2010, the IFRS consolidated statement of financial position was adjusted to reflect the change in carrying value of government royalty program obligations amounting to $641,729 with a corresponding entry to finance income. The obligations were measured based on projected revenues and corresponding royalty payments expected at that date, using the original discount rate of 30%. Total government royalty program obligations can be broken down as follows: Fast Cycle Pressure Swing Adsorption and Gas Management systems Pulsar Pressure Swing adsorption project December 31, 2010 $ January 1, 2010 $ 579,278 112,261 691,539 1,055,110 82,197 1,137,307 Refer to the tables below for the details of the impacts, resulting from the above described changes, on the IFRS opening consolidated statement of financial position and subsequent year presented. g) Items included in the financial statements of the Company’s subsidiaries and joint ventures must be measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). Under IFRS, indicators to consider for determining the functional currency of an entity are broken down into primary and secondary indicators. Under Previous GAAP, there is no such hierarchy when assessing the factors for determining the measurement currency. Following the assessment of these indicators using the IFRS hierarchy, management concluded that the Company’s subsidiary (Xebec Adsorption (Shanghai) Co. Ltd.) and joint venture (Xebec Adsorption South East Asia PTE. Ltd.) should use the Chinese renminbi (Yuan) and the Singapore dollar respectively as their functional currency to meet IFRS requirements as opposed to the previous dollar measurement currency used under Previous GAAP. Accordingly, the Company has prepared an opening statement of (48) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) financial position for these entities as at January 1, 2010 using their respective functional currencies as if they had always been used. As the functional currency of the subsidiary and joint venture differs from that of the Company, the financial statements of these entities were translated, for consolidation purposes, into Canadian dollars as follows: assets and liabilities at the closing rate at the date of the statement of financial position, and income and expenses at the average rate of the year. All resulting changes were recognized in other comprehensive income as cumulative translation adjustment. However, as the Company elected, in accordance with IFRS transitional provisions, to reset the cumulative translation adjustment account to zero at the date of transition to IFRS (refer to note b) above), amounts that would have been recognized in the cumulative translation adjustment account prior to January 1, 2010 have been transferred to deficit at that date. Refer to the tables below for the details of the impacts, resulting from the above described changes, on the opening IFRS consolidated statement of financial position and subsequent year presented. h) Under IFRS, warranty and other provisions, which were classified as accounts payable and accrued liabilities in Previous GAAP consolidated financial statements have been reclassified as provisions as required by IAS 1, Presentation of Financial Statements. The reclassification on January 1, 2010 and December 31, 2010 amounts to $835,983 and $1,340,129 respectively. i) Under IFRS, finance income and finance expense are presented separately in the consolidated statement of income. Under previous GAAP, net interest expense was presented in the consolidated statement of income. Accordingly, finance income balances of $17,829 for the year ended December 31, 2010 have been reclassified to finance income. j) Under IFRS, expenses recognized in the statement of comprehensive income must be presented using a classification based on nature or function. The Company chose to use a presentation by function. Accordingly, amortization expense for the year ended December 31, 2010 has been reclassified in cost of goods sold ($565,615) and selling and administrative expenses ($356,719). k) Under IFRS, the Company reclassified some of its accounts. Current and long-term portion of subordinated loan have been reclassified in current and long-term portion of long-term debt. The reclassification on January 1, 2010 and December 31, 2010 amounts to $62,496 and $156,256 respectively. Loss on disposal of property, plant and equipment and the write-down of inventory obsolescence included in cost of goods sold have been reclassified in loss on disposal of property, plant and equipment and selling and administrative expenses. The reclassification on December 31, 2010 amounted to $117,036 and $88,299 respectively. (49) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) l) Statement of financial position Previous GAAP Note 32(ii) (f)(i), (f)(ii) $ $ (f)(iii) $ (b), (g) $ 2,604,931 279,046 5,942,152 - 3,997,286 (5,599,536) - 956,046 - (59,142) (9,581) - 5,578,505 - - - - 9,238 - (165,557) - - - - 1,137,307 - - - - - - - (5,907,373) (1,611,488) (15,704) (68,723) As at January 1, 2010 IFRS $ 2,545,789 5,222,797 342,616 (h) $ - - - (835,983) 141,309 4,586,203 141,309 - 694,674 1,137,307 694,674 - - - (7,603,288) Non-current assets Property, plant and equipment Intangible assets Goodwill Current liabilities Trade payables and accrued liabilities Provisions Non-current liabilities Government royalty program obligation Provisions Equity Accumulated other comprehensive income Deficit (50) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) m) Statement of financial position As at December 31, 2010 Previous GAAP Note 32(ii) (f)(i), (f)(ii) $ $ (f)(iii) $ (b), (g) $ (h), (i), (j) $ IFRS $ 1,939,097 4,022,822 1,438,324 - (425,429) (1,095,708) - 890,112 - (30,655) (3,608) - - - - 1,908,442 4,483,897 342,616 8,594,752 - - - - - - - - - (164,863) - 691,539 - - - - - - (1,340,129) 1,036,095 7,089,760 1,036,095 - 304,034 691,539 304,034 (3,281) 75,903 72,622 Non-current assets Property, plant and equipment Intangible assets Goodwill Current liabilities Trade payables and accrued liabilities Provisions Non-current liabilities Government royalty program obligation Provisions Equity Accumulated other comprehensive income Deficit – Beginning of year Net loss for the year (5,907,373) (13,592,711) (1,611,488) 90,351 (15,704) 379,140 (68,723) 37,741 - (75,903) (7,603,288) (13,161,382) n) - Statements of loss and comprehensive loss For the year ended December 31, 2010 Previous GAAP Note 32(ii) (f)(i), (f)(ii) $ $ (f)(iii) $ (b), (g) $ (h), (i), (j), (k) $ IFRS $ Cost of goods sold Selling and administrative expenses Financial Foreign exchange gain Loss on disposal of property, plant and equipment Amortization Finance income Finance expense 13,226,426 (226,066) 65,934 (37,741) 360,280 13,388,833 10,132,192 443,042 (206,710) 922,334 - - 135,715 - - - - - - - - - (641,729) 196,655 - - - - - - 445,018 (443,042) 75,903 117,036 (922,334) (17,829) 460,871 10,712,925 - (130,807) 117,036 - (659,558) 657,526 Net loss for the year (13,592,711) 90,351 379,140 37,741 (75,903) (13,161,382) Cumulative translation adjustment - - - (3,281) 75,903 72,622 (51) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) iii) Adjustments to the statement of cash flows The transition from previous GAAP to IFRS had no significant impact on cash flows generated by the Company. 33 Subsequent events b) On March 22, 2012, the Company signed a settlement agreement with TPC with regard to its Fast Cycle Pressure Swing Adsorption and Gas Management systems and Pulsar Pressure Swing Adsorption project. The Company has to pay $250,000 at the execution of the agreement and $1,000,000 spread over four equal annual payments. Furthermore, the Company is liable to pay up to $750,000 in contingent payments based on cumulative funds generated from the license or sale by the Company of its intellectual property. c) On March 22, 2012, the Company sold to Air Products and Chemicals Inc. (“Air Products”) its intellectual property (“IP”) portfolio, including the patents and patent applications relating to its gas separation technology. In this transaction, the Company has also transferred ownership of its research and development facilities in Burnaby and Surrey, as well as other equipment located in British Columbia. Pursuant to this transaction, the Company has received aggregate gross proceeds of $8,600,000, and net proceeds of approximately $8,350,000. The transaction is also subject to payments for the achievement of certain conditions to be met within the next 24 months. The Company also entered into a license agreement with Air Products allowing the Company to continue to sell its systems in the biogas, hydrogen, natural gas and associated gas purification markets. 34 Third quarter information under IFRS (unaudited) The consolidated financial statements of the third quarter of 2011 have been restated to give effect to the following elements: 1- Reclassification of the operating lease initially accounted for as a finance lease. 2- Adjustment of gain on the disposal of property, plant and equipment initially accounted for as deferred gain on disposal of property, plant and equipment as an effect on the reclassification of the operating lease. 3- Adjustment of goodwill and gain (loss) on loan to joint venture initially recorded when the Company acquired Xebec Adsorption South East Asia PTE. Ltd. These restatements had no effect on the operating, financing or investment activities The effects of the restatements are as follows: (52) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) Interim Consolidated Statement of Financial Position (unaudited) As at September 30, 2011 Assets Current assets Restricted cash Trade and other receivables Inventories Investment tax credits receivable Other current assets Total current assets Non-current assets Balance of sale Property, plant and equipment Intangible assets Goodwill Total non-current assets Total assets Liabilities Current liabilities Bank overdraft Bank loan Trade payables and accrued liabilities Deferred revenues Current portion of deferred gain on sale of property Current portion of long-term debt and obligation Current portion of government royalty program obligation Provisions Total current liabilities Non-current liabilities Long-term debt Government royalty program obligation Government assistance Deferred gain on sale of property Obligation under finance lease Provisions Total non-current liabilities Total liabilities Equity Share capital Contributed surplus Accumulated other comprehensive income (loss) Deficit Non-controlling interest Total Equity Total liabilities and equity As previously Reported $ Restatements $ 579,671 3,829,024 2,162,417 75,000 313,226 6,959,338 800,000 3,894,513 4,095,366 618,718 9,408,597 16,367,935 87,364 500,000 5,727,499 3,246,746 151,788 303,190 189,150 185,000 10,390,737 217,812 669,464 28,333 2,125,037 3,138,710 268,170 6,447,526 16,838,263 19,802,272 2,066,635 (92,571) (22,231,212) (454,876) (15,452) (470,328) - - - - - - - (3,267,000) - - (3,267,000) (3,267,000) - - (69,270) - (151,788) (128,290) 69,270 - (280,078) - - - (2,125,037) (3,138,710) - (5,263,747) (5,543,825) - - 9,098 1,977,895 1,986,993 13,730 2,000,723 Balance Restated $ 579,671 3,829,024 2,162,417 75,000 313,226 6,959,338 800,000 627,513 4,095,366 618,718 6,141,597 13,100,935 87,364 500,000 5,658,229 3,246,746 - 174,900 258,420 185,000 10,110,659 217,812 669,464 28,333 - - 268,170 1,183,779 11,294,438 19,802,272 2,066,635 (83,473) (20,253,317) 1,532,117 (1,722) 1,530,395 16,367,935 (3,543,102) 12,824,833 (53) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) Interim Consolidated Statement of Profit (Loss) (unaudited) For the three-month period ended September 30, 2011 For the nine-month period ended September 30, 2011 As previously reported $ Restatements $ Restated $ As previously reported $ Restatements $ Restated $ Revenue 2,945,291 - 2,945,291 11,504,851 - 11,504,851 Cost of goods sold 1,690,794 18,111 1,708,905 7,346,448 54,707 7,401,155 Gross margin 1,254,497 (18,111) 1,236,386 4,158,403 (54,707) 4,103,696 Research and development expenses Selling and administrative expenses Foreign exchange loss (gain) Loss (gain) on disposal of property, plan and equipment Gain on revaluation of investment 100,765 1,229,249 36,409 - (132,917) - (19,844) - 100,765 1,209,405 36,409 487,105 4,922,014 (91,516) - (56,440) - 487,105 4,865,574 (91,516) (2,275,092) 271,022 (2,275,092) 138,105 (132,917) (2,275,092) 271,022 (2,275,092) 138,105 1,233,506 (2,023,914) (790,408) 5,184,686 (2,060,510) 3,124,176 Finance income Finance expense Finance costs – net (192) 229,350 229,158 - - - (192) (9,348) 229,350 449,607 229,158 440,259 - - - (9,348) 449,607 440,259 Net income (loss) for the period (208,167) 2,005,803 1,797,636 (1,466,542) 2,005,803 539,261 Income (loss) attributable to: Owner of the parent Non-controlling interest Earnings (loss) per share Basic and diluted (231,781) 23,614 1,998,118 7,685 1,766,337 31,299 (1,490,156) 23,614 1,998,118 7,685 507,962 31,299 (208,167) 2,005,803 1,797,636 (1,466,542) 2,005,803 539,261 (0.01) 0.04 (0.04) 0.01 (54) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2011 and 2010 (expressed in Canadian dollars) Interim Consolidated Statement of Comprehensive Profit (Loss) (unaudited) For the three-month period ended September 30, 2011 For the nine-month period ended September 30, 2011 As previously reported $ Restatements $ Restated $ As previously reported $ Restatements $ Restated $ Net income (loss) for the period (208,167) 2,005,803 1,797,636 (1,466,542) 2,005,803 539,261 Other comprehensive income (loss) Cumulative translation adjustment (177,249) (11,744) (188,993) (165,193) (11,744) (176,937) Comprehensive income (loss) for the period (385,416) 1,994,059 1,608,643 (1,631,735) 1,994,059 362,324 Attributable to: Owners of Xebec Adsorption Inc. Non-controlling interest (408,581) 23,165 (385,416) 2,006,767 (12,708) 1,994,059 1,598,186 10,457 1,608,643 (1,654,900) 23,165 (1,631,735) 2,006,767 (12,708) 1,994,059 351,867 10,457 362,324 (55) 

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