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)