Xebec Adsorption Inc.
Annual Report 2017

Plain-text annual report

Xebec Adsorption Inc. Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) Independent Auditor's Report To the Shareholders of Xebec Adsorption Inc. We have audited the accompanying consolidated financial statements of Xebec Adsorption Inc. which comprise the consolidated statements of financial position as at December 31, 2017 and 2016 and the consolidated statements of income (loss), the consolidated statements of comprehensive income (loss), the consolidated statements of changes in equity and the consolidated statements of cash flows for the years then ended, and 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 (IFRS) 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 audit 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 Raymond Chabot GrantThorntonLLPSuite 2000National Bank Tower600 De La Gauchetière Street WestMontréal, Quebec H3B 4L8T 514-878-2691Member of Grant Thornton International Ltdrcgt.com2 used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained 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. as at December 31, 2017 and 2016 and its financial performance and its cash flows for the years then ended, in accordance with International Financial Reporting Standards (IFRS). Emphasis of matter Without modifying our opinion, we draw attention to Note 1 to the consolidated financial statements which indicates the existence of an uncertainty that may cast doubt of the Company’s ability to continue as a going concern. Montreal April 23, 2018 1 1 CPA auditor, CA public accountancy permit no. A125741 Xebec Adsorption Inc. Consolidated Statements of Financial Position As at December 31, 2017 and 2016 (expressed in Canadian dollars) Assets Current assets Cash Trade and other receivables (Note 5) Inventories (Note 6) Investment tax credits receivable Other current assets Total current assets Non-current assets Property, plant and equipment (Note 7) Intangible assets (Note 8) Total non-current assets Total assets Liabilities Current liabilities Bank loan (Note 9) Credit facility (Note 10) Trade, other payables and accrued liabilities (Note 11) Deferred revenue (Note 12) Current portion of long-term debt (Note 13a)) Current portion of government royalty program obligation (Note 13b)) Current portion of provisions (Note 14) 2017 $ 2016 $ 1,341,121 4,133,259 1,963,392 15,943 260,157 1,088,592 2,449,441 1,329,516 47,953 188,297 7,713,872 5,103,799 208,632 418,363 626,995 274,538 190,743 465,281 8,340,867 5,569,080 - 1,437,912 3,585,755 720,996 22,236 86,826 16,689 755,000 - 3,623,259 942,575 22,112 757,540 209,133 Total current liabilities 5,870,414 6,309,619 Non-current liabilities Long-term debt (Note 13 a)) Government royalty program obligation (Note 13 b)) Obligation arising from shares issued by a subsidiary (Note 15) Government grants Deferred rent Provisions (Note 14) Deferred tax liability Total non-current liabilities Total liabilities Equity Share capital (Note 16) Contributed surplus Equity component of convertible debentures Accumulated other comprehensive loss Deficit Total equity Total liabilities and equity 2,223,478 504,546 3,912,314 - 132,815 5,601 81,989 774,788 - 3,582,135 2,083 138,516 8,926 - 6,860,743 4,506,448 12,731,157 10,816,067 19,703,836 3,339,740 291,389 (1,049,455) (26,675,800) 19,318,856 2,996,621 150,304 (940,216) (26,772,552) (4,390,290) (5,246,987) 8,340,867 5,569,080 The accompanying notes are an integral part of these consolidated financial statements. Approved by the Board of Directors __________________________________ Director (signed) Kurt Sorschak (signed) Joseph Petrowski ___________________________________ Director Xebec Adsorption Inc. Consolidated Statements of Income (Loss) For the years ended December 31, 2017 and 2016 (expressed in Canadian dollars) Revenue (Note 27) Cost of goods sold Gross margin Research and development expenses (Note 19) Selling and administrative expenses Foreign exchange loss Insurance compensation for damage to inventories Gain on conversion of shares issued by a subsidiary (Note 15) Operating income (loss) Other charge (income) Finance income Finance expenses (Note 20) Income (loss) before income taxes Income taxes (Note 22) Net income (loss) for the year Net income (loss) per share Basic and diluted net income (loss) per share (Note 16) 2017 $ 2016 $ 14,745,931 9,587,381 8,977,709 7,419,727 5,768,222 2,167,654 (31,114) 5,217,075 131,149 (132,366) 142,696 4,354,639 213,303 - (2,358) (352,248) 5,182,386 4,358,390 585,836 (2,190,736) (122,068) 611,152 489,084 (3,893) 543,916 540,023 96,752 (2,730,759) - (59,316) 96,752 (2,671,443) 0.002 (0.07) The accompanying notes are an integral part of these consolidated financial statements. Xebec Adsorption Inc. Consolidated Statements of Comprehensive Income (Loss) For the years ended December 31, 2017 and 2016 (expressed in Canadian dollars) Net income (loss) for the year Other comprehensive income (loss) Cumulative translation adjustment Comprehensive loss for the year 2017 $ 2016 $ 96,752 (2,671,443) (109,239) 165,605 (12,487) (2,505,838) The accompanying notes are an integral part of these consolidated financial statements. Amount Total $ (2,962,695) (2,671,443) 165,605 (2,505,838) - - - - Xebec Adsorption Inc. Consolidated Statements of Changes in Equity For the years ended December 31, 2017 and 2016 (expressed in Canadian dollars) Number Common shares Share capital – Common shares $ Contributed surplus $ Accumulated other comprehensive income (loss) $ Equity Component of convertible debentures $ Deficit $ Balance – January 1, 2016 39,363,867 19,318,856 2,925,379 (1,105,821) (24,101,109) Net loss for the year Other comprehensive income Comprehensive income (loss) for the year Issuance of convertible debentures (net of deferred tax liability of $ 59,316 (Note 22) Stock-based compensation expense (Note 17) - - - - - - - - - - - - 165,605 165,605 (2,671,443) - (2,671,443) 71,242 - - 71,242 150,304 150,304 Balance – December 31, 2016 39,363,867 19,318,856 2,996,621 (940,216) (26,772,552) 150,304 (5,246,987) Balance – January 1, 2017 39,363,867 19,318,856 2,996,621 (940,216) (26,772,552) 150,304 (5,246,987) Net income for the year Other comprehensive loss Comprehensive loss for the year Stock-based compensation (Note 17) Issuance of convertible debentures (net of deferred tax liability of $ 81,989 (Note 22) - - - - - - - - - - - (109,239) (109,239) 96,752 - 96,752 - 372,603 - - - - - - - - - - 96,752 (109,239) (12,487) 372,603 186,177 186,177 - (45,092) 291,389 59,051 251,353 (4,390,290) Share issued from the exercise of options Conversion of convertible debentures 1,140,500 2,000,000 88,535 296,445 (29,484) - Balance – December 31, 2017 42,504,367 19,703,836 3,339,740 (1,049,455) (26,675,800) Accumulated other comprehensive income (loss) relates solely to cumulative translation adjustments. The accompanying notes are an integral part of the consolidated financial statements. Xebec Adsorption Inc. Consolidated Statements of Cash Flows For the years ended December 31, 2017 and 2016 (expressed in Canadian dollars) Cash flows from Operating activities Net income (loss) for the year Items not affecting cash Depreciation of property, plant and equipment (Note 7) Amortization of intangible assets (Note 8) Reversal of inventory write-down (Note 6) Government grant Accretion finance expenses and gain on revaluation of government royalty program obligation (Note 13b)) Accretion of the obligation arising from shares issued by a subsidiary (Note 15) Accretion of convertible debentures (Note 13 a)) Stock-based compensation expense (Note 17) Future income taxes (Note 22) Reversal of trade payables Reversal of allowance for doubtful accounts (Note 18) Deferred rent Change in non-cash working capital balances related to operations (Note 23) Investing activities Acquisition of property, plant and equipment Acquisition of intangible assets Financing activities Increase (decrease) of bank loan Proceeds from debenture units Debenture issue costs Increase from obligation under capital lease Credit facility (Note 10) Proceeds from issuance of share capital (Note 17) Repayment of long-term debt Repayment of government royalty program obligation (Note 13b)) Net increase (decrease) in cash during the year Cash – Beginning of year Effect of exchange rate changes on cash Cash and cash equivalent – End of year Additional information Interest paid 2017 $ 2016 $ 96,752 (2,671,443) 87,584 80,325 (189,065) (2,083) (91,168) 332,537 86,549 372,603 - (697,659) (315,145) (5,701) (244,471) 94,785 76,837 (17,420) (5,000) 33,499 350,575 16,327 71,242 (59,316) (657) - 26,384 (2,084,187) (1,610,526) (655,667) (1,854,997) (2,739,854) (26,110) (308,702) (334,812) (755,000) 2,024,149 (129,390) 11,327 1,437,912 59,051 (24,303) (75,000) 2,548,746 (55,605) (28,894) (84,499) 380,000 1,000,000 (51,928) 42,120 - - - - 1,370,192 358,937 (1,454,161) 1,088,592 (106,408) 1,341,121 2,717,965 (175,212) 1,088,592 378,098 143,515 The accompanying notes are an integral part of these consolidated financial statements. Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 1. Nature of business and liquidity risk a) Nature of business Xebec Adsorption Inc. (“Xebec” or the “Company”) is a global provider which specializes in the design and manufacture of cost-effective and environmentally responsible purification, separation, dehydration and filtration equipment for gases and compressed air. Xebec’s main product lines are: biogas plants for the purification of biogas from agricultural digesters, landfill sites and waste water treatment plants, natural gas dryers for natural gas refuelling stations, associated gas purification systems which enable diesel displacement on drilling sites, and hydrogen purification systems for fuel cell and industrial applications. The Company is incorporated and domiciled in Canada and is listed on the TSX Venture (TSXV) Exchange under the symbol XBC-V. The address of its registered office is 730 Industriel Boulevard, Blainville, Quebec, Canada. The Company’s web site address is www.xebec.com. b) Going concern The consolidated financial statements have been prepared on the basis of the going concern assumption, meaning that the Company will be able to realize its assets and discharge its liabilities in the normal course of operations. The Company has realized an operating income of $585,836 (an operating loss of $2,190,736 in 2016), had cash outflows from operations of $1,854, 997 for the year ended December 31, 2017 ($2,739,854 in 2016) , finished the year with cash amounting to $1,341,121 ($1,088,592 in 2016) and a working capital of $1,843,458 (a negative working capital of $1,205,820 in 2016) and had access to credit facilities totalling $750,000 of which $0 ($755,000 in 2016) has been used (see Note 9). During the year, management undertook various initiatives and developed a plan to manage its operating and liquidity risks in light of prevailing economic conditions. Management is also currently seeking alternative financings for its operations. The Company has prepared a budget for 2018 for which management believes the assumptions are reasonable. Achieving budgeted results is dependent on improving the volume of revenues, delivering on sales and contract schedules, meeting expected overall operating margin levels and controlling general and administrative costs. The Company is thus faced with uncertainties that may have an impact on future operating results and liquidity. These uncertainties include fluctuations in foreign currency rates and achieving the Company’s business plan goals as mentioned in the previous paragraph. While management believes it has developed planned courses of action to mitigate operating and liquidity risks, there is no assurance that management will be able to achieve its business plan and maintain the necessary liquidity level including accessing liquidities from China if events or conditions develop that are not consistent with management’s expectations, key budget assumptions for 2018 and planned courses of action. Therefore, the Company may require additional external funding, and there is no assurance that it would be successful. Future changes in capital markets conditions could result in such funding not being available when required or at acceptable costs. The Company is unable to predict the possible effects, if any, of such uncertainties and the potential adjustments to the carrying values of assets and liabilities that could be needed should the Company have insufficient liquidity. Such adjustments could be material. (1) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 2. Basis of compliance and basis of preparation The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). These consolidated financial statements were approved for issue by the Board of Directors of the Company on April 23, 2018. The consolidated financial statements have been prepared on the historical cost convention, except for where IFRS requires recognition at fair value These consolidated financial statements are based on the accounting policies as described below. These policies have been consistently applied to all the periods presented, unless otherwise stated. 3. Significant accounting policies Basis of consolidation These consolidated financial statements include the accounts of the Company and its subsidiaries. Subsidiaries are entities controlled by the Company. Control is achieved when the Company: • • • has power over the investee; is exposed, or has rights, to variable returns from its involvement with the investee; and has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Company has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Company considers all relevant facts and circumstances in assessing whether or not the Company's voting rights in an investee are sufficient to give it power, including: • • • the size of the Company's holding of voting rights relative to the size and dispersion of holdings of the other vote holders; potential voting rights held by the Company, other vote holders or other parties; rights arising from other contractual arrangements; and (2) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) • any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders' meetings. Intercompany transactions, balances and unrealized gains and losses on transactions between different entities within the Company are eliminated. Subsidiaries comprise Xebec Adsorption (Shanghai) Co. Ltd., which is 70% owned, Xebec Adsorption USA Inc. (Houston) and Xebec Adsorption Europe SARL which are wholly owned. Subsidiaries are fully consolidated from the date on which control is obtained by the Company and are deconsolidated from the date that control ceases. The Company has the obligation to repurchase the Minority Shareholders' interest owned in Xebec Adsorption (Shanghai) Co. Ltd. under certain circumstances (see Note 15). Therefore, the accounts of Xebec Adsorption (Shanghai) Co. Ltd. are consolidated at 100% and the Minority Shareholders' interest is presented as a financial liability in these consolidated financial statements. Changes in the Company's ownership interests in subsidiary that do not result in the Company losing control over the subsidiaries are accounted for as equity transactions or liability transactions depending on the conditions that these changes occurred. The carrying amounts of the Company's interests are adjusted to reflect the changes in their relative interests in the subsidiaries. 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. Net realizable value is the estimated selling price for inventories less all estimated costs of completion and cost necessary to make the sale. 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 income (loss) during the year in which they are incurred. The major categories of property, plant and equipment are depreciated on a straight-line basis as follows: (3) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) Machinery and equipment Office furniture and equipment Computers Moulds Vehicles 3 to 10 years 2 to 5 years 3 years 5 years 5 years The Company allocates the amount initially recognized in respect of an item of property, plant and equipment to its significant components and depreciates each such component 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 income (loss). Identifiable intangible assets The Company’s intangible assets consist of software, capitalized development costs of a new line and engineering standardisation costs when the criteria mentioned in the research and development expenses accounting policy are met. These assets are capitalized and amortized on a straight-line basis in the consolidated statement of income (loss) over the period of their expected useful lives. Development costs and engineering standardisation costs are amortized over a period of five years. Software is amortized over a period of 3 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 depreciated or 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 for potential reversals when events or circumstances warrant such consideration. Provisions Provisions for 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 (4) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 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 natural gas equipment, biogas, associated gas and hydrogen 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 instruments. 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. At initial recognition, the Company classifies its financial instruments in the following categories depending on the purpose for which the instruments were acquired: Cash Trade and other receivables Bank loan Credit facility Trade and other payables and accrued liabilities Long-term debt Government royalty program obligation Obligation arising from shares issued by a subsidiary Loans and receivables Loans and receivables Financial liabilities Financial liabilities Financial liabilities Financial liabilities Financial liabilities Financial liabilities 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, if any. 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. Finance income and finance expenses are recognised by applying the effective interest rate, except for short-term receivable when the effect of discounting is immaterial. (5) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 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. 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. 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 re-measured using the original discount rate when the future projections initially used to measure the obligations are revised. Resulting changes in the carrying amount of these obligations are recognized in the consolidated statement of income (loss) as finance income or finance expenses. 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. Basic and Diluted Income (Loss) per Share Basic income (loss) per share is calculated by dividing net income (loss) for the year attributable to equity owners of the Company by the weighted average number of common shares outstanding during the year (Note 16). Diluted income (loss) per share is calculated by adjusting the weighted average number of common shares outstanding for dilutive instruments. The number of shares included with respect to options and similar instruments is computed which assumes that if all dilutive securities had been exercised at the (6) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 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. Revenue recognition The Company earns revenues mainly from the sale of natural gas dryers, air 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 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. 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 grants Non-refundable grants relating to property, plant and equipment are accounted for as deferred government grants 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 (7) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) received from the lessor) are charged to the consolidated statement of income (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 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. 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, share capital 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. During the year ended December 31, 2017, development expenses related to development costs of a new line and engineering standardisation costs were deferred and accounted for as identified intangible asset. 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 other comprehensive income or equity, in which case the income tax is also recognized directly as such. 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. (8) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 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. Foreign currency translation Functional and presentation currency: Items included in the financial statements of each entity consolidated 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 (loss) 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 (loss) 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 (loss) related to the subsidiary is reallocated between controlling and non-controlling interests. 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 (loss). (9) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) Segment reporting The Company have many product lines classified into three segments according to the technology, the products functionalities and uses. Clean Technology allows delivering of renewable gas for the production of fuel for a wide variety of applications, from fuel cells to the replacement of fossil fuels in transportation. Industrial Compressed Air and Gas Treatment uses filtration technology to separate liquid droplets, particles or solid contaminants, and oil vapor out of air and gas flows. This segment distributes many types of Airdryers and provides OEM replacement parts and maintenance for aftermarket. Oil and Gas segment focus on the commercialization of innovative membrane technology. For management purposes, the Company uses the same measurement policies as those in its financial statements. In addition, corporate assets are used by each segment and are therefore not attributable to any segment in particular. Accounting standards issued but not yet applied that have relevance to the Company The following standards have been issued but are not yet effective: In May 2014, the IASB issued IFRS 15, “Revenues from Contracts with Customers”, to specify how and when to recognize revenue as well as requiring the provision of more information and relevant disclosure. IFRS 15 supersedes IAS 18, “Revenue”, IAS 11, “Construction Contracts”, and other revenue-related interpretations. The standard his mandatory since January 1, 2018. The Company has evaluated that there is no material impact of this standard on its consolidated financial statements. In July 2014, the IASB amended IFRS 9, “Financial Instruments”, to bring together the classification and measurement, impairment and hedge accounting phases of the IASB’s project to replace IAS 39, “Financial Instruments: Recognition and Measurement”. The standard supersedes all previous versions of IFRS 9 and his mandatory since January 1, 2018. The Company has evaluated that there is no material impact of this standard on its consolidated financial statements. In January 2016, IASB issued IFRS 16, “Leases”, which specifies how an IFRS reporter will recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially unchanged from its predecessor, IAS 17. The standard will be mandatory for annual periods beginning on or after January 1, 2019. The Company is currently evaluating the impact of this standard on its consolidated financial statements. (10) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 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 affect the Company’s consolidated financial statements. i. Inventories must be valued at the lower of cost and net realizable value. A writedown of inventory will occur when its estimated market value less applicable variable selling expenses is below its carrying amount. Materials and other supplies held for use in the production of inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. This estimation process involves significant management judgment and is based on the Company’s assessment of market conditions for its products determined by historical usage, estimated future demand and, in some cases, the specific risk of loss on specifically identified inventory. Any change in the assumptions used in assessing this valuation will impact the carrying amount of the inventory and have a corresponding impact on cost of goods sold. ii. Impairment of internally generated intangible assets The Company performs a test for internally generated intangible assets impairment when there is any indication that internally generated intangible assets have suffered any impairment in accordance with the accounting policy stated in the summary of significant accounting policies of these consolidated financial statements. The recoverable amounts of internally generated intangible assets have been determined based on value-in-use calculations. The value in use calculation is based on a discounted cash flow model. These calculations require the use of estimates and forecasts of future cash flows. Qualitative factors, including, degree of variability in cash flows as well as other factors are considered when making assumptions with regard to future cash flows and the appropriate discount rate. A change in any of the significant assumptions or estimates used to evaluate internally generated intangible assets could result in a material change to the results of operations. iii. Percentage of completion and revenues from long-term production-type contracts Revenues recognized on long-term production-type contracts reflect management’s best assessment by taking into consideration all information available at the reporting date and the result on each ongoing contract and its estimated costs. The management assesses the profitability of the contract by applying important judgments regarding milestones marked, actual work performed and estimated costs to complete. Actual results could differ because of these unforeseen changes in the ongoing contracts’ models. (11) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) iv. Allowance for doubtful accounts The Company reviews all amounts periodically for indications of impairment and the amounts impaired have been provided for as an allowance for doubtful accounts. v. Liquidity risk The assessment of the Company’s ability to continue as a going concern and to raise sufficient funds to pay for its ongoing operations expenditures, meets its liabilities for the ensuing year, involve significant judgment based on historical experience and other factors including expectation of future events that are believed to be reasonable under the circumstances. 5. Trade and other receivables Trade receivables Other receivables Less: Allowance for doubtful accounts Trade and other receivables – net 2017 $ 2,760,659 1,462,159 (89,559) 4,133,259 2016 $ 2,138,748 758,984 (448,291) 2,449,441 Trade and other receivables are pledged as security for the credit facilities (see Notes 9 and 10). 6. Inventories Raw materials Work in progress Inventories 2017 $ 1,381,780 581,612 1,963,392 2016 $ 896,484 433,032 1,329,516 Cost of goods sold includes cost of inventories amounting to $5,153,437 in 2017 (2016 - $4,037,908). During the current year, a reversal of a previous inventory writedown amounting to $189,065 ($17,420 in 2016) was recognized in inventory as the Company deems these parts recoverable for future orders. Inventories are pledged as security for the credit facilities (see Notes 9 and 10). (12) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 7. Property, plant and equipment Cost Balance at December 31, 2015 Additions Effect of movements in exchange rates Balance at December 31, 2016 Additions Effect of movements in exchange rates Balance at December 31, 2017 Accumulated depreciation Balance at December 31, 2015 Depreciation Effect of movements in exchange rates Balance at December 31, 2016 Depreciation Effect of movements in exchange rates Balance at December 31, 2017 Carrying Amount At December 31, 2016 At December 31, 2017 Machinery and equipment(1) $ Office furniture and equipment $ Computers(1) $ Moulds $ Vehicles $ Total $ 548,952 45,988 (17,048) 577,892 5,431 (3,192) 580,131 342,427 50,011 (10,700) 381,738 46,208 (72) 427,874 196,154 152,257 156,537 132 (8,957) 147,712 6,951 (1,761) 152,902 127,067 10,427 (8,588) 128,906 9,154 (387) 137,673 18,806 15,229 275,690 9,485 (14,330) 270,845 13,728 550 285,123 245,528 16,933 (13,011) 249,450 15,224 510 265,184 176,944 - (10,367) 166,577 - (103) 166,474 120,706 17,414 (9,726) 128,394 16,998 (125) 145,267 35,984 - - 35,984 - - 35,984 35,984 - - 35,984 - - 35,984 1,194,107 55,605 (50,702) 1,199,010 26,110 ( 4,506) 1,220,614 871,712 94,785 (42,025) 924,472 87,584 (74) 1,011,982 21,395 19,939 38,183 21,207 - - 274,538 208,632 Depreciation of $87,584 (2016 – $94,785) is included in the consolidated statement of income (loss): $67,966 (2016 – $72,930) in cost of goods sold; and $19,618 (2016 – $21,855) in selling and administrative expenses. Property, plant and equipment are pledged as security for the credit facilities (see Notes 9 and 10)) (1) including equipment under finance lease. The cost of equipment under finance lease amount to $54,294 ($45,988 in 2016) and the accumulated depreciation amount to $4,883 ($383 in 2016). (13) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 8. Intangible assets Other Internally generated Software $ Development costs $ Engineering standardisation $ 313,653 28,404 (14,865) 327,192 - 10,203 337,395 282,618 17,140 (12,768) 286,990 20,629 10,927 318,546 40,202 18,849 298,485 490 - 298,975 2,084 - 301,059 88,737 59,697 - 148,434 59,696 33 208,163 150,541 92,896 - - - - 306,618 - 306,618 - - - - - - - - 306,618 Total intangible assets $ 612,138 28,894 (14,865) 626,167 308,702 10,203 945,072 371,355 76,837 (12,768) 435,424 80,325 10,960 526,709 190,743 418,363 Cost Balance at December 31, 2015 Additions Effect of movements in exchange rates Balance at December 31, 2016 Additions Effect of movements in exchange rates Balance at December 31, 2017 Accumulated amortization Balance at December 31, 2015 Amortization for the year Effect of movements in exchange rates Balance at December 31, 2016 Amortization for the year Effect of movements in exchange rates Balance at December 31, 2017 Carrying amount At December 31, 2016 At December 31, 2017 Amortization of $80,325 (2016 – $76,837) is included in the consolidated statement of income (loss): $20,213 (2016 – $16,277) in cost of goods sold; and $60,112 (2016 – $60,560) in selling and administrative expenses. (14) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 9. Bank loan The Company has access to credit facilities in the amount of $750,000 with Toronto-Dominion Bank of Canada which are guaranteed by Export Development Canada, and bear interest at the Toronto- Dominion’s prime rate plus 3.0% (5.7% in 2016) per annum and are limited by certain margin requirements concerning trade and other receivables. These credit facilities were used up to nil as at December 31, 2017 (2016 – $755,000). The company has a guarantee facility of $2,750,000 with Toronto-Dominion Bank of Canada. The guarantee facility was used up to $1,823,000 as at December 31, 2017. These credit facilities are secured by a first ranking hypothec of $5,000,000 on all movable property of the Company and are renewable annually. 10. Credit Facility On December 12, 2016, the Company contracted a facility loan with Export Development Canada (“EDC”) for an amount of $2,000,000. This amount is available in four advances. The facility bears an interest of prime rate plus 6.3% (9.5%). This interest is payable every month. This amount shall be repaid based on the completion of certain project milestones. The facility loan is secured by a second ranking hypothec in all present and future movable property of the Company. The following table summarizes the activity related to the facility with EDC during the year ended December 31, 2017: Balance – January 1, Addition Repayment Balance – December 31, 11. Trade, other payables and accrued liabilities 2017 $ - 2,000,000 (562,088) 1,437,912 2016 $ - - - - 2017 $ 2016 $ (15) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) Trade payables Accrued liabilities Payables to related parties (Note 25) Other payables Trade, other payables and accrued liabilities 2,741,565 723, 441 29,310 91,439 3,585,755 2,893,639 619,565 29,405 80,650 3,623,259 12. Deferred revenue Deferred revenue on current contracts 13. Long-term debt a) Loans Obligation under a capital lease, repayable in monthly installments of $1,607 including interest calculated at 13% maturing in October 2018, secured by equipment under finance lease. Obligation under a capital lease, repayable in monthly installments of $352 including interest calculated at 12% maturing in September 2020, secured by equipment under finance lease. Unsecured Convertible debentures Long-term debt Less: Current portion 2017 $ 2016 $ 720,996 942,575 2017 $ 2016 $ 18,669 42,120 10,475 2,216,570 2,245,714 22,236 2,223,478 - 754,780 796,900 22,112 774,788 (16) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) On November 16, 2017, the Company has completed an Unsecured Convertible Debentures (“Debentures”) financing for aggregate gross proceeds of $2,024,149. The Debentures will reach maturity on November 15, 2019 and bearing an annual interest rate of 8%, convertible into common shares of the Company at a price of $0.65 per share. The unpaid interests are convertible at the highest price of $0.65 per common share or the fair value of the common share at the request of the debenture holder. The Company used the residual value method to allocate the principal amount of the Debenture between the liability and the equity component. Under this method, the value of the equity component of $186,177 (net of deferred tax liability of $81,989) was determined by deducting the fair value of the liability component from the principal amount of the financing. The fair value of the liability component was $1,626,594 computes as the present value of future principal and interest payments discounted at a rate of 17.50%. The effective interest method is used to measure the Debenture after the initial recognition. On November 30, 2016, the Company has completed an Unsecured Convertible Debentures (“Debentures”) financing for aggregate gross proceeds of $1,000,000. The Debentures will reach maturity on November 30, 2019 and bearing an annual interest rate of 9%, convertible into common shares of the Company at a price of $0.15 per share. The unpaid interests are convertible at the highest price of $0.15 per common share or the fair value of the common share at the request of the debenture holder. The Company used the residual value method to allocate the principal amount of the Debenture between the liability and the equity component. Under this method, the value of the equity component of $150,304 (net of deferred tax liability of $59,316) was determined by deducting the fair value of the liability component from the principal amount of the financing. The fair value of the liability component was $790,380 computes as the present value of future principal and interest payments discounted at a rate of 19.50%. The effective interest method is used to measure the Debenture after the initial recognition. During the year, 2,000,000 common shares were issued as a result of the exercise of the conversion option by some of the debenture holders. The common shares issued included the carrying value of the liability component to the date of conversion. The conversion is a non-cash transaction and thus is excluded from the consolidated statement of cash flows. (17) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) b) Government royalty program obligation In 2012, the Company signed a settlement agreement with Technology Partnership Canada (TPC) with regard to the Company’s Fast Cycle Pressure Swing Adsorption and Gas Management systems and Pulsar Pressure Swing Adsorption project. The Company had to pay $250,000 at the execution of the agreement and $1,000,000 spread over four equal annual non-interest bearing payments, starting on January 31, 2013. Furthermore, the Company was liable to pay up to $750,000 in contingent payments based on proceeds from the sale by the Company of its intellectual property. Upon closing of the transaction, the Company paid $540,000 out of the $750,000 total contingent-based payments. On October 23, 2012, the Company accrued another $150,000 out of the $750,000 total contingent based payments, following additional proceeds received, leaving a potential maximum amount to be paid of $60,000 as at December 31, 2012. In 2013, the Company realized the last milestone pursuant to the transaction and paid the remaining $60,000. The Company renegotiated its payments terms with TPC, changing from an annual payment of $250,000 to monthly payments of $24,500 but adding an extra year to term. In February 2017, a new amendment to this agreement was reached changing the preceding payments terms from monthly payments of $24,500 to monthly payments of: • • • • • • • • And the balance of $22,540 on January 1, 2023. $29,505 upon execution including interest $5,000 starting from March 1, 2017 to January 1, 2018 $7,000 starting from February 1, 2018 to January 1, 2019 $8,000 starting from February 1, 2019 to January 1, 2020 $10,000 starting from February 1, 2020 to January 1, 2021 $15,000 starting from February 1, 2021 to October 1, 2022 $20,000 on November 1, 2022 and December 1, 2022 The following table summarizes the activity related to the government royalty program obligation during the year ended December 31, 2017: Balance – Beginning of year Gain on revaluation of government royalty program Accretion finance expenses Repayment Balance – End of year Current portion 2017 $ 757,540 (117,095) 25,927 (75,000) 591,372 (86,826) 504,546 2016 $ 724,041 33,499 - - 757,540 757,540 - (18) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) The carrying amount of the government royalty program obligation has been calculated by discounting the future cash flows at a 5% interest rate. 14. Provisions At December 31, 2016 Used during the year At December 31, 2017 Current portion of provision Non-current provision Warranty cost Provision for contingencies Warranty costs Total provision $ 160,532 $ 57,527 $ 218,059 (160,532) (35,237) (195,769) - - - 22,290 16,689 5,601 22,290 16,689 5,601 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. 15. Obligation arising from shares issued by subsidiary In September 2015, as a result of a Sino-foreign equity joint venture agreement, Xebec Adsorption (Shanghai) Co. Ltd., a subsidiary of Xebec Adsorption Inc. (“Xebec”), issued 1,714,285 common shares, representing a 30% participation, to Shanghai Chengyi New Energy Venture Capital Co. Ltd. (28.26%), an investment subsidiary of Shanghai based Shenergy Group, Shanghai Zhiyi Enterprise Management Consulting Co. Ltd. (0.1%) and Shanghai Liuhuan Investment Co. Ltd. (1.64%), a company held by a group of employees of Xebec Adsorption (Shanghai) Co. Ltd., (collectively the “Minority Shareholders”) for a net cash consideration of $3,423,075 (RMB 16,370,515). (19) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) Pursuant to this agreement, Xebec has the obligation to repurchase the Minority Shareholders’ interest in Xebec Adsorption (Shanghai) Co. Ltd., for a consideration of no less than the initial investment and annualized return of 10% if a) the achievement of specific financial targets were not achieved in any given year prior to December 31, 2020, or b) should the Minority Shareholders not divest by December 31, 2020 and should the Minority Shareholders exercise their put option with respect to a) or b) as mentioned above. Xebec recorded the proceeds from this transaction, as a financial liability in these consolidated financial statements. The obligation to repurchase and the related annualized return is presented under “Obligation arising from shares issued by a subsidiary”. The conversion of the financial liability denominated in the functional currency of our subsidiary Xebec Adsorption (Shanghai) Co. Ltd. (RMB) will be converted at the exchange rate at the end of each reporting period with gain and losses presented in the statement of income (loss) under “Gain/Loss on conversion of shares issued by a subsidiary”. Balance – Beginning of year Accretion interest Effect of exchange rate change on obligation Balance – End of year 2017 $ 3,582,135 332,537 (2,358) 3,912,314 2016 $ 3,583,808 350,575 (352,248) 3,582,135 (20) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 16. Share capital a) The Company is incorporated under the Canada Business Corporations Act, and its authorized share capital consists of an unlimited number of common shares, without par value. b) Share purchase warrants There were no warrants issued in 2017 and 2016. c) Income (loss) per share i) Basic Basic income (loss) per share is calculated using net income (loss) as the numerator and the weighted average number of shares as denominator. No adjustments to net income were necessary in 2017 and 2016. ii) Diluted For the year ended December 31, 2017, convertible debentures and outstanding stock options with an average exercise price of over $0.40 would have been anti-dilutive. For the year ended December 31, 2016, convertible debentures and outstanding stocks options would have been anti-dilutive. The reconciliation of the weighted average number of shares for the purpose of diluted income per share to the weighted average number of shares used in the calculation of basic income per share is as follows: Weighted average number of shares used in basic income per share Shares deemed to be issued for no consideration in respect of share- based payments Weighted average number of shares used in diluted income per share 2017 2016 40,562,060 39,363,867 4,674,896 - 45,236,956 39,363,867 (21) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 17. Stock options The stock option plan allowed for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock-based awards. Under the Plan, a fixed number of 7,892,773 common shares are available for grant. As at December 31, 2017, the maximum number of common shares available for issuance under all stock-based compensation arrangements is 63,743 Under the terms of the Xebec Adsorption Stock Option 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 at grant date and no more than quarterly. Stock option activity for the years ended December 31, is presented below: Outstanding – Beginning of year Granted Exercised Cancelled Expired Number of options 5,855,337 3,119,193 (1,140,500) (5,000) - Outstanding – End of year 7,829,030 Exercisable – End of year 5,804,837 2017 Weighted average exercise price $ 0.11 0.20 0.05 0.22 . - 0.19 0.13 Number of options 4,390,337 1,500,000 - (25,000) (10,000) 5,855,337 5,855,337 2016 Weighted average exercise price $ 0.16 0.05 - 7.29 . 0.22 0.11 0.11 (22) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) As at December 31, 2017, options outstanding and exercisable are as follows: Expiry date August 11, 2018 December 22, 2018 June 12, 2020 April 25, 2021 May 29, 2021 September 22, 2021 December 19, 2022 January 8, 2023 March 5, 2024 August 29, 2024 December 19, 2024 Weighted- Average Exercise Price Number of Options Outstanding Weighted- Average Remaining life Number of Options exercisable $0.22 $0.10 $0.16 $0.15 $0.14 $0.12 $0.55 $0.05 $0.18 $0.49 $0.55 $0.19 232,272 1,519,500 258,065 100,000 200,000 2,000,000 400,000 400,000 2,108,193 500,000 111,000 7,829,030 0.6 1.0 2.4 3.3 3.4 3.7 5.0 5.0 6.2 6.7 7.0 4.1 232,272 1,519,500 258,065 100,000 200,000 2,000,000 - 400,000 1,095,000 - - 5,804,837 As at December 31, 2016, options outstanding and exercisable are as follows: Exercise price range $ 0.05 – 0.10 0.12 – 0.16 0.22 Options outstanding Options exercisable Weighted average remaining contractual life (years) 3.96 4.34 1.61 4.03 Weighted average exercise price $ 0.08 0.13 0.22 0.11 Number of options 3,060,000 2,558,065 237,272 5,855,337 Number of options 3,060,000 2,558,065 237,272 5,855,337 Weighted average exercise price $ 0.08 0.13 0.22 0.11 On March 5, 2017, the Company granted 2,108,193 stock options to directors, officers and employees. The options are exercisable at $0.18 per share, and expire on March 5, 2024. The (23) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) options are subject to vesting criteria such that 1,095,000 shall vest on the grant date, 795,000 shall vest on March 5, 2018 and 218,193 shall vest on March 5, 2019. The grant of these stock options was conditional to the approval of the increase of the pool of the stock options of the Company by the shareholders at the Annual General Meeting and the TSX Venture Exchange. These approvals were obtained respectively on June 15, 2017 and August 9, 2017. The corresponding stock-based compensation amounted to $354,118, which was estimated using the Black-Scholes Option Pricing Model with the following assumptions: Risk-free interest rate Annualized volatility1 Share price Dividend rate Expected life of options 1.55% 137% $0.18 0.00% 7 years On August 29, 2017, the Company granted 500,000 stock options to an employee. The options are exercisable at $0.49 per share, and expire on August 29, 2024. The options are subject to vesting criteria such that 20% shall vest on the first anniversary date and 20% shall vest every twelve months thereafter. The corresponding stock-based compensation amounted to $227,026, which was estimated using the Black-Scholes Option Pricing Model with the following assumptions: Risk-free interest rate Annualized volatility1 Share price Dividend rate Expected life of options 1.80% 138% $0.49 0.00% 7 years On December 19, 2017, the Company granted 511,000 stock options to directors. The options are exercisable at $0.55 per share. 400,000 expire on December 19, 2022 and 111,000 expire on December 19, 2024. The options are subject to vesting criteria such that 33% shall vest on the first anniversary date and 33% shall vest every twelve months thereafter. The corresponding stock- based compensation amounted to $252,250, which was estimated using the Black-Scholes Option Pricing Model with the following assumptions: Risk-free interest rate Annualized volatility1 Share price Dividend rate Expected life of options 1 The expected volatility used was based on the historic volatility of the Company share price 1.57% 140% $0.55 0.00% 5 years (24) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) and, Risk-free interest rate Annualized volatility1 Share price Dividend rate Expected life of options 1.77% 138% $0.55 0.00% 7 years In 2016, 1,100,000 options were granted to employees at weighted average fair value of $0.05 and 400,000 options were granted to non-employees at a weighted average fair value of $0.05. During the year, the Company expensed $372,603 (2016 – $71,242) which totally relates to stock options granted in 2017. 18. Expenses by nature Employee salaries and benefits Material Subcontract cost Professional fees Rent and repairs and maintenance Travel expenses Stock-based compensation Office expense Amortization and depreciation Other Bad Debt Reversal of trade payables Reversal of allowance for doubtful accounts 2017 $ 5,521,600 5,457,118 867,993 818,272 700,393 658,667 372,603 239,660 167,908 17,951 (8,873) (303,363) (315,145) 2016 $ 5,062,355 4,037,908 274,235 473,566 669,899 525,420 71,242 280,466 171,622 131,658 75,995 - - 14,194,784 11,774,366 (25) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 19. Research and development expenses Employee salaries and benefits Material Subcontracting costs Professional fees Travel expenses Government grants Research and development tax credits Reversal of trade payables 20. Finance expenses Accretion of the obligation arising from shares issued by a subsidiary (Note 15) Interest on convertible debentures Interest and bank charges Interest on short term debt Accretion and revaluation of government royalty program obligation (Note 13b)) Interest on long term debt Reversal of trade payables 2017 $ 25,212 23,884 11,844 10,848 502 (2,083) (29,663) (71,658) 2016 $ 129,432 8,983 (44,229) 59,476 368 (5,000) (6,334) - (31,114) 142,696 2017 $ 2016 $ 332,537 197,228 191 093 186,802 25 927 203 (322,638) 350,575 16,327 143,515 - 33,499 - - 611,152 543,916 (26) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 21. Compensation of key management Compensation awarded to key management included: Salaries and short-term employee benefits Stock-based compensation 2017 $ 1,256,164 318,922 2016 $ 966,834 71,242 1,575,086 1,038,076 Key management included the Company’s senior management and members of the Board of Directors. 22. Income taxes Effective tax rate The income tax expense attributable to earnings differs from the amounts computed by applying the combined federal and provincial income tax rate of 26,8% (26.9 in December 31, 2016) to earnings before income taxes as a result of the follow: Income (loss) before income taxes Expected income tax recovery Tax expense at combines statutory rate Increase (decrease) in income taxes resulting from : Temporary difference unrecognized (recognized) Difference in foreign tax rate Stock base compensation Change of deferred tax rates Foreign exchange on consolidation Expired losses Other 2017 $ 96,752 25,930 2016 $ (2,671,442) (718,618) (412,952) (19,557) 99,858 108,285 854 67,007 130,575 206,432 23,043 19,164 337,351 4,639 36,663 32,190 - (59,136) (27) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) Composition of deferred income taxes in the Consolidated Statements of Income (Loss) Inception and reversal of temporary differences Temporary difference not recorded Change in deferred tax rate Movement of deferred income tax in 2017 2017 $ 304,667 (412,952) 108,285 2016 $ (602,919) 206,432 337,351 - (59,136) Contingency reserve Intangibles assets Debentures Government royalty program Non capital losses January 1, 2017 $ - - (53,975) - 53,975 - P&L Equity Component (81,989) (49,974) 37,143 (24,160) 118,980 - - - (81,989) - - (81,989) December 31, 2017 $ (81,989) (49,974) (98,821) (24,160) 172,955 (81,989) Movement of deferred income tax in 2016 January 1, 2016 $ P&L Equity Component December 31, 2016 $ Debentures Non capital losses - - - 5,161 53,975 59,136 (59,136) - (59,136) (53,975) 53,975 - (28) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) As at December 31, 2017, deductible timing differences for which the company has not recognized deferred tax asset are as follows: Federal $ Quebec $ Chine $ USA $ Property and equipment Scientific research and development expenses Capital losses carried forward Operating losses carried forward Other 995,217 - 24,583,744 219,247 54,175,945 688,795 80,662,948 995,217 - 24,587,643 219,247 56,733,006 688,795 83,223,908 - - - - - 1,434,206 - 1,434,206 - 708,665 - 708,665 The ability to realize the tax benefits is dependent upon a number of factors, including the future profitability of operations. Deferred tax assets are recognized only to the extent that it is probable that sufficient taxable profits will be available to allow the asset to be recovered. Accordingly, some deferred tax assets have not been recognized, these deferred tax assets not recognized equal an amount of $ 22,191,258 ($22,597,127 in 2016). As at December 31, 2016, deductible timing differences for which the company has not recognized deferred tax asset are as follows: Federal $ Quebec $ Chine $ USA $ Property and equipment Intangible assets Scientific research and development expenses Capital losses carried forward Operating losses carried forward Other 938,985 59,079 938,985 59,079 24,502,892 219,247 55,350,875 694,496 81,765,574 24,500,175 219,247 57,925,868 694,496 84,337,850 1,783,721 1,783,721 493,442 493,442 (29) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) As at December 31, 2017, the Company has non-capital tax losses, which are available to reduce taxes in futures years and expired as follows: Federal $ Quebec $ - 1,486,941 1,328,532 - 326,251 546,237 443,287 12,361,610 7,283,831 10,824,277 6,794,635 7,229,354 5,550,990 - - - - - - - - 1,480,325 1,328,532 2,635,090 326,251 494,621 433,086 12,361,610 7,295,856 10,824,277 6,794,635 7,229,354 5,529,369 - - - - - - - China $ - - - - - - - - - - - - - - - - 884,551 - - 549,655 USA $ 247,637 - 461,028 - - - - - - - - - - - - - - - - - 2037 2036 2035 2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 54,175,945 56,733,006 1,434,206 708,665 The Company has scientific research and experimental development expenses of $24,583,744 (2016 – $24,502,892) which are available to be carried forward indefinitely and deducted against future taxable income otherwise calculated. The potential benefit has not been recorded in the accounts. As at December 31, 2017, the Company also has investment tax credits of $5,678,183 (2016 – $5,659,361) available to offset future Canadian federal income taxes payable. The potential benefit of the investment tax credits has not been recognized in the accounts. (30) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 23. Supplemental Cash flow information Net change in non-cash working capital balances related to operations consists of the following: Decrease (increase) in assets: Trade and other receivables Inventories Investment tax credits receivable Other current assets Increase (decrease) in liabilities: Trade payables, other payables and accrued liabilities Deferred revenues Provisions and deferred rent 24. Commitments 2017 $ 2016 $ (1,368,673) (444,811) 32,010 (71,861) 660,157 (221,579) (195,769) (1,610,526) (12,282) (170,256) 69,723 (29,441) (256,911) 244,014 (500,514) (655,667) Following is a summary of Xebec’s contractual obligations and commitments: As at December 31, 2017 Operating leases Payment Due by Period Beyond 5 years $ 1,605,711 2 - 5 years $ 1,307,019 1 year $ 491,577 Total $ 3,404,307 Operating leases include one building in Blainville, Quebec, and various equipment leases. The operating leases expenses for the year ended December 31, 2017 amounted to $ 440,519 (S480,027 in 2016) (31) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 25. Related party transactions The following table presents a summary of the related party transactions during the period: Marketing and professional services expenses paid to companies controlled by members of the immediate family of an officer 2017 $ 2016 $ 158,900 111,796 These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. 26. Capital management The Company’s objective when managing capital is to use short-term funding sources to manage its working capital requirements and fund capital expenditures required to execute its operating and strategic plans. The Company’s capital structure is composed of the following: Cash Bank loan Credit facility Long-term debt Government royalty program obligation (Note 13 b)) Obligation arising from shares issued by a subsidiary (Note 15) Equity 2017 $ 2016 $ (1,341,121) - 1,437,912 2,245,714 591,372 (1,088,592) 755,000 - 796,900 757,540 3,912,314 3,582,135 6,846,191 (4,390,290) 4,802,983 (5,246,987) 2,455,901 (444,004) The Company is not subject to any capital requirements imposed by regulators. (32) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 27. Segmented information Revenue summarized by country, as determined by location of the customers, is as follows: Revenue United States France Canada China Singapore Other 2017 $ 2016 $ 3,174,092 4,022,726 4,028,670 2,405,773 112,501 1,002,169 4,022,932 - 2,397,870 847,323 739,826 1,579,430 14,745,931 9,587,381 Sales of $2,417,498 ($ 991,712 in 2016) arose from the Company’s largest customer. No other single customer contributed more than 10 % to the company’s revenue for both 2017 and 2016. Income (loss) summarized by business segments are as follows: As of December 31, 2017 Revenue Cost of goods sold Gross margin Gross margin % Research and development expenses Selling and administrative expenses Insurance compensation for damage to inventories Foreign exchange loss (gain) Gain on conversion of shares issued by a subsidiary Finance income Finance expenses Total expenses Segment income (loss) Oil and gas Processing Corporate Total Clean Technology $ Industrial Compressed Air and Gas treatment $ 8,902,695 6,180,724 2,721,971 4,457,380 2,794,488 1,662,892 $ 1,385,856 2,497 1,383,359 100% - 37% - 805,745 285,775 - - - - - - - - - - $ - - - 0% - 3,191,771 (132,366) 131,149 (2,358) (122,068) 611,152 31% (31,114) 933,784 - - - - - 902,670 1,819,301 805,745 857,147 285,775 1,097,584 3,677,280 (3,677,280) (33) $ 14,745,931 8,977,709 5,768,222 39% (31,114) 5,217,075 (132,366) 131,149 (2,358) (122,068) 611,152 5,671,470 96,752 Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) As of December 31, 2016 Revenue Cost of goods sold Gross margin Gross margin % Research and development expenses Selling and administrative expenses Foreign exchange loss Gain on conversion of shares issued by a subsidiary Finance income Finance expenses Income taxes Total expenses Segment income (loss) Clean Technology $ 4,809,731 4,481,318 328,413 7% 142,696 647,628 Industrial Compressed Air and Gas treatment $ 4,777,650 2,938,409 1,839,241 38% - 690,430 - - - - - - - - - - 790,324 (461,911) 690,430 1,148,811 Oil and gas Processing Corporate Total $ - - - 0% - - - - - - - - - $ - - - 0% - 3,016,581 213,303 $ 9,587,381 7,419,727 2,167,654 23% 142,696 4,354,639 213,303 (352,248) (3,893) 543,916 (59,316) 3,358,343 (3,358,343) (352,248) (3,893) 543,916 (59,316) 4,839,097 (2,671,443) The location of the Company’s non-current assets by geographic region is as follows: Non-current assets Canada Asia United States 2017 $ 520,491 66,570 39,934 626,995 2016 $ 305,071 111,480 48,730 465,281 (34) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) 28. Financial instruments a. Measurement categories and fair values, including valuation methods and assumptions The following tables show the carrying values and fair values of assets and liabilities by category as of: December 31, 2017 Loans and receivables Other financial liabilities Cash Trade and other receivables Other current assets Credit facility Trade, other payables and accrued liabilities Convertible debentures Government royalty program obligation Obligation arising from shares issued by a subsidiary Carrying amount $ 1,341,121 3,094,761 13,500 - - - - - Fair value $ Carrying amount $ Fair value $ 1,341,121 3,094,761 13,500 - - - - - - - - 1,437,912 3,032,213 - - - 1,437,912 3,032,213 2,216,570 2,216,570 591,372 591,372 3,912,314 3,912,314 (35) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) December 31, 2016 Loans and receivables Financial liabilities Carrying amount $ 1,088,592 1,743,353 15,850 - - - - - Fair value $ Carrying amount $ Fair value $ 1,088,592 1,743,353 15,850 - - - - - 755,000 - - - 755,000 3,118,064 3,118,064 - - - 754,780 754,780 757,540 757,540 3,582,135 3,582,135 Cash Trade and other receivables Other current assets Bank loan Trade, other payables and accrued liabilities Convertible debentures Government royalty program obligation Obligation arising from shares issued by a subsidiary The carrying values of cash, trade and other receivables, trade and other payables, accrued liabilities, bank loan and credit facility approximate their fair value due to their short-term maturities. The methods and assumptions used in estimating the fair values of other financial assets and financial liabilities are as follows: • Convertible debentures (classified in level 2 of the fair value hierarchy): The Company’s convertible debentures carries fixed interest rates. The fair value of the Company’s debt obligations has been calculated by discounting the future cash flows of the long-term debt at the interest rate of similar debt instruments. • Government royalty program obligation (classified in level 2 of the fair value hierarchy): Fair value of the government royalty program obligation has been calculated by discounting the future cash flows at the interest rate for a similar loan in the market. • Obligation arising from shares issued by a subsidiary (classified in level 2 of the fair value hierarchy): Fair value of the obligation arising from shares issued by a subsidiary has been calculated by computing an annualized return of 10% on the initial consideration • The Company’s financial instruments that are measured subsequent to initial recognition at fair value and financial instruments measured at amortized cost for which the fair value is disclosed are grouped into Levels 1 to 3 based on the degree to which the fair value is observable: Level 1 — Fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. (36) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) Level 2 — Fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 — Fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). b. 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 and other receivables. The carrying amount of its outstanding trade and other receivables 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 $89,559 (2016 – $448,291) was established based on prior experience and an assessment of current financial conditions of customers as well as the general economic environment. In cases where an allowance for doubtful accounts provision is recorded and a receivable balance is considered uncollectible, it is written off against the allowance for doubtful accounts. Bad debt recovery amounted to $324,018 in 2017 (expense in 2016 – $75,995). As at December 31, 2017, the Company’s three largest trade debtors accounted for 29% (13%, 9% and 7%) of the total trade receivables balance (2016 – 33% (13%, 10% and 10%)). Details of trade and other receivables 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 Allowance for doubtful accounts Other receivables Total trade and other receivable 2017 $ 838,415 470,099 277,461 327,850 846,834 2016 $ 987,000 159,745 205,948 102,154 683,901 2,760,659 (89,559) 1,462,159 2,138,748 (448,291) 758,984 4,133,259 2,449,441 (37) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) The following table summarizes the changes in the allowance for doubtful accounts for trade and other receivables: At beginning of period Reversal of allowance for doubtful accounts (provision for impairment) Unused amounts reserved At ending of period 2017 $ 2016 $ (448,291) (412,833) 324,018 34,714 (75,995) 40,537 (89,559) (448,291) The Company’s cash is maintained at financial institutions with high credit ratings; therefore, the Company considers the risk of non-performance on this instrument to be remote. To date, the Company has not incurred any losses related to its cash. c. 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 indicated 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 income (loss). Management believes that a 10% change in exchange rates would be reasonably possible and that the impact on net income (loss) of such a change would be approximately $129,964 for 2017 (2016 – $113,473). As at December 31, 2017, the following accounts are shown in their original currencies and converted into Canadian dollars. The Company does not use financial instruments to reduce this risk. Cash Trade and other receivables Trade and other payables Equivalent in Canadian dollars 2017 Euro US dollar 169,728 612,994 345,659 10,216 - (130,472) 1,128,381 (120,256) 1,415,554 (181,010) (38) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) Cash Trade and other receivables Trade and other payables Equivalent in Canadian dollars ii. Interest rate risk 2016 Euro US dollar 604,037 434,461 (114,296) 135 39,280 (114,365) 924,202 (74,950) 1,240,926 (106,196) 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 credit facility, for which the interest rates charged fluctuate based on the bank’s prime rate. As at December 31, 2017, the short-term bank loan and credit facility amounted to $1,437,912 (2016 – $755,000). If the interest rate on the bank loan and credit facility had been 50 basis points higher (lower), related to the bank loan and credit facility as at December 31, 2017, net income would have been $11,218 (2016 – $3,295) lower (higher). (39) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) d. 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: 2017 Financial liabilities Credit facility Trade and other payables and accrued liabilities Government royalty program obligation Obligation under capital lease Convertible debentures Obligation arising from shares issued by a subsidiary Financial liabilities Bank loan Trade and other payables and accrued liabilities Government royalty program obligation Obligation under capital lease Convertible debentures Obligation arising from shares issued by a subsidiary Carrying amount $ Contractual cash flow $ 0 to 12 months $ 13 to 24 months $ Thereafter $ 1,437,912 1,535,939 1,535,939 3,032,213 3,032,213 3,032,213 - - - - 591,372 682,540 82,000 95,000 505,540 29,144 2,216,570 31,261 3,173,569 23,878 4,219 231,143 2,942,426 3,164 3,912,314 3,912,314 - - 3,912,314 11,219,525 12,367,836 4,905,173 3,041,645 4,421,018 Carrying amount $ Contractual cash flow $ 0 to 12 months $ 13 to 24 months $ Thereafter $ 2016 755,000 755,000 755,000 3,118,064 3,118,064 3,118,064 757,540 757,540 757,540 - - - - - - 42,120 754,780 38,561 1,270,247 19,281 90,247 16,067 90,000 - 1,090,000 3,582,135 3,582,135 - - 3,582,135 9,009,639 9,521,547 4,740,132 106,067 4,672,135 (40) Xebec Adsorption Inc. Notes to Consolidated Financial Statements December 31, 2017 and 2016 (expressed in Canadian dollars) Contractual interest amounts on floating interest rates are established based on the spot rates as at the statement of financial position dates. The Company’s development is financed through a combination of borrowing under the existing credit facilities and the issuance of debt and equity (Note 1). (41) 

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