FormerXBC Inc. — Audit Report / Information 2020

Mar 25, 2021

Xebec Adsorption Inc.

Consolidated Financial Statements December 31, 2020 and 2019 (expressed in Canadian dollars)

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Independent Auditor's Report

To the Shareholders of Xebec Adsorption Inc.

Raymond Chabot Grant Thornton LLP Suite 2000 National Bank Tower 600 De La Gauchetière Street West Montréal, Quebec H3B 4L8

Telephone: 514-878-2691 Fax: 514-878-2127 www.rcgt.com

Opinion

We have audited the consolidated financial statements of Xebec Adsorption Inc. (hereafter "the Company"), which comprise the consolidated statements of financial position as at December 31, 2020 and 2019, and the consolidated statement 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 notes to consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2020 and 2019, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRS).

Basis for opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the "Auditor’s responsibilities for the audit of the consolidated financial statements" section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Member of Grant Thornton International Ltd

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Percentage of completion of contracts in progress at year-end

As described in note 3 to the consolidated financial statements, revenues from longterm 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). We identified the determination of the percentage of completion of contracts in progress at year-end as a key audit matter.

Why the matter was determined to be key audit matter

The determination of the percentage of completion was significant to our audit because management’s assessment of the percentage of completion requires significant judgements (see note 4), including milestones marked, actual work performed and estimated costs to complete. These significant judgements can have a material impact on the amounts of revenue and profit recognized.

How the matter was addressed in the audit

Our audit procedures related to management's estimate of percentage of completion of contracts at year-end included, among others:

• We reviewed, on a sample basis, contractual arrangements, including pricing and billing terms, contract changes, and terms and conditions;

• We confirmed, on a sample basis, contracts terms directly with customers;

• We tested, on a sample basis, costs incurred to date;

• We compared, on a sample basis, the estimates of costs to complete made in the prior period to actual contract costs incurred in the current period to assess management’s ability to estimate the costs to complete a contract;

• We tested, on a sample basis, future costs to complete the contracts to purchase orders and quotes obtained by management;

• We tested, on a sample basis, anticipated losses on contracts recorded in the current period; and

• We conducted inquiries with management and project managers to gain an understanding of the status of contract activities.

Valuation of assets acquired and liabilities assumed in business combinations

As described in note 3 to the consolidated financial statements, the Company applies the acquisition method in accounting for business combinations. The Company completed the final purchase price allocation for the business combinations described in note 5 to the consolidated financial statements. Under the acquisition method of accounting, management determines the fair value of assets acquired and liabilities assumed (with certain exceptions). We identified the valuation of assets acquired and liabilities assumed in business combinations as a key audit matter.

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Why the matter was determined to be key audit matter

The valuation of assets acquired and liabilities assumed in business combinations was significant to our audit because it involves significant judgement from management and a high degree of subjectivity and effort, including the need to involve fair value specialists. In particular, the fair value of the intangible assets and contingent consideration is dependent on the outcome of many variables, including the acquirees’ future cash flows and profitability.

How the matter was addressed in the audit

Our audit procedures related to the valuation of assets acquired and liabilities assumed included, among others:

• We reviewed the share purchase agreements;

• With the assistance of our valuation specialists, we evaluated the reasonableness of management’s projections of future cash flows by comparing the projections to historical results;

• With the assistance of our valuation specialists, we evaluated the reasonableness of the valuation methodologies and discount rates by:

• Testing information used to determine the discount rates;

• Performing sensitivity analysis by developing a range of independent estimates for the discount rates and comparing those to the discount rates applied by management.

• With the assistance of our valuation specialists, we evaluated the reasonableness of attrition rates of customer relationships; and

• We tested the fair values of the other assets and liabilities included upon the acquisition which were not subject to cash flow projection valuation methods.

Annual test for impairment

As described in Note 3 to the consolidated financial statements, the Company is required to annually test for impairment cash-generating units (CGU) to which goodwill has been allocated. We identified the Company's annual test for impairment as a key audit matter.

Why the matter was determined to be key audit matter

This annual impairment test was significant to our audit because the amount of goodwill of $162,802,163 as at December 31, 2020 is material to the consolidated financial statements. In addition, management’s determination of recoverable amounts of CGUs involves significant judgement from management and a high degree of subjectivity and efforts, including the need to involve fair value specialists.

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How the matter was addressed in the audit

Our audit procedures related to the Company’s evaluation of the recoverable amount included, among others:

• With the assistance of our valuation specialists, we evaluated the reasonableness of the methodologies to calculate the recoverable amount. We also evaluated the reasonableness of the significant assumptions used by the Company, in particular those relating to growth rates, profit margins and discount rates, which are key to the outcome of the impairment test. We did this by developing independent discount rates and assumptions, and performing sensitivity analysis;

• We assessed the adequacy of the Company’s disclosures about those assumptions to which the outcome of the impairment test is most sensitive, that is, those that have the most significant effect on the determination of the recoverable amount.

Information other than the consolidated financial statements and the auditor’s

report thereon

Management is responsible for the other information. The other information comprises the information included in the Management's Discussion and Analysis.

Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

We obtained the Management's Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard.

Responsibilities of management and those charged with governance for the

consolidated financial statements

Management is responsible for the preparation and fair presentation of the 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.

In preparing the consolidated financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

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Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgement and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control;

• Obtain an understanding of internal control relevant to the audit 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 Company’s internal control;

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management;

• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern;

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation;

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• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Louis Roy.

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Montreal March 24, 2021

1 CPA auditor, CA public accountancy permit no. A125741

Xebec Adsorption Inc. Consolidated Statements of Financial Position As at December 31, 2020 and 2019

(expressed in Canadian dollars)

Assets Current assets Cash Restricted cash (Note 5) Trade and other receivables (Note 6) Inventories (Note 7) Investment tax credits receivable Finance leases receivable (Note 11) Prepaid expenses Total current assets Non-current assets Finance leases receivable (Note 11) Investment and advance to related companies Deferred financing costs Property, plant and equipment (Note 8) Intangible assets (Note 9) Goodwill (Note 10) Other non-current assets Total non-current assets Total assets Liabilities Current liabilities Bank loan (Note 14) Trade, other payables and accrued liabilities (Note 12) Contract liabilities (Note 13) Current portion of long-term debt (Note 15a) Current portion of government royalty program obligation (Note 15b) Current portion of provisions (Note 16) Current portion of obligation arising from shares issued by a subsidiary (Note 17) Income taxes payable Total current liabilities Non-current liabilities Long-term debt (Note 15a) Government royalty program obligation (Note 15b) Obligation arising from shares issued by a subsidiary (Note 17) Provisions (Note 16) Deferred tax liabilities (Note 27) Total non-current liabilities Total liabilities Equity Share capital (Note 19) Contributed surplus Accumulated other comprehensive loss Deficit Total equity Total liabilities and equity	December 31, 2020 $ 160,937,938 7,641,960 35,123,268 21,145,474 15,943 129,005 1,130,986 226,124,574 3,015,753 116,259 984,507 36,577,749 15,003,915 162,802,163 53,247 218,553,593 444,678,167 974,500 27,570,908 7,507,335 14,052,453 185,341 1,541,184 2,971,944 108,543 54,912,208 42,625,642 182,957 - 348,982 2,575,577 45,733,158 100,645,366 396,609,335 8,144,748 (914,459) (59,806,823) 344,032,801 444,678,167	December 31, 2019 $ 22,358,457 324,700 24,121,723 6,244,400 15,943 - 1,051,260
		54,116,483
		- - - 3,026,779 5,689,079 3,504,279 -
		12,220,137
		66,336,620
		- 12,532,960 2,383,261 962,560 124,880 46,207 373,000 369,923
		16,792,791
		5,159,690 341,191 3,807,476 127,980 1,150,126
		10,586,463
		27,379,254
		63,484,034 4,569,636 (1,247,330) (27,848,974)
		38,957,366
		66,336,620

The accompanying notes are an integral part of these consolidated financial statements

Approved by the Board of Directors

(signed) Peter Bowie

_________ (signed)_ Kurt Sorschak Director

_____ Director

Xebec Adsorption Inc. Consolidated Statements of Income (loss) For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Revenue(Note 21) Cost of goods sold Gross margin Research and development expenses (Note 23) Selling and administrative expenses Foreign exchange loss Loss (gain) on conversion of shares issued by a subsidiary (Note 17) Operating income (loss) Other charge (income) Finance income Finance expenses (Note 24) Income (loss) before income taxes Income taxes (Note 27) Net income (loss) for the year Net income (loss) per share Basic net income (loss) per share (Note 19) Diluted net income (loss) per share (Note 19)	2020 $ 56,519,609 56,253,905 265,704 1,222,754 27,940,642 103,238 216,648 29,483,282 (29,217,578) (342,903) 3,092,179 2,749,276 (31,966,854) (9,005) (31,957,849) (0.33) (0.33)	2019 $ 49,317,880 33,829,894
		15,487,986
		71,503 11,297,432 383,693 (256,516)
		11,496,112
		3,991,874
		(32,246) 1,647,141
		1,614,895
		2,376,979 356,916
		2,020,063
		0.03
		0.03

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Comprehensive Income (loss) For the years ended December 31, 2020 and 2019

Xebec Adsorption Inc.

(expressed in Canadian dollars)

Net income (loss) for the year Other comprehensive loss Cumulative translation adjustment Comprehensive income (loss) for the year	2020 $ (31,957,849) 332,871 (31,624,978)	2019 $ 2,020,063 (106,988)
		1,913,075

The accompanying notes are an integral part of these consolidated financial statements.

Xebec Adsorption Inc.

Consolidated Statements of Changes in Equity For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Balance – January 1, 2019 Net income (loss) for the year Other comprehensive loss Comprehensive loss for the year Share issued from conversion of debentures Share issued from the exercise of options Stock-based compensation expense (Note 18) Share issued from public offering Warrants and compensation shares issued from public offering (Note 17) Warrants and compensation shares exercised from public offering (Note 17) Balance – December 31, 2019 Balance – January 1, 2020 Net income (loss) for the year Other comprehensive income Comprehensive income (loss) for the year Issuance of warrants from new financing (Note 15) Share issued from the exercise of options (Note 19) Share issued from public offering (Note 19) Shares to be issued from public offering (Note 19) Shares issued to HyGear (Note 5) Warrants and compensation shares issued from public offering (Note 19) Warrants and compensation shares exercised from public offering (Note 19) Warrants from public offering – Cancelled Stock-based compensation expense (Note 20) Deferred share unit compensation expense (Note 20) Restricted share unit compensation expense (Note 20) Balance – December 31, 2020	Number	Amount
	Common shares Warrants and Compensation Shares Share capital – Common shares Contributed surplus Accumulated other comprehensive income (loss) Deficit	Equity Component of convertible debentures Total
	$ $ $ $ $ $ 57,018,270 5,286,381 26,508,168 3,691,192 (1,140,342) (29,869,037) 189,645 (620,374)
	- - - - - 2,020,063 - 2,020,063 - - - - (106,988) - - (106,988)
	- - - - (106,988) 2,020,063 - 1,913,075 3,014,075 - 2,199,918 - - - (189,645) 2,010,273 2,219,898 - 466,404 (166,631) - - - 299,773 - - - 407,846 - - - 407,846 19,232,600 - 31,304,052 - - - - 31,304,052 - 9,582,996 - 647,172 - - - 647,172 2,893,835 (2,893,835) 3,005,492 (9,943) - - - 2,995,549 84,378,678 11,975,544 63,484,034 4,569,636 (1,247,330) (27,848,974) - 38,957,366
	84,378,678 11,975,544 63,484,034 4,569,636 (1,247,330) (27,848,974) - 38,957,366
	- - - - - (31,957,849) - (31,957,849) - - - - 332,871 - - 332,871
	- - - - 332,871 (31,957,849) - (31,624,978) - 3,000,000 - 2,953,520 - - - 2,953,520 1,903,333 - 681,841 (319,208) - - - 362,633 7,986,750 - 26,436,996 - - - - 26,436,996 35,689,974 - 194,807,780 - - - 194,807,780 10,014,364 - 90,129,273 - - - - 90,129,273 - 826,965 (630,997) 630,997 - - - - 12,369,887 (12,369,887) 21,700,408 (742,100) - - - 20,958,308 - (14,355) - - - - - - - - - 180,320 - - - 180,320 - - - 202,963 - - - 202,963 - - - 668,620 - - - 668,620 152,342,986 3,418,267 396,609,335 8,144,748 (914,459) (59,806,823) - 344,032,801

Accumulated other comprehensive income (loss) relates solely to cumulative translation adjustments.

The accompanying notes are an integral part of these consolidated financial statements.

Xebec Adsorption Inc. Consolidated Statements of Cash Flows For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars) Accetion on government assistance Cash flows from Operating activities Net income (loss) for the year Items not affecting cash Depreciation of property, plant and equipment (Note 8) Amortization of intangible assets (Note 9) Reversal of inventory write-down (Note 7) Accretion of convertible debentures Accretion finance expenses and gain on revaluation of government royalty program obligation (Note 15b) Accretion of earn-out (Note 15a) Accretion of the obligation arising from shares issued by a subsidiary (Note 17) Exchange gain/loss on the obligation arising from shares issued by a subsidiary Deferred share units compensation expense (Note 20) Restricted stock units compensation expense (Note 20) Stock-based compensation expense (Note 20) Accretion of financing costs (Note 15a) Accretion on government assistance (Note 15a) Interest on debt (Note 15a) Accretion of long-term debt (Note 15a) Accretion FTQ debt (Note 15a) Future income taxes Change in non-cash working capital balances related to operations (Note 25) Investing activities Acquisition of property, plant and equipment Acquisition of intangible assets Investment in related companies Business acquisitions, net of cash acquired (Note 5) Financing activities Increase of credit facility (Note 14) Accretion of debt liabilities (Note 15a) Payment of debt liabilities (Note 15a) Proceeds from issuance of share capital (Notes 19) EDC repayment (Note 15a) Earn-out repayment (Note 15a) EDC loan Holding USA (Note 15a) FTQ Investment (Note 15a) Government assistance (Note 15a) Repayment of long-term debt (Note 15a) Repayment of government royalty program obligation (Note 15b) Repayment of the obligation arising from shares issued by a subsidiary (Note 17) Net increase in cash and cash equivalent during the year Cash – Beginning of the year Effect of exchange rate changes on cash Cash and cash restricted – End of the year Additional information Income tax paid Interest paid	2020 $ (31,957,849) 1,132,617 2,652,479 110,881 - 20,228 38,121 306,187 216,648 202,963 668,620 180,320 492,253 11,960 (12,218) 76,410 147,826 (430,423)	2019 $ 2,020,063 572,223 1,265,173 (76,256) 154,209 24,298 59,128 267,639 (256,516) - - 407,846 - - 34,863 - (14,517)
	(26,142,977) (618,710)	4,458,153 (9,917,254)
	(26,761,687)	(5,459,101)
	(491,516) (775,385) (116,259) (70,826,778)	(304,649) (2,675,333) - (7,593,887)
	(72,209,938)	(10,573,869)
	974,500 308,036 (997,391) 242,565,717 (6,340,328) (220,000) 4,604,490 4,917,725 519,443 - (118,000) (1,731,367)	- - - 35,246,546 - - - - - (338,804) (95,000) -
	244,482,825	34,812,742
	145,511,199 22,683,157	18,779,772 3,922,146
	385,541	(18,761)
	168,579,898	22,683,157
	953,470 2,030,622	14,316 1,107,005

The accompanying notes are an integral part of these consolidated financial statements.

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

1 Nature of business

Xebec Adsorption Inc. (“Xebec” or the “Company”) is a global provider that 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 upgrading systems 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 and generation systems for fuel cell and industrial applications. The Company is incorporated and domiciled in Canada and is listed on the TSX (TSX) Exchange under the symbol XBC since January 7, 2021. It was previously 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.xebecinc.com.

The continued spread of COVID-19 around the globe and the responses of governmental authorities and corporate entities, including through mandated or voluntary shutdowns, may lead to a general slow-down in the economy and have led to disruptions to our work force and facilities, our customers, our sales and operations and our supply chain.

The full extent and impact of the COVID-19 pandemic is unknown and at this stage it is very difficult to project what will occur.

The company’s bad debt expense may increase, revenues and cash resources may be negatively affected, and the Company may need to assist potential customers with obtaining financing or government incentives to help customers fund their purchases of our products. Any temporary suspension of production in Xebec facilities as a direct result of COVID-19 or any required suspensions of any of Xebec’s suppliers, partners or customers may have a material adverse effect on Xebec.

2 Basis of compliance and basis of preparation

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and were approved and authorized for issue by the Board of Directors of the Company on March 24, 2021.

The consolidated financial statements have been prepared on the historical cost convention, except 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, unless otherwise stated.

Certain figures of the consolidated statements have been reclassified in order to comply with the basis of presentation adopted in the current year.

(2)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

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

• 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 Holding USA Inc., Xebec Adsorption Europe SRL, Xebec Europe B.V., Compressed Air International Inc., Applied Compression Systems Ltd. (ACS), Xebec RNG Holdings Inc., all of which are wholly owned; GNR Bromont L.P, which is 99% percent owned.

Xebec Adsorption Inc. owns 100% of GNR Québec Capital Management Inc. and 49.9995% of GNR Québec Capital S.E.C. The remaining 50.0% of GNR Québec Capital S.E.C. is 49.9995% owned by Fonds de solidarité FTQ (“FTQ”) and 0.001% owned by GNR Québec Capital Management Inc. The Company does not have full control over GNR Québec Capital Management Inc. and GNR Québec Capital S.E.C. Consequently, these investments are accounted for using the equity method.

(3)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Xebec Holding USA Inc. has four wholly owned subsidiaries: Xebec Adsorption USA Inc., CDA Systems LLC., Enerphase Industrial Solutions Inc. (Airflow) and The Titus Company (Titus).

Xebec RNG Holdings Inc. has one wholly owned subsidiary: GNR Bromont Management Inc. GNR Bromont Management Inc. owns the 1% remaining of GNR Bromont L.P.

Xebec Europe B.V. has two wholly owned subsidiaries: Xebec Deustchland GmbH and Green Vision Holding B.V. Green Vision Holding B.V fully owns HyGear Technologies and Services B.V. which has six wholly owned subsidiaries: HyGear Operations B.V., HyGear B.V., HyGear Asia PTE LTD, HyGear Fuel Cell B.V. and HyGear Hydrogen Plant B.V. and Buse – HyGear LTD which is 50% owned. HyGear LTD is expected to start its activities in the first quarter of 2022.

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 17). 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.

Business acquisitions

The Company applies the acquisition method in accounting for business acquisitions. The consideration transferred by the Company to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of assets transferred, liabilities incurred and the equity interest issued by the Company, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred.

Inventories

Inventories are stated at the lower of cost and net realizable value for raw materials, subassembly parts, work in progress and finished goods. Costs of raw materials are determined on an average cost basis or by using the first-in first-out method (Green Vision Holding B.V). Work in progress, sub-assembly parts 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 costs 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

(4)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

because of changed economic circumstances, the amount of the write-down is reversed and the reversal is limited to the amount of the original write-down, 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 or the manufacturing of the asset including borrowing costs capitalized. Manufacturing price is comprised of the cost of raw materials and consumables, plus expenditures directly attributable to an asset’s manufacturing and installation, including labour costs. Subsequent costs, such as replacement of parts or major inspections, 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:

Right-of-use-assets	Lease term
Machinery and equipment	3 to 15 years
Office furniture and equipment	2 to 7 years
Computers	2 to 5 years
Moulds	5 years
Leased equipment	15 years
Vehicles	3 to 10 years
Leasehold improvement	Lease term

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, engineering standardisation costs and expenditures on design and production of new or substantially improved products and processes when the criteria mentioned in the research and development expenses accounting policy are met. From business acquisitions, intangible assets consist of trade names and customer relationships. 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.

(5)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Development costs are amortized over a period of five years. Engineering standardisation costs and software are amortized over a period of three to five years. Customer relationships and trade names are amortized over a period of eight to ten years.

Impairment of non-financial assets

Cash-generating units (“CGUs”) to which goodwill has been allocated are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are separately identifiable cash flows (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.

Impairment losses for cash-generating units reduce the carrying amount of any goodwill allocated to that cash-generating unit. Any remaining impairment loss is charged pro rata to the other assets in the cash-generating unit.

The Company evaluates impairment losses for potential reversals when events or circumstances warrant such consideration with the exception of goodwill.

Goodwill

Goodwill represents the future economic benefits arising from business acquisitions that are not individually identified and separately recognised. Goodwill is carried at cost less accumulated impairment losses.

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 and 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 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.

(6)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Financial Instruments

The Company’s financial assets and liabilities are accounted for at amortized cost.

Cash Restricted cash Trade and other receivables Finance lease receivables

Bank loan Trade, other payables and accrued liabilities Long-term debt Government royalty program obligation Obligation arising from shares issued by a subsidiary

Except for those trade receivables that do not contain a significant financing component and are measured at the transaction price in accordance with IFRS 15, all financial assets are initially measured at fair value adjusted for transaction costs where applicable.

Financial assets, other than those designated and effective as hedging instruments, are classified into the following categories:

• Amortized cost

• Fair value through profit or loss (FVTPL)

• Fair value through other comprehensive income (FVOCI)

In the periods presented, the Company does not have any financial assets categorized as FVTPL or FVOCI.

The classification is determined by both the Company’s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset.

All income and expenses relating to financial assets that are recognized in income or loss are presented within finance expenses or finance income, except for impairments of trade receivables which are presented within selling and administrative expenses.

Financial assets are measured at amortized cost if the assets meet the following conditions and are not designated as FVTPL:

• They are held within a business model whose objective is to hold the financial assets and collect its contractual cash flows.

• The contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding.

After initial recognition, they are measured at amortized cost using the effective interest method. Discounting is omitted where the effect of discounting is immaterial.

(7)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

The Company considers a broader range of information when assessing credit risk and measuring expected credit losses, including past events, current conditions, and reasonable and supportable forecasts that affect the expected collectability of the future cash flows on the instrument. If the financial instrument has not deteriorated significantly in credit quality since initial recognition or has low credit risk, the Company considers that there are no expected credit losses.

In applying this forward-looking approach, a distinction is made between:

• financial instruments that have not deteriorated significantly in credit quality since initial recognition or that have low credit risk (“Stage 1”), and

• financial instruments that have deteriorated significantly in credit quality since initial recognition and whose credit risk in not low (“Stage 2”).

“Stage 3” would cover financial assets that have objective evidence of impairment at the reporting date.

“12-month expected credit losses” are recognized for the first category while “lifetime expected credit losses” are recognized for the second category.

Measurement of the expected credit losses is determined by a probability-weighted estimate of credit losses over the expected life of the financial instrument.

Financial liabilities are initially measured at fair value and where applicable, adjusted for transaction costs unless the Company designated a financial liability at fair-value through profit or loss.

Subsequently, financial liabilities are measured at amortized cost using the effective interest method. All interest-related charges and, if applicable, changes in an instrument’s fair value that are reported in income or loss are included within finance expense or finance income.

Government royalty program obligations

The Company receives from time to time, from different government agencies, funding designed to promote economic growth, create jobs 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 expense.

(8)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Share Capital

Share capital represents the amount received from the issue of shares, less issuance costs, net of any underlying income tax benefit from these issuance costs. If shares are issued when options and warrants are exercised, the share capital account also comprises the compensation costs previously recorded as contributed surplus. If shares are issued within the conversion option on the exercise of convertible debentures, the share capital account also includes the equity component of such convertible debentures.

Proceeds from unit placements are allocated between shares and warrants according to the residual value method, where the difference between the fair value and issue price of the shares when the warrants are issued is allocated to the warrants.

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 17).

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 for options and similar instruments is computed assuming that if all dilutive securities had been exercised at the later of the beginning of the year and the date of issuance, the proceeds would be used to purchase common shares at the average market value during the year.

Revenues from Contracts with Customers

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. 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. Provisions are established for estimated product returns and warranty costs at the time revenue is recognized. Cash received in advance is recorded as contract liabilities.

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 contract assets. Cash received in advance of revenues being recognized on contracts is recorded as contract liabilities.

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.

(9)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Revenues are 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.

Revenues for contracts in China are recognized upon completion and the Company can determine that control has been transferred to the customer in accordance with the agreed-upon specifications in the contract.

Revenues from services are recorded when services have been rendered. For contract services that last over a year, revenue is recognized over the duration of the contract.

Segment reporting

The Company operates three business segments:

• 1) Systems (Cleantech) – Includes Renewable Natural Gas, Hydrogen and Renewable Hydrogen for a variety of applications, from fuel cells to fossil fuel replacement applications for low carbon transportation fuels.

• 2) Infrastructure (Renewable Gas Generation) – Project development of renewable natural gas production facilities, in the build, own and operate (BOO) model that will generate low-carbon renewable transport fuels and carbon credits.

• 3) Support (Industrial Air and Gas Products, Parts, Service and Operational Support) – foundational recurring revenue model.

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 specifically.

Contract balances

Contract assets are recognized when goods or services are transferred to customers before consideration is received or before the Company has an unconditional right to payment for performance completed to date. Contract assets are subsequently transferred to receivables when the right of payment becomes unconditional. Contract assets include costs incurred and recorded margins in excess of advances and progress billings on long-term contracts.

Contract liabilities are recognized when amounts are received from customers in advance of transfer of goods or services. Contract liabilities are subsequently recognized in revenue as or when the Company performs under contracts. Contract liabilities include advances and progress billings in excess of long-term contracts cost incurred and recorded margins.

A net position of contract asset or contract liability is determined for each contract. The cash flows in respect of advances and progress billings are classified as cash flows from operating activities.

(10)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Costs to obtain or fulfill a contract

The Company recognizes as an asset the incremental costs of obtaining a contract with a customer when those costs are expected to be recovered.

Costs that would have been incurred regardless of whether the contract was obtained are recognized as an expense when incurred, unless those costs are explicitly chargeable to the customer regardless of whether the contract is obtained.

The Company recognizes the incremental costs of obtaining contracts as an expense when incurred because those costs are not expected to be recovered and are not charged to the customer.

Remaining performance obligations

The Company’s contracts are for delivery of goods within the 12 months following a contract’s signature; therefore, the Company uses the practical expedient allowed in Paragraph 121(a) of IFRS 15.

Following Paragraph 121(a), the Company does not disclose the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied as at the end of the reporting period.

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

The Company as a lessee:

The Company recognises a right-of-use asset and a lease liability with respect to a lease on the date the underlying asset is available for use by the Company (hereafter, the ‘commencement date’). Right-of-use assets are initially measured at cost, including the amount of the initial measurement of the lease liability, adjusted for lease payments on or after the commencement date, plus initial direct costs incurred and an estimate of all of the costs for dismantling and removing the underlying asset, less any lease incentives received, including deferred rent. The right-of-use asset is subsequently measured at cost less accumulated depreciation and accumulated impairment losses. The depreciation is recognised in a manner consistent with existing standards for property, plant and equipment over the lease term.

(11)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Lease liabilities are initially measured at the present value of the lease payments over the lease term. The lease payments are discounted using the Company’s incremental borrowing rate. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability and reducing the carrying amount to reflect the lease payments made.

The interest expense relating to lease liabilities is recognised in profit or loss using the effective interest method.

New right-of-use assets and lease liabilities are non-cash transactions and thus excluded from the consolidated statement of cash flows.

The Company as a lessor:

As part of its normal business activity, the Company enters into lease contracts whereby gas generation technologies are manufactured and placed at customer premises in order for the customer to have on-demand gas supply (Gas-as-a-Service). Depending on the lease contracts, the Company either classifies the leases as operating or finance leases.

To classify each lease, the Company makes an overall assessment of whether the lease transfers to the lessee substantially all of the risks and rewards of ownership incidental to ownership of the underlying asset. If this is the case, the lease is classified as finance lease, if not, the lease is classified as an operating lease. As part of this assessment, the Company considers certain indicators such as whether the lease term is for the major part of the economic life of the assets.

If an arrangement contains lease and non-lease components, the Company applies IFRS 15 to allocate the consideration in the lease arrangement.

Income from operating lease contracts is recognised on a straight-line basis over the term of the lease and is presented in the consolidated statement of profit or loss under revenue.

Amounts due from lessees under finance leases are recognised at the amount of the Company’s net investment in the leases (finance leases receivables). Finance lease income, presented within finance income, is allocated to accounting periods so as to reflect a constant periodic rate of return on the Company’s net investment outstanding in respect of the leases.

Subsequent to initial recognition, the Company reviews the estimated unguaranteed residual value and applies the expected credit loss model to recognise a provision on its finance lease receivables.

(12)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Long-term incentive plan

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.

The cost of the restricted share units (RSUs) is measured at the fair value of the common shares of the Company at the grant date and the number of RSUs expected to vest. The cost is recognized as compensation expense in the statement of income (loss) from the date of grant on a straight-line basis over the 36 months vesting period with a corresponding increase in equity. The Company revises the estimate of the number of RSUs expected to vest when necessary, if subsequent information indicates that the number of RSUs expected to vest differs from previous estimates.

The cost of deferred share units (DSUs) is measured at the fair value of the common shares of the Company at the grant date and the number of DSUs expected to vest. The cost is gradually recognized as compensation expense in the statement of income (loss) from the date of grant over a progressive vesting period based on the remaining vesting period with a corresponding increase in equity. The Company revises the estimate of the number of DSUs expected to vest when necessary, if subsequent information indicates that the number of DSUs expected to vest differs from previous estimates.

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, 2019, development expenses related to development costs for a new line of products and engineering standardisation costs were deferred and accounted for an identified intangible asset. There were no development expenses capitalised during the year ended December 31, 2020.

(13)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Income taxes

Income tax comprises current and deferred tax. Income tax is recognized in the consolidated statement of income (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.

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

(14)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

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 yearend 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).

Recently issued accounting standards

Definition of a business

In October 2018, the IASB issued amendments to the guidance in IFRS 3 Business combinations, which revise the definition of a business. These amendments introduce an optional concentration test that, if met, leads to the conclusion that the group of assets acquired is not a business and that no further assessment is needed. To be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. It is also no longer necessary to assess whether market participants are capable of replacing missing elements or integrating the acquired activities and assets. The Company applied these amendments on January 1, 2020. The application of these amendments did not have a significant impact on the consolidated financial statements.

Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Company

At the date of authorisation of these consolidated financial statements, several new, but not yet effective, standards and amendments to existing standards, and interpretations have been published by the IASB. None of these standards or amendments to existing standards have been adopted early by the Company. Management anticipates that all relevant pronouncements will be adopted for the first period beginning on or after the effective date of the pronouncement. New standards, amendments and interpretations not adopted in the current year have not been disclosed as they are not expected to have a material impact on the Company’s consolidated financial statements.

4 Significant accounting judgments and estimation uncertainties

Critical accounting estimates and judgements

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.

(15)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

• i. Inventories must be valued at the lower of cost and net realizable value.

A write-down 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 an impairment 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 the 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 unforeseen changes in the ongoing contracts’ models.

iv. Allowance for expected credit loss

The Company recognizes the impairment of financial assets in the amount of expected credit losses by means of the simplified approach, measuring impairment losses as lifetime expected credit losses. The trade receivables have been assessed on a collective basis as they possess shared credit risk characteristics and have been grouped based on the days past due.

• v. Acquisition valuation method

(16)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

The Company uses valuation techniques when determining the fair value of certain assets and liabilities acquired in a business combination. In particular, the fair values of the intangible assets, goodwill and contingent consideration are dependent on the outcome of many variables including the acquirees’ future profitability.

vi. Leases

Recognizing leases requires judgment and use of estimates and assumptions. Judgement is used to determine whether there is reasonable certainty that a lease extension or cancellation option will be exercised. Furthermore, management estimates are used to determine the lease terms and the appropriate interest rate to establish the lease liability.

Classification of finance and operating leases requires management to make assumptions related to the economic life and the fair value of the leased asset. In addition, at the commencement date of finance leases, the measurement of selling profit requires assumptions such as the determination of the unguaranteed residual value, the fair value of the leased asset and the rate implicit in the lease. Those assumptions are based on management’s best estimate by considering all information available at the reporting date, including profit margins by reference to transactions involving assets of a similar nature, market funding rates, the economic life of assets of a similar nature and the expected value of the asset at the end of the lease.

vii. Impairment of non-financial assets and goodwill

In assessing impairment, management estimates the recoverable amounts of each asset or cash-generating unit based on expected future cash flows and uses an interest rate to discount them. Estimation uncertainty relates to assumptions about future operating results and the determination of a suitable discount rate.

(17)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

5 Business combinations

• 1) During the years ended on December 31, 2020 and 2019, Xebec Adsorption Inc. acquired the following companies, all located in North America:

a) Compressed Air International Inc.

On January 1, 2019, the Company acquired all outstanding shares of Compressed Air International Inc. (CAI) for a purchase price of $2,200,000. $1,540,000 was paid in cash while $660,000 will be earned-out over the three years following the acquisition date (see Note 15a). The contingent consideration is payable only if the annual EBITDA for a period of three years exceeds a target level agreed by both parties. A first payment of $220,000 was disbursed on April 28, 2020, leaving a remaining balance of $440,000 to be earned-out over the next two years.

CAI is a distributor and full-service supplier of industrial compressed air and gas products with locations in Woodbridge and Guelph, Ontario. In business for 20 years, CAI offers an extensive range of compressors, genuine and OEM-equivalent compressor parts, compressed adsorption and refrigerant air dryers, filtration products, emergency and preventative maintenance service as well as complete installation and service packages.

For the year ended December 31, 2019, CAI generated revenues of $5,456,901 and a profit of $399,905.

b) CDA Systems LLC

On December 10, 2019, Xebec Holding USA Inc, a wholly owned subsidiary of the Company, acquired all outstanding shares of CDA Systems LLC. (CDA) for a purchase price of $7,430,503 ($5,614,162 USD). The purchase agreement includes an additional contingent consideration payable based on future EBITDA and other financial targets to be achieved over the next two years (Note 15a).

CDA Systems is a leading distributor and service provider of Oil-Free Air Compressors, Air Dryers, and Filtration Systems in California’s San Francisco Bay Area. CDA designs, sells, rents, and maintains Clean Dry Air systems and, with decades of industry experience, having supported major manufacturers with numerous equipment installations. These have included value engineered solutions supporting compression, dehydration, CNG, and other specialty gases, with a goal of achieving energy cost savings and utility rebates.

For the period from December 10 to December 31, 2019, CDA generated revenues of $288,800 and a profit of $64,089.

If CDA had been acquired on January 1, 2019, revenues of the Company for 2019 would have been $55,994,713 and the income before taxes for the year would have increased to $2,362,738.

(18)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

c) Enerphase Industrial Solutions Inc. (Air Flow)

On July 31, 2020, Xebec Holding USA Inc., a wholly owned subsidiary of Xebec Adsorption Inc., acquired all of the outstanding securities of Enerphase Industrial Solutions Inc. (doing business as “Air Flow”) for a purchase price of $5,781,329 ($4,313,137 USD). The purchase agreement includes an additional contingent consideration payable from future EBITDA to be achieved over the next three years (Note 15a).

Air Flow is a leading distributor and service provider of compressed air equipment in North Carolina. Incorporated in 1981, the company brings decades of industry experience, has built longstanding relationships with major manufacturers, and has developed a significant service footprint through numerous equipment installations. Air Flow’s focus is on preventative maintenance solutions, air energy system audits and analysis, timely machine rentals, and parts and service.

Airflow generated revenues of $5,156,718 and a profit of $190,239 from August 1, 2020 to December 31, 2020.

If Airflow had been acquired on January 1, 2020, revenue of the Company for the twelve-month period ended December 31, 2020 would have been $63,263,104 and the net loss for the period would have been ($31,548,255).

d) Applied Compression Systems Ltd.

On August 31, 2020, Xebec Adsorption Inc. acquired all outstanding shares of Applied Compression Systems Ltd. (“ACS”) for a purchase price of $4,828,123 which includes an amount of $778,123 that was paid on January 19, 2021 (Note 15a). Deferred compensation based on the annual EBITDA and subject to a key employment agreement will be payable for a period of three years as agreed by both parties.

Applied Compression Systems Ltd., located in British Colombia, offers a single source solution for air & gas compression requirements. The company has a strong focus on custom designed and fabricated compressor packages for specialized applications in the oil, gas, petrochemical, alternative fuel, waste-to-energy, research, power generation, mining and manufacturing industries. ACS can supply either standard units or design and fabricate equipment that is custom-built to specific requirements from concept to completion.

ACS generated revenues of $949,316 and a net loss of $99,187 after the intercompany eliminations for the period from September 1, 2020 to December 31, 2020.

If ACS had been acquired on January 1, 2020, revenue of the Company for the twelve-month period ended December 31, 2020 would have been $60,735,982 and the net loss for the period would have been ($29,622,261).

(19)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

e) The Titus Company

On October 30, 2020, Xebec Holding USA Inc., a wholly owned subsidiary of Xebec Adsorption Inc., acquired all of the outstanding shares of “The Titus Company” (Titus) for a purchase price of $8,235,627 ($6,183,832 USD). The purchase agreement includes an amount of $840,000 USD (par value $1,000,000 USD) which will be payable over the next three years (Note 15a).

Founded in 1986 in Pennsylvania, Titus has been in partnership with large and small companies throughout the Eastern Pennsylvania, Delaware and New Jersey regions and provides superior expertise and the capability to serve a wide range of needs. The Titus Company is also the largest supplier of air dryers to the United States Navy. With this acquisition, Xebec’s Cleantech Service Network (CSN) coverage expands to include Eastern Pennsylvania, Delaware and New Jersey.

Titus generated revenues of $1,478,456 and a net profit of $284,781 for the period from November 1, 2020 to December 31, 2020.

If Titus had been acquired on January 1, 2020, revenue of the Company for the twelve-month period ended December 31, 2020 would have been $67,287,186 and the net loss for the period would have been ($30,650,677).

(20)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

As at December 31, the final purchase price allocation for these five companies is as follow:

Fair value of consideration transferred Amount settled in cash Purchase price acquisition balance payable (receivable) Fair value of continent consideration Restricted cash and balance of acquisition payable Total Recognized amounts of identifiable net assets Trade and other receivables Inventories Cash and cash equivalents Prepaid expenses Total current assets Property, plant and equipment Assets acquired under right-of-use Intangibles assets Total non-current assets Trade, other payables Accrued liabilities Contract liabilities Income tax payable Current portion of long-term debt Total current liabilities Deferred tax liability Long-term debt Total non-current liabilities Identifiable net assets Trademarks Client relationships Goodwill on acquisition Consideration transferred settled in cash Cash and cash equivalent acquired Net cash outflows on acquisition	2020 15,027,333 1,446,835 1,138,000 1,232,911 18,845,079 4,496,767 3,650,485 1,999,848 134,914 10,282,014 486,689 2,154,713 - 2,641,402 (2,107,928) (367,155) (2,115,109) (247,106) - (4,837,298) (1,577,580) (2,761,000) (4,338,580) 3,747,538 684,440 6,601,420 7,811,681 15,097,541 18,845,079 15,027,333 1,999,849 13,027,484	2019 7,991,458 (220,971) 1,408,646 330,975
		9,510,108 3,000,269 1,476,830 397,571 150,845
		5,025,515 427,762 370,436 65,025
		863,223 (1,354,193) (266,474) (569,277) (34,963) (125,994)
		(2,350,901) (1,164,643) (249,645)
		(1,414,288) 2,123,549
		198,585 3,601,903 3,586,071
		7,386,559
		9,510,108
		7,991,458 397,571
		7,593,887

The fair value of the trade and other receivables acquired as part of the business acquisitions amounted to $4,496,767 ($3,000,269 in 2019) with the same gross contractual amount. As at the acquisition dates, the Company’s best estimate of the contractual cash flows not expected to be collected amounted to $NIL.

Goodwill is not expected to be deductible for tax purposes except for Air Flow’s goodwill for an amount of $1,571,941 ($1,172,740 USD).

(21)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Acquisition-related costs amounting to $1,173,017 ($803,933 in 2020 and $369,084 in 2019) are not included as part of consideration transferred and have been recognised as an expense in the consolidated statement of profit or loss, as part of selling and administrative expenses in the corresponding year.

For the twelve-month period ended December 31, 2020, goodwill experienced a negative variation of $272,748 due to fluctuation of the exchange rate.

2) HyGear Technology and Services B.V.

On December 31, 2020, the Company acquired 100% of Green Vision Holding B.V., the parent company of HyGear Technology and Services B.V. (“HyGear”) for aggregate consideration of $156,520,186, consisting of a cash payment of $66,390,912 and 10,014,364 shares issued at a fair value of $9.00 per share, the closing price of Xebec’s shares on December 31, 2020. HyGear is an emerging developer, manufacturer, and supplier of technology and products for the production, recovery, purification, and mixing of industrial gases, such as hydrogen and nitrogen. HyGear’s technological backbone consists of a number of active patents issued both in EU countries and the United States.

The cash consideration for the acquisition was financed using the proceeds from the Corporation’s bought deal public offering of subscription receipts completed through a syndicate of underwriters, and from a concurrent private placement of subscription receipts, through which combined gross proceeds of $143,751,840 were raised. Both the bought deal public offering and the private placement closed on December 30, 2020.

(22)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

The purchase price allocation will be completed within 12 months of the acquisition date. The preliminary details of the business combination are as follows:

Fair value of consideration transferred Amount settled in cash Fair value of shares issued Restricted cash and balance of acquisition payable Total Recognized amounts of identifiable net assets Trade and other receivables Inventories Cash and cash equivalents Current portion of finance lease receivables Total current assets Property, plant and equipment Assets acquired under right-of-use Intangibles assets Non-current portion of finance lease receivable Total non-current assets Trade and other payables Contract liability Current portion of long-term debt Total current liabilities Deferred income tax liability Long-term debt Total non-current liabilities Identifiable net assets Goodwill on acquisition Consideration transferred settled in cash Cash and cash equivalent acquired Net cash outflows on acquisition	2020 $ 59,835,550 90,129,276 6,555,360
	156,520,186 5,904,645 2,059,167 2,137,901 129,005
	10,230,718 27,883,752 3,104,077 4,252,440 3,015,753
	38,256,022 (4,352,882) (2,940,590) (4,280,687)
	(11,574,159) (350,125) (31,801,222)
	(32,151,347) 4,761,234
	151,758,952
	59,835,550 2,137,901
	57,697,649

The application of IFRS requires management to determine the fair value of the net assets acquired and liabilities assumed (with certain exceptions). As the acquisition closed on December 31, 2020, management has not completed its assessment of the fair value of assets acquired and liabilities assumed. The values included in the table above are based on the book value of the assets acquired and liabilities assumed. As management completes its assessment of the fair value of net assets acquired and liabilities assumed, there could be material adjustments to the assets and liabilities outlined above.

(23)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

The fair values outlined above are provisional and subject to revision as a result of information discovered after the acquisition date that relates to events and conditions at the acquisition date. The period when such revisions may be made is not more than 12 months from the date of the acquisition. Any such revisions made could be material. In particular, the valuation of intangible assets, property, plant and equipment, inventory and debt are provisional and subject to the finalization of independent valuations.

Included in the net assets acquired is a HyGear’s sponsored defined benefit plan, which includes certain HyGear employees in the Netherlands. The plan’s obligation is HyGear’s, but has been reinsured by an external third party for the full amount of the obligation. The value of the obligation is in the range of $900,000 but is offset by an asset of the same amount representing the amount recoverable from reinsurance. Therefore, the net of the asset and obligation is nil. HyGear also offered a defined contribution retirement benefit plans to its employees.

The goodwill is attributable to the fact that the acquisition is expected to allow Xebec to enter new markets, launch new product offerings and execute and accelerate its distributed renewable gas strategy.

Goodwill is not expected to be deductible for tax purposes.

Acquisition-related costs amounting to $2,376,766 are not included as part of consideration transferred and have been recognised as an expense in the consolidated statement of profit or loss, as part of selling and administrative expenses.

As the acquisition of HyGear closed on December 31, 2020, the acquisition did not have an impact on revenues and net income for the year ended December 31, 2020. Had the acquisition taken place on January 1, 2020, the pro forma revenues and net income (loss) of the Company would have been $61,384,457 and ($36,995,485), respectively.

(24)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

6) Trade and other receivables

Trade receivables Contract assets (Note 13) Other receivables Taxes receivable Supplier deposits Less: Allowance for expected credit loss Trade and other receivables - net	2020 $ 18,555,130 7,766,763 724,639 2,695,767 6,791,899 (1,410,930) 35,123,268	2019 $ 13,274,136 6,788,722 479,252 1,323,230 2,790,454 (534,071)
		24,121,723

Trade and other receivables are pledged as security for credit facilities (see Notes 14 and 15).

Note 31 includes disclosures relating to the credit risk exposure and analysis relating to the allowance for expected credit losses.

7) Inventories

Raw materials Work in progress Sub-assembly parts Inventories	2020 $ 11,955,276 8,228,884 961,314 21,145,474	2019 $ 4,499,161 1,745,239 -
		6,244,400

Cost of goods sold includes inventories of $35,334,274 in 2020 ($18,626,719 in 2019). During the year ended December 31, 2019, a reversal of a previous inventory write-down of $76,256 was recognized in inventory. Inventories are pledged as security for credit facilities (see Notes 14 and 15).

(25)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

8) Property, plant and equipment

Right-of- use-assets Machinery and Production Equipment $ $	Office furniture and Equipment Computers $ $	Moulds Vehicles Leasehold Improvement $ $ $	Assets under construction Leased Equipment $ $	Total $
Cost Balance at December 31, 2018 - 596,261 Additions 2,245,806 108,611 Additions through business acquisition 370,437 29,143 Disposals - - IFRS 16 reclassification 11,327 - Effect of movements in exchangerates (30,052) (13,273)	155,905 350,253 12,828 30,977 10,432 13,683 - (5,249) - (11,327) (5,647) (6,869)	169,311 35,984 20,450 12,564 - 150,996 279,897 93,160 1,447 - - - - - - (11,618) (1,766) (28)	- - - - - - - - - - - -	1,328,164 2,561,782 798,199 (5,249) - (69,253)
Balance at December 31, 2019 2,597,518 720,742 Additions 627,509 233,726 Additions through business acquisition 5,255,563 7,024,731 Disposals - (5,952) Effect of movements in exchangerates (55,015) 6,241	173,518 371,468 107,196 73,778 898,246 4,850 - (2,551) 3,924 6,012	450,154 127,378 172,865 - 31,500 53,818 - 1,067,057 97,698 - - - (524) (15,768) (2,873)	- - - - 10,849,173 8,428,686 - - - -	4,613,643 1,127,527 33,626,004 (8,503) (58,003)
Balance at December 31,2020 8,425,575 7,979,488	1,182,884 453,557	449,630 1,210,167 321,508	10,849,173 8,428,686	39,300,668
Accumulated depreciation Balance at December 31, 2018 - 471,008 Depreciation 426,593 45,792 IFRS 16 reclass 3,777 - Depreciation of assets disposed - - Effect of movements in exchange rates (153) (8,878)	149,609 225,918 10,817 49,405 - (3,777) - (5,249) (5,496) (5,567)	161,490 35,984 2,337 15,827 7,756 16,033 - - - - - - (6,214) (148) -	- - - - - - - - - -	1,046,346 572,223 - (5,249) (26,456)
Balance at December 31, 2019 430,217 507,922 Depreciation 761,724 57,004 Effect of movements in exchange rates (3,820) 5,127	154,930 260,730 18,432 62,127 3,486 3,974	171,103 43,592 18,370 112,825 87,258 33,247 (1,532) (3,662) (135)	- - - - - -	1,586,864 1,132,617 3,438
Balance at December 31,2020 1,188,121 570,053	176,848 326,831	282,396 127,188 51,482	- -	2,722,919
Carrying Amount At December 31,2019 2,167,301 212,820	18,588 110,738	279,051 83,786 154,495	- -	3,026,779
At December 31, 2020 7,237,454 7,409,435	1,006,036 126,726	167,234 1,082,979 270,026	10,849,173 8,428,686	36,577,749

(26)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Assets under construction

Assets under construction are related to expenditures for production equipment and lease equipment in the course of construction. Depending on the complexity of the asset, the time required to complete the construction ranges between 12-32 months. The construction of the hydrogen solutions is financed from a pool of general third-party borrowings. The amount of borrowing costs capitalized as of December 31, 2020 was $468,196.

Lease equipment

The Company has entered into operating leases on Gas-as-a-service (GaaS) contracts through its subsidiary Green Vision B.V. consisting of gas generating systems. These leases have terms of between five and ten years.

Future minimum rentals receivable under non-cancellable operating leases are as follows:

Within one year Between 1-2 years Between 2-3 years Between 3-4 years Between 4-5 years More than five years Total undiscounted lease payments receivable	December 31, 2020 $ December 31, 2019 $
	414,859 - 346,023 - 186,903 - 186,903 - 186,903 - - -
	1,321,590 -

Depreciation of $1,132,616 (2019 – $572,223) is included in the consolidated statement of income (loss) for the year ended December 31, 2020: $344,071 (2019 – $281,102) in cost of goods sold; and $788,546 (2019 – $291,121) in selling and administrative expenses.

Property, plant and equipment are pledged as security for credit facilities (see Notes 14 and 15).

(27)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

9) Intangible assets

Software Customer Relationships Development costs Engineering standardisation Trademarks Total intangible assets $ $ $ $ $ $	Software Customer Relationships Development costs Engineering standardisation Trademarks Total intangible assets $ $ $ $ $ $
Cost Balance at December 31, 2018 342,434 - 301,059 432,274 - 1,075,767 Additions 52,177 - - 2,623,156 - 2,675,333 Additions through business acquisitions 65,025 3,601,903 - - 198,585 3,865,513 Disposals - - - - - - Effect of movements in exchange rates (12,044) 16,595 - (9,155) - (4,604)
Balance at December 31, 2019 447,592 3,618,498 301,059 3,046,275 198,585 7,612,009 Additions 690,399 - - 361,581 - 1,051,980 Additions through business acquisitions 71,129 6,601,420 4,181,311 - 684,440 11,538,300 Reclassification - (16,916) - (276,595) - (293,511) Effect of movements in exchange rates 6,501 (336,303) - 114,113 (32,765) (248,454)
Balance at December 31,2020 1,215,621 9,866,699 4,482,370 3,245,374 850,260 19,660,324
Accumulated amortization Balance at December 31, 2018 338,361 - 268,375 63,554 - 670,290 Amortization for the year 3,832 54,966 32,684 1,173,691 - 1,265,173 Effect of movements in exchange rates (10,566) (6) - (1,961) - (12,533)
Balance at December 31, 2019 331,627 54,960 301,059 1,235,284 - 1,922,930 Amortization for the year 73,996 605,078 - 1,922,130 51,275 2,652,479 Effect of movements in exchange rates 5,002 (10,451) - 87,960 (1,511) 81,000
Balance at December 31,2020 410,625 649,587 301,059 3,245,374 49,764 4,656,409
Carrying amount At December 31,2019 115,965 3,563,538 - 1,810,991 198,585 5,689,079
At December 31,2020 804,996 9,217,112 4,181,311 -	800,496 15,003,915

The Company’s research development concentrates on the development of a gasses generator to improve and develop designs and processes for hydrogen solutions. The time required for a developed process and/or design to be completed and available for its intended use ranges between 24-36 months. The amount of borrowing costs capitalized as at December 31, 2020 was $490,947.

Amortization of $2,652,479 (2019 – $1,265,173) is included in the consolidated statement of income (loss) for the year ended December 31, 2020: $1,088,099 (2019 – $1,175,562) in cost of goods sold; and $729,799 (2019 – $89,611) in selling and administrative expenses and $834,581 in R&D expenses (NIL in 2019).

(28)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

10) Goodwill

The movements in the net carrying amount of goodwill are as follows:

Carrying amount – Beginning of year Acquired through business combinations Goodwill impairment Net exchange difference Carrying amount – End of the year	2020 $ 3,504,279 159,570,633 - (272,749) 162,802,163	2019 $ - 3,586,071 - (81,792)
		3,504,279

During the fourth quarter of 2020, the Company performed a test of impairment of its goodwill. For the purpose of annual impairment testing, goodwill is allocated to the following subsidiaries:

CAI CDA ACS Air Flow Titus HyGear As at December 31,	2020 $ 820,641 2,659,525 2,384,673 1,524,276 3,654,095 151,758,953 162,802,163	2019 $ 820,641 2,683,638 - - - -
		3,504,279

The recoverable amount, which is the greater of its fair value less costs to sell (“FVLCTS”) or value in use (“VIU”), was compared to the carrying amount of the CGU to determine whether or not an impairment loss should be recorded against the goodwill.

FVLCTS was determined using the prior transaction method (market approach). VIU was determined using the discounted future cash flow method (income approach), covering a detailed five-year forecast, using a discount rate from 15.7% to 24% and a growth rate of 3%. The growth rate reflects the minimum long-term growth rate for the acquisitions. The discount rate reflects appropriate adjustments relating to market risk and specific risk factors of the subsidiaries. Management’s key assumptions include stable gross profit margins of the forecast based on past experience.

The recoverable amounts were estimated to be higher than the carrying amounts and no impairment was required.

(29)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

11) Finance lease receivables

The Company has entered into a finance lease on a Gas-as-a-service (GaaS) contract through its subsidiary Green Vision B.V. consisting of gas generating systems. The lease term is 15 years, which represents substantially all of the economic life of the system.

Future minimum rentals receivable under this non-cancellable finance lease, including the undiscounted lease payments to be received, are as follows:

	2020	2019
	$	$
Less than one year	271,092		-
Between 1-2 years	271,092		-
Between 2-3 years	271,092		-
Between 3-4 years	271,092		-
Between 4-5 years	271,092		-
More than five years	2,402,778		-
	3,758,238		-
Unguaranteed residual value (discounted)	730,454		-
Unearned finance income	(1,302,710)		-
Allowance for expected credit losses of finance lease receivables	(41,224)		-
Total finance lease receivables	3,144,758		-
Current portion of finance lease receivables	129,005		-
Non-current portion of finance lease receivables	3,015,753		-

12) Trade, other payables and accrued liabilities

Trade payables Accrued liabilities Taxes payable Payables to related parties Other payables Other payables and accrued liabilities	2020 $ 2019 $
	20,059,461 9,254,404 7,034,425 3,060,902 196,896 156,061 3,436 2,731 276,690 58,862
	27,570,908 12,532,960

(30)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

13) Contract balances

Contract assets :

Cost incurred and recorded margins Addition through business acquisition Less: advances and progress billing	2020 $ 2019 $
	32,575,749 28,167,087 2,238,463 - (27,047,449) (21,378,365)
	7,766,763 6,788,722

Contract assets are included in trade and other receivables in the consolidated statements of financial position (Note 6).

Contract liabilities :

Advances and progress billings Addition through business acquisition Less: cost incurred and recorded margin	2020 $ 2019 $
	14,144,122 5,684,496 2,940,586 - (9,577,373) (3,301,235)
	7,507,335 2,383,261

Commercial and R&D contracts include government grants of $1,915,406.

14) Credit facility

The Company has access to credit facilities in the amount of $2,500,000 with National Bank of Canada which are guaranteed by Export Development Canada at 75%, and bear interest at the Canadian Prime Rate plus 2.75% per annum and are limited by certain margin requirements concerning trade and other receivables and inventories. The Company also has access to credit facilities through Compressed Air International with Toronto Dominion Bank (TD) in the amount of $150,000 and bear interest at the TD prime rate plus 3.50% per annum. The Company has access to a working capital loan of 5 million RMB with Bank of Shanghai through Xebec Shanghai, bearing an interest rate of 3.65%. The working capital loan is 85% guaranteed by Shanghai Policy-based Financing Guarantee Fund Management Center for small, medium and micro-enterprises.

The bank loan used as at December 31, 2020 amounted to $974,500 (2019 – $ NIL).

The credit facilities are secured by a first ranking hypothec of $3,000,000 on all movable property of the Company.

As of December 31, 2020, the company has a guarantee facility of $12,000,000 with National Bank of Canada sponsored at 100% by Export Development Canada. Standby fees at an annual

(31)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

rate of 0.75% are calculated on the unused portion of this operating credit. As at December 31, 2020, seven guarantee facilities were used for a total of $3,952,860 ($6,647,417 at December 31, 2019).

The Company also has access to a $5 million foreign exchange credit line with National Bank of Canada 100% guaranteed by GIC.

As at December 31, 2020 all ratios and conditions were respected by the Company.

(32)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

15) Long-term debt and government royalty program obligation

a) Long-term debt

i. NPEX Bonds ii. Subordinated loans iii. Obligation under a working capital line1 iv. Obligation under an unsecured loan facility2 v. Lease liabilities vi. Innovation loan HYREC vii. Bank loans viii. Contingent consideration (Note 5) ix. Business price acquisition balance payable (Note 5) x. Government assistance (Covid-19 government measures) xi. Other loans Long-term debt Current portion	2020 $ 2019 $ 18,889,352 - 9,171,321 - - 1,934,440 3,588,790 - 7,789,747 2,395,336 3,004,885 - 998,420 - 2,333,482 1,467,774 9,172,696 324,700 1,001,216 - 728,186 -
	56,678,095 6,122,250 (14,052,453) (962,560)
	42,625,642 5,159,690

i.NPEX Bonds

1) NPEX Bonds 2017-2023

On March 1, 2017, HyGear Technology & Services BV concluded a nominal 2,499,000 € public bond placement via NPEX. The bonds, having a nominal value of 1.00 € each, carry a 7.0% annualised interest rate and a six-year duration. Interest is payable monthly and the bonds are redeemable on February 28, 2023. Early redemption is possible after three years.

2) NPEX Bonds 2018-2024

On July 1, 2018 HyGear Technology & Services BV concluded a nominal 4,999,000 € public bond placement via NPEX. The bonds, having a nominal value of 1.00 € each, carry a 7.5%

1 The Obligation under a working capital line, has been recorded at its fair value less transactions costs directly attributable to its acquisition. Transaction costs are being amortized over the duration of the obligation with a face value of $2,000,000 at maturity.

2 The Obligation under a financing facility loan has been recorded at its fair value less transaction costs directly attributable to its acquisition. Transaction costs are being amortized over the duration of the obligation with a face value of $5,000,000 at maturity. The interest rate is adjusted yearly depending on the debt/EBITDA ratio.

(33)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

annualised interest rate and a six-year duration. Interest is payable monthly and the bonds are redeemable on June 16, 2024. Early redemption is possible after three years.

3) NPEX Bonds warrants 2019-2025

On June 24, 2019 HyGear Technology & Services BV concluded a nominal 4,999,000 € public bond placement via NPEX. The bonds, having a nominal value of 1.00 € each, carry an 8% annualised interest rate and a six-year duration. Interest is payable monthly and the bonds are redeemable on June 24, 2025. Early redemption is possible after three years.

The bonds are subordinated to the loans from the Cooperative Rabobank U.A., a loan from the Ministry of Economic Affairs, a loan from De Lage Landen Financial Services B.V., a loan from CBS bank and future loans.

The bonds are included at amortised cost, being the amount received taking account of any premium or discount, less transactions costs. Any difference between the proceeds (net of transactions costs) and the redemption value is recognised as interest in the income statement over the period of the bonds using the effective interest method.

All Green Vision Holding B.V. group companies are jointly and severally liable for interest payments and redemptions.

ii.Subordinated loans

On May 19, 2017, subordinated bridge loans were issued by DRL Resource Management B.V. and Oost NL (East Netherlands Development Agency) for an amount of 285,765 € and 250,000 €. These loans bear 7% interest on an annual basis. Interest is payable quarterly and the loans are repayable per June 2023. The loans are subordinated to the NPEX bonds 20192023.

On June 19, 2017, subordinated dividend loans were issued by DRL Resource Management B.V. and Oost NL for an amount of 159,940 € and 182,837 €. These loans bear 7.0% interest on an annual basis. Interest is payable quarterly and the loans are repayable six months after redemption of the 2017-2023 NPEX Bonds. The loan is subordinated to the NPEX bonds 2017-2023.

On July 1, 2018, subordinated dividend loans were issued by DRL Resource Management B.V. and Oost NL for an amount of 214,340 € and 187,332 €. The DRL loan bear 7.5% interest on an annual basis and the Oost NL loans bears 7.8% interest on an annual basis. Interest is payable quarterly and the loans are repayable in July 2024. The loan is subordinated on the NPEX 2018-2024.

(34)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Loan FHBG HPP

On August 2, 2018, a subordinated loan was issued by Fonds Herstructerering Bedrijventerreinen Gelderland (FHBG), part of Oost NL, for a total of 800,000 €. This loan is specifically provided to HyGear Hydrogen Plant B.V. The loan was issued in three tranches. The first tranche, amounting to 300,000 € was received in 2018. The second and third tranches, totaling 500,000 €, were received in 2019. This loan bears 6.32% interest on an annual basis, fixed for a period of five years. Interest is paid quarterly. The loan is repayable in 32 quarterly instalments, with the first instalment due in December 2019 and the last instalment due in September 2027.

Subordinated loan Oost NL

On October 5, 2019, a subordinated loan was issued by Oost NL for a maximum amount of 5,000,000 €. A first instalment of 2,000,000 € was received on the issue date. The loan bears 8.0% interest on an annual basis and interest is payable quarterly. A 2.0% fee is payable over the non-utilised loan amount. Early redemption is possible after three years. The loan is repayable in October 2025.

iii.Obligation under a working capital line

The Company had a $2 million, three-year term, working capital line bearing interest at the rate of 11.0% per annum, payable monthly. The aggregate amount of the principal loan was fully reimbursed in December 2020.

iv.Obligation under an unsecured loan facility

On May 5, 2020, the Company entered into a loan agreement with the Fonds de solidarité FTQ (Fonds) for an unsecured loan facility of $10 million. The loan facility has a term of five years and will be used for working capital, investments, acquisitions and general corporate purposes. It will allow the Company to continue its rapidly scale-up through organic and inorganic growth and allow investments in renewable gas infrastructure projects.

The loan is disbursable in tranches of a minimum amount of $2 million upon request of the Company and all tranches must be drawn no later than May 2022. A first tranche of $5 million was disbursed on May 5, 2020 on the closing date of the agreement. Each tranche of loan bears an interest rate of 9.0% per annum payable on a quarterly basis. The interest rate is adjusted yearly depending on the debt / EBITDA ratio. The aggregate amount of the principal loan shall be repaid in full in a single payment on the fifth anniversary of the closing date. As part of the agreement, the Fonds de solidarité FTQ has been granted 3,000,000 warrants exercisable for a period of two years from the date of closing. Each warrant will allow the Fonds to purchase one common share at an exercise price of $4.58. The fair value of the warrants was $2,953,520, which was estimated using the Black Scholes Option Pricing Model with the following assumptions:

(35)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Risk-free interest rate	1.11%
Annualized volatility	70.33%
Share price	$3.35
Expected life of warrants	2years

The expected volatility used was based on the historic volatility of the Company’s share price.

As the Company estimates that it is improbable that the second tranche of $5 million will be drawn before May 2022, 50% of the value attributable to the warrants was accounted for as deferred financing costs that will be amortized over 24 months using the straight-line method. The effective interest method is used to measure the loan after the initial recognition.

v.Lease liabilities

The Company leases office space, office equipment and vehicles (Note 8). The Company measures the lease liabilities at the present value of the lease payments. The present value is increased to reflect the interest on the lease liabilities and reduced to reflect the lease payments made.

Balance – Beginning of year Present value at first application Additions Additions through business acquisitions Accretion interest Lease payments Effect of exchange rate change on obligation Balance – End of year Current Portion	2020 $ 2019 $
	2,395,336 - - 2,278,065 833,127 113,384 5,258,790 370,436 308,036 225,060 (953,969) (563,864) (51,573) (27,745)
	7,789,747 2,395,336 (1,591,417) (459,410)
	6,198,330 1,935,926

(36)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Following is a summary of the Company’s obligations regarding lease payments:

As at December 31, 2020 Lease payments	Payment Due by Period
	1year 2 -5 years Beyond 5 years Total
	$ $ $ $ 1,968,439 5,077,438 1,256,347 8,302,223

Some leases require repayment of a portion of the lessor’s payments for property taxes, these amounts vary based on the use and wear and tear of the office space. Variable payments for property taxes for 2020 were $153,258 ($190,693 in 2019).

vi.Innovation loan HYREC

This loan was issued by RVO (Netherlands Enterprise Agency) on December 16, 2016 for a maximum of amount of 1,777,410 €. The funds can be used for the development of HY.REC (tailored systems for the recycling of industrial gases) and bears 7.0% interest rate on an annual basis. The repayment is due in the period 2020-2023. RVO issued the loan against security of all assets produced under this development project.

vii.Bank loans

The bank loan includes three loans:

Loan 1 was issued by the Rabobank (Netherland) on November 16, 2017 for an amount of 238,096 €. The loan carries a fixed 4.5% interest rate and is redeemable via monthly instalments of 4,579 €, starting in May 2018 and ending in February 2023. Early redemption is possible.

Loan 2 was issued by the Rabobank on November 16, 2017 for an amount of 666,666 €. The loan carries a fixed 2.4% interest rate and is redeemable via monthly instalments of 9,259 €, starting on May 2018 and ending in November 2024. Early redemption is possible.

Loan 3 was issued by the Rabobank on November 16, 2017 for an amount of 95,238 €. The loan carries a fixed 4.65% interest rate and is redeemable via 100% instalment of 95,238 €, in November 2024. Early redemption is possible.

Theses loans are secured by the HyGear group by as per general terms and conditions of the Rabobank Netherlands.

(37)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

viii.Contingent consideration

The following table summarizes the activity related to the contingent consideration:

Balance – Beginning of the year Accretion finance expenses Additions through business combination Repayment Net exchange difference Balance – End of the year Current portion	December 31, 2020 $ December 31, 2019 $ 1,467,774 - 38,121 59,128 1,138,000 1,408,646 (220,000) - (90,413) - 2,333,482 1,467,774 (200,642) (178,449) 2,132,840 1,289,325

ix.Balance of business acquisition payable

The following table summarizes the activity related to the balance of business acquisition payable:

Balance – Beginning the year Additions through business combination Repayment Working capital adjustment Accretion Net exchange difference Balance – End of the year Current portion	December 31, 2020 $ December 31, 2019 $
	324,700 - 9,235,106 330,975 (101,644) - (220,971) - 21,825 - (86,320) (6,275)
	9,172,696 324,700 (8,089,517) (324,700)
	1,083,179 -

x.Government assistance

a) On May 3, 2020, CDA received an amount of $479,443 (347,750 USD) for the Paycheck Protection Program (SBA loan) through Wells Fargo Paycheck protection loan, a Covid-19 related measure to help businesses keep their workforce employed during the Coronavirus crisis. The principal bears an interest rate of 1.0% per annum and monthly repayments of

(38)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

$14,641 USD shall be payable commencing on November 1, 2020. The loan is measured at the present value of future principal payments discounted at a rate of 11%, representing a carrying amount of $421,528 as at December 31, 2020. The Company believes that loan forgiveness will be applicable as it can provide sufficient documentation to demonstrate that all of the loan proceeds were used to support payroll costs and rent payments. As at December 31, 2020, CDA did not pay any capital reimbursements as the Company met all the criteria for loan forgiveness.

b) An account receivable of $579,688 (455,300 USD) is payable to Xebec Holding USA by the Sellers of Air Flow upon loan forgiveness for the Paycheck Protection Program as agreed by both parties. As at December 31, 2020, the loan forgiveness application was sent to the government authorities and Air Flow was still waiting for its approval.

xi.Other loans

As at December 31, 2020, other loans balance amounted to $728,186 and includes various loans for vehicle acquisitions.

• 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. In February 2017, new amendment to this agreement was reached extending the payment terms to January 1, 2023.

(39)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

The following table summarizes the activity related to the government royalty program obligation during the period ended:

Balance – Beginning of year Accretion finance expenses Repayment Balance – End of year Current portion	2020 $ 2019 $
	466,071 536,773 20,227 24,298 (118,000) (95,000)
	368,298 466,071 (185,341) (124,880)
	182,957 341,191

The carrying amount of the government royalty program obligation has been calculated by discounting the future cash flows at a 5% interest rate.

16) Provisions

a) Warranty provisions

rovisions
Balance – Beginning of year Provision for the year Balance – End of year, Current portion of provision Non-current provision	2020 $ 2019 $
	174,187 55,599 419,177 118,588
	593,364 174,187 (244,382) (46,207)
	348,982 127,980

The Company offers warranties for 18 months after shipping or 12 months after start-up to the purchasers of its gas purification and natural gas dryers.

• b) As at December 31, 2020, the provisions include an amount of $1,296,802 for anticipated losses on long-term production type contracts.

(40)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

17) 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).

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.

On July 24, 2018, the Minority Shareholders of Xebec Adsorption (Shanghai) Co. Ltd. and Xebec Adsorption Inc. agreed that Xebec Adsorption Inc. will pay the Minority Shareholders $186,500 (RMB 1 million) per year including 2018 until the EDC loan expiry or latest up to December 31, 2020 (whichever is earlier). The annual fees will be considered a deduction to the repurchase price at the time of repurchase. As the negotiations are still ongoing with the Minority Shareholders, the Company did not fulfill its repurchase obligation according to the original agreement by paying the full repurchase price in one lump sum.

In 2019 and 2020 no payments of the annual fee were processed. A conditional amount of $1,731,367 was paid in December 2020 based of the achievement of some performance targets as agreed by both parties.

On July 25, 2018, the Minority Shareholders of Xebec Adsorption (Shanghai) Co. Ltd, agreed that, for a period beginning on the date hereof up to the date that Export Development Canada has been repaid in full (including capital, interests and fees) under the EDC Financing Arrangement, it shall not exercise any of its divestment, refund, compensation and other equity repurchase rights.

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”.

(41)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Balance – Beginning of year Accretion interest Effect of exchange rate change on obligation Conditional reimbursement Balance – End of year Current Portion	2020 $ 2019 $
	4,180,476 4,169,353 306,187 267,639 216,648 (256,516) (1,731,367) -
	2,971,944 4,180,476 (2,971,944) (373,000)
	- 3,807,476

(42)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

18) Reconciliation of liabilities arising from financing activities

	Long-term	Government royalty	Obligation arising	Leases	Total
	debt	obligation program	from non-controlling	liabilities
			interest participation
			in a subsidiary
Balance as at December 31, 2019	3,726,914	466,071	4,180,476	2,395,336	10,768,797
Cash flows:
Financing fees	(19,776)	-	-	-	(19,776)
Balance of acquisition paid	(101,644)	-	-	-	(101,644)
Payments	(6,603,750)	(118,000)	(1,731,367)	(953,969)	(9,407,086)
Proceeds	10,061,433	-	-	-	10,061,433
Non-cash:
Accretion	262,102	20,227	306,187	308,037	896,553
Sale price adjustment	(220,971)	-	-	-	(220,971)
Equity component	(2,953,520)	-	-	627,509	(2,326,011)
Additions through business combination	43,748,378	-	-	5,464,409	49,212,787
Deferred financing fees	1,476,760	-	-	-	1,476,760
Net exchange variation	(487,579)	-	216,648	(51,574)	(322,505)
Balance as at December 31, 2020	48,888,347	368,298	2,971,944	7,789,748	60,018,337

	Long-term	Government royalty	Obligation arising	Leases	Total
	debt	obligation program	from non-controlling	liabilities
			interest participation
			in a subsidiary
Balance as at December 31, 2018	3,680,562	536,773	4,169,353	-	8,386,688
Cash flows:
Payments	-	(95,000)	-	(563,864)	(658,864)
Proceeds	-	-	-	-	-
Non-cash:
First application of IFRS 16	-	-	-	2,761,885	2,761,885
Accretion	248,197	24,298	267,639	225,060	765,194
Additions through business combination	1,733,347	-	-	-	1,733,347
Conversion of convertible debentures	(1,928,284)				(1,928,284)
Reclassification	(6,908)	-	-	-	(6,908)
Net exchange variation	-	-	(256,516)	(27,745)	(284,261)
Balance as at December 31, 2019	3,726,914	466,071	4,180,476	2,395,336	10,768,797

(43)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

19) 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) On July 4, 2019, Xebec Adsorption Inc. closed a bought deal public offering of units and listing warrants conducted by a syndicate of underwriters led by Desjardins Capital Markets and including Beacon Securities Ltd., Paradigm Capital Inc., Canaccord Genuity Corp. and M Partners Inc. In connection with the closing of the Offering, the Company issued a total of 8,280,000 Units, at a price of $1.40 per Unit, for aggregate gross proceeds of $11,592,000. Each Unit is comprised of one common share of the Company and one common share purchase warrant (a "Warrant"). Each Warrant entitles the holder thereof to acquire one additional Common Share for a period of 12 months from the closing date of the offering at an exercise price of $1.85.

In connection with the Offering, the Company paid the underwriters a cash commission equal to 6% of the gross proceeds of the Offering and Compensation Options equal to 6% of the units issued pursuant to the offering. Each Compensation Option entitles the underwriters to purchase a unit at a price of $1.40 for a period of 12 months from the closing date of the offering. For each Compensation Option exercised the underwrites are entitled to one warrant, with each warrant is exercisable to acquire one additional Common Share for a period of 12 months from the closing date of the offering at an exercise price of $1.85.

The Company intends to use the net proceeds of the Offering to develop and invest in new Renewable Natural Gas projects, to expand the Company’s monitoring and service capabilities through selective acquisitions and for general corporate purposes.

A total of 8,280,000 units were issued under the offering at a price of $1.40 per unit for aggregate gross proceeds of $11,592,000 for a total of 8,280,000 shares, 496,800 compensation options and 8,280,000 warrants. The issuance costs, excluding the nontransferable options to the agents were $1,091,105. No value was attributed to the warrants because the share price was higher than $1.40. The fair value of the 496,800 Compensation Options was $225,418 which was estimated using the Black-Scholes Option Pricing Model with the following assumptions:

(44)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Risk-free interest rate	1.57%
Annualized volatility3	60.35%
Share price	$1.40
Expected life of compensation options	1year

The fair value of the compensation warrants was $143,422 which was estimated using the Black Scholes Option Pricing Model with the following assumptions:

Risk-free interest rate	1.57%
Annualized volatility3	60.35%
Share price	$1.85
Expected life of compensation warrants	1year

• c) On December 27, 2019, Xebec Adsorption Inc. closed a bought deal public offering. A total of 10,952,600 common shares of Xebec were sold at a price of $2.10 per Common Share for aggregate gross proceeds of $23,000,460 for a total of 10,952,600 shares and 657,156 compensation options. The issuance costs, excluding the non-transferable options to the agents were $1,482,506. The fair value of the 657,156 Compensation Options was $345,957 which was estimated using the Black Scholes Option Pricing Model with the following assumptions:

Risk-free interest rate	1.62%
Annualized volatility3	57,44%
Share price	$2.10
Expected life of compensation options	1year

In connection with the Offering, the Corporation paid the Underwriters a cash commission equal to 6% of the gross proceeds of the Offering, and compensation options equal to 6% of the Common Shares issued pursuant to the Offering. Each Compensation Option will entitle the Underwriters to purchase a Common Share at an exercise price of $2.10 for a period of 12 months from the closing date of the Offering.

The net proceeds of the Offering will be used to, among other things and as more fully described in the short form prospectus relating to the Offering, develop and invest in new renewable gas projects, to pursue strategic growth initiatives and for general corporate purposes.

3 The expected volatility used was based on the historic volatility of the Company share price.

(45)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

• d) On June 26, 2020, Xebec Adsorption Inc. closed a bought deal public offering from which a total of 7,986,750 common shares of Xebec were sold at a price of $3.60 per common share for aggregate gross proceeds of $28,752,300 for a total of 7,986,750 common shares and 479,205 compensation options (more fully described below). The issuance costs, excluding the non-transferable options to the agents, were $2,315,304. The fair value of the 479,205 compensation options was $630,997, which was estimated using the Black Scholes Option Pricing Model with the following assumptions:

Risk-free interest rate	0.28%
Annualized volatility3	74.88%
Share price	$3.60
Expected life of compensation options	1year

In connection with the Offering, the Corporation paid the Underwriters a cash commission equal to 6% of the gross proceeds of the Offering, and compensation options equal to 6% of the common shares issued pursuant to the Offering. Each compensation option entitles the Underwriters to purchase a common share at an exercise price of $3.60 for a period of 12 months from the closing date of the Offering.

The net proceeds of the Offering will be used to, among other things and as more fully described in the short form prospectus relating to the Offering, develop and invest in new renewable gas projects, to pursue strategic growth initiatives and for general corporate purposes.

• e) On December 30, 2020, Xebec Adsorption Inc. closed an upsized bought deal public offering of subscription receipts for gross proceeds of $143,751,840, which includes the full exercise of the over-allotment option by the Underwriters. The Public Offering was completed through a syndicate of underwriters, which purchased, on a bought deal basis, an aggregate of 24,784,800 Subscription Receipts at a price of $5.80 per Subscription Receipt.

Each Subscription Receipt entitled the holder thereof to receive, upon closing of HyGear acquisition, without payment of additional consideration or further action, and subject to the terms and conditions of the Subscription Receipt Agreement, (i) one common share of Xebec and (ii) without duplication, an amount, if any, equal to the amount per Common Share of any dividends for which record dates have occurred during the period from the date of the Offering Closing up to, but not including the Acquisition Closing Date, less any applicable withholding taxes.

The Company also closed an upsized concurrent private placement of subscription receipts with Caisse de dépôt et placement du Québec (“CDPQ”) during which, 10,905,174 subscription receipts were issued for gross proceeds of $63,250,009 which includes the full exercise of the private placement option by CDPQ.

(46)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

The total issuance costs amounted to $12,194,069.

Following the December 30, 2020 public offering and private placement of subscription receipts, 35, 689,974 common shares of the Company’s were to be issued as at December 31, upon the closing of HyGear acquisition. The shares were issued on January 4, 2021.

• f) On December 31, 2020 the Company has acquired 100% of Green Vision Holding B.V., the parent company of HyGear Technology and Services B.V. for aggregate consideration of $156,520,186 consisting of a cash payment of $66,390,912 and 10,014,364 shares issued at a fair value of $9.00 per share, the closing price of Xebec’s shares on December 31, 2020.

(47)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

As at December 31, 2020, compensation options, compensation warrants and warrants are as follows:

Description	Expiry date	Exercise Price	Beginning balance	Issued	Cancelled	Exercised	Balance end of
							year
Warrants	May-20	$1.05	2,543,931	-	-	(2,543,931)	-
Compensation Options	May-20	$0.75	4,800	-	-	(4,800)	-
Warrants	Jul-20	$1.85	8,272,857	-	(14,356)	(8,258,501)	-
Compensation Options	Jul-20	$1.40	347,760	-	-	(347,760)	-
Compensation warrants	Jul-20	$1.85	149,040	347,760	-	(496,800)	-
Compensation Options	Dec-20	$2.10	657,156	-	-	(657,156)	-
Compensation Options	June-21	$3.60	-	479,207	-	(60,940)	418,267
Warrants	May-22	$4.58	-	3,000,000	-	-	3,000,000
		$4.46	11,975,544	3,826,965	(14,356)	(12,369,888)	3,418,267

As at December 31, 2019, compensation options, compensation warrants and warrants are as follows:

Description	Expiry date	Exercise Price	Beginning balance	Issued	Exercised	Balance end of year
Warrants	May-20	$1.05	4,719,983	-	(2,176,052)	2,543,931
Compensation Options	May-20	$0.75	566,398	-	(561,598)	4,800
Warrants	Jul-20	$1.85	-	8,280,000	(7,143)	8,272,857
Compensation Options	Jul-20	$1.40	-	496,800	(149,040)	347,760
Compensation warrants	Jul-20	$1.85	-	149,040	-	149,040
Compensation Options	Dec-20	$2.10	-	657,156	-	657,156
		$1.68	5,286,381	9,582,996	(2,893,833)	11,975,544

(48)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

g) 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 2020 and 2019.

Net income (loss) attributable to shareholders of the Company Weighted average number of shares used in basic income per share Basic income (loss) per share ii) Diluted Net income (loss) attributable to shareholders of the Company Increase (decrease) of net income attributable to shareholders of the Company assuming dilution Net income (loss) attributable to shareholder of the Company after diluted effect Weighted average number of shares used in basic income per share Increase of number weighted average number of shares assuming dilution Weighted average number of shares after diluted effect Diluted income (loss) per share	2020 $ 2019 $ (31,957,849) 2,020,063 96,492,983 64,319,442 (0.33) 0.03 2020 $ 2019 $ (31,957,849) 2,020,063 - -
	(31,957,849) 2,020,063 96,492,983 64,319,442 - 4,280,929
	96,492,983 68,600,371 (0.33) 0.03

For the year ended December 31, 2020, warrants, compensation options, compensation warrants, outstanding stock options and outstanding DSUs and RSUs would have been antidilutive.

(49)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

For the year ended December 31, 2019, convertible debentures and warrants with an exercise price over the average market price would have been anti-dilutive.

20) Long term incentive plan

On June 25, 2020, the Shareholders of Xebec approved the adoption by the Company of the long-term incentive plan (LTIP) replacing the prior Stock Option Plan. The LTIP permits the granting of options (“LTIP Options”), Restricted Stock Units (“RSUs”) and Deferred Share Units (“DSUs”), (collectively the “Awards”) to eligible participants of the Company and is administered with the oversight of the Compensation Committee.

The total number of common shares reserved and available for grant and issuance pursuant to Awards (including the common shares issuable upon exercise of the outstanding options previously granted under the prior Stock Option Plan) shall not exceed a number of common shares equal to 17,791,757.

No awards shall be granted under the Prior Stock Plan and all existing options granted under the Stock Option Plan will remain outstanding and subject to the terms of the prior Stock Plan.

The LTIP provides that the aggregate number of common shares issued to insiders and associates of such insiders under the LTIP or any other proposed or established share compensation arrangement within any one-year period, and issuable to insiders and associates of such insider at any time under the LTIP or any other proposed or established share compensation arrangement, shall not in each case exceed 10% of the issued and outstanding common shares.

The aggregate number of common shares issuable to any one consultant, within any one-year period, under the LTIP, or when combined with all of the Corporation’s other security-based compensation arrangements, shall not exceed 2% of the Corporation’s total issued and outstanding securities, calculated on the date the Award is granted to the consultant.

The aggregate number of common shares issuable to all participants retained to provide investor relations activities, within any one-year period, under the LTIP, or when combined with all of the Corporation’s other security-based compensation arrangements, shall not exceed 2% of the Corporation’s total issued and outstanding securities, calculated on the date the Award is granted to the participant, and options granted to such participants retained to provide investor relations activities must vest in stages over a period of not less than one year with no more than ¼ of the options vesting in any three month period.

The exercise price under an option shall be determined by the Compensation Committee and shall not be less than 100% of the fair market value of a common share on the date of grant of such option; provided, however, that the Committee may designate a purchase price below fair market value on the date of grant if the option is granted in substitution for a stock option previously granted by an entity that is acquired by or merged with the Company or an affiliate.

(50)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

The term of each option shall be fixed by the Committee at the date of grant but shall not be longer than 10 years from the date of grant.

a) Stock option activity for the year ended December 31, 2020, is presented below:

2020	2020	2019
Number of options Weighted average exercise price $		Number of options Weighted average exercise price $
Outstanding – Beginning of year 4,081,860 0.35 Granted - - Exercised (1,903,332) 0.19 Cancelled - - Expired - -		6,301,758 0.27 - - (2,219,898) 0.14 - - - -
Outstanding– End ofyear 2,178,528	0.48	4,081,860 0.35
Exercisable – End ofyear 1,700,194	0.45	3,054,859 0.26

The average share price for the exercised options was $4.27 ($1.79 in 2019).

(51)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

As at December 31, 2020, options outstanding and exercisable are as follows:

Expirydate Weighted- Average Exercise Price Number of Options Outstanding	Weighted- Average Remaininglife Number of Options exercisable
December 19, 2022 $0.55 400,000 January 7, 2023 $0.05 200,000 March 5, 2024 $0.18 373,193 August 29, 2024 $0.49 350,000 December 19, 2024 $0.55 86,334 May 14, 2025 $0.60 34,001 November 19,2025 $0.70 735,000	1.97 400,000 2.02 200,000 3.18 373,193 3.66 150,000 3.96 86,334 4.37 667 4.88 490,000
$0.48 2,178,528	3.55 1,700,194

As at December 31, 2019 options outstanding and exercisable are as follows:

Expirydate Weighted- Average Exercise Price Number of Options Outstanding	Weighted- Average Remaininglife Number of Options exercisable
April 25, 2021 $0.15 100,000 May 29, 2021 $0.14 200,000 December 19, 2022 $0.55 400,000 January 7, 2023 $0.05 200,000 March 5, 2024 $0.18 1,873,193 August 29, 2024 $0.49 375,000 December 19, 2024 $0.55 98,667 May 14, 2025 $0.60 100,000 November 19,2025 $0.70 735,000	1.32 100,000 1.41 200,000 2.97 266,666 3.02 200,000 4.18 1,873,193 4.66 75,000 4.96 61,667 5.37 33,333 5.89 245,000
$0.35 4,081,860	4.20 3,054,859

During the year ended December 31, 2020, the Company expensed $180,320 (2019 - $407,846) which relates to stock options granted in 2014, 2017 and 2018.

(52)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

b) DSU activity for the period ended December 31, is presented below:

			2020	2019
			Number	Number
			of DSU	of DSU
Outstanding	–	Beginning of year	-		-
Granted			66,231		-
Exercised			-		-
Outstanding	–	End ofyear	66,231		-

As at December 31, 2020, 66,231 DSUs were granted under the Corporation’s Stock Incentive Compensation Plan to directors of the board and a consultant of the Company for a fair value of $260,952. The DSUs are payable in common shares of Xebec upon the holder ceasing to be a director or consultant of the Company, as the case may be. One quarter of the DSUs vested in September 2020, upon grant, one quarter vested on December 14, 2020 and the rest will vest in stages until June 2021.

During the year ended December 31, 2020, the Company expensed $202,963 (2019 - $NIL) for share-based compensation related to the DSUs.

c) RSU activity for the period ended December 31, is presented below:

	2020	2019
	Number	Number
	of RSU	of RSU
Outstanding – Beginning of year	-	-
Granted	265,300	-
Exercised	-	-
Outstanding– End ofyear	265,300	-

(53)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

As at December 31, 2020, 265,300 RSUs were granted under the Corporation’s Stock Incentive Compensation Plan to employees of the Company for a fair value of $2,103,449 of which 179,300 RSUs were granted under the Company’s achievement of specific targets determined by the Board of Directors. RSUs are payable in common shares of Xebec upon the holder ceasing to be an employee or a consultant of the Company or upon the third anniversary date after grant date, whichever is earlier. The RSUs will vest in stages until November 2023.

During the year ended December 31, 2020, the Company expensed $668,620 (2019 - $NIL) for share-based compensation related to the RSUs.

21) Segmented information

The Company operates three business segments and specializes in Systems (Cleantech), Support (Industrial Air and Gas Products, Parts, Service and Operational Support), and Infrastructure (Renewable Gas Generation).

For the year ended December 31, revenue summarized by country, as determined by location of the customers, is as follows:

Revenue United States Canada China Other Korea Italy France	2020 $ 26,646,629 14,571,918 13,510,291 2,279,221 912,849 599,999 (2,001,298) 56,519,609	2019 $ 8,367,207 12,864,288 9,517,759 5,757,643 923,103 7,512,614 4,375,266
		49,317,880

No single customer contributed more than 10% to the Company’s revenue in 2020 (one in 2019 for sales of $5,461,652).

(54)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Incomes (losses) summarized by business segments are as follows:

For the year ended December 31, 2020

	Systems	Support	**Infrastructure **	Corporate	**Total **
	$	$	$	$	$
Revenues	28,099,313	28,420,296	-	-	56,519,609
COGS	35,446,485	20,807,420	-	-	56,253,905
Grossmargin	(7,347,172)	7,612,876	-	-	265,704
Gross Margin %	(26%)	27%	-	-	0.5%
Research and
Development expenses	1,222,754	-	-	-	1,222,754
Selling and administrative
expenses	1,598,414	5,213,586	199,258	20,929,384	27,940,642
Foreign exchange loss	-	-	-	103,738	103,738
Gain on disposal of assets				(500)	(500)
Gain on conversion of
shares issued by a
subsidiary	-	-	-	216,648	216,648
Financial income	-	-	-	(342,903)	(342,903)
Financialexpense	-	-	-	3,092,179	3,092,179
Totalexpenses	2,821,168	5,213,586	199,258	23,998,546	32,232,558
Segment income (loss)	(10,168,340)	2,399,290	(199,258)	(23,998,546)	(31,966,854)

(55)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

For the year ended December 31, 2019

	Systems	Support	Infrastructure	Corporate	**Total **
	$	$	$	$	$
Revenues	37,813,902	11,503,978	-	-	49,317,880
COGS	25,790,549	8,039,345	-	-	33,829,894
Grossmargin	12,023,353	3,464,633	-	-	15,487,986
Gross Margin %	32%	30%	-	-	31%
Research and
Development expenses	71,503	-	-	-	71,503
Selling and administrative
expenses	1,546,827	2,207,099	-	7,543,506	11,297,432
Foreign exchange loss	-	-	-	383,693	383,693
Gain on conversion of
shares issued by a
subsidiary	-	-	-	(256,516)	(256,516)
Financial income	-	-	-	(32,246)	(32,246)
Financialexpense	-	-	-	1,647,141	1,647,141
Totalexpenses	1,618,330	2,207,099	-	9,285,578	13,111,007
Segment income (loss)	10,405,023	1,257,534	-	(9,285,578)	2,376,979

The location of the Company’s non-current assets by geographic region as of December 31[st] is as follows:

Non-current assets Canada Europe United States Asia	2020 $ 2019 $ 166,889,474 4,509,680 33,608,330 919,309 17,826,535 6,507,805 229,254 283,343
	218,553,593 12,220,137

(56)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

22) Expenses by nature

Materials Employee salaries and benefits Subcontract costs Merger and acquisition fees Professional fees Contingency provision Amortization and depreciation Office expense Rent and repairs and maintenance Warranty Stock-based compensation Travel expenses Bad Debt Advertising Other	2020 $ 36,937,498 19,035,947 6,450,299 6,159,419 3,771,184 1,143,749 2,950,515 1,397,078 1,301,802 1,083,796 1,051,903 930,581 861,216 621,816 497,744 84,194,547	2019 $ 18,839,298 10,656,733 7,818,321 369,084 1,582,368 - 1,837,396 709,951 747,777 280,299 407,846 1,227,923 185,664 223,755 240,912
		45,127,327

23) Research and development expenses

Amortization and depreciation Employee salaries and benefits Subcontract costs Professional fees Travel expenses Research and development tax credits	2020 $ 834,581 496,343 30,000 6,000 688 (144,858) 1,222,754	2019 $ - 34,408 30,000 6,000 1,095 -
		71,503

(57)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

24) Finance expenses

Accretion of the obligation arising from shares issued by a subsidiary (Note 17) Financing fees Interest on convertible debentures Interest and bank charges Guarantee letter fees Interest on long term debt Interest on short term debt Accretion and revaluation of government royalty program obligation (Note 15b)	2020 $ 306,186 492,253 - 460,303 242,890 1,267,590 302,729 20,228 3,092,179	2019 $ 267,639 - 261,252 185,627 351,667 538,722 17,936 24,298
		1,647,141

25) Supplemental Cash flow information

For the year ended December 31, net change in non-cash working capital balances related to operations consists of the following:

Decrease (increase) in assets: Trade and other receivables Inventories Other current assets Other non-current assets Income taxes recoverable Increase (decrease) in liabilities: Trade payables, other payables and accrued liabilities Contract liabilities Income tax payable Provisions		2020 $ 2019 $ 3,232,846 (14,233,331) (9,302,303) (2,036,914) (332,696) (274,579) (53,247) - - 334,960 4,368,605 8,229,371 252,203 (2,055,348) (500,099) - 1,715,981 118,587
		(618,710) (9,917,254)

(58)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

26) Compensation of key management

Salaries and short-term employee benefits Stock-based compensation	2020 $ 1,463,484 153,352	2019 $ 838,247 295,596
	1,616,836	1,133,843

Key management includes the Company’s senior management.

27) Income taxes

The income tax expense attributable to earnings differs from the amounts computed by applying the combined federal and provincial tax rate of 26.5% (26.6% on December 31, 2019) to earnings before income taxes as a result of the following:

Non-deductible acquisition costs

Income (loss) before income taxes Expected income tax (recovery) 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 Non-deductible acquisition costs Tax assets recognized True up and other Composition of current income taxes in the income statement Inception and reversal of temporary differences	2020 $ (31,966,854) (8,471,216) 6,962,044 184,299 278,754 0 0 985,504 - 51,609 (9,006) 2020 $ 421,418 421,418	2019 $ 2,376,979 631,877 (305,467) (49,259) 108,487 (88,126) (4,785) - (110,132) 174,321
		356,916
		2019 $ 371,433
		371,433

(59)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Composition of deferred income taxes in the Consolidated Statement of Income (Loss)

Inception and reversal of temporary differences Temporary difference not recorded Change in deferred tax rate	2020 $ (7,392,468) 6,962,044 - (430,424)	2019 $ 379,076 (305,467) (88,126)
		(14,517)

Movement of deferred income tax in 2020

Others Property, plant and equipment Intangible assets Debentures Government royalty program Non-capital losses	January 1, 2020 $ P&L $ Business acquisition $ Capital $ Equity Component $ December 31, 2020 $ (34,162) 223,256 (628,451) - 11,791 (427,566) - 51,858 (39,025) - (347) 12,595 (203,237) 164,242 (2,207,120) - 60,278 (2,185,836) - - - - - - (10,459) (8,783) - - - (19,242) 44,621 (149) - - - 44,472
	(203,237) 430,424 (2,874,596) - 71,722 (2,575,577)

Movement of deferred income tax in 2019

Contingency reserve Intangible assets Debentures Government royalty program Non-capital losses	January 1, 2019 $ P&L $ Business acquisition $ Capital $ Equity Component $ December 31, 2019 $ (81,989) (34,162) - 81,989 - (34,162) (50,483) 65,000 (217,754) - - (203,237) (22,478) 22,478 - - - - (16,898) 6,439 - - - (10,459) 89,859 (45,238) - - - 44,621
	(81,989) 14,517 (217,754) 81,989 - (203,237)

As at December 31, 2020, deductible timing differences for which the company has not recognized deferred tax assets are as follows:

(60)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Property and equipment Scientific research and development expenses Capital losses carried forward Operating losses carried forward Other	Federal $ Quebec $ China $ USA $ Italy $ Netherlands $ 1,452,886 1,440,326 - - - - 25,432,941 25,479,654 - - - - 219,247 219,247 - - - - 80,590,627 82,484,711 259,879 1,674,627 4,109,456 5,880,013 13,777,244 13,777,245 1,220,844 - - -
	121,472,945 123,401,183 1,480,723 1,674,627 4,109,456 5,880,013

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. Deferred tax assets not recognized equal an amount of $35,586,636 ($23,463,763 in 2019).

As at December 31, 2019, deductible timing differences for which the company has not recognized deferred tax asset are as follows:

Property and equipment Scientific research and development expenses Capital losses carried forward Operating losses carried forward Other	Federal $ Quebec $ China $ USA $ Italy $ 444,827 444,827 - - - 24,786,377 24,761,247 - - - 219,247 219,247 - - - 57,444,239 59,380,392 77,276 282,985 - 3,320,697 3,320,697 1,220,120 - -
	86,215,387 88,126,410 1,297,396 282,985 -

(61)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

As at December 31, 2020, the Company has non-capital tax losses, which are available to reduce income taxes in future years and expire as follows:

Indefinite 2040 2039 2038 2037 2036 2035 2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022	Federal $ Quebec $ Chine $ USA $ Italie $ Netherlands $
	4,109,456 23,934,836 23,921,357 1,548,963 129,009 67,920 96,351 1,047,960 1,127,553 1,486,941 1,480,325 29,313 1,328,532 1,328,532 2,635,090 326,251 326,251 546,237 494,621 443,287 433,086 12,361,610 12,361,610 7,283,831 7,295,856 10,824,277 10,824,277 6,794,635 6,794,635 490,165 7,229,354 7,229,354 4,135,453 6,853,867 6,164,244 252,873 1,001,522 259,879
	80,590,627 82,484,711 259,879 1,674,627 4,109,456 5,880,013

As at December 31, 2019, the Company has non-capital tax losses, which are available to reduce taxes in futures years and expire as follows:

(62)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

2039 2038 2037 2036 2035 2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023

Federal $ Quebec $ China $ USA $ Italy $ 1,041,367 1,008,868 253,083 1,047,960 1,127,553 - - - 1,486,941 1,480,325 - 29,902 - - - - - 1,328,532 1,328,532 - - - - 2,635,090 - - - 326,251 326,251 - - - 546,237 494,621 - - - 443,287 433,086 - - - 12,361,610 12,361,610 - - - 7,283,831 7,295,856 - - - 10,824,277 10,824,277 - - - 6,794,635 6,794,635 - - - 7,229,354 7,229,354 - - - 6,729,957 6,040,334 - - - - - - - - 77,276 -

57,444,239 59,380,392 77,276 282,985 -

The Company has scientific research and experimental development expenses of $25,432,941 ($24,786,377 in 2019) which are available to be carried forward indefinitely and deducted against future tax income otherwise calculated. The potential benefit has not been recorded in the accounts.

(63)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

28) Commitments

• Research Agreement with McGill University

In August 2018, Xebec Adsorption Inc. (“Xebec”), signed a Research Agreement to co-develop a prototype reactor to produce Renewable Natural Gas (RNG) using a Power-to-Gas (P2G) process with McGill University. This process combines electricity generated from renewable sources with carbon dioxide (CO2) generated from waste. The project is being funded by Xebec as the Industrial sponsor and by the Natural Sciences and Engineering Research Council of Canada (NSERC) through a Collaborative Research and Development grant of $360,000 over a period of three years.

In consideration of McGill carrying out the Project, Xebec is committed to fund the Project with $90,000 over the period of three years. The funds will be paid in accordance with the following schedule:

xii. $30,000 upon signing xiii. $30,000 upon the first anniversary of the Effective Date xiv. $30,000 upon receiving the final report.

• Leases

Following is a summary of Xebec’s contractual obligations and commitments regarding leases for which the underlying asset is of low value:

As at December 31, 2020	Payment Due by Period
	1year 2 -5 years Beyond 5 years Total
	$ $ $ $ 391,453 227,857 - 619,310

Leases include various equipment leases. The leases expenses for year ended December 31, 2020 amounted to $294,592 ($282,646 in 2019).

(64)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

29) 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 Rent paid to companies controlled by members of the immediate family of an officer Salaries and short-term benefits paid to members of immediate family of an officer Material purchased to companies controlled by members of the immediate family of an officer	2020 $ 79,735 24,000 164,975 33,823 302,533	2019 $ 118,769 - 140,570 43,042
		302,381

These transactions are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.

30) 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 management monitors the solvency ratios at the end of the year as the NPEX Bonds include a solvency ratio of at least 35%.

The Company’s capital structure is composed of the following:

Cash Restricted cash Long-term debt (Note 15a) Government royalty program obligation (Note 15b) Obligation arising from shares issued by a subsidiary (Note 17) Equity	2020 $ 2019 $ 160,937,938 22,358,457 7,641,960 324,700 56,678,095 6,122,250 368,298 466,071 2,971,944 4,180,476
	228,598,235 33,451,954
	344,032,801 38,957,366
	572,631,036 71,538,194

The Company is not subject to any capital requirements imposed by regulators.

(65)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

31) 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:

v

December 31, 2020 Cash Restricted cash Trade and other receivables Other current assets Finance lease receivables Bank loan Trade, other payables and accrued liabilities Long-term debt Government royalty program obligation Obligation arising from shares issued by a subsidiary	Amortized Cost Carrying amount $ Fair value $	Amortized Cost
		Carrying amount $ Fair value $
	160,937,938 160,937,938 7,641,960 7,641,960 17,917,859 17,917,859 16,250 16,250 3,144,758 3,144,758	974,500 974,500 24,575,998 24,575,998 48,888,347 48,329,093 368,298 368,298 2,971,944 2,971,944

(66)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

December 31, 2019 Cash Restricted cash Trade and other receivables Other current assets Trade, other payables and accrued liabilities Long-term debt Government royalty program obligation Obligation arising from shares issued by a subsidiary	Amortized Cost Carrying amount $ Fair value $	Amortized Cost
		Carrying amount $ Fair value $
	22,358,457 22,358,457 324,700 324,700 12,976,897 12,976,897 7,300 7,300	11,401,489 11,401,489 3,726,914 3,726,194 466,071 466,071 4,180,476 4,180,476

The carrying values of cash, restricted cash, trade and other receivables, trade and other payables, accrued liabilities and bank loan approximate their fair value due to their shortterm maturities. The methods and assumptions used in estimating the fair values of other financial assets and financial liabilities are as follows:

• Long-term debt (classified in level 2 of the fair value hierarchy): The Company’s longterm debt carry 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:

(67)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

Level 1 — Fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities.

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, restricted cash, finance lease receivables 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 determines whether the credit risk of a financial asset has increased significantly since initial recognition considering reasonable and supportable information that is relevant and available without undue cost or effort, this includes both quantitative and qualitative information and analysis, based on the Company’s historical experience and informed credit assessment and including forward-looking information.

In addition, the Company is exposed to credit risk in relation to finance lease receivables and applies the simplified approach in IFRS 9 to measure the loss allowance at lifetime expected credit losses.

The Company assumes that the credit risk on a financial asset has increased significantly if it is more than 30 days past due or 120 days past due for the Chinese subsidiary. Certain customers have specific agreements that go over 120 days.

The Company considers a financial asset to be in default when the customer is unlikely to pay its credit obligations to the Company in full, without recourse by the Company to actions such as realising security (if any is held) or the financial asset is more that 120 days past due.

For trade receivables, contract assets and finance lease receivables, Green Vision Holding B.V. applies the simplified approach in IFRS 9 to measure the loss allowance at lifetime expected credit losses. Green Vision Holding B.V. determines the expected credit losses on trade receivables and contract assets by using a provision matrix, estimated based on historical credit loss experience and the profile of payments within the trade receivables (based on invoice date), adjusted as appropriate to reflect current conditions and estimates of future economic conditions.

The Company regularly monitors its credit risk exposure and takes steps such as employing credit-approval procedures, establishing credit limits, using credit assessments and

(68)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

monitoring practices to mitigate the likelihood of these exposures from resulting in an actual loss.

Bad debt expense amounted to $861,216 in 2020 ($185,664 in 2019). As at December 31, 2020, the Company’s three largest trade debtors accounted for 32% (17%, 9% and 6%) of the total trade receivables balance (2019 – 32% (20%, 8% and 4%)).

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 days4 Total trade receivables Allowance for expected credit loss Other receivables Total trade and other receivables	2020 $ 2019 $ 5,702,383 5,724,899 2,932,374 1,181,293 3,241,505 1,124,112 2,674,810 933,623 4,003,958 4,310,209
	18,555,030 13,274,136 (1,410,930) (534,071) 773,759 236,832
	17,917,859 12,976,897

The following table summarizes the changes in the allowance for trade and other receivables:

Balance - Beginning of year Change in the allowance for expected credit loss Balance – end of year	2020 $ 2019 $ (534,071) (431,674) (876,859) (102,397)
	(1,410,930) (534,071)

Trade and other receivables are reviewed on a weekly basis. All potential risks are provisioned and the amount on the consolidated financial statements reflects the analysis.

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.

4 Most of the trade receivables over 90 days belong to the Chinese subsidiary, where it is part of the normal business process to have accounts over 90 days. Certain customers have specific agreements that go over 120 days.

(69)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

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 of all currencies indicated would be reasonably possible and that the impact on net income (loss) of such a change would be approximately $749,413 for 2020 (2019 – $371,970). As at December 31, 2020, 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		2020
	US dollar Euro 710,760 12,228 4,685,393 40,000 203,185 26,191	British Pound - - 1,104
	5,599,338 78,420	1,104
	7,129,077 122,398	1,918

Cash Trade and other receivables Trade and other payables Equivalent in Canadian dollars		2019
	US dollar Euro 537,212 65,588 1,716,275 185,852 177,611 55,625	British Pound - - 7,491
	2,431,098 307,065	7,491
	3,157,511 447,792	12,866

ii. Interest rate risk

Interest rate risk is the risk that the fair value of future cash flows from financial instruments will fluctuate as market interest rates change.

(70)

Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

The Company is exposed to interest rate risk on its credit facility, for which the interest rates charged fluctuate based on the bank’s prime rate. As at December 31, 2020, the Company’s credit facility amounted to NIL except for a bank loan of $974,500 bearing a fixed interest rate of 3.65% available through Xebec Shanghai (2019 – $NIL). If the interest rate on the credit facility had been 50 basis points higher (lower), related to the credit facility as at December 31, 2020, the impact on the net income would have been negligible.

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 and other liabilities as at December 31:

Financial liabilities Bank loan Trade and other payables and accrued liabilities Government royalty program obligation Loan Fonds solidarité FTQ Government assistance Contingent liability Other long-term debts Business price balance acquisition payable Obligation arising from shares issued by a subsidiary

2020 Carrying amount $ Contractual cash flow $ 0 to 12 months $ 13 to 24 months $ Thereafter $ 974,500 974,500 974,500 - 24,575,998 24,575,998 24,575,998 - - 368,299 387,540 175,000 190,000 22,540 3,588,790 6,987,500 450,000 450,000 6,087,500 1,001,216 1,001,216 1,001,216 - - 2,333,482 2,358,712 580,316 999,198 779,198 32,792,162 33,605,257 3,537,237 527,547 29,540,474 9,172,696 9,376,408 8,230,528 572,940 572,940 2,971,944 2,971,944 2,971,944 - - 77,779,087 77,239,075 42,496,739 2,739,685 37,002,652

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Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

2019

Financial liabilities Trade and other payables and accrued liabilities Government royalty program obligation Obligation under capital line Contingent liability Balance from business acquisition payable Obligation arising from shares issued by a subsidiary	Carrying amount $ Contractual cash flow $ 0 to 12 months $ 13 to 24 months $ Thereafter $ 11,401,489 11,401,489 11,401,489 - - 466,071 505,540 118,000 175,000 212,540 1,934,440 2,348,333 220,000 2,128,333 - 1,467,774 1,531,126 1,091,126 440,000 - 324,700 324,700 324,700 - - 4,180,476 4,180,476 373,000 3,807,476 - 18,903,824 19,420,539 12,657,189 6,550,809 212,540

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.

32) Subsequent events

i ) On February 22, 2021, Xebec Adsorption Inc. closed the previously announced acquisition of Inmatec Gase Technologie GmbH & Co. KG, Inmatec GmbH and Inmatec Gas Technology FZC RAK (collectively “Inmatec”) in the United Arab Emirates for 23 million Euros. The transaction was financed with the proceeds from the public offering that closed December 30, 2020 and the concurrent private placement with Caisse de dépôt et placement du Québec (“CDPQ”).

Founded in 1993, Inmatec is an international market leader in the production of nitrogen generators and oxygen generators. Designed, developed and produced in Germany, over 8,000 Inmatec systems have been deployed and sold around the world. Their German manufacturing and engineering capabilities have resulted in a reputation for high quality and extremely reliable products. Inmatec’s products and manufacturing are among the best-inclass and this acquisition will give Xebec an accelerated entry into offering these products in North America.

Inmatec positions Xebec to execute and accelerate its distributed renewable and low carbon gas strategy. The acquisition of new oxygen and nitrogen generation technologies, and the access to new markets and service capabilities, will enable Xebec to bring cost-effective gas supply to customers around the world.

The Company is currently evaluating the impacts on its consolidated financial statements.

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Xebec Adsorption Inc. Notes to Consolidated Financial Statements For the years ended December 31, 2020 and 2019

(expressed in Canadian dollars)

ii) On February 24, 2021, the Company announced that it has secured credit facilities with National Bank of Canada’s Technology and Innovation Banking Group for a total value of up to $59.25 million. The expanded facilities will provide Xebec with greater financial flexibility and cash management to pursue its growth trajectory and its acquisition strategy aimed at developing a North American and European Cleantech Service Network for its renewable natural gas and hydrogen installations. These credit facilities represent the broadest access to debt financing available to the company to date.

iii) On March 16, 2021, the Company became aware that a legal proceeding in the Québec Superior Court (Class Actions Division) in the District of Montréal has been issued initiating a proposed class action against the Corporation, certain of its current directors and officers, and the underwriters of Xebec’s December 2020 bought deal public offering of subscription receipts by way of a short form prospectus. The claim alleges that Xebec would have made misrepresentations in its disclosure documents for Q3 2020 as well as the Prospectus with respect to revenue accounting practices and Xebec’s internal controls over financial reporting in violation of, among other things, sections 218, 221 and 225.8 of the Quebec Securities Act. The Corporation believes it has conducted itself in accordance with all relevant securities laws and that the complaint against it is without merit.

iv) On March 19, 2021, a legal proceeding in the Ontario Superior Court of Justice was issued initiating a proposed class action against the Company, its current directors and certain of the Company’s current and former officers, its auditor and the underwriters of Xebec’s December 2020 bought deal public offering of subscription receipts as defendants. The claim alleges that Xebec would have made misrepresentations in certain disclosure documents that were revealed in a press release dated March 12, 2021 entitled “Xebec Provides Updated 2020 Guidance” where the Company provided a revision downwards of 2020 guidance, in violation of, among other things, parts XXIII and XXIII.1 and sections 130 and 138.3(6) of the Ontario Securities Act, the corresponding provisions of the other Securities Legislation, and the common law. The Company believes it has conducted itself in accordance with all relevant securities laws and that the complaint against it is without merit.

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