FormerXBC Inc. - Management Reports 2021

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Xebec Adsorption Inc. Management's Discussion and Analysis Fourth Quarter and Fiscal Year ended December 31, 2020

March 24, 2021

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Additional information relating to the Company can be found on SEDAR at www.sedar.com

Xebec Management’s Discussion and Analysis

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The following Management’s Discussion and Analysis (“MD&A”) provides a review of Xebec’s results of operations, financial condition and cash flows for the period ended December 31, 2020. This discussion should be read in conjunction with the information contained in the Company’s consolidated Financial Statements and related notes for the periods ended December 31, 2020 and December 31, 2019. Additional information can be found on SEDAR at www.sedar.com.

The financial information presented herein has been prepared based on International Financial Reporting Standards (IFRS) for financial statements and is expressed in Canadian dollars unless otherwise stated.

In this MD&A, unless otherwise indicated or required by the context, “Xebec”, “the Company”, “we”, “us”, “our”, “our Company”, “the Group” and “our Group” designate, as the case may be, Xebec Adsorption Inc. or Xebec Adsorption Inc. and its subsidiaries.

The Company’s other subsidiaries are designated as follows: “Xebec Holding USA” for Xebec Holding USA Inc.; “Xebec Shanghai” for Xebec Adsorption (Shanghai) Co. Ltd.; “Xebec Europe” for Xebec Adsorption Europe SRL; Xebec Europe B.V.; “CAI” for Compressed Air International Inc.; “ACS“ for Applied Compression Systems Inc.; “RNG Holding” for Xebec RNG Holding Inc.; “GNR Bromont” for GNR Bromont L.P.; and GNR Quebec Capital L.P.

Xebec Holding USA Inc. has four subsidiaries, “CDA” for CDA Systems LLC; “Xebec USA” for Xebec USA Inc; “Air Flow” for Enerphase Industrial Solutions Inc.; and “Titus” for The Titus Company.

Xebec RNG Holdings Inc. has two wholly owned subsidiaries, GNR Bromont Management Inc. and GNR Quebec Capital Management Inc., both of which are wholly owned. GNR Bromont Management Inc. owns the 1% remaining of GNR Bromont L.P. and GNR Quebec Capital Management Inc owns 0.001% of GNR Quebec Capital L.P. Also, the fiscal year ending December 31, 2020 and those ended in prior years are sometimes designated by the terms “Fiscal 2020” and so on.

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

The information contained in this MD&A and certain other sections of this report also includes some figures that are not performance measures consistent with IFRS, such as earnings (loss) before amortization, financial expenses, other items and income taxes ("EBITDA"), Adjusted EBITDA. The Company uses EBITDA and Adjusted EBITDA because this measure enables management to assess the Company’s operational performance. This measure is a widely accepted financial indicator of a company’s ability to repay and assume its debt. Investors should not regard it as an alternative to operating revenues or cash flows, or as a measure of liquidity. As this measure is not established in accordance with IFRS, it might not be comparable to those of other companies.

The information contained in this Management’s Report accounts for any major event occurring up to March 24, 2021, the date the Board of Directors approved the Consolidated Financial Statements and Management’s Report for the period ended December 31, 2020. It presents the Company’s status and business context as they were, to management’s best knowledge, at the time this report was written.

This document contains forward-looking statements, which are qualified by reference to, and should be read together with, the “Forward-looking Statements” cautionary notice on page 42 of this MD&A.

Xebec Management’s Discussion and Analysis

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1.	OUR BUSINESS ............................................................................................................................ 5
	ABOUTUS............................................................................................................................................ 5
	VISION. MISSION. PURPOSE. PEOPLE. ..................................................................................................... 5
	OURPRODUCTS.................................................................................................................................... 6
	OURCUSTOMERS ANDSUPPLIERS.......................................................................................................... 6
	INTERNATIONALFOOTPRINT ANDCERTIFICATIONS..................................................................................... 6
	TECHNOLOGY........................................................................................................................................ 7
	Adsorption ...................................................................................................................................... 7
	Pressure Swing Adsorption (PSA) .................................................................................................. 7
	Filtration ......................................................................................................................................... 8
	Steam Methane Reforming ............................................................................................................ 8
	Electrolyser ..................................................................................................................................... 8
	Oxygen and Nitrogen On-site Generation ...................................................................................... 8
2.	OUR BUSINESS SEGMENTS ....................................................................................................... 9
	CLEANTECH(SYSTEMS) .......................................................................................................................... 9
	Renewable Natural Gas (RNG) ....................................................................................................... 9
	Hydrogen, Renewable Hydrogen (RH2) and Industrial Hydrogen .................................................. 9
	Renewable Natural Gas (RNG), Renewable Hydrogen (RH2) and Industrial Hydrogen Market Size
	..................................................................................................................................................... 10
	Product Lines ............................................................................................................................... 12
	INDUSTRIALSERVICE AND(SUPPORT) .................................................................................................... 12
	Market Size for Xebec’s Industrial Products ................................................................................ 13
	Product Line & Services ............................................................................................................... 13
	RENEWABLEGAS(INFRASTRUCTURE) .................................................................................................... 13
3.	BUSINESS STRATEGY ............................................................................................................... 14
	EXTERNALBUSINESSDRIVERS.............................................................................................................. 14
	PATH TOSUSTAINABLEGROWTH.......................................................................................................... 15
	Key Events in 2021 ....................................................................................................................... 15
	Key Events in 2020 ....................................................................................................................... 15
	STRATEGYMOVINGFORWARD.............................................................................................................. 16
	Build & Market Renewable Gas Solutions .................................................................................... 16
	Drive Recurring Revenue .............................................................................................................. 16
	2020 RESULTS.................................................................................................................................... 16
4.	OPERATING RESULTS .............................................................................................................. 17
	CURRENTBACKLOG AS OFMARCH18, 2021 ......................................................................................... 20
	BUSINESSSEGMENTREVIEW................................................................................................................ 20
	Systems - Cleantech .................................................................................................................... 20
	Support – Industrial Products and Service ................................................................................... 22
	Corporate and Other .................................................................................................................... 22
5.	FINANCIAL CONDITION ............................................................................................................ 23
	SUMMARYBALANCESHEET.................................................................................................................. 23
	TOTALINDEBTEDNESS.......................................................................................................................... 23

Xebec Management’s Discussion and Analysis

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CAPITALSTOCKINFORMATION............................................................................................................. 24
SHAREPURCHASEWARRANTSOUTSTANDING........................................................................................ 24
STOCKOPTIONSOUTSTANDING............................................................................................................. 24
6. SUMMARY OF QUARTERLY RESULTS .................................................................................... 25
7. USE OF FUNDS ........................................................................................................................... 25
8. LIQUIDITY AND CAPITAL RESOURCES .................................................................................. 28
CONTRACTUALOBLIGATIONS................................................................................................................ 28
CREDITFACILITIES............................................................................................................................... 29
9. OUTSTANDING SHARE DATA ................................................................................................... 29
10. SUBSEQUENT EVENTS ......................................................................................................... 30
11. CRITICAL ACCOUNTING ESTIMATES ................................................................................. 31
12. CHANGES IN ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS ....... 33
13. OUTLOOK AND MANAGEMENT GUIDANCE ....................................................................... 34
14. RELATED PARTY TRANSACTIONS ...................................................................................... 37
15. RECONCILIATION OF NON-IFRS MEASURES .................................................................... 38
16. ENTERPRISE RISK MANAGEMENT ..................................................................................... 39
17. RISK FACTORS ...................................................................................................................... 39
MACROECONOMIC ANDGEOPOLITICALRISKS......................................................................................... 40
OPERATINGRISKS............................................................................................................................... 41
FOREIGNCURRENCYEXCHANGERISK................................................................................................... 42
CORONAVIRUSIMPACT ONGLOBALOPERATIONS ANDDELIVERIES........................................................... 42
RISKSASSOCIATED TOLEGALPROCEEDINGS......................................................................................... 43
18. FORWARD-LOOKING STATEMENTS ................................................................................... 43
19. CORPORATE GOVERNANCE ................................................................................................ 45
APPROVAL.......................................................................................................................................... 45
ADDITIONALINFORMATION.................................................................................................................... 45

Xebec Management’s Discussion and Analysis

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1. OUR BUSINESS

About Us

Established in 1967, Xebec has over 50 years of experience in adsorption technology, supplying more than 10,000 units to clients worldwide.

Xebec is a global provider of clean energy solutions for renewable and low carbon gases used in energy, mobility and industry applications. The company specializes in deploying a portfolio of proprietary technologies for the distributed production of hydrogen, renewable natural gas, oxygen and nitrogen. By focusing on environmentally responsible gas generation, Xebec has helped thousands of customers around the world reduce their carbon footprints and operating costs. Headquartered in Québec, Canada, Xebec has a worldwide presence with five manufacturing facilities, eight Cleantech Service Centers and four sales offices spanning over four continents.

Vision. Mission. Purpose. People.

Xebec’s Vision is “A world powered by clean energy”.

Xebec’s Mission is to enable our world to transition to a low-carbon future by accelerating the production of renewable gases.

Xebec’s Purpose is profitable growth for a sustainable future as only a profitable company will have the strength and resources to support its employees, satisfy its shareholders, grow the company and the economy, and contribute positively to society while preserving and safeguarding our environment.

Xebec’s People work hard to deliver profitable growth. Our senior leaders set direction, create customer focus, define clear and visible values, and communicate high expectations and goals for the organization. Our strategies, systems, and methods for achieving performance excellence are developed to stimulate innovation, build knowledge and capabilities in an environment of respect, trust, diversity and teamwork.

Profitable growth is also the foundation for attracting and retaining talented, motivated and engaged employees. We are focused on building highly skilled and motivated teams that can meet the end-toend needs of a rapidly developing company and support the evolving renewable gas industry.

Over 400 employees to date
19 departments in a full range of disciplines from Sales, Finance, HR, Design, Engineering, Manufacturing, Production, Quality, Logistic, Service and Others
6 engineering specialties including Process, Mechanical, Electrical, Controls, Manufacturing and Service Engineering.
A wealth of skills including over 45 specialized degrees (bachelor’s degrees), 35 technical degrees, 15 masters and 7 doctorates
A culturally diverse workforce with more than a dozen nationalities and languages from the global community
23% of Xebec’s workforce is women and we are committed to increasing diversity and inclusion

Xebec Management’s Discussion and Analysis

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Our Products

Systems and equipment to convert biogas to Renewable Natural Gas (RNG) from agricultural digesters, source separated facilities, landfill sites and Wastewater Treatment Plants (WWTP)
Hydrogen generation and purification systems for energy, mobility and industrial applications
Systems for renewable hydrogen generation from the steam methane reforming of Renewable Natural Gas
Systems for renewable hydrogen generation from electrolysis of renewable electricity
Gas Processing Systems for removal of CO2 from assorted gas streams
Natural Gas Dryers for Natural Gas Vehicles (NGV) refueling stations
Energy-efficient Compressed Air Dryers & Compressed Air and Gas Filters for a broad range of industrial applications
Air & Gas compressors and vacuum pumps
• Custom gas purification systems for a variety of gas streams
On-site Oxygen and Nitrogen generators for industrial and healthcare applications

Our Customers and Suppliers

Our technologies are deployed throughout the world and cover industries as diverse as renewable energy, industrial gases, commercial and industrial manufacturing operations, health care establishments, petrochemical and pharmaceuticals.

International Footprint and Certifications

Xebec has established a direct presence and is focused on North America, Europe, Middle East, and China; however, our business is global with deliveries to countries like Madagascar, Kazakhstan, Malaysia, Thailand, Japan, South Korea, Germany, France, Italy, Austria, U.S., The Netherlands, United Kingdom, Australia, Singapore, UAE, Mexico, Colombia, Argentina, Nigeria and South Africa to name a few. Xebec works with several partner firms to establish a presence in new markets of interest. Xebec has obtained a variety of product and process certifications for the delivery of its products and systems in several different jurisdictions, including Europe, Canada, the U.S, Africa, Middle East and Asia.

Xebec Management’s Discussion and Analysis

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Global Leader in Decarbonizing Gases

Xebec is a global provider of clean energy solutions for the distributed generation of renewable and low carbon gases used in energy , mobility and industry applications

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EUROPE & MIDDLE EAST
2 Manufacturing Facilities
2 Cleantech Service Centers
2 Sales Offices
NORTH AMERICA 1 Hydrogen R&D Facility
2 Manufacturing Facilities ASIA
6 Cleantech Service Centers
1 Head Office in Québec, Canada 1 Manufacturing Facility
2 Sales Offices
Partner Network
88 253 $208 million+
Renewable Natural Gas References Hydrogen References Invested in R&D
522+ million Nm [3 ] / year capacity 902+ million Nm [3 ] / year capacity 14 patents owned
TSX: XBC 1
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Technology

Adsorption

Almost all industrial gases, whether they are inert, flammable, acid, reactive, or oxidizing, can be purified or dried using what is commonly known as adsorption technology. Adsorption technology is used to remove targeted impurities or separate bulk mixtures. This technology is used in many industrial gas treatment processes including biogas separation and purification, hydrogen production and recovery, air separation, and oxygen enrichment for medical applications as well as drying applications for air, natural gas, carbon monoxide, carbon dioxide, sulfur dioxide, acetylene, propylene, propane, and syngas.

Pressure Swing Adsorption (PSA)

Xebec’s proprietary technology replaces the complex and bulky network of piping and valves used in conventional Pressure Swing Adsorption (PSA) systems with two compact, integrated valves. Especially for biogas to RNG, Xebec’s advanced biogas upgrading systems improve methane recovery rates, reduce operating costs and, consequently, improve the profitability of the project for the owner. Xebec’s rotary valve technology is also integrated into some of its advanced hydrogen and gas purification products which operate at significantly higher cycle speeds (up to 50 cycles/minute) than conventional PSA systems. This results in a direct reduction in the amount of adsorbent material, the size of the equipment and the amount of energy required to purify a given volume of feed gas.

Xebec has one of the most compact, cost-effective and reliable PSA technologies available on the market. With minimal pressure drop, remarkable uptime performance, and occupying a fraction of the footprint of conventional systems, Xebec PSA systems have earned a reputation for easy, flexible installation and problem-free, economic performance.

Xebec Management’s Discussion and Analysis

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Proprietary and proven technology
Lowest life cycle cost systems
Reliable, quality reputation with thousands of adsorption units in the field
In-house capabilities in relevant engineering discipline and complete production expertise
A unique, win-win business model: sell innovative products to partners who then develop and serve local markets while Xebec drives aftermarket revenue with its proprietary technology; or offers complete systems to end-users in clearly identified markets
Commercial readiness to take advantage of opportunities driven by government incentives as well as regulations to curb CO2 emissions in transportation

Filtration

Air and gas filters are used to separate liquid droplets, particles or solid contaminants, and oil vapor out of air and gas flows. Xebec offers a range of specialized filters, including natural gas filters for onboard natural gas-fueled vehicles.

Steam Methane Reforming

Hydrogen today is predominantly generated in two different ways. Xebec, through the acquisition of HyGear in December 2020, miniaturized the most common technology to generate hydrogen on-site and in a decentralized manner. They are built inside shipping containers, which makes them easy to transport and small in environmental footprint. These systems are based on the SMR technology, a process by which hydrogen is created out of water and natural gas. These hydrogen generation systems operate autonomously; once the system is installed at a customer’s site and connected to the grid, the system has no need for an operator. It automatically follows the demand levels and increases or decreases its production based on the requirements of the customer.

Electrolyser

Xebec’s second hydrogen generation technology is based on electrolysis, a process by which hydrogen is generated from water and electricity. The company’s systems are based on alkaline stacks, as this is a reliable and cost-effective solution for electrolysis. These systems are slightly larger compared to the SMR systems and for that reason only the 50 m3/h and 100 m3/h systems are built inside shipping containers. The larger systems, 150 m3/h and 250 m3/h, are both skid mounted. Like the SMR based systems, the electrolyser-based systems are automated, do not require an operator, and can be load-following to ensure the customer always receives the correct volume of hydrogen.

Oxygen and Nitrogen On-site Generation

Using a form of adsorption and membrane-based technology, Xebec leverages these two proprietary technologies for generation of oxygen and nitrogen on-site. With nitrogen and oxygen production directly on site, companies avoid delivery bottlenecks and support the protection of the climate and the environment with the help of environmentally friendly gas generation.

Xebec Management’s Discussion and Analysis

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2. OUR BUSINESS SEGMENTS

Cleantech (Systems)

Renewable Natural Gas (RNG)

RNG is a significant opportunity for Xebec in the immediate term. Climate change is driving the energy transition toward 100% renewables, including the displacement of fossil natural gas with RNG. As much as wind and solar have been the prevalent renewable energies over the past 20 years, we believe that we are now at the cusp of similar robust growth for renewable natural gas .

Climate change is the macroeconomic driver for the adoption of renewable, zero-carbon energy. For RNG, gas utilities are an additional adoption driver. As electricity utilities are successfully shifting to renewable solar and wind energy, gas utilities are 20 to 25 years behind in their adoption of renewable energy. This is leaving them in a precarious position as they face declining demand for their products and services, driven by an acceleration toward electrification of their customer base, especially in home-heating, water heaters, and gas stoves. Investors in gas utilities are starting to see the prospect of significant losses and hundreds of billions of dollars of stranded gas assets if the business model does not shift quickly towards renewable gases. The good news is there is increasing alignment between policymakers and gas utilities to support this shift towards renewable natural gas and hydrogen with appropriate legislation and regulation.

In Europe, several countries have announced targets to be completely fossil fuel-free by 2050, implying a complete shift to 100% renewable natural gas and hydrogen. Accordingly, gas utilities are assessing their transition timelines and some major energy players in Europe, like Engie in France (former Gaz de France), have announced plans to be 100% renewable gas by 2050.

The transition towards 100% RNG is expected to evolve in three phases, starting with anaerobic digestion (organic waste converted to RNG), followed by pyro-gasification (the conversion of cellulosic forestry waste to RNG), followed by Power-to-Gas or P2G (the conversion of electricity to hydrogen gas for energy storage). Xebec has a position in each of these commercial opportunities, either through gas purification or through methanation technology which is applicable to P2G.

Hydrogen, Renewable Hydrogen (RH2) and Industrial Hydrogen

As a result of the recent acquisition of HyGear, Xebec acquired leading small-scale steam methane reforming and electrolysis technology and a reference base of more than 66 active hydrogen generation installations worldwide to accelerate entry into the fast-growing hydrogen fuel market. The acquisition of HyGear positions Xebec to execute and accelerate its distributed hydrogen generation strategy. The acquisition of new technology, and the access to new markets enables Xebec to launch a commercially viable renewable (green) hydrogen product offering.

Xebec considers hydrogen purification for fuel cell applications and Renewable Hydrogen as fuel for Fuel Cell Electric Vehicles (FCEV) to be another significant opportunity over the next decade and

Xebec Management’s Discussion and Analysis

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beyond. As fuel cells gain traction, the market will look for specialized purification solutions in a compact design. Xebec is already working with several fuel cell manufacturers in Europe, North America and China such as PlugPower, to provide such equipment for their refueling and/or hydrogen production equipment.

Xebec has also formed partnerships in the hydrogen space that will allow us to offer integrated systems from hydrogen generation to refueling, namely with FuruiHP in China, and JNK Heaters in South Korea. In Shanghai, Xebec Joint Venture partner, Shenergy Energy, has been nominated to build-out the Shanghai hydrogen refueling infrastructure.

Xebec will be in a position to gradually transition into the emerging hydrogen mobility space by providing on-site hydrogen generation and supply of hydrogen for refueling station as mobility applications become more prevalent.

According to the Hydrogen Council, the demand for H2 will increase significantly, with impressive numbers by 2050.

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Renewable Natural Gas (RNG), Renewable Hydrogen (RH2) and Industrial Hydrogen Market Size

RNG Market – Urgency is driven by new environmental targets and governmental policy/regulations incentivizing utilities and businesses to use renewable gases. As a result:

Prices for RNG are anywhere from $9 to $105 MMBtu, or 3 to 30x the price of fossil natural gas.
System and equipment sales currently exceed $10.9B in Xebec’s target markets. Based on announced projects in these regions, Xebec estimates a potential of over 8,000 installations in its core markets
In addition, as the cost of biogas products continues to decrease there is a significant market for small scale biogas solutions globally in the sub 450 Nm3/hr flow rate, expected to be hundreds of systems per year in the markets we are operating in.
Xebec introduced the BGX Biostream™, a standard product to address that sub 450 Nm3/h segment, which is currently being tested and validated for its operating results.

RH2 Market – The emerging hydrogen demand is driven by the need for hydrogen as an energy carrier for the transportation, energy and energy storage markets.

Organizations and countries around the world are becoming deeply invested in hydrogen, such

Xebec Management’s Discussion and Analysis

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as Hyundai’s $6.7 billion investment to boost fuel-cell output; Germany’s Green-Hydrogen research funding of €780 million; and Japan’s Ministry of Economy, Trade, and Industry’s hydrogen funding of approximately $560 million for 2019

Fuel Cell & Hydrogen Energy Association’s pathway report shows by 2025, total U.S. hydrogen demand could reach 13 million metric tons across applications, with up to 125,000 materialhandling FCEVs in the field, and up to 200,000 light-, medium-, and heavy-duty FCEVs traveling on U.S. roads. Each light duty FCEV requires about 0.5 to 1.5 kg of hydrogen per day while a heavy-duty FCEV could use 20-50 kg/day. China’s FCEV strategy is mainly focused on heavyduty trucks and buses where the hydrogen consumption is much larger and the demand for hydrogen is higher. Beijing mapped out a plan in 2019 to increase the number of hydrogen filling stations to 1,000 and have one million FCEVs on the road by 2030.
As the on-road FCEV market evolves globally the need for renewable hydrogen (RH2) is expected to grow. Renewable hydrogen can be produced through electrolysis using renewable electricity, or through steam methane reforming of renewable natural gas (upgraded biogas to renewable natural gas). Its attractiveness is from the low carbon content compared to fossil natural gas derived hydrogen, making it ideal for low carbon transport fuels.
One pathway for RH2 is the reforming of RNG in a steam methane reformer. As announced by industry participants like Nikola, Budweiser, Cummins and Hanwha there is an urgent need to deploy distributed hydrogen fueling infrastructure to support the launch of the heavy-duty trucking fleets with fuel cells. The potential for on-site hydrogen generators at truck stops is significant, and according to available data could initially be 600 to 1,000 on-site containerized steam methane reforming (SMR) units.
Through the combination of Xebec’s renewable natural gas systems and HyGear’s Steam Methane Reforming technology, Xebec will be able to offer clients low-cost onsite generated green hydrogen that can be used in transportation that will qualify for renewable identification numbers (RINs) under the U.S. Renewable Fuel Standard (RFS).

Industrial H2 Market – Subset of the industrial gas market for industrial users that need hydrogen, oxygen or nitrogen in their production process.

The main players in the industrial gas markets are Air Liquide, Linde, Praxair and Air Products. These companies collectively have more than 50% market share of the entire industrial gases production market. The industrial gas market consists mainly of Hydrogen, Nitrogen and Oxygen. These gases are utilized in industry today and all have their own specific uses. Hydrogen has the largest share with an estimated output of 115 billion Nm3 by 2023 (Freedonia, World Hydrogen Report, 2014).
Hydrogen is used in various industries and not all of these industries are inside the scope of Xebec’s capabilities. Xebec focuses on merchant (bulk) quantities for hydrogen supply. The bulk segment covers roughly 28% of the market based on the revenue split of Linde which is equal to an estimated amount of 32.2 billion Nm3 by 2023 (based on Linde’s Annual Report,

Xebec Management’s Discussion and Analysis

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2019).

A selection of industries use hydrogen in their production process and are within the scope of Xebec which include the flat glass, metal, food and semiconductor industries. These industries have hydrogen consumption that varies on average between 50 Nm3/h and 700 Nm3/h, and is dependent on the type of product the customer manufactures and the size of the factory. By combining multiple hydrogen generation systems, Xebec expects to be able to meet hydrogen demand to a significant part of these factories.

Product Lines

We offer a full suite of products based on proprietary technologies in the following categories:

On-site air dehydration under the ADX Solutions® brand
Biogas to renewable natural gas systems under the BGX Solutions® brand
Hydrogen purification systems under the H2X Solutions® brand
Natural gas dehydration units for refueling stations – NGX Solutions®
Products for the filtration & separation of air and gases under FSX Solutions®
Steam methane reforming products for production of hydrogen from (renewable) natural gas under the Hy.GEN brand
Electrolysis products for production of hydrogen from electricity under the Hy.GEN-e brand
On-site Oxygen and Nitrogen generators

Industrial Service and (Support)

Xebec designs, develops, builds, and sells a range of products including compressed air dryers for industrial applications under its ADX Solutions® brand; a complete range of compressed air and gas filtration products under its FSX Solution® brand; as well as alternative brand replacement parts. Through Inmatec, the company also offers on-site oxygen and nitrogen generators for industrial applications.

With 50+ years of global experience servicing our 18,000+ units and over 300+ gas installations, service, maintenance and operational support round out Xebec service offerings. With our current focus on renewable gas upgrading projects, our ability to provide local service and support is a foundational component of our strategy and a key competitive differentiator.

Xebec has established a roll-up strategy focused on acquiring small to mid-sized Compressed Air and Gas service businesses ($5 to 15 million revenue) throughout Canada and the U.S. to create a leading Cleantech Service Network, capable of supporting North American renewable gas installations
Xebec can capitalize on this historically high margin business that creates a significant recurring revenue base from sales of parts and service to over 18,000 currently operating global installations

Xebec Management’s Discussion and Analysis

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Xebec is the only Canadian manufacturer of gas adsorption systems with a full product portfolio and all necessary Canadian and Provincial certifications (CRN, CSA etc.) and believes it is well positioned for growth
Xebec is a world leading manufacturer of on-site oxygen and nitrogen generators which are seeing an increased uptake in demand as end customers switch to gas generation on premise

Market Size for Xebec’s Industrial Products

U.S. Market approximately USD$700.0 to USD$800.0 million
Canadian Market for Xebec products approximately $60.0 to $70.0 million
Xebec is targeting Industrial service and product revenues of $250.0 million by 2025
Global oxygen market of approximately $30.0 billion worldwide
Global nitrogen market of approximately $26.1 billion worldwide

Product Line & Services

Compressed Air and Gas Dryers
Compressed Air and Gas Filters
Spare Parts and Replacement Filter Elements
Dew-point Probes and Calibration Services
On-site Oxygen and Nitrogen Generators

Renewable Gas (Infrastructure)

Activity in this segment is being driven by newly established renewable gas requirements in two Canadian provinces, combined with continuing efforts by the Canadian federal government to become net-zero by 2050. Xebec announced the creation of GNR Quebec Capital L.P., (GNRQC) a limited partnership with the Fonds de solidarité FTQ that will identify locations and partners for the deployment of high-quality renewable gas assets to produce low carbon RNG that can not only fill the current provincial requirements but also the future requirements under potential federal legislation. All of Xebec’s renewable gas infrastructure activities in Québec were rolled into GNRQC and all investments by Xebec in the infrastructure segment in Québec will be made through this fund.

The concept:

GNRQC co-invests in partnerships that develop, set up, own and operate assets – Build, Own, Operate (BOO)
These partnerships sign off-take agreements with gas utilities and other third-party off-takers
They enter into supply agreements with feedstock suppliers
The partnership provides both debt and equity financing
The specific project partnerships choose sites where feedstock is easily available and natural gas interconnectivity is nearby
Project partnerships apply and receive all regulatory permits to erect and operate a plant

Xebec Management’s Discussion and Analysis

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3. BUSINESS STRATEGY

Xebec’s goal is to profitably grow revenue and earnings, building a sustainable business that will drive shareholder value.

External Business Drivers

Accelerating global warming and climate change is driving a transition from fossil energy sources towards renewable, zero-carbon energy.
Continued build-out of clean natural gas refueling infrastructure in the U.S., Canada, and Europe combined with rapidly increasing demand for renewable natural gas as a transportation fuel.
Implementation of low carbon fuel standards (LCFS) driving demand for renewable natural gas and hydrogen as a low carbon transportation fuel and establishment of RNG assets.
Increasing demand for small-scale, on-site, decentralized hydrogen production and purification solutions for fuel cell applications in transport and industrial applications
Hydrogen purification technologies poised to experience robust growth in the U.S., China, Japan, Canada, Germany, and India in refining and electronics industries (industrial applications)
Increasing demand for Compressed Air and Gas equipment across the food & beverage, medical and pharma industries that can deliver cleaner, purer, oil-free, dry and sterile compressed air
Acquisition opportunities in the Industrial Service and Support segment driven by the retirement of owners of target companies that fall into the “boomer” category
Impact of COVID-19 which has caused supply chain cost increases, higher installation costs for systems and equipment and overall higher than average cost overruns

Xebec Management’s Discussion and Analysis

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Path to Sustainable Growth

Key Events in 2021

March 10, 2021, a class action lawsuit is filed in Ontario
March 16, 2021, Xebec comments on class action lawsuit application filed in Québec
March 15, 2021, Xebec partnered with Coregas, one of Australia’s largest gas companies, to accelerate the development of hydrogen ecosystems in Australia and New Zealand
March 12, 2021, Xebec provides updated 2020 guidance
February 24, 2021, Xebec secured $59.3 million in new credit facilities from National Bank of Canada
February 22, 2021, Xebec completed its acquisition of Inmatec
February 16, 2021, Xebec launched UK hydrogen supply strategy with 15-year Gas-as-a-Service contract and construction of first Hydrogen Decentralized Production Hub in the country
February 12, 2021, Xebec announced the departure of Dr. Prabhu Rao as its Chief Operating Officer and the appointment of Marinus van Driel as its new President for the Global Hydrogen Group, in addition to his role as President for Xebec Europe
February 11, 2021, Xebec received an order for FuelCell Energy’s Port of Long Beach Project with Toyota
January 7, 2021, Xebec graduated to the TSX and started trading on the exchange

Key Events in 2020

December 31, 2020, Xebec completed its transformative acquisition of HyGear, a leading provider of local hydrogen through steam methane reforming and electrolysis technologies
December 30, 2020, Xebec closed its $143.8 million bought deal public offering and $63.3 million concurrent private placement with Caisse de dépôt et placement du Québec
December 17, 2020, Xebec entered the hydrogen and renewable natural gas markets in Germany with a definitive agreement for the acquisition of Inmatec, a world leader in on-site oxygen and nitrogen generation products
November 12, 2020, Xebec strengthened its partnership with Shenergy in China with a strategic investment
November 10, 2020, Xebec appointed a new Chief Financial Officer, Stéphane Archambault, replacing Louis Dufour who retired
October 31, 2020, Xebec finalized its fifth acquisition of Pennsylvania based The Titus Company
August 31, 2020, Xebec finalized its fourth acquisition of British Colombia based Applied Compression Systems
August 25, 2020, Xebec announced the appointment of Sara Elford to the Board of Directors
July 31, 2020, Xebec finalized its third acquisition of North Carolina based Enerphase Industrial

Xebec Management’s Discussion and Analysis

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Solutions (doing business as Air Flow)

June 26, 2020 Xebec closed a bought deal public offering for aggregate gross proceeds of $29 million
June 15, 2020, Xebec announced the appointment of Peter Bowie to the Board of Directors
May 6, 2020, Xebec announced a $10.0 million unsecured loan facility with Fonds de solidarité FTQ
February 18, 2020, Xebec announced its first Renewable Gas Infrastructure project
February 12, 2020, Xebec announced a $27 million U.S. Dairy Farmer project
January 20, 2020, Xebec appointed Brian Levitt as a Special Advisor to the Board of Directors

Strategy Moving Forward

Build & Market Renewable Gas Solutions

Expand RNG opportunities in France, Italy, Spain, California, and Canada (including renewable gas infrastructure investments)
Introduce and market our small scale BGX Biostream™ units in the markets we operate
Focus on Hydrogen Purification for Fuel Cells (refinery off-gas applications in China)
Develop small to mid-size hydrogen generation capabilities through SMR and electrolysis technologies and Decentralized Production Hubs
Expand on-site oxygen and nitrogen products to other markets such as North America and Asia
Continue to grow national & international partnerships

Drive Recurring Revenue

Through increased sale of filtration, parts & service products
Optimize supply chain network and other synergies within our industrial business
Continue to deploy an acquisition strategy for service companies in North America and Europe to create the leading “Cleantech Service Network”
Sign an increasing amount of long-term 15-year Gas-as-a-Service contracts

2020 Results

For the twelve-month period ended December 31, 2020, Xebec reported revenues of $56.5. million, a $7.2 million increase or 15% compared to $49.3 million for the same period in 2019
Order bookings increased from $99.3 million as at April 14, 2020, to $100.1 million as at March 24, 2021, representing a 0.8% increase
Net loss for the twelve-month period ended December 31, 2020 was $32.0 million, representing EPS of ($0.33), compared to a net profit of $2.0 million, representing an EPS of

Xebec Management’s Discussion and Analysis

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$0.03, for the same period last year

Working capital increased from $37.3 million as at December 31, 2019, to $171.2 million as at December 31, 2020 (current ratio increased from 3.22 to 4.12)
Quick Ratio increased from 2.77 as at December 31, 2019, to 3.57 as at December 31, 2020

4. OPERATING RESULTS

Selected Financial Information

(in millions of $)

	For the three-month period	For the three-month period		For the twelve-month period
	ended	December 31,		ended December 31,
	2020	2019	2020	2019
Systems	(4.1)	10.4	28.1	37.8
Support	10.4	3.2	28.4	11.5
Total revenue	6.4	13.6	56.5	49.3
Total COGS	17.8	9.5	56.3	33.8
Gross margin	(11.4)	4.1	0.3	15.5
Gross Margin %	-180%	30%	0.5%	31%
Research and Development expenses	1.1	-	1.2	0.1
Selling and administrative expenses	13.6	3.6	27.9	11.3
(Gain) loss on foreign exchange	0.7	0.2	0.1	0.4
(Gain) Loss on conversion of shares issued by a subsidiary	(0.0)	0.0	0.2	(0.3)
Operating profit(loss)	(26.9)	0.3	(29.2)	4.0
Finance expenses	1.4	0.4	2.8	1.6
Income taxes	0.0	0.4	(0.0)	0.4
Netprofit(loss)	(28.3)	(0.5)	(32.0)	2.0
Net profit (loss) per share	(0.26)	(0.006)	(0.33)	0.03
ADJUSTED EBITDA (1)	(22.6)	2.1	(22.0)	7.0
Cash used in operating activities	(8.9)	(2.2)	(26.8)	(5.5)
Cash and restricted cash	168.6	22.7	168.6	22.7
Working capital	171.2	37.3	171.2	37.3
Total Assets	444.7	66.3	444.7	66.3
Total non-current liabilities	45.7	10.6	45.7	10.6

(1) EBITDA is Non-IFRS measure. Refer to section 15 - Reconciliation of Non-IFRS Measure.

Highlights for the three-month period ended December 31, 2020, compared to the threemonth period ended December 31, 2019:

Revenues decreased by $7.2 million to $6.4 million for the three-month period ended December 31, 2020, compared to $13.6 million for the same period the prior year. The decrease is mainly due to revenue adjustments in the last quarter due to extraordinary items in the Cleantech Systems business segment resulting from the impact of the COVID-19

Xebec Management’s Discussion and Analysis

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pandemic and other operational issues, which substantially increased product, operational and installation costs. With the impact of COVID-19 lasting longer than expected and additional restrictions being re-imposed by local authorities in Q4/20, Xebec undertook a detailed accounting review of its long-term, production-type contracts for its renewable natural gas projects where revenues are recognized based on the percentage of completion method. As a result of the projected total cost of fulfilling these contracts having increased substantially, Xebec determined that previously incurred expenses represent a lower percentage of total costs than previously estimated. As such, revenues recognized to date had to be adjusted ($5.2 million) to reflect the revised percentage of completion for contracts under Xebec’s updated estimates. Furthermore, Xebec reversed revenues ($1.9 million) previously recognized based on the percentage of completion method due to the deteriorating financial position of a client where the likelihood of payment became uncertain in early 2021. Finally, two contracts that had become unprofitable were cancelled by a customer in early 2021 as a result of the delivery delays, due to COVID-19 and other related disruptions. This impact led to a $5.4 million revenue adjustment. The parts and materials used for these contracts have since been inventoried and are expected to be used for future contracts.

Gross margin decreased from $4.1 million to ($11.4) million for the three-month period ended December 31, 2020 compared to the same period the prior year. The gross margin % decrease from 30% to (178%) is mainly due to the reversal of revenues described earlier and some of the contracts previously estimated to be profitable now projected to result in losses. The percentage of completion method requires that losses on such contracts be recognized immediately, further impacting the Company’s gross margin. Moreover, the impact of COVID19 increased costs for projects in Italy and China, which also resulted in a gross margin deterioration.

Selling and administrative expenses (“SG&A” ) for the three-month period ended December 31, 2020, of $13.6 million were higher by $10.0 million compared to $3.6 million for the same three months of 2019. This is primarily due to several expenses that are non-recurring in nature that have been accounted for in the fourth quarter of 2020: (1) $4.8 million of transaction costs for the HyGear and Inmatec acquisitions; and (2) a $1.1 million provision for bad debt relating to uncollectible accounts receivable and a penalty for a biogas project in Europe. Additionally, $0.7 million of recurring administrative expenses resulted from the acquisitions of Titus and ACS. Finally, overall SG&A expenses increased due to an organizational scale up of employees and associated costs to support the increased level of sales, and from grants of restricted and deferred share units made to key employees.
Operating loss of $26.9 million for the three-month period of 2020 compared to an operating profit of $0.3 million for the same quarter in 2019. The decrease is mainly explained by the above-noted reduction in gross margin and increase in SG&A.

Xebec Management’s Discussion and Analysis

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Net loss of $28.3 million or ($0.26) per share in the three-month period ended December 31, 2020 compared to a net loss of $0.5 million or ($0.01) per share for the same period the prior year.
Adjusted EBITDA decreased to ($22.6) million for the three-month period ended December 31, 2020, from $2.1 million for the same period last year.

Highlights for the twelve-month period ended December 31, 2020, compared to the same period ended December 31, 2019

Revenues increased by $7.2 million to $56.5 million for the twelve-month period ended December 31, 2020, compared to $49.3 million for the same period the prior year. The increase comes from the acquisitions of CDA, Air Flow and ACS in the Support segment and was offset by the decrease of revenues in the Cleantech Systems segment.
Gross margin decreased from $15.5 million to $0.3 million, or 0.5% of revenue compared to 31% of the revenues for the same period the prior year. The decrease is mainly due to extraordinary items in the Cleantech Systems business segment including the impact of the COVID-19 pandemic. The reversal of revenues, as described earlier, is the result of some contracts, previously estimated to be profitable, are now projected to result in losses. The percentage of completion method requires that the losses on such contracts be recognized immediately, further impacting the Company’s gross margin. Moreover, the impact of COVID-19 increased costs for projects in Italy and China, which also resulted in a gross margin deterioration.
Selling and administrative expenses (“SG&A”) for the twelve-month period ended December 31, 2020, of $27.9 million are higher by $16.6 million when compared to $11.3 million for the same twelve months of 2019. This is primarily due to several expenses that are non-recurring in nature: (1) $5.7 million of transaction costs for the HyGear and Inmatec acquisitions and other acquisitions in the Support segment; and (2) a $1.7 million provision for bad debt relating to uncollectable accounts receivable and a penalty for a biogas project in Europe. Additionally, $5.0 million of recurring administrative expenses resulting from the acquisitions of Titus, Air Flow, CDA and ACS were accounted for in 2020. Finally, overall SG&A expenses increased due to an organizational scale up of employees and associated costs to support the increased level of sales, and from grants of restricted and deferred share units made to key employees.
Operating loss of $29.2 million for the twelve-month period ended December 31, 2020 compared to an operating profit of $4.0 million for the same period in 2019. The decrease is

Xebec Management’s Discussion and Analysis

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mainly explained by the above noted reduction in gross margin and the increase in SG&A.

Net loss of $32.0 million or ($0.33) per share compared to $2.0 million or $0.03 per share in the twelve-month period ended December 31, 2020 compared to the same period in the prior year.
Adjusted EBITDA of ($22.0) million for the twelve-month period ended December 31, 2020, compared to $7.0 million for the same period last year.

Current Backlog as of March 18, 2021

The order backlog is calculated considering contracts received and considered as firm orders.

Business Segment:	March 18, 2021	November 9,	August 10,	May 20,	April 14,
		2020	2020	2020	2020
In million of $
Support	26.4	9.5	7.4	9.4	11.5
System	73.7	78.9	78.1	80.4	87.8
Infrastructure	-	-	-	-	-
Consolidated Backlog	100.1	88.4	85.5	89.8	99.3

Business Segment Review

We report our results in two business segments – Systems and Support. Infrastructure is no longer reported due to its activities being rolled into a Joint-Venture with Fonds de solidarité FTQ. Our reporting structure reflects the way we manage our business and how we classify our operations for planning and measuring performance. The corporate office and administrative support are reported under Corporate and Other.

Systems - Cleantech

(in millions of $)

Revenues COGS Gross margin Gross Margin % Research and Development expenses Selling and administrative expenses Segmentgain/(loss)	For the three-month period ended December 31, 2020 2019 (4.1) 10.4 8.9 7.2 (12.9) 3.2 (316%) 31% 1.1 - 0.5 0.2 (14.5) 3.0	For the twelve-month period ended December 31, 2020 2019
		28.1 37.8 35.5 25.8
		(7.4) 12.0
		(26%) 32% 1.2 0.1 1.6 1.6
		(10.2) 10.4

Xebec Management’s Discussion and Analysis

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Revenues decreased by $14.5 million to ($4.1) million for the three-month period ended December 31, 2020 compared to the same period of 2019 and decreased by $9.7 million to $28.1 million for the twelve- month period ended December 31, 2020 compared to the same period of 2019. The Cleantech Systems segment revenue generation was affected by the economic slowdown caused by the COVID19 pandemic as well as previously outlined extraordinary items related to long-term, production-type renewable natural gas contracts that required revenue recognized based on the percentage of completion method earlier in the year to be adjusted in Q4 2020.

Gross Margin decreased by $16.1 million to ($12.9) million for the three-month period ended December 31, 2020 compared to $3.2 million in the same period of 2019, and by $19.4 million to ($7.4) million for the twelve-month period ended December 31, 2020 compared to $12.0 million in the prior year. Gross margin % decreased to (316%) for the three-month period ended December 31, 2020 compared to 31% in the same period of 2019 and decreased to (26%) for the twelve-month period ended December 31, 2020 from 32% in the prior year. The decrease is mainly due to higher than estimated costs related to our renewable natural gas contracts. The company also incurred increased costs and reduced productivity at all of its operating facilities due to the implementation of additional health and safety measures, higher installation costs and challenges related to rapid growth during the pandemic.

SG&A Expenses for the three-month period ended December 31, 2020 increased by $0.3 million to $0.5 million in the Systems segment compared to $0.2 million for the same period the prior year. For the twelve-month period ended December 31, 2020, SG&A expenses were flat compared to the same period the prior year.

Xebec Management’s Discussion and Analysis

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Support – Industrial Products and Service

(in millions of $)

Revenues COGS Gross margin Gross Margin % Selling and administrative expenses Segmentgain/(loss)	For the three-month period ended December 31, 2020 2019 10.4 3.2 8.9 2.3 1.5 0.9 14% 29% 2.0 0.6 (0.5) 0.3	For the twelve-month period ended December 31, 2020 2019
		28.4 11.5 20.8 8.0
		7.6 3.5
		27% 30% 5.2 2.2
		2.4 1.3

Revenues increased by $7.2 million to $10.4 million for the three-month period ended December 31, 2020 and increased by $16.9 million to $28.4 million for the twelve-month period ended December 31, 2020. The increase is mainly explained by the acquisitions of CDA, Air Flow, Titus and ACS as well as organic growth.

Gross Margin increased by $0.6 million for the three-month period ended December 31, 2020 and by $4.1 million for the twelve-month period ended December 31, 2020. Gross margin percentage decreased to 14% from 29% for the three-month period ended December 31, 2020 and to 27% from 30% for the twelve-month period ended December 31, 2020 mainly due to the ACS and CDA, which experienced lower gross margins due to revenue mix.

SG&A Expenses for the three-month period ended December 31, 2020 increased by $1.4 million, to $2.0 million from $0.6 million in the same period last year. For the twelve-month period, SG&A expenses increased by $3.0 million, to $5.2 million from $2.2 million in the prior year. The increase is mainly due to the addition of new subsidiaries.

Corporate and Other

(in millions of $) Selling and administrative expenses Foreign exchange loss (gain) Loss(gain)on conversion of shares issued by a subsidiary Total Financial income Financial expense Finance loss Income taxes Corporate Expenses	2020 2019 11.2 2.8 0.7 0.2 (0.0) 0.0 11.9 3.0 - (0.0) 1.4 0.4 1.4 0.4 0.0 For the three-month period ended December 31,
		2020 2019 ended December 31, For the twelve-month period
		20.9 7.5 0.1 0.4 0.2 (0.3)
		21.3 7.7
		(0.3) (0.0) 3.1 1.7
		2.8 1.6
		(0.0)
	13.3 3.4	24.0 9.3

Xebec Management’s Discussion and Analysis

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5. FINANCIAL CONDITION

Summary Balance Sheet

Summary Balance Sheet
	December 31,	December 31,
In millions of $	2020	2019
Current assets	226.1	54.1
Non-current assets	218.6	12.2
	444.7	66.3
Current liabilities	55.0	16.8
Non-current liabilities	45.7	10.5
Shareholders’ equity	344.0	39.0
	444.7	66.3

The increase in the Company’s total assets between December 31, 2020, and December 31, 2019 represents $378.4 million. This is mainly due to the increase in cash and restricted cash of $145.9 million, an increase in trade and other receivables of $11.0 million, an increase of $14.9 million in inventory, an increase of property, plant and equipment of $33.6 million, an increase of $9.3 million in intangible assets and an increase of $159.3 million in Goodwill resulting from several acquisitions.

The increase in liabilities of $73.4 million is mainly explained by the increase in long-term debt of $50.6 million and an increase of $20.2 million in trade payables, accrued liabilities and deferred revenues. Long term debt and other liabilities are mainly the result of acquisitions made during the year.

Working capital amounted to $171.1 million for a current ratio of 4.12:1 as at December 31, 2020 compared with working capital of $37.3 million and a current ratio of 3.22:1 as at December 31, 2019.

Shareholders’ equity totaled $344.0 million as at December 31, 2020 an increase of $305.0 million from December 31, 2019. The change is mainly explained by total share issuances of $311.4 million, as well as proceeds of $23.9 million from the exercise of warrants.

Total Indebtedness

Total Indebtedness
	December 31,	December 31,
In millions of $	2020	2019
Bank loans	1.0	-
Short-term debt	17.2	1.5
Long-term debt	42.8	9.3
	61.0	10.8

Total Indebtedness amounted to $61.0 million as at December 31, 2020 an increase of $50.2 million when compared to December 31, 2019, mainly due to the indebtedness of new acquisitions and loans for financing our investments into GNR Quebec Capital L.P.

Xebec Management’s Discussion and Analysis

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Capital Stock Information

The authorized share capital of the Company consists of an unlimited number of common shares and an unlimited number of preferred shares. As at December 31, 2020 Xebec Adsorption Inc. had 152,342,986 common shares issued.

Share Purchase Warrants Outstanding

As at December 31, 2020, the Company had 3,418,267 warrants outstanding. 3,826,965 new warrants were issued, 14,355 warrants were cancelled, and 12,369,887 warrants and compensations warrants were exercised in the twelve-month period ended December 31, 2020.

Stock Options Outstanding

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”) to eligible participants of the Company and is administered with oversight by the Compensation Committee.

Although the shareholders of the Company and the Exchange have approved common shares reserved for issuance under the LTIP of up to 20% of the total issued and outstanding common shares, the Board of Directors of the Company has fixed the number of common shares reserved to a lower number. Therefore, consistent with the Board of Directors' decision, 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 17,791,757 common shares.

As at the approval of the LTIP, all existing options granted under the prior Stock Option Plan remained outstanding and subject to the prior Stock Option 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 anyone-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 anyone-year period, under the LTIP, or when combined with all of the Company’s other security-based compensation arrangements, shall not exceed 2% of the Company’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 Company’s other security-based compensation arrangements, shall not exceed 2% of the Company’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

Xebec Management’s Discussion and Analysis

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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 purchase price per share purchasable under an option shall be determined by the 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. 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.

6. SUMMARY OF QUARTERLY RESULTS

In million of $, except net earnings(loss) per share	Q4 Q3 Q2 Q1 2020	Q4 Q3 Q2 Q1 2019
Revenues Net income (loss)	6.4 18.4 19.6 12.2 (28.3) (2.1) (0.8) (0.7)	13.6 13.2 13.6 9.8 (0.5) 1.0 (0.5) 0.4

Earnings (loss) per share
Basic	(0.26) (0.02) (0.010) (0.01)	(0.01) 0.02 (0.01) 0.01
Diluted	(0.26) (0.02) (0.01) (0.01)	(0.01) 0.01 (0.01) 0.01

7. USE OF FUNDS

7. USE OF FUNDS
Public financing & Private Placement - December 30, 2020	Anticipated use of Proceeds	Actual use of proceeds as at December 31, 2020
Acquisition of HyGear (Cash Portion) and Related Costs	$66,000,000	$68,767,678
Future Potential Acquisitions (including the Inmatec Acquisition and the LOI Acquisition) and Growth Opportunities	$37,000,000 - $60,000,000	$528,789
Potential repayment of HyGear Indebtedness	$29,500,000	-
Working Capital and General Corporate Purposes	$38,000,000	$3,207,860
Total	$170,500,000 - $193,500,000	$72,504,327

Xebec Management’s Discussion and Analysis

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Public financing - June 26, 2020 Investments Funds will be used to develop and invest in new renewable natural gas infrastructure projects, landfill projects and related mergers and acquisitions Working Capital Funds will be used for general corporate purposes as well as for the integration of future corporate acquisitions, to increase inventory, work in progress and to support market development. Research and Development Funds will be used for research and development activities to expand the Corporation’s presence in the renewablegas space. Legal, Audit and other Fees related to the Offering Total	Anticipated use of Proceeds	Actual use of proceeds as at December 31, 2020
	$18,000,000	$15,774,223
	$7,627,162	$9,718,933
	$1,000,000	$1,128,732
	$400,000	$405,274
	$27,027,162	$27,027,162

Public financing - December 27, 2019	Anticipated use of Proceeds	Actual use of proceeds as at September 30, 2020
Mergers and Acquisitions	$14,170,432	$9 233 813
Funds will be used to expand product offering, monitoring and service capabilities and support the industrila products segment throught potential mergers and acquistions
Working Capital	$5,750,000	$11 629 204
Working Capital Funds will be used for general corporate purposes as well as for the integration of future corporate acquistions, to increase inventory, work in progress and to support market development
Research and Development	$800,000	$94 022
Funds will be used for research and development activities to expand the Corporation's presence in the renewable gas space
Capital Equipment – Information Technology and Production	$500,000	$367 772
Legal, Audit and other Fees related to the Offering	$400,000	$295 621
Total	$21,620,432	$21,620,432

Xebec Management’s Discussion and Analysis

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Use of funds as at December 31, 2020

a) On December 30, 2020 Xebec Adsorption Inc. closed a bought deal public offering of subscription receipts conducted by a syndicate of underwriters, co-led by Desjardins Capital Markets and TD Securities Inc., and including National Bank Financial Inc., Canaccord Genuity Corp., Raymond James Ltd., Beacon Securities Ltd. and Stifel Nicolaus Canada Inc. Also, Xebec Adsorption Inc., closed a concurrent private placement with Caisse de dépôt et placement du Québec.

A total of 35,689,974 common shares of Xebec were sold at a price of $5.80 per common share for aggregate gross proceeds of $207,001,849.

As at December 31, 2020, the Company had used $72.5 million of the net proceeds from the December 30, 2020 Offering. Of the net proceeds used, $68.8 million was used for acquisition of HyGear, legal, audit and other fees related to the public offering and $3.7 million was used for working capital to support general operations.

b) On June 26, 2020, Xebec Adsorption Inc. closed a bought deal public offering of common shares conducted by a syndicate of underwriters led by Desjardins Capital Markets and including TD Securities Inc., Canaccord Genuity Corp., Raymond James Ltd, Beacon Securities Ltd. and Stifel Nicolaus Canada Inc.

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. The issuance costs, excluding the non-transferable options to the agents were $1,847,613. The fair value of the 479,205 compensation options was $630,997.

As at December 31, 2020, the Company had used $27.0 million of the net proceeds from the June 26, 2020 Offering. Of the net proceeds used, $0.4 million was used for legal, audit and other fees related to the public offering and $26.6 million was used for working capital to support general operations.

c) On December 27, 2019 Xebec Adsorption Inc. closed a bought deal public offering of common shares conducted by a syndicate of underwriters led by Desjardins Capital Markets and including Beacon Securities Ltd., Canaccord Genuity Corp., TD Securities Inc., Paradigm Capital Inc. and Raymond James Ltd.

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, plus 657,156 compensation options.

As at December 31, 2020 the Company had used all of the net proceeds from the December 27, 2019 Offering, representing an amount of $21.6 million. Of this amount, $9.2 million was used for mergers and acquisitions, $11.6 million for working capital to support general operations and the integration of the acquisitions, $0.1 million for R&D related costs, $0.4 million for the purchase of capital equipment, and $0.3 million for legal, audit and other fees related to the public offering.

Xebec Management’s Discussion and Analysis

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8. LIQUIDITY AND CAPITAL RESOURCES

	For the three-month	For the three-month	period	for the twelve-month	for the twelve-month	period
Cash flow from(used in)	ended December		31,	ended December		31,
in million of$	2020	2019	Change	2020	2019	Change
Operating activities	(8.9)	(2.2)	(6.7)	(26.8)	(5.5)	(21.3)
Investing activities	(64.4)	(7.7)	(56.7)	(72.2)	(10.6)	(61.6)
Financing activities	188.9	22.3	166.6	244.5	34.8	209.7

Analysis of principal cash flows for the three-month and the twelve-month period ended December 31, 2020

Operating activities in the three-month period ended December 31, 2020 used $8.9 million of cash, compared to $2.2 million of cash used during the same period in 2019. The use of cash for the threemonth period is mainly explained by the net loss of $28.3 million, partially compensated by an increase of $16.3 million in non-cash working capital. For the twelve-month period ended December 31, 2020, operating activities used $26.8 million of cash compared to $5.5 million used for the same period in 2019. The use of cash for the twelve-month period is mainly explained by the net loss of $32.0 million. Non-cash working capital was relatively flat for the year.

Investing activities generated a cash outflow of $64.4 million for the three-month period ended December 31, 2020 and a cash outflow of $72.2 million for the twelve-month period ended December 31, 2020. These cash outflows relate mainly to the acquisition of four companies during the year.

Financing activities for the three-month period ended December 31, 2020 resulted in a cash inflow of $188.9 million. The cash inflow is mainly explained by the proceeds from the issuance of share capital of $195.9 million for the three-month period partially compensated by a decreased in long-term debt of $6.0 million. Financing activities for the twelve-month period ended December 31, 2020 resulted in an inflow of $244.5 million mainly explained from the issuance of share capital of $242.6 million as well as new long-term debt of $3.5 million.

Contractual Obligations

As at December 31, 2020

in millions of$		Payments Due	byPeriod
	1year	2 -5years	Beyond 5years	Total
Operating leases	0.4	0.2	-	0.6
Total contractual obligations	0.4	0.2	-	0.6

Xebec Management’s Discussion and Analysis

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Credit Facilities

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 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.

9. OUTSTANDING SHARE DATA

Outstanding common shares and stock options:


	Number of shares	Exercise Price	Expiring Date
Issued and outstanding Common Shares as of March 24, 2021	152,449,768
Stock Options	200,000 200,000 350,000 86,334 34,000	$0,55 $0.05 $0.49 $0.55 $0.60	December 19, 2022 January 7, 2023 August 29, 2024 December 19, 2024 May 14, 2025
	870,334	$0.53

Xebec Management’s Discussion and Analysis

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Warrants	3,000,000	$4.58	May 5, 2022
Compensation shares	311,483	$3.60	June 26, 2021
RSUs	259,300
DSUs	66,232
Fully diluted as at March 24, 2021	156,957,117

10. SUBSEQUENT EVENTS

i) On February 22, 2021, Xebec Adsorption Inc. closed its previously announced acquisition of Inmatec Gase Technologie GmbH & Co. KG, Inmatec GmbH and Inmatec Gas Technology FZC RAK (collectively, “Inmatec”), to support the Company’s expansion into Germany’s hydrogen and renewable natural gas markets and extend its Cleantech Service Network strategy. The acquisition’s purchase price was financed with the proceeds from the public offering 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 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-in-class and this acquisition will give Xebec an accelerated entry into offering these products in North America.

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 CAD. 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 increasing 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 has become 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 Company, certain of its current directors and officers, and the underwriters of Xebec’s December 2020 bought deal public offering of subscription receipts by

Xebec Management’s Discussion and Analysis

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way of 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 Company 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.

11. CRITICAL ACCOUNTING ESTIMATES

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 audited consolidated financial statements.

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.

Impairment of internally generated intangible assets

The Company performs a test for internally generated intangible assets impairment when there is any indication that internally generated intangible assets have suffered any impairment in accordance with the accounting policy stated in the summary of significant accounting policies of these consolidated financial statements. The recoverable amounts of internally generated intangible assets have been determined based on value-in-use calculations. The value in use calculation is based on a discounted cash flow model. These calculations require the use of estimates and forecasts of future cash flows. Qualitative factors, including the strength of customer relationships, the degree of variability in cash

Xebec Management’s Discussion and Analysis

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flows as well as other factors are considered when making assumptions about 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.

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. Management assesses the profitability of the contract by applying important judgments regarding milestones marked, actual work performed and estimated costs to complete. Actual results could differ because of these unforeseen changes in the ongoing contracts’ models.

Allowance for expected credit loss

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

Acquisition valuation method

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

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.

Impairment of non-financial assets and goodwill

Xebec Management’s Discussion and Analysis

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In assessing impairment, management estimates the recoverable amounts of each asset or cashgenerating 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.

12. CHANGES IN ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS

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’). Rightof-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.

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

Xebec Management’s Discussion and Analysis

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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.

13. OUTLOOK AND MANAGEMENT GUIDANCE

Current Market Outlook

The political and regulatory backdrop for Xebec’s products and services remains positive, and both Europe and North America are moving aggressively towards net-zero positions by 2050. In the United States, the new administration reaffirmed is leadership as it relates to climate change and rejoined the Paris Agreement in January. Consequently, the EPA has reviewed its past practices under the Renewable Fuel Standard (RFS) and RINs (renewable identification numbers or low carbon fuel credits) have significantly increased in value from its three-year low in 2019 and is approaching its all-time-high from 2017. The increase in value of these credits is one factor that drives renewable gas project development.

Despite challenges faced by the COVID-19 pandemic and related operational issues, Xebec believes that the outlook for 2021 and beyond continues to be very positive. Xebec anticipates strong revenue growth and a return to positive adjusted EBITDA in 2021.

Cleantech Systems

Renewable Natural Gas

Xebec is accelerating its shift towards standardized biogas upgrading products for the renewable natural gas market. The company launched and delivered its first fully containerized and standardized BGX Biostream™ (“Biostream”) unit for small-scale biogas upgrading applications in 2020. Xebec expects that this new product will lead to predictable cost management and improved gross margins. In addition, Biostream will allow Xebec to scale its operations to fill the growing demand for RNG

Xebec Management’s Discussion and Analysis

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systems. The product’s value proposition offers customers significantly shorter lead times, one week installation and start-up periods, a modular and scalable design, and the ability to handle smaller, fluctuating biogas flow rates.

According to the American Biogas Council, it is estimated that 8,574 dairy, poultry, and swine farms and 3,878 water resource recovery facilities, are primed for biogas and renewable natural gas production. Biostream is estimated to cover approximately 80% of these use cases with its two standardized configurations. In addition, oil majors such as BP, Shell and Chevron, who are potential partners or customers, have become increasingly engaged in the market and have started to directly fund RNG developments.

Overall, the company continues to see a positive backdrop for the RNG industry as organizations and governments around the world aim to manage organic waste more effectively and decarbonize the energy supply, transportation and industry.

Xebec regards renewable natural gas quote activity as an early indicator of future order activity. The company’s quote log remains strong at over $1 billion quotes outstanding, of which $439.6 million (as of March 24, 2021) are actively being pursued. Biostream quotes have increased significantly over the last several months, as a result of new marketing and sales efforts, and now make up 23.8% of total quotes. The company is in final negotiations for several projects, leading to the expectation of positive short-term order outlook and an increased backlog.

The company expects that the renewable natural gas segment will comprise approximately 20% to 30% of total revenues in 2021.

Hydrogen

The hydrogen economy is rapidly growing and presents a large-scale market worldwide. Xebec’s hydrogen purification business coincides with the market’s expanding opportunities as the need for high-purity hydrogen for use in fuel cell electric vehicles increases.

On February 11, 2021, Xebec announced a contract for Fuel Cell Energy’s Port of Long Beach project with Toyota. This recent order, among others, showcases the growing interest in Xebec’s proprietary PSA technology for such applications.

As a result of Xebec’s acquisition of HyGear in December 2020, the company obtained a world leading hydrogen generation business with both steam methane reforming and electrolysis technologies. HyGear is expected to start contributing revenues and profits to Xebec in 2021 through a combination of equipment sales, long-term Gas-as-a-Service contracts and R&D projects.

The cornerstone of HyGear’s strategy is to satisfy the existing and evolving needs for industrial hydrogen, while also facilitating the upcoming demand for fuel cell electric vehicles (FCEVs). This is supported by both on-site hydrogen generation equipment and local decentralized hydrogen production hubs in strategic areas. Customers can either purchase equipment or sign long-term, 15year Gas-as-a-Service contracts and pay for the molecule itself.

Xebec Management’s Discussion and Analysis

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On February 16, 2021, Xebec announced the construction of the company’s second Decentralized Hydrogen Production Hub in West Bromwich, United Kingdom with Buse Gases Ltd as a joint venture. This hub is in addition to the one currently operational in Arnhem, The Netherlands, which was commissioned in 2017 and is delivering hydrogen to customers locally.

Decentralized Production Hubs will be a key aspect of Xebec’s hydrogen supply strategy going forward and the full details will be provided in a corporate update later this year.

Industrial Service & Support

Xebec continues its roll-up strategy by acquiring compressed air service companies to build out the company’s Cleantech Service Network throughout North America. With the strategic acquisitions of HyGear and Inmatec, the Cleantech Service Network coverage will now include Europe.

When customers select a vendor for a multi-million-dollar renewable natural gas or hydrogen system, the ability to provide local service and support figures prominently in their purchasing decision. The company continues to aggressively expand its Cleantech Service Network across its operating regions. As a result, Xebec is targeting approximately 30 companies (5 completed to date) by 2025, resulting in a yearly revenue run rate of about $250 million by 2025.

This strategy supports Xebec’s long-term plan to transition to a more services-based company. Increased exposure to service revenues is expected to improve the company’s overall revenue predictability and profitability. Lastly, the company’s service offering is not limited to its own equipment as technicians can interface with other vendors’ renewable natural gas and hydrogen systems.

Renewable Gas Infrastructure

Xebec is addressing the renewable gas infrastructure opportunity through GNR Quebec Capital L.P. (“GNRQC”), a fund created in partnership with The Fonds de solidarité FTQ (“Fonds”), the largest capital development fund in Québec. As a result, all of Xebec’s renewable gas infrastructure investment activities were folded into GNRQC. Xebec is an equal equity investor alongside the Fonds and will participate in the sale of renewable natural gas equipment alongside long-term service contracts for the equipment.

GNRQC is dedicated to developing high-performance organic waste treatment facilities for the production and distribution of renewable natural gas (RNG) in Québec. When fully capitalized with $100 million in equity and appropriately leveraged, GNRQC expects to finance approximately 12 to 15 renewable natural gas projects in the province over the next decade.

RNG production is supported by both the Québec government through targets and incentives and private corporations who are seeking ESG friendly solutions to reduce their carbon footprints. In the “2030 Plan for a Green Economy” announced on November 16, 2020, the Québec government’s budget included $213 million for the PSPGNR program (MERN), which will provide financial support for agricultural projects. Québec is also maintaining its target to increase bioenergy production by 50%

Xebec Management’s Discussion and Analysis

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and has a target of 10% RNG in the pipeline by 2030. This follows the government’s announcement on July 7, 2020 for its organic material management plan which set a target to recycle or recover 100% of organic waste in the province by 2030.

GRNQC started its operations in Q3 2020 and now employs a team comprising waste management, business development and project finance expertise. The fund has more than 20 projects under evaluation of both greenfield and brownfield varieties in agriculture, municipal and industrial waste applications. GRNQC expects to complete several investments in 2021 as projects progress over their average three-to-four-year development cycle.

Xebec does not expect to realize any investment income or losses for renewable gas infrastructure in 2021.

Management Guidance for 2021

For fiscal full-year 2021, Xebec expects to continue its revenue growth and a return to positive adjusted EBITDA. Given the current order backlog of $101.1 million (as of March 24, 2021), million, including projected revenues of HyGear, Inmatec and the Cleantech Service Network, we expect consolidated revenues for 2021 in the range of $110.0 to $130.0 million and adjusted EBITDA margins in the range of 3.0% to 4.0%.

14. RELATED PARTY TRANSACTIONS

	For	the three-month	the three-month	For the twelve-month	For the twelve-month
	period ended December		31,	period ended December 31,
In thousands of $	2020	2019		2020	2019
Marketing and professional services expenses paid to companies controlled
by members of the immediate family of an officer	10		25	80	119
Salaries and short-term benefits paid to members of immediate family of an
officer	34		48	165	141
Rent paid to companies controlled by members of immediately family of an
officer	18	-		24	-
Material purchased to companies controlled by members of the immediate
familyof an officer	11		8	34	43
Total	73		81	303	303

Xebec Management’s Discussion and Analysis

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15. RECONCILIATION OF NON-IFRS MEASURES

EBITDA

*EBITDA*
In millions of $	For the three-month period		For the twelve-month period
	ended December 31,		ended December 31,
	2020	2019	2020	2019
Net income (loss)	(28.3)	(0.5)	(32.0)	2.0
Depreciation of property	0.4	0.2	1.1	0.6
Amortization of intangible assets	1.3	1.2	2.7	1.3
Income taxes	0.0	0.4	(0.0)	0.4
Financing Expenses	1.4	0.4	2.7	1.6
EBITDA	(25.2)	1.6	(25.4)	5.8
Stock-based compensation expenses	0.8	0.1	1.1	0.4
Impairment of inventories	0.2	0.0	0.1	(0.1)
Exchange gain/loss on the obligation arising from non
controlling interest participation in a subsidiary	(0.0)	0.0	0.2	(0.3)
Foreign exchange loss (gain)	0.7	0.2	0.1	0.4
Accretion of debt	1.0	0.2	2.0	0.7
Adjusted EBITDA	(22.6)	2.1	(22.0)	7.0
Adjusted EBITDA in percentage of sales	-356%	15%	-39%	14%

EBITDA is a non-IFRS financial measure.

EBITDA is not a performance measure defined under IFRS and is not considered an alternative to income from operations or net (loss) earnings. EBITDA does not have a standardized meaning and is therefore not likely to be comparable with similar measures used by other publicly traded companies.

The adjusted EBITDA for the three-month period ended December 31, 2020 was ($22.6) million compared to $2.1 million in the same period of 2019, a decrease of $24.7 million mainly due to the net loss of $28.3 for the period.

Xebec Management’s Discussion and Analysis

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The adjusted EBITDA for the twelve-month period ended December 31, 2020 was ($22.0) million compared to $7.0 million in the same period of 2019, a decrease of $29.0 million mainly due to the net loss of $32.0 for this period.

16. ENTERPRISE RISK MANAGEMENT

Our Definition of Business Risk

We define business risk as the degree of exposure associated with the achievement of key strategic, financial, organizational and process objectives in relation to the effectiveness and efficiency of operations, the reliability of financial reporting, compliance with laws and regulations and the safeguarding of assets within an ethical organizational culture.

Our enterprise risks are largely derived from the Company’s business environment and are fundamentally linked to our strategies and business objectives. We strive to proactively mitigate our risk exposures through rigorous performance planning and effective and efficient business operational management.

The Company maintains director and officer liability insurance for errors, misstatements, misleading statements, acts, omissions, neglects, or breaches of duty committed, attempted, or allegedly committed or attempted by its directors and officers (the “Executive Protection Policy”). Claims under the Executive Protection Policy are limited at $10 million per loss for a maximum aggregate liability of $10 million per policy period. The Executive Protection Policy’s policy period began December 1, 2020 and will end on December 1, 2021.

The following sections summarize the principal risks and uncertainties that could affect our future business results going forward and our associated risk mitigation activities.

17. RISK FACTORS

An investment in our common shares involves risk. Investors should carefully consider the risks and uncertainties described below and in our Annual Information Form. The risks and uncertainties described below and in our Annual Information Form are not the only ones we face. Additional risks and uncertainties, including those that we do not know about now or that we currently deem immaterial, may also adversely affect our business. For a more complete discussion of the risks and uncertainties which apply to our business and our operating results (which are summarized below), please see our Annual Information Form and other filings with Canadian Regulatory Authorities (www.sedar.com).

Our business entails risks and uncertainties that affect our outlook and eventual results of our business and commercialization plans. The primary risks relate to meeting our product commercialization milestones, which require that our products exhibit the functionality, cost, and performance required to be commercially viable against competing technologies and that we have enough access to capital to fund these activities. There is also a risk that key markets for certain of our products may not be as large as we anticipate or never develop, or that market acceptance might take longer to develop than

Xebec Management’s Discussion and Analysis

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anticipated – in particular for applications such as advanced CO2 removal from natural gas, which requires industry acceptance and uptake, or our renewable natural gas (RNG) product offering which depends on government programs and regulatory support.

A summary of our identified risks and uncertainties are listed below:

Macroeconomic and Geopolitical Risks

Global economic factors beyond our control such as sustained and far reaching negative economic factors, more restrictive access to credit markets, the current state of the energy markets and low fuel price differential, including the effects of the decision of Saudi Arabia to reduce the price of its oil and to increase its production, pandemics or other outbreaks of illness, disease or virus, such as the strain of coronavirus known as COVID-19, or other broad economic issues may negatively affect the capital markets or market for our products, and reduce demand for our products as partners and potential customers defer their projects. The uncertain and unpredictable condition of the global economy could have a negative impact on our business, results of operations and consolidated financial condition, or our ability to accurately forecast our results, and it may cause a number of the risks that we currently face to increase in likelihood, magnitude, and duration, such as:

Significant markets for renewable natural gas (RNG) and other hydrogen purification products may never develop or may develop more slowly than we anticipate. This would significantly harm our revenues and may cause us to be unable to recover the losses we have incurred.
Changes in government policies and regulations could hurt the market for our products.
Lack of new government policies and regulations for renewable energy technologies could hurt the development of our renewable natural gas (RNG) and hydrogen generation and purification products.
We currently face and will continue to face significant competition from other developers and manufacturers of renewable natural gas (RNG) products and hydrogen purification systems. If we are unable to compete successfully, we could experience a loss of market share, reduced gross margins for our existing products and a failure to achieve acceptance of our proposed products.
We face competition for CO2 removal from natural gas systems from developers and manufacturers of traditional technologies and other alternative technologies.
Rapid technological advances or the adoption of new codes and standards could impair our ability to deliver our products in a timely manner and, as a result, our revenues would suffer.
Our articles of incorporation authorize us to issue an unlimited number of common and preferred shares. Significant issuances of common or preferred shares could dilute the share ownership of our shareholders, deter or delay a takeover of us that our shareholders may consider beneficial or depress the trading price of our common shares.
Our share price is volatile, and we may continue to experience significant share price and volume fluctuations.
Natural gas and oil prices are expected to remain volatile for the near future because of market

Xebec Management’s Discussion and Analysis

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uncertainties over the supply and the demand of this commodity due to the current state of the world economies, energy infrastructure and other factors, including geopolitical factors and the effects of COVID-19.

Operating Risks

We may not be able to implement our business strategy and the price of our common shares may decline.
Our quarterly operating results are likely to fluctuate significantly and may fail to meet the expectations of securities analysts and investors causing the price of our common shares to decline.
We currently depend on a relatively limited number of customers for most of our revenues and a decrease in revenue from these customers could materially adversely affect our business, consolidated financial condition, and results of operations.
Our insurance may not be enough.
Hydrogen Fuel Cell systems and applications may not be readily available on a cost-effective basis, in which case our hydrogen generation and purification products may not find a sufficient end market and our revenues and results of operations would be materially adversely affected.
We could be liable for environmental damages resulting from our research, development or manufacturing operations.
Our strategy for the sale of renewable natural gas products depends on developing partnerships with OEMs, governments, systems integrators, suppliers and other market channel partners who will incorporate our products into theirs.
We are dependent on third party suppliers for key materials and components for our products. If these suppliers become unable or unwilling to provide us with enough materials and components on a timely and cost-effective basis, we may be unable to manufacture our products cost-effectively or at all, and our revenues and gross margins would suffer.
We may not be able to manage successfully the anticipated expansion of our operations.
If we do not properly manage foreign sales and operations, our business could suffer.
We will need to recruit, train and retain key management and other qualified personnel to successfully expand our business.
We may acquire technologies or companies in the future, and these acquisitions could disrupt our business and dilute our shareholders’ interests.
We must continue to lower the cost of our renewable natural gas and hydrogen generation and purification products and demonstrate their reliability or consumers will be unlikely to purchase our products and we will therefore not generate enough revenues to achieve and sustain profitability.
Any failures or delays in field tests of our products could negatively affect our customer

Xebec Management’s Discussion and Analysis

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relationships and increase our manufacturing costs.

The components of our products may contain defects or errors that could negatively affect our customer relationships and increase our development, service and warranty costs.
We depend on intellectual property and our failure to protect that intellectual property could adversely affect our future growth and success.
Our products use flammable fuels that are inherently dangerous substances and could subject us to product liabilities.
We may not be able to raise sufficient capital to fund initiatives such as our acquisition roll-up strategy for the Cleantech Service Network.

Foreign Currency Exchange Risk

The majority of Xebec’s revenues are in Canadian and U.S. dollars, Chinese Yuan and Euros, while a significant portion of the operating expenses are in Canadian dollars, Chinese Yuan and Euros. Foreign exchange gains and losses are included in results from operations. A large decline in the U.S. dollar, Chinese Yuan or Euros relative to the Canadian dollar could impair revenues, margins, and other financial results. Xebec has not entered into foreign exchange contracts to hedge against gains and losses from foreign currency fluctuations.

Coronavirus Impact on Global Operations and Deliveries

The continued spread of COVID-19 around the globe and the responses of governmental authorities and corporate entities, including through mandated or voluntary shutdowns, has led to a general slowdown 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 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 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.

Xebec’s manufacturing operations in Shanghai, China (“Xebec Shanghai”) were previously affected by COVID-19 and were shut down for three additional weeks after the normal two-week Chinese New Year holiday, which resulted in Xebec Shanghai experiencing an impact on Q1/20 and Q2/20 revenues and earnings.

Our operations in Lombardy, Italy, were previously impacted by the mandated lockdown of the country in March and April 2020. Although Xebec does not have full manufacturing capabilities in Italy, projects are mostly outsourced into the supply chain. We have seen delays from suppliers and restrictions in our access to work sites.

Lastly, Xebec’s Canadian operations remain COVID-19 free, but there have been increasing costs and delay implications. Our schedule for North American deliveries has experienced higher than normal

Xebec Management’s Discussion and Analysis

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delays and we expect an abnormal operational environment until the end of 2021. The revision downwards of 2020 guidance was the result of cost overruns (supply chain and installation increases) and delivery delays in part from the impact of COVID-19.

Risks Associated to Legal Proceedings

In the ordinary course of business, the Company is involved in and potentially subject to legal proceedings. The proceedings may involve suppliers, customers, regulators, tax authorities or other persons. The potential outcome of legal proceedings and claims is uncertain.

A legal proceeding in the Ontario Superior Court of Justice was issued on March 19, 2021 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.

Xebec has also become aware that a legal proceeding in the Québec Superior Court (Class Actions Division) was issued on March 15, 2021 initiating a proposed class action against the Company, certain of its current directors, certain of the Company’s current and former officers 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 its disclosure documents for Q3 2020 as well as its December 2020 prospectus with respect to revenue accounting practices and Xebec’s internal controls over financial reporting.

As at the date hereof, the amounts claimed for damages in each of these actions have not been quantified. These actions are in a preliminary stage and have not yet been certified as class actions.

While the Company cannot predict the outcome of the actions discussed above, it intends to assert all available defences and vigorously defend these proceedings. Defending litigation, whether or not meritorious, is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities. In addition, legal fees and costs incurred in connection with such activities may be significant and we could, in the future, be subject to judgments or enter into settlements of claims for significant monetary damages. Further, the Company’s underwriting agreement with the underwriters in connection with its December 2020 bought deal public offering of subscription receipts contains contractual indemnification provisions that may require the Company to indemnify the underwriters with respect to the claims against them and their legal costs of defending the actions. A decision adverse to our interests could result in the payment of substantial damages and could have a material adverse effect on our cash flow, results of operations and financial position, and the limits of available insurance may be insufficient to cover our eventual liability.

18. FORWARD-LOOKING STATEMENTS

Xebec Management’s Discussion and Analysis

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This Management Discussion and Analysis (“MD&A”) contains forward-looking statements, including statements regarding the future success of the Company’s business, technology, and market opportunities. Forward-looking statements typically contain words such as “believes”, “expects”, “anticipates”, “continues”, “could”, “indicates”, “plans”, “will”, “intends”, “may”, “projects”, “schedules”, “would” or similar expressions suggesting future outcomes or events, although not all forward-looking statements contain these identifying words. Examples of such statements include, but are not limited to, statements concerning: (i) actions expected to be undertaken to achieve the Company’s strategic goals; (ii) the key market drivers impacting the Company’s success; (iii) intentions with respect to future renewable gas work; (iv) expectations regarding business activities and orders that may be received in fiscal 2021 and beyond; (v) trends in, and the development of, the Company’s target markets; (vi) the Company’s market opportunities; (vii) the benefits of the Company’s products, (viii) the intention to enter into agreements with partners; (ix) future outsourcing; (x) expectations regarding competitors; (xi) the expected impact of the described risks and uncertainties; (xii) intentions with respect to the payment of dividends; (xiii) the management of the Company’s liquidity risks in light of the prevailing economic conditions; (xiv) the Company’s cost reduction plan; (xv) the search for additional financing over the next months; (xvi) statements regarding the merits of the class action complaints filed against the Company; and (xvii) 2021 revenue and EBITDA guidance.

These statements are neither promises nor guarantees but involve known and unknown risks and uncertainties that may cause the Company’s actual results, level of activity or performance to be materially different from any future results, levels of activity or performance expressed in or implied by these forward-looking statements. These risks include, generally, risks related to revenue growth, operating results, industry and products, technology, competition, the economy, and other factors. Although the forward-looking statements contained herein are based upon what management believes to be current and reasonable assumptions, the Company cannot assure readers that actual results will be consistent with these forward-looking statements. Examples of such assumptions include but are not limited to: (i) trends in certain market segments and the economic climate generally; (ii) the pace and outcome of technological development; (iii) the identity and expected actions of competitors and customers; (iv) assumptions relating to the merits of the class action complaints filed against the Company and their impact; and (v) the value of the Canadian dollar. The forward-looking statements contained herein are made as of the date of this MD&A and are expressly qualified in their entirety by this cautionary statement. Except to the extent required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statements contained herein.

Xebec Management’s Discussion and Analysis

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19. CORPORATE GOVERNANCE

The Board of Directors of Xebec Adsorption Inc. is comprised of seven directors, five of whom are independent.

Approval

The Board of Directors of Xebec Adsorption Inc. has approved the disclosure contained in this MD&A. A copy of this MD&A will be provided to anyone who requests it.

Additional Information

Additional information relating to Xebec Adsorption Inc. is on SEDAR at www.sedar.com or by contacting:

Xebec Adsorption Inc., 730, Boulevard Industriel, Blainville, QC, Canada, J7C 3V4 Tel: (450) 797-8700 www.xebecinc.com email: [email protected] Attention: Stéphane Archambault, Chief Financial Officer

AI assistant

FormerXBC Inc. — Management Reports 2021

46443_rns_2021-03-25_5d31afc6-b280-4205-be75-f0199bee3ab3.pdf

The financial information presented herein has been prepared based on International Financial Reporting Standards (IFRS) for financial statements and is expressed in Canadian dollars unless otherwise stated.

Table of Contents

1. OUR BUSINESS

About Us

Vision. Mission. Purpose. People.

Our Products

Our Customers and Suppliers

International Footprint and Certifications

Global Leader in Decarbonizing Gases

Technology

Adsorption

Pressure Swing Adsorption (PSA)

Filtration

Steam Methane Reforming

Electrolyser

Oxygen and Nitrogen On-site Generation

2. OUR BUSINESS SEGMENTS

Cleantech (Systems)

Renewable Natural Gas (RNG)

Hydrogen, Renewable Hydrogen (RH2) and Industrial Hydrogen

Product Lines

Industrial Service and (Support)

Market Size for Xebec’s Industrial Products

Product Line & Services

Renewable Gas (Infrastructure)

The concept:

3. BUSINESS STRATEGY

External Business Drivers

Path to Sustainable Growth

Key Events in 2021

Key Events in 2020

Strategy Moving Forward

Build & Market Renewable Gas Solutions

Drive Recurring Revenue

2020 Results

4. OPERATING RESULTS

Selected Financial Information

Highlights for the three-month period ended December 31, 2020, compared to the threemonth period ended December 31, 2019:

Highlights for the twelve-month period ended December 31, 2020, compared to the same period ended December 31, 2019

Current Backlog as of March 18, 2021

Business Segment Review

Systems - Cleantech

Support – Industrial Products and Service

Corporate and Other

5. FINANCIAL CONDITION

Summary Balance Sheet

Total Indebtedness

Capital Stock Information

Share Purchase Warrants Outstanding

Stock Options Outstanding

6. SUMMARY OF QUARTERLY RESULTS

7. USE OF FUNDS

Use of funds as at December 31, 2020

8. LIQUIDITY AND CAPITAL RESOURCES

Contractual Obligations

Credit Facilities

9. OUTSTANDING SHARE DATA

10. SUBSEQUENT EVENTS

11. CRITICAL ACCOUNTING ESTIMATES

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

Impairment of internally generated intangible assets

Percentage of completion and revenues from long-term production-type contracts

Allowance for expected credit loss

Acquisition valuation method

Leases

Impairment of non-financial assets and goodwill

12. CHANGES IN ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS

The Company as a lessee:

The Company as a lessor:

13. OUTLOOK AND MANAGEMENT GUIDANCE

Current Market Outlook

Cleantech Systems

Renewable Natural Gas

Hydrogen

Industrial Service & Support

Renewable Gas Infrastructure

Management Guidance for 2021

FormerXBC Inc. Management Reports 2021