Xebec Announces Q2 2022 Financial Results

(All financial figures are in Canadian dollars unless otherwise noted)

MONTRÉAL–(BUSINESS WIRE)–Xebec Adsorption Inc. (TSX: XBC) (“Xebec” or the “Company”), a global provider of sustainable gas technologies, announced today its 2022 second quarter results, with the following highlights:

Second Quarter 2022 Highlights

• Revenues of $44.5 million compared to $32.7 million for the same period in 2021
• Gross margin (Non-IFRS) of $1.8 million or 4% compared to $5.0 million or 15% for the same period in 2021
• Adjusted EBITDA (Non-IFRS) of ($12.0) million compared to ($5.2) million for the same period in 2021
• Net loss of $23.4 million or $0.15 per share compared to a net gain of $10.2 million or $0.07 per share for the same period in 2021
• Backlog (Non-IFRS) of $270.2 million at August 10, 2022 compared to $75.9 million at August 11, 2021
• Captured remaining costs of legacy RNG contracts, as previously indicated in Q1 2022, with a special charge resulting in a gross margin (Non-IFRS) impact of $8.3 million, an adjusted EBITDA (Non-IFRS) impact of $8.6 million and a net loss impact of $11.9 million to encompass remaining costs on projects, potential penalties and warranty claims, an inventory obsolescence provision, and legal settlement and related costs
• Reduced North American headcount by 13% subsequent to the quarter on July 13, 2022 resulting in approximately $4.0 million in annual cost reductions and entered into workshare program in Germany saving approximately $0.5 million in the second half of 2022 (management estimates)

Financial Highlights:

Income Statement
(In millions of $, except per share amounts)		For the three-month period ended June 30, 2022									For the three-month period ended June 30, 2021
		Per Income Statement		Legacy RNG contracts (1)			Income statement excluding legacy RNG contracts				Per Income Statement			Legacy RNG contracts (1)			Income statement excluding legacy RNG contracts
Revenue		44.5		(0.3)			44.8				32.7			0.8			31.9
Gross margin (2)		1.8		(8.3)			10.1				5.0			(4.2)			9.2
Gross margin % (2)		4%		–			23%				15%			–			29%
Net income (loss)		(23.4)		(12.0)			(11.4)				10.2			(4.3)			14.5
EPS		(0.15)		(0.08)			(0.07)				0.07			(0.03)			0.10
Adjusted EBITDA (2)		(12.0)		(8.6)			(3.4)				(5.2)			(4.3)			(0.9)

Financial Position
(In millions of $)		June 30, 2022		December 31, 2021		Variance %
Cash and restricted cash		50.3		51.1		(2%)
Working capital (2)		35.9		81.0		(56%)
Net debt (2)		37.8		43.4		(13%)

Backlog
(In millions of $)		August 10, 2022		May 11, 2022		Variance %		August 11, 2021		Variance %
Backlog (2)		270.2		260.5		4%		75.9		256%

(1)		Isolates the impact from legacy RNG contracts from other operations to show the performance of the Company. Q2 2022 saw a special charge both to capture the remaining costs of these projects and costs to discontinue the product line going forward.
(2)		These are Non-IFRS measures. Please see disclosures below for more details on these Non-IFRS measures and for a reconciliation of these Non-IFRS measures to the most directly comparable measures calculated in accordance with IFRS.

Financial Results

• Revenues increased by $11.8 million to $44.5 million for the three-month period ended June 30, 2022 compared to $32.7 million for the same period the prior year. The increase is mainly explained by the integration of newly acquired companies, completion of second-generation Biostreams and organic growth initiatives in North America. The increase is partly offset by a lower level of sales in Europe, primarily attributable to supply chain constraints and reduced sales of oxygen and hydrogen generators, and a reduction of revenues from the deconsolidation of our Shanghai Joint-Venture last year.
• Revenues excluding legacy RNG contracts increased by $12.9 million to $44.8 million for the three-month period ended June 30, 2022 compared to $31.9 million for the same period the prior year.
• Gross margin (Non-IFRS) decreased from $5.0 million to $1.8 million for the three-month period ended June 30, 2022 compared to the same period the prior year. The gross margin % decrease from 15% to 4% is due to a provision intended to capture all the estimated losses on legacy RNG contracts, lower margin hydrogen contracts and higher material and supply chain costs.
• Gross margin excluding legacy RNG contracts (Non-IFRS) increased from $9.2 million to $10.1 million for the three-month period ended June 30, 2022 compared to the same period the prior year. The gross margin % (Non-IFRS) decreased from 29% to 23% due to lower margin hydrogen contracts and higher material and supply chain costs.
• Selling and administrative expenses (“SG&A”) of $17.2 million, increased by $5.0 million for the three-month period ended June 30, 2022 compared to $12.2 million for the same period the prior year. The increase was mainly associated with SG&A expenses from newly acquired companies.
• Research and development expenses of $1.0 million for the three-month period ended June 30, 2022 related to the continued development of the Company’s second generation Biostream product and our biogas upgrading and hydrogen technologies.
• Other (gains) and losses of $5.6 million for the three-month period ended June 30, 2022 compared to a gain of $20.0 million for the same period the prior year. The decrease is mainly due to the gain on deconsolidation of investment in our Shanghai Joint-Venture ($21.1 million) recorded last year combined with a provision for potential penalties recorded on legacy RNG contracts ($2.6 million), a net loss on foreign currency fluctuations (net loss of $1.0 million vs. a net gain of $0.2 million in the prior period) and a legal settlement and related costs ($1.2 million, including $0.7 million related to legacy RNG contracts). This was partly offset by lower integration and acquisition costs.
• Operating loss (Non-IFRS) of $21.3 million for the three-month period ended June 30, 2022 compared to an operating profit (Non-IFRS) of $11.8 million for the same period the prior year. The decrease is mainly explained by the above-noted items.
• Net loss of $23.4 million or $0.15 per share in the three-month period ended June 30, 2022 compared to a net gain of $10.2 million or $0.07 per share for the same period the prior year.
• Net loss excluding legacy RNG contracts of $11.4 million or $0.07 per share in the three-month period ended June 30, 2022 compared to a net gain of $14.5 million or $0.10 per share for the same period the prior year.
• Adjusted EBITDA (Non-IFRS) loss increased to $12.0 million for the three-month period ended June 30, 2022 from $5.2 million for the same period last year.
• Adjusted EBITDA (Non-IFRS) excluding legacy RNG contracts increased to a loss of $3.4 million for the three-month period ended June 30, 2022 from a loss of $0.9 million for the same period last year.
• Net debt (Non-IFRS) of $37.8 million as at June 30, 2022 compared to $43.4 million as at December 31, 2021. In July 2022, the Company and one of its bankers executed a forbearance agreement further due to a ratio covenant breach.

CEO Quote:

“Q2 saw more developments under our Centers of Excellence Framework while navigating through macroeconomic events contributing to the supply chain and inflationary pressures worldwide. As indicated, we captured the costs associated with our legacy RNG contracts associated with discontinuing the product line in the quarter. We will continue to work to drive down costs within our framework and may consider other options such as asset divestitures or joint ventures to further enhance our liquidity. With that being said, we are encouraged to see the level of commercial activity across our business verticals and the potential impact from legislation such as the pending Inflation Reduction Act of 2022,” stated Jim Vounassis, President and CEO of Xebec Adsorption Inc.

Current Market Outlook

Xebec continues to execute on its commercial pipeline as evidenced by its backlog (Non-IFRS) which has increased both year-over-year and quarter-over-quarter. However, current market conditions have created an environment where profitable growth is essential, and Xebec is addressing this with its previously announced Centers of Excellence Framework. While Xebec’s objective is to continue its growth trajectory, the Company is simultaneously taking actions to deliver better efficiencies and operating leverage in line with its previously announced three-year strategic plan. In addition to its cost saving initiatives, including its Centers of Excellence Framework, and financing efforts, the Company may consider other cash generating alternatives such as potential asset divestitures or joint ventures.

The second quarter of fiscal 2022 saw the Company discontinue certain business activities, mainly within its RNG segment, to ensure it is focusing on products and services that management believes can achieve desired operating margins long-term. A provision intended to capture all the remaining estimated losses of these legacy RNG contracts was recorded in the quarter and had a gross margin (Non-IFRS) impact of $8.3 million and a net loss impact of $11.9 million.

In July 2022, Xebec announced a headcount reduction of approximately 13% in North America, resulting in approximately $4.0 million in annual cost savings. These changes helped focused efforts, particularly in our Blainville, Québec facility. The Company continues to evaluate its business under the Centers of Excellence Framework which revolves around three levers: 1) core vs. non-core activities, 2) product rationalization, and 3) workforce and supply chain synergies, all of which aim to pursue operational efficiencies and focus our efforts across the business.

Xebec continues to be encouraged by the push towards increased onshoring of manufacturing, energy security and lower carbon fuels with proposed bills such as The Inflation Reduction Act of 2022 and its targeted US$369 billion in clean energy investments¹. We believe Xebec remains well positioned for the energy transition towards renewable and low carbon gases as markets around the world aim for lower costs, lower emissions and local supply for energy, industrial and mobility applications.

Systems – Cleantech

Renewable Natural Gas (RNG)

While 2022 started off with strong sales quoting activity, quotes have been slow to book into the backlog. Xebec believes this may be related to factors such as economic uncertainty, carbon credit pricing volatility and the early adopter nature of the second-generation Biostream product. While Xebec remains optimistic about the long-term growth prospects in RNG, the Company is cautious about the pace of order uptake in the short term.

Biostream deliveries to the Brightmark and Chevron Renewable Natural Gas Partnership remain on schedule with all 18 units expected to be manufactured and delivered by year end. Successful execution of this contract is a strategic priority for Xebec this year as it looks to further cement its leadership within the industry and create a record number of active RNG references.

The majority of legacy RNG contracts declared this quarter were in relation to the Company’s RNG segment as it finalizes the last of its legacy, production-type contracts, with provisions recognized for inventory write downs, potential penalties and warranty claims. Xebec aimed to capture all the estimated losses related to the full completion of this discontinued product line for the balance of the year. Going forward, the Company does not currently expect any further financial impact relating to these legacy activities. Revenues going forward are expected to be comprised entirely of standardized equipment.

We are optimistic about our remaining RNG business. While orders slowed this quarter, the Brightmark and Chevron Renewable Natural Gas Partnership contract deliveries are on track and we see a clear path to a profitable business in this segment.

Hydrogen

Hydrogen continues to present an array of opportunities for Xebec, some of which are translating into firm orders such as the previously announced PSA supply agreement with Haffner Energy, resulting in a record number of hydrogen PSA orders in the quarter. In addition, the Company is seeing strong demand for its Gas-as-a-Service offering globally and is working to progress its strategy in the segment to support the funding of the underlying assets more effectively. Gas-as-a-Service is important to improving scale and margins at our hydrogen operation in The Netherlands.

Gross margins (Non-IFRS) in the quarter continued to be impacted by increasing supply chain costs in Europe. Revenues also came in lower than expected due to delays with customers which have been pushed out to subsequent quarters. We believe the pipeline for potential projects continues to be strong with several key projects expected to be booked in the second half of 2022.

The hydrogen business continues to develop, but the pace of adoption by customers, supply chain issues and the capital required to support the Decentralized Production Hub strategy have pushed out the horizon for a cash positive business.

Carbon Capture and Sequestration

Xebec is making progress on its US$113.0 million contract with Summit Carbon Solutions and has secured all the necessary long-lead supply chain items to start manufacturing the equipment in the second half of 2022. Several units from the contract are expected to be delivered by year end with most of the contract to be executed and delivered by the end of 2023. Overall, Xebec continues to progress in its carbon capture and sequestration activities by working with existing customers while also aiming to create new opportunities for its technologies.

Oxygen and Nitrogen

The second quarter of fiscal 2022 saw a slowdown in the oxygen business as the strong demand from the COVID-19 pandemic subsided. Xebec believes that the oxygen business and consequently its whole on-site oxygen and nitrogen business will normalize to levels within the long-term mean of the industry. As a result, a work share program has been implemented to temporarily reduce overhead costs to respond to the shifting demand while retaining core employees. The cost reduction impact amounts to $0.5 million in SG&A for the second half of the 2022 and has the option to be renewed every six months.

The Company is focused on supplanting reduced oxygen demand with higher nitrogen orders. The second quarter of fiscal 2022 saw a significant order with Uponor commissioned in June 2022 where two large-scale nitrogen generators were provided to a customer who produces specialized high-tech metalized plastic hose connections. The nitrogen is used in the production process and saves over 230 liquid truck shipments per year which results in approximately 44,000KG per year of CO2 reduction.

The oxygen and nitrogen generation business are operating on a cash neutral basis. Its ability to produce material positive cash flow depends on the resolution of supply chain issues and increasing the nitrogen portion of the business in the face of declining oxygen demand triggered by declining intensity of the COVID-19 pandemic.

Lastly, Xebec has continued to see increased supply chain costs and consequently introduced increased pricing on generators to customers ranging between approximately 10%-20% beginning on March 1, 2022. The Company saw gross margins for this product line favourably reflect these updates.

Support – Industrial Products & Services

Now operating under the brand XBC Flow Services, our Support segment delivered operating results within expectations and continued to grow its service technician base to support the Company’s backlog (Non-IFRS). The latest wave of COVID-19 continued to impede on supply chain and logistics costs and reduced productivity for technicians in the segment. Existing and newly hired technicians have been playing a key role in supporting new Biostream deliveries, which will include installation and commissioning.

Integration efforts continue for service branches with the first location now running on Xebec’s global ERP system with several more to follow suit. In addition, brand transformation is underway with two Wisconsin service locations now successfully rebranded and a goal to complete two more in the third quarter of fiscal 2022. Xebec believes that these ongoing integration efforts will result in a realigned organization structure which reallocates saved costs for customer acquisition and retention.

The Support segment is progressing well and generating positive cash flow.

Xebec to Host Live Investor Webinar to Discuss Q2 2022 Results

An investor webinar for shareholders, analysts, investors, media representatives, and other stakeholders will be held today, August 11, 2022, at 8:30AM EDT (5:30AM PDT).

Register here: https://app.livestorm.co/xebec-adsorption-inc/2022-q2-investor-webinar

A recording of the webinar and supporting materials will be made available later today in the investor’s section of the Company’s website at xebecinc.com/investors.

2022 Second Quarter Financial Statements and Management’s Discussion and Analysis

The financial statements, notes to financial statements, and Management’s Discussion and Analysis for the three-month period ended June 30, 2022, are available on the company’s website at xebecinc.com/investors or on the SEDAR website at www.sedar.com.

Non-IFRS Measures and Reconciliation of Non-IFRS Measures

This press release refers to financial measures that are not recognized under International Financial Reporting Standard (“IFRS”). A Non-IFRS financial measure is a numerical indicator of a company’s performance, financial position or cash flow that excludes or includes amounts or is subject to adjustments that have the effect of excluding or including amounts that are included or excluded in most directly comparable measures calculated and presented in accordance with IFRS. Non-IFRS measures do not have any standardized meaning under IFRS and therefore are unlikely to be comparable to similar measures presented by other companies having the same or similar businesses.

The Company believes these measures are useful supplemental information. The following Non-IFRS measures are used by the Company in this press release: EBITDA, EBITDA margin, Adjusted EBITDA, Adjusted EBITDA margin and backlog.

Please find below definitions of Non-IFRS financial measures used by herein:

“Gross margin” means the operating income or loss excluding research and development, selling and administrative expenses, other gains and losses and after-tax share in profit or loss of equity accounted investees. We believe it is useful to management and investors in evaluating our ongoing operational performance. Please refer to section 6 “Operating results” of this MD&A for a reconciliation of this Non-IFRS measure to the most directly comparable measure calculated in accordance with IFRS.

“Gross margin %” being gross margin as a percentage of revenues. Please refer to section 6 “Operating results” of this MD&A for a reconciliation of this Non-IFRS measure to the most directly comparable measure calculated in accordance with IFRS. We believe it is useful to management and investors in evaluating our ongoing operational performance as a % of revenues.

“Operating profit or loss” means net income or loss excluding the effect of certain financing decisions, tax structures and discontinued operations. We believe it facilitated the comparison across reporting periods, and with companies and industries that do not have the same capital structure or tax laws. Please refer to section 6 “Operating results” of this MD&A for a reconciliation of this Non-IFRS measure to the most directly comparable measure calculated in accordance with IFRS.

“EBITDA” means the earnings before interest, income taxes, depreciation, and amortization, where interest is defined as net finance costs as per the consolidated statement of comprehensive income. We believe it is useful to management and investors in evaluating our ongoing operational performance. Please see table below for a reconciliation of this Non-IFRS measure to the most directly comparable measure calculated in accordance with IFRS.

“EBITDA margin” being EBITDA as a percentage of revenues. Please see table below for a reconciliation of this Non-IFRS measure to the most directly comparable measure calculated in accordance with IFRS. We believe it is useful to management and investors in evaluating both the operating profitability and cash flows generated from the business as a % of revenues.

“Adjusted EBITDA” starts with EBITDA and adjusts for Stock-based compensation expenses, impairment of inventories, exchange gain/loss on the obligation arising from non-controlling interest participation in a subsidiary, foreign exchange loss (gain), accretion of debt, impairment charge of tangible assets, remeasurement of investments, M&A transaction fees, one-time payments arising from the prior departure of employees and legal costs and legal settlement. We believe it is useful to management and investors in evaluating our ongoing operational performance. Additionally, Adjusted EBITDA is the profitability measure employed by management for making decisions about allocating resources and assess performance. Please see table below for a reconciliation of this Non-IFRS measure to the most directly comparable measure calculated in accordance with IFRS.

“Adjusted EBITDA margin” being Adjusted EBITDA as a percentage of revenues. Please see table below for a reconciliation of this Non-IFRS measure to the most directly comparable measure calculated in accordance with IFRS. We believe it is useful to management and investors in evaluating both the operating profitability and cash flows generated from the business as a % of revenues.

“Working capital” being the net of the current assets and current liabilities. We use it to monitor how much money we have committed in the day-to-day operation of our business.

“Net debt” being the total long-term debt, including the current portion of the long-term debt, and subtracting cash. We use it to monitor how much debt we have after taking into account cash. Please see table below for a reconciliation of this Non-IFRS measure to the most directly comparable measure calculated in accordance with IFRS.

“Backlog” means contracts that have been received and are considered as firm orders. We use it to monitor our production and up-coming sales. Backlog does not have a directly comparable IFRS measure.

Reconciliations and Calculations

The table set forth below provides a quantitative reconciliation of EBITDA, EBITDA margin, Adjusted EBITDA, and Adjusted EBITDA margin, each of which are Non-IFRS financial measures, to the most comparable IFRS measure disclosed in the Company’s financial statements to which the measure relates for the three months and six months ended June 30, 2022 and June 30, 2021. The reconciliation of Non-IFRS measures to the most directly comparable measure calculated in accordance with IFRS is provided below where appropriate. Backlog does not have a directly comparable IFRS measure.

Gross Margin and Operating Profit (Loss) Reconciliation
(In millions of $, except per share amounts and margin percentages)		For the three-month period ended June 30, 2022						For the three-month period ended June 30, 2021
		Per Income Statement		Legacy RNG contracts		Income statement excluding legacy RNG contracts		Per Income Statement		Legacy RNG contracts		Income statement excluding legacy RNG contracts
Revenue		44.5		(0.3)		44.8		32.7		0.8		31.9
Cost of goods sold		42.7		8.0		34.7		27.7		5.0		22.7
Gross margin (1)		1.8		(8.3)		10.1		5.0		(4.2)		9.2
Gross margin % (1)		4%		–		23%		15%		–		29%
Research and development expenses		1.0		–		1.0		0.9		–		0.9
Selling and administrative expenses		17.2		0.3		16.9		12.2		0.1		12.1
Share of after-tax profit of equity accounted investees		(0.7)		–		(0.7)		0.1		–		0.1
Other (gains) and losses		5.6		3.3		2.3		(20.0)		–		(20.0)
Operating profit (loss) (1)		(21.3)		(11.9)		(9.4)		11.8		(4.3)		16.1
Net finance expenses		2.3		(0.1)		2.2		1.3		–		1.3
(Loss)/gain before income taxes		(23.6)		(12.0)		(11.6)		10.5		(4.3)		14.8
Income taxes (recovery)/expense		(0.2)		–		(0.2)		0.3		–		0.3
Net (loss)/profit for the period		(23.4)		(12.0)		(11.4)		10.2		(4.3)		14.5

Contacts

For more information:
Xebec Adsorption Inc.

Brandon Chow, Director, Investor Relations

+1 450.979.8700 ext 5762

bchow@xebecinc.com

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