HYGS Hydrogenics Corporation New

EXHIBIT 99.1

Hydrogenics Reports Second Quarter 2015 Results

Three Significant Milestones Achieved in Quarter Provide Foundation for Future Success

Shipment Timing of Two Contracts Impacts Revenue in Quarter

MISSISSAUGA, Ontario, Aug. 11, 2015 (GLOBE NEWSWIRE) -- Hydrogenics Corporation (NASDAQ:HYGS) (TSX:HYG) ("Hydrogenics" or "the Company"), a leading developer and manufacturer of hydrogen generation and hydrogen-based power modules, today reported second quarter 2015 financial results. Results are reported in US dollars and are prepared in accordance with International Financial Reporting Standards (IFRS).

Second Quarter Highlights

"We are very encouraged by three significant developments in the quarter," said Daryl Wilson, President and Chief Executive Officer.

"First, on May 22, 2015 we signed the largest commercial order for fuel cells in the Company's history with Alstom Transport, a global leader in rail infrastructure, to provide power modules for at least 200 engines in a contract worth, including service and maintenance, more than €50 million over a 10 year period. This contract drove our firm order backlog to its highest level ever. It's an exciting achievement which not only demonstrates the growing demand for hydrogen-based transportation but Hydrogenics' role in developing leading-edge technology in the space.

"Second, with regard to Kolon, our partner in South Korea, our initial megawatt of power modules was shipped on June 25, 2015 is now onsite being commissioned. We expect the facility to be fully operational by early September. This represents the first step for future multi-megawatt power generation using fuel cell technology in South Korea and elsewhere.

"Finally, on May 4, 2015 we completed factory acceptance testing of our first next-generation, megawatt class PEM energy storage system. It was subsequently delivered to E.ON in Hamburg, Germany with installation and commissioning on this unit completed in early July. This is the world's largest single stack electrolysis unit and represents the basis for commercialization of utility-scale, multi-megawatt installations already quoted in our sales pipeline.

"So while our financial results this period were not as strong as we had expected due to shipment timing that pushed revenue into early July, we are strengthening our leadership in a world rapidly coming to realize the benefits of everything associated with hydrogen technology. Overall, the Company is well positioned for higher growth as well as increased order flow heading into 2016."

Summary of Results for the Quarter Ended June 30, 2015

• Revenue decreased to $7.4 million, versus $10.7 million last year, reflecting shipment timing and the decline in the value of the Euro compared to the US dollar in the second quarter of 2015 compared with the second quarter of 2014. Excluding the foreign exchange impact of $1.0 million, the decrease in revenue was approximately 20%.
   
• Gross profit was 14.1% of revenue for the quarter, versus 30.2% in the prior-year period, reflecting a change in product mix as well as higher indirect overhead costs as a percent of revenue when compared to the prior-year period. The weakening of the Euro relative to the US dollar of $0.3 million also contributed to the decrease.
   
• Cash operating costs declined 5% to $3.4 million for the three months ended June 30, 2015 compared to $3.6 million for the three months ended June 30, 2014, primarily reflecting lower SG&A expenses due to the impact of lower exchange rates on expenses denominated in Euros and Canadian dollars of $0.5 million, partially offset by a slight increase in R&D expenses.
   
• Adjusted EBITDA² loss was $2.3 million for the quarter compared with an Adjusted EBITDA² loss of $0.3 million in the second quarter of 2014. 
   
• Net loss was $3.7 million, or $(0.37) per share, in the quarter compared with a net loss of $0.1 million, or $(0.01) per share, in the second quarter of 2014.
   
• Hydrogenics secured $53.6 million of orders for renewable energy storage, industrial gas and power system applications during the quarter, resulting in a backlog of $102.3 million as of June 30, 2015. Order backlog movement during the second quarter (in millions) was as follows:

						Expected Revenue Recognition
	Mar 31, 2015 backlog	Orders Received	FX	Orders Delivered/ Revenue Recognized	June 30, 2015 backlog	During next 12 months	Beyond next 12 months
OnSite Generation	$ 27.7	$ 3.6	$ --	$ 4.5	$ 26.8	$  24.1	$ 2.7
Power Systems	28.1	50.0	0.3	2.9	75.5	6.7	68.8
Total	$ 55.8	$ 53.6	$ 0.3	$ 7.4	$ 102.3	$ 30.8	$ 71.5

• The Company exited the second quarter with $9.9 million of cash and restricted cash, a $0.5 million decrease from December 31, 2014, primarily reflecting: (i) $7.6 million of cash used in operating activities; (ii) $0.8 million related to the purchase of property, plant and equipment and; (iii) the foreign exchange impact of $0.5 million on the Euro and Canadian-denominated cash balances; partially offset by (iv) $8.5 million of proceeds of net operating borrowings, including the new $7.5 million credit facility.

Notes

1. Cash operating costs are defined as the sum of SG&A and R&D, less amortization and depreciation, and stock-based compensation expense inclusive of compensation costs indexed to the Company's share price. This is a non-IFRS measure and may not be comparable to similar measures used by other companies. Management uses this measure as a rough estimate of the amount of fixed costs to operate the Corporation and believes this is a useful measure for investors for the same purpose.
     
2. Adjusted EBITDA is defined as net loss excluding stock based compensation (both cash settled long term compensation indexed to share price and share based compensation), other finance income and expenses, depreciation and amortization. These items are considered by management to be outside of Hydrogenics' ongoing operational results. Adjusted EBITDA is a non-IFRS measure and may not be comparable to similar measures used by other companies.

Conference Call Details

Hydrogenics will hold a conference call at 10:00 a.m. EDT on August 11, 2015 to review the second quarter results. The telephone number for the conference call is (877) 307-1373 or, for international callers, (678) 224-7873. A live webcast of the call will also be available on the company's website, www.hydrogenics.com.

An archived copy of the conference call and webcast will be available on the company's website, www.hydrogenics.com, approximately six hours following the call. 

About Hydrogenics

Hydrogenics Corporation is a world leader in engineering and building the technologies required to enable the acceleration of a global power shift. Headquartered in Mississauga, Ontario, Hydrogenics provides hydrogen generation, energy storage and hydrogen power modules to its customers and partners around the world. Hydrogenics has manufacturing sites in Germany, Belgium and Canada and service centers in Russia, Europe, the US and Canada.

Forward-looking Statements

This release contains forward-looking statements within the meaning of the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995, and under applicable Canadian securities law. These statements are based on management's current expectations and actual results may differ from these forward-looking statements due to numerous factors, including: our inability to increase our revenues or raise additional funding to continue operations, execute our business plan, or to grow our business; inability to address a slow return to economic growth, and its impact on our business, results of operations and consolidated financial condition; our limited operating history; inability to implement our business strategy;  fluctuations in our quarterly results; failure to maintain our customer base that generates the majority of our revenues; currency fluctuations; failure to maintain sufficient insurance coverage; changes in value of our goodwill; failure of a significant market to develop for our products; failure of hydrogen being readily available on a cost-effective basis; changes in government policies and regulations; failure of uniform codes and standards for hydrogen fueled vehicles and related infrastructure to develop; liability for environmental damages resulting from our research, development or manufacturing operations; failure to compete with other developers and manufacturers of products in our industry; failure to compete with developers and manufacturers of traditional and alternative technologies; failure to develop partnerships with original equipment manufacturers, governments, systems integrators and other third parties; inability to obtain sufficient materials and components for our products from suppliers; failure to manage expansion of our operations; failure to manage foreign sales and operations; failure to recruit, train and retain key management personnel; inability to integrate acquisitions; failure to develop adequate manufacturing processes and capabilities; failure to complete the development of commercially viable products; failure to produce cost-competitive products; failure or delay in field testing of our products; failure to produce products free of defects or errors; inability to adapt to technological advances or new codes and standards; failure to protect our intellectual property; our involvement in intellectual property litigation; exposure to product liability claims;  failure to meet rules regarding passive foreign investment companies; actions of our significant and principal shareholders; dilution as a result of significant issuances of our common shares and preferred shares; inability of US investors to enforce US civil liability judgments against us; volatility of our common share price; and dilution as a result of the exercise of options. Readers should not place undue reliance on Hydrogenics' forward-looking statements. Investors are encouraged to review the section captioned "Risk Factors" in Hydrogenics' regulatory filings with the Canadian securities regulatory authorities and the US Securities and Exchange Commission for a more complete discussion of factors that could affect Hydrogenics' future performance. Furthermore, the forward-looking statements contained herein are made as of the date of this release, and Hydrogenics undertakes no obligations to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this release, unless otherwise required by law. The forward-looking statements contained in this release are expressly qualified by this.

Reconciliation of Cash Operating Costs to Operating Costs and Adjusted EBITDA to Net Loss
(in thousands of US dollars)
(unaudited)
Cash operating costs
	Three months ended		Nine months ended
	June 30		June 30
	2015	2014	2015	2014
Selling, general and administrative expenses	$ 2,579	$ 1,979	$ 5,158	$ 6,546
Research and product development expenses	1,039	915	2,061	1,831
Total operating costs	$ 3,618	$ 2,894	$ 7,219	$ 8,377
Less: Depreciation of property, plant and equipment and intangibles	(84)	(95)	(177)	(154)
Less: Compensation costs indexed to share price	90	968	234	(593)
Less: Stock-based compensation losses	(176)	(156)	(294)	(292)
Cash operating costs	$ 3,448	$ 3,611	$ 6,982	$ 7,338
Adjusted EBITDA
	Three months ended		Nine months ended
	June 30		June 30
	2015	2014	2015	2014
Net loss	$ (3,700)	$ (124)	$ (7,127)	$ (3,873)
Finance loss (income)	1,124	471	2,103	654
Depreciation of property, plant and equipment and intangible assets	149	178	310	318
Compensation indexed to share price	(90)	(968)	(234)	593
Stock-based compensation expense	176	156	294	292
Adjusted EBITDA	$ (2,341)	$ (287)	$ (4,654)	$ (2,016)

Hydrogenics Corporation
Condensed Interim Consolidated Balance Sheets
(in thousands of US dollars)
(Unaudited)
	June 30,	December 31,
	2015	2014
Assets
Current assets
Cash and cash equivalents	$ 8,016	$ 6,572
Restricted cash	1,247	3,228
Trade and other receivables	11,840	12,900
Inventories	15,351	14,698
Prepaid expenses	787	747
	37,241	38,145
Non-current assets
Restricted cash	655	621
Investment in joint venture	2,139	2,150
Property, plant and equipment	2,304	1,873
Intangible assets	213	157
Goodwill	4,241	4,609
	9,552	9,410
Total assets	$ 46,793	$ 47,555
Liabilities
Current Liabilities
Operating borrowings	$ 1,671	$ --
Trade and other payables	9,738	13,156
Warranty provisions	1,483	1,392
Deferred revenue	8,694	6,771
	21,586	21,319
Non-current liabilities
Other non-current liabilities	10,310	3,464
Non-current warranty provisions	837	1,155
Non-current deferred revenue	5,400	6,141
	16,547	10,760
Total liabilities	38,133	32,079
Equity
Share capital	348,275	348,259
Contributed surplus	20,099	18,927
Accumulated other comprehensive loss	(2,985)	(2,108)
Deficit	(356,729)	(349,602)
Total equity	8,660	15,476
Total equity and liabilities	$ 46,793	$ 47,555

Hydrogenics Corporation
Consolidated Interim Statements of Operations and Comprehensive Loss
(in thousands of US dollars, except share and per share amounts)
(Unaudited)
	Three months ended		Six months ended
	June 30,		June 30,
	2015	2014	2015	2014
Revenues	$ 7,368	$ 10,723	$ 14,899	$ 18,782
Cost of sales	6,326	7,483	12,704	13,624
Gross profit	1,042	3,240	2,195	5,158
Operating expenses
Selling, general and administrative expenses	2,579	1,979	5,158	6,546
Research and product development expenses	1,039	915	2,061	1,831
	3,618	2,894	7,219	8,377
Gain (Loss) from operations	(2,576)	346	(5,024)	(3,219)
Finance income (expenses)
Interest expense, net	(369)	(132)	(496)	(264)
Foreign currency gains (losses), net	73	(298)	(763)	(209)
Gain (loss) from joint venture	57	--	41	--
Other finance losses, net	(885)	(41)	(885)	(181)
Finance income (loss), net	(1,124)	(471)	(2,103)	(654)
Loss before income taxes	(3,700)	(125)	(7,127)	(3,873)
Income tax expense	--	--	--	--
Net loss for the period	(3,700)	(125)	(7,127)	(3,873)
Items that may be reclassified subsequently to net loss
Exchange differences on translating foreign operations	185	(62)	(877)	(67)
Comprehensive loss for the period	$ (3,515)	$ (187)	$ (8,004)	$ (3,940)
Net loss per share
Basic and diluted	$ (0.37)	$ (0.01)	$ (0.71)	$ (0.41)

Hydrogenics Corporation
Consolidated Interim Statements of Cash Flows
(in thousands of US dollars)
(unaudited)
	Three months ended		Six months ended
	June 30,		June 30,
	2015	2014	2015	2014
Cash and cash equivalents provided by (used in):
Operating activities
Net loss for the period	$ (3,700)	$ (125)	$ (7,127)	$ (3,873)
(Increase) decrease in restricted cash	1,410	62	1,947	(191)
Items not affecting cash:
Amortization and depreciation	149	178	310	318
Other finance losses, net	--	41	--	181
Unrealized foreign exchange losses (gains)	(261)	4	(256)	90
Unrealized gain on joint venture	(58)	--	(42)	--
Accreted non-cash and unpaid interest	345	115	466	233
Payment of post-retirement benefit liability	--	(21)	--	(45)
Portion of borrowings recorded as a reduction from research and development expenses	--	(118)	--	(118)
Stock-based compensation	176	157	294	293
Stock based compensation – RSUs and DSUs	(90)	(969)	(234)	592
Warrant issuance	885	--	885	--
Net change in non-cash working capital	(3,146)	(4,126)	(1,897)	(6,097)
Cash used in operating activities	(4,290)	(4,802)	(5,654)	(8,617)
Investing activities
Proceeds from disposals	--	--	--	9
Purchase of property, plant and equipment	(394)	(219)	(765)	(525)
Purchase of intangible assets	(81)	--	(81)	(80)
Cash used in investing activities	(475)	(219)	(846)	(596)
Financing activities
Repayment of repayable government contributions	(110)	(339)	(110)	(389)
Proceeds of borrowings, net of transaction costs	6,866	854	6,866	854
Proceeds of operating borrowings	1,671	--	3,822	--
Repayment of operating borrowings	(2,151)	(1,722)	(2,151)	--
Common shares issued	3	13,552	9	13,661
Cash provided by financing activities	6,279	12,345	8,436	14,126
Effect of exchange rate fluctuations on cash and cash equivalents held	295	(9)	(492)	(77)
Increase (Decrease) in cash and cash equivalents during the period	1,809	7,315	1,444	4,836
Cash and cash equivalents - Beginning of period	6,207	9,344	6,572	11,823
Cash and cash equivalents - End of period	$ 8,016	$ 16,659	$ 8,016	$ 16,659

CONTACT: Hydrogenics Contacts: Bob Motz, Chief Financial Officer Hydrogenics Corporation (905) 361-3660 investors@hydrogenics.com Chris Witty Hydrogenics Investor Relations (646) 438-9385 cwitty@darrowir.com

EXHIBIT 99.2

 

 

 

 

 

 

 

 

 

 

 

Hydrogenics Corporation

 

 

Second Quarter 2015

Management’s Discussion and Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following Management’s Discussion and Analysis (“MD&A”) of Hydrogenics Corporation (“Hydrogenics” or the “Company”) should be read in conjunction with the Company’s Condensed Interim Consolidated Financial Statements and related notes for three and six months ended June 30, 2015 and the Audited Consolidated Financial Statements and related notes for the year ended December 31, 2014. The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

The Company uses certain non-IFRS financial performance measures in this MD&A. For a detailed reconciliation of each of the non-IFRS measures used in this MD&A, please see the discussion under “Non-IFRS Measures” below.

In this MD&A, all currency amounts (except per unit amounts) are in thousands and, unless otherwise stated, they are in thousands of United States dollars (“US Dollars”). The information presented in this MD&A is as of August 10, 2015, unless otherwise stated.

Additional information about Hydrogenics, including our 2014 Audited Consolidated Financial Statements and our Annual Report on Form 40-F, which is filed in Canada as our annual information form, is available on our website at www.hydrogenics.com, on the SEDAR website at www.sedar.com, and on the EDGAR filers section of the U.S. Securities and Exchange Commission website at www.sec.gov.

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 21 of this MD&A.

“Hydrogenics” or the “Company” or the words “our,” “us” or “we” refer to Hydrogenics Corporation and its subsidiaries.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management’s Discussion and Analysis Table of Contents
Section	Description	Page
1	Overall Performance	4
2	Operating Results	7
3	Financial Condition	10
4	Summary of Quarterly Results	11
5	Outlook	11
6	Liquidity	12
7	Capital Resources	14
8	Off-Balance Sheet Arrangements	15
9	Related Party Transactions	15
10	Critical Accounting Estimates	15
11	Changes in Accounting Policies and Recent Accounting Pronouncements	15
12	Disclosure Controls	16
13	Internal Control Over Financial Reporting	16
14	Reconciliation of Non-IFRS Measures	17
15	Risk Factors	18
16	Outstanding Share Data	21
17	Forward-looking Statements	21

 

 

 

 

 

 

 

 

 

 

1    Overall Performance

Selected Financial information

(in thousands of US dollars, except per share amounts)

 

 

		Three months ended June 30,								2015 vs 2014				Six months ended June 30,								2015 vs 2014
		2015				2014				% Favourable (Unfavourable)				2015				2014				% Favourable (Unfavourable)
OnSite Generation		$	4,501				7,514				(40	%)		$	7,836				13,477				(42	%)
Power Systems			2,867				3,209				(11	%)			7,063				5,305				(33	%)
Total Revenue			7,368				10,723				(31	%)			14,899				18,782				(21	%)
Gross profit			1,042				3,240				(68	%)			2,195				5,158				(57	%)
Gross Margin %			14	%			30	%							15	%			27	%
Selling, General and Administrative Expenses			2,579				1,979				(30	%)			5,158				6,546				21	%
Research and Product Development Expenses			1,039				915				(14	%)			2,061				1,831				(13	%)
Income (Loss) from Operations			(2,576	)			346				(842	%)			(5,024	)			(3,219	)			(56	%)
Net Loss			(3,700	)			(125	)			(2884	%)			(7,127	)			(3,873	)			(84	%)
Net Loss Per Share			(0.37	)			(0.01	)			-				(0.71	)			(0.41	)			-
Cash Operating Costs1			3,448				3,611				5	%			6,982				7,338				5	%
Adjusted EBITDA1			(2,341	)			(288	)			(716	%)			(4,654	)			(2,016	)			(131	%)
Cash used in Operating Activities			(4,290	)			(4,802	)			11	%			(5,654	)			(8,617	)			34	%
Cash  and  Cash Equivalents (including Restricted Cash)			9,918				18,873				(47	%)			9,918				18,873				(47	%)
Total Assets			46,793				53,465				12	%			46,793				53,465				12	%
Total Non-Current Liabilities (excluding Deferred Revenue)			11,147				5,069				(120	%)			11,147				5,069				(120	%)

 

1.	Cash operating costs and Adjusted EBITDA are Non-IFRS measures. Refer to section 14 - Reconciliation of Non-IFRS Measures.

 

 

 

 

 

Highlights for the three months ended June 30, 2015 compared to the three months ended June 30, 2014

 

·

Revenues decreased by $3.4 million or 31% to $7.4 million for the three months ended June 30, 2015 compared to $10.7 million for the same period of the prior year. The decrease in revenue was due to fewer orders shipped in the current quarter combined with the weakening of the euro which also impacted revenue by approximately $1.2 million. During the second quarter of 2015, the Company received new orders for $53.6 million (2014 - $19.2 million) consisting of $3.6 million (2014 - $5.6 million) for the OnSite Generation business and $50.0 million (2014 - $13.6 million) for the Power Systems business. Total backlog for the second quarter of 2015 was $102.3 million compared to $67.1 million for the same period a year ago.

 

																						Expected Revenue Recognition
		Mar 31, 2015 backlog				Orders Received				FX				Orders Delivered/ Revenue Recognized				June 30, 2015 backlog				During next 12 months				Beyond next 12 months
OnSite Generation		$	27.7			$	3.6			$	-			$	4.5			$	26.8			$	24.1			$	2.7
Power Systems			28.1				50.0				0.3				2.9				75.5				6.7				68.8
Total		$	55.8			$	53.6			$	0.3			$	7.4			$	102.3			$	30.8			$	71.5

 

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Gross profit was 14.1% of revenue for the quarter, versus 30.2% in the prior-year period, reflecting a change in product mix as well as higher indirect overhead costs as a percentage of revenue when compared to the prior-year period. The weakening of the euro relative to the US dollar also contributed to the decrease.

·

Selling, general and administrative (“SG&A”) expenses for the second quarter of 2015 of $2.6 million were higher by $0.6 million or 30% compared to $2.0 for the prior year quarter. Excluding mark-to-market adjustments on the deferred share units (“DSUs”) in the current and prior year quarter, and the restricted share units (“RSUs”) in the prior year quarter and DSUs in the current and prior year quarter, SG&A expenses decreased by $0.3 million primarily due to the lower value of the euro and Canadian dollars when compared to the US dollar. The mark-to-market adjustments in the prior year quarter resulted in a decrease in SG&A of $1.0 million as the share price decreased from $30.05 to $19.67. In the current year quarter, the decrease in SG&A resulting from the share price decreasing from $14.40 to $12.50 was $0.1 million. Additionally there was no mark-to-market adjustment on the RSUs in current quarter due to their vesting and being paid out at the end of 2014.

 

·

Research and development (“R&D”) expenses were $1.0 million for the three months ended June 30, 2015 compared to $0.9 in the same period of 2014.

 

·

Cash operating costs were $3.4 for the three months ended June 30, 2015 compared to $3.6 for the three months ended June 30, 2014, with the lower costs due to lower SG&A expenses in the current year, partially offset by the slight increase in R&D expenses.

 

·

Adjusted EBITDA loss increased to $2.3 for the three months ended June 30, 2015 from $0.3 for the same period last year. The decline resulted mainly from a reduction in revenues, combined with lower margin sales, slightly higher R&D expenses, and an increase in SG&A expenses as discussed above.

 

·

Net loss increased by $3.6 million or $0.36 per share to $3.7 million or $0.37 per share in the current quarter from $125 or $0.01 per share, primarily due to the lower mark-to-market adjustment on DSUs and RSUs in the current quarter partially offset by losses on the foreign currency translation of long term receivables and lower margins as indicated above.

 

Highlights for the six months ended June 30, 2015 compared to the three months ended June 30, 2014

 

·

Revenues decreased by $3.9 million or 21% to $14.9 million for the six months ended June 30, 2015 compared to $18.8 million for the same period of the prior year. The decrease in revenue was due to fewer orders shipped in the current quarter combined with the weakening of the euro which also impacted revenue by approximately $1.4 million. During the first six months of 2015, the Company received new orders for $59.5 million (2014 - $29.1 million) consisting of $8.4 million (2014 - $13.7 million) for the OnSite Generation business and $51.1 million (2014 - $15.4 million) for the Power Systems business. Total backlog as at June 30, 2015 was $102.3 million compared to $67.1 million for the same period a year ago.

 

																						Expected Revenue Recognition
		Dec 31, 2014 backlog				Orders Received				FX				Orders Delivered/ Revenue Recognized				June 30, 2015 backlog				During next 12 months				Beyond next 12 months
OnSite Generation		$	28.3			$	8.4			$	(2.1	)		$	7.8			$	26.8			$	24.1			$	2.7
Power Systems			33.9				51.1				(2.4	)			7.1				75.5				6.7				68.8
Total		$	62.2			$	59.5			$	(4.5	)		$	14.9			$	102.3			$	30.8			$	71.5

 

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Gross profit was 14.7% of revenue for the quarter, versus 27.5% in the prior-year period, reflecting a change in product mix as well as higher indirect overhead costs as a percentage of revenue when compared to the prior-year period. The weakening of the euro relative to the US dollar also contributed to the decrease.

·

SG&A expenses for the six months ended June 30, 2015 of $5.2 million were lower by $1.4 million or 21% compared to $6.5 million for the same period of the prior year quarter. Excluding mark-to-market adjustments on the DSUs in the current and prior year period, and the RSUs in the prior year quarter and DSUs in the current and prior year period, SG&A expenses decreased by $0.6 million primarily due to the lower value of the euro and Canadian dollars when compared to the US dollar. The mark-to-market adjustments in the prior year period resulted in an increase in SG&A of $0.6 million as the share price increased from $20.42 in the first quarter prior year to $30.05, before decreasing to $19.67 in the second quarter prior year. In the current year quarter, the decrease in SG&A resulting from the share price decreasing from $15.42 to $12.50 was $0.2 million. Additionally there was no mark-to-market adjustment on the RSUs in the current period due to their vesting and being paid out at the end of 2014.

 

·

R&D expenses were $2.0 million for the six months ended June 30, 2015 compared to $1.8 million in the comparable period of 2014 and increased as a result of decreased R&D funding of $0.5 million as well as decreased R&D spending of $0.3 million. This reduction is due to the timing of R&D project spending as well as eligibility and submissions for R&D funding.

 

·

Net loss for the six months ended June 30, 2015, was $7.1 million or $0.37 per share compared to a net loss of $3.9 million or $0.41 per share for the same quarter of the prior year. The net loss in the current period reflects i) the lower revenues and lower margins ($3.0 million); ii) a slight increase in R&D expenses ($0.2 million); iii) an increase in foreign exchange losses due to translation ($0.8 million); iv) an increase in interest expense as a result of the loan entered into in the second quarter of 2015 ($0.1 million); v) increased interest expense due to accelerating interest accretion relating to the loan with the Province of Ontario ($0.1 million)as well as vi) an increase in other finance loss due to the issuance of warrants ($0.9 million). This was partially offset by the decrease in SG&A expenses above.

 

 

·

Cash operating costs decreased 5% to $7.0 million for the six months ended June 30, 2015 compared to $7.3 million for the six months ended June 30, 2014, primarily reflecting lower SG&A expenses due to the impact of lower exchange rates on expenses denominated in Euros and Canadian dollars.

 

·

Adjusted EBITDA loss increased to $4.7 million for the first half 2015 from $2.0 million for the same period last year. The decline resulted from decreased revenue, combined with lower margin sales and slightly higher research and development costs in the current year period, partially offset by a reduction in SG&A expenses excluding mark-to-market adjustments on RSU’s and DSU’s.

 

 

2      Operating Results

 

Business Segment Review

 

We report our results in two business segments, being OnSite Generation and Power Systems. 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 is reported under Corporate and Other.

OnSite Generation

 

Our OnSite Generation business segment is primarily based in Oevel, Belgium and develops products for industrial gas, hydrogen fueling and renewable energy storage markets.

Our OnSite Generation products are sold to merchant gas companies and end-users requiring high purity hydrogen for industrial applications. We also sell and service products for hydrogen fueling stations for transportation applications. Recent increases in orders and interest for fueling stations in Europe, California, the UK and elsewhere, have signaled what we believe could be a major increase in the size of this market. We also sell our products to leading electric power utilities to satisfy the need for renewable energy storage. During the past year, we have witnessed increased interest and orders for our small, medium and large scale energy storage products, which serve the need for ancillary electrical power services, such as grid balancing and load profiling. While this area is heavily dependent on public funding initiatives, it continues to present compelling growth opportunities.

The worldwide market for hydrogen is estimated at $5 billion annually, and is served by industrial gas companies as well as generated on site. We believe the annual market for on-site hydrogen generation equipment is approximately $100 million to $200 million, although the size of the addressable market for on-site hydrogen generation equipment could more than double if energy storage and electrolysis based hydrogen fueling stations gain widespread acceptance.

 

Selected Financial Information

 

		Three months ended June 30,												Six months ended June 30
		2015				2014				% Favourable (Unfavourable)				2015				2014				% Favourable (Unfavourable)
Revenues		$	4,501			$	7,514				(40	%)		$	7,836			$	13,477				(42	%)
Gross profit			653				2,147				(70	%)			930				2,914				(68	%)
Gross margin %			15	%			29	%			(49	%)			12	%			22	%			(45	%)
SG&A expenses			598				825				27	%			1,233				1,665				(26	%)
R&D expenses			476				390				(22	%)			900				773				(16	%)
Segment income (loss)		$	(421	)		$	932				(145	%)		$	(1,203	)		$	476				(353	%)

 

 

 

Revenues decreased by $3.0 million or 40% to $4.1 million for the three months ended June 30, 2015 compared to $7.5 million for the same period of 2014. Sales through June 30, 2015 consisted primarily of the sale of electrolyzer products to customers in industrial gas markets. Revenues were $7.8 million for the first half of the year compared to $13.5 million for the first six months of 2014. Orders awarded for the three months ended June 30, 2015 were $3.6 million (June 30, 2014 – $5.6 million). At June 30, 2015 backlog was $26.8 million (June 30, 2014 – $22.6 million), with $24.1 million of this backlog expected to be recognized as revenue in the next twelve months.

Gross Margin declined in the second quarter of 2015 to 15% compared to 29% in the second quarter of 2014 primarily due to higher margin projects in the prior year. Gross margin was 12% for the six months ended June 30, 2015 compared to 22% for the same period last year

SG&A Expenses were lower at $0.6 million and $1.2 million for the three and six months ended June 30, 2015 compared to $0.8 million and $1.7 million for the same periods of the previous year as a result of the decline in the euro versus the US dollar in the translation of these expenses.

R&D Expenses were $0.5 million and $0.9 million during the second quarter and first half of 2015 and $0.4 million and $0.8 million for the three and six months ended June 30, 2014. This increase over the prior year periods is a result of one funding project being in the active build phase, as well as reduced grant funding in the current year periods.

Segment Loss increased $1.4 million to a loss of $0.4 million for the three months ended June 30, 2015 compared to income of $0.9 million for the same period of the prior year largely due to the lower margin sales in the current period. Segment loss was $1.2 million for the six months ended June 30, 2015 compared to income of $0.5 million for the same period of the prior year.

 

Power Systems

 

Our Power Systems business segment is primarily based in Mississauga, Canada, with a satellite facility in Gladbeck, Germany. Our Power Systems business is based on proton exchange membrane (“PEM”) fuel cell technology, which transforms chemical energy liberated during the electrochemical reaction of hydrogen and oxygen into electrical energy. Our HyPM^® branded fuel cell products are based on our extensive track record of on-bench testing and real-time deployments across a wide range of stationary and motive power profiles. Our HyPM^® products are configured into multiple electrical power outputs ranging from five kilowatts to multiple megawatts with ease of integration, high reliability and operating efficiency, delivered from a highly compact unit.

Our target markets include stationary power applications, backup power for telecom, data centre installations and motive power applications, such as buses, trucks and utility vehicles. Additionally, our products are sold for prototype field tests intended to be direct replacements for traditional lead-acid battery packs for motive applications. The military, historically an early technology adopter, is a specialized market for our innovative fuel cell based products.

The worldwide market for data centre backup power is estimated to be in excess of $6 billion and the market for telecom backup power is estimated to be $2 to $3 billion in the United States alone, based on a complete displacement of existing products serving this market.

Selected Financial Information

 

		Three months ended June 30,												Six months ended June 30,
		2015				2014				% Favourable (Unfavourable				2015				2014				% Favourable (Unfavourable)
Revenues		$	2,867			$	3,209				11	%		$	7,063			$	5,305				33	%
Gross profit			389				1,093				(64	%)			1,265				2,244				(44	%)
Gross margin %			14	%			34	%			(60	%)			18	%			42	%			(58	%)
SG&A expenses			975				1,061				8	%			1,895				2,115				10	%
R&D expenses			562				520				(8	%)			1,141				1,051				(9	%)
Segment loss		$	(1,148	)		$	(488	)			(137	%)		$	(1,771	)		$	(922	)			(92	%)

 

 

 

Revenues increased $1.8 million or 33% to $7.1 million in the six months ended June 30, 2015 due to a delivery in the first quarter of 2015 for a large project to a research organization in Germany. Revenue decreased $0.3 million or 11% to $2.9 million for the three months ended June 30, 2015 compared to $3.2 million. Orders awarded for the three months ended June 30, 2015 were $5.2 million (June 30, 2014 - $13.6 million). At June 30, 2015, backlog was $75.5 million (June 30, 2014 - $44.5 million) of confirmed orders for Power Systems’ products and services, with $6.7 million of this backlog expected to be recognized as revenue in the next twelve months.

Gross Margin declined to 14% during the second quarter of 2015 from 34% for the second quarter of the prior year. Gross margin for the six months ended June 30, 2015 was 18% compared to 42% for the same period of the prior year, with the decline in the current period due to product mix with a larger percentage of higher margin engineering services in the prior year and the impact of the lower margin German project to a research organization in the current period.

SG&A Expenses decreased by $0.1 million to $1.0 million for the three months ended June 30, 2015 compared to $1,061 for the three months ended June 30, 2014. Expenses were lower in the current year as a result of the translation of the largely Canadian dollar expenses at lower Canadian dollar exchange rates versus the US dollar. SG&A expenses were $1.9 million for the first half of 2015 compared to $2.1 million for the first half of 2014.

R&D Expenses were $0.6 million and $1.1 million during the three and six months ended June 30, 2015 and were in line with spending of $0.5 million and $1.1 million during the same periods of the prior year.

Segment loss was $1.1 million and $1.8 million for the three months and six months ended June 30, 2015 compared to $0.5 million and $0.9 million for the three and six months ended June 30, 2014, primarily due to the lower margin projects during the current year.

 

Corporate and Other

 

Selected Financial Information

 

		Three months ended June 30,												Six months ended June 30
		2015				2014				% Favourable (Unfavourable)				2015				2014				% Favourable (Unfavourable)
SG&A expenses		$	1,006			$	93				(959	%)		$	2,030			$	2,766				27	%
R&D expenses			1				5				80	%			20				7				(186	%)
Net other finance losses			(885	)			(41	)			(2,061	%)			(887	)			(181	)			(390	%)
Gain (loss) on joint venture			57				-				100	%			41				-				100	%
Interest expense			369				132				(180	%)			496				(264	)			(88	%)
Foreign exchange gains (losses) net			73				(298	)			124	%			(761	)			(209	)			(264	%)
Segment Loss		$	(2,131	)		$	(570	)			(273	%)		$	(4,153	)		$	(3,428	)			(21	%)

 

SG&A Expenses increased by $0.9 million or 959% to $1,006 for the three months ended June 30, 2015 compared to $0.1 million for the three months ended June 30, 2014 primarily due to the impact of the mark-to-market adjustment on RSUs and DSUs in the current year as explained above. SG&A expenses decreased by $0.7 million or 27% for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014 primarily due to the impact of the mark-to-market adjustment on RSUs and DSUs in the current year as explained above, as well as a reduction due to the lower value of the euro and Canadian dollars when compared to the US dollar in the current quarter.

 

R&D Expenses were less than $0.1 million for the second quarter of 2015, consistent with the same period of the prior year and reflect the cost of maintaining our intellectual property.

Foreign exchange gains (losses) for the second quarter increased to a gain of $0.1 million from a loss of $0.3 million primarily due to the revaluation of euro and Canadian dollar receivables at the current exchange rates.

 

3     Financial Condition

 

		June 30,				December 31,				Increase/(decrease)
		2015				2014				$				%
Cash, cash equivalents, restricted cash and short-term investments			9,918			$	10,421				(503	)			(5	%)
Trade and other receivables			11,840				12,900				(1,060	)			(8	%)
Inventories			15,351				14,698				653				4	%
Operating borrowings			1,671				-				1,671				100	%
Trade and other payables			9,738				13,156				(3,418	)			(26	%)
Warranty provisions (current and non-current)			2,320				2,547				(227	)			(9	%)
Deferred revenue (current and non-current)			14,094				12,912				1,182				9	%
Other non-current liabilities			10,310			$	3,464				6,846				198	%

 

Cash, cash equivalents, restricted cash and short-term investments were $9.9 million, a decrease of $0.5 million or 5%. Refer to Section 6 - Liquidity for a discussion of the change in cash, cash equivalents, restricted cash and short-term investments.

Trade and other receivables were $11.8 million, a decrease of $1.1 million or 8% due to the collection of outstanding receivables in the quarter and the revaluation of Canadian and euro receivables at current rates partially offset by an increase in accrued receivables relating to the contract for integrated power propulsion systems for an OEM, where revenue and receivables are recognized using the percentage of completion method, for which the timing of the cash collected on outstanding receivables for this project does not correspond to recognition of the revenue and receivables.

Inventories were $15.4 million compared to $14.7. Excluding the foreign exchange impact as a result of the lower value of the euro and Canadian dollars when compared to the US dollar in the current quarter, inventories in fact increased approximately $3.6 million as a result of our increased commercial activity and increases in expected product deliveries during 2015.

Trade and other payables were $9.7 million and were lower by $3.4 million compared to $13.2 million at the end of December 31, 2014 as a result of suppliers payments for inventory shipped during the fourth quarter, as well as a reduction due to the foreign exchange impact as a result of the lower value of the euro and Canadian dollars when compared to the US dollar in the current quarter.

Warranty provisions were $2.3 million, a decrease of $0.2 million or 9% due to lower warranty provisions as a result of decreased revenue.

Deferred revenues were $14.1 million, an increase of $1.2 million or 9% reflecting customer deposits received on order bookings in the OSG business segment, partially offset by a reduction due to the foreign exchange impact as a result of the lower value of the euro and Canadian dollars when compared to the US dollar in the current quarter.

Other non-current liabilities were $10.3 million at June 30, 2015, a increase of $6.8 million or 198%, due to the new loan entered into in the second quarter of 2015.

 

4      Summary of Quarterly Results

 

The following table highlights selected financial information for the eight consecutive quarters ended June 30, 2015.

		2015 Q2				2015 Q1				2014 Q4				2014 Q3				2014 Q2				2014  Q1				2013 Q4				2013 Q3
Revenues		$	7,368			$	7,531			$	15,673			$	11,093			$	10,723			$	8,059			$	11,000			$	9,236
Gross Profit			1,042				1,153				2,989				3,067				3,240				1,918				2,705				2,730
Gross Margin %			14	%			15	%			19	%			28	%			30	%			24	%			25	%			30	%
Adjusted EBITDA1			(2,341	)			(2,313	)			160				(683	)			(288	)			(1,728	)			(165	)			(350	)
Net (Loss) Income			(3,700	)			(3,427	)			612			$	(1,262	)		$	(125	)		$	(3,748	)		$	(3,100	)		$	(491	)
Net (Loss) income Per Share - (Basic and Fully Diluted)		$	(0.37	)		$	(0.34	)		$	0.06			$	(0.13	)		$	(0.01	)		$	(0.40	)		$	(0.35	)		$	(0.05	)
Weighted Average Common Shares Outstanding			10,091,498				10,090,481				10,089,891				10,089,508				9,605,220				9,073,527				9,003,960				8,963,599

 

1.	Adjusted EBITDA is a Non-IFRS measure, refer to Section 14 – Reconciliation of Non-IFRS Measures.

 

 

5      Outlook

 

Although, first half results were negatively impacted by order timing and the weakening euro to the US dollar, we are experiencing a willingness on the part of utilities and regulatory agencies to increase spending in the growing problem areas related to energy storage and grid stabilization. We are also seeing a gradual maturation around the regulatory framework needed to integrate energy storage into an overall energy framework to permit its cost effective rollout. In addition, we continue to witness governments in many jurisdictions showing a willingness to increase spending on alternative energy projects for the same purpose. We believe we are well positioned to benefit from government initiatives in Canada, the European Union (particularly in Germany) and the United States (particularly in California), which we expect will positively impact our business. Recently, an increase in interest in our power-to-gas application and orders for energy storage and fueling stations in Europe, California, the UK and other geographies has signaled what we believe could be a significant increase in opportunities in the markets we serve.

Our joint venture with Kolon Water and Energy also provides for a unique application of fuel cell power modules to provide stationary primary power at the megawatt class. The Korean government regulatory support for fuel cell technology provides an avenue for significant growth in this area. We do have visibility to significant growth above 2014’s revenue.

The traditional on-site industrial hydrogen market has seen solid growth in recent months. The growth in this market is correlated to the economies of regions which do not have ready access to hydrogen delivery by truck or pipeline. As costs of truck transport rise the competitiveness of the onsite solution improves.

Over the past few years, we have taken significant steps to reduce operating and product costs, streamline our operations and consolidated financial position. At June 30, 2015, our order backlog was $102.3 million (June 30, 2014 - $67.1 million) spread across numerous geographical regions, of which $30.8 million is expected to be recorded as revenue in the next twelve months.

 

However, as a global company, we are subject to the risks arising from adverse changes in global economic and political conditions. Economic conditions in leading and emerging economies have been, and remain, unpredictable. In particular, currency fluctuations could have the impact of significantly reducing revenue and gross margin as well as the competitive positioning of our product portfolio. These macroeconomic and geopolitical changes could result in our current or potential customers reducing purchases or delaying shipment which could cause revenue recognition on these products to shift into later quarters of 2015 and into 2016.

 

 

6     Liquidity

Cash Used in Operating Activities

 

		Three months ended June 30												Six months ended June 30
		2015				2014				$ Change				2015				2014				$ Change
Net loss		$	(3,700	)		$	(125	)		$	(3,575	)		$	(7,127	)		$	(3,873	)		$	3,254
(Increase) decrease in restricted cash			1,410				62				1,348				1,947				(191	)			2,138
Changes in non-cash working capital			(3,146	)			(4,126	)			980				(2,830	)			(6,097	)			3,267
Other items not affecting cash			1,146				(613	)			1,759				2,356				1,544				812
Cash used in operating activities		$	(4,290	)		$	(4,802	)		$	512				(5,654	)		$	(8,617	)		$	2,963

Cash used in operating activities during the second quarter of 2015 decreased by $0.5 million to $4.3 million compared to $4.8 million used in the second quarter of 2014 with the decrease largely due to the change in non-cash working capital, partially offset by the decrease in margin.

Changes in restricted cash decreased by $1.3 as a result of the release of restricted cash related to letters of credit for customer deposits upon the shipment of their orders during the quarter.

 

Cash Used in Investing Activities

 

		Three months ended June 30												Six months ended June 30
		2015				2014				$ Change				2015				2014				$ Change
Proceeds on disposals		$	-			$	-			$	-			$	-			$	9			$	(9	)
Purchases of property plant and equipment			(394	)			(219	)			(175	)			(765	)			(525	)			(240	)
Purchase of intangibles			(81	)			-				(81	)			(81	)			(80	)			(1	)
Cash used in investing activities		$	(475	)		$	(219	)		$	(256	)		$	(846	)		$	(596	)		$	(250	)

 

 

Cash Provided By Financing Activities

 

		Three months ended June 30												Six months ended June 30
		2015				2014				$ Change					2015				2014			$ Change
Repayment of repayable government contributions		$	(110	)		$	(339	)		$	229			$	(110	)		$	(389	)		$	279
Proceeds of borrowings			6,866				854				6,012				6,866				854				6,012
Proceeds of operating borrowings			1,671				-				1,671				3,822				-				3,822
Repayment of operating borrowings			(2,151	)			(1,722	)			(429	)			(2,151	)			-				(2,151	)
Common shares issued on stock options exercised			3				13,552				(13,549	)			9				13,661				(13,652	)
Cash provided by financing activities		$	6,279				12,345			$	(6,066	)		$	8,436			$	14,126			$	5,690

 

Cash provided by financing activities for the three months ended June 30, 2015 decreased by $6.0 million. In the second quarter of the prior year, the Company received proceeds from common shares issued on warrant and option exercises of $13.5 million. In the second quarter of the current year, the Company entered into a loan agreement with a syndicate of lenders for a $7.5 million loan, with net proceeds of $6.9 million.

 

Contractual Obligations

 

			Total			Less than 1 year				1-3 years				4-5 years				After 5 years
Long-term debt1		$	14,129			$	676			$	9.426			$	2,081			$	1,946
Operating borrowings			1,671				1,671				-				-				-
Operating leases			3,793				896				2,032				796				69
Purchase obligations			8,402				8,334				68				-				-
Repayable government contributions			519				226				293				-				-
Total contractual obligations2		$	28,514			$	11,803			$	11,819			$	2,877			$	2,015

 

1.	Represents the undiscounted amounts payable as disclosed below under “Other Loan Facilities”.

2.	The table excludes the DSU liability of $934 included in our current liabilities which relate to units that are only settled once a director resigns as a director.

 

Credit and Loan Facilities

 

On May 7, 2015, Hydrogenics entered into a loan agreement with a syndicate of lenders for an 18 month loan of $7.5 million, included in the terms of the loan agreement, was the issuance of 250,000 warrants to lenders. Each warrant is exercisable for one common share of the Company at an exercise price of US$15.00 per common share. The loan bears interest at an annual rate of 11%.

At June 30, 2015 $2.6 million was drawn as standby letters of credit and bank guarantees against a $5.0 million Canadian credit facility. At June 30, 2015, the Company had C$2.4 million (December 31, 2014 - $1.9 million) available under this facility for use only as letters of credit and bank guarantees. Included in the above, is an outstanding bank guarantee for less than €0.1 million (December 31, 2014 – less than €0.1 million) for the Company’s Germany subsidiary.

The credit facility bears interest at EURIBOR plus 1.45% per annum and is secured by a €1 million first charge covering all assets of our Belgian subsidiary (the “Borrower”). The credit facility contains a negative pledge precluding the Borrower from providing security over its assets. Additionally, the Borrower is required to maintain a solvency covenant, defined as equity plus current account, divided by total liabilities of not less than 25% and ensure that its intercompany accounts with Hydrogenics do not fall below a defined level. At June 30, 2015, the Borrower was in compliance with these covenants.

 

At June 30, 2015 $2.6 million was drawn as standby letters of credit and bank guarantees against a $5.0 million Canadian credit facility. At June 30, 2015, the Company had C$2.4 million (December 31, 2014 - $1.9 million) available under this facility for use only as letters of credit and bank guarantees. Included in the above, is an outstanding bank guarantee for less than €0.1 million (December 31, 2014 – less than €0.1 million) for the Company’s Germany subsidiary.

These letters of credit and bank guarantees relate primarily to obligations in connection with the terms and conditions of the Company’s sales contracts. The standby letters of credit and letters of guarantee may be drawn on by the customer if the Company fails to perform its obligations under the sales contracts.

On September 28, 2011, we entered into a loan agreement with the Province of Ontario’s Ministry of Economic Development, Strategic Jobs and Investment Fund for funding up to C$6.0 million. Eligible costs must be incurred between October 1, 2010 and September 30, 2015. The loan is collateralized by a general security agreement covering assets of the Company. Additionally, the loan requires that we maintain a minimum cash deposit in a Canadian Financial institution.

The Company may need to take additional measures to increase its liquidity and capital resources, including obtaining additional debt or equity financing, pursuing joint-venture partnerships, equipment financings or other receivables financing arrangements. The Company may experience difficulty in obtaining satisfactory financing terms. Failure to obtain adequate financing on satisfactory terms could have a material adverse effect on Hydrogenics’s results of operations or financial condition.

 

 

7      Capital Resources

 

The Company considers its capital employed to consist of shareholders’ equity and total debt, net of cash and cash equivalents as follows:

 

		June 30, 2015				December 31, 2014
Shareholders’ equity		$	8,660			$	15,476
Operating borrowings			1,671				-
Long term debt and repayable government contributions			10,327				3,475
Total			20,658				18,951
Less cash and cash equivalents and restricted cash			9,918				10,421
Capital Employed		$	10,740			$	8,530

 

The Company’s financial objective when managing capital is to make sure that we have the cash and debt capacity and financial flexibility to fund our ongoing business objectives including operating activities, investments and growth in order to provide returns for our shareholders and other stakeholders.

We monitor our capital structure and makes adjustments according to market conditions in an effort to meet our objectives given the Company’s operating and financial performance and current outlook of the business and industry in general. The Company’s alternatives to fund future capital needs include cash flows from operating activities, debt or equity financing, adjustments to capital spending and/or sale of assets. The capital structure and these alternatives are reviewed by management and the board of directors of the Company on a regular basis to ensure the best mix of capital resources to meet the Company’s needs.

 

8       Off-Balance Sheet Arrangements

 

We do not have any material obligations under forward foreign exchange contracts, guarantee contracts, retained or contingent interests in transferred assets, outstanding derivative instruments or non-consolidated variable interests.

 

 

9        Related Party Transactions

 

In the normal course of operations, we subcontract certain manufacturing functions to a company owned by a family member of a senior officer, director, and shareholder of the Company. Hydrogenics made purchases of less than $0.1 million for the three and six months ended June 30, 2015 (three and six months ended June 30, 2014 – less than $0.1 million) from this related company. At June 30, 2015, the Company had an accounts payable balance due to this related party of less than $0.1 million (2014 – less than $0.1 million). We believe that transactions with this company are consistent with those we have with unrelated third parties.

On May 28, 2014, the Company entered into a joint arrangement with Kolon Water & Energy to form the joint venture Kolon Hydrogenics and the Company holds an equity investment in this joint venture. During 2014, the Company sold the joint venture a one megawatt power generation unit for $3.1 million and at the end of June 30, 2015 the Company had a receivable of $1.2 million owing from the joint venture, which is included in accrued accounts receivable.

All related party transactions involve the parent company and there are no related party transactions to disclose for the Company’s subsidiaries.

 

 

10       Critical Accounting Estimates

 

The Company’s management make judgments in it process of applying the Company’s accounting policies in the preparation of its consolidated financial statements. In addition, the preparation of financial information requires that the Company’s management make assumptions and estimates of effects of uncertain future events on the carrying amounts of the Company’s assets and liabilities at the end of the reporting period and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates as the estimation process is inherently uncertain. Estimates are reviewed on an ongoing basis based on historical experience and other factors that are considered to be relevant under the circumstances. Revisions to estimates and the resulting effects on the carrying amounts of the Company’s assets and liabilities are accounted for prospectively.

 

The critical judgments, estimates and assumptions applied in the preparation of Company’s financial information are reflected in Note 3 of the Company’s 2014 annual audited consolidated financial statements.

 

 

11       Changes in Accounting Policies and Recent Accounting Pronouncements

 

Our accounting policies and information on the adoption and impact of new and revised accounting standards the Company was required to adopt effective January 1, 2015 are disclosed in Note 2 of our condensed consolidated interim financial statements for the three months ended June 30, 2015.

 

 

 

12      Disclosure Controls

 

We have established disclosure controls and procedures that are designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under Canadian and US securities legislation is recorded, processed, summarized, and reported within the time periods specified in such rules and forms and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer (who are our Chief Executive Officer and Chief Financial Officer, respectively) as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation and as described below under "Internal Control over Financial Reporting", our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2015.

 

 

13       Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the CEO and the CFO and effected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS.

Our management, including our CEO and CFO, believes that any disclosure controls and procedures or internal control over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud might occur and not be detected.

At December 31, 2014, the Company identified there was a material weakness in internal control over financial reporting related to our foreign currency translation procedures. We completed other procedures, including validating, and in certain cases correcting, the calculation of the impact of foreign currencies on our non-monetary assets in our German subsidiary. These additional procedures allowed us to conclude that, notwithstanding the material weakness in our internal control over financial reporting, the consolidated financial statements fairly presented, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with IFRS.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

We did not design and implement internal controls to ensure that non-monetary assets denominated in foreign currency in our German subsidiary were accurately recorded in US dollars. The material weakness resulted in errors in the measurement of non-monetary assets in the German subsidiary that were corrected in the Company’s consolidated financial statements for the year ended December 31, 2014 prior to their release. Additionally, this material weakness could have, if uncorrected, resulted in a future misstatement of the aforementioned non-monetary assets or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.

The Company’s management, including the CEO and CFO has remediated the material weakness in internal control over financial reporting by enhancing existing controls and introducing new controls over the use of appropriate exchange rates in the recording and translation of all foreign currency transactions and balances.

The design of any system of controls and procedures is based in part on certain assumptions about the likelihood of certain events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

With the above noted changes in our internal control over financial reporting, an evaluation of the effectiveness of the Company’s internal control over financial reporting, including an evaluation of material changes that may have materially affected or are reasonably likely to have affected the internal controls over financial reporting, was conducted as of June 30, 2015, by company management including the CEO and the CFO. Management assessed the effectiveness of the Company’s internal control over financial reporting at June 30, 2015, based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as published in 2013. Based on this evaluation, management has concluded that the Company’s internal controls over financial reporting were effective as of June 30, 2015.

 

 

14       Reconciliation of Non-IFRS Measures

 

Non-IFRS financial measures, including earnings before interest, taxes, depreciation and amortization (“EBITDA”), “Adjusted EBITDA” and “cash operating costs” are used by management to provide additional insight into our performance and financial condition. We believe these non-IFRS measures are an important part of the financial reporting process and are useful in communicating information that complements and supplements the consolidated financial statements.

 

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)

 

The Company believes Adjusted EBITDA assists investors in comparing a company’s performance on a consistent basis excluding depreciation and amortization, stock-based compensation, including both share settled PSUs and stock options and cash settled RSUs and DSUs, which are non-cash in nature and can vary significantly. We believe that removing these expenses is a better measurement of operational performance. Investors should be cautioned that Adjusted EBITDA, as reported by us, may not be comparable in all instances to Adjusted EBITDA, as reported by other companies.

 

 

 

The following table provides a reconciliation of Adjusted EBITDA with net loss:

 

		Three months ended June 30								Six months ended June 30,
			2015				2014				2015				2014
Net loss		$	(3,700	)		$	(124	)		$	(7,127	)		$	(3,873	)
Finance loss (income)			1,124				471				2,103				654
Depreciation of property, plant and equipment and intangible assets			149				178				310				318
RSUs and DSUs (recovery) expense			(90	)			(968	)			(234	)			593
Stock-based compensation expense (including PSUs)			176				156				294				292
Adjusted EBITDA		$	(2,341	)		$	(287	)		$	(4,654	)		$	(2,016	)

 

Cash Operating Costs

We report cash operating costs because management feels they are a key measurement of the normal operating costs required to operate the ongoing business units of the Company. Cash operating costs are regularly reported to the chief operating decision maker and correspond to the definition used in our historical quarterly discussions. Investors should be cautioned that cash operating costs as reported by us may not be comparable in all instances to cash operating costs as reported by other companies.

The following table provides a reconciliation of cash operating costs with total operating expenses consisting of Selling, general and administrative expenses and Research and product development expenses:

 

		Three months ended June 30,								Six months ended June 30,
			2015				2014				2015				2014
Selling, general and administrative expenses		$	2,579			$	1,979			$	5,158			$	6,546
Research and product development expenses			1,039				915				2,061				1,831
Total operating costs		$	3,618			$	2,894			$	7,219			$	8,377
Less: Depreciation of property, plant and equipment  and intangibles			(84	)			(95	)			(177	)			(154	)
Less: RSUs and DSUs			90				968				234				(593	)
Less: Stock-based compensation expense (including PSUs)			(176	)			(156	)			(294	)			(292	)
Cash operating costs		$	3,448			$	3,611			$	6,982			$	7,338

 

 

15      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 (www.sedar.com) and U.S. securities regulatory authorities (www.sec.gov).

 

 

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 development and 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 sufficient access to capital to fund these activities. There is also a risk that key markets for certain of our products may never develop, or that market acceptance might take longer to develop than anticipated – in particular for applications such as energy storage which require leadership at a government and regulatory level.

 

 

A summary of our identified risks and uncertainties are as follows:

 

Macroeconomic and Geopolitical

•	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.
•	Certain external factors may affect the value of goodwill, which may require us to recognize an impairment charge.
•	Significant markets for fuel cell and other hydrogen energy 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 and expect to incur in the development of our products.
•	Changes in government policies and regulations could hurt the market for our products.
•	Lack of new government policies and regulations for the energy storage technologies could hurt the development of our hydrogen energy storage products.
•	Development of uniform codes and standards for hydrogen powered vehicles and related hydrogen refueling infrastructure may not develop in a timely fashion, if at all.
•	We currently face and will continue to face significant competition from other developers and manufacturers of fuel cell power products and hydrogen generation 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 fuel cell power products 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 involvement in intellectual property litigation could negatively affect our business.
•	If at any time we are classified as a passive foreign investment company under United State tax laws, our US shareholders may be subject to adverse tax consequences.
•	As a result of a strategic alliance entered into with a significant minority shareholder, they own a significant portion of our common shares and may act, or prevent corporate actions, to the detriment of other shareholders.
•	If we fail to maintain the requirements for continued listing on NASDAQ, our common shares could be delisted from trading on NASDAQ, which would materially adversely affect the liquidity of our common shares, the price of our common shares, and our ability to raise additional capital.
•	Future sales of common shares by our principal shareholders could cause our share price to fall and reduce the value of a shareholder’s investment.
•	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.

 

 

•	US investors may not be able to enforce US civil liability judgments against us or our directors and officers.
•	Our share price is volatile and we may continue to experience significant share price and volume fluctuations.

 

 

Operating

•	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 and may cause the price of our common shares to decline.
•	We currently depend on a relatively limited number of customers for a majority 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 sufficient.
•	Hydrogen may not be readily available on a cost-effective basis, in which case our fuel cell products may be unable to compete with existing power sources 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 fuel cell power 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 sufficient 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 have no experience manufacturing our fuel cell products on a large scale basis and if we do not develop adequate manufacturing processes and capabilities to do so in a timely manner, we will be unable to achieve our growth and profitability objectives.
•	We may never complete the development of commercially viable fuel cell power products and/or commercially viable hydrogen generation systems for new hydrogen energy applications, and if we fail to do so, we will not be able to meet our business and growth objectives.
•	We must continue to lower the cost of our fuel cell and hydrogen generation products and demonstrate their reliability or consumers will be unlikely to purchase our products and we will therefore not generate sufficient revenues to achieve and sustain profitability.
•	Any failures or delays in field tests of our products could negatively affect our customer 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.

 

Liquidity

•

Our inability to generate sufficient cash flows, raise additional capital and actively manage our liquidity may impair our ability to execute our business plan, and result in our reducing or eliminating product development and commercialization efforts, reducing our sales and marketing efforts, and having to forego attractive business opportunities.

 

Foreign Currency Exchange

•	Our operating results may be impacted by currency fluctuation.

 

 

16      Outstanding Share Data

The authorized share capital of the Company consists of an unlimited number of common shares, with no par value, and an unlimited number of preferred shares in series, with no par value. We had 10,092,375 common shares outstanding at June 30, 2015.

 

		2015								2014
		Number				Amount				Number				Amount
Balance at January 1			10,090,325			$	348,259				9,017,617			$	333,312
Issuance of common shares			-				-				1,057,144				14,768
Warrants exercised			-				-				-				-
Stock options exercised			2,050				16				14,135				171
At June 30,			10,092,375			$	348,275				10,088,896			$	348,251

 

At June 30, 2015, there were 536,174 stock options and 199,772 PSUs outstanding to purchase our common shares. If these securities are exercised, our shareholders could incur dilution.

 

17     Forward Looking Statements

This MD&A constitutes “forward-looking information,” within the meaning of applicable Canadian securities laws and “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 (collectively referred to herein as “forward-looking statements”). Forward-looking statements can be identified by the use of words, such as “plans,” “expects,” or “is expected,” “budget,” “scheduled,” “estimates,” “forecasts,” “intends,” “anticipates,” or “believes” or variations of such words and phrases or state that certain actions, events or results “may,” “could,” “would,” “might” or “will” be taken, occur or be achieved. These forward-looking statements relate to, among other things, our future results, levels of activity, performance, goals or achievements or other future events. These forward-looking statements are based on current expectations and various assumptions and analyses made by us in light of our experience and our perceptions of historical trends, current conditions and expected future developments and other factors that we believe are appropriate in the circumstances. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in our forward-looking statements.

 

These risks, uncertainties and factors include, but are not limited to: our inability to execute our business plan, or to grow our business; inability to address a slow return to economic growth, and its impact on our business, results of operations and consolidated financial condition; our limited operating history; inability to implement our business strategy; fluctuations in our quarterly results; failure to maintain our customer base that generates the majority of our revenues; currency fluctuations; failure to maintain sufficient insurance coverage; changes in value of our goodwill; failure of a significant market to develop for our products; failure of hydrogen being readily available on a cost-effective basis; changes in government policies and regulations; lack of new government policies and regulations for the energy storage technologies; failure of uniform codes and standards for hydrogen fuelled vehicles and related infrastructure to develop; liability for environmental damages resulting from our research, development or manufacturing operations; failure to compete with other developers and manufacturers of products in our industry; failure to compete with developers and manufacturers of traditional and alternative technologies; failure to develop partnerships with original equipment manufacturers, governments, systems integrators and other third parties; inability to obtain sufficient materials and components for our products from suppliers; failure to manage expansion of our operations; failure to manage foreign sales and operations; failure to recruit, train and retain key management personnel; inability to integrate acquisitions; failure to develop adequate manufacturing processes and capabilities; failure to complete the development of commercially viable products; failure to produce cost-competitive products; failure or delay in field testing of our products; failure to produce products free of defects or errors; inability to adapt to technological advances or new codes and standards; failure to protect our intellectual property; our involvement in intellectual property litigation; exposure to product liability claims; failure to meet rules regarding passive foreign investment companies; actions of our significant and principal shareholders; failure to maintain the requirements for continued listing on NASDAQ; dilution as a result of significant issuances of our common shares and preferred shares; inability of US investors to enforce US civil liability judgments against us; volatility of our common share price; and dilution as a result of the exercise of options.

These factors may cause the Company’s actual performance and financial results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements. Forward-looking statements do not take into account the effect that transactions or non-recurring or other special items announced or occurring after the statements are made have on the Company’s business. For example, they do not include the effect of business dispositions, acquisitions, other business transactions, asset write-downs or other charges announced or occurring after forward-looking statements are made. The financial impact of such transactions and non-recurring and other special items can be complex and necessarily depends on the facts particular to each of them.

We believe the expectations represented by our forward-looking statements are reasonable, yet there can be no assurance that such expectations will prove to be correct. The purpose of the forward-looking statements is to provide the reader with a description of management’s expectations regarding the Company’s fiscal 2015 financial performance and may not be appropriate for other purposes. Furthermore, unless otherwise stated, the forward-looking statements contained in this report are made as of the date of this report and we do not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise unless required by applicable legislation or regulation. The forward-looking statements contained in this report are expressly qualified by this cautionary statement.

 

 

 

 

 

 

 

 

Second Quarter 2015 Management’s Discussion and Analysis

Page 22

EXHIBIT 99.3

 

 

 

 

 

 

 

 

 

 

 

Hydrogenics Corporation

 

Second Quarter 2015

Condensed Interim Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hydrogenics Corporation

Condensed Interim Consolidated Balance Sheets

(in thousands of US dollars)

(unaudited) 

			June 30, 2015				December  31, 2014
Assets
Current assets
Cash and cash equivalents		$	8,016			$	6,572
Restricted cash			1,247				3,228
Trade and other receivables (note 4)			11,840				12,900
Inventories			15,351				14,698
Prepaid expenses			787				747
			37,241				38,145
Non-current assets
Restricted cash			655				621
Investment in joint venture (note 5)			2,139				2,150
Property, plant and equipment			2,304				1,873
Intangible assets			213				157
Goodwill			4,241				4,609
			9,552				9,410
Total assets		$	46,793			$	47,555
Liabilities
Current Liabilities
Operating borrowings (note 6)		$	1,671			$	-
Trade and other payables			9,738				13,156
Warranty provisions (note 7)			1,483				1,392
Deferred revenue			8,694				6,771
			21,586				21,319
Non-current liabilities
Other non-current liabilities (note 8)			10,310				3,464
Non-current warranty provisions (note 7)			837				1,155
Non-current deferred revenue			5,400				6,141
			16,547				10,760
Total liabilities			38,133				32,079
Equity
Share capital			348,275				348,259
Contributed surplus			20,099				18,927
Accumulated other comprehensive loss			(2,985	)			(2,108	)
Deficit			(356,729	)			(349,602	)
Total equity			8,660				15,476
Total equity and liabilities		$	46,793			$	47,555

 

 

Douglas S. Alexander Chairman	David C. Ferguson Director

 

The accompanying notes form an integral part of these condensed interim consolidated financial statements.

 

 

Hydrogenics Corporation

Condensed Interim Consolidated Statements of Operations and Comprehensive Loss

 

(in thousands of US dollars, except share and per share amounts)

(unaudited)

		Three months ended June 30,								Six months ended June 30,
			2015				2014				2015				2014
Revenues		$	7,368			$	10,723			$	14,899			$	18,782
Cost of sales			6,326				7,483				12,704				13,624
Gross profit			1,042				3,240				2,195				5,158
Operating expenses
Selling, general and administrative expenses			2,579				1,979				5,158				6,546
Research and product development expenses (note 11)			1,039				915				2,061				1,831
			3,618				2,894				7,219				8,377
Gain (Loss) from operations			(2,576	)			346				(5,024	)			(3,219	)
Finance income (expenses)
Interest expense, net			(369	)			(132	)			(496	)			(264	)
Foreign currency gains (losses), net(1)			73				(298	)			(763	)			(209	)
Gain (loss) from joint venture (note 5)			57				-				41				-
Other finance losses, net (note 12)			(885	)			(41	)			(885	)			(181	)
Finance income (loss), net			(1,124	)			(471	)			(2,103	)			(654	)
Loss before income taxes			(3,700	)			(125	)			(7,127	)			(3,873	)
Income tax expense			-				-				-				-
Net loss for the period			(3,700	)			(125	)			(7,127	)			(3,873	)
Items that may be reclassified subsequently to net loss
Exchange differences on translating foreign operations			185				(62	)			(877	)			(67	)
Comprehensive loss for the period		$	(3,515	)		$	(187	)		$	(8,004	)		$	(3,940	)
Net loss per share
Basic and diluted (note 13)		$	(0.37	)		$	(0.01	)		$	(0.71	)		$	(0.41	)

 

 

(1)

For the three and six months ended June 30, 2015 respectively, a loss of $44 and a gain of $250 relates to foreign exchange on borrowings. For the three and six months ended June 30, 2014 respectively, a loss of $122 and a gain of $12 relates to foreign exchange on borrowings.

 

 

 

The accompanying notes form an integral part of these condensed interim consolidated financial statements.

 

 

Hydrogenics Corporation

Condensed Interim Consolidated Statements of Changes in Equity

(in thousands of US dollars, except share and per share amounts)

(unaudited)

 

 

		Common shares																Accumulated other
		Number				Amount				Contributed surplus				Deficit				comprehensive loss(1)				Total equity
Balance at December 31, 2014			10,090,325			$	348,259			$	18,927			$	(349,602	)		$	(2,108	)		$	15,476
Net loss			-				-				-				(7,127	)			-				(7,127	)
Other comprehensive loss			-				-				-				-				(877	)			(877	)
Total comprehensive loss			-				-				-				(7,127	)			(877	)			(8,004	)
Issuance of warrants (note 8 & 9)			-				-				885				-				-				885
Issuance of common shares on exercise of stock options (note 10)			2,050				16				(7	)			-				-				9
Stock-based compensation expense (note 10)			-				-				294				-				-				294
Balance at June 30, 2015			10,092,375			$	348,275			$	20,099			$	(356,729	)		$	(2,985	)		$	8,660

 

 

		Common shares																Accumulated other
		Number				Amount				Contributed surplus				Deficit				comprehensive loss(1)				Total equity
Balance at December 31, 2013			9,017,617			$	333,312			$	18,449			$	(345,351	)		$	(249	)		$	6,161
Net loss			-				-				-				(3,873	)			-				(3,873	)
Other comprehensive loss			-				-				-				-				(67	)			(67	)
Total comprehensive loss			-				-				-				(3,873	)			(67	)			(3,940	)
Issuance of common shares (note 9)			1,057,144				14,768				-				-				-				14,768
Issuance of common shares on exercise of stock options (note 10)			14,135				171				(61	)			-				-				110
Stock-based compensation expense (note 10)			-				-				293				-				-				293
Balance at June 30, 2014			10,088,896			$	348,251			$	18,681			$	(349,224	)		$	(316	)		$	17,392

 

(1)

Accumulated other comprehensive loss represents currency translation adjustments.

 

The authorized share capital of the Company consists of an unlimited number of common shares, with no par value, and an unlimited number of preferred shares in series, with no par value.

 

 

 

The accompanying notes form an integral part of these condensed interim consolidated financial statements.

 

 

Hydrogenics Corporation

Condensed Interim Consolidated Statements of Cash Flows

(in thousands of US dollars)

(Unaudited)

		Three months ended								Six months ended
		June 30,								June 30,
			2015				2014				2015				2014
Cash and cash equivalents provided by (used in):
Operating activities
Net loss for the period		$	(3,700	)		$	(125	)		$	(7,127	)		$	(3,873	)
(Increase) decrease in restricted cash			1,410				62				1,947				(191	)
Items not affecting cash:
Amortization and depreciation			149				178				310				318
Other finance losses, net (note 12)			-				41				-				181
Unrealized foreign exchange losses (gains)			(261	)			4				(256	)			90
Unrealized gain on joint venture (note 5)			(58	)			-				(42	)			-
Accreted non-cash and unpaid interest			345				115				466				233
Payment of post-retirement benefit liability			-				(21	)			-				(45	)
Portion of borrowings recorded as a reduction from research and development expenses (note 8(i))			-				(118	)			-				(118	)
Stock-based compensation (note 10)			176				157				294				293
Stock based compensation – RSUs and DSUs (note 10)			(90	)			(969	)			(234	)			592
Warrant issuance (note 9)			885				-				885				-
Net change in non-cash working capital (note 14)			(3,146	)			(4,126	)			(1,897	)			(6,097	)
Cash used in operating activities			(4,290	)			(4,802	)			(5,654	)			(8,617	)
Investing activities
Proceeds from disposals			-				-				-				9
Purchase of property, plant and equipment			(394	)			(219	)			(765	)			(525	)
Purchase of intangible assets			(81	)			-				(81	)			(80	)
Cash used in investing activities			(475	)			(219	)			(846	)			(596	)
Financing activities
Repayment of repayable government contributions			(110	)			(339	)			(110	)			(389	)
Proceeds of borrowings, net of transaction costs (note 8)			6,866				854				6,866				854
Proceeds of operating borrowings (note 6)			1,671				-				3,822				-
Repayment of operating borrowings (note 6)			(2,151	)			(1,722	)			(2,151	)			-
Common shares issued			3				13,552				9				13,661
Cash provided by financing activities			6,279				12,345				8,436				14,126
Effect of exchange rate fluctuations on cash and cash equivalents held			295				(9	)			(492	)			(77	)
Increase (Decrease) in cash and cash equivalents during the period			1,809				7,315				1,444				4,836
Cash and cash equivalents - Beginning of period			6,207				9,344				6,572				11,823
Cash and cash equivalents - End of period		$	8,016			$	16,659			$	8,016			$	16,659

 

 

The accompanying notes form an integral part of these condensed interim consolidated financial statements.

 

 

Note 1 - Description of Business

 

Hydrogenics Corporation and its subsidiaries (“Hydrogenics” or the “Corporation” or the “Company”) design, develop and manufacture hydrogen generation products based on water electrolysis technology, and fuel cell products based on proton exchange membrane (“PEM”) technology. The Company has manufacturing plants in Canada and Belgium, a satellite facility in Germany, and a branch office in Russia. Its products are sold throughout the world.

 

Hydrogenics Corporation is incorporated and domiciled in Canada. The address of the Company’s registered head office is 220 Admiral Boulevard, Mississauga, Ontario, Canada. The Company’s shares trade under the symbol “HYG” on the Toronto Stock Exchange and under the symbol “HYGS” on NASDAQ.

 

On August 10, 2015, the Board of Directors authorized the condensed interim consolidated financial statements for issue.

 

Note 2 - Basis of Preparation and significant accounting policies

 

These unaudited condensed interim consolidated financial statements for the three and six months ended June 30, 2015 have been prepared in accordance with IAS 34, “Interim financial reporting. The disclosures contained in these unaudited condensed interim consolidated financial statements do not include all of the requirements of International Financial Reporting Standards (“IFRS”) for annual financial statements. The condensed interim consolidated financial statements should be read in conjunction with the annual financial statements for the year ended December 31, 2014, which have been prepared in accordance with IFRS, as issued by the International Accounting Standards Board (“IASB”). The unaudited condensed interim consolidated financial statements are based on accounting policies as described in the 2014 annual consolidated financial statements, except as described below:

 

Warrants 

The Company issued warrants in the second quarter of 2015, which have been classified as equity at issuance and recorded in contributed surplus.

 

Research and product development costs

In accordance with the accounting policies as described in the 2014 annual consolidated financial statements, the Company has capitalized development costs as intangible assets, amortized over the estimated useful life of three years.

 

Note 3 - Accounting Standards Issued But Not Yet Applied

 

In July 2014, the IASB issued a final version of IFRS 9, Financial Instruments, which replaces IAS 39, Financial Instruments: Recognition and Measurement, and supersedes all previous versions of the standard. The standard introduces a new model for the classification and measurement of financial assets and liabilities, a single expected credit loss model for the measurement of the impairment of financial assets and a new model for hedge accounting that is aligned with a company’s risk management activities. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with earlier adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.

 

In May 2014, the IASB issued the final revenue standard, IFRS 15 Revenue from Contracts with Customers, which will replace IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31 Revenue - Barter Transactions Involving Advertising Services.

 

 

The new standard provides a comprehensive five-step revenue recognition model for all contracts with customers and requires management to exercise significant judgement and make estimates that affect revenue recognition. IFRS 15 will be mandatorily effective for fiscal years beginning on or after January 1, 2017, and interim periods within that year. Earlier application is permitted. In April 2015, the IASB voted to publish an Exposure Draft proposing a one-year deferral of the effective date of the revenue Standard to January 1, 2018. The Company is assessing the new standard to determine its impact on the Company’s condensed interim consolidated financial statements.

 

Note 4 - Trade and Other Receivables

 

		June 30,  2015				December 31,  2014
Trade accounts receivables		$	3,593			$	4,469
Less:  Allowance for doubtful accounts			(128	)			(133	)
Net trade accounts receivable			3,465				4,336
Accrued receivables			6,462				6,049
Other receivables (including VAT receivables)			1,913				2,515
Total trade and other receivables		$	11,840			$	12,900

 

Included in accrued receivable is $5,528 relating to unbilled receivables on an uncompleted long term contract. Management anticipates that $1,481 of this amount will not be billed within the next 12 months.

 

Note 5 - Investment in Joint Venture

 

On May 28, 2014, the Company entered into a joint arrangement with a South Korean company, whereby the parties formed Kolon Hydrogenics to launch and market potential businesses based on products and technologies produced by Hydrogenics for the Korean market. The Company has a 49% equity position in Kolon Hydrogenics and shares joint control. The Board of Directors of the joint venture has four directors consisting of two nominees from each of Hydrogenics and Kolon Water and Energy, and all resolutions are adopted by an affirmative vote of two-thirds. The Company accounts for this joint venture using the equity method in accordance with IFRS 11 “Joint Arrangements”.

 

		June 30,  2015
Balance January 1, 2015		$	2,150
Share in profit of the joint venture			41
Foreign currency translation			(52	)
Investment in joint venture		$	2,139

 

Note 6 - Operating Borrowings

 

At June 30, 20 15, the Company had a Belgian joint credit and operating line facility of €7,000. Of this, €3,984 or approximately $4,437 was drawn as standby letters of credit and bank guarantees and €1,500 or approximately $1,671 was drawn as an operating line. At June 30, 2015, the Company had availability of €1,516 or approximately $1,688 (December 31, 2014 - $4,064) under this facility for use only as letters of credit and bank guarantees.

 

At June 30, 20 15, the Company also had a Canadian credit facility of $5,002. At June 30, 2015 $2,596 was drawn as standby letters of credit and bank guarantees. At June 30, 2015, the Company had $2,406 (December 31, 2014 - $1,879) available under this facility for use only as letters of credit and bank guarantees.

 

Note 7 - Warranty Provisions

 

Changes in the Company’s aggregate warranty provision are as follows:

 

			2015				2014
At January 1,		$	2,547			$	2,893
Additional provisions			549				1,420
Utilized during the period			(452	)			(899	)
Unused amounts reversed			(171	)			(175	)
Foreign currency translation			(153	)			(13	)
Total warranty provision at June 30,			2,320				3,226
Less current portion			(1,483	)			(2,040	)
Long-term warranty provision at June 30,		$	837			$	1,186

 

Note 8 - Other Non-current Liabilities

 

Other non-current liabilities are as follows:

 

			June 30,  2015				December 31, 2014
Long-term debt – Institutional (i)		$	6,928			$	-
Long-term debt – Province of Ontario (ii)			2,961				2,922
Non-current post-retirement benefit liability (iii)			191				208
Repayable government contributions (iv)			438				553
Total non-current liabilities			10,518				3,683
Less current portion of repayable government contribution			(208	)			(219	)
Total other non-current liabilities		$	10,310			$	3,464

  

(i)

Long-term debt

In the second quarter of 2015, the Company entered into a loan agreement with a syndicate of lenders for an 18 month facility of $7,500. The amortized cost of this loan at June 30, 2015 was $6,928. Included with this loan agreement was the issuance of 250,000 warrants to the lenders. The loan charges interest at an annual rate of 11%. The warrants have been recorded in contributed surplus.

 

(ii)

Long-term debt – Province of Ontario

In 2011, the Corporation entered into a loan agreement with the Province of Ontario’s Ministry of Economic Development and Trade, Strategic Jobs and Investment Fund for funding up to C$6,000. Each draw on the loan is calculated based on 50% of eligible costs to a maximum of C$1,500 per disbursement. Eligible costs must be incurred between October 1, 2010 and September 30, 2015.

 

 

The maturity date of the loan is ten years from the date of the first disbursement. The loan will be interest free for the first five years, commencing on the first day of the month following the date of the first disbursement, if certain criteria are met, such as the retention and creation of a specified number of jobs. After this five-year period, the loan will bear interest at a rate of 3.67%, if all criteria have been met, and will require repayment at a rate of 20% per year of the outstanding balance for the next five years. If the criteria are not met, the loan will bear interest at a rate of 5.67% per annum for the entire term of the loan commencing from the first disbursement. At the project completion date of September 30, 2015, the outstanding amount of the loan is subject to accelerated repayment in an amount based on the percentage shortfall of actual expenditures incurred to date compared to the contractual minimum. Such amount will be immediately repayable with interest calculated from the date of the last disbursement at a rate of 5.67%.

 

There is no availability remaining under this facility at June 30, 2015. The loan is collateralized by a general security agreement covering assets of Hydrogenics Corporation. Additionally, the Corporation is required to maintain a minimum balance of cash in Canadian dollars in a Canadian financial institution at all times.

 

The change in carrying value of this liability as at June 30 was as follows:

 

		Six months ended June 30
			2015				2014
At January 1,		$	2,922			$	2,260
Draw downs during the period			-				735
Interest accretion during the period			225				96
Foreign exchange revaluation			(186	)			95
At June 30,		$	2,961			$	3,186

 

(iii)

Post-retirement benefit liability

The liability at June 30, 2015 relates to defined contribution pension plans in Belgium and is payable in Euros. Applicable law states that in the context of defined contribution plans, the employer must guarantee a minimum return of 3.75% on employee contributions and 3.25% on employer contributions. The minimum guaranteed return for defined contributions plans in Belgium results in the employer being exposed to financial risk for the legal obligation to pay further contributions if the fund does not hold sufficient assets to meet the minimum guaranteed return.

 

In the past the Company did not apply the defined benefit accounting for these plans because higher discount rates were applicable and the return on plan assets provided by insurance companies was sufficient to cover the minimum guaranteed return. Continuous low interest rates offered by the European financial markets has resulted in employers in Belgium being required to measure the potential impact of defined benefit accounting for these plans. The Company has estimated the potential additional liabilities as $191 at June 30, 2015. There were no actuarial re-measurements during the six months ended June 30, 2015.

 

During 2014, the Company had a liability in respect of the value of an unfunded pension obligation. This liability was nil at June 30, 2015 (June 30, 2014 - $344), due to the death of the beneficiary of this plan.

 

 

(iv)

Repayable government contributions:

The Corporation has received government contributions related to certain historical research and development projects. In 1998, the Company entered into an agreement (the “TPC Agreement”) with Technologies Partnerships Canada (“TPC”), a program of Industry Canada to develop and demonstrate hydrogen fleet fuel appliances.

 

In January 2011, with respect to the TPC Agreement, the Corporation entered into an amended agreement (the “Amendment”) with Industry Canada. Under the terms of the Amendment, C$1,500 will be paid to Industry Canada in quarterly installments which commenced in January 2011 and will continue until September 2017. An additional payment (“the Contingent Amount) of 3% of the net proceeds of all equity instrument financing transactions completed by the Corporation on or before September 30, 2017 or the sum of C$800, whichever is the lesser amount, will be paid to Industry Canada. The Corporation has paid C$800 to date under the 3% contingent payment provisions described above, which is the maximum under the agreement.

 

The present value of this obligation at June 30, 2015 was $438 (December 31, 2014 - $553), including the current portion of $208 (December 31, 2014 - $219), which was included in trade and other payables.

 

		Six months ended June 30 2015				Six months ended June 30 2014
At January 1,		$	553			$	990
Repayments during the period			(110	)			(389	)
Interest accretion during the period			36				61
Increase for contingent amount			-				-
Foreign currency translation			(43	)			(31	)
Fair value loss			2				40
At June 30,		$	438			$	671
Less current portion			(208	)			(224	)
At June 30,		$	230			$	447

 

Fair value gains and losses have been recorded in other finance gains and losses, net of interest expense.

 

Note 9 - Share Capital

 

Common Shares

 

		June 30, 2015								June 30, 2014
			Number				Amount				Number				Amount
Balance at January 1			10,090,325			$	348,259				9,017,617			$	333,312
Share offering			-				-				1,000,000				13,551
Warrants exercised			-				-				57,144				1,217
Stock options exercised (note 9)			2,050				16				14,135				171
At June 30,			10,092,375			$	348,275				10,088,896			$	348,251

 

 

Common Share issuance

 

On May 13, 2014 the Company and CommScope, Inc. of North Carolina (“CommScope”) entered into an underwriting agreement to issue 1,500,000 common shares of the Company (1,000,000 from Treasury and 500,000 secondary shares by CommScope) at a price of US$15 per share. The underwriters also retained an overallotment of 225,000 shares that could be issued at any time during the 30 days following the closing of the offering. On May 16, 2014 the Company issued 1,000,000 shares for gross proceeds of $15,000. Net proceeds after underwriting fees and expenses were $13,552.

 

Warrant issuance

 

On May 8, 2015 as part of a loan agreement with a syndicate of lenders, the Company issued 250,000 share purchase warrants. Each warrant is exercisable for one common share of the Company at an exercise price of US$15.00 per common share. The warrants are non-transferrable and expire on May 6, 2019. As a result of this issuance, the fair market value of these warrants of $885 was included in other finance (losses) gains with a corresponding credit to contributed surplus.

 

The fair value of the warrants was determined using the Black-Scholes option pricing model with the following weighted average assumptions:

 

			2015
Risk-free interest rate (%)			0.71	%
Expected volatility (%)			65.6	%
Expected life in years			3
Expected dividend			Nil

 

Expected volatility was determined using the historical volatility for the Company’s share price for the three years prior to the date of grant, as this is the expected life of the warrants.

 

Note 10 - Stock-Based Compensation

 

Under the Company’s previous Stock Option Plan 252,006 stock options were outstanding at June 30, 2015. No further stock options may be issued under this plan.

 

Of the 660,564 shares available under the Omnibus Incentive Plan, to be issued as stock options, restricted share units (“RSUs”) and performance share units (“PSUs”), 284,168 have been granted as stock options and 199,772 have been granted as PSUs and were outstanding at June 30, 2015. The Company has 176,624 units available for issue under this plan at June 30, 2015. 

  

 

Stock Options

 

A summary of the Company’s stock option plan for the six months ended June 30, 2015 and 2014 is as follows:

 

		2015								2014
		Number of shares				Weighted average exercise price C$				Number of shares				Weighted average exercise price C$
Outstanding, beginning of period			481,403			$	6.99				503,907			$	8.63
Granted			56,821				16.14				-				-
Exercised			(2,050	)			5.56				(14,135	)			8.66
Expired			-				-				(5,052	)			160.11
Outstanding, end of period			536,174			$	7.97				484,720			$	7.05

 

During the six months ended June 30, 2015, 56,821 stock options were granted (2014 – nil). All options are for a term of ten years from the date of grant and vest over four years unless otherwise determined by the Board of Directors. The fair value of the stock options was determined using the Black-Scholes option pricing model with the following weighted average assumptions:

 

			2015
Risk-free interest rate (%)			0.88	%
Expected volatility (%)			63.1	%
Expected life in years			5
Expected dividend			Nil

 

Expected volatility was determined using the historical volatility for the Company’s share price for the five years prior to the date of grant, as this is the expected life of the stock options.

 

Stock-based compensation expense for the six months ended June 30, 2015, related to stock options was $130 (2014 - $166) and was included in selling, general and administrative expenses with an offsetting increase to contributed surplus.

 

Performance Share Units

 

During the six months ended June 30, 2015, 32,670 PSUs were granted with a fair value of C$527 (2014 - 37,827 units).

 

A summary of the Company’s PSU activity is as follows:

 

			2015				2014
Balance at January 1,			192,320				154,493
Forfeited			(25,218	)			-
PSUs granted			32,670				37,827
At June 30,			199,772				192,320

 

 

Stock-based compensation expense for the six months ended June 30, 2015, related to PSUs was $164 (2014 - $127), and was included in selling, general and administrative expenses with an offsetting increase to contributed surplus.

 

Deferred Share Units

 

The Company has a deferred share unit plan for non-employee directors, who are entitled to receive all or any portion of their annual cash retainer and meeting fees in the form of DSUs instead of cash. Each DSU is equivalent in value to a common share of the Company. The DSU liability is marked-to-market each reporting period with the offset recorded in selling, general and administrative expense.

 

A summary of the Company’s DSU activity is as follows:

 

		2015								2014
			Number				Amount				Number				Amount
Balance at January 1,			87,850			$	1,168				131,320			$	2,521
DSU redemptions			-				-				(49,442	)			(1,472	)
DSU compensation expense			5,437				57				2,396				52
DSU fair value adjustments			-				(291	)			-				453
At June 30,			93,287			$	934				84,274			$	1,554

 

For the period ended June 30, 2015, the Company recognized $57 (2014 - $52) as expense for the issue of new DSUs and a recovery of $291 (2014 – expense of $453) for the mark-to-market adjustment on the liability.

 

The DSU liability at June 30, 2015 of $934 (2014 - $1,554) was included in trade and other payables. DSUs vest immediately on the date of issuance.

 

Restricted Share Units (“RSUs”)

 

The RSU liability at June 30, 2015 was nil (2014 - $748) as all outstanding units had vested and were paid out at December 31, 2014.

 

A summary of the Company’s RSU activity is as follows:

		2015								2014
			Number				Amount				Number				Amount
Balance at January 1,			-			$	-				46,885			$	660
RSU amortization expense			-				-				-				141
RSU fair value adjustments			-				-				-				(53	)
At June 30,			-			$	-				46,885			$	748

 

 

 

 

Note 11 - Research and Product Development Expenses

 

Research and product development expenses are recorded net of non-repayable third party program funding received or receivable. For the six months ended June 30, 2015 and 2014, research and product development expenses and program funding are as follows:

 

Three months ended June 30,			2015				2014
Research and product development expenses		$	1,713			$	1,994
Government research and product development funding			(597	)			(1,079	)
Development costs capitalized			(77	)			-
Total		$	1,039			$	915

 

 

Six months ended June 30,			2015				2014
Research and product development expenses		$	3,384			$	3,563
Government research and product development funding			(1,246	)			(1,732	)
Development costs capitalized			(77	)			-
Total		$	2,061			$	1,831

 

 

Note 12 - Other Finance Gains and Losses, Net

 

Components of other finance gains and losses, net are as follows:

 

Three months ended June 30,			2015				2014
Warrant issuance		$	(885	)		$	-
Loss from change in net present value of repayable government contribution			-				(41	)
Total		$	(885	)		$	(41	)

 

 

Six months ended June 30,			2015				2014
Warrant issuance		$	(885	)		$	-
Loss from change in fair value of exercised warrants			-				(142	)
Loss from change in net present value of repayable government contribution			-				(39	)
Total		$	(885	)		$	(181	)

 

 

 

Note 13 - Net Loss Per Share

 

The loss per share for the periods ended June 30, 2015 and 2014 were as follows:

 

			Three months ended June 30								Six months ended June 30
			2015				2014				2015				2014
Net loss		$	(3,700	)		$	(187	)		$	(7,127	)		$	(3,940	)
Weighted average number of shares outstanding – basic and diluted			10,091,498				9,605,220				10,090,992				9,340,843
Net loss per share – basic and diluted		$	(0.37	)		$	(0.01	)		$	(0.71	)		$	(0.41	)

 

No effect has been given to the potential exercise of stock options and warrants in the calculation of diluted net loss per share, as their impact would be anti-dilutive.

 

Note 14 - Condensed Statements of Cash Flows

 

Components of the net change in non-cash working capital are as follows:

 

Three months ended June 30,			2015				2014
Decrease (increase) in current assets
Trade and other receivables		$	131			$	187
Inventories			(1,188	)			(1,560	)
Prepaid expenses			(59	)			215
Increase (decrease) in current liabilities
Trade and other payables, including warranty provision			(917	)			(1,873	)
Deferred revenue			(1,113	)			(1,095	)
Total		$	(3,146	)		$	(4,126	)

 

 

Six months ended June 30,			2015				2014
Decrease (increase) in current assets
Trade and other receivables		$	1,223			$	(2,614	)
Inventories			(654	)			(5,374	)
Prepaid expenses			(40	)			(136	)
Increase (decrease) in current liabilities
Trade and other payables, including warranty provision			(3,608	)			639
Deferred revenue			1,182				1,388
Total		$	(1,897	)		$	(6,097	)

 

 

Note 15 – Commitments and Contingencies

 

In November 2014, Hydrogenics entered into an agreement with the Independent Electricity System Operators (“IESO”) to provide a 2MW Power-to-Gas storage unit to the Province of Ontario. It is anticipated that the unit will be put into service in 2016, at which time the service commencement period will begin and will last for a period of 36 months. Hydrogenics will receive a total of C$2,950, paid in equal monthly installments in return for IESO’s use of the energy storage solution over the three year period.

 

In order to partially fund the development of the unit, Hydrogenics and the Province of Ontario, through the Ministry of Research and Innovation (“MRI”), negotiated a forgivable loan facility from the Innovation Demonstration Fund Program (“IDF”). The loan bears interest at 3.23%, is expected to mature on June 30, 2020, and the principal and interest are forgivable upon the satisfaction of certain criteria. Under the terms of the loan agreement, the government has committed to fund up to C$4,000 through a forgivable loan, to be funded at 50% of eligible costs incurred on the project. The total cost of the energy storage solution is expected to be C$8,000, of which C$1,960 of the costs will be funded by Hydrogenics, C$2,040 will be funded by Enbridge and the remaining C$4,000 from the forgivable loan. The project completion date is expected to be December 31, 2016.

 

The forgiveness of the principal and interest on the loan is contingent on a final commercialization report satisfactory to MRI, indicating successful commissioning and verification of the operation of the multi-stack two MW PEM electrolyser and demonstrated performance capabilities that would be deemed acceptable for ancillary service as per the IESO specifications. The forgivable loan has been accounted for as a government grant as management estimates there is reasonable assurance that the terms of forgiveness will be met.

 

At June 30, 2015, the Company has accumulated total costs in building the unit of $552 which have been classified as property, plant and equipment. The Company has received total funding of $118 under the IDF loan, of which $118 was received in the six months ended June 30, 2015 and has accrued an additional $114 of funding to be received. The funding amounts have been recorded as a reduction to property, plant and equipment.

 

Note 16 - Related Party Transactions

 

In the normal course of operations, the Company subcontracts certain manufacturing functions to a company owned by a family member of a senior officer who is also a director of the Company. During the three and six months ended June 30, 2015, Hydrogenics made purchases of $29 and $39 respectively (2014 - $46 and $81) from this related company. At June 30, 2015, the Company had an accounts payable balance due to this related party of $28 (2014 - $24).

 

At June 30, 2015 the Company had a receivable of $1,236 owing from its joint venture Kolon Hydrogenics, which is included in trade and accrued accounts receivable.

 

All related party transactions involve the parent company. There are no related party transactions to disclose for the Company’s subsidiaries.

 

Note 17 - Segmented Financial Information

 

The Company’s two reportable segments include OnSite Generation and Power Systems. Segmentation is based on the internal reporting and organizational structure, taking into account the different risk and income structures of the key products and production processes of the Company. Where applicable, corporate and other activities are reported separately as Corporate and Other. OnSite Generation includes the design, development, manufacture and sale of hydrogen generation products. Power Systems includes the design, development, manufacture and sale of fuel cell products.

 

 

Financial information by reportable segment for the three and six months ended June 30, 2015 and 2014 was as follows:

 

Three months ended June 30, 2015		On-Site Generation				Power Systems				Corporate and Other					Total
Revenues from external customers		$	4,501			$	2,867			$	-			$	7,368
Gross profit			653				389				-				1,042
Selling, general and administrative expenses			598				975				1,006				2,579
Research and product development expenses			476				562				1				1,039
Segment loss			(421	)			(1,148	)			(1,007	)			(2,576	)
Interest expense, net			-				-				(369	)			(369	)
Foreign currency gains, net			-				-				73				73
Gain (loss) in joint venture			-				-				57				57
Other finance losses, net			-				-				(885	)			(885	)
Loss before income taxes		$	(421	)		$	(1,148	)		$	(2,131	)		$	(3,700	)
Total segment assets			23,154				15,653				7,986				46,793
Total segment liabilities (current and non-current)			13,635				15,678				8,820				38,133

 

 

Three months ended June 30, 2014		On-Site Generation				Power Systems				Corporate and Other					Total
Revenues from external customers		$	7,514			$	3,209			$	-			$	10,723
Gross profit			2,147				1,093				-				3,240
Selling, general and administrative expenses			825				1,061				93				1,979
Research and product development expenses			390				520				5				915
Segment gain (loss)			932				(488	)			(98	)			346
Interest expense, net			-				-				(132	)			(132	)
Foreign currency losses, net			-				-				(298	)			(298	)
Other finance losses, net			-				-				(41	)			(41	)
Loss before income taxes		$	932			$	(488	)		$	(569	)		$	(125	)
Total segment assets			25,341				14,859				13,265				53,465
Total segment liabilities (current and non-current)			14,040				19,681				2,352				36,073

 

  

Six months ended June 30, 2015		On-Site Generation				Power Systems				Corporate and Other					Total
Revenues from external customers		$	7,836			$	7,063			$	-			$	14,899
Gross profit			930				1,265				-				2,195
Selling, general and administrative expenses			1,233				1,895				2,030				5,158
Research and product development expenses			900				1,141				20				2,061
Segment loss			(1,203	)			(1,771	)			(2,050	)			(5,024	)
Interest expense, net			-				-				(496	)			(496	)
Foreign currency losses, net			-				-				(763	)			(763	)
Gain (loss) in joint venture			-				-				41				41
Other finance losses, net			-				-				(885	)			(885	)
Loss before income taxes		$	(1,203	)		$	(1,771	)		$	(4,153	)		$	(7,127	)

 

 

Six months ended June 30, 2014			On-Site Generation				Power Systems				Corporate and Other				Total
Revenues from external customers		$	13,477			$	5,305			$	-			$	18,782
Gross profit			2,914				2,244				-				5,158
Selling, general and administrative expenses			1,665				2,115				2,766				6,546
Research and product development expenses			773				1,051				7				1,831
Segment gain (loss)			476				(922	)			(2,773	)			(3,219	)
Interest expense, net			-				-				(264	)			(264	)
Foreign currency losses, net			-				-				(209	)			(209	)
Other finance losses, net			-				-				(181	)			(181	)
Loss before income taxes		$	476			$	(922	)		$	(3,427	)		$	(3,873	)

 

Note 18 - Risk Management Arising From Financial Instruments

 

Fair value

 

The carrying value of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued liabilities (excluding the liabilities relating to the RSUs and DSUs) approximate their fair value given their short-term nature. The carrying value of the non-current liabilities approximates their fair value given the difference between the discount rates used to recognize the liabilities in the balance sheets and the market rates of interest is insignificant. The fair value of the liabilities relating to the RSUs and DSUs are classified as Level 1.

 

Fair value measurements recognized in the balance sheets must be categorized in accordance with the following levels:

 

(i)

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

(ii)

Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices);

(iii)

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

 

 

The Company has not transferred any financial instruments between Level 1, 2, or 3 of the fair value hierarchy during the six months ended June 30, 2015.

 

Financial instruments are classified into one of the following categories: fair value through profit and loss; held-to-maturity; available-for-sale; loans and receivables; and other financial liabilities. The following table summarizes information regarding the carrying values of the Company’s financial instruments:

 

		June 30, 2015				December 31, 2014
Cash and cash equivalents		$	8,016			$	6,572
Restricted cash			1,247				3,228
Restricted cash – non current			655				621
Trade and other receivables			11,840				12,900
Loans and receivables		$	21,758			$	23,321
Trade and other payables		$	9,738			$	13,156
Operating borrowings			1,671				-
Long-term debt			9,889				2,922
Non-current repayable government contributions			230				334
Post-retirement benefit liabilities			191				208
Other financial liabilities		$	21,719			$	16,620

 

 

 

 

 

 

 

 

 

 

Note 19 – Capital Management

 

The Company’s objective in managing capital is to ensure sufficient liquidity to pursue its growth strategy, fund research and product development, while at the same time, taking a conservative approach toward financial leverage and management of financial risk.

 

The Company’s primary uses of capital are to finance operations, increase non-cash working capital and capital expenditures. The Company currently funds these requirements from existing cash resources, cash raised through share issuances and long-term debt. The Company’s objectives when managing capital are to ensure the Company will continue to have enough liquidity so it can provide its products and services to its customers and returns to its shareholders. The Company monitors its capital on the basis of the adequacy of its cash resources to fund its business plan. In order to maximize the capacity to finance the Company’s ongoing growth, the Company does not currently pay a dividend to holders of its common shares.

 

The Company considers its capital employed as shareholders’ equity and total debt, net of cash and cash equivalents as follows:

 

		June 30, 2015				December 31, 2014
Shareholders’ equity		$	8,660			$	15,476
Operating borrowings			1,671				-
Long term debt and repayable government contributions			10,327				3,475
Total			20,658				18,951
Less cash and cash equivalents and restricted cash			9,918				10,421
Total capital employed		$	10,740			$	8,530

 

 

 

 

 

 

 

 

2015 Q2 Condensed Interim Consolidated Financial Statements

Page 20

 

EXHIBIT 99.4

 

EXHIBIT 99.5

 

FORM 52-109F2

CERTIFICATION OF INTERIM FILINGS

FULL CERTIFICATE

I, Daryl Wilson, President and Chief Executive Officer of Hydrogenics Corporation, certify the following:

1.

Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Hydrogenics Corporation (the “issuer”) for the interim period ended June 30, 2015.

2.

No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3.

Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4.

Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

5.

Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a)

designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

(i)

material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

(ii)

information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b)

designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

5.1

Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2

N/A

5.3

N/A

6.

Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2015 and ended on June 30, 2015 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

Date: August 11, 2015.

/s/ Daryl Wilson
Daryl Wilson
President and Chief Executive Officer

 

EXHIBIT 99.6

 

FORM 52-109F2

CERTIFICATION OF INTERIM FILINGS

FULL CERTIFICATE

I, Robert Motz, Chief Financial Officer of Hydrogenics Corporation, certify the following:

1.

Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Hydrogenics Corporation (the “issuer”) for the interim period ended June 30, 2015.

2.

No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3.

Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4.

Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

5.

Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a)

designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

(i)

material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

(ii)

information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b)

designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

5.1

Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2

N/A

5.3

N/A

6.

Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2015 and ended on June 30, 2015 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

Date: August 11, 2015.

/s/ Robert Motz
Robert Motz
Chief Financial Officer