UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F
(Check One)
☐ |
Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934 |
or
☒ |
Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 |
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For the fiscal year ended December 31, 2015 |
Commission file number: 000-31815 |
HYDROGENICS
CORPORATION -
CORPORATION HYDROGÉNIQUE
(Exact name of registrant as specified in its charter)
Canada |
2810 |
98-0644202 |
(Province or other jurisdiction
of incorporation or organization) |
(Primary Standard Industrial
Classification Code Number (if applicable)) |
(I.R.S. Employer
Identification Number) |
220 Admiral Boulevard Mississauga, Ontario L5T 2N6 (905) 361-3660 |
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(Address and Telephone Number of Registrant’s Principal Executive Offices)
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CT Corporation
111 8th Avenue
New York, New York 10011
(212) 894-8400 |
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(Name, Address (Including Zip Code) and Telephone Number (Including Area Code) of Agent For Service in the United States) |
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Securities registered or to be registered pursuant to Section 12(b) of the Act. |
Title of Each Class |
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Name Of Exchange On Which Registered |
Common Shares |
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The NASDAQ Global Market |
Securities registered or to be registered
pursuant to Section 12(g) of the Act: None
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act: None
For annual reports, indicate by check mark
the information filed with this Form:
☒ Annual Information Form |
|
☒ Audited Annual Financial
Statements |
Indicate the number of outstanding shares
of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 12,540,757
Common Shares
Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
Yes ☒ No
☐
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the Registrant was required to submit and post such files).
Yes ☐ No
☐
Principal Documents
The following documents of Hydrogenics
Corporation (the “Registrant” or the “Company”) are filed as exhibits to this annual report and are incorporated
by reference herein:
- the Registrant’s Annual Information Form for the year ended December 31, 2015;
- the Registrant’s Audited Consolidated Financial Statements for the years ended
December 31, 2015 and 2014; and
- the Registrant’s Management Discussion and Analysis for the year ended December
31, 2015.
Forward Looking Statements
This report contains forward-looking statements
concerning anticipated developments in the operations of the Company in future periods, planned development activities, the adequacy
of the Company’s financial resources and other events or conditions that may occur in the future. Forward-looking statements
are frequently, but not always, identified by words such as “estimate”, “project”, “believe”,
“anticipate”, “intend”, “expect”, “plan”, “predict”, “may”,
“should”, “will” and similar expressions, or by statements that events, conditions or results “will,”
“may,” “could” or “should” occur or be achieved. Forward-looking statements are statements
about the future and are inherently uncertain, and actual achievements of the Company or other future events or conditions may
differ materially from those reflected in the forward-looking statements due to a variety of risks, uncertainties and other factors,
including, without limitation, those described in the Annual Information Form incorporated by reference in this report.
The Company’s forward-looking statements
are based on the beliefs, expectations and opinions of management on the date the statements are made and the Company assumes no
obligation to update such forward-looking statements in the future. For the reasons set forth above, investors should not place
undue reliance on forward-looking statements.
Additional Disclosure
Certifications and Disclosure Regarding
Controls and Procedures.
(a) Certifications. See Exhibits
99.4 to 99.7 to this annual report on Form 40-F.
(b) Disclosure Controls and Procedures.
The required disclosure is included in Management’s Discussion and Analysis, which is incorporated herein by reference to
Exhibit 99.2.
(c) Management’s Annual Report
on Internal Control Over Financial Reporting. The required disclosure is included in Management’s Discussion and Analysis,
which is incorporated herein by reference to Exhibit 99.2.
(d) Attestation Report of the Registered
Public Accounting Firm. The attestation report of PricewaterhouseCoopers LLP is included in the Independent Audit Report included
in the Registrant’s audited consolidated financial statements attached hereto as Exhibit 99.1 and is incorporated by reference
herein.
(e) Changes in Internal Control Over
Financial Reporting. During the fiscal year ended December 31, 2015, there were no changes in the Registrant’s internal
control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Registrant’s
internal control over financial reporting.
Notices Pursuant to Regulation BTR.
None.
Identification of the Audit Committee
and Audit Committee Financial Expert
The required disclosure is included in
the Annual Information Form, under the heading “Audit Committee Matters”, which is incorporated herein by reference
to Exhibit 99.3. The Audit Committee has at least one member, Douglas Alexander, who qualifies as an audit committee financial
expert under applicable securities regulations.
Code of Ethics
The Registrant has adopted a code of ethics
that applies to all members of its Board of Directors, as well as its officers and employees. A copy of the code of ethics was
previously filed with the Securities and Exchange Commission, is posted on the Registrant’s Internet website at www.hydrogenics.com,
and is available in print to any person without charge, upon written request to the corporate secretary of the Registrant. No waivers
of the code of ethics have been granted to any principal officer of the Registrant or any person performing similar functions.
Principal Accountant Fees and Services
The required disclosure is included in
the Annual Information Form, under the heading “Audit Committee Matters”, which is incorporated herein by reference
to Exhibit 99.3.
Off-Balance Sheet Arrangements
The required disclosure is included under
the heading “Off-Balance Sheet Arrangements & Contractual Obligations” in Management’s Discussion and Analysis,
which is incorporated herein by reference to Exhibit 99.2. The information pertaining to the Registrant’s indemnification
arrangements contained in the Annual Information Form, under the heading “Material Contracts”, is also incorporated
herein by reference to Exhibit 99.3.
Tabular Disclosure of Contractual Obligations
The following table lists, as of December
31, 2015, information with respect to our contractual obligations (dollar amounts are expressed in thousands of U.S. dollars):
| |
Payments due by period, |
Contractual Obligations | |
| Total | | |
| Less than
one year | | |
| 1-3 years | | |
| 3-5 years | | |
| After 5 years | |
Operating leases | |
$ | 3,065 | | |
$ | 800 | | |
$ | 1,226 | | |
$ | 770 | | |
$ | 269 | |
Purchase obligations | |
| 9,440 | | |
| 9,435 | | |
| 5 | | |
| - | | |
| - | |
Employee future benefits | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Total contractual obligations | |
$ | 12,505 | | |
$ | 10,235 | | |
$ | 1,231 | | |
$ | 770 | | |
$ | 269 | |
The additional required disclosure is included
under the heading “Off-Balance Sheet Arrangements & Contractual Obligations” in Management’s Discussion and
Analysis, which is incorporated herein by reference to Exhibit 99.2.
NASDAQ Corporate Governance
The Registrant’s common shares are
listed on the NASDAQ Global Market (“Nasdaq”). Nasdaq Marketplace Rule 5615(a)(3) permits a foreign private issuer,
such as the Registrant, to follow its home country practice in lieu of most of the requirements of the 5600 Series of the Nasdaq
Marketplace Rules, provided, however, that such an issuer shall: comply with Rules 5625 (regarding notification of material non-compliance);
5640 (regarding voting rights), have an Audit Committee that satisfies Rule 5605(c)(3); and ensure that such Audit Committee’s
members meet the independence requirements in Rule 5605(c)(2)(A)(ii). We do not intend to follow Rule 5620(c) (shareholder quorum)
and Rule 5605(b) (majority independent director requirement) but instead will follow the practice described below.
Shareholder Meeting Quorum Requirements.
The Nasdaq minimum quorum requirement under Rule 5620(c) for a shareholder meeting is 33-1/3% of the outstanding shares of common
stock. In addition, a company listed on Nasdaq is required to state its quorum requirement in its by-laws. On March 7, 2008, our
Board of Directors approved an amendment to our by-laws to provide that the quorum requirement for a meeting of our shareholders
is two persons present in person or represented by proxy holding in the aggregate not less than 25% of the outstanding common shares
entitled to vote at the meeting. This amendment was approved by our shareholders at an annual and special meeting of shareholders
on May 6, 2008. We believe the foregoing is consistent with Canadian public companies and consistent with corporate governance
best practices in Canada.
Independent Director Requirements.
Nasdaq Rule 5605(b) requires a majority of independent directors on the Board of Directors and that the independent directors convene
regularly scheduled meetings at least twice a year at which only independent directors are present. The CBCA requires a “distributing
corporation” to have at least two directors who are not officers or employees of the corporation or its affiliates. There
are seven members of our Board. Five of the Company’s directors are “independent.” The Board’s determination
as to each director’s independence is made with reference to definitions under applicable securities laws and stock exchange
regulations. In order to facilitate open and candid discussions among independent directors, independent directors may meet at
the end of each regularly scheduled Board meeting, in an in camera session without the non-independent members. From time to time,
the independent directors will have a special meeting with only independent directors. In addition, we believe the fact that our
Audit Committee and Human Resources and Corporate Governance Committee are both composed entirely of independent directors facilitates
the Board’s exercise of independent judgment. The Human Resources and Corporate Governance Committee has oversight over executive
compensation and director nominations. .
Compensation Committee Independence.
Nasdaq Marketplace Rule 5605(d)(3)(D) provides that a listed issuer’s compensation committee may select, or receive advice
from, a compensation consultant, legal counsel or other adviser only after taking into account certain independence factors. We
follow applicable Canadian laws with respect to compensation consultants, legal counsel and other advisers to our Human Resources
and Corporate Governance Committee. Applicable Canadian securities legislation does not specifically require us to consider potential
conflicts of interest on the part of compensation consultants, legal counsel and other advisers to the compensation committee,
but best practices dictate that we disclose any such conflicts in our management information circular.
MINE SAFETY DISCLOSURES
Pursuant to Section 1503(a) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010, issuers that are operators, or that have a subsidiary that is an operator,
of a coal or other mine in the United States are required to disclose in their periodic reports filed with the SEC information
regarding specified health and safety violations, orders and citations, related assessments and legal actions, and mining-related
fatalities under the regulation of the Federal Mine Safety and Health Administration (“MSHA”) under the Federal Mine
Safety and Health Act of 1977, as amended (the “Mine Act”). During the fiscal year ended December 31, 2015, the Registrant
did not have any mines in the United States subject to regulation by MSHA under the Mine Act.
UNDERTAKING AND CONSENT TO SERVICE
OF PROCESS
A. Undertaking
The Registrant undertakes to make available,
in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when
requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities
in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.
B. Consent to Service of Process
The Registrant has previously filed with
the Commission an Appointment of Agent for Service of Process and Undertaking on Form F-X in connection with the class of securities
in relation to which the obligation to file this report arises.
Any change to the name or address of the
agent for service of the Registrant shall be communicated promptly to the SEC by amendment to Form F-X referencing the file number
of the Registrant.
SIGNATURES
Pursuant to the requirements of the United
States Securities Exchange Act of 1934, as amended, the Registrant certifies that it meets all of the requirements for filing on
Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized.
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Date: March 9, 2016 |
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HYDROGENICS CORPORATION -
CORPORATION HYDROGÉNIQUE |
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By: |
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/s/ Robert Motz |
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Name: Robert Motz |
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Title: Chief Financial Officer |
EXHIBIT
INDEX
Exhibit |
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Description |
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Annual Information |
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99.1 |
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Hydrogenics Corporation Consolidated Financial Statements for the years ended December 31, 2015 and 2014 |
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99.2 |
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Hydrogenics Corporation Management’s Discussion and Analysis for the year ended December 31, 2015 |
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99.3 |
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Annual Information Form for Hydrogenics Corporation dated as of March 9, 2016 |
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99.4 |
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 |
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99.5 |
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934 |
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99.6 |
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Section 1350 Certification of Chief Executive Officer |
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99.7 |
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Section 1350 Certification of Chief Financial Officer |
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99.8 |
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Consent of PricewaterhouseCoopers LLP |
Exhibit 99.1
Hydrogenics Corporation
2015 Consolidated Financial
Statements
Management’s Responsibility for Financial
Reporting
Management’s Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated financial statements have been prepared by management and approved by
the Board of Directors of Hydrogenics Corporation (the “Company”). The consolidated financial statements were prepared
in accordance with International Financial Reporting Standards and where appropriate, reflect management’s best estimates
and judgments. Where alternative accounting methods exist, management has chosen those methods considered most appropriate in
the circumstances. Management is responsible for the accuracy, integrity and objectivity of the consolidated financial statements
within reasonable limits of materiality, and for maintaining a system of internal controls over financial reporting as described
in “Management’s Report on Internal Control Over Financial Reporting.” Management is also responsible for the
preparation and presentation of other financial information included in the Annual Report and its consistency with the consolidated
financial statements.
The Audit Committee, which is appointed annually by the
Board of Directors and comprised exclusively of independent directors, meets with management as well as with the independent auditors
to satisfy itself that management is properly discharging its financial reporting responsibilities and to review the consolidated
financial statements and the independent auditor’s report.
The Audit Committee reports its findings to the Board
of Directors for consideration in approving the consolidated financial statements for presentation to the shareholders.
The Audit Committee considers, for review by the Board
of Directors and approval by the shareholders, the engagement or reappointment of the independent auditors.
The shareholders’ auditors have full access to
the Audit Committee, with and without management being present, to discuss the consolidated financial statements and to report
their findings from the audit process. The consolidated financial statements have been audited by the shareholders’ independent
auditors, PricewaterhouseCoopers LLP, Chartered Professional Accountants, and their report is provided herein.
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Daryl
C. F. Wilson
President and Chief Executive Officer
|
Robert
Motz
Chief Financial Officer
|
March 8, 2016
Mississauga, Ontario
2015 Consolidated Financial Statements | Page 2 |
Management’s Report on Internal Control Over Financial
Reporting
Management of the Company 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 President and Chief Executive Officer and the Chief Financial Officer and is 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 International Financial
Reporting Standards. It includes those policies and procedures that:
| • | provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Company’s assets that could have a material effect on
the Company’s consolidated financial statements; |
| • | pertain
to the maintenance of records that accurately and fairly reflect, in reasonable detail,
the transactions related to and dispositions of the Company’s assets; and |
| • | provide
reasonable assurance that transactions are recorded as necessary to permit preparation
of consolidated financial statements in accordance with International Financial Reporting
Standards, and that the Company’s receipts and expenditures are made only in accordance
with authorizations of management and the Company’s directors. |
Due to its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control
over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s
internal control over financial reporting at December 31, 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 assessment
and those criteria, management concluded that as at December 31, 2015, the Corporation’s internal control over financial
reporting was effective.
The effectiveness of the Company's internal control over
financial reporting as of December 31, 2015 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report, which is included in the Company’s audited financial statements.
|
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Daryl
C. F. Wilson
President and Chief Executive Officer |
Robert
Motz
Chief Financial Officer |
March 8, 2016
Mississauga, Ontario
2015 Consolidated Financial Statements | Page 3 |
March 8, 2016
Independent Auditor’s Report
To the Shareholders of
Hydrogenics Corporation
We have completed integrated audits of Hydrogenics Corporation and
its subsidiaries’ 2015 consolidated financial statements and their internal control over financial reporting as at December
31, 2015. Our opinions, based on our audits are presented below.
Report on the consolidated financial statements
We have audited the accompanying consolidated financial statements
of Hydrogenics Corporation and its subsidiaries, which comprise the consolidated balance sheets as at December 31, 2015 and December 31, 2014
and the consolidated statements of operations and comprehensive loss, consolidated statements of changes in equity, and consolidated
statements of cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies
and other explanatory information.
Management’s responsibility for the consolidated
financial statements
Management is responsible for the preparation and fair presentation
of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards
and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
Canadian generally accepted auditing standards also require that we comply with ethical requirements.
An audit involves performing procedures to obtain audit evidence,
on a test basis, about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on
the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate
in the circumstances. An audit also includes evaluating the appropriateness of accounting principles and policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements.We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for
our audit opinion on the consolidated financial statements.
Opinion
In our opinion, the consolidated financial statements present fairly,
in all material respects, the financial position of Hydrogenics Corporation and its subsidiaries as at December 31, 2015 and December
31, 2014 and their financial performance and their cash flows for the years then ended in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board.
2015 Consolidated Financial Statements | Page 4 |
Report on internal control over financial reporting
We have also audited Hydrogenics Corporation and its subsidiaries’
internal control over financial reporting as at December 31, 2015, based on criteria established in Internal Control - Integrated
Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management’s responsibility for internal control over financial
reporting
Management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control Over Financial Reporting.
Auditor’s responsibility
Our responsibility is to express an opinion on the company’s
internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects.
An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control, based on the assessed risk, and performing such
other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis
for our audit opinion on the company’s internal control over financial reporting.
Definition of internal control over financial reporting
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Inherent limitations
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies
or procedures may deteriorate.
2015 Consolidated Financial Statements | Page 5 |
Opinion
In our opinion, Hydrogenics Corporation and its subsidiaries maintained,
in all material respects, effective internal control over financial reporting as at December 31, 2015, based on criteria established
in Internal Control - Integrated Framework (2013) issued by COSO.
Yours very truly,
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Ontario
2015 Consolidated Financial Statements | Page 6 |
Hydrogenics Corporation
Consolidated Balance Sheets
(in thousands of US dollars)
| |
December 31, 2015 | | |
December 31, 2014 | |
| |
| | | |
| | |
Assets | |
| | | |
| | |
Current assets | |
| | | |
| | |
Cash and cash equivalents (note 6) | |
$ | 23,398 | | |
$ | 6,572 | |
Restricted cash (note 6) | |
| 971 | | |
| 3,228 | |
Trade and other receivables (note 7) | |
| 10,419 | | |
| 12,900 | |
Inventories (note 8) | |
| 14,270 | | |
| 14,698 | |
Prepaid expenses | |
| 428 | | |
| 747 | |
| |
| 49,486 | | |
| 38,145 | |
Non-current assets | |
| | | |
| | |
Restricted cash (note 6) | |
| 532 | | |
| 621 | |
Investment in joint venture (note 9) | |
| 1,951 | | |
| 2,150 | |
Property, plant and equipment (note 10) | |
| 3,049 | | |
| 1,873 | |
Intangible assets (note 11) | |
| 215 | | |
| 157 | |
Goodwill (note 12) | |
| 4,135 | | |
| 4,609 | |
| |
| 9,882 | | |
| 9,410 | |
Total assets | |
$ | 59,368 | | |
$ | 47,555 | |
| |
| | | |
| | |
Liabilities | |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Operating borrowings (note 16) | |
$ | 1,086 | | |
$ | - | |
Trade and other payables (note 13) | |
| 7,776 | | |
| 11,769 | |
Financial liabilities (note 14) | |
| 9,034 | | |
| 1,387 | |
Warranty provisions (note 15) | |
| 2,255 | | |
| 1,392 | |
Deferred revenue | |
| 10,146 | | |
| 6,771 | |
| |
| 30,297 | | |
| 21,319 | |
Non-current liabilities | |
| | | |
| | |
Other non-current liabilities (note 17) | |
| 3,121 | | |
| 3,464 | |
Non-current warranty provisions (note 15) | |
| 938 | | |
| 1,155 | |
Non-current deferred revenue | |
| 4,764 | | |
| 6,141 | |
| |
| 8,823 | | |
| 10,760 | |
Total liabilities | |
| 39,120 | | |
| 32,079 | |
Equity | |
| | | |
| | |
Share capital (note 18) | |
| 365,824 | | |
| 348,259 | |
Contributed surplus | |
| 18,964 | | |
| 18,927 | |
Accumulated other comprehensive loss | |
| (3,224 | ) | |
| (2,108 | ) |
Deficit | |
| (361,316 | ) | |
| (349,602 | ) |
Total equity | |
| 20,248 | | |
| 15,476 | |
Total equity and liabilities | |
$ | 59,368 | | |
$ | 47,555 | |
Guarantees and Contingencies (notes 16 and 28)
Douglas
S. Alexander
Chair |
David
C. Ferguson
Director |
The accompanying notes form an integral part of these consolidated
financial statements.
2015 Consolidated Financial Statements | Page 7 |
Hydrogenics Corporation
Consolidated Statements of Operations and Comprehensive Loss
For the years ended December 31,
(in thousands of US dollars, except
share and per share amounts)
| |
2015 | | |
2014 | |
Revenues | |
$ | 35,864 | | |
$ | 45,548 | |
Cost of sales | |
| 29,893 | | |
| 34,334 | |
Gross profit | |
| 5,971 | | |
| 11,214 | |
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| | | |
| | |
Operating expenses | |
| | | |
| | |
Selling, general and administrative expenses (note 20) | |
| 10,215 | | |
| 11,756 | |
Research and product development expenses (note 21) | |
| 4,070 | | |
| 3,284 | |
| |
| 14,285 | | |
| 15,040 | |
| |
| | | |
| | |
Loss from operations | |
| (8,314 | ) | |
| (3,826 | ) |
| |
| | | |
| | |
Finance income (expenses) | |
| | | |
| | |
Interest expense, net | |
| (1,322 | ) | |
| (540 | ) |
Foreign currency gains (losses), net(1) | |
| (428 | ) | |
| 117 | |
(Loss) from joint venture (note 9) | |
| (40 | ) | |
| (94 | ) |
Other finance gains (losses), net (note 25) | |
| (1,338 | ) | |
| (180 | ) |
Finance income (loss), net | |
| (3,128 | ) | |
| (697 | ) |
| |
| | | |
| | |
Loss before income taxes | |
| (11,442 | ) | |
| (4,523 | ) |
Income tax expense (note 26) | |
| - | | |
| - | |
Net loss for the period | |
| (11,442 | ) | |
| (4,523 | ) |
| |
| | | |
| | |
Items that will not be reclassified subsequently to net loss: | |
| | | |
| | |
Re-measurement of actuarial liability | |
| (104 | ) | |
| 64 | |
Items that may be reclassified subsequently to net loss | |
| | | |
| | |
Exchange differences on translating foreign operations | |
| (1,284 | ) | |
| (1,651 | ) |
Comprehensive loss for the period | |
$ | (12,830 | ) | |
$ | (6,110 | ) |
| |
| | | |
| | |
Net loss per share | |
| | | |
| | |
Basic and diluted (note 27) | |
$ | (1.12 | ) | |
$ | (0.47 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding (note 27) | |
| 10,199,015 | | |
| 9,718,349 | |
| (1) | For
the year ended December 31, 2015, a gain of $586 relates to foreign exchange on borrowings.
For the year ended December 31, 2014, a gain of $293 relates to foreign exchange on borrowings. |
The accompanying notes form an integral part of these consolidated
financial statements.
2015 Consolidated Financial Statements | Page 8 |
Hydrogenics Corporation
Consolidated Statements of Changes in Equity
(in thousands of US dollars, except share and per share amounts)
| |
Common shares | |
Contributed | |
| |
Accumulated
other comprehensive | |
Total |
| |
Number | |
Amount | |
surplus | |
Deficit | |
loss(1) | |
equity |
Balance at December 31, 2014 | |
| 10,090,325 | | |
$ | 348,259 | | |
$ | 18,927 | | |
$ | (349,602 | ) | |
$ | (2,108 | ) | |
$ | 15,476 | |
Net loss | |
| - | | |
| - | | |
| - | | |
| (11,442 | ) | |
| - | | |
| (11,442 | ) |
Other comprehensive loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,388 | ) | |
| (1,388 | ) |
Total comprehensive loss | |
| - | | |
| - | | |
| - | | |
| (11,442 | ) | |
| (1,388 | ) | |
| (12,830 | ) |
Transfer | |
| | | |
| | | |
| | | |
| (272 | ) | |
| 272 | | |
| - | |
Issuance of common shares (note 18) | |
| 2,448,385 | | |
| 17,549 | | |
| - | | |
| - | | |
| - | | |
| 17,549 | |
Adjustment for partial shares on share consolidation | |
| (3 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Issuance of common shares on exercise of stock options (note 19) | |
| 2,050 | | |
| 16 | | |
| (6 | ) | |
| - | | |
| - | | |
| 10 | |
Stock-based compensation expense (note 19) | |
| - | | |
| - | | |
| 43 | | |
| - | | |
| - | | |
| 43 | |
Balance at December 31, 2015 | |
| 12,540,757 | | |
$ | 365,824 | | |
$ | 18,964 | | |
$ | (361,316 | ) | |
$ | (3,224 | ) | |
$ | 20,248 | |
| |
Common shares | |
Contributed | |
| |
Accumulated other comprehensive | |
Total |
| |
Number | |
Amount | |
surplus | |
Deficit | |
loss(1) | |
equity |
Balance at December 31, 2013 | |
| 9,017,617 | | |
$ | 333,312 | | |
$ | 18,449 | | |
$ | (345,351 | ) | |
$ | (249 | ) | |
$ | 6,161 | |
Net loss | |
| - | | |
| - | | |
| - | | |
| (4,523 | ) | |
| - | | |
| (4,523 | ) |
Other comprehensive loss | |
| - | | |
| - | | |
| - | | |
| 272 | | |
| (1,859 | ) | |
| (1,587 | ) |
Total comprehensive loss | |
| - | | |
| - | | |
| - | | |
| (4,251 | ) | |
| (1,859 | ) | |
| (6,110 | ) |
Issuance of common shares and warrants exercised (note 18) | |
| 1,057,144 | | |
| 14,762 | | |
| - | | |
| - | | |
| - | | |
| 14,762 | |
Issuance of common shares on exercise of stock options (note 19) | |
| 15,564 | | |
| 185 | | |
| (66 | ) | |
| - | | |
| - | | |
| 119 | |
Stock-based compensation expense (note 19) | |
| - | | |
| - | | |
| 544 | | |
| - | | |
| - | | |
| 544 | |
Balance at December 31, 2014 | |
| 10,090,325 | | |
$ | 348,259 | | |
$ | 18,927 | | |
$ | (349,602 | ) | |
$ | (2,108 | ) | |
$ | 15,476 | |
| (1) | Accumulated
other comprehensive loss represents currency translation adjustments of $3,184 as of
December 31, 2015 (2014 – $1,900), and loss on re-measurement of actuarial liability
of ($40) as of December 31, 2015 (2014 – $208) |
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 consolidated
financial statements.
2015 Consolidated Financial Statements | Page 9 |
Hydrogenics Corporation
Consolidated Statements of Cash Flows
For the years ended December 31,
(in thousands of US dollars)
| |
2015 | | |
2014 | |
Cash and cash equivalents provided by (used in):
| |
| | | |
| | |
Operating activities | |
| | | |
| | |
Net loss for the period | |
$ | (11,442 | ) | |
$ | (4,523 | ) |
Decrease (increase) in restricted cash | |
| 2,172 | | |
| (1,825 | ) |
Items not affecting cash | |
| | | |
| | |
Loss on disposal of assets | |
| 9 | | |
| 1 | |
Amortization and depreciation | |
| 630 | | |
| 661 | |
Unrealized other gains and losses on hedging (note 25) | |
| 43 | | |
| - | |
Other finance losses (gains), net (note 25) | |
| - | | |
| 180 | |
Unrealized foreign exchange losses (gains) | |
| (369 | ) | |
| 259 | |
Unrealized loss on joint venture (note 9) | |
| 40 | | |
| 94 | |
Portion of borrowings recorded as a reduction of research and development expenses | |
| - | | |
| (355 | ) |
Accreted non-cash and unpaid interest and amortization of deferred financing fees (note16 (i), (ii) and 16(iv)) | |
| 920 | | |
| 480 | |
Payment of post-retirement benefit liability (note 17(iii)) | |
| - | | |
| (85 | ) |
Stock-based compensation (note 18) | |
| 43 | | |
| 544 | |
Stock-based compensation - RSUs and DSUs (note19) | |
| (234 | ) | |
| 82 | |
Warrant issuance (notes 16 and 24) | |
| 752 | | |
| - | |
Net change in non-cash working capital (note 30) | |
| 1,598 | | |
| (10,457 | ) |
Cash used in operating activities | |
| (5,838 | ) | |
| (14,944 | ) |
| |
| | | |
| | |
Investing activities | |
| | | |
| | |
Investment in joint venture (note 9) | |
| - | | |
| (2,307 | ) |
Proceeds from disposals (note 10) | |
| - | | |
| 10 | |
Purchase of property, plant and equipment (note 10) | |
| (2,028 | ) | |
| (871 | ) |
Receipt of IDF government funding (note 28) | |
| 118 | | |
| - | |
Purchase of intangible assets (note 11) | |
| (105 | ) | |
| (110 | ) |
Cash used in investing activities | |
| (2,015 | ) | |
| (3,278 | ) |
| |
| | | |
| | |
Financing activities | |
| | | |
| | |
Repayment of repayable government contributions (note 17(iv)) | |
| (213 | ) | |
| (498 | ) |
Proceeds of borrowings, net of transaction costs (note 17(i)) | |
| 6,866 | | |
| 854 | |
Proceeds of operating borrowings (note 16) | |
| 1,113 | | |
| - | |
Common shares issued and stock options exercised, net of issuance costs (note 18) | |
| 17,559 | | |
| 13,666 | |
Cash provided by financing activities | |
| 25,325 | | |
| 14,022 | |
| |
| | | |
| | |
Increase (decrease) in cash and cash equivalents during the period | |
| 17,472 | | |
| (4,200 | ) |
Cash and cash equivalents - Beginning of period | |
| 6,572 | | |
| 11,823 | |
Effect of exchange rate fluctuations on cash and cash equivalents held | |
| (646 | ) | |
| (1,051 | ) |
Cash and cash equivalents - End of period | |
$ | 23,398 | | |
$ | 6,572 | |
| |
| | | |
| | |
Supplemental disclosure | |
| | | |
| | |
Income taxes paid | |
$ | - | | |
$ | - | |
Interest paid | |
$ | 432 | | |
$ | 10 | |
The accompanying notes form an integral part of these consolidated
financial statements.
2015 Consolidated Financial Statements | Page 10 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
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 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.
Note 2 - Basis of Preparation
These consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board
(“IASB”) applicable to the preparation of consolidated financial statements.
The preparation of consolidated financial statements in accordance
with IFRS requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial
statements and notes to the consolidated financial statements. These estimates are based on management’s experience and
other factors, including expectations about future events that are believed to be reasonable under the circumstances. The Company
is required to make estimates that include revenue recognition, warranty provisions, and non-market vesting conditions to assess
the number of stock-based compensation awards to vest.
On March 8, 2016, the Board of Directors authorized the consolidated
financial statements for issue.
Note 3 - Summary of Significant Accounting Policies
The consolidated financial statements of the Company include the
accounts of Hydrogenics and all of its wholly-owned subsidiaries. All intercompany transactions, balances and unrealized gains
or losses on transactions between group companies have been eliminated. Accounting policies of subsidiaries have been changed,
where necessary, to ensure consistency with the policies adopted by the Company. Subsidiaries include all entities controlled
by the Company. Control exists when the Company has the power to, directly or indirectly, govern the financial and operating policies.
The existence and potential voting rights presently exercisable or convertible are considered when assessing whether the Company
controls another entity. Subsidiaries are fully consolidated from the date on which control was obtained by the Company and are
deconsolidated from the date on which control ceased. The consolidated financial statements have been prepared under the historical
cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value.
Investments in joint ventures
Investments in joint ventures, over which the Company has joint
control, are accounted for using the equity method. Under the equity method of accounting, investments are initially recorded
at cost, and the carrying amount is increased or decreased to recognize the Company’s share of the investee’s net
profit or loss, including net profit or loss recognized in other comprehensive income (“OCI”), subsequent to the date
of acquisition.
2015 Consolidated Financial Statements | Page 11 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Foreign currency translation
Items included in the financial statements of each consolidated
entity in the Company’s consolidated financial statements are measured using the currency of the primary economic environment
in which the entity operates (the “functional currency”). The consolidated financial statements are presented in US
dollars, which is the functional currency of Hydrogenics Corporation (“the parent company”).
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from
the settlement of foreign currency transactions and from the translation at period-end exchange rates of monetary assets and liabilities
denominated in currencies other than an operation’s functional currency are recognized in the consolidated statements of
operations and comprehensive loss.
The functional currency of the Company’s subsidiary located
in Belgium is the euro, which is the currency of the primary economic environment in which the subsidiary operates. The financial
statements of this subsidiary are translated into US dollars as follows: assets and liabilities, at the closing exchange rate
at the dates of the consolidated balance sheets; and the income and expenses and other comprehensive income (loss), at the average
exchange rate during the year as this is considered a reasonable approximation to the actual rates. All resulting changes are
recognized in other comprehensive loss as cumulative translation adjustments.
Cash and cash equivalents and restricted cash
Cash equivalents are short-term, highly liquid investments that
are readily convertible into known amounts of cash. Cash and cash equivalents, including restricted cash held as partial security
for standby letters of credit and letters of guarantee, include cash on hand deposits held with banks and other short-term highly
liquid investments with original maturities of three months or less.
Financial instruments
Financial assets and financial liabilities are recognized on the
trade date – the date on which the Company becomes a party to the contractual provisions of the instrument. Financial assets
are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the
Company has transferred substantially all risks and rewards of ownership. Financial liabilities are derecognized when they are
extinguished, which occurs when the obligation specified in the contract is discharged, cancelled, or expired. Financial assets
and financial liabilities are offset and the net amount reported in the consolidated balance sheets when there is a legally enforceable
right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the financial asset and
settle the financial liability simultaneously.
At initial recognition, the Company classifies its financial instruments
in the following categories depending on the purpose for which the instruments were acquired, as follows:
| (i) | Financial
assets and financial liabilities at fair value through profit or loss. A financial
asset or financial liability is classified in this category if acquired principally for
the purpose of selling or repurchasing in the short term. Derivatives are also included
in this category, unless designated as hedges. Financial instruments in this category
are recognized initially and subsequently at fair value. Transaction costs are expensed
in the consolidated statements of operations and comprehensive loss. Gains and losses
arising from changes in fair value are presented in the consolidated statements of operations
and comprehensive loss within other gains and losses in the period in which they arise.
Financial assets and financial liabilities at fair value through profit or loss are classified
as current, except for the portion expected to be realized or paid beyond 12 months of
the consolidated balance sheet dates, which is classified as non-current. The measurement
of the fair value of an asset or liability is based on assumptions that market participants
would use when pricing the asset or liability under current market conditions. |
2015 Consolidated Financial Statements | Page 12 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
| | The Company also periodically enters
into foreign exchange forward contracts to limit its exposure to foreign currency rate
fluctuations. These derivatives are recognized initially at fair value and are recorded
as either assets or liabilities based on their fair value. Subsequent to initial recognition,
these derivatives are measured at fair value and changes to their value are recorded
through net loss, unless these financial instruments are designated as hedges. |
| (ii) | Loans
and receivables. Loans and receivables are non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market. The Company’s
loans and receivables comprise trade and other receivables, cash and cash equivalents
and restricted cash, and are classified as current, except for the portion expected to
be realized or paid beyond 12 months of the consolidated balance sheet dates, which is
classified as non-current. Loans and receivables are initially recognized at fair value.
The measurement of the fair value of an asset is based on assumptions that market participants
would use when pricing the asset under current market conditions. Subsequently, loans
and receivables are measured at amortized cost using the effective interest method less
a provision for impairment. |
| (iii) | Financial
liabilities at amortized cost. Financial liabilities at amortized cost include trade
and other payables, repayable government contributions and long-term debt. All financial
liabilities at amortized cost are initially recognized at fair value and subsequently
measured at amortized cost using the effective interest method. At the end of each reporting
period, interest accretion related to repayable government contributions and long-term
debt is included in interest expense and changes in value attributable to changes in
the timing and amount of estimated future cash flows are included in other finance gains
losses, net. Financial liabilities are classified as current liabilities if payment is
due within 12 months (or within the normal operating cycle of the business if longer).
Otherwise, they are presented as non-current liabilities. |
| (iv) | Derivative
financial instruments, including hedge accounting. The Company periodically holds
derivative financial instruments to hedge its foreign currency risk exposures that are
designated as the hedging instrument in a hedge relationship. On initial designation
of the hedge, the Company formally documents the relationship between the hedging instrument
and hedged item, including the risk management objectives and strategy in undertaking
the hedge transaction, together with the methods that will be used to assess the effectiveness
of the hedging relationship. The Company makes an assessment, both at the inception of
the hedge relationship as well as on an ongoing basis, whether the hedging instruments
are expected to be “highly effective” in offsetting the changes in the fair
value or cash flows of the respective hedged items during the period for which the hedge
is designated, and whether the actual results of each hedge are within a range of 80-125%.
For a cash flow hedge of a forecast transaction, the transaction should be highly probable
to occur and should present an exposure to variations in cash flows that could ultimately
affect reported net income. Derivatives are recognized initially at fair value; attributable
transaction costs are recognized in profit or loss as incurred. Subsequent to initial
recognition, derivatives are measured at fair value, and changes therein are accounted
for as described below. |
| (v) | Cash
flow hedges. When a derivative is designated as the hedging instrument in a hedge
of the variability in cash flows attributable to a particular risk associated with a
recognized asset or liability or a highly probable forecast transaction that could affect
profit or loss, the effective portion of changes in the fair value of the derivative
is recognized in other comprehensive income and presented in unrealized gains/losses
on cash flow hedges in equity. The amount recognized in other comprehensive income is
removed and included in profit or loss in the same period as the hedged cash flows affect
profit or loss under the same line item in the consolidated statements of operations
and comprehensive loss as the hedged item. Any ineffective portion of changes in the
fair value of the derivative is recognized immediately in profit or loss. |
2015 Consolidated Financial Statements | Page 13 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
If the hedging instrument no longer meets the criteria
for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued
prospectively. The cumulative gain or loss previously recognized in other comprehensive income and presented in unrealized gains/losses
on cash flow hedges in equity remains there until the forecast transaction affects profit or loss.
If the forecast transaction is no longer expected to
occur, then the balance in other comprehensive income is recognized immediately in profit or loss. In other cases the amount recognized
in other comprehensive income is transferred to profit or loss in the same period that the hedged item affects profit or loss.
Inventories
Raw materials, work-in-progress and finished goods are valued at
the lower of cost, determined on a first-in, first-out basis, and net realizable value. Inventory costs include the cost of material,
labour, variable overhead and an allocation of fixed manufacturing overhead including amortization based on normal production
volumes. Net realizable value is the estimated selling price less estimated costs of completion and applicable selling expenses.
If the carrying value exceeds the net realizable amount, a writedown is recognized. The writedown may be reversed in a subsequent
period if the circumstances causing it no longer exist.
Property, plant and equipment
Property, plant and equipment are stated at cost less government
grants, accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable
to the acquisition of the asset. Subsequent costs are included in the asset’s carrying value or recognized as a separate
asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company
and the cost can be measured reliably. The cost and accumulated depreciation of replaced assets are derecognized when replaced.
Repairs and maintenance costs are charged to the consolidated statements of operations and comprehensive loss during the period
in which they are incurred.
Depreciation is calculated on a diminishing balance method to depreciate
the cost of the assets to their residual values over their estimated useful lives. The depreciation rates applicable to each category
of property, plant and equipment are as follows:
Furniture
and equipment |
20%
- 25% per annum |
Computer
hardware |
30%
per annum |
Automobiles |
30%
per annum |
Leasehold
improvements |
Straight-line
over the term of the lease |
Residual values, method of depreciation and useful lives of the
assets are reviewed at least annually and adjusted if appropriate.
Construction-in-progress assets are not depreciated until such
time they are available for use. Depreciation ceases at the earlier of the date the asset is classified as held-for-sale and the
date the asset is derecognized.
2015 Consolidated Financial Statements | Page 14 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Gains and losses on disposals of property, plant and equipment
are determined by comparing the proceeds with the carrying value of the asset and are included as part of other gains and losses
in the consolidated statements of operations and comprehensive loss.
Intangible assets
The Company’s intangible assets consist of computer software
with finite useful lives. These assets are capitalized and amortized over their useful lives using the diminishing balance method
of 30% per annum. Costs associated with maintaining computer software programs are recognized as an expense as incurred. The method
of amortization and useful lives of the assets are reviewed at least annually and adjusted if appropriate.
Goodwill
Goodwill is recognized as the fair
value of the consideration transferred including the recognized amount of any non-controlling interest in the acquiree, less the
fair value of the net identifiable assets acquired and liabilities assumed, as of the acquisition date. Subsequent to initial
recognition, goodwill is measured at cost less accumulated impairment losses. Goodwill acquired in business combinations is allocated
to groups of cash generating units (“CGU”) that are expected to benefit from the synergies of the combination.
The goodwill recorded in the Company’s consolidated financial statements relates to the OnSite
Generation CGU. Goodwill is not amortized.
Impairment
At each reporting date, the Company assesses whether there is objective
evidence that a financial asset is impaired. If such evidence exists, the Company recognizes an impairment loss on the financial
asset, which is carried at amortized cost. The loss is determined as the difference between the amortized cost of the financial
asset and the present value of the estimated future cash flows, discounted using the financial asset’s original effective
interest rate. The carrying value of the asset is reduced by this amount indirectly through the use of an allowance account. Impairment
losses on financial assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and
the decrease can be related objectively to an event occurring after the impairment was recognized.
Property, plant and equipment and definite life intangible assets
are tested for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Intangible
assets with an indefinite useful life or intangible assets not yet available-for-use are subject to an annual impairment test.
For the purpose of measuring recoverable values, assets are grouped at the lowest levels for which there are separately identifiable
cash inflows being the CGU. The recoverable value is the higher of an asset’s fair value less costs of disposal and value
in use (which is the present value of the expected future cash flows of the relevant asset or CGU). An impairment loss is recognized
for the value by which the asset’s carrying value exceeds its recoverable value.
Goodwill is not amortized but is reviewed for impairment annually
or at any time an indicator of impairment exists. Refer to Note 12 for a detailed discussion on how the goodwill testing is performed.
Goodwill acquired through a business combination is allocated to each CGU or group of CGUs that is expected to benefit from the
related business combination. A goodwill CGU represents the lowest level within an entity at which goodwill is monitored for internal
management purposes, which is not higher than an operating segment.
The Company evaluates impairment losses, other than goodwill impairment,
for potential reversals when events or circumstances warrant such consideration.
2015 Consolidated Financial Statements | Page 15 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Segment reporting
Operating segments are reported in a manner consistent with the
internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for
allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer.
The Corporation has two segments which are OnSite Generation and Power Systems. 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.
Provisions and product warranties
Provisions are recognized when the Company has a present legal
or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required
to settle the obligation, and the amount can be reliably estimated. Provisions are measured based on management’s best estimate
of the expenditure required to settle the obligation at the end of the reporting period, and are discounted to their present value
where the effect is material. Additionally, the Company performs evaluations to identify onerous contracts and where applicable,
records provisions for such contracts. Onerous contracts are those in which the unavoidable costs of meeting the obligations under
the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the
least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties
arising from the failure to fulfill it.
The Company typically provides a warranty for parts and/or labour
for up to two years or based on time or certain operating specifications, such as hours of operation. In establishing the warranty
provision, the Company estimates the likelihood that products sold will experience warranty claims and the estimated cost to resolve
claims received, taking into account the nature of the contract and past and projected experience with the products. Provisions
are reviewed at each consolidated balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable
that a payment to settle the obligation will be incurred, the provision is reversed.
Warrants
The Company issued warrants in the second quarter of 2015, which
have been classified as liabilities, which are recorded at their fair value with changes in fair value reflected in the consolidated
statements of operations.
Leases
Leases are classified as finance leases when the lease arrangement
transfers substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
The assets held under a finance lease are recognized as assets at the lower of the following two values: the present value of
the minimum lease payments under the lease arrangement or their fair value determined at inception of the lease. The corresponding
obligation to the lessor is accounted for as long-term debt. These assets are depreciated over the shorter of the useful life
of the assets and the lease term when there is no reasonable certainty the lessee will obtain ownership by the end of the lease
term. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated statements
of operations and comprehensive loss on a straight-line basis over the period of the lease.
2015 Consolidated Financial Statements | Page 16 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Research and product development
The Company incurs costs associated with the design and development
of new products. Expenditures during the research phase are expensed as incurred. Expenditures during the development phase are
capitalized if the Company can demonstrate each of the following criteria: (i) the technical feasibility of completing the intangible
asset so that it will be available-for-use or sale; (ii) its intention to complete the intangible asset and use or sell it; (iii)
its ability to use or sell the intangible asset; (iv) how the intangible asset will generate probable future economic benefits;
(v) the availability of adequate technical, financial, and other resources to complete the development and to use or sell the
intangible asset; and (vi) its ability to measure reliably the expenditure attributable to the intangible asset during its development;
otherwise, they are expensed as incurred. Capitalized costs are amortized over their estimated useful lives.
Funding for research and product development includes government
and non-government research and product development support. Government research and product development funding is recognized
when there is reasonable assurance the Company has complied with the conditions attached to the funding arrangement and is recognized
as the applicable costs are incurred. Non-governmental funding is recognized when the Company becomes party to the contractual
provisions of the funding agreement and is recognized as the applicable costs are incurred. Research and product development funding
is presented as a reduction in research and product development expenses unless it is for reimbursement of an asset, in which
case, it is accounted for as a reduction in the carrying amount of the applicable asset. Where the Company receives government
contributions that include fixed terms of repayment, a financial liability is recognized and measured as an amortized cost financial
liability, as discussed above.
Revenue recognition
Revenue is measured at the fair value of the consideration received
or receivable for the gross inflow of economic benefits during the period, arising in the ordinary course of the Company’s
activities.
Revenue is recognized when the Company has transferred the significant
risks and rewards of ownership of the goods to the buyer, it is probable the economic benefits will flow to the Company, delivery
has occurred, and the amount of revenue and costs incurred or to be incurred can be measured reliably. For sales of equipment,
these criteria are generally met at the time the product is shipped and delivered to the customer and depending on the delivery
conditions, title and risk have passed to the customer and acceptance of the product, when contractually required, has been obtained,
either via formal acceptance by the customer or lapse of rejection period. If all other revenue recognition criteria have been
met but delivery has not occurred, the Company recognizes revenue, provided that the following criteria have been met: (i) the
buyer must have assumed title to the goods and accepted billing; (ii) it must be probable delivery will take place; (iii) the
goods must be on hand identified and ready for delivery to the buyer at the time the sale is recognized; (iv) the buyer specifically
acknowledges the deferred delivery instructions; and (v) the usual payment terms apply.
Site commissioning revenue is recognized when the installation
has been completed. Revenue is measured based on the price specified in the sales contract, net of discounts and estimated returns.
Historical experience is used to estimate and provide for discounts and returns.
The Company also enters into transactions that represent multiple-element
arrangements, which may include any combination of equipment and service. These multiple-element arrangements are assessed to
determine whether they can be sold separately in order to determine whether they can be treated as more than one unit of accounting
or element for the purpose of revenue recognition. When there are multiple elements or units of accounting in an arrangement,
the arrangement consideration is allocated to the separate units of accounting or elements on a fair value basis. The revenue
recognition policy described above is then applied to each unit of accounting.
2015 Consolidated Financial Statements | Page 17 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Revenue from long-term contracts, such as customer specific product
development contracts, is recognized when the outcome of a transaction involving the rendering of services can be estimated reliably,
determined under the percentage-of-completion method based on the stage of completion. Under this method, the revenue recognized
equals the latest estimate of the total selling price of the contract multiplied by the actual completion rate, determined by
reference to the costs incurred for the transaction and the costs to complete the transaction. The outcome of a transaction can
be estimated reliably when the amount of revenue can be measured reliably, it is probable that the economic benefits associated
with the transaction will flow to the Company, the stage of completion at the end of the reporting period can be measured reliably,
and the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.
If circumstances arise that may change the estimates of revenue,
the remaining costs or extent of progress toward completion, estimates of revenue are revised. These revisions may result in increases
or decreases in estimated revenue or remaining costs to complete and are accounted for prospectively from the period in which
the circumstances that give rise to the revision become known by management. If the outcome of a transaction cannot be estimated
reliably, revenue is recognized only to the extent of the expenses recognized that are recoverable. When the outcome of a transaction
cannot be estimated reliably and it is not probable the costs incurred will be recovered, revenue is not recognized and the costs
incurred are recognized as an expense. Once the uncertainty surrounding the outcome no longer exists, revenue is recognized by
reference to the state of completion of the transaction at the end of the reporting period.
Cash received in advance of revenue being recognized is classified
as current deferred revenue, except for the portion expected to be settled beyond 12 months of the consolidated balance sheet
dates, which is classified as non-current deferred revenue.
Cost of sales
Cost of sales for products includes the cost of finished goods
inventory and the costs related to shipping and handling. Cost of sales for service includes direct labour and additional direct
and indirect expenses.
Share capital
Common shares are classified as equity. Incremental costs directly
attributable to the issuance of shares are recognized as a deduction from equity.
Post-retirement benefit liabilities
The Company has a post-retirement benefit obligation with respect
to the Belgium subsidiary related to defined contribution plans. Under Belgian law, a guaranteed return on the contributions is
required and as a result this is accounted for as a defined benefit plan. The Company has recorded a long-term liability associated
with this plan for the present value of the obligation at the consolidated balance sheet dates. Changes in the fair value of this
liability represent actuarial gains and losses arising from experience adjustments and are charged/credited to equity in other
comprehensive income.
Stock-based compensation
The Company’s stock-based compensation plans are summarized
below:
The Company grants stock options to certain employees. Stock options
vest 25% one year from the date of grant and annually thereafter over three years and expire after ten years. Each tranche in
an award is considered a separate award with its own vesting period and grant date fair value. The fair value of each tranche
is measured at the date of grant using the Black-Scholes option pricing model. Compensation expense is recognized (with a corresponding
adjustment to contributed surplus) over the tranche’s vesting period, and is based on the estimated number of instruments
expected to vest, which are then reestimated at the reporting dates to the extent that subsequent information indicates the actual
number of instruments expected to vest is likely to differ from previous estimates. When options are exercised the Company issues
new shares and the proceeds received net of any directly attributable transaction costs are credited to share capital at market
value and the difference is adjusted to contributed surplus.
2015 Consolidated Financial Statements | Page 18 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
| (ii) | Deferred
share units (“DSU”) |
The Company grants DSUs to directors as part of their compensation.
The DSUs vest upon grant and are settled in cash. The vested DSUs are marked-to-market at the end of each reporting period based
on the closing price of the Company’s shares with the change in fair value recorded in selling, general and administrative
expenses. The Company has set up a liability in the consolidated balance sheets, included within trade and other payables, for
the fair value of the vested DSUs.
| (iii) | Performance
share units (“PSU”)” |
The Company grants PSUs to certain employees. The PSUs will be
settled in the Company’s shares. The cost of the Company’s PSUs is charged to selling, general and administrative
expenses using the graded vesting method. The fair value of the vested share units is the fair value of the Company’s share
price on the date of grant. The resulting compensation expense, based on the fair value of the awards granted, excluding the impact
of any non-market service and performance vesting conditions, is charged to income over the period the employees unconditionally
become entitled to the award, with a corresponding increase to contributed surplus. Non-market vesting conditions are considered
in making assumptions about the number of awards that are expected to vest. At each reporting date, the Company reassesses its
estimates of the number of awards that are expected to vest and recognizes the impact of any revision in the consolidated statements
of operations and comprehensive loss with a corresponding adjustment to contributed surplus.
Income taxes
Income tax expense comprises current income tax expense and deferred
income tax expense. Income tax expense is recognized in the consolidated statements of operations, except to the extent that it
relates to items recognized directly in equity, in which case, income taxes are also recognized directly in comprehensive loss
or equity. Current income taxes are the expected taxes payable on the taxable income for the year, using income tax rates enacted,
or substantively enacted at the end of the reporting period, and any adjustment to income taxes payable in respect of previous
years.
In general, deferred income taxes are the amount of income taxes
expected to be paid or recoverable in future periods in respect of temporary differences, carry-forwards of unused tax losses
and carry-forwards of unused tax credits. Deferred income taxes arise between the tax base and their carrying values in the consolidated
financial statements as well as on unused tax losses and tax credits. Deferred income taxes are determined on a non-discounted
basis using tax rates and laws that have been enacted or substantively enacted at the consolidated balance sheet dates and are
expected to apply when the deferred income tax asset or liability is settled.
Deferred income taxes are provided on temporary differences arising
on investments in subsidiaries and associates, except, in the case of subsidiaries, where the timing of the reversal of the temporary
difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred income tax assets are recognized to the extent it is probable that taxable profits will be available against which the
deductible temporary differences and unused tax losses and tax credits can be utilized. The carrying value of deferred income
tax assets is reviewed at each consolidated balance sheet date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the deferred income tax asset to be recovered. Deferred income tax liabilities
are not recognized on temporary differences that arise from goodwill, which is not deductible for tax purposes. Deferred income
tax assets and liabilities are not recognized in respect of temporary differences that arise on initial recognition of certain
assets and liabilities acquired other than in a business combination. Deferred income tax assets and liabilities are presented
as non-current.
2015 Consolidated Financial Statements | Page 19 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Net loss per share
Basic net loss per share is calculated based on the weighted average
number of common shares outstanding for the year. Diluted net loss per share is calculated using the weighted average number of
common shares outstanding for the year for basic net loss per share plus the weighted average number of potential dilutive shares
that would have been outstanding during the year had all potential common shares been issued at the beginning of the year or when
the underlying stock options or warrants were granted, if later, unless they were anti-dilutive. The treasury stock method is
used to determine the incremental number of shares that would have been outstanding had the Company used proceeds from the exercise
of stock options and warrants to acquire common shares.
Note 4 - Significant Accounting Judgments and Estimation Uncertainties
Critical accounting estimates and judgments
The preparation of consolidated financial statements in accordance
with IFRS requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and notes to the consolidated financial statements. These estimates are based on management’s experience and
other factors, including expectations about future events that are believed to be reasonable under the circumstances. Significant
areas requiring the Company to make estimates include revenue recognition, warranty provisions, and the expectations of the number
of PSU awards that are expected to vest.
These estimates and judgments are further discussed below:
| (i) | Revenue recognition and contract
accounting |
The Company uses the percentage-of-completion method of accounting
for its long-term contracts, such as customer specific product development contracts. Use of the percentage-of-completion method
requires the Company to estimate the services performed to date as a proportion of the total services to be performed. This estimate
impacts both the amount of revenue recognized by the Company as well as the amount of deferred revenue. The determination of estimated
costs for completing a fixed-price contract is based on estimates that can be affected by a variety of factors such as potential
variances in scheduling and cost of materials along with the availability and cost of qualified labour and subcontractors, productivity,
as well as possible claims from subcontractors.
The determination of expected revenue represents the contractually
agreed revenue, including change orders. A change order results from an official change to the scope of the work to be performed
compared to the original contract that was signed.
The Company estimates costs separately for each customer specific
product development contract. The determination of estimates is based on the Company’s business practices, considering budgets
as well as its historical experience. Furthermore, management regularly reviews underlying estimates of product development contract
profitability. The long-term nature of certain product development contract arrangements commonly results in significant estimates
related to scheduling and estimated costs.
2015 Consolidated Financial Statements | Page 20 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
As noted above, the Company typically provides a warranty for parts
and/or labour for up to two years from the date of shipment or commissioning or based on certain operating specifications, such
as hours of operation. In establishing the warranty provision, management considers historical field data, results of internal
testing and in certain circumstances, application, in determining the value of this provision. Should these estimates prove to
be incorrect, the Company may incur costs different from those provided for in the warranty provision. Management reviews warranty
assumptions and makes adjustments to the provision at each reporting date based on the latest information available, including
the expiry of contractual obligations. Adjustments to the warranty provision are recorded in cost of sales.
Note 5 - 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 judgment and make estimates that affect revenue recognition. In September 2015, the IASB deferred the
effective date of the revenue standard to fiscal years beginning on or after January 1, 2018 and interim periods within that year.
Earlier application is permitted. The Company is assessing the new standard to determine its impact on the Company’s consolidated
financial statements.
IFRS 16 Leases (“IFRS 16”) sets out the
principles for the recognition, measurement, presentation an ddisclosure of leases for both parties to a contract, the customer
(‘lessee’) and the supplier (‘lessor). This will replace IAS 17 Leases (“IAS 17”) and related
Interpretations. IFRS 16 provides revised guidance on identifying a lease and for separating lease and non-lease components of
a contract. IFRS 16 introduces a single accounting model for all lessees and requires a lessee to recognize right-of-use assets
and lease liabilities for leases with terms of more than 12 moths, unless the underlying asset is of low value, and depreciation
of lease assets separately from interest on lease liabilities in the income statement. Under IFRS 16, lessor accounting for operating
and finance leases will remain substantially unchanged. IFRS 16 is effective for annual periods beginning on or after January
1, 2019, with earlier application permitted for entities that apply IFRS 15 Revenue from Contracts with Customers. The
Company’s contractual obligations in the form of operating leases under IAS 17 (note 28) will then be reflected on the balance
sheet resulting in an increase to both assets and liabilities upon adoption of IFRS 16, and changes to the timing of recognition
of expenses associated with the lease arrangements. The Company has not yet analyzed the new standard to determine its impact
on the Company’s consolidated balance sheet and consolidated statement of net loss and comprehensive loss.
2015 Consolidated Financial Statements | Page 21 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Note 6 – Cash and Cash Equivalents and Restricted Cash
At December 31, | |
2015 | | |
2014 | |
Cash and cash equivalents | |
$ | 23,398 | | |
$ | 6,572 | |
Restricted cash | |
| 971 | | |
| 3,228 | |
Restricted cash - non-current | |
| 532 | | |
| 621 | |
Total | |
$ | 24,901 | | |
$ | 10,421 | |
The restricted cash is held by financial institutions
in Canada and Europe as partial security for standby letters of credit and letters of guarantee. At December 31, 2015, the Company
had standby letters of credit and letters of guarantee issued by several financial institutions of $5,357 (2014 - $8,000), with
expiry dates extending to December 2018. See Note 16 – Lines of Credit and Bank Guarantees for additional information.
Note 7 - Trade and Other Receivables
| |
December 31, 2015 | | |
December 31, 2014 | |
Trade accounts receivables | |
$ | 2,314 | | |
$ | 4,469 | |
Less: Allowance for doubtful accounts | |
| (127 | ) | |
| (133 | ) |
Net trade accounts receivable | |
| 2,187 | | |
| 4,336 | |
Accrued receivables | |
| 6,450 | | |
| 6,049 | |
Other receivables | |
| 1,782 | | |
| 2,515 | |
Total receivables | |
$ | 10,419 | | |
$ | 12,900 | |
Included in accrued receivables is $6,450 relating to receivables
which are to be billed according to progress based, specified payment schedules, typical with long term percentage of completion
contracts. Management anticipates that $926 of this amount will not be billed within the next 12 months.
Note 8 - Inventories
| |
December 31, 2015 | | |
December 31, 2014 | |
Raw materials | |
$ | 7,737 | | |
$ | 6,651 | |
Work-in-progress | |
| 6,440 | | |
| 6,907 | |
Finished goods | |
| 93 | | |
| 1,140 | |
Total inventory | |
$ | 14,270 | | |
$ | 14,698 | |
2015 Consolidated Financial Statements | Page 22 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
At December 31, 2015, the inventory obsolescence provision was
as follows:
| |
2015 | | |
2014 | |
At January 1 | |
$ | 1,050 | | |
$ | 955 | |
Net Increase in the provision | |
| 547 | | |
| 512 | |
Writedowns during the period, net of recoveries | |
| (318 | ) | |
| (348 | ) |
Foreign exchange revaluation | |
| (47 | ) | |
| (69 | ) |
At December 31, | |
$ | 1,232 | | |
$ | 1,050 | |
Note 9 – Investment in Joint Venture
On May 28, 2014, the Company entered into a joint arrangement with
Kolon Water & Energy Co. Ltd., whereby the parties formed the joint venture 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”.
| |
December 31, 2015 | | |
December 31, 2014 | |
Balance January 1, | |
$ | 2,150 | | |
$ | - | |
Equity investment in joint venture | |
| - | | |
| 2,307 | |
Share in loss of the joint venture | |
| (40 | ) | |
| (94 | ) |
Foreign currency translation | |
| (159 | ) | |
| (63 | ) |
Investment in joint venture | |
$ | 1,951 | | |
$ | 2,150 | |
Financial information for the joint venture, as presented in the
IFRS financial statements of Kolon Hydrogenics follows below.
Summarized balance sheet information of Kolon Hydrogenics is a
follows:
| |
December 31, 2015 | | |
December 31, 2014 | |
Assets | |
| | | |
| | |
Current assets | |
$ | 590 | | |
$ | 3,863 | |
Non-current assets | |
| 5,508 | | |
| 3,313 | |
Total assets | |
$ | 6,098 | | |
$ | 7,176 | |
Liabilities | |
| | | |
| | |
Current liabilities | |
$ | 202 | | |
$ | 2,700 | |
Non-current liabilities | |
| 2,095 | | |
| 22 | |
Total liabilities | |
| 2,297 | | |
| 2,722 | |
Net assets | |
$ | 3,801 | | |
$ | 4,454 | |
2015 Consolidated Financial Statements | Page 23 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Summarized loss from continuing operations and total comprehensive
loss for Kolon Hydrogenics is as follows:
| |
12 months ended, December 31, 2015 | | |
May 28, 2014 - December 31, 2014 | |
Revenue | |
$ | 119 | | |
$ | - | |
Loss before income taxes | |
| (271 | ) | |
| (161 | ) |
Joint venture loss from continuing operations | |
$ | (329 | ) | |
| (126 | ) |
The Company’s portion of the joint venture’s
loss from continuing operations is 49% of the stated amount.
The following table is a reconciliation of the joint
venture’s financial information to the carrying amount of the Company’s investment in Kolon Hydrogenics:
| |
December 31, 2015 | | |
December 31, 2014 | |
Opening net assets of Kolon Hydrogenics (Equity Investment) | |
$ | 4,454 | | |
$ | - | |
Investment in Kolon Hydrogenics | |
| - | | |
| 4,708 | |
Loss of joint venture | |
| (329 | ) | |
| (126 | ) |
Foreign currency translation | |
| (324 | ) | |
| (128 | ) |
Closing net assets of Kolon Hydrogenics | |
$ | 3,801 | | |
$ | 4,454 | |
Unrealized (gains) losses on sales to Kolon | |
| 180 | | |
| (65 | ) |
Adjusted net assets of Kolon Hydrogenics | |
| 3,981 | | |
| 4,388 | |
Company’s share of net assets at 49% | |
$ | 1,951 | | |
$ | 2,150 | |
2015 Consolidated Financial Statements | Page 24 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Note 10 - Property, Plant and Equipment
| |
Plant and test equipment | | |
Furniture and equipment | | |
Computer hardware | | |
Leasehold improvements | | |
Construction in progress | | |
Total | |
Net book value
December 31, 2014
| |
$ | 181 | | |
$ | 1,451 | | |
$ | 93 | | |
$ | 148 | | |
$ | - | | |
$ | 1,873 | |
Additions | |
| 187 | | |
| 395 | | |
| 107 | | |
| 246 | | |
| 878 | | |
| 1,813 | |
Disposals | |
| - | | |
| (5 | ) | |
| (4 | ) | |
| - | | |
| - | | |
| (9 | ) |
Depreciation | |
| (66 | ) | |
| (392 | ) | |
| (65 | ) | |
| (62 | ) | |
| - | | |
| (585 | ) |
Foreign exchange | |
| (1 | ) | |
| (22 | ) | |
| (19 | ) | |
| (1 | ) | |
| - | | |
| (43 | ) |
Net book value
December 31, 2015
| |
$ | 301 | | |
$ | 1,427 | | |
$ | 112 | | |
$ | 331 | | |
$ | 878 | | |
$ | 3,049 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total cost | |
$ | 5,373 | | |
$ | 5,030 | | |
$ | 436 | | |
$ | 1,532 | | |
$ | 878 | | |
$ | 13,249 | |
Total accumulated depreciation | |
| (5,072 | ) | |
| (3,603 | ) | |
| (324 | ) | |
| (1,201 | ) | |
| - | | |
| (10,200 | ) |
Net book value December 31, 2015 | |
$ | 301 | | |
$ | 1,427 | | |
$ | 112 | | |
$ | 331 | | |
$ | 878 | | |
$ | 3,049 | |
Depreciation of $329 (2014 - $422) was included in selling, general
and administrative expenses and $256 (2014 - $186) in cost of sales.
| |
Plant and test equipment | | |
Furniture and equipment | | |
Computer hardware | | |
Leasehold improvements | | |
Total | |
Net book value December 31, 2013 | |
$ | 197 | | |
$ | 1,299 | | |
$ | 103 | | |
$ | 85 | | |
$ | 1,684 | |
Additions | |
| 42 | | |
| 673 | | |
| 47 | | |
| 109 | | |
| 871 | |
Disposals | |
| (10 | ) | |
| - | | |
| - | | |
| - | | |
| (10 | ) |
Depreciation | |
| (48 | ) | |
| (465 | ) | |
| (53 | ) | |
| (42 | ) | |
| (608 | ) |
Foreign exchange | |
| - | | |
| (56 | ) | |
| (4 | ) | |
| (4 | ) | |
| (64 | ) |
Net book value December 31, 2014 | |
$ | 181 | | |
$ | 1,451 | | |
$ | 93 | | |
$ | 148 | | |
$ | 1,873 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total cost | |
$ | 5,240 | | |
$ | 5,017 | | |
$ | 661 | | |
$ | 1,327 | | |
$ | 12,245 | |
Total accumulated depreciation | |
| (5,059 | ) | |
| (3,566 | ) | |
| (568 | ) | |
| (1,179 | ) | |
| (10,372 | ) |
Net book value December 31, 2014 | |
$ | 181 | | |
$ | 1,451 | | |
$ | 93 | | |
$ | 148 | | |
$ | 1,873 | |
2015 Consolidated Financial Statements | Page 25 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Note 11 - Intangible Assets
Computer software | |
2015 | | |
2014 | |
Net book value December 31, | |
$ | 157 | | |
$ | 100 | |
Additions | |
| 105 | | |
| 110 | |
Amortization | |
| (45 | ) | |
| (53 | ) |
Foreign exchange | |
| (2 | ) | |
| - | |
Net book value December 31, | |
$ | 215 | | |
$ | 157 | |
| |
| | |
| |
Total cost | |
$ | 1,989 | | |
$ | 1,889 | |
Total accumulated depreciation | |
| (1,774 | ) | |
| (1,732 | ) |
Net book value December 31, | |
$ | 215 | | |
$ | 157 | |
Amortization of $45 (2014 - $53) is included in the consolidated
statements of operations and comprehensive loss in selling, general and administrative expenses.
Note 12 - Goodwill
The carrying amounts of goodwill at the beginning and end of the
current and previous years are set out below.
| |
2015 | | |
2014 | |
At January 1 | |
$ | 4,609 | | |
$ | 5,248 | |
Foreign exchange revaluation | |
| (474 | ) | |
| (639 | ) |
At December 31 | |
$ | 4,135 | | |
$ | 4,609 | |
The recoverable amount of the OnSite Generation CGU was estimated
based on an assessment of fair value less costs of disposal. The methodology used to test impairment is classified as Level 3
per the hierarchy described in Note 32. Fair value less costs of disposal is determined using a multiple of approximately 3 times
revenue determined by reference to specific risks in relation to the OnSite Generation CGU and revenue multiples based on past
experience, forecasted results, and those noted for comparable companies. Furthermore, the Company reconciles the recoverable
amount to its consolidated market capitalization and the fair value of its debt. An impairment charge is recognized to the extent
that the carrying value exceeds the recoverable amount.
No impairment charges have arisen as a result of the reviews performed
as at December 31, 2015 and 2014. Reasonably possible changes in key assumptions would not cause the recoverable amount of goodwill
to fall below the carrying value.
2015 Consolidated Financial Statements | Page 26 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Note 13 - Trade and Other Payables
Accounts payable and accrued liabilities are as follows:
| |
December 31, 2015 | | |
December 31, 2014 | |
Trade accounts payable | |
$ | 3,720 | | |
$ | 6,426 | |
Accrued payroll and related compensation | |
| 1,798 | | |
| 2,874 | |
Supplier accruals | |
| 1,368 | | |
| 1,570 | |
Accrued professional fees | |
| 239 | | |
| 206 | |
Other | |
| 651 | | |
| 693 | |
Total accounts payable and accrued liabilities | |
$ | 7,776 | | |
$ | 11,769 | |
Note 14 – Financial Liabilities
Financial liabilities are as follows:
| |
December 31, 2015 | | |
December 31, 2014 | |
Debt - institutional (note 17) | |
| 7,140 | | |
| - | |
Warrants | |
| 752 | | |
| - | |
Deferred share unit liability | |
| 746 | | |
| 1,168 | |
Current portion of repayable government contributions (note 17) | |
| 354 | | |
| 219 | |
Derivative Liability (note 25) | |
| 42 | | |
| - | |
Total financial liabilities | |
$ | 9,034 | | |
$ | 1,387 | |
Warrants
On May 8, 2015, concurrent with a new loan agreement with a syndicate
of lenders, the Company issued 250,000 share purchase warrants. Each warrant was 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. These warrants include
anti-dilution provisions, and as a result are accounted for as a financial liability with changes in fair value reflected in the
consolidated statements of operations.
On December 16, 2015, as a result of the public offering, the exercise
price of the warrants was reduced to US$10.85 per common share.
2015 Consolidated Financial Statements | Page 27 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
The fair value of the warrants was determined using the Black-Scholes
option pricing model with the following weighted average assumptions:
| |
December 31, 2015 | | |
Inception May 8, 2015 | |
Risk-free interest rate (%) | |
| 0.56 | % | |
| 0.71 | % |
Expected volatility (%) | |
| 68.3 | % | |
| 65.6 | % |
Expected life in years | |
| 2.4 | | |
| 3 | |
Expected dividend | |
| Nil | | |
| Nil | |
Expected volatility was revised using the historical volatility
for the Company’s share price for the remaining 2.4 years prior to the date of grant, as this is the expected remaining
life of the warrants.
Note 15 - Warranty Provisions
Changes in the Company’s aggregate warranty provisions are
as follows:
| |
2015 | | |
2014 | |
At January 1, | |
$ | 2,547 | | |
$ | 2,893 | |
Additional provisions | |
| 1,977 | | |
| 2,307 | |
Utilized during the period | |
| (622 | ) | |
| (1,575 | ) |
Unused amounts reversed | |
| (511 | ) | |
| (795 | ) |
Foreign currency translation | |
| (198 | ) | |
| (283 | ) |
Total warranty provision at December 31, | |
| 3,193 | | |
| 2,547 | |
Less current portion | |
| (2,255 | ) | |
| (1,392 | ) |
Long-term warranty provision at December 31, | |
$ | 938 | | |
$ | 1,155 | |
Note 16 - Lines of Credit and Bank Guarantees
At December 31, 2015, the Company’s subsidiary in Belgium
(the “Borrower”) had a joint credit and operating line facility of €7,000. Under this facility, the Borrower
may borrow up to a maximum of 75% of the value of awarded sales contracts, approved by the Belgian financial institution, to a
maximum of €750; and may also borrow up to €1,250 for general business purposes, provided sufficient limit exists under
the overall facility limit of €7,000. Of this, €3,830 or approximately $4,159 was drawn as standby letters of credit
and bank guarantees and €1,000 or approximately $1,086 was drawn as an operating line. At December 31, 2015, the Company
had availability of less than €2,170 or approximately $2,356 (December 31, 2014 - $4,064) under this facility for use as
letters of credit and bank guarantees.
2015 Consolidated Financial Statements | Page 28 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
The credit facility bears interest at EURIBOR plus 1.45% per annum
and is secured by a €1,000 secured first charge covering all assets of 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 (intercompany account with the Corporate company), 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 December
31, 2015, the Borrower was in compliance with these covenants.
At December 31, 2015, the Company also had a Canadian credit facility
of $2,275. At December 31, 2015, $113 was drawn as standby letters of credit and bank guarantees. At December 31, 2015, the Company
had $2,162 (December 31, 2014 - $1,879) available under this facility for use only as letters of credit and bank guarantees.
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.
Note 17 - Other Non-current Liabilities
Other non-current liabilities are as follows:
| |
December 31, 2015 | | |
December 31, 2014 | |
Long-term debt - institutional (i) | |
$ | 7,140 | | |
$ | - | |
Long-term debt - Province of Ontario (ii) | |
| 2,865 | | |
| 2,922 | |
Non-current post-retirement benefit liabilities (iii) | |
| 288 | | |
| 208 | |
Repayable government contributions (iv) | |
| 322 | | |
| 553 | |
Total | |
| 10,615 | | |
| 3,683 | |
Less current portion of long-term debt - institutional (note 14) | |
| (7,140 | ) | |
| - | |
Less current portion of repayable government contribution (note 14) | |
| (192 | ) | |
| (219 | ) |
Less current portion of long-term debt - Province of Ontario (note 14) | |
| (162 | ) | |
| - | |
Total other non-current liabilities | |
$ | 3,121 | | |
$ | 3,464 | |
| (i) | Long-term
debt – Institutional |
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 December 31, 2015
was $7,140. The loan charges interest at an annual rate of 11%. Accrued interest of $140 is included within trade and other payables.
Total interest expense as at December 31, 2015 totalled $538. Total financing fees included in the amortized cost of the loan
at inception were $634. As of December 31, 2015 accretion of deferred financing fees of $274 has been included in interest expense.
| (ii) | Long-term
debt - Province of Ontario |
In 2011, the Company 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 had to
be incurred between October 1, 2010 and September 30, 2015.
2015 Consolidated Financial Statements | Page 29 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
After this five-year period, the loan bears interest at a rate
of 3.67% and will require repayment at a rate of 20% per year of the outstanding balance for the five years subsequent to the
sixth anniversary of the first disbursement. There is no availability remaining under this facility at December 31, 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 Company was in compliance with this covenant at December 31, 2015.
The change in carrying value of this liability at December 31 was
as follows:
| |
| 2015 | | |
| 2014 | |
At January 1, | |
$ | 2,922 | | |
$ | 2,260 | |
Drawdowns during the period | |
| - | | |
| 494 | |
Interest accretion during the period | |
| 446 | | |
| 379 | |
Foreign currency translation | |
| (503 | ) | |
| (211 | ) |
At December 31, | |
$ | 2,865 | | |
$ | 2,922 | |
| (iii) | Post-retirement
benefit liabilities |
The liability at December 31, 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.
| |
2015 | |
At January 1, | |
$ | 208 | |
Current service and net interest cost | |
| 160 | |
Employer contributions in the year | |
| (160 | ) |
Re-measurement of actuarial liability | |
| 104 | |
Foreign currency translation | |
| (24 | ) |
At December 31, | |
$ | 288 | |
| |
| | |
Plan assets | |
$ | 1,316 | |
Accrued benefit obligation | |
| (1,604 | ) |
Net defined benefit obligation | |
$ | (288 | ) |
The Company has estimated the potential additional liabilities
as $288 at December 31, 2015, using an actuarial measurement.
2015 Consolidated Financial Statements | Page 30 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
| (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 applications.
In January 2011, the Company entered into an amended agreement
(the “Amendment”) with TPC. Under the terms of the Amendment, C$1,500 will be paid to TPC in quarterly installments
until September 2017. An additional payment of 3% of the net proceeds of all equity instrument financing transactions completed
by the Company on or before December 31, 2017 or the sum of C$800, whichever is the lesser amount, was also to be paid to TPC.
The Company has paid the C$800 maximum under the agreement for this contingent payment.
The present value of this obligation at December 31, 2015 was $322
(2014 - $553), including the current portion of $192 (2014 - $219), which was included in trade and other payables.
The change in carrying value of this liability at December 31 was
as follows:
| |
2015 | | |
2014 | |
At January 1, | |
$ | 553 | | |
$ | 990 | |
Repayments during the period | |
| (213 | ) | |
| (498 | ) |
Interest accretion during the period | |
| 62 | | |
| 104 | |
Foreign currency translation | |
| (80 | ) | |
| (81 | ) |
Fair value (gain) loss | |
| - | | |
| 38 | |
At December 31, | |
$ | 322 | | |
$ | 553 | |
Less current portion | |
| (192 | ) | |
| (219 | ) |
At December 31, | |
$ | 130 | | |
$ | 334 | |
Fair value gains and losses have been recorded in other finance
gains and losses, net of interest expense.
Note 18 - Share Capital
Common shares
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.
| |
2015 | | |
2014 | |
| |
Number | | |
Amount | | |
Number | | |
Amount | |
Balance at January 1 | |
| 10,090,325 | | |
$ | 348,259 | | |
| 9,017,617 | | |
$ | 333,312 | |
Share offering | |
| 2,448,385 | | |
| 17,549 | | |
| 1,000,000 | | |
| 13,545 | |
Adjustment for partial shares on share consolidation | |
| (3 | ) | |
| - | | |
| - | | |
| - | |
Warrants exercised | |
| - | | |
| - | | |
| 57,144 | | |
| 1,217 | |
Stock options exercised (note 19) | |
| 2,050 | | |
| 16 | | |
| 15,564 | | |
| 185 | |
At December 31 | |
| 12,540,757 | | |
$ | 365,824 | | |
| 10,090,325 | | |
$ | 348,259 | |
2015 Consolidated Financial Statements | Page 31 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Common share issuance
On December 16, 2015, the Company completed a public offering for
which the Company issued 2,448,385 shares for gross proceeds of $18,975 inclusive of the overallotment. Net proceeds after underwriting
fees and expenses were $17,549.
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 $15 per share. 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 $13,545.
Warrants
On January 14, 2010, as part of a registered direct offering, the
Company issued 239,356 Series A warrants and 260,646 Series B warrants exercisable for a period of five years beginning in 2010.
The exercise price of the warrants is $3.68 per common share. All 239,356 of the Series A warrants and 191,574 of the Series B
warrants were fully exercised by December 31, 2013. The remaining 69,072 Series B warrants were exercised during 2014. The change
in fair value during the period was included in Other finance losses, net.
The activity of the Series A and B warrants during the year ended
2014 was as follows:
| |
2014 | |
| |
Number | | |
Amount | |
Balance at January 1 | |
| 69,072 | | |
$ | 1,075 | |
Loss on revaluation to fair value | |
| - | | |
| 142 | |
Fair value of warrants exercised | |
| (69,072 | ) | |
| (1,217 | ) |
Cash proceeds on exercise | |
| - | | |
| - | |
At December 31 | |
| - | | |
$ | - | |
During 2014, 69,072 warrants were exercised for $nil cash proceeds
and 57,144 shares were issued.
The loss due to the change in fair value of warrants during the
year was $nil (2014 - $142) and was included in other finance (losses) gains, net.
Note 19 – Stock-Based Compensation
Under the Hydrogenics Omnibus Incentive Plan adopted in 2012, the
Corporation may issue stock options, RSUs and PSUs to employees, directors and consultants as part of a long-term incentive plan.
Stock options were previously granted under the Corporation’s Stock Option Plan.
Under the Company’s previous
Stock Option Plan, 252,006 stock options were outstanding at December 31, 2015. No further
stock options may be issued under this plan.
Of the 660,564 shares available under the Omnibus Incentive Plan,
to be issued as stock options, RSUs and PSUs, 284,168 have been granted as stock options and 199,772 have been granted as PSUs
and were outstanding at December 31, 2015. The Corporation has 176,624 of share units available for issue as RSUs and PSUs under
the Omnibus Incentive Plan at December 31, 2015.
2015 Consolidated Financial Statements | Page 32 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Stock options
A summary of the Company’s stock option plan is as follows:
| |
2015 | | |
2014 | |
| |
Number of shares | | |
Weighted average exercise price C$ | | |
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 | | |
| (15,564 | ) | |
| 8.49 | |
Forfeited | |
| - | | |
| - | | |
| (1,888 | ) | |
| 22.48 | |
Expired | |
| - | | |
| - | | |
| (5,052 | ) | |
| 160.11 | |
Outstanding, end of period | |
| 536,174 | | |
$ | 7.97 | | |
| 481,403 | | |
$ | 6.99 | |
During the year ended Decmber 31, 2015, 2,050 (2014 – 15,564)
stock options were exercised resulting in cash proceeds of $10 (2014 - $119), an increase in equity of $16 (2014 – $185)
with an offset to contributed surplus of $6 (2014 – $66).
During the year ended December 30, 2015, 56,821 (2014 – nil)
stock options were granted with an average fair value of C$8.77 per option (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 year ended December 31,
2015, related to stock options, was $272 (2014 - $291) and was included in selling, general and administrative expenses with an
offsetting increase to contributed surplus.
2015 Consolidated Financial Statements | Page 33 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
The following table summarizes information about the Company’s
stock options outstanding as of December 31, 2015:
Grant date | |
Expiry date | |
Total number of options | | |
Weighted average remaining contractual life (in years) | | |
Exercise price C$ | | |
Number of vested options | | |
Weighted average remaining contractual life (in years) | | |
Exercise price C$ | |
May 23, 2006 | |
May 23, 2016 | |
| 3,190 | | |
| 0.39 | | |
$ | 84.25 | | |
| 3,190 | | |
| 0.39 | | |
$ | 84.25 | |
March 23, 2007 | |
March 23, 2017 | |
| 3,411 | | |
| 1.23 | | |
| 29.25 | | |
| 3,411 | | |
| 1.23 | | |
| 29.25 | |
March 12,2008 | |
March 12, 2018 | |
| 5,135 | | |
| 2.20 | | |
| 14.50 | | |
| 5,135 | | |
| 2.20 | | |
| 14.50 | |
March 27, 2009 | |
March 27, 2019 | |
| 6,216 | | |
| 3.24 | | |
| 13.25 | | |
| 6,216 | | |
| 3.24 | | |
| 13.25 | |
April 5, 2010 | |
April 5, 2020 | |
| 22,149 | | |
| 4.26 | | |
| 4.91 | | |
| 22,149 | | |
| 4.26 | | |
| 4.91 | |
March 31, 2011 | |
March 31, 2021 | |
| 85,000 | | |
| 5.25 | | |
| 6.96 | | |
| 85,000 | | |
| 5.25 | | |
| 6.96 | |
June 8, 2011 | |
June 8, 2021 | |
| 126,905 | | |
| 5.44 | | |
| 5.03 | | |
| 126,905 | | |
| 5.44 | | |
| 5.03 | |
May 11, 2012 | |
May 11, 2022 | |
| 157,871 | | |
| 6.36 | | |
| 6.25 | | |
| 118,403 | | |
| 6.36 | | |
| 6.25 | |
November 19, 2012 | |
November 19, 2022 | |
| 39,476 | | |
| 6.89 | | |
| 6.60 | | |
| 29,607 | | |
| 6.89 | | |
| 6.60 | |
March 21, 2013 | |
March 21, 2023 | |
| 30,000 | | |
| 7.22 | | |
| 8.10 | | |
| 15,000 | | |
| 7.22 | | |
| 8.10 | |
March 25, 2015 | |
March 25, 2015 | |
| 56,821 | | |
| 9.23 | | |
| 16.14 | | |
| - | | |
| 9.23 | | |
| 16.14 | |
| |
| |
| 536,174 | | |
| 6.13 | | |
$ | 7.97 | | |
| 415,016 | | |
| 5.62 | | |
$ | 7.04 | |
Performance Share Units (“PSUs”)
Under the Hydrogenics Omnibus Incentive Plan adopted
in 2012, the Company may issue performance based share units to employees, directors and consultants. Pursuant to the Hydrogenics
Omnibus Incentive Plan, participants may be granted a portion of their long-term incentive plan in the form of PSUs instead of
RSUs and stock options. A PSU is a unit, equivalent in value to a common share of the Company. Each PSU entitles the participant
to receive a cash payment or common shares, at the option of the Company. The fair value of the PSUs is recognized as a compensation
expense and is pro-rated over the expected vesting period with the offsetting increase to contributed surplus. Fair value is calculated
as the market value of the common share at the date of grant. Each PSU is subject to vesting performance conditions. The Company
estimates the length of the expected vesting period at the grant date, based on the most likely outcome of the performance conditions.
The Company will revise its estimate of the length of the vesting period, if necessary, if subsequent information indicates that
the length of the vesting period differs from previous estimates and any change to compensation cost will be recognized in the
period in which the revised estimate is made. In the fourth quarter of 2015, the Company revised its estimate of the length of
the expected vesting period based on management’s best estimate of the achievement of the vesting of specific performance
conditions. This adjustment resulted in a reversal of previously charged compensation expense of $543, with the offset to contributed
surplus. Forfeitures are estimated at the grant date and are revised to reflect a change in expected or actual forfeitures. The
expiry date of PSUs granted is five years from the date of award.
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 issued | |
| 32,670 | | |
| 37,827 | |
At December 31, | |
| 199,772 | | |
| 192,320 | |
2015 Consolidated Financial Statements | Page 34 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Stock-based compensation expense for the year ended December 31,
2015, related to PSUs, was $314 (2014 - $236) and was included in selling, general and administrative expenses with an offsetting
increase to contributed surplus. Offsetting this amount is a credit of $543 for the year ended December 31, 2015 (2014 - $nil)
representing the revision for the change in estimate regarding the achievement of performance conditions.
Deferred Share Units (“DSUs”)
The Company has a deferred share unit plan for directors. Pursuant
to the DSU Plan, non-employee directors are entitled to receive all or any portion of their annual cash retainer and meeting fees
in the form of DSUs instead of cash. A DSU is a unit, equivalent in value to a common share of the Company. Each DSU entitles
the participant to receive a cash payment upon termination of directorship, valued at the price of the Company’s common
share on the TSX on the date of termination. Compensation cost for DSUs granted under the DSU plan is recorded as an expense with
a corresponding increase in accrued liabilities and is measured at fair value. The DSU liability is marked-to-market each reporting
period with the offset recorded in selling, general and administrative expenses.
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 | |
| (15,713 | ) | |
| (188 | ) | |
| (49,441 | ) | |
| (1,472 | ) |
DSU compensation expense | |
| 11,491 | | |
| 108 | | |
| 5,971 | | |
| 105 | |
DSU fair value adjustments | |
| - | | |
| (342 | ) | |
| - | | |
| 14 | |
At December 31, | |
| 83,628 | | |
$ | 746 | | |
| 87,850 | | |
$ | 1,168 | |
For the year ended December 30, 2015, the Company recognized $108
(2014 - $105) as expense for the issue of new DSUs and a recovery of ($342) (2014 - expense of $14) for the mark-to-market adjustment
on the liability.
The DSU liability at December 31, 2015 of $746 (2014 - $1,168)
was included in trade and other payables. DSUs vest immediately on the date of issuance.
Restricted Share Units (“RSUs”)
The RSU liability at December 30, 2015 was $nil (2014 - $nil) 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 | |
RSUs vested redemptions | |
| - | | |
| - | | |
| (46,885 | ) | |
| (623 | ) |
RSU amortization expense | |
| - | | |
| - | | |
| - | | |
| 236 | |
RSU fair value adjustments | |
| - | | |
| - | | |
| - | | |
| (273 | ) |
At December 31, | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
2015 Consolidated Financial Statements | Page 35 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Summary of stock-based compensation expense (recovery)
| |
2015 | | |
2014 | |
Stock-based compensation expense - stock options | |
$ | 272 | | |
$ | 291 | |
Stock-based compensation expense - performance share units | |
| 314 | | |
| 253 | |
Stock-based compensation expense - performance share units change in estimate recovery | |
| (543 | ) | |
| - | |
Deferred share unit - new issuance | |
| 108 | | |
| 105 | |
Deferred share unit - mark-to-market adjustment | |
| (342 | ) | |
| 14 | |
Restricted share unit expense | |
| - | | |
| 236 | |
Restricted share unit expense - mark-to-market adjustment | |
| - | | |
| (273 | ) |
At December 31, | |
$ | (191 | ) | |
$ | 626 | |
Note 20 - Selling, General and Administrative Expenses
Year ended December 31, | |
2015 | | |
2014 | |
Salaries and benefits, office administration and other expenses | |
$ | 10,032 | | |
$ | 10,655 | |
Depreciation | |
| 329 | | |
| 422 | |
Amortization | |
| 45 | | |
| 53 | |
Stock-based compensation (including stock options and PSUs) | |
| 43 | | |
| 544 | |
DSUs | |
| (234 | ) | |
| 119 | |
RSUs | |
| - | | |
| (37 | ) |
Total | |
$ | 10,215 | | |
$ | 11,756 | |
Note 21 - 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 years ended December 31, 2015 and 2014, research and product development
expenses and non-repayable program funding, which have been received or receivable, are as follows:
Year ended December 31, | |
2015 | | |
2014 | |
Research and product development expenses | |
$ | 6,198 | | |
$ | 6,682 | |
Government research and product development funding | |
| (2,051 | ) | |
| (3,398 | ) |
Development costs capitalized | |
| (77 | ) | |
| - | |
Total | |
$ | 4,070 | | |
$ | 3,284 | |
2015 Consolidated Financial Statements | Page 36 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Note 22- Key Management Compensation
Key management includes the Company’s directors and key executive
members.
Year ended December 31, | |
2015 | | |
2014 | |
Salaries and short-term employee benefits | |
$ | 1,977 | | |
$ | 2,174 | |
Stock-based compensation | |
| | | |
| | |
DSUs | |
| 108 | | |
| 111 | |
Stock options | |
| 379 | | |
| - | |
PSUs | |
| 412 | | |
| 311 | |
Total | |
$ | 2,876 | | |
$ | 2,596 | |
Note 23 - Expenses by Nature
The following expenses are included in cost of sales; selling,
general and administrative expenses; and gross research and development expenses.
Year ended December 31, | |
2015 | | |
2014 | |
Raw materials and consumables used | |
$ | 25,155 | | |
$ | 27,381 | |
Employee benefits (note 24) | |
| 14,913 | | |
| 17,286 | |
Facilities | |
| 2,680 | | |
| 3,189 | |
Shareholder and other corporate communications | |
| 419 | | |
| 405 | |
Depreciation and amortization | |
| 630 | | |
| 662 | |
Professional services | |
| 1,098 | | |
| 1,067 | |
Insurance | |
| 501 | | |
| 534 | |
Marketing | |
| 280 | | |
| 328 | |
Other | |
| 630 | | |
| 1,920 | |
Total | |
$ | 46,306 | | |
$ | 52,772 | |
Note 24 - Employee Benefits Expense
The following employee benefits expenses are included in cost of
sales; selling, general and administrative expenses; and research and development expenses.
Year ended December 31, | |
2015 | | |
2014 | |
Salaries and wages | |
$ | 14,145 | | |
$ | 15,467 | |
Stock-based compensation (including PSUs), net of change in management estimate | |
| 43 | | |
| 544 | |
Medical, dental and insurance | |
| 379 | | |
| 698 | |
Pension costs | |
| 276 | | |
| 121 | |
Stock-based compensation - RSUs and DSUs | |
| (234 | ) | |
| 82 | |
Other | |
| 304 | | |
| 374 | |
Total | |
$ | 14,913 | | |
$ | 17,286 | |
2015 Consolidated Financial Statements | Page 37 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Note 25 - Other Finance Gains and Losses, Net
Components of other finance gains and losses, net are as follows:
Year ended December 31, | |
2015 | | |
2014 | |
Foreign exchange contracts - fair market value adjustment on settled held for trading financial instruments | |
$ | (544 | ) | |
$ | - | |
Foreign exchange contracts - fair market value adjustment on unsettled held for trading financial instruments | |
| (42 | ) | |
| | |
Issuance of warrants (note 14) | |
| (885 | ) | |
| - | |
Loss from change in fair value of exercised warrants | |
| - | | |
| (142 | ) |
Gain from change in fair value of outstanding warrants (note 14) | |
| 133 | | |
| - | |
Loss from change in net present value of repayable government contribution (note 17) | |
| - | | |
| (38 | ) |
Total | |
$ | (1,338 | ) | |
$ | (180 | ) |
Note 26 - Income Taxes
The Corporation had net losses for the periods ended December 31,
2015 and 2014 and income tax expense was $nil for each of these years.
The estimated income tax rate for the Company is based on substantively
enacted corporate tax rates, expected timing of reversals, and expected taxable income allocation to various tax jurisdictions.
The Company’s computation of income tax expense is as follows:
Year ended December 31, | |
2015 | | |
2014 | |
Loss before income taxes | |
$ | (11,442 | ) | |
$ | (4,523 | ) |
Statutory income tax rate | |
| 25 | % | |
| 25 | % |
Income tax recovery at statutory rates | |
| (2,860 | ) | |
| (1,130 | ) |
Non-deductible expenses | |
| 102 | | |
| 82 | |
Other permanent differences | |
| (68 | ) | |
| (163 | ) |
Effect of income tax and rate changes on deferred income taxes | |
| 168 | | |
| - | |
Effect of foreign currency rate changes on deferred income taxes | |
| 3,423 | | |
| (576 | ) |
Income taxes at different rates in foreign and other provincial jurisdictions | |
| (370 | ) | |
| (198 | ) |
Other | |
| (103 | ) | |
| (195 | ) |
Tax losses and other temporary differences not recognized | |
| (292 | ) | |
| 2,180 | |
Total income tax expense | |
$ | - | | |
$ | - | |
2015 Consolidated Financial Statements | Page 38 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
At December 31, 2015, the Company has available income tax loss
carry-forwards of $80,351 that may be used to reduce taxable income in future years, in certain jurisdictions, expiring as follows:
For the years ended | |
| |
2023 | |
$ | 130 | |
2024 | |
| 190 | |
2025 | |
| 244 | |
2026 | |
| 512 | |
2027 | |
| 14 | |
2028 | |
| 1 | |
2029 | |
| 541 | |
2030 | |
| 7,208 | |
2031 | |
| 6,432 | |
2032 | |
| 5,706 | |
2033 | |
| 130 | |
2034 | |
| 4,471 | |
2035 | |
| 5,876 | |
No expiry | |
| 48,896 | |
Total | |
$ | 80,351 | |
Components of the Company’s deductible temporary differences
and unused tax losses are:
Year ended December 31, | |
2015 | | |
2014 | |
Non-capital losses | |
$ | 24,224 | | |
$ | 24,686 | |
Investment tax credits | |
| 1,460 | | |
| 1,593 | |
Scientific research and experimental development | |
| 909 | | |
| 941 | |
Property, plant and equipment and intellectual property | |
| 1,027 | | |
| 916 | |
Provisions | |
| 190 | | |
| 156 | |
Other | |
| 247 | | |
| 59 | |
Total | |
$ | 28,057 | | |
$ | 28,351 | |
No deferred income tax asset has been recognized in respect of
the $28,057 of losses and other temporary differences, reflecting the Company’s uncertainty associated with the realization
of all deferred income tax assets.
2015 Consolidated Financial Statements | Page 39 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Note 27 - Net Loss Per Share
The loss per share for the periods ended December 31, 2015 and
2014 was as follows:
| |
2015 | | |
2014 | |
Net loss | |
$ | (11,442 | ) | |
$ | (4,523 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding – basic | |
| 10,199,015 | | |
| 9,718,349 | |
Dilutive effect of stock options | |
| - | | |
| - | |
Dilutive effect of warrants | |
| - | | |
| - | |
Weighted average number of shares outstanding – diluted | |
| 10,199,015 | | |
| 9,718,349 | |
Net loss per share – basic and diluted | |
$ | (1.12 | ) | |
$ | (0.47 | ) |
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 28 – Commitments and Contingencies
Forgivable loan facility
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
ship in 2017. Hydrogenics will receive a total of C$2,950, paid in equal monthly instalments, 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 March 31, 2017.
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 electrolyzer 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 December 31, 2015, the Company has accumulated total costs in
building the unit of $755, 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 year ended December 31, 2015 relating to expenditures in the year
ended 2014, and has accrued an additional $215 of funding to be received relating to expenditures in the year ended 2015. The
funding amounts have been recorded as a reduction to property, plant and equipment.
2015 Consolidated Financial Statements | Page 40 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Rental expenses
The Company incurred rental expenses of $894 under operating leases
in 2015 (2014 - $884). The Company has future minimum lease payments under operating leases relating to premises, office equipment
and vehicles as follows:
For the years ended | |
| |
2016 | |
$ | 872 | |
2017 | |
| 930 | |
2018 | |
| 428 | |
2019 | |
| 386 | |
2020 | |
| 384 | |
Thereafter | |
| 269 | |
Total | |
$ | 3,269 | |
The Company leases various premises, office equipment and vehicles
under non-cancellable operating lease agreements. The lease agreements are classified as non-cancellable, as penalties are charged
if cancellation does occur. Certain leases contain purchase option clauses, which provide the Company with the ability to purchase
the equipment or automobile at fair value at the time of exercise. The leases have varying terms, escalation clauses and renewal
rights.
Indemnification agreements
The Company has entered into indemnification agreements with its
current and former directors and officers to indemnify them, to the extent permitted by law, against any and all charges, costs,
expenses, amounts paid in settlement, and damages incurred by the directors and officers as a result of any lawsuit or any other
judicial, administrative or investigative proceeding in which the directors and officers are sued as a result of their service.
These indemnification claims will be subject to any statutory or
other legal limitation period. The nature of the indemnification agreements prevents the Company from making a reasonable estimate
of the maximum potential amount it could be required to pay to counterparties. The Company has purchased directors’ and
officers’ liability insurance. No amount has been recorded in the consolidated financial statements with respect to these
indemnification agreements, as the Company is not aware of any claims.
In the normal course of operations, the Company may provide indemnification
agreements, other than those listed above, to counterparties that require the Company to compensate them for costs incurred as
a result of changes in laws and regulations or as a result of litigation claims or statutory sanctions that may be suffered by
the counterparty as a consequence of the transaction. The terms of these indemnification agreements will vary based on the contract.
The nature of the indemnification agreements prevents the Company from making a reasonable estimate of the maximum potential amount
it could be required to pay to counterparties. No amount has been recorded in the consolidated financial statements with respect
to these indemnification agreements, as the Company is not aware of any claims.
2015 Consolidated Financial Statements | Page 41 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Note 29 - Related Party Transactions
In the normal course of operations, the Company subcontracts certain
manufacturing functions to a company owned by a family member of an executive officer and Director of the Company. During 2015,
Hydrogenics made purchases of $105 (2014 - $171) from this related company. At December 31, 2015, the Company had an accounts
payable balance due to this related party of $26 (2014 - $12).
The Company holds an equity investment in the joint venture Kolon
Hydrogenics. During 2015, the Company had sales to the joint venture of $724 (2014 - $3,136), and at the end of December 31, 2015
the Company had a receivable of $359 (2014 - $935) owing from the joint venture.
All related party transactions involve the parent company. There
are no related party transactions to disclose for the Company’s subsidiaries.
Note 30 - Consolidated Statements of Cash Flows
Components of the net change in non-cash working capital are as
follows:
December 31, | |
2015 | | |
2014 | |
Decrease (increase) in current assets | |
| | | |
| | |
Trade and other receivables | |
$ | 2,177 | | |
$ | (7,447 | ) |
Inventories | |
| (314 | ) | |
| (1,877 | ) |
Prepaid expenses | |
| 312 | | |
| 232 | |
Increase (decrease) in current liabilities | |
| | | |
| | |
Trade and other payables, including warranty provision | |
| (2,878 | ) | |
| (624 | ) |
Deferred revenue | |
| 2,301 | | |
| (741 | ) |
Total | |
$ | 1,598 | | |
$ | (10,457 | ) |
Note 31 - 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
2015 Consolidated Financial Statements | Page 42 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Financial information by reportable segment for the years ended
December 31, 2015 and 2014 was as follows:
Year ended December 31, 2015 | |
OnSite Generation | | |
Power Systems | | |
Corporate and Other | | |
Total | |
Revenues from external customers | |
$ | 23,556 | | |
$ | 12,308 | | |
$ | - | | |
$ | 35,864 | |
Gross profit | |
| 3,391 | | |
| 2,580 | | |
| - | | |
| 5,971 | |
Selling, general and administrative expenses | |
| 2,665 | | |
| 3,920 | | |
| 3,630 | | |
| 10,215 | |
Research and product development expenses | |
| 1,917 | | |
| 2,126 | | |
| 27 | | |
| 4,070 | |
Segment loss | |
| (1,191 | ) | |
| (3,466 | ) | |
| (3,657 | ) | |
| (8,314 | ) |
Interest expense, net | |
| - | | |
| - | | |
| (1,322 | ) | |
| (1,322 | ) |
Foreign currency losses, net | |
| - | | |
| - | | |
| (428 | ) | |
| (428 | ) |
Loss in joint venture | |
| - | | |
| - | | |
| (40 | ) | |
| (40 | ) |
Other finance losses, net | |
| - | | |
| - | | |
| (1,338 | ) | |
| (1,338 | ) |
Loss before income taxes | |
$ | (1,191 | ) | |
$ | (3,466 | ) | |
$ | (6,785 | ) | |
| (11,442 | ) |
Year ended December 31, 2014 | |
OnSite Generation | | |
Power Systems | | |
Corporate and Other | | |
Total | |
Revenues from external customers | |
$ | 30,192 | | |
$ | 15,356 | | |
$ | - | | |
$ | 45,548 | |
Gross profit | |
| 6,102 | | |
| 5,112 | | |
| - | | |
| 11,214 | |
Selling, general and administrative expenses | |
| 3,293 | | |
| 4,143 | | |
| 4,320 | | |
| 11,756 | |
Research and product development expenses | |
| 1,070 | | |
| 2,194 | | |
| 20 | | |
| 3,284 | |
Segment gain (loss) | |
| 1,739 | | |
| (1,225 | ) | |
| (4,340 | ) | |
| (3,826 | ) |
Interest expense, net | |
| - | | |
| - | | |
| (540 | ) | |
| (540 | ) |
Foreign currency gains (losses), net | |
| - | | |
| - | | |
| 117 | | |
| 117 | |
Loss in joint venture | |
| - | | |
| - | | |
| (94 | ) | |
| (94 | ) |
Other finance losses, net | |
| - | | |
| - | | |
| (180 | ) | |
| (180 | ) |
Income (loss) before income taxes | |
$ | 1,739 | | |
$ | (1,225 | ) | |
$ | (5,037 | ) | |
$ | (4,523 | ) |
2015 Consolidated Financial Statements | Page 43 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Balance sheet information by reportable segment at December 31,
2015 and 2014 was as follows:
At December 31, 2015 | |
OnSite Generation | | |
Power Systems | | |
Corporate and Other | | |
Total | |
Cash and cash equivalents and restricted cash | |
$ | 6,120 | | |
$ | 456 | | |
$ | 18,325 | | |
$ | 24,901 | |
Trade and other receivables | |
| 3,109 | | |
| 7,310 | | |
| - | | |
| 10,419 | |
Inventories | |
| 9,824 | | |
| 4,446 | | |
| - | | |
| 14,270 | |
Investment in joint venture | |
| - | | |
| - | | |
| 1,951 | | |
| 1,951 | |
Property, plant and equipment | |
| 410 | | |
| 2,639 | | |
| - | | |
| 3,049 | |
Goodwill and intangibles | |
| 4,257 | | |
| - | | |
| 93 | | |
| 4,350 | |
Other assets | |
| 106 | | |
| 207 | | |
| 115 | | |
| 428 | |
Total Assets | |
$ | 23,826 | | |
$ | 15,058 | | |
$ | 20,484 | | |
$ | 59,368 | |
Current liabilities | |
$ | 13,434 | | |
$ | 7,567 | | |
$ | 9,296 | | |
$ | 30,297 | |
Non-current liabilities | |
| 1,124 | | |
| 7,569 | | |
| 130 | | |
| 8,823 | |
Total Liabilities | |
$ | 14,558 | | |
$ | 15,136 | | |
$ | 9,426 | | |
$ | 39,120 | |
At December 31, 2014 | |
OnSite Generation | | |
Power Systems | | |
Corporate and Other | | |
Total | |
Cash and cash equivalents and restricted cash | |
$ | 3,354 | | |
$ | 245 | | |
$ | 6,822 | | |
$ | 10,421 | |
Trade and other receivables | |
| 4,614 | | |
| 8,286 | | |
| - | | |
| 12,900 | |
Inventories | |
| 9,714 | | |
| 4,984 | | |
| - | | |
| 14,698 | |
Investment in joint venture | |
| - | | |
| - | | |
| 2,150 | | |
| 2,150 | |
Property, plant and equipment | |
| 454 | | |
| 1,419 | | |
| - | | |
| 1,873 | |
Goodwill and intangibles | |
| 4,633 | | |
| - | | |
| 133 | | |
| 4,766 | |
Other assets | |
| 219 | | |
| 449 | | |
| 79 | | |
| 747 | |
Total Assets | |
$ | 22,988 | | |
$ | 15,383 | | |
$ | 9,184 | | |
$ | 47,555 | |
Current liabilities | |
$ | 9,358 | | |
$ | 10,060 | | |
$ | 1,901 | | |
$ | 21,319 | |
Non-current liabilities | |
| 1,109 | | |
| 9,318 | | |
| 333 | | |
| 10,760 | |
Total Liabilities | |
$ | 10,467 | | |
$ | 19,378 | | |
$ | 2,234 | | |
$ | 32,079 | |
The Company’s derivative financial instruments are considered
to be segment liabilities and are included in OnSite Generation.
Property, plant and equipment are located in the following countries:
Year ended December 31, | |
2015 | | |
2014 | |
Canada | |
$ | 2,374 | | |
$ | 1,167 | |
Belgium | |
| 410 | | |
| 454 | |
Germany | |
| 265 | | |
| 252 | |
Total | |
$ | 3,049 | | |
$ | 1,873 | |
2015 Consolidated Financial Statements | Page 44 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Revenue from external customers by region was as follows:
Year ended December 31, | |
2015 | | |
2014 | |
European Union | |
$ | 15,106 | | |
$ | 15,645 | |
Eastern Europe | |
| 7,695 | | |
| 11,084 | |
North America | |
| 6,288 | | |
| 7,712 | |
Asia | |
| 4,300 | | |
| 8,336 | |
Africa | |
| 927 | | |
| 330 | |
South and Central America | |
| 1,051 | | |
| 1,838 | |
Middle East | |
| 389 | | |
| 523 | |
Oceania and Carribbean | |
| 108 | | |
| 80 | |
Total | |
$ | 35,864 | | |
$ | 45,548 | |
Revenue for the largest customers as a percentage of the total
revenue was as follows:
Year ended December 31, | |
2015 | | |
2014 | |
First largest (Power segment) | |
| 13 | % | |
| 14 | % |
Second largest (2015 Power, 2014 Generation) | |
| 6 | % | |
| 10 | % |
Third largest (2015 Generation, 2014 Power/Generation) | |
| 5 | % | |
| 8 | % |
Fourth largest (2015 Generation, 2014 Power) | |
| 5 | % | |
| 8 | % |
All other customers | |
| 71 | % | |
| 60 | % |
Total | |
| 100 | % | |
| 100 | % |
Note 32 - Risk Management Arising From Financial Instruments
Fair value
The carrying value of cash and cash equivalents, restricted cash,
trade and other receivables, and trade and other payables approximates 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 consolidated balance sheets and the market rates of interest is insignificant.
Fair value measurements recognized in the consolidated balance
sheets must be categorized in accordance with the following levels:
2015 Consolidated Financial Statements | Page 45 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
| (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);
and |
| (iii) | Level
3: inputs for the asset or liability that are not based on observable market data (unobservable
inputs). |
The fair value of the liabilities relating to the RSUs and DSUs
is classified as Level 1. The fair value of the derivative assets/liabilities and warrants are classified as Level 2.
The Company has not transferred any financial instruments between
Levels 1, 2, or 3 of the fair value hierarchy during the year ended December 31, 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 value of the Company’s financial instruments:
| |
2015 | | |
2014 | |
Cash and cash equivalents | |
$ | 23,398 | | |
$ | 6,572 | |
Restricted cash | |
| 971 | | |
| 3,228 | |
Restricted cash – non-current | |
| 532 | | |
| 621 | |
Trade and other receivables | |
| 10,419 | | |
| 12,900 | |
Loans and receivables | |
$ | 35,320 | | |
$ | 23,321 | |
Trade and other payables | |
$ | 7,776 | | |
$ | 12,937 | |
Current portion of long-term debt and repayable government contribution | |
| 7,494 | | |
| 219 | |
Deferred share unit liability | |
| 746 | | |
| 1,168 | |
Operating borrowings | |
| 1,086 | | |
| - | |
Warrants | |
| 752 | | |
| - | |
Non-current portion of long-term debt | |
| 2,702 | | |
| 2,922 | |
Non-current portion of repayable government contributions | |
| 130 | | |
| 334 | |
Post-retirement benefit liabilities | |
| 288 | | |
| 208 | |
Derivative liability | |
| 42 | | |
| - | |
Other financial liabilities | |
$ | 21,016 | | |
$ | 17,788 | |
Liquidity risk
The Company has sustained losses and negative cash flows from operations
since its inception. At December 31, 2015, the Company had $23,398 (2014 - $6,572) of current unrestricted cash and cash equivalents.
Liquidity risk is the risk the Company will encounter difficulty in meeting its financial obligations associated with financial
liabilities that are settled by delivering cash or another financial asset. The Company is exposed to liquidity risk as it continues
to have net cash outflows to support its operations. The Company’s objective for liquidity risk management is to maintain
sufficient liquid financial resources to fund the consolidated balance sheets, pursue growth and development strategies, and to
meet commitments and obligations in the most cost-effective manner possible. The Company achieves this by maintaining sufficient
cash and cash equivalents and short-term investments and managing working capital. The Company monitors its financial position
on a monthly basis at minimum, and updates its expected use of cash resources based on the latest available data. Such forecasting
takes into consideration the Company’s financing plans and compliance with internal targets. A significant portion of the
Company’s financial liabilities is classified as current liabilities, as settlement is expected within one year.
The following table details the Company’s contractual maturity
for its net financial liabilities. The information presented is based on the earliest date on which the Company can be required
to pay and represents the undiscounted cash flow including principal and interest.
2015 Consolidated Financial Statements | Page 46 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
At December 31, 2015 | |
Due in less than 1 year | | |
Due in 1-3 years | | |
Due in 4-5 years | | |
Due in 6-10 years | |
Trade and other payables | |
$ | 7,776 | | |
$ | - | | |
$ | - | | |
$ | - | |
Deferred share unit liability | |
| 746 | | |
| - | | |
| - | | |
| - | |
Operating borrowings | |
| 1,086 | | |
| - | | |
| - | | |
| - | |
Warrants | |
| 752 | | |
| - | | |
| - | | |
| - | |
Current portion of long-term debt - Province of Ontario and institutional | |
| 7,663 | | |
| - | | |
| - | | |
| - | |
Repayable government contributions | |
| 208 | | |
| 160 | | |
| - | | |
| - | |
Derivative liability | |
| 42 | | |
| - | | |
| - | | |
| - | |
Long-term debt | |
| - | | |
| 1,939 | | |
| 1,817 | | |
| 863 | |
Total | |
$ | 18,273 | | |
$ | 2,099 | | |
$ | 1,817 | | |
$ | 863 | |
At December 31, 2014 | |
Due in less than 1 year | | |
Due in 1-3 years | | |
Due in 4-5 years | | |
Due in 6-10 years | |
Trade and other payables | |
$ | 11,769 | | |
$ | - | | |
$ | - | | |
$ | - | |
Deferred share unit liability | |
| 1,168 | | |
| - | | |
| - | | |
| - | |
Current portion of long-term debt - Province of Ontario and institutional | |
| - | | |
| - | | |
| - | | |
| - | |
Repayable government contributions | |
| 239 | | |
| 439 | | |
| - | | |
| - | |
Long-term debt | |
| - | | |
| 1,221 | | |
| 2,328 | | |
| 2,177 | |
Total | |
$ | 13,176 | | |
$ | 1,660 | | |
$ | 2,328 | | |
$ | 2,177 | |
Derivatives | |
Due in less than 1 year | |
Notional Amount Receivable | |
| | |
Euro | |
$ | 1,910 | |
Notional Amount Payable | |
| | |
USD | |
| 1,750 | |
GBP | |
$ | 221 | |
Credit risk
Credit risk arises from the risk one party to a financial instrument
will cause a financial loss for the other party by failing to discharge an obligation. The Company is exposed to credit risk from
customers. At December 31, 2015, the Company’s two largest customers accounted for 19% of revenue (24% at December 31, 2014)
and 61% of accounts receivable (2014 – 58%). In order to minimize the risk of loss for trade receivables, the Company’s
extension of credit to customers involves a review and approval by senior management as well as progress payments as contracts
are executed and in some cases, irrevocable letters of credit. The majority of the Company’s sales are invoiced with payment
terms between 30 and 60 days. The Company’s objective is to minimize its exposure to credit risk from customers in order
to prevent losses on financial assets by performing regular monitoring of overdue balances and to provide an allowance for potentially
uncollectible accounts receivable.
2015 Consolidated Financial Statements | Page 47 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
The Company’s trade receivables have a carrying value of
$8,764 at December 31, 2015 (2014 - $10,518), representing the maximum exposure to credit risk of those financial assets, exclusive
of the allowance for doubtful accounts.
The aging of these receivables is as follows:
At December 31, | |
2015 | | |
2014 | |
Not due | |
| 89 | % | |
| 68 | % |
Less than 30 days past due | |
| 7 | % | |
| 11 | % |
Less than 60 days past due, more than 30 days past due | |
| 2 | % | |
| 8 | % |
More than 60 days past due | |
| 2 | % | |
| 13 | % |
Total | |
| 100 | % | |
| 100 | % |
The Company’s gross exposure to credit risk for trade receivables
by geographic area at December 31 was as follows:
At December 31, | |
2015 | | |
2014 | |
Europe | |
| 72 | % | |
| 59 | % |
North America | |
| 9 | % | |
| 20 | % |
Asia | |
| 4 | % | |
| 17 | % |
Rest of world | |
| 15 | % | |
| 4 | % |
Total | |
| 100 | % | |
| 100 | % |
The activity of the allowance for doubtful accounts for the year
is as follows:
| |
2015 | | |
2014 | |
Allowance for doubtful accounts, beginning of year | |
$ | 133 | | |
$ | 139 | |
Bad debt expense | |
| - | | |
| 9 | |
Reversal of bad debt expense | |
| (6 | ) | |
| (13 | ) |
Writeoff of bad debts | |
| - | | |
| (2 | ) |
December 31, | |
$ | 127 | | |
$ | 133 | |
The Company believes the credit quality is high for the accounts
receivable, which are neither past due nor impaired based on prior experience of collections of accounts within 60 days of the
payment term on the invoice.
The Company may also have credit risk relating to cash and cash
equivalents and restricted cash, which it manages by dealing with chartered Canadian, chartered Belgian and German banks. The
credit risk is limited because the counterparties are chartered banks with high credit ratings assigned by international credit
rating agencies. In addition, the Company minimizes exposure to credit risk by strategically managing cash balances at individual
banks. As well, the Company may also fund working capital by leveraging credit facilities that are not 100% secured by cash, resulting
in a mitigation of credit risk at the corresponding bank.
The Company’s objective is to minimize its exposure to credit
risk in order to prevent losses on financial assets by placing its investments in lower risk bank acceptances of these banks.
The Company’s cash and cash equivalents and restricted cash was $24,901 at December 31, 2015 (2014 - $10,421), representing
the maximum exposure to credit risk of these financial assets. Approximately 99% (2014 - 99%) of the Company’s cash and
cash equivalents and restricted cash at December 31, 2015 was held by four financial institutions.
2015 Consolidated Financial Statements | Page 48 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
The Company’s exposure to credit risk relating to cash and
cash equivalents and restricted cash on deposit segmented by geographic area at December 31, 2015 and 2014 was as follows:
| |
2015 | | |
2014 | |
Canada | |
| 74 | % | |
| 64 | % |
Belgium | |
| 25 | % | |
| 33 | % |
Germany | |
| 1 | % | |
| 3 | % |
| |
| 100 | % | |
| 100 | % |
Foreign currency risk
Foreign currency risk arises because of fluctuations in exchange
rates. The Company conducts a significant portion of its business activities in currencies other than the Company’s functional
currency of US dollars and the functional currency of its Belgium subsidiary in euros. This primarily includes Canadian dollar
transactions at the parent company and US dollar transactions at the Company’s subsidiaries in Belgium and Germany.
The Company’s objective in managing its foreign currency
risk is to minimize its net exposure to foreign currency cash flows by converting foreign denominated financial assets into the
applicable currency of the subsidiary to the extent practicable to match the obligations of its financial liabilities. The Company
also periodically enters into foreign exchange forward contracts to limit its exposure to foreign currency rate fluctuations.
All of the foreign exchange forward contracts expire within the following 12 months.
Financial assets and financial liabilities denominated in foreign
currencies will be affected by changes in the exchange rate between the functional currency and these foreign currencies. This
primarily includes cash and cash equivalents; trade and other receivables; trade and other payables and other long-term liabilities,
which are denominated in foreign currencies.
The Company recognized a net foreign exchange loss of $428 (2014
- a net gain of $117) for the year ended December 31, 2015.
As at December 31, 2015, the Company had foreign exchange forward
contracts totalling $1,750 in notional USD and £150 in notional GBP, all due within one year.
At December 31, 2015, if the Canadian dollar had strengthened/weakened
by 10% against the US dollar, with all other variables held constant, the net loss would have been lower/higher by $613 as a result
of foreign exchange on the translation of Canadian dollar denominated balances.
At December 31, 2015, if the euro had strengthened/weakened by
10% against the US dollar, with all other variables held constant, the net loss would have been lower by $287 or higher by $318
as a result of foreign exchange on the translation of euro denominated balances.
Interest rate risk
Cash flow interest rate risk arises because of the fluctuation
in market interest rates. The Company’s objective in managing interest rate risk is to maximize the return on its cash and
cash equivalents and restricted cash. The Company is subject to interest rate risk on its short-term borrowings offset by cash
and cash equivalents. The Company’s borrowings are at a fixed interest rate. Given the prevailing interest rates earned
by the Company’s short-term investments, a 10% increase or decrease would have minimal impact on the Company’s results.
2015 Consolidated Financial Statements | Page 49 |
Hydrogenics Corporation
Notes to Consolidated Financial Statements
For the years ended December 31, 2015 and 2014
(in thousands of US dollars, except share and per share amounts)
Note 33 – 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’s capital is composed of debt and shareholders’
equity as follows:
| |
December 31, 2015 | | |
December 31, 2014 | |
Shareholders’ equity | |
$ | 20,248 | | |
$ | 15,476 | |
Operating borrowings | |
| 1,086 | | |
| - | |
Long-term debt and repayable government contributions | |
| 10,326 | | |
| 3,475 | |
Total | |
| 31,660 | | |
| 18,951 | |
Less Cash and cash equivalents and restricted cash | |
| 24,901 | | |
| 10,421 | |
Total capital employed | |
$ | 6,759 | | |
$ | 8,530 | |
2015 Consolidated Financial Statements
|
Page 50 |
Exhibit 99.2
Hydrogenics Corporation
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 Audited Consolidated Financial Statements and related notes for the year ended December 31,
2015. 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 March 8, 2016, unless otherwise stated.
Additional information about Hydrogenics, including our
2015 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 25 of this MD&A.
“Hydrogenics” or the “Company”
or the words “our,” “us” or “we” refer to Hydrogenics Corporation and its subsidiaries.
2015 Management’s Discussion and Analysis | Page 2 |
Management’s
Discussion and Analysis
Table of Contents |
Section |
Description |
Page |
1 |
Our Business |
4 |
2 |
Growth Strategy |
4 |
3 |
Overall Performance |
6 |
4 |
Operating Results |
9 |
5 |
Financial Condition |
12 |
6 |
Summary of Quarterly Results |
13 |
7 |
Fourth Quarter |
13 |
8 |
Outlook |
13 |
9 |
Liquidity |
15 |
10 |
Capital Resources |
18 |
11 |
Off-Balance Sheet Arrangements |
18 |
12 |
Related Party Transactions |
18 |
13 |
Critical Accounting Estimates |
19 |
14 |
Changes in Accounting Policies and Recent Accounting
Pronouncements |
19 |
15 |
Disclosure Controls |
19 |
16 |
Internal Control Over Financial Reporting |
20 |
17 |
Reconciliation of Non-IFRS Measures |
20 |
18 |
Risk Factors |
22 |
19 |
Outstanding Share
Data |
25 |
20 |
Forward-looking Statements |
25 |
2015 Management’s Discussion and Analysis | Page 3 |
1 Our Business
Hydrogenics, together with its subsidiaries, is a globally recognized
leader in the design, development and manufacture of hydrogen generation, energy storage and fuel cell products based on water
electrolysis technology and proton exchange membrane (“PEM”), technology. Hydrogenics’ mission is to provide
safe, secure, sustainable and emission free energy as a leading global provider of clean energy solutions based on hydrogen. We
maintain operations in Belgium, Canada and Germany with satellite offices in the United States and branch offices in Russia and
Indonesia.
We believe our intellectual property provides us with a strong
competitive advantage and represents a significant barrier to entry. As part of our portfolio, we maintain a collection of
innovative energy storage patents with broad and exclusive rights concerning the use of excess electrical power to produce
hydrogen from water while simultaneously providing electric grid stabilization services. We believe these patents place
Hydrogenics in the strongest possible position to build our company over the long term and will continue to strengthen our
efforts as electric grid operators look to hydrogen as an important strategy for utility-scale energy storage.
We operate in various geographic markets and organize ourselves
in two reportable segments being Onsite Generation and Power.
2 Growth Strategy
Our strategy is to develop electrolyzer and fuel cell products for
sale to OEMs, electric utilities, gas utilities, merchant gas companies and end-users requiring highly reliable products offered
at competitive prices. We believe our success will be substantially predicated on the following factors:
Increasing Market Penetration
At December 31, 2015, we had 16 full-time staff employed in sales
functions. Our senior management team is also actively involved in sales initiatives, including maintaining close contact with
our more significant customers. In the year, significant efforts were made in the sales function; including repositioning of responsibilities
to permit dedicated leadership for the sales function, obtaining detailed assessments of markets, and leveraging our strategic
relationships with companies such as Enbridge and Kolon.
2015 was a strong year for product launches. In Power Systems,
we launched a 1MW stationary baseload power system with our Korean partner Kolon Water and Energy. The unit began commercial
operation in October 2015 at a refinery site in Korea. On the mobility front Hydrogenics signed a 10 year contract to develop
and supply hydrogen fuel cell propulsion systems for Alstom Transport for passenger rail in Europe, In Q4 the first
prototype was shipped to Alstom Transport to begin early trials. In On Site Generation, our customer E.ON, a major
global energy and gas company headquartered in Germany, went live with our 1.5 Megawatt (“MW”) unit using our
newer PEM electrolyzer technology in Hamburg Germany. This energy storage application is in addition to the 2MW application
of alkaline electrolysis that was sold in 2012. We are now the only company in the world to successfully launch
PEM technology that can absorb a MW of energy in a single PEM stack. In addition, Hydrogenics shipped and successfully
started a 0.5 MW electrolyser for Kurion, an environmental company specializing in the cleanup of radioactive contaminated
water. Kurion has been a key player in the decontamination of the Fukushima plant in Japan. The electrolyser is
part of a pilot plant that if successful could be the technology selected by Japan to remediate the expanding volume of
tritiated water at Fukushima.
2015 Management’s Discussion and Analysis | Page 4 |
Additionally, we have developed or maintained relationships with
third parties we believe are well positioned in our relevant markets to identify new market opportunities for our products. In
the industrial gas market, these third parties include leading merchant gas companies, such as Air Liquide and Linde Gas. In the
energy storage market, it is leveraging our strategic relationship with Enbridge as well as our global contacts with other large
utilities, gas companies and regulators
We are also noting increased success in partnering with companies
to develop hydrogen fueling stations using our electrolysis technology as automobile manufacturers begin to roll out hydrogen fuel
cell vehicles at commercial production levels (principally for the European, Asian and California markets).
Future Markets
Hydrogenics is pioneering Power-to-Gas, an innovative
energy conversion and storage solution using electrolysis. Power-to-Gas is the three-step process of integrating renewable sources
of generation by load-following, converting the surplus electricity to hydrogen or renewable gas, and leveraging the existing natural
gas infrastructure for seasonal storage. An electrolyzer provides the rapid, dynamic response to the Independent System Operator’s
signals to accurately load-follow the intermittent generation pattern of renewable sources such as wind turbines. The hydrogen
produced is injected into the natural gas system and can be intermingled with natural gas and thus additional storage vessels are
not needed. Surplus electricity can be stored for consecutive days or even consecutive weeks without the need to discharge; it
is a seasonal storage capability. This energy storage solution bridges the power grid and the gas grid to unlock new options. It
enhances the flexibility of managing the power grid and provides the means to capitalize on the vast potential of alternative sources
of generation to produce a local source of renewable gas to de-carbonize the gas system. Hydrogenics is working with global energy
utilities such as E.ON and Enbridge to commercialize Power-to-Gas energy storage globally.
We also are promoting electrolysis in hydrogen fueling stations
as possible Power-to-Gas solutions at a distributed storage level. The electrolyzer can be used to generate hydrogen during
periods of surplus energy levels, thus absorbing the excess energy at lower cost to generate hydrogen. This hydrogen is then
stored at site and can be used to fuel hydrogen cars and buses. If the surplus power is generated from renewable energy sources
such as wind and solar, the potential exists for a completely green solution as hydrogen fuel cell vehicles emissions emit only
water vapor.
Within our OnSite Generation business segment, we remain focused
on two key areas. First, reducing the cost of our HySTAT® alkaline electrolyzer and improving its efficiency.
Innovation in the design, elimination of non-value adding components, improved component sourcing and fundamental electrochemical
improvements have all contributed to ongoing cost reduction initiatives in 2015. We also recognize the opportunity for larger scale
energy storage installations and are continuing to develop significantly scale-up products to better meet this market opportunity.
Second, we are looking at continuing the rollout of PEM electrolysis, particularly in the area of Power-to-Gas where the PEM technology
provides a more scalable solution than alkaline electrolysis at higher power levels.
Within our Power Systems business segment, we spent much of 2015
focusing on further reducing the cost of a fully integrated fuel cell system inclusive of its components. We have achieved
significant cost reduction milestones but will continue to further improve the financial viability of the product in the marketplace
by looking at both scale (increased volume ordering from suppliers) as well as bringing components of the supply chain in-house
to further reduce production cost.
2015 Management’s Discussion and Analysis | Page 5 |
3 Overall Performance
Selected Financial information
(in thousands of US dollars, except per share amounts)
| |
| |
| |
| |
2015 vs
2014 | |
2014 vs
2013 |
| |
| 2015 | | |
| 2014 | | |
| 2013 | | |
%
Favourable (Unfavourable) | | |
%
Favourable (Unfavourable) | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
OnSite Generation | |
$ | 23,556 | | |
$ | 30,192 | | |
$ | 24,078 | | |
| (22 | %) | |
| 25 | % |
Power Systems | |
| 12,308 | | |
| 15,356 | | |
| 18,335 | | |
| (20 | %) | |
| (16 | %) |
Total Revenue | |
| 35,864 | | |
| 45,548 | | |
| 42,413 | | |
| (21 | %) | |
| 7 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 5,971 | | |
| 11,214 | | |
| 12,061 | | |
| (47 | %) | |
| (7 | %) |
Gross Margin % | |
| 17 | % | |
| 25 | % | |
| 28 | % | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Selling, General and Administrative Expenses | |
| 10,215 | | |
| 11,756 | | |
| 16,275 | | |
| 13 | % | |
| 28 | % |
Research and Product Development Expenses | |
| 4,070 | | |
| 3,284 | | |
| 2,566 | | |
| (24 | %) | |
| (28 | %) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Income (Loss) from Operations | |
| (8,314 | ) | |
| (3,826 | ) | |
| (6,783 | ) | |
| (117 | %) | |
| 44 | % |
Net Loss | |
$ | (11,442 | ) | |
$ | (4,523 | ) | |
$ | (8,908 | ) | |
| (153 | %) | |
| 49 | % |
Net Loss Per Share | |
$ | (1.12 | ) | |
$ | (0.47 | ) | |
$ | (1.04 | ) | |
| (138 | %) | |
| 55 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Cash Operating Costs1 | |
$ | 14,102 | | |
$ | 13,939 | | |
$ | 13,546 | | |
| (1 | %) | |
| (3 | %) |
Adjusted EBITDA1 | |
| (7,875 | ) | |
| (2,539 | ) | |
| (1,217 | ) | |
| (210 | %) | |
| (109 | %) |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Cash used in Operating Activities | |
| (5,838 | ) | |
| (14,944 | ) | |
| (9,197 | ) | |
| 61 | % | |
| (62 | %) |
Cash & Cash Equivalents (including Restricted Cash) | |
| 24,901 | | |
| 10,421 | | |
| 13,847 | | |
| 139 | % | |
| (25 | %) |
Total Assets | |
| 59,368 | | |
| 47,555 | | |
| 40,070 | | |
| 25 | % | |
| (19 | %) |
Total Non-Current Liabilities (excluding Deferred Revenue) | |
$ | 4,059 | | |
$ | 4,619 | | |
$ | 4,076 | | |
| 12 | % | |
| (13 | %) |
| 1 | Cash operating costs and
Adjusted EBITDA are Non-IFRS measures. Refer to section 17 - Reconciliation of Non-IFRS
Measures. |
2015 Management’s Discussion and Analysis | Page 6 |
Highlights for the year ended December 31, 2015 compared
to the year ended December 31, 2014
| · | Revenues decreased by $9.7 million or 21% to $35.9 million for the year ended December 31, 2015
compared to $45.5 million in the prior year. Of the total decrease of $9.7 million, $5.0 million or 52% of the decline was due
to the impact of the weakening euro year-over-year against the US dollar. The balance of the decline of $4.7 million was due to
reduced order volume in both the Power Systems and OnSite Generation groups. |
| · | During 2015, the Company received new orders for $14.9 million (2014 - $36.3 million) for the OnSite
Generation business and $58.5 million (2014 - $17.2 million) for the Power Systems business. |
| |
| |
| |
| |
| |
|
| |
Dec 31, 2014 backlog | |
Orders Received | |
FX | |
Orders Delivered/ Revenue Recognized | |
December 31, 2015 backlog |
OnSite Generation | |
$ | 28.3 | | |
$ | 14.9 | | |
$ | (2.5 | ) | |
$ | 23.6 | | |
$ | 17.1 | |
Power Systems | |
| 33.9 | | |
| 58.5 | | |
| (3.9 | ) | |
| 12.3 | | |
| 76.2 | |
Total | |
$ | 62.2 | | |
$ | 73.4 | | |
$ | (6.4 | ) | |
$ | 35.9 | | |
$ | 93.3 | |
| · | Of the above backlog of $93.3 million, we expect to recognize $22.3 million in the following twelve
months as revenue. In addition, revenue for the year ending December 31, 2016 will also include orders received and delivered in
2016. |
| · | Gross
profit decreased $5.2 million to $6.0 million, or 16.6% of revenue, driven by the decrease
in revenue during 2015 bringing production capacity down from normal levels, several
key first-of-a-kind projects that had a lower margin profile, changes in product mix
(including a lower proportion of custom projects, including engineering services), as
well as gross margin compression as a result of the weakening euro and Canadian dollar
relative to the US dollar. |
| · | Selling,
general and administrative (“SG&A”) expenses for 2015 of $10.2 million
were lower by $1.6 million or 13% compared to $11.8 million for the year ended December
31, 2014. The improvement over the prior year was due largely in part to the weakening
of the euro and the Canadian dollar relative to the US dollar. Also contributing to the
decrease is the reversal of previously recorded stock based compensation due to changes
in managements estimates, as well as a mark-to-market adjustment on the deferred share
units (“DSUs”) and restricted share units (“RSUs”)
compared to the prior year as a result of the decline in share
price to C$12.35 the end of 2015 from C$15.42 per share at the end of 2014. |
| · | Research
and product development (“R&D”) expenses were $4.1 million for the year ended
December 31, 2015 compared to $3.3 million in 2014, with the increase due primarily to
a reduction in R&D funding in OnSite Generation of $1.0 million, increased spending
on R&D projects, specifically related to power to gas projects partially offset by
a reduction of R&D expenses due to the weakening of the euro and the Canadian dollar
relative to the US dollar. |
| · | The
Adjusted EBITDA loss increased to $7.9 million for the year ended December 31, 2015 from
$2.5 million for last year, for the reasons noted above. |
| ·
| Net loss for the year ended December 31, 2015, was $11.4 million or $1.12 per share compared
to a net loss of $4.5 million or $0.47 per share for the prior year. The net loss in the current period
reflects i) the lower revenues and lower margins ($5.2 million); ii) an increase in other finance loss
due to the issuance and subsequent adjustment of warrants ($0.9 million) and fair value adjustments
relating to held for trading foreign exchange forward contract ($0.6 million); iii) increased interest
expense due to interest expense on the institutional long-term debt entered into in 2015 ($0.5 million),
financing costs related to the institutional long-term debt ($0.3 million); and iv) an
increase in R&D expenses ($0.8 million). This was partially offset by the decrease
in SG&A expenses described above. |
2015 Management’s Discussion and Analysis | Page 7 |
| · | Cash operating costs were $14.1 million in the current year compared to $13.9 million for 2014,
with the higher costs a result of an increase in R&D expenditures partially offset by lower SG&A expenses. |
Highlights for the year ended December 31, 2014 compared
to the year ended December 31, 2013
| · | Revenues increased by $3.1 million or 7% to $45.5 million for the year ended December 31, 2014
compared to $42.4 million in the prior year. Increase in revenue was due to increases in Onsite Generation revenues offset by decreases
in Power Systems revenue in the current year as a result of orders from Q1 and Q2 of 2013 with no comparable orders during the
same periods in 2014. During the 2014, the Company received new orders for $36.3 million (2013 - $27.6 million) for the OnSite
Generation business and $17.2 million (2013 - $9.3 million) for the Power Systems business. |
| |
| |
| |
| |
| |
|
| |
Dec 31, 2013 backlog | |
Orders Received | |
FX | |
Orders Delivered/ Revenue Recognized | |
December 31, 2014 backlog |
OnSite Generation | |
$ | 22.5 | | |
$ | 36.3 | | |
$ | (0.3 | ) | |
$ | 30.2 | | |
$ | 28.3 | |
Power Systems | |
| 34.5 | | |
| 17.2 | | |
| (2.5 | ) | |
| 15.3 | | |
| 33.9 | |
Total | |
$ | 57.0 | | |
$ | 53.5 | | |
$ | (2.8 | ) | |
$ | 45.5 | | |
$ | 62.2 | |
| · | SG&A expenses for 2014 of $11.8 million
were lower by $4.5 million or 28% compared to $16.3 million for the year ended December 31, 2013. The improvement over the prior
year was primarily due to the mark-to-market adjustment on the restricted share units (“RSUs”) and deferred share units
(“DSUs”) compared to the prior year as a result of the decline in share price to C$15.42 the end of 2014 from C$20.42
per share at the end of 2013. |
| · | R&D expenses were $3.3 million for the year ended
December 31, 2014 compared to $2.6 million in 2013, with the increase due to the development of the Company’s Celerity™
fuel power system for medium and heavy duty vehicles and power to gas projects. |
| · | Net loss for the year ended December 31, 2014, was $4.5 million or $0.47 per share compared to
a net loss of $8.9 million or $1.04 per share for the prior year. The 49% improvement in the net loss reflects the impact of the
lower mark-to-market adjustment on the value of RSUs and DSUs in the current year indicated above, somewhat offset by lower margins
in the current year compared to the prior year. |
| · | Cash operating costs were $13.9 million in the current year compared to $13.5 million for 2013,
with the higher costs a result of an increase in R&D spending partially offset by lower SG&A expenses due to the impact
of exchange rate fluctuations. |
| · | The Adjusted EBITDA loss increased to $2.5 million for the year ended December 31, 2014 from $1.2
million for 2013. The decline resulted from lower margin sales and higher research and development costs in the current year. |
2015 Management’s Discussion and Analysis | Page 8 |
4 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.
Historically the demand for onsite generation of hydrogen gas has
been driven by relatively modest market applications for industrial hydrogen. A typical unit for these applications would generate
20-60 normal cubic meters of hydrogen and consume 100-300kW of electrical energy. Recently we have seen several applications which
would consume 10-100 megawatts (MW) of power, which is 100-300 times larger than a typical industrial unit to date. The emergence
of these applications has appeared slowly with customer and government support. Today several third party studies and internal
work by lead customers suggests substantial long term opportunity for “power to gas”, an application for energy conversion
and storage. Very large scale industrial applications are also appearing such as de-tritiation of contaminated waste water at nuclear
reactor sites.
Our OnSite Generation products are also sold to merchant gas companies
and end-users requiring high purity hydrogen for industrial applications. These uses of our product are subject to fluctuation
in new capital expenditures and plant expansions. We also sell and service products for hydrogen fueling stations for transportation
applications.
The worldwide market for hydrogen is estimated
at $5 billion annually. 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
| |
Years ended December 31 |
| |
| 2015 | | |
| 2014 | | |
| %
Favourable (Unfavourable) | |
Revenues | |
$ | 23,556 | | |
$ | 30,192 | | |
| (22 | %) |
Gross profit | |
| 3,391 | | |
| 6,102 | | |
| (44 | %) |
Gross margin % | |
| 14 | % | |
| 20 | % | |
| (29 | %) |
Selling, General and Administrative Expenses | |
| 2,665 | | |
| 3,293 | | |
| 19 | % |
Research and Product Development Expenses | |
| 1,917 | | |
| 1,070 | | |
| (79 | %) |
Segment Income (Loss) | |
$ | (1,191 | ) | |
$ | 1,739 | | |
| (168 | %) |
Revenues decreased by $6.6 million or 22% to $23.6
million for the year ended December 31, 2015 compared to $30.2 million for 2014. Revenue in 2015 consisted of the sale of electrolyzer
products to customers in industrial gas markets, hydrogen fueling stations and energy storage projects. Revenues decreased due
to a decline in new capital expenditures and plant expansion expenditures (in particular in key markets such as Eastern Europe
and Russia) as well as the weakening of the euro which impacted revenue by approximately $3.7 million. Orders awarded for the year
ended December 31, 2015 were $14.9 million (December 31, 2014 – $36.3 million). At December 31, 2015 we had $14.8 million
of confirmed orders (December 31, 2014 – $28.3 million), to be delivered and recognized as revenue in 2016.
2015 Management’s Discussion and Analysis | Page 9 |
Gross Margin declined in 2015 to 14% compared to 20%
in 2014 primarily due to the decrease in revenue during 2015, bringing production capacity down from anticipated levels, lower
margin orders – in particular in key first-of-a-kind projects, as well as gross margin compression as a result of the weakening
euro and Canadian dollar relative to the US dollar.
SG&A Expenses were $2.7 million for the year
ended December 31, 2015, a decrease of $0.6 million due to the impact of the weaker euro relative to the US dollar, as well as
reduced sale costs attributable to lower revenue/order intake.
R&D Expenses were $1.9 million during 2015 compared
to spending of $1.1 million for the year ended December 31, 2014 attributable to reduced funding on the current projects, partially
offset by projects nearing the completion stage, as well as the impact of the weaker euro relative to the US dollar.
Segment Income (Loss) decreased $2.9 million to a
loss of $1.2 million for the year ended December 31, 2015 compared to a gain of $1.7 million for 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 three 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 trains, 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. Our target addressable markets (stationary power, telecom back up power, data centre and mobility) are
estimated to be in excess of $2 billion specifically related to hydrogen power technology.
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
| |
Years ended December 31 |
| |
| 2015 | | |
| 2014 | | |
| %
Favourable (Unfavourable) | |
Revenues | |
$ | 12,308 | | |
$ | 15,356 | | |
| (20 | %) |
Gross Profit | |
| 2,580 | | |
| 5,112 | | |
| (50 | %) |
Gross margin % | |
| 21 | % | |
| 33 | % | |
| (37 | %) |
Selling, General and Administrative Expenses | |
| 3,920 | | |
| 4,143 | | |
| 5 | % |
Research and Product Development Expenses | |
| 2,126 | | |
| 2,194 | | |
| 3 | % |
Segment Income (Loss) | |
$ | (3,466 | ) | |
$ | (1,225 | ) | |
| (183 | %) |
2015 Management’s Discussion and Analysis | Page 10 |
Revenues decreased $3.0 million or 20% to $12.3 million
for the year ended December 31, 2015 compared to $15.4 million for 2014. Revenue for 2015 excluding the foreign exchange impact
due to the weakening of the euro, decreased $1.7 million. While order intake significantly increased, in the current year there
was a decrease in the revenue recognized due to the long term nature of significant projects. Orders awarded for the year ended
December 31, 2015 were $58.5 million (December 31, 2014 - $17.2 million). At December 31, 2015, backlog was $76.2 million of confirmed
orders for Power Systems’ products and services (December 31, 2014 - $33.9 million), with $7.5 million of this backlog expected
to be recognized as revenue in 2016.
Gross Margin declined to 21% during 2015 from 33%
for the prior year, with the decline in the current period reflecting gross margin compression as a result of the weakening euro
and Canadian dollar relative to the US dollar, as well as a lower proportion of custom projects, including engineering services,
which generally have higher gross margins combined with the impact of the lower margin German project to a research organization
in the current period.
SG&A Expenses decreased by 5% to $3.9 million
for the year ended December 31, 2015 compared to $4.1 million for the prior year. Expenses were lower in the current year due to
the weakening Canadian dollar relative to the US dollar.
R&D Expenses at $2.1 million for the year ended
December 31, 2015 were consistent with the year ended December 31. 2014, due to increased spending on R&D projects, specifically
related to power to gas projects, offset by the impact of the weakening Canadian dollar relative to the US dollar.
Segment Loss declined $2.2 million to a loss of $3.5
million for the year ended December 31, 2015 compared to a loss of $1.2 million for the year ended December 31, 2014.
Corporate and Other
Selected Financial Information
| |
Years ended December 31 |
| |
| 2015 | | |
| 2014 | | |
| %
Favourable (Unfavourable) | |
Selling, general and administrative expenses | |
$ | 3,630 | | |
$ | 4,320 | | |
| 16 | % |
Research and product development expenses | |
| 27 | | |
| 20 | | |
| (35 | %) |
Net other finance gains (losses) | |
| (1,338 | ) | |
| (180 | ) | |
| (643 | %) |
Loss on joint venture | |
| (40 | ) | |
| (94 | ) | |
| 57 | % |
Interest income (expense) | |
| (1,322 | ) | |
| (540 | ) | |
| (145 | %) |
Foreign exchange gains (losses) net | |
| (428 | ) | |
| 117 | | |
| (466 | %) |
Total | |
$ | (6,785 | ) | |
$ | (5,037 | ) | |
| (35 | %) |
SG&A Expenses decreased by $0.7 million or 16%
to $3.6 million for the year ended December 31, 2015 compared to $4.3 million for 2014. The improvement over the prior year was
due largely in part to the weakening of the euro and the Canadian dollar relative to the US dollar. Also contributing to the decrease
is the reversal of previously recorded stock based compensation due to changes in managements estimates, as well as a mark-to-market
adjustment on the deferred share units (“DSUs”) compared to the prior year as a result of the decline in share price
to C$12.35 the end of 2015 from C$15.42 per share at the end of 2014.
R&D Expenses were less than $0.1 million for the
year ended December 31, 2015 consistent with the prior year and reflect the cost of maintaining our intellectual property.
2015 Management’s Discussion and Analysis | Page 11 |
Net Other Finance Gains (Losses) increased by $1.1
million to a loss of $1.3 million for the 2015 year compared to a loss of $0.2 million at the end of 2014. The decrease is
due to i) the issuance of warrants ($0.9 million); and (ii) fair value adjustments relating to held for trading foreign exchange
forward contract ($0.6 million).
Interest expense increased by $0.8 million to $1.3
million for the 2015 year. The increase is due to interest expense on the institutional long-term debt entered into in 2015 ($0.5
million); and (iv) financing costs related to the institutional long-term debt ($0.3 million).
5 Financial Condition
| |
| December
31 | | |
| December
31 | | |
| Increase/(decrease) | |
| |
| 2015 | | |
| 2014 | | |
| $ | | |
| % | |
Cash, cash equivalents,
restricted cash and short-term investments | |
$ | 24,901 | | |
$ | 10,421 | | |
$ | 14,480 | | |
| 139 | % |
Trade and other receivables | |
| 10,419 | | |
| 12,900 | | |
| (2,481 | ) | |
| (19 | %) |
Inventories | |
| 14,270 | | |
| 14,698 | | |
| (428 | ) | |
| (3 | %) |
Operating borrowings | |
| 1,086 | | |
| - | | |
| 1,086 | | |
| 100 | % |
Trade and other payables | |
| 7,776 | | |
| 11,769 | | |
| 3,993 | | |
| (34 | %) |
Financial liabilities | |
| 9,034 | | |
| 1,387 | | |
| 7,647 | | |
| 551 | % |
Warranty provisions (current
and non-current) | |
| 3,193 | | |
| 2,547 | | |
| 646 | | |
| 25 | % |
Deferred revenue (current and
non-current) | |
| 14,910 | | |
| 12,912 | | |
| 1,998 | | |
| 15 | % |
Other
non-current liabilities | |
$ | 3,121 | | |
$ | 3,464 | | |
$ | (343 | ) | |
| (10 | %) |
Cash, cash equivalents, restricted cash and short-term investments
were $24.9 million, an increase of $14.5 million or 139%. Refer to Section 9 - Liquidity for a discussion of the change
in cash, cash equivalents, restricted cash and short-term investments.
Trade and other receivables were $10.4 million, a
decrease of $2.5 million or 19% due to the collection of outstanding receivables in the period as well as the revaluation of Canadian
and euro receivables at current rates as well as a decrease 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 $14.3 million compared to $14.7 million,
a decrease of 3%. Excluding the foreign exchange impact as a result of the lower value of the euro and Canadian dollar when compared
to the US dollar in the current period, inventories in fact increased approximately $1.1 million as a result of expected product
deliveries during early 2016.
Trade and other payables were $7.8 million, a decrease
of $4.0 million compared to $11.8 million at the end of December 31, 2014. Excluding the impact of an decrease due to the foreign
exchange impact as a result of the lower value of the euro and Canadian dollar when compared to the US dollar in the current period,
trade and other payables decreased $3.3 million. The decrease is a result of greater suppliers payments for inventory shipped during
the fourth quarter of 2015 as compared to 2014.
Financial liabilities were $9.0 million, an increase
of $7.6 million, primarily as a result of the current portion of the institutional debt of $7.1 million, combined with the warrant
liability of $0.8 million.
Warranty provisions were $3.2 million, an increase
of $0.6 million from $2.5 million at December 31, 2014. Excluding the impact of an decrease due to the foreign exchange impact
as a result of the lower value of the euro and Canadian dollar when compared to the US dollar in the current period, the warranty
provision increased $0.9 million. The increase is due to additional provisions related to the delivery of newly re-designed alkaline
electrolyzers in our OnSite Generation segment which may require additional costs to finalize the product design and units located
at customer sites.
2015 Management’s Discussion and Analysis | Page 12 |
Deferred revenues were $14.9 million, an increase
of $2.0 million or 15%. Excluding the impact of an decrease due to the foreign exchange impact as a result of the lower value of
the euro and Canadian dollar when compared to the US dollar in the current period, the deferred revenue increased $2.8 million
reflecting customer deposits received on order bookings in the OSG business segment.
Other non-current liabilities were $3.1 million at
December 31, 2015, a decrease of $0.3 million or 10%, due primarily to repayments on the repayable government contributions during
2015.
6 Summary of Quarterly Results
The following table highlights selected financial information for
the eight consecutive quarters ended December 31, 2015.
| |
| 2015 Q4 | | |
| 2015 Q3 | | |
| 2015 Q2 | | |
| 2015 Q1 | | |
| 2014 Q4 | | |
| 2014 Q3 | | |
| 2014 Q2 | | |
| 2014 Q1 | |
Revenues | |
$ | 11,321 | | |
$ | 9,644 | | |
$ | 7,368 | | |
$ | 7,531 | | |
$ | 15,673 | | |
$ | 11,093 | | |
$ | 10,723 | | |
$ | 8,059 | |
Gross Profit | |
| 1,675 | | |
| 2,101 | | |
| 1,042 | | |
| 1,153 | | |
| 2,989 | | |
| 3,067 | | |
| 3,240 | | |
| 1,918 | |
Gross Margin % | |
| 15 | % | |
| 22 | % | |
| 14 | % | |
| 15 | % | |
| 19 | % | |
| 28 | % | |
| 30 | % | |
| 24 | % |
Adjusted EBITDA1 | |
| (1,838 | ) | |
| (1,382 | ) | |
| (2,342 | ) | |
| (2,313 | ) | |
| 160 | | |
| (683 | ) | |
| (288 | ) | |
| (1,728 | ) |
Net (Loss) Income | |
| (2,122 | ) | |
| (2,192 | ) | |
| (3,701 | ) | |
| (3,427 | ) | |
| 612 | | |
| (1,262 | ) | |
| (125 | ) | |
| (3,748 | ) |
Net (Loss) income Per Share - (Basic and Fully Diluted) | |
$ | (0.20 | ) | |
$ | (0.22 | ) | |
$ | (0.37 | ) | |
$ | (0.34 | ) | |
$ | 0.06 | | |
$ | (0.13 | ) | |
$ | (0.01 | ) | |
$ | (0.40 | ) |
Weighted Average Common Shares Outstanding | |
| 10,518,178 | | |
| 10,092,375 | | |
| 10,091,498 | | |
| 10,090,481 | | |
| 10,089,891 | | |
| 10,089,508 | | |
| 9,605,220 | | |
| 9,073,527 | |
1. Adjusted EBITDA
is a Non-IFRS measure, refer to Section 17 – Reconciliation of Non-IFRS Measures.
7 Fourth Quarter
Revenues for the fourth quarter were $11.3 million
as a result of a higher volume of large orders being delivered in the fourth quarter compared to prior quarters.
Gross Margin was 15% in the fourth quarter, lower
than previous quarters, due to product mix (higher volume of lower margin product in the quarter, additional warranty costs charged
in the period in the OnSite Generation segment for first of a kind projects, as well as gross margin compression as a result of
the weakening euro and Canadian dollar relative to the US dollar and its impact on the procurement of US dollar based components
of cost of sales for euro revenue business.
Adjusted EBITDA was a loss of $1.8 million, an increase
in the loss from the third quarter due to the Company’s lower gross margin.
Net loss was $2.1 million compared to a net loss of
$2.2 million in the prior quarter due to the Company’s lower gross margin in the quarter, partially offset by reduced SG&A
expenses as well as reduced R&D expenditures.
8 Outlook
Our strategy is to profitably grow hydrogen energy solutions for
diverse applications globally. During 2015 several important milestones were realized in support of this strategy and position
us well for further growth in 2016 and onward. Most notably we commissioned our second power to gas facility with E.ON. This milestone
firmly establishes the commercial scale building block for much multi MW facilities in the future. We have communicated the pipeline
condition for this application at approximately 80 MW of projects worth in excess of $80 million. The realization and timing of
these opportunities is dependent on competitive process, funding and policy evolution in the European Union of which we expect
further clarity in 2016.
2015 Management’s Discussion and Analysis | Page 13 |
Although 2015 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 and our pipeline remains robust. 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.
For stationary power fuel cell applications, the delivery and successfully
commissioning and commercial operation of a one MW stationary fuel cell power plant in South Korea with our partner Kolon opens
opportunities for future growth in stationary power applications in Korea as the success of the pilot plant provides the potential
opportunity to scale into a multi-megawatt installation at the current pilot site and other sites.
The third milestone achieved this year which impacts our outlook
is the company’s largest commercial order for propulsion systems with Alstom Transport at 50 million euros. This opportunity
shows the commercial maturity and strong competitive positioning of our fuel cell technology. The first prototype of this order
was delivered in Q4. We anticipate further opportunity for our heavy duty fuel cell modules in other propulsion applications in
the near future.
Finally, we recently disclosed our participation with our partner
Kurion for a process to remove tritium from nuclear reactor waste water. The pilot plant was delivered and successfully started
in Q4 of 2015. Should the current pilot prove successful and be selected by the Japanese government, Hydrogenics would supply
an electrolysis process for more than 100 megawatts. The timing and full realization of these four opportunities cannot be assured
or specifically established. It is however important to understand the magnitude of these opportunities and the transformative
impact that any one of them will have on the business going forward.
The traditional on-site industrial hydrogen market has seen weakness
in the most recent quarter. Success 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 December 31, 2015, our order backlog
was $93.3 million (December 31, 2014 - $62.2 million) spread across numerous geographical regions, of which $22.3 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 2017.
2015 Management’s Discussion and Analysis | Page 14 |
9 Liquidity
Cash Used in Operating Activities
| |
Year ended December 31 |
| |
| 2015 | | |
| 2014 | | |
| $ Change | |
Net loss | |
$ | (11,442 | ) | |
$ | (4,523 | ) | |
$ | (6,919 | ) |
(Increase) decrease in restricted cash | |
| 2,172 | | |
| (1,825 | ) | |
| 3,997 | |
Net change in non-cash working capital | |
| 1,598 | | |
| (10,457 | ) | |
| 12,055 | |
Other items not affecting cash | |
| 1,834 | | |
| 1,861 | | |
| (27 | ) |
Cash used in operating activities | |
$ | (5,838 | ) | |
$ | (14,944 | ) | |
$ | 9,106 | |
Cash used in operating activities during 2015 decreased by $9.1
million to $5.8 million compared to $14.9 million used in 2014.
Restricted cash decreased by $4.0 million as a result of fewer funds
deposited with certain financial institutions to support bank guarantees and letters of credit on customer deposits.
Net change in non-cash working capital increased $12.1 million as
a result of increases in unearned revenue, a decrease in receivables, partially offset by a decrease in payables as described above
under Section 5 - Financial Condition.
Cash Used in Investing Activities
| |
Year ended
December 31 |
| |
| 2015 | | |
| 2014 | | |
| $ Change | |
Proceeds on disposals | |
$ | - | | |
$ | 10 | | |
$ | (10 | ) |
Purchases of property plant and equipment | |
| (2,028 | ) | |
| (871 | ) | |
| (1,157 | ) |
Receipt of IDF government funding | |
| 118 | | |
| - | | |
| 118 | |
Purchase of intangibles | |
| (105 | ) | |
| (110 | ) | |
| 5 | |
Investment in joint venture | |
| - | | |
| (2,307 | ) | |
| 2,307 | |
Cash used in investing activities | |
$ | (2,015 | ) | |
$ | (3,278 | ) | |
$ | 1,263 | |
Cash used in investing activities during 2015 was $ 2.0
million compared to $3.3 million for the year ended December 31, 2014 with the decrease due to the investment in the Kolon
Hydrogenics joint venture during the year ended December 31, 2014, which did not have a similar expenditure for the year
ended December 31, 2015. Offsetting this decrease was increased purchases of property, plant and equipment of $1.2M. The
current year expenditures related primarily to the Ontario Canada, IESO 2 MW Power-to-Gas storage project, as well as
expenditures on cost-reducing production equipment.
2015 Management’s Discussion and Analysis | Page 15 |
Cash Provided By Financing Activities
| |
Year ended
December 31 |
| |
| 2015 | | |
| 2014 | | |
| $ Change | |
Repayment of repayable government contributions | |
$ | (213 | ) | |
$ | (498 | ) | |
$ | 285 | |
Proceeds of borrowings | |
| 6,866 | | |
| 854 | | |
| 6,012 | |
Proceeds of operating borrowings | |
| 1,113 | | |
| - | | |
| 1,113 | |
Repayment of operating borrowings | |
| - | | |
| - | | |
| - | |
Common shares issued, warrants and options exercised | |
| 17,559 | | |
| 13,666 | | |
| 3,893 | |
Cash provided by (used in) financing activities | |
$ | 25,325 | | |
$ | 14,022 | | |
$ | 11,303 | |
In the second quarter of 2015, we entered into a loan agreement
with a syndicate of lenders for an 18 month facility of $7.5 million. Net proceeds after financing fees were $6.9 million.
On December 16, 2015, the Company completed a public offering for
which the Company issued 2,448,385 shares for gross proceeds of $19.0 million inclusive of the overallotment. Net proceeds after
underwriting fees and expenses were $17.5 million
Changes in cash provided by financing activities for the year ended
December 31, 2015 was $25.3 million compared to $14.0 million in the prior year with the issuance of 2,448,385 shares for net proceeds
of $17.5 million as described above, net proceeds of borrowings & operating borrowings of $8.0 million, partially offset by
the scheduled repayment of repayable government contributions.
In the first quarter of 2014, we filed a final short form base shelf
prospectus with certain Canadian and US securities regulatory authorities. The shelf prospectus allowed us to offer, from time
to time over a 25-month period, up to $100 million of debt, equity and other securities. 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 shares by CommScope) at a price of $15 per share. On May 16, 2014 the Company issued
1,000,000 shares for gross proceeds of $15,000. Net proceeds to the Company, after underwriting fees and expenses were $13,545.
Contractual Obligations
| |
| Total | | |
Less than 1 year
| | |
1-3 years | | |
4-5 years | | |
After 5 years | |
Long-term debt1, including current portion | |
$ | 12,282 | | |
$ | 7,663 | | |
$ | 1,939 | | |
$ | 1,817 | | |
$ | 863 | |
Operating borrowings | |
| 1,086 | | |
| 1,086 | | |
| - | | |
| - | | |
| - | |
Operating leases | |
| 3,065 | | |
| 800 | | |
| 1,226 | | |
| 770 | | |
| 269 | |
Purchase obligations | |
| 9,440 | | |
| 9,435 | | |
| 5 | | |
| - | | |
| - | |
Repayable government contributions | |
| 368 | | |
| 208 | | |
| 160 | | |
| - | | |
| - | |
Total contractual obligations2 | |
$ | 26,241 | | |
$ | 19,192 | | |
$ | 3,330 | | |
$ | 2,587 | | |
$ | 1,132 | |
| 1. | Represents
the undiscounted amounts payable as disclosed below under “Other Loan Facilities”. |
| 2. | The
table excludes the DSU liability of $746 included in our current liabilities which relate
to units that are only settled once a director resigns as a director. |
| 3. | The
table excludes the warrant liability of $752 included in our financial liabilities. |
2015 Management’s Discussion and Analysis | Page 16 |
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$10.85 per common
share. The loan bears interest at an annual rate of 11%.
At December 31, 2015, we had a Belgian joint credit and operating
line facility of €7 million. Under this facility, we may borrow up to a maximum of 75% of the value of awarded sales contracts,
approved by the Belgian financial institution, to a maximum of €0.8 million; and may also borrow up to €1.3 million for
general business purposes, provided sufficient limit exists under the overall facility limit of €7 million. Of this, €3.8
million or approximately $4.2 million was drawn as standby letters of credit and bank guarantees and €1 million or approximately
$1.1 million was drawn as an operating line. At December 31, 2015, we had availability of less than €2.2 million or approximately
$2.4 million (December 31, 2014 - $4.1 million) under this facility for use as letters of credit and bank guarantees.
The credit facility bears interest at EURIBOR plus 1.45% per annum
and is secured by a €1 million secured first charge covering all assets of the borrower. The credit facility contains a negative
pledge precluding the borrower from providing security over its assets. Additionally, our Belgian subsidiary is required to maintain
a solvency covenant, defined as equity plus current account (intercompany account with our Corporate entity), 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 December 31, 2015, we were in compliance with these covenants.
At December 31, 2015 we also had a Canadian credit facility of $2.28
million. At December 31, 2015, $0.11 million was drawn as standby letters of credit and bank guarantees. At December 31, 2015,
we had $2.16 million (December 31, 2014 - $1.88 million) available under this facility for use only as letters of credit and bank
guarantees.
These letters of credit and bank guarantees relate primarily
to obligations in connection with the terms and conditions of our sales contracts. The standby letters of credit and letters of
guarantee may be drawn on by the customer if we fail to perform our 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 had to be incurred between October 1, 2010 and September 30, 2015. After this five-year period, the loan bears interest
at a rate of 3.67% and will require repayment at a rate of 20% per year of the outstanding balance for the five years subsequent
to the sixth anniversary of the first disbursement. There is no availability remaining under this facility at December 31, 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. We were in compliance with this covenant at December 31, 2015.
We 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. We may experience difficulty in obtaining satisfactory financing terms.
Failure to obtain adequate financing on satisfactory terms could have a material adverse effect on Hydrogenics’ results of
operations or financial condition.
2015 Management’s Discussion and Analysis | Page 17 |
10 Capital Resources
We considers our capital employed to consist of shareholders’
equity and total debt, net of cash and cash equivalents as follows:
| |
| December 31, 2015 | | |
| December 31, 2014 | |
Shareholders’ equity | |
$ | 20,248 | | |
$ | 15,476 | |
Operating borrowings | |
| 1,086 | | |
| - | |
Long term debt and repayable government contributions | |
| 10,326 | | |
| 3,475 | |
Total | |
| 31,660 | | |
| 18,951 | |
Less cash and cash equivalents and restricted cash | |
| 24,901 | | |
| 10,421 | |
Capital Employed | |
$ | 6,759 | | |
$ | 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.
11 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. Our forward foreign exchange contracts have been accounted for as financial instruments in our consolidated
financial statements.
In the normal course of operations, we occasionally provide indemnification
agreements, other than those listed above, to counterparties that would require us to compensate them for costs incurred as a result
of changes in laws and regulations or as a result of litigation claims or statutory sanctions that may be suffered by the counterparty
as a consequence of the transaction. The terms of these indemnification agreements will vary. The nature of the indemnification
agreements prevents us from making a reasonable estimate of the maximum potential amount we could be required to pay to counterparties.
No amount has been recorded in the consolidated financial statements with respect to these indemnification agreements as we are
not aware of any claims.
12 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. During 2015, Hydrogenics
made purchases of $0.1 million (2014 - $0.2 million) from this related company. At December 31, 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 2015, the Company had sales to the joint venture of $0.7 million (2014 - $3.1 million). At the end of December 31, 2015
the Company had a receivable of $0.4 million (2014 $0.9 million) owing from the joint venture included in accrued accounts receivable.
2015 Management’s Discussion and Analysis | Page 18 |
13 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 4 of the Company’s 2015 annual audited consolidated
financial statements.
14 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 3 of
our consolidated financial statements and their related notes for the year ended December 31, 2015.
15 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 December 31, 2015.
2015 Management’s Discussion and Analysis | Page 19 |
16 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.
Management assessed the effectiveness of the Company’s internal
control over financial reporting at December 31, 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 believes, at December 31, 2015, the Corporation’s internal control over financial reporting is effective.
Also, management determined there were no material weaknesses in the Corporation’s internal control over financial reporting
at December 31, 2015.
The effectiveness of the Company's internal control over financial
reporting as of December 31, 2015, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report, which is included in the Company’s audited financial statements.
17 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.
2015 Management’s Discussion and Analysis | Page 20 |
The following table provides a reconciliation of Adjusted EBITDA
with net loss:
| |
Year ended December 31 |
| |
| 2015 | | |
| 2014 | |
Net loss | |
$ | (11,442 | ) | |
$ | (4,523 | ) |
Finance loss (income) | |
| 3,128 | | |
| 697 | |
Depreciation of property, plant and equipment and intangible assets | |
| 630 | | |
| 661 | |
RSUs and DSUs (recovery) expense | |
| (234 | ) | |
| 82 | |
Stock-based compensation expense (including PSUs) | |
| 43 | | |
| 544 | |
Adjusted EBITDA | |
$ | (7,875 | ) | |
$ | (2,539 | ) |
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:
| |
Year ended
December 31 |
| |
| 2015 | | |
| 2014 | |
Selling, general and administrative expenses | |
$ | 10,215 | | |
$ | 11,756 | |
Research and product development expenses | |
| 4,070 | | |
| 3,284 | |
Total operating costs | |
$ | 14,285 | | |
$ | 15,040 | |
Less: Depreciation of property, plant and equipment and intangibles | |
| (374 | ) | |
| (475 | ) |
Less: RSUs and DSUs (expense) recovery | |
| 234 | | |
| (82 | ) |
Less: Stock-based compensation expense (including PSUs) | |
| (43 | ) | |
| (544 | ) |
Cash operating costs | |
$ | 14,102 | | |
$ | 13,939 | |
2015 Management’s Discussion and Analysis | Page 21 |
18 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. |
2015 Management’s Discussion and Analysis | Page 22 |
|
· |
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. |
2015 Management’s Discussion and Analysis | Page 23 |
| · | 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. |
2015 Management’s Discussion and Analysis | Page 24 |
19 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 12,540,757 common shares
outstanding at December 31, 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 | |
| 2,448,385 | | |
| 17,549 | | |
| 1,000,000 | | |
| 13,545 | |
Warrants exercised | |
| - | | |
| - | | |
| 57,144 | | |
| 1,217 | |
Stock options exercised | |
| 2,050 | | |
| 16 | | |
| 15,564 | | |
| 185 | |
Adjustment for partial shares on share consolidation | |
| (3 | ) | |
| | | |
| | | |
| | |
At December 31, | |
| 12,540,757 | | |
$ | 365,824 | | |
| 10,090,325 | | |
$ | 348,259 | |
At December 31, 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.
20 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.
2015 Management’s Discussion and Analysis | Page 25 |
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
2016 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.
2015 Management’s Discussion and Analysis |
Page 26 |
Exhibit 99.3
Hydrogenics Corporation
Annual Information Form
For the Fiscal Year Ended December 31, 2015
March 9, 2016
TABLE OF CONTENTS
1. |
Forward-Looking Statements |
1 |
2. |
Corporate Structure |
2 |
3. |
Description of Our Business |
2 |
|
|
Overview |
2 |
|
|
|
OnSite Generation |
3 |
|
|
|
Power Systems |
4 |
|
|
|
History |
5 |
|
|
Industry Trends |
6 |
|
|
Our Strategy |
8 |
|
|
|
Increasing Market Penetration |
8 |
|
|
|
Future Market |
8 |
|
|
|
Advancing Our Product Designs |
9 |
|
|
|
Securing Additional Capital |
9 |
|
|
|
Retaining and Engaging Our Staff |
9 |
|
|
Our Products and Services |
10 |
|
|
|
HySTAT™ Hydrogen Stations |
10 |
|
|
|
HyPM® Fuel Cell Products |
10 |
|
|
Sales and Marketing |
10 |
|
|
Customers |
10 |
|
|
Research and Product Development |
12 |
|
|
Intellectual Property |
12 |
|
|
Manufacturing |
13 |
|
|
Facilities |
13 |
|
|
Human Resources |
14 |
|
|
Legal Proceedings |
14 |
|
|
Government Regulation |
14 |
4. |
Description of Share Capital |
14 |
5. |
Dividends |
14 |
6. |
Market For Securities |
15 |
7. |
Directors and Officers |
15 |
8. |
Interest of Management and Others in Material
Transactions |
20 |
|
|
|
Transactions with Viking Engineering & Tool Co. |
20 |
9. |
RISK FACTORS |
21 |
|
|
|
Risk Factors Related to Our Financial Condition |
21 |
|
|
|
Risk Factors Related to Our Business and Industry |
23 |
|
|
|
Risk Factors Related to Our Products and Technology |
28 |
|
|
|
Risk Factors Related to Ownership of Our Common Shares |
30 |
10. |
TRANSFER AGENTS AND REGISTRARS |
32 |
11. |
MATERIAL CONTRACTS |
32 |
12. |
INTERESTS OF EXPERTS |
32 |
13. |
ADDITIONAL INFORMATION |
32 |
APPENDIX A - AUDIT COMMITTEE CHARTER |
33 |
In this annual information form, the terms “Company,”
“Hydrogenics,” “our,” “us” and “we” refer to Hydrogenics Corporation and, as applicable,
its subsidiaries. All references to dollar amounts are to U.S. dollars unless otherwise indicated. Information contained on our
website is not part of this annual information form. Hydrogenics and the names of Hydrogenics’ products referenced herein
are either trademarks or registered trademarks of Hydrogenics. Other product and company names mentioned herein may be trademarks
and/or service marks of their respective owners.
1.
Forward-Looking Statements
Certain statements contained in the “Description of our Business”,
including: “Industry Trends”, “Our Strategy”, “Research and Product Development”, “Manufacturing”;
and “Risk Factors” sections of this annual information form constitute forward-looking statements and other statements
concerning our objectives and strategies and management’s beliefs, plans, estimates and intentions about our future results,
levels of activity, performance, goals or achievements and other future events. In some cases, you can identify these forward-looking
statements by our use of words such as “anticipates,” “believes,” “continue,” “could,”
“estimates,” “expects,” “intends,” “seeks,” “may,” “plans,”
“potential,” “predicts,” “should,” “strategy” or “will,” or the negative
or other variations of these words, or other comparable words or phrases. We believe the expectations reflected in our forward-looking
statements are reasonable, although we cannot guarantee future results, levels of activity, performance, goals or achievements
or other future events. Our ability to successfully execute our business plan, which includes an increase in revenue, obtaining
additional funding from potential investors or through non-traditional sources of financing and actively managing our liquidity,
will have a direct impact on our business, results of operations and financial condition, and if we are not successful will exacerbate
other risks and uncertainties. In addition, the failure to maintain the listing requirements of the Nasdaq Global Market could
adversely affect our common share price and ability to raise additional funds. Forward-looking statements are subject to many risks
and uncertainties that could 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 and other risk factors described in this annual information
form are not necessarily all of the important factors that could cause actual results to differ materially from those expressed
in our forward-looking statements. You should not place undue reliance on forward-looking statements. In addition, readers are
encouraged to read the section entitled “Risk Factors” in this annual information form for a broader discussion of
the factors that could affect our future performance.
These forward-looking statements are made as of the date of the
annual information form and we assume no obligation to update or revise them to reflect new events or circumstances, except as
required by applicable law.
2.
Corporate Structure
We were incorporated on June 10, 2009 under the Canada Business
Corporations Act, under the name “7188501 Canada Inc.” We changed our name to “Hydrogenics Corporation-Corporation
Hydrogenique” on October 27, 2009 in connection with the transaction involving Algonquin Power Income Fund (“APIF”),
as described further below under “APIF Transaction.”
Old Hydrogenics was founded in 1988 under the name “Traduction
Militech Translation Inc.” It subsequently changed its name to “Société Hydrogenique Incorporée-Hydrogenics
Corporation Incorporated”. From 1990 to August 1995, Société Hydrogenique Incorporée-Hydrogenics
Corporation Incorporated did not actively carry on business. In August 1995, we commenced our fuel cell technology development
business, and in 2000, changed our name to Hydrogenics Corporation - Corporation Hydrogenique. Until October 27, 2009, we
were a wholly owned subsidiary of Old Hydrogenics.
We are a globally recognized developer and provider of hydrogen
generation and fuel cell products. We conduct our business through the following business units: (i) OnSite Generation, which
focuses on hydrogen generation products for renewable energy, industrial and transportation customers; and (ii) Power Systems,
which focuses on fuel cell products for original equipment manufacturers, or OEMs, systems integrators and end users for stationary
applications, including backup power, and motive applications, such as forklift trucks. In November 2007, we announced we
were exiting the fuel cell test products, design, development and manufacturing business that was conducted through our test systems
business unit (“Test Systems”).
Our business units are supported by a corporate services group providing
finance, insurance, investor relations, communications, treasury, human resources, strategic planning, compliance, and other administrative
services.
Our principal executive offices are located at 220 Admiral Boulevard,
Mississauga, Ontario, Canada L5T 2N6. Our telephone number is (905) 361-3660. Our agent for service in the United States for any
actions relating to our common shares is CT Corporation System, 111 Eighth Avenue, New York, New York 10011, (212) 894-8400.
As of March 9, 2016, we beneficially owned, directly or indirectly,
100% of the voting and non-voting securities of the material subsidiaries listed below.
Subsidiaries |
Jurisdiction of Incorporation |
|
|
Hydrogenics Europe NV |
Belgium |
Hydrogenics GmbH |
Germany |
In 2014 we invested into and hold a 49% interest in Kolon-Hydrogenics,
a joint venture incorporated in South Korea. Kolon-Hydrogenics Co. Ltd owns 100% of Kolon Hydrogenics Power Co. Ltd, an incorporated
Korean company whose focus is on renewable energy opportunities.
3.
Description of Our Business
Overview
Hydrogenics, together with its subsidiaries, designs, develops and
manufactures hydrogen generation and fuel cell products based on water electrolysis technology and proton exchange membrane (“PEM”),
technology. Hydrogenics’ mission is to provide safe, secure, sustainable and emission free energy as a leading global provider
of clean energy solutions based on hydrogen. We maintain operations in Belgium, Canada and Germany with satellite offices in the
United States and a branch office in Russia.
Our OnSite Generation business segment is based in Oevel, Belgium
and develops products for industrial gas, hydrogen fueling and renewable energy storage markets. For the year ended December 31,
2015, our OnSite Generation business reported revenues of $23.6 million and, at December 31, 2015, had 93 full-time employees.
Our Power Systems business segment is based in Mississauga, Canada,
with a satellite facility in Gladbeck, Germany, and develops products for energy storage, stationary and motive power applications.
For the year ended December 31, 2015 our Power Systems business reported revenues of $12.3 million and, at December 31, 2015 had
76 full-time employees.
Where applicable, corporate and other activities are reported separately
as Corporate and Other. This is the provision of corporate services and administrative support. At December 31, 2015, our Corporate
and Other activities had five full-time employees.
Our business, as at March 9, 2016, is summarized below:
OnSite Generation
Our OnSite Generation business segment, is based on water electrolysis
technology which involves the decomposition of water into oxygen (O2) and hydrogen gas (H2) by passing an electric current through
a liquid electrolyte or a polymer electrolyte membrane (“PEM”). The resultant hydrogen gas is then captured and used
for industrial gas applications, hydrogen fueling applications, and is used to store renewable and surplus energy in the form of
hydrogen gas. Our HySTAT® branded electrolyzer products are based on 60 years of hydrogen experience, meet international standards,
such as ASME, CE, Rostechnadzor and UL, and are certified ISO 9001 from design to delivery. We configure our HySTAT® products
for both indoor and outdoor applications and tailor our products to accommodate various hydrogen gas requirements.
The worldwide market for hydrogen, which includes the merchant gas
market for hydrogen, is estimated at $5 billion annually, and is served by industrial gas companies as well as on-site hydrogen
generated by products manufactured by companies such as ours. We believe the annual market for on-site hydrogen generation equipment
is approximately $100 million to $200 million. We believe 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.
Our OnSite Generation products are sold to leading merchant gas
companies, such as Air Liquide and Linde Gas and end-users requiring high purity hydrogen produced on-site for industrial applications.
We also sell and service products for progressive oil and gas companies, such as Shell Hydrogen, requiring hydrogen fueling stations
for transportation applications. Recently, an increase in orders and interest for fueling stations in Europe and elsewhere, has
signaled what we believe could be a major increase in the size of this market. During the past year, we have also witnessed an
increase in interest and orders for our small, medium and large scale energy storage products, which also service the need for
ancillary electrical power services, such as grid balancing and load profiling. While this area is heavily dependent on public
funding initiatives, particularly in Europe, it continues to present compelling growth opportunities. In 2009, we began to sell
our products to leading electric power utilities to satisfy the need for renewable energy storage.
The business objectives for our OnSite Generation group are to:
(i) continue to pursue opportunities for customers to convert otherwise wasted renewable and other excess energy, such as wind,
solar or excess baseload energy, into hydrogen; (ii) further expand into traditional markets, such as Eastern Europe (including
Russia), Asia and the Middle East; (iii) grow our fueling station business; (iv) further increase the gross margins of existing
product lines by improving our procurement and manufacturing processes; (v) reduce the cost of ownership of our products through
design and technology improvement; and (vi) further increase the reliability and durability of our products to exceed the expectations
of our customers and improve the performance of our applications.
Our OnSite Generation business competes with merchant gas companies,
such as Air Liquide and Linde Gas which, in addition to being customers, operate large scale centralized hydrogen production plants
and are providers of alternative on-site hydrogen generation products using steam methane reforming (“SMR”) technology
or other electrolysis technology. We compete on performance, reliability and cost and believe we are well positioned in situations
where there is a need for high purity hydrogen manufactured on-site.
Hydrogenics is pioneering Power-to-Gas, an innovative energy conversion
and storage solution using electrolysis. Power-to-Gas is the three-step process of integrating renewable sources of generation
by load-following, converting the surplus electricity to hydrogen or renewable gas, and leveraging the existing natural gas infrastructure
for seasonal storage. An electrolyzer provides the rapid, dynamic response to the Independent System Operator’s signals to
accurately load-follow the intermittent generation pattern of renewable sources such as wind turbines. The hydrogen produced is
injected into the natural gas system and can be intermingled with natural gas and thus additional storage vessels are not needed.
Surplus electricity can be stored for consecutive days or even consecutive weeks without the need to discharge; it is a seasonal
storage capability. This energy storage solution bridges the power grid and the gas grid to unlock new options. It enhances the
flexibility of managing the power grid and provides the means to capitalize on the vast potential of alternative sources of generation
to produce a local source of renewable gas to de-carbonize the gas system. Hydrogenics is working with global energy utilities
such as E.ON and Enbridge to commercialize Power-to-Gas energy storage globally.
We also are promoting electrolysis in hydrogen fueling stations
as possible Power-to-Gas solutions at a distributed storage level. The electrolyzer can be used to generate hydrogen during periods
of surplus energy levels, thus absorbing the excess energy at lower cost to generate hydrogen. This hydrogen is then stored at
site and can be used to fuel hydrogen cars and busses. If the surplus power is generated from renewable energy sources such as
wind and solar, the potential exists for a completely green solution as hydrogen fuel cell vehicles emissions are only water vapor.
Power Systems
Our Power Systems business segment is based on 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. We configure our HyPM® products into multiple electrical power outputs
ranging from 1 kilowatt to 1 megawatt (“MW”) with ease of integration, high reliability and operating efficiency, delivered
from a highly compact area.
Our target markets include backup power for telecom and data centre
installations and motive power applications, such as buses, trucks and utility vehicles. 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.
Our Power Systems products are sold to leading Original Equipment
Manufacturers (“OEMs”), to provide backup power applications for telecom installations and vehicle and other integrators
for motive power, direct current (“DC”) and alternative current (“AC”) backup. Additionally, our products
are sold for prototype field tests intended to be direct replacements for traditional lead-acid battery packs for motive applications.
We also sell our Power systems in stationary power applications such as that employed by our Kolon-Hydrogenics joint venture in
South Korea. Finally, we also sell our Power Systems products to the military, aerospace and other early adopters of emerging technologies.
The business objectives for our Power Systems group are to: (i)
offer a standard fuel cell platform for many markets, thereby enabling ease of manufacturing and reduced development spending;
(ii) achieve further market penetration in the backup power and motive power markets by tailoring our HyPM® fuel cell products
to meet market specific requirements, including price, performance and features; (iii) reduce product cost; (iv) invest in sales
and market development activities in the backup power and motive power markets; (v) continue to target the military and other early
adopters of emerging technologies as a bridge to future commercial markets; and (vi) secure the requisite people and processes
to align our anticipated growth plans with our resources and capabilities.
Our Power Systems business competes with several well-established
battery and internal combustion engine companies in addition to several other fuel cell companies. We compete on relative price/performance
and design innovation. In the backup power market, we believe our HyPM® systems have an advantage over batteries and internal
combustion engines for customers seeking extended run requirements, by offering more reliable and economical performance. In motive
power markets, we believe our HyPM® products are well positioned against diesel generation and lead-acid batteries by offering
increased productivity and lower operational costs.
There are four types of fuel cells other than PEM fuel cells that
are generally considered to have possible commercial applications, including phosphoric acid fuel cells, molten carbonate fuel
cells, solid oxide fuel cells and alkaline fuel cells. Each of these fuel cell technologies differs in their component materials
and operating characteristics. While all fuel cell types may have potential environmental and efficiency advantages over traditional
power sources, we believe PEM fuel cells can be manufactured less expensively and are more efficient and more practical in small-scale
stationary and motive power applications. Further, most automotive companies have selected PEM technology for fuel cell powered
automobiles. We expect this will help establish a stronger industry around PEM technology and may result in a lower cost, as compared
to the other fuel cell technologies.
History
From inception through to the end of 2000, our revenues were predominantly
derived from selling test products and related diagnostic equipment, with limited sales of fuel cell products and engineering services,
principally under military and government contracts. In November 2000, we completed our initial public offering of common shares
generating net proceeds of $84 million and listed our common shares on the Toronto Stock Exchange (“TSX”) and the Nasdaq
Global Market (“Nasdaq”). These funds, combined with our expertise in the fuel cell testing business, provided the
platform for advancing the development of our fuel cell power products. In 2001, we began to expand the sale of our fuel cell products
and of our integration services.
In January 2003, we acquired Greenlight Power Technologies, Inc.,
our principal competitor in the fuel cell test equipment business, for $20 million, satisfied by approximately $2.3 million of
cash and 4.2 million common shares. Subsequent to our acquisition, we consolidated our fuel cell test businesses in Burnaby, British
Columbia allowing us to accelerate our fuel cell development activities in Mississauga, Ontario.
In a February 2004 offering, we issued a total of 11.4 million common
shares for net proceeds of $61.6 million including the over-allotment option.
In January 2005, we acquired Stuart Energy, a recognized leader
in onsite hydrogen generation systems for industrial, transportation and energy markets, for $129 million. We satisfied the purchase
price by issuing approximately 27 million shares. This acquisition diversified our product portfolio, provided us with a world
class customer base including Air Liquide, Air Products, Cheung Kong Infrastructure, Chevron, Ford, General Motors, Linde, Shell
Hydrogen and Toyota, strengthened our European presence, and augmented our management team and employee base. On completion of
our acquisition, we carried out a comprehensive integration program achieving annualized cost savings exceeding $10 million.
In March 2007, we implemented a restructuring and streamlining of
our operations to reduce its overall cost structure. Subsequently, in November 2007, further cost reduction initiatives were undertaken.
These initiatives resulted in a workforce reduction of approximately 100 full-time equivalent positions. The Company incurred approximately
$4.1 million pre-tax charges in 2007 in connection with these initiatives.
In November 2007, after conducting an extensive evaluation of the
opportunities for our fuel cell test products design, development and manufacturing business and canvassing all opportunities,
our Board of Directors approved plans for an orderly windup of the business which is based in our Burnaby, British Columbia facility.
In 2008, we further streamlined our operations, which resulted in
a workforce reduction of approximately 25 full-time equivalent positions representing approximately $1.3 million of annual payroll
costs.
On June 11, 2009, we, Old Hydrogenics, the Board of Trustees of
Algonquin Power Income Fund (“APIF”) and APIF’s manager, Algonquin Power Management Inc., agreed on the terms
of a series of transactions (collectively, the “APIF Transaction”) and agreements, pursuant to which Old Hydrogenics
agreed to transfer its entire business and operations to us, including all assets, liabilities, directors, management and employees,
but excluding its tax attributes. Concurrently, the APIF Transaction enabled unitholders of APIF to continue to hold their interest
in APIF as shareholders of Old Hydrogenics, which was renamed Algonquin Power & Utilities Corp. (“APUC”), a publicly
traded Canadian corporation. APUC has the ability to make efficient use of our accumulated tax attributes in the continued execution
of APIF’s business plans. Under the APIF Transaction, our shareholders had their common shares in the capital of Old Hydrogenics
redeemed for our common shares on a one-for-one basis. At the same time APIF unitholders exchanged their units for APUC common
shares.
As a result of completion of the APIF Transaction on October 27,
2009, unitholders of APIF did not retain any interest in the business of the Corporation nor did the Corporation’s shareholders
retain any interest in the business of APIF. We have continued to carry on the hydrogen generation and fuel cell business as a
public entity with all of the assets (including the intellectual property), except for certain tax assets, of our predecessor prior
to the APIF Transaction.
During 2010, we completed an offering of common shares and warrants
for gross cash proceeds of $5.0 million before placement agent’s fees and other offering expenses.
On August 9, 2010, we entered into a subscription agreement (the
“Agreement”) with CommScope Inc. of North Carolina, a subsidiary of CommScope wherein CommScope will purchase from
us common shares in four tranches, up to a maximum of 2,186,906 shares for a maximum aggregate purchase price of $8.5 million,
subject to achieving certain product development milestones. During 2010, we closed the first two tranches under the terms of the
Agreement for gross cash proceeds of $4.0 million. We incurred issuance costs of $0.2 million in connection with the issuance of
the first and second tranches. During 2011, we completed the final two tranches of a private placement offering of common shares
with CommScope for gross cash proceeds of $4.5 million.
In September 2011, the Corporation entered into an agreement with
the Province of Ontario’s Ministry of Economic Development, Strategic Jobs and Investment Fund
for a low-interest rate loan of up to CA$6.0 million.
During 2012, we completed a private placement offering of common
shares with Enbridge for gross cash proceeds of $5.0 million.
In 2013, we completed an offering of common shares for gross cash
proceeds of $6.9 million, including an overallotment.
In 2014, we completed an offering of common shares for gross cash
proceeds of $15 million. Also in 2014 we entered into a joint venture with Kolon Water and Energy, a South Korean company to develop
stationary power applications using fuel cell technology for the Korean market. Hydrogenics owns 49% of the joint venture and contributed
2.45 billion Korean Won to the transaction (approximately $2.3 million).
During 2015, we completed an offering of common shares and warrants
for gross cash proceeds of $19.0 million before placement agent’s fees and other offering expenses.
Industry Trends
A discussion of industry trends, by its nature, necessarily contains
certain forward-looking statements. Forward-looking statements require us to make assumptions and are subject to inherent
risks and uncertainties that could cause actual results or events to differ materially from current expectations. Please
refer to the caution regarding Forward-looking statements contained in the “Forward-looking Statements” section on
page 1 and the “Risk Factors” section beginning on page 21 for a discussion of such risks and uncertainties and the
material factors and assumptions related to the statements set forth in this section.
We anticipate our business will continue to benefit from several
broad trends including: (i) increased government legislation and programs worldwide promoting alternative energy sources such as
synthetic fuels, including hydrogen; (ii) increased awareness of the adverse impact of fossil fuels on our climate and environment;
and (iii) the need for industrialized economies to access alternative sources of energy to reduce fossil fuel dependency.
We anticipate these trends will continue and intensify in the future, allowing the benefits of hydrogen to be further demonstrated
in numerous applications. In particular, hydrogen can be generated universally from renewable power sources such as hydroelectric,
geothermal, solar and wind or from low-emission sources such as biomass and nuclear. These industry trends are discussed
below.
Increased government legislation and programs worldwide promoting
alternative energy sources including hydrogen. In recent years, numerous governments have introduced legislation to promote
and develop the use of hydrogen in energy applications as a partial response to the risks and adverse effects associated with fossil
fuels. We anticipate this interest will accelerate over time. Recent government legislation has been proposed or passed
in many jurisdictions to support renewable energy initiatives.
The European Union has set a series of demanding climate and energy
targets to be met by 2020, known as the "20-20-20" targets. The targets are i) a reduction in EU greenhouse gas emissions
of at least 20% below 1990 levels ii) to have 20% of EU energy consumption to come from renewable resources and iii) a 20% reduction
in primary energy use compared with projected levels, to be achieved by improving energy efficiency. One of the significant results
of these targets are that a significant amount of vehicles using diesel and gasoline fuels in the road transportation sector will
be replaced with vehicles that use natural gas and hydrogen by 2020. European efforts include the European Commission (“EC”)
establishing a platform to bring hydrogen and fuel cells to market and a proposed Joint Technology Initiative for public-private
partnership. The EC’s 7th Framework Programme is currently providing $1.2 billion over five years for hydrogen and
fuel cell initiatives under the European Hydrogen and Fuel Cell Technology Platform. In 2016, 117.5M euros of funding is
provided. There has been an increased commitment from German’s H2Mobility consortia to put the needed hydrogen filling stations
in place to meet these targets. There have also been EU early policy statements targeting hydrogen filling stations every 300 km
to ensure suitable coverage for the fuel cell vehicles intended to be brought to market.
Additionally, several Asian countries are responding to environmental,
energy, security and socio-economic concerns by introducing legislation and initiatives to promote hydrogen and fuel cell technologies.
Japan, Korea, India and China continue to invest significantly in the development and commercialization of hydrogen and fuel cells.
Finally, the global commitment to combating climate change was memorialized
with definitive greenhouse gas reduction targets at the United Nations Climate Change Conference (COP21) held in the fall of 2015.
Hydrogenics should benefit from these targets as countries look to invest into clean technology applications.
Finally, Hydrogenics is pioneering Power-to-Gas, an innovative energy
conversion and storage solution using electrolysis, which will assist the government to reach their goals on the climate and energy
targets. Power-to-Gas helps the grid operator integrate renewable sources of generation and converts this power into hydrogen
using electrolysis. The hydrogen can be used as a renewable fuel or renewable gas in different applications as follows: hydrogen
for FCEVs (fuel cell electric vehicles), direct injection into the natural gas grid, methanation for synthetic natural gas, or
as a renewable fuel stock for refineries or other industrial processes. Power-to-Gas is an energy storage solution which bridges
the electricity sector with the much largernatural gas and transport energy sectors using hydrogen as decarbonized gas or liquid
fuels. It is a scalable solution with expected commercial deployments in the 15 to 50 MW range. Hydrogenics is currently working
with leading utilities worldwide on demonstration projects.
Increased awareness of the adverse impact of fossil fuels on
our climate, environment and air quality. Governments worldwide continue to enact legislation aimed at curtailing the
impact of fossil fuels on the environment. In addition to well established protocols such as COP21, the Kyoto Accord and the Canada
Clean Air Act there have been recent initiatives in various jurisdictions which continue to reinforce that the impact of fossil
fuels on the environment must be reduced. De-carbonization for urban transit remains a high priority in many urban centers around
the world. Certain urban centers, such as Beijing are recording their highest ever levels of pollutants emphasizing the growing
awareness of the adverse impact of fossil fuels. In 2012 the EU brought out its airline carbon tax and enacted legislation requiring
airlines to pay a carbon emissions charge for all flights landing in the EU based on the amount of carbon emitted
The need for industrialized economies to access alternative sources
of energy to reduce their dependency on fossil fuels. Many industrialized nations, including some of the fastest growing
economies, import most, or all, of the fossil fuels consumed. This creates a dependency on external sources and exposes them to
significant trade imbalances. In addition, the earthquake and resulting tsunami in Japan has caused many governments to consider
reducing dependency on nuclear power plants and consider alternative power sources such as hydrogen. The growing concern over volatile
climate occurrences often attributed to climate change is driving the desire for longer backup power requirements. While conventional
backup systems are adequate for several hours of backup, the world has seen an increase of incidences requiring the ability to
maintain power over the course of several days, and we believe hydrogen fuel cell power is ideal for such applications.
For stationary power, in the United States alone, approximately 400,000 MWs of new electricity generating
capacity is forecast to be needed by 2020 to meet growing demand and to replace retiring generating units. The existing electricity
transmission and distribution grid in the United States is overburdened in many regions. By locating power generation products
close to where the power is used, known as distributed generation, it is possible to bypass the overloaded transmission and distribution
grid. Hydrogen and fuel cell technologies are well suited to a distributed generation model thereby providing an emerging
opportunity for hydrogen fuel cells and hydrogen powered internal combustion engines to provide stationary generating capacity.
China also has growing concerns about air quality, energy supply
and security, which is leading it to pursue initiatives promoting hydrogen and energy efficiency programs especially in urban transport.
Further, as the introduction of automobiles and transit vehicles continues to accelerate in China, such dependency on fossil fuels
may become increasingly unsustainable, creating an opportunity for hydrogen and fuel cells.
The above noted factors have led to increased interest from progressive electric power
and gas utilities throughout the world seeking a robust and cost-effective solution for renewable and excess energy storage and
the provision of ancillary services such as grid balancing and load following.
Our Strategy
Our strategy is to develop electrolyzer and fuel cell products for
sale to OEMs, electric utilities, gas utilities, merchant gas companies and end-users requiring highly reliable products offered
at competitive prices. We believe our success will be substantially predicated on the following factors:
Increasing Market Penetration
At December 31, 2015, we had 16 full-time staff employed in sales
functions. Our senior management team is also actively involved in sales initiatives, including maintaining close contact with
our more significant customers. In the year, significant efforts were made in the sales function; including repositioning of responsibilities
to permit dedicated leadership for the sales function, obtaining detailed assessments of markets, and leveraging our strategic
relationships with companies such as Enbridge and Kolon.
2015 was a strong year for product launches. In Power Systems, we
launched a 1 MW stationary baseload power system with our Korean partner Kolon Water and Energy. The unit began commercial operation
in October 2015 at a refinery site in Korea. On the mobility front Hydrogenics signed a 10 year contract to develop and supply
hydrogen fuel cell propulsion systems for Alstom Transport for passenger rail in Europe, In Q4 the first prototype was shipped
to Alstom Transport to begin early trials. In On Site Generation, our customer E.ON, a major global energy and gas company
headquartered in Germany, went live with our 1.5 MW unit using our newer PEM electrolyzer technology in Hamburg Germany. This energy
storage application is in addition to the 2 MW application of alkaline electrolysis that was sold in 2012. We are now
the only company in the world to successfully launch PEM technology that can absorb a MW of energy in a single PEM stack. In addition,
Hydrogenics shipped and successfully started a 0.5 MW electrolyser for Kurion, an environmental company specializing in the cleanup
of radioactive contaminated water. Kurion has been a key player in the decontamination of the Fukushima plant in Japan.
The electrolyser is part of a pilot plant that if successful could be the technology selected by Japan to remediate the expanding
volume of tritiated water at Fukushima.
Additionally, we have developed or maintained relationships with
third parties we believe are well positioned in our relevant markets to identify new market opportunities for our products. In
the industrial gas market, these third parties include leading merchant gas companies, such as Air Liquide and Linde Gas. In the
energy storage market, it is leveraging our strategic relationship with Enbridge as well as our global contacts with other large
utilities, gas companies and regulators
We are also noting increased success in partnering with companies
to develop hydrogen fueling stations using our electrolysis technology as automobile manufacturers begin to roll out hydrogen fuel
cell vehicles at commercial production levels (principally for the European, Asian and California markets).
Future Markets
The ongoing development of Power-to-Gas applications continues in
cooperation with global partners such as Enbridge in Canada and E.ON in Germany. Power-to-Gas enhances the flexibility of managing
the power grid and provides the means to capitalize on the vast potential of alternative sources of generation to produce
a local source of renewable gas to de-carbonize the gas system. As the existing fleet of Combined Cycle Gas Turbine (“CCGT”)
generators contract for this renewable gas, the clean but intermittent characteristics of renewable generation are transformed
into a dispatchable renewable resource when and where it is needed. Since the hydrogen or substitute natural gas is stored in the
natural gas system, the discharge of stored energy is not restricted to the site of charging like other technologies such as pumped
hydro storage and CAES (Compressed Air Energy Storage). As a result, a Power-to-Gas plant can be optimally sited at a point of
congestion on the power grid to alleviate the problem. It is also a scalable solution, with expected commercial deployments between
5MW to 100MW. Hydrogenics is currently working with leading utilities worldwide in demonstration projects and setting the stage
for commercial-scale projects.
We also are promoting electrolysis in hydrogen fueling stations
as possible Power-to-Gas solutions at a distributed storage level. The electrolyzer can be used to generate hydrogen during periods
of surplus energy levels, thus absorbing the excess energy at lower cost to generate hydrogen. This hydrogen is then stored at
site and can be used to fuel hydrogen cars and busses. If the surplus power is generated from renewable energy sources such as
wind and solar, the potential exists for a completely green solution as hydrogen fuel cell vehicles emissions are only water vapor.
Advancing Our Product Designs
Within our OnSite Generation business segment, we remain focused
on two key areas. First, reducing the cost of our HySTAT® alkaline electrolyzer and improving its efficiency. Innovation
in the design, elimination of non-value adding components, improved component sourcing and fundamental electrochemical improvements
have all contributed to ongoing cost reduction initiatives in 2015 and beyond. We also recognize the opportunity for larger scale
energy storage installations and are continuing to develop significantly scale-up products to better meet this market opportunity.
Second, we are looking at continuing the rollout of PEM electrolysis, particularly in the area of Power-to-Gas where the PEM technology
provides a more scalable solution than alkaline electrolysis at higher power levels.
Within our Power Systems business segment, we spent much of 2015
focusing on further reducing the cost of a fully integrated fuel cell system inclusive of its components. We have achieved significant
cost reduction milestones but will continue to further improve the financial viability of the product in the marketplace by looking
at both scale (increased volume ordering from suppliers) as well as bringing components of the supply chain in-house to further
reduce production cost.
Securing Additional Capital
As at December
31, 2015, we had $24.9 million of cash, cash equivalents and restricted cash, had $21.2 million of shareholders’ equity and
$59.6 million of assets.
Historically
we have not been profitable and we do not anticipate achieving a consistent level of profitability, and hence, generate consistent
positive cash flow from operations for the next several quarters. The failure to raise sufficient funds necessary to finance future
cash requirements could adversely affect our ability to pursue our strategy and negatively affect our operations in future periods.
We are addressing this matter by maintaining contact with analysts and institutional investors to better articulate our investment
merits and are advancing discussions with possible strategic investors.
In the second
quarter of 2014, we filed a final short form base shelf prospectus with certain Canadian and US securities regulatory authorities.
The shelf prospectus will allow us to offer, from time to time over a 25-month period, up to $100 million of debt, equity and other
securities.
Our intention
was to use any net proceeds received from any offering pursuant to such shelf prospectus to fund current operations and potential
future growth opportunities, except as otherwise may be disclosed in a prospectus supplement relating to such offering.
We are not required
to offer or sell all or any portion of the securities pursuant to the shelf prospectus in the future and will only do so if we
believe market conditions warrant it.
On May 13, 2014 we entered into an underwriting agreement with Canaccord
Genuity to issue 1,000,000 common shares of the Company at an issue price of $15.00 per share. Commscope participated in this offering
as a secondary issuer and sold 500,000 of their shares, also at $15.00 per share. On May 16, 2014 the Company issued 1,000,000
shares for gross proceeds of $15 million. Net proceeds after underwriting fees and expenses were $13.5 million.
On December 11, 2015 we entered into an underwriting agreement with
Craig-Hallum Capital Group LLC to issue 2,129,031 common shares of the Company at an issue price of $7.75 per share. Craig-Hallum
Capital Group also retained an overallotment of 319,354 shares that could be issued at any time on the ensuing 30 days. On December
16, 2015 the Company issued 2,448,385 shares for gross proceeds of $18,975 inclusive of the overallotment. Net proceeds after underwriting
fees and expenses were $17,549.
Retaining and Engaging Our
Staff
At December
31, 2015, we had 174 full-time employees, the majority of who have been employed by the Corporation for several years and possess
strong technical backgrounds with extensive industry experience. We strive to maintain a high level of employee engagement by compensating
at market rates, and providing interesting and challenging work.
At December 31, 2015, we had sixteen full-time staff employed in
sales functions. Our senior management team is also actively involved in sales initiatives, including maintaining close contact
with our more significant customers.
Our Products and Services
Our products include HySTAT™ hydrogen generation equipment
in our OnSite Generation business and HyPM® fuel cell products in our Power Systems business.
A summary of our product lines is noted below.
HySTAT™ Hydrogen Stations
HySTAT™ Hydrogen Stations offer a dependable on-site supply
of hydrogen for a variety of hydrogen applications, including vehicle fuelling, distributed power, and a variety of industrial
processes. From a selection of versatile modular components, we configure the optimum HySTAT™ Hydrogen Station to precisely
meet customer needs for hydrogen generation and storage. We also provide spare parts and service for our entire installed base.
We currently offer our HySTAT™ Hydrogen Station in multiple
configurations depending on the amount of hydrogen required. This product is suitable for producing continuous or batch supplies
of hydrogen typically for industrial processing applications and generates between 10 - 60 normal cubic meters per hour (“Nm3/hr”)
of hydrogen. Multiple standard units can be installed for larger applications with the capability of generating up to 500 Nm3/hr
of hydrogen.
HyPM® Fuel Cell Products
Our HyPM® fuel cell products provide high performance,
high efficiency electrical power from clean hydrogen fuel. The HyPM® product is well suited to compete with
existing battery applications by offering longer runtimes and life, at a significantly smaller size and weight. The HyPM®
product line also competes with certain diesel power applications by offering clean, quiet operation and higher demand reliability.
Our products are built on a common platform allowing us to achieve volume purchasing and manufacturing efficiencies.
HyPM® Fuel
Cell Power Modules. Our HyPM® power module runs on high purity hydrogen and produces DC power in standard
outputs of 2.5, 5, 8, 12, 16, 30, 90, 120 and 180 kW. This product is suitable for a wide range of stationary, mobile and portable
power applications. The HyPM® XR model is targeted at backup power applications and the HyPMHD® model
is targeted at motive power applications with our Celerity® and Celerity Plus® units for bus and
truck applications.
HyPX™ Fuel Cell
Power Pack. Our HyPX™ Power Pack includes a standard HyPM® power module integrated with hydrogen
storage tanks and ultracapacitors that provide higher power in short bursts. This product has the same form, fit and function
as large battery packs used in devices such as forklift trucks and tow tractors.
Integrated Fuel Cell Systems.
Our integrated fuel cell systems are built around our HyPM® power modules and used for portable and stationary applications
including portable and auxiliary power units for military applications and direct current or DC backup power system for cellular
tower sites.
Engineering Development Services.
We also enter into engineering development contracts with certain customers for new or custom products.
Sales and Marketing
Our products are sold worldwide to OEMs, systems integrators and
end-users through a direct sales force and a network of distributors. Our sales method varies depending on the product offering,
market and stage of technology adoption.
Customers
Our OnSite Generation products are sold to leading merchant gas
companies such as Air Liquide and Linde Gas and end users requiring high purity hydrogen produced on-site for industrial applications.
We also sell and service products for progressive oil and gas companies such as Shell Hydrogen requiring hydrogen fueling stations
for transportation applications. During the past year we have also witnessed an increase in interest and orders for our small,
medium and large scale energy storage products which also service the need for ancillary electrical power services such as grid
balancing and load profiling.
Our Power Systems products are sold to leading Original Equipment
Manufacturers (“OEMs”) such as CommScope, Inc. (“CommScope”) to provide backup power for telecom installations
and Alstom Transport for passenger rail propulsion. Supply to other integrators for mobility and other stationary applications
included AC backup and baseload power. Additionally, our products are sold for prototype field tests intended to be direct replacements
for traditional lead-acid battery packs for motive applications. We also sell our Power Systems products to the military and other
early adopters of emerging technologies.
In 2015, three customers each comprised 25% of our revenue (in 2014,
three customers each comprised 32% of our revenue). In 2015, 64% of our revenues was derived from Europe, 18% from North and South
America, 12% from Asia, and the remaining 6% were derived from other foreign jurisdictions (in 2014, these numbers were 59%, 21%,
18% and 2%, respectively). Accordingly, we have mitigated risk to any single market or adoption rate by diversifying our product
portfolio across the markets in which we operate.
We have entered into agreements with several customers to pursue
commercial opportunities, which we view as important to our success. Our key customer agreements are summarized below.
Leading Global Industrial Gas
Companies. We have previously established preferred supplier agreements with Air Liquide S.A., Air Products and Chemicals,
Inc., and Linde A.G., three of the leading global industrial gas companies. Typically, these agreements provide that for industrial
applications we will be the preferred supplier of on-site, electrolysis-based hydrogen generators to the applicable industrial
gas company. We believe these relationships represent valuable sales channels, while providing validation of our technology from
highly credible partners.
Enbridge. In April 2012,
we entered into a joint development agreement with Enbridge, the owner and operator of Canada's largest natural gas distribution
company, various North American midstream gas assets, and a leader in clean energy solutions, to jointly develop utility scale
energy storage in North America.
OEM. In October 2012, we
entered into a multi-year joint cooperation agreement with an OEM. In conjunction with the signing of the cooperation agreement,
we were awarded a $36 million contract for the supply of propulsion system equipment including integrated fuel cell power systems,
power electronic converters, associated hardware and propulsion system software. The contract includes additional equipment commitments
of $13 million as well as optional equipment and services totaling another $43 million over a 10 year period. These options will
be triggered as required for production, spare parts, warranty, and service requirements
CommScope. In August 2010,
we entered into a strategic alliance with CommScope, a global leader in infrastructure solutions for communications networks, that
calls for the development and distribution of specialized fuel cell power systems and includes an equity investment in Hydrogenics.
Under the terms of the agreement, CommScope and Hydrogenics have jointly developed next-generation power modules for telecom-related
backup power applications that are being incorporated by CommScope in its products sold to customers worldwide.
Kolon Water and Energy, In
June of 2014, we entered into a joint venture (Kolon-Hydrogenics) to provide stationary base load power systems with a partner
for the Korean market. A 1MW fuel cell power plant was delivered to a refinery site in 2015 and went into commercial production
in October. The joint venture is currently seeking commercial traction of the technology to scale to multi-MWs serving the Korean
market for alternate energy production using surplus hydrogen at refinery sites.
Alstom Transport, In May
2015, we entered into a mutually exclusive (for the European market) 10 year development and supply agreement for passenger rail
propulsion systems. Under the terms of the agreement Hydrogenics will supply prototype and pre-series units for certifications
trials and then progress to production series for a minimum of 200 units over 10 years.
Research and Product Development
Our research and product development team consists of approximately
44 staff, the majority of whom are located in Mississauga, Ontario, and are focused primarily on our fuel cell and PEM technology
activities. The remainder is located in Oevel, Belgium. Collectively, these individuals have many years of experience in the design
of electrolysis and fuel cell products. Our product development team combines leaders with extensive experience in their fields
with younger graduates from leading universities.
Our objective is to develop complete products rather than components
and to ensure these products are constantly improved throughout the product’s life. Our research activities are unique to
each of our business units but typically focus on the cost, performance and durability of our products. Our product development
activities commence with a market requirement document establishing the business case for the proposed product. This process involves
staff from our business development, finance, engineering and operations departments who balance the requirements of performance,
time to market, and product cost. Prototypes are often validated by lead customers such as CommScope.
We seek cost-sharing projects with various government and non-government
agencies, to offset, to the extent possible, our research and product development expenses. We currently have contribution agreements
with Natural Resources Canada and the Province of Ontario. In 2012, $3.0 million, or 54% of our research and product development
expenses, were funded by various governments. In 2013 Hydrogenics Corporation entered into a loan agreement with the Province of
Ontario’s Ministry of Economic Development and Trade, Strategic Jobs and Investment Fund for up to CA$6.0 million. In 2013
and 2014, the Corporation drew down CA $5.9 million of the loan, which is calculated based on 50% of eligible costs to a maximum
of CA $1.5 million per disbursement. The loan is a low interest rate loan, and if certain criteria are met, such as the retention
and creation of a specified number of jobs, the loan will be interest free for the first five years. In 2014, Hydrogenics Corporation
entered into a loan agreement with the Province of Ontario’s Ministry of Economic Development and Innovation, Innovation
Development Fund for up to CA$4.0 million. As of March 9, 2016, $0.3 million has been drawn on this loan. If conditions are met,
this loan is interest free and forgivable upon project completion.
Our current research and product development plans are summarized
below:
OnSite Generation. Our research
activities are focused on improving the performance and reducing the cost of our electrolyzer stacks and systems through advances
in materials, design and components. Our product development team is working on advancing the next generation of on-site hydrogen
generators by developing mega-watt (MW) scale PEM electrolyzer systems utilizing Hydrogenics’ MW scale PEM electrolyzer stack
technology. These new products are designed to store large amounts of renewable or other excess energy as hydrogen, thereby
helping to address large scale grid energy storage problems, for Power-to-Gas applications and for vehicle refueling.
Power Systems. Since
the late 90’s, research and development has focused on polymer electrolyte fuel cells (PEMFC) for hydrogen and reformate
applications. Our fuel cell research activities are concentrated on lowering the cost, improving the fuel efficiency, product
lifetime and reducing system complexity. Activities range from focused fundamental materials research to stack and system development
and testing. At the stack level, our research and development team is working on developing our next generation of stack
technology which is expected to significantly increase power density and lower costs. At the fuel cell engine or module
level, we continue to expand our product line by leveraging our proven stack and system architecture while continuing to lower
cost on existing products in order to meet market specific cost requirements.
Intellectual Property
We protect our intellectual property by means of a combination
of patent protection, copyrights, trademarks, trade secrets, licences, non-disclosure agreements and contractual provisions. We
generally enter into non-disclosure and confidentiality agreements with each of our employees, consultants and third parties that
have access to our proprietary technology. We currently hold 122 patents in a variety of jurisdictions and have 48 patent applications
pending. Additionally, we enter into commercial licences and cross-licences to access third party intellectual property.
We believe our intellectual property provides us a strong competitive
advantage and represents a significant barrier to entry into our industry for potential competitors. As part of our patent
portfolio, we maintain a collection of innovative energy storage patents with broad and exclusive rights concerning the use of
excess electrical power to produce hydrogen from water while simultaneously providing electric grid stabilization services.
We believe these patents place Hydrogenics in the strongest possible position to build our company over the long-term and will
continue to strengthen our efforts as electric grid operators look to hydrogen as an important strategy for utility-scale energy
storage.
We typically retain sole ownership of intellectual property developed
by us. In certain situations we provide for shared intellectual property rights. For example, with General Motors, we have a non-exclusive,
royalty free licence to use certain of General Motors’ proprietary fuel cell stack intellectual property in certain applications
and markets. We have these rights in perpetuity, including subsequent improvements to the licensed technology.
Given the relative early stages of our industry, our intellectual
property is and will continue to be important in providing differentiated products to customers.
Manufacturing
The majority of our manufacturing services, including parts procurement,
kitting, assembly and repair, are carried out in-house at our respective business unit manufacturing facilities. We also perform
certain manufacturing-related functions in-house, including manufacturing engineering and the development of manufacturing test
procedures and fixtures.
We anticipate being able to move various aspects of our manufacturing
operations to third parties or other lower cost jurisdictions as production volumes increase. By moving to third parties, we would
benefit from contract manufacturing economies of scale, access to high quality production resources and reduced equipment capital
costs and equipment obsolescence risk. We have also commenced sourcing components from third parties in Asia and expect to increase
the volume over time to reduce our material costs.
We are dependent on third party suppliers for certain key materials
and components for our products such as membrane electrode assemblies and ultra capacitors. We believe we have sufficient sources
and price stability of our key materials and components.
We have certifications in ISO 9001-2008 in both our Oevel and Mississauga
facilities, and ISO 14001 and OHSAS 18001 in our Oevel facility.
Facilities
We have the following facilities:
| · | Mississauga, Ontario, Canada. Our 25,300 square foot facility in Mississauga, Ontario serves
as our corporate headquarters and Power Systems manufacturing facility. It is leased until October 31, 2018. Principal activities
at this facility include the manufacture and assembly of our fuel cell power modules, and research and product development for
our fuel cell power products, fuel cell testing services and our corporate activities. |
| · | Oevel-Westerlo, Belgium. Our 67,813 square foot facility in Oevel-Westerlo, Belgium, serves
as our manufacturing facility for our OnSite Generation business and is leased until August 30, 2021. Principal activities at this
facility include the manufacture and assembly of our hydrogen generation equipment, water electrolysis research and product development
as well as administrative functions related to our OnSite Generation business. |
| · | Gladbeck, Germany. Our Power Systems group maintains a 13,300 square foot facility in Gladbeck,
Germany, which is leased until December 31, 2016. This facility is used to provide fuel cell integration services for European
customers and serves as our European office for the fuel cell activities of our Power Systems business. |
We also have small sales and service offices in Eastern Europe and
North America. We believe our facilities are presently adequate for our operations and we will be able to maintain suitable space
needed on commercially reasonable terms.
Human Resources
As at December 31, 2015, we employed approximately 174 full-time
staff. Our full-time staff is divided between 93 full-time staff in our OnSite Generation business, 76 full-time staff in our Power
Systems business, and five full-time staff in our Corporate Services group. As of December 31, 2015, five of our employees were
located in our Mississauga, Ontario corporate headquarters, 63 employees were located in our Mississauga, Ontario Power Systems
group, four employees were located in our Mississauga, Ontario OnSite generation group, thirteen employees were located in our
Gladbeck, Germany power generation group and 89 employees were located in our Oevel-Westerlo, Belgium OnSite generation group.
Our ability to attract, motivate and retain qualified personnel
is critical to our success. We attempt to align the interests of our employees with those of shareholders through the use of a
performance based compensation structure. We have entered into non-disclosure and confidentiality agreements with key management
personnel and with substantially all employees. None of our employees are represented by a collective bargaining agreement and
we believe our relations with our employees are good.
Legal Proceedings
We are not currently party to any material legal proceedings.
Government Regulation
We are not subject to regulatory commissions governing traditional
electric utilities and other regulated entities in any of the jurisdictions that we operate in. Our products are however subject
to oversight and regulation by governmental bodies in regards to building codes, fire codes, public safety, electrical and gas
pipeline connections and hydrogen siting, among others.
4.
Description of Share Capital
Our authorized capital consists of an unlimited number of common
shares and an unlimited number of preferred shares issuable in series, of which 12,540,757 common shares and no preferred shares
were issued and outstanding as of March 9, 2016.
Each common share carries one vote on all matters to be voted on
by our shareholders. Holders of common shares are entitled to receive dividends as and when declared by our Board of Directors
and to share ratably in our remaining assets available for distribution, after payment of liabilities, upon Hydrogenics’
liquidation, dissolution or winding up. Common shares do not carry pre-emptive rights or rights of conversion into any other securities.
All outstanding common shares are fully paid and non-assessable. There are no limitations on the rights of non-resident owners
of common shares to hold or vote their shares.
Our Board of Directors has the authority, without further action
by the shareholders, to issue an unlimited number of preferred shares in one or more series and, in the event that preferred shares
are issued, the Board also has the authority to fix the designations, powers, preferences, privileges and relative, participating,
optional or special rights of any preferred shares including any qualifications, limitations or restrictions. Special rights that
may be granted to a series of preferred shares include dividend rights, conversion rights, voting rights, redemption and liquidation
preferences, any or all of which may be superior to the rights of the common shares. Preferred share issuances could decrease the
market price of common shares and may adversely affect the voting and other rights of the holders of common shares. The issuance
of preferred shares could also have the effect of delaying or preventing a change in control of Hydrogenics.
5.
Dividends
We have never declared or paid any cash dividends on our common
shares. We currently intend to retain any future earnings to fund the development and growth of our business and we do not anticipate
paying any cash dividends in the foreseeable future.
6.
Market For Securities
Our common shares are listed on the TSX under the symbol “HYG”
and on the Nasdaq under the symbol “HYGS.” The following table sets forth the reported trading volumes and trading
prices in Canadian dollars and U.S. dollars, respectively, for our common shares on the TSX and Nasdaq during each month in 2015.
|
TSX |
Nasdaq |
2015 |
High (C$) |
Low (C$) |
Volume |
High ($) |
Low ($) |
Volume |
January |
19.60 |
15.30 |
118,400 |
15.83 |
12.85 |
1,521,733 |
February |
19.75 |
16.92 |
91,200 |
15.40 |
13.54 |
1,098,001 |
March |
19.61 |
14.12 |
187,500 |
17.55 |
11.21 |
1,760,311 |
April |
16.58 |
13.90 |
82,100 |
13.36 |
11.24 |
751,668 |
May |
15.58 |
10.51 |
225,700 |
12.81 |
8.51 |
2,192,074 |
June |
14.21 |
11.83 |
54,800 |
11.61 |
9.53 |
1,023,260 |
July |
13.49 |
11.00 |
38,000 |
10.50 |
8.50 |
676,978 |
August |
12.75 |
9.42 |
77,800 |
9.72 |
7.32 |
1,381,809 |
September |
12.60 |
9.53 |
31,800 |
9.60 |
7.45 |
693,450 |
October |
13.50 |
9.69 |
44,800 |
10.25 |
7.61 |
562,052 |
November |
16.19 |
12.50 |
70,700 |
12.08 |
9.43 |
1,282,747 |
December |
15.90 |
9.97 |
97,000 |
11.89 |
7.20 |
2,998,712 |
7.
Directors and Officers
The following table sets forth information with respect to our directors
and executive officers as of March 9, 2016:
Name and Province
or State and Country
of Residence |
|
Title |
|
Director or
Executive Officer Since |
Douglas Alexander
Ontario, Canada |
|
Chairman of our Board of Directors |
|
2006 |
Michael Cardiff
Ontario, Canada |
|
Director |
|
2007 |
Joseph Cargnelli
Ontario, Canada |
|
Chief Technology Officer and Director |
|
1996 |
Sara Elford,
British Columbia, Canada |
|
Director |
|
2016 |
David C. Ferguson
Ontario, Canada |
|
Director |
|
2014 |
Donald Lowry
Alberta, Canada |
|
Director |
|
2000 – 2007
2013 |
Daryl Wilson
Ontario, Canada |
|
President and Chief Executive Officer and Director |
|
2006 |
As of the date of this annual information form, our directors and
executive officers, as a group, beneficially own, or exercise control or direction over 176,698 of our common shares, being approximately
1.41% of our outstanding common shares. Each director will hold office until the next annual meeting of shareholders or until
his successor is duly elected or appointed.
Douglas S. Alexander, Chairman of our Board of Directors.
Mr. Alexander joined our Board of Directors in May 2006 and has served as Chairman of our Board of Directors since May
2009. Mr. Alexander is a Director and member of the Audit Committee of Critical Outcome Technologies Inc., and Equitable Life Insurance
Company and has served as the Chief Financial Officer of various Canadian public companies for 15 years. Mr. Alexander was formerly
lead director and chair of the Audit Committee of Saxon Financial Inc. Mr. Alexander served as a director of Stuart Energy from
2003 to January 2005. From 1999 to 2004, Mr. Alexander was Executive Vice President and Chief Financial Officer of Trojan Technologies
Inc., an international environmental high technology company. Mr. Alexander’s financial expertise and corporate experience
including direct responsibility for the Human Resource function while at Trojan Technologies Inc., in addition to his extensive
knowledge of the business, assist him in assessing appropriate executive compensation based on the Corporation’s performance.
Mr. Alexander is a Chartered Accountant and is a member of the Institute of Chartered Accountants in Scotland and Ontario. He is
also a Chartered Director, having graduated from the Director’s College, a joint venture between McMaster University and
the Conference Board of Canada. Mr. Alexander is a member of our Human Resource and Corporate Governance and Audit Committees.
Mr. Alexander resides in Ontario, Canada.
Michael Cardiff, Director. Mr. Cardiff joined our Board of Directors in November 2007. Mr. Cardiff was most recently Senior
Vice President Office of The CFO at INFOR a $3 Billion software company. His business unit included
software for financials, payroll, human resources, performance management, BI, planning and forecasting, compliance and risk management.
Prior to holding that position, Mr. Cardiff held numerous senior positions in a number of technology companies, including large
multinationals such as EDS, SAP and IBM, as well as startup companies such as Fincentric, Convergent Technologies, Tandem, and
Stratus Computer. Mr. Cardiff is currently a director of Hydrogenics Corporation (NASDAQ: HYGS; TSX: HYG), and Startech.Com. Mr.
Cardiff has also served as a director of other publicly traded companies, including Husky Injection Molding, Descartes Systems
Group, Visible Genetics and Burntsand Inc. He has also been a director of private companies, including Solcorp, Spectra Security
Software and Visible Decisions and not-for-profit organizations such as The Toronto Film Festival, Roy Thomson Hall and Medic Alert
Foundation. Mr. Cardiff is a member of, and holds the ICD.D designation from the Institute of Corporate Directors. Mr. Cardiff
resides in Ontario, Canada.
Joseph Cargnelli, Chief Technology Officer and Director. Mr.
Cargnelli is one of our founders and served as a director from January 1996 to January 2005, when he resigned in connection with
the closing of the Stuart Energy acquisition. Mr. Cargnelli was re-elected at the meeting of shareholders on May 17, 2005. Mr. Cargnelli
served as our Treasurer from January 1996 until July 2000. Mr. Cargnelli was appointed as our Vice President, Technology in
July 2000. His title was changed to Chief Technology Officer in April 2003. Mr. Cargnelli earned both a Masters of Applied
Science degree in Mechanical Engineering and a Bachelor of Applied Science degree in Mechanical Engineering from the University
of Toronto. From April 1992 to April 1993, Mr. Cargnelli served as a Research Engineer with the Laboratory of Advanced Concepts
in Energy Conversion Inc., a laboratory engaged in the research, development and demonstration of alkaline fuel cells and hydrogen
storage methods. Mr. Cargnelli is a member of the Professional Engineers of Ontario. Mr. Cargnelli resides in Ontario, Canada.
Sara Elford, Director. Ms. Elford joined our Board
of Directors in January 2016. Ms. Elford was most recently a sell-side equity research analyst with Canaccord Genuity, with over
20 years of experience in the capital markets industry. Over the course of her analyst career, Ms. Elford followed a broad range
of industries and business models, with a specific, but not exclusive, focus on emerging companies, technologies and/or sectors.
According to Thomson Reuters Starmine, she was named in the top two for stock picking in her sector six times since 2003, and in
2005 she was named the top stock picker in Canada across all sectors and analysts. Ms. Elford has been a CFA Charterholder since
1997 and completed the academic requirements for the directors’ education program with the ICD in 2015. She is currently
a member of the FTSE Environmental Markets Committee and is also a member of the Board of Directors of Carmanah Technologies and
Pure Technologies. She is a graduate of Bishop’s University in Quebec. Ms. Elford resides in British Columbia, Canada.
David C. Ferguson, Director. Mr. Ferguson joined our
Board of Directors in October 2014. Mr. Ferguson was Executive Managing Director and Chief Financial Officer of BMO Capital Markets
and was a member of the Board of Directors of BMO Nesbitt Burns between 1999 and 2012. Prior to 1999 Mr. Ferguson had a 25 year
career at KPMG including 16 years as an audit partner in the Toronto office serving major clients in the manufacturing, mining,
and financial services sectors. Mr. Ferguson is a member of the Board of Directors of GMP Securities Inc. where he serves as Chair
of the Audit Committee and a member of the Governance Committee. As well, he is the former President and Chair of the Board of
Directors of the Canadian Opera Company, one of Canada’s leading performing arts organizations. Mr. Ferguson is a Fellow
of the Institute of Chartered Professional Accountants of Ontario, and member of the Institute of Corporate Directors. Mr. Ferguson
received Bachelor of Commerce and Master of Business Administration degrees from the University of Toronto, and his Chartered Accountant
designation from the Institute of Chartered Accountants of Ontario. Mr. Ferguson resides in Ontario, Canada.
Donald Lowry, Director. Mr. Lowry was appointed to the Board of Directors in January 2013. After
16 years, Don Lowry stepped down from the position of President & CEO of EPCOR Utilities in March of 2013 to focus on corporate
board work and to serve on local community boards and associations. Prior to joining EPCOR, Don spent more than 20 years in the
telecommunications industry. He was President and Chief Operating Officer of Telus Communications Inc. and Chair of Alta Telecom.
Don is currently non-executive Chair of Capital Power and served as non-executive Chair of Canadian Oil Sands from 2009 to 2016.
As well, he serves as a director of Stantec and Melcor REIT. He was the Chair of the 2014-2015 Edmonton World Triathalon. In 2013
he established the Don and Norine Lowry, Women of Excellence annual scholarship for Edmonton women pursuing their post-secondary
education in Edmonton. In 2010 Don was recognized as Alberta Venture’s Business Person of the Year; and was the Alberta Chamber
of Resources’ Resource Person of the year in 2014. Don holds a B.Comm. (Honours) and an MBA from the University of Manitoba.
He is also a graduate of the Harvard Advanced Management Program and the Banff School of Management. Mr. Lowry resides in Alberta,
Canada.
Daryl Wilson, President and Chief Executive Officer and Director.
Mr. Wilson was appointed President and Chief Executive Officer in December 2006. Prior to joining Hydrogenics, Mr. Wilson
held senior leadership positions at Royal Group Technologies Inc., ZENON Environmental Inc., TOYOTA and DOFASCO Inc. Mr. Wilson
is a Director of ATS Automation Tooling Systems Inc. In 1990, Mr. Wilson earned an MBA from McMaster University in Operations Management/Management
Science. Mr. Wilson is a Professional engineer and holds a Bachelor’s degree in Chemical Engineering from the University
of Toronto. Mr. Wilson is a Chartered Director (C.Dir), having graduated in 2009 from Director’s College. Mr. Wilson resides
in Ontario, Canada.
Executive Officers
The following table sets forth information with respect to our executive
officers as of March 9, 2016:
Name and Province
or State and Country
of Residence |
|
Title |
|
Director or
Executive Officer Since |
Joseph Cargnelli
Ontario, Canada |
|
Chief Technology Officer and Director |
|
1996 |
Daryl Wilson
Ontario, Canada |
|
President and Chief Executive Officer and Director |
|
2006 |
Robert Motz
Ontario, Canada |
|
Chief Financial Officer and Corporate Secretary |
|
2012 |
Wido Westbroek
Ontario, Canada |
|
Vice President Sales and Marketing |
|
2011(1) |
Filip Smeets
Hasselt, Belgium |
|
General Manager, OnSite Generation |
|
2011 |
| (1) | Prior to Mr. Westbroek’s appointment as Vice President Sales and Marketing, he was the Vice
President and General Manager, OnSite Generation |
Robert Motz, Chief Financial Officer and Corporate Secretary. Mr. Motz joined us in 2012 in his current capacity
of Chief Financial Officer and Corporate Secretary. Mr. Motz was previously Chief Financial Officer and then Chief Executive Officer
of Aeroquest International Limited from 2008-2012 (at the time a Toronto Stock Exchange (“TSX”) listed company). Prior
to his role at Aeroquest, Mr. Motz served in a senior financial leadership role at Agility Logistics, Co., AMJ Campbell Inc. and
Motorola Canada Limited. Mr. Motz is a Chartered Accountant and a Chartered Professional Accountant having received his designation
in 1987.
Wido Westbroek, Vice President Sales and Marketing.
Mr. Westbroek joined us in 2006 as Vice President, Operations of the Belgium OnSite Generation business and subsequently appointed
as Vice President and General Manager for Hydrogenics Europe n.v. in 2007. Mr. Westbroek was appointed to his current position
effective August 1st, 2011. His former career, spanning 18 years, was with Powerlasers, a developer and manufacturer of unique
laser welding technology and a maker of auto parts for major automotive OEMs based in Canada and the U.S. Mr. Westbroek received
his Bachelor of Science in Physics at the University of Waterloo in Ontario.
Filip Smeets, General Manager, OnSite Generation.
Mr. Smeets joined us in 2011 as General Manager of the Belgian based OnSite Generation business. Mr. Smeets was previously a General
Manager with Cabot Corporation, a global performance materials company, headquartered in Boston, Massachusetts USA. During his
12 years tenure at Cabot Corporation, Mr. Smeets held increasingly responsible positions in marketing and business leadership.
Mr. Smeets received his Master's degree in Chemistry from the University of Antwerp, located in Belgium.
For information regarding the backgrounds of Mr. Cargnelli and Mr.
Wilson, see “Directors” above.
Auditor and Fees and Services
PricewaterhouseCoopers LLP (“PwC”) has served as our
auditors since 2000. Fees payable to PwC for the years ended December 31, 2015 and 2014 were as set out below.
Audit Fees
In 2015 and 2014, PwC charged us audit fees totalling CA $609,580
and CA $410,294, respectively. In 2015 and 2014, these fees included professional services rendered for the review of interim financial
statements, statutory audits of annual financial statements, consultations about financial and reporting standards and other regulatory
audits and filings, including Sarbanes-Oxley compliance.
Audit-Related Fees
In 2015 and 2014, PwC charged us audit related fees of CA $7,889
and CA $39,049, respectively. In 2015 and 2014, these fees included professional services that reasonably relate to the above services
and Canadian Public Accounting Board Fees.
Tax Fees
In 2015 and 2014, PwC charged us tax fees of CA $3,231 and CA $3,081
respectively. In 2014 and 2014, these fees included professional services for tax compliance, tax advice, tax planning and advisory
services relating to the preparation of corporate tax returns.
All Other Fees
In 2015 and 2014, PwC charged us other fees of CA $19,014 and CA
$104,575, respectively. In 2015, these fees related to audit fees for research & development funded audit requirements. In
2014, these fees related to assistance with the preparation of our base shelf prospectus and prospectus supplement filed in in
April and May of 2014 respectively.
Audit Committee
The Audit Committee of our Board of Directors operates under a
written charter that sets out its responsibilities and composition requirements. As at December 31, 2015 and March 9, 2016, the
members of the committee were: David C. Ferguson (Chair), Douglas S. Alexander, Michael Cardiff and Donald Lowry. The following
sets out the education and experience of each director relevant to the performance of his duties as a member of the committee.
Mr. Ferguson was Executive Managing Director and Chief Financial
Officer of BMO Capital Markets and was a member of the Board of Directors of BMO Nesbitt Burns between 1999 and 2012. Prior to
1999 Mr. Ferguson had a 25 year career at KPMG including 16 years as an audit partner in the Toronto office serving major clients
in the manufacturing, mining, and financial services sectors. Mr. Ferguson is a member of the Board of Directors of GMP Securities
Inc. where he serves as Chair of the Audit Committee and a member of the Governance Committee. As well, he is the former President
and Chair of the Board of Directors of the Canadian Opera Company, one of Canada’s leading performing arts organizations.
Mr. Ferguson is a Fellow of the Institute of Chartered Professional Accountants of Ontario, and member of the Institute of Corporate
Directors. Mr. Ferguson received Bachelor of Commerce and Master of Business Administration degrees from the University of Toronto,
and his Chartered Accountant designation from the Institute of Chartered Accountants of Ontario.
Mr. Alexander is a Director and member of the Audit Committee of
Critical Outcome Technologies Inc., and has served as the Chief Financial Officer of various Canadian public companies for 16 years.
Mr. Alexander was formerly lead director and chair of the Audit Committee of Saxon Financial Inc. Mr. Alexander served as a director
of Stuart Energy from 2003 to January 2005. From 1999 to 2004, Mr. Alexander was Executive Vice President and Chief Financial Officer
of Trojan Technologies Inc., an international environmental high technology company. Mr. Alexander is a Chartered Accountant and
is a member of the Institute of Chartered Accountants in Scotland and Ontario. He is also a Chartered Director, having graduated
from the Director’s College, a joint venture between McMaster University and the Conference Board of Canada.
Mr. Cardiff was the Chief Operating Officer of SAP Canada until
July of 2013. Prior to holding that position, Mr. Cardiff held numerous senior positions in a number of technology companies including
large multinationals such as EDS and IBM as well as startup companies such as Fincentric, Convergent Technologies, Tandem, and
Stratus Computer. Mr. Cardiff is currently a director of Medic Alert. Mr. Cardiff has also served as a director of Burntsand Inc.,
Descartes Systems Group, Husky Injection Molding Systems, Solcorp, Visible Genetics, Spectra Security Software Visible Decisions
and the Toronto Film Festival, Roy Thomson Hall. Mr. Cardiff has received many awards including “A Canadian Export Life
Time Achievement Award.” In 1998, Mr. Cardiff was named one of Canada’s “Top 40 Under 40,” recognizing
him as one of the nation’s most successful young leaders. Mr. Cardiff is a member of, and holds the ICD.d designation from,
the Institute of Corporate Directors.
Mr. Lowry retired in 2013 as President and Chief Executive Officer
of EPCOR Utilities Inc., an Edmonton, Alberta based utility that owns and operates electrical distribution networks and water
and wastewater treatment facilities in Alberta, Arizona and New Mexico. Mr. Lowry is also Board Chair of Capital Power Corporation
and Canadian Oil Sands Limited and is a director of the Canadian Electricity Association and the Telus Community Investment Board.
The Audit Committee charter requires each member of the Audit Committee
to be unrelated and independent, and the composition of the Audit Committee satisfy the independence, experience and financial
expertise requirements of the Nasdaq, the TSX and Section 10A of the Securities Exchange Act of 1934 (United States), as amended
by the Sarbanes-Oxley Act of 2002 (United States), and the rules promulgated thereunder. Accordingly, all committee members are
required to be financially literate or be willing and able to acquire the necessary knowledge quickly. Financial literacy means
the person has the ability to read and understand financial statements that present a breadth and level of complexity of accounting
issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by
our consolidated financial statements. We believe all of the current members of the Audit Committee are financially literate.
In addition, the Audit Committee charter contains independence requirements
that each committee member must satisfy each current member meets those requirements. Specifically, the charter provides that no
member of the committee may be an officer or retired officer of Hydrogenics and each member must be independent of Hydrogenics
within the meaning of all applicable laws, rules and regulations and any other relevant consideration, including laws, rules and
regulations particularly applicable to Audit Committee members. We believe all of the current members of the Audit Committee are
independent.
The Audit Committee has a policy restricting the provision of non-audit
services by our auditors. Any such services must be permitted engagements as provided by the Audit Committee charter and must be
pre-approved by the Audit Committee. The Audit Committee also pre-approves audit services and the related fees.
8.
Interest of Management and Others in Material Transactions
Transactions with Viking Engineering
& Tool Co.
In the normal course of operations, we subcontract certain machining
and sheet metal fabrication of parts to Viking Engineering & Tool Co., a company owned by the father and uncle of Joseph
Cargnelli, a director and senior officer of the Company and one of our principal shareholders. For the fiscal year ended December
31, 2015, billings by this related company totalled $0.1 million (2014 - $0.2 million, 2013 - $0.2 million). At December 31, 2015,
and February 29, 2016 we had an accounts payable balance due to this related company of less than $0.1 million in both periods.
We believe that transactions with this company are consistent with those we have with unrelated third parties.
Transactions with Joint Venture
The Company holds an equity investment in the joint venture Kolon
Hydrogenics. During 2015, the Company had sales to the joint venture of $0.7 million (2014 - $3.1 million), and at the end of December
31, 2015 the Company had a receivable of $0.4 million (2014 - $0.9 million) owing from the joint venture.
9.
Risk Factors
An investment in our common shares involves risk. Investors
should carefully consider the risks described below and the other information contained in, and incorporated by reference in, this
annual information form, including management’s discussion and analysis and our financial statements for the year ended December
31, 2015, which is available on SEDAR at www.sedar.com. The risks described below 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.
Risk Factors Related to Our Financial Condition
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.
At December 31, 2015, we had approximately $24.9 million of cash
and cash equivalents and restricted cash (2014 - $10.6 million). Restricted cash of $1.5 million is held as partial security for
standby letters of credit and letters of finance. There are uncertainties related to the timing and use of our cash resources and
working capital requirements. These uncertainties include, among other things, the timing and volume of commercial sales and associated
gross margins of our existing products and the development of markets for, and customer acceptance of, new products. To the extent
possible, we attempt to limit the significance of these risks by: (i) continually monitoring our sales prospects; (ii) continually
aiming to reduce product cost; and (iii) advancing our technology platforms and product designs. However, given that many of the
above noted factors are outside of our control, we may not be able to accurately predict our necessary cash expenditures or obtain
financing in a timely manner to cover any shortfalls.
If we are unable to generate sufficient cash flows or obtain adequate
additional financing which, given the current global economy and credit markets, is challenging, we may be unable to respond to
the actions of our competitors or we may be prevented from executing our business plan, or conducting all or a portion of our planned
operations. In particular, the development and commercialization of our products could be delayed or discontinued if we are unable
to fund our research and product development activities or the development of our manufacturing capabilities. In addition, we may
be forced to reduce our sales and marketing efforts or forego attractive business opportunities.
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.
While we continuously monitor the state of the broader economic
climate and, particularly, the markets in which we operate, the uncertain and unpredictable condition of the current global economy
and credit markets affects our outlook in three distinct ways. First, our products depend to some degree on general world economic
conditions and activity. If the current condition of the economy declines or we experience a continued slow return to economic
growth, demand for our products is not likely to increase significantly. Second, the current uncertain economic climate could adversely
affect our ability to conduct normal day-to-day selling activities, which depend on the granting of short-term credit to a wide
variety of purchasers and, particularly, the corresponding needs of those purchasers. Third, those purchasers have a corresponding
need to finance purchases by accessing their own lines of credit, which could become increasingly difficult. If the current condition
of the economy does not continue to improve, our business will likely be adversely affected.
In the case of an economic decline or a sustained period of slow
economic growth, we expect to experience significant difficulties on a number of fronts. As a result, we may face new risks as
yet unidentified. In addition, a number of risks that we ordinarily face and that are further described herein may increase in
likelihood, magnitude and duration. These risks include but are not limited to deferrals or reductions of customer orders, potential
deterioration of our customers’ ability to finance purchases, reduced revenue, further deterioration in our cash balances
and liquidity due to negative foreign currency exchange rates, and an inability to access capital markets.
Our operating results may be subject to currency fluctuation.
Our monetary assets and liabilities denominated in currencies other
than the US dollar will give rise to a foreign currency gain or loss reflected in net income (loss). To the extent the Canadian
dollar or the Euro strengthens against the US dollar, we may incur foreign exchange losses on our net consolidated monetary asset
balance, which is denominated in those currencies. Such losses would be included in our financial results, and consequently, may
have an adverse effect on our share price.
As we currently have operations based in Canada and Europe, a significant
portion of our expenses are in Canadian dollars and Euros. However, a significant part of our revenues are currently generated
in US dollars and Euros, and we expect this will continue for the foreseeable future. In addition, we may be required to finance
our European operations by exchanging Canadian dollars or US dollars into Euros. The exchange rates between the Canadian dollar,
the US dollar and the Euro are subject to daily fluctuations in the currency markets and these fluctuations in market exchange
rates are expected to continue in the future. Such fluctuations affect both our consolidated revenues as well as our consolidated
costs. If the value of the US dollar weakens against the Canadian dollar or the Euro, the profit margin on our products may be
reduced. Also, changes in foreign exchange rates may affect the relative costs of operations and prices at which we and our foreign
competitors sell products in the same market. While we continuously monitor foreign exchange fluctuations and review forecasted
changes regularly, we currently have limited currency hedging through financial instruments. We carry a portion of our short-term
investments in Canadian dollars and Euros.
Our mix of revenues in the recent past does not reflect our current
business strategy, it may be difficult to assess our business and future prospects.
For the year ended December 31, 2015,
we derived $23.6 million or 66% of revenues from our sales of hydrogen generation products and services and $12.3 million, or 34%,
of our revenues from sales of power products and services. For the year ended December 31, 2014, we derived $30.2 million or 66%
of revenues from our sales of hydrogen generation products and services and $15.3 million, or 34%, of our revenues from sales of
power products and services. Our current business strategy is to develop, manufacture and sell hydrogen energy storage systems,
hydrogen generation products and fuel cell power products in larger quantities. Because we have made limited sales of hydrogen
energy storage systems and fuel cell power products to date, our historical operating data may be of limited value in evaluating
our future prospects.
We may not be able to implement our business strategy and the price of our common
shares may decline.
We have not generated positive net income since our inception. Our
current business strategy is to develop a portfolio of hydrogen and fuel cell products with market leadership positions for each
product. In so doing, we will continue to incur significant expenditures for general administrative activities, including sales
and marketing and product research and development. As a result of these costs, we will need to generate and sustain significantly
higher revenues and positive gross margins to achieve and sustain profitability. We incurred a net loss for the year ended December
31, 2015 of $11.7 million, and a net loss for the year ended ended December 31, 2014 of $4.5 million, and a net loss for the year
ended December 31, 2013. Our accumulated deficit as at December 31, 2015 was $361.6 million, at December 31, 2014 was $349.6 million,
and at December 31, 2013 was $345.4 million.
As noted above, our strategy to limit the significance of these
risks and uncertainties is to execute a business plan aimed at increasing market penetration to achieve
forecasted revenues, improving operating cash flows, continuing to invest in product research and development, entering into complementary
markets, improving overall gross margins, and securing additional financing to fund our operations as needed. However, we
expect to incur significant operating expenses over the next several years. Accordingly, 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.
Our quarterly revenues and operating results have varied significantly
in the past and are likely to vary in the future. These quarterly fluctuations in our operating performance result from the length
of time between our first contact with a customer and the recognition of revenue from sales to that customer. Some of our products
are highly engineered and many are still in development stages; therefore, the length of time between approaching a customer and
delivering our products to that customer can span many quarterly periods. In many cases, a customer’s decision to buy our
products and services may require the customer to change its established business practices and to conduct its business in new
ways. As a result, we must educate customers on the use and benefits of our products and services. This can require us to commit
significant time and resources without necessarily generating any revenues. Many potential customers may wish to enter into trial
arrangements with us in order to use our products and services on a trial basis. The success of these trials may determine whether
or not the potential customer purchases our products or services on a commercial basis. Potential customers may also need to obtain
approval at a number of management levels and one or more regulatory approvals. This may delay a decision to purchase our products.
The length and variability of the sales cycles for our products
make it difficult to forecast accurately the timing and amount of specific sales and corresponding revenue recognition. The delay
or failure to complete one or more large sales transactions could significantly reduce our revenues for a particular quarter. We
may expend substantial funds and management effort during our sales cycle with no assurance that we will successfully sell our
products. As a result, our quarterly operating results are likely to fluctuate significantly and we may fail to meet the expectations
of securities analysts and investors, and the price of our common shares may 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.
While our business plan and sales and marketing strategy contemplates
a diverse base of future customers, to date a relatively limited number of customers have accounted for a majority of our revenues
and we expect they will continue to do so for the foreseeable future. Our four largest customers accounted for 29% of revenues
for the year ended December 31, 2015 (39% of revenues for the year ended December 31, 2014, 48% of revenues for the year ended
December 31, 2013). The identities of some of our largest customers have changed from year to year. Our arrangements with these
customers are generally non-exclusive, have no volume commitments and are often on a purchase order basis. We cannot be certain
customers who have accounted for significant revenue in past periods will continue to purchase our products and allow us to generate
revenues. Accordingly, our revenue and results of operations may vary from period to period. We are also subject to credit risk
associated with the concentration of our accounts receivable from these significant customers. If one or more of these significant
customers were to cease doing business with us, significantly reduce or delay purchases from us, or fail to pay on a timely basis,
our business, consolidated financial condition and results of operations could be materially adversely affected.
Our insurance may not be sufficient.
We carry insurance that we consider adequate considering the nature
of the risks and costs of coverage. We may not, however, be able to obtain insurance against certain risks or for certain products
or other resources located from time to time in certain areas of the world. We are not fully insured against all possible risks,
nor are all such risks insurable. Thus, although we maintain insurance coverage, such coverage may not be adequate.
Certain external factors may affect the value of goodwill, which
may require us to recognize an impairment charge.
Goodwill arising from our acquisition of Stuart Energy in 2005 comprises
approximately 6.9% of our total assets at December 31, 2015 (9.6% of our total assets at December 31, 2014, 13.1% of our total
assets at December 31, 2013). Economic, market, legal, regulatory, competitive, customer, contractual and other factors may affect
the value of goodwill. If any of these factors impair the value of these assets, accounting rules require us to reduce their carrying
value and recognize an impairment charge. This would reduce our reported assets and earnings in the year the impairment charge
is recognized.
Risk Factors Related to Our Business and Industry
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.
Significant markets may never develop for fuel cell and other hydrogen
energy products or they may develop more slowly than we anticipate. Any such delay or failure would significantly harm our revenues
and we may be unable to recover the losses we have incurred and expect to continue to incur in the development of our products.
If this were to occur, we may never achieve profitability and our business could fail. Fuel cell and other hydrogen energy products
represent an emerging market, and whether or not end-users will want to use them may be affected by many factors, some of which
are beyond our control, including: the emergence of more competitive technologies and products; other environmentally clean technologies
and products that could render our products obsolete; the future cost of hydrogen and other fuels used by our fuel cell products;
the future cost of the membrane electrode assembly used in our fuel cell products; the future cost of platinum group metals, a
key catalyst used in our fuel cell and hydrogen generation products; the regulatory requirements of agencies, including the development
of uniform codes and standards for fuel cell products, hydrogen refueling infrastructure and other hydrogen energy products; government
support by way of legislation, tax incentives, policies or otherwise, of fuel cell technology, hydrogen storage technology and
hydrogen refueling technology; the manufacturing and supply costs for fuel cell components and systems; the perceptions of consumers
regarding the safety of our products; the willingness of consumers to try new technologies; the continued development and improvement
of existing power technologies; and the future cost of fuels used in existing technologies.
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.
If our fuel cell product customers are not able to obtain hydrogen
on a cost-effective basis, we may be unable to compete with existing power sources and our revenues and results of operations would
be materially adversely affected. Our fuel cell products require oxygen and hydrogen to operate. While ambient air can typically
supply the necessary oxygen, our fuel cells rely on hydrogen derived from water or from fuels, such as natural gas, propane, methanol
and other petroleum products. We manufacture and develop hydrogen generation systems called electrolyzers that use electricity
to separate water into its constituent parts of hydrogen and oxygen. In addition, third parties are developing systems to extract,
or reform, hydrogen from fossil fuels. Significant growth in the use of hydrogen powered devices, particularly in the motive power
market, may require the development of an infrastructure to deliver the hydrogen. There is no guarantee that such an infrastructure
will be developed on a timely basis or at all. Even if hydrogen is available for our products, if its price is such that electricity
or power produced by our systems would cost more than electricity provided by other means, we may be unable to compete successfully.
Changes in government policies and regulations could hurt the market for our products.
The fuel cell and hydrogen industry is in its development phase
and is not currently subject to industry specific government regulations in Canada, the European Union, the United States, as well
as other jurisdictions, relating to matters such as design, storage, transportation and installation of fuel cell systems and hydrogen
infrastructure products. However, given that the production of electrical energy has typically been an area of significant government
regulation, we expect we will encounter industry specific government regulations in the future in the jurisdictions and markets
in which we operate. For example, regulatory approvals or permits may be required for the design, installation and operation of
stationary fuel cell systems under federal, state and provincial regulations governing electric utilities and motive power fuel
cell systems under federal, state and provincial emissions regulations affecting automobile and truck manufacturers. To the extent
there are delays in gaining such regulatory approval, our development and growth may be constrained. Furthermore, the inability
of our potential customers to obtain a permit, or the inconvenience often associated with the permit process, could harm demand
for fuel cell and other hydrogen products and, therefore, harm our business.
Our business will suffer if environmental policies change and no
longer encourage the development and growth of clean power technologies. The interest by automobile manufacturers in fuel cell
technology has been driven in part by environmental laws and regulations. There is no guarantee these laws and regulations will
not change and any such changes could result in automobile manufacturers abandoning their interest in fuel cell powered vehicles.
In addition, if current laws and regulations are not kept in force, or if further environmental laws and regulations are not adopted,
demand for vehicular fuel cells may be limited.
The market for stationary and portable energy related products is
influenced by federal, state and provincial government regulations and policies concerning the electric utility industry. Changes
in regulatory standards or public policy could deter further investment in the research and development of alternative energy sources,
including fuel cells and fuel cell products, and could result in a significant reduction in the potential market demand for our
products. We cannot predict how changing government regulation and policies regarding the electric utility industry will affect
the market for stationary and portable fuel cell systems.
Although the development of alternative energy sources and, in particular,
fuel cells, has been identified as a significant priority by many governments, we cannot be assured that governments will not change
their priorities or that any such change would not materially affect our revenues and our business. If governments change their
laws and regulations such that the development of alternative energy sources is no longer required or encouraged, the demand for
alternative energy sources, such as our fuel cell products may be significantly reduced or delayed and our sales would decline.
Lack of new government policies and regulations for the energy
storage technologies could hurt the development of the Power-to-Gas market for our hydrogen energy storage products.
One of the critical factors for Power-to-Gas project developers
in securing project financing, or to justify the capital investment internally, is the ability to monetize a sufficient portion
of the “diffused benefits” of the project. This may be accomplished through a contract mechanism or a combination
of new market reforms such as provision of new ancillary services such as load following or ramping service, tariffs for renewable
gas, and favourable electricity purchase provisions (eg. special exemption for transmission and network uplifts and other charges
on wholesale power purchases). While Power-to-Gas demonstration projects are being built today, if new government regulations
for large scale energy storage projects are not implemented, or are not sufficient to justify the investment by project developers,
it would critically impede our ability to sell electrolyzers for commercial-scale Power-to-Gas into those markets.
The 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.
Uniform codes and standards do not currently exist for fuel cell
systems, fuel cell components, hydrogen internal combustion engines or for the use of hydrogen as a vehicle fuel. Establishment
of appropriate codes and standards is a critical element to allow fuel cell system developers, fuel cell component developers,
hydrogen internal combustion engine developers, hydrogen infrastructure companies and hydrogen storage and handling companies to
develop products that will be accepted in the marketplace.
The development of hydrogen standards is being undertaken by numerous
organizations. Given the number of organizations pursuing hydrogen codes and standards, it is not clear whether universally accepted
codes and standards will occur in a timely fashion, if at all.
We could be liable for environmental damages resulting from our
research, development or manufacturing operations.
Our business exposes us to the risk of harmful substances escaping
into the environment, resulting in personal injury or loss of life, damage to or destruction of property, and natural resource
damage. Depending on the nature of the claim, our current insurance policies may not adequately reimburse us for costs incurred
in settling environmental damage claims and, in some instances, we may not be reimbursed at all. Our business is subject to numerous
laws and regulations that govern environmental protection and human health and safety. These laws and regulations have changed
frequently in the past and it is reasonable to expect additional more stringent changes in the future. Our operations may not comply
with future laws and regulations and we may be required to make significant unanticipated capital and operating expenditures. If
we fail to comply with applicable environmental laws and regulations, government authorities may seek to impose fines and penalties
on us, or to revoke or deny the issuance or renewal of operating permits, and private parties may seek damages from us. Under those
circumstances, we might be required to curtail or cease operations, conduct site remediation or other corrective action, or pay
substantial damage claims.
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.
In our markets for hydrogen generation systems, we compete with
a number of companies that develop and manufacture hydrogen generation products based on on-site water electrolysis and/or reforming
technologies. We also compete with suppliers of hydrogen gas that deliver hydrogen to the customer’s site in tube trailers
or cylinders or by pipeline. In many cases, these suppliers have established delivery infrastructure and customer relationships.
In the commercial production of fuel cell power products, we compete
with a number of companies that currently have fuel cell and fuel cell system development programs. We expect several of these
competitors will be able to deliver competing products to certain markets before we do. While our strategy is the development of
fuel cell and hydrogen generation technologies for sale to end-users, systems integrators, governments and market channel partners,
many of our competitors are developing products specifically for use in particular markets. These competitors may be more successful
in penetrating their specific markets than we are. In addition, an increase in the popularity of fuel cell power in particular
market channels may cause certain of our customers to develop and produce some or all of the fuel cell technologies we are developing.
Competition in the markets for fuel cell power modules and hydrogen
generation equipment is significant and will likely persist and intensify over time. We compete directly and indirectly with a
number of companies that provide products and services that are competitive with all, some or part of our products and related
services. Many of our existing and potential competitors have greater brand name recognition and their products may enjoy greater
initial market acceptance among our potential customers. In addition, many of these competitors have significantly greater financial,
technical, sales, marketing, distribution, service and other resources than we have and may also be better able to adapt quickly
to customers’ changing demands and to changes in technology.
While it is our strategy to continuously improve our products, if
we are unable to do so, and if we cannot generate effective responses to our competitors’ brand power, product innovations,
pricing strategies, marketing campaigns, partnerships, distribution channels, service networks and other initiatives, our ability
to gain market share or market acceptance for our products could be limited, our revenues and our profit margins may suffer, and
we may never become profitable.
We face competition for fuel cell power products from developers and manufacturers
of traditional technologies and other alternative technologies.
Each of our target markets is currently served by manufacturers
with existing customers and suppliers. These manufacturers use proven and widely accepted traditional technologies such as internal
combustion engines and turbines, as well as coal, oil, gas and nuclear powered generators. Additionally, there are competitors
working on developing technologies that use other types of fuel cells, energy storage technologies, hydrogen generation technologies
and other alternative power technologies, advanced batteries and hybrid battery/internal combustion engines, which may compete
for our target customers. Given that PEM fuel cells and electrolyzers have the potential to replace these existing power sources,
competition in our target markets will also come from these traditional power technologies, from improvements to traditional power
technologies and from new alternative power technologies, including other types of fuel cells.
If we are unable to continuously improve our products and if we
cannot generate effective responses to incumbent and/or alternative energy competitors’ brand power, product innovations,
pricing strategies, marketing campaigns, partnerships, distribution channels, service networks and other initiatives, our ability
to gain market share or market acceptance for our products could be limited, our revenues and our profit margins may suffer, and
we may never become profitable.
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.
Other than in a few specific markets, our strategy is to develop
and manufacture products and systems for sale to OEMs, governments, systems integrators, suppliers and other market channel partners
that have mature sales and distribution networks for their products. Our success may be heavily dependent on our ability to establish
and maintain relationships with these partners who will integrate our fuel cell products into their products and on our ability
to find partners who are willing to assume some of the research and development costs and risks associated with our technologies
and products. Our performance may, as a result, depend on the success of other companies, and there are no assurances of their
success. We can offer no guarantee that OEMs, governments, systems integrators, suppliers and other market channel partners will
manufacture appropriate products or, if they do manufacture such products, that they will choose to use our products as components.
The end products into which our fuel cell technology will be incorporated will be complex appliances comprising many components
and any problems encountered by such third parties in designing, manufacturing or marketing their products, whether or not related
to the incorporation of our fuel cell products, could delay sales of our products and adversely affect our financial results. Our
ability to sell our products to the OEM markets depends to a significant extent on our partners’ worldwide sales and distribution
networks and service capabilities. In addition, some of our agreements with customers and partners require us to provide shared
intellectual property rights in certain situations, and there can be no assurance that any future relationships we enter into will
not require us to share some of our intellectual property. Any change in the fuel cell, hydrogen or alternative fuel strategies
of one of our partners could have a material adverse effect on our business and our future prospects.
In addition, in some cases, our relationships are governed by a
non-binding memorandum of understanding or a letter of intent. We cannot provide the assurance that we will be able to successfully
negotiate and execute definitive agreements with any of these partners, and failure to do so may effectively terminate the relevant
relationship. We also have relationships with third party distributors who also indirectly compete with us. For example, we have
targeted industrial gas suppliers as distributors of our hydrogen generators. Because industrial gas suppliers currently sell hydrogen
in delivered form, adoption by their customers of our hydrogen generation products could cause them to experience declining demand
for delivered hydrogen. For this reason, industrial gas suppliers may be reluctant to purchase our hydrogen generators. In addition,
our third party distributors may require us to provide volume price discounts and other allowances, or customize our products,
either of which could reduce the potential profitability of these relationships.
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 rely on third party suppliers to provide key materials and components
for our fuel cell power products and hydrogen generation products. While we undertake due diligence before engaging with a supplier,
a supplier’s failure to provide materials or components in a timely manner, or to provide materials and components that meet
our quality, quantity or cost requirements, or our inability to obtain substitute sources for these materials and components in
a timely manner or on terms acceptable to us, may harm our ability to manufacture our products cost-effectively or at all, and
our revenues and gross margins might suffer. To the extent we are unable to develop and patent our own technology and manufacturing
processes and, to the extent that the processes our suppliers use to manufacture materials and components are proprietary, we may
be unable to obtain comparable materials or components from alternative suppliers and that could adversely affect our ability to
produce commercially viable products.
We may not be able to manage successfully the anticipated expansion of our operations.
The uneven pace of our anticipated expansion in facilities, staff
and operations may place serious demands on our managerial, technical, financial and other resources. We may be required to make
significant investments in our engineering and logistics systems and our financial and management information systems, as well
as retaining, motivating and effectively managing our employees. While we continually monitor our sales outlook and adjust our
business plans as necessary, our management skills and systems currently in place may not enable us to implement our strategy or
to attract and retain skilled management, engineering and production personnel. Our failure to manage our growth effectively or
to implement our strategy in a timely manner may significantly harm our ability to achieve profitability.
If we do not properly manage foreign sales and operations, our business could suffer.
We expect that a substantial portion of our future revenues will
continue to be derived from foreign sales. Our international activities may be subject to inherent risks, including regulatory
limitations restricting or prohibiting the provision of our products and/or services, unexpected changes in regulatory requirements,
tariffs, customs, duties and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles,
problems in collecting accounts receivable, fluctuations in currency exchange rates, foreign exchange controls that restrict or
prohibit repatriation of funds, technology export and/or import restrictions or prohibitions, delays from customs brokers or government
agencies, seasonal reductions in business activity and potentially adverse tax consequences resulting from operating in multiple
jurisdictions. While we aim to employ experienced knowledgeable management in our foreign operations, if we do not properly manage
foreign operations, our business could suffer.
We will need to recruit, train and retain key management and other qualified personnel
to successfully expand our business.
Our future success will depend in large part on our ability to recruit
and retain experienced research and development, engineering, manufacturing, operating, sales and marketing, customer service and
management personnel. We compete in emerging markets and there are a limited number of people with the appropriate combination
of skills needed to provide the services our customers require. In the past, we have experienced difficulty in recruiting qualified
personnel and we expect to experience continued difficulties in personnel recruiting. If we do not attract such personnel, we may
not be able to expand our business. In addition, new employees generally require substantial training, which requires significant
resources and management attention. Our success also depends on retaining our key management, research, product development, engineering,
marketing and manufacturing personnel. Even if we invest significant resources to recruit, train and retain qualified personnel,
we may not be successful in our efforts.
We may acquire technologies or companies in the future, and these acquisitions could
disrupt our business and dilute our shareholders’ interests.
We may acquire additional technologies or other companies in the
future and we cannot provide assurances that we will be able to successfully integrate their operations or that the cost savings
we anticipate will be fully realized. Entering into an acquisition or investment entails many risks, any of which could materially
harm our business, including: diversion of management’s attention from other business concerns; failure to effectively assimilate
the acquired technology, employees or other assets into our business; the loss of key employees from either our current business
or the acquired business; and the assumption of significant liabilities of the acquired company.
If we complete additional acquisitions, we may dilute the ownership
of current shareholders. In addition, achieving the expected returns and cost savings from our past and future acquisitions will
depend in part on our ability to integrate the products and services, technologies, research and development programs, operations,
sales and marketing functions, finance, accounting and administrative functions, and other personnel of these businesses into our
business in an efficient and effective manner. We cannot ensure we will be able to do so or that the acquired businesses will perform
at anticipated levels. If we are unable to successfully integrate acquired businesses, our anticipated revenues may be lower and
our operational costs may be higher.
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 have manufactured most of our products in our Power Systems segment
for prototypes and initial sales, and we have limited experience manufacturing products on a larger scale. We have experience manufacturing
products on a larger scale in our Generation segment. In order to produce certain of our products at affordable prices, we will
have to manufacture a large volume of such products. While several members of our senior management team have significant experience
in developing high volume manufacturing strategies for new products and while we have developed plans for efficient, low-cost manufacturing
capabilities and processes that will enable us to meet the quality, price, engineering, design and production standards or production
volumes required to successfully mass market such products, we do not know whether these plans will be implemented such that they
will satisfy the requirements of our customers and the market for the Power Systems segment. Our failure to develop these manufacturing
processes and capabilities in a timely manner could prevent us from achieving our growth and profitability objectives.
Risk Factors Related to Our Products and Technology
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 have made commercial sales of fuel cell power modules, integrated
fuel cell systems, hydrogen refueling stations and hydrogen energy storage systems for a relatively short period of time. Because
both our business and industry are still in the developmental stage, we do not know when or whether we will successfully complete
research and development of commercially viable fuel cell power products and commercially viable hydrogen generation equipment
for new hydrogen energy applications. If we do not complete the development of such commercially viable products, we will be unable
to meet our business and growth objectives. We expect to face unforeseen challenges, expenses and difficulties as a developing
company seeking to design, develop and manufacture new products in each of our targeted markets. Our future success also depends
on our ability to effectively market fuel cell products and hydrogen generation products once developed.
We must 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.
While we have significantly reduced the cost of our technology and
products in the past few years and we are continuously seeking and implementing additional product and manufacturing cost reductions,
fuel cells currently cost more than many established competing technologies, such as internal combustion engines and batteries.
The prices of fuel cell and hydrogen generation products are dependent largely on material and manufacturing costs. We cannot guarantee
we will be able to lower these costs to a level where we will be able to produce a competitive product or that any product we produce
using lower cost materials and manufacturing processes will not suffer from lower performance, reliability and longevity. If we
are unable to produce fuel cell and hydrogen generation products that are competitive with other technologies in terms of price,
performance, reliability and longevity, consumers will be unlikely to buy our fuel cell and hydrogen generation products. Accordingly,
we would not be able to generate sufficient revenues with positive gross margins 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.
We regularly field test our products and we plan to conduct additional
field tests in the future. While we dynamically manage the execution and results of these tests, any failures or delays in our
field tests could harm our competitive position and impair our ability to sell our products. Our field tests may encounter problems
and delays for a number of reasons, including the failure of our technology, the failure of the technology of others, the failure
to combine these technologies properly, operator error and the failure to maintain and service the test prototypes properly. Many
of these potential problems and delays are beyond our control. In addition, field test programs, by their nature, may involve delays
relating to product roll-out and modifications to product design, as well as third party involvement. Any problem or perceived
problem with our field tests, whether it originates from our technology, our design, or third parties, could damage our reputation
and the reputation of our products and limit our sales. Such field test failures may negatively affect our relationships with customers,
require us to extend field testing longer than anticipated before undertaking commercial sales and require us to develop further
our technology to account for such failures prior to the field tests, thereby increasing 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.
Our products are complex and must meet the stringent technical requirements
of our customers. The software and other components used in our fuel cell and hydrogen generation products may contain undetected
defects or errors, especially when first introduced, which could result in the failure of our products to perform, damage to our
reputation, delayed or lost revenue, product returns, diverted development resources and increased development, service and warranty
costs.
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.
While we actively and continuously monitor the developing markets
and regulations in markets for our products, our success depends in large part on our ability to keep our products current and
compatible with evolving technologies, codes and standards. Unexpected changes in technology or in codes and standards could disrupt
the development of our products and prevent us from meeting deadlines for the delivery of products. If we are unable to keep pace
with technological advancements and adapt our products to new codes and standards in a timely manner, our products may become uncompetitive
or obsolete and our revenues would suffer.
We depend on intellectual property and our failure to protect
that intellectual property could adversely affect our future growth and success.
While we proactively and regularly review our intellectual property
protection strategy, failure to protect our intellectual property rights may reduce our ability to prevent others from using our
technology. We rely on a combination of patent, trade secret, trademark and copyright laws to protect our intellectual property.
Some of our intellectual property is currently not covered by any patent or patent application. Patent protection is subject to
complex factual and legal criteria that may give rise to uncertainty as to the validity, scope and enforceability of a particular
patent. Accordingly, we cannot be assured that: any of the United States, Canadian or other patents owned by us or third party
patents licensed to us will not be invalidated, circumvented, challenged, rendered unenforceable, or licensed to others; or any
of our pending or future patent applications will be issued with the breadth of protection that we seek, if at all.
In addition, effective patent, trademark, copyright and trade secret
protection may be unavailable, limited, not applied for, or unenforceable in foreign countries.
Furthermore, although we typically retain sole ownership of the
intellectual property we develop, in certain circumstances we provide for shared intellectual property rights.
We have also entered into agreements with other customers and partners
that involve shared intellectual property rights. Any developments made under these agreements will be available for future commercial
use by all parties to the agreement.
We also seek to protect our proprietary intellectual property through
contracts including, when possible, confidentiality agreements and inventors’ rights agreements with our customers and employees.
We cannot be sure that the parties who enter into such agreements with us will not breach them, that we will have adequate remedies
for any breach or that such persons or institutions will not assert rights to intellectual property arising out of these relationships.
If necessary or desirable, we may seek licences under the patents or other intellectual property rights of others. However, we
cannot be sure we will obtain such licences or that the terms of any offered licences will be acceptable to us. Our failure to
obtain a licence from a third party for intellectual property we use in the future could cause us to incur substantial liabilities
and to suspend the manufacture and shipment of products or our use of processes that exploit such intellectual property.
Our involvement in intellectual property litigation could negatively
affect our business.
Our future success and competitive position depend in part on our
ability to obtain or maintain the proprietary intellectual property used in our principal products. In order to establish and maintain
such a competitive position, we may need to prosecute claims against others who we believe are infringing our rights and defend
claims brought by others who believe we are infringing their rights. Our involvement in intellectual property litigation could
result in significant expense to us, adversely affect the sale of any products involved or the use or licensing of related intellectual
property and divert the efforts of our technical and management personnel from their principal responsibilities, regardless of
whether such litigation is resolved in our favour. If we are found to be infringing on the intellectual property rights of others,
we may, among other things, be required to: pay substantial damages; cease the development, manufacture, use, sale or importation
of products that infringe on such intellectual property rights; discontinue processes incorporating the infringing technology;
expend significant resources to develop or acquire non-infringing intellectual property; or obtain licences to the relevant intellectual
property.
We cannot offer any assurance we will prevail in any such intellectual
property litigation or, if we were not to prevail in such litigation that licences to the intellectual property we are found to
be infringing on would be available on commercially reasonable terms, if at all. The cost of intellectual property litigation as
well as the damages, licensing fees or royalties that we might be required to pay could have a material adverse effect on our business
and financial results.
Our products use flammable fuels that are inherently dangerous
substances and could subject us to product liabilities.
While it is a key focus of management to develop and manufacture
safe and reliable products, our financial results could be materially impacted by accidents involving either our products or those
of other fuel cell manufacturers, either because we face claims for damages or because of the potential negative impact on demand
for fuel cell products. Our products use hydrogen, which is typically generated from gaseous and liquid fuels, such as propane,
natural gas or methanol, in a process known as reforming. While our fuel cell products do not use these fuels in a combustion process,
natural gas, propane and other hydrocarbons are flammable fuels that could leak and then combust if ignited by another source.
In addition, certain of our OEM partners and customers may experience significant product liability claims. As a supplier of products
and systems to these OEMs, we face an inherent business risk of exposure to product liability claims in the event our products,
or the equipment into which our products are incorporated, malfunction and result in personal injury or death. We may be named
in product liability claims even if there is no evidence our systems or components caused the accidents. Product liability claims
could result in significant losses from expenses incurred in defending claims or the award of damages. Since our products have
not yet gained widespread market acceptance, any accidents involving our systems, those of other fuel cell products or those used
to produce hydrogen could materially impede acceptance of our products. In addition, although our management believes our liability
coverage is currently adequate to cover these risks, we may be held responsible for damages beyond the scope of our insurance coverage.
Risk Factors Related to Ownership of Our Common Shares
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.
We would be classified as a passive foreign investment company (“PFIC”),
for US federal income tax purposes, in any taxable year in which, after applying relevant look-through rules with respect to the
income and assets of our subsidiaries, either at least 75% of our gross income is ‘‘passive income,’’ or
on average at least 50% of the gross value of our assets is attributable to assets that produce passive income or are held for
the production of passive income.
Based on our structure, and the composition of our income and assets,
we do not believe we were a PFIC for the taxable year ended December 31, 2015 or the prior taxable year. However, there can be
no assurance the Internal Revenue Service will not successfully challenge our position or that we will not become a PFIC in a future
taxable year, as PFIC status is retested each year and depends on our assets and income in that year. If we are classified as a
PFIC at any time that a US shareholder holds our common shares, such shareholder may be subject to an increased US federal income
tax liability and a special interest charge in respect of a gain recognized on the sale or other disposition of our common shares
and upon the receipt of certain ‘‘excess distributions’’ (as defined in the United States Internal Revenue
Code of 1986, as amended).
US shareholders should consult their own tax advisors concerning
the US federal income tax consequences of holding our common shares if we were a PFIC in any taxable year and its potential application
to their particular situation.
A limited number of shareholders collectively own a significant
portion of our common shares and may act, or prevent corporate actions, to the detriment of other shareholders.
A limited number of shareholders, including our founders, CommScope,
Enbridge, and General Motors, currently own a significant portion of our outstanding common shares. CommScope currently owns approximately
10.6% of our outstanding common shares. Enbridge currently owns approximately 4.7% of our outstanding common shares. General Motors
currently owns approximately 4.5% of our outstanding common shares. Accordingly, these shareholders may exercise significant influence
over all matters requiring shareholder approval, including the election of a majority of our directors and the determination of
significant corporate actions. This concentration could also have the effect of delaying or preventing a change in control that
could otherwise be beneficial to our 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.
Failure to meet the applicable continued listing requirements of
Nasdaq could result in our common shares being delisted from Nasdaq. In the past we have been unable to meet the Nasdaq requirements
for continued listing on the Nasdaq Global Market for certain periods of time, and though we have regained compliance of such requirements,
we may not be able to meet the requirements in the future. On September 18, 2012, we received notices from Nasdaq informing us
that we failed to maintain a market value of listed securities of at least $50.0 million for 30 consecutive business days, in addition
to the fact that we did not meet the minimum $50.0 million total assets and total revenues standard under Nasdaq Listing Rule 5450(b)(3)(A).
We were given 180 days to regain compliance by having our market capitalization exceed $50.0 million for a minimum of 10 consecutive
business days prior to the end of the 180-day period. We regained compliance on December 10, 2012.
If we fail to satisfy Nasdaq’s continued listing requirements,
our common shares could be delisted from Nasdaq, in which case we may transfer to the Nasdaq Capital Market, which generally has
lower financial requirements for initial listing or, if we fail to meet its listing requirements, the over-the-counter bulletin
board. However, there can be no assurance that our common shares will be eligible for trading on any such alternative exchanges
or markets in the United States. If we are delisted from Nasdaq, it could materially reduce the liquidity of our common shares,
lower the price of our common shares, and impair our ability to raise financing.
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.
If our principal shareholders, including our founders, sell substantial
amounts of their common shares in the public market, the market price of our common shares could fall and the value of a shareholder’s
investment could be reduced. The perception among investors that these sales may occur could have a similar effect. Share price
declines may be exaggerated if the low trading volume that our common shares have experienced to date continues. These factors
could also make it more difficult for us to raise additional funds through future offerings of our common shares or other securities.
Our articles of incorporation authorize us to issue an unlimited
number of common and preferred shares. Significant issuances of common or preferred shares could dilute the share ownership of
our shareholders, deter or delay a takeover of us that our shareholders may consider beneficial or depress the trading price of
our common shares.
Our articles of incorporation permit us to issue an unlimited number
of common and preferred shares. If we were to issue a significant number of common shares, it would reduce the relative voting
power of previously outstanding shares. Such future issuances could be at prices less than our shareholders paid for their common
shares. If we were to issue a significant number of common or preferred shares, these issuances could also deter or delay an attempted
acquisition of us that a shareholder may consider beneficial, particularly, in the event that we issue preferred shares with special
voting or dividend rights. While NASDAQ and Toronto Stock Exchange rules may require us to obtain shareholder approval for significant
issuances, we would not be subject to these requirements if we ceased, voluntarily or otherwise, to be listed on NASDAQ and the
Toronto Stock Exchange. Significant issuances of our common or preferred shares, or the perception that such issuances could occur,
could cause the trading price of our common shares to drop.
US investors may not be able to enforce US civil liability judgments
against us or our directors and officers.
We are organized under the laws of Canada. A majority of our directors
and officers are residents of Canada and all or a substantial portion of their assets and substantially all of our assets are located
outside of the United States. As a result, it may be difficult for US holders of our common shares to effect service of process
on these persons within the United States or to realize in the United States on judgments rendered against them. In addition, a
shareholder should not assume that the courts of Canada: (i) would enforce the judgments of US courts obtained in actions against
us or such persons predicated on the civil liability provisions of US federal securities laws or other laws of the United States;
or (ii) would enforce, in original actions, claims against us or such persons predicated on the US federal securities laws.
Our share price is volatile and we may continue to experience
significant share price and volume fluctuations.
Since our common shares were initially offered to the public in
November 2000, the stock markets, particularly in the technology and alternative energy sectors, and our share price have experienced
significant price and volume fluctuations. Our common shares may continue to experience volatility for reasons unrelated to our
own operating performance, including: performance of other companies in the fuel cell or alternative energy business; news announcements,
securities analysts’ reports and recommendations and other developments with respect to our industry or our competitors;
or changes in general economic conditions.
As at December 31, 2015 there were 536,174 stock options to purchase
our common shares. If these securities are exercised, our shareholders will incur substantial dilution.
A significant element in our business plan to attract and retain
qualified personnel is the issuance to such persons options to purchase our common shares. At December 31, 2015, we have issued
and have outstanding 536,174 options to purchase our common shares at an average price of CA$6.97 per common share. Accordingly,
to the extent that we are required to issue significant numbers of options to our employees, and such options are exercised, our
shareholders could experience significant dilution.
10.
TRANSFER AGENTS AND REGISTRARS
The registrar and transfer agent for our common shares in Canada
is CST Trust Company at its principal offices in Toronto, Ontario and the co-transfer agent and co-registrar for our common shares
in the United States is Computershare Investor Services LLC at its offices in New York, New York.
11.
MATERIAL CONTRACTS
For the fiscal year ended December 31, 2015, no material contracts
have been terminated, entered into or assigned by us other than in the ordinary course of business.
12.
INTERESTS OF EXPERTS
Our auditors are PricewaterhouseCoopers LLP, PwC Tower, Suite 2600,
18 York Street, Toronto, Ontario, M5J 0B2.
PricewaterhouseCoopers LLP, our independent auditors, have audited
our consolidated financial statements for the year ended December 31, 2015. As at the date hereof, PricewaterhouseCoopers LLP has
confirmed that they are independent with respect to the Company within the meaning of the Rules of Professional Conduct of the
Institute of Chartered Accountants of Ontario and the professional and regulatory requirements in the United States.
13.
ADDITIONAL INFORMATION
Additional financial information with respect to Hydrogenics, including
remuneration and indebtedness of directors and officers, principal holders of our securities and options to purchase securities
is contained in our management proxy circular in respect of our most recent annual meeting of shareholders that involved the election
of directors. Additional financial information is contained in our audited comparative consolidated financial statements and our
management discussion and analysis for our most recently completed fiscal year.
You may access other information about us, including our disclosure
documents, reports, statements or other information filed with the Canadian securities regulator authorities through SEDAR at www.sedar.com
and in the United States with the SEC at www.sec.gov.
APPENDIX A - AUDIT
COMMITTEE CHARTER
A.
Purpose
The Audit Committee shall be directly responsible for the appointment, compensation and oversight over the work of the Company’s public accountants. The Audit Committee shall monitor (1) the integrity of the consolidated financial statements of the Company, (2) the Company’s compliance with legal and regulatory requirements, (3) the public accountants’ qualifications and independence, and (4) the performance of the Company’s internal audit function and public accountants. The Audit Committee shall oversee the preparation of and review the report required by the rules of the Securities and Exchange Commission to be included in the Company’s annual proxy statement.
B.
Committee Membership
The Audit Committee shall consist of no fewer than three members. Each member of the Audit Committee shall be unrelated and independent, and the composition of the Audit Committee shall satisfy the independence, experience and financial expertise requirements of the Nasdaq Global Market, The Toronto Stock Exchange and Section 10A of the Securities Exchange Act of 1934, as amended by the Sarbanes-Oxley Act of 2002, and the rules promulgated thereunder. The Board shall appoint the members of the Audit Committee annually, considering the recommendation of the Human Resources and Corporate Governance Committee, and further considering the views of the Chairman of the Board and the Chief Executive Officer, as appropriate. The members of the Audit Committee shall serve until their successors are appointed.
The Board shall have the power at any time to change the membership of the Audit Committee and to fill vacancies in it, subject to such new member(s) satisfying the independence, experience and financial expertise requirements referred to above. Except as expressly provided in this Charter or the by-laws of the Company, or as otherwise provided by law or the rules of the stock exchanges to which the Company is subject, the Audit Committee shall fix its own rules of procedure.
C.
Committee Authority and Responsibilities
The Audit Committee shall have the sole authority to appoint or replace the public accountants (subject, if applicable, to shareholder ratification), and shall approve all audit engagement fees and terms and all non-audit engagements with the |
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public accountants. The Audit Committee shall consult with management but shall not delegate these responsibilities. In its capacity as a committee of the Board, the Audit Committee shall be directly responsible for the oversight of the work of the public accounting firm (including resolution of disagreements between management and the public accounting firm regarding financial reporting) for the purpose of preparing or issuing an audit report or related work, and the public accounting firm shall report directly to the Audit Committee. The Audit Committee shall have the authority, to the extent it deems necessary or appropriate, to retain and set and pay the compensation for special legal, accounting or other consultants to advise the committee and carry out its duties, and to conduct or authorize investigations into any matters within its scope of responsibilities.
The Audit Committee may request any officer or employee of the Company or the Company’s outside counsel or public accountants to attend a meeting of the Audit Committee or to meet with any members of, or consultants to, the Audit Committee. The Audit Committee shall have the ability to communicate directly with the public accountants and the Company’s internal auditor (if applicable).
The Audit Committee shall make regular reports to the Board. The Audit Committee shall review and reassess the adequacy of this Charter annually and recommend any proposed changes to the Board for approval. The Audit Committee shall annually review the Audit Committee’s own performance.
In performing its functions, the Audit Committee shall undertake those tasks and responsibilities that, in its judgment, would most effectively contribute and implement the purposes of the Audit Committee. The following functions are some of the common recurring activities of the Audit Committee in carrying out its oversight responsibility:
• Review and discuss with management and the public accountants the Company’s annual audited consolidated financial statements, including disclosures made in Management’s Discussion and Analysis of Financial Condition and Results of Operations and recommend to the Board whether the audited consolidated financial statements should be included in the Company’s annual report.
• Review and discuss with management and the public accountants the
Company’s quarterly financial statements, including disclosures made in Management’s Discussion and Analysis
of |
Financial
Condition and Results of Operations or similar disclosures, prior to the filing of its quarterly report.
• Review and discuss with management and the public accountants the
financial information and consolidated financial statements contained in any prospectus, registration statement, annual information
form, circular or other material disclosure document of the Company, in each case prior to the filing of such documents.
• Review and discuss with management and the public accountants, as applicable: (a) major issues regarding accounting principles and consolidated financial statement presentations, including any significant changes in the Company’s selection or application of accounting principles, and major issues as to the adequacy of the Company’s internal controls and any special audit steps adopted in light of material control deficiencies; (b) analyses prepared by management or the public accountants setting forth significant financial reporting issues and judgments made in connection with the preparation of the consolidated financial statements, including analyses of the effects of alternative IFRS methods on the consolidated financial statements; (c) any management letter provided by the public accountants and the Company’s response to that letter; (d) any problems, difficulties or differences encountered in the course of the audit work, including any disagreements with management or restrictions on the scope of the public accountants’ activities or on access to requested information and management's response thereto; (e) the effect of regulatory and accounting initiatives, as well as off-balance sheet structures, on the consolidated financial statements of the Company; and (f) prior to their release, earnings press releases, as well as financial information and earnings guidance (generally or on a case-by-case basis) provided to analysts and rating agencies.
• Discuss with management the Company’s major financial risk exposures
and the steps management has taken to monitor and control such exposures, including the Company’s risk assessment and risk
management policies.
• Obtain
and review a report from the public accountants at least annually regarding: (a) the public accountants’ internal quality
control procedures; (b) any material issues raised by the most recent quality control review, or peer review, of the firm, or
by any inquiry or investigation by governmental or professional authorities within the preceding five years respecting one or
more independent audits carried out by the firm; (c) any steps taken to deal |
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with any such issues; and (d) all relationships between the public accountants and the Company.
• Evaluate
the qualifications, performance and independence of the public accountants, including a review and evaluation of the lead partner
of the public accountants and taking into account the opinions of management.
• Ensure the lead audit partner of the public accountants and the audit
partner responsible for reviewing the audit are rotated at least every five years as required by the Sarbanes-Oxley Act of 2002.
• Discuss with management and the public accountants any accounting
adjustments that were noted or proposed by the public accountants but were passed (as immaterial or otherwise).
• Establish procedures for: (a) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters; and (b) the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters.
• Review disclosures made by the Company’s principal executive
officer or officers and principal financial officer or officers regarding compliance with their certification obligations as required
under the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder, including the Company's disclosure controls and procedures
and internal controls for financial reporting and evaluations thereof.
• Review with management and approve the Company’s investment
policies for its securities portfolio and review the portfolio management performance.
• Review the performances of the Chief Financial Officer and other senior
executives involved in the financial reporting process, review financial and accounting personnel succession planning within the
Company and, where possible, consult on the appointment of, or departure of, individuals occupying these positions.
D.
Limitations of Audit Committee's Roles
While the Audit Committee has the responsibilities and powers set forth in this Charter, it is not the duty of the Audit Committee
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to prepare consolidated financial statements, plan or conduct audits or to determine that the Company’s consolidated financial statements and disclosures are complete and accurate and are in accordance with Canadian generally |
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accepted accounting principles and applicable rules and regulations. These are the responsibilities of management and the public accountants. |
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CORPORATE OFFICE |
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Hydrogenics Corporation |
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220 Admiral Blvd |
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Mississauga, Ontario |
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Canada L5T 2N6 |
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TEL: (905) 361-3660 |
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Fax: (905) 361-3626 |
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www.hydrogenics.com |
Exhibit 99.4
CERTIFICATION PURSUANT TO RULE 13a-14
OR 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Daryl Wilson, certify that:
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1. |
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I have reviewed this annual report on Form 40-F of Hydrogenics Corporation; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; |
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4. |
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The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have: |
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(a) |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting 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 generally accepted accounting principles; |
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(c) |
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Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
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Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and |
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5. |
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The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions): |
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(a) |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and |
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(b) |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting. |
Date: March 9, 2016
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/s/ Daryl Wilson |
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Daryl Wilson |
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President and Chief Executive Officer |
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Exhibit 99.5
CERTIFICATION PURSUANT TO RULE 13a-14
OR 15d-14 OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert Motz, certify that:
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1. |
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I have reviewed this annual report on Form 40-F of Hydrogenics Corporation; |
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2. |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report; |
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4. |
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The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have: |
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(a) |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting 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 generally accepted accounting principles; |
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(c) |
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Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
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Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and |
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5. |
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The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions): |
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(a) |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and |
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(b) |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting. |
Date: March 9, 2016
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/s/ Robert Motz |
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Robert Motz |
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Chief Financial Officer |
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Exhibit 99.6
CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on
Form 40-F for the fiscal year ended December 31, 2015 of Hydrogenics Corporation (the “Company”) as filed with
the US Securities and Exchange Commission (the “Commission”) on the date hereof (the “Report”) and pursuant
to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Daryl Wilson, President
and Chief Executive Officer of the Company, certify, that:
(1) the
Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
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By: |
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/s/ Daryl Wilson |
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Name: |
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Daryl Wilson |
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Title: |
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President and Chief Executive Officer |
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Date: |
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March 9, 2016 |
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A signed original of this written statement
required by Section 906 has been provided to Hydrogenics Corporation and will be retained by Hydrogenics Corporation and furnished
to the Securities and Exchange Commission or its staff upon request.
Exhibit 99.7
CERTIFICATION PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on
Form 40-F for the fiscal year ended December 31, 2015 of Hydrogenics Corporation (the “Company”) as filed with
the US Securities and Exchange Commission (the “Commission”) on the date hereof (the “Report”) and pursuant
to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, I, Robert Motz, Chief Financial
Officer of the Company, certify, that:
(1) the
Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) the
information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
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By: |
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/s/ Robert Motz |
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Name: |
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Robert Motz |
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Title: |
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Chief Financial Officer |
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Date: |
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March 9, 2016 |
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A signed original of this written statement
required by Section 906 has been provided to Hydrogenics Corporation and will be retained by Hydrogenics Corporation and furnished
to the Securities and Exchange Commission or its staff upon request.
Exhibit 99.8
March 9, 2016
Consent of Independent Auditors
We hereby consent to the inclusion in this Annual Report on Form 40-F for the year ended
December 31, 2015 of Hydrogenics Corporation of our report dated March 8 2016, relating to the
consolidated financial statements, which appears in Exhibit 99.1 incorporated by reference in this Annual Report.
We also consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos.333-77004
and 333-116321), Form F-3 (No. 333-182974) and Form F-10 (No. 333-194940) of Hydrogenics Corporation of our report referred to
above.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Ontario
March 9, 2016
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