Form 6-K HYDROGENICS CORP For: Nov 07

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of November 2016.

 

Commission File Number: 000-31815

 

HYDROGENICS CORPORATION - CORPORATION HYDROGENIQUE

(Translation of registrant's name into English)

 

220 Admiral Boulevard, Mississauga, Ontario, L5T 2N6

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F [  ]      Form 40-F [x]

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):       

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):       

 

 

 

 

 

EXHIBIT LIST

 

 

Exhibit		Description
99.1		Press Release dated November 7, 2016 titled "Hydrogenics Reports Third Quarter 2016 Results"
99.2		Third Quarter 2016 Management's Discussion and Analysis of Financial Condition and Results of Operations
99.3		Third Quarter 2016 Consolidated Financial Statements and Results of Operations
99.4		PowerPoint Presentation titled "Q3 2016 Investor Presentation"
99.5		Form 52-109f2 - Certification of Annual Filings Full Certificate - Chief Executive Officer
99.6		Form 52-109f2 - Certification of Annual Filings Full Certificate - Chief Financial Officer

 

 

 

 

 

 SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HYDROGENICS CORPORATION - CORPORATION HYDROGENIQUE
Date: November 7, 2016	By:	/s/ ROBERT MOTZ
		Name: Robert Motz
		Title: Chief Financial Officer

 

EXHIBIT 99.1

Hydrogenics Reports Third Quarter 2016 Results

Record Backlog; Debt Facility Secured; Strong Outlook for Growth

MISSISSAUGA, Ontario, Nov. 07, 2016 (GLOBE NEWSWIRE) -- Hydrogenics Corporation (NASDAQ: HYGS) (TSX:HYG) ("Hydrogenics" or "the Company"), a leading developer and manufacturer of hydrogen generation and hydrogen-based power modules, today reported third quarter 2016 financial results. Results are reported in US dollars and are prepared in accordance with International Financial Reporting Standards (IFRS).

Third Quarter Highlights

“The third quarter was a very busy time for Hydrogenics, as we won new orders that increased our backlog to the highest level in corporate history,” said Daryl Wilson, Hydrogenics’ CEO and President. “With such awards in hand and given project timing, we expect stronger revenue in the fourth quarter and are well-positioned for higher growth in 2017. This quarter saw Alstom unveil its first fuel cell-powered train, at the InnoTrans railroad industry trade show in Berlin, and German aerospace leader DLR with the launch of its four-person HY4 plane, both using Hydrogenics technology. These were groundbreaking developments that relied on our applications engineering strength and advanced PEM fuel cell technology.

“In addition, we recently secured a new five year, $9 million debt facility. We remain on track with our long-term contracts for an Enbridge energy storage facility in Toronto, heavy-duty fuel cells for Alstom, our propulsion application, and numerous opportunities in China. At the same time we continue to work diligently with multiple parties in Korea, including Kolon, on sites that can leverage our hydrogen-based power generation technology. Demand for fueling continues to rise with fuel cell vehicle deployment as illustrated in the recently-announced partnership with StratosFuel to build North America’s largest renewable hydrogen power plant. We see markets for our various applications across Asia along with multiple avenues for growth in China, Europe and in California.”

Summary of Results for the Quarter Ended September 30, 2016

• Hydrogenics ended the third quarter of 2016 with the highest backlog in the Company’s history – $106.2 million. During the quarter, Hydrogenics secured $8.5 million of new orders, representing both fuel cell and electrolyzer applications. Of the $106.2 million in total backlog, the Company expects to recognize approximately $30 million as revenue over the next twelve months, in addition to what can be booked and billed as revenue during the same twelve month period.   
• Company revenue was $6.7 million for the quarter, a decrease of 30% from the third quarter of 2015. The decline reflects the absence of several key projects delivered in the prior-year period, partially offset by increased sales into the Chinese mobility market.
• Gross profit decreased to $1.0 million in the current quarter versus $2.1 million in the prior-year period, and the gross margin declined to 14.9% from 21.8% in the prior-year period. The decrease was principally attributed to the Company’s Power Systems segment, which incurred additional costs to support several key projects in Germany.
• The Company’s Adjusted EBITDA¹ loss increased slightly to $1.5 million for the three months ended September 30, 2016 from $1.4 million for the same period last year, reflecting lower gross profit, partially offset by reduced selling, general and administrative costs (“SG&A”) and reduced net research and development expenses (“R&D”).           
• Cash operating costs² decreased $0.9 million to $2.6 million for the current quarter compared to $3.5 million for the prior-year period, with the decline due to lower SG&A (excluding compensation indexed to share price) and R&D expenses. The decrease in SG&A was related to lower general & administrative expenses, and higher external funding reduced net R&D costs.
• The net loss for the quarter was $1.9 million, or $(0.15) per share, versus $2.2 million, or $(0.22) per share in the prior-year period.
• Subsequent to September 30, 2016, Hydrogenics secured a new term loan facility. This long-term facility on favorable terms strengthens our ability to support the future growth.

Notes

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

Conference Call Details
Hydrogenics will hold a conference call at 10:00 a.m. EST on November 7, 2016 to review the second quarter results. The telephone number for the conference call is (877) 307-1373 or, for international callers, (678) 224-7873.  A live webcast of the call will also be available on the company's website, www.hydrogenics.com.

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

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

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

 

Reconciliation of Cash Operating Costs to Operating Costs and Adjusted EBITDA to Net Loss
(in thousands of US dollars)
(unaudited)

Cash operating costs

	Three months ended September 30,								Nine months ended September 30,
			2016				2015				2016				2015
Selling, general and administrative expenses	$		2,365		$		2,566		$		7,719		$		7,724
Research and product development expenses			263				1,045				2,831				3,106
Total operating costs	$		2,628		$		3,611		$		10,550		$		10,830
Less: Depreciation of property, plant and             equipment and intangible assets			(98	)			(95	)			(298	)			(272	)
Less: Compensation indexed to share price			(6	)			174				100				408
Less: Stock-based compensation expense			36				(163	)			(254	)			(457	)
Cash operating costs	$		2,560		$		3,527		$		10,098		$		10,509

 

Adjusted EBITDA        

	Three months ended September 30									Nine months ended September 30,
			2016				2015				2016				2015
Net loss	$		(1,899	)	$		(2,192	)	$		(7,353	)	$		(9,319	)
Finance loss (income)			271				682				833				2,785
Depreciation of property, plant and equipment and intangible assets			192				138				548				448
Compensation indexed to share price			6				(174	)			(100	)			(408	)
Stock-based compensation expense			(36	)			163				254				457
Adjusted EBITDA	$		(1,466	)	$		(1,383	)	$		(5,818	)	$		(6,037	)

 

Hydrogenics Corporation
Condensed Interim Consolidated Balance Sheets
 (in thousands of US dollars)
(unaudited)

		September 30, 2016				December 31, 2015
Assets
Current assets
Cash and cash equivalents	$		9,997		$		23,398
Restricted cash			784				971
Trade and other receivables			13,571				10,419
Inventories			18,900				14,270
Prepaid expenses			924				428
			44,176				49,486
Non-current assets
Restricted cash			394				532
Investment in joint venture			2,057				1,951
Property, plant and equipment			3,820				3,049
Intangible assets			226				215
Goodwill			4,280				4,135
			10,777				9,882
Total assets	$		54,953		$		59,368
Liabilities
Current liabilities
Operating borrowings	$		2,248		$		1,086
Trade and other payables			11,353				7,776
Financial liabilities			8,710				9,034
Warranty provisions			1,766				2,255
Deferred revenue			9,120				10,146
			33,197				30,297
Non-current liabilities
Other non-current liabilities			3,495				3,121
Non-current warranty provisions			855				938
Non-current deferred revenue			3,811				4,764
			8,161				8,823
Total liabilities			41,358				39,120
Equity
Share capital			365,922				365,824
Contributed surplus			19,120				18,964
Accumulated other comprehensive loss			(2,778	)			(3,224	)
Deficit			(368,669	)			(361,316	)
Total equity			13,595				20,248
Total equity and liabilities	$		54,953		$		59,368

Hydrogenics Corporation
Consolidated Interim Statements of Operations and Comprehensive Loss
 (in thousands of US dollars, except share and per share amounts)
(unaudited)

	Three months ended										Nine months ended
	September 30,										September 30,
			2016				2015							2016					2015
Revenues	$		6,733		$		9,644			$				20,260			$		24,543
Cost of sales			5,733				7,543							16,230					20,247
Gross profit			1,000				2,101							4,030					4,296
Operating expenses
Selling, general and administrative expenses			2,365				2,566							7,719					7,724
Research and product development expenses			263				1,045							2,831					3,106
			2,628				3,611							10,550					10,830
Loss from operations			(1,628	)			(1,510		)					(6,520		)			(6,534			)
Finance income (expenses)
Interest expense, net			(439	)			(446		)					(1,310		)			(942			)
Foreign currency gains (losses), net			139				217							(39		)			(381			)
Loss from joint venture			(78	)			(127		)					(26		)			(86			)
Other finance gains (losses)			107				(326		)					542					(1,376			)
Finance loss, net			(271	)			(682		)					(833		)			(2,785			)
Loss before income taxes			(1,899	)			(2,192		)					(7,353		)			(9,319			)
Income tax expense			-				-							-					-
Net loss for the period			(1,899	)			(2,192		)					(7,353		)			(9,319			)
Items that may be reclassified subsequently to net loss
Exchange differences on translating foreign  operations			249				(79		)					446					(955			)
Comprehensive loss for the period	$		(1,650	)	$		(2,271		)	$				(6,907		)	$		(10,274			)
Net loss per share
Basic and diluted	$		(0.15	)	$		(0.22		)	$				(0.59		)	$		(0.92			)

Hydrogenics Corporation
Consolidated Interim Statements of Cash Flows
 (in thousands of US dollars) (unaudited)   

	Three months ended						Nine months ended
	September 30,						September 30,
	2016			2015			2016				2015
Cash and cash equivalents provided by    (used in):
Operating activities
Net loss for the period	$	(1,899	)	$	(2,192	)	$	(7,353	)	$		(9,319	)
(Increase) decrease in restricted cash		364			118			371				2,065
Items not affecting cash
Amortization and depreciation		192			138			548				448
Unrealized losses on hedging		-			111			-				111
Warrants		(106	)		-			(522	)			885
Unrealized foreign exchange (gains) losses		(41	)		227			145				(29	)
Unrealized (gain) loss on joint venture		78			127			26				86
Accreted non-cash and unpaid interest and          amortization of deferred financing fees		229			220			827				685
Stock-based compensation		(36	)		163			254				457
Stock-based compensation - RSUs and DSUs		6			(174	)		(100	)			(408	)
Net change in non-cash working capital		(1,545	)		326			(6,947	)			(1,575	)
Cash used in operating activities		(2,758	)		(936	)		(12,751	)			(6,594	)
Investing activities
Purchase of property, plant and equipment		(1,275	)		(674	)		(2,178	)			(1,553	)
Receipt of government funding		175			-			390				118
Purchase of intangible assets		-			-			(47	)			(81	)
Cash used in investing activities		(1,100	)		(674	)		(1,835	)			(1,516	)
Financing activities
Repayment of repayable government contributions		(55	)		(52	)		(163	)			(162	)
Proceeds of borrowings, net of transaction costs		-			-			-				6,866
Repayment of operating borrowings		-			(1,658	)		(1,077	)			(3,809	)
Proceeds of operating borrowings		2,248			2,240			2,248				6,062
Common shares issued		-			-			-				9
Cash provided by (used in) financing activities		2,193			530			1,008				8,966
Increase (decrease) in cash and cash equivalents during the period		(1,665	)		(1,080	)		(13,578	)			856
Cash and cash equivalents - Beginning of period		11,579			8,016			23,398				6,572
Effect of exchange rate fluctuations on cash and cash equivalents held		83			(6	)		177				(498	)
Cash and cash equivalents - End of period	$	9,997		$	6,930		$	9,997		$		6,930

 

Hydrogenics Contacts:

Bob Motz, Chief Financial Officer
Hydrogenics Corporation
(905) 361-3660
[email protected]

Chris Witty
Hydrogenics Investor Relations
(646) 438-9385
[email protected]

EXHIBIT 99.2

 

                  

 

 

 

 

 

 

 

 

Hydrogenics Corporation 

 

 

 

Third Quarter 2016

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 November 4, 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 24 of this MD&A.

 

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

 

 

 

 

 

 

 

 

 

Management’s Discussion and Analysis Table of Contents
Section	Description	Page
1	Overall Performance	4
2	Operating Results	7
3	Financial Condition	11
4	Summary of Quarterly Results	12
5	Outlook	12
6	Liquidity	14
7	Capital Resources	17
8	Off-Balance Sheet Arrangements	17
9	Related Party Transactions	17
10	Critical Accounting Estimates	18
11	Changes in Accounting Policies and Recent Accounting Pronouncements	18
12	Disclosure Controls	18
13	Internal Control Over Financial Reporting	19
14	Reconciliation of Non-IFRS Measures	19
15	Risk Factors	20
16	Outstanding Share Data	23
17	Forward-looking Statements	24

 

 

 

 

 

1       Overall Performance

 

Selected Financial information

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

 

 

 

		Three months ended September 30,								2016 vs 2015				Nine months ended September 30,								2016 vs 2015
			2016				2015				% Favourable (Unfavourable)				2016				2015				% Favourable (Unfavourable)
OnSite Generation		$	4,240			$	7,633				(44	%)		$	13,661			$	15,469				(12	%)
Power Systems			2,493				2,011				24	%			6,599				9,074				(27	%)
Total revenue			6,733				9,644				(30	%)			20,260				24,543				(17	%)
Gross profit			1,000				2,101				(52	%)			4,030				4,296				(6	%)
Gross margin %			15	%			22	%							20	%			18	%
Selling, general and administrative Expenses			2,365				2,566				8	%			7,719				7,724				-
Research and product development expenses			263				1,045				75	%			2,831				3,106				9	%
Loss from operations			(1,628	)			(1,510	)			(8	%)			(6,520	)			(6,534	)			-
Net loss			(1,899	)			(2,192	)			13	%			(7,353	)			(9,319	)			21	%
Net loss per share			(0.15	)			(0.22	)			32	%			(0.59	)			(0.92	)			36	%
Cash operating costs1			2,560				3,527				27	%			10,098				10,509				4	%
Adjusted EBITDA1			(1,466	)			(1,383	)			(6	%)			(5,818	)			(6,037	)			4	%
Cash used in operating activities			(2,758	)			(936	)			(195	%)			(12,751	)			(6,594	)			(93	%)
Cash  and  cash equivalents (including restricted cash)			11,175				8,713				28	%			11,175				8,713				28	%
Total assets			54,953				46,524				18	%			54,953				46,524				18	%
Total non-current liabilities (excluding deferred revenue)			4,350				11,017				61	%			4,350				11,017				61	%

 

 

 

 _______________________

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

 

 

Highlights for the three months ended September 30, 2016 compared to the three months ended September 30, 2015

 

·

The Company ended the third quarter of 2016 with the highest backlog level in history at $106.2 million, compared to $98.9 million for the same period a year ago. During the third quarter of 2016, the Company received new orders for $8.5 million (2015 - $5.7 million) consisting of $4.9 million (2015 - $3.5 million) for the OnSite Generation business and $3.6 million (2015 - $2.2 million) for the Power Systems business.

 

·

Revenues decreased by $2.9 million, or 30%, to $6.7 million for the three months ended September 30, 2016 compared to $9.6 million for the third quarter of 2015. The lower sales level was due to fewer orders shipped within the OnSite Generation business, partially offset by an increase of $0.5 million in the Power Systems business segment as a result of increased sales into the mobility market in China. The lower shipments in OnSite Generation reflects the absence of several key projects delivered in Q3 2015, including our electrolysis units to Kurion for the purification of tritiated waste water, as well as a portion of the energy storage, power to gas facility project with E.ON.

 

		June 30, 2016 backlog				Orders Received				FX				Orders Delivered/ Revenue Recognized				September 30, 2016 backlog
OnSite Generation		$	16.0			$	4.9			$	0.4			$	4.2			$	17.1
Power Systems			86.9				3.6				1.1				2.5				89.1
Total		$	102.9			$	8.5			$	1.5			$	6.7			$	106.2

 

·

Of the above backlog of $106.2 million, we expect to recognize $30.2 million in the following 12 months as revenue. In addition, revenue for the year ending December 31, 2017 will also include orders both received and delivered in the balance of 2017.

 

·

Adjusted EBITDA loss increased $0.1 million to $1.5 million for the three months ended September 30, 2016 from $1.4 million for the same period last year. This increase is due to a decrease in gross profit of $1.1 million, partially offset by a decrease in net research and product development expenses of $0.8 million and a decrease in selling, general and administrative expenses of $0.2 million (excluding compensation indexed to our share price), discussed below.

 

·

Gross profit decreased to $1.0 million in the current quarter versus $2.1 million in the prior-year period, and gross margin decreased to 15% in 2016 from 22% in the prior period. The decline was principally due to lower margin in the power systems segment resulting from additional costs incurred to support several key projects in Germany.

 

·

Selling, general and administrative (“SG&A”) expenses for the third quarter of 2016 of $2.4 million were lower by $0.2 million when compared to the prior year quarter. This reduction was the result of reduced general & administrative expenditures of $0.2 million, as well as a decrease related to the reversal of previously charged compensation expense of $0.2 million relating to our performance share units (“PSUs”), partially offset by an increase in SG&A related to compensation indexed to our share price of $0.1 million, and an increase in our allowance for doubtful accounts of less than $0.1 million.

 

·

Net research and product development expenses (“R&D”) were $0.3 million for the three months ended September 30, 2016 compared to $1.0 million in the same period of 2015. The decrease in net research and product development expenses is due to increased funding. Actual spending on research and product development expenses increased $1.8 million, an increase of 131%. R&D funding increased $2.6 million, an increase of 856%. This increase is due primarily to increased spending on the power to gas demonstration project in Denmark, announced in February 2016. The Company has also increased spending on multi-megawatt fuel cell system development.

 

 

·

Net loss decreased by $0.3 million to $1.9 million, or $0.15 per share, in the current quarter from $2.2 million, or $0.22 per share, in the prior period. The Company issued shares in the fourth quarter of 2015. The change is primarily due to a decrease in other finance losses of $0.4 million, the increase in adjusted EBITDA loss as noted above, as well as a decrease related to the reversal of previously charged compensation expense of $0.2 million relating to our PSUs, partially offset by an increase in SG&A related to compensation indexed to our share price of $0.1 million.

 

·

Cash operating costs decreased $1.0 million to $2.6 million for the three months ended September 30, 2016 compared to $3.5 million for the three months ended September 30, 2015, with the decrease in costs due to the decrease in SG&A (excluding compensation indexed to share price), and research and development expenses as noted above.

 

·

Subsequent to the end of the quarter, the Company entered into a loan agreement with Export Development Canada (“EDC”) for a five year facility of $9,000.

 

Highlights for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015

 

·

Revenues decreased by $4.2 million or 17% to $20.3 million for the nine months ended September 30, 2016 compared to $24.5 million for the same period of the prior year. The decrease in revenue was due to the lack of a comparable project which occurred in the first three months ended March 31, 2015 - the delivery of a large project to a research organization in Germany. Also contributing to the decrease is the sale of two significant items in the third quarter of 2015 - our electrolysis units to Kurion for the purification of tritiated waste water, as well as a portion of the energy storage, power to gas facility project with E.ON.

 

·

During the first nine months of 2016, the Company received new orders for $30.5 million (2015 - $65.3 million) consisting of $13.0 million (2015 - $11.9 million) for the OnSite Generation business and $17.5 million (2015 - $53.4million) for the Power Systems business.

 

		December 31, 2015 backlog				Orders Received				FX				Orders Delivered/ Revenue Recognized				September 30, 2016 backlog
OnSite Generation		$	17.1			$	13.0			$	0.7			$	13.7			$	17.1
Power Systems			76.2				17.5				2.0				6.6				89.1
Total		$	93.3			$	30.5			$	2.7			$	20.3			$	106.2

 

·

Adjusted EBITDA loss decreased by $0.2 million to $5.8 million for the nine months ended September 30, 2016 from $6.0 million for the same period last year. The decrease is a result of a decrease in net R&D expenses of $0.3 million, a decrease in SG&A expenses of $0.2 million partially offset by a $0.3 million decrease in gross profit.

 

·

Gross profit has improved to 19.9% of revenue for the nine months ended September 30, 2016, versus 17.5% in the prior-year period, reflecting the 2015 impact of a significant lowers margin German project included in the nine months ended September 30, 2015. This was partially offset by a reduction of overhead absorption of indirect overhead.

 

·

SG&A expenses for the nine months ended September 30, 2016 of $7.7 million were consistent with the prior-year period. SG&A expenses decreased $0.2 million excluding the impact of costs indexed to our share price, including the reversal of previously charged compensation expense of $0.2 million relating to our PSUs, which increased SG&A by $0.2 million. Included within this decrease is the reversal of an indemnification liability of $0.5 million in 2015 that had been set up associated with an acquisition in 2004. Offsetting this decrease, was an increase in SG&A as a result of an increase in our allowance for doubtful accounts of less than $0.1 million, as well as an increase in headcount and expenses in sales and marketing.

 

 

·

Net R&D expenses decreased $0.3 million to $2.8 million for the nine months ended September 30, 2016 compared to $3.1 million for the comparable period in 2015. R&D expenses were $6.7 million for the nine months ended September 30, 2016 compared to $4.7 million in the comparable period of 2015, an increase of $1.9 million. R&D funding was $3.8 million, an increase of $2.3 million from the comparable period of 2015. The increased R&D activity is due to increased spending on the power to gas demonstration project in Denmark, announced in February 2016, as well as increased spending on multi-megawatt fuel cell system development.

 

·

Net loss for the nine months ended September 30, 2016 improved $1.9 million or $0.33 per share to $7.4 million from a loss of $9.3 million for the same period of the prior year. The change in net loss in the current period reflects a decrease in other finance losses ($2.0 million); the reduction in adjusted EBITDA loss as noted above, as well as a decrease related to the reversal of previously charged compensation expense of $0.2 million relating to our PSUs, partially offset by an increase in SG&A related to compensation indexed to our share price of $0.3 million.

 

·

Cash operating costs decreased $0.4 million, or 1% to $10.1 million for the nine months ended September 30, 2016 compared to $10.5 million for the nine months ended September 30, 2015, primarily reflecting the changes in SG&A and R&D expenses above.

 

 

2       Operating Results

 

Business Segment Review

 

We report our results in two business segments, being OnSite Generation and Power Systems. Our reporting structure reflects the way we manage our business and how we classify our operations for planning and measuring performance. The corporate office and administrative support is reported under Corporate and Other.

 

OnSite Generation

 

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

 

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 to 60 normal cubic meters of hydrogen and consume 100 to 300 kilowatt (kW) of electrical energy. Recently we have seen several large scale applications which would consume 10 to 100 megawatts of power, which is 100 to 300 times larger than a typical industrial unit to date. 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. The ongoing commercialization of these applications will coincide with changes to legal and regulatory frameworks in countries that recognize the commercial importance of energy storage as a key factor in energy management and reducing a carbon footprint for electricity generation. In addition to Power-to-Gas, very large scale industrial applications are also appearing such as the de-tritiation of contaminated waste water at nuclear reactor sites.

 

Our OnSite Generation products also are sold to merchant gas companies and end-users requiring high purity hydrogen for industrial applications. Sales of these products are dependent on new capital expenditures and plant expansions by our customers. 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

 

		Three months ended September 30,												Nine months ended September 30
			2016				2015				% Favourable (Unfavourable)				2016				2015				% Favourable (Unfavourable)
Revenues		$	4,240			$	7,633				(44	%)		$	13,661			$	15,469				(12	%)
Gross profit			811				1,183				(31	%)			2,359				2,113				12	%
Gross margin %			19	%			16	%			23	%			17	%			14	%			26	%
Selling, general and administrative Expenses			717				665				(8	%)			2,233				1,898				(18	%)
Research and product development expenses/(funding)			(400	)			480				n/a				318				1,381				77	%
Segment income (loss)		$	494			$	38				1,200	%		$	(192	)		$	(1,166	)			84	%

 

Revenues decreased by $3.4 million or 44% to $4.2 million for the three months ended September 30, 2016 compared to $7.7 million for the same period of 2015 due to the sale of two significant items in the third quarter of 2015 - our electrolysis units to Kurion for the purification of tritiated waste water, as well as a portion of the energy storage, power to gas facility project with E.ON. Orders awarded for the three months ended September 30, 2016 were $4.8 million (September 30, 2015 – $3.5 million). Sales through September 30, 2016 consisted of the sale of electrolyser products to customers in industrial gas markets. Revenues were $13.7 million for the nine months ended September 30, 2016 compared to $15.5 million for the nine months ended September 30, 2015. At September 30, 2016 backlog was $17.0 million (September 30, 2015 - $22.8 million), with $16.4 million of this backlog expected to be recognized as revenue in the next twelve months.

 

Gross Margin improved in the third quarter of 2016 to 19% compared to 16% in the third quarter of 2015. This increase reflects improved direct margins due to product mix, partially offset by lower absorption of indirect overhead costs as a result of the decrease in revenue.

 

SG&A Expenses were higher at $0.7 million and $2.2 million for the three and nine months ended September 30, 2016 compared to $0.7 million and $1.9 million for the same periods of the previous year primarily as a result of an increase in headcount and expenses in sales and marketing.

 

R&D Expenses were ($0.4) million and $0.3 million during the third quarter and nine months ended September 30, 2016 and $0.5 million and $1.4 million for the three and nine months ended September 30, 2015. The increased R&D activity is due to increased spending and funding on the power to gas demonstration project in Denmark, announced in February 2016.

 

Segment Income (Loss) increased $0.5 million to income of $0.5 million for the three months ended September 30, 2016 compared to income of less than $0.1 million for the same period of the prior year largely due to the decrease in net R&D expenses in the current period. Segment loss was $0.2 million for the nine months ended September 30, 2016 compared to loss of $1.2 million for the same period of the prior year largely due to the decrease in net R&D expenses.

 

 

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, motive power applications, such as trains, buses, trucks and utility vehicles and backup power applications. 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 and mobility markets) are estimated to be in excess of $2 billion specifically related to hydrogen power technology.

 

Selected Financial Information

 

		Three months ended September 30,												Nine months ended September 30,
			2016				2015				% Favourable (Unfavourable)				2016				2015				% Favourable (Unfavourable)
Revenues		$	2,493			$	2,011				24	%		$	6,599			$	9,074				(27	%)
Gross profit			189				918				(79	%)			1,671				2,183				(23	%)
Gross margin %			8	%			46	%			(83	%)			25	%			24	%			5	%
Selling, general and administrative expenses			859				987				13	%			3,038				2,882				(5	%)
Research and product development expenses			643				558				(15	%)			2,382				1,699				(40	%)
Segment loss		$	(1,313	)		$	(627	)			(109	%)		$	(3,749	)		$	(2,398	)			(56	%)

 

Revenues increased $0.5 million or 24% to $2.5 million for the three months ended September 30, 2016 compared to $2.0 million for three months ended September 30, 2015. Revenue decreased $2.5 million for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The current quarter increased as a result of increased sales into the mobility market in China. The decrease in the nine months ended September 30, 2016, is partly due to the lack of a comparable project which occurred in the first three months ended March 31, 2015 - the delivery of a large project to a research organization in Germany, as well as the timing of revenue related to long term projects. Orders awarded for the three months ended September 30, 2016 were $3.6 million (September 30, 2015 - $2.2 million). At September 30, 2016, backlog was $89.1 million (September 30, 2015 - $76.1million) of confirmed orders for Power Systems’ products and services, with $18.5 million of this backlog expected to be recognized as revenue in the next 12 months.

 

Gross Margin improved to 25% from 24% for the nine months ended September 30, 2016, with the improvement in the current period due to product mix with a larger percentage of higher margin engineering services in the current year and the impact of the lower margin German project in the prior period. In the current quarter, gross margin has declined from 46% to 8% due to additional costs incurred to support several key projects in Europe. We expect margins to return to normal historical levels in future quarters.

 

SG&A Expenses decreased $0.1 million for the three months ended September 30, 2016 as compared to the prior period. For the nine months ended September 30, 2016, SG&A expenses increased $0.2 million as compared to the prior period. This increase is related to increased sales and marketing activity, including personnel and communication costs.

 

 

R&D Expenses were $0.6 million and $2.4 million during the three and nine months ended September 30, 2016 an increase of $0.1 million and $0.7 million respectively, from the three and nine months ended September 30, 2015. This 40% increase during the nine months of 2016 from the prior period represents increased spending on R&D, primarily surrounding multi-megawatt fuel cell system development and mobility applications.

 

Segment loss was $1.3 million and $3.7 million for the three and nine months ended September 30, 2016 compared to $0.6 million and $2.4 million for the three and nine months ended September 30, 2015, primarily due to the decline in gross margin and increased R&D spending.

 

 

Corporate and Other

 

Selected Financial Information

 

		Three months ended September 30,												Nine months ended September 30
			2016				2015				% Favourable (Unfavourable)				2016				2015				% Favourable (Unfavourable)
Selling, general and administrative expenses		$	789			$	914				14	%		$	2,448			$	2,944				17	%
Research and product development expenses			20				7				(186	%)			131				26				(404	%)
Interest expense			(439	)			(446	)			2	%			(1,310	)			(942	)			(39	)
Foreign exchange gains (losses) net			139				217				(36	%)			(39	)			(381	)			90	%
Gain (loss) on joint venture			(78	)			(127	)			39	%			(26	)			(86	)			70	%
Net other finance gain (losses)			107				(326	)			n/a				542				(1,376	)			n/a
Total		$	(1,080	)		$	(1,603	)			33	%		$	(3,412	)		$	(5,755	)			41	%

 

SG&A Expenses decreased by less than $0.1 million or 14% to $0.8 million for the three months ended September 30, 2016 compared to $0.9 million for the three months ended September 30, 2015. SG&A expenses decreased by $0.5 million or 17% for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015 primarily due to the reversal of an indemnification liability of $0.5 million that had been set up associated with an acquisition in 2004.

 

R&D Expenses were $0.1 million for the three and nine months ended September 30, 2016. The increase of $0.1 million reflects the increased legal and related costs of maintaining our intellectual property.

 

Net Other Finance Gains (Losses) increased by $0.4 million to a gain of $0.1 million for the three months ended September 30, 2016 compared to September 30, 2015. Net other finance gain (losses) increased by $1.9 million from a loss of $1.4 million for the nine months ended September 30, 2015 to a gain of $0.5 million for the nine months ended September 30, 2016. The increase is due to the fair value adjustments (gain) relating to outstanding warrants ($0.5 million) in the nine months ended September 30, 2016 whereas the nine months ended September 30, 2015 included an amount in other finance loss due to the initial issuance of warrants ($0.9 million). The nine months ended September 30, 2015 also included a fair market value adjustment loss of $0.5 million on unsettled foreign exchange contracts.

 

Interest expense remained consistent for the three months ended September 30, 2016 compared to the three months ended September 30, 2015. Interest expense increased by $0.4 million for the nine months ended September 30, 2016 compared to $0.9 million for the nine months ended September 30, 2015. The increase is primarily due to interest expense on the institutional long-term debt entered into in 2015.

 

 

3       Financial Condition

 

 

			September 30				December 31				Increase/(decrease)
			2016				2015				$				%
Cash, cash equivalents, restricted cash and short-term investments		$	11,175			$	24,901			$	(13,726	)			(55	%)
Trade and other receivables			13,571				10,419				3,152				30	%
Inventories			18,900				14,270				4,630				32	%
Operating borrowings			2,248				1,086				1,162				107	%
Trade and other payables			11,353				7,776				3,577				46	%
Financial liabilities			8,710				9,034				(324	)			(4	%)
Warranty provisions (current and non-current)			2,621				3,193				(572	)			(18	%)
Deferred revenue (current and non-current)			12,931				14,910				(1,979	)			(13	%)
Other non-current liabilities		$	3,495			$	3,121			$	374				12	%

 

Cash, cash equivalents, restricted cash and short-term investments were $11.2 million, a decrease of $13.7 million or 55%. Refer to Section 6 - Liquidity for a discussion of the change in cash, cash equivalents, restricted cash and short-term investments.

 

Trade and other receivables were $13.6 million, an increase of $3.2 million or 30% due to timing of billing of receivables in the period, as well as the revaluation of euro receivables at current rates increasing accounts receivable by approximately $0.1 million.

 

Inventories were $18.9 million compared to $14.3 million, an increase of 32%. Excluding the foreign exchange impact as a result of the strengthening value of the euro and Canadian dollar when compared to the US dollar in the current period, inventories increased approximately $4.0 million as a result of expected product deliveries during the subsequent three to six months, as well as utilized in upcoming R&D activities.

 

Trade and other payables were $11.4 million, an increase of $3.6 million compared to $7.8 million at the end of December 31, 2015, primarily due to timing, as seen above in the increase in inventories, partially offset by the impact of the strengthening value of the euro and Canadian dollar relative to the US dollar.

 

Financial liabilities were $8.5 million, a decrease of $0.5 million. The decrease is due to (i) the fair value adjustments relating to outstanding warrants totaling $0.5 million, as well as (ii) a decrease in the repayable government contributions of $0.1 million due to repayments. This is partially offset by an increase in the current portion of long term debt as a result of the accretion of transaction costs.

 

Warranty provisions were $2.6 million, a decrease of $0.6 million from $3.2 million at December 31, 2015. The decrease is due to lower anticipated warranty claims based on our current warranty experience.

 

Deferred revenues were $12.9 million, a decrease of $2.0 million or 13%. This decrease reflects the timing of customer deposits received on order bookings as at September 30, 2016 as well as the impact of the strengthening value of the euro relative to the US dollar.

 

Other non-current liabilities were $3.5 million at September 30, 2016, an increase of $0.4 million or 12%, due primarily to interest accretion on the long-term debt with the Province of Ontario of $0.2 million, as well as the impact of the strengthening value of the Canadian dollar relative to the US dollar. Subsequent to the end of the quarter, the Company entered into a loan agreement with Export Development Canada (“EDC”) for a five year facility of $9,000.

 

 

4       Summary of Quarterly Results

 

The following table highlights selected financial information for the eight consecutive quarters ended September 30, 2016.

 

			2016 Q3				2016 Q2				2016 Q1				2015 Q4				2015 Q3				2015 Q2				2015 Q1				2014 Q4
Revenues		$	6,733			$	9,198			$	4,329			$	11,321			$	9,644			$	7,368			$	7,531			$	15,673
Gross profit			1,000				1,819				1,211				1,675				2,101				1,042				1,153				2,989
Gross margin %			15	%			20	%			28	%			15	%			22	%			14	%			15	%			19	%
Adjusted EBITDA1			(1,466	)			(2,463	)			(1,889	)			(1,838	)			(1,382	)			(2,342	)			(2,313	)			160
Net (Loss) income			(1,899	)			(3,092	)			(2,362	)			(2,122	)			(2,192	)			(3,701	)			(3,427	)			612
Net (Loss) income per share - (basic and fully diluted)		$	(0.15	)		$	(0.25	)		$	(0.19	)		$	(0.20	)		$	(0.22	)		$	(0.37	)		$	(0.34	)		$	0.06
Weighted average common shares outstanding			12,544,960				12,541,080				12,540,757				10,518,178				10,092,375				10,091,498				10,090,481				10,089,891

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

 

 

5       Outlook

 

Our strategy is to profitably grow hydrogen energy solutions for diverse applications globally. We continue to leverage the milestones and reference sites established in 2015 and prior years to gain additional traction in the following target markets and applications:

 

Energy Storage – Last year, we commissioned our second Power-to-Gas facility with E.ON. This milestone firmly establishes the commercial scale building block for many multi megawatts facilities in the future. Currently we have a pipeline of approximately 70 megawatts of qualified leads worth in excess of $70 million. Conversion of these qualified leads into sales orders is dependent on completion of competitive process, funding, and policy evolution in the European Union. We are now constructing our two megawatt power to gas project in the Greater Toronto Area in partnership with Enbridge. When complete in the first quarter of 2017, this will become our first North American reference site for Power-to-Gas.

 

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 in this area. 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.

 

Motive Power - Another milestone achieved in 2015 which impacts our outlook for the balance of 2016 and onward is the Company’s largest commercial order for commuter train propulsion systems with Alstom Transport at €50 million. This order highlights the commercial maturity and strong competitive positioning of our fuel cell technology. The final prototype units will be delivered to Alstom over the next few months and it is expected that commercial production will begin in late 2017. Also, in the third quarter, Alstom Transport highlighted the hydrogen power train at the Innotrans rail show in Berlin which generated additional interest on the part of end customers.

 

In China, our efforts in securing key relationships with integrators (those companies that take our fuel cell and incorporate it into buses and other vehicles provided by original equipment manufacturers) in this market have now borne fruit with ongoing sales growth in 2016. Our backlog and sales pipeline is strong in this area with further orders expected in future quarters. We also anticipate further opportunity for our heavy duty fuel cell modules in other propulsion applications in the near future.

 

 

Stationary Power - The delivery and successful commissioning and commercial operation in Q4 of 2015 of a one megawatt 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 multiple multi-megawatt installations throughout South Korea. We are currently in ongoing discussions with Kolon and power plant operators and expect further announcements in due course.

 

Hydrogen Fueling – The movement to hydrogen powered buses, trains, trucks and automobiles has created demand for fueling infrastructure in the markets where these vehicles are being launched (principally Europe, China, Japan, Korea & California). We have been involved with the construction of over 50 fueling stations globally and see increased demand for hydrogen fueling, especially when it can be linked to electrolyzed hydrogen coming from electricity that is generated from renewable sources such as wind and solar energy thus reducing the carbon footprint of the production of hydrogen.

 

 

Outlook Summary

 

The timing and full realization of these four opportunities above 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.

 

Over the past few years, we have taken significant steps to reduce operating and product costs, streamline our operations and strengthen our consolidated financial position. While we may see volatility in our costs over the short-term, our expectations for the long-term are that our trend of improved cost efficiency will continue. At September 30, 2016, our order backlog was $106.2 million (December 31, 2015 - $93.3 million) spread across numerous geographical regions, of which $30.2 million is expected to be recorded as revenue in the next 12 months.

 

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 or beyond.

 

 

6       Liquidity

 

Cash Used in Operating Activities

 

 

		Three months ended September 30												Nine months ended September 30
			2016				2015				$ Change				2016				2015				$ Change
Net loss		$	(1,899	)		$	(2,192	)		$	293			$	(7,353	)		$	(9,319	)		$	1,966
(Increase) decrease in restricted cash			364				118				246				371				2,065				(1,694	)
Changes in non-cash working capital			(1,545	)			326				(1,871	)			(6,947	)			(1,575	)			(5,372	)
Other items not affecting cash			322				812				(490	)			1,178				2,235				(1,057	)
Cash used in operating activities		$	(2,758	)		$	(936	)		$	(1,822	)		$	(12,751	)		$	(6,594	)		$	(6,157	)

  

Cash used in operating activities during the third quarter of 2016 increased by $1.8 million to $2.8 million compared to $0.9 million used in the third quarter of 2015, as a result of the decrease in net loss adjusted for restricted cash & non-cash items as discussed below.

 

Restricted cash increased by $0.2 million as a result of greater funds deposited with certain financial institutions to support bank guarantees and letters of credit on customer deposits.

 

Non-cash working capital increased $1.9 million in the three months ended September 30, 2016 compared to the same period of the prior year as a result of increased inventories in the current quarter due to expected product deliveries and R&D spending during the subsequent periods.

 

Much of the change in non-cash working capital relates to increases in inventory levels in anticipation of future revenue associated with the shipment of this inventory.  We expect that inventory levels should normalize in future quarters as goods are shipped and the associated revenue is realized.

 

 

Cash Used in Investing Activities

 

		Three months ended September 30												Nine months ended September 30
			2016				2015				$ Change				2016				2015				$ Change
Purchases of property plant and equipment		$	(1,275	)		$	(674	)		$	(601	)		$	(2,178	)		$	(1,553	)		$	(625	)
Receipt of government funding			175				-				175				390				118				272
Purchase of intangibles			-				-				-				(47	)			(81	)			34
Cash used in investing activities		$	(1,100	)		$	(674	)		$	(426	)		$	(1,835	)		$	(1,516	)		$	(319	)

 

Cash used in investing activities during the three months ended September 30, 2016 was $1.1 million compared to $0.7 million for the three months ended September 30, 2015. The increase is a result of increased capital expenditures in the period relating to the development of the previously announced 2 megawatt power to gas project which will be operational in 2017, which Hydrogenics is partnered with Enbridge Inc. to develop.

 

 

Cash Provided By Financing Activities

 

		Three months ended September 30												Nine months ended September 30
			2016				2015				$ Change				2016				2015				$ Change
Repayment of repayable government contributions		$	(55	)		$	(52	)		$	(3	)		$	(163	)		$	(162	)		$	(1	)
Proceeds of borrowings			-				-				-				-				6,866				(6,866	)
Proceeds of operating borrowings			2,248				2,240				8				2,248				6,062				(3,814	)
Repayment of operating borrowings			-				(1,658	)			1,658				(1,077	)			(3,809	)			2,732
Common shares issued on stock options exercised			-				-				-				-				9				(9	)
Cash provided by financing activities		$	2,193			$	530			$	1,663			$	1,008			$	8,966			$	7,958

 

Cash provided by financing activities for the three months ended September 30 2016 increased by $1.7 million. In the third quarter of the prior year, the Company had a repayment of operating borrowings whereas in the third quarter of the current year the Company had operating borrowings outstanding at the end of the quarter, which we intend to repay on the maturity date of November 7, 2016. In the nine months ended September 30, 2015, the Company had entered into a loan agreement with a syndicate of lenders for a $7.5 million loan, with net proceeds of $6.9 million resulting in cash provided by financing activities to decrease by $8.0 million from 2015 as compared to the nine months ended September 30, 2016.

 

As discussed below in Credit and Loan Facilities, subsequent to September 30, 2016, the Company entered into a loan agreement with Export Development Canada (“EDC”) for a five year facility of $9.0 million.

 

We anticipate using between $14.0 million and $16.0 million in 2016 to fund operations, non-cash working capital requirements and capital expenditures. These estimates are based on our actual results for the nine months ended September 30, 2016 and our outlook for the three months ending December 31, 2016 and are dependent on the receipt of certain deposits and other working capital assumptions. In the event we are successful in securing additional orders in excess of our base case revenue outlook, our cash requirements would increase in order to support working capital requirements. Our standard practice is to require deposits at the time of the order to offset the demand on our working capital.

 

 

Contractual Obligations

 

			Total				Less than 1 year				1-3 years				4-5 years				After 5 years
Long-term debt1, including current portion		$	12,545			$	7,672			$	2,046			$	1,917			$	910
Operating borrowings			2,248				2,248
Operating leases			3,176				983				1,361				820				12
Purchase obligations			8,042				8,016				26				-				-
Repayable government contributions			207				207				-				-				-
Total contractual obligations2, 3		$	26,218			$	19,126			$	3,433			$	2,737			$	922

1.	Represents the undiscounted amounts payable as disclosed below under “Other Loan Facilities”.
2.	The table excludes the DSU liability of $646 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 $230 included in our financial liabilities.

 

 

Credit and Loan Facilities

At September 30, 2016, 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; and may also borrow up to €1.3 million for general business purposes, provided sufficient limit exists under the overall facility limit. Of this, €3.5 million or approximately $3.9 million was drawn as standby letters of credit and bank guarantees and €2.0 million or approximately $2.2 million was drawn as an operating line. At September 30, 2016, we had availability of €1.5 million or approximately $1.7 million (December 31, 2015 - $2.4 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 September 30, 2016 we also had a Canadian credit facility for use only as letters of credit and bank guarantees of C$3.1 million (US dollars - $2.4 million). At September 30, 2016, $nil was drawn as standby letters of credit and bank guarantees. At September 30, 2016, we had $2.4 million (December 31, 2015 - $2.3 million) available under this facility.

 

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 annual 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, which was November 30, 2011. There is no availability remaining under this facility at September 30, 2016.

 

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 September 30, 2016.

 

In the second quarter of 2015, the Company entered into a loan agreement with a syndicate of lenders for an 18 month facility of $7.5 million. The amortized cost of this loan at September 30, 2016 was $7.5 million. The loan charges interest at an annual rate of 11%. The maturity date of this loan is November 7, 2016.

 

As discussed in Note 21 of our condensed consolidated interim financial statements for the three months ended September 30, 2016, subsequent to September 30, 2016, the Company entered into a loan agreement with Export Development Canada (“EDC”) for a five year facility of $9.0 million. The loan is structured as a five year term loan with quarterly interest payments calculated at an annual interest rate of U.S. prime plus 10%, declining to U.S. prime plus 7% (or 5%) if certain annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) thresholds are met. The loan is secured by a second charge over the assets of the Company. Commencing March 31, 2017, the loan principal is subject to four quarterly repayments of $0.3 million and sixteen quarterly repayments of $0.5 million. There is a prepayment option to prepay a portion of, or the entire loan at any time, subsequent to March 31, 2017. As consideration for providing the loan facility, EDC will be granted 200,575 share purchase warrants. Each warrant will be exercisable for one common share of Hydrogenics at an exercise price of US$6.85 per common share. The exercise price of the warrants is subject to adjustment for dilutive events, with the adjusted exercise price to not be lower than the market price on the date of issue. The warrants will be transferrable and expire five years from the date of closing of November 4, 2016.

 

 

7    Capital Resources

 

We consider our capital employed to consist of shareholders’ equity and total debt, net of cash and cash equivalents as follows:

 

			September 30, 2016				December 31, 2015
Shareholders’ equity		$	13,595			$	20,248
Operating borrowings			2,248				1,086
Long term debt (including current portion) and repayable government contributions			11,030				10,326
Total			26,873				31,660
Less cash and cash equivalents and restricted cash			11,175				24,901
Capital Employed		$	15,698			$	6,759

 

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

 

 

8       Off-Balance Sheet Arrangements

 

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

 

 

9       Related Party Transactions

 

In the normal course of operations, we subcontract certain manufacturing functions to a company owned by a family member of a senior officer, director, and shareholder of the Company. During the three and nine months ended September 30, 2016, Hydrogenics made purchases of $0.1 million and $0.3 million, respectively, (three and nine months ended September 30, 2015 – less than $0.1 million) from this related company. At September 30, 2016, the Company had an accounts payable balance due to this related party of $0.1 million (2015 – less than $0.1 million). We believe that transactions with this company are consistent with those we have with unrelated third parties.

 

 

The Company holds an equity investment in the joint venture Kolon Hydrogenics. During the three and nine months ended September 30, 2016, the Company had sales to the joint venture of $0.2 million (2015 - $nil), and at the end of September 30, 2016 the Company had a receivable of $0.5 million (2015 - $0.9 million) owing from the joint venture in accrued accounts receivable.

 

 

10       Critical Accounting Estimates

 

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

 

The critical judgments, estimates and assumptions applied in the preparation of Company’s financial information are reflected in Note 4 of the Company’s 2015 annual audited consolidated financial statements.

 

 

11       Changes in Accounting Policies and Recent Accounting Pronouncements

 

Our accounting policies and information on the adoption and impact of new and revised accounting standards the Company was required to adopt effective January 1, 2016 are disclosed in Note 2 of our condensed consolidated interim financial statements for the three months ended September 30, 2016.

 

 

12       Disclosure Controls

 

We have established disclosure controls and procedures that are designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under Canadian and US securities legislation is recorded, processed, summarized, and reported within the time periods specified in such rules and forms and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer (who are our CEO (“Chief Executive Officer”) and CFO (“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 CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation and as described below under "Internal Control over Financial Reporting", our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2016.

 

 

13       Internal Control over Financial Reporting

 

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

 

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

 

Management assessed the effectiveness of the Company’s internal control over financial reporting at September 30, 2016, 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 September 30, 2016, 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 September 30, 2016.

 

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.

 

 

14       Reconciliation of Non-IFRS Measures

 

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

 

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization

 

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, equity settled restricted share units (“RSUs”) and cash settled deferred share units (“DSUs”), which are non-cash in nature and can vary significantly. We believe that removing these expenses is a better measurement of operational performance. Investors should be cautioned that Adjusted EBITDA, as reported by us, may not be comparable in all instances to Adjusted EBITDA, as reported by other companies.

 

 

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

 

		Three months ended September 30								Nine months ended September 30,
			2016				2015				2016				2015
Net loss		$	(1,899	)		$	(2,192	)		$	(7,353	)		$	(9,319	)
Finance loss (income)			271				682				833				2,785
Depreciation of property, plant and equipment and intangible assets			192				138				548				448
Compensation indexed to share price			6				(174	)			(100	)			(408	)
Stock-based compensation expense			(36	)			163				254				457
Adjusted EBITDA		$	(1,466	)		$	(1,383	)		$	(5,818	)		$	(6,037	)

 

 

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 SG&A and R&D expenses:

 

		Three months ended September 30,								Nine months ended September 30,
			2016				2015				2016				2015
Selling, general and administrative expenses		$	2,365			$	2,566			$	7,719			$	7,724
Research and product development expenses			263				1,045				2,831				3,106
Total operating costs		$	2,628			$	3,611			$	10,550			$	10,830
Less: Depreciation of property, plant and equipment  and intangible assets			(98	)			(95	)			(298	)			(272	)
Less: Compensation indexed to share price			(6	)			174				100				408
Less: Stock-based compensation expense			36				(163	)			(254	)			(457	)
Cash operating costs		$	2,560			$	3,527			$	10,098			$	10,509

 

 

15        Risk Factors

 

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

 

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.
·	If we fail to maintain the requirements for continued listing on NASDAQ, our common shares could be delisted from trading on NASDAQ, which would materially adversely affect the liquidity of our common shares, the price of our common shares, and our ability to raise additional capital. Future sales of common shares by our principal shareholders could cause our share price to fall and reduce the value of a shareholder’s investment.
·	Our articles of incorporation authorize us to issue an unlimited number of common and preferred shares. Significant issuances of common or preferred shares could dilute the share ownership of our shareholders, deter or delay a takeover of us that our shareholders may consider beneficial or depress the trading price of our common shares.
·	US investors may not be able to enforce US civil liability judgments against us or our directors and officers.
·	Our share price is volatile and we may continue to experience significant share price and volume fluctuations.

 

 

Operating

·	We may not be able to implement our business strategy and the price of our common shares may decline.
·	Our quarterly operating results are likely to fluctuate significantly and may fail to meet the expectations of securities analysts and investors and may cause the price of our common shares to decline.
·	We currently depend on a relatively limited number of customers for a majority of our revenues and a decrease in revenue from these customers could materially adversely affect our business, consolidated financial condition and results of operations.
·	Our insurance may not be sufficient.
·	Hydrogen may not be readily available on a cost-effective basis, in which case our fuel cell products may be unable to compete with existing power sources and our revenues and results of operations would be materially adversely affected.
·	We could be liable for environmental damages resulting from our research, development or manufacturing operations.
·	Our strategy for the sale of fuel cell power products depends on developing partnerships with OEMs, governments, systems integrators, suppliers and other market channel partners who will incorporate our products into theirs.
·	We are dependent on third party suppliers for key materials and components for our products. If these suppliers become unable or unwilling to provide us with sufficient materials and components on a timely and cost-effective basis, we may be unable to manufacture our products cost-effectively or at all, and our revenues and gross margins would suffer.
·	We may not be able to manage successfully the anticipated expansion of our operations.
·	If we do not properly manage foreign sales and operations, our business could suffer.
·	We will need to recruit, train and retain key management and other qualified personnel to successfully expand our business.
·	We may acquire technologies or companies in the future, and these acquisitions could disrupt our business and dilute our shareholders’ interests.
·	We have no experience manufacturing our fuel cell products on a large scale basis and if we do not develop adequate manufacturing processes and capabilities to do so in a timely manner, we will be unable to achieve our growth and profitability objectives.
·	We may never complete the development of commercially viable fuel cell power products and/or commercially viable hydrogen generation systems for new hydrogen energy applications, and if we fail to do so, we will not be able to meet our business and growth objectives.
·	We must continue to lower the cost of our fuel cell and hydrogen generation products and demonstrate their reliability or consumers will be unlikely to purchase our products and we will therefore not generate sufficient revenues to achieve and sustain profitability.
·	Any failures or delays in field tests of our products could negatively affect our customer relationships and increase our manufacturing costs.
·	The components of our products may contain defects or errors that could negatively affect our customer relationships and increase our development, service and warranty costs.
·	We depend on intellectual property and our failure to protect that intellectual property could adversely affect our future growth and success.
·	Our products use flammable fuels that are inherently dangerous substances and could subject us to product liabilities.

 

Liquidity

·

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

 

Foreign Currency Exchange

·	Our operating results may be impacted by currency fluctuation.

 

 

16       Outstanding Share Data

 

The authorized share capital of the Company consists of an unlimited number of common shares, with no par value, and an unlimited number of preferred shares in series, with no par value. We had 12,544,960 common shares outstanding at September 30, 2016.

 

		2016								2015
			Number				Amount				Number				Amount
Balance at January 1			12,540,757			$	365,824				10,090,325			$	348,259
Issuance of common shares on vesting of performance share units			4,203				98
Stock options exercised			-				-				2,050				16
At September 30,			12,544,960			$	365,922				10,092,375			$	348,275

 

At September 30, 2016, there were 629,040 stock options, 195,569 PSUs, and 52,483 RSUs outstanding to purchase or vest into our common shares. If these securities are exercised, our shareholders could incur dilution.

 

 

17       Forward Looking Statements

 

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

 

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

 

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

 

We believe the expectations represented by our forward-looking statements are reasonable, yet there can be no assurance that such expectations will prove to be correct. The purpose of the forward-looking statements is to provide the reader with a description of management’s expectations regarding the Company’s fiscal 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.

 

 

 

Third Quarter 2016 Management’s Discussion and Analysis

Page 24

EXHIBIT 99.3

 

 

 

 

 

 

Hydrogenics Corporation

 

Third Quarter 2016

Condensed Interim Consolidated Financial Statements

 

 

 

 

Hydrogenics Corporation

Condensed Interim Consolidated Balance Sheets

(in thousands of US dollars)

(unaudited)

---

 

			September 30, 2016				December 31, 2015
Assets
Current assets
Cash and cash equivalents		$	9,997			$	23,398
Restricted cash			784				971
Trade and other receivables (note 4)			13,571				10,419
Inventories			18,900				14,270
Prepaid expenses			924				428
			44,176				49,486
Non-current assets
Restricted cash			394				532
Investment in joint venture (note 5)			2,057				1,951
Property, plant and equipment			3,820				3,049
Intangible assets			226				215
Goodwill			4,280				4,135
			10,777				9,882
Total assets		$	54,953			$	59,368
Liabilities
Current liabilities
Operating borrowings (note 7)		$	2,248			$	1,086
Trade and other payables			11,353				7,776
Financial liabilities			8,710				9,034
Warranty provisions (note 6)			1,766				2,255
Deferred revenue			9,120				10,146
			33,197				30,297
Non-current liabilities
Other non-current liabilities (note 8)			3,495				3,121
Non-current warranty provisions (note 6)			855				938
Non-current deferred revenue			3,811				4,764
			8,161				8,823
Total liabilities			41,358				39,120
Equity
Share capital (note 9)			365,922				365,824
Contributed surplus			19,120				18,964
Accumulated other comprehensive loss			(2,778	)			(3,224	)
Deficit			(368,669	)			(361,316	)
Total equity			13,595				20,248
Total equity and liabilities		$	54,953			$	59,368

Contingencies and guarantees (note 17)

 

Douglas S. Alexander Chair	David C. Ferguson Director

 

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

Hydrogenics Corporation

Condensed Interim Consolidated Statements of Operations and Comprehensive Loss

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

(unaudited)

---

 

		Three months ended								Nine months ended
		September 30,								September 30,
			2016				2015				2016				2015
Revenues		$	6,733			$	9,644			$	20,260			$	24,543
Cost of sales			5,733				7,543				16,230				20,247
Gross profit			1,000				2,101				4,030				4,296
Operating expenses
Selling, general and administrative expenses (note 11)			2,365				2,566				7,719				7,724
Research and product development expenses (note 12)			263				1,045				2,831				3,106
			2,628				3,611				10,550				10,830
Loss from operations			(1,628	)			(1,510	)			(6,520	)			(6,534	)
Finance income (expenses)
Interest expense, net			(439	)			(446	)			(1,310	)			(942	)
Foreign currency gains (losses), net(1)			139				217				(39	)			(381	)
Loss from joint venture (note 5)			(78	)			(127	)			(26	)			(86	)
Other finance gains (losses) (note 13)			107				(326	)			542				(1,376	)
Finance loss, net			(271	)			(682	)			(833	)			(2,785	)
Loss before income taxes			(1,899	)			(2,192	)			(7,353	)			(9,319	)
Income tax expense			-				-				-				-
Net loss for the period			(1,899	)			(2,192	)			(7,353	)			(9,319	)
Items that may be reclassified subsequently to net loss
Exchange differences on translating foreign operations			249				(79	)			446				(955	)
Comprehensive loss for the period		$	(1,650	)		$	(2,271	)		$	(6,907	)		$	(10,274	)
Net loss per share
Basic and diluted (note 14)		$	(0.15	)		$	(0.22	)		$	(0.59	)		$	(0.92	)

 

(1)

For the three and nine months ended September 30, 2016, respectively, a gain of $28 and a loss of $179 relates to foreign exchange on borrowings. For the three and nine months ended September 30, 2015, respectively, a gain of $220 and a gain of $470 relates to foreign exchange on borrowings.

 

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

 

Hydrogenics Corporation

Condensed Interim Consolidated Statements of Changes in Equity

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

(unaudited)

---

 

		Common shares								Contributed								Accumulated other comprehensive				Total
			Number				Amount			surplus				Deficit				loss(1)				equity
Balance at December 31, 2015			12,540,757			$	365,824			$	18,964			$	(361,316	)		$	(3,224	)		$	20,248
Net loss			-				-				-				(7,353	)			-				(7,353	)
Other comprehensive income			-				-				-				-				446				446
Total comprehensive income (loss)			-				-				-				(7,353	)			446				(6,907	)
Issuance of common shares on vesting of performance share units (note 10)			4,203				98				(98	)			-				-				-
Stock-based compensation expense (note 10)			-				-				254				-				-				254
Balance at September 30, 2016			12,544,960			$	365,922			$	19,120			$	(368,669	)		$	(2,778	)		$	13,595

 

		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			-				-				-				(9,319	)			-				(9,319	)
Other comprehensive loss			-				-				-				-				(955	)			(955	)
Total comprehensive loss			-				-				-				(9,319	)			(955	)			(10,274	)
Issuance of common shares on exercise of stock options (note 10)			2,050				16				(7	)			-				-				9
Stock-based compensation expense (note 10)			-				-				457				-				-				457
Balance at September 30, 2015			10,092,375			$	348,275			$	19,377			$	(358,921	)		$	(3,063	)		$	5,668

 

(1)

Accumulated other comprehensive loss represents currency translation adjustments.

 

 

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

Hydrogenics Corporation

Condensed Interim Consolidated Statements of Cash Flows

(in thousands of US dollars)

(unaudited)

---

 

		Three months ended								Nine months ended
		September 30,								September 30,
			2016				2015				2016				2015
Cash and cash equivalents provided by (used in):
Operating activities
Net loss for the period		$	(1,899	)		$	(2,192	)		$	(7,353	)		$	(9,319	)
(Increase) decrease in restricted cash			364				118				371				2,065
Items not affecting cash
Amortization and depreciation			192				138				548				448
Unrealized losses on hedging (note 13)			-				111				-				111
Warrants (note 13)			(106	)			-				(522	)			885
Unrealized foreign exchange (gains) losses			(41	)			227				145				(29	)
Unrealized (gain) loss on joint venture (note 5)			78				127				26				86
Accreted non-cash and unpaid interest  and amortization of deferred financing fees			229				220				827				685
Stock-based compensation (recovery) (note 10)			(36	)			163				254				457
Stock-based compensation (recovery) - RSUs and DSUs (note 10)			6				(174	)			(100	)			(408	)
Net change in non-cash working capital (note 16)			(1,545	)			326				(6,947	)			(1,575	)
Cash used in operating activities			(2,758	)			(936	)			(12,751	)			(6,594	)
Investing activities
Purchase of property, plant and equipment			(1,275	)			(674	)			(2,178	)			(1,553	)
Receipt of government funding			175				-				390				118
Purchase of intangible assets			-				-				(47	)			(81	)
Cash used in investing activities			(1,100	)			(674	)			(1,835	)			(1,516	)
Financing activities
Repayment of repayable government contributions			(55	)			(52	)			(163	)			(162	)
Proceeds of borrowings, net of transaction costs (note 8)			-				-				-				6,866
Repayment of operating borrowings			-				(1,658	)			(1,077	)			(3,809	)
Proceeds of operating borrowings			2,248				2,240				2,248				6,062
Common shares issued			-				-				-				9
Cash provided by (used in) financing activities			2,193				530				1,008				8,966
Increase (decrease) in cash and cash equivalents during the period			(1,665	)			(1,080	)			(13,578	)			856
Cash and cash equivalents - Beginning of period			11,579				8,016				23,398				6,572
Effect of exchange rate fluctuations on cash and cash equivalents held			83				(6	)			177				(498	)
Cash and cash equivalents - End of period			9,997			$	6,930				9,997			$	6,930
Supplemental disclosure
Interest paid		$	209			$	192			$	621			$	194

 

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

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

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 unaudited condensed interim consolidated financial statements for the three and nine months ended September 30, 2016 have been prepared in accordance with International Accounting Standards (“IAS”) 34, “Interim financial reporting”. The disclosures contained in these unaudited condensed interim consolidated financial statements do not include all of the requirements of International Financial Reporting Standards (“IFRS”) for annual financial statements. The condensed interim consolidated financial statements should be read in conjunction with the annual financial statements for the year ended December 31, 2015, which have been prepared in accordance with IFRS, as issued by the International Accounting Standards Board (“IASB”). The unaudited condensed interim consolidated financial statements are based on accounting policies as described in the 2015 annual consolidated financial statements, except that effective January 1, 2016 the functional currency of the Company’s subsidiary located in Germany is now the euro which is the currency of the primary economic environment in which the subsidiary operates. In previous periods, the functional currency was the U.S. dollar. In the previously issued unaudited condensed interim financial statements for the three and nine months ended September 30, 2015, the warrants issued in the second quarter of 2015 were classified as equity at issuance and recorded in contributed surplus. Consistent with the presentation adopted in the audited annual consolidated financial statements for the year ended December 31, 2015 these warrants have been represented as financial liabilities at September 30, 2015 in these interim financial statements.

 

On November 4 2016, the Board of Directors authorized the condensed interim consolidated financial statements for issue.

 

Note 3 - Accounting Standards Issued But Not Yet Applied

 

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

 

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

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 and disclosure 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 months, 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 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 is assessing the new standard to determine its impact on the Company’s consolidated financial statements.

 

Note 4 - Trade and Other Receivables

 

			September 30,  2016				December 31,  2015
Trade accounts receivables		$	4,907			$	2,314
Less:  Allowance for doubtful accounts			(212	)			(127	)
Net trade accounts receivable			4,695				2,187
Accrued receivables			5,405				6,450
Other receivables			3,471				1,782
Total receivables		$	13,571			$	10,419

 

Included in accrued receivables is $4,318 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 $487 of this amount will not be billed within the next 12 months.

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

Note 5 – 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”.

 

			September 30,  2016				September 30,  2015
Balance January 1,		$	1,951			$	2,150
Share in income (loss) of the joint venture			(26	)			(86	)
Foreign currency translation			132				(181	)
Investment in joint venture at September 30,		$	2,057			$	1,883

 

Note 6 - Warranty Provisions

 

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

 

			September 30, 2016				September 30, 2015
Balance January 1,		$	3,193			$	2,547
Additional provisions			677				1,027
Utilized during the period			(516	)			(535	)
Unused amounts reversed			(814	)			(334	)
Foreign currency translation			81				(144	)
Total warranty provision at September 30,			2,621				2,561
Less current portion			(1,766	)			(1,814	)
Long-term warranty provision at September 30,		$	855			$	747

 

Note 7 - Lines of Credit and Bank Guarantees

 

At September 30, 2016, 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 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. Of this, €3,490 or approximately $3,922 was drawn as standby letters of credit and bank guarantees, and €2,000 or approximately $2,248 was drawn as an operating line. At September 30, 2016, the Company had availability of €1,510 or approximately $1,697 (December 31, 2015 - $2,356) under this facility for use as letters of credit and bank guarantees.

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

At September 30, 2016, the Company also had a Canadian credit facility for use only as letters of credit and bank guarantees of C$3,149 (US dollars - $2,401). At September 30, 2016, $nil was drawn as standby letters of credit and bank guarantees. At September 30, 2016, the Company had $2,401 (December 31, 2015 - $2,162) available under this facility.

 

Note 8 - Other Non-current Liabilities

 

Other non-current liabilities are as follows:

 

			September 30,  2016				December 31,  2015
Long-term debt - institutional (i)		$	7,456			$	7,140
Long-term debt - Province of Ontario (ii)			3,367				2,865
Non-current post-retirement benefit liabilities (iii)			299				288
Repayable government contributions (iv)			207				322
Total			11,329				10,615
Less current portion of long-term debt - institutional (due Nov 2016)(1)			(7,456	)			(7,140	)
Less current portion of repayable government contribution(1)			(207	)			(192	)
Less current portion of long-term debt - Province of Ontario(1)			(171	)			(162	)
Total other non-current liabilities		$	3,495			$	3,121

 

 

^{(1) The current portion is included within financial liabilities on the balance sheet.}

 

(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 September 30, 2016 was $7,456. The maturity date of this loan is November 7, 2016. Included with this loan agreement was the issuance of 250,000 warrants to the lenders which are reflected as financial liabilities on the balance sheet. The loan charges interest at an annual rate of 11%. Total financing fees included in the amortized cost of the loan at inception were $634.

 

As discussed in Note 21, subsequent to September 30, 2016 the Company entered into a loan agreement with Export Development Canada (“EDC”) for a five year facility of $9,000.

  

(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. The loan bears interest at a rate of 3.67% and will require annual 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. Annual repayments commence in November 2017, except for the current balance to be repaid in the fourth quarter of 2016 included within financial liabilities. There is no availability remaining under this facility at September 30, 2016.

 

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 September 30, 2016.

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

			September 30, 2016				September 30, 2015
At January 1,		$	2,865			$	2,922
Interest accretion during the period			343				347
Foreign currency translation			159				(402	)
At September 30,		$	3,367			$	2,867

 

(iii)

Post-retirement benefit liabilities

 

The liability of $299 at September 30, 2016 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.

 

There were no actuarial remeasurements during the three and nine months ended September 30, 2016.

 

(iv)

Repayable government contributions

 

The present value of the repayable government obligation at September 30, 2016 was $207 (September 30, 2015 - $373), including the current portion of $207 (September 30, 2015 - $196), which was included in trade and other payables.

 

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

 

			2016				2015
At January 1,		$	322			$	553
Repayments during the period			(163	)			(162	)
Interest accretion during the period			29				50
Foreign currency translation			19				(68	)
At September 30,		$	207			$	373
Less Current portion			(207	)			(196	)
At September 30,		$	-			$	177

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

Note 9 - Share Capital

 

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.

 

Common shares

 

			2016								2015
			Number				Amount				Number				Amount
Balance at January 1,			12,540,757			$	365,824				10,090,325			$	348,259
Stock options exercised (note 10)			-				-				2,050				16
Issuance of common shares on vesting of performance share units (note 10)			4,203				98				-				-
At September 30,			12,544,960			$	365,922				10,092,375			$	348,275

 

Note 10 – Stock-Based Compensation

 

Under the Company’s previous Stock Option Plan, 248,816 stock options were outstanding at September 30, 2016. No further stock options may be issued under this plan.

 

Of the 1,002,069 shares available under the Omnibus Incentive Plan, to be issued as stock options, RSUs and PSUs, 380,224 have been granted as stock options, 52,483 have been granted as RSUs and 199,772 have been granted as PSUs all of which were outstanding at September 30, 2016 except for 4,203 PSUs which vested in the nine months ended September 30, 2016. The Corporation has 369,590 share units available for issue as stock options, RSUs and PSUs under the Omnibus Incentive Plan at September 30, 2016.

 

Stock options

 

A summary of the Company’s stock option plans for the nine months ended September 30, 2016 and 2015 is as follows:

 

			2016								2015
			Number of shares				Weighted average exercise price C$				Number of shares				Weighted average exercise price C$
Outstanding, beginning of period			536,174			$	7.97				481,403			$	6.99
Granted			96,056				10.53				56,821				16.14
Expired			(3,190	)			84.25				(2,050	)			5.56
Exercised			-				-				-				-
Outstanding, end of period			629,040			$	7.97				536,174			$	7.97

 

During the nine months ended September 30, 2016, nil (2015 – 2,050) stock options were exercised resulting in cash proceeds of $nil (2015 - $9), an increase in equity of $nil (2015 - 16) with an offset to contributed surplus of $nil (2015 - $7).

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

During the nine months ended September 30, 2016, 96,056 (2015 - 56,821) stock options were granted with an average fair value of C$6.12 per option (2015 - C$8.77). 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:

 

			2016				2015
Risk-free interest rate			0.87	%			0.88	%
Expected volatility			65	%			63.1	%
Expected life in years			6				5
Expected dividend			Nil				Nil

 

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

 

Stock-based compensation expense for the nine months ended September 30, 2016, related to stock options, was $239 (nine months ended September 30, 2015 - $200) and was included in selling, general and administrative expenses with an offsetting increase to contributed surplus.

 

Restricted Share Units (“RSUs”)

 

The Company grants RSUs to certain employees. The RSUs will be settled in the Company’s shares. The cost of the Company’s RSUs is charged to selling, general and administrative expenses using the graded vesting method. RSU’s vest three years from grant date. The fair value of each grant of RSUs is the fair value of the Company’s share price on the date of grant. The resulting compensation expense, included in selling, general and administrative expenses, is based on the fair value of the awards granted is charged to income over the period the employees unconditionally become entitled to the award, with a corresponding increase to contributed surplus.

 

During the nine months ended September 30, 2016, 52,483 (2015 - nil) RSUs were granted with an average fair value of C$10.53 per unit (2015 - C$nil). All RSUs are for a term of three years from the date of grant, with vesting occurring at the end of the three years.

 

			2016				2015
Balance at January 1,			-				-
RSUs issued			52,483				-
At September 30,			52,483				-

 

Stock-based compensation expense for the nine months ended September 30, 2016, related to RSUs, was $67 (nine months ended September 30, 2015 - $nil).

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

Performance Share Units (“PSUs”)

 

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. 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 third quarter of 2016, 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 $169, with the offset to contributed surplus.

 

During the nine months ended September 30, 2016, nil PSUs were granted with a fair value of C$nil (nine months ended September 30, 2015 - 32,670 units with a fair value of C$527).

 

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

 

			2016				2015
Balance at January 1,			199,772				192,320
PSUs vested			(4,203	)			-
Forfeited			-				(25,218	)
PSUs issued			-				32,670
At September 30,			195,569				199,772

 

Stock-based compensation expense for the nine months ended September 30, 2016, related to PSUs, was $117 (nine months ended September 30, 2015 - $257) and was included in selling, general and administrative expenses with an offsetting increase to contributed surplus. Offsetting this amount is a credit of $169 for the three and nine months ended September 30, 2016 (three and nine months ended September 30, 2015 - $nil), representing the revision for the change in estimate regarding the achievement of performance conditions.

 

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

Deferred Share Units (“DSUs”)

 

The Company has a deferred share unit plan for directors. 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 as a fair value adjustment each reporting period with the offset recorded in selling, general and administrative expenses.

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

 

			2016								2015
			Number				Amount				Number				Amount
Balance at January 1,			83,628			$	746				87,850			$	1,168
DSU compensation expense			14,829				106				8,709				83
DSU fair value adjustments			-				(206	)			-				(491	)
At September 30,			98,457			$	646				96,559			$	760

 

For the nine months ended September 30, 2016, the Company recognized $106 (nine months ended September 30, 2015 - $83) as expense for the issue of new DSUs and a recovery of ($206), (nine months ended September 30, 2015 - recovery of $491) for the fair value adjustment on the liability.

 

The DSU liability at September 30, 2016 of $646 (2015 - $760) was included in trade and other payables. DSUs vest immediately on the date of issuance.

 

Summary of stock-based compensation expense (recovery)

 

			2016				2015
Stock-based compensation expense - stock options		$	239			$	200
Stock-based compensation expense – restricted share units			67				-
Stock-based compensation expense - performance share units			117				257
Stock-based compensation expense - performance share units change in estimate recovery			(169	)			-
Deferred share unit - new issuance			106				83
Deferred share unit - mark-to-market adjustment			(206	)			(491	)
At September 30,		$	154			$	49

 

Note 11 – Selling, General and Administrative Expenses

 

Included in selling, general and administrative expenses for the nine months ended September 30, 2016 is a credit of $470 relating to the reversal of an indemnification liability that had been set up associated with an acquisition in 2004.

 

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

Note 12 - 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 three and nine months ended September 30, 2016 and 2015, research and product development expenses and non-repayable program funding, which have been received or receivable, are as follows:

 

Three months ended September 30,			2016				2015
Research and product development expenses		$	3,109			$	1,346
Government research and product development funding			(2,846	)			(301	)
Development costs capitalized			-				-
Total		$	263			$	1,045

 

Nine months ended September 30,			2016				2015
Research and product development expenses		$	6,659			$	4,727
Government research and product development funding			(3,828	)			(1,544	)
Development costs capitalized			-				(77	)
Total		$	2,831			$	3,106

 

Note 13 - Other Finance Gains and Losses, Net

 

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

 

Three months ending September 30,			2016				2015
Foreign exchange contracts - fair market value adjustment on settled held for trading financial instruments		$	1			$	-
Foreign exchange contracts - fair market value adjustment on unsettled held for trading financial instruments			-				(326	)
Warrants			106				-
Total		$	107			$	(326	)

 

Nine months ending September 30,			2016				2015
Foreign exchange contracts - fair market value adjustment on settled held for trading financial instruments		$	20			$	-
Foreign exchange contracts - fair market value adjustment on unsettled held for trading financial instruments			-				(491	)
Warrants			522				(885	)
Total		$	542			$	(1,376	)

 

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

Note 14 - Net Loss Per Share

 

The loss per share for the periods ended September 30, 2016 and 2015 was as follows:

 

			Three months ended September 30								Nine months ended September 30
			2016				2015				2016				2015
Net loss		$	(1,899	)		$	(2,192	)		$	(7,353	)		$	(9,319	)
Weighted average number of common shares outstanding – basic and diluted			12,544,960				10,092,375				12,542,276				10,091,458
Net loss per share – basic and diluted		$	(0.15	)		$	(0.22	)		$	(0.59	)		$	(0.92	)

 

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 15 - 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 the three and nine months ended September 30, 2016, Hydrogenics made purchases of $140 and $298 (2015 - $42 and $81) from this related company. At September 30, 2016, the Company had an accounts payable balance due to this related party of $117 (2015 - $39).

 

The Company holds an equity investment in the joint venture Kolon Hydrogenics. During the three and nine months ended September 30, 2016, the Company had sales to the joint venture of $150 (2015 - $nil), and at the end of September 30, 2016 the Company had a receivable of $509 (2015 - $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 16 - Consolidated Statements of Cash Flows

 

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

 

Three months ended September 30,			2016				2015
Decrease (increase) in current assets
Trade and other receivables		$	(2,544	)		$	(412	)
Inventories			(1,307	)			(811	)
Prepaid expenses			(108	)			166
Increase (decrease) in current liabilities
Trade and other payables, including warranty provision and financial liabilities			3,566				648
Deferred revenue			(1,152	)			735
Total		$	(1,545	)		$	326

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

Nine months ended September 30,			2016				2015
Decrease (increase) in current assets
Trade and other receivables		$	(2,510	)		$	806
Inventories			(4,285	)			(1,465	)
Prepaid expenses			(492	)			126
Increase (decrease) in current liabilities
Trade and other payables, including warranty provision and financial liabilities			2,462				(2,959	)
Deferred revenue			(2,122	)			1,917
Total		$	(6,947	)		$	(1,575	)

 

Note 17 – 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 be shipped in 2017. Hydrogenics will receive a total of C$2,950, paid in equal monthly installments, in return for IESO’s use of the energy storage solution over the three-year period.

 

In order to partially fund the development of the unit, Hydrogenics and the Province of Ontario, through the Ministry of Research and Innovation (“MRI”), negotiated a forgivable loan facility from the Innovation Demonstration Fund Program (“IDF”). The loan bears interest at 3.23%, is expected to mature on June 30, 2020 and the principal and interest are forgivable upon the satisfaction of certain criteria. Under the terms of the loan agreement, the government has committed to fund up to C$4,000 through a forgivable loan, to be funded at 50% of eligible costs incurred on the project. The total cost of the energy storage solution is expected to be C$8,000, of which C$1,960 of the costs will be funded by Hydrogenics, C$2,040 will be funded by Enbridge and the remaining C$4,000 from the forgivable loan. The project completion date is expected to be 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 2MW Power-to-Gas storage unit 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 September 30, 2016, the Company has accumulated total costs in building the unit of $2,477 which have been classified as property, plant and equipment. The Company has received or accrued total funding of $1,210 under the IDF loan. The actual funding percentage varies from committed funding percentage due to foreign exchange translation. As of September 30, 2016, a total of $683 was accrued as funding receivables. The funding amounts have been recorded as a reduction to property, plant and equipment.

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

Note 18 - Segmented Financial Information

 

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

Financial information by reportable segment for the three and nine months ended September 30, 2016 and 2015 was as follows:

 

Three months ended September 30, 2016			OnSite Generation				Power Systems				Corporate and Other				Total
Revenues from external customers		$	4,240			$	2,493			$	-			$	6,733
Gross profit			811				189				-				1,000
Selling, general and administrative expenses			717				859				789				2,365
Research and product development expenses (recovery)			(400	)			643				20				263
Segment gain (loss)			494				(1,313	)			(809	)			(1,628	)
Interest expense, net			-				-				(439	)			(439	)
Foreign currency gains, net			-				-				139				139
Loss in joint venture			-				-				(78	)			(78	)
Other finance gains, net			-				-				107				107
Gain (Loss) before income taxes		$	494			$	(1,313	)		$	(1,080	)		$	(1,899	)
Total segment assets		$	27,576			$	19,217			$	8,160			$	54,953
Total segment liabilities (current and non-current)		$	16,206			$	16,535			$	8,617			$	41,358

 

 

 

 

 

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

Three months ended September 30, 2015			OnSite Generation				Power Systems				Corporate and Other				Total
Revenues from external customers		$	7,633			$	2,011			$	-			$	9,644
Gross profit			1,183				918				-				2,101
Selling, general and administrative expenses			665				987				914				2,566
Research and product development expenses			480				558				7				1,045
Segment gain (loss)			38				(627	)			(921	)			(1,510	)
Interest expense, net			-				-				(446	)			(446	)
Foreign currency gains, net			-				-				217				217
Loss in joint venture			-				-				(127	)			(127	)
Other finance losses, net			-				-				(326	)			(326	)
Gain (Loss) before income taxes		$	38			$	(627	)		$	(1,603	)		$	(2,192	)
Total segment assets		$	24,673			$	16,480			$	5,371			$	46,524
Total segment liabilities (current and non-current)		$	15,044			$	16,285			$	8,642			$	39,971

 

Nine months ended September 30, 2016			OnSite Generation				Power Systems				Corporate and Other				Total
Revenues from external customers		$	13,661			$	6,599			$	-			$	20,260
Gross profit			2,359				1,671				-				4,030
Selling, general and administrative expenses			2,233				3,038				2,448				7,719
Research and product development expenses			318				2,382				131				2,831
Segment loss			(192	)			(3,749	)			(2,579	)			(6,520	)
Interest expense, net			-				-				(1,310	)			(1,310	)
Foreign currency losses, net			-				-				(39	)			(39	)
Loss in joint venture			-				-				(26	)			(26	)
Other finance gains, net			-				-				542				542
Loss before income taxes		$	(192	)		$	(3,749	)		$	(3,412	)		$	(7,353	)

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

Nine months ended September 30, 2015			OnSite Generation				Power Systems				Corporate and Other				Total
Revenues from external customers		$	15,469			$	9,074			$	-			$	24,543
Gross profit			2,113				2,183				-				4,296
Selling, general and administrative expenses			1,898				2,882				2,944				7,724
Research and product development expenses			1,381				1,699				26				3,106
Segment loss			(1,166	)			(2,398	)			(2,970	)			(6,534	)
Interest expense, net			-				-				(942	)			(942	)
Foreign currency losses, net			-				-				(381	)			(381	)
Loss in joint venture			-				-				(86	)			(86	)
Other finance losses, net			-				-				(1,376	)			(1,376	)
Loss before income taxes		$	(1,166	)		$	(2,398	)		$	(5,755	)		$	(9,319	)

 

Note 19 - 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, financial assets and liabilities 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:

 

(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 three and nine months ended September 30, 2016.

 

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:

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

			September 30, 2016				December 31, 2015
Cash and cash equivalents		$	9,997			$	23,398
Restricted cash			784				971
Restricted cash – non-current			394				532
Trade and other receivables			13,571				10,419
Items classified as loans and receivables		$	24,746			$	35,320
Trade and other payables		$	11,353			$	7,776
Current portion of long-term debt and repayable government contribution			7,834				7,494
Operating borrowings			2,248				1,086
Non-current portion of long-term debt			3,196				2,702
Non-current portion of repayable government contributions			-				130
Post-retirement benefit liabilities			299				288
Items classified as other financial liabilities		$	24,930			$	19,476
Warrants			230				752
Deferred share unit liability			646				746
Derivative liability			-				42
Items classified as financial liability at fair value through profit and loss			876				1,540

 

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 dollar and the euro functional currency of its European operations. 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.

 

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.

 

As at September 30, 2016, the Company had no foreign exchange forward contracts.

 

Note 20 – 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.

 

Hydrogenics Corporation Notes to Condensed Interim Consolidated Financial Statements For the nine months ended September 30, 2016 (in thousands of US dollars, except share and per share amounts) (unaudited)

 

---

 

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:

 

			September 30, 2016				December 31, 2015
Equity		$	13,595			$	20,248
Operating borrowings			2,248				1,086
Long-term debt (including current portion), and repayable government contributions			11,030				10,327
Total			26,873				31,661
Less Cash and cash equivalents and restricted cash			11,175				24,901
Total capital employed		$	15,698			$	6,760

 

 

Note 21 – Subsequent Event

 

Subsequent to September 30, 2016, the Company entered into a loan agreement with Export Development Canada (“EDC”) for a five year facility of $9,000. The loan is structured as a five year term loan with quarterly interest payments calculated at an annual interest rate of U.S. prime plus 10%, declining to U.S. prime plus 7% (or 5%) if certain annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) thresholds are met. The loan is secured by a second charge over the assets of the Company. Commencing March 31, 2017, the loan principal is subject to four quarterly repayments of $250 and sixteen quarterly repayments of $500. There is a prepayment option to prepay a portion of, or the entire loan at any time, subsequent to March 31, 2017. As consideration for providing the loan facility, EDC will be granted 200,575 share purchase warrants. Each warrant will be exercisable for one common share of Hydrogenics at an exercise price of US$6.85 per common share. The exercise price of the warrants is subject to adjustment for dilutive events, with the adjusted exercise price to not be lower than the market price on the date of issue. The warrants will be transferrable and expire five years from the date of closing of November 7, 2016.

 

 

2016 Q3 Condensed Interim Consolidated Financial Statements

Page 22

---

EXHIBIT 99.4

 

1 1 Q3 2016 Earnings Presentation November 7, 2016

2 Safe Harbor Statement CertainstatementsintheBusinessUpdateandOrderBacklogsectionscontainforward-lookingstatementswithinthemeaningofthe“safeharbor” provisionsoftheU.S.PrivateSecuritiesLitigationReformActof1995,andunderapplicableCanadiansecuritieslaws.Thesestatementsarebased onmanagement’scurrentexpectationsandactualresultsmaydifferfromtheseforward-lookingstatementsduetonumerousfactors,including:our inabilitytoincreaseourrevenuesorraiseadditionalfundingtocontinueoperations,executeourbusinessplan,ortogrowourbusiness;ourinability toaddressaslowreturntoeconomicgrowth,anditsimpactonourbusiness,resultsofoperationsandconsolidatedfinancialcondition;ourlimited operating history; inability to implement our business strategy; fluctuations in our quarterly results; failure to maintain our customer base that generatesthemajorityofourrevenues;currencyfluctuations;failuretomaintainsufficientinsurancecoverage;changesinvalueofgoodwill;failureof asignificantmarkettodevelopforourproducts;failureofhydrogenbeingreadilyavailableonacost-effectivebasis;changesingovernmentpolicies andregulations;failureofuniformcodesandstandardsforhydrogenfuelledvehiclesandrelatedinfrastructuretodevelop;liabilityforenvironmental damagesresultingfromourresearch,development ormanufacturingoperations;failuretocompetewithotherdevelopersandmanufacturersof products in our industry; failure to compete with developers and manufacturers of traditional and alternative technologies; failure to develop partnershipswithoriginalequipmentmanufacturers,governments,systemsintegratorsandotherthirdparties;inabilitytoobtainsufficientmaterials andcomponentsforourproductsfromsuppliers;failuretomanageexpansionofouroperations;failuretomanageforeignsalesandoperations; failuretorecruit,trainandretainkeymanagementpersonnel;inabilitytointegrateacquisitions;failuretodevelopadequatemanufacturingprocesses andcapabilities;failuretocompletethedevelopmentofcommerciallyviableproducts;failuretoproducecost-competitiveproducts;failureordelayin fieldtestingofourproducts;failuretoproduceproductsfreeofdefectsorerrors;inability toadapttotechnologicaladvancesornewcodesand standards;failuretoprotectourintellectualproperty;ourinvolvementinintellectualpropertylitigation;exposuretoproductliabilityclaims;failureto meetrulesregardingpassiveforeigninvestmentcompanies;actionsofoursignificantandprincipalshareholders;dilutionasaresultofsignificant issuancesofourcommonsharesandpreferredshares;inabilityofUSinvestorstoenforceUScivilliabilityjudgmentsagainstus;volatilityofour commonshareprice;dilutionasaresultoftheexerciseofoptions;andfailuretomeetcontinuedlistingrequirementsofNasdaq.Readersshouldnot placeunduerelianceonHydrogenics’forward-lookingstatements.Investorsareencouragedtoreviewthesectioncaptioned“RiskFactors”inour regulatory filings with the Canadian securities regulatory authorities and the US Securities and Exchange Commission for a more complete discussionoffactorsthatcouldaffectourfutureperformance. Furthermore,theforward-lookingstatementscontainedhereinaremadeasofthedate ofthispresentation,andweundertakenoobligationtoreviseorupdateanyforward-lookingstatementsinordertoreflecteventsorcircumstances thatmayariseafterthedateofthispresentation,unlessotherwiserequiredbylaw.Theforward-lookingstatementscontainedinthispresentationare expresslyqualifiedbythis.

3 Q3 2016 Highlights • Product reliability is demonstrated as H2Fly launches world’s first 4-person fuel-cell powered plane • Commercialization progress evident as Alstomlaunches fuel-cell train at InnoTrans industry trade show in Berlin • Strong backlog continues over $100M • China business development robust and outlook improving • Inventory heavy with pending major deliveries • Intrinsic value in multiple pathways to scale

4 Application: Continuous Clean Power • 1MW pilot at the Daesansite wraps up as planned by year end • Plant has run more than 7,000 hours –performance has exceeded expectations • Core technology proven and valuable lessons learned for scale- up –operations, financing, collaboration, sourcing, facilities management, etc. • Focus now on three additional sites for a 5MW+ next step deployment

5 China Update • Certified Integrator Program (CIP) on track, with additional partners under review • Moving through scale-up process of 1- 10-100-1000 development • Growing number of bus and vehicle OEMs under contract with Hydrogenics’ CIPs • Potential partners for energy storage, fueling, and grid-related projects now in discussion • More developments expected before year end • Cumulative orders exceed 300 fuel cell units, of which more than 60 units already built and shipped this year It’s real -First prototype, already with 40,000 km road service, in Beijing

6 Application: Commuter Rail • Order received May, 2015 after global competitive bid –200 unit order • First full power demonstration rack delivered in five months • Final product design approved in spring of 2016 • Four units now in build with expected year-end delivery • Testing and vehicle certification in early 2017, followed by passenger deployment later that year • Excellent sales engagement at InnoTrans show Berlin in Sept.

7 Major Program Progress Program Area LeadCustomer Status Value Stationary MW Power Kolon 1MWpilot will run to year end as planned 3 x 5MW sites under review >$20M Pending Hydrogen Rail Alstom Transport Program on schedule 4 units first build now ongoingfor Q4 delivery >$50M Booked Detritiation Kurion Awaiting next step direction in Japan Paralleleffort on additional projects TBD Propulsion Confidential Major milestone crossed in July –design First product builds authourizedto go ahead $30M Firm $60M ** Power to Gas EON Enbridge 2Sites operating –more planned FirstCanadian facility in build for 2016 $20M deliv $70M Pipeline Fueling Various Demand growingin California and Europe Recent wind connected win with Stratos(Calif) More to come Mobility 4 CIP* China First proto builds under dev >$15M Automotive 4 Confidential 2 OEM 2 Disruptors New early stage technology development support and vehicle integration Vehicle supply driving interest TBD *Certified Integrator Program Partners ** Not in Backlog

8 $9M Loan Facility and Business Plan • New debt facility provides funding for growth • Long duration, large projects put pressure on cash cycle – Example: propulsion project is based on percentage completion, and revenue exceeds cash realized by $5M • Other government funded work for Power-to-Gas and fueling projects • Current high inventory level will cycle to cash in coming quarters, but debt facility will provide important support for future business • Funding of recently completed expansion of facilities and equipment expenditures

9 Building & Delivering Value • Global technology leadership demonstrated in competitive markets with Alstom, E.ON, Enbridge, CIPs • Multiple pathways to scale is a hedge against the uncertainty of any one application • Business opportunities in multiple geographies yield significant intrinsic value as applications scale independently • Strong cost discipline in both company and product yield significant operating leverage when scaling

10 0.0 4.0 8.0 12.0 2015 2016 Power Systems OnSite Generation Notes Revenue of $6.7 million in the quarter, a 30% decrease year-over-year, reflecting fewer orders shipped within the OnSite Generation segment, partially offset by an increase of $0.5 million in the Power Systems segment as a result of increased sales into the mobility market in China. Revenue Three months endedSeptember 30, 2016 $M Revenue by Business Unit 6.7 9.6 0 2 4 6 8 OnSite Generation Power Systems 7.6 2.0 4.2 2.5 2015 2016 $M Q3 Revenue

11 0.0 4.0 8.0 12.0 16.0 20.0 24.0 28.0 2015 2016 Power Systems OnSite Generation Notes Revenue of $20.3 million YTD, a 17% decrease year-over-year, due to the lack of a comparable project which occurred in the first quarter of 2015 as well as a decrease in sales of two significant items in the third quarter of 2015 –electrolysis units to Kurion and a Power-to-Gas facility project with E.ON. Revenue Nine months ended September 30, 2016 $M Revenue by Business Unit 20.3 24.5 0 2 4 6 8 10 12 14 16 OnSite Generation Power Systems 15.4 9.1 13.7 6.6 2015 2016 $M YTD Revenue

12 - 10.0 20.0 30.0 40.0 2015 2016 Power Systems OnSite Generation 0 5 10 15 20 25 30 35 40 45 50 OnSite Generation Power Sytems 15.5 45.6 19.1 7.6 2015 2016 Three months ended September 30, 2016 Gross Margin By Business Unit 21.8 14.9 Gross Margin Notes Gross margin was 14.9% of revenue for the quarter,versus 21.8% in the prior-year period. The decline was principallyduetolowermarginsinthePowerSystemssegmentresultingfromadditionalcostsincurredtosupport keyprojectsinGermany. % % Q3 GrossMargin

13 - 10.0 20.0 30.0 40.0 2015 2016 Power Systems OnSite Generation 0 5 10 15 20 25 30 OnSite Generation Power Sytems 13.7 24.1 17.3 25.3 2015 2016 Nine months ended September 30, 2016 Gross Margin By Business Unit 17.5 19.9 Gross Margin Notes Grossmarginimprovedto19.9%ofrevenuefortheninemonthsendedSeptember30,2016,versus17.5%inthe prior-yearperiod,reflectingthe2015impactofasignificantlylower-marginGermanprojectincludedinthenine monthsendedSeptember30,2015.Thiswaspartiallyoffsetbyareductionofoverheadabsorptionofindirect overhead. % % YTDGrossMargin

14 Three months ended Sept. 30 Change 2016 2015 $ % Revenue $ 6.7 $ 9.6 (2.9) (30)% Gross Profit 1.0 2.1 (1.1) (52)% Gross Margin % 14.9% 21.8% Operating Expenses Selling, general and administrative (excluding stock-based compensation, amortization and depreciation) 2.3 2.5 (0.2) (8)% Research and product development 0.2 1.0 (0.8) (80)% Adjusted EBITDA $ (1.5) $ (1.4) $ 0.1 7% Notes • AdjustedEBITDAisdefinedasnetlossexcluding: cashsettledlongtermcompensationindexedtoshareprice, sharesettledstock-basedcompensationexpense,netfinanceincomeandexpenses,depreciationandamortization. AdjustedEBITDAisanon-IFRSmeasureandmaynotbecomparabletosimilarmeasuresusedbyothercompanies. • ManagementusesAdjustedEBITDAasausefulmeasureofongoingoperationalresults. (in $ millions) Q3 Results

15 Nine months ended Sep. 30 Change 2016 2015 $ % Revenue $ 20.3 $ 24.5 (4.2) (17)% Gross Profit 4.0 4.3 (0.3) (6)% Gross Margin % 19.9% 17.5% Operating Expenses Selling, general and administrative (excluding stock-based compensation, amortization and depreciation) 7.0 7.2 (0.2) (2)% Research and product development 2.8 3.1 (0.3) (9)% Adjusted EBITDA $ (5.8) $ (6.0) $ (0.2) (3)% Notes • AdjustedEBITDAisdefinedasnetlossexcluding: cashsettledlongtermcompensationindexedtoshareprice, sharesettledstock-basedcompensationexpense,netfinanceincomeandexpenses,depreciationandamortization. AdjustedEBITDAisanon-IFRSmeasureandmaynotbecomparabletosimilarmeasuresusedbyothercompanies. • ManagementusesAdjustedEBITDAasausefulmeasureofongoingoperationalresults. (in $ millions) YTD Results

16 Jul. 1/16 Backlog Orders Received FX Orders Delivered Sep. 30/16 Backlog OnSiteGeneration $ 16.0 $ 4.9 $ 0.4 $ 4.2 $ 17.1 Power Systems 86.9 3.6 1.1 2.5 89.1 Total $ 102.9 $ 8.5 $ 1.5 $ 6.7 $ 106.2 As of September 30, 2016 ($M) Order Backlog Oftheabovebacklogof$106.2million,weexpecttorecognize$30.2millioninthefollowingtwelvemonthsas revenue. In addition, revenue for the year ending December 31, 2017 will also include orders received and deliveredin2017.

17 Cash and cash equivalents and restricted cash $ 11.2 $ 24.9 (13.7) (55)% Trade, other and grants receivable 13.6 10.4 3.2 30% Inventories 18.9 14.3 4.6 32% Operating borrowings 2.2 1.1 1.1 100% Trade and other payables 11.4 7.8 3.6 46% Financial liabilities 8.7 9.0 (0.3) (3)% Dec. 31, 2015 $ % ($M) ChangeSep.30, 2016 Consolidated Balance Sheet Highlights

18 Three months ended September 30, 2016 Three months ended September 30, 2015 Net loss (income) $ 1.9 $ 2.2 Finance (income) loss, net (0.2) (0.7) Amortization and depreciation (0.2) (0.1) Compensation indexed to share price - 0.2 Stock-based compensation expense - (0.2) Adjusted EBITDA loss (income) $ 1.5 $ 1.4 ($M) Q3 Reconciliationof Non-IFRS Measures –Adj. EBITDA * Note certain figures have been adjusted for rounding

19 Nine months ended September 30, 2016 Nine months ended September 30, 2015 Net loss (income) $ 7.3 $ 9.3 Finance (income) loss, net (0.8) (2.8) Amortization and depreciation (0.5) (0.4) Compensation indexed to share price 0.1 0.4 Stock-based compensation expense (0.3) (0.5) Adjusted EBITDA loss (income) $ 5.8 $ 6.0 ($M) YTD Reconciliationof Non-IFRS Measures –Adj. EBITDA * Note certain figures have been adjusted for rounding

20 

EXHIBIT 99.5

 

FORM 52-109F2

CERTIFICATION OF INTERIM FILINGS

FULL CERTIFICATE

 

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

 

1.

Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Hydrogenics Corporation (the “issuer”) for the interim period ended September 30, 2016.

 

2.

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

 

3.

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

 

4.

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

 

5.

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

 

(a)

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

 

(i)

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

 

(ii)

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

 

(b)

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

 

5.1

Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control – Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

5.2

N/A

 

5.3

N/A

 

6.

Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2016 and ended on September 30, 2016 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

 

Date: November 7, 2016.

 

/s/ Daryl Wilson

Daryl Wilson

President and Chief Executive Officer

 

 

EXHIBIT 99.6

 

FORM 52-109F2

CERTIFICATION OF INTERIM FILINGS

FULL CERTIFICATE

 

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

 

1.

Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Hydrogenics Corporation (the “issuer”) for the interim period ended September 30, 2016.

 

2.

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

 

3.

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

 

4.

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

 

5.

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

 

(a)

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

 

(i)

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

 

(ii)

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

 

(b)

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

 

5.1

Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control – Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

5.2

N/A

 

5.3

N/A

 

6.

Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2016 and ended on September 30, 2016 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

 

Date: November 7, 2016.

 

/s/ Robert Motz

Robert Motz

Chief Financial Officer