UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 20-F
(Mark One)
[  ]  
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[x]  
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012
OR
[  ]
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[  ]
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number: 000-31815
 
HYDROGENICS CORPORATION -
CORPORATION HYDROGÉNIQUE
(Exact name of Registrant as specified in its charter)
 
Canada
(Jurisdiction of incorporation or organization)
 
220 Admiral Boulevard
Mississauga, Ontario
Canada L5T 2N6
(905) 361-3660
(Address of principal executive office)
 
Robert Motz, Chief Financial Officer
220 Admiral Boulevard
Mississauga, Ontario
Canada L5T 2N6
 (905) 361-3638   Fax (905) 361-3626
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
Title of each class Name of each exchange on which registered
Common Shares The Nasdaq Global Market
 
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Warrants
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
 
At December 31, 2012, 7,775,540 common shares were issued and outstanding
 
 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [  ]
 
No   [x]
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes [  ]
 
No   [x]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [x]
 
No    [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [x]
 
No    [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  [  ]
 
Accelerated filer   [  ]
 
Non-accelerated filer  [x]
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
US GAAP  [  ]
 
International Financial Reporting Standards as issued  [x]
by the International Accounting Standards Board   
 
Other  [  ]
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
     
Item 17  [  ]
 
Item 18   [  ]
 
 If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
     
Yes [  ]
 
No   [x]
 
 
 

 
Hydrogenics Corporation

 
TABLE OF CONTENTS
 

   
 
 
 
 
 
 
 
 
 
  ITEM 9. 70
 
 
 
   
 
 
 
 
 
 
 
 
 
 
   
 
 
 
 
 
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Hydrogenics Corporation

 
INTRODUCTION AND USE OF CERTAIN TERMS
 
In this Form 20-F, references to the “United States” or to “US” are to the United States of America. You will find the words “we,” “our,” “us” and similar words or phrases in this Form 20-F. We use those words to comply with the requirement of the US Securities and Exchange Commission to use “plain English” in public documents like this Form 20-F. Each executive identified in this Form 20-F reports directly to other executives of the Company by whom the executive is employed, or to the Company’s Board of Directors (the “Board”).
 
In this Form 20-F, unless the context otherwise requires, the terms “Hydrogenics,” “Company,” “Corporation,” “we,” “us” and “our” refer to Hydrogenics Corporation, the Registrant, and its consolidated subsidiaries and, where the context requires, includes our predecessor (“Old Hydrogenics”) and its consolidated subsidiaries prior to October 27, 2009.  References to “common shares” or “Shares” herein refer to common shares of Hydrogenics.
 
Unless otherwise indicated, all references in this document to our securities for any period prior to March 12, 2010 have, where necessary, been adjusted to reflect the share consolidation effected on March 12, 2010, which resulted in one post-consolidation common share for every twenty-five pre-consolidation common shares.
 
Unless otherwise indicated, all dollar amounts are expressed in US dollars, references to “US $”, “$” or “dollar” are to US dollars, and references to “CA $” are to Canadian dollars.
 
PRESENTATION OF FINANCIAL INFORMATION
 
The financial information in this Form 20-F has been prepared in accordance with International Financial Reporting Standards (“IFRS”).  The Company adopted IFRS as of January 1, 2011. Please note that any prior financial statements filed with or furnished to the SEC were prepared in accordance with Canadian generally accepted accounting principles, which may not be comparable to the financial statements contained herein.
 
FORWARD-LOOKING STATEMENTS
 
This Form 20-F contains “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 risk factors and others are discussed in more detail herein, including under “Item 3. Key Information — Risk Factors,” “Item 4. Information on the Company,” and “Item 5. Operating and Financial Review and Prospects.”
 
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Hydrogenics Corporation

 
These factors may cause the Corporation’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 Corporation’s business. For example, they do not include the effect of business dispositions, acquisitions, other business transactions, asset writedowns 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 2013 financial performance and may not be appropriate for other purposes. Furthermore, unless otherwise stated, the forward-looking statements contained herein are made as of the date of this Form 20-F, 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.
 

 
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Hydrogenics Corporation

 
PART I
 
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
 
Not applicable.
 
OFFER STATISTICS AND EXPECTED TIMETABLE
 
Not applicable.
 
KEY INFORMATION
 
SELECTED FINANCIAL DATA
 
All financial data presented in this Form 20-F with respect to the years ended December 31, 2012, 2011 and 2010 are qualified in their entirety by reference to the relevant information in the consolidated financial statements and their notes.






 
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Hydrogenics Corporation

 
HYDROGENICS CORPORATION
SELECTED FINANCIAL INFORMATION
(Thousands of US dollars, except
  for share and per share amounts)
 
   
2012
   
2011
   
2010
 
Consolidated Balance Sheet Data
                 
Cash and cash equivalents
  $ 13,020     $ 7,785     $ 7,881  
Restricted cash
    3,782       2,175       1,843  
Total Assets
    42,088       31,061       31,473  
Non-current liabilities
    2,384       1,979       2,100  
Shareholders’ Equity
                       
Common shares
    323,513       318,016       313,461  
Contributed surplus
    17,995       17,480       16,731  
Deficit
    (336,518 )     (323,839 )     (314,051 )
Accumulated other comprehensive loss
    (758 )     (884 )     (705 )
 Total Shareholders’ Equity
  $ 4,232     $ 10,773     $ 15,436  
                         
Consolidated Statements of Income Data
                       
Revenues
  $ 31,806     $ 23,832     $ 20,930  
Cost of revenues
    26,561       18,344       15,504  
      5,245       5,488       5,426  
Loss from operations
    (12,107 )     (9,278 )     (8,911 )
Net loss for the year
    (12,679 )     (9,788 )     (6,548 )
                         
Net loss per share / Net loss from continuing operations per share
                       
Basic and diluted
  $ (1.72 )   $ (1.58 )   $ (1.40 )
Weighted average number of shares used in calculating basic and diluted net loss per share
    7,371,908       6,180,048       4,689,504  

Note:
*
Weighted average number of shares is presented post-consolidation.
 
We have never declared or paid any cash dividends on our common shares.
 
We have not included financial information for the years ended December 31, 2009 and 2008 as we cannot provide such information on an IFRS basis without unreasonable effort and expense.
 

CAPITALIZATION AND INDEBTEDNESS
 
Not applicable.
 
REASONS FOR THE OFFER AND USE OF PROCEEDS
 
Not applicable.
 
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Hydrogenics Corporation


RISK FACTORS
 
Risk Factors Related to Our Financial Condition
 
Our inability to generate sufficient cash flows, raise additional capital and actively manage our liquidity may impair our ability to execute our business plan, and result in our reducing or eliminating product development and commercialization efforts, reducing our sales and marketing efforts, and having to forego attractive business opportunities.
 
At December 31, 2012, we had approximately $16.8 million of cash and cash equivalents and restricted cash (2011 - $10.0 million). Restricted cash of $3.8 million is held as partial security for standby letters of credit and letters of finance. There are uncertainties related to the timing and use of our cash resources and working capital requirements. These uncertainties include, among other things, the timing and volume of commercial sales and associated gross margins of our existing products and the development of markets for, and customer acceptance of, new products. To the extent possible, we attempt to limit the significance of these risks by: (i) continually monitoring our sales prospects; (ii) continually aiming to reduce product cost; and (iii) advancing our technology platforms and product designs. However, given that many of the above noted factors are outside of our control, we may not be able to accurately predict our necessary cash expenditures or obtain financing in a timely manner to cover any shortfalls.
 
If we are unable to generate sufficient cash flows or obtain adequate additional financing which, given the current global economy and credit markets, is challenging, we may be unable to respond to the actions of our competitors or we may be prevented from executing our business plan, or conducting all or a portion of our planned operations. In particular, the development and commercialization of our products could be delayed or discontinued if we are unable to fund our research and product development activities or the development of our manufacturing capabilities. In addition, we may be forced to reduce our sales and marketing efforts or forego attractive business opportunities.
 
The uncertain and unpredictable condition of the global economy could have a negative impact on our business, results of operations and consolidated financial condition, or our ability to accurately forecast our results, and it may cause a number of the risks that we currently face to increase in likelihood, magnitude and duration.
 
While we continuously monitor the state of the broader economic climate and, particularly, the markets in which we operate, the uncertain and unpredictable condition of the current global economy and credit markets affects our outlook in three distinct ways. First, our products depend to some degree on general world economic conditions and activity. If the current condition of the economy declines or we experience a continued slow return to economic growth, demand for our products is not likely to increase significantly. Second, the current uncertain economic climate could adversely affect our ability to conduct normal day-to-day selling activities, which depend on the granting of short-term credit to a wide variety of purchasers and, particularly, the corresponding needs of those purchasers. Third, those purchasers have a corresponding need to finance purchases by accessing their own lines of credit, which could become increasingly difficult. If the current condition of the economy does not continue to improve, our business will likely be adversely affected.
 
In the case of an economic decline or a sustained period of slow economic growth, we expect to experience significant difficulties on a number of fronts. As a result, we may face new risks as yet unidentified. In addition, a number of risks that we ordinarily face and that are further described herein may increase in likelihood, magnitude and duration. These risks include but are not limited to deferrals or reductions of customer orders, potential deterioration of our customers’ ability to finance purchases, reduced revenue, further deterioration in our cash balances and liquidity due to negative foreign currency exchange rates, and an inability to access capital markets.
 
Our mix of revenues in the recent past does not reflect our current business strategy, it may be difficult to assess our business and future prospects.
 
For the year ended December 31, 2012, we derived $27.5 million or 86% of revenues from our sales of hydrogen generation products and services and $4.3 million, or 14%, of our revenues from sales of power products and services. For the year ended December 31, 2011, we derived $19.7 million, or 83%, of revenues from our sales of hydrogen generation products and services, and $4.1 million, or 17%, of our revenues from sales of power products and services. For the year ended December 31, 2010, we derived $15.9 million, or 76%, of revenues from sales of power products and services. Our current business strategy is to develop, manufacture and sell hydrogen energy storage systems, hydrogen generation products and fuel cell power products in larger quantities. Because we have made limited sales of hydrogen energy storage systems and fuel cell power products to date, our historical operating data may be of limited value in evaluating our future prospects. However, an order received in the third quarter of 2012 increased the order backlog in the Power Sales segment by $35.6M which will shift the mix of revenues in the future and emphasizes our future prospects in the Power Sales segment.
 
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Hydrogenics Corporation

 
Because we expect to continue to incur net losses, we may not be able to implement our business strategy and the price of our common shares may decline.
 
We have not generated positive net income since our inception. Our current business strategy is to develop a portfolio of hydrogen and fuel cell products with market leadership positions for each product. In so doing, we will continue to incur significant expenditures for general administrative activities, including sales and marketing and research and development. As a result of these costs, we will need to generate and sustain significantly higher revenues and positive gross margins to achieve and sustain profitability. We incurred a net loss for the year ended December 31, 2012 of $12.7 million, a net loss of $9.8 million for the year ended December 31, 2011, and a net loss of $6.5 million for the year ended December 31, 2010. Our accumulated deficit as at December 31, 2012 was $336.5 million, at December 31, 2011, it was $323.8 million, and, at December 31, 2010, it was $314.0 million.
 
As noted above, our strategy to limit the significance of these risks and uncertainties is to execute a business plan aimed at increasing market penetration to achieve forecasted revenues, improving operating cash flows, continuing to invest in research and product development, entering into complementary markets, improving overall gross margins, and securing additional financing to fund our operations as needed.  However, we expect to incur significant operating expenses over the next several years. As a result, we expect to incur further losses in 2013, and we may never achieve profitability. Accordingly, we may not be able to implement our business strategy and the price of our common shares may decline.
 
Our quarterly operating results are likely to fluctuate significantly and may fail to meet the expectations of securities analysts and investors and may cause the price of our common shares to decline.
 
Our quarterly revenues and operating results have varied significantly in the past and are likely to vary in the future. These quarterly fluctuations in our operating performance result from the length of time between our first contact with a customer and the recognition of revenue from sales to that customer. Some of our products are highly engineered and many are still in development stages; therefore, the length of time between approaching a customer and delivering our products to that customer can span many quarterly periods. In many cases, a customer’s decision to buy our products and services may require the customer to change its established business practices and to conduct its business in new ways. As a result, we must educate customers on the use and benefits of our products and services. This can require us to commit significant time and resources without necessarily generating any revenues. Many potential customers may wish to enter into trial arrangements with us in order to use our products and services on a trial basis. The success of these trials may determine whether or not the potential customer purchases our products or services on a commercial basis. Potential customers may also need to obtain approval at a number of management levels and one or more regulatory approvals. This may delay a decision to purchase our products.
 
The length and variability of the sales cycles for our products make it difficult to forecast accurately the timing and amount of specific sales and corresponding revenue recognition. The delay or failure to complete one or more large sales transactions could significantly reduce our revenues for a particular quarter. We may expend substantial funds and management effort during our sales cycle with no assurance that we will successfully sell our products. As a result, our quarterly operating results are likely to fluctuate significantly and we may fail to meet the expectations of securities analysts and investors, and the price of our common shares may decline.
 
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Hydrogenics Corporation

 
We currently depend on a relatively limited number of customers for a majority of our revenues and a decrease in revenue from these customers could materially adversely affect our business, consolidated financial condition and results of operations.
 
While our business plan and sales and marketing strategy contemplates a diverse base of future customers, to date a relatively limited number of customers have accounted for a majority of our revenues and we expect they will continue to do so for the foreseeable future. Our four largest customers accounted for 32% of revenues for the year ended December 31, 2012 (32% of revenues for the year ended December 31, 2011, 40% of revenues for the year ended December 31, 2010). The identities of some of our largest customers have changed from year to year. Our arrangements with these customers are generally non-exclusive, have no volume commitments and are often on a purchase order basis. We cannot be certain customers who have accounted for significant revenue in past periods will continue to purchase our products and allow us to generate revenues. Accordingly, our revenue and results of operations may vary from period to period. We are also subject to credit risk associated with the concentration of our accounts receivable from these significant customers. If one or more of these significant customers were to cease doing business with us, significantly reduce or delay purchases from us, or fail to pay on a timely basis, our business, consolidated financial condition and results of operations could be materially adversely affected.
 
Our operating results may be subject to currency fluctuation.

Our monetary assets and liabilities denominated in currencies other than the US dollar will give rise to a foreign currency gain or loss reflected in net income (loss). To the extent the Canadian dollar or the Euro strengthens against the US dollar, we may incur foreign exchange losses on our net consolidated monetary asset balance, which is denominated in those currencies. Such losses would be included in our financial results, and consequently, may have an adverse effect on our share price.
 
As we currently have operations based in Canada and Europe, a significant portion of our expenses are in Canadian dollars and Euros. However, a significant part of our revenues are currently generated in US dollars and Euros, and we expect this will continue for the foreseeable future. In addition, we may be required to finance our European operations by exchanging Canadian dollars or US dollars into Euros. The exchange rates between the Canadian dollar, the US dollar and the Euro are subject to daily fluctuations in the currency markets and these fluctuations in market exchange rates are expected to continue in the future. Such fluctuations affect both our consolidated revenues as well as our consolidated costs. If the value of the US dollar weakens against the Canadian dollar or the Euro, the profit margin on our products may be reduced. Also, changes in foreign exchange rates may affect the relative costs of operations and prices at which we and our foreign competitors sell products in the same market. While we continuously monitor foreign exchange fluctuations and review forecasted changes regularly, we currently have limited currency hedging through financial instruments. We carry a portion of our short-term investments in Canadian dollars and Euros.
 
Our insurance may not be sufficient.
 
We carry insurance that we consider adequate considering the nature of the risks and costs of coverage. We may not, however, be able to obtain insurance against certain risks or for certain products or other resources located from time to time in certain areas of the world. We are not fully insured against all possible risks, nor are all such risks insurable. Thus, although we maintain insurance coverage, such coverage may not be adequate.
 
Certain external factors may affect the value of goodwill, which may require us to recognize an impairment charge.
 
Goodwill arising from our acquisition of Stuart Energy in 2005 comprises approximately 11.9% of our total assets at December 31, 2012 (15.9% of our total assets at December 31, 2011, 16.2% of our total assets at December 31, 2010). Economic, market, legal, regulatory, competitive, customer, contractual and other factors may affect the value of goodwill. If any of these factors impair the value of these assets, accounting rules require us to reduce their carrying value and recognize an impairment charge. This would reduce our reported assets and earnings in the year the impairment charge is recognized.
 
 
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Hydrogenics Corporation

 
Risk Factors Related to Our Business and Industry
 
Significant markets for fuel cell and other hydrogen energy products may never develop or may develop more slowly than we anticipate. This would significantly harm our revenues and may cause us to be unable to recover the losses we have incurred and expect to incur in the development of our products.
 
Significant markets may never develop for fuel cell and other hydrogen energy products or they may develop more slowly than we anticipate. Any such delay or failure would significantly harm our revenues and we may be unable to recover the losses we have incurred and expect to continue to incur in the development of our products. If this were to occur, we may never achieve profitability and our business could fail. Fuel cell and other hydrogen energy products represent an emerging market, and whether or not end-users will want to use them may be affected by many factors, some of which are beyond our control, including: the emergence of more competitive technologies and products; other environmentally clean technologies and products that could render our products obsolete; the future cost of hydrogen and other fuels used by our fuel cell products; the future cost of the membrane electrode assembly used in our fuel cell products; the future cost of platinum group metals, a key catalyst used in our fuel cell and hydrogen generation products; the regulatory requirements of agencies, including the development of uniform codes and standards for fuel cell products, hydrogen refueling infrastructure and other hydrogen energy products; government support by way of legislation, tax incentives, policies or otherwise, of fuel cell technology, hydrogen storage technology and hydrogen refueling technology; the manufacturing and supply costs for fuel cell components and systems; the perceptions of consumers regarding the safety of our products; the willingness of consumers to try new technologies; the continued development and improvement of existing power technologies; and the future cost of fuels used in existing technologies.
 
Hydrogen may not be readily available on a cost-effective basis, in which case our fuel cell products may be unable to compete with existing power sources and our revenues and results of operations would be materially adversely affected.
 
If our fuel cell product customers are not able to obtain hydrogen on a cost-effective basis, we may be unable to compete with existing power sources and our revenues and results of operations would be materially adversely affected. Our fuel cell products require oxygen and hydrogen to operate. While ambient air can typically supply the necessary oxygen, our fuel cells rely on hydrogen derived from water or from fuels, such as natural gas, propane, methanol and other petroleum products. We manufacture and develop hydrogen generation systems called electrolyzers that use electricity to separate water into its constituent parts of hydrogen and oxygen. In addition, third parties are developing systems to extract, or reform, hydrogen from fossil fuels. Significant growth in the use of hydrogen powered devices, particularly in the motive power market, may require the development of an infrastructure to deliver the hydrogen. There is no guarantee that such an infrastructure will be developed on a timely basis or at all. Even if hydrogen is available for our products, if its price is such that electricity or power produced by our systems would cost more than electricity provided by other means, we may be unable to compete successfully.
 
Changes in government policies and regulations could hurt the market for our products.
 
The fuel cell and hydrogen industry is in its development phase and is not currently subject to industry specific government regulations in Canada, the European Union, the United States, as well as other jurisdictions, relating to matters such as design, storage, transportation and installation of fuel cell systems and hydrogen infrastructure products. However, given that the production of electrical energy has typically been an area of significant government regulation, we expect we will encounter industry specific government regulations in the future in the jurisdictions and markets in which we operate. For example, regulatory approvals or permits may be required for the design, installation and operation of stationary fuel cell systems under federal, state and provincial regulations governing electric utilities and motive power fuel cell systems under federal, state and provincial emissions regulations affecting automobile and truck manufacturers. To the extent there are delays in gaining such regulatory approval, our development and growth may be constrained. Furthermore, the inability of our potential customers to obtain a permit, or the inconvenience often associated with the permit process, could harm demand for fuel cell and other hydrogen products and, therefore, harm our business.
 
 
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Hydrogenics Corporation

 
Our business will suffer if environmental policies change and no longer encourage the development and growth of clean power technologies. The interest by automobile manufacturers in fuel cell technology has been driven in part by environmental laws and regulations. There is no guarantee these laws and regulations will not change and any such changes could result in automobile manufacturers abandoning their interest in fuel cell powered vehicles. In addition, if current laws and regulations are not kept in force, or if further environmental laws and regulations are not adopted, demand for vehicular fuel cells may be limited.
 
The market for stationary and portable energy related products is influenced by federal, state and provincial government regulations and policies concerning the electric utility industry. Changes in regulatory standards or public policy could deter further investment in the research and development of alternative energy sources, including fuel cells and fuel cell products, and could result in a significant reduction in the potential market demand for our products. We cannot predict how changing government regulation and policies regarding the electric utility industry will affect the market for stationary and portable fuel cell systems.
 
Although the development of alternative energy sources and, in particular, fuel cells, has been identified as a significant priority by many governments, we cannot be assured that governments will not change their priorities or that any such change would not materially affect our revenues and our business. If governments change their laws and regulations such that the development of alternative energy sources is no longer required or encouraged, the demand for alternative energy sources, such as our fuel cell products may be significantly reduced or delayed and our sales would decline.
 
Lack of new government policies and regulations for the energy storage technologies could hurt the development of the Power-to-Gas market for our hydrogen energy storage products. 
 
One of the critical factors for Power-to-Gas project developers in securing project financing, or to justify the capital investment internally, is the ability to monetize a sufficient portion of the “diffused benefits” of the project.  This may be accomplished through a contract mechanism or a combination of new market reforms such as provision of new ancillary services such as load following or ramping service, tariffs for renewable gas, and favourable electricity purchase provisions (eg. special exemption for transmission and network uplifts and other charges on wholesale power purchases).  While Power-to-Gas demonstration projects are being built today, if new government regulations for large scale energy storage projects are not implemented, or are not sufficient to justify the investment by project developers, it would critically impede our ability to sell electrolyzers for commercial-scale Power-to-Gas into those markets.
 
The development of uniform codes and standards for hydrogen powered vehicles and related hydrogen refueling infrastructure may not develop in a timely fashion, if at all.
 
Uniform codes and standards do not currently exist for fuel cell systems, fuel cell components, hydrogen internal combustion engines or for the use of hydrogen as a vehicle fuel. Establishment of appropriate codes and standards is a critical element to allow fuel cell system developers, fuel cell component developers, hydrogen internal combustion engine developers, hydrogen infrastructure companies and hydrogen storage and handling companies to develop products that will be accepted in the marketplace.
 
The development of hydrogen standards is being undertaken by numerous organizations. Given the number of organizations pursuing hydrogen codes and standards, it is not clear whether universally accepted codes and standards will occur in a timely fashion, if at all.
 
We could be liable for environmental damages resulting from our research, development or manufacturing operations.
 
Our business exposes us to the risk of harmful substances escaping into the environment, resulting in personal injury or loss of life, damage to or destruction of property, and natural resource damage.  Depending on the nature of the claim, our current insurance policies may not adequately reimburse us for costs incurred in settling environmental damage claims and, in some instances, we may not be reimbursed at all.  Our business is subject to numerous laws and regulations that govern environmental protection and human health and safety. These laws and regulations have changed frequently in the past and it is reasonable to expect additional more stringent changes in the future. Our operations may not comply with future laws and regulations and we may be required to make significant unanticipated capital and operating expenditures. If we fail to comply with applicable environmental laws and regulations, government authorities may seek to impose fines and penalties on us, or to revoke or deny the issuance or renewal of operating permits, and private parties may seek damages from us.  Under those circumstances, we might be required to curtail or cease operations, conduct site remediation or other corrective action, or pay substantial damage claims.
 
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We currently face and will continue to face significant competition from other developers and manufacturers of fuel cell power products and hydrogen generation systems. If we are unable to compete successfully, we could experience a loss of market share, reduced gross margins for our existing products and a failure to achieve acceptance of our proposed products.
 
In our markets for hydrogen generation systems, we compete with a number of companies that develop and manufacture hydrogen generation products based on on-site water electrolysis and/or reforming technologies. We also compete with suppliers of hydrogen gas that deliver hydrogen to the customer’s site in tube trailers or cylinders or by pipeline. In many cases, these suppliers have established delivery infrastructure and customer relationships.
 
In the commercial production of fuel cell power products, we compete with a number of companies that currently have fuel cell and fuel cell system development programs. We expect several of these competitors will be able to deliver competing products to certain markets before we do. While our strategy is the development of fuel cell and hydrogen generation technologies for sale to end-users, systems integrators, governments and market channel partners, many of our competitors are developing products specifically for use in particular markets. These competitors may be more successful in penetrating their specific markets than we are. In addition, an increase in the popularity of fuel cell power in particular market channels may cause certain of our customers to develop and produce some or all of the fuel cell technologies we are developing.
 
Competition in the markets for fuel cell power modules and hydrogen generation equipment is significant and will likely persist and intensify over time. We compete directly and indirectly with a number of companies that provide products and services that are competitive with all, some or part of our products and related services. Many of our existing and potential competitors have greater brand name recognition and their products may enjoy greater initial market acceptance among our potential customers. In addition, many of these competitors have significantly greater financial, technical, sales, marketing, distribution, service and other resources than we have and may also be better able to adapt quickly to customers’ changing demands and to changes in technology.
 
While it is our strategy to continuously improve our products, if we are unable to do so, and if we cannot generate effective responses to our competitors’ brand power, product innovations, pricing strategies, marketing campaigns, partnerships, distribution channels, service networks and other initiatives, our ability to gain market share or market acceptance for our products could be limited, our revenues and our profit margins may suffer, and we may never become profitable.
 
We face competition for fuel cell power products from developers and manufacturers of traditional technologies and other alternative technologies.
 
Each of our target markets is currently served by manufacturers with existing customers and suppliers. These manufacturers use proven and widely accepted traditional technologies such as internal combustion engines and turbines, as well as coal, oil, gas and nuclear powered generators. Additionally, there are competitors working on developing technologies that use other types of fuel cells, energy storage technologies, hydrogen generation technologies and other alternative power technologies, advanced batteries and hybrid battery/internal combustion engines, which may compete for our target customers. Given that PEM fuel cells and electrolyzers have the potential to replace these existing power sources, competition in our target markets will also come from these traditional power technologies, from improvements to traditional power technologies and from new alternative power technologies, including other types of fuel cells.
 
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If we are unable to continuously improve our products and if we cannot generate effective responses to incumbent and/or alternative energy competitors’ brand power, product innovations, pricing strategies, marketing campaigns, partnerships, distribution channels, service networks and other initiatives, our ability to gain market share or market acceptance for our products could be limited, our revenues and our profit margins may suffer, and we may never become profitable.
 
Our strategy for the sale of fuel cell power products depends on developing partnerships with OEMs, governments, systems integrators, suppliers and other market channel partners who will incorporate our products into theirs.
 
Other than in a few specific markets, our strategy is to develop and manufacture products and systems for sale to OEMs, governments, systems integrators, suppliers and other market channel partners that have mature sales and distribution networks for their products. Our success may be heavily dependent on our ability to establish and maintain relationships with these partners who will integrate our fuel cell products into their products and on our ability to find partners who are willing to assume some of the research and development costs and risks associated with our technologies and products. Our performance may, as a result, depend on the success of other companies, and there are no assurances of their success. We can offer no guarantee that OEMs, governments, systems integrators, suppliers and other market channel partners will manufacture appropriate products or, if they do manufacture such products, that they will choose to use our products as components. The end products into which our fuel cell technology will be incorporated will be complex appliances comprising many components and any problems encountered by such third parties in designing, manufacturing or marketing their products, whether or not related to the incorporation of our fuel cell products, could delay sales of our products and adversely affect our financial results. Our ability to sell our products to the OEM markets depends to a significant extent on our partners’ worldwide sales and distribution networks and service capabilities. In addition, some of our agreements with customers and partners require us to provide shared intellectual property rights in certain situations, and there can be no assurance that any future relationships we enter into will not require us to share some of our intellectual property. Any change in the fuel cell, hydrogen or alternative fuel strategies of one of our partners could have a material adverse effect on our business and our future prospects.
 
In addition, in some cases, our relationships are governed by a non-binding memorandum of understanding or a letter of intent. We cannot provide the assurance that we will be able to successfully negotiate and execute definitive agreements with any of these partners, and failure to do so may effectively terminate the relevant relationship. We also have relationships with third party distributors who also indirectly compete with us. For example, we have targeted industrial gas suppliers as distributors of our hydrogen generators. Because industrial gas suppliers currently sell hydrogen in delivered form, adoption by their customers of our hydrogen generation products could cause them to experience declining demand for delivered hydrogen. For this reason, industrial gas suppliers may be reluctant to purchase our hydrogen generators. In addition, our third party distributors may require us to provide volume price discounts and other allowances, or customize our products, either of which could reduce the potential profitability of these relationships.
 
We are dependent on third party suppliers for key materials and components for our products. If these suppliers become unable or unwilling to provide us with sufficient materials and components on a timely and cost-effective basis, we may be unable to manufacture our products cost-effectively or at all, and our revenues and gross margins would suffer.
 
We rely on third party suppliers to provide key materials and components for our fuel cell power products and hydrogen generation products. While we undertake due diligence before engaging with a supplier, a supplier’s failure to provide materials or components in a timely manner, or to provide materials and components that meet our quality, quantity or cost requirements, or our inability to obtain substitute sources for these materials and components in a timely manner or on terms acceptable to us, may harm our ability to manufacture our products cost-effectively or at all, and our revenues and gross margins might suffer. To the extent we are unable to develop and patent our own technology and manufacturing processes and, to the extent that the processes our suppliers use to manufacture materials and components are proprietary, we may be unable to obtain comparable materials or components from alternative suppliers and that could adversely affect our ability to produce commercially viable products.
 
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We may not be able to manage successfully the anticipated expansion of our operations.
 
The uneven pace of our anticipated expansion in facilities, staff and operations may place serious demands on our managerial, technical, financial and other resources. We may be required to make significant investments in our engineering and logistics systems and our financial and management information systems, as well as retaining, motivating and effectively managing our employees. While we continually monitor our sales outlook and adjust our business plans as necessary, our management skills and systems currently in place may not enable us to implement our strategy or to attract and retain skilled management, engineering and production personnel. Our failure to manage our growth effectively or to implement our strategy in a timely manner may significantly harm our ability to achieve profitability.
 
If we do not properly manage foreign sales and operations, our business could suffer.
 
We expect that a substantial portion of our future revenues will continue to be derived from foreign sales. Our international activities may be subject to inherent risks, including regulatory limitations restricting or prohibiting the provision of our products and/or services, unexpected changes in regulatory requirements, tariffs, customs, duties and other trade barriers, difficulties in staffing and managing foreign operations, longer payment cycles, problems in collecting accounts receivable, fluctuations in currency exchange rates, foreign exchange controls that restrict or prohibit repatriation of funds, technology export and/or import restrictions or prohibitions, delays from customs brokers or government agencies, seasonal reductions in business activity and potentially adverse tax consequences resulting from operating in multiple jurisdictions. While we aim to employ experienced knowledgeable management in our foreign operations, if we do not properly manage foreign operations, our business could suffer.
 
We will need to recruit, train and retain key management and other qualified personnel to successfully expand our business.
 
Our future success will depend in large part on our ability to recruit and retain experienced research and development, engineering, manufacturing, operating, sales and marketing, customer service and management personnel. We compete in emerging markets and there are a limited number of people with the appropriate combination of skills needed to provide the services our customers require. In the past, we have experienced difficulty in recruiting qualified personnel and we expect to experience continued difficulties in personnel recruiting. If we do not attract such personnel, we may not be able to expand our business. In addition, new employees generally require substantial training, which requires significant resources and management attention. Our success also depends on retaining our key management, research, product development, engineering, marketing and manufacturing personnel. Even if we invest significant resources to recruit, train and retain qualified personnel, we may not be successful in our efforts.
 
We may acquire technologies or companies in the future, and these acquisitions could disrupt our business and dilute our shareholders’ interests.
 
We may acquire additional technologies or other companies in the future and we cannot provide assurances that we will be able to successfully integrate their operations or that the cost savings we anticipate will be fully realized. Entering into an acquisition or investment entails many risks, any of which could materially harm our business, including: diversion of management’s attention from other business concerns; failure to effectively assimilate the acquired technology, employees or other assets into our business; the loss of key employees from either our current business or the acquired business; and the assumption of significant liabilities of the acquired company.
 
If we complete additional acquisitions, we may dilute the ownership of current shareholders. In addition, achieving the expected returns and cost savings from our past and future acquisitions will depend in part on our ability to integrate the products and services, technologies, research and development programs, operations, sales and marketing functions, finance, accounting and administrative functions, and other personnel of these businesses into our business in an efficient and effective manner. We cannot ensure we will be able to do so or that the acquired businesses will perform at anticipated levels. If we are unable to successfully integrate acquired businesses, our anticipated revenues may be lower and our operational costs may be higher.
 
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We have no experience manufacturing our fuel cell products on a large scale basis and if we do not develop adequate manufacturing processes and capabilities to do so in a timely manner, we will be unable to achieve our growth and profitability objectives.
 
We have manufactured most of our products in our Power Systems segment for prototypes and initial sales, and we have limited experience manufacturing products on a larger scale. We have experience manufacturing products on a larger scale in our Generation segment. In order to produce certain of our products at affordable prices, we will have to manufacture a large volume of such products. While several members of our senior management team have significant experience in developing high volume manufacturing strategies for new products and while we have developed plans for efficient, low-cost manufacturing capabilities and processes that will enable us to meet the quality, price, engineering, design and production standards or production volumes required to successfully mass market such products, we do not know whether these plans will be implemented such that they will satisfy the requirements of our customers and the market for the Power Systems segment. Our failure to develop these manufacturing processes and capabilities in a timely manner could prevent us from achieving our growth and profitability objectives.
 
Risk Factors Related to Our Products and Technology
 
We may never complete the development of commercially viable fuel cell power products and/or commercially viable hydrogen generation systems for new hydrogen energy applications, and if we fail to do so, we will not be able to meet our business and growth objectives.
 
We have made commercial sales of fuel cell power modules, integrated fuel cell systems, hydrogen refueling stations and hydrogen energy storage systems for a relatively short period of time.  Because both our business and industry are still in the developmental stage, we do not know when or whether we will successfully complete research and development of commercially viable fuel cell power products and commercially viable hydrogen generation equipment for new hydrogen energy applications. If we do not complete the development of such commercially viable products, we will be unable to meet our business and growth objectives. We expect to face unforeseen challenges, expenses and difficulties as a developing company seeking to design, develop and manufacture new products in each of our targeted markets. Our future success also depends on our ability to effectively market fuel cell products and hydrogen generation products once developed.
 
We must lower the cost of our fuel cell and hydrogen generation products and demonstrate their reliability or consumers will be unlikely to purchase our products and we will therefore not generate sufficient revenues to achieve and sustain profitability.
 
While we have significantly reduced the cost of our technology and products in the past few years and we are continuously seeking and implementing additional product and manufacturing cost reductions, fuel cells currently cost more than many established competing technologies, such as internal combustion engines and batteries. The prices of fuel cell and hydrogen generation products are dependent largely on material and manufacturing costs. We cannot guarantee we will be able to lower these costs to a level where we will be able to produce a competitive product or that any product we produce using lower cost materials and manufacturing processes will not suffer from lower performance, reliability and longevity. If we are unable to produce fuel cell and hydrogen generation products that are competitive with other technologies in terms of price, performance, reliability and longevity, consumers will be unlikely to buy our fuel cell and hydrogen generation products. Accordingly, we would not be able to generate sufficient revenues with positive gross margins to achieve and sustain profitability.
 
Any failures or delays in field tests of our products could negatively affect our customer relationships and increase our manufacturing costs.
 
We regularly field test our products and we plan to conduct additional field tests in the future. While we dynamically manage the execution and results of these tests, any failures or delays in our field tests could harm our competitive position and impair our ability to sell our products. Our field tests may encounter problems and delays for a number of reasons, including the failure of our technology, the failure of the technology of others, the failure to combine these technologies properly, operator error and the failure to maintain and service the test prototypes properly. Many of these potential problems and delays are beyond our control. In addition, field test programs, by their nature, may involve delays relating to product roll-out and modifications to product design, as well as third party involvement. Any problem or perceived problem with our field tests, whether it originates from our technology, our design, or third parties, could damage our reputation and the reputation of our products and limit our sales. Such field test failures may negatively affect our relationships with customers, require us to extend field testing longer than anticipated before undertaking commercial sales and require us to develop further our technology to account for such failures prior to the field tests, thereby increasing our manufacturing costs.
 
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The components of our products may contain defects or errors that could negatively affect our customer relationships and increase our development, service and warranty costs.
 
Our products are complex and must meet the stringent technical requirements of our customers. The software and other components used in our fuel cell and hydrogen generation products may contain undetected defects or errors, especially when first introduced, which could result in the failure of our products to perform, damage to our reputation, delayed or lost revenue, product returns, diverted development resources and increased development, service and warranty costs.
 
Rapid technological advances or the adoption of new codes and standards could impair our ability to deliver our products in a timely manner and, as a result, our revenues would suffer.
 
While we actively and continuously monitor the developing markets and regulations in markets for our products, our success depends in large part on our ability to keep our products current and compatible with evolving technologies, codes and standards. Unexpected changes in technology or in codes and standards could disrupt the development of our products and prevent us from meeting deadlines for the delivery of products. If we are unable to keep pace with technological advancements and adapt our products to new codes and standards in a timely manner, our products may become uncompetitive or obsolete and our revenues would suffer.
 
We depend on intellectual property and our failure to protect that intellectual property could adversely affect our future growth and success.
 
While we proactively and regularly review our intellectual property protection strategy, failure to protect our intellectual property rights may reduce our ability to prevent others from using our technology. We rely on a combination of patent, trade secret, trademark and copyright laws to protect our intellectual property. Some of our intellectual property is currently not covered by any patent or patent application. Patent protection is subject to complex factual and legal criteria that may give rise to uncertainty as to the validity, scope and enforceability of a particular patent. Accordingly, we cannot be assured that: any of the United States, Canadian or other patents owned by us or third party patents licensed to us will not be invalidated, circumvented, challenged, rendered unenforceable, or licensed to others; or any of our pending or future patent applications will be issued with the breadth of protection that we seek, if at all.
 
In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited, not applied for, or unenforceable in foreign countries.
 
Furthermore, although we typically retain sole ownership of the intellectual property we develop, in certain circumstances, such as with Dow Corning and General Motors, we provide for shared intellectual property rights.
 
We have also entered into agreements with other customers and partners that involve shared intellectual property rights. Any developments made under these agreements will be available for future commercial use by all parties to the agreement.
 
We also seek to protect our proprietary intellectual property through contracts including, when possible, confidentiality agreements and inventors’ rights agreements with our customers and employees. We cannot be sure that the parties who enter into such agreements with us will not breach them, that we will have adequate remedies for any breach or that such persons or institutions will not assert rights to intellectual property arising out of these relationships. If necessary or desirable, we may seek licences under the patents or other intellectual property rights of others. However, we cannot be sure we will obtain such licences or that the terms of any offered licences will be acceptable to us. Our failure to obtain a licence from a third party for intellectual property we use in the future could cause us to incur substantial liabilities and to suspend the manufacture and shipment of products or our use of processes that exploit such intellectual property.
 
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Our involvement in intellectual property litigation could negatively affect our business.
 
Our future success and competitive position depend in part on our ability to obtain or maintain the proprietary intellectual property used in our principal products. In order to establish and maintain such a competitive position, we may need to prosecute claims against others who we believe are infringing our rights and defend claims brought by others who believe we are infringing their rights. Our involvement in intellectual property litigation could result in significant expense to us, adversely affect the sale of any products involved or the use or licensing of related intellectual property and divert the efforts of our technical and management personnel from their principal responsibilities, regardless of whether such litigation is resolved in our favour. If we are found to be infringing on the intellectual property rights of others, we may, among other things, be required to: pay substantial damages; cease the development, manufacture, use, sale or importation of products that infringe on such intellectual property rights; discontinue processes incorporating the infringing technology; expend significant resources to develop or acquire non-infringing intellectual property; or obtain licences to the relevant intellectual property.
 
We cannot offer any assurance we will prevail in any such intellectual property litigation or, if we were not to prevail in such litigation that licences to the intellectual property we are found to be infringing on would be available on commercially reasonable terms, if at all. The cost of intellectual property litigation as well as the damages, licensing fees or royalties that we might be required to pay could have a material adverse effect on our business and financial results.
 
Our products use flammable fuels that are inherently dangerous substances and could subject us to product liabilities.
 
While it is a key focus of management to develop and manufacture safe and reliable products, our financial results could be materially impacted by accidents involving either our products or those of other fuel cell manufacturers, either because we face claims for damages or because of the potential negative impact on demand for fuel cell products. Our products use hydrogen, which is typically generated from gaseous and liquid fuels, such as propane, natural gas or methanol, in a process known as reforming. While our fuel cell products do not use these fuels in a combustion process, natural gas, propane and other hydrocarbons are flammable fuels that could leak and then combust if ignited by another source. In addition, certain of our OEM partners and customers may experience significant product liability claims. As a supplier of products and systems to these OEMs, we face an inherent business risk of exposure to product liability claims in the event our products, or the equipment into which our products are incorporated, malfunction and result in personal injury or death. We may be named in product liability claims even if there is no evidence our systems or components caused the accidents. Product liability claims could result in significant losses from expenses incurred in defending claims or the award of damages. Since our products have not yet gained widespread market acceptance, any accidents involving our systems, those of other fuel cell products or those used to produce hydrogen could materially impede acceptance of our products. In addition, although our management believes our liability coverage is currently adequate to cover these risks, we may be held responsible for damages beyond the scope of our insurance coverage.
 
Risk Factors Related to Ownership of Our Common Shares
 
If at any time we are classified as a passive foreign investment company under United State tax laws, our US shareholders may be subject to adverse tax consequences.

We would be classified as a passive foreign investment company (“PFIC”), for US federal income tax purposes, in any taxable year in which, after applying relevant look-through rules with respect to the income and assets of our subsidiaries, either at least 75% of our gross income is ‘‘passive income,’’ or on average at least 50% of the gross value of our assets is attributable to assets that produce passive income or are held for the production of passive income.
 
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Based on our structure, and the composition of our income and assets, we do not believe we were a PFIC for the taxable year ended December 31, 2012 or the prior taxable year. However, there can be no assurance the Internal Revenue Service will not successfully challenge our position or that we will not become a PFIC in a future taxable year, as PFIC status is retested each year and depends on our assets and income in that year. If we are classified as a PFIC at any time that a US shareholder holds our common shares, such shareholder may be subject to an increased US federal income tax liability and a special interest charge in respect of a gain recognized on the sale or other disposition of our common shares and upon the receipt of certain ‘‘excess distributions’’ (as defined in the United States Internal Revenue Code of 1986, as amended).
 
US shareholders should consult their own tax advisors concerning the US federal income tax consequences of holding our common shares if we were a PFIC in any taxable year and its potential application to their particular situation.
 
As a result of the strategic alliance entered into with CommScope and Enbridge, they own a significant portion of our common shares and may act, or prevent corporate actions, to the detriment of other shareholders.

As at December 31, 2012, CommScope owns 28.1% of our issued and outstanding common shares and Enbridge owns 13.9% of our issued and outstanding common shares.  Accordingly, CommScope and Enbridge may have the ability to exercise significant influence over all matters requiring shareholder approval.  This concentration could also have the effect of delaying or preventing a change in control that could otherwise be beneficial to our shareholders.

A limited number of shareholders collectively own a significant portion of our common shares and may act, or prevent corporate actions, to the detriment of other shareholders.
 
A limited number of shareholders, including our founders, CommScope, Enbridge, and General Motors, currently own a significant portion of our outstanding common shares. CommScope currently owns approximately 28.1% of our outstanding common shares. Enbridge currently owns approximately 13.9% of our outstanding common shares. General Motors currently owns approximately 5.9% of our outstanding common shares. In addition, Alpha currently holds 62,178 Series A warrants (representing the right to acquire the equivalent number of common shares) and 130,323 Series B warrants of the Corporation (representing the right to acquire the equivalent number of common shares), and Iroquois currently holds 79,678 Series A warrants and 130,323 Series B warrants. Accordingly, these shareholders may exercise significant influence over all matters requiring shareholder approval, including the election of a majority of our directors and the determination of significant corporate actions. This concentration could also have the effect of delaying or preventing a change in control that could otherwise be beneficial to our shareholders.
 
CommScope and Enbridge, as significant shareholders and parties to strategic alliances with us, and General Motors, with a representative on our Board of Directors, have the ability to influence our corporate actions and in a manner that may be adverse to other shareholder interests.
 
If we fail to maintain the requirements for continued listing on Nasdaq, our common shares could be delisted from trading on Nasdaq, which would materially adversely affect the liquidity of our common shares, the price of our common shares, and our ability to raise additional capital.
 
Failure to meet the applicable continued listing requirements of Nasdaq could result in our common shares being delisted from Nasdaq. In the past we have been unable to meet the Nasdaq requirements for continued listing on the Nasdaq Global Market for certain periods of time, and though we have regained compliance of such requirements, we may not be able to meet the requirements in the future. On September 18, 2012, we received notices from Nasdaq informing us that we failed to maintain a market value of listed securities of at least $50.0 million for 30 consecutive business days, in addition to the fact that we did not meet the minimum $50.0 million total assets and total revenues standard under Nasdaq Listing Rule 5450(b)(3)(A). We were given 180 days to regain compliance by having our market capitalization exceed $50.0 million for a minimum of 10 consecutive business days prior to the end of the 180-day period. We regained compliance on December 10, 2012.
 
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If we fail to satisfy Nasdaq’s continued listing requirements, our common shares could be delisted from Nasdaq, in which case we may transfer to the Nasdaq Capital Market, which generally has lower financial requirements for initial listing or, if we fail to meet its listing requirements, the over-the-counter bulletin board. However, there can be no assurance that our common shares will be eligible for trading on any such alternative exchanges or markets in the United States. If we are delisted from Nasdaq, it could materially reduce the liquidity of our common shares, lower the price of our common shares, and impair our ability to raise financing.

Future sales of common shares by our principal shareholders could cause our share price to fall and reduce the value of a shareholder’s investment.
 
If our principal shareholders, including our founders, sell substantial amounts of their common shares in the public market, the market price of our common shares could fall and the value of a shareholder’s investment could be reduced. The perception among investors that these sales may occur could have a similar effect. Share price declines may be exaggerated if the low trading volume that our common shares have experienced to date continues. These factors could also make it more difficult for us to raise additional funds through future offerings of our common shares or other securities.
 
Our articles of incorporation authorize us to issue an unlimited number of common and preferred shares. Significant issuances of common or preferred shares could dilute the share ownership of our shareholders, deter or delay a takeover of us that our shareholders may consider beneficial or depress the trading price of our common shares.
 
Our articles of incorporation permit us to issue an unlimited number of common and preferred shares. If we were to issue a significant number of common shares, it would reduce the relative voting power of previously outstanding shares. Such future issuances could be at prices less than our shareholders paid for their common shares. If we were to issue a significant number of common or preferred shares, these issuances could also deter or delay an attempted acquisition of us that a shareholder may consider beneficial, particularly, in the event that we issue preferred shares with special voting or dividend rights. While NASDAQ and Toronto Stock Exchange rules may require us to obtain shareholder approval for significant issuances, we would not be subject to these requirements if we ceased, voluntarily or otherwise, to be listed on NASDAQ and the Toronto Stock Exchange. Significant issuances of our common or preferred shares, or the perception that such issuances could occur, could cause the trading price of our common shares to drop.
 
US investors may not be able to enforce US civil liability judgments against us or our directors and officers.
 
We are organized under the laws of Canada. A majority of our directors and officers are residents of Canada and all or a substantial portion of their assets and substantially all of our assets are located outside of the United States. As a result, it may be difficult for US holders of our common shares to effect service of process on these persons within the United States or to realize in the United States on judgments rendered against them. In addition, a shareholder should not assume that the courts of Canada: (i) would enforce the judgments of US courts obtained in actions against us or such persons predicated on the civil liability provisions of US federal securities laws or other laws of the United States; or (ii) would enforce, in original actions, claims against us or such persons predicated on the US federal securities laws.
 
Our share price is volatile and we may continue to experience significant share price and volume fluctuations.
 
Since our common shares were initially offered to the public in November 2000, the stock markets, particularly in the technology and alternative energy sectors, and our share price have experienced significant price and volume fluctuations. Our common shares may continue to experience volatility for reasons unrelated to our own operating performance, including: performance of other companies in the fuel cell or alternative energy business; news announcements, securities analysts’ reports and recommendations and other developments with respect to our industry or our competitors; or changes in general economic conditions.
 
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As at December 31, 2012 there were 526,519 stock options to purchase our common shares, 141,856 Series A warrants, 260,646 Series B warrants and 124,085 DSUs. If these securities are exercised, our shareholders will incur substantial dilution.
 
A significant element in our business plan to attract and retain qualified personnel is the issuance to such persons options to purchase our common shares. At December 31, 2012, we have issued and have outstanding 526,519 options to purchase our common shares at an average price of CA$9.71 per common share. Accordingly, to the extent that we are required to issue significant numbers of options to our employees, and such options are exercised, our shareholders could experience significant dilution. As of December 31, 2012, we also have 141,856 Series A warrants and 260,646 Series B warrants issued and outstanding, whereby each warrant entitles the holder to purchase a common share for US$3.76. As of December 31, 2012, we also have 124,085 deferred share units (“DSUs”), whereby at the option of the holder, once vested they may be converted to common shares.  To the extent such Series A warrants, Series B warrants, and DSUs are exercised, our shareholders could experience significant dilution.
 
 


 
 
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INFORMATION ON THE COMPANY
 
HISTORY AND DEVELOPMENT OF HYDROGENICS CORPORATION
 
We were incorporated on June 10, 2009 under the Canada Business Corporations Act, under the name “7188501 Canada Inc.” We changed our name to “Hydrogenics Corporation-Corporation Hydrogenique” on October 27, 2009 in connection with the transaction involving Algonquin Power Income Fund (“APIF”), as described further below under “APIF Transaction.”
 
Old Hydrogenics was founded in 1988 under the name “Traduction Militech Translation Inc.” It subsequently changed its name to “Société Hydrogenique Incorporée-Hydrogenics Corporation Incorporated”. From 1990 to August 1995, Société Hydrogenique Incorporée-Hydrogenics Corporation Incorporated did not actively carry on business. In August 1995, we commenced our fuel cell technology development business, and in 2000, changed our name to Hydrogenics Corporation - Corporation Hydrogenique. Until October 27, 2009, we were a wholly owned subsidiary of Old Hydrogenics.
 
We are a globally recognized developer and provider of hydrogen generation and fuel cell products. We conduct our business through the following business units: (i) OnSite Generation, which focuses on hydrogen generation products for renewable energy, industrial and transportation customers; and (ii) Power Systems, which focuses on fuel cell products for original equipment manufacturers, or OEMs, systems integrators and end users for stationary applications, including backup power, and motive applications, such as forklift trucks. In November 2007, we announced we were exiting the fuel cell test products, design, development and manufacturing business that was conducted through our test systems business unit (“Test Systems”).
 
Our business units are supported by a corporate services group providing finance, insurance, investor relations, communications, treasury, human resources, strategic planning, compliance, and other administrative services.
 
Our principal executive offices are located at 220 Admiral Boulevard, Mississauga, Ontario, Canada L5T 2N6. Our telephone number is (905) 361-3660.  Our agent for service in the United States for any actions relating to our common shares is CT Corporation System, 111 Eighth Avenue, New York, New York 10011, (212) 894-8400.
 
Capital expenditures for the year ended December 31, 2012 were $0.4 million, compared with $0.9 million and $0.4 million for the years ended December 31, 2011 and 2010, respectively, and consisted primarily of capital expenditures for leasehold improvements and equipment.  We expect capital expenditure plans for 2013 and subsequent years to result in further investment in property, plant and equipment as we continue our manufacturing and development initiatives. Our current budget for 2013 includes a capital budget of $1.3 million to purchase and manufacture testing and other equipment, primarily for our research and development programs but also in support of ongoing operational needs. We expect that more than half of our investments will be in Canada.  Our capital requirements will be affected by many factors, including the success of our current product offerings, the ability to enhance our current products and our ability to develop and introduce new products that keep pace with technological developments in the marketplace.
 
As at December 31, 2012 we had cash and cash-equivalents and restricted cash of approximately $16.8 million.
 
There are currently no public takeover offers by third parties in respect of the Company’s shares.
 
APIF Transaction
 
On June 11, 2009, we, Old Hydrogenics, the Board of Trustees of APIF and APIF’s manager, Algonquin Power Management Inc., agreed on the terms of a series of transactions (collectively, the “APIF Transaction”) and agreements, pursuant to which Old Hydrogenics agreed to transfer its entire business and operations to us, including all assets, liabilities, directors, management and employees, but excluding its tax attributes. Concurrently, the APIF Transaction enabled unitholders of APIF to continue to hold their interest in APIF as shareholders of Old Hydrogenics, which was renamed Algonquin Power & Utilities Corp. (“APUC”), a publicly traded Canadian corporation. APUC has the ability to make efficient use of our accumulated tax attributes in the continued execution of APIF’s business plans. Under the APIF Transaction, our shareholders had their common shares in the capital of Old Hydrogenics redeemed for our common shares on a one-for-one basis. At the same time, APIF unitholders exchanged their units for APUC common shares.
 
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Hydrogenics Corporation

 
As a result of completing the APIF Transaction on October 27, 2009, unitholders of APIF did not retain any interest in the business of the Corporation nor did the Corporation’s shareholders retain any interest in the business of APIF. We have continued to carry on the hydrogen generation and fuel cell business as a public entity with all of the assets (including the intellectual property), except for certain tax assets, of our predecessor prior to the APIF Transaction.
 
BUSINESS OVERVIEW
 
Hydrogenics, together with its subsidiaries, design, develop and manufacture hydrogen generation products based on water electrolysis technology, and fuel cell products based on proton exchange membrane (PEM) technology. Hydrogenics’ mission is to provide safe, secure, sustainable and emission free energy as a leading global provider of clean energy solutions based on hydrogen. We maintain operations in Belgium, Canada and Germany with satellite offices in the United States and Russia.
 
Our OnSite Generation business segment is based in Oevel, Belgium and develops products for industrial gas, hydrogen fueling and renewable energy storage markets. For the year ended December 31, 2012, our OnSite Generation business reported revenues of $27.5 million and, at December 31, 2012, had 83 full-time employees.
 
Our Power Systems business segment is based in Mississauga, Canada, with a satellite facility in Gladbeck, Germany, and develops products for energy storage, stationary and motive power applications. For the year ended December 31, 2012 our Power Systems business reported revenues of $4.3 million and, at December 31, 2012 had 58 full-time employees.
 
Where applicable, corporate and other activities are reported separately as Corporate and Other. This is the provision of corporate services and administrative support. At December 31, 2012, our Corporate and Other activities had four full-time employees.
 
OnSite Generation
 
Our OnSite Generation business segment, is based on water electrolysis technology which involves the decomposition of water into oxygen (O2) and hydrogen gas (H2) by passing an electric current through a liquid electrolyte. The resultant hydrogen gas is then captured and used for industrial gas applications, hydrogen fueling applications, and is used to store renewable and surplus energy in the form of hydrogen gas. Our HySTAT® branded electrolyzer products are based on 60 years of hydrogen experience, meet international standards, such as ASME, CE, Rostechnadzor and UL, and are certified ISO 9001 from design to delivery. We configure our HySTAT® products for both indoor and outdoor applications and tailor our products to accommodate various hydrogen gas requirements.
 
The worldwide market for hydrogen, which includes the merchant gas market for hydrogen, is estimated at $5 billion annually, and is served by industrial gas companies as well as on-site hydrogen generated by products manufactured by companies such as ours. We believe the annual market for on-site hydrogen generation equipment is approximately $100 million to $200 million. We believe the size of the addressable market for on-site hydrogen generation equipment could more than double if energy storage and electrolysis based hydrogen fueling stations gain widespread acceptance.
 
Our OnSite Generation products are sold to leading merchant gas companies, such as Air Liquide and Linde Gas and end-users requiring high purity hydrogen produced on-site for industrial applications.  We also sell and service products for progressive oil and gas companies, such as Shell Hydrogen, requiring hydrogen fueling stations for transportation applications. Recently, an increase in orders and interest for fueling stations in Europe and elsewhere, has signaled what we believe could be a major increase in the size of this market. During the past year, we have also witnessed an increase in interest and orders for our small, medium and large scale energy storage products, which also service the need for ancillary electrical power services, such as grid balancing and load profiling.  While this area is heavily dependent on public funding initiatives, particularly in Europe, it continues to present compelling growth opportunities.  In 2009, we began to sell our products to leading electric power utilities to satisfy the need for renewable energy storage.
 
The business objectives for our OnSite Generation group are to: (i) continue to pursue opportunities for customers to convert otherwise wasted renewable and other excess energy, such as wind, solar or excess baseload energy, into hydrogen; (ii) further expand into traditional markets, such as Eastern Europe (including Russia), Asia and the Middle East; (iii) grow our fueling station business; (iv) further increase the gross margins of existing product lines by improving our procurement and manufacturing processes; (v) reduce the cost of ownership of our products through design and technology improvement; and (vi) further increase the reliability and durability of our products to exceed the expectations of our customers and improve the performance of our applications.
 
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Hydrogenics Corporation

 
Our OnSite Generation business competes with merchant gas companies, such as Air Liquide and Linde Gas which, in addition to being customers, operate large scale centralized hydrogen production plants and are providers of alternative on-site hydrogen generation products using steam methane reforming (“SMR”) technology or other electrolysis technology. We compete on performance, reliability and cost and believe we are well positioned in situations where there is a need for high purity hydrogen manufactured on-site.
 
Power Systems
 
Our Power Systems business segment is based on PEM fuel cell technology, which transforms chemical energy liberated during the electrochemical reaction of hydrogen and oxygen into electrical energy. Our HyPM® branded fuel cell products are based on our extensive track record of on-bench testing and real-time deployments across a wide range of stationary and motive power profiles. We configure our HyPM® products into multiple electrical power outputs ranging from 1 kilowatt to 1 megawatt with ease of integration, high reliability and operating efficiency, delivered from a highly compact area. We also develop and deliver hydrogen generation products based on PEM water electrolysis, which can also be used to serve the energy storage markets noted above.
 
Our target markets include backup power for telecom and data centre installations and motive power applications, such as buses, trucks and utility vehicles. The military, historically an early technology adopter, is a specialized market for our innovative fuel cell based products. The worldwide market for data centre backup power is estimated to be in excess of $6 billion and the market for telecom backup power is estimated to be $2 to $3 billion in the United States alone, based on a complete displacement of existing products serving this market. 
 
Our Power Systems products are sold to leading Original Equipment Manufacturers (“OEMs”), such as CommScope, Inc. (“CommScope”) to provide backup power applications for telecom installations and vehicle and other integrators for motive power, direct current (“DC”) and alternative current (“AC”) backup. Additionally, our products are sold for prototype field tests intended to be direct replacements for traditional lead-acid battery packs for motive applications. We also sell our Power Systems products to the military, aerospace and other early adopters of emerging technologies.
 
The business objectives for our Power Systems group are to: (i) offer a standard fuel cell platform for many markets, thereby enabling ease of manufacturing and reduced development spending; (ii) achieve further market penetration in the backup power and motive power markets by tailoring our HyPM® fuel cell products to meet market specific requirements, including price, performance and features; (iii) reduce product cost; (iv) invest in sales and market development activities in the backup power and motive power markets; (v) continue to target the military and other early adopters of emerging technologies as a bridge to future commercial markets; and (vi) secure the requisite people and processes to align our anticipated growth plans with our resources and capabilities.
 
Our Power Systems business competes with several well-established battery and internal combustion engine companies in addition to several other fuel cell companies. We compete on relative price/performance and design innovation. In the backup power market, we believe our HyPM® systems have an advantage over batteries and internal combustion engines for customers seeking extended run requirements, by offering more reliable and economical performance. In motive power markets, we believe our HyPM® products are well positioned against diesel generation and lead-acid batteries by offering increased productivity and lower operational costs.
 
There are four types of fuel cells other than PEM fuel cells that are generally considered to have possible commercial applications, including phosphoric acid fuel cells, molten carbonate fuel cells, solid oxide fuel cells and alkaline fuel cells. Each of these fuel cell technologies differs in their component materials and operating characteristics.  While all fuel cell types may have potential environmental and efficiency advantages over traditional power sources, we believe PEM fuel cells can be manufactured less expensively and are more efficient and more practical in small-scale stationary and motive power applications. Further, most automotive companies have selected PEM technology for fuel cell powered automobiles. We expect this will help establish a stronger industry around PEM technology and may result in a lower cost, as compared to the other fuel cell technologies.
 
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Hydrogenics Corporation


Segmented Revenues
 
(Millions of US dollars)
   
2012
   
2011
   
2010
 
OnSite Generation
  $ 27.5     $ 19.7     $ 15.9  
Power Systems
    4.3       4.1       5.0  
Total
  $ 31.8     $ 23.8     $ 20.9  

For additional financial information by business segment, see “Note 26. – Segmented Financial Information” to our consolidated financial statements, which can be found on page F-42 of this form, and is incorporated by reference herein.
 
Our revenues are segmented by geographic region, as follows:
 
(Thousands of US dollars)
   
2012
   
2011
   
2010
 
European Union
  $ 13,890     $ 4,854     $ 5,308  
Eastern Europe
    7,111       5,626       2,461  
North America
    2,814       3,108       4,212  
Asia
    2,510       611       3,363  
South America
    2,207       2,747       2,273  
Africa
    1,943       4,385       191  
Middle East
    932       122       2,412  
Oceania
    222       1.331       710  
Other
    177       1,048       -  
    $ 31,806     $ 23,832     $ 20,930  

Our strategy is to develop electrolyzer and fuel cell products for sale to OEMs, electric utilities, gas utilities, merchant gas companies and end-users requiring highly reliable products offered at competitive prices. We believe our success will be substantially predicated on the following factors:
 
Increasing Market Penetration
At December 31, 2012, we had seventeen full-time staff employed in sales functions. Our senior management team is also actively involved in sales initiatives, including maintaining close contact with our more significant customers. In the year, significant efforts were made in the sales function; including repositioning of responsibilities to permit dedicated leadership for the sales function, obtaining detailed assessments of markets, and leveraging our Commscope and Enbridge strategic relationships.

In 2012, we also continued to invest in product development. In Power Systems, we introduced a new fuel cell system architecture in order to be better aligned with backup power market opportunities and we have also expanded our fuel cell system power level by introducing a new 30 kW fuel cell product.  In On Site Generation, we also delivered our 2 Megawatt energy storage electrolyzer to E.ON, a major global energy and gas company located in Germany.  Hydrogenics is now better positioned for increasing market penetration in its two business segments.
 
Additionally, we have developed relationships with third parties we believe are well positioned in our relevant markets to identify new market opportunities for our products. In the industrial gas market, these third parties include leading merchant gas companies, such as Air Liquide and Linde Gas. In the energy storage market, it is leveraging our strategic relationship with Enbridge as well as our global contacts with other large utilities, gas companies and regulators.  In the backup power market, these third parties include leading OEMs, such as CommScope. 
 
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Hydrogenics Corporation


Future Markets
 
Hydrogenics is pioneering Power-to-Gas, an innovative energy conversion and storage solution using electrolysis.  Power-to-Gas is the three-step process of integrating renewable sources of generation by load-following, converting the surplus electricity to hydrogen or renewable gas, and leveraging the existing natural gas infrastructure for seasonal storage.  An electrolyzer provides the rapid, dynamic response to the Independent System Operator’s signals to accurately load-follow the intermittent generation pattern of renewable sources such as wind turbines.  The hydrogen produced is injected into the natural gas system which provides an unparalleled TWh of storage capacity.  Surplus electricity can be stored for consecutive days or even consecutive weeks without the need to discharge; it is a seasonal storage capability. This is the only energy storage solution which bridges the power grid and the gas grid to unlock new options.  It enhances the flexibility of managing the power grid and provides the means to capitalize on the vast potential of alternative sources of generation to produce a local source of renewable gas to de-carbonize the gas system.  As the existing fleet of Combined Cycle Gas Turbine (“CCGT”) generators contract for this renewable gas, the clean but intermittent characteristics of renewable generation are transformed into a dispatchable renewable resource when and where it is needed.  Since the hydrogen or substitute natural gas is stored in the natural gas system, the discharge of stored energy is not restricted to the site of charging like other technologies such as pumped hydro storage and CAES (Compressed Air Energy Storage).  As a result, Power-to-Gas plant can be optimally sited at a point of congestion on the power grid to alleviate the problem.  It is also a scalable solution, as additional 10MW Power-to-Gas modules can be added to an initial development as required.  Hydrogenics is currently working with leading utilities worldwide in demonstration projects and setting the stage for commercial-scale projects.  The Corporation is also advancing the next generation of PEM electrolyzers to meet the future demands of Power-to-Gas system developers across all applications—direct hydrogen injection into gas system, bio-methanation to inject substitute natural gas, renewable gas for oil refining, and distributed hydrogen fuelling stations.
 
Advancing Our Product Designs
 
Recently, we have received several orders and have seen considerable interest in using hydrogen as a medium to store renewable and excess energy, due to the favourable characteristics of hydrogen as an energy carrier.  In addition, our solution will also benefit ancillary electrical power services, such as grid balancing and load profiling. We are developing a renewable energy storage product incorporating an alkaline or PEM electrolyzer, a PEM fuel cell electrical generator or alternative electrical generator, and associated systems integration software. We anticipate adding other proprietary technologies to this product offering based on continued market development.
 
Within our OnSite Generation business segment, we are focused on reducing the cost of our HySTAT® electrolyzer and improving its efficiency. Innovation in the design, elimination of non-value adding components, improved component sourcing and fundamental electrochemical improvements have all contributed to ongoing cost reduction initiatives in 2013 and beyond. We also recognize the opportunity for larger scale energy storage installations and are continuing to develop significantly scale-up products to better meet this market opportunity.
 
Within our Power Systems business segment, we spent much of 2012 focusing on further reducing the cost of an fully integrated fuel cell system inclusive of its components.  We have achieved significant cost reduction milestones but will continue to further improve the financial viability of the product in the marketplace. We are also attempting to offset a portion of the associated development expenses by entering into cost-sharing agreements with OEMs and government agencies.
 
Securing Additional Capital
As at December 31, 2012, we had $16.8 million of cash, cash equivalents and restricted cash, had $4.2 million of shareholders’ equity and $42.1 million of assets.
 
During 2012, we completed a private placement offering of common shares with Enbridge for gross cash proceeds of $5.0 million.
 
We do not anticipate achieving a consistent level of profitability, and hence, generate consistent positive cash flow from operations for the next several quarters.  The failure to raise sufficient funds necessary to finance future cash requirements could adversely affect our ability to pursue our strategy and negatively affect our operations in future periods. We are addressing this matter by maintaining contact with analysts and institutional investors to better articulate our investment merits and are advancing discussions with possible strategic investors. While we continue to pursue various additional sources of financing, there are no definitive plans at this stage and there is no assurance these initiatives will be successful or provide additional funds sufficient to continue operations.
 
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Hydrogenics Corporation

 
In the third quarter of 2012, we filed a final short form base shelf prospectus with certain Canadian and US securities regulatory authorities. The shelf prospectus will allow us to offer, from time to time over a 25-month period, up to $25 million of debt, equity and other securities.  However, US securities law limits the issuance of shares, restricting the size of any offering to 1/3 of the market value of our public float in any 12-month period.
 
We intend to use any net proceeds received from any offering pursuant to such shelf prospectus to fund current operations and potential future growth opportunities, except as otherwise may be disclosed in a prospectus supplement relating to such offering.
 
We are not required to offer or sell all or any portion of the securities pursuant to the shelf prospectus in the future and will only do so if we believe market conditions warrant it.
 
Retaining and Engaging Our Staff
 
At December 31, 2012, we had 145 full-time employees, the majority of whom have been employed by the Corporation for several years and possess strong technical backgrounds with extensive industry experience. We strive to maintain a high level of employee engagement by compensating at market rates, providing interesting and challenging work, and, over time, the opportunity to create wealth by participating in our stock ownership program.
 
Our Products and Services
 
Our products include HySTAT™ hydrogen generation equipment in our OnSite Generation business and HyPM® fuel cell products in our Power Systems business.
 
A summary of our product lines is noted below.
 
HySTAT™ Hydrogen Stations
HySTAT™ Hydrogen Stations offer a dependable on-site supply of hydrogen for a variety of hydrogen applications, including vehicle fuelling, distributed power, and a variety of industrial processes.  From a selection of versatile modular components, we configure the optimum HySTAT™ Hydrogen Station to precisely meet customer needs for hydrogen generation and storage. We also provide spare parts and service for our entire installed base.
 
We currently offer our HySTAT™ Hydrogen Station in multiple configurations depending on the amount of hydrogen required. This product is suitable for producing continuous or batch supplies of hydrogen typically for industrial processing applications and generates between 10 - 60 normal cubic meters per hour (“Nm3/hr”) of hydrogen. Multiple standard units can be installed for larger applications with the capability of generating up to 500 Nm3/hr of hydrogen.
 
HyPM® Fuel Cell Products
Our HyPM® fuel cell products provide high performance, high efficiency electrical power from clean hydrogen fuel.  The HyPM® product is well suited to compete with existing battery applications by offering longer runtimes and life, at a significantly smaller size and weight. The HyPM® product line also competes with certain diesel power applications by offering clean, quiet operation and higher demand reliability.  Our products are built on a common platform allowing us to achieve volume purchasing and manufacturing efficiencies.
 
·  
HyPM® Fuel Cell Power Modules.  Our HyPM® power module runs on high purity hydrogen and produces DC power in standard outputs of 2.5, 5, 8, 12, 16, 30, 90, 120 and 180 kW. This product is suitable for a wide range of stationary, mobile and portable power applications. The HyPM® XR model is targeted at backup power applications and the HyPMHD® model is targeted at motive power applications.
 
·  
HyPX Fuel Cell Power Pack.  Our HyPX™ Power Pack includes a standard HyPM® power module integrated with hydrogen storage tanks and ultracapacitors that provide higher power in short bursts.  This product has the same form, fit and function as large battery packs used in devices such as forklift trucks and tow tractors.
 
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Hydrogenics Corporation

 
·  
Integrated Fuel Cell Systems.  Our integrated fuel cell systems are built around our HyPM® power modules and used for portable and stationary applications including portable and auxiliary power units for military applications and direct current or DC backup power system for cellular tower sites.
 
·  
Engineering Development Services.  We also enter into engineering development contracts with certain customers for new or custom products.

Sales and Marketing
 
Our products are sold worldwide to OEMs, systems integrators and end-users through a direct sales force and a network of distributors. Our sales method varies depending on the product offering, market and stage of technology adoption.
 
At December 31, 2012, we had seventeen full-time staff employed in sales functions. Our senior management team is also actively involved in sales initiatives, including maintaining close contact with our more significant customers.
 
Customers
Our OnSite Generation products are sold to leading merchant gas companies such as Air Liquide and Linde Gas and end users requiring high purity hydrogen produced on-site for industrial applications.  We also sell and service products for progressive oil and gas companies such as Shell Hydrogen requiring hydrogen fueling stations for transportation applications. During the past year we have also witnessed an increase in interest and orders for our small, medium and large scale energy storage products which also service the need for ancillary electrical power services such as grid balancing and load profiling.

Our Power Systems products are sold to leading Original Equipment Manufacturers (“OEMs”) such as CommScope, Inc. (“CommScope”) to provide backup power applications for telecom installations and vehicle and other integrators for mobility and other applications included AC backup. Additionally, our products are sold for prototype field tests intended to be direct replacements for traditional lead-acid battery packs for motive applications. We also sell our Power Systems products to the military and other early adopters of emerging technologies.

In 2012, three customers each comprised 26% of our revenue (in 2011, three customers each comprised 27% of our revenue). In 2012, 66% of our revenues was derived from Europe, 16% from North and South America, 8% from Asia, and the remaining 10% were derived from other foreign jurisdictions (in 2011, these numbers were 44%, 25%, 3% and 28%, respectively).  Accordingly, we have mitigated risk to any single market or adoption rate by diversifying our product portfolio across the markets in which we operate.
 
We have entered into agreements with several customers to pursue commercial opportunities, which we view as important to our success.  Our key customer agreements are summarized below.
 
·  
Military OEM.  In December 2005, we entered into a multi-year joint cooperation agreement with a military OEM.  In conjunction with the signing of the cooperation agreement, we were awarded an $8 million contract for multiple units of fuel cell power systems based on our 500 series fuel cell stack technology.
 
·  
Leading Global Industrial Gas Companies.  We have previously established preferred supplier agreements with Air Liquide S.A., Air Products and Chemicals, Inc., and Linde A.G., three of the leading global industrial gas companies.  Typically, these agreements provide that for industrial applications we will be the preferred supplier of on-site, electrolysis-based hydrogen generators to the applicable industrial gas company.  We believe these relationships represent valuable sales channels, while providing validation of our technology from highly credible partners.
 
·  
CommScope. In August 2010, we entered into a strategic alliance with CommScope, a global leader in infrastructure solutions for communications networks, that calls for the development and distribution of specialized fuel cell power systems and includes an equity investment in Hydrogenics. Under the terms of the agreement, CommScope and Hydrogenics have jointly developed next-generation power modules for telecom-related backup power applications that are being incorporated by CommScope in its products sold to customers worldwide.
 
·  
Enbridge. In April 2012, we entered into a joint development agreement with Enbridge, the owner and operator of Canada's largest natural gas distribution company, various North American midstream gas assets, and a leader in clean energy solutions, to jointly develop utility scale energy storage in North America.
 
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Hydrogenics Corporation

 
·  
OEM. In October 2012, we entered into a multi-year joint cooperation agreement with an OEM. In conjunction with the signing of the cooperation agreement, we were awarded a $36 million contract for the supply of propulsion system equipment including integrated fuel cell power systems, power electronic converters, associated hardware and propulsion system software. The contract includes additional equipment commitments of $13 million as well as optional equipment and services totaling another $43 million over a 10 year period. These options will be triggered as required for production, spare parts, warranty, and service requirements.
 
Research and Product Development
Our research and product development team consists of approximately 26 staff, the substantial majority of whom are located in Mississauga, Ontario, and are focused primarily on our fuel cell and PEM technology activities. The remainder is located in Oevel, Belgium.  Collectively, these individuals have many years of experience in the design of electrolysis and fuel cell products. Our product development team combines leaders with extensive experience in their fields with younger graduates from leading universities.
 
Our objective is to develop complete products rather than components and to ensure these products are constantly improved throughout the product’s life.  Our research activities are unique to each of our business units but typically focus on the cost, performance and durability of our products. Our product development activities commence with a market requirement document establishing the business case for the proposed product. This process involves staff from our business development, finance, engineering and operations departments who balance the requirements of performance, time to market, and product cost.  Prototypes are often validated by lead customers such as CommScope.
 
We seek cost-sharing projects with various government and non-government agencies, to offset, to the extent possible, our research and product development expenses.  We currently have contribution agreements with Natural Resources Canada and the Province of Ontario. In 2012, $0.5 million, or 8% of our research and product development expenses, were funded by various governments.  In 2011 Hydrogenics Corporation entered into a loan agreement with the Province of Ontario’s Ministry of Economic Development and Trade, Strategic Jobs and Investment Fund for up to CA$6.0 million.  During the year, the Corporation drew down CA $1.6 million of the loan, which is calculated based on 50% of eligible costs to a maximum of CA $1.5 million per disbursement.  The loan is a low interest rate loan, and if certain criteria are met, such as the retention and creation of a specified number of jobs, the loan will be interest free for the first five years.

Our current research and product development plans are summarized below:
 
·  
OnSite Generation. Our research activities are currently devoted to the scale-up of design and performance factors of our electrolyzer cell stacks. Our product development activities are focused on the development of mega-watt scale PEM electrolyzers and product line extension of our Alkaline electrolyzers.  These new products are designed to store renewable or other excess energy as hydrogen, thereby helping to address large scale grid energy storage problems, for Power-to-Gas applications or for vehicle refueling.  Our large scale product development efforts aim to make Hydrogenics the “one-stop shop” for all on-site hydrogen generation needs.
 
·  
Power Systems.  At the fuel cell stack and component level, we are concentrating on testing, adapting and integrating new materials, design concepts, manufacturing techniques, and cost reduction initiatives.  Our efforts today continue to blend the boundary between the fuel cell stack and necessary subsystems and components. At the fuel cell module or product level, we continue to expand our product line all the while continuing to lower cost on existing products in order to meet market specific cost requirements.  
 
Intellectual Property
We protect our intellectual property by means of a combination of patent protection, copyrights, trademarks, trade secrets, licences, non-disclosure agreements and contractual provisions. We generally enter into non-disclosure and confidentiality agreements with each of our employees, consultants and third parties that have access to our proprietary technology. We currently hold 121 patents in a variety of jurisdictions and have 24 patent applications pending. Additionally, we enter into commercial licences and cross-licences to access third party intellectual property.
 
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Hydrogenics Corporation

 
We believe our intellectual property provides us a strong competitive advantage and represents a significant barrier to entry into our industry for potential competitors.  As part of our patent portfolio, we maintain a collection of innovative energy storage patents with broad and exclusive rights concerning the use of excess electrical power to produce hydrogen from water while simultaneously providing electric grid stabilization services.  We believe these patents place Hydrogenics in the strongest possible position to build our company over the long-term and will continue to strengthen our efforts as electric grid operators look to hydrogen as an important strategy for utility-scale energy storage.
 
We typically retain sole ownership of intellectual property developed by us. In certain situations, such as with Dow Corning and General Motors, we provide for shared intellectual property rights. In the case of General Motors, we have a non-exclusive, royalty free licence to use certain of General Motors’ proprietary fuel cell stack intellectual property in certain applications and markets. We have these rights in perpetuity, including subsequent improvements to the licensed technology. In the case of Dow Corning, we jointly own a US patent application, together with all inventions falling within the description of such patent application specific to sealing and sealing materials for fuel cell and electrolyzer assemblies.
 
Given the relative early stages of our industry, our intellectual property is and will continue to be important in providing differentiated products to customers.
 
Manufacturing
The majority of our manufacturing services, including parts procurement, kitting, assembly and repair, are carried out in-house at our respective business unit manufacturing facilities. We also perform certain manufacturing-related functions in-house, including manufacturing engineering and the development of manufacturing test procedures and fixtures.

We anticipate being able to move various aspects of our manufacturing operations to third parties or other lower cost jurisdictions as production volumes increase. By moving to third parties, we would benefit from contract manufacturing economies of scale, access to high quality production resources and reduced equipment capital costs and equipment obsolescence risk. We have also commenced sourcing components from third parties in Asia and expect to increase the volume over time to reduce our material costs.
 
We are dependent on third party suppliers for certain key materials and components for our products such as membrane electrode assemblies and ultra capacitors. We believe we have sufficient sources and price stability of our key materials and components.
 
We have certifications in ISO 9001-2008 in both our Oevel and Mississauga facilities, and ISO 14001 and OHSAS 18001 in our Oevel facility.
 
Government Regulation
We are not subject to regulatory commissions governing traditional electric utilities and other regulated entities in any of the jurisdictions in which we operate. Our products are, however, subject to oversight and regulation by governmental bodies with regard to building codes, fire codes, public safety, electrical and gas pipeline connections and hydrogen siting, among others.
 
 
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Hydrogenics Corporation


ORGANIZATIONAL STRUCTURE
 
As of March 8, 2013, we beneficially owned, directly or indirectly, 100% of the voting and non-voting securities of the material subsidiaries listed below.
 
Subsidiaries
 
Jurisdiction of Incorporation
     
Hydrogenics Europe NV
 
Belgium
     
Hydrogenics GmbH
 
Germany

PROPERTY, PLANT AND EQUIPMENT
 
We have the following facilities:
 
·  
Mississauga, Ontario, Canada.  Our 25,300 square foot facility in Mississauga, Ontario serves as our corporate headquarters and Power Systems manufacturing facility. It is leased until October 31, 2013. Principal activities at this facility include the manufacture and assembly of our fuel cell power modules, and research and product development for our fuel cell power products, fuel cell testing services and our corporate activities.
 
·  
Oevel-Westerlo, Belgium.  Our 36,600 square foot facility in Oevel-Westerlo, Belgium, serves as our manufacturing facility for our OnSite Generation business and is leased until August 30, 2014.  Principal activities at this facility include the manufacture and assembly of our hydrogen generation equipment, water electrolysis research and product development as well as administrative functions related to our OnSite Generation business.
 
·  
Gladbeck, Germany.  Our Power Systems group maintains a 13,300 square foot facility in Gladbeck, Germany, which is leased until December 31, 2013. This facility is used to provide fuel cell integration services for European customers and serves as our European office for the fuel cell activities of our Power Systems business.
 
We also have small sales and service offices in Eastern Europe and North America. We believe our facilities are presently adequate for our operations and we will be able to maintain suitable space needed on commercially reasonable terms.
 
UNRESOLVED STAFF COMMENTS
 
None.
 
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
Management’s Discussion of Financial Condition and Results of Operations (“MD&A”)

The following discussion and analysis of our financial condition and results of operations for the fiscal years ended December 31, 2012, 2011, and 2010 should be read in conjunction with our audited consolidated financial statements and related notes included in this Form 20-F.
 
OPERATING RESULTS
 
A detailed discussion of our operating results for 2012 and 2011
 
This section provides a detailed discussion of our financial performance based on our consolidated financial statements.  All references to per share amounts pertain to net loss per share. Certain of the prior year’s figures have been reclassified to conform to the current year’s presentation.
 
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Hydrogenics Corporation


Hydrogenics Corporation
Summary Financial Analysis
(Thousands of US  dollars, except per share amounts)
                     
Percentage
Favourable
(Un-
favourable)
   
Percentage
Favourable
(Un-
favourable)
 
   
2012
   
2011
   
2010
   
2012
    2011  
OnSite Generation
  $ 27,477     $ 19,685     $ 15,921       40 %     24 %
Power Systems
    4,329       4,147       5,009       4 %     (17 )%
Revenues
    31,806       23,832       20,930       33 %     14 %
Gross Profit
    5,245       5,488       5,426       (4 )%     1 %
Percentage of Revenues
    16 %     23 %     26 %                
Selling, General and Administrative Expenses
    12,751       11,740       11,227       (9 )%     (5 )%
Research and Product Development Expenses
    4,606       2,934       3,445       (57 )%     15 %
Loss from Operations
    (12,107 )     (9,278 )     (8,911 )     (30 )%     (4 )%
Net Loss
    (12,679 )     (9,788 )     (6,545 )     (30 )%     (50 )%
Net Loss Per Share
  $ (1.72 )   $ (1.58 )   $ (1.40 )     (9 )%     (13 )%
                                         
Consolidated Statements of Cash Flows
                                       
Cash Used in Operating Activities
    (1,063 )     (4,401 )     (10,014 )     76 %     56 %
                                         
Other Measures
                                       
Cash Operating Costs1
    15,189       12,299       13,437       (23 )%     8 %
Adjusted EBITDA1
    (11,242 )     (8,236 )     (8,251 )     (36 )%     -  
 See Item 5, Operating and Financial Review and Prospects Reconciliation and Definitions of non-GAAP Measures.
                                       
 
Highlights for 2012 compared to 2011:
 
·  
Revenues were $31.8 million, an increase of 33% over 2011 primarily reflecting increased revenues and fulfillment of 2011 backlog in our OnSite generation business unit.  This revenue growth was driven by growth in fueling and renewable energy markets. The overall increase was also driven by increased revenues in our Power Systems business unit reflecting initial revenue on the contract for integrated power propulsion systems for an OEM. These overall growth factors were partially offset by a weakening of the Euro relative to the US dollar.
 
·  
Cash operating costs were $15.2 million, versus $12.3 million last year, with costs as a percent of revenue falling 3.9%. The year-over-year change reflects planned increases in research and development efforts focused on next-generation energy storage product development, additional marketing costs, and increased compensation costs arising from improved business performance.
 
·  
Hydrogenics’ Adjusted EBITDA loss was $11.2 million versus $8.2 million last year, reflecting; (i) the above-noted increase in cash operating costs of $2.9 million as a result of planned increases in research and development efforts focused on next-generation energy storage product development, additional marketing costs, and increased compensation costs arising from improved business performance; (ii) a $0.1 million increase associated with the Corporation’s deferred compensation plans, which are indexed to the share price; (iii) a $0.2 million decrease in gross profit, partially offset by (iv) a $0.2 million decrease in stock-based compensation. The Adjusted EBITDA loss as a percent of sales increased slightly year-over-year.
 
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Hydrogenics Corporation

 
·  
Net loss increased $2.9 million or 30% ($0.14 per share), reflecting: (i) the above noted increase in Adjusted EBITDA loss of $3.0 million; as well as an increase in finance loss of $0.1 million as a result of an increase in the fair value of outstanding warrants driven by an increase in our share price; partially offset by a decrease in other losses of $0.1 million and a decrease in amortization and depreciation of $0.1 million. 
 
·  
Cash and cash equivalents and restricted cash were $16.8 million at December 31, 2012, a $6.8 million increase compared to December 31, 2011 primarily reflecting: (i) $10.2 million in cash deposits in respect of a large order received in the third quarter of 2012; (ii) $4.8 million of net proceeds from the Enbridge equity investment, (iii) $1.6 million of operating borrowings, and; (iv) $0.3 million of proceeds from the exercise of warrants, partially offset by (v) $9.4 million of cash used in operating activities; (vi) $0.4 million of capital expenditures, and; (vii) repayments of our post-retirement benefit liability and repayable government contribution totalling $0.4 million.
 
Highlights for 2011 compared to 2010:
 
·  
Revenues were $23.8 million, an increase of 14% primarily reflecting increased order bookings in our OnSite generation business unit driven by growth in industrial, fueling and renewable energy markets. This increase was partially offset by decreased revenues in our Power Systems business unit.
 
·  
Cash operating costs were $12.3 million, a decrease of 8% reflecting: (i) a $0.6 million decrease in operating costs as a result of ongoing cost reduction efforts, including the move to a new lower cost facility in Mississauga, Ontario, Canada; and (ii) a $0.9 million increase in research and product development funding; partially offset by a $0.4 million increase in research and product development expenditures.
 
·  
Adjusted EBITDA loss excluding $0.7 million of increased costs associated with our deferred compensation plans, which are indexed to our share price; and $0.3 million increase in non-cash stock-based compensation costs in respect of executive stock options, which were surrendered in January 2011 decreased $1.0 million or 12%, reflecting: (i) a $0.4 million reduction in costs as a result of cost reduction initiatives; (ii) a $0.5 million increase in research and product development funding; and (iii) a $0.1 million increase in gross margin.
 
·  
While the loss from operations for 2011 was relatively consistent with 2010, net loss increased $3.2 million or 50% ($0.18 per share), reflecting: (i) the absence of a $1.7 million gain in 2010 resulting from a decrease in the fair value of warrants outstanding driven by a decrease in our share price in 2010; (ii) the absence of a $0.7 million gain in 2010 resulting from a decrease in the fair value of repayable government contributions in 2010; (iii) the absence of $0.4 million in recoveries from litigation settlements; (iv) a loss of $0.3 million as a result of an increase of in the fair value of outstanding warrants driven by an increase in our share price; and (v) an increase of less than $0.1 million in the fair value of repayable government contributions.
 
·  
Cash and cash equivalents and restricted cash were $10.0 million at December 31, 2011, a $1.0 million increase compared to December 31, 2010 reflecting: (i) $4.5 million of net proceeds from the third and fourth tranches of our subscription agreement with CommScope; (ii) $1.4 million of proceeds received on drawing the first disbursement of our loan with the Ontario government; partially offset by (iii) $3.7 million of cash used in operating activities; (iv) $0.9 million of capital expenditures; and (iv) $0.4 million repayment of other non-current liabilities.
 
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Hydrogenics Corporation


Business Segment Review
We report our results in two business segments (OnSite Generation and Power Systems). Corporate and Other is the provision of corporate services and administrative support. These segments are differentiated by the products developed and end-customer markets. Our reporting structure reflects how we manage our business and how we classify our operations for planning and measuring performance. See “Item 4, Information on the Company – Business Overview” for a description of our business segments.
 
OnSite Generation
Summary Financial Analysis
(Thousands of US dollars)
                     
Percentage
Favourable
(Unfavourable)
 
   
2012
   
2011
   
2010
   
2012
   
2011
 
Revenues
  $ 27,477     $ 19,685     $ 15,921       40 %     24 %
Gross Profit
    3,808       4,187       3,350       (9 )%     25 %
Percentage of Revenues
    14 %     21 %     21 %                
Selling, General and Administrative Expenses
    3,320       3,455       2,376       4 %     (45 )%
Research and Product Development Expenses
    765       682       842       (12 ) %     19 %
Segment Income
    (277 )     51       131       (643 )%     (61 )%

Revenues for 2012 were $27.5 million, an increase of $7.8 million or 40% over the previous year, primarily reflecting increased order bookings at December 31, 2011 in our OnSite generation business unit driven by growth in industrial, fueling and renewable energy markets in the prior year, partially offset by an 8% decrease in the value of the euro relative to the US dollar. Revenues for the year ended December 31, 2012 consisted of the sale of electrolyzer products to customers in industrial gas, renewable energy, energy storage and fueling markets. At December 31, 2012, we had $18.9 million of confirmed orders (2011 - $27.2 million), substantially all of which are anticipated to be delivered and recognized as revenue in 2013. Revenues for 2011 were $19.7 million, an increase of $3.8 million or 24% over the previous year, driven by order growth in industrial, fueling and renewable energy markets, as well as a 6% increase in the value of the euro relative to the US dollar. Revenues for the year ended December 31, 2011 consisted of the sale of electrolyzer products to customers in industrial gas, renewable energy and fueling markets.
 
Gross Profit was $3.8 million (14% of revenues) in 2012, compared to $4.2 million (21% of revenues) in 2011, primarily reflecting i) competitive, strategic pricing – accelerating the demonstration phase of a new market. Hydrogenics may use this strategy when our technology finds a fit in new markets, whether that be geographic or application based; and the adoption by a lead company will materially move the market in our favour. Also contributing to the decrease was the effect of pricing increases on key supplier components in our OnSite Generation business.  Cost reduction efforts are continuing through supply chain management and product design innovation in order to restore margins to target levels. Gross profit was $4.2 million (21% of revenues) in 2011, compared to $3.4 million (21% of revenues) in 2010, primarily the result of increased revenues.
 
Selling, General and Administrative (“SG&A”) Expenses for 2012 were $3.3 million, a decrease of $0.1 million, primarily reflecting a weakening of the Euro relative to the USD. SG&A expenses for 2011 were $3.5 million, an increase of $1.1 million or 45% over the previous year, attributable to increased selling costs associated with the growth in the order backlog, as well as an increase in costs resulting from the strengthening of the euro relative to the US dollar.
 
Research and Product Development (“R&D”) Expenses for 2012 were $0.8 million in 2012, an increase of $0.1 million or 12% as compared to 2011, reflecting increased materials related to renewable energy product development efforts of $0.2 million, partially offset by increased research and product development funding of $0.1 million.  R&D expenses for 2011 were $0.7 million, a decrease of $0.2 million or 19%, as compared to the previous year, reflecting decreased materials for experimentation and prototyping trials, as well as increased research and product development funding.
 
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Hydrogenics Corporation

 
Segment Income (Loss) for 2012 was a $0.3 million loss, a decrease of $0.3 million from 2011, reflecting decreased gross profit as well as an increase in R&D costs, described above. Segment income (loss) for 2011 was less than $0.1 million, a decrease of less than $0.1 million over 2010, reflecting increased revenues and decreased R&D costs, partially offset by increased selling costs.
 
Power Systems
Summary Financial Analysis
(Thousands of US dollars)
                     
Percentage
Favourable
(Unfavourable)
 
   
2012
   
2011
   
2010
   
2012
    2011  
Revenues
  $ 4,329     $ 4,147     $ 5,009       4 %     (17 )%
Gross Profit
    1,437       1,301       2,076       10 %     (37 )%
Percentage of Revenues
    33 %     31 %     41 %                
Selling, General and Administrative Expenses
    3,782       2,992       3,478       (26 )%     14 %
Research and Development Expenses
    3,821       2,157       2,519       (77 )%     14 %
Segment Loss
    (6,166 )     (3,848 )     (3,921 )     (60 )%     2 %

Revenues for 2012 were $4.3 million, an increase of $0.2 million or 4% compared to 2011 reflecting variations in timing of orders, and product deliveries. At December 31, 2012, we had $41.1 million (2011 - $1.9 million) of confirmed orders for Power Systems’ products and services. Revenues for 2011 were $4.1 million, a decrease of $0.9 million or 17% compared to 2010 reflecting variations in timing of orders, and product deliveries.
 
Gross Profit for 2012 was $1.4 million (33% of revenues, compared to $1.3 million (31% of revenues) in the previous year, reflecting a higher proportion of custom projects, which generally have higher gross margins.  Gross profit for 2011 was $1.3 million (31% of revenues, compared to $2.1 million (41% of revenues) in 2010, reflecting additional costs incurred on two custom product development projects and lower overhead absorption.
 
SG&A Expenses for 2012 were $3.8 million, 8.7% of orders received in the year, an increase of $0.8 million or 26% compared to the previous year primarily reflecting increased marketing efforts and a higher level of activity associated with commercial activities as well as higher compensation costs arising from improved business performance. SG&A expenses for 2011 were $3.0 million, a decrease of $0.5 million or 14% compared to the previous year primarily reflecting savings associated with cost reduction initiatives.
  
R&D Expenses for 2012 were $3.8 million, an increase of $1.7 million or 77%, attributable to increased R&D expenditures of $1.2 million primarily resulting from increased efforts on next-generation energy storage product development, as well as decreased R&D funding of $0.4 million as a result of variations in the timing of borrowings on the loan with the Province of Ontario’s Ministry of Economic Development, Strategic Jobs and Investment Fund. R&D expenses for 2010 were $2.2 million, a decrease of $0.3 million or 14%, primarily reflecting increased research and product development funding.
 
Segment Loss for 2012 was $6.2 million compared to $3.8 million for 2011 reflecting the increase in SG&A and R&D expenses described above, partially offset by increased revenues and gross profits. Segment loss for 2010 was $3.8 million compared to $3.9 million in 2010 reflecting ongoing cost reduction efforts, partially offset by decreased revenues and gross margins.
 
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Hydrogenics Corporation

 
Corporate and Other
Summary Financial Analysis
(Thousands of US dollars)
                     
Percentage
Favourable
(Unfavourable)
 
   
2012
   
2011
   
2010
   
2012
   
2011
 
Selling, General and Administrative Expenses
  $ 5,649     $ 5,293     $ 5,373       (7 )%     1 %
Research and Development Expenses
    20       95       84       79 %     (13 )%
Litigation Settlements
                    (437 )     -       (100 )%
Other Finance Gains (Losses), Net
    (438 )     (332 )     2,433       (32 )%     (114 )%
Segment Loss
    (6,236 )     (5,991 )     (2,775 )     (4 )%     (116 )%
 
SG&A Expenses were $5.6 million in 2012, an increase of 7% compared to the previous year. Included in SG&A expenses for the year are $0.8 million, respectively, of costs and fair value adjustments resulting from our DSU and restricted share unit (“RSU”) plans, which are indexed to our share price. This compares to a loss of $0.7 million in 2011. Also included in SG&A expenses are increased compensation costs arising from improved business performance, and increased professional costs associated with the short form base shelf prospectus filed in 2012, partially offset by a reduction in the value of the post-retirement benefit liability of $0.2 million. SG&A Expenses were $5.3 million in 2011, a decrease of 1% compared to 2010. This decrease is the result of: (i) $0.5 million of savings resulting from ongoing cost reduction initiatives; partially offset by (ii) an increase of $0.4 million in costs for our deferred compensation plans, which are indexed to our share price.
 
R&D Expenses for 2012 and 2011 were less than $0.1 million, consistent with the prior year.
 
Litigation Settlements for 2012 and 2011 were $nil compared to a recovery of $0.4 million in 2010. The 2010 recovery reflects the settlements noted below;
 
·  
On April 22, 2010, the Corporation reached a settlement with American Power Conversion Corporation (“APC”) regarding the Corporation’s previously announced litigation in connection with the Supply Agreement entitled “Hydrogenics Corporation v. American Power Conversion Corporation, Civil Action 09-11947.”  Under the terms of the settlement, APC paid the Corporation $1.2 million and both parties terminated all pending claims with regard to this matter.
 
·  
On May 21, 2010, the Corporation entered into separate settlement agreements with each of Alpha Capital Anstalt (“Alpha”) and Iroquois Master Fund Ltd. (“Iroquois”), regarding previously disclosed litigation and disputes. Under the terms of each settlement agreement, the Corporation issued 100,000 common shares to each of Alpha and Iroquois on a private placement basis in the United States to settle their claims.  The total issuance of 200,000 common shares represented approximately 4.76% of the Corporation’s equity in aggregate at June 30, 2010.  The settlement contained no admission of wrongdoing by the Corporation, its officers and directors. Following the receipt of the advice of counsel, the Board of Directors unanimously approved the settlement and concluded the settlement to be in the best interests of the Corporation. This resulted in an $0.8 million charge to litigation settlements. Under the terms of each settlement agreement, Hydrogenics filed with the U.S. Securities and Exchange Commission a registration statement on Form F-3 covering the resale of the 200,000 common shares issued to Alpha and Iroquois.
 
Other Finance Losses for 2012 were $0.4 million, compared to other finance losses of $0.3 million in 2011. This change is primarily the result of a $0.1 million change in the fair value of outstanding and exercised warrants (at the time of exercise) driven by an increase in our share price. Other Finance Losses for 2011 were $0.3 million, compared to other finance gains of $2.4 million in 2010. This change is primarily the result of: (i) a $2.0 million change in the fair value of outstanding warrants driven by an increase in our share price; and (ii) a $0.8 million increase in the present value of repayable government contributions.
 
 
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Hydrogenics Corporation

 
Segment Loss for 2012 was $6.2 million, an increase of $0.2 million compared to 2011 resulting from the increase in SG&A expenses of $0.4 million and the increase in other finance losses of $0.1 million, as noted above, offset by small decreases in other items in Finance income (loss), net. Segment Loss for 2011 was $6.0 million, an increase of $3.2 million compared to 2010 resulting from the decrease in other finance gains and the absence of $0.4 million of litigation settlement recoveries.
 
Financial Condition
A discussion of the significant changes in our consolidated balance sheets

As at December 31
 
(Thousands of US dollars)
 
               
Change
 
   
2012
   
2011
    $       %  
Cash, cash equivalents, restricted cash and short-term investments
  $ 16,802     $ 9,960       6,842       69 %
Trade and other receivables
    5,615       4,151       1,464       35 %
Inventories
    12,213       9,315       2,898       31 %
Trade and other payables
    11,946       9,986       1,960       20 %
Provisions (current and non-current)
    1,808       1,654       154       9 %
Unearned revenue (current and non-current)
    20,173       5,144       15,029       292 %
Warrants
    1,545       1,525       20       1 %
Other non-current liabilities
  $ 2,384     $ 1,979       405       20 %
 
Cash, cash equivalents and restricted cash were $16.8 million, an increase of $6.8 million or 69%. Refer to Item 5, Operating and Financial Review and Prospects - Liquidity and Capital Resources.
 
Trade and other receivables were $5.6 million, an increase of $1.5 million or 35% reflecting an increase in revenues as well as later timing of delivery on orders, compared to December 31, 2011, resulting in a greater proportion of receivables remaining outstanding at December 31, 2012.
 
Inventories were $12.2 million, an increase of $2.9 million or 31% reflecting increased purchases and work-in-progress for orders intended for delivery in early 2013.
 
Trade and other payables were $11.9 million, an increase of $2.0 million or 20% reflecting: (i) an increase in amounts payable for purchases of inventory; (ii) an increase in liabilities for deferred compensation plans indexed to our share price; and (iii) an increase in accrued payroll and related compensation.
 
Provisions were $1.8 million, an increase of $0.2 million or 9% reflecting increased revenues.
 
Unearned revenues were $20.2 million, an increase of $15.0 million or 292% reflecting deposits received on increased order bookings.
 
Warrants were $1.5 million, consistent with 2011 as a result of an increase in the fair value resulting from the increase in our share price, offset by the exercise of 82,500 Series A warrants.
 
Other non-current liabilities were $2.4 million at December 31, 2012 an increase of $0.4 million or 20%. The increase primarily reflects a $0.8 million increase in long-term debt as a result of the loan agreement with the Province of Ontario’s Ministry of Economic Development, Strategic Jobs and Investment Fund, partially offset by a $0.3 million decrease in the value of our post-retirement benefit liability, and a less than $0.1 million decrease in the value of repayable government contributions discussed below
 
Included in other non-current liabilities is $0.7 million to reflect the Corporation’s estimate of the fair value of the obligation owing to Industry Canada under the terms of a 2011 settlement agreement between the Corporation and Industry Canada.  Under the terms of the agreement, the Corporation agreed to pay up to CA$2.3 million in full and final settlement of all claims in connection with an agreement originally entered into in 1998 by Stuart Energy Systems Corporation (“Stuart Energy”), a wholly owned subsidiary of the Corporation until October 27, 2009, and Technologies Partnerships Canada, a program of Industry Canada. Pursuant to the settlement agreement, the Corporation will pay a total of CA$1.5 million to Industry Canada in quarterly instalments, commencing January 2011 and continuing until September 2017. An additional payment of 3.0% of the net proceeds of all equity instrument financing transactions completed by the Corporation on or before September 30, 2017 or the sum of CA$0.8 million, whichever will be the lesser amount, will also be paid to Industry Canada.
 
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Hydrogenics Corporation

 
Summary of Quarterly Results
 
A summary view of our quarterly financial performance
 
The following table highlights selected financial information for the eight consecutive quarters ended December 31, 2012.
 
(Thousands of US dollars - except per share amounts)
 
   
2012
     
2011
   
Prepared under IFRS accounting standards
    Q4       Q3       Q2       Q1       Q4       Q3       Q2       Q1  
Revenues
  $ 9,926     $ 7,897     $ 8,259     $ 5,724     $ 7,632     $ 4,932     $ 3,881     $ 7,387  
Gross Profit
    1,310       1,658       1,472       805       2,071       883       1,159       1,375  
Percentage of Revenues
    13 %     21 %     18 %     14 %     27 %     18 %     30 %     19 %
Adjusted EBITDA 1
    (2,649 )     (3,168 )     (2,332 )     (3,093 )     (1,316 )     (1,894 )     (2,110 )     (2,916 )
Net Loss
    (3,279 )     (3,074 )     (3,145 )     (3,181 )     (1,182 )     (1,764 )     (2,181 )     (4,661 )
Net Loss Per Share (Basic and Fully Diluted)
    (0.42 )     (0.40 )     (0.42 )     (0.48 )     (0.18 )     (0.27 )     (0.36 )     (0.85 )
Weighted Average Common Shares Outstanding
    7,724,427       7,688,197       7,562,012       6,605,648       6,605,491       6,604,249       5,999,347       5,494,230  

Note:
 
1.
Adjusted EBITDA is a Non-IFRS measure. See Item 5 – Operating and Financial Review and Prospects – Reconciliation and Definitions  of non-GAAP measures.
 
In the first quarter of 2012, our net loss decreased by $1.5 million ($0.37 per common share) compared to the first quarter of 2011 reflecting a $1.6 million increase in other finance gains and losses net. The change in other finance gains and losses net, primarily reflects the lack of a $1.4 million loss incurred during the first quarter of 2011 resulting from an increase in the fair value of outstanding warrants, which can be settled in cash at the option of the holder. In the first quarter of 2012, there was a $0.2 million gain resulting from a decrease in the fair value of outstanding warrants. This is partially offset by a $0.2 million increase in adjusted EBITDA loss attributable to decreased revenues and gross profit.
 
In the second quarter of 2012, our net loss increased by $1.0 million ($0.06 per common share) compared to the second quarter of 2011.  This increase primarily reflects a $0.4 million increase in the fair value of outstanding warrants, as well a $0.2 million increase in the net present value of repayable government assistance, and a $0.2 million increase in adjusted EBITDA loss attributable to lower gross profit in the quarter.
 
In the third quarter of 2012, our net loss increased by $1.3 million ($0.13 per common share) compared to the third quarter of 2011 primarily as a result of a $1.2 million increase in adjusted EBITDA loss attributable to  planned increases in research and development efforts focused on next-generation energy storage product development, costs for higher marketing and commercial activities as well as compensation costs arising from improved business performance, partially offset by an increase in gross profit.
______________________
1 EBITDA is a Non-IFRS measure. See Item 5 – Operating and Financial Review and Prospects – Reconciliation and Definitions of non-GAAP measures.
 
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Hydrogenics Corporation

 
In the fourth quarter of 2012, our net loss increased by $2.1 million ($0.24 per common share) compared to the fourth quarter of 2011.   A discussion of the key items is as follows;
 
·  
Revenues increased $2.3 million, or 30%, reflecting increased revenues in our OnSite Generation business unit driven by growth in industrial, fueling and renewable energy markets in the prior year and in our Power Systems business unit reflecting increased order bookings driven by the award of a contract for integrated power propulsion systems for an OEM as well as growth in backup power markets, mobility markets and energy storage/grid stabilization markets.
 
·  
Gross profit was $1.3 million (13% of revenues) compared to $2.1 million (27% of revenues), reflecting increased revenues partially offset by decreased gross margin as a percentage of revenue resulting from increased material costs. Cost reduction efforts are continuing through supply chain management and product design innovation in order to restore margins to target levels.
 
·  
SG&A expenses were $3.1 million, a decrease of $0.8 million or 20% associated to a decrease in the value of our post-retirement benefit liability due to a revaluation totalling $0.2 million as well as increased efforts on cost reduction.
 
·  
R&D expenses were $1.0 million, an increase of $1.3 million or 433% from a net recovery of $0.3 million in 2011. The net recovery in 2011 was primarily the result of $1.3 million of research and product development funding resulting from the receipt of the first disbursement under the loan agreement with the Province of Ontario’s Ministry of Economic Development, Strategic Jobs and Investment Fund. This disbursement was tied to qualified expenses which were incurred in previous quarters. In the fourth quarter of 2012, research and product development funding totaled $0.2 million. Also primarily contributing to the increase is $0.5 million in additional R&D expenses incurred primarily as a result of increased efforts on next-generation energy storage product development.
 
The information in this section of our annual report was obtained from our quarterly unaudited consolidated financial statements, which are denominated in US dollars and have been prepared in accordance with IFRS. This information is, in the opinion of management, prepared using accounting policies consistent with the audited consolidated financial statements and includes all adjustments necessary for the fair presentation of the results of the interim periods. We expect our operating results to vary significantly from quarter to quarter and they should not be relied on to predict future performance.
 
Reconciliation and Definition of Non-IFRS Measures
 
A description, calculation, and reconciliation of certain measures used by management
 
Non-IFRS financial measures, including earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) and cash operating expenses 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. Accordingly, we are presenting Adjusted EBITDA and cash operating expenses in this MD&A to enhance the usefulness of our MD&A. In accordance with Canadian Securities Administration Staff Notice 52-306, we have provided reconciliations of our non-IFRS financial measures to the most directly comparable IFRS number, disclosure of the purposes of the non-IFRS measure, and how the non-IFRS measure is used in managing the business.
 
Earnings Before Interest, Taxes, Depreciation and Amortization
 
We report Adjusted EBITDA because it is a key measure used by management to evaluate the performance of business units and the Corporation. Adjusted EBITDA is a measure commonly reported and widely used by investors as an indicator of a company’s operating performance and ability to incur and service debt, and as a valuation metric. The Corporation believes Adjusted EBITDA assists investors in comparing a company’s performance on a consistent basis without regard to depreciation and amortization, which are non-cash in nature and can vary significantly depending on accounting methods or non-operating factors, such as historical cost.
 
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Hydrogenics Corporation

 
Adjusted EBITDA is not a calculation based on IFRS and should not be considered an alternative to operating income (loss) or net income (loss) in measuring the Corporation’s performance, nor should it be used as an exclusive measure of cash flow, because it does not consider the impact of working capital growth, capital expenditures, debt principal reductions and other sources and uses of cash, which are disclosed in the consolidated statements of cash flows. Investors should carefully consider the specific items included in our computation of Adjusted EBITDA. While Adjusted EBITDA has been disclosed herein to permit a more complete comparative analysis of the Corporation’s operating performance relative to other companies, 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 is a reconciliation of Adjusted EBITDA with net loss. Adjusted EBITDA is regularly reported to the chief operating decision maker and corresponds to the definition used in our historical quarterly discussions.
 
Adjusted EBITDA
(Thousands of US dollars)
                 
   
2012
   
2011
   
2010
 
Net loss
  $ (12,679 )   $ (9,788 )   $ (6,548 )
Finance loss (income)
    572       510       (2,366 )
Litigation settlement
                    (437 )
Depreciation of property, plant and equipment
    823       880       899  
Amortization of intangible assets
    47       70       96  
Other losses
    (5 )     92       102  
Income tax expense
    -       -       3  
Adjusted EBITDA
  $ (11,242 )   $ (8,236 )   $ (8,251 )
 
Cash Operating Costs
 
We report cash operating costs because it is a key measure used by management to measure the fixed operating costs required to operate the ongoing business units of the Corporation. The Corporation believes cash operating costs are a useful measure in assessing our fixed operating costs.
 
Cash operating costs is not based on IFRS and should not be considered an alternative to loss from operations in measuring the Corporation’s performance, nor should it be used as an exclusive measure of our operating costs because it does not consider certain stock-based compensation expenses, which are disclosed in the consolidated statements of operations. Investors should carefully consider the specific items included in our computation of cash operating costs. While cash operating costs were disclosed herein to permit a more complete comparative analysis of the Corporation’s cost structure relative to other companies, 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 is a reconciliation of cash operating costs with loss from operations. Cash operating costs are regularly reported to the chief operating decision maker and correspond to the definition used in our historical quarterly discussions.
 
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Hydrogenics Corporation


Cash operating costs
(Thousands of US dollars)
                 
   
2012
   
2011
   
2010
 
Loss from operations
  $ 12,107     $ 9,278     $ 8,911  
Add: Gross margin
    5,245       5,488       5,426  
Add: Other gains (Less: Other losses)
    5       (92 )     (102 )
Add: Litigation settlement
    -       -       437  
Less: Stock-based compensation
    (1,298 )     (1,425 )     (243 )
Less: Depreciation of property, plant and equipment
    (823 )     (880 )     (899 )
Less: Amortization of intangible assets
    (47 )     (70 )     (96 )
Cash operating costs
  $ 15,189     $ 12,299     $ 13,434  
 
Impact of inflation

None.

Impact of Foreign Currency Fluctuations
For information regarding the impact of foreign currency fluctuations on our Company, see “Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – Foreign Currency Risk” and “Note 4 – Risk Management Arising from Financial Instruments – Foreign Currency Risk” to our consolidated financial statements, which can be found on page F-41 of this form, and is incorporated by reference herein.  We currently have limited currency hedging through financial instruments. We carry a portion of our short-term investments in Canadian dollars and euros.
 
Governmental Policies
For information regarding the potential impact of changes in governmental policies on the Company, see “Item 3.  Key Information – Risk Factors – Risk Factors Related to Our Business and Industry.”

Liquidity and Capital Resources
 
A discussion of our cash flow, liquidity, credit facilities and other disclosures
 
The following section explains how we manage our cash and capital resources to carry out our strategy and deliver results.
 
Cash Used in Operating Activities
 
 (Thousands of US dollars)
 
Years ended December 31
    Favourable  
   
2012
   
2011
   
(Unfavourable)
 
Net Loss For the Year
  $ (12,679 )   $ (9,788 )   $ (2,891 )     (30 )%
(Increase) decrease in restricted cash
    (1,607 )     (1,067 )     540       (51 )%
Changes in Non-cash Working Capital
    12,328       4,544       7,784       171 %
Other Items Not Affecting Cash
    897       1,910       1,015       53 %
Cash Used in Operating Activities
  $ (1,063 )   $ (4,401 )   $ 3,338       76 %
 
Changes in cash used in operating activities in 2012 compared to 2011 are discussed below.
 
·  
Net loss increased $2.9 million or 30% as described above in Item 5, “Operating and Financial Review and Prospects - Operating Results”.
 
 
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Hydrogenics Corporation

 
·  
Changes in non-cash working capital improved $7.8 million as described above Item 5, “Operating Review and Prospects - Financial Condition”.
 
·  
Other items decreased by $1.0 million or 53%. This decrease is primarily the result of; (i) a $0.8 million decrease of foreign exchange losses; (ii) a $0.2 million decrease in stock-based compensation; (iii) a $0.1 million decrease in depreciation; (iv) a $0.1 million increase in research and product development funding related to the loan agreement with the Province of Ontario’s Ministry of Economic Development, Strategic Jobs and Investment Fund (the proceeds received (net of transaction costs) is disclosed in Cash Provided By (Used in) Investing Activities below); partially offset by (v) a $0.1 million increase in accreted non-cash interest.
 
At current operating levels, we anticipate consuming between $5.0 million and $7.0 million of cash in 2013 to fund our anticipated net losses, non-cash working capital requirements and capital expenditures.  In the event we are successful in securing orders in excess of our base case revenue outlook, our cash requirements may increase.
 
The Corporation’s ability to generate profits and related positive operating cash flows will impact our estimate. There are various uncertainties affecting the Corporation’s revenues, including the current market environment, the level of sales orders, the adoption of new technologies by customers, the continuing development of products by the Corporation, price competition, and the ability of customers to finance purchases.  In addition, the Corporation also requires additional funding in the form of debt or equity and there are uncertainties surrounding the Corporation’s ability to access additional capital, including the volatility in prevailing economic conditions in recent months and years.
 
The Corporation’s strategy to mitigate these risks and uncertainties is to execute a business plan aimed at increasing market penetration to achieve forecasted revenues, improve operating cash flows, continuing to invest in research and product development, entering into complementary markets, improving overall gross margins, and securing additional financing to fund its operations as needed.  However, the success of these initiatives cannot be assured.
 
See also the risks related to our financial condition contained in “Item 3. Key Information – Risk Factors.”
 
Cash Provided By (Used in) Investing Activities
(Thousands of US dollars)
           
   
2012
   
2011
   
Change
 
Cash Used in Investing Activities
  $ 400     $ 909     $ 509       56 %
 
Cash used in investing activities was $0.4 million in 2012, a decrease of $0.5 million or 56% compared to cash used in investing activities of $0.9 million in 2011. This increase is primarily the result of a $0.5 million decrease in capital expenditures.
 
Cash Provided By Financing Activities
(Thousands of US dollars)
           
   
2012
   
2011
   
Change
 
Cash Provided By Financing Activities
  $ 6,391     $ 5,575     $ 816       15 %
 
Cash provided by financing activities was $6.4 million in 2012, a decrease of $0.8 million compared to 2011.  Cash provided by financing activities for 2011 reflects; (i) $5.2 million of net proceeds received from investments in common shares and exercise of warrants; (ii) $1.6 million of proceeds received from the first disbursement under the loan agreement with the Province of Ontario’s Ministry of Economic Development, Strategic Jobs and Investment Fund; partially offset by (iii) $0.3 million in repayments of government contributions.
 
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Hydrogenics Corporation

 
Cash provided by financing activities was $5.6 million in 2011, a decrease of $2.7 million compared to 2010.  Cash provided by financing activities for 2011 reflects; (i) $4.6 million of net proceeds received from investments in common shares and exercise of warrants; (ii) $1.4 million of proceeds received from the first disbursement under the loan agreement with the Province of Ontario’s Ministry of Economic Development, Strategic Jobs and Investment Fund; partially offset by (iii) $0.3 million in repayments of government contributions; and (iv) $0.1 million in repayments of the post-retirement benefit liability.
 
Credit Facilities
 
In order to better manage our short-term cash requirements, we regularly utilize a credit facility with Dexia Bank (“Dexia”), a Belgian based financial institution. At December 31, 2012, we had entered into operating lines of credit for up to 7.9 million Euro, or the US equivalent of $10.4 million (2011 - $7.1 million).
 
Pursuant to the terms of the credit facility, Hydrogenics Europe NV (the “Borrower”), a wholly owned Belgian based subsidiary, may utilize the facility for the issuance of standby letters of credit and letters of guarantee up to 7.9 million Euro. The Borrower may also borrow a maximum of 75% of the value of awarded sales contracts, approved by the Belgian financial institution, to a maximum of 0.75 million Euro, provided that sufficient room exists under the overall facility limit of 7.9 million Euro. The Borrower may also borrow up to 1.25 million Euro for general business purposes, provided sufficient limit exists as the overall facility remains at 7.9 million Euro at December 31, 2012. At December 31, 2012, the amount of the available lines of credit was reduced by 6.2 million Euro, the amount of the outstanding standby letters of credit and letters of guarantee, issued under the facility by the Belgian financial institution. At December 31, 2012, the Corporation had availability of 1.7 million Euro or the US equivalent of $2.2 million (December 31, 2011 - $2.1 million).

The credit facility bears interest at a rate of EURIBOR plus 1.45% per annum and is secured by a 1 million Euro secured first charge covering all assets of the Borrower. The credit facility contains a negative pledge precluding the Borrower from providing security over its assets. Additionally, the Borrower is required to maintain a solvency covenant, defined as equity plus current account divided by total liabilities of not less than 25%, and ensure that its intercompany accounts us do not fall below a defined level. At December 31, 2012, the Borrower was in compliance with these covenants.

Within the Power Systems business segment, we have an additional $0.9 million (December 31, 2011 - $0.7 million) of available operating lines of credit, for which $0.9 million is outstanding, representing standby letters of credit and letters of guarantee issued by the financial institution. At December 31, 2012, the Corporation had availability of $nil (December 31, 2011 - $0.2 million).
 
Other loan facilities
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 CA$6.0 million.  Eligible costs must be incurred between October 1, 2010 and September 30, 2015.

The maturity date of the loan is ten years from the date of the first disbursement. The loan will be interest free for the first five years, commencing on the first day of the month following the date of the first disbursement, if certain criteria are met, such as the retention and creation of a specified number of jobs. After this five-year period, the loan will bear interest at a rate of 3.67%, if all criteria have been met, and will require repayment at a rate of 20% per year of the outstanding balance for the next five years. If the criteria are not met, the loan will bear interest at a rate of 5.67% per annum for the entire term of the loan.
 
We drew CA$1.6 million on the loan during the year ended December 31, 2012. During 2011 we drew CA$1.5 million. The remaining CA$2.9 million remains undrawn at December 31, 2012 and at February 28, 2013. The loan is collateralized by a general security agreement covering our assets. Additionally, we are required to maintain a minimum balance of cash and cash equivalents.  At December 31, 2012 and February 28, 2013, we were in compliance with these covenants.
 
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Hydrogenics Corporation


Financial Instruments, Long-term Debt, Commitments and Contingent Off-balance Sheet Arrangements

The Corporation’s financial instruments and the nature of the risks, existing or potential, are as set out in the following table:
 
 
Risk
     
Market
Financial Instruments
Credit
Liquidity
Currency
Interest Rate
Cash and cash equivalents and restricted cash
X
 
X
X
Short-term investments
X
 
X
X
Trade and other receivables
X
 
X
 
Trade and other payables
 
X
X
 
Repayable government contributions and long-term debt
 
X
X
 
 
Credit risk
 
Credit risk arises from the potential that a counterparty will fail to perform its obligations. Credit risk associated with cash and cash equivalents, restricted cash and short-term investments is minimized by limiting net exposure to any one jurisdiction or financial institution and ensuring financial assets are placed for short periods of time, generally less than 90 days, with governments, well-capitalized financial institutions and other creditworthy counterparties. Ongoing reviews are performed by management to evaluate changes in the status of financial institutions and counterparties.
 
Credit risk associated with trade and other receivables is minimized by carrying out a detailed review and approval by senior management of credit extensions to customers taking into account customer history, any amounts that are past due and any available relevant information about the customers’ liquidity and potential going concern problems.  In addition, progress payments are generally required by customers as contracts are executed, which generally results in between 35% and 100% of a contract’s value being collected before shipments are made.  Where credit terms are extended beyond shipment, terms are generally not granted beyond 60 days. In addition, certain contracts are insured under an accounts receivable and contracts policy.  We also maintain provisions for potential credit losses. Any such losses to date have been insignificant.
 
Currency risk
 
Foreign currency risk arises because of fluctuations in exchange rates. We conduct a significant portion of our business activities in currencies other than the functional currency of the parent company (US dollars) and the functional currency of our self-sustaining subsidiary (euro).  This primarily includes Canadian dollar transactions at the parent company and US dollar transactions at our self-sustaining subsidiary.
 
Our objective in managing foreign currency risk is to minimize our net exposures to foreign currency cash flows by converting cash balances into foreign currencies to the extent practical to match other foreign currency obligations. Our foreign exchange risk management program includes the use of foreign exchange currency forward contracts to fix the exchange rates on short-term Canadian dollar and euro denominated transactions and commitments.
 
Interest rate risk
 
Interest rate risk arises because of the fluctuation in market interest rates.  We are subject to interest rate risk on our cash and cash equivalents, restricted cash and short-term investments; however, we do not have any variable rate long-term debt and, hence, are not subject to interest rate risk from borrowings.
 
Liquidity risk
 
Liquidity risk arises from our general funding needs and in the management of our assets, liabilities and optimal capital structure. We manage liquidity risk to maintain sufficient liquid financial resources to fund our commitments and obligations in the most cost-effective manner possible.
 
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Hydrogenics Corporation

 
We have sustained losses and negative cash flows from operations since our inception. At December 31, 2012, we had approximately $16.8 million of cash and cash equivalents and restricted cash. There are uncertainties related to the timing and use of our cash resources and working capital requirements. These uncertainties include, among other things, the timing and volume of commercial sales and associated gross margin of our existing products and the development of markets for, and customer acceptance of, new products.
 
Throughout 2013, we do not expect our operations to generate sufficient cash flow to fund our obligations as they come due. As such, these obligations will be funded out of existing and forecasted cash resources to the extent possible.
 
As a result of the expected use of our existing cash resources, we anticipate requiring additional funding to meet our anticipated growth objectives beyond 2013. Such funding may be in the form of debt or equity or a hybrid instrument, depending on the needs of the investor.  We are also pursuing additional traditional and non-traditional sources of financing. There is no assurance we will be successful in our financing efforts or that they will be sufficient.
 
Commitments
 
The following table of our material contractual obligations at December 31, 2012, sets forth the aggregate effect these obligations are expected to have on our cash flows for the periods indicated:
 
(Thousands of US dollars)
     
Payments due in
 
Operating Leases
 
2013
  $ 887  
2014
    570  
2015
    550  
2016
    441  
2017 and thereafter
    331  
    $ 2,779  
 
We do not have any material obligations under forward foreign exchange contract, guarantee contracts, retained or contingent interest in transferred assets, outstanding derivative instruments or non-consolidated variable interests.
 
Our treasury policy is to invest in high-yield monetary interest to maximize yield and safeguard capital to fund our operating requirements.
 
RESEARCH AND DEVELOPMENT
 
For information regarding our research and development policies and expenses, see “Item 5. Operating and Financial Review and Prospects – Operating Results.”
 
TREND INFORMATION
 
Current Market Environment
We are experiencing a willingness on the part of utilities and regulatory agencies to increase spending in the growing problem areas related to energy storage and grid stabilization. We also 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 and the United States, 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 and other geographies has signaled what we believe could be a significant increase in opportunities in the markets we serve.
 
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Hydrogenics Corporation

 
In addition, our agreement with CommScope lays the foundation for a strategic relationship dedicated to penetrating the large and growing market for telecom, AC, and DC backup power systems. We have already worked closely with CommScope in India, North America and Europe, and both companies see strong potential demand for power modules that address opportunities within the significantly growing backup power markets around the globe. In that vein, we are developing a broader range of products at various power levels, aiming for more attractive solutions and better economies of scale for our customers.
 
In addition, over the past few years, the Corporation has taken significant steps to reduce operating and product costs, streamline its operations and consolidated financial position. In 2011, we closed the final two tranches of the subscription agreement with CommScope for proceeds of $4.5 million and entered into a loan agreement with the Province of Ontario’s Ministry of Economic Development, Strategic Jobs and Investment Fund for up to CA$6.0 million.  In 2012, we completed a $5 million private placement offering of common shares to Enbridge.   At December 31, 2012, we maintain an order backlog of $60.0 million (December 31, 2011 - $29.1 million) spread across numerous geographical regions.
 
However, as a global corporation, we are subject to the risks arising from adverse changes in global economic conditions. Economic conditions in leading and emerging economies have been, and remain, unpredictable.  This could result in our current or potential customers delaying or reducing purchases. As we have witnessed in recent years, there is a threat of reduced sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition.
 
Delivery Outlook
We operate in various markets and in this Form 20-F, define the market in which we have a product offering, as a relevant market.  Our delivery outlook is segmented by relevant market and is subject to a number of factors that are within our control, such as product development and market engagement initiatives, as well as a number of factors beyond our control, such as macro economic conditions.  As part of our annual business planning cycle, we make a number of assumptions regarding delivery outlook in each of our relevant markets in order to best allocate our resources.
 
Set forth below is a summary assessment of those factors we anticipate will most significantly influence deliveries by relevant market as well as our anticipated level of deliveries by relevant market. We caution that readers should not place undue reliance on this assessment and refer to our forward-looking statement on page 2 of this Form 20F.
 
Relevant Market
 
Economic Activity in 2012
 
External and Corporate Specific Considerations
 
Anticipated Economic Activity in 2013
Industrial Gas
 
Revenues and orders delivered were lower than in 2011.
 
We continue to experience the impact of economic uncertainty in many of the markets where we have leadership in industrial gas (notably the Eurozone region).
 
We anticipate revenues and orders delivered will be similar to 2012.
Hydrogen Fueling Stations
 
Revenues and orders delivered were higher than in 2011.
 
Governments, particularly in the European Union, continue to support programs to accelerate the use of hydrogen fueling stations, particularly in Germany. We are continuing to dedicate resources to secure additional business.
 
We anticipate revenues and orders delivered will be higher than in 2012.
Energy Storage, Power to Gas and Ancillary Services
 
Revenues and orders delivered were higher than in 2011.
 
We delivered our first major order, a two megawatt energy storage project in Germany in late 2012.  We also entered into a strategic partnership with Enbridge to leverage our collective strengths to advance energy storage.  Energy storage is continuing to receive considerable attention throughout the world. We believe this has the potential to become a compelling market segment in 2013.
 
We anticipate revenues and orders delivered will be similar or slightly higher than in 2012.
 
 
 
 
 
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Hydrogenics Corporation

 
Backup Power
 
Revenues and orders delivered were higher than in 2011.
 
We announced our first major backup power order with our strategic partner CommScope, which we believe positions us well for these markets. We will continue to leverage our relationship and we expect further order activity in 2013.
 
We anticipate revenues and orders delivered will be higher than in 2012.
Motive/Mobile Power
 
Revenues and orders delivered were lower than in 2011.
 
Our $90 million OEM announcement will start to generate significant positive revenue in 2013.  Our system integration capability is well respected by OEMs.  We are well positioned to address market opportunities.
 
We anticipate revenues and orders delivered will be higher than in 2012.
Other Power Products
 
Progression and completion of anticipated milestones in custom projects.
 
Our expertise on custom engineering projects is well regarded by end-users. We continue to target custom engineering projects on a case by case basis.
 
We anticipate revenues and orders delivered will be higher than in 2012.
 
Industry Trends
A discussion of industry trends, by its nature, necessarily contains certain forward-looking statements.  Forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties that could cause actual results or events to differ materially from current expectations.  Please refer to the caution regarding Forward-looking statements contained in the “Forward-looking Statements” section on page 1 and “Item 3.  Key Information – Risk Factors” for a discussion of such risks and uncertainties and the material factors and assumptions related to the statements set forth in this section.
 
We anticipate our business will continue to benefit from several broad trends including: (i) high prices for oil and to a lesser extent natural gas in certain jurisdictions; (ii) increased government legislation and programs worldwide promoting alternative energy sources such as synthetic fuels, including hydrogen; (iii) increased awareness of the adverse impact of fossil fuels on our climate and environment; and (iv) the need for industrialized economies to access alternative sources of energy to reduce fossil fuel dependency.  We anticipate these trends will continue and intensify in the future, allowing the benefits of hydrogen to be further demonstrated in numerous applications. In particular, hydrogen can be generated universally from renewable power sources such as hydroelectric, geothermal, solar and wind or from low-emission sources such as biomass and nuclear.  These industry trends are discussed below.
 
High prices for oil and natural gas. In recent years, oil and to a lesser extent natural gas prices in certain jurisdictions have increased and it is anticipated that the general trend of prices will continue to rise over the long-term due to increased demand from emerging market economies such as China and India, localized supply constraints and political instability in oil producing areas.  As the cost of these commodities increases relative to the price of electricity, our electrolysis based on-site hydrogen generation products stand to become more cost competitive with other forms of hydrogen production and delivery, thereby increasing on-site generation market share.  Similarly, we expect the higher efficiency of fuel cells will make them increasingly appealing relative to conventional internal combustion engines. Supporting this, recently, there have been announcements by consortia of vehicle OEMs’ working together to launch fuel cell vehicles, as well as a recent announcement by Daimler that rather than deploy small fuel cell vehicles in 2015 on a small scale, they are going to go with larger passenger fuel cell vehicles in 2017 on a larger scale.
 
Increased government legislation and programs worldwide promoting alternative energy sources including hydrogen. In recent years, numerous governments have introduced legislation to promote and develop the use of hydrogen in energy applications as a partial response to the risks and adverse effects associated with fossil fuels.  We anticipate this interest will accelerate over time.  Recent government legislation has been proposed or passed in many jurisdictions to support renewable energy initiatives.
 
The European Union has set a series of demanding climate and energy targets to be met by 2020, known as the "20-20-20" targets. The targets are i) a reduction in EU greenhouse gas emissions of at least 20% below 1990 levels ii) to have 20% of EU energy consumption to come from renewable resources and iii) a 20% reduction in primary energy use compared with projected levels, to be achieved by improving energy efficiency. One of the significant results of these targets are that a significant amount of vehicles using diesel and gasoline fuels in the road transportation sector will be replaced with vehicles that use natural gas and hydrogen by 2020. European efforts include the European Commission (“EC”) establishing a platform to bring hydrogen and fuel cells to market and a proposed Joint Technology Initiative for public-private partnership.  The EC’s 6th Framework Programme is currently providing $2.2 billion over five years for hydrogen and fuel cell initiatives under the European Hydrogen and Fuel Cell Technology Platform.  As well, the EC has announced spending of approximately 1 billion euros per year between 2007 and 2013 as part of a European Strategic Energy Technology Plan tied to a proposed new energy policy for Europe. Hydrogen and fuel cells are included in that plan. There has been an increased commitment from German’s H2Mobility consortia to put the needed hydrogen filling stations in place to meet these targets. There have also been EU early policy statements targeting hydrogen filling stations every 300 km to ensure suitable coverage for the fuel cell vehicles intended to be brought to market.
 
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Hydrogenics Corporation

 
Additionally, several Asian countries are responding to environmental, energy, security and socio-economic concerns by introducing legislation and initiatives to promote hydrogen and fuel cell technologies.  Japan, Korea, India and China continue to invest significantly in the development and commercialization of hydrogen and fuel cells.
 
Hydrogenics is pioneering Power-to-Gas, an innovative energy conversion and storage solution using electrolysis, which will assist the government to reach their goals on the climate and energy targets.  Power-to-Gas is the three-step process of integrating renewable sources of generation by load-following, converting the surplus electricity to hydrogen or renewable gas, and leveraging the existing natural gas infrastructure for seasonal storage.  This is an energy storage solution which bridges the power grid and the gas grid to unlock new options.  It enhances the flexibility of managing the power grid and provides the means to capitalize on the vast potential of alternative sources of generation to produce a local source of renewable gas to de-carbonize the gas system.  As the existing fleet of CCGT (Combined Cycle Gas Turbine) generators contract for this renewable gas, the clean but intermittent characteristics of renewable generation are transformed into a dispatchable renewable resource when and where it is needed.  Since the hydrogen or substitute natural gas is stored in the natural gas system, the discharge of stored energy is not restricted to the site of charging like other technologies such as pumped hydro storage and CAES (Compressed Air Energy Storage).  As a result, Power-to-Gas plant can be optimally sited at a point of congestion on the power grid to alleviate the problem

Increased awareness of the adverse impact of fossil fuels on our climate, environment and air quality.  Governments worldwide continue to enact legislation aimed at curtailing the impact of fossil fuels on the environment. In addition to well established protocols such as the Kyoto Accord and the Canada Clean Air Act there have been recent initiatives in various jurisdictions which continue to reinforce that the impact of fossil fuels on the environment must be reduced. De-carbonization for urban transit remains a high priority in many urban centers around the world. Certain urban centers, such as Beijing are recording their highest ever levels of pollutants emphasizing the growing awareness of the adverse impact of fossil fuels. In 2012 the EU brought out its airline carbon tax and enacted legislation requiring airlines to pay a carbon emissions charge for all flights landing in the EU based on the amount of carbon emitted from the time   in India all telecom companies have been mandated to ensure that that at least 50% of all rural towers and 20% of the urban towers are powered by hybrid power by 2015. Further 75% of rural towers and 33% of urban towers are to be powered by hybrid power by 2020.decree forcing all telecom operators in the country to reduce their use of fossil fuel power for telecom towers by 50%.
 
The need for industrialized economies to access alternative sources of energy to reduce their dependency on fossil fuels. Many industrialized nations, including some of the fastest growing economies, import most of the fossil fuels consumed in their respective economies. This creates a dependency on external sources and exposes them to significant trade imbalances. In addition, the earthquake and resulting tsunami in Japan has caused many governments to consider reducing dependency on nuclear power plants and consider alternative power sources such as hydrogen. The growing concern over volatile climate occurrences as a result of Hurricane Sandy in the United States, and earthquakes in Iran, Afghanistan, and the Philippines, is driving the desire for longer backup power requirements. While conventional backup systems are adequate for several hours of backup, the world has seen an increase of incidences requiring the ability to maintain power over the course of several days, and we believe hydrogen fuel cell power is ideal for such applications.
 
 
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Hydrogenics Corporation

 
For stationary power, in the United States alone, approximately 400,000 megawatts of new electricity generating capacity is forecast to be needed by 2020 to meet growing demand and to replace retiring generating units.  The existing electricity transmission and distribution grid in the United States is overburdened in many regions.  By locating power generation products close to where the power is used, known as distributed generation, it is possible to bypass the overloaded transmission and distribution grid.  Hydrogen and fuel cell technologies are well suited to a distributed generation model thereby providing an emerging opportunity for hydrogen fuel cells and hydrogen powered internal combustion engines to provide stationary generating capacity.
 
China and India also have growing concerns about energy supply and security, which are leading those countries to pursue initiatives promoting hydrogen and energy efficiency programs. Further, as the introduction of automobiles continues to accelerate in India and China, such dependency on fossil fuels may become increasingly unsustainable, creating an opportunity for hydrogen and fuel cells.
 
The above noted factors have lead to increased interest from progressive electric power and gas utilities throughout the world seeking a robust and cost-effective solution for renewable and excess energy storage and the provision of ancillary services such as grid balancing and load profiling.
 
Additional Trends Information
For additional trends information, see “Item 3. Key Information – Risk Factors” and “Item 4. Information of the Company – Business Overview – Our Strategy” in this Form 20-F.
 
OFF-BALANCE SHEET ARRANGEMENTS

Contingent 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.
 
We have entered into indemnification agreements with our current and former directors and officers to indemnify them, to the extent permitted by law, against any and all charges, costs, expenses, and amounts paid in settlement and damages incurred as a result of any lawsuit or any other judicial, administrative or investigative proceeding in which they are involved as a result of their services. Any such indemnification claims will be subject to any statutory or other legal limitation periods. 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. We have purchased directors’ and officers’ liability insurance. No amount has been recorded in the consolidated financial statements with respect to these indemnification agreements, as we are not aware of any claims.
 
In the normal course of operations, we may 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.
 
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Hydrogenics Corporation

 
As of December 31, 2012 
 
Payments due by period
 
(Thousands of US dollars)
                             
Contractual Obligations
 
Total
   
Less than
1 year
   
1 – 3 years
   
3 - 5 years
   
More than
5 years
 
Long-Term Debt Obligations
    5,003       489       235       1,534       2,745  
Capital (Finance) Lease Obligations
    -       -       -       -       -  
Operating Lease Obligations
    2,779       887       1,561       331       -  
Purchase Obligations
    -       -       -       -       -  
Other Long-Term Liabilities Reflected on the Company’s Balance Sheet under IFRS
    -       -       -       -       -  
Total
    7,782       1,376       1,796       1,865       2.745  
 
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
DIRECTORS AND SENIOR MANAGEMENT
 
Directors
The following table sets forth information with respect to our directors as of March 8, 2013:
 
Name and Province
or State and Country
of Residence
 
Title
 
Director or
Executive Officer Since
Douglas Alexander (1)
Ontario, Canada
 
Chairman of our Board of Directors
 
2006
         
Michael Cardiff (1) (2)
Ontario, Canada
 
Director
 
2007
         
Joseph Cargnelli
Ontario, Canada
 
Chief Technology Officer and Director
 
1996
         
Henry J. Gnacke(3)
Michigan, U.S.A.
 
Director
 
2008
         
Donald Lowry
Alberta, Canada
 
Director
 
2000 – 2007
2013
         
Norman M. Seagram (1) (4)
Ontario, Canada
 
Director
 
2000
         
Daryl Wilson
Ontario, Canada
 
President and Chief Executive Officer and Director
 
2006
 
Notes:
1.
 
Member of the Audit Committee and the Human Resources and Corporate Governance Committee.
2.
 
Chairman of the Human Resources and Corporate Governance Committee.
3.
 
Member of the Human Resources and Corporate Governance Committee.
4.
 
Chairman of the Audit Committee.
 
Each director will hold office until the next annual and special meeting of shareholders, or until his successor is duly elected or appointed.
 
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Douglas S. Alexander, Chairman of our Board of Directors.  Mr. Alexander joined our Board of Directors in May 2006 and has served as Chairman of our Board of Directors since May 2009. Mr. Alexander is a Director and member of the Audit Committee of Critical Outcome Technologies Inc., and Equitable Life Insurance Company and has served as the Chief Financial Officer of various Canadian public companies for 15 years. Mr. Alexander was formerly lead director and chair of the Audit Committee of Saxon Financial Inc. Mr. Alexander served as a director of Stuart Energy from 2003 to January 2005. From 1999 to 2004, Mr. Alexander was Executive Vice President and Chief Financial Officer of Trojan Technologies Inc., an international environmental high technology company. Mr. Alexander’s financial expertise and corporate experience including direct responsibility for the Human Resource function while at Trojan Technologies Inc., in addition to his extensive knowledge of the business, assist him in assessing appropriate executive compensation based on the Corporation’s performance. Mr. Alexander is a Chartered Accountant and is a member of the Institute of Chartered Accountants in Scotland and Ontario.  He is also a Chartered Director, having graduated from the Director’s College, a joint venture between McMaster University and the Conference Board of Canada.  Mr. Alexander resides in Ontario, Canada.
 
Michael Cardiff, Director.  Mr. Cardiff joined our Board of Directors in November 2007. Mr. Cardiff is the Chief Operating Officer of SAP Canada. Prior to holding that position, Mr. Cardiff held numerous senior positions in a number of technology companies including large multinationals such as EDS and IBM as well as startup companies such as Fincentric, Convergent Technologies, Tandem, and Stratus Computer. Mr. Cardiff is currently a director of Medic Alert. Mr. Cardiff has also served as a director of Burntsand Inc., Descartes Systems Group, Husky Injection Molding Systems, Solcorp, Visible Genetics, Spectra Security Software Visible Decisions and the Toronto Film Festival, Roy Thomson Hall.  Mr. Cardiff has a strong base of experience in executive compensation and the experience necessary to guide the Human Resource and Corporate Governance Committee on its compensation policies and practices.  Mr. Cardiff has received many awards including “A Canadian Export Life Time Achievement Award.” In 1998, Mr. Cardiff was named one of Canada’s “Top 40 Under 40,” recognizing him as one of the nation’s most successful young leaders. Mr. Cardiff is a member of, and holds the ICD.d designation from the Institute of Corporate Directors. Mr. Cardiff resides in Ontario, Canada.
 
Joseph Cargnelli, Chief Technology Officer and Director.  Mr. Cargnelli is one of our founders and served as a director from January 1996 to January 2005, when he resigned in connection with the closing of the Stuart Energy acquisition. Mr. Cargnelli was re-elected at the meeting of shareholders on May 17, 2005. Mr. Cargnelli served as our Treasurer from January 1996 until July 2000.  Mr. Cargnelli was appointed as our Vice President, Technology in July 2000.  His title was changed to Chief Technology Officer in April 2003.  Mr. Cargnelli earned both a Masters of Applied Science degree in Mechanical Engineering and a Bachelor of Applied Science degree in Mechanical Engineering from the University of Toronto.  From April 1992 to April 1993, Mr. Cargnelli served as a Research Engineer with the Laboratory of Advanced Concepts in Energy Conversion Inc., a laboratory engaged in the research, development and demonstration of alkaline fuel cells and hydrogen storage methods.  Mr. Cargnelli is a member of the Professional Engineers of Ontario.  Mr. Cargnelli resides in Ontario, Canada.
 
Henry J. Gnacke, Director.  Mr. Gnacke joined our Board of Directors in May 2008. Mr. Gnacke is a Director at Variety Foods Services Inc. He is also a senior advisor to Mobias Motors and is currently a Senior Director at OHorizons LLC., a corporate advisory firm, specializing in acquisitions and operations in the Automotive sector. Formerly, Mr. Gnacke was the Executive Director, Global Purchasing Supply Chain at General Motors Corporation. He was responsible for Alternative Propulsion Technologies and specifically Fuel Cell propulsion and storage systems. Mr. Gnacke has over 30 years of experience and has held numerous positions at General Motors Corporation, including several international assignments in the Middle East, Asia and Europe. As a senior representative of General Motors Corporation, Mr. Gnacke is well positioned to provide guidance in making compensation related decisions. Mr. Gnacke is the nominee of General Motors Corporation in connection with our strategic alliance with General Motors Corporation. Mr. Gnacke is a Chartered Director (C.Dir), having graduated from Director’s College in 2012. Mr. Gnacke resides in Michigan, U.S.A.
 
Don Lowry, Director.  Mr. Lowry was appointed to the Board of Directors in January 2013.  Mr. Lowry is currently President and Chief Executive Officer of EPCOR Utilities Inc., an Edmonton, Alberta based utility that owns and operates electrical distribution networks and water and wastewater treatment facilities in Alberta, Arizona and New Mexico.  Mr. Lowry is also Board Chair of Capital Power Corporation and Canadian Oil Sands Limited and is a director of the Canadian Electricity Association and the Telus Community Investment Board. Mr. Lowry was previously a Board member at Hydrogenics from 2000-2007.
 
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Hydrogenics Corporation

 
Norman M. Seagram, Director.  Mr. Seagram has served as Chairman of our Board of Directors from July 2000 to December 2006, as Lead Director from January 2007 to September of that year, and subsequently as Chairman until May 2009. Mr. Seagram was President of Sportsco International LP (SkyDome) from February 2001 to March 2003.  From September 1996 to May 1997, Mr. Seagram was President and Chief Executive Officer of Molson Inc. (now Molson Coors), a company he had previously served for 24 years in a variety of senior management positions.  From October 1992 to August 1996, Mr. Seagram was Chairman and Chief Executive Officer of Air Liquide Canada, Inc., a producer of industrial gases.  Mr. Seagram is Chairman of the Toronto Symphony Foundation, a trustee of Trinity College School and the Toronto Symphony Foundation, and he is a director of Harbourfront Foundation.  He has served on the advisory board of the Faculty of Applied Science and Engineering, University of Toronto and INSEAD, Fontainebleau, France. He is a former director of the Toronto Economic Development Corporation (TEDCO).  In these roles, Mr. Seagram has been involved in the management and development of multi-disciplinary teams, including the determination and assessment of appropriate employee compensation. Mr. Seagram resides in Ontario, Canada.
 
Daryl Wilson, President and Chief Executive Officer and Director. Mr. Wilson was appointed President and Chief Executive Officer in December 2006. Prior to joining Hydrogenics, Mr. Wilson held senior leadership positions at Royal Group Technologies Inc., ZENON Environmental Inc., TOYOTA and DOFASCO Inc. Mr. Wilson is a Director of ATS Automation Tooling Systems Inc. In 1990, Mr. Wilson earned an MBA from McMaster University in Operations Management/Management Science. Mr. Wilson is a Professional engineer and holds a Bachelor’s degree in Chemical Engineering from the University of Toronto. Mr. Wilson is a Chartered Director (C.Dir), having graduated in 2009 from Director’s College. Mr. Wilson resides in Ontario, Canada.
 
Executive Officers
The following table sets forth information with respect to our executive officers as of March 8, 2013:
 
Name and Province
or State and Country
of Residence
 
Title
 
Director or
Executive Officer Since
Joseph Cargnelli
Ontario, Canada
 
Chief Technology Officer and Director
 
1996
         
Daryl Wilson
Ontario, Canada
 
President and Chief Executive Officer and Director
 
2006
         
Robert Motz
Ontario, Canada
 
Chief Financial Officer and Corporate Secretary
 
2012
         
Wido Westbroek
Ontario, Canada
 
Vice President Sales and Marketing
 
2011(2)
         
Filip Smeets
Hasselt, Belgium
 
General Manager, OnSite Generation
 
2011
         
Jennifer Barber(2)
Ontario, Canada
 
Former Chief Financial Officer and Corporate Secretary
 
2005
 
(1)  
Prior to Mr. Westbroek’s appointment as Vice President Sales and Marketing, he was the Vice President and General Manager, OnSite Generation
 
(2)  
Ms. Barber resigned as Chief Financial Officer and Corporate Secretary of the Company effective November 8, 2012.
 
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Hydrogenics Corporation


Robert Motz, Chief Financial Officer and Corporate Secretary. Mr. Motz joined us in 2012 in his current capacity of Chief Financial Officer and Corporate Secretary.  Mr. Motz was previously Chief Financial Officer and then Chief Executive Officer of Aeroquest International Limited from 2008-2012 (at the time a Toronto Stock Exchange (“TSX”) listed company).  Prior to his role at Aeroquest, Mr. Motz served in a senior financial leadership role at Agility Logistics, Co., AMJ Campbell Inc. and Motorola Canada Limited.  Mr. Motz is a Chartered Accountant and a Chartered Professional Accountant having received his designation in 1987.
 
Wido Westbroek, Vice President Sales and Marketing. Mr. Westbroek joined us in 2006 as Vice President, Operations of the Belgium OnSite Generation business and subsequently appointed as Vice President and General Manager for Hydrogenics Europe n.v. in 2007.  Mr. Westbroek was appointed to his current position effective August 1st, 2011. His former career, spanning 18 years, was with Powerlasers, a developer and manufacturer of unique laser welding technology and a maker of auto parts for major automotive OEMs based in Canada and the U.S. Mr. Westbroek received his Bachelor of Science in Physics at the University of Waterloo in Ontario.
 
Filip Smeets, General Manager, OnSite Generation. Mr. Smeets joined us in 2011 as General Manager of the Belgian based OnSite Generation business. Mr. Smeets was previously a General Manager with Cabot Corporation, a global performance materials company, headquartered in Boston, Massachusetts USA. During his 12 years tenure at Cabot Corporation, Mr. Smeets held increasingly responsible positions in marketing and business leadership. Mr. Smeets received his Master's degree in Chemistry from the University of Antwerp, located in Belgium.
 
Jennifer Barber, Former Chief Financial Officer and Corporate Secretary. Ms. Barber joined us through our acquisition of Stuart Energy in January 2005 and was appointed to the position of Vice President Finance and Corporate Controller in May 2005. Since taking on this position, Ms. Barber has led the finance team through a full range of financial consolidations arising from the acquisition, with the added responsibility of integrating Sarbanes-Oxley requirements into all of our financial processes and procedures. Ms. Barber was appointed Chief Financial Officer and Corporate Secretary of the Company effective July 29, 2011. Hired by Stuart Energy in 2001, Ms. Barber served as Director, Corporate Finance from 2003 onward, and prior to that as Controller. She was employed from 1997 to 2001 by PricewaterhouseCoopers LLP. Ms. Barber received Institute of Chartered Accountant accreditation in 2000. Ms. Barber resigned from the Company effective November 8, 2012
 
For information regarding the backgrounds of Mr. Cargnelli and Mr. Wilson, see “Directors” above.
 
COMPENSATION
 
As the Company reports its financial results in U.S. dollars, the following discussion is prepared showing U.S. dollars, except as otherwise noted, notwithstanding that the currencies in which the Named Executive Officers (as defined below) are paid is in Canadian dollars and euro. The average exchange rates for the year ended December 31, 2012, for the purposes of the following disclosure, are US$1 = CA$0.9996, and US$1 = 0.77euro.
 
The following compensation discussion and analysis is intended to supplement the more detailed information concerning compensation of executive officers and directors that appears in the tables that follow. Our goal is to provide a better understanding of our compensation practices and decisions made concerning the compensation payable to our executive officers and directors for 2012.
 
Elements of Executive Compensation Program
Our executive compensation program has three principal components: base salary; short-term incentive (paid in cash); and long-term, equity based incentives.
 
We believe this variable compensation encourages high performance, promotes accountability and ensures the interests of our executive officers are aligned with the interests of shareholders by linking individual performance and increases in shareholder value. Each of the components’ specified objectives are set forth below.
 
The Company also offers all employees and Named Executive Officers certain benefits, such as short-term disability income benefits, long-term disability income benefits, healthcare, dental care, survivor benefits, dependent coverage, employee life insurance, dependent life insurance, accidental death, dismemberment and specific loss insurance, which form an integral part of the total compensation offered by the Company.
 
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Base Salary
The objectives of base salary are to recognize market pay, acknowledge competencies and skills of individuals and reward individual contribution.  The annual base salary for each of our Named Executive Officers was initially determined at the time of hire based on a number of customary factors and is documented in an employment agreement provided to the executive officer (see also “Summary Compensation Table – Employment Agreements”). As Ms. Demerino was Interim Chief Financial Officer for a short period of time (18 days), the provisions of the executive compensation program did not apply to her).
 
Short-term Incentives
We provide a short-term incentive plan in which the Named Executive Officers, as well as other managers and employees participate. This incentive plan is intended to reward achievement of short-term financial performance and milestones and focus on key financial, strategic and other business objectives.  Pursuant to the short-term incentive plan, we have established layers of performance incentives up to certain percentages of base salary based on market benchmarking. In landmark years, the committee may elect to award a “stretch maximum” of 100% of base salary. The percentage that an executive is awarded is based on the achievement of corporate objectives, the achievement of business unit objectives and the achievement of individual objectives. Certain Named Executive Officers have employment agreements with us that modify our short-term incentive compensation (see “Summary Compensation Table – Employment Agreements”).
 
For 2012, the target bonuses were equal to 50% for each of President and Chief Executive Officer, Chief Financial Officer and Corporate Secretary, and Chief Technology Officer, and 100% for the Vice President Sales and Marketing, and up to 35,000 euro for the General Manager, OnSite Generation.
 
Long-term Incentives
Long-term compensation is designed to focus executives’ attention on the long-term interests of the Company and its shareholders.  In 2012, the Company implemented a new Omnibus Incentive Plan  (“Omnibus Plan”) which was approved by shareholders at the 2012 Annual and Special Meeting held on May 7, 2012.  A maximum of 660,564 Shares are available for issuance and granting of awards under the Omnibus Plan, representing 10% of the Company’s issued and outstanding Shares at that time.
 
Awards under the Omnibus Plan consist of stock options, RSUs and performance share units (“PSUs”, and together with RSUs hereinafter referred to as “Share Units”). These awards are discussed in more detail below.
 
Prior to the adoption of the Omnibus Plan in 2012, the Company had a stock option plan (the “Old Option Plan”) and an RSU plan (the “Old RSU Plan”). Upon the adoption of the Omnibus Plan, grants under these old plans have now been frozen and no further grants or awards will be made under such plans. However, the Old Option Plan and the Old RSU Plan will continue in effect for so long as and solely to the extent necessary to administer previously-granted awards that remain outstanding under such plans. See “Long-Term Incentives – Periods Prior to 2012” below for a description of the Old Option Plan and the Old RSU Plan.

Stock Options
Under the Omnibus Plan, the Board may grant stock options to any participant at any time. The exercise price for stock options will be determined by the Board, but may not be less than the fair market value of a Share (being the closing price of Shares on the TSX on the last trading day on which the Company’s Shares were traded occurring immediately prior to the applicable date, or if the Shares are not then traded on the TSX, as determined by the Board in its discretion) (the “Market Value”) on the date the stock option is granted, except in circumstances where the stock option is granted in exchange for another stock option, subject to TSX approval if required.
 
Stock options granted under the Omnibus Plan will vest and become exercisable as to one third of the stock option on each anniversary of the date of grant for the three years following the date of grant, unless otherwise specified in such participant’s option agreement.
 
Such stock options must be exercised within a period fixed by the Board that may not exceed ten years from the date of grant, except in a case where the expiry period falls during a blackout period, in which case the expiry period will be automatically extended until ten business days after the end of the blackout period. The Omnibus Plan also provides for earlier termination of stock options on the occurrence of certain events, including but not limited to, termination of a participant’s employment.
 
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Share Units
 
The Board may grant Share Units under the Omnibus Plan to any participant (other than directors) at any time. The terms and conditions of grants of Share Units, including the quantity, type of award, award date, vesting conditions, applicable vesting periods and other terms and conditions with respect to the award, as determined by the Board, will be set out in such participant’s RSU agreement or PSU agreement, as applicable.
 
Accounts will be maintained for each participant and each notional grant of Share Units, as granted to such participant from time to time, will be credited to such participant’s account. Share Units that fail to vest with respect to a participant, or that are paid out to the participant are cancelled and will be removed from such participant’s account.
 
Upon the vesting and settlement of a Share Unit, the number of Shares covered by the Share Unit will be issued from treasury by the Company as fully paid non-assessable Shares, valued at not less than fair market as at the date of issuance (the “Issue Date”). If a participant gives notice to the Company, on or before the Issue Date, of its election to receive cash pertaining to a Share Unit, the Company, with the approval of the Board, may agree to pay an amount in cash equal to the aggregate Market Value of the Shares to be issued in place of issuing to the participant Shares under the Share Unit.
 
In the case of PSUs, if the performance-related conditions in respect of the vesting of Share Units determined by the Board at the time of granting the award (the “Performance Vesting Conditions”) with respect to a fiscal year are not met during such fiscal year (the “Shortfall Year”), the PSUs which were scheduled to vest at the end of such Shortfall Year may vest in future years, so long as in such subsequent year the Performance Vesting Conditions for such subsequent year are equal to or greater than the cumulative aggregate Performance Vesting Conditions for the Shortfall Year and subsequent year. Performance Vesting Conditions may include but are not limited to, financial or operational performance of the Company, total shareholder return, individual performance criteria or otherwise, which may be measured over a specified period.
 
The Omnibus Plan is also subject to the following limitations: (i) no more than 10% of the Company’s outstanding Shares may be issued under the Omnibus Plan or pursuant to any other security-based compensation arrangements of the Company during any one year period; (ii) no more than 5% of the Company’s outstanding Shares may be issued under the Omnibus Plan or pursuant to any other security-based compensation arrangements of the Company to any one person; and (iii) no more than 10% of the Company’s outstanding Shares may be issued to insiders under the Omnibus Plan or under any other security-based compensation arrangements of the Company within any one year period or be issuable to insiders at any time. In addition, with respect to stock options, no more than 1% of the Company’s outstanding Shares during the term of the Omnibus Plan may be granted to directors, in the aggregate, and the annual value of stock options granted to directors cannot exceed CA $100,000 per director.
 
Shareholder approval is required for the following amendments to the Omnibus Plan: (i) increasing the number of Shares reserved for issuance under the Omnibus Plan; (ii) reducing the exercise price of a stock option, except pursuant to the terms of the Omnibus Plan; (iii) extending the expiry date of an award, except the automatic extension of an award pursuant to the terms of the Omnibus Plan; (iv) extending the participation in the Omnibus Plan to non-employee directors and non-consultants; (v) permitting awards to be transferred other than by testate or intestate succession; (vi) permitting the addition or modification of a cashless exercise feature, payable in cash or Shares, unless it provides for a full deduction of the number of underlying Shares from the Omnibus Plan reserve; or (vii) permitting awards, other than those permissible under the Omnibus Plan.
 
As at February 28, 2013, the Company has the following securities outstanding under the Omnibus Plan:
 
-           Stock options – 197,347
-           PSU’s – 148,320
-           RSU’s – NIL
-           Total – 345,667
 
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An additional 314,897 Shares remain available for future issuance pursuant to stock options or Share Unit grants under the Omnibus Plan, representing approximately 4.1% of the total number of issued and outstanding Shares.
 
Long Term Incentives – Periods Prior to 2012
 
Prior to the adoption of the Omnibus Plan in 2012, the Company had in place the Old Option Plan and the Old RSU Plan. Grants under these plans have now been frozen and no further grants or awards will be made under such plans.  However, the Old Option Plan and the Old RSU Plan will continue in effect for so long as and solely to the extent necessary to administer previously-granted awards that remain outstanding under such plans.
 
As at February 28 2013, the Company has 329,172 stock options outstanding under the Old Option Plan. Since the Old Option Plan was adopted, options exercised resulted in the issuance of 133,309 Shares as of April 1, 2013.
 
Under the Old Option Plan, if an option holder’s employment or term as a director or consultant ceases as a result of the option holder’s death, retirement or disability or because of the sale of the Company that employs the option holder, or to which the option holder is a director or consultant, all options vest immediately and may be exercised for 180 days (or, if earlier, to the end of the term). If an option holder’s employment or term as a director or consultant is terminated without cause the option holder’s options that are vested or that would otherwise have vested within the reasonable or contractual notice period may be exercised for 90 days (or, if earlier, to the end of the term). If an option holder’s employment or term as a director or consultant is terminated by voluntary resignation, vested options may be exercised for 90 days (or, if earlier, to the end of the term) and unvested options are cancelled. If an option holder’s employment or term as a director or consultant is terminated for cause, all options are immediately cancelled. Notwithstanding the foregoing, but subject to applicable securities laws, the Board of Directors may, at its discretion, permit the exercise of any or all options held by an option holder in the manner and on the terms authorized by the Board, provided the Board may not authorize the exercise of an option beyond ten years from the date of grant, excluding any automatic extension for an expiry date that falls in a blackout period.
 
Options under the Old Option Plan are non-transferable. The Board of Directors has the discretion to accelerate vesting and expiration of options in connection with a change of control of the Company, a sale of all or substantially all of the assets of the Company or a dissolution or liquidation of the Company. The Board of Directors may further take such steps it deems equitable and appropriate to adjust the number of Shares that may be acquired on the exercise of any options or the exercise price in the event the Company effects a subdivision or consolidation of the Shares, payment of a stock dividend (other than in lieu of a cash dividend), or other change in capitalization of the Company, or upon any amalgamation, continuation, reorganization involving the Company, by exchange of Shares, by sale or lease of assets or otherwise, to preserve the proportionality of the rights and obligations of the option holders.
 
As noted above, the Old Option plan was superseded by the Omnibus Plan and no further grants or awards will be made under such plan. However, the Old Option Plan will continue in effect for so long as and solely to the extent necessary to administer previously-granted awards that remain outstanding under such plan.
 
The Old RSU Plan provided for grants of RSUs to certain employees (each a ‘‘participant’’) of the Company and its affiliates. In determining the number of RSUs to be granted, the Human Resources and Corporate Governance Committee took into account such milestones and criteria as it had determined at the time of grant. An RSU is a right to receive a cash payment based on the value of a Share, subject to the vesting, forfeiture and other restrictions the Board of Directors may determine. RSUs are credited to an account in the name of the participant. If a dividend is paid on Shares, each participant’s RSU account is credited with additional RSUs (a ‘‘dividend RSU’’) equal to a fraction where the numerator is the product of: (i) the number of RSUs credited to the participant on the date the dividends are paid; and (ii) the dividend paid per Share, and the denominator is the closing price per Share on the TSX on the last trading day on which the Shares were traded preceding the date on which dividends are paid.
 
Each RSU issued under the old RSU plan vests no later than December 31 of the third calendar year following the calendar year in respect of which the RSU is granted or such earlier date as is determined at our Board’s discretion. RSUs are redeemed within 30 days following the vesting date (and no later than the December 31 date referenced above), by a cash payment to the participant equal to the number of vested RSUs multiplied by the closing price per Share on the TSX on the last trading day on which the Shares were traded preceding the vesting date. A dividend RSU vests on the same day as the RSU in respect of which it was granted and is redeemed by the Company on the same date as the applicable RSU.
 
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If a participant dies, retires or his or her employment is terminated by the Company without cause, or for disability or because of the sale of the Company that employs the participant, or to which the participant is a director or consultant, then a pro rata portion of unvested RSUs credited to the participant will vest and be redeemed. If the employment of a participant is terminated by resignation of the participant, the participant forfeits all rights to unvested RSUs. If the employment of a participant is terminated for cause, that participant forfeits all rights to vested and unvested RSUs. The Board of Directors may accelerate the vesting of RSUs in connection with a change of control.
 
RSUs are non-assignable. The Board of Directors determined which employees were granted RSUs; the time or times when RSUs were granted; the number of RSUs granted; and the date or dates on which RSUs will vest. The Human Resources and Corporate Governance Committee administers the Old RSU Plan.
 
As noted above, the Old RSU plan was superseded by the Omnibus Plan and no further grants or awards will be made under such plan. However, the Old RSU Plan will continue in effect for so long as and solely to the extent necessary to administer previously-granted awards that remain outstanding under such plan.
 
Summary Compensation Table
 
The following table provides a summary of compensation earned during the financial year ended December 31, 2012, by the Named Executive Officers.
 
Name and
Principal Position
 
Salary
($)
 
Share
Based
Awards (10)
($)
 
Option
Based
Awards (10)
($)
 
Non-equity
Incentive Plan
Compensation
(1)
($)
 
All Other
Compensation
(2)
($)
 
Total
Compensation
($)
Daryl Wilson (3)
President & Chief
Executive Officer
 
422,177
 
491,475
 
411,567
 
249,900
 
2,499
 
1,577,619
Robert Motz(3)(5)
Chief Financial Officer
and Corporate Secretary
 
22,107
 
224,400
 
156,720
 
18,393
 
441
 
422,059
Jennifer Barber (3) (6)
Former Chief Financial Officer and Corporate Secretary
 
186,418
 
111,513
 
93,382
 
Nil
 
2,499
 
393,812
Kelly Demerino (3) (7)
Former Interim Chief Financial Officer
 
130,925
 
Nil
 
Nil
 
26,295
 
2,499
 
159,089
Joseph Cargnelli (3)
Chief Technology Officer
 
218,319
 
111,513
 
93,382
 
224,910
 
2,499
 
650,622
Wido Westbroek (8)
Vice President and General Manager
 
204,072
 
111,513
 
93,382
 
203,518
 
2,499
 
614,984
Filip Smeets (4) (9)
General Manager, OnSite Generation
 
250,303
 
Nil
 
Nil
 
45,210
 
Nil
 
295,513

Notes:

1.
This represents the Company’s short-term incentive plan. The Company does not have any non-equity long-term incentive plans.
2.
Benefits did not exceed the lesser of CA $50,000 and 10% of the total annual salary and bonuses of any of the Named Executive Officers.
3.
These amounts are paid in Canadian funds and have been converted to US dollars at the average rate for the year. The Canadian dollar depreciated 2.0% relative to the US dollar in 2012 compared to 2011.  The Canadian dollar appreciated 2.3% relative to the US dollar in 2011 compared to 2010.
4.
Mr. Smeets’ salary is paid in euro and have been converted to US Dollars at the average rate for the year. The US dollar appreciated 6.9% relative to the euro in 2012 compared to 2011.   The US dollar appreciated 3.1% relative to the euro in 2011 compared to 2010.
5.
Mr. Motz was appointed the Chief Financial Officer and Corporate Secretary of the Company effective November 19, 2012.
6.
Ms. Barber was appointed the Chief Financial Officer and Corporate Secretary of the Company effective July 29, 2011. All figures in this summary compensation table prior to such date reflect the compensation paid to Ms. Barber in her capacity as Vice-President, Finance and Corporate Controller of the Company.  Ms Barber resigned as Chief Financial Officer and Corporate Secretary effective November 8, 2012.
7.
Ms. Demerino joined the company on August 1, 2011 and was appointed interim Chief Financial Officer and Corporate Secretary of the Company effective November 8, 2012 until Mr. Motz’s appointment to Chief Financial Officer and Corporate Secretary of the Company effective November 19, 2012. All figures in this summary compensation table prior to November 8, 2012 and subsequent to November 19, 2012 reflect compensation paid to Ms. Demerino in her capacity as Director of Finance and Corporate Controller of the Company.
 
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8.
Mr. Westbroek was appointed the Vice President Sales & Marketing effective July 29, 2011. All figures in this summary compensation table prior to such date reflects the compensation paid to Mr. Westbroek in euros in his capacity as Vice-President and General Manager of the Company’s Belgian based OnSite Generation business.
9.
Mr. Smeets was appointed as General Manager of the Company’s Belgian based OnSite Generation business on April 4, 2011.
10.
Each PSU granted in fiscal year 2012 for all named executive officers are valued at the market value at the date of grant.  For all named executive officers other than Mr. Motz the PSU grant was valued at $6.25. Mr. Motz’s PSU grant was valued at $6.60 per PSU.  This method is identical to the method used for financial reporting purposes.
11.
Based on the Black-Scholes valuation methodology. Each stock option granted in fiscal year 2012 for all named executive officers other than Mr. Motz was valued at $3.79. Mr. Motz’s stock option grant was valued at $3.97 per option granted.  Black-scholes valuation methodology is a typical market approach in valuing options. This method is identical to the method for used for financial reporting purposes.
 
Employment Agreements
 
Daryl Wilson’s employment agreement provides for a base salary of CA $434,500 subject to annual review, and a discretionary short-term incentive bonus of up to 50% of his base salary.
 
Robert Motz’s employment agreement provides for a base salary of CA $230,000, subject to annual review, and a discretionary short-term incentive bonus of up to 50% of his base salary.
 
Jennifer Barber’s employment agreement provided for a base salary of CA $210,000, subject to annual review, and a discretionary short-term incentive bonus of up to 50% of her base salary.  Ms. Barber resigned from the Company effective November 8, 2012.
 
Kelly Demerino’s employment agreement provides for a base salary of CA $131,325, subject to annual review, and a discretionary short-term incentive bonus of up to 20% of her base salary.
 
Joseph Cargnelli’s employment agreement provides for a base salary of CA $225,500, subject to annual review, and a discretionary short-term incentive bonus of up to 50% of his base salary.
 
Wido Westbroek’s employment agreement provides for a base salary of CA $206,000, subject to annual review, and a discretionary short-term incentive bonus of up to 50% of his base salary.
 
Filip Smeets’ employment agreement provides for a base salary of 194,988 euro, subject to annual review, and a discretionary short-term incentive bonus of up to 35,000 euros per year.
 
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Hydrogenics Corporation


Incentive Plan Awards
 
Outstanding Share-based Awards and Option-based Awards During the Year Ended December 31, 2012
 
   
Option-based Awards
    Share-based Awards
Name
 
Number of
Securities
Underlying
Unexercised
Options
(#)
   
Option
Exercise
Price
(CA $)
   
Option
Expiration
Date
 
Value of
Unexercised
In-the-
money
Options
(CA $)
   
Number of
Shares or
Units
of Shares
That Have
Not Vested
   
Market or
Payout
Value of Share
Based Awards
That Have
Not Vested
(CA $)
   
Market or
payout value
of vested
Share-based
awards not
paid out or