EX-99.2 3 exh_992.htm EXHIBIT 99.2

 

Exhibit 99.2

 

 

 
Hydrogenics Corporation
 

 

 

 

 

2018 Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

Management’s Responsibility for Financial Reporting

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements have been prepared by management and approved by the Board of Directors of Hydrogenics Corporation (the “Company”). The consolidated financial statements were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) and where appropriate, reflect management’s best estimates and judgments. Where alternative accounting methods exist, management has chosen those methods considered most appropriate in the circumstances. Management is responsible for the accuracy, integrity and objectivity of the consolidated financial statements within reasonable limits of materiality, and for maintaining a system of internal controls over financial reporting as described in “Management’s Report on Internal Control Over Financial Reporting.” Management is also responsible for the preparation and presentation of other financial information included in the Annual Report and its consistency with the consolidated financial statements.

 

The Audit Committee, which is appointed annually by the Board of Directors and comprised exclusively of independent directors, meets with management as well as with the independent auditors to satisfy itself that management is properly discharging its financial reporting responsibilities and to review the consolidated financial statements and the independent auditors’ report.

 

The Audit Committee reports its findings to the Board of Directors for consideration in approving the consolidated financial statements for presentation to the shareholders.

 

The Audit Committee considers, for review by the Board of Directors and approval by the shareholders, the engagement or reappointment of the independent auditors.

 

The shareholders’ auditors have full access to the Audit Committee, with and without management being present, to discuss the consolidated financial statements and to report their findings from the audit process. The consolidated financial statements have been audited by the shareholders’ independent auditors, PricewaterhouseCoopers LLP, Chartered Professional Accountants, and their report is provided herein.

 

   
   

Daryl C. F. Wilson

President and Chief Executive Officer

Marc Beisheim

Chief Financial Officer

 

March 15, 2019

 

Mississauga, Ontario

 

2018 Consolidated Financial StatementsPage 2

Hydrogenics Corporation

Management’s Report on Internal Control Over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the President and Chief Executive Officer and the Chief Financial Officer and is effected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). It includes those policies and procedures that:

 

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements;

 

pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, the transactions related to and dispositions of the Company’s assets; and

 

provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with IFRS, and that the Company’s receipts and expenditures are made only in accordance with authorizations of management and the Company’s directors.

 

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting at December 31, 2018, based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as published in 2013. Based on this assessment and those criteria, management concluded that as at December 31, 2018, the Company’s internal control over financial reporting was effective.

 

The effectiveness of the Company's internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included in the Company’s audited financial statements.

 

 

 

   

Daryl C. F. Wilson

President and Chief Executive Officer

Marc Beisheim

Chief Financial Officer

 

March 15, 2019

Mississauga, Ontario

 

 

 

 

 

 

 

 

2018 Consolidated Financial StatementsPage 3

Hydrogenics Corporation

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

To the Directors and Shareholders of Hydrogenics Corporation

 

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheets of Hydrogenics Corporation and its subsidiaries (together, the Company) as of December 31, 2018 and 2017, and the related consolidated statements of operations and comprehensive loss, changes in equity and cash flows for the years then ended, including the related notes (collectively referred to as the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and their financial performance and their cash flows for the years then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS). Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.

 

Change in accounting principles

As discussed in Note 5 to the consolidated financial statements, the Company changed the manner in which it accounts for revenue in 2018.

 

Basis for Opinions

 

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

2018 Consolidated Financial StatementsPage 4

Hydrogenics Corporation

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

Chartered Professional Accountants, Licensed Public Accountants

Oakville, Canada

March 15, 2019

 

We have served as the Company's auditor since 1999.

 

 

 

 

2018 Consolidated Financial StatementsPage 5

Hydrogenics Corporation

Hydrogenics Corporation

Consolidated Balance Sheets

(in thousands of US dollars)

 

 

                 
       December 31,
2018
   December 31,
2017
   January 1,
2017
 
   Note       Restated (Note 5)   Restated (Note 5) 
Assets                   
Current assets                   
Cash and cash equivalents  7   $7,561   $21,511   $10,338 
Restricted cash  7    935    435    405 
Trade and other receivables  8    6,728    8,736    5,144 
Contract assets  9    4,534    6,578    5,572 
Inventories  10    17,174    15,048    17,130 
Prepaid expenses  11    1,960    1,374    1,198 
        38,892    53,682    39,787 
Non-current assets                   
Restricted cash  7    241    468    535 
Contract assets  9    1,689    645     
Investment in joint ventures  12    1,644    2,797    1,750 
Property, plant and equipment  13    2,867    3,874    4,095 
Intangible assets  14    232    180    203 
Goodwill  15    4,359    4,569    4,019 
        11,032    12,533    10,602 
Total assets      $49,924   $66,215   $50,389 
Liabilities                   
Current liabilities                   
Operating borrowings  19   $   $1,200   $2,111 
Trade and other payables  16    9,068    9,736    7,235 
Contract liabilities  9    14,581    11,821    10,268 
Financial liabilities  17    

3,359

    4,913    3,939 
Provisions  18    2,041    1,744    2,045 
Deferred funding       1,744    880    508 
        30,793    30,294    26,106 
Non-current liabilities                   
Other liabilities  20    

5,711

    8,516    9,262 
Contract liabilities  9    1,420    2,223    3,494 
Provisions  18    810    976    841 
Deferred funding       229    33    12 
        

8,170

    11,748    13,609 
Total liabilities       38,963    42,042    39,715 
Share capital  21    387,911    387,746    365,923 
Contributed surplus       20,717    19,885    19,255 
Accumulated other comprehensive loss       (2,681)   (1,811)   (3,623)
Deficit       (394,986)   (381,647)   (370,881)
Total equity       10,961    24,173    10,674 
Total equity and liabilities      $49,924   $66,215   $50,389 

Guarantees and Commitments and Contingencies (notes 19 and 31)

Subsequent Events (note 37)

   

 

Douglas S. Alexander

Chair

David C. Ferguson

Director

 

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

 

2018 Consolidated Financial StatementsPage 6

Hydrogenics Corporation

Hydrogenics Corporation

Consolidated Statements of Operations and Comprehensive Loss

For the years ended December 31,

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

 

 

         
   Note   2018   2017 
           Restated (Note 5) 
             
Revenues      $33,896   $48,115 
Cost of sales       25,171    36,437 
Gross profit       8,725    11,678 
               
Operating expenses              
Selling, general and administrative expenses  23    11,613    13,626 
Research and product development expenses  24    7,486    6,376 
        19,099    20,002 
               
Loss from operations       (10,374)   (8,324)
               
Loss from joint ventures  12    (1,637)   (334)
               
Finance income (loss)              
Interest expense, net on financial instruments measured at amortized cost       (1,469)   (1,812)
Foreign currency gains, net(1)       144    635 
Other finance gains (losses), net  28    297    (931)
Finance loss, net       (1,028)   (2,108)
               
Loss before income taxes       (13,039)   (10,766)
Income tax expense  29    300     
Net loss for the year       (13,339)   (10,766)
               
Items that will not be reclassified subsequently to net loss:              
Re-measurements of actuarial liability       70    98 
Items that may be reclassified subsequently to net loss:              
Exchange differences on translating foreign operations       (940)   1,714 
Comprehensive loss for the year      $(14,209)  $(8,954)
               
Net loss per share - basic and diluted  30   $(0.86)  $(0.77)
               
Weighted average number of common shares outstanding, basic and diluted  30    15,441,947    13,947,636 

 

(1)Foreign currency gains (losses) include a gain of $223 on borrowings for the year ended December 31, 2018 (2017 – loss of $223).

 

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

 

2018 Consolidated Financial StatementsPage 7

Hydrogenics Corporation

Hydrogenics Corporation

Consolidated Statements of Changes in Equity

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

 

 

                  Accumulated   
                  other   
      Common shares  Contributed     comprehensive  Total
   Note  Number  Amount  surplus  Deficit  loss(1)  equity
Balance at December 31, 2016      12,544,960   $365,923   $19,255   $(371,173)  $(3,623)  $10,382 
Change in accounting policy  5               292        292 
Restated Balance at January 1, 2017      12,544,960    365,923    19,255    (370,881)   (3,623)   10,674 
Net loss                  (10,766)       (10,766)
Other comprehensive income                      1,812    1,812 
Total comprehensive income (loss)                  (10,766)   1,812    (8,954)
Adjustment for partial shares on share consolidation      (1)                    
Issuance of common shares  21   2,682,742    19,725                19,725 
Warrants exercised  17   200,575    1,966                1,966 
Issuance of common shares on exercise of stock options   22   4,400    36    (16)           20 
Issuance of common shares on vesting of performance share units  22   4,203    96    (96)            
Stock-based compensation expense  22           742            742 
Balance at December 31, 2017      15,436,879   $387,746   $19,885   $(381,647)  $(1,811)  $24,173 
Net loss                  (13,339)       (13,339)
Other comprehensive loss                      (870)   (870)
Total comprehensive loss                  (13,339)   (870)   (14,209)
Issuance of common shares on  vesting of performance share units  22   4,204    96    (96)            
Issuance of common shares on exercise of stock options  22   6,400    69    (29)           40 
Stock-based compensation expense  22           957            957 
Balance at December 31, 2018      15,447,483   $387,911   $20,717   $(394,986)  $(2,681)  $10,961 

 

(1)Accumulated other comprehensive loss represents currency translation adjustments of ($2,719) as of December 31, 2018 (2017 – $1,779), and a gain on re-measurement of actuarial liability of $27 as of December 31, 2018 (2017 – loss of $43)

 

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

 

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

 

2018 Consolidated Financial StatementsPage 8

 

Hydrogenics Corporation

 

Hydrogenics Corporation

Consolidated Statements of Cash Flows

For the years ended December 31,

(in thousands of US dollars)

 

 

 

   Note    2018    2017 
             Restated (Note 5) 
Cash and cash equivalents provided by (used in):              
Operating activities              
Net loss for the year      $(13,339)  $(10,766)
Decrease (increase) in restricted cash       (304)   134 
Items not affecting cash:              
Loss (gain) on disposal of property, plant and equipment       (11)   131 
Amortization and depreciation  13,14    706    672 
Loss (gain) from change in fair value of warrants  17    (398)   675 
Unrealized foreign exchange (gain) loss       (353)   494 
Unrealized loss from joint ventures  12    1,637    334 
Accreted interest and fair value adjustment  20    1,650    2,075 
Stock-based compensation  22    957    742 
Stock-based compensation – DSUs  22    (676)   950 
Net change in non-cash operating assets and liabilities  33    1,750    (223)
Cash used in operating activities       (8,381)   (4,782)
Investing activities              
Investment in joint venture  12        (93)
Purchase of property, plant and equipment  13    (1,001)   (3,920)
Receipt of government funding       974    1,792 
Proceeds from disposals of property, plant and equipment  12    700    1,035 
Purchase of intangible assets  14    (125)   (25)
Cash provided by (used in) investing activities       548    (1,211)
Financing activities              
Proceeds from common shares issued and stock options exercised, net of issuance costs  21, 22    40    19,745 
Principal repayments of long-term debt  20    (3,120)   (1,639)
Exercise of warrants  17        1,374 
Interest payments  20    (1,498)   (1,274)
Repayment of operating borrowings  19    (1,193)   (873)
Repayment of repayable government contributions           (171)
Cash provided by (used in) financing activities       (5,771)   17,162 
Increase (decrease) in cash and cash equivalents during the year       (13,604)   11,169 
Cash and cash equivalents – Beginning of year       21,511    10,338 
Effect of exchange rate fluctuations on cash and cash equivalents held       (346)   4 
Cash and cash equivalents – End of year      $7,561   $21,511 

 

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

 

2018 Consolidated Financial StatementsPage 9

 

Hydrogenics Corporation

 

 

Note 1 – Description of Business

 

Hydrogenics Corporation and its subsidiaries (“Hydrogenics” or the “Corporation” or the “Company”) design, develop and manufacture hydrogen generation products using water electrolysis technology (based on alkaline and proton exchange membrane (“PEM”) electrolyzers), and fuel cell products which convert hydrogen into electricity using PEM technology. The Company has manufacturing plants in Canada and Belgium, satellite facilities in Germany and the United States, and branch offices in Russia and Indonesia. Its products are sold throughout the world.

 

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

 

Note 2 – Basis of Preparation

 

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”) applicable to the preparation of consolidated financial statements.

 

On March 14, 2019, the Board of Directors authorized the consolidated financial statements for issue.

 

Note 3 – Summary of Significant Accounting Policies

 

The consolidated financial statements of the Company include the accounts of Hydrogenics and its wholly-owned subsidiaries; Hydrogenics USA, Inc., Hydrogenics Europe N.V., and Hydrogenics Holding GmbH. All intercompany transactions, balances and unrealized gains or losses on transactions between group companies have been eliminated. Accounting policies of subsidiaries have been changed, where necessary, to ensure consistency with the policies adopted by the Company. Subsidiaries include all entities controlled by the Company. Control exists when the Company is exposed or has rights to variable returns from the Company’s involvement, and has the ability to affect those returns through the Company’s power over the subsidiary. The existence and potential voting rights presently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control was obtained by the Company and are deconsolidated from the date on which control ceased. The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of certain financial assets and financial liabilities to fair value.

 

Investments in joint ventures

 

Investments in joint ventures, over which the Company has joint control, are accounted for using the equity method. Under the equity method of accounting, investments are initially recorded at cost, and the carrying amount is increased or decreased to recognize the Company’s share of the investee’s net profit or loss, including net profit or loss recognized in other comprehensive income (“OCI”), subsequent to the date of acquisition.

 

Foreign currency translation

 

Items included in the financial statements of each consolidated entity in the Company’s consolidated financial statements are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The consolidated financial statements are presented in US dollars, which is the functional currency of Hydrogenics Corporation (“the parent company”).

 

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in currencies other than an operation’s functional currency are recognized in the consolidated statements of operations and comprehensive loss.

 

2018 Consolidated Financial StatementsPage 10

 

Hydrogenics Corporation

 

The functional currency of the Company’s subsidiaries located in Belgium and Germany is the euro, which is the currency of the primary economic environment in which these subsidiaries operate. The financial statements of these subsidiaries are translated into US dollars as follows: assets and liabilities, at the closing exchange rate at the dates of the consolidated balance sheets; and the income and expenses and other comprehensive income (loss), at the average exchange rate during the year as this is considered a reasonable approximation to the actual rates. All resulting foreign exchange changes are recognized in other comprehensive loss as cumulative translation adjustments.

 

Cash and cash equivalents and restricted cash

 

Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash. Cash and cash equivalents, including restricted cash held as partial security for standby letters of credit and letters of guarantee, include cash on hand, deposits held with banks and other short-term, highly liquid investments with original maturities of three months or less.

 

Financial instruments (excluding hedging activities)

 

(i)Classification

 

The Company classifies its financial instruments in the following categories: at fair value through profit and loss (“FVPL”), at fair value through other comprehensive income (loss) (“FVOCI”) or at amortized cost. The Company determines the classification of financial assets and liabilities at initial recognition. The classification of the Company’s financial assets and liabilities is disclosed in note 35.

 

(ii)Measurement

 

Amortized cost

Financial assets and liabilities at amortized cost are initially recognized at fair value (except for trade receivables that do not contain a significant financing component which are measured at the transaction price) plus or minus transaction costs and subsequently carried at amortized cost less any impairment.

 

 

Fair value through profit and loss

Financial assets and liabilities carried at FVPL are initially recorded at fair value and transaction costs are expensed in the consolidated statements of operations and comprehensive loss. Derivatives are included in this category unless designated as hedges. Realized and unrealized gains and losses arising from changes in the fair value of the financial assets and liabilities held at FVPL are included in the consolidated statements of operations and comprehensive loss within other gains and losses in the period in which they arise.

 

Fair value through other comprehensive income

Financial assets carried at FVOCI are measured at fair value. Interest, dividends and impairment gains and losses are recognized in the consolidated statement of operations on the same basis as for amortized cost assets. Changes in fair value are recognized initially in other comprehensive income. When the assets are derecognized or reclassified the cumulative changes in fair value are reclassified to the consolidated statement of operations (except where they relate to investments in equity instruments). The Company has no financial instruments measured at fair value through other comprehensive loss.

 

(iii)Impairment of financial assets at amortized cost

 

For trade receivables and contract assets, the Company applies the simplified approach to providing for expected credit losses prescribed by IFRS 9, which requires the use of the lifetime expected loss provision for all trade receivables and contract assets based on the Company’s historical default rates over the expected life of the trade receivables adjusted for forward-looking estimates (see note 35).

 

2018 Consolidated Financial StatementsPage 11

 

Hydrogenics Corporation

 

(iv)Derecognition

 

i.Financial assets - The Company derecognizes financial assets only when the contractual rights to cash flows from the financial assets expire, or when it transfers the financial assets and substantially all of the associated risks and rewards of ownership to another entity. Gains and losses on derecognition are recognized in the consolidated statements of operations and comprehensive loss.

 

ii.Financial liabilities - The Company derecognizes financial liabilities only when its obligations under the financial liabilities are discharged, cancelled or expired. Generally, the difference between the carrying amount of the financial liability derecognized and the consideration paid and payable, including any non-cash assets transferred or liabilities assumed, is recognized in the consolidated statements of operations and comprehensive loss.

 

Derivatives and hedging activities

 

The Company periodically holds derivative financial instruments to hedge its foreign currency risk exposures that are designated as the hedging instrument in a hedge relationship. On initial designation of the hedge, the Company formally documents the relationship between the hedging instrument and hedged item, including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Company makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125%.

 

For a cash flow hedge of a forecast transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported net income. Derivatives are recognized initially at fair value; attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are recognized in other comprehensive income and presented in unrealized gains/losses on cash flow hedges in equity. The amount recognized in other comprehensive income is removed and included in profit or loss in the same period as the hedged cash flows affect profit or loss under the same line item in the consolidated statements of operations and comprehensive loss as the hedged item. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in other comprehensive income and presented in unrealized gains/losses on cash flow hedges in equity remains there until the forecast transaction affects profit or loss. If the forecast transaction is no longer expected to occur, then the balance in other comprehensive income is recognized immediately in profit or loss. In other cases the amount recognized in other comprehensive income is transferred to profit or loss in the same period that the hedged item affects profit or loss.

 

Inventories

 

Raw materials, work-in-progress and finished goods are valued at the lower of cost, determined on a first-in, first-out basis, and net realizable value. Inventory costs include the cost of material, labour, variable overhead and an allocation of fixed manufacturing overhead including amortization based on normal production volumes. Net realizable value is the estimated selling price less estimated costs of completion and applicable selling expenses. If the carrying value exceeds the net realizable amount, a write-down is recognized. The write-down may be reversed in a subsequent period if the circumstances causing it no longer exist.

 

2018 Consolidated Financial StatementsPage 12

 

Hydrogenics Corporation

 

Property, plant and equipment

 

Property, plant and equipment are stated at cost less government grants, accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Subsequent costs are included in the asset’s carrying value or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost can be measured reliably. The cost and accumulated depreciation of replaced assets are derecognized when replaced. Repairs and maintenance costs are charged to the consolidated statements of operations and comprehensive loss during the period in which they are incurred.

 

Depreciation is calculated on a diminishing balance method to depreciate the cost of the assets to their residual values over their estimated useful lives. The depreciation rates applicable to each category of property, plant and equipment are as follows:

 

Plant and Test equipment 30% per annum
Furniture and equipment 20% – 30% per annum
Computer hardware 30% per annum
Automobiles 30% per annum
Leasehold improvements Straight-line over the term of the lease

 

Residual values, method of depreciation and useful lives of the assets are reviewed at least annually and adjusted if appropriate.

 

Construction-in-progress assets are not depreciated until such time they are available for use. Depreciation ceases at the earlier of the date the asset is classified as held-for-sale and the date the asset is derecognized.

 

Gains and losses on disposals of property, plant and equipment are determined by comparing the proceeds with the carrying value of the asset and are included as part of other gains and losses in the consolidated statements of operations and comprehensive loss.

 

Intangible assets

 

The Company’s intangible assets consist of computer software with finite useful lives. These assets are capitalized and amortized over their useful lives using the diminishing balance method of 30% per annum. Costs associated with maintaining computer software programs are recognized as an expense as incurred. The method of amortization and useful lives of the assets are reviewed at least annually and adjusted if appropriate.

 

Goodwill

 

Goodwill is recognized as the fair value of the consideration transferred including the recognized amount of any non-controlling interest in the acquiree, less the fair value of the net identifiable assets acquired and liabilities assumed, as of the acquisition date. Subsequent to initial recognition, goodwill is measured at cost less accumulated impairment losses. Goodwill acquired in business combinations is allocated to groups of cash generating units (“CGU”) that are expected to benefit from the synergies of the combination. The goodwill recorded in the Company’s consolidated financial statements relates to the OnSite Generation CGU.

 

Impairment long-lived assets

 

Property, plant and equipment and definite life intangible assets are tested for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Intangible assets with an indefinite useful life or intangible assets not yet available-for-use are subject to an annual impairment test. When events or changes in circumstances indicate impairment, impairment test is performed earlier than annual. For the purpose of measuring recoverable values, assets are grouped at the lowest levels for which there are separately identifiable cash inflows being the CGU. Goodwill is not amortized but is reviewed for impairment annually or at any time an indicator of impairment exists. A goodwill CGU represents the lowest level within an entity at which goodwill is monitored for internal management purposes, which is not higher than an operating segment.

 

2018 Consolidated Financial StatementsPage 13

 

Hydrogenics Corporation

 

For the long-lived asset impairment test, the recoverable value is the higher of an asset or CGU’s fair value less costs of disposal and value in use. An impairment loss is recognized for the value by which the asset or CGU’s carrying value exceeds its recoverable value.

 

Segment reporting

 

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. The Corporation has two segments which are OnSite Generation and Power Systems. OnSite Generation includes the design, development, manufacture and sale of hydrogen generation products. Power Systems includes the design, development, manufacture and sale of fuel cell products.

 

Provisions and product warranties

 

Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are measured based on management’s best estimate of the expenditure required to settle the obligation at the end of the reporting period, and are discounted to their present value where the effect is material.

 

Provisions for the estimated cost of installation, start up and commissioning services related to the sale of equipment are recognized at the time of sale where the costs are insignificant in the context of the total contract and where the customer believes they are buying a final installed working product rather than the individual collection of products and services. These costs are revised if circumstances change and any resulting increase or decrease in estimated costs is reflected in the consolidated statement of operations and comprehensive loss in the period in which the circumstances that give rise to the revision become known by management.

 

Additionally, the Company performs evaluations to identify onerous contracts and where applicable, records provisions for such contracts. Onerous contracts are those in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The unavoidable costs under a contract reflect the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from the failure to fulfill it.

 

The Company typically provides a warranty for parts and/or labour for up to two years or based on time or certain operating specifications, such as hours of operation. In establishing the warranty provision, the Company estimates the likelihood that products sold will experience warranty claims and the estimated cost to resolve claims received, taking into account the nature of the contract and past and projected experience with the products. Provisions are reviewed at each consolidated balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that a payment to settle the obligation will be incurred, the provision is reversed.

 

Warrants

 

The Company’s warrants include anti-dilution provisions, and as a result have been classified as financial liabilities, and are recorded at their fair value with changes in fair value reflected in the consolidated statements of operations and comprehensive loss.

 

2018 Consolidated Financial StatementsPage 14

 

Hydrogenics Corporation

 

Leases

 

Leases are classified as finance leases when the lease arrangement transfers substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. The assets held under a finance lease are recognized as assets at the lower of the following two values: the present value of the minimum lease payments under the lease arrangement or their fair value determined at inception of the lease. The corresponding obligation to the lessor is accounted for as long-term debt. These assets are depreciated over the shorter of the useful life of the assets and the lease term when there is no reasonable certainty the Company will obtain ownership by the end of the lease term. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated statements of operations and comprehensive loss on a straight-line basis over the period of the lease.

 

Research and product development

 

The Company incurs costs associated with the design and development of new products. Expenditures during the research phase are expensed as incurred. Expenditures during the development phase are capitalized if the Company can demonstrate each of the following criteria: (i) the technical feasibility of completing the intangible asset so that it will be available-for-use or sale; (ii) its intention to complete the intangible asset and use or sell it; (iii) its ability to use or sell the intangible asset; (iv) how the intangible asset will generate probable future economic benefits; (v) the availability of adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset; and (vi) its ability to measure reliably the expenditure attributable to the intangible asset during its development; otherwise, they are expensed as incurred. Capitalized costs are amortized over their estimated useful lives. No government grants have been capitalized to date.

 

Government assistance

 

Funding for research and product development includes government and non-government research and product development support. Government research and product development funding is recognized when there is reasonable assurance the Company has complied with the conditions attached to the funding arrangement and is recognized as the applicable costs are incurred. Non-governmental funding is recognized when the Company becomes party to the contractual provisions of the funding agreement and is recognized as the applicable costs are incurred. Research and product development funding is presented as a reduction in research and product development expenses unless it is for reimbursement of an asset, in which case, it is accounted for as a reduction in the carrying amount of the applicable asset. Where the Company receives government contributions that include fixed terms of repayment, a financial liability is recognized and measured as an amortized cost financial liability, as discussed above.

 

Revenue recognition

 

The Company’s business is to develop and sell electrolyser and fuel cell products and provide related services. The equipment and services are sold both on their own and bundled together as a package of goods and/or services.

 

(a) Sale of equipment

 

Material promises within a contract to deliver distinct goods and services are accounted for as separate performance obligations and the contract price is allocated between each performance obligation based upon their relative stand-alone selling prices. Revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods and services to the customer. For contracts with customers in which the sale of equipment is generally expected to be the only performance obligation, the Company recognizes revenue at the point in time when control of the asset is transferred to the customer. Control normally passes upon shipment unless the company enters into a bill and hold arrangement, in which case revenue is recognized upon readiness for shipment. The Company’s standard payment terms include a deposit upon order acceptance and payment in full prior to delivery. Startup and commissioning services, if applicable, are invoiced upon completion of the service.

 

2018 Consolidated Financial StatementsPage 15

 

Hydrogenics Corporation

 

(i) Variable consideration

 

Some contracts with customers provide trade discounts, exclusivity, license, sales-based royalties and/or volume rebates and discounts and give rise to variable consideration. Variable consideration is estimated at contract inception and updated prospectively for any changes to the estimates. Variable consideration is only included in the transaction price to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

(ii) Warranty obligations

 

The Company provides for warranties for general repairs but does not generally provide extended warranties in its contracts with customers. As such, most existing warranties are assurance-type warranties which will continue to be accounted for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets. For non-standard contracts where the Company provides extended warranties, they are accounted for as separate performance obligations to which the Company allocates a portion of the transaction price.

 

(b) Long-term contracts

 

For long-term contracts, such as customer-specific product development contracts, control of the promised goods and services are generally transferred to the customers over time as performance obligations are satisfied. Revenue is recognized over time using input methods based on the measure of the progress towards complete satisfaction of that performance obligation. Under this method, the revenue recognized equals the latest estimate of the total transaction price of the contract multiplied by the actual completion rate, determined by reference to the costs incurred for the transaction and the estimated costs to complete the transaction.

 

The determination of the transaction price represents the contractually agreed amount, including change orders. A change order results from an official change to the scope of work to be performed compared to the original contract that was signed. The Company estimates costs separately for each customer specific development contract including the effects of change orders.

 

If circumstances arise that may change the estimated transaction price, the remaining costs or extent of progress toward completion, and estimates of revenues to be recorded are revised. These revisions may result in increases or decreased in estimated revenues or remaining costs to complete and are accounted for prospectively from the period in which the circumstances that give rise to the revision become known by management. If the outcome of a transaction cannot be estimated reliably, revenue is recognized only to the extent of the expenses recognized that are recoverable. When the outcome of a transaction cannot be estimated reliably, and it is not probable the costs incurred will be recovered, revenue is not recognized and the costs incurred are recognized as an expense. Once the uncertainty surrounding the outcome no longer exists, a cumulative catch up adjustment is recognized to record revenue related to prior performance that had not been recognized due to the inability to measure progress.

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) on the consolidated balance sheet. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets reported on the consolidated balance sheet at the end of each reporting period.

 

(c) Rendering of services

 

The Company provides start-up, commissioning, installation, scheduled or unscheduled maintenance, both with and without parts and other product development services. These services are sold either on their own or bundled together with the sale of equipment to a customer. Where these performance obligations are not considered distinct (i.e. where the customer believes they are buying a final installed working product and are not buying the individual collection of products and services bundle), these services are combined into a single performance obligation and recognized on the same basis as the sale of the related equipment. Revenue from services deemed to be a separate performance obligation are recognized by reference to the stage of completion based upon relative stand-alone selling prices.

 

2018 Consolidated Financial StatementsPage 16

 

Hydrogenics Corporation

 

(d) Technology transfer, license and exclusivity arrangements

 

When a single performance obligation includes technology transfer, license of intellectual property or exclusivity arrangements and one or more other goods or services, the Company considers the nature of the combined good or service for which the customer has contracted in determining whether that combined good or service is satisfied over time or at a point in time, and if over time, in selecting an appropriate method for measuring progress.

 

Revenues from sales-based royalties promised in exchange for a license of intellectual property are recognized as revenue at the later of the date the product subject to the royalty is sold by the licensee, or when the performance obligation to which the sales-based royalty has been allocated is satisfied.

 

(e) Contract assets

 

The Company recognizes contract assets depending on the relationship between the Company’s performance obligation and the contract payment terms. A trade receivable is separately recorded only when the Company has an unconditional right to the consideration. For long-term development contracts and OnSite Generation contracts in particular, customers usually retain a small portion of the contract price until completion of the service, installation and commissioning, which generally result in revenue in excess of billings which are presented as contract assets on the consolidated balance sheet. The associated provisions for future costs to complete this work are recorded in provisions.

 

(f) Contract liabilities

 

The Company may receive advances from customers upon contract execution for which revenue is expected to occur within 12 months. These are deferred within contract liabilities until recognition in revenue as or when the performance obligation is satisfied. In relation to licensing arrangements, upfront license fees considered to consist of a single performance obligation, including a license of intellectual property and one or more other goods or services, are deferred in contract liabilities until recognition in revenue as or when the combined performance obligation is satisfied. For contracts that require customers to pay long-term advances, the payment terms are structured primarily for reasons other than the provision of finance to the Company; notably, to meet working capital demands, to ensure the customers follow through with their purchase orders, to ensure an incentive to not terminate the contract for any reasons, including economic, or to mitigate a history of late payments. Other long-term customer advances are analyzed to determine whether there is a significant financing component in its contracts and are accounted for separately.

 

(g) Incremental costs

 

The Company incurs incremental costs like sales agent commissions for obtaining the contract or to fulfill a contract. These costs are deferred within prepaids for contracts expected to be delivered after more than one year and expensed as the contract is delivered. Where there is a retrospective step up in the sales agent commission on a sale as a result of the salesperson reaching a new cumulative sales threshold, the Company allocates the commission between the contract in question and the preceding contracts in the year that contributed to the agent reaching the threshold. The commission related to any contract that has already been recorded as revenue is expensed while the commission corresponding to contract revenue that has not yet been recorded is capitalized and expensed simultaneously with the related contract revenue.

 

Cost of sales

 

Cost of sales for products includes the cost of finished goods inventory and the costs related to shipping and handling. Cost of sales for service includes direct labour and additional direct and indirect expenses.

 

Share capital

 

Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a deduction from equity.

 

2018 Consolidated Financial StatementsPage 17

 

Hydrogenics Corporation

 

Post-retirement benefit liabilities

 

The Company has a post-retirement benefit obligation with respect to the Belgium subsidiary related to a defined contribution plan. Under Belgian law, a guaranteed return on the contributions is required and as a result this is accounted for as a defined benefit plan. The Company has recorded a long-term liability associated with this plan for the present value of the obligation at the consolidated balance sheet dates. Changes in the fair value of this liability represent actuarial gains and losses arising from experience adjustments and are charged/credited to equity in other comprehensive loss.

 

Stock-based compensation

 

The Company’s stock-based compensation plans are summarized below:

 

(i)Stock options

 

The Company grants stock options to certain employees. Stock options vest 25% one year from the date of grant and annually thereafter over three more years and expire after ten years. Each tranche in an award is considered a separate award with its own vesting period and grant date fair value. The fair value of each tranche is measured at the date of grant using the Black-Scholes option pricing model. Compensation expense is recognized (with a corresponding adjustment to contributed surplus) over the tranche’s vesting period, and is based on the estimated number of instruments expected to vest, which are then reestimated at the reporting dates to the extent that subsequent information indicates the actual number of instruments expected to vest is likely to differ from previous estimates. When options are exercised the Company issues new shares and the proceeds received net of any directly attributable transaction costs are credited to share capital at exercise price and the difference is adjusted to contributed surplus.

 

(ii)Restricted share units (“RSU”)

 

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

 

(iii)Deferred share units (“DSU”)

 

The Company grants DSUs to directors as part of their compensation. The DSUs vest upon grant and are settled in cash. The vested DSUs are marked-to-market at the end of each reporting period based on the closing price of the Company’s shares with the change in fair value recorded in selling, general and administrative expenses. The Company has set up a liability in the consolidated balance sheets, included within financial liabilities, for the fair value of the vested DSUs.

 

(iv)Performance share units (“PSU”)

 

The Company has granted PSUs to certain employees. The PSUs will be settled in the Company’s common shares. The cost of the Company’s PSUs is charged to selling, general and administrative expenses using the graded vesting method. The fair value of the vested share units is the fair value of the Company’s share price on the date of grant. The resulting compensation expense, based on the fair value of the awards granted, excluding the impact of any non-market service and performance vesting conditions, is charged to income over the period the employees unconditionally become entitled to the award, with a corresponding increase to contributed surplus. Non-market vesting conditions are considered in making assumptions about the number of awards that are expected to vest. At each reporting date, the Company reassesses its estimates of the number of awards that are expected to vest and recognizes the impact of any revision in the consolidated statements of operations and comprehensive loss with a corresponding adjustment to contributed surplus.

 

2018 Consolidated Financial StatementsPage 18

 

Hydrogenics Corporation

 

Income taxes

 

Income tax expense comprises current income tax expense and deferred income tax expense. Income tax expense is recognized in the consolidated statements of operations and comprehensive loss, except to the extent that it relates to items recognized directly in equity, in which case, income taxes are also recognized directly in equity. Current income taxes are the expected taxes payable on the taxable income for the year, using income tax rates enacted at the end of the reporting period, and any adjustment to income taxes payable in respect of previous years. Withholding taxes deducted from license fee revenues by foreign jurisdictions are accounted for and presented as income taxes in the consolidated statement of operations.

 

In general, deferred income taxes are the amount of income taxes expected to be paid or recoverable in future periods in respect of temporary differences, carry-forwards of unused non-capital tax losses and carry-forwards of unused tax credits. Deferred income taxes arise between the tax base and their carrying values in the consolidated financial statements as well as on unused tax losses and tax credits. Deferred income taxes are determined on a non-discounted basis using tax rates and laws that have been enacted or substantively enacted at the consolidated balance sheet dates and are expected to apply when the deferred income tax asset or liability is settled.

 

Deferred income taxes are provided on temporary differences arising on investments in subsidiaries and associates, except, in the case of subsidiaries, where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets are recognized to the extent it is probable that taxable profits will be available against which the deductible temporary differences and unused tax losses and tax credits can be utilized. The carrying value of deferred income tax assets is reviewed at each consolidated balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the deferred income tax asset to be recovered. Deferred income tax liabilities are not recognized on temporary differences that arise from goodwill, which is not deductible for tax purposes. Deferred income tax assets and liabilities are not recognized in respect of temporary differences that arise on initial recognition of certain assets and liabilities acquired other than in a business combination. Deferred income tax assets and liabilities are presented as non-current.

 

Net loss per share

 

Basic net loss per share is calculated based on the weighted average number of common shares outstanding for the year. Diluted net loss per share is calculated using the weighted average number of common shares outstanding for the year for basic net loss per share plus the weighted average number of potential dilutive shares that would have been outstanding during the year had all potential common shares been issued at the beginning of the year or when the underlying stock options or warrants were granted, if later, unless they were anti-dilutive. The treasury stock method is used to determine the incremental number of shares that would have been outstanding had the Company used proceeds from the exercise of stock options and warrants to acquire common shares.

 

Note 4 – Significant Accounting Judgments and Estimation Uncertainties

 

Critical accounting estimates and judgments

 

The preparation of consolidated financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and notes to the consolidated financial statements. These estimates are based on management’s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Significant areas requiring the Company to make estimates include revenue recognition and contract accounting, warranty provisions, goodwill impairment and going concern.

 

These estimates and judgments are further discussed below:

 

(i)Revenue recognition

 

Significant areas requiring the Company to make estimates impacting revenue recognition related to:

 

(a)Contracts with performance obligations satisfied over time.

 

2018 Consolidated Financial StatementsPage 19

 

Hydrogenics Corporation

 

Contracts with performance obligations satisfied over time include:

 

i.Customer specific product development contracts - The Company estimates costs separately for each customer specific product development contract. The determination of estimated costs for completing fixed-price contracts is based on the Company’s business practices, considering budgets as well as historical experience. Management regularly reviews these estimates, which can be affected by a variety of factors such as variances in scheduling, cost of materials, availability and cost of qualified labour and subcontractors, productivity, and possible claims from subcontractors.

 

ii.Maintenance contracts - Revenue from providing maintenance services is recognized in the accounting period in which the services are rendered. For fixed-price contracts, revenue is recognized based on the actual service provided to the end of the reporting period as a proportion of the total services to be provided, because the customer receives and uses the benefits simultaneously. Some maintenance contracts also offer scheduled visits and discounts on future spare part purchases. Because these represent additional performance obligations, the transaction price must be allocated to each performance obligation on a stand-alone selling price basis where material in the context of the contract. Management estimates the stand-alone selling price at contract inception based on observable prices for services rendered in similar circumstances to similar customers.

 

 

iii.Technology transfer, licensing and manufacturing support contracts – Technology transfer licensing and manufacturing support arrangements constitute a single performance obligation that includes both a license for intellectual property as well as associated manufacturing training and support services. The transaction price is recognized as revenue over time as the combined services are provided.

 

(b)Contracts with performance obligations satisfied at a point in time.

 

Installation, start up and commissioning services related to the sale of equipment are not distinct and are combined into a single performance obligation where the costs are insignificant in the context of the total contract and where the customer believes they are buying a final installed working product rather than the individual collection of products and services. Thus, as long as control has passed when the product is shipped, all the revenue is recorded and an estimate for remaining costs for this work is accrued. These costs will be revised if circumstances change and any resulting increase or decrease in estimated costs will be reflected in the consolidated statement of operations and comprehensive loss in the period in which the circumstances that give rise to the revision become known by management.

 

(ii)Warranty provision

 

The Company typically provides a warranty for parts and/or labour for up to two years from the date of shipment or commissioning or based on certain operating specifications, such as hours of operation. In establishing the warranty provision, management considers historical field data, projected claims experience, results of internal testing and in certain circumstances, application, in determining the value of this provision. Should these estimates prove to be incorrect, the Company may incur costs different from those provided for in the warranty provision. Management reviews warranty assumptions and makes adjustments to the provision at each reporting date based on the latest information available, including the expiry of contractual obligations. Adjustments to the warranty provision are recorded in cost of sales.

 

(iii)Goodwill impairment testing

 

The Company tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 3. The recoverable amount of the OnSite Generation CGU has been determined based on an estimation of fair value less cost to sell (“FVLCS”). In the absence of a binding sales agreement, FVLCS is estimated using an income approach by discounting future cash flows. The estimation of FVLCS requires the use of estimates which are explained in note 15.

 

Key estimates and assumptions, include management’s expectations of future revenue growth, operating costs and profit margins as well as discount rates for the CGU and incremental costs for disposing of the assets. Growth rate assumptions used are based on the Company’s historical growth, internal budget, expectations of future revenue growth as well as industry and expected market trends in the hydrogen refueling, Power-to-Gas and industrial hydrogen market sectors. The Company uses a discount rate to calculate the present value of estimated future cash flows, which represents its weighted average cost of capital (WACC), plus a premium to take into account specific industry, size and company specific risks of the CGU, as the case may be.  The income approach used by management is supplemented by a market based approach whereby the Company assesses the reasonableness of the resulting revenue multiples from the income approach valuation models based on available data from observable active market prices of broadly comparable businesses, data from recent transactions of similar assets within the same industry, when available and the Company’s stock price.

 

2018 Consolidated Financial StatementsPage 20

 

Hydrogenics Corporation

 

(iv)          Going concern

 

The assessment of events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern involves significant judgment. In making this determination management considers all relevant information. See note 35 for Liquidity risk disclosures. Management has determined that there is no going concern uncertainty at December 31, 2018. 

 

Note 5 – IFRS 9 Financial Instruments & IFRS 15 Revenue from Contracts with Customers – Impact of Adoption

 

IFRS 9 Financial Instruments – Impact of adoption

 

The Company adopted all the requirements of IFRS 9 Financial Instruments (“IFRS 9”) as of January 1, 2018. IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”). IFRS 9 utilizes a revised model for recognition and measurement of financial instruments and a single, forward-looking “expected loss” impairment model. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward in IFRS 9, such that the Company’s accounting policy with respect to financial liabilities is unchanged. Further, as a result of adoption of IFRS 9, management has not changed its accounting policy for financial assets except for the adoption of the simplified approach to determining expected credit losses for receivables and contract assets, which had no impact on the carrying value of any financial assets or financial liabilities on the January 1, 2018 transition date.

 

IFRS 15 Revenue from Contracts with Customers – Impact of adoption

 

The Company has adopted IFRS 15 from January 1, 2018 using the full retrospective method which resulted in changes in accounting policies and adjustments to the amounts recognized in the comparative financial statements.

 

 

 

 

 

 

 

2018 Consolidated Financial StatementsPage 21

 

Hydrogenics Corporation

 

The following table shows the effect of the adoption of IFRS 15 on the Company’s balance sheets at January 1, 2017:

 

 
 
 
 
 
 
 
 
 
IAS18
 carrying
amount
 
 
 
 
 
Note
 
 
 
 
 
 
 
Remeasure-
ments
 
 
 
 
 
 
 
 
 
 
Reclass-
ifications
 
 
 
 
 
 
 
 
 
IFRS 15
carrying
amount
 
 
 
Assets                      
Current assets                      
Cash and cash equivalents  $10,338     $       $10,338 
Restricted cash   405              405 
Trade and other receivables   9,802  5(c)       (4,658)   5,144 
Contract assets     5(a)(c)   914    4,658    5,572 
Inventories   17,208  5(a)       (78)   17,130 
Prepaid expenses   918  5(b)   280        1,198 
    38,671      1,194    (78)   39,787 
Non-current assets                      
Restricted cash   535              535 
Investment in joint ventures   1,750              1,750 
Property, plant and equipment   4,095              4,095 
Intangible assets   203              203 
Goodwill   4,019              4,019 
    10,602              10,602 
Total assets  $49,273     $1,194    (78)  $50,389 
Liabilities                      
Current liabilities                      
Operating borrowings  $2,111             $2,111 
Trade and other payables   7,235              7,235 
Contract liabilities     5(c)       10,268    10,268 
Financial liabilities   3,939              3,939 
Provisions   1,221  5(a)   902    (78)   2,045 
Deferred funding     5(c)       508    508 
Deferred revenue   10,788  5(c)       (10,788)    
    25,294      902    (90)   26,106 
Non-current liabilities                      
Other liabilities   9,262              9,262 
Contract liabilities     5(c)       3,494    3,494 
Provisions   841              841 
Deferred funding     5(c)       12    12 
Deferred revenue   3,494  5(c)       (3,494)    
    13,597          12    13,609 
Total liabilities   38,891      902    (78)   39,715 
Share capital   365,923                365,923 
Contributed surplus   19,255              19,255 
Accumulated other comprehensive loss   (3,623)             (3,623)
Deficit   (371,173) 5(a)(b)   292        (370,881)
Total equity   10,382      292        10,674 
Total equity and liabilities  $49,273     $1,194    (78)  $50,389 

  

2018 Consolidated Financial StatementsPage 22

 

Hydrogenics Corporation

 

The following adjustments were made to the amounts recognized in the consolidated balance sheets at December 31, 2017:

 

 
 
 
 
 
 
 
 
 
IAS 18 
carrying
amount
 
 
 
 
 
Note
 
 
 
 
 
 
 
Remeasure-
ments
 
 
 
 
 
 
 
 
 
 
Reclass-
ifications
 
 
 
 
 
 
 
 
 
IFRS 15 
carrying
amount
 
 
 
Assets                      
Current assets                      
Cash and cash equivalents  $21,511     $       $21,511 
Restricted cash   435              435 
Trade and other receivables   14,292  5(c)       (5,556)   8,736 
Contract assets     5(a)(c)   1,022    5,556    6,578 
Inventories   15,164  5(a)       (116)   15,048 
Prepaid expenses   978  5(b)   396        1,374 
    52,380      1,418    (116)   53,682 
Non-current assets                      
Restricted cash   468              468 
Non-current receivables   645  5(c)       (645)    
Contract assets     5(c)       645    645 
Investment in joint ventures   2,797              2,797 
Property, plant and equipment   3,874              3,874 
Intangible assets   180              180 
Goodwill   4,569              4,569 
    12,533              12,533 
Total assets  $64,913     $1,418    (116)  $66,215 
Liabilities                      
Current liabilities                      
Operating borrowings  $1,200             $1,200 
Trade and other payables   9,736  5(a)           9,736 
Contract liabilities     5(c)       11,821    11,821 
Financial liabilities   4,913              4,913 
Provisions   1,174  5(a)   741    (171)   1,744 
Deferred funding     5(c)       880    880 
Deferred revenue   12,734  5(c)       (12,734)    
    29,757      741    (204)   30,294 
Non-current liabilities                      
Other liabilities   8,516              8,516 
Contract liabilities     5(c)       2,223    2,223 
Provisions   921  5(a)       55    976 
Deferred funding     5(c)       33    33 
Deferred revenue   2,223  5(c)       (2,223)    
    11,660          88    11,748 
Total liabilities   41,417      741    (116)   42,042 
Share capital   387,746                387,746 
Contributed surplus   19,885              19,885 
Accumulated other comprehensive loss   (1,822) 5(a)   11        (1,811)
Deficit   (382,313) 5(a)(b)   666        (381,647)
Total equity   23,496      677        24,173 
Total equity and liabilities  $64,913     $1,418    (116)  $66,215 

 

2018 Consolidated Financial StatementsPage 23

 

Hydrogenics Corporation

 

The following table shows the effect of the adoption of IFRS 15 on the Company’s consolidated statement of operations and comprehensive loss for the year ended December 31, 2017:

 

 

   For the year ended December 31, 2017
    Based on
IAS 18
  Note   IFRS 15
Remeasurements
    Based on
IFRS 15
 
Revenues  $48,052  5(a)  $63   $48,115 
Cost of sales   36,632  5(a)   (195)   36,437 
Gross profit   11,420      258    11,678 
                  
Operating expenses                 
Selling, general and administrative expenses   13,742  5(b)   (116)   13,626 
Research and product development expenses   6,376          6,376 
    20,118      (116)   20,002 
                 
Loss from operations   (8,698)     374    (8,324)
                  
Loss from joint ventures   (334)         (334)
                  
Finance income (loss)                 
Interest expense, net on financial instruments measured at amortized cost   (1,812)         (1,812)
Foreign currency gains, net(1)   635          635 
Other finance losses, net   (931)         (931)
Finance loss, net   (2,108)         (2,108)
                  
Loss before income taxes   (11,140)     374    (10,766)
Income tax expense              
Net loss for the year   (11,140)     374    (10,766)
                  
Items that will not be reclassified subsequently to net loss:                 
Re-measurements of actuarial liability   98          98 
Items that may be reclassified subsequently to net loss                 
Exchange differences on translating foreign operations   1,703  5(a)   11    1,714 
Comprehensive loss for the year  $(9,339)    $385   $(8,954)
                  
Net loss per share - basic and diluted  $(0.80)    $0.03   $(0.77)

 

A summary of the impact of adoption of IFRS 15 is as follows:

 

(a)Installation, start-up and commissioning services

 

Under IAS 18, the Company applied the revenue recognition criteria to each separate identifiable component of a single transaction. The contracts containing installation and start-up and commissioning services were accounted for as a separate element from the product sale. Costs associated with these services were accumulated in inventory and a portion of the contract revenue was deferred until the associated work was completed.

 

Under IFRS 15, these performance obligations are not distinct and are combined into a single performance obligation with the associated product, where the costs are insignificant in the context of the total contract and where the customer believes they are buying a final installed working product and are not buying the individual collection of products and services that when combined create the finished product. In these situations, revenue is now recorded inclusive of these immaterial performance obligations and the estimated costs to fulfill these obligations accrued for when control passes at the time of shipment of the related products. Accordingly, the Company accrued $914 in contract assets, reduced inventory by $78 and accrued $824 in provisions for future costs expected to be incurred and reduced the deficit by $12 at January 1, 2017. Similarly, the Company accrued $1,022 in contract assets, reduced inventory by $116 and accrued $625 in provisions for future costs expected to be incurred and reduced the deficit by $281 at December 31, 2017.

 

2018 Consolidated Financial StatementsPage 24

 

Hydrogenics Corporation

 

The restatement effect on the consolidated statements of operations and comprehensive loss for the year ended December 31, 2017 results in a $63 increase in revenue and a $195 reduction in cost of sales. The impact of these restatements on cumulative translation adjustments arising from the Company’s subsidiaries was a gain of $11.

 

(b)Sales agent commissions

 

The Company incurs sales agent commissions for obtaining contracts. Under IAS18, these costs were expensed when they were earned or incurred.

 

Under IFRS 15, these incremental costs incurred to obtain contracts with customers are deferred for contracts expected to be delivered after more than one year and expensed as the contract is delivered. The Company deferred $280 of commissions in prepaid expenses and reduced the deficit by the same amount at January 1, 2017. Similarly, the Company deferred $396 of commissions in prepaid expenses and reduced the deficit by the same amount at December 31, 2017. The impact of these restatements on cumulative translation adjustments arising from the Company’s subsidiaries was immaterial.

 

The restatement effect on the consolidated statements of operations and comprehensive loss for the year ended December 31, 2017 results in a $116 decrease in selling, general and administrative expenses for commissions previously expensed. The impact of these restatements on cumulative translation adjustments arising from the Company’s subsidiaries was immaterial.

 

(c)Contract assets and liabilities

 

IFRS 15 distinguishes between contract assets and receivables based on whether receipt of the consideration is conditional on something other than the passage of time. At December 31, 2017, there was $5,556 (January 1, 2017 - $4,658) of trade and other receivables outstanding where the Company’s right to consideration was not unconditional (primarily relating to revenue accrued on long term contracts). This amount has been reclassified as current and non-current contract assets under IFRS 15.

 

Under IFRS 15, amounts received from customers before the Company has transferred the good or service are to be presented as contract liabilities. As a result, the amounts previously presented as deferred revenue related to contracts with customers have been reclassified as contract liabilities and amounts not relating to contracts with customers have been reclassified as deferred funding.

 

(d)Practical expedients

 

The Company has elected to make use of the following practical expedients:

·Completed contracts under IAS 11 and IAS 18 before the date of transition have not been reassessed.
·Costs incurred to obtain contracts with an amortization period of less than one year have been expensed as incurred.
·For completed contract with variable consideration, the Company used the transaction price at the date of contract completion rather than estimating variable consideration amounts in the comparative reporting periods.
·Consideration previously recognized was not adjusted for the effects of a significant financing component if the Company expected, at contract inception, that the period between when the Company transfers a promised good or service to the customer and when the customer pays for the good or service was one year or less.

 

2018 Consolidated Financial StatementsPage 25

 

Hydrogenics Corporation

 

·For contracts that were modified before the date of initial application, the Company did not retrospectively restate the contract for those contract modifications. The Company reflected the aggregate effect of all of the modifications that occur before the beginning of the earliest period presented when: (i) identifying the satisfied and unsatisfied performance obligations; (ii) determining the transaction price; and (iii) allocating the transaction price to the satisfied and unsatisfied performance obligations.
·The Company also applied the practical expedient not to disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the Company expects to recognize that amount as revenue for the year ended December 31, 2017

 

Note 6 – Accounting Standards Issued But Not Yet Applied – IFRS 16

 

IFRS 16 Leases (“IFRS 16”) sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, the customer (“lessee”) and the supplier (“lessor”). This standard will replace IAS 17 Leases (“IAS 17”) and related Interpretations. IFRS 16 provides revised guidance on identifying a lease and for separating lease and non-lease components of a contract. IFRS 16 introduces a single accounting model for all lessees and requires a lessee to recognize right-of-use assets and lease liabilities for leases with terms of more than 12 months, unless the underlying asset is of low value, and depreciation of lease assets separately from interest on lease liabilities in the consolidated statement of operations and comprehensive loss. Under IFRS 16, lessor accounting for operating and finance leases will remain substantially unchanged. IFRS 16 is effective for annual periods beginning on or after January 1, 2019. The Company’s contractual obligations in the form of operating leases under IAS 17 will then be reflected on the balance sheet resulting in an increase to both assets and liabilities upon adoption of IFRS 16, and changes to the timing of recognition of expenses associated with the lease arrangements. The Company is assessing the new standard to determine the impact on its consolidated financial statements. An initial review has been completed to identify leases that will require recognition of a right-of-use asset and lease liability. The Company is currently quantifying these impacts and assessing its transition and implementation options.

 

Note 7 – Cash and Cash Equivalents and Restricted Cash

 

 

At December 31,   2018    2017 
Cash and cash equivalents  $7,561   $21,511 
Restricted cash   935    435 
Restricted cash – non-current   241    468 
Total  $8,737   $22,414 

 

The restricted cash is held by financial institutions in Canada and Europe as partial security for standby letters of credit and letters of guarantee. At December 31, 2018, the Company had standby letters of credit and letters of guarantee issued by several financial institutions of $2,890 (2017 – $2,821), with expiry dates extending to December 2021. See Note 19 – Lines of Credit and Bank Guarantees for additional information.

 

Note 8 – Trade and Other Receivables

 

 

At December 31,   2018    2017 
         Restated (Note 5) 
Trade accounts receivable  $3,313   $6,466 
Less:  provision for impairment (note 35)   (30)   (18)
Net trade accounts receivable   3,283    6,448 
Other receivables   3,445    2,288 
Total trade and other receivables  $6,728   $8,736 

 

 

2018 Consolidated Financial StatementsPage 26

 

Hydrogenics Corporation

 

Note 9 – Contract Assets and Contract Liabilities

 

The Company has recognized the following assets and liabilities related to contracts with customers:

 

 

At December 31,   2018    2017    $ change  
Contract assets  $6,223   $7,223   $(1,000)
Less: non-current portion   (1,689)   (645)   (1,044)
Current portion   4,534    6,578    (2,044)
                
Contract liabilities   16,001    14,044    1,957 
Less: non-current portion   (1,420)   (2,223)   803 
Current portion   14,581    11,821    2,760 

 

(i)Significant changes in contract assets and liabilities

Contract assets at December 31, 2018 includes $4,048 (2017 – $4,764) relating to receivables which are to be billed according to progress based and specified payment schedules, typical with long-term contracts. The remainder relates to the final instalment of contract price on the sale of equipment for installation and commissioning, which is not invoiced to the customer until this work is complete. The change in the contract assets balance during the period reflects the change in the timeframe for a right to consideration to become unconditional (i.e. for the contract asset to be reclassified as a receivable).

 

Contract liabilities represent deposits and payments received in advance from customers for license fees, product development contracts and equipment sales. The change in the contract liabilities balance during the period reflects changes in the time frame for performance obligations to be satisfied and the timing of receipt of deposits.

 

(ii)Revenue recognized in relation to contract liabilities

Revenue recognized in the current year, included in opening contract liabilities, amounted to $7,042 (2017 - $895). There were no amounts recognized in the current year related to performance obligations that were satisfied in a prior year (2017 - $nil).

 

(iii)Unsatisfied performance obligations

The following table shows unsatisfied performance obligations as at December 31, 2018:

 

 

At December 31,   2018    2017 
OnSite Generation  $20,600   $19,900 
Power Systems   112,100    124,700 
Total  $132,700   $144,600 

 

The Company expects $49,000 of the balance to be recognized as revenues in 2019 and $83,700 is to be recognized beyond 12 months.

 

Note 10 – Inventories

 

 

At December 31,   2018    2017 
         Restated (Note 5) 
Raw materials  $

9,954

   $9,708 
Work-in-progress   6,349    4,750 
Finished goods   

871

    590 
Total inventories  $17,174   $15,048 

 

2018 Consolidated Financial StatementsPage 27

 

Hydrogenics Corporation

 

Total inventory in the table above are recorded net of provisions to write them down to net realizable value. At December 31, 2018, the inventory provision was as follows:

 

 

    2018    2017 
At January 1,  $1,534   $1,332 
Net increase in the provision   834    873 
Write-downs during the year   (779)   (691)
Foreign exchange revaluation   5    20 
At December 31,  $1,594   $1,534 

 

Note 11 – Prepaid Expenses

 

 

At December 31,   2018    2017 
         Restated (Note 5) 
Prepaid expenses  $1,593   $978 
Costs incurred to obtain contracts with customers   367    396 
Total prepaid expenses  $1,960   $1,374 

 

 

The costs incurred to obtain contracts with customers relate to sales agent commissions, which are deferred until the related contract revenues with customers are recognized. The amount amortized to the consolidated statement of operations and comprehensive loss for the year ended December 31, 2018 was $33 (2017 - $167).

 

Note 12 – Investment in Joint Ventures

 

On March 30, 2017, the Company entered into an arrangement with Enbridge Gas Distribution (Enbridge) to form the joint venture 2562961 Ontario Ltd. to develop, construct, own and operate a 2.5 megawatts (“MW”) Power-to-Gas energy storage facility project. The Company holds a 49% equity investment in this joint venture. The Board of Directors of the joint venture has five directors consisting of three nominees from Enbridge and two nominees of Hydrogenics and all resolutions are adopted by a majority vote. The Company accounts for this joint venture using the equity method in accordance with IFRS 11, “Joint Arrangements” using the hypothetical liquidation at book value (HLBV) method due to preferential dividends and return rights of the other partner.

 

During 2017, the Company sold the joint venture related project assets developed as part of the 2.5MW energy storage facility project for $2,030. Hydrogenics received cash consideration of $1,035 and a 49% equity investment in the newly formed joint venture of $995. A loss on disposal of the transferred assets arose of $146, as the transfer to the joint venture was done at the historical Canadian dollar value. This loss on disposal is adjusted for in the Company’s 49% share of the loss relating to the equity interest received. It is eliminated against the investment in the joint venture and will be amortized over the life of the fixed assets. Of the loss of $146, $35 was capitalized as the cost of the equity investment. Legal costs of $93 were capitalized as they were incurred in the creation of the joint venture.

 

During 2018, the Company sold the joint venture related project assets developed as part of the 2.5MW energy storage facility project for $1,372. Hydrogenics received cash consideration of $700 and a 49% equity investment in the newly formed joint venture of $672. The Company recorded a $30 gain on sale of assets as the transfer was done at historical Canadian dollar value. This gain on sale is adjusted for the Company’s 49% share of the loss relating to the equity interest received. It is eliminated against the investment in joint venture and will be amortized over the life of the project. Of the gain of $30, $8 was capitalized and netted against the cost of the equity investment.

 

2018 Consolidated Financial StatementsPage 28

 

Hydrogenics Corporation

 

During 2018, the energy storage facility project was commissioned and accepted by the Independent Energy Service Operator (“IESO”). The facility began in-service operations under an IESO Regulation Services contract effective May 2018.

 

 

    2018    2017 
Balance January 1,  $1,176   $ 
Equity investment in joint venture   664    1,123 
Loss from investment in joint venture using HLBV method   (76)    
Amortization of deferred loss on disposal   (10)   (9)
Foreign currency translation (loss) gain   (110)   62 
Investment in Enbridge joint venture at December 31,  $1,644   $1,176 

 

Summarized financial information for the joint venture, as presented in the IFRS financial statements of 2562961 Ontario Ltd. is as follows:

 

 

At December 31,   2018    2017 
Assets          
Current assets  $439   $1 
Non-current assets   3,202    2,156 
Total assets  $3,641   $2,157 
Liabilities          
Current liabilities  $293   $ 
Total liabilities   293     
Net assets  $3,348   $2,157 

 

 

For the year ended December 31,   2018    2017 
Revenue  $627   $ 
Earnings before income taxes   71    1 
Joint venture earnings from continuing operations  $52   $1 

 

 

At December 31,   2018    2017 
Opening net assets of 2562961 Ontario Ltd. (Equity Investment)  $2,157   $ 
Investment in 2562961 Ontario Ltd.   1,372    2,030 
Joint venture earnings during the year   52    1 
Foreign currency translation   (233)   126 
Closing net assets of 2562961 Ontario Ltd.  $3,348   $2,157 
Unrealized (gains) losses on sales to 2562961 Ontario Ltd.   56    71 
Adjusted net assets of 2562961 Ontario Ltd.   3,404    2,228 
Company’s share of net assets using the HLBV method  $1,570   $1,092 
Plus: capitalization of legal costs   93    93 
Less: amortization of deferred loss on disposal   (19)   (9)
Investment in Enbridge joint venture at December 31  $1,644   $1,176 

 

2018 Consolidated Financial StatementsPage 29

 

Hydrogenics Corporation

 

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

 

In June 2018, Kolon Water & Energy Co. Ltd. and the Company commenced discussions with respect to dissolving the joint arrangement. The carrying value of the assets of Kolon Hydrogenics have been reduced to their estimated net recoverable amount based upon an assessment of fair values less costs of disposal. The share in loss of the joint venture for the year reflects the Company’s proportionate share of this fair value adjustment. Discussions are ongoing to dissolve the joint venture in 2019.

 

 

    2018    2017 
Balance January 1,  $1,621   $1,750 
Share in loss of the joint venture   (1,561)   (334)
Foreign currency translation gain (loss)   (60)   205 
Investment in Kolon Hydrogenics joint venture at December 31,  $   $1,621 

 

 

Note 13 – Property, Plant and Equipment

 

 

    Plant and test 
equipment 
    Furniture and 
equipment 
    Computer 
hardware 
    Leasehold 
improvements 
    Construction 
in progress 
    Total  
Net book value December 31, 2017  $183   $1,187   $204   $352   $1,948   $3,874 
Additions   155    373    58    290    125    1,001 
Disposals           (1)       (1,342)   (1,343)
Depreciation   (100)   (333)   (90)   (117)       (640)
Foreign exchange   (8)   (9)   (4)   (4)       (25)
Net book value December 31, 2018  $230   $1,218   $167   $521   $731   $2,867 
                               
Total cost  $3,712   $5,889   $548   $2,044   $731   $12,924 
Total accumulated depreciation   (3,482)   (4,671)   (381)   (1,523)       (10,057)
Net book value December 31, 2018  $230   $1,218   $167   $521   $731   $2,867 

 

Included in construction in progress is $Nil (2017 - $1,342) relating to capital costs to be transferred to the joint venture project with Enbridge (note 12). During the current and prior year, assets with a book value of $1,342 and $2,176 respectively were transferred to the Enbridge joint venture (notes 12 and 32).

 

2018 Consolidated Financial StatementsPage 30

 

Hydrogenics Corporation

 

Depreciation of $454 (2017 – $397) was included in selling, general and administrative expenses, $104 (2017 - $81) in research and product development expenses, and $82 (2017 – $137) in cost of sales in consolidated statement of operations and comprehensive loss.

 

 

    Plant and test 
equipment 
    Furniture and 
equipment 
    Computer 
hardware 
    Leasehold 
improvements 
    Construction 
in progress 
    Total  
Net book value December 31, 2016  $214   $1,270   $182   $308   $2,121   $4,095 
Additions   55    233    91    117    2,003    2,499 
Disposals   (11)       (2)       (2,176)   (2,189)
Depreciation   (104)   (338)   (97)   (76)       (615)
Foreign exchange   29    22    30    3        84 
Net book value December 31, 2017  $183   $1,187   $204   $352   $1,948   $3,874 
                               
Total cost  $3,604   $5,648   $558   $1,777   $1,948   $13,535 
Total accumulated depreciation   (3,421)   (4,461)   (354)   (1,425)       (9,661)
Net book value December 31, 2017  $183   $1,187   $204   $352   $1,948   $3,874 

 

Note 14 – Intangible Assets

 

 

Computer software   2018    2017 
Net book value January 1,  $180   $203 
Additions   125    25 
Amortization   (66)   (57)
Foreign exchange   (7)   9 
Net book value December 31,  $232   $180 
           
Total cost  $2,158   $2,043 
Total accumulated depreciation   (1,926)   (1,863)
Net book value December 31,  $232   $180 

 

Amortization of $66 (2017 – $57) is included in the consolidated statements of operations and comprehensive loss in selling, general and administrative expenses.

 

Note 15 – Goodwill

 

The carrying amounts of goodwill at the beginning and end of the current and previous years are set out below.

 

 

    2018    2017 
At January 1,  $4,569   $4,019 
Foreign exchange revaluation   (210)   550 
At December 31,  $4,359   $4,569 

 

The goodwill relates to the Company's OnSite Generation business CGU. The Company performs its annual impairment test as of September 30.

 

In estimating the recoverable amount of this CGU, the Company first used an income approach, discounting its future estimated cash flows for Q4 2018 and a five-year forecast period, starting with the approved 2019 budget, and discounted those projected cash flows at a rate of return that reflects the relative risks of achieving those cash flows. To this amount, the Company added the present value of a terminal value, determined by applying a capitalization rate to the expected annual cash flows to be generated beyond the forecast period, and the present value of the tax shield from existing tax loss carryforwards to determine an estimated enterprise value. The resulting enterprise value was then adjusted for redundant assets, interest bearing debt and debt equivalents and estimated costs to sell to determine an estimated fair value less cost to sell.

 

2018 Consolidated Financial StatementsPage 31

 

Hydrogenics Corporation

 

Discounted cash flows over the forecast period used a five-year revenue compound annual growth rate (CAGR) of approximately 30% (2017 – 20%) and a perpetual growth rate of 2% (2017 – 2%) thereafter.   The five-year revenue CAGR used in the discounted cash flows calculations differs from past experience. Management has determined the five-year revenue CAGR based on expectations for future growth in demand for hydrogen generation products in our core markets; notably, multimegawatt Power-to-Gas and hydrogen refueling opportunities, the impact of recently launched and to be launched solutions, as well as its current backlog.  Gross direct margins (excluding indirect overheads) are projected to decline from 29% to 24.5% (2017 – 29% fixed) throughout the forecast period reflecting management’s expectation of competitive pressure on margins to achieve a 30% CAGR. Selling, general and administrative expenses and indirect manufacturing overheads are projected to increase at approximately 5% (2017 – 3%) per year after the 2018 period. Research and development costs (net of grants) are anticipated to increase in 2019 and 2020 and then return to historic levels of less than $1.5 million per year thereafter. Working capital requirements were estimated to approximate 10% (2017 – 15%) of annual sales throughout the forecast period. Using a weighted cost of capital approach, the Company applied a discount rate of 11.6% (2017 – 15.5%) to determine the present value of the projected cash flows and then deducted 1.25% (2017 - 3%) for estimated costs to sell. 

 

The Company supplemented the discounted cash flow analysis by considering transactions multiples over the past five years and current trading multiples for broadly comparable public company businesses with similar operations within the same industry to the resulting sales multiple of the OnSite CGU from the discounted cashflow approach (1.2 times (2017 – 2.2) trailing 12 months revenues) which was within the low end of the range due the significantly smaller size of the Company’s operations relative to some of these public companies comparables.

 

The sales and operations of the OnSite Generation CGU constitutes approximately half of the Company’s current sales and operations. Accordingly, the Company also compared the enterprise value of the OnSite Generation CGU against the Company’s overall market capitalization and the implied valuation of its Power Systems CGU and the respective revenue multiples. The revenue multiple for the Company as a whole was 2.5 times (2017 - 3.1) trailing 12 months revenues, the implied revenue multiple for the Power Systems CGU was 4.5 times (2017 - 3.8) trailing 12 months revenue and the implied revenue multiple for the OnSite Generation CGU was 1.2 times (2017 - 2.2) trailing 12 months revenue. Management believes all of these multiples are within the low end of the range when compared to multiples of broadly comparable public companies in the hydrogen fuel cell industry.

 

As the valuation techniques used by the Company require the use of unobservable inputs, the recoverable amount of the Company’s OnSite Generation CGU is classified within Level 3 of the fair value hierarchy. 

 

No impairment charges arose as a result of the reviews in either 2018 or 2017.   Reasonably possible changes in key assumptions in the discounted cash flow approach would not cause the recoverable amount of the OnSite Generation CGU to fall below its carrying value. The recoverable amount would equal its carrying value if a revenue multiple of 0.5 times (2017 - 0.3) revenue was used. 

 

Note 16 – Trade and Other Payables

 

Accounts payable and accrued liabilities are as follows:

 

 

At December 31,   2018    2017 
           
Trade accounts payable  $3,952   $4,612 
Accrued payroll and related compensation   2,292    2,645 
Supplier accruals   2,584    2,126 
Accrued professional fees   206    224 
Other   34    129 
Total accounts payable and accrued liabilities  $9,068   $9,736 

 

2018 Consolidated Financial StatementsPage 32

 

Hydrogenics Corporation

 

Note 17 – Financial Liabilities

 

Financial liabilities are as follows:

 

 

At December 31,   2018    2017 
Current portion of long-term debt – Export Development Canada (note 20)  $1,983   $2,470 
Current portion of long-term debt – Province of Ontario (note 20)   628    622 
Warrants   11    409 
Deferred share unit liability (note 22)   730    1,406 
Current portion of capital lease (note 20)   7    6 
Total financial liabilities  $3,359   $4,913 

 

Warrants

 

On November 4, 2016, concurrent with a new loan agreement with Export Development Canada (“EDC”), the Company issued 200,575 share purchase warrants. Each warrant was exercisable for one common share of the Company at an exercise price of US$6.85 per common share. The warrants were transferrable and were scheduled to expire on November 4, 2021. The proceeds of the loan (net of transaction costs) were allocated between the fair value of the warrant liability and the debt. These warrants include anti-dilution provisions, and as a result were accounted for as a financial liability with changes in fair value reflected in the consolidated statements of operations and comprehensive loss. These warrants were exercised on December 1, 2017 for cash proceeds of $1,374 which together with the associated warrant liability of $592 are reflected in the statements of changes in equity.

 

 

On May 8, 2015, concurrent with a new loan agreement with a syndicate of lenders, the Company issued 250,000 share purchase warrants. Each warrant was exercisable for one common share of the Company at an exercise price of US$15.00 per common share. The warrants are non-transferrable and expire on May 6, 2019. As a result of this issuance, the fair market value of these warrants of $885 was included in other finance (losses) gains. These warrants include anti-dilution provisions, and as a result are accounted for as a financial liability with changes in fair value reflected in the consolidated statements of operations and comprehensive loss. On December 16, 2015, as a result of the public offering, the exercise price of the warrants was reduced to US$10.85 per common share.

 

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

 

 

At December 31,   2018    2017 
Risk-free interest rate (%)   1.86%   1.68%
Expected volatility (%)   60.1%   55.3%
Expected life in years   0.35    0.38 
Expected dividend   Nil    Nil 

 

 

2018 Consolidated Financial StatementsPage 33

 

Hydrogenics Corporation

 

Note 18 – Provisions

 

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

 

 

    Warranty    Startup and
commissioning
    Total 
At January 1,  $2,095   $625   $2,720 
Additional provisions   1,994    726    2,720 
Utilized during the year   (906)   (784)   (1,690)
Unused amounts reversed   (781)   (12)   (793)
Foreign currency translation   (75)   (31)   (106)
Total provision at December 31, 2018   2,327    524    2,851 
Less current portion   (1,636)   (405)   (2,041)
Long-term provision at December 31, 2018  $691   $119   $810 

 

    Warranty    Startup and
commissioning
    Total
Restated (Note 5)
 
At January 1,  $2,062   $824   $2,886 
Additional provisions   1,192    1,087    2,279 
Utilized during the year   (639)   (1,358)   (1,997)
Unused amounts reversed   (734)       (734)
Foreign currency translation   214    72    286 
Total provision at December 31, 2017   2,095    625    2,720 
Less current portion   (1,174)   (570)   (1,744)
Long-term provision at December 31, 2017  $921   $55   $976 

 

 

Note 19 – Lines of Credit and Bank Guarantees

 

At December 31, 2018, the Company’s subsidiary in Belgium (the “Borrower”) had a joint credit and operating line facility of €7,000 (the “Credit Facility”), which renews annually in April upon review. Under the Credit Facility, the Borrower may borrow up to a maximum of 75% of the value of awarded sales contracts, approved by the Belgian financial institution, to a maximum of €500; and may also borrow up to €1,500 for general business purposes, provided sufficient limit exists under the overall facility limit of €7,000. Of the €7,000 facility, €2,175 or approximately $2,491 was drawn as standby letters of credit and bank guarantees and €Nil was drawn as an operating line. At December 31, 2018, the Company had availability of €6,321 or approximately $7,234 (December 31, 2017 – $4,377) under the Credit Facility totaling €4,321, or approximately $4,945, for use as letters of credit and bank guarantees and totaling €2,000, or approximately $2,289, as an operating line.

 

The Credit Facility bears interest at EURIBOR plus 1.45% per annum and is secured by a €1,000 secured first charge covering all assets of the Borrower. The credit facility contains a negative pledge precluding the Borrower from providing security over its assets. Additionally, the Borrower is required to maintain a solvency covenant, defined as equity plus current account (intercompany account with the parent company), divided by total liabilities of not less than 25% and ensure that its intercompany accounts with parent company do not fall below a defined level. At December 31, 2018, the Borrower was in compliance with these covenants.

 

At December 31, 2018, the Company also had a Canadian credit facility of $2,199 with no expiration date for use only as letters of credit and bank guarantees. At December 31, 2018, $399 was drawn as standby letters of credit and bank guarantees. At December 31, 2018, the Company had $1,800 (December 31, 2017 – $2,391) available under this facility.

 

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

 

2018 Consolidated Financial StatementsPage 34

 

Hydrogenics Corporation

 

Note 20 – Other Non-current Liabilities

 

Other non-current liabilities are as follows:

 

 

At December 31,   2018    2017 
Long-term debt – Export Development Canada (i)  $5,958   $8,344 
Long-term debt – Province of Ontario (ii)   2,091    2,896 
Non-current post-retirement benefit liabilities (iii)   247    330 
Capital lease   33    44 
Total   8,329    11,614 
Less current portion of long-term debt – EDC  (note 17)   (1,983)   (2,470)
Less current portion of long-term debt – Province of Ontario (note 17)   (628)   (622)
Less current portion of capital lease (note 17)   (7)   (6)
Total other non-current liabilities  $5,711   $8,516 

 

(i)Long-term debt – Export Development Canada (“EDC”)

 

In the fourth quarter of 2016, the Company entered into a loan agreement with EDC for a five-year facility of $9,000.

The loan is structured as a five-year term loan with quarterly interest payments calculated at an annual interest rate of U.S. prime plus 10%, declining to U.S. prime plus 5% to 7% if certain annual earnings before interest, taxes, depreciation and amortization thresholds are met. The loan is secured by a second charge over the assets located within Canada. Commencing March 31, 2017, the loan principal is subject to four quarterly repayments of $250 followed by 16 quarterly repayments of $500. There is an option to prepay a portion of, or the entire loan at any time, subsequent to March 31, 2017.

 

The amortized cost of this loan at December 31, 2018 was $5,958 (December 31, 2017 – $8,344). Total interest expense for the year ended December 31, 2018 was $1,133 (December 31, 2017 – $1,306). For the year ended December 31, 2018, accretion of deferred financing fees of $57 has been included in interest expense (December 31, 2017 – $102).

 

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

 

 

    2018    2017 
At January 1,  $8,344   $8,625 
Principal repayments during the year   (2,250)   (750)
Interest payments during the year   (1,370)   (1,093)
Interest accretion during the year   1,133    1,306 
Revaluation of variable rate long-term debt (note 28)   101    256 
At December 31,  $5,958   $8,344 

 

(ii)Long-term debt – Province of Ontario

 

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

 

After this five-year period, the loan bears interest at a rate of 3.67% and will require repayment at a rate of 20% per year of the outstanding balance for the five years subsequent to the sixth anniversary of the first disbursement. There is no availability remaining under this facility at December 31, 2018.

 

The loan is collateralized by a general security agreement covering assets of Hydrogenics Corporation. Additionally, the Corporation is required to maintain a minimum balance of cash in Canadian dollars in a Canadian financial institution at all times. The Company was in compliance with this covenant at December 31, 2018.

 

2018 Consolidated Financial StatementsPage 35

 

Hydrogenics Corporation

 

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

 

 

    2018    2017 
At January 1,  $2,896   $3,239 
Principal repayments during the year   (870)   (888)
Interest payments during the year   (128)   (181)
Interest accretion during the year   416    503 
Foreign currency translation   (223)   223 
At December 31,  $2,091   $2,896 

 

(iii)Post-retirement benefit liabilities

 

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

 

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

 

 

    2018    2017 
At January 1,  $330   $377 
Current service and net interest cost   122    153 
Employer contributions in the year   (122)   (153)
Re-measurement of actuarial liability   (70)   (99)
Foreign currency translation   (13)   52 
At December 31,  $247   $330 

 

    2018    2017 
Plan assets  $1,777   $1,716 
Accrued benefit obligation   (2,024)   (2,046)
Net defined benefit obligation  $(247)  $(330)

 

The Company has estimated the post-retirement benefit liabilities of $247 at December 31, 2018, using an actuarial measurement.

 

2018 Consolidated Financial StatementsPage 36

 

Hydrogenics Corporation

 

Note 21 – Share Capital

 

Common shares

 

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

 

 

   2018  2017
    Number     Amount     Number     Amount  
Balance at January 1,   15,436,879   $387,746    12,544,960   $365,923 
Adjustment for partial shares on share consolidation           (1)    
Issuance of common shares           2,682,742    19,725 
Warrants exercised (note 17)           200,575    1,966 
Issuance of common shares on vesting of performance share units (note 22)   4,204    96    4,203    96 
Issuance of common shares on exercise of stock options (note 22)   6,400    69    4,400    36 
At December 31,   15,447,483   $387,911    15,436,879   $387,746 

 

Common share issuance

 

On April 28, 2017, the Company and Fuzhou Bonded Zone Hejili Equity Investment Limited Partnership (“Hejili”) entered into a subscription agreement to issue 2,682,742 common shares of Hydrogenics to Hejili on a private placement basis, for gross proceeds to Hydrogenics of $21,000 or approximately $7.83 per common share. The subscription price represented a 10% premium to the 20-day volume-weighted average trading price of the Company’s common shares on the NASDAQ for the period ending April 27, 2017.

 

The transaction closed on June 27, 2017 and the Company received net proceeds of $19,725 after underwriting fees and expenses of $1,275. Subsequent to closing of the private placement, Hejili’s interest in Hydrogenics was approximately 17.6% of total issued common shares.

 

The subscription agreement provides, among other things, that Hejili has participation rights on future offerings and the right to nominate one director to the board of directors of Hydrogenics, and that Hejili will be subject to certain restrictions, including lock-up, transfer and voting restrictions, subject, in each case, to certain ownership threshold requirements. The subscription agreement also provides that Hejili will cooperate with Hydrogenics to jointly develop the Chinese market for hydrogen, energy storage and fuel cell products.

 

Note 22 – Stock-Based Compensation

 

Under the Hydrogenics Omnibus Incentive Plan adopted in 2012, the Corporation may issue stock options, RSUs and PSUs to employees, directors and consultants as part of a long-term incentive plan. Stock options were previously granted under the Corporation’s Stock Option Plan.

 

Under the Company’s previous Stock Option Plan, 234,976 stock options were outstanding at December 31, 2018. No further stock options may be issued under the Corporation’s Stock Option Plan.

 

Effective May 11, 2018, the Company amended the Omnibus Incentive Plan to increase the number of shares available for issuance to 1,308,032 from 1,002,069. The shareholders’ resolution was passed on May 11, 2018.

 

Of the 1,308,032 shares available under the Omnibus Incentive Plan, to be issued as stock options, RSUs and PSUs, 618,113 have been granted as stock options, 202,707 have been granted as RSUs and were outstanding at December 31, 2018. In addition, 12,609 previously issued PSU’s had fully vested as of December 31, 2018. The Corporation has 474,603 of share units available for issue as stock options, RSUs and PSUs under the Omnibus Incentive Plan at December 31, 2018.

 

2018 Consolidated Financial StatementsPage 37

 

Hydrogenics Corporation

 

Stock options

 

A summary of the Company’s stock option plan is as follows:

 

 

   2018  2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of 
shares
 
 
 
 
 
 
 
 
 
 
 
 
Weighted 
average 
exercise price 
C$
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Number of 
shares
 
 
 
 
 
 
 
 
 
 
 
 
Weighted 
average 
exercise price 
C$
 
 
 
 
Balance at January 1,   762,173   $7.99    628,636   $7.97 
Granted   111,621    11.23    141,268    8.56 
Exercised   (6,400)   8.05    (4,400)   6.22 
Forfeited   (9,280)   13.25         
Expired   (5,025)   10.44    (3,331)   29.25 
At December 31,   853,089   $8.37    762,173   $7.99 

 

During the year ended December 31, 2018, 6,400 (2017 – 4,400) stock options were exercised resulting in cash proceeds of $40 (2017 – $20), an increase in equity of $69 (2017 – $36) with an offset to contributed surplus of $29 (2017 – $16).

 

During the year ended December 31, 2018, 111,621 (2017 – 141,268) stock options were granted with an average fair value of C$11.23 per option (2017 – $8.56). All options are for a term of ten years from the date of grant and vest over four years unless otherwise determined by the Board of Directors. The fair value of the stock options was determined using the Black-Scholes option pricing model with the following weighted average assumptions:

 

 

    2018    2017 
Risk-free interest rate   2.12%   1.34%
Expected volatility   64.3%   64.6%
Expected life in years   7    6 
Expected dividend   Nil    Nil 

 

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

 

Stock-based compensation expense for the year ended December 31, 2018, related to stock options, was $539 (2017 – $444) and was included in selling, general and administrative expenses with an offsetting increase to contributed surplus.

 

2018 Consolidated Financial StatementsPage 38

 

Hydrogenics Corporation

 

The following table summarizes information about the Company’s stock options as of December 31, 2018:

 

 

Grant date  Expiry date   Total 
number 
of options 
    Weighted 
average 
 remaining 
contractual 
life (in 
years) 
    Exercise 
Price 
C$
    Number 
of vested 
options 
    Weighted 
average 
 remaining 
contractual 
life (in 
years) 
    Exercise 
Price 
C$
 
March 27, 2009  March 27, 2019   5,284    0.24   $13.25    5,284    0.24   $13.25 
April 6, 2010  April 5, 2020   19,787    1.26    4.91    19,787    1.26    4.91 
March 31, 2011  March 31, 2021   83,000    2.25    6.96    83,000    2.25    6.96 
June 8, 2011  June 8, 2021   126,905    2.44    5.03    126,905    2.44    5.03 
May 10, 2012  May 11, 2022   157,871    3.36    6.25    157,871    3.36    6.25 
November 19, 2012  November 19, 2022   39,476    3.89    6.60    39,476    3.89    6.60 
March 21, 2013  March 21, 2023   15,000    4.22    8.10    15,000    4.22    8.10 
March 26, 2015  March 25, 2025   56,821    6.23    16.14    42,616    6.23    16.14 
March 30, 2016  March 31, 2026   96,056    7.25    10.53    48,028    7.25    10.53 
March 14, 2017  March 14, 2027   141,268    8.20    8.56    35,317    8.20    8.56 
March 13, 2018  March 13, 2028   90,836    9.20    11.41        9.20    11.41 
June 1, 2018  June 1, 2028   20,785    9.42    10.45        9.42    10.45 
       853,089    5.29   $8.37    573,284    5.29   $8.37 

 

Performance Share Units (“PSUs”)

 

Under the Hydrogenics Omnibus Incentive Plan adopted in 2012, the Company may issue performance based share units to employees, directors and consultants. Pursuant to the Hydrogenics Omnibus Incentive Plan, participants may be granted a portion of their long-term incentive plan in the form of PSUs instead of RSUs and stock options. A PSU is a unit, equivalent in value to a common share of the Company. Each PSU entitles the participant to receive a cash payment or common shares, at the option of the Company. The fair value of the PSUs is recognized as a compensation expense and is pro-rated over the expected vesting period with the offsetting increase to contributed surplus. Fair value is calculated as the market value of the common share at the date of grant. Each PSU is subject to vesting performance conditions. The Company estimates the length of the expected vesting period at the grant date, based on the most likely outcome of the performance conditions. The Company will revise its estimate of the length of the vesting period, if necessary, if subsequent information indicates that the length of the vesting period differs from previous estimates and any change to compensation cost will be recognized in the period in which the revised estimate is made. Forfeitures are estimated at the grant date and are revised to reflect a change in expected or actual forfeitures. The expiry date of PSUs granted is five years from the date of award.

 

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

 

 

    2018    2017 
Balance at January 1,   191,366    195,569 
Expired   (187,162)    
Vested – share issuance   (4,204)   (4,203)
At December 31,       191,366 

 

Stock-based compensation expense for the year ended December 31, 2018, related to PSUs, was $6 (2017 – $31) and was included in selling, general and administrative expenses with an offsetting increase to contributed surplus.

 

2018 Consolidated Financial StatementsPage 39

 

Hydrogenics Corporation

 

Equity-settled Restricted Share Units (“RSUs”)

 

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

 

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

 

 

    2018    2017 
Balance at January 1,   133,184    52,483 
RSUs issued   69,523    80,701 
At December 31,   202,707    133,184 

 

Stock-based compensation expense for the year ended December 31, 2018, related to RSUs, was $412 (2017 – $267) and was included in selling, general and administrative expenses with an offsetting increase to contributed surplus.

 

Deferred Share Units (“DSUs”)

 

The Company has a deferred share unit plan for directors. Pursuant to the DSU Plan, non-employee directors are entitled to receive all or any portion of their annual cash retainer and meeting fees in the form of DSUs instead of cash. A DSU is a unit, equivalent in value to a common share of the Company. Each DSU entitles the participant to receive a cash payment upon termination of directorship, valued at the price of the Company’s common shares on the TSX on the date of termination. Compensation cost for DSUs granted under the DSU plan is recorded as an expense with a corresponding increase in accrued liabilities and is measured at fair value. The DSU liability is marked-to-market each reporting period with the offset recorded in selling, general and administrative expenses.

 

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

 

 

   2018  2017
    Number    Amount    Number    Amount 
Balance at January 1,   125,949   $1,406    106,506   $456 
DSU compensation expense   21,222    145    20,277    174 
DSU cancellation           (834)   (9)
DSU fair value adjustments       (821)       785 
At December 31,   147,171   $730    125,949   $1,406 

 

For the year ended December 31, 2018, the Company recognized $145 (2017 – $165) as expense for the issue of new DSUs (net of cancellations) and a recovery of $821 (2017 – expense of $785) for the mark-to-market adjustment on the liability.

 

The DSU liability at December 31, 2018 of $730 (2017 – $1,406) was included in financial liabilities. DSUs vest immediately on the date of issuance.

 

2018 Consolidated Financial StatementsPage 40

 

Hydrogenics Corporation

 

Summary of stock-based compensation expense (recovery)

 

 

Years ended December 31,   2018    2017 
Stock-based compensation expense - stock options  $539   $444 
Stock-based compensation expense - PSU   6    31 
Stock-based compensation expense - RSU (equity-settled)   412    267 
Subtotal stock based compensation expense   957    742 
DSU - new issuance (net of cancellations)   145    165 
DSU - mark-to-market adjustment   (821)   785 
Subtotal stock-based compensation expense - DSU   (676)   950 
Total  $281   $1,692 

 

Note 23 – Selling, General and Administrative Expenses

 

 

Year ended December 31,   2018    2017 
         Restated (Note 5) 
Salaries and benefits, office administration and other expenses  $10,812   $11,480 
Depreciation (note 13)   454    397 
Amortization (note 14)   66    57 
Stock-based compensation - stock options, PSU and RSU (note 22)   957    742 
Stock-based compensation - DSU (note 22)   (676)   950 
Total  $11,613   $13,626 

 

Note 24 – Research and Product Development Expenses

 

Research and product development expenses are recorded net of non-repayable third-party program funding received or receivable. For the years ended December 31, 2018 and 2017, research and product development expenses and non-repayable program funding, which have been received or receivable, are as follows:

 

 

Year ended December 31,   2018    2017 
Research and product development expenses  $12,023   $8,812 
Government research and product development funding   (4,537)   (2,436)
Total  $7,486   $6,376 

 

Note 25 – Key Management Compensation

 

Key management includes the Company’s directors and key executive members.

 

 

Year ended December 31,   2018    2017 
Salaries and short-term employee benefits  $2,286   $1,873 
Stock-based compensation          
         DSUs   145    165 
         Stock options   598    561 
         RSUs   601    533 
         PSUs   30     
Total  $3,660   $3,132 

 

Stock-based compensation represents fair value of amounts granted during the year.

 

2018 Consolidated Financial StatementsPage 41

 

Hydrogenics Corporation

 

Note 26 – Expenses by Nature

 

The following expenses are included in cost of sales; selling, general and administrative expenses; and gross research and product development expenses.

 

 

Year ended December 31,   2018    2017 
         Restated (Note 5) 
Raw materials and consumables used  $23,162   $32,818 
Employee benefits (note 27)   17,857    18,497 
Facilities   2,942    2,683 
Professional services   1,311    1,220 
Depreciation and amortization (note 13, 14)   706    672 
Shareholder and other corporate communications   395    479 
Insurance   502    504 
Marketing   581    499 
Other   1,351    1,503 
Total  $48,807   $58,875 

 

Note 27 – Employee Benefits Expense

 

The following employee benefits expenses are included in cost of sales; selling, general and administrative expenses and research and development expenses.

 

 

Year ended December 31,   2018    2017 
         Restated (Note 5) 
Salaries and wages  $16,461   $15,790 
Stock-based compensation (including equity-settled RSUs & PSUs), (note 22)   957    742 
Medical, dental and insurance   415    346 
Pension costs   326    270 
Stock-based compensation – DSUs (note 22)   (676)   950 
Other   374    399 
Total  $17,857   $18,497 

 

Note 28 – Other Finance Gains and Losses, Net

 

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

 

 

Year ended December 31,   2018    2017 
Revaluation of variable rate long-term debt – EDC (note 20)  $(101)  $(256)
Gain (loss) from change in fair value of outstanding warrants (note 17)   398    (675)
Total  $297   $(931)

 

Note 29 – Income Taxes

 

The Corporation had net losses for the periods ended December 31, 2018 and 2017 and income tax expense was $300 and $nil for each of these years, respectively.

 

The estimated income tax rate for the Company is based on substantively enacted corporate tax rates, expected timing of reversals, and expected taxable income allocation to various tax jurisdictions.

 

2018 Consolidated Financial StatementsPage 42

 

Hydrogenics Corporation

 

The Company’s computation of income tax expense is as follows:

 

 

Years ended December 31,   2018    2017 
         Restated (Note 5) 
Loss before income taxes  $(13,039)  $(10,766)
Statutory income tax rate   25%   25%
Income tax recovery at statutory rates   (3,260)   (2,692)
Non-deductible expenses   302    94 
Withholding tax   300     
Tax losses and other temporary differences not recognized   3,244    2,622 
Income taxes at different rates in foreign and other provincial jurisdictions   (233)   (256)
Other   (53)   231 
Total  $300   $ 

 

At December 31, 2018, the Company has available income tax loss carry-forwards of $109,953 that may be used to reduce taxable income in future years, in certain jurisdictions, expiring as follows:

 

 

For the years ended   2018    2017 
2024  $118   $118 
2025   244    244 
2026   512    512 
2027   14    14 
2028   1    1 
2029   517    517 
2030   7,208    7,208 
2031   6,243    6,432 
2032   5,524    5,706 
2033        
2034   4,814    4,680 
2035   5,798    6,238 
2036   5,237    5,411 
2037   4,789    4,853 
2038   6,177     
No expiry   62,757    61,518 
Total  $109,953   $103,452 

 

Components of the Company’s tax benefit of deductible temporary differences and unused tax losses are:

 

 

Year ended December 31,   2018    2017 
Non-capital losses  $30,508   $30,984 
Investment tax credits   1,649    1,349 
Scientific research and experimental development   745    745 
Property, plant and equipment and intellectual property   1,592    1,406 
Provisions   200    131 
Other   850    669 
Total  $35,544   $35,283 

 

No deferred income tax asset has been recognized in respect of the $35,544 of losses and other temporary differences, reflecting the Company’s uncertainty associated with the realization of deferred income tax assets.

 

2018 Consolidated Financial StatementsPage 43

 

Hydrogenics Corporation

 

Note 30 – Net Loss Per Share

 

The loss per share for the years ended December 31, 2018 and 2017 was as follows:

 

 

Year ended December 31,   2018    2017 
Net loss  $(13,339)  $(11,140)
Change in accounting policy (note 5)       374 
Net loss, restated   (13,339)   (10,766)
           
Weighted average number of shares outstanding – basic   15,441,947    13,947,636 
Dilutive effect of stock options        
Dilutive effect of warrants        
Weighted average number of shares outstanding – diluted   15,441,947    13,947,636 
Net loss per share – basic and diluted  $(0.86)  $(0.77)

 

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

 

Note 31 – Commitments and Contingencies

 

Forgivable loan facility

 

In November 2014, Hydrogenics entered into an agreement with the IESO to provide a 2.5MW Power-to-Gas storage unit to the Province of Ontario. The target in-service period for the IESO Regulation Services contract was the second quarter of 2018. The contract was assigned to the joint venture 2562961 Ontario Ltd. in 2017. The joint venture will receive a total of C$2,950, paid in equal monthly instalments, in return for IESO’s use of the energy storage solution over the initial three-year period commencing with commissioning. The Power-to-Gas storage unit is estimated to have a potential 20-year life.

 

In order to partially fund the development of the unit, Hydrogenics and the Province of Ontario, through the Ministry of Research and Innovation (“MRI”), negotiated a C$4,000 forgivable loan from the Innovation Demonstration Fund Program (“IDF”). The loan bears interest at 3.23%, is expected to mature on June 30, 2020 and the principal and interest are forgivable upon the satisfaction of certain criteria.

 

The forgiveness of the principal and interest on the loan is contingent on a final commercialization report satisfactory to MRI, indicating successful commissioning and verification of the operation of the multi-stack 2.5MW PEM electrolyzer and demonstrated performance capabilities that would be deemed acceptable for ancillary service as per the IESO specifications. The unit achieved acceptance by IESO in May 2018. The final commercialization report is expected to be delivered in 2019. The forgivable loan has been accounted for as a government grant as management estimates there is reasonable assurance that the terms of forgiveness will be met.

 

 

   December 31, 
 2018
    
Total cumulative cost of 2.5MW Power-To-Gas unit  $8,792 
Funding received from the IDF (C$4,000)   (2,941)
Cumulative costs transferred to the joint venture (note 12)   (3,402)
Foreign exchange loss on disposal   (117)
Costs recorded as research and product development costs   (2,332)
Costs remaining to be transferred to the joint venture  $ 

 

2018 Consolidated Financial StatementsPage 44

 

Hydrogenics Corporation

 

Rental expenses

 

The Company incurred rental expenses of $1,221 under operating leases in 2018 (2017 – $1,120). The Company has future minimum lease payments under operating leases relating to premises, office equipment and vehicles as follows:

 

 

For the years ended   
2019  $1,088 
2020   885 
2021   724 
2022   387 
2023   290 
Thereafter   560 
Total  $3,934 

 

The Company leases various premises, office equipment and vehicles under non-cancellable operating lease agreements. The lease agreements are classified as non-cancellable, as penalties are charged if cancellation does occur. Certain leases contain purchase option clauses, which provide the Company with the ability to purchase the equipment or automobile at fair value at the time of exercise. The leases have varying terms, escalation clauses and renewal rights.

 

Indemnification agreements

 

The Company has entered into indemnification agreements with its current and former directors and officers to indemnify them, to the extent permitted by law, against any and all charges, costs, expenses, amounts paid in settlement, and damages incurred by the directors and officers as a result of any lawsuit or any other judicial, administrative or investigative proceeding in which the directors and officers are sued as a result of their service.

 

These indemnification claims will be subject to any statutory or other legal limitation period. The nature of the indemnification agreements prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. The Company has purchased directors’ and officers’ liability insurance. No amount has been recorded in the consolidated financial statements with respect to these indemnification agreements, as the Company is not aware of any claims.

 

In the normal course of operations, the Company may provide indemnification agreements, other than those listed above, to counterparties that require the Company to compensate them for costs incurred as a result of changes in laws and regulations or as a result of litigation claims or statutory sanctions that may be suffered by the counterparty as a consequence of the transaction. The terms of these indemnification agreements will vary based on the contract. The nature of the indemnification agreements prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. No amount has been recorded in the consolidated financial statements with respect to these indemnification agreements, as the Company is not aware of any claims.

 

Note 32 – Related Party Transactions

 

In the normal course of operations, the Company subcontracts certain manufacturing functions to a company owned by a family member of an executive officer and Director of the Company. During 2018, Hydrogenics made purchases of $467 (2017 – $646) from this related company. At December 31, 2018, the Company had an accounts payable balance due to this related party of $21 (2017 – $8).

 

The Company holds an equity investment in the joint venture 2562961 Ontario Ltd., related to the energy storage facility project with Enbridge Gas Distribution. During the year ended December 31, 2018 the Company transferred assets to the joint venture of $1,372 (2017 – $2,030) and at the end of December 31, 2018 the Company had a receivable of $196 (2017 – $nil) owing from the joint venture.

 

2018 Consolidated Financial StatementsPage 45

 

Hydrogenics Corporation

 

The Company holds an equity investment in the joint venture Kolon Hydrogenics. The Company had no transactions with the joint venture in either 2018 or 2017.

 

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

 

Note 33 – Consolidated Statements of Cash Flows

 

Components of the net change in non-cash operating assets and liabilities are as follows:

 

 

Year ended December 31,   2018    2017 
         Restated (Note 5) 
Decrease (increase) in current assets          
Trade and other receivables  $1,834   $(4,013)
Contract assets   921    (1,006)
Inventories   (2,497)   3,343 
Prepaid expenses   (603)   (152)
Increase (decrease) in current liabilities          
Trade and other payables, including provisions   (1,164)   1,616 
Contract liabilities   2,260    (282)
Deferred funding   999    271 
Total  $1,750   $(223)

 

Note 34 – Segmented Financial Information

 

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

 

Financial information by reportable segment for the years ended December 31, 2018 and 2017 was as follows:

 

 

 
Year ended December 31, 2018
 
 
 
 
OnSite 
Generation
 
 
 
 
 
 
Power 
Systems
 
 
 
 
 
 
Corporate 
and Other
 
 
 
 
 
 
 
Total
 
 
Revenue transferred at a point in time  $17,463   $12,152   $   $29,615 
Revenue transferred over time   845    3,436        4,281 
Revenues from external customers   18,308    15,588        33,896 
Gross profit   2,648    6,077        8,725 
Selling, general and administrative expenses   2,959    4,276    4,378    11,613 
Research and product development expenses   2,927    4,495    64    7,486 
Segment loss   (3,238)   (2,694)   (4,442)   (10,374)
Loss in joint venture           (1,637)   (1,637)
Interest expense, net           (1,469)   (1,469)
Foreign currency gains, net           144    144 
Other finance gains, net           297    297 
Loss before income taxes  $(3,238)  $(2,694)  $(7,107)   (13,039)

 

2018 Consolidated Financial StatementsPage 46

 

Hydrogenics Corporation

 

 

 
Year ended December 31, 2017
 
 
 
 
OnSite 
Generation
 
 
 
 
 
 
Power 
Systems
 
 
 
 
 
 
Corporate 
and Other
 
 
 
 
 
 
 
Total
 
 
Revenue transferred at a point in time  $24,385   $19,393   $   $43,778 
Revenue transferred over time   883    3,454         4,337 
Revenues from external customers   25,268    22,847        48,115 
Gross profit   3,663    8,015        11,678 
Selling, general and administrative expenses   3,381    4,321    5,924    13,626 
Research and product development expenses   1,275    4,996    105    6,376 
Segment loss   (993)   (1,302)   (6,029)   (8,324)
Loss in joint venture           (334)   (334)
Interest expense, net           (1,812)   (1,812)
Foreign currency gains, net           635    635 
Other finance losses, net           (931)   (931)
Loss before income taxes  $(993)  $(1,302)  $(8,471)   (10,766)

 

Revenue, cost of sales and selling, general and administrative expenses for the comparative year have been restated to reflect the retrospective application of IFRS 15 adopted effective January 1, 2018. See Note 5.

 

Balance sheet information by reportable segment at December 31, 2018 and 2017 was as follows:

 

 

 
At December 31, 2018
 
 
 
 
OnSite 
Generation
 
 
 
 
 
 
Power 
Systems
 
 
 
 
 
 
Corporate 
and Other
 
 
 
 
 
 
 
Total
 
 
Cash and cash equivalents and restricted cash  $5,343   $162   $3,232   $8,737 
Trade and other receivables   1,949    4,779        6,728 
Contract assets (current and non-current)   1,678    4,545        6,223 
Inventories   6,324    10,850        17,174 
Prepaid expenses   368    1,353    239    1,960 
Investment in joint ventures           1,644    1,644 
Property, plant and equipment   272    2,595        2,867 
Goodwill and intangibles   4,427    10    154    4,591 
Total Assets  $20,361   $24,294   $5,269   $49,924 
Current liabilities  $12,039   $15,408   $3,346   $30,793 
Non-current liabilities   1,180    3,575    3,415    8,170 
Total Liabilities  $13,219   $18,983   $6,761   $38,963 

 

 

 
At December 31, 2017
 
 
 
 
OnSite 
Generation
 
 
 
 
 
 
Power 
Systems
 
 
 
 
 
 
Corporate 
and Other
 
 
 
 
 
 
 
Total
 
 
Cash and cash equivalents and restricted cash  $6,836   $1,160   $14,418   $22,414 
Trade and other receivables   4,936    3,800        8,736 
Contract assets (current and non-current)   676    6,547        7,223 
Inventories   8,045    7,003        15,048 
Prepaid expenses   270    928    176    1,374 
Investment in joint venture           2,797    2,797 
Property, plant and equipment   329    3,545        3,874 
Goodwill and intangibles   4,659    6    84    4,749 
Total Assets  $25,751   $22,989   $17,475   $66,215 
Current liabilities  $11,400   $14,538   $4,356   $30,294 
Non-current liabilities   1,138    4,737    5,873    11,748 
Total Liabilities  $12,538   $19,275   $10,229   $42,042 

 

Assets and liabilities for the comparative year have been restated to reflect the retrospective application of IFRS 15 adopted effective January 1, 2018. See Note 5.

 

2018 Consolidated Financial StatementsPage 47

 

Hydrogenics Corporation

 

Property, plant and equipment are located in the following countries:

 

 

Year ended December 31,   2018    2017 
Canada  $2,497   $3,371 
Belgium   272    329 
Germany   98    174 
Total  $2,867   $3,874 

 

Revenue from external customers by region was as follows:

 

 

Year ended December 31,   2018    2017 
         Restated (Note 5) 
Asia  $12,514   $24,120 
European Union   10,891    16,917 
North America   3,400    1,514 
Eastern Europe   2,896    2,697 
South and Central America   2,698    350 
Africa   616    1,145 
Middle East   456    1,037 
Oceania and Caribbean   425    335 
Total  $33,896   $48,115 

 

Revenue by product type was as follows:

         

Year ended December 31,   2018    2017 
         Restated (Note 5) 
Sale of equipment  $24,295   $40,601 
Spare parts and maintenance   6,267    5,662 
Product development services   2,063    581 
Exclusivity fees   1,271    1,271 
Total revenues by product type  $33,896   $48,115 

 

Revenue by market application was as follows:

         

Year ended December 31,   2018    2017 
         Restated (Note 5) 
Heavy duty motive  $13,855   $21,955 
Back-up power   1,082     
Technology solutions   1,397    850 
Power to gas energy storage   1,086    8,069 
Industrial hydrogen   14,259    16,578 
Fueling stations   2,217    663 
Total revenues by market application  $33,896   $48,115 

 

2018 Consolidated Financial StatementsPage 48

 

Hydrogenics Corporation

 

Revenue for the largest customers as a percentage of the total revenue was as follows:

 

 

Year ended December 31,   2018    2017 
First largest (Power segment)   13%   21%
Second largest (Power segment)   9%   10%
Third largest (Power segment)   5%   8%
Fourth largest (OnSite Generation segment)   5%   7%
All other customers   68%   54%
Total   100%   100%

 

Note 35 – Risk Management Arising From Financial Instruments

 

Fair value

 

The carrying value of cash and cash equivalents, restricted cash, trade and other receivables, trade and other payables and contract assets, and contract liabilities approximates their fair value given their short-term nature. The carrying value of the non-current financial liabilities approximates their fair value given the difference between the discount rates used to recognize the liabilities in the consolidated balance sheets and the market rates of interest is insignificant.

 

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

 

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

 

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

 

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

 

The fair value of the liabilities relating to the RSUs and DSUs is classified as Level 1. The fair value of the warrants are classified as Level 2.

 

The Company has not transferred any financial instruments between Levels 1, 2, or 3 of the fair value hierarchy during the year ended December 31, 2018.

 

Financial instruments are classified under IFRS 9 into one of the following measurement categories: financial assets at FVPL; financial liabilities at FVPL; financial assets at amortized cost, financial liabilities at amortized cost, and financial assets at FVOCI.

 

 

 

2018 Consolidated Financial StatementsPage 49

 

Hydrogenics Corporation

 

The following table summarizes information regarding the measurement category of the Company’s financial instruments under IFRS 9 (and where different the previous measurement category under IAS 39) and their carrying amounts (which did not change as a result of the adoption of IFRS 9):

 

 

At December 31,   2018    2017 
         Restated (Note 5) 
Cash and cash equivalents  $7,561   $21,511 
Restricted cash (current and non-current)   1,176    903 
Restricted cash – non-current          
Trade and other receivables, including contract assets   12,951    15,959 
Financial assets at amortized cost (IAS 39 - Loans and receivables)  $21,688   $38,373 
Trade and other payables  $9,068   $9,736 
Long-term debt and repayable government contribution (current and non-current)   8,049    11,240 
Operating borrowings       1,200 
Contract liabilities, current and non-current   16,001    14,044 
Capital lease   33    44 
Financial liabilities at amortized cost (IAS 39 - Other financial liabilities)  $33,151   $36,264 
DSU liability   730    1,406 
Warrants   11    409 
Financial liabilities at fair value through profit or loss  $741   $1,815 

 

Liquidity risk

 

The Company has sustained losses and negative cash flows from operations since its inception. At December 31, 2018, the Company had $7,561 (2017 – $21,511) of current unrestricted cash and cash equivalents. Liquidity risk is the risk the Company will encounter difficulty in meeting its financial obligations associated with financial liabilities that are settled by delivering cash or another financial asset. The Company is exposed to liquidity risk as it continues to have net cash outflows from its operations. The Company’s objective for liquidity risk management is to maintain sufficient liquid financial resources to fund the consolidated balance sheets, pursue growth and development strategies, and to meet commitments and obligations in the most cost-effective manner possible. The Company achieves this by maintaining sufficient cash and cash equivalents and managing working capital. The Company monitors its financial position on a monthly basis at minimum, and updates its expected use of cash resources based on the latest available data. Such forecasting takes into consideration the Company’s financing plans and compliance with internal targets. A significant portion of the Company’s financial liabilities is classified as current liabilities, as settlement is expected within one year.

 

There are uncertainties related to the timing and use of the Company’s 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. The Company’s operations may not generate sufficient cash flow to fund our obligations. As such, these obligations will be funded out of existing and forecasted cash resources. Hydrogenics may need to take additional measures to increase its liquidity and capital resources, including obtaining additional debt or equity financing, pursuing joint-venture arrangements, equipment financings or other receivables financing arrangements. Hydrogenics may experience difficulty in obtaining satisfactory financing terms. Failure to obtain adequate financing on satisfactory terms could have a material adverse effect on Hydrogenics’ results of operations or financial condition. On December 21, 2018, the Company announced it had entered into a subscription agreement for gross proceeds of $20,520 as described in note 37.

 

2018 Consolidated Financial StatementsPage 50

 

Hydrogenics Corporation

 

The following table details the Company’s contractual maturity for its net financial liabilities. The information presented is based on the earliest date on which the Company can be required to pay and represents the undiscounted cash flow including principal and interest.

 

 

 
At December 31, 2018
 
 
 
 
Due in less 
than 1 year
 
 
 
 
 
 
Due in 1-3 
years
 
 
 
 
 
 
Due in 4-5 
years
 
 
Trade and other payables  $9,068   $   $ 
DSU liability   730         
Warrants   11         
Long-term debt – Province of Ontario and EDC   3,760    6,493    7 
Total  $13,569   $6,493   $7 

 

 

 
At December 31, 2017
 
 
 
 
Due in less
than 1 year
 
 
 
 
 
 
Due in 1-3 
years
 
 
 
 
 
 
Due in 4-5 
years
 
 
Trade and other payables  $9,736   $   $ 
DSU liability   1,406         
Operating borrowings   1,200         
Warrants   409         
Long-term debt – Province of Ontario and EDC   4,653    7,243    3,123 
Total  $17,404   $7,243   $3,123 

 

Credit risk

 

Credit risk arises from the risk one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Company is exposed to credit risk from customers. At December 31, 2018, the Company’s two largest customers accounted for 22% of revenue (31% at December 31, 2017) and 14% of accounts receivable (2017 – 48%). In order to minimize the risk of loss for trade receivables, the Company’s extension of credit to customers involves a review and approval by senior management as well as progress payments as contracts are executed and in some cases, irrevocable letters of credit. The majority of the Company’s sales are invoiced with payment terms between 30 and 60 days. The Company’s objective is to minimize its exposure to credit risk from customers in order to prevent losses on financial assets by performing regular monitoring of overdue balances and to provide an allowance for potentially uncollectible accounts receivable.

 

The Company’s trade and other receivables have a carrying value of $3,313 at December 31, 2018 (2017 –$6,466), representing the maximum exposure to credit risk of those financial assets, exclusive of the loss allowance.

 

The aging of these receivables is as follows:

 

 

At December 31,   2018    2017 
Not due   76%   77%
Less than 30 days past due   8    11 
Less than 60 days past due, more than 30 days past due   1    1 
More than 60 days past due   15    11 
Total   100%   100%

 

2018 Consolidated Financial StatementsPage 51

 

Hydrogenics Corporation

 

The Company’s gross exposure to credit risk for trade receivables by geographic area at December 31 was as follows:

 

 

At December 31,   2018    2017 
Europe   62%   64%
North America   5    4 
Asia   31    30 
Rest of world   2    2 
Total   100%   100%

 

The Company applies the simplified approach to providing for expected credit losses prescribed by IFRS 9, which permits the use of the lifetime expected loss provision for all trade receivables and contract assets. To measure the expected credit losses, trade receivables and contract assets have been grouped based on shared credit risk characteristics and the days past due. The contract assets relate to unbilled work in progress and have substantially the same risk characteristics as the trade receivables for the same type of contracts. The Company has therefore determined that the expected loss rates for trade receivables are a reasonable approximation of the loss rates for the contract assets. The loss allowance at January 1, 2018 was determined on a combined company wide basis follows for both trade receivables and contract assets based upon the Company’s historic default rates over the expected life of trade receivables and contract assets adjusted for forward looking estimates.

 

January 1, 2018:  Not yet due  Less than 31
days past due
  31-60 days
past due
  More than 60
days past due
  Total
                
Expected loss rate   0.01%   0.05%   0.21%   1.34%     
Gross carrying amount  $9,849   $2,482   $166   $1,192   $13,689 
Loss allowance  $1   $1   $0   $16   $18 

 

 

The loss allowance for trade receivables and contract assets as at December 31, 2017 reconciled to the opening loss allowances on January 1, 2018 is as follows:

 

   Contract
Assets
  Trade and
other
receivables
  Total
At December 31, 2017 under IAS 39  $   $943   $943 
Write-off of amounts deemed uncollectible against gross receivables       (925)   (925)
                
Opening loss allowance as at January 1, 2018  $   $18   $18 

 

The loss allowance at December 31, 2018 was determined as follows for both trade receivables and contract assets:

 

December 31, 2018:  Not yet due  Less than 31
days past due
  31-60 days
past due
  More than 60
days past due
  Total
                
Expected loss rate   0.1%   2.6%   3.1%   0.9%     
Gross carrying amount  $8,334   $529   $96   $577  $9,536 
Loss allowance  $8   $14   $3   $5   $30 

 

Trade receivables and contract assets are written off when there is no reasonable expectation of recovery. During the year the Company made no write-offs of trade receivables and does not expect to receive future cash flow or recoveries from collection of cash flows previously written off.

 

2018 Consolidated Financial StatementsPage 52

 

Hydrogenics Corporation

 

The Company may also have credit risk relating to cash and cash equivalents and restricted cash, which it manages by dealing with chartered Canadian, Belgian and German banks. The credit risk is limited because the counterparties are chartered banks with high credit ratings assigned by international credit rating agencies. In addition, the Company minimizes exposure to credit risk by strategically managing cash balances at individual banks. As well, the Company may also fund working capital by leveraging credit facilities that are not 100% secured by cash, resulting in a mitigation of credit risk at the corresponding bank.

 

The Company’s objective is to minimize its exposure to credit risk in order to prevent losses on financial assets by placing its investments in lower risk bank acceptances at these banks. The Company’s cash and cash equivalents and restricted cash was $8,737 at December 31, 2018 (2017 – $22,414), representing the maximum exposure to credit risk of these financial assets. Approximately 99% (2017 – 98%) of the Company’s cash and cash equivalents and restricted cash at December 31, 2018 was held by four financial institutions.

 

The Company’s exposure to credit risk relating to cash and cash equivalents and restricted cash on deposit segmented by geographic area at December 31, 2018 and 2017 was as follows:

 

 

    2018    2017 
Canada   37%   65%
Belgium   61    30 
Germany   2    5 
    100%   100%

 

Foreign currency risk

 

Foreign currency risk arises because of fluctuations in exchange rates. The Company conducts a significant portion of its business activities in currencies other than the Company’s functional currency of US dollars and the functional currency of its Belgium and German subsidiaries (euro). This primarily includes Canadian dollar transactions at the parent company and US dollar transactions at the Company’s subsidiaries in Belgium and Germany.

 

The Company’s objective in managing its foreign currency risk is to minimize its net exposure to foreign currency cash flows by converting foreign denominated financial assets into the applicable currency of the subsidiary to the extent practicable to match the obligations of its financial liabilities. The Company also periodically enters into foreign exchange forward contracts to limit its exposure to foreign currency rate fluctuations. There were no foreign exchange forward contracts in place at December 31, 2018 or at December 31, 2017.

 

Financial assets and financial liabilities denominated in foreign currencies will be affected by changes in the exchange rate between the functional currency and these foreign currencies. This primarily includes cash and cash equivalents; trade and other receivables; contract assets; trade and other payables; contract liabilities and other long-term financial liabilities, which are denominated in foreign currencies.

 

The Company recognized a net foreign exchange gains of $144 for the year ended December 31, 2018 (2017 – $635).

 

At December 31, 2018, if the Canadian dollar had strengthened/weakened by 10% against the US dollar, with all other variables held constant, the net loss would have been lower/higher by approximately $870 as a result of foreign exchange on the translation of Canadian dollar denominated balances.

 

At December 31, 2018, if the euro had strengthened/weakened by 10% against the US dollar, with all other variables held constant, the net loss would have been lower/higher by approximately $445 as a result of foreign exchange on the translation of euro denominated balances.

 

2018 Consolidated Financial StatementsPage 53

 

Hydrogenics Corporation

 

Interest rate risk

 

Cash flow interest rate risk arises because of the fluctuation in market interest rates. The Company’s objective in managing interest rate risk is to maximize the return on its cash and cash equivalents and restricted cash. The Company is subject to interest rate risk on its short-term borrowings offset by cash and cash equivalents. The Company’s borrowings include both fixed and variable interest rates. Given the prevailing interest rates earned by the Company’s short-term investments, a 100 basis point increase or decrease would have minimal impact on the Company’s results.

 

Note 36 – Capital Management

 

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

 

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

 

The Company’s capital is composed of debt and shareholders’ equity as follows:

 

 

At December 31,   2018    2017 
Total equity  $10,961   $24,173 
Operating borrowings       1,200 
Long-term debt and repayable government contributions, including current portion   8,082    11,284 
Total   19,043    36,657 
Less Cash and cash equivalents and restricted cash   8,737    22,414 
Total capital employed  $10,306   $14,243 

 

Note 37 – Subsequent Events

 

On December 21, 2018, the Company and The Hydrogen Company (“H2C”) entered into a subscription agreement to issue 3,537,931 common shares of Hydrogenics to H2C on a private placement basis, for gross proceeds to Hydrogenics of $20,520 or $5.80 per common share. The subscription price represented approximately a 20% premium to the 20-day volume-weighted average trading price of the Company’s common shares on the NASDAQ for the period ending December 20, 2018.

 

The transaction closed on January 24, 2019 and the Company received net proceeds of $20,305 after fees and expenses of $215. Subsequent to closing of the private placement, H2C’s interest in Hydrogenics is approximately 18.6% of total issued common shares.

 

The subscription agreement provides, among other things, that H2C has participation rights on future offerings and the right to nominate one director to the board of directors of Hydrogenics, and that H2C will be subject to certain restrictions, including lock-up, transfer, standstill and voting restrictions, subject, in each case, to certain ownership threshold requirements or for a period of one year from the date of the subscription agreement.

 

2018 Consolidated Financial StatementsPage 54