EX-99.1 2 exhibit99-1.htm NOTICE OF ANNUAL MEETING, MANAGEMENT PROXY CIRCULAR AND 2013 ANNUAL REPORT

Notice of Annual Meeting, Management Proxy Circular
and 2013 Annual Report




CONTENTS

Notice of Annual Meeting       1
Management Proxy Circular 8
Matters to be Voted Upon 8
Voting Information 8
Corporate Governance 14
Executive Compensation 20
Additional Information 40
Defined Terms   42
Appendix "A" Board Mandate A1
Appendix "B" Description of Option Plan B1
Appendix "C" Description of SDP C1
Financial Information D1

 

ABOUT BALLARD POWER SYSTEMS
Ballard Power Systems (NASDAQ: BLDP)(TSX: BLD) is a global leader in clean energy fuel cell products and services. We have extensive expertise in proton exchange membrane (PEM) fuel cell technology, built on years of experience in product design, testing, system integration and commercialization. Our 350 dedicated employees – most of whom are located at our headquarters facility in Vancouver, Canada – sell to and support customers in such international locations as Southeast Asia, China, India, U.S., Canada, Mexico, the Caribbean, Europe and Africa. Our business model is focused on fuel cell product sales, engineering services and licensing activities. Learn more in this document and at www.ballard.com.

 

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements concerning: revenue estimates; market growth projections; operating expenses; cost savings; adjusted EBIDTA; product cost reductions and product shipments. These forward-looking statements reflect Ballard’s current expectations as contemplated under section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Any such forward-looking statements are based on Ballard’s assumptions relating to its financial forecasts and expectations regarding its product development efforts, manufacturing capacity, and market demand.

These statements involve risks and uncertainties that may cause Ballard's actual results to be materially different, including general economic and regulatory changes, detrimental reliance on third parties, successfully achieving our business plans and achieving and sustaining profitability. For a detailed discussion of these and other risk factors that could affect Ballard's future performance, please refer to Ballard's most recent Annual Information Form. Readers should not place undue reliance on Ballard's forward-looking statements and Ballard assumes no obligation to update or release any revisions to these forward-looking statements, other than as required under applicable legislation.





BALLARD POWER SYSTEMS INC.

9000 Glenlyon Parkway
Burnaby, British Columbia, Canada V5J 5J8

NOTICE OF ANNUAL MEETING

TO OUR SHAREHOLDERS:

Our 2014 Annual Meeting (the "Meeting") will be held at 9000 Glenlyon Parkway, Burnaby, British Columbia, on Tuesday, June 3, 2014 at 1:00 p.m. (Pacific Daylight Time) for the following purposes:

1. To receive our audited financial statements for the financial year ended December 31, 2013 and the report of our auditors thereon;
           
2. To elect our directors for the ensuing year;
 
3. To appoint our auditors for the ensuing year and to authorize our Audit Committee to fix the remuneration of the auditors;
 
4. To consider and, if thought appropriate, to approve a resolution, on an advisory basis, accepting the Corporation’s approach to executive compensation; and
 
5. To transact such other business as may properly be brought before the Meeting or any adjournment thereof.

A detailed description of the matters to be dealt with at the Meeting and our 2013 Annual Report are included with this Notice.

If you are unable to attend the Meeting in person and wish to ensure that your shares will be voted at the Meeting, you must complete, date and execute the enclosed form of proxy and deliver it in accordance with the instructions set out in the form of proxy and in the Management Proxy Circular accompanying this Notice, so that it is received by Computershare Investor Services Inc. no later than 1:00 p.m. (Pacific Daylight Time) on Friday, May 30, 2014.

If you plan to attend the Meeting you must follow the instructions set out in the form of proxy and in the Management Proxy Circular to ensure that your shares will be voted at the Meeting.

DATED at Burnaby, British Columbia, April 11, 2014.

BY ORDER OF THE BOARD
 
"Kerry Hillier"
 
Kerry Hillier
Corporate Secretary
Ballard Power Systems Inc.

1



Letter from IAN A. BOURNE
Chair of the Board

Fellow Shareholders:

     I am pleased on behalf of my fellow Directors to report to you regarding Ballard’s progress in 2013. We had quite a successful year, as our CEO John Sheridan describes in his letter.

     We welcomed Ian Sutcliffe after you voted him onto the Board at the 2013 Annual General Meeting. Our primary activities as a Board during 2013 were to oversee the continuing progress towards becoming a commercially successful company. We reviewed and approved the Company Strategy at the June meeting and dealt with a number of strategic issues, including those related to the financings that allowed us to strengthen the balance sheet. As we do each year, we reviewed the succession planning for Ballard’s senior leadership team. We also spend time at each meeting receiving Management’s updates on performance compared to the annual operating plan. We were pleased that quarterly and annual performance was consistent with our expectations. Ballard is maturing into a company focused on successful execution of plans and increasing predictability.

     Your Board appreciates that there are still risks in the business and we spend significant time evaluating Management’s assessments of the risks and actions in place or planned to mitigate them. John and his team have done very well over the last few years on this aspect of managing the Company.

     We announced in February that John Sheridan informed us of his decision to retire as CEO later this year. As a Board, we express our appreciation for the job he has done over the last 8 years. He has made an enormous difference and the benefits of his leadership will be felt for years to come.

     Finally, I want to recognize the continuing efforts of our dedicated employees and thank you, our shareholders, for continuing to support Ballard.

"Ian A. Bourne"

Ian A. Bourne
Chair of the Board of Directors

2



Letter from JOHN W. SHERIDAN
President and Chief Executive Officer

     2013 was a very successful year for Ballard in terms of the top line, bottom line and shareholder value growth. Your Management Team retained a sharp focus throughout 2013 on Ballard’s strategy to grow shareholder value in our core business, with a three-level business model built around: product sales; engineering services; and IP licensing. We believe that this core business focus provides a strong trajectory to positive EBITDA and positive cash flow in the near term.

     Beyond this near term horizon, we are also positioning for broader opportunities to grow shareholder value in important development stage markets. These include key development stage business opportunities for continuous power, distributed generation and zero emission fuel cell buses and cars. We continue to work with partners to position for future value creation in these areas.

     However, in the short term we remain obsessively focused on strong execution in our core business. The following provides a brief overview of our progress in 2013 in our core business:

FUEL CELL PRODUCT SALES

  • Telecom Backup Power sales accelerated in 2013, led by methanol-fuelled ElectraGenTM-ME systems. For the full year we shipped 796 ElectraGenTM systems, doubling the number of shipments in comparison to 2012, with about 80% of the sales being methanol-fuelled systems. Methanol-fuelled systems deliver a very strong value proposition to customers in regions where hydrogen fuel is relatively difficult to source, transport or store – including rural regions in Asia and South Africa – as well as regions where there is concern over extreme events that could take the grid down.
     
  • Material Handling was a relatively modest growth area in 2013, with revenue from fuel cell stack sales up 5%, accounting for $6.5 million of full-year revenue. However, with our customer Plug Power making significant progress in its financing and order book, Plug Power is now positioned to drive more meaningful growth in 2014.

ENGINEERING SERVICES

  • Our anchor Engineering Services contract is with Volkswagen – signed in March 2013. We quickly ramped up to a run rate of $4-to-$5 million per quarter and expect to maintain that cadence through the remaining term of the 4-year contract. Engineering Services generated $21.1 million in 2013, 24% growth over 2012.

IP LICENSING

  • Our first IP licensing contract enables local assembly of Ballard power modules for zero-emission buses in China, utilizing fuel cell stacks manufactured at our facility in Burnaby, Canada. Signed in September 2013, the contract is expected to generate revenue of approximately $11 million in the first 12-months.

3



     This progress in our core business resulted in a positive trend in top line and bottom line financial results throughout the year, as shown in the following quarterly results charts –

     The associated full year progress in 2013 relative to 2012 was impressive, with:

  • 40% growth in revenue, to $61.3 million;
     
  • 10 point improvement in gross margin, to 27%;
     
  • 7% improvement in cash operating costs, to $28.3 million; and
     
  • 63% improvement in Adjusted EBITDA, to ($8.2) million.

     More broadly, as we have executed our corporate strategy over the past several years, revenue and gross margin are up more than 2-times over the past two years, with cash operating cost and Adjusted EBITDA each improving more than 50% over the same period.

12011 revenue adjusted for Contract Manufacturing due to the completion of automotive manufacturing supply agreements with Daimler AG and a Daimler AG subsidiary in October 2011. Historical amounts to Daimler AG were reported in our former Contract Automotive segment and in our existing Fuel Cell Products and Services agreement.

     So, our strategy is working, we have execution momentum, we have strengthened our balance sheet and we have grown shareholder value. And now, with this strengthened positioning of our Company and

4



having served as your CEO for 8 years, I believe that 2014 is the right time for a CEO transition at Ballard. As such, I informed our Board of Directors in February of my decision to retire by the end of this year. This yearend retirement plan gives the Board an ideal timeline for a comprehensive search process and a smooth leadership transition.

     Looking back, it has been a privilege to lead the Ballard Team over the past 8 years. We have successfully delivered a remarkable transformation of Ballard:

  • from a Fuel Cell Car R&D organization, burning around $80 million of cash annually
     
    … to become …
     
  • a leading customer focused commercial company, providing clean energy fuel cell products and services on a global basis.

     But to be clear, our work is ‘far from done’. So while the Board Search Committee leads the CEO Search Process, it will be ‘business as usual’ for the Management Team; with an obsession on execution in the short term, and on strengthening our growth ramp for the medium term. And in that regard, we continue to be very bullish on our growth outlook for 2014 and beyond.

     We expect sales of Telecom Backup Power systems to penetrate more deeply into geographic areas in which we have established beachheads – in particular, Southeast Asia, South Africa and the CALA region. In addition, leveraging the strength of our channel partners, we plan to enter new geographic markets where our value proposition will ‘play’ well. In terms of other commercial fuel cell products, we expect sales of fuel cell stacks for Material Handling to grow at an accelerated rate in 2014, given Plug Power’s announcements regarding its extensive order book. As well, we expect continued growth in engineering services and IP licensing.

     With these exciting opportunities ahead of us, we look forward to reporting our progress as we move through 2014. And, I thank you once again for your continued support of Ballard.


"John Sheridan"

John Sheridan
President & CEO

Ballard Power Systems

5








MANAGEMENT PROXY CIRCULAR
dated as of April 11, 2014

MATTERS TO BE VOTED UPON

Registered Shareholders or their duly appointed proxyholders will be voting on:

  • the election of directors to our Board; 
     
  • the re-appointment of our auditors and authorization for our Audit Committee to fix the remuneration of the auditors;
     
  • on an advisory basis, the Corporation’s approach to executive compensation; and
     
  • to transact such other business as may properly be brought before the meeting.

     As of the date of this Management Proxy Circular, we know of no amendment, variation or other matter that may come before the Meeting other than the matters referred to in the Notice of Annual Meeting. If any other matter is properly brought before the Meeting, it is the intention of the persons named in the enclosed proxy to vote the proxy on that matter in accordance with their best judgment.

     With respect to resolutions to be voted on at the Meeting a simple majority of the votes (greater than 50%) cast in favour by Registered Shareholders, by proxy or in person, will constitute approval.

VOTING INFORMATION

SOLICITATION OF PROXIES

     This Management Proxy Circular is furnished in connection with the solicitation of proxies by our management in connection with the Meeting to be held on Tuesday, June 3, 2014 at 1:00 p.m. Pacific Daylight Time in Burnaby, British Columbia, Canada, or the date and place of any adjournment thereof. We are soliciting proxies primarily by mail, but our directors, officers and employees may solicit proxies personally, by telephone, by facsimile transmission or by other means of electronic communication. The cost of the solicitation will be borne by us. The approximate date on which this Management Proxy Circular and the related materials are first being sent to Registered Shareholders is April 28, 2014.

HOW TO VOTE

     Only Registered Shareholders or their duly appointed proxyholders are permitted to vote at the Meeting. Beneficial Shareholders are not permitted to vote at the Meeting as only proxies from Registered Shareholders can be recognized and voted at the Meeting. You may vote as follows:

     Registered Shareholders: If you are a Registered Shareholder you may vote by attending the Meeting in person, or if you do not plan to attend the Meeting, by completing the proxy and delivering it according to the instructions contained in the form of proxy and this Management Proxy Circular.

     Beneficial Shareholders: If you are a Beneficial Shareholder you may only vote by carefully following the instructions on the voting instruction form or proxy form provided to you by your stockbroker or financial intermediary. If you do not follow the special procedures described by your stockbroker or financial intermediary, you will not be entitled to vote.

EXECUTION AND REVOCATION OF PROXIES

     A Registered Shareholder or the Registered Shareholder’s attorney authorized in writing or, where the Registered Shareholder is a company, a duly authorized officer or attorney of that company, must execute the proxy. In order to be effective, completed proxies must be deposited at the office of the registrar and transfer agent for the Shares, being Computershare Investor Services Inc. ("Computershare"), Proxy Dept., 100 University Avenue, 9th Floor, Toronto Ontario, M5J 2Y1 (Fax: within North America: 1-866-249-7775; outside North America: 1-416-263-9524), not less than 48 hours (excluding Saturdays and holidays) before the time of the Meeting. The individuals named as proxyholders in the accompanying form of proxy are

8



directors and officers of Ballard. A Registered Shareholder desiring to appoint a person or company (who need not be a shareholder) to represent him or her at the Meeting, other than the persons or companies named in the enclosed proxy, may do so by inserting the name of such other person or company in the blank space provided in the proxy.

     A proxy may be revoked by written notice executed by the Registered Shareholder or by his or her attorney authorized in writing or, where the Registered Shareholder is a company, by a duly authorized officer or attorney of that company, and delivered to:

  • Computershare, at the address or fax number set out above, at any time up to and including the last business day preceding the day of the Meeting;
     
  • the registered office of the Corporation at any time up to and including the last business day preceding the day of the Meeting; or
     
  • the chair of the Meeting on the day of the Meeting and before any vote in respect of which the proxy is to be used is taken.

     A proxy may also be revoked in any other manner provided by law. Any revocation of a proxy will not affect a matter on which a vote is taken before such revocation.

VOTING OF SHARES AND EXERCISE OF DISCRETION BY PROXIES

     If you complete and deposit your proxy properly, then the proxyholder named in the accompanying form of proxy will vote or withhold from voting the Shares represented by the proxy in accordance with your instructions. If you do not specify a choice on any given matter to be voted upon, your Shares will be voted in favour of such matter. The proxy grants the proxyholder the discretion to vote on amendments to or variations of matters identified in the Notice of Annual Meeting and with respect to other matters that may properly come before the Meeting.

VOTING SHARES AND PRINCIPAL SHAREHOLDERS

     As of the Record Date of April 11, 2014, we had 126,563,503 Shares issued and outstanding, each carrying the right to one vote. On a show of hands, every individual who is present as a Registered Shareholder or as a representative of one or more corporate Registered Shareholders, or who is holding a proxy on behalf of a Registered Shareholder who is not present at the Meeting, will have one vote, and on a poll, every Registered Shareholder present in person or represented by proxy and every person who is a representative of one or more corporate Registered Shareholders, will have one vote for each Share recorded in the Registered Shareholder’s name on the register of shareholders, which is available for inspection during normal business hours at Computershare and will be available at the Meeting.

     As of the Record Date, to the knowledge of our directors and executive officers, no person beneficially owns, controls or directs, directly or indirectly, Shares carrying more than 10% of the voting rights attached to all issued and outstanding Shares carrying the right to vote in all circumstances.

INTEREST OF CERTAIN PERSONS OR COMPANIES IN MATTERS TO BE ACTED UPON

     No one who has been a director, director nominee or executive officer of ours at any time since January 1, 2013, or any of his or her associates or affiliates, has any material interest, direct or indirect, by way of beneficial ownership of Shares or otherwise, in any matter to be acted on at the Meeting other than the election of directors.

9



ELECTION OF DIRECTORS

     At the Meeting you will be asked to elect seven directors. All of our nominees are currently members of the Board. Each elected director will hold office until the end of our next annual shareholders’ meeting (or if no director is then elected, until a successor is elected) unless the director resigns or is otherwise removed from office earlier. If any nominee for election as a director advises us that he or she is unable to serve as a director, the persons named in the enclosed proxy will vote to elect a substitute director at their discretion.

     The following information pertains to our nominees for election as directors at the Meeting, as of April 11, 2014. The number of Shares shown as being held by each nominee constitute the number beneficially owned, or controlled or directed, directly or indirectly, by that nominee and such information has been provided to us by that nominee.

Ian A. Bourne

Age: 66

Alberta, Canada

Director since: 2003

Independent

Mr. Bourne’s principal occupation is corporate director, and he has been the Chair of the Board of Ballard since May 2006. Mr. Bourne was also our lead director from October 2005 to February 2006. Mr. Bourne was interim CEO of SNC-Lavalin Group Inc. from March 27, 2012 to October 1, 2012. Previously, Mr. Bourne was the Executive Vice President and the Chief Financial Officer of TransAlta Corporation (electricity generation and marketing) from January 1998 to December 2006 and from January 1998 to December 2005, respectively. He has completed the Directors Education Program of the Institute of Corporate Directors and has received his ICD.D designation. Mr. Bourne was recognized as a Fellow of the ICD in 2011.
Board and Committee
Membership(1)
Attendance
Board Memberships
Current:
Board (Chair)
Audit
Corporate Governance & Compensation
 
Former:
Corporate Governance
Human Resources & Compensation

7
5
2


2
2

100%
100%
100%


100%
100%
Current: SNC-Lavalin Group Inc.; Canadian Public Accountability Board; Wajax Corporation; Canada Pension Plan Investment Board; Canadian Oil Sands Limited
Previous: TransAlta Power LP; TransAltaCoGen LP; Glenbow Museum; Calgary Philharmonic Orchestra; The Calgary Foundation
Securities Held(2)
Year Shares DSUs Total of Shares and DSUs Total Value of Shares and
DSUs (C$)(3)
2014 26,824 186,374 213,198 $918,883
2013 26,824 153,019 179,843 $172,649


Douglas P. Hayhurst

Age: 67

B.C., Canada

Director since: 2012

Independent

Mr. Hayhurst’s principal occupation is corporate director. Previously, Mr. Hayhurst was an executive with IBM Canada Business Consulting Services (consulting services) and a partner with PricewaterhouseCoopers Management Consultants (consulting services). Prior to that, Mr. Hayhurst held various senior executive management roles with Pricewaterhouse including National Deputy Managing Partner (Toronto) and Managing Partner for British Columbia (Vancouver). Mr. Hayhurst received a Fellowship (FCA) from the Institutes of Chartered Accountants of British Columbia and of Ontario. He has completed the Directors Education Program of the Institute of Corporate Directors and has received his ICD.D designation.
Board and Committee
Membership
Attendance(4)
Board Memberships
Current:
Board
Audit
 
Former:
Corporate Governance
Human Resources & Compensation

7
4


2
1

100%
80%


100%
50%
Current: Accend Capital Corporation; Canexus Corporation; The Layfield Group Limited; Nature Conservancy of Canada; Canadian Institute of Chartered Accountants Risk Oversight and Governance Board
Previous: Catalyst Paper Corporation(5); Northgate Minerals Corporation
Securities Held(2)
Year Shares DSUs Total of Shares and DSUs Total Value of Shares and
DSUs (C$) (3)
2014 5,000 71,816 76,816 $331,077
2013 - 43,036 43,036 $41,315

10




Edwin J. Kilroy

Age: 54

Ontario, Canada

Director since: 2002

Independent

Mr. Kilroy’s principal occupation is corporate director. Mr. Kilroy has been the Chief Executive Officer of MedAvail Technologies Inc. (medication dispensing equipment and services) since November 2012. Previously, Mr. Kilroy was the Chief Executive Officer of Symcor Inc. (business process outsourcing services), from January 2005 to November 2010. Prior to that, Mr. Kilroy was the Chief Executive Officer of IBM Canada Ltd. (information technology) from April 2001 to January 2005.
Board and Committee
Membership
Attendance
Board Memberships
Current:
Board
Audit (Chair)
 
Former:
Corporate Governance

7
5


2

100%
100%


100%
Current: MedAvail Technologies Inc.
Previous: Symcor Inc.; The Conference Board of Canada
Securities Held(2)
Year Shares DSUs Total of Shares and DSUs Total Value of Shares and
DSUs (C$) (3)
2014 2,752 120,464 123,216 $531,061
2013 2,752 96,639 99,391 $95,415


John W. Sheridan

Age: 59

B.C., Canada

Director since: 2001

Non-Independent

Mr. Sheridan is President and Chief Executive Officer of Ballard, a position he has held since February 2006. Mr. Sheridan was also Chair of our Board from June 2004 to February 2006.

Board and Committee
Membership
Attendance
Board Memberships
Board
7
100%
Current: Dantherm Power; Canadian Hydrogen Fuel Cells Association; Midway Gold Corporation
Previous: Aliant Inc.; Bell Canada, Bell Actimedia, Bell Distribution, Bell Express Vu, Bell Mobility, Bell West, Bell Sygma UK Ltd; Encom Cable TV & Telecommunications, plc; Manitoba Telecom Services Inc.; MTS Communications Inc.; Photowatt Technologies; Sun Media Corp. Ltd.; NewPage Corporation(5); BC Hydrogen Highway; AFCC
Securities Held(2)
Year Shares DSUs Total of Shares and DSUs Total Value of Shares and
DSUs (C$) (3)
2014 409,527 154,280 563,807 $2,430,008
2013 524,522 57,943 582,465 $559,166

 
Carol M. Stephenson

Age: 63

Ontario, Canada

Director since: 2012

Independent

Ms. Stephenson’s principal occupation is corporate director. Previously, she was the Dean of the Richard Ivey School of Business at the University of Western Ontario from 2003 until 2013. Prior to that, she served as President and Chief Executive Officer of Lucent Technologies Canada from 1999 to 2003. Ms. Stephenson was invested as an Officer into the Order of Canada in 2010.
Board and Committee
Membership
Attendance
Board Memberships
Current:
Board
Corporate Governance & Compensation
(Chair)
 
Former:
Corporate Governance (Chair)
Human Resources & Compensation
 
7
2



2
2

100%
100%



100%
100%
Current: General Motors Company; Intact Financial Services Corporation (formerly ING Canada); Manitoba Telecom Services Inc.; Vancouver Olympic Games Organizing Committee (VANOC); Women on Boards; Catalyst Advisory Board
Previous: Union Energy Waterheater Income Fund; London Economic Development Corporation; Ontario Research Fund Advisory Board
Securities Held(2)
Year Shares DSUs Total of Shares and DSUs Total Value of Shares and
DSUs (C$) (3)
2014 3,550 83,693 87,243 $376,017
2013 3,550 50,149 53,699 $51,551

11



 
David B. Sutcliffe

Age: 54

B.C., Canada

Director since: 2005

Independent

Mr. Sutcliffe’s principal occupation is corporate director. Previously, Mr. Sutcliffe was the Chief Executive Officer of Sierra Wireless, Inc. (electrical and electronic industrial products) from May 1995 to October 2005. From May 2001 to April 2005, he was also the Chair of the Board of Sierra Wireless, Inc. He has completed the Directors Education Program of the Institute of Corporate Directors and has received his ICD.D designation.
Board and Committee
Membership
Attendance
Board Memberships
Current:
Board
Audit
Corporate Governance & Compensation
 
Former:
Human Resources & Compensation
(Chair)

7
5
2


2

100%
100%
100%


100%
Current: BC Social Ventures Partners
Previous: Sierra Wireless, Inc.; E-Comm 911; SMART Technologies Inc.
Securities Held(2)
Year Shares DSUs Total of Shares and DSUs Total Value of Shares and
DSUs (C$) (3)
2014 3,600 99,698 103,298 $445,214
2013 3,600 79,322 82,922 $79,605
 
 
Ian Sutcliffe

Age: 61

Ontario, Canada

Director since: 2013

Independent

Mr. Sutcliffe’s principal occupation is corporate director. Mr. Sutcliffe has been a partner at Sutcliffe & Associates Management Consultants (management consulting services) since June 1985. Previously, Mr. Sutcliffe was co-CEO of PHeMI, Inc. (medical software and IT infrastructure) form July 2010 to November 2012; CEO, Chairman and independent director of BluePoint Data (IT services) from Sept 2001 to June 2011; and Vice Chair and CEO of BCS Global (video conferencing services) from January 2003 to March 2004. Mr. Sutcliffe was President of Mediconsult.com (public internet health services) from June 1995 to June 1999 and President and CEO from 1999 to 2001. Prior to that, Mr. Sutcliffe was with Coopers & Lybrand (chartered accounting and consultancy firm) in Vancouver and London, England from June 1979 to June 1985.
Board and Committee
Membership
Attendance(6)
Board Memberships
Board
Audit
Corporate Governance & Compensation
5
3
2
100%
100%
100%
Current: Vita Nova Foundation; Restore Canada Foundation
Previous: BluePoint Data Inc.(4)
Securities Held(2)
Year Shares DSUs

Total of Shares and DSUs

Total Value of Shares and
DSUs (C$) (3)
2014 10,000 13,797 23,797 $102,565
2013 10,000 - 10,000 $9,600

(1)       Mr. Bourne is an ex officio member of each of the committees.
 
(2) As of April 11, 2014 and April 10, 2013, respectively.
 
(3) Based on a C$4.31 and C$0.96 closing Share price on the TSX as of April 11, 2014 and April 10, 2013, respectively.
 
(4) Mr. Hayhurst attended a total of 14 board and committee meetings in 2014 for an overall attendance rate of 87.5%.
   
(5) Canadian securities legislation requires disclosure of any company that becomes insolvent while a director is a member of its board, or within one year from ceasing to act as a director. In this regard, Mr. Hayhurst was a director of Catalyst Paper Corporation, which sought an Initial Order under the Companies’ Creditors Arrangement Act on January 31, 2012. NewPage Corporation filed for Chapter 11 protection in U.S. Bankruptcy Court in September 2011, 9 months after Mr. Sheridan resigned as a director of the company. Mr. Ian Sutcliffe was a director of BluePoint Data Inc. on May 12, 2012 when the British Columbia Securities Commission issued a cease trade order against it for failure to file its financial statements and management’s discussion and analysis related thereto for the year ended December 31, 2011. Mr. Sutcliffe resigned as a director on June 27, 2012, subsequent to which BluePoint sold its business and distributed the proceeds to its shareholders.
  
(6) Mr. Sutcliffe was elected to the board on June 3, 2013 and has attended all board and committee meetings from that date.

APPOINTMENT OF AUDITORS

     Our Audit Committee has recommended that KPMG LLP, Chartered Accountants, of 777 Dunsmuir Street, Vancouver, British Columbia, be nominated at the Meeting for re-appointment as our external auditors. Our Audit Committee will fix the remuneration of our external auditors if authorized to do so by shareholders at the Meeting. It is expected that representatives of KPMG LLP will be present at the Meeting. KPMG LLP were appointed as our external auditors in 1999. Total fees paid to KPMG in 2013 and 2012 are set forth in the table below. We comply with the requirement regarding the rotation of our audit engagement

12



partner every five years. The current audit engagement partner at KPMG LLP may continue in his role until the end of 2016.

     The following table shows the fees we incurred with KPMG LLP in 2013 and 2012:

Type of Audit Fees 2013 2012
(C$) (C$)
Audit Fees $447,170 $447,340
Audit-Related Fees   Nil   Nil
Tax Fees(1) Nil   $3,374
All Other Fees Nil Nil

(1)       The Tax Fees for 2012 related to tax advisory and transfer pricing services.

     For a more detailed description of the Audit Committee or to see the Audit Committee’s mandate, a copy of which is posted on our website, see the section entitled "Audit Committee Matters" in our Annual Information Form dated February 26, 2014, which section is incorporated by reference into this Management Proxy Circular.

ADVISORY VOTE ON APPROACH TO EXECUTIVE COMPENSATION

     The Corporate Governance & Compensation Committee ("CGCC") monitors developments and trends relating to say-on-pay in Canada and elsewhere. In the United States, the SEC has established say-on-pay advisory shareholder vote requirements. Although the Corporation’s shares are traded on NASDAQ, Ballard is a “foreign private issuer” with the SEC and accordingly these requirements do not apply to it. Say-on-pay shareholder votes have been implemented by a number of larger issuers in Canada, but such votes are still not mandated in Canada to date. At the request of the Board, our shareholders have passed resolutions on an advisory basis accepting the Corporation’s approach to executive compensation since 2011.

     The CGCC recommended to the Board that Ballard shareholders again be provided the opportunity, on an advisory basis, to vote at the Meeting in respect of the Corporation’s approach to executive compensation. The CGCC also recommended that adoption of a formal say-on-pay policy by the Board should continue to be deferred until Canadian regulatory requirements applicable to the Corporation are known.

     Accordingly, the shareholders of the Corporation are being given the opportunity to vote at this Meeting, on an advisory and non-binding basis, “FOR” or “AGAINST” the Corporation’s approach to executive compensation through the following resolution:

“RESOLVED, on an advisory basis and not to diminish the role and responsibilities of the Board of Directors of the Corporation, that the shareholders accept the approach to executive compensation disclosed in the Corporation’s management information circular delivered in advance of the Corporation’s 2014 annual meeting of shareholders.”

     The Board believes that shareholders should be well informed about and fully understand the objectives, philosophy and principles that it has used to make executive compensation decisions. For information regarding Ballard’s approach to executive compensation, shareholders should review the section entitled "Executive Compensation – Compensation Discussion and Analysis" appearing below in this Management Information Circular.

     Approval of the above resolution will require an affirmative vote of a majority of the votes cast on the matter at the Meeting. As the vote on this resolution is advisory, the results will not be binding on the Board or the CGCC. However, the Board and the CGCC will take the results of the advisory vote into account, as appropriate, as part of their ongoing review of executive compensation philosophy, policies and programs.

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     The Board recommends that shareholders vote “FOR” the foregoing resolutions. The representatives of management named in the enclosed form of proxy, if named as proxyholders, intend to vote for the resolution, unless the shareholder has specified in the form of proxy that his or her shares are to be voted against the resolution.

CORPORATE GOVERNANCE

     Our Board and senior management consider good corporate governance to be central to our effective and efficient operation. We monitor corporate governance initiatives as they develop and benchmark industry practices to ensure that we are in compliance with corporate governance rules.

     Our corporate governance practices are reflected in our Corporate Governance Guidelines, which provide for director qualification standards, director responsibilities, the form and amount of director compensation, director orientation and continuing education, management succession planning and performance evaluation of the Board. A copy of the Corporate Governance Guidelines can be found on our website. We have also reviewed our internal control and disclosure procedures, and are satisfied that they are sufficient to enable our Chief Executive Officer and Chief Financial Officer to certify our interim and annual reports filed with Canadian securities regulatory authorities, and to certify our annual reports filed with or submitted to the SEC.

     In addition, we have set up a process for shareholders to communicate to the Board, the details of which can be found on our website. A summary of shareholder feedback is provided to the Board through a semi-annual report.

     We believe that we comply with all applicable Canadian securities administrators (“CSA”) and NASDAQ corporate governance rules and guidelines. The CSA requires that listed corporations subject to National Instrument 58-101 - Disclosure of Corporate Governance Practices ("NI 58-101") disclose their policies respecting corporate governance. We comply with NI 58-101, which addresses matters such as the constitution and independence of corporate boards, the functions to be performed by boards and their committees, and the effectiveness and education of board members. We are exempt from the NASDAQ corporate governance rule requiring that each NASDAQ quoted company has in place a minimum quorum requirement for shareholder meetings of 33 1/3% of the outstanding shares of the company’s voting common stock. Our by-laws currently provide that a quorum is met if holders of at least five percent of the votes eligible to be cast at a shareholders’ meeting are present or represented by proxy at the meeting.

BOARD COMPOSITION AND NOMINATION PROCESS

     All of our directors are independent except for John Sheridan, our President and Chief Executive Officer. "Independence" is judged in accordance with the provisions of the United States Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), and as determined by the CSA and the NASDAQ. We conduct an annual review of the other corporate boards on which our directors sit, and have determined that currently there are no board interlocks with respect to our directors. The Board has also established a guideline for the maximum number of corporate boards on which a director should sit. This guideline has been set at five corporate boards (not including non-profit boards).

     Our Corporate Governance& Compensation Committee conducts an annual process under which an assessment is made of the skills, expertise and competencies of the directors and is compared to our needs and the needs of the Board. This process culminates in a recommendation to the Board of individual nominee directors for election at our annual shareholders’ meeting.

     The following table identifies some of the current skills and other factors considered as part of the competency matrix developed by the CGCC. Each director was asked to indicate the top three competencies which he/she believes they possess.

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Early Stage
President/CEO Sales/ Finance/ Product Corporate Business
Experience Strategy Marketing Accounting Development Governance Commercialization
Ian A. Bourne 2 1 3
Douglas P. 2 1 3
Hayhurst  
Edwin J. 2 1 3
Kilroy
John W. 1 3 2
Sheridan
Carol M. 1 2 3
Stephenson
David B. 1 3 2  
Sutcliffe  
Ian Sutcliffe 1   2 3      

     Directors are elected yearly at our annual shareholders’ meeting and serve on the Board until the following annual shareholders’ meeting, at which time they either stand for re-election or leave the Board. If no meeting is held, each director serves until his or her successor is elected or appointed, unless the director resigns earlier. The Board has established director resignation guidelines, which set out the circumstances under which a director would be compelled to submit a resignation or be asked to resign.

MAJORITY VOTING POLICY

     The Board established director resignation guidelines, which set out the circumstances under which a director would be compelled to offer a resignation or be asked to resign, including a majority voting policy. This policy requires that any nominee for director who receives a greater number of votes "withheld" than "for" his or her election shall tender his or her resignation to the Board following our annual shareholders’ meeting, to take effect immediately upon acceptance by the Board. Upon receipt of such conditional resignation, the CGCC will consider the matter and, as soon as possible, make a recommendation to the full Board regarding whether or not such resignation should be accepted. After considering the recommendation of the CGCC, the Board will decide whether or not to accept the tendered resignation and will, not later than 90 days after the annual shareholders’ meeting, issue a press release which either confirms that it has accepted the resignation or provides an explanation for why it has refused to accept the resignation. The director tendering his or her resignation will not participate in any meeting of the Board or the CGCC at which the resignation is considered. Subject to any restrictions or requirements contained in applicable corporate law or Ballard’s constating documents, the Board may: (a) leave a resulting vacancy unfilled until the next annual shareholders’ meeting; (b) appoint a replacement director whom the Board considers merits the confidence of the shareholders; or (c) call a special meeting of shareholders to elect a replacement director who may be a person nominated by management. The policy does not apply in respect of any contested shareholders’ meeting, which is any meeting of shareholders where the number of nominees for director is greater than the number of directors to be elected.

DIRECTOR SHARE OWNERSHIP GUIDELINES

     We have minimum share ownership guidelines that apply to our independent directors. The guidelines were revised by the Board effective September 21, 2011.

     All independent directors must hold the number of Ballard common shares having a value equivalent to three times the director’s annual retainer. Directors may apply DSUs they have received as payment for all or part of their annual retainer towards the minimum share ownership requirements.

     The value of shares held by directors will be measured on or about September 1st of each year based on the purchase price actually paid by the director for such shares, or the value of DSUs or shares received by the director when issued to him or her by the Corporation, as applicable.

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     Directors that were members of the Board at the time the guidelines were adopted in September 2011 have until September 2013 to comply with this requirement. Directors elected subsequently have five years from the date that they are first elected to the Board to comply. The Chair of the Board has five years from his original appointment as Chair in February 2006 to satisfy the minimum share ownership requirements for the Chair. Any director who fails to comply with the share ownership requirement may not stand for re-election. Currently, all directors have met or are on track to achieve these guidelines.

BOARD MEETINGS

     The Board meets on a regularly scheduled basis and directors are kept informed of our operations at meetings of the Board and its committees, and through reports by and discussions with management. In 2013, in-camera sessions, chaired by the Chair of the Board, were held after each regularly scheduled Board meeting involving all of the independent directors without the presence of management. In addition, communications between the directors and management occur apart from regularly scheduled Board and committee meetings. The Board has set a minimum meeting attendance guideline of 70%. Non-compliance with this guideline by a director is one of the factors considered in his or her individual performance evaluation at the end of the year.

ROLES AND RESPONSIBILITIES

     The Board operates under a formal mandate (a copy of which is attached as Appendix "A" and is posted on our website), which sets out its duties and responsibilities, including matters such as corporate strategy, fiscal management and reporting, selection of management, legal and regulatory compliance, risk management, external communications and performance evaluation. The Board has also established terms of reference and corporate governance guidelines for individual directors (copies of which are also posted on our website), which set out the directors’ individual responsibilities and duties. Terms of reference are also established for the Board chair and the CEO. These terms of reference and guidelines serve as a code of conduct with which each director is expected to comply, and address matters such as conflicts of interest, the duties and standard of care of directors, the level of availability expected of directors, requirements for maximizing the effectiveness of Board and committee meetings, and considerations that directors are to keep in mind in order to make effective and informed decisions.

     In addition, we have a Board-approved "Code of Ethics", which applies to all members of the Board, as well as our officers and employees. A copy of the Code of Ethics can be found on our website. This document is reviewed annually and updated or revised as necessary. Annually, all employees in Sales & Marketing, Finance & Administration, Supply Chain, Customer Service and Quality, and all management employees and officers, are required to formally acknowledge they have read, reviewed and comply with the Code of Ethics. A compliance report is then presented to the Audit Committee and Board.

     The Chair of the Board is responsible for ensuring the appropriate organization, content and flow of information to the Board and that all concerns of the directors are addressed. The Chair of the Board reviews and sets the agenda for each Board meeting. The Chair of the Board is also responsible for organizing and setting the frequency of Board meetings and ensuring that Board meetings are conducted efficiently. The Chair of the Board is an independent director.

     Each year, the Board identifies a list of focus priorities for the Board during the year. The CGCC regularly monitors the Board’s progress against these priorities throughout the year.

BOARD ORIENTATION AND EDUCATION

     We have established a formal director orientation and ongoing education program. Upon joining our Board, each director receives an orientation regarding our business. Such orientation consists of site visits to all of our manufacturing facilities, presentations regarding our business, technology and products, and a manual that contains various reference documents and information. Continuing education is offered by way of ongoing circulation of informative materials aimed at topical subject matters and management presentations at Board meetings, as well as guest speakers who are invited to speak to our Board on various topics. In the past, we have invited guest speakers to speak to our Board about the fuel cell industry,

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government regulation, corporate governance and risk management, and internal management representatives to speak about various issues relating to our technology and business. The educational presentations that are made by internal management provide an opportunity for Board members to meet and interact with members of our management team.

SHAREHOLDER FEEDBACK AND COMMUNICATION

     We have set up an e-mail process for shareholders to communicate with the Board, through the Chair of the Board. Shareholders who wish to send a message to the Chair of the Board can find the details of this process on our website. In addition, a summary of shareholder feedback that is received by us is provided to the Board through a semi-annual report.

BOARD AND DIRECTOR PERFORMANCE EVALUATIONS

     Each year, the Board conducts an evaluation and review of its performance during the past year. The evaluation is conducted through a process determined from time to time by the CGCC which elicits responses from individual directors on a confidential basis regarding the Board and individual directors. The process may include the completion of a questionnaire by all of the directors as well as individual director self-evaluations and peer evaluations. The CGCC presents the summary results to the full Board, which then, based on the results of the evaluation, determines appropriate changes to improve Board effectiveness.

COMMITTEES OF THE BOARD

     The Board has established two standing committees effective July 1, 2013: (1) the Audit Committee; and (2) the Corporate Governance & Compensation Committee (“CGCC”). The CGCC was established to assume the duties and responsibilities of the former Human Resources & Compensation Committee (“HRCC”) and Corporate Governance Committee, both of which were dissolved.

     Each committee has been delegated certain responsibilities, performs certain advisory functions and either makes certain decisions or makes recommendations to the Board. Each committee chair reports on the activities of the committee to the Board following each committee meeting. None of the members of these committees are current or former officers or employees of ours, or any of our subsidiaries.

     In addition to the standing committees of the Board, an ad hoc committee, the Financing Advisory Committee, was established in 2012 to consider and advise management on potential financing-related transactions.

     The following chart sets out current members of our standing committees:

Corporate Governance &
Compensation
Audit Committee Committee
Ian A. Bourne * *
Douglas P. Hayhurst ü
Edwin J. Kilroy ü (Chair)
John W. Sheridan ** **
Carol M. Stephenson ü (Chair)
David B. Sutcliffe ü ü
Ian Sutcliffe ü ü

*Chair of the Board and designated financial expert. Mr. Bourne is an ex officio member of each of the committees.
**Non-independent director. Mr. Sheridan attends the meetings but is not a voting member of the committees.

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     The information below sets out the members of each of our standing committees and indicates the number of meetings that each committee held in 2013. After the Meeting, we will reconstitute all of the standing committees to reflect the newly elected Board.

Audit Committee

     The Audit Committee is constituted in accordance with SEC rules, applicable securities laws and applicable NASDAQ rules, and assists the Board in fulfilling its responsibilities by reviewing financial information, the systems of corporate controls and the audit process.

     The Audit Committee is responsible for overseeing the audit process and the preparation of our financial statements, ensuring that our financial statements are fairly presented in accordance with International Financial Reporting Standards (“IFRS”), approving our quarterly financial statements, and reviewing and recommending to the Board our year-end financial statements and all financial disclosure contained in our public documents. The Audit Committee meets with our financial officers and our internal and external auditors to review matters affecting financial reporting, the system of internal accounting and financial disclosure controls and procedures, and the audit procedures and audit plans. The Audit Committee reviews our significant financial risks and the appointment of senior financial executives, and annually reviews our insurance coverage, tax loss carry forwards, pension and health care liabilities, and off-balance sheet transactions. The Audit Committee has at least two members, Ian A. Bourne and Douglas P. Hayhurst, who qualify as audit committee financial experts under applicable securities regulations. All of the members of the Audit Committee are independent directors and are financially literate.

     The Audit Committee is responsible for recommending the appointment of our external auditors (for shareholder approval at our annual general meeting), monitoring the external auditors’ qualifications and independence, and determining the appropriate level of remuneration for the external auditors. The external auditors report directly to the Audit Committee. The Audit Committee also approves in advance, on a case-by-case basis, any services to be provided by the external auditors that are not related to the audit.

     In addition, the Audit Committee is mandated to review all financial disclosure contained in prospectuses, annual reports, annual information forms, management proxy circulars and other similar documents. The Audit Committee is also responsible for ensuring that the internal audit function is being effectively carried out. The Audit Committee reviews and approves, in advance, related party transactions (including transactions and agreements in respect of which a director or executive officer has a material interest) on a case-by-case basis.

     The Audit Committee met 5 times during 2013. The members in 2013 were Ian A. Bourne (ex officio), Edwin J. Kilroy (Chair), Douglas P. Hayhurst, David B. Sutcliffe and Ian Sutcliffe. All of the members of the Audit Committee are independent of our management in accordance with the applicable Canadian and United States securities laws and exchange requirements.

     For a more detailed description of the Audit Committee or to see the Audit Committee’s mandate, a copy of which is posted on our website, see the section entitled "Audit Committee Matters" in our Annual Information Form dated February 26, 2014, which section is incorporated by reference into this Management Proxy Circular.

Corporate Governance & Compensation Committee

     The CGCC is responsible for the following1:

  • recommending the size of the Board and the formation and membership of committees of the Board;
     
  • review and approval of all director nominations to the Board;

____________________

1Formerly the responsibilities and duties of the Corporate Governance Committee dissolved as of July 1, 2013.

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  • determining director compensation;
     
  • maintaining an ongoing education program for Board members;
     
  • ensuring a formal process exists to evaluate the performance of the Board, Board committees, individual directors, and the Chair of the Board, and ensuring that appropriate actions are taken, based on the results of the evaluation, to improve the effectiveness of the Board;
     
  • conducting succession planning for the Chair of the Board; and
     
  • monitoring corporate governance and making recommendations to enable the Board to comply with best corporate governance practices in Canada and the United States;

     The CGCC is also responsible for2:

  • considering and authorizing the terms of employment and compensation of executive officers and providing advice on organizational and compensation structures in the various jurisdictions in which we operate;
     
  • reviewing and setting the minimum share ownership requirement for executive officers;
     
  • reviewing all distributions under our equity-based compensation plans, and reviewing and approving the design and structure of, and any amendments to, those plans;
     
  • ensuring appropriate senior management succession planning, recruitment, development, training and evaluation;
     
  • annually reviewing the performance objectives of our Chief Executive Officer and conducting his annual performance evaluation.

     Any compensation consultants engaged by us, at the direction of the committee, report directly to the committee, and the committee has the authority to appoint such consultants, determine their level of remuneration, and oversee and terminate their services.

     A copy of the Corporate Governance & Compensation Committee’s mandate is posted on our website. The mandate is reviewed annually and the committee’s performance is assessed annually through a process overseen by the Board.

     The CGCC met twice during 2013. The members were Ian A. Bourne (ex officio), Carol M. Stephenson (Chair), David B. Sutcliffe and Ian Sutcliffe. All of the members of the CGCC are independent of our management in accordance with the applicable Canadian and United States securities laws and exchange requirements.

     Collectively, the CCGC members have extensive compensation-related experience as senior executives (past and present) and members of the board of directors and committees of other public and private corporations. The Board is confident that the CCGC collectively has the knowledge, experience and background to carry out the Committee’s mandate effectively and to make executive compensation decisions in the best interests of the Corporation and its shareholders.

Former Committees

Corporate Governance Committee

     The Corporate Governance Committee met twice in 2013. The members were Ian A. Bourne (ex officio), Edwin J. Kilroy, Dr. C.S. Park, and Carol M. Stephenson (Chair). All of the members of the CGCC were independent of our management in accordance with the applicable Canadian and United States securities laws and exchange requirements.

____________________
 

2Formerly the responsibilities and duties of the Human Resources & Compensation Committee dissolved as of July 1, 2013.

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     The Corporate Governance Committee was dissolved as of July 1, 2013 and its duties and responsibilities were assumed by the CGCC.

Human Resources & Compensation Committee

     The HRCC met twice during 2013. The members were Ian A. Bourne (ex officio), Douglas P. Hayhurst, Dr. C.S. Park, Carol M. Stephenson and David B. Sutcliffe (Chair). All of the members of the HRCC were independent of our management in accordance with the applicable Canadian and United States securities laws and exchange requirements.

     The HRCC was dissolved as of July 1, 2013 and its duties and responsibilities were assumed by the CGCC.

Financing Advisory Committee

     The Financing Advisory Committee was a temporary committee of the Board established in June 2012 for the purpose of reviewing and analyzing the relevant facts and issues concerning financing-related transactions and to make recommendations to enable the Board to determine whether any such transaction is in the best interests of the Corporation.

     The Financing Advisory Committee met twice during 2013. The members were Ian A. Bourne, Douglas P. Hayhurst and Edwin J. Kilroy, all of whom are independent of our management in accordance with the applicable Canadian and United States securities laws and exchange requirements.

     The Financing Advisory Committee was dissolved in June 2013.

EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

     This section of this Management Proxy Circular contains a discussion of the elements of compensation earned by our "Named Executive Officers", who are listed in the Summary Compensation Table below: John W. Sheridan (President and Chief Executive Officer), Tony Guglielmin (Vice President and Chief Financial Officer), Christopher J. Guzy (Vice President and Chief Technical Officer), Paul Cass (Vice President, Operations) and Karim Kassam (Vice President, Business & Corporate Development).

     In this section the term “Compensation Committee” refers to (1) the HRCC for actions taken prior to July 1, 2013, (2) the CGCC for actions taken after that date, and (3) to both committees where the context does not imply a specific date.

Objectives of Our Executive Compensation Program

     The structure of our executive compensation program is designed to compensate and reward executives appropriately for driving superior performance. For our Named Executive Officers, a significant portion of their total direct compensation is "at risk" and tied closely to the success of the Corporation’s short and long-term objectives. "At risk" means that the executive will not realize value unless specified goals, many of which are directly tied to the Corporation’s performance, are achieved or the price at which our common shares are traded on the TSX or NASDAQ appreciates. In 2013, these performance goals, and resulting compensation awards, were largely focused on the Corporation’s key business drivers including growing revenue and building the long term order book, Adjusted EBITDA(3) performance, Gross Margin performance, on-time product deliveries and the delivery of key strategic business enablers to position the Corporation for long term success. This compensation philosophy puts a strong emphasis on pay for performance, and uses equity awards as a significant component in order to correlate the long-term growth of shareholder value with management’s most significant compensation opportunities. The strategic goals of

____________________

(3)        For a discussion of EBITDA and Adjusted EBITDA, please refer to Ballard’s Management’s Discussion & Analysis.

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the Corporation are reflected in the incentive-based executive compensation programs so that executives’ interests are aligned with shareholders’ interests.

Philosophy and Objectives

     Our philosophy and objectives regarding compensation are to:

                     (a)        attract and retain experienced, qualified, capable executive officers by paying salaries which are competitive in the markets in which we compete for executive talent;
 
  (b)   motivate short and long-term performance by directly linking annual bonuses to performance; and
 
  (c)   link our executive officers' interests with those of our shareholders by providing our executive officers with equity-based compensation, requiring them to comply with minimum share ownership guidelines and build a sustained ownership position.

Compensation Risk Considerations

The Compensation Committee and Board believe that relative to other market sectors (e.g. Financial) the risk associated with our compensation practices is low. Given the increased emphasis being placed on ensuring that compensation practices do not encourage behaviours that expose the corporation to greater risk, this is an area that the Compensation Committee and Board continue to monitor regularly.

The Compensation Committee and Board currently consider the risks associated with the company’s compensation policies and practices are mitigated by:

  • evaluating the impact of each compensation component on management behaviour:
     
    • for base pay, there is no unusual risk-taking being encouraged;
       
    • for long-term equity-based incentive programs, the potential risks are considered low, in part due to the mix of RSU and Option awards with time and/or performance based vesting terms, and overall generally consistent with other public company risks;
       
    • for short term cash incentives, the potential risks are low since the plan uses multiple metrics in the Corporate Multiplier, both quantitative and qualitative (described below) and has caps to the maximum earnings available under each component of the plan.
  • ensuring the committee and Board mandates reflect the correct accountabilities, oversight and controls on the company’s compensation policies and practices, especially as they relate to executive compensation; and
     
  • working with management and/or external consultants to stress test each compensation component, to ensure boundary conditions are reasonable and do not produce unexpected or unintended financial windfalls.

The Compensation Committee and Board consider that these mitigation approaches results in the Corporation’s risk profile associated with its compensation practices being low.

How Executive Compensation is Determined

     The Compensation Committee, consisting of 4 independent directors, is charged, on behalf of our Board, with reviewing and approving executive officers’ benefit policies and compensation plans, including our annual bonus plan and our long-term equity-based compensation plans. As part of its mandate, the committee approves and recommends to the Board the appointment of our executive officers. The committee also reviews and approves the amount and form of their compensation, their development and succession plans, and any significant organizational or management changes. The committee retains independent compensation consultants for professional advice and as a source of competitive market information. In 2013, the committee continued to retain Towers Watson on an as-needed basis, to provide

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independent advice related to Ballard executive compensation items. The committee also seeks the advice and recommendations of our President and Chief Executive Officer with respect to the compensation of our other executive officers. The President and Chief Executive Officer does not participate in the portions of the committee discussions that relate directly to his personal compensation.

Executive Pay Mix and the Emphasis on "At Risk" Pay

     We place emphasis on performance by having a significant proportion of our executive officers’ total annual compensation linked to corporate and individual performance. For 2013, an average of 54% of the annual compensation earned by each of our Named Executive Officers came from "at risk", variable, performance-related compensation containing inherent market performance risk, where annual compensation includes base salary, annual bonus and equity-based long-term incentives (including share options and RSUs).

The Use of Benchmarking

     Our overall compensation objective is to pay executives on average at the 50th percentile of the comparator group for full achievement of performance goals. Over-achievement or under-achievement will result in being over or under the average.

     In late 2011, the Compensation Committee, working with Towers Watson, updated the comparator companies contained within the Corporation’s compensation comparator group to reflect the Corporation’s current business size and market focus. A revised list of comparator companies was reviewed and accepted by the committee, which selected the group of comparators ensuring a suitable mix of Canadian and United States companies exhibiting a growth oriented mix of revenues, employee base, asset base, market capitalization and market focus. This same comparator group was maintained in 2013. This comparator group comprises the primary source of compensation data for review of the Corporation’s market competitiveness. The committee reviews the composition of the comparator company list on an annual basis.

     The Corporation’s current comparator group is:

Canadian Companies               United States Companies
EXFO Inc AeroVironment Inc
Gennum Corporation   Allied Motion Technologies Inc
Hydrogenics Corp. American Superconductor Corporation
Neo Material Technologies Inc Ener1 Inc
New Flyer Industries Inc   Energy Conversion Devices Inc
Sierra Wireless Inc Fuel Cell Energy Inc
Westport Innovations Inc GrafTech International Ltd
Plug Power Inc

     The committee compares each executive officer’s annual salary, target annual incentive bonus and long-term incentive compensation value, both separately and in the aggregate, to amounts paid for similar positions at comparator group companies. As noted above, the committee’s practice is to target annual total direct compensation for each executive at approximately the 50th percentile among the comparator group companies.

     Towers Watson have been retained by the Compensation Committee since 2008 to provide executive compensation benchmarking and general executive compensation, equity plan and Board compensation advisory services. Towers Watson continues to be the Committee’s advisors, available for ad-hoc consulting services as needed; however, the Committee did not require any services in 2013.

     The following table sets out the fees paid to Towers Watson during each of the two most recently completed financial years:

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Executive Compensation- All Other Fees
Related Fees
2013 Nil Nil
          2012 $4,098 Nil

Current Executive Compensation Elements

     Our compensation program for our executive officers has three primary components:

              (a)        annual salary;
 
  (b)   annual incentives (bonus); and
 
  (c)   equity-based long-term incentives comprised of awards that may be issued under our Option Plan, Share Distribution Plan or under the Market Purchase RSU Plan.

Significant Compensation Program Changes Planned in 2014

     There are no significant compensation program changes planned for 2014.

Annual Salary

     The Compensation Committee approves the annual salary of our executive officers. Salary guidelines and salary adjustments for our executive officers are considered with reference to:

              (a)        comparative market assessments performed by external compensation consultants;
 
  (b)   the experience and qualifications of each executive officer;
 
  (c)   the individual performance of each executive officer; and
 
  (d)   the roles and responsibilities of each executive officer.

     The Corporation chooses to pay this element of compensation, because the Corporation’s view is that a competitive base salary is a necessary element for attracting and retaining qualified and experienced executive talent.

     The Corporation’s decisions about this element of compensation and its annual level impacts decisions about the level of target annual incentive an executive might receive, but only in the sense that the incentive bonus target is set as a percentage of annual salary.

     In 2013, there were no annual salary increases for the Named Executive Officers.

Annual Bonus for Executive Officers

     The Compensation Committee reviews and approves the annual bonus for each executive officer based on the recommendations of our President and Chief Executive Officer in accordance with the factors described in the foregoing section.

     The annual target bonus for Mr. Guglielmin, Mr. Guzy and Mr. Cass was set at 60% of base salary in 2013. This target, first established in 2012 in response to the Towers Watson benchmarking study conducted in Fall 2011, was a reduction from the 70% level of 2011. This bonus target had previously been reduced by 5% points in each of 2008 and 2007 to better align annual incentive levels to market levels relative to the Corporation’s comparator group). Mr. Kassam’s annual target bonus was set at 55% of base salary in 2013.

     This annual bonus target is split into 2 parts. The first 50% is determined by individual and corporate performance relative to the Corporation’s annual goals. The second 50% is based on a stretch performance metric. In 2013, this stretch performance metric was over-achievement of a target Cashflow from Operations.

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     Therefore, 50% of each executive officer’s actual 2013 bonus was based on a combination of his individual performance and our corporate performance relative to goals, as discussed below under the section entitled "Methodology for Determining Annual Incentives", with the remaining 50% based on a stretch performance element related to over-achievement of annual Cashflow from Operations targets.

     The Corporation maintains an annual bonus program in order to motivate short and long-term performance by directly linking annual bonuses to the performance and progress of the Corporation.

     The Corporation’s decisions about this element of compensation do not directly affect decisions about any other element of the Corporation’s compensation program.

     For a full discussion of annual incentive compensation for our President and Chief Executive Officer, see the section entitled "Chief Executive Officer Compensation". The section below entitled "Methodology for Determining Annual Incentives" applies equally to the President and Chief Executive Officer as it does to the other executives.

Methodology for Determining Annual Incentives

     The actual annual bonus for each executive officer is determined by the CGCC on the basis of the following formula:

actual bonus = annual base salary x bonus percentage x individual performance multiplier

bonus percentage =     (50% of target bonus x corporate scorecard multiplier) +
(50% of target bonus x stretch performance goal multiplier)

Corporate Scorecard Multiplier

     The corporate scorecard multiplier is determined by the Compensation Committee and approved by the Board with reference to achievement against the corporate goals set out in a Corporate Performance Scorecard approved by the Compensation Committee and the Board prior to the commencement of the year. Each corporate performance goal on the scorecard is assigned a relative weighting in terms of importance to annual performance and growth of the Corporation, as well as a range of targeted outcomes, such that below a certain performance level the contribution of that goal to the overall corporate scorecard multiplier is zero. For 2013, the Corporate Performance Scorecard reflected a balance of Quantitative annual goals focussed on delivery of the 2013 operating plan (70% of the scorecard) and Qualitative goals focussed on key strategic outcomes during 2013 to position the Corporation for longer term success (30% of the scorecard). The Quantitative portion of the scorecard had 3 financial elements (Revenue, Gross Margin, and Adjusted EBITDA) and 2 operational elements (on-time product delivery and sales order book for 2014). The Qualitative portion of the scorecard had 3 elements (Demonstrating critical mass in Telecoms Back-Up Power systems deployment, Working with European bus partners to deliver demonstration fleets, and securing an additional OEM automotive customer).

     Goals related to on-time delivery, securing an additional OEM automotive customer, and gross margin were delivered at achievement levels above the 100% level. Goals related to on-time delivery, revenue, 2014 order book, Telecoms BUP deployment and Bus demonstrations fleets were delivered at the 100% level. The goal related to Adjusted EBITDA was delivered at close to the 100% achievement level.

     In aggregate the Corporate Scorecard Multiplier achievement equalled 113%, which as previously described, affected 50% of the executive’s annual bonus target.

Stretch Performance Goal Multiplier

     The stretch performance goal related to over-achievement of the annual Cashflow from Operations target was not achieved. As a result, the stretch performance goal multiplier for 2013 was 0%. This zero payout affected 50% of the executive’s annual bonus target.

Individual Performance Multiplier

     The individual performance multiplier is determined with reference to achievement against the individual goals set for each executive officer, with an individual performance multiplier greater than 100%

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being awarded for superior performance against these goals, and an individual performance multiplier of less than 100% being awarded for substandard performance against these goals. Individual goals are set for individual executive officers by the Chief Executive Officer and are based on agreed-upon objective/identifiable measures relative to their respective functional accountabilities, which are aligned to the corporate performance goals. Individual multipliers for each Executive ranged from 100% to 150%. A summary of their individual performance is as follows:

     Mr. Guglielmin: met all of his 2013 goals including departmental and corporate financial metrics, with significant over-achievements on the goals for strengthening liquidity and growing shareholder value.

     Mr. Guzy: met his key 2013 goals, relating to program development, engineering services deliverables and product quality improvement; as well, he make key contributions to major corporate achievements in engineering services and licensing contracts.

     Mr. Cass: met his key 2013 goals in production, customer service and quality and provided key support on numerous corporate priorities, related to the bus and material handling market segments.

     Mr. Kassam: met his key goals related to various corporate and business development priorities, primarily in areas related to continuous power in Africa and telecoms back-up power in African and India.

Long Term Incentives

     We provide our executive officers with equity-based long-term incentives through the Option Plan, Market Purchase RSU Plan and the SDP. These plans are designed to reinforce the connection between executive officer remuneration and our performance by motivating and rewarding participants for improving our long-term financial strength and enhancing shareholder value, and also providing retention value to executives. With respect to equity-based long-term compensation awards for our executive officers, individual performance and future contribution expectations are taken into account in determining the award. For 2013 awards, the President and Chief Executive Officer recommended to the Compensation Committee a value amount in dollars for each Named Executive Officer: see the amounts set out under “Share-Based Awards” and “Option-Based Awards” in our Summary Compensation Table. This value amount was broadly the same as for 2012 awards (the 2012 value having been reduced to 90% of the 2011 award value to more directly reflect the positioning relative to the comparator group). The recommendation for this year reflected a higher percentage of RSU awards than prior years (approximately 75-90% of the total value). This value amount was then converted to RSUs at the then current market price by dividing the dollar value by the closing share price on either the TSX or NASDAQ on the award date. The remaining approximately 10-25% of this value amount was converted to options by dividing the dollar value by the Black-Scholes value of a Ballard option on the award date. These options were then priced at the closing share price on the day prior to the award date.

     This element of compensation and the Corporation’s decisions about this element fit into the Corporation’s overall compensation objectives in that they link our shareholders’ interests with those of our executive officers by providing our executive officers with equity-based compensation, and requiring them to comply with minimum share ownership guidelines.

     The Corporation’s decisions about this element of compensation do not affect decisions about any other element of the Corporation’s compensation.

Share Options

     Share options are granted annually in respect of approximately 10-50% of the long-term incentive compensation to be provided to an executive. As a result, previous grants of Share options are not generally taken into account when making new grants. The actual number of Share options granted is determined by dividing the dollar value of the portion of the long-term incentive to be satisfied though an option grant by the Black-Scholes value of a Ballard option on the award date.

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     Under our Option Plan:

              (a)        the exercise price of each option is determined by the Board, but must not be less than the closing price per Share on the TSX or NASDAQ on the last trading day before the date the option is granted; and
 
  (b)   each option may be exercised by the holder in respect of up to one-third of the Shares subject to the option on or after the first, second and third anniversary of the effective date of the option on a cumulative basis.

     Share options are typically granted for a term of seven years.

Restricted Share Units

     Employees and executive officers are eligible to receive new RSU awards under the Market Purchase RSU Plan or SDP, which provide for vesting over periods of up to three years and awards may be subject to certain performance criteria, as determined by the Board upon the recommendation of the Compensation Committee. Redemption of these RSUs is satisfied either with Shares bought under the Market Purchase RSU Plan or by treasury based shares reserved under the SDP.

     The amount of the long-term incentive that is awarded to each executive officer is typically determined in the first quarter of each financial year, in conjunction with the determination of that executive officer’s annual bonus for the prior financial year. Since the long-term incentive is tied to future (as opposed to past) corporate performance, in our summary compensation table we report the grant of the long-term incentive in the "Share-Based Awards" column and the "Option-Based Awards" column for the particular year in which they were actually granted. The year-end values of unexercised or unvested Share options and RSUs, and the vesting during the year of Share options and RSUs are reported in the tables under the heading "Incentive Plan Awards".

     In 2012, the performance criteria for RSUs were amended to introduce a tiered approach to vesting based on the annual performance of the Corporation (as prescribed by the Corporate Performance Scorecard).

Corporate Scorecard RSU Vesting
<50% 0%
≥50% and <75% 50%
≥75% 100%

New Issuances

     On March 7, 2013, 1,063,524 RSUs were issued to the Named Executive Officers, including the President and Chief Executive Officer. For all our executive officers who received an award on that date, the RSU awards included a performance criteria achievement goal of a minimum corporate scorecard multiplier of 50% in each of the 3 years of the award, with 50% vesting if this threshold was achieved and 100% vesting if a corporate scorecard multiplier achievement of greater than 75% is achieved. Failure to meet this minimum corporate performance threshold in any one year results in that year’s award portion expiring and not being redeemed (see the section above entitled "Methodology for Determining Annual Incentives" for a description of the determination of the corporate scorecard multiplier). In February 2014, the Board determined, after setting the corporate multiplier to 113% for the purpose of determining annual bonus, that 100% of this year’s RSUs vested, per the terms of the RSU awards.

Redemptions

A redemption of RSUs to shares for the Named Executive Officers, based on partial vesting of annual awards granted in 2010, 2011 and 2012 was approved by the board on March 7, 2013.

     On March 11, 2013, 37,847 RSUs vested and after statutory withholdings, 21,306 RSUs were redeemed into Shares, representing 50% of one-third of the 2010 annual RSU long-term incentive award granted to Messrs. Sheridan, Cass, Guzy and Kassam.

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     On March 11, 2013, 68,254 RSUs vested and after statutory withholdings, 38,424 RSUs were redeemed into Shares, representing 50% of one-third of the 2011 annual RSU long-term incentive award granted to Messrs. Sheridan, Guglielmin, Cass and Guzy.

     On March 11, 2013, 117,949 RSUs vested and after statutory withholdings, 66,402 RSUs were redeemed into Shares, representing 50% of one-third of the 2012 annual RSU long-term incentive award granted to Messrs. Sheridan, Guglielmin, Cass, Guzy and Kassam.

     On June 13, 2013, 25,226 RSUs reached the end of their restriction period and after statutory withholdings, 14,202 RSUs were redeemed into Shares for Mr. Guglielmin. This award was the final 1/3 of his new hire award, granted on June 14, 2010 and subject to time vesting only.

     On September 26, 2013, 53,191 RSUs reached the end of their restriction period and after statutory withholdings, 29,946 RSUs were redeemed into Shares for Mr. Kassam. This award was granted on September 20, 2011 and subject to time vesting only.

Chief Executive Officer Compensation

     Mr. Sheridan was appointed President and CEO by the Board on February 22, 2006. When appointed, his base salary at that time was fixed at $530,000 Cdn per year. The CEO base salary has been frozen since that time, other than a 10% voluntary temporary reduction during the 2nd half of 2009. In January 2010, Mr. Sheridan’s base salary returned to its original level of $530,000 Cdn per year and continued at that level throughout 2010.

     Mr. Sheridan is entitled to receive an RRSP contribution (CDN$11,910 in 2013). The corporate RRSP program was changed in 2010 and this benefit was reduced by 50% relative to 2009. This benefit is now subject to an equivalent matching contribution from Mr. Sheridan. Mr. Sheridan is also entitled to receive company paid insurance premiums (CDN$2,198 in 2013).

     Mr. Sheridan’s target bonus for 2013 was equal to 80% of his annual base salary, reduced from 90% in 2011. This level of target bonus has been reduced from 100% in 2007. Mr. Sheridan’s bonus for 2013 was determined by the Compensation Committee on the basis of corporate financial and operational performance reflected in the Corporate Performance Scorecard rating, plus performance relative to the CEO’s individual goals for 2013, as approved by the Board.

     The Compensation Committee determined that Mr. Sheridan performed strongly in 2013, exceeding 4 of his 5 individual goals related to refining the corporate strategic direction, strengthening the Corporation’s liquidity position, growing shareholder value and strengthening employee engagement; and meeting the 5th goal related to deepening director knowledge with increased firsthand exposure to customers, suppliers and partners. Commensurate with this evaluation, the Compensation Committee determined that the appropriate Individual Bonus Multiplier for Mr. Sheridan was 150%.

     As noted earlier, the stretch performance goal related to over-achievement of the annual Cashflow from Operations target was not achieved. As a result, the stretch performance goal multiplier for 2013 was 0%. This zero payout affected 50% of the Mr. Sheridan’s annual bonus target.

     On March 7, 2013, the Board approved the recommendation by the Compensation Committee and Mr. Sheridan was granted a long-term incentive award, equivalent at the time of grant to a total value of CDN$831,250; with CDN$81,250 converted to options in respect of 125,000 Shares (at an exercise price of CDN$1.22 per Share) and a RSU award of CDN$750,000 (614,754 RSUs at a price of CDN$1.22 per Share). These awards formed Mr. Sheridan’s 2013 long-term incentive package, and the overall value and equity mix was approved by the Compensation Committee and the Board. Consistent with other Named Executive Officers, the RSU award has performance criteria and time vesting as described above in the “Restricted Share Units – New Issuances” section, and the share options were granted with a 7-year term, with one-third of the options vesting at the end of each of the first three years.

     The cash portion of Mr. Sheridan’s total compensation in 2013 was CDN$566,829 (for base salary and benefits). The non-cash compensation portion related to the theoretical value of Options and RSUs at

27



grant received in 2013, but to vest in later years, was CDN$831,250. The total value of Mr. Sheridan’s nominal compensation in 2013, the sum of the cash and non-cash components, was CDN$1,757,419.

Termination and Change of Control Benefits

     For a description of the termination and change of control benefits under Ballard's employee contracts and equity compensation plans for the President & CEO and other Named Executive Officers, see the section entitled "Termination and Change of Control Benefits" below.

Perquisites

     In addition to cash and equity compensation, the Corporation provides Named Executive Officers with certain personal benefits, consistent with similar benefits coverage within the comparator group. These benefits include a car allowance, medical benefits program, long and short-term disability coverage, life insurance, an annual medical and a financial planning allowance.

Retirement Benefits

     In 2013, Mr. Sheridan, Mr. Guglielmin, Mr. Guzy and Mr. Cass each received an RRSP contribution from the Corporation, equal to 50% of the maximum amount allowable under the Income Tax Act (Canada),based on the Named Executive Officer making an equivalent personal matching contribution. In 2010, the Corporation made changes to its overall RRSP program. Starting on January 1, 2010, each executive was required to make a matching contribution to receive an RRSP benefit. As a result of these changes, the maximum benefit each executive can receive is up to 50% of the maximum amount allowable under the Income Tax Act (Canada), based on the executive making an equal matching contribution. This is both a reduction of 50% in value of the total benefit relative to the program prior to 2010, and also requires a matching contribution from the executive. In 2013, Mr. Kassam received an RRSP contribution equal to 5% of his base salary, based on his making an equivalent personal matching contribution.

     None of the Named Executive Officers currently participates in a Corporation-sponsored Defined Benefits Plan, Defined Contribution Plan, or Supplemental Executive Retirement Plan, nor do they receive contributions to any such plan on their behalf from the Corporation.

Total Executive Officer Compensation

     The total value of the compensation of the Chief Executive Officer together with all of the other Named Executive Officers (as defined below in the section entitled "Executive Compensation") was CDN$4,131,964.

Minimum Share Ownership Guidelines

     We established executive officer minimum share ownership guidelines in 2003, which obligate each executive officer to own a minimum number of our Shares. Those guidelines were modified by our Board in December 2007 to increase the minimum share ownership requirements for our executive officers.

     For the President and Chief Executive Officer the minimum share ownership guideline is equal to the lesser of:

              (a)        the number of Shares that have a fair market value of three times the President and Chief Executive Officer’s base salary; or
 
  (b)   181,903 Shares.

     For executive officers other than the President and Chief Executive Officer, the minimum share ownership guideline is equal to the lesser of:

              (a)        the number of Shares with a fair market value equal to the executive officer’s annual base salary; or

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              (c)        the number of Shares equal to the executive officer’s annual base salary divided by the closing share price of Shares on the TSX or Nasdaq on the trading day of the date of hire. (4)

     Mr. Kassam is not subject to these minimum share ownership requirements.

     For the purposes of this section, the "fair market value" is defined as the closing price of our Shares as listed on the TSX on the date of review of the guideline. All executive officers have met or are on track to achieve the applicable guidelines. (5)

     Executives and directors are not permitted to hedge the market value of the Corporation securities granted to them as compensation or otherwise held, directly or indirectly, by them.

PERFORMANCE GRAPH

     The following graph compares the total cumulative return to a shareholder who invested $100 in our Shares on December 31, 2008, assuming reinvestment of dividends, with the total cumulative return of $100 on the NASDAQ Composite Index for the last five years.

2008 (Dec 31) 2009 (Dec 31) 2010 (Dec 31) 2011 (Dec 31) 2012 (Dec 31) 2013 (Dec 31)
       ($)        ($)        ($)        ($)        ($)        ($)
Ballard 100 167 133 96 54 134
NASDAQ 100 144 168 165 191 265
Composite  
Index

     The trend shown by this graph does not reflect the trend in the Corporation’s compensation to its Named Executive Officers.



____________________

(4)        For executives who were employed as at December 2007, the minimum share ownership guideline is equal to the lesser of: (a) the number of Shares with a fair market value equal to the executive officer’s annual base salary; or (b) 35,300 Shares.
   
(5)   For the President and Chief Executive Officer, the share acquisition period is five years from the date of hire. For other executive officers who were employed as at December 2007, the time for acquiring the new minimum share ownership level is eight years. For executive officers hired after December 2007, the minimum number of Shares must be acquired over a five-year period.

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EXECUTIVE COMPENSATION TABLES

     The following table summarizes the compensation paid for the fiscal years ended on December 31, 2011, December 31, 2012 and December 31, 2013 to our Named Executive Officers.

Summary Compensation Table
Long-Tern Incentives
Share-Based Option-Based All Other Total
Name and Principal Salary(2) Bonus(3)(4) Awards(5) Awards(6) Compensation(7) Compensation
Position Year (CDN$) (CDN$) (CDN$) (CDN$) (CDN$) (CDN$)
John W. Sheridan(1) 2013 530,000 359,340 750,000 81,250 36,829 1,757,419
President and Chief Executive 2012 530,000 0 675,000 225,000 29,910 1,459,910
Officer 2011 530,000 380,000 500,000 400,000 31,218 1,841,218
Tony Guglielmin 2013 310,000 157,635 167,500 48,750 31,533 715,418
Vice President and Chief 2012 310,000 0 162,000 54,000 29,596 555,596
Financial Officer 2011 310,000 168,175 120,000 120,000 28,627 746,802
Paul Cass 2013 265,000 89,835 167,500 48,750 29,959 601,044
Vice President Operations 2012 265,000 0 162,000 54,000 28,318 509,318
2011 258,671 151,320 120,000 120,000 32,117 682,108
Christopher J. Guzy 2013 310,000 136,617 167,500 48,750 43,443 706,310
Chief Technical Officer 2012 310,000 0 162,000 54,000 43,154 569,154
2011 310,000 134,540 120,000 120,000 44,042 728,582
Karim Kassam 2013 200,000 64,847 45,000 22,750 19,176 351,773
Vice President, Business & 2012 166,797 0 35,000 8,900 17,572 228,269
Corporate Development 2011 163,932 79,091 75,000 46,400 17,299 381,722

(1)        Mr. Sheridan is also a director, but receives no compensation for his service as a director.
 
(2)   Salary of each of the Named Executive Officers was paid in Canadian dollars. The United States dollar amounts for 2013 were US$498,308, US$291,463, US$249,154, US$291,463 and US$188,041 for Messrs. Sheridan, Guglielmin, Cass, Guzy and Kassam, respectively. The United States dollar amounts for 2012 were US$498,308, US$291,463, US$249,154, US$291,463 and US$156,823 for Messrs. Sheridan, Guglielmin, Cass, Guzy and Kassam, respectively. The United States dollar amounts for 2011 were US$498,308, US$291,463, US$243,203, US$291,463 and US$154,129 for Messrs. Sheridan, Guglielmin, Cass, Guzy and Kassam, respectively. The Canadian dollar amounts were converted into United States dollars for the purpose of this disclosure using the Bank of Canada noon rate of exchange on December 31, 2013.
 
(3)   In 2013, the bonus for Messrs. Sheridan, Guglielmin, Cass, and Guzy was issued as DSUs and this amount is based on the grant date fair market value of the award, which equals the closing price of the Shares on the TSX on the date of issuance of the award. The number of DSUs awarded is equal to the dollar amount of the award divided by the fair market value of the Shares at the time of issuance (based on the closing price of the Shares on the TSX on the date of issuance). The number of DSUs issued to Messrs. Sheridan, Guglielmin, Cass, and Guzy in respect of the fiscal year ended December 31, 2013 is as follows:

Bonus
Fair Market Value
Named Executive DSUs of a Share Total
  Officer Year (#) (CDN$)(A) (CDN$)(B)
John W. Sheridan 2013 96,338 3.73 359,340
Tony Guglielmin 2013 42,261 3.73 157,635
Paul Cass 2013 24,084 3.73 89,835
           Christopher J. Guzy 2013 36,627 3.73 136,617

             (A)        The fair market value of a Share has been calculated using the Canadian dollar closing price of the Shares underlying the DSUs on the TSX on the date of issuance.
 
(B)   The United States dollar amounts for 2013 were US$337,853, US$148,209, US$84,463 and US$128,448 for Messrs. Sheridan, Guglielmin, Cass and Guzy, respectively. The Canadian dollar amounts were converted into United States dollars for the purpose of this disclosure using the Bank of Canada noon rate of exchange on December 31, 2013.

    Mr. Kassam’s bonus was paid in cash in Canadian dollars. The United States dollar amount for Mr. Kassam’s 2013 bonus was US$60,969. The Canadian dollar amount was converted into United States dollars for the purpose of this disclosure using the Bank of Canada noon rate of exchange on December 31, 2013.
 
(4)        The bonus of each of the Named Executive Officers was paid in Canadian dollars. The corresponding United States dollar amounts for 2012 were US$0, US$0, US$0, US$0 and US$0 for Messrs. Sheridan, Guglielmin, Cass, Guzy and Kassam, respectively. The corresponding United States dollar amounts for 2011 were US$357,277, US$158,119, US$142,272, US$126,495 and US$74,361 for Messrs. Sheridan, Guglielmin, Cass, Guzy and Kassam, respectively. The Canadian dollar amounts were converted into United States dollars for the purpose of this disclosure using the Bank of Canada noon rate of exchange on December 31, 2013.

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(5)        Represents the total fair market value of RSUs issued to each Named Executive Officer during the 2011, 2012 and 2013 fiscal years. This amount is based on the grant date fair market value of the award, which equals the closing price of the Shares on the TSX and NASDAQ on the date of issuance of the award. Fair value is determined in accordance with IFRS 2 of the International Financial Reporting Standards (accounting fair value) is recorded as compensation expense in the statement of operations over vesting periods of one to three years. There is no difference in Canadian dollars between the grant date fair market value of the award and the accounting fair value.
 
  As noted above, a dollar value is approved for the long term incentive awarded to each executive and approximately 75-90% of this amount is awarded in the form of RSUs with the remaining 10-25% being awarded in the form of Share options in 2013. In 2012, approximately 75% of this amount was awarded in the form of RSUs with the remaining 25% being awarded in the form of Share options. In 2011, 50% of this amount was awarded in the form of RSUs with the remaining 50% being awarded in the form of Share options. The number of RSUs awarded is equal to the dollar amount of the award divided by the fair market value of the Shares at the time of issuance (based on the closing price of the Shares on the TSX and NASDAQ on the date of issuance). The number of RSUs issued to each Named Executive Officer in respect of the fiscal years ended December 31, 2011, December 31, 2012 and December 31, 2013 is as follows:

           Share-Based Awards
Fair Market Value
Named Executive RSUs of a Share Total
Officer Year (#) (CDN$)(A) (CDN$)(B)
John W. Sheridan 2013 614,754 1.22 750,000
2012 399,408 1.69 675,000
2011 238,095 2.10 500,000
  Tony Guglielmin 2013 137,295 1.22 167,500
2012 95,858 1.69 162,000
2011 57,143 2.10 120,000
Paul Cass 2013 137,295 1.22 167,500
2012 95,858 1.69 162,000
2011 57,143 2.10 120,000
Christopher J. Guzy 2013 137,295 1.22 167,500
2012 95,858 1.69 162,000
2011 57,143 2.10 120,000
Karim Kassam 2013 36,885 1.22 45,000
2012 20,710 1.69 35,000
2011 53,191 1.41 75,000

             (A)        The fair market value of a Share has been calculated using the Canadian dollar closing price of the Shares underlying the RSUs on the TSX on the date of issuance.
 
(B)   The United States dollar amounts for 2013 were US$705,152, US$157,484, US$157,484, US$157,484 and US$42,309 for Messrs. Sheridan, Guglielmin, Cass, Guzy and Kassam, respectively. The United States dollar amounts for 2012 were US$634,637, US$152,313, US$152,313, US$152,313 and US$32,907 for Messrs. Sheridan, Guglielmin, Cass, Guzy and Kassam, respectively. The United States dollar amounts for 2011were US$470,102, US$112,824, US$112,824, US$112,824 and US$70,515 for Messrs. Sheridan, Guglielmin, Cass, Guzy and Kassam, respectively. The Canadian dollar amounts were converted into United States dollars for the purpose of this disclosure using the Bank of Canada noon rate of exchange on December 31, 2013.

(6)        Represents the total of the fair market value of options to purchase our Shares issued under the Option Plan granted to each Named Executive Officer during each fiscal year. This amount is based on the grant date fair market value of the award determined using the Black-Scholes valuation model using the following key assumptions: expected life of 5 years, expected volatility of 63% and risk free interest rate of 1% for 2013; expected life of 5 years, expected volatility of 62% and risk free interest rate of 2% for 2012; and expected life of 5 years, expected volatility of 64% and risk free interest rate of 3% for 2011. Accounting fair value is recorded as compensation expense in the statement of operations over the vesting period. There is no difference in Canadian dollars between the grant date fair market value of the award determined using the Black-Scholes valuation model and accounting fair value determined in accordance with IFRS 2 of the International Financial Reporting Standards (accounting fair value).
 
  As noted above, a dollar value is approved for the long term incentive awarded to each executive and approximately 75-90% of this amount is awarded in the form of RSUs with the remaining 10-25% being awarded in the form of Share options. In 2012, approximately 75% of this amount is awarded in the form of RSUs with the remaining 25% being awarded in the form of Share options. In 2011, 50% of this amount was awarded in the form of RSUs with the remaining 50% being awarded in the form of Share options. The number of Share options awarded is equal to the dollar amount of the award divided by the fair market value of the Shares at the time of issuance (based on the closing trading price of the Shares on the TSX on the day prior to issuance). The number of Share options issued to each Named Executive Officer in respect of the fiscal years ended December 31, 2011, December 31, 2012 and December 31, 2013 is as follows:

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Option-Based Awards
Black-Scholes Value of Shares
          Shares Under Underlying Options on Date of
Named Executive Options Grant Fair Market Value
Officer Year (#) (CDN$/Share)(A) (CDN$))(B)
John W. Sheridan 2013 125,000 0.65 81,250
2012 252,808 0.89 225,000
2011 344,827 1.16 400,000
Tony Guglielmin 2013 75,000 0.65 48,750
2012 60,674 0.89 54,000
2011 103,448 1.16 120,000
Paul Cass 2013 75,000 0.65 48,750
2012 60,674 0.89 54,000
  2011 103,448 1.16 120,000
Christopher J. Guzy 2013 75,000 0.65 48,750
2012 60,674 0.89 54,000
2011 103,448 1.16 120,000
Karim Kassam 2013 35,000 0.65 22,750
2012 10,000 0.89 8,900
2011 40,000 1.16 46,400

(A) The fair market value of a Share has been calculated based on the Black-Scholes valuation model using the Canadian dollar closing price of the Shares underlying the options on the TSX on the date of issuance.
                  
(B) The United States dollar amounts for 2013 were US$76,392, US$45,835, US$45,835, US$45,835 and US$21,390 for Messrs. Sheridan, Guglielmin, Cass, Guzy and Kassam, respectively. The United States dollar amounts for 2012 were US$211,545, US$50,771, US$50,771, US$50,771 and US$8,368 for Messrs. Sheridan, Guglielmin, Cass, Guzy and Kassam, respectively. The United States dollar amounts for 2011 were US$376,081, US$112,824, US$112,824, US$112,824 and US$43,625 for Messrs. Sheridan, Guglielmin, Cass, Guzy and Kassam, respectively. The Canadian dollar amounts were converted into United States dollars for the purpose of this disclosure using the Bank of Canada noon rate of exchange on December 31, 2013.

(7)      

All Other Compensation was paid in Canadian dollars. The United States dollar amounts for 2013 were US$34,628, US$29,648, US$28,168, US$40,845 and US$18,029 for Messrs. Sheridan, Guglielmin, Cass, Guzy and Kassam, respectively. The United States dollar amounts for 2012 were US$28,122, US$27,826, US$26,625, US$40,574 and US$16,521 for Messrs. Sheridan, Guglielmin, Cass, and Guzy, respectively. The United States dollar amounts for 2011 were US$29,351, US$26,916, US$30,197, US$41,409 and US$16,265 for Messrs. Sheridan, Guglielmin, Cass, Guzy and Kassam, respectively. The Canadian dollar amounts were converted into United States dollars for the purpose of the table above using the Bank of Canada noon rate of exchange on December 31, 2013.

The value of the items included in this amount was based on the aggregate incremental cash cost to the Corporation. All Other Compensation, including the type and amount of each perquisite, the value of which exceeds 25% of the total value of perquisites reported for a Named Executive Officer, includes:


All Other Compensation
          Retirement Benefits
(RRSP / 401k /
Named Executive Defined Benefits) Insurance Premiums Other(A) Total
Officer Year (CDN$) (CDN$) (CDN$) (CDN$)
John W. Sheridan 2013 11,910 2,198 22,721 36,829
2012 11,485 2,128 16,297 29,910
2011 11,225 2,021 17,972 31,218
Tony Guglielmin 2013 11,910 1,075 18,548 31,533
2012 11,485 1,041 17,070 29,596
2011 11,225 967 16,435 28,627
Paul Cass 2013 11,910 1,075 16,974 29,959
  2012 11,485 1,041 15,792 28,318
2011 11,225 964 19,928 32,117
Christopher J. Guzy 2013 11,910 1,075 30,458 43,443
2012 11,485 1,041 30,628 43,154
2011 11,225 967 31,850 44,042
Karim Kassam 2013 9,748 632 8,796 19,176
2012 8,340 496 8,736 17,572
2011 8,194 453 8,652 17,299
                  
(A) Includes automobile allowances, temporary living and travel allowances, financial planning services and medical and health benefits.

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INCENTIVE PLAN AWARDS

The following table sets forth all option-based and share-based awards granted to our Named Executive Officers that are outstanding as of December 31, 2013.

Outstanding Share-Based Awards and Option-Based Awards
(as of December 31, 2013)

Option-Based Awards Share-Based Awards
Number of Value of
Securities Unexercised
         Underlying       Option             In-The-       Number of RSUs       Market or Payout   
Unexercised Exercise Option Money That Have Not Value of RSUs That
Named Executive Options Price(1) Expiration Options(2) Vested Have Not Vested(3)
Officer (#) (CDN$) Date (CDN$) (#) (CDN$)
John W. Sheridan 123,762 4.17 May 13, 2015 0 960,391 1,546,230
177,295 1.34 Mar. 5, 2016 47,870
185,185 2.40 Mar. 12, 2017 0
344,827 (4) 2.10 Mar. 9, 2018 0
252,808 (5) 1.69 Feb. 24, 2019 0
125,000 (6) 1.22 Mar. 8, 2020 0
Tony Guglielmin 175,000 1.80 Jun. 14, 2017 0 220,246 354,596
103,448 (7) 2.10 Mar. 9, 2018 0  
60,674 (8) 1.69 Feb. 24, 2019 0
75,000 (6) 1.22 Mar. 8, 2020 0  
Paul Cass 14,000 5.08 Feb 22, 2015 0 220,246 354,596
50,000 1.34 Mar. 5, 2016 13,500
88,888 2.40 Mar. 12, 2017 0
103,448 (7) 2.10 Mar. 9, 2018 0
60,674 (8) 1.69 Feb. 24, 2019 0
75,000 (6) 1.22 Mar. 8, 2020 0
Christopher J. 42,553 5.08 Feb. 22, 2015 0 220,246 354,596
  Guzy 85,101 1.34 Mar. 5, 2016 22,977
88,888 2.40 Mar. 12, 2017 0
103,448 (7) 2.10 Mar. 9, 2018 0
60,674 (8) 1.69   Feb. 24, 2019 0
75,000 (6) 1.22 Mar. 8, 2020 0  
Karim Kassam   15,000     3.10 Nov. 12, 2015     0 50,691 81,613
25,000 1.34   Mar. 5, 2016 6,750      
  30,000   2.40   Mar. 12, 2017 0
40,000 (9) 2.10 Mar. 9, 2018 0
10,000 (10) 1.69 Feb. 24, 2019 0
35,000 (6) 1.22 Mar. 8, 2020 0

(1) All figures are in Canadian dollars.
       
(2) This amount is based on the difference between the closing price of the Shares underlying the options on the TSX as at December 31, 2013, and the exercise price of the option. Where the difference is a negative number, the value is deemed to be 0.
 
(3) This amount is calculated by multiplying the number of RSUs that have not vested by the closing price of the Shares underlying the RSUs on the TSX as at December 31, 2013.
 
Such amounts may not represent the actual value of the RSUs which ultimately vest, as the value of the Shares underlying the RSUs may be of greater or lesser value and/or the exchange rate may be higher or lower on vesting. However, given that it would be not be feasible for the Corporation to estimate, with any certainty, the market value of its Shares or the exchange rate on vesting, the Corporation has used the market value and exchange rate at the end of the most recently completed financial year for the purpose of calculating the amount disclosed.
 
(4) Comprising 229,884 vested and 114,943 unvested options.
 
(5) Comprising 84,269 vested and 168,539 unvested options.
 
(6) Unvested options.
 
(7) Comprising 68,965 vested and 34,483 unvested options.
 
(8) Comprising 20,224 vested and 40,450 unvested options.
 
(9) Comprising 26,666 vested and 13,334 unvested options.
 
(10) Comprising 3,333 vested and 6,667 unvested options.

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     The following table sets forth the value of the incentive plan awards vested or earned during the year ended December 31, 2013 by our Named Executive Officers.

Incentive Plan Awards – Value Vested or Earned During the Year
(2013)

Option-Based Awards – Non-equity incentive plan
Value Vested During the Share-Based Awards – Value compensation – Value earned
Year(1) Vested During the Year(2) during the year
Named Executive Officer (CDN$) (CDN$) (CDN$)
John W. Sheridan 0 159,459 0
Tony Guglielmin 583 79,563 0
Paul Cass 0 43,645 0
Christopher J. Guzy 0 43,645 0
Karim Kassam 0 105,124 0

(1) This value was determined by calculating the difference between the market price of the underlying Shares on the TSX on the vesting date and the exercise price of the options on the vesting date.
     
(2) This value was determined by calculating the dollar value realized by multiplying the number of Shares by the market value of the underlying Shares on the TSX on the vesting date.

The number of options vesting to Named Executive Officers under the Option Plan during the most recently completed financial year is 569,321.

Summaries of the Corporations’ Option Plan and SDP are provided in Appendix “B” and “C”, respectively.

As noted in the Outstanding Share-Based Awards and Option-Based Awards table, as at December 31, 2013, there were 1,671,820 RSUs awarded to Named Executive Officers that were still unvested. The performance criteria for each of these RSUs will be determined by the Board at the appropriate time, and they are set to vest (subject to the terms of the Consolidated Share Distribution Plan or Market Purchase RSU Plan) as follows:

Named Executive Officer Number of RSUs That Have Not Vested Vesting Date
John W. Sheridan 133,136 February 23, 2014
284,283 March 7, 2014
133,136 February 22, 2015
204,918 March 7, 2015
204,918 March 6, 2016
Tony Guglielmin 31,952 February 23, 2014  
  64,812 March 7, 2014
31,952   February 22, 2015
45,765 March 7, 2015
45,765 March 6, 2016
Paul Cass 31,952 February 23, 2014
64,812 March 7, 2014
31,952 February 22, 2015
45,765 March 7, 2015
45,765 March 6, 2016
Christopher J. Guzy 31,952 February 23, 2014
64,812 March 7, 2014
31,952 February 22, 2015
45,765 March 7, 2015
45,765 March 6, 2016
Karim Kassam 6,903 February 23, 2014
12,295 March 7, 2014
6,903 February 22, 2015
12,295 March 7, 2015
12,295 March 6, 2016

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PENSION PLAN BENEFITS

     None of the Named Executive Officers participate in a Corporation-sponsored Defined Benefits Plan or Defined Contribution Plan, nor do they receive contributions to any such plan on their behalf from the Corporation.

TERMINATION AND CHANGE OF CONTROL BENEFITS

Employment Contracts

     Ballard employs a standard-form executive employment agreement which all of our Named Executive Officers have executed. These agreements have indefinite terms, provide for payments to be made on termination and otherwise include standard industry terms and conditions, including intellectual property, confidentiality, and non-competition and non-solicitation provisions in favour of Ballard.

The annual salary paid to each of our Named Executive Officers under their employment agreements for 2013 was as follows: Mr. Sheridan received C$530,000, Mr. Guglielmin received C$310,000, Dr. Guzy received C$310,000, Mr. Cass received C$265,000 and Mr. Kassam received C$200,000.

     Pursuant to these employment agreements, we can terminate a Named Executive Officer’s employment immediately, without any required period of notice or payment in lieu thereof, for just cause, upon the death of the executive, or if the executive does not renew any required work permits. In every other circumstance for Mr. Sheridan, Mr. Guglielmin, Dr. Guzy and Mr. Cass, other than one following a change of control, we are required to provide notice of 12 months plus one month for every year of employment completed with us, to a maximum of 24 months, or payment in lieu of such notice, consisting of the salary, bonus and other benefits that would have been earned during such notice period. In the same circumstances for Mr. Kassam we are required to provide notice of 6 months plus one month for every year of employment completed with us, to a maximum of 18 months, or payment in lieu of the salary and benefits.

     All of the employment contracts for the Named Executive Officers include a "double-trigger" in relation to a change of control – if the executive’s employment is terminated (including a constructive dismissal) within 2 years following the date of a change of control, the executive is entitled to a payment equivalent to payment in lieu of a 24 month notice period. For these purposes, a "change of control" under the employment agreements is defined as occurring when:

(a) a person or persons acting in concert acquires at least one-half of Ballard’s shares;
 
           (b)       the persons who comprise the Board of Ballard do not consist of a majority of persons who were previously directors of Ballard, or who were recommended to the shareholders for election to the Board by a majority of the Directors;
 
(c) there is a disposition of all or substantially all of Ballard’s assets to an entity in which Ballard does not have a majority interest; or
 
(d) Ballard is involved in any business combination that results in Ballard’s shareholders owning less than one-half of the voting shares of the combined entity.

     In addition, the CEO’s employment agreement includes an additional element in a Change of Control situation, whereby the 2nd trigger can be initiated should he no longer be included on the slate of directors in the annual Management Proxy Circular.

Equity-Based Compensation Plans

     The Option Plan provides that, if a participant ceases to be an employee of Ballard or its subsidiaries (other than by reason of death/disability or being retired), he or she will have up to 90 days, in the event of termination other than for just cause, or 30 days, in the event of voluntary resignation, in which to exercise his or her vested options (in each case subject to extension if the option would otherwise expire during, or within 9 business days after the end of, a blackout period). In the event of termination other than for just cause, the CEO has the discretion to extend the exercise period to up to one year after the optionee ceases to

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work for Ballard and to accelerate the vesting of unvested options that would have otherwise vested during that period in the next year (in effect, enabling the continuance of the options during a notice period).

     All Ballard RSUs awarded under either the SDP or the Market Purchase RSU Plan expire on the last day on which the participant works for Ballard or any of its subsidiaries (other than by reason of death/disability or being retired).

     DSUs will be redeemed for Shares under the SDP by no later than December 31 of the first calendar year commencing after the holder’s employment with Ballard and its subsidiaries is terminated, except in the case of US holders, whose DSUs will be redeemed for Shares approximately 6 months after termination of employment.

     The Option Plan provides for the acceleration of vesting of options upon a change of control, which is defined as:

(a) a person making a take-over bid that could result in that person or persons acting in concert acquiring at least two-thirds of Ballard’s shares and in respect of which the Board approves the acceleration of options;
 
(b) any person or persons acting in concert acquiring at least two-thirds of the outstanding Shares;
 
(c) there is a disposition of all or substantially all of Ballard’s assets to an entity in which Ballard does not have a majority interest;
 
           (d)       Ballard joins in any business combination that results in Ballard’s shareholders owning one-third or less of the voting shares of the combined entity and Ballard is privatized (or the parties to the business combination have publicly expressed an intention to privatize Ballard); or
 
(e) any other transaction, a consequence of which is to privatize Ballard is approved by Ballard security holders or, if such approval is not required, is approved by Ballard.

If an accelerated vesting event occurs, any outstanding option may be exercised at any time before the 60th day after such event.

     Under the SDP and the Market Purchase RSU Plan, the occurrence of any of the accelerated vesting events described above triggers (subject to Board approval in the case of a take-over bid) the termination of the restriction period applicable to RSUs such that holders will become immediately entitled to receive Shares in respect of their RSUs (subject to satisfaction of any performance criteria or other conditions specified in the award).

     The following table shows, for each Named Executive Officer, the amount such person would have been entitled to receive if on December 31, 2013: their employment was terminated without just cause; a change of control occurred; or, their employment was terminated without just cause and that termination occurred following a change in control.

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Triggering Event (as of December 31, 2013)
Termination of Employment
Named Executive Officer Termination of Employment (2) Change of Control (3) following Change of Control
(CDN$)(1) (CDN$)(1) (CDN$)(1)
John W. Sheridan
       Severance $1,510,500 $0 $1,908,000
       Other benefits $73,313 $0 $117,606
       Accelerated vesting $0 $1,594,099 $0
              Total $1,583,813 $1,594,099 $2,025,606
Tony Guglielmin
       Severance $620,000 $0 $992,000
       Other benefits $54,640 $0 $112,424
       Accelerated vesting $0 $354,596 $0
              Total $674,640 $354,596 $1,104,424
Christopher J. Guzy
       Severance $826,667 $0 $992,000
       Other benefits $98,545 $0 $143,254
       Accelerated vesting $0 $377,573 $0
              Total $925,212 $377,573 $1,135,254
Paul Cass  
       Severance $530,000 $0 $848,000
       Other benefits $98,146 $0 $182,034
       Accelerated vesting $0 $368,096 $0
              Total $628,146 $368,096 $1,030,034
Karim Kassam
       Severance $100,000 $0 $620,000
       Other benefits $18,600 $0 $37,200
       Accelerated vesting $0 $88,363 $0
              Total $118,600 $88,363 $657,200

(1) All values are in Canadian dollars.
 
(2) Based on accrued service to December 31, 2013.
 
(3)       All options and RSUs vest immediately upon a change of control. Value shown equals, in the case of RSUs, the price of the underlying Shares on December 31, 2013 multiplied by the number of RSUs. Value shown in the case of Options is the difference between the market price on December 31, 2013 and the exercise price for options, for those options where the market price on that date is greater than the exercise price.

DIRECTOR COMPENSATION

     Our CGCC (and the Corporate Governance Committee prior to July 1, 2013) has the responsibility for determining compensation for our Directors. The committee has determined that the principal method of compensating Directors should be through an annual retainer and meeting fees. Directors have not been issued any stock options in the last 5 years, and there is no current intention to do so in the future.

     The objective of the committee is to ensure that the annual retainer and meeting fees paid to Directors is commensurate with the high quality of candidates Ballard has enjoyed in the past and expects in the future. As a result, the committee seeks to provide compensation for directors at approximately the 50% mark for the comparator group of North American companies. The committee retains independent compensation consultants for professional advice and as a source of competitive market information. In

37



2011, the committee retained Towers Watson to provide independent compensation analysis and advice related to director compensation. Based on Towers Watson’s report in December 2011, which utilized the same comparator group of companies as those used for the Executive Compensation benchmarking study, the compensation provided to directors is slightly lower than the 50% mark. In 2009, in support of the Corporation's cost reduction initiatives, on the recommendation of the Committee, the Board decided to reduce the retainer fees for both the Chair and other Board members. The Board Chair also voluntarily decided to forego meeting fees for Board meetings, effectively making his annual retainer an 'all-in' fee. Effective June 1, 2012, based on the Towers Watson report the Board raised its retainer fees to better approximate the median of the market comparators. At the same time, the use of DSUs as partial compensation for Board and committee retainers was reinstituted. This fee structure continued in 2013.

     We remunerate directors who are not executive officers for services to the Board, committee participation and special assignments. The following table describes the compensation of independent directors:

C$(1)
Annual Retainer (Non-Executive Chair of the Board)       $140,000
Annual Retainer (Director) $65,000
Annual Retainer (Committee Chairs) $10,000
Committee Meeting Attendance Fee (per meeting) $1,500
Board Meeting Attendance Fee (per meeting) $1,500

     At the discretion of the Chair, a meeting fee may be paid to independent directors for meetings that the director is requested or required to attend that are not official meetings of the Board or committees.

     Directors are also reimbursed for travel and other reasonable expenses incurred in connection with fulfilling their duties. If a meeting or group of meetings is held on a continent other than the continent on which an independent director is resident, that director will receive an additional fee of U.S.$2,250 (or C$2,250 in the case of a non-United States resident), in recognition of the additional time required to travel to and from the meeting or meetings.

     In 2013, compensation was earned by the directors as follows(1):

Compensation
             Board and
   Committee Committee Total
Board Retainer Retainer Attendance Fees Compensation
Director (CDN$) (CDN$) (CDN$) (CDN$)
  Ian A. Bourne               140,000                     N/A                     N/A                     140,000          
  Douglas P. Hayhurst 65,000 0 21,000 86,000
Edwin J. Kilroy 65,000 10,000 24,000 99,000
Dr. C.S. Park   28,806 0   6,382   35,188
Carol M. Stephenson 65,000 10,000 19,500   94,500
David B. Sutcliffe   65,000     5,000   24,000 94,000  
Ian Sutcliffe 37,917 0 15,000 52,917

             (1)       All figures are in Canadian dollars. However, the compensation paid to Dr. Park was actually paid in United States dollars and converted into Canadian dollars for the purpose of the table above using the Bank of Canada noon rate of exchange on December 31, 2013. The United States dollar amounts paid to Dr. Park in respect of Board Retainer, Committee Retainer, and Board and Committee Attendance Fees were US$27,083, US$0 and US$6,000, respectively.

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     Historically, we have satisfied our Chair’s annual retainer by utilizing up to 1/3 cash and the remainder in equity-based compensation, and our Directors’ annual retainers by utilizing 100% in equity-based compensation. In 2003, we ceased the practice of annual grants of share options to our independent Directors.

     Commencing on June 1, 2012, the mix of cash and compensation was adjusted, such that the Chair now receives 50% cash and 50% DSUs for his annual retainer, with the other directors receiving Committee Chair fees 100% in DSUs and annual retainer fees in a cash/DSU mix (approx. 40%/60%, with the individual option to elect a greater portion of DSUs).

     Directors are entitled to participate in the deferred share unit section for directors (the "DSU Plan for Directors") in the SDP. Each DSU is convertible into one Share. The number of DSUs to be credited to a Director is determined quarterly by dividing the amount of the eligible remuneration to be deferred into DSUs by the fair market value per Share, being a price not less than the closing sale price at which the Shares are traded on the TSX (in respect of a DSU issued or to be issued to a person who is resident in any country other than the U.S.) or NASDAQ (in respect of a DSU issued or to be issued to a person who is resident in the U.S.) on the trading day before the relevant date. For the Directors, DSUs are credited to an account maintained for each eligible person by Ballard at the time specified by the Board (DSUs are granted in equal instalments over the course of a year, at the end of each quarter). However, a DSU is not redeemed until the Director leaves the Board, and its value on redemption will be based on the value of our Shares at that time. The SDP or any successor plans will be used to satisfy the redemption of DSUs issued pursuant to the DSU Plan for Directors.

INCENTIVE PLAN AWARDS

     The following table sets forth all option-based and share-based awards granted to our non-executive directors that are outstanding as of December 31, 2013.

Outstanding Share-Based Awards and Option-Based Awards
(as of December 31, 2013)

Option-Based Awards
Value of Unexercised
Number of Securities In-The-Money
Underlying Option Exercise Price(1) Options(2)
Name Unexercised Options (CDN$) Option Expiration Date (CDN$)
Ian A. Bourne 0
Doug Hayhurst 0
Edwin J. Kilroy 0
Carol Stephenson 0
David B. Sutcliffe 0
Ian Sutcliffe 0

(1) All figures are in Canadian dollars.
     
(2) This amount is based on the difference between the closing price of the Shares underlying the options on the TSX as at December 31, 2013, and the exercise price of the option. Where the difference is a negative number the value is deemed to be 0.

     No incentive plan awards vested for, or were earned by, our Directors during the year ended December 31, 2013.

     Directors are not permitted to hedge the market value of the Corporation securities they hold.

39



SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

     The following table sets out, as of December 31, 2013, the number of securities we are authorized to issue under our equity-based compensation plans and the relevant exercise prices at which such securities may be issued.

Number of Securities Remaining
Number of Securities to be Weighted -Average Exercise Available for Future Issuance
Issued Upon Exercise of Price of Outstanding Under Equity Compensation
Outstanding Options, Options, Warrants and Plans excluding securities
Warrants and Rights (#) Rights (CDN$) reflected in column (a)
Plan Category (a) (b) (c)
Equity-based compensation plans
approved by security holders
    8,690,851(1) 2.17 2,322,539
Equity-based compensation plans
not approved by security holders
Nil N/A N/A
Total 8,690,851 2.17 2,322,539

(1)         Shares issuable under the DSU Plan for Directors and the DSU Plan for Executive Officers (together, the "DSU Plans") will be satisfied with Shares reserved under the SDP or any successor plan.

     For a detailed description of our equity-based compensation plans, see Appendix "B" and "C" of this Management Proxy Circular.

INTEREST OF INFORMED PERSONS IN MATERIAL TRANSACTIONS

To the best of our knowledge, no informed person, proposed director or person who has been a director or executive officer of the Corporation (or any associate of affiliate of such persons) had any interest in any material transactions during the past year or has any interest in any material transaction to be considered at the Meeting, except as disclosed in this Management Proxy Circular.

INDEBTEDNESS OF DIRECTORS AND EXECUTIVE OFFICERS

     In compliance with Sarbanes-Oxley, we do not make or arrange personal loans to directors or executive officers. As of April 11, 2014, our current or former directors, officers and employees have no outstanding indebtedness to the Corporation, its subsidiaries or to any other entity and which is guaranteed by the Corporation or its subsidiaries.

DIRECTORS’ AND OFFICERS’ LIABILITY INSURANCE

     We purchase and maintain insurance for the benefit of our directors and officers for losses arising from claims against them for certain actual or alleged wrongful acts they may undertake while performing their director or officer function. The total annual premium in respect of our directors’ and officers’ liability insurance program was approximately US$245,000 for 2013 and US$245,000 for 2012. The aggregate maximum coverage provided by the policy for all claims, for both directors and officers, in any single policy year is US$30 million. In addition to the payment of the premiums, we are accountable for the payment of the policy deductible of US$0 to US$200,000 per claim. We have also agreed to indemnify each of our directors and officers against all expenses, liability and loss, reasonably incurred or suffered, arising from the performance of his or her duties as an officer or director of Ballard.

ADDITIONAL INFORMATION

     Additional information relating to us is included in the following public filings, which are incorporated by reference (the "Incorporated Documents") into, and form an integral part of, this Management Proxy Circular:

  • Annual Information Form dated February 26, 2014;

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  • Audited Annual Financial Statements for the year ended December 31, 2013 together with the auditors’ report thereon; and
     
  • Management's Discussion and Analysis for the year ended December 31, 2013.

     Copies of the Incorporated Documents and all our other public filings providing additional information relating to us may be obtained at www.sedar.com or www.sec.gov, or upon request and without further charge from either our Corporate Secretary, at 9000 Glenlyon Parkway, Burnaby, British Columbia, Canada V5J 5J8, or by calling our Investor Relations Department at (604) 454-0900.

PROPOSALS

     Any shareholder who intends to present a proposal at our 2015 annual shareholders’ meeting must send the proposal to our Corporate Secretary at 9000 Glenlyon Parkway, Burnaby, British Columbia, Canada V5J 5J8. In order for the proposal to be included in the proxy materials we send to shareholders for that meeting, the proposal:

  • must be received by us no later than January 10, 2015; and
     
  • must comply with the requirements of section 137 of the Canada Business Corporations Act.

     We are not obligated to include any shareholder proposal in our proxy materials for the 2015 annual shareholders’ meeting if the proposal is received after the January 10, 2015 deadline.

APPROVAL BY THE BOARD

     Our Board has approved the contents and the sending of this Management Proxy Circular to the shareholders of the Corporation.

BY ORDER OF THE BOARD

"Kerry Hillier"

Kerry Hillier
Corporate Secretary
Ballard Power Systems Inc.

Dated: April 11, 2014

41



DEFINED TERMS

     In this Management Proxy Circular:

"Ballard", "Corporation", "we", "us" and "our" refer to Ballard Power Systems Inc.

"Beneficial Shareholders" means holders of our Shares that do not hold our Shares in their own name, but instead, whose Shares are held on the Record Date by a bank, trust company, securities broker or other nominee.

"Board" means the board of directors of Ballard.

"C$" refers to Canadian currency.

"CBCA" means the Canadian Business Corporations Act.

"Equity-based Compensation Plans" means the Option Plan and the SDP.

"DSU" means deferred share unit.

"$" or "dollars" refer to United States currency unless specifically stated otherwise.

"Meeting" means the 2012 annual meeting of our Registered Shareholders and includes any adjournment thereof, unless otherwise indicated.

"NASDAQ" means the NASDAQ Global Market.

"Option Plan" means the Corporation’s consolidated share option plan, the principal terms of which are set out in Appendix "B".

"Record Date" means 5:00 p.m. Pacific Daylight Time on April 11, 2014.

"Registered Shareholders" means registered holders of our Shares on the Record Date.

"RSU" means restricted share unit.

"SDP" means the Corporation’s consolidated share distribution plan, the principal terms of which are set out in Appendix "C".

"SEC" means the U.S. Securities and Exchange Commission

"Shares" means common shares without par value in the capital of Ballard.

"TSX" means the Toronto Stock Exchange.

"US$" refers to United States currency.

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APPENDIX "A"
BOARD MANDATE

PURPOSE

The board of directors (the "Board") is responsible for the overall corporate governance of the Corporation. It oversees and directs the management of the Corporation’s business and affairs. In doing so, it must act honestly, in good faith, and in the best interests of the Corporation. The Board guides the Corporation’s strategic direction, evaluates the performance of the Corporation’s executive officers, monitors the Corporation’s financial results, and is ultimately accountable to the Corporation’s shareholders, employees, customers, suppliers, and regulators. Board members are kept informed of the Corporation’s operations at meetings of the Board and its committees, and through reports and analyses by, and discussions with, management. The Board manages the delegation of decision-making authority to management through Board resolutions under which management is given authority to transact business, but only within specific limits and restrictions. In this Mandate, the "Corporation" means Ballard Power Systems Inc. and a "director" means a Board member.

COMPOSITION

       A.        As stated in the Articles of the Corporation, the Board will be composed of no fewer than five and no more than fifteen directors.
 
B. The Board will have a majority of independent directors.
 
C. The Board will appoint its own Chair.

MEETINGS

       D.        Meetings of the Board will be held as required, but at least four times a year.
 
E. The Board will appoint its own Secretary, who need not be a director. The Secretary, in conjunction with the Chair of the Board, will draw up an agenda, which will be circulated in advance to the members of the Board along with the materials for the meeting. The Secretary will be responsible for taking and keeping the Board’s meeting minutes.
 
F. As set out in the By-laws of the Corporation, meetings will be chaired by the Chair of the Board, or if the Chair is absent, by a member chosen by the Board from among themselves.
 
G. If all directors consent, and proper notice has been given or waived, a director or directors may participate in a meeting of the Board by means of such telephonic, electronic or other communication facilities as permit all persons participating in the meeting to communicate adequately with each other, and a director participating in such a meeting by any such means is deemed to be present at that meeting.
 
H. The Board will conduct an in-camera session excluding management at the end of each Board meeting.
 
I. A majority of directors constitute a quorum.
 
J. All decisions made by the Board may be made at a Board meeting or evidenced in writing and signed by all Board members, which will be fully effective as if it had been made or passed at a Board meeting.

A-1



DUTIES AND RESPONSIBILITIES

       K.        Selection of Management
 
The Board is responsible for appointing the Chief Executive Officer ("CEO"), for monitoring and evaluating the CEO’s performance, and approving the CEO’s compensation. Upon recommendation of the CEO and the Corporate Governance & Compensation Committee, the Board is also responsible for appointing all officers. The Board also ensures that adequate plans are in place for management development and succession and conducts an annual review of such plans.
 
L. Corporate Strategy
 
The Board is responsible for reviewing and approving the Corporation’s corporate mission statement and corporate strategy on a yearly basis, as well as determining the goals and objectives to achieve and implement the corporate strategy, while taking into account, among other things, the opportunities and risks of the business. Each year, the Board meets for a strategic planning session to set the plans for the upcoming year. In addition to the general management of the business, the Board expects management to achieve the corporate goals set by the Board, and the Board monitors throughout the year the progress made against these goals.
 
In addition, the Board approves key transactions, which have strategic impact to the Corporation, such as acquisitions, key collaborations, key supply arrangements, and strategic alliances. Through the delegation of signing authorities, the Board is responsible for setting out the types of transactions that require approval of the Board before completion.
 
M. Fiscal Management and Reporting
 
The Board monitors the financial performance of the Corporation and must ensure that the financial results are reported: (a) to shareholders and regulators on a timely and regular basis; and (b) fairly and in accordance with generally accepted accounting principles. The Board must also ensure that all material developments of the Corporation are disclosed to the public on a timely basis in accordance with applicable securities regulations. In the spring of each year, the Board reviews and approves the Annual Report, which is sent to shareholders of the Corporation and describes the achievements and performance of the Corporation for the preceding year.
 
N. Legal Compliance
 
The Board is responsible for overseeing compliance with all relevant policies and procedures by which the Corporation operates and ensuring that the Corporation operates at all times in compliance with all applicable laws and regulations, and to the highest ethical and moral standards.
 
O. Statutory Requirements
 
The Board is responsible for approving all matters, which require Board approval as prescribed by applicable statutes and regulations, such as payment of dividends and issuances of shares. Management ensures that such matters are brought to the attention of the Board as they arise.
 
P. Formal Board Evaluation
 
The Board, through a process led by the Corporate Governance& Compensation Committee, conducts an annual evaluation and review of the performance of the Board, Board committees, and the Chair of the Board. The Corporate Governance & Compensation Committee reviews the results of such evaluation and together with the Chair of the Board, discusses potential ways to improve Board effectiveness. The Corporate Governance& Compensation Committee discusses the results of the evaluation and the recommended improvements with the full Board. The Board also sets annual effectiveness goals and tracks performance against those goals. In addition, each individual director’s performance is evaluated and reviewed regularly.

A-2



       Q.        Risk Management
 
The Board is responsible for identifying the Corporation’s principal risks and ensuring the implementation of appropriate systems to manage these risks. The Board is also responsible for the integrity of the Corporation’s internal controls and management information systems.
 
R. External Communications
 
The Board is responsible for overseeing the establishment, maintenance and annual review of the Corporation’s external communications policies which address how the Corporation interacts with analysts and the public and which also contain measures for the Corporation to avoid selective disclosure. The Board is responsible for establishing a process for receiving shareholder feedback. This is achieved through a semi-annual presentation of an investor relations report, which contains a summary of the feedback and common enquiries received from shareholders, as well as a Board e-mail address, which has been set up for the public to submit messages to the Board.

A-3



APPENDIX "B"
DESCRIPTION OF OPTION PLAN

     All directors, officers and employees of Ballard and its subsidiaries are eligible to participate in the Option Plan. Former Ballard employees who were transferred to AFCC Automotive Fuel Cell Cooperation Corp. ("AFCC") on January 31, 2008 (the "Transferred Employees") are also permitted to participate in the Option Plan for so long as they remain employees of AFCC. New Ballard options may not be granted to Transferred Employees under either the Option Plan or the prior option plans.

     As at April 11, 2014, the total number of Shares issued and reserved and authorized for issue under the Option Plan was 4,470,994 Shares, representing 3.5% of the issued and outstanding Shares as that date.

     The number of options granted under the Option Plan may adjust if any share reorganization, stock dividend or corporate reorganization occurs.

     The Option Plan limits insider participation such that the number of Shares issued to insiders, within any one-year period, and issuable to insiders, at any time, under the plan and any other Ballard equity-based compensation arrangements, cannot exceed 10% of Ballard’s issued and outstanding Shares.

     In any year, a non-executive Director’s participation in all Ballard equity-based compensation arrangements is limited to that number of shares (or that number of securities in respect of underlying shares) having a value of not more than C$100,000 on the date of grant, excluding any securities issued in respect of the non-executive Director’s annual retainer.

     Apart from the limits on Shares issued or issuable to insiders and to non-executive Directors, described above, the Option Plan does not restrict the number of Shares that can be issued to any one person or to Directors.

     The exercise price of a Ballard option will be determined by the Board and is to be no less than the closing price per Share on the TSX on the last trading day before the date the option is granted.

     Ballard options may have a term of up to 10 years from the date of grant, and unless otherwise determined by the Board, will vest in equal amounts on the first, second and third anniversaries of the date of grant.

     If an "accelerated vesting event" occurs, any outstanding option may be exercised at any time before the 60th day after such event. An accelerated vesting event occurs when: (a) a person makes a take-over bid that could result in that person or persons acting in concert acquiring at least two-thirds of Shares; (b) any person or persons acting in concert acquire at least two-thirds of Shares; (c) there is a disposition of all or substantially all of Ballard’s assets; (d) Ballard joins in any business combination that results in Ballard’s shareholders owning one-third or less of the voting shares of the combined entity and Ballard is privatized (or the parties to the business combination have publicly expressed an intention to privatize Ballard); or (e) any other transaction is approved, a consequence of which is to privatize Ballard.

     The Option Plan also contains a "double trigger" in the event of a take-over. Accordingly, vesting will only be accelerated if the Board approves the acceleration. In such circumstances, the Board will also have the ability to make such changes as it considers fair and appropriate, including accelerating vesting, otherwise modifying the terms of options to assist the holder to tender into the take-over bid or terminating options which have not been exercised prior to the successful completion of the accelerated vesting event.

     Under the Option Plan each option will expire (or no longer be capable of being exercised) on the earlier of:

              (a)        the expiration date as determined by the Board, which date will not be more than 10 years from the date of grant; and

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              (b)        if the optionee is a director, officer or employee, the optionee ceases to hold such position, except that, an option will be capable of exercise, if the optionee ceases to be a director, officer or employee:
 
(i)        because of his or her death, for one year after the optionee dies;
 
(ii) as a result of voluntary resignation, for 30 days after the last day on which the optionee ceases to be a director, or the officer or employee ceases to work for Ballard; or
 
(iii) other than as a result of voluntary resignation (in the case of a director) or termination other than for just cause (in the case of an officer or employee), for 90 days after the last day on which the optionee ceases to be a director, or the officer or employee ceases to work for Ballard (although in these circumstances, the Chief Executive Officer has discretion to extend the exercise period to up to one year after the optionee ceases to work for Ballard).

     In the event that the optionee dies, all previously unvested options vest and, in the circumstances described in (b)(iv) above, the Chief Executive Officer has discretion to accelerate the vesting of unvested options that would have otherwise vested in the next year. In the other circumstances described above, an option is only capable of being exercised in respect of options that were vested at the time the optionee ceased to be a director or ceased to work for Ballard.

     In the event that an optionee becomes "totally disabled" (as defined in the Option Plan), his or her options will continue to vest and be exercisable as they would have had the optionee continued to be a director, officer or employee of Ballard.

     Similarly, if an optionee becomes "retired" (as defined in the Option Plan), his or her options will continue to vest and be exercisable as they would have had the optionee continued to be a director, officer or employee of Ballard.

     If an option would otherwise expire or cease to be exercisable during a blackout period or within nine business days after the end of a blackout period (that is, a period during which employees and/or directors cannot trade in securities of the Corporation because they may be in possession of insider information), the expiry date of the option is extended to the date which is 10 business days after the end of the blackout period.

     The Board is entitled to make, at any time, and from time to time, and without obtaining shareholder approval, any of the following amendments

              (a)        amendments to the definitions and other amendments of a clerical nature;
 
(b) amendments to any provisions relating to the granting or exercise of options, including but not limited to provisions relating to the term, termination, amount and payment of the subscription price, vesting period, expiry or adjustment of options, provided that, without shareholder approval, such amendment does not entail:
 
(i)        a change in the number or percentage of Shares reserved for issuance under the plan;
 
(ii) a reduction in the exercise price of an option or the cancellation and reissuance of options;
 
(iii) an extension of the expiry date of an outstanding option;
 
(iv) an increase to the maximum number of Shares that may be:
 
(A)        issued to insiders within a one-year period; or
 
(B) issuable to insiders at any time,

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      under all of Ballard’s equity-based compensation arrangements, which could exceed 10% of the issued and outstanding Shares at that time;
 
                     (v)        an increase in the maximum number of securities that can be granted to directors (other than directors who are also officers) under all of Ballard’s equity-based compensation arrangements, which could exceed such number of securities in respect of which the underlying Shares have a Fair Market Value (as defined in the plan) on the date of grant of such securities of C$100,000;
 
(vi) permitting options to be transferable or assignable other than for normal course estate settlement purposes; or
 
(vii) a change to the amendment provisions of the plan;
   
              (c)        the addition or amendment of terms relating to the provision of financial assistance to optionees or resulting in optionees receiving any Ballard securities, including pursuant to a cashless exercise feature;
 
(d) any amendment in respect of the persons eligible to participate in the plan, provided that, without shareholder approval, such amendment does not permit non-employee directors to re-gain participation rights under the plan at the discretion of the Board if their eligibility to participate had previously been removed or increase limits previously imposed on non-employee director participation;
 
(e) such amendments as are necessary for the purpose of complying with any changes in any relevant law, rule, regulation, regulatory requirement or requirement of any applicable stock exchange or regulatory authority; or
 
(f) amendments to correct or rectify any ambiguity, defective provision, error or omission in the plan or in any agreement to purchase options.

     Options are not assignable except as permitted by applicable regulatory authorities in connection with a transfer to an optionee’s registered retirement savings plan or registered retirement income fund or to the personal representative of an optionee who has died.

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APPENDIX"C"
DESCRIPTION OF SDP

     The SDP is a single plan divided into the following three principal sections:

       1.        A deferred share unit section for senior executives (the "DSU Plan for Executive Officers"). Under the SDP, DSUs are granted at the election of each executive officer of Ballard who is eligible (as determined by the Board) in partial or full payment of his or her annual bonus, which otherwise is paid in Shares.
 
2. A deferred share unit section for directors (the "DSU Plan for Directors"). Under the DSU Plan for Directors, each independent outside director elects annually the proportion (0% to 100%) of his or her annual retainer that he or she wishes to receive in DSUs.

     Under the SDP, DSUs are credited to an account maintained for each eligible person by Ballard. Each DSU is convertible into one Share. The number of DSUs to be credited to an eligible person is determined on the relevant date by dividing the amount of the eligible remuneration to be deferred into DSUs by the fair market value per Share, being a price not less than the closing sale price at which the Shares are traded on the TSX (in respect of a DSU issued or to be issued to a person who is resident in any country other than the U.S.) or NASDAQ (in respect of a DSU issued or to be issued to a person who is resident in the U.S.) on the trading day before the relevant date. In the case of the executive officers, the relevant date is set by the Board but if such date occurs during a trading blackout, the number of DSUs will be determined on the first trading day after the day on which the blackout is lifted. For directors, DSUs are credited at the time specified by the Board (currently DSUs are granted in equal instalments over the course of a year, at the end of each quarter).

     On any date on which a dividend is paid on the Shares, an eligible person's account will be credited with the number of DSUs calculated by: (i) multiplying the amount of the dividend per Share by the aggregate number of DSUs that were credited to that account as of the record date for payment of the dividend; and (ii) dividing the amount obtained in (i) by the fair market value (determined as set out above) of Shares on the date on which the dividend is paid.

     A departing director or executive officer may receive Shares in respect of the DSUs credited to that person's account (at the ratio of one Share per DSU, subject to the deduction of any applicable withholding tax in the case of an eligible person who is a United States citizen or resident for the purpose of United States tax). A DSU, however, cannot be redeemed until such time as the director leaves the Board or the executive officer ceases to work for Ballard, and its value on redemption will be based on the value of Shares at that time. All DSUs vest immediately as they are issued in respect of remuneration that would have otherwise been paid in Shares or cash. DSUs do not expire. Except in the case of death, DSUs can only be assigned with consent.

       3.        A restricted share unit section (the "RSU Plan"). All employees (excluding non-executive directors) are eligible to participate in the RSU Plan.

     The vesting of RSUs issued under the SDP occurs up to three years from the date of issuance, subject to the achievement of any performance criteria which may be set by the Board and to earlier vesting upon the occurrence of any accelerated vesting event (as defined in the SDP). Each RSU is convertible into one Share, which will be issued under the SDP.

     A "double trigger" is included in the event of a take-over. Accordingly, in the event of a take-over the accelerated vesting of an RSU (technically, the shortening of the restriction period) will only occur if the Board so determines. In such circumstances, the Board will also have the ability to make such changes as it considers fair and appropriate in the circumstances, including the date on which the restriction period ends or otherwise modifying the terms of RSUs to assist the holder to tender into the take-over bid.

     In addition, the Board has the discretion to deem performance criteria or other conditions to have been met on the occurrence of an accelerated vesting event.

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     If any performance criteria or other conditions specified in an award of RSUs is not met on or before the last day of the restriction period applicable to the relevant grant (usually three years less one day from the date of grant), the RSUs will expire and the participant will no longer be entitled to receive any Shares upon conversion of those RSUs.

     All RSUs awarded to a participant under the SDP will also expire on the last day on which the participant works for Ballard or any of its subsidiaries (or, in the case of a Transferred Employee, AFCC or its subsidiaries) except that,

              (a)        in the event of the participant's death or total disability, the performance criteria and conditions specified in the participant's award of RSUs will, unless otherwise specified in the award, be deemed satisfied and the RSUs will be converted into Shares; and
 
  (b)   if the participant is retired, the vesting of RSUs will continue on the same terms as they would have had the participant continued to be an officer or employee of Ballard.

     RSUs cannot be assigned other than by will or the laws of descent and distribution.

     Under the SDP, the Board can elect to satisfy the conversion of RSUs through Ballard Shares purchased on the open market.

     As of April 11, 2014, the total number of Shares issued and reserved and authorized for issue under the SDP was 1,549,116 Shares, representing 1.2% of the issued and outstanding Shares as of April 11, 2014.

     The SDP limits insider participation such that the number of Shares issued to insiders, within any one-year period, and issuable to insiders, at any time, under the plan and any other Ballard equity-based compensation arrangements, cannot exceed 10% of Ballard’s issued and outstanding Shares.

     Under the SDP, in any year, a non-executive Director’s participation in all Ballard equity-based compensation arrangements is limited to that number of shares (or that number of securities in respect of underlying shares) having a value of not more than C$100,000 on the date of grant, excluding any securities issued in respect of the non-executive Director’s annual retainer.

     The SDP does not limit the number of DSUs that can be issued to executive officers.

     The SDP does not limit the number of RSUs that can be issued to any one participant.

     Apart from the limits on Shares issued or issuable to insiders and non-executive Directors described above, the SDP does not restrict the number of Shares that can be issued to any one person, to executive officers or to Directors.

     The SDP permits the Board, without obtaining shareholder approval, to amend any provision of the SDP and/or any RSU and/or DSU governed by it (whether outstanding or otherwise) (subject to any stock exchange or regulatory requirement at the time of any such amendment) including, without limitation, any of the following amendments:

              (a)        amendments to the definitions and other amendments of a clerical nature;
 
(b)   amendments to any provisions relating to the issuance of Shares, granting or conversion of DSUs or RSUs, including but not limited to provisions relating to the term, termination, and number of DSUs or RSUs to be awarded, provided that, without shareholder approval, such amendment does not entail:
 
(i)        a change in the number or percentage of Shares reserved for issuance under the plan;
 
(ii) a reduction of the issue price of the Shares issued under the plan or the cancellation and reissue of Shares;

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(iii) a reduction to the fair market value used to calculate the number of DSUs to be awarded;
 
(iv) an extension of time for redemption of a DSU or an extension beyond the original restriction period of a RSU;
 
(v)

an increase to the maximum number of Shares that may be:

 

(A)

       issued to insiders within a one-year period; or
 
(B) issuable to insiders at any time,  
 

under all of Ballard’s equity-based compensation arrangements, which could exceed 10% of the issued and outstanding Shares at that time;

 
              (vi) an increase in the maximum number of securities that can be granted to directors (other than directors who are also officers) under all of Ballard’s equity-based compensation arrangements, which could exceed such number of securities in respect of which the underlying Shares have a Fair Market Value (as defined in the plan) on the date of grant of such securities of C$100,000;
 
(vii) permitting DSUs or RSUs to be transferable or assignable other than for normal course estate settlement purposes; or
 
(viii) a change to the amendment provisions of the plan;
 
(c)        any amendment in respect of the persons eligible to participate in the plan (or any part of it), provided that, without shareholder approval, such amendment does not permit non-employee directors to:
 
(i)        participate as holders of RSUs at the discretion of the Board;
 
(ii) re-gain participation rights under any section of the plan at the discretion of the Board if their eligibility (as a class) to participate had previously been removed; or
 
(iii) increase limits previously imposed on non-employee director participation;
 
(d) such amendments as are necessary for the purpose of complying with any changes in any relevant law, rule, regulation, regulatory requirement or requirement of any applicable stock exchange or regulatory authority; or
 
(e) amendments to correct or rectify any ambiguity, defective provision, error or omission in the plan or in any option agreement, notice to redeem DSUs or RSU agreement.

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FINANCIAL INFORMATION


Management’s Discussion and Analysis

Consolidated Financial Statements



MANAGEMENT’S DISCUSSION AND ANALYSIS

This discussion and analysis of financial condition and results of operations of Ballard Power Systems Inc. (“Ballard”, “the Company”, “we”, “us” or “our”) is prepared as at February 25, 2014 and should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2013. The results reported herein are presented in U.S. dollars unless otherwise stated and have been prepared in accordance with International Financial Reporting Standards (“IFRS”). Additional information relating to the Company, including our Annual Information Form, is filed with Canadian (www.sedar.com) and U.S. securities regulatory authorities (www.sec.gov) and is also available on our website at www.ballard.com.

BUSINESS OVERVIEW

At Ballard, we are building a clean energy growth company. We are recognized as a world leader in proton exchange membrane (“PEM”) fuel cell development and commercialization. Our principal business is the design, development, manufacture, sale, service and license of fuel cell products for a variety of applications, focusing on our “commercial stage” markets of Telecom Backup Power and Material Handling and on our “development stage” markets of Bus and Distributed Generation, as well as the provision of Engineering Services for a variety of fuel cell applications.

A fuel cell is an environmentally clean electrochemical device that combines hydrogen fuel with oxygen (from the air) to produce electricity. The hydrogen fuel can be obtained from natural gas, kerosene, methanol or other hydrocarbon fuels, or from water through electrolysis. Ballard fuel cell products feature high fuel efficiency, low operating temperature, low noise and vibration, compact size, quick response to changes in electrical demand, modular design and environmental cleanliness. Embedded in each Ballard PEM fuel cell product lies a stack of unit cells designed with our proprietary esenciaTM technology which draws on intellectual property from our patent portfolio together with our extensive experience in key areas of fuel cell stack operation, system integration, and fuel processing.

We provide our customers with the positive economic and environmental benefits unique to fuel cell power. We plan to build value for our shareholders by developing, manufacturing, selling and servicing industry-leading fuel cell products to meet the needs of our customers in select target markets. Our focus is on leveraging the inherent reliability and durability derived from our legacy automotive technology into non-automotive markets where demand is near term and on our core competencies of PEM fuel cell design, development, manufacture, sales and service.

Our business strategy is a three-pronged approach to build shareholder value through product sales, engineering services, and licensing. In product sales, our focus is to leverage our product leadership and early mover positioning in the Telecom Backup Power and Material Handling markets. Through engineering services, our strategy is to leverage our technical capabilities and intellectual property, working with lead customers in profitable contract programs which could result in additional product sales opportunities. Our approach to licensing is to monetize our extensive intellectual property portfolio and fundamental knowledge in ways that establish new customer relationships as well as opportunities in new markets. To support our business strategy and our capability to execute on our clean energy growth priorities, we have also focused our efforts on bolstering our cash reserves in addition to continued efforts on both product cost reduction and managing our operating expense base including overall expense reductions, the pursuit

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of government funding for our research and product development efforts, and the redirection of engineering resources to revenue generating engineering service projects.

We are based in Canada, with head office, research and development, testing and manufacturing facilities in Burnaby, British Columbia. We also use a contract manufacturing facility in Tijuana, Mexico, have research and development facilities in Oregon and Maryland, U.S.A., and have a sales, manufacturing, and research and development facility in Hobro, Denmark.

RECENT DEVELOPMENTS

On February 25, 2014, Ballard’s President and Chief Executive Officer, John Sheridan, informed the Board of Directors of his intention to retire by the end of 2014. Ballard’s Board of Directors has established a search committee and expects to have the new Chief Executive Officer in place and the transition process completed by the fourth quarter of 2014.

On November 27, 2013, all of the convertible debt issued by our subsidiary Dantherm Power to Ballard and the non-controlling interests in Dantherm Power was exercised and converted into shares of Dantherm Power. The conversion did not impact the respective ownership of Dantherm Power with Ballard retaining a 52% ownership interest as compared to a 38% interest held by Dantherm A/S and a 10% interest held by Azure Hydrogen Energy Science and Technology Corporation (“Azure”). On conversion, the convertible debt held by the non-controlling interests, Dantherm A/S and Azure, totaling $3.5 million was reclassified on Ballard’s statement of financial position from debt to equity.

On October 9, 2013, we closed an underwritten offering (“October Offering”) of 10.35 million units at a price of $1.40 per unit for gross October Offering proceeds of $14.5 million. Each unit in the October Offering was comprised of one common share and 0.25 of a warrant to purchase one common share. Each whole warrant is exercisable immediately upon issuance, having a five-year term and an exercise price of $2.00 per share. Net proceeds from the October Offering were approximately U.S. $13.1 million, after deducting underwriting discounts, commissions and other offering expenses.

On September 26, 2013 (and further to the non-binding Memorandum of Understanding announced on May 28, 2013), we completed multi-year definitive agreements (“Azure Bus Licensing Agreement”) with Azure to support Azure’s zero emission fuel cell bus program for the China market. Azure plans to partner with Chinese bus manufacturers in a phased development program for deployment of zero emission fuel cell buses in China, using Ballard’s world leading fuel cell technology. For the first phase of the program, Ballard has agreed to provide a license, associated equipment and engineering services to enable assembly of Ballard’s FCvelocity®-HD7 bus power modules by Azure in China. Once this assembly capability is established, Azure will assemble modules with fuel cell stacks to be supplied exclusively by Ballard. The expected value of the contract to Ballard over the initial 12-months of the first phase will be approximately $11 million, related to the license for module assembly together with associated equipment and engineering services. If Azure’s China bus program progresses as planned, the contract will generate value beyond the $11 million license revenue, commensurate with the volume of fuel cell stacks to be ordered. Azure plans to secure funding from Chinese sources, including both private investors and governments, to enable the development of fuel cell bus fleets in China for initial public transit service by 2015. Amounts earned from the Azure Bus Licensing Agreement (approximately $4 million in the fourth quarter of 2013 and $7 million in 2014) are recorded as either Bus or Engineering Services revenues depending on the nature of the

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work performed.

On March 31, 2013, our subsidiary Dantherm Power completed an agreement whereby Azure acquired a 10% ownership position in Dantherm Power for proceeds of $2.0 million to Dantherm Power. The $2.0 million investment consisted of the issuance of Dantherm Power share capital of $1.4 million and Dantherm Power convertible debentures of $0.6 million (which was subsequently converted to Dantherm Power share capital in November 2013). Following the transaction in March 2013, Ballard’s ownership position in Dantherm Power was reduced from 57% to 52% while still retaining control over Dantherm Power.

On March 28, 2013, we completed an agreement with Anglo American Platinum Limited (“Anglo”) under which Anglo invested $4.0 million in Ballard through its PGM Development Fund. The investment was in the form of a $4.0 million, 5-year, non-interest bearing convertible promissory note (“Note”) issued by Ballard. The Note may be repaid in the form of Ballard common shares with Anglo having the option of repayment in common shares on or before the loan maturity date of April 1, 2018. Any Ballard common shares issued on conversion or repayment would be at a fixed price of $0.84 per share (or 4.76 million Ballard common shares on conversion or repayment of the entire $4.0 million Note). This issue price was set at a 20% discount to the market price of the Ballard common shares on the closing date of the transaction. The entire $4.0 million Note has been classified as an equity instrument and is recorded in Contributed Surplus.

On March 26, 2013, we closed on an underwritten offering (“March Offering”) of 7.275 million units at a price of $1.10 per unit for gross March Offering proceeds of $8.0 million. Each unit in the March Offering was comprised of one common share and one warrant to purchase one common share. Each warrant is exercisable immediately upon issuance, having a five-year term and an exercise price of $1.50 per share. Net proceeds from the March Offering were approximately $6.8 million, after deducting underwriting discounts, commissions and other offering expenses, legal and accounting fees, and previously incurred costs related to the 2012 base shelf prospectus under which the units were issued.

On March 6, 2013, we completed an agreement with Volkswagen Group (“Volkswagen”) for an engineering services contract to advance development of fuel cells for use in powering demonstration cars in Volkswagen’s fuel cell automotive research program. The contract term is 4 years commencing in March 2013, with an option for a 2 year extension. The expected contract value is in the range of approximately $60 - $100 million Canadian. Amounts earned from this agreement (approximately $3 million in the fourth quarter of 2013 and $13 million in 2013) are recorded primarily as Engineering Services revenues.

On January 31, 2013, we completed an agreement to sell substantially all of the assets in our Lowell, Massachusetts based Material Products division for gross cash proceeds of $10.5 million (on the delivery of net working capital of $3.7 million) and additional potential proceeds of up to $1.5 million. The additional potential proceeds of up to $1.5 million are payable in 2014 and 2015 through a product credit for fuel cell gas diffusion layers (“GDLs”) if the former Material Products division attains certain financial results in 2013. As the additional potential proceeds are currently unknown and contingent in nature, they are not recorded in our financial statements until actually realized. Excluding any potential contingent gain from the additional proceeds, net proceeds from the sale were approximately $9.1 million after deducting for working capital adjustments, broker commissions and expenses, and legal and other expenses. The Material Products segment was classified as a discontinued operation in our 2012 and 2013 year end consolidated financial statements.

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On January 15, 2013, we reached an agreement with Technology Partnerships Canada (“TPC”) to terminate all existing and future potential royalties payable in respect of future sales of fuel cell based stationary power products under the Utilities Development Program (Phase 2) in exchange for a final repayment to TPC of $1.9 million Canadian. Under the terms of the Utilities Development Program (Phase 2) with TPC, total royalties were payable annually at 4% of revenue of such products and limited to a total maximum repayment of $38.3 million Canadian. On settlement with TPC on January 15, 2013, we recorded a charge of ($1.2) million to Finance income (loss) representing the excess of the settlement amount of $1.9 million over royalty amounts accrued as of the date of settlement of $0.7 million. The $1.9 million settlement was paid in four equal quarterly installments of $0.48 million starting on January 31, 2013.

On August 1, 2012, we completed an agreement to acquire key assets and product lines from IdaTech LLC (“Idatech”), a former customer of Ballard. In exchange for $7.5 million of Ballard common shares issued from treasury (7.1 million Ballard shares valued at $1.05 per share based on our share price as of the acquisition date), we acquired Idatech’s key assets including fuel cell systems inventory, prepaid rights to inventory, product lines for backup power applications, distributor and customer relationships, a license to intellectual property, the right to assume control of a contract manufacturing facility in Tijuana, Mexico, and certain property, plant and equipment. Acquired fuel cell systems inventory, prepaid rights to inventory, product lines and intellectual property consist of both direct hydrogen units as well as methanol fuelled units and are designed for deployment as emergency backup power in the networks of wireless telecom service providers. The methanol systems incorporate a fuel reformer to extract hydrogen to be used as feedstock for the fuel cells from a mixture of methanol and water. In January 2013, Ballard exercised its right to assume control of Idatech’s contract manufacturing facility in Tijuana, Mexico.

In July 2012, we completed a 7% workforce reduction and an overall curtailment of discretionary spending designed to have a minimal impact on key product development initiatives and our manufacturing capabilities. Total restructuring and related costs of $1.6 million has been recorded in general and administration expense in our third quarter of 2012 financial results.

In June 2011, we obtained a $7.0 million Canadian (revised to $7.3 million Canadian in December 2012) award agreement from Sustainable Development Technology Canada (“SDTC”) for the period from 2011 to 2013 (extended to December 2014) for extending the operating life and lower the product cost of FCgen™-1300, the fuel cell product that powers Ballard’s CLEARgen™ distributed generation system. This award is in addition to a $4.8 million Canadian (revised to $6.9 million Canadian in June 2012) award agreement from SDTC announced in 2010 for the period from 2010 to 2012 (extended to November 2013) for helping to develop the FCvelocity®-HD7, Ballard’s next-generation of fuel cell power module designed specifically for integration into bus applications and reflecting improved durability and reliability as well as a significant reduction in cost. These awards are recorded primarily as a cost offset against our research and product development expenses as the expenses are incurred on these programs.

OPERATING SEGMENTS

We report our results in the single operating segment of Fuel Cell Products and Services. Our Fuel Cell Products and Services segment consists of the sale, service and license of fuel cell products for our “commercial stage” markets of Telecom Backup Power and Material Handling and for our “development stage” markets of Bus and Distributed Generation, as well as the provision of Engineering Services for a variety of fuel cell applications.

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As a result of the disposition of our Materials Products segment on January 31, 2013, the former Material Products segment has been classified as a discontinued operation in our 2013 and 2012 consolidated financial statements. As such, the operating results of the former Material Products segment for January 2013 and for 2012 have been removed from our results from continuing operations and are instead presented separately in the statement of comprehensive income as income from discontinued operations. The former Materials Product segment sold carbon fiber products primarily for automotive transmissions, and GDL’s for fuel cells.

SELECTED ANNUAL FINANCIAL INFORMATION

Results of Operations Year ended,
       2013          2012          2011  
(Expressed in thousands of U.S. dollars, except per share
       amounts and gross margin %)
From continuing operations
Revenues $ 61,251 $ 43,690 $ 55,773
Gross margin $ 16,759 $ 7,369 $ 7,279
Gross margin % 27% 17% 13%
Cash Operating Costs (1) $ 28,306 $ 30,301 $ 36,969
Adjusted EBITDA (1) $ (8,188 ) $ (22,076 ) $ (27,913 )
Normalized Net Loss (1) $        (18,278 ) $        (31,750 ) $        (35,448 )
Normalized Net Loss per share $ (0.18 ) $ (0.36 ) $ (0.42 )
Net loss from continuing operations attributable to Ballard $ (19,988 ) $ (42,320 ) $ (37,175 )
Net loss per share attributable to Ballard, basic and diluted $ (0.20 ) $ (0.48 ) $ (0.44 )
From discontinued operations
Net earnings (loss) from discontinued operations $ 24 $ (65 ) $ 3,755
Net earnings (loss) per share from discontinued operations $ - $ - $ 0.04
Financial Position At December 31,
  2013   2012   2011  
(expressed in thousands of U.S. dollars)
Assets from continuing operations $ 120,214 $ 116,749 $ 165,290
Assets from discontinued operations $ - $ 10,798 $ -
Total assets $ 120,214 $ 127,547 $ 165,290
Cash and cash equivalents $ 30,301 $ 9,770 $ 20,316
Short-term investments $ - $ 12,068 $ 25,878
Bank operating line $ - $ (9,358 ) $ (4,587 )
Net cash reserves $ 30,301 $ 12,480 $ 41,607
1        Cash Operating Costs, Adjusted EBITDA, Normalized Net Loss and Normalized Net Loss per share are non-GAAP measures. We use certain Non-GAAP measures to assist in assessing our financial performance. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. See reconciliation to GAAP in the Supplemental Non-GAAP Measures section.

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2013 Performance compared to 2013 Business Outlook

During 2013, we achieved both of our guidance targets:

  • Revenues in 2013 of $61.3 million were 40% higher than revenues in 2012, exceeding our 2013 outlook of revenue growth in excess of 30% over 2012 (or at least $56.8 million from $43.7 million in 2012); and
     
  • Adjusted EBITDA in 2013 of ($8.2) million improved 63% over 2012, exceeding our 2013 outlook of Adjusted EBITDA improvement in excess of 50% from 2012 (or lower than ($11.1) million from ($22.1) million in 2012).

RESULTS OF OPERATIONS (from continuing operations) – Fourth Quarter of 2013
Revenue and gross margin

(Expressed in thousands of U.S. dollars) Three months ended December 31,
 
Fuel Cell Products and        2013        2012        $ Change          % Change  
       Services
Telecom Backup Power $ 5,904 $ 5,793 $ 111 2%
Material Handling 1,968 1,491 477 32%
Engineering Services 6,215 7,070 (855 ) (12% )
Development Stage 3,229 2,122 1,107 52%
       Revenues 17,316        16,476 840 5%
Cost of goods sold        11,422 12,789        (1,367 ) (11% )
Gross Margin $ 5,894 $ 3,687 $ 2,207 60%
Gross Margin % 34% 22% n/a 12 pts

Fuel Cell Products and Services Revenues of $17.3 million for the fourth quarter of 2013 increased 5%, or $0.8 million, compared to the fourth quarter of 2012. The 5% increase was driven by higher Development Stage, Material Handling, and Telecom Backup Power revenues, partially offset by a decline in Engineering Services revenues.

Development stage revenues of $3.2 million increased $1.1 million, or 52%, due to significantly higher Bus revenues as a result of the Azure Bus Licensing Agreement which more than offset lower shipments in the fourth quarter of 2013 of heavy-duty fuel cell bus modules primarily to Van Hool NV. Material Handling revenues of $2.0 million increased $0.5 million, or 32%, as a result of significantly higher shipments in support of Plug Power Inc.’s GenDrive™ systems. Telecom Backup Power revenues of $5.9 million increased $0.1 million, or 2%, as increased shipments of hydrogen-based backup power stacks and increased shipments of methanol-based backup power systems more than offset the impact of a significant decline in shipments of hydrogen-based backup power systems (total methanol-based and hydrogen-based system shipments were 177 in the fourth quarter of 2013 as compared to 204 systems in the fourth quarter of 2012). Engineering Services revenues of $6.2 million declined ($0.9) million, or (12%), as services performed in the fourth quarter of 2013 on the Volkswagen and Azure agreements and other contracts were lower than amounts performed in the fourth quarter of 2012 on the Anglo American Platinum Limited project and certain other automotive contracts.

Fuel Cell Products and Services gross margins increased to $5.9 million, or 34% of revenues, for the fourth quarter of 2013, compared to $3.7 million, or 22% of revenues, for the fourth quarter of 2012. The overall increase and improvement in gross margin was driven by the 5% increase in overall revenues, the significant increase in higher margin Bus revenues which benefited from the Azure Bus Licensing Agreement, and by our ongoing

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product cost reduction efforts across all of our platforms. Gross margins in the fourth quarter of 2013 also benefited from a net downward adjustment to cost of product and service revenues of $0.5 million as a result of a reduction in accrued warranty obligations of $1.0 million, net of inventory obsolescence charges of ($0.5) million, both related primarily to contractual service expirations in the Bus market.

Cash Operating Costs

(Expressed in thousands of U.S. dollars) Three months ended December 31,
      2013       2012       $ Change         % Change  
Research and Product
       Development (operating cost) $      2,327 $      3,705 $      (1,378 ) (37% )
General and Administrative
(operating cost) 2,223   1,736   487 28%
Sales and Marketing (operating  
cost) 1,912 1,892 20 1%
Cash Operating Costs $ 6,462 $ 7,333 $ (871 ) (12% )
Cash Operating Costs is a non-GAAP measure. We use certain Non-GAAP measures to assist in assessing our financial performance. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. See reconciliation to GAAP in the Supplemental Non-GAAP Measures section. Cash Operating Costs adjusts operating expenses for stock-based compensation expense, depreciation and amortization, restructuring charges, acquisition costs and financing charges.

Cash Operating Costs (see Supplemental Non-GAAP Measures) for the fourth quarter of 2013 were $6.5 million, a decline of ($0.9) million, or (12%), compared to the fourth quarter of 2012. The 12% reduction in the fourth quarter of 2013 was driven primarily by a decline in research and product development costs as a result of the redirection of engineering resources to revenue generating engineering service projects, which more than offset an increased investment in sales and marketing capacity primarily in the Telecom Backup Power market largely related to the increase in sales personnel associated with the acquisition of the Idatech assets in August 2012. Labour and material costs incurred on revenue producing engineering services projects are reallocated from research and product development expenses to cost of goods sold. After adjusting for an increase in allowance for doubtful accounts of $0.3 million recorded in the fourth quarter of 2013, general and administrative costs were effectively flat quarter over quarter.

As a significant amount of our net operating costs (primarily labour) are denominated in Canadian dollars, operating expenses and Adjusted EBITDA are impacted by changes in the Canadian dollar relative to the U.S. dollar. As the Canadian dollar relative to the U.S. dollar was approximately 6% lower for the fourth quarter of 2013 as compared to the fourth quarter of 2012, positive foreign exchange impacts on our Canadian operating cost base and Adjusted EBITDA were approximately $0.4 million. A $0.01 decrease in the Canadian dollar, relative to the U.S. dollar, positively impacts annual Cash Operating Costs and Adjusted EBITDA by approximately $0.2 million to $0.3 million.

Adjusted EBITDA

(Expressed in thousands of U.S. dollars) Three months ended December 31,
        2013         2012           $ Change         % Change
Adjusted EBITDA $      171 $      (3,222 ) $      3,393 105%
EBITDA and Adjusted EBITDA are non-GAAP measures. We use certain Non-GAAP measures to assist in assessing our financial performance. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. See reconciliation to GAAP in the Supplemental Non-GAAP Measures section. Adjusted EBITDA adjusts EBITDA for stock-based compensation expense, transactional gains and losses, finance and other income, and acquisition costs.

Adjusted EBITDA (see Supplemental Non-GAAP Measures) for the fourth quarter of 2013 was $0.2 million, an improvement of $3.4 million, or 105%, compared to the fourth quarter of 2012. The $3.4 million reduction in Adjusted EBITDA loss in the fourth quarter of 2013 was driven by gross margin improvements of $2.2 million as a result of the 5% increase in total revenues and the overall improvement as a percentage of revenue from 22% to 34%,

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combined with a reduction in Cash Operating Costs of $0.9 million.

Net loss attributable to Ballard

(Expressed in thousands of U.S. dollars) Three months ended December 31,
        2013           2012           $ Change         % Change
Net loss attributable to Ballard from
continuing operations
$      (2,274 ) $      (17,059 ) $      14,785 87%

Net loss attributable to Ballard from continuing operations for the fourth quarter of 2013 was ($2.3) million, or ($0.02) per share, compared to a net loss of ($17.1) million, or ($0.19) per share, in the fourth quarter of 2012. The $14.8 million reduction in net loss for the fourth quarter of 2013 was driven by the improvement in Adjusted EBITDA of $3.4 million, and by a Fuel Cell Products and Services goodwill impairment charge of ($10.0) million and an impairment charge of ($0.6) million related to a write-down of manufacturing equipment both recorded in the fourth quarter of 2012.

Excluding the impact of these impairment charges of ($10.6) million in the fourth quarter of 2012, Normalized Net Loss (see Supplemental Non-GAAP Measures) in the fourth quarter of 2013 improved by $4.4 million, or $0.05 per share, compared to the fourth quarter of 2012.

Net loss attributable to Ballard from continuing operations excludes the net loss attributed to the non-controlling interests in the losses of Dantherm Power. During the fourth quarters of 2013 and 2012, we held a 52% equity interest in Dantherm Power. Net loss attributed to the non-controlling 38% equity interest held by Dantherm Power A/S and the non-controlling 10% equity interest held by Azure for the fourth quarter of 2013 was ($0.2) million, as compared to a net loss attributed to non-controlling interests of ($0.5) million for the fourth quarter of 2012.

Net loss attributable to Ballard from continuing operations also excludes the net loss from discontinued operations of ($1.3) million for the fourth quarter of 2012. As a result of the disposition of our Materials Products segment on January 31, 2013, the former Material Products segment has been classified as a discontinued operation in our 2013 consolidated financial statements. Net loss from discontinued operations in the fourth quarter of 2012 was negatively impacted by a goodwill impairment charge of ($1.8) million and a write-down of property, plant and equipment of ($0.5) million.

Cash used in operating activities

(Expressed in thousands of U.S. dollars) Three months ended December 31,
        2013           2012           $ Change         % Change
Cash (used in) provided by operating
activities
$      (872 ) $      (535 ) $      (337 )         (63% )

Cash used in operating activities in the fourth quarter of 2013 was ($0.9) million, consisting of cash operating losses of ($0.3) million and net working capital outflows of ($0.5) million. Cash used in operating activities in the fourth quarter of 2012 was ($0.5) million, consisting of cash operating losses of ($2.4) million and net working capital inflows of $1.9 million. The ($0.3) million increase in cash used by operating activities in the fourth quarter of 2013, as compared to the fourth quarter of 2012, was driven by higher relative working capital requirements of ($2.4) million which more than offset the relative improvement in cash operating losses of $2.1 million. The $2.1 million improvement in cash operating losses was due primarily to the $3.4 million improvement in Adjusted EBITDA, partially offset by fourth quarter of 2012 cash operating income from discontinued

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operations of ($1.2) million.

The total change in working capital of ($0.5) million in the fourth quarter of 2013 was due primarily to lower accounts payable and accrued liabilities of ($6.9) million as a result of increased supplier payments made for higher inventory purchases in the first three quarters of 2013, partially offset by lower accounts receivable of $4.8 million due to significant customer collections in the quarter, and by lower inventory levels of $1.5 million. This compares to a total change in working capital of $1.9 million in the fourth quarter of 2012 which was driven by lower inventory of $5.4 million as we consumed previously built-up or acquired inventory in order to fulfill the higher product shipments in the fourth quarter of 2012, combined with higher deferred revenue and cost recovery of $0.9 million. These fourth quarter of 2012 working capital inflows were partially offset by higher accounts receivable of ($2.5) million due primarily to the timing of shipment versus collection of our fuel cell product and service revenues, and by lower accounts payable and accrued liabilities of ($2.6) million due to increased supplier payments made for higher inventory purchases in the first three quarters of 2012.

RESULTS OF OPERATIONS (from continuing operations) – Year ended December 31, 2013

Revenue and gross margin

(Expressed in thousands of U.S. dollars) Year ended December 31,
Fuel Cell Products and
Services
        2013       2012       $ Change       % Change
Telecom Backup Power $      20,464 $      11,764 $      8,700 74%
Material Handling   6,456 6,161 295 5%
Engineering Services 21,132 16,987 4,145 24%
Development Stage 13,199   8,778   4,421 50%
      Revenues 61,251   43,690 17,561 40%
Cost of goods sold 44,492 36,321   8,171 22%
Gross Margin $ 16,759 $ 7,369 $ 9,390 127%
Gross Margin % 27% 17% n/a 10 pts

Fuel Cell Products and Services Revenues of $61.3 million for 2013 increased 40%, or $17.6 million, compared to 2012. The 40% increase was driven by significantly higher Telecom Backup Power, Development Stage and Engineering Services revenues combined with a slight increase in Material Handling revenues.

Telecom Backup Power revenues of $20.5 million increased $8.7 million, or 74%, as a result of higher shipments (796 systems in 2013 as compared to 399 systems in 2012) of methanol-based and hydrogen-based backup power systems enabled primarily by our August 2012 acquisition of Idatech’s key assets, combined with a modest increase in shipments of hydrogen-based backup power stacks. Engineering Services revenues of $21.1 million increased $4.1 million, or 24%, as services performed in 2013 on the new Volkswagen and Azure agreements and other contracts were significantly higher than amounts performed in 2012 on the Anglo American Platinum Limited project and certain other automotive contracts. Development stage revenues of $13.2 million increased $4.4 million, or 50%, due to significantly higher Bus revenues as a result of the Azure Bus Licensing Agreement and consistent shipments of heavy-duty fuel cell bus modules primarily to Van Hool NV, Azure, Sunline Transit Agency and CTTransit. This increase in Bus revenues in 2013 more than offset a decline in Distributed Generation revenues due

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primarily to the completion of the Toyota distributed power CLEARgen™ fuel cell system project in 2012. Material Handling revenues of $6.5 million increased $0.3 million, or 5%, as a result of slightly higher shipments in support of Plug Power Inc.’s GenDrive™ systems.

Fuel Cell Products and Services gross margins increased to $16.8 million, or 27% of revenues for 2013, compared to $7.4 million, or 17% of revenues for 2012. The overall increase and improvement in gross margin was driven by the 40% increase in overall revenues, the significant increase in higher margin Engineering Services and higher margin Bus revenues which benefited from the Azure Bus Licensing Agreement, combined with our ongoing product cost reduction efforts across all of our platforms. Gross margins in 2013 also benefited from a net downward adjustment to cost of product and service revenues of $0.7 million as a result of a reduction in accrued warranty obligations of $1.5 million, net of inventory obsolescence charges of ($0.8) million, both related primarily to contractual service expirations in the Bus market.

Cash Operating Costs

(Expressed in thousands of U.S. dollars) Year ended December 31,
      2013       2012       $ Change       % Change
Research and Product
       Development (operating cost) $     12,592 $     15,719 $     (3,127 ) (20% )
General and Administrative  
(operating cost) 8,485 8,106 379 5%
Sales and Marketing (operating  
cost) 7,229 6,476 753 12%
Cash Operating Costs $ 28,306 $ 30,301 $ (1,995 ) (7% )
Cash Operating Costs is a non-GAAP measure. We use certain Non-GAAP measures to assist in assessing our financial performance. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. See reconciliation to GAAP in the Supplemental Non-GAAP Measures section. Cash Operating Costs adjusts operating expenses for stock-based compensation expense, depreciation and amortization, restructuring charges, acquisition costs and financing charges.

Cash Operating Costs (see Supplemental Non-GAAP Measures) for 2013 were $28.3 million, a decline of ($2.0) million, or (7%), compared to 2012. The 7% reduction in 2013 was driven primarily by lower research and product development costs as a result of the redirection of engineering resources to revenue generating engineering service projects combined with lower operating costs across the business as a result of our continued cost reduction efforts including a 7% workforce reduction initiated in July 2012. Labour and material costs incurred on revenue producing engineering services projects are reallocated from research and product development expenses to cost of goods sold. These improvements more than offset the increased investment in sales and marketing capacity primarily in the Telecom Backup Power market largely related to the increase in sales personnel associated with the acquisition of the Idatech assets in August 2012.

As a significant amount of our net operating costs (primarily labour) are denominated in Canadian dollars, operating expenses and Adjusted EBITDA are impacted by changes in the Canadian dollar relative to the U.S. dollar. As the Canadian dollar relative to the U.S. dollar was approximately 3% lower for 2013 as compared 2012, positive foreign exchange impacts on our Canadian operating cost base and Adjusted EBITDA were approximately $0.7 million. A $0.01 decrease in the Canadian dollar, relative to the U.S. dollar, positively impacts annual Cash Operating Costs and Adjusted EBITDA by approximately $0.2 million to $0.3 million.

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Adjusted EBITDA

(Expressed in thousands of U.S. dollars) Year ended December 31,
      2013         2012       $ Change       % Change
Adjusted EBITDA $      (8,188 ) $      (22,076 ) $      13,888 63%
EBITDA and Adjusted EBITDA are non-GAAP measures. We use certain Non-GAAP measures to assist in assessing our financial performance. Non-GAAP measures do not have any standardized meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. See reconciliation to GAAP in the Supplemental Non-GAAP Measures section. Adjusted EBITDA adjusts EBITDA for stock-based compensation expense, transactional gains and losses, finance and other income, and acquisition costs.

Adjusted EBITDA (see Supplemental Non-GAAP Measures) for 2013 was ($8.2) million, an improvement of $13.9 million, or 63%, compared to 2012. The $13.9 million reduction in Adjusted EBITDA loss in 2013 was driven by gross margin improvements of $9.4 million as a result of the 40% increase in total revenues and the overall improvement as a percentage of revenue from 17% to 27%, combined with the reduction in Cash Operating Costs of $2.0 million. Adjusted EBITDA in 2012 was also negatively impacted by restructuring charges of ($1.9) million related to a 7% workforce adjustment initiated in July 2012 and a minor restructuring focused on manufacturing overhead cost reduction initiated in April 2012.

Net loss attributable to Ballard

(Expressed in thousands of U.S. dollars) Year ended December 31,
      2013         2012       $ Change       % Change
Net loss attributable to Ballard from
continuing operations
$      (19,988 ) $      (42,320 ) $      22,332 53%

Net loss attributable to Ballard from continuing operations for 2013 was ($20.0) million, or ($0.20) per share, compared to a net loss of ($42.3) million, or ($0.48) per share, in 2012. The $22.3 million reduction in net loss in 2013 was driven by the improvement in Adjusted EBITDA of $13.8 million, partially offset by higher stock-based compensation of ($1.2) million as a result of a downward adjustment to accrued stock-based compensation in 2012, and by a ($1.2) million charge to Finance income (loss) as a result of the settlement of the TPC obligation. On settlement with TPC on January 15, 2013, we recorded a charge of ($1.2) million to Finance income (loss) representing the excess of the settlement amount of $1.9 million over royalty amounts accrued as of the date of settlement of $0.7 million. Net loss in 2013 was also negatively impacted by impairment charges of ($0.5) million as we wrote-down our non-core investment in Chrysalix Energy Limited Partnership from $0.7 million to its estimated net realizable value of $0.2 million. Net loss in 2012 was also negatively impacted by a Fuel Cells Products and Services goodwill impairment charge of ($10.0) million and an impairment charge of ($0.6) million related to a write-down of manufacturing equipment.

Excluding the impact of the TPC settlement charge of ($1.2) million and the Chrysalix impairment charge of ($0.5) million in 2013, and the impairment charges of ($10.6) million in 2012, Normalized Net Loss (see Supplemental Non-GAAP Measures) in 2013 improved $13.5 million, or $0.18 per share, as compared to 2012.

Net loss attributable to Ballard from continuing operations excludes the net loss attributed to the non-controlling interests in the losses of Dantherm Power. During the first quarter of 2013, we held a 57% equity interest in Dantherm Power as compared to a 52% equity interest held in the last three quarters of 2013 and throughout 2012. As a result of the Azure investment in Dantherm Power on March 31, 2013, we now hold a 52% equity interest in Dantherm Power as compared to the non-controlling 38% equity interest held by Dantherm Power A/S and the non-controlling 10% equity interest held by Azure. Net loss attributed to non-controlling interests for 2013 was ($1.7) million, as compared to ($1.3)

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million for 2012. The increased loss at Dantherm Power in 2013 is primarily a result of a decline in higher margin engineering services revenues in 2013.

Net loss attributable to Ballard from continuing operations also excludes the net loss from discontinued operations of ($0.1) million for 2012. As a result of the disposition of our Materials Products segment on January 31, 2013, the former Material Products segment has been classified as a discontinued operation in our 2013 consolidated financial statements. Net loss from discontinued operations in 2012 includes a goodwill impairment charge of ($1.8) million and a write-down of property, plant and equipment of ($0.5) million.

Cash used in operating activities

(Expressed in thousands of U.S. dollars) Year ended December 31,
      2013         2012       $ Change       % Change
Cash (used in) provided by operating
activities
$      (17,416 ) $      (28,146 ) $      10,730 38%

Cash used by operating activities in 2013 was ($17.4) million, consisting of cash operating losses of ($12.1) million and net working capital outflows of ($5.3) million. Cash used in operating activities in 2012 was ($28.1) million, consisting of cash operating losses of ($22.2) million and net working capital outflows of ($5.9) million. The $10.7 million reduction in cash used by operating activities in 2013, as compared to 2012, was driven by the relative improvement in cash operating losses of $10.1 million combined with the reduction in working capital requirements of $0.6 million. The $10.1 million improvement in cash operating losses was due primarily to the $13.8 million improvement in Adjusted EBITDA, partially offset by 2012 cash operating income from discontinued operations of ($3.2) million.

The total change in working capital of ($5.3) million in 2013 was driven by lower accounts payable and accrued liabilities of ($4.9) million as a result of increased supplier payments made for higher inventory purchases in the fourth quarter of 2012 and in 2013, and by higher inventory of ($2.8) million due to the build of inventory to support expected higher product shipments in 2014. These 2013 working capital outflows were partially offset by lower accounts receivable of $1.3 million primarily as a result of the timing of Bus and Telecom Backup Power revenues and the related customer collections, and by higher deferred revenue of $2.5 million as we received Engineering Services and SDTC government grant receipts in advance of incurring the related contract work. This compares to a total change in working capital of ($5.9) million in 2012 which was driven primarily by lower accounts payable and accrued liabilities of ($10.5) million due to increased supplier payments made for higher inventory purchases in the fourth quarter of 2011 and in the first three quarters of 2012 combined with the payment of accrued 2011 annual employee bonuses, partially offset by lower inventory of $4.4 million as we consumed previously built-up or acquired inventory in order to fulfill the higher product shipments in the fourth quarter of 2012.

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RESULTS OF DISCONTINUED OPERATIONS – 2013 and 2012

(Expressed in thousands of U.S. dollars) Three months ended December 31,
      2013       2012       $ Change       % Change
Revenues $      - $      4,783 $      (4,783 ) (100% )
Cost of goods sold - 3,265 (3,265 ) (100% )
       Gross margin - 1,518 (1,518 ) (100% )
Operating expenses - (495 ) 495 100%
Impairment (charge) - (500 ) 500 100%
recovery on property,
plant and equipment
Impairment (charge) on - (1,815 ) 1,815 100%
goodwill
Income taxes - (7 ) 7 100%
Net earnings (loss) $ - $ (1,299 ) $ 1,299 100%
from discontinued
operations
Net earnings (loss) $ - $ 1,016 $ (1,016 ) (100% )
from discontinued
operations excluding
impairment charges
  
(Expressed in thousands of U.S. dollars) Year ended December 31,
2013 2012 $ Change % Change
Revenues $      867 $      15,540 $      (14,673 ) (94% )
Cost of goods sold 627   11,159 (10,532 ) (94% )
       Gross margin 240 4,381   (4,141 ) (95% )
Operating expenses (252 ) (2,053 ) 1,801   88%
Impairment (charge) 45 (500 ) 545 109%
recovery on property,
plant and equipment
Impairment (charge) on - (1,815 ) 1,815 100%
goodwill    
Income taxes (9 ) (78 ) 69 88%
Net earnings (loss) $ 24 $ (65 ) $ 89 137%
from discontinued
operations    
Net earnings (loss) $ (21 ) $ 2,250 $ (2,271 ) (101% )
from discontinued
operations excluding
impairment charges

As a result of the disposition of our Materials Products segment on January 31, 2013, the former Material Products segment has been classified as a discontinued operation in our 2013 and 2012 consolidated financial statements. As such, the operating results of the former Material Products segment for the month of January 2013 and for 2012 have been removed from our results from continuing operations and are instead presented separately in the statement of comprehensive income as income from discontinued operations. The former Materials Product segment sold carbon fiber products primarily for automotive transmissions, and GDL’s for fuel cells.

Impairment charges in 2012 were determined based on a fair value less costs to sell assessment which compared the segment’s carrying value at December 31, 2012 to the actual net proceeds received on disposition on January 31, 2013. As a result of this assessment, we recorded charges against income from discontinued operations in the fourth quarter of 2012 of ($1.8) million related to a write-off of Material Products goodwill and ($0.5) million related to a write-down of property, plant and equipment.

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OPERATING EXPENSES AND OTHER ITEMS FROM CONTINUING OPERATIONS

Research and product development expenses

(Expressed in thousands of U.S. dollars) Three months ended December 31 ,
Research and product development         2013         2012         $ Change         % Change  
Research and product development expense $      3,589 $      4,677 $      (1088 ) (23% )
Less: Depreciation and amortization expense $ (967 ) $ (449 ) $ (518 ) (115% )
Less: Stock-based compensation expense $ (295 ) $ (523 ) $ 228 44%
Research and product development (operating $ 2,327 $ 3,705 $ (1,378 ) (37% )
cost)
 
(Expressed in thousands of U.S. dollars) Year ended December 31,
Research and product development 2013 2012 $ Change   % Change
Research and product development expense $      17,117   $      19,273 $      (2,156 ) (11% )
Less: Depreciation and amortization expense $ (3,286 ) $ (2,593 ) $ (693 ) (27% )
Less: Stock-based compensation expense $ (1,239 ) $ (961 ) $ (278 ) (29% )
Research and product development (operating $ 12,592 $ 15,719 $ (3,127 ) (20% )
cost)

Research and product development expenses for the three months ended December 31, 2013 were $3.6 million, a decrease of ($1.1) million, or (23%), compared to the corresponding period of 2012. Excluding depreciation and amortization expense of ($1.0) million and ($0.4) million, respectively, and excluding stock-based compensation expense of ($0.3) million and ($0.5) million, respectively, in each of the periods, research and product development costs were $2.3 million, a decline of ($1.4) million, or (37%), compared to the fourth quarter of 2012.

Research and product development expenses for the year ended December 31, 2013 were $17.1 million, a decrease of ($2.2) million, or (11%), compared to 2012. Excluding depreciation and amortization expense of ($3.3) million and ($2.6) million, respectively, and excluding stock-based compensation expense of ($1.2) million and ($1.0) million, respectively, in each of the periods, research and product development costs were $12.6 million, a decline of ($3.1) million, or (20%), compared to 2012.

The respective 37% and 20% reductions in the fourth quarter of 2013 and the year ended December 31, 2013 were primarily as a result of the redirection of engineering labour resources to revenue generating engineering service projects, by the receipt of government funding for certain of our research and product development efforts, by lower operating costs across the business due to our continued cost reduction efforts including a 7% workforce reduction initiated in July 2012, and by lower labour costs in 2013 as a result of a slightly lower Canadian dollar relative to the U.S. dollar and the resulting positive impact on our Canadian operating cost base. These cost reductions in 2013 more than offset the impact of a downward adjustment to accrued cash-based compensation expense recorded in 2012 as a result of under performing against our 2012 corporate performance targets. Government research funding is reflected as a cost offset to research and product development expenses, whereas labour and material costs incurred on revenue producing engineering services projects are reallocated from research and product development expenses to cost of goods sold.

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General and administrative expenses

(Expressed in thousands of U.S. dollars) Three months ended December 31,
General and administrative        2013        2012        $ Change        % Change
General and administrative expense $      2,993 $      3,236 $      (243 ) (8% )
Less: Depreciation and amortization expense $ (42 ) $ (55 ) $ 13 24%
Less: Restructuring charges $ (43 ) $ - $ (43 ) (100% )
Less: Acquisition and integration costs $ - $ (91 ) $ 91 100%
Less: Financing charges $ - $ (564 ) $ 564 100%
Less: Stock-based compensation expense $ (685 ) $ (790 ) $ 105   13%
General and administrative (operating cost) $ 2,223 $ 1,736 $ 487 28%
 
(Expressed in thousands of U.S. dollars) Year ended December 31,
General and administrative 2013 2012 $ Change % Change
General and administrative expense $      11,413 $      12,306 $      (893 ) (7% )
Less: Depreciation and amortization expense $ (177 ) $ (235 ) $ 58   25%
Less: Restructuring charges $ (568 ) $ (1,931 ) $ 1,363 71%
Less: Acquisition and integration costs $ (78 ) $ (274 ) $ 196 72%
Less: Financing charges $ - $ (564 ) $ 564 100%
Less: Stock-based compensation expense $ (2,105 ) $ (1,196 ) $ (909 ) (76% )
General and administrative (operating cost) $ 8,485 $ 8,106 $ 379 5%

General and administrative expenses for the three months ended December 31, 2013 were $3.0 million, a decrease of ($0.2) million, or (8%), compared to the corresponding period of 2012. Excluding relatively insignificant depreciation and amortization expense, restructuring charges and acquisition costs, and excluding stock-based compensation expense of ($0.7) million and ($0.8) million, respectively, in each of the periods, and financing charges of ($0.6) million in the fourth quarter of 2012 related to withdrawn financing efforts, general and administrative costs were $2.2 million, an increase of $0.5 million, or 28%, compared to the fourth quarter of 2012.

General and administrative expenses for the year ended December 31, 2013 were $11.4 million, a decrease of ($0.9) million, or (7%), compared to the corresponding period of 2012. Excluding relatively insignificant depreciation and amortization expense and acquisition and integration costs, and excluding restructuring charges of ($0.6) million and ($1.9) million, respectively, in each of the periods, stock-based compensation expense of ($2.1) million and ($1.2) million, respectively, in each of the periods, and financing charges of ($0.6) million in the fourth quarter of 2012 related to withdrawn financing efforts, general and administrative costs were $8.5 million, an increase of $0.4 million, or 5%, compared to 2012.

The respective 28% and 5% increases in the fourth quarter of 2013 and the year ended December 31, 2013 were primarily as a result of a downward adjustment to accrued cash-based compensation expense recorded in 2012 and higher one-time legal expenses (approximately $0.3 million) incurred in the first quarter of 2013 related to the Volkswagen contract and the TPC settlement. These cost pressures in 2013 more than offset the benefit of our continued cost reduction efforts across the business including a 7% workforce reduction initiated in July 2012 and lower labour costs in 2013 as a result of a slightly lower Canadian dollar relative to the U.S. dollar and the resulting positive impact on our Canadian operating cost base. General and administrative costs also include impairment losses on trade receivables of ($0.3) million and ($0.2) million, respectively, in 2013 and 2012.

The increase in stock-based compensation expense in 2013 was due primarily to a downward adjustment to accrued stock-based compensation in 2012 as certain outstanding

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restricted share units ultimately failed to meet the vesting criteria in 2012 and were eventually cancelled in 2012.

Restructuring charges of ($0.6) million in 2013 relate primarily to minor restructurings focused on overhead cost reduction. Restructuring charges of ($1.9) million in 2012 relate primarily to the 7% workforce reduction initiated in July 2012 and a minor restructuring focused on manufacturing overhead cost reduction initiated in April 2012. Acquisition and integration costs of ($0.3) million in 2012 relate to the Idatech acquisition.

Sales and marketing expenses

(Expressed in thousands of U.S. dollars) Three months ended December 31,
Sales and marketing        2013          2012          $ Change          % Change  
Sales and marketing expense $       1,934 $       2,134 $       (200 ) (9% )
Less: Stock-based compensation expense $ (22 ) $ (242 ) $ 220 91%
Sales and marketing (operating cost) $ 1,912 $ 1,892 $ 20 1%
 
(Expressed in thousands of U.S. dollars) Year ended December 31,
Sales and marketing 2013   2012   $ Change   % Change  
Sales and marketing expense $ 7,661 $ 6,901 $ 759 11%
Less: Stock-based compensation expense $ (431 ) $ (425 ) $ (6 ) (1% )
Sales and marketing (operating cost) $ 7,230 $ 6,476 $ 753 12%

Sales and marketing expenses for the three months ended December 31, 2013 were $1.9 million, a decrease of ($0.2) million, or (9%), compared to the corresponding period of 2012. Excluding stock-based compensation expense of nil and ($0.2) million in each of the periods, sales and marketing costs were $1.9 million, an increase of nil million, or 1%, compared to the fourth quarter of 2012.

Sales and marketing expenses for the year ended December 31, 2013 were $7.7 million, an increase of $0.8 million, or 11%, compared to the corresponding period of 2012. Excluding stock-based compensation expense of ($0.4) million in each of the periods, sales and marketing costs were $7.2 million, an increase of $0.8 million, or 12%, compared to 2012.

The respective 1% and 12% increases in the fourth quarter of 2013 and the year ended December 31, 2013 were primarily as a result of increased investment in sales and marketing capacity primarily in the Telecom Backup Power market largely related to the increase in sales personnel associated with the acquisition of the Idatech assets in August 2012.

Finance income (loss) and other for the three months and year ended December 31, 2013 was $0.5 million and $0.2 million, respectively, compared to ($0.1) million and ($0.2) million, respectively, for the corresponding periods of 2012. The following tables provide a breakdown of our finance and other income (loss) for the reported periods:

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(Expressed in thousands of U.S. dollars) Three months ended December 31,
       2013          2012          $ Change          % Change  
Employee future benefit plan expense $       (92 ) $       (279 ) $       187 67%
Investment and other income 54 48 6 13%
Foreign exchange gain (loss) 584 148 436 294%
Finance income (loss) and other $ 546 $ (83 ) $ 629 758%
(Expressed in thousands of U.S. dollars) Year ended December 31,
2013   2012   $ Change   % Change  
Employee future benefit plan expense $ (282 ) $ (279 ) $ (3 ) (1% )
Settlement of TPC funding obligation (1,197 ) - (1,197 ) (100% )
Investment and other income 141 238 (97 ) (41% )
Foreign exchange gain (loss) 1,553 (178 ) 1,731 972%
Finance income (loss) and other $ 215 $ (219 ) $ 434 198%

Employee future benefit plan expense for the three months and year ended December 31, 2013 were ($0.1) million and ($0.3) million, respectively, compared to ($0.3) million for each of the corresponding periods of 2012. Employee future benefit plan expense primarily represents the excess of expected interest cost on plan obligations in excess of the expected return on plan assets related to a curtailed defined benefit pension plan for our current and former United States employees.

Settlement expense related to the TPC funding obligation of ($1.2) million recorded in 2013 represents the excess of the settlement amount of $1.9 million over royalty amounts accrued as of the date of settlement of $0.7 million. On January 15, 2013, we reached an agreement with Technology Partnerships Canada (“TPC”) to terminate all existing and future potential royalties payable in respect of future sales of fuel cell based stationary power products under the Utilities Development Program (Phase 2) in exchange for a final repayment to TPC of $1.9 million Canadian.

Foreign exchange gains for the three months and year ended December 31, 2013 were $0.6 million and $1.6 million, respectively, compared to nominal amounts for the corresponding periods of 2012. Foreign exchange gains and losses are attributable primarily to the effect of the changes in the value of the Canadian dollar, relative to the U.S. dollar, on our Canadian dollar-denominated net monetary position. Foreign exchange gains and losses are also impacted by the conversion of Dantherm Power’s assets and liabilities from the Danish Kroner to the U.S. dollar at exchange rates in effect at each reporting date. Foreign exchange gains in 2013 arose primarily as a result of the approximate 6% decline in the Canadian dollar, relative to the U.S. dollar, and its impact on our net Canadian dollar-denominated net liability position. Foreign exchange gains (losses) in 2012 were nominal as the Canadian dollar, relative to the U.S. dollar, was relatively stable over 2012.

Investment and other income for the three nine months and years ended December 31, 2013 and 2012 were nominal and were earned primarily on our cash, cash equivalents and short-term investments.

Finance expense for the three months and year ended December 31, 2013 was ($0.3) million and ($1.5) million, respectively, compared to ($0.5) million and ($1.7) million, respectively, for the corresponding periods of 2012. Finance expense relates primarily to the sale and leaseback of our head office building in Burnaby, British Columbia which was completed on March 9, 2010. Due to the long term nature of the lease, the leaseback of

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the building qualifies as a finance (or capital) lease.

Impairment loss on property, plant and equipment for the three months and year ended December 31, 2012 was ($0.6) million and relate to a write-down of manufacturing equipment never put into use.

Impairment loss on goodwill for the three months and year ended December 31, 2012 was ($10.0) million and consists of an impairment charge related to our Fuel Cell Products segment.

Impairment loss on investment for the three months and year ended December 31, 2013 was ($0.2) million and ($0.5) million, respectively, and consists of an impairment charge related to our non-core investment in Chrysalix Energy Limited Partnership which was written down from $0.7 million over the year to its estimated net realizable value of $0.2 million.

Net loss attributed to Dantherm Power non-controlling interests for the three months and year ended December 31, 2013 was ($0.2) million and ($1.7) million, respectively, compared to ($0.5) million and ($1.3) million, respectively, for the corresponding periods of 2012. Amounts primarily represent the non-controlling interest of Dantherm A/S and Azure in the losses of Dantherm Power as a result of their 43% total equity interest in the first quarter of 2013 and their 48% total equity interest in the last three quarters of 2013 and throughout 2012. The decline in performance at Dantherm Power in 2013 as compared to 2012 is primarily a result of a decline in higher margin engineering services revenues in 2013.

SUMMARY OF QUARTERLY RESULTS FROM CONTINUING OPERATIONS

The following table provides summary financial data for our last eight quarters from continuing operations:

(Expressed in thousands of U.S. dollars, except per share amounts Quarter ended,
and weighted average shares outstanding which are expressed in  
thousands)
       Dec 31,          Sep 30,          Jun 30,          Mar 31,  
2013   2013   2013   2013  
Revenues from continuing operations $       17,316 $       17,003 $       14,597 $       12,335
Net income (loss) attributable to Ballard from $ (2,274 ) $ (4,574 ) $ (5,203 ) $ (7,936 )
continuing operations
Net income (loss) per share attributable to $ (0.02 ) $ (0.05 ) $ (0.05 ) $ (0.09 )
Ballard from continuing operations, basic and
diluted
Weighted average common shares outstanding 109,113 99,364 99,233 92,233
 
Dec 31,   Sep 30,   Jun 30,   Mar 31,  
2012   2012   2012   2012  
Revenues $ 16,476 $ 10,311 $ 6,824 $ 10,078
Net income (loss) attributable to Ballard $ (16,809 ) $ (9,185 ) $ (7,416 ) $ (8,660 )
Net income (loss) per share attributable to $ (0.18 ) $ (0.10 ) $ (0.09 ) $ (0.10 )
Ballard from continuing operations, basic and
diluted
Weighted average common shares outstanding 91,801 89,269 84,621 84,566

Summary of Quarterly Results: There were no significant seasonal variations in our quarterly results from continuing operations. Variations in our net loss for the above periods were affected primarily by the following factors:

  • Revenues: Variations in fuel cell revenues reflect the demand and timing of our customers’ fuel cell vehicle, bus and fuel cell product deployments as well as the demand and timing of their engineering services projects. Variations in fuel cell

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revenues also reflect the timing of work performed and the achievements of milestones under long-term fixed price contracts including our contract with Volkswagen which commenced in the first quarter of 2013 and our Azure Bus Licensing Agreement which commenced in the third quarter of 2013. Revenues were also positively impacted in 2013 and in the third and fourth quarters of 2012 as a result of our acquisition of Idatech’s key assets and product lines as of August 1, 2012.

  • Operating expenditures: Operating expenses were negatively impacted by restructuring charges of ($1.6) million in the third quarter of 2012 as a result of a 7% workforce reduction. Restructuring charges are recognized in general and administrative expense. Operating expenses also include the impact of changes in the value of the Canadian dollar, versus the U.S. dollar, on our Canadian dollar denominated expenditures.
     
  • Finance income (loss): The net loss for the first quarter of 2013 was negatively impacted by a charge of ($1.2) million related to the settlement of a TPC funding obligation.
     
  • Impairment loss on property, plant and equipment: The net loss for the fourth quarter of 2012 was negatively impacted by an impairment charge of ($0.6) million related to the write-down of manufacturing equipment never put into use.
     
  • Impairment loss on investment: The net loss for the second quarter of 2013 was negatively impacted by an impairment charge of ($0.4) million related to a write-down of our non-core investment in Chrysalix Energy Limited Partnership.
     
  • Impairment loss on goodwill: The net loss for the fourth quarter of 2012 was negatively impacted by an impairment charge of ($10.0) million related to a write-down of goodwill in our Fuel Cell Products segment.

CASH FLOWS

Cash, cash equivalents and short-term investments were $30.3 million (or $30.3 million net of Operating Facility draws of nil) at December 31, 2013, compared to $21.8 million (or $12.5 million net of Operating Facility draws of $9.4 million) at December 31, 2012. The $8.5 million increase in cash, cash equivalents and short-term investments in 2013 was driven by March and October Offering net proceeds of $20.0 million, net proceeds on sale of the Material Products segment of $9.1 million, Anglo Note financing of $4.0 million, and the Azure investment in Dantherm Power of $2.0 million. These inflows were partially offset by a net loss (excluding non-cash items) of ($12.0) million, by net working capital requirements of ($5.4) million, and by net repayments against the Operating Facility of ($8.8) million.

For the three months ended December 31, 2013, cash used by operating activities was ($0.9) million, consisting of cash operating losses of ($0.3) million and net working capital outflows of ($0.5) million. For the three months ended December 31, 2012, cash used by operating activities was ($0.5) million, consisting of cash operating losses of ($2.4) million and net working capital inflows of $1.9 million. The ($0.3) million increase in cash used by operating activities in the fourth quarter of 2013, as compared to the fourth quarter of 2012, was driven primarily by higher relative working capital requirements of ($2.4) million which more than offset lower cash operating losses of $2.1 million. The $2.1 million improvement in cash operating losses was due primarily to the $3.4 million improvement in Adjusted EBITDA, partially offset by fourth quarter of 2012 cash operating income from discontinued operations of ($1.2) million. In the fourth quarter of 2013, net working capital cash outflows of ($0.5) million was due primarily to lower accounts payable and accrued

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liabilities of ($6.9) million as a result of increased supplier payments made for higher inventory purchases in the first three quarter of 2013, partially offset by lower accounts receivable of $4.8 million due to significant customer collections in the quarter, and by lower inventory levels of $1.5 million. Working capital inflows of $1.9 million in the fourth quarter of 2012 were driven by lower inventory of $5.4 million as we consumed previously built-up or acquired inventory in order to fulfill the higher product shipments in the fourth quarter of 2012, combined with higher deferred revenue and cost recovery of $0.9 million. These fourth quarter of 2012 working capital inflows were partially offset by higher accounts receivable of ($2.5) million due primarily to the timing of shipment versus collection of our fuel cell product and service revenues, and by lower accounts payable and accrued liabilities of ($2.6) million due to increased supplier payments made for higher inventory purchases in the first three quarters of 2012.

For the year ended December 31, 2013, cash used by operating activities was ($17.4) million, consisting of cash operating losses of ($12.0) million and net working capital outflows of ($5.4) million. For the year ended December 31, 2012, cash used by operating activities was ($28.1) million, consisting of cash operating losses of ($22.2) million and net working capital outflows of ($5.9) million. The $10.7 million reduction in cash used by operating activities in 2013, as compared to 2012, was driven by the relative improvement in cash operating losses of $10.1 million combined with the reduction in working capital requirements of $0.6 million. The $10.1 million improvement in cash operating losses was due primarily to the $13.9 million improvement in Adjusted EBITDA, partially offset by 2012 cash operating income from discontinued operations of ($3.2) million. In 2013, net working capital outflows of ($5.4) million in 2013 was driven by lower accounts payable and accrued liabilities of ($5.0) million as a result of increased supplier payments made for higher inventory purchases in the fourth quarter of 2012 and in 2013, and by higher inventory of ($2.9) million due to the buildup of inventory to support expected higher product shipments in 2014. These 2013 working capital outflows were partially offset by lower accounts receivable of $1.9 million primarily as a result of the timing of Bus and Telecom Backup Power revenues and the related customer collections, and by higher deferred revenue of $2.4 million as we received Engineering Services and SDTC government grant receipts in advance of incurring the related contract work. Working capital outflows of ($5.9) million in 2012 was driven primarily by lower accounts payable and accrued liabilities of ($10.5) million due to increased supplier payments made for higher inventory purchases in the fourth quarter of 2011 and in the first three quarters of 2012 combined with the payment of accrued 2011 annual employee bonuses, partially offset by lower inventory of $4.4 million as we consumed previously built-up or acquired inventory in order to fulfill the higher product shipments in the fourth quarter of 2012.

Investing activities resulted in cash outflows of ($0.1) million and inflows of $20.9 million, respectively, for the three and twelve months ended December 31, 2013, compared to cash inflows of $0.4 million and $13.0 million for the corresponding periods of 2012. Changes in short-term investments resulted in cash inflows of nil and $12.1 million, respectively, for the three and twelve month periods ended December 31, 2013, compared to cash inflows of $0.6 million and $13.8 million, respectively, for the corresponding periods of 2012. Balances change between cash equivalents and short-term investments as we make investment decisions with regards to the term of investments and our future cash requirements.

Other investing activities in 2013 consist primarily of net proceeds of $9.1 million received from the disposition of the former Material Products segment. Other investing activities in

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2012 consist primarily of proceeds on sale of $0.4 million for previously impaired manufacturing equipment, less capital expenditures of ($1.2) million.

Financing activities resulted in cash inflows of $10.5 million and $16.9 million, respectively, for the three and twelve months ended December 31, 2013, compared to cash outflows of ($0.4) million and inflows of $4.6 million, respectively, for the corresponding periods of 2012. Financing activities in 2013 include net October Offering proceeds of $13.1 million, net March Offering proceeds of $6.8 million, Anglo Note financing of $4.0 million, and proceeds related to the Azure investment in Dantherm Power of $2.0 million. These financing cash inflows in 2013 were partially offset by the full repayment of ($9.1) million against our Operating Facility which was used to assist with the financing of our working capital requirements and by finance lease payments of ($1.0) million. Financing activities in 2012 primarily represent advances, net of repayments, of $4.8 million on our Operating Facility. Financing activities in 2012 also include proceeds on convertible debenture financing from the Dantherm Power non-controlling interests to Dantherm Power of $0.9 million, partially offset by finance lease payments of ($1.0) million.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2013, we had total Liquidity of $30.3 million. We measure Liquidity as our net cash position, consisting of the sum of our cash, cash equivalents and short-term investments of $30.3 million, net of amounts drawn on our $10 million Canadian demand revolving facility (“Operating Facility”) of nil. The Operating Facility is occasionally used to assist in financing our short term working capital requirements and is secured by a hypothecation of our cash, cash equivalents and short-term investments.

We also have a $2.3 million Canadian capital leasing facility (“Leasing Facility”) which is used to finance the acquisition and / or lease of operating equipment and is secured by a hypothecation of our cash, cash equivalents and short-term investments. At December, 2013, $1.8 million was outstanding on the Leasing Facility.

Our Liquidity objective is to maintain cash balances sufficient to fund at least six quarters of forecasted cash used by operating activities at all times. Our strategy to attain this objective is to continue our drive to attain profitable operations that are sustainable by executing a business plan that continues to focus on Fuel Cell Products and Services revenue growth, improving overall gross margins, minimizing Cash Operating Costs, managing working capital requirements, and securing additional financing to fund our operations as needed until we do achieve profitable operations that are sustainable. As a result of our recent actions to bolster our cash balances including the disposition of the Material Products division, the March and October equity Offerings, and the issuance of the Anglo Note, we believe that we have adequate liquidity in cash and working capital to meet this Liquidity objective and to finance our operations.

Failure to achieve or maintain this Liquidity objective will have a material adverse effect on our financial condition and results of operations including our ability to continue as a going concern. There are also various risks and uncertainties affecting our ability to achieve this Liquidity objective including, but not limited to, the market acceptance and rate of commercialization of our products, the ability to successfully execute our business plan, and general global economic conditions, certain of which are beyond our control. While we continue to make significant investments in product development and market development activities necessary to commercialize our products, and make increased investments in working capital as we grow our business, our actual liquidity requirements will also vary and will be impacted by our relationships with our lead customers and strategic partners,

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our success in developing new channels to market and relationships with customers, our success in generating revenue growth from near-term product opportunities, our success in managing our operating expense and working capital requirements, foreign exchange fluctuations, and the progress and results of our research, development and demonstration programs.

In addition to our existing cash reserves of $30.3 million at December 31, 2013, there are 7.275 million warrants outstanding (expire March 27, 2018) from the March Offering each of which enables the holder to purchase one common share at a fixed price of $1.50 per common share, and 2.588 million warrants outstanding (expire October 9, 2018) from the October Offering each of which enable the holder to purchase one common share at a fixed price of $2.00 per common share. If any of these warrants are exercised, our liquidity position would be further augmented. We may also choose to pursue additional liquidity through the issuance of debt or equity in private or public market financings. To enable such an action and to allow the exercise of warrants, we filed a short form base shelf prospectus (“Prospectus”) in April 2012 in each of the provinces and territories of Canada, except Quebec, and a corresponding shelf registration statement on Form F-10 (“Registration Statement”) with the United States Securities and Exchange Commission. These filings enable offerings of equity securities during the effective period (to May 2014) of the Prospectus and Registration Statements. However, no assurance can be given that any such additional liquidity will be available or that, if available, it can be obtained on terms favorable to the Company.

2014 BUSINESS OUTLOOK

We expect the positive growth trends in 2012 and 2013 to continue in 2014 with a similar trajectory as we continue to pursue our growth strategy for fuel cell product sales, engineering services and intellectual property licensing. For 2014, we expect:

  • Revenue growth of approximately 30% (over 2013 revenue of $61.3 million); and
     
  • Approximately break-even Adjusted EBITDA (from ($8.2) million in 2013).

Consistent with the past couple of years, we expect a majority of our 2014 revenue to be realized in the second half of the year. Our revenue outlook for 2014 is based on our internal revenue forecast which reflects an assessment of overall business conditions and takes into account actual sales in the first two months of 2014, sales orders received for units and services to be delivered in 2014, and an estimate with respect to the generation of new sales in each of our markets for the balance of 2014. Our 2014 business revenue outlook is also supported by our 12-month order book of $43.5 million at December 31, 2013 ($36.8 million at December 31, 2012). The primary risk factors that could cause us to miss our revenue guidance for 2014 are Azure not fulfilling its obligations under the Azure Bus Licensing Agreement and other purchase commitments, delays from forecast in terms of closing and delivering expected sales primarily in our Telecom Backup Power market, and potential disruptions in the Material Handling market as a result of our reliance on a single customer in this market.

The key drivers for the expected improvement in Adjusted EBITDA for 2014 are expected increases in gross margins driven primarily by the above noted 30% increase in expected overall revenues combined with a continued shift to higher-margin Engineering Services and intellectual property licensing revenues, supported by continued operating expense optimization and a resulting reduction in Cash Operating Costs to the low to mid-$20 million range in 2014 from $28.3 million in 2013. Consistent with the expectation that a majority of our 2014 revenue will fall in the last half of the year, Adjusted EBITDA is

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expected to be improved in the last half of 2014, as compared to the first half of 2014.

Our Adjusted EBITDA outlook for 2014 is based on our internal Adjusted EBITDA forecast and takes into account our actual results for the first two months of 2014, our forecasted gross margin related to the above revenue forecast, the costs of our current and forecasted Cash Operating Costs, and assumes an average U.S. dollar exchange rate in the low 90’s in relation to the Canadian dollar for 2014. The primary risk factors that could cause us to miss our target Adjusted EBITDA outlook for 2014 is lower than expected gross margins due to (i) Azure not fulfilling its obligations under the Azure Bus Licensing Agreement and other purchase commitments, unexpected delays in terms of closing and delivering expected sales orders primarily in our Telecom Backup Power market, or lower revenues from forecast due to potential disruptions in the Material Handling market as a result of our reliance on a single customer in this market; (ii) shifts in product and service sales mix negatively impacting projected gross margin as a percentage of revenues; or (iii) delays in the timing of our projected product cost reductions. In addition, Adjusted EBITDA could also be negatively impacted by increases in Cash Operating Costs as a result of (i) lower than anticipated labour-based engineering services revenues or government cost recoveries, or increased product development costs due to unexpected cost overruns; or (ii) negative foreign exchange impacts due to a higher than expected Canadian dollar which impacts the cost of our Canadian dollar denominated operating expense base (primarily labour). A $0.01 decrease in the Canadian dollar, relative to the U.S. dollar, positively impacts annual Cash Operating Costs and Adjusted EBITDA by approximately $0.2 million to $0.3 million.

Similar to prior years and consistent with our revenue, Cash Operating Cost and Adjusted EBITDA performance expectations for 2014 and the resulting expected impacts on gross margin and working capital, we expect cash use in 2014 to be higher in the first half of 2014, as compared to the second half of 2014. Cash use in the first half of 2014 is expected to be negatively impacted by the payout of annual 2013 employee bonuses, the buildup of inventory to support higher product shipments in the last half of the year, and by the timing of revenues and the related customer collections which are also expected to be skewed towards the last half of the year. Our cash usage expectations for 2014 is based on our internal net cash forecast and takes into account our actual results for the first two months of 2014 and our forecasted net cash requirements for the balance of the year as a result of the above noted Adjusted EBITDA forecast and our expectations for working capital requirements, capital expenditures, and other investing, and financing activities for the year. The primary risk factors that could cause us to miss our cash flow from operations expectations for 2014 are lower than expected Adjusted EBITDA performance as a result of the occurrence of any or all of the above noted risk factors, and increased working capital requirements primarily as a result of (i) higher than anticipated accounts receivable due to delays in the timing of revenues and the related customer collections, (ii) unexpected changes in the timing and amount of expected government grants and the related contract payments; (iii) unexpected changes in the timing and mix of supplier purchases and payments; and (iv) increased inventory levels due to unexpected changes in the timing and mix of expected product shipments.

OFF-BALANCE SHEET ARRANGEMENTS & CONTRACTUAL OBLIGATIONS

Periodically, we use forward foreign exchange and forward platinum purchase contracts to manage our exposure to currency rate fluctuations and platinum price fluctuations. We record these contracts at their fair value as either assets or liabilities on our balance sheet. Any changes in fair value are either (i) recorded in our statement of comprehensive income

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if formally designated and qualified under hedge accounting criteria; or (ii) recorded in our statement of operations if either not designated, or not qualified, under hedge accounting criteria. At December 31, 2013, we did not have any outstanding foreign exchange currency contracts or outstanding platinum forward purchase contracts.

At December 31, 2013, we did not have any other material obligations under guarantee contracts, retained or contingent interests in transferred assets, outstanding derivative instruments or non-consolidated variable interests.

At December 31, 2013, we had the following contractual obligations and commercial commitments:

(Expressed in thousands of U.S. dollars) Payments due by period,
Contractual Obligations Total Less than 1-3 years 3-5 years        After 5
       one year               years
Operating leases $       18,114 $       2,566 $       5,262 $       5,161 $       5,125
Capital leases 17,318 2,179 3,413 2,621 9,105
Asset retirement obligations 5,955 - - - 5,955
Total contractual obligations $ 41,387 $ 4,745 $ 8,675 $ 7,782 $ 20,185

In addition, we have outstanding commitments of nil related primarily to purchases of capital assets at December 31, 2013. Capital expenditures pertain to our regular operations and are expected to be funded through cash on hand. Furthermore, we have issued irrevocable bank guarantees totaling $0.6 million at December 31, 2013 related to equipment prepayments received that expire in June 2014.

Prior to January 15, 2013, we also had previous funding obligations that were repayable through potential royalties in respect of sales of certain fuel cell-based stationary power products under a development program with the Canadian government agency, Technology Partnerships Canada (“TPC”). Under the terms of the Utilities Development Program with TPC, total royalties were payable annually at 4% of revenue of such products and limited to a total maximum repayment of CDN $38.3 million. As at January 15, 2013, a cumulative total of CDN $5.3 million in royalty repayments has been made to TPC. On January 15, 2013, we reached an agreement with TPC to terminate the Company’s obligation for all existing and future potential royalties payable in respect of future sales of fuel cell based stationary power products under the Utilities Development Program in exchange for a final repayment to TPC of CDN $1.9 million. The CDN $1.9 million settlement was paid in four equal quarterly installments of CDN $0.48 million in 2013.

As of December 31, 2013, we retain a previous funding obligation to pay royalties of 2% of revenues (to a maximum of CDN $5.4 million) on sales of certain fuel cell products for commercial distributed utility applications. No royalties have been incurred to date as a result of this agreement.

As of December 31, 2013, we retain a previous funding obligation to pay royalties of 2% of revenues (to a maximum of CDN $2.2 million) on sales on certain fuel cell products for commercial transit applications. No royalties have been incurred to date as a result of this agreement.

In the ordinary course of business or as required by certain acquisition or disposition agreements, we are periodically required to provide certain indemnities to other parties. Our Arrangement with Superior Plus includes an indemnification agreement dated December 31, 2008 (the "Indemnity Agreement"), which sets out the parties’ continuing obligations to the other. The Indemnity Agreement has two basic elements: it provides for

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the indemnification by each of the parties to the other for breaches of representations and warranties or covenants as well as, in our case, any liability relating to our business which is suffered by Superior Plus. Our indemnity to Superior Plus with respect to our representation relating to the existence of our tax pools immediately prior to the completion of the Arrangement is limited to an aggregate of CDN $7.4 million with a threshold amount of CDN $0.5 million before there is an obligation to make a payment. Second, the Indemnity Agreement provides for adjustments to be paid by us, or to us, depending on the final determination of the amount of our Canadian non-capital losses, scientific research and development expenditures and investment tax credits generated to December 31, 2008, to the extent that such amounts are more or less than the amounts estimated at the time the Arrangement was executed. At December 31, 2013, we have not accrued any amount owing, or receivable, as a result of the Indemnity Agreement or any other indemnity agreements undertaken in the ordinary course of business.

RELATED PARTY TRANSACTIONS

Related parties include shareholders with a significant ownership interest in either us or Dantherm Power, together with their subsidiaries and affiliates. Revenues and costs recognized from such transactions reflect the prices and terms of sale and purchase transactions with related parties, which are in accordance with normal trade practices at fair value. For 2013 and 2012, related party transactions and balances are limited to transactions between Dantherm Power and its non-controlling interests and are as follows:

(Expressed in thousands of U.S. dollars) Three months ended Year ended
December 31, December 31,
Transactions with related parties       2013       2012       2013       2012
Purchases $      97 $      - $         185   $         309
Finance expense on Dantherm Power $ 64 $ 86 $ 322 $ 289
debt to Dantherm Power non-      
controlling interests    

(Expressed in thousands of U.S. dollars) As at December 31,
Balances with related parties       2013       2012
Trade accounts payable $      139 $      100
Interest payable $ 16 $ 417
Dantherm Power debt to Dantherm Power non-controlling interests   $ 550   $ 2,507

On November 27, 2013, all of the convertible debt issued by our subsidiary Dantherm Power to the non-controlling interests in Dantherm Power was exercised and converted into shares of Dantherm Power. The conversion did not impact the respective ownership of Dantherm Power with Ballard retaining a 52% ownership interest as compared to a 38% interest held by Dantherm A/S and a 10% interest held by Azure. On conversion, the convertible debt (including interest payable) held by the non-controlling interests, Dantherm A/S and Azure, totaling $3.5 million, was reclassified on Ballard’s statement of financial position from debt to equity. As of December 31, 2013, the outstanding Dantherm Power debt (including interest) to Dantherm Power non-controlling interests totals $0.6 million, bears interest at 6.0% per annum, is non-convertible, and is repayable by December 31, 2014 (extended to December 31, 2014 in February 2014).

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OUTSTANDING SHARE DATA

As at February 25, 2014      
Common share outstanding 110,136,401
Warrants outstanding   9,862,500
Options outstanding 6,659,383

CRITICAL ACCOUNTING POLICIES AND KEY SOURCES OF ESTIMATION UNCERTAINTY

Our consolidated financial statements are prepared in accordance with IFRS, which require us to make estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.

Critical Judgments in Applying Accounting Policies:

Critical judgments that we have made in the process of applying our accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements is limited to our assessment of the Corporation’s ability to continue as a going concern (See Note 2 (e) to our condensed consolidated interim financial statements).

Our significant accounting policies are detailed in note 4 to our annual consolidated financial statements for the year ended December 31, 2013.

Key Sources of Estimation Uncertainty:

The following are key assumptions concerning the future and other key sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the reported amount of assets, liabilities, income and expenses within the next financial year.

REVENUE RECOGNITION

Revenues are generated primarily from product sales, services and licenses in our Fuel Cell Products and Services segment. Product revenues are derived primarily from standard equipment and material sales contracts and from long-term fixed price contracts. Service and license revenues are derived primarily from cost-plus reimbursable contracts and from long-term fixed price contracts.

On standard equipment and material sales contracts, revenues are recognized when (i) significant risks and rewards of ownership of the goods has been transferred to the buyer; (ii) we retain neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; (iii) the amount of revenue can be measured reliably; (iv) it is probable that the economic benefits associated with the sale will accrue to us; and (v) the costs incurred, or to be incurred, in respect of the transaction can be measured reliably. Provisions are made at the time of sale for warranties. Revenue recognition for standard equipment and material sales contracts does not usually involve significant estimates.

On cost-plus reimbursable contracts, revenues are recognized as costs are incurred, and include applicable fees earned as services are provided. Revenue recognition for cost-plus

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reimbursable contracts does not usually involve significant estimates.

On long-term fixed price contracts, revenues are recorded on the percentage-of-completion basis over the duration of the contract, which consists of recognizing revenue on a given contract proportionately with its percentage of completion at any given time. The percentage of completion is determined by dividing the cumulative costs incurred as at the balance sheet date by the sum of incurred and anticipated costs for completing a contract.

  • The determination of anticipated costs for completing a contract is based on estimates that can be affected by a variety of factors such as variances in the timeline to completion, the cost of materials, the availability and cost of labour, as well as productivity.
     
  • The determination of potential revenues includes the contractually agreed amount and may be adjusted based on the estimate of our attainment on achieving certain defined contractual milestones. Management’s estimation is required in determining the probability that the revenue will be received and in determining the measurement of that amount.

Estimates used to determine revenues and costs of long-term fixed price contracts involve uncertainties that ultimately depend on the outcome of future events and are periodically revised as projects progress. There is a risk that a customer may ultimately disagree with our assessment of the progress achieved against milestones or that our estimates of the work required to complete a contract may change. The cumulative effect of changes to anticipated revenues and anticipated costs for completing a contract are recognized in the period in which the revisions are identified. In the event that the anticipated costs exceed the anticipated revenues on a contract, such loss is recognized in its entirety in the period it becomes known.

During the three months and year ended December, 2013 and 2012, there was no material adjustments to revenues relating to revenue recognized in a prior period.

ASSET IMPAIRMENT

The carrying amounts of our non-financial assets other than inventories are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite useful lives, the recoverable amount is estimated at least annually.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In assessing fair value less costs to sell, the price that would be received on the sale of an asset in an orderly transaction between market participants at the measurement date is estimated. For the purposes of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other groups of assets. A cash-generating unit to which goodwill has been allocated reflects the lowest level at which goodwill is monitored for internal reporting purposes. Many of the factors used in assessing fair value are outside the control of management and it is reasonably likely that assumptions and estimates will change from period to period. These changes may result in future impairments. For example, our revenue growth rate could be lower than projected

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due to economic, industry or competitive factors, or the discount rate used in our value in use model could increase due to a change in market interest rates. In addition, future goodwill impairment charges may be necessary if our market capitalization decreased due to a decline in the trading price of our common stock, which could negatively impact the fair value of our operating segments.

An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in net loss. Impairment losses recognized in respect of the cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit on a pro-rata basis.

An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.

We perform the annual review of goodwill as at December 31 of each year, more often if events or changes in circumstances indicate that it might be impaired. Under IFRS, the annual review of goodwill requires a comparison of the carrying value of the asset to the higher of (i) value in use; and (ii) fair value less costs to sell. Value in use is defined as the present value of future cash flows expected to be derived from the asset in its current state. As of December 31, 2013, our consolidated goodwill balance of $36.3 million relates solely to our Fuel Cell Products and Services segment. Based on the impairment test performed as at December 31, 2013, we have concluded that no goodwill impairment charge is required for the year ending December 31, 2013. Details of our 2013 goodwill impairment tests are as follows:

  • One of the methods used to assess the recoverable amount of the goodwill is a fair value, less costs to sale, test. Our fair value test is in effect a modified market capitalization assessment, whereby we calculate the fair value of the Fuel Cell Products and Services segment by first calculating the value of the Company at December 31, 2013 based on the average closing share price in the month of December, add a reasonable estimated control premium of 25% to determine the Company’s enterprise value on a controlling basis after adjusting for excess cash balances, and then deducting the estimated costs to sell from this enterprise value to arrive at the fair value of the Fuel Cell Products segment. As a result of this assessment, we have determined that the fair value of the Fuel Cell Products segment exceeds its carrying value by a significant amount as of December 31, 2013 indicating that no impairment charge is required for 2013.
     
  • In addition to this fair value test, we also performed a value in use test on our Fuel Cell Products and Services segment that compared the carrying value of the segment to the present value of future cash flows expected to be derived from the segment. The principal factors used in this discounted cash flow analysis requiring significant estimation are the projected results of operations, the discount rate based on the weighted average cost of capital (“WACC”), and terminal value assumptions. Our value in use test was based on a WACC of 15%; an average estimated compound annual growth rate of approximately 30% from 2013 to 2018; and a terminal year EBITDA multiplied by a terminal value multiplier of 5.0. Our value in use assessment resulted in

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an estimated fair value for the Fuel Cell Products and Services segment that is consistent with that as determined under the above fair value, less costs to sell, assessment. As a result of this assessment, we have determined that the fair value of the Fuel Cell Products segment exceeds its carrying value by a significant amount as of December 31, 2013 indicating that no impairment charge is required for 2013.

In addition to the above goodwill impairment test, we perform a quarterly assessment of the carrying amounts of our non-financial assets (other than inventories) to determine whether there is any indication of impairment. As a result of this review, we recorded an impairment charge of ($0.6) million for the three months and year ended December 31, 2012 related to a write-down of manufacturing equipment that was never put into use.

WARRANTY PROVISION

A provision for warranty costs is recorded on product sales at the time of shipment. In establishing the accrued warranty liabilities, we estimate the likelihood that products sold will experience warranty claims and the cost to resolve claims received. In making such determinations, we use estimates based on the nature of the contract and past and projected experience with the products. Should these estimates prove to be incorrect, we may incur costs different from those provided for in our warranty provisions. During the three months and year ended December 31, 2013, we recorded provisions to accrued warranty liabilities of $0.1 million and $1.3 million, respectively, for new product sales, compared to $0.4 million and $1.5 million, respectively, for the three months and year ended December 31, 2012.

We review our warranty assumptions and make adjustments to accrued warranty liabilities quarterly based on the latest information available and to reflect the expiry of contractual obligations. Adjustments to accrued warranty liabilities are recorded in cost of product and service revenues. As a result of these reviews and the resulting adjustments, our warranty provision and cost of revenues for the three months and year ended December 31, 2013 were adjusted downwards by a net amount of $1.0 million and $1.5 million, respectively, compared to a net adjustment (upwards) downwards of ($0.2) million and $0.4 million, respectively, for the three months and year ended December 31, 2012. The adjustments to the accrued warranty liability provisions were primarily due to contractual expirations, changes in estimated and actual costs to repair, and improved lifetimes and reliability of our fuel cell products.

INVENTORY PROVISION

In determining the lower of cost and net realizable value of our inventory and establishing the appropriate provision for inventory obsolescence, we estimate the likelihood that inventory carrying values will be affected by changes in market pricing or demand for our products and by changes in technology or design which could make inventory on hand obsolete or recoverable at less than cost. We perform regular reviews to assess the impact of changes in technology and design, sales trends and other changes on the carrying value of inventory. Where we determine that such changes have occurred and will have a negative impact on the value of inventory on hand, appropriate provisions are made. If there is a subsequent increase in the value of inventory on hand, reversals of previous write-downs to net realizable value are made. Unforeseen changes in these factors could result in additional inventory provisions, or reversals of previous provisions, being required. During the three months and year ended December 31, 2013, inventory provisions of $0.5 million and $0.8 million, respectively, were recorded as a charge to cost of product and

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service revenues, compared to $0.2 million and $0.7 million, respectively, for the three months and year ended December 31, 2012.

EMPLOYEE FUTURE BENEFITS

The present value of our defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that have terms to maturity approximating the terms of the related pension liability. Determination of benefit expense requires assumptions such as the discount rate to measure obligations, expected plan investment performance, expected healthcare cost trend rate, and retirement ages of employees. Actual results will differ from the recorded amounts based on these estimates and assumptions.

INCOME TAXES

We use the asset and liability method of accounting for income taxes. Under this method, deferred income taxes are recognized for the deferred income tax consequences attributable to differences between the financial statement carrying values of assets and liabilities and their respective income tax bases (temporary differences) and for loss carry-forwards. The resulting changes in the net deferred tax asset or liability are included in income.

Deferred tax assets and liabilities are measured using enacted, or substantively enacted, tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities, of a change in tax rates, is included in income in the period that includes the substantive enactment date. Deferred income tax assets are reviewed at each reporting period and are reduced to the extent that it is no longer probable that the related tax benefit will be realized. As of December 31, 2013 and 2012, we have not recorded any deferred income tax assets on our consolidated statement of financial position.

NEW AND FUTURE IFRS ACCOUNTING POLICIES

Recently Adopted Accounting Policy Changes:

As required by IFRS, we adopted the following accounting standard changes effective January 1, 2013.

IFRS 10 – CONSOLIDATED FINANCIAL STATEMENTS

In May 2011, the IASB published IFRS 10 “Consolidated Financial Statements” which is a replacement of SIC-12 “Consolidation – Special Purpose Entities”, and certain parts of IAS 27 “Consolidated and Separate Financial Statements”. IFRS 10 uses control as the single basis for consolidation, irrespective of the nature of the investee, employing the following factors to identify control:

a) Power over the investee;

b) Exposure or rights to variable returns from involvement with the investee;

c) The ability to use power over the investee to affect the amount of the investor’s returns.

The adoption of IFRS 10 did not change our conclusions around control of our investees, and therefore no adjustment to previous accounting for investees was required in our consolidated financial statements.

IFRS 11 – JOINT ARRANGEMENTS

In May 2011, the IASB published IFRS 11 “Joint Arrangements” which supersedes IAS 31

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“Interests in Joint Ventures” and SIC-13 “Jointly Controlled Entities – Non-Monetary Contributions by Venturers”. IFRS 11 requires that joint ventures be accounted for using the equity method of accounting and eliminates the need for proportionate consolidation.

We were not impacted by the adoption of IFRS 11.

IFRS 12 – DISCLOSURE OF INTERESTS IN OTHER ENTITIES

In May 2011, the IASB published IFRS 12 “Disclosure of Interests in Other Entities” which requires that an entity disclose information on the nature of and risks associated with its interests in other entities (i.e. subsidiaries, joint arrangements, associates or unconsolidated structured entities) and the effects of those interests on its financial statements.

The adoption of IFRS 12 did not have a material impact on our consolidated financial statements.

IFRS 13 – FAIR VALUE MEASUREMENT

In May 2011, the IASB published IFRS 13 “Fair Value Measurement” to establish a single framework for fair value measurement of financial and non-financial items. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also requires disclosure of certain information on fair value measurements.

The adoption of IFRS 13 did not have a material impact on our consolidated financial statements. In accordance with IFRS 13, we have included additional fair value disclosures in our consolidated financial statements for the year ended December 31, 2013.

AMENDMENTS TO IAS 19 – EMPLOYEE BENEFITS

In June 2011, the IASB issued amendments to IAS 19 “Employee Benefits”. Changes in defined benefit obligations and plan assets are to be recognized in other comprehensive income when they occur, thus eliminating the corridor approach and accelerating recognition of past service cost. Net interest is to be recognized in net earnings and calculated using the discount rate by reference to market yields at the end of the reporting period on high quality corporate bonds. The actual return on plan assets minus net interest is to be recognized in other comprehensive income.

The adoption of IFRS 19 did not have a material impact on our financial statements as our accounting policy for employee benefits for the presentation of pension expense and the immediate recognition of actuarial gains and losses in other comprehensive income is consistent with the requirements of the amended IAS 19 standard. In accordance with the amended IAS 19 standard, we have included the required additional disclosures our consolidated financial statements for the year ended December 31, 2013. Furthermore, the computation of annual expense for 2013 has been based on the application of the discount rate used for the calculation of the defined benefit obligation to the expected return on plan assets, the impact of which was not material.

AMENDMENTS TO IAS 1 – FINANCIAL STATEMENT PRESENTATION

In June 2011, the IASB issued amendments to IAS 1 “Presentation of Financial Statements”. Items of other comprehensive income and the corresponding tax expense are required to be grouped into those that will and will not subsequently be reclassified through net earnings.

The adoption of the amendments to IAS 1 did not have a material impact on our financial

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statements. In accordance with the amendments to IAS 1, we have modified our statement of profit or loss and other comprehensive income in our consolidated financial statements for the year ended December 31, 2013.

Future Accounting Policy Changes:

The following is an overview of accounting standard changes that we will be required to adopt in future years. We do not expect to adopt any of these standards before their effective dates and we continue to evaluate the impact of these standards on our consolidated financial statements.

IFRS 9 – FINANCIAL INSTRUMENTS

IFRS 9 “Financial Instruments” introduces new requirements for the classification and measurement of financial assets. IFRS 9 requires all recognized financial assets that are within the scope of IAS 39 “Financial Instruments: Recognition and Measurement” to be measured at amortized cost or fair value in subsequent accounting periods following initial recognition. Specifically, financial assets that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. All other financial assets including equity investments are measured at their fair values at the end of subsequent accounting periods.

Requirements for classification and measurement of financial liabilities were added in October 2010 and they largely carried forward requirements in IAS 39, except that fair value changes due to credit risk for liabilities designated at fair value through profit and loss would generally be recorded in other comprehensive income.

IFRS 9 was amended in November 2013, to (i) include guidance on hedge accounting, (ii) allow entities to early adopt the requirement to recognize changes in fair value attributable to changes in an entity’s own credit risk, from financial liabilities designated under the fair value option, in other comprehensive income, without having to adopt the remainder of IFRS 9, and to (iii) remove the previous mandatory effective date for adoption of January 1, 2015, although the standard is available for early adoption.

AMENDMENTS TO OTHER IFRS STANDARDS

IAS 32 Financial Instruments: Presentation addresses inconsistencies when applying the offsetting requirements, and is effective for annual periods beginning on or after January 1, 2014. We do not expect these amendments to have a material impact on our financial statements.

SUPPLEMENTAL NON-GAAP MEASURES

In addition to providing measures prepared in accordance with GAAP, we present certain supplemental non-GAAP measures. These measures are Cash Operating Costs, EBITDA and Adjusted EBITDA, and Normalized Net Loss. These non-GAAP measures do not have any standardized meaning prescribed by GAAP and therefore are unlikely to be comparable to similar measures presented by other companies. We believe these measures are useful in evaluating the operating performance and liquidity of the Company’s ongoing business. These measures should be considered in addition to, and not as a substitute for, net income, cash flows and other measures of financial performance and liquidity reported in accordance with GAAP.

Cash Operating Costs

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This supplemental non-GAAP measure is provided to assist readers in determining our operating costs on a cash basis. We believe this measure is useful in assessing performance and highlighting trends on an overall basis. We also believe Cash Operating Costs is frequently used by securities analysts and investors when comparing our results with those of other companies. Cash Operating Costs differs from the most comparable GAAP measure, operating expenses, primarily because it does not include stock-based compensation expense, depreciation and amortization, restructuring charges, acquisition costs and financing charges. The following tables show a reconciliation of operating expenses to Cash Operating Costs from continuing operations for the three months and year ended December 31, 2013 and 2012:

(Expressed in thousands of U.S. dollars) Three months ended December 31,
Cash Operating Costs       2013       2012       $ Change
Total Operating Expenses $      8,516 $      10,047 $      (1,531 )
       Stock-based compensation expense (1,002 ) (1,555 ) 553
       Acquisition and integration costs - (91 ) 91
       Restructuring charges (43 ) - (43 )
       Financing charges - (564 ) 564
       Depreciation and amortization (1,009 ) (504 ) (505 )
Cash Operating Costs $ 6,462 $ 7,333 $ (871 )
 
(Expressed in thousands of U.S. dollars) Year ended December 31,
Cash Operating Costs 2013 2012 $ Change
Total Operating Expenses $ 36,191 $ 38,480 $ (2,289 )
       Stock-based compensation expense (3,775 ) (2,582 ) (1,193 )
       Acquisition and integration costs (78 ) (274 ) 196
       Restructuring charges (568 ) (1,931 ) 1,363
       Financing charges - (564 )     564  
       Depreciation and amortization     (3,464 ) (2,828 ) (636 )
Cash Operating Costs $ 28,306   $ 30,301 $ (1,995 )

EBITDA and Adjusted EBITDA
These supplemental non-GAAP measures are provided to assist readers in determining our operating performance and ability to generate operating cash flow. We believe this measure is useful in assessing performance and highlighting trends on an overall basis. We also believe EBITDA and Adjusted EBITDA are frequently used by securities analysts and investors when comparing our results with those of other companies. EBITDA differs from the most comparable GAAP measure, net loss attributable to Ballard from continuing operations, primarily because it does not include finance expense, income taxes, depreciation of property, plant and equipment, amortization of intangible assets, and goodwill impairment charges. Adjusted EBITDA adjusts EBITDA for stock-based compensation expense, transactional gains and losses, asset impairment charges, finance and other income, and acquisition costs. The following tables show a reconciliation of net income attributable to Ballard to EBITDA and Adjusted EBITDA from continuing operations for the three months and year ended December 31, 2013 and 2012:

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(Expressed in thousands of U.S. dollars) Three months ended December 31,
EBITDA and Adjusted EBITDA       2013       2012       $ Change
Net loss from continuing operations
attributable to Ballard $       (2,274 ) $       (17,059 ) $       14,785
Depreciation and amortization 1,557 1,016 541
Finance expense 268 458 (190 )
Income taxes 167 - 167
EBITDA attributable to Ballard $ (282 ) $ (15,585 ) $ 15,303
       Stock-based compensation expense 1,002 1,555 (553 )
       Acquisition and integration costs - 91 (91 )
       Finance and other (income) loss (546 ) 83 (629 )
       Impairment of goodwill - 10,000 (10,000 )
       Impairment of property, plant and - 570 (570 )
equipment
Impairment of equity investment 150 - 150
Loss (gain) on sale of property, plant and (153 ) 64 (217 )
equipment
Adjusted EBITDA $ 171 $ (3,222 ) $ 3,393
 
(Expressed in thousands of U.S. dollars) Year ended December 31,
EBITDA and Adjusted EBITDA 2013 2012 $ Change
Net loss from continuing operations
attributable to Ballard $ (19,988 ) $ (42,320 ) $ 22,332
Depreciation and amortization 5,655 4,840 815
Finance expense 1,486 1,690 (204 )
Income taxes 485 - 485
EBITDA attributable to Ballard $ (12,362 ) $ (35,790 ) $ 23,428
       Stock-based compensation expense   3,775   2,582 1,193  
       Acquisition and integration costs   78   274 (196 )
       Finance and other (income) loss (215 ) 219 (434 )
       Impairment of goodwill - 10,000 (10,000 )
       Impairment of property, plant and - 570  (570 )
equipment  
Impairment of equity investment 513 -     513
Loss (gain) on sale of property, plant and 23 69 (46 )
equipment
Adjusted EBITDA $ (8,188 ) $ (22,076 ) $ 13,888

Normalized Net Loss

This supplemental non-GAAP measure is provided to assist readers in determining our financial performance. We believe this measure is useful in assessing our actual performance by adjusting our results from continuing operations for one-time transactional gains and losses and impairment losses. Normalized Net Loss differs from the most comparable GAAP measure, net loss attributable to Ballard from continuing operations, primarily because it does not include transactional gains and losses and asset impairment charges. The following table shows a reconciliation of net loss attributable to Ballard from continuing operations to Normalized Net Loss for the three months and year ended December 31, 2013 and 2012.

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(Expressed in thousands of U.S. dollars) Three months ended December 31,
Normalized Net Loss 2013 2012 $ Change
Net loss attributable to Ballard from                  
continuing operations $      (2,274 ) $      (17,059 ) $      14,785
       Impairment of equity investment 150 - 150
       Impairment of goodwill - 10,000 (10,000 )
       Impairment of property, plant and - 570 (570 )
equipment
Normalized Net Loss $ (2,124 ) $ (6,489 ) $ 4,365
Normalized Net Loss per share $ (0.02 ) $ (0.07 ) $ 0.05
 
(Expressed in thousands of U.S. dollars) Year ended December 31,
Normalized Net Loss 2013 2012 $ Change
Net loss attributable to Ballard from
continuing operations $ (19,988 ) $ (42,320 ) $ 22,332
       Settlement of TPC funding obligation   1,197 -   1,197
       Impairment of equity investment 513 -