EXHIBIT 99.2
Hydrogenics Corporation
Second Quarter 2015
Management’s Discussion and Analysis
The following Management’s Discussion and Analysis (“MD&A”) of Hydrogenics Corporation (“Hydrogenics” or the “Company”) should be read in conjunction with the Company’s Condensed Interim Consolidated Financial Statements and related notes for three and six months ended June 30, 2015 and the Audited Consolidated Financial Statements and related notes for the year ended December 31, 2014. The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
The Company uses certain non-IFRS financial performance measures in this MD&A. For a detailed reconciliation of each of the non-IFRS measures used in this MD&A, please see the discussion under “Non-IFRS Measures” below.
In this MD&A, all currency amounts (except per unit amounts) are in thousands and, unless otherwise stated, they are in thousands of United States dollars (“US Dollars”). The information presented in this MD&A is as of August 10, 2015, unless otherwise stated.
Additional information about Hydrogenics, including our 2014 Audited Consolidated Financial Statements and our Annual Report on Form 40-F, which is filed in Canada as our annual information form, is available on our website at www.hydrogenics.com, on the SEDAR website at www.sedar.com, and on the EDGAR filers section of the U.S. Securities and Exchange Commission website at www.sec.gov.
This document contains forward-looking statements, which are qualified by reference to, and should be read together with the “Forward-looking Statements” cautionary notice on page 21 of this MD&A.
“Hydrogenics” or the “Company” or the words “our,” “us” or “we” refer to Hydrogenics Corporation and its subsidiaries.
Second Quarter 2015 Management’s Discussion and Analysis | Page 2 |
Management’s Discussion and Analysis Table of Contents |
| Section | Description | Page |
| 1 | Overall Performance | 4 |
| 2 | Operating Results | 7 |
| 3 | Financial Condition | 10 |
| 4 | Summary of Quarterly Results | 11 |
| 5 | Outlook | 11 |
| 6 | Liquidity | 12 |
| 7 | Capital Resources | 14 |
| 8 | Off-Balance Sheet Arrangements | 15 |
| 9 | Related Party Transactions | 15 |
| 10 | Critical Accounting Estimates | 15 |
| 11 | Changes in Accounting Policies and Recent Accounting Pronouncements | 15 |
| 12 | Disclosure Controls | 16 |
| 13 | Internal Control Over Financial Reporting | 16 |
| 14 | Reconciliation of Non-IFRS Measures | 17 |
| 15 | Risk Factors | 18 |
| 16 | Outstanding Share Data | 21 |
| 17 | Forward-looking Statements | 21 |
Second Quarter 2015 Management’s Discussion and Analysis | Page 3 |
1 Overall Performance
Selected Financial information
(in thousands of US dollars, except per share amounts)
| | | Three months ended
June 30, | | 2015 vs
2014 | | Six months ended
June 30, | | 2015 vs
2014 |
| | | 2015 | | | 2014 | | | %
Favourable
(Unfavourable) | | 2015 | | | 2014 | | | %
Favourable
(Unfavourable) |
| | | | | | | | | | | | | |
| OnSite Generation | | $ | 4,501 | | | | 7,514 | | | | (40 | %) | | $ | 7,836 | | | | 13,477 | | | | (42 | %) |
| Power Systems | | | 2,867 | | | | 3,209 | | | | (11 | %) | | | 7,063 | | | | 5,305 | | | | (33 | %) |
| Total Revenue | | | 7,368 | | | | 10,723 | | | | (31 | %) | | | 14,899 | | | | 18,782 | | | | (21 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross profit | | | 1,042 | | | | 3,240 | | | | (68 | %) | | | 2,195 | | | | 5,158 | | | | (57 | %) |
| Gross Margin % | | | 14 | % | | | 30 | % | | | | | | | 15 | % | | | 27 | % | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Selling, General and Administrative Expenses | | | 2,579 | | | | 1,979 | | | | (30 | %) | | | 5,158 | | | | 6,546 | | | | 21 | % |
| Research and Product Development Expenses | | | 1,039 | | | | 915 | | | | (14 | %) | | | 2,061 | | | | 1,831 | | | | (13 | %) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Income (Loss) from Operations | | | (2,576 | ) | | | 346 | | | | (842 | %) | | | (5,024 | ) | | | (3,219 | ) | | | (56 | %) |
| Net Loss | | | (3,700 | ) | | | (125 | ) | | | (2884 | %) | | | (7,127 | ) | | | (3,873 | ) | | | (84 | %) |
| Net Loss Per Share | | | (0.37 | ) | | | (0.01 | ) | | | - | | | | (0.71 | ) | | | (0.41 | ) | | | - | |
| Cash Operating Costs1 | | | 3,448 | | | | 3,611 | | | | 5 | % | | | 6,982 | | | | 7,338 | | | | 5 | % |
| Adjusted EBITDA1 | | | (2,341 | ) | | | (288 | ) | | | (716 | %) | | | (4,654 | ) | | | (2,016 | ) | | | (131 | %) |
| Cash used in Operating Activities | | | (4,290 | ) | | | (4,802 | ) | | | 11 | % | | | (5,654 | ) | | | (8,617 | ) | | | 34 | % |
| Cash and Cash Equivalents (including Restricted Cash) | | | 9,918 | | | | 18,873 | | | | (47 | %) | | | 9,918 | | | | 18,873 | | | | (47 | %) |
| Total Assets | | | 46,793 | | | | 53,465 | | | | 12 | % | | | 46,793 | | | | 53,465 | | | | 12 | % |
| Total Non-Current Liabilities (excluding Deferred Revenue) | | | 11,147 | | | | 5,069 | | | | (120 | %) | | | 11,147 | | | | 5,069 | | | | (120 | %) |
| 1. | Cash operating costs and Adjusted EBITDA are Non-IFRS measures. Refer to section 14 - Reconciliation of Non-IFRS Measures. |
Second Quarter 2015 Management’s Discussion and Analysis | Page 4 |
Highlights for the three months ended June 30, 2015 compared to the three months ended June 30, 2014
| · | Revenues decreased by $3.4 million or 31% to $7.4 million for the three months ended June 30, 2015 compared to $10.7 million for the same period of the prior year. The decrease in revenue was due to fewer orders shipped in the current quarter combined with the weakening of the euro which also impacted revenue by approximately $1.2 million. During the second quarter of 2015, the Company received new orders for $53.6 million (2014 - $19.2 million) consisting of $3.6 million (2014 - $5.6 million) for the OnSite Generation business and $50.0 million (2014 - $13.6 million) for the Power Systems business. Total backlog for the second quarter of 2015 was $102.3 million compared to $67.1 million for the same period a year ago. |
| | | | | | | | | | | | | Expected Revenue
Recognition |
| | | Mar 31,
2015
backlog | | Orders
Received | | FX | | Orders
Delivered/
Revenue
Recognized | | June 30,
2015
backlog | | During
next 12
months | | Beyond
next 12
months |
| OnSite Generation | | $ | 27.7 | | | $ | 3.6 | | | $ | - | | | $ | 4.5 | | | $ | 26.8 | | | $ | 24.1 | | | $ | 2.7 | |
| Power Systems | | | 28.1 | | | | 50.0 | | | | 0.3 | | | | 2.9 | | | | 75.5 | | | | 6.7 | | | | 68.8 | |
| Total | | $ | 55.8 | | | $ | 53.6 | | | $ | 0.3 | | | $ | 7.4 | | | $ | 102.3 | | | $ | 30.8 | | | $ | 71.5 | |
| · | Gross profit was 14.1% of revenue for the quarter, versus 30.2% in the prior-year period, reflecting a change in product mix as well as higher indirect overhead costs as a percentage of revenue when compared to the prior-year period. The weakening of the euro relative to the US dollar also contributed to the decrease. |
| · | Selling, general and administrative (“SG&A”) expenses for the second quarter of 2015 of $2.6 million were higher by $0.6 million or 30% compared to $2.0 for the prior year quarter. Excluding mark-to-market adjustments on the deferred share units (“DSUs”) in the current and prior year quarter, and the restricted share units (“RSUs”) in the prior year quarter and DSUs in the current and prior year quarter, SG&A expenses decreased by $0.3 million primarily due to the lower value of the euro and Canadian dollars when compared to the US dollar. The mark-to-market adjustments in the prior year quarter resulted in a decrease in SG&A of $1.0 million as the share price decreased from $30.05 to $19.67. In the current year quarter, the decrease in SG&A resulting from the share price decreasing from $14.40 to $12.50 was $0.1 million. Additionally there was no mark-to-market adjustment on the RSUs in current quarter due to their vesting and being paid out at the end of 2014. |
| · | Research and development (“R&D”) expenses were $1.0 million for the three months ended June 30, 2015 compared to $0.9 in the same period of 2014. |
| · | Cash operating costs were $3.4 for the three months ended June 30, 2015 compared to $3.6 for the three months ended June 30, 2014, with the lower costs due to lower SG&A expenses in the current year, partially offset by the slight increase in R&D expenses. |
| · | Adjusted EBITDA loss increased to $2.3 for the three months ended June 30, 2015 from $0.3 for the same period last year. The decline resulted mainly from a reduction in revenues, combined with lower margin sales, slightly higher R&D expenses, and an increase in SG&A expenses as discussed above. |
| · | Net loss increased by $3.6 million or $0.36 per share to $3.7 million or $0.37 per share in the current quarter from $125 or $0.01 per share, primarily due to the lower mark-to-market adjustment on DSUs and RSUs in the current quarter partially offset by losses on the foreign currency translation of long term receivables and lower margins as indicated above. |
Second Quarter 2015 Management’s Discussion and Analysis | Page 5 |
Highlights for the six months ended June 30, 2015 compared to the three months ended June 30, 2014
| · | Revenues decreased by $3.9 million or 21% to $14.9 million for the six months ended June 30, 2015 compared to $18.8 million for the same period of the prior year. The decrease in revenue was due to fewer orders shipped in the current quarter combined with the weakening of the euro which also impacted revenue by approximately $1.4 million. During the first six months of 2015, the Company received new orders for $59.5 million (2014 - $29.1 million) consisting of $8.4 million (2014 - $13.7 million) for the OnSite Generation business and $51.1 million (2014 - $15.4 million) for the Power Systems business. Total backlog as at June 30, 2015 was $102.3 million compared to $67.1 million for the same period a year ago. |
| | | | | | | | | | | | | Expected Revenue
Recognition |
| | | Dec 31,
2014
backlog | | Orders
Received | | FX | | Orders
Delivered/
Revenue
Recognized | | June 30,
2015
backlog | | During
next 12
months | | Beyond
next 12
months |
| OnSite Generation | | $ | 28.3 | | | $ | 8.4 | | | $ | (2.1 | ) | | $ | 7.8 | | | $ | 26.8 | | | $ | 24.1 | | | $ | 2.7 | |
| Power Systems | | | 33.9 | | | | 51.1 | | | | (2.4 | ) | | | 7.1 | | | | 75.5 | | | | 6.7 | | | | 68.8 | |
| Total | | $ | 62.2 | | | $ | 59.5 | | | $ | (4.5 | ) | | $ | 14.9 | | | $ | 102.3 | | | $ | 30.8 | | | $ | 71.5 | |
| · | Gross profit was 14.7% of revenue for the quarter, versus 27.5% in the prior-year period, reflecting a change in product mix as well as higher indirect overhead costs as a percentage of revenue when compared to the prior-year period. The weakening of the euro relative to the US dollar also contributed to the decrease. |
| · | SG&A expenses for the six months ended June 30, 2015 of $5.2 million were lower by $1.4 million or 21% compared to $6.5 million for the same period of the prior year quarter. Excluding mark-to-market adjustments on the DSUs in the current and prior year period, and the RSUs in the prior year quarter and DSUs in the current and prior year period, SG&A expenses decreased by $0.6 million primarily due to the lower value of the euro and Canadian dollars when compared to the US dollar. The mark-to-market adjustments in the prior year period resulted in an increase in SG&A of $0.6 million as the share price increased from $20.42 in the first quarter prior year to $30.05, before decreasing to $19.67 in the second quarter prior year. In the current year quarter, the decrease in SG&A resulting from the share price decreasing from $15.42 to $12.50 was $0.2 million. Additionally there was no mark-to-market adjustment on the RSUs in the current period due to their vesting and being paid out at the end of 2014. |
| · | R&D expenses were $2.0 million for the six months ended June 30, 2015 compared to $1.8 million in the comparable period of 2014 and increased as a result of decreased R&D funding of $0.5 million as well as decreased R&D spending of $0.3 million. This reduction is due to the timing of R&D project spending as well as eligibility and submissions for R&D funding. |
| · | Net loss for the six months ended June 30, 2015, was $7.1 million or $0.37 per share compared to a net loss of $3.9 million or $0.41 per share for the same quarter of the prior year. The net loss in the current period reflects i) the lower revenues and lower margins ($3.0 million); ii) a slight increase in R&D expenses ($0.2 million); iii) an increase in foreign exchange losses due to translation ($0.8 million); iv) an increase in interest expense as a result of the loan entered into in the second quarter of 2015 ($0.1 million); v) increased interest expense due to accelerating interest accretion relating to the loan with the Province of Ontario ($0.1 million)as well as vi) an increase in other finance loss due to the issuance of warrants ($0.9 million). This was partially offset by the decrease in SG&A expenses above. |
Second Quarter 2015 Management’s Discussion and Analysis | Page 6 |
| · | Cash operating costs decreased 5% to $7.0 million for the six months ended June 30, 2015 compared to $7.3 million for the six months ended June 30, 2014, primarily reflecting lower SG&A expenses due to the impact of lower exchange rates on expenses denominated in Euros and Canadian dollars. |
| · | Adjusted EBITDA loss increased to $4.7 million for the first half 2015 from $2.0 million for the same period last year. The decline resulted from decreased revenue, combined with lower margin sales and slightly higher research and development costs in the current year period, partially offset by a reduction in SG&A expenses excluding mark-to-market adjustments on RSU’s and DSU’s. |
2 Operating Results
Business Segment Review
We report our results in two business segments, being OnSite Generation and Power Systems. Our reporting structure reflects the way we manage our business and how we classify our operations for planning and measuring performance. The corporate office and administrative support is reported under Corporate and Other.
OnSite Generation
Our OnSite Generation business segment is primarily based in Oevel, Belgium and develops products for industrial gas, hydrogen fueling and renewable energy storage markets.
Our OnSite Generation products are sold to merchant gas companies and end-users requiring high purity hydrogen for industrial applications. We also sell and service products for hydrogen fueling stations for transportation applications. Recent increases in orders and interest for fueling stations in Europe, California, the UK and elsewhere, have signaled what we believe could be a major increase in the size of this market. We also sell our products to leading electric power utilities to satisfy the need for renewable energy storage. During the past year, we have witnessed increased interest and orders for our small, medium and large scale energy storage products, which serve the need for ancillary electrical power services, such as grid balancing and load profiling. While this area is heavily dependent on public funding initiatives, it continues to present compelling growth opportunities.
The worldwide market for hydrogen is estimated at $5 billion annually, and is served by industrial gas companies as well as generated on site. We believe the annual market for on-site hydrogen generation equipment is approximately $100 million to $200 million, although the size of the addressable market for on-site hydrogen generation equipment could more than double if energy storage and electrolysis based hydrogen fueling stations gain widespread acceptance.
Selected Financial Information
| | | Three months ended
June 30, | | Six months ended
June 30 |
| | | 2015 | | | 2014 | | | % Favourable
(Unfavourable) | | 2015 | | | 2014 | | | % Favourable
(Unfavourable) |
| Revenues | | $ | 4,501 | | | $ | 7,514 | | | | (40 | %) | | $ | 7,836 | | | $ | 13,477 | | | | (42 | %) |
| Gross profit | | | 653 | | | | 2,147 | | | | (70 | %) | | | 930 | | | | 2,914 | | | | (68 | %) |
| Gross margin % | | | 15 | % | | | 29 | % | | | (49 | %) | | | 12 | % | | | 22 | % | | | (45 | %) |
| SG&A expenses | | | 598 | | | | 825 | | | | 27 | % | | | 1,233 | | | | 1,665 | | | | (26 | %) |
| R&D expenses | | | 476 | | | | 390 | | | | (22 | %) | | | 900 | | | | 773 | | | | (16 | %) |
| Segment income (loss) | | $ | (421 | ) | | $ | 932 | | | | (145 | %) | | $ | (1,203 | ) | | $ | 476 | | | | (353 | %) |
Second Quarter 2015 Management’s Discussion and Analysis | Page 7 |
Revenues decreased by $3.0 million or 40% to $4.1 million for the three months ended June 30, 2015 compared to $7.5 million for the same period of 2014. Sales through June 30, 2015 consisted primarily of the sale of electrolyzer products to customers in industrial gas markets. Revenues were $7.8 million for the first half of the year compared to $13.5 million for the first six months of 2014. Orders awarded for the three months ended June 30, 2015 were $3.6 million (June 30, 2014 – $5.6 million). At June 30, 2015 backlog was $26.8 million (June 30, 2014 – $22.6 million), with $24.1 million of this backlog expected to be recognized as revenue in the next twelve months.
Gross Margin declined in the second quarter of 2015 to 15% compared to 29% in the second quarter of 2014 primarily due to higher margin projects in the prior year. Gross margin was 12% for the six months ended June 30, 2015 compared to 22% for the same period last year
SG&A Expenses were lower at $0.6 million and $1.2 million for the three and six months ended June 30, 2015 compared to $0.8 million and $1.7 million for the same periods of the previous year as a result of the decline in the euro versus the US dollar in the translation of these expenses.
R&D Expenseswere $0.5 million and $0.9 million during the second quarter and first half of 2015 and $0.4 million and $0.8 million for the three and six months ended June 30, 2014. This increase over the prior year periods is a result of one funding project being in the active build phase, as well as reduced grant funding in the current year periods.
Segment Lossincreased $1.4 million to a loss of $0.4 million for the three months ended June 30, 2015 compared to income of $0.9 million for the same period of the prior year largely due to the lower margin sales in the current period. Segment loss was $1.2 million for the six months ended June 30, 2015 compared to income of $0.5 million for the same period of the prior year.
Power Systems
Our Power Systems business segment is primarily based in Mississauga, Canada, with a satellite facility in Gladbeck, Germany. Our Power Systems business is based on proton exchange membrane (“PEM”) fuel cell technology, which transforms chemical energy liberated during the electrochemical reaction of hydrogen and oxygen into electrical energy. Our HyPM® branded fuel cell products are based on our extensive track record of on-bench testing and real-time deployments across a wide range of stationary and motive power profiles. Our HyPM® products are configured into multiple electrical power outputs ranging from five kilowatts to multiple megawatts with ease of integration, high reliability and operating efficiency, delivered from a highly compact unit.
Our target markets include stationary power applications, backup power for telecom, data centre installations and motive power applications, such as buses, trucks and utility vehicles. Additionally, our products are sold for prototype field tests intended to be direct replacements for traditional lead-acid battery packs for motive applications. The military, historically an early technology adopter, is a specialized market for our innovative fuel cell based products.
The worldwide market for data centre backup power is estimated to be in excess of $6 billion and the market for telecom backup power is estimated to be $2 to $3 billion in the United States alone, based on a complete displacement of existing products serving this market.
Selected Financial Information
| | | Three months ended
June 30, | | Six months ended
June 30, |
| | | 2015 | | | 2014 | | | % Favourable
(Unfavourable | | 2015 | | | 2014 | | | % Favourable
(Unfavourable) |
| Revenues | | $ | 2,867 | | | $ | 3,209 | | | | 11 | % | | $ | 7,063 | | | $ | 5,305 | | | | 33 | % |
| Gross profit | | | 389 | | | | 1,093 | | | | (64 | %) | | | 1,265 | | | | 2,244 | | | | (44 | %) |
| Gross margin % | | | 14 | % | | | 34 | % | | | (60 | %) | | | 18 | % | | | 42 | % | | | (58 | %) |
| SG&A expenses | | | 975 | | | | 1,061 | | | | 8 | % | | | 1,895 | | | | 2,115 | | | | 10 | % |
| R&D expenses | | | 562 | | | | 520 | | | | (8 | %) | | | 1,141 | | | | 1,051 | | | | (9 | %) |
| Segment loss | | $ | (1,148 | ) | | $ | (488 | ) | | | (137 | %) | | $ | (1,771 | ) | | $ | (922 | ) | | | (92 | %) |
Second Quarter 2015 Management’s Discussion and Analysis | Page 8 |
Revenues increased $1.8 million or 33% to $7.1 million in the six months ended June 30, 2015 due to a delivery in the first quarter of 2015 for a large project to a research organization in Germany. Revenue decreased $0.3 million or 11% to $2.9 million for the three months ended June 30, 2015 compared to $3.2 million. Orders awarded for the three months ended June 30, 2015 were $5.2 million (June 30, 2014 - $13.6 million). At June 30, 2015, backlog was $75.5 million (June 30, 2014 - $44.5 million) of confirmed orders for Power Systems’ products and services, with $6.7 million of this backlog expected to be recognized as revenue in the next twelve months.
Gross Margindeclined to 14% during the second quarter of 2015 from 34% for the second quarter of the prior year. Gross margin for the six months ended June 30, 2015 was 18% compared to 42% for the same period of the prior year, with the decline in the current period due to product mix with a larger percentage of higher margin engineering services in the prior year and the impact of the lower margin German project to a research organization in the current period.
SG&A Expensesdecreased by $0.1 million to $1.0 million for the three months ended June 30, 2015 compared to $1,061 for the three months ended June 30, 2014. Expenses were lower in the current year as a result of the translation of the largely Canadian dollar expenses at lower Canadian dollar exchange rates versus the US dollar. SG&A expenses were $1.9 million for the first half of 2015 compared to $2.1 million for the first half of 2014.
R&D Expenses were $0.6 million and $1.1 million during the three and six months ended June 30, 2015 and were in line with spending of $0.5 million and $1.1 million during the same periods of the prior year.
Segment loss was $1.1 million and $1.8 million for the three months and six months ended June 30, 2015 compared to $0.5 million and $0.9 million for the three and six months ended June 30, 2014, primarily due to the lower margin projects during the current year.
Corporate and Other
Selected Financial Information
| | | Three months ended
June 30, | | Six months ended
June 30 |
| | | 2015 | | | 2014 | | | % Favourable
(Unfavourable) | | 2015 | | | 2014 | | | % Favourable
(Unfavourable) |
| SG&A expenses | | $ | 1,006 | | | $ | 93 | | | | (959 | %) | | $ | 2,030 | | | $ | 2,766 | | | | 27 | % |
| R&D expenses | | | 1 | | | | 5 | | | | 80 | % | | | 20 | | | | 7 | | | | (186 | %) |
| Net other finance losses | | | (885 | ) | | | (41 | ) | | | (2,061 | %) | | | (887 | ) | | | (181 | ) | | | (390 | %) |
| Gain (loss) on joint venture | | | 57 | | | | - | | | | 100 | % | | | 41 | | | | - | | | | 100 | % |
| Interest expense | | | 369 | | | | 132 | | | | (180 | %) | | | 496 | | | | (264 | ) | | | (88 | %) |
| Foreign exchange gains (losses) net | | | 73 | | | | (298 | ) | | | 124 | % | | | (761 | ) | | | (209 | ) | | | (264 | %) |
| Segment Loss | | $ | (2,131 | ) | | $ | (570 | ) | | | (273 | %) | | $ | (4,153 | ) | | $ | (3,428 | ) | | | (21 | %) |
SG&A Expensesincreased by $0.9 million or 959% to $1,006 for the three months ended June 30, 2015 compared to $0.1 million for the three months ended June 30, 2014 primarily due to the impact of the mark-to-market adjustment on RSUs and DSUs in the current year as explained above. SG&A expenses decreased by $0.7 million or 27% for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014 primarily due to the impact of the mark-to-market adjustment on RSUs and DSUs in the current year as explained above, as well as a reduction due to the lower value of the euro and Canadian dollars when compared to the US dollar in the current quarter.
Second Quarter 2015 Management’s Discussion and Analysis | Page 9 |
R&D Expenseswere less than $0.1 million for the second quarter of 2015, consistent with the same period of the prior year and reflect the cost of maintaining our intellectual property.
Foreign exchange gains (losses)for the second quarter increased to a gain of $0.1 million from a loss of $0.3 million primarily due to the revaluation of euro and Canadian dollar receivables at the current exchange rates.
3 Financial Condition
| | | June 30, | | | December 31, | | | Increase/(decrease) |
| | | 2015 | | | 2014 | | | $ | | | % | |
| Cash, cash equivalents, restricted cash and short-term investments | | | 9,918 | | | $ | 10,421 | | | | (503 | ) | | | (5 | %) |
| Trade and other receivables | | | 11,840 | | | | 12,900 | | | | (1,060 | ) | | | (8 | %) |
| Inventories | | | 15,351 | | | | 14,698 | | | | 653 | | | | 4 | % |
| Operating borrowings | | | 1,671 | | | | - | | | | 1,671 | | | | 100 | % |
| Trade and other payables | | | 9,738 | | | | 13,156 | | | | (3,418 | ) | | | (26 | %) |
| Warranty provisions (current and non-current) | | | 2,320 | | | | 2,547 | | | | (227 | ) | | | (9 | %) |
| Deferred revenue (current and non-current) | | | 14,094 | | | | 12,912 | | | | 1,182 | | | | 9 | % |
| Other non-current liabilities | | | 10,310 | | | $ | 3,464 | | | | 6,846 | | | | 198 | % |
Cash, cash equivalents, restricted cash and short-term investmentswere $9.9 million, a decrease of $0.5 million or 5%. Refer to Section 6 - Liquidity for a discussion of the change in cash, cash equivalents, restricted cash and short-term investments.
Trade and other receivableswere $11.8 million, a decrease of $1.1 million or 8% due to the collection of outstanding receivables in the quarter and the revaluation of Canadian and euro receivables at current rates partially offset by an increase in accrued receivables relating to the contract for integrated power propulsion systems for an OEM, where revenue and receivables are recognized using the percentage of completion method, for which the timing of the cash collected on outstanding receivables for this project does not correspond to recognition of the revenue and receivables.
Inventorieswere $15.4 million compared to $14.7. Excluding the foreign exchange impact as a result of the lower value of the euro and Canadian dollars when compared to the US dollar in the current quarter, inventories in fact increased approximately $3.6 million as a result of our increased commercial activity and increases in expected product deliveries during 2015.
Trade and other payableswere $9.7 million and were lower by $3.4 million compared to $13.2 million at the end of December 31, 2014 as a result of suppliers payments for inventory shipped during the fourth quarter, as well as a reduction due to the foreign exchange impact as a result of the lower value of the euro and Canadian dollars when compared to the US dollar in the current quarter.
Warranty provisionswere $2.3 million, a decrease of $0.2 million or 9% due to lower warranty provisions as a result of decreased revenue.
Deferred revenueswere $14.1 million, an increase of $1.2 million or 9% reflecting customer deposits received on order bookings in the OSG business segment, partially offset by a reduction due to the foreign exchange impact as a result of the lower value of the euro and Canadian dollars when compared to the US dollar in the current quarter.
Other non-current liabilities were $10.3 million at June 30, 2015, a increase of $6.8 million or 198%, due to the new loan entered into in the second quarter of 2015.
Second Quarter 2015 Management’s Discussion and Analysis | Page 10 |
4 Summary of Quarterly Results
The following table highlights selected financial information for the eight consecutive quarters ended June 30, 2015.
| | | 2015
Q2 | | 2015
Q1 | | | 2014
Q4 | | | 2014
Q3 | | | 2014
Q2 | | | 2014
Q1 | | | 2013
Q4 | | | 2013
Q3 | |
| Revenues | | $ | 7,368 | | | $ | 7,531 | | | $ | 15,673 | | | $ | 11,093 | | | $ | 10,723 | | | $ | 8,059 | | | $ | 11,000 | | | $ | 9,236 | |
| Gross Profit | | | 1,042 | | | | 1,153 | | | | 2,989 | | | | 3,067 | | | | 3,240 | | | | 1,918 | | | | 2,705 | | | | 2,730 | |
| Gross Margin % | | | 14 | % | | | 15 | % | | | 19 | % | | | 28 | % | | | 30 | % | | | 24 | % | | | 25 | % | | | 30 | % |
| Adjusted EBITDA1 | | | (2,341 | ) | | | (2,313 | ) | | | 160 | | | | (683 | ) | | | (288 | ) | | | (1,728 | ) | | | (165 | ) | | | (350 | ) |
| Net (Loss) Income | | | (3,700 | ) | | | (3,427 | ) | | | 612 | | | $ | (1,262 | ) | | $ | (125 | ) | | $ | (3,748 | ) | | $ | (3,100 | ) | | $ | (491 | ) |
| Net (Loss) income Per Share - (Basic and Fully Diluted) | | $ | (0.37 | ) | | $ | (0.34 | ) | | $ | 0.06 | | | $ | (0.13 | ) | | $ | (0.01 | ) | | $ | (0.40 | ) | | $ | (0.35 | ) | | $ | (0.05 | ) |
| Weighted Average Common Shares Outstanding | | | 10,091,498 | | | | 10,090,481 | | | | 10,089,891 | | | | 10,089,508 | | | | 9,605,220 | | | | 9,073,527 | | | | 9,003,960 | | | | 8,963,599 | |
| 1. | Adjusted EBITDA is a Non-IFRS measure, refer to Section 14 – Reconciliation of Non-IFRS Measures. |
5 Outlook
Although, first half results were negatively impacted by order timing and the weakening euro to the US dollar, we are experiencing a willingness on the part of utilities and regulatory agencies to increase spending in the growing problem areas related to energy storage and grid stabilization. We are also seeing a gradual maturation around the regulatory framework needed to integrate energy storage into an overall energy framework to permit its cost effective rollout. In addition, we continue to witness governments in many jurisdictions showing a willingness to increase spending on alternative energy projects for the same purpose. We believe we are well positioned to benefit from government initiatives in Canada, the European Union (particularly in Germany) and the United States (particularly in California), which we expect will positively impact our business. Recently, an increase in interest in our power-to-gas application and orders for energy storage and fueling stations in Europe, California, the UK and other geographies has signaled what we believe could be a significant increase in opportunities in the markets we serve.
Our joint venture with Kolon Water and Energy also provides for a unique application of fuel cell power modules to provide stationary primary power at the megawatt class. The Korean government regulatory support for fuel cell technology provides an avenue for significant growth in this area. We do have visibility to significant growth above 2014’s revenue.
The traditional on-site industrial hydrogen market has seen solid growth in recent months. The growth in this market is correlated to the economies of regions which do not have ready access to hydrogen delivery by truck or pipeline. As costs of truck transport rise the competitiveness of the onsite solution improves.
Over the past few years, we have taken significant steps to reduce operating and product costs, streamline our operations and consolidated financial position. At June 30, 2015, our order backlog was $102.3 million (June 30, 2014 - $67.1 million) spread across numerous geographical regions, of which $30.8 million is expected to be recorded as revenue in the next twelve months.
Second Quarter 2015 Management’s Discussion and Analysis | Page 11 |
However, as a global company, we are subject to the risks arising from adverse changes in global economic and political conditions. Economic conditions in leading and emerging economies have been, and remain, unpredictable. In particular, currency fluctuations could have the impact of significantly reducing revenue and gross margin as well as the competitive positioning of our product portfolio. These macroeconomic and geopolitical changes could result in our current or potential customers reducing purchases or delaying shipment which could cause revenue recognition on these products to shift into later quarters of 2015 and into 2016.
6 Liquidity
Cash Used in Operating Activities
| | | Three months ended
June 30 | | Six months ended
June 30 |
| | | 2015 | | | 2014 | | | $ Change | | | 2015 | | | 2014 | | | $ Change | |
| Net loss | | $ | (3,700 | ) | | $ | (125 | ) | | $ | (3,575 | ) | | $ | (7,127 | ) | | $ | (3,873 | ) | | $ | 3,254 | |
| (Increase) decrease in restricted cash | | | 1,410 | | | | 62 | | | | 1,348 | | | | 1,947 | | | | (191 | ) | | | 2,138 | |
| Changes in non-cash working capital | | | (3,146 | ) | | | (4,126 | ) | | | 980 | | | | (2,830 | ) | | | (6,097 | ) | | | 3,267 | |
| Other items not affecting cash | | | 1,146 | | | | (613 | ) | | | 1,759 | | | | 2,356 | | | | 1,544 | | | | 812 | |
| Cash used in operating activities | | $ | (4,290 | ) | | $ | (4,802 | ) | | $ | 512 | | | | (5,654 | ) | | $ | (8,617 | ) | | $ | 2,963 | |
Cash used in operating activities during the second quarter of 2015 decreased by $0.5 million to $4.3 million compared to $4.8 million used in the second quarter of 2014 with the decrease largely due to the change in non-cash working capital, partially offset by the decrease in margin.
Changes in restricted cash decreased by $1.3 as a result of the release of restricted cash related to letters of credit for customer deposits upon the shipment of their orders during the quarter.
Cash Used in Investing Activities
| | | Three months ended
June 30 | | Six months ended
June 30 |
| | | 2015 | | | 2014 | | | $ Change | | | 2015 | | | 2014 | | | $ Change | |
| Proceeds on disposals | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 9 | | | $ | (9 | ) |
| Purchases of property plant and equipment | | | (394 | ) | | | (219 | ) | | | (175 | ) | | | (765 | ) | | | (525 | ) | | | (240 | ) |
| Purchase of intangibles | | | (81 | ) | | | - | | | | (81 | ) | | | (81 | ) | | | (80 | ) | | | (1 | ) |
| Cash used in investing activities | | $ | (475 | ) | | $ | (219 | ) | | $ | (256 | ) | | $ | (846 | ) | | $ | (596 | ) | | $ | (250 | ) |
Second Quarter 2015 Management’s Discussion and Analysis | Page 12 |
Cash Provided By Financing Activities
| | | Three months ended
June 30 | | Six months ended
June 30 |
| | | 2015 | | | 2014 | | | $ Change | | | | 2015 | | | | 2014 | | | $ Change | |
| Repayment of repayable government contributions | | $ | (110 | ) | | $ | (339 | ) | | $ | 229 | | | $ | (110 | ) | | $ | (389 | ) | | $ | 279 | |
| Proceeds of borrowings | | | 6,866 | | | | 854 | | | | 6,012 | | | | 6,866 | | | | 854 | | | | 6,012 | |
| Proceeds of operating borrowings | | | 1,671 | | | | - | | | | 1,671 | | | | 3,822 | | | | - | | | | 3,822 | |
| Repayment of operating borrowings | | | (2,151 | ) | | | (1,722 | ) | | | (429 | ) | | | (2,151 | ) | | | - | | | | (2,151 | ) |
| Common shares issued on stock options exercised | | | 3 | | | | 13,552 | | | | (13,549 | ) | | | 9 | | | | 13,661 | | | | (13,652 | ) |
| Cash provided by financing activities | | $ | 6,279 | | | | 12,345 | | | $ | (6,066 | ) | | $ | 8,436 | | | $ | 14,126 | | | $ | 5,690 | |
Cash provided by financing activities for the three months ended June 30, 2015 decreased by $6.0 million. In the second quarter of the prior year, the Company received proceeds from common shares issued on warrant and option exercises of $13.5 million. In the second quarter of the current year, the Company entered into a loan agreement with a syndicate of lenders for a $7.5 million loan, with net proceeds of $6.9 million.
Contractual Obligations
| | | | Total | | | Less than
1 year | | | 1-3 years | | | 4-5 years | | | After 5 years | |
| Long-term debt1 | | $ | 14,129 | | | $ | 676 | | | $ | 9.426 | | | $ | 2,081 | | | $ | 1,946 | |
| Operating borrowings | | | 1,671 | | | | 1,671 | | | | - | | | | - | | | | - | |
| Operating leases | | | 3,793 | | | | 896 | | | | 2,032 | | | | 796 | | | | 69 | |
| Purchase obligations | | | 8,402 | | | | 8,334 | | | | 68 | | | | - | | | | - | |
| Repayable government contributions | | | 519 | | | | 226 | | | | 293 | | | | - | | | | - | |
| Total contractual obligations2 | | $ | 28,514 | | | $ | 11,803 | | | $ | 11,819 | | | $ | 2,877 | | | $ | 2,015 | |
| 1. | Represents the undiscounted amounts payable as disclosed below under “Other Loan Facilities”. |
| 2. | The table excludes the DSU liability of $934 included in our current liabilities which relate to units that are only settled once a director resigns as a director. |
Credit and Loan Facilities
On May 7, 2015, Hydrogenics entered into a loan agreement with a syndicate of lenders for an 18 month loan of $7.5 million, included in the terms of the loan agreement, was the issuance of 250,000 warrants to lenders. Each warrant is exercisable for one common share of the Company at an exercise price of US$15.00 per common share. The loan bears interest at an annual rate of 11%.
At June 30, 2015 $2.6 million was drawn as standby letters of credit and bank guarantees against a $5.0 million Canadian credit facility. At June 30, 2015, the Company had C$2.4 million (December 31, 2014 - $1.9 million) available under this facility for use only as letters of credit and bank guarantees. Included in the above, is an outstanding bank guarantee for less than €0.1 million (December 31, 2014 – less than €0.1 million) for the Company’s Germany subsidiary.
The credit facility bears interest at EURIBOR plus 1.45% per annum and is secured by a €1 million first charge covering all assets of our Belgian subsidiary (the “Borrower”). The credit facility contains a negative pledge precluding the Borrower from providing security over its assets. Additionally, the Borrower is required to maintain a solvency covenant, defined as equity plus current account, divided by total liabilities of not less than 25% and ensure that its intercompany accounts with Hydrogenics do not fall below a defined level. At June 30, 2015, the Borrower was in compliance with these covenants.
Second Quarter 2015 Management’s Discussion and Analysis | Page 13 |
At June 30, 2015 $2.6 million was drawn as standby letters of credit and bank guarantees against a $5.0 million Canadian credit facility. At June 30, 2015, the Company had C$2.4 million (December 31, 2014 - $1.9 million) available under this facility for use only as letters of credit and bank guarantees. Included in the above, is an outstanding bank guarantee for less than €0.1 million (December 31, 2014 – less than €0.1 million) for the Company’s Germany subsidiary.
These letters of credit and bank guarantees relate primarily to obligations in connection with the terms and conditions of the Company’s sales contracts. The standby letters of credit and letters of guarantee may be drawn on by the customer if the Company fails to perform its obligations under the sales contracts.
On September 28, 2011, we entered into a loan agreement with the Province of Ontario’s Ministry of Economic Development, Strategic Jobs and Investment Fund for funding up to C$6.0 million. Eligible costs must be incurred between October 1, 2010 and September 30, 2015. The loan is collateralized by a general security agreement covering assets of the Company. Additionally, the loan requires that we maintain a minimum cash deposit in a Canadian Financial institution.
The Company may need to take additional measures to increase its liquidity and capital resources, including obtaining additional debt or equity financing, pursuing joint-venture partnerships, equipment financings or other receivables financing arrangements. The Company may experience difficulty in obtaining satisfactory financing terms. Failure to obtain adequate financing on satisfactory terms could have a material adverse effect on Hydrogenics’s results of operations or financial condition.
7 Capital Resources
The Company considers its capital employed to consist of shareholders’ equity and total debt, net of cash and cash equivalents as follows:
| | | June 30,
2015 | | | December 31,
2014 | |
| Shareholders’ equity | | $ | 8,660 | | | $ | 15,476 | |
| Operating borrowings | | | 1,671 | | | | - | |
| Long term debt and repayable government contributions | | | 10,327 | | | | 3,475 | |
| Total | | | 20,658 | | | | 18,951 | |
| Less cash and cash equivalents and restricted cash | | | 9,918 | | | | 10,421 | |
| Capital Employed | | $ | 10,740 | | | $ | 8,530 | |
The Company’s financial objective when managing capital is to make sure that we have the cash and debt capacity and financial flexibility to fund our ongoing business objectives including operating activities, investments and growth in order to provide returns for our shareholders and other stakeholders.
We monitor our capital structure and makes adjustments according to market conditions in an effort to meet our objectives given the Company’s operating and financial performance and current outlook of the business and industry in general. The Company’s alternatives to fund future capital needs include cash flows from operating activities, debt or equity financing, adjustments to capital spending and/or sale of assets. The capital structure and these alternatives are reviewed by management and the board of directors of the Company on a regular basis to ensure the best mix of capital resources to meet the Company’s needs.
Second Quarter 2015 Management’s Discussion and Analysis | Page 14 |
8 Off-Balance Sheet Arrangements
We do not have any material obligations under forward foreign exchange contracts, guarantee contracts, retained or contingent interests in transferred assets, outstanding derivative instruments or non-consolidated variable interests.
9 Related Party Transactions
In the normal course of operations, we subcontract certain manufacturing functions to a company owned by a family member of a senior officer, director, and shareholder of the Company. Hydrogenics made purchases of less than $0.1 million for the three and six months ended June 30, 2015 (three and six months ended June 30, 2014 – less than $0.1 million) from this related company. At June 30, 2015, the Company had an accounts payable balance due to this related party of less than $0.1 million (2014 – less than $0.1 million). We believe that transactions with this company are consistent with those we have with unrelated third parties.
On May 28, 2014, the Company entered into a joint arrangement with Kolon Water & Energy to form the joint venture Kolon Hydrogenics and the Company holds an equity investment in this joint venture. During 2014, the Company sold the joint venture a one megawatt power generation unit for $3.1 million and at the end of June 30, 2015 the Company had a receivable of $1.2 million owing from the joint venture, which is included in accrued accounts receivable.
All related party transactions involve the parent company and there are no related party transactions to disclose for the Company’s subsidiaries.
10 Critical Accounting Estimates
The Company’s management make judgments in it process of applying the Company’s accounting policies in the preparation of its consolidated financial statements. In addition, the preparation of financial information requires that the Company’s management make assumptions and estimates of effects of uncertain future events on the carrying amounts of the Company’s assets and liabilities at the end of the reporting period and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates as the estimation process is inherently uncertain. Estimates are reviewed on an ongoing basis based on historical experience and other factors that are considered to be relevant under the circumstances. Revisions to estimates and the resulting effects on the carrying amounts of the Company’s assets and liabilities are accounted for prospectively.
The critical judgments, estimates and assumptions applied in the preparation of Company’s financial information are reflected in Note 3 of the Company’s 2014 annual audited consolidated financial statements.
11 Changes in Accounting Policies and Recent Accounting Pronouncements
Our accounting policies and information on the adoption and impact of new and revised accounting standards the Company was required to adopt effective January 1, 2015 are disclosed in Note 2 of our condensed consolidated interim financial statements for the three months ended June 30, 2015.
Second Quarter 2015 Management’s Discussion and Analysis | Page 15 |
12 Disclosure Controls
We have established disclosure controls and procedures that are designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under Canadian and US securities legislation is recorded, processed, summarized, and reported within the time periods specified in such rules and forms and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer (who are our Chief Executive Officer and Chief Financial Officer, respectively) as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation and as described below under "Internal Control over Financial Reporting", our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2015.
13 Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the CEO and the CFO and effected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS.
Our management, including our CEO and CFO, believes that any disclosure controls and procedures or internal control over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud might occur and not be detected.
At December 31, 2014, the Company identified there was a material weakness in internal control over financial reporting related to our foreign currency translation procedures. We completed other procedures, including validating, and in certain cases correcting, the calculation of the impact of foreign currencies on our non-monetary assets in our German subsidiary. These additional procedures allowed us to conclude that, notwithstanding the material weakness in our internal control over financial reporting, the consolidated financial statements fairly presented, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with IFRS.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Second Quarter 2015 Management’s Discussion and Analysis | Page 16 |
We did not design and implement internal controls to ensure that non-monetary assets denominated in foreign currency in our German subsidiary were accurately recorded in US dollars. The material weakness resulted in errors in the measurement of non-monetary assets in the German subsidiary that were corrected in the Company’s consolidated financial statements for the year ended December 31, 2014 prior to their release. Additionally, this material weakness could have, if uncorrected, resulted in a future misstatement of the aforementioned non-monetary assets or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
The Company’s management, including the CEO and CFO has remediated the material weakness in internal control over financial reporting by enhancing existing controls and introducing new controls over the use of appropriate exchange rates in the recording and translation of all foreign currency transactions and balances.
The design of any system of controls and procedures is based in part on certain assumptions about the likelihood of certain events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
With the above noted changes in our internal control over financial reporting, an evaluation of the effectiveness of the Company’s internal control over financial reporting, including an evaluation of material changes that may have materially affected or are reasonably likely to have affected the internal controls over financial reporting, was conducted as of June 30, 2015, by company management including the CEO and the CFO. Management assessed the effectiveness of the Company’s internal control over financial reporting at June 30, 2015, based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as published in 2013. Based on this evaluation, management has concluded that the Company’s internal controls over financial reporting were effective as of June 30, 2015.
14 Reconciliation of Non-IFRS Measures
Non-IFRS financial measures, including earnings before interest, taxes, depreciation and amortization (“EBITDA”), “Adjusted EBITDA” and “cash operating costs” are used by management to provide additional insight into our performance and financial condition. We believe these non-IFRS measures are an important part of the financial reporting process and are useful in communicating information that complements and supplements the consolidated financial statements.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)
The Company believes Adjusted EBITDA assists investors in comparing a company’s performance on a consistent basis excluding depreciation and amortization, stock-based compensation, including both share settled PSUs and stock options and cash settled RSUs and DSUs, which are non-cash in nature and can vary significantly. We believe that removing these expenses is a better measurement of operational performance. Investors should be cautioned that Adjusted EBITDA, as reported by us, may not be comparable in all instances to Adjusted EBITDA, as reported by other companies.
Second Quarter 2015 Management’s Discussion and Analysis | Page 17 |
The following table provides a reconciliation of Adjusted EBITDA with net loss:
| | | Three months ended
June 30 | | Six months ended
June 30, |
| | | | 2015 | | | | 2014 | | | | 2015 | | | | 2014 | |
| Net loss | | $ | (3,700 | ) | | $ | (124 | ) | | $ | (7,127 | ) | | $ | (3,873 | ) |
| Finance loss (income) | | | 1,124 | | | | 471 | | | | 2,103 | | | | 654 | |
| Depreciation of property, plant and equipment and intangible assets | | | 149 | | | | 178 | | | | 310 | | | | 318 | |
| RSUs and DSUs (recovery) expense | | | (90 | ) | | | (968 | ) | | | (234 | ) | | | 593 | |
| Stock-based compensation expense (including PSUs) | | | 176 | | | | 156 | | | | 294 | | | | 292 | |
| Adjusted EBITDA | | $ | (2,341 | ) | | $ | (287 | ) | | $ | (4,654 | ) | | $ | (2,016 | ) |
Cash Operating Costs
We report cash operating costs because management feels they are a key measurement of the normal operating costs required to operate the ongoing business units of the Company. Cash operating costs are regularly reported to the chief operating decision maker and correspond to the definition used in our historical quarterly discussions. Investors should be cautioned that cash operating costs as reported by us may not be comparable in all instances to cash operating costs as reported by other companies.
The following table provides a reconciliation of cash operating costs with total operating expenses consisting of Selling, general and administrative expenses and Research and product development expenses:
| | | Three months ended
June 30, | | Six months ended
June 30, |
| | | | 2015 | | | | 2014 | | | | 2015 | | | | 2014 | |
| Selling, general and administrative expenses | | $ | 2,579 | | | $ | 1,979 | | | $ | 5,158 | | | $ | 6,546 | |
| Research and product development expenses | | | 1,039 | | | | 915 | | | | 2,061 | | | | 1,831 | |
| Total operating costs | | $ | 3,618 | | | $ | 2,894 | | | $ | 7,219 | | | $ | 8,377 | |
| Less: Depreciation of property, plant and equipment and intangibles | | | (84 | ) | | | (95 | ) | | | (177 | ) | | | (154 | ) |
| Less: RSUs and DSUs | | | 90 | | | | 968 | | | | 234 | | | | (593 | ) |
| Less: Stock-based compensation expense (including PSUs) | | | (176 | ) | | | (156 | ) | | | (294 | ) | | | (292 | ) |
| Cash operating costs | | $ | 3,448 | | | $ | 3,611 | | | $ | 6,982 | | | $ | 7,338 | |
15 Risk Factors
An investment in our common shares involves risk. Investors should carefully consider the risks and uncertainties described below and in our Annual Information Form. The risks and uncertainties described below and in our Annual Information Form are not the only ones we face. Additional risks and uncertainties, including those that we do not know about now or that we currently deem immaterial, may also adversely affect our business. For a more complete discussion of the risks and uncertainties which apply to our business and our operating results (which are summarized below), please see our Annual Information Form and other filings with Canadian (www.sedar.com) and U.S. securities regulatory authorities (www.sec.gov).
Second Quarter 2015 Management’s Discussion and Analysis | Page 18 |
Our business entails risks and uncertainties that affect our outlook and eventual results of our business and commercialization plans. The primary risks relate to meeting our product development and commercialization milestones, which require that our products exhibit the functionality, cost and performance required to be commercially viable against competing technologies and that we have sufficient access to capital to fund these activities. There is also a risk that key markets for certain of our products may never develop, or that market acceptance might take longer to develop than anticipated – in particular for applications such as energy storage which require leadership at a government and regulatory level.
A summary of our identified risks and uncertainties are as follows:
Macroeconomic and Geopolitical
| • | The uncertain and unpredictable condition of the global economy could have a negative impact on our business, results of operations and consolidated financial condition, or our ability to accurately forecast our results, and it may cause a number of the risks that we currently face to increase in likelihood, magnitude and duration. |
| • | Certain external factors may affect the value of goodwill, which may require us to recognize an impairment charge. |
| • | Significant markets for fuel cell and other hydrogen energy products may never develop or may develop more slowly than we anticipate. This would significantly harm our revenues and may cause us to be unable to recover the losses we have incurred and expect to incur in the development of our products. |
| • | Changes in government policies and regulations could hurt the market for our products. |
| • | Lack of new government policies and regulations for the energy storage technologies could hurt the development of our hydrogen energy storage products. |
| • | Development of uniform codes and standards for hydrogen powered vehicles and related hydrogen refueling infrastructure may not develop in a timely fashion, if at all. |
| • | We currently face and will continue to face significant competition from other developers and manufacturers of fuel cell power products and hydrogen generation systems. If we are unable to compete successfully, we could experience a loss of market share, reduced gross margins for our existing products and a failure to achieve acceptance of our proposed products. |
| • | We face competition for fuel cell power products from developers and manufacturers of traditional technologies and other alternative technologies. |
| • | Rapid technological advances or the adoption of new codes and standards could impair our ability to deliver our products in a timely manner and, as a result, our revenues would suffer. |
| • | Our involvement in intellectual property litigation could negatively affect our business. |
| • | If at any time we are classified as a passive foreign investment company under United State tax laws, our US shareholders may be subject to adverse tax consequences. |
| • | As a result of a strategic alliance entered into with a significant minority shareholder, they own a significant portion of our common shares and may act, or prevent corporate actions, to the detriment of other shareholders. |
| • | If we fail to maintain the requirements for continued listing on NASDAQ, our common shares could be delisted from trading on NASDAQ, which would materially adversely affect the liquidity of our common shares, the price of our common shares, and our ability to raise additional capital. |
| • | Future sales of common shares by our principal shareholders could cause our share price to fall and reduce the value of a shareholder’s investment. |
| • | Our articles of incorporation authorize us to issue an unlimited number of common and preferred shares. Significant issuances of common or preferred shares could dilute the share ownership of our shareholders, deter or delay a takeover of us that our shareholders may consider beneficial or depress the trading price of our common shares. |
Second Quarter 2015 Management’s Discussion and Analysis | Page 19 |
| • | US investors may not be able to enforce US civil liability judgments against us or our directors and officers. |
| • | Our share price is volatile and we may continue to experience significant share price and volume fluctuations. |
Operating
| • | We may not be able to implement our business strategy and the price of our common shares may decline. |
| • | Our quarterly operating results are likely to fluctuate significantly and may fail to meet the expectations of securities analysts and investors and may cause the price of our common shares to decline. |
| • | We currently depend on a relatively limited number of customers for a majority of our revenues and a decrease in revenue from these customers could materially adversely affect our business, consolidated financial condition and results of operations. |
| • | Our insurance may not be sufficient. |
| • | Hydrogen may not be readily available on a cost-effective basis, in which case our fuel cell products may be unable to compete with existing power sources and our revenues and results of operations would be materially adversely affected. |
| • | We could be liable for environmental damages resulting from our research, development or manufacturing operations. |
| • | Our strategy for the sale of fuel cell power products depends on developing partnerships with OEMs, governments, systems integrators, suppliers and other market channel partners who will incorporate our products into theirs. |
| • | We are dependent on third party suppliers for key materials and components for our products. If these suppliers become unable or unwilling to provide us with sufficient materials and components on a timely and cost-effective basis, we may be unable to manufacture our products cost-effectively or at all, and our revenues and gross margins would suffer. |
| • | We may not be able to manage successfully the anticipated expansion of our operations. |
| • | If we do not properly manage foreign sales and operations, our business could suffer. |
| • | We will need to recruit, train and retain key management and other qualified personnel to successfully expand our business. |
| • | We may acquire technologies or companies in the future, and these acquisitions could disrupt our business and dilute our shareholders’ interests. |
| • | We have no experience manufacturing our fuel cell products on a large scale basis and if we do not develop adequate manufacturing processes and capabilities to do so in a timely manner, we will be unable to achieve our growth and profitability objectives. |
| • | We may never complete the development of commercially viable fuel cell power products and/or commercially viable hydrogen generation systems for new hydrogen energy applications, and if we fail to do so, we will not be able to meet our business and growth objectives. |
| • | We must continue to lower the cost of our fuel cell and hydrogen generation products and demonstrate their reliability or consumers will be unlikely to purchase our products and we will therefore not generate sufficient revenues to achieve and sustain profitability. |
| • | Any failures or delays in field tests of our products could negatively affect our customer relationships and increase our manufacturing costs. |
Second Quarter 2015 Management’s Discussion and Analysis | Page 20 |
| • | The components of our products may contain defects or errors that could negatively affect our customer relationships and increase our development, service and warranty costs. |
| • | We depend on intellectual property and our failure to protect that intellectual property could adversely affect our future growth and success. |
| • | Our products use flammable fuels that are inherently dangerous substances and could subject us to product liabilities. |
Liquidity
| • | Our inability to generate sufficient cash flows, raise additional capital and actively manage our liquidity may impair our ability to execute our business plan, and result in our reducing or eliminating product development and commercialization efforts, reducing our sales and marketing efforts, and having to forego attractive business opportunities. |
Foreign Currency Exchange
| • | Our operating results may be impacted by currency fluctuation. |
16 Outstanding Share Data
The authorized share capital of the Company consists of an unlimited number of common shares, with no par value, and an unlimited number of preferred shares in series, with no par value. We had 10,092,375 common shares outstanding at June 30, 2015.
| | | 2015 | | 2014 |
| | | Number | | | Amount | | | Number | | | Amount | |
| Balance at January 1 | | | 10,090,325 | | | $ | 348,259 | | | | 9,017,617 | | | $ | 333,312 | |
| Issuance of common shares | | | - | | | | - | | | | 1,057,144 | | | | 14,768 | |
| Warrants exercised | | | - | | | | - | | | | - | | | | - | |
| Stock options exercised | | | 2,050 | | | | 16 | | | | 14,135 | | | | 171 | |
| At June 30, | | | 10,092,375 | | | $ | 348,275 | | | | 10,088,896 | | | $ | 348,251 | |
At June 30, 2015, there were 536,174 stock options and 199,772 PSUs outstanding to purchase our common shares. If these securities are exercised, our shareholders could incur dilution.
17 Forward Looking Statements
This MD&A constitutes “forward-looking information,” within the meaning of applicable Canadian securities laws and “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 (collectively referred to herein as “forward-looking statements”). Forward-looking statements can be identified by the use of words, such as “plans,” “expects,” or “is expected,” “budget,” “scheduled,” “estimates,” “forecasts,” “intends,” “anticipates,” or “believes” or variations of such words and phrases or state that certain actions, events or results “may,” “could,” “would,” “might” or “will” be taken, occur or be achieved. These forward-looking statements relate to, among other things, our future results, levels of activity, performance, goals or achievements or other future events. These forward-looking statements are based on current expectations and various assumptions and analyses made by us in light of our experience and our perceptions of historical trends, current conditions and expected future developments and other factors that we believe are appropriate in the circumstances. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in our forward-looking statements.
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These risks, uncertainties and factors include, but are not limited to: our inability to execute our business plan, or to grow our business; inability to address a slow return to economic growth, and its impact on our business, results of operations and consolidated financial condition; our limited operating history; inability to implement our business strategy; fluctuations in our quarterly results; failure to maintain our customer base that generates the majority of our revenues; currency fluctuations; failure to maintain sufficient insurance coverage; changes in value of our goodwill; failure of a significant market to develop for our products; failure of hydrogen being readily available on a cost-effective basis; changes in government policies and regulations; lack of new government policies and regulations for the energy storage technologies; failure of uniform codes and standards for hydrogen fuelled vehicles and related infrastructure to develop;liability for environmental damages resulting from our research, development or manufacturing operations; failure to compete with other developers and manufacturers of products in our industry; failure to compete with developers and manufacturers of traditional and alternative technologies; failure to develop partnerships with original equipment manufacturers, governments, systems integrators and other third parties; inability to obtain sufficient materials and components for our products from suppliers; failure to manage expansion of our operations; failure to manage foreign sales and operations; failure to recruit, train and retain key management personnel; inability to integrate acquisitions; failure to develop adequate manufacturing processes and capabilities; failure to complete the development of commercially viable products; failure to produce cost-competitive products; failure or delay in field testing of our products; failure to produce products free of defects or errors; inability to adapt to technological advances or new codes and standards; failure to protect our intellectual property; our involvement in intellectual property litigation; exposure to product liability claims; failure to meet rules regarding passive foreign investment companies; actions of our significant and principal shareholders; failure to maintain the requirements for continued listing on NASDAQ; dilution as a result of significant issuances of our common shares and preferred shares; inability of US investors to enforce US civil liability judgments against us; volatility of our common share price; and dilution as a result of the exercise of options.
These factors may cause the Company’s actual performance and financial results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements. Forward-looking statements do not take into account the effect that transactions or non-recurring or other special items announced or occurring after the statements are made have on the Company’s business. For example, they do not include the effect of business dispositions, acquisitions, other business transactions, asset write-downs or other charges announced or occurring after forward-looking statements are made. The financial impact of such transactions and non-recurring and other special items can be complex and necessarily depends on the facts particular to each of them.
We believe the expectations represented by our forward-looking statements are reasonable, yet there can be no assurance that such expectations will prove to be correct. The purpose of the forward-looking statements is to provide the reader with a description of management’s expectations regarding the Company’s fiscal 2015 financial performance and may not be appropriate for other purposes. Furthermore, unless otherwise stated, the forward-looking statements contained in this report are made as of the date of this report and we do not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise unless required by applicable legislation or regulation. The forward-looking statements contained in this report are expressly qualified by this cautionary statement.
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