Hydrogenics (HYGS) 6-K Hydrogenics Reports Second Quarter 2017 Results

Exhibit 99.2

             

Hydrogenics Corporation

Second Quarter 2017

Management’s Discussion and Analysis

Hydrogenics Corporation

The following Management’s Discussion and Analysis (“MD&A”) of Hydrogenics Corporation (“Hydrogenics” or the “Company”) should be read in conjunction with the Company’s Audited Consolidated Financial Statements and related notes for the year ended December 31, 2016. 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 1, 2017, unless otherwise stated.

Additional information about Hydrogenics, including our 2016 Audited Consolidated Financial Statements and our Annual Report on Form 20-F for the year ended December 31, 2016 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 26 of this MD&A.

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

Second Quarter 2017 Management’s Discussion and Analysis Page 2

Hydrogenics Corporation

Management’s Discussion and Analysis Table of Contents
Section	Description	Page
1	Overall Performance	4
2	Operating Results	8
3	Financial Condition	12
4	Summary of Quarterly Results	13
5	Outlook	14
6	Liquidity	16
7	Capital Resources	19
8	Off-Balance Sheet Arrangements	19
9	Related Party Transactions	20
10	Critical Accounting Estimates	20
11	Changes in Accounting Policies and Recent Accounting Pronouncements	20
12	Disclosure Controls	20
13	Internal Control Over Financial Reporting	21
14	Reconciliation of Non-IFRS Measures	21
15	Risk Factors	23
16	Outstanding Share Data	25
17	Forward-looking Statements	26

Second Quarter 2017 Management’s Discussion and Analysis Page 3

Hydrogenics Corporation

1       Overall Performance

Selected Financial information

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

	Three months ended June 30,						2017 vs 2016			Six months ended June 30,						2017 vs 2016
		2017			2016			% Favourable (Unfavourable)			2017			2016			% Favourable (Unfavourable)
OnSite Generation	$	4,142		$	7,679			(46	%)	$	6,262		$	9,421			(34	%)
Power Systems		3,345			1,519			120	%		10,062			4,106			145	%
Total revenue		7,487			9,198			(19	%)		16,324			13,527			21	%
Gross profit		250			1,819			(86	%)		2,930			3,030			(3	%)
Gross margin %		3	%		20	%					18	%		22	%
Selling, general and administrative expenses		3,333			3,106			(7	%)		6,334			5,354			(18	%)
Research and product development expenses		1,492			1,445			(3	%)		2,497			2,568			3	%
Loss from operations		(4,575	)		(2,732	)		(67	%)		(5,901	)		(4,892	)		(21	%)
Net loss		(5,742	)		(3,092	)		(86	%)		(8,008	)		(5,454	)		(47	%)
Net loss per share		(0.45	)		(0.25	)		(88	%)		(0.64	)		(0.43	)		(49	%)
Cash operating costs1		4,068			4,345			(6	%)		7,440			7,538			1	%
Adjusted EBITDA1		(3,726	)		(2,463	)		(51	%)		(4,436	)		(4,352	)		2	%
Cash used in operating activities		(2,839	)		(5,942	)		52	%		(3,468	)		(9,992	)		65	%
Cash and cash equivalents (including restricted cash)		29,224			13,108			123	%		29,224			13,108			123	%
At June 30,
Total assets		74,188			51,745			43	%		74,188			51,745			43	%
Total non-current liabilities (excluding deferred revenue)		12,307			4,442			(44	%)		12,307			4,442			(44	%)

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

Second Quarter 2017 Management’s Discussion and Analysis Page 4

Hydrogenics Corporation

Highlights for the three months ended June 30, 2017 compared to the three months ended June 30, 2016

· The Company strengthened the Balance Sheet in the three months ended June 30, 2017, with a $21.0 million private placement with the Hejili Equity Investment Limited Partnership. This investment increased our cash position in the company to $29.2 million at June 30, 2017.

· We ended the second quarter of 2017 with the highest backlog level in our history at $152.1 million, compared with $102.9 million for the same period a year ago. During the second quarter of 2017, we received new orders for $45.3 million (2016 - $16.2 million) consisting of $2.9 million (2016 - $2.5 million) for the OnSite Generation business and $42.4 million (2016 - $13.7 million) for the Power Systems business. The Power Systems business segment booked a multi-year agreement for the delivery of 1,000 fuel cell modules, along with ongoing engineering support to a Chinese integrator in the three months ended June 30, 2017.

	March 31, 2017 backlog		Orders Received		FX		Orders Delivered/ Revenue Recognized		June 30, 2017 backlog
OnSite Generation	$	28.4	$	2.9	$	1.1	$	4.1	$	28.3
Power Systems		81.4		42.4		3.4		3.4		123.8
Total	$	109.8	$	45.3	$	4.5	$	7.5	$	152.1

· Of the above backlog of $152.1 million, we expect to recognize approximately $65.0 million in the following 12 months as revenue. In addition, revenue for the year ending December 31, 2017 will also include orders both received and delivered in the balance of 2017, an increase of approximately $21 million from the $44 million in twelve month revenue as of March 31, 2017.

· We define backlog as the value associated with a firm, signed purchase order or contract. The value we include in backlog is the non-cancellable value of contracts.

· Revenues decreased by $1.7 million, or 19%, to $7.5 million for the three months ended June 30, 2017 compared to $9.2 million for the second quarter of 2016.

o The Power Systems business segment revenue increased $1.8 million due to an increase of deliveries in the Chinese mobility market of $2.4 million partially offset by a decrease of $0.8 million due to a realignment of costs and associated revenue on our propulsion contract (when compared to revenue on this contract for the three months ended June 30, 2016). In the quarter we completed the first prototype unit on this contract and the costs to complete this prototype resulted in a re-estimation of forecasted project costs, reducing recalculation of revenue associated with this contract reducing percentage of completion cumulative revenue by $1.7 million in the quarter. However, we now have a strong cost model for the balance of the project allowing for ongoing historical gross margin contribution from this contract.

o Revenue in the OnSite Generation business segment decreased $3.5 million due to fewer projects recognized in revenue resulting from delays in delivery of several On-Site Generation projects until later in 2017, as well as the absence of the delivery of a dual pressure fueling station realized in the three months ended June 30, 2016.

Second Quarter 2017 Management’s Discussion and Analysis Page 5

Hydrogenics Corporation

· Gross profit decreased to $0.3 million in the current quarter versus $1.8 million in the prior-year period partially as a result of the 19% decrease in revenue noted above. Also contributing to the decrease, was a reduction in gross margin which decreased from 20% in the prior period to 3% in the current period. The decrease in gross margin was principally due to lower gross margins on two significant projects based in Africa, in our On-Site Generation group which met with unanticipated delays and overruns due to delayed construction and scope changes by the engineering firms responsible for the construction of the facilities where our electrolyzers would be located, as well as the realignment of costs and associated revenue on our propulsion contract in the Power Systems segment, as well as weaker absorption of indirect overhead costs as a result of the decrease in revenue.

· Adjusted EBITDA loss increased $1.3 million to $3.7 million for the three months ended June 30, 2017 from $2.4 million for the same period last year. This decrease is due to a decrease in gross profit of $1.6 million, partially offset by a decrease in selling, general and administrative expenses of $0.4 million (excluding compensation indexed to our share price), discussed below.

· Selling, general and administrative (“SG&A”) expenses for the second quarter of 2017 increased$0.2 million when compared to the prior year quarter. Excluding mark to market expenses, which have increased as a result of the increase in our share price for the three months ended June 30, 2017 compared to the three months ended June 30, 2016, within both the OnSite Generation business segment and Power Systems business segment, SG&A expenses were lower as a result of a reduction in headcount and spending in sales and marketing, including consulting. Compensation costs did not increase in proportion to the significant increase in orders; although orders received in the quarter were strong, the targets associated with an increase in related compensation costs have not yet been achieved.

· Net research and product development expenses (“R&D”) were consistent for the period, totaling $1.5 million for the three months ended June 30, 2017 compared to $1.4 million in the same period of 2016.

· Net loss increased from $3.1 million, or $0.25 per share to $5.7 million, or $0.45 per share in the current period, primarily due to the decrease in gross profit of $1.6 million as noted above. Also contributing to the increase in net loss, was the increase in i) mark to market compensation expenses as well as ii) fair value adjustments (loss) related to outstanding warrants as a result of the increase in our share price. This was partially offset by a foreign currency gain of $0.4 million, compared to a loss of $0.1 million for the comparable period in 2017.

· Cash operating costs decreased 6% from $4.3 million to $4.1 million for the three months ended June 30, 2017 compared to $4.3 million for the three months ended June 30, 2016, with the decrease due to the decrease in in SG&A (excluding compensation indexed to share price).

Highlights for the six months ended June 30, 2017 compared to the six months ended June 30, 2016

· Revenues increased 21%, to $16.3 million for the six months ended June 30, 2017, from $13.5 million for the same period of the prior year. The increase in revenue was primarily due to increased activity within the Power Systems business segment such as; i) an increase of deliveries in the Chinese mobility market of $3.7 million; ii) an increase of $1.8 million related to our hydrogen fuel cell systems for commuter trains in Europe, as well as iii) an increase in our spares and service revenue of $0.4 million; partially offset by i) a decrease of $0.2 million due to the timing of revenue on our long-term significant custom contract; as well as ii) fewer orders shipped in the current period for the OnSite Generation business, including the absence of the delivery of a dual-pressure fueling station which was delivered in the period. During the first six months of 2017, the Company received new orders for $56.3 million (2016 - $21.9 million) consisting of $12.5 million (2016 - $8.0 million) for the OnSite Generation business and $43.8 million (2016 - $13.9 million) for the Power Systems business.

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Hydrogenics Corporation

	December 31, 2016 backlog		Orders Received		FX		Orders Delivered/ Revenue Recognized		June 30, 2017 backlog
OnSite Generation	$	20.8	$	12.5	$	1.3	$	6.3	$	28.3
Power Systems		85.8		43.8		4.2		10.0		123.8
Total	$	106.6	$	56.3	$	5.5	$	16.3	$	152.1

· Gross margin declined from 22% of revenue for the six months ended June 30, 2016, versus 18% in the current period, reflecting lower gross margins on two significant projects in the On-Site Generation business segment, as well as the realignment of costs and associated on our long-term significant custom contract in the Power Systems segment, as well as improved overhead absorption of indirect overhead costs in the Power Systems segment.

· Adjusted EBITDA loss remained consistent at $4.4 million for the first half 2017 as compared to the same period last year, as gross profit remained consistent although revenue increased.

· SG&A expenses for the six months ended June 30, 2017 of $6.3 million were greater by $0.9 million or 17% compared to $5.4 million for the same period of the prior year. Excluding the impact of the reversal of an indemnification liability of $0.5 million that had been set up associated with an acquisition in 2004 included within the six months ended June 30, 2016, as well as excluding mark to market expenses as a result of the increase in our share price for the six months ended June 30, 2017 as compared to the six months ended June 30, 2016, SG&A expenses have decreased. Within the OnSite Generation segment, SG&A expenses have decreased $0.2 million as a result of a reduction in headcount in sales and marketing. Within the Power Systems segment, SG&A expenses have decreased $0.3 million. While orders received in the period were strong, the targets associated with an increase in related compensation costs have not yet been achieved. The decrease is the result of lower consulting and marketing costs in the six months ended June 30, 2017.

· R&D expenses were consistent at $2.5 million for the six months ended June 30, 2017 compared to $2.6 million in the comparable period of 2016.

· Net loss for the six months ended June 30, 2017 increased $2.6 million or $0.21 per share to $8.0 million from a loss of $5.5 million for the same period of the prior year. The net loss in the current period primarily reflects the increase in our share price, increasing i) mark to market compensation expenses as well as ii) fair value adjustments (loss) related to outstanding warrants as a result of the increase in our share price. This was partially offset by a foreign currency gain of $0.5 million, compared to a loss of $0.2 million for the comparable period in 2017.

· Cash operating costs decreased 2% to $7.4 million for the six months ended June 30, 2017 compared to $7.5 million for the six months ended June 30, 2016, primarily reflecting the decrease in SG&A and R&D expenses above.

Second Quarter 2017 Management’s Discussion and Analysis Page 7

Hydrogenics Corporation

2       Operating Results

Business Segment Review

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

OnSite Generation

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

Historically the demand for onsite generation of hydrogen gas has been driven by relatively modest market applications for industrial hydrogen. A typical unit for these applications would generate 20 to 60 normal cubic meters of hydrogen and consume 100 to 300 kilowatt (kW) of electrical energy. Recently we have seen several large scale applications which would consume 10 to 100 megawatts (“MW”) of power, which is 100 to 300 times larger than a typical industrial unit to date. Today several third party studies and internal work by lead customers such as E.ON and Enbridge suggest substantial long term opportunity for “Power-to-Gas”, an application for energy conversion and storage. The ongoing commercialization of these applications will coincide with changes to legal and regulatory frameworks in countries that recognize the commercial importance of energy storage as a key factor in energy management and reducing the carbon footprint for electricity generation. In addition to Power-to-Gas, very large scale industrial applications are also appearing such as the detritiation of contaminated waste water at nuclear reactor sites. In larger applications, the use of PEM electrolysis technology results in highly efficient energy dense applications. Our 1.5MW PEM single stack electrolyzer is the most energy dense unit in the market today and is ideally suited for large scale energy storage applications. This electrolyzer was the basis for the HyLYZER 600 announced in April 2017, which is the world’s first 3MW single stack electrolyzer. The compact design of the HyLYZER 600 enables easy scale up for multi-MW applications.

Our OnSite Generation products are sold to leading merchant gas companies, such as Air Liquide and Linde Gas and end-users requiring high purity hydrogen produced on-site for industrial applications. We also sell and service products for progressive oil and gas companies, requiring hydrogen fueling stations for transportation applications. Recently, the rollout of fuel cell motor vehicles and the increase in fuel cell buses and other mass transit applications has resulted in an increase in orders and interest for fueling stations in Europe, California and elsewhere. This shift has signaled what we believe could be a major increase in the size of this market.

Selected Financial Information

	Three months ended June 30,								Six months ended June 30
		2017			2016		% Favourable (Unfavourable)			2017			2016		% Favourable (Unfavourable)
Revenues	$	4,142		$	7,679		(46	%)	$	6,262		$	9,421		(34	%)
Gross profit (loss)		(140	)		1,435		n/a			180			1,548		(88	%)
Gross margin %		(3	%)		19	%	n/a			3	%		16	%	(83	%)
Selling, general and administrative Expenses		697			785		11	%		1,303			1,516		14	%
Research and product development expenses		189			300		37	%		508			718		29	%
Segment income (loss)	$	(1,026	)	$	350		n/a		$	(1,631	)	$	(686	)	(138	%)

Second Quarter 2017 Management’s Discussion and Analysis Page 8

Hydrogenics Corporation

Revenuesdecreased by $3.5 million or 46% to $4.1 million for the three months ended June 30, 2017 compared to $7.7 million for the same period of 2016 due to fewer orders shipped in the current quarter, as well as the absence of the delivery of a dual-pressure fueling station which was delivered in the three months ended June 30, 2016. Sales through June 30, 2017 consisted of sales to customers in industrial gas markets. Revenues were $6.3 million for the first half of the year compared to $9.4 million for the first six months of 2016. Orders awarded for the three months ended June 30, 2017 were $2.9 million (June 30, 2016 - $2.4 million). At June 30, 2017 backlog was $28.3 million (June 30, 2016 - $15.9 million), with $22.2 million of this backlog expected to be recognized as revenue in the next twelve months.

Gross Margin decreased in the second quarter of 2017 to negative 3% compared to 19% in the second quarter of 2016. This decrease reflects the gross margin on two significant projects delivered in the quarter. These projects were first-of-a-kind with lower margins due to the higher costs associated with such projects. Also contributing to the decrease was weaker absorption of indirect overhead costs as a result of the decrease in revenue.

SG&A Expenses were lower by 11% and 14%, with balances of $0.7 million and $1.3 million for the three and six months ended June 30, 2017 compared to $0.8 million and $1.5 million for the same periods of the previous year as a result of a reduction in headcount in sales and marketing.

R&D Expenses were $0.2 million and $0.5 million during the second quarter and first half of 2017 and $0.3 million and $0.7 million for the three and six months ended June 30, 2016. This decrease over the prior year periods is due to timing differences on spending as R&D projects are completed and new R&D projects are beginning.

Segment Income (Loss)decreased $1.4 million to a loss of $1.0 million for the three months ended June 30, 2017 compared to income of $0.4 million for the same period of the prior year largely due to the decrease in gross profit as noted above. Segment loss was $1.6 million for the six months ended June 30, 2017 compared to a loss of $0.7 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 segment is based on PEM fuel cell technology, which transforms chemical energy liberated during the electrochemical reaction of hydrogen and oxygen into electrical energy. Our HyPM® branded fuel cell products are based on our extensive track record of on-bench testing and real-time deployments across a wide range of stationary and motive power profiles. We configure our HyPM® products into multiple electrical power outputs ranging from 3 kW to 1 MW with ease of integration, high reliability and operating efficiency, delivered from a highly compact area.

Our target markets include stationary power applications (including primary and back-up power) and motive power applications, such as trains, buses, trucks and utility vehicles and backup power applications. The military, historically an early technology adopter, is a specialized market for our innovative fuel cell based products. Our target future addressable markets (stationary power and mobility markets) are estimated to be in excess of $2 billion specifically related to hydrogen power technology.

Second Quarter 2017 Management’s Discussion and Analysis Page 9

Hydrogenics Corporation

Selected Financial Information

	Three months ended June 30,								Six months ended June 30,
		2017			2016		% Favourable (Unfavourable)			2017			2016		% Favourable (Unfavourable)
Revenues	$	3,345		$	1,519		120	%	$	10,062		$	4,106		145	%
Gross profit		390			384		2	%		2,750			1,482		86	%
Gross margin %		12	%		25	%	(52	%)		27	%		36	%	(25	%)
Selling, general and administrative expenses		1,019			1,246		18	%		1,929			2,179		11	%
Research and product development expenses		1,286			1,043		(23	%)		1,946			1,739		(12	%)
Segment loss	$	(1,915	)	$	(1,905	)	(1	%)	$	(1,125	)	$	(2,436	)	54	%

Revenues increased 120%, or $1.8 million, from $1.5 million to $3.3 million for the three months ended June 30, 2017 compared to $1.5 million for three months ended June 30, 2016. Revenue increased 145%, or $6.0 million for the six months ended June 30, 2017 compared to the six months ended June 30, 2016. The increase in the three and six months ended June 30, 2017 is due in part to a significant increase in the delivery of orders to the Chinese mobility market. These deliveries have increased revenue by $2.4 million for the three months, and $3.7 million for the six months ended June 30, 2017. For the three months ended June 30 2017, this was partially offset by a decrease of $0.6 million due to a realignment of costs and associated revenue on our long-term significant custom contract. For the six months ended June 30, 2017, there was an increase of $1.8 million related to our hydrogen fuel cell systems for commuter trains in Europe, an increase in our spares and service revenue of $0.4 million, partially offset by a decrease of $0.2 million due to the timing of revenue on our long-term significant custom contract.

Orders awarded for the three months ended June 30, 2017 were $42.3 million (June 30, 2016 - $13.7 million), which included a portion of the previously announced order for 1000 fuel cell units to a Chinese bus integrator. At June 30, 2017, backlog was $123.8 million (June 30, 2016 - $86.9 million) of confirmed orders for Power Systems’ products and services, with $42.6 million of this backlog expected to be recognized as revenue in the next 12 months.

Gross Margindecreased from 36% to 27% for the six months ended June 30, 2017, with the decrease in the current period due to product mix. The realignment of costs and associated revenue on our long-term significant custom engineering services contract combined with a lower margin profile on commuter rail revenue compared with other Power Systems business segment applications.

SG&A Expensesdecreased $0.2 million and $0.3 million for the three and six months ended June 30, 2017 as compared to the prior period. While orders received in the quarter were strong, the targets associated with an increase in related compensation costs have not yet been achieved. The decrease is the result of lower consulting and marketing costs in the three and six months ended June 30, 2017.

R&D Expenses were $1.3 million and $1.9 million during the three and six months ended June 30, 2017 an increase of $0.2 million and $0.2 million respectively, from the three and six months ended June 30, 2016. The increase represents increased spending on R&D, primarily surrounding multi-megawatt fuel cell system development, and mobility applications.

Segment loss was $1.9 million and $1.1 million for the three and six months ended June 30, 2017 compared to $1.9 million and $2.4 million for the three and six months ended June 30, 2016. Given the increase in revenue for the three months ended June 30, 2017 the loss remained consistent as a result of the decrease in gross profit. Segment loss decreased $1.3 million for the six months ended June 30, 2017 as a result of the increase in gross profit.

Second Quarter 2017 Management’s Discussion and Analysis Page 10

Hydrogenics Corporation

Corporate and Other

Selected Financial Information

	Three months ended June 30,									Six months ended June 30
		2017			2016		% Favourable (Unfavourable)				2017			2016		% Favourable (Unfavourable)
Selling, general and administrative expenses	$	1,617		$	1,075			(50	%)	$	3,102		$	1,659			(87	)%
Research and product development expenses		17			102			83	%		43			111			61	%
Net other finance gain (losses)		(1,006	)		224			n/a			(1,468	)		435			n/a
Gain (loss) on joint ventures		(101	)		(4	)		(2,425	%)		(171	)		52			n/a
Interest expense		454			438			(4	%)		923			871			(6	%)
Foreign exchange gains (losses) net		394			(142	)		n/a			455			(178	)		n/a
Total	$	(2,801	)	$	(1,537	)		(82	%)	$	(5,252	)	$	(2,332	)		44	%

SG&A Expenseswere $1.6 million for the three months ended June 30, 2017 and $3.1 million for the six months ended June 30, 2017. Excluding the impact of the reversal of an indemnification liability of $0.5 million that had been set up associated with an acquisition in 2004 included within the six months ended June 30, 2016, as well as excluding mark to market expenses as a result of the increase in our share price for the three and six months ended June 30, 2017 as compared to the three and six months ended June 30, 2016, SG&A expenses remained consistent.

R&D Expenseswere less than $0.1 million for the three and six months ended June 30, 2017. These expenses are the legal and related costs of maintaining our intellectual property.

Net Other Finance Gains (Losses)increased by $1.2 million to a loss of $1.0 million for the three months ended June 30, 2017 compared to June 30, 2016, and by $1.9 million to a loss of $0.4 million for the six months ended June 30, 2017 compared to June 30, 2016. The increase is due to the fair value adjustments (loss) relating to outstanding warrants in the three and six months ended June 30, 207 ($0.8 million and $1.2 million respectively), whereas the three and six months ended June 30, 2016 included far value adjustments (gains) related to outstanding warrants of $0.3 million and $0.4 million respectively. These fair value adjustments are the result of the increase in our share price for the three and six months ended June 30, 2017 as compared to the three and six months ended June 30, 2016

Interest expenseremained consistent for the three and six months ended June 30, 2017 as compared to the three and six months ended June 30, 2016.

Second Quarter 2017 Management’s Discussion and Analysis Page 11

Hydrogenics Corporation

3       Financial Condition

		June 30		December 31		Increase/(decrease)
		2017		2016		$		%
Cash, cash equivalents, restricted cash and short-term investments	$	29,224	$	11,278	$	17,946		159	%
Trade and other receivables		15,019		9,802		5,217		53	%
Inventories		17,819		17,208		611		4	%
Operating borrowings		2,283		2,111		172		8	%
Trade and other payables		12,152		7,235		4,917		68	%
Financial liabilities		6,177		3,939		2,238		57	%
Warranty provisions (current and non-current)		1,998		2,062		(64	)	(3	%)
Deferred revenue (current and non-current)		19,259		14,282		4,977		35	%
Other non-current liabilities	$	8,887	$	9,262	$	(375	)	(4	%)

Cash, cash equivalents, restricted cash and short-term investmentswere $29.2 million, an increase of $17.9 million or 159%. 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 $15.0 million, an increase of $5.2 million or 53%. Excluding the foreign exchange impact of $0.3 million (as a result of the strengthening value of the euro when compared to the US dollar in the current period), trade and other receivables increased approximately $4.9 million. This increase is reflective of the change in product mix and the timing of revenue recognition in the quarter. Second quarter 2017 revenue contains a significant portion of Chinese mobility orders with that were included in accrued receivables as they were invoiced and/or delivered after quarter end. With the increase in Chinese mobility orders, we expect to see an increase in accrued receivables. For these orders the customers are typically responsible for the shipment of their fuel cell modules, and until the unit has been shipped, regardless of the revenue recognition, the receivable will be classified as an accrued receivable. In 2016, we received a significant portion of the related receivable for our shipments at the point of revenue recognition resulting in a lower trade and other receivables balance at December 31, 2016. Further increasing our trade and other receivables balance is an increase in accrued receivables of $1.4 million related to accrued engineering services revenue that is recognized on a percentage of completion basis but for which is billed according to progress based, specified payment schedules. Significant progress was made on this long term contract in the six months ended June 30, 2017 resulting in a significant increase in accrued receivables. However, the specified payment term had not yet been met.   

Inventorieswere $17.8 million compared to $17.2 million, an increase of 4%. Excluding the foreign exchange impact of approximately $1.0 million as a result of the strengthening value of the euro and Canadian dollar when compared to the US dollar in the current period, inventories decreased approximately $0.4 million as a result of the product deliveries in the first half of 2017 and the expected product deliveries for the remainder of 2017.

Trade and other payableswere $12.2 million, an increase of $4.9 million compared to $7.2 million at the end of December 31, 2016. Excluding the foreign exchange impact of approximately $0.5 million as a result of the strengthening value of the euro and Canadian dollar when compared to the US dollar in the current period, trade and other payables increased $4.5 million. We manage working capital by monitoring our trade and other payables in conjunction with our collections ratio. Also increasing trade and other payables is the increase in inventory purchases and property, plant and equipment, for which payment has not yet been made as of June 30, 2017.

Financial liabilitieswere $6.2 million, an increase of $2.2 million, resulting from an increase in our deferred share unit liability due to increased mark to market expenses and an increase in the value of our warrants. Both increases are a result of the increase in our share price as at June 30, 2017 compared to December 31, 2016.

Second Quarter 2017 Management’s Discussion and Analysis Page 12

Hydrogenics Corporation

Warranty provisionswere $2.0 million, a decrease of less than $0.1 million from $2.1 million at December 31, 2016. The decrease is due to lower anticipated warranty claims based on our current warranty experience.

Deferred revenueswere $19.3 million, an increase of $5.0 million or 35%. This increase reflects the timing of customer deposits received on order bookings as at June 30, 2017 as well as the impact of the strengthening value of the euro relative to the US dollar of approximately $0.9 million.

Other non-current liabilities were $8.9 million at June 30, 2017, a decrease of $0.4 million or 4%. The decrease is due to the scheduled repayments of the fixed term long-term debt with the Province of Ontario and Export Development Canada.

4       Summary of Quarterly Results

The following table highlights selected financial information for the eight consecutive quarters ended June 30, 2017.

		2017 Q2			2017 Q1			2016 Q4			2016 Q3			2016 Q2			2016 Q1			2015 Q4			2015 Q3
Revenues	$	7,487		$	8,837		$	8,730		$	6,733		$	9,198		$	4,329		$	11,321		$	9,644
Gross profit		250			2,680			1,965			1,000			1,819			1,211			1,675			2,101
Gross margin %		3	%		30	%		23	%		15	%		20	%		28	%		15	%		22	%
Adjusted EBITDA1		(3,726	)		(711	)		(1,737	)		(1,466	)		(2,463	)		(1,889	)		(1,838	)		(1,382	)
Net loss		(5,742	)		(2,266	)		(2,504	)		(1,899	)		(3,092	)		(2,362	)		(2,122	)		(2,192	)
Net loss per share - (basic and fully Diluted)	$	(0.45	)	$	(0.18	)	$	(0.20	)	$	(0.15	)	$	(0.25	)	$	(0.19	)	$	(0.20	)	$	(0.22	)
Weighted average common shares outstanding		12,677,167			12,545,076			12,542,950			12,544,960			12,541,080			12,540,757			10,518,178			10,092,375

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

In the second quarter of 2017, our net loss increased to $5.7 million from $3.1 million ($0.45 per common share from $0.25 per common share), compared to the second quarter of 2016. A decrease in gross profit of $1.5 million was principally due to decreased revenues and reduced direct margins due to product mix. Also contributing to the decrease in gross margin was lower absorption of indirect overhead costs as a result of the decrease in revenue. There was also an increase in other finance losses of $1.1 million in the three months ended June 30, 2017 compared to the same period of 2016 due to the fair value adjustments (loss) relating to outstanding warrants ($0.8 million) in the three months ended June 30, 2017, whereas the three months ended June 30, 2016 included a gain of $0.3 million.

In the first quarter of 2017, our net loss remained consistent at $2.3 million ($0.18 per common share) compared to the first quarter of 2016. An increase in gross profit of $1.5 millionwas principally due to increased revenue and improved direct margins due to product mix. Also contributing to the increase in gross margin was greater absorption of indirect overhead costs as a result of the increase in revenue. This was offset by an increase in SG&A expenses related to the increased mark to market expenses as a result of the increase in our share price as well as the absence of the reversal in SG&A expenses of $0.5 million related to the indemnification liability in the first quarter of 2016. Also offsetting the increase in gross profit of $1.5 million was an increase in other finance losses of $0.7 million in the three months ended March 31, 2017 compared to the same period of 2016 due to the fair value adjustments (loss) relating to outstanding warrants ($0.5 million) in the three months ended March 31, 2017 whereas the three months ended March 31, 2016 included a gain of $0.1 million. The three months ended March 31, 2016 also included a fair market value adjustment gain of $0.1 million on unsettled foreign exchange contracts.

In the fourth quarter of 2016, our net loss increased by $0.4 million compared to the fourth quarter of 2015. Our gross profit increased $0.3 million, from $2.0 million (23% of revenues) for the three months ended December 31, 2016, compared to $1.7 million (15% of revenues) for the three months ended December 31, 2015. Gross margin increased due to the absence of the lower margin project to a research organization included in the results of the fourth quarter of 2015. SG&A expenses were $3.1 million, an increase of $0.6 million or 25%. Excluding the impact of stock-based compensation (recovery), SG&A expenses increased $0.1 million due to a provision in our allowance for doubtful accounts of $0.8 million. This was partially offset by timing in our SG&A expenses in the quarter. R&D expenses were $0.7 million, a decrease of $0.2 million or 20% from $1.0 million in the fourth quarter of 2015. R&D activity increased in OnSite Generation business unit due to increased spending, but this was more than offset by increased funding; both were primarily due to the Power-to-Gas demonstration project in Denmark, announced in February 2016.

Second Quarter 2017 Management’s Discussion and Analysis Page 13

Hydrogenics Corporation

In the third quarter of 2016, our net loss decreased by $0.3 million ($0.07 per common share) compared to the third quarter of 2015. This increase primarily reflects i) a decrease in other finance losses of $0.4 million; ii) an increase in adjusted EBITDA lossdue to a decrease in gross profit of $1.1 million; partially offset by iii) a decrease in net R&D expenses of $0.8 million; iv) a decrease in SG&A expenses of $0.2 million (excluding compensation indexed to our share price); and v) a decrease related to the reversal of previously charged compensation expense of $0.2 million relating to our PSUs, partially offset by an increase in compensation indexed to our share price of $0.1 million.

5       Outlook

Our strategy is to profitably grow hydrogen energy solutions for diverse applications globally. We continue to leverage the milestones and reference sites established in 2016 and prior years to gain additional traction in the following target markets and applications:

Motive Power – We achieved a key milestone in the last quarter of 2016 and the first quarter of 2017 with delivery of the first pre-commercial units for the Company’s ten-year commuter train propulsion system contract with Alstom Transport, which at €50 million is the largest order in our history. This order highlights the commercial maturity and strong competitive positioning of our fuel cell technology. It is expected that commercial production will begin in late 2017 for these units. In 2017, Alstom Transport successfully completed test trials of the trains and received certification from the European inspection authority for the trains to move onto public rail in Europe.  Interest from around the globe has been high in the Alstom product which allows electrified rail transport without the costly infrastructure addition of overhead catenary wires.

Our China strategy has also continued to show results in 2017 with significant orders and revenue received from several of our key integrators (companies that take our fuel cell modules and incorporate it into buses and other vehicles provided by original equipment manufacturers). Our backlog and sales pipeline is strong in this area with further orders expected in future quarters. We also anticipate further opportunity for our heavy duty fuel cell modules in other propulsion applications in the near future including the signing of license agreements with multiple partners.

Stationary Power – We continue to work with our partner Kolon in South Korea to evaluate future growth opportunities in stationary power applications in Korea. The success of the pilot plant provides the potential opportunity to scale into multiple multi-MW installations throughout South Korea. The pilot plant has been moved to a new location and we are currently in ongoing discussions with Kolon and power plant operators.

Energy Storage – In 2016 we commissioned our second Power-to-Gas facility with E.ON. This milestone firmly establishes the commercial scale building block for many multi MW facilities in the future. We currently have a pipeline of approximately 70 MWs of qualified leads worth in excess of $70 million. Conversion of these qualified leads into sales orders is dependent on completion of competitive process, funding, and policy evolution in the European Union. Early in 2017, we announced additional orders for Power-to-Gas plants in Europe and continue to see great interest in this market.  We are also now nearing completion of the construction of our 2MW Power-to-Gas project in the Greater Toronto Area in partnership with Enbridge.  This unit will begin operation in the third quarter of this year and discussions are already underway to expand the capability to 5MW.  

Second Quarter 2017 Management’s Discussion and Analysis Page 14

Hydrogenics Corporation

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

Outlook Summary

The timing and full realization of the opportunities above, under the current market environment, cannot be assured or specifically established. It is, however, important to understand the magnitude of these opportunities and the transformative impact that any one of them can have on the business going forward.

Over the past few years, we have taken significant steps to reduce operating and product costs, streamline our operations and strengthen our consolidated financial position. While we may see volatility in our costs over the short-term, we expect our trend of improved cost efficiency will continue over the long term. At June 30, 2017, our order backlog was $152.1 million (June 30, 2016 - $102.9 million) spread across numerous geographical regions, of which approximately $65 million is expected to be recorded as revenue in the next 12 months.

As a global company, we are subject to the risks arising from adverse changes in global economic and political conditions. Political conditions such as government commitments and policies towards environmental protection and renewable energy may change over time. 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 2018 or beyond.

Second Quarter 2017 Management’s Discussion and Analysis Page 15

Hydrogenics Corporation

6       Liquidity

Cash Used in Operating Activities

	Three months ended June 30									Six months ended June 30
		2017			2016			$ Change			2017			2016			$ Change
Net loss	$	(5,742	)	$	(3,092	)	$	(2,650	)	$	(8,008	)	$	(5,454	)	$	(2,554	)
(Increase) decrease in restricted cash		(912	)		(223	)		(689	)		(1,002	)		7			(1,009	)
Changes in non-cash working capital		1,865			(2,900	)		4,765			2,148			(5,401	)		7,549
Other items not affecting cash		1,950			273			1,677			3,394			856			2,538
Cash used in operating activities	$	(2,839	)	$	(5,942	)	$	(3,103	)	$	(3,468	)	$	(9,992	)	$	6,524

Cash used in operating activities during the second quarter of 2017 improved by $3.1 million compared to the second quarter of 2016 primarily as a result of improved working capital position, as well as an improvement due to recent product deliveries as well as deposits received for expected product deliveries.

We anticipate consuming between $2.0 million and $4.0 million of cash in 2017 to fund our anticipated net losses, non-cash working capital requirements and capital expenditures. In the event we are successful in securing orders in excess of our base case revenue outlook, our cash requirements may increase.

Cash Used in Investing Activities

	Three months ended June 30									Six months ended June 30
		2017			2016			$ Change			2017			2016			$ Change
Purchases of property plant and equipment	$	(519	)	$	(276	)	$	(243	)	$	(2,075	)	$	(904	)	$	(1,171	)
Receipt of government funding		1,492			30			1,462			1,851			215			1,636
Proceeds from disposals of property, plant and equipment		-			-			-			1,035			-			1,035
Investment in joint venture		-			-			-			(93	)		-			(93	)
Purchase of intangibles		(1	)		(5	)		4			(1	)		(47	)		46
Cash provided by (used in) investing activities	$	972		$	(251	)	$	(579	)	$	717		$	(736	)	$	1,453

Cash provided by (used in) investing activities during the three months ended June 30, 2017 was $1.0 million provided compared to $0.3 million used for the three months ended June 30, 2016, as a result of the receipt of government funding related to the 2MW Power-to-Gas storage unit project.

Second Quarter 2017 Management’s Discussion and Analysis Page 16

Hydrogenics Corporation

Cash Provided By Financing Activities

	Three months ended June 30									Six months ended June 30
		2017			2016			$ Change			2017			2016			$ Change
Common shares issued and stock options exercised, net of issuance costs	$	19,770			-		$	19,770		$	19,770			-		$	19,770
Principal repayment of long-term debt		(244	)		-			(244	)		(678	)		-			(678	)
Repayment of repayable government contributions		(56	)	$	(55	)		(2	)		(112	)	$	(109	)		(4	)
Proceeds of borrowings		-			-			-			190			-			190
Repayment of operating borrowings		(1,449	)		-			(1,448	)		-			(1,076	)		1,076
Cash provided by (used in) financing activities	$	18,021		$	(55	)	$	18,076		$	19,170		$	(1,185	)	$	20,355

Cash provided by financing activities for the three months ended June 30, 2017 increased by $18.1 million.

On April 28, 2017, the Company and Fuzhou Bonded Zone Hejili Equity Investment Limited Partnership (“Hejili”) entered into a subscription agreement to issue 2,682,742 common shares of Hydrogenics to Hejili on a private placement basis, for gross proceeds to Hydrogenics of $21.0 million or approximately $7.83 per common share. The subscription price represented a 10% premium to the 20 day volume-weighted average trading price of the Company’s common shares on the NASDAQ for the period ending April 27, 2017. The transaction closed on June 27, 2017. The Company received net proceeds of $19.8 million after underwriting fees and expenses. Subsequent to closing of the private placement, Hejili’s interest in Hydrogenics is approximately 17.6% of total issued shares.

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

In the second quarter of 2017, the Company had an decrease of operating borrowings outstanding of $1.4 million. In the three months ended June 30, 2017, the Company repaid $0.2 million of scheduled principal repayments related to the loan with Export Development Canada (“EDC”) which is a five year facility of $9.0 million.

Second Quarter 2017 Management’s Discussion and Analysis Page 17

Hydrogenics Corporation

Contractual Obligations

		Total		Less than 1 year		1-3 years		4-5 years		After 5 years
Long-term debt1, including current portion	$	16,281	$	3,632	$	7,418	$	5,231	$	-
Operating borrowings		2,283		2,283		-		-		-
Operating leases		2,841		1,068		1,239		534		-
Purchase obligations		12,742		12,700		42		-		-
Repayable government contributions		53		53		-		-		-
Total contractual obligations2, 3	$	34,200	$	19,736	$	8,699	$	5,765	$	-

1.	Represents the undiscounted amounts payable as disclosed below under “Other Loan Facilities”.
2.	The table excludes the DSU liability of $1,180 included in our current liabilities which relate to units that are only settled once a director resigns as a director.
3.	The table excludes the warrant liability of $1,573 included in our financial liabilities.

Credit and Loan Facilities

At June 30, 2017, the Company’s subsidiary in Belgium (the “Borrower”) had a joint credit and operating line facility of €10.7 million, which renews annually in April. Under this facility, the Borrower may borrow up to a maximum of 75% of the value of awarded sales contracts, approved by the Belgian financial institution, to a maximum of €0.5 million; and may also borrow up to €1.5 million for general business purposes, provided sufficient limit exists under the overall facility limit of €10,700. Also included within the facility, is an available line of credit for fixed-term advances ranging from seven days to 30 days for the specific financing of working capital on a significant project in Belgium up to €2.2 million; and ii) an available line of credit of €1.5 million dedicated as a bank guarantee loan for the Wind to Gas Sudermarsch project in Germany. Of the €10.7 million facility, €6.0 million or approximately $6.9 million was drawn as standby letters of credit and bank guarantees and €2.0 million or approximately $2.3 million was drawn as an operating line. At June 30, 2017, the Company had availability of €2.7 million or $3.1 million (December 31, 2016 - $4.7 million) under this facility for use as letters of credit and bank guarantees.

At June 30, 2017, the Company also had a Canadian credit facility of $2.0 million, with no expiration date for use only as letters of credit and bank guarantees. At June 30, 2017, $nil was drawn as standby letters of credit and bank guarantees. At June 30, 2017, the Company had $2.0 million (December 31, 2016 - $2.3 million) available under this facility.

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

On September 28, 2011, we entered into a loan agreement with the Province of Ontario’s Ministry of Economic Development, Strategic Jobs and Investment Fund for funding up to C$6.0 million. Eligible costs had to be incurred between October 1, 2010 and September 30, 2015. After this five-year period, the loan bears interest at a rate of 3.67% and requires annual repayment at a rate of 20% per year of the outstanding balance for the five years subsequent to the sixth anniversary of the first disbursement, which was November 30, 2011. There is no availability remaining under this facility at June 30, 2017.

The loan is collateralized by a general security agreement covering assets of Hydrogenics Corporation. Additionally, the Corporation is required to maintain a minimum balance of cash in Canadian dollars in a Canadian financial institution at all times. We were in compliance with this covenant at June 30, 2017.

Second Quarter 2017 Management’s Discussion and Analysis Page 18

Hydrogenics Corporation

In the fourth quarter of 2016, the Company entered into a loan agreement with EDC for a five-year facility of $9.0 million. The loan is structured as a five-year term loan with quarterly interest payments calculated at an annual interest rate of U.S. prime plus 10%, declining to U.S. prime plus 7% (or 5%) if certain annual earnings before interest, taxes, depreciation and amortization thresholds are met. The loan is secured by a second charge over the assets located within Canada. Commencing March 31, 2017, the loan principal is subject to four quarterly repayments of $0.25 million followed by 16 quarterly repayments of $0.5 million. There is an option to prepay a portion of, or the entire loan at any time.

7       Capital Resources

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

		June 30, 2017		December 31, 2016
Shareholders’ equity	$	23,432	$	10,382
Operating borrowings		2,283		2,111
Long term debt and repayable government contributions		11,904		12,043
Total		37,619		24,536
Less cash and cash equivalents and restricted cash		29,224		11,278
Capital employed	$	8,395	$	13,258

The Company’s financial objective when managing capital is to make sure that we have the cash, debt capacity and financial flexibility to fund our ongoing business objectives including operating activities, investments and growth in order to provide returns for our shareholders and other stakeholders.

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

8       Off-Balance Sheet Arrangements

We do not have any material obligations under forward foreign exchange contracts, guarantee contracts, retained or contingent interests in transferred assets, outstanding derivative instruments or non-consolidated variable interests. Our forward foreign exchange contracts have been accounted for as financial instruments in our consolidated financial statements.

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

Second Quarter 2017 Management’s Discussion and Analysis Page 19

Hydrogenics Corporation

9       Related Party Transactions

In the normal course of operations, we subcontract certain manufacturing functions to a company owned by a family member of a senior officer, director, and shareholder of the Company. During the three and six months ended June 30, 2017, Hydrogenics made purchases of $0.1 million and $0.3 million (2016 - less than $0.1 million and less than $0.2 million) from this related company. At June 30, 2017, the Company had an accounts payable balance due to this related party of less than $0.1 million (2016 - less than $0.1 million). We believe that transactions with this company are consistent with those we have with unrelated third parties.

The Company holds an equity investment in the joint venture 2562961 Ontario Ltd., related to the energy storage facility project with Enbridge Gas Distribution. During the three and six months ended June 30, 2017, the Company had sales to the joint venture of $2.0 million and $2.0 million respectively (2016 - $nil and $nil respectively) and at the end of June 30, 2017, the Company had a receivable of $0.3 million (2016 - $nil) owing from the joint venture.

The Company holds an equity investment in the joint venture Kolon Hydrogenics. During the three and six months ended June 30, 2017, the Company had sales to the joint venture of $nil and $nil, respectively (2016 - $nil and $nil, respectively), and at the end of June 30, 2017 the Company had a receivable of $nil (2016 - $0.4 million) owing from the joint venture in accrued accounts receivable.

10       Critical Accounting Estimates

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

The critical judgments, estimates and assumptions applied in the preparation of Company’s financial information are reflected in Note 4 of the Company’s 2016 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, 2017 are disclosed in Note 3 of our condensed consolidated interim financial statements for the three and six months ended June 30, 2017.

12       Disclosure Controls

We have established disclosure controls and procedures that are designed to ensure that the information required to be disclosed by the Company in the reports that it files or submits under Canadian and US securities legislation is recorded, processed, summarized, and reported within the time periods specified in such rules and forms and that such information is accumulated and communicated to management, including our principal executive officer and principal financial officer (who are our CEO (“Chief Executive Officer”) and CFO (“Chief Financial Officer”), respectively) as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met.

Second Quarter 2017 Management’s Discussion and Analysis Page 20

Hydrogenics Corporation

Our management, including our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation and as described below under "Internal Control over Financial Reporting", our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2017.

13       Internal Control over Financial Reporting

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

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

Management assessed the effectiveness of the Company’s internal control over financial reporting at June 30, 2017, based on the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as published in 2013. Based on this evaluation, management believes, at June 30, 2017, the Corporation’s internal control over financial reporting is effective. Also, management determined there were no material weaknesses in the Corporation’s internal control over financial reporting at June 30, 2017.

The effectiveness of the Company's internal control over financial reporting as of December 31, 2016, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which is included in the Company’s audited financial statements.

14       Reconciliation of Non-IFRS Measures

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

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization

The Company believes Adjusted EBITDA assists investors in comparing a company’s performance on a consistent basis excluding depreciation and amortization, stock-based compensation, including both share settled PSUs and stock options, equity settled restricted share units (“RSUs”) and cash settled deferred share units (“DSUs”), which are non-cash in nature and can vary significantly. We believe that removing these expenses is a better measurement of operational performance. Investors should be cautioned that Adjusted EBITDA, as reported by us, may not be comparable in all instances to Adjusted EBITDA, as reported by other companies.

Second Quarter 2017 Management’s Discussion and Analysis Page 21

Hydrogenics Corporation

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

	Three months ended June 30						Six months ended June 30,
		2017			2016			2017			2016
Net loss	$	(5,742	)	$	(3,092	)	$	(8,008	)	$	(5,454	)
Finance loss		1,167			360			2,107			562
Amortization and depreciation		202			184			401			356
DSUs expense (recovery)		459			(76	)		724			(106	)
Stock-based compensation expense (including PSUs & RSUs)		188			161			340			290
Adjusted EBITDA	$	(3,726	)	$	(2,463	)	$	(4,436	)	$	(4,352	)

Cash Operating Costs

We report cash operating costs because management feels they are a key measurement of the normal operating costs required to operate the ongoing business units of the Company. Cash operating costs are regularly reported to the chief operating decision maker and correspond to the definition used in our historical quarterly discussions. Investors should be cautioned that cash operating costs as reported by us may not be comparable in all instances to cash operating costs as reported by other companies.

The following table provides a reconciliation of cash operating costs with total operating expenses consisting of SG&A and R&D expenses:

	Three months ended June 30,						Six months ended June 30,
		2017			2016			2017			2016
Selling, general and administrative expenses	$	3,333		$	3,106		$	6,334		$	5,354
Research and product development expenses		1,492			1,445			2,497			2,568
Total operating costs	$	4,825		$	4,551		$	8,831		$	7,922
Less: Amortization and depreciation		(107	)		(121	)		(213	)		(200	)
Less: DSUs recovery (expense)		(459	)		76			(724	)		106
Less: Stock-based compensation expense (including PSUs & RSUs)		(188	)		(161	)		(340	)		(290	)
Less: Loss on disposal of assets		(3	)					(114	)
Cash operating costs	$	4,068		$	4,345		$	7,440		$	7,538

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Hydrogenics Corporation

15        Risk Factors

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

Our business entails risks and uncertainties that affect our outlook and eventual results of our business and commercialization plans. The primary risks relate to meeting our product development and commercialization milestones, which require that our products exhibit the functionality, cost and performance required to be commercially viable against competing technologies and that we have sufficient access to capital to fund these activities. There is also a risk that key markets for certain of our products may never develop, or that market acceptance might take longer to develop than anticipated – in particular for applications such as energy storage which require leadership at a government and regulatory level.

A summary of our identified risks and uncertainties are as follows:

Macroeconomic and Geopolitical

•  The uncertain and unpredictable condition of the global economy could have a negative impact on our business, results of operations and consolidated financial condition, or our ability to accurately forecast our results, and it may cause a number of the risks that we currently face to increase in likelihood, magnitude and duration.

•  Certain external factors may affect the value of goodwill, which may require us to recognize an impairment charge.

•  Significant markets for fuel cell and other hydrogen energy products may never develop or may develop more slowly than we anticipate. This would significantly harm our revenues and may cause us to be unable to recover the losses we have incurred and expect to incur in the development of our products.

•  Changes in government policies and regulations could hurt the market for our products.

•  Lack of new government policies and regulations for the energy storage technologies could hurt the development of our hydrogen energy storage products.   

•  Development of uniform codes and standards for hydrogen powered vehicles and related hydrogen refueling infrastructure may not develop in a timely fashion, if at all. 

•  We currently face and will continue to face significant competition from other developers and manufacturers of fuel cell power products and hydrogen generation systems. If we are unable to compete successfully, we could experience a loss of market share, reduced gross margins for our existing products and a failure to achieve acceptance of our proposed products.

•  We face competition for fuel cell power products from developers and manufacturers of traditional technologies and other alternative technologies.

•  Rapid technological advances or the adoption of new codes and standards could impair our ability to deliver our products in a timely manner and, as a result, our revenues would suffer.

•  Our involvement in intellectual property litigation could negatively affect our business.

•  If at any time we are classified as a passive foreign investment company under United State tax laws, our US shareholders may be subject to adverse tax consequences.

•  If we fail to maintain the requirements for continued listing on NASDAQ, our common shares could be delisted from trading on NASDAQ, which would materially adversely affect the liquidity of our common shares, the price of our common shares, and our ability to raise additional capital. Future sales of common shares by our principal shareholders could cause our share price to fall and reduce the value of a shareholder’s investment.

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Hydrogenics Corporation

•  Our articles of incorporation authorize us to issue an unlimited number of common and preferred shares. Significant issuances of common or preferred shares could dilute the share ownership of our shareholders, deter or delay a takeover of us that our shareholders may consider beneficial or depress the trading price of our common shares.

•  US investors may not be able to enforce US civil liability judgments against us or our directors and officers.

•  Our share price is volatile and we may continue to experience significant share price and volume fluctuations. 

Operating

•  We may not be able to implement our business strategy and the price of our common shares may decline.

•  Our quarterly operating results are likely to fluctuate significantly and may fail to meet the expectations of securities analysts and investors and may cause the price of our common shares to decline.

•  We currently depend on a relatively limited number of customers for a majority of our revenues and a decrease in revenue from these customers could materially adversely affect our business, consolidated financial condition and results of operations.

•  Our insurance may not be sufficient.

•  Hydrogen may not be readily available on a cost-effective basis, in which case our fuel cell products may be unable to compete with existing power sources and our revenues and results of operations would be materially adversely affected.

•  We could be liable for environmental damages resulting from our research, development or manufacturing operations.

•  Our strategy for the sale of fuel cell power products depends on developing partnerships with OEMs, governments, systems integrators, suppliers and other market channel partners who will incorporate our products into theirs.

•  We are dependent on third party suppliers for key materials and components for our products. If these suppliers become unable or unwilling to provide us with sufficient materials and components on a timely and cost-effective basis, we may be unable to manufacture our products cost-effectively or at all, and our revenues and gross margins would suffer.

•  We may not be able to manage successfully the anticipated expansion of our operations.

•  If we do not properly manage foreign sales and operations, our business could suffer.

•  We will need to recruit, train and retain key management and other qualified personnel to successfully expand our business.

•  We may acquire technologies or companies in the future, and these acquisitions could disrupt our business and dilute our shareholders’ interests.

•  We have no experience manufacturing our fuel cell products on a large scale basis and if we do not develop adequate manufacturing processes and capabilities to do so in a timely manner, we will be unable to achieve our growth and profitability objectives.

•  We may never complete the development of commercially viable fuel cell power products and/or commercially viable hydrogen generation systems for new hydrogen energy applications, and if we fail to do so, we will not be able to meet our business and growth objectives.

Second Quarter 2017 Management’s Discussion and Analysis Page 24

Hydrogenics Corporation

•  We must continue to lower the cost of our fuel cell and hydrogen generation products and demonstrate their reliability or consumers will be unlikely to purchase our products and we will therefore not generate sufficient revenues to achieve and sustain profitability.

•  Any failures or delays in field tests of our products could negatively affect our customer relationships and increase our manufacturing costs.

•  The components of our products may contain defects or errors that could negatively affect our customer relationships and increase our development, service and warranty costs.

•  We depend on intellectual property and our failure to protect that intellectual property could adversely affect our future growth and success.

•  Our products use flammable fuels that are inherently dangerous substances and could subject us to product liabilities. 

Liquidity

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

Foreign Currency Exchange

•  Our operating results may be impacted by currency fluctuation.

16       Outstanding Share Data

The authorized share capital of the Company consists of an unlimited number of common shares, with no par value, and an unlimited number of preferred shares in series, with no par value. We had 15,232,905 common shares outstanding at June 30, 2017.

	2017				2016
		Number		Amount		Number		Amount
Balance at January 1		12,544,960	$	365,923		12,540,757	$	365,824
Issuance of common shares		2,682,742		19,765		-		-
Issuance of common shares on vesting of performance share units		4,203		96		4,203		98
Stock options exercised		1,000		9		-		-
At June 30,		15,232,905	$	385,793		12,544,960	$	365,922

At June 30, 2017, there were 765,573 stock options, 191,366 PSUs, and 133,184 RSUs outstanding to purchase or vest into our common shares. If these securities are exercised, our shareholders could incur dilution.

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Hydrogenics Corporation

17       Forward Looking Statements

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

These risks, uncertainties and factors include, but are not limited to: our inability to execute our business plan, or to grow our business; inability to address a slow return to economic growth, and its impact on our business, results of operations and consolidated financial condition; our limited operating history; inability to implement our business strategy; fluctuations in our quarterly results; failure to maintain our customer base that generates the majority of our revenues; currency fluctuations; failure to maintain sufficient insurance coverage; changes in value of our goodwill; failure of a significant market to develop for our products; failure of hydrogen being readily available on a cost-effective basis; changes in government policies and regulations; lack of new government policies and regulations for the energy storage technologies; failure of uniform codes and standards for hydrogen fueled vehicles and related infrastructure to develop; liability for environmental damages resulting from our research, development or manufacturing operations; failure to compete with other developers and manufacturers of products in our industry; failure to compete with developers and manufacturers of traditional and alternative technologies; failure to develop partnerships with original equipment manufacturers, governments, systems integrators and other third parties; inability to obtain sufficient materials and components for our products from suppliers; failure to manage expansion of our operations; failure to manage foreign sales and operations; failure to recruit, train and retain key management personnel; inability to integrate acquisitions; failure to develop adequate manufacturing processes and capabilities; failure to complete the development of commercially viable products; failure to produce cost-competitive products; failure or delay in field testing of our products; failure to produce products free of defects or errors; inability to adapt to technological advances or new codes and standards; failure to protect our intellectual property; our involvement in intellectual property litigation; exposure to product liability claims; failure to meet rules regarding passive foreign investment companies; actions of our significant and principal shareholders; 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 2017 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.

Second Quarter 2017 Management’s Discussion and Analysis Page 26