f6k_073014.htm

MISSISSAUGA, Ontario, July 30, 2014 (GLOBE NEWSWIRE) -- Hydrogenics Corporation (Nasdaq:HYGS) (TSX:HYG) ("Hydrogenics" or "the Company"), a leading developer and manufacturer of hydrogen generation and hydrogen-based power modules, today reported second quarter 2014 financial results. Results are reported in US dollars and are prepared in accordance with International Financial Reporting Standards (IFRS).

"The evidence is building to support our growth strategy in energy storage and hydrogen power generation. Our recent announcement for a 2 megawatt Power-to-Gas installation in Ontario, Canada and our new joint venture in Korea represent significant increases in scale," said Daryl Wilson, President and Chief Executive Officer. "We are beginning to see momentum towards even larger projects where Hydrogenics' technology is uniquely positioned to lead. Our backlog has grown to $67.1 million, and we have visibility on a number of sizeable opportunities which could bring the backlog to well over $100 million within the next twelve months.

"Based on our current level of booked business and projected delivery timeframes, we forecast achieving positive Adjusted EBITDA² and over $50 million in revenue for the full 2014 fiscal year. The second half of 2014 – and, in particular, the fourth quarter – will show strong top line growth due to our current expected shipments and new business development initiatives. The market for energy storage applications is evolving at the pace anticipated, and we see additional contracts being announced in the coming quarters. Overall, Hydrogenics is very well positioned to meet the increasing demand for our unique hydrogen-based product portfolio going forward."

Recent Highlights (for the Quarter Ended June 30, 2014, unless otherwise noted)

Highlights for the Six months Ended June 30, 2014 (compared to the six months ended June 30, 2013, unless otherwise noted)

Hydrogenics will hold a conference call at 10:00 a.m. EDT today, July 30, 2014 to review the second quarter results. The telephone number for the conference call is (877) 307-1373 or, for international callers, (678) 224-7873. A live webcast of the call will also be available on the company's website, www.hydrogenics.com.

An archived copy of the conference call and webcast will be available on the company's website, www.hydrogenics.com, approximately six hours following the call.

Hydrogenics Corporation is a world leader in engineering and building the technologies required to enable the acceleration of a global power shift. Headquartered in Mississauga, Ontario, Hydrogenics provides hydrogen generation, energy storage and hydrogen power modules to its customers and partners around the world. Hydrogenics has manufacturing sites in Germany, Belgium and Canada and service centres in Russia, Europe, the US and Canada.

This release contains forward-looking statements within the meaning of the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995, and under applicable Canadian securities law. These statements are based on management's current expectations and actual results may differ from these forward-looking statements due to numerous factors, including: our inability to increase our revenues or raise additional funding to continue operations, 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; 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; 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. Readers should not place undue reliance on Hydrogenics' forward-looking statements. Investors are encouraged to review the section captioned "Risk Factors" in Hydrogenics' regulatory filings with the Canadian securities regulatory authorities and the US Securities and Exchange Commission for a more complete discussion of factors that could affect Hydrogenics' future performance. Furthermore, the forward-looking statements contained herein are made as of the date of this release, and Hydrogenics undertakes no obligations to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this release, unless otherwise required by law. The forward-looking statements contained in this release are expressly qualified by this.

Hydrogenics Corporation

Second Quarter 2014 Management’s Discussion and Analysis of

Financial Condition and Results of Operations

Hydrogenics Corporation

This Management’s Discussion and Analysis (“MD&A”) comments on the financial condition and operations of Hydrogenics Corporation (“Hydrogenics” or the “Corporation”), for the three and six months ended June 30, 2014 and updates our MD&A for fiscal 2013. The information contained herein should be read in conjunction with the Consolidated Financial Statements and Auditor’s Report for fiscal 2013 and the Consolidated Interim Financial Statements for the three and six months ended June 30, 2014.

The Corporation prepares its consolidated interim financial statements in accordance with International Financial Reporting Standards (“IFRS”) as set out in the Handbook of The Canadian Institute of Chartered Accountants (“CICA Handbook”). All financial information contained in this MD&A and in the audited consolidated interim financial statements has been prepared in accordance with International Financial Reporting Standards (“IFRS”), except for certain “Non-IFRS Measures” in Section 9 of this MD&A.

This MD&A is dated July 30, 2014 and all amounts are denominated in US dollars, unless otherwise noted.

Additional information about Hydrogenics, including our 2013 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 19 of this MD&A.

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

For additional information, please use www.hydrogenics.com/investor.

Second Quarter 2014 Management’s Discussion and Analysis

Page 2

Hydrogenics Corporation

Management’s Discussion and Analysis – Contents
Section		Page
1	Operating Results A detailed discussion of our operating results for the three and six months ended June 30, 2014	4
2	Financial Condition A discussion of the significant changes in our consolidated interim balance sheets	11
3	Summary of Quarterly Results A summary view of our quarterly financial performance	12
4	Liquidity and Capital Resources A discussion of our cash flow, liquidity, credit facilities and other disclosures	13
5	Critical Accounting Policies and Estimates A description of our accounting estimates that are critical to determining our financial results and changes to accounting policies	16
6	Recent Accounting Pronouncements A discussion of IFRS developments that have, will or might affect the Corporation	16
7	Outlook The outlook for our business	16
8	Internal Control Over Financial Reporting A statement of responsibilities regarding internal controls over financial reporting	17
9	Reconciliation and Definition of Non-IFRS Measures A description, calculation and reconciliation of certain measures used by management	17
10	Risk Factors and Forward-looking Statements Risk factors and caution regarding forward-looking statements	19

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

1	Operating Results

A detailed discussion of our operating results for the three and six months ended June 30, 2014

All references to per share amounts pertain to net loss per share and are presented on a consolidated basis. Certain of the prior year’s figures have been revised, please refer to Note 2 of the Consolidated Financial Statements for the period ended June 30, 2014 for further information.

Hydrogenics Corporation

Summary Financial Analysis

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

	Three months ended June 30									Six months ended June 30
	2014			2013			% Favourable (Unfavourable)			2014			2013			% Favourable (Unfavourable)
				Revised									Revised
Consolidated Interim Statements of Operations and Comprehensive Loss
OnSite Generation	$	7,514		$	4,844			55	%	$	13,477		$	11,310			19	%
Power Systems		3,209			4,942			(35	%)		5,305			10,867			(51	%)
Revenues		10,723			9,786			10	%		18,782			22,177			(15	%)

Gross profit		3,240			2,750			18	%		5,158			6,626			(22	%)
Percentage of Revenues		30	%		28	%					27	%		30	%

Selling, General and Administrative Expenses		1,979			4,875			59	%		6,546			8,497			23	%
Research and Product Development Expenses		915			926			1	%		1,831			1,786			(3	%)

Gain (Loss) from Operations		346			(3,051	)		111	%		(3,219	)		(3,657	)		12	%
Net Loss		(125	)		(4,178	)		97	%		(3,873	)		(5,317	)		27	%
Net Loss Per Share		(0.01	)		(0.49	)		98	%		(0.41	)		(0.63	)		35	%

Consolidated Interim Statements of Cash Flows
Cash used in Operating Activities		(4,802	)		(773	)		(521	%)		(8,617	)		(6,932	)		(24	%)

Other Measures
Cash Operating Costs1		3,611			3,794			(5	%)		7,338			7,502			(2	%)
Adjusted EBITDA1		(288	)		(870	)		67	%		(2,016	)		(702	)		187	%

__________________

1 Cash operating costs and Adjusted EBITDA are Non-IFRS measures. Please refer to Section 9 of this MD&A.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

	Three months ended June 30							Six months ended June 30
	2014		2013		% Favourable (Unfavourable)			2014		2013		% Favourable (Unfavourable)
			Revised							Revised
Selected Additional Information
Total Assets		45,082		39,654		14	%		45,082		39,654		14	%
Total Non-Current Liabilities (excluding Deferred Revenue)		5,069		3,043		(67	%)		5,069		3,043		(67	%)

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

Highlights for the three months ended June 30, 2014 compared to the three months ended June 30, 2013

Revenues increased 10% or $0.9 million, reflecting a significant increase in revenues from our OnSite Generation revenues due to growth, partially offset by a decrease in Power Systems revenue. The decrease in Power Systems revenue results primarily from the timing of orders from Commscope in Q1 and Q2 2013 with no comparable orders during the same period in 2014. During the second quarter of 2014, the OnSite Generation and the Power Systems business segments received new orders totaling $5.5 million (June 30, 2013 - $3.4 million) and $13.6 million (June 30, 2013 - $1.3 million), respectively. The increase in orders received in our Power Systems business segment is primarily the result of orders received from the signing of a definitive agreement to create a joint venture with Kolon Water & Energy, part of a leading conglomerate in South Korea to capitalize on renewable energy opportunities. Included within the backlog of $67.1 million at June 30, 2014 is $40.1 million which is expected to be recorded as revenue in the following twelve months.

											Expected Revenue Recognition
	March 31, 2014 backlog		Orders Received		FX		Orders Delivered/ Revenue Recognized		June 30, 2014 backlog		During next 12 mo		Beyond next 12 mo
OnSite Generation		24.5		5.6		0.0		7.5		22.6		22.1		0.5
Power Systems		34.0		13.6		0.1		3.2		44.5		18.0		26.5
Total		58.5		19.2		0.1		10.7		67.1		40.1		27.0

Cash operating costs decreased 5% or $0.2 to $3.6 million from $3.8 million for the comparable period in 2013, with costs as a percent of revenue falling 5%. The decrease in costs results from a decrease in marketing expenses and reduced compensation costs as compared to 2013 due to the increased business performance in 2013.

·	Adjusted EBITDA loss decreased 67% to $0.3 million from $0.9 million, against the comparable period in 2013. The improvement reflects an increase in gross margin of $1.5 million due to increased revenues in the three months ended June 30, 2014.

Net loss decreased to a loss of $0.1 million from a loss of $4.2 million or 111%, against the comparable period in 2013. The change reflects (i) the $0.6 million decrease in Adjusted EBITDA loss described above; (ii) the lack of a comparable $1.2 million of finance loss due to the change in the fair value of warrants attributable to the increase in our share price in 2013, as well as (iii) a gain of $1.0 million in 2014 relating to stock-based compensation expenses as a result of the decrease in our share price as compared to a loss of $1.8 in the comparable period in 2013 as a result of the increase in our share price in that period; partially offset by (iv) $0.3 million of additional foreign currency losses and interest expense.

Cash and cash equivalents and restricted cash were $18.9 million at June 30, 2014, a $5.1 million increase from December 31, 2013 primarily reflecting: (i) $13.7 million of proceeds from the issuance of common shares and exercise of options; and (ii) $0.9 million of proceeds from the loan agreement with the Ministry of Ontario; offset by (iIi) $8.6 million of cash used by operating activities; and (iv) $0.5 million of capital expenditures.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

Highlights for the six months ended June 30, 2014 compared to the six months ended June 30, 2013

Revenues decreased $3.4 million, or 15%, reflecting the timing of orders from Commscope in Q1 and Q2 2013 with no comparable orders during the same period in 2014. The increase in revenues from our OnSite Generation business segment results primarily from delays encountered in the corresponding period in 2013 in the execution of anticipated sales orders for the period and therefore delays in project commencement and completion. During the first six months of 2014, the OnSite Generation and the Power Systems business segments received orders totaling $13.7 million (June 30, 2013 - $5.6 million) and $15.4 million (June 30, 2013 - $6.4 million), respectively. The increase in orders received in our Power Systems business segment is primarily the result of orders received from the signing of a definitive agreement to create a joint venture with Kolon Water & Energy, part of a leading conglomerate in South Korea to capitalize on renewable energy opportunities. Included within the Power Systems new orders in the six months ended June 30, 2014, is $7.6 million of long term backlog which is not expected to be recognized as revenue in the following twelve months. Included within the backlog of $67.1 million at June 30, 2014 is $40.1 million which is expected to be recorded as revenue in the following twelve months.

												Expected Revenue Recognition
	Dec. 31, 2013 backlog		Orders Received		FX			Orders Delivered/ Revenue Recognized		June 30, 2014 backlog		During next 12 mo		Beyond next 12 mo
OnSite Generation		22.5		13.7		(0.1	)		13.5		22.6		22.1		0.5
Power Systems		34.5		15.4		(0.1	)		5.3		44.5		18.0		26.5
Total		57.0		29.1		(0.2	)		18.8		67.1		40.1		27.0

Cash operating costs were $7.3 million, a reduction of $0.2 million for the comparable period in 2013, with costs as a percent of revenue rising 5%. The decrease is primarily attributable to a $0.2 million decrease in marketing expenses and reduced compensation costs as compared to 2013 due to the increased business performance in 2013.

·	Adjusted EBITDA loss declined to $2.0 million from $0.7 million. The decline reflects a reduction in gross margin of $1.5 million due to reduced revenues, offset by an decrease in selling, general and administrative expenses of $0.2 million as noted above in cash operating costs.

Net loss improved 27% to a loss of $3.9 million from a loss of $5.3 million for the comparable period in 2013. The improvement reflects (i) the decrease in Adjusted EBITDA loss of $1.3 million noted above; (ii) a $1.0 million decrease in finance loss primarily attributable to the change in the fair value of warrants attributable to the increase in our share price in 2013, whereas at June 30, 2014 there are no outstanding warrants remaining and no significant finance losses recorded in the six month period ended June 30, 2014; as well as (iii) a reduction in stock-based compensation in the six months ended June 30, 2014 as compared to 2013 as a result of the decrease of our share price.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

Business Segment Review

We report our results in two business segments (OnSite Generation and Power Systems). Corporate and Other is the provision of corporate services and administrative support. These segments are differentiated by the products developed and end-customer markets. Our reporting structure reflects how we manage our business and how we classify our operations for planning and measuring performance.

OnSite Generation

Summary Financial Analysis

(in thousands of US dollars)

	Three months ended June 30									Six months ended June 30
	2014			2013			% Favourable (Unfavourable)			2014			2013			% Favourable (Unfavourable)
Revenues		7,514			4,844			55	%		13,477			11,310			19	%
Gross profit		2,147			492			336	%		2,914			1,963			48	%
Percentage of Revenues		29	%		10	%					22	%		17	%

Selling, General and Administrative Expenses		825			787			(5	%)		1,665			1,613			(3	%)
Research and Product Development Expenses		390			248			(57	%)		773			414			(87	%)
Segment Income (Loss)		932			(545	)		271	%		476			(65	)		832	%

Revenues increased 55% and 19% for the three and six months ended June 30, 2014, respectively due to an increase in the execution of sales orders in the period. Sales through June 30, 2014 consisted primarily of the sale of electrolyzer products to customers in industrial gas markets. Orders awarded for the six months ended June 30, 2014 were $13.7 million (June 30, 2013 – $5.6 million). At June 30, 2014 we had $22.5 million of confirmed orders (June 30, 2013 – $13.3 million), the majority of which are anticipated to be delivered and recognized in revenues in 2014.

Gross Profit margins improved 18% and 17% respectively for the three and six months ended June 30, 2014. The increase of revenue for the three months ended June 30, 2014 brought production capacity up to normal levels, and no further costs were required relating to the warranty costs incurred in the first three months of 2014.

Selling, General and Administrative (“SG&A”) Expenses were $0.8 million and $1.7 million respectively for the three and six months ended June 30, 2014 comparable to the prior periods in 2013.

Research and Product Development (“R&D”) Expenses were up $0.1 and $0.3 million respectively, for the three and six months ended June 30, 2014 relating to increased research and development spending attributable to further prototype development costs.

Segment Income (Loss) increased $1.5 million for the three months ended June 30, 2014 attributable to the income incurred in the three months ended June 30, 2014 as a result of the increased revenue and gross profit described above.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

Power Systems

Summary Financial Analysis

(in thousands of US dollars)

	Three months ended June 30									Six months ended June 30
	2014			2013			% Favourable (Unfavourable)			2014			2013			% Favourable (Unfavourable)
Revenues		3,209			4,942			(35	%)		5,305			10,867			(51	%)
Gross Profit		1,093			2,258			(52	%)		2,244			4,710			(52	%)
Percentage of Revenues		34	%		46	%					42	%		43	%

Selling, General and Administrative Expenses		1,061			1,158			8	%		2,115			2,336			22	%
Research and Product Development Expenses		520			666			22	%		1,051			1,354			9	%
Segment Income (Loss)		(489	)		448			(209	%)		(923	)		971			(195	%)

Revenues decreased 35% and 51% respectively for the three and six months ended June 30, 2014 compared to 2013 as a result of the timing of orders from Commscope in Q1 and Q2 2013 with no comparable orders during the same period in 2014. Orders awarded for the six months ended June 30, 2014 were $15.3 million (June 30, 2013 - $6.4 million). The increase in orders received in our Power Systems business segment is primarily the result of orders received from the signing of a definitive agreement to create a joint venture with Kolon Water & Energy, part of a leading conglomerate in South Korea to capitalize on renewable energy opportunities. At June 30, 2014, we had $44.5 million of confirmed orders for Power Systems’ products and services (June 30, 2013 - $36.6 million). Included within the Power Systems new orders in the six months ended June 30, 2014, is $7.6 million of long term backlog which is not expected to be recognized as revenue in the following twelve months. We expect to recognize $18.0 million (40%) of the Power System’s products and services backlog as revenue in the following twelve months.

Gross Profit declined to 34% and 42% of revenues respectively for the three and six months ended June 30, 2013, compared to 46% and 43% respectively in the comparative prior periods, reflecting the impact of excess capacity in the period.

SG&A Expenses decreased 8% and 22% respectively for the three and six months ended June 30, 2014. The decrease results from a decrease in marketing expenses and reduced compensation costs as compared to 2013 due to the increased business performance in 2013.

R&D Expenses were down $0.3 million for the six months ended June 30. 2014, compared to the comparative prior period, attributable to a slight decrease in R&D project activity consistent with the increase in commercial activity which will lead to increased revenues in the second half of 2014.

Segment Income declined $0.9 million and $1.9 million respectively for the three and six months ended June 30, 2014 primarily reflecting the decrease in gross profit discussed above.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

Corporate and Other

Summary Financial Analysis

(in thousands of US dollars)

	Three months ended June 30									Six months ended June 30
	2014			2013			% Favourable (Unfavourable)			2014			2013			% Favourable (Unfavourable)
Selling, General and Administrative Expenses		93			2,930			97	%		2,766			4,548			39	%
Research and Product Development Expenses		5			12			58	%		7			18			61	%
Other Finance Gains (Losses), Net		(41	)		(1,185	)		97	%		(181	)		(1,536	)		88	%
Segment Loss		(570	)		(4,081	)		86	%		(3,428	)		(6,223	)		45	%

SG&A Expenses decreased 97% and 39% respectively for the three and six months ended June 30, 2014 due primarily to stock based compensation expenses indexed to the decrease in our share price. Excluding stock based compensation expenses indexed to the decrease in our share price selling, generation and administrative expenses have remained consistent with the prior period.

R&D Expenses for 2014 were less than $0.1 million, consistent with the comparative periods, and reflect the payment of intellectual property management fees.

Other Finance Gains (Losses) decreased $1.1 and $1.4 million respectively for the three and six months ended June 30, 2014 primarily the result of a $1.2 and a $1.6 million fair value revaluation loss recorded in the three and six months ended June 30, 2013 on the exercised and outstanding warrants related to the increase in our share price in 2013. There are no comparative figures in 2014 as there are nil outstanding warrants at June 30, 2014.

Segment Loss decreased $3.5 and $2.8 million respectively for the three and six months ended June 30, 2014 reflecting increases in other finance losses and SG&A expenses as noted above.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

2	Financial Condition

A discussion of the significant changes in our Consolidated Interim Balance Sheets

	June 30		December 31		Change
(in thousands of US dollars)	2014		2013		$			%
Cash, cash equivalents, restricted cash and short-term investments	$	18,873	$	13,847		5,026			36	%
Trade and other receivables		8,015		5,391		2,624			49	%
Inventories		18,196		12,821		5,375			42	%
Operating Borrowings				-
Trade and other payables		13,923		13,193		730			6	%
Warranty provisions (current and non-current)		3,226		2,893		333			12	%
Deferred revenue (current and non-current)		15,041		13,653		1,388			10	%
Warrants		-		1,075		(1,075	)		(100	%)
Other non-current liabilities		3,883		3,095		788			25	%

Cash, cash equivalents, restricted cash and short-term investments were $18.9 million, an increase of $5.0 million or 36%. Refer to Section 4 - Liquidity and Capital Resources, for a discussion of the change in cash, cash equivalents, restricted cash and short-term investments.

Trade and other receivables were $8.0 million, an increase of $2.6 million or 49% consistent with the schedule of deliveries taking place later in the quarter ended June 30, 2014 resulting in lower cash collections by June 30, 2014 relative to the comparative period. Also contributing to the increase is an increase in accrued receivables relating to the contract for integrated power propulsion systems for an OEM as revenue is recognized using the percentage of completion method which does not necessarily correspond with the cash collection of outstanding receivables.

Inventories were $18.2 million, an increase of $5.4 million or 42% compared to the prior period and consistent with our growth targets and our significant increase in business expected in the second half of 2014.

Trade and other payables were $13.9 million, an increase of $0.7 million, reflecting primarily a combined increase of trade and payroll liabilities of $2.1 million (20% of the December 31, 2013 balance) as a result of the increase requirements for inventory purchases and the strengthening of the Canadian dollar relative to the US dollar, partially offset by a decrease in liabilities for compensation indexed to share price of $0.9M due to a decrease in our share price.

Warranty provisions were $3.2 million, an increase of $0.3 million or 12% consistent with the increase in our revenues in the quarter.

Deferred revenues were $15.0 million, an increase of $1.4 million or 10% reflecting deposits received on increased order bookings.

Warrants were nil, a decrease of $1.1 million or 100% resulting from the exercise of 69,072 Series B warrants. There are no outstanding warrants as at June 30, 2014.

Other non-current liabilities were $3.9 million at June 30, 2014, an increase of $0.8 million or 25%. The increase primarily reflects a $0.7 million increase in long-term debt as a result of the loan agreement with the Province of Ontario’s Ministry of Economic Development, Strategic Jobs and Investment Fund.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

3	Summary of Quarterly Results

A summary view of our quarterly financial performance

The following table highlights selected financial information for the eight consecutive quarters ended June 30, 2014.

(thousands of US dollars - except per share amounts)		2014 Q2			2014 Q1		2013 Q4		2013 Q3		2013 Q2		2013 Q1		2012 Q4		2012 Q3
											As Revised
Revenues	$	10,723		$	8,059		11,000		9,236		9,786		12,391		9,817		7,897
Gross Profit		3,240			1,917		2,705		2,730		2,749		3,877		1,328		1,702
Percentage of Revenues		30	%		24	%	25	%	30	%	28	%	31	%	14	%	22	%
Adjusted EBITDA 2		(288	)		(1,729	)	(162	)	(350	)	(873	)	170		(2,200	)	(3,074	)
Net Loss		(125	)		(3,749	)	(3,100	)	(491	)	(4,178	)	(1,139	)	(3,388	)	(3,026	)
Net Loss Per Share (Basic and Fully Diluted)		(0.01	)		(0.40	)	(0.35	)	(0.05	)	(0.49	)	(0.15	)	(0.44	)	(0.39	)
Weighted Average Common Shares Outstanding		9,605,220			9,073,527		9,003,960		8,963,599		8,542,637		7,843,373		7,724,427		7,688,197

4	Liquidity and Capital Resources

A discussion of our cash flow, liquidity, credit facilities and other disclosures

The following section explains how we manage our cash and capital resources to carry out our strategy and deliver results.

Cash Provided By (Used in) Operating Activities

	Three months ended June 30									Six months ended June 30
(in thousands of US dollars)	2014			2013			$ Change			2014			2013			$ Change
Net loss for the year	$	(125	)	$	(4,178	)		4,053		$	(3,873	)	$	(5,317	)		1,444
(Increase) decrease in restricted cash		62			340			(278	)		(191	)		115			(306	)
Changes in non-cash working capital		(4,126	)		(331	)		(3,795	)		(6,097	)		(6,424	)		327
Other items not affecting cash		(613	)		3,396			(4,031	)		1,544			4,694			(3,150	)
Cash provided by (used in) operating activities	$	(4,802	)	$	(773	)		(4,051	)	$	(8,617	)	$	(6,932	)		(129	)

Changes in cash used in operating activities for the three months ended June 30, 2014, compared to the three months ended June 30, 2013 are discussed below.

·	Net loss is analyzed above in Section 1 - Operating Results.

·	Non-cash working capital decreased $3.8 million as detailed above Section 2 - Financial Condition.

______________

1 2011 has not been restated for accounting standard changes related to employee benefits. The accounting changes were effective January 1, 2013 with retroactive adjustments to January 1, 2012.

2 Adjusted EBITDA is a Non-IFRS measure, see Section 9.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

Other items decreased by $4.0 million, primarily as a result of the decreased change in value of the liabilities for compensation indexed to share price of $2.8M as well as the lack of a $1.1 million other finance loss relating to an increase in the fair value of exercised and outstanding warrants related to the increase in our share price in 2013.

Changes in cash used in operating activities for the six months ended June 30, 2014, compared to the six months ended June 30, 2013 are discussed below.

·	Net loss is analyzed above in Section 1 - Operating Results.

·	Non-cash working capital increased $0.3 million as detailed above Section 2 - Financial Condition.

Other items decreased by $3.2 million, primarily as a result of the decreased change in value of the liabilities for compensation indexed to share price of $1.6M as well as the lack of a $1.5 million other finance loss relating to an increase in the fair value of exercised and outstanding warrants related to the increase in our share price in 2013.

As noted in our 2013 MD&A, we continue to anticipate using between $6.0 million and $8.0 million in 2014 to fund our anticipated net losses, non-cash working capital requirements and capital expenditures for the year. While our first half of 2014 required significant non-cash working capital injections, we anticipate the second half of 2014 to be cash flow positive. These estimates are based on our actual results for the six months ended June 30, 2014 and our outlook for the six months ending December 31, 2014.

In the first quarter of 2014, we filed a final short form base shelf prospectus with certain Canadian and US securities regulatory authorities. The shelf prospectus will allow us to offer, from time to time over a 25-month period, up to $100 million of debt, equity and other securities. On May 13, 2014 the Company and CommScope, Inc. of North Carolina (“CommScope”) entered into an underwriting agreement with Canaccord Genuity, Craig-Hallum Capital Group LLC and Roth Capital Partners, LLC to issue 1,500,000 common shares of the Company (1,000,000 from Treasury and 500,000 secondary shares by CommScope) at a price of $15 per share. The underwriters also retained an overallotment of 225,000 shares that could be issued at any time during the 30 days following the closing of the offering. On May 16, 2014 the Company issued 1,000,000 shares for gross proceeds of $15,000. Net proceeds after underwriting fees and expenses were $13,551.

Cash Used in Investing Activities

	Three months ended June 30									Six months ended June 30
(in thousands of US dollars)	2014			2013			$ Change			2014			2013			$ Change
Cash used in investing activities	$	(219	)	$	(349	)	$	(130	)	$	(596	)	$	(538	)	$	(58	)

Cash used in investing activities was $0.6 million for the six months ended June 30, 2014, consistent with the six months ended June 30, 2013.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

Cash Provided By Financing Activities

	Three months ended June 30									Six months ended June 30
(in thousands of US dollars)	2014			2013			$ Change			2014			2013			$ Change
(Repayment) proceeds of borrowings and operating borrowings	$	(868	)	$	(1,412	)	$	544		$	854		$	-		$	854
Common shares issued, warrants and options exercised		13,552			6,811			6,741			13,661			7,234			6,427
Other financing items		(339	)		(250	)		(89	)		(389	)		(299	)		(90	)
Cash provided by (used in) operating activities		12,345			5,149			7,196			14,126			6,935			7,191

Changes in cash provided by financing activities for the three months ended June 30, 2014, compared to the three months ended June 30, 2013 are discussed below.

·	Proceeds from common shares issued, and warrants and options exercised increased by $6.7 million over the comparative prior period. Proceeds during the three months ended June 30, 2014 included $13.6 million from the common share issuance.

·	Operating borrowings decreased by $0.5 million over the comparative prior period reflecting repayments from unrestricted cash on hand.

Changes in cash used in operating activities for the six months ended June 30, 2014, compared to the six months ended June 30, 2013 are discussed below.

·	Proceeds from common shares issued, warrants and options exercised increased $6.4 million over the comparative prior period. Proceeds during the six months ended June 30, 2014 included $13.6 million from the common share issuance and $0.1 from the exercise of warrants and stock options.

·	Operating borrowings increased by $0.9 million over the comparative prior period reflecting new borrowings under the loan agreement with the Province of Ontario.

Credit Facilities

We utilize a credit facility with a Belgian based financial institution, to better manage our short-term cash requirements and to support standby letters of credit and letters of guarantee provided to customers. At June 30, 2014, we had operating lines of credit for up to 7.0 million Euro, or the US equivalent of $9.6 million (December 31, 2013 - $12.0 million).

Pursuant to the terms of our credit facility, Hydrogenics Europe NV (the “Borrower”), a wholly owned Belgian-based subsidiary, may utilize the facility for the issuance of standby letters of credit and letters of guarantee up to 7.0 million Euros. The Borrower may also borrow a maximum of 75% of the value of awarded sales contracts, approved by the Belgian financial institution, to a maximum of 0.75 million Euros, and a further 1.25 million Euros for general business purposes, provided sufficient room exists under the overall facility limit of 7.0 million Euros. At June 30, 2014, the amount outstanding of standby letters of credit and letters of guarantee issued under the facility amounted to 3.3 million Euros. At June 30, 2014, we had availability of 3.7 million Euro or the US equivalent of $5.0 million (December 31, 2013 - $4.4 million).

The credit facility bears interest at a rate of EURIBOR plus 1.45% per annum and is secured by a 1 million Euro secured first charge covering all assets of the Borrower. The credit facility contains a negative pledge precluding our subsidiary from providing security over its assets. Additionally, our subsidiary is required to maintain a solvency covenant of not less than 25% and ensure that its intercompany accounts with us do not fall below a defined level. At June 30, 2014, the Borrower was in compliance with these covenants.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

Within the Power Systems business segment, we have an additional $2.4 million (December 31, 2013 - $2.4 million) of operating lines of credit, for which $2.4 million is outstanding, representing standby letters of credit and letters of guarantee issued by the financial institution. At June 30, 2014, the Corporation had availability of $nil (December 31, 2013 - $nil).

Other Loan Facilities

On September 28, 2011, we entered into a loan agreement with the Province of Ontario’s Ministry of Economic Development, Strategic Jobs and Investment Fund for funding up to CA$6.0 million. Eligible costs must be incurred between October 1, 2010 and September 30, 2015.

We drew CA $1.0 million on the loan during 2014. The remaining less than $0.1 million remains undrawn at June 30, 2014. The loan is collateralized by a general security agreement covering assets of Hydrogenics Corporation. Additionally, we are required to maintain a minimum balance of cash in CAD dollars or, alternatively, obtain permission from the lender to maintain equivalent balances in other currencies.

Contingent Off-Balance Sheet Arrangements

We do not have any material obligations under forward foreign exchange contracts, guarantee contracts, retained or contingent interests in transferred assets, outstanding derivative instruments or non-consolidated variable interests.

We have entered into indemnification agreements with our current and former directors and officers to indemnify them, to the extent permitted by law, against any and all charges, costs, expenses, and amounts paid in settlement and damages incurred as a result of any lawsuit or any other judicial, administrative or investigative proceeding in which they are involved as a result of their services. Any such indemnification claims will be subject to any statutory or other legal limitation periods. The nature of the indemnification agreements prevents us from making a reasonable estimate of the maximum potential amount we could be required to pay to counterparties. We have purchased directors’ and officers’ liability insurance. We are not aware of any claims and no amount has been recorded in the consolidated interim financial statements with respect to these indemnification agreements.

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

5	Critical Accounting Policies and Estimates

A description of our accounting estimates that are critical to determining our financial results and changes to accounting policies

Our consolidated interim financial statements are prepared in accordance with IFRS, which require us to make estimates and assumptions that affect the amounts reported in our consolidated interim financial statements. We have identified several policies as critical to our business operations and essential for an understanding of our results of operations. The application of these and other accounting policies are described in note 2 of our 2013 annual consolidated financial statements. We believe there have been no significant changes in our critical accounting estimates from what was previously disclosed in our MD&A for the year ended December 31, 2013. These policies are incorporated herein by reference. Preparation of our consolidated interim financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated interim financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could vary significantly from those estimates.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

6	Recent Accounting Pronouncements

A discussion of IFRS developments that have, will, or might affect the Corporation

Recently Issued Accounting Standards

Our accounting policies are described in note 2 of our consolidated interim financial statements. Information on the adoption and impact of new and revised accounting standards that the Corporation was required to adopt effective January 1, 2014 are as disclosed in our consolidated interim unaudited financial statements and related notes and as described in our 2013 MD&A dated March 6, 2014. There have been no material changes to our accounting policies from what was disclosed at that time other than what is disclosed in our consolidated interim financial statements.

The IASB has issued accounting standards that have not yet been adopted by the Corporation. The accounting standards are the same accounting standards issued but not yet applied as noted in the consolidated financial statements for the year ended December 31, 2013, except for those not adopted effective January 1, 2014 as disclosed in our consolidated interim financial statements.

Outlook

The outlook for our business.

Current Market Environment

We are experiencing a willingness on the part of utilities and regulatory agencies to increase spending in the growing problem areas related to energy storage and grid stabilization. We also continue to witness governments in many jurisdictions showing a willingness to increase spending on alternative energy projects for the same purpose. We believe we are well positioned to benefit from government initiatives in Canada, the European Union (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 and other geographies has signaled what we believe could be a significant increase in opportunities in the markets we serve.

In addition, our agreement with CommScope lays the foundation for a strategic relationship dedicated to penetrating the large and growing market for telecom, AC, and DC backup power systems. This relationship resulted in our first significant order for telecom backup power in 2013. We continue working closely with CommScope in North America and Europe, and both companies see strong potential demand for power modules that address opportunities within the significantly growing backup power markets around the globe. In that vein, we are developing a broader range of products at various power levels, aiming for more attractive solutions and better economies of scale for our customers. However, we do not yet have visibility on significant near-term market opportunities in these backup power applications that have delivery in 2014. We will continue to evaluate and pursue these opportunities as they arise.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

The traditional on-site industrial hydrogen market has also seen modest growth in recent months as economies in the regions that do not have ready access to hydrogen delivered by truck or pipe continue to improve. This growth is reflected in the improved OnSite Generation backlog as well as opportunities in our sales pipeline.

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, 2014, we maintain an order backlog of $67.1 million (December 31, 2013 - $57.0 million) spread across numerous geographical regions, of which $40.1 million is expected to be recorded as revenue in the following twelve months.

We are on track for our previously announced target of positive adjusted EBITDA with revenue exceeding $50.0 million for the 2014 year.

However, as a global corporation, 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. This could result in our current or potential customers delaying or reducing purchases. As we have witnessed in recent years, there is a threat of reduced sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition.

Delivery Outlook

We operate in various markets and in this MD&A, define the market in which we have a product offering, as a relevant market. Our delivery outlook is segmented by relevant market and is subject to a number of factors that are within our control, such as product development and market engagement initiatives, as well as a number of factors beyond our control, such as macro economic conditions. As part of our annual business planning cycle, we make a number of assumptions regarding delivery outlook in each of our relevant markets in order to best allocate our resources.

A detailed analysis of delivery outlook by relevant market is contained in the 2013 Annual MD&A. We believe that this analysis remains valid. However, the timing of delivery and ultimate revenue recognition will be such that delivery will accelerate in the second half of 2014 with the fourth quarter representing the strongest quarter of the year for both deliveries and revenue recognition.

8	Internal Control over Financial Reporting

A statement of responsibilities regarding internal controls over financial reporting.

There were no changes in our internal controls over financial reporting during the interim period ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

9	Reconciliation and Definition of Non-IFRS Measures

A description, calculation and reconciliation of certain measures used by management.

Non-IFRS financial measures, including earnings before interest, taxes, depreciation and amortization and other losses “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 interim financial statements. Accordingly, we are presenting Adjusted EBITDA and cash operating costs in this MD&A to enhance the usefulness of our MD&A. In accordance with Canadian Securities Administration Staff Notice 52-306, we have provided reconciliations of our non-IFRS financial measures to the most directly comparable IFRS number, disclosure of the purposes of the non-IFRS measure, and how the non-IFRS measure is used in managing the business.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

Earnings Before Interest, Taxes, Depreciation and Amortization

We report Adjusted EBITDA because it is a key measure used by management to evaluate the performance of business units and the Corporation. EBITDA or Adjusted EBITDA is a measure commonly reported and widely used by investors as an indicator of a company’s operating performance and ability to incur and service debt, and as a valuation metric. The Corporation believes Adjusted EBITDA assists investors in comparing a company’s performance on a consistent basis without regard to depreciation and amortization, which are non-cash in nature and can vary significantly depending on accounting methods or non-operating factors, such as historical cost.

For the year ended December 31, 2013 we have also changed the definition of Adjusted EBITDA to exclude stock based compensation (both share settled and cash settled stock based compensation). We believe that removing this expense allows for a better focus and measurement on operational performance.

Adjusted EBITDA is not a calculation based on IFRS and should not be considered an alternative to loss from operations or net income (loss) in measuring the Corporation’s performance, nor should it be used as an exclusive measure of cash flow, because it does not consider the impact of working capital growth, capital expenditures, debt principal reductions and other sources and uses of cash, which are disclosed in the consolidated interim statements of cash flows. Investors should carefully consider the specific items included in our computation of Adjusted EBITDA. While Adjusted EBITDA has been disclosed herein to permit a more complete comparative analysis of the Corporation’s operating performance relative to other companies, investors should be cautioned that Adjusted EBITDA, as reported by us, may not be comparable in all instances to Adjusted EBITDA, as reported by other companies.

The following is a reconciliation of Adjusted EBITDA with net loss. Adjusted EBITDA is regularly reported to the chief operating decision maker.

Adjusted EBITDA

(thousands of US dollars)	Three months ended June 30						Six months ended June 30
	2014			2013			2014			2013
Net loss	$	(125	)	$	(4,178	)	$	(3,873	)	$	(5,317	)
Finance loss (income)		471			1,127			654			1,660
Depreciation of property, plant and equipment		163			195			294			384
Amortization of intangible assets		15			9			24			18
Cash settled long term compensation indexed to share price		(969	)		1,811			592			2,212
Share settled stock-based compensation expense		157			166			293			341
Adjusted EBITDA	$	(288	)	$	(870	)	$	(2,016	)	$	(702	)

Cash Operating Costs

We report cash operating costs because it is a key measure used by management to measure the fixed operating costs required to operate the ongoing business units of the Corporation. The Corporation believes cash operating costs are a useful measure in assessing our fixed operating costs.

Cash operating costs are not based on IFRS and should not be considered an alternative to loss from operations in measuring the Corporation’s performance, nor should it be used as an exclusive measure of our operating costs because it does not consider certain stock-based compensation expenses, which are disclosed in the consolidated interim statements of operations. Investors should carefully consider the specific items included in our computation of cash operating costs. While cash operating costs were disclosed herein to permit a more complete comparative analysis of the Corporation’s cost structure relative to other companies, investors should be cautioned that cash operating costs as reported by us may not be comparable in all instances to cash operating costs as reported by other companies.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

The following is a reconciliation of cash operating costs with loss from operations. Cash operating costs are regularly reported to the chief operating decision maker and correspond to the definition used in our historical quarterly discussions.

Cash operating costs

(thousands of US dollars)	Three months ended June 30						Six months ended June 30
	2014			2013			2014			2013
(Gain) Loss from operations	$	(346	)	$	3,051		$	3,219		$	3,657
Add: Gross margin		3,240			2,750			5,158			6,626
Less: Stock-based compensation losses inclusive of compensation costs indexed to our share price		812			(1,977	)		(885	)		(2,553	)
Less: Depreciation of property, plant and equipment		(80	)		(21	)		(130	)		(210	)
Less: Amortization of intangible assets		(15	)		(9	)		(24	)		(18	)
Cash operating costs	$	3,611		$	3,794		$	7,338		$	7,502

10	Risk Factors and Forward-looking Statements

Risk factors and caution regarding forward-looking statements

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).

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:

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.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

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.

·	Our mix of revenues in the recent past does not reflect our current business strategy; it may be difficult to assess our business and future prospects.

·	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 operating results may be subject to currency fluctuation.

·	Our insurance may not be sufficient.

·	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.

·	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.

·	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 the Power-to-Gas market for 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 could be liable for environmental damages resulting from our research, development or manufacturing operations.

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.

·	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.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

·	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 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.

·	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.

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

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

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

·	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 the strategic alliance entered into with CommScope and Enbridge, they own a significant portion of our common shares and may act, or prevent corporate actions, to the detriment of other shareholders.

·	A limited number of shareholders collectively own a significant portion of our common shares and may act, or prevent corporate actions, to the detriment of other shareholders.

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.

·	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.

·	As at June 30, 2014 there were 484,720 stock options to purchase our common shares, nil Series A and Series B warrants, and 84,274 DSUs. If these securities are exercised, our shareholders will incur substantial dilution.

Second Quarter 2014 Management’s Discussion and Analysis

Page 21

Hydrogenics Corporation

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 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 Corporation’s actual performance and financial results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements. Forward-looking statements do not take into account the effect that transactions or non-recurring or other special items announced or occurring after the statements are made have on the Corporation’s business. For example, they do not include the effect of business dispositions, acquisitions, other business transactions, asset writedowns or other charges announced or occurring after forward-looking statements are made. The financial impact of such transactions and non-recurring and other special items can be complex and necessarily depends on the facts particular to each of them.

Second Quarter 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

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 Corporation’s fiscal 2014 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 2014 Management’s Discussion and Analysis

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Hydrogenics Corporation

Second Quarter 2014 Consolidated Financial Statements and Results of Operations

Hydrogenics Corporation

Consolidated Interim Balance Sheets

(in thousands of US dollars)

(unaudited)

	June 30 2014			December 31 2013

Assets
Current assets
Cash and cash equivalents	$	16,658		$	11,823
Restricted cash (note 15)		1,098			635
Trade and other receivables		8,015			5,391
Inventories (note 4)		18,196			12,821
Prepaid expenses		1,115			979
		45,082			31,649
Non-current assets
Restricted cash (note 15)		1,117			1,389
Property, plant and equipment		1,894			1,684
Intangible assets		156			100
Goodwill		5,216			5,248
		8,383			8,421
Total assets	$	53,465		$	40,070
Liabilities
Current liabilities
Trade and other payables (note 5)	$	13,923		$	13,193
Warranty provisions (note 6)		2,040			1,912
Deferred revenue		8,371			6,348
Warrants (note 8)		-			1,075
		24,334			22,528
Non-current liabilities
Other non-current liabilities (note 7)		3,883			3,095
Non-current warranty provisions (note 6)		1,186			981
Non-current deferred revenue		6,670			7,305
Total liabilities		36,073			33,909
Equity
Share capital (note 8)		348,251			333,312
Contributed surplus		18,681			18,449
Accumulated other comprehensive loss		(316	)		(249	)
Deficit		(349,224	)		(345,351	)
Total equity		17,392			6,161
Total equity and liabilities	$	53,465		$	40,070

Contingencies and guarantees (notes 13 and 15)

Douglas Alexander

Chairman

Don Lowry

Director

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

Second Quarter 2014 Consolidated Interim Financial Statements

Page 2

Hydrogenics Corporation

Consolidated Interim Statements of Operations and Comprehensive Loss

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

(unaudited)

	Three months ended June 30						Six months ended June 30
	2014			2013			2014			2013
				As Revised (Note 2)						As Revised (Note 2)
Revenues	$	10,723		$	9,786		$	18,782		$	22,177
Cost of sales		7,483			7,036			13,624			15,551
Gross profit		3,240			2,750			5,158			6,626

Operating expenses
Selling, general and administrative expenses (note 9)		1,979			4,875			6,546			8,497
Research and product development expenses (note 10)		915			926			1,831			1,786
		2,894			5,801			8,377			10,283
Gain (Loss) from operations		346			(3,051	)		(3,219	)		(3,657	)

Finance income (expenses)
Interest income		1			-			3			7
Interest expense		(133	)		(94	)		(267	)		(186	)
Foreign currency gains		-			239			148			354
Foreign currency losses		(298	)		(87	)		(357	)		(299	)
Other finance gains (losses), net (note 11)		(41	)		(1,185	)		(181	)		(1,536	)
Finance income (loss), net		(471	)		(1,127	)		(654	)		(1,660	)

Loss before income taxes		(125	)		(4,178	)		(3,873	)		(5,317	)
Income tax expense		-			-			-			-
Net loss for the period		(125	)		(4,178	)		(3,873	)		(5,317	)

Items that will be reclassified subsequently to net loss:
Exchange differences on translating foreign operations		(62	)		196			(67	)		(102	)
Comprehensive loss for the period	$	(187	)	$	(3,982	)	$	(3,940	)	$	(5,419	)

Net loss per share
Basic and diluted (note 12)	$	(0.01	)	$	(0.49	)	$	(0.41	)	$	(0.65	)

Weighted average number of common shares outstanding (note 12)		9,605,220			8,542,637			9,340,843			8,194,937

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

Second Quarter 2014 Consolidated Interim Financial Statements

Page 3

Hydrogenics Corporation

Consolidated Interim Statements of Changes in Equity

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

(unaudited)

	Common shares				Contributed						Accumulated other comprehensive			Total
	Number		Amount		surplus			Deficit			loss			equity
Balance at December 31, 2012 As Revised (Note 2)		7,775,540	$	323,513	$	17,995		$	(336,443	)	$	(758	)	$	4,307
Net loss		-		-		-			(5,317	)					(5,317	)
Other comprehensive loss		-		-		-						(101	)		(101	)
Total comprehensive loss		-		-		-			(5,317	)		(101	)		(5,418	)
Issuance of common shares (note 8)		1,146,254		8,710		-			-			-			8,710
Issuance of common shares on exercise of stock options (note 9)		40,767		411		(150	)		-			-			261
Stock-based compensation expense (note 9)		-		-		341			-			-			341
Balance at June 30, 2013 As Revised (Note 2)		8,962,561	$	332,634	$	18,186		$	(341,760	)	$	(859	)	$	8,201

Balance at December 31, 2013		9,017,617	$	333,312	$	18,449		$	(345,351	)	$	(249	)	$	6,161
Net loss		-		-		-			(3,873	)		-			(3,873	)
Other comprehensive loss		-		-		-			-			(67	)		(67	)
Total comprehensive loss		-		-		-			(3,873	)		(67	)		(3,940	)
Issuance of common shares (note 8)		1,057,144		14,768		-			-			-			14,768
Issuance of common shares on exercise of stock options (note 9)		14,135		171		(61	)		-			-			110
Stock-based compensation expense (note 9)		-		-		293			-			-			293
Balance at June 30, 2014		10,088,896	$	348,251	$	18,681		$	(349,224	)	$	(316	)	$	17,392

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

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

Second Quarter 2014 Consolidated Interim Financial Statements

Page 4

Hydrogenics Corporation

Consolidated Interim Statements of Cash Flows

(in thousands of US dollars)

(unaudited)

	Three months ended June 30						Six months ended June 30
	2014			2013			2014			2013
				As Revised (Note 2)						As Revised (Note 2)
Cash and cash equivalents provided by (used in):
Operating activities
Net loss for the period	$	(125	)	$	(4,178	)	$	(3,873	)	$	(5,317	)
Increase (decrease) in restricted cash		62			340			(191	)		115
Items not affecting cash:
Amortization and depreciation		178			204			318			402
Other finance losses (gains), net (note 11)		41			1,185			181			1,536
Unrealized foreign exchange (gains) losses		4			(30	)		90			81
Stock-based compensation (note 9)		157			166			293			341
Portion of borrowings recorded as a reduction from research and development expenses (note 7(i))		(118	)		-			(118	)		-
Accreted non-cash interest (note 7)		115			82			233			171
Payment of post-retirement benefit liability (note 7)		(21	)		(22	)		(45	)		(49	)
Liabilities for compensation indexed to share price		(969	)		1,811			592			2,212
Net change in non-cash working capital (note 17)		(4,126	)		(331	)		(6,097	)		(6,424	)
Cash used in operating activities		(4,802	)		(773	)		(8,617	)		(6,932	)

Investing activities
Proceeds from disposals		-			-			9			-
Purchase of property, plant and equipment		(219	)		(349	)		(525	)		(538	)
Purchase of intangible assets		-			-			(80	)		-
Cash used in investing activities		(219	)		(349	)		(596	)		(538	)

Financing activities
Repayment of repayable government contributions (note 7)		(339	)		(250	)		(389	)		(250	)
Proceeds of borrowings, net of transaction costs (note 7(i))		854						854
Proceeds of operating borrowings		-			-			-			1,412
Repayment of operating borrowings		(1,722	)		(1,412	)		-			(1,412	)
Common shares issued and warrants exercised, net of issuance costs (note 8)		13,552			6,811			13,661			7,234
Cash provided by financing activities		12,345			5,149			14,126			6,984

Effect of exchange rate fluctuations on cash and cash equivalents held		(9	)		135			(77	)		(189	)

Increase (Decrease) in cash and cash equivalents during the period		7,315			4,162			4,836			(675	)
Cash and cash equivalents - Beginning of period		9,344			8,183			11,823			13,020
Cash and cash equivalents - End of period	$	16,659		$	12,345		$	16,659		$	12,345

Supplemental disclosure
Income taxes paid	$	-		$	-		$	-		$	-
Interest paid		1			1			4			1

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

Second Quarter 2014 Consolidated Interim Financial Statements

Page 5

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

Note 1. Description of Business

Hydrogenics Corporation and its subsidiaries (“Hydrogenics” or the “Corporation”) design, develop and manufacture hydrogen generation products based on water electrolysis technology, and fuel cell products based on proton exchange membrane (“PEM”) technology. The Corporation has manufacturing plants in Canada and Belgium, a satellite facility in Germany, and a branch office in Russia. Its products are sold throughout the world.

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

Note 2. Basis of Preparation, Summary of Significant Accounting Policies, Judgments and Estimation Uncertainty

These consolidated interim financial statements have been prepared in accordance with IFRS as issued by the International Accounting Standards Board (“IASB”) applicable to the preparation of consolidated interim financial statements, including International Accounting Standard (“IAS”) 34.

These consolidated interim financial statements were approved for issue by the Board of Directors of the Corporation on July 29, 2014.

The accounting policies applied in these consolidated interim financial statements are consistent with those disclosed in Note 2 to the annual consolidated financial statements for the year ended December 31, 2013.

There were no standards adopted by the Corporation for the first time for the financial year beginning on or after January 1, 2014 that have a material impact on the Corporation.

The preparation of consolidated interim financial statements in accordance with IFRS requires management to make estimates and assumptions that affect the amounts reported in the consolidated interim financial statements and notes to the consolidated interim financial statements. These estimates are based on management’s experience and other factors, including expectations about future events that are believed to be reasonable under the circumstances. Significant areas requiring the Corporation to make estimates include revenue and gross profit recognition, warranty provisions, and the long-term debt.

The significant accounting judgments and estimation uncertainties used in the preparation of these consolidated interim financial statements should be read in conjunction with the consolidated annual financial statements for the year ended December 31, 2013 and the notes thereto.

Out of period adjustments

In connection with the preparation of the Corporation’s consolidated financial statements for the year ended December 31, 2013, adjustments were identified relating to prior periods. The out of period errors identified relate to several items that are individually immaterial and the impact on each financial statement line is summarized in the tables below.

The Corporation assessed the errors and concluded that the related amounts were not material to any of its previously issued financial statements, either individually or in the aggregate. However, the Corporation elected to revise its previously issued consolidated financial statements to correct the effect of these errors. This non-cash revision does not impact cash flows for any prior period.

Second Quarter 2014 Consolidated Interim Financial Statements

Page 6

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

The following tables present the effect of this correction on the Corporation’s Consolidation Statements of Operations and Comprehensive loss and Consolidated Statements of Cash Flow:

	For the three months ended June 30, 2013
	As previously reported			Adjustment			As revised
(unaudited)
Revenue	$	9,771		$	15		$	9,786
Cost of sales		7,205			(168	)		7,037
Research and product development expenses		1,080			(154	)		926
Net loss		4,516			(338	)		4,178
Net loss per share	$	(0.53	)	$	(0.04	)	$	(0.49	)

	For the six months ended June 30, 2013
	As previously reported			Adjustment			As revised
(unaudited)
Revenue	$	22,083		$	94		$	22,177
Cost of sales		15,975			(425	)		15,551
Research and product development expenses		2,018			(232	)		1,786
Net loss		6,067			(750	)		5,317
Net loss per share	$	(0.74	)	$	(0.09	)	$	(0.65	)

Note 3. Accounting Standards Issued But Not Yet Applied

IFRS 9, Financial Instruments, was issued in November 2009 and addresses classification and measurement of financial assets. It replaces the multiple category and measurement models in IAS 39 for debt instruments with a new mixed measurement model with only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments. Such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive income (“OCI”). Where equity instruments are measured at fair value through OCI, dividends are recognized in profit or loss to the extent they do not clearly represent a return of investment; however, other gains and losses (including impairments) associated with such instruments remain in accumulated OCI indefinitely.

Second Quarter 2014 Consolidated Interim Financial Statements

Page 7

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

Requirements for financial liabilities were added to IFRS 9 in October 2010 and they largely carried forward existing requirements in IAS 39, Financial Instruments – Recognition and Measurement, except that fair value changes due to credit risk for liabilities designated at fair value through profit and loss are generally recorded in OCI. In January 2012, the effective date was revised to January 1, 2015 with earlier application permitted. The Corporation has not yet assessed the impact of this standard and amendments or determined whether it will early adopt them.

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

On May 28, 2014, the IASB issued the final revenue standard, IFRS 15 Revenue from Contracts with Customers, which will replace IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers, and SIC 31 Revenue - Barter Transactions Involving Advertising Services.

The new standard will be mandatorily effective for fiscal years beginning on or after January 1, 2017, and interim periods within that year. Earlier application is permitted. The Corporation is analyzing the new standard to determine its impact on the Corporation’s balance sheet and statement of operations.

There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Corporation.

Note 4. Inventories

	June 30 2014		December 31 2013
Raw materials	$	9,119	$	8,036
Work-in-progress		8,537		4,533
Finished goods		540		252
	$	18,196	$	12,821

During the six months ended June 30, 2014, the Corporation recorded inventory obsolescence provisions as follows:

	Six months ended June 30
	2014			2013
At January 1	$	1,011		$	1,267
Write downs during the period, net of recoveries		51			(46	)
Foreign exchange revaluation		(3	)		(3	)
At June 30	$	1,059		$	1,218

Second Quarter 2014 Consolidated Interim Financial Statements

Page 8

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

Previously recorded inventory obsolescence provisions were reversed as a result of subsequent recoveries in net realizable value.

Note 5. Trade and Other Payables

Accounts payable and accrued liabilities are as follows:

	June 30 2014		December 31 2013
Trade accounts payable	$	6,310	$	3,115
Accrued payroll and related compensation		2,852		3,871
Liabilities for compensation plans indexed to share price		2,302		1,402
Supplier accruals		1,386		3,182
Current portion of repayable government contributions		224		465
Accrued professional fees		125		270
Current portion of post-retirement benefit liability		94		83
Other		630		805
	$	13,923	$	13,193

Note 6. Warranty Provisions

Changes in the Corporation’s aggregate warranty provision are as follows:

	Six months ended June 30,
	2014			2013
At January 1	$	2,893		$	1,808
Additional provisions		1,420			762
Utilized during the period		(899	)		(158	)
Unused amounts reversed		(175	)		(290	)
Foreign exchange differences		(13	)		(14	)
At June 30	$	3,226		$	2,108

	June 30 2014		December 31 2013
Current provision	$	2,040	$	1,912
Long term provision		1,186		981
Total provision	$	3,226	$	2,893

Second Quarter 2014 Consolidated Interim Financial Statements

Page 9

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

Note 7. Other Non-current Liabilities

Other non-current liabilities are as follows:

	June 30 2014		December 31 2013
Long-term debt (i)	$	3,186	$	2,260
Non-current post-retirement benefit liability (ii)		250		309
Non-current repayable government contributions (iii)		447		526
	$	3,883	$	3,095

(i)	Long-term debt

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

The maturity date of the loan is ten years from the date of the first disbursement. The loan will be interest free for the first five years, commencing on the first day of the month following the date of the first disbursement, if certain criteria are met, such as the retention and creation of a specified number of jobs. After this five-year period, the loan will bear interest at a rate of 3.67%, if all criteria have been met, and will require repayment at a rate of 20% per year of the outstanding balance for the next five years. If the criteria are not met, the loan will bear interest at a rate of 5.67% per annum for the entire term of the loan commencing from the first disbursement. At the project completion date of September 30, 2015, the outstanding amount of the loan is subject to accelerated repayment in an amount based on the percentage shortfall of actual expenditures incurred to date compared to the contractual minimum. Such amount will be immediately repayable with interest calculated from the date of the last disbursement at a rate of 5.67%.

The change in carrying value of this liability for the six months ended June 30 was as follows:

	Six months ended June 30
	2014		2013
At January 1	$	2,260	$	1,288
Draw downs during the period		735		-
Interest accretion during the period		96		98
Foreign exchange revaluation		95		(65	)
At June 30	$	3,186	$	1,321

(ii)	Post-retirement benefit liability

The liability, which is unfunded and payable in Canadian dollars, is a defined benefit plan to be paid to a beneficiary.

The present value of the unfunded obligation recognized in the consolidated interim balance sheets at June 30, 2014, including the current portion, is $344 (December 31, 2013 - $392).

Second Quarter 2014 Consolidated Interim Financial Statements

Page 10

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

(iii)

Repayable government contributions

The Corporation has received government contributions related to certain historical research and development projects. In 1998, Stuart Energy Systems Corporation (“Stuart Energy”) entered into an agreement (the “TPC Agreement”) with Technologies Partnerships Canada (“TPC”), a program of Industry Canada to develop and demonstrate hydrogen fleet fuel appliances.

In January 2011, with respect to the TPC Agreement, the Corporation entered into an amended agreement (the “Amendment”) with Industry Canada. Under the terms of the Amendment, a total of CA$1,500 will be paid to Industry Canada in quarterly instalments which commenced in January 2011 and will continue until September 2017. An additional payment of 3% of the net proceeds of all equity instrument financing transactions completed by the Corporation on or before September 30, 2017 or the sum of CA$800, whichever will be the lesser amount, will be paid to Industry Canada (“the Contingent Amount”).

The Amendment was not determined to be a significant modification of the TPC Agreement for accounting purposes. Accordingly, as at the date of the Amendment, the carrying value of the liability was adjusted to $1,158, determined by taking the net present value of the CA$1,500 due in accordance with the Amendment plus $285, which represented the Corporation’s best estimate of the Contingent Amount, using the effective interest rate inherent in the original TPC Agreement of 14%.

The change in carrying value of this liability for the six months ended June 30 was as follows:

	Six months ended June 30
	2014			2013
At January 1	$	990		$	1,130
Repayments during the period		(389	)		(250	)
Interest accretion during the period		61			73
Foreign exchange revaluation		(31	)		(53	)
Fair value (gain) loss		40			(80	)
At June 30	$	671		$	820

Fair value gains and losses have been recorded in other finance gains and losses, net of interest expense.

The values of the liability as at June 30, 2014 and December 31, 2013 were $671 and $990, of which the current portions of $224 and $465 were included in trade and other payables, respectively. The company has paid CA$800 to date under the 3% contingent payment provisions described above, which is the maximum under the agreement.

Second Quarter 2014 Consolidated Interim Financial Statements

Page 11

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

Note 8. Share Capital

	June 30, 2014				June 30, 2013
Common shares	Number		Amount		Number		Amount
Balance at January 1		9,017,617	$	333,312		7,775,540	$	323,513
Share offering		1,000,000		13,551		891,250		6,145
Warrants exercised		57,144		1,217		255,004		2,565
Stock options exercised (note 9)		14,135		171		40,767		411
Balance at June 30		10,088,896	$	348,251		8,962,561	$	332,634

Common Share issuance

On May 13, 2014 the Company and CommScope, Inc. of North Carolina (“CommScope”) entered into an underwriting agreement with Canaccord Genuity, Craig-Hallum Capital Group LLC and Roth Capital Partners, LLC to issue 1,500,000 common shares of the Company (1,000,000 from Treasury and 500,000 secondary shares by CommScope) at a price of $15 per share. The underwriters also retained an overallotment of 225,000 shares that could be issued at any time during the 30 days following the closing of the offering. On May 16, 2014 the Company issued 1,000,000 shares for gross proceeds of $15,000. Net proceeds after underwriting fees and expenses were $13,551.

On April 30, 2013 the Company entered into an underwriting agreement with Roth Capital to issue 775,000 common shares of the Company at an issue price of $7.75 per share. Roth Capital also retained an overallotment of 116,250 shares that could be issued at any time on the ensuing 30 days. On May 3, 2013 the Company issued 891,250 shares for gross proceeds of $6,907 inclusive of the overallotment. Net proceeds after underwriting fees and expenses were $6,145.

Agreement with Enbridge Inc.

On April 20, 2012, the Corporation entered into the Subscription Agreement and a joint development agreement with Enbridge, a North American leader in delivering energy. Under the terms of the joint development agreement, the Corporation and Enbridge will jointly develop utility scale energy storage. Under the terms of the Subscription Agreement, Enbridge purchased from Hydrogenics 1,082,251 common shares at CA$4.62 per share for an aggregate purchase price of CA$5,000. Pursuant to the terms of the Subscription Agreement, the Corporation will use a portion of the proceeds to develop utility scale energy storage. The Corporation incurred issuance costs of $190 in connection with common shares issued under the Subscription Agreement.

The Subscription Agreement provides, among other things, that Enbridge will have certain participation rights and, subject to certain ownership requirements, will have the right to appoint one non-voting observer to the Board of Directors of Hydrogenics.

Strategic Alliance with CommScope Inc.

On August 9, 2010, the Corporation entered into a strategic alliance with CommScope Inc. (“CommScope”), a global leader in infrastructure solutions for communications networks, for the development and distribution of specialized fuel cell power systems and included an equity investment in the Corporation.

Second Quarter 2014 Consolidated Interim Financial Statements

Page 12

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

Under the agreement, CommScope purchased from the Corporation 2,186,906 common shares on a private placement basis in four tranches for an aggregate purchase price of $8,500.

Subject to the maintenance of certain ownership requirements, CommScope has the right to have one non-voting observer on the Board of Directors of the Corporation. The Corporation and CommScope have also entered into an intellectual property licence agreement on the closing of the first tranche, wherein the Corporation granted to CommScope a licence to certain intellectual property resulting from the transaction, which is only exercisable by CommScope on the occurrence of specified events (such as the Corporation becoming insolvent or exiting the fuel cell business).

Registered direct offering

On January 14, 2010, as part of a registered direct offering, the Corporation issued 239,356 warrants (the “Series A warrants”), which are exercisable at any time until January 14, 2015, at an exercise price of $13.00 per common share. On the same day, the Corporation also issued 260,646 warrants (the “Series B warrants”) exercisable for a period of five years beginning on July 15, 2010 at an exercise price of $13.00 per common share. The terms of the warrants stipulated that the exercise price of the Series A and B warrants is to be reduced if the Corporation completes a share offering, whereby the price per common share of such an offering is lower than $13.00 per common share. As a result of the above noted investment by CommScope on August 9, 2010, the exercise price of the Series A and B warrants was reduced to $3.68 per common share.

Key assumptions included the following:

	June 30, 2014				December 31, 2013
	Series A		Series B		Series A		Series B
Market price of common shares		-		-		-	$	19.15
Risk-free interest rate		-		-		-		1.10%
Term to maturity		-		-		-		1.5 years
Volatility		-		-		-		64%

The Series A warrants were fully exercised in 2013 and the Series B warrants were fully exercised in the three months ended March 31, 2014. There are no outstanding warrants at June 30, 2014.

Cash proceeds on the warrants exercise amounted to $nil (June 30, 2013 – $828) during the six months ended June 30, 2014.

The change in fair value of outstanding warrants during the six months ended June 30, 2014 was as follows:

Second Quarter 2014 Consolidated Interim Financial Statements

Page 13

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

	Six months ended June 30
	2014			2013
At January 1	$	1,075		$	1,545
Fair value of warrants exercised during the period		(1,075	)		(1,137	)
Fair value (gain) loss upon revaluation		-			1,018
At June 30	$	-		$	1,426

Fair value gains and losses upon revaluation of warrants are included in other finance gains (losses), net of income tax expense.

Note 9. Stock-based Compensation

Stock option plan

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

A summary of the Corporation’s employee stock option plan activity of the six months ended June 30 is as follows:

	2014					2013
	Number of shares			Weighted average exercise price (CA$)		Number of shares			Weighted average exercise price (CA$)
Outstanding, beginning of period		503,907			8.63		526,519			9.71

Granted		-			-		30,000			8.10
Exercised		(14,135	)		8.66		(40,767	)		6.71
Expired		(5,052	)		160.11		(2,583	)		137.48
Outstanding, end of period		484,720			7.05		513,169			9.01

012mber31 at December 31, 2012mibus Incentive Plan All options are for a term of ten years from the date of grant and vest over four years unless otherwise determined by the Board of Directors. The fair value of the stock options granted in the period was determined using the Black-Scholes option pricing model with the following weighted average assumptions:

	June 30 2014		June 30 2013
Risk-free interest rate (%)		-		1.39	%
Expected volatility (%)		-		69	%
Expected life (in years)		-		5.5
Expected dividends		-	$ nil

Second Quarter 2014 Consolidated Interim Financial Statements

Page 14

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

Expected volatility during the six months ended June 30, 2013 was determined using the stock historical volatility for the 5.5 years prior to the date of grant, as this is the expected life of the stock option.

Stock-based compensation expense related to the stock options and PSUs of $157 and $292 for the three and six months ended June 30, 2014 is included in selling, general and administrative expenses (June, 2013 - $121 and $254). Proceeds on the exercise of options amounted to $110 for the six months ended June 30, 2014 (June 30, 2013 - $261).

Deferred Share Units (“DSUs”)

	June 30, 2014						June 30, 2013
DSU continuity schedule:	Number			Amount			Number			Amount
Balance at December 31		131,320		$	2,521			124,085		$	842
DSU redemptions		(49,442	)		(1,472	)		(805	)		-
DSU compensation expense		2,396			52			4,745			47
DSU fair value adjustments		n/a			453			n/a			901
Balance at June 30		84,274		$	1,554			128,025		$	1,790

The Corporation recognized a compensation expense associated with DSUs issued of $505 for the six months ended June 30, 2014 (June 30, 2013 - $948). The portion relating to compensation expense for the six months ended June 30, 2014 totaled $53 (June 30, 2013 - $47), and the portion related to fair value adjustments totaled $451 (June 30, 2013 - $901). The liability amount of $1,554 (December 31, 2013 - $2,521) is included in trade and other payables. DSUs issued vest immediately on the date of issuance.

Restricted Share Units (“RSUs”)

	June 30, 2014					June 30, 2013
RSU continuity schedule:	Number		Amount			Number		Amount
Balance at December 31		46,885	$	660			189,694	$	859
RSU compensation expense		n/a		141			n/a		416
RSU fair value adjustments		n/a		(53	)		n/a		846
Balance at June 30		46,885	$	748			189,694	$	2,121

During the six months ended June 30, 2014, the Corporation recognized a compensation expense of $88 (June 30, 2013 - $1,262) associated with RSUs issued under the Hydrogenics Omnibus Incentive Plan and the former RSU plan. The portion relating to compensation expense for the six months ended June 30, 2014 totaled $141 (June, 2013 - $416), and the portion related to fair value adjustments totaled ($53) (June 30, 2013 - $846). The liability amount of $748 (December 31, 2013 - $660) is included in trade and other payables.

Second Quarter 2014 Consolidated Interim Financial Statements

Page 15

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

Performance Share Units (“PSUs”)

	June 30
PSU continuity schedule:	2014		2013
Balance at December 31		154,493		148,320
PSUs issued		37,827		6,173
PSUs forfeited		-		-
Balance at June 30		192,320		154,493

During the six months ended June 30, 2014, 2014, the Corporation recognized a stock-based compensation expense associated with PSUs issued under the Hydrogenics Omnibus Incentive Plan of $127 (June 30, 2013 - $87), with the offsetting increase to contributed surplus.

Note 10. Research and Product Development Expenses

Research and product development expenses are recorded net of non-repayable third party program funding received or receivable. For the three and six months ended June 30, 2014 and 2013, research and product development expenses and non-repayable program funding, which have been received, or are to be received, are as follows:

	Three months ended June 30,
	2014			2013
Research and product development expenses	$	1,994		$	1,357
Government research and product development funding		(1,079	)		(431	)
	$	915		$	926

	Six months ended June 30,
		2014			2013
Research and product development expenses	$	3,563		$	2,629
Government research and product development funding		(1,732	)		(843	)
	$	1,831		$	1,786

Note 11. Other Finance Gains and Losses, Net

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

	Three months ended June 30,
	2014			2013
(Loss) gain from change in fair value of exercised warrants (note 8)	$	-		$	(461	)
(Loss) gain from change in fair value of outstanding warrants (note 8)		-			(776	)
(Loss) gain from change in net present value of repayable government contribution (note 7)		(41	)		52
	$	(41	)	$	(1,185	)

Second Quarter 2014 Consolidated Interim Financial Statements

Page 16

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

	Six months ended June 30,
	2014			2013
(Loss) gain from change in fair value of exercised warrants (note 8)	$	(142	)	$	(600	)
(Loss) gain from change in fair value of outstanding warrants (note 8)		-			(1,018	)
(Loss) gain from change in net present value of repayable government contribution (note 7)		(39	)		82
	$	(181	)	$	(1,536	)

Note 12. Net Loss Per Share

For the three and six months ended June 30, 2014, the weighted average number of common shares outstanding was 9,605,220 and 9,340,843 respectively. No effect has been given to the potential exercise of stock options and warrants in the calculation of diluted net loss per share, as the effect would be anti-dilutive.

Note 13. Contingencies

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

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

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

Second Quarter 2014 Consolidated Interim Financial Statements

Page 17

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

Note 14. Lines of Credit and Other Loan Facilities

Operating lines of credit

At June 30, 2014, the Corporation had entered into operating lines of credit for up to 7,000 Euro, or the US equivalent of $9,588 (December 31, 2013 - $12,019).

Pursuant to the terms of the credit facility, Hydrogenics Europe NV (the “Borrower”), a wholly owned Belgian based subsidiary, may utilize the facility for the issuance of standby letters of credit and letters of guarantee up to 7,000 Euro. The Borrower may also borrow a maximum of 75% of the value of awarded sales contracts, approved by the Belgian financial institution, to a maximum of 750 Euro, provided that sufficient room exists under the overall facility limit of 7,000 Euro. The Borrower may also borrow up to 1,250 Euro for general business purposes, provided sufficient limit exists under the overall facility limit of 7,000 Euro. At June 30, 2014, 3,319 Euro of standby letters of credit and letters of guarantee are outstanding and nil Euro has been drawn upon the operating line of credit. At June 30, 2014, the Corporation had availability of 3,681 Euro or the US equivalent of $5,042 (December 31, 2013 - $4,405).

The credit facility bears interest at a rate of EURIBOR plus 1.45% per annum and is secured by a 1,000 Euro secured first charge covering all assets of the Borrower. The credit facility contains a negative pledge precluding the Borrower from providing security over its assets. Additionally, the Borrower is required to maintain a solvency covenant, defined as equity plus current account divided by total liabilities of not less than 25%, and ensure that its intercompany accounts with Hydrogenics Corporation (“the parent Corporation”) do not fall below a defined level. At June 30, 2014, the Borrower was in compliance with these covenants.

Within the Power Systems business segment, the Corporations have an additional $2,372 (December 31, 2013 - $2,374) of operating lines of credit, for which $2,372 is outstanding, representing standby letters of credit and letters of guarantee issued by the financial institution. At June 30, 2014, the Corporation had availability of $nil (December 31, 2013 - $nil).

Other loan facilities

On September 28, 2011, the Canadian operating entity (“Hydrogenics Corporation”) entered into a loan agreement with the Province of Ontario’s Ministry of Economic Development, Strategic Jobs and Investment Fund for funding up to CA$6,000. Refer to Note 7 for further details.

The Corporation drew CA $972 on the loan during the six months ended June 30, 2014. The remaining CA$17 remains undrawn at June 30, 2014. 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 CAD dollars in a Canadian financial institution at all times.

Note 15. Guarantees

At June 30, 2014, the Corporation had outstanding standby letters of credit and letters of guarantee issued by several financial institutions that totalled $6,917 (December 31, 2013 - $7,614), with expiry dates extending to August 2017. The Corporation has restricted cash totalling $2,215 as partial security for these standby letters of credit and letters of guarantee, with $1,818 restricted in Hydrogenics Europe NV, $341 restricted in Hydrogenics Corporation, and $58 restricted within the German entity included in the Power Systems business segment. These instruments relate primarily to obligations in connection with the terms and conditions of the Corporation’s sales contracts. The standby letters of credit and letters of guarantee may be drawn on by the customer if the Corporation fails to perform its obligations under the sales contracts and the Corporation would be liable to the financial institution for the amount of the standby letter of credit or letter of guarantee in the event the instruments are drawn on.

Second Quarter 2014 Consolidated Interim Financial Statements

Page 18

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

Note 16. Related Party Transactions

In the normal course of operations, the Corporation subcontracts certain manufacturing functions to a corporation owned by a relative of one of the shareholders of the Corporation. Billings by this related corporation for material totalled $46 and $81 in the three and six months ended June 30, 2014 (June 30, 2013 - $77 and $165). At June 30, 2014, the Corporation has an accounts payable balance due to this related party of $24 (December 31, 2013 - $4).

As a result of CommScope’s investments in the Corporation, CommScope is also a related party. Revenues from this related party for product were $nil and $16 in the three and six months ended June 30, 2014 (June 30, 2013 - $1,549 and $3,895). At June 30, 2014, the Corporation has an accounts receivable balance from this related party of $nil (December 31, 2013 - $nil). Billings from this related party for product were $nil and $nil in the three and six months ended June 30, 2014 (June 30, 2013 - $nil and $nil). At June 30, 2014, the Corporation has an accounts payable balance to this related party of $nil (December 31, 2013 - $35).

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

Note 17. Consolidated Interim Statements of Cash Flows

Components of the net change in non-cash working capital are as follows:

	Three months ended June 30,
	2014			2013
Decrease (increase) in current assets
Trade and other receivables	$	187		$	3,112
Grants receivable		-			(206	)
Inventories		(1,560	)		413
Prepaid expenses		215			95
Increase (decrease) in current liabilities
Trade and other payables, including warranty provision		(1,873	)		(1,726	)
Deferred revenue		(1,095	)		(2,019	)
Subtotal	$	(4,126	)	$	(331	)
Liabilities for compensation indexed to share price		(969	)		1,811
	$	5,095		$	(1,480	)

	Six months ended June 30,
	2014			2013
Decrease (increase) in current assets
Trade and other receivables	$	(2,614	)	$	1,969
Grants receivable		-			(240	)
Inventories		(5,374	)		(434	)
Prepaid expenses		(136	)		226
Increase (decrease) in current liabilities
Trade and other payables, including warranty provision		639			(2,118	)
Deferred revenue		1,388			(5,827	)
Subtotal	$	(6,097	)	$	(6,424	)
Liabilities for compensation indexed to share price		592			2,212
	$	(5,506	)	$	(4,212	)

Second Quarter 2014 Consolidated Interim Financial Statements

Page 19

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

Note 18. Segmented Financial Information

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

Financial information by reportable segment for the three and six months ended June 30, 2014 and June 30, 2013 is as follows:

	Three months ended June 30, 2014
	OnSite Generation		Power Systems			Corporate and Other			Total
Consolidated Interim Statement of Operations and Comprehensive Loss:
Revenues from external customers	$	7,514	$	3,209		$	-		$	10,723
Intersegment revenue		246		49			-			295
Gross profit		2,147		1,093			-			3,240
Selling, general and administrative expenses		825		1,061			93			1,979
Research and product development expenses		390		520			5			915
Other finance losses, net		-		-			(41	)		(41	)
Interest income		-		-			1			1
Interest expense		-		-			(133	)		(133	)
Segment gain (loss) (i)		932		(488	)		(569	)		(125	)

Consolidated Interim Balance Sheet:
Total segment assets		25,340		14,859			13,265			53,465
Total segment liabilities (current and non-current)		14,040		19,681			2,352			36,073

Second Quarter 2014 Consolidated Interim Financial Statements

Page 20

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

	Three months ended June 30, 2013
	OnSite Generation			Power Systems		Corporate and Other			Total
Consolidated Interim Statement of Operations and Comprehensive Loss:
Revenues from external customers	$	4,844		$	4,942	$	-		$	9,786
Intersegment revenue		7			24		-			31
Gross profit		492			2,258		-			2,750
Selling, general and administrative expenses		787			1,158		2,930			4,875
Research and product development expenses		248			666		12			926
Other finance losses, net		-			-		(1,185	)		(1,185	)
Interest income		-			-		-			-
Interest expense		-			-		(94	)		(94	)
Segment gain (loss) (i)		(545	)		448		(4,081	)		(4,178	)

Consolidated Interim Balance Sheet:
Total segment assets		21,707			6,803		11,144			39,654
Total segment liabilities (current and non-current)		10,745			16,740		3,969			31,454

	Six months ended June 30, 2014
	OnSite Generation		Power Systems			Corporate and Other			Total
Consolidated Interim Statement of Operations and Comprehensive Loss:
Revenues from external customers	$	13,477	$	5,305		$	-		$	18,782
Intersegment revenue		246		93			-			339
Gross profit		2,914		2,244			-			5,158
Selling, general and administrative expenses		1,665		2,115			2,766			6,546
Research and product development expenses		773		1,051			7			1,831
Other finance losses, net		-		-			(181	)		(181	)
Interest income		-		-			3			3
Interest expense		-		-			(267	)		(267	)
Segment gain (loss) (i)		476		(923	)		(3,427	)		(3,873	)

Second Quarter 2014 Consolidated Interim Financial Statements

Page 21

Hydrogenics Corporation

Notes to Consolidated Interim Financial Statements

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

(unaudited)

	Six months ended June 30, 2013
	OnSite Generation			Power Systems		Corporate and Other			Total
Consolidated Interim Statement of Operations and Comprehensive Loss:
Revenues from external customers	$	11,310		$	10,867	$	-		$	22,177
Intersegment revenue		8			38		-			46
Gross profit		1,963			4,663		-			6,626
Selling, general and administrative expenses		1,613			2,336		4,548			8,497
Research and product development expenses		414			1,354		18			1,786
Other finance losses, net		-			-		(1,536	)		(1,536	)
Interest income		-			-		7			7
Interest expense		-			-		(186	)		(186	)
Segment gain (loss) (i)		(65	)		971		(6,223	)		(5,317	)

(i)

Segment loss includes directly attributable selling, general and administrative expenses, research and product development costs, net of associated grants and depreciation of property, plant and equipment and amortization of intangible assets. It is consistent with the Corporation’s profit or loss before tax expense (income).

Goodwill relating to the Corporation’s OnSite Generation segment at June 30, 2014 was $5,216 (December 31, 2013 - $5,248). OnSite Generation consists of the Corporation’s subsidiary primarily located in Belgium with a functional currency of the euro. The changes in goodwill are a result of currency fluctuations between the US dollar and the euro.

Note 19. Risk Management Arising From Financial Instruments – Fair Value

Fair value

The carrying value of cash and cash equivalents, restricted cash, accounts receivable, and accounts payable and accrued liabilities (excluding the liabilities relating to the RSUs and DSUs) approximate their fair value given their short-term nature. The carrying value of the non-current liabilities approximates their fair value given the difference between the discount rates used to recognize the liabilities in the consolidated balance sheets and the market rates of interest is insignificant.

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

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

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

(iii)

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

The Corporation has not transferred any financial instruments between Level 1, 2, or 3 of the fair value hierarchy during the six months ended June 30, 2014.

Page 22

Exhibit		Description

99.1		Press Release dated July 30, 2014 titled "Hydrogenics Reports Second Quarter 2014 Results"
99.2		Second Quarter 2014 Management's Discussion and Analysis of Financial Condition and Results of Operations
99.3		Second Quarter 2014 Consolidated Financial Statements and Results of Operations
99.4		PowerPoint Presentation titled "Q2 2014 Investor Presentation"
99.5		Form 52-109f2 - Certification of Interim Filings Full Certificate - Chief Executive Officer
99.6		Form 52-109f2 - Certification of Interim Filings Full Certificate - Chief Financial Officer

	HYDROGENICS CORPORATION - CORPORATION HYDROGENIQUE
Date: July 30, 2014	By:	/s/ ROBERT MOTZ Name: Robert Motz Title: Chief Financial Officer


Reconciliation of Adjusted EBITDA to Net Loss
(in thousands of US dollars)
(unaudited)

	3 months ended		6 months ended
	30-June-14	30-June-13	30-June-14	30-June-13


Adjusted EBITDA	(288)	(870)	(2,016)	(702)
Less:
Stock-based compensation	(157)	(166)	(293)	(341)
Cash settled compensation indexed to share price	969	(1,811)	(592)	(2,212)
Net Finance losses	(471)	(1,127)	(654)	(1,660)
Depreciation and amortization	(178)	(204)	(318)	(402)
Net Loss	(125)	(4,178)	(3,873)	(5,317)



Hydrogenics Corporation
Consolidated Interim Statements of Operations and Comprehensive Loss
(in thousands of US dollars, except share and per share amounts)
(unaudited)

	Three months ended June 30		Six months ended June 30
	2014	2013	2014	2013
		As Revised (Note 2)		As Revised (Note 2)

Revenues	$ 10,723	$ 9,786	$ 18,782	$ 22,177
Cost of sales	7,483	7,036	13,624	15,551
Gross profit	3,240	2,750	5,158	6,626

Operating expenses
Selling, general and administrative expenses	1,979	4,875	6,546	8,497
Research and product development expenses	915	926	1,831	1,786
	2,894	5,801	8,377	10,283
Gain (Loss) from operations	346	(3,051)	(3,219)	(3,657)

Finance income (expenses)
Interest income	1	--	3	7
Interest expense	(133)	(94)	(267)	(186)
Foreign currency gains	--	239	148	354
Foreign currency losses	(298)	(87)	(357)	(299)
Other finance gains (losses), net	(41)	(1,185)	(181)	(1,536)
Finance income (loss), net	(471)	(1,127)	(654)	(1,660)

Loss before income taxes	(125)	(4,178)	(3,873)	(5,317)
Income tax expense	--	--	--	--
Net loss for the period	(125)	(4,178)	(3,873)	(5,317)

Items that will be reclassified subsequently to net loss:
Exchange differences on translating foreign operations	(62)	196	(67)	(102)
Comprehensive loss for the period	$ (187)	$ (3,982)	$ (3,940)	$ (5,419)

Net loss per share
Basic and diluted	$ (0.01)	$ (0.49)	$ (0.41)	$ (0.65)

Weighted average number of common shares outstanding	9,605,220	8,542,637	9,340,843	8,194,937



Hydrogenics Corporation
Consolidated Interim Statements of Cash Flows
(in thousands of US dollars)
(unaudited)

	Three months ended June 30		Six months ended June 30
	2014	2013	2014	2013
		As Revised (Note 2)		As Revised (Note 2)
Cash and cash equivalents provided by (used in):
Operating activities
Net loss for the period	$ (125)	$ (4,178)	$ (3,873)	$ (5,317)
Increase (decrease) in restricted cash	62	340	(191)	115
Items not affecting cash:
Amortization and depreciation	178	204	318	402
Other finance losses (gains), net	41	1,185	181	1,536
Unrealized foreign exchange (gains) losses	4	(30)	90	81
Stock-based compensation	157	166	293	341
Portion of borrowings recorded as a reduction from research and development expenses (note 7(i))	(118)	--	(118)	--
Accreted non-cash interest	115	82	233	171
Payment of post-retirement benefit liability	(21)	(22)	(45)	(49)
Liabilities for compensation indexed to share price	(969)	1,811	592	2,212
Net change in non-cash working capital	(4,126)	(331)	(6,097)	(6,424)
Cash used in operating activities	(4,802)	(773)	(8,617)	(6,932)

Investing activities
Proceeds from disposals	--	--	9	--
Purchase of property, plant and equipment	(219)	(349)	(525)	(538)
Purchase of intangible assets	--	--	(80)	--
Cash used in investing activities	(219)	(349)	(596)	(538)

Financing activities
Repayment of repayable government contributions	(339)	(250)	(389)	(250)
Proceeds of borrowings, net of transaction costs	854		854
Proceeds of operating borrowings	--	--	--	1,412
Repayment of operating borrowings	(1,722)	(1,412)	--	(1,412)
Common shares issued and warrants exercised, net of issuance costs	13,552	6,811	13,661	7,234
Cash provided by financing activities	12,345	5,149	14,126	6,984

Effect of exchange rate fluctuations on cash and cash equivalents held	(9)	135	(77)	(189)

Increase (Decrease) in cash and cash equivalents during the period	7,315	4,162	4,836	(675)
Cash and cash equivalents - Beginning of period	9,344	8,183	11,823	13,020
Cash and cash equivalents - End of period	$ 16,659	$ 12,345	$ 16,659	$12,345

						Expected Revenue Recognition
	March 31, 2014 backlog	Orders Received	FX	Orders Delivered/ Revenue Recognized	June 30, 2014 backlog	During next 12 mo	Beyond next 12 mo
OnSite Generation	24.5	5.6	0.0	7.5	22.6	22.1	0.5
Power Systems	34.0	13.6	0.1	3.2	44.5	18.0	26.5
Total	58.5	19.2	0.1	10.7	67.1	40.1	27.0

/s/ Daryl Wilson
Daryl Wilson
President and Chief Executive Officer

Hydrogenics Reports Second Quarter 2014 Results

Significant New Orders Validate Growth Strategy as Company Nears Profitability