<PAGE> 1
EXHIBIT (1)
THIRD QUARTER REPORT 2000
[HYDROGENICS LOGO]
5
<PAGE> 2
Fellow Shareholders,
Having recently completed our initial public offering in Canada and the United
States, it is with great pleasure that I write to you to report on our third
quarter results.
To date, the Year 2000 has been a landmark year for Hydrogenics. Our
achievements during the past nine months have been very encouraging and have
strengthened our conviction that as a company we have chosen our goals well, and
have thus far charted our course with attainable and meaningful milestones.
We are delighted to report to the shareholders that we have achieved substantial
growth and progress in all facets of our business during the first three
quarters of 2000. Solid growth indicators include a significant increase in
revenue, the successful introduction of new and innovative products, a
broadening of our customer base, and further rapid development of our fuel cell
technology.
One of our primary goals for 2000 was to increase sales of our proprietary line
of FCATS(TM) systems, which are used for the testing and control of fuel cells
and fuel cell components. Our third quarter results show that we are achieving
this goal with revenues up 350% from the same period last year. We believe that
the success of our FCATS(TM) business, our 'today' business, sets us apart from
our competitors, and we are proud of that.
The attraction of our FCATS(TM) business extends beyond the growing revenue it
generates. We have always believed that our near and long term strategy for
penetration into the broad automotive, stationary, and portable markets will
build on our FCATS(TM) expertise. Hence, the innovation and growth of our
'today' business is doubly rewarding in view of our long term objectives.
Highlights from our third quarter reveal strong financial growth and significant
technology advancements.
Business highlights include:
- our revenue for the quarter increased 350% over the same period last year
- our first Asian market sale was achieved
- an Asia-Pacific sales office was established in Tokyo
- facilities expanded from 14,000 square feet to 95,000 square feet
Advancements in our fuel cell technology include:
- our 3rd generation PEM fuel cell stack with large active area was
manufactured and tested in the third quarter. It has achieved over 300
hours of continuous operation over the quarter, and continues to undergo
endurance testing. Significant advances in power density, durability and
manufacturability were achieved.
- our 2nd generation regenerative electrolyzer/fuel cell was assembled and
operated for about 700 hours in the electrolyzer mode, experiencing
negligible degradation. Improvements of over 50% in electrolysis
efficiency were achieved through improved stack design, advanced
materials, and special proprietary coating, sealing and assembly
techniques. Performance, durability and scale-up are ongoing.
- our compact PEM fuel cell stack, ambient pressure, targeted for HyTEF
(remote) applications, achieved over 500 hours of continuous operation and
is scheduled to be integrated with a controller for demonstration sometime
during the next two quarters.
Advancements in our test and control systems include:
- we delivered a novel AC Impedance measuring device, capable of measuring
the internal resistance of fuel cell stacks non-intrusively and in
real-time. We are experiencing strong market demand for this new product
because of its potential applications in embedded automotive systems.
- we delivered our first 85kW PEM fuel cell system development station,
targeted at the automotive and bus fuel cell markets. The unit underwent
functional testing and commissioning in the latter part of the quarter and
is now operating at a major client's site.
<PAGE> 3
Looking forward, we are prepared to execute our business plan with
continued vigor. Over the next 15 months we anticipate that revenue from
our 'today' business will continue to grow along with our customer base.
As well, we believe that the encouraging progress we are seeing in our
fuel cell power technology will lead the way to new products and expanded
markets. In addition, we intend to pursue collaboration and partnership
opportunities with other organizations that will facilitate
commercialization of our power generation products.
We remain confident that our commercial product lines of 'today' will play
a prominent role in the fuel cell applications of 'tomorrow'. We are
excited about what we have achieved and believe that Hydrogenics is well
positioned for continued growth, as fuel cell technology moves resolutely
from the laboratory to daily use.
"Pierre Rivard"
Pierre Rivard
Chief Executive Officer
Statements have been made in this report that constitute "forward-looking
statements". Investors are cautioned that all forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from any
future results, performance, or achievements expressed or implied by such
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "will", "expects", "anticipates", "plans",
"believes" or "potential", or the negative of these terms or other comparable
terminology. 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. Investors are encouraged to review the
section titled "Risk Factors" in our recently filed prospectus for a more
complete discussion of factors that could affect Hydrogenics' future
performance.
Financial Highlights
All amounts reported are in US dollars.
Revenues for the three months ended September 30, 2000 increased 350% to $2.6
million from $0.6 million for the three months ended September 30, 1999.
Revenues for the nine months ended September 30, 2000 increased 420% to $7.0
million from $1.3 million for the nine months ended September 30, 1999. This
growth reflects an increase in sales of fuel cell test and control systems to an
expanded customer base and introduction of new fuel cell test and control
products.
Cost of revenues as a percentage of revenue decreased to 72% for the three
months ended September 30, 2000 from 82% for the three months ended September
30, 1999. Cost of revenues as a percentage of revenue decreased to 68% for the
nine months ended September 30, 2000 from 78% for the nine months ended
September 30, 1999.
Operating expenses (excluding research and development) increased to $0.5
million for the three months ended September 30, 2000 from $0.2 million for the
three months ended September 30, 1999. Operating expenses (excluding research
and development) increased to $1.2 million for the nine months ended September
30, 2000 from $0.4 million for the nine months ended September 30, 1999. This
increase reflects the expansion of our sales and marketing activities, related
expenses to support the start-up of our Tokyo office, an increase in
professional advisory fees resulting from our private placement financing in
January, 2000 and our continued investment in staff, facilities and information
systems.
<PAGE> 4
Research and development expenses increased to $0.3 million for the three months
ended September 30, 2000 from $0.2 million for the three months ended September
30, 1999. For the nine months ended September 30, 2000 research and development
expenses increased to $0.7 million from $0.4 million for the nine months ended
September 30, 1999. We receive grants that partially offset these expenses.
Grants received were $0.1 million for the nine months ended September 30, 2000,
and $0.2 million for the nine months ended September 30, 1999. We anticipate
that our research and development expenses will increase significantly in future
periods as a result of increased investment by us in our research program.
As a result of the above, we recorded a net loss of $0.1 million for the three
months ended September 30, 2000 compared to a net loss of $0.2 million for the
three months ended September 30, 1999. Our earnings (loss) per share was $0.00
for the three months ended September 30, 2000 compared to earnings (loss) per
share of ($0.01) for the three months ended September 30, 1999. For the nine
months ended September 30, 2000, our earnings (loss) per share was $0.00
compared to earnings (loss) per share of ($0.02) for the nine months ended
September 30, 1999.
<PAGE> 5
HYDROGENICS CORPORATION
Financial Statements
(Unaudited)
SEPTEMBER 30, 2000
(expressed in U.S. dollars)
<PAGE> 6
HYDROGENICS CORPORATION
BALANCE SHEET
--------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
$ $
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents 453,380 1,307,023
Accounts receivable and unbilled revenues 992,930 2,667,432
Grants receivable 142,530 116,275
Inventories of raw materials 117,210 902,084
Prepaid expenses 8,067 270,959
---------- ----------
1,714,117 5,263,773
DEFERRED COSTS -- 635,863
CAPITAL ASSETS 249,755 828,056
---------- ----------
1,963,872 6,727,692
---------- ----------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities 952,849 1,612,391
Income taxes payable 8,869 266,305
Dividends payable on preferred shares 51,964 208,990
Customer deposits -- 44,693
---------- ----------
1,013,682 2,132,379
LOAN PAYABLE -- 92,701
PREFERRED SHARES (note 3) 912,423 4,005,179
---------- ----------
1,926,105 6,230,259
---------- ----------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 3) 145,273 591,513
DEFICIT (107,506) (78,077)
CURRENCY TRANSLATION ADJUSTMENT -- (16,003)
---------- ----------
37,767 497,433
---------- ----------
1,963,872 6,727,692
---------- ----------
APPROVED BY THE BOARD OF DIRECTORS:
"PIERRE RIVARD" "NORMAN SEAGRAM"
PIERRE RIVARD, DIRECTOR, CEO NORMAN SEAGRAM, CHAIRMAN
</TABLE>
<PAGE> 7
HYDROGENICS CORPORATION
Statements of Operations and Deficit
------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 2000 1999 2000
$ $ $ $
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES 567,884 2,568,773 1,342,125 7,027,859
COST OF REVENUES 466,463 1,858,358 1,044,289 4,780,826
---------- ---------- ---------- ----------
101,421 710,415 297,836 2,247,033
---------- ---------- ---------- ----------
OPERATING EXPENSES
Selling, general and administration 145,853 431,462 411,828 1,182,529
Research and development 176,937 268,734 369,934 678,196
Research and development grants (44,033) (35,400) (175,477) (140,842)
Depreciation of capital assets 5,049 33,436 10,216 56,025
---------- ---------- ---------- ----------
283,806 698,232 616,501 1,775,908
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (182,385) 12,183 (318,665) 471,125
---------- ---------- ---------- ----------
OTHER (INCOME) EXPENSES
Accrued dividends and amortization of
discount on preferred shares 18,295 81,894 54,887 230,665
Other interest and bank charges (7,025) (16,087) (16,973) (57,367)
---------- ---------- ---------- ----------
11,270 65,807 37,914 173,298
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (193,655) (53,624) (356,579) 297,827
---------- ---------- ---------- ----------
INCOME TAX EXPENSE (BENEFIT)
Current -- -- (5,751) 268,398
Future -- -- (9,353) --
---------- ---------- ---------- ----------
-- -- (15,104) 268,398
---------- ---------- ---------- ----------
NET INCOME (LOSS) FOR THE PERIOD (193,655) (53,624) (341,475) 29,429
RETAINED EARNINGS (DEFICIT) - BEGINNING
OF PERIOD (46,592) (24,453) 101,228 (107,506)
---------- ---------- ---------- ----------
DEFICIT - END OF PERIOD (240,247) (78,077) (240,247) (78,077)
---------- ---------- ---------- ----------
EARNINGS (LOSS) PER SHARE (note 5) (0.01) 0.00 (0.02) 0.00
</TABLE>
<PAGE> 8
HYDROGENICS CORPORATION
STATEMENT OF CASH FLOWS
------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 2000
$ $
(Unaudited)
<S> <C> <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
Net income (loss) for the period (341,475) 29,429
Items not affecting cash
Depreciation of capital assets 10,216 56,025
Amortization of discount on preferred shares 15,914 67,769
Future income taxes (9,353) --
Net change in non-cash working capital (note 4) (60,766) (1,689,537)
---------- ----------
(385,464) (1,536,314)
---------- ----------
INVESTING ACTIVITIES
Purchase of capital assets (215,568) (644,883)
---------- ----------
FINANCING ACTIVITIES
Preferred shares issued - net of issuance costs -- 3,623,348
Common shares issued -- 4,052
Increase in loan payable -- 94,405
Increase in deferred costs -- (635,863)
---------- ----------
-- 3,085,942
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
DURING THE PERIOD (601,032) 904,745
EFFECT OF EXCHANGE RATE ADJUSTMENTS -- (51,102)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 818,617 453,380
---------- ----------
CASH AND CASH EQUIVALENTS - END OF PERIOD 217,585 1,307,023
---------- ----------
</TABLE>
<PAGE> 9
HYDROGENICS CORPORATION
Notes to Financial Statements
(Unaudited) SEPTEMBER 30, 2000
------------------------------------------------------------------------------
(expressed in U.S. dollars)
1 DESCRIPTION OF BUSINESS
Hydrogenics Corporation designs and develops proton-exchange membrane, or
PEM, fuel cell automated test stations. The company's principal customers
include automotive companies, fuel cell developers and component suppliers
principally located in Canada, the United States and United Kingdom.
2 UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited balance sheet as at September 30, 2000 and the unaudited
statements of operations and deficit and cash flows for the nine months
ended September 30, 2000 have been prepared in accordance with Canadian
generally accepted accounting principles and, in the opinion of management,
have been prepared on the same basis as the audited financial statements and
include all adjustments necessary for the fair statement of the results of
the interim periods. All adjustments reflected in the financial statements
are of a normal recurring nature. The data disclosed in the notes to the
financial statements for this period is also unaudited. Results for the nine
months ended September 30, 2000 are not necessarily indicative of the
results to be expected for the full year.
The functional currency of the company is the Canadian dollar. Effective
December 31, 1999, the U.S. dollar was adopted as the reporting currency and
the financial information for 1999 and prior years has been presented in
U.S. dollars in accordance with a translation of convenience method using
the exchange rate at December 31, 1999 of US$1.00 - CAN$1.4433 being the
Bank of Canada noon buying rate at December 31, 1999. For periods subsequent
to December 31, 1999, the Canadian dollar amounts are translated into the
reporting currency using the current rate method, whereby assets and
liabilities are translated at the period-end exchange rate, and revenues and
expenses are translated at the average exchange rate for the period. Gains
or losses from translation into the reporting currency are included in the
cumulative translation adjustment in shareholders' equity.
3 SHARE CAPITAL AND PREFERRED SHARES
The authorized capital stock of the company consists of an unlimited number
of common shares and an unlimited number of preferred shares issuable in
series. On January 21, 2000, the 3,000,000 issued and outstanding common
shares were reduced to 2,812,500 common shares through a reverse share
split. On September 29, 2000, the number of outstanding common shares was
increased to 19,708,500 through a share split. The effects of the share
splits have been recognized retroactively in all share and per share data in
the accompanying financial statements and notes.
The 750,000 Series A (CAN$1,500,000) and 510,500 Series B (CAN$5,360,250)
preferred shares are cumulative, voting, convertible and redeemable. The
preferred shares are redeemable upon demand by the holder at face value plus
a 5% annual dividend, payable in cash, on the earlier of December 31, 2003
for Series A and January 24, 2005 for Series B, or in the event of
non-compliance under the shareholders' agreement. The total amount payable,
should redemption of the Series A preferred shares occur on December 31,
2003, and Series B occur on January 24, 2005, will be $1,299,106
(CAN$1,875,000) and $4,642,356 (CAN$6,700,312), respectively. At September
30, 2000, dividends payable amounted to $208,990
(1)
<PAGE> 10
HYDROGENICS CORPORATION
Notes to Financial Statements
(Unaudited) SEPTEMBER 30, 2000
------------------------------------------------------------------------------
(expressed in U.S. dollars)
(CAN$314,948). Conversion for each preferred share may occur at the option
of the holder for no consideration into seven common shares.
The number of common shares issuable on conversion will be adjusted in the
event that an anti-dilution event occurs pursuant to the operation of the
anti-dilution provisions. At conversion, the preferred shareholders are
entitled to receive cumulative dividends accrued to the date of conversion.
Automatic conversion will occur upon completion of a public underwriting
whereby the common shares are listed on a North American stock exchange, the
offering price is not less than CAN$2.14 per share, and the net proceeds to
the company are not less than CAN$15 million. The holders of the preferred
shares are entitled to vote with the holders of the common shares as if
conversion had occurred.
At September 30, 2000, The preferred shares have a liability and equity
component. The liability component is $4,005,179 based on the discounted
future cash flows to the holders of the preferred shares. The remaining
$566,675 is included in other equity within share capital.
On November 1, 2000, all outstanding Series A and Series B preferred shares
were converted into 8,823,500 common shares upon the closing of the
company's initial public offering.
ISSUED AND OUTSTANDING
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
$ $
<S> <C> <C>
19,708,500 (December 31, 1999 - 19,687,500) common shares 20,786 24,838
Other equity 124,487 566,675
------- -------
145,273 591,513
------- -------
</TABLE>
On January 24, 2000, the company issued 510,500 Series B preferred shares
for $7.23 (CAN$10.50) each in a private placement. The total proceeds
received were $3,623,348 (CAN$5,261,142), net of share issuance costs of
$67,567.
During 2000, the company adopted a broad-based employee share option plan.
This plan replaces previous employee share purchase arrangements. The number
of common shares that may be made subject to option under the share option
plan is limited to 4,641,000. All options are for a term of ten years from
the date of grant and vest over four years unless otherwise determined by
the board of directors. As of September 30, 2000, 2,619,845 options are
fully vested and the remainder vest over periods ranging from two to four
years from the date of grant. Options were granted to employees and
directors in the nine months ended September 30, 2000.
(2)
<PAGE> 11
HYDROGENICS CORPORATION
Notes to Financial Statements
(Unaudited) SEPTEMBER 30, 2000
------------------------------------------------------------------------------
(expressed in U.S. dollars)
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS FOR AVERAGE
COMMON EXERCISE PRICE
SHARES CAN$
<S> <C> <C>
Balance - December 31, 1999 1,394,533 0.22
Options granted 1,944,467 0.24
--------- ----
Balance - March 31, 2000 3,339,000 0.23
Options granted 452,550 2.30
Options exercised (21,000) 0.29
--------- ----
Balance - June 30, 2000 3,770,550 0.48
Options granted 34,300 9.04
--------- ----
Balance - September 30, 2000 3,804,850 0.56
--------- ----
</TABLE>
The following table summarizes information about the company's share options
outstanding as at September 30, 2000.
<TABLE>
<CAPTION>
NUMBER WEIGHTED NUMBER
OUTSTANDING AT AVERAGE EXERCISABLE AT
EXERCISE PRICE SEPTEMBER 30, REMAINING SEPTEMBER 30,
CAN$ 2000 CONTRACTUAL LIFE 2000
<S> <C> <C> <C>
0.05 1,312,500 9.15 years 1,221,158
0.29 1,834,000 9.05 years 1,237,488
1.05 420,000 9.45 years 148,552
1.50 32,900 9.75 years 2,056
2.11 21,000 9.75 years 1,313
2.23 10,500 9.75 years 656
3.01 1,400 9.75 years 88
3.38 7,000 9.75 years 437
3.80 3,500 9.75 years 219
4.29 4,200 9.75 years 88
4.64 35,000 9.75 years 2,187
5.00 74,550 9.75 years 4,222
5.07 14,000 9.75 years 875
6.43 10,500 9.75 years 128
9.29 7,000 9.75 years 103
10.00 3,150 9.75 years 39
10.71 13,650 9.75 years 236
--------- ---------
3,804,850 2,619,845
--------- ---------
</TABLE>
(3)
<PAGE> 12
HYDROGENICS CORPORATION
Notes to Financial Statements
(Unaudited) SEPTEMBER 30, 2000
------------------------------------------------------------------------------
(expressed in U.S. dollars)
4 STATEMENT OF CASH FLOWS
Net change in non-cash operating working capital is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 2000
$ $
<S> <C> <C>
Decrease (increase) in current assets
Accounts receivable and unbilled revenues (617,287) (1,734,350)
Grants receivable 17,137 26,255
Inventories (3,363) (812,580)
Prepaid expenses (13,644) (294,680)
Income taxes recoverable (5,750) -
Increase in current liabilities
Accounts payable and accrued liabilities 523,168 659,542
Income taxes payable - 257,436
Dividends payable 38,973 162,569
Customer deposits - 46,271
------- ----------
(60,766) (1,689,537)
------- ----------
</TABLE>
5 EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is calculated using the weighted average number of
common shares outstanding for the period, which amounted to 19,695,624
shares at September 30, 2000 (September 30, 1999 - 19,687,500 shares). No
effect has been given to the potential exercise of stock options and
conversion of preferred shares in the calculation of fully diluted earnings
(loss) per share in 2000 and 1999 as the effect would be anti-dilutive.
6 LETTER OF CREDIT
The company has provided its landlord with a letter of credit of $441,480
(CAN$650,000) as security for lease payments on a newly leased facility.
This letter of credit is secured by cash of $441,480 (CAN$650,000).
7 SUBSEQUENT EVENTS
a) SHARE OPTIONS
The shareholders of the company approved the grant of 100,900 additional
employee and director options to purchase common shares on October 6,
2000. These options have a ten-year term from the date of grant, vest
over a four-year period, and allow the holder to acquire common shares
for prices ranging from CAN$10.71 to CAN$12.14.
(4)
<PAGE> 13
HYDROGENICS CORPORATION
Notes to Financial Statements
(Unaudited) SEPTEMBER 30, 2000
------------------------------------------------------------------------------
(expressed in U.S. dollars)
b) INITIAL PUBLIC OFFERING
On November 1, 2000, the company completed an initial public offering on
the Nasdaq and Toronto Stock Exchanges, for net proceeds of
approximately $76.5 million. All of the outstanding Series A and Series
B preferred shares automatically converted into 8,823,500 common shares
based on the conversion provisions of the preferred shares (note 3).
Unaudited pro forma basic and diluted earnings (loss) per share,
computed assuming the conversion of all outstanding preferred shares at
the beginning of the year, or at the date of issuance if later, is $0.00
for the nine months ended September 30, 2000.
8 DIFFERENCES BETWEEN CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES AND
PRACTICES
The financial statements have been prepared in accordance with Canadian
generally accepted accounting practices (Canadian GAAP), which differ in
certain respects from those principles and practices that the company would
have followed had its financial statements been prepared in accordance with
accounting principles and practices generally accepted in the United States
(U.S. GAAP).
The reconciliation of net income (loss) for the three months and nine months
ended September 30 based on Canadian GAAP to conform to U.S. GAAP is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ----------------------------
1999 2000 1999 2000
$ $ $ $
<S> <C> <C> <C> <C>
Net income (loss) for the period based on
Canadian GAAP (193,655) (53,624) (341,475) 29,429
Accrued dividends and amortization of discount
on preferred shares (i) 18,295 81,894 54,887 230,665
Change in reporting currency (iv) 5,208 - 8,845 -
Stock-based compensation (ii) (17,051) (346,541) (17,051) (2,296,693)
---------- ---------- ---------- ----------
Net loss for the period based on U.S. GAAP (187,203) (318,271) (294,794) (2,036,599)
Other comprehensive income (loss) - foreign
currency translation adjustment (666) 267,800 2,213 271,997
---------- ---------- ---------- ----------
Comprehensive income (loss) for the period
based on U.S. GAAP (187,869) (50,471) (292,581) (1,764,602)
---------- ---------- ---------- ----------
Basic and diluted loss per share based on U.S.
GAAP (0.01) (0.01) (0.01) (0.09)
Pro forma loss per share (vi) (0.01) (0.07)
Weighted average number of shares used in
calculating basic and fully diluted
earnings (loss) per share 19,687,500 19,708,500 19,687,500 19,695,624
</TABLE>
(5)
<PAGE> 14
HYDROGENICS CORPORATION
Notes to Financial Statements
(Unaudited) SEPTEMBER 30, 2000
------------------------------------------------------------------------------
(expressed in U.S. dollars)
The effect of these adjustments on the shareholders' equity (deficiency) of
the company is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
$ $
<S> <C> <C>
Shareholders' equity based on Canadian GAAP 37,767 497,433
Equity component of preferred shares (i) (124,487) (566,675)
Cumulative amortization of discount on preferred shares (i) 21,220 88,991
Currency translation adjustment related to preferred shares (i) - (58,468)
------- -------
Shareholders' deficiency based on U.S. GAAP (65,500) (38,719)
------- -------
</TABLE>
i) Preferred shares
Under Canadian GAAP, convertible redeemable preferred shares are
presented as debt and equity components on the balance sheets. The
statements of operations include a charge for interest on the debt
component and dividends. However, under U.S. GAAP, these preferred
shares meet the definition of mandatorily redeemable shares, which are
considered a component of temporary equity outside of shareholders'
equity. They are recorded at face value and no accretion of a discount
is necessary. Dividends are accrued each period and are charged directly
to equity. In addition, a shareholders' equity reconciliation adjustment
is required to reflect the different foreign exchange translation
treatment between U.S. and Canadian GAAP. At September 30, 2000, the
balance of temporary equity for U.S. GAAP purposes, representing
principal and accrued dividends on mandatorily redeemable shares is
$4,673,000 (December 31, 1999 - $1,068,000).
ii) Stock-based compensation
Under Canadian GAAP, no compensation expense has been recognized with
respect to employee stock options. For U.S. GAAP reporting, the company
uses the intrinsic value method of APB Opinion No. 25 and options issued
under the plan are deemed to be compensatory to the extent that the fair
value of the stock exceeds the exercise price at the date of grant. The
compensation cost is recognized over the vesting period. For U.S. GAAP,
the compensation cost not yet recognized is presented as a deferred
stock-based compensation charge, with a corresponding amount included in
stock options outstanding, both of which form part of shareholders'
equity. As at September 30, 2000, equity balances for deferred
stock-based compensation expense and stock options outstanding are
$3,292,243 and $3,638,784, respectively.
iii) New accounting standards
For U.S. GAAP reporting purposes, the company will be required to adopt
FAS 133 "Accounting for Derivative Instruments and Hedging Activities"
for the 2001 fiscal year. The company does not use derivative financial
instruments for trading purposes and, at present, does not enter into
hedging transactions and therefore the impact of FAS 133 on financial
reporting will not be material.
(6)
<PAGE> 15
HYDROGENICS CORPORATION
Notes to Financial Statements
(Unaudited) SEPTEMBER 30, 2000
------------------------------------------------------------------------------
(expressed in U.S. dollars)
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation - an interpretation of APB Opinion No. 25" (FIN 44).
FIN 44 clarifies the application of APB Opinion No. 25 and among other
issues clarifies the definition of an employee for purposes of applying
APB Opinion No. 25, the criteria for determining whether a plan
qualifies as a non-compensatory plan, and the accounting consequence of
various modifications to the terms of previously fixed stock options or
awards. FIN 44 is effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. The company does not expect the application of FIN 44
to have a material impact on the company's financial position or results
of operations.
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101,
as amended by SAB No. 101A, provides guidance on the measurement and
timing of revenue recognition in financial statements of public
companies. The company does not expect the provisions of SAB 101 to have
a material impact on its financial statements.
iv) Change in reporting currency
The functional currency of the company is the Canadian dollar. Effective
as of December 31, 1999, the company adopted the U.S. dollar as its
reporting currency. Under U.S. GAAP, the financial statements, including
prior periods, are translated according to the current rate method
whereby revenues and expenses are translated at exchange rates
prevailing at the respective transaction dates and assets and
liabilities are translated at period-end rates. Under Canadian GAAP, at
the time of change in reporting currency, the historical financial
statements are presented using a translation of convenience whereby all
amounts for the current year and comparative figures are translated at
the exchange rate prevailing at December 31, 1999. For periods
subsequent to December 31, 1999, the Canadian GAAP treatment is
consistent with U.S. GAAP.
v) Comprehensive income
U.S. GAAP requires disclosure of comprehensive income, which comprises
income (loss) and other comprehensive income. The only item of other
comprehensive income for the company is the changes to the currency
translation adjustment account. As at September 30, 2000, accumulated
other comprehensive income (loss) is $267,115 (December 31, 1999 -
$(4,953)). Under Canadian GAAP, there is no standard for reporting
comprehensive income.
vi) Pro forma earnings (loss) per share
The company completed a public underwriting on November 1, 2000 (note
7(b)) causing the automatic conversion of preferred shares to 8,823,500
common shares (note 3). Pro forma basic and fully diluted loss per
share, computed assuming the conversion of all outstanding preferred
shares at the beginning of the periods presented, or at the date of
issuance if later, is ($0.07) for the nine months ended September 30,
2000 and ($0.01) for the three months ended September 30, 2000.
(7)
