**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 20-F**

 

**(MarkOne)**

 

| **o**      | **REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or  (g) OF THE SECURITIES EXCHANGE ACT OF 1934**                               |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                                  |
| **OR**     |
| ** ** | ** **                                                                                                                                  |
| **x**      | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended  December 31, 2009** |
| ** ** | ** **                                                                                                                                  |
| **OR**     |
| ** ** | ** **                                                                                                                                  |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                               |
| ** ** | ** **                                                                                                                                  |
| **OR**     |
| ** ** | ** **                                                                                                                                  |
| **o**      | **SHELL COMPANY REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                            |

 

Commissionfile number: 000-31815

 
| **HYDROGENICS CORPORATION -**

**CORPORATION HYDROGÉNIQUE**                                                                                           |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (Exact name of Registrant as specified in its charter)                                                                                                     |
|                                                                                                                                                       |
| **Canada**                                                                                                                                                 |
| (Jurisdiction of incorporation or organization)                                                                                                            |
|                                                                                                                                                       |
| **5985 McLaughlin Road**

**Mississauga, Ontario**

**Canada L5R 1B8**

**(905) 361-3660**                                                                 |
| (Address of principal executive office)                                                                                                                    |
|                                                                                                                                                       |
| **Lawrence Davis, Chief Financial Officer**

**5985 McLaughlin Road**

**Mississauga, Ontario**

**Canada L5R 1B8**

**(905) 361-3660 Fax (905) 361-3626** |
| (Name, Telephone, Email and/or Facsimile number and Address of  Company Contact Person)                                                                    |

 

Securitiesregistered or to be registered pursuant to Section 12(b) of the Act.

 

| Title of each  class |       | Name of each  exchange on which registered |
|----------------------|------------|--------------------------------------------|
| **Common Shares**    | ** ** | **The Nasdaq Global Market**               |

 

Securitiesregistered or to be registered pursuant to Section 12(g) of the Act.

 

**None**

 

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Securitiesfor which there is a reporting obligation pursuant to Section 15(d) ofthe Act.

 

**Warrants**

 

Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.

**At December 31, 2009, 3,701,987common shares were issued and outstanding**

(as adjusted to reflect the shareconsolidation implemented on March 12, 2010)

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

o Yes   x No

 

Ifthis report is an annual or transition report, indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.

o Yes   x No

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

x Yes   o No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).

x Yes   o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. 

 

| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x |
|---------------------------|--------|---------------------|--------|-------------------------|

 

Indicateby check mark which basis of accounting the registrant has used to prepare thefinancial statements included in this filing:

 

| U.S. GAAP o |   | International Financial Reporting Standards as issued  by the International Accounting Standards Board o |   | Other x |
|-------------|--------|----------------------------------------------------------------------------------------------------------|--------|---------|

 

If“Other” has been checked in response to the previous question, indicate bycheck mark which financial statement item the registrant has elected to follow.

o Item 17   x Item 18

 

Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes   x No

 

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**TABLE OF CONTENTS**

 
| INTRODUCTION AND USE OF CERTAIN  TERMS | 1                                                                             |
|----------------------------------------|-------------------------------------------------------------------------------|
|                                   |                                                                          |
| FORWARD LOOKING STATEMENTS             | 1                                                                             |
|                                   |                                                                          |
| PART I                            | 3                                                                             |
| ITEM 1.                                | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                         | 3 |
| ITEM 2.                                | OFFER STATISTICS AND EXPECTED TIMETABLE                                       | 3 |
| ITEM 3.                                | KEY INFORMATION                                                               | 3 |
| ITEM 4.                                | INFORMATION ON THE COMPANY                                                    | 18 |
| ITEM 4A.                               | UNRESOLVED STAFF COMMENTS                                                     | 28 |
| ITEM 5.                                | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                  | 29 |
| ITEM 6.                                | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                    | 48 |
| ITEM 7.                                | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                             | 63 |
| ITEM 8.                                | FINANCIAL INFORMATION                                                         | 65 |
| ITEM 9.                                | THE OFFER AND LISTING                                                         | 66 |
| ITEM 10.                               | ADDITIONAL INFORMATION                                                        | 68 |
| ITEM 11.                               | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                    | 75 |
| ITEM 12.                               | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                        | 75 |
|                                   |                                                                          |   |
| PART II                           |                                                                          | 76 |
| ITEM 13.                               | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                               | 76 |
| ITEM 14.                               | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS  AND USE OF PROCEEDS | 76 |
| ITEM 15.                               | CONTROLS AND PROCEDURES                                                       | 78 |
| ITEM 16A.                              | AUDIT COMMITTEE FINANCIAL EXPERT                                              | 79 |
| ITEM 16B.                              | CODE OF ETHICS                                                                | 80 |
| ITEM 16C.                              | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                        | 80 |
| ITEM 16D.                              | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                    | 81 |
| ITEM 16E.                              | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED  PURCHASERS       | 81 |
| ITEM 16F.                              | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT                             | 81 |
| ITEM 16G.                              | CORPORATE GOVERNANCE                                                          | 81 |
|                                   |                                                                          |   |
| PART III                          |                                                                          | 82 |
| ITEM 17.                               | FINANCIAL STATEMENTS                                                          | 82 |
| ITEM 18.                               | FINANCIAL STATEMENTS                                                          | 82 |
| ITEM 19.                               | EXHIBITS                                                                      | 84 |

 

i

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** **

**INTRODUCTIONAND USE OF CERTAIN TERMS**

** **

In this Form 20-F,references to the “United States” or to “U.S.” are to the United States ofAmerica. You will find the words “we,” “our,” “us” and similar words or phrasesin this Form 20-F. We use those words to comply with the requirement ofthe U.S. Securities and Exchange Commission to use “plain English” in publicdocuments like this Form 20-F. Each executive identified in this Form 20-Freports directly to other executives of the Company by whom the executive isemployed, or to the Company’s Board of Directors.

 

In this Form 20-F,unless the context otherwise requires, the terms “Hydrogenics”, “Company”, “we”,“us” and “our” refer to Hydrogenics Corporation, the Registrant, and itsconsolidated subsidiaries and, where the context requires, includes our predecessor(“Old Hydrogenics”) and its consolidated subsidiaries prior to October 27,2009.  References to “common shares” or “Shares”herein refer to common shares of Hydrogenics.

 

Unless otherwiseindicated, all references in this document to our securities have, wherenecessary, been adjusted to reflect the share consolidation effected on March 12,2010, which resulted in one post-consolidation common share for everytwenty-five pre-consolidation common shares.

 

**FORWARDLOOKING STATEMENTS**

** **

This Form 20-Fcontains “forward-looking information”, within the meaning of applicableCanadian securities laws and “forward-looking statements” within the meaning ofthe 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 certainactions, events or results “may”, “could”, “would”, “might” or “will” be taken,occur or be achieved. These forward-looking statements relate to, among otherthings, our future results, levels of activity, performance, goals orachievements or other future events. These forward-looking statements are basedon current expectations and various assumptions and analyses made by us inlight of our experience and our perceptions of historical trends, currentconditions and expected future developments and other factors that we believeare appropriate in the circumstances. These forward-looking statements involveknown and unknown risks, uncertainties and other factors that may cause actualresults or events to differ materially from those anticipated in ourforward-looking statements.

 

These risks,uncertainties and factors include, but are not limited to: our inability toincrease our revenues or raise additional funding to continue operations,execute our business plan, or to grow our business; inability to address asustained or broad economic recession, and its impact on our business, resultsof operations and consolidated financial condition; our limited operatinghistory; inability to implement our business strategy; inability to obtainshareholder approval to allow an adjustment to the exercise price of our seriesB warrants; unfavorable outcome of our litigation with Alpha Capital Anstalt;fluctuations in our quarterly results; failure to maintain our customer base thatgenerates the majority of our revenues; currency fluctuations; failure tomaintain sufficient insurance coverage; changes in value of our goodwill;failure of a significant market to develop for our products; failure ofhydrogen being readily available on a cost-effective basis; changes ingovernment policies and regulations; failure of uniform codes and standards forhydrogen-fuelled vehicles and related infrastructure to develop; failure tocompete with other developers and manufacturers of products in our industry;failure to compete with developers and manufacturers of traditional andalternative technologies; failure to develop partnerships with originalequipment manufacturers, governments, systems integrators and other thirdparties; inability to obtain sufficient materials and components for ourproducts from suppliers; failure to manage expansion of our operations; failureto manage foreign sales and operations; failure to recruit, train and retainkey management personnel; inability to integrate acquisitions; failure todevelop adequate manufacturing processes and capabilities; failure to completethe development of commercially viable products; failure to producecost-competitive products; failure or delay in field testing of our products;failure to produce products free of defects or errors; inability to adapt totechnological advances or new codes and standards; failure to protect ourintellectual property; our involvement in intellectual property litigation;exposure to product liability claims; failure to meet rules regardingpassive foreign investment companies; actions of our significant and principalshareholders; dilution as a result of significant issuances of our commonshares and preferred shares; inability of U.S. investors to enforce U.S. civilliability judgments against us; volatility of our common share price; anddilution as a result of the exercise of options.  These risk factors and others are discussedin more detail herein, including under “Item 3. Key Information — Risk Factors,”“Item 4. Information on the Company,” “Item 5. Operating and Financial Reviewand Prospects, and “Item 14. Material Modifications to the Rights of SecurityHolders and Use of Proceeds.”

 

These factors may causethe Company’s actual performance and financial results in future periods todiffer materially from any estimates or projections of future performance orresults expressed or implied by such forward-looking statements.Forward-looking statements do not take into account the effect that transactionsor non-recurring or other special items announced or occurring after thestatements are made have on the Company’s business. For example, they do notinclude the effect of business dispositions, acquisitions, other business 

 

1

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transactions,asset write-downs or other charges announced or occurring after forward-lookingstatements are made. The financial impact of such transactions andnon-recurring and other special items can be complex and necessarily depends onthe facts particular to each of them.

 

We believe that theexpectations represented by our forward-looking statements are reasonable, yetthere can be no assurance that such expectations will prove to be correct. Thepurpose of the forward-looking statements is to provide the reader with adescription of management’s expectations regarding the Company’s fiscal 2010financial performance and may not be appropriate for other purposes.Furthermore, unless otherwise stated, the forward-looking statements containedherein are made as of the date of this Form 20-F, and we do not undertakeany obligation to update publicly or to revise any of the includedforward-looking statements, whether as a result of new information, futureevents or otherwise unless required by applicable legislation or regulation.The forward-looking statements contained in this report are expressly qualifiedby this cautionary statement.

 

2

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** **

**PART I**

** **

**ITEM 1.**                             IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

** **

Not applicable.

 

**ITEM 2.**                             OFFER STATISTICS AND EXPECTED TIMETABLE

** **

Not applicable.

 

**ITEM 3.**                             KEY INFORMATION

** **

**SELECTEDFINANCIAL DATA**

** **

All financial datapresented in this Form 20-F with respect to the years ended December 31,2009, 2008 and 2007 are qualified in their entirety by reference to therelevant information in the consolidated financial statements and their notes.

 

3

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**HYDROGENICSCORPORATION**

**BALANCESHEETS DATA**

 
| **(in thousands of U.S. dollars, except for share   amounts)** | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|----------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| **ASSETS**                                                     |       |      |       |      |       |      |       |      |       |      |       |
| **Current Assets**                                             |       |      |       |      |       |      |       |      |       |      |       |
| Cash  and cash equivalents                                     |       | $         | 9,159      |      | $          | 21,601    |       | $         | 15,460     |      | $          | 5,937 |   | $ | 5,394 |   |
| Restricted  cash                                               |       | 1,603     |       | 1,130     |       | —    |       | —    |       | —    |       |
| Short-term  investments                                        |       | —    |       | —    |       | 15,032    |       | 54,350    |       | 80,396    |       |
| Accounts  receivable                                           |       | 3,685     |       | 3,974     |       | 12,713    |       | 9,740     |       | 7,733     |       |
| Grants  receivable                                             |       | 490       |       | 505       |       | 850       |       | 1,901     |       | 1,909     |       |
| Inventories                                                    |       | 11,746    |       | 10,101    |       | 12,659    |       | 12,718    |       | 8,685     |       |
| Prepaid  expenses                                              |       | 1,270     |       | 1,161     |       | 1,077     |       | 1,539     |       | 2,353     |       |
|                                                           |       | 27,953    |       | 38,472    |       | 57,791    |       | 86,185    |       | 106,470   |       |
| **Restricted cash**                                            |       | 240       |       | —    |       | —    |       | —    |       | —    |       |
| **Property, plant and equipment**                              |       | 3,169     |       | 4,082     |       | 4,847     |       | 5,435     |       | 5,682     |       |
| **Intangible assets**                                          |       | —    |       | —    |       | 249       |       | 500       |       | 33,972    |       |
| **Goodwill**                                                   |       | 5,446     |       | 5,025     |       | 5,025     |       | 5,025     |       | 68,505    |       |
| **Other non-current assets**                                   |       | —    |       | —    |       | 28        |       | 28        |       | 28        |       |
| ** **                                                     |       | $         | 36,808     |      | $          | 47,579    |       | $         | 67,940     |      | $          | 97,173 |   | $ | 214,657 |   |
| **LIABILITIES**                                                |       |      |       |      |       |      |       |      |       |      |       |
| **Current Liabilities**                                        |       |      |       |      |       |      |       |      |       |      |       |
| Accounts  payable and accrued liabilities                      |       | $         | 14,782     |      | $          | 17,298    |       | $         | 18,166     |      | $          | 21,380 |   | $ | 14,918 |   |
| Unearned  revenue                                              |       | 4,546     |       | 4,785     |       | 9,042     |       | 8,809     |       | 3,772     |       |
|                                                           |       | 19,328    |       | 22,083    |       | 27,208    |       | 30,189    |       | 18,690    |       |
| **Long-term debt**                                             |       | —    |       | —    |       | 11        |       | 94        |       | 325       |       |
| **Deferred research and development grants**                   |       | —    |       | 13        |       | 337       |       | 133       |       | 135       |       |
|                                                           |       | 19,328    |       | 22,096    |       | 27,556    |       | 30,416    |       | 19,150    |       |
| **Shareholders’ Equity**                                  |       |      |       |      |       |      |       |      |       |      |       |
| Common  Shares                                                 |       | 307,038   |       | 307,000   |       | 306,872   |       | 307,376   |       | 306,957   |       |
| Warrants                                                       |       | —    |       | —    |       | —    |       | —    |       | —    |       |
| Contributed  surplus                                           |       | 16,713    |       | 16,300    |       | 15,606    |       | 13,718    |       | 11,847    |       |
| Deficit                                                        |       | (300,795  | )          | (291,420  | )          | (277,101  | )          | (249,033  | )          | (118,274  | )          |
| Accumulated  other comprehensive loss                          |       | (5,476    | )          | (6,397    | )          | (4,993    | )          | (5,304    | )          | (5,023    | )          |
| Total  deficit and accumulated other comprehensive loss        |       | (306,271  | )          | (297,817  | )          | (282,094  | )          | (254,337  | )          | (123,297  | )          |
|                                                           |       | 17,480    |       | 25,483    |       | 40,384    |       | 66,757    |       | 195,507   |       |
| ** **                                                     |       | $         | 36,808     |      | $          | 47,579    |       | $         | 67,940     |      | $          | 97,173 |   | $ | 214,657 |   |
| Weighted  average number of shares                             |       | 3,697,740 |       | 3,683,226 |       | 3,671,916 |       | 3,672,642 |       | 3,649,076 |       |

 

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Note:

 

*                 Weighted average number of shares is presentedpost-consolidation.

 

4

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**HYDROGENICSCORPORATION****STATEMENTS OF INCOME DATA**

 
| **(in thousands of U.S. dollars, except for share and  per share  amounts)** | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| **Revenues**                                                                 |       | $         | 18,841     |      | $          | 39,340    |       | $         | 37,990     |      | $          | 30,059 |   | $ | 37,191 |   |
| **Cost of revenues**                                                         |       | 15,113    |       | 31,446    |       | 33,601    |       | 29,360    |       | 33,881    |       |
|                                                                         |       | 3,728     |       | 7,894     |       | 4,389     |       | 699       |       | 3,310     |       |
| **Operating expenses**                                                       |       |      |       |      |       |      |       |      |       |      |       |
| Selling,  general and administrative                                         |       | 16,995    |       | 15,022    |       | 24,006    |       | 27,891    |       | 24,616    |       |
| Research  and product development                                            |       | 5,219     |       | 7,296     |       | 9,690     |       | 9,379     |       | 7,745     |       |
| Wind-up  of test equipment business                                          |       | —    |       | —    |       | 2,016     |       | —    |       | —    |       |
| Impairment  of property, plant and equipment                                 |       | 317       |       | —    |       | —    |       | —    |       | —    |       |
| Amortization  of property, plant and equipment                               |       | 984       |       | 855       |       | 903       |       | 1,285     |       | 1,365     |       |
| Amortization  of intangible assets                                           |       | —    |       | 249       |       | 251       |       | 7,139     |       | 8,429     |       |
| Integration  costs                                                           |       | —    |       | —    |       | —    |       | —    |       | 1,123     |       |
| Impairment  of intangible assets and goodwill                                |       | —    |       | —    |       | —    |       | 90,834    |       | —    |       |
|                                                                         |       | 23,515    |       | 23,422    |       | 36,866    |       | 136,528   |       | 43,278    |       |
|                                                                         |       |      |       |      |       |      |       |      |       |      |       |
| **Loss from operations**/ Loss from continuing operations                    |       | (19,787   | )          | (15,528   | )          | (32,477   | )          | (135,829  | )          | (39,968   | )          |
| **Other income** (expenses)                                                  |       |      |       |      |       |      |       |      |       |      |       |
| Sale  of assets                                                              |       | —    |       | 44        |       | —    |       | 477       |       | —    |       |
| Loss  on disposal of property, plant and equipment                           |       | (14       | )          | —    |       | (308      | )          | —    |       | —    |       |
| Provincial  capital tax                                                      |       | (154      | )          | 170       |       | (127      | )          | (42       | )          | (91       | )          |
| Interest,  net                                                               |       | 169       |       | 923       |       | 2,249     |       | 3,551     |       | 2,936     |       |
| Foreign  currency gains (losses)                                             |       | 40        |       | 188       |       | 2,617     |       | 904       |       | (251      | )          |
|                                                                         |       | 41        |       | 1,325     |       | 4,431     |       | 4,890     |       | 2,594     |       |
| **Loss before income taxes**                                                 |       | (19,746   | )          | (14,203   | )          | (28,046   | )          | (130,939  | )          | (37,374   | )          |
| **Current income tax expense**(recovery)                                     |       | (10,371   | )          | 116       |       | 22        |       | (180      | )          | —    |       |
| **Net loss for the year**                                                    |       | (9,375    | )          | $         | (14,319    | )         | $          | (28,068   | )          | $         | (130,759   | ) | (37,374 | ) |
|                                                                         |       |      |       |      |       |      |       |      |       |      |       |
| **Net loss per share**/ Net loss from continuing operations per share        |       |      |       |      |       |      |       |      |       |      |       |
| Basic  and diluted                                                           |       | $         | (2.54      | )         | $          | (3.89     | )          | $         | (7.64      | )         | $          | (35.60 | ) | $ | (10.24 | ) |
| Shares  used in calculating basic and diluted net loss per share             |       | 3,697,740 |       | 3,683,226 |       | 3,671,916 |       | 3,672,642 |       | 3,649,076 |       |

 

We have never declared orpaid any cash dividends on our common shares.

 

The current income taxexpense (recovery) includes $10,464 of proceeds received from the APIFTransaction (which is defined below under “Item 4. Information on the Company”).  This amount will not reoccur in future years.

 

The financial informationin this Form 20-F has been prepared in accordance with Canadian generallyaccepted accounting practices (“GAAP”).  Certain financial informationunder U.S. GAAP are as follows:

 

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** **
| **(in thousands of U.S. dollars, except for share and  per share amounts)** | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|-----------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| Revenues                                                                    |       | $         | 18,841     |      | $          | 39,340    |       | $         | 37,990     |      | $          | 30,059 |   | $ | 37,191 |   |
| Loss  from operations before taxes                                          |       | $         | (19,636    | )         | $          | (15,440   | )          | $         | (32,477    | )         | $          | (120,058 | ) | $ | (55,739 | ) |
| Loss  from continuing operations before taxes                               |       | $         | (19,636    | )         | $          | (15,440   | )          | $         | (32,477    | )         | $          | (120,058 | ) | $ | (55,739 | ) |
| Net  loss for the year                                                      |       | $         | (9,224     | )         | $          | (14,231   | )          | $         | (28,068    | )         | $          | (114,988 | ) | $ | (53,145 | ) |
| Total  assets                                                               |       | $         | 36,387     |      | $          | 47,579    |       | $         | 67,940     |      | $          | 97,173 |   | $ | 198,881 |   |
| Net  assets                                                                 |       | $         | 17,719     |      | $          | 25,571    |       | $         | 40,384     |      | $          | 66,757 |   | $ | 179,736 |   |
| Shareholders’  Equity                                                  |       | $         | 17,719     |      | $          | 25,571    |       | $         | 40,384     |      | $          | 66,757 |   | $ | 179,736 |   |
|                                                                        |       |      |       |      |       |      |       |      |       |      |       |
| Basic  and fully diluted comprehensive net loss per share                   |       | $         | (2.49      | )         | $          | (3.86     | )          | $         | (7.64      | )         | $          | (31.30 | ) | $ | (14.56 | ) |
| Weighted  average number of shares used in calculating loss per share       |       | 3,697,740 |       | 3,683,226 |       | 3,671,916 |       | 3,672,642 |       | 3,649,076 |       |

 

For a discussion of thematerial differences between Canadian GAAP and U.S. GAAP as they relate to ourfinancial statements and a reconciliation of certain additional financialinformation, see “Note  20 — DifferencesBetween Canadian and United States Accounting Principles” to our consolidatedfinancial statements, which can be found beginning on page F-35 of thisform, and is incorporated by reference herein.

 

**CAPITALIZATIONAND INDEBTEDNESS**

** **

Not applicable.

 

**REASONSFOR THE OFFER AND USE OF PROCEEDS**

** **

Not applicable.

 

**RISKFACTORS**

** **

**Risk Factors Related to Our FinancialCondition**

** **

***If we are unsuccessful in increasing our revenues andraising additional funding, we may possibly cease to continue as we currentlydo.***

*** ***

The report of ourindependent auditors in respect of the 2009 fiscal year contains an explanatoryparagraph regarding our ability to continue as a going concern.  In addition, while our consolidated financialstatements for the year ended December 31, 2009 have been prepared on agoing concern basis, which contemplates the realization of assets andliquidation of liabilities during the normal course of operations, our abilityto continue as a going concern is dependent on the successful execution of theCompany’s business plan.  This planincludes an increase in revenue and additional funding to be provided bypotential investors as well as non-traditional sources of financing. We havedisclosed in our financial statements for the year ended December 31, 2009that there are material uncertaintiesthat cast substantial doubt upon our ability to continue as a going concern.

 

We have sustained lossesand negative cash flows from operations since our inception. We expect thatthis will continue throughout 2010 and 2011. If we do not raise enoughadditional capital during 2010, we do not expect our operations to generatesufficient cash flow to fund our obligations as they come due.

 

Additional funding may bein the form of debt or equity or a hybrid instrument depending on the needs ofthe investor. Given the prevailing global economic and credit marketconditions, we may not be able to raise additional cash resources through thesetraditional sources of financing. Although we are also pursuing non-traditionalsources of financing, the global credit market crisis has also adverselyaffected the ability of potential parties to pursue such transactions.Accordingly, as a result of the foregoing, we continue to review traditionalsources of financing, such as private and public debt or equity financingalternatives, as well as other alternatives to enhance shareholder value, 

 

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including, but notlimited to, non-traditional sources of financing, such as alliances withstrategic partners, the sale of assets or licensing of our technology, acombination of operating and related initiatives or a substantialreorganization of our business.

 

We had filed a finalshort form base shelf prospectus with certain Canadian securities regulatoryauthorities on January 4, 2010 and a corresponding registration statementon Form F-3, which was declared effective by the U.S. Securities andExchange Commission on December 31, 2009, to enhance our ability to accessthe capital markets.  Pursuant to the Form F-3,we may offer up to $16 million of debt, equity or other securities over a25-month period from December 31, 2009, provided that we cannot issuesecurities with a value exceeding one-third of our public float (i.e., theaggregate market value of our outstanding common shares held by non-affiliates)in any 12-month period.  On January 14,2010, we issued common shares and warrants having a value of $11.5 million,which is significantly greater than one-third of our current public float, totwo institutional investors in a registered direct offering pursuant to the Form F-3.  As a result, we may not issue any additionalsecurities pursuant to the Form F-3 until January 14, 2011 based onour current public float unless there was a significant increase in the marketprice of our common shares.  In addition,even if the market price of our common shares were to increase significantly,we could not in any event issue more than $4.5 million of additional securitiespursuant to our existing shelf prospectus.

 

In addition, there areother limits on our ability to issue securities to raise additional funding.The Nasdaq generally requires an issuer to obtain shareholder approval prior tothe issuance of common shares or securities convertible into or exercisable forcommon shares, other than in a public offering, equal to 20% or more of thecommon shares outstanding prior to such issuance in one or an integrated seriesof offerings if such securities are issued at a price below market value.  In light of our registered direct offering inJanuary 2010, we may be required to obtain shareholder approval forcertain issuances of our securities.

 

Furthermore, thesecurities purchase agreement that we entered into with the two institutionalinvestors in connection with the registered direct offering contains certainrestrictions that may affect our ability to obtain financing.  See the risk factor “We require shareholderapproval to allow an adjustment to the exercise price of our series B warrants,the failure of which could materially adversely affect our flexibility inobtaining necessary financing and our financial condition” for informationregarding such restrictions.  Inaddition, under the securities purchase agreement, we agreed that until April 15,2010, neither the Company nor any of its subsidiaries shall directly orindirectly issue, offer, sell, grant any option to purchase, or otherwisedispose of (or announce any such action with respect to) any of theirrespective equity or equity equivalent securities, including, withoutlimitation, any debt, preferred stock, rights, options, warrants or otherinstrument that is convertible into or exchangeable for capital stock and othersecurities of the Company.

 

There can be noassurances that we will achieve profitability or positive cash flows or be ableto obtain additional funding or that, if obtained, they will be sufficient, orwhether any other initiatives will be successful, such that we may continue asa going concern. There are material uncertainties related to certain adverseconditions and events that cast significant doubt on our ability to remain agoing concern.

 

***Our inability to generate sufficient cash flows, raiseadditional capital and actively manage our liquidity may impair our ability toexecute our business plan, and result in our reducing or eliminating productdevelopment and commercialization efforts, reducing our sales and marketingefforts, and having to forego attractive business opportunities.***

*** ***

At December 31,2009, we had approximately $11.0 million of cash and cash equivalents andrestricted cash (December 31, 2008 - $22.7 million). Restricted cash of$1.8 million is held as partial security for standby letters of credit andletters of finance. There are uncertainties related to the timing and use ofour cash resources and working capital requirements. These uncertaintiesinclude, among other things, the timing and volume of commercial sales andassociated gross margins of our existing products and the development ofmarkets for, and customer acceptance, of new products. Due to these and otherfactors, many of which are outside of our control, we may not be able toaccurately predict our necessary cash expenditures or obtain financing in atimely manner to cover any shortfalls.

 

If we are unable togenerate sufficient cash flows or obtain adequate additional financing, whichgiven the current global economy and credit markets is challenging, we may beunable to respond to the actions of our competitors or we may be prevented fromexecuting our business plan, or conducting all or a portion of our plannedoperations. In particular, the development and commercialization of ourproducts could be delayed or discontinued if we are unable to fund our researchand product development activities or the development of our manufacturingcapabilities. In addition, we may be forced to reduce our sales and marketingefforts or forego attractive business opportunities.

 

***A sustained and broad economic recession couldcontinue to have a negative impact on our business, results of operations andconsolidated financial condition, or our ability to accurately forecast ourresults, and it may cause a number of the risks that we currently face toincrease in likelihood, magnitude and duration.***

*** ***

Macro-level changes inthe global economy began to affect our business in the fourth quarter of 2008.Operationally, we experienced a delay in closing orders. Financially, weexperienced more challenging conditions as a result of weaker capital marketsworldwide and anticipate these changes may adversely alter our ability to raisecapital on favourable terms and could change the terms of our credit facility.

 

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The condition of thecurrent global economy and credit markets affects our outlook in three distinctways. First, our products depend, to some degree, on general world economicconditions and activity. If the current condition of the economy results in a sustainedbroad economic recession, demand for our products is likely to decline. Second,the current economic and credit climate could adversely affect our ability toconduct normal day-to-day selling activities which depend on the granting ofshort-term credit to a wide variety of purchasers and particularly thecorresponding need of those purchasers. Third, those purchasers have acorresponding need to finance purchases by accessing their own lines of credit.If the current condition of the economy is not resolved in a manner that willprovide access to credit to potential purchasers of our products, our businesswill likely suffer as a result.

 

With a sustained orexpanding economic downturn, we expect we will continue to experiencesignificant difficulties on a number of fronts, depending on the duration andseverity of the downturn. As a result, we may face new risks as yetunidentified, and a number of risks which we ordinarily face and which arefurther described herein may increase in likelihood, magnitude and duration.These risks include but are not limited to deferrals or reductions of customerorders, potential deterioration of our customers’ ability to finance purchases,reduced revenue, further deterioration in our cash balances and liquidity dueto foreign exchange impacts, and an inability to access capital markets. Thefinancial crisis and economic downturn will also reduce our ability toaccurately forecast our performance, results or cash position.

 

***Wehave a limited operating history, and because our mix of revenues in the recentpast does not reflect our current business strategy, it may be difficult toassess our business and future prospects.***

*** ***

We commenced operation ofour fuel celltest business in 1996 and since that time we have been engaged principally inthe manufacture and sale of fuel cell test and diagnostic equipment, theprovision of related engineering and testing services, and research and productdevelopment relating to fuel cell systems and subsystems. For the year ended December 31,2009, we derived $12.3 million, or 65%, of revenues from our sales of hydrogengeneration products and services, and $6.5 million, or 35%, of our revenuesfrom sales of power products and services. For the year ended December 31,2008, we derived $31.2 million, or 79%, of revenues from our sales of hydrogengeneration products and services, $5.6 million, or 15%, of our revenues fromsales of power products and services, and $2.5 million, or 6%, of our revenuesfrom sales of fuel cell test equipment and services. For the year ended December 31,2007, we derived $19.6 million, or 52%, of revenues from our sales of hydrogengeneration products and services, $6.1 million, or 16%, of our revenues fromsales of power products and services, and $12.3 million, or 32%, of ourrevenues from sales of fuel cell test equipment and services. On November 7,2007, we announced our decision to commence an orderly wind-up of our fuel celltest products design, development and manufacturing business, which isanticipated to be completed in early 2010. Our current business strategy is to develop, manufacture and sell fuelcell power products in larger quantities. In addition, following ouracquisition of Stuart Energy Systems Corporation (“Stuart Energy”) in January 2005,a significant part of our business now relates to hydrogengeneration products. Because we have made limited sales of fuel cell powerproducts to date and have added a new revenue stream with our hydrogengeneration business, our historical operating data may be of limited value inevaluating our future prospects.

 

***Becausewe expect to continue to incur net losses, we may not be able to implement ourbusiness strategy, and the price of our common shares may decline.***

*** ***

We have not generatedpositive net income since our inception. Our current business strategy is todevelop a portfolio of hydrogen and fuel cell products with market leadershippositions for each product. In so doing, we will continue to incur significantexpenditures for general administrative activities, including sales andmarketing and research and development. As a result of these costs, we willneed to generate and sustain significantly higher revenues and positive grossmargins to achieve and sustain profitability. We incurred net losses for theyear ended December 31, 2009 of $9.4 million, a net loss of$14.3 million for the year ended December 31, 2008, and  a net loss of $28.1 million for the yearended December 31, 2007. Our accumulated deficit as at December 31,2009 was $301.0 million, at December 31, 2008 was $291.4 million, and asat December 31, 2007 was $277.1 million.

 

We expect to incursignificant operating expenses over the next several years. As a result, weexpect to incur further losses in 2010 and 2011, and we may never achieveprofitability. Accordingly, we may not be able to implement our businessstrategy, and the price of our common shares may decline.

 

***Werequire shareholder approval to allow an adjustment to the exercise price ofour series B warrants, the failure of which could materially adversely affectour flexibility in obtaining necessary financing and our financial condition.***

*** ***

On January 14, 2010,we issued common shares, series A warrants and series B warrants to twoinstitutional investors in a registered direct offering (the “Offering”).  The terms of the Offering were set out in asecurities purchase agreement (the “Purchase Agreement”) dated as of January 11,2010 between us and the two institutional investors.  The Purchase Agreement requires us to seek shareholderapproval (i) to allow an adjustment to the exercise price of the series Bwarrants below the $12.00 floor price (the “Floor Price”) in certaincircumstances and (ii) acknowledging that, as a result of suchresolutions, the aggregate number of our common shares deemed to be have beenissued in connection with the Offering exceeds a certain shareholder approvalthreshold pursuant to the rules of the Nasdaq Global Market (the “WarrantResolution”).  We plan on seekingshareholder approval at the May 12, 2010 annual and special meeting ofshareholders.  Until the Warrant 

 

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Resolution is approved,the terms of the series B warrants dictate that no adjustment to the exerciseprice of the series B warrants shall cause the exercise price to be less thanthe Floor Price (as adjusted for any dividend, share split, share combination,reclassification or similar transaction).

 

If we do not obtainshareholder approval, the Purchase Agreement requires us to hold an additionalshareholder meeting in each semi-annual period thereafter until shareholderapproval is obtained or until shareholder approval is no longer required underthe rules and regulations of the Nasdaq Global Market or is no longerrequired to eliminate restrictions on adjustments to the exercise price belowthe Floor Price set forth in the series B warrants.

 

In addition, untilshareholder approval is obtained, with certain exceptions, we may not, directlyor indirectly, issue or sell, or in accordance with the terms of the warrants,be deemed to have issued or sold, any common shares for consideration percommon share less than the Floor Price at any time while any of the warrantsare outstanding without the prior written consent of each investor, whichconsent may be granted or withheld in each investor’s sole discretion.  Until shareholder approval is obtained, weare not able to issue, or be deemed to have issued, certain other securities(including options or shares of common stock to directors, officers oremployees of Hydrogenics pursuant to an employee benefit plan, certainconvertible securities or unregistered common shares to a person who entersinto a strategic alliance with us) for less than the fair market value of thecommon shares at the time such securities are issued or are deemed to beissued. Our Board of Directors and management of the Company believe that thefailure to obtain shareholder approval for the Warrant Resolution maymaterially adversely affect the Company’s flexibility in obtaining anynecessary financing and our financial condition.

 

***Weare currently involved in litigation with Alpha Capital Anstalt, the outcome ofwhich could adversely affect our financial condition.***

*** ***

Alpha Capital Anstalt (“Alpha”)filed suit against Hydrogenics and two of our officers on February 23,2010 in the Supreme Court of the State of New York (County of New York)regarding our share consolidation, which was completed on March 12, 2010.

 

We issued common sharesand warrants to Alpha and another institutional investor in the Offering(described above).  Under the terms ofthe Offering, Alpha and the other institutional investor each paid $2,500,000for 250,000 common shares, 119,678 series A warrants and 130,323 series Bwarrants of the Company.

 

In its complaint, Alphaalleges that our share consolidation triggers a put right pursuant to the termsof the warrants and gives rise to breach of contract, negligentmisrepresentation and fraud claims. Alpha is seeking damages of at least $2,000,000 plus interest, costs andfees with respect to the alleged put right and damages of at least $1,375,000plus interest, costs and fees with respect to the alleged breach of contract,negligent misrepresentation and fraud claims. We have also received correspondence from the other institutionalinvestor making similar allegations.

 

While we believe theclaims are without merit and we are taking such action as is advised to protectour interests, the outcome of litigation is inherently uncertain, and an unfavorableoutcome to the above litigation matter could have an adverse effect on ourfinancial condition and threaten our viability. In addition, we expect that ourlegal fees and expenses will be substantial so long as this matter remainsoutstanding.

 

***Our quarterlyoperating results are likely to fluctuate significantly and may fail to meetthe expectations of securities analysts and investors, and may cause the priceof our common shares to decline.***

*** ***

Our quarterly revenuesand operating results have varied significantly in the past and are likely tovary in the future. These quarterly fluctuations in our operating performanceresult from the length of time between our first contact with a customer andthe recognition of revenue from sales to that customer. Our products are highlyengineered and many are still in development stages; therefore, the length oftime between approaching a customer and delivering our products to thatcustomer can span many quarterly periods. In many cases a customer’s decisionto buy our products and services may require the customer to change itsestablished business practices and to conduct its business in new ways. As aresult, we must educate customers on the use and benefits of our products andservices. This can require us to commit significant time and resources withoutnecessarily generating any revenues. Many potential customers may wish to enterinto test arrangements with us in order to use our products and services on atrial basis. The success of these trials may determine whether or not thepotential customer purchases our products or services on a commercial basis.Potential customers may also need to obtain approval at a number of managementlevels and one or more regulatory approvals. This may delay a decision to purchaseour products.

 

The length andvariability of the sales cycles for our products make it difficult to forecastaccurately the timing and amount of specific sales and corresponding revenuerecognition. The delay or failure to complete one or more large salestransactions could significantly reduce our revenues for a particular quarter.We may expend substantial funds and management effort during our sales cyclewith no assurance that we will successfully sell our products. As a result, ourquarterly operating results are likely to fluctuate significantly and we mayfail to meet the expectations of securities analysts and investors, and theprice of our common shares may decline.

 

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*** ***

***Wecurrently depend on a relatively limited number of customers for a majority ofour revenues and a decrease in revenue from these customers could materiallyadversely affect our business, consolidated financial condition and results ofoperations.***

*** ***

To date, a relativelylimited number of customers have accounted for a majority of our revenues andwe expect they will continue to do so for the foreseeable future. Our fourlargest customers accounted for 27% of revenues for the year ended December 31, 2009,35% of our revenues for the year ended December 31, 2008, and 26% of ourrevenues for the year ended December 31, 2007. The identities of some ofour largest customers have changed from year to year. Our arrangements withthese customers are generally non-exclusive, have no volume commitments and areoften on a purchase-order basis. We cannot be certain that customers who haveaccounted for significant revenue in past periods will continue to purchase ourproducts and generate revenues. Accordingly, our revenue and results of operationsmay vary from period to period. We are also subject to credit risk associatedwith the concentration of our accounts receivable from these significantcustomers. If one or more of these significant customers were to cease doingbusiness with us, significantly reduce or delay purchases from us, or fail topay on a timely basis, our business, consolidated financial condition andresults of operations could be materially adversely affected.

 

***Ouroperating results may be subject to currency fluctuation.***

*** ***

Our monetary assets andliabilities denominated in currencies other than the U.S. dollar will give riseto a foreign currency gain or loss reflected in earnings. To the extent thatthe Canadian dollar or the euro strengthens against the U.S. dollar, we may incurnet foreign exchange losses on our net consolidated monetary asset balancewhich is denominated in those currencies. Such losses would be included in ourfinancial results and, consequently, may have an adverse effect on our shareprice.

 

As we currently haveoperations based in Canada and Europe, a significant portion of our expensesare in Canadian dollars and euros. However, a significant part of our revenuesare currently generated in U.S. dollars and euros, and we expect that this willcontinue for the foreseeable future. In addition, we may be required to financeour European operations by exchanging Canadian dollars or U.S. dollars intoeuros. The exchange rates between the Canadian dollar, the U.S. dollar and theeuro are subject to daily fluctuations in the currency markets and thesefluctuations in market exchange rates are expected to continue in the future.Such fluctuations affect both our consolidated revenues as well as ourconsolidated costs. If the value of the U.S. dollar weakens against theCanadian dollar or the euro, the profit margin on our products may be reduced.Also, changes in foreign exchange rates may affect the relative costs ofoperations and prices at which we and our foreign competitors sell products inthe same market. We currently have limited currency hedging through financialinstruments. We carry a portion of our short-term investments in Canadiandollars and euros.

 

***Ourinsurance may not be sufficient.***

*** ***

We carry insurance thatwe consider adequate considering the nature of the risks and costs of coverage.We may not, however, be able to obtain insurance against certain risks or forcertain products or other resources located from time to time in certain areasof the world. We are not fully insured against all possible risks, nor are allsuch risks insurable. Thus, although we maintain insurance coverage, suchcoverage may not be adequate.

 

***Certainexternal factors may affect the value of goodwill, which may require us torecognize an impairment charge.***

*** ***

Goodwill arising from ouracquisition of Stuart Energy in 2005 comprise approximately 14.8% of our totalassets as at December 31, 2009, 10.6% of our total assets as at December 31,2008 and 8% of our total assets as at December 31, 2007. Economic, market,legal, regulatory, competitive, customer, contractual and other factors mayaffect the value of goodwill. If any of these factors impair the value of theseassets, accounting rules require us to reduce their carrying value andrecognize an impairment charge. This would reduce our reported assets andearnings in the year the impairment charge is recognized.

 

**Risk Factors Related toOur Business and Industry**

** **

***Significantmarkets for fuel cell and other hydrogen energy products may never develop ormay develop more slowly than we anticipate, which would significantly harm ourrevenues and may cause us to be unable to recover the losses we have incurredand expect to incur in the development of our products.***

*** ***

Significant markets maynever develop for fuel cell and other hydrogen energy products or they maydevelop more slowly than we anticipate. Any such delay or failure wouldsignificantly harm our revenues and we may be unable to recover the losses wehave incurred and expect to continue to incur in the development of our products.If this were to occur, we may never achieve profitability and our businesscould fail. Fuel cell and other hydrogen energy products represent an emergingmarket, and whether or not end-users will want to use them may be affected bymany factors, some of which are beyond our control, including:

 

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·                  theemergence of more competitive technologies and products, including otherenvironmentally clean technologies and products that could render our productsobsolete;

 

·                  thefuture cost of hydrogen and other fuels used by our fuel cell systems;

 

·                  thefuture cost of the membrane electrode assembly used in our fuel cell systems;

 

·                  thefuture cost of platinum group metals, a key catalyst used in our fuel cell andhydrogen generation systems;

 

·                  theregulatory requirements of agencies, including the development of uniform codesand standards for fuel cell products, hydrogen refueling infrastructure andother hydrogen energy products;

 

·                  governmentsupport by way of legislation, tax incentives, policies or otherwise, of fuelcell technology, hydrogen storage technology and hydrogen refueling technology;

 

·                  themanufacturing and supply costs for fuel cell components and systems;

 

·                  theperceptions of consumers regarding the safety of our products;

 

·                  thewillingness of consumers to try new technologies;

 

·                  thecontinued development and improvement of existing power technologies; and

 

·                  thefuture cost of fuels used in existing technologies.

 

***Hydrogenmay not be readily available on a cost-effective basis, in which case our fuelcell products may be unable to compete with existing power sources, and ourrevenues and results of operations would be materially adversely affected.***

*** ***

If our fuel cell productcustomers are not able to obtain hydrogen on a cost-effective basis, we may beunable to compete with existing power sources, and our revenues and results ofoperations would be materially adversely affected. Our fuel cell productsrequire oxygen and hydrogen to operate. While ambient air can typically supplythe necessary oxygen, our fuel cells rely on hydrogen derived from water orfrom fuels such as natural gas, propane, methanol and other petroleum products.We manufacture and develop hydrogen generation systems called electrolyzersthat use electricity to separate water into its constituent parts of hydrogenand oxygen. In addition, third parties are developing systems to extract, orreform, hydrogen from fossil fuels. Significant growth in the use ofhydrogen-powered devices, particularly in the mobile market, may require thedevelopment of an infrastructure to deliver the hydrogen. There is no guaranteethat such an infrastructure will be developed on a timely basis or at all. Evenif hydrogen is available for our products, if its price is such thatelectricity or power produced by our systems would cost more than electricityprovided through other means, we may be unable to compete successfully.

 

***Changesin government policies and regulations could hurt the market for our products.***

*** ***

The fuel cell andhydrogen industry is in its development phase and is not currently subject toindustry-specific government regulations in Canada, the European Union and theUnited States as well as other jurisdictions, relating to matters such asdesign, storage, transportation and installation of fuel cell systems andhydrogen infrastructure products. However, given that the production ofelectrical energy has typically been an area of significant governmentregulation, we expect that we will encounter industry-specific governmentregulations in the future in the jurisdictions and markets in which we operate.For example, regulatory approvals or permits may be required for the design,installation and operation of stationary fuel cell systems under federal, stateand provincial regulations governing electric utilities and mobile fuel cellsystems under federal, state and provincial emissions regulations affectingautomobile manufacturers. To the extent that there are delays in gaining suchregulatory approval, our development and growth may be constrained.Furthermore, the inability of our potential customers to obtain a permit, orthe inconvenience often associated with the permit process, could harm demandfor fuel cell and other hydrogen products and, therefore, harm our business.

 

Our business will sufferif environmental policies change and no longer encourage the development andgrowth of clean power technologies. The interest by automobile manufacturers infuel cell technology has been driven in part by environmental laws andregulations. There is no guarantee that these laws and regulations will notchange and any such changes could result in automobile manufacturers abandoningtheir interest in fuel cell powered vehicles. In addition, if current laws andregulations are not kept in force or if further environmental laws andregulations are not adopted, demand for vehicular fuel cells may be limited.

 

The market for stationaryand portable energy-related products is influenced by federal, state andprovincial governmental regulations and policies concerning the electricutility industry. Changes in regulatory standards or public policy could deterfurther investment in the research and development of alternative energysources, including fuel cells and fuel cell products, and could result in asignificant reduction in the potential market demand for our products. Wecannot predict how changing government regulation and policies regarding theelectric utility industry will affect the market for stationary and portablefuel cell systems.

 

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Although the developmentof alternative energy sources, and in particular fuel cells, has beenidentified as a significant priority by many governments, we cannot be assuredthat governments will not change their priorities or that any such change wouldnot materially affect our revenues and our business. If governments changetheir laws and regulations such that the development of alternative energy sourcesis no longer required or encouraged, the demand for alternative energy sourcessuch as our fuel cell products may be significantly reduced or delayed and oursales would decline.

 

***Thedevelopment of uniform codes and standards for hydrogen powered vehicles andrelated hydrogen refueling infrastructure may not develop in a timely fashion,if at all.***

*** ***

Uniform codes andstandards do not currently exist for fuel cell systems, fuel cell components,hydrogen internal combustion engines or for the use of hydrogen as a vehiclefuel. Establishment of appropriate codes and standards is a critical element toallow fuel cell system developers, fuel cell component developers, hydrogeninternal combustion engine developers, hydrogen infrastructure companies andhydrogen storage and handling companies to develop products that will beaccepted in the marketplace.

 

The development ofhydrogen standards is being undertaken by numerous organizations. Given thenumber of organizations pursuing hydrogen codes and standards, it is not clearwhether universally accepted codes and standards will result in a timelyfashion, if at all.

 

***Wecurrently face and will continue to face significant competition from otherdevelopers and manufacturers of fuel cell power products and hydrogengeneration systems. If we are unable to compete successfully, we couldexperience a loss of market share, reduced gross margins for our existingproducts and a failure to achieve acceptance of our proposed products.***

*** ***

In our markets forhydrogen generation systems, we compete with a number of companies that developand manufacture hydrogen generation products based on on-site waterelectrolysis and/or reforming technologies. We also compete with suppliers ofhydrogen gas that deliver hydrogen to the customer’s site in tube trailers orcylinders or by pipeline. In many cases, these suppliers have establisheddelivery infrastructure and customer relationships.

 

In the commercialproduction of fuel cell power products, we compete with a number of companiesthat currently have fuel cell and fuel cell system development programs. Weexpect that several of these competitors will be able to deliver competingproducts to certain markets before we do. While our strategy is the developmentof fuel cell and hydrogen generation technologies for sale to end users,systems integrators, governments and market channel partners, many of ourcompetitors are developing products specifically for use in particular markets.These competitors may be more successful in penetrating their specific marketsthan we are. In addition, an increase in the popularity of fuel cell power inparticular market channels may cause certain of our customers to develop andproduce some or all of the fuel cell technologies that we are developing.

 

Competition in themarkets for fuel cell power modules and hydrogen generation equipment issignificant and will likely persist and intensify over time. We competedirectly and indirectly with a number of companies that provide products andservices that are competitive with all, some or part of our products andrelated services. Many of our existing and potential competitors have greaterbrand name recognition and their products may enjoy greater initial marketacceptance among our potential customers. In addition, many of thesecompetitors have significantly greater financial, technical, sales, marketing,distribution, service and other resources than we have and may also be betterable to adapt quickly to customers’ changing demands and to changes in technology.

 

If we are unable tocontinuously improve our products and if we cannot generate effective responsesto our competitors’ brand power, product innovations, pricing strategies,marketing campaigns, partnerships, distribution channels, service networks andother initiatives, our ability to gain market share or market acceptance forour products could be limited, our revenues and our profit margins may suffer,and we may never become profitable.

 

***Weface competition for fuel cell power products from developers and manufacturersof traditional technologies and other alternative technologies.***

*** ***

Each of our targetmarkets is currently served by existing manufacturers with existing customersand suppliers. These manufacturers use proven and widely accepted traditionaltechnologies such as internal combustion engines and turbines, as well as coal,oil, gas and nuclear powered generators. Additionally, there are competitorsworking on developing technologies that use other types of fuel cells and otheralternative power technologies, advanced batteries and hybrid battery/internalcombustion engines, which may compete for our target customers. Given thatproton exchange membrane (“PEM”) fuel cells have the potential to replace theseexisting power sources, competition in our target markets will also come fromthese traditional power technologies, from improvements to traditional powertechnologies and from new alternative power technologies, including other typesof fuel cells.

 

If we are unable tocontinuously improve our products and if we cannot generate effective responsesto incumbent and/or alternative energy competitors’ brand power, productinnovations, pricing strategies, marketing campaigns, partnerships,distribution channels, service 

 

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networks and otherinitiatives, our ability to gain market share or market acceptance for ourproducts could be limited, our revenues and our profit margins may suffer, andwe may never become profitable.

 

***Ourstrategy for the sale of fuel cell power products depends upon developingpartnerships with original equipment manufacturers (“OEMs”), governments,systems integrators, suppliers and other market channel partners who willincorporate our products into theirs.***

*** ***

Other than in a fewspecific markets, our strategy is to develop and manufacture products andsystems for sale to OEMs, governments, systems integrators, suppliers and othermarket channel partners that have mature sales and distribution networks fortheir products. Our success may be heavily dependent upon our ability toestablish and maintain relationships with these partners who will integrate ourfuel cell products into their products and on our ability to find partners whoare willing to assume some of the research and development costs and risksassociated with our technologies and products. Our performance may, as aresult, depend on the success of other companies, and there are no assurancesof their success. We can offer no guarantee that OEMs, governments, systemsintegrators, suppliers and other market channel partners will manufactureappropriate products or, if they do manufacture such products, that they willchoose to use our products as components. The end products into which our fuelcell technology will be incorporated will be complex appliances comprising manycomponents and any problems encountered by such third parties in designing,manufacturing or marketing their products, whether or not related to theincorporation of our fuel cell products, could delay sales of our products andadversely affect our financial results. Our ability to sell our products to theOEM markets depends to a significant extent upon our partners’ worldwide salesand distribution networks and service capabilities. In addition, some of ouragreements with customers and partners require us to provide sharedintellectual property rights in certain situations, and there can be noassurance that any future relationships that we enter into will not require usto share some of our intellectual property. Any change in the fuel cell,hydrogen or alternative fuel strategies of one of our partners could have amaterial adverse effect on our business and our future prospects.

 

In addition, in somecases, our relationships are governed by a non-binding memorandum ofunderstanding or a letter of intent. We cannot assure you that we will be ableto successfully negotiate and execute definitive agreements with any of thesepartners, and failure to do so may effectively terminate the relevant relationship.We also have relationships with third party distributors who also indirectlycompete with us. For example, we have targeted industrial gas suppliers asdistributors of our hydrogen generators. Because industrial gas supplierscurrently sell hydrogen in delivered form, adoption by their customers of ourhydrogen generation products could cause them to experience declining demandfor delivered hydrogen. For this reason, industrial gas suppliers may bereluctant to purchase our hydrogen generators. In addition, our third partydistributors may require us to provide volume price discounts and otherallowances, or customize our products, either of which could reduce thepotential profitability of these relationships.

 

***Weare dependent upon third party suppliers for key materials and components forour products. If these suppliers become unable or unwilling to provide us withsufficient materials and components on a timely and cost-effective basis, wemay be unable to manufacture our products cost-effectively or at all, and ourrevenues and gross margins would suffer.***

*** ***

We rely upon third partysuppliers to provide key materials and components for our fuel cell powerproducts, hydrogen generation products and fuel cell test equipment. A supplier’sfailure to provide materials or components in a timely manner, or to providematerials and components that meet our quality, quantity or cost requirements,or our inability to obtain substitute sources for these materials andcomponents in a timely manner or on terms acceptable to us, may harm ourability to manufacture our products cost-effectively or at all, and ourrevenues and gross margins might suffer. To the extent that we are unable todevelop and patent our own technology and manufacturing processes, and to theextent that the processes that our suppliers use to manufacture materials andcomponents are proprietary, we may be unable to obtain comparable materials orcomponents from alternative suppliers, and that could adversely affect ourability to produce commercially viable products.

 

***Wemay not be able to manage successfully the anticipated expansion of ouroperations.***

*** ***

The uneven pace of ouranticipated expansion in facilities, staff and operations may place seriousdemands on our managerial, technical, financial and other resources. We may berequired to make significant investments in our engineering and logisticssystems and our financial and management information systems, as well asretaining, motivating and effectively managing our employees. Our managementskills and systems currently in place may not enable us to implement ourstrategy or to attract and retain skilled management, engineering andproduction personnel. Our failure to manage our growth effectively or toimplement our strategy in a timely manner may significantly harm our ability toachieve profitability.

 

***Ifwe do not properly manage foreign sales and operations, our business couldsuffer.***

*** ***

We expect that asubstantial portion of our future revenues will continue to be derived from foreignsales. Our international activities may be subject to inherent risks, includingregulatory limitations restricting or prohibiting the provision of our productsand services, unexpected changes in regulatory requirements, tariffs, customs,duties and other trade barriers, difficulties in staffing and managing foreign 

 

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operations, longerpayment cycles, problems in collecting accounts receivable, fluctuations incurrency exchange rates, foreign exchange controls that restrict or prohibitrepatriation of funds, technology export and import restrictions orprohibitions, delays from customs brokers or government agencies, seasonalreductions in business activity and potentially adverse tax consequences resultingfrom operating in multiple jurisdictions. As a result, if we do not properlymanage foreign sales and operations, our business could suffer.

 

***Wewill need to recruit, train and retain key management and other qualifiedpersonnel to successfully expand our business.***

*** ***

Our future success willdepend in large part upon our ability to recruit and retain experiencedresearch and development, engineering, manufacturing, operating, sales andmarketing, customer service and management personnel. We compete in youngmarkets and there are a limited number of people with the appropriatecombination of skills needed to provide the services that our customersrequire. In the past, we have experienced difficulty in recruiting qualifiedpersonnel and we expect to experience continued difficulties in personnelrecruiting. If we do not attract such personnel, we may not be able to expandour business. In addition, new employees generally require substantialtraining, which requires significant resources and management attention. Oursuccess also depends upon retaining our key management, research, productdevelopment, engineering, marketing and manufacturing personnel. Even if weinvest significant resources to recruit, train and retain qualified personnel,we may not be successful in our efforts.

 

***Wemay acquire technologies or companies in the future, and these acquisitionscould disrupt our business and dilute our shareholders’ interests.***

*** ***

We may acquire additionaltechnologies or other companies in the future and we cannot provide assurancesthat we will be able to successfully integrate their operations or that thecost savings we anticipate will be fully realized. Entering into an acquisitionor investment entails many risks, any of which could materially harm our business,including:

 

·                  diversionof management’s attention from other business concerns;

 

·                  failureto effectively assimilate our acquired technology, employees or other assetsinto our business;

 

·                  theloss of key employees from either our current business or the acquiredbusiness; and

 

·                  assumptionof significant liabilities of the acquired company.

 

If we complete additionalacquisitions, we may dilute the ownership of current shareholders. In addition,achieving the expected returns and cost savings from our past and futureacquisitions will depend in part upon our ability to integrate the products andservices, technologies, research and development programs, operations, salesand marketing functions, finance, accounting and administrative functions, andother personnel of these businesses into our business in an efficient andeffective manner. We cannot ensure that we will be able to do so or that theacquired businesses will perform at anticipated levels. If we are unable tosuccessfully integrate acquired businesses, our anticipated revenues may belower and our operational costs may be higher.

 

***Wehave no experience manufacturing our products on a large scale basis, and if wedo not develop adequate manufacturing processes and capabilities to do so in atimely manner, we will be unable to achieve our growth and profitabilityobjectives.***

*** ***

We have manufactured mostof our products for prototypes and initial sales, and we have limitedexperience manufacturing products on a larger scale. In order to producecertain of our products at affordable prices we will have to manufacture alarge volume of such products. We do not know when or whether we will be ableto develop efficient, low-cost manufacturing capabilities and processes thatwill enable us to meet the quality, price, engineering, design and productionstandards or production volumes required to successfully mass market suchproducts. Even if we are successful in developing our manufacturingcapabilities and processes, we do not know whether we will do so in time tomeet our product commercialization schedule or to satisfy the requirements ofour customers and the market. Our failure to develop these manufacturingprocesses and capabilities in a timely manner could prevent us from achievingour growth and profitability objectives.

 

**Risk Factors Related toOur Products and Technology**

** **

***Wemay never complete the development of commercially viable fuel cell powerproducts and/or commercially viable hydrogen generation systems for newhydrogen energy applications, and if we fail to do so, we will not be able tomeet our business and growth objectives.***

*** ***

We have made commercialsales of hydrogen generation, fuel cell test and diagnostic equipment, fuelcell power modules, integrated fuel cell systems and hydrogen refuelingstations for a relatively short period of time. Because both our business andindustry are still in the developmental stage, we do not know when or whetherwe will successfully complete research and development of commercially viablefuel cell power products and commercially viable hydrogen generation equipmentfor new hydrogen energy applications. If we do not complete the development ofsuch commercially viable products, we will be unable to meet our business andgrowth objectives. We expect to face unforeseen challenges, expenses anddifficulties as a developing company seeking to design, develop and manufacturenew products in each of 

 

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our targeted markets. Ourfuture success also depends upon our ability to effectively market fuel cellproducts and hydrogen generation products once developed.

 

***Wemust lower the cost of our fuel cell and hydrogen generation products anddemonstrate their reliability, or consumers will be unlikely to purchase ourproducts and we will therefore not generate sufficient revenues to achieve andsustain profitability.***

*** ***

Fuel cells currently costmore than many established competing technologies, such as internal combustionengines and batteries. The prices of fuel cell and hydrogen generation productsare dependent largely upon material and manufacturing costs. We cannotguarantee that we will be able to lower these costs to a level where we will beable to produce a competitive product or that any product we produce usinglower cost materials and manufacturing processes will not suffer from lowerperformance, reliability and longevity. If we are unable to produce fuel celland hydrogen generation products that are competitive with other technologiesin terms of price, performance, reliability and longevity, consumers will beunlikely to buy our fuel cell and hydrogen generation products. Accordingly, wewould not be able to generate sufficient revenues with positive gross marginsto achieve and sustain profitability.

 

***Anyfailures or delays in field tests of our products could negatively affect ourcustomer relationships and increase our manufacturing costs.***

*** ***

We regularly field testour products and we plan to conduct additional field tests in the future. Anyfailures or delays in our field tests could harm our competitive position andimpair our ability to sell our products. Our field tests may encounter problemsand delays for a number of reasons, including the failure of our technology,the failure of the technology of others, the failure to combine thesetechnologies properly, operator error and the failure to maintain andservice the test prototypes properly. Many of these potential problems anddelays are beyond our control. In addition, field test programs, by theirnature, may involve delays relating to product roll-out and modifications toproduct design, as well as third party involvement. Any problem or perceivedproblem with our field tests, whether it originates from our technology, ourdesign, or third parties, could hurt our reputation and the reputation of ourproducts and limit our sales. Such field test failures may negatively affectour relationships with customers, require us to extend field testing longerthan anticipated before undertaking commercial sales and require us to developfurther our technology to account for such failures prior to the field tests,thereby increasing our manufacturing costs.

 

***Thecomponents of our ***productsmay***contain defects or errors that could negativelyaffect our customer relationships and increase our development, service andwarranty costs.***

*** ***

Our products are complexand must meet the stringent technical requirements of our customers. The software andother components used in our fuel cell and hydrogen generation products maycontain undetected defects or errors, especially when first introduced, whichcould result in the failure of our products to perform, damage to ourreputation, delayed or lost revenue, product returns, diverted developmentresources and increased development, service and warranty costs.

 

***Rapidtechnological advances or ***the ado***ption of new codes and standards couldimpair our ability to deliver our products in a timely manner and, as a result,our revenues would suffer.***

*** ***

Our success depends inlarge part on our ability to keep our products current and compatible withevolving technologies, codes and standards. Unexpected changes in technologyor in codes and standards could disrupt the development of our products andprevent us from meeting deadlines for the delivery of products. If we areunable to keep pace with technological advancements and adapt our products tonew codes and standards in a timely manner, our products may becomeuncompetitive or obsolete and our revenues would suffer.

 

***Wedepend upon intellectual property and our failure to protect that intellectualproperty could adversely affect our future growth and success.***

*** ***

Failure to protect ourintellectual property rights may reduce our ability to prevent others fromusing our technology. We rely on a combination of patent, trade secret,trademark and copyright laws to protect our intellectual property. Some of ourintellectual property is currently not covered by any patent or patentapplication. Patent protection is subject to complex factual and legal criteriathat may give rise to uncertainty as to the validity, scope and enforceabilityof a particular patent. Accordingly, we cannot be assured that:

 

·                  anyof the United States, Canadian or other patents owned by us or third partypatents licensed to us will not be invalidated, circumvented, challenged,rendered unenforceable, or licensed to others; or

 

·                  anyof our pending or future patent applications will be issued with the breadth ofprotection that we seek, if at all.

 

In addition, effectivepatent, trademark, copyright and trade secret protection may be unavailable,limited, not applied for or unenforceable in foreign countries.

 

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Furthermore, although wetypically retain sole ownership of the intellectual property we develop, incertain circumstances, such as with Dow Corning and General Motors, we providefor shared intellectual property rights. For instance, where intellectualproperty is developed pursuant to our use of technology licensed from GeneralMotors, we have committed to provide certain exclusive or non-exclusivelicences in favour of General Motors, and in some cases the intellectualproperty is jointly owned. As a result of these licences, we may be limited orprecluded, as the case may be, in the exploitation of such intellectualproperty rights.

 

We have also entered intoagreements with other customers and partners that involve shared intellectualproperty rights. Any developments made under these agreements will be availablefor future commercial use by all parties to the agreement.

 

We also seek to protectour proprietary intellectual property through contracts including, whenpossible, confidentiality agreements and inventors’ rights agreements with ourcustomers and employees. We cannot be sure that the parties that enter intosuch agreements with us will not breach them, that we will have adequateremedies for any breach or that such persons or institutions will not assertrights to intellectual property arising out of these relationships. Ifnecessary or desirable, we may seek licences under the patents or otherintellectual property rights of others. However, we cannot be sure that we willobtain such licences or that the terms of any offered licences will be acceptableto us. Our failure to obtain a license from a third party for intellectualproperty we use in the future could cause us to incur substantial liabilitiesand to suspend the manufacture and shipment of products or our use of processesthat exploit such intellectual property.

 

***Ourinvolvement in intellectual property litigation could negatively affect ourbusiness.***

*** ***

Our future success andcompetitive position depend in part upon our ability to obtain or maintain theproprietary intellectual property used in our principal products. In order toestablish and maintain such a competitive position we may need to prosecuteclaims against others who we believe are infringing our rights and defendclaims brought by others who believe that we are infringing their rights. Ourinvolvement in intellectual property litigation could result in significantexpense to us, adversely affect the sale of any products involved or the use orlicensing of related intellectual property and divert the efforts of ourtechnical and management personnel from their principal responsibilities,regardless of whether such litigation is resolved in our favour. If we arefound to be infringing on the intellectual property rights of others, we may,among other things, be required to:

 

·                  paysubstantial damages;

 

·                  ceasethe development, manufacture, use, sale or importation of products thatinfringe upon such intellectual property rights;

 

·                  discontinueprocesses incorporating the infringing technology;

 

·                  expendsignificant resources to develop or acquire non-infringing intellectualproperty; or

 

·                  obtainlicences to the relevant intellectual property.

 

We cannot offer anyassurance that we will prevail in any such intellectual property litigation or,if we were not to prevail in such litigation, that licences to the intellectualproperty that we are found to be infringing upon would be available oncommercially reasonable terms, if at all. The cost of intellectual propertylitigation as well as the damages, licensing fees or royalties that we might berequired to pay could have a material adverse effect on our business andfinancial results.

 

***Ourproducts use flammable fuels that are inherently dangerous substances and couldsubject us to product liabilities.***

*** ***

Our financial resultscould be materially impacted by accidents involving either our products or thoseof other fuel cell manufacturers, either because we face claims for damages orbecause of the potential negative impact on demand for fuel cell products. Ourproducts use hydrogen, which is typically generated from gaseous and liquidfuels such as propane, natural gas or methanol in a process known as reforming.While our fuel cell products do not use these fuels in a combustion process,natural gas, propane and other hydrocarbons are flammable fuels that could leakand then combust if ignited by another source. In addition, certain of our OEMpartners and customers may experience significant product liability claims. Asa supplier of products and systems to these OEMs, we face an inherent businessrisk of exposure to product liability claims in the event that our products, orthe equipment into which our products are incorporated, malfunction and resultin personal injury or death. We may be named in product liability claims even ifthere is no evidence that our systems or components caused the accidents.Product liability claims could result in significant losses from expensesincurred in defending claims or the award of damages. Since our products havenot yet gained widespread market acceptance, any accidents involving oursystems, those of other fuel cell products or those used toproduce hydrogen could materially impede acceptance of our products. Inaddition, although our management believes that our liability coverage iscurrently adequate to cover these risks, we may be held responsible for damagesbeyond the scope of our insurance coverage.

 

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** **

**RiskFactors Related to Ownership of Our Common Shares**

** **

***If at any time we qualify as a passive foreigninvestment company under United States tax laws, our shareholders may besubject to adverse tax consequences.***

*** ***

We would be classified asa passive foreign investment company (“PFIC”), for United States federal incometax purposes, in any taxable year in which, after applying relevantlook-through rules with respect to the income and assets of oursubsidiaries, either at least 75% of our gross income is ‘‘passive income,’’ oron average at least 50% of the gross value of our assets is attributable toassets that produce passive income or are held for the production of passiveincome.

 

Based on the structure ofthe Company, and the composition of our income and assets, the Company does notbelieve that it was a PFIC for the taxable year ended December 31, 2009 orits prior taxable year. However, there can be no assurance that the InternalRevenue Service will not successfully challenge our position or that we willnot become a PFIC in a future taxable year, as PFIC status is re-tested eachyear and depends on our assets and income in such year. If we are classified asa PFIC at any time that a U.S. Holder (as defined below) holds our commonshares, such holder may be subject to an increased United States federal incometax liability and a special interest charge in respect of gain realized fromthe sale or other disposition of our common shares and upon the receipt ofcertain ‘‘excess distributions’’ (as defined in the United States InternalRevenue Code of 1986, as amended).

 

U.S. Holders shouldconsult their own tax advisors concerning the United States federal income taxconsequences of holding our common shares if we were a PFIC in any taxable yearand its potential application to their particular situation.

 

***A limited number of shareholders collectively own asignificant portion of our common shares and may act, or prevent corporateactions, to the detriment of other shareholders.***

*** ***

A limited number ofshareholders, including our founders and General Motors, currently own asignificant portion of our outstanding common shares. General Motors currentlyowns approximately 10.8% of our outstanding common shares.  In addition, each of Alpha and IroquoisMaster Fund Ltd. currently owns approximately 5.9% of our outstanding commonshares, as well as 119,678 series A warrants (representing the right to acquirethe equivalent number of common shares) and 130,323 series B warrants of theCompany (representing the right to acquire the equivalent number of commonshares).  Accordingly, these shareholdersmay exercise significant influence over all matters requiring shareholderapproval, including the election of a majority of our directors and thedetermination of significant corporate actions. This concentration could alsohave the effect of delaying or preventing a change in control that couldotherwise be beneficial to our shareholders.

 

In addition to GeneralMotors’ current ownership of our common shares, pursuant to our strategicalliance with General Motors, for so long as General Motors holds at least 10%of our outstanding shares, if any of our founders, Pierre Rivard, JosephCargnelli or Boyd Taylor, wish to transfer (i) all or substantially all oftheir shares to any person, or (ii) any of their shares to a personactively competing with General Motors in the automotive or fuel cell industry,he must first offer the shares to General Motors. Moreover, if we issueadditional equity securities or securities convertible into equity securitiesfor cash consideration, we have granted General Motors the right to participatein such offering on a pro rata basis based on the fully diluted number ofcommon shares that it holds, subject to certain limited exceptions. We have alsoagreed that one director nominated by General Motors shall be included in theslate of directors that is presented to shareholders for approval at ourgeneral meeting. As a principal shareholder and party to the strategic allianceand representative on our Board, General Motors has the ability to influenceour corporate actions and in a manner that may be adverse to your interests.

 

***Future sales of common shares by our principalshareholders could cause our share price to fall and reduce the value of ashareholder’s investment.***

*** ***

If our principalshareholders, including our founders, sell substantial amounts of their commonshares in the public market, the market price of our common shares could falland the value of a shareholder’s investment could be reduced. The perceptionamong investors that these sales may occur could have a similar effect. Shareprice declines may be exaggerated if the low trading volume that our commonshares have experienced to date continues. These factors could also make it moredifficult for us to raise additional funds through future offerings of ourcommon shares or other securities.

 

***Our articles of incorporation authorize us to issue anunlimited number of common and preferred shares, and significant issuances ofcommon or preferred shares could dilute the share ownership of ourshareholders, deter or delay a takeover of us that our shareholders mayconsider beneficial or depress the trading price of our common shares.***

*** ***

Our articles ofincorporation permit us to issue an unlimited number of common and preferredshares. If we were to issue a significant number of common shares, it wouldreduce the relative voting power of previously outstanding shares. Such futureissuances could be at prices less than our shareholders paid for their commonshares. If we were to issue a significant number of common or preferred shares,these 

 

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issuances couldalso deter or delay an attempted acquisition of us that a shareholder mayconsider beneficial, particularly in the event that we issue preferred shareswith special voting or dividend rights. While Nasdaq and TSX rules mayrequire us to obtain shareholder approval for significant issuances, we wouldnot be subject to these requirements if we ceased, voluntarily or otherwise, tobe listed on Nasdaq and the TSX. Significant issuances of our common orpreferred shares, or the perception that such issuances may occur, could causethe trading price of our common shares to drop.

 

***U.S. investors may not be able to enforce U.S. civilliability judgments against us or our directors and officers.***

*** ***

We are organized underthe laws of Canada. A majority of our directors and officers are residents ofCanada and all or a substantial portion of their assets and substantially allof our assets are located outside of the United States. As a result, it may bedifficult for U.S. holders of our common shares to effect service of process onthese persons within the United States or to realize in the United States uponjudgments rendered against them. In addition, a shareholder should not assumethat the courts of Canada (i) would enforce judgments of U.S. courtsobtained in actions against us or such persons predicated upon the civilliability provisions of U.S. federal securities laws or other laws of theUnited States, or (ii) would enforce, in original actions, claims againstus or such persons predicated upon the U.S. federal securities laws.

 

***Our share price is volatile and we may continue toexperience significant share price and volume fluctuations.***

*** ***

Since our common shareswere initially offered to the public in November 2000, the stock markets,particularly in the technology and alternative energy sectors, and our shareprice have experienced significant price and volume fluctuations. Our commonshares may continue to experience volatility for reasons unrelated to our ownoperating performance, including:

 

·                  performance of other companies in thefuel cell or alternative energy business;

 

·                  news announcements, securities analysts’reports and recommendations and other developments with respect to our industryor our competitors; or

 

·                  changes in general economic conditions.

 

***As at March 25, 2010, there were 239,162, on apost-consolidation basis, options to purchase our common shares, 239,356 seriesA warrants and 260,646 series B warrants. If these securities are exercised,our shareholders will incur substantial dilution.***

*** ***

A significant element inour plan to attract and retain qualified personnel is the issuance to suchpersons of options to purchase our common shares. As at March 25, 2010, wehave issued and outstanding 239,162 options to purchase our common shares at anaverage price of Cdn. $ 65.00 per common share. Accordingly, to the extent that we are required to issue significantnumbers of options to our employees, and such options are exercised, ourshareholders could experience significant dilution. As of March 25, 2010,we also have 239,356 series A warrants and 260,646 series B warrant issued andoutstanding, whereby each warrant entitles the holder to purchase a commonshare.  To the extent such series Awarrants and series B warrants are exercised, our shareholders could experiencesignificant dilution.

 

**ITEM4.        INFORMATION ON THE COMPANY**

** **

**HISTORY AND DEVELOPMENT OF HYDROGENICS CORPORATION**

** **

We were incorporated on June 10,2009 under the Canada Business Corporations Act, under the name “7188501 CanadaInc.” We changed our name to “Hydrogenics Corporation—Corporation Hydrogenique”on October 27, 2009 in connection with the transaction involving AlgonquinPower Income Fund (“APIF”), as described further below under “APIF Transaction.”

 

Old Hydrogenics wasfounded in 1988 under the name “Traduction Militech Translation Inc.” Itsubsequently changed its name to “Societe Hydrogenique Incorporée—HydrogenicsCorporation Incorporated”. From 1990 to August 1995, Societe HydrogeniqueIncorporée—Hydrogenics Corporation Incorporated did not actively carry onbusiness. In August 1995, it commenced our fuel cell technologydevelopment business, and in 2000, changed its name to Hydrogenics Corporation —CorporationHydrogenique. Until October 27, 2009, we were a wholly-owned subsidiary ofOld Hydrogenics.

 

We are a globallyrecognized developer and provider of hydrogen generation and fuel cellproducts. We conduct our business through the following business units: (i) OnSiteGeneration, which focuses on hydrogen generation products for renewable energy,industrial and transportation customers; and (ii) Power Systems, whichfocuses on fuel cell products for original equipment manufacturers, or OEMs,systems integrators and end users for stationary applications, including backuppower, and motive applications, such as forklift truck. In November 2007,we announced that we were exiting the fuel cell test products, design,development and manufacturing business, that was 

 

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conducted throughour Test Systems business unit. The orderly wind-up of the Test Systems unit, whichfocused on fuel cell test and diagnostic products and contract testing servicesfor third parties, is expected to be completed in 2010.

 

Our business units aresupported by a corporate services group providing finance, insurance, investorrelations, communications, treasury, human resources, strategic planning,compliance, and other administrative services.

 

Our principal executiveoffices are located at 5985 McLaughlin Road, Mississauga, Ontario, Canada L5R1B8. Our telephone number is (905) 361-3600. Our agent for service in the United States is CT Corporation System, 111Eighth Avenue, New York, New York  10011,(212) 894-8400.

 

Capital expenditures forthe year ended December 31, 2009 were $0.8 million, compared with $0.9million and $1.3 million for the years ended December 31, 2008 and 2007,respectively, and consisted primarily of capital expenditures for equipment andcomputer equipment.  We expect capitalexpenditure plans for 2010 and subsequent years to result in further investmentin capital assets as we continue our manufacturing and development initiatives.Our current budget for 2010 includes a capital budget of $0.2 million topurchase and manufacture testing and other equipment, primarily for ourresearch and development programs but also in support of ongoing operationalneeds.  We expect that less than half ofour investments  will be in Canada.  Our capital requirements will be affected bymany factors, including the success of our current product offerings, theability to enhance our current products and our ability to develop andintroduce new products that keep pace with technological developments in themarketplace.

 

As at December 31,2009 we had cash and cash-equivalents and restricted cash of approximately$11.0 million.

 

There are currently nopublic takeover offers by third parties in respect of the Company’s shares.

 

***APIFTransaction***

** **

On June 11, 2009,we, Old Hydrogenics, the Board of Trustees of APIF and APIF’s manager,Algonquin Power Management Inc., agreed upon the terms of a series oftransactions (collectively, the “APIF Transaction”) and agreements, pursuant towhich Old Hydrogenics agreed to transfer its entire business and operations tous, including all assets, liabilities, directors, management and employees, butexcluding its tax attributes. Concurrently, the APIF Transaction enabledunitholders of APIF to continue to hold their interest in APIF as shareholdersof Old Hydrogenics, which was renamed “Algonquin Power & UtilitiesCorp.” (“APUC”), a publicly traded Canadian corporation. APUC has the abilityto make efficient use of our accumulated tax attributes in the continuedexecution of APIF’s business plans. Under the APIF Transaction, ourshareholders had their common shares in the capital of Old Hydrogenics redeemedfor our common shares on a one-for-one basis. At the same time APIF unitholdersexchanged their units for APUC common shares.

 

As a result of completionof the APIF Transaction on October 27, 2009, unitholders of APIF did notretain any interest in the business of the Company nor did the Company’sshareholders retain any interest in the business of APIF. We have continued tocarry on the hydrogen generation and fuel cell business as a public entity withall of the assets (including the intellectual property), except for certain taxassets, of our predecessor prior to the APIF Transaction.

 

Pursuant to continuity ofinterest accounting, the assets transferred and liabilities assumed wererecorded at their carrying values as reported by the Company immediately priorto the completion of the APIF Transaction. As a result, the cash proceeds wererecorded as a recovery of income taxes. The Company recorded a benefit of $10.4 million in the consolidatedfinancial statements.  $10.0 million ofthe benefit was received in cash during the year and the remaining amount wasincluded in “Accounts Receivable”.  Theamount included in “Accounts Receivable” was collected subsequent to December 31,2009.  The Company incurred transactioncosts of $3.3 million relating to the APIF Transaction and these costs wereincluded within selling, general and administrative expenses for 2009. Inaddition, as the future income tax benefits of Old Hydrogenics’ Canadiannon-capital losses, capital losses, scientific research and developmentexpenditures and investment tax credits generated through to the date of thecompletion of the transaction are not available to the Company after thecompletion of the transaction, the gross future income tax assets related tothese Canadian tax pools was reduced to $nil, with a corresponding reduction ofthe related valuation allowance (see note 16 to our consolidated financialstatements beginning on page F-30).

 

Details of the APIFTransaction are described more fully in Old Hydrogenics’ management proxycircular dated June 25, 2009. ***which was filed as Exhibit 99.1to Old Hydrogenics’ Report of Foreign Private Issuer on Form 6-K with theU.S. Securities and Exchange Commission on June 29, 2009. ***See also notes 2and 16 to our consolidated financial statements beginning on pages F-12and F-30, respectively.

 

**BUSINESS OVERVIEW**

** **

**Overview**

** **

Hydrogenics, togetherwith its subsidiaries, designs, develops and manufactures hydrogen generationproducts based on water electrolysis technology and fuel cell products based onproton exchange membrane, or PEM technology. Hydrogenics’ mission is to provide

 

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safe, secure,sustainable and emission free energy as a leading global provider of cleanenergy solutions based on hydrogen.  Wemaintain operations in Belgium, Canada and Germany.  We operate in various geographical marketsand organize ourselves in four reportable segments.

 

Our OnSite Generationbusiness segment is based in Oevel, Belgium and develops products forindustrial gas, hydrogen fueling and renewable energy storage markets. For theyear ended December 31, 2009, our OnSite Generation business reportedrevenues of $12.3 million and at December 31, 2009 had 61 full timeemployees.

 

Our Power Systems businesssegment is based in Mississauga, Canada with a satellite facility in Gladbeck,Germany.  This segment develops productsfor stationary and motive power applications. For the year ended December 31,2009, our Power Systems business reported revenues of $6.5 million and at December 31,2009 had 65 full time employees.

 

Our Test Systems businesssegment is based in Burnaby, Canada and provided fuel cell testing services andsold fuel cell test stations. In November 2007, we announced that we wouldimplement an orderly wind up of our Test Systems business in order to focus ourresources on our OnSite Generation and Power Systems businesses. We expect tofinalize the wind up in early 2010. For the year ended December 31, 2009our Test Systems business did not report any revenue and at December 31,2008 no longer had employees.

 

Our Corporate and Otherbusiness segment provides corporate services and administrative support. At December 31,2009, our Corporate and Other business had four full time employees.

 

Our business issummarized below.

 

***OnSite Generation***

*** ***

Our OnSite Generationbusiness segment is based on alkaline water electrolysis technology whichinvolves the decomposition of water (H2O)into oxygen (O2) and hydrogen gas (H2) by passing an electric current through a liquidelectrolyte. The resultant hydrogen gas is then captured and used forindustrial gas applications, hydrogen fueling applications, and used to storerenewable energy in the form of hydrogen gas. Our HySTAT® brandedelectrolyzer products are based on 60 years of hydrogen experience, meetinternational standards such as ASME, CE, Rostechnadzor and UL and arecertified ISO 9001 from design to delivery. We configure our HySTAT® products forboth indoor and outdoor applications and tailor our products to accommodatevarious hydrogen gas requirements.  Wehave also developed and delivered products in a smaller scale range based onPEM water electrolysis.

 

The worldwide market forhydrogen, which includes the merchant gas market for hydrogen, is estimated at$5 billion annually, and is served by industrial gas companies as well ason-site hydrogen generation product manufacturers such as ourselves. We believethat the annual market for on-site hydrogen generation equipment isapproximately $100 million to $200 million.

 

Our OnSite Generationproducts are sold to leading merchant gas companies such as Air Liquide S.A.and Linde AG and end users requiring high purity hydrogen produced on-site forindustrial applications.  We also sellproducts to progressive oil and gas companies, such as Shell Hydrogen,requiring hydrogen fueling stations for transportation applications. Recently,we have begun to sell our products to leading electric power utilities,including BC Powertech, and Newfoundland and Labrador Hydro requiring renewableenergy storage.

 

The business objectivesfor our OnSite Generation group are to: (i) further increase the grossmargins of existing product lines by improving our procurement andmanufacturing processes; (ii) further increase the reliability anddurability of our products to exceed the expectations of our applications; (iii) reducethe cost of ownership of our products through design and technologyimprovement; (iv) continue to pursue opportunities for customers toconvert renewable energy, such as wind and solar energy, into hydrogen; and (v) furtherexpand into ready markets such as Eastern Europe (including Russia), Asia andthe Middle East.

 

Our Onsite Generationbusiness competes with merchant gas companies such as Air Liquide S.A. andLinde Gas AG which, in addition to being customers, operate large scalehydrogen production plants and are providers of alternative on-site hydrogengeneration products using steam methane reforming, or “SMR” technology andother electrolsis technology. We compete on performance, reliability and costand believe we are well positioned in situations where there is a need for highpurity hydrogen manufactured on-site.

 

***Power Systems***

*** ***

Our Power Systemsbusiness segment is based on PEM fuel cell technology which transforms chemicalenergy liberated during the electrochemical reaction of hydrogen and oxygen toelectrical energy. Our HyPM® branded fuel cell products are based on ourextensive track record of on-bench testing and real-time deployments across awide range of stationary and motive power profiles. We configure our HyPM® products tomultiple electrical power outputs ranging from 4 to 65 kilowatts with ease ofintegration, high reliability and operating efficiency, delivered in a highlycompact area.

 

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Our target marketsinclude backup power for data centres and telecom installations plus motivepower applications, such as buses, trucks and utility vehicles. The military,historically an early technology adopter, is a specialized market for ourinnovative fuel cell based systems. The worldwide market for data centre backuppower is estimated to be in excess of $6 billion and the market for telecombackup power is estimated to be $2 to $3 billion in the U.S. alone, based on acomplete displacement of existing battery systems.

 

Our Power Systemsproducts are sold to leading OEMs such as Commscope Inc. to provide backuppower applications for data centres and telecom sites. Additionally, they arealso sold for prototype field tests of our fuel cell products intended to bedirect replacements for traditional lead-acid battery packs on indoorindustrial forklift applications. We also sell our Power Systems products tothe military and other early adopters of emerging technologies.

 

The business objectivesfor our Power Systems group are to: (i) offer a standard fuel cellplatform for many markets thereby enabling ease of manufacturing and reduceddevelopment spending; (ii) achieve further market penetration in thebackup power and motive power markets by tailoring our HyPM® fuel cellproducts to meet market specific requirements including price, performance andfeatures; (iii) invest in sales and market development activities in thebackup power and motive power markets; (iv) continue to target themilitary and other early adopters of emerging technologies as a bridge tofuture commercial markets; and (v) secure the requisite people andprocesses to align our anticipated growth plans with our resources andcapabilities.

 

Our Power Systemsbusiness competes with several well-established battery and combustiongenerator companies in addition to several other fuel cell companies. Wecompete on relative price/performance and design innovation. In the back-uppower market, we believe our HyPM® systems have an advantage over batteries andinternal combustion engines for customers seeking extended run requirements, byoffering a more reliable and economic performance. In motive power markets, webelieve our HyPM® products are well positioned against lead-acidbatteries by offering increased productivity and lower operational costs.

 

There are four types offuel cells other than PEM fuel cells that are generally considered to havepossible commercial applications: phosphoric acid fuel cells, molten carbonatefuel cells, solid oxide fuel cells and alkaline fuel cells. Each of these fuelcell technologies differ in their component materials, and operatingcharacteristics.  While all fuel celltypes may have potential environmental and efficiency advantages overtraditional power sources, we believe that PEM fuel cells can be manufacturedless expensively and are more efficient and more practical in small-scalestationary and motive power applications. Further, most automotive companieshave selected PEM technology for fuel-cell-powered automobiles. We expect thiswill help establish a stronger industry around PEM technology and may result ina lower cost as compared to the other fuel cell technologies.

 

***Test Systems***

 

***Segmented Revenues***

 
| ** **         | ** ** | **2009  (in millions)** | ** ** | **2008  (in millions)** | ** ** | **2007  (in millions)** | ** ** |
|--------------------|------------|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| OnSite  Generation |       | $                       | 12.3       |                    | $          | 31.2                    |       | $ | 19.6 |   |
| Power  Systems     |       | 6.5                     |       | 5.6                     |       | 6.1                     |       |
| Test  Systems(1)   |       | —                  |       | 2.5                     |       | 12.3                    |       |
| Total              |       | $                       | 18.8       |                    | $          | 39.3                    |       | $ | 38.0 |   |

 

----

Note:

 

(1)         Test Systems revenues include $nil million for engineering services in 2009,$0.4 million for engineering services in 2008 and $3.5 million for engineeringservices in 2007, primarily provided to General Motors.

 

For additional financial information by business segment,see “Note 19 — Segmented Financial Information” to our consolidated financialstatements, which can be found beginning on page F-32of this form, and is incorporated by reference herein.

 

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Our revenues aresegmented by geographic location as follows:

 
| ** **           | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------|------------|----------|------------|----------|------------|----------|------------|
|                 |       |     |       |     |       |     |       |
| United States        |       | $        | 2,561      |     | $          | 8,428    |       | $ | 5,609 |   |
| Canada               |       | 2,320    |       | 534      |       | 4,378    |       |
| Germany              |       | 2,227    |       | 655      |       | 1,395    |       |
| Turkey               |       | 1,857    |       | 77       |       | —   |       |
| France               |       | 1,678    |       | 1,144    |       | 2,633    |       |
| India                |       | 1,361    |       | 85       |       | 774      |       |
| Austria              |       | 1,147    |       | —   |       | 3        |       |
| Russia               |       | 793      |       | 12,927   |       | 5,629    |       |
| Spain                |       | 791      |       | 1,815    |       | 138      |       |
| Sweden               |       | 210      |       | 1,600    |       | 119      |       |
| United Arab Emirates |       | 187      |       | 20       |       | 1,255    |       |
| United Kingdom       |       | 178      |       | 1,076    |       | 552      |       |
| China                |       | 127      |       | 1,351    |       | 1,435    |       |
| Romania              |       | 74       |       | 83       |       | 277      |       |
| Belgium              |       | 43       |       | 2,020    |       | —   |       |
| Poland               |       | 34       |       | 639      |       | —   |       |
| Japan                |       | 24       |       | 492      |       | 2,256    |       |
| Saudi Arabia         |       | 11       |       | 1,790    |       | —   |       |
| Brazil               |       | 1        |       | 712      |       | 2,017    |       |
| Korea                |       | —   |       | 1,271    |       | 1,070    |       |
| Argentina            |       | —   |       | 8        |       | 2,010    |       |
| Slovenia             |       | —   |       | 3        |       | 1,275    |       |
| Rest of world        |       | 3,217    |       | 2,610    |       | 5,165    |       |
|                 |       | $        | 18,841     |     | $          | 39,340   |       | $ | 37,990 |   |

 

**OurStrategy**

** **

Our strategy is todevelop electrolyzer and fuel cell products for sale to OEMs, electricutilities, merchant gas companies and end-users requiring highly reliableproducts offered at competitive prices. We believe that our success will besubstantially predicated on the following factors:

 

***Advancing Our Product Designs***

*** ***

Within our OnSiteGeneration business segment, we are focused on reducing the cost of our HySTAT® electrolyzerand improving its efficiency. Innovation in the design, elimination of non-value adding components, improved sourcing and fundamental electrochemicalimprovements have all contributed to continous cost reduction in 2009.Recognizing the opportunity for larger scale energy storage installations weare developing significant scale-up designs.

 

Within our Power Systemsbusiness segment, we are focused on reducing the cost of a fuel cell system.Aremaining impediment to large scale adoption. Significant milestones were reached in 2009.  For market opportunities such as the home andbackup power market 

 

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requiring between4 and 12 kilowatts of electrical power, we are developing a PEM basedelectrolyzer. We are attempting to offset a portion of the associateddevelopment expenses by entering into cost sharing agreements with OEMs andgovernment agencies.

 

Recently, we have seenconsiderable interest in using hydrogen as a medium to store renewable energy,particularly wind and solar power, due to the favourable characteristics ofhydrogen as an energy carrier. We are developing a renewable energy storageproduct incorporating an alkaline electrolyzer, PEM fuel cell electricalgenerator and associated systems integration software. We anticipate addingother proprietary technologies to this product offering based on continuedmarket intelligence. In time, we anticipate developing a product offering thatwill benefit from ancillary electrical power services such as grid balancingand load profiling.

 

***Increasing Market Penetration***

*** ***

As at December 31,2009, we had seven full time staff employed in sales functions. Our seniormanagement team is also actively involved in sales initiatives includingmaintaining close contact with our more significant customers.

 

Additionally, we havedeveloped relationships with third parties that we believe are well positionedin our relevant markets to identify new market opportunities for our products.In the industrial gas market, these third parties include leading merchant gascompanies such as Air Liquide and Linde Gas. In the backup power market, thesethird parties include leading OEMs such as Commscope Inc.

 

We have recently begun tosell our renewable energy storage products to progressive electric powerutilities throughout the world seeking a robust and cost effective solution forrenewable energy storage. We have begun to access this market through tradeevents, meeting directly with electrical utilities, and marketing togovernmental agencies mandated to provide power to remote communities.

 

***Responding to Market Conditions***

*** ***

Macro-level changes inthe global economy began to impact our business in the fourth quarter of 2008and continued to impact our business throughout 2009. While many things werehappening beyond our control, we focused on the actions we can control.  We enhanced and realigned our salesforce.  We intensified our marketingefforts in the renewable energy storage field. We undertook numerous further cost reduction initiatives to enhance ouroverall cost structure and product cost profile.

 

The greatest areas ofconcern for us were delays in decision making and project progress with ourcustomers.  This led to delays in closingorders and delays in product shipments as a result of customers not being ableto pay for the balance of their orders.

 

We have taken a number ofinitiatives to better position ourselves including: (i) revised our annualand three-year financial plans to reflect a more conservative outlook in ourrelevant markets; (ii) incurred a charge of $0.5 million to implement a downsizingin January 2009 involving 25 full-time positions representingapproximately $1.3 million of annual payroll costs; (iii) incurred acharge of $0.4 to implement a further downsizing in December 2009involving 11 full-time positions representing approximately $0.9 million ofannual payroll costs; (iv) implemented reduced work week programs; and (v) continuedto curtail or defer operating expenditures to reduce our overhead levels.

 

***Securing Additional Capital***

*** ***

As at December 31,2009, we had $11.0 million of cash, cash equivalents and restricted cash andhad $17.5 million of shareholders’ equity.

 

We have been pursuing anumber of options to raise additional capital to fund our cash requirements. In2009, we completed the APIF Transaction raising $10.4 million prior totransaction costs and established a credit facility for up to 3.5 million eurowith a Belgian based financial institution. Additionally, in January 2010,we raised $5.0 million, before transaction costs, in a registered directoffering.  We continue to experiencechallenging conditions as a result of weak capital markets and a lower shareprice and anticipate this might adversely impact our ability to raise capitalon favourable terms in the future.

 

We do not anticipateachieving a consistent level of profitability, and hence, generating consistentpositive cash flow from operations for the next several quarters. In 2009, ourbusiness units incurred a net loss of $9.4 million.

 

The failure to raisesufficient funds necessary to finance future cash requirements could adverselyaffect our ability to pursue our strategy and negatively affect our operationsin future periods. We are addressing this matter by maintaining contact withanalysts and institutional investors to better articulate our investmentmerits, and, advancing discussions with possible strategic investors.

 

We filed a final shortform base shelf prospectus with certain ***Canadiansecurities regulatory authorities on January 4, 2010 and a correspondingregistration statement on Form F-3, which was declared effective by the***U.S.Securities and Exchange Commission on December 31, 2009.  This will enhance our ability to access thecapital markets.  On January 14,2010, we completed a registered direct offering of common shares and warrantswith two institutional investors, resulting in gross proceeds of $5 million,before placement agent’s fees and other offering expenses, pursuant to ourregistration statement on Form F-3. As a result of this offering, we may not issue any 

 

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additionalsecurities pursuant to the Form F-3 until January 14, 2011 based onour current public float unless there was a significant increase in the marketprice of our common shares.  In addition,even if the market price of our common shares were to increase significantly,we could not in any event issue more than $4.5 million of additional securitiespursuant to our existing shelf prospectus. For information regarding the shelf prospectus and the direct offering,including information regarding restrictions that may affect our ability toobtain financing as a result of the registered direct offering, see “Item3.  Key Information — Risk Factors — RiskFactors Related to Our Financial Condition — If we are unsuccessful in increasing our revenuesand raising additional funding, we may possibly cease to continue as wecurrently do,” and “Item 14.  MaterialModifications to the Rights of Security Holders and Use of Proceeds — MaterialModifications to the Rights of Security Holders.”  See also “Item 3. Key Information — RiskFactors — Risk Factors Related to Our Financial Condition — We are currently involved in litigationwith Alpha Capital Anstalt, the outcome of which could adversely affect ourfinancial condition” for information regarding our litigation with one of theinstitutional investors.

 

***Retaining and Engaging Our Staff***

*** ***

As at December 31,2009, we had 130 full-time staff, the majority of whom have been employed bythe Company for several years and possess strong technical backgrounds withextensive industry experience. We strive to maintain a high level of employeeengagement by offering compensation at market rates, providing interesting andchallenging work, and, over time, the opportunity to create wealth byparticipating in our stock ownership program.

 

**OurProducts and Services**

** **

Our products includeHySTATTM hydrogen generation equipment in our OnSite Generation business andHyPM® fuel cell products in our Power Systems business.  A summary of our product lines is notedbelow.

 

***HySTATTM Hydrogen Stations***

*** ***

HySTATTM Hydrogen Stationsoffer a dependable on-site supply of hydrogen for a variety of hydrogenapplications, including vehicle fueling, distributed power, and a variety ofindustrial processes.  From a selectionof versatile modular components, we configure the optimum HySTATTM HydrogenStation to precisely meet customer needs for hydrogen generation and storage.We also provide spare parts and service for our entire installed base.

 

We currently offer ourHySTATTM Hydrogen Station in multiple configurations depending on the amount ofhydrogen required. This product is suitable for producing continuous or batchsupplies of hydrogen typically for industrial processing applications andgenerates between 15 - 60 normal cubic meters per hour (“Nm3/hr”) of hydrogen.Multiple standard units can be installed for larger applications with thecapability of generating up to 500 Nm3/hr of hydrogen.

 

***HyPM® Fuel Cell Products***

*** ***

Our HyPM® fuel cell products provide highperformance, high efficiency electrical power from clean hydrogen fuel.  The HyPM® product is well suited to competewith existing battery applications by offering longer runtimes and life, at asignificantly smaller size and weight. The HyPM® product line also competes with certain diesel powerapplications by offering clean, quiet operation and higher demandreliability.  Our products are built on acommon platform allowing us to achieve volume purchasing and manufacturingefficiencies.

 

·                  *HyPM®  Fuel Cell Power Modules*. Our HyPM® power module runs on high purity hydrogen and produces DCpower in standard outputs of 8, 12, 16 and 65 kW.   This product is suitable for a wide range ofstationary, mobile and portable power applications.   The HyPM® XR model is targeted at backuppower applications and the HyPM® HD model is targeted at motive powerapplications.

 

·                  *HyPXTM Fuel Cell Power Pack*. Our HyPXTM Power Pack includes a standard HyPM® power module integratedwith hydrogen storage tanks and ultracapacitors that provide higher power inshort bursts.  This product has the sameform, fit and function as large battery packs used in devices such as forklifttrucks and tow tractors.

 

·                  *Integrated Fuel Cell Systems*. Our integrated fuel cell systems are built around our HyPM® powermodules and are targeted to portable and stationary applications includingportable and auxiliary power units for military applications and direct currentor DC backup power system for cellular tower sites.

 

·                  *Engineering Development Services*. We also enter into engineering development contracts with certaincustomers for new or custom products.

 

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*** ***

***Recent Developments***

*** ***

*Fuel Cells*

* *

On April 27, 2009 wesold a third HyPM® HD fuel cell power module as part of the FederalTransit Administration’s National Fuel Cell Bus Program (“NFCBP”).

 

On May 5, 2009, weannounced that two additional Hydrogenics’ fuel cell powered hybrid MidiBuseshave been put into operation. As we previously announced in 2008, the buseswere purchased by Vestische Strassenbahnen GmbH, a regional urban transitauthority located in Herten, Germany. There are now ten Hydrogenics-poweredMidiBuses in operation in Europe based on a Tecnobus S.p.A electric busplatform.

 

On August 4, 2009,we announced that we had received an additional order from Proterra LLC for azero-emission bus to be deployed in Fort Lewis, Washington. This is part of aproject led by the Center for Transportation and the Environment (“CTE”), sponsored under the DefenseLogistics Agency’s (“DLA”)Hydrogen and Fuel Cell Research and Development Program, and the third ProterraEcoRide transit bus that will utilize our fuel cell power modules. Separately,we have begun building two HyPM® HD 16 units for a zero-emissionEVAmerica, LLC Ecobus transit bus project to be demonstrated in Birmingham,Alabama. This initiative, supported by a grant from the U.S. Department of Transportation’sFederal Transit Administration to the University of Alabama at Birmingham (“UAB”), is led by a UAB research teamand also coordinated by CTE. The EVAmerica bus will be operated by theBirmingham-Jefferson County Transit Authority and service the UAB campus aswell as metropolitan Birmingham.

 

On September 3,2009, we announced that we were awarded a contract to provide HyPM 16 fuelmodules for use in zero emission class 8 short haul trucks being developed byVision Industries Corp. (OTC.BB:VIIC) of California. Vision’s TyranoTM truck isthought to be the world’s first plug-in electric/hydrogen fuel cell poweredheavy duty class 8 vehicle.

 

On January 4, 2010,we announced that we have entered into an agreement with Rosetti Marino S.p.A.,to jointly design, develop and commercialize utility-scale hydrogen powerplants for peak shaving and energy management. The plants will incorporate ourelectrolyzer and fuel cell systems for turnkey applications that producehydrogen for energy storage and electricity generation. Rosetti Marino willprovide expertise in large-scale gas compression, storage, and facility design.

 

*Electrolyzers*

* *

On April 30, 2009,we announced the installation of two HySTATTM electrolyzers in Europe forfueling station applications. In conjunction with Heliocentris Fuel Cells AG, aGerman fuel cell systems integrator, we have installed a hydrogen-generatingelectrolyzer at a bus fueling station in Barth, Germany. Also we installed,with Schwelm of Germany, an electrolyzer in Dunkirk, France for a similarhydrogen fueling application. In Barth, our electrolyzer will be the heart of asolar-assisted gas generation system, providing a zero-emission fuelingsolution for a bus also powered by one of our fuel cells. While producingclean, renewable fuel, the gas generation system will simultaneously provideoxygen to increase the efficiency of a municipal water treatment facility,saving capital costs for an otherwise necessary extension of treatmentcapacity. The Dunkirk fueling station is already operational, with busesrunning on a blend of hydrogen and natural gas. Dunkirk is the first city inFrance to have a public hydrogen station.

 

On August 31, 2009,we announced that we had received orders from Groupe Cevital of Algeria and theObeikan Investment Group of Saudi Arabia for electrolyzers worth, in aggregate,approximately $5 million. These Hydrogenics HySTAT units will be used toproduce high-quality hydrogen for vegetable oil processing and glassproduction.

 

On September 23,2009, we announced that we had received an order from one of India’s largeststeel manufacturers, Bhushan Power & Steel Limited, for a 2 megawattinstallation of HySTAT electrolyzers.

 

As noted above, on January 4,2010, we announced that we have entered into an agreement with Rosetti MarinoS.p.A., to jointly design, develop and commercialize utility-scale hydrogenpower plants for peak shaving and energy management.

 

On January 8, 2010,we announced the award of a development contract with the Canadian Space Agencyfor the development of a next generation power system to be used for surfacemobility applications on the moon. The scope of the contract includes anelectrolyzer that produces both hydrogen and oxygen using solar power and afuel cell system to be used for mobility, auxiliary, and life support systems.Pursuant to this contract we have partnered with MacDonald, Dettwiler andAssociates Ltd., Routes AstroEngineering and the University of Waterloo.

 

We recently ***enteredinto a global purchase and supply agreement with Linde AG, dated as of March 22,2010, which supersedes our previous agreements with Linde AG and will governsales of electrolytic hydrogen generators and other industrial gas productionand purification equipment and related accessories and services to Linde AG.***

 

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*Renewable Energy Projectsin Europe*

* *

On July 28, 2009 wereceived orders for two fuel cell power module systems — one in Greenland andthe other in France — for renewable energy projects. At both locations, we willdeliver HyPM Rack stationary systems to be utilized for primary and backuppower. In Greenland, the power modules will be delivered to Nukissiorfiit, thenational energy company, in the capital of Nuuk as part of project H2KT. Thisinitiative will demonstrate the***potential of using hydrogen forenergy storage and management in Greenland, such that the country can betterutilize its natural hydro-generation resources. In France, the power moduleswill be used for energy generation to supplement photovoltaic and wind power atthe new headquarters of the Abalone Group, a human resources consulting firmlocated in the city of Nantes. The Abalone building is planned to be totallyindependent of the national electricity grid.***

 

***Sales and Marketing***

*** ***

We have a direct salesforce of seven full-time sales professionals in Belgium, Canada, China,Germany, India, Russia and the United States, along with a global network ofsales agents and distribution channels. We believe that our ability to market and sell a diversified productportfolio through global sales and distribution channels provides us with anadvantage over our competitors.  Oursales force is largely organized by region for each business unit.

 

***Customers***

*** ***

The primary customers forour OnSite Generation products are leading industrial gas companies, industrialend users, oil and gas companies and utilities. The primary customers for ourPower Systems products are OEMs, systems integrators and end users.

 

In 2009, three customerscomprised 9%, 7% and 6% of our revenue (in 2008, three customers comprised 18%,7% and 5% of our revenue).  In 2009, 34%of our revenues were derived from Europe, 26% from North America, 8%from Asia, and the remaining 32% were derived from other foreign jurisdictions(in 2008, these numbers were 24%, 22%, 45% and 9%, respectively).  Accordingly, we have mitigated risk to anysingle market or adoption rate by diversifying our product portfolio across themarkets in which we operate.

 

We have entered intoagreements with several customers to pursue commercial opportunities which weview as important to our success.  Ourkey customer agreements are summarized below.

 

·                  *Military OEM*. In December 2005, we entered into a multi-year joint cooperationagreement with a military OEM.  Forreasons of confidentiality, we cannot disclose the name of this OEM.  In conjunction with the signing of thecooperation agreement, we were awarded an $8 million contract for multipleunits of fuel cell power systems based on our 500 series fuel cell stacktechnology.

 

·                  *Leading Global Industrial GasCompanies*.  We have previously established preferredsupplier agreements with Air Liquide S.A., Air Products and Chemicals, Inc.,and Linde A.G., three of the leading global industrial gas companies.  Typically, these agreements provide that, forindustrial applications, we will be the preferred supplier of onsite,electrolysis-based hydrogen generators to the applicable industrial gascompany.  We believe that theserelationships represent valuable sales channels, while providing validation ofour technology from highly credible partners.

 

·                  *General Motors*. In October 2001, we entered into an agreement with General Motorsto accelerate the development of fuel cell technology.  This agreement includes shared intellectualproperty rights and joint efforts in fuel cell product development, engineering,prototyping, testing, branding and marketing strategies. In connection withthis agreement, we issued General Motors approximately 11.4 million of ourcommon shares on a pre-consolidation basis, or 456,000 common shares on apost-consolidation basis, or approximately 21% of our then outstanding commonshares, and warrants to purchase approximately 2.5 million additional commonshares on a pre-consolidation basis, or approximately 100,000 additional commonshares on a post-consolidation basis. These warrants were subsequently cancelled in December 2005 (see “Item7. Major Shareholders and Related Party Transactions — Related PartyTransactions — Transactions with General Motors”).

 

***Research and Product Development***

*** ***

Our research and productdevelopment team consists of approximately 11 staff, the substantial majorityof whom are located in Mississauga, Ontario and are focused primarily on ourfuel cell activities. The remainder is located in Oevel, Belgium.  Collectively, these individuals have many yearsof experience in the design of electrolysis and fuel cell products. Our productdevelopment team combines leaders with extensive experience in their fieldswith younger graduates from leading universities.

 

Our objective is todevelop complete products rather than components and to ensure that theseproducts are constantly improved throughout the product life.  Our research activities are unique to each ofour business units but typically focus on the cost, performance and durabilityof our products. Our product development activities commence with a marketrequirement document establishing the business case 

 

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for the proposedproduct. This process involves staff from our business development, finance,engineering and operations departments who balance the requirements ofperformance, time to market, and product cost. Prototypes are often validated by lead customers such as CommScope, Inc.

 

We seek cost-sharingprojects with various government agencies, mainly in North America, topartially offset our research and product development expenses.  We currently have contribution agreementswith the Province of Ontario, Ministry of Research and Innovation, and with theCanada Foundation for Sustainable Development Technology, a corporation withoutshare capital incorporated under the Canada Corporations Act and continuedunder the Sustainable Development Technology Act (Canada).  In 2009, $1.4 million, or 21% of our researchand product development expenses were funded by various governments.

 

Our current research andproduct development plans are summarized below:

 

·                  *OnSite Generation*. Our research activities are focused onperformance improvements of our electrolyzer cell stacks. Our productdevelopment activities are focused on large scale electrolyzers to storerenewable or other zero-emission energy as hydrogen, thereby helping to addressthe intermittency problem associated with most renewable energies, or to refuelvehicles from locally-produced non-fossil sources. Our larger-scale andlower-scale product developments aim to make Hydrogenics the “one-stop shop”for all on-site hydrogen generation needs.

 

·                  *Power Systems*. At the fuel cell stack, or component level, we are focused on testing,adapting and integrating new materials, design concepts, manufacturingtechniques, and on cost reduction.  Atthe module or product level, we are focused on cost reduction and on meetingmarket specific requirements for durability and performance. Additionally, ourproduct development focuses on size reduction, allowing the same power moduleto be deployed in both mobile and stationary applications. Our product developmentalso focuses on small scale PEM electrolyzers, which we believe will havegreater demand due to their lower cost and size in the small capacity range of<10 Nm3/h.

 

***Intellectual Property***

*** ***

We protect ourintellectual property by means of a combination of patent protection,copyrights, trademarks, trade secrets, licences, non-disclosure agreements andcontractual provisions. We generally enter into a non-disclosure andconfidentiality agreement with each of our employees, consultants and thirdparties that have access to our proprietary technology.  We currently hold 87 patents in a variety ofjurisdictions and have more than 88 patent applications pending.  Additionally, we enter into commerciallicences and cross-licences to access third party intellectual property.

 

We typically retain soleownership of intellectual property developed by us. In certain situations, suchas with Dow Corning and General Motors, we provide for shared intellectualproperty rights. In the case of General Motors, we have a non-exclusive,royalty-free license to use certain of General Motors’ proprietary fuel cellstack intellectual property in certain applications and markets.  We have these rights in perpetuity, includingsubsequent improvements to the licensed technology. In the case of Dow Corning,we jointly own a U.S. patent application, together with all inventions fallingwithin the description of such patent application specific to sealing andsealing materials for fuel cell and electrolyzer assemblies.

 

Given the relative earlystages of our industry, our intellectual property is and will continue to beimportant in providing differentiated products to customers.

 

***Manufacturing***

*** ***

The majority of ourmanufacturing services, including parts procurement, kitting, assembly andrepair, are carried out in-house at our respective business unit manufacturingfacilities. We also perform certain manufacturing related functions in-house,including manufacturing engineering, and the development of manufacturing testprocedures and fixtures.

 

We anticipate being ableto move various aspects of our manufacturing operations to third parties orother lower cost jurisdictions as production volumes increase.  By moving to third parties, we would benefitfrom contract manufacturing economies of scale, access to high qualityproduction resources and reduced equipment capital costs and equipmentobsolescence risk.  We have alsocommenced sourcing components from third parties in Asia and expect to increasethe volume over time to reduce our material costs.

 

We are dependent uponthird party suppliers for certain key materials and components for our productssuch as membrane electrode assemblies and ultra capacitors.  We believe that we have sufficient sourcesand price stability of our key materials and components.

 

We have certifications inISO 9001-2000 in both of our Oevel and Mississauga facilities, and ISO 14001and OHSAS 18001 in our Oevel facility.

 

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** **

**GovernmentRegulation**

** **

We are not subject toregulatory commissions governing traditional electric utilities and otherregulated entities in any of the jurisdictions in which we operate. Ourproducts are however subject to oversight and regulation by governmental bodiesin regard to building codes, fire codes, public safety, electrical and gaspipeline connections and hydrogen siting, among others.

 

**ORGANIZATIONALSTRUCTURE**

** **

As of March 25,2010, we beneficially owned, directly or indirectly, 100% of the voting andnon-voting securities of the material subsidiaries listed below.

 
| **Subsidiaries**      | ** ** | **Jurisdiction  of Incorporation** |
|-----------------------|------------|------------------------------------|
|                  |       |                               |
| Hydrogenics Europe NV |       | Belgium                            |
|                  |       |                               |
| Hydrogenics GmbH      |       | Germany                            |

** **

**PROPERTY,PLANT AND EQUIPMENT**

** **

We have the followingfacilities:

 

·                  *Mississauga, Ontario, Canada*. Our 96,000 square foot facility in Mississauga, Ontario serves as ourcorporate headquarters and Power Systems manufacturing facility and is leaseduntil August 31, 2010. Principal activities at this facility include themanufacture and assembly of our fuel cell power and research and productdevelopment for our fuel cell power products, fuel cell testing services andour corporate activities.  We expect tovacate this facility upon its expiration on August 31, 2010 and enter intoa new lease in Mississauga for a smaller facility and lower annual costcompared to our current Mississauga facility.

 

·                  *Oevel-Westerlo, Belgium*. Our 32,000 square foot facility in Oevel-Westerlo, Belgium serves as ourmanufacturing facility for our OnSite Generation business and is leased until August 30,2014.  Principal activities at thisfacility include the manufacture and assembly of our hydrogen generationequipment, water electrolysis research and product development as well asadministrative functions related to our OnSite Generation business.

 

·                  *Gladbeck, Germany*. Our Power Systems group maintains a 6,458 square foot facility inGladbeck, Germany, which is leased until November 2010.  This facility is used to provide fuel cellintegration services for European customers and serves as our European officefor fuel cell activities of our Power Systems business.

 

·                  *Shanghai, China*. Our procurement group maintains a 100 square foot facility in Shanghai,China. This facility is used for sourcing of products in China and other Asiancountries.

 

In 2005, we assumed leaseobligations previously established by Stuart Energy, including a vacant 53,240square foot facility in Shawinigan, Quebec, with an annual lease cost ofapproximately $0.3 million expiring in May 2011.  This Shawinigan property was sublet in2006.  In connection with its acquisitionof Vandenborre Technologies NV in February 2003, Stuart Energy sought torationalize its operations in 2003.  As aresult, Stuart Energy has previously taken a financial charge relating to theShawinigan, Quebec facility.

 

We also have small salesoffices in Asia, Europe, and North America. We believe our facilities are presently adequate for our operations andwe will be able to maintain suitable space needed on commercially reasonableterms.

 

**ITEM4A.       UNRESOLVED STAFF COMMENTS**

** **

None.

 

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**ITEM5.  OPERATING AND FINANCIAL REVIEW ANDPROSPECTS**

** **

**OPERATINGRESULTS**

** **

This section provides adetailed discussion of our financial performance based on our consolidatedfinancial statements.  All references toper share amounts pertain to net loss per share. Certain of the prior year’sfigures have been reclassified to conform to the current year’s presentation.

 

**SummaryFinancial Analysis**

** **

(in thousand of U.S.dollars, except per share amounts)

 
| ** **                                                                               | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | **% Increase  (Decrease)** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------|------------|------------|------------|------------|------------|----------------------------|------------|
| ** **                                                                               | ** ** | **200****9** | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| **Consolidated Statements of Operations**                                                |       |         |       |       |       |       |       |                       |       |   |   |
| OnSite  Generation                                                                       |       | 12,303       |       | 31,207     |       | 19,608     |       | (61                        | )%         | 59 | % |
| Power  Systems                                                                           |       | 6,538        |       | 5,643      |       | 6,103      |       | 16                         | %          | (8 | )% |
|                                                                                     |       | 18,841       |       | 36,850     |       | 25,711     |       | (49                        | )%         | 43 | % |
| Test  Systems                                                                            |       | —       |       | 2,490      |       | 12,279     |       | (100                       | )%         | (80 | )% |
| Revenues                                                                                 |       | 18,841       |       | 39,340     |       | 37,990     |       | (52                        | )%         | 4 | % |
| Gross  Margin                                                                            |       | 3,728        |       | 7,894      |       | 4,389      |       | (52                        | )%         | 80 | % |
| % of  Revenues                                                                           |       | 20           | %          | 20         | %          | 12         | %          |                       |       |   |   |
|                                                                                     |       |         |       |       |       |       |       |                       |       |   |   |
| Selling,  General and Administrative Expenses                                            |       | 16,995       |       | 15,022     |       | 24,006     |       | 13                         | %          | (37 | )% |
|                                                                                     |       |         |       |       |       |       |       |                       |       |   |   |
| Research  and Product Development Expenses                                               |       | 5,219        |       | 7,296      |       | 9,690      |       | (28                        | )%         | (25 | )% |
|                                                                                     |       |         |       |       |       |       |       |                       |       |   |   |
| Net  Loss                                                                                |       | (9,375       | )          | (14,319    | )          | (28,068    | )          | (35                        | )%         | (49 | )% |
| Net  Loss Per Share                                                                      |       | $            | (2.54      | )          | $          | (3.89      | )          | $                          | (7.64      | ) | (35 | )% | (49 | )% |
|                                                                                     |       |         |       |       |       |       |       |                       |       |   |   |
| **Consolidated Statements of Cash Flows**                                                |       |         |       |       |       |       |       |                       |       |   |   |
| Cash  used in Operating Activities                                                       |       | (11,085      | )          | (6,758     | )          | (28,416    | )          | 64                         | %          | (76 | )% |
|                                                                                     |       |         |       |       |       |       |       |                       |       |   |   |
| **Other Measures**                                                                       |       |         |       |       |       |       |       |                       |       |   |   |
| Cash  Operating Costs(1)                                                                 |       | 21,801       |       | 21,624     |       | 32,143     |       | 1                          | %          | (33 | )% |
| Earnings  Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (1) |       | (18,486      | )          | (14,424    | )          | (31,323    | )          | 28                         | %          | (54 | )% |
|                                                                                          |            |              |            |            |            |            |            |                            |            |  |  |  |  |  |

 

----

Note:

 

(1)         Cash Operating Costs and EBITDA are Non-GAAP measures.  Please refer to “Item5. Operating and Financial Review and Prospects — Operating Results —Reconciliation and Definition of Non-GAAP Measures.”

 

***Highlights for 2009 compared to 2008***

*** ***

·                  Revenues were $18.8 million for the yearended December 31, 2009. Excluding Test Systems, revenues decreased 49%from the comparable period in 2008 resulting from variations in timing ofdelivery of products combined with lower order intake, primarily in our OnSiteGeneration business unit.

 

·                  Cash operating costs, exclusive of $3.3million of transaction related expenses associated with our transaction withthe trustees of Algonquin Power Income Fund, were $18.5 million, a 14% decreasefrom $21.6 million in 2008.  Cashoperating costs for the year ended December 31, 2009 include: (i) $1.0million of costs related to business streamlining initiatives; (ii) $0.4million of 

 

29

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costs associatedwith deferred compensation arrangements indexed to our share price; and (iii) $0.6million of costs attributable to our Test Systems business unit.

 

·                  EBITDA loss increased $4.1 million or28%, reflecting: (i) a $4.1 million decrease in gross margin as a resultof lower revenues; (ii) $3.3 million of transaction related expensesassociated with the APIF Transaction; offset by (iii) a $2.1 million decreasein research and product development expenses; and (iv) $1.2 million ofother items.

 

·                  Net loss decreased $4.9 million or 35%($0.06 per share), reflecting an $18.5 million EBITDA loss, offset by a $10.4million recovery of income taxes as a result of the APIF Transaction.

 

·                  Cash used in operating activitiesincreased $4.3 million or 64%, reflecting; (i) a $4.8 million decrease inour net loss; offset by (ii) an $8.3 million increase in non-cash workingcapital requirements; and (iii) $0.8 million of capital expenditures.

 

***Highlights for 2008 compared to 2007***

*** ***

·                  Revenues increased $11.1 million or 43%,exclusive of Test Systems revenues, as a result of revenue growth in our OnSiteGeneration business unit.

 

·                  Cash operating costs decreased $10.5million or 33%, primarily resulting from our 2007 business streamlininginitiatives and the decision to wind up our test equipment business and theabsence of $4.1 million in severance and related expenses.

 

·                  EBITDA loss decreased $16.9 million or54%, reflecting: (i) a $3.5 million increase in gross margin correspondingto an increase of eight percentage points; (ii) a $9.0 million decrease inselling, general and administrative expenses; (iii) a $2.4 milliondecrease in research and product development expenses; and (iv) theabsence of a $2.0 million provision recorded in 2007 in respect of the wind upof our test equipment business.

 

·                  Net loss decreased $13.8 million or 49%($3.75 per share), reflecting a lower EBITDA loss, partially offset bydecreased interest income and foreign currency gains.

 

·                  Cash used in operating activitiesdecreased $21.6 million, or 76% reflecting; (i) a $16.9 million decreasein our EBITDA loss; (ii) an $8.9 million decrease in non-cash workingcapital requirements; offset by (iii) a $3.8 million decrease in netinterest income and foreign currency gains; and (iv) $0.3million of other items.

 

**BusinessSegment Review**

** **

We report our results infour business segments, OnSite Generation, Power Systems, Test Systems, andCorporate and Other. These segments are differentiated by the productsdeveloped. Our reporting structure reflects how we manage our business and howwe classify our operations for planning and measuring performance. See “Item4.  Information on the Company — BusinessOverview” for a description of our business segments.

 

***OnSite Generation***

*** ***

*Summary FinancialAnalysis*

 
| ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **% Increase  (Decrease)** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------------------|------------|
| **(in thousand of U.S. dollars)**             | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| Revenues                                      |       | 12,303     |       | 31,207     |       | 19,608     |       | (61                        | )%         | 59 | % |
| Gross  Margin                                 |       | 2,608      |       | 6,919      |       | 610        |       | (62                        | )%         | 1034 | % |
| % of  Revenues                                |       | 21         | %          | 22         | %          | 3          | %          |                       |       |   |   |
|                                          |       |       |       |       |       |       |       |                       |       |   |   |
| Selling,  General and Administrative Expenses |       | 2,877      |       | 3,552      |       | 4,182      |       | (19                        | )%         | (15 | )% |
| Research  and Product Development Expenses    |       | 1,489      |       | 1,261      |       | 1,865      |       | 18                         | %          | (32 | )% |
| Segment  Income/(Loss)                        |       | (1,758     | )          | 2,106      |       | (5,436     | )          | (183                       | )%         | (139 | )% |

 

***Revenues***for 2009 were $12.3million, a decrease of $18.9 million or 61%. This decrease is due to: (i) variations in thetiming of project deliveries; (ii) a 6% increase in the value of the U.S.dollar relative to the euro; and (iii) lower order intake. We believe thelower order intake is the result of prevailing conditions in credit markets andthe current global economy.  Revenues forthe year ended December 31, 2009 consisted of the sale of electrolyzerproducts to customers in industrial gas and renewable energy markets. As at December 31,2009, we had $16.4 million of confirmed orders (December 31, 2008 - $14.8million), substantially all of which are anticipated to be delivered andrecognized as revenue in 2010.

 

30

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Revenues for 2008 were$31.2 million, an increase of $11.6 million or 59% compared to 2007, as aresult of increased product demand, operational improvements and product costreductions. Revenues in 2008 consisted of the sale of electrolyzer products tocustomers in industrial gas, hydrogen fueling and renewable energy storagemarkets.

 

***GrossMargin***for2009 was $2.6 million (21% of revenues), compared to $6.9 million (22% ofrevenues) in 2008.  The decrease in grossmargin in 2009 over 2008 is primarily the result of lower revenue as well as a6% increase in the value of the U.S. dollar relative to the euro. Gross margin******for 2008 was $6.9 million (22% ofrevenues), compared to $0.6 million (3% of revenues) in 2007, reflectingoperational improvements and increased overhead absorption.

 

***Selling, General and Administrative (“SG&A”) Expenses*** for 2009 were $2.9 million, a decrease of $0.7 million or 19%.SG&A expenses for 2008 were $3.6 million, a decrease of $0.6 million or 15%compared to 2007. These decreases are primarily the result of streamlining and cost reduction initiatives.In 2009, these decreases reflect a 6% increase in the U.S. dollar relative tothe euro.

 

***Researchand Product Development (“R&D”) Expenses***for 2009 were $1.5 million, an increaseof $0.2 million or 18%. The increase in 2009 is attributable to increasedmaterial consumption for experimentation and prototyping trials to support ourrenewable energy product development efforts. R&D expenses for 2008 were$1.3 million, a decrease of $0.6 million or 32% compared to 2007,and reflectthe adoption of a standard product platform to service multiple marketapplications.

 

***SegmentLoss***for 2009was $1.8 million, an increase of $3.8 million or 183% primarily reflectingdecreased gross margins resulting from lower revenues.  Segment income for 2008 was $2.1 millioncompared to a segment loss of $5.4 million in 2007, reflecting increasedproduct demand combined with operational improvements, cost efficiencies andincreased overhead absorption.

 

***Power Systems***

*** ***

*Summary FinancialAnalysis*

 
| ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **% Increase  (Decrease)** | ** ** |
|-----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------------------|------------|
| **(in thousand of U.S. dollars)**             | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| Revenues                                      |       | 6,538      |       | 5,643      |       | 6,103      |       | 16                         | %          | (8 | )% |
| Gross  Margin                                 |       | 853        |       | 214        |       | 846        |       | 299                        | %          | (75 | )% |
| % of  Revenues                                |       | 13         | %          | 4          | %          | 14         | %          |                       |       |   |   |
|                                          |       |       |       |       |       |       |       |                       |       |   |   |
| Selling,  General and Administrative Expenses |       | 4,309      |       | 4,162      |       | 8,247      |       | 4                          | %          | (50 | )% |
| Research  and Product Development Expenses    |       | 3,516      |       | 5,808      |       | 6,882      |       | (39                        | )%         | (16 | )% |
| Segment  Loss                                 |       | (6,972     | )          | (9,757     | )          | (14,283    | )          | (29                        | )%         | (32 | )% |

 

***Revenues*** for 2009 were $6.5 million, an increase of $0.9million or 16% compared to 2008 and primarily reflect timing of projectdeliveries and a higher proportion of revenues from custom and pre-commercialmarkets. As at December 31, 2008, we had $3.3 million (December 31,2008-$7.6 million) of confirmed orders for Power Systems’ products and services,over half of which are anticipated to be delivered and recognized as revenue in2010. Revenues for 2008 were $5.6 million, a decrease of $0.5 million or 8%compared to 2007 and reflect a higher proportion of revenues from backup powerand motive power markets, as opposed to pre-commercial markets, consistent withour business plan.

 

***GrossMargin***for2009 was $0.9 million (13% of revenues) compared to $0.2 million (4% ofrevenues) in 2008, reflecting a higher proportion of custom and pre-commercialmarket revenues which generally have a higher gross margin.  Gross margin for 2008 was $0.2 million (4% ofrevenues) compared to $0.8 million (14% of revenues) in 2007 reflecting ahigher proportion of revenues from backup power and motive power markets which generallyhave lower margin as we aim to replace incumbent technologies in these markets.

 

***SG&A******Expenses*** for 2009 were $4.3 million, an increaseof $0.2 million or 4%. This increase reflects $1.0 million of costs incurred associatedwith business streamlining initiatives during the first and fourth quarters of2009, partially offset by the resulting decreased costs from these businessstreamlining initiatives and an increase in the value of the U.S. dollarrelative to the euro. SG&A expenses for 2008 were $4.2 million, a decrease of $4.1million or 50%, compared to 2007, and reflect the results of streamliningand cost reduction initiatives and the absence of $2.9 million in severance andrelated expenses associated with initiatives commenced in 2007.

 

***R&DExpenses*** for2009 were $3.5 million, a decrease of $2.3 million or 39% compared to 2008, andare attributable to streamlining and cost reduction initiatives. R&Dexpenses for 2008 were $5.8 million, a decrease of $1.1 million or 16% comparedto 2007, and reflect a $0.3 million decrease in R&D expendituresattributable to developing standard products for multiple market applicationscombined with $0.8 million of increased third party funding as a result of thepartial deployment of Class 1 forklifts for long-term customer testing.

 

31

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***SegmentLoss*** for 2009 was $7.0 million compared to $9.8 millionin 2008, reflecting increased gross margin and decreased R&D expendituresresulting from our streamlining and cost reduction initiatives undertakenduring 2009, offset by a $0.2 million increase in SG&A expenses. Segmentloss for 2008 was $9.8 million compared to a segment loss of $14.3 million in2007, reflecting $0.5 million of decreased gross margin, $4.1 million indecreased SG&A expenses, and $2.0 million in decreased R&D expendituresresulting from our streamlining and cost reduction initiatives undertakenduring 2007, and lower gross margin.

 

***TestSystems***

 

*Summary Financial Analysis*

 
| ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **% Increase (Decrease)** | ** ** |
|----------------------------------------------|------------|------------|------------|------------|------------|------------|------------|---------------------------|------------|
| **(in thousand of U.S. dollars)**            | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** | **200****9**              | ** ** | **2008** | ** ** |
| Revenues                                     |       | —     |       | 2,490      |       | 12,279     |       | (100                      | )%         | (80 | )% |
| Gross Margin                                 |       | 267        |       | 762        |       | 2,936      |       | (65                       | )%         | (74 | )% |
| % of Revenues                                |       | n/a        | %          | 31         | %          | 24         | %          |                      |       |   |   |
|                                         |       |       |       |       |       |       |       |                      |       |   |   |
| Selling, General and Administrative Expenses |       | 574        |       | 1,171      |       | 2,069      |       | (51                       | )%         | (43 | )% |
| Research and Product Development Expenses    |       | —     |       | 60         |       | 318        |       | (100                      | )%         | (81 | )% |
| Wind-up of Test Equipment Business Expense   |       | —     |       | —     |       | 2,016      |       | 0                         | %          | (100 | )% |
| Segment Income/(Loss)                        |       | (307       | )          | (469       | )          | (1,465     | )          | (35                       | )%         | (68 | )% |

 

***Revenues*** for 2009 were nil, comparedto $2.5 million in 2008 and $12.3 million in 2007. These decreases are theresult of our decision in 2007 to wind up our test equipment business.  Test Systems’ revenues for 2008 relate to thedelivery of orders received prior to our decision to wind up this business. Asat December 31, 2009, we had no orders for Test Systems’ products andservices remaining to be delivered.

 

***GrossMargin***for 2009 was $0.2 million compared to $0.8 million(31% of revenues) in 2008 and $2.9 million (24% of revenues) in 2007,reflecting the reversal of warranty accruals . Gross margin in 2008 and 2007 reflected the gross margin realized on ourremaining orders.

 

***SG&AExpenses***for 2009 were $0.6 million, a decrease of $0.6million from 2008 and $0.9 million for 2007. The reductions in both yearsreflect our decision to downsize and subsequently wind-up our test equipmentbusiness.

 

***R&DExpenses***for 2008 and 2009 were less than $0.1 million, adecrease of $0.3 million from 2007. The reductions in both years reflect ourdecision to downsize and subsequently wind-up our test equipment business.

 

***Wind-up of TestEquipment Business**Expenses***for2008 and 2009 were nil, a decrease of $2.0 million or 100% compared to 2007 asa result of incurring $2.0 million of costs in 2007 relating to the wind-up ofour test equipment business as announced on November 7, 2007. In 2008, weincurred $0.6 million of costs attributable to the wind-up of our testequipment business which were allocated to the various accounts as incurred. Weanticipate incurring less than $0.1 million of costs in 2010 to complete the wind-upof our test equipment business. In November 2007, we indicated that weanticipated incurring a cash cost and corresponding charge to earnings between$3.5 million and $4.0 million to complete the wind-up of our test equipmentbusiness. Consistent with 2008, we continue to expect to incur a total of $3.5million to wind-up our test equipment business, ahead of our initial outlook.

 

***SegmentLoss*** for 2009 was $0.3 million compared to a segment lossof $0.5 million in 2008 and a segment loss of$1.5 million in 2007.

 

***Corporateand Other***

 

*Summary Financial Analysis*

 
| ** **                                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **% Increase (Decrease)** | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------------------|------------|
| **(in thousands of U.S. dollars)** | ** ** | **2009**   | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2009**                            | ** ** | **2008** | ** ** |
| Selling, General and Administrative Expenses           |       | 9,235      |       | 5,444      |       | 7,957      |       | 69                                  | %          | (32 | )% |
| Research and Development Expenses                      |       | 214        |       | 167        |       | 625        |       | 28                                  | %          | (73 | )% |
| Segment Loss                                           |       | (338       | )          | (6,199     | )          | (6,884     | )          | (95                                 | )%         | (10 | )% |

 

***SG&AExpenses***for 2009 were $9.2 million in 2009, an increaseof $3.8 million or 70%. This increase is the result of: (i) $3.3 milliontransaction related expenses associated with the APIF Transaction; (ii) $1.0million of costs related to business streamlining initiatives; and (ii) 

 

32

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$0.5 million of deferredcompensation costs indexed to our share price; partially offset by (iii) lowercosts as a result of business streamlining initiatives. SG&A expenses for2008 were $5.4 million, a decrease of $2.5 million or 32% compared to 2007reflecting: (i) the results of our streamlining and cost reduction initiativesundertaken in the fourth quarter of 2007; and (ii) the absence of $1.0million in severance and other related expenses associated with thesestreamlining and cost reduction initiatives; partially offset by (iii) $0.3million of costs incurred associated with various financing initiatives.

 

***R&DExpenses***for 2009 were $0.2 million, an increase of lessthan $0.1 million compared to 2008, reflecting increased intellectual propertyfees in 2009.  R&D expenses for 2008decreased $0.5 million or 73% compared to 2007, reflecting decreasedintellectual property fees.

 

***SegmentLoss***for 2009 was $0.3 million, a decrease of $5.9million or 95% primarily as a result of the APIF Transaction generatingproceeds of Cdn. $10.8 million, prior to transaction costs. Segment loss for2008 was $6.2 million, a decrease of $0.7 million or 10% compared to 2007,attributable to reduced operating costs as a result of streamlining initiativestaken in 2007.

 

**Financial Condition**

** **

*A discussion of the significant changes in our consolidatedbalance sheets.*

* *

As at December 31, (in thousands of U.S.dollars)

 
| ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                         | ** ** | **2009**   | ** ** | **2008**   | ** ** | **$**      | ** ** | **%**      | ** ** | **Commentary** | ** ** |
| Cash, cash equivalents  restricted cash and short-term investments |       | $          | 11,002     |       | $          | 22,731     |       | (11,729    | )          | (52 | )% | ·        Refer to “Item 5. Operating and Financial Review and  Prospects –Liquidity and Capital Resources.” |   |
|                                                               |       |       |       |       |       |       |       |       |       |   |   |
| Accounts receivable                                                |       | 3,685      |       | 3,974      |       | (289       | )          | (7         | )%         | ·        Lower  revenues, offset by $0.4 million receivable from the APIF Transaction. |   |
|                                                               |       |       |       |       |       |       |       |       |       |   |   |
| Inventory                                                          |       | 11,746     |       | 10,101     |       | 1,645      |       | 16         | %          | ·        $3.2 million increase in finished goods awaiting customer payment  and/or delivery offset by $1.7 million of decreased raw materials. |   |
|                                                               |       |       |       |       |       |       |       |       |       |   |   |
| Accounts payable and  accrued liabilities                          |       | 14,782     |       | 17,298     |       | (2,516     | )          | (15        | )%         | ·        Improved product lead times and decreased raw material inventory  levels. Refer to note 9 to our consolidated financial statements for a  breakdown of this account. |   |
|                                                               |       |       |       |       |       |       |       |       |       |   |   |
| Unearned revenue                                                   |       | 4,546      |       | 4,785      |       | (239       | )          | (5         | )%         | ·        Reduction in revenues offset by higher proportion of deposits. |   |
|                                                                    |            |            |            |            |            |            |            |            |            |  |  |  |  |

 

33

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As at December 31, (in thousands of U.S.dollars)

 
| ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                         | ** ** | **2008**   | ** ** | **2007**   | ** ** | **$**      | ** ** | **%**      | ** ** | **Commentary** | ** ** |
| Cash, cash equivalents  restricted cash and short-term investments |       | $          | 22,731     |       | $          | 30,492     |       | (7,761     | )          | (25 | ) | ·        Please refer to “Item 5. Operating and Financial Review and Prospects  —Liquidity and Capital Resources.” |   |
|                                                               |       |       |       |       |       |       |       |       |       |   |   |
| Accounts receivable                                                |       | 3,974      |       | 12,713     |       | (8,739     | )          | (69        | )          | ·        Improved management of accounts receivable and strong cash  collections prior to year-end. |   |
|                                                               |       |       |       |       |       |       |       |       |       |   |   |
| Inventory                                                          |       | 10,101     |       | 12,659     |       | (2,558     | )          | (20        | )          | ·        Decreased work-in-process as a result of improved product lead times. |   |
|                                                               |       |       |       |       |       |       |       |       |       |   |   |
| Accounts payable and  accrued liabilities                          |       | 17,298     |       | 18,166     |       | (868       | )          | (5         | )          | ·        Improved product lead times and decreased inventory levels.

 

·        Refer to note 11 to our consolidated financial statements for the  year ended December 31, 2008, which was filed with the SEC on  August 12, 2009 as part of our amendment no. 1 to the Form 20-F for  the year ended December 31, 2008, for a breakdown of this account. |   |
|                                                               |       |       |       |       |       |       |       |       |       |   |   |
| Unearned revenue                                                   |       | 4,785      |       | 9,042      |       | (4,257     | )          | (47        | )          | ·        Fewer deposits for orders received prior to the end 2008 compared to  2007. |   |
|                                                                    |            |            |            |            |            |            |            |            |            |  |  |  |  |

 

34

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**Summary Of QuarterlyResults**

** **

*A summary view of our quarterly financial performance.*

* *

The followingtable highlights selected financial information for the eight consecutivequarters ending December 31, 2009.*

 

(in thousands of U.S. dollars, except for shareand per share amounts)

 
| ** **                                       | ** ** | **2009**  | ** ** | **2008**  | ** ** |
|--------------------------------------------------|------------|-----------|------------|-----------|------------|
| ** **                                       | ** ** | **Q4**    | ** ** | **Q3**    | ** ** | **Q2** | ** ** | **Q1** | ** ** | **Q4** | ** ** | **Q3** | ** ** | **Q2** | ** ** | **Q1** | ** ** |
| Revenues                                         |       | $         | 4,207      |      | $          | 3,558 |   | $ | 5,540 |   | $ | 5,536 |   | $ | 8,855 |   | $ | 10,984 |   | $ | 8,790 |   | $ | 10,711 |   |
| Gross Margin                                     |       | 665       |       | 575       |       | 857 |   | 1,631 |   | 2,568 |   | 1,488 |   | 1,973 |   | 1,865 |   |
| % of Revenues                                    |       | 16        | %          | 16        | %          | 16 | % | 30 | % | 29 | % | 14 | % | 22 | % | 17 | % |
| EBITDA**                                         |       | (4,058    | )          | (5,159    | )          | (5,510 | ) | (3,759 | ) | (2,004 | ) | (3,446 | ) | (5,066 | ) | (3,908 | ) |
| Net Profit (Loss)                                |       | 6,071     |       | (5,439    | )          | (6,010 | ) | (3,997 | ) | (1,950 | ) | (3,728 | ) | (4,319 | ) | (4,322 | ) |
| Net Profit (Loss) Per  Share (Basic and diluted) |       | 1.64      |       | (1.47     | )          | (1.63 | ) | (1.08 | ) | (0.53 | ) | (1.01 | ) | (1.18 | ) | (1.18 | ) |
| Weighted Average Common  Shares Outstanding      |       | 3,699,795 |       | 3,696,607 |       | 3,696,284 |   | 3,696,226 |   | 3,696,267 |   | 3,695,149 |   | 3,670,627 |   | 3,670,628 |   |
|                                                  |            |           |            |           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

Note:

 

*   Certain minor variances exist between theannual consolidated financial statements and this summary.

**Refer to “Reconciliation and Definition of Non-GAAP Measures” below for areconciliation of Non-GAAP measures.

 

In the first quarter of2009, our net loss decreased by $0.3 million ($0.10 per common share) comparedto the first quarter of 2008 due to increased gross margin and cost controlmeasures, inclusive of $0.6 million of business streamlining expenses, offsetby a 48% decrease in revenue.

 

In the second quarter of2009, our net loss increased by $1.7 million ($0.45 per common share) comparedto the second quarter of 2008 due to (i) a $3.3 million decrease inrevenues; (ii) $1.2 million of transaction related expenses associatedwith the APIF Transaction; and (iii) a 6% decrease in gross margin.

 

In the third quarter of2009, our net loss increased by $1.7 million ($0.46 per common share) comparedto the third quarter of 2008 due to: (i) a $7.4 million decrease inrevenue; and (ii) $1.8 million of transaction related expenses associatedwith the APIF Transaction; partially offset by; (iii) a 2% increase ingross margin.

 

In the fourth quarter of2009, we recorded net profit of $6.1 million ($1.64 per common share) comparedto a net loss of $2.0 million ($0.53 per common share) in the fourth quarter of2008 as noted below.

 

·                  Revenuesdecreased $4.6 million, or 52%, reflecting a decrease of $6.0 million inrevenues in our OnSite Generation business unit due to the timing of projectexecution, which we believe is the result of prevailing conditions in creditmarkets and the current global economy. This decrease was partially offset byincreased revenue in our Power Systems business unit of $1.4 million, or 163%.

 

·                  Grossmargin was $0.7 million (16% of revenues) in the fourth quarter of 2009compared to $2.6 million (29% in the fourth quarter of 2008), reflecting ahigher proportion of revenues from our Power Systems business unit and loweroverhead absorption as a result of lower revenues in our OnSite Generationbusiness unit.

 

·                  SG&A expenses******for the fourth quarter of 2009 were$4.0 million, an increase of $1.2 million or 41% compared to the comparableperiod of 2008 reflecting $0.4 million of severance and business streamliningrelated expenses

 

·                  R&Dexpenses******for the fourth quarter of2009 were $0.7 million, a decrease of $1.0 million or 59% compared to thefourth quarter of 2008 reflecting streamlining and cost reduction initiativescoupled with the receipt of research and product development fundingtotalling  $0.8 million during the fourthquarter of 2009.

 

35

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·                  Recoveryof current income taxes for the fourth quarter of 2009 was  $10.4 million, reflecting a gain recorded inconnection with the transaction with the trustees of Algonquin Power IncomeFund.

 

The information in thissection was obtained from our quarterly unaudited consolidated financialstatements, which are denominated in U.S. dollars and have been prepared inaccordance with Canadian GAAP. This information is, in the opinion ofmanagement, prepared using accounting policies consistent with the auditedconsolidated financial statements and includes all adjustments necessary forthe fair presentation of the results of the interim periods. We expect ouroperating results to vary significantly from quarter to quarter and they shouldnot be relied upon to predict future performance.

 

**Reconciliation andDefinition of Non-GAAP Measures**

** **

*A description, calculation, and reconciliation ofcertain measures used by management.*

* *

Non-GAAP financialmeasures including earnings before interest, taxes, depreciation and amortization(“EBITDA”) and cash operating expenses are used by management to provideadditional insight into our performance and financial condition. We believethese Non-GAAP measures are an important part of the financial reportingprocess and are useful in communicating information that complements andsupplements the consolidated financial statements. Accordingly, we arepresenting EBITDA and cash operating expenses in this annual report on Form20-F to enhance the usefulness of this form. In accordance with CanadianSecurities Administration Staff Notice 52-306, we have provided reconciliationsof our Non-GAAP financial measures to the most directly comparable CanadianGAAP number, disclosure of the purposes of the Non-GAAP measure, and how the Non-GAAPmeasure is used in managing the business.

 

***Earningsbefore interest, taxes, depreciation and amortization (EBITDA)***

*** ***

We report EBITDA becauseit is a key measure used by management to evaluate performance of businessunits and the Company. EBITDA is a measure commonly reported and widely used byinvestors as an indicator of a company’s operating performance and ability toincur and service debt, and as a valuation metric. We believe EBITDA assistsinvestors in comparing a company’s performance on a consistent basis withoutregard to depreciation and amortization, which are non-cash in nature and canvary significantly depending upon accounting methods or non-operating factorssuch as historical cost.

 

EBITDA is not acalculation based on Canadian GAAP or U.S. GAAP and should not be considered analternative to operating income or net income in measuring our performance, norshould it be used as an exclusive measure of cash flow, because it does notconsider the impact of working capital growth, capital expenditures, debtprincipal reductions and other sources and uses of cash, which are disclosed inthe consolidated statements of cash flows. Investors should carefully considerthe specific items included in our computation of EBITDA. While EBITDA has beendisclosed herein to permit a more complete comparative analysis of ouroperating performance relative to other companies, investors should becautioned that EBITDA as reported by us may not be comparable in all instancesto EBITDA as reported by other companies.

 

The following is areconciliation of EBITDA with Net loss. EBITDA is regularly reported to thechief operating decision maker and corresponds to the definition used in ourhistorical quarterly discussions.

 

*EBITDA*

*(in thousands of us dollars)*

 
| ** **                                    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net loss                                      |       | $        | (9,375     | )        | $          | (14,319  | )          | $ | (28,068 | ) |
| Amortization of property, plant and equipment |       | 984      |       | 855      |       | 903      |       |
| Amortization of intangible assets             |       | —   |       | 249      |       | 251      |       |
| Impairment of property, plant and equipment   |       | 317      |       | —   |       | —   |       |
| Other income                                  |       | 41       |       | 1,325    |       | 4,431    |       |
| Income tax expense (recovery)                 |       | (10,371  | )          | 116      |       | 22       | )          |
| EBITDA                                        |       | $        | (18,486    | )        | $          | (14,424  | )          | $ | (31,323 | ) |

*** ***

***CashOperating Expenses***

*** ***

We report cash operating expensesbecause it is a key measure used by management to measure the fixed operatingcosts required to operate the ongoing business units of the Company. We believecash operating expenses is a useful measure in assessing our fixed operatingcosts.

 

36

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Cash operating expensesare not based on Canadian or U.S. GAAP and should not be considered analternative to loss from operations in measuring the Company’s performance, norshould it be used as an exclusive measure of our operating costs because itdoes not consider certain stock based compensation expenses which are disclosedin the consolidated statements of operations. Investors should carefullyconsider the specific items included in our computation of cash operating expenses.While cash operating expenses are disclosed herein to permit a more completecomparative analysis of our cost structure relative to other companies,investors should be cautioned that cash operating expenses as reported by usmay not be comparable in all instances to cash operating expenses as reportedby other companies.

 

The following is a reconciliationof cash operating expenses with loss from operations. Cash operating expensesare regularly reported to the chief operating decision maker and corresponds tothe definition used in our historical quarterly discussions.

 

*Cash Operating Costs*

*(in thousands of U.S. dollars)*

 
| ** **                                           | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Loss from operations                                 |       | $        | (19,787    | )        | $          | (15,528  | )          | $ | (32,477 | ) |
| Less: Gross margin                                   |       | (3,728   | )          | (7,894   | )          | (4,389   | )          |
| Less: Wind-up of test equipment business             |       | —   |       | —   |       | 2,016    |       |
| Less: Stock-based compensation                       |       | 413      |       | 694      |       | 1,553    |       |
| Less: Amortization of property, plant and  equipment |       | 984      |       | 855      |       | 903      |       |
| Less: Amortization of intangible assets              |       | —   |       | 249      |       | 251      |       |
| Less: Impairment of property, plant and equipment    |       | 317      |       | —   |       | —   |       |
| Cash Operating Costs                                 |       | $        | 21,801     |     | $          | 21,624   |       | $ | 32,143 |   |

** **

**Impact of Inflation**

** **

None.

 

**Impact of ForeignCurrency Fluctuations**

** **

For information regardingthe impact of foreign currency fluctuations on our Company, see “Item 5.Operating and Financial Review and Prospects — Liquidity and Capital Resources —Foreign Currency Risk” and “Note 4 — Risk Management Arising from FinancialInstruments — Foreign Currency Risk” to our consolidated financial statements,which can be found beginning on page F-19of this form, and is incorporated by reference herein.  We currently have limited currency hedgingthrough financial instruments. We carry a portion of our short-term investmentsin Canadian dollars and euros.

 

**Governmental Policies**

** **

For information regardingthe potential impact of changes in governmental policies on the Company, see “Item3.  Key Information — Risk Factors — RiskFactors Related to Our Business and Industry.”

 

37

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**LIQUIDITY AND CAPITAL RESOURCES**

** **

The following sectionexplains how we manage our cash and capital resources to carry out our strategyand deliver results.

 

**Cash Used in OperatingActivities**

** **

*(inthousands of U.S. dollars)*

 
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | **2009**   | ** ** | **2008**   | ** ** | **$**      | ** ** | **%** | ** ** |
| EBITDA loss                        |       | (18,486    | )          | (14,424    | )          | (4,062     | )          | (28 | )% |
| Other income                       |       | 41         |       | 1,325      |       | (1,284     | )          | (97 | )% |
| Change in non-cash working capital |       | (3,632     | )          | 4,817      |       | (8,449     | )          | (175 | )% |
| Other items                        |       | 10,992     |       | 1,524      |       | 9,468      |       | 621 | % |
| Cash used in operating activities  |       | (11,085    | )          | (6,758     | )          | (4,327     | )          | (64 | )% |

 

Changes in cash used inoperating activities in 2009 compared to 2008 are discussed below.

 

·                  EBITDAloss increased $4.1 million or 28% as more particularly described in “Item 5.Operating and Financial Review and Prospectus — Operating Results.”

 

·                  Otherincome decreased $1.3 million or 97% as a result of $0.8 million of lowerinterest income, net $0.3 million of increased provincial capital tax resultingfrom certain elections filed in connection with the APIF Transaction, and $0.2million of lower foreign currency gains. The decrease in lower interest income, net, was the result of lowerinterest rates and a lower asset base. The decrease in foreign currency gains resulted from variations in theU.S. dollar relative to the Canadian dollar and the euro during 2009.

 

·                  Changesin non-cash working capital increased $8.4 million as more particularlydescribed in “Item 5. Operating and Financial Review and Prospectus — OperatingResults — Financial Condition.”

 

·                  Otheritems increased $11.0 million or 621%, primarily as a result of the recovery ofincome taxes of $10.4 million.  Thisresulted from the closing of the APIF Transaction, which generated proceeds of $10.4million, prior to transaction costs.

 

At current operatinglevels, we anticipate consuming between $10.0 million and $15.0 million in 2010to fund our anticipated EBITDA losses, non-cash working capital requirementsand capital expenditures.  In the eventthat we are successful in securing orders in excess of our base-case revenueoutlook, our cash requirements would increase.

 

The report of ourindependent auditors in respect of the 2009 fiscal year contains an explanatorynote regarding our ability to continue as a going concern. In addition, whileour consolidated financial statements have been prepared on a going concernbasis, which contemplates the realization of assets and liquidation ofliabilities during the normal course of operations, there are materialuncertainties related to certain conditions and events that cast significantdoubt upon the Company’s ability to continue as a going concern.   These events and conditions that cast significant doubt include theCompany’s recurring operating losses and negative cash flows from operations.The Company expects these conditions to continue in the near term.

 

The Company needs toincrease its revenue to generate profits and related operating cash flows.During 2009, the Company experienced a decline in revenue due to variations inthe timing of delivery combined with lower order intake due to the prevailing conditionsin the Company’s markets and the current global economy.  There arevarious uncertainties affecting our revenues related to the current marketenvironment including the level of sales orders, the length of sales cycles,the continuing development of products by the Company, the adoption of newtechnologies by customers, price competition, and continuation of governmentincentives for the Company’s customers and the ability of customers to financepurchases. 

 

The Company also requiresadditional funding in the form of debt or equity in addition to the fundingobtained during the year and subsequent to year-end.  During the year, theCompany generated cash proceeds of $10.4 million from the transaction with thetrustees of Algonquin Power Income Fund.  Subsequent to December 31,2009, the Company completed an offering of common shares and warrants for grosscash proceeds of $5 million before placement agent’s fees and other offeringexpenses.  While the Company is pursuing various sources of financing,there are no definitive plans at this stage and there is no assurance theseinitiatives will be successful or provide additional funds sufficient tocontinue operations.

 

38

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The material uncertaintiesreferred to above relate to the Company’s ability to increase revenue and toraise additional funding to support operations.  Additionally, acontinuation of the broad economic recession or slow recovery could continue tohave a negative impact on the Company’s business, results of operations andconsolidated financial condition, or Hydrogenics’ ability to forecast resultsand cash flows, and it may cause a number of the risks the Company currentlyfaces (such as the ability to increase revenue and to raise capital) toincrease in likelihood, magnitude and duration.  Macro-level changes inthe global economy began to affect the Company’s business in the fourth quarterof 2008 and have continued throughout 2009. 

 

The Company’s ability tocontinue as a going concern and manage the material uncertainties is dependenton the successful execution of its business plan, which involves: (i) securingadditional financing to fund its operations, (ii) continued investment inresearch and development through advancing product designs for efficiency,durability, cost reduction and entry into complementary markets to improveoverall gross margins; (iii) increasing market penetration and sales toimprove operating cash flow; and (iv) actively managing its workingcapital to preserve cash resources.   At present, the success of theseinitiatives cannot be assured due to the material uncertainties describedabove. 

 

See also the risksrelated to our financial condition contained in “Item 3. Key Information — RiskFactors.”

 

At present, the successof these initiatives cannot be assured due to certain material uncertaintiesand hence the appropriateness of the use of accounting principles applicable toa going concern. We had filed a final short form base shelf prospectus withcertain ***Canadiansecurities regulatory authorities on January 4, 2010 and a correspondingregistration statement on Form F-3, which was declared effective by the***U.S.Securities and Exchange Commission on December 31, 2009.  On January 14, 2010, we completed aregistered direct offering of common shares and warrants with two institutionalinvestors, resulting in gross proceeds of $5 million, before placement agent’sfees and other offering expenses, pursuant to our registration statement on Form F-3.  As a result of this offering, we may notissue any additional securities pursuant to the Form F-3 until January 14,2011 based on our current public float unless there was a significant increasein the market price of our common shares. In addition, even if the market price of our common shares were toincrease significantly, we could not in any event issue more than $4.5 millionof additional securities pursuant to our existing shelf prospectus.  For information regarding the shelfprospectus and the direct offering, including information regardingrestrictions that may affect our ability to obtain financing as a result of theregistered direct offering, see “Item 3. Key Information — Risk Factors — Risk Factors Related to Our Financial Condition — If we are unsuccessfulin increasing our revenues and raising additional funding, we may possiblycease to continue as we currently do,” and “Item 14.  Material Modifications to the Rights ofSecurity Holders and Use of Proceeds — Material Modifications to the Rights ofSecurity Holders.”  See also “Item 3.Key Information — Risk Factors — RiskFactors Related to Our Financial Condition — We are currently involvedin litigation with Alpha Capital Anstalt, the outcome of which could adverselyaffect our financial condition” for information regarding our litigation withone of the institutional investors.

 

We anticipate we willrequire additional funding during 2010. We continue to review sources of financing, a combination of operatingand related initiatives, as well as other alternatives to enhance shareholdervalue, including, but notlimited to, alliances with strategic partners, private and public debt orequity financing alternatives, the sale or licensing of our technology or asubstantial reorganization of our business.

 

At present, we have notentered into any definitive agreement or arrangement to implement any of thesealternatives and there can be no assurance that we will identify or be able tonegotiate or carry out any of them. Further information will be provided if weintend to propose or pursue any or more of such alternatives.

 

**Cash Provided by (Usedin) Investing Activities**

 

*(inthousands of U.S. dollars)*

 
| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                      | ** ** | **2009**   | ** ** | **2008**   | ** ** | **$**      | ** ** | **%** | ** ** |
| Cash provided by (used in) investing activities |       | $          | (1,465     | )          | $          | 13,017     |       | (14,482 | ) | (111 | )% |
|                                                 |            |            |            |            |            |            |            |  |  |  |  |

 

39

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Cash used by investingactivities was $1.5 million in 2009, a decrease of $14.5 million or 111%compared to 2008. The $1.5 million of cash used in investing activities reflectsa $0.7 million increase in restricted cash as well as $0.8 million of capitalexpenditures.

 

**Cash Provided by (Usedin) Financing Activities**

** **

*(inthousands of U.S. dollars)*

 
| ** **                                      | ** ** | ** ** | ** ** | ** ** | ** ** | **Change** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                      | ** ** | **2009**   | ** ** | **2008**   | ** ** | **$**      | ** ** | **%** | ** ** |
| Cash provided by (used in) financing activities |       | $          | 108        |       | $          | (118       | )          | $ | 226 |   | 191 | % |
|                                                 |            |            |            |            |            |            |            |  |  |  |  |  |

 

Cash provided byfinancing activities was $0.1 million in 2009, an increase of $0.2 millioncompared to 2008, reflecting a $0.1 million decrease in deferred research andproduct development grants and less than $0.1 million of funds received on theexercise of stock options.

 

**Credit Facilities**

** **

We utilize a creditfacility with Dexia Bank (“Dexia”), a Belgian based financial institution, tobetter manage our short-term cash requirements and to support letters ofguarantee provided to customers. As at December 31, 2009, we had operatinglines of credit available up to 3.5 million euro or $5.0 million compared to$11.5 million as at December 31, 2008. The change in the available linesof credit from December 31, 2008 is the result of the termination of thecredit facility with a Canadian chartered bank and the establishment of a newcredit facility with Dexia. As at December 31, 2009 and 2008, we had noindebtedness on our credit facilities.

 

Pursuant to the terms ofa new credit facility with Dexia, Hydrogenics Europe NV (the “Borrower”), awholly-owned Belgian based subsidiary, may borrow a maximum of 75% of the valueof awarded sales contracts approved by Dexia, to a maximum of 2.0 million euro,along with a maximum of 1.5 million euro for general business purposes.  The credit facility bears interest at a rateof Euribor plus 1.45% per annum and is secured by a 1.0 million euro first  charge secured against all the assets of theBorrower. This credit facility, which may be increased by an additional 1.5million euro in certain circumstances, contains a negative pledge precludingthe Borrower from providing security over its assets. Additionally, theBorrower is required to maintain a solvency covenant, defined as equity pluscurrent account divided by total liabilities, of not less than 25%, and ensurethat its inter-company account with Hydrogenics does not fall below a certainlevel. As at December 31, 2009, the solvency covenant was 35%. As at December 31,2009, the inter-company account was in compliance with these covenants.

 

The amount of theavailable line of credit is reduced by the amount of outstanding standbyletters of credit and letters of guarantee, if any, issued from time to time byDexia. As at December 31,2009, there is no availability under this line of credit as the Company has notsubmitted any sales orders for approval.

 

**Financial Instruments**

** **

The Company’s financialinstruments and the nature of the risks, existing or potential, are as set outin the following table:

 
| ** **                                                                                                       | ** ** | **Risk**   | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **                                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **Market Risks** | ** ** |
| ** **                                                                                                       | ** ** | **Credit** | ** ** | **Liquidity** | ** ** | **Currency** | ** ** | **Interest Rate** | ** ** |
| Cash and cash equivalents and restricted cash  (which are primarily held in euros and Canadian and U.S. dollars) |       | X          |       |   |   | X |   | X |   |
| Short-term investments                                                                                           |       | X          |       |   |   | X |   | X |   |
| Accounts receivable                                                                                              |       | X          |       |   |   | X |   |   |   |
| Grants receivable                                                                                                |       | X          |       |   |   | X |   | X |   |
| Accounts payable and accrued liabilities                                                                         |       |       |       | X |   | X |   |   |   |

 

40

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**Credit risk**

** **

Credit risk arises fromthe potential that a counterparty will fail to perform its obligations. Creditrisk associated with cash and cash equivalents and short-term investments isminimized by ensuring that financial assets are placed for short periods oftime, generally less than 90 days, with governments, well-capitalized financialinstitutions and other creditworthy counterparties. An ongoing review isperformed by management to evaluate changes in the status of counterparties.

 

Credit risk associatedwith accounts receivable is minimized by carrying out a detailed review and approvalby senior management of credit extensions to customers taking into accountcustomer history, any amounts that are past due and any available relevantinformation on the customers’ liquidity and potential going concernproblems.  In addition, progress paymentsare generally required by customers as contracts are executed which generallyresults in between 35% and 100% of a contract value being collected beforeshipments are made.  Where credit termsare extended beyond shipment, terms are generally not granted beyond 60days.  We maintain provisions forpotential credit losses and any such losses to date have been insignificant.

 

Credit risk associatedwith grants receivable is substantially minimized by ensuring that fundingagreements are accepted from government entities or well-capitalizedcorporations.

 

**Foreign currency risk**

** **

While our functionalcurrency is the U.S. dollar, we conduct a significant portion of our businessin foreign currencies including the Canadian dollar and euro.  Monetary assets and liabilities denominatedin foreign currencies are affected by changes in the exchange rate between theU.S. dollar and these foreign currencies.

 

Our objective in managingforeign currency risk is to minimize our net exposures to foreign currency cashflows by converting cash balances into foreign currencies to the extentpractical to match other foreign currency obligations. Our foreign exchangerisk management program includes the use of foreign exchange currency forwardcontracts to fix the exchange rates on short-term Canadian dollar and eurodenominated transactions and commitments.

 

**Interest rate risk**

** **

Interest rate risk arisesbecause of the fluctuation in market interest rates.  We are subject to interest rate risk on ourcash and cash equivalents and short-term investments; however, we do not haveany long-term debt and hence are not subject to interest rate risk fromborrowings.

 

**Liquidity**

** **

Liquidity risk arisesfrom our general funding needs and in the management of our assets, liabilitiesand optimal capital structure. We manage liquidity risk to maintain sufficientliquid financial resources to fund our balance sheet and to meet ourcommitments and obligations in the most cost-effective manner possible.

 

We have sustained lossesand negative cash flows from operations since our inception. At December 31,2009, we had approximately $11.0 million of cash and cash equivalents andrestricted cash.  Subsequent to year end,we raised $5 million, before transaction costs, in a registered direct offeringof common shares. There are significant uncertainties related to the timing anduse of our cash resources and working capital requirements. These uncertaintiesinclude, among other things, the timing and volume of commercial sales andassociated gross margin of our existing products and the development of marketsfor, and customer acceptance of new products.

 

Throughout 2010 and 2011,we do not expect our operations to generate sufficient cash flow to fund ourobligations as they come due. As such, these obligations will be funded out ofexisting cash resources to the extent possible. In the first and fourth quarters of 2009, we took actions to streamlineour business, including additional headcount reductions as well as additionalcost saving measures in order to minimize the impact on our existing cashresources.

 

As a result of theexpected use of our existing cash resources, we anticipate requiring additionalfunding to meet our anticipated obligations. Such funding may be in the form ofdebt or equity or a hybrid instrument depending on the needs of the investor.In order to improve our chances of securing funding, we filed a base shelfprospectus on January 4, 2010. We are also pursuing additional traditionaland non-traditional sources of financing. There is no assurance that we will besuccessful in our financing efforts or that they will be sufficient.

 

As mentioned under “Item4.  Information of the Company — History and Development of HydrogenicsCorporation”, we completed the APIF Transaction, which provided us with workingcapital.  In addition, we filed a finalshort form base shelf prospectus with certain ***Canadiansecurities regulatory authorities on January 4, 2010 and a correspondingregistration statement on Form F-3, which was declared effective by the***U.S.Securities and Exchange Commission on December 31, 2009, to enhance ourability to access the capital markets. On January 14, 2010, we completed a registered direct offering ofcommon shares and warrants with two institutional investors, resulting in gross

 

41

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proceeds of $5 million,before placement agent’s fees and other offering expenses, pursuant to ourregistration statement on Form F-3. For information regarding the shelf prospectus and the direct offering,see “Item 3.  Key Information — RiskFactors — RiskFactors Related to Our Financial Condition — If we are unsuccessful inincreasing our revenues and raising additional funding, we may possibly ceaseto continue as we currently do,” and “Item 14. Material Modifications to the Rights of Security Holders and Use ofProceeds — Material Modifications to the Rights of Security Holders.”  See also “Item 3. Key Information — RiskFactors — Risk Factors Related toOur Financial Condition — We are currently involved in litigation withAlpha Capital Anstalt, the outcome of which could adversely affect ourfinancial condition” for information regarding our litigation with one of theinstitutional investors.

 

The condition of thecurrent global economy and credit markets affect our outlook in two primaryways. First, our products depend, to some degree, on general world economicconditions and activity. If the current condition of the economy results in asustained broad economic recession, demand for our products is likely todecline. Secondly, the current economic and credit climate could adverselyaffect our ability to conduct, normal, day-to-day selling activities whichdepend on the granting of short-term credit to a wide variety of purchasers andparticularly the corresponding need of those purchasers to finance purchases byaccessing credit.  Our business isdependent on purchasers of our products having access to adequate levels ofcredit.  If the current condition of theeconomy is not resolved in a manner that will provide access to credit topotential purchasers of our products, our business will likely suffer as aresult. Given these uncertainties, we will continue to monitor our operatingstrategy.

 

**Commitments**

** **

The following table ofour material contractual obligations as at December 31, 2009 sets forththe aggregate effect that these obligations are expected to have on our cashflows for the period indicated:

 

*(in thousands of U.S. dollars)*

* *
| **Payments due in** | ** ** | **Operating Leases** | ** ** |
|---------------------|------------|----------------------|------------|
| 2010                |       | $                    | 1,039      |   |
| 2011                |       | 587                  |       |
| 2012                |       | 589                  |       |
| 2013                |       | 501                  |       |
| 2014 and thereafter |       | 415                  |       |
|                |       | $                    | 3,131      |   |

 

----

We cannot be certain thatwe have or will be able to raise sufficient capital to repay our short andlong-term contractual obligations and maintain planned levels of operations.

 

We do not have anymaterial obligations under forward foreign exchange contracts, guaranteecontracts, retained or contingent interests in transferred assets, outstandingderivative instruments or non-consolidated variable interests.

 

Our treasury policy is toinvest in high-yield monetary interests to maximize yield and safeguard capitalto fund our operating requirements.

 

42

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**RESEARCH AND DEVELOPMENT**

** **

For information regarding our research and developmentpolicies, see “Item 4. Information of the Company — Business Overview —Research and Product Development.”  For information regarding research andproduct development expenses for the fiscal years ended December 31, 2007,December 31, 2008, and December 31, 2009, see “Note 11 — Research andProduct Development” to our consolidated financial statements, which can befound beginning on page F-27 of this form, and is incorporated byreference herein.

 

***AdvancingOur Product Designs***.**** Within our OnSite Generation business segment,we are focused on reducing the cost of our HySTAT® electrolyzer and improving its efficiency.Innovation in the design, elimination of non- value adding components, improvedsourcing and fundamental electrochemical improvements have all contributed tocontinuous cost reduction in 2009. We recognize the opportunity for largerscale energy storage installations we are developing significant scale-updesigns.

 

Within our Power Systemsbusiness segment, we are focused on reducing the cost of a fuel cell system, aremaining impediment to large scale adoption. Significant milestones were reached in 2009.  For market opportunities such as the home andbackup power market requiring between 4 and 12 kilowatts of electrical power,we are developing a PEM based electrolyzer. We are attempting to offset aportion of the associated development expenses by entering into cost sharingagreements with OEMs and government agencies.

 

Recently, we have seenconsiderable interest in using hydrogen as a medium to store renewable energy,particularly wind and solar power, due to the favourable characteristics ofhydrogen as an energy carrier. We are developing a renewable energy storageproduct incorporating an alkaline electrolyzer, PEM fuel cell electricalgenerator and associated systems integration software. We anticipate addingother proprietary technologies to this product offering based on continuedmarket intelligence. In time, we anticipate developing a product offering thatwill benefit from ancillary electrical power services such as grid balancingand load profiling.

 

Research costs and costsincurred in applying for patents and licenses are expensed as incurred. Productdevelopment costs are expensed as incurred until the product or process isclearly defined and the associated costs can be identified, technicalfeasibility is reached, there is an intention to produce or market the product,the future market is clearly defined and adequate resources exist or areexpected to be available to complete the project. To date, no productdevelopment costs have been capitalized.

 

Funding for research andproduct development includes government and non-government research and productdevelopment support. Research and product development support is recognized asthe applicable costs are incurred unless it is for reimbursement of an asset,in which case it is accounted for as a reduction in the cost of the applicableasset.

 

**TREND INFORMATION**

** **

**Current MarketEnvironment**

** **

Recent market events andthe resulting tightening of credit continues to reduce available liquidity andoverall economic activity. While governments around the world have takenunprecedented actions to limit the impact of these events, it is still tooearly to assess the duration of this slowdown. As a global corporation, we aresubject to the risks arising from adverse changes in global economicconditions. For example, as a result of the financial crisis in the creditmarkets, the direction and relative strength of many economies have becomeincreasingly uncertain. If economic growth in leading or emerging economies isslowed, our current or potential customers may continue to delay or reducepurchases. This could result in reductions in sales of our products, longersales cycles, slower adoption of new technologies and increased pricecompetition, which could materially and adversely affect our business, resultsof operations and consolidated financial condition.

 

Over the past few years,the Company has taken significant steps to streamline its operations andconsolidated financial position to better face a difficult economic situation.During the first and fourth quarters of 2009, in order to further streamlineoperations, the Company reduced its headcount as well as implementingadditional cost saving measures in order to maximize the Company’s cashresources. We have no funded or secured debt obligations outstanding, andmaintain an order backlog of $19.7 million as at December 31, 2009 spreadacross numerous geographical regions.

 

Recently, we havewitnessed governments in many jurisdictions show a willingness to increasespending on alternative energy projects to stimulate the economy and we believewe are well positioned to benefit from government initiatives in Canada, theEuropean Union and the U.S., which will positively impact our business.However, as no business is immune to a slowdown in the economy, we haveexperienced adverse effects of the recent economic downturn in 2009.  The Company closely monitors its exposure tothe following potential risks, which could impact future profitability and cashflows: (i) sustained lower levels of orders, higher cancellation rates orsignificant delay of orders, any one of which would require productionadjustments; and (ii) lower available customer financing, which couldaffect our customers’ ability to finance their purchases.

 

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With a sustained orexpanding economic downturn, we expect we will continue to experiencesignificant difficulties on a number of fronts, depending on the duration andseverity of the downturn. As a result, we may face new risks as yetunidentified, and a number of risks which we ordinarily face and which arefurther described herein may increase in likelihood, magnitude and duration.These risks include but are not limited to deferrals or reductions of customerorders, potential deterioration of our customers’ ability to finance purchases,reduced revenue, further deterioration in our cash balances and liquidity dueto foreign exchange impacts, and an inability to access capital markets. Thefinancial crisis and economic downturn will also reduce our ability toaccurately forecast our performance, results or cash position.  At current operating levels, we anticipateconsuming between $10.0 and $15.0 million in 2010 to fund our anticipatedEBITDA losses, non-cash working capital requirements and capital expenditures.  In the event that we are successful insecuring orders in excess of our base-case revenue outlook, our cashrequirements would increase.  For furtherdiscussion of our revenues and delivery outlook, see “Delivery Outlook” below.

 

**Delivery Outlook**

** **

We operate in variousmarkets and in this Annual Report on Form 20-F, define the market in whichwe have a product offering as a relevant market. Our delivery outlook issegmented by market and is subject to a number of factors that are within ourcontrol, such as product development and market engagement initiatives, as wellas a number of factors that are beyond our control, such as macro economicconditions. As part of our annual business planning cycle, we make a number ofassumptions regarding delivery outlook in each of our relevant markets in orderto best allocate our resources, including value of orders received, timing oforders received and timing of receipt of progress and final payments, amongothers.

 

Set forth below is asummary assessment of those factors we anticipate will most significantlyinfluence deliveries by relevant market as well as our anticipated level ofdeliveries by relevant market.  Wecaution that readers should not place undue reliance on this assessment andrefer to our caution regarding forward-looking statements on page 1 ofthis Form 20-F.

 

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| **Relevant  Market**          | ** ** | **Economic  Activity in  200****9** | ** ** | **External and Company Specific Considerations**                                                                                                                                                                                                                                                                 | ** ** | **Anticipated Economic  Activity  in 2010**                          |
|-------------------------------|------------|------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|
| **Industrial Gas**            |       | 25 units delivered                       |       | We expect GDP growth in emerging markets and developing economies  will remain above worldwide average real GDP growth levels over the next  three years but lower than recent years.

 

We expect the rebound from the economic slowdown in 2009 to be slow  and historical order levels to resume in the later part of 2010. |       | We anticipate that revenues and orders delivered will be higher than  in 2009. |
|                          |       |                                     |       |                                                                                                                                                                                                                                                                                                                                 |       |                                                                           |
| **Hydrogen Fueling Stations** |       | 1 unit delivered                         |       | Governments have recently announced initiatives to accelerate the use  of hydrogen fueling stations for the transportation sector in Benelux and  Germany.

 

Our continued market presence positions us to secure additional  business.                                                                                       |       | We anticipate that revenues and orders delivered will be higher than  in 2009. |
|                          |       |                                     |       |                                                                                                                                                                                                                                                                                                                                 |       |                                                                           |
| **Renewable Energy Storage**  |       | 2 units delivered                        |       | Renewable energy storage is continuing to receive considerable  attention throughout the world.

 

We saw growth in this market in 2009 and it has the potential to  become our fastest growing market segment in 2010.

 

We are dedicating more resources to this market opportunity in 2010.                          |       | We anticipate revenues and orders delivered will be higher than in  2009.      |
|                          |       |                                     |       |                                                                                                                                                                                                                                                                                                                                 |       |                                                                           |
| **Backup Power**              |       | 18 units delivered                       |       | 30% tax credit introduced in the U.S. for fuel cell backup power  products.

 

Progress with OEMs advancing.

 

Product development initiatives now well advanced.

 

Significant product cost reductions are being realized.                                                                                      |       | We anticipate revenues and orders delivered will be higher than in  2009.      |
|                          |       |                                     |       |                                                                                                                                                                                                                                                                                                                                 |       |                                                                           |
| **Motive/Mobile Power**       |       | 25 units delivered                       |       | 30% tax credit introduced in the U.S. for motive power products.

 

Our system integration  capability is well respected by OEMs.  Good progress in  bus, truck, utility vehicle and boat markets. 

 

Product development initiatives advanced in  2009.                                                           |       | We anticipate that revenues and orders delivered will be lower than  in 2009.  |
|                          |       |                                     |       |                                                                                                                                                                                                                                                                                                                                 |       |                                                                           |
| **Other Power Products**      |       | 16 units delivered                       |       | Our work on other niche mobility applications will continue with  similar revenue targets.                                                                                                                                                                                                                                           |       | We anticipate revenues and orders delivered will be similar to 2009.           |

 

45

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**American PowerConversion Corporation**

** **

On July 22, 2009, weannounced that we formally notified American Power Conversion Corporation (“APC”)of the termination of the manufacturing and supply agreement (the “SupplyAgreement”) dated August 9, 2006 between Hydrogenics and APC.  The Supply Agreement provided that APC wouldpurchase up to 500 HyPM XR 12 kW Fuel Cell Power Modules for integration intoAPC’s NCPI solutions, specifically its InfraStruXure architecture, over a threeyear period, subject to the terms of the Supply Agreement. In the notice oftermination, we demanded a termination payment of approximately $2.1 million byAPC, as determined by a formula in the Supply Agreement based on the number ofproducts for which APC has issued orders and paid for under the SupplyAgreement. We are aggressively pursuing this matter.

 

On November 13,2009, we filed a complaint against APC in the U.S. District Court for the Districtof Massachusetts in connection with the Supply Agreement. On December 23,2009, APC filed its answer to our complaint and counterclaims, denyingliability on our claim, and seeking unspecified damages based on APC’sassertion that, pursuant to an alleged oral agreement, APC believed that wewould not seek the termination payment under the Supply Agreement.

 

**Industry Trends**

** **

A discussion of industrytrends, by its nature, necessarily contains certain forward-lookingstatements.  Forward-looking statementsrequire us to make assumptions and are subject to inherent risks anduncertainties that could cause actual results or events to differ materiallyfrom current expectations.  Please referto the caution regarding forward-looking statements contained in the “ForwardLooking Statements” section on page 1 and “Item 3.  Key Information — Risk Factors” for adiscussion of such risks and uncertainties and the material factors andassumptions related to the statements set forth in this section.

 

We anticipate ourbusiness will continue to benefit from several broad trends including: (i) highprices for oil and natural gas; (ii) increased government legislation andprograms worldwide promoting alternative energy sources such as syntheticfuels, including hydrogen; (iii) increased awareness of the adverse impactof fossil fuels on our climate and environment; and (iv) the need forindustrialized economies to access alternative sources of energy to reducefossil fuel dependency.  We anticipatethese trends will continue and intensify in the future, allowing the benefitsof hydrogen to be further demonstrated in numerous applications.  In particular, “green” hydrogen can begenerated universally from renewable power sources such as hydroelectric,geothermal, solar and wind or from low-emission sources such as biomass andnuclear.  These industry trends arediscussed below.

 

*High prices for oil and naturalgas.* In recent years, oil and natural gas prices haveincreased and it is anticipated that the general trend of prices will continueto rise over the long term due to increased demand from emerging marketeconomies such as China and India, localized supply constraints and politicalinstability in oil producing areas.  Asthe cost of these commodities increase relative to the price of electricity,our electrolysis-based on-site hydrogen generation products stand to becomemore cost competitive with other forms of hydrogen production and delivery,thereby increasing on-site generation market share.  Similarly, we expect that the higherefficiency of fuel cells will make them increasingly appealing relative toconventional internal combustion engines.

 

*Increased government legislationand programs worldwide promoting alternative energy sources including hydrogen.* In recent years,numerous governments have introduced legislation to promote and develop the useof hydrogen in energy applications as a partial response to the risks andadverse effects associated with fossil fuels. We anticipate this interest will accelerate over time.  Recent government legislation has beenproposed or passed in many jurisdictions to support renewable energyinitiatives including passage of the American Recovery and Reinvestment Act of2009 in the United States and the Green Energy and Green Economy Act, 2009 inOntario, Canada.

 

The European Union hasadopted an action plan to replace 20% of vehicles using diesel and gasolinefuels in the road transportation sector with vehicles that use natural gas andhydrogen by 2020.  European efforts includethe European Commission (“EC”) establishing a platform to bring hydrogen andfuel cells to market and a proposed Joint Technology Initiative forpublic-private partnership.  The EC’s 6thFramework Programme is currently providing $2.2 billion over five years forhydrogen and fuel cell initiatives under the European Hydrogen and Fuel CellTechnology Platform.  As well, the EC hasannounced spending of approximately 1 billion euros per year between 2007 and2013 as part of a European Strategic Energy Technology Plan tied to a proposednew energy policy for Europe. Hydrogen and fuel cells are included in thatplan.

 

Additionally, severalAsian countries are responding to environmental, energy, security andsocio-economic concerns by introducing legislation and initiatives to promotehydrogen and fuel cell technologies. Japan, Korea, India and China continue to invest significantly in thedevelopment and commercialization of hydrogen and fuel cells.

 

*Increased awareness of theadverse impact of fossil fuels on our climate, environment and airquality. *Governmentsworldwide continue to enact legislation aimed at curtailing the impact offossil fuels on the environment.  Mostnotably, the Kyoto Accord, a United Nations sanctioned protocol, attempts toaddress global warming problems by reducing greenhouse gas emissions.  Jurisdictions are also 

 

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enacting legislationaimed at curbing idling or emissions that affect urban air quality, or affectindoor operation of utility vehicles. In October 2006, the Canadiangovernment announced the Clean Air Act designed to tackle pollution andgreenhouse gas emissions.  This actstrictly enforces industry compliance to a set of national standards on bothair pollution and emissions of greenhouse gases.

 

*The need for industrializedeconomies to access alternative sources of energy to reduce their dependency onfossil fuels.* Manyindustrialized nations, including some of the fastest growing economies, importmost of the fossil fuels consumed in their respective economies. This creates adependency on external sources and exposes them to significant tradeimbalances.

 

For stationary power, inthe United States alone, approximately 400,000 megawatts of new electricitygenerating capacity is forecast to be needed by 2020 to meet growing demand andto replace retiring generating units. The existing electricity transmission and distribution grid in theUnited States is overburdened in many regions. By locating power generation products close to where the power is used,known as distributed generation, it is possible to bypass the overloadedtransmission and distribution grid. Hydrogen and fuel cell technologies are well suited to a distributed generationmodel thereby providing an emerging opportunity for hydrogen fuel cells andhydrogen powered internal combustion engines to provide stationary generatingcapacity.

 

China and India also havegrowing concerns about energy supply and security which are leading thosecountries to pursue initiatives promoting hydrogen and energy efficiencyprograms. Further, as the introduction of automobiles continues to acceleratein India and China, such dependency on fossil fuels may become increasinglyunsustainable, creating an opportunity for hydrogen and fuel cells.

 

**Additional TrendsInformation**

** **

For additional trendsinformation, see “Item 3. Key Information — Risk Factors” and “Item 4.Information of the Company — Business Overview — Our Strategy” in this Form 20-F.

 

**OFF-BALANCE SHEET ARRANGEMENTS**

** **

**Contingent Off-BalanceSheet Arrangements**

** **

We do not have anymaterial obligations under forward foreign exchange contracts, guaranteecontracts, retained or contingent interests in transferred assets, outstandingderivative instruments or non-consolidated variable interests.

 

As a result of theGovernment of Canada’s commitment to developing domestic alternative energytechnologies, we have entered into repayable contribution and other R&Darrangements with various Canadian governmental ministries and public sectorenterprises. Under these arrangements, we have received $12.7 million offunding toward agreed upon R&D project costs. Pursuant to the agreements,the funding parties have a right to receive as repayment, between 0.3% and 4.0%of gross revenues attributable to the commercial exploitation of the associatedtechnologies and in one case, 0.53% of our OnSite Generation business unit’sgross business revenues. To date, we have recognized $51.3 million in revenuesfrom these technologies and recorded a repayable amount of $0.3 million. Atthis time, the amount of further product revenues to be recognized isuncertain, and accordingly no further liabilities for repayment have beenaccrued. These arrangements expire between September 30, 2006 and March 31,2016, or when total amounts repaid reach the utilized amount of the advance,depending on the terms of the individual contracts. The amount of fundingavailable to us under similar arrangements varies from year to year, andalthough we believe that these agencies and enterprises will continue tosupport the industry, there is no guarantee of the amount of future funding.

 

In 1998, Stuart Energy awholly-owned subsidiary of the Company until October 27, 2009, enteredinto an agreement with Technologies Partnerships Canada (“TPC”), a program ofMinistry of Industry of the Canadian government to develop and demonstrateHydrogen Fleet Fuel Appliances. This agreement was amended in 2003 to expandStuart Energy’s scope of work and resulted in Stuart Energy receiving a totalof $5.6 million of funding from TPC. Pursuant to the amended TPC agreement,Stuart Energy undertook to repay 150% of the funds advanced by TPC, or $14.2million (the “Repayable Loan Amount”). The amended agreement requires StuartEnergy to commence making royalty payments against the Repayable Loan Amount onthe earlier of Stuart Energy revenues reaching Cdn. $90 million or April 1,2007. In accordance with the terms of the amended agreement, Stuart Energy (nowthe Company) is required to commence payments to TPC at 0.53% of its annualgross business revenues for a period of 12 years or until the Repayable LoanAmount is fully repaid. To date, we have recognized $51.3 million in revenuesand recorded a repayable amount of $0.3 million.

 

We have entered intoindemnification agreements with our current and former directors and officersto indemnify them, to the extent permitted by law, against any and all charges,costs, expenses, and amounts paid in settlement and damages incurred as aresult of any lawsuit or any other judicial, administrative or investigativeproceeding in which they are involved as a result of their services. Any suchindemnification claims will be subject to any statutory or other legallimitation periods. The nature of the indemnification agreements prevents usfrom making a reasonable estimate of the maximum potential amount we could berequired to pay to counterparties. We have purchased directors’ and officers’liability insurance. No amount has been recorded in the consolidated financialstatements with respect to these indemnification agreements.

 

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In the normal course ofoperations, we may provide indemnification agreements, other than those listedabove, to counterparties that would require us to compensate them for costsincurred as a result of changes in laws and regulations or as a result of litigationclaims or statutory sanctions that may be suffered by the counterparty as aconsequence of the transaction. The terms of these indemnification agreementswill vary. The nature of the indemnification agreements prevents us from makinga reasonable estimate of the maximum potential amount we could be required topay to counterparties. No amount has been recorded in the consolidatedfinancial statements with respect to these indemnification agreements.

 

**TABULARDISCLOSURE OF CONTRACTUAL OBLIGATIONS**

** **

*As of December 31, 2009*

 
| ** **                                                                                                                     | ** ** | **Payments due by period** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **Contractual Obligations**                                                                                                    |       | **Total**                  |       | **less than 1 year** |   | **1-3 years** |   | **3-5 years** |   | **more than  5  years** |   |
| Long-Term  Debt Obligations                                                                                                    |       | —                     |       | — |   | — |   | — |   | — |   |
| Capital  (Finance) Lease Obligations                                                                                           |       | —                     |       | — |   | — |   | — |   | — |   |
| Operating  Lease Obligations                                                                                                   |       | 3,131                      |       | 1,039 |   | 1,677 |   | 415 |   | — |   |
| Purchase  Obligations                                                                                                          |       | —                     |       | — |   | — |   | — |   | — |   |
| Other  Long-Term Liabilities Reflected on the Company’s Balance Sheet under the GAAP  of the primary financial statements |       | —                     |       | — |   | — |   | — |   | — |   |
| Total                                                                                                                          |       | 3,131                      |       | 1,039 |   | 1,677 |   | 415 |   | — |   |

 

**ITEM 6.  DIRECTORS,SENIOR MANAGEMENT AND EMPLOYEES**

** **

**DIRECTORSAND SENIOR MANAGEMENT**

** **

**Directors**

** **

The following table setsforth information with respect to our directors as of March 25, 2010:

 
| **Name and Province or State  and Country of Residence** | ** ** | **Title**                                          | ** ** | **Director or   Executive Officer Since** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------------------|
| Douglas Alexander(1)  Ontario, Canada                                                       |       | Chairman of our Board of Directors                 |       | 2006                                                          |
|                                                                                        |       |                                               |       |                                                          |
| Michael Cardiff(1)(2)  Ontario, Canada                                                      |       | Director                                           |       | 2007                                                          |
|                                                                                        |       |                                               |       |                                                          |
| Joseph Cargnelli  Ontario, Canada                                                           |       | Chief Technology Officer and Director              |       | 1996                                                          |
|                                                                                        |       |                                               |       |                                                          |
| Henry J. Gnacke  Michigan, U.S.A.                                                           |       | Director                                           |       | 2008                                                          |
|                                                                                        |       |                                               |       |                                                          |
| Norman M. Seagram(1)(3)  Ontario, Canada                                                    |       | Director                                           |       | 2000                                                          |
|                                                                                        |       |                                               |       |                                                          |
| Daryl Wilson  Ontario, Canada                                                               |       | President and Chief Executive Officer and Director |       | 2006                                                          |

 

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Notes:

 
| (1) |   | Member of the Audit  Committee and the Human Resources and Corporate Governance Committee. |
|-----|--------|--------------------------------------------------------------------------------------------|
| (2) |   | Chairman of the Human  Resources and Corporate Governance Committee.                       |
| (3) |   | Chairman of the Audit  Committee.                                                          |

 

Each director will holdoffice until the next annual and special meeting of shareholders, or until hissuccessor is duly elected or appointed.

 

**DouglasS. Alexander, *Chairman of our Board ofDirectors***. Mr. Alexander joined our Board ofDirectors in May 2006 and has served as Chairman of our Board of Directorssince May 2009. Mr. Alexanderis a Director and member of the Audit Committee of Critical OutcomeTechnologies Inc., and has served as the Chief Financial Officer of variousCanadian public companies for 15 years. Mr. Alexander was formerly leaddirector and chair of the Audit Committee of Saxon Financial Inc. Mr. Alexanderserved as a director of Stuart Energy from 2003 to January 2005. From 1999to 2004, Mr. Alexander was Executive Vice President and Chief FinancialOfficer of Trojan Technologies Inc., an international environmental hightechnology company. Mr. Alexander is a Chartered Director, havinggraduated from the Director’s College, a joint venture between McMasterUniversity and the Conference Board of Canada.  Mr. Alexander resides in Ontario, Canada.

 

**MichaelCardiff, *Director***. Mr. Cardiff joined our Board of Directors in November 2007.Currently, Mr. Cardiff is the Chief Executive Officer of Accelerents, aconsulting firm focused on strategy development. Prior to holding thatposition, Mr. Cardiff held numerous senior positions in a number oftechnology companies including large multinationals such as EDS and IBM as wellas startup companies such as Fincentric, Convergent Technologies, Tandem, andStratus Computer. Mr. Cardiff is currently a director of Descartes SystemsGroup and Burntsand Inc. Mr. Cardiff has also served as a director ofHusky Injection Molding Systems, Solcorp, Visible Genetics, Spectra SecuritySoftware Visible Decisions and the Toronto Film Festival, Roy Thomson Hall. Mr. Cardiffhas received many awards including “A Canadian Export Life Time AchievementAward.” In 1998, Mr. Cardiff was named one of Canada’s “Top 40 Under 40,”recognizing him as one of the nation’s most successful young leaders. Mr. Cardiffis a member of, and holds the ICD.d designation from, the Institute ofCorporate Directors. Mr. Cardiff resides in Ontario, Canada.

 

**JosephCargnelli, *Chief Technology Officer andDirector***.Mr. Cargnelli is one of our founders and served as a director from January 1996to January 2005, when he resigned in connection with the closing of theStuart Energy acquisition. Mr. Cargnelli was re-elected at the meeting ofshareholders on May 17, 2005. Mr. Cargnelli served as our Treasurerfrom January 1996 until July 2000. Mr. Cargnelli was appointed as our Vice President, Technology in July 2000.  His title was changed to Chief TechnologyOfficer in April 2003.  Mr. Cargnelliearned both a Masters of Applied Science degree in Mechanical Engineering and aBachelor of Applied Science degree in Mechanical Engineering from theUniversity of Toronto.  From April 1992to April 1993, Mr. Cargnelli served as a Research Engineer with theLaboratory of Advanced Concepts in Energy Conversion Inc., a laboratory engagedin the research, development and demonstration of alkaline fuel cells andhydrogen storage methods.  Mr. Cargnelliis a member of the Professional Engineers of Ontario.  Mr. Cargnelli resides in Ontario, Canada.

 

**Henry J.Gnacke, *Director***. Mr. Gnacke joined our Board ofDirectors in May 2008. Formerly, Mr. Gnacke was the ExecutiveDirector, Global Purchasing Supply chain at General Motors Corporation. He wasresponsible for fuel cell propulsion systems and General Motors Corporation’sE-Flex programs. Mr. Gnacke has over 30 years of experience and has heldnumerous positions at General Motors Corporation, including severalinternational assignments in the Middle East, Asia and Europe. Mr. Gnackeis the nominee of General Motors in connection with our strategic alliance withGeneral Motors. Mr. Gnacke resides in Michigan, U.S.A.

 

**NormanM. Seagram, *Director***. Mr Seagram served as Chairman of our Board of Directors from July 2000 to December 2006,as Lead Director from January 2007 to September of that year, andsubsequently as Chairman until May 2009. Mr. Seagram wasPresident of Sportsco International LP (SkyDome) from February 2001 to March 2003. From September 1996 to May 1997, Mr. Seagram was President andChief Executive Officer of Molson Inc., a company he had previously served for24 years in a variety of senior management positions.  From October 1992to August 1996, Mr. Seagram was Chairman and Chief Executive Officerof Air Liquide Canada, Inc., a producer of industrial gases.  Mr. Seagramis a trustee of Trinity College School and the Toronto Symphony Foundation, andhe is a director of Harbourfront Foundation.  He serves on the advisoryboard of the Faculty of Applied Science and Engineering, University of Toronto,and INSEAD, Fontainebleau, France. He is a former director of the TorontoEconomic Development Corporation (TEDCO).  Mr. Seagram resides inToronto, Ontario, Canada.

 

**DarylWilson, *President and Chief ExecutiveOfficer and Director***. Mr Wilson****was appointedPresident and Chief Executive Officer in December 2006. Prior to joiningHydrogenics, Mr. Wilson held senior leadership positions at Royal GroupTechnologies Inc., ZENON Environmental Inc., Toyota and Dofasco Inc. In 1990 Mr. Wilsonearned an MBA from McMaster University in Operations Management/ManagementScience. Mr. Wilson is a Professional engineer and holds a Bachelor’sdegree in Chemical Engineering from the 

 

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University of Toronto. Mr. Wilson is a Chartered Director (C.Dir),having graduated in 2009 from Director’s College. Mr. Wilson resides inOntario, Canada.

 

On November 30,2009, V. James Sardo resigned from our Board of Directors due to limitations onhis availability because of other business activities and professionalcommitments. Mr. Sardo had been a member of the Board of Directors sinceMay, 2003 and had been a member of the audit committee and human resources andcorporate governance committee of Hydrogenics. We have no immediate plans tofill the vacancy in the board left by Mr. Sardo’s departure.

 

**ExecutiveOfficers**

** **

The following table setsforth information with respect to our executive officers as of June 23,2009:

 
| **Name and Province or State  and Country of Residence** | ** ** | **Title**                                          | ** ** | **Director or   Executive Officer Since** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------------------|
| Joseph Cargnelli  Ontario, Canada                                                           |       | Chief Technology Officer and Director              |       | 1996                                                          |
|                                                                                        |       |                                               |       |                                                          |
| Daryl Wilson  Ontario, Canada                                                               |       | President and Chief Executive Officer and Director |       | 2006                                                          |
|                                                                                        |       |                                               |       |                                                          |
| Lawrence E. Davis  Ontario, Canada                                                          |       | Chief Financial Officer and Corporate Secretary    |       | 2005                                                          |
|                                                                                        |       |                                               |       |                                                          |
| Jennifer Barber  Ontario, Canada                                                            |       | Vice President, Finance and Corporate Controller   |       | 2005                                                          |
|                                                                                        |       |                                               |       |                                                          |
| Wido Westbroek  Geel, Belgium                                                               |       | Vice President and General Manager                 |       | 2006                                                          |

 

**LawrenceE. Davis,*Chief Financial Officer andCorporate Secretary***. Mr. Davis has served as our Chief FinancialOfficer since April 1, 2005. Mr. Davis has over 20 years of financialand operational experience. He has been a Chartered Accountant since 1987. From1999 to 2003, Mr. Davis was the Chief Financial Officer of GDI Global DataInc., a wireless data services company. Mr. Davis also acted as thePresident of Saturn Capital Corporation, a merchant bank that advises, investsin and assumes senior management positions for high growth businesses from 1997until 1999. From 1987 to 1997, Mr. Davis served as a Vice President forPricewaterhouseCoopers LLP and he previously worked for two years with Ernst &Young.

 

**JenniferBarber, *Vice President, Finance andCorporate Controller***. Ms. Barber joined us through our acquisition ofStuart Energy in January 2005 and was appointed to the position of VicePresident Finance and Corporate Controller in May 2005. Since taking onthis position, Ms. Barber has led the finance team through a full range offinancial consolidations arising from the acquisition, with the addedresponsibility of integrating Sarbanes-Oxley requirements into all of ourfinancial processes and procedures. Hired by Stuart Energy in 2001, Ms. Barberserved as Director, Corporate Finance from 2003 onward, and prior to that asController. She was employed from 1997 to 2001 by PricewaterhouseCoopers LLP. Ms. Barberreceived Institute of Chartered Accountant accreditation in 2000.

 

**WidoWestbroek, *Vice President and GeneralManager***.Mr. Westbroek joined us in 2006 as Vice President, Operations of theBelgium On-Site division. His former career, spanning 18 years, was withPowerlasers, a developer and manufacturer of unique laser welding technologyand a maker of auto parts for major automotive OEMs based in Canada and theU.S.. Mr. Westbroek received his Bachelor of Science in Physics at theUniversity of Waterloo in Ontario.

 

For information regardingthe backgrounds of Mr. Cargnelli and Mr. Wilson, see “Directors”above.

 

**COMPENSATION**

** **

As the Company reportsits financial results in U.S. dollars, the following discussion is preparedshowing U.S. dollars, except as otherwise noted, notwithstanding that thecurrencies in which our President and Chief Executive Officer, our ChiefFinancial Officer and our three most highly compensated executives, other thanthe President and Chief Executive Officer and Chief Financial Officer(collectively, the “Named Executive Officers”) are paid are in Canadian dollarsand euros. The average exchange rates for the year ended December 31,2009, for the purposes of the following disclosure, are U.S.$1 = Cdn. $1.142,and U.S.$1 = 0.719 euros.

 

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The followingcompensation discussion and analysis is intended to supplement the moredetailed information concerning compensation of executive officers anddirectors that appears in the tables that follow. Our goal is to provide abetter understanding  of our compensationpractices and decisions made concerning the compensation payable to ourexecutive officers and directors for 2009.

 

**Elementsof Executive Compensation Program**

** **

Our executivecompensation program has three principal components:

 

·                  base salary;

 

·                  short-term incentive (paid in cash); and

 

·                  long-term, equity-based incentives.

 

We believe that thisvariable compensation encourages high performance, promotes accountability andensures that the interests of our executive officers are aligned with theinterests of shareholders by linking individual performance and increases inshareholder value. Each of the components’ specified objectives are set forthbelow.

 

The Company also offersall employees, and the President and Chief Executive Officer, our ChiefFinancial Officer and our three most highly compensated executives, other thanthe President and Chief Executive Officer and Chief Financial Officer, certainbenefits, such as short-term disability income benefits, long-term disabilityincome benefits, healthcare, dental care, survivor benefits, dependentcoverage, employee life insurance, dependent life insurance, accidental death,dismemberment and specific loss insurance, which form an integral part of thetotal compensation offered by the Company.

 

***Base Salary***

*** ***

The objectives of basesalary are to recognize market pay, acknowledge competencies and skills ofindividuals and reward individual contribution. The annual base salary for each of our Named Executive Officers wasinitially determined at the time of hire based on a number of customaryfactors, and is documented in an employment agreement provided to the executiveofficer (see also “Summary Compensation Table — Employment Agreements”).Historically, we retain compensation consultants to assist in determiningappropriate levels of salary and bonus payable to our executive officers, basedon relevant market data concerning the market place and our peer group. Thisdata is then used as a basis for determining the executive officer’s initialbase salary.

 

***Short-term Incentives***

*** ***

We provide a short-termincentive plan in which the Named Executive Officers, as well as other managersand employees participate. This incentive plan is intended to rewardachievement of short-term financial performance and milestones and focus on keyfinancial, strategic and other business objectives.  Pursuant to the short-term incentive plan, wehave established layers of performance incentives up to certain percentages ofbase salary based on market benchmarking. In landmark years, the committee mayelect to award a “stretch maximum” of 100% of base salary. The percentage thatan executive is awarded is based on the achievement of corporate objectives,the achievement of business unit objectives and the achievement of individualobjectives. Certain Named Executive Officers have employment agreements with usthat modify our short-term incentive compensation (see “Summary CompensationTable — Employment Agreements).

 

For 2009, the targetbonuses were equal to 40% of the base salary for the Vice President and GeneralManager and Vice President, Finance and Corporate Controller, and 50% for eachof President and Chief Executive Officer, Chief Financial Officer and CorporateSecretary and Chief Technology Officer.

 

***Long-term Incentives***

*** ***

Long-term compensation isdesigned to focus executives’ attention on the long-term interests of theCompany and its shareholders, and consists of two elements for our executiveofficers:

 

·                  Stock Option Plan — pursuant to which wegrant options to certain employees and officers to purchase Shares at a fixedprice; and

 

·                  RSU Plan — pursuant to which we grantcertain executive officers RSUs, representing the cash equivalent of Shares,subject to the vesting, forfeiture and other restrictions the Board ofDirectors may determine.

 

Together, we believethese stock options and RSUs link the executives’ long-term compensationdirectly to the appreciation in the price of our Shares and align the interestsof executives with the interests of shareholders.

 

51

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***Stock Options***

*** ***

Our stock option planallows the Human Resources and Corporate Governance Committee to grantdirectors, officers, eligible employees and consultants of the Company optionsto acquire Shares. The purposes of the stock option plan are to attract, retainand motivate key members of our team, to align incentives with the resultsrealized by shareholders, and to provide competitive compensation arrangementsthat reward the creation of shareholder value over the long-term.

 

The stock option planprovides that options will expire no later than 10 years from the grant dateor, if that date occurs during a blackout period or other period during whichan insider is prohibited from trading in our securities by our insider tradingpolicy, 10 business days after the period ends, subject to certain exceptions.Options will have an exercise price per share of not less than the closingprice of the Shares on the TSX on the trading day before the option is granted.Unless otherwise specified in a particular option agreement, options grantedunder this plan will vest over three years with one third of the option grantvesting each year.

 

Issuances of optionsunder the stock option plan are subject to the several restrictions. No morethan 10% of the Shares outstanding may be issued under the stock option planand all other security based compensation arrangements in any one year period.In addition, the number of Shares reserved for issuance pursuant to optionsgranted to any one person under the stock option plan and all other securitybased compensation arrangements cannot exceed 5% of the outstanding Shares.

 

The aggregate number ofShares reserved for issuance pursuant to options granted to insiders under thestock option plan cannot exceed 10% of the outstanding Shares. Further, withinany one year period, insiders may not, in the aggregate, be issued under thestock option plan and all other security based compensation arrangements anumber of Shares which exceeds 10% of the outstanding issue and no individualinsider may be issued a number of Shares that exceeds 5% of the outstandingissue.

 

Shareholder approval isrequired for the following amendments to the stock option plan: (i) increasingthe number of Shares reserved for issuance under the stock option plan; (ii) reducingthe exercise price of an option except appropriate reductions in connectionwith a subdivision or consolidation of Shares or payment of a stock dividend oran amalgamation, combination or other reorganization involving the company; (iii) extendingthe term of an option beyond the expiry date or beyond 10 years from its grantdate (except the automatic extension where the expiry date would have occurredwithin a blackout period of the company); (iv) extending the participationof non-employee directors and non-consultants in the stock option plan; (v) permittingoptions to be transferred other than by testate or intestate succession; (vi) permittingthe addition or modification of a cashless exercise feature, payable in cash orShares, unless it provides for a full deduction of the number of underlyingShares from the stock option plan reserve; (vii) permitting awards, otherthan options, to be made under the stock option plan; or (viii) pursuantto the company’s bylaws or the rules or policies of any exchange, thatrequire shareholder approval.

 

Currently there are348,466****Shares reserved for issuance under thestock option plan representing approximately 8% of the total number of issuedand outstanding Shares.

 

As at December 31,2009, the Company had 243,503 stock options outstanding. As of March 25,2010, 109,304****stock options remain availablefor grant, and a net total of 239,162 stock options have been granted toparticipants in the stock option plan, with the underlying Shares representingapproximately 6% of the total number of issued and outstanding Shares, takinginto account options that have been forfeited or cancelled. Since the stockoption plan was adopted, options exercised resulted in the issuance of 131,534Shares as of March 25, 2010.

 

If an option holder’semployment or term as a director or consultant ceases as a result of the optionholder’s death, retirement or disability or because of the sale of the companywhich employs the option holder, or to which the option holder is a director orconsultant, all options vest immediately and may be exercised for 180 days (or,if earlier, to the end of the term). If an option holder’s employment or termas a director or consultant is terminated without cause the option holder’soptions which are vested or which would otherwise have vested within thereasonable or contractual notice period may be exercised for 90 days (or, if earlier,to the end of the term). If an option holder’s employment or term as a directoror consultant is terminated by voluntary resignation, vested options may beexercised for 90 days (or, if earlier, to the end of the term) and unvestedoptions are cancelled. If an option holder’s employment or term as a directoror consultant is terminated for cause, all options are immediately cancelled.Notwithstanding the foregoing, but subject to applicable securities laws, theBoard of Directors may, in its discretion, permit the exercise of any or alloptions held by an option holder in the manner and on the terms authorized bythe Board; provided that the Board may not authorize the exercise of an optionbeyond 10 years from the date of grant, excluding any automatic extension foran expiry date which falls in a blackout period.

 

Options arenon-transferable. The Board of Directors has the discretion to acceleratevesting and expiration of options in connection with a change of control of thecompany, a sale of all or substantially all of the assets of the company or adissolution or liquidation of the company. The Board of Directors may furthertake such steps it deems equitable and appropriate to adjust the number ofShares that may be acquired on the exercise of any options or the exerciseprice in the event that the company effects a subdivision or consolidation ofthe Shares, payment of a stock dividend (other than in lieu of a cashdividend), or other change in capitalization of the company, or upon any 

 

52

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amalgamation,continuation, reorganization involving the company, by exchange of Shares, bysale or lease of assets or otherwise, to preserve the proportionality of therights and obligations of the option holders.

 

***Restricted Share Units***

*** ***

The RSU Plan is designedto retain certain employees of the Company and its affiliates and to allow themto participate in the long-term success of the company. The RSU Plancomplements the stock option plan and allows the Company to offer, throughcombinations of these equity-based incentive programs, optimal alignment of theinterests of management and certain employees of the Company and its affiliateswith that of its shareholders.

 

The RSU Plan provides forgrants of RSUs to certain employees (each a ‘‘participant’’) of the Company andits affiliates. In determining the number of RSUs to be granted, the HumanResources and Corporate Governance Committee may take into account suchmilestones and criteria it determines at the time of grant. An RSU is a rightto receive a cash payment based on the value of a Share, subject to thevesting, forfeiture and other restrictions the Board of Directors maydetermine. RSUs are credited to an account in the name of the participant. If adividend is paid on Shares, each participant’s RSU account is credited withadditional RSUs (a ‘‘dividend RSU’’) equal to a fraction where the numerator isthe product of: (a) the number of RSUs credited to the participant on thedate the dividends are paid, and (b) the dividend paid per Share, and thedenominator is the closing price per Share on the TSX on the last trading dayon which the Shares were traded preceding the date on which dividends are paid.

 

Each RSU vests no laterthan December 31 of the third calendar year following the calendar year inrespect of which the RSU is granted or such earlier date as is determined inour Board’s discretion. RSUs are redeemed within 30 days following the vestingdate (and no later than the December 31 date referenced above), by a cashpayment to the participant equal to the number of vested RSUs multiplied by theclosing price per Share on the TSX on the last trading day on which the Shareswere traded preceding the vesting date. A dividend RSU vests on the same day asthe RSU in respect of which it was granted and is redeemed by the Company onthe same date as the applicable RSU.

 

If a participant dies,retires or his or her employment is terminated by the Company without cause, orfor disability or because of the sale of the Company which employs theparticipant, or to which the participant is a director or consultant, then apro rata portion of unvested RSUs credited to the participant will vest and beredeemed. If the employment of a participant is terminated by resignation ofthe participant the participant forfeits all rights to unvested RSUs. If theemployment of a participant is terminated for cause, that participant forfeitsall rights to vested and unvested RSUs. The Board of Directors may acceleratethe vesting of RSUs in connection with a change of control.

 

RSUs are non-assignable.The Board of Directors determines which employees will be granted RSUs; thetime or times when RSUs will be granted; the number of RSUs to be granted; andthe date or dates on which RSUs will vest. The Human Resources and CorporateGovernance Committee administers the RSU Plan.

 

The Board may from timeto time amend or suspend the RSU Plan in whole or in part and may at any timeterminate the RSU Plan without prior notice. However, except as expressly setforth in the RSU Plan, no such amendment, suspension, or termination mayadversely affect the RSUs previously granted to a participant without theconsent of the affected participant.

 

***Summary Compensation Table***

*** ***

The following tableprovides a summary of compensation earned during the financial year ended December 31,2009 by the Named Executive Officers.

 

53

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| **Name and Principal   Position**                                    | ** ** | **Salary  ($)** | ** ** | **Share-  Based  Awards  ($)** | ** ** | **Option-  Based  Awards  ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation  (1)  ($)** | ** ** | **All Other  Compensation  (2)  ($)** | ** ** | **Total  Compensation  ($)** | ** ** |
|----------------------------------------------------------------------|------------|-----------------|------------|--------------------------------|------------|---------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------|------------|------------------------------|------------|
| Daryl Wilson, *President & Chief Executive  Officer*        |       | 345,159         |       | 34,668                         |       | 241,930                         |       | Nil                                                    |       | Nil                                   |       | 621,757                      |       |
| Lawrence Davis, *Chief Financial Officer and Corporate  Secretary*   |       | 219,298         |       | 57,934                         |       | 51,821                          |       | Nil                                                    |       | Nil                                   |       | 329,053                      |       |
| Joseph Cargnelli, *Chief Technology Officer*                         |       | 179,133         |       | 47,508                         |       | 42,459                          |       | Nil                                                    |       | Nil                                   |       | 269,100                      |       |
| Wido Westbroek, *Vice President and General Manager*                 |       | 175,694         |       | 16,892                         |       | 15,121                          |       | Nil                                                    |       | Nil                                   |       | 207,707                      |       |
| Jennifer Barber, *Vice President, Finance and Corporate  Controlle*r |       | 135,442         |       | 12,563                         |       | 11,250                          |       | Nil                                                    |       | Nil                                   |       | 159,255                      |       |

 

----

Notes:

 
| (1)    |   | This represents the  Company’s short-term incentive plan. The Company does not have any non-equity  long-term incentive plans.         |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                        |
| (2)    |   | Benefits did not exceed  the lesser of Cdn. $50,000 and 10% of the total annual salary and bonuses of  any of the Named Executive Officers. |

 

*Employment Agreements*

* *

Daryl Wilson’s employmentagreement provides for a base salary of Cdn. $395,000, subject to annualreview, and a discretionary short-term incentive bonus of up to 50% of his basesalary.

 

Lawrence Davis’employment agreement provides for a base salary of Cdn. $250,000, subject toannual review, and a discretionary short-term incentive bonus of up to 50% ofhis base salary.

 

Joseph  Cargnelli’s employment agreement provides fora base salary of Cdn. $205,000, subject to annual review, and a discretionaryshort-incentive bonus of up to 50% of his base salary.

 

Wido Westbroek’semployment agreement provides for a base salary 126,500 euros, and adiscretionary short-term incentive bonus of up to 40% of his base salary.

 

Jennifer Barber’semployment agreement provides for a base salary of Cdn. $155,000, subject toannual review, and a discretionary short-term incentive bonus of up to 40% ofher base salary.

 

54

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*** ***

***Incentive Plan Awards***

*** ***

*Outstanding Share-BasedAwards and Option-Based Awards During the Year Ended December 31, 2009*

 
| ** **       | ** ** | **Option-based Awards**                                               | ** ** | **Share-based Awards**                   | ** **   |
|------------------|------------|----------------------------------------------------------------------------|------------|-----------------------------------------------|--------------|
| **Name**         | ** ** | **Number of   Securities   Underlying   Unexercised   Options   (#)** | ** ** | **Option   Exercise   Price   (Cdn. $)** | ** **   | **Option Expiration   Date** | ** ** | **Value of   Unexercised   In-The-   Money   Options** | ** ** | **Number of   Shares or   Units   of Shares   That Have   Not Vested** | ** ** | **Market or Payout   Value of Share-   Based Awards   That   Have Not Vested   (Cdn. $)** | ** ** |
| Daryl Wilson     |       | 9,000                                                                      |       | $                                             | 40.00        |   | December 8,  2016 |   | Nil |   | 30,228 |   | 302,280 |   |
|             |       | 8,564                                                                      |       | $                                             | 29.25        |   | March 23,  2017 |   | Nil |   |   |   |   |   |
|             |       | 15,100                                                                     |       | $                                             | 14.50        |   | March 12,  2018 |   | Nil |   |   |   |   |   |
|             |       | 40,000                                                                     |       | $                                             | 13.25        |   | March 27,  2019 |   | Nil |   |   |   |   |   |
|             |       |                                                                       |       |                                          |         |   |   |   |   |   |   |   |   |
| Lawrence Davis   |       | 4,000                                                                      |       | $                                             | 127.50       |   | February 8,  2015 |   | Nil |   | 26,948 |   | 269,480 |   |
|             |       | 2,600                                                                      |       | $                                             | 112.75       |   | May 16,  2015 |   | Nil |   |   |   |   |   |
|             |       | 4,214                                                                      |       | $                                             | 84.25        |   | May 23,  2016 |   | Nil |   |   |   |   |   |
|             |       | 11,116                                                                     |       | $                                             | 29.25        |   | March 23,  2017 |   | Nil |   |   |   |   |   |
|             |       | 9,556

8,568                                                               |       | $

$                                          | 14.50

13.25 |   | March 12,  2018  March 27, 2019 |   | Nil

Nil |   |   |   |   |   |
|             |       |                                                                       |       |                                          |         |   |   |   |   |   |   |   |   |
| Joseph Cargnelli |       | 6,268

7,020                                                               |       | $

$                                          | 14.50  13.25 |   | March 12,  2018  March 27, 2019 |   | Nil  Nil |   | 19,740 |   | 197,400 |   |
|             |       |                                                                       |       |                                          |         |   |   |   |   |   |   |   |   |   |
| Wido Westbroek   |       | 3,000                                                                      |       | $                                             | 54.75        |   | July 14,  2016 |   | Nil |   | 6,344 |   | 63,440 |   |
|             |       | 2,748                                                                      |       | $                                             | 29.25        |   | March 23,  2017 |   | Nil |   |   |   |   |   |
|             |       | 1,780

2,500                                                               |       | $

$                                          | 14.50  13.25 |   | March 12,  2018  March 27, 2019 |   | Nil  Nil |   |   |   |   |   |
|             |       |                                                                       |       |                                          |         |   |   |   |   |   |   |   |   |
| Jennifer Barber  |       | 222                                                                        |       | $                                             | 192.50       |   | October 1,  2011 |   | Nil |   | 5,060 |   | 50,600 |   |
|             |       | 1,000                                                                      |       | $                                             | 112.75       |   | May 16,  2015 |   | Nil |   |   |   |   |   |
|             |       | 1,016                                                                      |       | $                                             | 84.25        |   | May 23,  2016 |   | Nil |   |   |   |   |   |
|             |       | 2,580                                                                      |       | $                                             | 29.25        |   | March 23,  2017 |   | Nil |   |   |   |   |   |
|             |       | 1,552

1,860                                                               |       | $

$                                          | 14.50  13.25 |   | March 12,  2018  March 27, 2019 |   | Nil  Nil |   |   |   |   |   |

 

*Incentive Plan Awards -Value Vested or Earned During the Year Ended December 31, 2009*

 
| **Name**         | ** ** | **Option-Based Awards -  Value Vested During the  Year  ($)** | ** ** | **Share-Based Awards -  Value Vested During the  Year  ($)** | ** ** | **Non-Equity Incentive Plan  Compensation -   Value Earned During the   Year  ($)** | ** ** |
|------------------|------------|----------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| ** **       | ** ** | ** **                                                                             | ** ** | ** **                                                                            | ** ** | ** **                                                                                                                  | ** ** |
| Daryl Wilson     |       | Nil                                                                                    |       | Nil                                                                                   |       | Nil                                                                                                                         |       |
| Lawrence Davis   |       | Nil                                                                                    |       | Nil                                                                                   |       | Nil                                                                                                                         |       |
| Joseph Cargnelli |       | Nil                                                                                    |       | Nil                                                                                   |       | Nil                                                                                                                         |       |
| Wido Westbroek   |       | Nil                                                                                    |       | Nil                                                                                   |       | Nil                                                                                                                         |       |
| Jennifer Barber  |       | Nil                                                                                    |       | Nil                                                                                   |       | Nil                                                                                                                         |       |

 

55

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** **

**Compensationof Directors**

** **

***Director Compensation Table***

*** ***

The following tableprovides a summary of compensation earned during the financial year ended December 31,2009 by our directors.

 
| **Name**             | ** ** | **Fees   Earned  ($)** | ** ** | **Share-Based  Awards  ($)** | ** ** | **Option-  based  awards  ($)** | ** ** | **Non-Equity  Incentive  Plan  Compensation  ($)** | ** ** | **All Other   Compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|----------------------|------------|-----------------------------|------------|------------------------------|------------|---------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------|------------|----------------|------------|
| Norman M. Seagram    |       | Nil                         |       | 82,000                       |       | n/a                             |       | n/a                                                |       | Nil                                         |       | 82,000         |       |
| Douglas S. Alexander |       | 22,250                      |       | 58,750                       |       | n/a                             |       | n/a                                                |       | Nil                                         |       | 81,000         |       |
| Michael Cardiff      |       | 34,000                      |       | 27,000                       |       | n/a                             |       | n/a                                                |       | Nil                                         |       | 61,000         |       |
| Henry J. Gnacke      |       | 25,000                      |       | 24,000                       |       | n/a                             |       | n/a                                                |       | Nil                                         |       | 49,000         |       |
| V. James Sardo (1)   |       | 35,062                      |       | 25,500                       |       | n/a                             |       | n/a                                                |       | Nil                                         |       | 60,562         |       |

 

----

Note:

 

(1)                                  Mr. Sardo resigned from the Board ofDirectors on November 30, 2009.

 

In 2009, each of ourdirectors who is considered “independent” was paid an annual fee of $12,000 forhis services as a director and an attendance fee of $1,000 for each Board orcommittee meeting attended.  Eachcommittee chair received an additional attendance fee of $500 for eachcommittee meeting attended.  Our Chairmanof the Board was paid an annual fee of $25,000 for his services and anattendance fee of $1,500 for each Board meeting attended.  All directors were reimbursed for travel andother reasonable expenses incurred in attending Board and committee meetings.

 

For compensationinformation regarding Mr. Cargnelli and Mr. Wilson, please see “Elementsof Executive Compensation Program” above.

 

***Deferred Share Units***

*** ***

Old Hydrogenicsestablished its deferred share unit plan and director ownership guidelines in2004, in an effort to better align the interests of non-employee directors withthe interests of our shareholders by linking annual short-term incentive awardsto the future value of the Shares.  On June 22,2009, Old Hydrogenics’ Board of Directors approved certain administrativeamendments to its deferred share unit plan. In October 2009, we adopted the DSU Plan, which is identical to OldHydrogenics’ deferred share unit plan.

 

Pursuant to the DSU Plan,independent directors are entitled to elect to receive all or any portion oftheir annual retainer and meeting fees in the form of deferred share units (“DSUs”)instead of cash. A DSU is a right to receive a cash payment based on the valueof a common share, credited by means of a bookkeeping entry in the books of theCompany, to an account in the name of the independent director. At the end ofthe director’s tenure as a member of the Board, the director is paid, in cash,the market value of the common shares represented by the DSUs.  As a result of the implementation of the DSUPlan, directors were not eligible to receive additional awards of stockoptions.  The Board of Directors hasapproved the following annual DSU grants to independent directors:  independent director — $24,000 equivalent inDSUs; Chair of the Human Resources and Corporate Governance Committee - $34,000equivalent in DSUs; Chair of the Audit Committee - $34,000 equivalent in DSUs;and Chairman of the Board of Directors - $39,000 equivalent in DSUs.

 

Contemporaneously withthe adoption of the DSU Plan, the Board also established ownership guidelinesfor directors pursuant to which each non-employee director is required to holdShares and/or DSUs equal to five times the director’s annual cash retainerwithin three years of initial appointment.

 

56

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***Incentive Plan Awards***

*** ***

*Outstanding Share-BasedAwards and Option-Based Awards During the Year Ended December 31, 2009*

 
| ** **           | ** ** | **Option-based Awards**                                          | ** ** | **Share-based Awards**      |
|----------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------|
| **Name**             | ** ** | **Number of  securities  underlying  unexercised  options  (#)** | ** ** | **Option  exercise  price  ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Value of  Unexercised  In-The-  Money  Options** | ** ** | **Number of  Shares or  Units of  Shares That  Have Not  Vested** | ** ** | **Market or Payout   Value of  Share-Based Awards   That  Have Not Vested  (Cdn. $)** |
| Norman M. Seagram    |       | n/a                                                                   |       | n/a                              |   | n/a |   | n/a |   | n/a |   | n/a |
| Douglas S. Alexander |       | n/a                                                                   |       | n/a                              |   | n/a |   | n/a |   | n/a |   | n/a |
| Michael Cardiff      |       | n/a                                                                   |       | n/a                              |   | n/a |   | n/a |   | n/a |   | n/a |
| Henry J. Gnacke      |       | n/a                                                                   |       | n/a                              |   | n/a |   | n/a |   | n/a |   | n/a |
| V. James Sardo       |       | n/a                                                                   |       | n/a                              |   | n/a |   | n/a |   | n/a |   | n/a |

 

*Incentive Plan Awards -Value Vested or Earned During the Year Ended December 31, 2009*

 
| **Name**             | ** ** | **Option-Based Awards -  Value Vested During  the  Year  ($)** | ** ** | **Share-Based Awards -  Value Vested During the  Year  ($)** | ** ** | **Non-Equity Incentive Plan Compensation -   Value Earned During the Year  ($)** |
|----------------------|------------|------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|
| Norman M. Seagram    |       | n/a                                                                                |       | 82,000                                                                                |       | n/a                                                                                                                           |
| Douglas S. Alexander |       | n/a                                                                                |       | 58,750                                                                                |       | n/a                                                                                                                           |
| Michael Cardiff      |       | n/a                                                                                |       | 27,000                                                                                |       | n/a                                                                                                                           |
| Henry J. Gnacke      |       | n/a                                                                                |       | 24,000                                                                                |       | n/a                                                                                                                           |
| V. James Sardo       |       | n/a                                                                                |       | 25,000                                                                                |       | n/a                                                                                                                           |

 

**BOARDPRACTICES**

** **

For information regardingthe period during which the directors and executive officers have served inoffice, see “Item 6. Directors, Senior Management And Employees — Directors andSenior Management” above.  Each directorelected will hold office until the next annual meeting of shareholders or untilhis successor is duly elected or appointed.

 

**Terminationand Change of Control Benefits of Executive Directors**

** **

Mr. Wilson’semployment agreement provides that Mr. Wilson is entitled to 18 months’salary and bonus in lieu of notice if he is terminated without cause from hisposition at any time, or if he is terminated upon a change of control of theCompany. This amount is equal to a maximum of approximately Cdn. $997,375 basedon Mr. Wilson’s current compensation. The agreement also provides that alloutstanding stock options held by Mr. Wilson will immediately vest upontermination without cause or termination resulting from a change of control ofthe Company. Mr. Wilson has agreed to refrain from competing with andinterfering in the business of Hydrogenics for a period of one year subsequentto his termination for any reason. Under the RSU Plan, if Mr. Wilson’semployment is terminated by the Company without cause, prior to the vestingdate of any awarded RSUs, then a pro rata portion of such RSUs will vestimmediately prior to the date of his termination of employment. The value ofsuch RSUs, as of December 31, 2009, is Cdn. $302,280.

 

57

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Mr. Cargnelli’semployment agreement provides that Mr. Cargnelli is entitled to 24 months’salary and one and a half times the average bonus paid in the two fiscal yearspreceding termination in lieu of notice if Mr. Cargnelli is terminatedwithout cause from his position at any time, or if he is terminated upon achange of control of the Company.  Thisamount is equal to a maximum of approximately Cdn. $717,500 based on Mr. Cargnelli’scurrent compensation. Mr. Cargnelli has agreed to refrain from competingwith and interfering in the business of Hydrogenics for a period of three yearssubsequent to his termination for any reason. Under the RSU Plan, if Mr. Cargnelli’s employment is terminated bythe Company without cause, prior to the vesting date of any awarded RSUs, thena pro rata portion of such RSUs will vest immediately prior to the date of histermination of employment. The value of such RSUs, as of December 31,2009, is Cdn. $197,400.

 

**HumanResources and Corporate Governance Committee**

** **

As of March 25,2010, we have a Human Resources and Corporate Governance Committee.

 

***Composition of Human Resources and CorporateGovernance Committee***

*** ***

The following individualsserved as the members of the Human Resources and Corporate Governance Committeeas at December 31, 2009 and March 25, 2010: Michael Cardiff (Chair),Douglas S. Alexander and Norman M. Seagram.

 

Each member of the HumanResources and Corporate Governance Committee is independent under testsestablished by legal and stock exchange requirements to which the Company issubject.  None of the members of theHuman Resources and Corporate Governance Committee is an officer, employee orformer officer or employee of the Company or any of its affiliates.

 

***Nomination of Directors and Compensation***

*** ***

Annually, the HumanResources and Corporate Governance Committee assesses the size of the Board ofDirectors, the competencies, skills and personal qualities required of theBoard of Directors in order to add value to the Company, and the competencies,skills and personal qualities of existing directors.  Based on this assessment, the Human Resourcesand Corporate Governance Committee will consider whether to recommend anychanges to the composition of the Board of Directors, including proposingnominations to the Board for approval.  When required, the Human Resources andCorporate Governance Committee will evaluate potential candidates for servingas a director having regard to the background, employment and qualifications ofpossible candidates and will consider whether the candidate’s competencies,skills and personal qualities are aligned with the Company’s needs.

 

In fulfilling itscharter, the committee’s role also includes reviewing and reporting to theBoard on: human resource planning, including the terms of the compensation packagesprovided to our employees; succession planning and senior managementappointments; the levels and form of executive compensation in general; and thespecific compensation of senior executives, including the annual compensationof the President and Chief Executive Officer. The committee also administersthe Company’s stock option plan, the DSU Plan and the RSU Plan and reviews andmakes recommendations to the Board regarding the annual compensation ofnon-employee directors.

 

***Report of the Human Resources and Corporate GovernanceCommittee***

*** ***

The Human Resources andCorporate Governance Committee ensures that the Company develops and implementsan effective and efficient approach to corporate governance and has a plan forthe continuity of its officers and an executive compensation plan that ismotivational and competitive, which will attract, retain and inspire executivemanagement and other key personnel.

 

The committee ensuresthat the Company’s business and affairs are carried out in a transparent mannerthat will enhance shareholder value.  Thecommittee assesses the effectiveness of the Company’s corporate governanceprocesses and compensation policies and, where appropriate, makesrecommendations with respect to the implementation, development and modificationwith respect to these processes and policies.

 

In 2009, the HumanResources and Corporate Governance Committee, in fulfilling itsresponsibilities, took the following measures:

 

·                  monitored and reviewed emerging SOX,Nasdaq, TSX and CSA corporate governance standards;

 

·                  reviewed its own charter in the contextof emerging corporate governance best practices;

 

·                  reviewed the size and composition of theBoard and committees to ensure that directors continue to have the appropriateexpertise and background to support corporate strategy and operations;

 

·                  prepared nomination recommendations inrespect of the Board for approval by shareholders;

 

·                  reviewed our approach to compensation forour employees, officers and directors;

 

·                  reviewed and approved incentive bonusawards and the salary for each officer of the Company;

 

58

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·                  reviewed and recommended stock optionawards;

 

·                  approved the short-term incentive awardsfor our officers; and

 

·                  engaged the services of an independentexternal consultant to provide advice and expertise regarding director andexecutive compensation.

 

The Human Resources andCorporate Governance Committee met six times in 2009. The Human Resources andCorporate Governance Committee is satisfied that it has fulfilled its charterduring the year ended December 31. 2009.

 

***Other Committee Assessments***

*** ***

The Human Resources andCorporate Governance Committee is responsible for supervising the assessment ofthe effectiveness of the Board of Directors as a whole and each committee ofthe Board of Directors, for evaluating the performance of the Chairman of theBoard, the Chair of each committee and the performance and contribution ofindividual directors.  The processgenerally involves the Human Resources and Corporate Governance Committeeassigning the task of conducting a survey of directors (with respect to theirviews on the effectiveness of the Board of Directors, Chairman of the Board,each committee of the Board and its Chair and individual directors).  The form of the survey is approved by theHuman Resources and Corporate Governance Committee. The results of the surveyare communicated in writing to the Chairman of the Board and the Chairman thenreports the overall results and the Chairman’s recommendations to theBoard.  The Chairman also meets in personor by telephone with each Board member to confidentially discuss his peerevaluation.  The Chairman also meets withthe Chair of the Human Resources and Corporate Governance Committee to reviewthe results of the survey prior to the Human Resources and Corporate GovernanceCommittee meeting to finalize its recommendations for Board and committeenominations.  The Chair of the HumanResources and Corporate Governance Committee meets with the Chairman of theBoard to discuss the Chairman’s performance assessment.

 

The Human Resources andCorporate Governance Committee administers the Company’s executive compensationprogram for executive officers, including with respect to the Named ExecutiveOfficers.

 

The committee has primaryresponsibility for determining executive remuneration and for the design andreview of the Company’s compensation plans. In fulfilling this role, the committee seeks to:

 

·                  provide total compensation that isclosely linked to the Company’s performance and to individual performance;

 

·                  align the interests of the Company’sexecutive officers with those of its shareholders through potential stock ownership;and

 

·                  ensure that compensation and benefits areat levels such that the Company is able to attract and retain the caliber ofexecutives and officers it needs to achieve its desired growth and performancetargets.

 

**AuditCommittee**

** **

Our Board of Directorshas delegated to the Audit Committee responsibility for assisting the Board inits oversight role with respect to the quality and integrity of financialinformation and reporting disclosure, risk management, the performance,qualifications and independence of the external auditors and legal andregulatory compliance.  The AuditCommittee regularly meets *in camera*to review management’s financial stewardship. The Audit Committee consists entirely of unrelated and independent andfinancially literate directors.

 

During the past year, theAudit Committee, in fulfilling its responsibilities, took the followingmeasures:

 

·                  reviewed and discussed with managementand the auditors the audited annual consolidated financial statements andmanagement’s discussion and analysis (“MD&A”);

 

·                  discussed with the external auditors allmatters pertaining to professional auditing guidelines and standards in Canadaand the United States, including the external auditors’ independence; and

 

·                  received written disclosure from theexternal auditors as recommended by The Canadian Institute of CharteredAccountants and the Independence Standards Board in the United States.

 

Based on thisinformation, the Audit Committee recommended to the Board that the consolidatedaudited financial statements and MD&A be included in the annual report toshareholders.

 

During the past year, theAudit Committee also took the following measures:

 

·                  reviewed the performance of the externalauditors and recommended reappointment of the external auditors forshareholders’ approval;

 

59

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·                  reviewed the independence andqualification of the external auditors based on the external auditors’ disclosure of its relationships with theCompany;

 

·                  approved the audit and non-audit feespaid to the external auditors;

 

·                  ensured that all services to be providedby the auditors are approved in advance by the committee or are approved by theChair of the committee and subsequently reported to the committee as a whole inthe following meeting of the committee, all in accordance with the externalAuditors’ Pre-approval Policy;

 

·                  reviewed with the external auditors and managementthe overall scope and plans of the annual audit;

 

·                  reviewed with management and the externalauditors the interim quarterly financial statements, including a discussionwith the external auditors of matters that are required to be disclosed undergenerally accepted auditing standards;

 

·                  reviewed with management and the auditorsall financial information and financial statements contained in this Form 20-F,which is being filed in Canada as our annual information form, and ourmanagement proxy circular, in each case prior to publication;

 

·                  reviewed with management our investmentpolicy;

 

·                  met with management and the externalauditors to discuss and review the Company’s control environment and culture,and the Company’s program to maintain SOX Section 404 compliance;

 

·                  reviewed our overall risk managementstrategy;

 

·                  reviewed our progress on theimplementation of International Financial Reporting Standards (“IFRS”);

 

·                  reviewed and approved various aspects anddocuments related to the APIF transaction;

 

·                  met regularly *in camera* with the internal and external auditors; and

 

·                  reviewed procedures for the receipt andtreatment of complaints regarding accounting, internal accounting controls orauditing matters, and the confidential, anonymous submission by employees ofconcerns regarding questionable accounting or auditing matters. Theseprocedures can be found on the Company’s investor relations web page atwww.hydrogenics.com.

 

The Audit Committee metsix times in 2009. The Audit Committee is satisfied that it has fulfilled itscharter during the year ended December 31, 2009.

 

The Audit Committee ofour Board of Directors operates under a written charter that sets out itsresponsibilities and composition requirements. As at December 31, 2009 and March 25,2010, the members of the committee were: Norman M. Seagram (Chair), Douglas S.Alexander and Michael Cardiff.  Thefollowing sets out the education and experience of each director relevant tothe performance of his duties as a member of the committee.

 

Norman M. Seagram isChair of our Audit Committee.  Mr. Seagram was President of SportscoInternational LP (SkyDome) from February 2001 to March 2003. From September 1996 to May 1997, Mr. Seagram was President andChief Executive Officer of Molson Inc., a company he had previously served for24 years in a variety of senior management positions.  From October 1992to August 1996, Mr. Seagram was Chairman and Chief Executive Officerof Air Liquide Canada, Inc., a producer of industrial gases.  Mr. Seagramis a trustee of Trinity College School and the Toronto Symphony Foundation, andhe is a director of Harbourfront Foundation.  He serves on the advisoryboard of the Faculty of Applied Science and Engineering, University of Toronto,and INSEAD, Fontainebleau, France. He is a former director of the TorontoEconomic Development Corporation (TEDCO).Mr. Alexander is a Director andmember of the Audit Committee of Critical Outcome Technologies Inc., and hasserved as the Chief Financial Officer of various Canadian public companies for15 years. Mr. Alexander was formerly lead director and chair of the AuditCommittee of Saxon Financial Inc. Mr. Alexander served as a director ofStuart Energy from 2003 to January 2005. From 1999 to 2004, Mr. Alexanderwas Executive Vice President and Chief Financial Officer of Trojan TechnologiesInc., an international environmental high technology company. Mr. Alexanderis a Chartered Director, having graduated from the Director’s College, a jointventure between McMaster University and the Conference Board of Canada. Mr. Cardiff is the Chief ExecutiveOfficer of Accelerents, a consulting firm focused on strategy development.Prior to holding that position, Mr. Cardiff held numerous senior positionsin a number of technology companies including large multinationals such as EDSand IBM as well as startup companies such as Fincentric, ConvergentTechnologies, Tandem, and Stratus Computer. Mr. Cardiff is currently adirector of Descartes Systems Group and Burntsand Inc. Mr. Cardiff hasalso served as a director of Husky Injection Molding Systems, Solcorp, VisibleGenetics, Spectra Security Software Visible Decisions and the Toronto FilmFestival, Roy Thomson Hall. Mr. Cardiff has received many awards including“A Canadian Export Life Time Achievement Award.” In 1998, Mr. Cardiff wasnamed one of Canada’s “Top 40 Under 40,” recognizing him as one of the nation’smost successful young leaders. Mr. Cardiff is a member of, and holds theICD.d designation from, the Institute of Corporate Directors.

 

60

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The Audit Committeecharter requires that each member of the Audit Committee be unrelated andindependent, and the composition of the Audit Committee satisfy theindependence, experience and financial expertise requirements of the Nasdaq,the TSX and Section 10A of the Securities Exchange Act of 1934 (UnitedStates), as amended by the Sarbanes-Oxley Act of 2002 (United States), and the rules promulgatedthereunder.  Accordingly, all committeemembers are required to be financially literate or be willing and able toacquire the necessary knowledge quickly. Financial literacy means that theperson has the ability to read and understand financial statements that presenta breadth and level of complexity of accounting issues that are generallycomparable to the breadth and complexity of the issues that can reasonably beexpected to be raised by our financial statements. We believe all of thecurrent members of the Audit Committee are financially literate.

 

In addition, the AuditCommittee charter contains independence requirements that each committee membermust satisfy and each current member meets those requirements. Specifically,the charter provides that no member of the committee may be an officer orretired officer of Hydrogenics and each member must be independent ofHydrogenics within the meaning of all applicable laws, rules andregulations and any other relevant consideration, including laws, rules andregulations particularly applicable to Audit Committee members.

 

The Audit Committee has apolicy restricting the provision of non-audit services by our auditors. Anysuch services must be permitted engagements as provided by the Audit Committeecharter and must be pre-approved by the Audit Committee.  The Audit Committee also pre-approves auditservices and the related fees.

 

**EMPLOYEES**

** **

As at December 31,2009, we employed approximately 130****full-timestaff.  Our full-time staff is dividedbetween 61****full-time staff in our OnSiteGeneration business, 65****full-timestaff in our Power Systems business, and four full-time staff in our corporateservices group.

 

Asof December 31, 2009, four****of ouremployees were located in our Mississauga, Ontario corporate headquarters, 67****employees werelocated in our Mississauga, Ontario power systems group, 7 employees were located in our Mississauga,Ontario OnSite generation group, nine****employees werelocated in our Gladbeck, Germany powergeneration group and 54 employees were located in our Oevel-Westerlo, BelgiumOnSite generation group.  We alsoemployed 2 temporary and contract employees at our Mississauga, Ontariofacility and****11 subcontractors at our Oevel-Westerlo, Belgium facility.

 

As at December 31,2008, we employed approximately 166 full-time staff.  Our full-time staff is divided between 73full-time staff in our OnSite Generation business, 81 full-time staff in ourPower Systems business, 5 full-time staff in our Test Systems business and 7full-time staff in our corporate services group.

 

Asof December 31, 2008, seven of our employees were located in our Mississauga, Ontario corporateheadquarters seventy-four employees werelocated in our Mississauga, Ontario power systems group, 11 employees were located in our Mississauga,Ontario OnSite generation group, eight employees were located in our Gladbeck, Germany power generation group and62 employees were located in our Oevel-Westerlo, Belgium OnSitegeneration group.  We also employed 2temporary and contract employees at our Mississauga, Ontario facility and eightsubcontractors at our Oevel-Westerlo,Belgium facility.

 

As at December 31,2007, we employed approximately 186 full-time staff.  Our full-time staff is divided between 80full-time staff in our OnSite Generation business, 84 full-time staff in ourPower Systems business, 13 full-time staff in our Test Systems business and 9full-time staff in our corporate services group.

 

Our ability to attract,motivate and retain qualified personnel is critical to our success.  We attempt to align the interests of ouremployees with those of shareholders through the use of incentive stock optionsand a performance-based compensation structure. A majority of employees own our common shares or options to purchase ourcommon shares.  We have entered intonon-disclosure and confidentiality agreements with key management personnel andwith substantially all employees.  Noneof our employees are represented by a collective bargaining agreement and webelieve that our relations with our employees are good.

 

**SHAREOWNERSHIP**

** **

Below is a summary of thesecurities ownership for each director and Named Executive Officer as of March 25,2010.

 

61

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| ** **           | ** ** | **Share-Based Awards** | ** ** | **Option-Based Awards** | ** ** |
|----------------------|------------|------------------------|------------|-------------------------|------------|
| ** **           | ** ** | ** **             | ** ** | **% of**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Number of  securities** | ** ** | **Option** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **           | ** ** | ** **             | ** ** | **Common**              | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | **underlying** | ** ** | **exercise** | ** ** | **Option** | ** ** | **% of** | ** ** |
| ** **           | ** ** | **Common**             | ** ** | **Shares**              | ** ** | ** ** | ** ** | **DSUs** | ** ** | ** ** | ** ** | **RSUs** | ** ** | **unexercised** | ** ** | **price** | ** ** | **Expiration** | ** ** | **Options** | ** ** |
| **Name**             | ** ** | **Shares**             | ** ** | **Outstanding**         | ** ** | **DSUs** | ** ** | **Outstanding** | ** ** | **RSUs** | ** ** | **Outstanding** | ** ** | **options** | ** ** | **(Cdn. $)** | ** ** | **Date** | ** ** | **Outstanding** | ** ** |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Norman M. Seagram    |       | 1,428                  |       | Less than 1%            |       | 18,957 |   | 45% |   | Nil |   | Nil |   | 196 |   | $ | 125.00 |   | June 30, 2010 |   | 1% |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 480 |   | $ | 217.50 |   | January 19, 2011 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 320 |   | $ | 218.75 |   | May 16, 2011 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 400 |   | $ | 205.00 |   | June 27, 2012 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 480 |   | $ | 147.75 |   | March 30, 2013 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 600 |   | $ | 164.50 |   | April 27, 2014 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Douglas S. Alexander |       | 999                    |       | Less than 1%            |       | 10,982 |   | 26% |   | Nil |   | Nil |   | Nil |   | N/A |   | N/A |   | Nil |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Michael Cardiff      |       | Nil                    |       | Nil                     |       | 4,170 |   | 10% |   | Nil |   | Nil |   | Nil |   | N/A |   | N/A |   | Nil |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Henry J. Gnacke      |       | Nil                    |       | Nil                     |       | 1,781 |   | 4% |   | Nil |   | Nil |   | Nil |   | N/A |   | N/A |   | Nil |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Joseph Cargnelli     |       | 158,660                |       | 4%                      |       | Nil |   | Nil |   | 19,740 |   | 22% |   | 6,268 |   | $ | 14.50 |   | March 12, 2018 |   | 5% |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 7,020 |   | $ | 13.25 |   | March 27,2019 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Daryl Wilson         |       | 4,000                  |       | Less than 1%            |       | Nil |   | Nil |   | 30,228 |   | 34% |   | 9,000 |   | $ | 40.00 |   | December 8, 2016 |   | 30% |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 8,564 |   | $ | 29.25 |   | March 23, 2017 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 15,100 |   | $ | 14.50 |   | March 12, 2018 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 40,000 |   | $ | 13.25 |   | March 27, 2019 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lawrence Davis       |       | Less than 1%           |       | Less than 1%            |       | Nil |   | Nil |   | 26,948 |   | 31% |   | 4,000 |   | $ | 127.50 |   | February 8, 2015 |   | 16% |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 2,600 |   | $ | 112,75 |   | May 16, 2015 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 4,214 |   | $ | 84.25 |   | May 23, 2016 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 11,116 |   | $ | 29.25 |   | March 23, 2017 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 9,556 |   | $ | 14.50 |   | March 12, 2018 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 8,568 |   | $ | 13.25 |   | March 27, 2019 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Wido Westbroek       |       | Less than 1%           |       | Less than 1%            |       | Nil |   | Nil |   | 6,344 |   | 7% |   | 3,000 |   | $ | 54.75 |   | July 14, 2016 |   | 4% |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 2,748 |   | $ | 29.25 |   | March 23, 2017 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 1,780 |   | $ | 14.50 |   | March 12, 2018 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 2,500 |   | $ | 13.25 |   | March 27, 2019 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Jennifer Barber      |       | Less than 1%           |       | Less than 1%            |       | Nil |   | Nil |   | 5,060 |   | 6% |   | 222 |   | $ | 192.50 |   | October 1, 2011 |   | 3% |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 1,000 |   | $ | 112.75 |   | May 16, 2015 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 1,016 |   | $ | 84.25 |   | May 23, 2016 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 2,580 |   | $ | 29.25 |   | March 23, 2017 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 1,552 |   | $ | 14.50 |   | March 12, 2018 |   |   |   |
|                 |       |                   |       |                    |       |   |   |   |   |   |   |   |   | 1,860 |   | $ | 13.25 |   | March 27, 2019 |   |   |   |

 

For information regardingarrangements for involving employees in the capital of our Company, see “Item6. Directors, Senior Management And Employees — Compensation — Elements ofExecutive Compensation Program — Long-term Incentives” above.

 

62

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** **

**ITEM7.  MAJOR SHAREHOLDERS AND RELATED PARTYTRANSACTIONS**

** **

**MAJORSHAREHOLDERS**

** **

To the knowledge of ourdirectors and officers, as of March 25, 2010, no person or companybeneficially owns, directly or indirectly, or exercises control or directionover common shares carrying more than 5% of the voting rights attached to ouroutstanding common shares other than the following:

 

·                  General Motors Holdings LLC (“GeneralMotors”), which owns 454,560 common shares, representing 10.8% of ouroutstanding common shares;

 

·                  Alpha, which owns 250,000 common shares,representing 5.9% of our outstanding common shares, 119,678 series A warrants(representing the right to acquire the equivalent number of common shares) and130,323 series B warrants of the Company (representing the right to acquire theequivalent number of common shares); and

 

·                  Iroquois Master Fund Ltd., which owns250,000 common shares, representing 5.9% of our outstanding common shares,119,678 series A warrants (representing the right to acquire the equivalentnumber of common shares) and 130,323 series B warrants of the Company(representing the right to acquire the equivalent number of common shares).

 

For information regardingthe pre-emptive right granted to General Motors, see “Item 7. MajorShareholders and Related Party Transactions — Related Party Transactions —Transactions with General Motors” below.

 

Our major shareholders donot have voting rights different from those of our other shareholders.

 

As of February 9,2010, approximately 15,916 U.S. shareholders heldapproximately 2,523,689 common shares or approximately 68% of our outstandingcommon shares.

 

**RELATEDPARTY TRANSACTIONS**

** **

**Transactionswith Viking Engineering & Tool Co.**

** **

In the normal course ofoperations, we subcontract certain machining and sheet metal fabrication ofparts to Viking Engineering & Tool Co., a company owned by the fatherand uncle of Joseph Cargnelli, a director and senior officer of the Company andone of our principal shareholders. For the fiscal year ended December 31,2009, billings by this related company totaled $0.1 million, a decrease of $0.1million from the $0.2 million billed the previous year. For the year ended December 31,2007, billings by this related company totaled $0.8 million, a decrease of $0.2million from the $1.0 million billed in the previous year. At December 31,2009, we had an accounts payable balance due to this related company of lessthan ten thousand dollars. We believe that transactions with this company areconsistent with those we have with unrelated third parties. All related partytransactions have been recorded at the exchange amount, which is theconsideration paid or received as established and agreed by the relatedparties.

 

**Transactionswith General Motors**

** **

In October 2001, weformed a strategic alliance with General Motors to accelerate the developmentof fuel cell technology in global commercial markets.  In connection with this strategic alliance,we issued to General Motors approximately 11.4 million of our common shares, orapproximately 21% of our outstanding shares at October 2001, and warrantsto purchase approximately 2.5 million additional shares.  We cancelled these warrants in a transactionwith General Motors in December 2005 for consideration of $750,000, whichwe paid in the form of a credit against the amount due from General Motors inrespect of testing services.  All testingservices have since been completed.  Wehave agreed that one director nominated by General Motors shall be included inthe slate of directors that is presented to shareholders for approval at ourgeneral meeting.

 

In connection with thisstrategic alliance, General Motors granted us a non-exclusive, royalty freelicence to use certain of General Motors’ proprietary fuel cell stackintellectual property in certain applications and modules.  The use or incorporation of General Motors’fuel stack intellectual property outside these defined areas requires theconsent of General Motors.  We granted toGeneral Motors, its affiliates and any third parties with whom General Motorshas a technical or business relationship related to fuel cells a perpetual,royalty-free, non-exclusive licence to use all of the intellectual property wedevelop that (i) uses General Motors’ proprietary fuel cell stackintellectual property, and/or (ii) is funded by General Motors.  Intellectual property that is not funded byGeneral Motors but which uses General Motors’ fuel cell stack technology islicensed to General Motors non-exclusively. Intellectual property that has been developed through funding by GeneralMotors, whether owned solely by us or jointly by us and General Motors, islicensed to General Motors on an exclusive basis for mobile applications and ona non- exclusive basis for all other applications.  In the event that we wish to liquidate ordiscontinue activity in the fuel cell business, or 

 

63

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otherwise wish totransfer any of the intellectual property associated with General Motors’proprietary fuel cell stack intellectual property developed using funds fromGeneral Motors, we are required to offer it first to General Motors.  We have also agreed to provide General Motorswith certain services, access to technology and testing resources in connectionwith its fuel cell development program and we have agreed that all products,material hardware and resources purchased from us by General Motors will be atour most favourable commercial prices.

 

For so long as General Motorsholds at least 10% of our outstanding shares, in the event that any of ourfounders, Pierre Rivard, Joseph Cargnelli or Boyd Taylor, wish to transfer (i) allor substantially all of their shares to any person, or (ii) any of theirshares to a person actively competing with General Motors in the automotive orfuel cell industry, he must first offer the shares to General Motors.  In addition, in the event that we issueadditional equity securities or securities convertible into equity securitiesfor cash consideration, we have granted General Motors the right to participatein such offering on a pro rata basis based on the fully diluted number ofcommon shares that it holds.  GeneralMotors’ pre-emptive right is subject to certain limited exceptions, includingthe issuance of shares in connection with acquisitions.

 

**Indebtednessof Directors and Executive Officers**

** **

From January 1, 2007to March 25, 2010, none of our current directors or executive officers areindebted to the Company.

 

***Indebtedness of Directors and Executive Officers Under(1) Securities Purchase and (2) Other Programs***

 
| **Name and Principal  Position**                                                             | ** ** | **Involvement  of  Company or  Subsidiary**                                                                           | ** ** | **Largest  Amount  Outstanding  During 2007   ($)** | ** ** | **Amount  Outstanding   as  at****March 25,  2****010  ($)** | ** ** | **Financially  Assisted  Securities  Purchases  During 200****7** | ** ** | **Security  for  Indebtedness   (#  of shares)** | ** ** | **Amount  Forgiven  During  2007 ($)** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------|------------|
| Securities  Purchase Program                                                                 |       |                                                                                                                  |       |                                                |       |                                                              |       |                                                              |       |                                             |       |                                   |       |
|                                                                                         |       |                                                                                                                  |       |                                                |       |                                                              |       |                                                              |       |                                             |       |                                   |       |
| Jon  Slangerup,(1)(2)(3) former President and Chief Executive Officer of  Stuart Energy |       | Provided loan by Stuart  Energy (now a subsidiary of the Company) to purchase common shares of  Stuart Energy(2) |       | 957,887                                             |       | Nil                                                               |       | Nil                                                               |       | 150,775                                          |       | 957,887                                |       |

 

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Notes:

 

(1)   JonSlangerup was the President and Chief Executive Officer of Stuart Energy from July 2001until January 2005, when he resigned in connection with our acquisition ofStuart Energy.

 

(2)   At thetime of hiring Mr. Slangerup in July 2001, Stuart Energy’s board ofdirectors determined that it was desirable and appropriate to align Mr. Slangerup’sinterests with those of the shareholders of Stuart Energy by encouraging Mr. Slangerupto purchase up to 203,750 common shares of Stuart Energy. On September 28,2001, as part of Mr. Slangerup’s inducement option which was approved bythe shareholders of Stuart Energy at the September 25, 2001 shareholders’meeting, Stuart Energy provided a loan to Mr. Slangerup in the principalamount of approximately Cdn.$1,151,188 to facilitate the purchase by Mr. Slangerupof 203,750 treasury common shares of Stuart Energy at Cdn.$5.65 per share. Thisloan was secured by a demand promissory note and a pledge by Mr. Slangerupof the purchased common shares. The loan was interest free, unless in default,in which case the loan bears interest at 6% after default. In January 2005,when we acquired Stuart Energy, our separation agreement with Mr. Slangerupbecame effective. As part of that agreement, we agreed to extend until December 31,2006 (the “Extension Date”) the term of this loan which would otherwise expireupon the termination of Mr. Slangerup’s employment with Stuart Energy. The203,750 common shares of Stuart Energy pledged by Mr. Slangerup assecurity for the loan were exchanged for 150,775 Shares, which in turn havebeen pledged in favour of the Company as security for the loan. Consistent withthe terms of Mr. Slangerup’s then employment arrangement, the separationagreement provides that the outstanding loan may be forgiven by Hydrogenics atany time. In addition, Mr. Slangerup and Hydrogenics had agreed that atthe end of the Extension Date (or any time prior to the Extension Date, at theelection of Hydrogenics), Hydrogenics shall purchase for cancellation thepledged shares from Mr. Slangerup, subject to compliance with applicablesecurities laws, and shall apply the proceeds from the sale to the loanrelating to such pledged shares. Should proceeds from the sale 

 

64

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of the pledged shares beless than the amount of the loan, subject to applicable law, the balance of theloan will be forgiven and Mr. Slangerup will be compensated for anynegative tax consequences resulting from forgiveness of the loan.

 

(3)   On March 20,2007 the Company purchased for cancellation the pledged shares and applied theamount resulting therefrom to Mr. Slangerup’s loan. The balance of theloan was forgiven and Mr. Slangerup will be compensated for any negativetax consequences resulting from this forgiveness, in accordance with theCompany’s contractual commitments to Mr. Slangerup.

 

**INTERESTSOF EXPERTS AND COUNSEL**

** **

None.

 

**ITEM8.  FINANCIAL INFORMATION**

** **

**CONSOLIDATEDSTATEMENTS AND OTHER FINANCIAL INFORMATION**

** **

**FinancialStatements**

** **

See “Item 18.Financial Statements.” For accounting purposes, we are considered to be acontinuation of Old Hydrogenics and the financial statements of Old Hydrogenicsfor the periods prior to October 27, 2009 are considered to be ourfinancial statements.

 

**LegalProceedings**

** **

See “Item 5.  Operating and Financial Review and Prospects —Trend Information — Delivery Outlook — American Power Conversion Corporation”for information regarding the complaint we filed against APC in the U.S.District Court for the District of Massachusetts on November 13, 2009, inconnection with a certain supply agreement with APC.

 

See “Item 3. KeyInformation — Risk Factors — Risk Factors Related to Our FinancialCondition — We arecurrently involved in litigation with Alpha Capital Anstalt, the outcome ofwhich could adversely affect our financial condition” for information regardingthe suit filed by Alpha against Hydrogenics and two of our officers on February 23,2010 in the Supreme Court of the State of New York (County of New York)regarding our share consolidation, which was completed on March 12,2010.  We have also receivedcorrespondence from the other institutional investor in the registered directoffering completed on January 14, 2010 making allegations similar to thosemade by Alpha.

 

We are not currentlyparty to any other material legal proceedings.

 

**DividendsPolicy**

** **

We have never declared orpaid any cash dividends on our common shares. We currently intend to retain any future earnings to fund thedevelopment and growth of our business and we do not anticipate paying any cashdividends in the foreseeable future.

 

**SIGNIFICANTCHANGES**

** **

For information regardingsignificant changes since December 31, 2009, see “Item 14.  Material Modifications to the Rights ofSecurity Holders and Use of Proceeds — Material Modifications to the Rights ofSecurity Holders,” “Item 4.  Informationof the Company — Business Overview — Our Products and Services — RecentDevelopments,” and note 21 to our consolidated financial statements onbeginning on page F-37.

 

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** **

**ITEM9.      THE OFFER AND LISTING**

** **

**LISTINGDETAILS**

** **

The following table setsforth the reported trading prices in Canadian dollars and U.S. dollars for ourcommon shares on the TSX and Nasdaq, respectively.  Trading prices prior to March 12, 2010are on a pre-consolidation basis and trading prices for the period from March 12,2010 to March 25, 2010 are on a post-consolidation basis.

 

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| ** **                                     | ** ** | **TSX**          | ** ** | **Nasdaq**     | ** ** |
|------------------------------------------------|------------|------------------|------------|----------------|------------|
| ** **                                     | ** ** | **High  (Cdn$)** | ** ** | **Low (Cdn$)** | ** ** | **High ($)** | ** ** | **Low ($)** | ** ** |
| **Annual Market Prices**                       |       |             |       |           |       |   |   |   |   |
| 2005                                           |       | 6.45             |       | 2.93           |       | 5.38 |   | 2.50 |   |
| 2006                                           |       | 5.03             |       | 1.35           |       | 4.40 |   | 1.21 |   |
| 2007                                           |       | 1.73             |       | 0.90           |       | 1.65 |   | 0.84 |   |
| 2008                                           |       | 2.47             |       | 0.37           |       | 2.45 |   | 0.32 |   |
| 2009                                           |       | 0.80             |       | 0.38           |       | 0.75 |   | 0.29 |   |
| **Quarterly Market Prices**                    |       |             |       |           |       |   |   |   |   |
| *2008*                                         |       |             |       |           |       |   |   |   |   |
| First  Quarter                                 |       | 1.05             |       | 0.51           |       | 1.07 |   | 0.49 |   |
| Second  Quarter                                |       | 1.99             |       | 0.50           |       | 1.95 |   | 0.50 |   |
| Third  Quarter                                 |       | 2.47             |       | 0.60           |       | 2.45 |   | 0.55 |   |
| Fourth  Quarter                                |       | 0.98             |       | 0.37           |       | 0.92 |   | 0.32 |   |
| *2009*                                         |       |             |       |           |       |   |   |   |   |
| First  Quarter                                 |       | 0.73             |       | 0.38           |       | 0.63 |   | 0.29 |   |
| Second  Quarter                                |       | 0.80             |       | 0.56           |       | 0.55 |   | 0.51 |   |
| Third Quarter                                  |       | 0.75             |       | 0.49           |       | 0.69 |   | 0.45 |   |
| Fourth Quarter                                 |       | 0.70             |       | 0.38           |       | 0.69 |   | 0.36 |   |
| *2010*                                         |       |             |       |           |       |   |   |   |   |
| First Quarter (until March 11)            |       | 0.55             |       | 0.23           |       | 0.54 |   | 0.21 |   |
| First Quarter (March 12 to March 25) |       | 7.87             |       | 5.49           |       | 7.75 |   | 5.46 |   |
| **Monthly Market Prices**                      |       |             |       |           |       |   |   |   |   |
| *2009*                                         |       |             |       |           |       |   |   |   |   |
| September                                      |       | 0.75             |       | 0.52           |       | 0.69 |   | 0.49 |   |
| October                                        |       | 0.70             |       | 0.48           |       | 0.69 |   | 0.42 |   |
| November                                       |       | 0.51             |       | 0.42           |       | 0.63 |   | 0.39 |   |
| December                                       |       | 0.50             |       | 0.38           |       | 0.49 |   | 0.36 |   |
| *2010*                                         |       |             |       |           |       |   |   |   |   |
| January                                        |       | 0.55             |       | 0.38           |       | 0.54 |   | 0.36 |   |
| February                                       |       | 0.40             |       | 0.23           |       | 0.37 |   | 0.21 |   |
| March 1  to March 11                 |       | 0.25             |       | 0.23           |       | 0.25 |   | 0.23 |   |
| March 12  to March 25                |       | 7.87             |       | 5.49           |       | 7.75 |   | 5.46 |   |

 

**Plan ofDistribution**

 

Notapplicable.

 

**MARKETS**

** **

Our common shares arelisted on the TSX under the symbol “HYG”. As a result of the shareconsolidation implemented on March 12, 2010, our common shares are listed onthe Nasdaq under the symbol “HYGSD” until April 9, 2010, at which point theywill revert to trading under the symbol “HYGS,” which is the symbol they werelisted under prior to the share consolidation.

 

**SELLINGSHAREHOLDERS**

** **

Not applicable.

 

**DILUTION**

** **

Not applicable.

 

**EXPENSESOF THE ISSUE**

** **

Not applicable.

 

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** **

**ITEM10.**                      ADDITIONAL INFORMATION

** **

**SHARECAPITAL**

** **

Not applicable.

 

**MEMORANDUMAND ARTICLES OF ASSOCIATION**

** **

**CompanyPurpose**

** **

The Company’s restated articlesof incorporation, together with any amendments thereto, which we refer to asour articles of incorporation, are filed with Industry Canada, pursuant to theCanada Business Corporations Act, which we refer to as the CBCA. Our articlesof incorporation do not have a stated purpose.

 

**Directors**

** **

Pursuant to applicableCanadian law, our directors, in exercising their powers and discharging theirduties must act honestly and in good faith with a view to the best interests ofthe Company. They must also exercise the care, diligence and skill that areasonably prudent person would exercise in comparable circumstances.

 

Pursuant to theprovisions of the CBCA, a director who is party to a material contract ortransaction with the Company, is a director or an officer or an individualacting in a similar capacity of a party to the contract or transaction, or whohas a material interest in a party to a material contract or transaction withthe Company must disclose to the Company the nature and extent of such interestin writing or request to have such interest noted in the minutes of meetings ofthe directors. Furthermore, a director who has a material interest in a matterbefore the board must refrain from voting on the matter unless the contract: iswith one of our affiliates;  relates tothe director’s remuneration as a director or officer of the Company; or,relates to our indemnity or insurance for our officers and directors.

 

Pursuant to the CBCA atleast 25% of our directors must be resident Canadians. The CBCA also requiresthat we have not less than three directors, at least two of whom are notofficers, directors or employees of the Company. We currently have sixdirectors, five of whom are resident Canadians. Our articles of incorporationprovide that the minimum size of our Board of Directors be three and themaximum size of our Board of Directors be twelve. Our directors may, from timeto time, determine the number of directors on the board by resolution, which iscurrently six directors. Our articles of incorporation and our by-laws do notimpose any other director qualification requirements.

 

In February 2010,the Board of Directors amended our by-laws to provide the Chairman of the Boardof Directors with a casting vote in the case of an equality of votes on aquestion before the Board of Directors at a meeting of the Board of Directors.

 

***Director Share Ownership Guidelines***

*** ***

We have establisheddirector share ownership guidelines that require each of our directors to holdShares or DSUs equal to five times the director’s annual cash retainer withinthree years of his initial appointment. The General Motors nominee on the Boardis not required to comply with these guidelines.

 

Given the recent declinein the price for our common shares, exacerbated by prevailing global economicand credit market conditions, the Human Resources and Corporate GovernanceCommittee has amended the guidelines to permit the value to be measured ateither the year-end Share price, or a director’s acquisition cost of Shares andinitial grant price of DSUs.  The Boardhas approved this amendment and all Directors are in compliance.

 

**SHAREHOLDERRIGHTS**

** **

Our authorized capitalconsists of an unlimited number of common shares with no par value and anunlimited number of preferred shares with no par value issuable in series, ofwhich 4,201,983common shares and no preferredshares were issued and outstanding as of March 25, 2010.  As of March 25, 2010,we also have 239,355 series A warrants and 260,644 series B warrants issued andoutstanding, whereby each warrant entitles the holder to purchase a commonshare (see “Item 14.  MaterialModifications to the Rights of Security Holders and Use of Proceeds — MaterialModifications to the Rights of Security Holders — ***RegisteredDirect Offering of Common Shares and Warrants***” forinformation regarding the warrants.)

 

Our articles ofincorporation permit us to issue an unlimited number of common and preferredshares.  If we were to issue asignificant number of common shares, it would reduce the relative voting powerof previously outstanding shares.

 

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Each common share carriesone vote on all matters to be voted on by our shareholders.  Holders ofcommon shares are entitled to receive dividends if, as and when declared by ourBoard of Directors and to share ratably in our remaining assets available fordistribution, after payment of liabilities, upon Hydrogenics’ liquidation,dissolution or winding up.  Common shares do not carry pre-emptive rights orrights of conversion into any other securities.  However, we have grantedGeneral Motors a pre-emptive right.  See “Item 7 — Major Shareholders andRelated Party Transactions — Related Party Transactions — Transactions withGeneral Motors.”  All outstanding common shares are fully paid andnon-assessable.  There are no limitations on the rights of non-residentowners of common shares to hold or vote their shares.

 

Our Board of Directorshas the authority, without further action by the shareholders, to issue anunlimited number of preferred shares in one or more series and, in the eventthat preferred shares are issued, the Board also has the authority to fix thedesignations, powers, preferences, privileges and relative, participating,optional or special rights of any preferred shares including anyqualifications, limitations or restrictions. Special rights that may be granted to a series of preferred sharesinclude dividend rights, conversion rights, voting rights, redemption andliquidation preferences, any or all of which may be superior to the rights ofthe common shares.  Preferred shareissuances could decrease the market price of common shares and may adverselyaffect the voting and other rights of the holders of common shares.  The issuance of preferred shares could alsohave the effect of delaying or preventing a change in control of Hydrogenics.

 

We have never declared orpaid any cash dividends on our common shares. We currently intend to retain any future earnings to fund thedevelopment and growth of our business and we do not anticipate paying any cashdividends in the foreseeable future.

 

**CHANGESTO SHAREHOLDER RIGHTS**

** **

Under the CBCA,amendments to our articles of incorporation will generally require approval byspecial resolution. A special resolution is a resolution passed by a majorityof not less than two-thirds of the votes cast by the shareholders who voted inperson or by proxy in respect of that resolution at the annual or specialmeeting called for such purpose. If the amendment is of a nature affecting aparticular class or series of our shares in a manner requiring a separate classor series vote, that class or series is entitled to vote on the amendmentwhether or not it otherwise carries the right to vote. Under the CBCA, our directorsmay make, amend or repeal any by-law that regulates our business or affairs.Where our directors make, amend or repeal a by-law, they are required to submitthe by-law, amendment or repeal to the shareholders at the next meeting ofshareholders, and the shareholders may, by an ordinary resolution, which is aresolution passed by a simple majority of the votes cast by shareholders whovoted in respect of the resolution, confirm, reject or amend the by-law,amendment or repeal.

 

**SHAREHOLDERMEETINGS**

** **

Our board is required tocall an annual meeting of the shareholders no later than 15 months after theholding of the last preceding annual meeting. Our board may also call a specialmeeting of the shareholders at any time. The only persons entitled to attend ameeting of our shareholders are our directors, our auditors and those personsentitled to vote at such meeting and any other persons who, although notentitled to vote at the meeting, are entitled to attend such meeting pursuantthe provisions of the CBCA. Under our by-laws, a quorum of shareholders shallbe two persons present in person or represented by proxy holding in theaggregate not less than 25% of the outstanding shares of the Company.

 

**LIMITATIONS**

** **

There are no limitations in ourarticles of incorporation or by-laws or under Canadian federal or provinciallaws, on the right of non-residents of Canada or foreign owners to hold or voteour common shares, except for transactions involving or being deemed to involvean acquisition of control, which requires compliance with the Investment CanadaAct.

 

**CHANGEIN CONTROL**

** **

Our articles ofincorporation and by-laws do not contain any provisions that would have theeffect of delaying, deferring or preventing a change in control of the Company.

 

Under the CBCA, certainextraordinary corporate actions, such as amalgamations, continuances, sales,leases or exchanges of all or substantially all of the property of acorporation other than in the ordinary course of business, and otherextraordinary corporate actions such as liquidations or dissolutions are alsorequired to be approved by special resolution. In certain cases, a specialresolution to approve an extraordinary corporate action is also required to beapproved separately by the holders of a class or series of shares.

 

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** **

**DISCLOSUREOF SHAREHOLDINGS**

** **

Our by-laws do not imposean ownership threshold, above which shareholder ownership must be disclosed andany obligation to make such disclosure would be the subject of applicablesecurities laws.

 

**MATERIALCONTRACTS**

** **

For the two yearsimmediately preceding the date of this Annual Report, no material contractshave been terminated, entered into or assigned by us other than in the ordinarycourse of business and other than the material contracts summarized below.

 

On July 22, 2009, weannounced that we formally notified American Power Conversion Corporation (“APC”)of the termination of the manufacturing and supply agreement dated August 9,2006 between Hydrogenics and APC.  See “Item5.  Operating and Financial Review andProspects — Trend Information — Delivery Outlook — American Power ConversionCorporation” for information regarding the termination.

 

The following materialcontracts were entered into in connection with the APIF Transaction describedunder “Item 4.  Information of the Company — History and Development ofHydrogenics Corporation.”

 

·                  Support Agreement dated June 11,2009, among the Trustees of Algonquin Power Income Fund (the “Algonquin Board”),Hydrogenics and Old Hydrogenics.  TheSupport Agreement sets out the terms and conditions pursuant to which theparties implemented the APIF Transaction, which involved (i) a plan ofarrangement among Hydrogenics, Old Hydrogenics and its wholly-ownedsubsidiaries, Stuart Energy and Hydrogenics Test Systems Inc. (“Test Systems”),and (ii) a take-over bid pursuant to which Old Hydrogenics will makeoffers to acquire all of the issued and outstanding units and convertibledebentures of APIF.

 

·                  Expense Reimbursement Agreement dated June 11,2009, among Algonquin Power Management Inc. (“APMI”), Hydrogenics and OldHydrogenics.  The Expense Reimbursement Agreement with APMI, the Managerof APIF, provides for the payment by one party to the other of professionaladvisory costs and expenses incurred in connection with the transactionscontemplated in the Support Agreement, to a maximum amount of Cdn. $1,000,000if the transactions fail to be completed under certain conditions.

 

·                  APMI Guarantee dated June 11, 2009,among APMI, Hydrogenics and Old Hydrogenics.  Pursuant to the APMIGuarantee, APMI has agreed to unconditionally and irrevocably guarantee theobligations of the Algonquin Board under the Support Agreement.

 

·                  Algonquin Power Guarantee dated June 11,2009, among APIF, APMI, Hydrogenics and Old Hydrogenics.****** Pursuant to the Algonquin Power Guarantee,APIF has agreed to unconditionally and irrevocably guarantee the obligations ofAPMI under the Expense Reimbursement Agreement and the APMI Guarantee.

 

·                  Indemnity Agreement dated October 27,2009, between Hydrogenics and APUC.  TheIndemnity Agreement is primarily designed to provide APUC with indemnificationfrom Hydrogenics, the resulting entity that is carrying on the businesspreviously carried on by APUC, for claims relating to Hydrogenics’ businessthat are brought against APUC in the future.

 

·                  Divestiture Agreement dated October 27,2009, among Hydrogenics, Old Hydrogenics, Stuart Energy and Test Systems.  Pursuant to the Divestiture Agreement, weagreed to acquire from Old Hydrogenics, Stuart Energy and Test Systems all oftheir assets (excluding their tax attributes) and to pay, assume, discharge,perform and fulfill, as the case may be, all of their liabilities (excludingcertain liabilities specified in the agreement).

 

The following materialcontracts were entered into in connection with the registered direct offeringdescribed under “Item 14.  MaterialModifications to the Rights of Security Holders and Use of Proceeds — MaterialModifications to the Rights of Security Holders — Registered ***DirectOffering of Common Shares and Warrants***.”

 

·                  Securities Purchase Agreement dated January 11,2010, among Hydrogenics and two investors. Pursuant to such agreement, Hydrogenics agreed to sell common shares andwarrants in a registered direct offering to the two investors, resulting ingross proceeds of $5 million before placement agent’s fees and other offeringexpenses.

 

·                  Warrant Agreement dated January 14,2010 between Hydrogenics and Mellon Investor Services LLC.  The Warrant Agreement appoints MellonInvestor Services LLC as the warrant agent to act on behalf of Hydrogenics inconnection with the issuance, transfer, exchange and exercise of the warrantsissued in the registered direct offering and certain other related matters.

 

As described under “Item5.  Operating and Financial Review andProspects — Trend Information — Delivery Outlook,” on July 20, 2009, weannounced that we had terminated our manufacturing and supply agreement dated August 9,2006 with American Power Conversion Corporation.

 

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** **

**EXCHANGE CONTROLS**

** **

There is no law,government decree or regulation in Canada restricting the export or import ofcapital or affecting the remittance of dividends, interest or other payments toa nonresident holder of common shares, other than withholding tax requirements.

 

**TAXATION**

** **

Because Canadian andUnited States tax consequences may differ from one holder to the next, thediscussion set out below does not purport to describe all of the taxconsiderations that may be relevant to a shareholder and such shareholder’sparticular situation. Accordingly, a shareholder is advised to consult a taxadvisor as to the United States and Canadian federal, provincial, state andother tax consequences of owning our common shares. The statements of UnitedStates and Canadian tax law set out below are based upon the laws andinterpretations in force as of the date of this annual report, and are subjectto changes occurring after that date.

 

**Canadian Federal IncomeTax Considerations**

** **

In this summary, a “U.S.holder” means a person who, for the purposes of the Income Tax Act (Canada)(the “Income Tax Act”) and the Canada-United States Income Tax Convention(1980) (the “Convention”), is a resident of the United States and is not andhas not been a resident of Canada, does not have and has not had at any time, apermanent establishment or fixed base in Canada and otherwise qualifies for thefull benefits of the Convention, and who, for the purposes of the Income TaxAct:

 

·                  deals at arm’s length and is notaffiliated with us;

 

·                  holds our common shares as capitalproperty;

 

·                  does not use or hold and is not deemed touse or hold our common shares in the course of carrying on, or otherwise inconnection with, a business in Canada;

 

·                  is not a “registered non-resident insurer”or “authorized foreign bank,” each within the meaning of the Income Tax Act;and

 

·                  does not carry on an insurance businessin Canada and elsewhere.

 

Generally, our commonshares will be capital property to a U.S. holder unless they are held in thecourse of carrying on a business of buying or selling securities or in anadventure of concern in the nature of trade. This summary does not deal withspecial situations, such as the particular circumstances of traders or dealers,United States limited liability companies (which may not be considered to be aresident of the Untied States for the purposes of the Convention), tax-exemptentities, insurers or financial institutions. Such holders and other holders who do not meet the criteria of a U.S.holder described above should consult their own tax advisors.  There are no Canadian federal estate taxesapplicable to the purchase or ownership of our common shares. Under the IncomeTax Act, on death, a U.S. holder would be deemed to dispose of all of his orher assets, including our common shares.

 

This summary is based onthe current provisions of the Income Tax Act and the regulations in force underthe Income Tax Act on the date of this annual report, the Convention, currentpublished administrative and assessing practices of the Canada  Revenue Agency, all specific proposals toamend the Income Tax Act and the regulations publicly announced by the Ministerof Finance (Canada) prior to the date of this annual report and all judicialdecisions currently in effect.

 

This summary is notexhaustive and, except for the proposed amendments to the Income Tax Act, doesnot take into account or anticipate prospective or retrospective changes in thelaw or the administrative or assessing practices of the Canada Revenue Agency,whether these changes are effected by judicial, governmental or legislativeaction or interpretation. This summary does not take into account taxlegislation or considerations of any province or territory of Canada. None ofthe tax consequences described herein depend or rely upon any of the proposedamendments to the Income Tax Act passing into law. Because Canadian taxconsequences may differ from one holder to the next, this summary does notpurport to describe all of the tax considerations that may be relevant to ashareholder and his particular situation. The Canadian tax treatment to a U.S.holder may differ from the treatment described herein. A shareholder is advisedto consult a tax advisor.

 

***Dividends***

*** ***

Dividends paid, creditedor deemed to have been paid or credited on our common shares are subject tonon-refundable Canadian withholding tax under the Income Tax Act at the rate of25%, although this rate may be reduced by the provisions of an applicableincome tax treaty. Subject to the exceptions noted immediately below, under theConvention, U.S. holders who beneficially own the dividends will be subject toa 15% withholding tax on the gross amount of such dividends.  In the case of a U.S. holder that is acorporation that beneficially owns at least 10% of our voting shares, theapplicable rate of withholding tax on dividends will be reduced to 5%. In thecase of dividends paid, 

 

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credited or deemedto be credited to a U.S. holder that is a tax exempt organization as describedin Article XXI of the Convention, generally no withholding tax will bepayable.

 

***Dispositions***

*** ***

A U.S. holder willgenerally not be subject to tax under the Income Tax Act on any capital gainrealized on a disposition of our common shares, unless the common sharesconstitute “taxable Canadian property” of the U.S. holder at the time ofdisposition and the U.S. holder is not entitled to relief under theConvention.  Provided our common sharesare listed on a “designated stock exchange” (which includes the TSX and Nasdaq)at the time of the disposition, our common shares generally will not constitutetaxable Canadian property of a U.S. holder unless, at any time during the 60-monthperiod immediately preceding the disposition, the U.S. holder, persons withwhom the U.S. holder does not deal at arm’s length, or the U.S. holder togetherwith such persons owned, 25% or more of the issued shares of any series orclass of our capital stock or unless our common shares are deemed under theIncome Tax Act to be taxable Canadian property to the U.S. holder.  If our common shares constitute taxableCanadian property to a particular U.S. holder, any capital gain arising ontheir disposition may be exempt from Canadian tax under the Convention if, atthe time of disposition, our common shares do not derive their valueprincipally from real property situated in Canada.

 

On March 4, 2010,the Department of Finance (Canada) announced in the 2010 Canadian FederalBudget that it is proposing to amend the definition of “taxable Canadianproperty” in the Tax Act to exclude shares (whether listed or not) ofcorporations that do not derive, directly or indirectly, more than 50% of theirfair market value from one or any combination of (i) real or immovableproperty situated in Canada, (ii) Canadian resource properties, (iii) timberresource properties, and (iv) options in respect of or interests or civillaw rights in such property, at any time during the 60-month period immediatelypreceding the disposition.  If thedefinition of “taxable Canadian property” is amended as proposed and our commonshares are not considered to have derived more than 50% of their fair marketvalue from one or any combination of properties described in (i) to (iv) atany time during the 60-month period preceding the disposition, then our commonshares will not be taxable Canadian property at the time of the dispositionunless such shares are otherwise deemed to be taxable Canadian property to theU.S. holder.

 

**United States FederalIncome Taxation**

** **

The following discussionsummarizes the material United States federal income tax consequences to a ‘‘U.S.Holder’’ (as defined below) of the acquisition, ownership and disposition ofour common shares. This summary assumes that you hold your common shares ascapital assets within the meaning of Section 1221 of the U.S. InternalRevenue Code of 1986, as amended (the “U.S. Tax Code”). This summary does notpurport to be a complete analysis of all of the potential United States federalincome tax considerations that may be relevant to a particular holder’sacquisition, ownership or disposition of our common shares in light of suchholder’s particular circumstances, nor does it address the United Statesfederal income tax consequences applicable to holders subject to special taxrules, including without limitation banks, brokers, dealers in securities orcurrencies, traders in securities that elect to use a mark-to-market method ofaccounting for their securities holdings, tax-exempt entities, insurancecompanies, persons liable for alternative minimum tax, persons that actually orconstructively own or have owned 5% or more of our common shares, persons thathold common shares as part of a straddle or a hedge, constructive sale,synthetic security, conversion or other integrated transaction, partnershipsand other pass-through entities, persons whose functional currency is not theU.S. dollar, financial institutions, and expatriates of the United States. Inaddition, this summary does not address the tax consequences arising under thetax laws of any state, local or foreign jurisdiction.

 

If any entity that isclassified as a partnership for United States federal income tax purposes holdscommon shares, the tax treatment of its partners will generally depend upon thestatus of the partner and the activities of the partnership. Partnerships andother entities that are classified as partnerships for United States federalincome tax purposes and persons holding common shares through a partnership orother entity classified as a partnership for United States federal income taxpurposes are urged to consult their own tax advisors regarding the consequencesof the acquisition, ownership and disposition of our common shares.

 

This section is based onthe U.S. Tax Code, the Treasury regulations thereunder (the “TreasuryRegulations”), published United States Internal Revenue Service (“IRS”)rulings, administrative interpretations and judicial decisions, all ascurrently in effect. These authorities are subject to change, repeal orrevocation, possibly on a retroactive basis, which may result in United Statesfederal income tax consequences different from those discussed below.

 

For purposes of this discussion,you are a ‘‘U.S. Holder’’ if you are a beneficial owner of common shares andyou are for United States federal income tax purposes (i) an individualwho is a citizen or resident of the United States, (ii) a corporation orother entity taxable as a corporation created or organized under the laws ofthe United States or any political subdivision thereof, (iii) an estatewhose income is subject to United States federal income tax regardless of itssource, or (iv) a trust (a) if a United States court can exerciseprimary supervision over the trust’s administration and one or more UnitedStates persons are authorized to control all substantial decisions of the trustor (b) that has a valid election in effect under applicable TreasuryRegulations to be treated as a United States person.

 

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This summary does notdiscuss the United States federal income tax consequences to any beneficialowner of common shares that is not a U.S. Holder. Each U.S. Holder is urged toconsult with its own tax advisor regarding the tax consequences of theacquisition, ownership and disposition of common shares, including the effectsof United States federal, state, local, non-United States and other tax laws.

 

***Taxation of Distributionson Common Shares***

*** ***

Subject to the PFIC rules discussedbelow, the gross amount of any actual or deemed distribution by us (includingany Canadian taxes withheld therefrom) with respect to your common shares willbe included in your gross income as a dividend to the extent such distributionis paid out of our current or accumulated earnings and profits, as determinedunder United States federal income tax principles. A distribution in excess ofour current and accumulated earnings and profits will first be treated as atax-free return of capital to the extent of your adjusted tax basis in ourcommon shares and will be applied against and reduce such basis on adollar-for-dollar basis. Thereafter, to the extent that such distributionexceeds your adjusted tax basis in our common shares, the distribution will betreated as gain from the sale or exchange of such common shares. Dividends willnot be eligible for the dividends received deduction generally allowed toUnited States corporations in respect of dividends received from other UnitedStates corporations.

 

If you are anon-corporate U.S. Holder, including an individual, dividends you receive intaxable years beginning before January 1, 2011, may be subject to UnitedStates federal income tax at the lower rates applicable to capital gains,provided that (i) we are a “qualified foreign corporation” and (ii) certainholding period and other requirements are satisfied. A qualified foreigncorporation includes a non-United States corporation that is eligible for thebenefits of a comprehensive income tax treaty with the United States thatincludes an exchange of information program and that the United States TreasuryDepartment has determined to be satisfactory for purposes of the qualifieddividend provisions of the U.S. Tax Code. The United States Treasury Departmenthas determined that the Convention (as defined above) is satisfactory forpurposes of the qualified dividend provisions of the U.S. Tax Code. Inaddition, a foreign corporation not otherwise treated as a qualified foreigncorporation shall be so treated with regard to any dividend paid by suchcorporation if the stock with respect to which the dividend is paid isregularly tradable on an established securities market in the United States. Aqualified foreign corporation does not include a non-United States corporationthat is a PFIC for the taxable year in which a dividend is paid or that was aPFIC for the preceding taxable year. Accordingly, dividends on the commonshares will be eligible for these lower rates of taxation provided that (i) weare not a PFIC for the taxable year the dividend is paid or for the precedingtaxable year, (ii) we are eligible for the benefits of the Convention orour common shares are readily tradable on an established securities market inthe United States, and (iii) you satisfy certain holding period and otherrequirements. You should consult your own tax advisors regarding theapplication of these rules.

 

Any tax withheld underCanadian law with respect to distributions on our common shares at a rate notexceeding the rate provided in the Convention may, subject to a number ofcomplex limitations, be claimed as a foreign tax credit against your U.S.federal income tax liability or may be claimed as a deduction for U.S. federalincome tax purposes. The limitation on foreign taxes eligible for credit iscalculated separately with respect to specific classes of income. For thispurpose, dividends distributed with respect to our common shares will beforeign source income and generally will constitute ‘‘passive category income’’or, in the case of certain U.S. Holders, ‘‘general category income.” The rules relatingto United States foreign tax credits are complex and the availability of aforeign tax credit depends on numerous factors. You should consult your own taxadvisors concerning the application of the United States foreign tax credit rules toyour particular situation.

 

The gross amount ofdistributions paid in Canadian dollars will be included by each U.S. Holder ingross income in a U.S. dollar amount calculated by reference to the exchangerate in effect on the day the distributions are paid, regardless of whether thepayment is in fact converted into U.S. dollars on such date. If you convertsuch Canadian dollars into U.S. dollars on the date of the payment, you shouldnot be required to recognize any foreign currency gain or loss with respect tothe receipt of the Canadian dollar distributions. If instead you convert suchCanadian dollars into U.S. dollars at a later date, any currency gain or lossrealized from the conversion of the Canadian dollars will be treated as U.S.source ordinary income or loss.

 

***Taxation ofDispositions of Common Shares***

*** ***

Subject to the PFIC rules discussedbelow, upon a sale or other taxable disposition of common shares, you generallywill recognize capital gain or loss for United States federal income taxpurposes equal to the difference, if any, between the amount that you realizeand your adjusted tax basis in your common shares. Your adjusted tax basis inour common shares generally will be the cost to you of such shares, asdetermined under United States federal income tax principles. For taxable yearsbeginning before January 1, 2011, capital gain of a non-corporate U.S.Holder, including an individual, generally will be taxed at a maximum rate of15% if the property has been held for more than one year. The deductibility ofcapital losses is subject to limitations. The gain or loss generally will begain or loss from sources within the United States for United States foreigntax credit limitation purposes.

 

If a U.S. Holder receivesany Canadian dollars on the sale or other taxable disposition of our commonshares, such U.S. Holder may recognize ordinary income or loss as a result ofcurrency fluctuations between the date of the sale or other taxable dispositionof our common shares and the date the sale proceeds are converted into U.S.dollars.

 

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*** ***

***Passive ForeignInvestment Company Considerations***

*** ***

Special, generallyadverse, United States federal income tax rules apply to United Statespersons owning shares of a PFIC (as defined above). A non-United Statescorporation will be classified as a PFIC for United States federal income taxpurposes in any taxable year in which, after applying relevant look-through rules withrespect to the income and assets of subsidiaries, either at least 75% of itsgross income is ‘‘passive income,’’ or on average at least 50% of the grossvalue of its assets is attributable to assets that produce passive income orare held for the production of passive income. For this purpose, passive incomegenerally includes, among other things, dividends, interest, certain rents androyalties and gains from the disposition of property that produces such income.If we are classified as a PFIC for any taxable year in which a U.S. Holder hasheld our common shares, we may continue to be classified as a PFIC for anysubsequent taxable year in which the U.S. Holder continues to hold our commonshares, even if our income or assets would not cause us to be a PFIC in suchsubsequent taxable year.

 

Based on the structure ofthe Company, and the composition of our income and assets, the Company does notbelieve that it was a PFIC for the taxable year ended December 31, 2009 orits prior taxable year.  However, therecan be no assurance that the IRS will not successfully challenge our positionor that we will not become a PFIC in a future taxable year, as PFIC status isre-tested each year and depends on our assets and income in such year. If weare classified as a PFIC at any time that you hold our common shares, you maybe subject to an increased United States federal income tax liability and aspecial interest charge in respect of gain recognized on the sale or otherdisposition of your common shares and upon the receipt of certain ‘‘excessdistributions’’ (as defined in the U.S. Tax Code).

 

To mitigate the adverseconsequences of this tax regime, you may be eligible to make:

 

·                  a ‘‘qualified electing fund’’ election (aQEF election), as defined in the U.S. Tax Code, to be taxed currently on yourpro rata portion of our ordinary earnings and net capital gain, whether or notsuch earnings or gain is distributed in the form of dividends or otherwise, or

 

·                  a ‘‘mark-to-market’’ election and therebyagree for the year of the election and each subsequent tax year to recognizeordinary gain or loss (but only to the extent of prior ordinary gain) based onthe increase or decrease in market value for such taxable year. Your tax basisin our common shares would be adjusted to reflect any such income or loss.

 

In order for you to makea QEF election, we would have to provide certain information regarding your prorata share of our ordinary earnings and net capital gain. We currently do notintend to provide such information in the event we are classified as a PFIC. Inorder for you to make a mark-to-market election, our common shares must be ‘‘marketable.’’  We believe that our common shares shouldqualify as marketable stock (although there can be no assurance that this willcontinue to be the case).

 

You should consult yourown tax advisors concerning the United States federal income tax consequencesof holding our common shares if we were a PFIC in any taxable year and itspotential application to your particular situation.

 

***InformationReporting and Backup Withholding***

*** ***

If you are anon-corporate U.S. Holder, information reporting on IRS Form 1099 willapply with respect to:

 

·                  dividend payments or other taxabledistributions made to you within the United States, and

 

·                  the payment of proceeds to you from thesale of common shares effected at a United States office of a broker (and undercertain circumstances at a non-United States office of a broker),

 

unless you come withincertain categories of exempt recipients.

 

Additionally, backupwithholding may apply to such payments if you are a non-corporate U.S. Holderthat does not come within certain categories of exempt recipients and you:

 

·                  fail to provide an accurate taxpayeridentification number,

 

·                  are notified by the IRS that you havefailed to report all interest and dividends required to be shown on your UnitedStates federal income tax returns, or

 

·                  in certain circumstances, fail to complywith other applicable requirements of the backup withholding rules.

 

A U.S. Holder who doesnot provide a correct taxpayer identification number may be subject topenalties imposed by the IRS. If backup withholding applies to you, undercurrent law 28% of the gross amount of any payments to you with respect to ourcommon shares will be withheld and paid over to the IRS.

 

Any amounts withheld frompayments to you under the backup withholding rules will be allowed as acredit against your United States federal income tax liability and may entitleyou to a refund, provided the required information is timely furnished to theIRS. You should 

 

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consult your owntax advisor regarding the application of backup withholding in your particularsituation, the availability of an exemption from backup withholding, and theprocedure for obtaining such an exemption, if available.

 

**DIVIDENDS AND PAYING AGENTS**

** **

Not applicable.

 

**STATEMENT BY EXPERTS**

** **

Not applicable.

 

**DOCUMENTS ON DISPLAY**

** **

Any statement in this Form 20-Fabout any of our contracts or other documents is not necessarily complete. Ifthe contract or document is filed as an exhibit to the Form 20-F thecontract or document is deemed to modify the description contained in this Form 20-F.You must review the exhibits themselves for a complete description of thecontract or document.

 

You may review a copy ofour filings with the SEC, including exhibits and schedules filed with it, atthe SEC’s Public Reference Room, 100 F Street, N.E., Washington,D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information.In addition, the SEC maintains an Internet site at http://www.sec.gov thatcontains reports and other information regarding issues that file electronicallywith the SEC. These SEC filings are also available to the public fromcommercial document retrieval services.

 

We are required to filereports and other information with the SEC under the Exchange Act andregulations under that act. As a foreign private issuer, we are exempt from therules under the Exchange Act prescribing the form and content of proxystatements and our officers, directors and principal shareholders are exemptfrom the reporting and short swing profit recovery provisions contained in Section 16of the Exchange Act.

 

In addition, we arerequired to file documents required by Canadian securities laws electronicallywith Canadian securities regulatory authorities and these filings are availableon our SEDAR profile at www.sedar.com. Written requests for such documents should be directed to our CorporateSecretary at 5985 McLaughlin Road, Mississauga, Ontario, Canada L5R 1B8.

 

**SUBSIDIARY INFORMATION**

** **

Not applicable.

 

**ITEM 11.       QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

** **

For information regardingquantitative and qualitative disclosures about market risk, please see “Item 5.Operating and Financial Review and Prospects — Liquidity and Capital Resources.”

 

**ITEM 12.       DESCRIPTION OF SECURITIES OTHER THANEQUITY SECURITIES**

** **

Not applicable.

 

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**PART II**

** **

**ITEM 13.       DEFAULTS, DIVIDEND ARREARAGES ANDDELINQUENCIES**

** **

None.

 

**ITEM 14.       MATERIAL MODIFICATIONS TO THE RIGHTS OFSECURITY HOLDERS AND USE OF PROCEEDS**

** **

**MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS**

** **

**Share Consolidation**

** **

Shareholders approved aspecial resolution at the annual and special meeting of shareholders on May 13,2009 which gave authority to the Board of Directors to implement aconsolidation of our issued and outstanding common shares at any time prior to March 24,2010.  This special resolution gives our Board of Directors the authority,in its sole discretion, to select the exact consolidation ratio, provided that (i) theratio may be no smaller than one post-consolidation common share for every 10pre-consolidation common shares and no larger than one post-consolidationcommon share for every 25 pre-consolidation common shares, and (ii) thenumber of pre-consolidation common shares in the ratio must be a whole numberof common shares.

 

On February 8, 2010,we announced that we will implement a share consolidation of our issued andoutstanding common shares in order to comply with the Minimum Bid PriceRule.  The consolidation was effective asof March 12, 2010, and was implemented with a ratio of onepost-consolidation share for every 25 pre-consolidation shares (the “ShareConsolidation”).  The consolidationreduced the number of shares outstanding from approximately 105.0 million toapproximately 4.2 million.

 

Registered shareholdersof Hydrogenics received instructions by mail on how to obtain a new sharecertificate representing their consolidated common shares. No fractional shareswere issued as a result of the consolidation. If the consolidation resulted ina registered shareholder having a fractional interest of less than a wholeshare, such fractional interest was rounded down to the nearest whole number.Our common shares held through a broker, bank, trust company, nominee or otherfinancial intermediary were adjusted by that firm.

 

***Principal Effectsof the Share Consolidation***

*** ***

The Share Consolidationoccurred simultaneously for all of the common shares and the consolidationratio was the same for all of such common shares. The consolidation affected allshareholders uniformly. Except for any variances attributable to fractionalshares, the change in the number of issued and outstanding common shares thatresulted from the Share Consolidation caused no change in the capitalattributable to the common shares and did not materially affect anyshareholders’ percentage ownership in the Company, even though such ownershipwill be represented by a smaller number of common shares.

 

In addition, the ShareConsolidation did not affect any shareholder’s proportionate voting rights.Each common share outstanding after the Share Consolidation is entitled to onevote and is fully paid and non-assessable.

 

The principal effects ofthe consolidation include the following:

 

·                  Reduction in number of common sharesoutstanding — the number of common shares issued and outstanding was reducedfrom approximately 105,049,666 common shares pre-consolidation to 4,201,983common shares immediately after consolidation; and

 

·                  Reduction in number of common sharesreserved for issuance under the stock option plan — the number of common sharesreserved for issuance under our stock option plan was reduced proportionatelybased on the consolidation ratio selected by our Board of Directors.

 

Earnings per common sharehas been proportionately affected as a result of the Share Consolidation.

 

**Amendments to ShareIncentive Plans**

** **

On June 22, 2009,Old Hydrogenics’ Board of Directors approved certain administrative amendmentsto its stock option plan, RSU Plan and DSU Plan.  Such amended plans are currently in force anddid not require approval of the shareholders of Old Hydrogenics because (i) inthe case of its RSU Plan and its DSU Plan, applicable securities laws do notrequire shareholder approval as the plans do not provide for the issuance ofsecurities from treasury, and (ii) in the case of the stock option plan,the amendments are of an administrative and technical nature and are permittedto be made without shareholder approval under the express terms of theplan.  See “Item 16.  Directors, Senior 

 

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Management andEmployees — Compensation” for a description of these plans.  In October 2009, we adopted OldHydrogenics’ stock option plan, RSU Plan and DSU Plan.

 

**2008 Base ShelfProspectus**

** **

On June 30, 2009, wewithdrew our registration statement on Form F-10 filed with the U.S.Securities and Exchange Commission as we no longer maintain the aggregatemarket value of the public float of our outstanding Shares to utilize theregistration statement on Form F-10 in the U.S.  On October 26, 2009, we also withdrewour base shelf prospectus dated September 23, 2008 filed with certainprovincial securities authorities in Canada prior to completion of and as aresult of the APIF Transaction described under “Item 4.  Information on the Company — History andDevelopment of Hydrogenics Coporation.”

 

***2009 Shelf Prospectus***

** **

***On January 4, 2010, we announced that we have filed afinal short form base shelf prospectus with certain Canadian securitiesregulatory authorities, and a corresponding registration statement on Form F-3***(File No. 333-162998)***hasbeen declared effective by the U.S. Securities and Exchange Commission on December 31,2009.  These filings were intended torestore our flexibility to access the capital markets that was available to uswith our prior shelf prospectus and corresponding registration statement on Form F-10,which were withdrawn in 2009.***

 

Pursuant to the Form F-3,we may offer up to $16 million of debt, equity or other securities over a25-month period from December 31, 2009, provided that we cannot issuesecurities with a value exceeding one-third of our public float (i.e., theaggregate market value of our outstanding common shares held by non-affiliates)in any 12-month period.  As a result ofour registered direct offering in January 2010, which is described belowunder “***RegisteredDirect Offering of Common Shares and Warrants***,” wemay not issue any additional securities pursuant to the Form F-3 until January 14,2011 based on our current public float unless there was a significant increasein the market price of our common shares. In addition, even if the market price of our common shares were toincrease significantly, we could not in any event issue more than $4.5 millionof additional securities pursuant to our existing shelf prospectus.  See “Item 3. Key Information — Risk Factors — Risk Factors Relatedto Our Financial Condition — If we are unsuccessful in increasing our revenues and raisingadditional funding, we may possibly cease to continue as we currently do.”

 

***Except as otherwise may be disclosed in a prospectussupplement relating to a particular offering, Hydrogenics currently intends touse the net proceeds received to fund current operations and potential futuregrowth opportunities.  ShouldHydrogenics, offer any securities, it will make a prospectus supplementavailable that will include the specific terms of the securities being offered.***

 

***Hydrogenics is not required to offer or sell all or anyportion of the securities in the future and will only do so if marketconditions warrant.***

 

***Registered Direct Offering of CommonShares and Warrants***

** **

On January 11, 2010,we announced that we will sell common shares and warrants in a registereddirect offering with two institutional investors, resulting in gross proceedsof $5 million, before placement agent’s fees and other offering expenses.  This offering closed on January 14,2010.

 

Under the terms of thetransaction, Hydrogenics sold 12,500,000 units of the Company (“units”) at a price of $0.40 per unit,before reflecting the share consolidation which took place on March 12,2010. Each unit consists of (i) one common share in the capital of theCompany, (ii) 0.47871088 of one series A warrant expiring on the datewhich is five years from the date of its issue (a “series A warrant”) and (iii) 0.52128912 of one series Bwarrant expiring on the date which is five years from the “initial exercisedate” which is six months and one day from the date of its issue (a “series B warrant” and together withthe series A purchaser warrants, the “warrants”).Each warrant entitles the holder to purchase one common share for $0.52(subject to certain adjustments).  Theseries A warrants are immediately exercisable and the series B warrants are notexercisable until six months and one day after issue.  As of March 25, 2010, there are 239,355series A warrants and 260,644 series B warrants issued and outstanding.  Each of the warrants contains “full-ratchet”anti-dilution protection as to the exercise price but not the number of sharesissuable thereunder.

 

The securities describedabove were offered by us pursuant to the Company’s shelf prospectus dated December 31,2009, which is contained in the Company’s Registration Statement on Form F-3(described above under “2009 Shelf Prospectus”), and the related prospectussupplement no. 1 to the shelf prospectus, which was filed with U.S. Securitiesand Exchange Commission on January 12, 2010.

 

We intend to use the netproceeds from this offering for general working capital purposes.

 

As a result of thisoffering, there are certain restrictions that may affect our ability to obtainfinancing.  The common shares andwarrants issued pursuant to this offering have a value of $11.5 million, whichis significantly greater than one-third of our current public float.  

 

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As described aboveunder “***2009Shelf Prospectus,”***we may offer up to $16 millionof debt, equity or other securities over a 25-month period from December 31,2009, provided that we cannot issue securities with a value exceeding one-thirdof our public float (i.e., the aggregate market value of our outstanding commonshares held by non-affiliates) in any 12-month period.  As a result, we may not issue any additionalsecurities pursuant to the Form F-3 until January 14, 2011 based onour current public float unless there was a significant increase in the marketprice of our common shares.  In addition,even if the market price of our common shares were to increase significantly,we could not in any event issue more than $4.5 million of additional securitiespursuant to our existing shelf prospectus.

 

In addition, there areother limits on our ability to issue securities to raise additional funding.The Nasdaq generally requires an issuer to obtain shareholder approval prior tothe issuance of common shares or securities convertible into or exercisable forcommon shares, other than in a public offering, equal to 20% or more of thecommon shares outstanding prior to such issuance in one or an integrated seriesof offerings if such securities are issued at a price below market value.  In light of our registered direct offering inJanuary 2010, we may be required to obtain shareholder approval forcertain issuances of our securities.

 

Furthermore, thesecurities purchase agreement that we entered into with the two institutionalinvestors in connection with the registered direct offering contains certainrestrictions that may affect our ability to obtain financing.  The agreement requires us to seek shareholderapproval to (i) to allow an adjustment to the exercise price of the seriesB warrants below the $12.00 floor price in certain circumstances and (ii) acknowledgingthat, as a result of such resolutions, the aggregate number of our commonshares deemed to be have been issued in connection with the Offering exceeds acertain shareholder approval threshold pursuant to the rules of the NasdaqGlobal Market.  Until such shareholderapproval is obtained, the terms of the series B warrants dictate that noadjustment to the exercise price of the series B warrants shall cause theexercise price to be less than the Floor Price (as adjusted for any dividend,share split, share combination, reclassification or similar transaction).  If we do not obtain shareholder approval, thesecurities purchase agreement requires us to hold an additional shareholdermeeting in each semi-annual period thereafter until shareholder approval isobtained or until shareholder approval is no longer required under the rules andregulations of the Nasdaq Global Market or is no longer required to eliminaterestrictions on adjustments to the exercise price below the $12.00 floor priceset forth in the series B warrants.  Inaddition, until shareholder approval is obtained, with certain exceptions, wemay not, directly or indirectly, issue or sell, or in accordance with the termsof the warrants, be deemed to have issued or sold, any common shares forconsideration per common share less than the floor price at any time while anyof the warrants are outstanding without the prior written consent of eachinvestor, which consent may be granted or withheld in each investor’s solediscretion.  Until shareholder approvalis obtained, we are not able to issue, or be deemed to have issued, certainother securities (including options or shares of common stock to directors,officers or employees of Hydrogenics pursuant to an employee benefit plan,certain convertible securities or unregistered common shares to a person whoenters into a strategic alliance with us) for less than the fair market valueof the common shares at the time such securities are issued or are deemed to beissued.  See the risk factor “Item3.  Key Information — Risk Factors — RiskFactors Related to Our Financial Condition — We require shareholder approval to allow anadjustment to the exercise price of our series B warrants, the failure of whichcould materially adversely affect our flexibility in obtaining necessaryfinancing and our financial condition” for additional information regardingsuch restrictions.

 

In addition, under thesecurities purchase agreement, we agreed that until April 15, 2010,neither the Company nor any of its subsidiaries shall directly or indirectlyissue, offer, sell, grant any option to purchase, or otherwise dispose of (orannounce any such action with respect to) any of their respective equity orequity equivalent securities, including, without limitation, any debt,preferred stock, rights, options, warrants or other instrument that isconvertible into or exchangeable for capital stock and other securities of theCompany.  See “Item 3.  Key Information — Risk Factors — RiskFactors Related to Our Financial Condition — If we are unsuccessful in increasing our revenuesand raising additional funding, we may possibly cease to continue as wecurrently do” for additional information regarding restrictions on our abilityraise additional funding.

 

We are currently involvedin litigation with one of the institutional investors.  See “Item 3. Key Information — RiskFactors — Risk Factors Related to Our Financial Condition — We are currently involved in litigationwith Alpha Capital Anstalt, the outcome of which could adversely affect ourfinancial condition.”

 

**USE OF PROCEEDS**

** **

Not applicable.

 

**ITEM 15.       CONTROLS AND PROCEDURES**

** **

**EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES**

** **

As of the end of theperiod covered by this Annual Report on Form 20-F, an evaluation was carriedout by our management, under the supervision, and with the participation, ofour Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”),of the 

 

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effectiveness ofour disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)). Based on that evaluation, the CEO and CFO concluded that suchdisclosure controls and procedures were effective and designed to ensure thatmaterial information relating to us and our consolidated subsidiaries would bemade known to them by others within those entities.

 

**EVALUATION OF INTERNAL CONTROLS**

** **

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. Internal control over financial reporting is a processdesigned by, or under the supervision of, the President and CEO and the CFO andeffected by the Board of Directors, management and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles.

 

Due to its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of the effectivenessof internal control over financial reporting to future periods are subject tothe risk that the controls may become inadequate because of changes inconditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

 

Management assessed theeffectiveness of the Company’s internal control over financial reporting as at December 31,2009, based on the criteria set forth in Internal Control — IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Based on this assessment,management believes that, as at December 31, 2008, the Company’s internalcontrol over financial reporting is effective. Also, management determined thatthere were no material weaknesses in the Company’s internal control overfinancial reporting as at December 31, 2009.

 

**LIMITATIONS OF CONTROLS AND PROCEDURES**

** **

Our management, includingour CEO and CFO, believe that any disclosure controls and procedures or internalcontrols over financial reporting, no matter how well conceived and operated,can provide only reasonable, not absolute, assurance that the objectives of thecontrol system are met. Further, the design of a control system must reflectthe fact that there are resource constraints, and the benefits of controls mustbe considered relative to their costs. Because of the inherent limitations inall control systems, they cannot provide absolute assurance that all controlissues and instances of fraud, if any, within us have been prevented ordetected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of asimple error or mistake. Additionally, controls can be circumvented by theindividual acts of some persons, by collusion of two or more people, or byunauthorized override of the control. The design of any systems of controls alsois based in part upon certain assumptions about the likelihood of futureevents, and there can be no assurance that any design will succeed in achievingits stated goals under all potential future conditions. Accordingly, because ofthe inherent limitations in a cost effective control system, misstatements dueto error or fraud may occur and not be detected.

 

**REPORTS ON INTERNAL CONTROL OVER FINANCIAL REPORTING**

** **

Our management’s Reporton Internal Control Over Financial Reporting can be found on page F-3 inthis form.  Our independent auditors,PricewaterhouseCoopers LLP, a registered public accounting firm has audited theaccompanying annual consolidated financial statements for the year ended December 31,2009 and our internal control over financial reporting as at December 31,2009.  Their attestation report can befound beginning on page F-4 of our consolidated financial statements.

 

**CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING**

** **

During the year ended December 31,2009, there were no changes in our internal control over financial reportingthat have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

**ITEM 16A.    AUDIT COMMITTEE FINANCIAL EXPERT**

** **

**IDENTIFICATION OF THE AUDIT COMMITTEE**

** **

We have aseparately-designated audit committee established in accordance with section3(a)(58)(A) of the Securities Exchange Act of 1934.  Our audit committee is comprised ofindependent members: Norman M. Seagram (Chair), Douglas S. Alexander andMichael Cardiff.

 

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** **

**AUDIT COMMITTEE FINANCIAL EXPERT**

** **

Our Board of Directorshas determined that it has at least one audit committee financial expertserving on its audit committee. Douglas Alexander has been determined to be anaudit committee financial expert and is independent, as that term is defined byNasdaq’s listing standards.  The U.S.Securities and Exchange Commission has indicated that the designation of thisindividual as an audit committee financial expert does not make him an “expert”for any purpose, or impose any duties, obligations or liabilities that aregreater than those imposed on members of the audit committee and board ofdirectors who do not carry this designation or affect the duties, obligationsor liabilities of any other member of the audit committee or board ofdirectors.

 

**ITEM 16B.    CODE OF ETHICS**

** **

**CODE OF ETHICS**

** **

We have adopted a writtenCode of Business Conduct and Ethics (the “Code”) which governs the behavior ofour directors, officers, and employees. The Code also includes provisionsrequired by the *Sarbanes-Oxley Act of 2002*that are applicable to our CEO, CFO and other senior financial officers. TheBoard of Directors, through the Human Resources and Corporate GovernanceCommittee, oversees compliance with the Code. Any amendments to, or waiversfrom, any provisions of the Code will be publicly disclosed.  The Code is also accessible on our investorrelations web page at www.hydrogenics.com.

 

**ITEM 16C.    PRINCIPAL ACCOUNTANT FEES AND SERVICES**

** **

**PRINCIPAL ACCOUNTANTS FEES AND SERVICES**

** **

The followingtable sets forth the total remuneration that was paid by us and oursubsidiaries to our independent accountants, PricewaterhouseCoopers LLP (“PwC”),in each of the year ended December 31, 2009 and 2008:

 
| ** **         | ** ** | **2009**                         | ** ** | **2008** | ** ** |
|--------------------|------------|----------------------------------|------------|----------|------------|
| ** **         | ** ** | **Cdn. $ (unaudited)** | ** ** |
| Audit  fees        |       | 519,940                          |       | 724,548  |       |
| Audit-related fees |       | 4,725                            |       | 8,904    |       |
| Tax fees           |       | 42,821                           |       | 90,535   |       |
| All other fees     |       | 282,626                          |       | 64,425   |       |
| Total              |       | 850,112                          |       | 888,412  |       |

 

**Audit Fees**

** **

In 2009 and 2008, PwCcharged us audit fees totaling, Cdn. $519,940 and Cdn. $724,548, respectively.In 2009 and 2008, these fees included professional services rendered for thereview of interim financial statements, statutory audits of annual financialstatements, consultations about financial and reporting standards and otherregulatory audits and filings, including Sarbanes-Oxley compliance.

 

**Audit-Related Fees**

** **

In 2009 and 2008, PwCcharged us audit-related fees of Cdn. $4,725 and Cdn. $8,904,respectively.  In 2009 and 2008, thesefees included professional services that reasonably relate to the aboveservices and Canadian Public Accounting Board Fees.

 

**Tax Fees**

** **

In 2009 and 2008, PwCcharged us tax fees of Cdn. $42,821 and Cdn. $90,535 respectively.  In 2009 and 2008, these fees includedprofessional services for tax compliance, tax advice, tax planning and advisoryservices relating to the preparation of corporate tax returns.

 

**All Other Fees**

** **

In 2009 and 2008, PwCcharged us other fees of Cdn. $282,626 and Cdn. $64,425, respectively. In 2009,these fees related to advisory services related to assistance with thetransaction with Algonquin Power Income Fund, the implementation of IFRS,assistance with the 

 

80

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preparation of our baseshelf prospectus filed in January, 2010 and other regulatory matters. In 2008,these fees related to assistance with the preparation of our base shelfprospectus filed in September, 2008 as well advisory services related to theimplementation of IFRS and other regulatory matters.

 

**PRE-APPROVAL POLICIES**

** **

Our audit committeeapproved all audit and non-audit services provided to us and to oursubsidiaries during the periods listed above. Our audit committee has adopted pre-approval policies and procedures toensure that all services provided by the auditor are approved in advance by theaudit committee or are approved by the chair of the audit committee andsubsequently reported to the committee as a whole at the following meeting ofthe committee, all in accordance with the external auditors’ pre-approvalpolicy.

 

**ITEM 16D.    EXEMPTIONS FROM THE LISTING STANDARDS FORAUDIT COMMITTEES**

** **

Not applicable.

 

**ITEM 16E.     PURCHASES OF EQUITY SECURITIES BY THEISSUER AND AFFILIATED PURCHASERS**

** **

None.

 

**ITEM 16F.     CHANGE IN REGISTRANT’S CERTIFYINGACCOUNTANT**

** **

None.

 

**ITEM 16G.    CORPORATE GOVERNANCE**

** **

We are a foreign privateissuer and our common shares are listed on the Nasdaq.  Nasdaq Rule 5615(a)(3) permits aforeign private issuer to follow its home country practice in lieu of therequirements of the Rule 5600 Series, provided, however, that such anissuer shall: comply with Rules 5625 (regarding notification of materialnoncompliance), 5640 (regarding voting rights), have an audit committee thatsatisfies Rule 5605(c)(3), and ensure that such audit committee’s membersmeet the independence requirements in Rule 5605(c)(2)(A)(ii). We areintending not to follow Rule 5620(c) (shareholder quorum) and Rule 5605(b) (majorityindependent director requirement) but instead to follow the practice describedbelow.

 

***ShareholderMeeting Quorum Requirements***.  The Nasdaq minimum quorum requirement under Rule 5620(c) fora shareholder meeting is 33-1/3% of the outstanding shares of common stock. Inaddition, a company listed on Nasdaq is required to state its quorumrequirement in its By-Laws. On March 7, 2008, our Board of Directorsapproved an amendment to our By-Laws to provide that the quorum requirement fora meeting of our shareholders is two persons present in person or representedby proxy holding in the aggregate not less than 25% of the outstanding commonshares entitled to vote at the meeting. This amendment was approved by our shareholders at an annual and specialmeeting of shareholders on May 6, 2008. We believe the foregoing isconsistent with Canadian public companies and consistent with corporategovernance best practices in Canada.

 

***IndependentDirector Requirements***. Nasdaq Rule 5605(b) requires a majority of independentdirectors on the board of directors and that the independent directors conveneregularly scheduled meetings at least twice a year at which only independentdirectors are present.  The CBCA requiresa “distributing corporation” to have at least 2 directors who are not officersand employees of the corporation or its affiliates.  As a result of the resignation of V. JamesSardo on November 30, 2009, there are now six members of our Board ratherthan seven members.  Half of the Company’sdirectors are “independent.”  The Board’sdetermination as to each director’s independence is made with reference todefinitions under applicable securities laws and stock exchangeregulations.  In order to facilitate openand candid discussions among independent directors, independent directors maymeet at the end of each regularly scheduled Board meeting, in an *in camera* session without the non-independent members.  From time to time, the independent directorswill have a special meeting with only independent directors.  In addition, we believe the fact that ourAudit Committee and Human Resources and Corporate Governance Committee are bothcomposed entirely of independent directors facilitates the Board’s exercise ofindependent judgment.  As described under“Item 6.  Directors, Senior Managementand Employees — Board Practices — Human Resources and Corporate GovernanceCommittee — Nomination of Directors and Compensation,” the Human Resources andCorporate Governance Committee has oversight over executive compensation anddirector nominations.

 

81

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** **

**PART III**

** **

**ITEM 17.       FINANCIAL STATEMENTS**

** **

We have responded toItem 18 in lieu of responding to this item.

 

**ITEM 18.       FINANCIAL STATEMENTS**

** **

The following financialstatements are filed as part of this annual report on Form 20-F.

 
| ** **                                                                 | ** ** | **Page** |
|----------------------------------------------------------------------------|------------|----------|
|                                                                       |       |     |
| Index  to consolidated financial statements                                |       | F-1      |
|                                                                       |       |     |
| Management’s Responsibility for Financial Reporting                   |       | F-2      |
|                                                                       |       |     |
| Management’s Report on Internal Control Over Financial  Reporting     |       | F-3      |
|                                                                       |       |     |
| Independent  Auditors’ Report                                         |       | F-4      |
|                                                                       |       |     |
| Comments  by Independent Auditors on Canada — US Reporting Difference |       | F-6      |
|                                                                       |       |     |
| Consolidated  Balance Sheets                                               |       | F-7      |
|                                                                       |       |     |
| Consolidated  Statements of Operations                                     |       | F-8      |
|                                                                       |       |     |
| Consolidated  Statements of Cash Flows                                     |       | F-9      |
|                                                                       |       |     |
| Consolidated  Statements of Shareholders’ Equity                      |       | F-10     |
|                                                                       |       |     |
| Notes  to Consolidated Financial Statements                                |       | F-11     |

 

82

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**HYDROGENICSCORPORATION**

 

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                                                 | **Page**   |
|----------------------------------------------------------------------------|------------|
| ** **                                                                 | ** ** |
| Index  to consolidated financial statements                                | F-1        |
|                                                                       |       |
| Management’s  Responsibility for Financial Reporting                  | F-2        |
|                                                                       |       |
| Management’s  Report on Internal Control Over Financial Reporting     | F-3        |
|                                                                       |       |
| Independent  Auditors’ Report                                         | F-4        |
|                                                                       |       |
| Comments  by Independent Auditors on Canada — US Reporting Difference | F-6        |
|                                                                       |       |
| Consolidated  Balance Sheets                                               | F-7        |
|                                                                       |       |
| Consolidated  Statements of Operations                                     | F-8        |
|                                                                       |       |
| Consolidated  Statements of Cash Flows                                     | F-9        |
|                                                                       |       |
| Consolidated  Statements of Shareholders’ Equity                      | F-10       |
|                                                                       |       |
| Notes  to Consolidated Financial Statements                                | F-11       |

 

F-1

----

 

**Management’s Responsibility for Financial Reporting**

 

Management’s Discussion and Analysis of Financial Condition and Resultsof Operations and the Consolidated Financial Statements have been prepared bymanagement and approved by the Board of Directors of the Company. TheConsolidated Financial Statements were prepared in accordance with Canadiangenerally accepted accounting principles and, where appropriate, reflectmanagement’s best estimates and judgments. Where alternative accounting methodsexist, management has chosen those methods considered most appropriate in thecircumstances.  Management is responsiblefor the accuracy, integrity and objectivity of the Consolidated FinancialStatements within reasonable limits of materiality, and for maintaining asystem of internal controls over financial reporting as described in “Management’sReport on Internal Control Over Financial Reporting”. Management is alsoresponsible for the preparation and presentation of other financial informationincluded in the Annual Report and its consistency with the ConsolidatedFinancial Statements.

 

The Audit Committee, which is appointed annually by the Board ofDirectors and comprised exclusively of independent directors, meets withmanagement as well as with the independent auditors to satisfy itself thatmanagement is properly discharging its financial reporting responsibilities andto review the Consolidated Financial Statements and the independent auditors’report.

 

The Audit Committee reports its findings to the Board of Directors forconsideration in approving the Consolidated Financial Statements forpresentation to the shareholders.

 

The Audit Committee considers, for review by the Board of Directors andapproval by the shareholders, the engagement or reappointment of theindependent auditors.

 

The Consolidated Financial Statements have been independently audited byPricewaterhouseCoopers LLP, Chartered Accountants, on behalf of theshareholders, in accordance with Canadian generally accepted auditing standardsand, with respect to the Consolidated Financial Statements for the years ended December 31,2009, December 31, 2008 and December 31, 2007 in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Their report outlines the nature of their audit and expresses their opinion onthe Consolidated Financial Statements of the Company. In addition, our auditorshave issued an attestation report on management’s assessment of the Company’sinternal controls over financial reporting as of December 31, 2009.  PricewaterhouseCoopers LLP has direct accessto the Audit Committee of the Board of Directors.

 
|                                        | ** ** |                              |
|----------------------------------------|------------|------------------------------|
| **Daryl Wilson**                       | ** ** | **Lawrence Davis**           |
| President  and Chief Executive Officer |       | **Chief  Financial Officer** |
|                                   |       |                         |
|                                   |       |                         |
| March 25,  2010                   |       |                         |
| Mississauga, Ontario                   |       |                         |

 

*2009 Consolidated FinancialStatements*

 

F-2

----

 

**Management’s Report on Internal Control Over FinancialReporting**

 

Management of Hydrogenics Corporation (the “Corporation”) isresponsible for establishing and maintaining adequate internal control overfinancial reporting.  Internal controlover financial reporting is a process designed by, or under the supervision of,the President and Chief Executive Officer and the Chief Financial Officer andis effected by the Board of Directors, management and other personnel toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith Canadian generally accepted accounting principles.  It includes those policies and proceduresthat:

 

·                  provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the Corporation’s assets that could have a material effect on theCorporation’s financial statements.

 

·                  pertain to the maintenance of records thataccurately and fairly reflect, in reasonable detail, the transactions relatedto and dispositions of the Corporation’s assets;

 

·                  provide reasonable assurance thattransactions are recorded as necessary to permit preparation of consolidatedfinancial statements in accordance with Canadian generally accepted accountingprinciples, and that the Corporation’s receipts and expenditures are made onlyin accordance with authorizations of management and the Corporation’sdirectors; and, due to its inherent limitations, internal control overfinancial reporting may not prevent or detect misstatements. Also, projectionsof any evaluation of the effectiveness of internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of the Corporation’s internalcontrol over financial reporting as at December 31, 2009, based on thecriteria set forth in Internal Control — Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”).Based on this assessment, management concluded that, as at December 31,2009, the Corporation’s internal control over financial reporting waseffective.

 

Hydrogenics’ internal control over financial reporting as at December 31,2009, has been audited by PricewaterhouseCoopers LLP, independent auditors, whoalso audited the Corporation’s consolidated financial statements for the yearended December 31, 2009.  As statedin the Independent Auditors’ Report to the Shareholders of the Corporation,PricewaterhouseCoopers LLP, express an unqualified opinion on the effectivenessof the Corporation’s internal control over financial reporting.

 
|                                        | ** ** |                          |
|----------------------------------------|------------|--------------------------|
| **Daryl Wilson**                       | ** ** | **Lawrence Davis**       |
| President  and Chief Executive Officer |       | Chief  Financial Officer |
|                                   |       |                     |
|                                   |       |                     |
| March 25,  2010                   |       |                     |
| Mississauga,  Ontario                  |       |                     |

 

F-3

----

 

**Independent Auditors’ Report**

 

Tothe Shareholders of Hydrogenics Corporation

 

Wehave completed integrated audits of Hydrogenics Corporation’s 2009, 2008 and2007 consolidated financial statements and of its internal control overfinancial reporting as at December 31, 2009.  Our opinions, based on our audits, arepresented below.

 

**Consolidated financial statements**

 

Wehave audited the accompanying consolidated balance sheets of HydrogenicsCorporation as at December 31, 2009 and December 31, 2008,consolidated statements of operations, shareholders’ equity and cash flows foreach of the years in the three year period ended December 31, 2009.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

Weconducted our audits of the Company’s financial statements as at December 31,2009 and for each of the years in the three year period then ended inaccordance with Canadian generally accepted auditing standards and thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform an audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement.  An audit of financialstatements includes examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements. A financial statement audit also includes assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of the Company as at December 31,2009 and December 31, 2008 and the results of its operations and its cashflows for each of the years in the three year period ended December 31,2009 in accordance with Canadian generally accepted accounting principles.

 

**Internal control over financial reporting**

 

Wehave also audited Hydrogenics Corporation’s internal control over financialreporting as at December 31, 2009, based on criteria established in *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO).  The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting, included in the accompanying report entitled Management’sResponsibility for Financial Reporting. Our responsibility is to express an opinion on the Company’s internalcontrol over financial reporting based on our audit.

 

We conducted our audit of internal control over financial reporting inaccordance with the standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects.  An audit of internalcontrol over financial reporting includes obtaining an understanding ofinternal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectivenessof internal 

 

F-4

----

 

control based on the assessed risk, and performing such otherprocedures as we consider necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Inour opinion, the Company maintained, in all material respects, effectiveinternal control over financial reporting as at December 31, 2009 based oncriteria established in Internal Control — Integrated Framework issued by theCOSO.

 

 

 

CharteredAccountants, Licensed Public Accountants

Toronto,Ontario

March 25,2010

 

F-5

----

 

**Comments by Independent Auditors on Canada — US ReportingDifference**

 

Inthe United States, reporting standards for auditors require the addition of anexplanatory paragraph (following the opinion paragraph) when the financialstatements are affected by conditions and events that cast substantial doubt onthe company’s ability to continue as a going concern, such as those describedin Note 1 to the 2009 consolidated financial statements of HydrogenicsCorporation. Our report to the shareholders on the consolidated financialstatements dated March 25, 2010 is expressed in accordance with Canadianreporting standards which do not permit a reference to such events andconditions in the auditors’ report when these are adequately disclosed in thefinancial statements.

 

 

 

CharteredAccountants, Licensed Public Accountants

Toronto,Ontario

March 25,2010

 

F-6

----

 

HydrogenicsCorporation

ConsolidatedBalance Sheets

(inthousands of US dollars)

 
| ** **                                              | ** ** | **December 31********2009** | ** ** | **December 31********2008** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
|                                                    |       |                             |       |                             |       |
| **Assets**                                              |       |                             |       |                             |       |
| ** **                                              |       |                             |       |                             |       |
| **Current assets**                                      |       |                             |       |                             |       |
| Cash and cash equivalents                               |       | $                                | 9,159      |                             | $          | 21,601 |   |
| Restricted cash                                         |       | 1,603                            |       | 1,130                            |       |
| Accounts receivable (note 6)                            |       | 3,685                            |       | 3,974                            |       |
| Grants receivable                                       |       | 490                              |       | 505                              |       |
| Inventories (note 7)                                    |       | 11,746                           |       | 10,101                           |       |
| Prepaid expenses                                        |       | 1,270                            |       | 1,161                            |       |
|                                                    |       | 27,953                           |       | 38,472                           |       |
| ** **                                              |       |                             |       |                             |       |
| Restricted cash                                         |       | 240                              |       | —                           |       |
| Property, plant and equipment (note 8)                  |       | 3,169                            |       | 4,082                            |       |
| Goodwill                                                |       | 5,446                            |       | 5,025                            |       |
|                                                    |       | $                                | 36,808     |                             | $          | 47,579 |   |
| ** **                                              |       |                             |       |                             |       |
| **Liabilities**                                         |       |                             |       |                             |       |
| ** **                                              |       |                             |       |                             |       |
| **Current liabilities**                                 |       |                             |       |                             |       |
| Accounts payable and accrued liabilities (note 9)       |       | $                                | 14,782     |                             | $          | 17,298 |   |
| Unearned revenue                                        |       | 4,546                            |       | 4,785                            |       |
|                                                    |       | 19,328                           |       | 22,083                           |       |
| ** **                                              |       |                             |       |                             |       |
| **Deferred research and development  grants**           |       | —                           |       | 13                               |       |
|                                                    |       | 19,328                           |       | 22,096                           |       |
| ** **                                              |       |                             |       |                             |       |
| **Shareholders’ Equity**                           |       |                             |       |                             |       |
| Common shares (nominal par value)                       |       | 307,038                          |       | 307,000                          |       |
| Contributed surplus                                     |       | 16,713                           |       | 16,300                           |       |
| Deficit                                                 |       | (300,795                         | )          | (291,420                         | )          |
| Accumulated other comprehensive loss                    |       | (5,476                           | )          | (6,397                           | )          |
| Total deficit and accumulated other comprehensive  loss |       | (306,271                         | )          | (297,817                         | )          |
|                                                    |       | 17,480                           |       | 25,483                           |       |
|                                                    |       | $                                | 36,808     |                             | $          | 47,579 |   |

 

Going concern (note 1)

Contingencies, guarantees and commitments (notes 12 and 13)

 
|                   |   |                |
|-------------------|--------|----------------|
| Douglas Alexander |   | Norman Seagram |
| Chairman          |   | Director       |

 

Theaccompanying notes form an integral part of these Consolidated FinancialStatements.

 

F-7

----

 

HydrogenicsCorporation

ConsolidatedStatements of Operations

(inthousands of US dollars, except for share and per share amounts)

 
| ** **                                                      | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**    | ** ** |
|-----------------------------------------------------------------|------------|-----------|------------|-----------|------------|-------------|------------|
| **Revenues**                                                    |       | $         | 18,841     |      | $          | 39,340      |       | $ | 37,990 |   |
| ** **                                                      |       |      |       |      |       |        |       |
| **Cost of revenues**                                            |       | 15,113    |       | 31,446    |       | 33,601      |       |
|                                                            |       | 3,728     |       | 7,894     |       | 4,389       |       |
| **Operating expenses**                                          |       |      |       |      |       |        |       |
| Selling, general and administrative                             |       | 16,995    |       | 15,022    |       | 24,006      |       |
| Research and product development (note 11)                      |       | 5,219     |       | 7,296     |       | 9,690       |       |
| Windup of test equipment business (note 5)                      |       | —    |       | —    |       | 2,016       |       |
| Impairment  of property, plant and equipment (note 8)           |       | 317       |       | —    |       | —      |       |
| Amortization of property, plant and equipment                   |       | 984       |       | 855       |       | 903         |       |
| Amortization of intangible assets                               |       | —    |       | 249       |       | 251         |       |
|                                                            |       | 23,515    |       | 23,422    |       | 36,866      |       |
| **Loss from operations**                                        |       | (19,787   | )          | (15,528   | )          | (32,477     | )          |
| ** **                                                      |       |      |       |      |       |        |       |
| **Other income (expenses)**                                     |       |      |       |      |       |        |       |
| Sale  of assets                                                 |       | —    |       | 44        |       | —      |       |
| Loss on disposal of property, plant and equipment               |       | (14       | )          | —    |       | (308        | )          |
| Provincial capital tax                                          |       | (154      | )          | 170       |       | (127        | )          |
| Interest                                                        |       | 169       |       | 923       |       | 2,249       |       |
| Foreign currency gains                                          |       | 40        |       | 188       |       | 2,617       |       |
|                                                            |       | 41        |       | 1,325     |       | 4,431       |       |
| ** **                                                      |       |      |       |      |       |        |       |
| **Loss before income taxes**                                    |       | (19,746   | )          | (14,203   | )          | (28,046     | )          |
| **Provision for (recovery of) income  taxes (notes 2 and 16)**  |       | (10,371   | )          | 116       |       | 22          |       |
| **Net loss for the year**                                       | ** ** | **$**     | **(9,375** | **)**     | **$**      | **(14,319** | **)**      | **$** | **(28,068** | **)** |
| ** **                                                      |       |      |       |      |       |        |       |
| **Net loss per share**                                          |       |      |       |      |       |        |       |
| Basic and diluted****(note  17)                                 |       | $         | (2.54      | )         | $          | (3.89       | )          | $ | (7.64 | ) |
|                                                            |       |      |       |      |       |        |       |
| Weighted average number of common shares outstanding  (note 17) |       | 3,697,740 |       | 3,683,226 |       | 3,671,916   |       |

 

Theaccompanying notes form an integral part of these Consolidated FinancialStatements.

 

F-8

----

 

HydrogenicsCorporation

ConsolidatedStatements of Cash Flows

(inthousands of US dollars)

 
| ** **                                                             | ** ** | **2009** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|------------|------------|------------|------------|
|                                                                   |       |     |       |       |       |       |       |
| **Cash and cash equivalents provided  by (used in)**                   |       |     |       |       |       |       |       |
| **Operating activities**                                               |       |     |       |       |       |       |       |
| Net loss for the year                                                  |       | $        | (9,375     | )          | $          | (14,319    | )          | $ | (28,068 | ) |
| Items not affecting cash                                               |       |     |       |       |       |       |       |
| Amortization of property, plant and equipment                          |       | 1,326    |       | 1,106      |       | 1,611      |       |
| Amortization of intangible assets                                      |       | —   |       | 249        |       | 251        |       |
| Impairment of property, plant and equipment                            |       | 317      |       | —     |       | —     |       |
| Unrealized foreign exchange losses (gains)                             |       | (148     | )          | 695        |       | 29         |       |
| Stock-based compensation expense                                       |       | 413      |       | 694        |       | 1,553      |       |
| Loss on disposal of property, plant and equipment                      |       | 14       |       | —     |       | 308        |       |
| Net change in non-cash working capital (note 18)                       |       | (3,632   | )          | 4,817      |       | (4,100     | )          |
|                                                                   |       | (11,085  | )          | (6,758     | )          | (28,416    | )          |
| **Investing activities**                                               |       |     |       |       |       |       |       |
| Decrease in short-term investments                                     |       | —   |       | 15,032     |       | 39,318     |       |
| Increase in restricted cash                                            |       | (713     | )          | (1,130     | )          | —     |       |
| Purchase of property, plant and equipment                              |       | (752     | )          | (929       | )          | (1,331     | )          |
| Proceeds from sale of asset                                            |       | —   |       | 44         |       | —     |       |
|                                                                   |       | (1,465   | )          | 13,017     |       | 37,987     |       |
| ** **                                                             |       |     |       |       |       |       |       |
| **Financing activities**                                               |       |     |       |       |       |       |       |
| Repayment of long-term debt                                            |       | —   |       | (11        | )          | (83        | )          |
| Deferred research and development grants                               |       | 70       |       | (235       | )          | 204        |       |
| Common shares issued (purchased and cancelled), net  of issuance costs |       | 38       |       | 128        |       | (169       | )          |
|                                                                   |       | 108      |       | (118       | )          | (48        | )          |
| **Increase (decrease) in cash and  cash equivalents during the year**  |       | (12,442  | )          | 6,141      |       | 9,523      |       |
| ** **                                                             |       |     |       |       |       |       |       |
| **Cash and cash equivalents —  Beginning of year**                |       | 21,601   |       | 15,460     |       | 5,937      |       |
| Cash and cash equivalents****—  End of year                       | ** ** | **$**    | **9,159**  | ** ** | **$**      | **21,601** | ** ** | **$** | **15,460** | ** ** |
| ** **                                                             |       |     |       |       |       |       |       |
| **Supplemental disclosure**                                            |       |     |       |       |       |       |       |
| Interest paid                                                          |       | $        | 11         |       | $          | 17         |       | $ | 52 |   |
| Income taxes paid                                                      |       | 87       |       | 118        |       | 63         |       |

 

Theaccompanying notes form an integral part of these Consolidated FinancialStatements.

 

F-9

----

 

HydrogenicsCorporation

ConsolidatedStatements of Shareholders’ Equity

(inthousands of US dollars, except for share and per share amounts)

 
| ** **                                              | ** ** | **Common shares** | ** ** | **Contributed** | ** ** | ** **  | ** ** | **Accumulated  other  comprehensive** | ** ** | **Total  shareholders’** | ** ** |
|---------------------------------------------------------|------------|-------------------|------------|-----------------|------------|-------------|------------|---------------------------------------|------------|-------------------------------|------------|
| ** **                                              | ** ** | **Number**        | ** ** | **Amount**      | ** ** | **surplus** | ** ** | **Deficit**                           | ** ** | **income  (loss)**            | ** ** | **equity** | ** ** |
| ** **                                              |       |              |       |            | * *   |        | * *   |                                  | ** ** | ** **                    | ** ** | ** ** | ** ** |
| **Balance at Dec. 31, 2006**                       |       | 3,676,659         |       | $               | 307,376    |        | $          | 13,718                                |       | $                             | (249,033   | ) | $ | (5,304 | ) | $ | 66,757 |   |
| ** **                                              |       |              |       |            |       |        |       |                                  |       |                          |       |   |   |
| Net  loss for the year                                  |       | —            |       | —          |       | —      |       | (28,068                               | )          | —                        |       | (28,068 | ) |
| Foreign  currency translation adjustments               |       | —            |       | —          |       | —      |       | —                                |       | 311                           |       | 311 |   |
|                                                    |       |              |       |            |       |        |       |                                  |       |                          |       |   |   |
| **Comprehensive loss**                                  |       | —            |       | —          |       | —      |       | —                                |       | —                        | ** ** | **(27,757** | **)** |
| ** **                                              |       |              |       |            |       |        |       |                                  |       |                          | ** ** | ** ** | ** ** |
| Shares  issued:                                         |       |              |       |            |       |        |       |                                  |       |                          |       |   |   |
| Shares  returned to treasury                            |       | (6,031            | )          | (504            | )          | 335         |       | —                                |       | —                        |       | (169 | ) |
| Stock-based  compensation expense                       |       | —            |       | —          |       | 1,553       |       | —                                |       | —                        |       | 1,553 |   |
| **Balance at Dec. 31, 2007**                       |       | 3,670,628         |       | 306,872         |       | 15,606      |       | (277,101                              | )          | (4,993                        | )          | 40,384 |   |
| ** **                                              |       |              |       |            |       |        |       |                                  |       |                          |       |   |   |
| Net  loss for the year                                  |       | —            |       | —          |       | —      |       | (14,319                               | )          | —                        |       | (14,319 | ) |
| Foreign  currency translation adjustments               |       | —            |       | —          |       | —      |       | —                                |       | (1,404                        | )          | (1,404 | ) |
|                                                    |       |              |       |            |       |        |       |                                  |       |                          |       |   |   |
| **Comprehensive loss**                                  |       |              |       |            |       |        |       |                                  |       |                          | ** ** | **(15,723** | **)** |
| ** **                                              |       |              |       |            |       |        |       |                                  |       |                          | ** ** | ** ** | ** ** |
| Shares  issued:                                         |       |              |       |            |       |        |       |                                  |       |                          |       |   |   |
| Issuance  of common shares on exercise of stock options |       | 25,599            |       | 128             |       | —      |       | —                                |       | —                        |       | 128 |   |
| Stock-based  compensation expense                       |       | —            |       | —          |       | 694         |       | —                                |       | —                        |       | 694 |   |
| **Balance at Dec. 31, 2008**                       |       | 3,696,227         |       | $               | 307,000    |        | $          | 16,300                                |       | $                             | (291,420   | ) | $ | (6,397 | ) | $ | 25,483 |   |
| ** **                                              |       |              |       |            |       |        |       |                                  |       |                          |       |   |   |
| Net  loss for the year                                  |       | —            |       | —          |       | —      |       | (9,375                                | )          | —                        |       | (9,375 | ) |
| Foreign  currency translation adjustments               |       | —            |       | —          |       | —      |       | —                                |       | 921                           |       | 921 |   |
|                                                    |       |              |       |            |       |        |       |                                  |       |                          |       |   |   |
| **Comprehensive loss**                                  |       |              |       |            |       |        |       |                                  |       |                          | ** ** | **(8,454** | **)** |
| ** **                                              |       |              |       |            |       |        |       |                                  |       |                          | ** ** | ** ** | ** ** |
| Shares  issued:                                         |       |              |       |            |       |        |       |                                  |       |                          |       |   |   |
| Issuance  of common shares on exercise of stock options |       | 5,760             |       | 38              |       | —      |       | —                                |       | —                        |       | 38 |   |
| Stock-based  compensation expense                       |       | —            |       | —          |       | 413         |       | —                                |       | —                        |       | 413 |   |
| **Balance at Dec. 31, 2009**                       |       | 3,701,987         |       | $               | 307,038    |        | $          | 16,713                                |       | $                             | (300,795   | ) | $ | (5,476 | ) | $ | 17,480 |   |

 

Theauthorized capital stock of the Corporation consists of an unlimited number ofcommon shares and an unlimited number of preferred shares issuable in series.

 

The accompanying notes form an integral part of theseConsolidated Financial Statements.

 

F-10

----

 

HydrogenicsCorporation

Notesto Consolidated Financial Statements

(inthousands of US dollars, except share and per share amounts)

 

**Note  1. Description of Business and Going Concern**

 

Hydrogenics Corporation (“Hydrogenics”or the “Corporation”), as reorganized (note 2), together with its subsidiaries,designs, develops and manufactures hydrogen generation products based on waterelectrolysis technology and fuel cell products based on proton exchangemembrane, or PEM, technology.  

 

While the accompanyingconsolidated financial statements have been prepared on a going concern basis,which contemplates the realization of assets and discharge of liabilitiesduring the normal course of operations and the continuation of operations forthe foreseeable future, there are material uncertainties related to certainconditions and events that cast significant doubt upon the Corporation’sability to continue as a going concern.     These events andconditions that cast significant doubt include the Corporation’s recurringoperating losses and negative cash flows from operations. The Corporationexpects these conditions to continue in the near term.

 

The Corporation needs toincrease its revenue to generate profits and related operating cash flows.During 2009, the Corporation experienced a decline in revenue due to variationsin the timing of delivery combined with lower order intake due to theprevailing conditions in the Corporation’s markets and the current globaleconomy.  There are various uncertainties affecting our revenues relatedto the current market environment including the level of sales orders, thelength of sales cycles, the continuing development of products by theCorporation, the adoption of new technologies by customers, price competition,and continuation of government incentives for the Corporation’s customers andthe ability of customers to finance purchases.

 

The Corporation alsorequires additional funding in the form of debt or equity in addition to thefunding obtained during the year and subsequent to year-end.  During theyear, the Corporation generated cash proceeds of $10,464 from the transactionwith the trustees of Algonquin Power Income Fund (see note 2 for furtherdiscussion).  Subsequent to December 31, 2009, the Corporationcompleted an offering of common shares and warrants for gross cash proceeds of$5,000 before placement agent’s fees and other offering expenses.  Whilethe Corporation is pursuing various sources of financing, there are nodefinitive plans at this stage and there is no assurance these initiatives willbe successful or provide additional funds sufficient to continue operations.

 

The materialuncertainties referred to above relate to the Corporation’s ability to increaserevenue and to raise additional funding to support operations. Additionally, a continuation of the broad economic recession or slowrecovery could continue to have a negative impact on the Corporation’sbusiness, results of operations and consolidated financial condition, orHydrogenics’ ability to forecast results and cash flows, and it may cause anumber of the risks the Corporation currently faces (such as the ability toincrease revenue and to raise capital) to increase in likelihood, magnitude andduration.  Macro-level changes in the global economy began to affect theCorporation’s business in the fourth quarter of 2008 and have continuedthroughout 2009.

 

The Corporation’s abilityto continue as a going concern and manage the material uncertainties isdependent on the successful execution of its business plan, which involves: (i) securingadditional financing to fund its operations, (ii) continued investment inresearch and development through advancing product designs for efficiency,durability, cost reduction and entry into complementary markets to improveoverall gross margins; (iii) increasing market penetration and sales toimprove operating cash flow; and (iv) actively managing its working capital topreserve cash resources.   At present, the success of these initiativescannot be assured due to the material uncertainties described above.

 

F-11

----

 

HydrogenicsCorporation

Notesto Consolidated Financial Statements

(inthousands of US dollars, except share and per share amounts)

 

These consolidated financialstatements do not include any adjustments or disclosures that may result fromthe Corporation’s inability to continue as a going concern. If the goingconcern assumption were not appropriate for these consolidated financialstatements, adjustments may be necessary in the carrying values of assets andliabilities and the reported expenses and balance sheet classifications; suchadjustments could be material.

 

**Note 2. Basis of Preparation**

 

The accompanying consolidated financial statements of Hydrogenics andits subsidiaries have been prepared in accordance with Canadian generallyaccepted accounting principles (“Canadian GAAP”) which, in the case of theCorporation, conform in all material respects with accounting principlesgenerally accepted in the United States (“US GAAP”), except as outlined in note20.

 

**Continuityof Interest Accounting**

 

On June 11, 2009,the Corporation, the Corporation’s original predecessor (“Old Hydrogenics”),the board of trustees of Algonquin Power Income Fund (“APIF”) and APIF’smanager, Algonquin Power Management Inc., agreed on the terms of a series oftransactions (collectively, the “APIF Transaction”) and agreements, pursuant towhich Old Hydrogenics agreed to transfer its entire business and operations tothe Corporation, including all assets, liabilities, directors, management andemployees, but excluding its tax attributes.. Under the APIF Transaction, theCorporation’s shareholders  had theircommon shares in the capital of Old Hydrogenics redeemed for common shares ofthe Corporation on a one-for-one basis. At the same time APIF unitholders  exchanged their units for Algonquin Power &Utilities Corp (“APUC”) common shares.

 

As a result of completionof the APIF Transaction on October 27, 2009, unitholders of APIF did notretain any interest in the business of the Corporation nor did the Corporation’sshareholders retain any interest in the business of APIF. The Corporationcontinued to carry on the hydrogen generation and fuel cell business as apublic entity with all of the assets (including the intellectual property, butexcluding tax attributes) of its predecessor prior to the APIF Transaction.

 

Pursuant to continuity ofinterest accounting, the assets transferred including intellectual property(exclusive of tax attributes) and liabilities assumed  were recorded at their carrying values asreported by the Corporation immediately prior to the completion of the APIFTransaction. As a result, the cash proceeds were recorded as a recovery ofincome taxes reflecting the disposal of the tax attributes.  The Corporation recorded a benefit of $10,464in the consolidated financial statements. Of the benefit, $9,994 was receivedin cash during the year and the remaining $470 was included in Accountsreceivable.  The amount included inAccounts receivable was collected subsequent to December 31, 2009.  The Corporation incurred transaction costs of$3,300 relating to the APIF transaction and these costs were included withinselling, general and administrative expenses for 2009.  In addition, as the future income tax benefitsof Old Hydrogenics’ Canadian non-capital losses, capital losses, scientificresearch and development expenditures and investment tax credits generatedprior to the date of the completion of the transaction are not available to theCorporation after the completion of the transaction, the gross future incometax assets related to these Canadian tax pools was reduced to $nil (note 16).

 

**Principlesof Consolidation**

 

The consolidatedfinancial statements include the accounts of the Corporation and itssubsidiaries, which are wholly owned. All intercompany transactions and balances have been eliminated onconsolidation.

 

**Use ofEstimates**

 

The preparation of consolidated financial statements in accordance withCanadian GAAP requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the consolidated financial statements

 

F-12

----

 

HydrogenicsCorporation

Notesto Consolidated Financial Statements

(inthousands of US dollars, except share and per share amounts)

 

and the reported amounts of revenues and expenses during the year.Actual results could differ from those estimates.

 

Significant estimates made by the Corporation include allowances forthe fair value of goodwill, warranty provisions, stock-based compensation,potentially uncollectible accounts receivable, provisions for inventory, whichis carried in excess of net realizable value, and provisions for costs tocomplete contracts in progress and valuation allowances for future income taxassets.

 

**Cash andCash Equivalents**

 

Cash and cash equivalents consist of cash on deposit and highly liquidshort-term interest bearing securities with maturities at the date of purchaseof less than 90 days. Cash and cash equivalents are designated asheld-for-trading and carried at fair value. Changes in fair value are recorded in earnings.

 

**RestrictedCash**

 

Restricted cash consists of cash on deposit and highly liquidshort-term interest bearing securities with maturities at the date of purchaseof less than 90 days. These instruments are held as full or partial securityfor standby letters of credit and letters of guarantee (“The Letters”).  The Corporation cannot utilize thisrestricted cash until the Letters have expired. Where these Letters have maturities of greater than one year, theassociated security is classified as a non-current asset. Restricted cash isdesignated as held-for-trading and carried at fair value based on Level 1inputs such as quoted prices in active markets. Changes in fair value are recorded in earnings.

 

**Inventories**

 

Raw materials, work-in-progress and finished goods are valued at the lowerof cost, determined on a first-in, first-out basis, and net realizablevalue.  Inventory costs include the costof material, labour, variable overhead and an allocation of fixed manufacturingoverhead including amortization based on normal production volumes.

 

**Property,Plant and Equipment**

 

Property, plant and equipment are recorded at cost less accumulatedamortization. Property, plant and equipment are amortized from the date ofacquisition or, in respect of internally constructed assets, from the time anasset is substantially completed and ready for use. The cost of internallyconstructed assets includes materials, labour and directly attributableoverhead costs.

 

Amortization is computed using the declining balance method as follows:

 

| Test equipment                  |   | 30% per annum |
|---------------------------------|--------|---------------|
| Computer  hardware and software |   | 30% per annum |
| Furniture and  equipment        |   | 20% per annum |
| Automobiles                     |   | 30% per annum |

 

Leasehold improvements are amortized on a straight-line basis over theterm of the lease.

 

Long-lived assets are tested for impairment whenever circumstancesindicate the carrying value may not be recoverable. When events orcircumstances indicate the carrying amount of long-lived assets are notrecoverable, the long-lived assets are tested for impairment by comparing the estimateof future expected cash flows to the carrying amount of the assets or groups ofassets. If the carrying value is not recoverable from future expected cashflows, any loss is measured as the amount by which the asset’s carrying valueexceeds fair value and amounts recorded in the period. Recoverability isassessed relative to undiscounted cash flows from the direct use anddisposition of the asset or group of assets.

 

The Corporation reviews the recoverability of the carrying amount ofproperty, plant and equipment when events or circumstances indicate that thecarrying amounts may not be recoverable. This evaluation is based onprojections of future undiscounted net cash flows. The total of these projectednet cash flows is referred to as the “net recoverable amount.” If the netrecoverable amount is less than the carrying value, the asset is written downto fair value.

 

F-13

----

 

HydrogenicsCorporation

Notesto Consolidated Financial Statements

(inthousands of US dollars, except share and per share amounts)

 

**Goodwill**

 

Goodwill represents the excess of purchase price over the fair value ofidentifiable assets acquired in a business combination accounted for using thepurchase method of accounting.  Goodwillis not amortized but is subject to fair value impairment tests on at least anannual basis and, additionally, whenever events and changes in circumstancesindicate that the carrying value might not be recoverable. Impairment ofgoodwill is tested at the reporting unit level by comparing the reporting unit’scarrying amount, including goodwill, to the fair value of the reporting unit.The fair values of the reporting units are estimated using a combination of theincome or discounted cash flows approach and the market approach, whichutilizes comparable companies’ data. If the carrying amount of the reportingunit exceeds its fair value, then a second step is performed to determine theamount of impairment loss, measured as the amount by which the carrying valueof the reporting unit’s goodwill exceeds its fair value, if any. Any impairmentloss would be expensed in the consolidated statements of operations.

 

**RevenueRecognition**

 

Revenues from the sale of equipment are recognized when there ispersuasive evidence of an arrangement, goods have been delivered, the amount isfixed or determinable, and collection is reasonably assured. When customeracceptance clauses are considered to be substantive, recognition of revenue isdeferred until customer acceptance is received. If delivery has not occurred, the Corporation will recognize revenueprovided all other criteria are met and the risks of ownership have passed tothe customer, the customer has a fixed commitment to purchase the goods, thecustomer requests that the delivery not occur until a later date, there is afixed schedule for delivery of the goods, the Corporation has not retained anyspecific performance obligations such that the earnings process is notcomplete, the ordered goods have been segregated from the Corporation’sinventory and is not subject to being used to fill other orders and the productis complete and ready for shipment.

 

Revenues from long-term contracts are determined under thepercentage-of-completion method whereby revenues are recognized on a pro ratabasis in relation to contract costs incurred. Costs and estimated profit oncontracts-in-progress in excess of amounts billed are reflected as unbilledrevenues. Losses, if any, are recognized immediately.

 

Revenues relating to engineering and testing services are recognized asservices are rendered. Cash received in advance of revenue being recognized oncontracts is classified as unearned revenue.

 

The Corporation alsoenters into transactions that represent multiple element arrangements, whichmay include any combination of equipment and service. These multiple elementarrangements are assessed to determine whether they can be separated into morethan one unit of accounting or element for the purpose of revenue recognition.When the appropriate criteria for separating revenue into more than one unit ofaccounting is met and there is objective evidence of the fair value for allunits of accounting or elements in an arrangement, the arrangementconsideration is allocated to the separate units of accounting or elementsbased on each unit’s relative value. This objective evidence of fair value isestablished through prices charged for each revenue element when that elementis sold separately. The allocation based on each unit’s relative value is thesame as using the relative fair value. For the periods presented, theCorporation has had fair value for each of the elements in its revenuearrangements. The revenue recognition policies described above are then appliedto each unit of accounting.

 

**ProductWarranties**

 

The Corporation typically provides a warranty for parts and/or labourfor up to one year or based on certain operating specifications such as hoursof operation. Warranty cost provisions are based on management’s best estimatesof such costs, taking into account the specific arrangements of the transactionand past history.

 

**Researchand Product Development Costs**

 

Research costs are expensed as incurred. Product development costs(which typically include applying for patents and licenses) are expensed asincurred until the Corporation can demonstrate each of the following criteria: (i) thetechnical feasibility of completing the intangible asset so that it will beavailable for use or sale, (ii) its intention to complete the intangible assetand use or sell it, (iii) its ability to use or sell

 

F-14

----

 

HydrogenicsCorporation

Notesto Consolidated Financial Statements

(inthousands of US dollars, except share and per share amounts)

 

the intangible asset, (iv) how the intangible asset will generateprobable future economic benefits, (v) the availability of adequatetechnical, financial and other resources to complete the development and to useor sell the intangible asset and (vi) its ability to measure reliably theexpenditure attributable to the intangible asset during its development. Todate, no product development costs have been capitalized.

 

Funding for research and product developmentincludes government and non-government research and product developmentsupport. Research and productdevelopment support is recognized as the applicable costs are incurred unlessit is for reimbursement of an asset, in which case it is accounted for as areduction in the cost of the applicable asset.

 

**Stock-basedCompensation**

 

The Corporation has stock-based compensation plans, which are describedin note 10.  The Corporation estimatesthe fair value of stock-based compensation to employees and directors andexpenses the fair value over the estimated vesting period of the stock optionswith the off-set being recorded in contributed surplus. Any consideration paidby employees or directors on the exercise of stock options or purchase of stockis credited to share capital together along with any previously recognizedcompensation expense. If shares or stock options are repurchased from employeesor directors, the excess of the consideration paid over the carrying amount ofthe shares or vested stock options cancelled is charged to deficit, unless aportion of the consideration represents payments over the fair value of theshare or stock option, in which case that portion is recognized in compensationexpense.  Forfeitures of stock-basedcompensation awards are accounted for in the period in which the forfeiture occurs.

 

**DeferredShare Units**

 

The intrinsic value of the Corporation’s deferred share units ischarged to selling, general and administrative expenses using the gradedvesting method. Since the deferred share units will be settled in cash, theintrinsic value of the vested share units is revalued each quarter until thesettlement date. The Corporation has set up a liability in the consolidatedbalance sheets, included within accounts payable and accrued liabilities, forthe total intrinsic value of the vested deferred share units.  Forfeitures of deferred share units areaccounted for in the period in which the forfeiture occurs.

 

**RestrictedShare Units**

 

The intrinsic value of the Corporation’s restricted share units ischarged to selling, general and administrative expenses using the gradedvesting method. Since the restricted share units will be settled in cash, theintrinsic value of the vested share units is revalued each quarter until thesettlement date. The Corporation has set up a liability in the consolidatedbalance sheets, included within accounts payable and accrued liabilities, forthe total intrinsic value of the vested restricted share units.  Forfeitures of restricted share units areaccounted for in the period in which the forfeiture occurs.

 

**IncomeTaxes**

 

Income taxes are recorded using the liability method.  Future income tax amounts arise due totemporary differences between the accounting and income tax basis of theCorporation’s assets and liabilities and the unused tax losses of the Corporation.Future income tax assets and liabilities are measured using substantivelyenacted income tax rates in effect for the year in which those temporarydifferences are expected to be recovered or settled. The effect on futureincome tax assets and liabilities of a change in income tax rates and laws isrecognized in the period that includes the date of substantive enactment.  Future income tax assets are recognized tothe extent that realization of such benefits is considered to be more likelythan not.

 

**ForeignCurrency Translation**

 

Monetary assets and liabilities denominated in currencies other thanthe functional currency are translated at the rate of exchange in effect at theend of the period. Non-monetary assets and liabilities are translated at historicalrates of exchange. Revenue and expense items denominated in currencies otherthan the functional currency are translated into the functional currency at theaverage rate of exchange for the period, except for amortization, which istranslated at historical rates. Resultant gains and losses are included in theresults of operations.

 

F-15

----

 

HydrogenicsCorporation

Notesto Consolidated Financial Statements

(inthousands of US dollars, except share and per share amounts)

 

Assets and liabilities of the Corporation’s Belgian subsidiary areconsidered to be self-sustaining and are translated into US dollars at theperiod-end exchange rates, and the results of its operations are translated atthe average rate of exchange for the period. The resulting translationadjustments are accumulated in a separate component of shareholders’ equity.

 

The operations of the Corporation’s other subsidiaries are consideredintegrated with those of the Corporation and, accordingly, their accounts aretranslated into US dollars using the temporal method. Under this method,monetary assets and liabilities are translated using the period-end exchangerate, and non-monetary items are translated using historical rates of exchange.Revenues and expenses of these subsidiaries are translated at the averageexchange rate for the period, except for amortization, which is translated athistorical rates of exchange. Resultant gains and losses are included in theresults of operations.

 

**Net LossPer Share**

 

Basic net loss per share is calculated based on the weighted averagenumber of common shares outstanding for the year. Diluted net loss per share iscalculated using the daily weighted average number of common shares that wouldhave been outstanding during the year had all potential common shares beenissued at the beginning of the year or when the underlying options or warrantswere granted, if later unless they were anti-dilutive.  The treasury stock method is used todetermine the incremental number of shares that would have been outstanding hadthe Corporation used proceeds from the exercise of options and warrants toacquire common shares.

 

**Financial Instruments**

 

All financial instruments are measured at fair value on initialrecognition. After initial recognition, financial instruments are measured attheir fair values, except for loans and receivables and other financialliabilities, which are measured at amortized cost. The Corporation hasdesignated cash and cash equivalents and restricted cash as held-for-trading.Accounts receivable are classified as loans and receivables, and approximatefair value. Financial liabilities included within accounts payable and accruedliabilities are classified as other financial liabilities and approximate fairvalue.

 

**Restructuring Costs**

 

Costs associated with exit or disposal activities, including leasetermination costs and employee severance costs associated with restructuring,plant closing or other activity, are recognized when specified criteria aremet.  With respect to lease terminationcosts, we recognize these costs at the cease-use date and record these amountsat the present value of the estimated lease payments, net of estimated subleaseincome.  Severance and terminationbenefits result from a specific event and therefore are considered to becontractual termination benefits. The costs related to contractual terminationbenefits are recognized as a liability and expensed when it is probable thatthe employees will be entitled to benefits and the amount can be reasonablydetermined. The benefits provided were either specified in an employmentagreement or were based on existing legislative formula or were consistent withthe Corporation’s past practice. The amounts were accrued when managementapproved the plan and committed the entity to the restructuring event thatobligated the Corporation to the employees, management had identified allsignificant actions to take to cause the obligating event to occur and actionsrequired by management’s plan were to commence shortly thereafter and becompleted within an appropriate time such that there would not be significantchanges to management’s plan.

 

F-16

----

 

HydrogenicsCorporation

Notesto Consolidated Financial Statements

(inthousands of US dollars, except share and per share amounts)

 

**Note 3.  New AccountingStandards**

 

The Corporation has adopted the following changes to its accountingpolicies:

 

*(i)*                                  *Canadian standards*

 

In February 2008,The Canadian Institute of Chartered Accountants (“CICA”) issued Handbook Section 3064“Goodwill and Intangible Assets,” which replaced existing Handbook Sections3062 “Goodwill and Other Intangible Assets” and 3450 “Research and DevelopmentCosts.” The new standards introduced changes to the recognition, measurementand disclosure of goodwill and intangible assets. The new standard alsoprovides guidance for the recognition of internally developed intangibleassets, including assets developed from research and development activities,ensuring consistent treatment of all intangible assets, whether separatelyacquired or internally developed. Handbook Section 3064 applies to interimand annual financial statements relating to fiscal years beginning on or after October 1,2008, with earlier adoption encouraged. The Corporation adopted this standardeffective January 1, 2009.  Theadoption of this standard did not have a material impact on the Corporation’sconsolidated financial position, results of operations or cash flows.

 

(ii)           *US standards*

 

The following changesonly apply to note 20 of the consolidated financial statements.

 

Effective July 1,2009, the Corporation adopted the Financial Accounting Standards Board (“FASB”)Accounting Standards Codification (“Codification”).  The Codification is the source ofauthoritative accounting principles recognized by FASB to be applied bynongovernmental entities in the preparation of financial statements inconformity with US GAAP. Rules and interpretive releases of the Securitiesand Exchange Commission (“SEC”) under authority of federal securities laws arealso sources of authoritative US GAAP for SEC registrants. All guidancecontained in the Codification carries an equal level of authority. TheCodification superseded all existing non-SEC accounting and reportingstandards. References made to FASB guidance throughout this document have beenupdated for the Codification.  Theadoption of the Codification did not have a material impact on the Corporation’sconsolidated results of operations and consolidated financial position.

 

In December 2007, the FASB issued FASB ASC Topic 805 BusinessCombinations (“ASC 805”). The standard retains the purchase method ofaccounting for acquisitions, but requires a number of changes, including changesin the way assets and liabilities are recognized in purchase accounting. Italso changes the recognition of assets acquired and liabilities assumed arisingfrom contingencies, requires the capitalization of in-process research anddevelopment at fair value, and requires the expensing of acquisition relatedcosts as incurred. The Corporation adopted ASC 805 on January 1, 2009 andit is applied prospectively to business combinations (and relatednon-controlling interest, if any) completed on or after this date.

 

In September 2006,the FASB issued FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”).ASC 820 establishes a framework for measuring the fair value of assets andliabilities. This framework is intended to provide increased consistency in howfair value determinations are made under various existing accounting standardsthat permit, or in some cases require, estimates of fair market value.  ASC 820 also expands financial statementdisclosure requirements about a corporation’s use of fair value measurements,including the effect of such measures on earnings. This standard is effectivefor fiscal years beginning after November 15, 2007. The Corporation adoptedthis new guidance effective January 1, 2008. This standard did not changethe Corporation’s consolidated financial position, results of operations orcash flows. For non-financial assets and non-financial liabilities, thestandard is effective for financial statements issued for fiscal yearsbeginning after November 15, 2008. The Corporation adopted this guidanceeffective January 1, 2009.  Theadoption of this guidance did not have a material impact on the Corporation’sresults of operations and consolidated financial position.

 

F-17

----

 

HydrogenicsCorporation

Notesto Consolidated Financial Statements

(inthousands of US dollars, except share and per share amounts)

 

In April 2009, theFASB issued amendments to ASC 820 Fair Value Measurements and Disclosures (“ASU2009-05”). ASU 2009-05 requires disclosures, in interim reporting periods andin financial statements for annual reporting periods, regarding the fair valueof all financial instruments for which it is practicable to estimate thatvalue, whether recognized or not on the Corporation’s balance sheet. ASU2009-05 is effective for interim reporting periods ending after June 15,2009.  The Corporation adopted thedisclosures required under this standard effectively for the year ended December 31,2009. While the adoption of ASU 2009-05 impacts the Corporation’s disclosures,it did not have an impact on the Corporation’s results of operations orconsolidated financial condition.

 

In May 2009, theFASB issued ASC 855, Subsequent Events (“ASC 855”), which was effective for theCorporation during 2009.  ASC 855 setsforth the circumstances and the period after the balance sheet date for whichan entity should evaluate events for recognition or disclosure in its financialstatements.  In addition, ASC 855 identifies the disclosures that an entityshould make about such events.  The Corporation adopted ASC 855 in 2009and has evaluated subsequent events from December 31, 2009, through to thedate of issuance of the consolidated financial statements in accordance withthe statement.  Adoption of ASC 855 did not have an effect on theCorporation’s results of operations and consolidated financial position.

 

The Corporation will beadopting the following changes to its accounting policies in the future.

 

*(i)*                                                          *Canadian standards*

 

In January 2009, theCICA issued Handbook Sections 1582 “Business Combinations”, 1601 “ConsolidatedFinancial Statements”, and 1602 “Non-controlling Interests.”  These sections replace the former Handbook Section 1581,“Business Combinations” and Handbook Section 1600, “Consolidated FinancialStatements,” and establish a new section for accounting for a non-controllinginterest in a subsidiary.  Handbook Section 1582is effective for business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after January 1,2011.  Handbook Sections 1601 and 1602apply to interim and annual consolidated financial statements relating to yearsbeginning on or after January 1, 2011. The Corporation is currently assessing the effect these standards mayhave on the Corporation’s results of operations and consolidated financialposition.

 

The CICA has announcedthat Canadian GAAP for publicly accountable enterprises will be replaced withIFRS over a transition period expected to end in 2011. The Corporation willbegin reporting its financial statements in accordance with IFRS on January 1,2011.

 

In December 2009,the CICA issued EIC 175, Multiple Deliverable Revenue Arrangements, replacingEIC 142, Revenue Arrangements with Multiple Deliverables. This abstract wasamended to: (1) provide updated guidance on whether multiple deliverablesexist, how the deliverables in an arrangement should be separated, and theconsideration allocated; (2) require, in situations where a vendor doesnot have vendor-specific objective evidence (“VSOE”) or third party evidence ofselling price, that the entity allocate revenue in an arrangement usingestimated selling prices of deliverables; (3) eliminate the use of theresidual method and require an entity to allocate revenue using the relativeselling price method; and (4) require expanded qualitative andquantitative disclosures regarding significant judgments made in applying thisguidance. The accounting changes summarized in EIC 175 are effective for fiscalyears beginning on or after January 1, 2011, with early adoptionpermitted. Adoption may either be on a prospective basis or by retrospectiveapplication. If the Abstract is adopted early, in a reporting period that isnot the first reporting period in the entity’s fiscal year, it must be appliedretroactively from the beginning of the Corporation’s period of adoption. TheCorporation is currently assessing the future impact of these amendments on itsconsolidated financial statements and has not yet determined the timing andmethod of its adoption.

 

F-18

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

*(ii)**                               **US standards*

 

In October 2009, theFASB issued amendments to ASC 605, Revenue Recognition (“ASU 2009-13”) andamendments to ASC 985, Software (“ASU 2009-14). ASU 2009-13 requires entitiesto allocate revenue in an arrangement using estimated selling prices of thedelivered goods and services based on a selling price hierarchy. The amendmentseliminate the residual method of revenue allocation and require revenue to beallocated using the relative selling price method. ASU 2009-14 removes tangibleproducts from the scope of software revenue guidance and provides guidance ondetermining whether software deliverables in an arrangement that includes atangible product are covered by the scope of the software revenue guidance. ASU2009-13 and ASU 2009-14 should be applied on a prospective basis for revenuearrangements entered into or materially modified in fiscal years beginning onor after June 15, 2010, with early adoption permitted. The Corporationdoes not expect adoption of ASU 2009-13 or ASU 2009-14 to have a materialimpact on the Corporation’s consolidated results of operations or consolidatedfinancial condition.

 

**Note 4.**  **Risk Management Arising From Financial Instruments**

 

Under Canadian GAAP,financial instruments are classified into one of the following categories:  held-for-trading, held-to-maturity,available-for-sale, loans and receivables, and other financial liabilities.  The following table summarizes informationregarding the carrying value of the Corporation’s financial instruments:

 
| ** **                         | ** ** | **2009**   | ** ** | **2008** | ** ** |
|------------------------------------|------------|------------|------------|----------|------------|
| Held-for-trading  (i)              | ** ** | **$**      | **11,002** |     | $          | 22,731 |   |
| Loans  and receivables (ii)        | ** ** | **4,175**  |       | 4,479    |       |
| Other  financial liabilities (iii) | ** ** | **10,414** |       | 13,063   |       |
|                                    |            |            |            |          |            |  |  |

 

----

(i)                                     Includes cash and cash equivalents andrestricted cash

(ii)                                  Includes accounts receivable

(iii)                               Includes financial liabilities includedwithin accounts payable and accrued liabilities

 

**Liquidity**

 

The Corporation hassustained losses and negative cash flows from operations since itsinception.   At December 31, 2009,the Corporation had approximately $9,159 (December 13, 2008 - $21,601) ofcash and cash equivalents.  Liquidityrisk is the risk that the Corporation will encounter difficulty in meeting itsfinancial obligations associated with financial liabilities that are settled bydelivering cash or another financial asset. The Corporation is exposed to significant liquidity risk as it continuesto have net cash outflows to support its operations.  The Corporation’s approach to managingliquidity risk is to ensure it will have sufficient liquidity to meetliabilities when due.  The Corporationachieves this by maintaining sufficient cash and cash equivalents andshort-term investments.  The Corporationmonitors its financial position on a monthly basis and updates its expected useof cash resources based on the latest available data.  Substantially all of the Corporation’sfinancial liabilities will mature within one year.  There are uncertainties related to the timingand use of the Corporation’s cash resources. Note 1, Description of Business and Going Concern, discloses the riskssurrounding the timing and the use of the Corporation’s cash resources.

 

The Corporation continuedto use cash in its operating activities of $11,085 and investing activities of$1,465 for the year ended December 31, 2009 (2008 — used cash inoperations of $6,758 and received from investing activities of $13,017respectively).

 

F-19

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

The table belowsummarizes the Corporation’s financial and accrued liabilities into relevantmaturity groups based on the remaining period at the balance sheet date to thecontractual maturity date. The amounts disclosed in the table are thecontractual undiscounted cash flows:

 
| ** **                                                                      | ** ** | **Anticipated settlement  within six months from  December 31, 2009** | ** ** | **Anticipated settlement between  six and twleve months from  December 31, 2009** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|-----------|------------|
| Financial  liabilities included within Accounts payable and accrued liabilities |       | $                                                                          | 9,297      |                                                                                   | $          | 1,117     |       | $ | 10,414 |   |
|                                                                                 |            |                                                                            |            |                                                                                        |            |           |            |  |  |  |

 

**Creditrisk**

 

Credit risk arises fromthe potential that a counterparty will fail to perform its obligations.  The Corporation is exposed to credit riskfrom customers. At December 31, 2009, the Corporation’s two largestcustomers accounted for 9% (18% at December 31, 2008) and 7% (7% at December 31,2008) of revenues, respectively.  Inorder to minimize the risk of loss for trade receivables, the Corporation’sextension of credit to customers involves a review and approval by seniormanagement as well as progress payments as contracts are executed and in somecases irrevocable letters of credit.  Themajority of the Corporation’s sales are invoiced with payment terms between 30and 60 days.  The Corporation’s objectiveis to minimize its exposure to credit risk from customers in order to preventlosses on financial assets by performing regular monitoring of overdue balancesand to provide allowance for potentially uncollectible accounts receivable.

 

The Corporation reviewsits trade receivable accounts regularly and writes down their carrying valuesto their expected realizable values, by making an allowance for doubtfulreceivables, as soon as the account is determined not to be fully collectible,which is done based on management’s evaluation of the situation on a customerby customer basis.  The Corporation’s assessmentof outstanding receivables from customers is primarily based on the Corporation’sassessment of the creditworthiness of the customer.  The allowance is charged against earnings.Shortfalls in collections are applied against this provision. Estimates for theallowance for doubtful receivables are determined on a customer-by-customerevaluation of collectibility at each balance sheet reporting date, taking intoaccount the amounts that are past due and any available relevant information ofthe customers’ liquidity and going concern problems.

 

The Corporation’s tradereceivables have a carrying value of $2,919 as at December 31, 2009($3,661 as at December 31, 2008), representing the maximum exposure tocredit risk of those financial assets, exclusive of the allowance for doubtfulaccounts.  Normal credit terms foramounts due from customers call for payment within 30 to 60 days.  An insignificant amount of these receivableswere past due as at December 31, 2009. The Corporation’s exposure tocredit risk for trade receivables by geographic area as at December 31 wasas follows:

 
| ** **     | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------|------------|----------|------------|----------|------------|
| Europe         | ** ** | **51**   | **%**      | 46       | %          |
| United  States | ** ** | **13**   |       | 13       |       |
| Asia           | ** ** | **8**    |       | 32       |       |
| Rest  of world | ** ** | **28**   |       | 9        |       |
|           | ** ** | **100**  | **%**      | 100      | %          |

 

F-20

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

The activity of theallowance for doubtful accounts for the period is as follows:

 
| ** **                                                | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| Allowance  for doubtful accounts – beginning of year | ** ** | **$**    | **228**    |     | $          | 351 |   |
| Bad  debt expense                                         | ** ** | **283**  |       | 126      |       |
| Write-off  of bad debts                                   | ** ** | **(223** | **)**      | (249     | )          |
| Allowance  for doubtful accounts – end of year       | ** ** | **$**    | **288**    |     | $          | 228 |   |

 

The Corporation believesthat the credit quality is high for the neither past due nor impaired accountsreceivable based on prior experience of collections of accounts within 0-30days of billing.

 

The Corporation may alsohave credit risk relating to cash and cash equivalents and restricted cash,which it manages by dealing with large chartered Belgian, Canadian and Germanbanks.  The Corporation’s objective is tominimize its exposure to credit risk in order to prevent losses on financialassets by placing its investments in lower risk bank acceptances of thesechartered banks. The Corporation’s cash and cash equivalents and restrictedcash carrying value is $11,002 ($22,731 at December 31, 2008),representing the maximum exposure to credit risk of these financialassets.    Approximately 52% (82% - December 31,2008) of the Corporation’s cash and restricted cash at December 31, 2009was held by four financial institutions. The Corporation’s exposure to creditrisk relating to cash and cash equivalents and short-term investments,segmented by geographic area as at December 31, was as follows:

 
| ** ** | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------|------------|----------|------------|----------|------------|
| Canada     | ** ** | **71**   | **%**      | 37       | %          |
| Belgium    | ** ** | **20**   |       | 54       |       |
| Germany    | ** ** | **9**    |       | 9        |       |
|       | ** ** | **100**  | **%**      | 100      | %          |

 

**Foreigncurrency risk**

 

Foreign currency riskarises because of fluctuations in exchange rates. The Corporation conducts asignificant portion of its business activities in currencies other than thefunctional currency of the parent company (US$) and the functional currency ofour self-sustaining subsidiary (euros). This primarily includes Canadian dollar transactions at the parentcompany and US$ transactions at our self-sustaining subsidiary. The Corporation’sobjective in managing its foreign currency risk is to minimize its net exposureto foreign currency cash flows by converting foreign denominated financialassets into the applicable functional currency of the subsidiary to the extentpractical to match the obligations of its financial liabilities.  Financial assets and financial liabilitiesdenominated in foreign currencies will be affected by changes in the exchangerate between the functional currency and these foreign currencies.  This primarily includes cash and cashequivalents, accounts receivable and accounts payable and accrued liabilities,which are denominated in foreign currencies. The Corporation recognized foreign exchange gains in the year ended December 31,2009 of $40 compared to $188 in the year ended December 31, 2008.

 

If a shift in theCanadian dollar relative to the US$ of 10% were to occur, the exchange gain orloss on the net financial assets could be plus or minus $601 (December 31,2008 - $335) due to exchange rate fluctuations and this amount would berecorded in the consolidated statements of operations.

 

The Corporation conductsa significant portion of its business activities in foreign currencies. Ittherefore seeks to manage its foreign currency risk and to minimize its netexposures to foreign currency cash flows by converting cash balances intoforeign currencies to the extent practical to match other foreign currencyobligations.

 

F-21

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

**Interestrate risk**

 

Interest rate risk arisesbecause of the fluctuation in market interest rates.  The Corporation’s objective in managinginterest rate risk is to maximize the return on its cash and cash equivalentsand restricted cash. The Corporation is subject to interest rate risk on itscash and cash equivalents; however, the Corporation does not have any long-termdebt and hence is not subject to interest rate risk from borrowings.  If a shift in interest rates of 10% were tooccur, the impact on cash and cash equivalents and restricted cash and therelated net loss for the period could be plus or minus $100.

 

**Fairvalue**

 

The carrying value ofcash and cash equivalents, restricted cash, accounts receivable, and accountspayable and accrued liabilities approximate their fair value given theirshort-term nature.  The fair value ofcash and cash equivalents and restricted cash was determined based on quotedprices in active markets for identical assets.

 

**Managementof capital**

 

The Corporation’sobjective in managing capital is to ensure sufficient liquidity to pursue itsgrowth strategy, fund research and product development, undertake selectiveacquisitions, while at the same time taking a conservative approach towardfinancial leverage and management of financial risk.

 

The Corporation’s capitalis composed of share capital, contributed surplus, accumulated deficit andforeign currency translation adjustments included within accumulated othercomprehensive income (loss). The total capital as at December 31, 2009 is$17,059 (December 31, 2008 -  $25,483). The Corporation’s primary uses of capital are to financeoperations, increases in non-cash working capital and capitalexpenditures.  The Corporation currentlyfunds these requirements from existing cash resources and cash raised through shareissuances and the APIF transaction (note 2). The Corporation’s objectives when managing capital are to ensure theCorporation will continue to have enough liquidity so it can provide itsproducts and services to its customers and returns to its shareholders.

 

The Corporation monitorsits capital on the basis of the adequacy of its cash resources to fund itsbusiness plan.  In order to maximize thecapacity to finance the Corporation’s ongoing growth, the Corporation does notcurrently pay a dividend to holders of its common shares.

 

**Note 5. Business Streamlining Initiatives and Windup of TestEquipment Business**

 

**BusinessStreamlining Initiatives**

 

In March and November 2007,the Corporation recorded charges for severance and related expenses forbusiness streamlining initiatives, aimed at reducing expenses to improve futurecash flows by reducing the Corporation’s headcount. These charges were includedin selling, general and administrative expenses as at December 31,2007.  The business streamliningactivities relating to the March 2007 and November 2007 annoucementswere complete as at December 31, 2008. The expenses resulting from the March 2007announcement were exclusively charged to the Power Systems business unit. Theexpenses related to the November 2007 announcement were charged to thebusiness units as follows: $846 for Power Systems; $142 for OnSite Generation;and $1,002  for Corporate and Other.  For both the March 2007 and November 2007announcements, the amount expensed for the twelve months ended December 31,2007 (which is identical to the expected cumulative charge) was $2,100 and $1,990,respectively.

 

F-22

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

A summary of themovements in the liability are as follows;

 
| ** **              | ** ** | **March 2007** | ** ** | **November 2007** | ** ** | **Total** | ** ** |
|-------------------------|------------|---------------------|------------|------------------------|------------|-----------|------------|
| December 31,  2006 |       | —              |       | —                 |       | —    |       |
| Expense  for the period |       | $                   | 2,100      |                   | $          | 1,990     |       | $ | 4,090 |   |
| Cash  payments          |       | (2,100              | )          | —                 |       | (2,100    | )          |
| December 31,  2007 |       | —              |       | 1,990                  |       | 1,990     |       |
| Cash  payments          |       | —              |       | (1,981                 | )          | (1,981    | )          |
| December 31,  2008 |       | —              |       | 9                      |       | 9         |       |
| Cash  payments          |       | —              |       | (9                     | )          | (9        | )          |
| December 31,  2009 |       | —              |       | —                 |       | —    |       |
|                         |            |                     |            |                        |            |           |            |  |  |  |

 

On January 5, 2009 and December 10, 2009, in order to furtherstreamline operations, the Corporation reduced its headcount and implementedadditional cost saving measures in order to maximize the Corporation’s cashresources.  The Corporation recordedcharges of $582 and $409 respectively for severance and related expenses, whichare included in selling, general and administrative expenses. These amountswere charged to the Corporation’s business segments as follows: Corporate -$146; OnSite Generation - $99; and Power Systems - $746.

 

A summary of themovements in the liability are as follows;

 
| ** **              | ** ** | **January 2009** | ** ** | **December 2009** | ** ** | **Total** | ** ** |
|-------------------------|------------|-----------------------|------------|------------------------|------------|-----------|------------|
| December 31,  2008 |       | —                |       | —                 |       | —    |       |
| Expense  for the period |       | $                     | 582        |                   | $          | 409       |       | $ | 991 |   |
| Cash  payments          |       | (582                  | )          | (33                    | )          | (615      | )          |
| December 31,  2009 |       | —                |       | 376                    |       | 376       |       |
|                         |            |                       |            |                        |            |           |            |  |  |  |

 

**Windupof Test Equipment Business**

 

On November 7, 2007,the Corporation announced plans to wind up its fuel cell test products design,development and manufacturing business, due to lower than planned gross marginand growth prospects and not achieving certain operating targets. During theyear ended December 31, 2007, the Corporation incurred $2,016 in respectof severance and related expenses, and the writeoff of inventory.  The windup of the Test Equipment business isexpected to be completed in 2010. The expenses relating to the windup of theTest Equipment business all relate to the Test segment. The Corporation expectsto incur a cumulative charge of approximately $3,500 relating to the windup ofthe Test Equipment business, of which $2,016 was incurred in 2007. $853 wasincurred in 2008 and $619 was incurred in 2009, representing a total of $3,488incurred to date.  The remainder will becharged to expenses in 2010.

 

The majority of the costsassociated with the windup of the Test Equipment business are expensed asincurred. However, a reconciliation of the beginning and ending liabilitybalances for severance and other termination benefits is as follows:

 
| ** **                              | ** ** | **Windup of Test Equipment  Business** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| December 31,  2006                 |       | —                                 |       |
| Accrual  for contract termination costs |       | $                                      | 1,598      |   |
| Cash  payments                          |       | (648                                   | )          |
| December 31,  2007                 |       | 950                                    |       |
| Cash  payments                          |       | (950                                   | )          |
| December 31,  2008                 |       | —                                 |       |
|                                         |            |                                        |            |  |

 

F-23

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

**Note 6.  AccountsReceivable**

 
| ** **                                    | ** ** | **2009**   | ** ** | **2008** | ** ** |
|-----------------------------------------------|------------|------------|------------|----------|------------|
|                                          | ** ** | ** ** |       |     |       |
| Trade accounts  receivable                    | ** ** | **$**      | **2,919**  |     | $          | 3,661 |   |
| Less: Allowance for  doubtful accounts        | ** ** | **(288**   | **)**      | (228     | )          |
| Goods and services tax  and other receivables | ** ** | **1,054**  |       | 541      |       |
|                                          | ** ** | **$**      | **3,685**  |     | $          | 3,974 |   |

 

**Note 7. Inventories**

 
| ** **       | ** ** | **2009**  | ** ** | **2008** | ** ** |
|------------------|------------|-----------|------------|----------|------------|
| Raw  materials   | ** ** | **$**     | **3,239**  |     | $          | 4,938 |   |
| Work-in-progress | ** ** | **5,336** |       | 5,004    |       |
| Finished  goods  | ** ** | **3,171** |       | 159      |       |
|             | ** ** | **$**     | **11,746** |     | $          | 10,101 |   |

 

During the year ended December 31,2009, the Corporation recorded provisions of $349 (December 31, 2008 -$1,298). During the year, approximately $13,630 of inventory was expensed incost of revenues (December 31, 2008 and December 31, 2007 - $29,851and $29,725 respectively).

 

**Note 8. Property, Plant and Equipment**

 

As at December 31, 2009, the net book value of property, plant andequipment is as follows:

 
| ** **                      | ** ** | **Cost**   | ** ** | **Accumulated  amortization** | ** ** | **Net book  value** | ** ** |
|---------------------------------|------------|------------|------------|-------------------------------|------------|---------------------|------------|
|                            | ** ** | ** ** | ** ** | ** **                    | ** ** | ** **          | ** ** |
| Test equipment                  | ** ** | **$**      | **5,179**  | ** **                    | **$**      | **4,724**           | ** ** | **$** | **455** | ** ** |
| Furniture and equipment         | ** ** | **4,482**  | ** ** | **2,897**                     | ** ** | **1,585**           | ** ** |
| Computer hardware and  software | ** ** | **2,642**  | ** ** | **2,129**                     | ** ** | **513**             | ** ** |
| Leasehold improvements          | ** ** | **1,097**  | ** ** | **906**                       | ** ** | **191**             | ** ** |
| Automobiles                     | ** ** | **564**    | ** ** | **554**                       | ** ** | **10**              | ** ** |
| Assets held-for-sale            | ** ** | **855**    | ** ** | **495**                       | ** ** | **360**             | ** ** |
|                            | ** ** | **$**      | **14,819** | ** **                    | **$**      | **11,705**          | ** ** | **$** | **3,169** | ** ** |

 

As at December 31, 2008, the net book value of property, plant andequipment is as follows:

 
| ** **                      | ** ** | **Cost** | ** ** | **Accumulated  amortization** | ** ** | **Net book  value** | ** ** |
|---------------------------------|------------|----------|------------|-------------------------------|------------|---------------------|------------|
|                            |       |     |       |                          |       |                |       |
| Test equipment                  |       | $        | 6,250      |                          | $          | 5,336               |       | $ | 914 |   |
| Furniture and equipment         |       | 4,040    |       | 2,471                         |       | 1,569               |       |
| Computer hardware and  software |       | 2,619    |       | 1,874                         |       | 745                 |       |
| Leasehold improvements          |       | 1,000    |       | 799                           |       | 201                 |       |
| Automobiles                     |       | 43       |       | 29                            |       | 14                  |       |
| Assets held- for-sale           |       | 639      |       | —                        |       | 639                 |       |
|                            |       | $        | 14,591     |                          | $          | 10,509              |       | $ | 4,082 |   |

 

F-24

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

Test equipment and Furniture and equipment under construction, as at December 31,2009, not yet subject to amortization, amounted to $55 (2008 - $28).

 

The net book value of equipment under capital lease as at December 31,2009 was $nil (2008 - $33).

 

During 2009, the Corporation recorded a write-down of certain property,plant and equipment which has been classified as held-for-sale.  These held-for-sale assets have been recordedat fair value, less estimated costs to sell.

 

**Note 9.  AccountsPayable and Accrued Liabilities**

 
| ** **                                   | ** ** | **2009**   | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|------------|------------|----------|------------|
| Trade accounts payable                       | ** ** | **$**      | **3,296**  |     | $          | 4,506 |   |
| Warranty  liability accruals                 | ** ** | **3,185**  |       | 3,717    |       |
| Severance and related  compensation payments | ** ** | **2,298**  |       | 1,693    |       |
| Accrued  payroll costs                       | ** ** | **1,694**  |       | 2,067    |       |
| Facility  accruals                           | ** ** | **1,560**  |       | 1,400    |       |
| Supplier  accruals                           | ** ** | **1,503**  |       | 3,165    |       |
| Accrued  professional fees                   | ** ** | **590**    |       | 433      |       |
| Excise  tax payable                          | ** ** | **384**    |       | —   |       |
| Provincial  capital tax payable              | ** ** | **—** |       | 25       |       |
| Current  portion of long-term debt           | ** ** | **—** |       | 10       |       |
| Other                                        | ** ** | **272**    |       | 282      |       |
|                                         | ** ** | **$**      | **14,782** |     | $          | 17,298 |   |

 

Included within severance and related compensation payments is apost-retirement benefit obligation of $1,184 (December 31, 2008 -$1,050).  The liability, which isunfunded and payable in Canadian dollars, is a defined benefit plan to be paidto a beneficiary.  The key assumptionsused in this valuation are annual payments ($100), the expected life of thebeneficiaries (approximately 11.5 years) and the discount rate (4%).  The amount expensed in 2009 is $134 (2008 -$340).  Actuarial gains and losses as aresult of changes in these assumptions are recognized into income in the periodof the change.  During 2009, thepost-retirement benefit obligation was reduced by the amount of annual cashpayments ($100) and was increased by annual interest accretion ($34) andforeign exchange movements during the year ($200).

 

Information regarding the changes in the Corporation’s aggregateproduct warranty liabilities is as follows for the years ended December 31,2009 and December 31, 2008:

 
| ** **                                     | ** ** | **2009**   | ** ** | **2008** | ** ** |
|------------------------------------------------|------------|------------|------------|----------|------------|
| Balance,  December 31, 2008 and 2007      | ** ** | **$**      | **3,717**  |     | $          | 3,592 |   |
| Accruals for warranties  during the year       | ** ** | **1,585**  |       | 2,332    |       |
| Settlements made during  the year              | ** ** | **(1,146** | **)**      | (1,499   | )          |
| Reversal of warranty  accruals during the year | ** ** | **(971**   | **)**      | (708     | )          |
| Balance,  December 31, 2009 and 2008      | ** ** | **$**      | **3,185**  |     | $          | 3,717 |   |

 

**Note 10. Employee stock-based compensation**

 

On February 8, 2010the Corporation announced that it would implement a share consolidation of itsissued and outstanding common shares in order to comply with the Minimum BidPrice Rule of the Nasdaq Global Market (“NASDAQ”). The consolidation waseffective as of March 12, 2010 and was implemented with a ratio of onepost-consolidation share for every 25 pre-consolidation shares. The Corporationhas amended the disclosures in the consolidated financial statements to reflectthe share consolidation as if it had occurred on December 31, 2006.

 

F-25

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

**StockOption Plan**

 

During 2000, the Corporation adopted an employee stock option plan. Asat December 31, 2009, the number of common shares that may be issued underthe stock option plan was 348,466. As at December 31, 2009, 131,534 commonshares had been issued through the exercise of stock options under this plan.Up to 348,466 additional common shares are available to be issued in connectionwith the exercise of stock options. Of the 348,466 available common shares,243,503 have been granted as stock options that were outstanding at December 31,2009.  All options are for a term of tenyears from the date of grant and vest over four years unless otherwisedetermined by the Board of Directors.

 

A summary of the Corporation’s employee stock option plan activity isas follows:

 
| ** **                        | ** ** | **2009**              | ** ** | **2008**                                            | ** ** | **2007**              | ** ** |
|-----------------------------------|------------|-----------------------|------------|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **Number of  shares** | ** ** | **Weighted  average  exercise  price********(CA$)** | ** ** | **Number of  shares** | ** ** | **Weighted  average  exercise  price********(CA$)** | ** ** | **Number of  shares** | ** ** | **Weighted  average  exercise  price********(CA$)** | ** ** |
| Outstanding, beginning  of year   | ** ** | **245,191**           | ** ** | **91.00**                                           |       | 277,292               |       | 101.25 |   | 275,734 |   | 121.25 |   |
| Granted                           | ** ** | **77,144**            | ** ** | **13.25**                                           |       | 52,000                |       | 14.50 |   | 65,798 |   | 29.25 |   |
| Exercised                         | ** ** | **(5,760**            | **)**      | **7.25**                                            |       | (25,599               | )          | 5.00 |   | — |   | — |   |
| Forfeited                         | ** ** | **(71,148**           | **)**      | **97.75**                                           |       | (54,994               | )          | 104.25 |   | (50,032 | ) | 118.00 |   |
| Expired                           | ** ** | **(1,924**            | **)**      | **268.50**                                          |       | (3,508                | )          | 184.00 |   | (14,208 | ) | 141.25 |   |
| Outstanding, end of  year         | ** ** | **243,503**           | ** ** | **65.00**                                           |       | 245,191               |       | 91.00 |   | 277,292 |   | 101.25 |   |
| Options exercisable,  end of year | ** ** | **131,824**           | ** ** | **106.50**                                          |       | 173,350               |       | 124.00 |   | 161,753 |   | 111.75 |   |

 

The following table summarizes information about the Corporation’sshare options outstanding as at December 31, 2009:

 
| **Exercise price********CAN$** | ** ** | **Number********outstanding at********December 31********2009** | ** ** | **Weighted********average********remaining********contractual life** | ** ** | **Weighted********average********exercise  price CAN$** | ** ** | **Number********exercisable at********December 31  2009** | ** ** | **Weighted********average********exercise  price  CAN$** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
|                                |       |                                                                      |       |                                                                      |       |                                                         |       |                                                                |       |                                                     |       |
| 0.25  – 13.25                  | ** ** | **74,340**                                                                | ** ** | **9.23**                                                                  | ** ** | **13.25**                                                    |       | **—**                                                          | ** ** | **—**                                               | ** ** |
| 13.26  - 25.00                      | ** ** | **46,525**                                                                | ** ** | **8.19**                                                                  | ** ** | **14.50**                                                    |       | **20,830**                                                          | ** ** | **14.50**                                                | ** ** |
| 25.01  - 100.00                     | ** ** | **60,751**                                                                | ** ** | **6.34**                                                                  | ** ** | **42.50**                                                    |       | **49,105**                                                          | ** ** | **43.75**                                                | ** ** |
| 100.01  - 200.00                    | ** ** | **28,656**                                                                | ** ** | **3.51**                                                                  | ** ** | **136.75**                                                   |       | **28,656**                                                          | ** ** | **136.75**                                               | ** ** |
| 200.01  - 303.50                    | ** ** | **33,231**                                                                | ** ** | **1.67**                                                                  | ** ** | **231.00**                                                   | ** ** | **33,231**                                                          | ** ** | **231.05**                                               |       |
| ** **                          | ** ** | **243,503**                                                               | ** ** | **6.61**                                                                  | ** ** | **65.00**                                                    | ** ** | **131,824**                                                         | ** ** | **106.50**                                               |       |

 

Stock options granted to employees during 2009 and 2008 are valuedusing the Black-Scholes option pricing model with the following assumptions:risk-free interest rate 2.93% (2008 - 3.46%), average expected life of fouryears, expected volatility 66% (2008 - 64%) and no dividends. The fair value ofthe stock options granted during 2009 was $424 (2008 - $387) (weighted average$5.50 per share) (2008 - $7.50) per share and the related expense recognized inthe consolidated statement of operations for the year ended December 31,2009 was $413 ($0.11 per share on a basic and diluted basis) (2008 - $694, 2007- $1,553).

 

F-26

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

(inthousands of US dollars, except share and per share amounts)

 

**DeferredShare Unit Plan**

 

The Corporation has a deferred share unit plan (“DSU Plan”) fordirectors. Pursuant to the DSU Plan, non-employee directors are entitled toreceive all or any portion of their annual cash retainer and meeting fees inthe form of deferred share units (“DSUs”) instead of cash. In addition, theBoard of Directors may, at its discretion, make annual awards to non-employeesof DSUs as or in lieu of non-cash compensation. As a result of theimplementation of the DSU Plan, directors are not eligible to receiveadditional awards of stock options. A DSU is a unit, equivalent in value to acommon share of the Corporation, credited by means of a bookkeeping entry inthe books of the Corporation, to an account in the name of the non-employeedirector. Each DSU entitles the participant to receive a cash payment or commonshares, at the option of the Corporation, upon termination of directorship inan amount calculated with reference to the trading price of a Hydrogenicscommon share on the Toronto Stock Exchange on the date of termination.  Compensation cost for DSUs granted under theDSU Plan is recorded as an expense with a corresponding increase in accruedliabilities and is measured at intrinsic value. Changes in intrinsic value between the grant date and the measurementdate result in a change in the measure of compensation cost.

 

During the year ended December 31, 2009, 17,883 (2008 — 13,470)DSUs were issued with immediate vesting on the date of issuance. As at December 31,2009, 42,371 (2008 — 30,004) DSUs were outstanding under the DSU Plan. The Corporation recognized a compensation expense of $216 for the yearended December 31, 2009 (2008 - ($170); 2007 - $281) related to the DSUs.

 

**RestrictedShare Unit Plan**

 

In 2008, the Board ofDirectors authorized a restricted share unit (“RSU Plan”) for seniorexecutives. Pursuant to the RSU Plan, senior executives may be granted aportion of their long term incentive plan in the form of restricted share units(“RSUs”) instead of stock options. A RSU is a unit, equivalent in value to acommon share of the Corporation, credited by means of a bookkeeping entry inthe books of the Corporation, to an account in the name of the seniorexecutive. Each RSU entitles the participant to receive a cash payment no laterthan December 31 of the third calendar year following the year in respectof which the RSUs were granted. Compensation cost for RSUs granted under the RSU Plan is recorded as anexpense with a corresponding increase in accrued liabilities and is measured atintrinsic value.  Changes in intrinsicvalue between the grant date and the measurement date result in a change in themeasure of compensation cost.

 

During the year ended December 31, 2009, 36,820 (2008 — 51,500)RSUs were awarded with vesting over a three-year period.  As at December 31, 2009, 88,320 (2008 -51,500) RSUs were outstanding under the RSU Plan.  As a result, theCorporation recognized a compensation expense of $190 for the year ended December 31,2009 (2008 - $113, 2007 - $nil).

 

**Note 11. Research and Product Development**

 

Research and product development expenses are recorded net of thirdparty program funding received or receivable. For 2009, 2008 and 2007, researchand product development expenses and program funding, which have been receivedor are receivable, are as follows:

 
| ** **                                       | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Research and product  development expenses       | ** ** | **$**      | **6,625**  |     | $          | 8,716    |       | $ | 10,346 |   |
| Research and product  development funding        | ** ** | **(1,406** | **)**      | (1,420   | )          | (656     | )          |
| Total research and  product development expenses | ** ** | **$**      | **5,219**  |     | $          | 7,296    |       | $ | 9,690 |   |

 

F-27

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

**Note 12.  Commitments**

 

The Corporation incurred rental expenses of $1,755 under operatingleases in 2009 (2008 - $1,856; 2007 - $1,823). The Corporation has futureminimum lease payments under operating leases relating to premises and officeequipment as follows:

 
| 2010       | ** ** | **$**   | **1,039**  | ** ** |
|------------|------------|---------|------------|------------|
| 2011       | ** ** | **587** | ** ** |
| 2012       | ** ** | **589** | ** ** |
| 2013       | ** ** | **501** | ** ** |
| 2014       | ** ** | **290** | ** ** |
| Thereafter | ** ** | **125** | ** ** |
|       | ** ** | **$**   | **3,131**  | ** ** |

 

The Corporation has entered into repayable contribution and otherresearch and development arrangements with various Canadian governmentalministries and public sector enterprises. Under these arrangements, the Corporation is eligible to receive up to$12,664 (2008 - $10,927; 2007 - $13,430) toward agreed upon research anddevelopment project costs. The amount received or receivable as at December 31,2009 was $12,664 (2008 - $10,927; 2007 - $13,430).  The amounts are repayable based on the futurerevenue of the Corporation.  Thesearrangements will expire in stages ending on March 31, 2016 or when totalamounts repaid reach the utilized amount of the advance, depending on the termsof the individual contracts.

 

**Note 13. Contingencies**

 

As at December 31, 2009, the Corporation has outstanding standbyletters of credit and letters of guarantee issued by several financialinstitutions, which total $3,173 (December 31, 2008 - $2,306) with expirydates extending to October 2011. The Corporation has restricted cashtotalling $1,843 as partial security for these standby letters of credit andletters of guarantee.  These instrumentsrelate primarily to obligations in connection with the terms and conditions ofthe Corporation’s sales contracts. The standby letters of credit and letters ofguarantee may be drawn upon by the customer if the Corporation fails to performits obligations under the sales contracts and the Corporation would be liableto the financial institution for the amount of the standby letter of credit orletter of guarantee in the event the instruments are drawn on.

 

In 1998, Stuart Energy, awholly owned subsidiary of the Corporation until October 27, 2009, enteredinto an agreement with Technologies Partnerships Canada (“TPC”), a program ofthe Ministry of Industry of the Canadian government to develop and demonstrateHydrogen Fleet Fuel Appliances. This agreement was amended in 2003 to expandthe scope of work and resulted in Stuart Energy receiving a total of $5,557 offunding from TPC.  Pursuant to anammendment to the TPC agreement, Stuart Energy received an additional $1,335 offunding.   Stuart Energy undertook torepay $16,466 (the “Repayable Loan Amount”). The amended agreement requiresStuart Energy to commence making royalty payments against the Repayable LoanAmount on the earlier of revenues of Stuart Energy reaching a minimum of CA$90,000 or April 1, 2007. In accordance with the terms of the agreement,Stuart Energy is required to commence payments to TPC at 0.53% of its annualgross business revenues for a period of 12 years or until the Repayable LoanAmount is fully repaid. To date, the Corporation has recognized $51,325 (2008 -$42,800) in revenues and recorded a repayable amount of $272 (December 31,2008 - $227).

 

The Corporation has entered into indemnification agreements with itscurrent and former directors and officers to indemnify them, to the extentpermitted by law, against any and all charges, costs, expenses, amounts paid insettlement and damages incurred by the directors and officers as a result ofany lawsuit or any other judicial, administrative or investigative proceedingin 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

 

F-28

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

limitation period. The nature of the indemnification agreementsprevents the Corporation from making a reasonable estimate of the maximumpotential amount it could be required to pay to counterparties. The Corporationhas purchased directors’ and officers’ liability insurance. No amount has beenrecorded in the consolidated financial statements with respect to theseindemnification agreements.

 

In the normal course of operations, the Corporation may provideindemnification agreements, other than those noted above, to counterpartiesthat would require the Corporation to compensate them for costs incurred as aresult of changes in laws and regulations or as a result of litigation claimsor statutory sanctions that may be suffered by the counterparty as a consequenceof the transaction. The terms of these indemnification agreements will varybased on the contract. The nature of the indemnification agreements preventsthe Corporation from making a reasonable estimate of the maximum potentialamount it could be required to pay to counterparties. No amount has beenrecorded in the consolidated financial statements with respect to theseindemnification agreements.

 

**Note 14. Lines of Credit**

 

****As at December 31, 2009, theCorporation had operating lines of credit available up to 3,500 euros, or USequivalent $5,005 (December 31, 2008 – $11,535.

 

Pursuant to the terms of a new credit facility, Hydrogenics Europe NV (“theBorrower”), a wholly owned Belgian-based subsidiary, may borrow a maximum of75% of the value of awarded sales contracts, approved by the Belgian financialinstitution, to a maximum of 2,000 euros, along with a maximum of 1,500 eurosfor general business purposes.  Thecredit facility bears interest at a rate of EURIBOR plus 1.45% per annum and issecured by a 1,000 euro first secured charge covering all assets of theBorrower. The credit facility may be increased to 1,500 euros in certaincircumstances, and contains a negative pledge precluding the Borrower fromproviding security over its assets. Additionally, the Borrower is required tomaintain a solvency covenant, defined as equity plus current account divided bytotal liabilities, of not less than 25% and ensure that its intercompanyaccount with the Corporation does not fall below a certain level. As at December 31,2009, the Corporation was in compliance with these covenants.

 

The amount of the available line of credit is reduced by $2,061, theamount of the outstanding standby letters of credit and letters of guarantee,if any, issued from time to time by the Belgian financial institution. As at December 31,2009, the Corporation did not have any availability under this line of creditas the Corporation did not submit any sales contracts for approval.

 

As at December 31, 2009 and 2008, the Corporation had noindebtedness on these lines of credit.

 

**Note 15. Related Party Transactions**

 

In the normal course of operations, the Corporation subcontractscertain manufacturing functions to a corporation owned by a relative of one ofthe principal shareholders of the Corporation. Billings by this relatedcorporation for material totalled $92 in 2009 (2008 - $220; 2007 - $823).  At December 31, 2009, the Corporationhas an accounts payable balance due to this related party of $6 (2008 - $34;2007 - $58). All related party transactions have been recorded at the exchangeamount, which is the consideration paid or received as established and agreedto by the related parties.

 

F-29

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

**Note 16. Income Taxes**

 

As outlined in Note 2, the Company received proceeds of $10,464 fromAPIF in exchange for the benefit of certain tax attributes retained by APIF.  APIF retained the benefit to non-capitallosses, scientific research and experimental development expenses, property,plant and equipment and intellectual property and investment tax credits with acarrying value of approximately $177,000 at October 27, 2009.

 

The break-down of income tax expense for each of the years is asfollows:

 
| ** **                               | ** ** | **2009**    | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Current income taxes                     | ** ** | **93**      |       | 116      |       | 22       |       |
| Proceeds received from  APIF transaction | ** ** | **(10,464** | **)**      | —   |       | —   |       |
| **Income  tax (recovery) expense**       | ** ** | **(10,371** | **)**      | **116**  | ** ** | **22**   | ** ** |

 

The Corporation’s computation of income tax expense is as follows:

 
| ** **                                                                                                    | ** ** | **2009**    | ** **  | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
|                                                                                                          | ** ** | ** **  |        |     |       |     |       |
| Loss before income  taxes                                                                                     | ** ** | **$**       | **(19,746** | **)**    | $          | (14,203  | )          | $ | (28,046 | ) |
| Statutory income tax  rate                                                                                    | ** ** | **33.00**   | **%**       | 33.50    | %          | 36.12    | %          |
| Income tax recovery at  statutory rate                                                                        | ** ** | **(6,516**  | **)**       | (4,758   | )          | (10,130  | )          |
| Non-deductible  expenses                                                                                      | ** ** | **143**     |        | 185      |       | 433      |       |
| Other  permanent differences                                                                                  | ** ** | **—**  |        | 1,018    |       | 24       |       |
| Expiry of non-capital  losses                                                                                 | ** ** | **2,019**   |        | 7,438    |       | —   |       |
| Effect  of income tax and rate changes on future income taxes                                                 | ** ** | **—**  |        | (1,111   | )          | 10,651   |       |
| Effect of foreign currency  rate changes on future income taxes                                               | ** ** | **(13,116** | **)**       | 21,119   |       | (15,528  | )          |
| Currency effect of  difference in US dollar financial reporting compared with CA dollar income  tax reporting | ** ** | **(600**    | **)**       | 1,340    |       | (1,390   | )          |
| Change  in valuation allowance related to the current year                                                    | ** ** | **18,163**  |        | (25,231  | )          | 15,940   |       |
| Other                                                                                                         | ** ** | **—**  |        | 116      |       | 22       |       |
| Proceeds  received from the APIF transaction                                                                  | ** ** | **(10,464** | **)**       | —   |       | —   |       |
| Income  tax expense                                                                                           | ** ** | **$**       | **(10,371** | **)**    | $          | 116      |       | $ | 22 |   |

 

F-30

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

As at December 31, 2009, the Corporation has available income taxloss carryforwards of $44,125 that may be used to reduce taxable income infuture years, in certain jurisdictions, expiring as follows:

 
| 2029       |   | $      | 138    |   |
|------------|--------|--------|--------|--------|
| No  expiry |   | 43,987 |   |
|       |   | $      | 44,125 |   |

 

As at December 31, 2009, the Corporation has no unclaimedscientific research and experimental development expenditures (2008 - $27,355)that can be used to offset future income over an indefinite period. TheCorporation also has no non-refundable investment tax credits (2008 - $6,775)that can be used to reduce future federal income taxes payable.

 

Components of the Corporation’s net future income tax asset are:

 
| ** **                                                 | ** ** | **2009**    | ** ** | **2008** | ** ** |
|------------------------------------------------------------|------------|-------------|------------|----------|------------|
| **Assets**                                                 | ** ** | ** **  |       |     |       |
| Non-capital losses                                         | ** ** | **$**       | **15,453** |     | $          | 66,844 |   |
| Scientific research and  experimental development expenses | ** ** | **—**  |       | 7,835    |       |
| Property, plant and  equipment and intellectual property   | ** ** | **123**     |       | 12,321   |       |
| Investment tax credits                                     | ** ** | **—**  |       | 5,759    |       |
| Warranty and other  provisions                             | ** ** | **545**     |       | 533      |       |
| Share issue costs                                          | ** ** | **1**       |       | (201     | )          |
| Valuation allowance                                        | ** ** | **(16,122** | **)**      | (93,091  | )          |
| **Net  future income tax asset**                           | ** ** | **$**       | **—** |     | $          | — |   |

 

The Corporation has recorded a valuation allowance to reflectuncertainties associated with the realization of all future income taxassets.  The movement in the valuationallowance during 2009 consists of an increase as a result of current yearresults of $18,163 and a reduction in the valuation allowance as a result ofthe APIF transaction (note 2) of $95,132 reflecting the disposal of taxattributes.

 

**Note 17. Net Loss Per Share**

 

On February 8, 2010the Corporation announced it would implement a share consolidation of itsissued and outstanding common shares in order to comply with the Minimum BidPrice Rule of the NASDAQ. The consolidation was effective as of March 12,2010 and was implemented with a ratio of one post-consolidation share for every25 pre-consolidation shares. The consolidation reduced the number of sharesoutstanding from approximately 105,049,666 to approximately 4,201,987.  The Corporation has amended the disclosuresin the consolidated financial statements to reflect the share consolidation asif it had occurred on December 31, 2006.

 

Net loss per share is calculated using the weighted average number ofcommon shares outstanding for the year of 3,697,740 shares in 2009 (2008 –3,683,226; 2007 – 3,671,916).  No effecthas been given to the potential exercise of stock options and warrants in thecalculation of diluted net loss per share as the effect would be anti-dilutive.

 

F-31

----

 

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

**Note 18. Consolidated Statements of Cash Flows**

 

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

 
| ** **                                  | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Decrease (increase) in  current assets      | ** ** | ** ** |       |     |       |     |       |
| Accounts receivable                         | ** ** | **$**      | **754**    |     | $          | 7,335    |       | $ | (2,687 | ) |
| Grants receivable                           | ** ** | **(69**    | **)**      | 320      |       | 1,290    |       |
| Inventories                                 | ** ** | **(1,645** | **)**      | 2,558    |       | 59       |       |
| Prepaid expenses and  other current assets  | ** ** | **(174**   | **)**      | (89      | )          | 507      |       |
| Increase (decrease) in  current liabilities | ** ** | ** ** |       |     |       |     |       |
| Accounts payable and  accrued liabilities   | ** ** | **(2,259** | **)**      | (1,050   | )          | (3,486   | )          |
| Unearned revenue                            | ** ** | **(239**   | **)**      | (4,257   | )          | 217      |       |
|                                        | ** ** | **$**      | **(3,632** | **)**    | $          | 4,817    |       | $ | (4,100 | ) |

 

**Note 19. Segmented Financial Information**

 

The Corporation’s reportable segments include: (i) OnSiteGeneration; (ii) Power Systems; and (iii) Test Systems. Whereapplicable, corporate and other activities are reported separately as Corporateand Other. Accordingly, operating segments have changed from prior years andall years have been restated to reflect the new organization.

 

OnSite Generation includes the design, development, manufacture, andsale of hydrogen generation products. Power Systems includes the design,development, manufacture, and sale of fuel cell products. Test Systems, whichis in the process of being wound up, included the manufacturing and sale offuel cell test products and diagnostic testing services.

 

Financial information by reportable segment for the years ended December 31,2009, 2008 and 2007 is as follows:

 
| ** **                                     | ** ** | **Year ended  December 31, 2009** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **OnSite  Generation**                 | ** ** | **Power  Systems** | ** ** | **Test********Systems** | ** ** | **Corporate  and Other** | ** ** | **Total** | ** ** |
| Revenue from external  customers               | ** ** | **$**                                  | **12,303** | ** ** | **$** | **6,538** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **18,841** | ** ** |
| Amortization of  intangible assets             | ** ** | **—**                             | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** | **—** | ** ** |
| Amortization of  property, plant and equipment | ** ** | **—**                             | ** ** | **—** | ** ** | **—** | ** ** | **984** | ** ** | **984** | ** ** |
| Interest income                                | ** ** | **—**                             | ** ** | **—** | ** ** | **—** | ** ** | **180** | ** ** | **180** | ** ** |
| Interest expense                               | ** ** | **—**                             | ** ** | **—** | ** ** | **—** | ** ** | **(11** | **)** | **(11** | **)** |
| Income tax recovery                            | ** ** | **—**                             | ** ** | **—** | ** ** | **—** | ** ** | **(10,371** | **)** | **(10,371** | **)** |
| Segment loss (i)                               | ** ** | **(1,758**                             | **)**      | **(6,972** | **)** | **(307** | **)** | **(338** | **)** | **(9,375** | **)** |
|                                                |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                     | ** ** | **Year ended December 31,  2008** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **OnSite  Generation**                 | ** ** | **Power  Systems** | ** ** | **Test********Systems** | ** ** | **Corporate  and Other** | ** ** | **Total** | ** ** |
| Revenue from external  customers               |       | $                                      | 31,207     |   | $ | 5,643 |   | $ | 2,490 |   | $ | — |   | $ | 39,340 |   |
| Amortization of  intangible assets             |       | —                                 |       | — |   | — |   | 249 |   | 249 |   |
| Amortization of property,  plant and equipment |       | —                                 |       | — |   | — |   | 855 |   | 855 |   |
| Interest income                                |       | —                                 |       | — |   | — |   | 940 |   | 940 |   |
| Interest expense                               |       | —                                 |       | — |   | — |   | (17 | ) | (17 | ) |
| Income tax expense  recovery                   |       | —                                 |       | — |   | — |   | 116 |   | 116 |   |
| Segment income (loss)  (i)                     |       | 2,106                                  |       | (9,757 | ) | (469 | ) | (6,199 | ) | (14,319 | ) |
|                                                |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-32

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 
| ** **                                     | ** ** | **Year ended December 31,  2007** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **OnSite  Generation**                 | ** ** | **Power  Systems** | ** ** | **Test********Systems** | ** ** | **Corporate  and Other** | ** ** | **Total** | ** ** |
| Revenue from external  customers               |       | $                                      | 19,608     |   | $ | 6,103 |   | $ | 12,279 |   | $ | — |   | $ | 37,990 |   |
| Amortization of  intangible assets             |       | —                                 |       | — |   | — |   | 251 |   | 251 |   |
| Amortization of  property, plant and equipment |       | —                                 |       | — |   | — |   | 903 |   | 903 |   |
| Interest income                                |       | —                                 |       | — |   | — |   | 2,301 |   | 2,301 |   |
| Interest expense                               |       | —                                 |       | — |   | — |   | (52 | ) | (52 | ) |
| Income tax expense                             |       | —                                 |       | — |   | — |   | 22 |   | 22 |   |
| Segment loss (i)                               |       | (5,436                                 | )          | (14,283 | ) | (1,465 | ) | (6,884 | ) | (28,068 | ) |
|                                                |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(i)             Segment income (loss) includes revenuesless cost of revenues, directly attributable selling, general andadministrative costs, research and product development costs net of associatedgrants, amortization of property, plant and equipment and intangible assets,other expenses (or income) and income taxes. Amortization of property, plantand equipment  is not allocated to thesegments as a significant portion of the Corporation’s assets are common acrossthe segments.

 

The accounting policies for inter-segment transactions are the same asthose described in Note 2.

 

Goodwill relating to the Corporation’s OnSite Generation segment as at December 31,2009 was $5,446 (2008 - $5,025), respectively. OnSite Generation primarilyconsists of the Corporation’s self-sustaining subsidiary located in Belgiumwith a functional currency of the Euro. The goodwill balance increased in 2009 as a result of currencyfluctuations between the US$ and Euro. There is no goodwill relating to Power Systems or Test Systems. TheCorporation currently does not allocate its remaining assets among reportablesegments.

 

A significant portion of the Corporation’s goodwill is common acrossthe locations. Therefore, management does not classify goodwill on a locationbasis.

 

Revenues and cost of revenues derived from products and services are asfollows:

 
| ** **   | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007**   | ** ** |
|--------------|------------|------------|------------|----------|------------|------------|------------|
| **Revenues** | ** ** | ** ** |       |     | ** ** | ** ** | ** ** |
| Products     | ** ** | **$**      | **14,736** |     | $          | 38,693     |       | $ | 34,486 |   |
| Services     | ** ** | **4,105**  |       | 647      |       | 3,504      |       |
|         | ** ** | **$**      | **18,841** |     | $          | 39,340     |       | $ | 37,990 |   |

 
| ** **           | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007**   | ** ** |
|----------------------|------------|------------|------------|----------|------------|------------|------------|
| **Cost of revenues** | ** ** | ** ** |       |     | ** ** | ** ** | ** ** |
| Products             | ** ** | **$**      | **13,219** |     | $          | 31,090     |       | $ | 32,402 |   |
| Services             | ** ** | **1,894**  |       | 356      |       | 1,199      |       |
|                 | ** ** | **$**      | **15,113** |     | $          | 31,446     |       | $ | 33,601 |   |

 

F-33

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

Revenues are segmented by geographic location, as follows:

 
| ** **           | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------|------------|------------|------------|----------|------------|----------|------------|
|                 | ** ** | ** ** |       |     |       |     |       |
| United States        | ** ** | **$**      | **2,561**  |     | $          | 8,428    |       | $ | 5,609 |   |
| Canada               | ** ** | **2,320**  |       | 534      |       | 4,378    |       |
| Germany              | ** ** | **2,227**  |       | 655      |       | 1,395    |       |
| Turkey               | ** ** | **1,857**  |       | 77       |       | —   |       |
| France               | ** ** | **1,678**  |       | 1,144    |       | 2,633    |       |
| India                | ** ** | **1,361**  |       | 85       |       | 774      |       |
| Austria              | ** ** | **1,147**  |       | —   |       | 3        |       |
| Russia               | ** ** | **793**    |       | 12,927   |       | 5,629    |       |
| Spain                | ** ** | **791**    |       | 1,815    |       | 138      |       |
| Sweden               | ** ** | **210**    |       | 1,600    |       | 119      |       |
| United Arab Emirates | ** ** | **187**    |       | 20       |       | 1,255    |       |
| United Kingdom       | ** ** | **178**    |       | 1,076    |       | 552      |       |
| China                | ** ** | **127**    |       | 1,351    |       | 1,435    |       |
| Romania              | ** ** | **74**     |       | 83       |       | 277      |       |
| Belgium              | ** ** | **43**     |       | 2,020    |       | —   |       |
| Poland               | ** ** | **34**     |       | 639      |       | —   |       |
| Japan                | ** ** | **24**     |       | 492      |       | 2,256    |       |
| Saudi Arabia         | ** ** | **11**     |       | 1,790    |       | —   |       |
| Brazil               | ** ** | **1**      |       | 712      |       | 2,017    |       |
| Korea                | ** ** | **—** |       | 1,271    |       | 1,070    |       |
| Argentina            | ** ** | **—** |       | 8        |       | 2,010    |       |
| Slovenia             | ** ** | **—** |       | 3        |       | 1,275    |       |
| Rest of world        | ** ** | **3,217**  |       | 2,610    |       | 5,165    |       |
|                 | ** ** | **$**      | **18,841** |     | $          | 39,340   |       | $ | 37,990 |   |

 

The Corporation’s largest customers comprise the following percentagesof revenues:

 
| ** ** | ** ** | **2009**   | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------|------------|------------|------------|----------|------------|----------|------------|
| ** ** | ** ** | **%**      | ** ** | **%**    | ** ** | **%**    | ** ** |
|       | ** ** | ** ** |       |     |       |     |       |
| First      | ** ** | **9**      |       | 18       |       | 12       |       |
| Second     | ** ** | **7**      |       | 7        |       | 5        |       |
| Third      | ** ** | **6**      |       | 5        |       | 5        |       |
| Fourth     | ** ** | **5**      |       | 5        |       | 4        |       |
| Others     | ** ** | **73**     |       | 65       |       | 74       |       |
|       | ** ** | **100**    |       | 100      |       | 100      |       |

 

Property, plant and equipment are located in the following countries:

 
|    | ** ** | **2009**  | ** ** | **2008** | ** ** |
|---------|------------|-----------|------------|----------|------------|
| Canada  | ** ** | **$**     | **1,356**  |     | $          | 2,100 |   |
| Belgium | ** ** | **1,813** |       | 1,982    |       |
|    | ** ** | **$**     | **3,169**  |     | $          | 4,082 |   |

 

A significant portion of the Corporation’s production, testing,equipment, and facilities are common across the segments. Therefore, managementdoes not classify asset information on a segmented basis.

 

F-34

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

**Note 20. Differences Between Canadian and United StatesAccounting Principles**

 

The Corporation’s consolidated financial statements have been preparedin accordance with Canadian GAAP, which differs in certain respects from thoseprinciples that the Corporation would have followed had its consolidatedfinancial statements been prepared in accordance with US GAAP.

 

A reconciliation of net loss for the year from Canadian GAAP to conformwith US GAAP is as follows:

 
| ** **                                                                              | ** ** | **2009**      | ** ** | **2008**  | ** ** | **2007**  | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------|------------|-----------|------------|-----------|------------|
| Net loss for the year  based on Canadian GAAP                                           | ** ** | **$**         | **(9,375** | **)**     | $          | (14,319   | )          | $ | (28,068 | ) |
| Stock-based  compensation (i)                                                           |       | 151           |       | 88        |       | —    |       |
| Net loss for the year  based on US GAAP                                                 | ** ** | **$**         | **(9,224** | **)**     | $          | (14,231   | )          | $ | (28,068 | ) |
|                                                                                    | ** ** | ** **    |       |      |       |      |       |
| Basic and fully diluted  comprehensive net loss per share based on US GAAP              | ** ** | **$**         | **(2.49**  | **)**     | $          | (3.86     | )          | $ | (7.64 | ) |
| Weighted average number  of shares used in calculating comprehensive net loss per share | ** ** | **3,697,740** |       | 3,683,226 |       | 3,671,916 |       |

 
| ** **                                        | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Shareholders’ equity  based on Canadian GAAP | ** ** | **$**    | **17,480** |     | $          | 25,483   |       | $ | 40,384 |   |
| Stock-based  compensation (i)                     | ** ** | **239**  |       | 88       |       | —   |       |
| Shareholders’ equity  based on US GAAP       | ** ** | **$**    | **17,719** |     | $          | 25,571   |       | $ | 40,384 |   |

 

The condensed statements of operations and cash flows for the yearsended December 31, under US GAAP, are as follows:

 
| ** **                                       | ** ** | **2009**    | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Revenues                                         | ** ** | **$**       | **18,841** |     | $          | 39,340   |       | $ | 37,990 |   |
| Cost of revenues                                 | ** ** | **15,113**  |       | 31,446   |       | 33,601   |       |
| Operating expenses                               | ** ** | **23,364**  |       | 23,334   |       | 36,866   |       |
| Loss  from operations                            | ** ** | **(19,636** | **)**      | (15,440  | )          | (32,477  | )          |
| Net loss for the year                            | ** ** | **(9,224**  | **)**      | (14,231  | )          | (28,068  | )          |
|                                             | ** ** | ** **  |       |     |       |     |       |
| Cash  used in operating activities               | ** ** | **(11,085** | **)**      | (6,758   | )          | (28,416  | )          |
| Cash provided by (used  in) investing activities | ** ** | **(1,465**  | **)**      | 13,017   |       | 37,987   |       |
| Cash  provided by (used in) financing activities | ** ** | **108**     |       | (118     | )          | (48      | )          |
|                                                  |            |             |            |          |            |          |            |  |  |  |

 

----

(i)                                     Under US GAAP, stock-based compensationcost is based on the estimated number of instruments expected to vest, whichare then re-estimated at reporting dates to the extent that subsequentinformation indicates the actual number of instruments expected to vest islikely to differ from previous estimates. Under Canadian GAAP, forfeitures ofstock-based compensation awards, DSUs and RSUs can be accounted for in theperiod in which the forfeiture occurs.

 

F-35

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

A reconciliation of additional disclosures to conform with US GAAP isas follows:

 

**Consolidatedstatements of cash flows**

 

The consolidatedstatements of cash flows have been prepared in accordance with International AccountingStandard 7, “Cash flow statements.”  As aresult, a reconciliation to US GAAP is not required.

 

**Revenue**

 

Sales taxes collected areexcluded from revenue.

 

**Stock-basedcompensation**

 

The Corporation adoptedthe provisions of ASC 718 “Compensation - Stock Compensation” for US GAAPeffective January 1, 2006.  Noincome tax benefit is recorded in the consolidated statements of operations forthese costs.

 

The total intrinsic valueof options exercised during the year ended December 31, 2009, 2008 and 2007was approximately $27, $5, and $nil, respectively.  As of December 31, 2009, there wasapproximately $323 (December 31, 2008 - $325) of unrecognized compensationcost related to stock option awards that is expected to be recognized asexpense over a weighted average period of 2.8 years (2008 - 2.6 years).  The total fair value of stock options thatvested during the years ended December 31, 2009, 2008 and 2007, wasapproximately $495, $1,329, and $1,502, respectively.

 

The total intrinsic valueof options outstanding as at December 31, 2009 was $nil (December 31,2008 - $25).  The total intrinsic valueof options exercisable as at December 31, 2009 was $nil (December 31,2008 - $25).  The total number of optionsfully vested as at December 31, 2009 and expected to vest beyond December 31,2009 was 238,287 (December 31, 2008 — 220,672).  The total intrinsic value of these optionswas $nil at December 31, 2009 ($25 - December 31, 2008) with aweighted average contractual term of 6.5 years (2008 - 6.2 years) and aweighted average exercise price of $66.07 (2008 - $91.00).  The weighted average contractual term of theoptions exercisable is 4.8 years (2008 - 5.0 years).

 

The Corporation’sestimate of an expected option term is based on the exercise behaviour of itsemployees.  The estimated stock pricevolatility was derived based on the Corporation’s actual historical stockprices over the past four years, which represents the Corporation’s bestestimate of expected volatility.  Therisk free interest rate for periods within the contractual life of the award isbased on the interest rates of government bonds with similar contractual lives.

 

DSUs granted tonon-employee directors during 2009, 2008, and 2007 are valued using theBlack-Scholes option pricing model with assumptions materially consistent withthose used to value stock options.  In2009, 2008 and 2007, 17,883, 13,470, and 13,417, DSUs were granted.  In 2009, 5,517 DSUs were exercised (2008 -738).

 

**Incometaxes**

 

The components of lossbefore income taxes for the years ended December 31, 2009, 2008 and 2007are as follows:

 

Loss before income taxes:

 
| ** ** | ** ** | **2009**   | ** **  | **2008** | ** ** | **2007** | ** ** |
|------------|------------|------------|-------------|----------|------------|----------|------------|
| Canada     | ** ** | **$**      | **(15,231** | **)**    | $          | (14,471  | )          | $ | (24,834 | ) |
| Foreign    | ** ** | **(4,364** | **)**       | 268      |       | (3,212   | )          |
| Total      | ** ** | **$**      | **(19,595** | **)**    | $          | (14,203  | )          | $ | (28,046 | ) |

 

F-36

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

The significantcomponents of the income tax benefit for the years ended December 31,2009, 2008 and 2007 are as follows:

 
| ** **                               | ** ** | **2009**    | ** **  | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Current taxes:                           | ** ** | ** **  |        |     |       |     |       |
| Canadian                                 | ** ** | **$**       | **17**      |     | $          | —   |       | $ | — |   |
| Proceeds from APIF  transaction (note 2) | ** ** | **(10,464** | **)**       | —   |       | —   |       |
| Foreign                                  | ** ** | **76**      |        | 116      |       | 22       |       |
|                                     | ** ** | **$**       | **(10,371** | **)**    | $          | 116      |       | $ | 22 |   |

 
| ** **           | ** ** | **2009**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------|------------|------------|------------|------------|------------|------------|------------|
| Future income taxes: | ** ** | ** ** | ** ** | ** ** |       |       |       |
| Canadian             | ** ** | **$**      | **—** | ** ** | **$**      | **—** |       | $ | — |   |
| Foreign              | ** ** | **—** | ** ** | **—** |       | —     |       |
|                 | ** ** | **$**      | **—** |       | $          | —     |       | $ | — |   |

 

At December 31,2009, the Corporation adopted the provisions of ASC 740 - Income Taxes, on January 1,2007.  The Corporation does not have any uncertain tax filing positions. As a result, the Corporation has included all of its tax benefits in itsdisclosure of future income tax assets.  There are no significant changesto this assessment of uncertain tax filing positions anticipated within thenext 12 months.

 

The Corporationrecognizes accrued interest and penalties related to unrecognized tax benefitsas a component of income tax expense. This accounting policy did not change as a result of the adoption of FIN48.  During the year ended December 31,2009, the Corporation recognized $nil in interest and penalties (2008 - $nil,2007 - $nil).  The Corporation had $nilof interest and penalties accrued at December 31, 2009 (December 31,2008 - $nil, December 31, 2007 - $nil).

 

The Corporation filesincome tax returns in the Canadian federal jurisdiction and various provincialand foreign jurisdictions. In the normal course of business, the Corporation issubject to examination by taxing authorities. Open tax years in Canada rangefrom 2004 to 2009.  Open tax years inforeign jurisdictions range from 2005  to 2009.  However, upon examination in subsequentyears, if net operating loss carry forwards and tax credit carry forwards areutilized, the Canadian and foreign jurisdictions can reduce net operating losscarry forwards and tax credit carry forwards utilized in the year beingexamined if they do not agree with the carry forward amount.  As of December 31, 2009, the Corporationwas not under audit in Canada or non-Canadian taxing jurisdiction.

 

**Note 21. Subsequent events**

 

On January 14, 2010the Corporation issued units in a registered direct offering with twoinstitutional investors, resulting in gross proceeds of $5,000 before placementagent’s fees and other offering expenses. Under the terms of the transaction,Hydrogenics sold 12,500,000 units for $0.40 per unit (500,000 and $10.00respectively on a post consolidated basis). The units consisted of 12,500,000shares (500,000 on a post consolidated basis) of the Corporation and  warrants for the purchase of one common sharefor each common share purchased; 5,983,886 (239,356 on a post consolidatedbasis) of these warrants are exercisable at any time until January 14,2015, at an exercise price of $0.52 per common share ($13.00 on a postconsolidated basis). The remaining 6,516,114 warrants (260,646 on a postconsolidated basis) are exercisable for a period of five years beginning July 12,2010, at an exercise price of $0.52 per common share. Each of the warrantscontains protection as to the exercise price but not the number of sharesissuable thereunder and conditions subject to Shareholder approval.

 

F-37

----

 

Hydrogenics Corporation

Notes to Consolidated Financial Statements

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

 

Subsequent to year end,the Corporation completed the second tranche of the transaction (the “Transaction”)with Algonquin Power Income Fund (note 2).  An additional $0.4 million was received by the Corporation on February 23,2010.

 

On February 25,2010, Alpha Capital Anstalt (“Alpha”) filed suit against the Corporation andtwo of its’ Officers in the Supreme Court of the State of New York (County ofNew York) regarding the Company’s proposed share consolidation, which wasannounced on February 8, 2010. The Corporation issued common shares andwarrants to Alpha and another institutional investor in a registered directoffering (the “Offering”) completed on January 14, 2010. The terms of theOffering were set out in a securities purchase agreement (the “PurchaseAgreement”) dated as of January 11, 2010 between the Corporation, Alphaand the other institutional investor. Under the terms of the Offering, Alphaand the other institutional investor each paid $2,500 for 6,250,000 commonshares (250,000 on a post-consolidated basis), 2,991,943 series A warrants(119,678 on a post-consolidated basis) and 3,258,057 series B warrants (130,323on a post consolidated basis) of the Company. In its complaint, Alpha allegesthat the Corporation’s proposed share consolidation triggers a put rightpursuant to the terms of the warrants and gives rise to breach of contract,negligent misrepresentation and fraud claims. Alpha is seeking damages of atleast $2,000 plus interest, costs and fees with respect to the alleged putright and damages of at least $1,375 plus interest, costs and fees with respectto the alleged breach of contract, negligent misrepresentation and fraudclaims. The Corporation believes that the claims are without merit and theCorporation will take such action as is advised to protect the Corporation’sinterests. The Corporation has also received a letter from the otherinstitutional investor making similar allegations but no suit has been filed.

 

On February 8, 2010the Corporation announced it would implement a share consolidation of itsissued and outstanding common shares in order to comply with the Minimum BidPrice Rule of the NASDAQ. The consolidation was effective as of March 12,2010 and was implemented with a ratio of one post-consolidation share for every25 pre-consolidation shares. The consolidation reduced the number of sharesoutstanding from approximately 105,049,666 to approximately 4,201,987.  The Corporation has amended the disclosuresin the consolidated financial statements to reflect the share consolidation asif it had occurred on December 31, 2006.

 

F-38

----

** **

**ITEM 19.       EXHIBITS**

 
| **Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 1.1*       |       | Articles of  Incorporation (incorporated by reference from Exhibit 99.2 to Company’s  Report of Foreign Private Issuer on Form 6-K, File No. 000-31815,  filed with the Securities and Exchange Commission on October 27, 2009)                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 1.2*       |       | Articles of Arrangement  (incorporated by reference from Exhibit 99.4 to the Company’s Report of  Foreign Private Issuer on Form 6-K, File No. 000-31815, filed with  the Securities and Exchange Commission on  October 27, 2009)                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 1.3*       |       | Certificate of  Arrangement (incorporated by reference from Exhibit 99.5 to the  Company’s Report of Foreign Private Issuer on Form 6-K, File  No. 000-31815, filed with the Securities and Exchange Commission on  October 27, 2009)                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 1.4*       |       | Articles of Amendment  to the Company’s Articles of Incorporation (incorporated by reference from  Exhibit 99.3 to the Company’s Report of Foreign Private Issuer on  Form 6-K, File No. 000-31815, filed with the Securities and  Exchange Commission on March 9, 2010)                                                                         |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 1.5*       |       | By-law No. 1  (incorporated by reference from Exhibit 99.3 to Company’s Report of  Foreign Private Issuer on Form 6-K, File No. 000-31815, filed with  the Securities and Exchange Commission on October 27, 2009)                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 1.6        |       | Amendment to By-law  No. 1                                                                                                                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 2.1        |       | Form of share  certificate                                                                                                                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 2.2*       |       | Warrant agreement dated  as of January 14, 2010 between the Company and Mellon Investor Services  LLC (including form of warrants) (incorporated by reference from  Exhibit 99.1 to the Company’s Report of Foreign Private Issuer on  Form 6-K, File No. 000-31815, filed with the Securities and  Exchange Commission on January 14, 2010)     |
|       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                     |
| 4.1*       |       | Stock Option Plan dated  June 22, 2009****(incorporated by reference from Exhibit 4.1 to Old  Hydrogenics’ Annual Report on Form 20-F, File No. 000-31815, filed  with the Securities and Exchange Commission on June 30, 2009)                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2*       |       | Restricted Share Unit  Plan dated June 22, 2009****(incorporated by reference from Exhibit 4.2 to Old  Hydrogenics’ Annual Report on Form 20-F, File No. 000-31815, filed  with the Securities and Exchange Commission on June 30, 2009**)**                                                                                                     |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 4.3*       |       | Deferred Share Unit  Plan dated June 22, 2009****(incorporated by reference from Exhibit 4.3 to Old  Hydrogenics’ Annual Report on Form 20-F, File No. 000-31815, filed  with the Securities and Exchange Commission on June 30, 2009**)**                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 4.4*       |       | Lease, dated  June 23, 2000 (as amended by a Lease Extension Agreement dated  February 10, 2005), by and between Orlando Corporation and Hydrogenics  (incorporated by reference from Exhibit 4.4 to Old Hydrogenics’ Annual  Report on Form 20-F, File No. 000-31815, filed with the Securities  and Exchange Commission on June 30, 2009) |

 

83

----

 
| 4.5*   |         | Support Agreement dated  June 11, 2009, among the Company, Old Hydrogenics, and the Trustees of  Algonquin Power Income Fund (incorporated by reference from Exhibit 99.2  to Amendment No. 1 to Old Hydrogenics’ Report of Foreign Private Issuer  on Form 6-K, File No. 000-31815, filed with the Securities and  Exchange Commission on August 17, 2009)** |
|--------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.6*   |         | Expense Reimbursement  Agreement dated June 11, 2009, among Algonquin Power Management Inc.,  the Company and Old Hydrogenics (incorporated by reference from  Exhibit 99.3 to Old Hydrogenics’ Report of Foreign Private Issuer on  Form 6-K, File No. 000-31815, filed with the Securities and  Exchange Commission on June 16, 2009)                            |
|   | *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.7*   |         | APMI Guarantee dated  June 11, 2009, among Algonquin Power Management Inc., the Company and  Old Hydrogenics (incorporated by reference from Exhibit 99.4 to Old  Hydrogenics’ Report of Foreign Private Issuer on Form 6-K, File  No. 000-31815, filed with the Securities and Exchange Commission on  June 16, 2009)                                             |
|   | *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.8*   |         | Algonquin Power  Guarantee dated June 11, 2009, among Algonquin Power Income Fund, Algonquin  Power Management Inc., the Company and Old Hydrogenics (incorporated by  reference from Exhibit 99.5 to Old Hydrogenics’ Report of Foreign  Private Issuer on Form 6-K, File No. 000-31815, filed with the  Securities and Exchange Commission on June 16, 2009)     |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.9*   |         | Divestiture Agreement  dated October 27, 2009, among the Company, Old Hydrogenics, Stuart  Energy Systems Corporation and Hydrogenics Test Systems Inc. (incorporated by  reference from Exhibit 99.8 to the Company’s Report of Foreign Private Issuer  on Form 6-K, File No. 000-31815, filed with the Securities and  Exchange Commission on October 27, 2009)  |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.10*  |         | Indemnity Agreement  dated October 27, 2009, between the Company and Algonquin  Power & Utilities Corp. (incorporated by reference from  Exhibit 99.7 to the Company’s Report of Foreign Private Issuer on  Form 6-K, File No. 000-31815, filed with the Securities and  Exchange Commission on October 27, 2009)                                         |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.12*  |         | Securities Purchase  Agreement dated January 11, 2010, among the Company, Iroquois Master  Fund Ltd. and Alpha Capital Anstalt (incorporated by reference from  Exhibit 99.1 to the Company’s Report of Foreign Private Issuer on  Form 6-K, File No. 000-31815, filed with the Securities and  Exchange Commission on January 12, 2010)                           |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 8.1    |         | List of Significant  Subsidiaries                                                                                                                                                                                                                                                                                                                                                                |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 12.1   |         | Certification of the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                    |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 12.2   |         | Certification of the  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                    |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 13.1   |         | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 13.2   |         | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 15.1   |         | Consent of  PricewaterhouseCoopers LLP                                                                                                                                                                                                                                                                                                                                                      |

 

84

----

 

----

*    Previouslyfiled.

 

**   Portions ofthis exhibit have been omitted pursuant to a request for confidentialtreatment.

 

85

----

 

**SIGNATURE**

 

The registrant herebycertifies that it meets all of the requirements for filing on Form 20-Fand that it has duly caused and authorized the undersigned to sign this annualreport on its behalf.

 

 
|                            | **HYDROGENICS CORPORATION** |
|---------------------------------|-----------------------------|
|                            |                        |   |
|                            |                        |   |
| Dated: March 26, 2010 | By:                         | /s/ Lawrence Davis |
|                            |                        | Name: | Lawrence Davis |
|                            |                        | Title: | Chief Financial Officer |
|                                 |                             |  |  |  |

 

86

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**HYDROGENICSCORPORATION**

 

**INDEXTO EXHIBITS**

 
| **Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1*       |       | Articles of  Incorporation (incorporated by reference from Exhibit 99.2 to Company’s  Report of Foreign Private Issuer on Form 6-K, File No. 000-31815,  filed with the Securities and Exchange Commission on October 27, 2009)                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 1.2*       |       | Articles of Arrangement  (incorporated by reference from Exhibit 99.4 to the Company’s Report of  Foreign Private Issuer on Form 6-K, File No. 000-31815, filed with  the Securities and Exchange Commission on October 27,  2009)                                                                                                                    |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 1.3*       |       | Certificate of  Arrangement (incorporated by reference from Exhibit 99.5 to the  Company’s Report of Foreign Private Issuer on Form 6-K, File  No. 000-31815, filed with the Securities and Exchange Commission on  October 27, 2009)                                                                                                                 |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 1.4*       |       | Articles of Amendment  to the Company’s Articles of Incorporation (incorporated by reference from  Exhibit 99.3 to the Company’s Report of Foreign Private Issuer on  Form 6-K, File No. 000-31815, filed with the Securities and  Exchange Commission on March 9, 2010)                                                                         |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 1.5*       |       | By-law No. 1  (incorporated by reference from Exhibit 99.3 to Company’s Report of  Foreign Private Issuer on Form 6-K, File No. 000-31815, filed with  the Securities and Exchange Commission on October 27, 2009)                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 1.6        |       | Amendment to By-law  No. 1                                                                                                                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 2.1        |       | Form of share  certificate                                                                                                                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 2.2*       |       | Warrant agreement dated  as of January 14, 2010 between the Company and Mellon Investor Services  LLC (including form of warrants) (incorporated by reference from  Exhibit 99.1 to the Company’s Report of Foreign Private Issuer on  Form 6-K, File No. 000-31815, filed with the Securities and  Exchange Commission on January 14, 2010)     |
|       | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                     |
| 4.1*       |       | Stock Option Plan dated  June 22, 2009****(incorporated by reference from Exhibit 4.1 to Old  Hydrogenics’ Annual Report on Form 20-F, File No. 000-31815, filed  with the Securities and Exchange Commission on June 30, 2009)                                                                                                                  |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 4.2*       |       | Restricted Share Unit  Plan dated June 22, 2009****(incorporated by reference from Exhibit 4.2 to Old  Hydrogenics’ Annual Report on Form 20-F, File No. 000-31815, filed  with the Securities and Exchange Commission on June 30, 2009**)**                                                                                                     |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 4.3*       |       | Deferred Share Unit  Plan dated June 22, 2009****(incorporated by reference from Exhibit 4.3 to Old  Hydrogenics’ Annual Report on Form 20-F, File No. 000-31815, filed  with the Securities and Exchange Commission on June 30, 2009**)**                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                           |
| 4.4*       |       | Lease, dated  June 23, 2000 (as amended by a Lease Extension Agreement dated  February 10, 2005), by and between Orlando Corporation and Hydrogenics  (incorporated by reference from Exhibit 4.4 to Old Hydrogenics’ Annual  Report on Form 20-F, File No. 000-31815, filed with the Securities  and Exchange Commission on June 30, 2009) |

 

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| 4.5*   |         | Support Agreement dated  June 11, 2009, among the Company, Old Hydrogenics, and the Trustees of  Algonquin Power Income Fund (incorporated by reference from Exhibit 99.2  to Amendment No. 1 to Old Hydrogenics’ Report of Foreign Private Issuer  on Form 6-K, File No. 000-31815, filed with the Securities and  Exchange Commission on August 17, 2009)** |
|--------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.6*   |         | Expense Reimbursement  Agreement dated June 11, 2009, among Algonquin Power Management Inc.,  the Company and Old Hydrogenics (incorporated by reference from  Exhibit 99.3 to Old Hydrogenics’ Report of Foreign Private Issuer on  Form 6-K, File No. 000-31815, filed with the Securities and  Exchange Commission on June 16, 2009)                            |
|   | *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.7*   |         | APMI Guarantee dated  June 11, 2009, among Algonquin Power Management Inc., the Company and  Old Hydrogenics (incorporated by reference from Exhibit 99.4 to Old  Hydrogenics’ Report of Foreign Private Issuer on Form 6-K, File  No. 000-31815, filed with the Securities and Exchange Commission on  June 16, 2009)                                             |
|   | *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.8*   |         | Algonquin Power  Guarantee dated June 11, 2009, among Algonquin Power Income Fund,  Algonquin Power Management Inc., the Company and Old Hydrogenics  (incorporated by reference from Exhibit 99.5 to Old Hydrogenics’ Report  of Foreign Private Issuer on Form 6-K, File No. 000-31815, filed  with the Securities and Exchange Commission on June 16, 2009)     |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.9*   |         | Divestiture Agreement  dated October 27, 2009, among the Company, Old Hydrogenics, Stuart  Energy Systems Corporation and Hydrogenics Test Systems Inc. (incorporated by  reference from Exhibit 99.8 to the Company’s Report of Foreign Private  Issuer on Form 6-K, File No. 000-31815, filed with the Securities  and Exchange Commission on October 27, 2009)  |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.10*  |         | Indemnity Agreement  dated October 27, 2009, between the Company and Algonquin  Power & Utilities Corp. (incorporated by reference from  Exhibit 99.7 to the Company’s Report of Foreign Private Issuer on  Form 6-K, File No. 000-31815, filed with the Securities and  Exchange Commission on October 27, 2009)                                         |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.12*  |         | Securities Purchase  Agreement dated January 11, 2010, among the Company, Iroquois Master  Fund Ltd. and Alpha Capital Anstalt (incorporated by reference from  Exhibit 99.1 to the Company’s Report of Foreign Private Issuer on  Form 6-K, File No. 000-31815, filed with the Securities and  Exchange Commission on January 12, 2010)                           |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 8.1    |         | List of Significant  Subsidiaries                                                                                                                                                                                                                                                                                                                                                                |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 12.1   |         | Certification of the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                    |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 12.2   |         | Certification of the  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                                                                                    |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 13.1   |         | Certification of the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 13.2   |         | Certification of the  Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                |
|   |         |                                                                                                                                                                                                                                                                                                                                                                                             |
| 15.1   |         | Consent of  PricewaterhouseCoopers LLP                                                                                                                                                                                                                                                                                                                                                      |

 

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*    Previously filed.

 

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**   Portions ofthis exhibit have been omitted pursuant to a request for confidentialtreatment.

 

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