Hydrogenics Reports Second Quarter 2006 Results

August 8, 2006

Progress on operational issues within OnSite Generation group and strengthened visibility in targeted fuel cell markets

MISSISSAUGA, ONTARIO — (MARKET WIRE) — August 08, 2006 — Hydrogenics Corporation (TSX: HYG)(NASDAQ: HYGS), a leading developer and manufacturer of hydrogen and fuel cell products, is reporting second quarter and six-month unaudited results. Results are reported in U.S. dollars and are prepared in accordance with Canadian generally accepted accounting principles.”As announced on July 28, 2006, over the course of the second quarter we made progress towards resolving the supply chain and component quality issues that we identified earlier this year within our OnSite Generation group,” said Pierre Rivard, President and Chief Executive Officer of Hydrogenics Corporation. “However, this update also communicated that we have now identified further operational and production quality issues which we believe we are addressing through appropriate corrective measures. While optimistic that we will have these issues resolved in the latter half of the year, we cannot be definitive as to when deliveries by our OnSite Generation business unit will return to historical levels.”

“During the quarter, we signed multi-year preferred supplier agreements with Linde Gas and BOC, industry leaders in the merchant gas market, thereby strengthening our market reach and sales potential.”

“Our Power Systems business unit continues to make significant progress in fuel cell product and market development efforts for backup power and light mobility markets as evidenced by recent announcements,” added Rivard. “These included orders from Linde AG and a major Japanese distributor totaling 5 HyPM Fuel Cell Power Packs for deployment in Class 1 forklifts and airport tow tractors, Additionally, we were pleased to announce a government-sponsored contract to further develop our fuel cell power pack technology and deploy up to 19 forklifts and tuggers at General Motors of Canada. In the area of backup power, we received our first Asian order from a leading mobile telecom company for three HyPM XR fuel cell power modules.”

Results for the second quarter of 2006 compared to the second quarter of 2005

– Revenues were $5.4 million, a 15% decrease from $6.4 million primarily due to the previously announced production delays in our OnSite Generation group.

– Gross profit, expressed as a percentage of revenues, was negative 15% (positive 17% in 2005) and reflects $1.8 million of additional warranty reserves largely for deliveries within our Belgian OnSite Generation group made prior to our acquisition of Stuart Energy. The requirement for these reserves became apparent upon the discovery of operational and other production quality issues identified after the implementation of standardized testing protocols implemented to resolve the supply chain and component quality issues experienced in our OnSite Generation group.

– Cash operating costs, a non-GAAP measure(1), defined as selling, general and administrative and research and product development expenses, excluding stock-based compensation were $8.1 million, a 15% increase from $7.0 million reflecting a weakening of the U.S. dollar relative to the Canadian dollar and higher costs to achieve Sarbanes-Oxley Act compliance.

– Net loss was $9.6 million, a 1% increase from $9.5 million.

(1) Cash Operating costs is a non-GAAP measure used to assist in assessing Hydrogenics’ financial performance. A description of the non-GAAP measure and reconciliation to financial statement line items follows on page 5.

Results for the second quarter of 2006 compared to the first quarter of 2006

– Revenues were $5.4 million, a 12% decrease from $6.4 million primarily due to the previously announced production delays in our OnSite Generation group.

– Gross profit, expressed as a percentage of revenues, was negative 15%, a decrease of 32% primarily due to $1.8 million of additional warranty reserves in our OnSite Generation group noted above.

– Cash operating costs were $8.1 million, an increase of 10% consistent with our business strategy to invest in targeted vertical markets, beginning in the second quarter.

– Net loss was $9.6 million, an increase of 16%, or $1.3 million.

Results for the six months ended June 30, 2006 compared to the six months ended June 30, 2005

– Revenues were $11.5 million, a 35% decrease due to production delays in our OnSite Generation group.

– Gross profit, expressed as a percentage of revenues, was 2%, a decrease of 10% due to additional warranty reserves in our OnSite Generation group noted above.

– Cash operating costs were $15.4 million, a decrease of 6% from $16.4 million.

– Net loss was $18.0 million, a decrease of 13% from $20.7 million.

Liquidity

We had $73.1 million in cash and cash equivalents and short-term investments as at June 30, 2006. The $7.7 million sequential quarterly decrease in cash and cash equivalents and short-term investments is attributable to: (i) $7.2 million net cash outflows from operations; and (ii) $0.5 million of capital expenditures.

Order backlog  Our order backlog as at June 30, 2006 was $31.5 million, as follows:                           Q1   Orders   Product/Service           Q2                     Backlog Received         Delivered      Backlog                   ------------------------------------------------- OnSite Generation   $  15.2   $  4.3            $  1.6      $  17.9 Power Systems           9.4      0.6               1.0          9.0 Test Systems            3.6      3.8               2.8          4.6                   -------------------------------------------------                     $  28.2   $  8.7            $  5.4      $  31.5                   -------------------------------------------------                   -------------------------------------------------

We expect to deliver, and recognize as revenue in 2006, approximately one-third and substantially all of our June 30th order backlog in our Power Systems and Test Systems business units respectively. Our ability to deliver, and recognize as revenue, our order backlog in our OnSite Generation business unit is predicated on resolving, in a timely manner, the operational and production quality issues previously identified.Second Quarter Highlights

Progress on markets:

OnSite Generation

– We delivered three hydrogen generation units including two for industrial applications and one for a fueling application.

– We signed multi-year preferred supplier agreements with Linde Gas and BOC.

– We secured $4.3 million of new orders including an initial order under our new BOC supply agreement for a hydrogen generation plant in New Zealand.

Power Systems

– We delivered eight Fuel Cell Power Modules (representing 180 kW).

– We secured orders for: (i) five Fuel Cell Power Packs to be integrated into forklifts and tow tractors for Linde AG and into a leading Japanese OEM’s Class 1 forklift; (ii) 3 Fuel Cell Power Modules for DC backup power for a leading Asian mobile telecom company.

– We finalized a government-sponsored contract with Sustainable Development Technology Canada to further develop our HyPM Fuel Cell Power Pack and deliver up to 19 forklifts and tuggers to General Motors of Canada over a two year operational period.

– We continued market development efforts with American Power Conversion (NASDAQ: APCC), including the installation of a critical network AC unit in an urban office tower with full compliance to extensive codes and regulations.

– We delivered more fuel cell power (703 kW) in first half 2006 than the whole of 2005, with an accelerating order book.

Test Systems

– We delivered 12 test stations including three Solid Oxide Fuel Cell (SOFC) units.

– We secured $3.8 million of new orders, a significant component of which was from a leading Japanese automotive OEM.

– We established a distribution agreement with a large Japanese corporation to address increasing market potential in Japan.

Progress on products and technology:

– We made progress in resolving component quality and supply chain issues in our OnSite Generation business unit.

– We continued development of our S-4000 IMET electrolyzer for integration with large scale renewable energy installations.

– We continued advancing our next generation fuel cell product development efforts to optimize product performance, cost and certification for targeted vertical markets.

– We continued development work on advanced test station software tools and new technologies for fuel cell diagnostics.

CONFERENCE CALL DETAILS

We will hold a conference call to review our results on August 8, 2006 at 10:30 a.m. (EDT). To participate in this conference call, please dial (416)-695-9753 approximately ten minutes before the call. Alternatively, a live webcast of our conference call will be available on our website at www.hydrogenics.com. Please visit our website at least fifteen minutes early to register and download any necessary software. Should you be unable to participate, a replay as well as a podcast link will also be available on our website.

ABOUT HYDROGENICS

Hydrogenics Corporation (www.hydrogenics.com) is a leading global developer of clean energy solutions, advancing the Hydrogen Economy by commercializing hydrogen and fuel cell products. The company has a portfolio of products and capabilities serving the hydrogen and energy markets of today and tomorrow. Hydrogenics, based in Mississauga, Ontario, Canada, has operations in North America, Europe and Asia.

NON-GAAP MEASURES

Hydrogenics uses several non-GAAP measures to assist in assessing its’ financial performance. Cash operating costs is defined as the sum of selling, general and administrative costs and research and product development expenditures less stock-based compensation expenses. This is a non-GAAP measure and may not be comparable to similar measures used by other companies.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This release contains forward-looking statements within the meaning of the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Law of 1995. These statements are based on management’s current expectations and actual results may differ from these forward-looking statements due to numerous factors, including changes in the competitive environment adversely affecting the products, markets, revenues or margins of Hydrogenics’ business. Readers should not place undue reliance on Hydrogenics’ forward-looking statements. Investors are encouraged to review the section captioned “Risk Factors” in Hydrogenics’ regulatory filings with the Canadian securities regulatory authorities and the United States Securities and Exchange Commission for a more complete discussion of factors that could affect Hydrogenics’ future performance. Furthermore, the forward-looking statements contained herein are made as of the date of this release, and Hydrogenics undertakes no obligations to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this release. The forward-looking statements contained in this release are expressly qualified by this cautionary statement.

Hydrogenics Corporation Interim Consolidated Balance Sheets (in thousands of U.S. dollars) (unaudited) ------------------------------------------------------------------------ ------------------------------------------------------------------------                                                     June 30  December 31                                                       2006         2005                                                ------------------------- Assets  Current assets  Cash and cash equivalents                       $   69,671  $     5,394 Short-term investments                               3,386       80,396 Accounts receivable                                  6,582        7,733 Grants receivable                                    2,733        1,909 Inventories                                         12,478        8,685 Prepaid expenses                                     1,794        2,353                                                -------------------------                                                     96,644      106,470  Property, plant and equipment                        5,590        5,682 Intangible assets                                   29,740       33,972 Goodwill                                            68,450       68,505 Other non-current assets                                81           28                                                -------------------------                                                 $  200,505  $   214,657                                                -------------------------                                                -------------------------  Liabilities  Current liabilities Accounts payable and accrued liabilities        $   15,715  $    14,918 Unearned revenue                                     5,368        3,772                                                -------------------------                                                     21,083       18,690  Long-term debt                                         251          325 Deferred research and development grants               160          135                                                -------------------------                                                     21,494       19,150                                                -------------------------  Shareholders' Equity Share capital and other equity                     320,228      318,804 Deficit                                           (136,232)    (118,274) Accumulated other comprehensive loss                (4,985)      (5,023)                                                -------------------------                                                    179,011      195,507                                                -------------------------                                                 $  200,505  $   214,657                                                -------------------------                                                -------------------------    Hydrogenics Corporation Interim Consolidated Statement of Shareholders' Equity (in thousands of U.S. dollars, except for share and per share amounts) (unaudited) ------------------------------------------------------------------------ ------------------------------------------------------------------------                                              Common shares                                        -------------------- Contributed                                            Number    Amount     surplus  Balance at Dec. 31, 2005               91,679,670 $ 306,957 $    11,847  Comprehensive loss:  Net loss                                        -         -           -  Foreign currency  translation adjustments                        -         -           - Comprehensive loss  Shares issued: Issuance of common shares  on exercise of options                   116,796       388           - Stock-based consulting  expense                                        -         -          39 Stock-based compensation  expense                                        -         -         997                               ------------------------------------------ Balance at Jun. 30, 2006               91,796,466 $ 307,345 $    12,883                               ------------------------------------------                               ------------------------------------------                                               Accumulated                                                    other          Total                                            comprehensive  shareholders'                                   Deficit  income (loss)         equity  Balance at Dec. 31, 2005       $ (118,274) $      (5,023) $     195,507  Comprehensive loss:  Net loss                          (17,958)             -        (17,958)  Foreign currency  translation adjustments                -             38             38                                                           -------------- Comprehensive loss                                              (17,920)                                                           -------------- Shares issued: Issuance of common shares  on exercise of options                 -              -            388 Stock-based consulting  expense                                -              -             39 Stock-based compensation  expense                                -              -            997                               ------------------------------------------ Balance at Jun. 30, 2006       $ (136,232) $      (4,985) $     179,011                               ------------------------------------------                               ------------------------------------------    Hydrogenics Corporation Interim Consolidated Statements of Operations (in thousands of U.S. dollars, except for share and per share amounts) (unaudited) ------------------------------------------------------------------------ ------------------------------------------------------------------------                               Three months ended        Six months ended                                         June 30                 June 30                                2006        2005        2006        2005                         ------------------------------------------------ Revenues                 $    5,376  $    6,293  $   11,512  $   17,597  Cost of revenues              6,170       5,215      11,253      15,497                         ------------------------------------------------                                (794)      1,078         259       2,100                         ------------------------------------------------ Operating expenses Selling, general and  administrative               6,586       5,875      13,224      12,552 Research and product  development                  1,967       1,698       3,182       4,951 Amortization of  property, plant and  equipment                      266         362         530         736 Amortization of  intangible assets            2,118       2,065       4,236       4,203 Integration costs                 -         313           -       1,037                         ------------------------------------------------                              10,937      10,313      21,172      23,479                         ------------------------------------------------ Loss from operations        (11,731)     (9,235)    (20,913)    (21,379)                         ------------------------------------------------  Other income (expenses) Provincial capital tax          (60)        (86)        (86)       (132) Interest                      1,060         496       2,006       1,166 Foreign currency gains  (losses)                     1,118        (663)      1,053        (328)                         ------------------------------------------------                               2,118        (253)      2,973         706                         ------------------------------------------------ Loss before income taxes     (9,613)     (9,488)    (17,940)    (20,673) Current income tax  expense                         13          11          18          48                         ------------------------------------------------ Net loss for the period  $   (9,626) $   (9,499) $  (17,958) $  (20,721)                         ------------------------------------------------                         ------------------------------------------------  Net loss per share Basic and diluted        $    (0.11) $    (0.10) $    (0.20) $    (0.23)  Shares used in  calculating basic and  diluted net loss per  share                   91,781,393  91,675,121  91,743,525  90,766,791    Hydrogenics Corporation Interim Consolidated Statements of Cash Flows (in thousands of U.S. dollars) (unaudited) ------------------------------------------------------------------------ ------------------------------------------------------------------------                               Three months ended        Six months ended                                         June 30                 June 30                                2006        2005        2006        2005                         ------------------------------------------------ Cash and cash  equivalents provided by  (used in) Operating activities Net loss for the period    $ (9,626)   $ (9,499)  $ (17,958)  $ (20,721) Items not affecting cash  Amortization of  property, plant and   equipment                     447         436         893       1,032  Amortization of   intangible assets           2,118       2,065       4,236       4,203  Unrealized foreign   exchange (gains) losses        15        (141)        (12)        (11)  Imputed interest on   long-term debt                  -           8           1          16  Non-cash consulting fees        20          18          39          37  Stock-based compensation       495         563         997       1,059 Net change in non-cash  working capital               (709)     (1,467)       (422)     (2,959)                         ------------------------------------------------                              (7,240)     (8,017)    (12,226)    (17,344)                         ------------------------------------------------  Investing activities Decrease in short-term  investments                 14,002      49,687      77,010      46,375 Purchase of property,  plant and equipment           (540)        (59)       (805)       (298) Business acquisitions,  net of cash acquired             -           -           -        (343)                         ------------------------------------------------                              13,462      49,628      76,205      45,734                         ------------------------------------------------  Financing activities Repayment of long-term  debt                           (30)        (54)        (93)        (81) Deferred research and  development grant              (25)         (9)          3         (17) Common shares issued,  net of issuance costs          165          11         388         146                         ------------------------------------------------                                 110         (52)        298          48                         ------------------------------------------------  Increase in cash and  cash equivalents during  the period                   6,332      41,559      64,277      28,438 Cash and cash  equivalents - Beginning  of period                   63,339      13,088       5,394      26,209                         ------------------------------------------------ Cash and cash  equivalents - End of  period                    $ 69,671    $ 54,647   $  69,671   $  54,647                         ------------------------------------------------                         ------------------------------------------------   Supplemental disclosure Interest paid              $      1    $     24   $       2   $      30 Income taxes paid                 -          10           5          66

SOURCE:  Hydrogenics Corporation

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