**Exhibit 99.2**

 

Consolidated Financial Statements

(Expressed in thousands of United States dollars)

 

**WESTPORT  INNOVATIONS  INC.**

 

For the nine months ended December 31, 2011 and

the years ended March 31, 2011 and 2010

 

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| **KPMG LLP**                     | Telephone | (604) 691-3000 |
|----------------------------------|-----------|----------------|
| **Chartered Accountants**        | Fax       | (604) 691-3031 |
| PO Box 10426 777 Dunsmuir Street | Internet  | www.kpmg.ca    |
| Vancouver BC V7Y 1K3             |      |           |
| Canada                           |      |           |

 

**INDEPENDENT AUDITORS’ REPORT OF  REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Shareholders of Westport Innovations Inc.

 

We have audited the accompanying consolidated financial statements of Westport Innovations Inc., which comprise the consolidated balance sheets as at December 31, 2011 and March 31, 2011, the consolidated statements of operations, comprehensive income (loss), shareholders’ equity and cash flows for the nine-month period ended December 31, 2011 and the years ended March 31, 2011 and March 31, 2010, and notes, comprising a summary of significant accounting policies and other explanatory information.

 

*Management’s Responsibility for the Consolidated Financial Statements*

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with generally accepted accounting principles in the United States, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

*Auditors’ Responsibility*

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.  The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances.  An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as, evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

 

KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 

KPMG Canada provides services to KPMG LLP. 

 

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*Westport Innovations Inc.*

*Page 2*

 

*Opinion*

 

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Westport Innovations Inc. as at December 31, 2011 and March 31, 2011 and its consolidated results of operations and its consolidated cash flows for the nine-month period ended December 31, 2011 and the years ended March 31, 2011 and March 31, 2010 in accordance with generally accepted accounting principles in the United States.

 

*Other Matters*

 

The Company’s consolidated financial statements for the years ended March 31, 2011 and March 31, 2010 were previously prepared in conformity with Canadian generally accepted accounting principles.  As more fully described in note 3(a) to the consolidated financial statements, the Company elected, on April 1, 2011, to change its basis of preparing its consolidated financial statements to US generally accepted accounting principles.  Consequently, the Company’s consolidated financial statements for March 31, 2011 and March 31, 2010 referred to above have been restated to conform with US generally accepted accounting principles.

 

As discussed in note 3(a) to the consolidated financial statements, the Company has elected to change its timing of its annual goodwill impairment testing date from January 31 to November 30.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Westport Innovation Inc.’s internal control over financial reporting as of December 31, 2011 based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 28, 2012 expressed an unmodified opinion on the effectiveness of Westport Innovation Inc.’s internal control over financial reporting.

 

 

**//s// KPMG LLP**

 

Chartered Accountants

 

February 28, 2012

Vancouver, Canada

 

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| **KPMG LLP**                     | Telephone | (604) 691-3000 |
|----------------------------------|-----------|----------------|
| **Chartered Accountants**        | Fax       | (604) 691-3031 |
| PO Box 10426 777 Dunsmuir Street | Internet  | www.kpmg.ca    |
| Vancouver BC V7Y 1K3             |      |           |
| Canada                           |      |           |

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Shareholders and Board of Directors of Westport Innovations Inc.

 

We have audited Westport Innovations Inc.’s, (the “Company”) internal control over financial reporting as of December 31, 2011, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).  The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Financial Statements and Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audit also included performing such other procedures as we considered necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.

KPMG Canada provides services to KPMG LLP.

 

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*Westport Innovations Inc.*

*Page 2*

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011 based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

The Company acquired Emer S.p.A during the nine-month period ended December 31, 2011 and management excluded from its assessment of the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2011, Emer S.p.A’s internal controls over financial reporting associated with total assets of $123,892 and total revenues of $31,831 included in the consolidated financial statements of the Company as of and for the nine-month period ended December 31, 2011.  Our audit of internal control over financial reporting of the Company also excludes an evaluation of internal controls over financial reporting of Emer S.p.A.

 

The Company acquired Alternative Fuel Vehicle Sweden AB during the nine-month period ended December 31, 2011 and management excluded from its assessment of the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2011, Alternative Fuel Vehicle Sweden AB’s internal controls over financial reporting associated with total assets of $2,720 and total revenues of $2,566 included in the consolidated financial statements of the Company as of and for the nine-month period ended December 31, 2011.  Our audit of internal control over financial reporting of the Company also excludes an evaluation of internal controls over financial reporting of Alternative Fuel Vehicle Sweden AB.

 

We also have conducted our audit on the consolidated financial statements in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States).  Our report dated February 28, 2012 expressed an unqualified opinion on those consolidated financial statements.

 

 

**//s// KPMG LLP**

 

Chartered Accountants

 

February 28, 2012

Vancouver, Canada

 

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**WESTPORT INNOVATIONS INC.**

Consolidated Balance Sheets

(Expressed in thousands of United States dollars, except share amounts)

 
| ** **                                                                     | ** ** | **December 31, 2011** | ** ** | **March 31,2011**                    | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                     | ** ** | ** **                      | ** ** | **(Recast –   Note 3(a))** | ** ** |
|                                                                           |       |                            |       |                                      |       |
| Assets                                                                         |       |                            |       |                                      |       |
| Current assets:                                                                |       |                            |       |                                      |       |
| Cash and cash equivalents                                                      |       | $                               | 70,298     |                                      | $          | 148,462 |   |
| Short-term investments                                                         |       | 15,379                          |       | 31,841                                    |       |
| Accounts receivable (note   5)                                                 |       | 55,423                          |       | 15,934                                    |       |
| Loan receivable (note   21(a))                                                 |       | 19,409                          |       | 14,200                                    |       |
| Inventories (note 6)                                                           |       | 37,057                          |       | 16,805                                    |       |
| Prepaid expenses                                                               |       | 6,551                           |       | 1,786                                     |       |
| Current portion of   deferred income tax assets (note 20(b))                   |       | 6,447                           |       | 7,282                                     |       |
| Other current assets (note   8)                                                |       | 2,034                           |       | —                                    |       |
|                                                                           |       | 212,598                         |       | 236,310                                   |       |
| Long-term investments   (note 7)                                               |       | 8,369                           |       | 5,622                                     |       |
| Other assets (note 8)                                                          |       | 1,994                           |       | 1,982                                     |       |
| Property, plant and   equipment (note 9)                                       |       | 36,243                          |       | 12,083                                    |       |
| Intangible assets (note   10)                                                  |       | 36,582                          |       | 6,859                                     |       |
| Deferred income tax assets   (note 20(b))                                      |       | 5,075                           |       | 2,316                                     |       |
| Goodwill (note 11)                                                             |       | 55,814                          |       | 8,202                                     |       |
|                                                                           |       |                            |       |                                      |       |
|                                                                           |       | $                               | 356,675    |                                      | $          | 273,374 |   |
|                                                                           |       |                            |       |                                      |       |
| Liabilities and   Shareholders’ Equity                                    |       |                            |       |                                      |       |
|                                                                           |       |                            |       |                                      |       |
| Current liabilities:                                                           |       |                            |       |                                      |       |
| Accounts payable and   accrued liabilities (note 12)                           |       | $                               | 55,807     |                                      | $          | 24,765 |   |
| Deferred revenue                                                               |       | 3,146                           |       | 2,041                                     |       |
| Short-term debt                                                                |       | —                          |       | 208                                       |       |
| Current portion of   long-term debt (note 13)                                  |       | 20,568                          |       | 15,210                                    |       |
| Current portion of   warranty liability (note 14)                              |       | 12,978                          |       | 12,151                                    |       |
|                                                                           |       | 92,499                          |       | 54,375                                    |       |
|                                                                           |       |                            |       |                                      |       |
| Warranty liability (note   14)                                                 |       | 11,253                          |       | 5,884                                     |       |
| Long-term debt (note 13)                                                       |       | 65,577                          |       | 10,012                                    |       |
| Deferred revenue                                                               |       | 10,327                          |       | 6,932                                     |       |
| Deferred income tax   liabilities (note 20(b))                                 |       | 3,446                           |       | —                                    |       |
| Other long-term   liabilities (note 15)                                        |       | 3,104                           |       | 164                                       |       |
|                                                                           |       | 186,206                         |       | 77,367                                    |       |
| Shareholders’ equity:                                                     |       |                            |       |                                      |       |
| Share capital (note 17):                                                       |       |                            |       |                                      |       |
| Authorized:                                                                    |       |                            |       |                                      |       |
| Unlimited common shares,   no par value                                        |       |                            |       |                                      |       |
| Unlimited preferred shares   in series, no par value                           |       |                            |       |                                      |       |
| Issued:                                                                        |       |                            |       |                                      |       |
| 48,455,601 (2011 -   46,972,304) common shares                                 |       | 459,866                         |       | 430,608                                   |       |
| Other equity instruments                                                       |       | 6,112                           |       | 4,205                                     |       |
| Additional paid in capital                                                     |       | 4,499                           |       | 5,141                                     |       |
| Accumulated deficit                                                            |       | (331,158                        | )          | (284,509                                  | )          |
| Accumulated other   comprehensive income                                       |       | 13,271                          |       | 25,641                                    |       |
|                                                                           |       | 152,590                         |       | 181,086                                   |       |
| Joint venture partners’   share of net assets of joint ventures (note 21) |       | 17,879                          |       | 14,921                                    |       |
|                                                                           |       | 170,469                         |       | 196,007                                   |       |
| Commitments and   contingencies (notes 16 and 22)                              |       |                            |       |                                      |       |
| Subsequent events (note   25)                                                  |       |                            |       |                                      |       |
|                                                                           |       | $                               | 356,675    |                                      | $          | 273,374 |   |

 

See accompanying notes to consolidated financial statements.

 

Approved on behalf of the Board:

 
| “Gottfried Muench” |   | Director | “John A.Beaulieu” |   | Director |
|------------------------------|--------|----------|-----------------------------|--------|----------|

 

1

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**WESTPORT INNOVATIONS INC.**

Consolidated Statements of Operations

(Expressed in thousands of United States dollars, except share and per share amounts)

 
| ** **                                                                       | ** ** | **Nine months ended   December 31,** | ** ** | **Years ended March 31,**  | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                       | ** ** | **2011**                                            | ** ** | **2011**                                  | ** ** | **2010** | ** ** |
| ** **                                                                       | ** ** | ** **                                          | ** ** | **(Recast –   Note 3(a))** | ** ** | **(Recast –   Note 3(a))** | ** ** |
|                                                                             |       |                                                |       |                                      |       |   |   |
| Product revenue                                                                  |       | $                                                   | 189,682    |                                      | $          | 110,475 |   | $ | 94,803 |   |
| Parts revenue                                                                    |       | 26,677                                              |       | 29,459                                    |       | 26,850 |   |
| Service revenue                                                                  |       | 10,181                                              |       | 8,128                                     |       | — |   |
|                                                                             |       | 226,540                                             |       | 148,062                                   |       | 121,653 |   |
|                                                                             |       |                                                |       |                                      |       |   |   |
| Cost of revenue and   expenses:                                                  |       |                                                |       |                                      |       |   |   |
| Cost of product and parts   revenue                                              |       | 145,930                                             |       | 90,982                                    |       | 82,979 |   |
| Research and development   (notes 18 and 19)                                     |       | 43,294                                              |       | 34,663                                    |       | 26,213 |   |
| General and administrative   (note 18)                                           |       | 23,534                                              |       | 16,211                                    |       | 11,839 |   |
| Sales and marketing (note   18)                                                  |       | 24,961                                              |       | 21,660                                    |       | 16,741 |   |
| Foreign exchange loss   (gain)                                                   |       | (2,036                                              | )          | 3,877                                     |       | 379 |   |
| Depreciation and   amortization                                                  |       | 6,280                                               |       | 3,455                                     |       | 1,828 |   |
| Bank charges, interest and   other                                               |       | 1,206                                               |       | 665                                       |       | 419 |   |
|                                                                             |       | 243,169                                             |       | 171,513                                   |       | 140,398 |   |
|                                                                             |       |                                                |       |                                      |       |   |   |
| Loss before undernoted                                                           |       | (16,629                                             | )          | (23,451                                   | )          | (18,745 | ) |
|                                                                             |       |                                                |       |                                      |       |   |   |
| Income (loss) from   investment accounted for by the equity method (note 7) |       | 1,500                                               |       | 842                                       |       | (983 | ) |
| Interest on long-term debt   and amortization of discount                        |       | (2,998                                              | )          | (3,323                                    | )          | (2,539 | ) |
| Interest and other income                                                        |       | 958                                                 |       | 1,222                                     |       | 392 |   |
| Gain on sale of long-term   investments (note 7)                                 |       | —                                              |       | —                                    |       | 2,827 |   |
|                                                                             |       |                                                |       |                                      |       |   |   |
| Loss before income taxes                                                         |       | (17,169                                             | )          | (24,710                                   | )          | (19,048 | ) |
|                                                                             |       |                                                |       |                                      |       |   |   |
| Income tax recovery   (expense) (note 20):                                       |       |                                                |       |                                      |       |   |   |
| Current                                                                          |       | (19,630                                             | )          | (8,886                                    | )          | (9,663 | ) |
| Deferred                                                                         |       | 3,963                                               |       | (761                                      | )          | 1,271 |   |
|                                                                             |       | (15,667                                             | )          | (9,647                                    | )          | (8,392 | ) |
| Net loss for the year                                                            |       | (32,836                                             | )          | (34,357                                   | )          | (27,440 | ) |
|                                                                             |       |                                                |       |                                      |       |   |   |
| Net income (loss)   attributed to:                                               |       |                                                |       |                                      |       |   |   |
| Joint venture partners   (note 21)                                               |       | 12,958                                              |       | 7,785                                     |       | 7,071 |   |
| The Company                                                                      |       | (45,794                                             | )          | (42,142                                   | )          | (34,511 | ) |
|                                                                             |       |                                                |       |                                      |       |   |   |
| Loss per share   attributable to the Company:                                    |       |                                                |       |                                      |       |   |   |
| Basic and diluted                                                                |       | $                                                   | (0.96      | )                                         | $          | (1.00 | ) | $ | (1.01 | ) |
|                                                                             |       |                                                |       |                                      |       |   |   |
| Weighted average common   shares outstanding:                                    |       |                                                |       |                                      |       |   |   |
| Basic and diluted                                                                |       | 47,933,348                                          |       | 42,305,889                                |       | 34,133,247 |   |

 

See accompanying notes to consolidated financial statements.

 

2

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**WESTPORT INNOVATIONS INC.**

Consolidated Statements of Comprehensive Income (Loss)

(Expressed in thousands of United States dollars)

 
| ** **                                                                                                                             | ** ** | **Nine months ended   December 31,** | ** ** | **Years ended March 31,**  | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                             | ** ** | **2011 **                                      | ** ** | **2011**                                  | ** ** | **2010** | ** ** |
| ** **                                                                                                                             | ** ** | ** **                                          | ** ** | **(Recast –   Note 3(a))** | ** ** | **((Recast –   Note 3(a))** | ** ** |
|                                                                                                                                   |       |                                                |       |                                      |       |   |   |
| Loss for the year                                                                                                                      |       | $                                                   | (32,836    | )                                         | $          | (34,357 | ) | $ | (27,440 | ) |
| Other comprehensive income   (loss):                                                                                                   |       |                                                |       |                                      |       |   |   |
| Unrealized gain on   available for sale securities, net of tax of $nil (2011 - $nil; 2010 - $300)                                      |       | —                                              |       | —                                    |       | 1,708 |   |
| Reclassification of net   realized gains on available for sale securities to net loss, net of tax of   $nil (2011 - $nil; 2010 - $300) |       | —                                              |       | —                                    |       | (2,101 | ) |
| Cumulative translation   adjustment                                                                                                    |       | (12,370                                             | )          | 7,414                                     |       | 14,431 |   |
|                                                                                                                                   |       | (12,370                                             | )          | 7,414                                     |       | 14,038 |   |
|                                                                                                                                   |       |                                                |       |                                      |       |   |   |
| Comprehensive loss                                                                                                                     |       | $                                                   | (45,206    | )                                         | $          | (26,943 | ) | $ | (13,402 | ) |
|                                                                                                                                   |       |                                                |       |                                      |       |   |   |
| Comprehensive income   (loss) attributable to:                                                                                         |       |                                                |       |                                      |       |   |   |
| Joint venture partners                                                                                                                 |       | $                                                   | 12,958     |                                      | $          | 7,785 |   | $ | 7,071 |   |
| The Company                                                                                                                            |       | (58,164                                             | )          | (34,728                                   | )          | (20,473 | ) |

 

See accompanying notes to consolidated financial statements.

 

3

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**WESTPORT INNOVATIONS INC.**

Consolidated Statements of Shareholders’ Equity

(Expressed in thousands of United States dollars, except share amounts)

 
| ** **                                                      | ** ** | **Common   Shares   outstanding** | ** ** | **Share   capital** | ** ** | **Other equity   instruments** | ** ** | **Additional paid   in capital** | ** ** | **Accumulated   deficit** | ** ** | **Accumulated other   comprehensive   income** | ** ** | **Joint venture partners’   share of net assets of   joint ventures** | ** ** | **Total   shareholders’   equity** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------|------------|---------------------|------------|-------------------------------------|------------|--------------------------------------------|------------|---------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
|                                                            |       |                              |       |                |       |                                |       |                                       |       |                      |       |                                                |       |                                                                                                          |       |                                    |       |
| Balance, March 31,   2009 (Recast — Note 3 (a))       |       | 32,040,540                        |       | $                   | 232,621    |                                | $          | 9,848                                      |       | $                         | 4,000      |                                                | $          | (207,856                                                                                                      | )          | $                                       | 4,189      |   | $ | 10,065 |   | $ | 52,867 |   |
|                                                            |       |                              |       |                |       |                                |       |                                       |       |                      |       |                                                |       |                                                                                                          |       |                                    |       |
| Issue of common shares on   exercise of stock options           |       | 389,580                           |       | 3,634               |       | —                              |       | (1,365                                     | )          | —                    |       | —                                              |       | —                                                                                                        |       | 2,269                                   |       |
| Issue of common shares on   exercise of performance share units |       | 601,855                           |       | 3,190               |       | (3,190                              | )          | —                                     |       | —                    |       | —                                              |       | —                                                                                                        |       | —                                  |       |
| Issue of common shares on   public offering                     |       | 5,462,500                         |       | 57,356              |       | —                              |       | —                                     |       | —                    |       | —                                              |       | —                                                                                                        |       | 57,356                                  |       |
| Share issuance costs                                            |       | —                            |       | (3,192              | )          | —                              |       | —                                     |       | —                    |       | —                                              |       | —                                                                                                        |       | (3,192                                  | )          |
| Stock-based compensation                                        |       | —                            |       | —              |       | 3,167                               |       | 1,363                                      |       | —                    |       | —                                              |       | —                                                                                                        |       | 4,530                                   |       |
| Net loss for the year                                           |       | —                            |       | —              |       | —                              |       | —                                     |       | (34,511                   | )          | —                                              |       | 7,071                                                                                                         |       | (27,440                                 | )          |
| Dividends paid by joint   ventures                              |       | —                            |       | —              |       | —                              |       | —                                     |       | —                    |       | —                                              |       | (4,000                                                                                                        | )          | (4,000                                  | )          |
| Other comprehensive income                                      |       | —                            |       | —              |       | —                              |       | —                                     |       | —                    |       | 14,038                                              |       | —                                                                                                        |       | 14,038                                  |       |
|                                                            |       |                              |       |                |       |                                |       |                                       |       |                      |       |                                                |       |                                                                                                          |       |                                    |       |
| Balance, March 31,   2010 (Recast — Note 3 (a))       |       | 38,494,475                        |       | $                   | 293,609    |                                | $          | 9,825                                      |       | $                         | 3,998      |                                                | $          | (242,367                                                                                                      | )          | $                                       | 18,227     |   | $ | 13,136 |   | $ | 96,428 |   |
|                                                            |       |                              |       |                |       |                                |       |                                       |       |                      |       |                                                |       |                                                                                                          |       |                                    |       |
| Issue of common shares on   exercise of stock options           |       | 472,414                           |       | 5,115               |       | —                              |       | (1,817                                     | )          | —                    |       | —                                              |       | —                                                                                                        |       | 3,298                                   |       |
| Issue of common shares on   exercise of performance share units |       | 241,825                           |       | 3,239               |       | (3,239                              | )          | —                                     |       | —                    |       | —                                              |       | —                                                                                                        |       | —                                  |       |
| Issue of common shares on   exercise of warrants                |       | 858,221                           |       | 13,853              |       | (4,344                              | )          | —                                     |       | —                    |       | —                                              |       | —                                                                                                        |       | 9,509                                   |       |
| Cancellation of common   shares                                 |       | (52,131                           | )          | (895                | )          | —                              |       | —                                     |       | —                    |       | —                                              |       | —                                                                                                        |       | (895                                    | )          |
| Reclassification of fair   value of expired warrants            |       | —                            |       | —              |       | (2,413                              | )          | 2,413                                      |       | —                    |       | —                                              |       | —                                                                                                        |       | —                                  |       |
| Stock-based compensation                                        |       | —                            |       | —              |       | 4,376                               |       | 547                                        |       | —                    |       | —                                              |       | —                                                                                                        |       | 4,923                                   |       |
| Issue of common shares on   public offering                     |       | 6,957,500                         |       | 121,756             |       | —                              |       | —                                     |       | —                    |       | —                                              |       | —                                                                                                        |       | 121,756                                 |       |
| Share issuance costs                                            |       | —                            |       | (6,069              | )          | —                              |       | —                                     |       | —                    |       | —                                              |       | —                                                                                                        |       | (6,069                                  | )          |
| Net loss for the year                                           |       | —                            |       | —              |       | —                              |       | —                                     |       | (42,142                   | )          | —                                              |       | 7,785                                                                                                         |       | (34,357                                 | )          |
| Dividends paid by joint   ventures                              |       | —                            |       | —              |       | —                              |       | —                                     |       | —                    |       | —                                              |       | (6,000                                                                                                        | )          | (6,000                                  | )          |
| Other comprehensive income                                      |       | —                            |       | —              |       | —                              |       | —                                     |       | —                    |       | 7,414                                               |       | —                                                                                                        |       | 7,414                                   |       |
|                                                            |       |                              |       |                |       |                                |       |                                       |       |                      |       |                                                |       |                                                                                                          |       |                                    |       |
| Balance, March 31,   2011 (Recast — Note 3 (a))       |       | 46,972,304                        |       | $                   | 430,608    |                                | $          | 4,205                                      |       | $                         | 5,141      |                                                | $          | (284,509                                                                                                      | )          | $                                       | 25,641     |   | $ | 14,921 |   | $ | 196,007 |   |
|                                                            |       |                              |       |                |       |                                |       |                                       |       |                      |       |                                                |       |                                                                                                          |       |                                    |       |
| Issue of common shares on   exercise of stock options           |       | 225,845                           |       | 2,810               |       | —                              |       | (994                                       | )          | —                    |       | —                                              |       | —                                                                                                        |       | 1,816                                   |       |
| Issue of common shares on   exercise of performance share units |       | 391,612                           |       | 3,799               |       | (3,799                              | )          | —                                     |       | —                    |       | —                                              |       | —                                                                                                        |       | —                                  |       |
| Issue of common shares in   connection with acquisitions        |       | 915,021                           |       | 23,052              |       | —                              |       | —                                     |       | —                    |       | —                                              |       | —                                                                                                        |       | 23,052                                  |       |
| Cancellation of common   shares                                 |       | (49,181                           | )          | (403                | )          | —                              |       | —                                     |       | (855                      | )          | —                                              |       | —                                                                                                        |       | (1,258                                  | )          |
| Stock-based compensation                                        |       | —                            |       | —              |       | 5,706                               |       | 352                                        |       | —                    |       | —                                              |       | —                                                                                                        |       | 6,058                                   |       |
| Net loss for the year                                           |       | —                            |       | —              |       | —                              |       | —                                     |       | (45,794                   | )          | —                                              |       | 12,958                                                                                                        |       | (32,836                                 | )          |
| Dividends paid by joint   ventures                              |       | —                            |       | —              |       | —                              |       | —                                     |       | —                    |       | —                                              |       | (10,000                                                                                                       | )          | (10,000                                 | )          |
| Other comprehensive income                                      |       | —                            |       | —              |       | —                              |       | —                                     |       | —                    |       | (12,370                                             | )          | —                                                                                                        |       | (12,370                                 | )          |
|                                                            |       |                              |       |                |       |                                |       |                                       |       |                      |       |                                                |       |                                                                                                          |       |                                    |       |
| Balance, December 31,   2011                               |       | 48,455,601                        |       | $                   | 459,866    |                                | $          | 6,112                                      |       | $                         | 4,499      |                                                | $          | (331,158                                                                                                      | )          | $                                       | 13,271     |   | $ | 17,879 |   | $ | 170,469 |   |

 

See accompanying notes to consolidated financial statements.

 

4

----

 

**WESTPORT INNOVATIONS INC.**

Consolidated Statements of Cash Flows

(Expressed in thousands of United States dollars)

 
| ** **                                                         | ** ** | **Nine months   ended   December 31,** | ** ** | **Years ended March 31,**  | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                         | ** ** | **2011**                                         | ** ** | **2011**                                  | ** ** | **2010** | ** ** |
| ** **                                                         | ** ** | ** **                                       | ** ** | **(Recast –   Note 3(a))** | ** ** | **(Recast –   Note 3(a))** | ** ** |
|                                                               |       |                                             |       |                                      |       |   |   |
| Cash flows from operating   activities:                            |       |                                             |       |                                      |       |   |   |
| Loss for the year                                                  |       | $                                                | (32,836    | )                                         | $          | (34,357 | ) | $ | (27,440 | ) |
| Items not involving cash:                                          |       |                                             |       |                                      |       |   |   |
| Depreciation and   amortization                                    |       | 6,280                                            |       | 3,455                                     |       | 1,828 |   |
| Stock-based compensation   expense                                 |       | 6,179                                            |       | 4,923                                     |       | 4,530 |   |
| Deferred income tax   expense (recovery)                           |       | (3,963                                           | )          | 761                                       |       | (1,271 | ) |
| Change in deferred lease   inducements                             |       | (47                                              | )          | (58                                       | )          | (95 | ) |
| Gain on disposition of   long-term investments                     |       | —                                           |       | —                                    |       | (2,827 | ) |
| Loss (income) from   investment accounted for by the equity method |       | (1,500                                           | )          | (842                                      | )          | 983 |   |
| Accretion of long-term   debt                                      |       | 1,016                                            |       | 1,992                                     |       | 1,298 |   |
| Other                                                              |       | 654                                              |       | (344                                      | )          | — |   |
| Changes in non-cash   operating working capital:                   |       |                                             |       |                                      |       |   |   |
| Accounts receivable                                                |       | (18,581                                          | )          | 5,523                                     |       | (5,667 | ) |
| Inventories                                                        |       | (2,051                                           | )          | (1,927                                    | )          | 5,523 |   |
| Prepaid expenses                                                   |       | (4,639                                           | )          | (488                                      | )          | 54 |   |
| Accounts payable and   accrued liabilities                         |       | 3,255                                            |       | (2,831                                    | )          | 645 |   |
| Deferred revenue                                                   |       | 4,430                                            |       | 3,058                                     |       | 1,526 |   |
| Warranty liability                                                 |       | 5,860                                            |       | (2,844                                    | )          | 1,495 |   |
|                                                               |       | (35,943                                          | )          | (23,979                                   | )          | (19,418 | ) |
| Cash flows from investing   activities:                            |       |                                             |       |                                      |       |   |   |
| Purchase of property,   plant and equipment                        |       | (13,269                                          | )          | (3,613                                    | )          | (204 | ) |
| Purchase of intangible   assets                                    |       | (123                                             | )          | —                                    |       | — |   |
| Sale of short-term   investments, net                              |       | 15,516                                           |       | 3,376                                     |       | 7,584 |   |
| Proceeds from disposition   of long-term investments               |       | —                                           |       | —                                    |       | 3,744 |   |
| Advances on loan   receivable                                      |       | (29,816                                          | )          | (20,942                                   | )          | (17,099 | ) |
| Repayment on loan   receivable                                     |       | 24,013                                           |       | 18,185                                    |       | 12,721 |   |
| Acquisitions, net of   acquired cash (note 4)                      |       | (9,084                                           | )          | (13,016                                   | )          | — |   |
| Investment in equity   interest (note 7)                           |       | (955                                             | )          | (4,316                                    | )          | — |   |
|                                                               |       | (13,718                                          | )          | (20,326                                   | )          | 6,746 |   |
| Cash flows from financing activities:                              |       |                                             |       |                                      |       |   |   |
| Repayment of demand   installment loan                             |       | —                                           |       | (3,206                                    | )          | (1,245 | ) |
| Repayment on operating   lines of credit                           |       | (3,240                                           | )          | —                                    |       | — |   |
| Repayment of short-term   debt                                     |       | (221                                             | )          | —                                    |       | (1,120 | ) |
| Repayment of long-term   debt                                      |       | (53,057                                          | )          | (117                                      | )          | (42 | ) |
| Issuance of subordinated   debenture notes                         |       | 34,345                                           |       | —                                    |       | — |   |
| Finance costs incurred                                             |       | (1,392                                           | )          | —                                    |       | — |   |
| Shares issued for cash                                             |       | 1,816                                            |       | 134,563                                   |       | 59,625 |   |
| Share issuance costs                                               |       | —                                           |       | (6,069                                    | )          | (3,192 | ) |
| Dividends paid to joint   venture partner                          |       | (10,000                                          | )          | (6,000                                    | )          | (4,000 | ) |
|                                                               |       | (31,749                                          | )          | 119,171                                   |       | 50,026 |   |
| Effect of foreign exchange   on cash and cash equivalents          |       | 3,246                                            |       | 3,116                                     |       | 2,171 |   |
|                                                               |       |                                             |       |                                      |       |   |   |
| Increase (decrease) in   cash and cash equivalents                 |       | (78,164                                          | )          | 77,982                                    |       | 39,525 |   |
|                                                               |       |                                             |       |                                      |       |   |   |
| Cash and cash equivalents,   beginning of year                     |       | 148,462                                          |       | 70,480                                    |       | 30,955 |   |
|                                                               |       |                                             |       |                                      |       |   |   |
| Cash and cash equivalents,   end of year                           |       | $                                                | 70,298     |                                      | $          | 148,462 |   | $ | 70,480 |   |

 

5

----

 

**WESTPORT INNOVATIONS INC.**

Consolidated Statements of Cash Flows, Continued

(Expressed in thousands of United States dollars)

 
| ** **                                                                                                        | ** ** | **Nine months   ended   December 31,** | ** ** | **Years ended March 31,**  | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                        | ** ** | **2011**                                         | ** ** | **2011**                                  | ** ** | **2010** | ** ** |
| ** **                                                                                                        | ** ** | ** **                                       | ** ** | **(Recast –   Note 3(a))** | ** ** | **(Recast –   Note 3(a))** | ** ** |
|                                                                                                              |       |                                             |       |                                      |       |   |   |
| Supplementary information:                                                                                        |       |                                             |       |                                      |       |   |   |
| Interest paid                                                                                                     |       | $                                                | 1,349      |                                      | $          | 1,729 |   | $ | 1,437 |   |
| Taxes paid                                                                                                        |       | 7,460                                            |       | 11,394                                    |       | 8,454 |   |
| Non-cash transactions:                                                                                            |       |                                             |       |                                      |       |   |   |
| Purchase of property,   plant and equipment by assumption of capital lease obligation                             |       | 34                                               |       | —                                    |       | 343 |   |
| Shares issued on exercise   of performance share units                                                            |       | 3,799                                            |       | 2,344                                     |       | 3,190 |   |
| Cancellation of   performance share units                                                                         |       | 1,258                                            |       | 895                                       |       | — |   |
| Common shares issued in   connection with acquisitions (note 4)                                                   |       | 23,052                                           |       | —                                    |       | — |   |
| Contingent consideration   payable in common shares for Alternative Fuel Vehicle Sweden AB acquisition   (note 4) |       | 428                                              |       | —                                    |       | — |   |
|                                                                                                                   |            |                                                  |            |                                           |            |  |  |  |  |  |

 

See accompanying notes to consolidated financial statements.

 

6

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**1.****             ****Company organization and operations:**

 

Westport Innovations Inc. (the “Company”) was incorporated under the Business Corporations Act (Alberta) on March 20, 1995.

 

The Company is a provider of high-performance, low-emission engine and fuel system technologies utilizing gaseous fuels.  Its technology and products enable light (<5.9-litre), medium (5.9- to 8.9-litre), heavy-duty (11- to 16-litre) and high horsepower (>16-litre) petroleum-based fuel engines to use primarily natural gas, giving users a cleaner, more plentiful and generally less expensive alternative fuel.

 

The Company is focused on developing technology to enable more environmentally sustainable engines without compromising the performance, fuel economy, durability, and reliability of diesel engines.  The substitution of natural gas for petroleum-based fuel drives a significant reduction in harmful combustion emissions, such as nitrogen oxides, particulate matter and greenhouse gas, in addition to providing an abundant, relatively inexpensive alternative fuel.  Its systems can be used to enable combustion engines to use gaseous fuels, such as natural gas, propane, or hydrogen.  Its research and development effort and investment have resulted in a substantial patent portfolio that serves as the foundation for its differentiated technology offerings and competitive advantage.

 

The Company has a joint venture interest in Cummins Westport Inc. (“CWI”), a joint venture with Cummins Inc. (“Cummins”), formed in 2001 (note 21 (a)).  CWI develops, supports and markets a comprehensive product line of on highway low-emission, high performance engines and ancillary products using proprietary intellectual property.

 

On July 2, 2010, the Company acquired, through its wholly owned subsidiary, Juniper Engines Italy S.r.l., 100% of the outstanding shares of OMVL S.p.A. (“OMVL”), including its 51% interest in Westport Light Duty Canada Inc. (previously named “Juniper Engines Inc.”, from Società Italiana Tecnomeccanica La Precisa S.p.A. and Sit International B.V (note 4(c)).  OMVL is based in Pernumia, Italy and designs, manufactures and markets complete fuelling systems for new vehicles and the aftermarket conversion of engines from gasoline to compressed natural gas and liquefied petroleum gas.

 

On July 1, 2011, the Company acquired, through its wholly owned subsidiary, Juniper Engines Italy S.r.l., 100% of the outstanding shares of Emer S.p.A. (“Emer”), from Venice S.p.A. (note 4(a)).  Based in Brescia, Italy, Emer is a fuel system provider in the compressed natural gas (“CNG”) and liquefied petroleum gas (“LPG”) industry.

 

On October 12, 2011, the Company acquired, through its wholly owned subsidiary, Westport Light Duty Inc., 100% of the outstanding shares of Alternative Fuel Vehicle Sweden AB (“AFV”) (note 4(b)).  Based in Gothenburg, Sweden, AFV is the sole supplier of natural gas fuel systems to Volvo Car Company.

 

These consolidated financial statements have been presented on a going concern basis, which assumes the realization of assets and the settlement of liabilities in the normal course of operations.  To date, the Company has financed its operations primarily by equity and debt financing, sale of investments, its share of operating cash flows from CWI, operating cash flows from its wholly owned subsidiaries, and margins on the sale of products and parts.  If the Company does not have sufficient funding from internal or external sources, it may be required to delay, reduce or eliminate certain research and development programs and forego acquisition of certain equipment.  The future operations of the Company are dependent upon its ability to produce, distribute and sell an economically viable product to attain profitable operations.

 

7

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**2.****             ****Significant accounting policies:**

 

(a)          Basis of presentation:

 

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and variable interest entities for which the Company is considered the primary beneficiary.  Intercompany balances and transactions have been eliminated.

 

Interests in variable interest entities are consolidated by the Company if the Company is the primary beneficiary.  The Company has identified CWI and BTIC Westport Inc. (“BWI”) as variable interest entities and determined that the Company is the primary beneficiary.  Accordingly, the Company has consolidated these entities.  The 50% interest held by the Company’s joint venture partners is reflected as “joint venture partners’ share of net assets of joint ventures” in these consolidated financial statements.

 

These consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).  Effective April 1, 2011, the Company elected to report its consolidated financial statements in accordance with U.S. GAAP.  The change in generally accepted accounting principles and its impact on the consolidated financial statements is described in note 3(a).

 

(b)         Foreign currency translation:

 

Effective April 1, 2010, the Company changed the reporting currency for its consolidated financial statement presentation from the Canadian dollar to the United States dollar.  The functional currency of the Company’s operations continues to be the Canadian dollar except for CWI, which continues to use the U.S. dollar as its functional currency, OMVL and Emer, which use the Euro as their functional currency, and AFV, which uses the Swedish Krona as its functional currency.  The Company translates its consolidated Canadian dollar, Euro and Swedish Krona functional currency financial statements into the reporting currency using the current rate method. All assets and liabilities are translated using the period end exchange rates.  Shareholders’ equity balances are translated using a weighted average of historical exchange rates.  Revenues and expenses are translated using the monthly average rate for the period. All resulting exchange differences are recognized in other comprehensive income.

 

Transactions that are denominated in currencies other than the functional currency of the Company or its subsidiaries are translated at the rate in effect on the date of the transaction.  Foreign currency denominated monetary assets and liabilities are translated at the exchange rate in effect on the balance sheet date.  Non-monetary assets and liabilities are translated at the historical exchange rate.  All foreign exchange gains and losses are recognized in the statement of operations, except for the translation gains and losses arising from available-for-sale instruments which are recorded through other comprehensive income until realized through disposal or impairment.

 

8

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**2.**              **Significant accounting policies (continued):**

 

(b)         Foreign currency translation (continued):

 

Except as otherwise noted, all amounts in these financial statements are presented in U.S. dollars.  The year-end exchange rate of the Canadian dollar as at December 31, 2011 was $1.02 (March 31, 2011 - $1.03), and the average exchange rate for the nine month period ended December 31, 2011 was $1.01 (years ended March 31, 2011 - $0.98; March 31, 2010 - $0.92).  The period end exchange rate of the Euro was 1.30 (March 31, 2011 - 1.42), and the average exchange rate for the Euro for the nine month period ended December 31, 2011 was 1.40 (July 2, 2010 to March 31, 2011 - 1.34).  The period end exchange rate of the Swedish Krona was 0.15 (October 12, 2011 - 0.15) and the average exchange rate for the Swedish Krona from October 12, 2011 to December 31, 2011 was 6.74.

 

(c)          Cash and cash equivalents:

 

Cash and cash equivalents includes cash, term deposits, bankers acceptances and guaranteed investment certificates with maturities of ninety days or less when acquired.  Cash equivalents are considered as held for trading and recorded at fair value with changes in fair value recognized in the consolidated statements of operations.

 

(d)         Short-term investments:

 

Short-term investments, consisting of investment grade commercial paper, banker acceptances, bearer deposit notes, guaranteed investment certificates and other term deposits, are considered available for sale and recorded at fair value with changes in fair value recognized in accumulated other comprehensive income until realized.  A decline in value that is considered other than temporary is recognized in net loss for the period.

 

(e)          Accounts and loans receivable:

 

Accounts receivable and loans receivable are measured at amortized cost.  An allowance for doubtful accounts is recorded based on a review of specific accounts deemed uncollectible.  Account balances are charged against the allowance in the period in which it is considered probable that the receivable will not be recovered.

 

(f)            Inventories:

 

The Company’s inventories consist of the Company’s fuel system products (finished goods), work-in-progress, purchased parts and assembled parts. Inventories are recorded at the lower of cost and net realizable value.  Cost is determined based on the lower of weighted average cost and net realizable value.  The cost of fuel system product inventories, assembled parts and work-in-progress includes materials, labour and production overhead including depreciation.  An inventory obsolescence provision is provided to the extent cost of inventory exceeds net realizable value.  In establishing the amount of the inventory obsolescence provision, management estimates the likelihood that inventory carrying values will be affected by changes in market demand and technology, which would make inventory on hand obsolete.

 

9

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**2.****             ****Significant accounting policies (continued):**

** **

(g)         Property, plant and equipment:

 

Property, plant and equipment are stated at cost.  Depreciation is provided as follows:

 
| **Assets**                        | ** ** | **Basis**     | ** ** | **Rate**     | ** ** |
|-----------------------------------|------------|---------------|------------|--------------|------------|
|                              |       |          |       |         |       |
| Buildings                         |       | Straight-line |       | 10   years   |       |
| Computer   equipment and software |       | Straight-line |       | 3   years    |       |
| Furniture   and fixtures          |       | Straight-line |       | 5   years    |       |
| Machinery   and equipment         |       | Straight-line |       | 8   years    |       |
| Leasehold   improvements          |       | Straight-line |       | Lease   term |       |

 

(h)         Long-term investments:

 

The Company accounts for investments in which it has significant influence using the equity basis of accounting.  All other long-term investments, other than warrants, are designated as available for sale and recorded at their fair value to the extent a reliable fair value is determinable.  Changes in fair value are recognized in accumulated other comprehensive income (loss).  A decline in value that is considered other than temporary is recognized in net loss for the period.  Investments in warrants are accounted for as derivative instruments and recognized at fair value.  Changes in fair value are recognized in net loss for the year.

 

(i)             Financial liabilities:

 

Accounts payable and accrued liabilities, short-term debt and long-term debt are measured at amortized cost.  Transaction costs relating to long-term debt are deferred in other assets on initial recognition and are amortized using the effective interest rate method.

 

(j)             Research and development costs:

 

Research and development costs are expensed as incurred and are recorded net of government funding received or receivable.  Related investment tax credits reduce research and development expenses in the same year in which the related expenditures are charged to earnings or loss, provided there is reasonable assurance the benefits will be realized.

 

(k)          Government assistance:

 

The Company periodically applies for financial assistance under available government incentive programs, which is recorded in the period it is received or receivable.  Government assistance relating to the purchase of property, plant and equipment is reflected as a reduction of the cost of such assets.  Government assistance related to research and development activities is recorded as a reduction of the related expenditures.

 

(l)             Intangible assets:

 

Intangible assets consist primarily of the cost of intellectual property, trademarks, technology, customer contracts and non-compete agreements.  Intangible assets are amortized over their estimated useful lives which range from 5 to 20 years.

 

10

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**2.****             ****Significant accounting policies (continued):**

** **

(m)       Impairment of long-lived assets:

 

The Company reviews its long-lived assets for impairment, including property, plant and equipment and intellectual property, to be held and used whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.  If such conditions exist, assets are considered impaired if the sum of the undiscounted expected future cash flows expected to result from the use and eventual disposition of an asset is less than its carrying amount.  An impairment loss is measured at the amount by which the carrying amount of the asset exceeds its fair value.  When quoted market prices are not available, the Company uses the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset as an estimate of fair value.

 

(n)         Goodwill impairment:

 

Goodwill is not amortized and instead is tested at least annually for impairment, or more frequently when events or changes in circumstances indicate that goodwill might be impaired.  This impairment test is performed annually at November 30.

 

A two-step test is used to identify a potential impairment and to measure the amount of impairment, if any.  The first step is to compare the fair value of the reporting unit with its carrying amount, including goodwill.  If the fair value of the reporting unit exceeds its carrying amount, goodwill is considered not impaired; otherwise, goodwill is impaired and the loss is measured by performing step two.  Under step two, the impairment loss is measured by comparing the implied fair value of the reporting unit goodwill with the carrying amount of goodwill.

 

Fair value is determined using widely accepted valuation techniques, including discounted cash flows and market multiple analyses.  These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies.  It is the Company’s policy to conduct impairment testing based on its current business strategy in light of present industry and economic conditions, as well as its future expectations.

 

Goodwill is recorded at the time of purchase for the excess of the amount of the purchase price over the fair values of the assets acquired and liabilities assumed.  Future adverse changes in market conditions or poor operating results of underlying assets could result in losses or an inability to recover the carrying value of the goodwill, thereby possibly requiring an impairment charge.

 

11

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**2.****             ****Significant accounting policies (continued):**

 

(o)         Warranty liability:

 

Estimated warranty costs are recognized at the time the Company sells its products and are included in cost of revenue.  The Company provides warranty coverage on products sold for a period of two years from the date the products are put into service by customers.  Warranty liability represents the Company’s best estimate of warranty costs expected to be incurred during the warranty period.  Furthermore, the current portion of warranty liability represents the Company’s best estimate of the costs to be incurred in the next twelve-month period.  The Company uses historical failure rates and cost to repair defective products together with known information to estimate the warranty liability.  New product launches require a greater use of judgment in developing estimates until claims experience becomes available.  Product specific experience is typically available four or five quarters after product launch, with a clear experience trend not evident until eight to twelve quarters after launch.  The Company records warranty expense for new products upon shipment using a factor based upon historical experience from previous engine generations in the first year, a blend of actual product and historical experience in the second year and product specific experience thereafter.  The ultimate amount payable by the Company and the timing will depend on actual failure rates and cost to repair failures of its products.  Since a number of the Company’s products are new in the market, historical data may not necessarily reflect actual costs to be incurred and may result in significant fluctuations in the warranty liability.

 

(p)         Extended warranty:

 

The Company sells extended warranty contracts that provide coverage in addition to the basic two-year coverage.  Proceeds from the sale of these contracts are deferred and amortized over the extended warranty period commencing at the end of the basic warranty period.  On a periodic basis, management reviews the estimated warranty costs expected to be incurred related to these contracts and recognizes a loss to the extent such costs exceed the related deferred revenue.

 

(q)         Revenue recognition:

 

Product and parts revenue is recognized when the products are shipped and title passes to the customer.  Revenue also includes fees earned from performing research and development activities for third parties, as well as technology license fees from third parties.  Revenue from research and development activities is recognized as the services are performed.  Revenue from technology license fees is recognized over the duration of the licensing agreement.  Amounts received in advance of the revenue recognition criteria being met are recorded as deferred revenue.

 

The Company also earns service revenue from certain research and development arrangements under which the Company provides contract services relating to developing natural gas engines or biogas engines for use in customer products.  Service revenue is recognized using the milestone method upon completion of project milestones as defined and agreed to by the Company and its customers.  The Company recognizes consideration earned from the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved.  The payment associated with each milestone relates solely to past performance and is deemed reasonable upon consideration of deliverables and the payment terms within the contract.

 

12

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**2.****             ****Significant accounting policies (continued):**

 

(r)            Income taxes:

 

The Company uses the asset and liability method of accounting for income taxes.  Under this method, deferred income tax assets and liabilities are determined based on temporary differences between the accounting and tax basis of the assets and liabilities and for loss carry forwards and are measured using the tax rates expected to apply when these tax assets and liabilities are recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes income tax laws that have been enacted at the balance sheet date.  A valuation allowance is provided to reduce the deferred income tax assets if, based upon available evidence, it is more likely than not that some or all of the deferred income tax assets will not be realized.

 

The Company recognizes the benefit of tax positions when it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements.  The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.

 

In cases where the Company is charged interest and penalties on uncertain tax positions that do not meet the recognition criteria, the Company includes these in interest expense and other operating expenses, respectively.

 

(s)          Stock-based compensation plans:

 

The Company has stock option plans, which are described in note 18(a).  The Company accounts for stock-based compensation related to stock options granted to employees and directors at their fair value on the date of grant. Compensation expense, net of estimated forfeitures, is recognized in results from operations over the vesting period.  The Company has an employee share purchase plan, which is described in note 18(b).  The Company matches the employees’ contribution and recognizes this cost as an expense in the period it is incurred.  This plan was terminated on March 31, 2011.

 

The Company also issues share units under its stock-based compensation plans as described in note 18(c).  The Company grants both restricted share units (“RSUs”) and performance share units (“PSUs”).  The Company accounts for stock-based compensation related to RSUs and PSUs (the “Units”) at their fair value on the date of grant, and compensation expense, net of estimated forfeitures, is recognized in the period earned, which generally is the period over which the Units vest.  Certain Units vest based on both a service condition and a market condition which is determined by the performance of the Company’s share price on the Toronto Stock Exchange.  The impact of market conditions, if any, on the compensation expense is determined at the time of grant with no adjustment to compensation expense for actual result of the market condition.

 

13

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**2.**              **Significant accounting policies (continued):**

 

(t)            Post-retirement benefits:

 

The Company has implemented a group-registered retirement savings plan (“RRSP”) in which full-time employees of the Company are eligible to participate.  Eligible employees may make contributions up to their personal eligible contribution limit under the Canadian Income Tax Act.  The Company contributes up to a maximum combined total of 5% of the employee’s regular base pay to the RRSP and/or the employee share purchase plan and recognizes this cost as an expense in the period it is incurred.  During the nine months ended December 31, 2011, the Company recognized $699 (years ended March 31, 2011 - $661; March 31, 2010 - $635) of expense associated with the RRSP.

 

(u)         Use of estimates:

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant areas requiring the use of estimates are the determination of the fair value of assets and liabilities acquired in business combinations, the determination of future cash flows and discount rates for impairment of long-lived assets and goodwill, valuation of inventories, valuation of deferred income tax assets and recognition of tax uncertainties, and the determination of warranty liability.  Actual results could differ from those estimates.

 

(v)         Loss per share:

 

Basic loss per share is calculated using the weighted average number of shares outstanding during the period.  Diluted loss per share is computed similarly to basic loss per share, except the weighted average number of shares outstanding is increased to include additional shares from the assumed exercise of conversion options, stock options, warrants, and performance and restricted share units, if dilutive.  For stock options, warrants and share units, the number of additional shares is calculated by assuming that outstanding stock options, warrants and share units were exercised at the beginning of the year or when granted and the proceeds from such exercises were used to repurchase shares of common stock at the average market price during the period.  For conversion options, the Company uses the if-converted method, which assumes the exercise of options occurs at the beginning of the year or when granted.  For all periods presented, diluted loss per share does not differ from basic loss per share as the impact of dilutive securities is anti-dilutive.

 

(w)       Reclassifications:

 

Certain items in the prior period financial statements have been reclassified to conform with current year presentation.

 

14

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**3.****             ****Accounting changes:**

** **

(a)          Changes in accounting policies:

 

*Change in generally accepted accounting principles:*

* *

The Company historically prepared its consolidated financial statements in accordance with Canadian GAAP and provided a supplemental reconciliation to U.S. GAAP.  Effective April 1, 2011, the Company adopted U.S. GAAP as the accounting and reporting framework for its consolidated financial statements.  These consolidated financial statements, including the related notes, have been prepared in accordance with U.S. GAAP.  All comparative financial information contained herein has been recast to reflect the Company’s results as if the Company had historically reported in accordance with U.S. GAAP.  The adjustments related to the amortization of acquired in-process research and development costs, classification of debt issuance costs and tax impact on realized and unrealized gain on available for sale securities.  The adjustments resulted in a decrease in accumulated deficit of $146, a decrease in assets of $12, an increase in liabilities of $130 and a decrease in shareholders’ equity of $142 at April 1, 2011.  The adjustments also resulted in a decrease in net loss of $141 and $129 for the years ended March 31, 2011 and 2010, respectively.

 

*Change in goodwill impairment testing date:*

* *

Due to the change of the Company’s fiscal year-end from March 31 to December 31, the annual goodwill impairment testing date has been changed to November 30 from January 31, effective for the nine-month period ended December 31, 2011.

 

(b)         Adoption of new accounting standards:

 

*Multiple-Deliverable Revenue Arrangements*

 

In October 2009, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2009-13,*Multiple-Deliverable Revenue Arrangements*.  The new guidance provides a more flexible alternative to identify and allocate consideration among multiple elements in a bundled arrangement when vendor-specific objective evidence or third-party evidence of selling price is not available.  The new guidance requires the use of the relative selling price method and eliminates the residual method to allocation arrangement consideration.  Additional expanded qualitative and quantitative disclosures are also required.  The guidance is effective for the Company prospectively for revenue arrangements entered into or materially modified on or after April 1, 2011.  Adoption of this update did not have any impact on the Company’s consolidated financial statements.

 

*Fair value measurements and disclosures*

 

In January 2010, the FASB issued ASU No. 2010-06, *Fair Value Measurements and Disclosures,*to require more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and transfers between Levels 1, 2, and 3.  This update was effective for the Company on April 1, 2011.  The adoption of this update increased our disclosure requirements on the fair value of our financial instruments, which is included in note 24.

 

15

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**3.**              **Accounting changes (continued):**

* *

(b)         Adoption of new accounting standards (continued):

* *

*Intangibles — Goodwill and Other*

 

In December 2010, the FASB issued ASU No. 2010-28, *Intangibles - Goodwill and Other*, which modifies step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts.  For those reporting units, an entity is required to perform step 2 of the impairment test if it is more likely than not that a goodwill impairment exists.  This update was effective for the Company on April 1, 2011.  Adoption of this update did not have any impact on the consolidated financial statements.

 

*Business Combinations*

 

In December 2010, the FASB issued ASU No. 2010-29, *Business Combinations*, on the disclosure of supplementary pro forma information for business combinations.  A public entity (acquirer) that presents comparative financial statements should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period.  This update is effective prospectively for acquisitions on or after April 1, 2011 for the Company.  As a result of adopting this update, the additional disclosures required by this update were made in note 4 related to the Company’s acquisition of Emer and AFV.

 

(c)          New accounting pronouncements:

 

*Fair value measurements*

 

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, (“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. The Company does not anticipate the adoption of this standard to have a material impact in the Company’s consolidated financial statement footnote disclosures.

 

16

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**3.****             ****Accounting changes (continued):**

** **

(c)**         **New accounting pronouncements (continued):

** **

*Comprehensive Income*

 

In June 2011, the FASB issued ASU No. 2011-05, *Comprehensive Income (Topic 220): Presentation of Comprehensive Income*, (“ASU 2011-05”).  ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  In December 2011, the FASB issued ASU No. 2011-12 (“ASU 2011-12”), which defers certain requirements within ASU 2011-05.  These amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income in all periods presented.  This new guidance is to be applied retrospectively.  The Company does not expect the adoption of this standard to have any impact on the Company’s consolidated financial statements.

 

*Intangibles — Goodwill and other*

 

In September 2011, the FASB issued ASU No. 2011-08, *Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment* (“ASU 2011-08”), which allows an entity to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value.  If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test.  Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011.  The Company will be applying this guidance effective for our fiscal year beginning January 1, 2012.

 

*Balance sheet*

 

In December 2011, the FASB issued ASU No. 2011-11, *Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities* (“ASU 2011-11”).  ASU 2011-11 enhances disclosures regarding financial instruments and derivative instruments. Entities are required to provide both net information and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of IFRS.  This new guidance is to be applied retrospectively.  The Company anticipates that the adoption of this standard will expand its consolidated financial statement footnote disclosures.

 

17

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**4.****             ****Business combinations:**

** **

(a)          Acquisition of Emer:

 

On July 1, 2011, the Company acquired, through its wholly owned subsidiary, Juniper Engines Italy S.r.l., 100% of the outstanding shares of Emer from the seller.  The fair value of the consideration for the acquisition was $39,706 and is still subject to adjustment.  Westport paid cash of $17,607 on closing and issued 881,860 common shares with a value of $22,099 based on the NASDAQ closing price of the Company’s shares on July 1, 2011 of $25.06.  The Company also assumed approximately $77,000 in existing net debt of Emer. Post-closing, Westport repaid approximately $36,300 of the debt, leaving approximately $40,700 in debt on the consolidated balance sheet as of July 1, 2011.

 

The acquisition was accounted for as a business combination using the purchase method.  The results of Emer have been included in the consolidated financial statements of the Company from July 1, 2011.  The Company has engaged an independent third-party to value property and equipment, inventories and intangible assets.  The fair value amounts below are preliminary and subject to change. The final fair value amounts may differ materially from the amounts disclosed below.  Any such changes in the determination of the fair value of the assets and liabilities acquired could also result in changes to current and future operating results.  Preliminary fair value adjustments include adjustments to inventories, property, plant and equipment, intangible assets and deferred taxes.  The estimated preliminary fair value of the assets acquired and liabilities assumed are as follows:

 
| Consideration allocated   to:                                  |   |    |   |
|----------------------------------------------------------------|--------|---------|--------|
| Property, plant and   equipment                                |   | $       | 17,644 |   |
| Other tangible assets,   including cash of $11,073             |   | 60,532  |   |
| Intangible assets subject   to amortization over 5 to 20 years |   | 32,954  |   |
| Goodwill                                                       |   | 50,774  |   |
| Total assets acquired                                          |   | 161,904 |   |
| Less:                                                          |   |    |   |
| Long-term debt                                                 |   | (83,272 | )      |
| Other liabilities                                              |   | (38,926 | )      |
| Total net assets acquired                                      |   | $       | 39,706 |   |
|                                                           |   |    |   |
| Consideration:                                                 |   |    |   |
| Cash                                                           |   | $       | 17,607 |   |
| Common shares                                                  |   | 22,099  |   |
|                                                           |   | $       | 39,706 |   |

 

18

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**4.****             ****Business combinations (continued):**

** **

(a)          Acquisition of Emer (continued):

 

The foreign exchange rate used to translate Euro denominated net assets acquired, liabilities assumed and purchase consideration into U.S. dollars was 1.45 based on the July 1, 2011 closing rate.

 

The Company recognized goodwill associated with the transaction of $50,774. Goodwill includes the value of the assembled work force and expected synergies including access to markets and supply chain integration.  Goodwill is not deductible for tax purposes.

 

The consolidated financial statements reflect consolidated revenue and net loss for Emer of $31,831 and $1,924, respectively, from July 1, 2011 to December 31, 2011.  Had the Company acquired Emer on April 1, 2011, consolidated pro forma revenue and net loss for the nine-month period ended December 31, 2011 would have been $247,216 (year ended March 31, 2011 - $219,609) and $54,927 (year ended March 31, 2011 - $31,322), respectively, not including the financial results of AFV (note 4(b)).

 

The Company incurred acquisition related expenses of $1,683 during the nine months ended December 31, 2011, which have been recorded in general and administrative expenses in the consolidated statements of operations.

 

(b)         Acquisition of AFV:

 

On October 11, 2011, the Company acquired, through its wholly owned subsidiary Westport Light Duty Canada Inc., 100% of the outstanding shares of AFV.  The fair value of the consideration for the acquisition was $3,939.  Westport paid cash of $2,558 on closing and issued 33,161 common shares with a value of $953 based on the TSX closing price of the Company’s shares on October 11, 2011 of $28.74 (CDN$29.56).  There is also a contingent earn-out which will be settled in Westport shares if AFV achieves certain performance targets by December 31, 2014.

 

The Company also assumed approximately $1,087 in existing debt of AFV.  Upon closing Westport settled $420 of the debt, leaving approximately $667 in debt on the consolidated balance sheet as of October 11, 2011.

 

19

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**4.****             ****Business combinations (continued):**

** **

(b)         Acquisition of AFV (continued):

 

The acquisition was accounted for as a business combination using the purchase method.  The results of AFV have been included in the consolidated financial statements of the Company from October 11, 2011.

 

The fair value of the assets acquired and liabilities assumed are as follows:

 
| Consideration allocated   to:                            |   |   |   |
|----------------------------------------------------------|--------|--------|--------|
| Total tangible assets,   including cash of $8            |   | $      | 2,161  |   |
| Intangible assets subject   to amortization over 8 years |   | 2,638  |   |
| Goodwill                                                 |   | 2,701  |   |
| Total assets acquired                                    |   | 7,500  |   |
| Less: total liabilities                                  |   | (3,561 | )      |
| Total net assets acquired                                |   | $      | 3,939  |   |
|                                                     |   |   |   |
| Consideration:                                           |   |   |   |
| Cash                                                     |   | $      | 2,558  |   |
| Common shares                                            |   | 953    |   |
| Contingent consideration   payable                       |   | 428    |   |
|                                                     |   | $      | 3,939  |   |

 

The foreign exchange rate used to translate net assets acquired, liabilities assumed and purchase consideration from Swedish Krona into U.S. dollars was 6.6712 based on the October 11, 2011 closing rate.

 

The Company recognized goodwill associated with the transaction of $2,701.  Goodwill includes the value of the assembled work force and expected synergies including access to markets and product know-how.  Goodwill is not deductible for tax purposes.

 

The consolidated financial statements reflect consolidated revenue and net loss for AFV of $2,566 and $191, respectively, from October 11, 2011 to December 31, 2011.  Had the Company acquired AFV on April 1, 2011, consolidated pro forma revenue and net loss for the nine months ended December 31, 2011 would have been $201,707 (year ended March 31, 2011 - $148,062) and $43,064 (year ended March 31, 2011 - $42,724), respectively, not including the financial results of Emer (note 4(a)).

 

The Company incurred acquisition related expenses of $93 during the nine months ended December 31, 2011, which have been recorded in general and administrative expenses in the consolidated statements of operations.

 

20

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**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**4.****             ****Business combinations (continued):**

** **

(c)          Acquisition of OMVL:

 

On July 2, 2010, the Company acquired, through its wholly owned subsidiary, Juniper Engines Italy S.r.l., 100% of the outstanding shares of OMVL, including its 51% interest in Juniper, from Società Italiana Tecnomeccanica La Precisa S.p.A and Sit International B.V.  The fair value of the consideration for the acquisition was $25,711.  Westport paid cash of $17,146 on closing, and is required to pay $10,778 (€7,600 euro) on the third anniversary of the closing date.  The obligation to the Sellers payable on July 2, 2013 was recognized as a liability on the acquisition date and recorded at fair value.  The amount is non-interest bearing and the fair value was determined using a credit adjusted risk free rate of 3.72% to discount future cash flows.  The long-term payable to the sellers of OMVL is recorded in long-term debt on the consolidated balance sheet (note 13(b)).

 

The Company also entered into an “on first demand” bank guarantee in favour of the Sellers with Banca Intesa S.p.A, covering the Company’s future payment obligation payable on July 2, 2013.  The bank guarantee is subject to a cross guarantee with the Bank of Montreal with whom the Company has a credit facility (note 13(b)).

 

The Company previously held the other 49% of Juniper, which was accounted for as a long-term investment using the equity method.  After the transaction, Juniper became a wholly owned subsidiary of the Company.  As a result of this transaction, the Company remeasured its 49% interest in the net assets and liabilities of Juniper held prior to the transaction at fair value and recognized a gain of $184, which is recorded in other income.  For the period from April 1, 2010 to July 2, 2010, the Company recognized a loss of $155 (year ended March 31, 2010 - $983) from investment accounted for by the equity method.

 

The acquisitions were accounted for as business combinations using the purchase method.  The results of OMVL and the additional 51% of Juniper have been included in the consolidated financial statements of the Company from July 2, 2010.

 

The Company obtained an independent third-party valuation of inventories, property and equipment, and intangible assets. The fair value of the assets acquired and liabilities assumed are as follows:

 
| Consideration allocated   to:                                                |   |    |   |
|------------------------------------------------------------------------------|--------|---------|--------|
|                                                                         |   |    |   |
| Total tangible assets,   including cash of $4,130                            |   | $       | 23,531 |   |
| Intangible assets subject   to amortization                                  |   | 6,338   |   |
| Goodwill                                                                     |   | 7,573   |   |
| Total assets acquired                                                        |   | 37,442  |   |
| Less: total liabilities   assumed and gain on acquisition of Juniper of $184 |   | (11,731 | )      |
| Total net assets acquired                                                    |   | $       | 25,711 |   |
|                                                                         |   |    |   |
| Consideration:                                                               |   |    |   |
| Cash                                                                         |   | $       | 17,146 |   |
| Long-term payable                                                            |   | 8,565   |   |
|                                                                         |   | $       | 25,711 |   |

 

21

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**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**4.****             ****Business combinations (continued):**

 

(c)          Acquisition of OMVL (continued):

 

The foreign exchange rate used to translate Euro denominated assets acquired, liabilities assumed and purchase consideration into U.S. dollars was 1.26 based on the July 2, 2010 Bank of Canada closing rate.

 

The Company recognized goodwill associated with the transactions of $7,573.  The goodwill includes the value of the assembled work force and expected synergies including access to markets and supply chain integration.  Goodwill is not deductible for tax purposes.

 

The consolidated financial statements for the year ended March 31, 2011 reflect consolidated revenue for Juniper (including OMVL) of $23,713 and net loss of $5,138.  Had the Company acquired OMVL on April 1, 2010, the Company’s pro forma revenue and net loss for the year end March 31, 2011 would have been $158,580 and $39,785, respectively.

 

The Company incurred acquisition related expenses of $397 during the year of acquisition, which have been recorded in general and administrative expenses in the consolidated statements of operations.

 

**5.****             ****Accounts****receivable****:**

 
| ** **                                             | ** ** | **December 31, 2011** | ** ** | **March 31, 2011** | ** ** |
|--------------------------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
|                                                   |       |                            |       |                         |       |
| Customer trade receivable                              |       | $                               | 43,268     |                         | $          | 14,289 |   |
| Government funding   receivable                        |       | 1,412                           |       | 1,281                        |       |
| Due from joint venture   partner and other receivables |       | 11,528                          |       | 1,075                        |       |
| Allowance for doubtful   accounts                      |       | (785                            | )          | (711                         | )          |
|                                                   |       |                            |       |                         |       |
|                                                   |       | $                               | 55,423     |                         | $          | 15,934 |   |

 

**6.****             ****Inventories:**

 
| ** **             | ** ** | **December 31, 2011** | ** ** | **March 31, 2011** | ** ** |
|------------------------|------------|---------------------------------|------------|------------------------------|------------|
|                   |       |                            |       |                         |       |
| Purchased parts        |       | $                               | 20,020     |                         | $          | 10,494 |   |
| Assembled parts        |       | 4,198                           |       | 2,705                        |       |
| Work-in-process        |       | 6,994                           |       | 3,453                        |       |
| Finished goods         |       | 6,360                           |       | 1,349                        |       |
| Obsolescence provision |       | (515                            | )          | (1,196                       | )          |
|                   |       |                            |       |                         |       |
|                   |       | $                               | 37,057     |                         | $          | 16,805 |   |

 

During the nine months ended December 31, 2011, the Company recorded a write-down to net realizable value of approximately $430 (years ended March 31, 2011 - $nil; March 31, 2010 - $1,793) for obsolescence and scrap. Cost of revenue related to product revenue for the nine months ended December 31, 2011 was $128,036 (years ended March 31, 2011 - $72,448; March 31, 2010 - $66,277) and cost of revenue related to parts revenue was $17,894 (years ended March 31, 2011 - $18,534; March 31, 2010 - $16,702).

 

22

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**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**7.****             ****Long-term investments:**

 
| ** **                     | ** ** | **December 31, 2011** | ** ** | **March 31, 2011** | ** ** |
|--------------------------------|------------|---------------------------------|------------|------------------------------|------------|
|                           |       |                            |       |                         |       |
| Weichai Westport Inc.          |       | $                               | 7,732      |                         | $          | 5,622 |   |
| Minda-Emer Technologies   Ltd. |       | 637                             |       | —                       |       |
|                           |       |                            |       |                         |       |
|                           |       | $                               | 8,369      |                         | $          | 5,622 |   |

 

On July 3, 2010, the Company invested $4,316 under an agreement with Weichai Power Co. Ltd. and Hong Kong Peterson (CNG) Equipment Ltd. to form Weichai Westport Inc. (“WWI”).  On October 11, 2011, the Company invested an additional $955 in WWI.  The Company has a 35% equity interest in WWI.

 

For the nine months ended December 31, 2011, the Company recognized income of $1,438 (year ended March 31, 2011 - $997), as income from investment accounted for by the equity method.

 

On July 1, 2011, the Company acquired 50% interest in Minda-Emer Technologies Ltd (“Minda-Emer”) through its acquisition of Emer.  On the date of acquisition, the interest in Minda-Emer was ascribed a value of $643.  As the Company does not control Minda-Emer, it accounts for this investment using the equity method.  During the nine months ended December 31, 2011, the Company recognized income of $62.

 

The gain on sale of long-term investments recognized for the year ended March 31, 2010 of $2,827 consisted of disposals of various available-for-sale equity securities.

 

**8.****             ****Other assets:**

 
| ** **                       | ** ** | **December 31, 2011** | ** ** | **March 31, 2011** | ** ** |
|----------------------------------|------------|---------------------------------|------------|------------------------------|------------|
|                             |       |                            |       |                         |       |
| Note receivable (a)              |       | $                               | 2,446      |                         | $          | 1,852 |   |
| Deferred financing charges   (b) |       | 1,323                           |       | 130                          |       |
| Other                            |       | 259                             |       | —                       |       |
|                             |       | 4,028                           |       | 1,982                        |       |
| Current portion                  |       | (2,034                          | )          | —                       |       |
|                             |       | $                               | 1,994      |                         | $          | 1,982 |   |

 

----

(a)          On October 15, 2010, the Company entered into a Note and Warrant Purchase Agreement (the “Agreement”) with a private energy company based in the United States to fund operating and capital expenditures related to infrastructure development activities.  The Agreement was subsequently amended on September 30, 2011.

 

Under the Agreement, the Company loaned $2,200 and received 1,427,179 warrants representing 20% of the current outstanding shares to purchase common shares at $0.10 per share for a period of five years.  The loan bears interest at 12.5%, and is payable on maturity dates ranging from October 15, 2012 to October 20, 2013.

 

Recoverability of the loan will depend on the future success of the counterparty’s operations and cash flows.  The Company has determined that the fair value of the warrants is nominal, given that the counterparty’s development activities are at an early stage.

** **

(b)         Financing charges incurred on the issuance of subordinated debentures (note 13(a)) have been deferred and are being amortized into income over the term of the loans using the effective interest rate method.

 

23

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**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**9.****             ****Property, plant and equipment:**

 
| **December 31, 2011**   | ** ** | **Cost** | ** ** | **Accumulated   amortization** | ** ** | **Net book   value** | ** ** |
|-----------------------------------|------------|----------|------------|--------------------------------|------------|---------------------------|------------|
|                              |       |     |       |                           |       |                      |       |
| Land and buildings                |       | $        | 668        |                           | $          | 124                       |       | $ | 544 |   |
| Computer equipment and   software |       | 8,914    |       | 7,257                          |       | 1,657                     |       |
| Furniture and fixtures            |       | 2,072    |       | 1,602                          |       | 470                       |       |
| Machinery and equipment           |       | 55,025   |       | 27,322                         |       | 27,703                    |       |
| Leasehold improvements            |       | 14,930   |       | 9,061                          |       | 5,869                     |       |
|                              |       |     |       |                           |       |                      |       |
|                              |       | $        | 81,609     |                           | $          | 45,366                    |       | $ | 36,243 |   |

 
| **March 31, 2011**      | ** ** | **Cost** | ** ** | **Accumulated   amortization** | ** ** | **Net book   value** | ** ** |
|-----------------------------------|------------|----------|------------|--------------------------------|------------|---------------------------|------------|
|                              |       |     |       |                           |       |                      |       |
| Computer equipment and   software |       | $        | 7,839      |                           | $          | 7,219                     |       | $ | 620 |   |
| Furniture and fixtures            |       | 1,741    |       | 1,331                          |       | 410                       |       |
| Machinery and equipment           |       | 29,546   |       | 19,401                         |       | 10,145                    |       |
| Leasehold improvements            |       | 10,088   |       | 9,180                          |       | 908                       |       |
|                              |       |     |       |                           |       |                      |       |
|                              |       | $        | 49,214     |                           | $          | 37,131                    |       | $ | 12,083 |   |

 

As at December 31, 2011, equipment with a cost of $15,448 (March 31, 2011 - $443) and a net book value of $3,662 (March 31, 2011 - $354) is held under capital lease.

 

**10.****      ****Intangible assets:**

 
| **December 31, 2011** | ** ** | **Cost** | ** ** | **Accumulated   amortization** | ** ** | **Net book   value** | ** ** |
|---------------------------------|------------|----------|------------|--------------------------------|------------|---------------------------|------------|
|                            |       |     |       |                           |       |                      |       |
| Patents and trademarks          |       | $        | 19,508     |                           | $          | 727                       |       | $ | 18,781 |   |
| Technology                      |       | 6,380    |       | 1,122                          |       | 5,258                     |       |
| Customer contracts              |       | 13,334   |       | 815                            |       | 12,519                    |       |
| Non-compete agreement           |       | 37       |       | 13                             |       | 24                        |       |
|                            |       |     |       |                           |       |                      |       |
|                            |       | $        | 39,259     |                           | $          | 2,677                     |       | $ | 36,582 |   |

 
| **March 31, 2011** | ** ** | **Cost** | ** ** | **Accumulated   amortization** | ** ** | **Net book   value** | ** ** |
|------------------------------|------------|----------|------------|--------------------------------|------------|---------------------------|------------|
|                         |       |     |       |                           |       |                      |       |
| Patents and trademarks       |       | $        | 3,273      |                           | $          | 125                       |       | $ | 3,148 |   |
| Technology                   |       | 2,059    |       | 190                            |       | 1,869                     |       |
| Customer contracts           |       | 1,970    |       | 159                            |       | 1,811                     |       |
| Non-compete agreement        |       | 37       |       | 6                              |       | 31                        |       |
|                         |       |     |       |                           |       |                      |       |
|                         |       | $        | 7,339      |                           | $          | 480                       |       | $ | 6,859 |   |

 

During the nine months ended December 31, 2011 and the years ended March 31, 2011 and 2010, amortization of $1,806, $592 and $131, respectively, was recognized in the statement of operations.

** **

The expected amortization of intangible assets for fiscal year 2012 to 2016 is $3,381 per year.

 

24

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**11.****      ****Goodwill:**

 

A continuity of goodwill is as follows:

 
| ** **                        | ** ** | **December 31, 2011** | ** ** | **March 31, 2011** | ** ** |
|-----------------------------------|------------|---------------------------------|------------|------------------------------|------------|
|                              |       |                            |       |                         |       |
| Balance, beginning of   period    |       | $                               | 8,202      |                         | $          | — |   |
| Acquisition of Emer (note   4(a)) |       | 50,774                          |       | —                       |       |
| Acquisition of AFV (note   4(b))  |       | 2,701                           |       | —                       |       |
| Acquisition of OMVL (note   4(c)) |       | —                          |       | 7,573                        |       |
| Impact of foreign exchange        |       | (5,863                          | )          | 629                          |       |
|                              |       |                            |       |                         |       |
| Balance, end of period            |       | $                               | 55,814     |                         | $          | 8,202 |   |

 

**12.****      ****Accounts payable and accrued liabilities:**

 
| ** **             | ** ** | **December 31, 2011** | ** ** | **March 31, 2011** | ** ** |
|------------------------|------------|---------------------------------|------------|------------------------------|------------|
|                   |       |                            |       |                         |       |
| Trade accounts payable |       | $                               | 40,758     |                         | $          | 18,270 |   |
| Accrued payroll        |       | 9,534                           |       | 4,852                        |       |
| Accrued interest       |       | 1,233                           |       | 416                          |       |
| Income taxes payable   |       | 2,705                           |       | 1,087                        |       |
| Other                  |       | 1,577                           |       | 140                          |       |
|                   |       | $                               | 55,807     |                         | $          | 24,765 |   |

 

**13.****      ****Long-term debt:**

 
| ** **                         | ** ** | **December 31, 2011** | ** ** | **March 31, 2011** | ** ** |
|------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
|                               |       |                            |       |                         |       |
| Subordinated debenture   notes (a) |       | $                               | 35,398     |                         | $          | 15,078 |   |
| Long-term payable (b)              |       | 9,330                           |       | 9,919                        |       |
| Senior financing (c)               |       | 24,871                          |       | —                       |       |
| Senior revolving financing   (c)   |       | 11,360                          |       | —                       |       |
| Other bank financing (d)           |       | 2,557                           |       | —                       |       |
| Capital lease obligations   (e)    |       | 2,629                           |       | 225                          |       |
|                               |       | 86,145                          |       | 25,222                       |       |
|                               |       |                            |       |                         |       |
| Current portion                    |       | (20,568                         | )          | (15,210                      | )          |
|                               |       |                            |       |                         |       |
|                               |       | $                               | 65,577     |                         | $          | 10,012 |   |

 

----

(a)          On September 23, 2011, the Company raised $35,398 (CDN$36,000) through the issuance of debentures to Macquarie Private Wealth Inc. (“Macquarie”) on a private placement basis.

 

The debentures are unsecured and subordinated to senior indebtedness, mature on September 22, 2014 and bear interest at 9% per annum, payable in cash semi-annually in arrears on March 15th and September 15th of each year during the term, commencing on March 15, 2012.

 

The debentures are redeemable at the option of the Company but cannot be redeemed on or prior to September 22, 2012.  The debentures may be redeemed at a price equal to $1,150 per $1,000 principal amount of the debentures after September 22, 2012 and on or before March 22, 2013.  After March 22, 2013 and before maturity, the debentures can be redeemed at a price equal to $1,100 per $1,000 principal amount.

 

25

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**13.****      ****Long-term debt (continued):**

 

(a)   Continued:

 

The Company has paid to Macquarie a cash commission equal to 3.85% of the gross proceeds of the offering totaling $1,460 which is included in other assets (note 8) and amortized over the term of the debentures.

 

On July 3, 2011, the Company repaid the previously outstanding debentures plus accrued interest totaling $15,078.

 

(b)         On July 2, 2010, the Company acquired OMVL for $25,711.  A portion of the purchase price amounting to $9,859 (€7,600) is payable on the third anniversary of the closing date.  The difference between the carrying value of this liability and the principal amount is accreted to the principal amount using the effective interest rate of 3.72% over the term to maturity.  The amount payable to the Sellers will be paid in full on maturity and is not subject to any interest payments.  The amount outstanding is denominated in Euros, exposing the Company to foreign exchange changes.  The amount is guaranteed to the sellers of OMVL by Banca Intesa S.p.A with a cross guarantee from the Bank of Montreal with a letter of credit for $10,387 (CDN$10,564).

 

(c)          The senior financing agreement bears interest at the 6-month Euribor plus 2.5% and its carrying value is recorded at amortized cost using the effective interest rate method.  The principal repayment schedule of the remaining senior financing is as follows for the years ended December 31:

 
| 2012   |   | $     | 6,635  |   |
|--------|--------|-------|--------|--------|
| 2013   |   | 3,658 |   |
| 2014   |   | 4,023 |   |
| 2015   |   | 4,389 |   |
| 2016   |   | 4,572 |   |
| 2017   |   | 2,286 |   |
|   |   | $     | 25,563 |   |

 

The senior revolving financing facility bears interest at the 6-month Euribor plus 2.5% (4.1% as at December 31, 2011) and will be repaid through two principal payments of $6,486 (€5,000) and $5,189 (€4,000) on March 31, 2016 and September 30, 2017, respectively.

 

The Company has pledged its interest in Emer as a general guarantee for its senior financing and senior revolving financing.

 

Throughout the entire term of these financing arrangements, the Company is required to meet certain financial and non-financial covenants.  As of December 31, 2011, the Company is in compliance with all covenants under the financing arrangements.

 

(d)         Other bank financing consists of various unsecured bank financing arrangements that carry rates of interest ranging from 4% to 9.63% and are payable on maturity dates ranging from May 31, 2012 to June 30, 2016.

 

26

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**13.****      ****Long-term debt (continued):**

 

(e)          The Company has capital lease obligations that have initial terms of three to five years at interest rates ranging from 2.13% to 15.92%.  The capital lease obligations require the following minimum annual payments during the respective fiscal years:

 
| 2012                           |   | $      | 1,236  |   |
|--------------------------------|--------|--------|--------|--------|
| 2013                           |   | 935    |   |
| 2014                           |   | 412    |   |
| 2015                           |   | 241    |   |
| 2016                           |   | 19     |   |
| 2017                           |   | 2      |   |
|                           |   | 2,845  |   |
| Amount representing   interest |   | (216   | )      |
|                           |   |   |   |
|                           |   | $      | 2,629  |   |

 

(f)            On September 29, 2011, the Company amended its credit facility that increased the maximum borrowings from CDN$20,000 to CDN$30,000.  The credit facility is governed by a margin requirement limiting such borrowings to a calculated amount based on cash and investments held with the creditor.  Borrowings may be drawn in the form of direct borrowings, letters of credit, foreign exchange forward contracts, and overdraft loans.  Outstanding amounts on direct borrowings and overdraft loans drawn under this credit facility bear interest at the prime rate, and letters of credit bear interest at 0.75% per annum.  As at December 31, 2011, no amounts of this credit facility were drawn (March 31, 2011 - $nil).

 

**14.****      ****Warranty liability:**

** **

A continuity of the warranty liability is as follows:

 
| ** **                     | ** ** | **December 31,   2011** | ** ** | **March 31,   2011** | ** ** | **March 31,   2010** | ** ** |
|--------------------------------|------------|------------------------------|------------|---------------------------|------------|---------------------------|------------|
|                           |       |                         |       |                      |       |                      |       |
| Balance, beginning of   period |       | $                            | 18,035     |                      | $          | 20,950                    |       | $ | 19,496 |   |
| Warranty claims                |       | (9,514                       | )          | (14,143                   | )          | (14,164                   | )          |
| Warranty accruals              |       | 15,768                       |       | 14,034                    |       | 17,718                    |       |
| Change in warranty   estimates |       | (10                          | )          | (2,735                    | )          | (2,059                    | )          |
| Impact of foreign exchange     |       | (48                          | )          | (71                       | )          | (41                       | )          |
| Balance, end of period         |       | $                            | 24,231     |                      | $          | 18,035                    |       | $ | 20,950 |   |
| Current portion                |       | (12,978                      | )          | (12,151                   | )          | (11,894                   | )          |
| Long-term portion              |       | 11,253                       |       | 5,884                     |       | 9,056                     |       |

 

27

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**15.****      ****Other long-term liabilities:**

 
| ** **                                            | ** ** | **December 31,   2011** | ** ** | **March 31,   2011** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|---------------------------|------------|
|                                                  |       |                         |       |                      |       |
| Severance indemnity (a)                               |       | $                            | 1,914      |                      | $          | — |   |
| Long-term tax accrual (c)                             |       | 644                          |       | —                    |       |
| Contingent consideration   payable to acquire AFV (b) |       | 428                          |       | —                    |       |
| Deferred lease inducements                            |       | 118                          |       | 164                       |       |
|                                                  |       |                         |       |                      |       |
|                                                  |       | $                            | 3,104      |                      | $          | 164 |   |

 

----

(a)          Italian law requires companies to make a mandatory termination payment to employees.  It is paid, as a lump sum, when the employment ends for any reason such as retirement, resignation, or layoff.  The severance indemnity liability is calculated in accordance with local civil and labour laws based on each employee’s length of service, employment category and remuneration.  There is no vesting period or funding requirement associated with the liability.  The liability recorded in the consolidated balance sheet is the amount that the employee would be entitled to if the employee terminates immediately.  This liability for severance indemnities relates primarily to the Company’s employees in Italy.

 

(b)         The total purchase price to acquire AFV also includes earn-out payments payable in the Company’s shares and tied to revenue and production milestones to be achieved no later than December 31, 2014.  This contingent consideration is estimated to be $428 as at December 31, 2011.

 

(c)**         **The long-term tax accrual represents the Company’s estimate of tax uncertainties associated with tax positions previously taken with respect to the Company’s tax returns.  This accrual includes $161 of estimated interest and penalties.

 

**16.****      ****Government assistance:**

 

From time to time, the Company enters into agreements for financial assistance with government agencies.  During the nine months ended December 31, 2011, and the years ended March 31, 2011 and 2010, government assistance of $2,767, $1,675 and $1,333, respectively, was received or receivable by the Company, which has been recorded as a reduction of the related research and development expenditures (note 19).

 

Under the terms of an agreement with the Industry Canada’s Industrial Technologies Office (“ITO”), from April 1, 2008 to March 31, 2015, inclusive, the Company is obligated to pay annual royalties equal to the greater of $1,327 (CDN $1,350) or 0.33% of the Company’s annual revenue provided that gross revenue exceeds $13,274 (CDN $13,500) in any of the aforementioned fiscal years.  The royalty payment period may be extended until the earlier of March 31, 2018 or until cumulative royalties total $27,729 (CDN $28,200).  For the nine months ended December 31, 2011, $1,327 (March 31, 2011 - $1,392) in royalties have been paid or are payable of which $996 (March 31, 2011 - $1,392) remains accrued in accounts payable and accrued liabilities as at December 31, 2011.

 

28

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**16.****      ****Government assistance (continued):**

 

The Company is also obligated to pay royalties to the Government of Canada’s Department of Natural Resources equal to 1% of future revenue from engines for power generators until the earlier of ten years  from the project completion date (August 30, 2004) or when cumulative royalties total $983 (CDN$1,000).  As at December 31, 2011, there has been no revenue from the sales of engines for power generators; therefore, no royalty payments have been paid or are payable.

 

**17.****      ****Share capital:**

** **

On December 17, 2009, the Company issued 5,462,500 common shares at a price of $10.50 per share.  Gross proceeds totaled $57,356 and the Company incurred share issuance costs of $3,192.

 

On November 15, 2010, the Company issued 6,957,500 common shares at a price of $17.50 per share.  Gross proceeds totaled $121,756 and the Company incurred share issue costs of $6,069.

 

On July 1, 2011, the Company issued 881,860 common shares at a price of $25.06 per share as part of the consideration paid to acquire Emer (note 4(a)).

 

On October 11, 2011, the Company issued 33,161 common shares at a price of $28.74 per share as part of the consideration paid to acquire AFV (note 4(b)).

 

**18.****      ****Stock options and other stock-based plans:**

** **

At the Company’s 2010 annual general meeting, the Company’s shareholders ratified and approved the Westport Omnibus Plan and reserved 2,226,645 common shares under this plan.  Under the Westport Omnibus plan, stock options, restricted share units (“RSUs”) and performance share units (“PSUs”) may be granted and are exercisable into common shares of the Company for no additional consideration.  Any employee, contractor, director or executive officer of the Company is eligible to participate in the Westport Omnibus Plan.

** **

The Executive and Senior Management Compensation Program sets out provisions where the RSUs and PSUs (together the “Units”) will be granted to the Company’s executive management if performance milestones are achieved as determined at the discretion of the Human Resources and Compensation Committee of the Company’s Board of Directors. These performance milestones are focused on achievement of key cash management, profitability and revenue growth objectives.  Vesting periods and conditions for each Unit granted pursuant to the Westport Omnibus Plan are at the discretion of the Board of Directors and may include time based, share price or other performance targets.

 

29

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**18.****      ****Stock options and other stock-based plans (continued):**

** **

(a)          Stock options:

 

The Company grants incentive stock options to employees, directors, officers and consultants.  Stock options are granted with an exercise price of not less than the market price of the Company’s common shares on the date immediately prior to the date of grant.  The exercise period of the options may not exceed eight years from the date of grant.  Vesting periods of the options are at the discretion of the Board of Directors and may be based on fixed terms, achieving performance milestones or reaching specified share price targets.

 

A summary of the status of the Company’s stock option plan as of December 31, 2011, March 31, 2011 and 2010 and changes during the periods then ended are presented as follows:

 
| ** **                           | ** ** | **December 31, 2011** | ** ** | **March 31, 2011**                             | ** ** | **March 31, 2010** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|----------------------------------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **Number of   shares**     | ** ** | **Weighted   average   exercise   price   (CDN $)** | ** ** | **Number of   shares**  | ** ** | **Weighted   average   exercise   price   (CDN $)** | ** ** | **Number of   shares** | ** ** | **Weighted   average   exercise   price   (CDN $)** | ** ** |
|                                 |       |                            |       |                                                     |       |                         |       |   |   |   |   |   |   |
| Outstanding, beginning of   period   |       | 562,014                         |       | $                                                        | 8.46       |                         | 1,051,589  |   | $ | 8.13 |   | 1,136,163 |   | $ | 7.32 |   |
|                                 |       |                            |       |                                                     |       |                         |       |   |   |   |   |   |   |
| Granted                              |       | —                          |       | —                                                   |       | —                       |       | — |   | 406,262 |   | 10.79 |   |
| Exercised                            |       | (225,845                        | )          | 7.87                                                     |       | (472,414                     | )          | 7.19 |   | (389,580 | ) | 6.53 |   |
| Cancelled/expired                    |       | (8,142                          | )          | 4.84                                                     |       | (17,161                      | )          | 23.24 |   | (101,256 | ) | 15.87 |   |
|                                 |       |                            |       |                                                     |       |                         |       |   |   |   |   |   |   |
| Outstanding, end of period           |       | 328,027                         |       | $                                                        | 8.96       |                         | 562,014    |   | $ | 8.46 |   | 1,051,589 |   | $ | 8.13 |   |
|                                 |       |                            |       |                                                     |       |                         |       |   |   |   |   |   |   |
| Options exercisable, end   of period |       | 311,360                         |       | $                                                        | 8.55       |                         | 455,206    |   | $ | 7.75 |   | 550,471 |   | $ | 8.44 |   |

 

Stock options are available for issuance under the Westport Omnibus Plan and were previously granted under the Company’s Stock Option Plan.  During the nine month period ended December 31, 2011, the Company recognized $352 (years ended March 31, 2011 - $547; March 31, 2010 - $1,363) in stock-based compensation related to stock options.  No stock options were granted during the nine month period ended December 31, 2011 or the year ended March 31, 2011.  The fair value of the options granted during the year ended March 31, 2010 was determined using the Black-Scholes option pricing formula simulation with the following weighted average assumptions:  expected dividend yield - nil%, expected stock price volatility - 78.7%, risk free interest rate - 1.60%; expected life of options — 3.3 years.  The weighted average grant date fair value was $5.60 for options granted for the fiscal year ended March 31, 2010.

 

As at December 31, 2011, $87 of compensation cost related to stock option awards has yet to be recognized in the results from operations and will be recognized over a weighted average period of 2.48 years.

 

30

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**18.  Stock options and other stock-based plans (continued):**

 

(a)   Stock options (continued):

 
| **Range of exercise prices   (CDN $)**  | ** ** | **Number   outstanding,   December 31,   2011** | ** ** | **Weighted   average   remaining   contractual   life** | ** ** | **Weighted   average   exercise price   (CDN $)** | ** ** | **Number   exercisable,   December 31,   2011** | ** ** | **Weighted   average   exercise price   (CDN $)** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------------------|------------|
|                                                        |       |                                                 |       |                                                    |       |                                                        |       |                                                 |       |                                                        |       |
| $ 3.22 to $  3.47                            |       | 8,360                                                |       | 2.5                                                     |       | $                                                           | 3.33       |                                                 | 8,360      |                                                        | $          | 3.33 |   |
|    4.24 to     4.87 |       | 37,955                                               |       | 2.3                                                     |       | 4.48                                                        |       | 37,955                                               |       | 4.48                                                        |       |
|    5.29 to     5.99 |       | 87,487                                               |       | 1.4                                                     |       | 5.29                                                        |       | 87,487                                               |       | 5.29                                                        |       |
|    6.13 to     9.10 |       | 33,399                                               |       | 2.1                                                     |       | 8.88                                                        |       | 33,399                                               |       | 8.88                                                        |       |
|  10.33 to   11.11                       |       | 118,686                                              |       | 3.0                                                     |       | 11.07                                                       |       | 118,686                                              |       | 11.07                                                       |       |
|  14.90 to   16.50                       |       | 42,140                                               |       | 3.8                                                     |       | 15.85                                                       |       | 25,473                                               |       | 15.42                                                       |       |
|                                                        |       |                                                 |       |                                                    |       |                                                        |       |                                                 |       |                                                        |       |
| $ 3.22 to $16.50                                  |       | 328,027                                              |       | 2.48                                                    |       | $                                                           | 8.96       |                                                 | 311,360    |                                                        | $          | 8.55 |   |

 

(b)         Employee share purchase plan:

 

The Company has an employee share purchase plan (“ESPP”) in which full-time employees of the Company are eligible to participate.  Eligible employees may make contributions to the ESPP of up to 10% of their regular base pay.  The Company contributes up to a maximum combined total of 5% of the employee’s regular base pay to the employee’s RRSP and/or ESPP.  Shares contributed to the ESPP are purchased by the Company on a semi-monthly basis in the open market.  Shares purchased on behalf of the employee with the employee’s contribution vest with the employee immediately.  Shares purchased with the Company’s contribution vest on December 31st of each year, so long as the employee is still employed with the Company.  The ESPP was cancelled on March 31, 2011.

 

(c)          Share units:

 

The value assigned to issued Units and the amounts accrued are recorded as other equity instruments.  As Units are exercised and the underlying shares are issued from treasury of the Company, the value is reclassified to share capital.

 

During the nine months ended December 31, 2011, the Company recognized $5,827 (years ended March 31, 2011 - $4,376; March 31, 2010 - $3,167) of stock-based compensation associated with the Westport Omnibus Plan and the former Amended and Restated Unit Plan.

 

31

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**18.****      ****Stock options and other stock-based plans (continued):**

 

(c)          Share units (continued):

 

The fair value of all other Units was determined based on the market price of the underlying shares on the date of grant.  Compensation expense, net of estimated forfeitures, is recognized in results from operations over the vesting period.

 

A continuity of the Units issued under the Westport Omnibus Plan and the former Amended and Restated Unit Plan as of December 31, 2011, March 31, 2011 and March 31, 2010 are as follows:

 
| ** **                                         | ** ** | **December 31, 2011** | ** ** | **March 31, 2011**                                              | ** ** | **March 31, 2010** | ** ** |
|----------------------------------------------------|------------|---------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                         | ** ** | **Number of   units**      | ** ** | **Weighted   average   grant date   fair value   (CDN $)** | ** ** | **Number   of units**   | ** ** | **Weighted   average   grant date   fair value   (CDN $)** | ** ** | **Number of   units** | ** ** | **Weighted   average   grant date   fair value   (CDN $)** | ** ** |
|                                               |       |                            |       |                                                                      |       |                         |       |   |   |   |   |   |   |
| Outstanding, beginning of   period                 |       | 1,377,237                       |       | $                                                                         | 12.19      |                         | 1,194,913  |   | $ | 8.56 |   | 1,729,970 |   | $ | 7.55 |   |
|                                               |       |                            |       |                                                                      |       |                         |       |   |   |   |   |   |   |
| Granted                                            |       | 269,292                         |       | 35.70                                                                     |       | 424,149                      |       | $ | 22.78 |   | 105,084 |   | $ | 9.10 |   |
| Exercised                                          |       | (391,612                        | )          | 9.61                                                                      |       | (241,825                     | )          | $ | 12.81 |   | (601,855 | ) | $ | 5.65 |   |
| Cancelled/expired                                  |       | (4,000                          | )          | 18.61                                                                     |       | —                       |       | — |   | (38,286 | ) | $ | 10.91 |   |
|                                               |       |                            |       |                                                                      |       |                         |       |   |   |   |   |   |   |
| Outstanding, end of period                         |       | 1,250,917                       |       | 18.04                                                                     |       | 1,377,237                    |       | $ | 12.19 |   | 1,194,913 |   | $ | 8.56 |   |
|                                               |       |                            |       |                                                                      |       |                         |       |   |   |   |   |   |   |
| Units outstanding and   exercisable, end of period |       | 276,931                         |       | 7.97                                                                      |       | 541,534                      |       | $ | 6.91 |   | 182,495 |   | $ | 10.79 |   |
|                                                    |            |                                 |            |                                                                           |            |                              |            |  |  |  |  |  |  |  |  |  |

 
| ** **                      | ** ** | **December 31, 2011** | ** ** | **March 31, 2011**                                              | ** ** | **March 31, 2010** | ** ** |
|---------------------------------|------------|---------------------------------|------------|---------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                      | ** ** | **Number of   units**      | ** ** | **Weighted   average   grant date   fair value   (CDN $)** | ** ** | **Number   of units**   | ** ** | **Weighted   average   grant date   fair value   (CDN $)** | ** ** | **Number of   units** | ** ** | **Weighted   average   grant date   fair value   (CDN $)** | ** ** |
|                            |       |                            |       |                                                                      |       |                         |       |   |   |   |   |   |   |
| Unvested, beginning of   period |       | 835,703                         |       | $                                                                         | 15.62      |                         | 1,012,418  |   | $ | 8.16 |   | 1,132,410 |   | $ | 8.61 |   |
|                            |       |                            |       |                                                                      |       |                         |       |   |   |   |   |   |   |
| Granted                         |       | 269,292                         |       | $                                                                         | 35.70      |                         | 424,149    |   | $ | 22.78 |   | 105,084 |   | $ | 9.10 |   |
| Vested                          |       | (127,009                        | )          | $                                                                         | 17.55      |                         | (548,733   | ) | $ | 7.58 |   | (186,790 | ) | $ | 10.89 |   |
| Cancelled/expired               |       | (4,000                          | )          | $                                                                         | 18.61      |                         | (52,131    | ) | $ | 13.64 |   | (38,286 | ) | $ | 10.91 |   |
|                            |       |                            |       |                                                                      |       |                         |       |   |   |   |   |   |   |
| Unvested, end of period         |       | 973,986                         |       | $                                                                         | 20.90      |                         | 835,703    |   | $ | 15.62 |   | 1,012,418 |   | $ | 8.16 |   |

 

As at December 31, 2011, $14,114 of compensation cost related to Units awards has yet to be recognized in results from operations and will be recognized over a weighted average period of 3.34 years.

 

32

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**18.****      ****Stock options and other stock-based plans (continued):**

 

(c)   Share units (continued):

 

Of the Units granted during the nine months ended December 31, 2011, 145,794 Units were subject to market and service conditions. The fair value of these Units was determined using a Monte-Carlo simulation using the following weighted average assumptions: expected dividend yield - nil%; expected stock price volatility - 59.98%; and risk free interest rate - 1.52%.  The valuation model determined the grant date fair value based on assumptions about the likelihood of the Company achieving different payout factors as driven by the market conditions.  Payout factors are determined based upon the absolute stock price two years after the grant date and the stock price relative to a Synthetic Clean Tech index of comparative companies two years after the grant date.  One-half of these Units vest after two years and the remainder after three years from the date of the grant.  The impact of market conditions, if any, on compensation expense for these units is determined at the time of the grant with no adjustment to the compensation expense for the actual results of the market condition.

 

The fair value of all other Units was determined based on the market price of the underlying shares on the date of grant.  Compensation expense, net of estimated forfeitures, is recognized in results from operations over the vesting period.

 

The aggregate intrinsic value of the Company’s stock option awards and share units at December 31, 2011 are as follows:

 
| ** **     | ** ** | **December 31,   2011   CDN$** | ** ** | **March 31,   2011   CDN$** | ** ** |
|----------------|------------|-------------------------------------|------------|----------------------------------|------------|
|           |       |                                |       |                             |       |
| Stock options: |       |                                |       |                             |       |
| Outstanding    |       | $                                   | 8,138      |                             | $          | 7,187 |   |
| Exercisable    |       | 7,851                               |       | 6,143                            |       |
| Exercised      |       | 5,849                               |       | 6,644                            |       |
| Share units:   |       |                                |       |                             |       |
| Outstanding    |       | $                                   | 42,234     |                             | $          | 29,266 |   |
| Exercisable    |       | 9,352                               |       | 11,508                           |       |
| Exercised      |       | 7,688                               |       | 2,801                            |       |

 

Stock-based compensation associated with the Unit plans and the stock option plan is included in operating expenses as follows:

 
| ** **                 | ** ** | **Nine months   ended   December 31,   2011** | ** ** | **Year ended   March 31,   2011** | ** ** | **Year ended   March 31,   2010** | ** ** |
|----------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
|                       |       |                                                    |       |                                        |       |                                        |       |
| Research and development   |       | $                                                       | 825        |                                        | $          | 627                                         |       | $ | 598 |   |
| General and administrative |       | 3,302                                                   |       | 2,958                                       |       | 3,217                                       |       |
| Sales and marketing        |       | 2,052                                                   |       | 1,338                                       |       | 715                                         |       |
|                       |       |                                                    |       |                                        |       |                                        |       |
|                       |       | $                                                       | 6,179      |                                        | $          | 4,923                                       |       | $ | 4,530 |   |

 

33

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**19.****      ****Research and development expenses:**

** **

Research and development expenses are recorded net of program funding received or receivable.  The research and development expenses had been incurred and program funding had been received or are receivable as follows:

 
| ** **                          | ** ** | **Nine months ended   December 31,   2011** | ** ** | **Year ended   March 31,   2011** | ** ** | **Year ended   March 31,   2010** | ** ** |
|-------------------------------------|------------|------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
|                                |       |                                                       |       |                                        |       |                                        |       |
| Research and development   expenses |       | $                                                          | 46,061     |                                        | $          | 36,338                                      |       | $ | 27,546 |   |
| Program funding (note 16)           |       | (2,767                                                     | )          | (1,675                                      | )          | (1,333                                      | )          |
|                                |       |                                                       |       |                                        |       |                                        |       |
| Research and development            |       | $                                                          | 43,294     |                                        | $          | 34,663                                      |       | $ | 26,213 |   |

 

**20.****      ****Income taxes:**

** **

(a)          The Company’s income tax provision differs from that calculated by applying the combined enacted Canadian federal and provincial statutory income tax rate of 26.5% for the nine months ended December 31, 2011 (years ended March 31, 2011 - 28.0%; March 31, 2010 - 29.6%) as follows:

 
| ** **                                                                          | ** ** | **Nine months   ended   December 31,   2011** | ** ** | **Year ended   March 31,   2011** | ** ** | **Year ended   March 31,   2010** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
|                                                                                |       |                                                    |       |                                        |       |                                        |       |
| Loss before income taxes                                                            |       | $                                                       | (17,169    | )                                           | $          | (24,710                                     | )          | $ | (19,048 | ) |
|                                                                                |       |                                                    |       |                                        |       |                                        |       |
| Expected income tax   recovery                                                      |       | $                                                       | 4,550      |                                        | $          | 6,919                                       |       | $ | 5,638 |   |
|                                                                                |       |                                                    |       |                                        |       |                                        |       |
| Reduction (increase) in   income taxes resulting from:                              |       |                                                    |       |                                        |       |                                        |       |
| Permanent differences for   interest on long-term debt and amortization of discount |       | 13                                                      |       | (558                                        | )          | (384                                        | )          |
| Non-deductible stock-based   compensation                                           |       | (1,642                                                  | )          | (1,379                                      | )          | (1,341                                      | )          |
| Other permanent   differences                                                       |       | (176                                                    | )          | (42                                         | )          | (33                                         | )          |
| Withholding taxes                                                                   |       | (500                                                    | )          | (303                                        | )          | (194                                        | )          |
| Change in enacted rates                                                             |       | (213                                                    | )          | 24                                          |       | (951                                        | )          |
| Foreign tax rate   differences, foreign exchange and other adjustments              |       | (4,308                                                  | )          | (3,285                                      | )          | (1,119                                      | )          |
| Change in valuation   allowance                                                     |       | (13,391                                                 | )          | (11,023                                     | )          | (10,008                                     | )          |
|                                                                                |       |                                                    |       |                                        |       |                                        |       |
| Income tax expense                                                                  |       | $                                                       | (15,667    | )                                           | $          | (9,647                                      | )          | $ | (8,392 | ) |

 

34

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**20.****      ****Income taxes (continued):**

 

(b)         The significant components of the net deferred income tax assets and liabilities are as follows:

 
| ** **                                  | ** ** | **December 31,   2011** | ** ** | **March 31,   2011** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|---------------------------|------------|
|                                        |       |                         |       |                      |       |
| Deferred income tax   assets:               |       |                         |       |                      |       |
| Net operating loss carry forwards           |       | $                            | 51,296     |                      | $          | 40,581 |   |
| Intangible assets                           |       | 873                          |       | 2,918                     |       |
| Property, plant and   equipment             |       | 3,109                        |       | 2,066                     |       |
| Financing and share   issuance costs        |       | 5,212                        |       | 2,472                     |       |
| Warranty liability                          |       | 11,889                       |       | 6,447                     |       |
| Deferred revenue                            |       | 861                          |       | 3,092                     |       |
| Inventory                                   |       | 1,972                        |       | 713                       |       |
| Unrealized foreign   exchange               |       | 1,324                        |       | 889                       |       |
| Research and development                    |       | 2,086                        |       | 534                       |       |
| Other                                       |       | 1,782                        |       | 997                       |       |
|                                        |       |                         |       |                      |       |
| Total gross deferred   income tax assets    |       | 80,404                       |       | 60,709                    |       |
| Valuation allowance                         |       | (61,456                      | )          | (48,065                   | )          |
|                                        |       |                         |       |                      |       |
| Total deferred income tax   assets          |       | 18,948                       |       | 12,644                    |       |
|                                        |       |                         |       |                      |       |
| Deferred income tax   liabilities:          |       |                         |       |                      |       |
| Intangible assets                           |       | 6,696                        |       | 1,936                     |       |
| Property, plant and   equipment             |       | 4,168                        |       | 829                       |       |
| Other                                       |       | 8                            |       | 281                       |       |
|                                        |       |                         |       |                      |       |
| Total deferred income tax   liabilities     |       | 10,872                       |       | 3,046                     |       |
|                                        |       |                         |       |                      |       |
| Total net deferred income   tax assets      |       | $                            | 8,076      |                      | $          | 9,598 |   |
|                                        |       |                         |       |                      |       |
| Allocated as follows:                       |       |                         |       |                      |       |
| Current deferred income   tax assets        |       | $                            | 6,447      |                      | $          | 7,282 |   |
| Long-term deferred income   tax assets      |       | 5,075                        |       | 2,316                     |       |
| Long-term deferred income   tax liabilities |       | (3,446                       | )          | —                    |       |
|                                        |       |                         |       |                      |       |
| Total net deferred income   tax assets      |       | $                            | 8,076      |                      | $          | 9,598 |   |

 

The valuation allowance is reviewed on a quarterly basis to determine whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized.  The ultimate realization of deferred income tax assets is dependent on the generation of income during the future periods in which those temporary differences are expected to reverse.  If the evidence does not exist that all the deferred income tax assets will be fully realized, a valuation allowance has been recorded.

 

The following is a summary of the changes in the deferred income tax asset valuation allowance:

 
| ** **                            | ** ** | **Nine months ended   December 31, 2011** | ** ** | **Year ended   March 31, 2011** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------------|------------|------------------------------------------------|------------|
|                                  |       |                                                          |       |                                           |       |
| Beginning balance                     |       | $                                                             | 48,065     |                                           | $          | 32,368 |   |
| Additions                             |       | 13,391                                                        |       | 15,697                                         |       |
| Reductions                            |       | —                                                        |       | —                                         |       |
| Ending deferred valuation   allowance |       | $                                                             | 61,456     |                                           | $          | 48,065 |   |

 

35

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**20.****      ****Income taxes (continued):**

** **

(c)          The components of the Company’s income tax recovery (expense) are as follows:

 
| ** **                                  | ** ** | **Net income (loss)**   | ** ** | **Income tax recovery (expense)** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------|------------|
| ** **                                  | ** ** | **before income taxes** | ** ** | **Current**                                      | ** ** | **Deferred** | ** ** | **Total** | ** ** |
|                                        |       |                              |       |                                             |       |   |   |   |   |
| Nine months ended   December 31, 2011: |       |                              |       |                                             |       |   |   |   |   |
| Canada                                      |       | $                                 | (60,897    | )                                                | $          | (500 | ) | $ | — |   | $ | (500 | ) |
| United States                               |       | 42,923                            |       | (18,697                                          | )          | 1,775 |   | (16,922 | ) |
| Italy                                       |       | (1,342                            | )          | (388                                             | )          | 2,205 |   | 1,817 |   |
| Other                                       |       | 2,147                             |       | (45                                              | )          | (17 | ) | (62 | ) |
|                                        |       |                              |       |                                             |       |   |   |   |   |
|                                        |       | $                                 | (17,169    | )                                                | $          | (19,630 | ) | $ | 3,963 |   | $ | (15,667 | ) |
|                                        |       |                              |       |                                             |       |   |   |   |   |
| Year ended March 31,   2011:           |       |                              |       |                                             |       |   |   |   |   |
| Canada                                      |       | $                                 | (45,962    | )                                                | $          | (304 | ) | $ | (32 | ) | $ | (336 | ) |
| United States                               |       | 21,633                            |       | (8,954                                           | )          | (272 | ) | (9,226 | ) |
| Italy                                       |       | 1,015                             |       | 372                                              |       | (457 | ) | (85 | ) |
| Other                                       |       | (1,396                            | )          | —                                           |       | — |   | — |   |
|                                        |       |                              |       |                                             |       |   |   |   |   |
|                                        |       | $                                 | (24,710    | )                                                | $          | (8,886 | ) | $ | (761 | ) | $ | (9,647 | ) |
|                                        |       |                              |       |                                             |       |   |   |   |   |
| Year ended March 31,   2010:           |       |                              |       |                                             |       |   |   |   |   |
| Canada                                      |       | (39,297                           | )          | (201                                             | )          | (41 | ) | (242 | ) |
| United States                               |       | 20,774                            |       | (9,462                                           | )          | 1,312 |   | (8,150 | ) |
| Other                                       |       | (525                              | )          | —                                           |       | — |   | — |   |
|                                        |       |                              |       |                                             |       |   |   |   |   |
|                                        |       | $                                 | (19,048    | )                                                | $          | (9,663 | ) | $ | 1,271 |   | $ | (8,392 | ) |

 

(d)         The Company has loss carry forwards in the various jurisdictions available to offset future taxable income as follows:

 
| **Expiring in:** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **2015** | ** ** | **2016** | ** ** | **2025 and   later** | ** ** | **Total** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|---------------------------|------------|-----------|------------|
|                  |       |     |       |     |       |     |       |     |       |     |       |                      |       |      |       |
| Canada                |       | $        | —     |     | $          | 2,658    |       | $        | 2,466      |     | $          | —                    |       | $         | —     |   | $ | 192,437 |   | $ | 197,561 |   |
| Italy                 |       | —   |       | —   |       | —   |       | —   |       | —   |       | 3,685                     |       | 3,685     |       |
| United states         |       | —   |       | —   |       | —   |       | —   |       | —   |       | 1,321                     |       | 1,321     |       |
| Sweden                |       | —   |       | —   |       | —   |       | —   |       | —   |       | 776                       |       | 776       |       |
| Other                 |       | 44       |       | 63       |       | 522      |       | 214      |       | 300      |       | 226                       |       | 1,369     |       |
|                  |       |     |       |     |       |     |       |     |       |     |       |                      |       |      |       |
| Total                 |       | $        | 44         |     | $          | 2,721    |       | $        | 2,988      |     | $          | 214                       |       | $         | 300        |   | $ | 198,445 |   | $ | 204,712 |   |

 

36

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**20.****      ****Income taxes (continued):**

** **

(e)          As at December 31, 2011, the Company has unrecognized tax benefits of $644 (March 31, 2011 - $nil) which is an increase based on tax positions related to the current year.  All of these unrecognized tax benefits would affect the Company’s effective tax rate if recognized in future periods.

 

In cases where the Company is charged interest and penalties on uncertain tax positions that do not meet the recognition criteria, the Company includes these in interest expense and other operating expenses, respectively.  As at December 31, 2011, the amount of accrued interest and penalties on unrecognized tax benefits was $161 (note 15(c)).

 

**21.****      ****Investment in Joint Ventures:**

 
| ** **                | ** ** | **December 31,   2011** | ** ** | **March 31,    2011** | ** ** |
|---------------------------|------------|------------------------------|------------|---------------------------------|------------|
|                      |       |                         |       |                            |       |
| Cummins Westport Inc. (a) |       | $                            | 17,728     |                            | $          | 14,770 |   |
| BTIC Westport Inc. (b)    |       | 151                          |       | 151                             |       |
|                      |       |                         |       |                            |       |
|                      |       | $                            | 17,879     |                            | $          | 14,921 |   |

 

----

(a)   Cummins Westport Inc.:

 

The Company entered into a joint venture with Cummins on March 7, 2001.  From inception until December 31, 2003, the Company was responsible for all capital contributions to fund operations.  Initially and to December 31, 2003, the Company owned 100% of the common shares and Cummins owned 100% of the non-participating preferred shares, which were convertible into common shares for no consideration at the option of Cummins.

** **

On December 16, 2003, the Company and Cummins amended the joint venture agreement to have CWI focus on and develop markets for alternative fuel engines.  In addition, the two companies signed a Technology Partnership Agreement that creates a flexible arrangement for future technology development between Cummins and the Company.  Under the terms of the amended joint venture agreement, Cummins exercised the conversion feature of the preferred shares effective January 1, 2004.  However, the Company remained responsible for funding the profit and loss of CWI through CWI’s fiscal 2004 year for the period January 1 to December 31, 2004.  Based on its economic interest in CWI, the Company continued to consolidate 100% of the results of operations from CWI until December 31, 2004.  Cummins has agreed to manufacture engines for CWI’s business and transfer the engines to CWI at cost.

 

In consideration for this service, CWI agreed to pay Cummins a technology royalty access fee equal to 2.75% to a cumulative maximum of $10,400.  As at December 31, 2011, CWI has paid royalties totaling $10,400.

 

37

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**21.****      ****Investment in Joint Ventures (continued):**

** **

(a)   Cummins Westport Inc. (continued):

 

CWI has provided a loan to Cummins under a demand loan agreement.  The loan receivable bears interest monthly at a rate equal to the Bank of Canada prime corporate paper one-month rate in effect on the last day of each month. As at December 31, 2011, this rate was 1.06%.  All outstanding interest is payable in United States dollars on or before December 15, 2011. Interest begins accruing on the date in which monies are advanced under the loan agreement.  The loan is uncollateralized and is renewed annually.

 

The consolidated financial statements include 100% of the assets, liabilities, revenue and expenses of CWI as at and for all periods presented.  From January 1, 2005, Cummins Inc. (“Cummins”) shares equally in the profits and losses of CWI.  However, the Company has determined that CWI is a variable interest entity, and the Company is the primary beneficiary.  Accordingly, the Company continues to consolidate CWI with Cummins’ share of CWI’s income included in “Joint venture partners’ share of income from joint ventures”.   For the nine months ended December 31, 2011, the net income from CWI attributable to Cummins was $12,958 (years ended March 31, 2011 - $7,999, March 31, 2010 - $7,165).  A summarized balance sheet is presented below:

 
| ** **       | ** ** | **December 31,   2011** | ** ** | **March 31,   2011** | ** ** |
|------------------|------------|------------------------------|------------|---------------------------|------------|
|             |       |                         |       |                      |       |
| Current assets   |       | $                            | 46,888     |                      | $          | 36,855 |   |
| Long-term assets |       | 5,481                        |       | 4,326                     |       |
|             |       |                         |       |                      |       |
| Total assets     |       | $                            | 52,369     |                      | $          | 41,181 |   |

 
| ** **                              | ** ** | **December 31,   2011** | ** ** | **March 31,   2011** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|---------------------------|------------|
|                                    |       |                         |       |                      |       |
| Current liabilities:                    |       |                         |       |                      |       |
| Current portion of   warranty liability |       | $                            | 11,791     |                      | $          | 11,443 |   |
| Other current liabilities               |       | 8,546                        |       | 5,250                     |       |
|                                    |       | 20,337                       |       | 16,693                    |       |
|                                    |       |                         |       |                      |       |
| Long-term liabilities:                  |       |                         |       |                      |       |
| Warranty liability                      |       | 8,039                        |       | 7,738                     |       |
| Other long-term   liabilities           |       | 8,095                        |       | 3,720                     |       |
|                                    |       | 16,134                       |       | 11,458                    |       |
|                                    |       |                         |       |                      |       |
| Total liabilities                       |       | $                            | 36,471     |                      | $          | 28,151 |   |

 

38

----

 

**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**21.**       **Investment in Joint Ventures (continued):**

 

(b)   BTIC Westport Inc.:

 

On July 21, 2006, the Company and Beijing Tianhai Industry Co. Ltd. (“BTIC”) of Beijing, China formed BWI to market liquefied natural gas (“LNG”) fuel tanks for vehicles.  Through the 50:50 joint venture agreement and related license and supply agreements, BTIC and Westport share equally in the profits on products developed and sold by the joint venture.  Headquartered in Beijing, China, BWI sells tanks for installation on any vehicle, regardless of the natural gas engine manufacturer.

 

The consolidated financial statements include 100% of the assets, liabilities, revenue, and expenses of BWI since the Company has determined that BWI is a variable interest entity and that the Company is the primary beneficiary.  Accordingly, the Company consolidates BWI.  For the nine months ended December 31, 2011, the net loss from BWI attributable to BTIC was $nil (years ended March 31, 2011 - $214, March 31, 2010 - $94).

 

**22.****      ****Commitments and contingencies:**

** **

The Company has obligations under operating lease arrangements that require the following minimum annual payments during the respective fiscal years:

 
| 2012   |   | $      | 4,122  |   |
|--------|--------|--------|--------|--------|
| 2013   |   | 3,508  |   |
| 2014   |   | 1,565  |   |
| 2015   |   | 714    |   |
| 2016   |   | 659    |   |
|   |   |   |   |
|   |   | $      | 10,568 |   |

 

For the nine months ended December 31, 2011, the Company incurred operating lease expense of $2,070 (years ended March 31, 2011 - $1,599; March 31, 2010 - $1,459).

 

As at December 31, 2011, the Company’s wholly owned subsidiary Emer has provided a total amount of guarantees to third parties of $771 (€594), which include guarantees to its customers for the completion of specific supplies.

 

The Company is a party to a variety of agreements in the ordinary course of business under which it is obligated to indemnify a third party with respect to certain matters. Typically, these obligations arise as a result of contracts for sale of the Company’s product to customers where the Company provides indemnification against losses arising from matters such as product liabilities. The potential impact on the Company’s financial results is not subject to reasonable estimation because considerable uncertainty exists as to whether claims will be made and the final outcome of potential claims. To date, the Company has not incurred material costs related to these types of indemnifications.

 

39

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**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**23.****      ****Segmented information:**

** **

The Company’s business operates in four reportable operating segments:

 

· CWI which serves the medium- to heavy-duty engine markets.  The fuel for CWI engines is typically carried on vehicles as compressed natural gas or liquefied natural gas;

 

· Westport LD, which designs, produces and sells high-performance alternative fuel engines targeting the global CNG and LPG industrial and light-duty automotive market;

 

· Westport HD, which offers a 15-litre LNG engine for the heavy-duty trucking market. Westport HD is our proprietary development platform, engaged in the engineering, design and marketing of natural-gas enabling technology for the heavy-duty diesel engine and truck market; and

 

· Corporate, which includes corporate costs such as R&D, G&A, marketing, interest and other charges, foreign exchange and depreciation that cannot be attributed to a particular segment and are incurred by all segments.

 

These reporting segments offer different products and services and are managed separately as each business requires different technology and marketing strategies.

 

The accounting policies for the reportable segments are consistent with those described in note 2.  The Company evaluates segment performance based on the net operating income (loss), which is before income taxes and does not include depreciation and amortization, foreign exchange gains and losses, bank charges, interest and other expenses, interest and other income, and gain on sale of long-term investments.  The Company did not record any intersegment sales or transfers for the nine months ended December 31, 2011 and the years ended March 31, 2011 and 2010.

 

40

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**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**23.****      ****Segmented information (continued):**

 
| ** **                       | ** ** | **Nine months ended   December 31,    2011** | ** ** | **Year ended   March 31,   2011** | ** ** | **Year ended    March 31,    2010** | ** ** |
|----------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------------------|------------|
|                             |       |                                                             |       |                                        |       |                                                    |       |
| Revenue:                         |       |                                                             |       |                                        |       |                                                    |       |
| CWI                              |       | $                                                                | 138,844    |                                        | $          | 111,287                                                 |       | $ | 111,818 |   |
| Westport LD                      |       | 59,191                                                           |       | 23,713                                      |       | —                                                  |       |
| Westport HD                      |       | 28,505                                                           |       | 13,062                                      |       | 9,835                                                   |       |
| Corporate                        |       | —                                                           |       | —                                      |       | —                                                  |       |
|                             |       | $                                                                | 226,540    |                                        | $          | 148,062                                                 |       | $ | 121,653 |   |
|                             |       |                                                             |       |                                        |       |                                                    |       |
| Net operating income   (loss):   |       |                                                             |       |                                        |       |                                                    |       |
| CWI                              |       | $                                                                | 42,833     |                                        | $          | 25,399                                                  |       | $ | 22,269 |   |
| Westport LD                      |       | (8,820                                                           | )          | (2,183                                      | )          | —                                                  |       |
| Westport HD                      |       | (23,221                                                          | )          | (18,371                                     | )          | (22,085                                                 | )          |
| Corporate                        |       | (21,971                                                          | )          | (20,299                                     | )          | (16,303                                                 | )          |
|                             |       | (11,179                                                          | )          | (15,454                                     | )          | (16,119                                                 | )          |
|                             |       |                                                             |       |                                        |       |                                                    |       |
| Depreciation and   amortization: |       |                                                             |       |                                        |       |                                                    |       |
| CWI                              |       | (80                                                              | )          | (80                                         | )          | (60                                                     | )          |
| Westport LD                      |       | (5,103                                                           | )          | (1,305                                      | )          | —                                                  |       |
| Westport HD                      |       | —                                                           |       | —                                      |       | —                                                  |       |
| Corporate                        |       | (1,097                                                           | )          | (2,070                                      | )          | (1,768                                                  | )          |
|                             |       | (6,280                                                           | )          | (3,455                                      | )          | (1,828                                                  | )          |
|                             |       |                                                             |       |                                        |       |                                                    |       |
| Loss before undernoted           |       | (17,459                                                          | )          | (18,909                                     | )          | (17,947                                                 | )          |
|                             |       |                                                             |       |                                        |       |                                                    |       |
| Other income (expense),   net    |       | 290                                                              |       | (5,801                                      | )          | (1,101                                                  | )          |
|                             |       |                                                             |       |                                        |       |                                                    |       |
| Income before income taxes       |       | $                                                                | (17,169    | )                                           | $          | (24,710                                                 | )          | $ | (19,048 | ) |
|                             |       |                                                             |       |                                        |       |                                                    |       |
| Capital expenditures:            |       |                                                             |       |                                        |       |                                                    |       |
| CWI                              |       | $                                                                | 146        |                                        | $          | 442                                                     |       | $ | 53 |   |
| Westport LD                      |       | 2,118                                                            |       | 211                                         |       | —                                                  |       |
| Corporate                        |       | 11,005                                                           |       | 2,960                                       |       | 151                                                     |       |
|                             |       | $                                                                | 13,269     |                                        | $          | 3,613                                                   |       | $ | 204 |   |

 

For the nine months ended December 31, 2011, 60% (years ended March 31, 2011 - 60%; March 31, 2010 - 67%) of the Company’s revenue was from sales in the Americas, 18% (years ended March 31, 2011 - 15%; March 31, 2010 - 14%) from sales in Asia, and 22% (years ended March 31, 2011 - 25%; March 31, 2010 - 19%) from sales elsewhere.

 

41

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**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**23.****      ****Segmented information (continued):**

** **

As at December 31, 2011, total goodwill of $55,814 (March 31, 2011 - $8,202) was allocated to the Westport LD segment.  As at December 31, 2011, total long-term investments of $7,732 (March 31, 2011 - $5,622) was allocated to the Corporate segment and $637 (March 31, 2011 - $nil) was allocated to the Westport LD segment.  Total assets are allocated as follows:

 
| ** **                | ** ** | **December 31,   2011** | ** ** | **March 31,    2011** | ** ** |
|---------------------------|------------|------------------------------|------------|---------------------------------|------------|
|                      |       |                         |       |                            |       |
| CWI                       |       | $                            | 52,369     |                            | $          | 41,181 |   |
| Westport LD               |       | 101,324                      |       | 46,708                          |       |
| Westport HD and corporate |       | 202,982                      |       | 185,485                         |       |
|                      |       | $                            | 356,675    |                            | $          | 273,374 |   |

 

Capital assets and goodwill information by geographic area:

 
| ** **    | ** ** | **December 31,   2011** | ** ** | **March 31,    2011** | ** ** |
|---------------|------------|------------------------------|------------|---------------------------------|------------|
|          |       |                         |       |                            |       |
| Italy         |       | $                            | 72,378     |                            | $          | 12,755 |   |
| Canada        |       | 16,294                       |       | 6,701                           |       |
| Sweden        |       | 2,519                        |       | —                          |       |
| United States |       | 812                          |       | 787                             |       |
| Australia     |       | 32                           |       | —                          |       |
| China         |       | 22                           |       | 42                              |       |
|          |       | $                            | 92,057     |                            | $          | 20,285 |   |

 

**24.****      ****Financial instruments:**

** **

(a)   Financial risk management:

 

The Company has exposure to liquidity risk, credit risk, foreign currency risk, and interest rate risk.

 

(b)   Liquidity risk:

 

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they are due.  The Company has sustained losses and negative cash flows from operations since inception.  At December 31, 2011, the Company has $85,677 of cash, cash equivalents, and short-term investments.

 

42

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**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**24.****      ****Financial instruments (continued):**

** **

(b)         Liquidity risk (continued):

 

The following are the contractual maturities of financial obligations as at December 31, 2011:

 
| ** **                                 | ** ** | **Carrying   amount** | ** ** | **Contractual   cash flows** | ** ** | **< 1 year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **> 5 years** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|-----------------------------------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|----------------------------|------------|
|                                       |       |                  |       |                              |       |                      |       |               |       |               |       |                       |       |
| Accounts payable and   accrued liabilities |       | $                     | 55,807     |                              | $          | 55,807                    |       | $                  | 55,807     |               | $          | —                     |       | $ | — |   | $ | — |   |
| Unsecured subordinated   debentures (1)    |       | 35,398                |       | 44,077                            |       | 2,246                     |       | 41,831             |       | —             |       | —                     |       |
| Long-term payable (2)                      |       | 9,330                 |       | 9,859                             |       | —                    |       | 9,859              |       | —             |       | —                     |       |
| Senior financing (3)                       |       | 24,871                |       | 28,791                            |       | 8,124                     |       | 8,866              |       | 9,493              |       | 2,308                      |       |
| Senior revolving financing   (3)           |       | 11,360                |       | 14,386                            |       | 12,191                    |       | 1,033              |       | 1,033              |       | 129                        |       |
| Other bank financing                       |       | 2,557                 |       | 2,720                             |       | 1,711                     |       | 470                |       | 395                |       | 144                        |       |
| Other long-term debt                       |       | 2,629                 |       | 2,845                             |       | 1,236                     |       | 1,347              |       | 260                |       | 2                          |       |
| Operating lease   commitments              |       | —                |       | 10,568                            |       | 4,122                     |       | 5,073              |       | 1,373              |       | —                     |       |
| Royalty payments(4)                        |       | —                |       | 23,735                            |       | 1,327                     |       | 2,655              |       | 19,753             |       | —                     |       |
|                                       |       |                  |       |                              |       |                      |       |               |       |               |       |                       |       |
|                                       |       | $                     | 141,952    |                              | $          | 192,788                   |       | $                  | 86,764     |               | $          | 71,134                     |       | $ | 32,307 |   | $ | 2,583 |   |

 

----

(1)   Includes interest at 9%.

(2)   Includes interest at 3.72%.

(3)   Includes interest at 4.1%, the rate in effect at December 31, 2011.

(4)   From fiscal 2011 to 2015, inclusive, the Company is obligated to pay annual royalties equal to the greater of $1,327 (CDN$1,350) or 0.33% of the Company’s gross annual revenue from all sources, provided that gross revenue exceeds CDN$13,500 in any aforementioned fiscal year, up to a maximum of $27,718 (CDN$28,189). The Company has assumed the minimum required payments.

 

The Company expects to be able to meet its future financial obligations with its current source of funds.  However, there are uncertainties related to the timing of the Company’s cash inflows and outflows, specifically around the sale of inventories and amounts required for market and product development costs.  These uncertainties include the volume of commercial sales related to its natural gas engines and fuel system products and the development of markets for, and customer acceptance of, these products.  As a result, the Company may need to seek additional equity or arrange debt financing, which could include additional lines of credit, in order to meet its financial obligations.

 

43

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**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**24.****      ****Financial instruments (continued):**

 

(c)   Credit risk:

 

Credit risk arises from the potential that a counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s cash and cash equivalents, short-term investments, accounts receivable and loan receivable.  The Company manages credit risk associated with cash and cash equivalents and short-term investments by regularly consulting with its current bank and investment advisors and investing primarily in liquid short-term paper issued by Schedule 1 Canadian banks, R1 rated companies and governments.  The Company monitors its portfolio, and its policy is to diversify its investments to manage this potential risk.

 

The Company is also exposed to credit risk with respect to uncertainties as to timing and amount of collectability of accounts receivable and loans receivable.  As at December 31, 2011, 77% (March 31, 2010 - 85%) of accounts receivable relates to customer receivables, 2% (March 31, 2010 - 8%) relates to government grants receivable and 21% (March 31, 2010 - 7%) relates to amounts due from partners and indirect and value added taxes receivable.  The loan receivable in current assets is due from Cummins Inc., a large U.S. based engine manufacturer and the Company’s joint venture partner.  The Company is also exposed to credit risk on a loan receivable from a private energy company (note 7).  In order to minimize the risk of loss for customer receivables, the Company’s extension of credit to customers involves review and approval by senior management as well as progress payments as contracts are executed.  Most sales are invoiced with payment terms in the range of 30 days to 90 days.  The Company reviews its customer receivable accounts and regularly recognizes an allowance for doubtful receivables as soon as the account is determined not to be fully collectible.  Estimates for allowance for doubtful debts are determined by a customer-by-customer evaluation of collectability at each balance sheet reporting date, taking into consideration past due amounts and any available relevant information on the customers’ liquidity and financial position.

 

The carrying amount of cash and cash equivalents, short-term investments, accounts receivable, loan receivable and other assets of $164,604 at December 31, 2011 represents the Company’s maximum credit exposure.

 

44

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**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**24.****      ****Financial instruments (continued):**

** **

(d)   Foreign currency risk:

 

Foreign currency risk is the risk that the fair value of future cash flows of financial instruments will fluctuate because of changes in foreign currency exchange rates.  The Company conducts a significant portion of its business activities in foreign currencies, primarily the United States dollar (“U.S.”) and the Euro (“Euro”).  Cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and long-term debt that are denominated in foreign currencies will be affected by changes in the exchange rate between the Canadian dollar and these foreign currencies.

 

The Company’s objective in managing its foreign currency risk is to minimize its net exposures to foreign currency cash flows by transacting with third parties in U.S. dollars and Canadian dollars to the maximum extent possible and practical.  The Company attempts to limit its exposure to foreign currency risk by holding a combination of Canadian and U.S. denominated cash and cash equivalents and short-term investments based on forecasted Canadian or U.S. dollar net expenditures.  The Company currently does not enter into any forward foreign currency contracts to further limit its exposure.

 

The Company’s functional currency is the Canadian dollar. The U.S. dollar and the Euro carrying amount of financial instruments subject to exposure to foreign currency risk in the consolidated balance sheet at December 31, 2011 is as follows:

 
| ** **                | ** ** | **U.S. dollars** | ** ** |
|---------------------------|------------|-----------------------|------------|
|                      |       |                  |       |
| Cash and cash equivalents |       | $                     | 28,311     |   |
| Short-term investments    |       | 11,955                |       |
| Accounts receivable       |       | 781                   |       |
| Other assets              |       | 2,446                 |       |
| Accounts payable          |       | 3,484                 |       |
|                           |            |                       |            |  |

 
| ** **                | ** ** | **Euros** | ** ** |
|---------------------------|------------|-----------|------------|
|                      |       |      |       |
| Cash and cash equivalents |       | €    | 339        |   |
| Long-term debt            |       | 7,193     |       |
|                           |            |           |            |  |

 

If foreign exchange rates on December 31, 2011 had changed by 25 basis points, with all other variables held constant, net loss for the year ended December 31, 2011 would have changed by $100 and $17 for US dollar denominated and Euro denominated financial instruments, respectively.  The Company’s exposure to currencies other than U.S. dollars and Euros is not material.

 

45

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**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**24.****      ****Financial instruments (continued):**

** **

(e)   Interest rate risk:

 

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates.  The Company is subject to interest rate risk on its loan receivable and certain long-term debt with variable rates of interest.  The Company limits its exposure to interest rate risk by continually monitoring and adjusting portfolio duration to align to forecasted cash requirements and anticipated changes in interest rates.

 

If interest rates for the year ended December 31, 2011 had changed by 50 basis points, with all other variables held constant, net loss for the year ended December 31, 2011 would have changed by $17.

 

(f)    Fair value of financial instruments:

 

The carrying amounts reported in the balance sheets for cash and cash equivalents, accounts receivable, loan receivable and accounts payable and accrued liabilities approximate their fair values due to the short-term period to maturity of these instruments.

 

The Company’s short-term investments are recorded at fair value.  The long-term investment represents our interests in the WWI and Minda-Emer joint ventures, which are accounted for using the equity method.

 

The carrying value reported in the balance sheets for obligations under capital lease, which is based upon discounted cash flows, approximates its fair value.

 

Other assets consist of a note receivable from by a private energy company (note 8). It is recorded at the outstanding principal amount plus accrued interest.  Given that the company is private, there is a lack of observable market data.  However, the Company believes that the carrying value of the note approximates its fair value as the interest rate of 12.5% represents a market-based rate that would be demanded for a note with similar terms and conditions.

 

The Company also received warrants to purchase common shares under the Note and Warrant Purchase Agreement.  As the shares are privately held, there is a lack of observable market data and the fair value of the common shares is not readily determinable.  The Company believes the fair value of the warrants is nominal given the counterparty’s development activities are still at an early stage.

 

The carrying value reported in the balance sheet for the unsecured subordinated debenture notes (note 13(a)) approximates its fair value, based on market rates of interest for similar indebtedness. Additionally, the interest rate on the notes approximates the interest rate being demanded in the market for debt with similar terms and conditions.

 

The carrying value reported in the balance sheet for other long-term payable (note 13(b)) is recorded at amortized cost using the effective interest rate method.  It is being accreted to the gross proceeds of €7,600 that is payable to OMVL on July 2, 2013 at the effective interest rate of 3.65%.  As at December 31, 2011, the fair value of the long-term debt is higher than its carrying value by $191 based on a market interest rate of 2.35%.

 

46

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**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**24.****      ****Financial instruments (continued):**

** **

(f)    Fair value of financial instruments (continued):

 

The carrying value reported in the balance sheet for senior financing agreements (note 13(c)) approximates its fair value as at December 31, 2011, as the interest rate on the debt is floating and therefore approximates the market rate of interest.  The Company’s credit spread also has not substantially changed from the 2.5% premium currently paid.

 

The Company categorizes its fair value measurements for items measured at fair value on a recurring basis into three categories as follows:

 

Level 1 —  Unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

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

 

When available, the Company uses quoted market prices to determine fair value and classify such items in Level 1.  When necessary, Level 2 valuations are performed based on quoted market prices for similar instruments in active markets and/or model–derived valuations with inputs that are observable in active markets.  Level 3 valuations are undertaken in the absence of reliable Level 1 or Level 2 information.

 

As at December 31, 2011, cash and cash equivalents and short-term investments are measured at fair value on a recurring basis and are included in Level 1.

 

**25.****      ****Subsequent events:**

** **

On February 20, 2012, the Company entered into an amended and restated joint venture agreement (“JVA”) with Cummins Inc. for the CWI joint venture.  The JVA was amended to provide for, among other things, clarification concerning the scope of products within CWI. In addition, the parties have revised certain economic terms of the JVA.

 

Under the prior JVA, CWI had a global exclusive right to design, engineer, and market mid-range on-road spark-ignited natural gas engines based on Cummins diesel engines manufactured in Cummins facilities. The Company and Cummins have agreed in the amended and restated JVA to focus CWI’s future product development on North American markets including engines for on-road applications between the displacement range of 5.9 litres through 12 litres, and to have these engines manufactured in Cummins North American plants.

 

The joint venture will now have a term ending December 31, 2021 and can be terminated under certain circumstances before the end of the term, including in the event of a material breach of the agreement by, or in the event of a change of control of, one of the parties.

 

47

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**WESTPORT INNOVATIONS INC.**

Notes to Consolidated Financial Statements

(Expressed in thousands of United States dollars except share and per share amounts)

 

Nine months ended December 31, 2011 and years ended March 31, 2011 and 2010

 

**25.****      ****Subsequent events (continued):**

** **

On February 22, 2012, the Company announced its offering of 5,500,000 common shares at a price of $43.25 per share in the United States and Canada, for gross proceeds of $237,875.  The Company granted the underwriters of the offering an option to purchase an additional 825,000 common shares at the offering price.  On February 27, 2012, the Company announced the closing of its offering of common shares, including the exercise of the underwriters’ over-allotment option in full.  With the exercise of the option, the Company issued a total of 6,325,000 common shares under the offering for gross proceeds of $273,556.

 

48

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