Exhibit
4.3


 





 


BASIS OF PRESENTATION


 


This management’s discussion and analysis (“MD&A”) of the financial
results of Westport Innovations Inc. (“Westport”, “the Company”, “we”) should
be read in conjunction with, and is qualified by, Westport’s Consolidated
Financial Statements and related notes for the year ended March 31, 2008
(the “Financial Statements”), which have been prepared in accordance with
Canadian generally accepted accounting principles (“GAAP”).   Additional information relating to Westport,
including our Financial Statements and Annual Information Form, is available on
SEDAR at www.sedar.com.  This MD&A is
dated May 16, 2008 and all amounts herein are expressed in Canadian
dollars, unless otherwise stated.


 


FORWARD LOOKING STATEMENTS


 


This MD&A
contains forward-looking statements, including statements regarding the future
success of our business and technology strategies, working capital
requirements, timing of completion of our assembly centre,  intentions of partners and potential
customers, and future market opportunities. 
These statements are neither promises nor guarantees, but involve known
and unknown risks and uncertainties that may cause our actual results, levels
of activity, performance or achievements to be materially different from any
future results, levels of activities, performance or achievements expressed in
or implied by these forward looking statements. 
These risks include risks related to our revenue growth, operating
results, industry and products as well as other factors discussed below and
elsewhere in this report.  Readers should
not place undue reliance on any such forward-looking statements, which speak
only as of the date they were made.  We
disclaim any obligation to publicly update or revise such statements to reflect
any change in our expectations or in events, conditions or circumstances on
which any such statements may be based, or that may affect the likelihood that
actual results will differ from those set forth in the forward looking
statements.


 


BUSINESS OVERVIEW


 


Headquartered
in Vancouver, Canada, Westport is engaged in the research, development and
marketing of high performance, low-emission engines and fuel systems that use
gaseous fuels such as natural gas, propane or hydrogen.  We expect strong demand for these products
for transportation, power generation and industrial applications because of the
performance, emissions and life-cycle costs characteristics when compared to
alternatives now available or known to be under development for these applications.  We believe that growing public concern over
the environment, high oil prices and national energy security issues in the
United States, China and Europe will drive demand for our products and
services.


 


1

















 


To
encourage customers to adopt natural gas solutions for their transportation
requirements, our strategy is to provide integrated solutions from fuel supply
and storage through to service and support. 
To do so, we develop our technologies and products in cooperation with
the world’s leading engine, component and vehicle manufacturers and fuel
infrastructure providers.  We target
markets where there are life-cycle cost advantages arising from favourable fuel
pricing differentials between natural gas and diesel and/or where there are
government incentives or mandates for lower emissions.  We currently have one operating segment,
which involves the research, development, and related commercialization of
engines and fuel systems operating on gaseous fuels such as natural gas and
hydrogen for the on-road commercial vehicle sector.  Within that operating segment, we focus on
the following strategic pillars: profitably growing Cummins Westport Inc. (“CWI”),
our 50:50 commercial joint venture with Cummins Inc. (“Cummins”); launching our
liquefied natural gas (“LNG”) systems for heavy duty (Class 8) trucks in
North America and Australia; developing new alliances and enabling new market
segments globally and across applications; and maintaining our technology
leadership with innovative ideas and collaborative research.


 


CWI


 


Our
first strategic pillar, CWI, is focused on the development, marketing and sale
of medium duty, spark-ignited (“SI”) natural gas or liquefied petroleum gas (“LPG”)
engines for transit bus, shuttle and urban specialty vehicles such as refuse
trucks.  Geographically, CWI’s revenues
are derived primarily from North America with strong interest and markets
developing in Asia, Europe and South America. CWI produces engines in the
United States, India and China through facilities owned and operated by Cummins
and its affiliates.  CWI has dominant
market share in the North America natural gas transit market and is seeing
increasing growth in the specialty vehicle markets such as refuse with the
launch of the ISL-G engine in mid-2007 and with the increase in diesel fuel
costs compared to natural gas.


 


CWI’s
strategy is to grow profitably by leveraging its parents – Cummins for its
global manufacturing, distribution and service support network, and Westport
for its worldwide natural gas focus and expertise, industry relations and
technology leadership.  Since January 1,
2004, when the joint venture was re-launched to focus on SI products, CWI
revenues, expressed in US dollars to exclude foreign exchange distortions, have
grown at more than 30% compounded annually on a calendar year basis while
pre-tax operating profits have increased by approximately 450% in the same
period.  In the year ended March 31,
2008, in Canadian dollars and after taking into account Cummins’ 50% share, CWI
contributed $3.0 million on a pre-tax basis. 
In fiscal 2007, CWI contributed $4.4 million to Westport on a pre-tax
basis, more than double the fiscal 2006 contribution of $1.6 million.  CWI’s assets, liabilities, revenue and expenses
are disclosed separately in note 18 of our Financial Statements.


 


2

















 


LNG Systems for Heavy-Duty Trucks


 


Our second strategic pillar
focuses on the introduction of high-performance LNG systems for heavy duty
trucks.  This product line incorporates
our proprietary direct injection technologies which allow us to deliver a
natural gas-fueled version of the latest original equipment manufacturer (“OEM”)
diesel engines and match the base engine’s efficiency and performance without
changing the base engine design, thereby minimizing the disruptions to the
manufacturer and to the customer in switching fuels.  In order to deliver LNG to our engines, we
have developed proprietary integrated LNG fuel pumps and storage tanks to form
a complete system, and in order to support the adoption of LNG systems, we also
work with engine, truck, component and fuel providers as necessary to provide
integrated solutions for customers.  We
are currently focused on markets in North America and Australia and on fleets
with high fuel usage, return to depot fueling, and access to natural gas fuel
at a discount to diesel.


 


Corporate Development and Technology Activities


 


We are
also focused on developing new OEM and supply relationships and new innovative
technologies.  We cooperate or have
cooperated on fuel delivery system development programs with a number of
companies including Beijing Tianhai Industry Co. Ltd (“BTIC”), Cryostar SAS (“Cryostar”),
Ford, BMW, Isuzu, and Cummins and are in various stages of negotiations to
develop and commercialize our technologies with other global leaders.


 


As at March 31,
2008, we also held an approximate 3% investment interest in Clean Energy Fuels
Corp. (“Clean Energy”), a publicly listed company and North America’s largest
provider of natural gas fuel and service infrastructure for vehicles.  As at the date of this MD&A, we also hold
a 50% interest in BTIC Westport Inc (“BWI”), a joint venture with BTIC, which
sells and markets LNG tanks for natural gas fuelled vehicles globally, and a
49% interest in Juniper Engines Inc. (“Juniper”), a 49:51 venture with OMVL
SpA.


 


3

















 


SELECTED ANNUAL FINANCIAL INFORMATION


 


Selected
Statements of Operations Data for Fiscal Years Ended March 31, 2006 to
2008


 


	
   

  	
   

  	
  Fiscal years ended March 31

  	
   

  
	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (expressed in thousands of Canadian
  dollars, except for per share amounts, shares outstanding and units shipped)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Units shipped

  	
   

  	
  2,720

  	
   

  	
  2,001

  	
   

  	
  1,327

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total revenue

  	
   

  	
  71,536

  	
   

  	
  60,480

  	
   

  	
  43,552

  	
   

  
	
  Gross margin

  	
   

  	
  22,513

  	
   

  	
  22,099

  	
   

  	
  14,910

  	
   

  
	
  GM %

  	
   

  	
  31

  	
  %

  	
  37

  	
  %

  	
  34

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net loss

  	
   

  	
  (10,315

  	
  )

  	
  (11,307

  	
  )

  	
  (16,860

  	
  )

  
	
  Net loss per share – basic and diluted (1)

  	
   

  	
  (0.12

  	
  )

  	
  (0.15

  	
  )

  	
  (0.23

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Weighted average shares outstanding

  	
   

  	
  88,087,882

  	
   

  	
  75,174,826

  	
   

  	
  74,228,495

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and short-term investments

  	
   

  	
  22,762

  	
   

  	
  23,081

  	
   

  	
  7,832

  	
   

  
	
  Total assets

  	
   

  	
  78,940

  	
   

  	
  59,633

  	
   

  	
  29,500

  	
   

  
	
  Long-term financial liabilities (2)

  	
   

  	
  5,762

  	
   

  	
  22,648

  	
   

  	
  3,497

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash used in operations before changes in
  non-cash working capital

  	
   

  	
  (17,594

  	
  )

  	
  (11,325

  	
  )

  	
  (8,661

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CWI income for the year after taxes

  	
   

  	
  11,632

  	
   

  	
  12,114

  	
   

  	
  3,186

  	
   

  
	
  JV Partner’s share of CWI income

  	
   

  	
  5,816

  	
   

  	
  6,057

  	
   

  	
  1,593

  	
   

  



 






(1)   Fully
diluted loss per share is not materially different as the effect of conversion
of stock options, warrants and performance share units would be anti-dilutive.


(2)   Excluding
current portions of warranty liability and long-term debt obligations, and Joint
Venture Partners’ share of net assets of joint ventures


 


OVERVIEW OF FISCAL 2008 RESULTS


 


In the
fiscal year ended March 31, 2008, revenues increased to $71.5 million from
$60.5 million in fiscal 2007, a year over year increase of 18%.  Our products and parts are priced in US
dollars and are accordingly affected by fluctuations in the US to Canadian
dollar exchange rate.  In US dollar
terms, consolidated revenues increased by approximately 31% but the increase
was offset by the decline in the US dollar against the Canadian dollar.  In Canadian dollar terms, CWI revenues
increased by 16% to $67.3 million from $58.0 million in the prior year.   In US dollar terms, CWI’s increase was
approximately 29% with sales in all regions seeing double digit growth with product
revenues up 79% in Asia, up 14% in North America, and up 38% in the rest of the
world, and parts revenue up 36%.  
Non-CWI revenues were $4.2 million with the sale of 36 LNG systems for
heavy duty trucks accounting for $3.1 million of the total.


 


Our
net loss for the year ended March 31, 2008 was $10.3 million, or $0.12 per
share, compared to $11.3 million, or $0.15 per share for the year ended March 31,
2007.   Net loss decreased by $1.0
million primarily because of a 


 


4

















 


$2.5
million increase in gains from the sale of long-term investments and a $0.7
million decrease in interest on long-term debt and amortization of discount
offset by increases in foreign exchange loss of $1.4 million and increased expenses.  In the year ended March 31, 2008, we
recognized $8.0 million in gains and $1.3 million in future income tax expense
from the sale of Clean Energy shares and $2.7 million from the disposition of
substantially all of our shares of Wild River Resources Inc. (“Wild River”)
compared to $8.1 million in gains associated with the Wild River transaction in
the year ended March 31, 2007. 
Interest on long-term debt and amortization of discount decreased by
$0.7 million with the conversion of the convertible debt issued to Perseus
L.L.C. (“Perseus”) in July, 2007.   CWI’s
income before income taxes for fiscal 2008 was $6.0 million, down from $8.9
million in fiscal 2007 primarily because of a $1.8 million accrual primarily
taken to resolve a customer specific issue associated with a now discontinued
product.  CWI’s future income tax
recovery increased from $3.5 million in fiscal 2007 to $5.9 million in fiscal
2008 with the recognition of CWI’s remaining tax losses.  CWI contributed $5.8 million after taxes and after
taking into account Cummins’ 50% share of net income compared to $6.1 million
in the prior year.


 


As at March 31,
2008, our cash and short term investments balance was $22.8 million compared to
$23.1 million at the end of fiscal 2007. 
During the year, we sold 746,275 shares of Clean Energy for proceeds of
$11.2 million.  We also sold
substantially all of our shares in Wild River for proceeds of $6.7 million,
which were applied against our related limited recourse bank loan of $6.7
million, fully repaying the related loan. 
During the year, we also negotiated a limited recourse loan, repayable
only from certain receipts of sales of LNG systems, from Clean Energy for
US$6.0 million to allow us to produce approximately 75 LNG systems in
anticipation of deliveries to Ports of Los Angeles and Long Beach (the “Ports”)
customers in calendar 2008.  As at March 31,
2008, we had 73 completed LNG units in finished goods inventory and 2 units
substantially completed.  Although
funding for these units was approved in October, 2007, the Ports’ process
releasing the funds has taken longer than anticipated.


 


On July 26,
2007, Perseus, through its affiliates, exercised the conversion option on the
approximately $22.1 million of secured, subordinated convertible notes (the “Notes”)
held by them in order to acquire approximately 16.5 million common shares of
Westport, which were then sold to third parties with all proceeds going to
Perseus and its affiliates.  As an
inducement for Perseus’s conversion of the Notes, we agreed to pay them, in
cash or in shares, an amount equal to 50% of the interest that would otherwise
have been payable on the Notes, on December 31, 2007 and June 30,
2008, had the Notes not been converted. 
On conversion, the long-term debt portion of $13.3 million and value of
the conversion option of $7.6 million were moved to share capital and the
inducement, which was allocated to the conversion option based on the relative
fair values of the debt and equity features of the Notes, was charged directly
to accumulated deficit.  During the year
ended March 31, 2008, we


 


5

















 


recognized
$1.0 million in interest on long-term debt and amortization of discount expense
and we issued 156,816 shares to settle $0.5 million of the amounts payable to
Perseus, net of any applicable taxes.  
As at March 31, 2008, we had $0.4 million of inducement fee
payable.


 


On October 26,
2007, we announced the formation of a 49:51 equity joint venture with OMVL SpA,
an Italian company that designs, manufactures and markets complete fueling
systems for new vehicles and for the aftermarket conversion of engines from
gasoline (petrol) to CNG and LPG.  The
new venture will design, produce and sell alternative fuel engines in the sub-5
litre class for global applications.  As
required under the terms of the Juniper joint venture agreement, we invested
$1.5 million on April 1, 2008, giving us 49% of future profits and losses.


 


In January, 2008, we announced
that the Kenworth Truck Company (“Kenworth”), a division of PACCAR Inc., will
begin production in 2009 of Kenworth T800 LNG trucks with our LNG fuel system
technology adapted for the Cummins ISX-15-liter engine at its manufacturing
facility in Renton, Washington.  In order
to support the Kenworth factory initiative, we are investing approximately $3.5
million in a new LNG Fuel System Assembly Center in the Metro Vancouver area,
which is expected to be completed in the summer of 2008.  The Kenworth initiative is being undertaken
to support volume orders of LNG systems for port and non-port customers with
the Ports of Los Angeles and Long Beach currently targeting replacement of
approximately 8,400 diesel trucks by 2011 with LNG trucks with a planned phase
out date of older diesel trucks starting October 1, 2008.


 


In
fiscal 2007, we were awarded AUD$1.4 million from the Australian government to
demonstrate and evaluate the use of LNG as a fuel for heavy duty highway trucks
in Australia, where natural gas enjoys a significant price advantage over diesel.  We successfully completed this demonstration
program with approximately 275,000 kilometres of field  experience at the end of March, 2008 and
following successful engine testing, Westport’s LNG fuel system adapted to the
2008 Cummins ISX heavy-duty engine was certified to the 2008 Australian Design Rules (ADR
80/02 and ADR 30/01), enabling commercial sales in Australia to begin.


 


During
the fourth quarter of fiscal 2008, we saw increased interest in our products
and services from fleet users, OEMs and governments.  We were awarded an aggregate of US$2.25
million in funding from the South Coast Air Quality Management District
(SCAQMD), the California Energy Commission (CEC) and the Ports of Los Angeles
and Long Beach for development, demonstration, certification and
commercialization of our 2010 LNG product. 
Related to the clean truck initiatives being undertaken by the ports of
Los Angeles and Long Beach, Southern Counties Express placed an initial order
for 50 LNG trucks.  Outside of port
activities, CWI received a 250 unit order for its ISL-G engine from San Diego
Metropolitan Transit System.  In
February, 2008, we announced that Wal-Mart Stores, Inc., will be
introducing four LNG fuelled Peterbilt 386 trucks into service in California in
the summer of 2008.  The deployment was
partially funded by the Mojave Desert Air Quality Management District’s 


 


6

















 


(“MDAQMD”)
Mobile Source Emission Reductions Competitive Bidding Program.  Subsequent to March 31, 2008, Sterling
Trucks of Redford, Michigan launched the new Sterling® Set-Back 113, its first
natural gas vehicle, featuring the Cummins Westport ISL G engine.


 


CRITICAL ACCOUNTING POLICIES AND ESTIMATES


 


Financial
statement preparation requires that we use estimates and assumptions that
affect the reported amount of assets and liabilities as well as revenues and
expenses.  Our accounting policies are
described in note 2 to our Financial Statements.  The following policies have a significant
impact on the consolidated Financial Statements or are impacted significantly
by judgments, assumptions and estimates used in the preparation of our
consolidated Financial Statements.


 


Variable Interest Entity Accounting


 


A
variable interest entity (“VIE”) is any type of legal structure not controlled
by voting equity, but rather by contractual and/or other financial
arrangements.  Interests in VIEs are
consolidated by the company that is the primary beneficiary.  We have identified CWI and BWI as VIEs and
determined that we are the primary beneficiary in both cases.  Accordingly, we consolidate CWI and BWI,
reflecting 100% of their assets, liabilities, revenues and expenses in our
consolidated financial statements and showing the 50% interest held by our
joint venture partners, Cummins and BTIC, as “Joint Venture Partners’ share of
net income from joint ventures”.


 


Warranty Liability


 


Estimated
warranty costs are recognized at the time we sell our products and included in
cost of revenues.  We use historical
failure rates, and costs to repair product defects during the warranty period,
together with information on known products to estimate the warranty
liability.  The ultimate amount payable
and the timing will depend on actual failure rates and the actual cost to
repair.  We review our warranty provision
quarterly and make adjustments to our assumptions based on the latest
information available at that time. 
Adjustments to the warranty provision are recorded in cost of revenues.


 


Revenue Recognition


 


Our
primary source of revenue is the sale of CWI SI engines, kits and parts and LNG
systems.  Product revenue is recognized,
net of estimated costs of returns, allowances, and sales incentives, when the
products are shipped and title passes to the customers and collection is reasonably
assured.  Product revenue also includes
fees earned from performing research and development activities for third
parties and revenues earned from licensing our technologies to third parties.  Revenue from research and development
activities is recognized as the services are performed.   Amounts received in advance of revenue
recognition are recorded as deferred revenue. 
Parts revenue is recognized as the parts are sold.


 


7

















 


Inventory Valuation


 


Inventory
consists of fuel systems, component parts, work-in-progress, finished goods and
CWI engine products.  In establishing
whether or not a provision is required for inventory obsolescence, we estimate
the likelihood that inventory carrying values will be affected by changes in
market demand for our products and by changes in technology, which could make
inventory on hand obsolete.  We perform
regular reviews to assess the impact of changes in technology, sales trends and
other changes on the carrying value of inventory.  If and when we determine that such changes
have occurred and that they would have a negative impact on the carrying value
of inventory on hand, adequate provisions would be made.  Unforeseen changes in these factors could
result in the recognition of additional inventory provisions.


 


Long-term Investments


 


Long-term
investments 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.  A decline in
value that is considered other than temporary is recognized in net loss for the
period.


 


Equipment, Furniture, and Leasehold Improvements and Intellectual
Property


 


Generally
accepted accounting principles in Canada require that we consider whether or
not there has been an impairment in our long-lived assets, such as equipment,
furniture and leasehold improvements and intellectual property, whenever events
or changes in circumstances indicate that the carrying value of the assets may
not be recoverable.  If such costs are
not recoverable, we are required to write down the assets to fair value.  When quoted market values are not available,
we use 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 to determine whether or not a write down is required.


 


ADOPTION OF NEW ACCOUNTING STANDARDS


 


Our
accounting policies are substantially unchanged from the prior fiscal year
ended March 31, 2007 except as noted below.


 


Financial Instruments


 


In
April, 2005, the Canadian Institute of Chartered Accountants (“CICA”) issued Section 3855
Financial Instruments – Recognition and Measurement, applicable to interim and
annual financial statements relating to fiscal years beginning on or after October 1,
2006.


 


Under Section 3855,
financial assets and liabilities, including derivative instruments, are
initially recognized and subsequently measured based on their classification as
held-for-trading, available for sale financial assets, held-to-maturity


 


8

















 


loans
and receivables, or other financial liabilities as follows:


 


·      Held-for-trading
financial instruments are measured at their fair value with changes in fair
value recognized in net income for the period.


 


·      Available
for sale financial assets are measured at their fair value and changes in fair
value are included in other comprehensive income until the asset is removed
from the balance sheet.


 


·      Held-to-maturity
investments, loans and receivables and other financial liabilities are measured
at amortized cost using the effective interest rate method.


 


Derivative
instruments, including embedded derivatives, are measured at their fair value
with changes in fair value recognized in net income for the period unless the
instrument is a cash flow hedge and hedge accounting applies, in which case
changes in fair values are recognized in other comprehensive income.


 


We
adopted this section effective April 1, 2007.  Short-term and long-term investments have
been classified as “available for sale” and, except where fair value is not
determinable, are being measured at fair value with changes in fair value
included in other comprehensive income until the investments are sold.  As the result of adopting Section 3855,
long-term investments increased by $20.4 million as at April 1, 2007.  The net, after tax adjustment to Accumulated
Other Comprehensive Income (“AOCI”) in shareholders, was $17.0 million.  We also recognized an adjustment of $3.4
million to accumulated deficit related to the tax benefit of prior year loss
carry forwards recognized to offset the future tax liability generated by the
adjustment to the accounting basis of the investments.  We also added a separate statement entitled “Consolidated
Statements of Shareholders’ Equity and Comprehensive Income (Loss)” and added
the caption “Accumulated other comprehensive income (loss)” to the shareholders’
equity section of our balance sheet.  Other
comprehensive loss for the year ended March 31, 2008, was $16.5 million,
which includes our net loss of $10.3 million, a reclassification from
unrealized gains, net of taxes of $1.3 million, to net income of $6.8 million
related to investments sold and an unrealized gain, net of taxes of $0.2
million on available for sale securities of $0.6 million.  From time to time, we also sell Clean Energy
call options, which give the counterparty the right, but not the obligation to
acquire one of our Clean Energy shares for an agreed upon strike price on or
before the expiration date.  In the
fourth quarter of fiscal 2008, we sold 1,000 call option lots, representing
100,000 shares with an average strike price of US$17.50, for net proceeds of
$0.1 million, which is included in interest and other income.  All of these options expired without being
exercised.  As at the date of this
MD&A, we had 1,750 open call option lots, representing 175,000 shares, with
an average strike price of US$15.14 and expiring in June, 2008.


 


9

















 


Comprehensive Income


 


CICA Section 1530
introduced new standards for the reporting and presentation of comprehensive
income, which is the change in equity, or net assets, of an enterprise during a
reporting period from transactions and other events and circumstances from
non-owner sources.  It includes all
changes in equity during a period except those resulting from investments by,
and distributions to, owners.  We adopted
Section 1530 effective April 1, 2007.


 


Hedging


 


CICA Section 3865
specifies the circumstances under which hedge accounting is permissible and how
hedge accounting may be performed. As we are not currently engaged in hedging
activities, adoption of this new standard has no impact on the consolidated
financial statements.


 


NEW ACCOUNTING PRONOUNCEMENTS AND DEVELOPMENTS


 


The
following changes have been recently issued and will be adopted in future.


 


International Financial Reporting Standards (“IFRS”)


 


In 2006, Canada’s Accounting Standards Board
ratified a strategic plan that will result in Canadian GAAP, as used by
publicly accountable enterprises, being fully converged with International
Financial Reporting Standards as issued by the International Accounting
Standards Board (“IFRS-IASB”) over a transitional period to be completed by
2011.  We will be required to report
using the converged standards effective for interim and annual financial
statements relating to fiscal years beginning no later than on or after January 1,
2011.


 


Canadian
GAAP will be fully converged with IFRS-IASB through a combination of two
methods: as current joint-convergence projects of the United States’ Financial
Accounting Standards Board and the International Accounting Standards Board are
agreed upon, they will be adopted by Canada’s Accounting Standards Board and
may be introduced in Canada before the publicly accountable enterprises’
transition date to IFRS-IASB; and standards not subject to a joint-convergence
project  will be exposed in an omnibus
manner for introduction at the time of the publicly accountable enterprises’
transition date to IFRS-IASB.


 


The
International Accounting Standards Board currently has projects underway that
are expected to result in new pronouncements that continue to evolve IFRS-IASB,
and, as a result, IFRS-IASB as at the transition date is expected to differ
from its current form.  We are in the
process of assessing the impacts on us of the Canadian convergence initiative.


 


10
















 


Financial
instruments


 


In December 2006,
the CICA issued Section 3862 and Section 3863 of the CICA Handbook,
Financial Instruments - Disclosures and Financial Instruments - Presentation,
respectively.  Generally, the new
sections will replace Section 3861, Financial Instruments - Disclosure and
Presentation.  These sections establish
standards for the presentation of financial instruments and non-financial
derivatives and identify the information that should be disclosed about
them.  Both sections are effective for us
on April 1, 2008 and are expected to result in more extensive disclosures
in the Company’s annual and interim financial statements.


 


Capital
Disclosures


 


In December 2006,
the CICA issued Section 1535, Capital Disclosures which establishes disclosure
requirements about the company’s objectives, policies and processes for
managing capital, as well as quantitative information about capital. This
section is effective for us on April 1, 2008 and is expected to result in
more extensive disclosures in our annual and interim financial statements.


 


Inventories


 


In June 2007, the
CICA issued Section 3031, Inventories, which replaces the existing Section 3030,
establishes standards for the measurement and disclosure of inventories.  The new standard provides more extensive
guidance on the determination of cost, including allocation of overhead,
requires impairment testing and expands the disclosure requirements. In certain
circumstances, the new section will also permit the reversal of previous
write-downs.  This standard is effective April 1,
2008 for us.  We are currently evaluating
the impact of the adoption of this new standard on our consolidated financial
statements.


 


Goodwill
and Intangible Assets


 


In February 2008,
the CICA issued Section 3064, Goodwill and Intangible Assets, which
replaces Section 3062, Goodwill and Other Intangible Assets and Section 3450,
Research and Development Costs.  Section 3064
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and intangible
assets.  Standards concerning goodwill
are unchanged from the standards included in the previous Section 3062.  We are currently evaluating the impact of the
adoption of this new standard on the measurement, recognition, presentation and
disclosure of our intangible assets in our consolidated financial statements.


 


Financial
Statement Presentation


 


In May 2007, the
Accounting Standards Board (“AcSB”) amended Section 1400, General
Standards of Financial Statement Presentation, to change the guidance related
to management’s responsibility to assess the ability of the entity to continue
as a going concern. Management is required to make an assessment of an entity’s
ability to


 


11

















 


continue as a going
concern and should take into account all available information about the
future, which is at least, but is not limited to, 12 months from the balance
sheet dates. Disclosure is required of material uncertainties related to events
or conditions that may cast significant doubt upon the entity’s ability to
continue as a going concern. These amendments are effective for annual periods
beginning after January 1, 2008.  We
plan to adopt this new guidance effective April 1, 2008. These standards
may impact our disclosures but is not expected to impact our financial
position, results of operations or cash flows.


 


DISCLOSURE CONTROLS AND PROCEDURES
AND INTERNAL CONTROLS OVER FINANCIAL REPORTING


 


Our disclosure controls
and procedures are designed to provide reasonable assurance that  relevant information is gathered and reported
to senior management, including the Chief Executive Officer (“CEO”) and the
Chief Financial Officer (“CFO”), on a timely basis so that appropriate decisions
can be made regarding public disclosures.  We have also designed internal
controls over financial reporting to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with Canadian GAAP.  Under the
supervision of the CEO and CFO, management evaluated the effectiveness of the
design and operation of the Company’s disclosure controls and procedures and
assessed the design of the Company’s internal control over financial reporting
as of March 31, 2008.  Based on this
evaluation, we have concluded that disclosure controls and procedures were
effective and internal controls over financial reporting have been adequately
designed to provide reasonable assurance regarding the reliability of our
financial statements and reports.


 


During the year ended March 31,
2008, we implemented certain inventory modules of our enterprise resource
planning system to allow us to more efficiently track cost of sales.  However, our primary internal controls and
processes over inventory remained unchanged. 
We also automated parts of our warranty tracking processes for LNG
systems and are in the process of reviewing requirements for a sales order
system.  No material changes were made in
our internal controls over financial reporting during the year ended March 31,
2008.  We expect that our financial
reporting policies, processes and systems will continue to evolve as we
continue to launch product at increasing volume levels and partner with various
OEMs and other partners.


 


12

















 


FINANCIAL OVERVIEW


 


RESULTS FROM OPERATIONS


 


Product
revenue for the
year ended March 31, 2008 was $55.2 million, up $8.0 million, or 17%, from
$47.2 million in the prior fiscal year, on total CWI and LNG product shipments
of 2,720 units compared to 2,001 units in the prior year.   CWI product revenue was up 14% to $51.0
million compared to $44.7 million in fiscal 2007.   In US dollar terms, CWI product revenue
increased US$10.5 million, or by 27%, up US$3.9 million in North America,
US$4.2 million in Asia and US$2.4 million elsewhere.  However, in Canadian dollar terms, the
increase was offset by a 12% decline in the average US to Canadian dollar
exchange rate during the year.


 


Our geographical and
product mix will vary from year to year depending on where our customers are in
their order cycles and their locations.  
In fiscal 2008, sales to Asia were driven primarily by shipments to
China for Beijing Public Transit and for export in Chinese buses.  North American growth was driven primarily by
the launch of the ISL-G in the year and increased demand for our product in
refuse and other specialty applications while revenues internationally
increased due to growth in activities in India and increased sales to
Europe.   Non-CWI revenues grew from $2.4
million to $4.2 million with 36 LNG shipments in the year compared to eight in
the prior year, offsetting a $0.5 million decrease in engineering services and
other revenue.


 


For the year ended March 31,
2007, product revenue was $47.2 million up 58% from fiscal 2006 revenues of
$29.9 million and 1,327 units shipped. 
Increased revenues reflected strong CWI sales activities in North
America and Asia with revenues from Asia accounting for 13% of revenues
compared to 4% in fiscal 2006.  CWI also
recognized approximately $1.9 million in B-Gas production kits and components
shipped to China and India for local assembly and sale in those countries.


 


Non-CWI revenues
increased to $2.4 million in 2007 compared to $1.3 million in 2006 with the
first eight shipments of LNG systems for heavy duty trucks resulting in
approximately $0.8 million in revenues. 
In both 2007 and 2006, the balance of the non-CWI revenues related to
prototype vehicle work performed by Westport for Isuzu and other OEM
partners.  Our development program with
Isuzu ended December 31, 2006 and no further revenue is contemplated at
this time.


 


Parts
revenue for the
years ended March 31, 2008 and 2007 were $16.3 million and $13.3 million,
respectively.   The 23% increase is
attributable to distributors stocking new parts for the newly launched ISL-G
engine, modifications related to the L-Gas engine, an increasing and aging engine
population, product mix and timing, offset by declines in the US dollar.  For the year ended March 31, 2007, parts
revenue compared to fiscal 2006 was down $0.3 million to $13.3 million from
$13.6 million reflecting the weaker US dollar. 
In US dollar terms, parts revenue had increased slightly year over
year.  Parts revenue is a function of
engine population, failure rates and price.


 


13

















 


Cost
of revenue for
the year ended March 31, 2008 was $49.0 million compared to $38.4 million
in the prior year.   Included in CWI’s
cost of revenue of $45.5 million and $36.2 million for fiscal years 2008 and
2007 were net positive adjustments to warranty of $1.3 million and $1.4 million
respectively.   Non-CWI cost of revenues
were $3.5 million and $2.2 million.


 


Cost of revenues for the
years ended March 31, 2007 and 2006 was $38.4 million and $28.6 million,
respectively, with the $9.8 million increase consistent with the $16.9 million
increase in year over year revenues. 
Warranty adjustments amounted to $1.8 million in fiscal 2006 reflecting
actual claims experience being better than the expected experience at time of
sale.


 


Cost of revenue includes
production costs and the associated warranty. 
Estimated warranty costs are recognized at the time we sell our products
and included in cost of revenues.  We use
historical failure rates, and costs to repair product defects during the
warranty period, together with information on known products to estimate the
warranty liability.  The ultimate amount
payable and the timing will depend on actual failure rates and the actual cost
to repair.  We review our warranty
provision quarterly and make adjustments based on the latest information
available at that time.  These
adjustments reflect our growing claims data for CWI products, which enables us
to better estimate our warranty liability. 
However, with the launch of new products such as the HPDI LNG systems
and the new ISL-G engine, we expect warranty numbers to continue to fluctuate,
sometimes significantly, from quarter to quarter.  Adjustments to the warranty provision are
recorded in cost of revenues.


 


Revenue


 


(expressed
in thousands of Canadian dollars except for units)


 




	
   

  	
   

  	
  Fiscal years ended March 31

  	
   

  
	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unit shipments

  	
   

  	
  2,720

  	
   

  	
  2,001

  	
   

  	
  1,327

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Product revenue

  	
   

  	
  55,238

  	
   

  	
  47,195

  	
   

  	
  29,932

  	
   

  
	
  Parts revenue

  	
   

  	
  16,298

  	
   

  	
  13,285

  	
   

  	
  13,620

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  71,536

  	
   

  	
  60,480

  	
   

  	
  43,552

  	
   

  






 


Product
Revenue by Geographic Region


 


(as
a percentage of revenue)


 


	
   

  	
   

  	
  Fiscal years ended March 31

  	
   

  
	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  North America

  	
   

  	
  66

  	
  %

  	
  72

  	
  %

  	
  82

  	
  %

  
	
  Asia

  	
   

  	
  18

  	
  %

  	
  13

  	
  %

  	
  4

  	
  %

  
	
  Rest of the world

  	
   

  	
  16

  	
  %

  	
  15

  	
  %

  	
  14

  	
  %

  



 


Gross
margin was $22.5
million and $22.1 million for the years ended March 31, 2008 and 2007,
respectively, compared to $14.9 million for the year ended March 31,
2006.  Gross margin percentages were 31%,
37% and 34% for those years, respectively.  
Comparing fiscal 2008 to 2007, gross margin percentage declined
primarily because of product and geographical mix and with parts, kits and LNG
systems generally selling at lower margins on a percentage basis relative to
CWI engines and smaller engines generally having lower margins than larger
engines.  CWI gross margin percentages
also declined in the year with the launch of the ISL-G engine, which, being a
new product, launched with more aggressive pricing and a conservative warranty
estimates than its predecessors, the C-Gas Plus and L-Gas.  On non-CWI products, foreign exchange reduced
LNG systems margins in the year with inventories purchased when the US dollar
was stronger and sales occurring when the US 


 


14

















 


dollar was weaker.   Gross margins improved three percentage
points between fiscal 2006 and 2007 primarily because of product and
geographical mix.


 


Research
and development
expenses,  net of program funding,
increased $1.1 million, or 5%, in fiscal 2008 to $23.0 million from $21.9
million in the prior year.  CWI net
research and development expenses decreased by $0.5 million with the launch of
the ISL-G during the year and the weaker US dollar lowering the cost of labour
and materials.  Non-CWI net expenses
increased by $1.6 million with investments made in the year in 2007 LNG North
America and Australia product development and current product support
offsetting decreases in development costs associated with our Isuzu program,
which formally ended in fiscal 2007, and costs related to getting our LNG tank
and pump systems commercial ready in fiscal 2007.  Government funding also decreased from $5.2
million in fiscal 2007 to $3.7 million in fiscal 2008 with funding from
Technology Partnerships Canada down $0.9 million as a result of maximum funding
levels reached in the year and with CWI funding down $1.0 million with the
ISL-G product development completed. 
Funding related to the Australian demonstration project increased by
$0.6 million.


 


Net research and
development expenses were $21.9 million and $16.9 million for the years ended March 31,
2007 and 2006, respectively.  The $5.0
million increase in research and development costs year over year was primarily
the result of the following:


 


·                  Reduced government funding of $3.5
million with major government funded projects such as the US government funded
1.2 gram product development and our Canadian government funded 401
demonstration substantially completed in 2006;


 


·                  Increased CWI research and development
activities ($1.5 million) related primarily to the ISL-G engine which was
launched in the calendar year 2007; and


 


·                  Increased engineering and development
work associated with our on and off-engine LNG systems and increased investment
in our patent portfolio as we prepared to commercialize product.


 


These items were offset
by a decrease of $1.3 million in stock-based compensation in 2007 compared to 2006
reflecting a special grant of options to all employees in 2006.


 


Research
and Development Expenses


 


(expressed
in thousands of Canadian dollars except percentages)


 


	
   

  	
   

  	
  Fiscal years ended March 31

  	
   

  	
  Year over year

  	
   

  
	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Research and development expenses

  	
   

  	
  26,684

  	
   

  	
  27,041

  	
   

  	
  25,628

  	
   

  	
  -1

  	
  %

  	
  6

  	
  %

  	
  5

  	
  %

  
	
  Program funding

  	
   

  	
  (3,658

  	
  )

  	
  (5,150

  	
  )

  	
  (8,689

  	
  )

  	
  -29

  	
  %

  	
  - 41

  	
  %

  	
  45

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Research and development, net

  	
   

  	
  23,026

  	
   

  	
  21,891

  	
   

  	
  16,939

  	
   

  	
  5

  	
  %

  	
  29

  	
  %

  	
  -8

  	
  %

  



 


15

















 


General
and administrative expenses
for the year ended March 31, 2008 were $6.0 million compared to $6.9
million in the prior year.  The $0.9
million decrease relates primarily to a $1.0 million decrease in stock based
compensation.  In fiscal 2007, certain
milestones associated with performance share units granted in fiscal years 2005
and 2006 were met, thereby triggering the vesting of those performance share units
and the resulting expense.


 


For the year ended March 31,
2007, general and administrative expenses increased by $2.0 million from $4.9
million in fiscal 2006 with annual compensation and stock based compensation up
$0.8 million in fiscal 2007 and the balance relating to higher public company
costs, including investor relations and the establishment of an internal audit
function, and increased legal and finance support activities related to
commercialization of our HPDI system.


 


Sales
and marketing
expenses for the years ended March 31, 2008 and 2007 were $10.6 million
and $7.1 million, respectively, with an accrual of $1.8 million taken by CWI to
resolve customer operational issues accounting for approximately half of the
$3.5 million increase.  Other CWI sales
and marketing expenses increased by $0.5 million with the launch of the ISL-G
engine.  Non-CWI sales and marketing
costs increased by $1.2 million as we ramped up business development activities
in California, Europe and China.


 


In the year ended March 31,
2007, sales and marketing expenses increased to $7.1 million from $5.8 million
in fiscal 2006 primarily because of increased business development costs in
China ($1.0 million), and costs associated with sales and marketing activities
related to LNG systems offset by lower stock-based compensation expense in the
year.


 


Foreign
exchange gains and losses primarily reflect the realized net gains and losses on
foreign currency transactions and the net unrealized gains and losses on our
net US dollar denominated assets and liabilities, which are mainly comprised of
accounts receivable, and warranty liability. 
For the year ended March 31, 2008, we recognized a foreign exchange
loss of $1.3 million with the Canadian dollar appreciating by 12% against the
US dollar during the year.  As at March 31,
2008, we were in a net US dollar asset position with US dollar cash and
receivables, primarily related to CWI, offsetting US dollar payables and
warranty liability, The Canadian dollar was relatively unchanged as at March 31,
2007 compared to March 31, 2006 resulting in foreign exchange gains of
approximately of $0.1 million in those fiscal years.


 


Depreciation
and amortization for
the years ended March 31, 2008, 2007 and 2006 were $1.6 million, $1.4
million and $2.8 million, respectively. 
Between 2006 and 2007, depreciation and amortization expense decreased
by $1.3 million primarily as the result of certain intellectual property,
equipment and furniture becoming fully amortized in the year ended March 31,
2007 and because we changed the estimated remaining useful life of our research
and development machinery and equipment from five to eight years in the second
quarter of fiscal 2006.


 


16

















 


Depreciation increased
from fiscal 2007 to fiscal 2008 by $0.1 million reflecting depreciation and
amortization of capital expenditures being made in the period offset by assets
becoming fully depreciated.


 


Interest
on long-term debt and amortization of discount of $1.0 million and $1.7 million in the years ended March 31,
2008 and 2007 related to the interest and the accretion on the Notes issued to
funds managed by Perseus.  Prior to the
notes being converted in July, 2007, interest was being accrued at 8% per annum
and was payable in notes or in common shares on June 30 and December 31
of each year for the first two years, after which time, the interest may be
payable in notes, common shares, or in cash. 
Canadian GAAP also required us to separately value the debt and equity
components of convertible debt as well as the warrants issued in connection
with the financing.  Accordingly, the
value of the warrants ($1.4 million) and the value of the conversion feature
($7.6 million) as calculated using the Black-Scholes option pricing model were
shown on the balance sheet as at March 31, 2007, under “Other equity
instruments” and the amount allocated to the debt of $13.1 million was included
in “Long-term debt” and was being accreted to its face value using the
effective interest rate method.


 


Interest
and other income
for the years ended March 31, 2008, 2007 and 2006 were $1.3 million, $0.8
million and $0.5 million, respectively. 
Amounts include interest income on cash and short-term investments as
well as gains from the sale of equipment and income earned from the sale of Clean
Energy options.


 


Gain
on sale of long-term investments in fiscal 2008 of $10.7 million relates to the sale
of Clean Energy shares ($8.0 million) and of our remaining interest in Wild
River ($2.7 million).  In fiscal 2007,
the $8.1 million related to the gain, net of expenses, on the sale of 45% of
our interest in Wild River and the dilution gain arising when we reduced our
ownership from 55% to 16% and we changed our accounting for Wild River from the
consolidation method to the cost method.


 


Income
tax recovery for
the years ended March 31, 2008 and 2007 were $4.5 million and $3.1
million, respectively.  Current income
tax expense, representing cash taxes payable in the year, were $0.2 million and
$0.4 million for fiscal 2008 and 2007, respectively, and future income tax
recoveries were $4.7 million and $3.5 million for those same periods,
respectively.   Future income tax
recoveries and expenses arise on the recognition of temporary differences
between the carrying amounts and the tax bases of our assets and
liabilities.  In the years ended March 31,
2008 and 2007, CWI recognized future income tax recoveries of $5.9 million and
$3.5 million, respectively, arising from the recognition of future income tax
assets associated with its loss carryforwards. 
Prior to fiscal 2007, these losses were fully offset by a valuation
allowance.  However, as CWI has shown a
consistent history of profitability and we expect that CWI will continue to
generate taxable income in the future, thereby utilizing those losses, a portion
of its loss carryforwards were recognized in fiscal 2007 and the balance fully
recognized in fiscal 2008.


 


17

















 


In the year ended March 31,
2008, we also recognized a $1.3 million future income tax expense associated
with the gains on sale of available for sale investments previously recognized
in AOCI.  As we have sufficient tax basis
in the shares of Clean Energy and other available for sale investments and
sufficient losses to offset any related taxes payable, we also recognized an
adjustment to our Deficit of $3.4 million related to the tax benefit of prior
year loss carryforwards recognized to offset the future tax liability generated
by the adjustment to the accounting basis of the investments on adoption of
CICA Handbook section 3855, Financial Instruments – Measurement and
Presentation.  Future income tax
expense of $2.2 million related to mark to market
adjustments on available for sale assets has been included in
Accumulated Other Comprehensive Income and will be recognized in net income or
loss when the remaining shares are sold and the related gain recognized.


 


Joint
Venture Partners’ share of income from joint ventures of $5.6 million in fiscal 2008 reflects
Cummins’ 50% share of CWI’s net income after tax, or $5.8 million, and also
includes BTIC’s 50% share of BWI’s net operating loss in the period, or $0.3
million.  For the year ended March 31,
2007, Cummins’ share of CWI’s net income was $6.1 million representing 50% of
CWI’s pre-tax income of $8.9 million (2006 - $3.2 million) and 50% of CWI’s net
tax recovery of $3.3 million (2006 - nil).  
For the year ended March 31, 2006, Cummins’ share of CWI’s net
income was $1.6 million, representing 50% of CWI’s net income for the year.


 


CAPITAL REQUIREMENTS, RESOURCES AND
LIQUIDITY


 


As at March 31,
2008, our cash, cash equivalents and short-term investment position was $22.8
million, a decrease of $0.3 million from the end of fiscal 2007.  Cash and cash equivalents consist of
guaranteed investment certificates, bankers acceptances, and term deposits with
maturities of 90 days or less when acquired. 
Short-term investments consist of investment grade commercial
paper.  We invest primarily in short-term
paper issued by Schedule 1 Canadian banks, R1 high rated corporations and
governments.  While we do not hold asset
backed securities directly, these parties may be exposed in varying degrees to
asset backed securities and US sub-prime mortgages.  We continually monitor our portfolio and
diversify our investments.


 


For the year ended March 31,
2008, our cash used in operations was $15.8 million with loss for the year
adjusted for items not involving cash and before changes in non-cash working
capital of $17.6 million, a non-GAAP measure, and changes in working capital
contributing $1.8 million.  We also
purchased $1.7 million in equipment, furniture and leasehold improvements.   During the fourth quarter of fiscal 2008,
Cummins entered into a loan agreement with CWI and borrowed $6.8 million.  We expect going forward that Cummins will
continue to borrow funds equal to its share 50% share of CWI’s cash each
quarter.  During the year ended March 31,
2008, we funded our operations and purchases of equipment, furniture and
leasehold improvements through the sale of our Clean Energy shares ($11.3
million), by drawing on our bank line ($4.2 million, net of repayments),
through our


 


18

















 


unsecured, limited
recourse loan with Clean Energy for $6.0 million and through proceeds received
on the exercise of employee share options ($1.0 million, net of share issuance
costs).  We also disposed of
non-essential assets for $0.6 million and received $0.4 million from BTIC for
their 50% share of BWI.   In addition, we
sold substantially all of our shares in Wild River for proceeds of $6.7
million, which were applied against our related limited recourse bank loan of
$6.7 million, thereby fully repaying the loan.


 


Changes in working
capital for the year ended March 31, 2008 were impacted positively by cash
inflows from lower accounts receivable ($3.9 million) with the collection of
amounts owing from the Industrial Technologies Office’s Technology Partnerships
Canada (“TPC”) program as at March 31, 2007, lower amounts owing from
Cummins as at March 31, 2008 compared to March 31, 2007 with CWI’s
fourth quarter 2008 net profit numbers down compared to the fourth quarter of
fiscal 2007 and timing of government related funding and collections; higher
accounts payable and accrued liabilities of $2.4 million primarily related to
CWI policy accruals of approximately $1.8 million; and higher warranty
liabilities from the sale of CWI engines and LNG systems during the year.  Working capital was negatively impacted by
cash outflows related to net inventory additions of $6.2 million.  The $1.7 million spent on equipment,
furniture and leasehold improvements in the year ended March 31, 2008
related primarily to machinery and equipment ($0.7 million) for testing and
production, our Assembly Centre ($0.6 million), and information technology
systems ($0.4 million).


 


In order to support the
Kenworth factory initiative of our LNG systems, we are opening a new LNG Fuel
System Assembly Center in the Metro Vancouver area in the summer of 2008.  This initiative is expected to increase
capital costs by approximately $3.5 million, of which $0.5 million has already
been incurred, with funding coming from existing cash resources and existing
credit facilities.  We also expect increases
in working capital for inventory purposes. 
On April 1, 2008, we invested $1.5 million into our joint venture
with OMVL.


 


Our plan is to use our
current cash, cash equivalents and short-term investments, our share of CWI
profits, borrowings under our credit facility and proceeds from the sale of our
investment in Clean Energy, valued at $18.7 million as at March 31, 2008,
to fund our committed milestones and obligations for our current programs.  We will also continue to look to partners and
governments to help fund our investments on commercially acceptable terms.  However, there are no guarantees that we will
be successful in obtaining third party funding on acceptable terms or at
all.  Our $13 million credit facility
with our bank has been drawn down by our demand instalment loan of $5.8 million
and a $0.6 million letter of credit and is subject to and limited by financial
covenants, which may prevent us from drawing against the full amount of the
line.  During the year, we re-negotiated
the interest rate payable on our credit facility from prime to prime minus
0.25% for borrowings up to $5 million. 
Further rate reductions apply if borrowings exceed $5 million.  Clean Energy’s common stock is listed on the
NASDAQ Global Market and its share price is subject to fluctuations with
changes in its business, general economic factors and/or


 


19

















 


market conditions, which
may impact our capital requirements.  As
at the date of this MD&A, we owned approximately 1 million shares of Clean
Energy.


 


Westport’s capital
requirements will vary depending on a number of factors, including the timing
and size of orders for our LNG systems, our ability to successfully launch
product on time, our supply chain and manufacturing requirements, our success
in executing our business plan, relationships with current and potential
strategic partners, commercial sales and margins, product reliability, progress
on research and development activities, capital expenditures and working
capital requirements.  We also review investment
and acquisition opportunities on a regular basis for technologies, businesses
and markets that would complement our own products or assist us in our
commercialization plans.  Significant new
orders, expanded engine programs, acquisitions or investments could require
additional funding.  If such additional
funding is not available to us, if expected orders do not materialize or are
delayed, or if we have significant overspending in our programs, we may be required
to delay, reduce or eliminate certain research and development activities,
reduce or cancel inventory orders, and possibly forego new program, acquisition
or investment opportunities.  Any of
those circumstances could potentially result in a delay of the
commercialization of our products in development and could have an adverse
effect on our business, results of operations, liquidity and financial
condition.


 


This “Capital
Requirements, Resources and Liquidity” section contains certain forward looking
statements.  By their nature, forward-looking
statements require us to make assumptions and are subject to inherent risks and
uncertainties.  Readers are encouraged to
read the “Forward Looking Statements and Basis of Presentation” sections of
this MD&A which discusses forward-looking statements and the “Risks and
Uncertainties” section of this MD&A and of our Annual Information Form.


 


SHARES OUTSTANDING


 


For the years ended March 31,
2008, 2007 and 2006, the weighted average number of shares used in calculating
the loss per share was 88,087,882, 75,174,826 and 74,228,495,
respectively.  Shares, share options and
performance share units outstanding and exercisable as at the following dates
are shown below:


 


	
   

  	
   

  	
  March 31, 2008

  	
   

  	
  May 16, 2008

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Weighted

  	
   

  	
   

  	
   

  	
  Weighted

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  average

  	
   

  	
   

  	
   

  	
  average

  	
   

  
	
   

  	
   

  	
  Number

  	
   

  	
  exercise price

  	
   

  	
  Number

  	
   

  	
  exercise price

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  (Unaudited)

  	
   

  	
  (Unaudited)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Shares outstanding

  	
   

  	
  95,959,485

  	
   

  	
  N/A

  	
   

  	
  96,046,425

  	
   

  	
  N/A

  	
   

  
	
  Share Options

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  - Outstanding

  	
   

  	
  4,325,297

  	
   

  	
  $

  	
  1.99

  	
   

  	
  4,237,220

  	
   

  	
  $

  	
  2.00

  	
   

  
	
  - Exercisable

  	
   

  	
  2,916,539

  	
   

  	
  $

  	
  2.22

  	
   

  	
  2,828,462

  	
   

  	
  $

  	
  2.24

  	
   

  
	
  Performance Share Units

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  - Outstanding

  	
   

  	
  3,790,468

  	
   

  	
  N/A

  	
   

  	
  3,790,468

  	
   

  	
  N/A

  	
   

  
	
  - Exercisable

  	
   

  	
  1,940,470

  	
   

  	
  N/A

  	
   

  	
  1,940,470

  	
   

  	
  N/A

  	
   

  



 


20
















 


During the year ended March 31,
2008, we granted 250,000 stock options and 1,938,650 performance share units,
of which 1,188,650 related to amounts granted under the Company’s long-term
incentive program and 750,000 related to the Company’s retention plan for key
employees.  All 4,134,663 warrants
related to the Perseus convertible debt were exercised on a cashless basis into
2,338,669 common shares during the fiscal year ended March 31, 2008, and
accordingly, no warrants are outstanding as at March 31, 2008.


 


SUMMARY OF
QUARTERLY RESULTS AND DISCUSSION OF FOURTH QUARTER 2008


 


The
following table provides summary unaudited financial data for our last eight
quarters:


 


Selected Quarterly Operations Data (unaudited)


Three months ended


 


	
   

  	
   

  	
  30-Jun-06

  	
   

  	
  30-Sep-06

  	
   

  	
  31-Dec-06

  	
   

  	
  31-Mar-07

  	
   

  	
  30-Jun-07

  	
   

  	
  30-Sep-07

  	
   

  	
  31-Dec-07

  	
   

  	
  31-Mar-08

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Units shipped

  	
   

  	
  341

  	
   

  	
  414

  	
   

  	
  629

  	
   

  	
  617

  	
   

  	
  533

  	
   

  	
  867

  	
   

  	
  801

  	
   

  	
  519

  	
   

  
	
  Average foreign exchange rate (C$:US$)

  	
   

  	
  $

  	
  1.11

  	
   

  	
  $

  	
  1.12

  	
   

  	
  $

  	
  1.14

  	
   

  	
  $

  	
  1.17

  	
   

  	
  $

  	
  1.10

  	
   

  	
  $

  	
  1.04

  	
   

  	
  $

  	
  0.98

  	
   

  	
  $

  	
  1.00

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (expressed in thousands of Canadian dollars
  except per share)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Product revenue

  	
   

  	
  $

  	
  7,644

  	
   

  	
  $

  	
  10,327

  	
   

  	
  $

  	
  13,568

  	
   

  	
  $

  	
  15,656

  	
   

  	
  $

  	
  11,842

  	
   

  	
  $

  	
  16,639

  	
   

  	
  $

  	
  15,488

  	
   

  	
  $

  	
  11,269

  	
   

  
	
  Parts revenue

  	
   

  	
  $

  	
  2,978

  	
   

  	
  $

  	
  3,401

  	
   

  	
  $

  	
  3,248

  	
   

  	
  $

  	
  3,658

  	
   

  	
  $

  	
  3,888

  	
   

  	
  $

  	
  4,530

  	
   

  	
  $

  	
  3,822

  	
   

  	
  $

  	
  4,058

  	
   

  
	
  Total revenue

  	
   

  	
  $

  	
  10,622

  	
   

  	
  $

  	
  13,728

  	
   

  	
  $

  	
  16,816

  	
   

  	
  $

  	
  19,314

  	
   

  	
  $

  	
  15,730

  	
   

  	
  $

  	
  21,169

  	
   

  	
  $

  	
  19,310

  	
   

  	
  $

  	
  15,327

  	
   

  
	
  Gross margin

  	
   

  	
  $

  	
  4,037

  	
   

  	
  $

  	
  4,776

  	
   

  	
  $

  	
  5,398

  	
   

  	
  $

  	
  7,888

  	
   

  	
  $

  	
  5,338

  	
   

  	
  $

  	
  6,053

  	
   

  	
  $

  	
  6,554

  	
   

  	
  $

  	
  4,568

  	
   

  
	
   

  	
   

  	
  38

  	
  %

  	
  35

  	
  %

  	
  32

  	
  %

  	
  41

  	
  %

  	
  34

  	
  %

  	
  29

  	
  %

  	
  34

  	
  %

  	
  30

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net income (loss) for the period

  	
   

  	
  $

  	
  (5,420

  	
  )

  	
  $

  	
  (1,840

  	
  )

  	
  $

  	
  (5,778

  	
  )

  	
  $

  	
  1,731

  	
   

  	
  $

  	
  (4,724

  	
  )

  	
  $

  	
  (4,867

  	
  )

  	
  $

  	
  7,401

  	
   

  	
  $

  	
  (8,125

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Earnings (loss) per share:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Basic

  	
   

  	
  $

  	
  (0.07

  	
  )

  	
  $

  	
  (0.02

  	
  )

  	
  $

  	
  (0.08

  	
  )

  	
  $

  	
  0.02

  	
   

  	
  $

  	
  (0.06

  	
  )

  	
  $

  	
  (0.05

  	
  )

  	
  $

  	
  0.08

  	
   

  	
  $

  	
  (0.09

  	
  )

  
	
  Diluted

  	
   

  	
  $

  	
  (0.07

  	
  )

  	
  $

  	
  (0.02

  	
  )

  	
  $

  	
  (0.08

  	
  )

  	
  $

  	
  0.02

  	
   

  	
  $

  	
  (0.06

  	
  )

  	
  $

  	
  (0.05

  	
  )

  	
  $

  	
  0.07

  	
   

  	
  $

  	
  (0.09

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash from (used in) operations before
  change in non-cash operating working capital

  	
   

  	
  $

  	
  (3,685

  	
  )

  	
  $

  	
  (3,760

  	
  )

  	
  $

  	
  (4,448

  	
  )

  	
  $

  	
  568

  	
   

  	
  $

  	
  (3,372

  	
  )

  	
  $

  	
  (2,645

  	
  )

  	
  $

  	
  (3,339

  	
  )

  	
  $

  	
  (8,238

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Company’s 100% share of CWI net income

  	
   

  	
  $

  	
  1,528

  	
   

  	
  $

  	
  1,392

  	
   

  	
  $

  	
  806

  	
   

  	
  $

  	
  8,388

  	
   

  	
  $

  	
  1,160

  	
   

  	
  $

  	
  2,412

  	
   

  	
  $

  	
  8,870

  	
   

  	
  $

  	
  (810

  	
  )

  
	
  Joint Venture Partner’s share of CWI net
  income

  	
   

  	
  $

  	
  764

  	
   

  	
  $

  	
  696

  	
   

  	
  $

  	
  403

  	
   

  	
  $

  	
  4,194

  	
   

  	
  $

  	
  580

  	
   

  	
  $

  	
  1,206

  	
   

  	
  $

  	
  4,435

  	
   

  	
  $

  	
  (405

  	
  )

  



 


Our
revenues and operating results can vary significantly from quarter to quarter
depending on the timing of product deliveries, product mix, product launch
dates, research and development project cycles, timing of related government
funding and foreign exchange impacts. 
Net loss has and can vary significantly from one quarter to another depending
on operating results, gains and losses from investing activities, stock-based
compensation awards, recognition of tax benefits and other similar events.


 


Net
income (loss) for the three month periods ending September 30, 2006
through to the quarter ending September 30, 2007 include interest and
amortization related to the Notes issued to Perseus, which were converted July 26,
2007.  Upon conversion, the Notes were
retired and interest and amortization ceased. 
In the three months ended September 30, 2006, we also recognized a
net gain of $3.9 million on the sale of 45% of WRI.


 


Consolidated
net income for the three months ended December 31, 2007 was $7.4 million,
or $0.08 earnings per share ($0.07 on a fully diluted basis), compared to a net
loss of $5.8 million, or $0.08 loss per share, for the three months ended December 31,
2006.  Included in net income for the
three months ended December 31, 2007 is a gain on the sale of long-term
investments of $9.4 million, including a $6.7 million gain on the sale of
approximately 


 


21

















 


600,000
of our 2 million shares of Clean Energy, and a $2.7 million gain on the sale of
substantially all of our shares of Wild River. 
CWI also recognized $5.9 million in future income tax benefits, 50% of
which, after deducting our joint venture partner’s share, is included in our
net income number.  Excluding the effects
of the gains and our share of the tax benefit, our net loss for the third
quarter was $5.0 million.


 


Three
months ended March 31, 2008 and 2007


 


Our
total consolidated revenues for the three months ended March 31, 2008 were
down $4.0 million to $15.3 million from $19.3 million in the same period in
fiscal 2007 with product revenues down $4.4 million and parts revenue up $0.4
million.  CWI product revenues were down
$3.7 million primarily as the result of a delay in the completion of the
integration of the ISL-G at an OEM, which caused planned deliveries to slip
into fiscal 2009 and timing of customer deliveries.  Non-CWI product revenues also decreased by
$0.7 million with 8 LNG systems shipped in the fourth quarter of fiscal
2007.  The Canadian dollar also
appreciated by approximately 15% fourth quarter fiscal 2008 over fiscal 2007,
reducing revenues in Canadian dollar terms.


 


Net
loss for the three months ended March 31, 2008 was $8.1 million compared
to net income of $1.7 million in the three months ended March 31,
2007.  Gross margin decreased by $3.3
million on lower revenues, and gross margin percentages decreased from 41% in
the fourth quarter of fiscal 2007 to 30% in fiscal 2008 as the result of
product mix and a $0.8 million warranty adjustment taken by CWI in fiscal
2007.  In the fourth quarter of fiscal
2008, CWI also made a special $1.4 million accrual to support customer
operational issues associated with a discontinued product.  As a result, CWI’s loss before taking into
account Cummins’ share was $0.8 million compared to net income of $8.4 million,
including recognition of future income tax recovery of $3.4 million, in the
fourth quarter of fiscal 2007.  Non-CWI
net loss in the fourth quarter of fiscal 2008 was $7.7 million, which includes
a $1.3 million future income tax expense associated with the gains recognized
on the sale of long-term investments.  In
anticipation of increased demand for our LNG products, we have increased
expenses related to sales and marketing, supply chain and engineering efforts
related to OEM integration.  In the
fourth quarter of fiscal 2007, non-CWI net loss was $2.5 million, which
included $2.2 million in funding from TPC and reversal of a royalty accrual of
$1.3 million on receipt of the approved extension in our funding contract.  We also recognized a $4.2 million gain on the
dilution of our interest in Wild River which was offset by $2.0 million in
non-cash stock-based compensation and annual bonuses.


 


22

















 


CONTRACTUAL
OBLIGATIONS AND COMMITMENTS


 


	
   

  	
   

  	
  Minimum Annual Payments due by Period

  	
   

  
	
  (expressed in thousands of

  	
   

  	
  Less than 1

  	
   

  	
  1 to 3

  	
   

  	
  4 to 5

  	
   

  	
  After 5

  	
   

  	
   

  	
   

  
	
  Canadian dollars)

  	
   

  	
  year

  	
   

  	
  years

  	
   

  	
  years

  	
   

  	
  years

  	
   

  	
  Total

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Capital lease obligations

  	
   

  	
  54

  	
   

  	
  8

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  62

  	
   

  
	
  Operating leases

  	
   

  	
  1,298

  	
   

  	
  2,518

  	
   

  	
  2,056

  	
   

  	
  636

  	
   

  	
  6,508

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total contractual commitments

  	
   

  	
  1,352

  	
   

  	
  2,526

  	
   

  	
  2,056

  	
   

  	
  636

  	
   

  	
  6,570

  	
   

  



 


Contractual Commitments


 


Capital
lease obligations related primarily to office equipment, have terms of two to
five years and have interest rates ranging from 1.15% to 6.17%.  Operating lease commitments represent our
future minimum lease payments under leases related primarily to our operating
premises and office equipment.  We also
have an outstanding letter of credit for $0.6 million.


 


Demand Instalment Loan


 


As
of March 31, 2008, we had $5.8 million in a demand instalment loan
outstanding, up $4.2 million from $1.6 million as at March 31, 2007.  The loan is drawn against our line of credit
of $13 million and bears interest at prime less 0.25% for amounts under $5.0
million with further rate reductions applying above $5.0 million.  The loan is being amortized over five years.


 


OMVL


 


As
required under our signed joint venture agreement with OMVL, we contributed
$1.5 million to the venture on April 1, 2008 in exchange for our 49% of
the entity.


 


23

















 


CONTINGENT
OFF-BALANCE SHEET ARRANGEMENTS


 


Government Funding


 


We
are continually exploring strategic opportunities to work with governments to
provide them with alternative fuel solutions. 
As a result of our government partnerships, we recognized $3.7 million
in government funding in fiscal 2008, $5.2 million in 2007 and $8.7 million in
2006.  Under certain repayment terms, we
are obligated to repay royalties as follows:


 


	
  AGREEMENT

  	
   

  	
  DESCRIPTION

  	
   

  	
  ROYALTIES

  	
   

  	
  TERM

  
	
  INDUSTRIAL TECHNOLOGIES

  OFFICE

  (FORMERLY

  TECHNOLOGY PARTNERSHIPS

  CANADA)

  	
   

  	
  Fund 30% of the eligible

  costs of, among other

  research projects, the

  adaptation of Westport’s

  technology to diesel

  engines, up to $18.9

  million.

  	
   

  	
  Annual royalties equal to

  the greater of

  $1,350,000 or 0.33% of

  annual gross revenues

  from all sources,

  provided that gross

  revenues exceed $13.5

  million.



  Share purchase

  warrants valued at $4

  million under Black-Scholes.

  	
   

  	
  Fiscal 2009 to fiscal

  2015, inclusive; royalty

  period may be extended

  until the earlier of March

  31, 2018 or until

  cumulative royalties total

  $28,189,000.

   

  To be issued no earlier

  than September 30, 2008.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  DEPARTMENT OF NATURAL

  RESOURCES

  CANADA

  	
   

  	
  Funded $1 million for

  demonstration of a low

  emissions natural gas

  power generator in

  Grande Prairie, Alberta.

  	
   

  	
  1% of revenues from

  future sales of natural

  gas engines for power

  generators.

  	
   

  	
  Earlier of 10 years from

  project completion date

  (August 30, 2004), or

  when cumulative

  royalties total $1 million.

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  GREEN ECONOMY DEVELOPMENT

  FUND (Province of

  British Columbia)

  	
   

  	
  $ 0.6 million for low-

  emission, natural gas

  power generation

  demonstration project.

  	
   

  	
  0.75% from gross

  revenue received by

  Westport on certain

  natural gas fuel systems.

  	
   

  	
  Earlier of the seventh

  anniversary of the

  funding contribution date

  (April 10, 2001) or when

  the cumulative royalties

  paid by Westport equal

  $0.8 million.

  



 


As
at March 31, 2008, no royalties have been paid or were payable under these
agreements.  We are in discussions with
TPC to extend the work phase of our agreement by another year.  If TPC does not accept our request for an
extension, we expect to begin accruing royalties with a minimum of $1.35
million starting in fiscal 2009 with actual payment due in fiscal 2010.  If we are successful in our request,
royalties will begin to accrue in fiscal 2010 and our obligation to issue $4
million of warrants will be deferred to September, 2009 from September, 2008.


 


24

















 


BUSINESS
RISKS AND UNCERTAINTIES


 


An
investment in our business involves risk and readers should carefully consider
the risks described below and in our Annual Information Form and other
filings on www.sedar.com.  Our ability to
generate revenue and profit from our technologies is dependent on a number of
factors, and the risks identified below, if they were to occur, could have a
material impact on our business, financial condition, liquidity, results of
operation or prospects.  While we have
attempted to identify the primary known risks that are material to our
business, the risks and uncertainties described below may not be the only ones
we face.  Additional risks and
uncertainties, including those that we do not know about now or that we
currently believe are immaterial may also adversely affect our business,
financial condition, liquidity, results of operation or prospects.


 


We have incurred and continue to
incur losses


 


We
have incurred substantial losses since our inception in 1996, and continue to
incur losses.  We cannot predict if and
when we will operate profitably or if we will be able to implement our business
strategy successfully.  Pursuing our
strategy requires us to incur significant expenditures for research and product
development, marketing and general administrative activities.  As a result, we need to continue to grow our
revenues and gross margins to achieve and sustain profitability and positive
operating cash flows and we may need to raise additional capital.


 


We may be unable to raise additional
capital


 


Execution
of our business plan and our commercial viability could be jeopardized if we
are unable to raise additional funds for our commercialization plans, to fund
working capital, research and development projects, sales, marketing and
product development activities and other business opportunities.  We attempt to mitigate this risk by
generating funds from a variety of sources including: through the sale of our
commercial products, through the sale of non-core assets including long-term
investments, through funding from government agencies, industry and business
partners, and through the issuance of shares or debt in the public equity
markets or through strategic investors. 
In addition, we try to maintain reserves of cash and short-term
investments and seek to obtain funding commitments before we take on any
significant incremental initiatives. 
There can, however, be no assurance that we will be able to secure
additional funding, or funding on terms acceptable to us, to pursue our commercialization
plans.


 


Potential fluctuations in our
financial results make financial forecasting difficult


 


We
expect our revenues and results of operation to continue to vary significantly
from quarter to quarter.  Sales and
margins may be lower than anticipated due to timing of customer orders and
deliveries, unexpected delays in our supply chain, general economic and
market-related factors, product quality, performance and safety issues and
competitive factors.  In addition, the
continuance and timing of government funding of our research and development
programs is difficult to predict, and may cause quarter to quarter variations
in financial results.  In


 


25

















 


addition,
due to our early stage of commercialization, we cannot accurately predict our
future revenues or results of operations. 
We are also subject to normal operating risks such as credit risks,
foreign currency risks and global and regional economic conditions.  As a result, quarter-to-quarter comparisons
of our revenues and results of operation may not be meaningful.  It is likely that in one or more future
quarters our results of operation will fall below the expectations of
securities analysts and investors.  If
this happens, the trading price of our shares might be materially and adversely
affected.


 


A market for engines with our fuel
systems may never develop or may take longer to develop than we anticipate


 


Although
we are seeing strong growth in CWI revenues and interest from the Ports of Los
Angeles and Long Beach, municipalities and private fleets, engines with our
fuel systems represent an emerging market, and we do not know whether end-users
will ultimately want to use them or pay for their initial incremental
cost.  The development of a mass market
for our fuel systems may be affected by many factors, some of which are beyond
our control, including: the emergence of newer, more competitive technologies
and products; the future cost of natural gas and other fuels used by our
systems; the ability to successfully build the refueling infrastructure
necessary for our systems; regulatory requirements; availability of government
incentives; customer perceptions of the safety of our products; and customer
reluctance to try a new product.


 


If
a market fails to develop or develops more slowly than we anticipate, we may be
unable to recover the losses we will have incurred in the development of our
products and may never achieve profitability.


 


We currently benefit from government
incentives to facilitate demand for our products and fund our research and
development programs and these incentives may not be renewed or may be
redirected


 


While
some of our customers and potential customers have made successful applications
for government incentives to assist them in converting their vehicles to
natural gas engines, there is no guarantee that such incentives will continue
to be available.  Today our LNG systems
customers and potential customers in the United States may have access to
local, state and federal incentives through programs and initiatives such as
the federal Highway and Energy Bills, which provide fuel and tax credits, and
grants available from Carl Moyer and South Coast Air Quality Management
District.  If these and other similar
incentive programs are discontinued or are no longer available to our customers
and potential customers, it may have a detrimental effect on our sales. There
are also no guarantees that the Ports of Los Angeles and Long Beach will carry
out or be able to fund their Clean Air Action Plan.


 


In
addition, from time to time we enter into agreements with government agencies
to fund our research and development programs. 
There can be no assurance that we will continue to receive funding from
government


 


26

















 


agencies
at the same levels we have received in the past or at all. Funding agreements
with government agencies are also subject to audit, which could result in
certain funding being denied or monies received from such agencies having to be
repaid.


 


Fuel price differentials are hard to
predict and may be less favourable in the future


 


The
acceptance of natural gas-fuelled engines by customers depends in part on the
price differential between natural gas and diesel fuel.  Natural gas has generally been, and currently
is, less expensive than diesel fuel in many jurisdictions.  This price differential is affected by many
factors, including changes in the resource base for natural gas compared with
crude oil, pipeline transportation capacity for natural gas, refining capacity
for crude oil and government excise and fuel tax policies.  There can be no assurance that natural gas
will remain less expensive than diesel fuel.


 


Our growth rate is dependent on
growth in natural gas refueling infrastructure that may not take place


 


For
motor vehicles, natural gas must be carried on board in liquefied or compressed
form and there are few public or private refuelling stations available in most
jurisdictions.  We are involved in
developing such infrastructure through our relationship with Clean Energy, the
largest natural gas refuelling company for vehicles in North America, and are
seeking further involvement with other natural gas refuelling companies.  However, there can be no assurance that Clean
Energy will continue to be successful in expanding the availability of natural
gas as a vehicle fuel, or that other companies will develop refuelling stations
to meet projected demand.  If customers
are unable to obtain fuel conveniently and affordably, a mass market for
vehicles powered by our technology is unlikely to develop.


 


Changes in environmental and
regulatory policies could hurt the market for our products


 


We
currently benefit from, and hope to continue to benefit from, certain
government environmental policies, mandates and regulations around the world,
most significantly in the automotive markets and in the United States.  Examples of such regulations include those
that provide economic incentives, subsidies, tax credits and other benefits to
purchasers of low emission vehicles, restrict the sale of engines that do not
meet emission standards, fine the sellers of non-compliant engines, tax the
operators of diesel engines and require the use of more expensive ultra-low
sulphur diesel fuel.  There can be no
assurance that these policies, mandates and regulations will be continued.  Incumbent industry participants with a vested
interest in gasoline and diesel, many of which have substantially greater
resources than we do, may invest significant time and money in an effort to
influence environmental regulations in ways that delay or repeal requirements
for clean vehicle emissions.  If these
are discontinued or if current requirements are relaxed, this may have a
material impact on our competitive position.


 


27

















 


We currently face and will continue
to face significant competition


 


Our
products face and will continue to face significant competition, including from
incumbent technologies. New developments in technology may negatively affect
the development or sale of some or all of our products or make our products
uncompetitive or obsolete. Other companies, many of which have substantially
greater customer bases, businesses and other resources than us, are currently
engaged in the development of products and technologies that are similar to, or
may be competitive with, certain of our products and technologies.


 


Competition
for our products may come from current power technologies, from improvements to
current power technologies and from new alternative power technologies,
including other fuel systems.  Each of
our target markets is currently serviced by existing manufacturers with
existing customers and suppliers using proven and widely accepted technologies.  Additionally, there are competitors working
on developing technologies such as cleaner diesel engines, bio-diesel, fuel
cells, advanced batteries and hybrid battery/internal combustion engines in
each of our targeted markets.  Each of
these competitors has the potential to capture market share in various markets,
which could have a material adverse effect on our position in the industry and
our financial results.  For our products
to be successful against competing technologies, especially diesel engines,
they must offer advantages in one or more of these areas: emissions
performance, fuel economy, engine performance, power density, engine and fuel
system weight, and engine and fuel system price.  There can be no assurance that our products
will be able to offer advantages in all or any of these areas.


 


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


 


Failure
to protect our existing and future intellectual property rights could seriously
harm our business and prospects, and may result in the loss of our ability to
exclude others from practicing our technology or our own right to practice our
technologies.  If we do not adequately
ensure our freedom to use certain technology, we may have to pay others for
rights to use their intellectual property, pay damages for infringement or
misappropriation and/or be enjoined from using such intellectual property.  Our patents do not guarantee us the right to
practice our technologies if other parties own intellectual property rights
that we need in order to practice such technologies.  Our patent position is subject to complex
factual and legal issues that may give rise to uncertainty as to the validity,
scope and enforceability of a particular patent.  There can be no assurance that:


 


·   any of the rights we have under U.S. or foreign patents owned by us or
other patents that third parties license to us will not be curtailed, for
example through invalidation, circumvention, challenge, being rendered
unenforceable or by license to others;


 


·   we were the
first inventors of inventions covered by our issued patents or pending
applications or that we were the first to file patent applications for such
inventions;


 


28

















 


·   any of our
pending or future patent applications will be issued with the breadth of claim
coverage sought by us, or be issued at all;


 


·   our
competitors will not independently develop or patent technologies that are
substantially equivalent or superior to our technologies;


 


·   any of our
trade secrets will not be learned independently by our competitors; or


 


·   the steps we
take to protect our intellectual property will be adequate.


 


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


 


We
also seek to protect our proprietary intellectual property, including
intellectual property that may not be patented or patentable, in part by
confidentiality agreements and, if applicable, inventors’ rights agreements
with our strategic partners and employees. 
There can be no assurance that these agreements will not be breached,
that we will have adequate remedies for any breach or that such persons or
institutions will not assert rights to intellectual property arising out of
these relationships.


 


Certain
intellectual property has been licensed to us on a non-exclusive basis from
third parties who may also license such intellectual property to others,
including our competitors.  If necessary
or desirable, we may seek further licenses under the patents or other
intellectual property rights of others. 
However, we can give no assurances that we will obtain such licenses or
that the terms of any offered licenses will be acceptable to us.  The failure to obtain or renew a license from
a third party for intellectual property we use at present could cause us to
incur substantial liabilities and to suspend the manufacture, shipment of
products or our use of processes requiring such intellectual property.


 


We could become engaged in
intellectual property litigation that may negatively affect our business


 


While
we are not currently engaged in any intellectual property litigation, we could
become subject to lawsuits in which it is alleged that we have infringed the
intellectual property rights of others or in which the scope, validity and
enforceability of our intellectual property rights is challenged. In addition,
we may commence lawsuits against others who we believe are infringing upon our
rights. Our involvement in intellectual property litigation could be time
consuming and result in significant expense to us, diversion of resources, and
delays or stoppages in the development, production and sales of products
or intellectual property, whether or not any claims have merit or such
litigation is resolved in our favour.  In
the event of an adverse outcome as a defendant in any such litigation, we may,
among other things, be required to:


 


·   pay substantial damages;


 


·   cease the development, manufacture, use, sale or importation of
products that infringe upon other patented


 


29

















 


intellectual property;


 


·   expend significant resources to develop or acquire non-infringing
intellectual property;


 


·   discontinue processes incorporating infringing technology; or


 


·   obtain licenses to the infringing intellectual property.


 


Any
such result could require the expenditure of substantial time and other
resources and could have a material adverse effect on our business and
financial results.


 


We could become liable for
environmental damages resulting from our research, development or manufacturing
activities


 


The
nature of our business and products exposes us to potential claims and
liability for environmental damage, personal injury, loss of life, and damage
to or destruction of property.  Our
business is subject to numerous laws and regulations that govern environmental
protection and human health and safety. 
These laws and regulations have changed frequently in the past and it is
reasonable to expect additional and more stringent changes in the future.  Our operations may not comply with future
laws and regulations, and we may be required to make significant unanticipated
capital and operating expenditures.  If
we fail to comply with applicable environmental laws and regulations,
governmental authorities may seek to impose fines and penalties on us or to
revoke or deny the issuance or renewal of operating permits, and private
parties may seek damages from us.  Under those
circumstances, we might be required to curtail or cease operations, conduct
site remediation or other corrective action, or pay substantial damage
claims.  In addition, depending on the
nature of the claim, our current insurance policies may not provide sufficient
or any coverage for such claims.


 


Certain of our products may not be
commercially viable


 


Our
direct injection technology has been demonstrated in heavy duty trucks, light
duty vehicles and high horsepower applications. 
However, we do not know when or whether we will be successful in the
commercialization of products for any of our target markets.  There can be no assurance that engines using
our direct injection technology will perform as well as we expect, or that
prototypes and commercial systems will be developed and sold in commercially
viable numbers.


 


Our
HPDI LNG systems presently have higher initial capital costs than many
established competing technologies, and manufacturing costs of some of our
products at a large-scale commercial level have not yet been confirmed.  If we are unable to produce fuel systems that
are economically competitive, on a life cycle costs basis, in terms of price,
reliability and longevity, operators of commercial vehicle fleets and power
generators will be unlikely to buy products containing our fuel systems.


 


30
















 


We are dependent on relationships with strategic partners


 


Execution of our current
strategy is dependent on cooperation with strategic partners for technology
development, manufacturing and distribution. 
To be commercially viable, our fuel systems must be integrated into
engines and our engines must be integrated into chassis manufactured by OEMs. 
We can offer no guarantee that existing technology agreements will be renewed
or advanced into commercialization agreements, or that OEMs will manufacture
engines with our fuel systems or chassis for our engines, or, if they do
manufacture such products, that customers will choose to purchase them.  Any integration, design, manufacturing or
marketing problems encountered by OEMs could adversely affect the market for
our products and our financial results. 
In addition, there can be no assurance of the commercial success of any
joint ventures in which we are, or will become, involved.


 


Any change in our
relationships with our strategic partners, whether as a result of economic or
competitive pressures or otherwise, including any decision by our strategic
partners to reduce their commitment to our products and technology in favour of
competing products or technologies, or to bring to an end our various
alliances, could have a material adverse effect on our business and financial
results.


 


We are dependent on relationships with our suppliers


 


While we have negotiated
supply agreements with various manufacturers and have entered into strategic
supply agreements with BTIC and Cryostar, certain of these manufacturers may
presently be the sole supplier of key components for our products and we are
dependent on their ability to source materials, manage their capacity,
workforce and schedules.  In particular,
we are dependent on sole suppliers for our injectors, tanks, and pumps for our
HPDI LNG systems and their ability to ramp up capacity and maintain quality and
cost to support our production requirements. 
For a number of reasons, including but not limited to shortages of
parts, labour disruptions, lack of capacity and equipment failure, a supplier
may fail to supply materials or components that meet our quality, quantity or
cost requirements or to supply any at all. 
If we are not able to resolve these issues or obtain substitute sources
for these materials or components in a timely manner or on terms acceptable to
us, our ability to manufacture certain products may be harmed and we may be
subjected to cancellation of orders or penalties for failed or late deliveries,
which could have a material adverse effect on our business and financial
results.  Our products also use steel and
other materials that have global demand. 
The prices and quantities at which those supplies are available
fluctuate and may increase significantly. 
Competitive pressure, however, may not allow us to increase the sales
price of our products.  Any such
increases may therefore negatively affect our margins and


 


31

















 


financial condition.  We mitigate these risks by seeking secondary
suppliers, by carrying inventory, and by locking in long-term pricing when
possible.  There are no guarantees,
however, that we will be successful in securing alternative suppliers or that
our inventory levels will be sufficient for our production requirements.


 


We are dependent on our relationship with Cummins for CWI
revenues and profits


 


The majority of our
revenues are currently derived from the operations of CWI, which, in turn,
purchases all of its current and foreseeable engine products from
Cummins-affiliated plants and distributors. 
Although the factories operate with modern technology and experienced
management, there can be no assurance that the factory and distribution systems
will always be able to perform on a timely and cost-effective basis. Any
reduction in the manufacturing and distribution capabilities of
Cummins-affiliated plants and distributors could have a material adverse effect
on our business and financial results.


 


Our limited production trials, commercial launch activities
and field tests could encounter problems


 


We are currently
conducting, and plan to continue to conduct, limited production trials and
field tests on a number of our products as part of our product development
cycle and we are working on scaling up our production capabilities.  These trials, production readiness activities
and field tests may encounter problems and delays for a number of reasons,
including the failure of our technology, the failure of the technology of
others, the failure to combine these technologies properly and the failure to
maintain and service the test prototypes properly.  Some of these potential problems and delays
are beyond our control.  Any problem or
perceived problem with our limited production trials and field tests could hurt
our reputation and the reputation of our products and delay their commercial
launch.


 


We may have difficulty managing the expansion of our
operations


 


To support the launch,
and increase sales and service, of our LNG system products, we may be required
to expand the scope of our operations rapidly. 
This may include a need for a significant increase in employees and an
increase in the size, or relocation, of our premises and changes to our information
systems, processes and policies.  Such
rapid expansion may place a significant strain on our senior management team,
support teams, information technology platforms and other resources.  In addition, we may be required to place more
reliance on our strategic partners and suppliers, some of whom may not be
capable of meeting our production demands in terms of quantity, quality or
cost.  Difficulties in effectively
managing the budgeting, forecasting and other process control issues presented
by such a rapid expansion could harm our business, prospects, results of
operations or financial condition.


 


32

















 


Warranty claims could diminish our margins


 


There is a risk that the
warranty accrual included in our cost of product revenue is not sufficient and
that we may recognize additional expenses as a result of warranty claims in
excess of our current expectations.  Such
warranty claims may necessitate a redesign, re-specification or recall of our
products, which, in turn, may have an adverse impact on our finances and on
existing or future sales.  Although we
attempt to mitigate against these risks through our sales and marketing
initiatives and our product development, quality assurance, support and service
programs, there can be no assurance that such initiatives and programs are
adequate or that sales of our commercial products will continue to grow and
contribute financially.


 


Although CWI products
have shown improvements in warranty experience over the past few years and we
continue to work to improve our products, there are no guarantees that this
trend will continue or that it will not reverse.  New products may have different performance
characteristics from previous products. 
In addition, we have limited field experience with our HPDI LNG systems
from which to make our warranty accrual estimates.


 


We could become subject to product liability claims


 


Our business exposes us
to potential product liability claims that are inherent in natural gas,
propane, and hydrogen and products that use these gases.  Natural gas, propane, and hydrogen are
flammable gases and therefore potentially dangerous products.  We also produce fuel processors that generate
hydrogen from certain raw fuels, which are also flammable.  Any accidents involving our products or other
natural gas, propane, or hydrogen-based products could materially impede
widespread market acceptance and demand for our engines and fuel systems.  In addition, we may be subject to a claim by
end-users or others alleging that they have suffered property damage, personal
injury or death because our products did not perform adequately.  Such a claim could be made whether or not our
products perform adequately under the circumstances.  From time to time, we may be subject to
product liability claims in the ordinary course of business and we carry a
limited amount of product liability insurance for this purpose.  However, our current insurance policies may
not provide sufficient or any coverage for such claims, and we cannot predict
whether we will be able to maintain our insurance coverage on commercially
acceptable terms.


 


We have foreign currency risk


 


While a majority of our
revenues, cost of sales, expenses and warranty balances are all denominated in
US dollars, many of our operating expenses, other than cost of sales, are in
Canadian dollars.  Foreign exchange gains
and losses are included in results from operations.  A large decline in the value of the US dollar
relative to the Canadian dollar could impair revenues, margins and other
financial results.  For example, for
fiscal 2008, the decline of the US dollar offset the increase in our
revenues.  We have not entered into
foreign exchange contracts to hedge against gains and losses from foreign
currency fluctuations. From fiscal 2002 to fiscal 2007, on average, the US


 


33

















 


dollar has declined 28%
against the Canadian dollar.  From fiscal
2007 to fiscal 2008, on average, the US dollar depreciated a further 12%.


 


We could lose or fail to attract the personnel necessary to
run our business


 


Our success depends in
large part on our ability, and that of our affiliates, to attract and retain
key management, engineering, scientific, manufacturing and operating
personnel.  As we develop additional
capabilities we may require more skilled personnel.  Given the highly specialized nature of our
products, these personnel must be highly skilled and have a sound understanding
of our industry, business or our technology. 
Recruiting personnel for the alternative fuel industry is also highly
competitive.  Although to date we have
been successful in recruiting and retaining qualified personnel, there can be
no assurance that we will continue to attract and retain the personnel needed for
our business.  The failure to attract or
retain qualified personnel could have a material adverse effect on our
business.


 


If we do not properly manage foreign sales and operations,
our business could suffer


 


We expect that a
substantial portion of our future revenues will be derived from sales outside
of Canada, and we operate in jurisdictions where we may lack sufficient
expertise, local knowledge or contacts. 
Establishment of an international market for our products may take
longer and cost more to develop than we anticipate, and is subject to inherent
risks, including unexpected changes in government policies, trade barriers,
difficulty in staffing and managing foreign operations, longer payment cycles,
and foreign exchange controls that restrict or prohibit repatriation of funds.  As a result, if we do not properly manage
foreign sales and operations, our business could suffer.


 


We may not realize the anticipated benefits from joint
ventures, investments or acquisitions


 


Our joint ventures, and
any future joint venture, investment or acquisition could expose us to certain
liabilities, including those that we fail or are unable to identify during the
acquisition process.  In addition, joint
ventures and acquisitions often result in difficulties in integration, and, if
such difficulties were to occur, they could adversely affect our results.  The integration process may also divert the
attention of, and place significant demands on, our managerial resources, which
may disrupt our current business operations. 
As a result, we may fail to meet our current product development and
commercialization schedules. 
Additionally, we may not be able to find suitable joint venture
partners, investments or acquisitions, which could adversely affect our
business strategy.


 


Our share price may fluctuate


 


The stock market in
general, and the market prices of securities of technology companies in
particular, can be extremely volatile, and fluctuations in our share price may
be unrelated to our operating performance. 
Our share price could be subject to significant fluctuations in response
to many factors, including: actual or anticipated variations in our results of
operations; the addition or loss of customers; announcements of technological


 


34

















 


innovations, new products
or services by us or our competitors; changes in financial estimates or
recommendations by securities analysts; conditions or trends in our industry;
our announcements of significant acquisitions, strategic relationships, joint
ventures or capital commitments; additions or departures of key personnel;
general market conditions; and other events or factors, many of which may be
beyond our control.


 


NON-GAAP MEASURES


 


We use certain non-GAAP
measures to assist in assessing our financial performance and liquidity.  Non-GAAP measures do not have any
standardized meaning prescribed by GAAP and are therefore unlikely to be
comparable to similar measures presented by other companies.  Non-GAAP measures and reconciliations to
financial statement line items for the periods indicated are as follows:


 


Cash
flows from operations before changes in non-cash operating working capital


 


(expressed
in thousands of Canadian dollars)


 


	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  	
  2006

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash flows from operations:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss for the year

  	
   

  	
  $

  	
  (10,315

  	
  )

  	
  $

  	
  (11,307

  	
  )

  	
  $

  	
  (16,860

  	
  )

  
	
  Items not involving cash:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Depreciation and amortization

  	
   

  	
  1,550

  	
   

  	
  1,410

  	
   

  	
  2,752

  	
   

  
	
  Stock-based compensation expense

  	
   

  	
  664

  	
   

  	
  2,089

  	
   

  	
  2,934

  	
   

  
	
  Accretion of TPC warrants

  	
   

  	
  —

  	
   

  	
  571

  	
   

  	
  1,143

  	
   

  
	
  Future income tax recovery

  	
   

  	
  (4,691

  	
  )

  	
  (3,455

  	
  )

  	
  —

  	
   

  
	
  Change in deferred lease inducements

  	
   

  	
  (251

  	
  )

  	
  (164

  	
  )

  	
  (154

  	
  )

  
	
  Gain on sale of long-term investments

  	
   

  	
  (10,659

  	
  )

  	
  (8,120

  	
  )

  	
  —

  	
   

  
	
  Joint Venture Partners’ share of net income from joint ventures

  	
   

  	
  5,564

  	
   

  	
  6,057

  	
   

  	
  1,593

  	
   

  
	
  Interest on long-term debt and amortization of discount

  	
   

  	
  690

  	
   

  	
  1,663

  	
   

  	
  —

  	
   

  
	
  Other

  	
   

  	
  (146

  	
  )

  	
  (69

  	
  )

  	
  (69

  	
  )

  
	
  Cash flows from operations before changes in non-cash operating
  working capital

  	
   

  	
  $

  	
  (17,594

  	
  )

  	
  $

  	
  (11,325

  	
  )

  	
  $

  	
  (8,661

  	
  )

  



 


35