Exhibit
4.5


 


Consolidated Financial
Statements


(Expressed in thousands
of Canadian dollars)


 


WESTPORT  INNOVATIONS 
INC.


 


Three months ended June 30,
2008 and 2007


 

















 


WESTPORT
INNOVATIONS INC.


Consolidated Balance Sheets


(Expressed in thousands of Canadian
dollars)


 


	
   

  	
   

  	
  June 30,

  2008

  	
   

  	
  March 31,

  2008

  	
   

  
	
   

  	
   

  	
  (unaudited)

  	
   

  	
   

  	
   

  
	
  Assets

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current assets:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash
  equivalents

  	
   

  	
  $

  	
  18,026

  	
   

  	
  $

  	
  7,560

  	
   

  
	
  Short-term
  investments

  	
   

  	
  —

  	
   

  	
  15,202

  	
   

  
	
  Accounts
  receivable

  	
   

  	
  8,915

  	
   

  	
  7,028

  	
   

  
	
  Loan receivable
  (note 8(a))

  	
   

  	
  8,456

  	
   

  	
  6,774

  	
   

  
	
  Inventories
  (note 3)

  	
   

  	
  11,674

  	
   

  	
  9,020

  	
   

  
	
  Prepaid expenses

  	
   

  	
  892

  	
   

  	
  1,033

  	
   

  
	
  Current portion
  of future income tax assets

  	
   

  	
  7,362

  	
   

  	
  4,944

  	
   

  
	
   

  	
   

  	
  55,325

  	
   

  	
  51,561

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Long-term
  investments (note 4)

  	
   

  	
  12,899

  	
   

  	
  18,754

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Equipment,
  furniture and leasehold improvements, net

  	
   

  	
  5,744

  	
   

  	
  3,685

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Intellectual
  property, net

  	
   

  	
  538

  	
   

  	
  574

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Future income
  tax assets

  	
   

  	
  399

  	
   

  	
  4,366

  	
   

  
	
   

  	
   

  	
  $

  	
  74,905

  	
   

  	
  $

  	
  78,940

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Liabilities and
  Shareholders’ Equity

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current liabilities

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts payable
  and accrued liabilities

  	
   

  	
  $

  	
  7,959

  	
   

  	
  $

  	
  8,470

  	
   

  
	
  Current portion
  of deferred revenue

  	
   

  	
  206

  	
   

  	
  205

  	
   

  
	
  Demand
  instalment loan

  	
   

  	
  5,879

  	
   

  	
  5,776

  	
   

  
	
  Short-term debt

  	
   

  	
  5,955

  	
   

  	
  5,995

  	
   

  
	
  Current portion
  of long-term debt

  	
   

  	
  48

  	
   

  	
  54

  	
   

  
	
  Current portion
  of warranty liability

  	
   

  	
  5,588

  	
   

  	
  4,899

  	
   

  
	
  Obligation to
  issue warrants

  	
   

  	
  4,000

  	
   

  	
  4,000

  	
   

  
	
   

  	
   

  	
  29,635

  	
   

  	
  29,399

  	
   

  
	
  Warranty
  liability

  	
   

  	
  5,863

  	
   

  	
  4,258

  	
   

  
	
  Long-term debt

  	
   

  	
  44

  	
   

  	
  8

  	
   

  
	
  Deferred lease
  inducements

  	
   

  	
  516

  	
   

  	
  280

  	
   

  
	
  Deferred revenue

  	
   

  	
  1,375

  	
   

  	
  1,216

  	
   

  
	
  Joint Venture
  Partners’ share of net assets of joint ventures (note 8(c))

  	
   

  	
  15,470

  	
   

  	
  13,983

  	
   

  
	
   

  	
   

  	
  52,903

  	
   

  	
  49,144

  	
   

  
	
  Shareholders’
  equity:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Share capital:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Authorized:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unlimited common
  shares, no par value

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unlimited
  preferred shares in series, no par value

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Issued:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  27,483,717 (2008
  — 27,416,993) common shares

  	
   

  	
  258,798

  	
   

  	
  258,202

  	
   

  
	
  Other equity
  instruments (note 6)

  	
   

  	
  3,236

  	
   

  	
  3,079

  	
   

  
	
  Additional paid
  in capital

  	
   

  	
  4,945

  	
   

  	
  5,097

  	
   

  
	
  Deficit

  	
   

  	
  (250,924

  	
  )

  	
  (247,460

  	
  )

  
	
  Accumulated
  other comprehensive income

  	
   

  	
  5,947

  	
   

  	
  10,878

  	
   

  
	
   

  	
   

  	
  22,002

  	
   

  	
  29,796

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Share
  consolidation (note 1) 

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Subsequent
  events (note 12)

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  74,905

  	
   

  	
  $

  	
  78,940

  	
   

  



 


See accompanying
notes to consolidated financial statements.


 


1

















 


WESTPORT
INNOVATIONS INC.


Consolidated Statements of Operations
(unaudited)


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


 


	
   

  	
   

  	
  Three months ended June 30

  	
   

  
	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Product revenue

  	
   

  	
  $

  	
  21,428

  	
   

  	
  $

  	
  11,842

  	
   

  
	
  Parts revenue

  	
   

  	
  4,081

  	
   

  	
  3,888

  	
   

  
	
   

  	
   

  	
  25,509

  	
   

  	
  15,730

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cost of revenue
  and expenses:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cost of revenue

  	
   

  	
  17,170

  	
   

  	
  10,392

  	
   

  
	
  Research and
  development (notes 6 and 7)

  	
   

  	
  7,163

  	
   

  	
  5,441

  	
   

  
	
  General and
  administrative (note 6)

  	
   

  	
  1,462

  	
   

  	
  1,113

  	
   

  
	
  Sales and
  marketing (note 6)

  	
   

  	
  2,595

  	
   

  	
  1,777

  	
   

  
	
  Foreign exchange
  loss (gain) (note 10)

  	
   

  	
  (92

  	
  )

  	
  539

  	
   

  
	
  Depreciation and
  amortization

  	
   

  	
  376

  	
   

  	
  367

  	
   

  
	
  Bank charges,
  interest and other (note 10)

  	
   

  	
  105

  	
   

  	
  58

  	
   

  
	
   

  	
   

  	
  28,779

  	
   

  	
  19,687

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss before
  undernoted

  	
   

  	
  (3,270

  	
  )

  	
  (3,957

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss from
  investment accounted for by the equity method (note 4(b))

  	
   

  	
  (80

  	
  )

  	
  —

  	
   

  
	
  Interest on
  long-term debt and amortization of discount

  	
   

  	
  —

  	
   

  	
  (770

  	
  )

  
	
  Interest and
  other income

  	
   

  	
  303

  	
   

  	
  229

  	
   

  
	
  Gain on sale of
  investments (note 4(a))

  	
   

  	
  3,813

  	
   

  	
  718

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income (loss)
  before income taxes and Joint Venture Partners’ share of income from joint
  ventures

  	
   

  	
  766

  	
   

  	
  (3,780

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income tax
  expense:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current

  	
   

  	
  101

  	
   

  	
  67

  	
   

  
	
  Future

  	
   

  	
  2,565

  	
   

  	
  297

  	
   

  
	
   

  	
   

  	
  2,666

  	
   

  	
  364

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss before
  Joint Venture Partners’ share of income from joint ventures

  	
   

  	
  (1,900

  	
  )

  	
  (4,144

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Joint Venture
  Partners’ share of net income from joint ventures (note 8)

  	
   

  	
  (1,564

  	
  )

  	
  (580

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss for the
  period

  	
   

  	
  $

  	
  (3,464

  	
  )

  	
  $

  	
  (4,724

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Basic and
  diluted loss per share

  	
   

  	
  $

  	
  (0.13

  	
  )

  	
  $

  	
  (0.22

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Weighted average
  common shares outstanding - Basic and diluted

  	
   

  	
  27,443,257

  	
   

  	
  21,641,626

  	
   

  



 


See accompanying
notes to consolidated financial statements.


 


2

















 


WESTPORT
INNOVATIONS INC.


Consolidated Statements of Comprehensive
Loss (unaudited)


(Expressed in thousands of Canadian
dollars)


 


	
   

  	
   

  	
  Three months ended June 30

  	
   

  
	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss for the
  period

  	
   

  	
  $

  	
  (3,464

  	
  )

  	
  $

  	
  (4,724

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Other
  comprehensive loss

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unrealized loss
  on available for sale securities, net of tax of $338 (2007 – $nil)

  	
   

  	
  (1,717

  	
  )

  	
  (1,218

  	
  )

  
	
  Reclassification
  of net realized gains on available for sale securities to net loss, net of
  tax of $676 (2007 - $nil)

  	
   

  	
  (3,137

  	
  )

  	
  (718

  	
  )

  
	
  Cumulative
  translation adjustment

  	
   

  	
  (77

  	
  )

  	
  —

  	
   

  
	
   

  	
   

  	
  (4,931

  	
  )

  	
  (1,936

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Comprehensive
  loss

  	
   

  	
  $

  	
  (8,395

  	
  )

  	
  $

  	
  (6,660

  	
  )

  



 


See accompanying
notes to consolidated financial statements.


 


3

















 


WESTPORT INNOVATIONS INC.


Consolidated
Statements of Shareholders’ Equity


(Expressed in thousands of Canadian
dollars, except share amounts)


 


Three months ended June 30, 2008


 


	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
  Accumulated

  other

  	
   

  	
  Total

  	
   

  
	
   

  	
   

  	
  Common

  	
   

  	
  Share

  	
   

  	
  Other equity

  	
   

  	
  Additional paid

  	
   

  	
  Accumulated

  	
   

  	
  comprehensive

  	
   

  	
  shareholders’

  	
   

  
	
   

  	
   

  	
  shares

  	
   

  	
  capital

  	
   

  	
  instruments

  	
   

  	
  in capital

  	
   

  	
  Deficit

  	
   

  	
  income

  	
   

  	
  equity

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance,
  March 31, 2007

  	
   

  	
  21,624,594

  	
   

  	
  232,830

  	
   

  	
  12,352

  	
   

  	
  5,301

  	
   

  	
  (239,865

  	
  )

  	
  —

  	
   

  	
  10,618

  	
   

  
	
  Transitional
  adjustment on adoption of new accounting standards for financial instruments,
  net of tax of $3,370

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  3,483

  	
   

  	
  17,032

  	
   

  	
  20,515

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance,
  April 1, 2007

  	
   

  	
  21,624,594

  	
   

  	
  232,830

  	
   

  	
  12,352

  	
   

  	
  5,301

  	
   

  	
  (236,382

  	
  )

  	
  17,032

  	
   

  	
  31,133

  	
   

  
	
  Issue of common
  shares on exercise of stock options

  	
   

  	
  232,024

  	
   

  	
  1,967

  	
   

  	
  —

  	
   

  	
  (762

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  1,205

  	
   

  
	
  Issue of common
  shares on exercise of performance share units

  	
   

  	
  60,383

  	
   

  	
  390

  	
   

  	
  (390

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Issue of common
  shares on conversion of subordinated convertible notes and settlement of
  accrued interest

  	
   

  	
  4,831,801

  	
   

  	
  21,759

  	
   

  	
  (7,569

  	
  )

  	
  —

  	
   

  	
  (763

  	
  )

  	
  —

  	
   

  	
  13,427

  	
   

  
	
  Issue of common
  shares on exercise of warrants

  	
   

  	
  668,191

  	
   

  	
  1,420

  	
   

  	
  (1,420

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Share issue
  costs

  	
   

  	
  —

  	
   

  	
  (164

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (164

  	
  )

  
	
  Stock-based
  compensation

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  106

  	
   

  	
  558

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  664

  	
   

  
	
  Net loss

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (10,315

  	
  )

  	
  —

  	
   

  	
  (10,315

  	
  )

  
	
  Other
  comprehensive loss

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (6,154

  	
  )

  	
  (6,154

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance,
  March 31, 2008

  	
   

  	
  27,416,993

  	
   

  	
  $

  	
  258,202

  	
   

  	
  $

  	
  3,079

  	
   

  	
  $

  	
  5,097

  	
   

  	
  $

  	
  (247,460

  	
  )

  	
  $

  	
  10,878

  	
   

  	
  $

  	
  29,796

  	
   

  
	
  Issue of common
  shares on exercise of stock options

  	
   

  	
  66,724

  	
   

  	
  596

  	
   

  	
  —

  	
   

  	
  (226

  	
  )

  	
  —

  	
   

  	
  —

  	
   

  	
  370

  	
   

  
	
  Stock-based
  compensation

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  157

  	
   

  	
  74

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  231

  	
   

  
	
  Net loss

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (3,464

  	
  )

  	
  —

  	
   

  	
  (3,464

  	
  )

  
	
  Other comprehensive
  loss

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  (4,931

  	
  )

  	
  (4,931

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Balance,
  June 30, 2008 (unaudited)

  	
   

  	
  27,483,717

  	
   

  	
  $

  	
  258,798

  	
   

  	
  $

  	
  3,236

  	
   

  	
  $

  	
  4,945

  	
   

  	
  $

  	
  (250,924

  	
  )

  	
  $

  	
  5,947

  	
   

  	
  $

  	
  22,002

  	
   

  



 


See accompanying notes to consolidated
financial statements.


 


4
















 


WESTPORT INNOVATIONS INC.


Consolidated Statements of Cash Flows


(Expressed in thousands of Canadian
dollars)


 


	
   

  	
   

  	
  Three months ended June 30

  	
   

  
	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
  (Unaudited)

  	
   

  	
  (Unaudited)

  	
   

  
	
  Cash flows from
  operations:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss for the
  period

  	
   

  	
  $

  	
  (3,464

  	
  )

  	
  $

  	
  (4,724

  	
  )

  
	
  Items not
  involving cash:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Depreciation and
  amortization

  	
   

  	
  376

  	
   

  	
  367

  	
   

  
	
  Stock-based
  compensation expense

  	
   

  	
  231

  	
   

  	
  113

  	
   

  
	
  Future income
  tax recovery

  	
   

  	
  2,565

  	
   

  	
  297

  	
   

  
	
  Change in
  deferred lease inducements

  	
   

  	
  (89

  	
  )

  	
  (57

  	
  )

  
	
  Gain on sale of
  investments

  	
   

  	
  (3,813

  	
  )

  	
  (718

  	
  )

  
	
  Joint Venture
  Partners’ share of net income from joint ventures

  	
   

  	
  1,564

  	
   

  	
  580

  	
   

  
	
  Loss from
  investment accounted for by the equity method

  	
   

  	
  80

  	
   

  	
  —

  	
   

  
	
  Interest on
  long-term debt and amortization of discount

  	
   

  	
  —

  	
   

  	
  770

  	
   

  
	
  Changes in
  non-cash operating working capital:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts
  receivable

  	
   

  	
  (1,887

  	
  )

  	
  986

  	
   

  
	
  Inventories

  	
   

  	
  (2,654

  	
  )

  	
  (251

  	
  )

  
	
  Prepaid expenses

  	
   

  	
  141

  	
   

  	
  145

  	
   

  
	
  Accounts payable
  and accrued liabilities

  	
   

  	
  (511

  	
  )

  	
  (1,521

  	
  )

  
	
  Deferred revenue

  	
   

  	
  160

  	
   

  	
  44

  	
   

  
	
  Warranty
  liability

  	
   

  	
  2,294

  	
   

  	
  (565

  	
  )

  
	
   

  	
   

  	
  (5,007

  	
  )

  	
  (4,534

  	
  )

  
	
  Cash flows from
  investments:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Purchase of
  equipment, furniture and leasehold improvements

  	
   

  	
  (2,349

  	
  )

  	
  (182

  	
  )

  
	
  Sale of
  short-term investments, net

  	
   

  	
  15,202

  	
   

  	
  2,909

  	
   

  
	
  Disposition of
  long-term investments

  	
   

  	
  5,220

  	
   

  	
  1,119

  	
   

  
	
  Loan receivable

  	
   

  	
  (1,682

  	
  )

  	
  —

  	
   

  
	
  Investment in
  joint venture (note 4(b))

  	
   

  	
  (1,500

  	
  )

  	
  —

  	
   

  
	
  Leasehold
  inducement

  	
   

  	
  325

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
  15,216

  	
   

  	
  3,846

  	
   

  
	
  Cash flows from
  financing:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Issue of demand
  instalment loan

  	
   

  	
  500

  	
   

  	
  —

  	
   

  
	
  Repayment of
  demand instalment loan

  	
   

  	
  (397

  	
  )

  	
  (135

  	
  )

  
	
  Repayment of
  other long-term debt

  	
   

  	
  (30

  	
  )

  	
  (18

  	
  )

  
	
  Shares issued
  for cash

  	
   

  	
  370

  	
   

  	
  575

  	
   

  
	
   

  	
   

  	
  443

  	
   

  	
  422

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Effect of
  foreign exchange on cash and cash equivalents

  	
   

  	
  (186

  	
  )

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Increase in cash
  and cash equivalents

  	
   

  	
  10,466

  	
   

  	
  (266

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash
  equivalents, beginning of period

  	
   

  	
  7,560

  	
   

  	
  1,702

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash
  equivalents, end of period

  	
   

  	
  $

  	
  18,026

  	
   

  	
  $

  	
  1,436

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Supplementary
  information:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest paid

  	
   

  	
  $

  	
  62

  	
   

  	
  $

  	
  30

  	
   

  
	
  Taxes paid

  	
   

  	
  25

  	
   

  	
  —

  	
   

  
	
  Non-cash
  transactions:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Purchase of
  equipment, furniture and leasehold improvements by assumption of capital
  lease obligation

  	
   

  	
  50

  	
   

  	
  —

  	
   

  
	
  Shares issued on
  exercise of performance share units

  	
   

  	
  —

  	
   

  	
  135

  	
   

  



 


See accompanying
notes to consolidated financial statements.


 


5

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements
(unaudited)


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


 


Three months ended June 30, 2008 and
2007


 


1.                         Basis of
presentation:


 


The unaudited consolidated balance sheet
as at June 30, 2008, the unaudited consolidated statements of operations,
comprehensive loss and cash flows for the three months ended June 30, 2008
and 2007 and the unaudited consolidated statements of shareholders’ equity for
the three months ended June 30, 2008 have been prepared in accordance with
Canadian generally accepted accounting principles for interim financial
statements.  The accompanying unaudited
consolidated financial statements do not include all information and footnote
disclosures required under Canadian generally accepted accounting principles
for annual financial statements. Except as described in note 2, these financial
statements have been prepared, on a basis consistent with, and should be read
in conjunction with, the consolidated financial statements and notes thereto
for the fiscal year ended March 31, 2008.


 


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


 


In the opinion of management, all
adjustments (consisting solely of normal recurring accruals) considered
necessary for a fair presentation of the financial position, results of
operations and cash flows as at June 30, 2008 and for all periods
presented have been included.  Certain
comparative amounts have been reclassified to conform with the presentation
adopted in the current period.  Shares,
share options, performance share units, warrants and per share amounts have
been adjusted on a retroactive basis to reflect the three-and-one-half-to-one
share consolidation (3.5:1) completed on July 21, 2008.


 


2.                         Accounting
policies:


 


Stock-based
compensation plans:


 


On April 1, 2008, the Company changed its
accounting policy for stock-based compensation to estimate forfeitures on the
date of grant and to calculate stock-based compensation based on options
expected to vest.  Previously, the
Company recognized the effect on stock-based compensation of forfeitures of
options prior to vesting as they occurred.  On the date of the change in accounting
policy, the Company determined that the effect of forfeitures was not material,
and accordingly, the change resulted in no adjustment to opening deficit or for
any of the prior periods presented.


 


Financial
instruments – Disclosures:


 


Effective April 1, 2008, the Company adopted CICA Handbook Section 3862,
Financial instruments - Disclosures and Section 3863,
Financial Instruments - Presentation.  Generally, the new sections replace Section 3861,
Financial Instruments - Disclosure and Presentation.  These new sections established standards for
the presentation of financial instruments and non-financial derivatives and
increased disclosure requirements including disclosure about the nature and
extent of risks arising from financial instruments and how the entity manages
those risks (see note 10).  Adoption of Section 3863
did not impact the consolidated financial statements.


 


6

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements
(unaudited)


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


 


Three months ended June 30, 2008 and
2007


 


2.                         Accounting
policies (continued):


 


Capital Disclosures:


 


Effective,
April 1, 2008 the Company adopted CICA Handbook Section 1535, Capital Disclosures, which establishes standards for
disclosing information about the Company capital and how it is managed (see
note 11).


 


Inventory:


 


Effective,
April 1, 2008, the Company adopted CICA Handbook Section 3031, Inventories. The new standard provides more guidance on the
measurement and disclosure requirements for inventories. The new standard
requires inventory to be measured at the lower of cost and net realizable
value.  The new standard also allows the
reversals of previous write-downs to the net realizable value when there is a
subsequent increase in the value of inventories. Adoption of this standard had
no impact on the consolidated financial statements. 


 


Foreign currency:


 


During the period, the Company determined that Cummins
Westport Inc. (“CWI”), with a US dollar functional currency, is economically,
financially and operationally independent of the Company and the Company’s
exposure to exchange rate changes is now limited to the Company’s net
investment in CWI. Accordingly, the accounts of CWI are translated into
Canadian dollars as follows:


 


(i)                    Revenue and expenses at the average rate of exchange.


 


(ii)                 Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date (previously non-monetary assets were
translated at historical costs).


 


(iii)              Exchange
gains and losses arising from translation are included in a separate component
of accumulated other comprehensive income (previously exchange gains and losses
were included in net loss).


 


International
Financial Reporting Standards:


 


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 (“IFRS”) as
issued by the International Accounting Standards Board over a transitional
period to be completed by 2011.  The
Company will be required to report under IFRS effective for interim and annual
financial statements relating to its fiscal year beginning on April 1,
2011.


 


Adoption of IFRS will impact all
areas of financial accounting and reporting.  The Company is in
the process of assessing the impacts of the Canadian convergence initiative and
is developing a conversion plan.


 


7

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements
(unaudited)


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


 


Three months ended June 30, 2008 and
2007


 


3.                         Inventories:


 


	
   

  	
   

  	
  June 30,

  2008

  	
   

  	
  March 31,

  2008

  	
   

  
	
   

  	
   

  	
  (Unaudited)

  	
   

  	
   

  	
   

  
	
  Finished goods

  	
   

  	
  $

  	
  4,407

  	
   

  	
  $

  	
  4,407

  	
   

  
	
  Parts

  	
   

  	
  5,804

  	
   

  	
  4,136

  	
   

  
	
  Work-in-process

  	
   

  	
  1,463

  	
   

  	
  477

  	
   

  
	
   

  	
   

  	
  $

  	
  11,674

  	
   

  	
  $

  	
  9,020

  	
   

  



 


During the three months ended June 30, 2008,  we recognized 
$14,016 (2007 - $9,744) related to inventoriable items in cost of sales.


 


Amounts removed from inventory and included in cost of
sales is based on standard cost which approximates weighted average cost and
variances between actual and standard costs are included in cost of sales.  Cost of inventory includes depreciation and
amortization where applicable but depreciation and amortization related to
inventory sold is included in depreciation and amortization expense.


 


4.                         Long-term
investments:


 


	
   

  	
   

  	
  June 30,

  2008

  	
   

  	
  March 31,

  2008

  	
   

  
	
   

  	
   

  	
  (Unaudited)

  	
   

  	
   

  	
   

  
	
  Clean Energy
  Fuels Corp. (a)

  	
   

  	
  $

  	
  11,425

  	
   

  	
  $

  	
  18,693

  	
   

  
	
  Juniper Engines
  Inc. (b)

  	
   

  	
  1,420

  	
   

  	
  —

  	
   

  
	
  Other
  investments

  	
   

  	
  54

  	
   

  	
  61

  	
   

  
	
   

  	
   

  	
  $

  	
  12,899

  	
   

  	
  $

  	
  18,754

  	
   

  



 






(a)                    As at June 30, 2008, the Company owned
an approximate 2% (March 31, 2008 - 3%) interest in Clean Energy Fuels
Corp. (“CEFC”), an owner and operator of natural gas refueling facilities.  During the three months ended June 30,
2008, the Company sold 387,960 shares of CEFC for net proceeds of $5,218 (2007
- $1,119) resulting in a gain on sale of $3,538 (2007 - $718).  As at June 30, 2008, the Company owned
975,111 shares of CEFC which have been valued at a closing market price of
$11.72 per share (US$11.49 per share).


 


(b)                   On October 26, 2007, the Company and
OMVL SpA (“OMVL”) entered into a joint venture agreement, engineering
agreements and supply agreements to design, produce and sell alternative fuel
engines in the sub-5 litre class for global applications.  Based in Pernumia, Italy, OMVL designs,
manufactures and markets complete fueling systems for new vehicles and for the
aftermarket conversion of engines from gasoline (petrol) to compressed natural
gas and liquid petroleum gas.  Under the
terms of the joint venture agreement, OMVL and the Company share 51% and 49%,
respectively, of the profits or losses of the venture.  The jointly controlled company is
headquartered in Vancouver, Canada and will continue to exploit the global
engineering, production and distribution strengths of OMVL and its parent
company, SIT Group, to deliver engines worldwide.  The Company supports the new venture through
supply of technology, design, testing and market development services.  On April 1, 2008, the Company
contributed $1,500 to the formation of the joint venture.


 


8

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements
(unaudited)


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


 


Three months ended June 30, 2008 and
2007


 


4.                         Long-term
investments (continued):


 


(b)                   The Company has determined that Juniper is a
variable interest entity.  However, the
Company is not the primary beneficiary and has accounted for its interest in
Juniper using the equity method.


 


During the three months ended June 30,
2008, the Company recognized a loss of $80 (2007 – $nil) as loss from
investment accounted for by the equity method.


 


5.                         Stock
options and other stock-based plans:


 


	
   

  	
   

  	
  Three months ended

  June 30, 2008

  	
   

  	
  Three months ended

  June 30, 2007

  	
   

  
	
   

  	
   

  	
  Number of

  shares

  	
   

  	
  Weighted

  average

  exercise

  price

  	
   

  	
  Number of

  shares

  	
   

  	
  Weighted

  average

  exercise

  price

  	
   

  
	
   

  	
   

  	
  (Unaudited)

  	
   

  	
  (Unaudited)

  	
   

  	
  (Unaudited)

  	
   

  	
  (Unaudited)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Outstanding,
  beginning of period

  	
   

  	
  1,235,799

  	
   

  	
  $

  	
  6.96

  	
   

  	
  1,493,998

  	
   

  	
  $

  	
  7.18

  	
   

  
	
  Granted

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  8,571

  	
   

  	
  6.69

  	
   

  
	
  Exercised

  	
   

  	
  (66,724

  	
  )

  	
  5.54

  	
   

  	
  (111,845

  	
  )

  	
  5.15

  	
   

  
	
  Cancelled/expired

  	
   

  	
  (1,373

  	
  )

  	
  19.87

  	
   

  	
  (4,899

  	
  )

  	
  10.96

  	
   

  
	
  Outstanding, end
  of period

  	
   

  	
  1,167,702

  	
   

  	
  $

  	
  7.04

  	
   

  	
  1,385,825

  	
   

  	
  $

  	
  6.79

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Options
  exercisable, end of period

  	
   

  	
  765,675

  	
   

  	
  $

  	
  7.94

  	
   

  	
  791,404

  	
   

  	
  $

  	
  8.02

  	
   

  



 


During
the three months ended June 30, 2008, the Company recognized $157 (2007 –
$86) in stock-based compensation related to stock options.  No options were granted. The fair value of
the options granted in the three months ended June 30, 2007 was determined
using the Black-Scholes option pricing model using the following weighted
average assumptions:  expected dividend
yield – nil%; expected stock price volatility – 59%; risk free interest rate –
4.79%; expected life of options – 5 years. 
The weighted average grant date fair value for options granted in the
three months ended June 30, 2007 was $3.68.  


 


6.                           Other
equity instruments:


 


Other
equity instruments includes the value assigned to performance share units
(“PSUs”) issued by the Company that have vested but have not been
exercised.  During the three months ended
June 30, 2008, no PSUs (2007 – 339,614) were granted.  No PSUs were exercised during the three
months ended June 30, 2008 (2007 – 24,912) and as at June 30, 2008,
there are 1,082,990 PSUs outstanding of which 554,420 were exercisable.  During the three months ended June 30,
2008, the Company recognized stock-based compensation expense of $74 (2007 –
$27) related to PSU’s which vested during the period.


 


The
stock-based compensation associated with the Performance Share Unit Plan and
the stock option plan (note 5), is included in operating expenses as follows:


 


	
   

  	
   

  	
  Three months ended June 30

  	
   

  
	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Research and
  development

  	
   

  	
  $

  	
  57

  	
   

  	
  $

  	
  20

  	
   

  
	
  General and
  administrative

  	
   

  	
  98

  	
   

  	
  77

  	
   

  
	
  Sales and
  marketing

  	
   

  	
  76

  	
   

  	
  16

  	
   

  
	
   

  	
   

  	
  $

  	
  231

  	
   

  	
  $

  	
  113

  	
   

  



 


9

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements
(unaudited)


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


 


Three months ended June 30, 2008 and
2007


 


7.                           Research
and development expenses:


 


Research
and development expenses are recorded net of program funding received or
receivable.  For the three months ended June 30,
2008 and 2007, the following research and development expenses had been
incurred and program funding received or receivable:


 


	
   

  	
   

  	
  Three months ended June 30

  	
   

  
	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Research and
  development expenses

  	
   

  	
  $

  	
  7,882

  	
   

  	
  $

  	
  6,731

  	
   

  
	
  Program funding

  	
   

  	
  (719

  	
  )

  	
  (1,290

  	
  )

  
	
   

  	
   

  	
  $

  	
  7,163

  	
   

  	
  $

  	
  5,441

  	
   

  



 


8.                           Investment
in Joint Ventures:


 


(a)                    Cummins
Westport Inc.:


 


The consolidated financial statements
include 100% of the assets, liabilities, revenue and expenses of CWI as at and
for all periods presented.  From January 1,
2005, Cummins shares equally in the profits and losses of CWI.  However, the Company has determined that CWI
is a variable interest entity and that the Company is the primary beneficiary.  Accordingly, the Company continues to
consolidate CWI with Cummins’ share of CWI’s income and losses included in
“Joint venture partners’ share of income from joint ventures”. 


 


Assets,
liabilities, revenue and expenses of CWI included in the consolidated financial
statements of the Company as at and for the periods presented are as follows:


 


	
   

  	
   

  	
  June 30,

  2008

  	
   

  	
  March 31,

  2008

  	
   

  
	
   

  	
   

  	
  (Unaudited)

  	
   

  	
   

  	
   

  
	
  Current assets:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash
  equivalents

  	
   

  	
  $

  	
  13,119

  	
   

  	
  $

  	
  137

  	
   

  
	
  Short-term
  investments

  	
   

  	
  —

  	
   

  	
  13,713

  	
   

  
	
  Accounts
  receivable

  	
   

  	
  4,415

  	
   

  	
  3,503

  	
   

  
	
  Loan receivable

  	
   

  	
  8,456

  	
   

  	
  6,774

  	
   

  
	
  Prepaid expenses

  	
   

  	
  71

  	
   

  	
  108

  	
   

  
	
  Current portion
  of future income tax assets

  	
   

  	
  7,362

  	
   

  	
  4,944

  	
   

  
	
   

  	
   

  	
  33,423

  	
   

  	
  29,179

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Future income
  tax assets

  	
   

  	
  399

  	
   

  	
  4,366

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Equipment, furniture
  and leasehold improvements

  	
   

  	
  403

  	
   

  	
  166

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  34,225

  	
   

  	
  $

  	
  33,711

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current
  liabilities:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Accounts payable
  and accrued liabilities

  	
   

  	
  $

  	
  1,986

  	
   

  	
  $

  	
  2,131

  	
   

  
	
  Current portion
  of deferred revenue

  	
   

  	
  92

  	
   

  	
  69

  	
   

  
	
  Current portion
  of warranty liability

  	
   

  	
  5,415

  	
   

  	
  4,689

  	
   

  
	
   

  	
   

  	
  $

  	
  7,493

  	
   

  	
  $

  	
  6,889

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Long-term
  liabilities

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Warranty
  liability

  	
   

  	
  $

  	
  5,653

  	
   

  	
  $

  	
  3,985

  	
   

  
	
  Deferred revenue

  	
   

  	
  573

  	
   

  	
  386

  	
   

  
	
   

  	
   

  	
  $

  	
  6,226

  	
   

  	
  $

  	
  4,371

  	
   

  



 


10

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements
(unaudited)


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


 


Three months ended June 30, 2008 and
2007


 


8.                         Investment
in Joint Ventures (continued):


 


(a)                    Cummins
Westport Inc. (continued):


 


The loan receivable above of $8,456 was loaned to Cummins
under a demand loan agreement, with interest accruing monthly at the one month
prime corporate paper rate.  The loan is
unsecured.


 


	
   

  	
   

  	
  Three months ended June 30

  	
   

  
	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
  (Unaudited)

  	
   

  	
  (Unaudited)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Product revenue

  	
   

  	
  $

  	
  21,040

  	
   

  	
  $

  	
  10,719

  	
   

  
	
  Parts revenue

  	
   

  	
  4,081

  	
   

  	
  3,888

  	
   

  
	
   

  	
   

  	
  25,121

  	
   

  	
  14,607

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cost of revenue
  and expenses:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cost of revenue

  	
   

  	
  16,967

  	
   

  	
  9,495

  	
   

  
	
  Research and
  development

  	
   

  	
  1,598

  	
   

  	
  1,978

  	
   

  
	
  General and
  administrative

  	
   

  	
  442

  	
   

  	
  154

  	
   

  
	
  Sales and
  marketing

  	
   

  	
  1,430

  	
   

  	
  1,117

  	
   

  
	
   

  	
   

  	
  20,437

  	
   

  	
  12,744

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income before
  undernoted

  	
   

  	
  4,684

  	
   

  	
  1,863

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Interest and
  investment income

  	
   

  	
  202

  	
   

  	
  177

  	
   

  
	
  Effect of
  foreign currency translation

  	
   

  	
  —

  	
   

  	
  (526

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income before
  income taxes

  	
   

  	
  4,886

  	
   

  	
  1,514

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income tax
  expense:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Current

  	
   

  	
  101

  	
   

  	
  57

  	
   

  
	
  Future

  	
   

  	
  1,551

  	
   

  	
  297

  	
   

  
	
   

  	
   

  	
  1,652

  	
   

  	
  354

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Income for the
  period

  	
   

  	
  3,234

  	
   

  	
  1,160

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Joint Venture
  Partner’s share of net income from joint venture

  	
   

  	
  (1,617

  	
  )

  	
  (580

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Company’s share
  of income

  	
   

  	
  $

  	
  1,617

  	
   

  	
  $

  	
  580

  	
   

  



 


(b)                   BTIC
Westport Inc.:


 


On July 21, 2006, the Company and Beijing Tianhai
Industry Co. Ltd. (“BTIC”) of Beijing, China formed BWI to market liquefied
natural gas (“LNG”) fuel tanks for vehicles. 
Through the 50:50 joint venture agreement and related license and supply
agreements, BTIC and Westport share equally in the profits on products
developed and sold by the joint venture. 
During the year ended March 31, 2008, the Company contributed $425
(US$400) to the formation of this joint venture.


 


11

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements
(unaudited)


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


 


Three months ended June 30, 2008 and
2007


 


8.                         Investment
in Joint Ventures (continued):


 


(b)                   BTIC
Westport Inc. (continued):


 


The consolidated financial statements include 100% of the
assets, liabilities, revenue and expenses of BWI since the Company has
determined that BWI is a variable interest entity and that the Company is the
primary beneficiary.  Accordingly, the
Company consolidates BWI and BTIC’s share of BWI’s income and losses is
included in “Joint venture partners’ share of income from joint ventures”.  For the three months ended June 30,
2008, the Company’s share of loss from BWI was $53.


 


(c)                    Joint
Venture Partners’ share of net assets of joint ventures:


 


	
   

  	
   

  	
  June 30,

  2008

  	
   

  	
  March 31,

  2008

  	
   

  
	
   

  	
   

  	
  (Unaudited)

  	
   

  	
   

  	
   

  
	
  Cummins Westport
  Inc. (a)

  	
   

  	
  $

  	
  15,349

  	
   

  	
  $

  	
  13,809

  	
   

  
	
  BTIC Westport
  Inc. (b)

  	
   

  	
  121

  	
   

  	
  174

  	
   

  
	
   

  	
   

  	
  $

  	
  15,470

  	
   

  	
  $

  	
  13,983

  	
   

  



 


9.                           Segmented
information:


 


The
Company currently operates in one operating segment which involves the research
and development and the related commercialization of engines and fuel systems
operating on gaseous fuels.  The majority
of the Company’s equipment, furniture and leasehold improvements are located in
Canada.  For the three months ended June 30,
2008, 83% (2007 - 49%) of the Company’s revenue was from sales in North
America, 7% (2007 - 30%) from sales in Asia, and 10% (2007 - 21%) from sales
elsewhere.


 


10.                   Financial
instruments:


 


(a)                    Financial
risk management:


 


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


 


(b)                   Liquidity:


 


Liquidity risk is the risk that the Company will not be
able to meet its financial obligations as they fall due.  The Company has sustained losses and negative
cash flows from operations since inception.  
At June 30, 2008, the Company has approximately $18,026 of cash and
cash equivalents.


 


12
















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements
(unaudited)


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


 


Three
months ended June 30, 2008 and 2007


 


10.          Financial instruments
(continued):


 


(b)        Liquidity (continued):


 


The following are the contractual maturities of
financial obligations as at June 30, 2008:


 


	
   

  	
   

  	
  Carrying

  amount

  	
   

  	
  Contractual

  cash flows

  	
   

  	
  < 1 year

  	
   

  	
  2-3

  years

  	
   

  	
  4-5

  years

  	
   

  	
  > 5 years

  	
   

  
	
  Accounts payable
  and accrued liabilities

  	
   

  	
  $

  	
  7,959

  	
   

  	
  $

  	
  7,959

  	
   

  	
  $

  	
  7,959

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  	
  $

  	
  —

  	
   

  
	
  Demand instalment loan (1)(2)

  	
   

  	
  5,879

  	
   

  	
  6,647

  	
   

  	
  1,839

  	
   

  	
  2,968

  	
   

  	
  1,840

  	
   

  	
  —

  	
   

  
	
  Short-term debt (3)

  	
   

  	
  5,955

  	
   

  	
  5,955

  	
   

  	
  5,955

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
  Long-term debt

  	
   

  	
  92

  	
   

  	
  92

  	
   

  	
  48

  	
   

  	
  36

  	
   

  	
  8

  	
   

  	
  —

  	
   

  
	
  Operating lease commitments

  	
   

  	
  —

  	
   

  	
  6,201

  	
   

  	
  1,303

  	
   

  	
  2,515

  	
   

  	
  1,892

  	
   

  	
  491

  	
   

  
	
  Royalty payments(4)

  	
   

  	
  337

  	
   

  	
  28,189

  	
   

  	
  1,350

  	
   

  	
  2,700

  	
   

  	
  2,700

  	
   

  	
  21,439

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  $

  	
  20,222

  	
   

  	
  $

  	
  55,043

  	
   

  	
  $

  	
  18,454

  	
   

  	
  $

  	
  8,219

  	
   

  	
  $

  	
  6,440

  	
   

  	
  $

  	
  21,930

  	
   

  



 






(1)     Includes
interest at the interest rate in effect on June 30, 2008.


 


(2)     Demand
instalment loan is repayable over five years unless the bank demands early
payment.


 


(3)     Short-term
debt is repayable only from the sale of certain LNG systems.  The Company has assumed these systems will be
sold within a year.


 


(4)     From
fiscal 2009 to 2015, inclusive, the Company is obligated to pay annual
royalties equal to the greater of $1,350 or 0.33% of the Company’s gross annual
revenue from all sources, provided that gross revenue exceeds $13,500 in any
aforementioned fiscal year, up to a maximum of $28,189. The Company has assumed
the minimum required payments.


 


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


 


(c)        Credit risk:


 


Credit
risk arises from the potential that a counterparty to a financial instrument
fails to meet its contractual obligations and arises principally from the
Company’s cash and cash equivalents, short-term investments, accounts
receivable and loan receivable.  The
Company manages credit risk associated with cash and cash equivalents and
short-term investments by regularly consulting with its current bank and
investment advisors and investing primarily in liquid short-term paper issued
by Schedule 1 Canadian banks, R1 high rated companies and governments.  While the Company does not hold asset-backed
securities directly, these parties may be exposed in varying degrees to
asset-backed securities and U.S. sub-prime mortgages.  The Company monitors its portfolio and its
policy is to diversify its investments to manage this potential risk.


 


13

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements
(unaudited)


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


 


Three
months ended June 30, 2008 and 2007


 


10.          Financial instruments
(continued):


 


The
Company is also exposed to credit risk with respect to uncertainties as to
timing and amount of collectibility of accounts receivable and loan
receivable.  26% (March 31, 2008 -
30%) of accounts receivable relates to government grants receivable and 46% (March 31,
2008 - 48%) is due from Cummins Inc., a large U.S. based engine manufacturer
and our joint venture partner, relating to proceeds for the sale of products
collected by Cummins on the Company’s behalf. 
The loan receivable is due from Cummins. 
In order to minimize the risk of loss for trade receivables the
Company’s extension of credit to customers involves review and approval by
senior management as well as progress payments as contracts are executed.  Most sales are invoiced with payment terms in
the range of 30 to 90 days. The Company reviews its trade receivable accounts
and regularly recognizes an allowance for doubtful receivables as soon as the
account is determined not to be fully collectible. Estimates for allowance for
doubtful debts are determined by a customer-by-customer evaluation of
collectibility at each balance sheet reporting date, taking into account the amounts
that are past due and any available relevant information on the customers’
liquidity and going concern problems.


 


The
carrying amount of cash and cash equivalents, short-term investments, accounts
receivable and loan receivable of $35,397 at June 30, 2008 represents the
Company’s maximum credit exposure.


 


(d)     Foreign currency risk:


 


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


 


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


 


14

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements
(unaudited)


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


 


Three months ended June 30, 2008 and 2007


 


10.          Financial
instruments (continued):


 


(d)        Foreign currency risk (continued):


 


The U.S. dollar carrying amount subject to exposure to
foreign currency risk at June 30, 2008 is as follows:


 


	
   

  	
   

  	
  U.S. dollars

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  Cash and cash
  equivalents

  	
   

  	
  $

  	
  3,831

  	
   

  
	
  Accounts receivable

  	
   

  	
  382

  	
   

  
	
  Long-term
  investments 

  	
   

  	
  11,204

  	
   

  
	
  Accounts payable

  	
   

  	
  322

  	
   

  
	
  Short-term debt

  	
   

  	
  5,840

  	
   

  
					



 


If
foreign exchange rates on June 30, 2008 had changed by 0.25%, with all
other variables held constant, net loss for the three months ended June 30,
2008 would have changed by $5 and other comprehensive income by $24.  The Company’s exposure to currencies other
than U.S. dollars is not material.


 


(e)        Interest rate risk:


 


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


 


If
interest rates for the three months ended June 30, 2008 had changed by 25
basis points, with all other variables held constant, net loss for the three
months ended June 30, 2008 would have changed by $2.


 


(f)         Equity price risk:


 


The
value of our equity investment in CEFC, a publicly traded company, is subject
to market price volatility.  This
investment is classified as available for sale. As of June 30, 2008, every
dollar change in the stock price of CEFC, would result in a change in other
comprehensive income of $975.


 


15

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements
(unaudited)


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


 


Three
months ended June 30, 2008 and 2007


 


10.          Financial
instruments (continued):


 


(g)        Fair value of financial instruments:


 


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


 


The Company’s short- and
long-term investments are recorded at fair value except for its interest in
Juniper Engines Inc. which is accounted for using the equity method and other
investments which are carried at cost (note 4) due to the lack of a readily
available market for these securities.


 


The
carrying value reported in the balance sheets for obligations under capital
lease, which is based upon discounted cash flows, approximates its fair
value.  The fair value of the Company’s
demand instalment loan and short-term debt are not materially different from its
carrying value based on market rates of interest.


 


The
carrying value of the Company’s obligation to issue warrants represents
management’s best estimate of its fair value.


 


11.          Management
of capital:


 


As at June 30, 2008, the Company’s capital is composed
of share capital and its $13,000 line of credit with a Schedule 1 Canadian
bank.  Subsequent to June 30, 2008,
the Company raised $15,000 in debenture units, the primary terms of which are
described in note 12(a).


 


The Company’s
objectives when managing capital are as follows:


 


·      to
safeguard the entity’s ability to continue as a going concern, so that it can
continue to provide returns for shareholders and benefits for other
stakeholders;


 


·      to
maintain sufficient cash, cash and cash equivalents on hand to pay make service
debt payments as they become due and to meet externally imposed capital
requirements (the Company must maintain cash and cash equivalents and short and
long-term investments of at least 1.5 times the amount drawn against its line
of credit and outstanding letters of credit); and


 


·      to
have sufficient cash, cash equivalents, short term investments and marketable
available for sale securities on hand to fund the Company’s business plans.


 


The Company’s primary uses of capital are to finance
product development, market development, working capital, capital expenditures,
and operating losses.  The Company
currently funds these requirements from internally generated cash flows,
primarily from its 50% share of CWI and non-CWI revenues, sales of Clean Energy
shares, amounts drawn against its line of credit, government funding and
proceeds from the offering of debt or equity securities.


 


There were no changes to the Company’s approach to capital
management during the three months ended June 30, 2008.


 


16

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements
(unaudited)


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


 


Three
months ended June 30, 2008 and 2007


 


12.          Subsequent events:


 


(a)        On July 3, 2008, the Company completed the sale and issue of
15,000 debenture units of the Company for total gross proceeds of $15,000.  Each Debenture Unit consists of one unsecured
subordinated debenture in the principal amount of $1 bearing interest at 9% per
annum and 180 (post share consolidation – 51) common share purchase warrants
exercisable into common shares of the Company at any time for a period of two
years from the date of issue at $5.35 (post share consolidation – $18.73).  The Company has the option to redeem the
debentures at any time after 12 months and before 18 months from the date of
issue at 115% of their principal amount and at 110% of the principal amount
after 18 months.  Interest is payable
semi-annually and the debentures mature on July 3, 2011.  A total of 2,700,000 warrants (post share
consolidation – approximately 771,428) were issued. The Company also issued
161,413 (post share consolidation – approximately 46,118) broker warrants which
are exercisable into common shares of the Company at $4.60 (post share
consolidation – $16.10) for a period of two years.


 


(b)        On
July 16, 2008, the Company announced that it had entered into a joint
venture agreement with Weichai Power Co., Ltd. (“Weichai Power”), China’s
largest heavy duty engine manufacturer, and Hong Kong Peterson (CNG) Equipment
Limited (“Hong Kong Peterson”) to form a new entity, Weichai Westport Inc.
(“WWI”).  WWI will research, develop,
design, manufacture, market, distribute and sell advanced, alternative fuel
engines (and relevant parts and kits) for use in automobiles, heavy duty
trucks, power generation and shipping applications.  Under the terms of the 30-year joint venture
agreement, Westport’s initial investment to acquire a 35% share of the joint
venture is expected to be approximately US$4.5 million (30 million RMB).  Weichai Power and Hong Kong Peterson will
hold a 40% and 25% interest, respectively, in WWI.


 


(c)        On
July 21, 2008, the Company filed a preliminary prospectus in Canada and a
registration statement on Form F-10 with the U.S. Securities and Exchange
Commission in connection with its planned initial public offering of common
shares in the United States. The preliminary prospectus and the registration
statement relating to these securities have not yet become effective.


 


17

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements
(unaudited)


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


 


Three
months ended June 30, 2008 and 2007


 


13.          Reconciliation
to United States generally accepted accounting standards:


 


The interim consolidated
financial statements of the Company as at June 30, 2008 and for the three
months ended June 30, 2008 and 2007 have been prepared in accordance with Canadian
generally accepted accounting principles (“GAAP”) for interim financial
reporting. Such principles differ in certain respects from United States (“US”)
GAAP. For information on material differences between Canadian GAAP and US
GAAP, references should be made to note 23, Reconciliation to US Generally
Accepted Accounting Principles in the consolidated financial statements for the
years ended March 31, 2008 and 2007 filed on SEDAR on July 21, 2008.


 


The
significant measurement differences listed in the US GAAP Reconciliations that
are applicable to the interim consolidated financial statements as at June 30,
2008 and for the three months ended June 30, 2008 and 2007, are as
follows:


 


(a)        Convertible notes:


 


For
Canadian GAAP purposes, on issue of the convertible notes on June 12, 2006
to Perseus L.L.C. the Company allocated certain amounts to the value of the
warrants and conversion options based on their estimated fair value with the
difference between the gross proceeds and the value of the warrants and
conversion options allocated to the debt. 
For US GAAP purposes, the allocation between the debt and the warrants
would be done on a relative fair value basis. 
In addition, under US GAAP, an amount is allocated only to a beneficial
conversion option when the market price of the shares into which the debt is
convertible exceeds the effective exercise price.  For US GAAP purposes, only the second tranche
of the notes issued in January 2007 was deemed to have a beneficial
conversion option.


 


Accordingly,
for US GAAP purposes, the adjustment to interest on long-term debt and
amortization of discount for the three months ended June 30, 2008 and 2007
associated with the difference in the amounts allocated to the debt was $nil
and $113, respectively.


 


(b)        Investments:


 


Under
Canadian GAAP, the income tax recovery generated by a reversal of a previously
recognized future income tax valuation allowance to reduce future income tax
liabilities generated by mark to market adjustments on available for sale
securities is recognized in net loss for the year while the related tax expense
is included in accumulated other comprehensive income (“AOCI”) until the shares
are sold at which time the tax expense is included in net loss.  Under US GAAP, the reversal of the valuation
allowance would be recognized in other comprehensive income.  Accordingly, for US GAAP purposes, future
income tax expense of $1,014 recognized under Canadian GAAP would not be
recognized in the three months ended 30, 2008.


 


18

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements
(unaudited)


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


 


Three
months ended June 30, 2008 and 2007


 


13.          Reconciliation
to United States generally accepted accounting standards (continued):


 


(c)        Acquired in-process research and development costs:


 


Under
Canadian GAAP, acquired in-process research and development costs are
capitalized and amortized to earnings. 
For US GAAP purposes, such in-process research and development costs are
expensed immediately if there is no alternative use for the research and
developments.  Accordingly, amortization
of in-process research and development recorded under Canadian GAAP for the
three months ended June 30, 2008 and 2007 of $36 and $36, respectively,
would not be recognized under U.S. GAAP. 
As at June 30, 2008, the carrying value of intellectual property
would be reduced by $538 (March 31, 2008 - $574) with a corresponding
increase in deficit.


 


(d)        Stock-based compensation:


 


For
US GAAP purposes, the Company accounts for stock-based compensation in
accordance with Statement of Financial Accounting Standards No. 123(R), Share-based Payment (“SFAS 123(R)”) and estimates
forfeitures on the date of grant and calculates stock-based compensation based
on options expected to vest.  Prior to April 1,
2008, the Company accounted for forfeitures as they occurred for Canadian GAAP
purposes.  The Company determined that
the effect of forfeitures was not material for prior periods. On April 1,
2008, for Canadian GAAP, the Company changed its accounting policy and
estimates forfeitures on the date of grant and calculates stock-based
compensation based on options expected to vest. 
Accordingly, this GAAP difference has been eliminated.


 


Additional
information about the PSUs issued under the 2001 PSU Plan are as follows:


 


	
   

  	
   

  	
  Units

  	
   

  	
  Weighted average

  grant date fair

  value

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unvested,
  March 31, 2008 and June 30, 2008

  	
   

  	
  528,570

  	
   

  	
  $

  	
  6.69

  	
   

  
							



 


The aggregate intrinsic value of the Company’s
stock option awards and PSUs at June 30, 2008 are as follows:


 


	
   

  	
   

  	
  June 30, 2008

  	
   

  
	
   

  	
   

  	
  (Unaudited)

  	
   

  
	
  Stock options

  	
   

  	
   

  	
   

  
	
  Outstanding

  	
   

  	
  $

  	
  12,168

  	
   

  
	
  Exercisable

  	
   

  	
  7,318

  	
   

  
	
  PSUs:

  	
   

  	
   

  	
   

  
	
  Outstanding

  	
   

  	
  $

  	
  11,560

  	
   

  
	
  Exercisable

  	
   

  	
  6,558

  	
   

  



 


19

















 


WESTPORT INNOVATIONS INC.


Notes to Consolidated Financial Statements
(unaudited)


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


 


Three
months ended June 30, 2008 and 2007


 


13.          Reconciliation
to United States generally accepted accounting standards (continued):


 


(d)        Stock-based compensation (continued):


 


The
total intrinsic value of options and PSUs exercised for the three months ended June 30,
2008 and 2007 was $791 and $1,669, respectively.  As at June 30, 2008, $4,517 of
compensation cost relating to share-based payment awards has yet to be
recognized in results from operations and will be recognized over a weighted
average period of four years.


 


(e)        Effect of US GAAP differences:


 


The
effect of the previously discussed accounting differences on total assets,
total liabilities and shareholders’ equity, net loss, comprehensive loss and
loss per share under US GAAP are as follows:


 


	
   

  	
   

  	
  June 30,

  2008

  	
   

  	
  March 31,

  2008

  	
   

  
	
   

  	
   

  	
  (Unaudited)

  	
   

  	
   

  	
   

  
	
  Total assets,
  Canadian GAAP

  	
   

  	
  $

  	
  74,905

  	
   

  	
  $

  	
  78,940

  	
   

  
	
  Differences in
  accounting for:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Intellectual
  property (c)

  	
   

  	
  (538

  	
  )

  	
  (574

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total assets, US
  GAAP

  	
   

  	
  $

  	
  74,367

  	
   

  	
  $

  	
  78,366

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total
  liabilities, Canadian GAAP and US GAAP

  	
   

  	
  $

  	
  52,903

  	
   

  	
  $

  	
  49,144

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Shareholders’
  equity, Canadian GAAP

  	
   

  	
  $

  	
  22,002

  	
   

  	
  $

  	
  29,796

  	
   

  
	
  Difference in
  accounting for:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Intellectual
  property (c)

  	
   

  	
  (538

  	
  )

  	
  (574

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Shareholders’
  equity, US GAAP

  	
   

  	
  $

  	
  21,464

  	
   

  	
  $

  	
  29,222

  	
   

  



 


	
   

  	
   

  	
  June 30,

  2008

  	
   

  	
  June 30,

  2007

  	
   

  
	
   

  	
   

  	
  (Unaudited)

  	
   

  	
  (Unaudited)

  	
   

  
	
  Loss for the
  year, Canadian GAAP

  	
   

  	
  $

  	
  (3,464

  	
  )

  	
  $

  	
  (4,724

  	
  )

  
	
  Difference in
  amortization of discount on convertible notes (a)

  	
   

  	
  —

  	
   

  	
  113

  	
   

  
	
  Tax expense on
  realized and unrealized gain on available for sale securities (b)

  	
   

  	
  1,014

  	
   

  	
  —

  	
   

  
	
  Amortization of
  intellectual property (c)

  	
   

  	
  36

  	
   

  	
  36

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss for the
  year, US GAAP

  	
   

  	
  (2,414

  	
  )

  	
  (4,575

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Other
  comprehensive income (loss):

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Tax expense on
  realized and unrealized gain on available for sale securities (b)

  	
   

  	
  (1,014

  	
  )

  	
  —

  	
   

  
	
   

  	
   

  	
  (1,014

  	
  )

  	
  (4,575

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Comprehensive
  income (loss), US GAAP

  	
   

  	
  $

  	
  (3,428

  	
  )

  	
  $

  	
  (4,575

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Basic and
  diluted loss per share, US GAAP

  	
   

  	
  $

  	
  (0.09

  	
  )

  	
  $

  	
  (0.21

  	
  )

  



 


There
are no differences between Canadian GAAP and US GAAP in total cash flows from operations,
investments and financing presented in the consolidated statement of cash flows
in any of the years presented.


 


20