Exhibit
4.6


 





 


MANAGEMENT’S DISCUSSION AND ANALYSIS


 


BASIS OF PRESENTATION


 


This Management’s Discussion
and Analysis (“MD&A”) covers the interim consolidated financial statements
for Westport Innovations Inc. (“Westport”, “the Company”, “we”) for the three
months ended June 30, 2008 and provides an update to our annual MD&A
dated May 16, 2008 for the fiscal year ended March 31, 2008.  This information is intended to assist
readers in analyzing our financial results and should be read in conjunction
with the audited annual consolidated financial statements, including the
accompanying notes, for the fiscal year ended March 31, 2008 and our
annual MD&A dated May 16, 2008. 
Our consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles (“GAAP”).  The effect of significant differences between
Canadian GAAP and U.S. GAAP have been disclosed in note 13 to the interim
consolidated financial statements for the three months ended June 30, 2008
and 2007.


 


Additional information
relating to Westport, including our Annual Information Form, is available on
SEDAR at www.sedar.com.  This MD&A is
dated July 25, 2008.   All financial
information is reported in Canadian dollars unless otherwise noted.  Shares, share options, performance share
units, warrants and per share amounts have been adjusted on a retroactive basis
to reflect our three and one-half-to-one (3.5:1) share consolidation completed
on July 21, 2008.


 


FORWARD LOOKING STATEMENTS


 


This MD&A contains forward-looking
statements, including statements regarding the demand for our products, the
future success of our business and technology strategies, investment and
capital requirements, 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 except as
required by National Instrument 51-102.


 


FINANCIAL OVERVIEW


 


Our business operations and
strategy are substantially unchanged from March 31, 2008.  We are engaged in the research, development
and marketing of high performance, low-emission engines and fuel systems that
use gaseous fuels such as natural gas, LPG 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.  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.  We develop our technologies
and products in cooperation with the world’s leading engine, component and
vehicle manufacturers and fuel infrastructure providers.  Our business focus is to continue to
profitably grow Cummins Westport Inc. (“CWI”), our 50:50 commercial joint
venture with Cummins Inc.; launch our LNG systems for heavy-duty (Class 8)
trucks in North America and Australia; and develop new alliances and enabling
new market segments globally and across applications while maintaining our
technology leadership with innovative ideas and collaborative research.


 


Our consolidated revenue for
the three months ended June 30, 2008 was $25.5 million, an increase of
$9.8 million from $15.7 million for the same period in the prior year.  This growth was primarily the result of a 72%
increase in CWI revenues on 1,077 units shipped in the quarter with deliveries
of the ISL-G and a catch up of orders which had slipped from the previous
quarter.  Non-CWI revenues decreased by
$0.7 million in the 


 


1

















 


period with continued delays
in orders anticipated for trucks operating at the Ports of Los Angeles and Long
Beach (the “Ports”).  Subsequent to June 30,
2008, the Ports announced a “Jump Start” program and approved funding for 100
Kenworth trucks with our LNG systems for delivery this fiscal year.


 


Our net loss for the three
months ended June 30, 2008 was $3.5 million, a loss of $0.13 per share,
compared to $4.7 million, a loss of $0.22 per share.  The $1.2 million improvement in loss for the
period was due primarily to the increase in net gain after taxes on sale of
investments of $2.2 million and a $1.0 million improvement in contribution from
CWI after taxes and JV partner’s share offset by a $2.7 million increase in
non-CWI operating expenses related primarily to the launch of our LNG systems
for heavy duty.  Interest on long-term debt and
amortization of discount decreased by $0.8 million with Perseus LLC fully
converting their previously held convertible notes to common shares in July,
2007, thereby eliminating the debt.  We
also recognized a $0.1 million foreign exchange gain in the three months ended June 30,
2008 compared to a loss of $0.5 million in the three months ended June 30,
2007.


 


As at June 30, 2008, our
cash, cash equivalents and short-term investments totaled $18.0 million
compared to $22.8 million at March 31, 2008.  For the three months ended June 30,
2008, cash flows used in operations were $5.0 million compared to $4.5 million
in the three months ended June 30, 2007 with $2.7 million used in the
period to acquire inventory.  We also
spent $2.3 million on purchases of equipment, furniture and leasehold
improvements, primarily associated with the building of our assembly centre and
expansion of office space, and invested $1.5 million in Juniper Engines Inc.,
acquiring a 49% equity interest in the joint venture with OMVL, SpA.  We raised $5.2 million through the sale of
shares of Clean Energy.


 


Subsequent to June 30,
2008, on July 3, 2008, we issued 15,000 debenture units for total gross
proceeds of $15 million.  Each debenture
unit consists of an unsecured subordinated debenture in the principal amount
$1,000 bearing interest at 9% per annum and 51 Common Share purchase warrants
exercisable into Common Shares at any time for a period of two years from the
date of issue at $18.73 per share.  We
have 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 their principal amount after 18 months. 
Interest is payable semi-annually and the debentures mature on July 3,
2011.  We also issued 46,118 broker
warrants which are exercisable into Common Shares at a price of $16.10 per
share for a period of two years from the date of issue.


 


On July 14, 2008, we
announced that we had entered into a development agreement with a leading
European engine manufacturer relating to our proprietary HPDI fuel system
operating with natural gas and biogas. 
We and the European engine manufacturer will work together to integrate
and test our HPDI fuel system on their engine platforms.  The testing is expected to take place over
the next 12 to 18 months, with the vast majority of development work adapting
our HPDI fuel system for use on the European manufacturer’s engine platform
being done in Vancouver.


 


On July 16, 2008, we
announced that we had entered into a 30-year joint venture agreement with
Weichai Power and 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 WWI joint venture
agreement, our initial investment is expected to be approximately U.S.$4.5
million (30 million RMB), equaling a 35% equity interest in WWI.  Weichai Power and Hong Kong Peterson will hold
40% and 25% equity interests in WWI, respectively.  The board of directors of WWI will be
composed of five directors.  We and
Weichai Power will appoint two members each to the board of directors of WWI
and Hong Kong Peterson will appoint one. 
The Chair of the board of WWI will rotate between Weichai Power and us
after each three-year term, with Weichai Power appointing the first board
Chair.


 


On July 21, 2008, we
consolidated our Common Shares on a three and one-half-to-one (3.5:1)
basis.  Trading in our Common Shares
commenced on a post-consolidation basis on the Toronto Stock Exchange on July 24,
2008.  No fractional Common Shares were
issued in connection with the consolidation, and all such fractional interests
were rounded down to the nearest whole number of Common Shares.  As a result of the share consolidation, as at
July 25th, we now have approximately 27,509,573 Common Shares issued and
outstanding.


 


On July 21, 2008, we
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 a planned
initial public offering of Westport common shares in the United States. The
preliminary prospectus and registration statement relating to these securities
have not yet become effective and subject to market conditions, may not be
successful.


 


2

















 


CRITICAL ACCOUNTING
POLICIES


 


Our consolidated financial
statements are prepared in accordance with Canadian GAAP, which require us to
make estimates and assumptions that affect the amounts reported in our
consolidated financial statements.  We
have identified several policies as critical to our business operations and in
understanding our results of operations. 
These policies, which require use of estimates and assumptions in
determining their reported amounts, include our accounting of CWI as a variable
interest entity, the valuation of long-term investments, equipment, furniture
and leasehold improvements, intellectual property, revenue recognition,
inventory and warranty.  The application
of these and other accounting policies are described in note 2 of our fiscal
2008 annual consolidated financial statements. 
There have been no significant changes in our critical accounting
estimates from what was previously disclosed in our MD&A for the year ended
March 31, 2008 except as noted below in the “Changes in Accounting Policy”
section.  Actual amounts may vary
significantly from estimates used.


 


CHANGES IN ACCOUNTING
POLICY


 


The accounting policies used
in the unaudited consolidated interim financial statements for the three months
ended June 30, 2008 are unchanged from the year ended March 31, 2008,
except as noted below.


 


Stock-based
compensation plans


 


On April 1, 2008, we
changed our accounting policy related to stock-based compensation plans and we
now estimate forfeitures on the date of grant and calculate stock-based
compensation based on options expected to vest. 
Previously, we recognized the effect on stock-based compensation of
forfeitures of options prior to vesting as they occur which was permitted under
CICA Handbook 3870, “Stock-based compensation and other stock-based
payments”.  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 periods presented.


 


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 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.  While the
adoption of these sections resulted in additional disclosures, which we have
included as note 10 to the financial statements for the period ended June 30,
2008, adoption of these standards did not have a material impact on our
consolidated financial position, results of operations, or cash flows.


 


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.  While the adoption of this section resulted
in additional disclosures, which we have included as note 11 to the financial
statements for the period ended June 30, 2008, there was no material
impact on our consolidated financial position, results of operations, or cash
flows.


 


Inventories


 


In June 2007, the CICA
issued Section 3031, “Inventories”, which replaces the existing Section 3030
and establishes standards for the measurement and disclosure of
inventories.  The new standard provides
more extensive guidance on the determination of cost, including allocation of
depreciation and overhead and expands the disclosure requirements. In certain
circumstances, the new section also permits the reversal of previous
write-downs of inventory to net realizable value.  We adopted this section on April 1,
2008.  Adoption of this standard did not
have a material impact on our consolidated financial position, results of
operations, or cash flows.


 


3

















 


The
following changes will be adopted in the future:


 


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.  Section 3064 applies to
interim and annual financial statements relating to fiscal years beginning on
or after October 1, 2008.  We expect
to adopt this new section on April 1, 2009 and 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.


 


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 our fiscal
year beginning on April 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 impact on us of the Canadian convergence initiative
and developing a conversion plan.


 


DISCLOSURE CONTROLS 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, our the Chief Executive Officer (“CEO”) and
our 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.  We expect that our financial reporting
policies, processes and systems will continue to evolve as we
commercialize our products.  However, no
material changes were made in our internal controls over financial reporting
during the interim period ended June 30, 2008.


 


RESULTS FROM OPERATIONS


 


Product revenue for the three months ended June 30, 2008
and 2007 was $21.4 million and $11.8 million, respectively, an increase of
81%.  The revenue growth was the result
of the doubling in CWI shipments from 522 units to 1,077 units with increased
shipments of the ISL G, which was launched in the first quarter of fiscal 2008
and some slippage of units from the fourth quarter of fiscal 2008 into the
first quarter of fiscal 2009.  Non-CWI
revenue was $0.4 million, down from $1.1 million in the same period of the
prior year when 11 LNG systems were delivered. 
Foreign exchange had a negative impact of approximately 8% as the US
dollar declined by that amount on average quarter over quarter.


 


4

















 


Revenue


(expressed in thousands of Canadian dollars except for units)


 


	
   

  	
   

  	
  Three months ended

  	
   

  
	
   

  	
   

  	
  June 30

  	
   

  
	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
  (unaudited)

  	
   

  	
  (unaudited)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Unit shipments

  	
   

  	
  1,078

  	
   

  	
  533

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Product revenue

  	
   

  	
  21,428

  	
   

  	
  11,842

  	
   

  
	
  Parts revenue

  	
   

  	
  4,081

  	
   

  	
  3,888

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  25,509

  	
   

  	
  15,730

  	
   

  



 


Parts revenue for the three months
ended June 30, 2008 compared to June 30, 2007 was up slightly from $3.9 million to $4.1
million due to CWI distributors and OEMs stocking ISL G parts, and increased
population of engines in service.


 


Cost of revenue for the three months ended June 30, 2008
and 2007 was $17.2 million and $10.4 million, respectively.  The increase reflected the higher revenues
and product mix.  In the three months
ended June 30, 2008, as part of its quarterly warranty review process, CWI
took an additional $0.1 million in warranty expense compared to a credit of
$0.6 million in the same period in the prior year.


 


Gross margin increased to $8.3 million from $5.3 million
on higher revenues.  Gross margin
percentage was relatively unchanged at 33% compared to 34% in the same quarter
in the prior year.  Gross margin
percentage is generally affected by product and geographical mix.


 


Research and development expenses, on a net of funding basis, for the
three months ended June 30, 2008 increased to $7.2 million from $5.4
million in the same period in the prior fiscal year.  CWI research and development expenses
decreased by $0.4 million, partly because of foreign exchange and partly
because of flooding in Indiana in June 2008, which shut down the Cummins
Technology Centre.  Non-CWI research and
development expenses (“R&D”) increased by $2.1 million primarily because of
increased product development and support costs ($1.1 million), lower
government funding in the period ($0.7 million) and a $0.3 million accrual for
royalty payments to the Industrial Technologies Office (“ITO”) as described in
the “Contingent Off-Balance Sheet Arrangements” section of this MD&A.


 


Research and Development Expenses


(expressed in thousands of Canadian dollars)


 


	
   

  	
   

  	
  Three months ended June 30

  	
   

  
	
   

  	
   

  	
  2008

  	
   

  	
  2007

  	
   

  
	
   

  	
   

  	
  (unaudited)

  	
   

  	
  (unaudited)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Research and development expenses

  	
   

  	
  7,882

  	
   

  	
  6,731

  	
   

  
	
  Program funding

  	
   

  	
  (719

  	
  )

  	
  (1,290

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Research and development, net

  	
   

  	
  7,163

  	
   

  	
  5,441

  	
   

  



 


General and administrative expenses for the three months ended June 30,
2008 and 2007 were $1.5 million and $1.1 million, respectively, and increased
primarily due to increased business activities and timing of travel,
conferences and other similar activities.


 


5

















 


Sales and marketing expenses were $2.6 million and $1.8 million
for the three months ended June 30, 2008 and 2007, respectively.  CWI expenses increased by $0.3 million
because of timing of expenses and increased marketing activities.  Non-CWI sales and marketing expenses grew by
$0.5 million primarily because of increased field service and other customer
related activities associated with the commercialization of our LNG systems for
heavy-duty trucks.


 


Foreign exchange gain of $0.1 million in the three months ended June 30,
2008 relates primarily to the gain recognized on US dollar denominated
transactions.   Foreign exchange
loss  of $0.5 million in the three months ended June 30, 2007 primarily
reflects the realized net loss on foreign currency transactions and the net unrealized
losses on our US dollar denominated assets and liabilities, which as at March 31,
2007 was comprised mainly of cash, accounts receivable and warranty.  From March 31, 2007 to June 30,
2007, the US dollar weakened by 8%.


 


Depreciation and amortization
for the three months ended June 30, 2008 was consistent with the
comparable period in the prior year at $0.4 million.


 


Loss from
investment accounted for by the equity method relates to our 49% share of Juniper.


 


Interest on
long-term debt and amortization of discount was $0.8 million in the three months ended June 30,
2007 and relates primarily to the interest and the accretion on $22.1 million
in convertible notes.  The full amount of
the notes was converted into shares subsequent to June 30, 2007.


 


Gain on sale
of investments of $0.7
million in the three months ended June 30, 2007 arose on the sale of
92,575 shares of Clean Energy for proceeds of $1.1 million.  In the three months ended June 30, 2008,
we sold 387,960 shares of Clean Energy for net proceeds of $5.2 million and a
resulting gain on sale of $3.5 million. We also sold some short term
investments resulting in a gain of $0.3 million.


 


Income tax
expense in the three
months ended June 30, 2008 was $2.7 million.  $1.7 million related to CWI with $0.1 million
payable and $1.6 million drawing down the future income tax asset.  The remaining $1.0 million relates to an
increase in the valuation allowance related to unrealized losses on available
for sale securities offset by tax expense related to sales of investments
previously reflected in accumulated other comprehensive income.


 


Joint venture partners’
share of income from joint ventures reflects Cummins’ 50% share of CWI’s net operating contribution in the
period and includes Cummins’ share of CWI’s future income tax benefit.  It also includes BTIC’s 50% share of BWI’s
net operating loss in the period.


 


CAPITAL REQUIREMENTS,
RESOURCES AND LIQUIDITY


 


As at June 30, 2008, our
cash and cash equivalents and short-term investment position was $18.0 million.  Cash and cash equivalents consist of
guaranteed investment certificates, bankers acceptances, and term deposits with
maturities of 90 days or less when acquired.


 


During the three months ended
June 30, 2008, we used $5.0 million for operating purposes including $2.5
million for non-cash working capital purposes such as inventory purchases.  We also used $2.3 million for purchases of
equipment, furniture and leasehold improvements, primarily related to our assembly
centre and leasehold improvements related to office expansions.  We also invested $1.5 million in Juniper
Engines and advanced Cummins another $1.7 million in short-term loan
receivable.  We sold approximately 28% of
our remaining shares of Clean Energy for $5.2 million in net proceeds and
received $0.4 million on the exercise of employee share options in the period.


 


Our plan is to use our
current cash and cash equivalents and short-term investments, our share of CWI
profits, borrowings under our credit facility, proceeds from the sale of our
investment in Clean Energy, valued at $11.4 million as at June 30, 2008,
and the proceeds from our July 2008 debenture unit offering to fund our
current programs and initiatives and our recently announced OEM
arrangements.  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.  We have
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 a planned
initial public offering of Westport common shares in the United States to raise
more capital for the Company. The 


 


6

















 


preliminary prospectus and
registration statement relating to these securities have not yet become
effective and subject to market conditions, may not be successful.


 


As at June 30, 2008, our
$13 million credit facility with our bank was drawn down by our demand
instalment loan of $5.9 million and a $0.6 million letter of credit.  Our bank credit facility is subject to and
limited by financial covenants, which may prevent us from drawing against the
full amount of the line.  Subsequent to June 30,
2008, as described in the “Financial Overview” section of this MD&A, we
also raised approximately $14.1 million, net of commissions and expenses,
through the issuance of debentures.  The
related debenture agreement restricts us from incurring additional indebtedness
for borrowed monies except for certain senior indebtedness, unsecured debt up
to $20 million ranking pari passu with the debentures, and debt subordinated to
the debentures.  The note indenture does
not restrict us from increasing the amount of certain senior indebtedness owing
to our bankers or other senior lenders currently outstanding or from creating
liens on our assets to secure such senior indebtedness or permitted increases
to such senior indebtedness.  The note
indenture additionally does not restrict our subsidiaries and affiliates from
incurring indebtedness for borrowed money or other obligations.


 


Clean Energy’s common stock
is listed on the NASDAQ and its share price is subject to fluctuations with changes
in its business, general economic factors and/or market conditions, which may
impact our capital requirements.  As at July 25,
2008, we owned approximately 975,000 shares of Clean Energy with a market value
of approximately U.S.$12.6 million based on the NASDAQ closing price of
U.S.$12.88 per share.


 


Our 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, 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, particularly
inventory.  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 “Basis of Presentation” section of
this MD&A which discusses forward-looking statements and the “Risks and
Uncertainties” section of our Annual Information Form.


 


CONTINGENT OFF-BALANCE SHEET ARRANGEMENTS


 


Commitments
and contingencies have been disclosed in our annual MD&A dated May 16,
2008 and are substantially unchanged except that the royalty term for the Green
Economy Development Fund (Province of British Columbia) ended April 10,
2008.  We are also in continuing
discussions with ITO to extend the work phase of our funding agreement to March 31,
2009.  As ITO is still reviewing our
request for an extension, we have accrued $0.3 million in royalties in the
three months ended June 30, 2008. 
If ITO approves the extension, the $1.35 million minimum in annual
royalties would likely begin to accrue in fiscal 2010, in which case, we will
reverse our $0.3 million accrual.


 


SHARES OUTSTANDING


 


For the three months ended June 30,
2008 and 2007, after reflecting our 3.5:1 share consolidation effected July 21,
2008, the weighted average number of shares used in calculating the loss per
share were 27,443,257 and 21,641,626, respectively.  Shares, share options and performance share
units outstanding and exercisable as at the following dates are shown below:


 


7

















 


	
   

  	
   

  	
  June 30, 2008

  	
   

  	
  July 25, 2008

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Weighted

  	
   

  	
   

  	
   

  	
  Weighted

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  average

  	
   

  	
   

  	
   

  	
  average exercise

  	
   

  
	
   

  	
   

  	
  Number

  	
   

  	
  exercise price

  	
   

  	
  Number

  	
   

  	
  price

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Shares outstanding

  	
   

  	
  27,483,717

  	
   

  	
  N/A

  	
   

  	
  27,509,573

  	
   

  	
  N/A

  	
   

  
	
  Share Options

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  - Outstanding

  	
   

  	
  1,167,702

  	
   

  	
  $7.04

  	
   

  	
  1,156,569

  	
   

  	
  $7.04

  	
   

  
	
  - Exercisable

  	
   

  	
  765,675

  	
   

  	
  $7.94

  	
   

  	
  757,645

  	
   

  	
  $7.94

  	
   

  
	
  Performance Share Units

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  - Outstanding

  	
   

  	
  1,082,990

  	
   

  	
  N/A

  	
   

  	
  1,082,990

  	
   

  	
  N/A

  	
   

  
	
  - Exercisable

  	
   

  	
  554,420

  	
   

  	
  N/A

  	
   

  	
  554,420

  	
   

  	
  N/A

  	
   

  
	
  Warrants

  	
   

  	
  —

  	
   

  	
  —

  	
   

  	
  817,546

  	
   

  	
  $18.58

  	
   

  



 


During the three months ended June 30, 2008, no stock options or
performance share units were granted.


 


SELECTED QUARTERLY
FINANCIAL DATA (unaudited)


 


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


 


Selected Quarterly Operations Data (unaudited)


 


	
  Three months ended

  	
   

  	
  30-Sep-06

  	
   

  	
  31-Dec-06

  	
   

  	
  31-Mar-07

  	
   

  	
  30-Jun-07

  	
   

  	
  30-Sep-07

  	
   

  	
  31-Dec-07

  	
   

  	
  31-Mar-08

  	
   

  	
  30-Jun-08

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Units shipped

  	
   

  	
  414

  	
   

  	
  629

  	
   

  	
  617

  	
   

  	
  533

  	
   

  	
  867

  	
   

  	
  801

  	
   

  	
  519

  	
   

  	
  1,078

  	
   

  
	
  Average foreign exchange rate (C$:US$)

  	
   

  	
  $

  	
  1.12

  	
   

  	
  $

  	
  1.14

  	
   

  	
  $

  	
  1.17 

  	
   

  	
  $

  	
  1.10

  	
   

  	
  $

  	
  1.04

  	
   

  	
  $

  	
  0.98 

  	
   

  	
  $

  	
  1.00

  	
   

  	
  $

  	
  1.01

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  (expressed in thousands of Canadian dollars
  except per share)

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Product revenue

  	
   

  	
  $

  	
  10,327

  	
   

  	
  $

  	
  13,568

  	
   

  	
  $

  	
  15,656 

  	
   

  	
  $

  	
  11,842

  	
   

  	
  $

  	
  16,639

  	
   

  	
  $

  	
  15,488 

  	
   

  	
  $

  	
  11,269

  	
   

  	
  $

  	
  21,428

  	
   

  
	
  Parts revenue

  	
   

  	
  $

  	
  3,401

  	
   

  	
  $

  	
  3,248

  	
   

  	
  $

  	
  3,658 

  	
   

  	
  $

  	
  3,888

  	
   

  	
  $

  	
  4,530

  	
   

  	
  $

  	
  3,822 

  	
   

  	
  $

  	
  4,058

  	
   

  	
  $

  	
  4,081

  	
   

  
	
  Total revenue

  	
   

  	
  $

  	
  13,728

  	
   

  	
  $

  	
  16,816

  	
   

  	
  $

  	
  19,314 

  	
   

  	
  $

  	
  15,730

  	
   

  	
  $

  	
  21,169

  	
   

  	
  $

  	
  19,310 

  	
   

  	
  $

  	
  15,327

  	
   

  	
  $

  	
  25,509

  	
   

  
	
  Gross margin

  	
   

  	
  $

  	
  4,776

  	
   

  	
  $

  	
  5,398

  	
   

  	
  $

  	
  7,888 

  	
   

  	
  $

  	
  5,338

  	
   

  	
  $

  	
  6,053

  	
   

  	
  $

  	
  6,554 

  	
   

  	
  $

  	
  4,568

  	
   

  	
  $

  	
  8,339

  	
   

  
	
   

  	
   

  	
  35

  	
  %

  	
  32

  	
  %

  	
  41

  	
  %

  	
  34

  	
  %

  	
  29

  	
  %

  	
  34

  	
  %

  	
  30

  	
  %

  	
  33

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Net income (loss) for the period

  	
   

  	
  $

  	
  (1,840

  	
  )

  	
  $

  	
  (5,778

  	
  )

  	
  $

  	
  1,731 

  	
   

  	
  $

  	
  (4,724

  	
  )

  	
  $

  	
  (4,867

  	
  )

  	
  $

  	
  7,401 

  	
   

  	
  $

  	
  (8,125

  	
  ) 

  	
  $

  	
  (3,464

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Earnings (loss) per share-post consolidation:

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Basic

  	
   

  	
  $

  	
  (0.09

  	
  )

  	
  $

  	
  (0.27

  	
  )

  	
  $

  	
  0.08 

  	
   

  	
  $

  	
  (0.22

  	
  )

  	
  $

  	
  (0.19

  	
  )

  	
  $

  	
  0.28 

  	
   

  	
  $

  	
  (0.30

  	
  ) 

  	
  $

  	
  (0.13

  	
  )

  
	
  Diluted

  	
   

  	
  $

  	
  (0.09

  	
  )

  	
  $

  	
  (0.27

  	
  )

  	
  $

  	
  0.06 

  	
   

  	
  $

  	
  (0.22

  	
  )

  	
  $

  	
  (0.19

  	
  )

  	
  $

  	
  0.26 

  	
   

  	
  $

  	
  (0.30

  	
  )

  	
  $

  	
  (0.13

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

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

  	
   

  	
  $

  	
  (3,760

  	
  )

  	
  $

  	
  (4,448

  	
  )

  	
  $

  	
  568 

  	
   

  	
  $

  	
  (3,372

  	
  )

  	
  $

  	
  (2,645

  	
  )

  	
  $

  	
  (3,339 

  	
  )

  	
  $

  	
  (8,238

  	
  ) 

  	
  $

  	
  (2,550

  	
  )

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Company’s 100% share of CWI net income

  	
   

  	
  $

  	
  1,392

  	
   

  	
  $

  	
  806

  	
   

  	
  $

  	
  8,388 

  	
   

  	
  $

  	
  1,160

  	
   

  	
  $

  	
  2,412

  	
   

  	
  $

  	
  8,870 

  	
   

  	
  $

  	
  (810

  	
  ) 

  	
  $

  	
  3,234

  	
   

  
	
  Joint Venture Partner’s share of CWI net income

  	
   

  	
  $

  	
  696

  	
   

  	
  $

  	
  403

  	
   

  	
  $

  	
  4,194 

  	
   

  	
  $

  	
  580

  	
   

  	
  $

  	
  1,206

  	
   

  	
  $

  	
  4,435 

  	
   

  	
  $

  	
  (405

  	
  ) 

  	
  $

  	
  1,617

  	
   

  



 


Our quarterly results are
impacted by the timing of product deliveries, completion of engineering
milestones, government and partner funding, timing of sale of investments,
financing related transactions and foreign exchange gains and losses.  CWI income or loss, and our resulting 50%
share, will vary from quarter to quarter depending on the timing of unit sales,
product and customer mix, and the timing of completion of engineering
milestones and related government funding.


 


RISKS AND UNCERTAINTIES


 


Business risks and
uncertainties  related to product development, competitive
and regulatory environments, economic and industry factors and other sources
are described in detail in our 2008 Annual Information Form and are substantially
unchanged.


 


8

















 


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


(expressed in thousands of Canadian dollars)


 


	
  Three months ended

  	
   

  	
  30-Jun-08

  	
   

  	
  30-Jun-07

  	
   

  
	
   

  	
   

  	
  (Unaudited)

  	
   

  	
  (Unaudited)

  	
   

  
	
  Cash flows from operations:

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Loss for the year

  	
   

  	
  $

  	
  (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 long-term 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

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Cash used in operations before changes in non-cash
  operating working capital (non-GAAP)

  	
   

  	
  $

  	
  (2,550

  	
  )

  	
  $

  	
  (3,372

  	
  )

  



 


9