Westport Innovations Inc.

Westport Innovations Inc.

February 01, 2005 09:01 ET

Westport Reports Results for Third Quarter Ending December 31, 2004


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: WESTPORT INNOVATIONS INC.

TSX SYMBOL: WPT

FEBRUARY 1, 2005 - 09:01 ET

Westport Reports Results for Third Quarter Ending
December 31, 2004

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Feb. 1, 2005) - Westport
Innovations Inc. (TSX:WPT) today reported results for its third fiscal
quarter ended December 31, 2004 and provided an update on operations.

Westport's consolidated net loss for the three months ended December 31,
2004 improved to $4.2 million ($0.06 loss per share) from $13.0 million
($0.20 loss per share) during the same period last year on consolidated
revenues of $9.2 million and $7.9 million respectively. Loss per share
improved by 33% from $0.09 loss per share in the previous quarter
primarily because of improved product sales and gross margin. The
stronger Canadian dollar reduced revenues by approximately 8% quarter
over quarter, but also had the effect of reducing US dollar expenses and
warranty liabilities, resulting in a net $0.4 million in foreign
exchange gain in the quarter.

For the quarter, cash used in operations before changes in non-cash
working capital improved to $2.1 million, down from $7.6 million this
quarter last year. Cummins Westport Inc. (CWI), contributed
approximately $1.3 million this quarter and ended 2004, its first fiscal
year under the new joint venture agreement, with a $0.1 million profit
on shipments of 1295 units, up approximately 16% from the prior calendar
year. Excluding CWI, Westport's cash used in operations before working
capital was $3.4 million for the quarter. For the nine months ended
December 31, 2004, consolidated cash used in operations before working
capital, was $10.5 million. At the current rate of change in this
measure, the company should end the year significantly better than its
annual goal of $17.5 million. As at December 31, 2004, Westport's cash,
short-term investments and accounts receivable, net of accounts payable,
totaled $22.8 million.

"We are pleased with our steady and sustained success in developing our
business and managing our path to profitability while continuing to
advance our technology programs," said David Demers, Westport's Chief
Executive Officer. "Moreover, Westport and CWI are continuing to make
significant inroads into new market opportunities, particularly in Asia."

Business Programs Update

Cummins Westport Inc.

In the quarter, CWI announced that Renault Trucks of France, part of the
Volvo group, Europe's largest and the world's second largest truck
manufacturer, launched its two newest vehicles powered by CWI natural
gas engines. Targeted for refuse collection, street cleaning, and urban
delivery, the vehicles will be offered by Renault through their
extensive European distribution network.

In late January, shortly after the close of the quarter, CWI received
its single largest order, for 450 engines, from CWI's leading Asian
customer, Beijing Public Transport Holdings Ltd (BPT). Canadian Prime
Minister Paul Martin took part in the announcement of the order in
Beijing. With delivery of these engines BPT will be operating over 2600
natural gas buses powered by CWI engines.

Hugh Foden, CWI's President, commented, "I am proud of CWI's
accomplishments this year and I am confident that I will be leaving CWI
well positioned for global growth. Our financial results this year
demonstrate the great potential of our uniquely scalable business
venture."

Guan Saw, who is currently General Manager for Cummins East Asia
International Distributor Business in Beijing, has been appointed the
new CWI President effective April 1.

Westport Program Highlights

In the quarter, Westport announced two very significant funding awards
to advance its High Pressure Direct Injection (HPDI) program for
heavy-duty truck engines: a US $1.5 million subcontract with the U.S.
Department of Energy's National Renewable Energy Laboratory in October,
and a US $1.95 million grant from California's South Coast Air Quality
Management District (AQMD) in December. In announcing the award, the
AQMD cited Westport's HPDI technology as an important component in the
district's efforts to achieve US air quality standards.

Dr. Michael Gallagher, Westport's President and Chief Operating Officer,
said, "These new funding agreements, along with the Isuzu program
funding announced in September, are major contributors to Westport's
success in reducing its quarterly cash requirements by 72% compared to
one year ago. We are continuing to validate the benefits and
capabilities of direct injection natural gas trucks in real-world
applications while building strategic relationships with customers,
industry partners, and policy-makers. This strategy will allow us to
enable the market for commercial products with reduced risk and greater
certainty of success."

Westport also continued to advance its hydrogen technology program in
the quarter, announcing a new agreement with BMW AG of Munich Germany
for supply and development tasks of hydrogen-fueled injection components.

In China, Westport signed a Memorandum of Understanding with Beijing
Sinogas Co. Ltd. and Qingdao Sino-Canada S&T Park Co. Ltd. to explore
mutual opportunities to develop, market, and sell gaseous- fuelled
vehicles and infrastructure solutions in China. Beijing Sinogas Co. Ltd.
specializes in the construction of CNG/LNG stations and has registered
subsidiaries in 15 Chinese cities. Qingdao Sino-Canada S&T Park Co. is
an initiative between the National Research Council of Canada and the
Ministry of Science and Technology of China, which was established to
facilitate R&D collaboration between the two countries.

Phil Hodge, Westport's Vice President responsible for China
opportunities, commented, "China has recognized the immediate
opportunity to use natural gas in transportation applications to reduce
urban air pollution and to mitigate its economy's growing dependency on
imported oil. We are encouraged by the interest in our technologies and
we are in the process of building relationships to allow us to best
exploit this opportunity and build shareholder value."

Westport Innovations Inc. is the leading developer of technologies that
allow engines to operate on clean-burning fuels such as natural gas,
hydrogen, and hydrogen-enriched natural gas (HCNG). Westport has
technology development alliances in place with Ford, MAN, BMW and Isuzu,
and an ownership interest in Clean Energy, the largest provider of
vehicular natural gas in North America. Cummins Westport Inc.,
Westport's joint venture with Cummins Inc., manufactures and sells the
world's widest range of low-emissions alternative fuel engines for
commercial transportation applications such as trucks and buses.

Westport has scheduled a public conference call for Tuesday, February 1
at 8 am (Pacific Standard Time) to discuss the quarterly results. To
access the conference call by telephone, please dial 1-800-936-9754
(North America) or 1-973-935-2048 (International). Alternatively, the
webcast of the conference call can be accessed through the Westport web
site at www.westport.com and selecting "Our Investors", and then
selecting "Conference Calls & AGMs" from the top menu. Replays will be
available in streaming audio on the same website shortly after the
conclusion of the conference call.

To view the financials and management's discussion and analysis, please
point your browser to the following link:
www.westport.com/investor/financial.php.

Note: This document contains forward-looking statements about Westport's
business, operations, technology development or to the environment in
which it operates, which are based on Westport's estimates, forecasts
and projections. These statements are not guarantees of future
performance and involve risks and uncertainties that are difficult to
predict, or are beyond Westport's control. Consequently, readers should
not place any undue reliance on such forward-looking statements. In
addition, these forward-looking statements relate to the date on which
they are made. Westport disclaims any intention or obligation to update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.



Consolidated Financial Statements
(Expressed in Canadian dollars)

WESTPORT INNOVATIONS INC.

For the three and nine months ended December 31, 2004 and 2003


WESTPORT INNOVATIONS INC.
Consolidated Balance Sheets
(Expressed in Canadian dollars)
--------------------------------------------------------------------
--------------------------------------------------------------------
December 31, March 31,
2004 2004
--------------------------------------------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents (note 3) $ 1,277,537 $ 2,105,161
Short-term investments 20,950,554 18,678,441
Accounts receivable (note 7) 6,287,315 5,073,384
Inventory (note 2(b)) 1,594,866 -
Prepaid expenses 596,399 532,848
--------------------------------------------------------------------
30,706,671 26,389,834

Long-term investments 12,206,286 12,206,286

Equipment, furniture,
and leasehold improvements 33,251,795 32,584,544
Accumulated amortization (25,977,786) (21,879,862)
--------------------------------------------------------------------
7,274,009 10,704,682

Intellectual property
and other intangible assets (note 6(c)) 4,865,586 3,314,160
Accumulated amortization (3,062,018) (2,466,310)
--------------------------------------------------------------------
1,803,568 847,850

--------------------------------------------------------------------

$ 51,990,534 $ 50,148,652
--------------------------------------------------------------------
--------------------------------------------------------------------

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and
accrued liabilities $ 5,732,146 $ 3,743,467
Demand instalment loan 2,491,228 3,206,755
Current portion of long-term
debt obligations 134,593 214,413
Current portion of warranty liability 3,862,974 3,814,163
--------------------------------------------------------------------
12,220,941 10,978,798

Long-term debt obligations 726,406 852,561

Deferred lease inducements (note 2(c)) 859,229 189,285

Warranty liability 2,677,378 4,059,744

Shareholders' equity:
Share capital:
Issued: 73,889,473 (2004 - 64,340,430)
common shares (note 4) 230,324,081 213,965,067
Other equity instruments (note 6) 4,996,875 3,007,665
Additional paid in capital
(notes 2(a) and 5) 2,576,344 91,770
Deficit (202,390,720) (182,996,238)
--------------------------------------------------------------------
35,506,580 34,068,264
--------------------------------------------------------------------

$ 51,990,534 $ 50,148,652
--------------------------------------------------------------------
--------------------------------------------------------------------

Commitments and contingencies (note 6(c))
See accompanying notes to consolidated financial statements.


WESTPORT INNOVATIONS INC.
Consolidated Statements of Operations and Deficit
(Expressed in Canadian dollars)
--------------------------------------------------------------------
Three months ended Nine months ended
December 31 December 31
------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)

Product
revenue $ 7,030,516 $ 7,285,570 $ 17,129,110 $ 17,091,159
Parts
revenue 2,211,330 611,886 6,917,987 2,079,608
--------------------------------------------------------------------

9,241,846 7,897,456 24,047,097 19,170,767

Cost of
revenues and
expenses:
Cost of
revenues 5,692,734 5,296,710 16,422,731 12,907,057
Research and
development
(notes 6
and 7) 4,836,980 7,815,811 13,974,224 21,579,935
General and
administrative
(note 6) 966,307 1,072,025 3,941,621 3,670,083
Sales and
marketing
(note 6) 771,496 1,841,268 2,589,209 4,868,255
Foreign
exchange
gain (408,976) (355,053) (730,241) (1,189,364)
Amortization 1,578,002 1,730,145 4,802,605 5,101,524
Bank charges
and interest
on capital
leases 75,657 71,979 223,034 246,972
--------------------------------------------------------------------
13,512,200 17,472,885 41,223,183 47,184,462
--------------------------------------------------------------------

Loss
before
undernoted (4,270,354) (9,575,429) (17,176,086) (28,013,695)

Interest
and other
income 172,791 230,558 333,435 588,200

Restructuring
costs - (457,400) - (457,400)
Write
down of
equipment,
furniture, and
leasehold
improvements (58,678) (3,219,469) (58,678) (3,219,469)

--------------------------------------------------------------------
Loss for the
period (4,156,241) (13,021,740) (16,901,329) (31,102,364)

Deficit,
beginning of
period as
reported (198,234,479) (163,355,021) (182,996,238) (145,274,397)

Cumulative
adjustment
for change in
accounting
for
stock-based
compensation
(note 2) - - (2,493,153) -
--------------------------------------------------------------------

Deficit,
beginning of
period as
adjusted (198,234,479) (163,355,021) (185,489,391) (145,274,397)
--------------------------------------------------------------------

Deficit,
end of
period $(202,390,720) $(176,376,761) $(202,390,720)$(176,376,761)
--------------------------------------------------------------------
--------------------------------------------------------------------

Basic and
diluted
loss per
share $ 0.06 $ 0.20 $ 0.25 $ 0.54

Weighted
average
common
shares
outstanding 73,888,504 63,856,453 67,891,683 57,325,646

--------------------------------------------------------------------
--------------------------------------------------------------------
See accompanying notes to consolidated financial statements.


WESTPORT INNOVATIONS INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
--------------------------------------------------------------------
Three months ended Nine months ended
December 31 December 31
------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Cash provided
by (used in):

Operations:
Loss for the
period $ (4,156,241) $ (13,021,740) $ (16,901,329)$ (31,102,364)
Items not
involving
cash:
Amortization 1,578,002 1,730,145 4,802,605 5,101,524
Stock-based
compensation
expense
(note
6(a)) 213,250 1,377 685,832 164,667
Lease
inducement
benefit
(expense) (84,537) 137,662 25,941 137,662
Write
down of
equipment,
furniture,
and
leasehold
improvements 58,678 3,219,469 58,678 3,219,469
Accretion
of TPC
warrants
(note
6(b)) 285,714 285,714 857,142 857,143
--------------------------------------------------------------------
(2,105,134) (7,647,373) (10,471,131) (21,621,899)
Change in
non-cash
operating
working
capital:
Accounts
receiv-
able (2,546,560) 2,559,147 (1,213,931) 4,230,313
Inventory (1,175,624) - (1,594,866) -
Prepaid
expenses
and other
current
assets 102,415 (18,800) (63,551) (214,522)
Accounts
payable
and
accrued
liabilities 1,558,705 503,675 1,988,679 (3,561,493)
Warranty
liability (1,045,622) 199,517 (1,333,555) (184,017)
--------------------------------------------------------------------
(5,211,820) (4,403,834) (12,688,355) (21,351,618)

Investments:
Purchase of
equipment,
furniture,
and
leasehold
improvements (64,712) (632,924) (283,902) (2,279,694)
Purchase of
short-term
investments,
net 5,456,681 5,946,630 (2,272,113) 2,014,359
--------------------------------------------------------------------
5,391,969 5,313,706 (2,556,015) (265,335)

Financing:
Issue of
common
shares,
net of
issuance
costs (34,188) (21,750) 15,248,248 22,056,047
Repayment
of demand
instalment
loan (238,509) (153,507) (715,527) (811,403)
Repayment of
long-term
debt
obligations (36,117) (44,206) (205,975) (289,723)
Leasehold
inducement,
net 90,000 - 90,000 -
--------------------------------------------------------------------
(218,814) (219,463) 14,416,746 20,954,921
--------------------------------------------------------------------

Increase
(decrease)
in cash
and cash
equivalents (38,665) 690,409 (827,624) (662,032)

Cash and
cash
equivalents,
beginning
of period 1,316,202 1,629,558 2,105,161 2,981,999
--------------------------------------------------------------------

Cash and
cash
equivalents,
end of
period $ 1,277,537 $ 2,319,967 $ 1,277,537 $ 2,319,967
--------------------------------------------------------------------
--------------------------------------------------------------------

Supplementary
information

Interest
paid $ 57,402 $ 62,410 $ 153,060 $ 219,598

Non-cash
transactions:
Shares
issued on
exercise of
performance
share
units - 1,657,338 1,003,629 1,657,338
Shares to
be issued on
acquisition
of
intellectual
property
and other
intangible
assets
(note 6(c)) - - 1,551,426 -
Leasehold
improvements
acquired
through
leasehold
inducement 551,000 - 551,000 -

--------------------------------------------------------------------
--------------------------------------------------------------------

See accompanying notes to consolidated financial statements.


WESTPORT INNOVATIONS INC.
Notes to Consolidated Financial Statements (unaudited)
(Expressed in Canadian dollars)

Three and nine months ended December 31, 2004 and 2003


1. Basis of presentation:

The unaudited consolidated balance sheet as at December 31, 2004 and the
unaudited consolidated statements of operations and deficit and cash
flows for the three and nine months ended December 31, 2004 and 2003
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. These
financial statements have been prepared, except as disclosed in note
2(a), 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, 2004. Certain comparative figures have been
reclassified to conform with the basis of presentation adopted in the
current year.

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 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
December 31, 2004 and for all periods presented, have been included.

2. Accounting policies:

a) Stock-based compensation:

In November 2003, the Accounting Standards Board ("AcSB") amended
Handbook Section 3870 - "Stock-based compensation and other Stock-based
Payments". Amended HB 3870 requires that stock based compensation
related to stock options granted to employees and directors be accounted
for using the fair value method and recognized as stock-based
compensation in results from operations over the vesting period.
Effective for the Company's fiscal year beginning April 1, 2004, the
Company adopted these amended recommendations of HB 3870. As permitted
by HB 3870, the Company has retroactively adopted the fair value method
of accounting for these awards without restatement of prior periods.
Adoption of amended HB 3870 resulted in an increase to the opening
deficit and share capital as of April 1, 2004 of $2,493,153 and $67,753
respectively to reflect the cumulative effect of the change on prior
periods with a corresponding increase in additional paid in capital of
$2,425,400. Prior to adoption of amended HB 3870, the Company recognized
stock based compensation for options granted to employees and directors
using the intrinsic value method which had resulted in no stock-based
compensation expense related to such grants.

b) Inventories:

The Company's inventory consists of CWI engine products. Inventories are
stated at the lower of cost, on a specific identification basis, or net
realizable value.

c) Deferred lease inducements:

The Company renegotiated its existing long-term lease agreements for its
corporate offices and research facilities in 2004 and 2005 that included
certain lease inducements that are accounted for in accordance with
EIC-21 "Accounting for Lease Inducements by the Lessee". These
inducements included capital leasehold improvements and other costs
funded by the lessor and periods with reduced rental payments. The lease
inducement benefits are amortized on a straight-line basis over the term
of the lease as a reduction to rental expense. Leasehold improvements
acquired as part of the lease inducement are amortized over the term of
the lease.

3. Cash and cash equivalents:

A total of $676,118 in cash has been set aside as security for certain
capital lease and other long-term debt obligations. This amount will be
reduced as the principal amounts owing on these obligations are paid
down.

4. Share capital:

On September 10, 2004, the Company entered into a bought deal financing
agreement with a syndicate of investment dealers for 9,000,000 units
consisting of 9,000,000 common shares and 4,500,000 common share
purchase warrants (the "Warrants"). The units were priced at $1.80 per
unit for gross proceeds of $16,200,000 and net proceeds of $15,104,866,
which is being used for research and development expenditures and
general corporate purposes. On September 29, 2004, the financing
successfully closed. Each Warrant entitles the holder to acquire, on or
before March 29, 2006, one common share of the Company upon payment of
$2.10 per share.

5. Share purchase options:



--------------------------------------------------------------------
Nine months ended Nine months ended
December 31, 2004 December 31, 2003
------------------------ ------------------------
Share Weighted Share Weighted
options average options average
exercise exercise
price price
--------------------------------------------------------------------
Outstanding,
beginning
of year 3,254,688 $ 3.93 3,811,909 $ 4.61
Granted 326,810 1.98 827,473 1.60
Exercised (74,694) (1.88) (37,837) (1.50)
Cancelled (1,022,230) (3.85) (1,113,299) (3.12)
--------------------------------------------------------------------

Outstanding,
end of
year 2,484,574 $ 3.80 3,488,246 $ 3.82
--------------------------------------------------------------------
--------------------------------------------------------------------

Exercisable,
end of
year 2,041,751 $ 4.15 2,875,748 $ 3.95
--------------------------------------------------------------------
--------------------------------------------------------------------


Effective April 1, 2004, the Company recognizes stock-based compensation
for employees using the fair value method (note 2(a)). The Company
adopted this policy retroactively without restatement. Had compensation
cost for the three and nine months ended December 31, 2003 for employee
share options granted on or after April 1, 2002 been determined based on
fair value at the grant dates of the share options and charged to
operations over the vesting period of the options consistent with the
recommendations in amended HB 3870, net loss and net loss per share for
the three and nine months ended December 31, 2003 would be as follows:



--------------------------------------------------------------------
December 31, 2003
-----------------------------
Three months Nine months
--------------------------------------------------------------------

As reported:

Net loss $ 13,021,740 $ 31,102,364

Net loss per share
Basic and diluted $ 0.20 $ 0.54

Stock-based compensation $ 1,377 $ 164,667
--------------------------------------------------------------------

Pro-forma:

Net loss $ 13,078,167 $ 31,895,742

Net loss per share
Basic and diluted $ 0.20 $ 0.56

Stock-based compensation $ 57,804 $ 958,045

--------------------------------------------------------------------
--------------------------------------------------------------------


The fair value of options granted for purposes of stock-based
compensation has been determined using the Black-Scholes option pricing
formula using the following weighted average assumptions: expected
dividend yield - nil%; expected stock price volatility - 68.40% (2003 -
93.43%); risk free interest rate - 3.49% (2003 - 3.14%); expected life
of options - 4 years (2003 - 4 years). The average fair value of options
granted for the three and nine months ended December 31, 2004 was $0.87
(2003 - $1.21) and $1.11 (2003 - $1.10).

6. Other equity instruments:



--------------------------------------------------------------------
December 31, March 31,
2004 2004
--------------------------------------------------------------------
(Unaudited)

Value assigned to performance
share units (a) $ 1,445,449 $ 1,864,808
Value assigned to TPC warrants (b) 2,000,000 1,142,857
Shares to be issued (c) 1,551,426 -
--------------------------------------------------------------------

$ 4,996,875 $ 3,007,665
--------------------------------------------------------------------
--------------------------------------------------------------------


a) Share units:

Pursuant to the Company's 2003 Share Unit Plan (the "2003 Plan"), the
Company may issue up to 2,500,000 common shares with each unit ("Unit")
exercisable into one common share of the Company for no additional
consideration. Any employee, contractor, director or executive officer
of the Company who is selected by the Board of Directors of the Company
is eligible to participate in the 2003 Plan. The Executive Plan sets out
provisions where the Units will be granted to the Company's executive
management if specific performance milestones are achieved as
established by the Human Resources and Compensation Committee in
consultation with the Company's management. These performance milestones
are focused on achievement of key cash management, profitability and
revenue growth objectives. Each Unit vests 1/3 on the grant date and 1/3
on each anniversary thereafter for a period of two years.

During the three and nine months ended December 31, 2004, nil and
1,197,728 Units have been granted by the Company. During the three and
nine months ended December 31, 2003, nil and 78,225 Units were granted.
During the three and nine months ended December 31, 2004, nil and
474,349 Units were exercised and as at December 31, 2004 there are
1,104,879 performance share units outstanding. The stock-based
compensation associated with the 2003 Plan and the stock option plan
(note 5), is included in operating expenses as follows:



--------------------------------------------------------------------
Three months ended Nine months ended
December 31 December 31
----------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------
Research and
development $ 71,820 $ 1,377 $ 176,241 $ 30,878
General and
administrative 136,490 - 481,551 133,789
Sales and
marketing 4,940 - 28,040 -
--------------------------------------------------------------------
$ 213,250 $ 1,377 $ 685,832 $ 164,677
--------------------------------------------------------------------
--------------------------------------------------------------------


b) TPC warrants:

Under the terms of the agreement with Technology Partnerships Canada
("TPC"), warrants with a fair value of $4,000,000 based on the
Black-Scholes pricing model will be issued on September 30, 2006. The
value of the warrants is being recognized on a straight-line basis to
September 30, 2006. For the three and nine months ended December 31,
2004, accretion totaling $285,714 (2003 - $285,714) and $857,142 (2003 -
$857,143), respectively, has been included in research and development
expenses.

c) Shares to be issued:

On July 3, 2002, the Company purchased substantially all of the assets
of GVH Entwicklungsgesellchaft fur Verbrennungsmotoren and
Energietechnik mbH ("GVH"), of Dortmund, Germany. Additional
consideration relating to the GVH acquisition of up to Euros 3,850,886
(approximately $5,789,000) may be payable when three pre-defined
milestones are achieved and announced. This contingent consideration was
excluded from the purchase equation. Two of the three milestones relate
to the issuance of patents regarding hot surface ignition. The third
milestone relates to the Company entering into an agreement with an
engine manufacturer to commercialize hot surface ignition technology.
This contingent consideration will be paid for through the issuance of
shares of the Company. The shares will be issued and priced only when
the pre-defined milestones are achieved and not before July 3, 2006. If
any milestone is achieved prior to July 3, 2006, the Company will accrue
a corresponding amount to be paid as an increase to Intellectual
Property, and as an increase to Shareholders' Equity, classified as
shares to be issued. In April 2004, one of the milestones was achieved
and up to Euros 962,722 ($1,551,426 Canadian) worth of shares are
currently issuable after July 3, 2006. This amount has been accrued as
shares to be issued with a corresponding increase in intellectual
property.

7. Research and development expenses:

Research and development expenses are recorded net of program funding
received or receivable. For the three and nine months ended December 31,
2004 and 2003, the following research and development expenses had been
incurred and program funding received or receivable:



--------------------------------------------------------------------
Three months ended Nine months ended
December 31 December 31
--------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------------------

Research and
development
expenses $ 5,674,637 $ 8,862,692 $ 17,888,721 $ 28,101,053
Program
funding (837,657) (1,046,881) (3,914,497) (6,521,118)
--------------------------------------------------------------------

Total
research and
development
expense $ 4,836,980 $ 7,815,811 $ 13,974,224 $ 21,579,935
--------------------------------------------------------------------
--------------------------------------------------------------------


In the three and nine months ended December 31, 2004, program funding is
comprised mainly of funding from TPC, Sustainable Development Technology
Canada, and National Renewable Energy Laboratory, which was used to fund
research and demonstration projects including the adaptation of the
Company's technology to diesel engines. In the three and nine month
periods ended December 31, 2003, program funding is comprised mainly of
funding from TPC which was used to fund research projects including the
adaptation of the Company's technology to diesel engines. At December
31, 2004, $2,919,398 (March 31, 2004 - $2,508,874) of funding earned by
the Company based on the terms of various funding agreements has not yet
been received and is included in accounts receivable.

8. Investment in Cummins Westport Inc.:

The consolidated financial statements include the Company's 100% share
of the revenues, expenses, assets and liabilities of the joint venture,
Cummins Westport Inc., as follows:



--------------------------------------------------------------------
December 31, March 31,
2004 2004
--------------------------------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 182,011 $ 574
Accounts receivable 2,827,441 2,676,956
Inventory 1,594,866 -
Prepaid expenses and other
current assets 81,025 187,190
--------------------------------------------------------------------

$ 4,685,343 $ 2,864,720
--------------------------------------------------------------------
--------------------------------------------------------------------

Current liabilities:
Accounts payable and
accrued liabilities $ 3,589,026 $ 650,720
Current portion of
warranty liability 3,862,974 3,814,163
--------------------------------------------------------------------

$ 7,452,000 $ 4,464,883
--------------------------------------------------------------------
--------------------------------------------------------------------

Long-term liabilities:
Warranty liability $ 2,677,378 $ 4,059,744
--------------------------------------------------------------------
--------------------------------------------------------------------


Three months ended Nine months ended
December 31 December 31
--------------------------- --------------------------
2004 2003 2004 2003
--------------------------------------------------------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)

Product
revenue $ 6,835,492 $ 7,285,570 $ 16,439,620 $ 16,807,937
Parts
revenue 2,211,330 611,886 6,917,987 2,079,607
--------------------------------------------------------------------

9,046,822 7,897,456 23,357,607 18,887,544

Cost of
revenues and
expenses:
Cost of
revenue 5,497,710 5,296,710 15,734,902 12,569,591
Research and
development 1,385,372 5,159,312 5,087,341 16,218,032
General and
administrative 177,865 302,679 1,007,889 670,168
Sales and
marketing 672,000 1,593,509 2,494,437 3,806,575
--------------------------------------------------------------------
7,732,947 12,352,210 24,324,569 33,264,366
--------------------------------------------------------------------

Income (loss)
before
undernoted 1,313,875 (4,454,754) (966,962) (14,376,822)

Write down
of equipment,
furniture, and
leasehold
improvements - (2,631,045) - (2,631,045)
--------------------------------------------------------------------

Income (loss)
for the
period $ 1,313,875 $ (7,085,799) $ (966,962) $(17,007,867)
--------------------------------------------------------------------
--------------------------------------------------------------------


9. Segmented information:

The Company currently operates in one operating segment which involves
the research and development and 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 and nine months ended December 31, 2004, 83% (2003
- 92%) and 69% (2003 - 89%) respectively of the Company's revenue was
from sales in North America, 7% (2003 - 8%) and 16% (2003 - 10%)
respectively from sales in China, and 10% (2003 - 0%) and 15% (2003 -
1%) respectively from the rest of the world.

-30-

Contact Information

  • FOR FURTHER INFORMATION PLEASE CONTACT:
    Westport Innovations Inc.
    Alexis Zehr
    Investor Relations & Communications
    (604) 718-2046
    Email: invest@westport.com
    Website: www.westport.com