Westport Fuel Systems Annual Report 2015

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FY2015 Annual Report · Westport Fuel Systems

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WESTPORT INNOVATIONS INC.

2015 ANNUAL REPORT

1750 West 75th Avenue, Suite 101

Vancouver, British Columbia V6P 6G2

Canada

T +1 604-718-2000

F +1 604-718-2001

www.westport.com

TABLE OF CONTENTS

LETTER TO SHAREHOLDERS

SUSTAINABILITY REPORT

CATALYST FOR INNOVATION

KEY COLLABORATIONS

THE REPORT: OUR APPROACH AND SCOPE

FOOTNOTES

MANAGEMENT'S DISCUSSION & ANALYSIS

BUSINESS OVERVIEW

GENERAL DEVELOPMENTS

SELECTED ANNUAL FINANCIAL INFORMATION

RESULTS FROM OPERATIONS

CAPITAL REQUIREMENTS, RESOURCES & LIQUIDITY

CONTRACTUAL OBLIGATIONS & COMMITMENTS

CONTINGENT OFF-BALANCE SHEET ARRANGEMENTS

SHARES OUTSTANDING

CRITICAL ACCOUNTING POLICIES & ESTIMATES

NEW ACCOUNTING PRONOUNCEMENTS & DEVELOPMENTS

DISCLOSURE CONTROLS & PROCEDURES

SUMMARY OF QUARTERLY RESULTS

RELATED PARTY TRANSACTIONS

BUSINESS RISKS & UNCERTAINTIES

REPORTS

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEET

CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

CONSOLIDATED STATEMENTS OF CASH FLOWS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INFORMATION FOR SHAREHOLDERS

2 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

LETTER TO
SHAREHOLDERS

To our shareholders,

The transportation sector is undergoing a profound
transformation, with the industry expected to change more
in the next ten years than it has in the past one hundred.
The Paris Climate Accord signals a strong call to action
with more than 175 countries committing to large
greenhouse gas (“GHG”) emissions reductions over the
next 15 years. The increasing availability of low-carbon
fuels, the rise of a poly-fuel economy with natural gas,
electric vehicles, biofuels, and hydrogen competing with
diesel and gasoline, continued technological advancements
and breakthroughs on both incumbent and new
powertrains, the participation of non-traditional industry
players like Google and Apple with capital to invest in
autonomous vehicles, and the emergence of new
transportation companies like Uber have already begun to
influence how people and freight are moved, and how and
where we live.

Our 2015 strategy was crafted to ensure that Westport
maintains its position as the global leader in alternative
fuel solutions for the transportation sector. There were
four key elements to this strategy and we had confidence in
our ability to achieve them despite macro headwinds in
multiple end markets. We are pleased to report our
progress this year.

Firstly, Westport is about advanced technology. The
first-generation of natural gas vehicles are now well
established in the marketplace-with many delivered
through our joint ventures or incorporate Westport
proprietary components-and with some major customers
now having years of experience, we believe the market
opportunity is becoming clear. Customers know what to
expect and are demanding alternative fuel solutions that
have the performance, cost, and emissions characteristics
to match the best diesel- and gasoline-powered products
currently available.

We will continue to invest in our technology portfolio
to deliver the best product solutions to our original
equipment manufacturer (“OEM”) customers, who will in
turn launch world-leading products that shift the world
from its reliance on petroleum-based fuels. In 2015, for
example, we launched the next-generation vehicles with
Volvo Car and Ford F-150 pickup trucks powered by
Westport WiNG™ Power System. As urban air quality

LETTER TO SHAREHOLDERS

remains a critical environmental challenge in key markets,
we are particularly proud of the announcement for the
Cummins Westport ISL G Near Zero NOx natural gas
engine launch, because this product will reduce the already
low NOx emissions from our current Cummins Westport
Inc. (“CWI”) engines by another 90%.

We continue to invest heavily in delivering the Westport
high pressure direct injection (“Westport™ HPDI”) 2.0
program to meet the performance and durability standards
demanded by our OEM customers. We also announced a
new alliance with AVL of Austria and successfully
advanced or completed technology proof of concept studies
with new OEM partners. The Westport™ HPDI 2.0
program is on schedule, on budget, and expected to be
ready for field test trucks in late 2016, with early
production trials commencing in 2017 with our first
demonstration customers. Given the challenge of
economically replacing the energy density of fossil fuels,
we believe Westport™ HPDI 2.0 remains the only viable
alternative fuel solution for heavy-duty vehicles in the
market today.

Secondly, we said we would rationalize and
consolidate our current product portfolio to reduce
cost, improve margin, ensure customer value and leading
price performance, and achieve full system sales beyond
individual component sales. We delivered examples of this
in 2015, and the process will continue as we complete our
proposed merger with Fuel Systems Solutions, Inc. ("Fuel
Systems") and rationalize our joint product offerings.

Thirdly, we committed to identifying and executing
the sale of non-core assets. We have reached
satisfactory terms with several counterparties, including
the previously announced asset sale to Cartesian Capital
Group. We will announce details as these transactions
close and continue to do so throughout 2016 as we reach
for synergies following the anticipated merger with Fuel
Systems.

Finally, as we make the transition from a research and
development company to a growing and profitable
operating company, we made relentless progress to drive
cost efficiencies and reduce our global overhead
expenses. This year was a challenge due to currency
volatility and the tremendous uncertainty of global energy
prices. However, while some lines of business were
seriously impacted by market conditions, we were still able
to reduce our operating expenses by $37 million for the
year, compared to 2014. This came through cost
discipline, prioritization of investments, improved

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 3

OEMs, with the economic benefits of using a less expensive
and even renewable fuel like renewable natural gas.
According to the California Air Resources Board Low
Carbon Fuel Standard reporting tool, more than 50% of
natural gas vehicles in California are now powered by
renewable natural gas from landfills, dairies, and other
sources, rather than fossil natural gas. This is a global
trend that we expect to grow rapidly.

With the compelling performance of next-generation
natural gas vehicles, increased product choice, and
emissions reductions benefits, we believe that Westport is
well-positioned in key markets and segments as policy
makers and OEMs bring more alternative fuel solutions
into the transportation energy mix.

We look forward to continuing to develop our global
business in 2016, and progressing our vision of a diverse
transportation energy mix powered by clean, low-carbon,
inexpensive natural gas. On behalf of our Board of
Directors, the management team and employees around
the world, thank you for your continued interest and
support for Westport.

Sincerely,

David R. Demers
Chief Executive Officer

Ashoka Achuthan
Chief Financial Officer

LETTER TO SHAREHOLDERS

efficiencies, and some favourable currency exchange
factors.

As a result, the Westport Operations business unit’s
adjusted EBITDA improved significantly to a $1.7 million
loss in Q4 2015, compared with $11.6 million in Q4 2014,
an 85% improvement. This is despite a drop in revenue
year-over-year (partly as a result of our product line
reduction process). Our cash used in operations during
the year saw a similarly dramatic improvement with $46.8
million used in the year, compared with $97.6 million in
2014, an improvement of 52%. CWI delivered a
particularly strong financial performance after two years of
warranty reserve adjustments. In addition, CWI had two
important new product announcements that will position
us for a strong performance in 2016.

After the year-end, we strengthened our balance sheet
through a strategic financing with Cartesian Capital Group
and the sale of non-core assets. This solid foundation is
expected to be further bolstered following completion of
the proposed merger with Fuel Systems. We expect that
our proposed merger with Fuel Systems will improve both
companies’ competitive positioning across the spectrum
going forward. We believe we will have strong offerings at
the low-cost end of the spectrum, as well as unique
technologies, such as Westport™ HPDI 2.0, for customers
demanding the same efficiency, emissions, and engine
performance as diesel. We believe that we will have
distinctive systems development capabilities for OEMs
who are now looking to move into the next generation of
differentiated products.

In 2016, we will continue to advance our strategy and focus
on the key elements that will drive success which include:

• Completion of the proposed Fuel Systems merger

including associated integration;

• Advancement of Westport™ HPDI 2.0 to

commercialization;

• Continued rationalization of our portfolio, while

maintaining openness to market growth opportunities;

• Strengthening of our balance sheet; and

• Relentless pursuit of finding cost efficiencies and

lowering expenses.

The transportation sector is facing unrelenting pressure to
innovate on engine and vehicle performance, find cost
reductions, and reduce emissions. The global focus on
greenhouse gases also introduces a new opportunity for
Westport. Our technologies present the right solutions to

4 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

CHANGING THE WAY
THE WORLD MOVES

The transportation sector is undergoing profound change,
with the industry expected to change more in the next ten
years than it did in the last 100. The Paris Climate Accord
signals a strong call to action as nearly 200 countries
committed to large reductions in greenhouse gas (“GHG”)
emissions over the next 15 years, quantified carbon dioxide
(“CO2”) mitigation targets, and $100 billion in financing of
actions. The increasing availability of low-carbon fuels, the
rise of a poly-fuel economy with natural gas, electric
vehicles, biofuels, and hydrogen competing with diesel and
gasoline, continued technological advancements and
breakthroughs on both incumbent and new powertrains,
and the emergence of new transportation companies like
Uber have already begun to influence how people and
freight are moved, and how and where we live.

Our 2015 Sustainability Report highlights Westport’s
updates, progress, and challenges in reaching our vision of
a sustainable transportation future. We continue to strive
to create leading edge technologies that meet or exceed the
requirements of legislation and industry codes and
standards to shift the transportation sector to natural gas.
Working in conjunction with our partners, we are
committed to delivering low-emission natural gas
solutions that will meet the demand for high-efficiency,
high-performance, and low-carbon transportation.

We appreciate your time in reviewing our progress for
2015 and welcome your feedback or inquiries.

A CATALYST FOR
INNOVATION

The heightened focus on the environmental performance
of the transportation sector with more stringent
requirements for increased engine efficiency, improved
urban air quality, and GHG emission reductions has put
pressure on engine and vehicle manufacturers but
introduced an opportunity for collaboration and
innovation.

SUSTAINABILITY REPORT

INCREASED ENGINE
EFFICIENCY

The United States Environmental Protection Agency
(“EPA”) and the National Highway Traffic Safety
Administration (“NHTSA”) announced their intention to
create a national program to establish the next phase of
greenhouse gas emissions and fuel efficiency standards for
medium- and heavy-duty vehicles. The draft proposal
released in July 2015 covered medium- and heavy-duty
trucks and commercial vehicles beginning with model year
2021 through 2027 and a continuation of the Phase 1 GHG
rules established from 2014–2018.

The agencies sought comments from industry on the
impacts of the rule, and the ability of engine and
technology providers to comply and provide the next
generation of fuel efficient engines. We contributed to this
discussion with our partners by providing comprehensive
comments about issues critical to natural gas vehicle
compliance and to ensure that the agencies were well
informed about the potential of natural gas vehicles to help
meet future GHG limits. A final rule is expected in 2016.

Under the draft rule, natural gas engine technologies
remain a strong pathway for the long term reduction of
CO2 emissions and will comply with the stringent new
limits set for medium- and heavy-duty vehicles.

IMPROVED URBAN AIR
QUALITY

The California Air Resources Board (“CARB”) adopted
optional low oxides of nitrogen (“NOx”) emission
standards for on-road heavy-duty engines in 2013. For
California to meet its 2023 and 2023 ambient ozone air
quality standards, CARB estimates that it will require a
90% reduction in NOx emissions below 2010 baseline
levels measured in the South Coast air basin.

The Cummins Westport ISL G Near Zero became the first
mid-range engine in North America to receive emissions
certifications from both the U.S. EPA and ARB in
California that meet the 0.02 g/bhp-hr optional Near Zero
NOx Emissions standards for medium-duty truck, urban
bus, school bus, and refuse applications. Methane
emissions have also been cut dramatically though the
combined use of closed crankcase ventilation and revised
catalyst formulations. Coupled with renewable natural gas
(“RNG”), an ISL G Near Zero will offer zero-emission
benefits comparable to an electric vehicle.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 5

SUSTAINABILITY REPORT » A CATALYST FOR INNOVATION

REDUCED GHG EMISSIONS

As an engine and fuel system manufacturer, Westport’s
first priority is to ensure that our products comply with the
latest and most stringent environmental regulations. This
has historically been focused on reducing urban air
pollutants, an area where natural gas engines and vehicles
have been very successful. Increasingly we are tasked to
comply with stringent GHG regulations that focus
specifically on reducing carbon dioxide and other
greenhouse gases such as methane and nitrous oxide
(“N2O”). Current regulations cover the GHG emissions
produced by the engine alone, on a tank-to-wheels
(“TTW”) basis.

The chemical and physical properties of natural gas
(predominantly methane) position it as a low carbon fuel
for transportation. For every mega Joule (“MJ”) of energy
released through the combustion of natural gas,
approximately 25% less CO2 emissions are produced
compared to combusting diesel or gasoline.

We continuously look for technology solutions to
simultaneously:

• Improve engine efficiency (increase the amount of

energy output per MJ of fuel energy input),

• Reduce CO2 emissions, and

• Reduce emissions of methane (using the most advanced

combustion optimisation tools and techniques).

The Cummins Westport ISL G Near Zero NOx 8.9L engine
is scheduled for launch in 2016 will remove a significant
source of methane emissions via the use of closed
crankcase ventilation (“CCV”) technology.

Westport™ HPDI 2.0 technology, which is optimum for
heavy-duty (“HD”) vehicles, includes further
improvements to maximize the GHG benefits of natural
gas. These include a closer match to the base diesel engine
efficiency, careful optimisation of combustion to limit
unburnt methane emissions to less than 0.2% of total fuel
flow, and capture of regulator ventilation.

6 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

For the CWI ISX12 G, ISL G and ISL G Near Zero engines, the tailpipe
CO2, methane, and N2O emissions were taken from EPA and CARB
certification Executive Orders. HPDI 2.0 attributes are based on
Westport internal data. GHG benefits are calculated using the EPA
specified methods applicable to Phase 1 GHG Regulations.

Westport’s North American products are certified in
accordance with the relevant stringent regulatory
requirements set by the EPA and CARB, and with the
equivalent regulatory frameworks in place in our global
markets. In many of these markets, engine emissions of
both CO2 and methane are measured and accounted for as
part of the certification process, this ensures compliance
with the latest GHG aspects of regulation.

With modest engineered enhancements, our product plans
will see us fully compliant with even the strictest
requirements of the newest CO2 regulations out to 2021
and beyond.

THE POTENTIAL OF RNG

As an engine and fuel system manufacturer, our direct
responsibility is for the performance of fuels in the engines
we develop and the emissions created by the engine.
However, when any transportation fuels are used, it is not
just the direct emissions that are factored in the decision.
There are emissions that are generated in the production
of all fuels (i.e. oil extraction, refining, electricity
generation, natural gas processing and transmission).
When these emissions are taken into account, a well-to-
wheel (“WTW”) comparison can be made that includes
the carbon intensity in producing, delivering, and
combusting fuels.

Depending on the upstream production and supply chain
energy and emissions characteristics, some of the low
carbon benefit of fossil natural gas is reduced (from ~25%
lower to ~17% lower than petroleum). However,
transportation grade natural gas is increasingly being

produced from non-fossil sources, in the form of RNG or
biomethane. Feedstocks for RNG include landfill gas
(“LFG”), municipal solid waste (“MSW”), waste water
treatment plants (“WWTP”), or agricultural manure.

In the case of these alternative natural gas feedstocks,
substantial carbon intensity reductions can be achieved

SUSTAINABILITY REPORT » A CATALYST FOR INNOVATION

since turning these waste products into transportation fuel
eliminates direct emissions of CO2 and methane that occur
naturally and without any end-use benefit.

This chart shows the fuel carbon intensity on a per unit energy basis. For example, for 1 MJ of energy of CNG made from landfill gas and used in
an engine, the total amount of CO2 WTW that results is about 85% lower than using 1 MJ of diesel. This chart addresses only the fuel, and as such
does not take into account engine tailpipe emissions of methane, or any differences in engine efficiency.

When vehicle efficiency and tailpipe emissions are
accounted for, RNG (in this case from landfill gas) can
reduce the greenhouse gas emissions of natural gas heavy
duty trucks by approximately 75% compared to the level
produced from equivalent diesel trucks[1].

Landfill Gas fuel carbon intensity from GREET (greet.es.anl.gov) life-
cycle emissions model maintained by Argonne National Labs.

KEY COLLABORATIONS
IN 2015

Industry leadership begins with outreach and dialogue and
we have contributed to many technical working groups,
committees, and advisory panels to learn, share our
expertise, and help build a body of knowledge about
natural gas vehicles, their benefits, and challenges with
deployment.

While the economic value proposition remains the primary
driver of natural gas for transportation, policy makers,
OEM partners and industry stakeholders are looking to the
other compelling energy, environmental, and sustainability
benefits. It is critical for Westport to contribute sound,
intelligent, data driven, and defensible analysis to a
discussion on sustainable mobility and the transition to
alternative fuels.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 7

SUSTAINABILITY REPORT » KEY COLLABORATIONS

BUSINESS FOR SOCIAL
RESPONSIBILITY
Future of Fuels
www.bsr.org

Westport has been a member of Business for Social
Responsibility (“BSR”) since 2012 and was a founding
member of the Future of Fuels working group.[2] The
mission of Future of Fuels is to identify and promote
transportation fuel pathways that enhance the
sustainability and availability of emerging alternative fuel
choices. The working group’s objectives are to develop
tools and research to map, measure, and manage a
sustainable transition to low-carbon commercial freight,
convene value chain stakeholders to identify and address
the greatest challenges to the deployment of sustainable
fuels, and build partnerships that catalyze and test low-
carbon commercial freight solutions.

In 2015, Future of Fuels published The Sustainability
Impacts of Fuel[3] and five fuel briefs (petroleum, natural
gas, electrification, hydrogen, biofuels) for sustainability
practitioners outlining tactical approaches to accelerate the
transition to low-carbon fuels. The Fuel Sustainability
Tool was launched in 2015 to enable corporate decision-
makers to compare fuel pathways within different types of
fuels used in medium-and heavy-duty trucks.

THE CARBON DISCLOSURE
PROJECT
www.cdp.net

The Carbon Disclosure Project (“CDP”) is an international,
not-for-profit organization providing the only global
system for companies to measure, disclose, manage and
share environmental performance information. It works
with 822 investors with US$95 trillion in assets and holds
the largest collection of self-reported corporate climate
data.

We prepared our first CDP report in 2012 and have
committed to file annual reports detailing our
environmental performance in accordance with the CDP
methodology. Our 2015 report is available for viewing at
the CDP website.[4] As a clean technology leader, we
recognize that we must accurately account for and mitigate
the environmental impact of natural gas engines and
vehicles. Our work with the CDP is a major step in
expanding the reach and rigour of Westport’s
sustainability transparency.

8 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

COP 21
Implications for the Transport Sector

The Paris Climate Accord signals a strong call to action as
nearly 200 countries committed to large reductions in
greenhouse gas emissions over the next 15 years,
quantified CO2 mitigation targets, and $100 billion in
financing of actions.

As part of the many activities concurrent with the annual
Conference of Parties (“COP”) 21, Westport was invited by
the World Intellectual Property Organization and the
National Institute of Industrial Property (“INPI”), France
to display Westport™ HPDI technology as part of their
innovation poster showcase at the Solutions COP21
exposition in Paris. Westport was one of only two
Canadian companies selected to display its technology
along with cutting edge sustainable technologies from 70
countries.

There is an urgent need for sustainable, low-carbon
solutions for the transportation and energy sectors.
Because natural gas vehicles can operate with 100 percent
renewable natural gas or any percentage of blended
renewable and conventional gas, they are a promising
technology for freight transportation now and into the
future as renewable fuels are expected to represent a
greater market share of fuel consumed.

ENVIRONMENTAL DEFENSE FUND
Pump to Wheels Methane Leakage
Study

The Environmental Defense Fund (“EDF”) has a history of
cross-sector collaboration and balanced environmental
analysis. In 2012, the EDF initiated a series of studies with
academic and industry partners to better understand the
source and quantity of methane emissions along the
natural gas supply chain.[5] Westport is a core supporting
member of a multi-partner study initiated by EDF and
conducted by the Center for Alternative Fuels, Engines and
Emission (“CAFEE”) at West Virginia University.

The study was completed in 2015 and provides an
important data baseline of in-use natural gas vehicles and
fueling stations. We anticipate the module covering
natural gas vehicle and fuel systems will be published in
2016. Participation in working groups and studies of this
nature help to advance Westport and industry leadership
by providing credible and defensible data using widely
accepted methodologies and scientific principles.

OUR APPROACH AND
SCOPE

This is our seventh published sustainability report,
documenting our strategy, programs and achievements
related to the environment, the safety of people and
products, our employees, and our community. The scope of
this report relates only to our operations in British
Columbia, Canada. We have identified a need to extend the
scope to encompass all of our global operations and are
working to establish processes to achieve this goal. While
the majority of our engine testing and development occurs
in Vancouver, we recognize that we must tell a more
complete story about our activities, success and challenges.
This report discloses data from January to December 2015.
Historical data from the past four fiscal years have been
included for comparative purposes, where appropriate.

REPORT CONTENT

This report has been developed in accordance with the
Global Reporting Initiative ("GRI") G3 standard reporting
guidelines. The GRI is an independent institution that
provides a standard framework for sustainability reporting
across companies and industries. We have applied the
principles of materiality and stakeholder inclusiveness as
recommended by the GRI to assess the relevance of
sustainability priorities to Westport and our stakeholders.

Westport has self-declared this report to correspond to
application level B in the sex-level grid of the GRI G3
guidelines. Application Level B requires us to disclose our
performance on at least twenty core economic, social and
environmental indicators.

DETERMINING MATERIAL ISSUES

The intent of the new GRI G4 materiality review process is
to ensure that content included in our annual sustainability
report represents the key environmental, economic, and
social issues that are most critical to our stakeholders.

In 2015 we undertook an extensive internal risk management
exercise which will guide and supplement our process for
determining materiality in accordance with the framework
of the new G4 reporting guidelines. We reviewed our existing
mechanisms for gathering stakeholder feedback and
sought additional input where possible to organize our

SUSTAINABILITY REPORT » REPORT CONTENT

the prioritization matrix

findings using
system
recommended by GRI. While the GRI has recommended that
we comply with the G4 guidelines by December 31, 2015, we
will be able to do so by December 31, 2016.

GRI INDICATOR INDEX

LEGEND

AA1

(we report on this indicator)
[indicator description] » (report location)

BB2

(we partially report on this indicator)

ECONOMIC PERFORMANCE

EC1

EC2

Direct economic value generated and distributed
» (2014 Audited Financial Statements)

Financial implications and risks and opportunities of climate
change » (Climate Change Risks and Opportunities)

SOCIAL PERFORMANCE
HR3

Employee training on human rights » (Human Rights)

LA1

LA3

LA6

LA7

SO1

SO2

SO3

PR1

PR2

Total workforce by employment type, employment contract, and
region » (Employee)

Benefits provided to full-time, part-time and temporary
employees » (Employee)

Workforce represented in Occupational Health and Safety
Committees » (Health and Safety)

Rates of injury, occupational disease, lost days, and work-related
fatalities » (Health and Safety)

Nature, scope and effectiveness of programs to manage impact
on communities » (Community Impacts)

Percentage and total number of business units analyzed for risks
related to corruption » (Anti-Corruption Efforts)

Percentage of employees trained on anti-corruption policies and
procedures » (Anti-Corruption Efforts)

Life cycle stages: health and safety impacts of products-assessed
for improvements » (Product Responsibility)

Total number of incidents of non-compliance with regulations
and voluntary codes concerning health and safety impacts of
products » (Health and Safety)

ENVIRONMENTAL PERFORMANCE
EN3 Direct energy consumption by primary energy source » (Energy)

EN4

EN5

EN6

EN7

EN8

Indirect energy consumption by primary source » (Energy)

Energy saved due to conservation and efficiency efforts
» (Energy)

Initiatives to provide energy-efficient or renewable based
products and reductions » (Energy)

Initiatives to reduce indirect energy consumption and reductions
achieved » (Energy)

Total water withdrawal by source » (Water)

EN16 Total direct and indirect greenhouse gas emissions

» (Greenhouse Gas Emissions)

EN18 Initiatives to reduce GHG emissions and reductions achieved

» (Greenhouse Gas Emissions)

EN22 Total amount of waste by type and disposal method

» (Waste Generation and Diversion)

EN23 Total number and volume of significant spills
» (Waste Generation and Diversion)

EN28 Value of fines and non-monetary sanctions for environmental

non-compliance » (Environmental Compliance)

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 9

SUSTAINABILITY REPORT » REPORT CONTENT » SOCIAL PERFORMANCE INDICATORS

SOCIAL PERFORMANCE
INDICATORS

Human Rights

Westport is dedicated to preserving all fundamental and
universally recognized human rights as outlined by the
United Nations and the International Labour
Organization. Our commitment is stated and reinforced by
our Code of Conduct which is reviewed and signed
annually by each of our employees.

Total Workforce

Westport is committed to providing a healthy work
environment, defined by respectful relationships,
professional development and advancement potential and
an execution-focused culture to capitalize on business
opportunities. We are dedicated to ensuring that Westport
remains a desirable employer in all our locations. A similar
benefits package is offered to both full-time and part-time
employees.[6]

TOTAL WORKFORCE

as of Dec. 31, 2015

Full
Time

Part
Time

Fixed Term

Payroll Agency

Co-op

Grand
Total

Argentina

Australia

Canada

China

France

India

Italy

Korea

Netherlands

Sweden

United Kingdom

United States

282

234

Grand Total

725

Health and Safety

302

261

817

The health and safety of our employees, facilities, and
communities is an integral part of Westport’s operations.
When gauging world-class safety performance, recordable
injury rates and lost-time injury rates are statistical,
comparative industry measures. Our results are indicative
of our ongoing and significant commitment to injury
prevention, risk mitigation, regulatory compliance, and
continuous safety improvement.

10 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

Our Health and Safety Committee members are champions
for workplace safety. Westport maintains a Health and
Safety Committee in British Columbia or approximately
one Committee for every 300 employees. Our Committees
are made up of cross-functional management and
employee representatives who advise and recommend
action on any unresolved workplace health and safety
issues brought to them.

SAFETY INCIDENTS

as of Dec. 31 2015

2014

2013

2012

2011

Recordable injury frequency

Recordable injury rate[7]

0.33

0.96

1.22

0.46

0.31

Lost time injury frequency

Lost time injury rate[8]

0.33

0.32

0.49

0.23

0.31

Our rate of recordable injuries and lost time injuries
remained in line with our historical average. We continue
put the health and safety of our employees at the center of
our operational priorities.

Community Impacts

The importance of being a good neighbour is captured
within our Environmental Policy statement. Westport’s
geographic location, with our technical facilities adjacent
to homes, schools, and other businesses requires us to
monitor and manage the potentially adverse impacts our
operations might have on our immediate neighbors.

Our Facilities Engineering Group maintains a preventative
maintenance schedule for key equipment to minimize the
likelihood of environment releases and noise levels in
excess of municipal by-laws. Westport responds to
community concerns regarding our facilities,
infrastructure, noise levels and environmental impacts in a
timely manner. We received one noise complaint in 2015
associated with the filling of our liquid nitrogen tank and
were able to expediently resolve this issue with our
neighbour.

Anti-Corruption Efforts

Our expectations for individual integrity and ethical, moral
and legal conduct are outlined in our Code of Conduct. The
Code of Conduct has mandated compliance with all
applicable laws in the jurisdictions where we operate and
has always prohibited the giving or receiving of improper
payments to influence business decisions. In addition,
Westport maintains a confidential ethics hotline to provide
an avenue for employees to raise concerns about corporate
conduct. The policy includes the reassurance that they will

SUSTAINABILITY REPORT » REPORT CONTENT » SOCIAL PERFORMANCE INDICATORS

be protected from reprisals or victimization for “whistle
blowing” in good faith.

Product Responsibility

Quality and safety are imperatives across the product life
cycle. Our Quality Management System (“QMS”) is
certified to ISO 9001:2008 standards for the design,
assembly, and commercialization of LNG fuel systems.
Westport QMS comprises the organization’s policies and
procedures that aim to ensure that customer requirements
are met with consistency, resulting in enhanced customer
confidence and satisfaction. The QMS, other internal
requirements and engineering systems have contributed to
no incidents of non-compliance with regulations and
voluntary codes concerning the health and safety impacts
of our products. Internal systems and processes have been
established to ensure that the health and safety impacts of
our products are assessed in each of the following life-cycle
stages:

HEALTH & SAFETY IMPACTS ASSESSED AT LIFE-CYCLE STAGE

Development of product concept

Research and development

Certification

Manufacturing and production

Marketing and promotion

Storage, distribution, and supply

Use and service

Disposal, reuse or recycling

Status

YES

PARTIAL

COMMUNITY ENGAGEMENT

Being active in the community has always been central to
Westport’s values. Since 2002, Westport has been a strong
supporter of the United Way of the Lower Mainland. From
modest beginnings, our annual workplace campaign has
grown steadily and in 2015 our cumulative fundraising
total reached $1.272 million CDN.

United Way of the Lower Mainland
Community Schools

Westport is a proud partner of the United Way and
Vancouver School Board’s Community Schools Program.
Community schools provide safe and structured after-
school activities to students aged 6-12. After-school
programs play a critical role in providing structured,
supervised time for children to be active, to develop
positive social skills, and to build overall capabilities.

Studies have linked participation in these programs with
greater academic success, increased self-confidence and
self-esteem, and better relationships with peers and adults.

Through this partnership, Westport employees lead classes
over seven weeks in cooking, acrobatics, guitar, electronics,
and visual arts at Lloyd George Elementary School.

Canadian Blood Services

Westport has been a member of the Canadian Blood
Services’ Partners for Life Program since 2001. This
nationwide program is designed to encourage group
donations from business and community organizations.
Each year, we set a target, coordinate group donations and
allow employees to take time from work to donate. In
2015, we made 60 donations. Since 2006, Westport
employees have donated over 560 pints of blood or enough
to impact more than 120 lives.[9]

ENVIRONMENTAL
PERFORMANCE INDICATORS

Environmental Compliance

Compliance with applicable federal, provincial, and
municipal regulations is a baseline environmental
performance standard and we believe that leading
organizations must go beyond minimum environmental
requirements. Since its inception in 1996, Westport has
not received any fines or non-monetary sanctions for
environmental non-compliance.

Water

It is expected that climate change will impact global water
resources. Water use is an increasingly critical component
of each organization’s sustainability performance. Despite
this, only the largest industries in British Columbia have
water meters with data logging capability and the city of
Vancouver does not currently provide meters to light
industrial or commercial customers such as Westport.

Our calculations indicate that Westport facilities
cumulatively have an average daily rate of water use of
approximately 13.5 m³ per day. Engine and fuel system
component testing activities use process water that flows
in a closed-loop thereby minimizing total water
withdrawals. Water conserving domestic appliances and
fixtures has been installed at all locations in an effort to
further reduce our impact. We recognize that providing

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 11

SUSTAINABILITY REPORT » REPORT CONTENT » ENVIRONMENTAL PERFORMANCE INDICATORS

necessarily an energy-intensive process. There are
currently no regulatory requirements for a company of our
size to disclose its emissions.[12] The process of compiling a
GHG inventory provides an important foundation for
understanding reduction opportunities and measuring
progress. Westport works through the internationally-
recognized Carbon Disclosure Project to inventory and
make public our GHG emissions. We have identified future
opportunities to reduce the impacts of our operations, as
well as opportunities to integrate climate change risk into
our risk management procedures and overall business
strategy.

Waste Generation and Diversion

Waste reduction, reuse and recycling programs are well
established and well-maintained. Using formulas based on
bin size and frequency of collection, Westport generates
approximately 200 tonnes of waste annually. Reducing the
amount of waste sent to landfill remains a priority and we
have launched employee education and awareness efforts
to communicate the importance of minimizing the amount
of waste generated.

We extend the opportunity for employees to recycle
electronics, batteries, confidential paper, and some
hazardous waste like paint through our waste
minimization program. Our Facilities Engineering Group
tracks the amount of waste recycled via our hazardous
waste program, scrap materials collection and office waste
initiatives.

TYPES OF HAZARDOUS AND SOLID WASTE RECYCLED

Absorbent pads
& materials

Aluminum

Batteries

Beverage
containers

Cardboard

Coolant

Diesel

E-waste

Filters/rags

Light bulbs

Lube oil

Organics &
kitchen waste

Paper

Steel

Hard & soft
plastic

Plastic oil pails

Solvents

Viscor

Wastewater

Wood

only an estimate and not actual water use is a limitation of
our current sustainability report.

Energy Consumption

Our energy consumption decreased significantly in 2015.
This is due in part to product development cycles but also
to our ability to test components on systems capable of
recycling fuel, and a greater focus on energy efficiency
improvements. The bulk of our LNG test rigs continue to
operate on liquid nitrogen and we continue to return
power to the grid through the use of transient
dynamometers in our test cells.

ENERGY CONSUMPTION

(values in gigajoules)

2015

2014

2013

2012

2011

for the 12 months ending Dec. 31

DIRECT
Diesel

LPG

LNG

CNG

749

2,000

2,722

2,250

1,250

5,436

21,730

8,559

8,466

11,193

18,887

35,449

38,148

28,802

19,352

NG returned

(4,351)

(13,937)

(1,024)

(1,860)

(3,663)

Net direct
consumption

INDIRECT

20,721

45,242

48,405

37,693

28,232

Electrical

12,576

16,249

14,956

12,239

7,392

Greenhouse Gas Emissions

The Greenhouse Gas Protocol developed by the World
Business Council on Sustainable Development
(“WBSCD”) is the globally accepted standard for
greenhouse gas emissions accounting. The organizational
boundary of this inventory includes all of Westport’s
British Columbia-based facilities and includes both scope
one and scope two emissions.[10] We have not measured
scope three emissions to date.

GREENHOUSE GAS INVENTORY[11] (unaudited)

(values in tonnes CO2
equivalent)

Total Scope 1
Direct Emissions

Total Scope 2
Indirect Emissions

for the 12 months ended Dec. 31

2015

2014

2013

2012

2011

1,272.8

2,389.7

2,576.1

2,224.2

1,805.5

303.0

413.0

387.0

288.0

237.0

Total GHG impact

1,575.8

2,802.7

2,963.1

2,512.2

2,042.5

Finding comparable organizations against which to
benchmark our GHG emissions remains a challenge, as the
research and development of new engine technologies is

12 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

FOOTNOTES

1. The graphs shown here are illustrative, based on the
assumptions within GREET. However, the carbon
intensity of renewable natural gas can be highly
variable based on the type of feedstock, the geography,
energy consumption to produce the biomethane, and
the outcome for the feedstock if not used to make
RNG.

2. Future of Fuels working group: www.bsr.org/en/our-

work/working-groups/future-of-fuels

3. The Sustainability Impacts of Fuel, Future of Fuels:
www.bsr.org/en/our-insights/report-view/the-
sustainability-impacts-of-fuel

4. Registration at no cost is required to view corporate
reports filed on The Carbon Disclosure Project
website: www.cdp.net/en-US/Results/Pages/
Company-Responses.aspx?company=36607.

5. The five study modules are production, gathering lines
and processing facilities, pipelines and storage, local
distribution, and commercial trucks and refueling
stations. The first peer-reviewed study has now been
published in the journal Proceedings of the National
Academy of Science and is available online at
www.pnas.org/content/110/44/17768.

6. Part-time employees must work at least three days per
week to be eligible for the same benefits package as
full-time employees. Casual employees or contractors
are not eligible for benefits.

7. The recordable injury incident rate is the annualized
rate of occupational injuries and illness per 100
employees. It is a calculation of the number of injuries
x 200,000/employee hours worked. First aid
classified injuries are not included.

8. The lost time injury rate is a calculation of the total

number of lost time injuries x 200,000/employee
hours worked. Lost days refer to scheduled work days
and the count begins on the next scheduled work day
immediately after the injury.

9. According to Canadian Blood Services an average of

4.6 pints are required per patient.

10. Scope One direct Emissions encompass both liquefied
and compressed natural gas, diesel, propane, and fuel
used in company vehicles. Scope Two indirect
Emissions include emissions associated with the
purchase and use of electricity.

SUSTAINABILITY REPORT » FOOTNOTES

11. The GHG Protocol methodology used at this time only

includes emissions associated with fuel consumption
and not energy and emissions associated with fuel
production, distribution and transport.

12. In Canada, Large Final Emitters (“LFEs”)—facilities

that emit the equivalent of 100,000 tonnes or more of
carbon dioxide (CO2) equivalents per year—are
required to disclose their emissions.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 13

MANAGEMENT'S DISCUSSION AND ANALYSIS

BASIS OF
PRESENTATION

This Management’s Discussion and Analysis (“MD&A”)
for Westport Innovations Inc. (“Westport”, the
“Company”, “we”, “us”, “our”) is intended to assist
readers in analyzing our financial results and should be
read in conjunction with the audited consolidated financial
statements, including the accompanying notes, for the
fiscal year ended December 31, 2015. Our consolidated
financial statements have been prepared in accordance
with generally accepted accounting principles in the
United States (“U.S. GAAP”). The Company’s reporting
currency is the U.S. dollar. This MD&A is dated as of
March 29, 2016.

Additional information relating to Westport, including our
Annual Information Form (“AIF”) and Form 40-F, is
available on SEDAR at www.sedar.com and on EDGAR at
www.sec.gov. All financial information is reported in U.S.
dollars unless otherwise noted.

FORWARD LOOKING
STATEMENTS

This MD&A contains forward-looking statements that are
based on the beliefs of management and reflects our
current expectations as contemplated under the safe
harbor provisions of Section 21E of the United States
Securities Act of 1934, as amended. Such statements
include but are not limited to statements regarding the
orders or demand for our products, our investments, cash
and capital requirements, the intentions of partners and
potential customers, the performance of our products, our
future market opportunities, availability of funding and
funding requirements, our estimates and assumptions
used in our accounting policies, our accruals, including
warranty accruals, our financial condition, timing of when
we will adopt or meet certain accounting and regulatory
standards and the alignment of our business segments.
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 activity, performance or
achievements expressed in or implied by these forward
looking statements. These risks include risks related to

14 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

revenue growth, operating results, liquidity, industry and
products, general economy, conditions of the capital and
debt markets, government or accounting policies and
regulations, technology innovations, as well as other
factors discussed below and elsewhere in this report,
including the risk factors contained in the Company’s most
recent AIF filed on SEDAR at www.sedar.com. The
forward-looking statements contained in this MD&A are
based upon a number of material factors and assumptions
which include, without limitation, market acceptance of
our products, merger with Fuel Systems Inc., Cartesian
financing, product development delays in contractual
commitments, the ability to attract and retain business
partners, competition from other technologies, price
differential between natural gas and liquefied petroleum
gas, unforeseen claims, exposure to factors beyond our
control as well as the additional factors referenced in our
AIF. 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 applicable legislation.

The forward looking statements contained in this
document speak only as of the date of this MD&A. Except
as required by applicable legislation, Westport does not
undertake any obligation to release publicly any revisions
to these forward looking statements to reflect events or
circumstances after this MD&A, including the occurrence
of unanticipated events. The forward-looking statements
contained in this MD&A are expressly qualified by this
cautionary statement.

BUSINESS OVERVIEW

We are a leading provider of high-performance, low-
emission engine and fuel system technologies utilizing
gaseous fuels. Our technology and products enable light-
(less than 5.9 litre), medium- (5.9 to 10 litre), heavy-duty-
(10 to 16 litre) and high-horsepower- (greater than 16 litre)
petroleum-based fuel engines and vehicles to use primarily
natural gas, giving users a cleaner and generally less
expensive alternative fuel based on a more abundant
natural resource. Through our partnerships and direct
sales efforts, we sell natural gas and propane engines, fuel

MANAGEMENT'S DISCUSSION AND ANALYSIS » BUSINESS OVERVIEW

systems, and components to customers in more than 79
countries. We currently have strategic relationships with
three of the world's top four engine producers and supply
or have strategic relationships with six of the world's top
ten truck producers, as well as seven of the world's top ten
automotive manufacturers. Our strategic relationships
with OEMs provide us with access to their manufacturing
capacity, supply chain and global distribution networks
without incurring the considerable investment associated
with these assets. We commercialize our technology in
markets where demand for clean, low emission engines is
prevalent.

Since our founding in 1995, we have invested over $863
million towards the research, development and
commercialization of our proprietary technologies and
related products. Conversely, our research and
development efforts and investments have resulted in a
substantial patent portfolio that serves as the foundation
for our differentiated technology offerings and competitive
advantage. Our technologies and related products enable
combustion engines to use gaseous fuels, such as natural
gas, propane, renewable natural gas (“RNG”) or hydrogen.
The substitution of natural gas for petroleum-based fuel
drives a reduction in harmful combustion emissions, such
as particulate matter and greenhouse gases, in addition to
providing a relatively inexpensive alternative fuel from a
more plentiful natural resource.

The principle focus of the operating business units are
summarized below:

OPERATING BUSINESS UNITS

During the first quarter of 2015, Westport realigned the
structure of the Company's internal organization. The
realignment combines, our historical operating segments,
Westport Applied Technologies, Westport On-Road
Systems and Westport Off-Road Systems into a single
operating segment, Westport Operations. This change
reflects the manner in which operating decisions and
assessing business performance is currently managed by
the Chief Operating Decision Makers (the CEO and the
COO “CODMs”). As Westport narrows its focus within
certain business units, including its investments in joint
ventures, and defers certain products and related
programs, the CODMs manage the combined businesses as
a whole. Therefore, the Westport Operations segment
provides more meaningful information to users of
Westport’s financial statements. All comparable prior
period information has been recast to reflect this change.

Westport Operations

Westport Operations designs, manufactures and sells
compressed natural gas ("CNG"), liquefied natural gas
("LNG"), and liquefied petroleum gas ("LPG")
components and systems to over 20 global OEMs,
including Fiat, Volkswagen, Tata Motors, the GAZ Group,
Chrysler, General Motors, Ford Motor Company ("Ford"),
PACCAR Inc., Volvo Car Group, Hyundai and Kia and to
aftermarket customers in over 79 countries. Sales from
Westport's wholly-owned Italian subsidiaries, OMVL
S.p.A. ("OMVL") and Emer S.p.A ("EMER"), including
Emer's wholly-owned subsidiary Valtek S.p.A., Westport's
Australian operations, and, recently acquired Netherlands
based Prins Autogassystemen Holding B.V. ("Prins") are
made either directly to OEMs or through one of their many
global distributors. Westport Operations has a strong
customer base in Europe and North America and is
growing in Asia, South America, and Africa.

Westport supports customers with vehicle conversions
through the Ford Qualified Vehicle Modifier ("QVM")
program with products in the Ford line, including transit,
cargo shuttle and taxi vehicles. Sold under the Westport
WiNG™ Power System brand, product offerings include
the Ford Transit Van dedicated, F-250/F-350 bi-fuel (CNG
and gasoline) and dedicated, F-450 to F-650, F-59
dedicated, E-450 dedicated and Transit Connect bi-fuel
vehicle models. Westport also provides aftermarket
conversion products, alternative fuel systems and
application engineering.

Other products include Volvo Car bi-fuel systems (CNG
and gasoline) for the V60 and V70 bi-fuel wagon; Westport
mobile LNG fuel services; Westport iCE PACK™ LNG
Tank System for spark-ignited ("SI") engines; LNG tender
products for the rail market; and Westport industrial
engines sold to Clark Material Handling and Cummins
Western Canada for forklift and oilfield applications.

Corporate & Technology
Investments

The Corporate and Technology Investments business unit
("Corporate and Technology Investments") is
responsible for investments in new research and
development programs with OEMs, corporate oversight
and general administrative duties. Corporate and
Technology Investments focuses on long-term product
development and future return on investments. Once a

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 15

product is launched, the associated revenue will be
recognized under Westport Operations.

Managing Partner and Founder of Cartesian, has been
appointed to Westport's Board of Directors.

MANAGEMENT'S DISCUSSION AND ANALYSIS » BUSINESS OVERVIEW

On September 1, 2015, the Company announced a
proposed business combination (the "Merger") with Fuel
Systems Solutions, Inc. (“Fuel Systems”). Under the
terms of the Merger, the Company will acquire all of the
outstanding shares of Fuel Systems common stock in a
stock-for-stock transaction under which Fuel Systems
shareholders will receive 2.129 Company shares for each
share of Fuel Systems common stock they own at closing.

On March 7, 2016, the Company signed an Amendment to
the Agreement and Plan of Merger (the “Amendment”)
in relation to the Merger between the Company and Fuel
Systems. The exchange ratio of the Agreement has been
amended to include a collar mechanism. In the event that
the NASDAQ volume weighted average price ("VWAP") of
the Company common shares during a specified measuring
period is equal to or greater than $2.37, then Fuel Systems
stockholders will receive 2.129 Company common shares
per Fuel Systems share on closing of the Merger and
through the exchange process. In the event that the
Company’s VWAP is equal to or less than $1.64, then Fuel
Systems stockholders will receive approximately 3.08
Company common shares per Fuel Systems share on
closing of the Merger and through the exchange process. In
the event that the Company's VWAP is greater than $1.64
and less than $2.37, then Fuel Systems stockholders would
receive a number of Company common shares per Fuel
Systems share equal to dividing $5.05 by the Company’s
VWAP, rounded to four decimal places. The measuring
period will be the ten consecutive trading days ending on
and including the trading day five business days prior to
the anticipated closing date.

On March 18, 2016, the Company announced that its
shareholders approved the issuance of such number of
Company common shares as required to complete the
Merger.

The Merger requires certain regulatory approvals and
approval by a majority of the shareholders of Fuel Systems.
All substantive regulatory approvals have been received.
The Merger is currently anticipated to close in April 2016.

Cummins Westport Joint Venture

Cummins Westport Inc. (“CWI”), our 50:50 joint venture
with Cummins, Inc., (“Cummins”), serves the medium- to
heavy-duty engine markets. CWI engines are offered by
many OEMs for use in transit, school and shuttle buses,
conventional trucks and tractors, and refuse collection
trucks, as well as specialty vehicles such as short-haul port
drayage trucks and street sweepers. The fuel for CWI
engines is typically carried on the vehicles as CNG or LNG.
CWI engines are produced at certain of Cummins' plants,
allowing CWI to leverage Cummins' manufacturing
footprint without incurring additional capital costs. CWI
also utilizes Cummins' supply chain, back office systems
and distribution and sales networks. CWI is the leading
supplier of natural gas engines to the North American
medium- and heavy-duty truck and transit bus industries.

Weichai Westport Joint Venture

Weichai Westport Inc. (“WWI”) is a joint venture between
Westport [35% interest], Weichai Holding Group Co. Ltd.
("Weichai") [40% interest] and Hong Kong Peterson
(CNG) Equipment Ltd. ("Hong Kong Peterson") [25%
interest] focusing on the Chinese market. WWI develops,
manufactures, and sells advanced, alternative fuel engines
and parts that are widely used in city bus, coach, and
heavy-duty truck applications in China or exported to
other regions globally.

GENERAL
DEVELOPMENTS

Subsequent to year end, the Company announced that it
has entered into an agreement with Cartesian Capital
Group for up to $71.3 million in financing to support
global growth initiatives. The financing agreement
immediately provides $17.5 million in non-dilutive capital
with additional capital contingent on reaching key
milestones and establishing new investment opportunities.
This financing package includes a contingent payment
(derived substantially from future HPDI product sales), a
convertible debenture, non-core asset sales, and
incremental funding capacity to support future product
development. As part of the financing agreement, Peter Yu,

16 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

MANAGEMENT'S DISCUSSION AND ANALYSIS » SELECTED ANNUAL FINANCIAL INFORMATION

SELECTED ANNUAL
FINANCIAL
INFORMATION

The following table sets forth a summary of our financial
results for the years ended December 31, 2015, December
31, 2014 and the year ended December 31, 2013:

The following tables set forth a summary of the financial
results of our joint ventures for the years ended December
31, 2015, December 31, 2014 and the year ended December
31, 2013:

SELECTED CWI STATEMENTS OF OPERATIONS DATA

Years ended Dec 31

(expressed in millions of United States dollars)

2015

2014

2013

Total revenue

Gross margin

$ 331.9

$ 337.2

$ 310.7

103.8

66.4

64.2

31.3%

19.7%

20.7%

SELECT CONSOLIDATED STATEMENTS OF OPERATIONS DATA

GM %

(expressed in millions of USD,
except per share amounts and
shares outstanding)

Years ended December 31

2015

2014

Total revenue

Gross margin[1]

GM %

Net loss

Net loss per share
—basic and diluted[2]

Weighted average shares
outstanding

103.3

130.6

20.0

19.4%

32.7

25.0%

(98.4)

(149.6)

(185.4)

(1.53)

(2.37)

(3.22)

64,109,703

63,130,022

57,633,190

2013

164.0

15.3

9.3%

1. Gross margin is calculated as revenue less cost of product

revenue. The Company’s gross margin may not be
comparable to those of other entities because some entities
include depreciation and amortization related to products
sold in cost of sales. Gross margin as defined above applies to
the discussion of gross margin throughout the MD&A. (For the
years ended December 31, 2015, 2014, and 2013 depreciation
and amortization is excluded from the calculation of gross
margin).

Fully diluted loss per share is the same as basic loss per share
as the effect of conversion of stock options, restricted share
units and performance share units would be anti-dilutive.

The following table sets forth a summary of our financial
position as at December 31, 2015 and December 31, 2014:

SELECTED BALANCE SHEET DATA

(expressed in millions of United States dollars) Dec 31, 2015 Dec 31, 2014

Cash and short-term investments

27.8 $

Total assets

Long-term debt

209.7

62.5

94.0

335.8

76.7

Net income before income taxes

50.5

21.0

23.1

Net income attributable to the
Company

17.1

8.1

9.4

SELECTED WWI STATEMENTS OF OPERATIONS DATA

Years ended Dec 31

(expressed in millions of United States dollars)

2015

2014

2013

Total revenue

Gross margin

GM %

Net income before income taxes

Net income attributable to the
Company

$ 186.0

$ 618.5

$ 466.6

21.4

52.5

37.3

11.5%

8.5%

8.0%

3.8

1.0

20.3

14.5

6.0

4.3

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 17

MANAGEMENT'S DISCUSSION AND ANALYSIS » RESULTS FROM OPERATIONS

RESULTS FROM
OPERATIONS

REVENUE

2015 / 2014

Total segments revenues, including 100% of CWI and
WWI revenue, decreased $465.1 million, or 43% from
$1,086.3 million in 2014 to $621.2 million in 2015.

The following table summarizes revenues by segment for
the year ended December 31, 2015 compared to the year
ended December 31, 2014:

REVENUES (2015 / 2014)

(expressed in millions of U.S.
dollars)

2015

2014

Years ended Dec 31

Change

Westport Operations

100.1 $

127.0 $

(26.9)

(21)%

Corporate and
Technology Investments

CWI

WWI

3.2

331.9

186.0

3.6

337.2

618.5

(0.4)

(11)%

(5.3)

(2)%

(432.5)

(70)%

Total segment revenues

621.2 $ 1,086.3 $ (465.1)

(43)%

Less: Equity investees'
revenues

Total consolidated
revenues

517.9

955.7

(437.8)

(46)%

103.3 $

130.6 $

(27.3)

(21)%

Westport Operations revenue for the year ended
December 31, 2015 decreased $26.9 million, or 21% from
$127.0 million to $100.1 million. Westport Operations has
been impacted significantly by the decline in the price of
oil and the strengthening of the US dollar. Revenue from
European operations for the year ended December 31,
2015, including the Prins acquisition increased by €6.2
million, while revenue from North American operations
decreased by approximately $17.1 million. The decrease in
revenue from North American operations was driven by
decreases in Westport's Ford qualified vehicle modifier
("QVM") business, decreased sales of Westport iCE
PACK™, and a decrease in engineering service contracts.
A further decrease of approximately $12.0 million in
revenue was driven by unfavourable impacts of foreign
currency translation from the Euro to the US dollar
equivalent.

Corporate and Technology Investments revenue for
the year ended December 31, 2015 decreased $0.4 million,
or 11% from $3.6 million to $3.2 million. The decrease is
primarily driven by unfavourable impacts of foreign
currency translation from the Canadian to the US dollar

18 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

equivalent. The Company is pleased to report that it met
several key milestones during the year with our OEM
partners.

CWI revenue for the year ended December 31, 2015
decreased $5.3 million, or 2% from $337.2 million to
$331.9 million. CWI product revenue for the year ended
December 31, 2015 decreased $9.6 million, or 3%, to
$274.0 million on sales of 9,940 units compared to $283.6
million and 10,512 units for the year ended December 31,
2014, which was primarily attributed to the decline of the
price of oil and other macroeconomic conditions. CWI
parts revenue for the year ended December 31, 2015 was
$57.8 million compared with $53.7 million for the year
ended December 31, 2014 which was primarily attributed
to the increase of natural gas engine population in service.

WWI revenue for the year ended December 31, 2015
decreased $432.5 million, or 70% , from $618.5 million to
$186.0 million. WWI shipped 15,956 units in 2015
compared with 51,006 units for the year ended December
31, 2014. Westport’s WWI results are in-line with general
market conditions in China and in-line with diesel truck
sales. Truck demand remains subdued, as demonstrated by
the decrease of recent monthly commercial vehicle sales in
China year-over-year, according to China Association of
Automotive Manufacturers ("CAAM").

2014 / 2013

Total segments revenues, including 100% of CWI and
WWI revenue, increased $145.0 million, or 15% from
$941.3 million in 2013 to $1,086.3 million in 2014.

The following table summarizes total revenue by segment
for the years ended December 31, 2014 compared to the
year ended December 31, 2013:

REVENUES (2014 / 2013)

(expressed in millions of U.S.
dollars)

2014

2013

Years ended Dec 31

Change

Westport Operations

127.0 $

151.6 $

(24.6)

(16)%

Corporate and
Technology Investments

CWI

WWI

3.6

337.2

618.5

12.4

310.7

466.6

(8.8)

(71)%

26.5

151.9

9 %

33 %

15 %

Total segment revenues

$ 1,086.3 $

941.3 $

145.0

Less: Equity investees'
revenues

Total consolidated
revenues

955.7

777.3

178.4

23 %

130.6 $

164.0 $

(33.4)

(20)%

Westport Operations revenue for the year ended
December 31, 2014 decreased $24.6 million, or 16% to

MANAGEMENT'S DISCUSSION AND ANALYSIS » RESULTS FROM OPERATIONS

$127.0 million from $151.6 million for the year ended
December 31, 2013. Revenue from European operations
decreased $7.0 million driven by an unfavourable impact
of foreign currency translation from the Euro to the US
dollar equivalent and weaknesses in certain markets,
particularly Europe and Asia. Revenue from North
American operations decreased $18.1 million due to the
discontinuation of the first generation Westport™ HPDI
system in December 2013, offset by increased shipments of
Westport iCE PACK, and increased service revenue.

Corporate and Technology Investments revenue for
the year ended December 31, 2014 decreased $8.8 million,
or 71% from $12.4 million to $3.6 million. The decrease is
driven by decreases in license fees earned from our
development agreements. All costs associated with our
development agreements were recorded as research and
development expenses in the period incurred in the
consolidated statement of operations.

CWI revenue for the year ended December 31, 2014
increased $26.5 million, or 9% from $310.7 million to
$337.2 million. CWI product revenue for the year ended
December 31, 2014 increased $22.6 million, or 9%, to
$283.6 million on sales of 10,512 units compared to $261.0
million and 10,314 units for the year ended December 31,
2013, which was primarily attributed to the launch of the
ISX12 G heavy duty truck engine in April of 2013
contributing to the increased volumes in North America.
CWI parts revenue for the year ended December 31, 2014
was $53.7 million compared with $49.6 million for the
year ended December 31, 2013 which was primarily
attributed to the increase of natural gas engine population
in service.

WWI revenue for the year ended December 31, 2014
increased $151.9 million, or 33%, from $466.6 million to
$618.5 million. WWI shipped 51,006 units in 2014
compared with 38,138 units for the year ended December
31, 2013.

GROSS MARGIN

2015 / 2014

Total segments gross margin, including 100% share of CWI
and WWI decreased $6.4 million, or 4% from $151.6
million in 2014 to $145.2 million in 2015.

The following table presents gross margin by segment for
the year ended December 31, 2015 compared to the year
ended December 31, 2014:

GROSS MARGIN (2015 / 2014)

(expressed in millions
of U.S. dollars)

Westport
Operations

Corporate and
Technology
Investments

CWI

WWI

Total segment
gross margin

Less:
Equity investees'
gross margin

Total consolidated
gross margin

Year
ended
Dec 31,
2015

% of
Revenue

Year
ended
Dec 31,
2014

% of
Revenue

Change

16.7

16.7% $

29.1

22.9% $ (12.4)

(43)%

3.3

100.0%

103.8

21.4

31.3%

11.5%

3.6

66.4

52.5

100.0%

(0.3)

(8)%

19.7%

37.4

56 %

8.5% (31.1)

(59)%

$ 145.2

23.4% $ 151.6

14.0% $ (6.4)

(4)%

125.2

24.2%

118.9

12.4%

6.3

5 %

20.0

19.4% $

32.7

25.0% $ (12.7)

(39)%

Westport Operations gross margin decreased $12.4
million to $16.7 million, or 16.7% of revenue, for the year
ended December 31, 2015 compared to $29.1 million, or
22.9% of revenue for the year ended December 31, 2014.
The decrease in gross margin percentage is due to
inventory obsolescence charges of $8.7 million in the
current year compared to $2.1 million in the prior year.
Adjusted gross margin would have been 24.0% of revenue
without the obsolescence, compared to 24.6% in the prior
year. Gross margin also decreased due to lower revenue
and changes in product mix.

CWI gross margin increased $37.4 million to $103.8
million, or 31.3% of revenue from $66.4 million or 19.7%
of revenue. CWI product margin and product gross margin
percentage for the year ended December 31, 2015 were
$84.2 million and 30.7%, respectively, compared to $52.2
million and 18.4%, respectively, for the year ended
December 31, 2014. This increase in CWI gross margin
percentage was due primarily to a favourable decrease of
$23.5 million in net warranty adjustments and net
extended coverage claims compared to the year ended
December 31, 2014. Reliability of the ISL G engine has
continued to improve as a result of hardware and
calibration changes. CWI parts gross margin percentage
was 33.9% for the year ended December 31, 2015
compared to 26.5% for the year ended December 31, 2014.
The increase in parts gross margin is primarily due to a
change in product mix.

WWI gross margin decreased $31.1 million to $21.4
million, from $52.5 million. The decrease in gross margin
relates to a decrease in the number of engines sold. Gross
margin as a percentage of revenue increased from 8.5% to
11.5% as a result of changes in product mix and product
pricing.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 19

MANAGEMENT'S DISCUSSION AND ANALYSIS » RESULTS FROM OPERATIONS

2014 / 2013

Total segments gross margin, including 100% share of CWI
and WWI increased $34.8 million, or 30% from $116.8
million in 2013 to $151.6 million in 2014.

The following table presents gross margin by segment for
the year ended December 31, 2014 compared to year ended
December 31, 2013:

GROSS MARGIN (2014 / 2013)

Year
ended
Dec 31,
2014

% of
Revenue

Year
ended
Dec 31,
2013

% of
Revenue

Change

29.1

22.9% $

3.0

2.0% $ 26.1

870 %

3.6

66.4

52.5

100.0%

19.7%

8.5%

12.3

64.2

37.3

100.0%

(8.7)

(71)%

20.7%

2.2

3 %

8.0%

15.2

41 %

$ 151.6

14.0% $ 116.8

12.4% $ 34.8

30 %

(expressed in millions
of U.S. dollars)

Westport
Operations

Corporate and
Technology
Investments

CWI

WWI

Total segment
gross margin

Less:
Equity investees'
gross margin

Total consolidated
gross margin

December 31, 2013. This increase in CWI gross margin
percentage was due primarily to a decrease of $8.3 million
in net warranty adjustments and net extended coverage
claims and mix of sales compared to the year ended
December 31, 2013. Warranty adjustments and net
extended coverage claims totaling $21.7 million were
recorded for the year ended December 31, 2014 which is a
decrease of $15.1 million from prior year claims of $36.8
million. CWI parts gross margin percentage was 26.5% for
the year ended December 31, 2014 compared to 43.5% for
the year ended December 31, 2013, which was due to a
change in product mix and pricing.

WWI gross margin increased $15.2 million to $52.5
million, or 8.5% of revenue from $37.3 million or 8.0% of
revenue. The increase in gross margin percentage related
primarily to a change product mix and product pricing.

RESEARCH & DEVELOPMENT
EXPENSES

118.9

12.4%

101.5

13.1%

17.4

17 %

32.7

25.0% $

15.3

9.3% $ 17.4

114 %

2015 / 2014

Westport Operations gross margin increased $26.1
million to $29.1 million, or 22.9% of revenue, for the year
ended December 31, 2014 compared to $3.0 million, or
2.0% of revenue for the year ended December 31, 2013.
Gross margin from North American operations increased
$30.9 million as a result of the prior year including $26.3
million of warranty adjustments and inventory net
realizable write downs related to the discontinuation of the
first generation Westport™ HPDI system. Gross margin
from European operations decreased $4.8 million as a
result of changes in product mix and weaknesses in certain
markets including Europe and Asia.

Corporate and Technology Investments gross
margin decreased $8.7 million from $12.3 million to $3.6
million. The decrease in gross margin is driven by a
reduction in revenue. The gross margin percentage was
100% in both periods as Corporate and Technology
Investments gross margin relates entirely to service
revenue and revenue earned under our development
agreements and other fee payments.

CWI gross margin increased $2.2 million to $66.4 million,
or 19.7% of revenue from $64.2 million or 20.7% of
revenue. CWI product margin and product gross margin
percentage for the year ended December 31, 2014 were
$52.2 million and 18.4%, respectively, compared to $42.7
million and 16.4%, respectively, for the year ended

20 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

The following table presents details of research and
development (“R&D”) expense by segment for the year
ended December 31, 2015 compared to year ended
December 31, 2014:

RESEARCH & DEVELOPMENT (2015 / 2014)

Years ended Dec 31

Change

(expressed in millions of U.S. dollars)

2015

2014

Westport Operations

13.6 $

21.3 $ (7.7)

36%

Corporate and Technology
Investments

Total research and
development

39.2

55.3

(16.1)

29%

52.8 $

76.6 $ (23.8)

31%

Westport Operations research and development
expenses decreased $7.7 million due to reduction in
program expenses, decreased headcount, and favorable
impacts of foreign currency translation from the Euro and
the Canadian to the US dollar equivalent.

Corporate and Technology Investments research
and development expenses decreased $16.1 million from
$55.3 million to $39.2 million due to reduction in program
expenses and prioritizing of investment programs,
decreased headcount and favorable impacts of foreign
currency translation from the Canadian to the US dollar
equivalent.

MANAGEMENT'S DISCUSSION AND ANALYSIS » RESULTS FROM OPERATIONS

2014 / 2013

The following table presents details of R&D expense by
segment for the year ended December 31, 2014 compared
to year ended December 31, 2013:

RESEARCH & DEVELOPMENT (2014 / 2013)

Years ended Dec 31

Change

(expressed in millions of U.S. dollars)

2014

2013

Westport Operations

21.3 $

23.0 $ (1.7)

(7)%

Corporate and Technology
Investments

Total research and
development

55.3

68.1

(12.8)

(19)%

76.6 $

91.1 $ (14.5)

(16)%

Westport Operations research and development
expenses decreased $1.7 million primarily due to lower
R&D expenses spent on Westport WiNG Systems as
product development was completed in 2013.

Corporate and Technology Investments research
and development expenses decreased $12.8 million from
$68.1 million to $55.3 million primarily driven by
reduction in program expenses and prioritizing of
investment programs.

SELLING, GENERAL &
ADMINISTRATIVE EXPENSES

2015 / 2014

The following table presents details of Selling, General and
Administrative (“SG&A”) expense by segment for the year
ended December 31, 2015 compared to the year ended
December 31, 2014:

SELLING, GENERAL & ADMINISTRATIVE (2015 / 2014)

Years ended Dec 31

Change

(expressed in millions of U.S. dollars)

2015

2014

Westport Operations

18.3 $

30.5 $ (12.2)

(40)%

Corporate and Technology
Investments

Total selling, general and
administrative

34.4

35.3

(0.9)

(3)%

52.7 $

65.8 $ (13.1)

(20)%

Westport Operations SG&A expenses decreased $12.2
million due to decreased headcount and favorable impacts
of foreign currency translation from the Euro and the
Canadian to the US dollar equivalent.

Corporate and Technology Investments SG&A
expenses decreased $0.9 million due to decreased
headcount and favorable impacts of foreign currency
translation from the Canadian to the US dollar equivalent.

Within 2015 SG&A are one time costs of $4.5 million
related to the proposed merger between the Company and
Fuel Systems. Without these merger costs, SG&A would
have decreased 15.3% year over year.

2014 / 2013

The following table presents details of SG&A expense by
segment for the year ended December 31, 2014 compared
to the year ended December 31, 2013:

SELLING, GENERAL & ADMINISTRATIVE (2014 / 2013)

Years ended Dec 31

Change

(expressed in millions of U.S. dollars)

2014

2013

Westport Operations

30.5 $

47.5 $

(17)

(36)%

Corporate and Technology
Investments

Total selling, general and
administrative

35.3

27.7

7.6

27 %

65.8 $

75.2 $ (9.4)

(13)%

Westport Operations SG&A expenses decreased $17.0
million primarily due to decreased headcount from
consolidating our facilities, discontinuation of activity
related to the first generation WestportTM HPDI system
and decreased scope of off-road programs.

Corporate and Technology Investments SG&A
expenses increased $7.6 million due to increase in
headcount to support new programs and global market
development initiatives and severance recorded during the
year.

FOREIGN EXCHANGE GAINS
& LOSSES

Foreign exchange gains and losses reflected net realized
gains and losses on foreign currency transactions and the
net unrealized gains and losses on our net U.S. dollar
denominated monetary assets and liabilities in our
Canadian operations that were mainly composed of cash
and cash equivalents, short-term investments, accounts
receivable and accounts payable. In addition, the Company
has foreign exchange exposure on Euro denominated
monetary assets and liabilities where the functional
currency of the subsidiary is not the Euro. For the year
ended December 31, 2015, we recognized a net foreign
exchange gain of $11.6 million with the decline in the
Canadian dollar relative to the U.S. dollar. A majority of
the foreign exchange gain for the year ended December 31,
2015 is unrealized.

For the year ended December 31, 2014, we recognized a net
foreign exchange gain of $3.4 million with the movement

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 21

MANAGEMENT'S DISCUSSION AND ANALYSIS » RESULTS FROM OPERATIONS

in the Canadian dollar relative to the U.S. dollar. This
compares to a net foreign exchange gain of $15.2 million
for the year ended December 31, 2013.

period amounts. The Company does not believe the
adjustment is material to the year ended December 31,
2015 consolidated financial statements.

DEPRECIATION &
AMORTIZATION

Depreciation and amortization for the year ended
December 31, 2015 was $13.7 million compared to $18.7
million for the year ended December 31, 2014 and $16.3
million for the year ended December 31, 2013. The
decrease primarily related to depreciation of property and
equipment purchases, which decreased due to favourable
impacts of foreign currency translation from the Euro and
the Canadian to the US dollar equivalent.

INCOME FROM INVESTMENT
ACCOUNTED FOR BY THE
EQUITY METHOD

Income from investments accounted for by the equity
method primarily relates to our 50% interest in CWI and
our 35% interest in WWI and our increase in equity
income results primarily from higher revenues and gross
margins for CWI and WWI in the current year compared to
the prior year.

INCOME FROM INVESTMENT ACCOUNTED FOR BY THE EQUITY METHOD

(expressed in millions of U.S. dollars)

2015

2014

2013

Years ended Dec 31

CWI – 50% interest

WWI – 35% interest

Other

17.1 $

8.1 $

1.0

0.2

6.0

0.1

9.4

4.3

(0.3)

Income from investment accounted
for by the equity method

18.3 $

14.2 $

13.4

During the first quarter of 2015, the Company identified
adjustments in CWI's estimated 2014 financial statement
results, which primarily related to warranty accrual. The
identified adjustments resulted in a cumulative $1.2
million understatement of the Company’s income from
investments accounted for by the equity method for the
year ended December 31, 2014. The Company corrected
the amounts related to CWI in the first quarter of 2015,
which had the net effect of increasing income from
investments accounted for by the equity method by $1.2
million for the year ended December 31, 2015. The
Company did not believe this adjustment was material to
its consolidated financial statements for the year ended
December 31, 2014 and, therefore, did not restate any prior

22 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

INTEREST ON LONG-TERM DEBT
& AMORTIZATION OF
DISCOUNT EXPENSE

Interest on long-term debt and amortization of discount
expense primarily relates to our interest expense on
Canadian dollar and Euro denominated debentures.

INTEREST ON LONG-TERM DEBT & AMORTIZATION OF DISCOUNT EXPENSE

Years ended Dec 31

(expressed in millions of U.S. dollars)

2015

2014

2013

Canadian debentures
– 9% per annum

Senior financing facilities

Amortization of discount and non-
cash interest expense

3.9 $

3.7 $

0.9

0.7

1.6

0.5

Total Interest on long-term debt

5.5 $

5.8 $

3.1

1.0

0.7

4.8

Interest on long-term debt for the year ended December
31, 2015 of $5.5 million is lower compared to the year
ended December 31, 2014 due to favorable impacts of
foreign currency translation from the Euro and the
Canadian to the US dollar equivalent.

Interest on long-term debt for the year ended December
31, 2014 of $5.8 million is higher compared to the year
ended December 31, 2013 due to additional interest on
senior financing facilities as a result of increased
borrowings.

INCOME TAX EXPENSE

Income tax expense for the year ended December 31, 2015
was $0.7 million compared to an income tax recovery of
$0.6 million for the year ended December 31, 2014 and an
income tax expense of $0.9 million for year ended
December 31, 2013.

The increase for the year ended December 31, 2015
primarily relates to higher distributable earnings from our
investment in CWI. The decrease in income tax expense for
the year ended December 31, 2014 compared to the year
ended December 31, 2013 primarily relates to lower
distributable earnings from our investment in CWI and a
recovery of the deferred income tax liability relating to the
intangible and goodwill impairment charges.

MANAGEMENT'S DISCUSSION AND ANALYSIS » CAPITAL REQUIREMENTS, RESOURCES & LIQUIDITY

CAPITAL
REQUIREMENTS,
RESOURCES &
LIQUIDITY

As at December 31, 2015, our cash, cash equivalents and
short-term investment position was $27.8 million, a
decrease of $66.2 million from $94.0 million at December
31, 2014. Cash and cash equivalents consist of guaranteed
investment certificates, term deposits and bankers
acceptances with maturities of 90 days or less when
acquired. Short-term investments consist of investment
grade bankers’ acceptances, term deposits and commercial
paper. We invest primarily in short-term paper issued by
Schedule 1 Canadian banks, R1 high rated corporations
and governments.

The Company has sustained net losses since inception and
as at December 31, 2015 has an accumulated deficit of
$863.3 million. As at December 31, 2015 the Company has
cash and cash equivalents and short-term investments of
$27.8 million. The Company’s ability to continue as a
going concern is dependent on its available cash, its ability
to find new sources of financing or raise cash through the
sale of assets while in pursuit of operating profitability.
There can be no assurance that the Company will be
successful in achieving its objectives. Management
believes that the cash balances available as of
December 31, 2015, combined with cost cutting measures
in place and its ability to find new sources of financing or
raise cash through the sale of assets subsequent to the
balance sheet date, provides sufficient funds for the
Company to meet its obligations beyond the next 12
months. The accompanying financial statements do not
include any adjustments that might be necessary if the
Company is unable to continue as a going concern. See also
"Cartesian Financing" in the subsequent events of the
General Developments section of this MD&A for cash
raised subsequent to year end.

Our plan is to use our current cash, cash equivalents and
short-term investments, our share of CWI dividends
(typically declared and paid quarterly) and borrowings
under our credit facility to fund our committed milestones
and obligations for our current programs. We will also
continue to seek third party and government funding on
commercially acceptable terms to offset costs of our
investments; however, there are no guarantees that we will

be successful in obtaining third party funding on
acceptable terms or at all.

CASH FLOW FROM
OPERATING ACTIVITIES

We prepare our statement of cash flows using the indirect
method. Under this method, we reconcile net loss to cash
flows from operating activities by adjusting net loss for
those items that impact net loss but may not result in
actual cash receipts or payments during the period. These
reconciling items include but are not limited to
depreciation and amortization, stock-based compensation
expense, unrealized foreign exchange gain, income from
investments accounted for by the equity method,
provisions for inventory reserves and doubtful accounts,
and changes in the consolidated balance sheet for working
capital from the beginning to the end of the period.

2015 compared to 2014

In 2015, our net cash flow used in operating activities was
$69.1 million, a decrease of $37.7 million from the net cash
flow used in operating activities in the year ended
December 31, 2014. This change was primarily driven by a
reduction in program expenses, decreased headcount, and
favorable impacts of foreign currency translation from the
Euro and the Canadian to the US dollar equivalent. Cash
used in operations decreased by $4.3 million compared to
the prior year. These changes include increases in positive
operating cash flow associated with accounts payables
(primarily in relation with timing of payments), offset by
an increase in accounts receivables (primarily as a result of
increased sales in Q4 2015 versus Q4 2014).

CASH FLOW FROM INVESTING
ACTIVITIES

Our net cash used in investing activities consisted
primarily of dividends received from joint ventures, offset
by purchases of property, plant and equipment property
(“PP&E”).

2015 compared to 2014

In 2015, our net cash flow received from investing
activities was $16.4 million, a decrease of $4.9 million.
Dividends received from joint ventures increased by $17.3
million to $20.5 million, primarily as a result of stronger
net income attributable to CWI. CWI improved the

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 23

MANAGEMENT'S DISCUSSION AND ANALYSIS » CAPITAL REQUIREMENTS, RESOURCES & LIQUIDITY

reliability of the ISL G engine, which resulted in a
favourable decrease of $23.5 million in net warranty
adjustments and net extended coverage claims compared
to the year ended December 31, 2014. PP&E additions
decreased by $5.4 million to $4.8 million primarily as a
result of prioritizing investments and capital asset projects.
Net cash flow received from investing activities decreased
because no short-term investments matured in 2015,
compared to $31.4 million in 2014.

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

CASH FLOW FROM
FINANCING ACTIVITIES

2015 compared to 2014

In 2015, our net cash flow from financing activities was
negative because our repayment of operating lines of credit
and long term facilities was greater than our infusion of
cash from drawing on operating lines of credit. In 2014,
our net cash flow from financing activities was positive,
primarily as a result of raising an extra $17.8 million in
unsecured subordinated debentures.

Westport’s capital requirements will vary depending on a
number of factors, including the timing and size of orders
for our LNG systems, our ability to successfully launch
products on time, our supply chain and manufacturing
requirements, our success in executing our business plan,
relationships with current and potential strategic partners,
commercial sales and margins, product reliability, progress
on research and development activities, capital
expenditures and working capital requirements. We also
continue to 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.

24 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

CONTRACTUAL
OBLIGATIONS &
COMMITMENTS

CONTRACTUAL OBLIGATIONS & COMMITMENTS

Accounts payable and
accrued liabilities

Unsecured
subordinated
debentures (1)

Senior financing (2)

Senior revolving
financing (3)

Other bank financing (4)

Capital lease
obligations

Operating lease
commitments

Royalty payments (5)

Carrying
amount

Contractual
cash flows

< 1

1–3

4–5

Years

57.5 $

57.5 $ 57.5 $ — $ — $ —

38.4

9.1

10.9

3.2

0.8

—

46.0

9.4

11.4

3.6

0.8

56.5

14.5

3.6

6.3

0.3

2.0

0.4

3.3

1.2

42.4

1.8

11.1

0.2

0.4

8.0

2.1

—

0.7

—

0.1

—

9.4

1.9

—

0.7

—

1.3

—

35.8

9.1

$ 119.9 $

199.7 $ 74.6 $ 66.0 $ 12.1 $ 46.9

Includes interest at 9%.

Includes interest at rates disclosed in note 13(b) of the annual
financial statements in effect at at December 31, 2015.

Includes interest at rates disclosed in note 13(c) of the annual
financial statements in effect at December 31, 2015.

Includes interest at rates disclosed in note 13(d) in effect at
December 31, 2015.

The Company is obligated to pay annual royalties equal to
the greater of CDN $1.4 million or 0.33% of the Company's
gross annual revenue from all sources, including CWI, provided
that gross revenue exceeds CDN $13.5 million in any
aforementioned fiscal year, until a total of CDN $28.2 million
has been paid. The Company has assumed the minimum
required payments.

CAPITAL LEASE OBLIGATIONS
& OPERATING LEASE
COMMITMENTS

Capital lease obligations related primarily to office
equipment and machinery, have initial terms of three to
five years and have interest rates ranging from 3.1% to

MANAGEMENT'S DISCUSSION AND ANALYSIS » CONTRACTUAL OBLIGATIONS & COMMITMENTS

4.9%. Operating lease commitments represent our future
minimum lease payments under leases related primarily to
our operating premises and office equipment.

SENIOR FINANCING

Senior financing consists of three arrangements with a
combined $15.9 million in principal outstanding.

The Emer S.p.A ("Emer") senior financing agreement with
outstanding principal of $9.4 million is denominated in
EUROS and bears interest at the 6-month Euribor
plus 2.5% (2.6% as at December 31, 2015) and is recorded
at amortized cost using the effective interest rate method.
Interest is paid semi-annually. The Company has pledged
its interest in Emer as a general guarantee for its senior
financing. The senior financing matures in 2017.

The outstanding principal for the Prins senior financing as
of December 31, 2015 is $2.0 million. The senior financing
agreement is denominated in EUROS and bears interest at
the 3-month Euribor plus 3.5% (3.6% as at December 31,
2015). Interest is paid quarterly. The Company has
pledged its interest in Prins as a general guarantee for its
senior financing. The senior financing matures in 2016.

The Prins senior mortgage loan was assumed on the
acquisition of Prins. The senior mortgage loan is
denominated in EUROS and bears interest at 3-month
Euribor plus 1% (1.1% as at December 31, 2015). Interest is
paid quarterly. The Company has pledged its interest in
Prins's building as a general guarantee for its senior
mortgage loan. The senior mortgage loan matures in
2020.

The three senior financing agreements will be repaid in
accordance with [note 13(b)] of the annual financial
statements.

SENIOR REVOLVING
FINANCING

The senior revolving financing facility is denominated in
EUROS and bears interest at the 6-month Euribor
plus 2.6% (2.7% as at December 31, 2015) and will be
repaid through one principal payment of €10 million on
March 31, 2017. Interest is paid semi-annually. The
Company has pledged its interest in Emer as a general
guarantee for its senior revolving financing.

The principal repayment schedule of the senior financings
are as follows for the years ended December 31:

SENIOR REVOLVING FINANCING

Subordinated
debenture
notes

Senior financing Prins Senior
Mortgage
Loan

Emer

Prins

Senior
revolving
financing

Total

2016 $

— $

3.8 $

1.9 $

0.3 $

— $ 6.0

2017

2018

2019

2020+

38.3

1.0

0.1

—

0.3

0.4

1.0

10.9

50.6

—

0.3

0.4

1.0

38.3 $

4.8 $

2.0 $

2.3 $

10.9 $ 58.3

SUBORDINATED DEBENTURE
NOTES

On September 23, 2011, the Company raised CDN$36.0
million through the issuance of debentures (the "Initial
Debentures"). The Initial Debentures were unsecured
and subordinated to senior indebtedness, matured on
September 22, 2014, and bore interest at 9% per annum,
were payable in cash semi-annually in arrears on March 15
and September 15 of each year during the term, which
commenced on March 15, 2012.

On June 27, 2014, the Company raised CDN$19.0 million
through the issuance of debentures on a private placement
basis (the “Additional Debentures”). In conjunction
with the issuance of the Additional Debentures, the
Company amended the terms of the Initial Debentures (the
“Amended Initial Debentures”). The Amended Initial
Debentures are ranked pari passu with the Additional
Debentures and both shall be treated as the same series of
debentures (the “New Debentures”) with the same
terms. The New Debentures totaling CDN$55.0 million
are composed of the Additional Debentures CDN$19.0
million and the Amended Initial Debentures CDN$36.0
million. The New Debentures are unsecured and
subordinated to senior indebtedness, mature on
September 15, 2017, and bear interest at 9% per annum,
payable in cash semi-annually in arrears on March 15 and
September 15 of each year during the term.

The New Debentures contain an extension option that will
allow each debenture holder to have the option to extend, a
maximum of six times, the maturity date for an additional
period of six months provided that greater than CDN
$10,000 of the aggregate principal amount of the New
Debentures remain outstanding.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 25

MANAGEMENT'S DISCUSSION AND ANALYSIS » CONTRACTUAL OBLIGATIONS & COMMITMENTS

The extension option was deemed not clearly and closely
related to the New Debentures and is separately accounted
for as a standalone derivative. The Company recorded this
embedded derivative as a non-current liability on its
consolidated balance sheet. At issuance on June 27, 2014,
the embedded derivative’s fair value was determined to be
CDN$1.3 million, which was recorded as a reduction to the
carrying value of the New Debentures. The Company is
accreting the carrying value of the debt to interest expense
by using the effective interest method through to the
maturity date of the New Debentures. The embedded
derivative is subsequently adjusted to fair value at each
reporting date, with the associated fair value loss (gain)
recorded in interest and other income (loss). The
derivative liability is included in other long term liabilities
on the consolidated balance sheets. The Company
determined the fair value of the embedded derivative using
the Interest Rate Option Pricing Method which
incorporated the Black-Karasinski model.

The table below discloses the accounting values assigned to
the subordinated debenture notes. All values are disclosed
in CDN ("C$"). The approximate exchange rate used to
value the subordinated debenture notes to USD at
December 31, 2015 was 0.72 (2014 – 0.86).

SUBORDINATED DEBENTURE NOTES

(All values in Canadian dollars)

Dec 31

2015

Balance, beginning of period

52.0 C$

Issuance of Additional Debentures

Extension Option Discount

Accretion for extension option

Accretion of share issuance costs

—

0.4

0.7

Balance, end of period

53.1 C$

2014

34.0

19.0

(1.2)

0.2

—

52.0

1. We adopted ASU 2015-03 in the fourth quarter of 2015. We
applied the change retrospectively to Jan. 1, 2014 for prior
period balances of unamortized debt issuance costs, resulting
in a CDN $2.0 million reduction in other assets and long-term
debt on our consolidated balance sheet as of Dec. 31, 2014.

ROYALTY PAYMENTS

Royalty payments include annual royalties payable to
Industry Canada’s Industrial Technologies Office (“ITO”)
as outlined in “Government Funding” below.

PURCHASE COMMITMENTS

The Company purchases components from a variety of
suppliers and contract manufacturers. During the normal
course of business, in order to manage manufacturing lead

26 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

times and help ensure adequate component supply, the
Company enters into agreements with suppliers and
contract manufacturers. A portion of our reported
estimated purchase commitments arising from these
agreements are firm, noncancelable, and unconditional
commitments. The Company may be subject to penalties,
and may lose important suppliers, if it is unable to meet its
purchase commitments. In 2014, the Company entered
into several long-term fixed price contracts to purchase
parts to produce certain products. These contracts
represent firm purchase commitments which are evaluated
for potential market value losses. The Company estimated
a loss on these firm purchase commitments with reference
to the estimated future sales price of these products and
recognized a provision for inventory purchase
commitments of $4.1 million in 2014. The provision is
recognized in other payables in accounts payable and
accrued liabilities. During 2015 the provision has been
drawn down to $2.1 million.

CONTINGENT OFF-
BALANCE SHEET
ARRANGEMENTS

GOVERNMENT FUNDING

We are continually exploring strategic opportunities to
work with governments to provide them with alternative
fuel solutions. As a result of our government partnerships,
we recognized $0.2 million in government funding during
the year ended December 31, 2015 compared with $0.9
million for the year ended December 31, 2014 and $0.6
million for the year ended December 31, 2013.

Under certain repayment terms, we are obligated to repay
royalties as follows:

Industrial Technologies Office
(formerly Technology Partnerships Canada)

DESCRIPTION: Fund 30% of the eligible costs of,
among other research projects, the adaptation of
Westport’s technology to diesel engines, up to CDN
$18.9 million.

ROYALTIES: Annual royalties equal to the greater of
CDN $1.35 million or 0.33% of annual gross revenues

MANAGEMENT'S DISCUSSION AND ANALYSIS » CONTINGENT OFF-BALANCE SHEET ARRANGEMENTS

from all sources, provided that gross revenues exceed
CDN $13.5 million.

TERM: Fiscal 2010 to fiscal 2015, inclusive; royalty
period may be extended until the earlier of March 31,
2018 or until cumulative royalties total CDN $28.2
million.

For the year ended December 31, 2015, royalties of $0.3
million relating to ITO were paid. $2.4 million remain
accrued at December 31, 2016. Cumulative royalties paid
to date relating to ITO at December 31, 2015 total CDN
$10.0 million.

SHARES OUTSTANDING

For the years ended December 31, 2015, December 31,
2014 and the year ended December 31, 2013, the weighted
average number of shares used in calculating the loss per
share was 64,109,703, 63,130,022 and 57,633,190,
respectively. During the year ended December 31, 2015,
we granted 5,556,630 RSUs and PSUs (together the
“Share Units”). The Common Shares, share options and
Share Units outstanding and exercisable as at the following
dates are shown below:

SHARES OUTSTANDING
(weighted average exercise
prices ("WAEP") are presented in
Canadian dollars)

Common Shares
outstanding

Share Units

Dec 31, 2015

Mar 29, 2016

Shares / units WAEP Shares / units WAEP

64,380,819

64,487,305

CRITICAL
ACCOUNTING
POLICIES & ESTIMATES

Our consolidated financial statements are prepared in
accordance with U.S. GAAP, which requires 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 the use of judgment,
estimates and assumptions in determining their reported
amounts, include our accounting of CWI as variable
interest entity, warranty liability, revenue recognition,
inventories, property, equipment, furniture and leasehold
improvements, stock-based compensation, goodwill and
intangible assets. The application of these and other
accounting policies are described in Note 2 of our calendar
year 2015 annual consolidated financial statements. Actual
amounts may vary significantly from estimates used.

VARIABLE INTEREST ENTITIES

A variable interest entity (“VIE”) is any type of legal
structure not controlled by voting equity but rather by
contractual and/or other financial arrangements. Interests
in VIEs are consolidated by the company that is the
primary beneficiary. The Company’s interest in CWI is a
VIE but it is determined that there is no primary
beneficiary.

Outstanding (1)(2)

Exercisable

9,657,921

1,150,294

N/A

9,118,870

1,379,694

N/A

WARRANTY LIABILITY

1. As at December 31, 2015, excludes 41,302 (March 29, 2016 -
35,315) of phantom share units, respectively, which when
vested, are exercisable in exchange for a cash payment and
do not result in the issuance of common shares.

2. As at December 31, 2015, includes 3,561,433 (March 29, 2016 -

3,140,200) PSUs with payout levels ranging between 0% and
200% upon achieving the required performance criteria over
the measurement period. None of these PSUs are currently
known to be issuable based on the prior achievement of the
required 200% conversion ratio as at the date hereof, however
such awards have not yet become vested.

Estimated warranty costs are recognized at the time we sell
our products and included in cost of revenue. We use
historical failure rates and costs to repair product defects
during the warranty period, together with information on
known products to estimate the warranty liability. The
ultimate amount payable and the timing will depend on
actual failure rates and the actual cost to repair. We review
our warranty provision quarterly and record adjustments
to our assumptions based on the latest information
available at that time. Since a number of our products are
new in the market, historical data may not necessarily
reflect actual costs to be incurred, and this exposes the
Company to potentially significant fluctuations in
liabilities and our statement of operations. New product
launches require a greater use of judgment in developing

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 27

MANAGEMENT'S DISCUSSION AND ANALYSIS » CRITICAL ACCOUNTING POLICIES & ESTIMATES

estimates until claims experience becomes available.
Product specific experience is typically available four or
five quarters after product launch, with a clear experience
trend not evident until eight to twelve quarters after
launch. We generally record warranty expense for new
products upon shipment using a factor based upon
historical experience from previous engine generations in
the first year, a blend of actual product and historical
experience in the second year and product specific
experience thereafter. Adjustments to and estimated future
direct warranty costs are accrued and charged to cost of
revenue in the period when the related revenues are
recognized while indirect warranty overhead salaries and
related costs are charged to cost of revenue in the period
incurred.

During the fourth quarter of 2013, a study of the historical
data indicated that the cost to repair product defects
continued to increase significantly primarily associated
with our extended warranty contracts. As a result, the
Company recognized a change in estimate in our base
warranty liability and a loss on our extended warranty
contracts representing the excess of the estimated cost to
service these contracts over the amount of the deferred
revenue recognized associated with the contracts. The
warranty liability was reviewed in the fourth quarter of
2014 and 2015, and no change in estimate was required.

REVENUE RECOGNITION

Product Revenue

The Company’s primary source of revenue is from the sale
of kits, Westport LNG systems and parts, and Westport
CNG and LPG fuel systems for OEMs in the light-duty
automotive and industrial markets. Product revenue is
recognized when contractual terms are agreed upon, the
price is fixed or determinable, the products are shipped
and title passes to the customer and collectability is
reasonably assured.

Revenue from Research &
Development

28 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

our achieving defined milestones or on the performance of
work under product development programs. Revenues are
recognized using the milestone method based on
assessment of progress achieved against the defined
milestones. Revenue may also be recognized using the
proportionate performance method of accounting based on
the performance of work under the research and
development arrangement. All costs incurred related to
revenue earned from research and development
arrangements are recorded as research and development
expense as incurred.

Revenue from Contracts

The Company earns revenue under certain contracts to
provide engineering development services. These
contracts provide for the payment for services based on the
performance of work under product development
programs. Revenues are recognized under these contracts
based on the percentage of completion method of
accounting. The components to measure percentage of
completion may include estimated costs to complete a
contract, estimated hours to completion or management’s
assessment of work to be performed. When estimates of
total costs to be incurred on a contract exceed total
estimates of revenue to be earned, a provision for the
entire loss on the contract is recorded in the period the loss
is determined. Changes to the estimated percentage of
completion of a contract may result in an adjustment to
previously recognized revenues. All costs incurred related
to revenue earned from contracts are recorded in cost of
products sold.

Arrangements with customers may include multiple
deliverables, including any combination of products,
services, and licenses. In these arrangements, the
Company allocates revenue to all deliverables based on
their relative selling prices. The Company uses a hierarchy
to determine the selling price to be used for allocating
revenue to deliverables:

a. vendor-specific objective evidence of fair value

("VSOE"),

third-party evidence of selling price ("TPE"), and

c. best estimate of selling price ("BESP"), which are

determined as follows:

VSOE

In limited circumstances are products sold separately in
stand-alone arrangements. In determining VSOE, the
Company requires that a substantial majority of the selling

MANAGEMENT'S DISCUSSION AND ANALYSIS » CRITICAL ACCOUNTING POLICIES & ESTIMATES

prices for a product or service falls within a reasonably
narrow pricing range, generally evidenced by the pricing
rates of approximately 85% of such historical stand-alone
transactions falling within plus or minus 10% of the
median rate. In addition, the Company considers the
geographies in which the products or services are sold,
major product and service groups, customer classification,
and other environmental or marketing variables in
determining VSOE.

TPE

VSOE exists only when the Company sells the deliverable
separately. When VSOE does not exist, the Company
attempts to determine TPE based on competitor prices for
similar deliverables when sold separately. Generally, the
Company’s go-to-market strategy for many of its products
differs from that of its peers and its offerings contain a
significant level of customization and differentiation such
that the comparable pricing of products with similar
functionality sold by other companies cannot be obtained.
Furthermore, the Company is unable to reliably determine
what similar competitor products’ selling prices are on a
stand-alone basis. Therefore, the Company is typically not
able to determine TPE.

BESP

The objective of BESP is to determine the price at which
the Company would transact a sale if the product or service
were sold on a stand-alone basis. When both VSOE and
TPE do not exist, the Company determines BESP by first
collecting all reasonably available data points including
sales, cost and margin analysis of the product, and other
inputs based on the Company’s normal pricing practices.
Second, the Company makes any reasonably required
adjustments to the data based on market and Company-
specific factors. Third, the Company stratifies the data
points, when appropriate, based on customer, magnitude
of the transaction and sales volume.

Once elements of an arrangement are separated into more
than one unit of accounting, revenue is recognized for each
separate unit of accounting based on the nature of the
revenue as described above.

Changes in cost estimates and the fair values of certain
deliverables could negatively impact the Company’s
operating results. In addition, unforeseen conditions could
arise over the contract term that may have a significant
impact on the Company’s operating results.

License Revenue

Revenue from technology license fees is recognized over
the duration of the licensing agreement. Amounts received
in advance of the revenue recognition criteria being met
are recorded as deferred revenue.

INVENTORIES

The Company’s inventories consist of the Company’s fuel
system products (finished goods), work-in-progress,
purchased parts and assembled parts. Inventories are
recorded at the lower of cost and net realizable value. Cost
is determined based on the lower of weighted average cost
and net realizable value. The cost of fuel system product
inventories, assembled parts and work-in-progress
includes materials, labour and production overhead
including depreciation. The Company provides inventory
write-downs based on excess and obsolete inventories
determined primarily by future demand forecasts. In
addition, the Company records a liability for firm,
noncancelable, and unconditional purchase commitments
with manufacturers for quantities in excess of the
Company’s future demand forecast consistent with its
valuation of excess and obsolete inventory.

PROPERTY, PLANT &
EQUIPMENT & INTANGIBLE
ASSETS

We consider whether or not there has been an impairment
in our long-lived assets, such as equipment, furniture and
leasehold improvements and intangible assets, whenever
events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. If such
assets are not recoverable, we are required to write down
the assets to fair value. When quoted market values are not
available, we use the expected future cash flows discounted
at a rate commensurate with the risks associated with the
recovery of the asset as an estimate of fair value to
determine whether or not a write down is required.

Intangible Assets

Based on the revenue and operating results and decline in
the oil price, the Company concluded there were
impairment indicators requiring the performance of a
long-lived assets impairment test for customer contracts,
technology and other intangibles as of November 30, 2014.
Accordingly non-cash impairment charges aggregating to

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 29

MANAGEMENT'S DISCUSSION AND ANALYSIS » CRITICAL ACCOUNTING POLICIES & ESTIMATES

$5.8 million were recorded during the year ended
December 31, 2014 which reduced the carrying values of
technology by $0.1 million, customer contracts by $4.7
million and other intangibles by $1.0 million for the
Westport Operations segment.

Based on the revenue and operating results and decline in
the oil price, the Company concluded there were
impairment indicators requiring the performance of a
long-lived assets impairment test for customer contracts,
technology and other intangibles as of November 30, 2015.
The Company completed its annual assessment at
November 30, 2015 and concluded that intangible assets
were not impaired.

Impairment of Property, Plant &
Equipment

During the year ended December 31, 2015, the Company
recorded an impairment charge of $4.0 million. The
impairment resulted primarily from the write-down of
Orca LNG trailers ("Orcas") which provide in-yard fleets
convenient refueling in the absence of a permanent
liquefied natural gas ("LNG") solution. The method used
to determine fair value was recent sales of Orcas and the
impairment charge was recorded in the Westport
Operations segment.

During the year ended December 31, 2014, the Company
recorded an impairment charge of $5.2 million. The
impairment was primarily recorded against non-utilized
test cells, and non-utilized equipment related to facility
closures.

STOCK-BASED
COMPENSATION

We account for stock-based compensation related to stock
options, Performance Share Units (“PSUs”) and
Restricted Share Units (“RSUs”) granted to employees
and directors using the fair value method. The resulting
compensation expense for stock options is calculated using
the Black-Scholes valuation method net of estimated
forfeitures and is recognized in results from operations
over the period in which the related employee services are
rendered. We account for performance shares by
calculating the fair value using a Monte-Carlo simulation
and RSUs by calculating the fair value based on the market
price of the Company’s common shares on the date of
grant. The compensation expense is recorded in the period

30 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

it is earned, which generally is the period over which the
units vest.

GOODWILL

We do not amortize goodwill but instead test it annually
for impairment, or more frequently when events or
changes in circumstances indicate that goodwill might be
impaired. This impairment test is performed annually at
November 30. We use a two-step test to identify the
potential impairment and to measure the amount of
impairment, if any. The first step is to compare the fair
value of the reporting unit with its carrying amount,
including goodwill. If the fair value of the reporting unit
exceeds its carrying amount, goodwill is not considered
impaired; otherwise, goodwill is impaired and the loss is
measured by performing step two. Under step two, the
impairment loss is measured by comparing the implied fair
value of the reporting unit goodwill with the carrying
amount of goodwill.

We determine fair value using widely accepted valuation
techniques, including discounted cash flows and market
multiple analyses. These types of analyses contain
uncertainties because they require management to make
assumptions and to apply judgment to estimate industry
economic factors and the profitability of future business
strategies.

The Company's annual assessment date is November 30.
However, based on the revenue and operating results of
the Italian reporting unit, which is within the Westport
Operations segment in the nine months ended September
30, 2015, the decline in the outlook for the remainder of
2015 and future years and the decline in the Company's
share price, the Company concluded there were
impairment indicators requiring an interim goodwill
impairment assessment as of September 30, 2015. Based
on the Company's assessment, it was determined that the
carrying amount of goodwill exceeded the implied fair
value of goodwill and as a result an impairment of $18.7
million was recorded in the Italian reporting unit.

The remaining goodwill of $3.0 relates to the Netherlands
reporting unit, which is within the Westport Operations'
segment. The Company completed its annual assessment
at November 30, 2015 and concluded that the goodwill was
not impaired.

An assessment of the carrying value of goodwill was
previously conducted as of November 30, 2014. Based on
the Company's assessment, it was determined that

MANAGEMENT'S DISCUSSION AND ANALYSIS » CRITICAL ACCOUNTING POLICIES & ESTIMATES

carrying amount of goodwill exceeded the implied fair
value of goodwill and as a result an impairment of $18.5
million was recorded in the US reporting unit, which is
within the Westport Operations segment for the year
ended December 31, 2014.

For 2014 and 2015, the fair value of the reporting units was
determined using the present value of expected future cash
flows discounted at a rate equivalent to a market
participant’s weighted-average cost of capital. The
estimates and assumptions regarding expected future cash
flows and the appropriate discount rates are in part based
upon historical experience, financial forecasts and industry
trends and conditions.

NEW ACCOUNTING
PRONOUNCEMENTS &
DEVELOPMENTS

ADOPTED IN 2015

Simplifying the Presentation of Debt
Issuance Costs

In April 2015, the FASB issued ASU 2015-03, which
requires debt issuance costs related to a debt liability to be
presented in the balance sheet as a direct deduction from
the carrying amount of the debt liability instead of being
presented as an asset. The recognition and measurement
guidance for debt issuance costs has not changed. ASU
2015-03 requires retrospective application and represents
a change in accounting principle. ASU 2015-03 is effective
for fiscal years beginning after December 15, 2015 and
early adoption is permitted for financial statements that
have not been previously issued. We adopted this update
in the fourth quarter of 2015. We applied the change
retrospectively to January 1, 2014 for prior period balances
of unamortized debt issuance costs, resulting in a $1.5
million (CDN $2.0 million) reduction in other assets and
long-term debt on our consolidated balance sheet as of
December 31, 2014.

Simplifying the Accounting for
Measurement-Period Adjustments
(Topic 805): Business Combinations

In September 2015, the FASB issued ASU 2015-16, which
replaces the requirement that an acquirer in a business

combination account for measurement period adjustments
retrospectively with a requirement that an acquirer
recognize adjustments to the provisional amounts that are
identified during the measurement period in the reporting
period in which the adjustment amounts are determined.
ASU 2015-16 requires that the acquirer record, in the same
period’s financial statements, the effect on earnings of
changes in depreciation, amortization, or other income
effects, if any, as a result of the change to the provisional
amounts, calculated as if the accounting had been
completed at the acquisition date. For public business
entities, ASU 2015-16 is effective for fiscal years beginning
after December 15, 2015, including interim periods within
those fiscal years. The guidance is to be applied
prospectively to adjustments to provisional amounts that
occur after the effective date of the guidance, with earlier
application permitted for financial statements that have
not been issued. Our early adoption of ASU 2015-16 in the
third quarter of 2015 did not have a material impact on our
consolidated financial statements.

Simplifying the Balance Sheet
Classification of Deferred Taxes
(Topic 740): Income Taxes

In November 2015, the FASB issued ASU 2015-17
amending the accounting for income taxes and requiring
all deferred tax assets and liabilities to be classified as non-
current on the consolidated balance sheet. The ASU is
effective for reporting periods beginning after December
15, 2016, with early adoption permitted. The ASU may be
adopted either prospectively or retrospectively. We
adopted this update as of December 31, 2015 and applied
the change retrospectively to January 1, 2014 for prior
period balances of deferred tax assets and liabilities,
resulting in a $3.6 million reduction in total current assets
and corresponding increase in long term assets, along with
a $0.4 million reduction in total current liabilities and
corresponding increase in long term liabilities on our
consolidated balance sheet as of December 31, 2014.

TO BE ADOPTED IN THE FUTURE

Revenue

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 31

MANAGEMENT'S DISCUSSION AND ANALYSIS » NEW ACCOUNTING PRONOUNCEMENTS & DEVELOPMENTS

issues, improves comparability of revenue recognition
practices across entities, industries, jurisdictions and
capital markets, provides more useful information to users
of financial statements through improved disclosure
requirements and simplifies the preparation of financial
statements by reducing the number of requirements to
which an entity must refer. The guidance in this update
supersedes the revenue recognition requirements in Topic
605, Revenue Recognition, and most industry-specific
guidance throughout the Industry Topics of the
Codification. Additionally, this update supersedes some
cost guidance included in Subtopic 605-35, Revenue
Recognition - Construction-Type and Production-Type
Contracts. Topic 606 is effective for public entities with
reporting periods beginning after December 15, 2017. Early
adoption would be permitted as of the original effective
date in ASU 2014-09 (i.e., annual reporting periods
beginning after December 15, 2016, including interim
reporting periods within the annual periods). The
Company has not yet evaluated the impact of the adoption
of this new standard.

Going Concern

In August 2014, the FASB issued ASU 2014-15
Presentation of Financial Statements - Going Concern,
outlining management’s responsibility to evaluate whether
there is substantial doubt about an entity’s ability to
continue as a going concern, along with the required
disclosures. ASU 2014-15 is effective for the annual period
ending after December 15, 2016 with early adoption
permitted. The Company does not anticipate a material
impact to the Company’s financial statements as a result of
this change.

Amendments to the Consolidation
Analysis (Topic 810): Consolidation

In February 2015 the FASB issued ASU 2015-02, which
revises the current consolidation guidance which results in
a change in the determination of whether an entity
consolidates certain types of legal entities. The Company is
currently assessing the impact of the new standard on its
consolidated financial statements. The new standard is
effective for annual and interim reporting periods
beginning after December 15, 2015 and may be applied on
a full or modified retrospective basis.

Simplifying the Measurement of
Inventory (Topic 330): Inventory

In July 2015, the FASB issued ASU 2015-11, which requires
an entity to measure inventory at the lower of cost or net
realizable value, which consists of the estimated selling
prices in the ordinary course of business, less reasonably
predictable cost of completion, disposal, and
transportation. For public entities, the updated guidance is
effective for fiscal years beginning after December 15,
2016, including interim periods within those fiscal years.
The guidance is to be applied prospectively with earlier
application permitted as of the beginning of an interim or
annual reporting period. The Company does not anticipate
a material impact to the Company’s financial statements as
a result of this change.

DISCLOSURE
CONTROLS &
PROCEDURES &
INTERNAL CONTROLS
OVER FINANCIAL
REPORTING

EVALUATION OF DISCLOSURE
CONTROLS & PROCEDURES

Our disclosure controls and procedures are designed to
provide reasonable assurance that relevant information is
gathered and reported to senior management, including
the Chief Executive Officer (“CEO”) and the Chief
Financial Officer (“CFO”), on a timely basis such that
appropriate decisions can be made regarding public
disclosures. As of the end of the period covered by this
report, we evaluated, under the supervision and with the
participation of management, including the CEO and CFO,
the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended (“Exchange Act”).

32 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

MANAGEMENT'S DISCUSSION AND ANALYSIS » DISCLOSURE CONTROLS & PROCEDURES

MANAGEMENT'S REPORT ON
INTERNAL CONTROL OVER
FINANCIAL REPORTING

The Company's management is responsible for
establishing and maintaining adequate internal control
over financial reporting, as such term is defined in Rule
13a-15(f) promulgated under the Exchange Act. Our
internal control over financial reporting is designed under
our supervision, and affected by the Company’s board of
directors, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of the Company’s
consolidated financial statements for external reporting
purposes in accordance with U.S. GAAP and the
requirements of the SEC, as applicable. There are inherent
limitations in the effectiveness of internal control over
financial reporting, including the possibility that
misstatements may not be prevented or detected.
Accordingly, even effective internal controls over financial
reporting can provide only reasonable assurance with
respect to financial statement preparation. Furthermore,
the effectiveness of internal controls can change with
circumstances.

All internal control systems, no matter how well designed
and operated, can provide only reasonable, not absolute,
assurance that the control system’s objectives will be met.
Because of the inherent limitations in all control systems,
no evaluation of controls can provide absolute assurance
that all control issues have been detected. The design of
any system of controls is based in part on certain
assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in
achieving its stated goals under potential future
conditions, regardless of how remote. Therefore, even
those systems determined to be effective can provide only
reasonable assurance with respect to financial statement
preparation and presentation.

On July 23, 2015, we reported that we had identified a
material weakness in our internal control over financial
reporting as further described in our amended
Management’s Discussion and Analysis for the year ended
December 31, 2014. A material weakness is a deficiency, or
a combination of deficiencies, in internal control over
financial reporting such that there is a reasonable
possibility that a material misstatement of the annual
financial statements will not be prevented or detected on a
timely basis. As a result of this material weakness, our CEO

and CFO concluded that our disclosure controls and
procedures were not effective at a reasonable assurance
level as of December 31, 2014. Accordingly, management
had concluded that the Company's internal control over
financial reporting was not effective as of December 31,
2014. In response to the identified material weakness,
management took specific actions to address the material
weakness as further described in our amended
Management’s Discussion and Analysis for the year ended
December 31, 2014 filed on July 23, 2015. As a result of
these actions, management has concluded that the
material weakness has been remediated as of December 31,
2015.

Management, including the CEO and CFO, has evaluated
the effectiveness of our internal control over financial
reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the
Exchange Act, in relation to criteria described in Internal
Control-Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”). Based on this evaluation,
management has determined that our internal control over
financial reporting was effective as of December 31, 2015.

KPMG LLP, our independent registered public accounting
firm, has audited our consolidated financial statements
and expressed an unqualified opinion thereon. KPMG has
also expressed an unqualified opinion on the effective
operation of our internal control over financial reporting
as of December 31, 2015.

CHANGES IN INTERNAL
CONTROL OVER FINANCIAL
REPORTING

Other than the changes described above with respect to the
remediation of the material weakness at December 31,
2014, there were no changes in our internal control over
financial reporting that occurred during the year ended
December 31, 2015 that have materially affected, or are
reasonably likely to materially affect, our internal controls
over financial reporting.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 33

MANAGEMENT'S DISCUSSION AND ANALYSIS » SUMMARY OF QUARTERLY RESULTS

SUMMARY OF
QUARTERLY RESULTS

DISCUSSION OF THE QUARTER
ENDED DECEMBER 31, 2015

Our revenues and operating results can vary significantly
from quarter to quarter depending on the timing of
product deliveries, product mix, product launch dates,

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

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

SELECTED CONSOLIDATED QUARTERLY OPERATIONS DATA (unaudited)

(expressed in millions of United States dollars except for per share amounts)

2014

2015

Three months ended: Mar 31

Jun 30

Sep 30

Dec 31

Mar 31

Jun 30

Sep 30

Dec 31

Product revenue (1)

Service and other revenue

Total revenue

Cost of product and parts revenue

Gross margin

Gross margin percentage

Net loss for the period

EBITDA (2)

Adjusted EBITDA (3)

Loss per share

Basic and diluted

34.8

31.8

24.0

27.4

27.0

24.6

21.3

24.9

5.1

39.9

27.6

6.1

37.9

24.3

1.4

25.4

17.3

—

27.4

28.7

1.0

28.0

22.6

3.2

27.8

18.1

1.0

22.3

21.0

12.3

13.6

8.1

(1.3)

5.4

9.7

1.3

0.2

25.1

21.6

3.5

30.8%

35.9%

31.9%

(4.7)%

19.3%

34.9%

5.8%

13.9%

(23.9) $

(35.4) $

(25.5) $ (64.8)

(18.8) $

(28.8) $

(20.8) $ (57.5)

(22.1) $

(16.9) $

(22.0) $ (23.0)

(17.2) $

(20.5) $

(37.4) $

(23.3)

(11.7) $

(14.8) $

(32.5) $

(19.3)

(9.2) $

(7.7) $

(9.8) $

(12.3)

(0.38) $

(0.56) $

(0.40) $ (1.03)

(0.30) $

(0.58) $

(0.35)

Income from unconsolidated joint ventures
CWI net income attributable to the Company

WWI net income attributable to the Company

(0.8) $

0.5

0.4

0.7

0.9

1.2

7.6

3.6

5.9

0.3

3.4

0.1

3.5

0.1

4.3

0.5

In 2014, the Company combined the parts revenue with product revenue into a single line item in the consolidated statement of
operations and comprehensive loss for all periods presented.

The term EBITDA (earnings before interest, taxes, depreciation and amortization) does not have a standardized meaning according to U.S.
GAAP. See non-GAAP measures for more information.

The term Adjusted EBITDA is not defined under U.S. GAAP and is not a measure of operating income, operating performance or liquidity
presented in accordance with U.S. GAAP. Westport defines Adjusted EBITDA as EBITDA adjusted for amortization of stock-based
compensation, unrealized foreign exchange gain or loss, and non-cash and other unusual adjustments. See non-GAAP measures for more
information.

THREE MONTHS ENDED
DECEMBER 31, 2015 & 2014

Our consolidated revenue for the three months ended
December 31, 2015 was $25.1 million, a decrease of $2.3
million, or 8.4%, from $27.4 million for the three months
ended December 31, 2014.

Our consolidated net loss for the three months ended
December 31, 2015 was $23.3 million, or a loss of $0.36
per diluted share, compared to a net loss of $64.8 million,
or a loss of $1.03 per diluted share, for the three months
ended December 31, 2014. The decrease in net loss

34 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

primarily relates to lower SG&A and R+D costs in 2015
and higher non-cash and other unusual adjustments taken
in the fourth quarter of 2014.

NON-GAAP MEASURES

We use certain non-GAAP measures to assist in assessing
our financial performance. Non-GAAP measures do not
have any standardized meaning prescribed in U.S. GAAP
and are therefore unlikely to be comparable to similar
measures presented by other companies.

MANAGEMENT'S DISCUSSION AND ANALYSIS » SUMMARY OF QUARTERLY RESULTS

EBITDA
The term EBITDA (earnings before interest, taxes,
depreciation and amortization) is a non-GAAP financial
measure. The Company defines EBITDA as loss before
income taxes adjusted for interest expense (net) and
depreciation and amortization.

Management believes that EBITDA is an important
indicator commonly reported and widely used by investors
and analysts as an indicator of the Company’s operating
performance and ability. The intent is to provide
additional useful information to investors and analysts and

QUARTERLY EBITDA DATA

such measures do not have any standardized meaning
under U.S. GAAP. These measures should not be
considered in isolation or as a substitute for measures of
performance prepared in accordance with U.S. GAAP.
Other issuers may define EBITDA differently.

EBITDA increased $13.2 million in the three months
ended December 31, 2015 to a loss of $19.3 million from a
loss of $32.5 million for the three months ended
September 30, 2015 primarily as a result of a goodwill
impairment charge taken in the third quarter of 2015.

Three months ended:

Mar 31

Jun 30

Sep 30

Dec 31

Mar 31

Jun 30

Sep 30

Dec 31

Loss before income taxes

Interest expense, net (1)

Depreciation

EBITDA

(23.9) $

(35.1) $

(26.2) $

(65.1) $

(16.7) $

(19.9) $

(37.2) $

(23.9)

0.8

4.3

1.7

4.6

0.7

4.7

2.5

5.1

1.4

3.6

1.6

3.5

1.4

3.3

1.3

3.3

(18.8) $

(28.8) $

(20.8) $

(57.5) $

(11.7) $

(14.8) $

(32.5) $

(19.3)

2014

2015

Interest expense, net is the aggregate of bank charges, interest, and other, interest on long term-debt and amortization of discount.

ADJUSTED EBITDA

The term Adjusted EBITDA is not defined under U.S.
GAAP and is not a measure of operating income, operating
performance or liquidity presented in accordance with U.S.
GAAP.

Adjusted EBITDA is used by management to review
operational progress of its business units and investment
programs over successive periods and as a long-term
indicator of operational performance since it ties closely to
the unit’s ability to generate sustained cash flows.

Westport defines Adjusted EBITDA as EBITDA adjusted
for stock-based compensation, unrealized foreign
exchange gain or loss, and non-cash and other unusual
adjustments. Adjusted EBITDA has limitations as an
analytical tool, and when assessing Westport’s operating

QUARTERLY ADJUSTED EBITDA DATA

performance, investors should not consider Adjusted
EBITDA in isolation, or as a substitute for net loss or other
consolidated statement of operations data prepared in
accordance with U.S. GAAP. Among other things,
Adjusted EBITDA does not reflect Westport’s actual cash
expenditures. Other companies may calculate similar
measures differently than Westport, limiting their
usefulness as comparative tools. Westport compensates for
these limitations by relying primarily on its U.S. GAAP
results.

Adjusted EBITDA decreased $2.5 million in the three
months ended December 31, 2015 to a loss of $12.3 million
from a loss of $9.8 million for the three months ended
September 30, 2015 primarily as a result of lower margins,
and higher R&D and SG&A expenses.

2014

2015

Three months ended:

Mar 31

Jun 30

Sep 30

Dec 31

Mar 31

Jun 30

Sep 30

Dec 31

EBITDA

Stock based compensation

Unrealized foreign exchange (gain) loss

Non-cash and other unusual adjustments (1)

(18.8) $

(28.8) $

(20.8) $

(57.5) $

(11.7) $

(14.8) $

(32.5) $

(19.3)

4.7

(8.9)

0.9

3.3

8.6

—

1.0

(2.2)

—

(0.9)

35.4

3.4

(2.9)

2.0

4.7

(1.2)

3.6

3.3

(8.0)

27.4

3.5

0.5

3.0

Adjusted EBITDA

(22.1) $

(16.9) $

(22.0) $

(23.0) $

(9.2) $

(7.7) $

(9.8) $

(12.3)

1. Non-cash and other unusual adjustments include impairment of long lived assets, provision for inventory purchase commitments, intangible
impairment, goodwill impairment, one time inventory obsolescence charges and one time costs related to the proposed merger between
the Company and Fuel Systems. The three month ended December 31, 2015 figure included other unusual adjustments related to the
discontinuation of the first generation of Westport HPDI systems.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 35

MANAGEMENT'S DISCUSSION AND ANALYSIS » RELATED PARTY TRANSACTIONS

RELATED PARTY
TRANSACTIONS

As part of our joint venture agreement, we engage in
transactions with CWI.

As at December 31, 2015, net amounts due from CWI total
$1.2 million (2014 – $2.5 million). Amounts receivable
relate to costs incurred by the Company on behalf of CWI.
The amounts are generally reimbursed by CWI to the
Company in the month following the month in which the
payable is incurred. Cost reimbursements from CWI
consisted of the following:

COST REIMBURSEMENTS FROM CWI

2015

2014

2013

Research and development

— $

General and administrative

Sales and marketing

0.9

4.8

1.5

4.9

Total

5.7 $

6.5 $

0.2

1.4

4.7

6.3

All material transactions between the Company and CWI
have been eliminated on application of equity accounting.

SUBSEQUENT EVENTS

See the "General Developments" section of this MD&A for
updates related to Cartesian Financing and The Merger
with Fuel Systems Solutions, Inc.

BUSINESS RISKS AND
UNCERTAINTIES

An investment in our business involves risk and readers
should carefully consider the risks described in our AIF
and other filings on www.sedar.com and www.sec.gov.
Our ability to generate revenue and profit from our
technologies is dependent on a number of factors, and the
risks discussed in our AIF, if they were to occur, could have
a material impact on our business, financial condition,
liquidity, results of operation or prospects. While we have
attempted to identify the primary known risks that are
material to our business, the risks and uncertainties
discussed in our AIF may not be the only ones we face.
Additional risks and uncertainties, including those that we
do not know about now or that we currently believe are
immaterial may also adversely affect our business,
financial condition, liquidity, results of operation or
prospects. A full discussion of the risks impacting our
business is contained in the AIF for the year ended
December 31, 2015 under the heading “Risk Factors” and is
available on SEDAR at www.sedar.com.

36 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

INDEPENDENT
AUDITORS’ REPORT OF
REGISTERED PUBLIC
ACCOUNTING FIRM

Opinion

In our opinion, the consolidated financial statements present
fairly, in all material respects, the consolidated financial position
of Westport Innovations Inc. as at December 31, 2015, and its
consolidated results of operations and its consolidated cash flows
for the years ended December 31, 2015 and December 31, 2013, in
accordance with US generally accepted accounting principles.

To the Shareholders of Westport Innovations Inc.

Comparative Information

REPORTS

We have audited the accompanying consolidated financial
statements of Westport Innovations Inc., which comprise the
consolidated balance sheet as at December 31, 2015, the
consolidated statements of operations and comprehensive
income, shareholders’ equity and cash flows for the years ended
December 31, 2015 and December 31, 2013 and notes, comprising
a summary of significant accounting policies and other
explanatory information.

Management’s Responsibility for the Consolidated
Financial Statements

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

Auditors’ Responsibility

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

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

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

Without modifying our opinion, we draw attention to [Note 3(a)]
to the consolidated financial statements which indicates that the
comparative information presented as at and for the year ended
December 31, 2014 has been adjusted for the adoption of new
accounting standards in 2015.

The consolidated financial statements of Westport Innovations Inc.
as at and for the year ended December 31, 2014, excluding the
adjustments described in [Note 3(a)] to the consolidated financial
statements, were audited by another auditor who expressed an
unmodified opinion on those financial statements on March 9, 2015
(October 15, 2015 as to the change in reportable segments discussed
in [Note 23] to the consolidated financial statements).

As part of our audit of the consolidated financial statements as at
and for the year ended December 31, 2015, we audited the
adjustments described in [Note 3(a)] to the consolidated financial
statements that were applied to adjust the comparative
information presented as at and for the year ended December 31,
2014. In our opinion, the adjustments are appropriate and have
been properly applied.

We were not engaged to audit, review, or apply any procedures to
the December 31, 2014 consolidated financial statements, other
than with respect to the adjustments described in [Note 3(a)] to
the consolidated financial statements. Accordingly, we do not
express an opinion or any other form of assurance on those
financial statements taken as a whole.

Other Matter

We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), Westport
Innovations Inc.’s internal control over financial reporting as of
December 31, 2015, based on the criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission
("COSO"), and our report dated March 29, 2016 expressed an
unmodified (unqualified) opinion on the effectiveness of Westport
Innovations Inc.’s internal control over financial reporting.

KPMG LLP
Chartered Professional Accountants
March 29, 2016
Vancouver, Canada

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 37

the company’s assets that could have a material effect on the
financial statements.

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

In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December
31, 2015, based on the criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission
("COSO").

We also have audited, in accordance with Canadian generally
accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States), the
consolidated balance sheet of the Company as of December 31,
2015, and the consolidated statements of operations and
comprehensive income, shareholders’ equity and cash flows for
the years ended December 31, 2015 and December 31, 2013 and
our report dated March 29, 2016 expressed an unqualified
opinion on those consolidated financial statements.

KPMG LLP
Chartered Professional Accountants
March 29, 2016
Vancouver, Canada

REPORTS

REPORT OF
INDEPENDENT
REGISTERED PUBLIC
ACCOUNTING FIRM

To the Shareholders of Westport Innovations Inc.

We have audited Westport Innovations Inc.’s (“the Company”)
internal control over financial reporting as of December 31, 2015,
based on the criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). The
Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting,
included in the accompanying “Management’s Report on
Financial Statements and Assessment of Internal Control over
Financial Reporting”. Our responsibility is to express an opinion
on the Company’s internal control over financial reporting based
on our audit.

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

A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that

1. pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company;

2. provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made
only in accordance with authorizations of management and
directors of the company; and

3. provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of

38 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

REPORT OF
INDEPENDENT
REGISTERED PUBLIC
ACCOUNTING FIRM

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

We have audited, before the effects of the adjustments to
retrospectively apply accounting standards adopted in 2015 as
discussed in Note 3 to the consolidated financial statements, the
accompanying consolidated financial statements of Westport
Innovations Inc. and subsidiaries (the “Company”), which
comprise the consolidated balance sheet as of December 31, 2014,
and consolidated statements of operations and comprehensive
(loss) income, changes in shareholders’ equity and cash flows for
the year ended December 31, 2014 and a summary of significant
accounting policies and other explanatory information, (the 2014
consolidated financial statements before the effects of the
adjustments discussed in [Note 3] to the consolidated financial
statements are not presented herein).

Management's Responsibility for the Consolidated
Financial Statements

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

Auditor’s Responsibility

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

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

REPORTS

the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the
consolidated financial statements.

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

Opinion

In our opinion, such 2014 consolidated financial statements,
before the effects of the adjustments to retrospectively apply
accounting standards adopted in 2015 as discussed in [Note 3] to
the consolidated financial statements, present fairly, in all
material respects, the financial position of Westport Innovations
Inc. and subsidiaries as at December 31, 2014, and its financial
performance and its cash flows for the year ended December 31,
2014 in accordance with accounting principles generally accepted
in the United States of America.

Other Matter

We were not engaged to audit, review, or apply any procedures to
the adjustments to retrospectively apply accounting standards
adopted in 2015 as discussed in [Note 3] to the consolidated
financial statements and, accordingly, we do not express an
opinion on any other form of assurance about whether such
retrospective adjustments are appropriate and have been
properly applied. Those retrospective adjustments were audited
by other auditors.

/s/ Deloitte LLP
Chartered Professional Accountants
Vancouver, Canada
March 9, 2015
(October 15, 2015 as to the change in reportable segments
discussed in [Note 23] to the consolidated financial statements)

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 39

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEET

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

2015

2014

ASSETS

Current Assets

Cash and cash equivalents
Short-term investments
Accounts receivable [note 5]
Inventories [note 6]
Prepaid expenses

Long-term investments [note 7]
Other assets
Property, plant and equipment [note 9]
Intangible assets [note 10]
Deferred income tax assets [note 19(b)]
Goodwill [note 11]

LIABILITIES & SHAREHOLDERS’ EQUITY

Current Liabilities

Accounts payable and accrued liabilities [note 12]
Current portion of deferred revenue
Current portion of long-term debt [note 13]
Current portion of warranty liability [note 14]

Warranty liability [note 14]
Long-term debt [note 13]
Deferred revenue
Deferred income tax liabilities [note 19(b)]
Other long-term liabilities [note 15]

Shareholders’ Equity

Share capital [note 17]

Authorized:

Unlimited common shares, no par value
Unlimited preferred shares in series, no par value

Issued:

64,380,819 (2014 – 63,480,722) common shares

Other equity instruments
Additional paid in capital
Accumulated deficit
Accumulated other comprehensive income

Commitments and contingencies [note 22]

27,143 $
696
38,324
35,660
3,475
105,298
31,111
2,863
42,527
22,307
2,538
3,008
209,652 $

57,454 $
1,779
8,257
5,554
73,044
8,437
54,190
1,513
3,570
1,302
142,056

93,282
723
46,849
41,824
4,641
187,319
33,324
1,973
58,134
27,920
3,827
23,352
335,849

55,502
1,782
18,955
9,696
85,935
13,413
57,741
3,795
5,352
1,605
167,841

937,029
16,460
9,837
(863,348)
(32,382)
67,596

930,857
7,767
9,837
(764,960)
(15,493)
168,008

209,652 $

335,849

See accompanying notes to consolidated financial statements. Approved on behalf of the Board:

Brenda J. Eprile
Director

Warren Baker
Director

40 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

FINANCIAL STATEMENTS » CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME (LOSS)

Years ended December 31

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

2015

2014

2013

Product revenue

Service and other revenue [note 21]

COST OF REVENUE & EXPENSES

Cost of product revenue

Research and development [note 17(d)] [note 18]

General and administrative [note 17(d)]

Sales and marketing [note 17(d)]

Foreign exchange (gain) loss

Depreciation and amortization [note 9] [note 10]

Bank charges, interest and other

Impairment of long lived assets

Provision for inventory purchase commitments [note 12] [note 22(b)]

Intangible impairment [note 10]

Goodwill impairment [note 11]

Loss from operations

Income from investments accounted for by the equity method

Interest on long-term debt and amortization of discount

Interest and other income

Loss before income taxes

INCOME TAX EXPENSE (RECOVERY) [note 19]

Current

Deferred

Net loss for the year

OTHER COMPREHENSIVE INCOME (LOSS)

Cumulative translation adjustment

Comprehensive loss

LOSS PER SHARE

Basic and diluted

97,844 $

118,015 $

5,460

103,304

12,554

130,569

83,314

52,777

35,201

17,496

(11,601)

13,654

378

4,015

—

18,707

213,941

97,923

76,580

40,319

25,489

(3,433)

18,666

703

5,238

4,106

5,823

18,543

289,957

148,001

16,031

164,032

148,690

91,132

46,475

28,707

(15,168)

16,288

595

4,838

—

1,721

34,964

358,242

(110,637)

(159,388)

(194,210)

18,317

(5,529)

192

14,222

(5,849)

817

13,444

(4,789)

1,018

(97,657)

(150,198)

(184,537)

1,245

(514)

731

606

(1,185)

(579)

1,414

(541)

873

(98,388) $

(149,619) $

(185,410)

(16,889)

(15,201)

(17,308)

(115,277) $

(164,820) $

(202,718)

(1.53) $

(2.37) $

(3.22)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

Basic and diluted

64,109,703

63,130,022

57,633,190

See accompanying notes to consolidated financial statements.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 41

FINANCIAL STATEMENTS » CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

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

Common
shares
outstanding

Share
capital

Other equity
instruments

Additional paid
in capital

Accumulated
deficit

Accumulated
other
comprehensive
income (loss)

Total
shareholders'
equity

JANUARY 1, 2013

Issue of common shares:

55,294,091 $

733,385 $

9,228 $

6,384 $

(429,932) $

17,016 $

336,081

On exercise of stock options

On exercise of share units

In connection with acquisition

111,986

609,200

718,485

1,147

10,599

24,091

On public offering

6,000,000

152,340

—

(10,599)

—

3,285

—

11,920

—

(406)

—

2,227

—

(185,410)

—

741

—

24,091

152,340

3,285

(5,065)

14,147

(185,410)

—

(17,308)

—

(5,065)

—

Acquisition to be settled
by issuance of common shares

Share issue costs

Stock-based compensation

Net loss for the year

Other comprehensive loss

DECEMBER 31, 2013

Issue of common shares:

On exercise of stock options

On exercise of share units

In connection with acquisition

Stock-based compensation

Net loss for the year

Other comprehensive loss

DECEMBER 31, 2014

Issue of common shares:

On exercise of share units

In connection with acquisition

Stock-based compensation

Net loss for the year

Other comprehensive loss

62,733,762

916,497

13,834

8,205

(615,342)

(292)

322,902

43,071

608,975

94,914

—

374

10,701

3,285

—

(10,701)

(3,285)

7,919

—

(132)

—

1,764

—

(149,619)

—

242

—

9,683

(149,619)

—

(15,201)

63,480,722

930,857

7,767

9,837

(764,960)

(15,493)

168,008

575,024

325,073

—

5,010

1,162

—

(5,010)

—

13,703

—

(98,388)

—

—
(16,889)

—

1,162

13,703

(98,388)

(16,889)

DECEMBER 31, 2015

64,380,819 $

937,029 $

16,460 $

9,837 $

(863,348) $

(32,382) $

67,596

See accompanying notes to consolidated financial statements.

42 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

FINANCIAL STATEMENTS » CONSOLIDATED STATEMENTS OF CASH FLOWS

CONSOLIDATED STATEMENTS OF CASH FLOWS

(expressed in thousands of United States dollars)

2015

2014

2013

Years ended December 31

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES

Net loss for the year
Items not Involving Cash

Depreciation and amortization

Stock-based compensation expense

Unrealized foreign exchange gain

Deferred income tax (recovery) expense

Income from investments accounted for by the equity method

Amortization of long-term debt

Impairment of long lived assets

Inventory write-downs to net realizable value

Provision for inventory purchase commitments

Intangible impairment

Goodwill impairment

Change in fair value of derivative liability and bad debt expense

Changes in Non-Cash Operating Working Capital

Accounts receivable

Inventories

Prepaid expenses

Accounts payable and accrued liabilities

Deferred revenue

Warranty liability

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES

Purchase of property, plant and equipment

Maturity (purchase) of short-term investments, net

Acquisitions, net of acquired cash [note 4]

Dividends received from joint ventures

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES

Repayment of operating lines of credit and long term facilities

Increase in operating lines of credit and issuance of long term facilities

Finance costs incurred

Proceeds from stock options exercised

Shares issued for cash

Share issuance costs

(98,388) $

(149,619) $

(185,410)

13,654

14,871
(11,601)
(514)
(18,317)
876

4,015

8,743

—

18,707
587

975

(5,997)
661

9,526

(1,507)

(5,359)
(69,068)

(4,845)

—
787

20,464

16,406

(8,308)

5,432

—

(2,876)

18,666
9,683
(3,434)
(1,185)
(14,222)
2,139

5,238

2,102

4,106

5,823

18,543
1,338

11,629
(1,367)
(556)
(4,749)
(5,096)
(5,797)
(106,758)

(10,249)
31,369
(3,053)
3,200

21,267

(9,540)
17,797
(2,033)
242

—

—
6,466

16,288

14,283
(15,168)
(541)
(13,444)
1,643

4,838

4,925

—
1,721

34,964
(37)

(12,289)
5,179

513
(2,064)
5,208

22,602

(116,789)

(26,450)
(5,771)
1,178

8,287
(22,756)

(13,678)
—

—
741

152,340
(5,065)
134,338

Effect of foreign exchange on cash and cash equivalents

(10,601)

(6,206)

(5,238)

Decrease in cash and cash equivalents

(66,139)

(85,231)

(10,445)

Cash and cash equivalents, beginning of year

93,282

178,513

188,958

Cash and cash equivalents, end of year

SUPPLEMENTARY INFORMATION

Interest paid

Taxes paid, net of refunds
Non-Cash Transactions

27,143 $

93,282 $

178,513

4,551 $

1,238

4,702 $
871

3,911

1,321

Shares issued on exercise of share units

5,010

10,701

10,599

See accompanying notes to consolidated financial statements.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 43

FINANCIAL STATEMENTS » NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO
CONSOLIDTATED
FINANCIAL
STATEMENTS

1. COMPANY ORGANIZATION
& OPERATIONS

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

The Company is a provider of high-performance, low-
emission engine and fuel system technologies utilizing
gaseous fuels. Its technology and products enable light-
duty (<5.9 litre), medium-duty (5.9 to 10 litre), heavy-duty
(11 to 16 litre) and high horsepower (>16 litre) petroleum-
based fuel engines to use primarily natural gas, giving
users a cleaner, more plentiful and generally less expensive
alternative fuel.

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

2. SIGNIFICANT ACCOUNTING
POLICIES

a. Basis of Presentation

The consolidated financial statements include the accounts
of the Company, its wholly owned subsidiaries and variable
interest entities (“VIEs”) for which the Company is
considered the primary beneficiary. All intercompany
balances and transactions have been eliminated on
consolidation.

44 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

These consolidated financial statements are presented in
accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”).

The Company has sustained net losses since inception and
as at December 31, 2015 has an accumulated deficit of
$863,348. As at December 31, 2015 the Company has cash
and cash equivalents of $27,143. The Company’s ability to
continue as a going concern is dependent on its available
cash, its ability to find new sources of financing or raise
cash through the sale of assets while in pursuit of
operating profitability. There can be no assurance that the
Company will be successful in achieving its objectives.
Management believes that the cash balances available as of
December 31, 2015, combined with cost cutting measures
in place and its ability to find new sources of financing or
raise cash through the sale of assets subsequent to the
balance sheet date, provides sufficient funds for the
Company to meet its obligations beyond the next 12
months. The accompanying financial statements do not
include any adjustments that might be necessary if the
Company is unable to continue as a going concern. See also
"Cartesian Financing" and "Merger with Fuel Systems
Solutions, Inc." in Note 25 of these financial statements for
cash raised subsequent to year end.

b. Foreign Currency Translation

The Company’s reporting currency for its consolidated
financial statement presentation is the United States
dollar. The functional currencies of the Company’s
operations and subsidiaries include the following: United
States, Canadian ("CDN") and Australian dollar, Euro,
Chinese Renminbi (“RMB”), and Swedish Krona. The
Company translates assets and liabilities of non-U.S. dollar
functional currency operations using the period end
exchange rates, shareholders’ equity balances using the
weighted average of historical exchange rates, and
revenues and expenses using the monthly average rate for
the period with the resulting exchange
differences recognized in other comprehensive income.
Transactions that are denominated in currencies other
than the functional currency of the Company’s
operations or its subsidiaries are translated at the rate in
effect on the date of the transaction. Foreign currency
denominated monetary assets and liabilities are translated
to the applicable functional currency at the exchange rate
in effect on the balance sheet date. Non-monetary assets
and liabilities are translated at the historical exchange rate.
All foreign exchange gains and losses are recognized in the
statement of operations, except for the translation gains

FINANCIAL STATEMENTS » NOTES » 2. SIGNIFICANT ACCOUNTING POLICIES

and losses arising from available-for-sale instruments,
which are recorded through other comprehensive income
until realized through disposal or impairment.

Except as otherwise noted, all amounts in these financial
statements are presented in U.S. dollars. For the periods
presented, the Company used the following exchange
rates:

EXCHANGE RATES AS AT DEC 31

Canadian dollar

Australian dollar

Euro

RMB

Swedish Krona

Period end

Average

2015

2014

2015

2014

0.72

0.73

1.09

0.15

0.12

0.86

0.82

1.21

0.16

0.13

0.78

0.75

1.11

0.16

0.12

0.91

0.90

1.33

0.16

0.15

c. Cash and Cash Equivalents

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

d. Short-term Investments

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

e. Accounts Receivable, Net

Accounts receivable are measured at amortized cost. The
Company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its
customers to make required payments. Past due balances
over 90 days are reviewed individually for collectibility. If
the financial condition of the Company’s customers were
to deteriorate, adversely affecting their ability to make
payments, additional allowances would be required. Based
on management’s assessment, the Company provides for
estimated uncollectible amounts through a charge to
earnings and a credit to a valuation allowance. Balances

that remain outstanding after the Company has used
reasonable collection efforts are written off through a
charge to the valuation allowance and a credit to accounts
receivable.

f. Inventories

g. Property, Plant & Equipment

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

DEPRECIATION CLASSES

Assets

Buildings

Computer equipment and
software

Furniture and fixtures

Basis

Rate

Straight-line

15 years

Straight-line

3 years

5 years

Machinery and equipment

Straight-line

8-10 years

Leasehold improvements

Straight-line Lease term

h. Long-term Investments

The Company accounts for investments in which it has
significant influence, including VIEs for which the
Company is not the primary beneficiary, using the equity
method of accounting. Under the equity method, the
Company recognizes its share of income from equity
accounted investees in the statement of operations with a
corresponding increase in long-term investments. Any
dividends paid or payable are credited against long-term
investments.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 45

FINANCIAL STATEMENTS » NOTES » 2. SIGNIFICANT ACCOUNTING POLICIES

i. Financial Liabilities

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

j. Research & Development Costs

Research and development costs are expensed as incurred
and are recorded net of government funding received or
receivable.

k. Government Assistance

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

l. Intangible Assets

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

m. Impairment of Long-lived Assets

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

n. Goodwill Impairment

Goodwill is recorded at the time of purchase for the excess
of the amount of the purchase price over the fair values of

46 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

the identifiable assets acquired and liabilities assumed.
Goodwill is not amortized and instead is tested at least
annually for impairment, or more frequently when events
or changes in circumstances indicate that goodwill might
be impaired. This impairment test is performed annually
at November 30. Future adverse changes in market
conditions or poor operating results of underlying assets
could result in an inability to recover the carrying value of
the goodwill, thereby possibly requiring an impairment
charge.

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

Fair value is determined using widely accepted valuation
techniques, which may include discounted cash flows and
market multiple analyses. These types of analyses contain
uncertainties because they require management to make
assumptions and to apply judgment to estimate industry
economic factors and the profitability of future business
strategies.

o. Warranty Liability

Estimated warranty costs are recognized at the time the
Company sells its products and are included in cost of
revenue. The Company provides warranty coverage on
products sold for a period ending two years from the date
the products are put into service by customers. Warranty
liability represents the Company’s best estimate of
warranty costs expected to be incurred during the warranty
period. Furthermore, the current portion of warranty
liability represents the Company’s best estimate of the
costs to be incurred in the next twelve-month period. The
Company uses historical failure rates and cost to repair
defective products to estimate the warranty liability. New
product launches require a greater use of judgment in
developing estimates until claims experience becomes
available. Product specific experience is typically available
four or five quarters after product launch, with a clear
experience trend not evident until eight to twelve quarters
after launch. The Company records warranty expense for
new products upon shipment using a factor based upon

FINANCIAL STATEMENTS » NOTES » 2. SIGNIFICANT ACCOUNTING POLICIES

historical experience from previous engine generations in
the first year, a blend of actual product and historical
experience in the second year and product specific
experience thereafter. The amount payable by the
Company and the timing will depend on actual failure
rates and cost to repair failures of its products. Since a
number of the Company’s products are new in the market,
historical data may not necessarily reflect actual costs to be
incurred and may result in significant fluctuations in the
warranty liability.

p. Extended Warranty

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

q. Revenue Recognition

PRODUCT REVENUE

REVENUE FROM RESEARCH &
DEVELOPMENT

The Company also earns service revenue from research
and development arrangements under which the Company
provides contract services relating to developing natural
gas engines or biogas engines for use in products and
providing ongoing development services to assist with the
development and commercialization of products. These
contracts provide for the payment for services based on
our achieving defined milestones or on the performance of
work under product development programs. Revenues are
recognized using the milestone method based on
assessment of progress achieved against the defined
milestones. Revenue may also be recognized using the

proportionate performance method of accounting based on
the performance of work under the research and
development arrangement. All costs incurred related to
revenue earned from research and development
arrangements are recorded as research and development
expense as incurred.

REVENUE FROM CONTRACTS

vendor-specific objective evidence of fair value
("VSOE"),

ii.

third-party evidence of selling price ("TPE"), and

iii. best estimate of selling price ("BESP"), which are

determined as follows:

VSOE In limited circumstances are products sold
separately in stand-alone arrangements. In determining
VSOE, the Company requires that a substantial majority of
the selling prices for a product or service falls within a
reasonably narrow pricing range, generally evidenced by
the pricing rates of approximately 85% of such historical
stand-alone transactions falling within plus or minus 10%
of the median rate. In addition, the Company considers the
geographies in which the products or services are sold,
major product and service groups, customer classification,

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 47

FINANCIAL STATEMENTS » NOTES » 2. SIGNIFICANT ACCOUNTING POLICIES

and other environmental or marketing variables in
determining VSOE.

TPE VSOE exists only when the Company sells the
deliverable separately. When VSOE does not exist, the
Company attempts to determine TPE based on competitor
prices for similar deliverables when sold separately.
Generally, the Company’s go-to-market strategy for many
of its products differs from that of its peers and its
offerings contain a significant level of customization and
differentiation such that the comparable pricing of
products with similar functionality sold by other
companies cannot be obtained. Furthermore, the Company
is unable to reliably determine what similar competitor
products’ selling prices are on a stand-alone basis.
Therefore, the Company is typically not able to determine
TPE.

BESP The objective of BESP is to determine the price at
which the Company would transact a sale if the product or
service were sold on a stand-alone basis. When both VSOE
and TPE do not exist, the Company determines BESP by
first collecting all reasonably available data points
including sales, cost and margin analysis of the product,
and other inputs based on the Company’s normal pricing
practices. Second, the Company makes any reasonably
required adjustments to the data based on market and
Company-specific factors. Third, the Company stratifies
the data points, when appropriate, based on customer,
magnitude of the transaction and sales volume.

Once elements of an arrangement are separated into more
than one unit of accounting, revenue is recognized for each
separate unit of accounting based on the nature of the
revenue as described above.

LICENSE REVENUE

r. Income Taxes

The Company accounts for income taxes using the asset
and liability method. Under this method, deferred income

48 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

tax assets and liabilities are determined based on the
temporary differences between the accounting basis and
tax basis of the assets and liabilities and for loss carry-
forwards, tax credits and other tax attributes, using the
enacted tax rates in effect for the years in which the
differences are expected to reverse. The effect of a change
in tax rates on the deferred income tax assets and liabilities
is recognized in income in the period that includes the
enactment date.

The Company recognizes deferred income tax assets to the
extent the assets are more-likely-than-not to be realized.
In making such a determination the Company considers all
available positive and negative evidence, including future
reversals of existing taxable temporary differences,
projected future taxable income, tax-planning strategies,
and results of recent operations. If it is determined that,
based on all available evidence, it is more-likely-than-not
that some or all of the deferred income tax assets will not
be realized, a valuation allowance is provided to reduce the
deferred income tax assets.

The Company uses a two-step process to recognize and
measure the income tax benefit of uncertain tax positions
taken or expected to be taken in a tax return. The tax
benefit from an uncertain tax position is recognized if it is
more-likely-than-not that the position will be sustained
upon examination by a tax authority based solely on the
technical merits of the position. A tax benefit that meets
the more-likely-than-not recognition threshold is
measured as the largest amount that is greater than 50%
likely to be realized upon settlement with the tax authority.
To the extent a full benefit is not expected to be realized,
an income tax liability is established. Any change in
judgment related to the expected resolution of an
uncertain tax position is recognized in the year of such a
change.

3. ACCOUNTING CHANGES

a. New Accounting

Pronouncements Adopted in
2015

SIMPLIFYING THE PRESENTATION OF DEBT
ISSUANCE COSTS

FINANCIAL STATEMENTS » NOTES » 3. ACCOUNTING CHANGES

presented as an asset. The recognition and measurement
guidance for debt issuance costs has not changed. ASU
2015-03 requires retrospective application and represents
a change in accounting principle. ASU 2015-03 is effective
for fiscal years beginning after December 15, 2015 and
early adoption is permitted for financial statements that
have not been previously issued. We adopted this update
in the fourth quarter of 2015. We applied the change
retrospectively to January 1, 2014 for prior period balances
of unamortized debt issuance costs, resulting in a $1,486
(CDN$1,964) reduction in other assets and long-term debt
on our consolidated balance sheet as of December 31,
2014.

SIMPLIFYING THE ACCOUNTING FOR
MEASUREMENT-PERIOD ADJUSTMENTS
(TOPIC 805): BUSINESS COMBINATIONS

In September 2015, the FASB issued ASU 2015-16, which
replaces the requirement that an acquirer in a business
combination account for measurement period adjustments
retrospectively with a requirement that an acquirer
recognize adjustments to the provisional amounts that are
identified during the measurement period in the reporting
period in which the adjustment amounts are determined.
ASU 2015-16 requires that the acquirer record, in the same
period’s financial statements, the effect on earnings of
changes in depreciation, amortization, or other income
effects, if any, as a result of the change to the provisional
amounts, calculated as if the accounting had been
completed at the acquisition date. For public business
entities, ASU 2015-16 is effective for fiscal years beginning
after December 15, 2015, including interim periods within
those fiscal years. The guidance is to be applied
prospectively to adjustments to provisional amounts that
occur after the effective date of the guidance, with earlier
application permitted for financial statements that have
not been issued. Our early adoption of ASU 2015-16 in the
third quarter of 2015 did not have a material impact on our
consolidated financial statements.

SIMPLIFYING THE BALANCE SHEET
CLASSIFICATION OF DEFERRED TAXES
(TOPIC 740): INCOME TAXES

adopted this update as of December 31, 2015 and applied
the change retrospectively to January 1, 2014 for prior
period balances of deferred tax assets and liabilities,
resulting in a $3,556 reduction in total current assets and
corresponding increase in long term assets, along with a
$398 reduction in total current liabilities and
corresponding increase in long term liabilities on our
consolidated balance sheet as of December 31, 2014.

b. New Accounting

Pronouncements to be Adopted
in the Future

REVENUE

In May 2014, Financial Accounting Standards Board
(“FASB”) issued ASU 2014-09, Revenue From Contracts
With Customers (“Topic 606”). Topic 606 removes
inconsistencies and weaknesses in revenue requirements,
provides a more robust framework for addressing revenue
issues, improves comparability of revenue recognition
practices across entities, industries, jurisdictions and
capital markets, provides more useful information to users
of financial statements through improved disclosure
requirements and simplifies the preparation of financial
statements by reducing the number of requirements to
which an entity must refer. The guidance in this update
supersedes the revenue recognition requirements in Topic
605, Revenue Recognition, and most industry-specific
guidance throughout the Industry Topics of the
Codification. Additionally, this update supersedes some
cost guidance included in Subtopic 605-35, Revenue
Recognition - Construction-Type and Production-Type
Contracts. Topic 606 is effective for public entities with
reporting periods beginning after December 15, 2017. Early
adoption would be permitted as of the original effective
date in ASU 2014-09 (i.e., annual reporting periods
beginning after December 15, 2016, including interim
reporting periods within the annual periods). The
Company has not yet evaluated the impact of the adoption
of this new standard.

GOING CONCERN

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 49

Corporate and Technology Investments segment during
the year ended December 31, 2014.

During the three months ended September 30, 2015, the
Company finalized the allocation of the purchase price to
the identifiable assets acquired and liabilities assumed
based on it estimates of their fair values on the acquisition
date. The measurement period adjustments to goodwill
for the Prins acquisition were primarily due to a settlement
agreement reached with the sellers during the third
quarter of 2015 for working capital disputes related to the
acquisition. The Company received a cash settlement of
EUR 700 ($787) from the sellers, which contributed to the
purchase price of Prins being revised to EUR 11,500
($14,230). The fair values of acquired assets and liabilities
were revised from the estimated values filed on Form 40-
F/A on October 15, 2015 as a result of the Company’s
finalizing the valuation of the acquired assets and assumed
liabilities. Goodwill increased by $149, while current
assets decreased by $791 and current liabilities increased
by $145. There was no effect on current period earnings as
a result of the changes to the provisional amounts
recognized.

The following table summarizes the final allocation of the
purchase price to the estimated fair values of assets
acquired and liabilities assumed at the date of the
acquisition, as well as the adjustments made during the
measurement period.

FINANCIAL STATEMENTS » NOTES » 3. ACCOUNTING CHANGES

adoption permitted. The Company does not anticipate a
material impact to the Company’s financial statements as a
result of this change.

AMENDMENTS TO THE CONSOLIDATION
ANALYSIS (TOPIC 810): CONSOLIDATION

SIMPLIFYING THE MEASUREMENT OF
INVENTORY (TOPIC 330): INVENTORY

4. BUSINESS COMBINATIONS

a. Acquisition of Prins

Autogassystemen Holding B.V.

On December 2, 2014 ("the acquisition date"), the
Company acquired 100% of the outstanding shares of Prins
Autogassystemen Holding B.V. ("Prins") for a base
purchase price of EUR 12,200 ($15,017). The Company
paid cash of EUR 2,500 ($3,112) and assumed debt of EUR
9,700 ($11,905). The results of Prins's consolidated
operations have been included since December 2, 2014.
Prins is a world leader in the development of alternative
fuel systems and provides cost-effective and innovative
solutions for a wide range of engine types.

The Company recognized $342 of acquisition related costs
in General and Administrative expense under the

50 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

FINANCIAL STATEMENTS » NOTES » 4. BUSINESS COMBINATIONS

PRINS PURCHASE PRICE ALLOCATION

PRO FORMA RESULTS

Preliminary
Purchase
Price
Allocation

Measurement
Period
Adjustments

Final
Purchase
Price
Allocation

Consideration allocated to

Other tangible assets

13,138 $

(791) $ 12,347

Property, plant and
equipment

Intangible assets subject to
amortization over 5 years

Goodwill

3,824

3,024

3,221

—

149

3,824

3,024

3,370

The following unaudited supplemental pro forma
information presents the consolidated financial results as
if the acquisition of Prins had occurred on January 1, 2013.
This supplemental pro forma information has been
prepared for comparative purposes and does not purport
to be indicative of what would have occurred had the
acquisition been made on January 1, 2013, nor are they
indicative of any future results.

Total assets acquired

$ 23,207 $

(642) $ 22,565

PRINS PRO FORMA RESULTS

Less

Current liabilities

7,211 $

145 $

7,356

Deferred income tax
liabilities

Debt assumed

979

11,905

—

979

11,905

$ 20,095 $

145 $ 20,240

Total net assets acquired

3,112 $

(787) $

2,325

Consideration

Paid to sellers

INTANGIBLE ASSETS

3,112 $

(787) $

2,325

The fair value of intangible assets is $3,024 and is assigned
to customer relationships. The intangible assets are being
amortized over their estimated useful life of five years.

INVENTORY

The fair value of $4,975 assigned to inventory was based
on estimated selling prices and selling costs associated
with the inventory.

GOODWILL

Of the total consideration paid, $3,370 (measured at the
December 31, 2014 EURO/USD exchange rate) has been
allocated to goodwill. The entire goodwill recognized is
assigned to the Westport Operations and is not deductible
for tax purposes.

LAND AND BUILDING

The fair value of $3,824 assigned to land and building was
based on valuations of similar buildings in the area and
will be amortized over its estimated useful life of 15 years.

The consolidated financial statements reflect consolidated
revenue and net loss for Prins of $1,196 and $(301),
respectively, from December 2, 2014 to December 31,
2014.

Years ended Dec 31

2014

2013

Revenue

Revenue for the period

130,569 $

164,032

Add: BAF [note 4(b)]

Add: Prins

—

30,993

7,249

30,885

Pro forma revenue for the period $

161,562 $

202,166

Net Loss

Net loss for the period

$ (149,619) $ (185,410)

Add: BAF [note 4(b)]

Add: Prins

—

(4,038)

(1,381)

Pro forma net loss for the period

$ (149,528) $ (190,829)

These amounts have been calculated after applying the
Company’s accounting policies and adjusting the results of
Prins to reflect the additional depreciation and
amortization that would have been charged assuming the
fair value adjustments to property, plant and equipment
and intangible assets had been applied on January 1, 2013,
together with the consequential tax effects.

b. Acquisition of BAF Technologies

On June 28, 2013 (“the acquisition date”), the
Company acquired 100% of the outstanding common
shares of BAF Technologies ("BAF") and its subsidiary,
ServoTech Engineering, Inc. (“ServoTech”) from Clean
Energy Fuels Corp. (“Clean Energy”). The results of
BAF’s consolidated operations have been included since
July 1, 2013 in these consolidated financial statements in
the Westport Operations segment. BAF is a natural gas
vehicle business that supports customers with vehicle
conversions under Ford’s Qualified Vehicle Modifier
(“QVM”) program. ServoTech is an engineering company
that provides a total engineering solution from initial
concept phase to prototype hardware and validation.

Pursuant to the Stock Purchase Agreement, the acquisition
was settled with 816,460 of the Company’s common

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 51

FINANCIAL STATEMENTS » NOTES » 4. BUSINESS COMBINATIONS

shares. The number of shares transferred was determined
using the 10-day volume weighted average price
("VWAP") per share prior to and including the acquisition
date ($30.62 per share). Of the 816,460 common shares,
718,485 shares, with a fair value of $24,091, were issued
on the acquisition date and 97,975 shares (“Holdback
shares”), with a fair value of $3,285, were issued. The fair
value of the shares transferred or to be transferred was
determined by the closing share price on the acquisition
date ($33.53 per share).

As part of the business acquisition, the Company entered
into a marketing agreement (“Marketing Agreement”)
with Clean Energy, effective on the acquisition date for a
period of two years. The Company was required to make a
cash payment of $5,000 to Clean Energy in March 2014.
Under the terms of the Marketing Agreement, Clean
Energy will provide products and services to the Company.

The products and services received pursuant to the
Marketing Agreement have been accounted for as a
separate transaction from the business combination and
the Company has determined the fair value of these
products and services to be $2,678. The fair value has been
allocated to the products and services and will be
recognized when the goods are received and services
performed. The fair value of the products and services of
the Marketing Agreement was determined using Level 1
and Level 2 inputs.

The excess of the consideration payable of $5,000 and the
fair value of the goods and services to be received separate
from the business combination of $2,322 has been
included as purchase consideration for the acquisition of
BAF.

The following table summarizes management’s final fair
market valuation of the assets acquired and liabilities
assumed at the acquisition date based on the results of a
valuation report issued by a third-party valuation firm.

52 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

BAF FAIR MARKET VALUATION

Consideration allocated to

Other tangible assets, including cash of $1,178

$ 9,116

Property, plant and equipment

Intangible assets subject to amortization over 3–10 yrs

Goodwill

Total assets acquired

Less: Total liabilities

Total net assets acquired

Consideration

Payable to Clean Energy

Common shares issued

Common shares to be issued

905

7,729

18,542

36,292

(6,594)

$ 29,698

$ 2,322

24,091

3,285

$ 29,698

The Company recognized $493 of acquisition related costs
in General and Administrative expense under the
Corporate and Technology Investments segment during
the year ended December 31, 2013.

INTANGIBLE ASSETS

The fair values for specifically identifiable intangible assets
by major asset class are as set forth below.

BAF INTANGIBLE ASSETS

Customer relationships

Core technology

Other intangibles

Total

INVENTORY

Assigned
fair value

Weighted average
amortization period

6,350

160

1,219

7,729

8 years

10 years

3 years

7 years

The fair value of $5,792 assigned to inventory was based
on assumptions about the selling prices and selling costs
associated with the inventory.

DEFERRED INCOME TAXES

The Company recognized a deferred income tax liability of
$296 relating to the difference in book and tax bases of
acquired assets.

GOODWILL

Of the total consideration paid, $18,542 has been allocated
to goodwill. The entire goodwill amount recognized is
assigned to the Westport Operations segment. The
goodwill recognized is attributable primarily realizing

FINANCIAL STATEMENTS » NOTES » 4. BUSINESS COMBINATIONS

expected synergies that are specific to the Company’s
business. The goodwill is not deductible for tax purposes.

The consolidated financial statements reflect consolidated
revenue and net loss for BAF of $17,097 and $3,512,
respectively, from June 28, 2013 to December 31, 2013.

PRO FORMA RESULTS

The following unaudited supplemental pro forma
information presents the consolidated financial results as
if the acquisition of BAF had occurred on January 1, 2012.
This supplemental pro forma information has been
prepared for comparative purposes and does not purport
to be indicative of what would have occurred had the
acquisition been made on January 1, 2012, nor are they
indicative of any future results.

BAF PRO FORMA RESULTS

Revenue

Net loss

Years ended Dec 31

2013

2012

171,281 $

181,972

(189,448) $

(100,946)

These amounts have been calculated after applying the
Company’s accounting policies and adjusting the results of
BAF to reflect the additional depreciation and amortization
that would have been charged assuming the fair value
adjustments to property, plant and equipment and
intangible assets had been applied on January 1, 2012,
together with the consequential tax effects.

During the year ended December 31, 2015, the Company
recorded write-downs to net realizable value of
approximately $8,743 (year ended December 31, 2014 -
$2,102; year ended December 31, 2013 - $4,925).

7. LONG-TERM INVESTMENTS

LONG-TERM INVESTMENTS

Weichai Westport Inc. (a)

Cummins Westport Inc. (b)

Other equity accounted investees

Total long-term investments

Dec 31, 2015 Dec 31, 2014

19,065 $

10,731

1,315

31,111 $

18,791

13,196

1,337

33,324

a. Weichai Westport Inc.

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

For the year ended December 31, 2015, the Company
recognized its share of WWI’s income of $1,044 (year
ended December 31, 2014 - $6,027; year ended
December 31, 2013 - $4,264), as income from investment
accounted for by the equity method.

Assets, liabilities, revenue and expenses of WWI as of and
for the years presented are as follows:

5. ACCOUNTS RECEIVABLE

WWI ASSETS & LIABILITIES

Dec 31, 2015 Dec 31, 2014

ACCOUNTS RECEIVABLE

Dec 31, 2015 Dec 31, 2014

Current assets

Customer trade receivable

35,517 $

43,256

Cash and short-term investments

4,898 $

Due from joint venture [note 20]

Other receivables

Income tax receivable

Allowance for doubtful accounts

1,165

3,617

1,047

(3,022)

Total

38,324 $

2,538

3,307

499

(2,751)

46,849

Accounts receivable

Inventory

Other current assets

Long-term assets

6. INVENTORIES

INVENTORIES

Purchased parts

Work-in-process

Finished goods

Total

Dec 31, 2015 Dec 31, 2014

20,864 $

28,227

3,485

11,311

4,879

8,718

35,660 $

41,824

Property, plant and equipment

Deferred income tax assets

Other long-term assets

Total assets

Current liabilities

Accounts payable and
accrued liabilities

Total liabilities

67,302

38,267

729

6,401

6,611

1,516 $

11,734

72,121

83,594

1,249

5,736

7,781

—

125,724

182,215

71,162 $

128,838

71,162 $

128,838

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 53

FINANCIAL STATEMENTS » NOTES » 7. LONG-TERM INVESTMENTS

WWI REVENUES & EXPENSES

Years ended Dec 31

2015

2014

2013

Product revenue

$ 185,967 $ 618,465 $ 466,580

Cost of revenue & expenses

Cost of product revenue

164,581

565,943

429,238

Operating expenses

17,602

32,227

22,846

182,183

598,170

452,084

Income before income taxes

3,784

20,295

14,496

Income tax expense

844

3,076

2,315

Income for the year

2,940 $ 17,219 $ 12,181

b. Cummins Westport Inc.

The Company entered into a joint venture with Cummins
on March 7, 2001. On December 16, 2003, the Company
and Cummins amended the joint venture agreement
(“JVA”) focusing CWI on developing markets for
alternative fuel engines. In addition, the two companies
signed a Technology Partnership Agreement that creates a
flexible arrangement for future technology development
between Cummins and the Company.

On February 20, 2012, the JVA was amended and restated
to provide for, among other things, clarification concerning
the scope of products within CWI. In addition, the parties
have revised certain economic terms of the JVA.

The joint venture has a term of ten years from the date of
the JVA and can be terminated under certain
circumstances before the end of the term, including in the
event of a material breach of the agreement by, or in the
event of a change of control of one of the parties.

Prior to February 20, 2012, the Company and Cummins
shared equally in the profits and losses of CWI. Under the
new JVA, profits and losses are shared equally up to an
established revenue baseline, then any excess profit will be
allocated 75% to the Company and 25% to Cummins.

The Company has determined that CWI is a variable interest
entity ("VIE"). Cummins and Westport each own 50% of the
common shares of CWI and have equal representation on the
Board of Directors. No one shareholder has the unilateral
power to govern CWI. The Board of Directors has power over
the operating decisions and to direct other activities of CWI
that most significantly impact CWI’s economic performance
as set forth in the governing documents. As decision-making
at the Board of Directors’ level requires unanimous approval,
this power is shared. Accordingly neither party is the primary
beneficiary.

54 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

For the year ended December 31, 2015, the Company
recognized its share of CWI’s income of $17,105 (year
ended December 31, 2014 - $8,136; year ended
December 31, 2013 - $9,433), as income from investment
accounted for by the equity method.

During the first quarter of 2015, the Company identified
adjustments in CWI's estimated 2014 financial results,
which primarily related to warranty accrual. The
identified adjustments resulted in a cumulative $1,184
understatement of the Company’s income from
investments accounted for by the equity method for the
year ended December 31, 2014. The Company corrected
the amounts related to CWI in the first quarter of 2015,
which had the net effect of increasing income from
investments accounted for by the equity method by $1,184
for the year ended December 31, 2015. The Company did
not believe this adjustment was material to its
consolidated financial statements for the year ended
December 31, 2014 and, therefore, did not restate any prior
period amounts. The Company does not believe the
adjustment is material to the year ended December 31,
2015 consolidated financial statements.

Assets, liabilities, revenue and expenses of CWI are as
follows:

CWI ASSETS & LIABILITIES

Current assets

Dec 31, 2015 Dec 31, 2014

Cash and short-term investments

114,053

107,415

Accounts receivable

4,632

12,741

Current portion of deferred income
tax assets

Other current assets

Long-term assets

Property, plant and equipment

Deferred income tax assets

Total assets

Current liabilities

18,990

21,967

287

116

1,212

32,015

1,294

29,408

171,189 $

172,941

Current portion of warranty liability

37,313 $

48,818

Current portion of deferred revenue

Accounts payable & accrued liabilities

Long-term liabilities

Warranty liability

Deferred revenue

Other long-term liabilities

13,858

11,852

63,023

37,963

45,859

2,908

86,730

8,029

6,419

63,266

43,983

34,345

2,771

81,099

Total liabilities

149,753 $

144,365

FINANCIAL STATEMENTS » NOTES » 7. LONG-TERM INVESTMENTS

CWI REVENUES & EXPENSES

Product revenue

Parts revenue

Cost of revenue &
expenses

Cost of product and parts
revenue

Research and development

General and administrative

Sales and marketing

Foreign exchange (gain) loss

Bank charges, interest & other

Years ended Dec 31

2015

2014

2013

$ 274,033 $ 283,551 $ 261,012

57,849

53,683

49,639

331,882

337,234

310,651

228,058

270,832

246,403

30,165

1,414

21,236

817

21,131

1,202

22,514

805

21,522

1,348

17,839

(7)

607

281,718

316,518

287,712

Income from operations

50,164

20,716

22,939

Interest and investment income

367

260

117

Income before income taxes

50,531

20,976

23,056

Income tax expense
(recovery)

Current

Deferred

The carrying amount and maximum exposure to losses
relating to VIEs in which the Company holds a significant
variable interest but is not the primary beneficiary, and
which have not been consolidated, were as follows:

Balance at Dec 31

2015

2014

Carrying
amount

Maximum
exposure
to loss

Carrying
amount

Maximum
exposure
to loss

Equity method investment

$ 10,731 $

10,731 $ 13,196 $

13,196

Accounts receivable

1,165

2,538

9. PROPERTY, PLANT &
EQUIPMENT

PROPERTY, PLANT & EQUIPMENT

December 31, 2015
Land and buildings

Computer equipment and
software

Cost

Accumulated
depreciation

Net book
value

2,706 $

165 $

2,541

7,171

5,163

70,415

10,394

6,234

2,084

937

3,079

36,739

33,676

8,100

2,294

19,785

21,514

24,600

Furniture and fixtures

(648)

(15,719)

(18,566)

19,137

5,795

6,034

Machinery and equipment

Leasehold improvements

Income for the year

31,394 $

15,181 $

17,022

Total 2015

$ 95,849 $

53,322 $ 42,527

8. VARIABLE INTEREST ENTITY

Cummins and Westport each own 50% of the common
shares of CWI and have equal representation on the Board
of Directors. No one shareholder has the unilateral power
to govern CWI. The Board of Directors has power over the
operating decisions and to direct other activities of CWI
that most significantly impact CWI’s economic
performance as set forth in the governing documents. As
decision-making at the Board of Directors’ level requires
unanimous approval, this power is shared. Accordingly,
neither party is the primary beneficiary.

The Company has not historically provided and does not
intend to provide financial or other support to CWI that
the Company is not contractually required to provide.

December 31, 2014
Land and buildings

Computer equipment and
software

Furniture and fixtures

Machinery and equipment

Leasehold improvements

3,015 $

— $

3,015

9,277

6,194

81,933

12,460

7,063

1,798

2,214

4,396

36,135

45,798

9,749

2,711

Total 2014

$ 112,879 $

54,745 $ 58,134

The Company reviews its long-lived assets for impairment
including property, plant and equipment, and intangible
assets whenever events and changes in circumstances
indicate that the carrying amount of the assets may not be
recoverable. Based on the revenue and operating results
and decline in the oil price, the Company concluded there
were impairment indicators requiring the performance of a
long-lived assets impairment test during the years ended
December 31, 2015 and 2014.

During the year ended December 31, 2015, the Company
recorded an impairment charge of $4,015. The
impairment resulted primarily from the write-down of
Orca LNG trailers ("Orcas") which provide in-yard fleets
convenient refueling in the absence of a permanent
liquefied natural gas ("LNG") solution. The method used
to determine fair value was recent sales of Orcas and the

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 55

FINANCIAL STATEMENTS » NOTES » 9. PROPERTY, PLANT & EQUIPMENT

impairment charge was recorded in the Westport
Operations segment.

During the year ended December 31, 2014, the Company
recorded an impairment charge of $5,238. The
impairment was primarily recorded against non-utilized
test cells, and non-utilized equipment related to facility
closures.

Depreciation expense for the year ended December 31,
2015 was $10,703 (year ended December 31, 2014 -
$14,106; year ended December 31, 2013 - $12,246).

10. INTANGIBLE ASSETS

INTANGIBLE ASSETS

December 31, 2015
Patents and trademarks

Technology

Customer contracts

Other intangibles

Cost

Accumulated
depreciation

Net book
value

16,964 $

4,094 $ 12,870

4,862

12,025

283

2,663

4,952

118

2,199

7,073

165

Total 2015

$ 34,134 $

11,827 $ 22,307

December 31, 2014
Patents and trademarks

Technology (1)

Customer contracts (1)

Other intangibles (1)

18,425 $

3,445 $ 14,980

6,449

13,762

3,142

4,163

3,307

9,599

Total 2014

$ 38,698 $

10,778 $ 27,920

1. The Company reviews its long-lived assets for impairment

including property, plant and equipment, and intangible assets
whenever events and changes in circumstances indicate that
the carrying amount of the assets may not be recoverable.
Based on the revenue and operating results and decline in the
oil price, the Company concluded there were impairment
indicators requiring the performance of a long-lived assets
impairment test for customer contracts, technology and other
intangibles as of November 30, 2014. Accordingly non-cash
impairment charges aggregating to $5,823 were recorded
during the year ended December 31, 2014 which reduced the
carrying values of technology by $115, customer contracts by
$4,705 and other intangibles by $1,003 for the Westport
Operations segment.

Based on the revenue and operating results and decline in
the oil price, the Company concluded there were
impairment indicators requiring the performance of a
long-lived assets impairment test for customer contracts,
technology and other intangibles as of November 30, 2015.
The Company completed its annual assessment at
November 30, 2015 and concluded that intangible assets
were not impaired.

56 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

During the year ended December 31, 2015, amortization of
$2,951 (December 31, 2014 - $4,560; year ended
December 31, 2013 - $4,042) was recognized in the
statement of operations.

The expected amortization of intangible assets for fiscal
2016 to 2020 is $2,526 per year.

11. GOODWILL

A continuity of goodwill is as follows:

GOODWILL

Dec 31, 2015 Dec 31, 2014

Balance, beginning of period:

23,352 $

41,500

Acquisition of Prins [note 4(a)]

Measurement period adjustments
[note 4(a)]

—

149

3,221

—

Impairment losses

(18,707)

(18,543)

Impact of foreign exchange changes

(1,786)

(2,826)

Balance, end of period

3,008 $

23,352

Goodwill is subject to assessment for impairment by
applying a fair-value based test on an annual basis or more
frequently if circumstances indicate a potential
impairment. The Company's annual assessment date is
November 30. However, based on the revenue and
operating results of the Italian reporting unit, which is
within the Westport Operations segment in the nine
months ended September 30, 2015, the decline in the
outlook for the remainder of 2015 and future years and the
decline in the Company's share price, the Company
concluded there were impairment indicators requiring an
interim goodwill impairment assessment as of September
30, 2015. Based on the Company's assessment, it was
determined that the carrying amount of goodwill exceeded
the implied fair value of goodwill and as a result an
impairment of $18,707 was recorded in the Italian
reporting unit.

The remaining goodwill of $3,008 relates to the
Netherlands reporting unit, which is also within the
Westport Operations segment. The Company completed its
annual assessment at November 30, 2015 and concluded
that the goodwill was not impaired.

An assessment of the carrying value of goodwill was
previously conducted as of November 30, 2014. Based on
the Company's assessment, it was determined that
carrying amount of goodwill exceeded the implied fair
value of goodwill and as a result an impairment of $18,543
was recorded in the US reporting unit, which is within the

Westport Operations segment for the year ended
December 31, 2014.

12. ACCOUNTS PAYABLE &
ACCRUED LIABILITIES

ACCOUNTS PAYABLE & ACCRUED LIABILITIES

Trade accounts payable

42,851 $

41,796

Dec 31, 2015 Dec 31, 2014

Accrued payroll

Accrued interest

Taxes payable

Other payables [note 22(b)]

3,839

1,037

2,014

7,713

5,270

1,237

580

6,619

Total

57,454 $

55,502

13. LONG-TERM DEBT

LONG-TERM DEBT

Dec 31, 2015 Dec 31, 2014 (1)

Subordinated debenture notes (a)

38,359 $

Senior financing (b)

Senior revolving financing (c)

Other bank financing (d)

Capital lease obligations (e)

Current portion

Total

9,123

10,859

3,312

794

62,447

(8,257)

44,645

15,910

12,101

2,646

1,394

76,696

(18,955)

54,190 $

57,741

1. We adopted ASU 2015-03 in the fourth quarter of 2015. We

applied the change retrospectively to January 1, 2014 for prior
period balances of unamortized debt issuance costs, resulting
in a $1,486 (CDN$1,964) reduction in other assets and long-term
debt on our consolidated balance sheet as of December 31,
2014.

a. Subordinated Debenture Notes

On September 23, 2011, the Company raised CDN $36,000
through the issuance of debentures to Macquarie Private
Wealth Inc. (“Macquarie”) on a private placement basis
(the “Initial Debentures”). The Initial Debentures were
unsecured and subordinated to senior indebtedness,
matured on September 22, 2014, and bore interest at 9%

FINANCIAL STATEMENTS » NOTES » 11. GOODWILL

per annum, payable in cash semi-annually in arrears on
March 15 and September 15 of each year during the term,
which commenced on March 15, 2012. The Initial
Debentures were redeemable at the option of the Company
at a price equal to CDN$1,150 per CDN$1,000 principal
amount of the debentures on or before March 22, 2013.
After March 22, 2013 and before maturity, the debentures
were redeemedable at a price equal to CDN$1,100 per CDN
$1,000 principal amount.

On June 27, 2014, the Company raised CDN$19,000
through the issuance of debentures to Richardson GMP
Limited (“RGMP”), formerly Macquarie Private Wealth
Inc. on a private placement basis (the “Additional
Debentures”). In conjunction with the issuance of the
Additional Debentures, the Company amended the terms
of the Initial Debentures (the “Amended Initial
Debentures”). The Amended Initial Debentures are
ranked pari passu with the Additional Debentures and
both shall be treated as the same series of debentures (the
“New Debentures”) with the same terms. The New
Debentures totaling CDN$55,000 are composed of the
Additional Debentures CDN$19,000 and the Amended
Initial Debentures CDN$36,000. The New Debentures are
unsecured and subordinated to senior indebtedness,
mature on September 15, 2017, and bear interest at 9% per
annum, payable in cash semi-annually in arrears on March
15 and September 15 of each year during the term. The
New Debentures are redeemable at the option of the
Company at a price equal to CDN$1,150 per CDN$1,000
principal amount of the debentures after September 15,
2015 and on or before March 15, 2016. After March 15,
2016 and before maturity, the debentures can be redeemed
at a price equal to CDN$1,100 per CDN$1,000 principal
amount.

The Company has performed the assessment of embedded
derivatives within the New Debentures and concluded that
there is an embedded derivative that requires bifurcation
related to the extension option from the New Debentures.
The extension option was deemed not clearly and closely
related to the New Debentures and is separately accounted
for as a standalone derivative. The Company recorded this
embedded derivative as a non-current liability on its

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 57

FINANCIAL STATEMENTS » NOTES » 13. LONG-TERM DEBT

consolidated balance sheet. At issuance on June 27, 2014,
the embedded derivative’s fair value was determined to be
CDN$1,249, which was recorded as a reduction to the
carrying value of the New Debentures. The Company is
accreting the carrying value of the debt to interest expense
by using the effective interest method through to the
maturity date of the New Debentures. The embedded
derivative is subsequently adjusted to fair value at each
reporting date, with the associated fair value loss (gain)
recorded in interest and other income (loss). The
derivative liability is included in other long term liabilities
on the consolidated balance sheets. The Company
determined the fair value of the embedded derivative using
the Interest Rate Option Pricing Method which
incorporated the Black-Karasinski model.

SUBORDINATED DEBENTURE NOTES ACCOUNTING VALUES

(values in Canadian dollars) Dec 31, 2015 Dec 31, 2014

Balance, beginning of period

C$ 51,970 C$ 34,036

Issuance of Additional Debentures

Extension Option Discount

Accretion for extension option

Accretion of share issuance costs

—

395

724

19,000

(1,249)

183

—

Balance, end of period

C$ 53,089 C$ 51,970

b. Senior Financing

SENIOR FINANCING

Emer Senior Financing (1)

Prins Senior Financing (2)

Prins Senior Mortgage Loan (3)

Total

Dec 31, 2015 Dec 31, 2014

4,807 $

2,036

2,280

9,376

3,630

2,904

9,123 $

15,910

1. The Emer S.p.A ("Emer") senior financing agreement is

denominated in Euros, bears interest at the 6-month Euribor
plus 2.5% (2.6% as at December 31, 2015) and is recorded at
amortized cost using the effective interest rate method. Interest
is paid semi-annually. The Company has pledged its interest in
Emer as a general guarantee for its senior financing. The senior
financing matures in 2017.

2. A total of $7,521 Prins senior financing is denominated in Euros

and was assumed on the acquisition of Prins [note 4(a)].
Principal of $3,891 was repaid on December 2, 2014. Additional
principal has been repaid in 2015. The senior financing
agreement bears interest at the 3-month Euribor plus 3.5% (3.6%
as at December 31, 2015). Interest is paid quarterly. The
Company has pledged its interest in Prins as a general
guarantee for its senior financing. The senior financing matures
in 2016.

58 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

3. The Prins senior mortgage loan is denominated in Euros and was

assumed on the acquisition of Prins [note 4(a)]. The senior
mortgage loan bears interest at 3-month Euribor plus 1% (1.1%
as at December 31, 2015). Interest is paid quarterly. The
Company has pledged its interest in Prins's building as a general
guarantee for its senior mortgage loan. The senior mortgage
loan matures in 2020.

c. Senior Revolving Financing

The senior revolving financing facility is denominated in
Euros and bears interest at the 6-month Euribor plus 2.6%
(2.7% as at December 31, 2015) and will be repaid through
one principal payment of €10,000 on March 31, 2017.
Interest is paid semi-annually. The Company has pledged
its interest in Emer as a general guarantee for its senior
revolving financing.

Throughout the entire term of these financing
arrangements, the Company is required to meet certain
financial and non-financial covenants. As of December 31,
2015, the Company is in compliance with all covenants
under the financing arrangements.

The principal repayment schedule of the senior financings
are as follows for the years ended December 31:

SENIOR REVOLVING FINANCING

Subordinated
debenture
notes

Senior financing Prins Senior
Mortgage
Loan

Emer

Prins

Senior
revolving
financing

Total

2016 $

— $3,796 $1,955 $

326 $

— $ 6,077

2017

2018

2019

2020+

38,359

1,011

—

326

325

977

10,859

50,636

—

326

325

977

38,359 $4,807 $2,036 $

2,280 $ 10,859 $58,341

d. Other Bank Financing

OTHER BANK FINANCING

Emer other financing (1)

Prins other financing (2)

Other financing

Total

Dec 31, 2015 Dec 31, 2014

2,019 $

1,269

1,129

1,424

3,312 $

2,646

1. Emer other financing consists of various unsecured bank

financing arrangements that carry rates of interest ranging from
1.01% to 2.90% (2014 - 1.01%% to 2.90%%) and are payable on
maturity dates ranging from June 23, 2015 to June 23, 2017.

2. Prins other bank financing consists of a credit facility for

maximum borrowings of €2,000. The credit facility bears interest
at the 3 month Euribor +3.5% (3.6% as of December 31, 2015).
The credit facility is governed by an accounts receivable list
requirement limiting such borrowings to 60% of accepted
accounts receivable.

e. Capital Lease Obligations

The Company has capital lease obligations that have initial
terms of three to five years at interest rates ranging from
3.1% to 4.9% (2014 - 3.1%% to 4.9%). The capital lease
obligations require the following minimum annual
principal payments during the respective fiscal years:

The capital lease obligations are as follows:

CAPITAL LEASE OBLIGATIONS

2016

2017

2018

2019

2020

Total

369

256

148

—

794

14. WARRANTY LIABILITY

A continuity of the warranty liability is as follows:

WARRANTY LIABILITY

Years ended Dec 31

2015

2014

2013

Balance, beginning of period

$ 23,109 $ 28,845 $

6,380

Warranty assumed on acquisition

—

1,952

582

Warranty claims

Warranty accruals

Change in estimate

Impact of foreign exchange
changes

(9,438)

(10,709)

(5,397)

427

—

2,734

4,153

— 22,837

(107)

287

290

Balance, end of period

$ 13,991 $ 23,109 $ 28,845

Less: Current portion

Long-term portion

(5,554)

(9,696)

(9,955)

8,437 $ 13,413 $ 18,890

FINANCIAL STATEMENTS » NOTES » 13. LONG-TERM DEBT

15. OTHER LONG-TERM
LIABILITIES

OTHER LONG TERM LIABILITIES

Severance indemnity (a)

Contingent consideration payable
related to AFV acquisition (b)

Derivative Liability [note 13(a)]

Current portion
(included in accounts payable and
accrued liabilities, other payables)

Total

Dec 31, 2015 Dec 31, 2014

1,230 $

1,519

—

1,240

1,302 $

2,845

—

(1,240)

1,302 $

1,605

a. Severance Indemnity

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

b. Contingent Consideration
Payable Related to AFV
Acquisition

The total purchase price to acquire AFV included earn-out
payments payable in the Company’s shares and tied to
revenue and production milestones to be achieved no later
than December 31, 2014. This contingent consideration
had a fair value of $407 as at December 31, 2014.

The Company recorded compensation expense relating to
two employees of AFV who received earn-out payments in
the Company’s shares. This contingent consideration had a
fair value of $833 as at December 31, 2014.

During the year ended December 31, 2015, 325,073 shares
were issued in connection with the earn-out payments
described above at CDN $4.51 per share.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 59

FINANCIAL STATEMENTS » NOTES » 16. GOVERNMENT ASSISTANCE

16. GOVERNMENT
ASSISTANCE

From time to time, the Company enters into agreements
for financial assistance with government agencies. During
the years ended December 31, 2015, 2014 and 2013,
government assistance of $215, $892 and $640 was
received or receivable by the Company, respectively, which
has been recorded as a reduction of the related research
and development expenditures [Note 18].

Under the terms of an agreement with the Industry
Canada’s Industrial Technologies Office (“ITO”), from
April 1, 2008 to March 31, 2015, inclusively, the Company
is obligated to incur annual royalties equal to the greater of
$1,164 (CDN$1,350) or 0.33%% of the Company’s annual
revenue provided that gross revenue exceeds $11,638
(CDN$13,500) in any of the aforementioned fiscal years.
The royalty payment period may be extended until the
earlier of March 31, 2018 or until cumulative royalties total
$24,389 (CDN$28,200). For the year ended December 31,
2015 $285 (December 31, 2014 - $1,481) in royalties were
paid. As at December 31, 2015 $2,387 remains accrued in
accounts payable and accrued liabilities (December 31,
2014 - $1,269). As at December 31, 2015, cumulative
royalties of CDN$10,014 have been paid.

17. SHARE CAPITAL, STOCK
OPTIONS & OTHER STOCK-
BASED PLANS

During the year ended December 31, 2015, the Company
issued 900,097 common shares, net of cancellations, upon
exercises of share units and in connection with earn out
payments [Note 15(b)], (year ended December 31, 2014 –
652,046 common shares; year ended December 31, 2013 –
721,186 common shares). The Company issues shares from
treasury to satisfy stock option and share unit exercises.

At the Company's 2012 annual general meeting, the
Company’s shareholders ratified and approved the
Westport Omnibus Plan and reserved 8,000,000 common
shares under this plan. Under the Westport Omnibus Plan,
stock options, Restricted Share Units (“RSUs”) and
Performance Share Units (“PSUs”) may be granted and
are exercisable into common shares of the Company for no
additional consideration. Any employee, contractor,
director or executive officer of the Company is eligible to
participate in the Westport Omnibus Plan. During the
year ended December 31, 2015 the Company's

60 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

shareholders increased the number of common shares
reserved for issuance under the Omnibus Plan by
1,900,000.

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

a. Stock Options

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

A summary of the status of the Company’s stock option
plan as of December 31, 2015, December 31, 2014 and
December 31, 2013 and changes during the periods then
ended are presented as follows:

STOCK OPTION PLAN SUMMARY

(stock option values
expressed in Canadian
dollars)

Outstanding,
beginning of period

Granted

Exercised

Dec 31, 2015

Dec 31, 2014

Dec 31, 2013

WAEP

32,223 $ 17.64

816,450 $30.20

996,047 $27.78

—

— (43,071)

6.17 (111,986)

6.80

Forfeited / Expired

(23,653)

18.63 (741,156) 33.82

(67,611) 33.72

Outstanding,
end of period

Options exercisable,
end of period

8,570 $ 14.90

32,223 $17.64

816,450 $30.20

8,570 $ 14.90

32,223 $17.64

305,506 $24.15

WAEP = weighted average exercise price (C$)

During the year ended December 31, 2015, the Company
recognized $nil (year ended December 31, 2014 - $1,764;

FINANCIAL STATEMENTS » NOTES » 17. SHARE CAPITAL, STOCK OPTIONS & OTHER STOCK-BASED PLANS

year ended December 31, 2013 - $2,094) in stock-based
compensation related to stock options.

No stock options were granted during the year ended
December 31, 2015 or the year ended December 31, 2014.

b. Share Units

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

During the year ended December 31, 2015, the Company
recognized $14,871 (year ended December 31, 2014 -
$7,919; year ended December 31, 2013 - $12,189) of stock-
based compensation associated with the Westport
Omnibus Plan and the former Amended and Restated Unit
Plan.

A continuity of the Units issued under the Westport
Omnibus Plan and the former Amended and Restated Unit
Plan as of December 31, 2015, December 31, 2014 and
December 31, 2013 are as follows:

SHARE UNIT PLAN SUMMARY

(share values
expressed in
Canadian dollars)

Outstanding,
beginning of
year

Dec 31, 2015

Dec 31, 2014

Dec 31, 2013

WAGF

5,337,873 $10.27

1,200,591 $23.68

1,095,094 $20.68

future performance and other conditions tied to the payout
of the PSU. The vesting of the 2,695,000 PSU's granted in
2015 is conditional upon Shareholders of Westport
approving an increase in the number of awards available
for issuance pursuant to the Westport Omnibus Plan. As a
result these PSU's are being treated as a liability until this
condition is met.

As at December 31, 2015, $25,496 of compensation cost
related to Units awards has yet to be recognized in results
from operations and will be recognized over a weighted
average period of 2.0 years.

c. Aggregate Intrinsic Values

The aggregate intrinsic value of the Company’s share units
at December 31, 2015 and 2014 are as follows:

AGGREGATE INTRINSIC VALUES OF SHARE UNITS

(values in CDN$) Dec 31, 2015 Dec 31, 2014

Outstanding

Exercisable

Exercised

26,849 $

23,433

3,198

1,599

624

7,238

d. Stock-based Compensation

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

Granted

5,556,630

6.74

5,792,162

10.54

742,140

30.21

STOCK-BASED COMPENSATION IN OPERATING EXPENSES

Exercised /
Vested

Forfeited /
Expired

Outstanding,
end of year

Units
outstanding &
exercisable,
end of period

(575,024) 11.49

(608,975) 19.52

(448,526) 24.44

(661,558) 10.34 (1,045,905) 21.75

(188,117) 29.80

9,657,921 $ 7.62

5,337,873 $10.27 1,200,591 $23.68

1,150,294 $ 9.58

142,166 $11.67

224,638 $11.20

WAGF = weighted average grant date fair value ($C)

During 2015, 5,556,630 (December 31, 2014 - 5,792,162)
share units were granted to employees. This included
2,861,630 Restricted Share Units ("RSUs") (2014 -
4,820,763) and 2,695,000 Performance Share Units
("PSUs") (2014 - 971,399). Values of RSU awards are
generally determined based on the fair market value of the
underlying Common Share on the date of grant. RSUs
typically vest over a three year period so the actual value
received by the individual depends on the share price on
the day such RSUs are settled for Common Shares, not the
date of grant. PSU awards do not have a certain number of
Common Shares that will issue over time - it depends on

Years ended Dec 31

2015

2014

2013

Research and development

9,915 $

1,749 $

2,195

General and administrative

Sales and marketing

2,224

2,732

5,884

2,050

10,201

1,887

Total

$ 14,871 $

9,683 $ 14,283

18. RESEARCH &
DEVELOPMENT EXPENSES
Research and development expenses are recorded net of
government assistance received or receivable. The research
and development expenses had been incurred and program
funding had been received or receivable are as follows:

RESEARCH & DEVELOPMENT EXPENSES

Years ended Dec 31

2015

2014

2013

Research & development expenses $ 52,992 $ 77,472 $ 91,772

Government assistance [note 16]

(215)

(892)

(640)

Research & development

$ 52,777 $ 76,580 $ 91,132

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 61

FINANCIAL STATEMENTS » NOTES » 19. INCOME TAXES

19. INCOME TAXES

a. Provision

The Company’s income tax provision differs from that
calculated by applying the combined enacted Canadian
federal and provincial statutory income tax rate of 26% for
the year ended December 31, 2015 (year ended
December 31, 2014 - 26%; year months ended
December 31, 2013 - 26%) as follows:

INCOME TAX PROVISION

Loss before income taxes

$ (97,657) $(150,198) $(184,537)

Years ended Dec 31

2015

2014

2013

b. Deferred Income Tax

The significant components of the deferred income tax
assets and liabilities are as follows:

DEFERRED INCOME TAX ASSETS & LIABILITIES

Dec 31, 2015 Dec 31, 2014

Deferred income tax assets

Net loss carry forwards

129,653 $

129,258

Intangible assets

Property, plant and equipment

Financing and share issuance costs

Warranty liability

Deferred revenue

Inventory

3,792

7,317

712

4,220

849

2,206

3,140

6,270

4,091

6,836

1,533

5,131

1,416

2,336

2,733

7,262

Expected income tax recovery

(25,381)

(39,051)

(47,979)

Research and development

Increase (reduction) in
income taxes resulting from

Non-deductible stock-based
compensation

3,553

2,495

3,619

Other permanent differences

(76)

(446)

(2,562)

Other

Total gross deferred income tax assets

158,159

160,596

Valuation allowance

(153,099)

(152,207)

Total deferred income tax assets

5,060

8,389

Withholding taxes

1,429

969

590

Deferred income tax liabilities

Foreign tax rate differences,
foreign exchange and other
adjustments

Non-taxable income from
equity investment

Change in valuation
allowance

Goodwill impairment

Change in uncertain tax
position

(138)

7,409

3,858

Property, plant and equipment

Intangible assets

(4,512)

(3,739)

(2,851)

Other

(4,566)

(1,177)

(349)

(6,386)

(2,754)

(774)

21,036

25,784

37,391

4,820

4,748

8,807

Total deferred income tax liabilities

(6,092)

(9,914)

Total net deferred income tax liabilities

(1,032) $

(1,525)

Allocated as follows

—

873

Deferred income tax assets

2,538

3,827

Deferred income tax liabilities

(3,570)

(5,352)

Total net deferred income tax liabilities

(1,032) $

(1,525)

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

The deferred income tax assets have been reduced by the
uncertain tax position presented in [note 19(f)].

—

1,252

Income tax expense (recovery) $

731 $

(579) $

62 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

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

DEFERRED INCOME TAX ASSET VALUATION ALLOWANCE

Year ended Dec 31

2015

2014

Beginning balance

152,207 $

126,424

Additions

Reductions

892

—

25,783

—

Ending valuation allowance

153,099 $

152,207

c. Income Tax Expense / Recovery

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

FINANCIAL STATEMENTS » NOTES » 19. INCOME TAXES

LOSS CARRY-FORWARDS

Expiring in:

2016

2017

2018

2019

2020

2021+

Total

Canada

$ — $ — $ — $ — $ — $ 366,271 $ 366,271

Italy

United States

Sweden

Other

Total

—

— 1,038

6,432

4,946

5,625

67,481

17,643

6,398

5,625

67,481

17,643

18,814

$ — $ — $ 1,038 $6,432 $ 4,946 $ 463,418 $ 475,834

e. Deferred Income Tax Liability

The Company has not recognized a deferred income tax
liability for the undistributed earnings of certain foreign
subsidiaries which are essentially investments in those
foreign subsidiaries and are permanent in duration.

INCOME TAX EXPENSE (RECOVERY)

f. Tax Reserves

Year ended Dec 31, 2015

Canada

United States

Italy

Other

Year ended Dec 31, 2014

Canada

United States

Italy

Other

Year ended Dec 31, 2013

Canada

United States

Italy

Other

Net income
(loss) before
income

taxes Current Deferred

Total

(43,973) $

793 $

228 $ 1,021

(22,227)

(20,695)

(10,762)

389

—

(566)

(177)

(176)

(122)

(97,657) $ 1,245 $

(514) $

731

(87,784) $

165 $

301 $

466

(49,577)

—

(3,834)

521

(1,463)

(942)

(9,003)

(88)

(23)

(111)

$ (150,198) $

606 $ (1,185) $ (579)

(99,188) $

444 $

89 $

533

(31,019)

(27,247)

(27,083)

836

(295)

(239)

(311)

(24)

525

$ (184,537) $ 1,414 $

(541) $

873

d. Loss Carry-forwards

The Company has loss carry-forwards in the various tax
jurisdictions available to offset future taxable income as
follows:

The Company records uncertain tax positions in
accordance with ASC No. 740, Income Taxes. As at
December 31, 2015, the total amount of the Company’s
uncertain tax benefits was $1,230 (year ended December
31, 2014 - 1,230). If recognized in future periods, the
uncertain tax benefits would affect our effective tax rate.
The Company files income tax returns in Canada, the U.S.,
Italy, and various other foreign jurisdictions. All taxation
years remain open to examination by the Canada Revenue
Agency, the 2009 to 2014 taxation years remain open to
examination by the Internal Revenue Service and the
Italian Revenue Agency, and various years remain open in
the other foreign jurisdictions.

A reconciliation of the change in the reserves for uncertain
tax positions from January 1, 2015 to December 31, 2015 is
as follows:

TAX RESERVES

Balance as of January 1, 2015

Tax positions related to the current year

Additions

Reductions

Tax positions related to prior years

Opening

Additions

Reductions

Settlements

Lapses in statutes of limitations

—

1,230

—

Balance as of December 31, 2015

1,230

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 63

FINANCIAL STATEMENTS » NOTES » 20. RELATED PARTY TRANSACTIONS

20. RELATED PARTY
TRANSACTIONS

Pursuant to the amended and restated JVA, Westport
engages in transactions with CWI.

As at December 31, 2015, net amounts due from CWI total
$1,165 (2014 - $3,621). Amounts receivable relate to costs
incurred by Westport on behalf of CWI. The amounts are
generally reimbursed by CWI to Westport in the month
following the month in which the payable is incurred. Cost
reimbursements from CWI consisted of the following:

RELATED PARTY TRANSACTIONS

Years ended Dec 31

2015

2014

2013

Research and development

18 $

3 $

178

General and administrative

Sales and marketing

Total

906

4,818

1,548

4,935

1,351

4,725

$ 5,742 $ 6,486 $ 6,254

21. SERVICE AND OTHER
REVENUE

Service and other revenue for the year ended December 31,
2015 consisted of other fee payments of $nil (year ended
December 31, 2014 - $1,480; year ended December 31,
2013 - $1,484), and service revenue of $5,460 (year ended
December 31, 2014 - $11,074; year ended December 31,
2013 - $14,547) under existing development agreements.
All costs associated with the development agreements were
recorded as research and development expenses in the
period incurred.

22. COMMITMENTS &
CONTINGENCIES

a. Contractual Commitments

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

64 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

CONTRACTUAL COMMITMENTS

2016

2017

2018

2019

2020

Thereafter

Total

3,334

3,246

4,775

5,080

4,333

35,767

$ 56,535

For the year ended December 31, 2015, the Company
incurred operating lease expense of $3,763 (year ended
December 31, 2014 - $3,879; year ended December 31,
2013 - $5,675).

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

The Company is engaged in certain legal actions in the
ordinary course or business and believes that the ultimate
outcome of these actions will not have a material adverse
effect on our operating results, liquidity or financial
position.

b. Purchase Commitments

The Company purchases components from a variety of
suppliers and contract manufacturers. During the normal
course of business, in order to manage manufacturing lead
times and help ensure adequate component supply, the
Company enters into agreements with suppliers and
contract manufacturers. A portion of our reported
estimated purchase commitments arising from these
agreements are firm, noncancelable, and unconditional
commitments. The Company may be subject to penalties,
and may lose important suppliers, if it is unable to meet its
purchase commitments. In 2014, the Company entered
into several long-term fixed price contracts to purchase
parts to produce certain products. These contracts
represent firm purchase commitments which are evaluated
for potential market value losses. The Company estimated
a loss on these firm purchase commitments with reference

FINANCIAL STATEMENTS » NOTES » 22. COMMITMENTS & CONTINGENCIES

to the estimated future sales price of these products and
recognized a provision for inventory purchase
commitments of $4,106 in 2014. The provision is
recognized in other payables in accounts payable and
accrued liabilities [note 12]. During 2015, no additional loss
for provision for inventory purchase commitments was
accrued and the provision has been drawn down to
$2,050.

23. SEGMENT INFORMATION

During the first quarter of 2015, Westport realigned the
structure of the company's internal organization. The
realignment combines, our historical operating segments,
Westport Applied Technologies, Westport On-Road
Systems and Westport Off-Road Systems into a single
operating segment, Westport Operations. This change
reflects the manner in which operating decisions and
assessing business performance is currently managed by
the Chief Operating Decision Makers (the CEO and the
COO “CODMs”). As Westport narrows its focus within
certain business units, including its investments in joint
ventures, and defers certain products and related
programs, the CODMs manage the combined businesses as
a whole. Therefore, the Westport Operations segment
provides more meaningful information to users of
Westport’s financial statements. All comparable periods
presented have been revised to reflect this change.

The financial information for the Company’s business
segments evaluated by the CODMs includes the results of
CWI and WWI as if they were consolidated, which is
consistent with the way Westport manages its business
segments. As CWI and WWI are accounted for under the
equity method of accounting, an adjustment is reflected in
the tables below to reconcile the segment measures to the
Company’s consolidated measures.

The Company’s business operates in four operating
segments:

• Westport Operations designs manufactures and sells
compressed natural gas, liquefied natural gas, and
liquefied petroleum gas components and systems to
over 20 global OEMs, and to aftermarket customers in
over 60 countries.

•

Corporate and Technology Investments, which includes
corporate costs such as research and development,
general and administrative, marketing, interest and
other charges, foreign exchange and depreciation that

cannot be attributed to a particular segment and are
incurred by all segments;

• CWI which serves the medium- to heavy-duty engine

markets with spark ignited natural gas engines. The fuel
for CWI engines is typically carried on vehicles as
compressed natural gas or liquefied natural gas; and

• WWI develops, manufactures, and sells advanced,

alternative fuel engines and parts that are widely used
in city bus, coach, and heavy-duty truck applications in
China or exported to other regions globally.

The accounting policies for the reportable segments are
consistent with those described in note 2. The CODM
evaluates segment performance based on the net operating
income (loss), which is before income taxes and does not
include depreciation and amortization, impairment
charges, foreign exchange gains and losses, bank charges,
interest and other expenses, interest and other income,
and gain on sale of long-term investments. The Company
did not record any intersegment sales or transfers for the
year ended December 31, 2015, December 31, 2014 and
December 31, 2013.

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 65

FINANCIAL STATEMENTS » NOTES » 23. SEGMENT INFORMATION

SEGMENT INFORMATION

Years ended Dec 31

2015

2014

2013

Revenue

Westport Operations

$ 100,108 $ 126,988 $ 151,615

Corporate and Technology
Investments

CWI

WWI

3,196

3,581

12,417

331,882

337,234

310,651

185,967

618,465

466,580

Total segment revenues

621,153

1,086,268

941,263

Less: equity investees' revenue

(517,849)

(955,699)

(777,231)

Total consolidated revenues

$ 103,304 $ 130,569 $ 164,032

Net consolidated operating income (loss) excluding depreciation
and amortization, losses on impairments, write-downs and
disposals, provision for inventory purchase commitments, foreign
exchange loss (gain), bank charges and other

Westport Operations

$ (15,230) $ (22,379) $ (67,426)

Corporate and Technology
Investments

CWI

WWI

(70,254)

(87,363)

(83,546)

51,011

3,784

21,555

78,502

23,539

14,496

Total segment operating loss

(30,689)

(9,685)

(112,937)

Less: equity investees’ operating income

(54,795)

(100,057)

(38,035)

Net consolidated operating loss
excluding depreciation and
amortization, losses on impairments,
write-downs and disposals, provision for
inventory purchase commitments,
foreign exchange (gain) loss, bank
charges and other

Depreciation and amortization

(85,484)

(109,742)

(150,972)

regions. Product and service and other revenues are
attributable to geographical regions based on location of
the Company’s customers and presented as a percentage of
the Company’s product and service revenues are as
follows:

REVENUE BY REGION

Americas
(including United States)

Asia (including China)

Other (including Italy)

% of total product revenue and service
and other revenue, years ended Dec 31

2015

2014

2013

28%

16%

56%

40%

12%

48%

42%

11%

47%

The Company’s revenue earned from Canadian customers
is not significant and has been included in revenue from
sales in the Americas.

As at December 31, 2015, total goodwill of $3,008
(December 31, 2014 - $23,352) was allocated to the
Westport Operations segment.

As at December 31, 2015, total long-term investments of
$30,565 (December 31, 2014 - $32,898) was allocated to
the Corporate segment and $546 (December 31, 2014 -
$426) was allocated to Westport Operations.

Westport Operations

6,625

13,573

11,474

Corporate and Technology
Investments

Provision for inventory purchase
commitments (Westport Operations)

Losses on impairments,
write-downs and disposals

Corporate and Technology
Investments

Westport Operations

Net consolidated operating loss before
foreign exchange (gain) loss, bank
charges and other

Foreign exchange (gain) loss, bank
charges and other

7,029

5,093

4,814

Total assets are allocated as follows:

—

4,106

—

TOTAL ASSETS

—

3,458

31,564

22,722

36,376

26,146

52,376

9,959

57,811

Westport Operations

Corporate and Technology
Investments and unallocated assets

CWI

WWI

(121,860)

(162,118)

(208,783)

Less: equity investees’ total assets

Dec 31, 2015 Dec 31, 2014

157,452 $

219,261

52,200

171,189

125,724

506,565

296,913

116,588

172,941

182,215

691,005

355,156

(11,223)

(2,730)

(14,573)

Total consolidated assets

209,652 $

335,849

The Company’s long-lived assets consist of property, plant
and equipment, intangible assets and goodwill (included in
intangible assets below).

Loss from operations

(110,637)

(159,388)

(194,210)

Interest on long-term debt and other
income (expenses), net

Income from investment accounted for
by the equity method

(5,337)

(5,032)

(3,771)

18,317

14,222

13,444

Loss before income taxes

$ (97,657) $ (150,198) $ (184,537)

Total additions to long-lived assets
excluding business combinations

Westport Operations

1,350 $

2,278 $

20,871

Corporate and Technology
Investments

3,495

7,971

5,579

Total Additions

4,845 $

10,249 $

26,450

It is impracticable for the Company to provide
geographical revenue information by individual countries;
however, it is practicable to provide it by geographical

66 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

Long-lived assets information by geographic area:

CONTRACTUAL OBLIGATIONS & COMMITMENTS

FINANCIAL STATEMENTS » NOTES » 23. SEGMENT INFORMATION

LONG-LIVED ASSETS BY REGION

December 31, 2015

Italy

Netherlands

Canada

United States

Sweden

China

Australia

Less: equity investees' long
lived assets

Total consolidated long-lived
assets

December 31, 2014

Italy

Netherlands

Canada

United States

Sweden

China

Australia

Less: equity investees' long
lived assets

Total consolidated long-lived
assets

Fixed
Assets

Intangible
Assets

Total

6,212 $

19,531 $

25,743

2,952

18,875

14,210

124

7,059

708

5,135

494

—

155

8,087

19,369

14,210

124

7,059

863

50,140

25,315

75,455

7,613

—

7,613

42,527 $

25,315 $

67,842

9,084 $

44,139 $

53,223

3,729

24,410

20,386

208

6,329

1,018

6,245

673

—

215

9,974

25,083

20,386

208

6,329

1,233

65,164

51,272

116,436

7,030

—

7,030

58,134 $

51,272 $ 109,406

24. FINANCIAL INSTRUMENTS

a. Financial Risk Management

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

b. Liquidity Risk

Liquidity risk is the risk that the Company will not be able
to meet its financial obligations as they are due. The
Company has sustained losses and negative cash flows
from operations since inception. At December 31, 2015,
the Company has $27,839 of cash, cash equivalents and
short-term investments.

The following are the contractual maturities of financial
obligations as at December 31, 2015:

Accounts
payable &
accrued
liabilities

Unsecured
subordinated
debentures (1)
Senior
financing (2)

Senior
revolving
financing (3)
Other bank
financing (4)

Capital lease
obligations

Operating
lease
commitments
Royalty
payments (5)

Carrying
amount

Contractual
cash flows

< 1

1–3

4–5

Years

$ 57,454 $

57,454 $ 57,454 $

— $

—

38,359

45,999

3,577

42,422

—

9,123

9,428

6,303

1,804

669

652

10,859

11,423

282

11,141

3,312

3,612

1,968

794

830 369,000

238

441

—

1,315

—

56,535

3,334

8,021

9,413

35,767

14,393

1,360

1,950

9,133

$119,901 $ 199,674 $ 74,647 $ 66,017 $ 12,143 $ 46,867

Includes interest at 9%.

Includes interest at rates disclosed in note 13(b) of the annual
financial statements in effect at at December 31, 2015.

Includes interest at rates disclosed in note 13(c) of the annual
financial statements in effect at December 31, 2015.

Includes interest at rates disclosed in note 13(d) in effect at
December 31, 2015.

5. The Company is obligated to pay annual royalties equal to the
greater of CDN $1.4 million or 0.33% of the Company's gross
annual revenue from all sources, including CWI, provided that
gross revenue exceeds CDN $13.5 million in any
aforementioned fiscal year, until a total of CDN $28.2 million has
been paid. The Company has assumed the minimum required
payments.

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 and
accounts receivable. The Company manages credit risk
associated with cash and cash equivalents and short-term
investments by regularly consulting with its current bank
and investment advisors and investing primarily in liquid
short-term paper issued by Schedule 1 Canadian banks, R1
rated companies and governments. The Company
monitors its portfolio, and its policy is to diversify its
investments to manage this potential risk.

The Company is also exposed to credit risk with respect to
uncertainties as to timing and amount of collectability of
accounts receivable and loans receivable. As at
December 31, 2015, 85% (December 31, 2014 - 86%) of
accounts receivable relates to customer receivables, and
15% (December 31, 2014 - 14%) relates to amounts due
from joint venture and indirect, income tax and value

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 67

FINANCIAL STATEMENTS » NOTES » 24. FINANCIAL INSTRUMENTS

added taxes receivables. In order to minimize the risk of
loss for customer receivables, the Company’s extension of
credit to customers involves review and approval by senior
management as well as progress payments as contracts are
executed. Most sales are invoiced with payment terms in
the range of 30 days to 90 days. The Company reviews its
customer receivable accounts and regularly recognizes an
allowance for doubtful receivables as soon as the account is
determined not to be fully collectible. Estimates for
allowance for doubtful debts are determined on a
customer-by-customer evaluation of collectability at each
balance sheet reporting date, taking into consideration
past due amounts and any available relevant information
on the customers’ liquidity and financial position.

The carrying amount of cash and cash equivalents, short-
term investments and accounts receivable as at
December 31, 2015 of $66,163 (December 31, 2014 -
$140,854) 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.”) and the Euro (“Euro”). Cash and cash
equivalents, short-term investments, accounts receivable,
accounts payable, and long-term debt that are
denominated in foreign currencies will be affected by
changes in the exchange rate between the Canadian dollar
and these foreign currencies.

The Company’s functional currency is the Canadian dollar.
The U.S. dollar amount of financial instruments subject to
exposure to foreign currency risk in the consolidated
balance sheet at December 31, 2015 is as follows:

FOREIGN CURRENCY RISK IN BALANCE SHEET

Cash and cash equivalents

Short-term investments

Accounts receivable

Accounts payable

e. Interest Rate Risk

U.S. dollars

15,289

—

6,710

4,604

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

68 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

subject to interest rate risk on certain long-term debt with
variable rates of interest. The Company limits its exposure
to interest rate risk by continually monitoring and
adjusting portfolio duration to align to forecasted cash
requirements and anticipated changes in interest rates.

If interest rates for the year ended December 31, 2015 had
increased or decreased by 50 basis points, with all other
variables held constant, net loss for the year ended
December 31, 2015 would have increased or decreased by
$69.

f. Fair Value of Financial

Instruments

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

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

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

The carrying value reported in the balance sheet for the
unsecured subordinated debenture notes [note 13(a)] is
greater than its fair value based on a recent financing the
Company performed with the Cartesian Group [note 25]. The
approximate fair value of the unsecured subordinated
debenture notes at December 31, 2015 is approximately
$32,500 (CDN $44,900). Additionally, the interest rate on
the notes approximates the interest rate being demanded
in the market for debt with similar terms and conditions.

The carrying value reported in the balance sheet for senior
financing agreements [note 13(b and c)] approximates their
fair values as at December 31, 2015, as the interest rates on
the debt is floating and therefore approximates the market
rates of interest. The Company’s credit spread in these
subsidiaries also has not substantially changed from the
premiums currently paid.

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

FINANCIAL STATEMENTS » NOTES » 24. FINANCIAL INSTRUMENTS

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

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

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

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

As at December 31, 2015, cash and cash equivalents and
short-term investments are measured at fair value on a
recurring basis and are included in Level 1.

25. SUBSEQUENT EVENTS

a. Cartesian Financing

On January 11, 2016, Westport announced that it had
entered into a financing agreement with Cartesian Capital
Group ("Cartesian") to support global growth initiatives.
The financing agreement immediately provided $17,500 in
non-dilutive capital (the "Tranche 1 Financing"). In
consideration for the funds provided to Westport,
Cartesian is entitled to payments in respect of the Tranche
1 Financing based on the greater of

i. a percentage of amounts received by Westport on

select HPDI and joint venture products in excess of
agreed thresholds through 2025 and

ii. stated fixed amounts per annum.

The carrying value is being accreted to the expected
redemption value using the effective interest method.

Cartesian. The minimum fixed payments result in an
effective interest rate of approximately 23% using this
method. The effective interest rate actually required to be
utilized could be higher if future joint venture earnings
and, or future product sales are higher than the minimum
fixed payments stipulated in the agreement.

b. Merger with Fuel Systems

Solutions, Inc.

On March 18, 2016, the Company announced that its
shareholders approved the issuance of such number of
Company common shares as required to complete the
Merger.

The payments owing to Cartesian in respect of the Tranche
1 Financing are accounted for using the effective interest
method with a notional interest rate being calculated
based on the minimum fixed payments owing to

WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT » 69

INFORMATION FOR SHAREHOLDERS

DIRECTORS & EXECUTIVE OFFICERS

Name / position

Ashoka Achuthan
CFO

Residence

Chicago,
Illinois

Jim Arthurs
Executive Vice President

North Vancouver,
British Columbia

Warren J. Baker
Chairman & Director

Avila Beach,
California

Joseph P. Caron
Director

David R. Demers
CEO & Director

Brenda J. Eprile
Director

West Vancouver,
British Columbia

Vancouver,
British Columbia

North York,
Ontario

Nancy S. Gougarty
President & COO

Vancouver,
British Columbia

Philip B. Hodge
Director

Dezsö J. Horváth
Director

Calgary,
Alberta

Toronto,
Ontario

Gottfried (Guff) Muench
Director

West Vancouver,
British Columbia

Rodney T. Nunn
Director

Chatham,
Ontario

Committees

AU HR NC

Start
date

Nov
2013

Jan
2014

Sep

2002 • •
2014 •

Aug

Mar
1995

Oct

2013 •• •

Feb
2013

Sep

Jun
2012

•
2001 •• •
2010 •

Jul

Mar
2016

Thomas G. Rippon
Executive Vice President

White Rock,
British Columbia

Sep
2013

Peter M. Yu
Director

New York City,
New York

Jan

2016 •

Committees are as follows: AU = Audit; HR = Human Resources &
Compensation; NC = Nominating & Corporate Governance

CORPORATE INFORMATION

STOCK LISTINGS

NASDAQ

Toronto Stock Exchange

WPRT

WPT

Westport Shareholder Services
Shareholders with questions about their account—
including change of address, lost stock certificates, or
receipt of multiple mail-outs and other related inquiries
—should contact our Transfer Agent and Registrar:

Computershare Trust Company of Canada
510 Burrard Street, 2nd Floor
Vancouver, British Columbia, Canada V6C 3B9
T 604-661-9400 » F 604-661-9401

Legal Counsel
Bennett Jones LLP, Calgary, Alberta, Canada

Auditors
KPMG LLP, Independent Registered Public Accounting
Firm, Vancouver, British Columbia, Canada

70 » WESTPORT INNOVATIONS INC. 2015 ANNUAL REPORT

ANNUAL MEETING OF
SHAREHOLDERS
WHEN: Tuesday, June 28, 2015 at 10:00 AM (Pacific)
WHERE: 1750 West 75th Avenue, Suite 101, Vancouver, BC

WESTPORT ON THE INTERNET
Topics featured can be found on our websites:

WESTPORT

westport.com

FUEL FOR THOUGHT (BLOG) blog.westport.com

YOUTUBE

FACEBOOK

TWITTER

youtube.com/westportdotcom

facebook.com/westportdotcom

twitter.com/westportdotcom

CUMMINS WESTPORT

cumminswestport.com

The information on these websites is not incorporated
by reference into this Annual Report. Financial results,
Annual Information Form, news, services, and other
activities can also be found on the Westport website, on
SEDAR at sedar.com, or at the SEC at sec.gov.
Shareholders and other interested parties can also sign
up to receive news updates in a variety of formats
including email, Twitter, and RSS feeds:
westport.com/contact/subscriptions

CONTACT INFORMATION
1750 West 75th Avenue, Suite 101
Vancouver, British Columbia, Canada V6P 6G2
T 604-718-2000 » F 604-718-2001
invest@westport.com

FORWARD LOOKING
STATEMENTS

This document contains forward-looking statements about Westport’s business,
operations, technology development, products, the performance of our products,
sources of revenue, our future market opportunities and/or about the
environment in which it operates, which are based on Westport’s estimates,
forecasts, and projections. Such forward looking statements include, but are not
limited to, statements concerning returns to shareholders, competitive pressures
on our industry and future consolidation and alliances in that industry, changes
in adjusted EBTIDA results, our focus for the year ahead, and impacts of climate
change. These statements are not guarantees of future performance and involve
risks and uncertainties that are difficult to predict, or are beyond Westport’s
control and may cause actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of activity,
performance or achievements expressed in or implied by these forward looking
statements. These risks include risks relating to the timing and demand for our
products, future success of our business strategies and other risk factors
described in our most recent Annual Information Form and other filings with
securities regulators. 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 except as
required by applicable legislation.

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