Aetherion Technologies Inc 6-K, filed May 6, 2021
Aetherion Technologies Inc. (AETR)
6-K
2021-05-06
For: 2021-03-31
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April 06, 2026
About this 6-K
Aetherion Technologies Inc filed this 6-K on May 6, 2021.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of May 2021
Commission File Number: 001-34152
WESTPORT FUEL SYSTEMS INC.
(Translation of registrant's name into English)
1750 West 75th Avenue, Suite 101, Vancouver, British Columbia, Canada, V6P 6G2
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
£ Form 20-F S Form 40-F
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): o
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): o
EXHIBIT INDEX
| Exhibit | Description | |||||||
| 99.1 | ||||||||
| 99.2 | ||||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| WESTPORT FUEL SYSTEMS INC. | ||||||||
| By: | /s/ Richard Orazietti | |||||||
| Name: | Richard Orazietti | |||||||
| Title: | Chief Financial Officer | |||||||
Date: May 6, 2021
 | Management's Discussion and Analysis | |||||||
BASIS OF PRESENTATION
This Management’s Discussion and Analysis (“MD&A”) for Westport Fuel Systems Inc. (“Westport Fuel Systems”, the “Company”, “we”, “us”, “our”) for the three months ended March 31, 2021 provides an update to our annual MD&A dated March 15, 2021 for the fiscal year ended December 31, 2020. This information 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, 2020 and our unaudited condensed consolidated interim financial statements for the three months ended March 31, 2021. Our condensed consolidated interim 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 United States dollar ("U.S. dollar"). This MD&A is dated as of May 6, 2021.
Additional information relating to Westport Fuel Systems, 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 forward-looking statements include, but are not limited to, statements regarding the orders or demand for our products (including from our High Pressure Direct Injection ("Westport HPDI 2.0TM" or "HPDI") supply agreement with Weichai Westport Inc. ("WWI")), the timing for the launch and certification of WWI's HPDI engine, margin pressure in 2021 and the timing for amelioration of supply chain issues, the impact of COVID-19 on future performance, earnings, supply and demand for our products, the continuation of margin pressure through 2021, consumer confidence levels, conversion of existing convertible debt, the recovery of our revenues and the timing thereof, our investments, cash and capital requirements, the intentions of our partners and potential customers, monetization of joint venture intellectual property, the performance of our products, our future market opportunities, our ability to continue our business as a going concern and generate sufficient cash flows to fund operations, the availability of funding and funding requirements, our future cash flows, including cash flows specific to Cummins Westport Inc. ("CWI"), our estimates and assumptions used in our accounting policies, our accruals, including warranty accruals, our financial condition, the timing of when we will adopt or meet certain accounting and regulatory standards and the alignment of our business segments. These forward-looking 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 revenue growth, operating results, liquidity, our industry and products, the general economy, conditions of the capital and debt markets, government or accounting policies and regulations, regulatory investigations, climate change legislation or 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. In addition, the impacts of the COVID-19 pandemic could cause actual results to differ materially from the forward-looking statements contained in this MD&A. 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, product development delays in contractual commitments, the ability to attract and retain business partners, competition from other technologies, the impact of the COVID-19 pandemic, conditions or events affecting cash flows or our ability to continue as a going concern, price differential between compressed natural gas, liquefied natural gas, and liquefied petroleum gas relative to petroleum-based fuels, 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 are pertinent only as of the date they were made.
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 Fuel Systems 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.
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| Management's Discussion and Analysis | |||||||
FIRST QUARTER 2021 HIGHLIGHTS
•Revenues of $76.4 million, up 14% compared to the same period in 2020 due to increased sales volume in light-duty and heavy-duty original equipment manufacturer ("OEM") businesses
•Net loss of $3.1 million and net loss per share of $0.02 was impacted by supply chain-related production issues at our initial HPDI launch partner, one-time severance costs and an unrealized foreign exchange loss
•Adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") were $2.7 million (see "Non-GAAP Measures" section in this MD&A)
•Announced co-investment agreement with our Tier 1 injector manufacturing partner to expand manufacturing footprint for HPDI 2.0 injectors in China
•Agreed to extend and increase the supply agreement terms for the supply of at least 25,000 HPDI systems from 18,000 ending December 31, 2024
•At-the-Market equity offering raised $13.2 million gross proceeds in the three months ended March 31, 2021 for a cumulative total of $27.6 million; cash and cash equivalents were $59.7 million at the end of the quarter
•Announced commencement of a research project with Scania to apply our HPDI system with hydrogen to the latest Scania commercial vehicle engine
BUSINESS OVERVIEW
Westport Fuel Systems is focused on engineering, manufacturing, and supplying alternative fuel systems and components for transportation vehicles. Our diverse product offering sold under a wide range of established brands enables the deployment of a range of alternative fuels offering both environmental and economic advantages, including liquefied petroleum gas ("LPG"), compressed natural gas ("CNG"), liquefied natural gas ("LNG"), renewable natural gas ("RNG"), and hydrogen (together known as "gaseous fuels"). We supply our products and services through a network of distributors, directly to OEMs and to supplier OEMs and we provide delayed OEM ("DOEM") services. In total, we have customers in more than 70 countries. Today, our products and services are available for passenger car, light, medium and heavy-duty truck, cryogenic, and hydrogen applications.
The majority of our revenues are generated through the following businesses:
•Independent aftermarket ("IAM"): We sell systems and components across a wide range of brands, primarily through a global network of distributors that consumers can purchase and have installed onto their vehicles to use LPG or CNG fuels, in addition to gasoline.
•DOEM: We directly or indirectly convert new passenger cars for OEMs or importers, to address local market needs when a global LPG or CNG bi-fuel vehicle platform is not available directly from the OEM.
•Light-duty OEM: We sell systems and components to OEMs that are used to manufacture new, direct off the assembly line LPG or CNG-fueled vehicles.
•Heavy-duty OEM: We sell systems and components, including HPDI products, to engine OEMs and commercial vehicle OEMs. Our fully integrated Westport HPDI 2.0TM system, powered primarily by LNG, matches the power, torque, and fuel economy benefits found in traditional compression ignition engines using only diesel fuel, resulting in reduced greenhouse gas emissions and the capability to cost-effectively run on renewable fuels.
•Electronics: We design, industrialize and assemble electronic control modules.
•Hydrogen: We design, develop, produce and sell hydrogen components for transportation and industrial applications. Also, we are adapting our HPDI system to use hydrogen or hydrogen/natural gas blends in internal combustion engines. This area of our business saw substantial growth in 2020 and remained strong in the current quarter.
HPDI
Our HPDI business is still in the early stages of commercialization. Meaningful increases in sales volumes are required for the HPDI business to benefit from economies of scale. Sales volumes with our initial launch partner have grown despite the economic impact of COVID-19, and we anticipate additional growth from our supply arrangement with WWI, as well as additional OEMs entering into supply agreements for our HPDI technology. Production capacity of the LNG tank assembly for HPDI application doubled in 2020 to accommodate the expected ramp-up in sales volumes. In March 2021, we entered into an investment agreement with our Tier 1 global injector manufacturing partner to expand production at their facility in Yantai, China in anticipation of increased demand for fuel injectors to the growing global market for HPDI 2.0™. In the third quarter of 2020, WWI's HPDI engine was certified to meet China VI emissions standards of the Ministry of Ecology and Environment
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| Management's Discussion and Analysis | |||||||
("MEE") of the People's Republic of China, which is an important step in the commercialization of the HPDI technology in the Chinese market. During the first quarter of 2021, WWI has agreed to extend the term of the original supply agreement signed in 2018 to December 31, 2024 and increased the minimum purchase of Westport HPDI 2.0TM components required to produce a minimum of 25,000 engines by the end of 2024, up from 18,000 engines. The next significant milestone in commercializing the HPDI technology into the Chinese market is the OEM vehicle certification operating with a WWI HPDI engine.
Gross margin and gross margin percentage from our HPDI product will vary based on production and sales volumes, levels of development work, successful implementation of initiatives to reduce the cost of input materials, and foreign exchange rates. Margin pressure is expected to continue through 2021 as launch costs and contracted price discounts with the existing OEM customers are only partially offset by cost reductions of materials until higher scale is achieved. The production challenges caused by supply chain issues experienced by our initial OEM launch partner will affect revenues and margins through the second quarter and are expected to ameliorate in the second half of 2021.
We also generate a significant portion of our income from CWI, our 50:50 joint venture with Cummins, Inc. ("Cummins"), by selling spark-ignited natural gas engines. The joint venture term is scheduled to end on December 31, 2021, and we are evaluating our strategic alternatives in anticipation of this termination. Specifically, we see a growing opportunity to sell and supply our alternative fuel systems, especially our HPDI technology, in heavy-duty applications in the North America market for clean transportation. Refer to the "Operating Segments" section of this MD&A for more detail.
IMPACT OF COVID-19 ON OUR BUSINESS
The COVID-19 pandemic has impacted our business since March 2020. The extent, duration and impact of COVID-19 is uncertain, however since the second half of 2020, our sales and customer demand has rebounded and remained relatively stable during the first quarter of 2021. Our production plants located in Northern Italy closed temporarily during the first half of 2020 due to the COVID-19 pandemic, but have since remained open and are in full production in 2021.
While demand for medium and heavy-duty trucks has increased due to an ongoing need for freight transportation and the growing demand for more climate-friendly vehicles in markets with favourable fuel price economics, sales of our heavy-duty business were adversely affected in 2021 by the impact of the global shortage of semiconductors experienced by our HPDI OEM launch partner.
Our light-duty OEM and DOEM businesses are dependent on new vehicle sales with gaseous fuel systems. Sales revenue in the light-duty OEM business recovered significantly in the first quarter of 2021 compared to prior quarters in 2020, to levels slightly below pre-COVID-19. Sales revenue from the DOEM business declined compared to the same period in the prior year. While we are optimistic about the remainder of 2021, the global supply and effectiveness of vaccines and spread of new virus variants may adversely affect customer demand going forward.
We are closely monitoring and making efforts to mitigate the impact of COVID-19 on our business. We have significant operations in Italy where there has been a high number of cases of COVID-19. We also source components from China, which has been impacted by the global supply chain for semiconductor chips and other materials. At this time, management does not expect a material impact to its business, however, the situation is evolving and could become material if the supply chain disruption is prolonged or end-customer demand declines.
In response to the pandemic, we have undertaken numerous financing actions and implemented multiple austerity measures, including actions to reduce costs, such as salary and other compensation deferrals and reductions, and delaying non-critical projects and capital expenditures to secure liquidity and improve our ability to fund our operations. We continue to work closely with our key lenders to strengthen our liquidity and reduce our cost of capital through both debt and equity financing. We are also participating in government wage-subsidy and other support programs in the countries where we operate. We have received $0.2 million in the three months ended March 31, 2021 (three months ended March 31, 2020 - $0.5 million) related to these programs.
Liquidity to fund ongoing operations and growth opportunities is further discussed in the "Liquidity and Going Concern" section in the MD&A below.
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| Management's Discussion and Analysis | |||||||
Q1 2021 RESULTS
Revenues for the three months ended March 31, 2021 increased year-over-year by 14% to $76.4 million compared to the first quarter of 2020, reflecting the benefit of increased OEM sales volumes in our light-duty and heavy-duty businesses, and to a lesser extent, increased aftermarket sales volumes. Revenues in U.S. dollar terms benefited from a 9% increase in the average Euro versus U.S. dollar exchange rate, period over period.
We reported a net loss of $3.1 million for the three months ended March 31, 2021 compared to a net loss of $15.3 million for the first quarter of 2020. The improvement primarily resulted from higher gross margins in the current period due to the significant impact of a $10.0 million charge, excluding $7.7 million in insurance recoveries recorded in the second quarter of 2020, taken for a field service campaign in the comparative period in 2020, a decrease in unrealized foreign exchange losses due mostly to the strengthening of the Canadian dollar versus U.S. dollar, and higher earnings from CWI, partially offset by increased operating expenses, including one-time severance expenses of $0.7 million, and lower margins from our heavy-duty OEM business.
We generated $2.7 million in Adjusted EBITDA during the three months ended March 31, 2021 as compared to negative $3.6 million Adjusted EBITDA for the three months ended March 31, 2020. Besides the changes to profitability as described above, the prior year first quarter also had a large unrealized foreign exchange loss of $6.9 million compared to $0.7 million in the current quarter.
LIQUIDITY AND GOING CONCERN
In connection with preparing consolidated financial statements for each annual and interim reporting period, we are required to evaluate whether there are conditions or events, considered in aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued. Substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that a company will be unable to meet its obligations as they become due within one year after the date that the consolidated financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans and actions that have not been fully implemented as of the date that the financial statements are issued. When substantial doubt exists, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about its ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both: (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued; and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Generally, to be considered probable of being effectively implemented, the plans must have been approved before the date that the financial statements are issued.
Management's evaluation has concluded that there are no known or currently foreseeable conditions or events that raise substantial doubt about our ability to continue as a going concern within one year after the date these condensed consolidated interim financial statements are issued. These condensed consolidated interim financial statements have therefore been prepared on the basis that we will continue as a going concern.
At March 31, 2021, our net working capital was $85.3 million including cash and cash equivalents of $59.7 million. Our short-term and long-term debt, including the royalty payable, was $78.8 million, of which $27.8 million matures in 2021 and $39.3 million matures by May 31, 2022. We have another $2.1 million in restricted cash pledged to the repayment of the debt we hold in our Italian subsidiaries recorded in other long-term assets. During the quarter, we incurred a loss of $3.1 million and negative cash flows from operations of $2.6 million, generated cash of $6.5 million from investing activities and used cash of $5.8 million in financing activities.
As part of our liquidity and funding management, we are evaluating foreseeable future cash flows from the CWI joint venture, as the joint venture term is scheduled to end on December 31, 2021. The joint venture pays significant dividends to the joint venture partners; we received $7.9 million as dividends in the three months ended March 31, 2021 ($5.8 million in the three months ended March 31, 2020). As per the joint venture agreement, both Cummins and Westport Fuel Systems have equal rights to the joint venture's intellectual property. However, there is no certainty that we will be able to monetize the intellectual property on a recurring basis to the level of the current dividends received from the joint venture. See notes 6 and 7(a) for additional details related to the CWI joint venture.
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| Management's Discussion and Analysis | |||||||
Management's conclusion and assessment
We believe that the cash on hand at March 31, 2021, the continued recovery of OEM and IAM businesses and the growth of our HD OEM business, coupled with current committed capital, will provide the cash flow necessary to fund operations over the next year to May, 2022. The ability to continue as a going concern beyond May, 2022, will be dependent on our ability to generate sufficient positive cash flows from operations, effective management of the CWI joint venture transition and our ability to finance our long-term strategic objectives and operations (specifically the growth of the HPDI business). If, as a result of future events, we were to determine that we were no longer able to continue as a going concern, significant adjustments would be required to the carrying value of assets and liabilities in the accompanying, consolidated financial statements and the adjustments could be material.
SELECTED FINANCIAL INFORMATION
The following table sets forth a summary of our financial results:
Selected Consolidated Statements of Operations Data
| Three months ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| (expressed in millions of U.S. dollars, except for per share amounts) | ||||||||||||||||||||||||||
| Revenue | $ | 76.4 | $ | 67.2 | ||||||||||||||||||||||
| Gross margin | $ | 13.0 | $ | 4.3 | ||||||||||||||||||||||
| Gross margin % | 17 | % | 6 | % | ||||||||||||||||||||||
| Income from investments accounted for by the equity method | $ | 6.6 | $ | 5.4 | ||||||||||||||||||||||
| Net loss | $ | (3.1) | $ | (15.3) | ||||||||||||||||||||||
| Net loss per share - basic and diluted | $ | (0.02) | $ | (0.11) | ||||||||||||||||||||||
| Weighted average basic and diluted shares outstanding | 147.1 | 136.4 | ||||||||||||||||||||||||
| EBITDA (1) | $ | 1.9 | $ | (11.1) | ||||||||||||||||||||||
| Adjusted EBITDA (1) | $ | 2.7 | $ | (3.6) | ||||||||||||||||||||||
(1) See "Non-GAAP Measures" section in this MD&A
Selected Balance Sheet Data
The following table sets forth a summary of our financial position as at March 31, 2021 and December 31, 2020:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| (expressed in millions of U.S. dollars) | ||||||||||||||
| Cash and cash equivalents | $ | 59.7 | $ | 64.3 | ||||||||||
| Net working capital (1) | 57.5 | 53.8 | ||||||||||||
| Total assets | 333.3 | 346.3 | ||||||||||||
| Short-term debt | 7.9 | 23.4 | ||||||||||||
| Long-term debt, including current portion | 54.3 | 62.0 | ||||||||||||
| Royalty payable, including current portion | 16.5 | 16.0 | ||||||||||||
| Non-current liabilities (2) | 43.0 | 40.9 | ||||||||||||
| Total liabilities | 219.1 | 242.2 | ||||||||||||
| Shareholders' equity | 114.2 | 104.1 | ||||||||||||
(1) Excluding cash and cash equivalents, short-term debt, the current portion of long-term debt and the current portion of the royalty payable
(2) Excluding long-term debt and the royalty payable
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| Management's Discussion and Analysis | |||||||
RESULTS FROM OPERATIONS
OPERATING SEGMENTS
We manage and report the results of our business through four segments: OEM, IAM, the CWI Joint Venture, and Corporate. This reflects the way operating decisions and the assessment of business performance is currently managed by the Chief Operating Decision Maker ("CODM"). The financial information for the business segments evaluated by the CODM includes the results of CWI as if they were consolidated, which is consistent with the way we manage our business segments.
OEM Business Segment
Our OEM segment designs, manufactures, and sells alternative fuel systems, components and electronics, including the Westport HPDI 2.0TM product and related engineering services, to OEMs and to supplier OEMs. Our diverse product offerings are sold under established global brands and utilize a broad range of alternative fuels, which have numerous environmental and economic advantages including: LPG, CNG, LNG, RNG, and hydrogen. The OEM business segment's products and services are available for passenger cars, light-, medium- and heavy-duty trucks, cryogenics, and hydrogen applications. The OEM group includes the light-duty and heavy-duty OEM product lines and the DOEM and electronic businesses, as previously described.
IAM Business Segment
Our IAM segment designs, manufactures, and sells alternative fuel systems and components that consumers can purchase and have installed onto their vehicles to use LPG or CNG fuels in addition to gasoline. Distribution of such products is realized through a comprehensive distribution network (in more than 70 countries) selling our products to the workshops that are responsible for conversion, maintenance and service.
CWI Joint Venture
CWI serves the medium and 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. CWI is the leading supplier of natural gas engines to the North American medium and heavy-duty truck and transit bus industries. The purpose of the joint venture is to engage in the business of developing, marketing and selling spark-ignited natural gas or propane engines for on-highway use. CWI utilizes Cummins' supply chain, back office systems and distribution and sales networks. All CWI natural gas engines are dedicated 100% natural gas engines. The fuel for CWI engines can be carried in tanks on the vehicle as CNG or LNG. All engines are also capable of operating on RNG. CWI is a Delaware corporation owned 50% by Westport Fuel Systems Canada Inc., a wholly-owned subsidiary of Westport Fuel Systems, and 50% by Cummins. The board of directors of CWI is comprised of three representatives from each of Westport Fuel Systems and Cummins. On February 19, 2012, Westport Fuel Systems, Cummins and CWI entered into a Second Amended and Restated Joint Venture Agreement governing the operations of CWI, which amended the focus of CWI's future product development investments to North American markets, including engines for on-road applications between the displacement range of 5.9 litres through 12 litres, and to have these engines manufactured in Cummins' North American plants.
The joint venture term is scheduled to end on December 31, 2021.
Corporate Business Segment
The Corporate business segment is responsible for public company activities, corporate oversight, financing, capital allocation and general administrative duties, such as securing our intellectual property.
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| Management's Discussion and Analysis | |||||||
| Three Months Ended March 31, 2021 | |||||||||||||||||
| Revenue | Operating Income (Loss) | Depreciation & Amortization | Equity Income | ||||||||||||||
| OEM | $ | 42.7 | $ | (6.5) | $ | 2.1 | $ | 0.2 | |||||||||
| IAM | 33.7 | 1.6 | 1.3 | — | |||||||||||||
| Corporate | — | (3.3) | 0.1 | 6.4 | |||||||||||||
| CWI - 50% | 41.1 | 8.6 | — | — | |||||||||||||
| Total Segment | 117.5 | 0.4 | 3.5 | 6.6 | |||||||||||||
| Less: CWI - 50% | (41.1) | (8.6) | — | — | |||||||||||||
| Total Consolidated | $ | 76.4 | $ | (8.2) | $ | 3.5 | $ | 6.6 | |||||||||
| Three Months Ended March 31, 2020 | |||||||||||||||||
| Revenue | Operating Income (Loss) | Depreciation & Amortization | Equity Income | ||||||||||||||
| OEM | $ | 34.2 | $ | (14.5) | $ | 1.8 | $ | 0.1 | |||||||||
| IAM | 33.0 | 4.8 | 1.5 | — | |||||||||||||
| Corporate | — | (10.2) | 0.1 | 5.3 | |||||||||||||
| CWI - 50% | 38.3 | 6.7 | — | — | |||||||||||||
| Total Segment | 105.5 | (13.2) | 3.4 | 5.4 | |||||||||||||
| Less: CWI - 50% | (38.3) | (6.7) | — | — | |||||||||||||
| Total Consolidated | $ | 67.2 | $ | (19.9) | $ | 3.4 | $ | 5.4 | |||||||||
Revenue
Total consolidated revenues from operations for the three months ended March 31, 2021 increased by $9.2 million or 14% from $67.2 million in 2020 to $76.4 million in 2021.
OEM
Revenue for the three months ended March 31, 2021 was $42.7 million compared with $34.2 million for the three months ended March 31, 2020. The 25% increase in revenue was primarily driven by increased light-duty OEM business sales volumes to OEMs in Russia and India during the quarter, electronics business and higher year-over-year HPDI product sales to our initial OEM launch partner, more than offsetting a decline in the DOEM business that has been affected by the impact on customer demand due to COVID-19. Although the demand for our HPDI technology continues on a positive trajectory, our HPDI product sales were lower than in the second half of 2020 due to supply chain challenges that have affected the production at our initial OEM launch partner.
IAM
Revenue for the three months ended March 31, 2021 was $33.7 million compared with $33.0 million for the three months ended March 31, 2020. A 9% increase in the average Euro rate versus the U.S. dollar more than offset lower demand period over period.
(expressed in millions of U.S. dollars)
| Three months ended March 31, | Change | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
| OEM | $ | 42.7 | $ | 34.2 | $ | 8.5 | 25 | % | |||||||||||||||||||||||||||||||||||||||
| IAM | 33.7 | 33.0 | 0.7 | 2 | % | ||||||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 76.4 | $ | 67.2 | $ | 9.2 | 14 | % | |||||||||||||||||||||||||||||||||||||||
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| Management's Discussion and Analysis | |||||||
Gross Margin
Total consolidated gross margin for the three months ended March 31, 2021 increased by $8.7 million or 202% from $4.3 million in 2020 to $13.0 million for the same period in 2021.
OEM
Gross margin increased by $11.0 million to $4.9 million, or 11% of revenue, for the three months ended March 31, 2021 compared to negative $6.1 million, or negative 18% of revenue for the three months ended March 31, 2020. The gross margin recorded in the prior year quarter included a $10.0 million expense related to a field service campaign. Excluding this charge, gross margin for the current quarter increased by $1.0 million with a consistent gross margin percentage at 11% of revenue. This increase in gross margin was largely due to higher sales, as discussed previously, more than offsetting a negative impact from product mix in the current period.
IAM
Gross margin decreased by $2.3 million to $8.1 million, or 24% of revenue, for the three months ended March 31, 2021 compared to $10.4 million, or 32% of revenue for the three months ended March 31, 2020. The decrease in gross margin percentage is mainly due an increased proportion of sales to emerging markets with lower gross margins compared to Western Europe, and to a lesser extent, higher manufacturing costs in the current quarter reflecting a one-week facilities shut-down in the last week of March 2020.
(expressed in millions of U.S. dollars)
| Three months ended March 31, 2021 | % of Revenue | Three months ended March 31, 2020 | % of Revenue | Change | ||||||||||||||||||||||||||||||||||
| $ | % | |||||||||||||||||||||||||||||||||||||
| OEM | $ | 4.9 | 11 | % | $ | (6.1) | (18) | % | $ | 11.0 | 180 | % | ||||||||||||||||||||||||||
| IAM | 8.1 | 24 | % | 10.4 | 32 | % | (2.3) | (22) | % | |||||||||||||||||||||||||||||
| Total gross margin | $ | 13.0 | 17 | % | $ | 4.3 | 6 | % | $ | 8.7 | 202 | % | ||||||||||||||||||||||||||
Research and Development ("R&D") Expenses
OEM
R&D expenses for the three months ended March 31, 2021 were $5.4 million, compared to $4.4 million for the three months ended March 31, 2020. The increase in R&D expense in the current quarter is primarily due to a 9% increase in the average Euro rate versus the U.S. dollar period over period and increased expenses related to Hydrogen research and other development activities.
(expressed in millions of U.S. dollars)
| Three months ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||
| OEM | $ | 5.4 | $ | 4.4 | $ | 1.0 | 23 | % | ||||||||||||||||||||||||||||||||||||||||||
| IAM | 1.3 | 1.3 | — | — | % | |||||||||||||||||||||||||||||||||||||||||||||
| Corporate | — | 0.1 | (0.1) | (100) | % | |||||||||||||||||||||||||||||||||||||||||||||
| Total R&D expenses | $ | 6.7 | $ | 5.8 | $ | 0.9 | 16 | % | ||||||||||||||||||||||||||||||||||||||||||
8
| Management's Discussion and Analysis | |||||||
Selling, General and Administrative ("SG&A") Expenses
OEM
SG&A expenses for three months ended March 31, 2021 were $5.1 million compared with $3.3 million for the three months ended March 31, 2020. The increase of SG&A expense is mainly due to a 9% increase in the average Euro rate versus the U.S. dollar period over period and higher compensation expense compared to the prior year quarter.
IAM
SG&A expenses for three months ended March 31, 2021 were $4.6 million compared with $3.6 million for the three months ended March 31, 2020. The increase of SG&A expense is mainly due to higher compensation expense, including salary and bonus.
Corporate
SG&A expenses for the three months ended March 31, 2021 were $2.5 million compared with $3.1 million for the three months ended March 31, 2020. The decrease is primarily due to lower legal costs and travel costs in the current period.
(expressed in millions of U.S. dollars)
| Three months ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||
| OEM | $ | 5.1 | $ | 3.3 | $ | 1.8 | 55 | % | ||||||||||||||||||||||||||||||||||||||||||
| IAM | 4.6 | 3.6 | 1.0 | 28 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Corporate | 2.5 | 3.1 | (0.6) | (19) | % | |||||||||||||||||||||||||||||||||||||||||||||
| Total SG&A expenses | $ | 12.2 | $ | 10.0 | $ | 2.2 | 22 | % | ||||||||||||||||||||||||||||||||||||||||||
9
| Management's Discussion and Analysis | |||||||
Selected CWI Statements of Operations Data
We account for CWI using the equity method of accounting. However, due to its significance to our operating results, we disclose CWI's assets, liabilities and income statement in notes 6, 7(a) and 19 of our condensed consolidated interim financial statements and discuss revenue and gross margins in this MD&A.
The following table sets forth a summary of the financial results of CWI for the three months ended March 31, 2021, and March 31, 2020.
| Three months ended March 31, | Change | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | |||||||||||||||||||||||||||||||||||||||||||||||
| (expressed in millions of U.S. dollars except for number of units) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Units | 1,873 | 1,513 | 360 | 24 | % | |||||||||||||||||||||||||||||||||||||||||||||
| Revenue | $ | 82.3 | $ | 76.7 | $ | 5.6 | 7 | % | ||||||||||||||||||||||||||||||||||||||||||
| Gross margin | $ | 21.0 | $ | 21.6 | $ | (0.6) | (3) | % | ||||||||||||||||||||||||||||||||||||||||||
| Gross margin % | 26 | % | 28 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Operating expenses | $ | 3.9 | $ | 8.2 | $ | (4.3) | (52) | % | ||||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 17.1 | $ | 13.4 | $ | 3.7 | 28 | % | ||||||||||||||||||||||||||||||||||||||||||
| Net income | $ | 12.9 | $ | 10.6 | $ | 2.3 | 22 | % | ||||||||||||||||||||||||||||||||||||||||||
| Net income attributable to the Company | $ | 6.4 | $ | 5.3 | $ | 1.1 | 21 | % | ||||||||||||||||||||||||||||||||||||||||||
Revenue
Revenue for the three months ended March 31, 2021 was $82.3 million, a 7% increase compared to $76.7 million for the three months ended March 31, 2020. Unit sales for the three months ended March 31, 2021 were 1,873 compared to 1,513 for the three months ended March 31, 2020. The increase in unit sales in the current year period largely reflects the timing of sales and increase in demand. Parts revenue decreased from $29.1 million to $25.8 million due to fewer parts purchases for repairs, reflecting improving product quality.
Gross Margin
Gross margin decreased by $0.6 million to $21.0 million, or 26% of revenue from $21.6 million or 28% of revenue in the prior year period. The decrease in gross margin and gross margin percentage primarily reflects product mix and a $1.9 million parts warranty provision.
10
| Management's Discussion and Analysis | |||||||
Other significant expense and income items for the three months ended March 31, 2021
Foreign exchange gains and losses reflect net realized gains and losses on foreign currency transactions and net unrealized gains and losses on our net U.S. dollar denominated monetary assets and liabilities in our Canadian operations that were mainly comprised of cash and cash equivalents, short-term investments, accounts receivable and accounts payable. In addition, we have foreign exchange exposure on Euro denominated monetary assets and liabilities where the functional currency of the subsidiary is not the Euro. For the three months ended March 31, 2021, we recognized a foreign exchange loss of $0.7 million compared to a foreign exchange loss of $6.9 million in the comparative period. The loss in the current quarter primarily relates to the unrealized foreign exchange losses that resulted from the translation of U.S. dollar denominated debt in our Canadian legal entities. The Canadian dollar strengthened by 1% against the U.S. dollar during the first quarter of 2021.
Depreciation and amortization for the three months ended March 31, 2021 was $3.5 million, compared to $3.4 million for the three months ended March 31, 2020. The amount included in cost of product revenue for the three months ended March 31, 2021 was $2.0 million compared with $1.9 million for the three months ended March 31, 2020.
Income from investments primarily relates to our 50% interest in CWI earnings, accounted for by the equity method. See the "Selected CWI Statements of Operations Data" section in this MD&A for more detail.
Interest on long-term debt and amortization of discount
| Three months ended March 31, | ||||||||||||||||||||||||||||||||
| (expressed in millions of U.S. dollars) | 2021 | 2020 | ||||||||||||||||||||||||||||||
| Interest expense on short-term and long-term debt | $ | 1.2 | $ | 0.9 | ||||||||||||||||||||||||||||
| Royalty payable accretion expense | 0.5 | 0.7 | ||||||||||||||||||||||||||||||
| Total interest on short-term and long-term debt and accretion on royalty payable | $ | 1.7 | $ | 1.6 | ||||||||||||||||||||||||||||
The increase in debt year-over-year due to efforts to bolster the Company's liquidity during the pandemic led to an increase in interest expense in the current quarter compared to the three months ended March 31, 2020. The increase in interest expense due to higher debt levels was partially offset by a lower cost of borrowing achieved through government-sponsored debt programs in Canada and Italy and the refinancing of the convertible notes with Cartesian. The royalty payable accretion expense decreased as we continued to make repayments as scheduled.
Income tax expense of $0.4 million for the three months ended March 31, 2021 compares to an income tax recovery of $0.7 million for the three months ended March 31, 2020. The net decrease in income tax recovery is primarily due to the tax benefit recorded in the prior year period on losses related to a one-time field service campaign. Lower income from our operations in Italy also contributed to a decrease in overall tax expense.
11
| Management's Discussion and Analysis | |||||||
CAPITAL REQUIREMENTS, RESOURCES AND LIQUIDITY
Our cash and cash equivalents position decreased by $4.5 million during the first three months of 2021 to $59.7 million from $64.3 million at December 31, 2020. The decrease was primarily the result of the use of cash in our operating activities from the loss on our OEM businesses, partially offset by operating profit in our IAM business, and payments made under our debt facilities during the quarter.
COVID-19 and the related economic impact on customer demand and supply chain materially impacted our business. We were able to access various government supports, and we have significantly strengthened our balance sheet by negotiating more attractive financing rates, and extending maturity of our debt to ensure sufficient liquidity to meet obligations. See the "Liquidity and Going Concern" section in this MD&A for further discussion.
Cash Flow from Operating Activities
For the three months ended March 31, 2021, our net cash flows used in operating activities were $2.6 million, an improvement of $7.2 million from $9.8 million in net cash flow used in operating activities in the three months ended March 31, 2020. The decrease in cash used is primarily due to a lower net loss during the three months ended March 31, 2021 compared to the prior year quarter, attributable to the $10.0 million expense related to a field service campaign recorded in the three months ended March 31, 2020.
Cash Flow from Investing Activities
Our net cash from investing activities consisted primarily of cash acquired through dividends received from the CWI joint venture and the sale of assets and investments, partially offset by purchases of property, plant and equipment of $1.7 million.
For the three months ended March 31, 2021, our net cash flows from investing activities were $6.5 million compared to net cash flows of $4.2 million for the three months ended March 31, 2020. The increase is mainly due to dividends of $7.9 million received in the three months ended March 31, 2021 compared to dividends of $5.8 million in the first quarter of 2020. Capital expenditures increased to $1.7 million in the three months ended March 31, 2021 from $1.6 million in the three months ended March 31, 2020.
Cash Flow from Financing Activities
For the three months ended March 31, 2021, our net cash flows used in financing activities were $5.8 million compared to $0.6 million for the three months ended March 31, 2020, primarily due to a decrease in net borrowing from the short-term HSBC revolving financing facility, partially offset by $12.8 million in net proceeds from the issuance of 1,819,712 common shares through our At-the-Market equity offering at a weighted average share price of $7.26 per share, net of transaction costs of $0.4 million including commission of $0.3 million.
12
| Management's Discussion and Analysis | |||||||
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
| Carrying amount | Contractual cash flows | < 1 year | 1 - 3 years | 4-5 years | > 5 years | |||||||||||||||||||||||||||||||||
| Accounts payable and accrued liabilities | $ | 81.3 | $ | 81.3 | $ | 81.3 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||
| Short-term debt (1) | 7.9 | 7.9 | 7.9 | — | — | — | ||||||||||||||||||||||||||||||||
| Long-term debt, principal (2) | 54.3 | 54.3 | 15.0 | 24.0 | 12.7 | 2.6 | ||||||||||||||||||||||||||||||||
| Long-term debt, interest (2) | — | 3.4 | 1.8 | 1.4 | 0.2 | — | ||||||||||||||||||||||||||||||||
| Long-term royalty payable (3) | 16.6 | 21.7 | 7.5 | 7.5 | 3.9 | 2.8 | ||||||||||||||||||||||||||||||||
| Operating lease obligations (4) | 32.2 | 37.5 | 4.9 | 7.5 | 3.0 | 22.1 | ||||||||||||||||||||||||||||||||
| $ | 192.3 | $ | 206.1 | $ | 118.4 | $ | 40.4 | $ | 19.8 | $ | 27.5 | |||||||||||||||||||||||||||
(1) For details of our short-term debt, see note 12 in the condensed consolidated interim financial statements.
(2) For details of our long-term debt, principal and interest, see note 13 in the condensed consolidated interim financial statements.
(3) For additional information on the long-term royalty, see note 14 of the condensed consolidated interim financial statements.
(4) For additional information on operating lease obligations, see note 11 of the condensed consolidated interim financial statements.
SHARES OUTSTANDING
For the three months ended March 31, 2021 and March 31, 2020, the weighted average number of shares used in calculating the loss per share was 147,126,250 and 136,429,224, respectively. The Common Shares and Share Units (comprising of performance share units and restricted share units) outstanding and exercisable as at the following dates are shown below:
| March 31, 2021 | May 6, 2021 | |||||||||||||||||||||||||
| Number | Number | |||||||||||||||||||||||||
| Common Shares outstanding | 147,848,018 | 147,848,018 | ||||||||||||||||||||||||
| Share Units | ||||||||||||||||||||||||||
| Outstanding | 1,251,437 | 1,251,437 | ||||||||||||||||||||||||
| Exercisable | 41,667 | 61,819 | ||||||||||||||||||||||||
13
| Management's Discussion and Analysis | |||||||
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our condensed consolidated interim 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 the assessment of liquidity and going concern, warranty liability, revenue recognition, inventories, and property, equipment, furniture and leasehold improvements. The application of these and other accounting policies are described in note 3 of our annual consolidated financial statements and our MD&A, for the year ended December 31, 2020, filed on March 15, 2021. Actual amounts may vary significantly from estimates used. There have been no significant changes in accounting policies applied to the March 31, 2021 condensed consolidated interim financial statements.
We believe that we have taken into account all the possible impacts of known events arising from the COVID-19 pandemic in the preparation of our consolidated financial statements. However, changes in circumstances due to COVID-19 could impact our judgments and estimates associated with our liquidity and going concern assessment, and other critical accounting assessments.
DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING
During the three months ended March 31, 2021, there were no changes to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
14
| Management's Discussion and Analysis | |||||||
SUMMARY OF QUARTERLY RESULTS
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, restructuring charges, stock-based compensation awards and foreign exchange impacts. Net income (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
| Three months ended | 30-Jun-19 | 30-Sep-19 | 31-Dec-19 | 31-Mar-20 | 30-Jun-20 | 30-Sep-20 | 31-Dec-20 | 31-Mar-21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (expressed in millions of U.S. dollars except for per share amounts) | (1) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total revenue | $ | 82.4 | $ | 75.4 | $ | 74.3 | $ | 67.2 | $ | 36.0 | $ | 65.4 | $ | 83.9 | $ | 76.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cost of revenue | $ | 63.1 | $ | 57.5 | $ | 60.5 | $ | 62.9 | $ | 23.8 | $ | 55.4 | $ | 70.9 | $ | 63.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross margin | $ | 19.3 | $ | 17.9 | $ | 13.8 | $ | 4.3 | $ | 12.2 | $ | 10.0 | $ | 13.0 | $ | 13.0 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross margin % | 23.4 | % | 23.7 | % | 18.6 | % | 6.4 | % | 33.9 | % | 15.3 | % | 15.5 | % | 17.0 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) from continuing operations | $ | (2.3) | $ | 4.9 | $ | 0.6 | $ | (15.3) | $ | 3.0 | $ | 0.8 | $ | 4.1 | $ | (3.1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | (2.6) | $ | 5.0 | $ | 0.7 | $ | (15.3) | $ | 3.0 | $ | 0.8 | $ | 4.1 | $ | (3.1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EBITDA (3) | $ | 4.0 | $ | 11.7 | $ | 5.0 | $ | (11.1) | $ | 9.2 | $ | 4.9 | $ | 13.1 | $ | 1.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA (4) | $ | 8.1 | $ | 9.4 | $ | 3.6 | $ | (3.6) | $ | 6.2 | $ | 4.0 | $ | 8.1 | $ | 2.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. dollar to Euro average exchange rate | 0.89 | 0.90 | 0.90 | 0.91 | 0.91 | 0.85 | 0.84 | 0.83 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. dollar to Canadian dollar average exchange rate | 1.33 | 1.32 | 1.32 | 1.35 | 1.39 | 1.33 | 1.30 | 1.27 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Earnings (loss) per share | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basic and diluted from continuing operations | $ | (0.02) | $ | 0.04 | $ | 0.00 | $ | (0.11) | $ | 0.02 | $ | 0.01 | $ | 0.03 | $ | (0.02) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basic and diluted | $ | (0.02) | $ | 0.04 | $ | 0.00 | $ | (0.11) | $ | 0.02 | $ | 0.01 | $ | 0.03 | $ | (0.02) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CWI net income attributable to the Company | $ | 5.9 | $ | 5.4 | $ | 6.7 | $ | 5.3 | $ | 4.2 | $ | 4.9 | $ | 9.4 | $ | 6.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) During the first quarter of 2020, we recorded a $10.0 million expense related to a field service campaign as discussed in the "Gross Margin" section of this MD&A.
(2) During the second quarter of 2020, we recorded a $7.7 million insurance recovery related to the field service campaign as discussed in the "Gross Margin" section of this MD&A.
(3) 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.
(4) 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 Fuel Systems defines Adjusted EBITDA as EBITDA adjusted for amortization of stock-based compensation, unrealized foreign exchange gain or loss, and non-cash and other adjustments. See non-GAAP measures for more information.
15
| Management's Discussion and Analysis | |||||||
Non-GAAP Measures:
We have included certain non-GAAP performance measures throughout this MD&A. These performance measures are employed by us internally to measure operating and economic performance and to assist in business decision-making, as well as providing key performance information to senior management. We believe that, in addition to conventional measures prepared in accordance with U.S. GAAP, certain investors and other stakeholders also use this information to evaluate our operating and financial performance; however, these non-GAAP performance measures do not have any standardized meaning. Accordingly, these performance measures are intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with U.S. GAAP.
Non-GAAP Measures - EBITDA and Adjusted EBITDA
Our condensed consolidated interim financial statements are prepared in accordance with U.S. GAAP. These U.S. GAAP financial statements include non-cash charges and other charges and benefits that may be unusual or infrequent in nature or that we believe may make comparisons to our prior or future performance difficult. In addition to conventional measures prepared in accordance with U.S. GAAP, Westport Fuel Systems and certain investors use EBITDA and Adjusted EBITDA as an indicator of our ability to generate liquidity by producing operating cash flow to fund working capital needs, service debt obligations and fund capital expenditures. Management also uses these non-GAAP measures in its review and evaluation of the financial performance of Westport Fuel Systems. EBITDA is also frequently used by investors and analysts for valuation purposes whereby EBITDA is multiplied by a factor or "EBITDA multiple" that is based on an observed or inferred relationship between EBITDA and market values to determine the approximate total enterprise value of a company. We believe that these non-GAAP financial measures also provide additional insight to investors and securities analysts as supplemental information to our U.S. GAAP results and as a basis to compare our financial performance period-over-period and to compare our financial performance with that of other companies. We believe that these non-GAAP financial measures facilitate comparisons of our core operating results from period to period and to other companies by, in the case of EBITDA, removing the effects of our capital structure (net interest income on cash deposits, interest expense on outstanding debt and debt facilities), asset base (depreciation and amortization) and tax consequences. Adjusted EBITDA provides this same indicator of Westport Fuel Systems' EBITDA from continuing operations and removing such effects of our capital structure, asset base and tax consequences, but additionally excludes any unrealized foreign exchange gains or losses, stock-based compensation charges and other one-time impairments and costs which are not expected to be repeated in order to provide greater insight into the cash flow being produced from our operating business, without the influence of extraneous events.
EBITDA and Adjusted EBITDA are intended to provide additional information to investors and analysts and do not have any standardized definition under U.S. GAAP, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with U.S. GAAP. EBITDA and Adjusted EBITDA exclude the impact of cash costs of financing activities and taxes, and the effects of changes in operating working capital balances, and therefore are not necessarily indicative of operating profit or cash flow from operations as determined under U.S. GAAP. Other companies may calculate EBITDA and Adjusted EBITDA differently.
EBITDA
Westport Fuel Systems defines EBITDA as net income or loss from continuing operations before income taxes adjusted for net interest expense and depreciation and amortization
| Three months ended | 30-Jun-19 | 30-Sep-19 | 31-Dec-19 | 31-Mar-20 | 30-Jun-20 | 30-Sep-20 | 31-Dec-20 | 31-Mar-21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Income (loss) before income taxes from continuing operations | $ | (1.4) | $ | 5.7 | $ | (0.3) | $ | (16.0) | $ | 4.6 | $ | 0.2 | $ | 5.3 | $ | (2.8) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net (1) | 1.4 | 1.8 | 1.5 | 1.5 | 1.2 | 1.3 | 4.0 | 1.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 4.0 | 4.2 | 3.8 | 3.4 | 3.4 | 3.4 | 3.8 | 3.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EBITDA | $ | 4.0 | $ | 11.7 | $ | 5.0 | $ | (11.1) | $ | 9.2 | $ | 4.9 | $ | 13.1 | $ | 1.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) Interest expense, net is calculated as interest and other income, net of bank charges and interest on long-term debt and other payables and amortization of discount.
16
| Management's Discussion and Analysis | |||||||
Non-GAAP Measures (continued):
Adjusted EBITDA
Westport Fuel Systems defines Adjusted EBITDA as EBITDA from continuing operations adjusted for stock-based compensation, unrealized foreign exchange gains or losses, and non-cash and other adjustments.
| Three months ended | 30-Jun-19 | 30-Sep-19 | 31-Dec-19 | 31-Mar-20 | 30-Jun-20 | 30-Sep-20 | 31-Dec-20 | 31-Mar-21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EBITDA | $ | 4.0 | $ | 11.7 | $ | 5.0 | $ | (11.1) | $ | 9.2 | $ | 4.9 | $ | 13.1 | $ | 1.9 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | 0.3 | 0.3 | 0.5 | 0.6 | 0.6 | 0.9 | 0.3 | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized foreign exchange (gain) loss | (0.7) | 0.7 | (2.6) | 6.9 | (3.6) | (2.3) | (5.3) | 0.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Intangible impairment | — | — | 0.7 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Asset impairment | — | — | — | — | — | 0.5 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Legal costs associated with SEC investigation | 4.5 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | (3.3) | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | 8.1 | $ | 9.4 | $ | 3.6 | $ | (3.6) | $ | 6.2 | $ | 4.0 | $ | 8.1 | $ | 2.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
17
Condensed Consolidated Interim Financial Statements (unaudited)
(Expressed in thousands of United States dollars)
WESTPORT FUEL SYSTEMS INC.
For the three months ended March 31, 2021 and 2020
| WESTPORT FUEL SYSTEMS INC. | ||
| Condensed Consolidated Interim Balance Sheets (unaudited) | ||
| (Expressed in thousands of United States dollars, except share amounts) | ||
| March 31, 2021 and December 31, 2020 | ||
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Assets | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents (including restricted cash) | $ | 59,746 | $ | 64,262 | ||||||||||
| Accounts receivable (note 4) | 81,157 | 90,467 | ||||||||||||
| Inventories (note 5) | 57,130 | 51,402 | ||||||||||||
| Prepaid expenses | 7,098 | 11,767 | ||||||||||||
| Short-term investment (note 6) | 9,433 | — | ||||||||||||
| Total current assets | 214,564 | 217,898 | ||||||||||||
| Long-term investments (note 7) | 3,163 | 13,954 | ||||||||||||
| Property, plant and equipment (note 8) | 54,986 | 57,507 | ||||||||||||
| Operating lease right-of-use assets (note 11) | 32,409 | 27,962 | ||||||||||||
| Intangible assets (note 9) | 10,850 | 11,784 | ||||||||||||
| Deferred income tax assets | 1,957 | 2,140 | ||||||||||||
| Goodwill | 3,252 | 3,397 | ||||||||||||
| Other long-term assets | 12,136 | 11,621 | ||||||||||||
| Total assets | $ | 333,317 | $ | 346,263 | ||||||||||
| Liabilities and shareholders’ equity | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable and accrued liabilities (note 10) | $ | 81,325 | $ | 84,599 | ||||||||||
| Current portion of operating lease liabilities (note 11) | 4,952 | 4,476 | ||||||||||||
| Short-term debt (note 12) | 7,888 | 23,445 | ||||||||||||
| Current portion of long-term debt (note 13) | 16,624 | 16,302 | ||||||||||||
| Current portion of long-term royalty payable (note 14) | 7,451 | 7,451 | ||||||||||||
| Current portion of warranty liability (note 15) | 11,056 | 10,749 | ||||||||||||
| Total current liabilities | 129,296 | 147,022 | ||||||||||||
| Long-term operating lease liabilities (note 11) | 27,235 | 23,486 | ||||||||||||
| Long-term debt (note 13) | 37,700 | 45,651 | ||||||||||||
| Long-term royalty payable (note 14) | 9,096 | 8,591 | ||||||||||||
| Warranty liability (note 15) | 7,168 | 8,187 | ||||||||||||
| Deferred income tax liabilities | 2,996 | 3,250 | ||||||||||||
| Other long-term liabilities | 5,624 | 6,017 | ||||||||||||
| Total liabilities | 219,115 | 242,204 | ||||||||||||
| Shareholders’ equity: | ||||||||||||||
| Share capital (note 16): | ||||||||||||||
| Unlimited common and preferred shares, no par value | ||||||||||||||
147,848,018 (2020 - 144,069,972) common shares | 1,130,895 | 1,115,092 | ||||||||||||
| Other equity instruments | 7,305 | 7,671 | ||||||||||||
| Additional paid-in-capital | 11,516 | 11,516 | ||||||||||||
| Accumulated deficit | (1,008,819) | (1,005,679) | ||||||||||||
| Accumulated other comprehensive loss | (26,695) | (24,541) | ||||||||||||
| Total shareholders' equity | 114,202 | 104,059 | ||||||||||||
| Total liabilities and shareholders' equity | $ | 333,317 | $ | 346,263 | ||||||||||
| Commitments and contingencies (note 18) | ||||||||||||||
| Subsequent events (note 13(a)) | ||||||||||||||
See accompanying notes to condensed consolidated interim financial statements.
| Approved on behalf of the Board: | Rita Forst | Director | Brenda J. Eprile | Director | |||||||||||||
1
| WESTPORT FUEL SYSTEMS INC. | ||
| Condensed Consolidated Interim Statements of Operations and Comprehensive Loss (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
| Three months ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Revenue | $ | 76,443 | $ | 67,223 | ||||||||||||||||||||||
| Cost of revenue and expenses: | ||||||||||||||||||||||||||
| Cost of revenue | 63,426 | 62,948 | ||||||||||||||||||||||||
| Research and development | 6,712 | 5,800 | ||||||||||||||||||||||||
| General and administrative | 9,290 | 6,632 | ||||||||||||||||||||||||
| Sales and marketing | 2,931 | 3,325 | ||||||||||||||||||||||||
| Foreign exchange loss | 731 | 6,895 | ||||||||||||||||||||||||
| Depreciation and amortization | 1,510 | 1,496 | ||||||||||||||||||||||||
| 84,600 | 87,096 | |||||||||||||||||||||||||
| Loss from operations | (8,157) | (19,873) | ||||||||||||||||||||||||
| Income from investments accounted for by the equity method | 6,577 | 5,367 | ||||||||||||||||||||||||
| Interest on long-term debt and accretion on royalty payable | (1,749) | (1,552) | ||||||||||||||||||||||||
| Interest and other income, net of bank charges | 547 | 85 | ||||||||||||||||||||||||
| Loss before income taxes | (2,782) | (15,973) | ||||||||||||||||||||||||
| Income tax expense (recovery) | 358 | (684) | ||||||||||||||||||||||||
| Net loss for the period | (3,140) | (15,289) | ||||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||
| Cumulative translation adjustment | (2,154) | 169 | ||||||||||||||||||||||||
| Comprehensive loss | $ | (5,294) | $ | (15,120) | ||||||||||||||||||||||
| Loss per share: | ||||||||||||||||||||||||||
| Net loss per share - basic and diluted | $ | (0.02) | $ | (0.11) | ||||||||||||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||||||||||||
| Basic and diluted | 147,126,250 | 136,429,224 | ||||||||||||||||||||||||
See accompanying notes to condensed consolidated interim financial statements.
2
| WESTPORT FUEL SYSTEMS INC. | ||
| Condensed Consolidated Interim Statements of Shareholders’ Equity (unaudited) | ||
| (Expressed in thousands of United States dollars, except share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
| Common Shares Outstanding | Share capital | Other equity instruments | Additional paid in capital | Accumulated deficit | Accumulated other comprehensive loss | Total shareholders' equity | ||||||||||||||||||||||||||||||||||||||
| January 1, 2020 | 136,416,981 | $ | 1,094,633 | $ | 6,857 | $ | 10,079 | $ | (998,320) | $ | (23,890) | $ | 89,359 | |||||||||||||||||||||||||||||||
| Issuance of common shares on exercise of share units | 48,891 | 87 | (87) | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 591 | — | — | — | 591 | |||||||||||||||||||||||||||||||||||||
| Net loss for the period | — | — | — | — | (15,289) | — | (15,289) | |||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 169 | 169 | |||||||||||||||||||||||||||||||||||||
| March 31, 2020 | 136,465,872 | $ | 1,094,720 | $ | 7,361 | $ | 10,079 | $ | (1,013,609) | $ | (23,721) | $ | 74,830 | |||||||||||||||||||||||||||||||
| January 1, 2021 | 144,069,972 | $ | 1,115,092 | $ | 7,671 | $ | 11,516 | $ | (1,005,679) | $ | (24,541) | $ | 104,059 | |||||||||||||||||||||||||||||||
| Issuance of common shares on exercise of share units | 143,217 | 420 | (420) | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Issuance of common shares on conversion of convertible debt | 1,815,117 | 2,577 | — | — | — | — | 2,577 | |||||||||||||||||||||||||||||||||||||
| Issuance of common shares on at-the-market public offering, net of costs incurred | 1,819,712 | 12,806 | — | — | — | — | 12,806 | |||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 54 | — | — | — | 54 | |||||||||||||||||||||||||||||||||||||
| Net loss for the period | — | — | — | — | (3,140) | — | (3,140) | |||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | (2,154) | (2,154) | |||||||||||||||||||||||||||||||||||||
| March 31, 2021 | 147,848,018 | $ | 1,130,895 | $ | 7,305 | $ | 11,516 | $ | (1,008,819) | $ | (26,695) | $ | 114,202 | |||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated interim financial statements.
3
| WESTPORT FUEL SYSTEMS INC. | ||
| Condensed Consolidated Interim Statements of Cash Flows (unaudited) | ||
| (Expressed in thousands of United States dollars) | ||
| Three months ended March 31, 2021 and 2020 | ||
| Three months ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Cash flows from (used in) operating activities: | ||||||||||||||||||||||||||
| Net loss for the period | $ | (3,140) | $ | (15,289) | ||||||||||||||||||||||
| Items not involving cash: | ||||||||||||||||||||||||||
| Depreciation and amortization | 3,473 | 3,369 | ||||||||||||||||||||||||
| Stock-based compensation expense | 84 | 624 | ||||||||||||||||||||||||
| Unrealized foreign exchange loss | 731 | 6,895 | ||||||||||||||||||||||||
| Deferred income tax | (190) | (2,141) | ||||||||||||||||||||||||
| Income from investments accounted for by the equity method | (6,577) | (5,367) | ||||||||||||||||||||||||
| Interest on long-term debt and accretion of royalty payable | 1,749 | 1,552 | ||||||||||||||||||||||||
| Change in inventory write-downs to net realizable value | 198 | (317) | ||||||||||||||||||||||||
| Change in bad debts expense | 48 | 38 | ||||||||||||||||||||||||
| Net cash used before working capital changes | (3,624) | (10,636) | ||||||||||||||||||||||||
| Changes in non-cash operating working capital: | ||||||||||||||||||||||||||
| Accounts receivable | 6,797 | 576 | ||||||||||||||||||||||||
| Inventories | (6,875) | (3,727) | ||||||||||||||||||||||||
| Prepaid and other assets | 3,842 | (640) | ||||||||||||||||||||||||
| Accounts payable and accrued liabilities | (3,343) | (5,696) | ||||||||||||||||||||||||
| Warranty liability | 620 | 10,315 | ||||||||||||||||||||||||
| Net cash used in operating activities | (2,583) | (9,808) | ||||||||||||||||||||||||
| Cash flows from (used in) investing activities: | ||||||||||||||||||||||||||
| Purchase of property, plant and equipment and other assets | (1,662) | (1,624) | ||||||||||||||||||||||||
| Proceeds on sale of investments and assets | 316 | — | ||||||||||||||||||||||||
| Dividends received from joint ventures | 7,878 | 5,823 | ||||||||||||||||||||||||
| Net cash from investing activities | 6,532 | 4,199 | ||||||||||||||||||||||||
| Cash flows from (used in) financing activities: | ||||||||||||||||||||||||||
| Payments under short and long-term facilities | (23,221) | (11,717) | ||||||||||||||||||||||||
| Drawings on operating lines of credit | 4,605 | 11,070 | ||||||||||||||||||||||||
| Proceeds from share issuance, net | 12,805 | — | ||||||||||||||||||||||||
| Net cash used in financing activities | (5,811) | (647) | ||||||||||||||||||||||||
| Effect of foreign exchange on cash and cash equivalents | (2,654) | (664) | ||||||||||||||||||||||||
| Decrease in cash and cash equivalents | (4,516) | (6,920) | ||||||||||||||||||||||||
| Cash and cash equivalents, beginning of period (including restricted cash) | 64,262 | 46,012 | ||||||||||||||||||||||||
| Cash and cash equivalents, end of period (including restricted cash) | $ | 59,746 | $ | 39,092 | ||||||||||||||||||||||
4
| WESTPORT FUEL SYSTEMS INC. | ||
| Condensed Consolidated Statements of Cash Flows (unaudited) | ||
| (Expressed in thousands of United States dollars) | ||
| Three months ended March 31, 2021 and 2020 | ||
| Three months ended March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Supplementary information: | |||||||||||||||||||||||
| Interest paid | $ | 812 | $ | 1,925 | |||||||||||||||||||
| Taxes paid (refund), net of refunds | 457 | (187) | |||||||||||||||||||||
Refer to note 16 for non-cash transactions
See accompanying notes to condensed consolidated interim financial statements.
5
| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
1. Company organization and operations:
Westport Fuel Systems Inc. (the “Company”) was incorporated under the Business Corporations Act (Alberta) on March 20, 1995. The Company engineers, manufactures and supplies alternative fuel systems and components for use in transportation markets on a global basis. The Company's components and systems control the pressure and flow of gaseous alternative fuels, such as propane and natural gas used in internal combustion engines.
2. Liquidity and going concern
(a) Impact of COVID-19
The COVID-19 pandemic has impacted the Company's business since March 2020. The extent, duration and impact of COVID-19 is uncertain, however since the second half of 2020, the Company's sales and customer demand has rebounded and remained relatively stable during the first quarter of 2021. The Company's production plants located Northern Italy closed temporarily during the first half of 2020 due to the COVID-19 pandemic, but have since remained open and are in full production in 2021.
While the demand for medium and heavy-duty trucks has increased due to an ongoing need for freight transportation and the growing demand for more climate-friendly vehicles in markets with favourable fuel price economics, sales of the Company's heavy-duty business were adversely affected in 2021 by the impact of the global shortage of semiconductors experienced by its initial High Pressure Direct Injection ("Westport HPDI 2.0TM" or "HPDI") Original Equipment Manufacturer ("OEM") launch partner.
The Company's light-duty OEM and Delayed OEM ("DOEM") businesses are dependent on new vehicle sales with gaseous fuel systems. Sales revenue from light-duty OEM business recovered significantly in the first quarter of 2021, to levels slightly below pre-COVID-19. Sales revenue from DOEM business declined compared to the same period in the prior year. Future results may be impacted by the global supply and effectiveness of vaccines and new virus variants may adversely affect customer demand going forward.
Management is closely monitoring and making efforts to mitigate the impact of COVID-19 on the Company's business. The Company has significant operations in Italy where there has been a high number of cases of COVID-19. The Company also sources components from China, which has been impacted by the global supply chain for semiconductor chips and other materials. At this time, management does not expect a material impact to its business; however, the situation is evolving and could become material if the supply chain disruption is prolonged or end customer demand declines.
In response to pandemic, the Company has undertaken numerous financing actions and implemented multiple austerity measures, including actions to reduce costs, such as salary and other compensation deferrals and reductions, and delaying non-critical projects and capital expenditures to secure liquidity and improve its ability to fund its operations. The Company continues to work closely with its key lenders to strengthen its liquidity and reduce its cost of capital through both debt and equity financing. The Company is also participating in government wage-subsidy and other support programs in the countries where it operates. The Company has received $198 in the three months ended March 31, 2021 ($467 in the three months ended March 31, 2020) related to these programs.
6
| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
2. Liquidity and going concern (continued):
(b) Liquidity and going concern
In connection with preparing consolidated financial statements for each annual and interim reporting period, the Company is required to evaluate whether there are conditions or events, considered in aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Substantial doubt exists when conditions and events, considered in the aggregate, indicate that it is probable that a company will be unable to meet its obligations as they become due within one year after the date that the consolidated financial statements are issued. This evaluation initially does not take into consideration the potential mitigating effect of management’s plans and actions that have not been fully implemented as of the date that the financial statements are issued. When substantial doubt exists, management evaluates whether the mitigating effect of its plans sufficiently alleviates substantial doubt about the Company’s ability to continue as a going concern. The mitigating effect of management’s plans, however, is only considered if both: (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued; and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. Generally, to be considered probable of being effectively implemented, the plans must have been approved before the date that the financial statements are issued.
Management's evaluation has concluded that there are no known or currently foreseeable conditions or events that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date these condensed consolidated interim financial statements are issued. These condensed consolidated interim financial statements have therefore been prepared on the basis that the Company will continue as a going concern.
The assessment of the liquidity and going concern requires the Company to make judgments about the existence of conditions or events that raise substantial doubt about the ability to continue as a going concern within one year after the date that the consolidated financial statements are issued. This includes judgments about the Company's future activities and the timing thereof and estimates of future cash flows. Significant assumptions used in the Company's forecasted model of liquidity include forecasted sales, including forecasted increases in sales of the heavy-duty OEM business, forecasted costs and capital expenditures, amongst others. Changes in the assumptions could have a material impact on the forecasted liquidity and going concern assessment.
The Company believes that it has considered all possible impacts of known events arising from the COVID-19 pandemic in the preparation of the condensed consolidated interim financial statements; however, changes in circumstances due to COVID-19 could impact management's judgments and estimates associated with the liquidity and going concern assessment, and other critical accounting assessments.
At March 31, 2021, the Company's net working capital was $85,268 including cash and cash equivalents of $59,746. The Company's short-term and long-term debt, including the royalty payable, was $78,759, of which $27,760 matures in 2021 and $39,300 matures by May 31, 2022. The Company has another $2,085 in cash pledged to the repayment of the debt it holds in its Italian subsidiaries recorded in other long-term assets. During the quarter, the Company incurred a loss of $3,140 and negative cash flows from operating activities of $2,583, generated cash of $6,532 from investing activities and used cash of $5,811 in financing activities.
As part of its liquidity and funding management, the Company is evaluating foreseeable future cash flows from the Cummins Westport joint venture, as the joint venture term is scheduled to end on December 31, 2021. The joint venture pays significant dividends to the joint venture partners, with the Company receiving $7,878 as dividends in the three months ended March 31, 2021 (three months ended March 31, 2020 - $5,823). As per the joint venture agreement, both Cummins Inc. and the Company have equal rights to the joint venture’s intellectual property. However, there is no certainty that the Company will be able to monetize the intellectual property on a recurring basis to the level of the current dividends received from the joint venture. See notes 6 and 7(a) for additional details related to the Cummins Westport joint venture.
7
| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
2. Liquidity and going concern (continued):
Management believes that the cash on hand at March 31, 2021, the continued recovery of OEM and Independent Aftermarket ("IAM") businesses and the growth of its HD OEM business, coupled with current committed capital, will provide the cash flow necessary to fund operations over the next year to May 2022. The ability to continue as a going concern beyond May 2022 will be dependent on the Company's ability to generate sufficient positive cash flows from operations, successful conversion of or refinancing of the convertible debt, effective management of the Cummins Westport joint venture transition and on the Company's ability to finance its long term strategic objectives and operations (specifically the growth of the HPDI business). If, as a result of future events, the Company was to determine it was no longer able to continue as a going concern, significant adjustments would be required to the carrying value of assets and liabilities in the accompanying, consolidated financial statements and the adjustments could be material.
3. Basis of preparation:
(a) Basis of presentation:
These interim financial statements have been prepared in accordance with U.S. GAAP.
These interim financial statements do not include all note disclosures required on an annual basis, and therefore, should be read in conjunction with the annual audited consolidated financial statements for the year ended December 31, 2020, filed with the appropriate securities regulatory authorities. The Company followed the same policies and procedures as in the annual audited consolidated financial statements for the year ended December 31, 2020.
In the opinion of management, all adjustments, which include reclassifications and normal recurring adjustments necessary to present fairly the condensed consolidated interim balance sheets, condensed consolidated interim results of operations and comprehensive loss, condensed consolidated interim statements of shareholders' equity and condensed consolidated interim cash flows as at March 31, 2021 and for all periods presented, have been recorded. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results for the Company's full year.
(b) Foreign currency translation:
The Company’s functional currency is the Canadian dollar and its reporting currency for its consolidated financial statement presentation is the United States dollar ("U.S. Dollar"). The functional currencies for the Company's subsidiaries include the following: U.S. dollar, Canadian dollar, Euro, Argentina Peso, Chinese Renminbi (“RMB”), Swedish Krona, and Indian Rupee. 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 currencies of the Company’s or its subsidiaries' operations are translated at the rates 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 rates 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 and losses arising from available-for-sale instruments, which are recorded through other comprehensive income until realized through disposal or impairment.
8
| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
3. Basis of preparation (continued):
Except as otherwise noted, all amounts in these interim financial statements are presented in thousands of U.S. dollars. For the periods presented, the Company used the following exchange rates:
| Period ended | Average for the three months ended | ||||||||||||||||||||||||||||||||||
| March 31, 2021 | December 31, 2020 | March 31, 2021 | March 31, 2020 | ||||||||||||||||||||||||||||||||
| Canadian dollar | 1.26 | 1.27 | 1.27 | 1.34 | |||||||||||||||||||||||||||||||
| Euro | 0.85 | 0.82 | 0.83 | 0.91 | |||||||||||||||||||||||||||||||
| Argentina Peso | 91.86 | 84.06 | 132.54 | 61.52 | |||||||||||||||||||||||||||||||
| RMB | 6.55 | 6.53 | 6.48 | 6.98 | |||||||||||||||||||||||||||||||
| Swedish Krona | 8.72 | 8.19 | 8.39 | 9.68 | |||||||||||||||||||||||||||||||
| Indian Rupee | 73.15 | 73.00 | 72.92 | 72.42 | |||||||||||||||||||||||||||||||
4. Accounts receivable:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Customer trade receivables | $ | 72,358 | $ | 81,968 | ||||||||||
| Other receivables | 14,857 | 14,967 | ||||||||||||
| Income tax receivable | 68 | 52 | ||||||||||||
| Due from related parties (note 6) | 263 | 74 | ||||||||||||
| Allowance for doubtful accounts | (6,389) | (6,594) | ||||||||||||
| $ | 81,157 | $ | 90,467 | |||||||||||
5. Inventories:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Purchased parts | $ | 43,705 | $ | 36,066 | ||||||||||
| Work-in-process | 2,412 | 3,203 | ||||||||||||
| Finished goods | 11,013 | 12,133 | ||||||||||||
| $ | 57,130 | $ | 51,402 | |||||||||||
During the three months ended March 31, 2021, the net change in inventory provision is an increase of $198 (three months ended March 31, 2020 - recovery of $317).
9
| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
6. Short-term investment:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Cummins Westport Inc. | $ | 9,433 | $ | — | ||||||||||
The Company and Cummins Inc. (“Cummins”) each own 50% of the common shares of CWI. For the three months ended March 31, 2021, the Company recognized its share of CWI’s income of $6,445 (three months ended March 31, 2020 - $5,304) in income from investments accounted for by the equity method. The CWI joint venture term is scheduled to end on December 31, 2021 and therefore, the investment in CWI was reclassified as short-term investment from long-term investment as at March 31, 2021.
As at March 31, 2021, the Company has a related party accounts receivable balance of $263 (December 31, 2020 - $74) due from CWI.
Assets, liabilities, revenue and expenses of CWI are as follows:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Current assets: | ||||||||||||||
| Cash and short-term investments | $ | 99,192 | $ | 94,984 | ||||||||||
| Accounts receivable | 2,931 | 5,681 | ||||||||||||
| 102,123 | 100,665 | |||||||||||||
| Long-term assets: | ||||||||||||||
| Property, plant and equipment | 548 | 605 | ||||||||||||
| Deferred income tax assets | 21,767 | 21,651 | ||||||||||||
| 22,315 | 22,256 | |||||||||||||
| Total assets | $ | 124,438 | $ | 122,921 | ||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable and accrued liabilities | $ | 9,321 | $ | 5,557 | ||||||||||
| Current portion of warranty liability | 20,278 | 19,485 | ||||||||||||
| Current portion of deferred revenue | 13,069 | 13,628 | ||||||||||||
| 42,668 | 38,670 | |||||||||||||
| Long-term liabilities: | ||||||||||||||
| Warranty liability | 35,154 | 34,737 | ||||||||||||
| Deferred revenue | 23,538 | 23,802 | ||||||||||||
| Other long-term liabilities | 4,201 | 3,969 | ||||||||||||
| 62,893 | 62,508 | |||||||||||||
| Total liabilities | $ | 105,561 | $ | 101,178 | ||||||||||
10
| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
6. Short-term investment (continued):
| Three months ended March 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Product revenue | $ | 56,514 | $ | 47,546 | ||||||||||
| Parts revenue | 25,784 | 29,122 | ||||||||||||
| 82,298 | 76,668 | |||||||||||||
| Cost of revenue and expenses: | ||||||||||||||
| Cost of product and parts revenue | 61,293 | 55,027 | ||||||||||||
| Research and development | 1,236 | 4,465 | ||||||||||||
| General and administrative | 406 | 349 | ||||||||||||
| Sales and marketing | 2,219 | 3,387 | ||||||||||||
| 65,154 | 63,228 | |||||||||||||
| Income from operations | 17,144 | 13,440 | ||||||||||||
| Interest and investment income | 140 | 498 | ||||||||||||
| Income before income taxes | 17,284 | 13,938 | ||||||||||||
| Income tax expense | 4,395 | 3,330 | ||||||||||||
| Net income | $ | 12,889 | $ | 10,608 | ||||||||||
7. Long-term investments:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Cummins Westport Inc. (a) | $ | — | $ | 10,866 | ||||||||||
| Weichai Westport Inc. (b) | 1,824 | 1,824 | ||||||||||||
| Minda Westport Technologies Limited | 1,191 | 1,116 | ||||||||||||
| Other equity-accounted investees | 148 | 148 | ||||||||||||
| $ | 3,163 | $ | 13,954 | |||||||||||
(a) Cummins Westport Inc.:
The CWI joint venture term is scheduled to end on December 31, 2021. Additional details related to the CWI joint venture are included in note 6.
(b) Weichai Westport Inc.:
The Company, indirectly through its wholly-owned subsidiary, Westport Innovations (Hong Kong) Limited (“Westport HK”), is currently the registered holder of a 23.33% equity interest in WWI. In April 2016, the Company sold to Cartesian entities a derivative economic interest granting it the right to receive an amount of future income received by Westport HK from WWI equivalent to having an 18.78% equity interest in WWI and concurrently granted a Cartesian entity an option to acquire all of the equity securities of Westport HK for a nominal amount. The Company retained the right to transfer any equity interest held by Westport HK in WWI that was in excess of an 18.78% interest in the event that such option was exercised. As a result of such transactions, the Company’s residual 23.33% equity interest in WWI currently corresponds to an economic interest in WWI equivalent to just 4.55%.
Cartesian is a global private equity firm based in New York that has investments in the Company. Various Cartesian entities are associated with these investments including Pangaea Two Management, LP; Pangaea Two Acquisition Holdings XIV, LLC; Pangaea Two Acquisition Holdings Parallel XIV, LLC. Collectively, these entities will be referred to as “Cartesian”. In addition, Peter Yu, the founder and managing partner of Cartesian, was elected as a Director of the Company in January 2016 and resigned as a Director of the Company in July 2020. See notes 13(b) and 14 for additional details of Cartesian’s investments in the Company.
11
| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
8. Property, plant and equipment:
| Accumulated | Net book | |||||||||||||||||||
| March 31, 2021 | Cost | depreciation | value | |||||||||||||||||
| Land and buildings | $ | 5,193 | $ | 1,738 | $ | 3,455 | ||||||||||||||
| Computer equipment and software | 7,044 | 5,540 | 1,504 | |||||||||||||||||
| Furniture and fixtures | 5,507 | 4,663 | 844 | |||||||||||||||||
| Machinery and equipment | 102,130 | 56,704 | 45,426 | |||||||||||||||||
| Leasehold improvements | 13,336 | 9,579 | 3,757 | |||||||||||||||||
| $ | 133,210 | $ | 78,224 | $ | 54,986 | |||||||||||||||
| Accumulated | Net book | |||||||||||||||||||
| December 31, 2020 | Cost | depreciation | value | |||||||||||||||||
| Land and buildings | $ | 5,303 | $ | 1,701 | $ | 3,602 | ||||||||||||||
| Computer equipment and software | 7,045 | 5,570 | 1,475 | |||||||||||||||||
| Furniture and fixtures | 4,968 | 4,148 | 820 | |||||||||||||||||
| Machinery and equipment | 102,834 | 54,387 | 48,447 | |||||||||||||||||
| Leasehold improvements | 12,479 | 9,316 | 3,163 | |||||||||||||||||
| $ | 132,629 | $ | 75,122 | $ | 57,507 | |||||||||||||||
9. Intangible Assets:
| Accumulated | Net book | |||||||||||||||||||
| March 31, 2021 | Cost | amortization | value | |||||||||||||||||
| Brands, patents and trademarks | $ | 20,594 | $ | 11,186 | $ | 9,408 | ||||||||||||||
| Technology | 5,783 | 5,396 | 387 | |||||||||||||||||
| Customer contracts | 12,687 | 11,782 | 905 | |||||||||||||||||
| Other intangibles | 457 | 307 | 150 | |||||||||||||||||
| Total | $ | 39,521 | $ | 28,671 | $ | 10,850 | ||||||||||||||
| Accumulated | Net book | |||||||||||||||||||
| December 31, 2020 | Cost | amortization | value | |||||||||||||||||
| Patents and trademarks | $ | 21,763 | $ | 11,513 | $ | 10,250 | ||||||||||||||
| Technology | 6,040 | 5,613 | 427 | |||||||||||||||||
| Customer contracts | 13,234 | 12,283 | 951 | |||||||||||||||||
| Other intangibles | 477 | 321 | 156 | |||||||||||||||||
| Total | $ | 41,514 | $ | 29,730 | $ | 11,784 | ||||||||||||||
12
| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
10. Accounts payable and accrued liabilities:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Trade accounts payable | $ | 59,027 | $ | 57,307 | ||||||||||
| Accrued payroll | 15,536 | 14,737 | ||||||||||||
| Taxes payable | 4,111 | 3,905 | ||||||||||||
| Deferred revenue | 2,542 | 8,008 | ||||||||||||
| Accrued interest | 109 | 137 | ||||||||||||
| Other payables | — | 505 | ||||||||||||
| $ | 81,325 | $ | 84,599 | |||||||||||
11. Operating lease right-of-use assets and lease liabilities:
The Company has entered into various non-cancellable operating lease agreements primarily for its manufacturing facilities and offices. The Company's leases have lease terms expiring between 2021 and 2033. Many leases include one or more options to renew. The Company does not assume renewals in its determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. The average remaining lease term is approximately five years and the present value of the outstanding operating lease liability was determined applying a weighted average discount rate of 3.0% based on incremental borrowing rates applicable in each location.
The components of lease cost are as follows:
| Three months ended March 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Operating lease cost: | ||||||||||||||
| Amortization of right-of-use assets | $ | 973 | $ | 687 | ||||||||||
| Interest | 210 | 154 | ||||||||||||
| Total lease cost | $ | 1,183 | $ | 841 | ||||||||||
The maturities of lease liabilities as at March 31, 2021 are as follows:
| The remainder of 2021 | $ | 3,921 | ||||||
| 2022 | 4,125 | |||||||
| 2023 | 3,575 | |||||||
| 2024 | 3,159 | |||||||
| 2025 | 2,622 | |||||||
| Thereafter | 20,145 | |||||||
| Total undiscounted cash flows | 37,547 | |||||||
| Less imputed interest | (5,360) | |||||||
| Present value of operating lease liabilities | 32,187 | |||||||
| Less: current portion | (4,952) | |||||||
| Long term operating lease liabilities | $ | 27,235 | ||||||
13
| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
12. Short-term debt:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Revolving financing facility (a) | $ | 1,871 | $ | 17,428 | ||||||||||
| Credit facility (b) | 6,017 | 6,017 | ||||||||||||
| Balance, end of period | $ | 7,888 | $ | 23,445 | ||||||||||
(a) The Company has a revolving financing facility with HSBC. This facility is secured by certain receivables of the Company and the maximum draw amount is $20,000, based on the receivables outstanding. As the Company collects these secured receivables, the facility is repaid. The interest rate for this facility is the Libor rate plus 2.5%.
(b) On July 23, 2020, the Company entered into a one-year $10,000 non-revolving term credit facility with EDC to provide working capital support in response to short-term liquidity shortfalls as a result of the COVID-19 pandemic. This credit facility's interest rate is the U.S. Prime Rate plus 3.0% per annum on amounts drawn and has no prepayment penalty or standby charge. As at March 31, 2021, the Company has drawn $6,000 on this facility. On February 16, 2021, the Company and EDC amended the credit facility such that the Company will not be able to draw any additional funds from this facility after February 16, 2021.
13. Long-term debt:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Term loan facilities, net of debt issuance costs (a) | $ | 49,162 | $ | 53,731 | ||||||||||
| Convertible debt (b) | 2,212 | 4,362 | ||||||||||||
| Other bank financing (c) | 792 | 1,325 | ||||||||||||
| Capital lease obligations (d) | 2,158 | 2,535 | ||||||||||||
| Balance, end of period | 54,324 | 61,953 | ||||||||||||
| Current portion | (16,624) | (16,302) | ||||||||||||
| Long-term portion | $ | 37,700 | $ | 45,651 | ||||||||||
(a) On December 20, 2017, the Company entered into a loan agreement with EDC for a $20,000 non-revolving term facility. The Company incurred debt issuance costs of $1,013 related to the loan which are being amortized over the loan term using the effective interest rate method. The loan bears interest at 6% (prior to March 1, 2019, at 9% plus monitoring fees), payable quarterly, as well as quarterly principal repayments. On March 23, 2020, the Company and EDC amended the terms of the secured term loan to defer $6,000 in principal payments in 2020, to recommence payment of $2,000 quarterly starting March 15, 2021 and to extend the term of the loan until September 30, 2022. As at March 31, 2021, the amount outstanding for this loan was $11,700, net of issuance costs, compared to $13,618, net of issuance costs, as at December 31, 2020. The loan is secured by share pledges over Westport Fuel Systems Canada Inc., Fuel Systems Solutions, Inc., Westport Luxembourg S.a.r.l and by certain of the Company's property, plant and equipment.
On October 9, 2018, and November 28, 2019, the Company entered into Euro denominated loan agreements with UniCredit S.p.A. ("UniCredit"). These loans bear interest at an annual rate of 2.3% and 1.8%, respectively, and interest is paid quarterly. The loans mature on December 31, 2023 and September 30, 2023, respectively. As at March 31, 2021, the amount outstanding for these loans was $6,333 compared to $7,246 as at December 31, 2020, and is secured by a cash pledge of $2,085, with these restricted funds recorded in other long-term assets.
On April 29, 2021, the Company and UniCredit amended the terms of the above Euro denominated loan agreements to combine the facilities into one $8,803 loan facility. This loan matures on March 31, 2027, bears interest at an annual rate of 1.65% and interest is paid quarterly. The cash pledge as security is removed after the amendment.
14
| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
13. Long-term debt (continued):
On May 20, 2020, the Company entered into a third Euro denominated loan agreement with UniCredit. The effective interest rate of this loan is 1.82% with a maturity date of May 31, 2025. As at March 31, 2021, the amount outstanding for this loan was $5,029 compared to $5,558 as at December 31, 2020. There is no security on the loan as it was made as part of the Italian government's Decreto Liquidità to help Italian companies to secure liquidity to continue operating while mitigating some of the impact of COVID-19.
On July 17, 2020, the Company entered into a fourth Euro denominated loan agreement with UniCredit. The effective interest rate of this loan is 1.75% with a maturity date of July 31, 2026. As at March 31, 2021, the amount outstanding for this loan was $17,830 compared to $18,650 as at December 31, 2020. There is no security on the loan as it was made as part of the Italian government's COVID-19 Decreto Liquidità.
On August 11, 2020, the Company entered into a Euro denominated loan agreement with Deutsche Bank. The effective interest rate of this loan is 1.7% with a maturity date of August 31, 2026. As at March 31, 2021, the amount outstanding for this loan was $8,270 compared to $8,659 as at December 31, 2020. There is no security on the loan as it was made as part of the Italian government's COVID-19 Decreto Liquidità.
(b) On January 11, 2016, the Company entered into a financing agreement ("Tranche 2 Financing") with Cartesian. As part of the agreement, on June 1, 2016, convertible debt was issued in exchange for 9.0% convertible unsecured notes due June 1, 2021, which are convertible into common shares of the Company in whole or in part, at Cartesian's option, at any time following the twelve month anniversary of the closing at a conversion price of $2.17 per share. Interest is payable annually in arrears on December 31 of each year during the term. On July 24, 2020, Westport restructured the Tranche 2 Financing agreement and entered into a new financing agreement with Cartesian. Under the terms of the agreement, the Company agreed to pay down the principal amount of the existing convertible notes from $17,500 to $10,000. Concurrent with such repayment, the maturity of the remaining amended notes was extended three years to July 31, 2023, the coupon rate was reduced from 9.0% annually to 6.5% annually, and the conversion price was revised from $2.17 per share to $1.42 per share.
During the first quarter of 2021, Cartesian exercised its option to convert a principal amount of $2,500, plus accrued and unpaid interest on such principal amount, into 1,815,117 common shares of the Company. To date, Cartesian has exercised its option to convert a total principal amount of $7,500, plus accrued and unpaid interest on such principal amount, into 5,422,585 common shares of the Company.
(c) Other bank financing consists of various secured and unsecured bank financing arrangements that carry rates of interest ranging from 0.75% to 3.8% and have various maturities out to 2023. Security includes a building owned by the Company in the Netherlands and certain accounts receivable.
(d) The Company has capital lease obligations with terms of two to five years at interest rates ranging from 1.3% to 5.7%.
Throughout the term of certain of these financing arrangements, the Company is required to meet certain financial and non-financial covenants. As of March 31, 2021, the Company is in compliance with all covenants under the financing arrangements.
The principal repayment schedule of the senior financings and convertible debt are as follows as at March 31, 2021:
| Term loan facilities | Convertible Debt | Other bank financing | Capital lease obligations | Total | ||||||||||||||||||||||||||||||||||
| Remainder of 2021 | $ | 11,515 | $ | — | $ | 264 | $ | 642 | $ | 12,421 | ||||||||||||||||||||||||||||
| 2022 | 14,496 | — | 352 | 506 | 15,354 | |||||||||||||||||||||||||||||||||
| 2023 | 8,452 | 2,212 | 176 | 441 | 11,281 | |||||||||||||||||||||||||||||||||
| 2024 | 6,343 | — | — | 386 | 6,729 | |||||||||||||||||||||||||||||||||
| 2025 and thereafter | 8,356 | — | — | 183 | 8,539 | |||||||||||||||||||||||||||||||||
| $ | 49,162 | $ | 2,212 | $ | 792 | $ | 2,158 | $ | 54,324 | |||||||||||||||||||||||||||||
15
| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
14. Long-term royalty payable:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Balance, beginning of period | $ | 16,042 | $ | 18,258 | ||||||||||
| Accretion expense | 505 | 3,732 | ||||||||||||
| Repayment | — | (5,948) | ||||||||||||
| Balance, end of period | 16,547 | 16,042 | ||||||||||||
| Current portion | (7,451) | (7,451) | ||||||||||||
| Long-term portion | $ | 9,096 | $ | 8,591 | ||||||||||
On January 11, 2016, the Company entered into a financing agreement with Cartesian to support the Company's global growth initiatives. The financing agreement immediately provided $17,500 in cash (the “Tranche 1 Financing”). In consideration for the funds provided to the Company, Cartesian is entitled to royalty payments based on the greater of (i) a percentage of amounts received by the Company on select HPDI systems and CWI joint venture income through 2025 and (ii) stated fixed amounts per annum subject to adjustment for asset sales. The carrying value is being accreted to the expected redemption value using the effective interest method, which is approximately 23% per annum. Amounts due to Cartesian are secured by an interest in the Company's HPDI intellectual property and a priority interest in the Company's CWI joint venture interest.
In January 2017, the Company and Cartesian signed a Consent Agreement which allows the Company to sell certain assets in exchange for prepayment of the Cartesian royalty. Cartesian is paid 15% of the net proceeds from these asset sales to a maximum of $15,000, with these payments being allocated on a non-discounted basis to future years' minimum payments.
As of March 31, 2021, the total royalty prepayments paid to Cartesian as a result of the Consent Agreement was $11,912.
The estimated repayments including interest are as follows, for the twelve months ending March 31:
| 2022 | $ | 7,451 | ||||||||||||
| 2023 | 5,657 | |||||||||||||
| 2024 | 1,795 | |||||||||||||
| 2025 | 1,637 | |||||||||||||
| 2026 | 2,270 | |||||||||||||
| 2027 | 2,851 | |||||||||||||
| $ | 21,661 | |||||||||||||
15. Warranty liability:
A continuity of the warranty liability is as follows:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| Balance, beginning of period | $ | 18,936 | $ | 8,901 | ||||||||||
| Warranty claims | (770) | (6,906) | ||||||||||||
| Warranty accruals | 852 | 16,191 | ||||||||||||
| Change in estimate | — | (291) | ||||||||||||
| Impact of foreign exchange | (794) | 1,041 | ||||||||||||
| Balance, end of period | 18,224 | 18,936 | ||||||||||||
| Less: current portion | (11,056) | (10,749) | ||||||||||||
| Long-term portion | $ | 7,168 | $ | 8,187 | ||||||||||
16
| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
16. Share capital and other stock-based plans:
On November 9, 2020, the Company filed a prospectus supplement to establish an At-the-Market equity program ("ATM Program") which allows the Company to issue up to $50,000 of common shares from treasury to the public from time to time, at the Company's discretion and subject to regulatory requirements. In the first quarter of 2021, the Company issued 1,819,712 common shares at weighted average share price of $7.26 per share for gross proceeds of $13,211, net of total transaction costs of $405, including commission of $264 resulting in net proceeds of $12,806. The ATM Program was completed as of March 20, 2021 and the Company raised a total of $27,586 gross proceeds through this ATM Program.
On January 21, 2021, Cartesian exercised its option to convert a principal amount of $2,500, plus accrued and unpaid interest on such principal amount, into 1,815,117 common shares at $1.42 per share.
During the three months ended March 31, 2021, the Company issued 143,217 common shares upon exercises of share units (three months ended March 31, 2020 – 48,891 common shares). The Company issues shares from treasury to satisfy share unit exercises.
(a) Share Units ("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 three months ended March 31, 2021, the Company recognized $84 (three months ended March 31, 2020 - $624) of stock-based compensation associated with the Westport Omnibus Plan.
A continuity of the Units issued under the Westport Omnibus Plan as of March 31, 2021 and March 31, 2020 are as follows:
| Three months ended March 31, 2021 | Three months ended March 31, 2020 | |||||||||||||||||||||||||
| Number of units | Weighted average grant date fair value (CDN $) | Number of units | Weighted average grant date fair value (CDN $) | |||||||||||||||||||||||
| Outstanding, beginning of period | 1,452,378 | $ | 3.29 | 1,777,941 | $ | 3.19 | ||||||||||||||||||||
| Granted | — | — | 56,951 | 1.40 | ||||||||||||||||||||||
| Exercised | (143,217) | 3.71 | (48,891) | 2.41 | ||||||||||||||||||||||
| Forfeited/expired | (57,724) | 3.32 | (10,117) | 3.35 | ||||||||||||||||||||||
| Outstanding, end of period | 1,251,437 | $ | 3.23 | 1,775,884 | $ | 3.16 | ||||||||||||||||||||
| Units outstanding and exercisable, end of period | 41,667 | $ | 2.41 | 9,123 | $ | 2.41 | ||||||||||||||||||||
During the three months ended March 31, 2021, no share units were granted to directors and employees (2020 - 56,951). The prior year included 36,051 restricted share units ("RSUs") and 20,900 performance share units ("PSUs"). Values of RSU awards are generally determined based on the fair market value of the underlying common shares 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, but are based on future performance and other conditions tied to the payout of the PSU.
As at March 31, 2021, $1,121 of compensation cost related to Units awarded has yet to be recognized in results from operations and will be recognized over two years.
17
| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
16. Share capital and other stock-based plans (continued):
(b) Aggregate intrinsic values:
The aggregate intrinsic value of the Company’s share units at March 31, 2021 was as follows:
| March 31, 2021 | ||||||||
| (CDN $) | ||||||||
| Share units: | ||||||||
| Outstanding | $ | 11,313 | ||||||
| Exercisable | 345 | |||||||
(c) Stock-based compensation:
Stock-based compensation associated with the Westport Omnibus Plan is included in operating expenses as follows:
| Three months ended March 31, | |||||||||||||||||||||||
| 2021 | 2020 | ||||||||||||||||||||||
| Cost of revenue | $ | 19 | $ | 12 | |||||||||||||||||||
| Research and development | 27 | 48 | |||||||||||||||||||||
| General and administrative | 14 | 507 | |||||||||||||||||||||
| Sales and marketing | 24 | 57 | |||||||||||||||||||||
| $ | 84 | $ | 624 | ||||||||||||||||||||
17. Related party transactions:
The Company enters into related party transactions with the CWI joint venture. Refer to note 6 for the related party transactions with CWI.
18. Commitments and contingencies:
(a) Contractual commitments
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.
(b) Contingencies
The Company is engaged in certain legal actions and tax audits in the ordinary course of business and believes that, based on the information currently available, the ultimate outcome of these actions will not have a material adverse effect on our operating results, liquidity or financial position.
18
| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
19. Segment information:
The Company manages and reports the results of its business through four segments: OEM, IAM, the CWI Joint Venture, and Corporate. This reflects the manner in which operating decisions and assessing business performance is currently managed by the Chief Operating Decision Maker ("CODM"). The financial information for the business segments evaluated by the CODM includes the results of CWI as if they were consolidated, which is consistent with the way the Company manages its business segments. As CWI is 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 matters.
Financial information by business segment as follows:
| Three months ended March 31, 2021 | |||||||||||||||||
| Revenue | Operating Income (Loss) | Depreciation & Amortization | Equity Income | ||||||||||||||
| OEM | $ | 42,761 | $ | (6,467) | $ | 2,143 | $ | 132 | |||||||||
| IAM | 33,682 | 1,637 | 1,274 | — | |||||||||||||
| Corporate | — | (3,327) | 56 | 6,445 | |||||||||||||
| CWI - 50% | 41,149 | 8,572 | 29 | — | |||||||||||||
| Total Segment | 117,592 | 415 | 3,502 | 6,577 | |||||||||||||
| Less: CWI - 50% | (41,149) | (8,572) | (29) | — | |||||||||||||
| Total Consolidated | $ | 76,443 | $ | (8,157) | $ | 3,473 | $ | 6,577 | |||||||||
| Three months ended March 31, 2020 | |||||||||||||||||
| Revenue | Operating Income (Loss) | Depreciation & Amortization | Equity Income | ||||||||||||||
| OEM | $ | 34,272 | $ | (14,473) | $ | 1,847 | $ | 63 | |||||||||
| IAM | 32,951 | 4,759 | 1,461 | — | |||||||||||||
| Corporate | — | (10,159) | 61 | 5,304 | |||||||||||||
| CWI - 50% | 38,334 | 6,720 | 31 | — | |||||||||||||
| Total Segment | 105,557 | (13,153) | 3,400 | 5,367 | |||||||||||||
| Less: CWI - 50% | (38,334) | (6,720) | (31) | — | |||||||||||||
| Total Consolidated | $ | 67,223 | $ | (19,873) | $ | 3,369 | $ | 5,367 | |||||||||
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| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
19. Segment information (continued):
It is impracticable for the Company to provide geographical revenue information by individual countries; however, it is practicable to provide it by geographical 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:
| % of total revenue | ||||||||||||||||||||||||||
| Three months ended March 31, | ||||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||||
| Europe | 60 | % | 66 | % | ||||||||||||||||||||||
| Americas | 12 | % | 17 | % | ||||||||||||||||||||||
| Asia | 12 | % | 8 | % | ||||||||||||||||||||||
| Africa | 11 | % | 2 | % | ||||||||||||||||||||||
| Others | 5 | % | 7 | % | ||||||||||||||||||||||
As at March 31, 2021, total long-term investments of $1,972 (December 31, 2020 - $12,838) was allocated to the Corporate segment and $1,191 (December 31, 2020 - $1,116) was allocated to the OEM segment.
Total assets are allocated as follows:
| March 31, 2021 | December 31, 2020 | |||||||||||||
| OEM | $ | 138,440 | $ | 148,959 | ||||||||||
| IAM | 149,064 | 156,967 | ||||||||||||
| Corporate | 45,813 | 40,337 | ||||||||||||
| CWI - 50% | 62,219 | 61,461 | ||||||||||||
| $ | 395,536 | $ | 407,724 | |||||||||||
| Less: CWI - 50% | (62,219) | (61,461) | ||||||||||||
| Total consolidated assets | $ | 333,317 | $ | 346,263 | ||||||||||
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| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
20. Financial instruments:
(a) Financial management risk
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 a history of losses and negative cash flows from operations since inception. At March 31, 2021, the Company has $59,746 of cash, cash equivalents and short-term investments, including restricted cash of $103.
The following are the contractual maturities of financial obligations as at March 31, 2021:
| Carrying amount | Contractual cash flows | < 1 year | 1-3 years | 4-5 years | >5 years | |||||||||||||||||||||||||||||||||
| Accounts payable and accrued liabilities | $ | 81,325 | $ | 81,325 | $ | 81,325 | $ | — | $ | — | $ | — | ||||||||||||||||||||||||||
| Short-term debt (note 12) | 7,888 | 7,888 | 7,888 | — | — | — | ||||||||||||||||||||||||||||||||
| Term loan facilities (note 13 (a)) | 49,162 | 51,779 | 15,739 | 21,167 | 12,289 | 2,584 | ||||||||||||||||||||||||||||||||
| Convertible debt (note 13 (b)) | 2,212 | 2,879 | 162 | 2,717 | — | — | ||||||||||||||||||||||||||||||||
| Other bank financing (note 13 (c)) | 792 | 798 | 270 | 528 | — | — | ||||||||||||||||||||||||||||||||
| Capital lease obligations (note 13 (d)) | 2,158 | 2,232 | 581 | 1,078 | 573 | — | ||||||||||||||||||||||||||||||||
| Long-term royalty payable (note 14) | 16,547 | 21,661 | 7,451 | 7,452 | 3,907 | 2,851 | ||||||||||||||||||||||||||||||||
| Operating lease obligations (note 11) | 32,187 | 37,547 | 4,952 | 7,458 | 3,025 | 22,112 | ||||||||||||||||||||||||||||||||
| $ | 192,271 | $ | 206,109 | $ | 118,368 | $ | 40,400 | $ | 19,794 | $ | 27,547 | |||||||||||||||||||||||||||
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| WESTPORT FUEL SYSTEMS INC. | ||
| Notes to Condensed Consolidated Interim Financial Statements (unaudited) | ||
| (Expressed in thousands of United States dollars, except share and per share amounts) | ||
| Three months ended March 31, 2021 and 2020 | ||
20. Financial Instruments (continued):
(c) 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 approximate their fair values due to the short-term period to maturity of these instruments.
The long-term investments represent the Company's interest in CWI, WWI, Minda Westport Technologies Limited, and other investments. CWI is the most significant of the long-term investments and is accounted for using the equity method. WWI and other investments are accounted for at fair value.
The carrying values reported in the consolidated balance sheet for obligations under capital and operating leases, which are based upon discounted cash flows, approximate their fair values.
The carrying value of the term loan facilities, convertible debt and other bank financing included in the long-term debt (note 13(a)) do not materially differ from their fair value as at March 31, 2021, as the majority of the term loan facilities, convertible debt and other bank financing were raised or amended recently.
The Company categorizes its fair value measurements for items measured at fair value on a recurring basis into three categories as follows:
| 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 March 31, 2021, cash and cash equivalents and short-term investments are measured at fair value on a recurring basis and are included in Level 1.
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