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The long anticipated Financials...

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Yahoo! Canada Mail Welcome, the_wanneks@roger... [Sign Out, My Account] Finance Home - Accueil - Help Press Release Source: RailPower Technologies Corp. Railpower Reports 2006 Fourth Quarter and Year End Financial Results Friday March 30, 7:00 am ET TSX Symbol: P MONTREAL, March 30 /CNW/ - Railpower Technologies Corp. ("Railpower" or the "Company") (TSX: P - News), a leader in specialized energy technology systems for the transportation industry, today reported its financial results for the three and twelve-month periods ended December 31, 2006. (All dollar amounts are in $CDN unless stated otherwise.) 2006 Highlights - Produced 38 units and delivered 28 during the year - Obtained Tier 2, U.S. Environmental Protection Agency ("EPA") certification for the RP-series three-engine road switcher locomotive and delivered 15 road switchers to the customer sites - Reached an agreement with a customer to amicably terminate the contract for the procurement of 35 yard Green Goat locomotives which resulted in a reversal to the provision for future contract losses of $18.7 million - Commenced design of a prototype hybrid diesel electric power unit for use in TSI Terminal Systems Inc.'s rubber tyred gantry ("RTG") cranes commonly used in major ports - First European hybrid yard switcher completed in Sweden, by Swedish Train Technology - Subsequent to quarter end, completed equity financing raising gross proceed of $34.5 million - Recorded a net loss for the year of $41.5 million compared to $59.9 million in 2005 - Recognized a contract loss in the amount of $16.0 million for its largest current order. The loss is due to additional labor hours, higher warranty costs due to the extension of the warranty period granted in November 2006 and penalties on expected late deliveries. "During 2006, our management team commenced the implementation of a turnaround strategy. We recruited senior engineering and finance talent to address our core internal functions, costing and reporting processes were put into place in all our departments and new procurement and manufacturing process were developed," said José Mathieu, President and CEO of Railpower. "In terms of product developments, we completed a new and improved third generation yard switcher, we launched the production of our RP-series multi-genset road switcher and we recently completed a battery-dominant hybrid power plant for installation on RTG cranes." "Looking ahead, we will continue to improve our procurement and manufacturing processes, focus on increasing the market penetration of our RP-series road switchers and build up a family of road switchers based on this initial model. We will also further develop our hybrid technology for derivative applications, such as RTG cranes. We have a tremendous market opportunity to address and by continuing to execute on our focused business plan, we believe we are well positioned to succeed." Financial Results For the fourth quarter of 2006, revenue increased to $11.3 million, compared to $10.0 million in the fourth quarter of 2005. The Company's increased revenue in the fourth quarter resulted from the delivery of 11 units, compared to delivery of 12 in the fourth quarter a year ago, at a higher selling price. For the year ended December 31, 2006, revenue increased to $25.6 million, compared to $20.2 million in the same period a year ago. Increased revenue in the year resulted from the delivery of 28 units compared to 24 in 2005. As at December 31, 2006, the Company had firm orders for 105 locomotives and three cranes compared to an order book of 163 locomotives at the end of 2005. Cost of goods sold ("COGS") in the fourth quarter totaled $19.2 million compared to $15.6 million in the fourth quarter of 2005. For the year ended December 31, 2006, COGS totaled $40.7 million compared to $30.2 million for the year ended December 31, 2005. The increase in COGS in the year resulted primarily from the write-down of inventory to its net realizable value, the increase in manufacturing overhead and a provision for obsolescence of raw material. Operating expenses, including engineering and research and development ("R&D"), general and administrative ("G&A"), selling and service related expenses, for the fourth quarter of 2006 totaled $6.7 million, compared to operating expenses of $7.5 million for the fourth quarter of 2005. Operating expenses for the year ended December 31, 2006 totaled $28.8 million, compared to operating expenses of $22.3 million for the year ended December 31, 2005. The increase in operating expenses during 2006 resulted from higher levels of activity, the completion of an inspection program for the Green Goats, the development of IT processes and systems and increased engineering and R&D expenses related to the completion of the third generation yard switcher (GG20B) as well as design and validation of the RP-series road switcher and the development of the first hybrid crane. Net loss for the fourth quarter of 2006 was $5.8 million, or ($0.11) per share, compared to a net loss of $40.5 million, or ($0.91) per share in the same period a year ago. The Company's decreased net loss in the current quarter is primarily attributable to the decrease in the provision for future contract losses. Net loss for the year ended December 31, 2006 was $41.5 million, or ($0.76) per share compared to a net loss of $59.9 million, or ($1.36) per share in 2005. As at December 31, 2006, the Company had cash and cash equivalents of $1.1 million, compared to $76.8 million as at December 31, 2005. The Company's decreased cash position as at December 31, 2006 reflects significantly higher levels of inventory related to work-in-process manufacturing and increases in accounts receivable, offset by a reversal to the provision for future contract losses of $18.7 million related to termination of a contract for 35 Green Goat yard locomotives. The Company has since significantly improved its cash position. Cost-cutting and cash preservations measures were put into place, and subsequent to year end, in February 2007, a public equity offering raising gross proceeds of $34.5 million was completed. Railpower's consolidated financial statements and Management's Discussion and Analysis ('MD&A') as at December 31, 2006, were prepared in accordance with Canadian generally accepted accounting principles and are presented in Canadian dollars, except where indicated otherwise. The full statements and MD&A will be filed on SEDAR (www.sedar.com) and, be available via Railpower's website (www.railpower.com) later today. Outlook Moving into 2007, the Company will focus its efforts on increasing the market penetration of the RP-series road switcher. Railpower is currently in discussions with several Class I railroads which have expressed an interest in testing our RP-series demonstration units. Proposals have been submitted for approximately 120 units to Class I railroads, as well as with some industrial and overseas potential customers. The Company will also look to advance its strategy of penetrating derivative markets for its hybrid technology. This technology is highly suitable for the power and energy requirements of RTG cranes used for moving shipping containers in major ports. Terminal Systems Inc, has agreed to test Railpower's hybrid diesel electric power unit for use in their RTG cranes. Three hybrid power plants are currently being developed, and the 1st one will be installed by TSI on their cranes in the first half of 2007. In terms of manufacturing, Railpower expects to continue its delivery schedule of three units per week, ramping up to five units per week, in order to fulfill its largest current order by the end of June 2007. The Company is exploring the possibility of operating its own manufacturing facility. This facility would provide a shorter production cycle and would reduce working capital requirements. However, the Company will keep some assembly capacity in the United States. Upon completion of the current orders, the Company believes that it has the necessary cash to pursue its sales and marketing activities, to continue the development of its product lines, to improve the processes and systems and to keep its core resources. Notice of Conference Call and Webcast José Mathieu, President and CEO of Railpower, will host a conference call today at 9:00 am (EST) to review the financial results. All interested parties are invited to participate. A live audio webcast of the call will be available at www.railpower.com or www.newswire.ca. A taped replay of the conference call will also be available until Friday, April 6, 2007 by calling 416-640-1917 or 1-877-289-8525 reference number 21219970 followed by the number sign. About Railpower Railpower (TSX: P - News), (www.railpower.com) is engaged in the development, construction, marketing and sales of specialized, patented, environmentally friendly technology systems for the transportation and related industries. Railpower's technologies significantly reduce fuel usage, operating and maintenance costs, and emissions. While Railpower's origins are in the transportation industry, its technologies have broad potential and applications in other markets and industries. Railpower is headquartered in Montreal, Quebec. Its U.S. office is located in Erie, Pennsylvania. Caution regarding forward-looking statements Certain statements contained in this release contain forward-looking statements. When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect" and similar expressions may be used to identify forward-looking statements. Those statements reflect our current views with respect to future events or conditions, including prospective results of operations, financial position, predictions of future actions, plans or strategies. Certain material factors and assumptions were applied in drawing our conclusions and making those forward-looking statements. By their nature, those statements reflect management's current views, beliefs and assumptions and are subject to certain risks and uncertainties, known and unknown, including, without limitation, product development or manufacturing delays, changing environmental regulations, the ability to attract and retain business partners, the acceptance of our existing and new products, future levels of government funding, the need to obtain and maintain proprietary rights over our technology, competition from other technologies, the ability to access the capital required for research, product development, operations and marketing, the need to generate positive cash flow in the foreseeable future, changes in energy prices and currency levels. Many factors could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by these forward-looking statements. Should one or more of these risks or uncertainties materialize, or should the assumptions underlying our projections or forward-looking statements prove incorrect, our actual results may vary materially from those described in this report as intended, planned, anticipated, believed, estimated, or expected. We do not intend and do not assume any obligation to update these forward-looking statements whether as a result of new information, plans, events or otherwise. RAILPOWER TECHNOLOGIES CORP. Consolidated Balance Sheets (Expressed in Canadian dollars) ------------------------------------------------------------------------- December 31, December 31, 2006 2005 ------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents (note 4) $ 1,130,011 $ 76,829,474 Restricted investments (note 5) 2,053,604 4,713,189 Accounts receivable (note 6) 9,922,401 6,282,433 Deposits to suppliers 108,927 58,534 Inventory (note 7) 62,019,205 13,849,922 Prepaid expenses 934,082 536,783 ----------------------------------------------------------------------- 76,168,230 102,270,335 Plant and equipment (note 8) 1,662,244 1,229,914 Lease, demonstration and service units (note 9) 5,921,854 3,638,482 Patents (note 10) 487,514 365,760 Deferred development costs - 805,984 ------------------------------------------------------------------------- $ 84,239,842 $ 108,310,475 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities 16,841,284 11,179,140 Advanced billing (note 11) 23,417,068 - Term loan (note 12) 2,745,974 3,086,796 Provision for warranties (note 13) 4,991,293 5,102,518 Provision for contract losses (note 14) 8,586,486 23,018,371 ----------------------------------------------------------------------- 56,582,105 42,386,825 Shareholders' equity Share capital (note 15) 146,081,902 145,454,777 Contributed surplus (note 15) 4,442,257 1,862,772 Deficit (122,866,422) (81,393,899) ----------------------------------------------------------------------- 27,657,737 65,923,650 $ 84,239,842 $ 108,310,475 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Risks and uncertainties (note 2) Contractual obligations and commitments (note 18) Contingencies (notes 9 and 22) Subsequent events (note 23) The accompanying notes are an integral part of the consolidated financial statements. RAILPOWER TECHNOLOGIES CORP. Consolidated Statements of Operations and Deficit (Expressed in Canadian dollars) ------------------------------------------------------------------------- Year ended December 31 ------------------------------- 2006 2005 ------------------------------------------------------------------------- Sales $ 25,647,651 $ 20,177,261 Cost of goods sold (40,710,428) (30,182,615) Provision for contract losses 3,805,684 (23,018,371) Amortization of plant and equipment and lease and service units (707,389) (554,082) Amortization and write-down of patents and deferred development costs (1,192,564) (10,724) Amortization of government grants 77,733 63,807 Warranty expenses (1,350,499) (5,103,117) ------------------------------------------------------------------------- (14,429,812) (38,627,841) Selling expenses (1,378,453) (1,610,687) Service expenses (4,660,911) (3,163,929) Engineering and research & development expenses (10,939,734) (9,081,278) General and administrative expenses (11,850,940) (8,450,824) ------------------------------------------------------------------------- Operating loss (43,259,850) (60,934,559) Interest income 1,608,659 1,267,567 Foreign exchange gain (loss) 434,901 (39,024) Interest expense (256,233) (205,464) ------------------------------------------------------------------------- Loss for the year (41,472,523) (59,911,480) Deficit, beginning of year (81,393,899) (21,482,419) ------------------------------------------------------------------------- Deficit, end of year $(122,866,422) $ (81,393,899) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Net loss per weighted average common share; basic and diluted $ (0.76) $ (1.36) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares outstanding; basic and diluted 54,870,835 44,191,631 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. RAILPOWER TECHNOLOGIES corp. Consolidated Statements of Cash Flows (Expressed in Canadian dollars) ------------------------------------------------------------------------- Year ended December 31 ------------------------------- 2006 2005 ------------------------------------------------------------------------- Cash flows from operating activities Loss for the year $ (41,472,523) $ (59,911,480) Items not involving cash Amortization of plant and equipment and lease and service units 707,389 554,082 Amortization and write-down of patents and deferred development costs 1,192,564 10,724 Amortization of government grants (77,733) (63,807) Stock-based compensation 2,666,522 1,545,438 Gain on sale of equipment - (37,214) Changes in working capital and other items Increase in accounts receivable (3,997,452) (5,659,628) Increase in deposits to suppliers (50,393) (58,534) Increase in inventory (47,403,453) (4,292,196) Increase in prepaid expenses (397,299) (324,527) Increase in accounts payable and accrued liabilities 5,662,144 6,138,907 Increase in advance billing 23,417,068 - Decrease in customer deposits - (315,465) Increase (decrease) in provision for warranties (111,225) 5,078,468 Increase (decrease) in provision for contract losses (14,431,885) 23,018,371 ------------------------------------------------------------------------- Net cash used in operating activities (74,296,276) (34,316,861) ------------------------------------------------------------------------- Cash flows from investing activities Decrease (increase) in restricted investments 2,659,585 (475,067) Expenditures on patents (146,754) (159,305) Expenditures on plant and equipment (998,384) (674,524) Investment in lease, demonstration and service units (3,112,804) (3,918,876) Proceeds on sale of fixed assets - 666,361 Investment in deferred development costs (361,580) (792,439) ------------------------------------------------------------------------- Net cash used in investing activities (1,959,937) (5,353,850) ------------------------------------------------------------------------- Cash flows from financing activities Issuance of long-term debt - 2,358,720 Repayment of long-term debt (340,822) (443,874) Government grants 357,484 1,775,498 Issuance of common stock for cash, net of share issue costs 540,088 58,896,857 ------------------------------------------------------------------------- Net cash provided by financing activities 556,750 62,587,201 ------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (75,699,463) 22,916,490 Cash and cash equivalents, beginning of year 76,829,474 53,912,984 Cash and cash equivalents, end of year (note 4) $ 1,130,011 $ 76,829,474 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplementary information Interest paid $ 234,021 $ 205,464 Income taxes paid $ - $ 10,379 The accompanying notes are an integral part of the consolidated financial statements. RAILPOWER TECHNOLOGIES CORP. Consolidated Balance Sheets (Expressed in Canadian dollars) ------------------------------------------------------------------------- December 31, December 31, 2006 2005 ------------------------------------------------------------------------- Assets Current assets Cash and cash equivalents (note 4) $ 1,130,011 $ 76,829,474 Restricted investments (note 5) 2,053,604 4,713,189 Accounts receivable (note 6) 9,922,401 6,282,433 Deposits to suppliers 108,927 58,534 Inventory (note 7) 62,019,205 13,849,922 Prepaid expenses 934,082 536,783 ----------------------------------------------------------------------- 76,168,230 102,270,335 Plant and equipment (note 8) 1,662,244 1,229,914 Lease, demonstration and service units (note 9) 5,921,854 3,638,482 Patents (note 10) 487,514 365,760 Deferred development costs - 805,984 ------------------------------------------------------------------------- $ 84,239,842 $ 108,310,475 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities Accounts payable and accrued liabilities 16,841,284 11,179,140 Advanced billing (note 11) 23,417,068 - Term loan (note 12) 2,745,974 3,086,796 Provision for warranties (note 13) 4,991,293 5,102,518 Provision for contract losses (note 14) 8,586,486 23,018,371 ----------------------------------------------------------------------- 56,582,105 42,386,825 Shareholders' equity Share capital (note 15) 146,081,902 145,454,777 Contributed surplus (note 15) 4,442,257 1,862,772 Deficit (122,866,422) (81,393,899) ----------------------------------------------------------------------- 27,657,737 65,923,650 $ 84,239,842 $ 108,310,475 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Risks and uncertainties (note 2) Contractual obligations and commitments (note 18) Contingencies (notes 9 and 22) Subsequent events (note 23) The accompanying notes are an integral part of the consolidated financial statements. Approved by the Board: ------------------------, Director ------------------------, Director RAILPOWER TECHNOLOGIES CORP. Consolidated Statements of Operations and Deficit (Expressed in Canadian dollars) ------------------------------------------------------------------------- Year ended December 31 ------------------------------- 2006 2005 ------------------------------------------------------------------------- Sales $ 25,647,651 $ 20,177,261 Cost of goods sold (40,710,428) (30,182,615) Provision for contract losses 3,805,684 (23,018,371) Amortization of plant and equipment and lease and service units (707,389) (554,082) Amortization and write-down of patents and deferred development costs (1,192,564) (10,724) Amortization of government grants 77,733 63,807 Warranty expenses (1,350,499) (5,103,117) ------------------------------------------------------------------------- (14,429,812) (38,627,841) Selling expenses (1,378,453) (1,610,687) Service expenses (4,660,911) (3,163,929) Engineering and research & development expenses (10,939,734) (9,081,278) General and administrative expenses (11,850,940) (8,450,824) ------------------------------------------------------------------------- Operating loss (43,259,850) (60,934,559) Interest income 1,608,659 1,267,567 Foreign exchange gain (loss) 434,901 (39,024) Interest expense (256,233) (205,464) ------------------------------------------------------------------------- Loss for the year (41,472,523) (59,911,480) Deficit, beginning of year (81,393,899) (21,482,419) ------------------------------------------------------------------------- Deficit, end of year $(122,866,422) $ (81,393,899) ------------------------------------------------------------------------- Net loss per weighted average common share; basic and diluted $ (0.76) $ (1.36) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average number of common shares outstanding; basic and diluted 54,870,835 44,191,631 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. RAILPOWER TECHNOLOGIES CORP. Consolidated Statements of Cash Flows (Expressed in Canadian dollars) ------------------------------------------------------------------------- Year ended December 31 ------------------------------- 2006 2005 ------------------------------------------------------------------------- Cash flows from operating activities Loss for the year $ (41,472,523) $ (59,911,480) Items not involving cash Amortization of plant and equipment and lease and service units 707,389 554,082 Amortization and write-down of patents and deferred development costs 1,192,564 10,724 Amortization of government grants (77,733) (63,807) Stock-based compensation 2,666,522 1,545,438 Gain on sale of equipment - (37,214) Changes in working capital and other items Increase in accounts receivable (3,997,452) (5,659,628) Increase in deposits to suppliers (50,393) (58,534) Increase in inventory (47,403,453) (4,292,196) Increase in prepaid expenses (397,299) (324,527) Increase in accounts payable and accrued liabilities 5,662,144 6,138,907 Increase in advance billing 23,417,068 - Decrease in customer deposits - (315,465) Increase (decrease) in provision for warranties (111,225) 5,078,468 Increase (decrease) in provision for contract losses (14,431,885) 23,018,371 ------------------------------------------------------------------------- Net cash used in operating activities (74,296,276) (34,316,861) ------------------------------------------------------------------------- Cash flows from investing activities Decrease (increase) in restricted investments 2,659,585 (475,067) Expenditures on patents (146,754) (159,305) Expenditures on plant and equipment (998,384) (674,524) Investment in lease, demonstration and service units (3,112,804) (3,918,876) Proceeds on sale of fixed assets - 666,361 Investment in deferred development costs (361,580) (792,439) ------------------------------------------------------------------------- Net cash used in investing activities (1,959,937) (5,353,850) ------------------------------------------------------------------------- Cash flows from financing activities Issuance of long-term debt - 2,358,720 Repayment of long-term debt (340,822) (443,874) Government grants 357,484 1,775,498 Issuance of common stock for cash, net of share issue costs 540,088 58,896,857 ------------------------------------------------------------------------- Net cash provided by financing activities 556,750 62,587,201 ------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (75,699,463) 22,916,490 Cash and cash equivalents, beginning of year 76,829,474 53,912,984 ------------------------------------------------------------------------- Cash and cash equivalents, end of year (note 4) $ 1,130,011 $ 76,829,474 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Supplementary information Interest paid $ 234,021 $ 205,464 Income taxes paid $ - $ 10,379 The accompanying notes are an integral part of the consolidated financial statements. RAILPOWER TECHNOLOGIES CORP. Notes to Consolidated Financial Statements (Expressed in Canadian dollars) ------------------------------------------------------------------------- 1. The Company Railpower Technologies Corp. (the "Company") is a public company listed on the Toronto Stock Exchange ("TSX") formed under the Canada Business Corporations Act on June 30, 2001. The Company is engaged in the development, construction, marketing and sales of specialized energy technology systems for transportation and power generation. A subsidiary, Railpower Hybrid Technologies Corp., was incorporated under the laws of the State of Washington in January 2004 and has its principal office in Erie, Pennsylvania. 2. Risks and uncertainties (a) Use of estimate The preparation of financial statements in conformity with Canadian generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates and assumptions are based on management's historical experience, knowledge of current events and conditions and activities that the Company may undertake in the future. Significant estimates include, but are not limited to: - the key economic assumptions used to determine the projected cash flows used in supporting the going concern assumption; - the provision for contract losses; - the provision for warranty; - the allowance for doubtful accounts; - the allowance for inventory obsolescence and its net realizable value; - the estimated useful lives of assets; - the valuation allowances for deferred income tax assets; - the accrual of contingencies. The most significant estimates affect inventory valuation, provisions for warranties and provisions for contract losses. These depend upon subjective or complex judgments about matters that are uncertain and both internal and external conditions that are evolving. Changes in those estimates could materially impact the consolidated financial statements. They are also subject to uncertainties both internal and external to the Company, some of which stemming from the dependencies described in note 2 (b). Management reviews these estimates on an on-going basis. Adjustments, if any, will be reflected in operations in the period the uncertainty is resolved. (b) Dependencies Customers Due to the nature of the North American railroad industry, the Company depends on large orders from a small number of customers. Its largest customers are the seven Class I railroads and locomotive leasing companies in North America. It may also receive orders from smaller railroads but the size of these orders will be significantly smaller than those placed by Class I railroads. Currently, the Company is dependent on one significant customer. Sales to this customer accounted for 64% of total sales of 2006. In addition, a significant portion of the inventory is related to fulfilling the commitment to this customer, as described in note 14(4). Contract manufacturers and suppliers In order to fulfill its obligation towards this significant customer, the Company is also dependant of two contract manufacturers to assemble the locomotives and on a limited number of key suppliers. Prolonged disruptions in the assembly of locomotives and or delays in the supply of quality materials could have a material adverse effect on the Company's operating results and financial condition as it would affect its ability to fulfill its commitment to this customer in relation to timing, quality, quantity and cost. As a result, the Company would be subject to significant penalties from this customer. (c) Measurement uncertainty As disclosed in note 2(a), the preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Certain risks and factors could materially affect the degree of uncertainty associated with the measurement of many amounts in the financial statements. Adequacy of the Company's provisions for warranties and for contract losses are items subject to significant measurement uncertainty as explained below: Warranty The Company began commercial production and delivery of Green Goat locomotives in 2005 and Road Switcher locomotives in 2006. As with any new product, it is possible that the long term use of our locomotives in actual working conditions may expose some weaknesses, failures or shortcomings in our designs, specifications, manufacturing techniques, components or systems. As the Company's products are sold with a limited warranty, it may experience warranty repair costs in excess of our current expectations. It is also possible that problems arise with respect to a significant component or give rise to a safety or liability issue for which it may need to consider a redesign, re-specification or recall. The Company provides for the estimate of warranty cost based on contract terms, historical warranty loss experience and future expectations and is periodically adjusted for recent actual experience. Because warranty estimates are forecasts that are based on the best available information, future claims costs may differ from the amount provided for. The Company adjusts initial provisions for warranties as changes in the future obligation become reasonably estimatable. Provisions for contract losses In estimating the loss on contract, all related known and estimatable costs are considered including those related to direct overhead, warranties, and penalties. As the company is in its early stages of production, overhead rates were based on an estimate of normal subcontractor man hours required for production. Judgment is involved in differentiating between actual production man hours and man hours incurred for evolving design and production needs. Furthermore, penalties were estimated based on the current production delivery schedule. As the Company is dependant on key suppliers and contract manufacturers, delays in procurement and production may result in the delivery schedule not being met and penalties being incurred. Management continuously monitors its ability to meet the required deadlines and includes potential contract penalties when it becomes reasonable to estimate that the delivery schedule will not be met. 3. Significant accounting policies These consolidated financial statements are expressed in Canadian dollars and have been prepared in accordance with GAAP using the significant accounting policies described below. (a) Principles of consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Railpower Hybrid Technologies Corp., from its date of formation. All intercompany balances and transactions are eliminated on consolidation. (b) Cash and cash equivalents Cash and cash equivalents are defined to include cash and highly liquid short-term investments with original maturities of three months or less and are presented at cost. (c) Inventory Raw materials inventory is stated at the lower of average cost and replacement cost. Inventory of work-in-process and finished goods are stated at the lower of average cost, determined on a specific identification basis, and net realizable value. Locomotives which are complete but not yet in possession of the customer are classified as finished goods. Kits for the conversion of locomotives to hybrid or multi engines configuration situated at customers' sites for which delivery is substantially complete and locomotives which have been delivered to the customer are classified as finished goods at customer's site (note 7) until revenue recognition criteria have been met. (d) Plant and equipment Equipment is recorded at cost and amortized on a declining- balance basis at a rate of 30% per year. Leasehold improvements are recorded at cost and amortized on a straight-line basis over the term of the lease. (e) Lease, demonstration and service units Lease, demonstration and service locomotives are recorded at the lower of cost and net realizable value and are amortized over their estimated useful life (22 years) on a straight line basis. (f) Patents Patents are initially recorded at cost and are amortized on a specific identification straight-line basis over the life of the individual patents, which is generally 20 years. Patents are reviewed on a regular basis to ensure that they still have value for the Company. (g) Warranty A provision for warranty cost is initially recorded when revenue for the underlying locomotive is recognized to reflect an estimate of the Company's costs to fulfill its warranty obligations on the locomotive, including battery packs, contained in the contract of sale. Expenditures to repair customers' locomotives during the warranty period are charged as incurred against the warranty accrual. Periodically, the Company reassesses the adequacy of its warranty accrual against its expenditure experience and identified claim issues and adjusts the provision to reflect the expectations of future costs to fulfill its warranty obligations. (h) Foreign currency translation The measurement and reporting currency of the Company is the Canadian dollar. Transactions of the Company that are denominated in foreign currencies are recorded in Canadian dollars at exchange rates in effect at the related transaction date. Monetary assets and liabilities denominated in foreign currencies are adjusted to reflect exchange rates at the balance sheet date. Non-monetary assets, including related amortization, are translated at historical rates. Exchange gains and losses arising on the translation of monetary assets and liabilities are included in the statement of operations for the period. (i) Revenue recognition The Company's sales are mainly derived from the sales of locomotives and locomotive kits. The Company accounts for its locomotive and locomotive kit sales contracts on the percentage of completion basis by the output method with each locomotive or locomotive kit under a contract considered an output. Under this method, sales revenue is recognized upon delivery of the completed locomotive or the completed locomotive kit to the customer, when substantially all contract conditions are met, no uncertainties surrounding product acceptance and no rights of return exist, the related revenue is fixed or determinable, collectibility is reasonably assured and the customer takes title and assumes the majority of risks and rewards of ownership. The Company assesses the expectations of profitability of its contracts periodically. When there is reasonable certainty of an overall loss on a given contract, that estimated loss is recognized in full in the accounts. This results in the Company accounting for each output unit in a contract on a zero profit basis prospectively. In estimating the loss on contract, all related disbursements are considered including those related to warranties, penalties and direct overhead. Provisions for contract losses are shown separately as liabilities on the balance sheet, if significant, except in circumstances in which related costs are accumulated on the balance sheet, in which case the provisions are deducted from the related accumulated costs in inventory. In addition, as units are delivered, the portion of the contract loss related to warranties is reclassified to the provision for warranties on the balance sheet. Any subsequent adjustments to the contract loss are recognized when reasonably estimable. Customer deposits or payments received in advance of meeting the revenue recognition criteria are classified within current liabilities in the consolidated financial statements under advanced billing. (j) Research and development Research costs are expensed in the period in which they are incurred. Development costs are expensed in the period incurred unless such costs meet stringent criteria for deferral and amortization under GAAP primarily related to product definition, technical feasibility and marketability. The capitalized deferred development costs are amortized against future sales of the products developed, except for costs related to specific agreements reached with partners to develop new markets or industries where these costs are amortized over the term of the agreements on a straight-line basis. (k) Stock-based compensation plan Effective October 1, 2003, the Company adopted the fair-value based method of accounting for stock-based compensation on a prospective basis, for all awards of shares and stock options granted on or after October 1, 2003 to employees and directors and on or after October 1, 2002 for options granted to non- employees. The resulting compensation expense is charged to earnings over the vesting period on a straight-line basis except for awards to non-employees whereby the compensation expense is recognized as the goods or services are received. Stock-based compensation expense is added to contributed surplus when recognized and transferred to share capital upon issuance of common shares. Proceeds received on the exercise of stock options are included in share capital. Prior to October 1, 2003, options granted to employees and directors were accounted for using the intrinsic value method of accounting for stock-based compensation. The Company discloses the pro-forma effect of accounting for all stock options awarded to employees subsequent to September 30, 2002 by the fair value method in note 15(e) to the consolidated financial statements. (l) Government grants The Company receives incentive grants towards the cost of certain of its activities from governments. Grants received that relate to expenses of a given period reduce those expenses when received. Grants received towards the capital cost of the Company's lease and service units reduce the capital cost of the related locomotives. As a result, the capital costs and the grants of the locomotives are amortized over the useful life of the locomotives. The amortization of the grants for which the grants are received with the amortization is classified as a reduction of depreciation and amortization expense. (m) Income taxes Income taxes are accounted for under the asset and liability method. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Future tax assets and liabilities are measured using enacted or substantively enacted income tax rates and laws expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the year that substantive enactment date occurs. To the extent that realization of a future tax asset is not considered to be more likely than not, a valuation allowance is recorded. (n) Earnings (loss) per share Basic earnings (loss) per share is calculated using the weighted average number of common shares outstanding. The Company uses the treasury stock method to calculate diluted earnings per share. However, diluted loss per share does not differ from basic loss per share as the effect of all outstanding options and warrants would be anti-dilutive to basic loss per share and result in a lower loss per share. (o) Comparative figures Certain comparative figures have been reclassified to conform with the financial statement presentation adopted for the current year. 4. Cash and cash equivalents The major components of cash and cash equivalents are as follows: --------------------------------------------------------------------- December 31, December 31, 2006 2005 --------------------------------------------------------------------- Cash $ 1,130,011 $ 676,124 Bank term deposits - 76,153,350 --------------------------------------------------------------------- $ 1,130,011 $ 76,829,474 --------------------------------------------------------------------- --------------------------------------------------------------------- 5. Restricted investments As at December 31, 2006, the Company has invested a total of $424,000 ($591,589 in 2005) in one (two at December 31, 2005) Guaranteed Investment Certificate ("GIC") expiring on November 19, 2007 (September 27, 2006 and November 8, 2006 in 2005). The GIC is redeemable prior to maturity and is yielding 2.8% at December 31, 2006 (2.8% at December 31, 2005). The GIC is held as security by the financial institution as collateral against a letter of credit outstanding in favor of a supplier. An additional amount of $1,629,604 (US$ 1,398,322) (US$ 1,400,000 in 2005) is held as collateral by a financial institution against the long-term debt and corporate credit card lines. As at December 31, 2005, additional amounts of $1,721,240 (US $1,480,000) and $837,360 (US $720,000) were invested in a financial institution commercial paper and were held as security by this financial institution as collateral against a letter of credit with a supplier. The deposits had yields of 4.32% and 4.25% and maturity dates of May 5, 2006 and April 4, 2006, respectively. 6. Accounts receivable --------------------------------------------------------------------- December 31, December 31, 2006 2005 --------------------------------------------------------------------- Trade $ 7,285,358 $ 5,332,773 Sales taxes 2,617,291 883,794 Interest and other 19,752 65,866 --------------------------------------------------------------------- $ 9,922,401 $ 6,282,433 --------------------------------------------------------------------- --------------------------------------------------------------------- 7. Inventory --------------------------------------------------------------------- December 31, December 31, 2006 2005 --------------------------------------------------------------------- Raw materials $ 13,331,717 $ 9,541,863 Work in process 36,466,563 1,763,500 Finished goods at plant or in transit 7,590,537 2,013,154 Finished goods at customer's site 4,630,388 531,405 --------------------------------------------------------------------- $ 62,019,205 $ 13,849,922 --------------------------------------------------------------------- --------------------------------------------------------------------- The Company entered into a sale agreement at the end of September 2006 with regard to a service unit. Consequently, the locomotive was transferred at its net carrying value in the finished goods at customer's site. 8. Plant and equipment --------------------------------------------------------------------- December 31, December 31, 2006 2005 --------------------------------------------------------------------- Equipment $ 2,597,432 $ 1,804,138 Accumulated amortization (1,032,173) (595,544) --------------------------------------------------------------------- 1,565,259 1,208,594 Leasehold improvements 152,154 119,608 Accumulated amortization (55,169) (98,288) --------------------------------------------------------------------- 96,985 21,320 --------------------------------------------------------------------- $ 1,662,244 $ 1,229,914 --------------------------------------------------------------------- --------------------------------------------------------------------- During 2006, the Company transferred a locomotive (net cost of $87,923) previously used as a utility unit from the equipment to the lease, demonstration and service units. 9. Lease, demonstration and service units --------------------------------------------------------------------- December 31, December 31, 2006 2005 --------------------------------------------------------------------- Lease and service units $ 3,891,181 $ 3,798,723 Accumulated amortization (316,301) (160,241) --------------------------------------------------------------------- 3,574,880 3,638,482 Demonstration units under construction 2,346,974 - --------------------------------------------------------------------- $ 5,921,854 $ 3,638,482 --------------------------------------------------------------------- --------------------------------------------------------------------- As mentioned in note 8, one locomotive was transferred during 2006 from the equipment to the lease, demonstration and service units. The Company received in 2005 two grants for total amount of $1,775,498 from the State of California to help the Company reduce the capital cost of two lease and service units. These grants are not repayable, in whole or in part, unless the Company violates the terms and conditions of the individual agreements. As at December 31, 2006, no such violations have occurred. These locomotives are leased for five years at less than market rates to railroads operating in California, reflecting the contribution by the State to the cost of the asset. At the conclusion of the five year leases, the locomotives are available for lease or sale by the Company at market rates prevailing at that time. 10. Patents --------------------------------------------------------------------- December 31, December 31, 2006 2005 --------------------------------------------------------------------- Patents $ 540,903 $ 394,149 Accumulated amortization (53,389) (28,389) --------------------------------------------------------------------- $ 487,514 $ 365,760 --------------------------------------------------------------------- --------------------------------------------------------------------- 11. Advanced billing Certain sale contracts allow the Company to bill or partially bill the customers for the sale of locomotives or locomotive kits before delivery and acceptance. In addition, during the fourth quarter of 2006, management has reached an agreement with a major customer to accelerate payment terms on certain units, therefore significantly increasing the number of locomotives and kits being billed in advance of the delivery and acceptance process. These amounts are recorded under advanced billing on the balance sheet until the locomotives or the kits are delivered and accepted by the customers and revenue is recognized. At that time, the related advanced billing is applied to the customer's receivable balance. 12. Term loan --------------------------------------------------------------------- December 31, December 31, 2006 2005 --------------------------------------------------------------------- Term loan $ 2,745,974 $ 3,086,796 Current portion (2,745,974) (3,086,796) --------------------------------------------------------------------- $ - $ - --------------------------------------------------------------------- --------------------------------------------------------------------- In late 2004, the Company entered into a lending agreement with a financial institution under which the financial institution provided a three year term loan of an aggregate of US$2,925,000. This loan is payable on a monthly basis by installments of US$27,083 plus interest, bears interest at LIBOR plus 3.75% (effective rates of 9.11% and 7.85% as at December 31, 2006 and 2005, respectively), is secured against six of the Company's lease and service locomotives and will mature in December 2007. At December 31, 2006 and 2005, the loan is also secured against a compensating balance of US dollars held in financial institution short term investment account (note 5). The Company does not comply with certain financial covenants in its loan agreement for the year ended December 31, 2006, but has obtained a waiver from the financial institution up to the maturity date, being December 31, 2007. 13. Provision for warranties As explained in note 3 (g), management reassesses on a regular basis the adequacy of the provision for warranties. The following table outlines the variations in the provision for the year: --------------------------------------------------------------------- December 31, December 31, 2006 2005 --------------------------------------------------------------------- Balance at the beginning of the year $ 5,102,518 $ 24,050 Reversal of battery replacement provision (1,105,545) - Additional increases in provision 2,456,044 5,078,468 --------------------------------------------------------------------- 1,350,499 5,078,468 Reclassification of warranty provision from provision for contract losses for units delivered (note 14) 572,815 - Actual costs incurred during the year (2,066,332) - Foreign exchange rate impact on provision 31,793 --------------------------------------------------------------------- Balance at the end of the year $ 4,991,293 $ 5,102,518 --------------------------------------------------------------------- --------------------------------------------------------------------- 14. Provision for contract losses As explained in note 3 (i), management reviews on a regular basis the expected profitability on its contracts. The following table outlines the variations in the provision for the year: --------------------------------------------------------------------- December 31, December 31, 2006 2005 --------------------------------------------------------------------- Balance at the beginning of the year $ 23,018,371 $ - Reversal of provision after cancellation of a contract(1) (18,751,516) - Reversal of battery replacement provision(2) (3,839,169) - Increase in provision for completed contracts 10,221,965 - Increase in provision for contracts in progress, net of provision of $6,572,972 applied against the inventory 8,563,036 23,018,371 --------------------------------------------------------------------- (3,805,684) 23,018,371 Actual costs and penalities incurred during the year for units delivered (10,065,660) - Reclassification of warranty component to warranty provision for units delivered (note 13) (572,815) - Foreign exchange rate impact on provision 12,274 - --------------------------------------------------------------------- Balance at the end of the year(3)(4) $ 8,586,486 $ 23,018,371 --------------------------------------------------------------------- --------------------------------------------------------------------- (1) In the course of the year, management came to an agreement with a major customer to terminate a contract for which the Company expected to incur significant losses. As a result, the provision for future contact losses was decreased by $18,751,516 (including a provision for warranties of $3,008,331), gross of a penalty of $1,139,400. (2) As at December 31, 2005, the provision for future contract losses included a provision for possible battery life issues on units not yet sold. During the year, the Company reviewed the expected costs related to this matter and decreased the provision for future contract losses by $3,839,169. (3) Included in the provision for contract losses is $5,640,580 for warranty components ($7,076,563 in 2005) which will be transferred to warranty provision upon delivery of the units. (4) The provision for losses is largely related to a significant customer for which all locomotives must be shipped from the plants by June 15, 2007. There is a risk that the projected delivery schedule will not be met and significant additional penalties incurred. In addition, the customer may have no further obligation to accept the locomotives delivered after this date. No provision has been made for this contingency as the Company's production schedule currently permits it to respect its obligation (note 2). 15. Share capital (a) Authorized Unlimited number of voting common shares without nominal or par value Unlimited number of non-voting preferred shares without nominal or par value (b) Common shares issued ----------------------------------------------------------------- Contributed Shares Amount surplus ----------------------------------------------------------------- Balance, December 31, 2004 42,315,452 $ 86,331,400 $ 543,854 Stock-based compensation - - 1,545,438 Issued on exercise of options 743,896 1,792,927 (226,520) Issued on exercise of warrants 435,322 766,062 - Issued on public offering 11,214,955 60,000,009 - Share issuance costs - (3,435,621) - ----------------------------------------------------------------- Balance, December 31, 2005 54,709,625 $ 145,454,777 $ 1,862,772 Stock-based compensation - - 2,666,522 Issued on exercise of options 285,833 627,125 (87,037) ----------------------------------------------------------------- Balance, December 31, 2006 54,995,458 $ 146,081,902 $ 4,442,257 ----------------------------------------------------------------- ----------------------------------------------------------------- (c) Warrants ----------------------------------------------------------------- Weighted Number average exercise of warrants price ----------------------------------------------------------------- Balance, December 31, 2004 435,322 $ 1.76 Exercised in 2005 (435,322) 1.76 ----------------------------------------------------------------- Balance, December 31, 2005 and 2006 - $ - ----------------------------------------------------------------- ----------------------------------------------------------------- (d) Director and employee options The Company's stock-based compensation plan for its directors, officers, consultants and employees allows a number of options equal to 12% of the outstanding common shares. The outstanding options issued under the plan vest over a period of up to five years. In September 2006, the Company repriced 1,648,567 stock options previously granted at exercise prices ranging from $1.90 to $6.65. The new exercise price was set at $1.80 which was the closing price of the Company's shares on the day preceding the repricing. As a result of the stock options repricing, the fair value of the options, calculated using the Black-Scholes model, increased by $565,015. At the time of the repricing, 457,727 options had vested and for these, the increase in fair value of $146,892 was expensed. The remaining increase in the fair value amounting to $418,123 will be amortized on the remaining vesting period of the options. For these, $54,852 was recognized during the year. All other characteristics of the repriced options remain the same. The status of the Company's stock-based compensation plan as of December 31, 2006 and 2005, and changes during the years ended on these dates are presented below: ----------------------------------------------------------------- Weighted Number average of shares price ----------------------------------------------------------------- Outstanding, December 31, 2004 2,741,666 $ 2.65 Granted 2,011,000 5.59 Exercised (743,896) 2.11 Expired/cancelled (349,668) 4.55 ----------------------------------------------------------------- Outstanding, December 31, 2005 3,659,102 4.04 Granted 2,107,000 2.76 Exercised (285,833) 1.87 Repriced (1,648,567) 4.61 Repriced 1,648,567 1.80 Expired/cancelled (1,036,334) 4.53 Outstanding, December 31, 2006 4,443,935 $ 2.29 ----------------------------------------------------------------- ----------------------------------------------------------------- At December 31, 2006, the Company had reserved a total of 4,443,935 common shares related to issued director and employee options: ----------------------------------------------------------------- Outstanding Exercisable ----------------------------------------------------- Weighted average remaining Number at contractual Number at Exercise Dec. 31, Average life Dec. 31, Average prices 2006 price (in years) 2006 price ----------------------------------------------------------------- 0.56 - 0.84 82,000 $ 0.67 4.9 - $ - 1.00 - 1.50 586,000 1.42 1.6 400,000 1.41 1.70 - 2.51 2,612,935 1.84 3.7 740,267 1.91 3.20 - 4.75 473,000 3.88 4.0 56,333 4.11 5.30 - 6.22 690,000 5.74 3.7 310,000 5.65 ----------------------------------------------------------------- 4,443,935 $ 2.29 3.5 1,506,600 $ 2.14 ----------------------------------------------------------------- (e) Stock option compensation expense As disclosed in note 3 (k), the Company uses the fair value method to account for all options granted on or after October 1, 2003 and the intrinsic method for options granted to employees prior thereto. If the fair value method had also been used to account for options granted to directors, officers and employees during the year ended September 30, 2003, the Company's loss and loss per share would have been adjusted to the pro-forma amounts indicated below: ----------------------------------------------------------------- Year ended December 31, ------------------------------- 2006 2005 ----------------------------------------------------------------- Loss as reported $ (41,472,523) $ (59,911,480) Pro forma stock-based compensation expense (38,403) (166,252) Pro forma loss (41,510,926) (60,077,732) ----------------------------------------------------------------- ----------------------------------------------------------------- Pro forma basic and diluted loss per share $ (0.76) $ (1.41) ----------------------------------------------------------------- ----------------------------------------------------------------- The fair value of the options granted or repriced has been determined using the Black-Scholes option pricing formula using the following weighted average assumptions: ----------------------------------------------------------------- Year ended December 31, ------------------------------- 2006 2005 ----------------------------------------------------------------- Risk-free interest rate 4.01% 2.69% Expected life 3.4 years 4 years Expected volatility 85% 48% Expected dividends - - ----------------------------------------------------------------- ----------------------------------------------------------------- The total stock-based compensation expense for the years ended December 31, 2006 and 2005 was $2,666,522 and $1,545,438, respectively. 16. Related party transactions There were no related party transactions during the years 2006 and 2005. 17. Income taxes Income tax recovery differs from the amount calculable by reference to the Canadian statutory tax rate of 32.67% (year ended December 31, 2005 - 35.6%) as follows: --------------------------------------------------------------------- Year ended December 31, ------------------------------- 2006 2005 --------------------------------------------------------------------- Income tax rate 32.67% 35.60% Income tax recovery $ 13,549,073 $ 21,328,487 Permanent differences (925,027) (596,806) Adjustments to future tax assets and liabilities for changes in applicable provincial tax rates and substantively enacted changes in tax laws and rates (1,131,225) - Difference with foreign tax rates 2,204,598 432,932 Other (108,521) 625,335 Variation in valuation allowance (13,588,898) (21,789,948) --------------------------------------------------------------------- Net income tax recovery $ - $ - --------------------------------------------------------------------- --------------------------------------------------------------------- The tax effects of temporary differences that give rise to significant portions of the future tax assets are presented below: --------------------------------------------------------------------- December 31, December 31, 2006 2005 --------------------------------------------------------------------- Future tax assets (liabilities): Net operating loss carry forwards $ 38,000,513 $ 18,466,696 Warranty and contract loss provisions 5,098,421 9,882,874 Financing fees 1,380,837 2,178,324 Scientific research and experimental development expenditures 695,451 757,822 Inventory - 89,536 Plant and equipment (192,536) (285,829) Other (155,109) 149,256 ------------------------------------------------------------------- 44,827,577 31,238,679 Valuation allowance (44,827,577) (31,238,679) --------------------------------------------------------------------- Net future tax assets $ - $ - --------------------------------------------------------------------- --------------------------------------------------------------------- The valuation allowance for future tax assets as of December 31, 2006 is $44,827,577 (December 31, 2005 - $31,238,679). The net change in the total valuation allowance for the year ended December 31, 2006 was $13,588,898 (December 31, 2005 - $21,789,948). In assessing the realizability of the future tax assets, management considers whether it is more likely than not that some portion or all of the future tax assets will not be realized. The ultimate realization of future tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of future tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the future tax assets are deductible, management has provided a full valuation allowance for the future tax assets. At December 31, 2006, the Company has net operating loss carry forwards for income tax purposes which are available to offset future taxable income. These operating losses expire as follows: --------------------------------------------------------------------- December 31, 2006 ----------------------------------------------- Canada USA Total --------------------------------------------------------------------- 2007 $ 56,156 $ - $ 56,156 2008 606,207 - 606,207 2009 1,648,470 - 1,648,470 2010 1,170,226 - 1,170,226 2014 and beyond 36,449,063 66,352,942 102,802,005 --------------------------------------------------------------------- $ 39,930,122 $ 66,352,942 $ 106,283,064 --------------------------------------------------------------------- --------------------------------------------------------------------- At December 31, 2006, the Company has investment tax credits earned on qualifying Scientific Research and Experimental Development activities which are available to offset future Canadian federal income taxes payable. These investment tax credits expire as follows: --------------------------------------------------------------------- December 31, 2006 --------------------------------------------------------------------- 2008 $ 1,217 2010 57,069 2011 107,411 2012 456,467 2013 133,642 --------------------------------------------------------------------- $ 755,806 --------------------------------------------------------------------- --------------------------------------------------------------------- 18. Contractual obligations and commitments The following table outlines the known contractual obligations and commitments to make future payments for contracts such as commercial commitments and operating leases as at December 31, 2006: --------------------------------------------------------------------- Contractual commitments --------------------------------------------------------------- Operating Suppliers Subcontractors leases Total --------------------------------------------------------------------- 2007 $ 38,242,719 $ 12,450,424 $ 490,900 $ 51,184,043 2008 - - 410,032 410,032 2009 - - 266,446 266,446 2010 - - 164,834 164,834 2011 - - 161,534 161,534 There- after - - 726,903 726,903 --------------------------------------------------------------------- Total $ 38,242,719 $ 12,450,424 $ 2,220,649 $ 52,913,792 --------------------------------------------------------------------- --------------------------------------------------------------------- At December 31, 2006, the Company had one letter of credit outstanding in favor of a supplier that totaled US$300,000 compared to US$2,500,000 at December 31, 2005. This letter of credit was secured by a deposit totaling $424,000. The Company has not entered into any other off balance sheet arrangements, hedges or other financial instruments. 19. Fair values The carrying values of cash and cash equivalents, restricted investments, accounts receivable, accounts payable and accrued liabilities and the term loan approximate their fair value due to the relatively short periods to maturity of the instruments. 20. Geographic segmented information The Company operates in two geographic locations: Canada and the United States. As at December 31, 2006, the Company's long-lived assets were physically located as follows: --------------------------------------------------------------------- Canada United States Total --------------------------------------------------------------------- Plant and equipment $ 518,320 $ 1,143,924 $ 1,662,244 Demonstration units - 2,346,974 2,346,974 Lease and service units - 3,574,880 3,574,880 --------------------------------------------------------------------- Total long-lived assets $ 518,320 $ 7,065,778 $ 7,584,098 --------------------------------------------------------------------- --------------------------------------------------------------------- At as December 31, 2005, the Company's long-lived assets were physically located as follows: --------------------------------------------------------------------- Canada United States Total --------------------------------------------------------------------- Lease and service units $ 698,438 $ 2,940,044 $ 3,638,482 Plant and equipment 198,308 1,031,606 1,229,914 --------------------------------------------------------------------- Total $ 896,746 $ 3,971,650 $ 4,868,396 --------------------------------------------------------------------- --------------------------------------------------------------------- For the year ended December 31, 2006 the Company's revenue by geographic location determined by reference to the customer location was as follows: --------------------------------------------------------------------- Canada United States Total --------------------------------------------------------------------- Sales $ - $ 25,647,651 $ 25,647,651 Interest income 1,392,036 216,623 1,608,659 --------------------------------------------------------------------- Total $ 1,392,036 $ 25,864,274 $ 27,256,310 --------------------------------------------------------------------- --------------------------------------------------------------------- For the year ended December 31, 2005 the Company's revenue by geographic location determined by reference to the customer location was as follows: --------------------------------------------------------------------- Canada United States Total --------------------------------------------------------------------- Sales $ 651,630 $ 19,525,631 $ 20,177,261 Interest income 1,116,292 151,275 1,267,567 --------------------------------------------------------------------- Total $ 1,767,922 $ 19,676,906 $ 21,444,828 --------------------------------------------------------------------- --------------------------------------------------------------------- 21. Sales revenue by major customers For the years ended December 31, 2006 and 2005, the Company's sales revenue by major customers (greater than 10% of revenues) is as follows: --------------------------------------------------------------------- Year ended December 31, ----------------------------------------------- 2006 % 2005 % --------------------------------------------------------------------- Customer A $ 16,576,354 64 $ 9,463,661 47 Customer B 2,500,065 10 3,578,413 18 Customer C 968,834 4 2,785,013 14 --------------------------------------------------------------------- Total of major customers 20,045,253 78 15,827,087 79 Other combined 5,602,398 22 4,350,174 21 --------------------------------------------------------------------- Total sales $ 25,647,651 100 $ 20,177,261 100 --------------------------------------------------------------------- --------------------------------------------------------------------- 22. Contingencies In the normal course of operations, the Company may become involved in various legal actions. As at December 31, 2006, the Company was party to one legal action for an amount of $263,000 which is being contested. While the final outcome with respect to the pending action cannot be predicted with certainty, it is management's opinion that its resolution will not have a material adverse effect on the Company's financial position, earnings or cash flows. 23. Subsequent events (a) Public offering On February 13, 2007, the Company completed a public offering of 34,500,000 units ("Units") at a price of $1.00 per Unit for aggregate gross proceeds to the Company of $34,500,000. The offering included the exercise in full of the underwriters' over- allotment option to purchase an additional 4,500,000 Units. Each Unit consisted of one common share in the share capital of the Company ("Common Share") and one-half of one Common Share purchase warrant. Each whole Common Share purchase warrant will entitle the holder thereof to purchase one Common Share at a price of $1.25, on or before February 12, 2010. The Company intends to use the net proceeds of the offering as follows: approximately $20.0 million for working capital purposes to: (i) finance the fulfillment of the Company's current orders and future orders, depending on the payment terms; and (ii) to support the level of inventory. The balance of approximately $12.0 million will be used for continued technology research and development purposes and new business development activities. (b) Stock options On February 22, 2007, the Company issued 1,680,000 additional stock options to its directors, officers and employees at the exercise price of $1.15. For further information José Mathieu, President & CEO, Railpower Technologies Corp., Tel: [phone] ext.501, Toll Free: 1-866-678-5277, Email: [e-mail] Eric Bouchard or Arianna Vanin, Investor Relations, The Equicom Group Inc., Tel: [phone] or [phone] ext. 266, Email: [e-mail] or [e-mail] -------------------------------------------------------------------------------- Source: RailPower Technologies Corp.