Mail Stop 3561
January 26, 2006
Mr. Brian Richardson
Chief Financial Officer
Dynamotive Energy Systems Corporation
1700 West 75th Ave., Suite 230
Vancouver, BC V6P 6G2
Canada
Re: Dynamotive Energy Systems Corporation
Form 20-F for the Fiscal Year Ended December 31, 2004
File No. 000-27524
Dear Mr. Richardson:
We have reviewed your response letter dated December 16,
2005
and have the following comments. Where indicated, we think you
should revise your filings in response to these comments. If you
disagree, we will consider your explanation as to why our comments
are inapplicable or a revision is unnecessary. Please be as
detailed
as necessary in your explanations. In some of our comments, we
may
ask you to provide us with information so we may better understand
your disclosure. After reviewing this information, we may raise
additional comments.
Notes to Consolidated Financial Statements, page 60
Note 9 - Convertible Debenture, page 71
1. We note your response to our prior comment number 2 of our
October
31, 2005 letter and have the following additional comments:
* Please note that we do not agree with your assessment that your
convertible debt is a "conventional convertible" instrument.
Conventionally convertible instruments are limited to those that
are
convertible into a fixed number of shares or an equivalent amount
of
cash (at the discretion of the company). Since the conversion
terms
of your convertible debt are not fixed, the embedded conversion
feature in your convertible debt does not automatically qualify
for
the scope exception in paragraph 11 of SFAS 133 obviating
bifurcation
of the embedded conversion feature. Rather, further assessment is
required under paragraphs 12 through 32 of EITF 00-19 to determine
whether the embedded conversion feature would be classified in
stockholders` equity before you can conclude that bifurcation is
not
required. Although it appears that you have unlimited authorized
shares available to physically settle upon conversion, please note
that all of the conditions in paragraphs 12 through 32 of EITF 00-
19
must be met in order for the embedded conversion feature to be
classified as equity. Please confirm for us that the embedded
conversion feature meets all of these conditions. Refer to
paragraphs 4 and 12-32 of EITF 00-19. Please also confirm that
the
noteholders do not have any net settlement alternative with regard
to
the warrants. If the warrants do not contain a net settlement
alternative, please confirm that these warrants likewise meet all
of
the conditions set forth in EITF 00-19 for classification in
equity.
* Please clarify for us how you determined the fair value of the
beneficial conversion feature (BCF) of your convertible debt.
Specifically, please confirm that you did not use the Black
Scholes
option pricing model to value the BCF. Rather, we would expect
that
your use of the Black Scholes option pricing model was limited to
determining the fair value of the warrants prior to your
allocation
of the gross proceeds on a relative fair value basis between the
convertible debt and the warrants. In this regard, please confirm
that you included the fair value of the contingent warrants
issuable
upon conversion as a component of the relative fair value of the
convertible debt when you allocated the gross proceeds on a
relative
fair value basis.
* Please confirm for us that you calculated the BCF of your
convertible debt based upon the effective conversion price as
prescribed by EITF 98-5, Accounting for Convertible Securities
with
Beneficial Conversion Features or Contingently Adjustable
Conversion
Ratios. Please provide us with the calculations supporting the
fair
value of the warrants and the contingently issuable warrants,
including all assumptions used in the calculation.
Note 20 - Reconciliation of GAAP, page 91
2. We note your response to our prior comment number 4 of our
October
31, 2005 letter and have the following additional comments:
* Please confirm for us that you exclude escrowed shares from your
calculation of weighted average shares outstanding for purposes of
calculating basic and diluted earnings per share. If so, please
disclose this fact in future filings.
* Please confirm for us that you are accounting for your repriced
stock options as variable awards for US GAAP purposes.
* * * * *
As appropriate, please respond to these comments within 10
business days or tell us when you will provide us with a response.
Please furnish a cover letter that keys your responses to our
comments and provides any requested information. Detailed cover
letters greatly facilitate our review. Please understand that we
may
have additional comments after reviewing your amendment and
responses
to our comments.
You may contact Scott Ruggiero at (202) 551-3331 if you have
questions regarding comments on the financial statements and
related
matters. Please contact me at (202) 551-3716 with any other
questions.
Sincerely,
William Choi
Branch Chief
Mr. Brian Richardson
Dynamotive Energy Systems Corporation
January 26, 2006
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