UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number: 0-27524
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DYNAMOTIVE TECHNOLOGIES CORPORATION
(Exact name of Registrant as specified in its charter)
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British Columbia N/A
- -------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Suite 105 - 1700 West 75th Avenue
---------------------------------------
Vancouver, B.C. V6P 6G2
(Address of principal executive offices)
(604) 267-6000
----------------------------
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No []
State the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
Class Outstanding at May 4, 2001
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Common Stock, no par value 36,943,926
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following financial statements have been prepared in accordance with
accounting principles generally accepted in Canada. While adhering to these
Canadian accounting principles results in financial statements disclosing an
information content substantially similar to financial statements that comply
with United States generally accepted accounting principles, there are material
variations in the two country's accounting principles, practices and methods
used. Reference should be made to the notes that accompany the Company's
financial statements as well as to Note 15 of the Company's annual report on
Form 10-K which discusses the material variations in the accounting principles
in Canada as compared to those followed in the United States.
Interim Financial Statements Page
Consolidated Balance Sheet 3
Consolidated Statement of Loss and Deficit 4
Consolidated Statement of Cashflow 5
Notes to Interim Financial Statement 6 - 24
CONSOLIDATED FINANCIAL STATEMENTS (in U.S. dollars)
DYNAMOTIVE TECHNOLOGIES CORPORATION
March 31, 2001
DynaMotive Technologies Corporation
CONSOLIDATED BALANCE SHEET
(expressed in U.S. dollars)
March 31, December 31,
2001 2000
$ $
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ASSETS
Current
Cash and cash equivalents 1,092,792 1,095,715
Accounts receivable 145,392 298,676
Government grants receivable [note 5b and 8] 234,587 661,046
Inventory 20,998 20,528
Prepaid expenses and deposits 185,692 136,848
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Total current assets 1,679,461 2,212,813
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Capital assets 1,651,821 1,526,369
Patents 691,940 729,938
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4,023,222 4,469,120
========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness [note 3] 221,983 233,520
Accounts payable and accrued liabilities 407,886 560,906
Deferred Revenue 122,046 103,948
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Total current liabilities 751,915 898,374
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Commitments and contingencies [note 1, 5 and 6]
Shareholders' equity
Share capital, [note 4] 21,881,583 21,040,882
Shares to be issued 165,435 250,713
Contributed surplus [note 4f] 1,829,645 1,584,997
Cumulative translation adjustment (427,614) (371,062)
Deficit (20,177,742) (18,934,784)
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Total shareholders' equity 3,271,307 3,570,746
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4,023,222 4,469,120
========================================================================
See accompanying notes
3
DynaMotive Technologies Corporation
CONSOLIDATED STATEMENT OF LOSS AND DEFICIT
Period ended March 31 (expressed in U.S. dollars)
Three Months Three Months
ended ended
March 31, March 31,
2001 2000
$ $
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REVENUE
Sales 97,118 266,942
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97,118 266,942
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EXPENSES
Amortization and depreciation 87,444 67,638
Cost of sales 75,780 133,208
Research and Development[note 5b and 9] 74,994 169,378
Interest expense 6,176 3,332
Marketing 179,093 148,896
Office supplies, telephone and insurance 52,121 68,433
Professional fees [note 6] 497,367 129,536
Royalties -- 12,826
Rent 83,716 32,253
General and administrative salaries
and benefits [note 6] 293,100 679,799
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1,349,791 1,445,279
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Loss from operations (1,252,673) (1,178,337)
OTHER REVENUE AND EXPENSES
Interest income 10,175 29,282
Loss on asset disposals (460) --
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(9,715) (29,282)
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Loss for the Period (1,242,958) (1,149,055)
Deficit, beginning of period (18,934,784) (14,177,911)
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Deficit, end of period (20,177,742) (15,326,966)
===========================================================================
Weighted average number of common shares
Outstanding 34,491,242 29,626,768
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Loss per common share (0.04) (0.04)
===========================================================================
See accompanying notes
4
DynaMotive Technologies Corporation
CONSOLIDATED STATEMENT OF CASHFLOW
Period ended March 31 (expressed in U.S. dollars)
Three Months Three Months
ended ended
March 31, March 31,
2001 2000
$ $
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OPERATING ACTIVITIES
Loss for the period (1,242,958) (1,149,055)
Add items not involving cash:
Amortization and depreciation 87,444 67,638
Stock based compensation 481,594 283,668
Net change in non-cash working capital
balances related to operations [note 7] 395,508 194,033
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Cash used in operating activities (278,412) (603,716)
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FINANCING ACTIVITIES
Decrease in bank indebtedness (11,537) --
Retirement of debt -- (81,492)
Share subscriptions 82,098
Share capital issued 518,274 4,440,550
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Cash provided by financing activities 506,737 4,441,156
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INVESTING ACTIVITIES
Increase in patents costs 7,002 (3,788)
Purchase of capital assets (net of (182,713) (51,400)
government grants)
Proceeds on sale of equipment 1,015 --
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Cash used in investing activities (174,496) (55,188)
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Effect of exchange rate changes on cash (56,552) (12,315)
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Increase (decrease) in cash and cash
equivalent during the period (2,923) 3,769,937
Cash and cash equivalent at beginning of period 1,095,715 223,769
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Cash end of period 1,092,792 3,993,706
================================================================================
See accompanying notes
5
1. NATURE OF BUSINESS
DynaMotive Technologies Corporation ("the Company") was incorporated on April
11, 1991 under the laws of the Province of British Columbia. Since its
inception the Company has been engaged in the process of commercializing
several technologies that are in various stages of development.
The Company's primary focus is to commercialize its patented BioOil production
technology and establish this technology as the worldwide industry standard for
production of BioOil clean fuels. The Company has developed, patented, or
acquired three primary technologies: (1) BioTherm(TM), a biomass-to-energy
technology that converts low value forest waste and agricultural by-products
into liquid BioOil, which can be used as a fuel or as a raw material for the
production of various derivative products; (2) DynaPower(R), a metal cleaning
process that does not involve the use of chemicals; and (3) actuator
technologies used in both steel and aluminum welding. To date, the Company's
principal revenues have been derived from the sales of the actuators and sales
of DynaPower(R) systems to various customer applications. The principal market
for the Company's products is in the United States.
These financial statements have been prepared on the going concern basis, which
presumes the Company will be able to realize its assets and discharge its
liabilities in the normal course of operations for the foreseeable future.
The Company incurred a net loss of $1,242,958 for the first quarter ended March
31, 2001 and as at March 31,2001 has a deficit of $20,177,742.
The ability of the Company to continue as a going concern is uncertain and is
dependent on achieving profitable operations, and continuing development of new
technologies, the outcome of which cannot be predicted at this time.
Accordingly, the Company will require, for the foreseeable future, ongoing
capital infusions in order to continue its operations, fund its research and
development activities, and ensure orderly realization of its assets at their
carrying value. The financial statements do not reflect adjustments in carrying
values and classifications of assets and liabilities that would be necessary
should the Company not be able to continue in the normal course of operations.
2. SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in Canada. A
reconciliation of amounts presented in accordance with United States accounting
principles is detailed in note 10.
The following is a summary of significant accounting policies used in the
preparation of these consolidated financial statements:
6
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries DynaMotive Corporation, incorporated under the
laws of Rhode Island, U.S.A.; DynaMotive Europe Limited (formerly known as
DynaMotive Technologies Corporation (UK) Limited), incorporated under the laws
of the United Kingdom; DynaMotive Canada Inc., federally incorporated under the
laws of Canada; DynaPower Inc., incorporated under the law of British Columbia;
DynaMotive Puerto Rico, Inc., incorporated under the laws of Puerto Rico;
DynaMill Systems Ltd. and DynaMotive Electrochem Corporation, incorporated
under the laws of British Columbia. DynaMill Systems Ltd., DynaMotive
Electrochem Corporation, and DynaMotive Puerto Rico, Inc. are companies with no
significant net assets or operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from these estimates.
FOREIGN CURRENCY TRANSLATION
The accounts of the Company and its consolidated subsidiaries are measured
using the Canadian dollar as the functional currency. Monetary items
denominated in foreign currencies are translated into Canadian dollars
using exchange rates in effect at the balance sheet date and non-monetary items
are translated using historical exchange rates. Exchange gains or losses
arising on the translation or settlement of foreign currency denominated
monetary items are included in the determination of net income, except for
gains or losses related to long-term monetary items which are deferred and
amortized over the life of the item.
The Company uses the U.S. dollar as the reporting currency for its consolidated
financial statements. Assets and liabilities are translated into U.S. dollars
using current exchange rates in effect at the balance sheet date and revenue
and expense accounts are translated using the average exchange rate during the
year. Gains and losses resulting from this process are recorded in
shareholders' equity as an adjustment to the cumulative translation adjustment
account.
FINANCIAL DERIVATIVES
Forward currency derivative financial instruments, such as forward contracts,
are used from time to time to manage the effects of exchange rate changes on
foreign currency exposures. Gains and losses on forward foreign exchange
contracts are not recognized until realized and are then charged to income on
a basis that corresponds with changes in the related amounts of foreign
currency expenses.
7
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
REVENUE RECOGNITION
Revenue from the sale of products is recognized upon shipment of the product
to the customer. Revenue from contracts relating to implementation of the
Company's metal cleaning systems in a commercial application is recognized
on a completed contract basis, except for those which are greater than three
months in duration, for which revenue is recognized on a percentage of
completion basis where the basis of measure of performance is based on
engineering estimates of completion. Losses on contracts are recognized
when they become known.
GOVERNMENT ASSISTANCE AND INVESTMENT TAX CREDITS
Government assistance towards current expenses is included in the determination
of income for the period as a reduction of the expenses to which it relates.
Government assistance towards the acquisition of capital assets is deducted
from the cost of the related capital assets. Investment tax credits are
accounted for under the cost reduction method whereby they are netted against
the expense or capital asset to which they relate.
Investment tax credits are recorded when the Company has incurred the
qualifying expenditures and there is reasonable assurance the tax credits will
be realized.
INVENTORY
Inventory comprises of work in progress relating to the Company's products
under construction and is recorded at the lower of average cost and net
realizable value. Inventory work in progress costs include the cost of raw
materials, direct labor and overhead.
RESEARCH AND DEVELOPMENT COSTS
Research costs are expensed in the year incurred. Development costs are
expensed in the year incurred unless the Company believes the development
project meets generally accepted accounting criteria for deferral and
amortization. In evaluating these criteria the Company considers technological
feasibility to be established only when a product demonstrates it operates
under conditions which are acceptable to target customers.
If management determines that the development of products to which such costs
have been capitalized is not reasonably certain, or that costs exceed
recoverable value, such costs are charged to operations.
PRODUCT WARRANTIES
A liability for estimated warranty expense is established by a charge against
cost of goods sold. The subsequent costs incurred for warranty claims serve to
reduce the product warranty liability.
8
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
PATENTS
Patents consist of the consideration paid for the patents and related legal
costs and are amortized over the lesser of the estimated useful life of the
related technology and the life of the patent commencing with commercial
production. If management determines that development of products to which
patent costs relate is not reasonably certain, or that costs exceed recoverable
value, such costs are charged to operations.
Due to the long-term nature of estimates inherent in determining future cash
flows, it is possible that the amounts or the estimated useful life of such
assets could be reduced in the future.
CAPITAL ASSETS
Capital assets are recorded at cost, net of government assistance, and
amortized using the following methods and annual rates:
Furniture and fixtures 20% declining balance
Computer equipment 30% declining balance
Computer software 100% declining balance
Test equipment 20% declining balance
Leasehold improvements Straight line over the term of the lease
CASH EQUIVALENTS
The Company considers all highly liquid financial instruments purchased with
an original maturity of three months or less to be cash equivalents and are
recorded at the amortized cost which approximates fair value.
FINANCIAL INSTRUMENTS
The fair values of the financial instruments approximates their carrying value
except as otherwise disclosed in the financial statements.
INCOME TAXES
The Company follows the liability method of tax allocation in accounting for
income taxes.
STOCK BASED COMPENSATION PLAN
The Company has two stock based compensation plans - a stock appreciation
rights (SAR) plan and a stock option plan for directors, employees and others,
which are described in Note 4. Under the terms of the stock option plan the
Company may grant fixed options or options whose vesting is contingent on
future performance. No compensation is recognized when SAR's and fixed or
performance based stock options are granted to employees and directors.
9
2. SIGNIFICANT ACCOUNTING POLICIES (cont'd.)
The Company has a compensation arrangement with an officer of the Company
whereby the officer receives a fixed number of common shares per month. The
Company records compensation expense monthly based on the month-end quoted
market price of the Company's stock.
In addition, the Company has entered into compensation arrangements which
entitle non-employees to specific amounts which can only be settled by applying
the amounts to exercise outstanding options to purchase common shares monthly
over a period of up to twelve months. The Company recognizes compensation
expense based on the fair value of the common stock issuable under the
arrangement, when related services are performed. The common shares issuable
under these arrangements are generally issued in the quarter following the
period in which they are earned.
The Company may also issue stock options, SAR's and warrants as consideration
for services rendered by non-employees. Such equity awards are recorded at
their fair value, as compensation expense when the Company receives the related
services and the equity awards vest. No compensation is recognized in
connection with options and warrants awarded in connection with private
placements, since the share issue costs are net against the proceeds raised.
If shares or stock options are repurchased, the excess of the consideration
paid over the carrying value of the shares or stock options cancelled is
charged to contributed surplus or deficit.
LOSS PER COMMON SHARE
Loss per common share is based on the weighted average number of shares
outstanding for the year including escrowed shares. The effect of potential
issues of shares under share option, share purchase warrants and conversion
agreements have not been disclosed as they are antidilutive.
3. BANK INDEBTEDNESS
The Company has an authorized credit facility up to a maximum of $327,247
[$Cdn. 500,000]. As collateral for the loan, the Company has provided the
lender a General Security Agreement providing a charge on all present and
future assets. Amounts borrowed are repayable within 120 days from the date of
borrowing and as at March 31,2001 $221,983 (Cdn. $350,000) has been drawn down
on this loan.
Covenants under the credit facility include, among other things, a requirement
for the Company to obtain written consent prior to declaring dividends,
significantly changing ownership control, committing to mergers, acquisitions,
or changes in Company's principal line of business or entering other guarantees
or other contingent liabilities and assets are not to be further encumbered.
The fair market value of the loan March 31, 2001 approximates its carrying
value.
10
4. SHARE CAPITAL
[a] AUTHORIZED SHARE CAPITAL AND ISSUED COMMON SHARES
March 31, December 31,
2001 2000
$ $
- ------------------------------------------------------------------------------------------
Authorized
100,000,000 common shares
100,000,000 preferred shares Class A with $5.00 par value
Issued and outstanding
36,745,548 [December 31, 2000 - 35,851,060] $21,881,583 $21,040,882
- ------------------------------------------------------------------------------------------
[i] Pursuant to a private placement on February 20, 2001, the Company
issued 417,246 common shares for total cash proceed of $500,695.
[ii] During the first quarter of 2001, 27,333 common shares were issued to
directors at $0.81 per common share in lieu of cash compensation.
[iii] During the first quarter of 2001, 405,963 common shares were issued as
payment for commercial services based upon reported share prices
ranging from $0.50 to $2.00 per common share.
$ Number of Shares
- ---------------------------------------------------------------------------------
Share Capital, December 31, 2000 21,040,882 35,851,060
Private placement issued for cash 500,695 417,246
Shares issued from exercise of options for cash 17,579 43,946
Shares issued, directors & employees compensation 22,208 27,333
Shares issued, for commercial services 300,219 405,963
Share Capital, March 31, 2001
Common shares without par value 21,881,583 36,745,548
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At March 31, 2001, the Company has 170,570 common shares to be issued to an
officer and non-employees for services rendered under compensation arrangements.
11
4. SHARE CAPITAL (cont'd.)
[b] ESCROW AGREEMENT
At December 31, 1998, 1,232,000 common shares were held in escrow to be
released at a rate of one share for each $0.17 of "cash flow" as defined in
the agreement, generated by the Company.
During 1999, the Board approved an amendment to the Escrow agreement's release
provisions that applied to 676,000 of the shares held in escrow. The amended
release provisions are: 1/3 of the common shares in escrow will be released
upon the Company achieving a capitalized stock value of $30 million for a
consistent twenty day trading period; 1/3 of the common shares in escrow will
be released upon the Company achieving a capitalized stock value of $50 million
for a consistent twenty day trading period; 1/3 of the common shares in escrow
will be released upon the Company achieving a capitalized stock value of $100
million for a consistent twenty day trading period.
During the first quarter of 2001 no common shares were released from
escrow and at March 31, 2001 781,334 common shares are held in escrow.
[c] STOCK OPTIONS
At March 31, 2001 the following stock options to Directors, employees and
others were outstanding:
No. of common Exercise Price
shares issuable $ Date of expiry
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655,236 0.40 April 30, 2001 - December 10, 2004
100,000 0.50 January 31, 2005
620,100 0.75 January 31, 2002 - January 31, 2004
883,500 1.00 January 31, 2002 - February 28, 2005
2,560,000 1.50 April 30, 2001 - January 31, 2006
20,000 1.95 June 14, 2005
41,722 2.00 July 31, 2001 - December 19, 2002
6,000 2.75 December 1, 2002
12,000 3.13 November 15, 2001
3,985 4.00 October 31, 2002
50,000 5.50 November 12, 2001
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4,952,543
==============================================================================
From time to time, the Company has provided incentives in the form of share
purchase options to the Company's directors, officers and employees. The
Company has reserved 5,511,832 (15%) of common shares for issuance upon the
exercise of stock options of which at March 31, 2001 559,289 are available
to be granted. The exercise price and the vesting terms of the options are
determined by the Compensation Committee. The exercise price will generally
be at least equal to the market price of the common shares at the date of
the grant and the term may not exceed five years from the date of the grant.
Stock options granted are also subject to certain vesting provisions
as determined by the Compensation Committee.
12
4. SHARE CAPITAL (cont'd.)
Stock option transactions for the respective periods and the number of stock
options outstanding are summarized as follows:
No. of Common Weighted Average
SHARES ISSUABLE EXERCISE PRICE
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BALANCE, DECEMBER 31, 1997 1,547,385 2.58
- -------------------------------------------------------------------------------
Options granted 872,635 0.46
Options cancelled (478,566) 2.48
Options exercised (96,943) 0.75
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BALANCE, DECEMBER 31, 1998 1,844,511 0.73
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Options granted 1,070,863 1.11
Options cancelled (262,634) 0.97
Options exercised (242,601) 0.46
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BALANCE, DECEMBER 31, 1999 2,410,139 0.90
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Options granted 3,885,500 1.17
Options cancelled (265,278) 1.63
Options expired (63,600) 2.19
Options exercised (737,119) 0.54
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BALANCE, DECEMBER 31, 2000 5,229,642 1.14
- -------------------------------------------------------------------------------
Options granted 128,000 1.32
Options cancelled -- --
Options expired 15,000 2.00
Options exercised (390,099) 1.45
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BALANCE, MARCH 31, 2001 4,982,543 1.12
- -------------------------------------------------------------------------------
During 2000, the Company repriced 234,278 options issued to non-employees from
original exercise prices ranging from $1.50 to $2.00 to a new exercise price
of $0.75, the then market price of the shares.
On December 14, 1998, the Company repriced 318,000 options issued to Directors
from an original exercise price of $2.00 to $0.40. On December 10, 1999 these
same options were repriced again from $0.40 to $1.00.
Included in the options granted in 2001, were 48,000 options to a non-employee
for services rendered. The valuation of this stock based compensation is to be
recorded at fair value when related services are performed.
13
4. SHARE CAPITAL (cont'd.)
[d] COMMON SHARE PURCHASE WARRANTS
At March 31, 2001 common share purchase warrants outstanding were as follows
Number of Common Exercise Expiration
Shares Issuable Price Date
- ---------------------------------------------------------------------------------------------
Series F Warrants 2,075,000 $1.50 March 5, 2005
Series G Warrants 300,000 $2.50 March 01, 2003
Series H Warrants 15,000 $1.75 May 31, 2002
Series I Warrants 15,000 $2.50 May 31, 2002
Series J Warrants 1,005,000 $2.00 July 31, 2002 - July 31, 2003
Series K Warrants 75,000 $1.50 July 31, 2003
- ---------------------------------------------------------------------------------------------
(1) 2,000,000 of the Series F warrants were issued as an integral part of a
private placement. These warrants vested upon successful completion of
the private placement.
75,000 of the Series F warrants were issued to an employee of the Company
for past services.
(2) The Series G warrants were issued as a placement fee for a private
placement. These warrants vested upon successful completion of the private
placement.
(3) The Series H, I, J, and K warrants have been issued for services. Of
these warrants, 75,000 have been issued to an employee of the Company for
past services. The remaining warrants have been issued to non-employees.
The warrants remaining have the following vesting terms: 675,000 warrants
vest monthly based on the consulting agreement term; 120,000 warrants vest
upon completion of performance criteria; and, 315,000 warrants vested
immediately upon grant.
As at March 31, 2001, 393,333 warrants are unvested. Compensation for the first
quarter in respect of the vested warrants has been recorded at a fair value of
$201,243.
[e] STOCK APPRECIATION RIGHTS
During 1998, the Company established a stock appreciation rights plan whereby
the participants will be entitled to require the Company to redeem the stock
appreciation rights ("SARs") for an amount equal to the excess of the market
value of the underlying common shares over the initial value of the SAR at the
date of grant.
14
4. SHARE CAPITAL (cont'd.)
The SARs vest as the Company achieves stock values as defined in the agreement:
1/3 of the SAR's issued may be redeemed upon the Company achieving a
capitalized stock value of $30 million for a consistent twenty day trading
period; 1/3 of the SAR's issued may be redeemed upon the Company achieving a
capitalized stock value of $50 million for a consistent twenty day trading
period; 1/3 of the SAR's issued may be redeemed upon the Company achieving a
capitalized stock value of $100 million for a consistent twenty day trading
period.
The Company also has the right to redeem the SARs at its option under certain
circumstances. The number of SARs that can be granted under the plan until
December 31, 2008 cannot exceed 2,500,000.
Stock appreciation rights transactions and the number of stock appreciation
rights outstanding at March 31, 2001 are summarized as follows:
No. of
SAR's Issued
- ------------------------------------------------------------------------------
Balance, December 31, 1999 and 1998 1,747,500
SAR's redeemed (11,667)
- ------------------------------------------------------------------------------
Balance, December 31, 2000 1,735,833
- ------------------------------------------------------------------------------
Balance, March 31, 2001 1,735,833
- ------------------------------------------------------------------------------
At March 31, 2001, the following stock appreciation rights all of which were
issued to employees, were outstanding:
SAR's Initial Value Expiration Date
- ------------------------------------------------------------------------------
1,253,333 $0.400 January 28, 2004
200,000 $0.625 May 1, 2004
207,500 $1.000 May 1, 2004
75,000 $1.000 March 8, 2004
- ------------------------------------------------------------------------------
1,735,833
- ------------------------------------------------------------------------------
15
4. SHARE CAPITAL (cont'd.)
[f] CONTRIBUTED SURPLUS
During 1994, the Company entered into an escrow agreement with certain
shareholders, Directors and employees, whereby the Company issued 2,512,720
common shares for cash consideration of $22,300. During 1995, the Company
repurchased for cash 1,280,720 of these common shares at their original issue
price of $11,366. The excess of the weighted average cost of the 1,280,720
common shares repurchased and cancelled over the purchase price, amounting to
$409,030 ($Cdn. 560,315), has been credited to contributed surplus.
Contributed surplus also includes the fair value of stock options and warrants
issued to non-employees for services rendered.
5. COMMITMENTS AND CONTINGENCIES
Commitments
[a] Pursuant to an agreement to purchase certain patents, the Company is
committed to pay a royalty of $7,100 on each sale of a unit of related product
to a maximum of $106,500. No sales have occurred to March 31, 2001 on which the
Company owes such royalty.
[b] During the year ended December 31, 1997, the Company entered into a
contribution agreement with Industry Canada-Technology Partnerships Canada
whereby the Company is entitled to receive a maximum of approximately $6.1
million or 37% of eligible expenditures, as defined in the agreement. In the
event that commercial viability is achieved, then the assistance is repayable,
denominated in Canadian dollars, commencing February 15, 2002 based on
royalties from sales of specified products after December 31, 2001 resulting
from the project to a maximum of $11 million. During the first quarter of 2001,
$211,578 was claimed and is included in government grants receivable [see
note 9]. The Company has yet to achieve commercial viability.
[c] The Company has available a maximum aggregate forward exchange contract
facility of up to $750,000 U.S. dollars or the equivalent thereof in other
approved currencies. The daily settlement limit is $250,000. No such
instruments were outstanding at March 31, 2001.
[d] The Company has the following future minimum lease commitments for
premises and equipment expiring through 2005:
$
- ------------------------------------------------------------------------------
2001 171,750
2002 219,000
2003 214,000
2004 124,000
2005 119,000
- ------------------------------------------------------------------------------
847,750
- ------------------------------------------------------------------------------
16
5. COMMITMENTS AND CONTINGENCIES (Cont'd.)
Contingencies
In the ordinary course of business activities, the Company may be contingently
liable for litigation and claims with customers, suppliers and former
employees. Management believes that adequate provisions have been recorded in
the accounts where required. Although it is not possible to estimate the
extent of potential costs and losses, if any, management believes that the
ultimate resolution of such contingencies will not have a material adverse
effect on the consolidated financial position of the Company.
[a] In 1996 the Company was named as a co-defendant in a legal action for
unspecified damages for alleged interference with the rights to a
disintegration technology held by a subsidiary of the Company. The outcome of
the action is not determinable at this time and the amount of any liability,
if any, cannot be reasonably estimated. Accordingly, no provision for loss has
been made in these consolidated financial statements.
[b] The Company is a party to a legal proceeding filed by HPG Research Ltd
for an alleged breach of a royalty agreement and a potential claim of a
Certain percentage of DynaPower sales. The parties have agreed to proceed with
arbitration, as provided for under the agreement.
[c] At the end of the first quarter 2001, the Company was named a party to a
legal proceeding filed by Southwestern Wire, Inc. (SWI), an Oklahoma
corporation, in the District Court of Cleveland County, State of Oklahoma for
an alleged breach of contract by the Company with respect to SWI's purchase of
a 24 wire DynaPower cleaning system for a potential claim of $101,000. The
outcome of the action is not determinable at this time and the amount of any
liability, if any, cannot be reasonably estimated. Accordingly, no provision
for loss has been made in these consolidated financial statements.
6. RELATED PARTY TRANSACTIONS
In addition to the transactions described in Note 4, the Company had the
following transactions with related parties:
[a] Consulting fees and salaries of $117,168 for the first quarter have
been paid to Directors (or companies controlled by Directors) of the
Company.
[b] The Company has entered into:
[i] a royalty agreement, pursuant to an agreement to purchase certain
patents for an unlimited term with a Company controlled by a previous
Director of the Company, based on 4% of the gross receipts from unit
sales. No sales have occurred to date.
[ii] a royalty agreement during 1993, pursuant to the use of certain
proprietary information, with a Company controlled by a former officer
of the Company to pay the greater of $7,100 in 1996 and increasing by
$3,600 each subsequent anniversary or 10% of the net proceeds of the
sale of the components, for each anniversary date, developed from
certain proprietary information for an unlimited term. If the Company
fails to make a payment as required, it will forfeit all rights
relating to the agreement including any patents or sub-licenses to
third parties. No royalty expense has been recorded for 2001.
17
6. RELATED PARTY TRANSACTIONS (Cont'd)
[iii] During 2000, the Company entered into a 24 month consulting and
research agreement, expiring February 9, 2002, with a Company
controlled by a board member of the Company. The contract fees are
$10,000 ($15,000 Cdn) per month. The agreement is extendable annually
by mutual agreement. Included in research and development expenses are
fees of $30,000 to this related party.
7. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES
Three Months Twelve Months
ended ended
March 31, 2001 December 31, 2000
$ $
- -------------------------------------------------------------------------------
Accounts and government
grants receivable 579,743 (140,591)
Work in progress/Inventory (469) 17,422
Prepaid expenses and deposits (48,843) (7,318)
Accounts payable and accrued liabilities (153,020) 46,485
Deferred Revenue 18,098 (161,176)
- -------------------------------------------------------------------------------
395,507 (245,178)
===============================================================================
Supplementary information
- -------------------------------------------------------------------------------
Interest paid 6,176 26,523
===============================================================================
8. MAJOR CUSTOMERS
[a] The Company sells to multiple customers. The majority of sales for the
period ended March 31, 2001 were derived from 3 customers each representing
61%, 20% and 15%, respectively of consolidated sales. The majority of sales
for the year ended March 31, 2000 were derived from 2 customers each
representing 58% and 40% respectively of consolidated sales. As at March 31,
2001 the aggregate accounts receivable balances relating to these customers was
$44,500.
[b] During the year ended December 31, 1997 the Company entered into an
exclusive royalty licensing agreement with a major customer which provides
that customer the rights to the use of certain technology developed by the
Company for the production of actuators for welding applications. The licensing
agreement provides for a five year non-competition period specifically related
to stud welding. No licensing revenue have been recognized for the period
ended March 31, 2001
18
9. GOVERNMENT ASSISTANCE
Government assistance in the amount of $211,578 has been recorded as a
reduction of expenditures for the period.
In addition to government assistance disclosed in note 5 [b], during 2000, the
Company entered into a contribution agreement with Natural Resources Canada
whereby the Company is entitled to receive a maximum of $163,623 (Cdn -
$250,000) as defined in the agreement. The contribution is non-repayable.
In 2000, $163,623 was claimed of which $23,009 is included in government grants
receivable as at March 31, 2001.
10. SEGMENTED INFORMATION
The Company has five reportable segments. The segments are DynaPower(R),
Actuators, BioTherm(TM), Corporate, and Other. DynaPower(R) is a process for
cleaning metal without the use of chemicals. The actuator technology is used
in both steel and aluminum welding. BioTherm(TM) is a biomass-to-energy
technology that converts low value forest waste and agricultural by-products
into BioOil, while Corporate consists of interest. Other includes a pulverizing
technology which disintegrates a variety of solid materials and organic waste
into a form suitable for the production of BioOil.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on many factors, including net income or loss.
The Company's reportable business segments are strategic business units that
offer different products and services. They are managed separately because each
business requires different technology and marketing strategies.
March March
2001 2000
$ $
- ------------------------------------------------------------------------------
REVENUE
Actuator -- --
DynaPower(R) 96,529 266,942
BioTherm(TM) -- --
Other -- --
Corporate 589 --
- ------------------------------------------------------------------------------
97,118 266,942
- ------------------------------------------------------------------------------
LOSS FOR THE PERIOD
Actuator (7,586) (4,438)
DynaPower(R) (96,677) (1,766)
BioTherm(TM) (204,907) (380,043)
Other (3,907) (4,186)
Corporate (929,881) (758,622)
- ------------------------------------------------------------------------------
(1,242,958) (1,149,055)
- ------------------------------------------------------------------------------
19
10. SEGMENTED INFORMATION (cont'd.)
March December
2001 2000
$ $
- ------------------------------------------------------------------------------
CAPITAL EXPENDITURES, INCLUDING PATENTS
(NET OF GRANT & DISPOSAL)
Actuator -- --
DynaPower(R) 8,924 111,557
BioTherm(TM) 130,067 1,110,863
Other 14,367 3,984
Corporate 21,338 224,463
- ------------------------------------------------------------------------------
174,696 1,450,867
- ------------------------------------------------------------------------------
March March
2001 2000
$ $
- ------------------------------------------------------------------------------
AMORTIZATION
Actuator 7,586 4,438
DynaPower(R) 29,264 23,406
BioTherm(TM) 29,505 27,428
Other 3,553 4,186
Corporate 17,536 8,180
- ------------------------------------------------------------------------------
87,444 67,638
- ------------------------------------------------------------------------------
March December
2001 2000
$ $
- ------------------------------------------------------------------------------
TOTAL ASSETS
Actuator 56,151 63,737
DynaPower(R) 435,792 476,462
BioTherm(TM) 1,530,239 1,429,496
Other 86,127 75,295
Corporate 1,914,913 2,424,130
- ------------------------------------------------------------------------------
4,023,222 4,469,120
- ------------------------------------------------------------------------------
20
10. SEGMENTED INFORMATION (cont'd.)
Geographic Information
The Company holds substantially all of its capital assets in Canada and
revenues from external customers by customer location is as follows:
March March
2001 2000
$ $
- ------------------------------------------------------------------------------
Revenue
United States 14,818 154,934
Italy 3,420 5,157
Canada 59,015 106,851
France 19,505 --
Other 360 --
- ------------------------------------------------------------------------------
97,118 266,942
- ------------------------------------------------------------------------------
11. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Company prepares the consolidated financial statements in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP"), which
conform in all material respects to those in the United States ("U.S. GAAP"),
except as follows:
[i] Under U.S. GAAP, basic earnings per share excludes any dilutive effects
of options, warrants, convertible securities and shares in escrow.
Diluted earnings per share are calculated in accordance with the
treasury stock method and are based on the weighted average number of
common shares and dilutive common share equivalents outstanding.
[ii] Under U.S. GAAP, the excess, if any, between the fair value of the shares
in escrow and the nominal amount paid, will be recorded as compensation
expense upon release from escrow.
[iii] Under U.S. GAAP, patent costs are amortized over the life of the patent
commencing with the date the patent is granted.
[iv] Under U.S. GAAP, stock based compensation to non-employees is recorded
at the fair market value of the shares issued.
[v] For reconciliation purposes to U.S. GAAP, the Company has elected to
follow Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees" (APB 25) in accounting for its employee stock
options. The exercise price of 70,000 (1999 - 33,196; 1998 - 316,969)
fixed employee stock options granted in 2000 were less than the market
price of the underlying stock on the date of the grant. The exercise
price of fixed employee stock options granted in 2001 were greater than
the market price of the underlying stock on the date of the grant.
21
11. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONT'D)
[vi] For purposes of reconciliation to U.S. GAAP, the re-pricing of options
can give rise to additional compensation expense. In fiscal 2000, no
compensation expense resulted from the re-pricing of options based on the
transition provision of FIN44, commencing July 1, 2000. Options repriced
after December 15, 1998 are subject to variable plan accounting under
U.S. GAAP. In the pro forma information on net income and earnings per
share, pursuant to the provisions of Statement of Financial Accounting
Standards No. 123 "Accounting for stock based compensation" ("SFAS 123"),
additional compensation expense in respect of the re-pricing of the
options has been reflected.
[vii] For purposes of reconciliation to U.S. GAAP, the stock appreciation
rights ("SARs") and performance based stock options are accounted for as
a variable compensation plan under APB 25. Compensation relating to
variable plans is recorded in the reconciliation when it becomes probable
that the award will be earned.
[viii]For purposes of reconciliation to U.S. GAAP, the Company presents the
disclosure requirements of Financial Accounting Standard No. 130
("SFAS 130") in these consolidated financial statements. SFAS 130
requires the presentation of comprehensive income and its components.
Comprehensive income includes all changes in equity during a period
except shareholder transactions. Other accumulated comprehensive income
comprises only the cumulative translation adjustment.
If accounting principles generally accepted in the United States were
followed, the significant variations on the consolidated statements of loss
and comprehensive loss would be as summarized in the table below.
Three Months Three Months
ended ended
March 31, March 31,
2001 2000
$ $
- ------------------------------------------------------------------------------
Loss for the period, Canadian GAAP 1,242,958 1,149,055
Adjustment for patent cost amortization 1,785 988
Adjustment for stock-based compensation 6,803 129,802
Adjustment for variable accounting expenses -- 198,750
- ------------------------------------------------------------------------------
Loss for the year, as adjusted 1,251,546 1,478,595
- ------------------------------------------------------------------------------
Unrealized losses on foreign currency translation 56,552 17,412
- ------------------------------------------------------------------------------
Comprehensive loss for the year, U.S. GAAP 1,308,098 1,496,007
- ------------------------------------------------------------------------------
Weighted average number of common shares
Outstanding 34,491,242 29,626,768
- ------------------------------------------------------------------------------
Loss per common share, U.S. GAAP (0.04) (0.05)
==============================================================================
22
11. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (cont'd.)
Consolidated balance sheet items which vary significantly under accounting
principles generally accepted in the United States would be as follows:
March 31, December 31,
2000 2000
$ $
- ------------------------------------------------------------------------------
Patents 649,772 651,558
==============================================================================
Total assets 4,021,436 4,390,740
==============================================================================
Share capital 24,335,292 23,409,409
Share deposit 165,435 250,713
Contributed surplus 1,829,645 1,584,997
Cumulative translation adjustment (427,614) (371,062)
Deficit (22,633,237) (21,381,691)
- ------------------------------------------------------------------------------
Shareholders' equity 3,269,521 3,492,366
==============================================================================
The weighted-average fair value of options granted in 2001 where the stock
price is equal to the exercise price of the options, greater than the exercise
price of the options and less than the exercise of the options was $0.00,
$0.00, and $0.67 respectively.
The Black Scholes options valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
Pro forma information regarding net income and earnings per share as required
by Statement of Financial Accounting Standard No. 123 "Accounting for stock
based compensation" ("SFAS 123"), is estimated at the date of grant using a
Black Scholes pricing model with the following assumptions: Risk free interest
rate for 2001 of 5.0%, dividend yields of 0%; volatility factors of the
expected market price of the Company's common stock of 1.303 and a weighted
average expected life of the option of 5 years.
23
11. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (cont'd.)
Supplemental disclosure of pro forma loss and loss per share:
March 31, 2000
- ------------------------------------------------------------------------------
Pro forma loss 1,274,247
Pro forma loss per share (0.04)
==============================================================================
12. SUBSEQUENT EVENTS
In April 2000, the Company acquired 75% of Border Biofuels Limited (BBL),a UK
Green Power project development Company. Through the acquisition of BBL, the
Company has accessed 15 year power purchase contracts in the UK for the
production of 60 MW of electricity. Projects are to be fuelled by BioOil. The
contracts provide an option for, but not the obligation to provide power.
13. COMPARATIVE FIGURES
Certain comparative figures have been reclassified in order to conform with
the presentation adopted in the current year.
24
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
DynaMotive Technologies Corporation is an energy systems Company that is
a world leader in the development of technology to produce competitively
priced fuels from renewable and non-depleting biomass. DynaMotive's liquid
fuel, known as BioOil, presents significant market opportunities that the
Company intends to exploit commercially as a clean fuel to replace natural
gas, diesel and other fossil fuels to produce power and heat in industrial
boilers, gas turbines and diesel engines. The Company and its partners are
also engaged in research and development on a range of derivative products
that, if successful, could further enhance the market and value for BioOil as
an alternative fuel and product source.
DynaMotive Technologies Corporation was incorporated on April 11, 1991
in the Province of British Columbia, Canada, by registration of its Memorandum
of Articles, pursuant to the Company Act of British Columbia under the name of
DynaMotive Canada Corporation. On October 31, 1995, the shareholders approved a
change of name to the Company's current name. As of March 31, 2001, the Company
had seven wholly-owned subsidiaries: DynaMotive Corporation (incorporated in
the State of Rhode Island in 1990 and holding some of the Company's patents),
DynaMotive ElectroChem Corporation (incorporated in the Province of British
Columbia in 1993), DynaMotive Europe Limited (incorporated in the United
Kingdom in 1996 under the name of DynaMotive Technologies (UK) Ltd.), DynaMill
(TM) Systems Limited (incorporated in the Province of British Columbia in
1996), DynaMotive Puerto Rico, Inc. (incorporated in Puerto Rico in 1997),
DynaPower, Inc. (incorporated in the Province of British Columbia in May 2000
under the name 606620 B.C. Ltd which was officially changed to DynaPower Inc.
in July 2000) and DynaMotive Canada, Inc. (federally incorporated in November
2000). In this Report, unless the context otherwise requires, the terms the
"Company" and "DynaMotive" shall refer to DynaMotive Technologies Corporation.
The Company is currently listed on the over-the-counter bulletin board market
(OTCBB). Symbol: DYMTF.OB.
DESCRIPTION OF BUSINESS
DynaMotive's primary focus is to commercialize its potential BioOil
production technology and establish this technology as the worldwide industry
standard for production of BioOil clean fuels. To support this goal, the
Company plans over the next two years to expand upon its existing operations
in Europe, the US, and Canada as well as to develop commercial presence in Asia
and Latin America.
The Company has previously developed and commercialized two other
innovative industrial technologies which have produced commercial sales:
DynaPower(R), an acid free industrial metal cleaning system for wire
manufacturing with sales to date in twelve countries, and motion control
actuator systems used for robotic automotive manufacturing. In September 1997,
the Company sold certain rights to one of its actuator product lines to its
co-development partner, Emhart Tucker (a Black & Decker subsidiary).
As of March 31, 2001, DynaMotive and its wholly owned subsidiaries have
active inventions protected by patents issued and patents pending via
in-house development or license, with the earliest U.S. patent scheduled to
expire on December 3, 2010.
This Quarterly Report on Form 10-Q may contain forward looking statements,
within the meaning of the United States Securities Act of 1933, as amended,
and the United States Securities Exchange Act of 1934, as amended, regarding
DynaMotive Technologies Corporation. Actual events or results may differ
materially from the Company's expectations, which are subject to a number of
known and unknown risks and uncertainties including but not limited to changes
and/or delays in product development plans and schedules, customer acceptance
of new products, changes in pricing or other actions by competitors, the
ability to integrate acquisition of Border Biofuels Ltd., and general economic
and market conditions. Other risk factors discussed in the Company's past
filings with the United States Securities and Exchange Commission may also
affect the actual results achieved by the Company.
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto included elsewhere herein. The
Company's quarterly operating results have been and will continue to be
affected by a wide variety of factors that could materially and adversely
affect revenues and profitability. These include factors relating to
competition, such as competitive pricing pressure and the potential
introduction of new products by competitors; manufacturing factors, including
constraints in the Company's supply of products from outside manufacturing and
assembly operations and shortages or increases in the prices of raw materials
and components; sales and distribution factors, such as changes in customer
base or distribution channels resulting in lower margins or the loss of a
significant alliance partner; new product development and introduction
problems, such as increased research, development, marketing and beta test
expenses associated with new product introductions, and delays in the
introduction of new products and technologies; as well as other factors,
including levels of expenses relative to revenue levels, personnel changes,
expenses that may be incurred in litigation, and fluctuations in foreign
currency exchange rates. The Company has experienced and expects to continue
to experience fluctuations in operating results, and there can be no assurance
that the Company will achieve profitability in the future.
CORE TECHNOLOGIES & STRATEGIC BUSINESS UNITS
The Company is organized into two strategic business units. The BioOil
Business Unit is commercializing a unique biomass-to-energy technology that
converts low value forest and agricultural wastes into liquid BioOil that can
be used as a "green" fuel for power generation or as the raw material for a
range of derivative products. The DynaPower Business Unit develops and markets
industrial metal wire cleaning systems that provide exceptional levels of
product cleanliness while eliminating the need for toxic chemical cleaning
systems traditionally used by the wire industry. In 2000, the Company
established the DynaPower division as a wholly owned operating subsidiary
named DynaPower, Inc.
BIOOIL BUSINESS UNIT
The BioOil Business Unit develops and markets technology for the
production of biofuels (liquid: BioOil, solid: char and gaseous: non-
condensable gases). - renewable and non-depleting "green" fuels made from
biomass that can be used for generating heat and power in industrial boilers,
gas turbines and stationary diesel engines, as well as range of derivative
products including, blended fuels for transportation, slow release fertilizers
and specialty chemicals.
By virtue of being derived from biomass waste, all BioOil fuels are
considered to be carbon dioxide ("CO2") and greenhouse gas neutral. When
combusted, they produce virtually no sulfur dioxide ("SOX") and significantly
reduced nitrogen oxide ("NOX") emissions compared with diesel fuel, therefore
having significant advantages over fossil fuels with respect to reduction of
atmospheric pollution.
DynaMotive has developed technical expertise internally to enable it to
design and build commercial-sized BioOil production plants in key markets
identified by the Company. The technology group will also provide technical
support and expertise to DynaMotive's operating companies around the world
while continuing to further develop the Company's BioOil technology and
applications. The multidisciplinary team includes senior project, chemical and
process control engineers, research scientists and plant operations
specialists.
BIOOIL PRODUCTION PROCESS
BioOil is produced using a patented fast pyrolysis process, developed by
Resource Transforms International, Ltd. (RTI), trade named BioTherm(TM).
The process converts forest and agricultural waste, such as sawdust, sugar cane
bagasse and wheat straw amongst others, into commercial fuels (BioOil, char
and non-condensable gases).
In February 2000, the Company acquired the patent to this technology from
RTI and entered into a research agreement with RTI on biofuels and BioOil
derivative products.
In the BioTherm(TM) reactor, biomass waste materials are rapidly heated in
the absence of oxygen. The rapidly vaporized volatiles are then quickly
condensed, forming a liquid fuel referred to as BioOil, solid char and non-
condensable gases. Depending upon the feedstock used (many different sources of
feedstock have been bench tested thus far), the process typically produces
60-75 tons of BioOil, 15-25 tons of char and approximately 15 tons of non-
condensable gases from 100 tons of biomass waste. The Company believes that the
overall simplicity of the BioTherm(TM) process and the fact that all the major
equipment is already well proven in existing related industrial applications
gives the Company's BioOil technology competitive advantages over other
pyrolysis conversion technologies such as lower capital and operating costs,
higher product yield, a significantly higher quality BioOil and the flexibility
to process a wide variety of feedstocks.
The Company began producing batch quantities of BioOil in 1997 in its
0.5 tonne per day BioTherm(TM) pilot plant located at the Company's research
and development facility in Vancouver BC. By the end of 1998, the BioOil
Technology Group had upgraded, commissioned and operated the plant to a
capacity of two tonnes per day on a continuous basis. In 1999, further
changes were made to the feed system, BioTherm(TM) reactor, cyclone, and
instrumentation and control systems to provide increased stable operation. Once
these changes were made, the BioTherm(TM) was re-commissioned and produced
BioOil of sufficiently high quality to meet fuel specification requirements as
defined by our engine testing partners.
The plant conforms to all applicable British Columbia safety, electrical
and mechanical design standards, utilizing state-of-the-art 'smart'
instrumentation and a high-powered industrial-grade distributed control system
(DCS). The Company adopted this design philosophy in order to facilitate easy
scale-up to commercial plant capacities. Once commissioned, the fully automated
plant will have a production capacity of 6,000 litres of BioOil per day,
providing much larger quantities of BioOil for engine and combustion test
programs. Depending on the development of derivative products described below,
the management may consider placing the plant into industrial service for
specialty applications in the future.
Following the success of the new 10 tpd BioOil plant, the Company plans to
begin construction of a 50-70 tpd commercial demonstration plant in 2001 in the
UK which is intended to serve as a springboard for design and construction of
full scale, 100 to 400 tpd commercial plants to be built in Canada, Europe,
Brazil, Asia and other international markets
BIOOIL COMMERCIAL APPLICATIONS & MARKETS
The nearest term and most appropriate commercial application for BioOil is
as a clean burning fuel to replace fossil fuels for generating power and heat
in industrial boilers, gas turbines and stationary diesel engines used in the
forest and sugar industries. In late 1998, the Company began shipping BioOil
from the pilot plant to various engine manufacturers and users for testing
purposes.
The Company's initial target market for BioOil fuel is in Europe where,
given current fossil fuel price projections, BioOil fuel for power generation
could prove to be competitive. Strong regulatory pressures coupled with high
SOX, NOX and CO2 taxes on fossil fuels, renewable energy tax incentives and
subsidies make BioOil an attractive renewable energy option. Increasingly,
regulatory pressure and incentives are also creating opportunities in North
America that are being evaluated by the Company.
There are also significant opportunities for the application of BioOil as
a fuel for power generation in countries that are heavily reliant on fossil
fuel imports and have a strong agricultural base producing large volumes of
biomass wastes. BioOil produced from these wastes could be used to replace
fossil fuels, while utilizing an abundant local resource. This is particularly
applicable to island economies (Caribbean/South Pacific) and to certain regions
in Latin America, the Far East, Australia and Africa.
FUTURE BIOOIL APPLICATIONS & DERIVATIVE PRODUCTS
BioOil has a wide range of potential commercial applications. As the
BioOil industry matures it has the potential to follow a similar development
path as the petroleum industry beginning with exploitation of basic unrefined
BioOil fuels for power generation and district heating followed by blends and
emulsions for transportation. Development of higher value products including
agro-products, resins, adhesives, specialty chemicals, slow release fertilizers
and other derivatives may occur as refining and processing techniques are
established. Over time, we anticipate that BioOil will be refined in much the
same way that petroleum is today to derive the highest value energy and
chemical products.
CHAR PRODUCTION
Char is a significant co-product of the Company's pyrolysis process. Char
is a granular solid with properties similar to coal. At 23 - 25 GJ per tonne,
pyrolysis char has a higher heating value than wood and many grades of coal.
Like BioOil, it is a "green" fuel which is CO2 neutral and does not contain any
sulfur.
Early stage applications of char will focus on direct substitution or
augmentation of fossil fuels to produce process heat and power via commercially
available technologies in BioOil plants, sawmills, thermal power generation
and cement production. Char may also have potential for use as a feedstock for
manufacturing of charcoal briquettes.
BIOOIL STRATEGIC PARTNERS, INVESTMENT AND GOVERNMENT FUNDING
DynaMotive is commercializing its BioOil production technology through a
network of industrial and institutional partners. DynaMotive has formed
relationships with the following companies: Resource Transforms
International (RTI), Ltd. (original developer of the patented BioTherm(TM)
pyrolysis technology), Orenda Aerospace (a member of the Magellan Aerospace
Corporation and a recognized leader in power and propulsion technologies),
Cosan Bom Jesus (one of Brazil's and the world's largest sugar and ethanol
producers and exporters), Solar Turbines (a wholly owned subsidiary of
Caterpillar Inc. and the world leader in industrial turbines in the 1-15
megawatt capacity) and China Energy Holdings Limited (a wholly owned subsidiary
of China Strategic Holdings Limited of Hong Kong). An alliance with Canadian
Forest Products Ltd. (Canfor Corporation) was announced in March 2001.
The Company's BioOil technologies are consistent with the environmental
and economic objectives of governments around the world. The Company has
received strong support from the Canadian federal government and is in
discussion with other governments and international agencies in target
markets directly and through project partners to examine BioOil financing and
grant potential. Canadian government support has been received from Industry
Canada/Technology Partnerships Canada (TPC) which has agreed to contribute
Cdn $8.2 million (US $6.1 million) to DynaMotive for development and
commercialization of BioOil fuels and derivative products and Natural Resources
Canada (NRCan) which has contributed $250,000 to support ongoing research and
development of BioOil at the CANMET national laboratory.
DYNAPOWER(R) ACID-FREE METAL CLEANING SYSTEMS
The Company's DynaPower(R) technology cleans ferrous and non-ferrous
metals in a cost-effective manner without acids, caustics or solvents
traditionally used by the steel and wire industry, thus eliminating the risks
and costs associated with handling harmful chemicals and disposing of
hazardous waste. The metal wire cleaning system uses bipolar electrolysis and
ultrasound (DynaSonics(R)) to peel away scale, remove lubricants and create a
metal surface that is exceptionally clean, dry, pH-neutral and rust-resistant.
The DynaPower(R) Business Unit focuses on the following product applications:
stainless steel, mid and high carbon steel, extrusion clad steel, copper and
aluminum wire products.
DynaPower(R) technology also allows the customer to use the process to
prepare metal surfaces ready for standard industry metal treatments
such as electroplating, hot-dip zinc coating and rubber adhesion. The
Company's wire cleaning equipment can continuously process wire at a rate
comparable to or better than conventional chemical cleaning processes but
without the added expenses and hazards otherwise encountered when using acid,
caustics or solvents.
As part of a corporate reorganization in 1999, the Company decided to
outsource the manufacture of DynaPower(R) wire cleaning systems, thus reducing
staff and operational costs. In the year 2000, the Company has established
preferred supplier agreements with multiple vendors to further secure
manufacturing inputs and control costs.
During the first quarter of 2001, DynaPower continues to work on
completing previous sales In addition, during the first
quarter of 2001, DynaPower secured an additional order from Sumiden Wire
Products Corporation of Dickson, TN. Sumiden Wire Products is a wholly owned
subsidiary of Sumitomo Electric Industries, Ltd., Japan (the fourth largest
producer of wire and cable products in the world.)
During the first quarter of 2001, the Company has also completed the first
prototype of the DynaSonics(R) cleaning technology that it believes has
significant commercial potential for ultrasonic cleaning of wire drawing dies.
The Company has developed a novel process for cleaning diamond or tungsten
carbide dies which are used by the wire industry for drawing a variety of metal
wires. Die makers and wire mills have been aggressively looking for an
effective cleaning process to replace old, ineffective and slow processes.
DynaMotive believes that its new technology can be used by die makers to
quickly and effectively clean their dies during the manufacturing or servicing
processes and by wire mills to clean their dies during regular maintenance.
The Company anticipates it will begin in-plant trials shortly.
On May 1,2001 DynaMotive announced that it intends to divest its Metal
Cleaning Subsidiary, DynaPower, Inc. (DynaPower). Furthermore, it announced
that it has entered into a Letter of Intent with DynaPower Management for a
potential Management Buyout (MBO). The Company intends to retain intellectual
property ownership (Patents) and intends to receive on-going royalties from its
patents. While the Company intends to complete the divestiture by the third
quarter of this year, there can be no assurance that the divestiture will be
completed by the end of third quarter of 2001 or at all.
RESULTS OF OPERATIONS
The Company's financial statements have been prepared in accordance with
accounting principles generally accepted in Canada. A reconciliation of
amounts presented in accordance with United States accounting principles is
detailed in note 11 of the Company's consolidated financial statements.
Financial information concerning the Company's industry segments is summarized
in Note 10 to Consolidated Financial Statements.
Total sales revenues for the first quarter of 2001 decreased to $97,118
while the same quarter for 2000 generated $266,942. Revenue for the first
quarter of 2001 was lower than the same quarter in 2000 due to decline in
commercial sales volume of its DynaPower(R) metal cleaning systems. The
Company has announced its intent to divest its DynaPower business division to
focus on the commercial development of its BioOil technologies.
Cost of sales in the first quarter of 2001 decreased to $75,780, from
$133,208 in the same period of 2000 due to corresponding decrease in sales of
DynaPower(R) metal cleaning systems. For the 3 months ended March 31, 2001,
the gross margin was 22.0% compared to 50.1% in the same period of 2000. The
quarter-to-quarter decrease in gross margin is due to introductory prices
offered to clients for evaluation purpose.
For the quarters ended March 31, 2001 and 2000 the Company expended
$116,244 and $245,719 respectively on research and development. The decrease in
research and development expenditure during the first quarter of 2001 was due
to the construction of 10 tons per day pilot plant. Of these amounts,$41,250 and
$73,341 respectively were sponsored by government funding.
General and administrative salaries and benefits decreased to $293,100 in
the first quarter of 2001 compared to $679,779 in the same period of 2000. The
decrease is due to a one overtime and employee bonus payout in the first
quarter of 2000.
Overall capital expenditures, net of government grants and disposals for
developing and patenting the Company's technologies increased to $174,696 in
the first quarter from $55,188 in the same period in 2000. The majority of
the increase is due to repairs and upgrades to the Company's existing test
equipments.
The Company's total assets decreased to $4,023,222 at the end March 31,
2001 from $4,469,120 at the end of the same period in 2000. The decrease is
due to collection of accounts and government grants receivables to fund
operating expenditures. Liability decreased to $751,915 in the first quarter
of 2001 from $898,374 in the same quarter in 2000 primarily due to decrease in
trade accounts payable and accrued liabilities.
The loss for the first quarter of 2001 was $1,242,958 as compared to
$1,149,055 for the same period in 2000. The increase in loss is primarily
due to an increase in professional fees, paid to independent consultants
assisting in Company's commercialization effort. The majorities of the fees
were paid with the issuance of restricted common shares.
Use of cash in operating activities for the first quarter of 2001
decreased significantly to $278,412 from $603,717 of the same quarter in 2000.
The decrease in use of cash was primarily due to (i) changes in working capital
consisted of accounts and government grant receivables, deferred revenue, and
accounts payables, and (ii) increase in non-cash expenses paid in common
shares.
The end-of-period deficit increased from $18,934,784 at March 31, 2000 to
$20,177,742 at March 31, 2001. Even though the loss for the first quarter of
2001 increased slightly as compared to the same period in 2000, the loss per
common share remained the same at four cents ($0.04), due to a corresponding
increase in the weighted average number of common shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
In February 2001, the Company completed the closing of a private placement
having raised an additional $500,695 from sales of 417,246 shares of its
common stock and $17,579 from 43,946 shares of common stock options exercised
for cash. During the first quarter ended March 31, 2001, the Company received a
government assistance commitment of $211,578, all of which is included in
government grants receivable at March 31, 2001 as noted on note 5 and 9 of the
consolidated financial statements.
With the current cash on hand and anticipated divesting of its DynaPower
business division to focus on the commercial development of its BioOil
technologies, the Company anticipates that it will require additional financing
for its operation and commercialization of its BioTherm(R) technologies during
this year. The Company is working closely with a global investment bank with
the intent to raise up to $15 million in equity financing during the second
quarter of 2001. Given the market condition and other factors, there can be no
guarantee that the Company will be successful in securing additional financing.
If adequate funds are not available on acceptable terms when needed, the
Company may be required to delay, scale-back or eliminate the manufacturing,
marketing or sales of one or more of its products or research and development
programs.
As of the end of the first quarter of 2001, the Company had cash and cash
equivalents of $1,092,792, a decrease of $2,923 from the $1,095,715 as at
December 31, 2000. The primary sources for liquidity for the Company during the
first quarter of 2001 were from the Company's private placement offering
totaling $500,695 and collection of government grant receivables. At the end
of the same quarter in 2000, the Company had cash and cash equivalents of
$3,993,706. Primary sources of liquidity for the first quarter of 2000 were
from the Company's private placements.
During the first quarter of 2001, the Company generated cash in the amount
of $506,737 from financing activities, and used cash in operating and in
investing activities in the amounts of $278,412, and $174,696, respectively.
For the same quarter in 2000, the Company used cash in operating and in
investing activities in the amounts of $603,716 and $55,188, respectively,
while financing activities generated cash of $4,441,156.
Cash used in operating activities for the first quarter of 2001, which
consists of a loss for the period of $1,242,958, was partially offset by
amortization, and stock based compensation expense in the amount of $87,444,
and $481,594, respectively. Non-cash working capital items increased by
$395,508 during the first quarter of 2001. Cash used in operating activities
for the same quarter in 2000 consisted of a loss of $1,149,055, which was
partially offset by amortization and non-cash compensation expenses in the
amount of $67,638, and $283,668 respectively. Non-cash working capital items
increased by $194,033 during the same quarter in 2000.
Financing activities for the first quarter of 2001 included a private
placement offering and common stock options exercise for cash totaling
$518,274. Financing activities for the first quarter of 2001 also included
a decrease of $11,537 in bank indebtedness.
Investing activities resulted in a net decrease of cash by $174,696 for
the first quarter of 2001 which consisted of $181,699, net of government
grants, incurred in acquisitions and upgrades of capital assets, an increase
of $7,002 as a result of revaluation of patent costs.
RECENT DEVELOPMENTS AND FUTURE EVENTS
In January, 2001 the Company began commissioning of its new 10 tonne per
day BioOil plant, construction of which was completed on budget and in record
time in December 2000. The initial production runs were completed successfully
and fuel quality BioOil was produced from wood waste. With a processing
capacity of 10 tonnes of biomass feedstock per day, the fully automated plant
has been built to industrial standards in order to facilitate scale-up of the
technology to full scale commercial capacity. Delivering to the marketplace a
technology that is reliable, replicable and scalable is a cornerstone of the
Company's development strategy. Completion of the new plant brings the Company
one step closer to development of full scale commercial BioOil facilities.
During first quarter of 2001, the Company announced that it had
successfully completed BioOil combustion testing at Natural Resources
Canada's (NRCan) CANMET Energy Technology Centre (CETC) in Ottawa, Ontario.
The success of this test program creates opportunities for early commercial
applications for BioOil as a clean burning fuel to replace natural gas, diesel
and other fossil fuels in the multi-billion dollar industrial fuels market.
Customers for BioOil fuels could potentially include local, regional and
international energy users such as electrical utilities, forest companies, oil
and gas producers and manufacturing companies.
Also during the first quarter, the Company announced that it has signed a
Memorandum of Understanding (MOU) with TECNA S.A. of Argentina, a major
engineering and construction Company that has played a leading role in the
oil and gas sector in Latin America and internationally. Under terms of the
MOU, TECNA would provide engineering, procurement and construction (EPC)
services for commercial BioOil energy projects in Latin America and other
markets on a non-exclusive basis. TECNA would also collaborate with DynaMotive
to provide technical design and input optimization on DynaMotive's BioOil
production technology. The agreement with TECNA is another critical step in
the Company's commercialization strategy by which it will gain proven
capabilities in project development and construction. These are expected to
translate into efficiencies in engineering design, procurement, construction
and project management.
On March 8, 2001 the Company officially opened its new BioOil plant
and announced a Memorandum of Understanding alliance with Canadian Forest
Products Ltd., Canada's largest forest products Company,
to develop commercial BioOil applications in the forest industry. This
partnership is a significant milestone in DynaMotive's commercialization
program. The MOU establishes a framework for collaboration through several
stages of development. Initially, Canfor will provide prepared feedstock for
the operation of DynaMotive's 10 tonne per day pilot plant and work with
DynaMotive to validate BioOil fuel applications in sawmills and pulp mills.
The companies have also established the principles for developing a 25 - 50
tonne per day BioOil demonstration project and for commercial BioOil projects
including feedstock supply and fuel purchase agreements.
During the first quarter 2001, representatives of the Company attended
a number of important renewable energy and environmental conferences and trade
fairs including: EECO (Environment and Energy Conference) in Toronto Ontario in
January where the Chief Operating Officer made a presentation; Environment 2001
in Abu Dhabi, U.A.E.; 2nd World Sugar Conference in Miami, Florida where the
Chief Technology Officer presented a technical paper; and the Green House Gas
Forum in New York where Director of Research and Development Dr. Jan Barynin,
Ph.D. presented a technical paper.
In April 2000, the Company acquired 75% of Border Biofuels Limited (BBL),
a UK Green Power project development Company. Through the acquisition of BBL,
the Company has accessed 15 year power purchase contracts in the UK for the
production of 60 MW of electricity. Projects are to be fuelled by BioOil. The
contracts provide an option for, but not the obligation to provide power.
On May 1,2001 DynaMotive announced that it intends to divest its Metal
Cleaning Subsidiary, DynaPower, Inc. (DynaPower). Furthermore, it announced
that it has entered into a Letter of Intent with DynaPower Management for a
potential Management Buyout. The Company intends to retain intellectual
property ownership (Patents) and intends to receive on-going royalties from its
patents. While the Company intends to complete the divestiture by the third
quarter of this year, there can be no assurance that the divestiture will be
completed by the end of third quarter of 2001 or at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is affected by fluctuations in foreign currencies and changes
in interest rates. The Company's revenue is primarily in US dollars while the
majority of its expenses are in Canadian currency. The Company holds cash in
both US and Canadian funds and exchanges from US currency to Canadian currency
as necessary.
The Company can be adversely affected when the Canadian currency
appreciates. The management has the ability, to some extent, to time exchanges
and enter into forward exchange contracts in an attempt to mitigate such risk.
The Company reports in US currencies. When translating the Company's financial
statements from Canadian dollars to US currencies, depending on the prevailing
exchange rate at the time, certain impact from prior exchange transactions may
be off-set. The extent of the Company's exposure depends on the degree of
fluctuation in foreign currencies. Due to the nature of foreign currency
exchange, the exact exposure is difficult to estimate.
The Company holds its cash reserve in short term deposits. The interest
revenue obtained from these instruments will depend on the market interest
rates prevailing at the time. Based on cash positions at March 31, 2001, the
change in interest revenue due to changes in market interest rates is not
material. The Company also has short term credit facilities which it draws upon
and repays as necessary. The interest expense depends on the prevailing market
rate at the time. Due to the average size of the loan outstanding at any one
time, the differences in interest expenses resulting from fluctuation in
interest rates are not material.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the third quarter 2000, the Company was named a party to a legal
proceeding filed by HPG Research Ltd., a British Columbia Company, in the
Supreme Court of British Columbia, for an alleged breach of a Royalty
Agreement, executed between the Company and HPG in 1993, and potential claim
of a certain percentage of DynaPower sales. As at the end of 2000, the parties
agreed to proceed to arbitration under the Commercial Arbitration Act of
British Columbia and are in the process of finding a suitable arbitrator for
this matter. No arbitrator has been appointed as at the end of first quarter
2001.
At the end of the first quarter 2001, the Company was named a party to a
legal proceeding filed by Southwestern Wire, Inc. (SWI), an Oklahoma
corporation, in the District Court of Cleveland County, State of Oklahoma for
an alleged breach of contract by the Company with respect to SWI's purchase of
a 24 wire DynaPower cleaning system for a potential claim of $101,000.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In February 2001, the Company closed a private placement financing of its
common shares, no par value, for a total of $500,695 at a share price of $1.20
per share. Subscribers to the funding also received a warrant to purchase one-
fifth of a share of common stock for each share of common stock purchased. The
warrants have a two year term, subject to accelerated termination under
certain circumstances and are exercisable at a share price equal to $2.00.
A total of 417,246 shares and 83,448 warrants were issued to: BC Advanced
Systems Foundation, K.F. McCready, and Chia Tai Chen.
The offering was made, and the securities were sold to purchasers who
are not U.S. Persons (as defined in Regulation S promulgated under the US
Securities Act) and is therefore exempt from United States registration
requirements under Regulation S. The securities issued have not been
registered under the Securities Act of 1933 and may not be offered or sold
in the United States absent registration or an applicable exemption from
registration.
ITEM 6. EXHIBITS and REPORTS ON FORM 8-K
(a) Exhibits
3.1 Company Act Memorandum of DynaMotive Technologies Corporation, as
amended to date (filed as Exhibit 3.1 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended June 30, 2000.)
3.2 Articles of DynaMotive Technologies Corporation, as amended to date
(filed as Exhibit 3.2 to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 2000.)
(b) Reports on Form 8-K
None.
DYNAMOTIVE TECHNOLOGIES CORPORATION
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 as of the 15th day of May 2001.
DYNAMOTIVE TECHNOLOGIES CORPORATION
/s/ Robert Andrew Kingston
------------------------------------
Robert Andrew Kingston,
President & Chief Executive Officer
/s/ Stephen Ives
------------------------------------
Stephen Ives
Chief Financial Officer
Exhibit Index
Exhibit Description
3.1 Company Act Memorandum of DynaMotive Technologies
Corporation, as amended to date (filed as Exhibit
3.1 to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 2001.)
3.2 Articles of DynaMotive Technologies Corporation,
as amended to date (filed as Exhibit 3.2 to the
Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2000.)