UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number: 0-27524
- ---------------------------------------------------------------------------
DYNAMOTIVE ENERGY SYSTEMS CORPORATION
(Exact name of Registrant as specified in its charter)
- ---------------------------------------------------------------------------
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 July 1, 2002
------------------------------------------------------------------
Common Stock, no par value 46,745,980
PART I - FINANCIAL INFORMATION
TABLE OF CONTENTS
DYNAMOTIVE ENERGY SYSTEMS CORPORATION
EXPLANATORY NOTE
This Form 10-Q/A amends the Registrant's quarterly Form 10-Q for the third
fiscal quarter ended September 30, 2001 as filed on November 14, 2001 and
is being filed to reflect the restatement of the Registrant's consolidated
financial statements for that period.
This Form 10-Q/A amends the Registrant's quarterly report on Form 10-Q for
the three months ended September 30, 2001 as filed on November 14, 2001 and
is being filed to restate the Registrant's consolidated financial statements
for the quarter ended September 30, 2001. The restatement relates to grant
amounts from the United Kingdom (UK) Government that were recorded as revenue
under UK Generally Accepted Accounting Principles (GAAP) by its UK subsidiary
DynaMotive Europe Ltd., for which we have subsequently determined should not
have been recognized as revenue in the third quarter, 2001, under Canadian
GAAP. These amounts should have been recorded as reductions in expenses and
reductions in the cost of capital assets. This Form 10-Q/A amends quarterly
results of operations for the three months ended September 30, 2001 and
restates the Quarterly Consolidated Statements of Operations and Consolidated
Balance Sheet for the three months ended September 30, 2001 as follows:
Revenues have been decreased by $278,086, expenses have been decreased by
$280,699, other revenues and expenses have been decreased by $46,071 and
minority interest has been decreased by $22,533 for the three months ended
September 30, 2001. In addition, this Form 10-Q/A restates the Consolidated
Balance Sheet as of September 30, 2001 as follows: current assets decreased by
$86,621, Other Assets decreased by $147,708, current liabilities decreased by
$29,523, other liabilities and long term debt decreased by $33,620 and
shareholders' equity decreased by $170,186.
For purposes of this Form 10-Q/A, and in accordance with Rule 12B-15 under
the Securities Exchange Act of 1934, as amended, each item of the 2001
third quarter Form 10-Q as filed on November 14, 2001 that was affected by
the restatement has been amended and restated in its entirety. No attempt
has been made in this Form 10-Q/A to modify or update other disclosures as
presented in the original Form 10-Q except as required to reflect the
effects of the restatement. In particular, and without limitation, in
"Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations," the Company has given certain information about the
business environment applicable to the Company, the business outlook and
certain forward-looking information. This information has not been revised
from the information provided in the Form 10-Q for the quarter ended
September 30, 2001 because it was not affected by the restatement.
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 16 of the Company's annual
report on Form 10-K which discuss the material variations in the accounting
principles in Canada as compared to those followed in the United States.
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-September 30, 2001 and December 31,
2000
Consolidated Statements of Operations and Comprehensive Loss -
Three and nine months ended September 30, 2001 and 2000
Consolidated Statements of Cash Flows - Nine months ended
September 30, 2001 and 2000
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
SIGNATURES
2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Financial Statements (in U.S. dollars)
DYNAMOTIVE ENERGY SYSTEMS CORPORATION
September 30, 2001
3
DynaMotive Energy Systems Corporation
CONSOLIDATED BALANCE SHEET (in U.S. dollars)
September 30, December 31,
2001 2000
(Unaudited) Audited
(As restated,Note 1)
$ $
- ---------------------------------------------------------------------------
ASSETS
Current
Cash and cash equivalents 44,005 1,095,715
Accounts receivable 179,491 298,676
Government grants receivable [note 5b and 9] 644,653 661,046
Inventory 17,120 20,528
Prepaid expenses and deposits 238,584 136,848
- ------------------------------------------------------------------------
Total current assets 1,123,853 2,212,813
- ------------------------------------------------------------------------
Deferred project costs 3,392,258 --
Capital assets 2,128,769 1,526,369
Goodwill -- --
Patents 660,016 729,938
- ------------------------------------------------------------------------
7,304,896 4,469,120
- ------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 1,691,629 560,906
Bank indebtedness -short term [note 3] 305,983 233,520
Deferred Revenue 52,429 103,948
Minority interest 525 --
- ------------------------------------------------------------------------
Total current liabilities 2,050,566 898,374
- ------------------------------------------------------------------------
Bank Indebtedness - long term [notes 3] 2,015,778 --
Shareholders loan 387,957 --
Other loan 238,009 --
- ------------------------------------------------------------------------
Total liabilities 4,692,310 898,374
- ------------------------------------------------------------------------
Commitments and contingencies [note 1, 5 and 6]
Shareholders' equity
Share capital, [note 4] 24,071,595 21,040,882
Shares to be issued 101,008 250,713
Convertible shareholders loan 156,791 --
Contributed surplus [note 4f] 2,151,160 1,584,997
Cumulative translation adjustment (607,642) (371,062)
Deficit (23,260,326) (18,934,784)
- ------------------------------------------------------------------------
Total shareholders' equity 2,612,586 3,570,746
- ------------------------------------------------------------------------
7,304,896 4,469,120
- ------------------------------------------------------------------------
See accompanying notes
4
DynaMotive Energy Systems Corporation
CONSOLIDATED STATEMENT OF LOSS AND DEFICIT (in U.S. dollars)
Three Months Ended Nine Months Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2000 2001 2000
Unaudited Unaudited Unaudited Unaudited
(as restated) (as restated)
$ $ $ $
- ------------------------------------------------------------------------------
REVENUE
Sales [note 8] 84,206 138,760 458,653 584,511
- ------------------------------------------------------------------------------
84,206 138,760 458,653 584,511
- ------------------------------------------------------------------------------
EXPENSES
Cost of sales 191,880 94,340 508,197 371,346
Amortization and depreciation 58,908 73,841 219,200 218,937
Interest expense 31,574 12,370 42,886 19,597
Marketing 85,187 135,227 488,311 637,451
Office supplies, telephone
and insurance 137,514 82,703 307,235 203,021
Professional fees [note 6] 82,503 616,953 1,366,967 1,417,270
Royalties -- 3,613 1,805 21,865
Rent 97,223 64,836 267,597 133,767
Research and Development
[note 5b and 9] 88,581 66,623 308,402 237,648
General and administrative
salaries and benefits [note 6] 352,502 249,020 1,151,577 1,140,964
Translation loss 181,934 -- 181,934 --
- ------------------------------------------------------------------------------
1,307,806 1,399,526 4,844,111 4,401,866
- ------------------------------------------------------------------------------
Loss from operations (1,223,600) (1,260,766 )(4,385,458) (3,817,355)
OTHER REVENUE AND EXPENSES
Bad debt expense (46,081) -- (46,081) --
Interest income 8,030 13,886 18,455 125,841
Loss on asset disposals (3,580) -- (4,047) (24,615)
Capital tax expenses -- -- (53,765) --
- ------------------------------------------------------------------------------
(41,631) 13,886 (85,438) 101,226
- ------------------------------------------------------------------------------
(1,265,231) (1,246,880) (4,470,896) (3,716,129)
Minority interest 70,204 -- 145,354 --
- ------------------------------------------------------------------------------
Loss for the Period (1,195,027) (1,246,880) (4,325,542) (3,716,129)
Deficit, beginning of period (22,065,299)(16,647,160)(18,934,784)(14,177,911)
- ------------------------------------------------------------------------------
Deficit, end of period (23,260,326)(17,894,040)(23,260,326)(17,894,040)
- ------------------------------------------------------------------------------
Weighted average number of
common shares Outstanding 36,257,840 34,048,212 35,258,963 32,138,953
- ------------------------------------------------------------------------------
Loss per common share (0.03) (0.04) (0.12) (0.12)
- ------------------------------------------------------------------------------
See accompanying notes
5
DynaMotive Energy Systems Corporation
CONSOLIDATED STATEMENT OF CASHFLOW
(expressed in U.S. dollars)
Nine months Ended
Sept 30 Sept 30,
2001 2000
Unaudited Unaudited
(as restated)
$ $
- -----------------------------------------------------------------------------
OPERATING ACTIVITIES
Loss for the period (4,325,542) (3,716,129)
Add items not involving cash:
Amortization and depreciation 219,200 218,937
Minority interest (145,354) --
Loss on asset disposal 4,047 24,615
Translation loss 181,934 --
Stock based compensation 1,643,407 1,616,220
Net change in non-cash working capital
balances related to operations [note 7] 76,723 (90,617)
- ------------------------------------------------------------------------------
Cash used in operating activities (2,345,585) (1,946,974)
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in bank indebtedness 113,271 91,966
Decrease in loan from shareholder (3,175) --
Increase in other loans 200,645 --
Decrease in convertible shareholders loan (15,985) --
Share capital issued 1,805,673 4,436,129
- ------------------------------------------------------------------------------
Cash provided by financing activities 2,100,429 4,528,095
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase in patents costs (14,190) (29,280)
Purchase of capital assets (net of
government grants) (775,243) (596,793)
Acquisition disbursement (70,243) --
- ------------------------------------------------------------------------------
Cash used in investing activities (859,676) (626,073)
- ------------------------------------------------------------------------------
Effect of exchange rate changes on cash 53,122 (50,415)
- ------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents during the period (1,051,710) 1,904,633
Cash and cash equivalents at beginning of period 1,095,715 223,769
- ------------------------------------------------------------------------------
Cash and cash equivalent at end of period 44,005 2,128,402
- ------------------------------------------------------------------------------
See accompanying notes
6
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 1. RESTATEMENT OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
The restatement relates to grant amounts from the UK Government that were
recorded as revenue under UK GAAP by its UK subsidiary DynaMotive Europe Ltd.,
for which we have subsequently determined should not have been recognized as
revenue in the third quarter, 2001, under Canadian GAAP. These consolidated
financials statements restate the Quarterly Consolidated Statements of
Operations and Consolidated Balance Sheet for the three months ended September
30, 2001 as follows: Revenues have been decreased by $278,086, expenses have
been decreased by $280,699, other revenues and expenses have been decreased by
$46,071 and minority interest has been decreased by $22,533 for the three
months ended September 30, 2001. In addition, this Form 10-Q/A restates the
Consolidated Balance Sheet as of September 30, 2001 as follows: current assets
decreased by $86,621, Other Assets decrease by $146,708, current liabilities
decreased by $29,523, other liabilities and long term debt decreased by
$33,620 and shareholders' equity decreased by $170,186. The restatement has
resulted in an increase in net loss for the three months ended September 30,
2001 of $65,991 ($0.00 per share).
Three Months Ended September 31, 2001
Previously Restatement
reported Adjustments As Restated
$ $ $
- -------------------------------------------------------------------------------
Consolidated Statement of Operations:
Revenues 362,292 (278,086) 84,206
Expenses 1,588,505 (280,699) 1,307,806
Loss from operations (1,226,213) 2,613 (1,223,600)
Other revenue and expense 4,440 (46,071) (41,631)
Minority interest 92,737 (22,533) 70,204
Loss for the Period (1,129,036) (65,991) (1,195,027)
Per common share:
Loss for the period:
- Basic (0.03) (0.03)
Consilidated Balance Sheet:
Current assets 1,210,474 (86,621) 1,123,853
Other assets 6,327,751 (146,708) 6,181,043
-------------------------------------------
Total assets 7,538,225 (233,329) 7,304,896
-------------------------------------------
Current liabilities 2,080,089 (29,523) 2,050,566
Other liabilities & long-
Term debt 2,675,364 (33,620) 2,641,744
Shareholders' equity 2,782,772 (170,186) 2,612,586
-------------------------------------------
Total liabilities &
Shareholders' equity 7,538,225 (233,329) 7,304,896
-------------------------------------------
7
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 1. RESTATEMENT OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
(Cont'd)
Nine Months Ended September 31, 2001
Previously Restatement
reported Adjustments As Restated
$ $ $
- -------------------------------------------------------------------------------
Consolidated Statement of Operations:
Revenues 805,227 (346,574) 458,653
Expenses 5,124,810 (280,699) 4,844,111
Loss from operations (4,319,583) (65,875) (4,385,458)
Other revenue and expense 39,367 (46,071) 85,438
Minority interest 150,765 (5,411) 145,354
Loss for the Period (4,208,185) (117,357) (4,325,542)
Per common share:
Loss for the period:
- Basic (0.12) (0.12)
Consilidated Balance Sheet:
Current assets 1,210,474 (86,621) 1,123,853
Other assets 6,327,751 (146,708) 6,181,043
-------------------------------------------
Total assets 7,538,225 (233,329) 7,304,896
-------------------------------------------
Current liabilities 2,080,089 (29,523) 2,050,566
Other liabilities & long-
Term debt 2,675,364 (33,620) 2,641,744
Shareholders' equity 2,782,772 (170,186) 2,612,586
-------------------------------------------
Total liabilities &
Shareholders' equity 7,538,225 (233,329) 7,304,896
-------------------------------------------
Note 2. NATURE OF BUSINESS
DynaMotive Energy Systems Corporation ("the Company") was incorporated on
April 11, 1991 under the laws of the Province of British Columbia under the
name of DynaMotive Canada Corporation. The Company changed its name to
DynaMotive Technologies Corporation in 1995, and changed to its current name
in June 2001. 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. With the recent acquisition of Border
Biofuels Ltd, the Company will gain access to BioOil fuelled electricity
projects in the United Kingdom ("UK") over a 15-year period. The Company has
developed, patented, or acquired three primary technologies: (1) BioTherm(TM),
a biomass-to-
8
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 2. NATURE OF BUSINESS (cont'd)
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 metal cleaning business is in the United States, while the
principle market for near term BioOil related business is in the UK.
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 $4,325,542 for first nine months of 2001
and as at September 30, 2001 has a deficit of $23,260,326.
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.
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 accounting principles
generally accepted in the United States of America is detailed in note 11.
The following is a summary of significant accounting policies used in the
preparation of these consolidated financial statements:
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 (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 laws 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. The consolidated financial statements also
include 75% of Border Biofuels
9
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 2. NATURE OF BUSINESS (cont'd)
Limited, incorporated under the law of United Kingdom, acquired through
DynaMotive Europe Limited. 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
Foreign 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.
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. Revenue from power purchase projects of
acquired Border Biofuels operations (Note
10
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 2. NATURE OF BUSINESS (cont'd)
12) is recognized on a completed contract basis. 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 labour 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.
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.
11
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 2. NATURE OF BUSINESS (cont'd)
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 approximate 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.
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
12
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 2. NATURE OF BUSINESS (cont'd)
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.
Note 3. BANK INDEBTEDNESS
[a] The Company has an authorized credit facility up to a maximum of $316,957
[$Cdn. 500,000]. As collateral for the loan, the Company has provided the
lender a General Security Agreement providing a lien on all present and future
assets. Amounts borrowed are repayable within 120 days from the date of
borrowing and as at September 30, 2001 $285,261, (Cdn. $450,000) 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 on September 30, 2001 approximates its
carrying value.
[b] The Company's subsidiary Border Biofuels Limited (BBL) has extended a
credit facility agreement with Bank of Scotland for a maximum of $1,715,346
(GBP 1,162,789). Under this agreement, Bank of Scotland has the security right
over the assets of BBL and its subsidiaries. Interest charge is calculated
daily on annualized based rate plus 3%. The borrowed amount must be repaid
together with interest by Mach 30, 2004 or earlier from audited profits
generated in BBL and its subsidiaries prepared in accordance with UK GAAP.
As of September 30, 2001,
13
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 3. BANK INDEBTEDNESS (cont'd)
$1,692,987 (GBP 1,147,632) has been drawn down on the credit facility. The
fair market value of the loan on September 30, 2001 approximates its carrying
value.
Covenants to BBL under the credit facility include, among others, 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, changing the
auditor, or providing other guarantees or entering contingent liabilities and
assets are not to be further encumbered.
[c] The Company's subsidiary Border Biofuels Limited (BBL) has entered a loan
facility with Bank of Scotland for a maximum of $295,040 (GBP 200,000). Under
this agreement, Bank of Scotland has the security right over the assets of BBL
and its subsidiaries. Interest charge is calculated daily on annualized based
rate plus 3%. The borrowed amount must be repaid together with interest by
March 30, 2003. The Company has provided a guarantee for this amount. As of
September 30, 2001, $322,815 (GBP 218,828) has been drawn down on this
facility. The fair market value of the loan on September 30, 2001 approximates
its carrying value.
Covenants to BBL under the credit facility include, among others, 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, changing the
auditor, or providing other guarantees or entering contingent liabilities and
assets are not to be further encumbered.
[d] Included in Short-term Bank indebtedness is the Company's subsidiary
DynaMotive Europe Limited's bank overdraft of $20,722 (GBP 14,047) as of
September 30, 2001.
Note 4. SHARE CAPITAL
[a] Authorized share capital
September 30, 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
39,908,436 common shares
[December 31, 2000 - 35,851,060] $24,071,595 $21,040,882
- -----------------------------------------------------------------------------
14
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 4. SHARE CAPITAL (Cont'd.)
[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] Pursuant to the closing of the May 2001 private placement, the
Company issued a total of 995,154 common shares for cash proceeds of
$645,000 and $151,125 in settlement of commercial fees.
[iii] Pursuant to an interim closing of a private placement on August 20,
2001, the Company issued a total of 1,181,818 common shares for cash
proceeds of $600,000 and $50,000 in settlement of commercial fees.
[iv] 87,979 common shares were issued to directors in lieu of cash
compensation based upon reported share prices ranging from $0.81 to
$0.94 per common share.
[v] 1,225,233 common shares were issued as payment for commercial
services based upon reported share prices ranging from $0.50 to $2.00
per common share.
[vi] 149,946 common shares were issued pursuant to the exercise of options
at $0.40 per common share for cash.
$ Number of
Shares
- ------------------------------------------------------------------------------
Share Capital, December 31, 2000 21,040,882 35,851,060
Private placement issued for cash 1,745,695 2,314,405
Private placement issued, non cash 201,125 279,813
Shares issued from exercise of options for cash 59,978 149,946
Shares issued, directors & employees compensation 77,874 87,979
Shares issued, for commercial services 946,041 1,225,233
- ------------------------------------------------------------------------------
Balance, September 30, 2001 24,071,595 39,908,436
- ------------------------------------------------------------------------------
Shares to be issued
At September 30, 2001, the Company has 182,100 Common shares to be issued to an
officer and non-employees for services rendered under compensation arrangements
[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.
15
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 4. SHARE CAPITAL (cont'd.)
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 nine months of 2001 no common shares were released from
escrow and at September 30, 2001, 781,334 common shares were held in escrow.
[c] Stock Options
At September 30, 2001 the following stock options to Directors, employees and
others were outstanding:
No. of common Exercise Price
shares issuable $ Date of expiry
- ---------------------------------------------------------------------------
549,236 0.40 October 28, 2001 - December 10, 2004
100,000 0.50 January 31, 2005
255,400 0.75 January 31, 2002 - January 31, 2004
861,500 1.00 January 31, 2002 - February 28, 2005
2,610,000 1.50 May 30, 2002 - May 31, 2006
20,000 1.95 June 14, 2005
34,222 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
- ---------------------------------------------------------------------------
4,502,343
- ---------------------------------------------------------------------------
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 5,986,265 (15%) of common shares for issuance upon the
exercise of stock options of which at September 30, 2001 1,483,922 are
available to be granted. The exercise price and the vesting terms of the
options are etermined 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.
16
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 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
- ---------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 1,844,511 0.73
- ---------------------------------------------------------------------------
Options granted 1,070,863 1.11
Options cancelled (262,634) 0.97
Options exercised (242,601) 0.46
- ---------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 2,410,139 0.90
- ---------------------------------------------------------------------------
Options granted 3,885,500 1.17
Options cancelled (265,278) 1.63
Options expired (63,600) 2.26
Options exercised (737,119) 0.54
- ---------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 5,229,642 1.14
- ---------------------------------------------------------------------------
Options granted 234,445 1.22
Options cancelled -- --
Options expired (15,000) 2.00
Options exercised (946,744) 0.74
- ---------------------------------------------------------------------------
BALANCE, SPETEMBER 30, 2001 4,502,343 1.55
- ---------------------------------------------------------------------------
During 2000, the Company re-priced 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 re-priced 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 re-priced again from $0.40 to $1.00.
Included in the options granted in 2001, were 60,000 options to a non-employee
for services performed for the Company. The valuation of this stock based
compensation is to be recorded at fair value when the related services are
performed.
17
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 4. SHARE CAPITAL (cont'd.)
[d] Common share purchase warrants
(1) At September 30, 2001 common share purchase warrants outstanding were
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 1, 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
Series L Warrants 83,448 $2.00 February 20, 2003
Series M Warrants 589,041 $1.50 June 22, 2003-September 30, 2004
Series N-a. Warrants 386,362 $1.50 March 5, 2002
Series N-b. Warrants 386,365 $1.50 September 5, 2004
- ------------------------------------------------------------------------------
(1) 2,000,000 of the Series F warrants were issued as an integral part of a
subscription to 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.
(4) The Series L, M, N-a, N-b warrants have been issued as an integral part of
private placements. These warrants vested upon successful completion of
the private placements.
As at September 30, 2001, 120,000 warrants are unvested. Compensation for the
first nine months of 2001 in respect of the vested warrants has been recorded
at a fair value of $469,567.
18
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 4. SHARE CAPITAL (cont'd.)
[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 ("SAR's") 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.
The SAR's 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 SAR's at its option under certain
circumstances. The number of SAR's 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 September 30, 2001 is 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
- --------------------------------------------------------------------
SAR's cancelled (249,166)
- --------------------------------------------------------------------
Balance, September 30, 2001 1,486,667
- --------------------------------------------------------------------
At September 30, 2001, the following stock appreciation rights all of which
were issued to employees, were outstanding:
SAR's Initial Value Expiration Date
- ---------------------------------------------------------------------
1,132,502 $0.400 January 28, 2004
200,000 $0.625 May 1, 2004
154,165 $1.000 May 1, 2004
- ---------------------------------------------------------------------
1,486,667
- ---------------------------------------------------------------------
19
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 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.
Note 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 September 30, 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 nine months of
2001, $547,735 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 September 30, 2001.
20
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 5. COMMITMENTS AND CONTINGENCIES (cont'd)
[d] The Company has the following future minimum lease commitments for
premises and equipment expiring through 2005:
$
- --------------------------------------------------------------------
2001 57,250
2002 219,000
2003 214,000
2004 124,000
2005 119,000
- --------------------------------------------------------------------
733,250
- --------------------------------------------------------------------
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(R) 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.
Note 6. RELATED PARTY TRANSACTIONS
In addition to the transactions described in Note 4, the Company had the
following transactions with related parties:
21
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 6. RELATED PARTY TRANSACTIONS (cont'd)
[a] Consulting fees and salaries of $415,979 for first nine months of 2001 and
$365,430 for the first nine months of 2000 have been paid to Directors (or
companies controlled by Directors) of the Company.
[b] The Company's subsidiary Border Biofuels Limited has loan agreement with
two of its directors totaling $326,926 (GBP 231,012). The loan bear interest
at annual LIBOR rate plus 3.5% calculated monthly. The loan, which has the
similar repayment term as that of Bank of Scotland loan (Note 3[b]), is
repayable upon Border Biofuels Ltd. achieving net positive relevant profit
under Generally Accepted Accounting Principles in the United Kingdom ("UK
GAAP"). Relevant profit is defined as the amount obtained by deducting the
accumulated liabilities from the retained profit, at any given time.
The Company's subsidiary Border Biofuels Limited also has loan agreements with
its shareholders totaling, $158,796 (GBP 112,208). These loans can be
conditionally converted to DynaMotive's common shares at the higher rate of
$3.00 per share or the prevailing market price at the time BBL achieves net
positive relevant profit under UK GAAP. Relevant profit is defined as the
amount obtained by deducting the accumulated liabilities from the retained
profit, at any given time. As of September 30, 2001, the outstanding loan
amount, approximating its carrying value, is $161,082 (GBP 109,193).
[c] 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.
[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 $90,000 to this related party.
22
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 7. NET CHANGE IN NON-CASH WORKING CAPITAL BALANCES
Nine months Nine months
ended ended
Sept 30, 2001 Sept 30, 2000
$ $
- -----------------------------------------------------------------------------
Accounts and government
grants receivable 64,536 54,877
Work in progress/Inventory 2,445 35,156
Prepaid expenses and deposits (105,344) (213,395)
Accounts payable and accrued liabilities 162,606 4,469
Deferred revenue (47,520) 28,276
- -----------------------------------------------------------------------------
76,723 (90,617)
- -----------------------------------------------------------------------------
Supplementary information
- -----------------------------------------------------------------------------
Interest paid 42,886 19,597
- -----------------------------------------------------------------------------
Note 8. MAJOR CUSTOMERS
[a] The Company sells to multiple customers. The majority of sales for the
nine months ended September 30, 2001 were derived from 2 customers each
representing 23%, and 22%, respectively of consolidated sales. The majority of
sales for the year ended September 30, 2000 were derived from 3 customers each
representing 52%, 36% and 12% respectively of consolidated sales. As at
September 30, 2001 the aggregate accounts receivable balances relating to
these customers was $15,821 (September 30, 2000 - $40,741).
[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 September 30, 2001.
Note 9. GOVERNMENT ASSISTANCE
Government assistance in the amount of $936,338 has been recorded as a
reduction of expenditures for the first nine months of 2001.
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
23
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 9. GOVERNMENT ASSISTANCE (cont'd)
contribution is non-repayable. In 2000, $163,623 was claimed of which 100% has
been received by September 30,2001.
During the first quarter of 2001, the Company's subsidiary Border Biofuels
Limited (BBL) entered into a contribution agreement with Department of Trade
and Industry (DTI), a department of the United Kingdom government, whereby BBL
and its collaboration partners are entitled to receive $1,696,694 (GBP
1,161,300) under the New & Renewable Energy Programme between January 9, 2001
and July 8, 2003. DynaMotive is named one of the collaboration partners to the
program. Except for the proceeds from disposing project assets, the
contribution is non repayable. As at September 30, 2001, $342,875 has been
claimed of which $89,468 is included in government grants receivable as at
September 30, 2001.
NOTE 10. SEGMENTED INFORMATION
The Company has six reportable segments. The segments are DynaPower(R),
Actuators, BioTherm(TM), Corporate, Border Biofuels, and Other. DynaPower(R)
is 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 and
administrative costs. Acquired subsidiary operation Border Biofuels
specializes in the development of green power projects in the United Kingdom.
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.
24
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
NOTE 10. SEGMENTED INFORMATION (cont'd)
September September
2001 2000
$ $
- ------------------------------------------------------------------------------
REVENUE
Actuator -- --
DynaPower(R) 276,552 583,700
BioTherm(TM) -- 811
Other -- --
Border Biofuels 182,010 --
Corporate -- --
- ------------------------------------------------------------------------------
458,562 584,511
- ------------------------------------------------------------------------------
LOSS FOR THE PERIOD
Actuator (15,403) (13,118)
DynaPower(R) (261,854) (244,628)
BioTherm(TM) (699,821) (803,731)
Other (30,019) (11,990)
Border Biofuels (662,726) --
Corporate (2,655,719) (2,642,662)
- ------------------------------------------------------------------------------
(4,325,542) (3,716,129)
- ------------------------------------------------------------------------------
25
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
NOTE 10. SEGMENTED INFORMATION (cont'd)
September December
2001 2000
$ $
- ----------------------------------------------------------------------------
CAPITAL EXPENDITURES, INCLUDING PATENTS
(NET OF GRANT & DISPOSAL)
Actuator -- --
DynaPower(R) (27,243) 111,557
BioTherm(TM) 252,315 1,110,863
Other 65,261 3,984
Border Biofuels 487,392 --
Corporate 11,707 224,463
- ------------------------------------------------------------------------------
789,432 1,450,867
- ------------------------------------------------------------------------------
September September
2001 2000
$ $
- ------------------------------------------------------------------------------
AMORTIZATION
Actuator 15,403 13,118
DynaPower(R) 74,445 72,064
BioTherm(TM) 74,935 96,448
Other 8,959 11,990
Border Biofuels 4,779 --
Corporate 40,679 25,317
- ------------------------------------------------------------------------------
219,200 218,937
- ------------------------------------------------------------------------------
September December
2001 2000
$ $
- ------------------------------------------------------------------------------
TOTAL ASSETS
Actuator 40,748 63,737
DynaPower(R) 330,792 476,462
BioTherm(TM) 1,606,567 1,429,496
Other 130,482 75,295
Border Biofuels 2,417,019 --
Corporate 2,779,288 2,424,130
- ------------------------------------------------------------------------------
7,304,896 4,469,120
- ------------------------------------------------------------------------------
26
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
NOTE 10. SEGMENTED INFORMATION (cont'd)
Geographic Information
The Company holds substantially all of its capital assets in Canada and UK,
and revenues from external customers by customer location is as follows:
September September
2001 2000
$ $
- ------------------------------------------------------------------------------
Revenue
United States 112,019 505,860
Italy 5,478 11,206
Canada 109,908 62,491
France 48,787 --
United Kingdom 182,461 --
Other -- 4,954
- ------------------------------------------------------------------------------
458,653 584,511
- ------------------------------------------------------------------------------
Note 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.
27
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 11. Reconciliation of generally accepted accounting principles (cont'd.)
[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 was 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.
[vi] For purposes of reconciliation to U.S. GAAP, the re-pricing of options
can give rise to additional compensation expense. During the first nine months
of 2001 no compensation expense resulted from the re-pricing of options based
on the transition provision of FIN44, commencing July 1, 2000. Options re-
priced 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 ("SAR's") 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.
28
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
NOTE 11. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (cont'd.)
Three Three Nine Nine
months months months months
ended ended ended ended
Sept 30, Sept 30, Sept 30, Sept 30,
2001 2000 2001 2000
$ $ $ $
- ------------------------------------------------------------------------------
Loss for the period, Canadian GAAP(1,195,027)(1,246,880)(4,325,542)(3,716,129)
Adjustment for patent
cost amortization 249 (1,127) (3,664) 8,940
Adjustment for stock-based
Compensation (4,167) (12,075) (15,136) (12,075)
- ------------------------------------------------------------------------------
Loss for the year, as adjusted (1,198,945)(1,260,082)(4,344,342)(3,719,264)
- ------------------------------------------------------------------------------
Unrealized losses on foreign
currency translation (210,590) 25,650 (236,580) (51,303)
- ------------------------------------------------------------------------------
Loss for the year, as adjusted (1,409,535)(1,234,432)(4,580,922)(3,770,567)
- ------------------------------------------------------------------------------
Weighted average number of
common shares outstanding 36,257,840 34,048,212 35,258,963 32,138,953
- ------------------------------------------------------------------------------
Loss per common share (0.04) (0.04) (0.13) (0.12)
- ------------------------------------------------------------------------------
The three months ended March 31, 2000, six months ended June 30, 2000 and nine
months ended September 30, 2000 balances have been restated. A schedule of
the restatements is detailed in note 13.
Consolidated balance sheet items which vary significantly under accounting
principles generally accepted in the United States would be as follows:
September 30, December 31,
2001 2000
$ $
- ------------------------------------------------------------------------------
Patents 627,396 651,558
- ------------------------------------------------------------------------------
Total assets 7,222,851 4,390,740
- ------------------------------------------------------------------------------
Share capital 26,475,749 23,409,409
Share to be issued 101,008 250,713
Contributed surplus 2,151,160 1,584,997
Cumulative translation adjustment (607,642) (371,062)
Deficit (25,726,033) (21,381,691)
- ------------------------------------------------------------------------------
Shareholders' equity 2,394,242 3,492,366
- ------------------------------------------------------------------------------
29
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
NOTE 11. RECONCILIATION OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (cont'd.)
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.
Supplemental disclosure of pro forma loss and loss per share:
September 30 2001 June 30, 2000
- ------------------------------------------------------------------------------
Pro forma loss 4,344,342 3,716,264
Pro forma loss per share (0.12) (0.12)
- ------------------------------------------------------------------------------
Note 12. ACQUISTION OF BORDER BIOFUELS LIMITED
The Company acquired 75% of the outstanding common shares of Border Biofuels
Limited's (BBL), a United Kingdom Green Power project development company, on
April 6, 2001 for a nominal cash consideration of GBP 1. The Company has the
option to acquire the balance of BBL's equity (25%) for $1,570,704
(GBP 1,108,628) in DynaMotive stock at the higher rate of $3.00 per share or
the prevailing market price at the time BBL achieve net positive relevant
profit under UK GAAP. Relevant profit is defined as the amount obtained by
deducting the accumulated liabilities from the retained profit, at any given
time.
Furthermore, as part of the transaction, BBL restructured its debt with its
Bankers ($1,645,567 (GBP 1,162,789), see Note 3[b]). This debt will be repaid
from profits generated by BBL with no recourse to the Company. Further in
connection with the acquisition, the Company provided a guarantee of $283,038
(GBP 200,000) to BBL's banker.
30
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Note 12. ACQUISTION OF BORDER BIOFUELS LIMITED (cont'd.)
The acquisition of BBL was accounted using the purchase method. The
consolidated financial statement reflected the results of operation of Border
Biofuels Limited from the date of acquisition through September 30, 2001. The
total assets acquired amounted to $4,000,115 (GBP 2,825,730), and the total
liabilities acquired were $3,402,482 (GBP 2,404,258). The net asset was
calculated to be $597,633 (GBP 421,472), of which $149,427 (GBP 105,368)
represented minority interest. Given the purchase price of GBP 1, the
acquisition resulted in a negative goodwill (75%) of $448,225 (GBP 316,102).
This amount is used to reduce the corresponding portion of acquired BBL
goodwill from prior investments ($365,249, (GBP 257,798)). The remaining
credit balance was used to reduce deferred project costs ($82,606,
(GBP 58,305)).
Note 13. CHANGES IN PRIOR YEAR BALANCES
Certain options, warrants and shares issued to non-employees were issued at a
price other than market price in the prior year. The prior year's nine month
ended September 30, 2000 balances have been restated as follows:
31
DynaMotive Energy Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 (in U.S. dollars)
Three Three Three Nine
months months months months
ended ended ended ended
Mar 31, Jun 30, Sept 30, Sept 30,
2000 2000 2000 2000
$ $ $ $
- ------------------------------------------------------------------------------
Deficit as at December 31,1999 14,177,911 15,326,966 16,229,676 14,177,911
Net loss for the period before
Restatements 1,149,055 902,710 753,903 2,805,668
- ------------------------------------------------------------------------------
Deficit before restatements 15,326,966 16,229,676 16,983,579 16,983,579
- ------------------------------------------------------------------------------
Restatements for the period
Balance b/f previous quarter -- 290,568 417,483 --
Marketing expenses 6,875 30,491 -- 37,366
Office supplies, Telephone
And insurance (15,617) 75,418 (26,569) 33,232
Professional fees 283,693 96,424 843,234 1,223,351
General & administrative salaries -- -- (15) (15)
Board compensation & staff bonus -- -- (276,665) (276,665)
Overtime settlement expenses -- -- (65,616) (65,616)
SAR Redemption -- -- (7,960) (7,960)
Interest & other income 15,617 (75,418) 26,569 (33,232)
- ------------------------------------------------------------------------------
Total adjustments c/f to
next period 290,568 417,483 910,461 910,461
- ------------------------------------------------------------------------------
Deficit after restatements 15,617,534 16,647,159 17,894,040 17,894,040
- ------------------------------------------------------------------------------
Weighted average number of
Common shares outstanding 29,626,768 33,915,151 34,048,212 32,138,953
- ------------------------------------------------------------------------------
Loss per common share after
restatements (0.05) (0.04) (0.04) (0.12)
- ------------------------------------------------------------------------------
Note 14. COMPARATIVE FIGURES
Certain comparative figures have been reclassified in order to conform with
the presentation adopted in the current year.
32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Energy Systems 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 the acquisition of Border Biofuels Limited. with the
business of the Company, 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
ssembly 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.
In this Report, unless the context otherwise requires, the terms the
"Company" and "DynaMotive" refer to DynaMotive Energy Systems Corporation and
its subsidiaries. The Company is currently listed on the over-the-counter
bulletin board (OTCBB) under the symbol: DYMTF.OB.
1. Restatement of the Three and Nine Months Ended September 30, 2001
The restatement relates to grant amounts from the UK Government that were
recorded as revenue under UK GAAP by its UK subsidiary DynaMotive Europe Ltd.,
for which we have subsequently determined should not have been recognized as
revenue in the third quarter, 2001, under Canadian GAAP. As a result, the
consolidated financials statements for the three and nine months ended
September 30, 2001 are revised as follows: For the three months ended
September 30, 2001 revenues have been decreased by $278,086, expenses have
been decreased by $280,699,
33
other revenues and expenses have been decreased by $46,071 and minority
interest has been decreased by $22,533. For the nine months ended September
30, 2001 revenues have been decreased by $346,574,expenses have been decreased
by $280,699, other revenues and expenses have been decreased by $46,071 and
minority interest has been decreased by $5,411. Also, this Form 10-Q/A
restates the Consolidated Balance Sheet as of September 30, 2001 as follows:
current assets decreased by $86,621, Other Assets decrease by $146,708,
current liabilities decreased by $29,523, other liabilities and long term debt
decreased by $33,620 and shareholders' equity decreased by $170,186. The
restatement has resulted in an increase in net loss for the nine months ended
September 30, 2001 of $117,357 ($0.00 per share).
2. Introduction
DynaMotive Energy Systems Corporation 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'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. To support this goal the
Company plans over the next two years to expand upon its existing operations
in Canada, Europe and the US, as well as to develop commercial presence in
Asia and Latin America.
During the second quarter of 2001, the Company acquired 75% of the
outstanding common shares of Border Biofuels, a UK Green Power project
development company, for a cash consideration of 1 pound sterling, along with
a guarantee of GBP 200,000 of Border BioFuels indebtedness. The transaction
also provided the Company a right to purchase the balance of Border BioFuels
for GBP 1,108,628 in DynaMotive stock at the higher rate of $3.00 per share or
the prevailing market price at the time Border Biofuels achieves
profitability. Border Biofuels owns 69 Megawatts of BioOil fuelled electricity
projects under 15-year power purchase agreements under the Non Fossil Fuel
Obligation and Scottish Renewable Obligation programs of the UK government.
Revenues under these agreements could potentially exceed $800,000,000 over the
15-year period.
As of September 30, 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.
34
3. 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 accounting principles generally accepted
in the United States of America are 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 third quarter of 2001 decreased to $84,206
while the same quarter for 2000 generated $138,760 of revenues. Revenue for
the third quarter of 2001 was lower than the same quarter in 2000 due to the
decline in DynaPower commercial sales due to a weaker economy and announced
ivestiture of the DynaPower business. On a comparative basis, revenue
generated from the Company's metal cleaning business for the first nine months
of 2001 and 2000 were $276,552 and $583,700, respectively. Again, this
decrease was due to a decline in commercial sales volume of its DynaPower(R)
metal cleaning systems due to a weaker economic environment and the announced
divestiture of the business.
On May 1, 2001, the Company announced that it intends to divest its metal
cleaning subsidiary, DynaPower Inc., and has entered into a Letter of Intent
for a potential management buy-out. The Company intends to retain ownership of
certain patents connected with its metal cleaning technology and to continue
to receive royalty payments from these patents. While the Company intends to
complete the divestiture by the fourth quarter of this year, there can be no
assurance that the divestiture will be completed by the end of the fourth
quarter of 2001 or at all.
Cost of sales in the third quarter of 2001 increased to $191,880, from
$94,340 in the same period of 2000 due to corresponding higher unit costs at
DynaPower and due to costs at the Company's UK subsidiary DynaMotive Europe
Ltd. For the three months ended September 30, 2001, the gross margin was -
127.9% compared to 32.0% in the same period of 2000. The quarter-to-quarter
decrease in gross margin is due to lower unit margins within DynaPower and
negative margins at DynaMotive Europe Ltd.
For the third quarter of 2001 and 2000 the Company expended $166,419 and
$130,414 respectively on research and development. Of these amounts, $77,838
and $63,791 respectively were sponsored by government funding. For the first
nine months of 2001 and 2000, the Company expended $506,994 and $488,120,
respectively on research and development. Of these amounts, $198,592 and
$250,472 respectively were sponsored by government funding. The increase in
research and development expenditures in 2001 reflects the increased
activities in the Company's commercialization effort.
General and administrative salaries and benefits increased to $352,502 in
the third quarter of 2001 compared to $249,020 in the same period of 2000.
The increase reflects the increased cost structure resulting from the
acquisition of Border Biofuels.
35
Overall capital expenditures, net of government grants and disposals, for
developing and patenting the Company's technologies totaled $789,433 in the
first nine months of 2001. For the same period in 2000, total capital
expenditures were $626,073. The increase is due primarily to the acquisition
of Border Biofuels.
The Company's total assets increased to $7,304,896 at September 30, 2001
from $4,469,120 at December 31, 2000. The increase is due primarily to the
acquisition of Border Biofuels Limited. Liabilities increased to $4,692,310 at
the end of the third quarter from $898,374 at December 31, 2000 also due to
the acquisition of Border Biofuels.
The operating loss for the nine month period ending September 30 2001 was
$4,325,542 as compared to $3,716,129 for the same period in 2000. The
increase in loss is primarily due to (i) an increase in overhead expenses such
as occupancy, office expenses, and administrative salaries, resulting from the
acquisition of Border Biofuels, and (ii) an increase in professional fees paid
to independent consultants assisting in the Company's commercialization
effort. The majority of such fees were paid in restricted common stock or
warrants to purchase common stock.
Use of cash in operating activities for the nine month period ending
September 30, 2001 increased to $2,345,585 from $1,946,974 in the same period
in 2000. The increase in use of cash was primarily due to the increase in
operating losses for the nine month period, which was substantially offset by
non-cash equity compensation, and changes in working capital consisting of
accounts receivables, government grant receivables, deferred revenue, and
accounts payables.
The end-of-period deficit increased from $18,934,784 at December 31, 2000
to $23,260,326 at September 30, 2001. The loss per common share for the third
quarter of 2001 decreased to three cents ($0.03) as compared to four cents
($0.04) for the same quarter in 2000.
During the third quarter, DynaMotive and its alliance partner, Tecna SA,
jointly announced that they are fast tracking the design and construction of
pyrolysis (BioOil) plants. The Company's objective is to develop a modular
design that will allow for a "building block approach" to expanding plant
capacity. Plant modules will be fabricated in shops and shipped to locations
for final assembly. Plant construction is being considered for Canada, the
United States and United Kingdom.
DynaMotive also announced during the third quarter that it has formally
launched the design of a 100 tonne per day (tpd) pyrolysis plant that will be
the core of an integrated biomass-to-energy system. The plant capacity
represents a 400% increase in capacity from its original plan. The 100 tpd
plant is projected to produce enough fuel to continuously fire a 2.5 Megawatt
turbine and be capable of providing electricity to a small town (2,000
households).
DynaMotive expects to demonstrate the commercial feasibility of its BioOil
fueled system in cooperation with Orenda Turbines, part of Magellan Aerospace
of Canada, and Border Biofuels. The flagship project is expected to generate
2.5 Megawatt and be the first BioOil power
36
generation plant of its kind. DynaMotive is currently evaluating sites for the
commercial scale energy system.
DynaMotive and Border BioFuels have submitted planning applications to
develop a Forest Residue fired power station on Arran, an Island off the
Scottish coast. The project intends to use wood from sustainable production in
existing forestry operations on the island to generate 'green' electricity.
The power station should generate up to one third of the island's electricity
needs. The scheme has the benefit of an electricity supply contract awarded
under the Scottish Renewables Obligation, a government project designed to
foster the development of energy from renewable sources in recognition of its
environmental advantages. The venture also has the support of the Forestry
Commission which will provide the wood fuel for the plant. Project revenues
have been estimated to exceed $ 30 million over the project primary period of
15 years.
4. Liquidity And Capital Resources
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 the development and commercialization of
BioOil fuels and derivative products, and Natural Resources Canada which has
contributed $250,000 to support research and development of BioOil both in
house and at CANMET national laboratory. In addition, DynaMotive Europe
Limited together with Border Biofuels and a strategic partner, received a
grant commitment of $1.7 million from the United Kingdom Department of Trade
and Industry to support the development of an integrated BioOil and
electricity generating plant in the UK. During the third quarter of 2001, the
Company continued working with TPC to revise the contribution agreement
entered into in 1997.
As of the end of the third quarter of 2001, the Company had cash and cash
equivalents of $44,005, representing a decrease of $1,051,710 from cash and
cash equivalents as at December 31, 2000. The primary sources of liquidity for
the Company during the third quarter of 2001 was the Company's private
placement offerings and stock option exercises for cash totaling $1,138,373.
During the first nine months of 2001, the Company generated cash in the
amount of $2,100,429 from financing activities, and used cash in operating and
in investing activities in the amounts of $2,345,585, and $859,676
respectively. For the same period in 2000, the Company used cash in operating
and in investing activities in the amounts of $1,946,974 and $626,073,
respectively, while financing activities generated cash of $4,528,095.
Cash used in operating activities for the first nine months of 2001, which
consists of a loss for the period of $4,325,542, was partially offset by
amortization, stock based compensation
37
and a translation loss in the amounts of $219,200, $1,643,407 and $181,934,
respectively. Non-cash working capital items decreased by $76,723 during the
nine month period of 2001. Cash used in operating activities for the same
period in 2000 consisted of a loss of $3,716,129, which was partially offset
by amortization and non-cash compensation expenses in the amount of $218,937,
and $1,616,220 respectively. Non-cash working capital items increased by
$90,617 during the same period in 2000.
Financing activities for the first nine months of 2001 included private
placement offerings and common stock option exercises for cash totaling
$1,805,673. Financing activities for the first nine months of 2001 also
included an increase in bank indebtedness and shareholder loans totaling
$113,271, and ($3,175), respectively. Financing activities for same period in
2000 included common share subscriptions received and options exercised for
cash totaling $4,436,129, and an increase in bank indebtedness from the first
nine months of $91,966.
Investing activities during the third quarter of 2001 resulted in a net
decrease in cash of $859,676 which consisted of $775,243, net of government
grants, in purchases of capital assets, $70,243 in acquisition disbursement
costs and $14,190 increased in patent costs. During the same period in 2000,
the Company acquired capital assets net of government grants, and technology
patents in the amounts of $596,793, and $29,280, respectively.
With the current cash on hand and management's intent to focus on the
commercial development of its BioOil technologies, the Company will require
additional financing in order to fund its continuing operations and such
commercialization during the remainder of 2001 and into the future. The
Company continues to work closely with a global investment bank as well as its
commercialization partners with the intent of raising up to $4.5 million in
equity financing during the fourth quarter of 2001. Given market conditions
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.
38
DYNAMOTIVE ENERGY SYSTEMS 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 16th day of July 2002.
DYNAMOTIVE ENERGY SYSTEMS CORPORATION
/s/ Robert Andrew Kingston
-------------------------------------
Robert Andrew Kingston,
President & Chief Executive Officer
/s/ Richard Lin
-------------------------------------
Richard Lin
Chairman
39